SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
-----------------
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
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 Enterprises, 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)
(801) 345-6100
(Registrant's telephone number, including area code)
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 October 31, 1999, 32,676,881 shares of the Company's Class A Common
Stock, $.001 par value per share, and 54,606,905 shares of the Company's Class B
Common Stock, $.001 par value per share, were outstanding.
<PAGE>
NU SKIN ENTERPRISES, INC.
1999 FORM 10-Q QUARTERLY REPORT - THIRD 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.......................11
Item 3. Quantitative and Qualitative Disclosures about Market Risk..17
Part II. Other Information
Item 1. Legal Proceedings.........................................18
Item 2. Changes in Securities.....................................18
Item 3. Defaults upon Senior Securities...........................18
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...........................................................20
1
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Nu Skin Enterprises, Inc.
Consolidated Balance Sheets
(in thousands, except share amounts)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(Unaudited)
September 30, December 31,
1999 1998
ASSETS
Current assets
<S> <C> <C>
Cash and cash equivalents $ 108,150 $ 188,827
Accounts receivable 17,569 13,777
Related parties receivable 15,394 22,255
Inventories, net 80,948 79,463
Prepaid expenses and other 73,194 50,475
--------- ---------
295,255 354,797
Property and equipment, net 55,120 42,218
Other assets, net 264,895 209,418
--------- ---------
Total assets $ 615,270 $ 606,433
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 17,722 $ 17,903
Accrued expenses 107,825 132,723
Related parties payable 14,809 25,029
Current portion of long-term debt 54,891 14,545
--------- ---------
195,247 190,200
Long-term debt, less current portion 87,822 138,734
Other liabilities 22,857 22,857
--------- ---------
Total liabilities 305,926 351,791
--------- ---------
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, 32,796,696 and 33,709,251 shares issued and
outstanding 33 34
Class B common stock - 100,000,000 shares authorized, $.001
par value, 54,606,905 shares issued and outstanding 55 55
Additional paid-in capital 126,507 146,781
Retained earnings 232,033 158,064
Deferred compensation (7,828) (6,688)
Accumulated other comprehensive income (41,456) (43,604)
--------- ---------
309,344 254,642
--------- ---------
Total liabilities and stockholders' equity $ 615,270 $ 606,433
========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
2
<PAGE>
Nu Skin Enterprises, Inc.
Consolidated Statements of Income (Unaudited)
(in thousands, except per share amounts)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Three Nine Nine
Months Ended Months Ended Months Ended Months Ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Revenue $ 220,088 $ 217,852 $ 665,125 $ 654,766
Cost of sales 37,557 44,290 114,593 134,581
Cost of sales - amortization of inventory
step-up (Note 2) -- 8,640 -- 21,600
--------- --------- --------- ---------
Gross profit 182,531 164,922 550,532 498,585
--------- --------- --------- ---------
Operating expenses
Distributor incentives 85,495 79,961 254,784 238,359
Selling, general and administrative 66,648 47,600 185,873 142,301
--------- --------- --------- ---------
Total operating expenses 152,143 127,561 440,657 380,660
--------- --------- --------- ---------
Operating income 30,388 37,361 109,875 117,925
Other income (expense), net (5,192) 3,101 (1,348) 10,595
--------- --------- --------- ---------
Income before provision for income taxes
and minority interest 25,196 40,462 108,527 128,520
Provision for income taxes 4,070 14,971 34,558 44,288
Minority interest -- -- -- 3,081
--------- --------- --------- ---------
Net income $ 21,126 $ 25,491 $ 73,969 $ 81,151
========= ========= ========= =========
Net income per share (Note 7):
Basic $ .24 $ .30 $ .85 $ .97
Diluted $ .24 $ .30 $ .84 $ .94
Weighted average common shares outstanding:
Basic 86,927 85,318 87,177 83,983
Diluted 87,951 86,242 88,285 86,319
Pro forma data:
Income before pro forma provision for
income taxes and minority interest $ 128,520
Pro forma provision for income taxes (Note 6) 47,424
Pro forma minority interest 1,944
---------
Pro forma net income $ 79,152
=========
Pro forma net income per share (Note 7):
Basic $ .94
Diluted $ .92
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
3
<PAGE>
Nu Skin Enterprises, Inc.
Consolidated Statements of Cash Flows (Unaudited)
(in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine Nine
Months Ended Months Ended
Sept. 30, Sept. 30,
1999 1998
Cash flows from operating activities:
<S> <C> <C>
Net income $ 73,969 $ 81,151
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 21,844 9,232
Amortization of deferred compensation 2,762 2,730
Amortization of inventory step-up -- 21,600
Income applicable to minority interest -- 3,081
Changes in operating assets and liabilities:
Accounts receivable (3,185) (1,302)
Related parties receivable (3,411) 3,165
Inventories, net (184) 4,103
Prepaid expenses and other (19,773) (18,423)
Other assets (12,227) (14,108)
Accounts payable (895) (12,685)
Accrued expenses (47,734) (19,032)
Related parties payable 198 13,399
--------- ---------
Net cash provided by operating activities 11,364 72,911
--------- ---------
Cash flows from investing activities:
Purchase of property and equipment (22,620) (14,414)
Payments for lease deposits (1,886) (1,660)
Receipt of refundable lease deposits 752 1,066
Purchase of Big Planet, net of cash acquired (13,571) --
--------- ---------
Net cash used in investing activities (37,325) (15,008)
--------- ---------
Cash flows from financing activities:
Exercise of distributor and employee stock options 2,529 --
Termination of Nu Skin USA license fee (10,000) --
Payment to stockholders under the NSI Acquisition (Note 2) (25,000) --
Payments on long-term debt (14,545) (41,634)
Proceeds from long-term debt -- 181,538
Payment to stockholders for notes payable -- (180,000)
Repurchase of shares of common stock (19,612) (1,521)
--------- ---------
Net cash used in financing activities (66,628) (41,617)
--------- ---------
Effect of exchange rate changes on cash 11,912 (16,310)
--------- ---------
Net decrease in cash and cash equivalents (80,677) (24)
Cash and cash equivalents, beginning of period 188,827 174,300
--------- ---------
Cash and cash equivalents, end of period $ 108,150 $ 174,276
========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
4
<PAGE>
Nu Skin Enterprises, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
1. THE COMPANY
Nu Skin Enterprises, Inc. (the "Company"), is a direct selling company
involved in the distribution and sale of premium quality, innovative
personal care and nutritional products and technology products and
services. The Company's operations throughout the world are divided
into three segments: North Asia, which consists of Japan and South
Korea; Southeast Asia, which consists of Taiwan, Thailand, Hong Kong
(including Macau), the Philippines, Australia, and New Zealand; and
Other Markets, which consists of the United Kingdom, Austria, Belgium,
Denmark, France, Germany, Iceland, Italy, Ireland, Luxemburg, Poland,
Portugal, Spain, Sweden, the Netherlands, Brazil, Canada, Mexico,
Guatemala and the United States (the Company's subsidiaries operating
in these countries are collectively referred to as the "Subsidiaries").
As discussed in Note 2, the Company completed the NSI Acquisition on
March 26, 1998. Prior to the NSI Acquisition, each of the Subsidiaries
elected to be treated as an S corporation. In connection with the NSI
Acquisition, the Acquired Entities' S corporation status was
terminated, and the Acquired Entities declared distributions to the
stockholders that included all of the Acquired Entities' previously
earned and undistributed taxable S corporation earnings totaling $87.1
million in 1997 and $37.6 million in 1998 (the "S Distribution Notes").
As discussed in Note 3, the Company completed the Pharmanex Acquisition
on October 16, 1998, which enhanced the Company's involvement with the
distribution and sale of nutritional products.
As discussed in Note 4, in March 1999, Nu Skin International, a
subsidiary of the Company, terminated its distribution license and
various other license agreements and other intercompany agreements with
Nu Skin USA, Inc. (Nu Skin USA"). Also, in March 1999, through a newly
formed wholly-owned subsidiary, the Company acquired selected assets of
Nu Skin USA. In May 1999, the Company acquired Nu Skin Canada, Inc., Nu
Skin Mexico, Inc. and Nu Skin Guatemala, Inc.
(collectively, the "North American Affiliates").
As discussed in Note 5, the Company completed the Big Plant Acquisition
on July 13, 1999, which enabled the Company to provide marketing and
distribution of technology-based products and services.
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 September 30, 1999 and for the three and
nine-month periods ended September 30, 1999 and 1998. 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, 1998.
2. ACQUISITION OF NU SKIN INTERNATIONAL, INC. AND CERTAIN AFFILIATES
On March 26, 1998, the Company completed the acquisition (the "NSI
Acquisition") of the capital stock of Nu Skin International, Inc.
("NSI"), NSI affiliates operating in Europe, Australia and New Zealand
and certain other NSI affiliates (the "Acquired Entities") for $70.0
million in preferred stock and long-term notes payable to the
stockholders of the Acquired Entities (the "NSI Stockholders") totaling
approximately $6.2 million. In addition, contingent upon NSI and the
Company meeting specific earnings growth targets, the Company may pay
up to $25.0 million in cash per year over a four-year period to the NSI
Stockholders. A payment of $25.0 million was paid on April 1, 1999 to
the NSI Stockholders based on NSI and the Company meeting specific
earnings growth targets for the year ended December 31, 1998. Also, as
part of the NSI Acquisition, the Company assumed approximately $171.3
million in S Distribution Notes and incurred acquisition costs totaling
$3.0 million. The net assets acquired totaling $90.4 million include
net deferred tax liabilities totaling
5
<PAGE>
Nu Skin Enterprises, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
$7.4 million recorded upon the conversion of the Acquired Entities from
S to C corporations. All contingent consideration paid will be
accounted for as an adjustment to the purchase price and allocated to
the Acquired Entities' assets and liabilities.
The NSI Acquisition was accounted for by the purchase method of
accounting, except for that portion of the Acquired Entities under
common control of a group of stockholders, which portion was accounted
for in a manner similar to a pooling of interests. The common control
group is comprised of the NSI Stockholders who are immediate family
members. The minority interest, which represents the ownership
interests of the NSI Stockholders who are not immediate family members,
was acquired during the NSI Acquisition. Prior to the NSI Acquisition,
a portion of the Acquired Entities' net income, capital contributions
and distributions (including cash dividends and S Distribution Notes)
had been allocated to the minority interest.
For the portion of the NSI Acquisition accounted for by the purchase
method of accounting, the Company recorded inventory step-up of $21.6
million and intangible assets of $34.8 million. During 1998, the
inventory step-up was fully amortized. For the three and nine-month
periods ended September 30, 1999, the Company recorded amortization of
intangible assets relating to the NSI Acquisition of $0.6 million and
$1.9 million, respectively, and for the three and nine-month periods
ended September 30, 1998, the Company recorded amortization of $0.5
million and $1.0 million for those same intangible assets,
respectively.
For the portion of the NSI Acquisition accounted for in a manner
similar to a pooling of interests, the excess of purchase price paid
over the book value of the net assets acquired was recorded as a
reduction of stockholders' equity.
On May 5, 1998, the stockholders of the Company approved the automatic
conversion of the Preferred Stock issued in the NSI Acquisition into
2,986,663 shares of Class A Common Stock. Under the terms of the NSI
Acquisition, the 2,986,663 shares of Class A Common Stock were adjusted
down by 8,504 shares in June 1998.
3. ACQUISITION OF PHARMANEX, INC.
On October 16, 1998, the Company completed the acquisition of
privately-held Generation Health Holdings, Inc., the parent company of
Pharmanex, Inc. ("Pharmanex"), for $77.6 million, which consisted of
approximately 4.0 million shares of the Company's Class A Common Stock,
including 261,008 shares issuable upon exercise of options assumed by
the Company (the "Pharmanex Acquisition"). Contingent upon Pharmanex
meeting specific revenue and other requirements, approximately 565,000
of the 4.0 million shares are being held in escrow and will be returned
to the Company if such requirements are not met within one year from
the date of the Pharmanex Acquisition. Approximately 130,959 shares
were returned to the Company following the first year anniversary. The
Company entered into a mutual release of claims and modification
agreement which was accepted by former stockholders of Generation
Health Holdings, Inc., holding approximately 88% of the consideration
received, pursuant to which the Company agreed to release 134,038
shares from escrow and agreed to extend the period in which Pharmanex
could meet specific revenue requirements. See Item 5 of this Form 10-Q.
The contingent shares issued, if any, will be accounted for as an
adjustment to the purchase price and allocated to the acquired assets
and liabilities. Also, as part of the Pharmanex Acquisition, the
Company assumed approximately $34.0 million in liabilities and incurred
acquisition costs totaling $1.3 million. The net assets acquired
totaling $3.6 million include net deferred tax assets totaling $0.8
million. In connection with the closing of the Pharmanex Acquisition,
the Company paid approximately $29.0 million relating to the assumed
liabilities.
The Pharmanex Acquisition was accounted for by the purchase method of
accounting. The Company recorded inventory step-up of $3.7 million and
intangible assets of $92.4 million. In addition, the Company allocated
$13.6 million to purchased in-process research and development
based on a discounted cash-flow method reflecting the stage of
completion of the related projects. During 1998, the in-process
research and development amount was fully written off. For the three
and nine-month periods ended September 30, 1999, the Company recorded
amortization of
6
<PAGE>
Nu Skin Enterprises, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
intangible assets relating to the Pharmanex Acquisition of $1.7 million
and $5.2 million and amortization of inventory step-up relating to the
Pharmanex Acquisition of $0.9 million and $2.8 million, respectively.
Pro forma results as if the Pharmanex Acquisition had occurred at
January 1, 1998 have not been presented because the results are not
considered material.
4. ACQUISITION OF CERTAIN ASSETS OF NU SKIN USA, INC.
On March 8, 1999, NSI terminated its distribution license and various
other license agreements and other intercompany agreements with Nu Skin
USA, Inc. and paid Nu Skin USA a $10.0 million termination fee. Also,
on that same date, through a newly formed wholly-owned subsidiary, the
Company acquired selected assets of Nu Skin USA and assumed
approximately $8.0 million of Nu Skin USA liabilities.
The acquisition of the selected assets and assumption of liabilities
and the termination of these agreements has been recorded for the
consideration paid, except for the portion of Nu Skin USA which is
under common control of a group of stockholders, which portion has been
recorded at predecessor basis.
5. ACQUISITION OF BIG PLANET, INC.
On July 13, 1999, the Company completed the acquisition of Big Planet,
Inc. ("Big Planet"), for $29.2 million, which consisted of a cash
payment of $14.6 million and a note payable of $14.6 million (the "Big
Planet Acquisition"). In addition, the Company loaned approximately
$4.5 million in connection with the closing to redeem the option
holders and certain management stockholders of Big Planet.
The Big Planet Acquisition was accounted for by the purchase method of
accounting. The Company recorded intangible assets of $47.0 million
which will be amortized over a period of 20 years. For each of the
three and nine-month periods ended September 30, 1999, the Company
recorded amortization on each of the intangible assets relating to the
Big Planet Acquisition of $0.5 million. Big Planet incurred operating
losses of approximately $22.0 million in 1998 and approximately $22.8
million from the period January 1, 1999 through July 12, 1999.
Big Planet has agreed to purchase technology and telecommunications
products, services and equipment from several suppliers. If Big Planet
does not satisfy the terms of its commitments under these agreements,
the total aggregate termination penalty is approximately $24.7 million.
6. INCOME TAXES
As a result of the NSI Acquisition described in Note 2, the Acquired
Entities are no longer treated as S corporations for U.S. Federal
income tax purposes. The consolidated statements of income include a
pro forma presentation for income taxes, including the effect on
minority interest, which would have been recorded as if the Acquired
Entities had been taxed as C corporations rather than as S corporations
for the three-month period ended March 31, 1998. The significant
decrease in the effective tax rate for the third quarter of 1999 is
related to the utilization of foreign tax credits as a result of the
Company's global tax restructuring plans.
7. NET INCOME PER SHARE
Net income per share and pro forma net income per share are 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 dilutive potential common shares that were
outstanding during the periods presented.
7
<PAGE>
Nu Skin Enterprises, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
8. DERIVATIVE FINANCIAL INSTRUMENTS
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 by
creating offsetting positions through the use of foreign currency
exchange contracts and through certain intercompany loans of foreign
currency. 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. Gains and losses on foreign currency forward
contracts and certain intercompany loans of foreign currency are
recorded as other income and expense in the consolidated statements of
income.
At September 30, 1999 and December 31, 1998, the Company held foreign
currency forward contracts with notional amounts totaling approximately
$51.3 million and $46.3 million, respectively, to hedge foreign
currency items. These contracts do not qualify as hedging transactions
and, accordingly, have been marked to market. The net losses on foreign
currency forward contracts were $4.8 million and $0.5 million for the
three-month periods ended September 30, 1999 and 1998, respectively,
and were $2.2 million for the nine-month period ended September 30,
1999. The net gains on foreign currency forward contracts were $2.9
million for the nine-month period ended September 30, 1998. These
contracts at September 30, 1999 have maturities through May 2000.
9. REPURCHASE OF COMMON STOCK
During the three and nine-month periods ended September 30, 1999, the
Company repurchased approximately 303,000 and 1,305,000 shares,
respectively, of Class A common stock from Nu Skin USA as described in
Note 4, open market repurchases and certain stockholders for
approximately $3.7 million and $19.2 million, respectively.
10. COMPREHENSIVE INCOME
The components of comprehensive income, net of related tax, for the
three and nine-month periods ended September 30, 1999 and 1998, were as
follows (in thousands):
<TABLE>
<CAPTION>
Three Three Nine Nine
Months Ended Months Ended Months Ended Months Ended
Sept. 30, 1999 Sept. 30, 1998 Sept. 30, 1999 Sept. 30, 1998
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net income $ 21,126 $ 25,491 $ 73,969 $ 81,151
Other comprehensive income, net of tax:
Foreign currency translation adjustments 2,783 (1,015) 2,148 (9,562)
-------- -------- -------- --------
Comprehensive income $ 23,909 $ 24,476 $ 76,117 $ 71,589
======== ======== ======== ========
</TABLE>
11. SEGMENT INFORMATION
During 1998, the Company adopted Statement of Financial Accounting
Standards No. 131 ("SFAS 131"), Disclosures about Segments of an
Enterprise and Related Information. As described in Note 1, the
Company's operations throughout the world are divided into three
reportable segments: North Asia, Southeast Asia and Other Markets.
Segment data includes intersegment revenue, intersegment profit and
operating expenses and intersegment receivables and payables. The
Company evaluates the performance of its segments based on operating
income. Information as to the operations of the Company in each of the
three segments is set forth below (in thousands):
8
<PAGE>
Nu Skin Enterprises, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Three Nine Nine
Months Ended Months Ended Months Ended Months Ended
Sept. 30,1999 Sept. 30,1998 Sept. 30,1999 Sept. 30,1998
------------- ------------- ------------- -------------
Revenue
<S> <C> <C> <C> <C>
North Asia $ 148,232 $ 161,634 $ 464,636 $ 466,659
Southeast Asia 69,186 74,559 206,947 237,025
Other Markets 84,668 65,824 234,651 212,281
Eliminations (81,998) (84,165) (241,109) (261,199)
--------- --------- --------- ---------
Totals $ 220,088 $ 217,852 $ 665,125 $ 654,766
========= ========= ========= =========
Operating Income
North Asia $ 18,396 $ 29,232 $ 69,032 $ 90,018
Southeast Asia 10,203 2,396 26,264 12,870
Other Markets 2,016 5,062 7,510 6,840
Eliminations (227) 671 7,069 8,197
--------- --------- --------- ---------
Totals $ 30,388 $ 37,361 $ 109,875 $ 117,925
========= ========= ========= =========
As of As of
Sept. 30, December 31,
1999 1998
--------- ---------
Total Assets
North Asia $ 130,117 $ 167,867
Southeast Asia 110,939 110,518
Other Markets 473,192 500,299
Eliminations (98,978) (172,251)
--------- ---------
Totals $ 615,270 $ 606,433
========= =========
</TABLE>
Information as to the Company's operation in different geographical
areas is set forth below (in thousands):
Revenue
Revenue from the Company's operations in Japan totaled $143,984 and
$158,559 for the three-month periods ended September 30, 1999 and 1998,
respectively, and totaled $452,846 and $458,518 for the nine-month
periods ended September 30, 1999 and 1998, respectively. Revenue from
the Company's operations in Taiwan totaled $26,883 and $28,737 for the
three-month periods ended September 30, 1999 and 1998, respectively,
and totaled $80,808 and $92,324 for the nine-month periods ended
September 30, 1999 and 1998, respectively. Revenue from the Company's
operations in the United States (which includes intercompany revenue)
totaled $78,950 and $63,012 for the three-month periods ended September
30, 1999 and 1998, respectively, and totaled $219,467 and $203,733 for
the nine-month periods ended September 30, 1999 and 1998, respectively.
Long-lived assets
Long-lived assets in Japan were $32,334 and $20,242 as of September 30,
1999 and December 31, 1998, respectively. Long-lived assets in Taiwan
were $3,537 and $2,466 as of September 30, 1999 and December 31, 1998,
respectively. Long-lived assets in the United States were $267,288 and
$213,856 as of September 30, 1999 and December 31, 1998, respectively.
12. NEW ACCOUNTING STANDARDS
Reporting on the Costs of Start-Up Activities
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5 ("SOP 98-5"), Reporting on the Costs
of Start-Up Activities. The statement is effective for fiscal years
beginning after December 15, 1998. The statement requires costs of
start-up activities and organization costs to be expensed as incurred.
The Company has adopted SOP 98-5 for
9
<PAGE>
Nu Skin Enterprises, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
calendar year 1999. The adoption of SOP 98-5 did not materially affect
the Company's consolidated financial statements.
Accounting for Derivative Instruments and Hedging Activities
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133 ("SFAS 133"), Accounting for
Derivative Instruments and Hedging Activities. The statement requires
companies to recognize all derivatives as either assets or liabilities,
with the instruments measured at fair value. The accounting for changes
in fair value, gains or losses, depends on the intended use of the
derivative and its resulting designation. The statement is effective
for all fiscal quarters of fiscal years beginning after June 15, 2000.
The Company will adopt SFAS 133 by January 1, 2001. The Company is
currently evaluating the impact the adoption of SFAS 133 will have on
the Company's consolidated financial statements.
10
<PAGE>
Nu Skin Enterprises, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
1999 compared to 1998
Revenue increased 1.0% and 1.6% to $220.1 million and $665.1 million
from $217.9 million and $654.8 million for the three and nine-month periods
ended September 30, 1999, compared with the same periods in 1998, respectively,
primarily as a result of strengthening foreign currencies and the addition of
revenue from operations in the United States and Big Planet.
Revenue in North Asia, which consists of Japan and South Korea,
decreased 8.3% and 0.4% to $148.2 million and $464.6 million for the three and
nine-month periods ended September 30, 1999, from $161.6 million and $466.7
million for the same periods in 1998, respectively. This decrease in revenue
during the third quarter was due mostly to a 26.9% sequential decrease in local
currency revenue in Japan offset by an increase of 12% in the Japanese yen to
the U.S. dollar during the quarter. Management believes that the local currency
revenue decline in Japan is due mostly to distributor uncertainty related to the
global implementation of a new divisional business model with an enhanced
compensation plan in connection with the integration of Pharmanex and Big
Planet, and issues concerning the Company's compensation plan requirements,
which became increasingly difficult for distributors to reach as consumer
confidence continued to lag. These factors continued from the second quarter of
1999 into the third quarter. Revenue in South Korea during the three and
nine-month periods ended September 30, 1999 increased 38.1% and 44.8%,
respectively, compared to the same periods in 1998 as a result of both a
strengthening of the South Korean won and strong local currency growth for the
same periods following several quarters of extensive educational training
programs and the launch of new nutritional products in that market.
Revenue in Southeast Asia, which consists of Taiwan, Thailand, Hong
Kong (including Macau), the Philippines, Australia and New Zealand, totaled
$36.1 million and $108.0 million for the three and nine-month periods ended
September 30, 1999, a decrease of 5.2% and 12.7% from revenue of $38.1 million
and $123.7 million for the same periods in 1998, respectively. This decrease in
revenue resulted primarily from a decline of 6.5% and 12.5% in revenue in Taiwan
for the three and nine-month periods ended September 30, 1999, compared to the
same periods in 1998, respectively. The Company's operations in Taiwan suffered
the impact of a devastating earthquake in Taiwan, which occurred during the
third quarter of 1999. In addition, operations in Taiwan have continued to
suffer the impact of increased competition and an overall decline in sales in
the direct selling industry in Taiwan, which management believes is largely due
to distractions to distributors by fluctuations in direct selling activities in
the People's Republic of China as well as economic concerns throughout Southeast
Asia.
Revenue in the Company's other markets, which include the United
Kingdom, Germany, Iceland, Italy, the Netherlands, France, Belgium, Spain,
Portugal, Ireland, Austria, Luxemburg, Poland, Denmark, Sweden, Brazil, Canada,
Mexico, Guatemala and the United States, increased 97.2% and 43.6% to $35.7
million and $92.5 million for the three and nine-month periods ended September
30, 1999, compared to $18.1 million and $64.4 million for the same periods in
1998, respectively. This increase in revenue was primarily due to the additional
revenue stream from sales in the United States resulting from the termination of
the Company's license agreement with Nu Skin USA, which occurred in March 1999,
and the additional revenue resulting from the Big Planet Acquisition.
Gross profit as a percentage of revenue was 82.9% and 82.8% for the
three and nine-month periods ended September 30, 1999, compared to 75.7% and
76.2% for the same periods in 1998. The increase in the gross profit as a
percentage of revenue for the three and nine-month periods ended September 30,
1999 resulted from the strengthening of the Japanese yen and other Asian
currencies relative to the U.S. dollar, higher margin sales to distributors in
the United States following the termination of the Company's license agreement
with Nu Skin USA, local manufacturing efforts and reduced duty rates. The
Company's gross margin was negatively impacted by the Big Planet Acquisition,
which includes the sale of lower margin technology products and services. In
addition, in the first and second quarters of 1998, the Company recorded
amortization of inventory step-up related to the NSI Acquisition of $8.6 million
and $13.0 million, respectively, which did not recur in 1999. The Company
purchases a significant majority of goods in U.S. dollars and recognizes revenue
in local currency and is consequently subjected to exchange rate risks in its
gross margins.
Distributor incentives as a percentage of revenue increased to 38.8%
and 38.3% for the three and nine-month periods ended September 30, 1999 from
36.7% and 36.4% for the same periods in 1998.
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The primary reason for this increase in 1999 was due to the Company beginning to
sell products to distributors in the United States and paying the requisite
commissions related to those sales.
Selling, general and administrative expenses as a percentage of revenue
increased to 30.3% and 27.9% for the three and nine-month periods ended
September 30, 1999 from 21.8% and 21.7% for the same periods in 1998. In dollar
terms, selling, general and administrative expenses increased to $66.6 million
and $185.9 million for the three and nine-month periods ended September 30, 1999
from $47.6 million and $142.3 million for the same periods in 1998. This
increase as a percentage of revenue and in dollar terms was due to stronger
foreign currencies in 1999 which resulted in higher expenses in foreign markets,
additional overhead expenses relating to the operations in the United States, an
additional $9.9 million during the first nine months of 1999 in amortization
resulting from the Company's acquisitions of NSI, Pharmanex and Big Planet, and
an additional $5.5 million of selling, general and administrative expenses
related to the Big Planet Acquisition.
Operating income decreased 18.7% and 6.8% to $30.4 million and $109.9
million for the three and nine-month periods ended September 30, 1999 from $37.4
million and $117.9 million for the same periods in 1998 and operating margin
decreased to 13.8% and 16.5% from 17.1% and 18.0% for the same periods,
respectively. Operating margins have declined due to the decline in local
currency revenue in Japan and the increases in distributor incentives and
selling, general and administrative expenses, which more than offset the
improvements in gross margins. These increased expenses are mostly related to
the NSI Acquisition, the termination of the Company's license agreement with Nu
Skin USA, stronger foreign currencies and the Big Planet Acquisition.
Other income decreased to an expense of $5.2 million and $1.3 million
for the three and nine-month periods ended September 30, 1999 from income of
$3.1 million and $10.6 million for the same periods in 1998, respectively. This
decrease was primarily due to the significant hedging losses recorded in the
third quarter of 1999 from forward contracts and intercompany loans resulting
from a stronger Japanese yen in relation to the U.S. dollar.
Provision for income taxes decreased 72.7% and 21.9% to $4.1 million
and $34.6 million for the three and nine-month periods ended September 30, 1999
from $15.0 million and $44.3 million for the same periods in 1998, respectively.
This decrease is due to the reduced effective tax rate from 37.0% in the second
and third quarters of 1998 to 36.0% in the second quarter of 1999 and 16.2% in
the third quarter of 1999. This significant decrease in the effective tax rate
for the third quarter of 1999 is related to the utilization of foreign tax
credits as a result of the Company's global tax restructuring plans. The pro
forma provision for income taxes presents income taxes as if NSI and its
affiliates had been taxed as C corporations rather than as S corporations for
the three-month period ended March 31, 1998.
Minority interest represents the ownership interest of NSI held by
individuals who are not immediate family members. The minority interest was
purchased as part of the NSI Acquisition on March 26, 1998.
Net income decreased 17.3% and 8.9% to $21.1 million and $74.0 million
for the three and nine-month periods ended September 30, 1999 from $25.5 million
and $81.2 million for the same periods in 1998 and net income as a percentage of
revenue decreased to 9.6% and 11.1% from 11.7% and 12.4% for the same periods,
respectively. Net income decreased due to the factors noted above in operating
income and other income, and was somewhat offset by the factors noted in
provision for income taxes.
Liquidity and Capital Resources
Historically, the Company's principal needs for funds have been for
distributor incentives, working capital (principally inventory purchases),
operating expenses, capital expenditures and the development of operations in
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 to fund operating activities.
The Company generates significant cash flow from operations due to
favorable gross margins and minimal capital requirements. Additionally, the
Company does not generally extend credit to distributors but requires payment
prior to shipping products. This process eliminates the need for significant
accounts receivable from distributors. During the first and third quarters of
each year, the Company pays significant accrued income taxes in many foreign
jurisdictions including Japan. These large cash payments somewhat offset the
significant cash generated in these quarters. During the nine-month period ended
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September 30, 1999, the Company generated $11.4 million from operations compared
to $72.9 million generated during the nine-month period ended September 30,
1998. This decrease in cash generated from operations primarily related to
reduced net income in 1999 compared to 1998, excluding amortization from the NSI
and Pharmanex acquisitions, and also due to the significant operating expenses
in 1999 resulting from the Company's operations in the United States and funding
of Big Planet operations.
As of September 30, 1999, working capital was $100.0 million compared
to $164.6 million as of December 31, 1998. This decrease is primarily due to the
increase at September 30, 1999 in the current portion of long-term debt and the
Big Planet Acquisition that occurred in the third quarter of 1999. Cash and cash
equivalents at September 30, 1999 and December 31, 1998 were $108.2 million and
$188.8 million, respectively.
Capital expenditures, primarily for equipment, computer systems and
software, office furniture and leasehold improvements, were $22.6 million for
the nine-month period ended September 30, 1999. In addition, the Company
anticipates additional capital expenditures through the remainder of 1999 of
approximately $8.0 million to further enhance its infrastructure, including
enhancements to computer systems and software and call-center facilities in
order to accommodate anticipated future growth.
In March 1998, the Company completed the NSI Acquisition. Pursuant to
the terms of the NSI Acquisition, NSI and the Company met earnings growth
targets in 1998 resulting in a contingent payment payable to the NSI
stockholders of $25.0 million as of December 31, 1998. Contingent upon NSI and
the Company meeting earnings growth targets over the next three years, the
Company may pay up to $25.0 million in cash in each of the next three years to
the NSI stockholders. The contingent consideration of $25.0 million earned in
1998 was paid in the second quarter of 1999 and has been accounted for as an
adjustment to the purchase price and allocated to the assets and liabilities of
NSI and its previously private affiliates. Any additional contingent
consideration paid over the next three years, if any, will be accounted for in a
similar manner.
In May 1998, the Company and its Japanese subsidiary Nu Skin Japan
entered into a $180.0 million credit facility with a syndicate of financial
institutions for which ABN-AMRO, N.V. acted as agent. This credit facility was
used to satisfy liabilities which were assumed as part of the NSI Acquisition.
The Company borrowed $110.0 million and Nu Skin Japan borrowed the Japanese yen
equivalent of $70.0 million denominated in local currency. Payments totaling
$41.6 million were made during the second quarter of 1998 and payments totaling
$14.5 million were made during the first quarter of 1999 relating to the $180.0
million credit facility. As of September 30, 1999, the balance relating to the
$180.0 million credit facility totaled $142.7 million of which approximately
$54.9 million is due in 2000 and approximately $87.8 million will be due in
2001. The U.S. portion of the credit facility bears interest at either a base
rate as specified in the credit facility plus an applicable margin or the London
Inter-Bank Offer Rate plus an applicable margin, in the borrower's discretion.
The Japanese portion of the credit facility bears interest at the applicable
Tokyo Inter-Bank Offer Rate plus an applicable margin. The maturity date for the
credit facility is three years from the borrowing date, with a possible
extension of the maturity date upon approval of the lenders. The credit facility
provides that the amounts borrowed are to be used for general corporate
purposes. The Company is currently in compliance with all financial and other
covenants under the credit facility. During 1999, the Company renewed a $10.0
million revolving credit agreement with ABN-AMRO, N.V. Advances are available
under the agreement through May 18, 2000 with a possible extension upon approval
of the lender. There were no outstanding balances under this credit facility at
September 30, 1999.
During 1998, the board of directors authorized the Company to
repurchase up to $20.0 million of the Company's outstanding shares of Class A
common stock and in July 1999, the board of directors authorized the Company to
repurchase up to an additional $10.0 million of the Company's outstanding shares
of Class A common stock. As of September 30, 1999, the Company had repurchased
1,601,454 shares in public and private transactions for an aggregate price of
approximately $21.0 million. In addition, in March 1999, the board of directors
separately authorized and the Company completed the purchase of approximately
700,000 shares of the Company's Class A common stock from Nu Skin USA and
certain stockholders for approximately $10.0 million as part of the asset
purchase agreement.
As part of the Pharmanex Acquisition, the Company assumed approximately
$34.0 million in liabilities and incurred acquisition costs totaling $1.3
million. The net assets acquired totaling $3.6 million include net deferred tax
assets totaling $0.8 million. In connection with the closing of the Pharmanex
Acquisition, the Company paid approximately $29.0 million relating to the
assumed liabilities.
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In March 1999, NSI terminated its distribution license and various
other license agreements and other intercompany agreements with Nu Skin USA and
paid Nu Skin USA a $10.0 million termination fee. The Company also, through a
newly formed wholly-owned subsidiary, acquired selected assets of Nu Skin USA
and assumed approximately $8.0 million of Nu Skin USA's liabilities in March
1999. In May 1999, the Company completed the acquisition of its private
affiliates Nu Skin Canada, Nu Skin Mexico and Nu Skin Guatemala for
approximately $2.0 million (inclusive of cash distributed by the acquired
entities prior to closing) in cash and assumed net liabilities of up to $4.0
million.
In July 1999, the Company completed the acquisition of its affiliate
Big Planet for an aggregate of approximately $29.2 million, of which
approximately $14.6 million is payable in the form of a promissory note and
approximately $14.6 million was paid in cash. In connection with the closing of
Big Planet, the Company loaned Big Planet approximately $4.5 million to redeem
the option holders and management stockholders of Big Planet. In addition, the
Company loaned Big Planet approximately $10.3 million to fund Big Planet
operations through the closing of the acquisition. Big Planet incurred operating
losses of approximately $22.0 million in 1998, approximately $22.8 million from
the period January 1, 1999 through July 12, 1999 and approximately $5.8 million
from the period July 13, 1999 through September 30, 1999. The Company
anticipates Big Planet will continue to incur operating losses in the
foreseeable future. Big Planet has agreed to purchase technology and
telecommunications products, services and equipment from several suppliers. If
Big Planet does not satisfy the terms of its commitments under these agreements,
the total aggregate termination penalty is approximately $24.7 million. The
largest of these purchase commitments is for long distance telecommunication
services. At the current level of long distance service provided to Big Planet
customers and assuming reasonable growth, management believes that it will be
able to satisfy this purchase commitment.
The Company had related party payables of $14.8 million and $25.0
million at September 30, 1999 and December 31, 1998, respectively. In addition,
the Company had related party receivables of $15.4 million and $22.3 million at
September 30, 1999 and December 31, 1998, respectively. Related party balances
outstanding in excess of 60 days bear interest at a rate of 2% above the U.S.
prime rate. As of September 30, 1999, 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. The Company currently believes
existing cash balances together with future cash flows from operations will be
adequate to fund cash needs relating to the implementation of its strategic
plans.
Year 2000
The Company has developed a comprehensive plan to address Year 2000
issues. In connection with this plan, the Company has established a committee
that is responsible for assessing and testing the Company's systems to identify
Year 2000 issues, and overseeing the upgrade or remediation of non-compliant
Year 2000 systems. This committee reports on a regular basis to the Company's
executive management team and the audit committee of the board of directors on
the progress and status of the plan and the Year 2000 issues affecting the
Company.
To date, the Company has completed a broad scope assessment and audit
of its information technology systems and non-information technology systems to
identify and prioritize potential Year 2000 issues. The Company has also
completed a micro-based assessment designed to identify specific Year 2000
issues at the hardware, software and processing levels. Through this process,
the Company has identified potential Year 2000 issues in its information
systems, and is in the process of addressing these issues through upgrades and
other remediation. The Company has completed the micro-based assessment and
remediation of substantially all of its significant in-house corporate systems,
domestic and foreign, and has completed the integration tests of the domestic
remediated systems and all of such systems have been installed and put into
service. The Company is nearing completion of the testing of its remediated
systems in its foreign markets and plans to have any of those remediated systems
that are not currently in service installed and placed in service over the next
several weeks. Over the next several weeks the Company plans to recheck its
desktop applications and computers to verify Year 2000 compliance and that no
changes have occurred since the last review.
As part of the Year 2000 plan, the Company has also assessed and
monitored its vendors and suppliers and other third parties for Year 2000
readiness. The committee sent questionnaires to these third parties seeking
their assessment and evaluation of their own Year 2000 readiness and has
received
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responses back from a substantial majority of these third parties. Members of
the committee have also visited in person the Company's key vendors and
suppliers to assess the Year 2000 readiness of such suppliers and vendors and to
share Year 2000 information and plans for contingencies. The Company will
continue the follow-up with third party vendors throughout the remainder of
1999.
The Company has also completed an evaluation of the Year 2000 readiness
of recently-acquired Big Planet, Inc. and the actions taken to date by Big
Planet to assess and remediate any Year 2000 issues with respect to it
operations and systems. Big Planet had established its own plan and resources to
address Year 2000 issues and has continued that work following the acquisition.
The majority of Big Planet's systems and hardware have been deployed in 1998 and
1999 and management believes that such systems are not a high risk area for
traditional Year 2000 concerns. However, Big Planet's management team is
aggressively reviewing all systems and is completing its Year 2000 compliance
testing procedures. Big Planet management believes that it will be able to
address any remaining Year 2000 issues or develop adequate contingency plans to
limit any material interruption of its business prior to the end of the year.
The Company believes that any interruption of Big Planet's business would not
have a material impact on the Company's financial condition.
The Company currently estimates that the cost of all upgrades related
to Year 2000 issues, including scheduled upgrades intended primarily to increase
efficiencies within the Company and also address the Year 2000 issues, is
anticipated to be approximately $3.0 million through the remainder of 1999,
which the Company anticipates will be funded by cash from operations. To date,
the Company has spent approximately $10.0 million.
Based on the Company's evaluation of the Year 2000 issues affecting the
Company, management believes that Year 2000 readiness of the Company's vendors
and suppliers and related contingency plans, which is beyond the Company's
control, is currently the most significant area of risk, particularly in its
foreign markets. Management does not believe it is possible at this time to
quantify the most reasonable worst case Year 2000 scenario. However, the Company
has begun to formulate contingency plans to limit, to the extent possible,
interruption of the Company's operations arising from the failure of third
parties to be Year 2000 compliant as the Company moves forward in the
implementation of its Year 2000 plan. These plans include, among other things,
maintaining two months of inventory and providing for back-up electrical power
where feasible. The Company will continue to work with third parties as
indicated above to further evaluate and quantify this risk and will continue the
development of contingency plans throughout the remainder of 1999 as this
process moves forward. There can be no assurance, however, that the Company will
be able to successfully identify and remedy all Year 2000 issues or develop
contingency plans for all Year 2000 issues that could, directly or indirectly,
harm its operations, some of which are beyond the Company's control. In
particular, the Company cannot predict or evaluate domestic and foreign
governments' and utility companies' preparation for the Year 2000 or the
readiness of other third parties (domestic and foreign) that do not have
relationships with the Company, and the resulting impact that the failure of
such parties to be Year 2000 compliant may have on the economy in general and on
its business, which could cause an interruption of the Company's business.
The foregoing discussion of the Year 2000 issues contains
forward-looking statements that represent the Company's current expectations or
beliefs. These forward-looking statements are subject to risks and uncertainties
that could cause outcomes to be different from those currently anticipated
including those risks identified under the heading "Note Regarding
Forward-looking Statements."
Currency Risk and Exchange Rate Information
A majority of the Company's revenue and many of its 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 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.
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 a
majority 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
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positions through the use of foreign currency exchange contracts and through
intercompany loans of foreign currency. 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 its operating results.
The Company's foreign currency derivatives are comprised of
over-the-counter forward contracts with major international financial
institutions. As of September 30, 1999, the primary currency for which the
Company had net underlying foreign currency exchange rate exposure was the
Japanese yen. Based on the Company's foreign exchange contracts at September 30,
1999 as discussed in Note 8 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 result in significant other income or
expense recorded in the Consolidated Statements of Income.
Outlook
Management believes that the acquisitions of Pharmanex, Big Planet and
Nu Skin operations in the United States should positively impact the Company's
long-term revenue and earnings growth rates. Management currently anticipates
gross margins to stabilize on a sequential basis over the next few quarters as
the Company continues selling products directly to U.S. distributors rather than
recognizing lower margin intercompany revenue, as well as a stronger Japanese
yen and reduced duties from the Company's global tax restructuring plans and
local manufacturing efforts. Management also anticipates that distributor
incentives as a percentage of revenue will continue to be higher in the fourth
quarter of 1999 due to paying commissions to U.S. based distributors. Selling,
general and administrative expenses as a percentage of revenue will generally be
higher in the fourth quarter of 1999 and the first quarter of 2000 as compared
to the prior year due to increased amortization of intangible assets acquired in
the acquisitions of Pharmanex and NSI, as well as stronger foreign currencies
and expenses related to the Company's global convention in the fourth quarter
and its Japanese convention in the first quarter of 2000. In addition, overhead
related to the acquired U.S. operations as well as Big Planet will increase
selling, general and administrative expenses. Management expects to return to
historic tax rates in the fourth quarter of 1999.
The foregoing outlook section contains forward-looking statements that represent
the Company's current expectations or beliefs concerning future operating
results. These forward-looking statements are subject to risks and uncertainties
that could cause outcomes to be different from those currently anticipated
including those risks identified below under the heading "Note Regarding
Forward-looking Statements."
Note Regarding Forward-Looking Statements
With the exception of historical facts, the statements contained in
this Management's Discussion and Analysis of Financial Condition and Results of
Operations, in particular in the Liquidity and Capital Resources section, the
Year 2000 section, and the Outlook section, 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 (i) the
Company's belief that existing cash and cash flow from operations will be
adequate to fund cash needs, including the capital requirements of its Year 2000
remediation program; (ii) the Company's expectations concerning its ability to
identify and remediate or address any Year 2000 related issues, including with
third parties, and its ability to develop viable contingency plans in the event
the Company's or its vendor's systems are not compliant, all as more fully
described under the Year 2000 section above; (iii) management's belief that
recent acquisitions should positively impact the Company's long-term revenue and
earnings growth rates; (iv) management's anticipation that gross margins will
stabilize; (v) management's anticipation that distributor incentives and
selling, general and administrative expenses will generally be higher in the
fourth quarter of 1999 and the first quarter of 2000 as compared to the prior
year, and that tax rates will return to historical levels in the fourth quarter;
and (vi) the Company's plan to implement forward contracts and other hedging
strategies to manage foreign currency risks. 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 the risks and uncertainties
set forth below, and the other risks and factors described herein and in the
Company's other filings with the Securities and
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Exchange Commission (which contain a more detailed discussion of the risks and
uncertainties related to the Company's business) could cause (and in some cases
in the past have caused) the Company's actual results and outcomes to differ
materially from those discussed or anticipated. The Company also wishes to
advise readers that it is not obligated to update or revise these forward
looking statements to reflect new events or circumstances. Important factors and
risks that might cause actual results to differ from those anticipated include,
but are not limited to:
(a) Management's ability to successfully integrate the business of
Pharmanex and Big Planet with the Company's existing operations and
shift to a product-based divisional structure, which is subject to
risks including continued or renewed confusion or uncertainty among the
Company's distributor's which the Company believes has adversely
affected the productivity of the Company's distributors during the last
couple of quarters, and unforeseen expenses or difficulties in shifting
to a divisional strategy.
(b) The ability of the Company to retain its key and executive level
distributors. The Company has experienced a reduction in the number of
active and executive distributors. 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, or if the Company receives adverse publicity.
(c) Because a substantial majority of the Company's sales are generated
from the Asian region, particularly Japan and Taiwan, significant
variations in operating results including revenue, gross margin and
earnings from those expected could be caused by (i) renewed or
sustained weakness of Asian economies, or (ii) any weakening of foreign
currencies, particularly the yen, which has recently strengthened
significantly and helped offset the effects of the decline in local
currency revenue in Japan, and the risk that the Company will not be
able to favorably implement forward contracts and other hedging
strategies to manage foreign currency risk.
(d) Adverse business or political conditions, increased competition,
the maturity of the direct sales channel in certain select markets such
as Taiwan, adverse publicity, or changes in laws and regulations
(including any increased government regulation of direct selling
activities and products in existing and future markets such as the
PRC's restrictions on direct selling or changes in U.S. or foreign tax
regulations), unanticipated increases in expenses, the Company's
reliance on outside manufacturers, and general business risks that
could adversely affect the Company's ability to sell products and
expand or maintain its existing distributor force or otherwise
adversely affect its operating results.
(e) Risks associated with the Company's new business opportunities, new
product offerings and new markets, including: any legal or regulatory
restrictions, particularly those applicable to nutritional products and
the services offered by Big Planet, that might delay or prevent the
Company from introducing such opportunities and products into all of
its markets or limit the ability of the Company to effectively market
such products, the risk that such opportunities and products will not
gain market acceptance or meet the Company's expectations as a result
of increased competition, any lack of market acceptance by consumers or
the Company's distributors, and the risk that sales from such new
business opportunities and product offerings could reduce sales of
existing products and will not generate incremental revenue growth.
(f) Any increased expenditures required to address the Year 2000 issue
if the Company's technology requirements change or unforseen problems
are discovered and the risk that the Company's and its vendors' plans
to remedy Year 2000 issues and any related contingency plans may be
inadequate, or that undetected and unanticipated issues will arise,
which could result in disruptions of the Company's business.
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 8 to the Financial Statements contained in Item 1 of
Part I.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Reference is made to the Company's Annual Report on Form 10-K and
its Quarterly Report on Form 10-Q for information concerning the legal
proceedings. There have been no material developments in these
proceedings since the date of the filing of the Quarterly Report on
Form 10-Q for the quarter ended June 30, 1999.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
In connection with the acquisition of Generation Health
Holdings, Inc., and its subsidiary Pharmanex, Inc. (the "Merger"), the
representatives of the former stockholders of Generation Health
Holdings, Inc. disputed on behalf of such stockholders certain claims
for indemnification made by the Company, the calculation of balance
sheet adjustments, issues regarding the 434,834 shares of stock held in
escrow (the "Cholestin Escrow") subject to the satisfaction of certain
conditions regarding Pharmanex's product, Cholestin, and certain other
issues. Effective October 16, 1999, the Company entered into a Mutual
Release of Claims and Modification Agreement (the "Agreement") with
former stockholders of Generation Health Holdings, Inc. who received
approximately 88% of the consideration received in the transaction and
who accepted the terms of the Agreement (the "Accepting Holders").
Among other things, the Agreement provides that: (A) 79,099 shares of
the Class A Common Stock issued in the transaction will be reconveyed
to the Company to satisfy certain indemnification claims made by the
Company (after netting out 24,434 shares the Company agreed to issue as
part of the balance sheet adjustment); (B) 134,038 shares of the Class
A Common Stock held in the Cholestin Escrow were released to the
Accepting Holders; (C) the time period in which the performance
criteria for sales of Cholestin could be met for release of shares from
the Cholestin Escrow was extended until June 15, 2000 for the Accepting
Holders and such shares now will be released from the Cholestin Escrow
to the extent of the percentage of such performance criteria achieved;
(D) the Accepting Holders and the Company granted mutual releases of
claims; and (E) Accepting Holders holding approximately 3.0 million
shares of Class A Common Stock received in the Merger agreed to not
sell or transfer such shares, subject to certain exceptions, until the
earliest of (i) February 10, 2000, (ii) the third day following the
date the Company publicly releases its earnings for 1999 and (iii) the
date, if applicable, the Company otherwise publicly announces or states
that its earnings for 1999 will be less than analysts' estimates. A
copy of the Mutual Release of Claims and Modification Agreement is
filed as Exhibit 10.1 to this report and incorporated herein by
reference.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Regulation S-K
Number Description
10.1 Mutual Release of Claims and Modification
Agreement dated as of October 16, 1999 by
and among Nu Skin Enterprises and the
Stockholder Representatives on behalf of
the former stockholders of Generations
Health Holdings, Inc.
27.1 Financial Data Schedule - Nine Months Ended
September 30, 1999
18
<PAGE>
(b) Current Report on Form 8-K. A Current Report on Form
8-K was filed on July 28, 1999 regarding the
acquisition of Big Planet, Inc.
19
<PAGE>
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 12th day of November, 1999.
NU SKIN ENTERPRISES, INC.
By: /s/ Corey B. Lindley
Corey B. Lindley
Its: Chief Financial Officer
(Principal Financial and Accounting Officer)
20
<PAGE>
EXHIBIT INDEX
10.1 Mutual Release of Claims and Modification
Agreement dated as of October 16, 1999 by
and among Nu Skin Enterprises and the
Stockholder Representatives on behalf of
the former stockholders of Generations
Health Holdings, Inc.
27.1 Financial Data Schedule - Nine Months Ended
September 30, 1999
21
MUTUAL RELEASE OF CLAIMS AND MODIFICATION AGREEMENT
THIS MUTUAL RELEASE OF CLAIMS AND MODIFICATION AGREEMENT (the
"Agreement") is made and entered into as of this 16th day of October, 1999, by
and among NU SKIN ENTERPRISES, INC., a Delaware corporation ("Nu Skin"), John
Diekman, Gerald Cohn, William E. McGlashan, Jr., Henry S. Burdick and Peter
Castleman, acting in all matters pursuant to the direction of at least four of
such persons, as representatives and Attorney-in-Fact of the Stockholders (the
"Stockholders Representatives") of GENERATION HEALTH HOLDINGS, INC., a Delaware
corporation (the "Company") pursuant to the power of attorney granted to such
Stockholders Representatives by the Stockholders of Generation Health Holdings,
Inc. (the "Stockholders"), pursuant to the Stockholder's Letter and LASALLE BANK
NATIONAL ASSOCIATION, a national banking association, as escrow agent (the
"Escrow Agent").
WITNESSETH:
WHEREAS, Nu Skin, Sage Acquisition Corporation ("Merger Sub") and the
Company entered into that Restated Agreement and Plan of Merger and
Reorganization dated as of October 16, 1998 (the "Merger Agreement", and
capitalized terms not otherwise defined herein shall have the meaning ascribed
to them in the Merger Agreement);
WHEREAS, pursuant to the Merger Agreement, the Company merged with and
into Merger Sub in accordance with the General Corporation Law of the State of
Delaware and upon the terms and subject to the conditions set forth in the
Merger Agreement;
WHEREAS, the parties hereto wish to resolve certain disputes and grant
a mutual release of claims and in connection therewith modify certain rights,
obligations and liabilities of those Stockholders who timely accept the terms
and conditions of this Agreement by executing and delivering a Stockholder's
Election Form substantially in the form attached hereto as Exhibit A (the
"Accepting Holders"), which executed Election Form shall be attached hereto as
Exhibit B with a schedule of the names of the Accepting Holders, and Nu Skin as
set forth in the Merger Agreement, the Cholestin Escrow Agreement, the Escrow
Agreement, the Registration Rights Agreement and the Stockholder Escrow
Agreement dated as of October 16, 1998 by and among the Stockholders
Representatives, the Escrow Agent and the Stockholders (the "Stockholder Escrow
Agreement"); and
WHEREAS, the Accepting Holders received in excess of sixty percent
(60%) of the Merger Consideration (as defined below);
NOW, THEREFORE, in consideration of the covenants and agreements herein
set forth, the parties hereto agree as follows:
1. CHOLESTIN ESCROW.
(a) Notwithstanding that Nu Skin has or will notify the Escrow Agent
that the conditions set forth in Section 5.16(a) of the Merger Agreement
necessary for the distribution to the Stockholders of the Total Cholestin Escrow
Shares have not been satisfied and directing the Escrow Agent to distribute such
shares to Nu Skin in accordance with Section 5.16(a) of the Merger Agreement and
the Cholestin Escrow Agreement, in consideration of the release of claims by the
Accepting Holders set forth in Section 3 below and the other terms and
conditions of this Agreement, with respect to the Accepting Holders only, the
Total Cholestin Escrow Shares held in the names of the Accepting Holders (the
"Accepting Holders Total Cholestin Escrow Shares") will not be cancelled and
returned to Nu Skin pursuant to Section 5.16 of the Merger Agreement and the
Cholestin Escrow Agreement at this time, but shall be held and distributed to
the Accepting Holders and/or Nu Skin, as the case may be, as set forth in this
Agreement. All other Total Cholestin Escrow Shares, other than the Accepting
Holders Total Cholestin Escrow Shares, shall be cancelled and returned to Nu
Skin by the Escrow Agent promptly following October 25, 1999 in the manner
contemplated by the Merger Agreement and the Cholestin Escrow Agreement. The
provisions of Section 5.16 of the Merger Agreement shall continue to apply to
the Accepting Holders Total Cholestin Escrow Shares, which provisions are
incorporated herein by reference, subject to the following changes: (i) all
references to "the first anniversary of the Effective Date" shall be deleted and
replaced with "June 15, 2000", and (ii) rather than distributing the shares on
an all or nothing basis at June 15, 2000, the shares shall be distributed to the
Accepting Holders pro rata based on the percentage of the Sales objective
satisfied as set forth below.
(b) Notwithstanding any other provision in the Merger Agreement, the
Cholestin Escrow Agreement or the certificate delivered or to be delivered to
the Escrow Agent pursuant to Section 7(c) of the Cholestin Escrow Agreement to
the contrary, Nu Skin shall deliver to the Escrow Agent on or before October 25,
1999 written instructions pursuant to this Agreement authorizing and instructing
the Escrow Agent promptly to deliver the Initial Release Amount (as defined
below) to the Accepting Holders pro rata. For purposes of this Section 1(b), the
"Initial Release Amount" shall equal 152,192 shares (35% of the Total Cholestin
Escrow Shares) multiplied by a fraction, the numerator of which is the number of
Accepting Holders Total Cholestin Escrow Shares and the denominator of which is
the Total Cholestin Escrow Shares.
(c) Notwithstanding any other provision in the Merger Agreement or the
Cholestin Escrow Agreement to the contrary, on each of January 15, 2000 and
April 15, 2000, and within 20 days after June 15, 2000 (each a "Release Date"),
Nu Skin shall deliver to the Escrow Agent written instructions pursuant to this
Agreement authorizing and instructing the Escrow Agent to deliver to the
Accepting Holders pro rata the Earned Amount (as defined below) of the then
remaining Accepting Holders Total Cholestin Escrow Shares. For purposes of this
Section 1(c), "Earned Amount" shall equal (i) the percentage equivalent of the
total Sales (net of returns) in the United States or worldwide, as the case may
be, by Nu Skin of products containing Cholestin as calculated as of the 31st day
of the month immediately preceding January 15, 2000 and April 15, 2000, and as
calculated as of June 15, 2000, divided by $12,000,000 for United States sales
or $75,000,000 for worldwide sales, whichever percentage is greater, multiplied
by (ii) the Accepting Holders Total Cholestin Escrow Shares, minus (iii) the
number of Accepting Holders Total Cholestin Escrow Shares theretofor released
and delivered to the Accepting Holders.
(d) Promptly upon receipt of written instructions contemplated by
Section 1 hereof, (i) the Escrow Agent shall deliver a copy of such written
instructions to the Stockholders Representatives and (ii) the Escrow Agent, the
Stockholders Representatives and Nu Skin shall take such action as may be
necessary to cause certificates representing the amount of shares specified in
the written instructions delivered pursuant to Sections 1(b) or (c) hereof to be
distributed to the Accepting Holders pro rata in accordance with the procedures
set forth in Sections 7(b) and (e) of the Cholestin Escrow Agreement.
(e) The provisions set forth in Section 7(b), (c), (d) and (e) of the
Cholestin Escrow Agreement, subject to the modifications in this Agreement,
shall continue in effect with respect to any of the Accepting Holders Total
Cholestin Escrow Shares on deposit after June 15, 2000 with respect to Sales
made through that date. If as of June 15, 2000, total Cholestin Sales have not
reached one of (i) $12,000,000 in the United States or (ii) $75,000,000
worldwide then the portion of the Accepting Holders Total Cholestin Escrow
Shares which are not distributed to the Accepting Holders based on sales through
June 15, 2000 in accordance with the formula set forth above shall be cancelled
and returned to Nu Skin. Within twenty days after June 15, 2000, Nu Skin shall
deliver a certificate to the Stockholder Representatives and the Escrow Agent
indicating the number of the remaining Accepting Holder Total Escrow Shares to
be delivered to the Accepting Holders pursuant to this Agreement and the number
that are to be returned to Nu Skin for cancellation. The provisions of Section
7(b), (c), (d) and (e) of the Cholestin Escrow Agreement, subject to the
modifications in this Agreement, shall apply with respect to the procedures to
be followed with respect to such certificate and the distribution of shares to
the Stockholders or Nu Skin as the case may be. Accepting Holders shall deliver
to the Escrow Agent stock transfer powers duly executed in blank (with
signatures duly notarized if requested by Nu Skin) to facilitate the
distribution of Accepting Holder Total Escrow Shares as contemplated by this
Section 1.
(f) Notwithstanding any other provision of this Agreement, the Merger
Agreement, the Cholestin Escrow Agreement or the certificate delivered or to be
delivered to the Escrow Agent pursuant to Section 7(c) of the Cholestin Escrow
Agreement to the contrary, in each circumstance in which Accepting Holders Total
Cholestin Escrow Shares are to be distributed to the Accepting Holders, the
number of such shares to be distributed to the Accepting Holders shall be
rounded to the nearest whole number. Under no circumstances shall any Accepting
Holder receive more shares from the Escrow Fund (as defined in the Cholestin
Escrow Agreement) than were deposited in that Escrow Fund by or on behalf of
such Accepting Holder.
2. TRADING LIMITATIONS.
(a) Each Stockholder who received a certificate or certificates
representing 21,000 or fewer shares of Class A Common Stock in connection with
the Merger, including, without limitation, the Escrow Shares and the Cholestin
Escrow Shares (the "Merger Consideration"), shall, as of October 16, 1999, be
released from the trading limitations set forth in Article III of that certain
Stockholder's Letter executed by each Stockholder prior to the Merger; provided,
however, that any Accepting Holder who received more than 10,000 shares of
Merger Consideration may, at such Accepting Holder's sole discretion, elect to
be governed by the trading limitations set forth in Section 2(b) hereof by so
indicating on such Accepting Holder's Election Form, and in consideration of
making such election, Nu Skin shall permit such Accepting Holder to participate
in the liquidity event, if any, contemplated by Section 6 hereof.
(b) Each Accepting Holder who received a certificate or certificates
representing more than 21,000 shares of Merger Consideration irrevocably agrees
that, except pursuant to the exercise of registration rights in accordance with
the Registration Rights Agreement, such Accepting Holder shall not, from the
date hereof and for a period ending on the first to occur of (a) three days
following the date that Nu Skin publicly announces its earnings for the fiscal
year ended December 31, 1999 or issues a press release or public statement
indicating that its earnings for the fiscal year ended December 31, 1999 will be
below analysts' expectations, (b) February 10, 2000 and (c) the consummation of
a transaction sponsored or arranged by Nu Skin in which each Accepting Holder's
shares of Class A Common Stock are purchased by Nu Skin or a third party (a
"liquidity event"), but only with respect to those shares sold in such liquidity
event, (i) offer to sell, sell, contract to sell, pledge or otherwise dispose of
any Merger Consideration or any securities substantially similar to the Merger
Consideration, including, but not limited to, any securities that are
convertible into or exchangeable for, or that represent the right to receive,
shares of Class A Common Stock or any substantially similar securities, but
excluding shares of Class A Common Stock, if any, owned by such Accepting Holder
that do not constitute Merger Consideration or (ii) establish a "put equivalent
position" with respect to any of the Merger Consideration within the meaning of
Rule 16a-1(h) under the Securities Exchange Act of 1934, as amended, or (iii)
publicly announce an intention to take any of the actions set forth in (i) or
(ii) above; provided, however, that the limitations set forth above shall not
apply to (A) any bona fide transfers or gifts to the ancestors, siblings,
descendants, spouse or domestic partner of such Accepting Holder, or any trust
for the benefit of such persons or such Accepting Holder, if such Accepting
Holder has provided prior written notice to Nu Skin of such transfer and such
transferee has agreed in writing to be bound by the terms hereof or (B) any
transfer of Merger Consideration to the Stockholders Representatives pursuant to
Section 9.01 of the Merger Agreement; provided, further, that any Accepting
Holder who is subject to paragraph (b) of this Section 2 may, at such Accepting
Holder's sole discretion, take any of the actions set forth in clauses (i)
through (iii) above on or after October 16, 1999 with respect to such Accepting
Holder's pro rata percentage of 150,000 of the shares of Merger Consideration.
Nu Skin and the transfer agent with respect to the Class A Common Stock are
hereby authorized to enforce the provisions of the preceding sentence by
refusing to permit transfers which Nu Skin believes may violate such sentence.
(c) Nu Skin agrees that prior to March 26, 2000, it will not modify,
amend or waive the terms of any transfer restrictions in force as of October 10,
1999 as set forth in that certain Amended and Restated Stockholders Agreement,
as amended through October 10, 1999, among the Nu Skin founding stockholder
group in a manner that could adversely effect the Accepting Holders, except that
Nu Skin may waive such transfer restrictions solely with respect to charitable
contributions approved by Nu Skin's special committee of outside directors
charged with evaluating requests by members of the NUS founding stockholder
group for release of their shares of Class A Common Stock as charitable
contributions consistent with its fiduciary duties and past practices.
3. RELEASE AND WAIVER.
(a) Each of the Accepting Holders hereby fully releases, remises,
acquits, and forever discharges Nu Skin and each of its affiliates, officers,
directors, employees, agents, successors and assigns, and each of such person's
respective heirs, executors, administrators, trustees, beneficiaries, assigns,
predecessors and successors ("Accepting Holders Released Parties") from any and
all claims, suits, obligations, liabilities, causes of action, demands, charges,
complaints, damages, losses, attorney's fees, and costs or expenses, of any kind
whatsoever, whether at law or in equity, whether known or unknown, that the
Accepting Holders, any predecessor or successor in interest of the Accepting
Holders, now has, ever had, or might conceive or accrue in the future against
any of the Accepting Holders Released Parties arising out of, occurring in
connection with, or otherwise relating to the Merger Agreement and all related
transactions, from the beginning of the world up to and including the date
hereof; provided, however, that the foregoing release shall not apply to or
affect (i) any obligations, duties or rights arising under this Agreement, (ii)
any obligations, duties or rights under Sections 5.08, 5.09, 5.12, 5.13, 5.14 or
5.22 of the Merger Agreement, the Registration Rights Agreement or the
respective Stockholder's Letters (other than Article II), (iii) any obligations,
duties or rights under any employment agreement, consulting agreement,
confidentiality agreement, or lost certificate affidavit entered into by and
between Nu Skin and any Stockholder in connection with the Merger Agreement, or
any promissory note assumed or succeeded to by Nu Skin or its affiliates as a
result of the Merger or (iv) any obligations of Nu Skin under the Merger
Agreement (as modified by this Agreement), the Escrow Agreement (as modified by
this Agreement), and/or the Cholestin Escrow Agreement (as modified by this
Agreement), which by the respective terms of such agreements are to be performed
following the date of this Agreement.
(b) Nu Skin, on behalf of itself and all its affiliates, hereby fully
releases, remises, acquits, and forever discharges each Accepting Holder and
each of such person's respective heirs, executors, administrators, trustees,
beneficiaries, assigns, predecessors and successors ("Nu Skin Released Parties")
from any and all claims, suits, obligations, liabilities, causes of action,
demands, complaints, damages, losses, attorney's fees, and costs or expenses, of
any kind whatsoever, whether at law or in equity, whether known or unknown, that
Nu Skin, any predecessor or successor in interest of Nu Skin, now has, ever had,
or might conceive or accrue in the future against any of the Nu Skin Released
Parties arising out of, occurring in connection with, or otherwise relating to
breaches of representations, warranties and covenants under the Merger Agreement
and all related documentation among Nu Skin, the Stockholders and/or the
Stockholders Representatives, from the beginning of the world up to and
including the date hereof; provided, however, that the foregoing release shall
not apply to or affect (i) any obligations, duties or rights arising under this
Agreement, (ii) any obligations, duties or rights under Sections 5.08, 5.09,
5.12, 5.13, 5.14 or 5.22 of the Merger Agreement, the Registration Rights
Agreement or the respective Stockholder's Letters (other than Article II), (iii)
any obligations, duties or rights under any employment agreement, consulting
agreement, confidentiality agreement, or lost certificate affidavit entered into
by and between Nu Skin and any Stockholder in connection with the Merger
Agreement, or any promissory note assumed or succeeded to by Nu Skin or its
affiliates as a result of the Merger or (iv) any obligations of the Accepting
Holders under the Merger Agreement (as modified by this Agreement), the Escrow
Agreement (as modified by this Agreement), and/or the Cholestin Escrow Agreement
(as modified by this Agreement), which by the respective terms of such
agreements are to be performed following the date of this Agreement.
(c) Notwithstanding the respective releases given by the parties
herein, each party hereto shall be entitled to enforce any right created, or
conferred upon such party, by this Agreement, including through instituting
legal action against an otherwise released person. If any party hereto brings an
action to enforce its rights hereunder, the prevailing party shall be entitled
to recover its costs and expenses, including court costs and attorneys' fees
incurred in connection with such suit.
(d) The mutual releases set forth in this Section 3 are entered into by
the Accepting Holders and Nu Skin without any admission of liability to any
other, but solely for the purpose of avoiding costly litigation, further
uncertainty, controversy, and legal expense. Without limiting the foregoing,
nothing contained herein shall be taken or construed to be an inference or
admission by any party or as evidencing or indicating in any degree the truth or
correctness of any claims or defense asserted by any party.
4. BOOK VALUE ADJUSTMENTS. Pursuant to Section 2.08 of the Merger
Agreement, Nu Skin shall deliver to the Escrow Agent for deposit into the Escrow
Account (as defined in the Escrow Agreement) as of October 16, 1999, a
certificate representing 24,434 shares of Class A Common Stock. The Stockholders
and Nu Skin hereby agree that upon such deposit, all required adjustments to the
Merger Consideration shall have been made and no further adjustments to the
Merger Consideration shall be made pursuant to Section 2.08 of the Merger
Agreement.
5. General escrow.
(a) As of October 16, 1999, the Escrow Agent shall distribute to Nu
Skin a total of 103,533 Total Escrow Shares1 from the Escrow Account (as defined
in the Escrow Agreement). The Escrow Agent, the Stockholders Representatives and
Nu Skin shall cause a certificate representing such shares to be delivered to Nu
Skin as payment in full of claims made by Nu Skin pursuant to Sections
7.02(a)(v) and (vii) of the Merger Agreement. Nu Skin, for itself and all
Indemnified Parties, hereby agrees that the Reserved Amount (as defined in the
Escrow Agreement) is $0.00 following the distribution of Total Escrow Shares
described above. All other Total Escrow Shares, other than those distributed to
Nu Skin pursuant to this Section 5(a) or subject to Sections 5(c), 5(d) and 5(f)
below, shall be distributed to the Stockholders promptly following the one year
anniversary of the Effective Date as contemplated by the Escrow Agreement.
Following the distribution to Nu Skin of the Total Escrow Shares pursuant to
this Section 5(a), Nu Skin shall have no further interest in the Escrow Fund (as
defined in the Escrow Agreement) and Nu Skin shall have no further rights,
duties or obligations under the Escrow Agreement.
(b) Upon the Escrow Agent's receipt of certificates representing the
shares referenced in Section 4 hereof, the Escrow Agent shall increase the
number of shares of Class A Common Stock beneficially owned by each Stockholder
or Accepting Holder, as applicable, in the Escrow Fund (as defined in the Escrow
Agreement), pro rata based on such Stockholder's proportionate interest in such
deposited shares. In lieu of issuing and depositing the 24,434 shares required
by Section 4 hereof, Nu Skin may authorize the Escrow Agent to reduce by 24,434
the number of shares to be delivered to Nu Skin pursuant to Section 5(a).
(c) Notwithstanding any other provision in the Merger Agreement or in
Escrow Agreement to the contrary, the Accepting Holders' pro rata portion of the
set aside in the Escrow Fund (as defined in the Escrow Agreement) originally
consisting of $250,000 in cash and Class A Common Stock and 33,207 Escrow Shares
established pursuant to Section 10(b)(ii) of the Escrow Agreement (the "SR
Expense Set Aside") remaining after payment of all Stockholders Representatives,
accrued and unpaid expenses through the date this Agreement is actually executed
and delivered, shall be held by the Escrow Agent in the Escrow Account (as
defined in the Escrow Agreement) to pay the accrued and unpaid fees and expenses
of the Stockholders Representatives without regard to the termination of the
Escrow Fund (as defined in the Escrow Agreement). Any claims made by the
Stockholders Representatives against the SR Expense Set Aside shall comply with
the provisions of Section 10(b)(ii) of the Escrow Agreement. As soon as the
Stockholders Representatives are satisfied that their responsibilities to the
Stockholders have been discharged, the Stockholders Representatives shall
deliver a certificate to the Escrow Agent to that effect. Upon the Escrow
Agent's receipt of such certificate, the Escrow Agreement shall be deemed
terminated in accordance with Section 14 of the Escrow Agreement and the balance
of the SR Expense Set Aside shall be distributed in accordance with Section 8(h)
of the Escrow Agreement.
(d) As of October 25, 1999, the Escrow Agent and the Stockholders
Representatives shall take such action as may be necessary to (i) reduce the
Accepting Holders' pro rata portion of 173,913 shares of Class A Common Stock on
deposit in the Escrow Fund (as defined in the Escrow Agreement), (ii) cause a
certificate representing such shares to be transferred to the Escrow Agent for
deposit into the Escrow Fund (as defined in the Stockholder Escrow Agreement).
Following such deposit, the Escrow Fund (as defined in the Stockholder Escrow
Agreement) shall be held or distributed, as the case may be, in accordance with
the terms of the Stockholder Escrow Agreement. Notwithstanding any other
provision to the contrary in the Stockholder Escrow Agreement, including,
without limitation, Section 13(b) thereof, the Stockholders Escrow Agreement
shall not terminate until the Stockholders Representatives are satisfied that
their obligations as described in Section 3 of the Stockholders Escrow
Agreement, and all reasonable expenses incurred in connection therewith, have
been discharged, at which time the Stockholders Representatives shall deliver a
certificate to the Escrow Agent to that effect and the Escrow Agent shall
promptly, but no later than ten days following receipt of such certificate from
the Stockholders Representatives, distribute to the Stockholders pro rata any
cash or shares of Class A Common Stock remaining in the Escrow Fund (as defined
in the Stockholders Escrow Agreement).
(e) For the purposes of Sections 5(c) and 5(d) hereof, the Accepting
Holders' (as a group) pro rata portion of (i) the remaining SR Expense Set Aside
as described in Section 5(c) and (ii) the 173,913 shares that were to be
deposited pursuant to Stockholders Escrow Agreement as described in Section 5(d)
will be equal to a fraction (expressed as a percentage), the numerator of which
is the total number of shares of Merger Consideration received by the Accepting
Holders and the denominator of which is the total number of shares of Merger
Consideration received by all Stockholders.
(f) The Rejecting Holders' portion of (i) the remaining SR Expense Set
Aside (after payment of all Stockholders Representatives' accrued and unpaid
expenses through the date that this Agreement is actually executed and
delivered) and (ii) the 173,193 Shares of Merger Consideration that were to have
been deposited in escrow pursuant to the Stockholders Escrow Agreement, will be
distributed to each Rejecting Holder pro rata in accordance with Section 8(h) of
the Escrow Agreement. For the purposes of this Section 5(f), each Rejecting
Holder's pro rata interest in distributions pursuant to this Section 5(f) shall
equal the total amount to be distributed multiplied by a fraction, the numerator
of which is the number of shares of Merger Consideration received by such
Rejecting Holder and the denominator of which is the total number of shares of
Merger Consideration received by all Rejecting Holders.
6. LIQUIDITY.
Nu Skin agrees to use its reasonable best efforts, acting in good
faith, to provide Accepting Holders who are subject to the trading limitations
set forth in Section 2(b) hereof an opportunity to participate in a commercially
reasonable liquidity event on or before April 15, 2000. For purposes of this
Section 6, each Accepting Holder acknowledges that a commercially reasonable
liquidity event may include a private or public transaction at a price per share
below the closing price of Class A Common Stock on the day immediately preceding
the date of the closing of such liquidity event; provided, however, that the per
share consideration received by Accepting Holders in connection with such
liquidity event shall in no event be less than the per share amount of
consideration offered to the Nu Skin founding stockholder group or to Nu Skin in
connection with a related financing transaction; provided, further, that any
Accepting Holder who participates in such liquidity event and thereby has the
opportunity to sell at least 50% of all of such Stockholder's Merger
Consideration, excluding for purposes of such calculation any shares of such
Stockholder's Merger Consideration held in escrow as of the date of the
liquidity event (the "Eligible Shares"), agrees that the trading limitations set
forth in Section 2(b) hereof shall remain in effect until the later of (a) the
end of the restricted period set forth in Section 2(b) hereof or (b) 90 days
following the closing of such liquidity event; and, provided further, that (i)
if less than fifty percent (50%) of the Eligible Shares are tendered in such
liquidity event, Accepting Holders who elect not to participate in such
liquidity event (the "Non-participating Holders") agree that the trading
limitations set forth in Section 2(b) hereof shall remain in effect with respect
to such Accepting Holders shares of Merger Consideration until 60 days following
the closing of such liquidity event and (ii) if fifty percent (50%) or more of
the Eligible Shares are tendered in such liquidity event, Non-participating
Holders agree that the trading limitations set forth in Section 2(b) hereof
shall remain in effect with respect to such Accepting Holders shares of Merger
Consideration until 45 days following the closing of such liquidity event;
provided, however, that (x) notwithstanding (i) or (ii) above, in no event shall
the restricted period end prior to the period set forth in Section 2(b) and (y)
under no circumstances shall any Accepting Holder be required to agree to any
transfer restriction relating to a liquidity event that is more restrictive as
to time, scope or otherwise, than those agreed to by any member of the Nu Skin
founding stockholder group participating in such (or a related) liquidity event.
7. REGISTRATION RIGHTS.
Each Accepting Holder irrevocably agrees to vote such Accepting
Holder's shares of Merger Consideration in favor of not more than one demand
registration right under the Registration Rights Agreement.
8. Effectiveness.
Each of the Merger Agreement, the Cholestin Escrow Agreement, the
Escrow Agreement and the Stockholder Escrow Agreement is specifically amended to
the extent provided herein and as necessary to give effect to such amendments.
Except as provided in the immediately preceding sentence, such agreements shall
continue in full force and effect.
9. ESCROW AGENT.
The Escrow Agent shall receive fees in the amount of (a) $3,000 for the
administration of the Escrow Fund (as defined in the Cholestin Escrow Agreement,
as modified by this Agreement) and (b) $2,750 for the administration of the
Escrow Fund (as defined in the Escrow Agreement, as modified by this Agreement)
for services rendered by the Escrow Agent under this Agreement for the period
from October 17, 1999 through October 16, 2000. All such fees owed to the Escrow
Agent hereunder shall be paid and satisfied out of those respective Escrow Funds
or such other sources as the parties hereto shall mutually agree. All
computations required to be made under the terms of this Agreement in
calculating the number of shares to be distributed from any escrow by the Escrow
Agent hereunder shall be made by Nu Skin and/or the Stockholders
Representatives, and such party shall provide any such computation in writing to
the other parties hereto.
10. GOVERNING LAW.
This Agreement, and all matters relating hereto, shall be governed by,
and construed in accordance with the laws of the State of Delaware applicable to
contracts executed and to be performed within that State.
11. ENTIRE AGREEMENT.
This Agreement constitutes the entire agreement between the parties and
supersede all prior agreements and understandings, both written and oral,
between the parties, or any of them, with respect to the subject matter hereof.
12. COOPERATION.
Each party agrees to cooperate with the other and to take all action
reasonably necessary to give full effect to the provisions and intent of this
Agreement.
13. AMENDMENTS.
This Agreement may not be amended or modified except by an instrument
in writing signed by, or on behalf of, the Stockholders Representatives, Nu Skin
and the Escrow Agent.
14. AUTHORIZATION.
The Stockholders Representatives, Nu Skin and the Escrow Agent each
represent and warrant (i) this Agreement has been duly and validly authorized,
executed and delivered, subject to the application of equitable remedies, and
(ii) each person executing this Agreement on behalf of the parties hereto is
duly authorized and fully competent to execute this Agreement on behalf of such
parties.
15. NOTICES.
All notices or other communications hereunder shall be in writing and
shall be given or made (and shall be deemed to have been duly given or made upon
receipt) by delivery in person, or by overnight courier service, telecopy, or
registered or certified mail (postage prepaid, return receipt requested) to the
respective parties hereto at their address set forth below:
if to the Stockholders Representatives:
John Diekman
c/o Bay City Capital, LLC
750 Battery Street, Suite 600
San Francisco, California 94111
Telecopier: (415) 837-0996
with a copy to:
Latham & Watkins
233 South Wacker Drive, Suite 5800
Chicago, Illinois 60606
Attention: Michael A. Pucker
Telecopier: (312) 993-9767
if to Nu Skin:
Nu Skin Enterprises, Inc.
One Nu Skin Plaza
75 West Center Street
Provo, Utah 84601
Attention: M. Truman Hunt
Telecopier: (801) 345-3099
if to the Escrow Agent:
LaSalle Bank National Association
135 South LaSalle Street
Suite 1960
Chicago, Illinois 60603
Attention: Mark F. Rimkus
Telecopy: (312) 904-2236
or to such other persons or addresses as may be designated in writing by the
party to receive such notice as provided above.
16. COUNTERPARTS.
This Agreement may be executed in any number of counterparts, and by
different parties hereto in separate counterparts, each of which when executed
shall be deemed to be an original but all of which when taken together shall
constitute one and the same agreement.
17. NO third party beneficiaries.
This Agreement is for the sole benefit of the parties hereto, the
Stockholders and their permitted assigns, and nothing herein, express or
implied, is intended to or shall confer upon any other person or entity any
legal or equitable right, benefit or remedy of any nature whatsoever under or by
reason of this Agreement.
18. SEVERABILITY.
If any term or other provision of this Agreement is invalid, illegal or
incapable of being enforced by any rule of Law or public policy, all other
conditions and provisions of this Agreement shall nevertheless remain in full
force and effect so long as the economic and legal substance of the transactions
contemplated by this Agreement is not affected in any manner materially adverse
to any party. Upon such determination that any term or other provisions is
invalid, illegal or incapable of being enforced, the parties hereto shall
negotiate in good faith to modify this Agreement so as to effect the original
intent of the parties as closely as possible in a mutually acceptable manner in
order that the transactions contemplated by this Agreement be consummated as
originally contemplated to the fullest extent possible.
19. SUCCESSORS AND ASSIGNS.
This Agreement shall be binding upon, inure to the benefit of and be
enforceable by the parties and their respective successors and assigns.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
IN WITNESS WHEREOF, this Agreement has been duly executed and delivered
by the parties hereto as of the date first written above.
NU SKIN ENTERPRISES, INC.
By: /s/ M. Truman Hunt
Name: M. Truman Hunt
Title: Vice President and
General Counsel
/s/ John Diekman
John Diekman
/s/Gerald L. Cohn
Gerald L. Cohn
/s/William McGlashan, Jr.
William McGlashan, Jr.
/s/Henry S. Burdick
Henry S. Burdick
/s/Peter Castleman
Peter Castleman
Not individually, but each in his capacity as a Stockholders
Representative and as attorneys in fact of the Accepting Holders
LASALLE BANK NATIONAL ASSOCIATION,
as Escrow Agent
By: Russell C. Bergman
Name:Russell C. Bergman
Title:Vice President
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<PERIOD-END> SEP-30-1999
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