ITEM 1.                  BUSINESS

 

Overview

 

We are a leading, global direct selling company with operations in 50 markets worldwide.  We develop and distribute innovative, premium-quality anti-aging personal care products and nutritional supplements under our Nu Skin and Pharmanex brands, respectively.  We strive to secure competitive advantage in four key areas: our people, our products, the culture we promote, and the business opportunities we offer.  In 2009, our 25 th year of operations, we posted record revenue of $1.33 billion.  Revenue in 2009 grew 7% based on the success of strong product innovation and distributor initiatives.

 

As of December 31, 2009, we had a   global network of over 761,000 active distributors.  Approximately 33,000 of our distributors were qualified sales leaders we refer to as “executive distributors.”  Our executive distributors play a critical leadership role in the growth and development of our business.

 

 

 

 

 

 

 

 

 

 

Our business is subject to various laws and regulations globally, particularly with respect to our product categories as well as our direct selling distribution channel, sometimes referred to as “network marketing” or “multi-level marketing”.  Accordingly, we face certain risks, including risks associated with potential improper activities of our distributors or any inability to obtain necessary product registrations.

 

Our Difference Demonstrated

 

Operating in the highly competitive direct selling, personal care and nutritional supplement industries, our success depends on our ability to attract and retain both distributors and consumers with our innovative products.  Our greatest competitive strengths continue to be found in our people, our products, our culture and our opportunity.

 

Our People.   We distribute all of our products exclusively through our distributors as opposed to retail stores or mail order catalogs.  Consequently, our most significant asset is our extensive global network of distributors who enable us to rapidly introduce products and penetrate our markets with little upfront promotional cost.  Our revenue is highly dependent upon the number and productivity of our distributors.  As of December 31, 2009, we had a   global network of over 761,000 active distributors.   Approximately 33,000 of our distributors were executive distributors, who are most seriously pursuing the direct selling opportunity and play a critical leadership role for our network of distributors.

 

Our Products.   Compelling and innovative products are vital to our success as they help attract distributors and customers.  Our research and development team, including more than 75 in-house scientists, collaborate to create products with innovative features that deliver real results and benefits and improve people’s lives.  Our distributors use the innovative features of our products to build successful sales organizations and attract new customers.  Our product strategy is focused on anti-aging.  As aging is best addressed both externally and internally, we believe we are well positioned as one of the few companies that has successfully built brand equity and balanced revenue in both skin care and nutrition.  We currently offer a wide range of anti-aging products.  Our new ageLOC based products are formulated to target both the signs and the ultimate sources of aging.  We believe our ageLOC anti-aging platform will continue to bridge the categories of skin care and nutrition to deliver a unique, more comprehensive approach to anti-aging.

 

Our Culture.   From our inception over 25 years ago, Nu Skin Enterprises' mission has been to improve people's lives—through our quality products, our rewarding business opportunities and by promoting an uplifting and enriching culture.  Our mission statement encourages people to be a “force for good” in the world around them.  Our culture unites our distributors, customers and employees in innovative humanitarian efforts, the most significant of which are our Nourish the Children initiative that provides our distributors the ability to donate meals to starving children, and our Force for Good Foundation that supports many charitable causes that benefit children.  In short, we believe that people are attracted to organizations that focus on more than just financial incentives.  We encourage our distributors and our employees to live each day with an understanding that together we have the opportunity to make the world a better place.

 

 

 

 

 

 

 

 

Our Product Categories

 

We have two primary product categories, each operating under its own brand.  We market our premium-quality personal care products under the Nu Skin brand and our science-based nutritional supplements under the Pharmanex brand.

 

Presented below are the U.S. dollar amounts and associated revenue percentages from the sale of Nu Skin, Pharmanex, and other products and services for the years ended December 31, 2007, 2008, and 2009.  This table should be read in conjunction with the information presented in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation,” which discusses the factors impacting revenue trends and the costs associated with generating the aggregate revenue presented.

 

 

 

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(1)

In 2009, 84% of our sales were transacted in foreign currencies that were then converted to U.S. dollars for financial reporting purposes at weighted-average exchange rates.  Foreign currency fluctuations had no material impact on reported revenue in 2009 compared to 2008.  Foreign currency fluctuations negatively impacted reported revenue by approximately 3% in 2008 compared to 2007.

Nu Skin.   Nu Skin is the brand of our original product line and offers premium-quality anti-aging personal care products.  Our strategy is to leverage our network marketing distribution model to establish Nu Skin as an innovative leader in the anti-aging personal care market.  We are committed to continuously improving and evolving our product formulations to develop and incorporate innovative and proven ingredients.

 

 

 

 

 

 

 

 

Another innovative product that positively impacted our revenue growth over the past four years is the Galvanic Spa System. The Galvanic Spa instrument emits a very mild electrical current. When the Galvanic Spa System is used to apply products that carry either positively or negatively charged active ingredients, product efficacy improves dramatically. The Galvanic Spa System is an ideal direct selling product because our distributors can easily demonstrate its benefits.  This helps them to recruit new customers and distributors.  Our Galvanic Spa System , Galvanic Spa Gels , and associated products accounted for approximately 19% of our total revenue and 33% of Nu Skin revenue in 2009.  In early 2010, we introduced an ageLOC Edition Galvanic Spa System II to capitalize on enthusiasm for ageLOC generally.  This newest spa is more user-friendly and improves the amount of ingredients delivered to the skin.  We plan to launch this improved ageLOC Edition Galvanic Spa System II to our distributor force globally in 2010.

 

The following table summarizes our Nu Skin product line by category:

 

 

 

 

 

 

 

 

 

 

 

 

Pharmanex.   We market a variety of anti-aging nutritional products under our Pharmanex brand.  Direct selling has proven to be an extremely effective method of marketing our high-quality nutritional supplements because our distributors can personally educate consumers on the quality and benefits of our products, differentiating them from our competitors’ offerings.   LifePak , our flagship line of micronutrient supplements, accounted for 18% of our total revenue and 43% of Pharmanex revenue in 2009.

 

Our strategy for our nutritional supplement business is to continue to introduce innovative, substantiated anti-aging products based on extensive research and development and quality manufacturing.  In addition, we provide tools such as our technologically advanced Pharmanex BioPhotonic Scanner to measure and demonstrate the positive impact of our key nutritional products.  In 2010, we plan to introduce our first ageLOC nutritional products designed to address the internal sources of aging.  We believe the addition of ageLOC nutritional products will continue to bridge the two key anti-aging categories of skin care and nutrition to deliver a unique, more comprehensive approach to anti-aging.

 

 

 

The following table summarizes our Pharmanex product line by category:

 

 

 

Other.   We also offer a limited number of other products and services, including digital content storage, water purifiers and other household products.  We also have integrated technology into other areas of our business and offer advanced tools and services that help distributors establish an online presence and manage their business.  These “other” categories of products represented only a small percentage of our revenue in 2009 and will not likely be an area of focus in the next few years.

 

Sourcing and Production

 

Nu Skin.   In order to maintain high product quality, we acquire our ingredients and contract production of our proprietary products from suppliers and manufacturers that we believe are reliable, reputable and deliver high quality materials and service.  Our ageLOC Edition Galvanic Spa System II is procured from a single vendor who owns certain patent rights associated with such product.  We believe our agreements with this vendor are sufficiently long-term and exclusive.  However, to continue offering this product category following any termination of our relationship with this vendor, we would need to develop a new galvanic unit and source it from another supplier.  We also acquire ingredients and products from one other supplier that currently manufactures products representing approximately 30% of our Nu Skin personal care revenue in 2009.  We maintain a good relationship with our suppliers and do not anticipate that either party will terminate the relationship in the near term.  We also have ongoing relationships with secondary and tertiary suppliers.  Please refer to “Item 1A - Risk Factors” for a discussion of risks and uncertainties associated with our supplier relationships and with the sourcing of raw materials and ingredients.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

We also established a production facility in Shanghai, where we currently manufacture our personal care products sold in China, as well as a small portion of product exported to select other markets. We believe that if the need arose, this plant could be expanded or other facilities could be built in China to produce larger amounts of inventory for export or as a back up to our existing supply chain.

 

Pharmanex.   Substantially all of our Pharmanex nutritional supplements and ingredients, including LifePak, are produced or provided by third-party suppliers and manufacturers.  We rely on two partners for the majority of our Pharmanex products, one of which supplies products that represent approximately 35% of our nutritional supplement revenue while the other supplier manufactures products that represent approximately 20% of our nutritional supplement revenue in 2009.  In the event we become unable to source any products or ingredients from these suppliers or from other current vendors, we believe that we would be able to produce or replace those products or substitute ingredients without great difficulty or significant increases to our cost of goods sold.  Please refer to “Item 1A. – Risk Factors” for a discussion of certain risks and uncertainties associated with our supplier relationships, as well as with the sourcing of raw materials and ingredients.

 

We also maintain a facility in Zhejiang Province, China, where we produce some of our Pharmanex nutritional supplements for sale in China and herbal extracts used to produce Tegreen 97 , ReishiMax GLp and other products sold globally.

 

Research and Development

 

We continually invest in our research and development capabilities.  Our research and development expenditures were $10.0   million, $9.6 million and $10.4 million in 2007, 2008 and 2009, respectively.  These amounts do not include salary and overhead expenses for our internal research and development activities.  Because of our commitment to product innovation, we plan to continue to commit resources to research and development in the future.  As we invest in our ageLOC platform of products, we expect an increase in our research and development expenditures over the next couple of years.

 

The Nu Skin Center for Anti-Aging Research, our primary research and testing laboratory located adjacent to our office complex in Provo, Utah, houses both Pharmanex and Nu Skin research facilities and professional and technical personnel.  We are currently in the preliminary planning phase of building a state-of-the-art innovation center adjacent to our corporate headquarters, a portion of which will be dedicated to research and development. We believe this facility will cost approximately $40 million and will take roughly two years to complete.  We also maintain research facilities in China.  Much of our Pharmanex research is conducted in China, where we benefit from a well-educated, low-cost, scientific labor pool that enables us to conduct research at a much lower cost than would be possible in the United States.

 

We have joint research projects with numerous independent scientists, including scientific advisory boards comprised of recognized authorities in related disciplines for each of our nutritional and personal care product categories. We also fund and collaborate on basic research projects with researchers from prominent universities and research institutions in the United States, Europe and Asia, whose staffs include scientists with basic research expertise in natural product chemistry, biochemistry, dermatology, pharmacology and clinical studies.

 

 

 

 

 

 

 

 

 

In addition, we evaluate a significant number of product ideas for our Nu Skin and Pharmanex categories presented by outside sources.  We utilize strategic licensing and other relationships with vendors for access to directed research and development work for innovative and proprietary offerings.

 

Intellectual Property

 

Our major trademarks are registered in the United States and in each country where we operate or have plans to operate, and we consider trademark protection to be very important to our business.  Our major trademarks include Nu Skin®, our fountain logos, Pharmanex®, ageLOC™, LifePak® and Galvanic Spa®.  In addition, a number of our products, including the ageLOC Edition Galvanic Spa System II and Pharmanex BioPhotonic Scanner , are based on proprietary technologies and formulations, some of which are patented or licensed from third parties.  We also rely on trade secret protection to protect our proprietary formulas and other proprietary information.

 

Additional comparative revenue and related financial information is presented in the tables captioned “Segment Information” in Note 17 to our Consolidated Financial Statements.  The information from these tables is incorporated by reference in this Report.

North Asia .   The following table provides information on each of the markets in the North Asia region, including the year it opened, 2009 revenue, and the percentage of our total 2009 revenue for each market:

(U.S. dollars in millions)	Year Opened	2009 Revenue		Percentage of 2009 Revenue
Japan	1993	$	461.9		35%
South Korea	1996	$	144.2		11%

Japan is our largest market and accounted for approximately 35% of total revenue in 2009. We market most of our Nu Skin and Pharmanex products in Japan, along with a limited number of other offerings.  In addition, all product categories offer a limited number of locally developed products sold exclusively in our Japanese market. In December 2009, we introduced our ageLOC Future Serum.   In 2010, we plan to introduce the ageLOC Transformation skin care system and ageLOC products designed to address the internal sources of aging .

 

 

 

 

 

 

 

 

 

The direct selling environment in Japan continues to be difficult as the industry has been on the decline for several years and regulatory and media scrutiny have increased.  Please refer to “Government Regulation” and “Item 1A. – Risk Factors” for a discussion of risks and uncertainties associated with challenges in the Japan market.

In South Korea, we offer most of our Nu Skin and Pharmanex products, along with a limited number of other offerings. In 2010, we plan to introduce the ageLOC Transformation skin care system .

Americas .   The following table provides information on each of the markets in the Americas region, including the year opened, 2009 revenue, and the percentage of our total 2009 revenue for each market:

(1)	Latin America includes Colombia, Costa Rica, El Salvador, Guatemala, Honduras, Mexico and Venezuela.

 

Substantially all of our Nu Skin and Pharmanex products, as well as limited other products and services, are available for sale in the United States.  In 2009, we introduced the ageLOC Transformation skin care system.  In 2010, we plan to begin introducing ageLOC products designed to address the internal sources of aging.  In 2009, we opened operations in Colombia.

Greater China.   The following table provides information on each of the markets in the Greater China region, including the year opened, 2009 revenue, and the percentage of our total 2009 revenue for each market:

Our Hong Kong and Taiwan markets operate using our global direct selling business model and global compensation plan.  We offer a robust product offering of the majority of our Nu Skin and Pharmanex products and limited other products and services in Hong Kong and Taiwan, although one of our flagship Nu Skin products, the Galvanic Spa System II is not approved for sale in Taiwan. Approximately half of our revenue in these markets comes from orders through our monthly product subscription program, which has led to improved retention of customers and distributors and has helped streamline the ordering process.

In China, we sell many of our Nu Skin products and a locally produced value line of personal care products under the Scion brand name.  We also sell a select number of Pharmanex products, including our number one nutritional product, LifePak.

 

 

 

 

 

We currently are unable to fully operate under our global direct selling business model in China as a result of regulatory restrictions on direct selling activities in this market.  Consequently, we have developed a retail sales model that utilizes an employed sales force and contractual sales promoters to sell products through fixed locations that we are supplementing with a single level direct sales opportunity in those locations where we have obtained a direct sales license.  We rely on our sales force to market and sell products at the various retail locations supported by only minimal advertising and traditional promotional efforts.  Our retail model in China is largely based upon our ability to attract customers to our retail stores through our sales force, to educate them about our products through frequent training meetings, and to obtain repeat purchases.

We also continue to implement a direct sales opportunity that allows us to engage independent direct sellers who can sell products away from our retail stores.  We have received licenses and approvals to engage in direct selling activities in the municipalities of Shanghai, Beijing and in five cities in the Guangdong province, and we continue to work to obtain the necessary approvals in other locations in China.  The direct selling licenses allow us to engage an entry-level, non-employee sales force that can sell products away from fixed retail locations.  Our current direct sales model is structured in a manner that we believe is complementary to our existing retail sales model.

Europe .   The following table provides information on our Europe region, including the year opened, revenue for 2009, and the percentage of our total 2009 revenue for the region.

(U.S. dollars in millions)	Year Opened	2009 Revenue		Percentage of 2008 Revenue
Europe region (1)	1995	$	133.6		10%

 

 

(1)	Europe includes Austria, Belgium, Czech Republic, Denmark, Finland, France, Germany, Hungary, Ireland, Iceland, Israel, Italy, Luxembourg, the Netherlands, Norway, Poland, Portugal, Romania, Russia, Slovakia, South Africa, Spain, Sweden, Switzerland, Turkey   and the United Kingdom.

 

We currently operate and offer a full range of Nu Skin and Pharmanex products in 26 countries throughout Northern, Eastern, and Central Europe as well as in Israel and South Africa.  In 2010, we plan to introduce the ageLOC Transformation skin care system and ageLOC products designed to address the internal sources of aging in this region .   Various products and distributor tools have contributed to Europe’s recent success, including the Galvanic Spa System II , the Pharmanex BioPhotonic Scanner , and g3.   We have been experiencing strong growth in Central and Eastern European markets.  In 2009, we opened operations in Turkey.

South Asia/Pacific.   The following table provides information on each of the markets in the South Asia/Pacific region, including the year opened, 2009 revenue, and the percentage of our total 2009 revenue for each market:

 

 

 

 

 

 

 

 

 

 

 

We offer a majority of our Pharmanex and Nu Skin products in the South Asia/Pacific region.  In 2010, we plan to introduce the ageLOC Transformation skin care system and ageLOC products designed to address the internal sources of aging in this region .   Marketing initiatives in South Asia/Pacific have centered on monthly product subscription orders and the Galvanic Spa System II .

Distribution

 

Overview .   The foundation of our sales philosophy and distribution system is network marketing.  We sell our products through distributors who are not employees, except in China where we sell our products through employed retail sales representatives, contractual sales promoters and independent direct sellers.  Our distributors generally purchase products from us for resale to consumers and for personal consumption.  We also sell products directly to preferred customers at discounted monthly subscription prices.

Network marketing is an effective vehicle to distribute our products because:

 

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distributors can educate consumers about our products in person, which we believe is more effective for premium-quality, differentiated products than using traditional advertising;

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direct sales allow for actual product demonstrations and testing by potential customers;

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there is greater opportunity for distributor and customer testimonials; and

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as compared to other distribution methods, our distributors can provide customers higher levels of service and encourage repeat purchases.

 

“Active distributors” under our global compensation plan are defined as those distributors who have purchased products for resale or personal consumption during the previous three months.  In addition, we have implemented “preferred customer” programs in many of our markets, which allow customers to purchase products directly from us, generally on a recurring monthly product subscription basis.  We include preferred customers who have purchased products during the previous three months in our “active distributor” numbers.  While preferred customers are legally very different from distributors, both are considered customers of our products.

“Executive distributors” under our global compensation plan must achieve and maintain specified personal and group sales volumes each month.  Once an individual becomes an executive distributor, he or she can begin to take advantage of the benefits of commission payments on personal and group sales volume.  As a result of direct selling restrictions in China, we have implemented a modified business model utilizing sales employees and contractual sales promoters in our retail stores in addition to independent direct sellers.  (See the discussion on China in “Geographic Sales Regions.”)

Our revenue is highly dependent upon the number and productivity of our distributors.  Growth in sales volume requires an increase in the productivity and/or growth in the total number of distributors.  As of December 31, 2009, we had a   global network of over 761,000 active distributors.  Approximately 33,000 of our distributors were executive distributors.  As of each of the dates indicated below, we had the following number of active and executive distributors in the referenced regions:  Our number of active distributors has historically fluctuated from year to year based on various factors, including our business model transition in China, efforts to train and discipline distributors in Japan and changes in promotions.

 

 

 

Sponsoring .   We rely on our distributors to recruit and sponsor new distributors of our products.  While we provide internet support, product samples, brochures, magazines, and other sales and marketing materials at cost, distributors are primarily responsible for recruiting and educating new distributors with respect to products, our global compensation plan, and how to build a successful distributorship.

The sponsoring of new distributors creates multiple levels in a network marketing structure.  Individuals 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 and we do not pay any commissions for sponsoring new distributors.  However, because of the financial incentives provided to those who succeed in building and mentoring a distributor network that resells and consumes products, many of our distributors attempt, with varying degrees of effort and success, to sponsor additional distributors.  People often become distributors after using our products as regular customers.  Once a person becomes a distributor, he or she is able to purchase products directly from us 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 among other things, obligates the distributor to abide by our policies and procedures.

 

Global Compensation Plan .   One of our competitive advantages is our global sales compensation plan.  Under our global compensation plan, a distributor is paid consolidated monthly commissions in the distributor’s home country, in local currency, for the distributor’s own product sales and for product sales in that distributor’s downline distributor network across all geographic markets.  Because of restrictions on direct selling in China, our sales employees and contractual sales promoters there do not participate in the global compensation plan, but are instead compensated according to a compensation model established for that market.

 

Commissions on the sale of an individual Nu Skin or Pharmanex product can exceed 50% of the wholesale price, except in a limited number of markets where commissions are limited by law.   The actual commission payout percentage, however, varies depending on the number of distributors at each payout level within our global compensation plan.  Historically, our distributor compensation plan has paid out to distributors approximately 42% of commissionable sales.   We believe that our commission payout as a percentage of total sales is among the most generous paid by major direct selling companies.

 

 

 

 

 

 

From time to time, we make modifications and enhancements to our global compensation plan to help motivate distributors.  In 2008 and 2009, we successfully launched modifications to our compensation plan worldwide designed to improve commission payments early in the distributor lifecycle.  In addition, we evaluate a limited number of distributor requests on a monthly basis for exceptions to the terms and conditions of the global compensation plan, including volume requirements.  While our general policy is to discourage exceptions, we believe that the flexibility to grant exceptions is critical in retaining distributor loyalty and dedication and we make exceptions in limited cases as necessary.

 

High Level of Distributor Incentives .   Based upon management’s knowledge of our competitors’ distributor compensation plans, we believe our global compensation plan is among the most financially rewarding plans offered by leading direct selling companies. There are two fundamental ways in which our distributors can earn money:

 

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through retail markups on sales of products purchased by distributors at wholesale; and

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through a series of commissions on product sales.

Each of our 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 generally based upon a product’s wholesale cost, net of any point-of-sale taxes.  As a distributor’s business expands to successfully sponsoring other distributors into the business, who in turn expand their own businesses, a distributor receives a higher percentage of commissions.  An executive’s commissions can increase substantially as multiple downline distributors achieve executive status.  In determining commissions, the number of levels of downline distributors included in an executive’s commissionable group increases as the number of executive distributorships directly below the executive increases.

Distributor Support .   We are committed to providing high-level support services tailored to the needs of our distributors in each market.  We attempt to meet the needs and build the loyalty of distributors by providing personalized distributor services and by maintaining a generous product return policy.  Because the majority of our distributors are part time and have only a limited number of hours each week to concentrate on their business, we believe that maximizing a distributor’s efforts by providing effective distributor support has been, and will continue to be, important to our success.

 

Through training meetings, distributor conventions, web-based messages, distributor focus groups, regular telephone conference calls, and other personal contacts with distributors, we seek to understand and satisfy the needs of our distributors.  We provide walk-in, telephonic, and Web-based product fulfillment and tracking services that result in user-friendly, timely product distribution.  Several of our walk-in retail centers maintain meeting rooms, which our distributors may utilize for training and sponsoring activities.  Because of our efficient distribution system, we believe that most of our distributors do not maintain a significant inventory of our products.

 

Payments .   Distributors generally pay for products prior to shipment.  Accordingly, we carry minimal accounts receivable.  Distributors typically pay for products in cash, by wire transfer or by credit card.

 

 

 

 

 

Product Returns .   We believe we are among the most consumer-protective companies in the direct selling industry.  While the regulations and our operations vary somewhat from country to country, we generally follow a similar procedure for product returns.  For 30 days from the date of purchase, our product return policy generally allows a retail customer to return any Nu Skin or Pharmanex product to us directly or to the distributor through whom the product was purchased for a full refund.  After 30 days from the date of purchase, the end user’s return privilege is at the discretion of the distributor.  Our distributors can generally return unused products directly to us for a 90% refund for one year.  Through 2009, our experience with actual product returns averaged less than 5% of annual revenue.

Rules Affecting Distributors .   We monitor regulations and distributor activity in each market to ensure our distributors comply with local laws.  Our published distributor policies and procedures establish the rules that distributors must follow in each market.  We also monitor distributor activity to maintain a level playing field for our distributors, ensuring that some are not disadvantaged by the activities of others.  We require our 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 our literature.

 

Distributors must represent to us that their receipt of commissions is based on retail sales and substantial personal sales efforts.  We must also monitor sales aids used by distributors such as videotapes, audiotapes, brochures and promotional clothing to help ensure they comply with applicable laws and regulations.  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.  Distributors may not use our trademarks or other intellectual property without our consent.

 

Our products may not be sold, and our business opportunities may not be promoted, in traditional, non-Company owned retail environments.  We have made an exception to this rule by allowing some of our Pharmanex products to be sold in independently owned pharmacies and drug stores meeting specified requirements.  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 a manner to attract the general public into the establishment to purchase products.

 

In order to qualify for commission bonuses, our distributors generally must satisfy specific requirements including achieving at least 100 points, which is approximately $100 in personal sales volume per month.  In addition, individual markets may have requirements specific to that country based on regulatory factors.  For example, in the United States, distributors must also:

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document retail sales or customer connections to established numbers of retail customers; and

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sell and/or consume at least 80% of personal sales volume.

 

We systematically review reports of alleged distributor misbehavior.  If we determine one of our distributors has violated any of our policies or procedures, we may terminate the distributor’s rights completely.  Alternatively, we may impose sanctions, such as warnings, probation, withdrawal or denial of an award, suspension of privileges of a distributorship, fines and/or withholding of commissions until specified conditions are satisfied, or other appropriate injunctive relief.

 

 

 

Our Culture

From our inception over 25 years ago, Nu Skin Enterprises' mission has been to improve people's lives—through our quality products, our rewarding business opportunities and by promoting an uplifting and enriching culture.  Our mission statement encourages people to be a “force for good” in the world around them.  Our culture unites our distributors, customers and employees in innovative humanitarian efforts, the most significant of which are our Nourish the Children initiative that provides our distributors the ability to donate meals to starving children, and our Force for Good Foundation that supports many charitable causes that benefit children.  In short, we believe that people are attracted to organizations that focus on more than just financial incentives.  We encourage our distributors and our employees to live each day with an understanding that together we have the opportunity to make the world a better place.

 

Nourish the Children.   In 2002, we introduced an innovative humanitarian initiative, Nourish the Children, which applies the power of our distribution network to help address the problem of hunger and malnutrition.  We sell a highly nutritious meal replacement product under the brand, “VitaMeal,” and encourage our distributors, customers and employees to purchase VitaMeal and donate their purchase to charitable organizations that specialize in distributing food to alleviate famine and poverty.  Distributors earn commissions on sales of Vitameal to distributors in their downline and their customers. For every eight packages of VitaMeal purchased and donated, we donate an additional package.  Since 2002, our distributors, customers and employees have joined together to donate more than 150 million meals to malnourished children in various locations throughout the world.

Force for Good Foundation.   The original Force for Good campaign was introduced in conjunction with the Nu Skin Epoch product line in 1996. This unique brand of skin and hair care products was developed in partnership with the world's leading ethnobotanists.  A donation of 25 cents from the sale of each Epoch product was directed to preserve the environments, languages, lifestyles, and traditions of indigenous people around the world.  Today, the Force for Good Foundation provides support for charitable efforts throughout the globe, with a special emphasis on addressing the humanitarian needs of children.  Charitable projects supported by the Force for Good Foundation, our Company, our employees, and our distributors include helping to provide crucial heart surgeries for children in Southeast Asia and China, supporting schools for children in need, helping farmers in Malawi be trained to grow more crops to better support the needs of their families, and other projects.

Competition

Direct Selling Companies .   We compete with other direct selling organizations, some of which have a longer operating history and higher visibility, name recognition and financial resources than we do.  The leading direct selling companies in our existing markets are Avon and Alticor (Amway).  We compete for new distributors on the strength of our multiple business opportunities, product offerings, global compensation plan, management, and our international operations.  In order to successfully compete in this market and attract and retain distributors, we must maintain the attractiveness of our business opportunities to our distributors.

 

Nu Skin and Pharmanex Products .   The markets for our Nu Skin and Pharmanex products are highly competitive.  Our competitors include manufacturers and marketers of personal care and nutritional products, pharmaceutical companies and other direct selling organizations, many of which have longer operating histories and greater name recognition and financial resources than we do.  We compete in these markets by emphasizing the innovation, value and premium quality of our products and the convenience of our distribution system.  We focus on delivering a product whose value can be measured and provide our distributors with powerful tools that allow them to demonstrate this effectiveness.

 

 

 

 

 

 

 

 

 

 

 

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.  Laws and regulations in Japan, Korea and China are particularly restrictive and difficult.  These laws and regulations are generally intended to prevent fraudulent or deceptive schemes, often referred to as “pyramid” schemes, that compensate participants for recruiting additional participants irrespective of product sales, use high-pressure recruiting methods and/or do not involve legitimate products.  The laws and regulations in our current markets often:

 

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impose cancellation/product return, inventory buy-backs and cooling-off rights for consumers and distributors;

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require us or our distributors to register with governmental agencies;

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impose caps on the amount of commission we can pay;

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impose reporting requirements; and

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impose upon us 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 laws and regulations governing direct selling are modified from time to time, and, like other direct selling companies, we are subject from time to time to government investigations in our various markets related to our direct selling activities.  This can require us to make changes to our business model and aspects of our global compensation plan in the markets impacted by such changes and investigations.

Regulators in Japan have increased their scrutiny of our industry.  Several direct sellers in Japan have been penalized for actions of their distributors that violated applicable regulations, including one prominent international direct selling company that was suspended from sponsoring activities for three months in 2008, and another large Japanese direct selling company that was suspended from sponsoring activities for six months in 2009.  In addition, Japanese media has reported on increased political pressure on lawmakers supporting our industry.

We continue to experience a high level of general inquiries regarding our company and complaints to consumer protection centers in Japan and have taken steps to try to resolve these issues including providing additional training to our distributors   and restructuring our compliance group in Japan.  We have seen improvements in some prefectures, but not in others.  In 2009, we received one written and one oral warning from Consumer Centers in two prefectures raising concerns about our distributor training and number of general inquiries and complaints.  We are implementing additional steps to reinforce our distributor education and training in Japan to help address these concerns.  If consumer complaints escalate to a government review or if the current level of complaints does not improve, there is an increased likelihood that regulators could take action against us or we could receive negative media attention, either of which could harm our business.

 

 

 

 

As a result of restrictions in China on direct selling activities, we have implemented a retail store model utilizing an employed sales force and contractual sales promoters, and we are currently integrating direct selling in our business model in this market pursuant to applicable direct selling regulations. The regulatory environment in China remains complex.  China’s direct selling and anti-pyramiding regulations are restrictive and contain various limitations, including a restriction on the ability to pay multi-level compensation to independent distributors. Our operations in China have attracted significant regulatory and media scrutiny since we expanded our operations there in January 2003. Regulations are subject to discretionary interpretation by municipal and provincial level regulators as well as local customs and practices. Interpretations of what constitutes permissible activities by regulators can vary from province to province and can change from time to time because of the lack of clarity in the rules regarding direct selling activities and differences in customs and practices in each location.

Because of the Chinese government’s significant concerns about direct selling activities, it scrutinizes very closely activities of direct selling companies. At times, investigations and related actions by government regulators have impeded our ability to conduct business in certain locations, and have resulted in a few cases where we have paid fines.  In each of these cases, we have been allowed to recommence operations after the government’s investigation, and no material changes to our business model were required in connection with these fines and impediments.   Please refer to “Item 1A. Risk Factors” for more information on the regulatory risks associated with our business in China.

The regulatory environment with respect to direct selling in China remains fluid and the process for obtaining the necessary governmental approvals to conduct direct selling continues to evolve.  The regulations and processes in some circumstances have been interpreted differently by different governmental authorities.   In order to expand our direct selling model into additional provinces we currently must obtain a series of approvals from the Departments of Commerce in such provinces, the Shanghai Department of Commerce (our supervisory authority), as well as the Departments of Commerce in each city and district in which we plan to operate.  We also are required to obtain the approval of the State Ministry of Commerce, which is the national governmental authority overseeing direct selling.  In addition, regulators are acting cautiously as they monitor the roll-out of direct selling, which has made the approval process take longer than we anticipated.   Please refer to “Item 1A. Risk Factors” for more information on the risks associated with our planned expansion of direct selling in China.

Regulation of Our Products .   Our Nu Skin and Pharmanex products and related promotional and marketing activities are subject to extensive governmental regulation by numerous domestic and foreign governmental agencies and authorities, including the FDA, the FTC, the Consumer Product Safety Commission, the Department of Agriculture, State Attorneys General and other state regulatory agencies in the United States, and the Ministry of Health, Labor and Welfare in Japan and similar government agencies in each market in which we operate.

Our personal care products are subject to various laws and regulations that regulate cosmetic products and set forth regulations for determining whether a product can be marketed as a “cosmetic” or requires further approval as an over-the-counter (OTC) drug. In the United States, regulation of cosmetics are under the jurisdiction of the FDA.  The Food, Drug and Cosmetic Act defines cosmetics by their intended use, as “articles intended to be rubbed, poured, sprinkled, or sprayed on, introduced into, or otherwise applied to the human body . . . for cleansing, beautifying, promoting attractiveness, or altering the appearance.”  Among the products included in this definition are skin moisturizers, perfumes, lipsticks, fingernail polishes, eye and facial makeup preparations, shampoos, permanent waves, hair colors, toothpastes and deodorants, as well as any material intended for use as a component of a cosmetic product.  Conversely, a product will not be considered a cosmetic, but may be considered an (OTC) drug if it is intended for use in the diagnosis, cure, mitigation, treatment, or prevention of disease, or is intended to affect the structure or any function of the body. A product’s intended use can be inferred from marketing or product claims.  The other markets in which we operate have similar regulations.  In Japan, the Ministry of Health, Labor and Welfare regulates the sale and distribution of cosmetics and requires us to have an import business license and to register each personal care product imported into Japan.  In Taiwan, all “medicated” cosmetic products require registration.  In China, personal care products are placed into one of two categories, “general” and “drug.”  Products in both categories require submission of formulas and other information with the health authorities, and drug products require human clinical studies.  The product registration process in China for these products can take from nine to more than 18 months.  Such regulations in any given market can limit our ability to import products and can delay product launches as we go through the registration and approval process for those products.  The sale of cosmetic products is regulated in the European Union under the European Union Cosmetics Directive, which requires a uniform application for foreign companies making personal care product sales .

 

 

 

 

 

 

Our Pharmanex products are subject to various regulations promulgated by government agencies in the markets in which we operate.  In the United States, we generally market our nutritional products as conventional foods or dietary supplements.  The FDA has jurisdiction over this regulatory area.  Because these products are regulated under the Dietary Supplement and Health Education Act, we are generally not required to obtain regulatory approval prior to introducing a product into the United States market.  None of this infringes, however, upon the FDA’s power to remove from the market any product it determines to be unsafe or an unapproved drug.  In our foreign markets, the products are generally regulated by similar government agencies, such as the Ministry of Health, Labor and Welfare in Japan, the KFDA in South Korea, and the Department of Health in Taiwan.  We typically market our Pharmanex products in international markets as foods or health foods under applicable regulatory regimes.  In the event a product, or an ingredient in a product, is classified as a drug or pharmaceutical product in any market, we will generally not be able to distribute that product in that market through our distribution channel because of strict restrictions applicable to drug and pharmaceutical products.  China has some of the most restrictive nutritional supplement product regulations. Products marketed as “health foods” are subject to extensive laboratory and clinical analysis by governmental authorities, and the product registration process for these products may take two years or more.  We market both “health foods” and “general foods” in China.  Our flagship product, LifePak , is currently marketed as a general food, as only two of the three main capsules having received “health food” classification.  Currently, “general foods” is not an approved category for direct selling; therefore, we will only market LifePak through our retail stores until final “health food” classification for LifePak is obtained for the other capsule.  Additionally, there is some risk associated with the common practice in China of marketing a product as a “general food” while seeking “health food” classification.  If government officials feel our categorization of our products is inconsistent with product claims, ingredients or function, this could end or limit our ability to market such products in China in their current form.

The markets in which we operate all have varied regulations that distinguish foods and nutritional health supplements from “drugs” or “pharmaceutical products.”  Because of the varied regulations, some products or ingredients that are recognized as a “food” in certain markets may be treated as a “pharmaceutical” in other markets.  In Japan, for example, if a specified ingredient is not listed as a “food” by the Ministry of Health and Welfare, we must either modify the product to eliminate or substitute that ingredient, or petition the government to treat such ingredient as a food.  We experience similar issues in our other markets.  This is particularly a problem in Europe where the regulations differ from country to country.  As a result, we must often modify the ingredients and/or the levels of ingredients in our products for certain markets.  In some circumstances, the regulations in foreign markets may require us to obtain regulatory approval prior to introduction of a new product or limit our uses of certain ingredients altogether.  Because of negative publicity associated with some supplements, there has been an increased movement in the United States and other markets to expand the regulation of dietary supplements, which could impose additional restrictions or requirements in the future.  In general, the regulatory environment is becoming more complex with increasingly strict regulations each year.

 

 

 

 

 

 

 

 

 

 

 

Effective June 2008, the U.S. Food and Drug Administration established regulations to require current good manufacturing practices (cGMP) for dietary supplements.  The regulations ensure that dietary supplements are produced in a quality manner, do not contain contaminants or impurities, and are accurately labeled. The regulations include requirements for establishing quality control procedures for us and our vendors and supliers, designing and constructing manufacturing plants, and testing ingredients and finished products.  The regulations also include requirements for record keeping and handling consumer product complaints.  If dietary supplements contain contaminants or do not contain the dietary ingredient they are represented to contain, the FDA would consider those products to be adulterated or misbranded.  Our business is subject to additional FDA regulations, such as those implementing an adverse event reporting system (“AER’s”) effective December 2007, which requires us to document and track adverse events and report serious adverse events associated with consumers’ use of our products.  Compliance with these regulations has increased and may further increase the cost of manufacturing certain of our products as we work with our vendors to assure they are in compliance.

Most of our major markets also regulate advertising and product claims regarding the efficacy of products.  Accordingly, these regulations can limit our ability to inform consumers of the full benefits of our products.  For example, in the United States, we are unable to claim that any of our nutritional supplements will diagnose, cure, mitigate, treat or prevent disease.  In most of our foreign markets, we are not able to make any “medicinal” claims with respect to our Pharmanex products.  In the United States, 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.  Most of the other markets in which we operate have not adopted similar legislation and we may be subject to more restrictive limitations on the claims we can make about our products in these markets.  For example, in Japan, our nutritional supplements are marketed as food products, which significantly limits our ability to make any claims regarding these products.

 

To date, we have not experienced any difficulty maintaining our import licenses.  However, due to the varied regulations governing the manufacture and sale of nutritional products in the various markets, we have found it necessary to reformulate many of our products or develop new products in order to comply with such local requirements.  In the United States, we are also subject to a consent decree with the FTC and various state regulatory agencies arising out of investigations that occurred in the early 1990s of certain alleged unsubstantiated product and earnings claims made by our distributors.  The consent decree requires us to, among other things, supplement our procedures to enforce our policies, not allow our distributors to make earnings representations without making certain average earnings disclosures, and not allow our distributors to make unsubstantiated product claims.  Compliance with the anti terrorism regulations of the US has caused some delays in customs but these situations have been resolved by working with the US customs officials and training our vendors and market staff in the guidelines.  The FTC recently approved, effective December 1, 2009, revisions to its Guides Concerning the Use of Endorsements and Testimonials in Advertising, or Guides, that impose disclosure of typical results and any material connections between an endorser and the company they are endorsing.

We also develop technologically-advanced business tools designed to help our distributors effectively market our Nu Skin and Pharmanex products.  For example, during the last several years we have introduced our Pharmanex BioPhotonic Scanner in many of our markets around the world as well as our Galvanic Spa System . These tools are subject to the regulations of various health, consumer protection and other governmental authorities around the world.  These regulations vary from market to market and affect whether our business tools are required to be registered as medical devices, the claims that can be made with respect to these tools, who can use them, and where they can be used.  We have been subject to regulatory inquiries in the United States, Japan, and other countries with respect to the status of the Pharmanex BioPhotonic Scanner as a non-medical device.  Any determination that medical device clearance is required for one of our tools could require us to expend significant time and resources in order to meet the stringent standards imposed on medical device companies or prevent us from marketing the product.  For example, we are not able to market the Galavanic Spa System in Taiwan or Colombia as a result of the regulatory restrictions in these markets.  We are also subject to regulatory constraints on the claims that can be made with respect to the use of our business tools.

 

 

 

 

 

 

 

 

 

Other Regulatory Issues .   As a United States entity operating through subsidiaries in foreign jurisdictions, we are subject to foreign exchange control, transfer pricing and customs laws that regulate the flow of funds between us and our subsidiaries and for product purchases, management services and contractual obligations, such as the payment of distributor commissions.

 

As is the case with most companies that operate in our product categories, we receive from time to time inquiries from government regulatory authorities regarding the nature of our business and other issues, such as compliance with local direct selling, transfer pricing, customs, taxation, foreign exchange control, securities and other laws.  Negative publicity resulting from inquiries into our operations by the 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 late 1990s resulting from adverse media attention in South Korea, harmed our business.

 

Employees

As of December 31, 2009, we had approximately 3,400 full- and part-time employees worldwide. This does not include approximately 2,600 individuals who were employed as sales representatives in our China operations.  We also had labor contracts with approximately 2,900 potential new sales representatives in China.  None of our employees are represented by a union or other collective bargaining group, except in China and a small number of employees in Japan.  We believe that our relationship with our employees is good, and we do not foresee a shortage in qualified personnel necessary to operate our business.

Available Information

Our Internet address is www.nuskinenterprises.com .  We make available free of charge on or through our Internet Website our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission (the “SEC”).  The public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549.  The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1–800–SEC–0330.  The SEC maintains an internet site at http://www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.

 

 

 

 

 

 

 

 

Set forth below is the business background of each of our executive officers.

Blake Roney founded our company in 1984 and served as its president through 1996.  Mr. Roney currently serves as the Chairman of the Board, a position he has held since our company became public in 1996. Mr. Roney is also a trustee of the Force for Good Foundation, a charitable organization that was established in 1996 by Mr. Roney and the other founders of our company to help encourage and drive the philanthropic efforts of our company, its employees, its distributors and its customers to enrich the lives of others. He received a B.S. degree from Brigham Young University.

Truman Hunt has served as our President since January 2003 and our Chief Executive Officer since May 2003.  He has also served as a director of our company since May 2003.  Mr. Hunt joined our company in 1994 and has served in various positions, including Vice President and General Counsel from 1996 to January 2003 and Executive Vice President from January 2001 until January 2003.  He received a B.S. degree from Brigham Young University and a J.D. degree from the University of Utah.

Ritch Wood has served as our Chief Financial Officer since November 2002.  Prior to this appointment, Mr. Wood served as Vice President, Finance from July 2002 to November 2002 and Vice President, New Market Development from June 2001 to July 2002.  Mr. Wood joined our company in 1993 and has served in various capacities.  Prior to joining us, he worked for the accounting firm of Grant Thornton LLP.  Mr. Wood earned a B.S. and a Master of Accountancy degree from Brigham Young University.

Joe Chang has served as Chief Scientific Officer and Executive Vice President of Product Development since February 2006.  Dr. Chang served as President of our Pharmanex division from April 2000 to February 2006.  Dr. Chang served as Vice President of Clinical Studies and Pharmacology of Pharmanex from 1997 until April 2000.  Dr. Chang has nearly 20 years of pharmaceutical experience.  He received a B.S. degree from Portsmouth University and a Ph.D. degree from the University of London.

Daniel Chard has served as President of Global Sales and Operations since May 2009.  Prior to serving in this position, Mr. Chard served as Executive Vice President of Distributor Success from February 2006 to May 2009 and President of Nu Skin Europe from April 2004 to February 2006.  Mr. Chard also served as Vice President of Marketing and Product Management of Big Planet, our technology products and services division, from May 2003 to April 2004 and as Senior Director of Marketing and Product Development at Pharmanex.  Prior to joining us in 1998, Mr. Chard worked in a variety of strategic marketing positions in the consumer products industry.  Mr. Chard holds a B.A. degree in Economics from Brigham Young University and an M.B.A. from the University of Minnesota.

 

 

 

 

 

 

 

 

 

 

 

Scott Schwerdt has served as President, Americas, Europe and South Pacific since February 2006.  Mr. Schwerdt served as Regional Vice President of North America and President of Nu Skin Enterprises United States, Inc. from May 2004 to February 2006.  Mr. Schwerdt previously served as the General Manager of our U.S. operations from May 2001 to May 2004.  Mr. Schwerdt joined our company in 1988 and has held various positions, including Vice President of North America/South Pacific Operations and Vice President of Europe.  Mr. Schwerdt received a B.A. degree in International Relations from Brigham Young University.

Matthew Dorny has served as our General Counsel and Secretary since January 2003.  Mr. Dorny previously served as Assistant General Counsel from May 1998 to January 2003.  Prior to joining us, Mr. Dorny was a securities and business attorney in private practice in Salt Lake City, Utah.  Mr. Dorny received B.A., M.B.A. and J.D. degrees from the University of Utah.

Ashok Pahwa has served as Chief Marketing Officer since June 2008.  Mr. Pahwa has over 25 years of marketing experience in the direct selling and consumer products industries.  Prior to joining us, Mr. Pahwa was Vice President of Global Marketing and Sales at Wall Street Institute, a global English language training company, from February 2006 to January 2008.  Mr. Pahwa served as Vice President of New Businesses at Avon Products, Inc., a global direct seller of personal care products, from 2003 to 2006.  He also served in various positions at Mary Kay Cosmetics, a global direct seller of personal care products, from 1993 until 2003.  He spent more than ten years with Publicis/Bloom and Ogilvy & Mather, global advertising agencies.  Mr. Pahwa holds a bachelor’s degree in economics from the University of Delhi, a master’s degree in management studies from the University of Bombay and a master’s degree in business administration from Texas Tech University.

 

Note Regarding Forward-Looking Statements.   Certain statements made in this filing under the caption “Item 1- 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,” “expect,” “intend,” “will continue,” “anticipate,” “estimate,” “project,” “believe” 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 future economic performance in countries where we operate.  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.  We assume no responsibility or obligation to update these statements to reflect any changes.  The forward-looking statements and associated risks set forth herein relate to, among other things:

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our plans and expectations regarding our initiatives, strategies, development and launch of new products, and other innovation efforts;

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our expectations regarding our suppliers and our ability to replace them if needed;

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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our expectations and beliefs regarding government regulations of our industry and our ability to comply with such regulations;

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our expectations and beliefs regarding our distributors and our compensation plan; and