UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, DC 20549
(Mark One)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No
As of November 1, 2001, 33,152,904 shares of the Company's Class A Common Stock, $.001 par value per share, and 49,341,240 shares of the Company's Class B Common stock, $.001 par value per share, were outstanding.
Nu Skin, Pharmanex, Big Planet, Nu Skin 180º and LifePak are trademarks of Nu Skin Enterprises, Inc. or its subsidiaries.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTSNU SKIN ENTERPRISES, INC.Consolidated Balance Sheets(in thousands, except share amounts)
The accompanying notes are an integral part of these consolidated financial statements.
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NU SKIN ENTERPRISES, INC.Consolidated Statements of Income (Unaudited)(in thousands, except per share amounts)
The accompanying notes are an integral part of these consolidated finanical statements.
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NU SKIN ENTERPRISES, INC.Consolidated Statements of Cash Flows (Unaudited)(in thousands)
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NU SKIN ENTERPRISES, INC.Notes to Consolidated Financial Statements
1. THE COMPANY
2. NET INCOME PER SHARE
3. DIVIDENDS PER SHARE
4. DERIVATIVE FINANCIAL INSTRUMENTS
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5. REPURCHASE OF COMMON STOCK
6. COMPREHENSIVE INCOME
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7. SEGMENT INFORMATION
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8. REVOLVING CREDIT AGREEMENT
9. NEW PRONOUNCEMENTS
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Revenue increased 4.0% to $224.2 million for the three-month period ended September 30, 2001 from $215.6 million for the same period in 2000 primarily due to the growth in the Southeast Asia region. Revenue in the quarter was negatively impacted approximately 11.6% by a weakening of foreign currencies compared to the prior-year period. In local currency, the Company experienced revenue growth in each of its operating regions other than North America, which resulted in overall constant currency growth of 13.7% and 8.5% for the three and nine-month periods ended September 30, 2001 compared to the same prior-year periods, respectively. However, due to a weakening of foreign currencies, revenue decreased 0.5% to $653.1 million for the nine-month period ended September 30, 2001 from $656.2 million for the same period in 2000.
Revenue in North Asia decreased 1.0% and 5.6% to $141.4 million and $408.6 million for the three and nine-month periods ended September 30, 2001 from $142.8 million and $433.0 million for the same periods in 2000, respectively. This decrease in revenue was due to revenue in Japan decreasing 4.1% and 8.2% to $128.7 million and $377.3 million for the three and nine-month periods ended September 30, 2001 from $134.2 million and $411.2 million for the same periods in 2000, respectively. This decrease is directly attributable to a 12.8% and 12.6% weakening in the Japanese yen for the three and nine-month periods ended September 30, 2001 compared to the same prior-year periods, respectively. In local currency, revenue in Japan increased 8.2% and 3.4% for the three and nine-month periods ended September 30, 2001 compared to the same prior-year periods, respectively, due to the strength of key Nu Skin and Pharmanex products launched in the past 18 months, the success of the automatic repurchasing programs and the personalized web sites the Company offers its distributor force. The decline in revenue in Japan in U.S. dollar terms was partially offset by an increase in revenue in South Korea of 47.7% and 43.6% to $12.7 million and $31.3 million for the three and nine-month periods ended September 30, 2001 from $8.6 million and $21.8 million for the same periods in 2000, respectively. In local currency terms, revenue in South Korea was 70.3% and 65.9% higher for the three and nine-month periods ended September 30, 2001 versus the same prior-year periods, respectively. The continued revenue growth in South Korea in U.S. dollar and local currency terms is attributed to an improving economy as well as a rebound in the direct selling industry as a whole in South Korea. In addition the Company has effectively executed a strategy designed to create sustainable growth fueled by new product launches including the launch of Pharmanex's weight management products and Nu Skin's 180º anti-aging skin therapy system.
Revenue in Southeast Asia increased 34.4% and 19.3% to $39.8 million and $107.1 million for the three and nine-month periods ended September 30, 2001 from $29.6 million and $89.8 million for the same periods in 2000, respectively. In local currency terms, revenue in Southeast Asia increased 43.2% and 26.5% for the three and nine-month periods ended September 30, 2001 compared to the same prior-year periods, respectively. The increase in revenue resulted primarily from operations in Singapore which generated $11.7 million and $24.9 million for the three and nine-month periods ended September 30, 2001, respectively, following the opening of the market in Singapore late in 2000. Success in Singapore has also contributed to modest growth in other markets in the Southeast Asia region, such as Hong Kong, Thailand and Australia. The increase in revenue from operations in Singapore was somewhat offset by the results in Taiwan, which decreased 18.6% and 18.4% to $17.1 million and $52.7 million for the three and nine-month periods ended September 30, 2001 from $21.0 million and $64.6 million for the same prior-year periods, respectively. In local currency, revenue in Taiwan declined 8.9% and 10.9% during the three and nine-month periods ended September 30, 2001 compared to the same prior-year periods, respectively. Revenue in Taiwan on a local currency basis increased 5.1% during the second quarter of 2001 compared to the first quarter of 2001 due in part to seasonal trends, but decreased 1.3% from the second quarter of 2001 to the third quarter of 2001. Management believes that the Company's operations in Taiwan have stabilized. Over the last several years, the Company's Taiwan operations have suffered the impact of increased competition and economic pressures and an overall decline in sales in the direct selling industry in Taiwan. In addition, since the Company's business model for
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distributors encourages top leaders to assist in opening new markets, management believes the decline in revenue in Taiwan compared to the prior-year period was also in part due to top leaders from that market focusing on Singapore.
Revenue in North America, consisting of the United States and Canada, decreased 4.9% and 0.8% to $36.7 million and $118.8 million for the three and nine-month periods ended September 30, 2001 from $38.6 million and $119.7 million for the same periods in 2000, respectively. This revenue decrease is related primarily to the revenue declines in the United States. Management believes that the Company's operations in the United States continue to be negatively impacted by distributor uncertainty relating to the Company's divisional strategies. In order to overcome this, these strategies have recently been refined and modified to simplify the Company's business in order to help renew growth in the United States. Although management believes that the Company's operations in the United States were in-line to show level or slightly positive growth in the third quarter of 2001, the tragic events of September 11, 2001 in the United States slowed operations in the United States for the balance of the third quarter. The revenue for the nine-month period ended September 30, 2001 benefited from the international convention held in the United States in February 2001, which generated approximately $5.0 million in revenue from sales to international distributors attending the convention, as well as additional revenue from new business development efforts which provided an additional $12.8 million in revenue. The new business development efforts recorded in the Big Planet division is a business related to outsourcing personnel and benefits for small businesses. Without the impact of this additional revenue, revenue in the North America region would have decreased approximately 12.0% during the nine-month period ended September 30, 2001 versus the same prior-year period.
Revenue in the Company's other markets, which includes its European and Latin American operations, increased 37.0% and 35.8% to $6.3 million and $18.6 million for the three and nine-month periods ended September 30, 2001 from $4.6 million and $13.7 million for the same periods in 2000, respectively. This increase in revenue is due to a 39.2% and 39.5% increase for the three and nine-month periods ended September 30, 2001 in revenue in Europe in U.S. dollar terms compared with the same prior-year periods, respectively. In local currency terms, revenue in Europe increased approximately 41.0% during the third quarter of 2001 versus the same prior-year period.
Gross profit as a percentage of revenue decreased to 79.5% and 79.8% for the three and nine-month periods ended September 30, 2001 compared to 82.9% and 83.3% for the same periods in the prior year, respectively. The decrease in gross profit percentages resulted from the weakening of the Japanese yen and other currencies relative to the U.S. dollar, the increased revenue relating to the new business development efforts recorded in the Big Planet division as described above that carry a lower gross margin, the shift in product mix from Nu Skin personal care products to Pharmanex products, which carry a slightly lower gross margin and discounts associated with the Company's growing automatic purchase programs. 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.
Distributor incentives as a percentage of revenue increased to 39.4% and 39.3% for the three and nine-month periods ended September 30, 2001 compared to 38.9% for both the same prior-year periods. In the later part of 1999, the Company restructured a portion of its compensation plan for distributors, adding short-term, division-focused incentives, which slightly increased overall compensation to the Company's distributors.
Selling, general and administrative expenses as a percentage of revenue decreased to 31.4% and 32.5% for the three and nine-month periods ended September 30, 2001 compared to 33.0% and 33.6% for the same prior-year periods, respectively. Selling, general and administrative expenses decreased to $70.5 million and $211.9 million for the three and nine-month periods ended September 30, 2001 compared to $71.1 million and $220.6 million for the same periods in the prior year, respectively. The decreases resulted primarily from a weaker Japanese yen in 2001 as well as the Company's cost-saving initiatives including reductions in headcount and occupancy costs. Offsetting these lower
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expenses were the costs incurred during the first quarter in 2001 for the Company's convention in the United States which added approximately $5.0 million in selling, general and administrative expenses.
Other income (expense), net increased $0.7 million for the three-month period ended September 30, 2001 compared to the same prior-year period resulting in net other income of $0.2 million. This increase related primarily to a $2.3 million gain from the sale of an interest in the Company's Malaysian subsidiary and was offset by a $1.9 million loss resulting from the exchange of intercompany payables and receivables as well as the exchange loss on the Company's yen based bank debt, which is translated into U.S. dollars for financial reporting purposes. Other income (expense), net increased $5.1 million for the nine-month period ended September 30, 2001 compared to the same period in the prior year resulting in net other income of $5.4 million. This increase related primarily to foreign currency gains resulting from the strength of the U.S. dollar and the sale of an interest in the Company's Malaysian subsidiary.
Provision for income taxes decreased to $7.4 million and $21.6 million for the three and nine-month periods ended September 30, 2001 from $8.4 million and $25.6 million for the same prior-year periods. This decrease is largely due to the decreases in operating income as compared to the same prior-year periods, offset by an increase in the effective tax rate from 36.0% in the third quarter of 2000 to 37.0% in the third quarter of 2001.
Net income decreased to $12.5 million and $36.7 million for the three and nine-month periods ended September 30, 2001 from $15.0 million and $45.5 million for the same prior-year periods, respectively. Net income decreased primarily because of the factors noted above in "gross profit" and "distributor incentives" and was somewhat offset by the factors noted in "selling, general and administrative," "other income (expense), net" and "provision for income taxes" above.
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 nine-month period ended September 30, 2001, the Company generated $49.5 million from operations compared to $18.0 million during the nine-month period ended September 30, 2000. This increase in cash generated from operations in 2001 compared to the same prior-year period is primarily related to reduced cash payments to vendors for purchases of inventory resulting from increased efficiencies in the Company's management of inventory and reduced foreign taxes paid in 2001 versus 2000.
As of September 30, 2001, working capital was $129.7 million compared to $122.8 million as of December 31, 2000. Cash and cash equivalents at September 30, 2001 and December 31, 2000 were $65.9 million and $64.0 million, respectively. In addition to factors such as capital expenditures, dividends and stock repurchases, the Company's U.S. dollar reported cash position was negatively impacted during the nine-month period from the strength of the U.S. dollar relative to other currencies, particularly the Japanese yen.
Capital expenditures, primarily for equipment, computer systems and software, office furniture and leasehold improvements, were $11.6 million for the nine-month period ended September 30, 2001. In addition, the Company anticipates additional capital expenditures in 2001 of approximately $5.0 million to further enhance its infrastructure, including enhancements to computer systems and Internet related software in order to expand the Company's Internet capabilities.
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In March 1998, the Company completed the acquisition of Nu Skin International, Inc. (the "NSI Acquisition"). Pursuant to the terms of the NSI Acquisition, Nu Skin International, Inc. ("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 the specified earnings growth targets for the years ended December 31, 1999 and 2000. Contingent upon NSI and the Company meeting specified 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 9.7 billion Japanese yen of ten-year senior notes (the "Notes") to The Prudential Insurance Company of America. The Notes bear interest at an effective rate of 3.03% per annum and are due October 2010, with principal payments beginning October 2004. As of September 30, 2001, the outstanding balance on the Notes was 9.7 billion Japanese yen, or $81.3 million.
On May 10, 2001, the Company entered into a $60.0 million revolving credit agreement (the "Revolving Credit Facility") with Bank of America, N.A. and Bank One, N.A. for which Bank of America, N.A. acted as agent. The proceeds may be used for working capital, capital expenditures and other purposes including repurchases of the Company's outstanding shares of Class A common stock. There were no outstanding balances relating to the Revolving Credit Facility as of September 30, 2001.
Since August 1998, the board of directors has authorized the Company to repurchase up to $70.0 million of the Company's outstanding shares of Class A common stock. The repurchases are used primarily to fund the Company's equity incentive plans. During the three and nine-month periods ended September 30, 2001, the Company repurchased approximately 480,000 and 1,977,000 shares for an aggregate price of approximately $3.5 million and $14.2 million, respectively. As of September 30, 2001, the Company had repurchased a total of approximately 6.2 million shares for an aggregate price of approximately $54.5 million.
In August 2001, the board of directors declared a quarterly cash dividend of $0.05 per share for all classes of common stock. This quarterly cash dividend of approximately $4.2 million was paid on September 27, 2001, to stockholders of record on September 10, 2001. In addition, the board of directors has subsequently declared a quarterly cash dividend of $0.05 per share for all classes of common stock payable on December 20, 2001. Management believes that cash flows from operations will be sufficient to fund future dividend payments.
The Company had related party payables of $7.0 million and $9.0 million at September 30, 2001 and December 31, 2000, respectively. In addition, the Company had related party receivables of $12.8 million and $13.2 million, respectively, at those dates. These balances are largely related to the acquisition of Big Planet, Inc. and the Nu Skin USA, Inc. transactions completed during 1999, as well as a loan to a significant stockholder.
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.
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 the first quarter, which generally has a negative impact on such quarter. Management believes that direct selling in Japan, the United States and Europe is also generally negatively impacted during the month of August, which is in the Company's third quarter, when many individuals traditionally take vacations.
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The following table provides information concerning the number of active and executive distributors as of the dates indicated. 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.
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 strengthening in the U.S. dollar. The Company seeks to reduce its exposure to fluctuations in foreign exchange rates through the use of foreign currency exchange contracts, through intercompany loans of foreign currency and through its Japanese yen denominated debt. The Company does not use such derivative financial instruments for trading or speculative purposes. The Company regularly monitors its foreign currency risks and periodically takes measures to reduce the impact of foreign exchange fluctuations on the Company's operating results.
The Company's foreign currency derivatives are comprised of over-the-counter forward contracts with major international financial institutions. As of September 30, 2001, the primary currency for which the Company had net underlying foreign currency exchange rate exposure was the Japanese yen. Based on the Company's foreign exchange contracts at September 30, 2001 as discussed in Note 4 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.
With the exception of historical facts, the statements contained in 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
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upon assumptions and beliefs that may not materialize. These forward-looking statements include, but are not limited to, statements concerning:
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 described 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:
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The information required by Item 3 of Part I of Form 10-Q is incorporated herein by reference from the section entitled "Currency Risk and Exchange Rate Information" in "Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations" of Part I and also in Note 4 to the Financial Statements contained in Item 1 of Part I.
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Reference is made to the Company's Annual Report on Form 10-K for the year ended December 31, 2000 and the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2001 for information concerning legal proceedings.
None.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on this 14th day of November, 2001.
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