UNITED STATES
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, 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 October 31, 2000, 31,480,273 shares of the Company's Class A Common
Stock, $.001 par value per share, and 53,408,951 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 - 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.......................................10
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..................................................................19
Nu Skin, Pharmanex, Big Planet, Nu Skin 180 and LifePak are trademarks of Nu
Skin Enterprises, Inc. or its subsidiaries.
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,
2000 1999
------------ ------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 49,899 $ 110,162
Accounts receivable 21,134 18,160
Related parties receivable 13,487 16,424
Inventories, net 89,494 85,751
Prepaid expenses and other 60,424 52,388
------------ ------------
234,438 282,885
Property and equipment, net 57,729 57,948
Other assets, net 297,082 302,382
------------ ------------
Total assets $ 589,249 $ 643,215
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 15,038 $ 22,685
Accrued expenses 87,203 114,691
Related parties payable 11,389 15,059
Current portion of long-term debt (Note 10) -- 55,889
------------ ------------
113,630 208,324
Long-term debt, less current portion 87,143 89,419
Other liabilities 38,549 36,093
------------ ------------
Total liabilities 239,322 333,836
------------ ------------
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, 31,321,701 and 32,002,158 shares issued and
outstanding 31 32
Class B common stock - 100,000,000 shares authorized, $.001
par value, 53,578,780 and 54,606,905 shares issued and
outstanding 54 55
Additional paid-in capital 108,200 119,652
Retained earnings 290,253 244,758
Deferred compensation (2,404) (6,898)
Accumulated other comprehensive income (46,207) (48,220)
----------- ------------
349,927 309,379
----------- ------------
Total liabilities and stockholders' equity $ 589,249 $ 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 Nine Nine
Months Ended Months Ended Months Ended Months Ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenue $ 215,567 $ 220,088 $ 656,151 $ 665,125
Cost of sales 36,839 37,557 109,735 114,593
---------- ---------- ---------- ----------
Gross profit 178,728 182,531 546,416 550,532
---------- ---------- ---------- ----------
Operating expenses
Distributor incentives 83,773 85,495 255,036 254,784
Selling, general and administrative 71,080 66,648 220,616 185,873
---------- ---------- ---------- ----------
Total operating expenses 154,853 152,143 475,652 440,657
---------- ---------- ---------- ----------
Operating income 23,875 30,388 70,764 109,875
Other income (expense), net (500) (5,192) 321 (1,348)
---------- ---------- ---------- ----------
Income before provision for income taxes 23,375 25,196 71,085 108,527
Provision for income taxes 8,415 4,070 25,590 34,558
---------- ---------- ---------- ----------
Net income $ 14,960 $ 21,126 $ 45,495 $ 73,969
========== ========== ========== ==========
Net income per share (Note 4):
Basic $ .18 $ .24 $ .53 $ .85
Diluted $ .18 $ .24 $ .53 $ .84
Weighted average common shares outstanding:
Basic 85,077 86,927 85,603 87,177
Diluted 85,409 87,951 86,017 88,285
</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,
2000 1999
------------ -------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 45,495 $ 73,969
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 23,009 21,844
Amortization of deferred compensation 4,494 2,762
Changes in operating assets and liabilities:
Accounts receivable (2,974) (3,185)
Related parties receivable 2,937 (3,411)
Inventories, net (3,743) (184)
Prepaid expenses and other (8,036) (19,773)
Other assets, net (6,874) (12,227)
Accounts payable (7,647) (895)
Accrued expenses (25,032) (47,734)
Related parties payable (3,670) 198
------------ -------------
Net cash provided by operating activities 17,959 11,364
------------ -------------
Cash flows from investing activities:
Purchase of property and equipment (13,117) (22,620)
Payments for lease deposits (24) (1,886)
Receipt of refundable lease deposits 743 752
Purchase of Big Planet, net of cash acquired -- (13,571)
------------ -------------
Net cash used in investing activities (12,398) (37,325)
------------ -------------
Cash flows from financing activities:
Exercise of distributor and employee stock options 90 2,529
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)
Repurchase of shares of common stock (11,544) (19,612)
------------ --------------
Net cash used in financing activities (67,132) (66,628)
------------ --------------
Effect of exchange rate changes on cash 1,308 11,912
------------ -------------
Net decrease in cash and cash equivalents (60,263) (80,677)
Cash and cash equivalents, beginning of period 110,162 188,827
------------ ------------
Cash and cash equivalents, end of period $ 49,899 $ 108,150
============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
4
<PAGE>
Nu Skin Enterprises, Inc.
Notes to Consolidated Financial Statements
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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.("Pharmanex"), 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").
The Company completed the Big Planet Acquisition (as defined in Note
3) 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, 2000 and for
the three and nine-month periods ended September 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 various accounts payable of Nu Skin USA.
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 nine-month periods ended September 30, 2000, the Company recorded
amortization on the intangible assets relating to the Big Planet
Acquisition of $0.6 million and $1.8 million, respectively. Big Planet
incurred operating losses of approximately $19.7 million for the
nine-month period ended September 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 give 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 September 30, 2000 and December 31, 1999, the Company held foreign
currency forward contracts with notional amounts totaling
approximately $26.0 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 $0.5 million and $2.4
million for the three and nine-month periods ended September 30, 2000,
respectively, and the net losses on foreign currency forward contracts
were $4.8 million and $2.2 million for the three and nine-month
periods ended September 30, 1999, respectively. These contracts at
September 30, 2000 have maturities through March 2001.
6. REPURCHASE OF COMMON STOCK
During the three-month periods ended September 30, 2000 and 1999, the
Company repurchased approximately 1,039,000 and 303,000 shares,
respectively, of Class A common stock for approximately $6.5 million
and $3.7 million, respectively. During the nine-month periods ended
September 30, 2000 and 1999, the Company repurchased approximately
1,718,000 and 1,305,000 shares, respectively, of Class A common stock
for approximately $11.5 million and $19.6 million, respectively.
7. COMPREHENSIVE INCOME
The components of comprehensive income, net of related tax, for the
three and nine-month periods ended September 30, 2000 and 1999, were
as follows (in thousands):
<TABLE>
<CAPTION>
Three Three Nine Nine
Months Ended Months Ended Months Ended Months Ended
Sept. 30, 2000 Sept. 30, 1999 Sept. 30, 2000 Sept. 30, 1999
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net income $ 14,960 $ 21,126 $ 45,495 $ 73,969
Other comprehensive income, net of tax:
Foreign currency translation
adjustments 323 2,783 2,013 2,148
-------------- -------------- -------------- --------------
Comprehensive income $ 15,283 $ 23,909 $ 47,508 $ 76,117
============== ============== ============== ==============
</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 Nine Nine
Months Ended Months Ended Months Ended Months Ended
Sept. 30, 2000 Sept. 30,1999 Sept. 30, 2000 Sept. 30,1999
-------------- ------------- -------------- -------------
Revenue
<S> <C> <C> <C> <C>
North Asia $ 142,802 $ 148,232 $ 432,980 $ 464,636
Southeast Asia 65,677 69,186 208,915 206,947
Other Markets 101,391 84,668 308,379 234,651
Eliminations (94,303) (81,998) (294,123) (241,109)
-------------- ------------- -------------- -------------
Totals $ 215,567 $ 220,088 $ 656,151 $ 665,125
============== ============= ============== =============
Operating Income
North Asia $ 10,611 $ 18,396 $ 28,116 $ 69,032
Southeast Asia 5,954 10,203 22,619 26,264
Other Markets 557 2,016 9,865 7,510
Eliminations 6,753 (227) 10,164 7,069
-------------- ------------- -------------- -------------
Totals $ 23,875 $ 30,388 $ 70,764 $ 109,875
============== ============= ============== =============
As of As of
Sept. 30, December 31,
2000 1999
-------------- -------------
Total Assets
North Asia $ 90,259 $ 116,918
Southeast Asia 69,731 111,204
Other Markets 462,345 520,832
Eliminations (33,086) (105,739)
-------------- -------------
Totals $ 589,249 $ 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 $134,164 and
$143,984 for the three- month periods ended September 30, 2000 and
1999, respectively, and totaled $411,185 and $452,846 for the
nine-month periods ended September 30, 2000 and 1999, respectively.
Revenue from the Company's operations in Taiwan totaled $20,950 and
$26,883 for the three- month periods ended September 30, 2000 and
1999, respectively, and totaled $64,563 and $80,808 for the nine-month
periods ended September 30, 2000 and 1999, respectively. Revenue from
the Company's operations in the United States (which includes
intercompany revenue) totaled $94,887 and $78,950 for the three-month
periods ended September 30, 2000 and 1999, respectively, and totaled
$290,516 and $219,467 for the nine-month periods ended September 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 $25,218 and $29,314 as of September
30, 2000 and December 31, 1999, respectively. Long-lived assets in
Taiwan were $3,212 and $3,381 as of September 30, 2000 and December
31, 1999, respectively. Long-lived assets in the United States were
$296,939 and $310,255 as of September 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 does not anticipate that the adoption of
SFAS 133 will have a significant impact 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.
10. SUBSEQUENT EVENTS
Long-term Debt Refinancing
On October 12, 2000, the Company refinanced the $87.1 million balance
of its existing credit facility with the proceeds of a private
placement of $90.0 million of ten-year senior notes (the "Notes") to
The Prudential Insurance Company of America. The Notes are denominated
in Japanese yen. The Notes bear interest at an effective rate of 3.03%
annually and becomes due October 2010 with principal payments
beginning October 2004. The debt is classified as long-term in the
consolidated financial statements as of September 30, 2000.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
2000 compared to 1999
Revenue decreased 2.0% and 1.3% to $215.6 million and $656.2 million
for the three and nine- month periods ended September 30, 2000 from $220.1
million and $665.1 million for the same periods in 1999, respectively. The
decrease in revenue on a year-over-year basis was due to lower revenue results
in Japan and Taiwan, which was partially offset by increased revenue in the
United States from the operations of Big Planet, as discussed below.
Fluctuations in foreign currency exchange rates positively impacted revenue for
the quarter by approximately 3% on a year-over-year basis.
Revenue in North Asia decreased 3.6% and 6.8% to $142.8 million and
$433.0 million for the three and nine-month periods ended September 30, 2000
from $148.2 million and $464.6 million for the same periods in 1999,
respectively. This decrease in revenue was due to revenue in Japan decreasing
6.8% and 9.2% to $134.2 million and $411.2 million for the three and nine-month
periods ended September 30, 2000 from $144.0 million and $452.8 million for the
same periods in 1999, respectively. The decline in revenue in Japan was
partially offset by an increase in revenue in South Korea of 104.8% and 84.7% to
$8.6 million and $21.8 million for the three and nine-month periods ended
September 30, 2000 from $4.2 million and $11.8 million for the same periods in
1999, respectively. In local currency terms, revenue in Japan was 10.7% lower in
the third quarter of 2000 versus the prior year and 16.7% lower for the
nine-month period ended September 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 18 months as
discussed in previous filings. On a sequential basis, revenue in Japan declined
by 5.8% after increasing by 5.8% from the first to the second quarter of 2000.
The sequential decline in revenue in Japan in the third quarter of 2000 is due
in part to the discontinuance of a quarterly LifePak discount promotion in Japan
in favor of the Company's Automatic Delivery Program ("ADP"), which offers a
smaller discount to purchasers for a long-term monthly commitment. Management
believes that as the ADP program continues to grow, it will generate a more
stable and consistent revenue stream. Management also believes that revenue in
the quarter, compared to the prior sequential quarter, was also affected by
seasonality trends and promotional efforts focused on initiatives planned for
the fourth quarter and sales of Nu Skin 180 Anti-Aging Skin Therapy System ("Nu
Skin 180") during the latter part of the second quarter in connection with the
initial launch of Nu Skin 180. In South Korea, the revenue increase is primarily
due to significant new product launches including Pharmanex's weight management
products in the second quarter of 2000 and Nu Skin 180 in the third quarter of
2000.
Revenue in Southeast Asia decreased 18.0% and 16.9% to $29.6 million
and $89.8 million for the three and nine-month periods ended September 30, 2000
from $36.1 million and $108.0 million for the same periods in 1999,
respectively. This decline in revenue was primarily a result of revenue in
Taiwan decreasing 21.9% and 20.0% to $21.0 million and $64.6 million for the
three and nine-month periods ended September 30, 2000 from $26.9 million and
$80.8 million for the same periods in 1999, respectively. While 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 economic concerns throughout
Southeast Asia, revenue results in the third quarter were essentially level with
the second quarter of 2000. Management believes that this leveling of sales is
due to new promotional plans and initiatives in this market. Management believes
that the Company's year-over-year comparisons in Taiwan suffered from the impact
of a major earthquake, which occurred late in the third quarter of 1999. In
addition, direct selling as a distribution channel has significantly penetrated
the Taiwan market.
Revenue in the Company's Other Markets, which include its European and
North and South America markets, increased 21.0% and 44.2% to $43.2 million and
$133.4 million for the three and nine- month periods ended September 30, 2000
from $35.7 million and $92.5 million for the same periods in
10
<PAGE>
1999, respectively. This increase in revenue is due to the additional revenue of
$6.0 million and $24.9 million for the three and nine-month periods ended
September 30, 2000, respectively, from Big Planet following the Big Planet
Acquisition, which occurred in July 1999. In addition, the increase in revenue
for the nine-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 March 1999. This additional revenue more than offsets the
elimination of revenue from sales to the Company's former affiliates in these
markets, which revenue is now eliminated in consolidation. On a sequential
basis, revenue in the United States decreased by $4.3 million, which is
primarily due to lower revenue from Big Planet in the United States. This
decline in Big Planet revenue is largely related to the Company's conclusion of
the "Free to a Good Home" Iphone initiative, which provided a free Iphone to
subscribers entering into a long-term commitment for the Company's Internet and
long distance services. The Company is currently focusing on initiatives that
place an emphasis on higher margin products such as web page building and
telecommunications products.
Gross profit as a percentage of revenue remained constant at 82.9%
for the three-month period ended September 30, 2000 compared to the same period
in the prior year and increased to 83.3% for the nine-month period ended
September 30, 2000 compared to 82.8% for the same period in the prior year. The
increase in the gross profit percentage for the nine-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 currencies. Consequently, the Company is subject to exchange rate risks
in its gross margins. The Company's gross margin was negatively impacted by Big
Planet operations, which include the sale of lower margin technology products
and services. Due to the overall growth in revenue from Big Planet, the impact
of Big Planet on gross margins had a greater offsetting effect in the second and
third quarters of 2000 than it did in the first quarter of 2000.
Distributor incentives as a percentage of revenue increased to 38.9%
for both the three and nine-month periods ended September 30, 2000 compared to
38.8% and 38.3% 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 33.0% and 33.6% of revenue for the three and nine-month periods
ended September 30, 2000 compared to 30.3% and 27.9% of revenue for the same
periods in the prior year, respectively. In U.S. dollar terms, selling, general
and administrative expenses increased to $71.1 million and $220.6 million for
the three and nine-month periods ended September 30, 2000 compared to $66.6
million and $185.9 million for the same periods in the prior year, respectively.
This increase was due primarily to an additional $2.1 million and $19.1 million
of selling, general and administrative expenses relating to the assumed
operations of Big Planet for the three and nine-month periods ended September
30, 2000, respectively. In addition, the Company incurred an incremental $2.3
million of overhead expenses during the nine-month period ended September 30,
2000 compared to the same period in the prior year for operations in North
America following the acquisition of certain assets from Nu Skin USA in March
1999 and the North American Affiliates in May 1999. Selling, general and
administrative expenses also increased on a year-over-year basis by $4.8 million
for the nine-month period ended September 30, 2000 due to a stronger Japanese
yen in 2000. Finally, a convention held in Japan in the first quarter of 2000
resulted in higher expenses of approximately $4.7 million in the first quarter
of 2000, versus the same period in the prior year.
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Other income (expense), net increased $4.7 million and $1.0 million for
the three and nine-month periods ended September 30, 2000, respectively,
compared to the same periods in the prior year primarily as a result of 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. The increase for the nine-month period in 2000 was
offset by lower net gains recorded on foreign currency contracts in the first
half of 2000 compared to the same prior-year period as well as reduced interest
expense relating to the Company's long-term debt.
Provision for income taxes increased to $8.4 million for the
three-month period ended September 30, 2000 from $4.1 million for the same
prior-year period. This increase is due to the increase in the effective tax
rate from 16.2% in the third quarter of 1999 to 36.0% in the third quarter of
2000. The effective tax rate of 16.2% in the third quarter of 1999 related to
the utilization of foreign tax credits as a result of the Company's global tax
restructuring plans in that period. Provision for income taxes decreased to
$25.6 million for the nine-month period ended September 30, 2000 from $34.6
million for the same prior-year period. This decrease is due to lower income
earned in 2000 versus 1999.
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
comprise 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 nine-month period ended September
30, 2000, the Company generated $18.0 million from operations compared to $11.4
million during the nine-month period ended September 30, 1999. This increase in
cash generated from operations in 2000 compared to the same prior-year period
primarily related to reduced foreign taxes paid in Japan as a result of the
Company's global tax restructuring plans. This reduction in foreign taxes paid
was somewhat offset by lower net income in 2000.
As of September 30, 2000, working capital was $120.8 million compared
to $74.6 million as of December 31, 1999. Cash and cash equivalents at September
30, 2000 and December 31, 1999 were $49.9 million and $110.2 million,
respectively. The decrease in cash and cash equivalents are related primarily to
a debt payment of $55.7 million which occurred in March 2000. The increase in
working capital is primarily related to the refinancing of the Company's
existing credit facility, as described in Note 10 of the notes to the
Consolidated Financial Statements, as well as the change noted above in cash and
cash equivalents.
Capital expenditures, primarily for equipment, computer systems and
software, office furniture and leasehold improvements, were $13.1 million for
the nine-month period ended September 30, 2000. In addition, the Company
anticipates additional capital expenditures through the remainder of 2000 of
approximately $7.0 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
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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 additional contingent consideration paid over the next
two years, if any, will be accounted for in a similar manner.
On October 12, 2000, the Company refinanced the $87.1 million balance
of its existing credit facility with the proceeds of a private placement of
$90.0 million of ten-year senior notes (the "Notes") to The Prudential Insurance
Company of America. The Notes are denominated in Japanese yen. The Notes bear
interest at an effective rate of 3.03% annually and become due October 2010
with principal payments beginning October 2004. The debt is classified as
long-term in the consolidated financials statements as of September 30, 2000.
During 2000, 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 September 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 nine-month periods ended September 30,
2000, the Company repurchased approximately 1,039,000 and 1,718,000 shares for
an aggregate price of approximately $6.5 million and $11.5 million,
respectively. As of September 30, 2000, the Company had repurchased a total of
3,999,102 shares for an aggregate price of approximately $39.3 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 September 30, 2000 and December 31, 1999, respectively. In addition,
the Company had related party receivables of $13.5 million and $16.4 million,
respectively, at those dates.
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, South Korea and
Thailand celebrate their respective local New Year in our first quarter.
Management believes that direct selling in Japan, the United States 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.
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Distributor Information
The following table provides information concerning the number of
active and executive distributors as of the dates indicated.
As of Sept. 30, 2000 As of Sept. 30, 1999
---------------------- ---------------------
Active Executive Active Executive
------- --------- ------- ---------
North Asia . . . . . . . . . 292,000 13,957 321,000 14,977
Southeast Asia . . . . . . . 98,000 2,957 118,000 4,137
Other Markets. . . . . . . . 71,000 3,550 69,000 2,761
------- --------- ------- ---------
Total. . . . . . . . . . . . 461,000 20,464 508,000 21,875
======= ========= ======= =========
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 September 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 September 30,
2000 as discussed in Note 5 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 has had a positive impact in many of its
markets, particularly in the United States, Japan and South Korea. While
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
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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. During the fourth quarter of 2000, management
anticipates modest sequential revenue growth in Japan and Taiwan and relatively
level revenue in South Korea and the United States. Overall sequential revenue
growth for the fourth quarter, which has historically been one of the Company's
strongest quarters of the year, is expected to be 5% to 8%. For the year 2001,
the Company anticipates revenue growth rates in the mid to high single digits.
Gross margins are anticipated to decrease slightly in the fourth
quarter of 2000 and into 2001 due to the lower margin goods and services
provided by Big Planet as well as the Company's forecast of slightly weaker
foreign currencies. Distributor incentives are anticipated to 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 fourth quarter of 2000 as the Company looks to
continue improving efficiencies and are anticipated to slightly increase in the
first quarter of 2001 relating to the planned convention to be held in the
United States during the first quarter of 2001 and in the fourth quarter of 2001
due to the planned convention in Japan. While the Company experienced reduced
tax rates for the year ended December 31, 1999, management believes that its
annual corporate tax rates will continue at current levels through the remainder
of 2000 and with slight increases in 2001. Overall, management believes that net
income and earnings per share will increase 7% to 10% in the fourth quarter of
2000 compared to the third quarter. For the year 2001, management believes that
earnings growth rates will slightly exceed revenue growth rates due to improved
operating efficiencies.
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:
o the Company's belief that existing cash and cash flow from operations will
be adequate to fund cash needs;
o management's belief that the Company's divisional strategy will yield
overall growth;
o the belief that revenue will increase sequentially in Japan and Taiwan and
will remain relatively stable in the United States and South Korea during
the fourth quarter;
o management's belief that earnings will improve by 7% to 10% during the
fourth quarter compared to the third quarter and revenue will increase by
5% to 8% sequentially;
o the current anticipation that revenue will increase in the mid to high
single digits in 2001 compared to 2000 and that earnings growth rates will
be slightly more than the revenue growth rates as a result of improved
operating efficiencies;
o management's anticipation that during the fourth quarter of 2000 gross
margins will decrease slightly, distributor incentives will 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
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o 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 not to place any undue
reliance on such forward-looking statements, which reflect the Company's beliefs
and expectations only as of the date of this report. The Company assumes no
obligation to update or revise these forward-looking statements to reflect new
events or circumstances or any changes in its beliefs or expectations. Important
factors, risks and uncertainties that might cause actual results to differ from
those anticipated include, but are not limited to, the following:
(a) There can be no assurances that the factors that have negatively impacted
the business over the past year will not continue to have a negative impact
or that recent initiatives, including the Company's divisional strategy,
will help stabilize operations or renew growth on a sustained basis. The
Company has recently implemented various initiatives to stabilize its Asian
operations and renew growth. Although management believes initial results
have been positive, there is still uncertainty concerning the long-term
effect of recent initiatives. In addition, there is a risk that the
implementation of the Company's divisional strategy, Internet initiatives,
and promotions could create renewed confusion or uncertainty among
distributors and not increase distributor productivity.
(b) Risks and uncertainties associated with the Company's e-commerce
initiatives and Big Planet's initiatives. These risks include:
o uncertainty concerning the degree to which such initiatives will
increase and sustain levels of distributor interest, activity or
retention or generate incremental revenue growth,
o the risk of technological problems or development issues that could
interrupt or delay such initiatives and impede distributor enthusiasm
or increase the costs of such initiatives, and
o the risk that the Company's e-commerce initiatives will not continue
generating the operating efficiencies currently being experienced.
(c) 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.
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(d) Because a substantial majority of the Company's sales are generated from
the Asian region, particularly Japan, significant variations in operating
results including revenue, gross margin and earnings from those expected
could be caused by
o renewed or sustained weakness of Asian economies or consumer
confidence,
o weakening of foreign currencies, particularly the Japanese yen, and
o the risk that the Company will not be able to favorably implement
forward contracts and other hedging strategies to manage foreign
currency risk.
(e) Risks associated with the Company's new business opportunities, new product
offerings and new markets, including:
o any legal or regulatory restrictions 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,
o the risk that such opportunities and products will not gain market
acceptance or meet the Company's expectations as a result of increased
competition,
o any lack of market acceptance by consumers or the Company's
distributors, and
o 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.
(f) The Company's operations could also be affected by the following risks:
o adverse business or political conditions, continued competitive
pressure,
o the maturity of the direct sales channel in certain of the Company's
markets,
o changes in laws and regulations (including any increased government
regulation of direct selling activities and products in existing and
future markets such as Singapore, the People's Republic of China, or
changes in U.S. or foreign tax regulations), and
o the Company's reliance on outside manufacturers.
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.
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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
filings on Form 10-Q for information concerning legal proceedings. In September
2000, the Company filed a motion to dismiss in the case Karen Kindt, on behalf
of Nu Skin Enterprises, Inc. v. Blake Roney et.al, which was filed in the Court
of Chancery in the State of Delaware in January 2000. In accordance with
Delaware statutory process, the Company established a Special Litigation
Committee consisting of independent directors to investigate, analyze and
evaluate the allegations and issues raised in the complaint. The Special
Litigation Committee filed its final report under seal with the Delaware Court
of Chancery in September 2000. Based on the determinations of the Special
Litigation Committee, the Company has moved to dismiss the complaint.
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
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Regulation S-K
Number Description
10.1 Note Purchase Agreement dated October 12, 2000 by and
between the Company and The Prudential Insurance
Company of America
10.2 Pledge Agreement dated October 12, 2000 by and between
the Company and State Street Bank and Trust Company of
California, N.A., acting in its capacity as collateral
agent
10.3 Collateral Agency Agreement dated October 12, 2000 by
and between the Company, State Street Bank and Trust
Company of California, N.A., as Collateral Agent, and
the lenders and note holders party thereto
27.1 Financial Data Schedule - Nine Months Ended September
30, 2000
(b) Reports on Form 8-K. No current Reports on Form 8-K were filed
during the quarter ended September 30, 2000.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on this 7th day of
November, 2000.
NU SKIN ENTERPRISES, INC.
By: /s/ Corey B. Lindley
---------------------
Corey B. Lindley
Its: Chief Financial Officer
(Principal Financial and Accounting Officer)
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EXHIBIT INDEX
10.1 Note Purchase Agreement dated October 12, 2000 by and between the
Company and The Prudential Insurance Company of America
10.2 Pledge Agreement dated October 12, 2000 by and between the
Company and State Street Bank and Trust Company of California,
N.A., acting in its capacity as collateral agent
10.3 Collateral Agency Agreement dated October 12, 2000 by and between
the Company, State Street Bank and Trust Company of California,
N.A., as Collateral Agent, and the lenders and note holders party
thereto
27.1 Financial Data Schedule - Nine Months Ended September 30, 2000
20
