| 10.31 |
Assignment of Leasehold Improvements by and between Big Planet, Inc. and Maple
Hills Investment dated as of July 13, 1999, incorporated by reference to Exhibit
10.44 to the Company’s Annual Report on Form 10-K for the year ended
December 31, 1999. |
| 10.32 |
Employment Agreement by and between Pharmanex and Joseph Chang, incorporated by
reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q
for the quarter ended June 30, 2000. |
| 10.33 |
Promissory Note by and between the Company and Grant Pace, incorporated by
reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q
for the quarter ended June 30, 2000. |
| 10.34 |
Note Purchase Agreement dated October 12, 2000, by and between the Company and
The Prudential Insurance Company of America, incorporated by reference to
Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter
ended September 30, 2000. |
| 10.35 |
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, incorporated by reference to Exhibit 10.2 to the
Company’s Quarterly Report on Form 10-Q for the quarter ended September 30,
2000. |
| 10.36 |
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, incorporated by reference to
Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the quarter
ended September 30, 2000. |
| 13 |
2000 Annual Report to Stockholders (Only items incorporated by reference).
|
| 21.1 |
Subsidiaries of the Company.* |
| 23.1 |
Consent of PricewaterhouseCoopers LLP.* |
*Previously filed.
11
EXHIBIT 13
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data as of December 31, 1997,
1998, 1999 and 2000 and for the years ended December 31, 1996, 1997, 1998, 1999
and 2000 have been derived from the audited consolidated financial statements.
The financial data as of December 31, 1996 is unaudited but, in management's
opinion, includes all necessary information to present fairly the information
included therein. The Company's consolidated financial statements for all
periods presented before December 31, 1998 have been combined and restated for
the acquisition of Nu Skin International, Inc. ("NSI") and certain other related
affiliates in March 1998 (the "NSI Acquisition").
Year Ended December 31,
----------------------------------------------------
1996 1997 1998 1999(2) 2000
-------- -------- -------- -------- --------
(U.S. dollars in thousands, except per share data)
Income Statement Data:
Revenue $761,638 $953,422 $913,494 $894,249 $879,758
Cost of sales 171,187 191,218 188,457 151,681 149,342
Cost of sales-- amortization
of inventory step-up -- -- 21,600 -- --
-------- -------- -------- -------- --------
Gross profit 590,451 762,204 703,437 742,568 730,416
-------- -------- -------- -------- --------
Operating expenses:
Distributor incentives 282,588 362,195 331,448 346,951 345,259
Selling, general and administrative 168,706 201,880 202,150 265,770 294,744
Distributor stock expense 1,990 17,909 -- -- --
In-process research and development -- -- 13,600 -- --
-------- -------- -------- -------- --------
Total operating expenses 453,284 581,984 547,198 612,721 640,003
-------- -------- -------- -------- --------
Operating income 137,167 180,220 156,239 129,847 90,413
Other income (expense), net 10,771 8,973 13,599 (1,411) 5,993
-------- -------- -------- -------- --------
Income before provision for income
taxes and minority interest 147,938 189,193 169,838 128,436 96,406
Provision for income taxes 49,526 55,707 62,840 41,742 34,706
Minority interest (1) 13,700 14,993 3,081 -- --
-------- -------- -------- -------- --------
Net income $ 84,712 $118,493 $103,917 $ 86,694 $ 61,700
======== ======== ======== ======== ========
Net income per share:
Basic $ 1.07 $ 1.42 $ 1.22 $ 1.00 $ 0.72
Diluted $ 1.02 $ 1.36 $ 1.19 $ 0.99 $ 0.72
Weighted average common shares
outstanding (000s):
Basic 79,194 83,331 84,894 87,081 85,401
Diluted 83,001 87,312 87,018 87,893 85,642
As of December 31,
----------------------------------------------------
1996 1997 1998 1999(2) 2000
-------- -------- -------- -------- --------
(U.S. dollars in thousands)
Balance Sheet Data:
Cash and cash equivalents $214,823 $174,300 $188,827 $110,162 $ 63,996
Working capital 143,308 123,220 164,597 74,561 122,835
Total assets 380,482 405,004 606,433 643,215 590,803
Short-term notes payable to
stockholders 71,487 19,457 -- -- --
Long-term notes payable to
stockholders -- 116,743 -- -- --
Short-term debt -- -- 14,545 55,889 --
Long-term debt -- -- 138,734 89,419 84,884
Stockholders' equity 113,495 94,892 254,642 309,379 366,733
As of December 31,
----------------------------------------------------
1996 1997 1998 1999 2000
-------- -------- -------- -------- --------
Other Operating Data:
Number of active distributors (3)(4) 397,000 448,000 470,000 494,000 475,000
Number of executive distributors 21,479 22,689 22,781 21,005 21,381
- ----------
(1) Minority interest represents the ownership interests in NSI held by
individuals prior to the NSI Acquisition in 1998 who are not immediate
family members of the majority-interest holders. The Company purchased
the minority interest as part of the NSI Acquisition.
(2) 1999 results include transactions during the year which are discussed in
detail in Management's Discussion and Analysis of Financial Condition and
Results of Operations.
(3) Active distributors are those distributors who were resident in the
countries in which the Company operated and purchased products during the
three months ended as of the date indicated. An executive distributor is an
active distributor who has achieved required personal and group sales
volumes. The increase in the number of active distributors in 1999 is
primarily due to the inclusion of distributors formerly licensed to the
Company's affiliate Nu Skin USA, Inc.
(4) The Big Planet representatives do not necessarily place product orders with
the Company for resale to retail customers. Big Planet representatives sign
up retail customers for Internet, telecommunications and other services
with the Company or its service providers for all products. Therefore, the
active distributors for 1999 and 2000 do not include approximately 29,000
and 40,000 Big Planet representatives who have residual sales volume on a
three month rolling basis, respectively, for service provided by the
Company or its service providers.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the Company's financial condition and results
of operations should be read in conjunction with the consolidated financial
statements and the related notes thereto, which are included in this Annual
Report to Stockholders.
General
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
telecommunications products and services.
The Company's revenue depends upon the number and productivity of
independent distributors who purchase products and sales materials from the
Company in their local currency for resale to their customers or for personal
use. The Company recognizes revenue when products are shipped and title passes
to these independent distributors. Revenue is net of returns, which have
historically been less than 5.0% of gross sales. Distributor incentives are paid
to several levels of distributors on each product sale. The amount of the
incentive varies depending on the purchaser's position within the Company's
Global Distributor Compensation Plan. These incentives are classified as
operating expenses. The following table sets forth revenue information by region
for the time periods indicated. This table should be reviewed in connection with
the tables presented under "Results of Operations," which disclose distributor
incentives and other costs associated with generating the aggregate revenue
presented.
Year Ended December 31,
------------------------------
Region 1998 1999 2000
- ------ -------- -------- --------
(U.S. dollars in millions)
North Asia $ 665.5 $ 619.3 $ 585.4
North America 72.7 117.9 155.8
Southeast Asia 159.7 140.1 119.5
Other Markets 15.6 17.0 19.1
-------- -------- --------
$ 913.5 $ 894.3 $ 879.8
======== ======== ========
Revenue generated in North Asia represented 67% of total revenue generated
during the year ended December 31, 2000. The Company's operations in Japan
generated 95% of the North Asia revenue during the same period. Revenue
generated in North America represented 18% of total revenue generated during the
year ended December 31, 2000. The Company's operations in the United States
generated 95% of the North America revenue during that period. Revenue from
Southeast Asia operations represented 14% of total revenue generated during the
year ended December 31, 2000. The Company's operations in Taiwan generated 70%
of the Southeast Asia revenue during that period.
Cost of sales primarily consists of the cost of products purchased from
third-party vendors (generally in U.S. dollars), the freight cost of shipping
these products to distributors as well as import duties for such products.
Additionally, cost of sales includes the cost of sales materials sold to
distributors at or near cost. Sales materials are generally purchased in local
currencies. As the sales mix changes between product categories and sales
materials, cost of sales and gross profit may fluctuate to some degree due
primarily to the margin on each product line as well as varying import duty
rates levied on imported product lines. In each of the Company's current
markets, duties are generally higher on nutritional supplements than on personal
care products. Also, as currency exchange rates fluctuate, the Company's gross
margin will fluctuate.
Distributor incentives are the Company's most significant expense.
Distributor incentives are paid to distributors on a monthly basis based upon
their personal and group sales volumes as well as the group sales volumes of up
to six levels of executive distributors in their downline sales organizations.
These incentives are computed each month based on the sales volume and network
of the Company's global distributor force. Small fluctuations occur in the
amount of incentives paid as the network of distributors actively purchasing
products changes from month to month. However, due to the size of the Company's
distributor force of approximately 475,000 active distributors, the fluctuation
in the overall payout is relatively small. The overall payout averages
from 39% to 42% of global product sales. Sales materials and starter kits are
not subject to distributor incentives. In addition, sales to the Company's North
American private affiliates (the "North American Affiliates") were not subject
to distributor incentives prior to being acquired by the Company in 1999.
Distributor incentives include the cost of computing and paying commissions as
well as the cost of incentive programs for distributors including an annual trip
for the Company's leading distributors. These additional costs average
approximately 1% of revenue.
Selling, general and administrative expenses include wages and benefits,
depreciation and amortization, rents and utilities, travel and entertainment,
promotion and advertising, research and development, professional fees and other
operating expenses.
Provision for income taxes depends on the statutory tax rates in each of
the countries in which the Company operates. For example, statutory tax rates
are 16.0% in Hong Kong, 25.0% in Taiwan, 30.8% in South Korea and 46.3% in
Japan. The Company is subject to taxation in the United States at a statutory
corporate federal tax rate of 35.0%. However, the Company receives foreign tax
credits in the United States for the amount of foreign taxes actually paid in a
given period, which are utilized to reduce taxes in the United States to the
extent allowed.
In March 1998, the Company completed the acquisition (the "NSI
Acquisition") of the capital stock of Nu Skin International, Inc. ("NSI") and
the Company's other previously privately-held affiliates in Europe, Australia
and New Zealand (collectively the "Acquired Entities"). The NSI Acquisition was
accounted for by the purchase method of accounting, except for that portion of
the Acquired Entities under common control of a group of stockholders, which
have been combined and restated in the Company's consolidated financial
statements as if the Company and the Acquired Entities had been combined during
all periods presented. The Company allocated $43.6 million of the purchase price
to goodwill, intellectual property and other intangible assets relating to the
portion accounted for by the purchase method.
Minority interest represents the ownership interests in NSI held by
individuals prior to the NSI Acquisition in 1998 who are not immediate family
members of the majority-interest holders. The Company purchased the minority
interest as part of the NSI Acquisition.
In October 1998, the Company acquired Generation Health Holdings, Inc., the
parent of Pharmanex (the "Pharmanex Acquisition"). With the Pharmanex
Acquisition, the Company increased its nutritional product development and
formulation capabilities. In connection with the Pharmanex Acquisition, the
Company allocated $92.4 million to goodwill, intellectual property and other
intangible assets and $13.6 million to purchased in-process research and
development. During 1998, the Company fully wrote off the in-process research
and development amount.
In March 1999, NSI terminated its distribution license and various other
license agreements and other intercompany agreements with Nu Skin USA, Inc. ("Nu
Skin USA") and paid Nu Skin USA a $10.0 million termination fee. Also, in March
1999, 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. In May 1999, the Company completed the acquisition of its
affiliates in Canada, Mexico and Guatemala. In July 1999, the Company completed
the acquisition (the "Big Planet Acquisition") of Big Planet, Inc. ("Big
Planet").
Results of Operations
The following tables set forth operating results and operating results as a
percentage of revenue, respectively, for the periods indicated.
Year Ended December 31,
------------------------------
1998 1999 2000
-------- -------- --------
(U.S. dollars in millions)
Revenue $ 913.5 $ 894.3 $ 879.8
Cost of sales 188.5 151.7 149.4
Cost of sales -- amortization of inventory
step-up 21.6 -- --
-------- -------- --------
Gross profit 703.4 742.6 730.4
-------- -------- --------
Operating expenses:
Distributor incentives 331.4 347.0 345.3
Selling, general and administrative 202.2 265.8 294.7
In-process research and development 13.6 -- --
-------- -------- --------
Total operating expenses 547.2 612.8 640.0
-------- -------- --------
Operating income 156.2 129.8 90.4
Other income (expense), net 13.6 (1.4) 6.0
-------- -------- --------
Income before provision for income taxes
and minority interest 169.8 128.4 96.4
Provision for income taxes 62.8 41.7 34.7
Minority interest 3.1 -- --
-------- -------- --------
Net income $ 103.9 $ 86.7 $ 61.7
======== ======== ========
Unaudited supplemental data(1):
Income before pro forma provision for
income taxes and minority interest $ 169.8
Pro forma provision for income taxes 66.0
Pro forma minority interest 1.9
--------
Pro forma net income $ 101.9
========
Year Ended December 31,
------------------------------
1998 1999 2000
-------- -------- --------
Revenue 100.0% 100.0% 100.0%
Cost of sales 20.6 17.0 17.0
Cost of sales-- amortization of
inventory step-up 2.4 -- --
-------- -------- --------
Gross profit 77.0 83.0 83.0
-------- -------- --------
Operating expenses:
Distributor incentives 36.3 38.8 39.2
Selling, general and administrative 22.1 29.7 33.5
In-process research and development 1.5 -- --
-------- -------- --------
Total operating expenses 59.9 68.5 72.7
-------- -------- --------
Operating income 17.1 14.5 10.3
Other income (expense), net 1.5 (.1) .7
-------- -------- --------
Income before provision for income taxes
and minority interest 18.6 14.4 11.0
Provision for income taxes 6.9 4.7 4.0
Minority interest .3 -- --
-------- -------- --------
Net income 11.4% 9.7% 7.0%
======== ======== ========
Unaudited supplemental data(1):
Income before pro forma provision for
income taxes and minority interest 18.6%
Pro forma provision for income taxes 7.2
Pro forma minority interest .2
--------
Pro forma net income 11.2%
========
- ----------
(1) Reflects adjustment for federal and state income taxes as if the Company's
subsidiaries had been taxed as C corporations rather than as S corporations
for the year ended December 31, 1998.
2000 Compared to 1999
Revenue in 2000 decreased 1.6% to $879.8 million from $894.3 million in
1999. The decrease in revenue 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 2000 by approximately
4%.
Revenue in North Asia decreased 5.5% to $585.4 million compared to $619.3
million in 1999. This decrease in revenue was due to revenue in Japan decreasing
8.0% to $554.2 million in 2000 from $602.4 million in 1999. In local currency
terms, revenue in Japan was 12.5% lower in 2000 versus the prior year. The
decrease in revenue in Japan is largely due to continuing challenges with
distributor productivity and competition faced by the Company in 1999 and early
in the year 2000 as discussed in the 1999 to 1998 comparisons. In addition,
economic uncertainty in Japan negatively impacted revenue. In 2000, the Company
undertook several initiatives to help stabilize revenue in Japan, including the
launch of the Pharmanex business opportunity for distributors early in the year,
increased focus on its automatic delivery program and the launch of the
Pharmanex web site product (ePharmanex) late in the year and other initiatives.
The Company believes these initiatives helped stabilize revenue in the latter
half of this year as local currency revenue in Japan in the fourth quarter of
2000 increased slightly compared to the fourth quarter of 1999. The overall
decline in revenue in Japan in 2000 was somewhat offset by an increase in
revenue in South Korea of 84.6% to $31.2 million in 2000 from $16.9 million in
1999. The revenue increase in South Korea was primarily due to significant new
product launches in 2000 including Pharmanex's weight management products and Nu
Skin 180, as well as an overall increase in the number of executive level
distributors.
Revenue in Southeast Asia totaled $119.5 million for the year ended
December 31, 2000, down from revenue of $140.1 million for the year ended
December 31, 1999, a decrease of $20.6 million or 14.7%. This decline in revenue
was primarily a result of revenue in Taiwan decreasing 19.5% to $83.4 million in
2000 from $103.6 million in 1999. 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. In addition, direct
selling as a distribution channel has significantly penetrated the Taiwanese
market. The revenue decline in Southeast Asia was partially offset by the
opening of the market in Singapore which generated $1.0 million in revenue in
one month of operation in 2000. In addition, the revenue from the Company's
retail operations opened in China in 2000 was $1.2 million. Other markets in the
region such as Hong Kong, Thailand, the Philippines, Australia and New Zealand
were slightly down in 2000 versus 1999 due largely to economic uncertainty in
the region as well as a negative foreign currency impact for the year.
Revenue in North America, consisting of the United States and Canada,
increased 32.1% to $155.8 million in 2000, from $117.9 million in 1999. This
increase in revenue is due to the inclusion of a full year of operations of Big
Planet following its acquisition in July 1999 as well as a full year of
operations of the Company's North America sales operations following the
termination of the license agreements in March 1999. Revenue in the Big Planet
division increased $32.9 million due to the timing of the acquisition as well as
growth within Big Planet in the year 2000. In addition, revenue in North
America, exclusive of Big Planet, increased by $5.0 million due to a full year
of revenue from sales to distributors in North America during 2000, following
the early 1999 acquisitions. Revenue in the United States decreased sequentially
during the last two quarters of the year primarily as a result of the
termination of Big Planet's iPhone giveaway and weaker than anticipated sales
during the fourth quarter holiday season. The Company made the strategic
decision to terminate the iPhone giveaway in order to improve operating profits.
Management is optimistic that the Company's global convention in the first
quarter of 2001, new product launches and other initiatives planned for the
United States will help reverse this revenue trend in 2001.
Revenue in the Company's other markets, which include its European,
Latin American and Brazilian operations, increased 12.6% to $19.1 million in
2000. This increase is largely due to a 35% increase in local currency revenue
in Europe, more than making up for the negative currency impact experienced in
Europe in 2000 from 1999.
Gross profit as a percentage of revenue remained constant at 83.0% for
the years ended December 31, 2000 and 1999. The Company's gross margin in 2000
was positively impacted by 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. This positive impact was offset by the
overall growth in revenue from Big Planet in 2000, which includes revenue from
lower margin technology products and services.
Distributor incentives as a percentage of revenue increased to 39.2%
for the year ended December 31, 2000 from 38.8% for the year ended December 31,
1999. 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 has enhanced its compensation plan for distributors, adding short-term
incentives for emerging distributor leaders. This has led to a slight increase
in distributor incentives.
Selling, general and administrative expenses as a percentage of revenue
increased to 33.5% in 2000 from 29.7% in 1999. In U.S. dollar terms, selling,
general and administrative expenses increased to $294.7 million in 2000 from
$265.8 million in 1999. This increase of $28.9 million was due primarily to an
additional $18.3 million of selling, general and administrative expenses related
to the assumed operations of Big Planet for a full year in 2000 compared to
selling, general and administrative expenses from Big Planet following its
acquisition in mid-1999. In addition, the Company incurred an incremental $6.7
million of overhead expenses during 2000 compared to 1999 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 due to a stronger Japanese yen in 2000.
On a local currency basis, selling, general and administrative expenses in
foreign markets declined slightly in 2000 from 1999, but due to a stronger
Japanese yen, the U.S. dollar amount of such expenses increased by $4.0 million.
Operating income decreased to $90.4 million for the year ended December 31,
2000 from $129.8 million in 1999. Operating income decreased due to the revenue
decreases noted above in "revenue" and the operating expense increases noted in
"distributor incentives" and "selling, general and administrative" above.
Other income (expense), net increased $7.4 million for the year ended
December 31, 2000 compared to the prior year primarily as a result of the
foreign currency gains resulting from favorable exchange rate fluctuations
between the U.S. dollar and the Japanese yen within the Company's currency
hedging program. In addition, the Company's interest expense decreased by
approximately $1.0 million relating to the Company's pay down of its long-term
debt.
Provision for income taxes decreased to $34.7 million for the year
ended December 31, 2000 from $41.7 million in 1999. This decrease is primarily
related to lower income earned in 2000 versus 1999, which was somewhat offset by
the lower effective tax rate of 32.5% in 1999 versus 36.0% in 2000. The lower
effective tax rate in 1999 was due to the improved ability to utilize foreign
tax credits as a result of the Company's global tax restructuring plans in that
period.
Net income decreased to $61.7 million for the year ended December 31,
2000 from $86.7 million in 1999. Net income decreased primarily because of the
factors noted above in "operating income," and was somewhat offset by the
factors noted in "other income (expense), net" and "provision for income taxes"
above.
1999 Compared to 1998
Revenue decreased 2.1% to $894.3 million from $913.5 million for the years
ended December 31, 1999 and 1998, respectively. The decrease in revenue resulted
primarily from a significant decline in local currency revenue in Japan and was
somewhat offset by favorable comparative exchange rates and the addition of
revenue from Big
Planet after the Big Planet Acquisition in July 1999 and the Company's
operations in the United States after the termination of the Company's license
agreement with Nu Skin USA in March 1999.
Revenue in North Asia, which consists of Japan and South Korea, decreased
6.9% to $619.3 million in 1999 from $665.5 million in 1998. This decline in
revenue was a result of revenue in Japan decreasing $51.8 million or 7.9% to
$602.4 million in 1999 from $654.2 million in the prior year. Revenue in Japan
in U.S. dollar terms for 1999 benefited from a 12.7% increase in the strength of
the Japanese yen relative to the U.S. dollar. In local currency, revenue in
Japan decreased 19.7% in 1999 versus 1998. Sales activity in Japan was affected
negatively during 1999 by distributor uncertainty concerning the implementation
of the Company's divisional model and other issues associated with compensation
plan requirements and the Company's effort to enforce distributor policies and
procedures. In addition, competitive conditions and weakness in consumer
confidence also significantly impacted revenue in Japan. The decline in revenue
in Japan was somewhat offset by increases in revenue in South Korea.
Revenue in Southeast Asia, which consists of Taiwan, Thailand, Hong Kong,
the Philippines, Australia and New Zealand, totaled $140.1 million for 1999,
down from revenue of $159.7 million in 1998, a decrease of $19.6 million. This
decline in revenue was primarily a result of revenue in Taiwan decreasing to
$103.6 million in 1999 from $119.5 million in the prior year. During 1999, the
Company's operations in Taiwan suffered the impact of a devastating earthquake,
which occurred during the third quarter of 1999. In addition, operations in
Taiwan have continued to suffer the impact of increased competition and an
overall decline in sales in the direct selling industry in Taiwan, which
management believes is largely due to the uncertainty of the viability of direct
selling activities in the People's Republic of China as well as economic
concerns throughout Southeast Asia.
Revenue in North America, consisting of the United States and Canada,
increased 62.2% to $117.9 million from $72.7 million for the years ended
December 31, 1999 and 1998, respectively. This increase in revenue was primarily
due to the additional revenue stream of $83.8 million from sales in the United
States resulting from the termination of the Company's license agreement with Nu
Skin USA, which occurred in March 1999, and the additional revenue of $11.4
million resulting from the Big Planet Acquisition, which occurred in July 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. Revenue in the Company's other markets, which
include its European, Latin American and Brazilian operations, increased 9.0% to
$17.0 million in 1999.
Gross profit as a percentage of revenue was 83.0% for the year ended
December 31, 1999 compared to 77.0% for the year ended December 31, 1998. The
increase in the gross profit as a percentage of revenue for 1999 resulted from
the strengthening of the Japanese yen and other Asian currencies relative to the
U.S. dollar, higher margin sales to distributors in the United States following
the termination of the Company's license agreement with Nu Skin USA, increased
local manufacturing efforts and reduced duty rates. In addition, in 1998, the
Company recorded amortization of inventory step-up related to the NSI
Acquisition of $21.6 million which did not recur in 1999. The Company's gross
margin was negatively impacted by the Big Planet Acquisition, which includes the
sale of lower margin technology products and services. 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.
Distributor incentives as a percentage of revenue increased to 38.8% for
the year ended December 31, 1999 from 36.3% for the year ended December 31,
1998. The primary reason for the increase in 1999 was the termination of the
Company's license agreement with Nu Skin USA which resulted in the Company
beginning to sell products to distributors in the United States and paying the
requisite commissions related to those sales. In addition, the Company has
restructured its compensation plan, adding short-term, division-focused
incentives, which increased compensation to the Company's entry-level
distributors in the latter part of 1999.
Selling, general and administrative expenses as a percentage of revenue
increased to 29.7% for the year ended December 31, 1999 from 22.1% for the year
ended December 31, 1998. In U.S. dollar terms, selling, general and
administrative expenses increased to $265.8 million for the year ended December
31, 1999 from $202.2 million in 1998. This increase was due to stronger foreign
currencies in 1999, primarily the Japanese yen, which resulted in higher
expenses of approximately $14.2 million in Japan. In addition, selling, general
and administrative expenses
increased due to $29.5 million in additional overhead expenses relating to the
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, an additional $14.9 million in 1999 of amortization expense resulting from
the Company's acquisitions of NSI, Pharmanex and Big Planet, and an additional
$14.1 million of selling, general and administrative expenses in foreign markets
relating to the Big Planet Acquisition.
Operating income decreased to $129.8 million for the year ended December
31, 1999 from $156.2 million in 1998 and operating margin decreased to 14.5% for
the year ended December 31, 1999 from 17.1% in 1998. Operating income and margin
decreased due to the declines in local currency revenue in Japan and the
increases in distributor incentives and selling, general and administrative
expenses, which more than offset the improvements in gross margins and the
expense recorded in 1998 relating to in-process research and development, which
did not recur in 1999.
Other income decreased to an expense of $1.4 million for the year ended
December 31, 1999 from income of $13.6 million in 1998. This decrease in other
income was primarily due to the significant hedging gains recorded in 1998 from
forward contracts and intercompany loans resulting from a stronger Japanese yen
in relation to the U.S. dollar, which did not recur in 1999.
Provision for income taxes decreased to $41.7 million for the year ended
December 31, 1999 from $62.8 million in 1998. This decrease is due to a reduced
effective tax rate from 37.0% in 1998 to 32.5% in 1999. This significant
decrease in the effective tax rate in 1999 is related to the Company's ability
to utilize foreign tax credits as a result of the Company's global tax planning.
The pro forma provision for income taxes presents income taxes as if NSI and its
affiliates had been taxed as C corporations rather than as S corporations for
the year ended December 31, 1998.
Net income decreased to $86.7 million for the year ended December 31, 1999
from $103.9 million in 1998 and net income as a percentage of revenue decreased
to 9.7% for the year ended December 31, 1999 from 11.4% in 1998. Net income
decreased primarily because of the factors noted above in "operating income" and
"other income (expense), net," and was somewhat 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
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. The Company generated $43.4 million from
operations in 2000 compared to $30.3 million in 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. The impact of the reduction in foreign
taxes paid on cash generated from operations was somewhat offset by lower net
income in 2000.
As of December 31, 2000, working capital was $122.8 million compared to
$74.6 million as of December 31, 1999. Cash and cash equivalents at December 31,
2000 and 1999 were $64.0 million and $110.2 million, respectively. The decrease
in cash and cash equivalents is 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 below, 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 $23.0 million for
the year ended December 31, 2000. In addition, the Company anticipates capital
expenditures in 2001 of approximately $28.0 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 are required to pay certain
contingent payments if specific earnings growth targets are met. The Company and
NSI did not meet specific earnings growth targets for the years ended December
31, 1999 and 2000. Contingent upon NSI and the Company meeting specific earnings
growth targets during 2001, the Company may pay up to $75.0 million in cash over
the next year to the stockholders of NSI. However, management believes it is
unlikely that such contingency payments will be made.
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 financial statements as of December 31, 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 December 31, 2000.
Since August 1998, the board of directors has authorized the Company to
repurchase up to $50.0 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 years ended December 31, 2000 and 1999, the Company
repurchased approximately 1,893,000 and 1,364,000 shares for an aggregate price
of approximately $12.8 million and $17.1 million, respectively. As of December
31, 2000, the Company had repurchased a total of approximately 4,175,000 shares
for an aggregate price of approximately $40.0 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.
In February 2001, the board of directors authorized the Company to declare
a quarterly cash dividend of $0.05 per share for all classes of common stock.
This initial quarterly cash dividend will be paid on March 28, 2001, to
stockholders of record on March 12, 2001. Management believes that cash flows
from operations will be sufficient to fund this and future dividend payments.
The Company had related party payables of $9.0 million and $15.1 million at
December 31, 2000 and 1999, respectively. In addition, the Company had related
party receivables of $13.2 million and $16.4 million, respectively, at those
dates. These balances are largely related to the Big Planet Acquisition and the
Nu Skin USA transactions completed during 1999.
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, including the Company's
distributors, traditionally take vacations.
Distributor Information
The following table provides information concerning the number of active
and executive distributors as of the dates indicated.
As of December 31, 1998 As of December 31, 1999 As of December 31, 2000
----------------------- ----------------------- -----------------------
Active Executive Active(1) Executive Active(1) Executive
---------- ---------- ---------- ---------- ---------- ----------
North Asia 331,000 17,311 311,000 14,601 301,000 14,968
North America -- -- 54,000 2,547 52,000 2,632
Southeast Asia 120,000 5,091 113,000 3,419 100,000 3,044
Other Markets 19,000 379 16,000 438 22,000 737
---------- ---------- ---------- ---------- ---------- ----------
Total 470,000 22,781 494,000 21,005 475,000 21,381
========== ========== ========== ========== ========== ==========
- ----------
(1) The Big Planet representatives do not necessarily place product orders with
the Company for resale to retail customers. Big Planet representatives sign
up retail customers for Internet, telecommunications and other services
with the Company or its service providers for all products. Therefore, the
active distributors for 1999 and 2000 do not include approximately 29,000
and 40,000 Big Planet representatives who have residual sales volume on a
three month rolling basis, respectively, for service provided by the
Company or its service providers.
Quarterly Results
The following table sets forth certain unaudited quarterly data for the
periods shown.
1999 2000
------------------------------------ -------------------------------------
1st 2nd 3rd 4th 1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
------- ------- ------- ------- ------- ------- ------- -------
(U.S. dollars in millions, except per share amounts)
Revenue $ 233.8 $ 211.3 $ 220.1 $ 229.1 $ 213.6 $ 227.0 $ 215.6 $ 223.6
Gross profit 192.8 175.3 182.5 192.0 179.3 188.4 178.7 184.0
Operating income 47.1 32.4 30.4 19.9 21.5 25.3 23.9 19.7
Net income 30.8 22.0 21.1 12.8 14.9 15.7 15.0 16.2
Net income per share:
Basic 0.35 0.25 0.25 0.15 0.17 0.18 0.18 0.19
Diluted 0.35 0.25 0.24 0.15 0.17 0.18 0.18 0.19
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 December 31, 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 December 31,
2000 as discussed in Note 17 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 represent a material potential loss in
fair value, earnings or cash flows against such contracts. This potential loss
does not consider the underlying foreign currency transaction or translation
exposures of the Company.
Following are the weighted average currency exchange rates of US $1 into
local currency for each of the Company's international or foreign markets in
which revenue exceeded US $5.0 million for at least one of the quarters listed:
1998 1999 2000
----------------------------------- ----------------------------------- -----------------------------------
1st 2nd 3rd 4th 1st 2nd 3rd 4th 1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Japan(1) 128.2 135.9 139.5 119.3 116.8 120.8 112.4 104.1 107.1 106.7 107.7 110.1
Taiwan 32.8 33.6 34.5 32.6 32.6 32.7 32.0 31.7 30.8 30.6 31.1 32.4
Hong Kong 7.7 7.8 7.8 7.8 7.8 7.8 7.8 7.8 7.8 7.8 7.8 7.8
South Korea 1,585.7 1,392.6 1,327.0 1,278.9 1,197.6 1,189.4 1,195.2 1,170.9 1,124.8 1,115.6 1,115.4 1,165.0
- ----------
(1) As of March 1, 2001 the exchange rate of US $1 into the Japanese yen was
approximately 117.0.
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:
* the Company's belief that existing cash and cash flow from operations will
be adequate to fund cash needs;
* management's belief that the Company's global convention and initiatives
planned for the United States will help reverse the recent decline in
revenue;
* the expectation that the Company will spend $28.0 million for capital
expenditures in 2001;
* the belief that the Company is unlikely to pay any further contingent
payments to the former NSI Stockholders; and
* the anticipation that cash will be sufficient to pay future dividends.
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) Because a substantial majority of the Company's sales are generated from
the Asian regions, particularly from Japan and Taiwan, significant
variations in operating results including revenue, gross margin and
earnings from those expected could be caused by
* renewed or sustained weakness of Asian economies or consumer
confidence, and
* weakening of foreign currencies, particularly the Japanese yen, and
any inability to implement forward contracts and other hedging
strategies to manage foreign currency risk.
(b) There can be no assurances that the business initiatives and strategies
that have helped stabilize revenue in Japan during the end of 2000 will
stabilize operations or renew growth on a sustained basis or will have a
similar effect in other markets such as Taiwan. Many of the initiatives
have only been recently introduced and there is still uncertainty
concerning the long-term effect of these initiatives. In addition, there is
a risk that the continued refinement and implementation of the Company's
divisional strategy, Internet initiatives and promotions could create
renewed confusion or uncertainty among distributors and not increase
distributor productivity.
(c) Risks and uncertainties associated with the Company's e-commerce
initiatives. These risks include:
* uncertainty concerning the degree to which such initiatives will
increase and sustain levels of distributor interest, activity or
retention or generate incremental revenue growth, and
* 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.
(d) The ability of the Company to retain its key and executive level
distributors. The Company has experienced a reduction in the number of
active and executive distributors. Because the Company's products are
distributed exclusively through its distributors, the Company's operating
results could be adversely affected if the Company's existing and new
business opportunities and products do not generate sufficient economic
incentive to retain its existing distributors or to sponsor new
distributors on a sustained basis, or if the Company receives adverse
publicity.
(e) Risks associated with the Company's new product offerings planned for 2001
and launched at its global convention, including:
* the risk that such products will not gain market acceptance or meet
the Company's expectations as a result of increased competition,
* the risk that sales from such product offerings could reduce sales of
existing products and not generate significant incremental revenue
growth or help increase distributor numbers and productivity, and
* any legal or regulatory restrictions that might delay or prevent the
Company from offering its new products into all of its markets or
limit the ability of the Company to effectively market such products.
(f) The Company's operations could also be affected by the following risks:
* adverse business or political conditions, continued competitive
pressure,
* the maturity of the direct sales channel in certain of the Company's
markets,
* 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, or changes in
U.S. or foreign tax regulations), and
* the Company's reliance on outside manufacturers.
Nu Skin Enterprises, Inc.
Consolidated Balance Sheets
(U.S. dollars in thousands, except share amounts)
- --------------------------------------------------------------------------------
December 31,
-----------------------
1999 2000
---------- ----------
ASSETS
Current assets
Cash and cash equivalents $ 110,162 $ 63,996
Accounts receivable 18,160 18,191
Related parties receivable 16,424 13,176
Inventories, net 85,751 82,015
Prepaid expenses and other 52,388 44,513
---------- ----------
282,885 221,891
Property and equipment, net 57,948 60,562
Other assets, net 302,382 308,350
---------- ----------
Total assets $ 643,215 $ 590,803
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 22,685 $ 15,837
Accrued expenses 114,691 74,199
Related parties payable 15,059 9,020
Current portion of long-term debt 55,889 --
---------- ----------
208,324 99,056
Long-term debt, less current portion 89,419 84,884
Other liabilities 36,093 40,130
---------- ----------
Total liabilities 333,836 224,070
---------- ----------
Commitments and contingencies (Notes 12 and 20)
Stockholders' equity
Class A common stock - 500,000,000 shares
authorized, $.001 par value, 32,002,158
and 31,338,676 shares issued and outstanding 32 31
Class B common stock - 100,000,000 shares
authorized, $.001 par value, 54,606,905
and 53,408,951 shares issued and outstanding 55 54
Additional paid-in capital 119,652 106,284
Accumulated other comprehensive income (48,220) (45,347)
Retained earnings 244,758 306,458
Deferred compensation (6,898) (747)
---------- ----------
309,379 366,733
---------- ----------
Total liabilities and stockholders' equity $ 643,215 $ 590,803
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
Nu Skin Enterprises, Inc.
Consolidated Statements of Income
(U.S. dollars in thousands, except per share amounts)
- --------------------------------------------------------------------------------
Year Ended December 31,
---------------------------------
1998 1999 2000
--------- --------- ---------
Revenue $ 913,494 $ 894,249 $ 879,758
Cost of sales 188,457 151,681 149,342
Cost of sales-amortization of inventory step-up (Note 3) 21,600 -- --
--------- --------- ---------
Gross profit 703,437 742,568 730,416
--------- --------- ---------
Operating expenses:
Distributor incentives 331,448 346,951 345,259
Selling, general and administrative 202,150 265,770 294,744
In-process research and development (Note 4) 13,600 -- --
--------- --------- ---------
Total operating expenses 547,198 612,721 640,003
--------- --------- ---------
Operating income 156,239 129,847 90,413
Other income (expense), net 13,599 (1,411) 5,993
--------- --------- ---------
Income before provision for income taxes
and minority interest 169,838 128,436 96,406
Provision for income taxes (Note 15) 62,840 41,742 34,706
Minority interest 3,081 -- --
--------- --------- ---------
Net income $ 103,917 $ 86,694 $ 61,700
========= ========= =========
Net income per share (Note 2):
Basic $ 1.22 $ 1.00 $ 0.72
Diluted $ 1.19 $ 0.99 $ 0.72
Weighted average common shares outstanding (000s):
Basic 84,894 87,081 85,401
Diluted 87,018 87,893 85,642
Unaudited pro forma data (Note 15):
Income before pro forma provision for
income taxes and minority interest $ 169,838
Pro forma provision for income taxes 65,998
Pro forma minority interest 1,947
---------
Pro forma net income $ 101,893
=========
Pro forma net income per share:
Basic $ 1.20
Diluted $ 1.17
The accompanying notes are an integral part of these consolidated financial
statements.
Nu Skin Enterprises, Inc.
Consolidated Statements of Stockholders' Equity
(U.S. dollars in thousands, except share amounts)
- --------------------------------------------------------------------------------
Accumulated
Class A Class B Additional Other Total
Preferred Common Common Paid-In Comprehensive Retained Deferred Stockholders'
Stock Stock Stock Capital Income Earnings Compensation Equity
--------- ------- ------- ---------- ------------ -------- ------------ ------------
Balance at January 1, 1998 $ 2 $ 12 $ 70 $ 115,053 $ (28,578) $ 17,788 $ (9,455) $ 94,892
Net income -- -- -- -- -- 103,917 -- 103,917
Foreign currency translation adjustments -- -- -- -- (15,026) -- -- (15,026)
------------
Total comprehensive income 88,891
Repurchase of 917,000 shares of -- -- -- (10,549) -- -- -- (10,549)
Class A common stock (Note 13)
Amortization of deferred compensation -- -- -- -- -- -- 3,626 3,626
Issuance of notes payable to stockholders -- -- -- -- -- (24,413) -- (24,413)
Purchase of Acquired Entities and
termination of S corporation status 1 -- -- (22,144) -- 60,772 -- 38,629
Purchase of Pharmanex (Note 4) -- 4 -- 78,710 -- -- (859) 77,855
Exercise of distributor and
employee stock options -- -- -- 1,961 -- -- -- 1,961
Conversion of preferred stock (Note 3) (3) 3 -- -- -- -- -- --
Conversion of shares from Class
B to Class A -- 15 (15) -- -- -- -- --
Contingent payments to
stockholders (Note 7) -- -- -- (16,250) -- -- -- (16,250)
--------- ------- ------- ---------- ------------ -------- ------------ ------------
Balance at December 31, 1998 -- 34 55 146,781 (43,604) 158,064 (6,688) 254,642
Net income -- -- -- -- -- 86,694 -- 86,694
Foreign currency translation adjustments -- -- -- -- (4,616) -- -- (4,616)
------------
Total comprehensive income 82,078
Repurchase of 1,985,000 shares -- (2) -- (26,860) -- -- -- (26,862)
of Class A common stock (Note 13)
Amortization of deferred compensation -- -- -- -- -- -- 3,692 3,692
Termination of Nu Skin USA
license fee (Note 5) -- -- -- (6,444) -- -- (650) (7,094)
Issuance of employee stock
awards and options -- -- -- 3,252 -- -- (3,252) --
Exercise of distributor and
employee stock options -- -- -- 2,923 -- -- -- 2,923
--------- ------- ------- ---------- ------------ -------- ------------ ------------
Balance at December 31, 1999 -- 32 55 119,652 (48,220) 244,758 (6,898) 309,379
Net income -- -- -- -- -- 61,700 -- 61,700
Foreign currency translation adjustments -- -- -- -- 2,873 -- -- 2,873
------------
Total comprehensive income 64,573
Repurchase of 1,893,000 shares
of Class A common stock (Note 13) -- (1) (1) (12,763) -- -- -- (12,765)
Amortization of deferred compensation -- -- -- -- -- -- 5,252 5,252
Exercise of distributor and
employee stock options -- -- -- 294 -- -- -- 294
Forfeiture of employee stock
awards and options -- -- -- (899) -- -- 899 --
--------- ------- ------- ---------- ------------ -------- ------------ ------------
Balance at December 31, 2000 $ -- $ 31 $ 54 $ 106,284 $ (45,347) $306,458 $ (747) $ 366,733
========= ======= ======= ========== ============ ======== ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
Nu Skin Enterprises, Inc.
Consolidated Statements of Cash Flows
(U.S. dollars in thousands)
- --------------------------------------------------------------------------------
Year Ended December 31,
---------------------------------------
1998 1999 2000
--------- --------- ---------
Cash flows from operating activities:
Net income $ 103,917 $ 86,694 $ 61,700
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 15,768 29,515 32,350
Amortization of deferred compensation 3,626 3,692 5,252
Amortization of inventory step-up 21,600 -- --
Write-off of in-process research and development 13,600 -- --
Income applicable to minority interest 3,081 -- --
Changes in operating assets and liabilities:
Accounts receivable (900) (3,776) (31)
Related parties receivable 1,215 (4,441) 3,248
Inventories, net (3,556) (2,133) 3,736
Prepaid expenses and other (7,248) 1,033 7,875
Other assets, net (4,100) (57,169) (21,400)
Accounts payable (8,767) 4,068 (6,848)
Accrued expense (8,973) (40,868) (40,492)
Related parties payable (10,703) 448 (6,039)
Other liabilities -- 13,236 4,037
--------- --------- ---------
Net cash provided by operating activities 118,560 30,299 43,388
--------- --------- ---------
Cash flows from investing activities:
Purchase of property and equipment (18,320) (29,719) (23,030)
Purchase of Pharmanex, net of cash acquired (Note 4) (28,750) -- --
Purchase of Big Planet, net of cash acquired (Note 6) -- (13,571) --
Payments for lease deposits (633) (2,206) (195)
Receipt of refundable lease deposits 1,650 1,508 255
--------- --------- ---------
Net cash used in investing activities (46,053) (43,988) (22,970)
--------- --------- ---------
Cash flows from financing activities:
Payments on long-term debt (41,634) (14,545) (142,821)
Termination of Nu Skin USA license fee (Note 5) -- (10,000) --
Payment to stockholders under the NSI Acquisition -- (25,000) --
Proceeds from long-term debt 181,538 -- 90,000
Repurchase of shares of common stock (10,549) (26,862) (12,765)
Exercise of distributor and employee stock options 1,961 2,923 294
Payment to stockholders for notes payable (Note 7) (180,000) -- --
--------- --------- ---------
Net cash used in financing activities (48,684) (73,484) (65,292)
--------- --------- ---------
Effect of exchange rate changes on cash (9,296) 8,508 (1,292)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents 14,527 (78,665) (46,166)
Cash and cash equivalents, beginning of period 174,300 188,827 110,162
--------- --------- ---------
Cash and cash equivalents, end of period $ 188,827 $ 110,162 $ 63,996
========= ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
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
telecommunications products and services. The Company distributes products
throughout the world. The Company's operations are divided into four segments:
North Asia, which consists of Japan and South Korea; North America, which
consists of the United States and Canada; Southeast Asia, which consists of
Australia, Hong Kong (including Macau), New Zealand, the PRC (China), the
Philippines, Singapore, Taiwan and Thailand; and Other Markets, which consists
of the Company's markets in Brazil, Europe, Guatemala and Mexico (the Company's
subsidiaries operating in these countries are collectively referred to as the
"Subsidiaries"). The Company was incorporated on September 4, 1996 as a holding
company.
As discussed in Note 3, the Company completed the NSI Acquisition on March
26, 1998. Prior to the NSI Acquisition, each of the acquired entities elected to
be treated as an S corporation.
As discussed in Note 4, the Company completed the Pharmanex Acquisition on
October 16, 1998, which enhanced the Company's involvement with the distribution
and sale of nutritional products.
As discussed in Note 5, on March 8, 1999, Nu Skin International, Inc.
("NSI") a subsidiary of the Company, terminated its distribution license and
various other license agreements and other intercompany agreements with Nu Skin
USA, Inc. ("Nu Skin USA"). Also, in March 1999, through a newly formed
wholly-owned subsidiary, the Company acquired selected assets of Nu Skin USA. In
May 1999, the Company acquired Nu Skin Canada, Inc., Nu Skin Mexico, Inc. and Nu
Skin Guatemala, Inc. (collectively, the "North American Affiliates").
As discussed in Note 6, 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.
2. Summary of Significant Accounting Policies
Consolidation
The consolidated financial statements include the accounts of the Company
and the Subsidiaries. All significant intercompany accounts and transactions are
eliminated in consolidation.
Use of estimates
The preparation of these financial statements in conformity with accounting
principles generally accepted in the United States of America required
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Significant estimates include reserves for
product returns, obsolete inventory and taxes. Actual results could differ from
these estimates.
Cash and cash equivalents
Cash equivalents are short-term, highly liquid instruments with original
maturities of 90 days or less.
Nu Skin Enterprises, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Inventories
Inventories consist primarily of merchandise purchased for resale and are
stated at the lower of cost, using the first-in, first-out method, or market.
The Company had reserves for obsolete inventory totaling $13,600,000, $7,200,000
and $2,800,000 as of December 31, 1998, 1999 and 2000, respectively.
Property and equipment
Property and equipment are recorded at cost and depreciated using the
straight-line method over the following estimated useful lives:
Furniture and fixtures 5-7 years
Computers and equipment 3-5 years
Leasehold improvements Shorter of estimated useful life or lease term
Vehicles 3-5 years
Expenditures for maintenance and repairs are charged to expense as
incurred.
Other assets
Other assets consist primarily of deferred tax assets, deposits for
noncancelable operating leases, distribution rights, goodwill and long-term
intangibles acquired in the NSI Acquisition (Note 3), the Pharmanex Acquisition
(Note 4) and the Big Planet Acquisition (Note 6). The goodwill and intangible
assets and distribution rights asset are being amortized on a straight-line
basis over their estimated useful lives ranging from 4 to 20 years. The Company
assesses the recoverability of long-lived assets by determining whether the
amortization of the balance over its remaining life can be recovered through
undiscounted future operating cash flows attributable to the assets.
Revenue recognition
Revenue is recognized when products are shipped and title passes to
independent distributors who are the Company's customers. A reserve for product
returns is accrued based on historical experience. The Company generally
requires cash or credit card payment at the point of sale. The Company has
determined that no allowance for doubtful accounts is necessary. Amounts
received prior to shipment and title passage to distributors are recorded as
deferred revenue.
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. The implementation of SAB 101 did
not significantly impact the Company's revenue recognition policies.
Research and development
The Company's research and development activities are conducted primarily
through its Pharmanex division. Research and development costs are expensed as
incurred.
Income taxes
The Company has adopted Statement of Financial Accounting Standards No. 109
("SFAS 109"), Accounting for Income Taxes. Under SFAS 109, the liability method
is used in accounting for income taxes. Under this method, deferred tax assets
and liabilities are determined based on the differences between financial
reporting and tax bases of assets and liabilities and are measured using the
enacted tax rates and laws that will be in effect when the differences are
expected to reverse.
Nu Skin Enterprises, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Net income per share
The Company computes earnings per share under Statement of Financial
Accounting Standards No. 128 ("SFAS 128"), Earnings per Share. SFAS 128
specifies the computation, presentation and disclosure requirements for earnings
per share data. SFAS 128 also requires the presentation of both basic and
diluted earnings per share data for entities with complex capital structures.
Diluted earnings per share data gives effect to all dilutive potential common
shares that were outstanding during the periods presented.
Foreign currency translation
Most of the Company's business operations occur outside of the United
States. Each Subsidiary's local currency is considered the functional currency.
Since a substantial portion of the Company's inventories are purchased with U.S.
dollars in the United States and since the Company is incorporated in the United
States, all assets and liabilities are translated into U.S. dollars at exchange
rates existing at the balance sheet dates, revenues and expenses are translated
at weighted average exchange rates, and stockholders' equity is recorded at
historical exchange rates. The resulting foreign currency translation
adjustments are recorded as a separate component of stockholders' equity in the
consolidated balance sheets, and transaction gains and losses are included in
other income and expense in the consolidated financial statements.
Fair value of financial instruments
The fair value of financial instruments including cash and cash
equivalents, accounts receivable, related parties receivable, accounts payable,
related parties payable and notes payable approximate book values. The carrying
amount of long-term debt approximates fair value because the applicable interest
rates approximate current market rates. Fair value estimates are made at a
specific point of time, based on relevant market information.
Stock-based compensation
The Company measures compensation expense for its stock-based employee
compensation plans using the intrinsic value method prescribed by Accounting
Principles Board Opinion No. 25 ("APB 25"), Accounting for Stock Issued to
Employees, and provides pro forma disclosures of net income and net income per
share as if the fair value based method prescribed by Statement of Financial
Accounting Standards No. 123 ("SFAS 123"), Accounting for Stock-Based
Compensation, had been applied in measuring compensation expense (Note 14).
Reporting comprehensive income
The Company has adopted Statement of Financial Accounting Standards No. 130
("SFAS 130"), Reporting Comprehensive Income. Comprehensive income is defined as
the change in equity of a business enterprise during a period from transactions
and other events and circumstances from nonowner sources, and it includes all
changes in equity during a period except those resulting from investments by
owners and distributions to owners.
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 its
consolidated financial statements.
Nu Skin Enterprises, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
3. Acquisition of NSI and Certain Affiliates
On March 26, 1998, the Company completed the acquisition (the "NSI
Acquisition") of the capital stock of NSI, NSI affiliates in Europe, South
America, Australia and New Zealand and certain other NSI affiliates (the
"Acquired Entities") for $70.0 million in preferred stock and long-term notes
payable to the stockholders of the Acquired Entities (the "NSI Stockholders")
totaling approximately $6.2 million. In addition, contingent upon NSI and the
Company meeting specific earnings growth targets, the Company agreed to pay up
to $100.0 million in cash during the subsequent four year period to the NSI
Stockholders. The Company and NSI met specific earnings growth targets in 1998
resulting in a contingent payment to the NSI Stockholders of $25.0 million. The
Company and NSI did not meet specific earnings growth targets for the years
ended December 31, 1999 and 2000. Contingent upon NSI and the Company meeting
specific earnings growth targets during 2001, the Company may pay up to $75.0
million in cash over the next year to the NSI Stockholders. However, management
believes it is unlikely that such contingency payments will be made. 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 year, if any, will be
accounted for in a similar manner. Also, as part of the NSI Acquisition, the
Acquired Entities' S corporation status was terminated, and the Acquired
Entities declared distributions to the stockholders that included all of the
Acquired Entities' previously earned and undistributed taxable S corporation
earnings (the "S Distribution Notes"). The S Distribution Notes assumed as part
of the NSI Acquisition totaled approximately $171.3 million and, in addition,
the Company incurred acquisition costs totaling $3.0 million. The net assets
acquired totaling $90.4 million include net deferred tax liabilities totaling
$7.4 million recorded upon the conversion of the Acquired Entities from S to C
corporations.
The NSI Acquisition was accounted for by the purchase method of accounting,
except for that portion of the Acquired Entities under common control of a group
of stockholders, which portion was accounted for in a manner similar to a
pooling of interests. The common control group is comprised of the NSI
Stockholders who are immediate family members. The minority interest, which
represents the ownership interests of the NSI Stockholders who are not immediate
family members, was acquired during the NSI Acquisition. Prior to the NSI
Acquisition, a portion of the Acquired Entities' net income, capital
contributions and distributions (including cash dividends and S Distribution
Notes) had been allocated to the minority interest.
For the portion of the NSI Acquisition accounted for by the purchase
method, the Company recorded inventory step-up of $21.6 million and intangible
assets of $34.8 million. During 1998, the inventory step-up was fully amortized
and the Company recorded amortization of intangible assets totaling $1.6
million, $2.6 million and $2.5 million during 1998, 1999 and 2000, respectively.
For the portion of the NSI Acquisition accounted for in a manner similar to
a pooling of interests, the excess of purchase price paid over the book value of
the net assets acquired was recorded as a reduction of stockholders' equity.
In connection with the restatement of the Company's consolidated financial
statements for 1997, the portion of the NSI Acquisition and the resulting
Preferred Stock issued to the common control group is reflected as if such stock
had been issued on the date of the Company's incorporation on September 4, 1996.
On May 5, 1998, the stockholders of the Company approved the automatic
conversion of the Preferred Stock issued in the NSI Acquisition into 2,978,159
shares of Class A common stock.
4. Acquisition of Pharmanex, Inc.
On October 16, 1998, the Company completed the acquisition of
privately-held Generation Health Holdings, Inc., the parent company of
Pharmanex, Inc. (the "Pharmanex Acquisition"), for $77.6 million, which
consisted of approximately 3.6 million shares of the Company's Class A common
stock, including approximately 261,000 shares issuable upon exercise of options
assumed by the Company (Note 14). Also, as part of the Pharmanex Acquisition,
Nu Skin Enterprises, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
the Company assumed approximately $34.0 million in liabilities, the majority of
which was settled in cash in connection with the closing, and incurred
acquisition costs totaling $1.3 million.
The Pharmanex Acquisition was accounted for by the purchase method of
accounting. The Company recorded inventory step-up of $3.7 million and
intangible assets of $92.4 million. In addition, the Company allocated $13.6
million to purchased in-process research and development based on a discounted
cash-flow method reflecting the stage of completion of the related projects.
During 1998, the in-process research and development amount was fully written
off and the Company recorded amortization of intangible assets totaling $1.3
million, $6.9 million and $7.2 million during 1998, 1999 and 2000, respectively.
The Company recorded amortization of inventory step up of $0.4 million and $3.3
million during 1998 and 1999, respectively.
5. 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.
6. 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. The Company recorded amortization on the
intangible assets relating to the Big Planet Acquisition of $1.1 million and
$2.3 million during 1999 and 2000, respectively. Big Planet incurred operating
losses of approximately $25.0 million for the year ended December 31, 2000.
7. Related Party Transactions
Scope of related party activity
Prior to the acquisition of certain assets of Nu Skin USA (see Note 5) and
the acquisition of the North American Affiliates in 1999, the Company had
transactions with these affiliated entities. The transactions with these
entities were as follows: (1) The Company sold products and marketing materials.
(2) The Company collected trademark royalty fees from these entities on products
bearing NSI trademarks that are not purchased from NSI. (3) The Company entered
into a distribution agreement with each independent distributor. (4) The Company
collected license fees from these entities for the right to use the
distributors, and for the right to use the Company's distribution system and
other related intangibles. (5) The Company operates a global commission plan
whereby distributors' commissions are determined by aggregate worldwide
purchases made by downline distributors. Thus, commissions on purchases from
the Company earned by distributors located in geographic areas outside those
held by the Company were remitted to the Company, which then forwarded these
commissions to the distributors. (6) The Company collected fees for management
and support services provided to these entities.
Nu Skin Enterprises, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
The purchase prices paid by the affiliated entities for the purchase of
product and marketing materials are determined pursuant to the Distribution
Agreement between the Company and the affiliated entities. The selling prices to
these affiliated entities of products and marketing materials were determined
pursuant to the Wholesale Distribution Agreements between the Company and these
affiliated entities. Trademark royalty fees and license fees were charged
pursuant to the Trademark/Trade Name License Agreement between the Company and
these affiliated entities and the Licensing and Sales Agreement between the
Company and these affiliated entities, respectively. The independent distributor
commission program is managed by the Company. Charges to the affiliated entities
were based on a worldwide commission fee of 42% of product revenue, which covers
commissions paid to distributors on a worldwide basis and the direct costs of
administering the global compensation plan. Management and support services fees
were billed to the affiliated entities pursuant to the Management Services
Agreement between the Company and the affiliated entities and consisted of all
direct expenses incurred by the Company and indirect expenses allocated to the
affiliated entities based on the entities' net sales. The sales revenue,
royalties, licenses and management fees charged to the affiliated entities prior
to the acquisition were recorded as revenue in the consolidated statements of
income and totaled $72,691,000 and $13,610,000 for the years ended December 31,
1998 and 1999, respectively.
Notes payable to stockholders
In connection with the NSI Acquisition described in Notes 1 and 3, the
Company assumed S Distribution Notes totaling $171.3 million and long-term notes
payable to the NSI Stockholders totaling $6.2 million, both bearing interest at
6.0% per annum. These amounts were paid in full, including accrued interest of
$3.3 million, during 1998. Prior to the NSI Acquisition, the Acquired Entities
paid $2.5 million of the S Distribution Notes, plus accrued interest of $1.8
million in 1998.
Certain relationships with stockholder distributors
Two major stockholders of the Company have been independent distributors
for the Company since 1984. These stockholders are partners in an entity which
receives substantial commissions from the Company, including commissions
relating to sales within the countries in which the Company operates. By
agreement, the Company pays commissions to this partnership at the highest level
of distributor compensation to allow the stockholders to use their expertise and
reputations in network marketing to further develop the Company's distributor
force, rather than focusing solely on their own distributor organizations. The
commissions paid to this partnership relating to sales within the countries in
which the Company operates were $800,000, $3,331,000 and $3,368,000 for the
years ended December 31, 1998, 1999 and 2000, respectively. The increase in the
1999 and 2000 commissions paid to this partnership reflects the amounts paid
relating to sales in 1999 and 2000 within the North American countries and Big
Planet, which were not included in the amounts in 1998.
Loan to stockholder
The Company has loaned $5.0 million to a non-management stockholder. The
loan is partly secured by shares of Class B common stock, and matures in
December 2001. Interest accrues at a rate of 6.0% per annum on this loan. The
loan balance, including accrued interest, totaled $5.6 million and $6.0 million
at December 31, 1999 and 2000, respectively.
Lease agreements
The Company leases corporate office and warehouse space from two affiliated
entities. Total lease payments to these two affiliated entities were $3.0
million, $2.8 million and $2.7 million for the years ended December 31, 1998,
1999 and 2000, respectively.
Nu Skin Enterprises, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
8. Property and Equipment
Property and equipment are comprised of the following (U.S. dollars in
thousands):
December 31,
---------------------
1999 2000
-------- --------
Furniture and fixtures $ 33,598 $ 35,995
Computers and equipment 64,588 71,377
Leasehold improvements 25,057 23,797
Vehicles 1,414 1,187
-------- --------
124,657 132,356
Less: accumulated depreciation (66,709) (71,794)
-------- --------
$ 57,948 $ 60,562
======== ========
Depreciation of property and equipment totaled $11,543,000, $14,148,000 and
$16,978,000 for the years ended December 31, 1998, 1999 and 2000, respectively.
9. Other Assets
Other assets consist of the following (U.S. dollars in thousands):
December 31,
---------------------
1999 2000
-------- --------
Goodwill and intangibles $198,450 $203,730
Deposits for noncancelable operating leases 10,179 11,837
Distribution rights 8,687 8,750
Deferred taxes 86,341 88,551
Other 15,749 26,063
-------- --------
319,406 338,931
Less: accumulated amortization (17,024) (30,581)
-------- --------
$302,382 $308,350
======== ========
Amortization of goodwill and intangible assets totaled $3,248,000,
$14,929,000 and $14,934,000 for the years ended December 31, 1998, 1999 and
2000, respectively. Amortization of the distribution rights asset totaled
$438,000 for each of the years ended December 31, 1998, 1999 and 2000.
10. Accrued Expenses
Accrued expenses consist of the following (U.S. dollars in thousands):
December 31,
---------------------
1999 2000
-------- --------
Income taxes payable $ 18,121 $ 10,756
Accrued commission payments to distributors 39,857 26,425
Other taxes payable 9,385 13,016
Other accruals 47,328 24,002
-------- --------
$114,691 $ 74,199
======== ========
Nu Skin Enterprises, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
11. Long-Term Debt
In 1998, the Company and its Japanese subsidiary Nu Skin Japan Co., Ltd.
("Nu Skin Japan") entered into a $180.0 million credit facility with a syndicate
of financial institutions. This unsecured credit facility was used to satisfy
Company liabilities which were assumed as part of the NSI Acquisition. The
Company borrowed $110.0 million and Nu Skin Japan borrowed the Japanese yen
equivalent of $70.0 million denominated in local currency. Payments totaling
$41.6 million, $14.5 million and $55.7 million were made during 1998, 1999 and
2000, respectively, relating to the $180.0 million credit facility.
On October 12, 2000, the Company refinanced the $87.1 million remaining
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 financial statements as of December
31, 2000. Interest expense relating to the long-term debt totaled $4.7 million,
$5.7 million and $4.8 million for the years ended December 31, 1998, 1999 and
2000, respectively.
The Notes contain other terms and conditions and affirmative and negative
financial covenants customary for credit facilities of this type. As of December
31, 2000, the Company is in compliance with all financial covenants under the
Notes.
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 December 31, 2000.
Maturities of long-term debt at December 31, 2000 are as follows (U.S.
dollars in thousands):
Year Ending December 31,
------------------------
2001 - 2003 $ --
2004 12,126
2005 12,126
Thereafter 60,632
--------
Total $ 84,884
========
12. Lease Obligations
The Company leases office space and computer hardware under noncancelable
long-term operating leases. Most leases include renewal options of up to three
years. Minimum future operating lease obligations at December 31, 2000 are as
follows (U.S. dollars in thousands):
Year Ending December 31,
------------------------
2001 $ 9,300
2002 7,062
2003 4,726
2004 2,754
2005 2,094
--------
Total minimum lease payments $ 25,936
========
Rental expense for operating leases totaled $15,969,000, $18,354,000 and
$20,683,000 for the years ended December 31, 1998, 1999 and 2000, respectively.
Nu Skin Enterprises, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
13. Capital Stock
The Company's authorized capital stock consists of 25 million shares of
preferred stock, par value $.001 per share, 500 million shares of Class A common
stock, par value $.001 per share and 100 million shares of Class B common stock,
par value $.001 per share. The shares of Class A common stock and Class B common
stock are identical in all respects, except for voting rights and certain
conversion rights and transfer restrictions, as follows: (1) each share of Class
A common stock entitles the holder to one vote on matters submitted to a vote of
the Company's stockholders and each share of Class B common stock entitles the
holder to ten votes on each such matter; (2) stock dividends of Class A common
stock may be paid only to holders of Class A common stock and stock dividends of
Class B common stock may be paid only to holders of Class B common stock; (3) if
a holder of Class B common stock transfers such shares to a person other than a
permitted transferee, as defined in the Company's Certificate of Incorporation,
such shares will be converted automatically into shares of Class A common stock;
and (4) Class A common stock has no conversion rights; however, each share of
Class B common stock is convertible into one share of Class A common stock, in
whole or in part, at any time at the option of the holder.
Weighted average common shares outstanding
The following is a reconciliation of the weighted average common shares
outstanding for purposes of computing basic and diluted net income per share (in
thousands):
Year Ended December 31,
------------------------
1998 1999 2000
------ ------ ------
Basic weighted average common shares
outstanding 84,894 87,081 85,401
Effect of dilutive securities:
Stock awards and options 2,124 812 241
------ ------ ------
Diluted weighted average common shares
outstanding 87,018 87,893 85,642
====== ====== ======
Repurchase of common stock
Since August 1998, the board of directors has authorized the Company to
repurchase up to $50.0 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 years ended December 31, 1999 and 2000, the Company
repurchased approximately 1,364,000 and 1,893,000 shares for an aggregate price
of approximately $17.1 million and $12.8 million, respectively. As of December
31, 2000, the Company had repurchased a total of approximately 4,175,000 shares
for an aggregate price of approximately $40.0 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.
Conversion of common stock
In December 1998, the holders of the Class B common stock converted 15.0
million shares of Class B common stock to Class A common stock.
14. Equity Incentive Plans
During the year ended December 31, 1996, the Company's board of directors
adopted the Nu Skin Enterprises, Inc. 1996 Stock Incentive Plan (the "1996 Stock
Incentive Plan"). The 1996 Stock Incentive Plan provides for granting of stock
awards and options to purchase common stock to executives, other employees,
independent consultants and directors of the Company and its Subsidiaries. As of
December 31, 2000, approximately 3.5 million shares were available for grant
under this plan.
Effective November 21, 1996, the Company implemented a one-time distributor
equity incentive program which provided for grants of options to selected
distributors for the purchase of 1,605,000 shares of the Company's Class A
common stock. The options are exercisable at a price of $5.75 per share and
vested one year from the effective date. The Company recorded distributor stock
expense of $19.9 million over the vesting period. As of December 31, 2000,
approximately 641,000 of these options had been exercised.
Pursuant to the Pharmanex Acquisition, the Company assumed outstanding
options under two stock option plans. The options were converted into the right
to purchase approximately 261,000 shares of Class A common stock.
A summary of the Company's stock option plans as of December 31, 1998, 1999
and 2000 and changes during the years then ended, is presented below:
1998 1999 2000
--------------------- ---------------------- ----------------------
Weighted Weighted Weighted
Average Average Average
Shares Exercise Shares Exercise Shares Exercise
(in 000s) Price (in 000s) Price (in 000s) Price
--------- -------- --------- --------- --------- ---------
Outstanding - beginning of year 2,112.3 $ 7.72 3,570.3 $ 10.82 5,071.6 $ 13.53
Granted at fair value 1,890.5 13.87 2,319.1 17.00 1,969.7 7.41
Exercised (394.3) 5.73 (410.2) 5.07 (31.1) 5.59
Forfeited/Canceled (38.2) 10.17 (407.6) 10.17 (1,183.1) 16.04
--------- --------- ---------
Outstanding - end of year 3,570.3 10.82 5,071.6 13.53 5,827.1 11.01
Options exercisable at year-end 1,948.5 $ 5.92 2,146.2 $ 6.83 2,056.9 $ 9.65
The following table summarizes information concerning outstanding and
exercisable options at December 31, 2000:
Options Outstanding Options Exercisable
------------------------------------ ----------------------
Weighted Weighted Weighted
Average Average Average
Shares Exercise Years Shares Exercise
Exercise Price Range (in 000s) Price Remaining (in 000s) Price
- -------------------- --------- -------- --------- --------- --------
$0.92 to $5.75 1,252.2 $ 4.92 5.95 1,229.5 $ 4.94
$6.56 to $11.00 1,996.1 7.43 9.42 21.3 11.00
$12.00 to $16.00 1,447.3 13.55 8.29 449.9 13.61
$17.00 to $28.50 1,131.5 20.80 8.13 356.2 20.84
--------- ---------
5,827.1 11.01 8.14 2,056.9 9.65
Nu Skin Enterprises, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
The Company accounts for stock-based compensation in accordance with the
provisions of APB 25. The Company recorded expense in the amount of $220,000,
$579,000 and $703,000 in 1998, 1999 and 2000, respectively, in connection with
options granted under the Company's equity incentive plans. As of December 31,
2000, approximately $747,000 remains to be amortized over the remaining vesting
periods of the options. Had compensation expense been determined based on the
fair value at the grant dates as prescribed in SFAS 123, the Company's results
for the years ended December 31 would have been as follows:
1998 1999 2000
--------- --------- ---------
Pro forma net income (in 000s) $ 103,023 $ 84,456 $ 52,430
Pro forma earnings per share:
Basic $ 1.21 $ 0.97 $ 0.61
Diluted $ 1.18 $ 0.97 $ 0.61
The fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions:
1998 1999 2000
--------- --------- ---------
Risk-free interest rate 4.5% 6.8% 6.2%
Expected life 3.4 years 2.7 years 4.0 years
Expected volatility 48.0% 80.0% 85.0%
Expected dividend yield -- -- --
The weighted-average grant date fair values of options granted during 1998,
1999 and 2000 were $7.88, $10.56 and $4.72, respectively.
Since the Company's initial public offering in 1996, the Company has
granted stock awards of its Class A common stock to employees. In total,
approximately 686,000 shares were issued in this program, and the awards vested
ratably over a one to four year period. The Company recorded compensation
expense of $1.2 million and $2.7 million for the years ended December 31, 1998
and 1999, respectively, and the remaining compensation expense of $2.8 million
for the year ended December 31, 2000 relating to these stock awards.
Effective February 1, 2000, the Company's board of directors adopted the
Employee Stock Purchase Plan (the "Purchase Plan"), which provides for the
issuance of a maximum of 200,000 shares of Class A common stock. Eligible
employees can have up to 15% of their earnings withheld, up to certain maximums,
to be used to purchase shares of the Company's Class A common stock on every
April 30th, July 31st, October 31st or January 31st (the "Purchase Date"). The
price of the Class A common stock purchased under the Purchase Plan will be
equal to 85% of the lower of the fair market value of the Class A common stock
on the commencement date of each three month offering period or Purchase Date.
During 2000, approximately 20,000 shares were purchased at prices ranging from
$4.62 to $7.75 per share. At December 31, 2000, approximately 180,000 shares
were available under the Purchase Plan for future issuance.
Nu Skin Enterprises, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
15. Income Taxes
Consolidated income before provision for income taxes consists of income
earned primarily from international operations. The provision for current and
deferred taxes for the years ended December 31, 1998, 1999 and 2000 consists of
the following (U.S. dollars in thousands):
1998 1999 2000
-------- -------- --------
Current
Federal $ 3,695 $ 3,030 $ 1,677
State 3,580 3,030 1,589
Foreign 72,317 56,165 36,503
-------- -------- --------
79,592 62,225 39,769
Deferred
Federal (10,712) (19,008) 4,337
State (48) (215) 836
Foreign 947 (1,260) (10,236)
Change in tax status (6,939) -- --
-------- -------- --------
Provision for income taxes $ 62,840 $ 41,742 $ 34,706
======== ======== ========
Prior to the reorganization of the initial companies to form the Company
(the "Reorganization") and the NSI Acquisition described in Notes 3 and 7, the
Subsidiaries elected to be taxed as S corporations whereby the income tax
effects of the Subsidiaries' activities accrued directly to their stockholders;
therefore, adoption of SFAS 109 required no establishment of deferred income
taxes since no material differences between financial reporting and tax bases of
assets and liabilities existed. Concurrent with the Company's Reorganization and
the NSI Acquisition, the Company terminated the S corporation elections of its
Subsidiaries. As a result, deferred income taxes under the provisions of SFAS
109 were established.
The principal components of deferred tax assets are as follows (U.S.
dollars in thousands):
December 31, December 31,
1999 2000
------------ ------------
Deferred tax assets:
Inventory differences $ 12,224 $ 5,164
Foreign tax credit 40,503 60,278
Distributor stock options and employee stock awards 5,261 6,723
Capitalized legal and professional 2,570 1,427
Accrued expenses not deductible until paid 12,632 14,154
Withholding tax 8,897 2,142
Minimum tax credit 10,264 10,739
Net operating losses 11,017 7,096
----------- ------------
Total deferred tax assets 103,368 107,723
----------- ------------
Deferred tax liabilities:
Foreign deferred tax 11,657 14,816
Exchange gains and losses 3,566 5,880
Cost of goods sold adjustment -- 3,220
Pharmanex intangibles step-up 21,116 18,880
Other 4,067 6,149
------------ ------------
Total deferred tax liabilities 40,406 48,945
------------ ------------
Valuation allowance -- --
------------ ------------
Deferred taxes, net $ 62,962 $ 58,778
============ ============
Nu Skin Enterprises, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
The consolidated statements of income include a pro forma presentation for
income taxes, including the effect on minority interest, which would have been
recorded if the Company's Subsidiaries had been taxed as C corporations for all
periods presented. A reconciliation of the Company's pro forma effective tax
rate for the year ended December 31, 1998 and the actual tax rate for the years
ended December 31, 1999 and 2000 compared to the statutory U.S. Federal tax rate
is as follows:
Year Ended December 31,
----------------------------
1998 1999 2000
------ ------ ------
Income taxes at statutory rate 35.00% 35.00% 35.00%
Foreign tax credit limitation (benefit) 4.40 (7.77) --
Cumulative effect of change in tax status (4.09) -- --
Pharmanex in-process research
and development 2.80 -- --
Non-deductible expenses .83 1.72 1.92
Branch remittance gains and losses (1.38) 3.78 (.03)
Other (.56) (.23) (.89)
------ ------ ------
37.00% 32.50% 36.00%
====== ====== ======
16. Employee Benefit Plan
The Company has a 401(k) defined contribution plan which permits
participating employees to defer up to a maximum of 15% of their compensation,
subject to limitations established by the Internal Revenue Code. Employees who
work a minimum of 1,000 hours per year, who have completed at least one year of
service and who are 21 years of age or older are qualified to participate in the
plan. The Company matches 100% of the first 2% and 50% of the next 2% of each
participant's contributions to the plan. Participant contributions are
immediately vested. Company contributions vest based on the participant's years
of service at 25% per year over four years. The Company's contribution totaled
$829,000, $910,000 and $979,000 for the years ended December 31, 1998, 1999 and
2000, respectively.
17. Derivative Financial Instruments
The Company's Subsidiaries enter into significant transactions with each
other and third parties which may not be denominated in the respective
Subsidiaries' functional currencies. The Company seeks to reduce its exposure to
fluctuations in foreign exchange rates by creating offsetting positions through
the use of foreign currency exchange contracts and through certain intercompany
loans of foreign currency. The Company does not use such derivative financial
instruments for trading or speculative purposes. The Company regularly monitors
its foreign currency risks and periodically takes measures to reduce the impact
of foreign exchange fluctuations on the Company's operating results. Gains and
losses on foreign currency forward contracts and certain intercompany loans of
foreign currency are recorded as other income and expense in the consolidated
statements of income.
At December 31, 1999 and 2000, the Company held foreign currency forward
contracts with notional amounts totaling approximately $31.1 million and $28.9
million, respectively, to hedge foreign currency items. These contracts do not
qualify as hedging transactions and, accordingly, have been marked to market.
The net gain on foreign currency forward contracts was $2.6 million for the year
ended December 31, 1998, the net loss on foreign currency forward contracts was
$0.3 million for the year ended December 31, 1999 and the net gain on foreign
currency forward contracts was $4.5 million for the year ended December 31,
2000. These contracts at December 31, 2000 have maturities through July 2001.
Nu Skin Enterprises, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
18. Supplemental Cash Flow Information
Cash paid for interest totaled $3,731,000, $5,714,000 and $4,194,000 for
the years ended December 31, 1998, 1999 and 2000, respectively. Cash paid for
income taxes totaled $77,271,000, $76,596,000 and $30,860,000 for the years
ended December 31, 1998, 1999 and 2000, respectively.
Noncash investing and financing activities
For the year ended December 31, 1998, noncash investing and financing
activities were as follows: (1) $37.6 million distribution to the stockholders
of the Acquired Entities (Note 3). (2) Purchase of Acquired Entities for $70.0
million in Preferred Stock and $6.2 million in long-term notes payable. Net
assets acquired totaled $90.4 million and assumed liabilities totaled $171.3
(Note 3). (3) $25.0 million in contingent consideration issued to the NSI
Stockholders. $8.8 million of the contingent payment was recorded as an increase
in intangible assets and $16.2 million of the contingent payment was recorded as
a reduction of stockholders' equity (Notes 3 and 7). (4) Purchase of Pharmanex
for $77.6 million in Class A common stock and $0.2 million in cash. Net assets
acquired totaled $3.6 million and assumed liabilities totaled $34.0 million
(Note 4).
For the year ended December 31, 1999, noncash investing and financing
activities included the purchase of Big Planet for $29.2 million of which $14.6
million consisted of a note payable (Note 6).
19. Segment Information
As described in Note 1, the Company's operations throughout the world are
divided into four reportable segments: North Asia, North America, 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 four segments is
set forth below (U.S. dollars in thousands):
Year Ended December 31,
-----------------------------------
1998 1999 2000
--------- --------- ---------
Revenue
North Asia $ 665,523 $ 619,283 $ 585,373
North America 280,115 320,630 386,498
Southeast Asia 320,606 265,604 271,246
Other Markets 15,616 16,960 19,075
Eliminations (368,366) (328,228) (382,434)
--------- --------- ---------
Totals $ 913,494 $ 894,249 $ 879,758
========= ========= =========
Year Ended December 31,
-----------------------------------
1998 1999 2000
--------- --------- ---------
Operating Income
North Asia $ 89,075 $ 84,396 $ 42,331
North America 55,051 12,457 18,708
Southeast Asia 19,385 31,922 27,001
Other Markets (8,057) (6,924) (7,295)
Eliminations 785 7,996 9,668
--------- --------- ---------
Totals $ 156,239 $ 129,847 $ 90,413
========= ========= =========
Nu Skin Enterprises, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
December 31,
----------------------
1999 2000
--------- ---------
Total Assets
North Asia $ 116,918 $ 83,941
North America 508,825 471,221
Southeast Asia 111,204 76,279
Other Markets 12,007 13,039
Eliminations (105,739) (53,677)
--------- ---------
Totals $ 643,215 $ 590,803
========= =========
Information as to the Company's operations in different geographical areas
is set forth below (U.S. dollars in thousands):
Revenue
Revenue from the Company's operations in Japan totaled $654,168, $602,411
and $554,210 for the years ended December 31, 1998, 1999 and 2000, respectively.
Revenue from the Company's operations in Taiwan totaled $119,511, $103,581 and
$83,436 for the years ended December 31, 1998, 1999 and 2000, respectively.
Revenue from the Company's operations in the United States (which includes
intercompany revenue) totaled $280,115, $316,128 and $380,785 for the years
ended December 31, 1998, 1999 and 2000, respectively.
Long-lived assets
Long-lived assets in Japan were $29,314 and $23,782 as of December 31, 1999
and 2000, respectively. Long-lived assets in Taiwan were $3,381 and $3,235 as of
December 31, 1999 and 2000, respectively. Long-lived assets in the United States
were $310,255 and $313,415 as of December 31, 1999 and 2000, respectively.
20. Commitments and Contingencies
The Company is subject to governmental regulations pertaining to product
formulation, labeling and packaging, product claims and advertising and to the
Company's direct selling system. The Company is also subject to the jurisdiction
of numerous foreign tax authorities. Any assertions or determination that either
the Company or the Company's distributors is not in compliance with existing
statutes, laws, rules or regulations could potentially have a material adverse
effect on the Company's operations. In addition, in any country or jurisdiction,
the adoption of new statutes, laws, rules or regulations or changes in the
interpretation of existing statutes, laws, rules or regulations could have a
material adverse effect on the Company and its operations. Although management
believes that the Company is in compliance, in all material respects, with the
statutes, laws, rules and regulations of every jurisdiction in which it
operates, no assurance can be given that the Company's compliance with
applicable statutes, laws, rules and regulations will not be challenged by
foreign authorities or that such challenges will not have a material adverse
effect on the Company's financial position or results of operations or cash
flows.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Nu Skin Enterprises, Inc.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income, stockholders' equity and cash flows
present fairly, in all material respects, the financial position of Nu Skin
Enterprises, Inc. and its subsidiaries at December 31, 1999 and 2000, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2000 in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Salt Lake City, Utah
February 12, 2001
MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
COMMON STOCK. The Company's Class A common stock is listed on the New York
Stock Exchange ("NYSE") and trades under the symbol "NUS". The Company's Class B
common stock has no established trading market. The following table is based
upon information available to the Company and sets forth the range of the high
and low sales prices for the Company's Class A common stock for the quarterly
periods during 1999 and 2000 based upon quotations on the NYSE.
Quarter Ended High Low
------------- -------- --------
March 31, 1999 $ 25.25 $ 17.75
June 30, 1999 22.88 15.50
September 30, 1999 22.00 10.69
December 31, 1999 14.63 8.50
Quarter Ended High Low
------------- -------- --------
March 31, 2000 $ 10.38 $ 7.88
June 30, 2000 8.25 5.75
September 30, 2000 7.50 5.50
December 31, 2000 6.75 4.25
The market price of the Company's Class A common stock is subject to
significant fluctuations in response to variations in the Company's quarterly
operating results, general trends in the market for the Company's products and
product candidates, economic and currency exchange issues in the foreign markets
in which the Company operates and other factors, many of which are not within
the control of the Company. In addition, broad market fluctuations, as well as
general economic, business and political conditions, may adversely affect the
market for the Company's Class A common stock, regardless of the Company's
actual or projected performance.
The closing price of the Company's Class A common stock on March 9, 2001
was $8.01. The approximate number of holders of record of the Company's Class
A common stock and Class B common stock as of March 9, 2001 was 896 and 57,
respectively. This number of record holders does not represent the actual number
of beneficial owners of shares of the Company's Class A common stock because
shares are frequently held in "street name" by securities dealers and others for
the benefit of individual owners who have the right to vote their shares.
In February 2001, the board of directors authorized the Company to declare
a quarterly cash dividend of $0.05 per share for all classes of common stock.
This initial quarterly cash dividend was be paid on March 28, 2001, to
stockholders of record on March 12, 2001. Management believes that cash flows
from operations will be sufficient to fund this and future dividend payments.
