Back to GetFilings.com
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the fiscal year ended December 31, 1999 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934.
NU SKIN ENTERPRISES, INC.
----------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 001-12421 87-0565309
- -------------- ---------------- ----------------
(State or other jurisdiction (Commission File No.) (IRS Employer
of incorporation) Identification No.)
75 West Center Street
Provo, Utah 84601
----------------------------------------------------------------
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (801) 345-6100
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of exchange on which registered
- ------------------- ------------------------------------
Class A Common Stock, $.001 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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 [ ]
Based on the closing sales price of the Class A Common Stock on the
New York Stock Exchange on March 10, 2000, the aggregate market value of the
voting stock (Class A and Class B Common Stock) held by non-affiliates of the
Registrant was $304,050,000. For purposes of this calculation, voting stock held
by officers, directors, and stockholders holding more than 10% of the voting
stock has been excluded.
As of March 10, 2000, 32,003,086 shares of the Registrant's Class A
Common Stock, $.001 par value per share, and 54,606,905 shares of the
Registrant's Class B Common Stock, $.001 par value per share, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE. Portions of the Registrant's 1999 Annual
Report to Stockholders to be furnished to the stockholders of the Registrant
pursuant to Rule 14a-3(b) in connection with Registrant's 2000 Annual Meeting of
Stockholders are attached hereto as Exhibit 13 and are incorporated herein by
reference into Parts II and IV of this Form. Portions of the Registrant's
definitive Proxy Statement for the Registrant's 2000 Annual Meeting of
Stockholders to be filed with the Securities and Exchange Commission within 120
days after the Registrant's fiscal year end are incorporated by reference in
Part III of this report.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
PART I ......................................................................1
ITEM 1. Business .....................................................1
General .................................................1
Operating Divisions .....................................2
Nu Skin ............................................2
Pharmanex ..........................................4
Big Planet .........................................8
Regional Profiles .......................................10
Distribution System .....................................11
Competition .............................................16
Intellectual Property ...................................17
Government Regulation ...................................17
Employees ...............................................21
Risk Factors ............................................21
ITEM 2. Properties ...................................................28
ITEM 3. Legal Proceedings ............................................28
ITEM 4. Submission of Matters to a Vote of Security Holders .........29
PART II .....................................................................31
ITEM 5. Market for Registrant's Common Equity and Related Stockholder
Matters ......................................................31
ITEM 6. Selected Financial Data ......................................31
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations ........................................31
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk ...31
ITEM 8. Financial Statements and Supplementary Data ..................31
ITEM 9. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure .........................................31
PART III ....................................................................31
PART IV .....................................................................31
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K .....................................................31
Signatures ..................................................................44
i
FORWARD LOOKING STATEMENTS
THIS ANNUAL REPORT ON FORM 10-K, IN PARTICULAR "ITEM 7. MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND
"ITEM 1. BUSINESS," INCLUDE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF
SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. THESE STATEMENTS
REPRESENT THE COMPANY'S EXPECTATIONS OR BELIEFS CONCERNING, AMONG OTHER THINGS,
FUTURE REVENUE, EARNINGS, AND OTHER FINANCIAL RESULTS, NEW PRODUCTS, FUTURE
OPERATIONS AND OPERATING RESULTS, AND FUTURE BUSINESS AND MARKET OPPORTUNITIES.
THE COMPANY WISHES TO CAUTION AND ADVISE READERS THAT THESE STATEMENTS INVOLVE
RISK AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM
THE EXPECTATIONS AND BELIEFS CONTAINED HEREIN. FOR A SUMMARY OF CERTAIN RISKS
RELATED TO THE COMPANY'S BUSINESS, SEE "ITEM 1. BUSINESS -- RISK FACTORS"
BEGINNING ON PAGE 22.
UNLESS THE CONTEXT REQUIRES OTHERWISE, REFERENCES TO THE COMPANY ARE TO
NU SKIN ENTERPRISES, INC. AND ITS SUBSIDIARIES. IN THIS ANNUAL REPORT ON FORM
10-K, REFERENCES TO "DOLLARS" AND "$" ARE TO UNITED STATES DOLLARS. NU SKIN,
PHARMANEX, INTERIOR DESIGN NUTRITIONALS, "6S QUALITY PROCESS", BIG PLANET AND
IDN ARE TRADEMARKS OF THE COMPANY. THE ITALICIZED PRODUCT NAMES USED IN THIS
ANNUAL REPORT ON FORM 10-K ARE PRODUCT NAMES AND ALSO, IN CERTAIN CASES,
TRADEMARKS OF THE COMPANY. "IPHONE" IS A TRADEMARK OF INFOGEAR TECHNOLOGY
CORPORATION.
PART I
ITEM 1. BUSINESS
GENERAL
Nu Skin Enterprises ("Nu Skin Enterprises" or the "Company") is a
leading, global direct selling company that develops and distributes
premium-quality, innovative personal care and nutritional products. The Company
also markets and distributes technology, Internet and telecommunications
services and products. Nu Skin Enterprises is one of the largest direct selling
companies in the world and currently operates in 31 countries throughout Asia,
North and South America and Europe. The Company distributes its products
exclusively through a network marketing system. The Company currently has a
network of approximately 500,000 active distributors located throughout its
markets that purchase products for resale to consumers and for personal
consumption.
In March 1999, the Company terminated its exclusive license and
distribution agreements with the Company's privately owned affiliate, Nu Skin
USA, Inc., and commenced operations in the United States through a new
wholly owned subsidiary. In May 1999, the Company acquired its other
privately owned affiliates operating in Canada, Mexico and Guatemala. As a
result of these transactions, the Company now owns all of the Nu Skin entities
operating everywhere in the world and the right to expand into all future
markets. In July 1999, the Company completed the acquisition of Big Planet,
Inc., a privately owned direct selling affiliate engaged in the marketing and
distribution of technology, Internet and telecommunications services and
products. In connection with these transactions and the acquisition of
Pharmanex, Inc., a developer and distributor of nutritional supplements, in
October 1998, the Company began transitioning from managing its business based
on a geographic model to managing its business based on product lines. Each of
the Company's product-based divisions offers a distinct business opportunity for
the Company's distributors. Each division is also managed and directed by a
distinct management team. The Company first implemented its divisional strategy
in the United States in early 1999 and currently has three operating divisions
there. The Company has subsequently introduced its divisional strategy into
certain Asian markets by launching the Pharmanex business opportunity through
its Pharmanex division, most recently in Japan in February 2000.
-1-
OPERATING DIVISIONS
Nu Skin Enterprises currently has three operating divisions: Nu Skin,
which offers personal care products; Pharmanex, which offers nutritional
supplements; and Big Planet, which offers technology, Internet and
telecommunications products and services. Presented below are the dollar amount
and percentage of revenue from the sale of Nu Skin products, Pharmanex products
and Big Planet products and services for each of the years ended December 31,
1997, 1998 and 1999. This table should be read together with the information
presented in "Management's Discussion and Analysis of Financial Condition and
Results of Operations," contained in the Company's 1999 Annual Report to
Stockholders, which is incorporated by reference into this Form 10-K and which
discusses the costs associated with generating the aggregate revenue presented.
Revenue by Product Category
(Dollar Amounts in Thousands)
Year Ended Year Ended Year Ended
December 31, 1997 December 31, 1998 December 31, 1999
--------------------- --------------------- ---------------------
Product Category $ % $ % $ %
- ---------------- --------- --------- --------- --------- --------- ---------
Nu Skin $ 638,956 67.0% $ 560,976 61.4% $ 503,570 56.3%
Pharmanex (1) 314,466 33.0 352,518 38.6 379,241 42.4
Big Planet (2) -- -- -- -- 11,438 1.3
--------- --------- --------- --------- --------- ---------
Total $ 953,422 100.0% $ 913,494 100.0% $ 894,249 100.0%
========= ========= ========= ========= ========= =========
- ---------
(1) The Company acquired Pharmanex in October 1998 and formally launched its
products in the United States and other markets in 1999. Accordingly, the
nutritional supplement revenue reflected in this table for 1997 and 1998 is
primarily from sales of the Company's IDN nutritional supplement line, which
constituted the Company's nutritional product offering prior to the Pharmanex
acquisition.
(2) The Company acquired Big Planet in July 1999. Accordingly, the table above
only reflects revenue for the period during which the Company owned Big Planet
(i.e., July 17, 1999 to December 31, 1999). Big Planet's revenue for the year
ended December 31, 1998 was $14.7 million and its revenue for the year ended
December 31, 1999 was $21.8 million.
NU SKIN
OVERVIEW. Nu Skin is the Company's original product line and business
opportunity and currently consists of premium-quality lines of over 100 personal
care products. Nu Skin's strategy is to distribute high quality personal care
products and treatments that utilize advanced, innovative formulas. For example,
Nu Skin was one of the first companies to market topical applications of various
vitamins including Vitamins A, C and E. Other examples include the NU SKIN 180
ANTI-AGING SKIN THERAPY system, a scientifically advanced skin care system
designed to fight the signs of aging, and TRUFACE, an innovative skin treatment
using a liquid crystal retinol delivery system. In 1999, Nu Skin entered into a
nine-year contract with Stanford University for directed research on skin care
products and established the Nu Skin Center for Dermatological Research at
Stanford University's School of Medicine. Nu Skin seeks to take advantage of its
educated distributor force to provide consumers with a high level of information
and instruction about its products and guidelines for using them effectively.
NU SKIN PRODUCTS. Nu Skin's current personal care products are divided
into the following lines: face care, body care, hair care, color cosmetics, sun
protection, oral hygiene, fragrance, and specialty products. Nu Skin offers
products individually and in product sets that include a variety of products in
each product line. The
-2-
product sets are especially popular during the opening phase of a new market,
when distributors and consumers are anxious to purchase a variety of products,
and during holiday and gift giving seasons in each market.
The following is a brief description of each product line within the Nu Skin
division:
Face Care. The face care line is Nu Skin's premier line of personal
care products and consists of 20 different cleansers, moisturizers and special
treatments. Nu Skin's cleansers and moisturizers allow users to cleanse
thoroughly without causing dryness and to moisturize with effective humectants.
These products include: TRUFACE, an innovative skin treatment using a liquid
crystal retinol delivery system; REJUVENATING CREAM, a facial moisturizer and
one of Nu Skin's most popular personal care products; and PH BALANCE FACIAL
TONER, a product combining aloe vera and other ingredients designed to prepare
the skin for effective moisturization. Nu Skin's specialized treatment products
utilize advanced formulas and ingredients designed for specific skin care
conditions. Special treatment products include the scientifically advanced NU
SKIN 180 ANTI-AGING SKIN THERAPY system of products, which was introduced in
1999. These products utilize unparalleled levels of lactic acids to help fight
the signs of aging while limiting the potential for irritation. Specialty
treatments include a variety of other products including NU SKIN WHITE, a line
of pigment lighteners, and SKIN BRIGHTENING COMPLEX, which is designed to
lighten skin color and diminish the appearance of discoloration caused by sun
exposure and aging.
Body Care. Nu Skin's line of body care products incorporates
premium-quality ingredients to cleanse and condition skin. The body care product
line consists of 12 different cleansers, moisturizers and special treatments.
The cleansers are formulated without soaps, which dry the skin, and include BODY
BAR, a non-soap cleansing bar. Nu Skin's moisturizers contain light but
effective humectants and emollients. Body care special treatments include
DERMATIC EFFECTS, a body contouring lotion containing extracts of hibiscus and
malvaceae that has been clinically demonstrated to aid in preventing the
appearance of cellulite and aging skin, and MHA REVITALIZING BODY LOTION, which
combines multiple hydroxy acids. Other popular products in this line include
BODY SMOOTHER, a moisturizing lotion, and BODY CLEANSING GEL.
Hair Care. Nu Skin has designed its hair care line, HAIRFITNESS, to
meet the needs of people with all types of hair and hair problems. Focusing on
the condition of the scalp and its impact on hair quality, Nu Skin's hair care
products use water-soluble conditioners like panthenol to reduce build-up on the
scalp and to promote healthy hair. HAIRFITNESS includes 12 products featuring
CEREGEN, an innovative wheat-based complex of conditioning molecules designed to
enhance hair repair. In April 1999, Nu Skin introduced a hair care line, KANURE,
specifically designed and formulated for the Brazilian market to address the
natural properties of severely dry and curly hair.
Color Cosmetics. Nu Skin's color cosmetics line, NU COLOUR, consists of
13 talc-free products with over 150 SKU's including eye shadow, lipliner,
lipsticks, mascara, blush and finishing powder. Nu Skin relaunched a new and
revised NU COLOUR line in 1999 with new packaging and new shades.
Sun Protection. Nu Skin designed its line of SUNRIGHT products to
provide sun screen protection with non-irritating and non-greasy ingredients.
The sun protection line includes two sun screen products and a sun screen lip
balm.
Oral Hygiene. Nu Skin has an exclusive license to offer for sale in the
direct selling channel a line of oral health care products under the trademark
AP-24. AP-24 incorporates anti-plaque technology designed to help prevent plaque
build-up 24 hours a day. The product line includes various oral health care
products including toothpaste, mouthwash and floss.
Fragrance. Nu Skin offers fragrances under the trademarks SAFIRO and
BELIEVE.
Specialty Products. EPOCH is a line of ethnobotanical personal care
products created in cooperation with well known ethnobotanists. These products
unite natural compounds used by indigenous cultures with advanced scientific
ingredients. This product line consists of various products including GLACIAL
MARINE MUD, a revitalizing
-3-
clay mask containing beneficial sea botanicals, EPOCH ANTISEPTIC HAND SANITIZER,
a product containing lavender that disinfects hands, and FIREWALKER FOOT CREAM,
created specifically to soothe and rejuvenate tired, aching feet.
NUTRIOL is another line of specialty products that Nu Skin is licensed
to sell in the direct selling channel. The NUTRIOL product line is manufactured
in Europe and consists of two hair care products that incorporate
mucopolysaccharide, a proprietary ingredient. NUTRIOL products are designed to
replenish vital minerals and elements.
NU SKIN PRODUCT DEVELOPMENT. The product development philosophy for Nu
Skin is represented by its marketing slogan: "All of the Good and None of the
Bad." Nu Skin products do not contain soaps and other harsh cleansers that can
dry and irritate skin, undesirable oils such as lanolin, elements known to be
irritating and pore clogging, and conditioning agents that leave heavy residues.
Nu Skin is also committed to continuously improving its evolving personal care
product formulations to incorporate innovative and proven ingredients into its
product line. A recent example of Nu Skin's product development capability is
the NU SKIN 180 ANTI-AGING SKIN THERAPY system, one of the first products to
utilize significantly higher levels of alpha and beta hydroxy acids for topical
application while minimizing the risk of irritation.
For product development support in personal care, Nu Skin relies on an
advisory board comprised of recognized authorities in various disciplines. Nu
Skin utilizes its directed-research agreement with Stanford University Medical
Center's Department of Dermatology for directed research and clinical trials of
Nu Skin products or materials. Nu Skin also evaluates a significant number of
product ideas presented by distributors, vendors, and other outside sources. Nu
Skin utilizes its strategic relationships with vendors for directed research and
development work.
NU SKIN SOURCING AND PRODUCTION. In order to maintain high product
quality, Nu Skin acquires its ingredients and products from reliable and
reputable suppliers that Nu Skin considers to be superior sources of such
ingredients and products. For approximately eight years, Nu Skin has acquired
ingredients and products from a supplier that currently manufactures 53% of its
personal care products. Nu Skin's current contract with this supplier expires
this year, but Nu Skin expects to renew the contract for an additional term. Nu
Skin also has ongoing relationships with secondary and tertiary suppliers who
supply remaining products and ingredients. Nu Skin believes that in the event it
is unable to source any products or ingredients from its major supplier it could
produce or replace such products or substitute ingredients without great
difficulty or significant increases in the cost of goods sold from its other
secondary and tertiary suppliers.
PHARMANEX
OVERVIEW. Following the acquisition of Pharmanex in October 1998, the
Company consolidated its existing Interior Design Nutritionals, or IDN, product
line with the Pharmanex product line of nutritional supplements. The Company
believes that combining Pharmanex's research and development capabilities and
its nutritional and botanical supplements with the Company's existing product
development resources and vitamin and mineral products, including its flagship
product, LIFEPAK, helps position the new Pharmanex division to penetrate further
the growing nutritional supplement market. The new Pharmanex division currently
offers over 60 nutritional supplements and nutri-food products. The separate
Pharmanex business opportunity has been launched in the United States, Japan,
Taiwan, Hong Kong and South Korea.
Pharmanex believes that the nutritional supplement market is expanding
globally because of changing dietary patterns, an increasingly health-conscious
population and a growing amount of scientific evidence supporting the benefits
of using vitamin and natural self-care products and supplements. Pharmanex also
believes that its scientifically-substantiated nutritional supplements are
particularly well-suited to network marketing because the average consumer is
often uneducated or confused about nutritional supplements, particularly the
importance of scientific substantiation. The direct selling channel can be a
more effective method than traditional retailing channels to educate consumers
about the benefits of nutritional supplements and to differentiate the quality
and benefits of its products from those offered by competitors.
-4-
In January 1999, Pharmanex discontinued selling its products in
traditional retail channels where they had been distributed before the Company
acquired Pharmanex. Pharmanex nutritional and botanical supplements are now
available exclusively through the Company's distributor network, which Pharmanex
believes can educate consumers more effectively about these products on a
person-to-person basis. Consistent with this personal selling approach,
Pharmanex also allows small, independent pharmacies to retail its products
because these pharmacies tend to provide personalized service and accommodate
the flow of information to consumers on a person-to-person basis.
PHARMANEX PRODUCTS. Pharmanex's nutritional supplements are currently
distributed under the brand names Pharmanex and IDN. As the Pharmanex business
opportunity and the Company's divisional strategy are rolled out to markets
outside of the United States, and as new versions of IDN products are
introduced, Pharmanex anticipates that a number of products currently
distributed under the IDN brand will be distributed under the Pharmanex brand
name.
Pharmanex's nutritional supplements currently include the LIFEPAK line
of multivitamin, mineral and phytonutrient supplements and a line of self-care
nutritional supplements. Pharmanex also offers nutritional products in the
following lines: weight-management, nutritious foods and snacks, and sports and
fitness products. Pharmanex also sells a water filtration system. Pharmanex has
designed its nutritional products to promote healthy, active lifestyles and
general well-being when used in conjunction with proper diet and exercise. In
1999, many of the nutritional and botanical supplements acquired in the
Pharmanex acquisition were introduced in the United States and selected Asian
markets.
Pharmanex must often reformulate its nutritional products to satisfy
strict regulatory requirements in many of the Company's different markets. While
each product's concept and positioning are generally the same, regulatory
differences between markets result in some product ingredient differences. For
example, Japanese regulations and consumer preferences mandate the use of
tablets instead of gelatin capsules that are typically used in the United
States. See "-- Government Regulation" for more information about government
regulation of Pharmanex's nutritional products.
The following is a brief description of each of the nutritional product
lines within the Pharmanex division:
Multivitamin/Mineral Supplements. This product line consists of various
vitamin, mineral and antioxidant supplements, including LIFEPAK. The LIFEPAK
family of products, the core Pharmanex nutritional supplement, is designed to
provide a beneficial mix of nutrients including vitamins, minerals, antioxidants
and phytonutrients, which are nutrient extracts from plants. The introduction of
LIFEPAK in the United States in 1992 and Japan in 1995 resulted in a significant
increase in the Company's revenue. Sales of LIFEPAK accounted for approximately
20% of the Company's total revenue in 1999. Pharmanex currently sells LIFEPAK in
14 markets, including the United States, Japan and Taiwan. Pharmanex offers
LIFEPAK in different formulations to meet the unique needs of adults generally,
women, seniors, teenagers and pregnant women. LIFEPAK was recently reformulated
to include catechins derived from TEGREEN 97, a Pharmanex product containing
high levels of green tea polyphenols.
Self-Care Nutritional Supplements. Pharmanex currently offers a line of
self-care natural nutritional supplements which are nutritional products
designed to meet the personalized needs of the user in the following areas:
* Energy/Stamina
* Heart Health
* Antioxidant Protection
* Relaxation
* Immune System Support
* Women's Health
* Special Needs
-5-
These self-care dietary supplements are designed to provide consumers with a
specific, consistent level of the desired dosage of the important components of
the supplement. In addition, Pharmanex implements quality control processes
designed to enhance its ability to keep products free from contaminants.
The principal products in this line include CHOLESTIN, CORDYMAX CS-4,
TEGREEN 97 and BIOGINGKO 27/7. CHOLESTIN is a nutritional supplement derived
from the fermentation of a strain of red yeast on rice substrate. A recent
double-blind, placebo-controlled study conducted at the UCLA Center for Human
Nutrition and published in the February 1999 issue of the AMERICAN JOURNAL OF
CLINICAL NUTRITION demonstrated the effectiveness of CHOLESTIN in helping to
promote healthy cholesterol levels. In February 1999, a Federal District Court
judge ruled that CHOLESTIN could be legally sold as a nutritional supplement
under the Dietary Supplement Health and Education Act of 1994. The Food and Drug
Administration (the "FDA") had previously challenged the status of CHOLESTIN as
a dietary supplement, claiming it was a drug and could not be marketed without
FDA approval. The FDA has appealed the decision that CHOLESTIN can be sold as a
nutritional supplement.
CORDYMAX CS-4 is a nutritional supplement designed to help reduce
fatigue. Several clinical trials have been conducted on this product which have
demonstrated that CORDYMAX CS-4 can help reduce fatigue. CORDYMAX CS-4 is
offered as a stand-alone product and in a combination product with St. John's
Wort, a positive mood enhancer, distributed under the trademark BIO ST. JOHN'S.
In addition, Pharmanex offers BIOGINKGO 27/7, a ginkgo biloba extract that
promotes blood circulation to the brain, arms and legs, and TEGREEN 97, a
supplement that contains a concentrated level of decaffeinated green tea
polyphenols, potent antioxidants found in green tea.
In 1999, Pharmanex also introduced VENIX, a product designed to promote
sexual well-being, and REISHI, a popular botanical supplement in the Company's
Asian markets, particularly Taiwan. This product line also includes a line of
other standardized botanical and dietary supplements including PANAX GINSENG,
KAVA KAVA, ECHINACEA, GARLIC, HAWTHORN, OPTIMUM OMEGA and others that similarly
have been formulated to meet a broad range of health needs.
Nutritious and Healthy Snacks. As part of its mission to promote a
healthy lifestyle and long-term wellness, Pharmanex's NUTRI-FOODS product line
includes nutritional drinks such as ALOE FOUNTAIN, which contains organically
grown aloe vera, and SPLASH C with aloe vera, a healthy beverage providing
significant amounts of Vitamins C and E as well as calcium in each serving. This
product line also includes meal supplements such as nutritious snack bars.
Sports and Fitness Products. The SPORTRITION line of sports and fitness
products caters to health conscious individuals with active lifestyles. This
product line consists of a packaged group of nutritional supplements offering a
comprehensive, flexible program for individuals who desire to improve athletic
performance. Products in the SPORTRITION line include OVERDRIVE, a sports
supplement that features antioxidants, B vitamins and chromium chelate, and
PROGRAM-16 protein bars, designed to provide nutritional support for individuals
involved in strenuous exercise.
Weight Management. The HEALTHTRIM 2000 weight management program
includes a line of nutritional products designed to provide nutritional support
to weight conscious individuals. These products include fiber supplements
marketed under the product names FIBRENET and FIBRENET PLUS, LIFEPAK TRIM and
other related products.
Image Solutions. In 1999, Pharmanex introduced a line of nutritional
supplements designed to create outward beauty from within. These products
include HAIR FORMULA, designed to promote and maintain healthy hair and VEIN
FORMULA, designed to promote circulatory and leg vein health.
Specialty Products. In the fourth quarter of 1998, the Company
introduced a high-performance home water filtration system in Japan. The water
filtration system was subsequently introduced in other Asian markets. The
FOUNTAIN FRESH filtration system was designed by and is being manufactured
exclusively for the Company by CUNO Incorporated, a worldwide manufacturer of
home and industrial filtration systems.
-6-
PHARMANEX PRODUCT DEVELOPMENT. Pharmanex is committed to providing high
quality, standardized and substantiated nutritional supplements. This philosophy
has led to Pharmanex's commitment to avoid stimulants and any ingredients that
are reported to have any long-term addictive or harmful effects, even if the
short-term effects may be desirable. Pharmanex believes that it is one of the
few nutritional supplement companies in the United States that has a research
and development program modeled after the pharmaceutical industry. Pharmanex
believes that this research and development capability provides it with an
important competitive advantage in the industry. Moreover, because a substantial
portion of Pharmanex's research and development activities are conducted in the
Peoples' Republic of China (The "PRC"), it believes that it is able to conduct
quality research and development work as well as initial clinical trials in
higher numbers due to the significantly lower cost than would be incurred if
Pharmanex conducted comparable work in the United States.
Pharmanex utilizes its "6S Quality Process" in its development
activities, which is designed to provide a precise, standardized, recommended
dosage of each beneficial natural ingredient in every capsule. The 6S Quality
Process generally involves the following steps:
* SELECTION. Conducting a scientific review of research and databases in
connection with the selection of potential products and ingredients,
and determining the authenticity, usefulness and safety standards for
such potential products and ingredients.
* SOURCING. Investigating potential sources, evaluating the quality of
such sources and performing botanical and chemical evaluations where
appropriate.
* STRUCTURE. Determining the structural profile of natural compounds and
active ingredients.
* STANDARDIZATION. Standardizing the product to at least one
biologically relevant active ingredient.
* SAFETY. Assessing safety from available research, and, where
necessary, performing additional tests such as microbial tests and
chemical analyses for toxins and heavy metals.
* SUBSTANTIATION. Reviewing documented pre-clinical and clinical trials,
and, where necessary and appropriate, initiating studies and clinical
trials sponsored by Pharmanex.
Pharmanex employs approximately 50 scientists at its dedicated research
and development center in Shanghai, the PRC, and at its Provo, Utah and San
Francisco, California offices. Pharmanex also has working relationships with 150
other independent scientists including an advisory board comprised of recognized
authorities in related disciplines. In addition, Pharmanex evaluates a
significant number of product ideas presented to it by distributors and other
outside sources. Pharmanex has established collaborative agreements with three
prominent universities and research institutions in the PRC: Shanghai Medical
University, Beijing Medical University and the Institute of Materia Medica. The
staffs of these institutions include scientists with expertise in natural
product chemistry, biochemistry, pharmacology and clinical studies. Pharmanex's
research and development center in Shanghai coordinates and validates
Pharmanex's collaborative efforts with these institutions. Pharmanex also
currently has collaborative research and clinical study programs with several
major university research centers in the United States, including UCLA, the
Rippe Center for Clinical Lifestyle Research, Columbia University, the
University of Kansas, and internationally with the University of Hong Kong
School of Medicine. The Company's research and development expenditures have
increased substantially following the acquisition of Pharmanex, but still do not
represent a material portion of the Company's selling, general, and
administrative expenses on a consolidated basis.
PHARMANEX SOURCING AND PRODUCTION. Substantially all of Pharmanex's
nutritional supplements and ingredients, including LIFEPAK, are produced or
provided by third-party suppliers that Pharmanex considers to be among the best
suppliers of such products and/or ingredients. Pharmanex currently relies on two
unaffiliated suppliers for approximately 50% of its nutritional supplements.
Pharmanex believes that, in the event it were unable to source any products or
ingredients from these suppliers or its other current suppliers other than as
described below, it could produce or replace such products or substitute
ingredients without great difficulty or
-7-
significant increases in the cost of goods sold. CORDYMAX CS-4, a nutritional
supplement, is sourced from a sole supplier in the PRC pursuant to a contract
expiring in 2006. CHOLESTIN is currently sourced from a supplier pursuant to a
contract that expires in 2016. The Company recently amended a contract with an
additional supplier to obtain a perpetual license to purchase a red yeast strain
that can be used to make CHOLESTIN. This contract is valid for all markets
outside of the PRC and will allow the Company to utilize other suppliers to
manufacture CHOLESTIN if necessary. Pharmanex also maintains an extraction and
purification facility located in Huzhou, Zhejiang Province, the PRC, where it
currently produces the extracts for BIOGINKGO 27/7 and TEGREEN 97 products.
Pharmanex has contract cultivation areas in the PRC. Because some of
Pharmanex's natural and botanical products such as BIO ST. JOHN'S and BIOGINKGO
27/7 come from crops that can only be harvested once a year, problems with such
crops could limit Pharmanex's ability to produce such products. In addition, as
these products can only be produced once a year, Pharmanex must rely on the
accuracy of its estimates of product requirements in sourcing these products. If
Pharmanex underestimates its product requirements, it may not be able to
re-stock such product until the next growing season. To help mitigate this
problem, Pharmanex continues to work on sourcing raw materials in both the
Northern and Southern hemispheres to provide for two separate growing seasons.
BIG PLANET
OVERVIEW. The Internet is rapidly emerging as a global medium for
communications and electronic commerce. The recent growth of the Internet and
electronic commerce is effecting significant changes in traditional methods of
information delivery and product purchasing. In addition, deregulation of
telecommunications and the growth in wireless communications have resulted in
changes and opportunities in the telecommunications markets. In 1999, Nu Skin
Enterprises acquired Big Planet, Inc., a privately owned affiliate of the
Company that began operations in the United States in April 1998. This
acquisition provided Nu Skin Enterprises with a new business opportunity
involving technology, Internet and telecommunications products and services
allowing Nu Skin Enterprises to:
* Take advantage of the opportunities provided by the rapid growth of
the technology, Internet and telecommunications markets,
* Appeal to a broader base of customers and distributors,
* Utilize the strength and competitive advantages of its distribution
system to reach new segments of the marketplace, and
* Leverage Big Planet's expertise in the Internet to better leverage the
Internet and Web with the Nu Skin and Pharmanex divisions.
Big Planet's core strategy is to be an "InterNetworking" company that
combines the global Internet revolution with the power of network marketing. The
Company believes that technology, Internet and telecommunications products are
highly compatible with its distribution system and that Big Planet provides a
compelling business opportunity for technology-oriented entrepreneurs desiring
to participate in the Internet revolution. Big Planet leverages the direct
selling expertise of the Company's distributor force to provide high levels of
service to its customers in a product area that is often confusing to consumers.
Big Planet trains its distributors to educate consumers as needed to help them
understand and take advantage of the latest technology products.
Big Planet's current business model is based on a three-pronged
strategy:
* Introducing convenient and simple-to-use devices to access the
Internet;
-8-
* Connecting customers to the Internet as an Internet Service Provider
("ISP") and offering various long distance and other Internet and
telecommunications products and services; and
* Offering a destination, or Internet community, for its customers once
they are online where they can conveniently shop and gain access to
other services and information.
BIG PLANET PRODUCTS. Big Planet's product offering is structured around
its three-pronged objective of providing devices, connections and destinations.
Big Planet has invested significantly in local infrastructure for its Internet
and operation support facilities. Big Planet also has entered into contractual
relationships with several industry-leading technology companies, including
Qwest Communications, AT&T Wireless, UUNet, SkyTel, IBM, I-Link, Incorporated,
and other key vendors, to provide convenient and reliable technology, Internet
and telecommunications products and services. Big Planet's distributors receive
commissions based on Big Planet's gross margin on each sale of products or
services, including monthly recurring service charges, or based on the
commission received by Big Planet with respect to products sold directly by
third-party vendors to Big Planet's customers.
Devices. Big Planet has chosen the IPHONE as an introductory product,
which suits the needs and experience levels of its users. The IPHONE is a
technologically-advanced telephone that provides simple and convenient Internet
access via a touch screen and pull-out keyboard and supports hypertext markup
language ("HTML"). The phone also includes speaker, speed-dial, directory,
caller-identification and voicemail features. The IPHONE was developed by
InfoGear Technology Corporation. Big Planet has licensed the exclusive right to
market the IPHONE in the multi-level marketing sales channel in the United
States. In September 1999, Big Planet launched a free IPHONE campaign, which
allows a customer to obtain an IPHONE free of charge with a three-year
subscription to Big Planet's Internet and long-distance services. Big Planet is
currently evaluating options for an IPHONE-like device for its Japan market.
Connections. Big Planet provides dial-up Internet access to its
customers through three separate access plans designed to cover the needs of a
broad demographic group of consumers. As with many other Internet service
providers, Big Planet outsources Internet access through a nationwide backbone
network of more than 2,900 dial up access sites, or "POPS," in cities throughout
the United States, which Big Planet believes is currently one of the largest
network of POPS in the United States. Big Planet currently has approximately
40,000 Internet service customers. The Internet Service includes easy to use,
reliable and competitively priced Internet access, electronic mail and content
filtration for distributors and consumers. Big Planet also provides a powerful,
yet easy-to-use tool for creating and maintaining sophisticated Web sites which
is designed for the small business segment of the Internet, including Big Planet
representatives. Big Planet currently hosts approximately 15,000 Web sites
primarily for individuals and small businesses.
Big Planet currently offers domestic and international long distance,
prepaid calling cards, paging products and services and personal 800 numbers.
Big Planet offers both residential and business long distance services through
its relationship with Qwest Communications. As of December 31, 1999,
approximately 30,000 customers were subscribed for long-distance service through
this relationship. In February 2000, Big Planet contracted with I-Link,
Incorporated ("I-Link"), an enhanced voice and data communications company, to
obtain the exclusive global network marketing channel distribution rights for
I-Link's products and services. Under the agreement, I-Link's existing network
marketing representatives, together with their existing customers and sales
volume, were transitioned to Big Planet and Big Planet began buying products and
services from I-Link on a wholesale basis. The primary product is I-Link's
"V-Link" which provides enhanced communications capabilities to customers
including unified messaging of voicemail, e-mail and fax, and "find-me, follow
me" features that allow a single phone call to ring to various different
telephone devices such as cell, office and home. Big Planet has also entered
into agreements to offer wireless telecommunications services through AT&T
Wireless and through the Sprint PCS network. Big Planet also has a business
relationship with SkyTel, which allows Big Planet to sell SkyTel's prepaid
paging products, including SkyTel's BEEPWEARPRO pager watch.
-9-
Destination. The Big Planet online store, www.bpstore.com, provides an
online shopping environment to Big Planet distributors and their customers. The
Big Planet store was initially opened in September 1998 and currently offers
access to a wide selection of products and services from numerous different
vendors in addition to Nu Skin and Pharmanex products. Big Planet has entered
into agreements which link the Big Planet online store to Web sites of over 150
online retailers such as OnlineOfficeSupplies.com, ToysRus.com, Borders.com,
Outpost.com, DVDExpress and Flowerclub.com. Distributors earn commissions on
purchases by their customers through the online store and these affiliate sites.
The Big Planet portal, my.bigplanet.com, completes the Internet community that
Big Planet provides, offering customers various sources of information such as
weather forecasts, stock quotes and other services, including a concierge
service. The concierge service allows Big Planet customers to utilize a
live-operator and Internet-search service that offers a personalized alternative
to today's traditional Web-based search engines.
BIG PLANET PRODUCT DEVELOPMENT. To date, Big Planet's product
development has focused on developing its Internet facilities and operational
systems in order to develop operational and support platforms necessary to
ensure consistent services and provide for the introduction of new products and
services. Big Planet continues to identify and secure contractual relationships
with various vendors and suppliers that will enable Big Planet to sell
competitively-priced technology, Internet and telecommunications products and
services through its distribution channel. In addition, Big Planet is committed
to identifying and securing contractual relationships with various vendors and
suppliers for a wide selection of products for sale through its online store.
Big Planet is evaluating the next generation of Internet devices including set
top boxes, Internet appliances, cellular phones and wireless personal assistant
devices that connect to the Internet.
BIG PLANET SOURCING AND PRODUCTION. Because the Internet is the key
component of Big Planet's business and strategy of controlling its customer
relationships, Big Planet has made a significant investment in building a
state-of-the-art network operations center which serves as the central platform
for its U.S.-based Internet services, Web site hosting services and its online
store. Similar to other ISPs, Big Planet outsources dial-up Internet access
through a nationwide telecommunications network of approximately 2,900 POPS in
cities throughout the United States with a contract with UUNet and other key
backbone providers. Big Planet also has contractual relationships with leading
technology companies such as Cisco Systems, EMC Corporation and Sun Microsytems,
which provide additional reliability and support for its ISP business. Except
for its Internet services, Web hosting and online shopping platform,
substantially all of the services and products offered by Big Planet are
contracted or sourced from unaffiliated third parties pursuant to contractual
arrangements. For example, Big Planet has contracted with Qwest Communications
to provide long distance phone services and Encore Telecommunications, LLC to
provide wireless communications through the Sprint PCS network. By acting on an
agency basis for these services, Big Planet is able to avoid the large capital
deployment and investment that would be required to build the infrastructure
necessary to provide such services. However, Big Planet's profit margins and its
ability to deliver quality service at competitive prices depend upon its ability
to negotiate and maintain favorable terms with such third-party providers. Big
Planet also contracts with or enters into various business relationships with
various unaffiliated parties to acquire the right to distribute unique and
innovative products, such as the iPhone, through its online store.
REGIONAL PROFILES
For information on revenue for each of the geographic regions in which
Nu Skin Enterprises operated for the years ended December 31, 1997, 1998 and
1999, reference is made to "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and Note 18 to the consolidated financial
statements contained in the 1999 Annual Report to Stockholders and incorporated
herein by reference.
NORTH ASIA. The North Asia region currently consists of Nu Skin
Enterprises' markets in Japan and South Korea. Japan is the Company's largest
market with approximately $602.4 million in revenue in 1999. According to the
World Federation of Direct Selling Associations, the direct selling channel in
Japan generated sales of approximately $28.4 billion of goods and services in
1998, making Japan the largest direct selling market in the world. As of
December 31, 1999, virtually all of Nu Skin's personal care products and nearly
one-third of Pharmanex's nutritional supplements, including LIFEPAK, the
Company's leading multi-vitamin and mineral
-10-
supplement, were available in the Japanese market. In 1999, selected Pharmanex
products acquired in the Pharmanex acquisition, including TEGREEN 97, CHOLESTIN,
BIOGINKGO 27/7 and CORDYMAX CS-4, were introduced into Japan. In February 2000,
the Company's divisional strategy was implemented in Japan with the introduction
of the separate Pharmanex business opportunity. In addition, Big Planet is in
the process of working with the Japanese market to make dial-up access service
available to customers in Japan through the @nifty Internet service provided by
Nifty Corporation, one of the largest ISPs in Japan. Under this arrangement,
distributors will receive commissions for each monthly subscription fee paid by
a customer that signs up for the "Big Planet powered by @nifty" account. Nu Skin
currently offers the majority of its personal care products and Pharmanex
currently offers approximately 20% of its nutritional supplements in South
Korea. The Pharmanex business opportunity and certain of the natural nutritional
supplements acquired in the Pharmanex acquisition were introduced into South
Korea in January 2000.
SOUTHEAST ASIA. The Company's Southeast Asia region currently consists
of the markets in Taiwan, Hong Kong, Thailand, the Philippines, New Zealand,
Australia and a small retail operation in the PRC. This region has been
significantly affected by the Asian economic recession, which has severely
curtailed consumer spending. Taiwan is the largest market in this region with
revenue of $103.6 million in 1999. The Company is one of the largest direct
selling companies in Taiwan. According to the World Federation of Direct Selling
Associations, the direct selling channel in Taiwan generated approximately $1.2
billion in sales of goods and services in 1998. Management believes that the
direct selling industry in Taiwan contracted during 1998 and 1999 due in part to
the economic recession in the region and the PRC's ban on direct selling where
many Taiwanese distributors had hoped to expand their businesses. Approximately
2.8 million people, which is about 10% of the population, are estimated to be
involved in direct selling. Taiwan's government strictly regulates direct
selling activities. For example, Taiwan's government has enacted tax legislation
aimed to ensure proper tax payments by distributors on product sales to
consumers. As of December 31, 1999, Nu Skin offered most of its personal care
products and Pharmanex offered approximately one-half of its nutritional
supplements in Taiwan. In August 1999, Pharmanex introduced its separate
business opportunity and certain of the natural nutritional supplements acquired
in the Pharmanex acquisition into Taiwan. Big Planet currently does not
distribute any products or services in the Southeast Asia markets.
OTHER MARKETS. The Other Markets region currently consists of the
markets in Europe, the North American markets (which until 1999 had been
operated by private affiliates) and Brazil. In March 1999, the Company
terminated its license agreement with its affiliate Nu Skin USA which, prior to
this termination, had the exclusive right to sell the Company's products within
the United States. Accordingly, the only revenue the Company recognized in 1998
from sales in the United States related to license fees paid to the Company for
use of the Company's trademarks and trade names and revenue from sales of the
Company's products to Nu Skin USA. These fees and revenue accounted for a
majority of the revenue in Other Markets in 1998. As of March 1999, the Company
has recognized all revenue and associated expenses from sales of products in the
United States. According to the World Federation of Direct Selling Associations,
the direct selling channel in the United States generated sales of approximately
$23 billion of goods and services in 1998, making the United States the second
largest direct selling market in the world. In February 1999, Nu Skin
Enterprises introduced its divisional strategy into the United States, the first
market in which this strategy was implemented. Substantially all of Nu Skin's
personal care products and Pharmanex's nutritional supplements and all of Big
Planet's products and services are available in the United States.
The European markets first opened in 1995 with the opening of the
United Kingdom, Belgium, the Netherlands, France and Germany. Since that initial
opening, an additional ten markets have been opened in Europe, including Iceland
and Norway in 1999. Approximately 75 of Nu Skin's personal care products are
sold in Europe. Pharmanex has introduced several IDN products into a limited
number of the European markets. Big Planet currently does not offer any products
in the European market.
In November 1998, the Company opened the Brazilian market, which is the
Company's first market in South America. According to the World Federation of
Direct Selling Associations, the direct selling channel in Brazil generated
sales of approximately $3.1 billion of goods and services in 1998, prior to the
recent currency devaluation, making Brazil the third largest direct selling
market in the world. Approximately 25% of Nu Skin's
-11-
personal care products have been introduced in Brazil, along with 15 locally
produced products. Neither Big Planet nor Pharmanex has introduced any of their
products into the Brazil market.
DISTRIBUTION SYSTEM
OVERVIEW OF DISTRIBUTION SYSTEM. The foundation of the Company's sales
philosophy and distribution system is network marketing. Under most network
marketing systems, distributors purchase products for resale to consumers and
for personal consumption. Pursuant to the Company's Global Compensation Plan,
the Company currently sells products exclusively through independent
distributors who are not the Company's employees. The Company's network
marketing program differs from many other network marketing programs in several
respects.
* The Global Compensation Plan is among the most financially rewarding
plans offered to distributors by network marketing companies and can
result in commissions to distributors aggregating up to 58% of a
personal care or nutritional product's wholesale price. On a global
basis, commissions have averaged approximately 39 to 42% of revenue
from commissionable sales over the last eight years.
* The Company was among the first to allow distributors to be
compensated for product sales of downline-sponsored distributors
around the world, and the Company believes it is now the first major
network marketing company to allow distributors to be fully
compensated for product sales of downline-sponsored distributors
globally across all operating divisions.
* The Company's order and fulfillment systems eliminate the need for
distributors to carry significant levels of inventory.
Network marketing is an effective vehicle to distribute the Company's
products because:
* Consumers can learn about products in person from distributors, which
the Company believes is more effective for premium-quality products
than using television and print advertisements,
* Direct sales allow for actual product testing by potential customers,
* There is greater opportunity for distributor and customer
testimonials, and
* As compared to other distribution methods, distributors can give
customers higher levels of service and attention by, among other
things, following up on sales to ensure proper product usage and
customer satisfaction and to encourage repeat purchases.
Direct selling as a distribution channel has been enhanced in the past
decade by advancements in communications, including telecommunications and
Internet connectivity, and the proliferation of the use of videos and other
electronic devices. For this reason, the Company maintains an in-house staff of
creative and video production personnel for timely and cost-effective production
of sales materials. In addition, the Company has recently reorganized its
Information Technology department in order to, among other things, leverage Big
Planet's existing Internet resources and expertise to implement effective
Internet strategies in each of the Company's product divisions. The Company
believes that the Internet will become an increasingly important business factor
as more and more consumers purchase products over the Internet as opposed to
traditional retail and direct sales channels. As a result, the Company expects
that direct sellers will need to adapt their business models to integrate the
Internet into their operations to remain successful. Management is committed to
fully utilizing current and future technological advances to continue enhancing
the effectiveness of direct selling. The Company's divisions in the United
States currently maintain web sites where products may be ordered. In Japan, the
Company's largest market, the Company set up an Internet order process in 1999.
Since the introduction of the service in September 1999, more than 40,000
Japanese distributors have registered to use such service and have used it to
place over $25 million in sales.
-12-
Because of the nature of Big Planet's products and services, Big Planet
distributors do not buy products for resale but act as independent sales
representatives of Big Planet. These representatives can earn a commission on
sales through the Big Planet online store by their customers. Big Planet does
not pay commissions on the wholesale price but on the gross margins from sales
of services and products. If products and services are purchased directly by
distributors or customers from third parties with contractual relationships with
Big Planet, the commission is based on the commission that Big Planet receives
from such third parties with respect to such sales.
The Company's revenue depends directly upon the number and productivity
of its distributors. Growth in sales volume requires an increase in the
productivity of distributors and/or growth in the total number of distributors.
Over the last year, the Company has experienced a decline in the number of its
distributors. The Company cannot assure stockholders that the productivity or
number of distributors will be sustained at current levels or increased in the
future. Furthermore, the Company estimates that, as of December 31, 1999,
approximately 300 distributorships worldwide maintained Hawaiian Blue Diamond or
Blue Diamond executive distributor levels, which are the Company's two highest
executive distributor levels, and, together with their extensive downline
networks, account for substantially all of the Company's revenue. Consequently,
the loss of a high-level distributor, together with a group of leading
distributors in such distributor's downline network, or the loss of a
significant number of distributors for any reason, could harm the Company's
business.
SPONSORING. The Company relies on its distributors to sponsor new
distributors. While the Company provides, at cost, product samples, brochures,
magazines and other sales materials, distributors are primarily responsible for
educating new distributors with respect to products, the Global Compensation
Plan, and how to build a successful distributorship.
The sponsoring of new distributors creates multiple levels in the
network marketing structure. Persons that a distributor sponsors are referred to
as "downline" or "sponsored" distributors. If downline distributors also sponsor
new distributors, they create additional levels in the structure, but their
downline distributors remain in the same downline network as their original
sponsoring distributor.
Sponsoring activities are not required of distributors. However,
because of the financial incentives provided to those who succeed in building a
distributor network that consumes and resells products, the Company believes
that most of its distributors attempt, with varying degrees of effort and
success, to sponsor additional distributors. Generally, distributors invite
acquaintances to sales meetings in which they present the Company's products and
explain the Global Compensation Plan. People are often attracted to become
distributors after using the Company's products and becoming regular customers.
Once a person becomes a distributor, he or she is able to purchase products
directly from the Company at wholesale prices. The distributor is also entitled
to sponsor other distributors in order to build a network of distributors and
product users.
A potential distributor must enter into a standard distributor
agreement which obligates the distributor to abide by the Company's policies and
procedures. Additionally, in most countries except Japan, a new distributor is
required to enter into a product purchase agreement with the Company's local
subsidiary, which governs product purchases. In some markets, the Company
requires distributors to purchase a starter kit, which includes the Company's
policies and procedures, for the approximate cost of producing the starter kit.
GLOBAL COMPENSATION PLAN. The Company believes that one of its key
competitive advantages is the Company's Global Compensation Plan. Distributors
receive higher levels of commissions as they advance under the Global
Compensation Plan. The Global Compensation Plan is seamlessly integrated across
all markets in which distributors sell products, allowing distributors to
receive commissions for global product sales, rather than merely local product
sales. The Company has also enhanced the Global Compensation Plan to allow
distributors to develop a seamless global network of downline distributors
across any or all of the product divisions. Management believes the Company is
the first major network marketing company to allow distributors to be fully
compensated for global sales of downline-sponsored distributors across
separately branded product divisions.
-13-
The Company's distributors benefit significantly from receiving
commissions at the same rate for sales in foreign countries as for sales in
their respective home countries and across product divisions. In addition,
distributors are not required to establish new distributorships or requalify for
higher levels of commissions within each new country in which they begin to
operate, which is frequently the case under the compensation plans of many of
the Company's competitors. Under the Global Compensation Plan, distributors are
paid consolidated monthly commissions in the distributor's home country, in
local currency, for product sales in that distributor's global downline
distributor network across all product divisions.
HIGH LEVEL OF DISTRIBUTOR INCENTIVES. Based upon management's knowledge
of competitors' distributor compensation plans, management believes that the
Global Compensation Plan is among the most financially rewarding plans offered
to distributors by network marketing companies. Currently, there are two
fundamental ways in which distributors can earn money:
* Through retail markups on personal care and nutritional products sold
wholesale (recommend range of 43% to 60%), and
* Through a series of commissions on product sales.
Commissions on personal care and nutritional products can result in
commissions aggregating up to 58% of a product's wholesale price. On a global
basis, commissions have averaged approximately 39 to 42% of revenue from
commissionable sales over the last eight years.
Each of the Company's products carries a specified number of sales
volume points. Commissions are based on total personal and group sales volume
points per month. Sales volume points are essentially based upon a product's
wholesale cost, net of any point-of-sale taxes. As a distributor's retail
business expands and as he or she successfully sponsors other distributors into
the business who in turn expand their own businesses, he or she receives a
higher percentage of commissions.
Once a distributor becomes an executive-level distributor, the
distributor can begin to take full advantage of the benefits of commission
payments on personal and group sales volume. To achieve executive status, a
distributor must achieve specified personal and group sales volumes for a
required period of time. To maintain executive status, a distributor must
generally also maintain specified personal and group sales volumes. An
executive's commissions can increase substantially as downline distributors
achieve executive status. In determining commissions, the number of levels of
downline distributors included in an executive's group increases as the number
of executive distributorships directly below the executive increases.
On a monthly basis, the Company evaluates distributor requests for
exceptions to the terms and conditions of the Global Compensation Plan. While
the general policy is to discourage exceptions, the Company believes that the
flexibility to grant such exceptions is critical in retaining distributor
loyalty and dedication. In each market, distributor services personnel evaluate
each such instance and make appropriate recommendations to the Company.
As of the dates indicated below, the Company had the following number
of executive distributors:
Region 1995 1996 1997 1998 1999
- ------ ------ ------ ------ ------ ------
North Asia 4,017 14,844 16,654 17,311 14,601
Southeast Asia 4,129 6,199 5,642 5,091 3,419
Other Markets(1) 27 436 393 379 2,985
------ ------ ------ ------ ------
Total 8,173 21,479 22,689 22,781 21,005
====== ====== ====== ====== ======
- ----------
(1) Upon the termination of the Nu Skin USA distribution license in March 1999,
the Company added 2,757 executive level distributors in the United States.
-14-
DISTRIBUTOR SUPPORT. The Company is committed to providing high-level
support services tailored to the needs of its distributors in each market. The
Company attempts to meet the needs and build the loyalty of distributors by
providing personalized distributor services, a support staff that assists
distributors as they build networks of downline distributors and a liberal
product return policy. Because many distributors have only a limited number of
hours each week to concentrate on their business, the Company believes that
maximizing a distributor's efforts by providing effective distributor support
has been and will continue to be important to the Company's success.
Through training meetings, annual conventions, distributor focus
groups, regular telephone conference calls and other personal contacts with
distributors, the Company seeks to understand and satisfy the needs of its
distributors. The Company provides walk-in, telephonic and computerized product
fulfillment and tracking services that result in user-friendly, timely product
distribution. Several walk-in centers maintain meeting rooms which distributors
may utilize in training and sponsoring activities. In addition, the Company is
committed to evaluating new ideas in technology and services that it can provide
to distributors, such as automatic product reordering. The Company currently
utilizes voicemail, teleconferencing, fax and Internet services to provide
Company and product information and ordering and to handle group and personal
sales volume inquiries.
RULES AFFECTING DISTRIBUTORS. The Company's standard distributor
agreement, policies and procedures and compensation plan contained in every
starter and/or introductory kit outline the scope of permissible distributor
marketing activities. The distributor rules and guidelines are designed to
provide distributors with maximum flexibility and opportunity within the bounds
of governmental regulations regarding network marketing and prudent business
policies and procedures. Distributors are independent contractors and are
expressly prohibited from representing themselves as agents or employees. The
Company requires distributors to present products and business opportunities
ethically and professionally. Distributors further agree that their
presentations to customers must be consistent with, and limited to, the product
claims and representations made in literature distributed by the Company. Under
most regulations governing nutritional supplements, no medical claims may be
made regarding the products, nor may distributors prescribe any particular
product as suitable for any specific ailment. Even though sponsoring activities
can be conducted in many countries, distributors may not conduct marketing
activities outside of countries in which the Company currently conducts business
and further may not export for sale products from one country to another.
Distributors must represent to the Company that their receipt of
commissions is based on retail sales and substantial personal sales efforts.
Exhibiting commission statements or checks is prohibited. The Company must
produce or pre-approve all sales aids used by distributors such as videotapes,
audiotapes, brochures, promotional clothing and other miscellaneous items.
Distributors may not use any form of media advertising to promote
products. Products may be promoted only by personal contact or by literature
produced or approved by the Company. Generic business opportunity
advertisements, without using the Company's name, may be placed in accordance
with required guidelines in some countries. The Company's logos and names may
not be permanently displayed at any location. Distributors may not use the
Company's trademarks or other intellectual property without the Company's
consent.
Products generally may not be sold, and the Company's business
opportunities may not be promoted, in traditional retail environments. Pharmanex
has made an exception to this rule and has allowed its products to be sold in
independently owned pharmacies and drug stores meeting specified requirements.
Additionally, distributors may not sell at conventions, trade shows, flea
markets, swap meets and similar events. Distributors who own or are employed by
a service-related business such as a doctor's office, hair salon or health club,
may make products available to regular customers as long as products are not
displayed visibly to the general public in such a way as to attract the general
public into the establishment to purchase products.
Generally, a distributor can receive commission bonuses on nutritional
and personal care products only if, on a monthly basis, the distributor:
-15-
* Achieves at least 100 points, which is approximately $100, in personal
sales volume,
* Documents retail sales to at least five retail customers,
* Sells and/or consumes at least 80% of personal sales volume, and
* Is not in default of any material policies or procedures.
The Company systematically reviews alleged reports of distributor
misbehavior. If the Company determines that a distributor has violated any of
the distributor policies or procedures, the Company may terminate the
distributor's rights completely. Alternatively, the Company may impose sanctions
such as warnings, probation, withdrawal or denial of an award, suspension of
privileges of a distributorship, fines or penalties, withholding commissions
until specified conditions are satisfied or other appropriate injunctive relief.
A distributor may voluntarily terminate his/her distributorship at any time.
PAYMENT. Distributors generally pay for products prior to shipment.
Accordingly, the Company carries minimal accounts receivable. Distributors
typically pay for products in cash, by wire transfer and by credit card. Cash,
which represents a significant portion of all payments, is received by order
takers in the distribution centers when orders are personally picked up by a
distributor.
SALES AIDS. The Company provides an assortment of sales aids to
facilitate the sales of its products. In dollar terms, the largest sales aid is
the Company's starter kit which includes materials such as product brochures,
training materials and order forms. Sales aids include videotapes, audiotapes,
brochures, promotional clothing and other miscellaneous items to help create
consumer awareness of the Company and its products. Sales aids are priced at the
Company's approximate cost, and distributors do not receive commissions on
purchases of sales aids.
PRODUCT GUARANTEES. The Company believes that it is among the most
consumer-protective companies in the direct selling industry. For 30 days from
the date of purchase, the Company's product return policy allows a retail
purchaser to return any product to the distributor through whom the product was
purchased for a full refund. After 30 days from the date of purchase, the return
privilege is in the discretion of the distributor. Because distributors may
return unused and resalable products to the Company for a refund of 90% of the
purchase price for one year, they are encouraged to provide consumer refunds
beyond 30 days. In addition, the Company's product return policy is an important
tool used by distributors in developing a retail customer base. The Company's
experience with actual product returns has averaged less than 5% of annual
revenue through 1999. Because many of Big Planet's products and services are
provided directly to consumers by third-party vendors, the same 30-day return
privilege does not apply to products purchased by consumers from such vendors
unless such vendors otherwise agree.
COMPETITION
PERSONAL CARE AND NUTRITIONAL PRODUCTS. The markets for personal care
and nutritional products are large and intensely competitive. The Company
competes directly with numerous companies that manufacture and market personal
care and nutritional products in each of the Company's product categories and
product lines. The Company competes with other companies in the personal care
and nutritional products industry by emphasizing the innovation, value and
premium-quality of its products and the convenience of the Company's
distribution system. Many of the Company's competitors have much greater name
recognition and financial resources than the Company. Moreover, large
pharmaceutical companies are increasingly entering into the nutritional
supplement market. In addition, personal care and nutritional products can be
purchased in a wide variety of channels of distribution. While the Company
believes that consumers appreciate the convenience of ordering products from
home through a sales person or through a catalog, the buying habits of many
consumers accustomed to purchasing products through traditional retail channels
are difficult to change. The Company's product offerings in each product
category are also relatively small compared to the wide variety of products
offered by many other personal care and nutritional product companies. There
cannot be any assurance that the
-16-
Company's personal care and nutrition business and results of operations will
not be harmed by market conditions and competition in the future.
TECHNOLOGY, INTERNET, AND TELECOMMUNICATIONS PRODUCTS AND SERVICES. The
markets for technology, Internet and telecommunications products and services
are similarly large and intensely competitive. In addition, the Internet
services and e-commerce markets are new and rapidly evolving. The Company
expects the competition to intensify further in these markets in the future.
Barriers to entry for e-commerce are relatively low as current and new
competitors can launch new Web sites at relatively low costs. Big Planet's
online shopping services also compete with other channels of distribution,
including catalogue sales and traditional retail sales. Big Planet currently or
potentially competes with other companies for its Internet and
telecommunications services and products, including:
* Established, large online services providers such as America Online
and Microsoft Network,
* Local, regional and national Internet service providers such as
MindSpring and Earthlink,
* National telecommunications companies such as AT&T Corporation, MCI
WorldCom, Inc. and Sprint Corporation, and
* Numerous e-commerce Web sites such as Amazon.com and Buy.com.
Many of Big Planet's competitors have much greater name recognition and
financial resources than the Company. In addition, the Company understands that
some e-commerce vendors have elected to sell products for little or no gross
margins and to generate revenue through the sale of advertising. Big Planet
would have a difficult time competing based on price with such vendors because
its distribution system results in a commission payment based on such sales. Big
Planet may be at a disadvantage because it relies upon services and products
provided by third parties and must rely on its ability to acquire quality and
reliable services from vendors at a price that allows its distributors to sell
services at competitive rates and still generate attractive commissions. Big
Planet attempts to compete with other companies in this market through offering
convenient access to a wide variety of technology, Internet and
telecommunications services and products at competitive prices with a high level
of customer service. There can be no assurance that Big Planet's business and
results of operations will not be harmed by the intense competition in the
technology, Internet and telecommunications market.
NETWORK MARKETING COMPANIES. The Company also competes with other
direct selling organizations, some of which have a longer operating history and
higher visibility, name recognition and financial resources. The leading network
marketing company in the Company's existing markets is Amway Corporation and its
affiliates. The Company competes for new distributors on the strength of its
multiple business opportunities, product offerings, Global Compensation Plan,
management strength and appeal of the Company's international operations. The
Company anticipates the entry of many more direct selling organizations into the
marketplace as this distribution channel expands over the next several years and
as existing competitors expand into new markets. In order to successfully
compete in this market and attract and retain distributors, the Company must
maintain the attractiveness of its business opportunities to its distributors.
There can be no assurance that the Company will be able to successfully meet the
challenges posed by this increased competition.
INTELLECTUAL PROPERTY
The Company's major trademarks are registered in the United States and
in many other countries, and the Company considers its trademark protection to
be very important to its business. The major trademarks include the following:
Nu Skin, Interior Design Nutritionals, IDN, Pharmanex, Big Planet, and LIFEPAK.
The Company generally registers its important trademarks in the United States
and each market where the Company operates or has plans to operate. In addition,
a number of the Company's products are based on proprietary technologies and
formulations.
-17-
GOVERNMENT REGULATION
DIRECT SELLING ACTIVITIES. Direct selling activities are regulated by
various federal, state and local governmental agencies in the United States and
foreign countries. These laws and regulations are generally intended to prevent
fraudulent or deceptive schemes, often referred to as "pyramid," "money games"
or "chain sales" schemes, that promise quick rewards for little or no effort,
require high entry costs, use high pressure recruiting methods and/or do not
involve legitimate products. The laws and regulations in the Company's current
markets often:
* Impose cancellation/product return, inventory buy-backs and
cooling-off rights for consumers and distributors,
* Require the Company or its distributors to register with governmental
agencies,
* Impose reporting requirements, and/or
* Impose upon the Company requirements, such as requiring distributors
to maintain levels of retail sales to qualify to receive commissions,
to ensure that distributors are being compensated for sales of
products and not for recruiting new distributors.
The extent and provisions of these laws, however, vary from country to country
and can impose significant restrictions and limitations on the Company's
business operations. For example, in South Korea, the Company cannot pay more
than 35% of its revenue to its distributors in any given month. In Germany, the
German Commercial Code prohibits using direct salespersons to promote
multi-level marketing arrangements by making the inducement to purchase products
for resale illegal. Accordingly, the Company, through its German subsidiary,
sells products to consumers through a "commercial agent" rather than a
distributor. As a result, in Germany the Company is subject to potential tax and
social insurance liability as well as agency laws governing the termination of
commercial agents. The European Commission is also currently monitoring the
direct sales industry which could lead to European Union level regulation in the
Company's markets in Europe.
Based on the Company's research conducted in opening existing markets,
the nature and scope of inquiries from government regulatory authorities, and
the Company's history of operations in such markets to date, the Company
believes that its method of distribution is in compliance in all material
respects with the laws and regulations relating to direct selling activities of
the countries in which the Company currently operates. The PRC currently has
laws in place that prohibit the Company from conducting business in such market
using the Company's existing business model. The PRC recently announced its
intention to lift this temporary ban in 2003. There can be no assurance,
however, that the Company will be allowed to conduct business in new markets or
continue to conduct business in each of its existing markets. See "Risk Factors
- -- Laws and regulations may prohibit or severely restrict our direct sales
efforts and cause our sales and profitability to decline" for additional
discussion of the regulatory environment for network marketing.
REGULATION OF PERSONAL CARE AND NUTRITIONAL PRODUCTS. The Company's
personal care and nutritional products and related promotional and marketing
activities are subject to extensive governmental regulation by numerous domestic
and foreign governmental agencies and authorities. These include the Food and
Drug Administration (the "FDA"), the Federal Trade Commission (the "FTC") , the
Consumer Product Safety Commission, and the United States Department of
Agriculture in the United States, State Attorneys General and other state
regulatory agencies, and the Ministry of Health and Welfare in Japan.
The Company's markets have varied regulations concerning product
formulation, labeling, packaging and importation. These laws and regulations
often require the Company to, among other things:
* Reformulate products for a specific market to meet the specific
product formulation laws of such country,
-18-
* Conform product labeling to the regulations in each country, and
* Register or qualify products with the applicable government authority
or obtain necessary approvals or file necessary notifications for the
marketing of such products.
For example, in Japan, the Ministry of Health and Welfare requires the Company
to have an import business license and to register each personal care product
imported into Japan. The Company must also reformulate many products to satisfy
other Ministry of Health and Welfare regulations. In Taiwan, all "medicated"
cosmetic and pharmaceutical products require registration. These regulations can
limit the Company's ability to import products into the Company's markets and
can delay introductions of new products into markets as the Company goes through
the registration and approval process for such products. The sale of cosmetic
products is regulated in the European Union member states under the European
Union Cosmetics Directive, which requires a uniform application for foreign
companies making personal care product sales.
Nutritional supplements are strictly regulated in the Company's
markets. These markets have varied regulations that apply to and distinguish
nutritional health supplements from "drugs" or "pharmaceutical products." For
example, the Company's products are regulated by the FDA of the United States
under the Federal Food, Drug and Cosmetic Act. The Federal Food, Drug and
Cosmetic Act has been amended several times with respect to nutritional
supplements, most recently by the Nutrition Labeling and Education Act and the
Dietary Supplement Health and Education Act. The Dietary Supplement Health and
Education Act establishes rules for determining whether a product is a dietary
supplement. Under this statute, dietary supplements are regulated more like
foods than drugs, are not subject to the food additive provisions of the law,
and are generally not required to obtain regulatory approval prior to being
introduced to the market. None of this infringes, however, upon the FDA's power
to remove an unsafe substance from the market. In the event a product, or an
ingredient in a product, is classified as a drug or pharmaceutical product in
any market, the Company will generally not be able to distribute such product in
such market through the Company's distribution channel because of strict
restrictions applicable to drug and pharmaceutical products. For example,
certain of Pharmanex's nutritional products, such as BIOGINGKO 27/7 and St.
John's Wort, may not be marketed through the direct sales channel in certain
European markets, such as Germany and Austria, and CHOLESTIN cannot be marketed
in South Korea. In addition, the FDA has recently appealed the decision of a
federal district court that CHOLESTIN could be sold as a dietary supplement
under the Dietary Supplement Health and Education Act. If the FDA succeeds in
overturning the district court's decision, the Company will be unable to sell
CHOLESTIN in its current form without first obtaining FDA approval.
Many of the Company's existing markets also regulate product claims
and advertising. These laws regulate the types of claims and representations
that can be made regarding the efficacy of products, particularly dietary
supplements. Accordingly, these regulations can limit the ability of the Company
and its distributors to inform consumers of the full benefits of the Company's
products. This can make it difficult to adequately distinguish the Company's
quality products from lower-price products of poor quality that do not offer the
same level of benefits. In Japan, the Company and its distributors are severely
restricted in making any claims concerning the health benefits of the Company's
nutritional supplements. In the United States, the Company is unable to make any
claim that any of the Company's nutritional supplements will diagnose, cure,
mitigate, treat or prevent disease. The Dietary Supplement Health and Education
Act, however, permits substantiated, truthful and non-misleading statements of
nutritional support to be made in labeling, such as statements describing
general well being resulting from consumption of a dietary ingredient or the
role of a nutrient or dietary ingredient in affecting or maintaining a structure
or a function of the body. The FDA recently issued final regulations concerning
these issues. One of the strategic purposes of the Company's acquisition of
Pharmanex was to obtain additional resources to enhance the Company's ability to
comply with these requirements in the Company's markets.
The FTC similarly requires that product claims be substantiated. In
1994, Nu Skin International, Inc., a subsidiary of the Company ("Nu Skin
International"), and three of its distributors entered into a consent decree
with the FTC with respect to its investigation of product claims and distributor
practices. As part of the settlement of this investigation, Nu Skin
International paid approximately $1.0 million to the FTC. In August
-19-
1997, Nu Skin International reached a settlement with the FTC with respect to
product claims and its compliance with the 1994 consent decree, pursuant to
which settlement Nu Skin International paid $1.5 million to the FTC.
The Company and its vendors are also subject to laws and regulations
governing the manufacturing of the Company's products. For example, in the
United States the FDA regulations establish Good Manufacturing Practices for
foods and drugs. The FDA has also proposed detailed Good Manufacturing Practices
for nutritional supplements; however, no such regulations have yet been adopted.
To date, the Company has not experienced any difficulty maintaining its
import licenses but has experienced complications regarding health and safety
and food and drug regulations for nutritional products. Many of the Company's
products have required reformulation to comply with local requirements. In
addition, in Europe there is no uniform legislation governing the manufacture
and sale of nutritional products. Complex legislation governing the
manufacturing and sale of nutritional products in this market has inhibited the
Company's ability to gain quick access to this market for the Company's
nutritional supplements. These conditions could continue to delay sales of the
Company's nutritional supplements in these markets, particularly Germany, which
already has a large nutritional, herbal and dietary products industry.
Currently, the Company is only marketing its core nutritional products in a
limited number of countries in the European market.
INTERNET/TELECOMMUNICATIONS REGULATION. In the United States, Internet
service providers are generally considered "enhanced service providers" and are
exempt from federal and state regulations governing common carriers.
Accordingly, Big Planet's provision of Internet access services is currently
exempt from tariff, certification and rate regulation. Nevertheless, regulations
governing disclosure of confidential information, copyright, excise tax and
other requirements apply to Big Planet's provision of Internet access services.
In addition, the applicability of certain existing laws to the Internet is
uncertain. The majority of laws were adopted prior to the advent of the Internet
and related technologies and do not clearly address unique issues associated
with the Internet and related technologies. Additionally regulations directly or
indirectly governing Internet service providers could be adopted in the future.
Accordingly, there can be no assurance that operations will not be adversely
affected by the adoption of any such laws or the application of existing laws to
the Internet.
Big Planet's telecommunications products and services are subject to
varying degrees of telecommunications regulation in each of the jurisdictions in
the United States in which Big Planet operates. In the United States, domestic
telecommunications service and international communications services in the
United States are subject to the provisions of the Communications Act, as
amended by the Telecommunications Act of 1996, and Federal Communications
Commission (the "FCC") regulations and rules adopted thereunder, as well as the
applicable laws and regulations of the various states. Big Planet currently
offers long distance and cellular services through master agency relationships
with Qwest Communications, AT&T Wireless and Encore Telecommunications. Under
such relationships, Qwest, AT&T and Encore are the regulated provider of such
services and Big Planet is not subject to the jurisdiction of state or federal
telecommunications regulatory bodies in connection with the offering of such
products and services. Big Planet is also currently providing enhanced voice and
data communication services as a result of its recent transaction with I-Link.
Although these services are currently not regulated by state or federal
telecommunications agencies, the FCC is conducting an inquiry into the
applicability of traditional telecommunications regulations to such services.
Currently, the I-Link services can be considered "enhanced services" exempt from
federal and state regulations governing common carriers. Notwithstanding the
foregoing, Big Planet is currently authorized on both a federal and state level
(in substantially all 50 states) to provide traditional long distance
telecommunications service. To the extent Big Planet elects to become a reseller
of long distance services or the provision of enhanced voice and data
communication services becomes subject to regulations, Big Planet may become
subject to rules and regulations which may impose material burdens on the Big
Planet's operations or financial performance.
Big Planet is not currently providing Internet or telecommunications
services in any foreign markets. In overseas markets, such services would be
subject to the regulatory regimes in each of the countries in which it seeks to
conduct business. Local regulations range from permissive to restrictive,
depending upon the country. Many overseas telecommunications markets are
undergoing dramatic changes as a result of privatization and deregulation.
Despite recent trends toward deregulation, some countries do not currently
permit competition in
-20-
the provision of public switched voice telecommunications services, which will
limit Big Planet's and other similarly situated United States-based carriers'
ability to provide telecommunications services in some markets. Some countries,
including Japan, presently subject Internet access service to regulatory
oversight under existing telecommunications laws in some circumstances.
OTHER REGULATORY ISSUES. As a United States entity operating through
subsidiaries in foreign jurisdictions, the Company is subject to foreign
exchange control and transfer pricing laws that regulate the flow of funds
between the Company's subsidiaries and the Company for product purchases,
management services and contractual obligations such as the payment of
distributor commissions. The Company believes that it is operating in compliance
with all applicable foreign exchange control and transfer pricing laws. However,
there can be no assurance that the Company will continue to be found to be
operating in compliance with foreign exchange control and transfer pricing laws,
or that such laws will not be modified, which, as a result, may require changes
in the Company's operating procedures.
As is the case with most companies that operate in the Company's
product categories, the Company has from time to time received inquiries from
government regulatory authorities regarding the nature of the Company's business
and other issues such as compliance with local direct selling, customs,
taxation, foreign exchange control, securities and other laws. Although to date
none of these inquiries has resulted in a finding materially adverse to the
Company, adverse publicity resulting from inquiries into the Company's
operations by United States and state government agencies in the early 1990s,
stemming in part from alleged inappropriate product and earnings claims by
distributors, and in the mid 1990s resulting from adverse media attention in
South Korea, harmed the Company's business and results of operations. The
Company could face similar inquiries in the future, which, either as a result of
findings adverse to the Company as a result of adverse publicity resulting from
the instigation of such inquiries, could harm the Company's business and results
of operations.
Based on the Company's experience and research and the nature and scope
of inquiries from government regulatory authorities, the Company believes that
it is in material compliance with all regulations applicable to the Company.
Despite this belief, the Company could be found not to be in material compliance
with existing regulations as a result of, among other things, the considerable
interpretative and enforcement discretion given to regulators or misconduct by
independent distributors.
Any assertion or determination that the Company or its distributors are
not in compliance with existing laws or regulations could harm the Company's
business or results of operations. In addition, in any country or jurisdiction,
the adoption of new laws or regulations or changes in the interpretation of
existing laws or regulations could generate negative publicity and/or harm the
Company's business and results of operations. Government agencies and courts in
any of the Company's markets could use their discretionary powers and authority
to interpret and apply laws in a manner that would limit the Company's ability
to operate or otherwise harm the Company's business. The Company cannot
determine the effect, if any, that future governmental regulations or
administrative orders may have on its business and results of operations.
Governmental regulations in countries where the Company plans to commence or
expand operations may prevent, delay or limit market entry of certain products
or require the reformulation of such products. Regulatory action, whether or not
it results in a final determination adverse to the Company, has the potential to
create negative publicity, with detrimental effects on the motivation and
recruitment of distributors and, consequently, on the Company's sales and
earnings.
EMPLOYEES
As of December 31, 1999, the Company had approximately 2,800 full-time
and part-time employees. None of the employees is represented by a union or
other collective bargaining group. The Company believes its relationship with
its employees is good, and does not currently foresee a shortage in qualified
personnel needed to operate the Company's business.
-21-
RISK FACTORS
There are certain significant risks that the Company faces, many of
which are substantial in nature. The following risks and information should be
considered in connection with the other information contained in this filing.
The Securities and Exchange Commission (the "SEC") has issued regulations which
require these risk factors to be presented in first person narrative and other
"plain English" styles required by the SEC. The purpose of these requirements is
to make the risk factors easier to understand and more clear.
FAILURE TO SUCCESSFULLY IMPLEMENT THE DIVISIONAL STRATEGY COULD HARM OUR
BUSINESS AND RESULTS OF OPERATIONS.
We have faced challenges in implementing our divisional strategy in
1999. The growth outlook for the year 2000 and beyond is based upon the success
of this strategy of focusing on three divisions of products and opportunity. If
we are unable to successfully integrate this strategy, or if the strategy does
not generate increased distributor activity and productivity, then we may
experience lower revenue, earnings and business synergies than we currently
expect from such strategy. Some of the challenges include:
* Distributor uncertainty concerning the strategy, the implementation of
the strategy and related changes to the distributor compensation plan,
* Longer than anticipated delays in obtaining incremental revenue growth
and distributor growth from the implementation of the strategy,
* Unforeseen expenses or difficulties in the further implementation of
the strategy, and
* Increasing strain on management to effectively manage a worldwide
business that is growing in complexity and diversity across all three
divisions and in all markets.
IF THE NUMBER OR PRODUCTIVITY OF INDEPENDENT DISTRIBUTORS DOES NOT INCREASE, OUR
REVENUE WILL NOT INCREASE.
To increase revenue, we must increase the number of and/or the
productivity of our distributors. We can provide no assurances that distributor
numbers will increase or remain constant or that productivity will increase.
Over the past year, we have experienced a decline in the number of our
distributors. This trend may continue. Distributors may terminate their services
at any time, and, like most direct selling companies, there is high turnover
among distributors from year to year. We cannot accurately predict how the
number and productivity of distributors may fluctuate because we primarily rely
upon existing distributors to sponsor and train new distributors and to motivate
new and existing distributors. Operating results could be adversely affected if
our existing and new business opportunities and products do not generate
sufficient economic incentive or interest to retain existing distributors and
attract new distributors. The number and productivity of distributors also
depend on several additional factors, including:
* Adverse publicity regarding us, our products, our distribution channel
or our competitors,
* The public's perception of our products and their ingredients,
* The public's perception of our distributors and direct selling
businesses in general, and
* General economic and business conditions.
In addition, we may face "saturation" or maturity levels in a given country or
market. This is of particular concern in Taiwan, where industry sources have
estimated that up to 10% of the population is already involved in some form of
direct selling. The maturity of certain of our markets could also affect our
ability to attract and retain distributors in those markets.
-22-
ADVERSE ECONOMIC AND POLITICAL CONDITIONS IN SOME ASIAN MARKETS, PARTICULARLY
JAPAN, COULD HARM OUR BUSINESS.
Economic and political conditions in most Asian markets have been poor
in recent years and may not improve or may worsen. In 1998 and 1999 our revenue
and net income decreased in part because of economic conditions in these markets
and stagnant consumer confidence. Continued or worsening economic and political
conditions in Asia, particularly in Japan given that market's significance to
our operations, could further reduce our revenue and net income.
CURRENCY EXCHANGE RATE FLUCTUATIONS COULD LOWER OUR REPORTED REVENUE AND NET
INCOME.
We recognize most of our revenue in non-United States markets using
local currencies. We purchase inventory primarily in the United States and in
U.S. dollars. In preparing our financial statements, we translate revenue and
expenses in these countries from their local currencies into U.S. dollars using
weighted average exchange rates. We had favorable exchange rate movement in 1999
that helped to partially offset the local currency decline in revenue in Japan.
Given the uncertainty of exchange rate fluctuations, we cannot estimate the
effect these fluctuations may have upon future business, product pricing,
results of operations or financial condition. However, because nearly all
revenue is realized in local currencies and the majority of cost of sales is
denominated in U.S. dollars, gross profits will be positively affected by a
weakening in the U.S. dollar and will be negatively affected by a strengthening
of the U.S. dollar. Although we attempt to reduce exposure to exchange rate
fluctuations by using foreign currency exchange contracts, we cannot be certain
these contracts or any other hedging activity will effectively reduce exchange
rate exposure.
GOVERNMENT INQUIRIES, INVESTIGATIONS AND ACTIONS COULD HARM OUR BUSINESS.
From time to time we receive formal and informal inquiries from various
government regulatory authorities about our business and our compliance with
local laws and regulations. Any assertion or determination that we or any of our
distributors are not in compliance with existing laws or regulations could
potentially harm our business. Even if governmental actions do not result in
rulings or orders, they potentially could decrease distributor productivity and
create negative publicity. Negative publicity could detrimentally affect our
efforts to motivate and recruit new distributors and, consequently, reduce
revenue and net income.
THE LOSS OF KEY HIGH-LEVEL DISTRIBUTORS COULD REDUCE OUR REVENUE.
Although we have approximately 500,000 distributors, approximately 300
distributors currently occupy the highest levels under the Global Compensation
Plan. These distributors, together with their extensive networks of
downline-sponsored distributors, account for substantially all of our revenue.
As a result, the loss of a high-level distributor or a group of leading
distributors in such distributor's network of downline distributors could
significantly reduce our revenue.
LAWS AND REGULATIONS MAY PROHIBIT OR SEVERELY RESTRICT OUR DIRECT SALES EFFORTS
AND CAUSE OUR SALES AND PROFITABILITY TO DECLINE.
Various government agencies throughout the world regulate direct sales
practices, intending generally to prevent fraud. If we are unable to continue
business in existing markets or commence operations in new markets because of
such laws, our revenue and profitability will decline. The PRC and Singapore
currently have laws that prohibit us from conducting business in such markets
under our current distribution model. Other countries in which we currently do
business could change their laws or regulations to negatively affect or prohibit
completely direct sales efforts. Additionally, government agencies and courts in
the countries where we operate may use their powers and discretion in
interpreting and applying laws in a manner that limits our ability to operate or
otherwise harms our business. Also, if any governmental authority brings a
regulatory enforcement action against us that interrupts business, revenue and
earnings would likely suffer. See "Government Regulation" for additional
discussion of regulations and laws governing our direct sales practices.
-23-
CHALLENGES BY PRIVATE PARTIES COULD HARM OUR BUSINESS.
We are currently subject to litigation commenced by certain Canadian
distributors in 1993 which involves claims under U.S. federal securities laws
and state anti-pyramid laws. An adverse judicial decision in such lawsuit, a
determination that our marketing system constitutes a security, or the
initiation of additional lawsuits challenging the legality of our network
marketing system would harm our business. In the United States, the network
marketing industry and regulatory authorities have generally relied on the
implementation of distributor rules and policies designed to promote retail
sales, to protect consumers and to prevent inappropriate activities, such as
inventory loading, to distinguish between legitimate network marketing
distribution plans and unlawful pyramid schemes. We have adopted rules and
policies based on those the FTC found acceptable in reviewing the legality of
Amway Corporation's marketing system. We have also developed our rules and
policies based on negotiations and discussions with the Attorney Generals'
offices in several states and the FTC, and based on industry standards required
by domestic and global direct sales associations. Legal and regulatory
requirements concerning network marketing systems, however, involve a high level
of subjectivity, are inherently fact based and are subject to judicial
interpretation. For example, in a 1996 case, WEBSTER V. OMNITRITION, the Ninth
Circuit Court of Appeals ruled that the existence of rules patterned after the
rules reviewed by the FTC in the Amway case do not establish as a matter of law
that a network marketing system is legal. The court indicated that a company may
need to introduce evidence that the rules and policies are enforced and actually
serve to deter inventory loading and encourage retail sales in order to
demonstrate that a particular network marketing system is lawful. The Ninth
Circuit also raised questions and issues concerning the effectiveness of the
rules at issue in that case and referred the case back to the trial court. These
issues have not been definitively addressed by either a regulatory body or court
since WEBSTER V. OMNITRITION. Because of the foregoing, we can provide no
assurance that we would not be harmed by the application or interpretation of
statutes or regulations governing network marketing.
GOVERNMENT REGULATION OF PRODUCTS AND SERVICES MAY RESTRICT OR INHIBIT
INTRODUCTION OF THESE PRODUCTS IN SOME MARKETS AND COULD HARM OUR BUSINESS.
We may be unable to introduce our products in some markets if we fail
to obtain needed regulatory approvals, or if any product ingredients are
prohibited. For example, the FDA is seeking to prohibit the marketing of our
product CHOLESTIN as a dietary supplement in the United States. If the FDA
prevails, this would adversely affect sales of CHOLESTIN in its current form. In
addition, regulations in Germany and Austria currently prevent us from marketing
certain products such as St. John's Wort and BIOGINKGO 27/7. In addition, some
markets have restrictions on private competition and foreign ownership of
telecommunications products and services. The Internet is an emerging technology
and market and, as such, new laws and regulations could be adopted to regulate
such market and services that could affect our business. Failure to introduce
products or delays in introducing products could reduce revenue and decrease
profitability. Regulators also may prohibit us from making therapeutic claims
about products despite research and independent studies supporting such claims.
These product claim restrictions could lower sales of some of our products. See
"Government Regulation" for more information about government regulation of our
products and services.
CHANGES IN TAX LAWS COULD HARM OUR BUSINESS.
We are subject to various domestic and foreign tax, foreign exchange,
import duty and transfer price laws. These laws can be complex and subject to
various interpretations. We are subject to various risks including:
* Changes in any such laws that result in higher taxes or duties,
subject more of our income to taxation in higher tax-rate
jurisdictions, subject our sales to point-of-sales or value-added
taxes, or impose new or additional taxes.
* Any investigation or determination by regulatory authorities that we
are not in compliance with such laws.
-24-
* Inability to utilize foreign tax credits.
As we increase sales of our products and services over the Internet, we could
become subject to more taxes in the future if such transactions become subject
to greater taxation. In the United States, Congress passed the Internet Tax
Freedom Act in 1998, which placed a three-year moratorium on state and local
taxes on Internet access, unless such tax was already imposed prior to October
1, 1998, and on discriminatory taxes on electronic commerce. There is a
possibility that Congress may not renew this legislation in 2001. If Congress
chooses not to renew this legislation, U.S. state and local governments would be
free to impose new taxes on electronically purchased goods. We may face similar
situations in our foreign markets in the future.
LOSING SUPPLIERS OR RIGHTS TO SELL PRODUCTS COULD HARM OUR BUSINESS.
We currently acquire products and ingredients from a limited number of
suppliers we consider to be among the best suppliers of products and
ingredients. We also license the right to distribute some of our products from
third parties. Losing any of these suppliers or licenses could restrict our
ability to produce or distribute certain products and harm our sales as a
result. We also obtain some of our botanical products from plants that can only
be harvested once a year. As a result, problems growing a certain plant in a
given year could limit our ability to produce a product with ingredients derived
from that plant.
WE COULD BE SUBJECT TO PENALTIES FOR FAILING TO MEET MINIMUM PURCHASE
REQUIREMENTS.
We have entered into several agreements that enable us to distribute
CHOLESTIN and CORDYMAX CS-4, both well-publicized Pharmanex products, and
certain products and services of Big Planet. These contracts contain minimum
purchase commitments. If we fail to satisfy minimum purchase requirements under
the Pharmanex license agreements or otherwise default on our obligations, we
could be required to pay a penalty of up to approximately $2.5 million in
connection with the CHOLESTIN contract and up to approximately $2.0 million in
connection with the CORDYMAX CS-4 contract to terminate our obligations. If any
of these licenses are terminated as a result, it could limit our ability to sell
CHOLESTIN or CORDYMAX CS-4. If Big Planet does not satisfy the terms of its
commitments under its minimum purchase agreements, the total aggregate
termination penalties under such agreements could be approximately $24.7
million. The largest of these commitments is for long distance
telecommunications services. Big Planet is currently attempting to renegotiate
the terms of this agreement.
OUR MARKETS ARE INTENSELY COMPETITIVE, AND MARKET CONDITIONS AND THE STRENGTHS
OF COMPETITORS MAY HARM OUR BUSINESS.
The markets for personal care and nutritional products and technology,
Internet and telecommunications services and products are intensely competitive.
We also compete with other network marketing companies for distributors. Results
of operations may be harmed by market conditions and competition in the future.
Many competitors have much greater name recognition and financial resources than
we have, which may give them a competitive advantage. Also, we currently do not
have significant patent or other proprietary protection, and competitors may
introduce products with the same natural ingredients and herbs as we use in our
products. For example, CHOLESTIN, which is derived from the fermentation of red
yeast on rice substrate, has received recent publicity. In response to this
publicity, competitors have introduced competing red yeast products. Because of
restrictions under regulatory requirements concerning claims about dietary
supplements, we may have a difficult time differentiating our products from
competitors' products. Accordingly, as a result of these competing products
entering the nutritional market, sales of CHOLESTIN and other natural
supplements could suffer. In addition the technology, Internet and
telecommunications products and services market is very price sensitive.
IF WE FAIL TO KEEP PACE WITH INTERNET-RELATED AND OTHER TECHNOLOGICAL CHANGES,
OUR BUSINESS MAY BE HARMED.
Direct selling companies are adapting their business models to
integrate the Internet and other technological advances into their operations as
more and more consumers purchase goods and services using the Internet instead
of traditional retail and direct sales channels. The Internet and e-commerce
markets are characterized by rapidly changing technology, evolving industry
standards, and frequent new services and
-25-
enhancements to meet evolving customer demand. In 1999, we completed the
acquisition of Big Planet which is postured to help us integrate the Internet
into our business. Big Planet's and our other e-commerce initiatives' future
success will depend on our ability to adapt to rapidly changing technologies, to
adapt services to evolving industry standards and to continually improve the
performance, features and reliability of our services. Failure to adapt to such
changes could harm our business.
ADOPTION OF NEW INTERNET AND TECHNOLOGICAL ADVANCES COULD REQUIRE SUBSTANTIAL
EXPENDITURES.
The widespread adoption of new Internet, networking or
telecommunications technologies or other technological changes could require
substantial expenditures to modify or adapt services or infrastructure. Big
Planet incurred operating losses of approximately $36 million in 1999 ($13.7
million following the acquisition by us in July 1999), and we anticipate further
operating losses over the next couple of years. We can provide no assurances
that we will be able to integrate the Internet into our business in a profitable
manner or that we will be able to operate Big Planet profitably or effectively
market its products and services through a network marketing system.
SYSTEM FAILURES COULD HARM BUSINESS.
As Internet and other technology initiatives are integrated into our
business, our success will depend on the efficient and uninterrupted operation
of computer and communications hardware and software systems. These systems and
operations are vulnerable to damage or interruption from fires, earthquakes,
telecommunications failures and other events. They are also subject to
break-ins, sabotage, intentional acts of vandalism and similar misconduct.
Despite any precautions, the occurrence of a natural disaster or other
unanticipated problems could result in interruptions in services and reduce our
revenue and profits.
BIG PLANET MAY BE LIABLE FOR INFORMATION DISSEMINATED THROUGH ITS INTERNET
ACCESS SERVICE.
If Big Planet becomes liable for information provided by its users and
carried on its Internet access service, Big Planet could be directly harmed and
may be forced to implement new measures to reduce its exposure to this
liability. The law relating to the liability of online services companies for
information carried on or disseminated through their services is currently
unsettled. Several private lawsuits currently are pending that seek to impose
liability upon other online services companies. In addition, federal, state and
foreign legislation has been proposed that imposes liability or prohibits the
transmission over the Internet of different types of information.
OUR E-COMMERCE STRATEGIES AND BIG PLANET'S OPERATIONS WILL DEPEND ON THE
DEVELOPMENT AND MAINTENANCE OF THE INTERNET INFRASTRUCTURE.
The success of Big Planet's service and our e-commerce strategies will
depend largely on the development and maintenance of the Internet
infrastructure. This includes maintenance of a reliable network backbone with
the necessary speed, data capacity and security, as well as timely development
of complementary products such as high speed modems, for providing reliable
Internet access and services. Because global commerce and the online exchange of
information is new and evolving, we cannot predict whether the Internet will
prove to be a viable commercial marketplace in the long term. The Internet has
experienced, and is likely to continue to experience, significant growth in the
number of users and amount of traffic. If the Internet continues to experience
an increased number of users, increased frequency of use or increased bandwidth
requirements, the Internet infrastructure may be unable to support the demands
placed on it. In addition, the performance of the Internet may be harmed by
increased users or bandwidth requirements.
-26-
THE HOLDERS OF OUR CLASS B COMMON STOCK CONTROL OVER 90% OF THE COMBINED VOTING
POWER, AND THIRD PARTIES WILL BE UNABLE TO GAIN CONTROL OF OUR COMPANY THROUGH
PURCHASES OF CLASS A COMMON STOCK.
The ten original stockholders of our company together with their family
members and affiliates have the ability to control the election of the board of
directors and, as a result, future direction and operations, without the
supporting vote of any other stockholder. These stockholders together with their
family members and affiliates are able to control decisions about business
opportunities, declaring dividends and issuing additional shares of Class A
common stock or other securities. These stockholders own all outstanding shares
of Class B Common Stock, which have ten-to-one voting privileges over shares of
Class A Common Stock. Currently, these stockholders and their affiliates
collectively own shares that represent more than 90% of the combined voting
power of the outstanding shares of both classes of common stock. As long as
these stockholders are majority stockholders, third parties will not be able to
obtain control of our company through open-market purchases of shares of Class A
Common Stock.
PRODUCT LIABILITY CLAIMS EXCEEDING PRODUCT LIABILITY INSURANCE COVERAGE COULD
HARM OUR BUSINESS.
We may be required to pay for losses or injuries caused by our
products. If product liability insurance coverage fails to cover fully future
product liability claims, we could be required to pay substantial monetary
damages, which could harm business. We currently maintain an insurance policy
covering product liability claims with a $1.0 million per claim and $1.0 million
annual aggregate limit and an umbrella policy of $40 million.
SHARES ELIGIBLE FOR FUTURE SALE COULD AFFECT THE MARKET PRICE OF OUR CLASS A
COMMON STOCK.
If our stockholders sell a substantial number of shares of Class A
Common Stock in the public market, the market price of our Class A Common Stock
could fall. Several of our principal stockholders hold a large number of shares
of the outstanding Class A Common Stock and the Class B Common Stock that is
convertible into Class A Common Stock. Our original stockholders, who own
approximately 80% of the outstanding shares, have been subject to an agreement
which has limited their ability to sell shares on the open market since our
initial public offering in 1996. These restrictions will end on March 26, 2000,
and these original stockholders will be free to sell their shares on the open
market subject to the volume limitations imposed by Rule 144. A decision by one
or more of these stockholders to sell their shares could lower the market price
of the Class A Common Stock.
NOTE REGARDING FORWARD-LOOKING STATEMENTS. Certain statements made in this
filing under the caption "Business" are "forward-looking statements" within the
meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). In addition, when used in this Report the words or phrases
"will likely result," "expects," "intends," "will continue," "is anticipated,"
"estimates," "projects," "management believes," "the Company believes" and
similar expressions are intended to identify "forward-looking statements" within
the meaning of the Exchange Act.
Forward-looking statements include plans and objectives of management
for future operations, including plans and objectives relating to our products
and our future economic performance in each country in which we operate and our
financial results. These forward-looking statements involve risks and
uncertainties and are based on certain assumptions that may not be realized.
Actual results and outcomes may differ materially from those discussed or
anticipated. The forward-looking statements and associated risks set forth
herein relate to, among other things:
* Our efforts to shift to a strategic, product-based divisional
operating structure.
* Our development efforts with respect to new personal care products and
nutritional products through our research and development resources
and capabilities.
-27-
* Our expectation that we will renew our contract with our primary
supplier and that we could source from other suppliers without great
difficulty or significant increases in costs of goods.
* Our belief that the Pharmanex acquisition has helped position us to
penetrate further the growing nutritional market and that Pharmanex's
research and development activities provide us with a competitive
advantage.
* Our belief that we are able to perform more quality research and
development work due to lower costs.
* Our belief that technology, Internet and telecommunications products
provide a compelling business opportunity and will allow us to reach
new segments of the market.
* Big Planet's efforts to evaluate options for an IPHONE-like device in
Japan and other Internet devices for its markets and its efforts to
establish additional strategic relationships to expand Big Planet's
product offering.
* The planned introduction of Internet services in Japan through the
proposed relationship with Nifty Corporation.
* Upgrading of our technological resources to support distributors,
including using the Internet in distributing products.
* Our compliance with applicable laws and regulations, including
obtaining necessary product registrations and approvals.
All forward-looking statements are subject to known and unknown risks
and uncertainties, including those discussed in the above-referenced Risk
Factors, that could cause actual results to differ materially from historical
results and those presently anticipated or projected. We wish to caution you not
to place undue reliance on any such forward-looking statements, which speak only
as of the date made. In light of the significant uncertainties inherent in
forward-looking statements, the inclusion of any such statement should not be
regarded as a representation by us or any other person that our objectives or
plans will be achieved. We disclaim any obligation or intent to update any such
factors or forward-looking statements to reflect future events or developments.
-28-
ITEM 2. PROPERTIES
The Company generally leases its warehouse, office, or distribution
facilities in each geographic region in which the Company currently has
operations. Nu Skin Enterprises believes that its existing and planned
facilities are adequate for its current operations in each of its existing
markets. The following table summarizes, as of March 10, 2000, Nu Skin
Enterprises' major leased office and distribution facilities.
LOCATION FUNCTION APPROXIMATE SQUARE FEET
- -------- -------- -----------------------
Provo, Utah* Distribution center 198,000
Provo, Utah* Corporate offices 125,000
San Francisco, California Pharmanex corporate office 10,783
Redwood City, California Laboratory 4,963
Los Angeles, California Warehouse 30,000
Yokohama, Japan Warehouse 40,000
Tokyo, Japan Call center/distribution center 56,000
Tokyo, Japan Central office/distribution center 28,000
Taipei, Taiwan Central office/distribution center 35,000
Taoyuan, Taiwan Warehouse/distribution center 46,000
Ontario, Canada Office/warehouse 31,000
Venlo, Netherlands Warehouse/offices 20,000
- -----------------
*These facilities are leased from related parties.
In connection with the acquisition of Pharmanex, the Company acquired a
production facility located in Huzhou, Zhejiang Province, China. The design and
construction of this extraction and purification facility was completed in
October 1994 and on-line production began in November 1994.
ITEM 3. LEGAL PROCEEDINGS
In February 1999, a federal district judge in Utah ruled that
CHOLESTIN, one of Pharmanex's natural nutritional supplements, could be legally
sold as a nutritional supplement under the Dietary Supplement Health and
Education Act of 1994. The FDA had previously challenged the status of Cholestin
as a dietary supplement, claiming it was a drug and could not be marketed
without FDA approval. The FDA has since appealed to the Tenth Circuit Court of
Appeals seeking to overturn the district court's decision. If the decision is
overturned, the Company will not be able to sell CHOLESTIN in its current form
without FDA approval.
In March 1993, a class action lawsuit entitled NATALIE CAPONE ON BEHALF
OF HERSELF AND ALL OTHERS SIMILARLY SITUATED V. NU SKIN CANADA, INC., NU SKIN
INTERNATIONAL, INC., BLAKE RONEY, ET AL., was filed against Nu Skin
International and affiliated parties in federal district court in Utah alleging
violations of the anti-fraud provisions of the Securities Act of 1933 and the
Securities Exchange Act of 1934, common law fraud and violations of the Utah
Consumer Sales Practices Act. The plaintiffs in the case also seek injunctive
relief as well as disgorgement of profits and restitution to the plaintiffs of
earnings, profits and other compensation. In June 1997, the court denied NSI's
motion for summary judgment but also denied the plaintiff's motion to certify a
-29-
similarly situated class of distributors. However, in May 1998 the court granted
the plaintiff's motion to certify a similarly situated class of distributors
based on more limited non-reliance claims under the Securities Act and the Utah
Anti-Pyramid statute. The case has recently been assigned to a new judge and
continues in discovery. The Company intends to continue to vigorously defend
against this action.
In January 2000, a derivative lawsuit captioned KAREN KINDT, ON BEHALF
OF NU SKIN ENTERPRISES, INC. V. BLAKE RONEY ET.AL was filed in the Court of
Chancery in the State of Delaware in and for New Castle County against the Board
of Directors alleging a breach of fiduciary duty and self-dealing in connection
with the Company's acquisition of Nu Skin International in 1998, and the
termination of the license agreements with Nu Skin USA and the acquisition of
Big Planet in 1999. The Board of Directors has appointed a special litigation
committee to investigate the validity of the complaint.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the security holders
during the fourth quarter of the fiscal year ended December 31, 1999.
-30-
PART II
ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The information required by Item 5 of Form 10-K is incorporated
herein by reference from the information contained in the section captioned
"Market for Registrant's Common Equity and Related Stockholder Matters" in the
Company's 1999 Annual Report to Stockholders, sections of which are attached
hereto as Exhibit 13.
ITEM 6. SELECTED FINANCIAL DATA
The information required by Item 6 of Form 10-K is incorporated
herein by reference from the information contained in the section captioned
"Selected Financial Data" in the Company's 1999 Annual Report to Stockholders,
sections of which are attached hereto as Exhibit 13.
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information required by Item 7 of Form 10-K is incorporated
herein by reference from the information contained in the section captioned
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in the Company's 1999 Annual Report to Stockholders, sections of
which are attached hereto as Exhibit 13.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by Item 7A of Form 10-K is incorporated
herein by reference from the information contained in the section captioned
"Management's Discussion and Analysis of Financial Condition and Results of
Operations-Currency Risk and Exchange Rate Information" and Note 16 to the
Consolidated Financial Statements in the Company's 1999 Annual Report to
Stockholders, sections of which are attached hereto as Exhibit 13.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by Item 8 of Form 10-K is incorporated
herein by reference to the Consolidated Financial Statements and the related
notes set forth in the Company's 1999 Annual Report to Stockholders, sections of
which are attached hereto as Exhibit 13.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
The information required by Items 10, 11, 12, and 13 of Part III are hereby
incorporated by reference to the Company's Definitive Proxy Statement filed or
to be filed with the Securities and Exchange Commission not later than April 29,
2000.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as part of this Form 10-K:
-31-
1. Financial Statements (pursuant to Part II, Item 8)*
Reports of Independent Accountants. **
Consolidated Balance Sheets at December 31, 1998 and
1999
Consolidated Statements of Income for the years ended
December 31, 1997, 1998, and 1999
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1997, 1998, and 1999
Consolidated Statements of Cash Flows for the years
ended December 31, 1997, 1998, and 1999
Notes to Consolidated Financial Statements
--------------------
*Except as noted below, the foregoing are incorporated by
reference to the Company's 1999 Annual Report to Stockholders,
sections of which are attached hereto as Exhibit 13.
**The report of Grant Thornton LLP is attached hereto as Exhibit
23.2 and incorporated herein by reference.
2. Financial Statement Schedules: Financial statement
schedules have been omitted because they are not
required or are not applicable, or because the
required information is shown in the financial
statements or notes thereto.
3. Exhibits: The following Exhibits are filed with
this Form 10-K:
Exhibit
Number Exhibit Description
------ -------------------
2.1 Stock Acquisition Agreement between Nu
Skin Asia Pacific, Inc. and each of the
persons on the signature pages thereof,
dated February 27, 1998, incorporated
by reference to Exhibit 2.1 of the
Company's Annual Report on Form 10-K
for the year ended December 31, 1997.
2.2 Restated Agreement and Plan of
Reorganization and Merger by and
between the Company, Sage Acquisition
Corporation and Generation Health
Holdings, Inc. dated as of October 16,
1998, incorporated by reference to
Exhibit 2.1 to the Company's Amendment
No.1 to Current Report on Form 8-K/A
filed April 13, 1999.
2.3 Agreement and Plan of Merger dated as
of May 3, 1999 by and among Nu Skin
Enterprises, Inc., NSC Sub, Inc. NSG
Sub, Inc., NSM Sub, Inc., NFB Sub,
Inc., Nu Skin Canada, Inc., Nu Skin
Guatemala, Inc., Nu Skin Guatemala,
S.A., Nu Skin Mexico, Inc., Nu Skin
Mexico, S.A. de C.V., Nu Family
Benefits Insurance Brokerage, Inc. and
certain stockholders, incorporated by
reference to Exhibit 2.1 to the
Company's Current Report on Form 8-K
filed on June 25, 1999.
-32-
2.4 Agreement and Plan of Merger and
Reorganization dated May 3, 1999
between and among the Company, Big
Planet Holdings, Inc., Big Planet,
Inc., Nu Skin USA, Inc., Richard W.
King, Kevin V. Doman and Nathan W.
Ricks, incorporated by reference to
Exhibit 2.1 to the Company's Current
Report on Form 8-K filed on July 28,
1999.
2.5 First Amendment to Agreement and Plan
of Merger and Reorganization dated July
2, 1999 between and among the Company,
Big Planet Holdings, Inc., Big Planet,
Inc., Maple Hills Investment, Inc.
(formerly Nu Skin USA, Inc.), Richard
W. King, Kevin V. Doman and Nathan W.
Ricks, incorporated by reference to
Exhibit 2.2 to the Company's Current
Report on Form 8-K filed on July 28,
1999.
3.1 Amended and Restated Certificate of
Incorporation of the Company
incorporated by reference to Exhibit
3.1 to the Company's Registration
Statement on Form S-1 (File No.
333-12073) (the "Form S-1").
3.2 Certificate of Amendment to the Amended
and Restated Certificate of
Incorporation incorporated by reference
to Exhibit 3.1 of the Company's
Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 1998.
3.3 Certificate of Designation, Preferences
and Relative Participating, Optional,
and Other Special Rights of Preferred
Stock and Qualification, Limitations
and Restrictions Thereof, incorporated
by reference to Exhibit 3.3 to the
Company's Annual Report on Form 10-K
for the year ended December 31, 1998.
3.4 Amended and Restated Bylaws of the
Company incorporated by reference to
Exhibit 3.2 to the Company's Form S-1.
4.1 Specimen Form of Stock Certificate for
Class a Common Stock incorporated by
reference to Exhibit 4.1 to the
Company's Form S-1.
4.2 Specimen Form of Stock Certificate for
Class B Common Stock incorporated by
reference to Exhibit 4.2 to the
Company's Form S-1.
10.1 Form of Indemnification Agreement to be
entered into by and among the Company
and certain of its officers and
directors incorporated by reference to
Exhibit 10.1 to the Company's Form S-1.
10.2 Intentionally left blank.
10.3 Employment Contract, dated December 12,
1991, by and between Nu Skin Taiwan and
John Chou incorporated by reference to
Exhibit 10.3 to the Company's Form S-1.
10.4 Employment Agreement, dated May 1,
1993, by and between Nu Skin Japan and
Takashi Bamba incorporated by reference
to Exhibit 10.4 to the Company's Form
S-1.
10.5 Form of Bonus Incentive Plan for
Subsidiary Presidents incorporated by
reference to Exhibit 10.18 to the
Company's Form S-1.
-33-
10.6 Option Agreement by and between the
Company and M. Truman Hunt incorporated
by reference to Exhibit 10.19 to the
Company's Form S-1.
10.7 Form of Amended and Restated
Stockholders Agreement dated as of
November 28, 1997, incorporated by
reference to Exhibit 10.25 to the
Company's Annual Report on Form 10-K
for the year ended December 31, 1997.
10.8 Form of Management Services Agreement
by and between NSIMG and each of Nu
Skin USA, Inc. ("Nu Skin USA") and the
other North American Affiliates,
incorporated by reference to Exhibit
10.33 to the Company's Annual Report on
Form 10-K for the year ended December
31, 1998.
10.9 Form of Wholesale Distribution
Agreement by and between NSI and each
of Nu Skin USA and the other North
American Affiliates, incorporated by
reference to Exhibit 10.34 to the
Company's Annual Report on Form 10-K
for the year ended December 31, 1998.
10.10 Form of Licensing and Sales Agreement
by and between NSI and each of Nu Skin
USA and the other North American
Affiliates, incorporated by reference
to Exhibit 10.35 to the Company's
Annual Report on Form 10-K for the year
ended December 31, 1998.
10.11 Form of Trademark\Tradename Licensing
Agreement by and between NSI and each
of Nu Skin USA and the other North
American Affiliates, incorporated by
reference to Exhibit 10.36 to the
Company's Annual Report on Form 10-K
for the year ended December 31, 1998.
10.12 Tax Sharing and Indemnification
Agreement dated December 31, 1997, by
and among NSI, Nu Skin USA, and the
shareholders of NSI and Nu Skin USA and
their successors and assigns,
incorporated by reference to Exhibit
10.37 to the Company's Annual Report on
Form 10-K for the year ended December
31, 1998.
10.13 Assumption of Liabilities and
Indemnification Agreement dated
December 31, 1997, by and between NSI
and Nu Skin USA, incorporated by
reference to Exhibit 10.38 to the
Company's Annual Report on Form 10-K
for the year ended December 31, 1998.
10.14 Employee Benefits Allocation Agreement
by and between NSI and Nu Skin USA,
incorporated by reference to Exhibit
10.39 to the Company's Annual Report on
Form 10-K for the year ended December
31, 1998.
10.15 Form of Licensing Agreement between NSI
and Big Planet, incorporated by
reference to Exhibit 10.40 to the
Company's Annual Report on Form 10-K
for the year ended December 31, 1998.
10.16 Form of Management Services Agreement
between NSI and Big Planet, incorporated
by reference to Exhibit 10.41 to the
Company's Annual Report on Form 10-K for
the year ended December 31, 1998.
-34-
10.17 Warehouse Lease Agreement dated March
1996, between NSI and Aspen
Investments, Ltd., incorporated by
reference to Exhibit 10.42 to the
Company's Annual Report on Form 10-K
for the year ended December 31, 1998.
10.18 Lease Agreement dated January 27, 1995,
by and between NSI and Scrub Oak, Ltd.,
incorporated by reference to Exhibit
10.43 to the Company's Annual Report on
Form 10-K for the year ended December
31, 1998.
10.19 Sublease Agreement dated January 1,
1998, by and between NSI and Nu Skin
USA, incorporated by reference to
Exhibit 10.44 to the Company's Annual
Report on Form 10-K for the year ended
December 31, 1998.
10.20 Warehouse Lease Agreement (Annex) dated
October 1, 1993, by and between NSI and
Aspen Investments, Ltd., incorporated
by reference to Exhibit 10.45 to the
Company's Annual Report on Form 10-K
for the year ended December 31, 1998.
10.21 Contribution and Distribution Agreement
dated as of December 31, 1997, by and
between NSI an Nu Skin USA incorporated
by reference to Exhibit 10.46 to the
Company's Annual Report on Form 10-K
for the year ended December 31, 1998.
10.22 Form of the Company's Employee
Incentive Bonus Plan, incorporated by
reference to Exhibit 10.47 to the
Company's Annual Report on Form 10-K
for the year ended December 31, 1998.
10.23 Amendment in Total and Complete
Restatement of Deferred Compensation
Plan, incorporated by reference to
Exhibit 10.48 to the Company's Annual
Report on Form 10-K for the year ended
December 31, 1998.
10.24 Form of Deferred Compensation Plan (New
Form), incorporated by reference to
Exhibit 10.49 to the Company's Annual
Report on Form 10-K for the year ended
December 31, 1998.
10.25 Amendment in Total and Complete
Restatement of NSI Compensation Trust,
incorporated by reference to Exhibit
10.50 to the Company's Annual Report on
Form 10-K for the year ended December
31, 1998.
10.26 Employment Agreement by and between
Pharmanex, Inc. and William McGlashan,
Jr., incorporated by reference to
Exhibit 10.51 to the Company's Annual
Report on Form 10-K for the year ended
December 31, 1998.
10.27 Asset Purchase Agreement by and among
the Company, Nu Skin United States,
Inc., and Nu Skin USA, dated as of
March 8, 1999, incorporated by
reference to Exhibit 10.52 to the
Company's Annual Report on Form 10-K
for the year ended December 31, 1998.
-35-
10.28 Termination Agreement by and between
NSI and Nu Skin USA, dated as of March
8, 1999, incorporated by reference to
Exhibit 10.53 to the Company's Annual
Report on Form 10-K for the year ended
December 31, 1998.
10.29 Indemnification Limitation Agreement by
and among the Company, Nu Skin United
States, Inc., NSI, Nu Skin USA, and the
other parties who executed such
agreement, incorporated by reference to
Exhibit 10.54 to the Company's Annual
Report on Form 10-K for the year ended
December 31, 1998.
10.30 Amendment No. 1 to Amended and Restated
Stockholders Agreement dated as of
November 28, 1997, incorporated by
reference to Exhibit 10.55 to the
Company's Annual Report on Form 10-K
for the year ended December 31, 1998.
10.31 Amendment No. 2 to Amended and Restated
Stockholders Agreement.
10.32 Note and Pledge Agreement between the
Company and William McGlashan Jr.,
incorporated by reference to Exhibit
10.1 of the Company's Quarterly Report
on Form 10-Q for the quarter ended June
30, 1999.
10.33 Amended and Restated Employment
Agreement between Pharmanex and William
McGlashan Jr., incorporated by
reference to Exhibit 10.2 to the
Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1999.
10.34 First Amendment to Indemnification
Limitation Agreement dated as of May 3,
1999 between Nu Skin Enterprises, Inc.,
Nu Skin USA, Inc., and the Stockholders
of the acquired entities identified
therein, incorporated by reference to
exhibit 10.1 to the Company's Current
Report on Form 8-K filed on July 28,
1999.
10.35 Credit Agreement dated May 8, 1998 by
and among Nu Skin Enterprises, Inc., Nu
Skin Japan Co. Ltd., the Lenders named
therein and ABN AMRO Bank N.V., as
agent for the Lenders, incorporated by
reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q
for the period ended June 30, 1998.
10.36 Amendment No. 1 to Credit Agreement
dated June 30, 1998, incorporated by
reference to Exhibit 10.2 to the
Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1999.
10.37 Amendment No. 2 to Credit Agreement
dated February 22, 1999, incorporated
by reference to Exhibit 10.3 to the
Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1999.
10.38 Amendment No. 3 to Credit Agreement
dated May 10, 1999, incorporated by
reference to Exhibit 10.4 to the
Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1999.
-36-
10.39 Second Amended and Restated Nu Skin
Enterprises, Inc. 1996 Stock Incentive
Plan (corrected version).
10.40 Mutual Release of Claims and
Modification Agreement dated as of
October 16, 1999 by and among Nu Skin
Enterprises and the Stockholder
Representatives on behalf of the former
stockholders of Generations Health
Holdings, Inc., incorporated by
reference to Exhibit 10.1 to the
Company's Annual Report on Form 10-Q
for the quarter ended September 30,
1999.
10.41 Services Agreement between Grant F.
Pace and the Company.
10.42 Base Form of Stock Option Agreement.
10.43 Consulting Agreement by and between Max
L. Pinegar and Nu Skin International,
Inc.
10.44 Assignment of Leasehold Improvements by
and between Big Planet, Inc. and Maple
Hills Investment dated as of July 13,
1999.
13 1998 Annual Report to Stockholders (Only
items incorporated by reference).
21.1 Subsidiaries of the Company.
23.1 Consent of PricewaterhouseCoopers LLP.
23.2 Consent and Report of Grant Thornton
LLP.
27. Financial Data Schedule.
(b) The Company did not file any current reports on
Form 8-K during the fourth quarter.
-37-
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 March 23, 2000.
NU SKIN ENTERPRISES, INC.
By: /s/ Steven J. Lund
Steven J. Lund, President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on March 23, 2000.
SIGNATURE CAPACITY IN WHICH SIGNED
- --------- ------------------------
/s/ Blake M. Roney
Blake M. Roney Chairman of the Board
/s/ Steven J. Lund President, Chief Executive Officer, and Director
Steven J. Lund (Principal Executive Officer)
/s/ Corey B. Lindley Executive Vice President and Chief Financial
Corey B. Lindley Officer
(Principal Financial Officer and Accounting
Officer)
/s/ Sandra N. Tillotson
Sandra N. Tillotson Senior Vice President, Director
/s/ Keith R. Halls
Keith R. Halls Senior Vice President, Director
/s/ Brooke B. Roney
Brooke B. Roney Senior Vice President, Director
/s/ Daniel W. Campbell
Daniel W. Campbell Director
/s/ E. J. "Jake" Garn
E. J. "Jake" Garn Director
/s/ Paula Hawkins
Paula Hawkins Director
/s/ Andrew D. Lipman
Andrew D. Lipman Director
/s/ Max L. Pinegar
Max L. Pinegar Senior Vice President, Director
-38-
EXHIBIT INDEX
Exhibit
Number Exhibit Description
- ------- -------------------
2.1 Stock Acquisition Agreement between Nu Skin Asia Pacific, Inc.
and each of the persons on the signature pages thereof, dated
February 27, 1998, incorporated by reference to Exhibit 2.1 of
the Company's Annual Report on Form 10-K for the year ended
December 31, 1997.
2.2 Restated Agreement and Plan of Reorganization and Merger by and
between the Company, Sage Acquisition Corporation and Generation
Health Holdings, Inc. dated as of October 16, 1998, incorporated
by reference to Exhibit 2.1 to the Company's Amendment No.1 to
Current Report on Form 8-K filed April 13, 1999.
2.3 Agreement and Plan of Merger dated as of May 3, 1999 by and among
Nu Skin Enterprises, Inc., NSC Sub, Inc. NSG Sub, Inc., NSM Sub,
Inc., NFB Sub, Inc., Nu Skin Canada, Inc., Nu Skin Guatemala,
Inc., Nu Skin Guatemala, S.A., Nu Skin Mexico, Inc., Nu Skin
Mexico, S.A. de C.V., Nu Family Benefits Insurance Brokerage,
Inc. and certain stockholders, incorporated by reference to
Exhibit 2.1 to the Company's Current Report on Form 8-K filed on
June 25, 1999.
2.4 Agreement and Plan of Merger and Reorganization dated May 3, 1999
between and among the Company, Big Planet Holdings, Inc., Big
Planet, Inc., Nu Skin USA, Inc., Richard W. King, Kevin V. Doman
and Nathan W. Ricks, incorporated by reference to Exhibit 2.1 to
the Company's Current Report on Form 8-K filed on July 28, 1999.
2.5 First Amendment to Agreement and Plan of Merger and
Reorganization dated July 2, 1999 between and among the Company,
Big Planet Holdings, Inc., Big Planet, Inc., Maple Hills
Investment, Inc. (formerly Nu Skin USA, Inc.), Richard W. King,
Kevin V. Doman and Nathan W. Ricks, incorporated by reference to
Exhibit 2.2 to the Company's Current Report on Form 8-K filed on
July 28, 1999.
3.1 Amended and Restated Certificate of Incorporation of the Company
incorporated by reference to Exhibit 3.1 to the Company's
Registration Statement on Form S-1 (File No. 333-12073) (the
"Form S-1").
3.2 Certificate of Amendment to the Amended and Restated Certificate
of Incorporation incorporated by reference to Exhibit 3.1 of the
Company's Quarterly Report on Form 10-Q for the quarterly period
ended June 30, 1998.
3.3 Certificate of Designation, Preferences and Relative
Participating, Optional, and Other Special Rights of Preferred
Stock and Qualification, Limitations and Restrictions Thereof,
incorporated by reference to Exhibit 3.3 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1998.
3.4 Amended and Restated Bylaws of the Company incorporated by
reference to Exhibit 3.2 to the Company's Form S-1.
4.1 Specimen Form of Stock Certificate for Class a Common Stock
incorporated by reference to Exhibit 4.1 to the Company's Form
S-1.
4.2 Specimen Form of Stock Certificate for Class B Common Stock
incorporated by reference to Exhibit 4.2 to the
Company's Form S-1.
-39-
Exhibit
Number Exhibit Description
- ------- -------------------
10.1 Form of Indemnification Agreement to be entered into by and among
the Company and certain of its officers and directors
incorporated by reference to Exhibit 10.1 to the Company's Form
S-1. Exhibit Number Exhibit Description
10.2 Intentionally left blank.
10.3 Employment Contract, dated December 12, 1991, by and between Nu
Skin Taiwan and John Chou incorporated by reference to Exhibit
10.3 to the Company's Form S-1.
10.4 Employment Agreement, dated May 1, 1993, by and between Nu Skin
Japan and Takashi Bamba incorporated by reference to Exhibit 10.4
to the Company's Form S-1.
10.5 Form of Bonus Incentive Plan for Subsidiary Presidents
incorporated by reference to Exhibit 10.18 to the Company's Form
S-1.
10.6 Option Agreement by and between the Company and M. Truman Hunt
incorporated by reference to Exhibit 10.19 to the Company's Form
S-1.
10.7 Form of Amended and Restated Stockholders Agreement dated as of
November 28, 1997, incorporated by reference to Exhibit 10.25 to
the Company's Annual Report on Form 10-K for the year ended
December 31, 1997.
10.8 Form of Management Services Agreement by and between NSIMG and
each of Nu Skin USA, Inc. ("Nu Skin USA") and the other North
American Affiliates, incorporated by reference to Exhibit 10.33
to the Company's Annual Report on Form 10-K for the year ended
December 31, 1998.
10.9 Form of Wholesale Distribution Agreement by and between NSI and
each of Nu Skin USA and the other North American Affiliates,
incorporated by reference to Exhibit 10.34 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1998.
10.10 Form of Licensing and Sales Agreement by and between NSI and
each of Nu Skin USA and the other North American Affiliates,
incorporated by reference to Exhibit 10.35 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1998.
10.11 Form of Trademark\Tradename Licensing Agreement by and between
NSI and each of Nu Skin USA and the other North American
Affiliates, incorporated by reference to Exhibit 10.36 to the
Company's Annual Report on Form 10-K for the year ended December
31, 1998.
10.12 Tax Sharing and Indemnification Agreement dated December 31,
1997, by and among NSI, Nu Skin USA, and the shareholders of NSI
and Nu Skin USA and their successors and assigns, incorporated by
reference to Exhibit 10.37 to the Company's Annual Report on Form
10-K for the year ended December 31, 1998.
10.13 Assumption of Liabilities and Indemnification Agreement dated
December 31, 1997, by and between NSI and Nu Skin USA,
incorporated by reference to Exhibit 10.38 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1998.
10.14 Employee Benefits Allocation Agreement by and between NSI and Nu
Skin USA, incorporated by reference to Exhibit 10.39 to the
Company's Annual Report on Form 10-K for the year ended December
31, 1998.
-40-
Exhibit
Number Exhibit Description
- ------- -------------------
10.15 Form of Licensing Agreement between NSI and Big Planet,
incorporated by reference to Exhibit 10.40 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1998.
10.16 Form of Management Services Agreement between NSI and Big
Planet, incorporated by reference to Exhibit 10.41 to the
Company's Annual Report on Form 10-K for the year ended December
31, 1998.
10.17 Warehouse Lease Agreement dated March 1996, between NSI and
Aspen Investments, Ltd., incorporated by reference to Exhibit
10.42 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1998.
10.18 Lease Agreement dated January 27, 1995, by and between NSI and
Scrub Oak, Ltd., incorporated by reference to Exhibit 10.43 to
the Company's Annual Report on Form 10-K for the year ended
December 31, 1998.
10.19 Sublease Agreement dated January 1, 1998, by and between NSI and
Nu Skin USA, incorporated by reference to Exhibit 10.44 to the
Company's Annual Report on Form 10-K for the year ended December
31, 1998.
10.20 Warehouse Lease Agreement (Annex) dated October 1, 1993, by and
between NSI and Aspen Investments, Ltd., incorporated by
reference to Exhibit 10.45 to the Company's Annual Report on Form
10-K for the year ended December 31, 1998.
10.21 Contribution and Distribution Agreement dated as of December 31,
1997, by and between NSI an Nu Skin USA incorporated by reference
to Exhibit 10.46 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1998.
10.22 Form of the Company's Employee Incentive Bonus Plan,
incorporated by reference to Exhibit 10.47 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1998.
10.23 Amendment in Total and Complete Restatement of Deferred
Compensation Plan, incorporated by reference to Exhibit 10.48 to
the Company's Annual Report on Form 10-K for the year ended
December 31, 1998.
10.24 Form of Deferred Compensation Plan (New Form), incorporated by
reference to Exhibit 10.49 to the Company's Annual Report on Form
10-K for the year ended December 31, 1998.
10.25 Amendment in Total and Complete Restatement of NSI Compensation
Trust, incorporated by reference to Exhibit 10.50 to the
Company's Annual Report on Form 10-K for the year ended December
31, 1998.
10.26 Employment Agreement by and between Pharmanex, Inc. and William
McGlashan, Jr., incorporated by reference to Exhibit 10.51 to the
Company's Annual Report on Form 10-K for the year ended December
31, 1998.
10.27 Asset Purchase Agreement by and among the Company, Nu Skin
United States, Inc., and Nu Skin USA, dated as of March 8, 1999,
incorporated by reference to Exhibit 10.52 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1998.
10.28 Termination Agreement by and between NSI and Nu Skin USA, dated
as of March 8, 1999, incorporated by reference to Exhibit 10.53
to the Company's Annual Report on Form 10-K for the year ended
December 31, 1998.
-41-
Exhibit
Number Exhibit Description
- ------- -------------------
10.29 Indemnification Limitation Agreement by and among the Company,
Nu Skin United States, Inc., NSI, Nu Skin USA, and the other
parties who executed such agreement, incorporated by reference to
Exhibit 10.54 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1998.
10.30 Amendment No. 1 to Amended and Restated Stockholders Agreement
dated as of November 28, 1997, incorporated by reference to
Exhibit 10.55 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1998.
10.31 Amendment No. 2 to Amended and Restated Stockholders Agreement.
10.32 Note and Pledge Agreement by and between the Company and William
McGlashan Jr., incorporated by reference to Exhibit 10.1 of the
Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1999.
10.33 Amended and Restated Employment Agreement between Pharmanex and
William McGlashan Jr., incorporated by reference to Exhibit 10.2
to the Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1999.
10.34 First Amendment to Indemnification Limitation Agreement dated as
of May 3, 1999 between Nu Skin Enterprises, Inc., Nu Skin USA,
Inc., and the Stockholders of the acquired entities identified
therein, incorporated by reference to exhibit 10.1 to the
Company's Current Report on Form 8-K filed on July 28, 1999.
10.35 Credit Agreement dated May 8, 1998 by and among Nu Skin
Enterprises, Inc., Nu Skin Japan Co. Ltd., the Lenders named
therein and ABN AMRO Bank N.V., as agent for the Lenders,
incorporated by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the period ended June 30, 1998.
10.36 Amendment No. 1 to Credit Agreement dated June 30, 1998,
incorporated by reference to Exhibit 10.2 to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31,
1999.
10.37 Amendment No. 2 to Credit Agreement dated February 22, 1999,
incorporated by reference to Exhibit 10.3 to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31,
1999.
10.38 Amendment No. 3 to Credit Agreement dated May 10, 1999,
incorporated by reference to Exhibit 10.4 to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31,
1999.
10.39 Second Amended and Restated Nu Skin Enterprises, Inc. 1996 Stock
Incentive Plan (corrected version).
10.40 Mutual Release of Claims and Modification Agreement dated as of
October 16, 1999 by and among Nu Skin Enterprises and the
Stockholder Representatives on behalf of the former stockholders
of Generations Health Holdings, Inc., incorporated by reference
to Exhibit 10.1 to the Company's Annual Report on Form 10-Q for
the quarter ended September 30, 1999.
-42-
Exhibit
Number Exhibit Description
- ------- -------------------
10.41 Services Agreement between the Company and Grant F. Pace.
10.42 Base Form of Stock Option Agreement.
10.43 Consulting Agreement between Max L. Pinegar and Nu Skin
International, Inc.
10.44 Assignment of Leasehold Improvements by and between Big Planet,
Inc. and Maple Hills Investment, Inc. dated as of July 13, 1999.
13 1998 Annual Report to Stockholders (Only items incorporated by
reference).
21.1 Subsidiaries of the Company.
23.1 Consent of PricewaterhouseCoopers LLP.
23.2 Consent and Report of Grant Thornton LLP.
27. Financial Data Schedule.
-43-