SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
-----------------
FORM 10-Q
(MarkOne)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED
JUNE 30, 2000
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 August 7, 2000, 30,918,332 shares of the Company's Class A Common
Stock, $.001 par value per share, and 54,578,780 shares of the Company's Class B
Common Stock, $.001 par value per share, were outstanding.
<PAGE>
NU SKIN ENTERPRISES, INC.
2000 FORM 10-Q QUARTERLY REPORT - SECOND QUARTER
TABLE OF CONTENTS
Page
Part I. Financial Information
Item 1. Financial Statements:
Consolidated Balance Sheets ..........................2
Consolidated Statements of Income ....................3
Consolidated Statements of Cash Flows ................4
Notes to Consolidated Financial Statements ...........5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations .................10
Item 3. Quantitative and Qualitative Disclosures about Market Risk .16
Part II. Other Information
Item 1. Legal Proceedings ..........................................17
Item 2. Changes in Securities ......................................17
Item 3. Defaults upon Senior Securities ............................17
Item 4. Submission of Matters to a Vote of Security Holders ........17
Item 5. Other Information ..........................................18
Item 6. Exhibits and Reports on Form 8-K ...........................18
Signatures ..........................................................19
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)
June 30, December 31,
2000 1999
ASSETS ----------- -----------
Current assets
<S> <C> <C>
Cash and cash equivalents $ 48,014 $ 110,162
Accounts receivable 19,090 18,160
Related parties receivable 13,834 16,424
Inventories, net 92,035 85,751
Prepaid expenses and other 61,881 52,388
----------- -----------
234,854 282,885
Property and equipment, net 57,773 57,948
Other assets, net 299,401 302,382
----------- -----------
Total assets $ 592,028 $ 643,215
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 12,093 $ 22,685
Accrued expenses 104,614 114,691
Related parties payable 11,381 15,059
Current portion of long-term debt 48,051 55,889
----------- -----------
176,139 208,324
Long-term debt, less current portion 39,877 89,419
Other liabilities 36,093 36,093
----------- ----------
Total liabilities 252,109 333,836
----------- ----------
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, 31,377,528 and 32,002,158 shares issued and outstanding 31 32
Class B common stock - 100,000,000 shares authorized, $.001 par value,
54,578,780 and 54,606,905 shares issued and outstanding 55 55
Additional paid-in capital 114,709 119,652
Retained earnings 275,293 244,758
Deferred compensation (3,639) (6,898)
Accumulated other comprehensive income (46,530) (48,220)
----------- ----------
339,919 309,379
----------- ----------
Total liabilities and stockholders' equity $ 592,028 $ 643,215
=========== ==========
</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 Six Six
Months Ended Months Ended Months Ended Months Ended
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue $ 226,959 $ 211,286 $ 440,584 $ 445,037
Cost of sales 38,605 36,019 72,896 77,036
------------ ------------ ------------ ------------
Gross profit 188,354 175,267 367,688 368,001
------------ ------------ ------------ ------------
Operating expenses
Distributor incentives 88,468 81,640 171,263 169,289
Selling, general and administrative 74,539 61,220 149,536 119,225
------------ ------------ ------------ ------------
Total operating expenses 163,007 142,860 320,799 288,514
------------ ------------ ------------ ------------
Operating income 25,347 32,407 46,889 79,487
Other income (expense), net (868) 1,980 821 3,844
------------ ------------ ------------ ------------
Income before provision for income taxes 24,479 34,387 47,710 83,331
Provision for income taxes 8,812 12,379 17,175 30,488
------------ ------------ ------------ ------------
Net income $ 15,667 $ 22,008 $ 30,535 $ 52,843
============ ============ ============ ============
Net income per share (Note 4):
Basic $ .18 $ .25 $ .35 $ .60
Diluted $ .18 $ .25 $ .35 $ .60
Weighted average common shares outstanding:
Basic 85,865 87,158 86,044 87,466
Diluted 86,192 88,425 86,370 88,750
</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>
Six Six
Months Ended Months Ended
June 30, June 30,
2000 1999
------------ ------------
Cash flows from operating activities:
<S> <C> <C>
Net income $ 30,535 $ 52,843
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 15,170 14,014
Amortization of deferred compensation 3,259 1,393
Changes in operating assets and liabilities:
Accounts receivable (930) (369)
Related parties receivable 2,590 (6,824)
Inventories, net (6,284) 9,644
Prepaid expenses and other (9,493) (13,953)
Other assets, net (5,282) (5,093)
Accounts payable (10,592) 3,342
Accrued expenses (10,077) (21,512)
Related parties payable (3,678) (29)
------------ ------------
Net cash provided by operating activities 5,218 33,456
------------ ------------
Cash flows from investing activities:
Purchase of property and equipment (9,032) (11,699)
Payments for lease deposits (24) (1,274)
Receipt of refundable lease deposits 725 161
------------ ------------
Net cash used in investing activities (8,331) (12,812)
------------ ------------
Cash flows from financing activities:
Repurchase of shares of common stock (Note 6) (4,987) (15,541)
Exercise of distributor and employee stock options 43 2,264
Termination of Nu Skin USA license fee -- (10,000)
Payment to stockholders under the NSI Acquisition -- (25,000)
Payments on long-term debt (55,678) (14,545)
------------ ------------
Net cash used in financing activities (60,622) (62,822)
------------ ------------
Effect of exchange rate changes on cash 1,587 144
------------ ------------
Net decrease in cash and cash equivalents (62,148) (42,034)
Cash and cash equivalents, beginning of period 110,162 188,827
------------ ------------
Cash and cash equivalents, end of period $ 48,014 $ 146,793
============ ============
</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 leading, global direct
selling company that develops and distributes premium-quality, innovative
personal care products and nutritional supplements and technology and
telecommunication products and services. The Company distributes products
throughout the world. The Company's operations are divided into three
segments: North Asia, which consists of Japan and South Korea; Southeast
Asia, which consists of Australia, Hong Kong (including Macau), New
Zealand, the PRC (China), the Philippines, Taiwan and Thailand; and Other
Markets, which consists of the Company's markets in Europe, South America
and North America (the Company's subsidiaries operating in these
countries are collectively referred to as the "Subsidiaries"). The
Company was incorporated on September 4, 1996 as a holding company.
The Company completed the acquisition (the "NSI Acquisition") of the
capital stock of Nu Skin International, Inc. ("NSI"), NSI affiliates in
Europe, South America, Australia and New Zealand and certain other NSI
affiliates (collectively, the "Acquired Entities") on March 26, 1998.
The Company completed the acquisition of privately-held Generation Health
Holdings, Inc., the parent company of Pharmanex, Inc., on October 16,
1998, which enhanced the Company's involvement with the distribution and
sale of nutritional products.
As discussed in Note 2, on March 8, 1999, NSI 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 3, the Company completed the Big Planet 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 June 30, 2000 and for the three and six-month periods
ended June 30, 2000 and 1999. 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,
1999.
5
<PAGE>
Nu Skin Enterprises, Inc.
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
2. 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 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 in exchange for assuming
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.
3. 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 Big Planet approximately
$4.5 million immediately prior to 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. During the three and
six-month periods ended June 30, 2000, the Company recorded amortization
on the intangible assets relating to the Big Planet Acquisition of $0.6
million and $1.2 million, respectively. Big Planet incurred operating
losses of approximately $22.8 million from the period January 1, 1999
through July 12, 1999 and approximately $13.0 million for the six-month
period ended June 30, 2000.
4. NET INCOME PER SHARE
Net income per share is computed based on the weighted average number of
common shares outstanding during the periods presented. Additionally,
diluted earnings per share data gives effect to all dilutive potential
common shares that were outstanding during the periods presented.
5. 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.
6
<PAGE>
Nu Skin Enterprises, Inc.
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
At June 30, 2000 and December 31, 1999, the Company held foreign currency
forward contracts with notional amounts totaling approximately $26.4
million and $31.1 million, respectively, to hedge foreign currency items.
These contracts do not qualify as hedging transactions and, accordingly,
have been marked to market. The net gains on foreign currency forward
contracts were $0.8 million and $0.1 million for the three-month periods
ended June 30, 2000 and 1999, respectively, and were $1.9 million and
$2.6 million for the six-month periods ended June 30, 2000 and 1999,
respectively. These contracts at June 30, 2000 have maturities through
February 2001.
6. REPURCHASE OF COMMON STOCK
During the three-month periods ended June 30, 2000 and 1999, the Company
repurchased approximately 392,000 and 220,000 shares, respectively, of
Class A common stock for approximately $2.5 million and $3.7 million,
respectively. During the six-month periods ended June 30, 2000 and 1999,
the Company repurchased approximately 679,000 and 1,002,000 shares,
respectively, of Class A common stock for approximately $5.0 million and
$15.5 million, respectively.
7. COMPREHENSIVE INCOME
The components of comprehensive income, net of related tax, for the three
and six-month periods ended June 30, 2000 and 1999, were as follows (in
thousands):
<TABLE>
<CAPTION>
Three Three Six Six
Months Ended Months Ended Months Ended Months Ended
June 30, 2000 June 30, 1999 June 30, 2000 June 30, 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net income $ 15,667 $ 22,008 $ 30,535 $ 52,843
Other comprehensive income, net of tax:
Foreign currency translation adjustments 1,606 61 1,690 (635)
------------- ------------- ------------- -------------
Comprehensive income $ 17,273 $ 22,069 $ 32,225 $ 52,208
============= ============= ============= =============
</TABLE>
8. 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):
7
<PAGE>
Nu Skin Enterprises, Inc.
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Three Six Six
Months Ended Months Ended Months Ended Months Ended
June 30, 2000 June 30, 1999 June 30, 2000 June 30,1999
------------- ------------- ------------- ------------
Revenue
<S> <C> <C> <C> <C>
North Asia $ 149,805 $ 143,356 $ 290,178 $ 316,404
Southeast Asia 66,517 69,980 143,238 137,761
Other Markets 100,325 82,582 206,988 149,983
Eliminations (89,688) (84,632) (199,820) (159,111)
------------- ------------- ------------- ------------
Totals $ 226,959 $ 211,286 $ 440,584 $ 445,037
============= ============= ============= ============
Operating Income
North Asia $ 10,286 $ 22,516 $ 17,505 $ 50,636
Southeast Asia 8,157 7,329 16,665 16,061
Other Markets 1,867 1,123 9,308 5,494
Eliminations 5,037 1,439 3,411 7,296
------------- ------------- ------------- ------------
Totals $ 25,347 $ 32,407 $ 46,889 $ 79,487
============= ============= ============= ============
As of As of
June 30, December 31,
2000 1999
------------- ------------
Total Assets
North Asia $ 92,140 $ 116,918
Southeast Asia 64,925 111,204
Other Markets 473,634 520,832
Eliminations (38,671) (105,739)
------------- ------------
Totals $ 592,028 $ 643,215
============= ============
</TABLE>
Information as to the Company's operations in different geographical areas
is set forth below (in thousands):
Revenue
Revenue from the Company's operations in Japan totaled $142,408 and
$139,232 for the three-month periods ended June 30, 2000 and 1999,
respectively, and totaled $277,021 and $308,862 for the six-month periods
ended June 30, 2000 and 1999, respectively. Revenue from the Company's
operations in Taiwan totaled $21,395 and $25,918 for the three-month
periods ended June 30, 2000 and 1999, respectively, and totaled $43,613 and
$53,925 for the six-month periods ended June 30, 2000 and 1999,
respectively. Revenue from the Company's operations in the United States
(which includes intercompany revenue) totaled $94,144 and $77,374 for the
three-month periods ended June 30, 2000 and 1999, respectively, and totaled
$195,629 and $140,517 for the six-month periods ended June 30, 2000 and
1999, respectively.
8
<PAGE>
Nu Skin Enterprises, Inc.
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
Long-lived assets
Long-lived assets in Japan were $26,637 and $29,314 as of June 30, 2000
and December 31, 1999, respectively. Long-lived assets in Taiwan were
$3,473 and $3,381 as of June 30, 2000 and December 31, 1999,
respectively. Long-lived assets in the United States were $297,551 and
$310,255 as of June 30, 2000 and December 31, 1999, respectively.
9. NEW ACCOUNTING STANDARDS
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. Changes in the fair value of
derivatives are recorded each period in current earnings or other
comprehensive income, depending on the intended use of the derivative and
its resulting designation. The 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.
Revenue Recognition in Financial Statements
In December 1999, the Securities and Exchange Commission staff issued
staff Accounting Bulletin No. 101 ("SAB 101"), Revenue Recognition in
Financial Statements, which provides guidance on the recognition,
presentation and disclosure of revenue in financial statements. SAB 101
did not impact the Company's revenue recognition policies.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
2000 compared to 1999
Revenue increased 7.4% to $227.0 million from $211.3 million for the
three-month period ended June 30, 2000, compared with the same period in 1999,
respectively, and revenue decreased 1.0% to $440.6 million from $445.0 million
for the six-month period ended June 30, 2000, compared with the same period in
1999, respectively. Revenue for the second quarter of 2000 benefitted from an
additional $14.5 million in revenue in the USA from Big Planet after the Big
Planet Acquisition in July 1999 as well as favorable currency exchange rates in
the current year period.
Revenue in North Asia increased 4.5% to $149.8 million from $143.4
million for the three-month period ended June 30, 2000, compared with the same
period in 1999, respectively and decreased 8.3% to $290.2 million from $316.4
million for the six-month period ended June 30, 2000, compared with the same
period in 1999, respectively. The increase in revenue for the second quarter of
2000 was due to revenue in Japan increasing 2.3% to $142.4 million from $139.2
million in the second quarter of 1999 and also due to revenue in South Korea
increasing 80.5% to $7.4 million from $4.1 million. The revenue increase in
Japan is due to a stronger Japanese yen in the year 2000 versus the prior year.
In local currency terms, revenue in Japan was 9.7% lower in the second quarter
and 19.4% lower for the six-month period ended June 30, 2000 versus the prior
year. The 2000 results reflect the impact of distributor productivity issues as
well as increased competition experienced by the Company over the last 12
months. On a sequential basis, however, revenue increased 6.1% on a local
currency basis due to a favorable distributor response to the launch of the
Pharmanex business opportunity late in the first quarter and the launch of the
popular Nu Skin 180 anti-aging skin therapy product late in the second quarter.
In South Korea, the revenue increase is primarily due to significant growth in
the Pharmanex division which included the launch of the Company's Body Design
weight management products in the second quarter.
Revenue in Southeast Asia decreased 14.4% and 16.3% to $29.8 million
and $60.2 million for the three and six-month periods ended June 30, 2000 from
$34.8 million and $71.9 million for the same periods in 1999, respectively. This
decline in revenue was primarily a result of revenue in Taiwan decreasing 17.4%
and 19.1% to $21.4 million and $43.6 million for the three and six-month periods
ended June 30, 2000 from $25.9 million and $53.9 million for the same periods in
1999, respectively. The Company's 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
the uncertainty of the viability of direct selling activities in the PRC as well
as economic concerns throughout Southeast Asia. In addition, direct selling as a
distribution channel has significantly penetrated the Taiwan market. Management
believes that the Company's operations in Taiwan have also continued to suffer
the impact of a major earthquake, which occurred during the third quarter of
1999.
Revenue in the Company's other markets, which include its European
and North and South America markets, increased 42.9% and 58.8% to $47.3 million
and $90.2 million for the three and six-month periods ended June 30, 2000 from
$33.1 million and $56.8 million for the same periods in 1999, respectively. This
increase in revenue is due to the additional revenue of $14.5 million and $23.9
million for the three and six-month periods ended June 30, 2000, respectively,
from Big Planet following the Big Planet Acquisition, which occurred in July
1999 as well as revenue from the transition of representatives and customers of
I-Link in March 2000, resulting in sequential and year over year revenue
increases in the USA. On a divisional basis, other U.S.-based divisions were
relatively constant on a sequential and a year over year basis as more
distributors focused on Big Planet. In addition, the increase in revenue for the
six-month period also related to revenue of $26.3 million for the three-month
period ended March 31, 2000 compared to revenue of $5.7 million from March 8,
1999 through March 31, 1999 from sales in the United States resulting from the
termination of the Company's license agreement with Nu Skin USA, which occurred
in
10
<PAGE>
March 1999. This additional revenue more than offset the elimination of revenue
from sales to the Company's former affiliates in these markets, which revenue is
now eliminated in consolidation.
Gross profit as a percentage of revenue remained constant at 83.0%
for the three-month period ended June 30, 2000 compared to the same period in
the prior year and increased to 83.5% for the six-month period ended June 30,
2000 compared to 82.7% for the same period in the prior year. The increase in
the gross profit percentage for the six-month period in 2000 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, increased
local manufacturing efforts and reduced duty rates. The Company purchases a
significant majority of goods in U.S. dollars and recognizes revenue in local
currency and is consequently subject to exchange rate risks in its gross
margins. The Company's gross margin was negatively impacted by Big Planet
operations, which includes the sale of lower margin technology products and
services. Due to the continued growth in revenue from Big Planet, the impact of
Big Planet on gross margins had a greater offsetting effect in the second
quarter of 2000, than it did in the first quarter.
Distributor incentives as a percentage of revenue increased to 39.0%
and 38.9% for the three and six-month periods ended June 30, 2000 compared to
38.6% and 38.0% for the same periods in the prior year, respectively. The
primary reason for the increase in 2000 was the termination of the Company's
license agreement with Nu Skin USA which resulted in the Company beginning to
sell products directly to distributors in the United States and paying the
requisite commissions related to those sales. In addition, the Company recently
restructured a portion of its compensation plan for distributors, adding
short-term, division-focused incentives, which has increased compensation to the
Company's entry-level distributors since the later part of 1999.
Selling, general and administrative expenses as a percentage of revenue
increased to 32.8% and 33.9% of revenue, respectively, for the three and
six-month periods ended June 30, 2000 compared to 29.0% and 26.8% of revenue,
respectively, for the same periods in the prior year. In U.S. dollar terms,
selling, general and administrative expenses increased to $74.5 million and
$149.5 million for the three and six-month periods ended June 30, 2000 compared
to $61.2 million and $119.2 million for the same periods in the prior year,
respectively. This increase was due primarily to an additional $8.9 million and
$17.0 million of selling, general and administrative expenses relating to the
assumed operations of Big Planet for the three and six-month periods ended June
30, 2000, respectively. In addition, the Company incurred an incremental $5.0
million of overhead expenses during the first half of 2000 compared to the first
half of 1999, for operations in North America following the acquisition of
certain assets from Nu Skin USA in March 1999 and operations in Canada, Mexico
and Guatemala in May 1999. Selling, general and administrative expenses also
increased year-over-year due to stronger foreign currencies in 2000, primarily
the Japanese yen, and a convention held in Japan in the first quarter of 2000
which resulted in higher expenses of approximately $4.7 million in Japan in the
first quarter of 2000, versus the same period in the prior year.
Operating income decreased to $25.3 million and $46.9 million for the
three and six-month periods ended June 30, 2000 from $32.4 million and $79.5
million in the same prior-year periods, respectively. Operating margin decreased
to 11.2% and 10.6% for the three and six-month periods ended June 30, 2000
compared to 15.3% and 17.9% for the same prior-year periods, respectively.
Operating income and margin decreased primarily due to the increase in selling,
general and administrative expenses noted in the preceding paragraph.
Other income (expense), net decreased $2.8 million and $3.0 million for
the three and six-month periods ended June 30, 2000 compared to the same periods
in the prior year. These decreases are related to the lower net gains recorded
on foreign currency contracts in 2000 compared to 1999 due to the strengthening
of the Japanese yen in relation to the U.S. dollar.
11
<PAGE>
Provision for income taxes decreased to $8.8 million and $17.2 million
for the three and six-month periods ended June 30, 2000 from $12.4 million and
$30.5 million for the same periods in the prior year, respectively. This
decrease is primarily related to the decline in income before taxes as a result
of the factors noted above.
Net income decreased to $15.7 million and $30.5 million for the three
and six-month periods ended June 30, 2000 from $22.0 million and $52.8 million,
respectively. Net income as a percentage of revenue decreased to 6.9% for the
three and six-month periods ended June 30, 2000 from 10.4% and 11.9% for the
same periods in the prior year, respectively. These decreases resulted due to
the factors noted in "operating income" and "other income" and were offset by
the factors noted in "provision for income taxes" above.
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 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 typically generates positive cash flow from operations due
to favorable gross margins, the variable nature of distributor commissions which
compromise a significant percentage of operating expenses, and minimal capital
requirements. During the first and third quarters of each year, however, the
Company pays significant accrued income taxes in many foreign jurisdictions
including Japan. These large cash payments often more than offset significant
cash generated in these quarters. During the six-month period ended June 30,
2000, the Company generated $5.2 million from operations compared to $33.5
million during the six-month period ended June 30, 1999. The significant
decrease in cash generated from operations in 2000 compared to the same
prior-year period primarily related to reduced net income in 2000 compared to
1999 of $22.3 million and the increase in inventory of approximately $21.0
million as of June 30, 2000 compared to inventory as of June 30, 1999, which
were somewhat offset by reduced foreign income taxes paid in the first half of
2000, compared to the same period in the prior year.
As of June 30, 2000, working capital was $58.7 million compared to
$74.6 million as of December 31, 1999. Cash and cash equivalents at June 30,
2000 and December 31, 1999 were $48.0 million and $110.2 million, respectively.
Both the decreases in working capital and cash and cash equivalents are related
primarily to the debt payment of $55.7 million in March 2000 for the current
portion of long-term debt, as well as lower cash generated from operations as
discussed above.
Capital expenditures, primarily for equipment, computer systems and
software, office furniture and leasehold improvements, were $9.0 million for the
six-month period ended June 30, 2000. In addition, the Company anticipates
additional capital expenditures through the remainder of 2000 of approximately
$18.0 million to further enhance its infrastructure, including enhancements to
computer systems and Internet related software in order to expand the Company's
Internet capabilities and 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 to the stockholders of NSI
(the "NSI Stockholders") of $25.0 million. The Company and NSI did not meet
specific earnings growth targets for the year ended December 31, 1999. However,
contingent upon NSI and the Company meeting earnings growth targets during 2000
and 2001, the Company may pay up to $75.0 million in cash over the next two
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 the Acquired Entities. Any
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<PAGE>
additional contingent consideration paid over the next two years, if any, will
be accounted for in a similar manner.
In May 1998, the Company and its Japanese subsidiary Nu Skin Japan Co.,
Ltd. entered into a $180.0 million credit facility (the "Credit Facility") with
a syndicate of financial institutions for which ABN-AMRO, N.V. acted as agent.
The 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
Co., Ltd. borrowed the Japanese yen equivalent of $70.0 million denominated in
local currency. Payments against the credit facility totaling $41.6 million were
made during the second quarter of 1998, payments totaling $14.5 million were
made during the first quarter of 1999 and payments totaling $55.7 million were
made during the first quarter of 2000. As of June 30, 2000, the balance relating
to the Credit Facility totaled $87.9 million based on the quarter end exchange
rate of Japanese yen to the U.S. dollar. In March 2000, the payment terms of the
Credit Facility were extended resulting in a payment of approximately $48.1
million due in 2001 and approximately $19.9 million due in each of 2002 and
2003. 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 Company'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 of the
Credit Facility as extended is March 31, 2003. 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, 2001 with a possible extension upon approval of the lender. There were
no outstanding balances under this credit facility at June 30, 2000.
Since August 1998, the board of directors has authorized the Company to
repurchase up to $40.0 million of the Company's outstanding shares of Class A
common stock. The repurchases are used primarily to fund the Company's equity
incentive plans. During the three and six-month periods ended June 30, 2000, the
Company repurchased approximately 392,000 and 679,000 shares for an aggregate
price of approximately $2.5 million and $5.0 million, respectively. As of June
30, 2000, the Company had repurchased a total of 2,960,102 shares for an
aggregate price of approximately $32.5 million. In addition, in March 1999, in
connection with the termination of the license and distribution agreements with
Nu Skin USA, 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.
The Company had related party payables of $11.4 million and $15.1
million at June 30, 2000 and December 31, 1999, respectively. In addition, the
Company had related party receivables of $13.8 million and $16.4 million,
respectively, at those dates. Related party balances outstanding in excess of 60
days beyond the date they become due and payable bear interest at a rate of 2%
above the U.S. prime rate. As of June 30, 2000, no material related party
payables or receivables had been outstanding for more than 60 days beyond the
date they are due and payable.
Management considers the Company to be sufficiently liquid to be able
to meet its obligations on both a short and long-term basis. Management
currently believes existing cash balances together with future cash flows from
operations will be adequate to fund cash needs relating to the implementation of
the Company's strategic plans.
Seasonality
In addition to general economic factors, the direct selling industry is
impacted by seasonal factors and trends such as major cultural events and
vacation patterns. For example, Japan, Taiwan, Hong Kong,
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<PAGE>
South Korea and Thailand celebrate their respective local New Year in our first
quarter. Management believes that direct selling in Japan and Europe is also
generally negatively impacted during the month of August, which is in the
Company's third quarter, when many individuals traditionally take vacations.
Distributor Information
The following table provides information concerning the number of
active and executive distributors as of the dates indicated.
<TABLE>
<CAPTION>
As of June 30, 2000 As of June 30, 1999
------------------- -------------------
Active Executive Active Executive
-------- --------- -------- ---------
<S> <C> <C> <C> <C>
North Asia 301,000 14,119 330,000 15,822
Southeast Asia 96,000 2,929 117,000 4,283
Other Markets 72,000 3,600 73,000 3,506
-------- --------- -------- ---------
Total 469,000 20,648 520,000 23,611
======== ========= ======== =========
</TABLE>
Currency Risk and Exchange Rate Information
A majority of the Company's revenue and many of the Company's expenses are
recognized primarily outside of the United States except for inventory purchases
which are primarily transacted in U.S. dollars from vendors in the United
States. Each subsidiary's local currency is considered the functional currency.
All revenue and expenses are translated at weighted average exchange rates for
the periods reported. Therefore, the Company's reported 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 the Company's future business,
product pricing, results of operations or financial condition. However, because
a majority of the Company's revenue is realized in local currencies and the
majority of the Company's cost of sales is denominated in U.S. dollars, the
Company's gross profits will be positively affected by a weakening in the U.S.
dollar and will be negatively affected by a strengthening in the U.S. dollar.
The Company seeks to reduce its exposure to fluctuations in foreign exchange
rates by creating offsetting positions through the use of foreign currency
exchange contracts 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 the Company's operating results.
The Company's foreign currency derivatives are comprised of
over-the-counter forward contracts with major international financial
institutions. As of June 30, 2000, 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 June 30, 2000 as discussed
in Note 6 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's outlook for the remainder of 2000 and looking forward to
2001 is contingent upon the continued success of its strategy of aligning the
Company's historical business along three divisions of products and
opportunities: Nu Skin (personal care products), Pharmanex (nutritional
products), and Big Planet (technology, Internet and telecommunications products
and services). Each of these divisions is supported by Nu Skin Enterprises'
resources, expertise and knowledge of direct selling. During 1999, the
divisional strategy was implemented or announced in major markets. While
implementation initially caused some disruption in the distributor force,
management believes that its strategy positively impacted overall revenue in the
second quarter of 2000, particularly in the United States, Japan and South
Korea. While
14
<PAGE>
management believes that its divisional strategy will yield overall growth for
the Company in a market, it recognizes that division specific growth in any
given market may vary as distributors shift their attention and focus from one
division to another just as the Company's seamless compensation plan yields
variations in individual market performance as distributors shift their focus
among geographic markets. Management anticipates modest sequential revenue
growth in Taiwan and South Korea and continued stabilization of revenue in Japan
and the United States during the second half of the year.
Gross margins are anticipated to remain strong as the Company continues
to focus on selling differentiated, high margin goods. As Big Planet continues
to fuel revenue growth, gross margins will decrease due to the lower margin
goods and services provided by Big Planet. Distributor incentives are
anticipated to continue at current levels or slightly increase due to new
incentive programs aimed at attracting new distributors. Selling, general and
administrative costs are anticipated to slightly decrease as a percentage of
revenue through the remainder of 2000 as the Company looks to improve
efficiencies. While the Company experienced reduced tax rates for the year
ended December 31, management believes that its annual corporate tax rates will
continue at current levels through the remainder of 2000.
Note Regarding Forward-Looking Statements
With the exception of historical facts, the statements contained in
this Report and Management's Discussion and Analysis of Financial Condition and
Results of Operations, are "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995 (the "Reform Act") which
reflect the Company's current expectations and beliefs regarding the future
results of operations, performance and achievements of the Company. These
statements are subject to risks and uncertainties and are based upon assumptions
and beliefs that may not materialize. These forward-looking statements include,
but are not limited to, statements concerning: (i) the Company's belief that
existing cash and cash flow from operations will be adequate to fund cash needs;
(ii) management's belief that the Company's divisional strategy is beginning to
generate growth in certain markets including the United States, Japan and South
Korea; (iii) the belief that the Company's divisional strategy will yield
overall growth; (iv) the belief that revenue in Japan, the United States, South
Korea and Taiwan will stabilize or modestly increase for the balance of the
year; (v) management's anticipation that gross margins will remain strong,
distributor incentives will generally continue at historical rates or slightly
increase, selling, general and administrative expenses will slightly decrease as
a percent of revenue, and that tax rates will remain at historical levels; 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 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, risks and uncertainties that might
cause actual results to differ from those anticipated include, but are not
limited to:
(a) The risk that the sequential growth in Japan from the first and
second quarters will not be sustained and may not necessarily be
indicative of future operating results. The Company has implemented
various initiatives to stabilize its Asian operations and renew
growth. Although initial results have resulted in modest returns,
there can be no assurances that the factors that have negatively
impacted the business will not continue to have a negative impact or
that the initiatives will help stabilize operations or renew growth
on a sustained basis.
15
<PAGE>
(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
divisional strategy and its operating results could be adversely
affected if the Company's existing and new business opportunities and
products do not generate sufficient economic incentive to retain its
existing distributors or to sponsor new distributors on a sustained
basis, or if the Company receives adverse publicity.
(c) 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 distributors which the Company believes has adversely
affected the productivity of the Company's distributors, and
potential unforeseen expenses or difficulties in shifting to a
divisional strategy.
(d) 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 consumer confidence, or (ii)
weakening of foreign currencies, particularly the Japanese yen, which
has recently strengthened 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.
(e) Adverse business or political conditions, continued competitive
pressure, the maturity of the direct sales channel in certain of the
Company's markets, 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 People's Republic of China'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,
fluctuations in quarterly results 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.
(f) 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 products and 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 not generate significant
incremental revenue growth.
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 5 to
the Financial Statements contained in Item 1 of Part I.
16
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Reference is made to the Company's Annual Report on Form 10-K for
information concerning legal proceedings. On July 21, 2000, the Tenth Circuit
Court of Appeals reversed a decision by the district court in the case Pharmanex
v. Donna Shalala. The case was originally initiated by Pharmanex, a subsidiary
of the Company, in the Federal District Court for the District of Utah to
challenge the decision by the Food and Drug Administration that Cholestin was a
drug and could not be marketed as a dietary supplement. In February 1999, the
Utah district court ruled that Cholestin could be legally sold as a dietary
supplement under the Dietary Supplement Health and Education Act of 1994
("DSHEA") based on the courts statutory interpretation of a provision of DSHEA
that excludes from the definition of dietary supplements an article that is
approved as a new drug which was not marketed as a dietary supplement prior to
such approval. The Tenth Circuit Court of Appeals reversed the district courts
decision with respect to the interpretation of such provision and remanded the
case back to the district court to determine whether Cholestin can be legally
sold as a dietary supplement based on other provisions of DSHEA, the facts of
the case and the appellate courts ruling regarding the interpretation of the
relevant statute.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Stockholders was held on May 11, 2000. At
the Annual Meeting, Blake M. Roney, Steven J. Lund, Sandra N. Tillotson, Keith
R. Halls, Brooke B. Roney, Max L. Pinegar, E.J. "Jake" Garn, Paula F. Hawkins,
Daniel W. Campbell and Andrew D. Lipman were elected to serve as directors of
the Company until the next annual meeting of stockholders or until their
successors are duly elected. Each director was elected by a plurality of votes
in accordance with the Delaware General Corporation Law. There was no
solicitation in opposition to management's director nominees. The following
chart reflects the vote tabulation with respect to each director nominee. The
figures reported reflect votes cast by holders of the Company's Class A common
stock and Class B common stock. Each share of Class A common stock entitles its
holder to one vote, and each share of Class B common stock entitles its holder
to ten votes.
Name of Director Nominee Votes For Votes Withheld
------------------------ ----------- --------------
Blake M. Roney 437,587,657 88,175
Steven J. Lund 437,587,657 88,175
Sandra N. Tillotson 437,587,657 88,175
Keith R. Halls 437,587,657 88,175
Brooke B. Roney 437,587,657 88,175
Max L. Pinegar 437,587,657 88,175
E.J. "Jake" Garn 437,587,657 88,175
Paula F. Hawkins 437,587,657 88,175
Daniel W. Campbell 437,587,657 88,175
Andrew D. Lipman 437,587,657 88,175
17
<PAGE>
The stockholders also approved the Company's 2000 Employee Stock
Purchase Plan with 434,136,274 votes voted in favor of the amendment, 3,160,293
votes cast against and 379,265 abstentions. The stockholders also ratified the
appointment of PricewaterhouseCoopers LLP as the Company's independent public
accountants, with 437,644,347 votes being cast for, 18,924 votes being cast
against, and 12,561 abstentions.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Regulation S-K
Number Description
------ -----------
10.1 Employment Agreement by and between Pharmanex
and Joseph Chang.
10.2 Promissory Note by and between the Company
and Grant Pace.
27.1 Financial Data Schedule - Six Months Ended
June 30, 2000
(b) Reports on Form 8-K. No current Reports on Form 8-K were filed
during the quarter ended June 30, 2000.
18
<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 14th day of
August, 2000.
NU SKIN ENTERPRISES, INC.
By: /s/ Corey B. Lindley
Corey B. Lindley
Its: Chief Financial Officer
(Principal Financial and Accounting Officer)
19
<PAGE>
EXHIBIT INDEX
10.1 Employment Agreement by and between Pharmanex and Joseph Chang.
10.2 Promissory Note by and between the Company and Grant Pace.
27.1 Financial Data Schedule - Six Months Ended June 30, 2000
20
