TABLE OF
CONTENTS
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Our Product Divisions
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Sourcing and Production
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-8-
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Research and Development
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Geographic Sales Regions
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Intellectual Property
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Government Regulation
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Available Information
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ITEM 3.
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LEGAL PROCEEDINGS
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ITEM 4.
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SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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-38-
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ITEM 5.
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MARKET FOR REGISTRANT’S COMMON EQUITY,
RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
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ITEM 6.
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SELECTED FINANCIAL DATA
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ITEM 7.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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-42-
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ITEM 7A.
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QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
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ITEM 8.
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FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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ITEM 9.
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CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON
ACCOUNTING AND FINANCIAL DISCLOSURE
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ITEM 9A.
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CONTROLS AND PROCEDURES
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ITEM 9B.
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OTHER INFORMATION
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-93-
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ITEM 15.
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EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
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-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
OUR EXPECTATIONS OR BELIEFS CONCERNING, AMONG OTHER THINGS, FUTURE REVENUE, EARNINGS,
GROWTH STRATEGIES, NEW PRODUCTS, FUTURE OPERATIONS AND OPERATING RESULTS, AND FUTURE
BUSINESS AND MARKET OPPORTUNITIES. WE WISH TO CAUTION AND ADVISE READERS THAT THESE
STATEMENTS INVOLVE RISKS 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 OUR BUSINESS, SEE “ITEM 1. BUSINESS – RISK FACTORS”
BEGINNING ON PAGE 24.
In this Annual Report on Form
10-K, references to “dollars” and “$” are to United States dollars. Nu
Skin, Pharmanex, and Big Planet are our trademarks. The italicized product names used in
this Annual Report on Form 10-K are product names and also, in certain cases, our
trademarks.
PART I
Overview
Nu
Skin Enterprises is a leading, global direct selling company with operations in
approximately 40 countries throughout Asia, the Americas and Europe. We develop and
distribute premium quality, innovative personal care products and nutritional supplements
that are sold worldwide under the Nu Skin and Pharmanex brands. We also market
technology-related products and services under the Big Planet brand. We operate through a
direct selling model in all of our markets except Mainland China (hereinafter
“China”), where we operate using a retail model with employed sales
representatives because of current regulatory restrictions on direct selling activities.
We
are one of the largest direct selling companies in the world with 2004 revenue of $1.14
billion. As of December 31, 2004, we had a
global network of approximately 820,000
active independent distributors, sales representatives, and preferred customers,
approximately 32,000 of whom were executive level distributors or full-time sales
representatives. Our executive level distributors and full-time sales representatives play
an important leadership role in our distribution network and are critical to the growth
and profitability of our business. We recognized approximately 88% of our revenue in
markets outside the United States in 2004. Our Japanese operations accounted for
approximately 51% of our 2004 revenue, although this market’s contribution to our
overall revenue is lower compared to prior years as a result of our expansion into and
growth in other markets. Because of the size of our foreign operations, our operating
results can be impacted positively or negatively by economic, political and business
conditions around the world as well as foreign currency fluctuations, particularly in
Japan and other Asian markets.
We
develop and market branded consumer products that we believe are well-suited for direct
selling. Our distributors market and sell our products by educating consumers about the
benefits and distinguishing characteristics of our products and by providing personalized
customer service. Through
-1-
dedicated research and development, we continually develop and
introduce new products and enhance our existing line of products to provide our
distributors with a differentiated product portfolio. We believe that we are able to
attract and motivate high-caliber independent distributors because of our focus on
developing innovative products, our attractive global compensation plan and our advanced
technological distributor support. Our business is subject to various laws and regulations
throughout the world, in particular with respect to network marketing activities and
nutritional supplements. This creates certain risks for our business, including any
inability to obtain necessary product registrations or improper activities by our
distributors.
Our
strategy for growing our business over the last year has focused on three key areas:
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expansion
into new markets;
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•
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introduction
of unique tools and initiatives to motivate distributors and improve retention; and
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development
of compelling and innovative products.
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We
continued our efforts to expand into additional new markets and grow operations in
recently opened markets. During the year, we expanded our presence in China by opening 13
new stores in 12 new provinces and 1 new municipality. We grew our revenue in China from
$38.5 million in 2003 to $105.6 million in 2004. We also introduced a limited number of
Pharmanex products into China in January 2005. We commenced operations in Israel, Brunei
and Hungary during 2004 and continue to work on commencing operations in other markets,
including Indonesia and Russia.
We
also remain committed to providing our distributors with unique tools and initiatives that
motivate distributors and help them attract and retain customers and other distributors.
During 2004, we continued to expand the use of the Pharmanex
®
BioPhotonic
Scanner (the “BioPhotonic Scanner”) in the United States and key international
markets including Japan. The BioPhotonic Scanner is based on a patented technology that
allows our distributors to non-invasively measure the impact of our nutritional products
on overall nutritional status. In addition, we have continued to expand and promote
product subscription programs in many of our markets that provide incentives for customers
to commit to purchase a set amount of products on a monthly basis. We believe these
subscription programs have improved customer retention and helped drive revenue growth in
many of our markets.
Compelling
and innovative products and initiatives are vital to our company because they help empower
and motivate our distributors. As a result, we continue to focus on the development and
introduction of innovative products and reformulated products in order to help grow our
business in existing markets. Our product development philosophy across all three
divisions is to develop products and related initiatives that allow customers to
“live better, longer.” Some of the products introduced in the last year include:
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MarineOmega,
a novel fish oil product containing omega-3 fatty acids;
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TRA
,
a weight management system;
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IgG
Boost
, a colostrum supplement to support immune functions;
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Estera
,
a line of supplements that focus on the nutritional needs of women;
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Nu
Skin Tri-Phasic White
, an advanced system to restore even skin color and tone;
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-2-
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Nu
Skin Polishing Peel
, a cost effective, at-home alternative to microdermabrasion; and
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Epoch
Calming Touch
, a soothing “ethnobotanical” cream for rash skin conditions.
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Our Product Divisions
We
have three product divisions: Nu Skin, which offers personal care products; Pharmanex,
which offers nutritional supplements and products; and Big Planet, which offers
technology-related products and services.
Presented
below are the U.S. dollar amounts and percentages of revenue from the sale of Nu Skin,
Pharmanex and Big Planet products and services for each of the years ended December 31,
2002, 2003, and 2004. This table should be read together with the information presented in
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations,” which discusses the costs associated with generating the aggregate
revenue presented:
Revenue by Product
Category
(U.S. dollars in millions)
(1)
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Year Ended December 31,
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2002
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2003
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2004
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Product Category
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$
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%
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$
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%
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$
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%
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Nu Skin
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470.6
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48.8
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476.2
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48.3
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548.1
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48.2
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Pharmanex
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439.0
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45.5
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472.1
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47.8
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567.2
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49.8
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Big Planet
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54.5
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5.7
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38.2
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3.9
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22.6
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2.0
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Total
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964.1
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100.0
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986.5
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100.0
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1,137.9
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100.0
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(1)
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In 2004, over 88% of our sales were transacted in foreign currencies that are
converted to U.S. dollars for financial reporting purposes at weighted-average
exchange rates. Foreign currency fluctuations positively impacted reported
revenue by 4% in 2004 compared to 2003, and also positively impacted reported
revenue by 4% in 2003 compared to 2002.
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Nu Skin
.
Nu Skin is our original product line and offers over 100 premium
quality personal care products in the areas of daily skin care, advanced skin treatments,
ethnobotanical, and other advanced personal care products.
Our
strategy is to leverage our network marketing distribution model to establish Nu Skin as
an innovative leader in the personal care market. We are committed to continuously
improving and evolving our product formulations to incorporate innovative and proven
ingredients. In 2004, we introduced several new products, including
Nu Skin Tri-Phasic
White
,
Nu Skin Polishing Peel
, and
Epoch Calming Touch,
described in the
“Overview” section above.
Our
educated distributor force provides consumers with detailed information and instruction
about our Nu Skin products and guidelines for using the products most effectively, thereby
enabling us to bring more sophisticated ideas and technologies to market. We are committed
to developing tools to help our distributors market our products more effectively. In
early 2004, we introduced the Nu Skin
®
Regimen
-3-
Optimizer, a proprietary
software tool powered by Big Planet technology. This program integrates decades of skin
care expertise into an easy to use, mobile product recommendation tool. This mobile tool
serves as a complement to our use of the VISIA™ Complexion Analysis System in our
distributor centers around the world. This imaging system utilizes an imaging tool
produced by a third party, and provides customers with a more in-depth analysis of their
skin in order to tailor product recommendations to their specific needs.
Our
leading product categories in the Nu Skin division are daily skin care and advanced skin
treatments. The following table summarizes the current Nu Skin product line by category:
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Category
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Description
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Selected Products
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Daily Skin Care
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Our premium line of daily skin care products
consists of face and body products including cleansers, toners, moisturizers, specialty products and body
care.
Nutricentials
products fortified with topically applied nutrients uniquely position this line.
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Night Supply Nourishing
Cream
Liquid Body Bar
Enhancer
Celltrex Ultra Recovery Fluid
Perennial Intense Body
Moisturizer
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Advanced Skin Treatments
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Our advanced skin treatments are designed to target
specific skin care needs with ingredients scientifically proven to provide visible results for concerns
ranging from anti-aging to acne.
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Nu Skin 180° Anti-Aging
Skin Therapy System
Tru Face Line Corrector
Tru Face Essence
Tru Face Revealing Gel
Nu Skin Galvanic Spa System II
Nu Skin Clear Action
Acne
Medication System
Nu Skin Tri-Phasic White
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Ethnobotanicals
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Our
Epoch
line is distinguished by utilizing the traditions of indigenous cultures. Each
Epoch
product is formulated with botanical ingredients derived
from renewable resources found in nature. In addition, we contribute a percentage of our proceeds from
Epoch
sales to charitable causes.
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Epoch Baby
Calming Touch
Glacial Marine Mud
Ava puhi moni Shampoo
IceDancer Invigorating Leg Gel
FireWalker Moisturizing Foot
Cream
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Color Cosmetics
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Our
Nu Colour
cosmetics are an ideal continuation of a face care regimen. Our skin beneficial complexion products bring out the skin's natural radiance
and the wearable range of shades and blendable textures enhance natural beauty.
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Nu Colour Cosmetics:
Skin Beneficial Tinted Moisturizer
Bronzing Pearls
Replenishing Lipstick
Eye Makeup Remover
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-4-
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Category
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Description
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Selected Products
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Scion
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Scion
is a line of essential personal care products that provide
value-oriented solutions to meet basic grooming needs with quality ingredients.
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Scion Toothpaste
Scion Two-In-One Shampoo
Scion Hand and Body Wash
Scion Moisturizing Body Lotion
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Other Products
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Our personal care portfolio also includes daily use products such as hair care, scalp treatment and sun protection.
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DailyKind Mild Shampoo
FreeFall Detangling Spray
Nutriol Hair Fitness
Sunright Lip Balm
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Pharmanex
.
We currently offer over 100 Pharmanex nutritional products within our global
markets. We are committed to providing our customers with high-quality,
standardized and scientifically substantiated nutritional supplements. Pharmanex
nutritional supplements include our flagship
LifePak
line of
micronutrient and phytonutrient supplements, which accounted for 23% of our
total revenue and 46% of Pharmanex revenue in 2004. We also offer a line of
targeted Pharmanex nutritional supplements, weight management products and other
specialty products. We design Pharmanex nutritional products to promote healthy,
active lifestyles and general well being when used in conjunction with proper
diet and exercise.
We
believe that direct selling is a more effective method of marketing high-quality
nutritional supplements than traditional retailing channels because our distributors are
able to educate consumers about the benefits of our nutritional supplements and to
differentiate the quality and benefits of our products from those offered by competitors.
Our strategy is to further expand our nutritional supplement business by continuing to
introduce new, innovative products based on extensive research and development. Any
ingredients that are proven to have any long-term addictive or harmful effects are not
considered for product development, even if the short-term effects may be desirable. Our
research capability consists of research and development centers in Shanghai, China;
Beijing, China; and Provo, Utah. We have also established collaborative arrangements with
prominent research institutions and independent scientists throughout the world. Our
product development efforts are focused in the areas of anti-aging, weight management and
other nutrition issues. In 2004, we introduced several new products, including
MarineOmega
,
TRA
,
IgG Boost
and
Estera,
described in the
“Overview” section above.
We
are continuously looking for ways to help our distributors market our products more
effectively. In 2003, we introduced the BioPhotonic Scanner, an innovative, laser-based
scanning tool based on patented technology that measures the level of carotenoids (a
powerful antioxidant) in skin tissue. We believe we are the first nutrition company to
make available a non-invasive tool that will measure the level of antioxidant carotenoids
in the skin in order to observe the effects of regular nutritional supplementation. The
BioPhotonic Scanner was first made available to our distributors in the United States,
where we currently lease over 1,400 units to distributors for use in their promotion and
sale of nutritional supplements. In late 2003, we began making the BioPhotonic Scanner
available in our walk-in centers in some of our Asian markets and expanded the program
further in 2004, including the launch of the BioPhotonic Scanner in Japan in November 2004
and the introduction of BioPhotonic Scanner lease programs in Taiwan, Hong Kong, Europe,
and certain of our markets in Southeast Asia. We have also recently placed BioPhotonic
Scanners in our retail stores in China and in our walk-in centers in Latin America. There
are regulatory uncertainties in some markets, including the U.S., with respect to the
status of the BioPhotonic Scanner as a non-medical device. For a discussion of the risks
associated with these uncertainties, please refer to the section below entitled,
“Risk Factors.”
-5-
We
have also emphasized the use of our monthly product subscription program for our Pharmanex
products. This program is particularly well-suited for Pharmanex products including the
LifePak
daily supplement line, which come in ten day, fifteen day, or one-month
supply packages. We have found that our distributors are able to generate a higher
customer retention rate through the use of this program.
Pharmanex
also sells a
Vitameal
dehydrated food product made with a blend of enriched rice
and lentils.
Vitameals
are highly nutritious and designed to serve as an emergency
food supply for the home. Pharmanex also supplies
Vitameal
as part of a
humanitarian relief effort designed to satisfy the nutritional needs of children at risk
of starvation. We have implemented a program that provides a convenient way for
distributors to donate
Vitameal
products they purchase from us to relief
organizations for use in humanitarian relief. This initiative is maintained under the
Nourish the Children trademark. In the past 34 months, our distributors have provided over
20 million meals to starving children through this program. Almost 2 million of these
meals were distributed in Southeast Asia to children affected by the tsunami that hit in
late December 2004.
The
following table summarizes the current Pharmanex product lines by category:
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Category
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Description
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Selected Products
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Micronutrient Supplements
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Our
LifePak
family of daily supplements is designed to provide a beneficial mix of nutrients including vitamins, minerals and antioxidants.
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LifePak
LifePak Women
LifePak Prime
LifePak Trim
LifePak Teen
LifePak Kosher
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Targeted Nutritional Solutions
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Our self-care dietary supplements contain consistent levels
of botanical ingredients that are designed to provide consumers with targeted wellness benefits.
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Tegreen 97
ReishiMax GLp
MarineOmega
Cholestin
CordyMax Cs-4
Cortitrol
BioGingko 27/7
IgG Boost
Estera Women
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Weight Management
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Our
TRA
ephedra-free
line of weight management products was created to capitalize on the growing weight management category.
TRA
supplements are
complementary to any diet program that is currently on the market.
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OverDrive
FibreNet
TRA
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Other - Specialty Products
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Our portfolio of other nutritional products includes
healthy drinks and other specialty wellness products.
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Splash C
Appeal
AloeDrink
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-6-
Big Planet
.
Big Planet offers high technology products and services that are
currently centered around three product categories: business tools, digital photography
and home care. We evaluate emerging trends in technology and develop products that are
designed to capitalize on these trends while being easy to use. This allows us to provide
compelling and innovative products designed specifically for non-technical people, an
underserved market due to the common complexities of high-tech products. For example, in
2004 we introduced
BP Internet Security
, an advanced, yet easy-to-use Internet
security software product for home and small business computers, which addresses the
escalating threat of Internet security issues.
Our
Big Planet business tools products and services are designed to enable our distributors to
create and maintain an online business presence and to increase their productivity by
leveraging technology in the management of their direct selling activities. These products
include individual, personalized distributor websites that grant customers easy and
convenient access to information about our products and services. We host these websites
for our distributors and provide content with relevant product and business information.
Distributors may also configure their individual websites, customizing their marketing
efforts and conducting e-commerce activities across our product lines. Other Big Planet
products designed to enhance distributor activity include Internet access, advanced
telecommunication products, online business tools, which help our distributors to monitor
their sales activity, as well as set up meetings, communicate with their sales
organizations and conduct electronic-based marketing efforts.
Our
current development focus centers around digital photography. We believe that the
convergence of trends in digital cameras, mass storage and the Internet offers a unique
opportunity to provide a line of products and services that make it easy for consumers to
preserve, organize, share and enjoy their precious photographic memories. In 2004, we
introduced several new products in this category including:
Photo Saver CD
, a
service in which we scan traditional photographs and slides, converting them to a digital
form and storing them on a CD;
Movie Magic DVD
and
Picture Show DVD
, services
that translate digital photos into personalized movies and/or slide shows on a DVD
utilizing pictures and music selected by the customer. In 2005, we plan to introduce a
digital photo website,
Photomax.com
, which will make it easy for consumers to view,
organize and share digital pictures online.
We
target some investment at our
Ecosphere
line of home care products designed to
improve the personal environment by cleaning it and protecting it from potentially harmful
contaminants. This product line is developed primarily for our Asian markets and includes
water purification and surface cleaning products.
-7-
The
following table summarizes the current Big Planet product lines by category:
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Category
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Description
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Selected Products
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Business Tools
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Advanced tools and services
that help distributors and consumers establish an online presence and manage their business.
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Global Web Page
BP Mall
ISP for U.S. — by Qwest
ISP for Japan — by Nifty
BP Internet Security
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Ecosphere
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A line of home care products to improve the personal environment.
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Water Purifier
Filtering Showerhead
Surface Wipes
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Digital Photography
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A line of digital photography
services designed for non-technical consumers.
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Picture Show DVD
Movie Magic DVD
Photo Saver CD
Photomax Website
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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 that we believe are
reliable, reputable and deliver us high quality materials and services. For more than ten
years, we have acquired ingredients and products from one primary supplier that currently
manufactures approximately 41% of our Nu Skin personal care products. Our contract with
this supplier is for a one-year term that automatically renews each year for an additional
one-year term unless either party terminates the contract. We maintain a good relationship
with our supplier and do not anticipate that either party will terminate the contract in
the near term. We also have ongoing relationships with secondary and tertiary suppliers
who supply almost all of our remaining products and ingredients. We believe that, in the
event we are unable to source any products or ingredients from our major supplier, we
could produce or replace those products or substitute ingredients from our secondary and
tertiary suppliers without great difficulty or significant increases in our cost of goods
sold. Please refer to the section below entitled, “Risk Factors” for a
discussion of risks and uncertainties associated with our supplier relationships as well
as the sourcing of raw materials and ingredients.
In
2001, we established our own manufacturing facility in Shanghai, China where we currently
manufacture our personal care products sold through our retail stores in China. A small
portion of the output from this facility is exported to our other markets. As needed, this
facility could be expanded or other facilities could be built in China to provide
manufacturing capabilities for our other markets as a back-up to our major supplier in
addition to our secondary and tertiary suppliers.
The
identification of bovine spongiform encephalopathy (“BSE”, commonly known as
“mad cow disease”) in one cow in the United States in late 2003 has generally
not impacted our ability to import our personal care products into our international
markets, except for a small number of products in South Korea. In addition, China
suspended the importation of any finished goods or bulk cosmetic products from the United
States that do not contain a “BSE-free” certification. Since substantially all
of our personal care products sold through our retail stores in China are produced in our
Shanghai facility, we were able to easily address this issue by accelerating the local
manufacturing of the small number of products we were still exporting in bulk to China.
-8-
Pharmanex
.
Substantially all of our Pharmanex nutritional supplements and ingredients,
including
LifePak
, are produced or provided by third-party suppliers that
we consider to be among the best suppliers of these products and ingredients. We
currently rely on two suppliers for the majority of our Pharmanex products, one
of which supplies approximately 38% and the other of which supplies
approximately 26% of our Pharmanex nutritional supplements. We believe that, in
the event we were unable to source any products or ingredients from these
suppliers or our other current suppliers, we could produce or replace these
products or substitute ingredients without great difficulty or significant
increases in our cost of goods sold. Please refer to the section below entitled,
“Risk Factors” for a discussion of certain risks and uncertainties
associated with our supplier relationships as well as the sourcing of raw
materials and ingredients.
We
also maintain a facility located in Zhejiang Province, China, where we produce herbal
extracts for our
Tegreen 97,
ReishiMax GLp
and other products for sale globally.
We recently completed the build-out of a new manufacturing facility in Zhejiang Province
where we will produce the Pharmanex nutritional supplement products for sale through our
retail stores in China. We are in the process of building a new herbal extract plant
adjacent to this facility which will replace the existing herbal extract facility. We are
also currently planning to build a nutritional supplement manufacturing facility in China
for export, which is scheduled to be on-line by the end of 2006.
Prior
to 2004, substantially all of our Pharmanex revenue was generated from products that were
encapsulated in gel capsules produced with bovine materials. In late 2003, BSE (mad cow
disease) was identified in one cow in the United States, prompting a few countries,
including Japan and South Korea, to suspend importation of nutritional supplements
encapsulated with bovine-based gelatin produced in the United States. In addition, Japan
enacted a prohibition on the sale of such products in the country after February 16, 2004.
In response, we converted some gelatin encapsulated products into an all porcine-based
gelatin form, and switched to tablet form for other products, including
LifePak
for
the Japanese market. Following the implementation of these measures in early 2004, except
in the U.S., substantially all of our Pharmanex revenue in 2004 was generated from
products that are encapsulated in porcine-based gel capsules or from tablet products.
Substantially all of our nutritional supplement products for sale in the U.S. continue to
utilize bovine-based gel capsules.
To
help ensure the quality of Pharmanex products, we have implemented an extensive quality
control process designed to maintain tight quality controls through all stages of
development, including the sourcing of raw materials and the manufacturing and packaging
of our products. During investigations of potential sources of botanical raw materials, we
conduct analyses of samples from each potential source. Suppliers are chosen based on the
quality and concentration level of the active ingredients present in the source. We also
maintain close working relationships with the manufacturers of our products and their
quality control departments to implement quality assurance programs that meet our
requirements. We regularly check and monitor their compliance with these programs. Our
selection and retention of manufacturers is driven by their ability to meet our strict
quality control criteria.
Since
the initial introduction of the BioPhotonic Scanner in 2003, we have relied on a
third-party manufacturer to produce them. In December 2004, we opened a plant in Shanghai,
China where we self-manufacture BioPhotonic Scanners. This facility will allow us to
produce sufficient BioPhotonic Scanners to support recent launches in Japan and China, and
to support the needs for future launches in other markets.
Big
Planet
.
Other than web hosting, digital photography services, and online
distributor tools, nearly all of the Big Planet services and products we offer are
currently contracted or sourced from unaffiliated third parties pursuant to contractual
arrangements. By contracting to provide these services or by acting as a commissioned
agent for these services, we are able to avoid the large capital deployment and
-9-
investment
that would be required to build the infrastructure necessary to provide these services.
However, our profit margins and ability to deliver quality services at competitive prices
depend upon our ability to negotiate and maintain favorable terms with our third-party
providers. In connection with our Big Planet digital photography services, we are
developing our own internal infrastructure for these services.
Research and Development
We
continually invest in our research and development capabilities. Our research and
development expenditures were approximately $7 million in 2002, approximately $6 million
in 2003 and approximately $8 million in 2004. The majority of our recent research and
development activities have been directed towards our Pharmanex products. Much of our
Pharmanex research to date has been conducted in China, where we benefit from a very
educated, low cost labor pool that enables us to conduct research and clinical trials at a
much lower cost than we would incur in the United States. We also have a laboratory
adjacent to our office complex in Provo, Utah, which houses both Pharmanex and Nu Skin
research facilities and technical personnel. Because of our commitment to product
innovation, we will continue to commit significant resources to research and development
in the future.
We
believe that we are one of the few nutritional supplement companies in the United States
that has a research and development program modeled after the pharmaceutical industry. We
believe that this research and development capability provides us with an important
competitive advantage in the industry. We employ approximately 125 scientists at our
dedicated research and development centers in Shanghai, Beijing and Utah.
In
order to provide high quality, standardize products, we utilize our unique 6S Quality
Process
®
in our development and sourcing activities. We believe that this
6S Quality Process enhances our ability to provide consumers with safe, effective and
consistent products. The 6S Quality Process 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 potential products and ingredients.
|
|
|
•
|
|
Sourcing.
Investigating potential sources, evaluating the quality of sources
and performing botanical and chemical evaluations where appropriate.
|
|
|
•
|
|
Structure.
Determining the structural profile of natural compounds and active ingredients.
|
|
|
•
|
|
Standardization.
Standardizing the product dosage of its biologically relevant active ingredients.
|
|
|
•
|
|
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.
|
We
also have working relationships with other independent scientists, including a scientific
advisory board comprised of recognized authorities in various related disciplines, and we
evaluate a significant number of product ideas presented to us by outside sources. Our
Pharmanex division also establishes collaborative arrangements with prominent
universities and research institutions in the United States, Europe, and Asia. The staffs
of these institutions include scientists with expertise in natural product
-10-
chemistry,
biochemistry, pharmacology and clinical studies. Some of the university research centers
that we have worked with include UC Davis, UC Los Angeles, Vanderbilt University, Tufts
University, Columbia University, the University of Kansas, the University of Hong Kong
School of Medicine and Taiwan Academia Sinica.
For product development support of our Nu Skin personal care line, we have established an
aggressive licensing strategy and rely on an advisory board comprised of recognized
authorities in various disciplines as well as an in-house staff of research and marketing
professionals. We also have entered into an agreement with the Stanford University Medical
Center for directed research and clinical studies involving Nu Skin products and
materials. These activities are conducted at the Nu Skin Center for Dermatological
Research at Stanford University’s School of Medicine. This center focuses on
scientific investigation, dermatology research, product development and clinical trials.
We believe our strategic alliances provide important access to scientific developments
that can lead to innovative product concepts.
Geographic Sales Regions
We
currently sell and distribute our products in 40 markets, and we operate a direct selling
model in each of our markets except China. Our operations are divided into five geographic
regions: North Asia, Greater China, North America, South Asia/Pacific and Other Markets.
The following table sets forth the revenue for each of the geographic regions for the
years ended December 31, 2002, 2003 and 2004:
Revenue by Region
(U.S. dollars in millions)
|
|
Year Ended December 31,
|
|
|
|
2002
|
|
2003
|
|
2004
|
|
|
|
|
|
|
North Asia
|
|
$ 597.1
|
|
62%
|
|
$ 612.8
|
|
62%
|
|
$ 640.1
|
|
56%
|
|
|
Greater China
|
|
104.9
|
|
11
|
|
135.5
|
|
14
|
|
229.8
|
|
20
|
|
|
North America
|
|
142.7
|
|
15
|
|
127.6
|
|
13
|
|
145.7
|
|
13
|
|
|
South Asia/Pacific
|
|
91.1
|
|
9
|
|
75.8
|
|
8
|
|
81.8
|
|
7
|
|
|
Other Markets
|
|
28.3
|
|
3
|
|
34.8
|
|
3
|
|
40.5
|
|
4
|
|
|
|
|
$ 964.1
|
|
100%
|
|
$ 986.5
|
|
100%
|
|
$ 1,137.9
|
|
100%
|
|
North
Asia
.
The following table provides information on each of the markets in the North
Asia region including the year it was opened, 2004 revenue, and the percentage of our
total 2004 revenue for each market:
|
(U.S. dollars in millions)
|
Year Opened
|
2004 Revenue
|
|
Percentage of
2004 Revenue
|
|
|
|
|
|
|
|
|
|
|
|
Japan
|
|
1993
|
|
$
574.4
|
|
51%
|
|
South Korea
|
|
1996
|
|
$
65.7
|
|
5%
|
|
Japan
is our largest market globally, accounting for approximately 51% of our revenue in 2004.
Distributors and customers can purchase products via telephone or in any of three walk-in
centers in Japan. Most of our orders in Japan, however, come through monthly product
subscription programs and via the Internet, making our product ordering process efficient
and improving customer retention. We also operate distributor business consultation
centers in Tokyo and Osaka for the use of distributors in conducting business. We
currently offer most of our Nu Skin and Pharmanex products for sale in Japan and a limited
number of Big Planet products. In addition, all three product divisions offer a limited
number of locally developed products sold exclusively in our Japanese market. In November
2004, we
-11-
launched the BioPhotonic Scanner into Japan and began leasing them to some of our
key distributor leaders. We currently lease over 200 BioPhotonic Scanners to distributor
leaders in Japan, and plan to expand this program throughout 2005. We have also recently
implemented modifications to our compensation plan in this market to promote increased
participation in our monthly product subscription program as well as sponsorship and
executive distributor development.
In
South Korea, we currently offer most of our Nu Skin and Pharmanex products and a limited
number of Big Planet services. We also made the BioPhotonic Scanner available in our
walk-in centers in this market in January 2005, and plan on offering short-term
BioPhotonic Scanner leases to our top performing executive distributors. Products are
available through two walk-in centers in this market in addition to phone, Internet, and
monthly product subscriptions. The South Korean market has been subject to difficult
economic and geopolitical conditions during the last two years that have impacted the
industry overall. However, we enjoy strong local support from our distributor leaders who
remain dedicated to our products and business plan in South Korea and we have successfully
grown our business there during this difficult period.
Greater
China.
The following table provides information on each of the markets in
the Greater China region including the year that sales of Nu Skin products began, 2004
revenue, and the percentage of our total 2004 revenue for each market:
|
(U.S. dollars in millions)
|
Year Opened
|
2004 Revenue
|
|
Percentage of
2004 Revenue
|
|
|
|
|
|
|
|
|
|
|
|
China
|
|
2003
|
|
$
105.6
|
|
9%
|
|
|
Taiwan
|
|
1992
|
|
$
82.8
|
|
7%
|
|
Hong Kong
|
|
1991
|
|
$
41.4
|
|
4%
|
|
In
Hong Kong and Taiwan, we operate our global direct selling business model utilizing our
global compensation plan. In Hong Kong, we have a product showcase where distributors can
purchase products, a distributor business center where distributors can conduct business,
and a warehouse to store products. The vast majority of sales in Hong Kong are transacted
at our product showcase. In Taiwan, we operate four distributor walk-in centers where
products can be ordered and picked up along with a warehouse that ships the majority of
product orders to distributors and customers. In each of these markets we conduct frequent
training meetings for the sales force, quarterly seminars of a larger scale, and large
conventions every 12 to 18 months. In Hong Kong, our conventions are regional conventions
due to the proximity of Hong Kong to China.
We
currently offer a robust product offering of the majority of our Nu Skin and Pharmanex
products in Hong Kong and Taiwan, and only limited Big Planet products and services. In
recent years, we have begun to place significant focus in Hong Kong and Taiwan on our
monthly product subscription program for distributors and customers. The majority of our
revenue in these markets now comes from such orders, which has lead to improved retention
of customers and distributors and has streamlined the ordering process. In addition, in
late 2004 we began leasing BioPhotonic Scanners to our distributors in these two markets,
and we currently lease approximately 250 BioPhotonic Scanners to distributor leaders
there.
We
currently do not 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 which utilizes an employed sales
force to sell products through fixed retail locations. We rely on this employed 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
-12-
our ability to attract customers to our retail stores through our
employed sales force, to educate them about our products through frequent training
meetings, and to obtain repeat purchases from the sales employees and their customers. Our
model only allows for product sales to be transacted within our retail stores, and we
currently have over 120 retail locations in operation there. Our employed sales force
earns base pay and related benefits, as well as a bonus based upon personal sales efforts.
While our distributor leaders from other markets are able to introduce customers and sales
people to our stores, their promotional efforts are limited due to the restrictions on
direct selling in this market.
In
connection with its admission to the World Trade Organization, China agreed to adopt
direct selling regulations that will allow sales away from a fixed location. We currently
anticipate that these new regulations will be adopted in the next several months.
Depending on the specific requirements and restrictions set forth in the new regulations,
we may implement changes to our business model to the extent the regulations provide us
more flexibility to operate a direct selling business there. For example, it is widely
anticipated that it will be necessary for a company to have a certain minimum number of
retail stores in a particular province in order to conduct direct selling in such
province. Therefore, we plan to add to our current base of 120 stores in the country by
opening 80 to 100 more retail stores in 2005, and additional stores in 2006, in order to
begin receiving approvals for direct selling in the various provinces once the new
regulations are adopted. Although the regulations are not yet final, and we have not yet
been approved to conduct direct selling, we anticipate that we will be able to conduct
direct selling in four or five leading provinces and municipalities by the end of 2005,
and in additional provinces and municipalities in 2006. As our business model in China is
centered on our sales representatives and their productivity, we do not believe that store
openings will lead directly to new revenue in this market. Rather, revenue growth is
primarily dependent upon sales force productivity and the recruitment of new sales
representatives.
We
employed 5,400 full-time sales representatives in China as of December 31, 2004. Although
we enter into labor contracts with all potential new sales representatives, only a small
percentage complete the qualification process, become full-time sales representatives and
continue as such for an extended period of time. We provide these potential new sales
representatives with a minimum base pay and other labor benefits. As of December 31, 2004,
we had approximately 12,000 of such sales employees not yet considered full-time sales
representatives.
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. In January 2005 we began selling three
Pharmanex products, including
LifePak,
and at the same time placed BioPhotonic
Scanners in each of our 120 retail stores.
North
America
.
The following table provides information on each of the markets in the
North America region including the year it was opened, 2004 revenue, and the percentage of
our total 2004 revenue for each market:
|
(U.S. dollars in millions)
|
Year Opened
|
2004 Revenue
|
|
Percentage of
2004 Revenue
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
1984
|
|
$
135.7
|
|
12%
|
|
Canada
|
|
1990
|
|
$
10.0
|
|
1%
|
|
Our
worldwide headquarters are located in Provo, Utah, where we also operate a walk-in center
where distributors and customers can purchase products, and a business center for use by
distributors in conducting business. Substantially all of our Nu Skin and Pharmanex
products, as well as our Big Planet products and services, are available for sale in the
United States. The BioPhotonic Scanner has been a significant focus for us as an important
distributor business tool in the U.S. since its initial introduction in
-13-
2003. The
BioPhotonic Scanner has been an important factor in the growth of our Pharmanex business
over the last few years, as well as the significant growth in monthly product subscription
revenue in the United States. In 2004, our Pharmanex business in the United States grew
36% compared to 2003.
South
Asia/Pacific.
The following table provides information on each of the
markets in the South Asia/Pacific region including the year it was opened, 2004 revenue,
and the percentage of our total 2004 revenue for each market:
|
(U.S. dollars in millions)
|
Year Opened
|
2004 Revenue
|
|
Percentage of
2004 Revenue
|
|
|
|
|
|
|
|
|
|
|
|
Singapore/Malaysia/Brunei
|
|
2000/2001/2004
|
|
$
40.0
|
|
4%
|
|
|
Thailand
|
|
1997
|
|
$
25.6
|
|
2%
|
|
|
Australia/New Zealand
|
|
1993
|
|
$
13.1
|
|
1%
|
|
Philippines
|
|
1998
|
|
$
3.1
|
|
—*
|
|
We
operate our global direct selling business model utilizing our global compensation plan in
each of our markets in the South Asia/Pacific region. Similar to other markets, products
can be purchased over the phone or Internet in most of these markets and at various
walk-in centers. Marketing initiatives in these markets have centered around monthly
product subscription orders and the BioPhotonic Scanner, which is available in many of our
walk-in centers in these markets. We offer a majority of our Pharmanex and Nu Skin
products in these markets and very few Big Planet products. We are currently working on
plans to commence operations in Indonesia in 2005.
Other
Markets
.
The following table provides information on each of the markets in the
Other Markets region including the year it was opened, revenue for 2004, and the
percentage of our total 2004 revenue for each market:
|
(U.S. dollars in millions)
|
Year Opened
|
2004 Revenue
|
|
Percentage of
2004 Revenue
|
|
|
|
|
|
|
|
|
|
|
|
Europe
(1)
|
|
1995
|
|
$
36.6
|
|
4%
|
|
Latin America and Other
(2)
|
|
1994
|
|
$
3.9
|
|
—*
|
|
|
(1)
|
Europe includes operations in the following countries: United Kingdom, Germany,
Ireland, France, Belgium, the Netherlands, Luxembourg, Spain, Portugal, Italy,
Austria, Poland, Sweden, Iceland, Norway, Finland, Denmark, Israel and Hungary.
|
|
(2)
|
Latin America and Other includes the following countries: Brazil, Guatemala and
Mexico.
|
We
currently operate in 19 countries throughout Western, Southern, and Central Europe
offering a full range of Nu Skin, Pharmanex, and Big Planet products. Our facilities
include six full-service offices as well as multiple walk-in centers where distributors
and customers can purchase products. Our products are also available through phone and web
ordering.
Over
the past year we have made an investment in our Latin America markets and have implemented
some modifications to our compensation model in Mexico that we believe provide a more
attractive
-14-
opportunity for distributors in that market. We also believe that this
compensation model can be a useful prototype to help us compete in less developed
economies throughout the world including our other current markets in Latin America and
potential new markets in Eastern Europe, which we believe will be among the fastest
growing direct selling regions in the world over the next several years. We are also
working to improve margins in Mexico by importing products manufactured in our China
manufacturing facility. These initiatives have helped us attract top industry independent
distributor leaders to our business in Mexico, who are responsible for a significant
portion of the growth we are currently experiencing there.
In
Brazil, we have introduced 16 locally produced products under the Nu Skin Living™
brand. We are also currently working on plans to commence operations in Russia by mid-2006, and we are looking into other Eastern European markets as well.
Distribution
Overview.
The foundation of our sales philosophy and distribution system is network
marketing. We currently sell our products through independent distributors who
are not our employees in all of our markets except China. Our distributors
generally purchase products from us for resale to consumers and for personal
consumption. Because of the nature of our Big Planet products and services,
distributors buy a limited number of our Big Planet products for resale but
primarily act as independent sales representatives for our products and receive
a commission on product sales from us.
We
believe that network marketing is an effective vehicle to distribute our products because:
|
|
•
|
|
distributors
can educate consumers about our products in person, which we believe is more effective
for premium quality, differentiated 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, our distributors can provide customers higher
levels of service and encourage repeat purchases.
|
“Active
distributors” under our global compensation plan are 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, consisting of retail purchasers in China as well as non-distributors purchasing
products, generally on a monthly product subscription basis, directly from us in our other
markets outside of China. Throughout this Annual Report, we include preferred customers
who have purchased products for resale or personal consumption 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
level distributors” under our global compensation plan are those distributors who are
most seriously pursuing the direct selling opportunity and must achieve and maintain
specified personal and group sales volumes for a required period of time. 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. In
China, government regulations currently prevent us from implementing our direct sales
business model there. As a result, we have implemented a modified business model utilizing
retail stores and an employed sales force. See the discussion on China in
-15-
“Geographic
Sales Regions.” Employed full-time sales representatives are those sales
representatives that have completed a qualification process and receive a salary, labor
benefits and bonuses based on their personal sales efforts. These sales representatives
have a monthly volume commitment that is about 40% of the dollar amount of an executive
level distributor’s monthly volume commitment under our global compensation plan.
Throughout this Annual Report, we include full-time sales representatives in China in our
“executive level distributor” numbers in order to provide some level of
comparison between our China model with employed sales people and our global direct
selling model.
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, 2004, we had approximately 820,000 active distributors
of our products and services. Approximately 32,000 of these distributors were executive
level distributors. As of each of the dates indicated below, we had the following number
of executive distributors in the referenced regions:
Total Number of
Executive Distributors by Region
|
Region
|
|
2000
|
|
2001
|
|
2002
|
|
2003
|
|
2004
|
|
|
|
|
|
|
|
|
|
North Asia
|
|
14,968
|
|
16,891
|
|
17,668
|
|
17,013
|
|
16,637
|
|
|
Greater China
|
|
2,609
|
|
2,698
|
|
3,564
|
|
5,991
|
(1)
|
8,827
|
(2)
|
|
North America
|
|
2,632
|
|
2,419
|
|
2,693
|
|
2,861
|
|
3,099
|
|
|
South Asia/Pacific
|
|
435
|
|
1,842
|
|
2,972
|
|
2,175
|
|
2,076
|
|
|
Other Markets
|
|
737
|
|
989
|
|
1,018
|
|
1,091
|
|
1,377
|
|
|
Total
|
|
21,381
|
|
24,839
|
|
27,915
|
|
29,131
|
|
32,016
|
|
|
(1)
|
Includes
3,100 employed, full-time sales representatives in China.
|
|
(2)
|
Includes
5,437 employed, full-time sales representatives in China.
|
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 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.
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 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 consumes and
resells products, we believe that many of our distributors attempt, with varying degrees
of effort and success, to sponsor additional distributors. People are often attracted to
become distributors after using our products and becoming 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 obligates the distributor to abide by our
policies and procedures.
Global
Compensation Plan.
We believe that one of our key competitive advantages is our
global sales compensation plan. Under our global compensation plan a distributor is paid
consolidated monthly
-16-
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 full-time employed sales representatives
there do not participate in the global compensation plan, but are compensated according to
a retail sales model established for that market. Additionally, while global distributor
leaders are compensated based on sales activity of preferred customers and sales employees
in China, sales in China do not accrue to satisfy applicable sales volume requirements
within the global compensation plan.
Commissions
on the sale of an individual Nu Skin or Pharmanex product can reach approximately 58% of
the wholesale price. The actual payout percentage, however, varies depending on a
distributor’s level within the global compensation plan. On a global basis, the
overall commissions payout on these products has typically averaged approximately 41% to
43%. 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 and develop leadership characteristics. In addition, on a
monthly basis we evaluate a limited number of distributor requests 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.
High
Level of Distributor Incentives.
Based upon management’s knowledge of our
competitors’ distributor compensation plans, we believe that our global compensation
plan is among the most financially rewarding plans offered to distributors by leading
direct selling companies. Currently, there are two fundamental ways in which our
distributors can earn money:
|
|
•
|
|
through
retail markups on sales of products purchased by distributors at wholesale; and
|
|
|
•
|
|
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 from 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 computerized 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
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sponsoring activities. Because of our
efficient distribution system, we do not believe that most of our distributors maintain a
significant inventory of our products.
Technology
and Internet Initiatives.
We believe that the Internet has become increasingly
important to our business as more consumers communicate online and purchase products over
the Internet as opposed to traditional retail and direct sales channels. As a result, we
have committed significant resources to enhancing our e-commerce capabilities and the
abilities of our distributors to take advantage of the Internet. We have introduced a
global web page that allows a distributor to have a personalized website through which he
or she can sell products in many of our 40 global markets.
Rules
Affecting Distributors.
We closely monitor regulations in each market as well as
the activity of distributors to ensure that our distributor activities 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 ensure
that our distributors enjoy a level playing field and that distributors are not
disadvantaged by the activities of another. 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. Even though sponsoring
activities can be conducted in many countries, our distributors may not conduct marketing
activities outside of those countries in which we currently conduct business, and further
they may not export for sale products from one country to another.
Distributors
must represent to us that their receipt of commissions is based on retail sales and
substantial personal sales efforts. We must produce or pre-approve all sales aids used by
distributors such as videotapes, audiotapes, brochures and promotional clothing.
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 us.
Distributors may not use our trademarks or other intellectual property without our
consent.
Except
in China, products generally may not be sold, and our business opportunities may not be
promoted, in traditional 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 concerns. 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.
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We
systematically review reports of alleged distributor misbehavior. If we determine that one
of our distributors has violated any of our distributor 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 withholding of commissions until specified conditions are
satisfied or other appropriate injunctive relief.
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Product
Guarantees.
We believe that 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. Our experience with actual product returns has averaged less than 5% of annual
revenue through
2004.
Payment.
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. Cash, which represents a significant portion of
all payments, is received by order takers in the distribution centers or retail
stores in China when orders are placed.
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, our global compensation plan,
management strength, and appeal of 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.
Big
Planet Products and Services.
The markets for our Big Planet products and
services are also highly competitive. Many of our competitors for these products and
services have much greater name recognition and financial resources than we do. We compete
in this market by delivering products that are more user-friendly than those of our
competitors, developing unique features and product interfaces, partnering with leading
technology vendors whose competitive positioning can assist us, and leveraging our direct
selling channel strengths. The market for technology and telecommunication products is
very price sensitive. We rely on our ability to acquire quality and reliable services from
vendors at prices that allow our distributors to sell services at competitive prices and
still generate attractive commissions.
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 our trademark protection to be very important to
our business. Our major trademarks include Nu Skin, Pharmanex, Big Planet and
LifePak
. In addition, a number of our products and tools, including the 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 know-how. Our business is not substantially dependent
on any single licensed technology from any third party.
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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” 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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us or our distributors to register with governmental agencies;
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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.
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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. Based on our research
conducted in existing markets, the nature and scope of inquiries from government
regulatory authorities and our history of operations in those markets to date, we believe
that our 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 we
currently operate.
Because
China has restrictions on direct selling activities that prevent us from direct selling
our products through independent contractors, we have implemented a retail store model
utilizing an employed sales force. In connection with its admission to the World Trade
Organization, China agreed to establish regulations regarding sales away from fixed
locations. Regulatory authorities in China have been working on these regulations for
sometime, but final regulations have not been published or adopted. The direct selling
industry and the development of these regulations have generated a significant degree of
media scrutiny in China and there remains a high level of uncertainty with respect to the
specific requirements and restrictions that may be imposed in such new regulations and the
specific impact these regulations will have on our business. As some direct selling
companies are currently allowed to operate direct selling models in China as a result of
regulatory exemptions granted to them, the regulations should have the positive benefit of
creating a level playing field among direct sellers operating in China.
The
regulatory environment in China is complex. Regulations are subject to discretionary
interpretation by municipal and provincial level regulators. Because of the
government’s significant concerns about direct selling activities, it scrutinizes
very closely activities of direct selling companies. 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 clearly defined rules regarding direct selling
activities. As government regulators have reviewed our retail business model there, we
have made some modifications to our business model and policies in response to their
recommendations and directions. We expect that they will provide ongoing recommendations
and/or direction as to our method of operations.
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Because
we operate a direct selling model outside of China, our operations in China have attracted
significant regulatory and media scrutiny since we expanded our operations there in
January 2003. At times, investigations and related actions by government regulators have
caused an obstruction to our ability to conduct business in certain locations, and have
resulted in a few cases in fines being paid by our company. In each of these cases, we
have been allowed to recommence operations after the government’s investigation, and
no changes to our business model were required in connection with these fines and
obstructions.
We
anticipate that direct selling companies in China will continue to be scrutinized by the
government and the media even after the adoption of the new direct selling regulations as
companies adjust to the new regulations. We also expect to receive continued guidance and
direction as we work with regulators to address our business model and any changes we make
to comply with the new direct selling regulations.
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 United States Department of Agriculture in the
United States, State Attorneys General and other state regulatory agencies, and the
Ministry of Health, Labor and Welfare in Japan and similar government agencies in each
market in which we operate. For example, in Japan, the Ministry of Health, Labor and
Welfare requires us to have an import business license and to register each personal care
product imported into Japan. In Taiwan, all “medicated” cosmetic and
pharmaceutical 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 eighteen months. These
regulations in our various markets can limit our ability to import products into our
markets and can delay introductions of new products into markets as we go through the
registration and approval process for our 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
.
Our
Pharmanex products are subject to various regulations in the markets in which we operate.
In the United States, these products are regulated by the Food and Drug Administration.
Because our products are regulated more like foods 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 an unsafe substance from the market. In our foreign
markets, the products are generally regulated by similar government agencies such as the
Ministry of Health and Welfare in Japan 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 categorized as “health foods” are subject to extensive laboratory
analysis by governmental authorities, and the product registration process for these
products takes approximately two years.
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
considered a “food” in certain markets may be treated as a
“pharmaceutical” in other markets. For example, in Japan if a specified
ingredient is not listed as a
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“food” by the Ministry of Health and Welfare, we
must either modify the product that we are marketing in the United States to eliminate, or
provide a substitute for, that ingredient, or petition the government to treat such
ingredient as a food. We experience similar issues in our other markets. As a result, we
often must change or modify the ingredients and/or the levels 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. Because of recent
negative publicity associated with some supplements such as “ephedra” (which we
have never marketed) and other potentially harmful ingredients, there has been an
increasing movement in the United States and other markets to increase the regulation of
dietary supplements which could impose additional restrictions or requirements in the
future.
Most
of our existing major markets also regulate product claims and advertising regarding the
types of claims and representations that can be made regarding the efficacy of products.
This is particularly true with respect to our dietary supplements because we typically
market them as foods or health foods. 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 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. In addition, all product
claims must be substantiated.
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.
Other Regulatory Issues.
As a United States entity operating through subsidiaries in
foreign jurisdictions, we are subject to foreign exchange control, transfer pricing and
custom laws that regulate the flow of funds between our subsidiaries and us 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
inquiries from government regulatory authorities, from time to time, 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 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.
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Employees
As
of December 31, 2004, we had approximately 10,000 full- and part-time employees,
approximately 5,400 of whom are employed full-time sales representatives in our China
operations. We also had labor contracts with an additional approximately 12,000 potential
new sales representatives, only a small percentage of whom are expected to complete the
qualification process and become full-time sales representatives. None of our employees is
represented by a union or other collective bargaining group, with the exception of the
limited number of employees involved in our operations in Brazil. We believe that our
relationship with employees is good, and we do not currently 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.
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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the expectation that our relationship with our current primary suppliers will not end in
the near term, and the belief that we could produce or source our personal care products
from other suppliers and expand manufacturing capabilities in China, and replace our
primary suppliers of Pharmanex products without great difficulty or increased cost;
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our
plans to build and open a nutritional supplement manufacturing facility in China for
export by the end of 2006;
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our belief that we can produce sufficient BioPhotonic Scanners in our new manufacturing
facility in China to support recent launches in Japan and China, as well as future
launches in other markets;
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our
plans to continue to develop new, innovative products and to improve and evolve our
existing product formulations;
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our
plans to commit significant resources to research and development in the future;
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our
plans to continue to implement an aggressive licensing and strategic research alliances
in order to develop innovative product concepts;
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our
belief that providing effective distributor support will be important to our success;
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our
plans to continue to develop tools and initiatives to help our distributors market our
products more effectively;
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our plans to continue to enter and expand new markets, including Indonesia, Russia, and
Eastern Europe, and our belief that Eastern Europe will be among the fastest growing
direct selling regions in the world over the next several years;
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our plans to add additional retail stores in China in order to obtain a direct selling
license there in connection with the anticipated new direct selling regulations, and our
belief that the new regulations should benefit us by creating a level playing field among
direct sellers operating in that country; and
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our
belief that we do not currently foresee a shortage in qualified personnel necessary to
operate our business.
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These
and other forward-looking statements are subject to various risks and uncertainties
including those described below under “Risk Factors” and in “Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of
Operations.”
Risk Factors
We
face a number of substantial risks. Our business, financial condition or results of
operations could be harmed by any of these risks. The trading price of our common stock
could decline due to any of these risks, and they should be considered in connection with
the other information contained in this Annual Report on Form 10-K. These risk factors
should be read together with “Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations.”
Currency exchange rate
fluctuations could lower our revenue and net income.
In
2004, we recognized approximately 88% of our revenue in markets outside of the United
States in each market’s respective local currency. We purchase inventory primarily in
the United States in U.S. dollars. In preparing our financial statements, we translate
revenue and expenses in foreign countries from their local currencies into U.S. dollars
using weighted-average exchange rates. If the U.S. dollar strengthens relative to local
currencies, particularly the Japanese yen inasmuch as we generated approximately 51% of
our 2004 revenue in Japan, our reported revenue, gross profit and net income will likely
be reduced. Given the global, complex political and economic dynamics that effect exchange
rate fluctuations, we cannot estimate the effect these fluctuations may have upon future
reported results or our overall financial condition. Although we attempt to reduce our
exposure to short-term exchange rate fluctuations by using foreign currency exchange rate
contracts for the Japanese yen, we cannot be certain these contracts or any other hedging
activity will effectively reduce exchange rate exposure. In addition, there have been
recent indications that the Chinese government may allow the yuan to float against the
U.S. dollar, which would result in exchange rate risk for our Chinese operations.
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Because our Japanese operations
account for a majority of our business, adverse changes in our business operations in
Japan would harm our business.
Approximately
51% of our 2004 revenue was generated in Japan. Various factors could harm our business in
Japan, including worsening economic conditions. Many of our competitors have seen their
businesses in this market contract in the last few years, which we believe is primarily a
result of economic conditions during this period. We believe our operating results have
been negatively impacted in the past in part because of economic conditions, and continued
or worsening economic and political conditions in Japan could impact our revenue and net
income. In addition, we continue to face increasing competition from existing and new
competitors in Japan. Our financial results would be harmed if our products, business
opportunity or planned growth initiatives do not retain and generate continued interest
and enthusiasm among our distributors and consumers in this market. If the BioPhotonic
Scanner does not generate distributor excitement or attract new distributors or customers
in Japan, it may limit our prospects for growth in that market.
If we are unable to retain our
existing independent distributors and recruit additional distributors, our revenue will
not increase and may even decline.
We
distribute almost all of our products through our independent distributors (including
sales representatives) and we depend on them to generate virtually all of our revenue. Our
distributors may terminate their services at any time, and, like most direct selling
companies, we experience high turnover among distributors from year to year. As a result,
in order to maintain sales and increase sales in the future, we need to continue to retain
existing distributors and recruit additional distributors. To increase our revenue, we
must increase the number of and/or the productivity of our distributors.
We
have experienced periodic declines in both active distributors and executive distributors
in the past. The number of our active and executive distributors may not increase and
could decline again in the future. While we take many steps to help train, motivate and
retain distributors, we cannot accurately predict how the number and productivity of
distributors may fluctuate because we rely primarily upon our distributor leaders to
recruit, train and motivate new distributors. Our operating results could be harmed if we
and our distributor leaders do not generate sufficient interest in our business to retain
existing distributors and attract new distributors.
The number and productivity of our distributors also depends on several additional
factors, including:
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adverse publicity regarding us, our products, our distribution channel or our competitors;
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a
lack of interest in, or the technical failure of, existing or new products;
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the
public's perception of our products and their ingredients;
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the
public's perception of our distributors and direct selling businesses in general;
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our
actions to enforce our policies and procedures; and
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general
economic and business conditions.
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In addition, we may face saturation or maturity levels in a given country or market which
could negatively impact our ability to attract and retain distributors in such market.
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Our expansion of operations in
China has resulted in governmental scrutiny, and our operations in China may be harmed by
the results of such scrutiny.
The
Chinese government banned direct selling activities in China in 1998, subject to certain
limited exceptions. The government has rigorously monitored and enforced this ban. In the
past, the government has taken significant actions against companies that the government
found were engaging in direct selling in violation of applicable law, including shutting
down their businesses and imposing substantial fines. Although a few of our global direct
selling competitors have authorization to conduct limited direct selling activities after
the 1998 ban, we have not received such authorization. Consequently, we have not
implemented our direct sales model in China. Instead, we have implemented a business model
that utilizes retail stores and an employed sales force that we believe complies with
applicable regulations. We also allow distributor leaders from outside of China to help us
recruit, find, train and motivate our employed sales force in China. Frequently,
individuals, including our competitors, complain to local regulatory agencies that our
China business model violates applicable regulations on direct selling. As a result, we
regularly visit with regulators to address their questions and concerns and explain our
local business model. We also use our best efforts to train our China sales force on our
business model.
The
regulatory environment in China is evolving, and officials in the Chinese government often
exercise discretion in deciding how to interpret and apply applicable regulations. We have
made some modifications to our business model and policies in response to concerns
expressed by governmental authorities prior to and since we opened for business in January
2003. In addition, some of our distributors living outside of China and some of our
employed sales representatives in China have engaged in activities that violated our
policies in this market and resulted in some regulatory concern and some adverse
publicity. In addition, reviews and investigations by government regulators have at
times obstructed our ability to conduct business and have resulted in several cases in
fines being paid by us, which in the aggregate have been less than 1% of our revenue in
China since we began operating there. We may incur similar or more severe sanctions in the
future. Occasionally, we have also been asked to cease sales activity in some stores while
the regulators review our operations. While, in each of these cases, we have been allowed
to recommence operations after the government’s review, there is no assurance that
this will always be the case.
Although
we have worked closely with both national and local governmental agencies in implementing
our plans, our efforts to comply with local laws may be harmed by a rapidly evolving
regulatory climate, concerns about activities resembling direct selling and any subjective
interpretation of laws. Any determination that our operations or activities, or the
activities of our employed sales representatives or distributors living outside of China,
are not in compliance with applicable regulations could result in the imposition of
substantial fines, extended interruptions of business, restrictions on our ability to open
new stores or expand into new locations, changes to our business model, the termination of
required licenses to conduct business, limitations on the number of sales persons we can
employ, or other actions, all of which would harm our business.
If China fails to adopt new direct
selling regulations, or if these regulations are not favorable to us, this could harm our
business.
In
connection with its admission to the World Trade Organization, China agreed to establish
regulations regarding sales away from fixed locations. Chinese regulators have indicated
that they intend to publish new direct selling regulations within the next several months.
There can be no assurance that these regulations will be adopted or, if adopted, that they
will benefit us. While we anticipate that we will be able to obtain a direct selling
license under any new proposed regulations, there can be no assurance that we will be able
to obtain such a license should we apply. There has been some uncertainty and confusion
regarding the direction of the new regulations and the type of restrictions or
requirements that
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may be imposed under such regulations. Although we currently do not
operate a direct selling business in China, our future growth could be harmed if the
regulations are not adopted or are unfavorable, if the adoption or implementation of new
regulations are delayed further than anticipated, or if we are unable to obtain a license
for direct selling under these regulations. In the event the new regulations prevent us
from offering a distributor compensation model comparable to what we offer in other
markets, our business may be negatively impacted. In addition, if the Chinese government
adopts new direct selling regulations, these could negatively impact our current business
model in China if they incorporate changes that impose restrictions on us, or if
interpretations of existing laws change as a result of such new regulations which require
us to make changes to our business model in ways that could harm our business in this
market.
If we are unable to open new
stores in China as quickly as we would like, our ability to grow our business there could
be negatively impacted.
It
is widely anticipated that new direct selling regulations expected to be adopted in China
during the next several months will require a company to have a certain minimum number of
retail stores in a particular province in order to conduct direct selling in such
province. Regulatory provisions require us to obtain a license for each store that we
operate in China and regulators have broad discretion in approving these licenses. If
regulators fail to approve licenses for new stores at a rate that meets our growth
demands, this could limit our ability to obtain direct selling licenses in some provinces
and harm our business.
If we are unable to successfully
manage rapid growth in China, our operations may be harmed.
As
a result of Chinese regulations prohibiting us from implementing our direct selling model
in China, we have opened over 100 of our own retail stores and hired a large and rapidly
growing employed sales force. In addition, due to import restrictions in China, we have
built and operate our own manufacturing plant to produce the products that we sell in our
stores in China. We have experienced rapid growth in China, and we cannot assure you that
we will be able to successfully manage rapid expansion of manufacturing operations and a
rapidly growing and dynamic sales force. We also cannot assure you that we will not
experience difficulties in dealing with or taking employment related actions (such as
hiring, terminations and salary administration, including social benefit payments) with
respect to our employed sales representatives, particularly given the highly regulated
nature of the employment relationship in China. If we are unable to effectively manage
such growth and expansion of our retail stores, manufacturing operations or our employees,
our government relations may be compromised and our operations in China may be harmed.
Intellectual property rights are
difficult to enforce in China.
Chinese
commercial law is relatively undeveloped compared to most of our other major markets, and,
as a result, we may have limited legal recourse in the event we encounter significant
difficulties with patent or trademark infringers. Limited protection of intellectual
property is available under Chinese law, and the local manufacturing of our products may
subject us to an increased risk that unauthorized parties may attempt to copy or otherwise
obtain or use our product formulations. As a result, we cannot assure you that we will be
able to adequately protect our product formulations.
Technical issues associated with
the BioPhotonic Scanner could negatively impact the success of our scanner program, which
could harm our business.
Our
introduction of a laser-based scanner that measures the levels of caratenoid antioxidants
in the skin has generated considerable enthusiasm among some of our distributors. We have
not had experience
-27-
in developing, manufacturing, and marketing sophisticated technology
products such as the BioPhotonic Scanner. As with any new technology, we have experienced
technical issues in developing and manufacturing a scanner that meets required
specifications and performs at a consistent level. If we are unable to timely resolve
technical issues or are otherwise unable to deliver scanners that perform to a standard
expected by our distributors or if we are unable to make a sufficient number of scanners
available to interested distributors at reasonable lease rates, we could dampen
distributor enthusiasm and this may harm our business. Because of the substantial
investment in the scanner initiative, we may not be able to recoup our investment or may
have to record an expense that would negatively impact earnings if the scanner program is
not successful for any reason.
If the BioPhotonic Scanner is
determined to be a medical device in a particular geographic market or if our distributors
use it for medical diagnostic purposes, this could harm our ability to utilize it.
In March 2003 the FDA questioned the status of the BioPhotonic Scanner as a
non-medical device. We subsequently filed an application with the FDA to have it
classified as a non-medical device. The FDA has not yet acted on our
application. There are various factors that could determine whether the
BioPhotonic Scanner is a medical device including the claims that we or our
distributors make about it. We have faced similar uncertainties and regulatory
issues in other markets with respect to the status of the BioPhotonic Scanner as
a non-medical device and the claims that can be made in using it. A
determination in any of these markets that it is a medical device or that
distributors are using it to make medical claims or perform medical diagnoses
could negatively impact our plans for or use of the BioPhotonic Scanner in such
market. In the event medical device clearance is required in any market,
obtaining clearance could require us to provide documentation concerning its
clinical utility and to make some modifications to its design, specifications
and manufacturing process in order to meet stringent standards imposed on
medical device companies. There can be no assurance we would be able to provide
such documentation and make such changes promptly or in a manner that is
satisfactory to regulatory authorities.
We are currently involved in litigation with another licensee of the
technology utilized in the BioPhotonic Scanner. The other licensee has alleged
that the BioPhotonic Scanner is being used for medical diagnostic purposes in a
medical clinical setting by certain distributors who are medical doctors,
dentists and chiropractors. We allow such practitioners to use the BioPhotonic
Scanner solely for promoting the sale of our nutritional supplements and not for
medical diagnostic purposes or in a medical clinical setting, but the other
licensee alleges that the way in which the BioPhotonic Scanner is used
by such practitioners violates our license. We disagree. We estimate that we
lease 10% or less of our active BioPhotonic Scanners in the United States to such practitioners. An
adverse ruling in this matter could limit the ability of distributors who are
health professionals to utilize the BioPhotonic Scanner, which could have a
negative impact on our business.
Governmental regulations relating
to the marketing and advertising of our products and services, in particular our
nutritional supplements, may restrict or inhibit our ability to sell these products.
Our
products and our related marketing and advertising efforts are subject to extensive
governmental regulations by numerous domestic and foreign governmental agencies and
authorities. These include the FDA, the FTC, the Consumer Product Safety Commission and
the Department of Agriculture in the United States, State Attorneys General and other
state regulatory agencies and the Ministry of Health, Labor and Welfare in Japan along
with similar governmental agencies in other foreign markets where we operate.
Our
markets have varied regulations concerning product formulation, labeling, packaging and
importation. These laws and regulations often require us to, among other things:
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reformulate
products for a specific market to meet the specific product formulation laws of that
country;
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conform
product labeling to the regulations in each country; and
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register or qualify products with the applicable governmental authority or obtain
necessary approvals or file necessary notifications for the marketing of our products.
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Restrictions
on or our ability 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, regardless of the existence of research and independent
studies that may support such claims. These product claim restrictions could prevent us
from realizing the potential revenue from some of our products.
Recent negative publicity
concerning supplements with certain controversial ingredients has spurred efforts to
change existing laws and regulations with respect to nutritional supplements that, if
successful, could result in more restrictive and burdensome regulations.
There
have been some recent injuries and deaths that have been attributed to the use of
nutritional supplements that contain ephedra (which we have never sold) and other
controversial ingredients that have generated negative publicity. Because of this negative
publicity, there has been an increasing movement in the United States and other markets to
increase the regulation of dietary supplements which could impose additional restrictions
or requirements in the future. Although we are committed to not market nutritional
supplements that contain any substances such as ephedra that are controversial and that
could pose health risks, our operations could be harmed if governmental laws or
regulations are enacted that restrict the ability of companies to market or distribute
nutritional supplements or impose additional burdens or requirements on nutritional
supplement companies as a result of public reaction to the recent injuries and deaths
caused by supplements that do contain such ingredients.
If we are unable to successfully
expand operations in any of the new markets we have currently targeted, we may have
difficulty achieving our long-term objectives.
A
significant percentage of our revenue growth over the past decade has been attributable to
our expansion into new markets. For example, the revenue growth we experienced in the last
two years was due in part to our successful expansion of operations into China. Moreover,
our growth over the next several years depends in part on our ability to successfully
introduce our products and our distribution system into new markets, including Indonesia
and Russia and further development of China and Eastern Europe. In addition to the
regulatory difficulties we may face in gaining access into these new markets, we could
face difficulties in achieving acceptance of our premium-priced products in developing
markets. In the past, we have struggled to operate successfully in developing country
markets, such as Latin America. This may also be the case in Eastern Europe and the other
new markets into which we currently intend to expand. If we are unable to successfully
expand our operations into these new markets, our opportunities to grow our business may
be limited, and, as a result, we may not be able to achieve our long-term objectives.
In
addition, sometimes the opening of a new market or the introduction of a key initiative in
a market can have a negative impact on other markets if it attracts the attention and time
of key executive distributor leaders from other markets.
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Global political issues and
conflicts could harm our business.
Because
a substantial portion of our business is conducted outside of the United States, our
business is subject to global political issues and conflicts, including terrorism threats,
tensions related to North Korea, political tensions between the People’s Republic of
China and Taiwan, and other issues. If these conflicts or issues escalate, or if there is
increased anti-American sentiment, this could harm our foreign operations. In addition,
changes and actions by governments in foreign markets, in particular those markets such as
China where capitalism and free market trading is still evolving, could harm our business.
Adverse publicity concerning our
business, marketing plan or products could harm our business and reputation.
The
size of our distribution force and the results of our operations can be particularly
impacted by adverse publicity regarding us, the legality of our distributor network, our
products or the actions of our distributors. Specifically, we are susceptible to adverse
publicity concerning:
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suspicions
about the legality and ethics of network marketing;
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the
ingredients or safety of our or our competitors' products;
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regulatory
investigations of us, our competitors and our respective products;
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the
actions of our current or former distributors; and
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public
perceptions of direct selling businesses generally.
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In
addition, in the past we have experienced negative publicity that has harmed our business
in connection with regulatory investigations and inquiries. We may receive negative
publicity in the future, and it may harm our business and reputation.
Although our distributors are
independent contractors, improper distributor actions that violate laws or regulations
could harm our business.
Distributor
activities in our existing markets that violate governmental laws or regulations could
result in governmental actions against us in markets where we operate. Except in China,
our distributors are not employees and act independently of us. We implement strict
policies and procedures to ensure our distributors will comply with legal requirements.
However, given the size of our distributor force, we experience problems with distributors
from time to time. For example, product claims made by some of our distributors in 1990
and 1991 led to an investigation by the FTC, which resulted in our entering into a consent
decree with the FTC as described below.
Inability of new products to gain
distributor and market acceptance could harm our business.
A
critical component of our business is our ability to develop new products that create
enthusiasm among our distributor force. If we are unable to introduce new products planned
for introduction, our distributor productivity could be harmed. In addition, if any new
products fail to gain market acceptance, are restricted by regulatory requirements or have
quality problems, this would harm our results of operations. Factors that could affect our
ability to continue to introduce new products include, among others, government
regulations, the inability to attract and retain qualified research and development staff,
the termination of third-party research and collaborative arrangements, proprietary
protections of
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competitors that may limit our ability to offer comparable products and the
difficulties in anticipating changes in consumer tastes and buying preferences.
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
determination that we or 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 create negative publicity which could
detrimentally affect our efforts to recruit or motivate distributors and attract customers
and, consequently, reduce revenue and net income.
In
the early 1990s, we entered into voluntary consent agreements with the FTC and a few state
regulatory agencies relating to investigations of our distributors’ product claims
and practices. These investigations centered on alleged unsubstantiated product and
earnings claims made by some of our distributors. We believe that the negative publicity
generated by this FTC action, as well as a subsequent action in the mid-1990s related to
unsubstantiated product claims, harmed our business and results of operations in the
United States. Pursuant to the consent decrees, we agreed, among other things, to
supplement our procedures to enforce our policies, to not allow distributors to make
earnings representations without making additional disclosures relating to average
earnings and to not make, or allow our distributors to make, product claims that were not
substantiated. We have taken various actions, including implementing a more generous
inventory buy-back policy, publishing average distributor earnings information,
supplementing our procedures for enforcing our policies, and reviewing distributor product
sales aids, to address the issues raised by the FTC and state agencies in these
investigations. As a result of the previous investigations, the FTC makes inquiries from
time to time regarding our compliance with applicable laws and regulations and our consent
decree. Any further actions by the FTC or other comparable state or federal regulatory
agencies, in the United States or abroad, could have a further negative impact on us in
the future.
In
addition, we are susceptible to government-initiated campaigns that do not rise to the
level of formal regulations. For example, the South Korean government, several South
Korean trade groups and members of the South Korean media initiated campaigns in 1997 and
1998 urging South Korean consumers not to purchase luxury or foreign goods. We believe
that these campaigns and the related media attention they received, together with the
economic recession that occurred in the late 1990s in the South Korean economy,
significantly harmed our South Korean business. We cannot assure you that similar
government, trade group or media actions will not occur again in South Korea or in other
countries where we operate or that such events will not similarly harm our operations.
The loss of key high-level
distributors could negatively impact our distributor growth and our revenue.
As
of December 31, 2004, we had approximately 820,000 active independent distributors, sales
representatives and preferred customers, including approximately 32,000 executive level
distributors or full-time sales representatives. Approximately 385 distributors occupied
the highest distributor level under our global compensation plan as of that date. These
distributors, together with their extensive networks of downline 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 the distributor’s network of downline distributors,
whether by their own choice or through disciplinary actions by us for violations of our
policies and procedures, could negatively impact our distributor growth and our revenue.
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Laws and regulations may prohibit
or severely restrict our direct sales efforts and cause our revenue and profitability to
decline.
Various
government agencies throughout the world regulate direct sales practices. 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
order cancellations, product returns, 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
reporting requirements to regulatory agencies; and/or
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require
us to ensure that distributors are not being compensated based upon the recruitment of
new distributors.
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Complying
with these widely varying and sometimes inconsistent rules and regulations can be
difficult and require the devotion of significant resources on our part. If we are unable
to continue business in existing markets or commence operations in new markets because of
these laws, our revenue and profitability will decline. Countries where we currently do
business could change their laws or regulations to negatively affect or prohibit
completely direct sales efforts. In addition, 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. If any governmental authority were to bring a regulatory enforcement action
against us that interrupts our business, revenue and earnings would likely suffer.
Challenges by private parties to
the form of our network marketing system could harm our business.
We
may be subject to challenges by private parties, including our distributors, to the form
of our network marketing system or elements of 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 and to distinguish between
legitimate network marketing distribution plans and unlawful pyramid schemes. We have
adopted rules and policies based on case law, rulings of the FTC, discussions with
regulatory authorities in several states and domestic and global industry standards. 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. 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, particularly in any civil challenge by a current or former distributor.
Increases in duties on our
imported products in our markets outside of the United States could reduce our revenue and
harm our competitive position.
Historically,
we have imported most of our products into the countries in which they are ultimately
sold. These countries impose various legal restrictions on imports and typically impose
duties on our products. In any given country, regulators may challenge our methodologies
used in determining our duties and other amounts owed, or may increase duties on imports.
Such increases by regulators may
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reduce our profitability and harm our competitive
position relative to locally produced goods. For example, in October 2004, we were
assessed by the Yokohama customs authorities in Japan a total of approximately $9 million,
net of any recovery of consumption taxes, for duties on products imported into Japan from
October 2002 through October 2003. The value and methodology we used for determining the
amount of duties payable for these periods is consistent with prior years and has been
previously reviewed on several occasions by the audit division of the Japan customs
authorities, and reviewed and approved by the Valuation Department of the Yokohama customs
authority. As such, we believe the assessment is improper and we have filed letters of
protest with Yokohama customs. We expect to receive a reply within the next couple of
months. If necessary, we will appeal this issue to the Ministry of Finance in Japan. In
order to file our letter of protest with Yokohama customs, we were required to pay the
amount that was assessed. In addition, the Audit Division of Yokohama customs has recently
completed an audit of the period from November 2003 through October 2004. Although we have
not yet been informed of the results of this audit, we may be assessed for additional
duties related to this period, which we anticipate would be a similar amount to the prior
assessment. We would file letters of protest with Yokohama customs in a similar manner in
case of any such assessment. To the extent we are unable to successfully defend ourselves
against this or other such challenges by regulators or our methodologies, we may be
required to pay additional assessments and penalties and increased duties as a result
which may, individually or in the aggregate, negatively impact our gross margins and
operating results.
Governmental authorities may
question our intercompany transfer pricing policies or change their laws in a manner that
could increase our effective tax rate or otherwise harm our business.
As
a U.S. company doing business in international markets through subsidiaries, we are
subject to foreign tax and intercompany pricing laws, including those relating to the flow
of funds between our company and our subsidiaries. Regulators in the United States and in
foreign markets closely monitor our corporate structure and how we effect intercompany
fund transfers. If regulators challenge our corporate structure, transfer pricing
mechanisms or intercompany transfers, our operations may be harmed, and our effective tax
rate may increase. Tax rates vary from country to country, and, if regulators determine
that our profits in one jurisdiction may need to be increased, we may not be able to fully
utilize all foreign tax credits that are generated, which will increase our effective tax
rate. For example, our corporate income tax rate in the United States is 35%. If our
profitability in a higher tax jurisdiction, such as Japan where the corporate tax rate is
currently set at 46%, increases disproportionately to the rest of our business, our
effective tax rate may increase. The various customs, exchange control and transfer
pricing laws are continually changing and are subject to the interpretation of
governmental agencies. Despite our efforts to be aware of and comply with such laws and
changes to and interpretations thereof, there is a risk that we may not continue to
operate in compliance with such laws. We may need to adjust our operating procedures in
response to such changes, and as a result our business may suffer.
The loss of suppliers could harm
our business.
For
approximately ten years, we have acquired ingredients and products from a supplier that
currently manufactures approximately 41% of our Nu Skin personal care products. In
addition, we currently rely on two suppliers for a majority of Pharmanex nutritional
supplement products, one of which supplies approximately 38% and the other of which
supplies approximately 26%. In the event we were to lose any of these suppliers and
experience any difficulties in finding or transitioning to alternative suppliers, this
could harm our business. In addition, we obtain some of our products from sole suppliers.
We also license the right to distribute some of our products from third parties. Although
none of these products individually represent a substantial portion of our revenue, in the
event we are unable to renew these contracts, we may need to discontinue some products or
develop substitute products, which could harm our revenue. In addition, if we experience
supply shortages or regulatory impediments with respect to the raw materials and
ingredients we use in our products (as was the case with BSE issues described below),
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we
may need to seek alternative supplies or suppliers. If we are unable to successfully
respond to such issues our business could be harmed.
Production difficulties and quality
control problems could harm our business.
Occasionally,
we have experienced production difficulties with respect to our products, including the
delivery of products that do not meet our quality control standards. These quality
problems have resulted in the past, and could result in the future, in stock outages or
shortages in our markets with respect to products, harming our sales and creating
inventory write-offs for unusable product. In addition, these issues can negatively impact
distributor confidence as well as potentially invite additional governmental scrutiny in
our various markets.
We depend on our key personnel,
and the loss of the services provided by any of our executive officers or other key
employees could harm our business and results of operations.
Our
success depends to a significant degree upon the continued contributions of our senior
management, many of whom would be difficult to replace. These employees may voluntarily
terminate their employment with us at any time. We may not be able to successfully retain
existing personnel or identify, hire and integrate new personnel. We do not carry key
person insurance for any of our personnel. While we have signed offer letters from most of
our senior executives, we have no formal employment agreements in effect with any of them.
If we lose the services of our executive officers or key employees for any reason, our
business, financial condition and results of operations could be harmed.
Our markets are intensely
competitive, and market conditions and the strengths of competitors may harm our business.
The
markets for our products are intensely competitive. Our 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. For example, our Nu Skin products compete directly with branded,
premium retail products. We also compete with other direct selling organizations. The
leading direct selling companies in our existing markets are Avon and Alticor (Amway). We
currently do not have significant patent or other proprietary protection, and our
competitors may introduce products with the same ingredients that we use in our products.
Because of regulatory restrictions concerning claims about the efficacy of dietary
supplements, we may have difficulty differentiating our products from our
competitors’ products, and competing products entering the nutritional market could
harm our nutritional supplement revenue.
We also compete with other network marketing companies for distributors. Some of these
competitors have a longer operating history and greater visibility, name recognition and
financial resources than we do. Some of our competitors have also adopted and could
continue to adopt some of our successful business strategies, including our global
compensation plan for distributors. Consequently, to successfully compete in this market
and attract and retain distributors, we must ensure that our business opportunities and
compensation plans are financially rewarding. We have over 20 years of experience in this
market and believe we have significant competitive advantages, but we cannot assure you
that we will be able to successfully compete in every endeavor in this market.
Product liability claims could
harm our business.
We
may be required to pay for losses or injuries purportedly caused by our products. Although
we have had a very limited product claims history, we have recently experienced difficulty
in finding insurers
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that are willing to provide product liability coverage at reasonable
rates due to insurance industry trends and the rising cost of insurance generally. As a
result, we have elected to self-insure our product liability risks for our core product
lines. Until we elect and are able to obtain product liability insurance, if any of our
products are found to cause any injury or damage, we will be subject to the full amount of
liability associated with any injuries or damages. This liability could be substantial. We
cannot predict if and when product liability insurance will be available to us on
reasonable terms.
System failures could harm our
business.
Because
of our diverse geographic operations and our complex distributor compensation plan, our
business is highly dependent on efficiently functioning information technology 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. We have adopted
a Business Continuity/Disaster Recovery Plan, which is in the process of being
implemented. Our primary data sets are archived and stored at third-party, secure sites,
but we have not contracted for a third-party recovery site. 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.
The discovery of Bovine Spongiform
Encephalopathy (“BSE”, commonly referred to as “mad cow disease”) in
the United States could harm our business if the measures we have implemented to address
regulatory issues surrounding BSE are not successful.
Prior
to 2004, substantially all of our Pharmanex nutritional supplement revenue was generated
from products encapsulated in gel capsules produced with bovine materials. In early 2004
we implemented alternative production plans to utilize non-bovine gelatin capsules, and
produce certain products in tablet form. Following the implementation of these measures,
substantially all of our Pharmanex revenue in 2004 outside of the United States was
generated from products that are encapsulated in porcine-based capsules or from tablet
products. Substantially all of our nutritional supplement products for sale in the United
States continue to utilize bovine-based gel capsules. If we experience production
difficulties, quality control problems, or shortages in supply in connection with these
alternative plans, this could result in additional risk of product shortages or write-offs
of inventory that no longer can be used. In addition, our business could be harmed if
consumers become unduly concerned about the risks of BSE with respect to our remaining
bovine-sourced gelatin capsules or, alternatively, if consumers react negatively to our
switching from capsules to tablets on some products.
The
sources and ingredients of our products are also subject to additional governmental
regulations by numerous domestic and foreign governmental agencies and authorities
regarding product ingredients. We may be unable to introduce our products in some markets
if we are unable to obtain the necessary regulatory approvals or if any product
ingredients are prohibited, which could harm our business.
There is uncertainty whether the
SARS or other epidemics could return or arise, particularly in those Asian markets most
affected by such epidemics in recent years.
Our
revenue was negatively impacted in 2003 by the SARS epidemic that hit Asia during that
year. It is difficult to predict the impact on our business, if any, of a recurrence of
SARS or other epidemic or the emergence of new epidemics. Although such an event could
generate increased sales of health/immune supplements and certain personal care products,
our direct selling and retail activities and results of operations could be harmed if the
fear of SARS or other communicable diseases that spread rapidly in densely populated areas
causes people to avoid public places and interaction with one another.
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The market price of our Class A
common stock is subject to significant fluctuations due to a number of factors that are
beyond our control.
Our
Class A common stock closed at $10.30 per share on March 3, 2003 and closed at $22.33 per
share on February 28, 2005. During this two-year period, our Class A common stock traded
as low as $8.75 per share and as high as $28.15 per share. Many factors could cause the
market price of our Class A common stock to fall. Some of these factors include:
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fluctuations
in our quarterly operating results;
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the
sale of shares of Class A common stock by our original or significant stockholders;
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general
trends in the market for our products;
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acquisitions
by us or our competitors;
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economic
and/or currency exchange issues in those foreign countries in which we operate;
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changes
in estimates of our operating performance or changes in recommendations by securities
analysts; and
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general
business and political conditions.
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market fluctuations could also lower the market price of our Class A common stock
regardless of our actual operating performance.
As of February 28, 2005, our
original stockholders, together with their family members, estate planning entities and
affiliates, controlled approximately 28% of the combined stockholder voting power, and
their interests may be different from yours.
The
original stockholders of our company, together with their family members and affiliates,
have the ability to influence the election and removal of the board of directors and, as a
result, future direction and operations of our company. As of February 28, 2005, these
stockholders owned approximately 28% of the voting power of the outstanding shares of
Class A common stock. Accordingly, they may influence decisions concerning business
opportunities, declaring dividends, issuing additional shares of Class A common stock or
other securities and the approval of any merger, consolidation or sale of all or
substantially all of our assets. They may make decisions that are adverse to your
interests.
If our stockholders sell a
substantial number of shares of our 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. Any decision by any of our principal stockholders to aggressively sell their
shares could depress the market price of our Class A common stock.
As
of February 28, 2005, we had 69,818,601 shares of Class A common stock outstanding. All of
these shares are freely tradable, except for approximately 20 million shares held by
certain stockholders who participated in our October 2003 recapitalization transaction
wherein we repurchased approximately 10.8 million of our shares from our original
stockholders and their affiliates and facilitated their resale of approximately 6.2
million additional shares to a group of private equity investors. Under the terms of our
repurchase, our original stockholders agreed that they will not sell or otherwise dispose
of any shares of
-36-
Class A common stock on the open market or without the prior written
consent of a majority of our independent directors prior to October 22, 2005. This
agreement is subject to the following exceptions:
|
|
•
|
|
certain
charitable donations to religious organizations;
|
|
|
•
|
|
transfers of common stock to immediate family members or related persons who or estate
planning entities that agree to be bound by similar restrictions;
|
|
|
•
|
|
transfers pursuant to an existing put option held by one of our original
stockholders, Sandra Tillotson, for up to 3.5 million shares; and
|
|
|
•
|
|
the pledge of shares as security for loans up to $10 million, provided certain conditions
are met, including our right to purchase any shares upon the occurrence of an event of
default at a price equal to 50% of the average closing price for the 15 days immediately
prior to the event of default.
|
These
stockholders also agreed that, after the expiration of the two-year lock-up agreement in
October 2005, they will be subject to certain volume limitations with respect to open
market transactions. In the event these lock-up restrictions were removed, the resulting
sales could cause the price of our Class A common stock to decline.
Our
principal properties consist of the following:
Operational
Facilities
. These facilities include administrative offices, walk-in centers, and
warehouse/distribution centers. Our operational facilities measuring 50,000 square feet or
more include the following:
|
|
•
|
|
our
worldwide headquarters in Provo, Utah;
|
|
|
•
|
|
our
worldwide distribution center/warehouse in Provo, Utah; and
|
|
|
•
|
|
our
distribution center in Tokyo, Japan.
|
Manufacturing
Facilities.
Each of our manufacturing facilities measure 50,000 square feet or more, and
include the following:
|
|
•
|
|
our
nutritional supplement manufacturing facility in Zhejiang Province, China;
|
|
|
•
|
|
our
personal care manufacturing facility in Shanghai, China; and
|
|
|
•
|
|
our
BioPhotonic Scanner manufacturing facility in Shanghai, China.
|
Retail
Stores
. We currently operate over 100 stores in 17 provinces throughout China,
measuring a total of approximately 250,000 square feet.
Research
and Development Centers.
We operate three research and development centers, one in
Provo, Utah, one in Shanghai, China, and one in Beijing, China.
-37-
With
the exception of our research and development center in Utah, our nutritional supplement
plant in China, and a few other minor facilities, which we own, we lease the properties
described above. Our headquarters and distribution center in Utah are leased from related
parties. We believe that our existing and planned facilities are adequate for our current
operations in each of our existing markets.
|
ITEM 3.
|
|
LEGAL PROCEEDINGS
|
On
October 29, 2004, a motion for preliminary injunction was filed by Caroderm, Inc.
(“Caroderm”) in the action
Caroderm, Inc. and University of Utah Research
Foundation v. Nu Skin Enterprises, Inc., Niksun Acquisition Corporation, et. al.
.,
Third Judicial District Court, Salt Lake County, State of Utah. The complaint was filed in
this action on July 16, 2004 by Caroderm, which is a separate licensee of the technology
utilized in the BioPhotonic Scanner, listing the University of Utah Research Foundation
(“UURF”) as an involuntary plaintiff because UURF owns the relevant patent and
has granted the licenses at issue in the litigation. Caroderm and we have each obtained a
license to the same technology, with the scope of the respective licenses permitting
mutually exclusive fields of use. The motion and complaint allege that we are in violation
of the terms of our license because of alleged use of the BioPhotonic Scanner for medical
diagnostic purposes or in medical clinical settings. The motion cites the alleged use of
the BioPhotonic Scanner in medical clinic settings by certain distributors who are medical
doctors, dentists, chiropractors, and other health professionals. The complaint and motion
seek an order of the court enjoining and restraining us and requiring us to take steps to
stop the use of the BioPhotonic Scanner by our distributors for medical diagnostic
purposes or in a medical clinical setting in excess of our granted field of use. Our
license permits use of the technology to promote the sale of nutritional supplements and
permits medical doctors and other medical professionals to utilize the BioPhotonic
Scanner, but does not permit use for medical diagnostic purposes in a medical clinical
setting. Distributors have previously been notified of our policy and these restrictions,
and the terms of the lease with distributors prohibits them from utilizing the BioPhotonic
Scanner for medical diagnostic purposes or in a medical clinical setting. Our policy does
not allow medical doctors to use the BioPhotonic Scanner in their medical clinics or for
medical diagnostic purposes. However, we do allow them to use the BioPhotonic Scanner
outside of a medical clinical setting in connection with the promotion and sale of dietary
supplements. Dentists, chiropractors, and other health professionals that are not medical
doctors are permitted to utilize the BioPhotonic Scanner in their offices because it is
believed that the scope of the license does not prohibit these professionals from using it
in their offices to promote the sale of nutritional supplements. This position is contrary
to Caroderm’s allegations set out in the complaint and in the motion. This matter is
currently in the discovery stage, and a trial has been set for April of 2005 with respect
to the consolidated complaint and motion.
|
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, 2004.
PART II
|
ITEM 5.
|
|
MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
|
Our
Class A common stock is listed on the New York Stock Exchange (“NYSE”) and
trades under the symbol “NUS.” The following table is based upon the information
available to us and sets forth the
-38-
range of the high and low sales prices for our Class A
common stock for the quarterly periods during 2003 and 2004 based upon quotations on the
NYSE.
|
Quarter Ended
|
|
High
|
|
Low
|
|
|
|
|
|
|
March 31, 2003
|
|
$ 13.40
|
|
$ 8.82
|
|
|
June 30, 2003
|
|
10.50
|
|
8.75
|
|
|
September 30, 2003
|
|
12.90
|
|
10.22
|
|
|
December 31, 2003
|
|
17.98
|
|
12.77
|
|
|
Quarter Ended
|
|
High
|
|
Low
|
|
|
|
|
|
|
March 31, 2004
|
|
$ 21.97
|
|
$ 16.65
|
|
|
June 30, 2004
|
|
25.91
|
|
20.55
|
|
|
September 30, 2004
|
|
28.15
|
|
23.03
|
|
|
December 31, 2004
|
|
25.75
|
|
16.27
|
|
The
market price of our Class A common stock is subject to significant fluctuations in
response to variations in our quarterly operating results, general trends in the market
for our products and product candidates, economic and currency exchange issues in the
foreign markets in which we operate and other factors, many of which are not within our
control. In addition, broad market fluctuations, as well as general economic, business,
regulatory and political conditions may adversely affect the market for our Class A common
stock, regardless of our actual or projected performance.
The
closing price of our Class A common stock on February 28, 2005, was $22.33. The
approximate number of holders of record of our Class A common stock as of February 28,
2005 was 655. This number of holders of record does not represent the actual number of
beneficial owners of shares of our Class A common stock because shares are frequently held
in “street name” by securities dealers and others for the benefit of individual
owners who have the right to vote their shares.
We
declared and paid a $0.07 per share dividend for Class A common stock in March, June,
September and December of 2003, and a $0.08 per share quarterly dividend for Class A
common stock in March, June, September and December of 2004. The board of directors
declared a quarterly cash dividend of $0.09 per share of Class A common stock on February
3, 2005. This quarterly cash dividend will be paid on March 23, 2005, to stockholders of
record on March 4, 2005. Management believes that cash flows from operations will be
sufficient to fund this and future dividend payments, if any.
We
expect to continue to pay dividends on our common stock. However, the declaration of
dividends is subject to the discretion of our board of directors and will depend upon
various factors, including our net earnings, financial condition, cash requirements,
future prospects and other factors deemed relevant by our board of directors.
-39-
Equity Compensation Plan
Information
The
following table provides information as of December 31, 2004 about our Class A common
stock that may be issued upon the exercise of options, warrants and rights under all of
our existing equity compensation plans (including individual arrangements):
|
Plan Category
|
|
Number of securities to be issued
upon exercise of outstanding options, warrants and rights
(a)
|
|
Weighted-average exercise price
of outstanding options, warrants and rights
(b)
|
|
Number of securities remaining
available for future issuance under equity compensation plans (excluding securities reflected in column (a))
(c)
|
|
|
|
|
|
|
Equity compensation plans
approved by security
holders
|
|
6,542,674
|
(1)
|
|
$ 13.41
|
|
|
3,369,238
|
(2)
|
|
|
|
|
Equity compensation plans
not approved by security
holders
|
|
—
|
|
|
$ —
|
|
|
—
|
|
|
|
|
|
|
Total
|
|
6,542,674
|
|
|
$ 13.41
|
|
|
3,369,238
|
|
|
|
(1)
|
Does not include information for options assumed in connection with acquisitions
by us of other companies. As of December 31, 2004, a total of 50,426 shares of
Class A common stock were issuable upon exercise of such assumed options, at a
weighted-average exercise price per share of $9.71. All of these shares
correspond to options we assumed in our acquisition of Pharmanex.
|
|
(2)
|
Consists of 3,258,800 shares available for future issuance under our Second
Amended and Restated 1996 Stock Incentive Plan and 110,438 shares available for
future issuance under our 2000 Employee Stock Purchase Plan. The authorized
number of shares purchasable by participants under the 2000 Employee Stock
Purchase Plan may be increased by 75,000 shares each year beginning in 2003 and
ending in 2009.
|
Purchases of Equity
Securities by the Issuer
|
|
(a)
|
|
(b)
|
|
(c)
|
|
(d)
|
|
|
Period
|
|
Total Number of Shares Purchased
|
|
Average Price Paid per Share
|
|
Total Number of Shares Purchased as Part of Publicly
Announced Plans or Programs
|
|
Approximate Dollar Value of Shares that may yet be Purchased
Under the Plans or Programs
(in millions)
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
October 1 - 31, 2004
|
|
75,000
|
|
$ 17.29
|
|
75,000
|
|
$ 7.1
|
|
|
November 1 - 30, 2004
|
|
677
|
|
$ 9.35
|
|
—
|
|
$ 7.1
|
|
|
December 1 - 31, 2004
|
|
296
|
|
$ 22.88
|
|
—
|
|
$ 7.1
|
|
|
Total
|
|
75,973
|
(2)
|
$ 17.24
|
|
75,000
|
|
(1)
|
In August 1998, our board of directors approved a plan to repurchase $10.0
million of our Class A common stock in open market transactions. Our board has
from time to time increased the amount authorized under the plan and a total
amount of approximately $110.0 million is currently authorized, including an
additional $20.0 million authorized in February 2005. As of December 31, 2004, we
had
|
-40-
|
|
repurchased approximately $82.9 million of shares under the plan. There has
been no termination or expiration of the plan since the initial date of
approval.
|
|
(2)
|
We have authorized the repurchase of shares acquired by our employees in
certain Asian markets because of regulatory and other issues that make it
difficult and costly for these persons to sell such shares in the open market.
These shares were awarded or acquired in connection with our initial public
offering in 1996. Of the shares listed in this column, 677 shares for November
and 296 shares for December relate to repurchases from such employees at an
average per share purchase price of $13.46.
|
|
ITEM 6.
|
|
SELECTED
FINANCIAL DATA
|
The
following selected consolidated financial data as of and for the years ended December 31,
2000, 2001, 2002, 2003 and 2004 have been derived from the audited consolidated financial
statements.
|
|
Year Ended December 31,
|
|
|
2000
|
|
2001
|
|
2002
|
|
2003
|
|
2004
|
|
|
|
(U.S. dollars in thousands, except per share data)
|
|
Income Statement Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$ 879,758
|
|
$ 885,621
|
|
$ 964,067
|
|
$ 986,457
|
|
$ 1,137,864
|
|
|
Cost of sales
|
|
149,342
|
|
178,083
|
|
190,868
|
|
176,545
|
|
191,211
|
|
|
Gross profit
|
|
730,416
|
|
707,538
|
|
773,199
|
|
809,912
|
|
946,653
|
|
|
Operating expenses:
|
|
|
Selling expenses
|
|
345,259
|
|
347,452
|
|
382,159
|
|
407,088
|
|
487,631
|
|
|
General and administrative expenses
|
|
294,744
|
|
288,605
|
|
285,229
|
|
289,925
|
|
333,263
|
|
|
Restructuring and other charges
|
|
—
|
|
—
|
|
—
|
|
5,592
|
|
—
|
|
|
Total operating expenses
|
|
640,003
|
|
636,057
|
|
667,388
|
|
702,605
|
|
820,894
|
|
|
Operating income
|
|
90,413
|
|
71,481
|
|
105,811
|
|
107,307
|
|
125,759
|
|
|
Other income (expense), net
|
|
5,993
|
|
8,380
|
|
(2,886
|
)
|
432
|
|
(3,618
|
)
|
|
Income before provision for income taxes
|
|
96,406
|
|
79,861
|
|
102,925
|
|
107,739
|
|
122,141
|
|
|
Provision for income taxes
|
|
34,706
|
|
29,548
|
|
38,082
|
|
39,863
|
|
44,467
|
|
|
Net income
(1)
|
|
$ 61,700
|
|
$ 50,313
|
|
$ 64,843
|
|
$ 67,876
|
|
$ 77,674
|
|
|
Net income per share:
|
|
|
Basic
|
|
$ 0.72
|
|
$ 0.60
|
|
$ 0.79
|
|
$ 0.86
|
|
$ 1.10
|
|
|
Diluted
|
|
$ 0.72
|
|
$ 0.60
|
|
$ 0.78
|
|
$ 0.85
|
|
$ 1.07
|
|
|
Weighted-average common shares outstanding (000s):
|
|
|
Basic
|
|
85,401
|
|
83,472
|
|
81,731
|
|
78,637
|
|
70,734
|
|
|
Diluted
|
|
85,642
|
|
83,915
|
|
83,128
|
|
79,541
|
|
72,627
|
|
|
|
|
|
|
|
Balance Sheet Data
(at end of period):
|
|
|
Cash and cash equivalents and current investments
|
|
$ 63,996
|
|
$ 75,923
|
|
$ 120,341
|
|
$ 122,568
|
|
$ 120,095
|
|
|
Working capital
|
|
123,828
|
|
153,495
|
|
181,942
|
|
149,324
|
|
117,401
|
|
|
Total assets
|
|
555,621
|
|
546,024
|
|
577,794
|
|
591,059
|
|
609,737
|
|
|
Current portion of long-term debt
|
|
—
|
|
—
|
|
—
|
|
17,915
|
|
18,540
|
|
|
Long-term debt
|
|
84,884
|
|
73,718
|
|
81,732
|
|
147,488
|
|
132,701
|
|
|
Stockholders' equity
|
|
366,733
|
|
379,890
|
|
386,486
|
|
290,248
|
|
296,233
|
|
|
|
|
|
|
|
Supplemental Operating Data
(at end of period):
|
|
|
Approximate number of active distributors
(2)
|
|
497,000
|
|
558,000
|
|
566,000
|
|
725,000
|
|
820,000
|
|
|
Number of executive distributors
(2)
|
|
21,381
|
|
24,839
|
|
27,915
|
|
29,131
|
|
32,016
|
|
|
(1)
|
|
In
January 2002, we adopted SFAS 142, “Goodwill and Other Intangible
Assets.” Assuming no amortization of goodwill and other indefinite lived
intangibles for all periods presented prior to adoption, net income would have
been $68 million and $57 million for each of the years ended December 31, 2000
and 2001, respectively. For 2003, net income includes a pre-tax, non-recurring
charge of $6 million due to restructuring and other charges incurred during the
third quarter.
|
|
(2)
|
|
Active
distributors include preferred customers and distributors purchasing
products directly from us during the three months ended as of the
date indicated. An executive distributor is an active
|
-41-
|
|
|
distributor who
has achieved required personal and group sales volumes. Following the opening of our
retail business in China during 2003, active distributors includes
117,000 and 147,000 preferred customers in China and executive
distributors includes 3,100 and 5,437 employed, full-time sales
representatives for the years ended December 31, 2003 and 2004,
respectively.
|
|
ITEM 7.
|
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
|
The
following discussion of our financial condition and results of operations should be read
in conjunction with the Consolidated Financial Statements and related Notes thereto, which
are included in this Annual Report on Form 10-K.
Overview
We
are a leading, global direct selling company with operations in approximately 40 countries
throughout Asia, the Americas and Europe. We develop and distribute premium quality,
innovative personal care products and nutritional supplements that are sold worldwide
under the Nu Skin and Pharmanex brands. We also market technology-related products and
services under the Big Planet brand. We operate through a direct selling model in all of
our markets except Mainland China (hereinafter “China”), where we operate using
a retail sales model with employed sales representatives because of current regulatory
restrictions on direct selling activities. In 2004, we had revenue of $1.14 billion and a
global network of approximately 820,000 active independent distributors and preferred
customers who purchase our products for resale or for personal use. Approximately 32,000
of these distributors were executive level distributors or full-time sales representatives, who
play an important leadership role in our distribution network and are critical to the
growth and profitability of our business.
Our
revenue depends on the number and productivity of our active independent distributors and
executive distributor leaders. We have been successful in attracting and motivating
distributors by:
|
|
•
|
|
developing
and marketing innovative, technologically advanced products;
|
|
|
•
|
|
offering
an attractive global compensation plan; and
|
|
|
•
|
|
providing
compelling initiatives, advanced technological tools, and strong distributor support.
|
Our distributors market and sell our
products and recruit other distributors based on the distinguishing benefits and
innovative characteristics of our products, the benefits of our compensation plans, and
other initiatives. As a result, it is vital to our business that we continuously leverage
our research and development resources to develop and introduce innovate products and
provide our distributors with a differentiated portfolio of products and initiatives. If
we experience delays in introducing compelling products or attractive initiatives into a
market, this can have a negative impact on revenue. Additionally, it is important that we
continually innovate our compensation plan to provide a vibrant earnings opportunity for
our distributor force.
We
have experienced significant growth over the last year due in part to our efforts to
expand into new markets, including our expansion of operations in China. We are currently
working on plans to commence operations in Indonesia and Russia. Our global compensation
plan, which we utilize in all of our markets except China, motivates our key distributor
leaders to assist in the recruitment and training of distributor leaders in new markets
because they are compensated for global sales in their network of distributors. This has
allowed us to generate rapid growth in our new markets. Sometimes, however, the opening of
a new market or the introduction of a key initiative such as the roll-out of the
Pharmanex
®
-42-
BioPhotonic Scanner (the “BioPhotonic Scanner”) in a
market can have a temporary negative impact on other markets if it attracts the attention
and time of key executive distributor leaders from other markets.
We
also have continued to expand and promote product subscription programs in many of our
markets that provide incentives for customers to commit to purchase a specific amount of
products on a monthly basis. We believe these subscription programs have improved customer
retention and helped drive revenue growth in many of our markets. Subscription orders
represented 29% of our revenue in 2004 compared to 24% in the prior year.
In
2004, we generated approximately 84% of our revenue from our Asian markets, with sales in
Japan representing approximately 51% of revenue. Because of the size of our foreign
operations, operating results can be impacted negatively or positively by factors such as
foreign currency fluctuations, in particular fluctuations between the Japanese yen and the
U.S. dollar, and economic, political and business conditions around the world. In
addition, our business is subject to various laws and regulations, in particular
regulations related to network marketing activities and nutritional supplements that
create certain risks for our business, including improper claims or activities by our
distributors and potential inability to obtain necessary product registrations. For more
information about these risks and challenges we face, please refer to “Note Regarding
Forward-Looking Statements.”
Income Statement
Presentation
We
recognize revenue in five geographic regions. We translate revenue from each market’s
local currency into U.S. dollars using quarterly weighted-average exchange rates. The
following table sets forth revenue information by region for the time periods indicated.
This table should be reviewed in connection with the tables presented under “Results
of Operations,” which disclose selling expenses and other costs associated with
generating the aggregate revenue presented.
|
|
Year Ended December 31,
|
|
Revenue by Region
|
|
2002
|
|
2003
|
|
2004
|
|
|
|
(U.S. dollars in millions)
|
|
|
|
|
North Asia
|
|
$ 597.1
|
|
62%
|
|
$ 612.8
|
|
62%
|
|
$ 640.1
|
|
56%
|
|
|
Greater China
|
|
104.9
|
|
11
|
|
135.5
|
|
14
|
|
229.8
|
|
20
|
|
|
North America
|
|
142.7
|
|
15
|
|
127.6
|
|
13
|
|
145.7
|
|
13
|
|
|
South Asia/Pacific
|
|
91.1
|
|
9
|
|
75.8
|
|
8
|
|
81.8
|
|
7
|
|
|
Other Markets
|
|
28.3
|
|
3
|
|
34.8
|
|
3
|
|
40.5
|
|
4
|
|
|
|
|
$ 964.1
|
|
100%
|
|
$ 986.5
|
|
100%
|
|
$ 1,137.9
|
|
100%
|
|
Cost
of sales primarily consists of:
|
|
•
|
|
cost
of products purchased from third-party vendors, generally in U.S. dollars;
|
|
|
•
|
|
manufacturing
costs of self-manufactured products;
|
|
|
•
|
|
the
cost of sales materials which we sell to distributors at or near cost;
|
|
|
•
|
|
the
amortization expenses associated with certain products and services such as BioPhotonic
Scanners that are leased to distributors;
|
|
|
•
|
|
the
freight cost of shipping products to distributors, and import duties for the products;
and
|
|
|
•
|
|
royalties
and related expenses for licensed technologies.
|
-43-
We source the majority of our
products from third-party manufacturers located in the United States. Due to Chinese
government restrictions on the importation of finished goods applicable to our business in
China, we are required to manufacture our own products for distribution in China. We are
also considering plans to manufacture more products in China for export in order to reduce
our cost of sales. Cost of sales and gross profit may fluctuate as a result of changes in
the ratio between self-manufactured products and products sourced from third-party
suppliers. In addition, because we purchase a significant majority of our goods in U.S.
dollars and recognize revenue in local currencies, we are subject to exchange rate risks
in our gross margins.
Selling
expenses are our most significant expense and are classified as operating expenses. Our
global compensation plan, which we employ in all of our markets except China, is an
important factor in our ability to attract and retain distributors. We pay commissions to
several levels of distributors on each product sale. The amount of the commission paid
varies depending on the purchaser’s position within our global compensation plan. We
pay commissions monthly, based upon a distributor’s personal and group product
volumes, as well as the group product volumes of up to six levels of executive
distributors in such distributor’s downline sales organization. We do not pay
commissions on sales materials, which are sold to distributors at or about cost. Small
fluctuations occur in the amount of commissions paid as the network of distributors
actively purchasing products changes from month to month. However, due to the size of our
distributor force of approximately 820,000 active distributors, the fluctuation in the
overall payout is relatively small. The overall payout has typically averaged from 41% to
43% of global product sales. From time to time we make modifications and enhancements to
our global compensation plan to help motivate distributors and develop leadership
characteristics, which can have an impact on selling expenses.
Distributors
also have the opportunity to make retail profits by purchasing products from us at
wholesale and selling them to retail customers with a retail mark-up. We do not pay
commissions on these retail sales by distributors nor do we recognize any revenue from
these retail sales. In many markets, we also allow individuals who are not distributors to
buy products directly from us at wholesale prices. We refer to these purchasers as
“preferred customers.” We pay commissions on preferred customer purchases to the
referring distributors. Selling expenses also include wages, benefits, bonuses and other
labor and unemployment expenses we pay to our employed sales representatives in China.
General
and administrative expenses include:
|
|
•
|
|
depreciation
and amortization;
|
|
|
•
|
|
promotion
and advertising;
|
|
|
•
|
|
research
and development; and
|
|
|
•
|
|
other
operating expenses.
|
-44-
Labor expenses are the most
significant portion of our general and administrative expenses. Promotion and advertising
expenses include costs of distributor conventions held in various markets worldwide, which
we expense in the period in which they are incurred. Because our various distributor
conventions are not always held during each fiscal year, their impact on our general and
administrative expenses may vary from year to year. For example, we typically hold our
global distributor convention and our Japan distributor convention, our two most expensive
conventions, every 18 months. Therefore, we will not incur expenses for these conventions
during every fiscal year or in comparable interim periods, and year-over-year comparisons
will be impacted accordingly. We held global distributor conventions in October 2002 and
February 2004, and Japan distributor conventions in February 2003 and November 2004. We
are scheduled to hold a global distributor convention in October 2005.
Provision
for income taxes depends on the statutory tax rates in each of the jurisdictions in which
we operate. For example, statutory tax rates in 2004 were approximately 17.5% in Hong
Kong, 25% in Taiwan, 30% in South Korea, 46% in Japan and 31% in China. We are currently
benefiting from a tax holiday in China, which will run through the end of 2005. We will
then be subject to a reduced tax rate of 50% of the statutory rate for the years 2006,
2007 and 2008, after which time we will be subject to the full statutory rate. We are
subject to taxation in the United States at the statutory corporate federal tax rate of
35%, and we pay taxes in multiple states within the United States at various tax rates.
Critical Accounting
Policies
The
following critical accounting policies and estimates should be read in conjunction with
our audited consolidated financial statements and related notes thereto. Management
considers the most critical accounting policies to be the recognition of revenue,
accounting for income taxes and accounting for intangible assets. In each of these areas,
management makes estimates based on historical results, current trends and future
projections.
Revenue.
We recognize revenue when products are shipped, which is when title and risk
of loss pass to our independent distributors. With some exceptions in various
countries, we offer a return policy whereby distributors can return unopened and
unused product for up to 12 months subject to a 10% restocking fee. Reported
revenue is net of returns, which have historically been less than 5% of gross
sales. A reserve for product returns is accrued based on historical experience.
We classify selling discounts as a reduction of revenue. Our global compensation
plan for our distributors is focused on remunerating distributors based upon the
selling efforts of the distributors and their downline, and not their personal
purchases.
Income
Taxes.
We account for income taxes in accordance with Statements of
Financial Accounting Standards (“SFAS”) No. 109, “Accounting for Income
Taxes.” This statement establishes financial accounting and reporting standards for
the effects of income taxes that result from an enterprise’s activities during the
current and preceding years. It requires an asset and liability approach for financial
accounting and reporting of income taxes. We pay income taxes in many foreign
jurisdictions based on the profits realized in those jurisdictions, which can be
significantly impacted by terms of intercompany transactions among our affiliates around
the world. Deferred tax assets and liabilities are created in this process. As of December
31, 2004, we have net deferred tax assets of $49.2 million. These net deferred tax assets
assume sufficient future earnings will exist for their realization, as well as the
continued application of current tax rates. We have considered projected future taxable
income and ongoing tax planning strategies in determining that no valuation allowance is
required. In the event we were to determine that we would not be able to realize all or
part of our net deferred tax assets in the future, an adjustment to the deferred tax
assets would be charged to earnings in the period such determination was made.
-45-
Our
foreign taxes paid are high relative to foreign operating income and our U.S. taxes paid
are low relative to U.S. operating income due largely to the flow of funds among our
subsidiaries around the world. As payments for services, management fees, license
arrangements and royalties are made from our foreign affiliates to our U.S. corporate
headquarters, these payments often incur withholding and other forms of tax that are
generally creditable for U.S. tax purposes. Therefore, these payments lead to increased
foreign effective tax rates and lower U.S. effective tax rates. Variations (or shifts)
occur in our foreign and U.S. effective tax rates from year to year depending on several
factors including the impact of global transfer prices and the timing and level of
remittances from foreign affiliates.
We
are subject to regular audits by federal, state and foreign tax authorities. These audits
may result in additional tax liabilities. We account for such contingent liabilities in
accordance with SFAS No. 5, “Accounting for Contingencies” and believe that we
have appropriately provided for income taxes for all years. Several factors drive the
calculation of our tax reserves. Some of these factors include: (i) the expiration of
various statutes of limitations; (ii) changes in tax law and regulations; (iii) issuance
of tax rulings; and (iv) settlements with tax authorities. Changes in any of these factors
may result in adjustments to our reserves, which would impact our reported financial
results.
Intangible
Assets.
Under the provisions of SFAS No. 142 “Goodwill and Other
Intangible Assets” (“SFAS 142”), our goodwill and intangible assets with
indefinite useful lives are no longer amortized. Our intangible assets with definite lives
are recorded at cost and are amortized over their respective estimated useful lives, and
are reviewed for impairment in accordance with SFAS No. 144, “Accounting for the
Impairment or Disposal of Long-Lived Assets” (see Note 5 to the Consolidated
Financial Statements).
We
are required to make judgments regarding the useful life of our intangible assets. With
the implementation of SFAS 142, we determined certain intangible assets to have indefinite
lives based upon our analysis of the requirements of SFAS No. 141, “Business
Combinations” (“SFAS 141”) and SFAS 142. Under the provisions of SFAS 142,
we are required to test these assets for impairment at least annually. The annual
impairment tests have been completed and did not result in an impairment charge. To the
extent an impairment is identified in the future, we will record the amount of the
impairment as an operating expense in the period in which it is identified.
In
connection with a registration statement we filed in October 2003, the Staff of the
Securities and Exchange Commission commented on and sought additional support for the
indefinite life designation of our trade names, marketing rights and distributor network
assets. Based on our assessment in responding to these comments, we recorded the following
in the second quarter of 2004: (i) a one-time amortization charge of $1.2 million
resulting from retroactive changes in the estimates of the useful lives of certain
intangible assets, which included the assignment of useful lives to our distributor
network and certain trademarks and trade names that were previously designated as
indefinite lived assets; (ii) an entry to reduce intangible assets and retained earnings
by approximately $8.8 million to reflect a reduction in the carrying amount of the
marketing rights previously purchased from a group of controlling shareholders to its
carryover basis; and (iii) an entry to reclassify approximately $7.4 million from goodwill
to distributor network and trade names and trademarks to retroactively reflect intangible
assets acquired.
As
a result of these changes we recorded an additional $0.9 million of amortization related
to these assets during the remainder of 2004 and will continue to recognize an additional
$1.2 million of such amortization per year through the remainder of the useful lives,
which approximate 11 years as of December 31, 2004.
-46-
Results of Operations
The
following table sets forth our operating results as a percentage of revenue for the
periods indicated:
|
|
Year Ended December 31,
|
|
|
|
2002
|
|
2003
|
|
2004
|
|
|
|
|
|
|
|
Revenue
|
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
|
Cost of sales
|
|
19.8
|
|
17.9
|
|
16.8
|
|
|
|
|
|
|
|
Gross profit
|
|
80.2
|
|
82.1
|
|
83.2
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
Selling expenses
|
|
39.6
|
|
41.3
|
|
42.9
|
|
|
General and administrative expenses
|
|
29.6
|
|
29.4
|
|
29.3
|
|
|
Restructuring and other charges
|
|
—
|
|
.5
|
|
—
|
|
|
|
|
|
|
|
Total operating expenses
|
|
69.2
|
|
71.2
|
|
72.2
|
|
|
|
|
|
|
|
Operating income
|
|
11.0
|
|
10.9
|
|
11.0
|
|
|
Other income (expense), net
|
|
(.3
|
)
|
—
|
|
(.3
|
)
|
|
|
|
|
|
|
Income before provision for income taxes
|
|
10.7
|
|
10.9
|
|
10.7
|
|
|
Provision for income taxes
|
|
4.0
|
|
4.0
|
|
3.9
|
|
|
|
|
|
|
|
Net income
|
|
6.7
|
%
|
6.9
|
%
|
6.8
|
%
|
2004 Compared to 2003
Overview
Revenue
in 2004 increased 15% to $1,137.9 million from $986.5 million in 2003. Excluding the
impact of changes in foreign currency exchange rates, we would have experienced a revenue
increase of 11% for 2004 compared to 2003. The revenue increase in 2004 was a result of
significant revenue growth in China, as well as solid revenue growth in the United States,
Taiwan and Hong Kong. During 2004 we continued to see the positive impact of our
BioPhotonic Scanner and monthly product subscription programs. We continued to expand our
use of the BioPhotonic Scanner in the United States and initiated lease programs in other
key markets including Japan in November 2004. Subscription orders represented 29% of our
revenue in 2004 compared to 24% in the prior year. We believe that these programs are
strengthening our recurring revenue base and are improving customer retention rates, as
well as helping our distributor leaders build their sales organizations. Revenue growth in
2004 was negatively impacted by a decline in local currency revenue in Japan.
These
factors also contributed to a $0.22 increase in earnings per share in 2004 compared to
2003. Earnings per share for 2003 included the impact of a $0.04 per share, one-time
restructuring charge. The growth in earnings per share was also positively impacted by the
repurchase of 10.8 million and 3.1 million shares of our Class A common stock in October
2003 and July 2004, respectively.
-47-
Revenue
North
Asia.
The following table sets forth revenue for the North Asia region and its principal
markets (U.S. dollars in millions):
|
|
2003
|
|
2004
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
Japan
|
|
$ 553.8
|
|
$ 574.4
|
|
4%
|
|
|
South Korea
|
|
59.0
|
|
65.7
|
|
11%
|
|
|
North Asia total
|
|
$ 612.8
|
|
$ 640.1
|
|
4%
|
|
Excluding
the impact of changes in foreign currency exchange rates, revenue in North Asia decreased
1% in 2004 compared to 2003. In local currency, revenue in Japan decreased 3%. Revenue in
Japan during 2004 was negatively impacted by the absence of a compelling growth driver for
our distributors during most of the year as a result of regulatory uncertainty associated
with the BioPhotonic Scanner that prevented us from introducing it until November 2004.
Revenue was also negatively impacted by:
|
|
•
|
|
key
distributor leaders spending time in other markets pending the launch of the BioPhotonic
Scanner;
|
|
|
•
|
|
stock outages resulting from product quality and regulatory challenges we faced during
2004, including BSE (or mad cow disease) issues in the first quarter, which required us to
convert many of our dietary supplements for sale in Japan from bovine-based capsules to
tablets and non-bovine based capsules; and
|
We
began leasing BioPhotonic Scanners to our distributor leaders in Japan in November 2004,
and we plan to increase the number of BioPhotonic Scanners available for lease in this
market throughout the upcoming year. We have also made recent changes to our distributor
incentives which are designed to help promote growth in the number of executive
distributors. These initiatives helped us post improved results in the fourth quarter,
with local currency revenue down only 2% on a year-over-year basis compared to an 8%
decline in the third quarter, and solid sequential growth of 7% in executive distributors.
In
South Korea, our local currency revenue grew 7% in 2004 compared to 2003 primarily as a
result of continued growth in our active distributors. We believe that strong initiatives
and distributor support contributed to the growth in this market despite the difficult
regulatory and economic conditions in South Korea that we expect will continue to
negatively impact this market in 2005.
Greater
China.
The following table sets forth revenue for the Greater China region and its
principal markets (U.S. dollars in millions):
|
|
2003
|
|
2004
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
China
|
|
$ 38.5
|
|
$ 105.6
|
|
174%
|
|
|
Taiwan
|
|
73.1
|
|
82.8
|
|
13%
|
|
|
Hong Kong
|
|
23.9
|
|
41.4
|
|
73%
|
|
|
Greater China total
|
|
$ 135.5
|
|
$ 229.8
|
|
70%
|
|
-48-
Revenue
growth in Greater China was a result of the continued expansion of operations in China, as
well as strong growth in Hong Kong and Taiwan. Currencies in China and Hong Kong are
generally pegged to the U.S. dollar, minimizing the impact of foreign currency
fluctuations on this region.
China
revenue grew by 174% compared to 2003. We continued to successfully grow our business in
China as a result of:
|
|
•
|
|
expansion
of our sales representatives, based in part upon the attractiveness of the opportunity
for employment with us in the market;
|
|
|
•
|
|
successful
product launches and promotions; and
|
|
|
•
|
|
a
robust economy, with a focus on international brands and opportunities.
|
Following a period of rapid
sequential growth in China in 2003 and the first half of 2004, however, revenue declined
slightly in the third quarter of 2004 compared to the second quarter, and then stabilized
sequentially in the fourth quarter. Also, the number of sales representatives remained
essentially level during the second half of the year. This softening in the second half of
the year is attributed to a softening of the recruiting environment for new customers and
sales representatives after an initial 18 months of rapid sequential growth. This
softening was also largely the result of our taking actions against sales representatives who
had violated company policies. Due to increased media and government scrutiny of
activities related to direct selling and direct selling companies operating in China in
advance of new direct selling regulations, we focused more on training our sales
representatives and enforcing our sales policies that prohibit improper promotion of our
business, and less on implementing aggressive growth initiatives. This emphasis resulted
in disciplinary actions against, or termination of employment of, sales representatives
who had violated these policies, and contributed to the lack of growth in our revenue, our
customers and our sales representative numbers during the second half of 2004. We believe,
however, that our long-term growth prospects were enhanced due to these actions. Results
in China were also negatively impacted by uncertainties and delays with respect to the new
direct selling regulations and related negative and confusing media coverage.
We
currently anticipate that new regulations will be adopted in the next several months and
are optimistic that the new regulations will positively impact our business in China.
After publication of the new regulations, we anticipate that companies interested in
operating direct selling businesses in China will need to secure a direct selling license,
which will likely take several months. In the meantime, we are implementing initiatives to
keep the opportunity vibrant for our sales leaders, including the launch of three key
Pharmanex products in January 2005 and the introduction of the BioPhotonic Scanner in our
retail stores in China. We also are taking steps to be prepared to apply for a direct
selling license under the anticipated regulations. We currently have retail stores in
nearly every province in China, but the new regulations are expected to require a certain
minimum number of retail stores in a particular province in order to receive approval to
conduct direct selling in such province. Therefore, it is widely anticipated that a
company will need a minimum of 300 to 400 retail stores in China to conduct direct selling
in all provinces and municipalities throughout the country. We currently have 120 stores
in China and plan to add 80 to 100 stores in 2005 and additional stores in 2006. While the
regulations are still not final, and we have not yet been approved to conduct direct
selling, we anticipate that we will be able to conduct direct selling in four or five
leading provinces and municipalities by the end of 2005, and in additional provinces and
municipalities in 2006. As our business model in China is centered on our sales
representatives and their productivity, we do not believe that store openings will
directly lead to new revenue in the market. Rather, revenue growth is primarily dependent
upon sales force productivity and the recruitment of new sales representatives.
-49-
We
expect to continue to experience government and media scrutiny in China due to our status
as a leading, global direct selling company and the increased focus on the direct selling
industry as new regulations are implemented. Until such time as the regulations are final,
we obtain a direct selling license, and make any changes to our business model, we will
continue to focus on training our sales employees and enforcing our employee policies to
maximize the likelihood of obtaining a direct selling license in a timely manner.
Hong
Kong and Taiwan each generated strong growth in revenue and in the number of executive and
active distributors in 2004. Modifications we made to our compensation plan in early 2004
in these markets to promote the development of executive distributors, as well as
continued growth in monthly product subscription orders, contributed to the growth in
revenue in these markets. The revenue increases in these markets were also due in part to
continued enthusiasm for business prospects in China and the use of the BioPhotonic
Scanner, particularly in Taiwan. In addition, revenue in Hong Kong was positively impacted
by sales of products to sales representatives from China for personal consumption,
particularly to those sales representatives attending our third quarter sales convention
in Hong Kong. We anticipate, however, that the launch of Pharmanex products into China
will have a negative impact on Hong Kong and Taiwan revenue in 2005.
North
America.
The following table sets forth revenue for the North America region and its
principal markets (U.S. dollars in millions):
|
|
2003
|
|
2004
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$ 118.2
|
|
$ 135.7
|
|
15%
|
|
|
Canada
|
|
9.4
|
|
10.0
|
|
6%
|
|
|
North America total
|
|
$ 127.6
|
|
$ 145.7
|
|
14%
|
|
Revenue
in the United States grew 15% in 2004 compared to 2003 and was positively impacted by:
|
|
•
|
|
the
BioPhotonic Scanner program;
|
|
|
•
|
|
our
monthly product subscription program;
|
|
|
•
|
|
the
launch of a number of new, innovative Pharmanex and Nu Skin products; and
|
|
|
•
|
|
$5.8
million in sales to international distributors at our global convention held in the U.S.
in February 2004, which did not occur in 2003.
|
These initiatives resulted in a 36%
increase in Pharmanex revenue and a 4% increase in Nu Skin revenue in 2004 compared to
2003, excluding sales to international distributors at our global distributor
convention.
These initiatives also continued to enhance distributor
enthusiasm and sponsorship as well as increase retention. The number of executive
distributors grew 10% in 2004 compared to 2003. The growth in revenue in Pharmanex and Nu
Skin in the United States was partially offset by a decline in Big Planet revenue,
primarily as a result of our strategic elimination of low margin products and services
that generated approximately $11.0 million in revenue in 2003. Over the last couple of
years, Big Planet has focused on eliminating low margin products while developing and
introducing new products and services with margins comparable to Nu Skin and Pharmanex
products.
In
addition, in connection with the global roll-out of the BioPhotonic Scanner program, some
of our key U.S. distributor leaders spent time promoting the BioPhotonic Scanner in
international markets. This negatively impacted revenue and distributor activity in the
United States during the last half of the year as revenue and distributor statistics were
relatively flat sequentially. The BioPhotonic Scanner was first
-50-
introduced to our
distributor force in the U.S. more than two years ago. As a result, we are currently
working to implement initiatives tied to the BioPhotonic Scanner to maintain distributor
enthusiasm and drive revenue in this market.
We are currently involved in litigation with another licensee of the
technology utilized in the BioPhotonic Scanner. The other licensee has alleged
that the BioPhotonic Scanner is being used for medical diagnostic purposes in a
medical clinical setting by certain distributors who are medical doctors,
dentists and chiropractors. We allow such practitioners to use the BioPhotonic
Scanner solely for promoting the sale of our nutritional supplements and not for
medical diagnostic purposes or in a medical clinical setting, but the other
licensee alleges that the way in which the BioPhotonic Scanner is used
by such practitioners violates our license. We disagree. We estimate that we
lease 10% or less of our active BioPhotonic Scanners in the United States to
such practitioners.
South
Asia/Pacific
. The following table sets forth revenue for the South Asia/Pacific region
and its principal markets (U.S. dollars in millions):
|
|
2003
|
|
2004
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
Singapore/Malaysia/Brunei
|
|
$ 36.7
|
|
$ 40.0
|
|
9%
|
|
|
Thailand
|
|
22.7
|
|
25.6
|
|
13%
|
|
|
Australia/New Zealand
|
|
13.5
|
|
13.1
|
|
(3%)
|
|
|
Philippines
|
|
2.9
|
|
3.1
|
|
7%
|
|
|
South Asia/Pacific total
|
|
$ 75.8
|
|
$ 81.8
|
|
8%
|
|
Excluding
the impact of changes in foreign currency exchange rates, revenue in South Asia/Pacific
increased 4% in 2004 compared to 2003. The increase in local currency revenue in this
region was due primarily to revenue growth in Thailand as well as an increase in combined
Singapore/Malaysia revenue. We have experienced solid growth in Thailand for the last four
years, but revenue was down 13% in local currency in the fourth quarter compared to prior
year results. We launched the BioPhotonic Scanner program in Thailand in late 2004 to help
improve distributor activity and revenue in this market. Our focus on our monthly product
subscription programs, growth in our nutrition business, and the BioPhotonic Scanner
contributed to the revenue increases in Malaysia and Singapore. The revenue increases in
these markets were slightly offset by a decrease in revenue in combined Australia/New
Zealand.
We
anticipate that, in connection with our planned opening of the Indonesian market in 2005,
some of our distributors in our other South Asia/Pacific and Greater China markets may
focus some of their energies on this new market. We expect this could have some negative
impact on these markets during 2005.
Other
Markets.
The following table sets forth revenue for our Other Markets (U.S. dollars in
millions):
|
|
2003
|
|
2004
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe
|
|
$ 32.0
|
|
$ 36.6
|
|
14%
|
|
|
Latin America
|
|
2.8
|
|
3.9
|
|
39%
|
|
|
Other Markets total
|
|
$ 34.8
|
|
$ 40.5
|
|
16%
|
|
The
16% increase in Other Markets was primarily due to a 14% increase in revenue in Europe,
which was mostly attributed to the favorable impact of foreign currency fluctuations in
2004 compared to 2003. We experienced higher local currency growth in Europe during the
second half of 2004, and in 2004 active distributors and executive distributors grew 25%
and 17%, respectively over 2003. Although our
-51-
Latin America business accounts for a small
part of our business, we are making efforts to grow our business there as well as in other
developing countries around the world. As a result of these efforts, revenue in Mexico was
up 54% in local currency in 2004 compared to 2003, and the executive distributor count
grew by 149%.
Gross
profit
Gross
profit as a percentage of revenue increased to 83.2% in 2004 compared to 82.1% in 2003.
Our gross profit was positively impacted by the shift away from low margin Big Planet
revenue to higher margin Nu Skin and Pharmanex products, strong gross margins in China
resulting from in-house manufacturing in that market, and the positive impact of
fluctuations in foreign currency exchange rates in 2004 compared to 2003. During 2004, we
continued to expand the BioPhotonic Scanner program in the U.S. and in our international
markets. Lease revenue from BioPhotonic Scanners has significantly lower margins than our
personal care and nutritional supplement products, as we lease them on essentially a
break-even basis. We expect gross margins to be slightly lower in 2005 compared to 2004 as
a result of our expansion of the BioPhotonic Scanner program this year.
Selling
expenses
Selling
expenses
as a percentage of revenue increased to 42.9% in 2004 from
41.3% in 2003. Selling expenses increased to $487.6 million in 2004 from $407.1 million in
2003. The increase in selling expenses as a percentage of revenue is due in part to higher
costs associated with our employed sales representatives in China. We currently pay
approximately 8% to 10% of local revenue in additional labor costs, including unemployment
and benefits to our sales representatives in China. The increase in selling expenses as a
percent of revenue was also due to a short-term increase in distributor incentives in
Japan in the fourth quarter of 2004. This increase in incentives resulted from the
implementation of new components to our compensation plan in this market while certain
existing components were transitioned out over several months. Completion of this
transition will positively impact selling expenses as a percentage of revenue going
forward. We expect selling expenses as a percentage of revenue to be slightly lower in
2005 compared to 2004, due in part also to our continued expansion of the BioPhotonic
Scanner program, as no commissions are paid on the lease revenue from these machines.
General
and administrative expenses
General and administrative expenses as a percentage of revenue decreased
slightly to 29.3% in 2004 from 29.4% in 2003. General and administrative
expenses increased to $333.3 million in 2004 from $289.9 million in 2003. The
U.S. dollar increase during 2004 in general and administrative expenses was
primarily due to the incremental costs associated with significantly larger
retail operations in China versus the prior year, stronger foreign currencies
against the U.S. dollar, and higher distributor convention expenses. We
anticipate incurring expenses of approximately $6.5 million in 2005 for our
global distributor convention versus $10.5 million in 2004 relating to our
global distributor convention and Japan distributor convention. General and
administrative expenses will also be negatively impacted in 2005 by new
accounting rules requiring us to begin expensing stock-based compensation
granted to employees starting in the third quarter of 2005. Had we recognized
compensation cost for stock options in accordance with these new rules during
2004, our general and administrative expenses would have been approximately
$10.0 million higher that year.
Other
income (expense), net
-52-
Other
income (expense), net
was $3.6 million of expense in 2004 compared to
$0.4 million of income in 2003. This increase in other income (expense), net of $4.0
million is primarily related to increased interest expenses due to additional debt we
entered into during 2003.
Provision
for income taxes
Provision
for income taxes increased to $44.5 million in 2004 from $39.9 million in 2003. This
increase was largely due to the increase in operating income as compared to the prior
year. The effective tax rate decreased to 36.4% from 37.0% of pre-tax income in 2004 and
2003, respectively. This decrease in the effective tax rate was largely due to our
election in 2004 to permanently reinvest some of our earnings related to our foreign
operations. We anticipate the remittance of these earnings to be postponed indefinitely.
Net
income
As
a result of the foregoing factors, net income increased to $77.7 million in 2004 from
$67.9 million in 2003.
2003 Compared to 2002
Revenue
Overview
.
Revenue in 2003 increased 2% to $986.5 million from $964.1 million in 2002.
Excluding the impact of changes in foreign currency exchange rates, we
experienced a revenue decline of 2% for 2003 compared to 2002. This resulted
from the sale of our professional employer organization in the United States in
August 2003 and our transition away from certain Big Planet offerings, both of
which were eliminated as part of our continued efforts to eliminate low margin
products and services. Although these actions negatively impacted 2003 to 2002
revenue comparisons by $22.0 million, we believe that they positively impacted
gross and operating margins in the fourth quarter of 2003.
Revenue
in 2003 was positively impacted by significant revenue growth from our expanded operations
in China. In addition, growth in our U.S. nutrition business also positively impacted 2003
results. These improvements were largely offset by declines in local currency revenue in
South Korea, Singapore and Malaysia, and in Japan for the year ended December 31, 2003.
The negative year-over-year comparisons were related in part to the shift of attention of
distributor leaders away from their home markets during the first quarter of 2003 to focus
on China, the positive impact on revenue results in 2002 from distributor enthusiasm
surrounding and incentives related to our planned expansion of operations in China, and
geo-political conflicts and weak economic conditions. After two consecutive quarters of
year-over-year declines in Japan, revenue stabilized in this market during the last half
of 2003.
In
late December 2003, the Company received notification that Japanese and South Korean
regulators had suspended the importation of nutritional supplements in bovine-based
capsules, which includes many of our Pharmanex products. A few weeks later, Japanese
regulators also determined they would no longer allow these same products to be sold by
nutrition companies after February 16, 2004. As a result, we transitioned our production
to non-bovine capsules and tablets.
-53-
North
Asia.
The following table sets forth revenue for the North Asia region and its principal
markets (U.S. dollars in millions):
|
|
2002
|
|
2003
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
Japan
|
|
$ 533.0
|
|
$ 553.8
|
|
4%
|
|
|
South Korea
|
|
64.1
|
|
59.0
|
|
(8%)
|
|
|
North Asia total
|
|
$ 597.1
|
|
$ 612.8
|
|
3%
|
|
Excluding
the impact of changes in foreign currency exchange rates, revenue in North Asia decreased
3% in 2003 compared to 2002. In local currency, revenue in Japan decreased 2% in 2003
compared to 2002. Local currency revenue in Japan during 2003 was negatively impacted by
the factors noted in “Revenue – Overview” above. In local currency, revenue
in South Korea decreased 12%. The decrease in revenue in South Korea was primarily a
result of the factors discussed in “Revenue – Overview” above, as well as
regulatory changes requiring a modification to our global compensation plan towards the
end of 2002, which was disconcerting to our distributor leaders in this market.
Greater
China.
The following table sets forth revenue for the Greater China region and its
principal markets (U.S. dollars in millions):
|
|
2002
|
|
2003
|
|
Change
|
|
|
|
|
|
|
|
Taiwan
|
|
$ 78.9
|
|
$ 73.1
|
|
(7%)
|
|
|
China
|
|
2.0
|
|
38.5
|
|
1,825%
|
|
|
Hong Kong
|
|
24.0
|
|
23.9
|
|
—
|
|
|
Greater China total
|
|
$ 104.9
|
|
$ 135.5
|
|
29%
|
|
Revenue
in Greater China increased primarily as a result of the expansion of operations in China.
Foreign currency fluctuations from 2002 to 2003 did not have a notable impact on this
region. Revenue in China was $38.5 million in 2003, following our expansion of retail
operations and the introduction of Nu Skin branded products in China in January 2003. On a
sequential basis, revenue in China increased 67% from the third quarter to the fourth
quarter. This growth is attributed to an increased number of preferred customers and
employed sales representatives in China. The success of our product launches and product
promotions as well as our employment opportunities provide an attraction to many
unemployed or underemployed sales people in China. As our business expands in China, we
have experienced government scrutiny due to our international reputation as a direct
selling company.
The
increase in revenue in China was somewhat offset by the decline in revenue in Taiwan. We
believe that the SARS epidemic negatively impacted revenue in Taiwan and Hong Kong during
the first half of 2003. In addition, revenue in Taiwan and Hong Kong during the second,
third, and fourth quarters of 2002 was positively impacted by distributor enthusiasm
surrounding our planned expansion of operations in China in 2003.
North
America
. The following table sets forth revenue for the North America region and its
principal markets (U.S. dollars in millions):
|
|
2002
|
|
2003
|
|
Change
|
|
|
|
|
|
|
|
United States
|
|
$ 133.3
|
|
$ 118.2
|
|
(11%)
|
|
|
Canada
|
|
9.4
|
|
9.4
|
|
—
|
|
|
North America total
|
|
$ 142.7
|
|
$ 127.6
|
|
(11%)
|
|
The
decline in revenue in the United States is principally a result of a $22.0 million revenue
decline in Big Planet in 2003 compared to the prior year. This decline was due primarily
to the sale of our
-54-
professional employer organization and the restructuring of Big Planet
telecommunication products, both of which transitions are part of our continued efforts to
eliminate or modify low margin products. In addition, revenue in 2002 in the United States
included $6.0 million of sales to foreign distributors during the third quarter of 2002 at
the global distributor convention held in the United States, which did not recur in 2003.
Increasing
distributor activity tied to the BioPhotonic Scanner program, a focus on signing up more
consumers on monthly reorder programs, the introduction of new weight management products
and implementation of distributor leadership incentives, however, resulted in 36% growth
in our Pharmanex revenue in the United States from $48.3 million in 2002 to $65.6 million
in 2003, excluding sales to foreign distributors at the 2002 global convention held in the
United States. Nu Skin revenue held relatively constant in 2003 compared to 2002,
excluding sales to foreign distributors at the same 2002 global convention. Moreover, we
experienced an 18% increase in our 2003 executive distributors in the United States and a
20% increase during 2003 of automatic delivery orders compared to 2002. Early in 2003, the
FDA questioned the status of the BioPhotonic Scanner as a non-medical device. We believe
the BioPhotonic Scanner can be marketed as a non-medical device, but the FDA has not
responded yet to our request to classify the BioPhotonic Scanner as a non-medical device.
In the event the FDA concludes that the BioPhotonic Scanner requires medical device
clearance, this could delay or inhibit our ability to market the BioPhotonic Scanner. We
intend to contest any conclusion by the FDA that the BioPhotonic Scanner is a
medical device.
South
Asia/Pacific
. The following table sets forth revenue for the South Asia/Pacific region
and its principal markets (U.S. dollars in millions):
|
|
2002
|
|
2003
|
|
Change
|
|
|
|
|
|
|
|
Singapore/Malaysia
|
|
$ 64.3
|
|
$ 36.7
|
|
(43%)
|
|
|
Thailand
|
|
13.0
|
|
22.7
|
|
75%
|
|
|
Australia/New Zealand
|
|
11.0
|
|
13.5
|
|
23%
|
|
|
Philippines
|
|
2.8
|
|
2.9
|
|
4%
|
|
|
South Asia/Pacific total
|
|
$ 91.1
|
|
$ 75.8
|
|
(17%)
|
|
Excluding
the impact of changes in foreign currency exchange rates, revenue in South Asia/Pacific
decreased 21% in 2003 compared to 2002. The decrease in revenue in this region was due
primarily to the combined decrease in Singapore and Malaysia. Both Singapore and Malaysia
were opened in the last two years. We often experience a revenue contraction after an
initial period of rapid revenue growth following the opening of the market. This revenue
contraction occurred later than usual in Singapore and Malaysia and was more pronounced
than anticipated. We believe that this was due in part to distributor enthusiasm related
to the planned opening of expanded operations in China in January 2003, which drove
revenue growth throughout 2002. This decrease was somewhat offset by an increase in
revenue in both Thailand and combined Australia/New Zealand.
Other
Markets.
The following table sets forth revenue for our Other Markets (U.S. dollars in
millions):
|
|
2002
|
|
2003
|
|
Change
|
|
|
|
|
|
|
|
Europe
|
|
$ 25.6
|
|
$ 32.0
|
|
25%
|
|
|
Latin America
|
|
2.7
|
|
2.8
|
|
4%
|
|
|
Other Markets total
|
|
$ 28.3
|
|
$ 34.8
|
|
23%
|
|
This
increase was primarily due to a 25% increase in revenue in Europe, which included the 17%
favorable impact of currency fluctuations in 2003 compared to 2002.
-55-
Gross
profit
Gross
profit as a percentage of revenue increased to 82.1% in 2003 compared to 80.2% in 2002.
Our gross profit was positively impacted by the divestiture of our professional employer
organization, the decline in low margin revenue from Big Planet, a new personal care
manufacturing plant in China and the positive impact of fluctuations in foreign currency
in 2003 compared to 2002.
Selling
expenses
Selling
expenses as a percentage of revenue increased to 41.3% in 2003 from
39.6% in 2002. In U.S. dollars, selling expenses increased to $407.1 million in 2003 from
$382.2 million in 2002. The increase in selling expenses was due to the increase of sales
employee labor and commission expenses in China. In addition, selling expenses as a
percent of revenue increased due to the divestiture of our professional employer
organization, which paid no commissions, and by the introduction of leadership incentives
in Japan and in the United States.
General
and administrative expenses
General
and administrative expenses as a percentage of revenue remained nearly level at 29.4% in
2003 from 29.6% in 2002. In U.S. dollars, general and administrative expenses increased to
$289.9 million in 2003 from $285.2 million in 2002. The U.S. dollar increase during 2003
in general and administrative expenses was primarily due to the incremental costs
associated with the expansion of retail operations in China in 2003, as well as the
negative impact of foreign currency fluctuations on operating expenses in 2003. These
increases were somewhat offset by the reduction in labor expenses resulting from our
restructuring that occurred in the third quarter of 2003.
Restructuring
and other charges
Restructuring
and other charges of $5.6 million recorded in the third quarter of 2003 include $5.1
million of expenses resulting from an early retirement program and other employee
separation charges. As a result of these employee terminations, our overall headcount was
reduced by approximately 130 employees, the majority of which were employees at our U.S.
headquarters. These restructuring expenses consisted primarily of severance and other
compensation charges. The savings associated with these reductions in force have been
refocused on revenue growth initiatives throughout the company. In connection with these
restructuring charges, we also completed the divestiture of our professional employer
organization operated through Big Planet resulting in a charge of approximately $0.5
million.
Other
income (expense), net
Other
income (expense), net
was
$0.4 million of income
in 2003 compared to $2.9 million of expense in 2002. This increase in other income
(expense), net of $3.3 million is primarily related to the foreign exchange fluctuations
to the U.S. dollar on the translation of yen based bank debt and other foreign denominated
intercompany balances into U.S. dollars for financial reporting purposes.
Provision
for income taxes
Provision
for income taxes increased to $39.9 million in 2003 from $38.1 million in 2002. This
increase was largely due to the increase in operating income as compared to the prior
year. The effective tax rate remained at 37.0% of pre-tax income for 2003 and 2002.
-56-
Net
income
As
a result of the foregoing factors, net income increased to $67.9 million in 2003 from
$64.8 million in 2002. Earnings per share were positively impacted by the repurchase of
10.8 million shares of our Class A common stock, which occurred in October 2003.
Liquidity and Capital
Resources
Historically,
our principal needs for funds have been for operating expenses including selling expenses,
working capital (principally inventory purchases), capital expenditures and the
development of operations in new markets. We have generally relied on cash flow from
operations to meet our cash needs and business objectives without incurring long-term debt
to fund operating activities.
We
typically generate positive cash flow from operations due to favorable gross margins, the
variable nature of selling expenses (which constitute a significant percentage of
operating expenses), and minimal capital requirements. We generated $130.4 million in cash
from operations in 2004 compared to $109.0 million in 2003. This increase in cash
generated from operations in 2004 compared to the prior-year period is primarily related
to the increase in net income, which includes higher non-cash amortization charges in
2004, and the reduction in cash payments for income taxes during 2004 compared to the
prior year.
As
of December 31, 2004, working capital was $117.4 million compared to $149.3 million as of
December 31, 2003. Our working capital decreased primarily due to an increase in accrued
selling expenses as a result of higher December revenue for the year ended December 31,
2004, an increase in accrued contingent liabilities and a decrease in our current deferred
tax assets at December 31, 2004 due to the timing of payments from foreign affiliates,
which we do not expect to recur in future years. Cash and cash equivalents at December 31,
2004 were $109.9 million and were $122.6 million at December 31, 2003. Our cash balance
was positively impacted by $130.4 million in cash flows from operations during 2004 as
well as $16.6 million from the exercise of employee stock options and was offset by the
use of approximately $35.0 million for capital expenditures, $72.3 million for repurchases
of shares of our common stock, $22.6 million for the payment of dividends, $16.2 million
for the repayment of long-term debt and $10.2 million of net purchases of investments.
Our
capital expenditures have been primarily focused on:
|
|
•
|
|
purchases
of BioPhotonic Scanners;
|
|
|
•
|
|
computer
systems and software; and
|
|
|
•
|
|
the
build-out of manufacturing facilities and additional retail stores in China, as well as
other leasehold improvements in our various markets.
|
Capital expenditures were $35.0
million in 2004, and we anticipate capital expenditures in 2005 of approximately $40.0
million to $50.0 million relating primarily to the items listed above.
We
maintain a $25.0 million revolving credit facility that expires in May 2007. Drawings on
this revolving credit facility may be used for working capital, capital expenditures and
other purposes including repurchases of our outstanding shares of Class A common stock. As
of December 31, 2004, there were no outstanding balances under our revolving credit
facility.
-57-
We
also have a $125.0 million multi-currency private uncommitted shelf facility with
Prudential Investment Management, Inc. As of December 31, 2004, we had $70.0 million
outstanding under this shelf facility, $5.0 million of which is included in the current
portion of long-term debt. This long-term debt is U.S. dollar denominated, bears interest
of approximately 4.5% per annum and is amortized in two tranches over five and seven years
beginning in October 2004 and April 2006, respectively. In February 2005, we made an
additional borrowing under the Shelf Facility in Japanese yen denominated senior notes in
the amount of 3.1 billion yen, or approximately $30.0 million as of February 28, 2005.
These notes bear interest of approximately 1.7% per annum and are due April 2014, with
principal payments beginning in April 2008. Our long-term debt also includes the long-term
portion of Japanese yen denominated ten-year senior notes issued to the Prudential
Insurance Company of America in 2000. The notes bear interest at an effective rate of
3.0% per annum and are due October 2010, with annual principal payments that began in
October 2004. As of December 31, 2004, the outstanding balance on the notes was 8.3
billion Japanese yen, or $81.2 million, $13.5 million of which is included in the current
portion of long-term debt. The Japanese notes and the revolving and shelf credit
facilities are secured by guarantees issued by our material subsidiaries or by pledges of
65% to 100% of the outstanding stock of our material subsidiaries.
Since
August 1998, our board of directors has authorized us to repurchase up to $110.0 million
of our outstanding shares of Class A common stock under a stock repurchase program, which
allows us to repurchase our shares on the open market or in private transactions. This
includes an additional $20.0 million authorized by the board of directors in February
2005. The repurchases are used primarily for our equity incentive plans and strategic
initiatives. During the year ended December 31, 2004 we repurchased approximately 0.1
million shares of Class A common stock under this program for an aggregate amount of
approximately $1.3 million. Between August 1998 and December 31, 2004, we had repurchased
a total of approximately 8.8 million shares of Class A common stock under this program for
an aggregate price of approximately $82.9 million.
On
July 30, 2004, we purchased approximately 3.1 million shares of common stock from members
of our original stockholder group for an aggregate purchase price of approximately $71.0
million, or $22.62 per share. The purchase was made pursuant to an option granted in
connection with the recapitalization transaction that occurred in October 2003, and we
used existing cash balances to pay for the repurchase. The purchase price was determined
based on the agreement entered into in October 2003, which provided for a purchase price
equal to 94% of the lower of (a) the closing sales price on the New York Stock Exchange on
the date the notice of exercise was given, and (b) the average closing sales price over
the immediately preceding 15 trading days. A special committee of independent directors of
the board of directors made the decision to exercise the option. The special committee
engaged its own independent financial and legal advisors. We still have a similar option
to acquire approximately 300,000 shares from one of our original shareholders. Since 1998,
we have repurchased an aggregate of approximately 22.7 million shares pursuant to our
stock repurchase program and other privately negotiated transactions.
During
each quarter of 2004, our board of directors declared cash dividends of $0.08 per share on
our Class A common stock. These quarterly cash dividends totaled approximately $22.6
million and were paid during 2004 to stockholders of record in 2004. In February 2005, the
board of directors declared a dividend to be paid in March 2005 of $0.09 per share for
Class A common stock. Currently, we anticipate that our board of directors will continue
to declare quarterly cash dividends and that the cash flows from operations will be
sufficient to fund our future dividend payments. Assuming a quarterly dividend declaration
of $0.09 per share in 2005, dividends for the year should total approximately $25.2
million based upon the number of shares currently outstanding. However, the declaration of
dividends is subject to the discretion of our board of directors and will depend upon
various factors, including our net earnings, financial condition, cash requirements,
future prospects and other factors deemed relevant by our board of directors.
-58-
We
believe we have sufficient liquidity to be able to meet our obligations on both a short-
and long-term basis. We currently believe that existing cash balances together with future
cash flows from operations and existing lines of credit will be adequate to fund our cash
needs. The majority of our historical expenses have been variable in nature and as such, a
potential reduction in the level of revenue would reduce our cash flow needs. Within the
past year our capital needs have increased due to the retail store model in China
including manufacturing facilities and the manufacture of BioPhotonic Scanners. In the
event that our current cash balances, future cash flow from operations and current lines
of credit are not sufficient to meet our obligations or strategic needs, we would consider
raising additional funds in the debt or equity markets or restructuring our current debt
obligations. Additionally, we would consider realigning our strategic plans including a
reduction in capital spending, stock repurchases or dividend payments.
Contractual Obligations
and Contingencies
The
following table sets forth payments due by period for fixed contractual obligations as of
December 31, 2004 (U.S. dollars in thousands):
|
|
Total
|
|
2005
|
|
2006-2007
|
|
2008-2009
|
|
Thereafter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt obligations
(1)
|
|
$ 151,241
|
|
$ 18,540
|
|
$ 57,080
|
|
$ 52,080
|
|
$ 23,541
|
|
|
Capital lease obligations
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
Operating lease obligations
(2)
|
|
68,843
|
|
12,989
|
|
25,347
|
|
24,942
|
|
5,565
|
|
|
Purchase obligations
(3)
|
|
65,925
|
|
51,511
|
|
9,732
|
|
1,105
|
|
3,577
|
|
Other long-term liabilities reflected
on the balance sheet
|
|
—
|
(4)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ 286,009
|
|
$ 83,040
|
|
$ 92,159
|
|
$ 78,127
|
|
$ 32,683
|
|
|
(1)
|
Long-term debt excludes estimated interest payments under these obligations
since a significant portion of our long-term debt is Japanese yen denominated.
We anticipate interest expense on this long-term debt to be similar to our 2004
interest expense, which was $5.9 million. In February 2005, we made an
additional borrowing under the Shelf Facility in Japanese yen denominated senior
notes in the amount of 3.1 billion yen (see Note 8 to the Consolidated Financial
Statements).
|
|
(2)
|
Operating leases include corporate office and warehouse space with two entities
that are owned by certain officers and directors of our company who are also
founding shareholders. Total payments under these leases were $3.6 million for
the year ended December 31, 2004 with remaining long-term obligations under
these leases of $23.5 million.
|
|
(3)
|
We are also party to acquisition agreements related to the BioPhotonic Scanner
pursuant to which contingent payments of up to $5.5 million and 937,500 shares
of our Class A common stock may be made if certain operating and revenue targets
are met, based on the BioPhotonic Scanner in driving results. These amounts are
not included in the table above.
|
|
(4)
|
Other long-term liabilities reflected on the balance sheet primarily consist of
long-term tax related balances, which totaled $29.9 million as of December 31,
2004.
|
In
October 2004, we were assessed by the Yokohama customs authorities in Japan a total of
approximately $9.0 million, net of any recovery of consumption taxes, for duties on products
imported into Japan from October 2002 through October 2003. The value and methodology we
used for determining the amount of duties payable for these periods is consistent with
prior years and has been
-59-
previously reviewed on several occasions by the audit division of
the Japan customs authorities, and reviewed and approved by the Valuation Department of
the Yokohama customs authority. As such, we believe the assessment is improper and we have
filed letters of protest with Yokohama customs. We expect to receive a reply within the
next couple of months. If necessary, we will appeal this issue to the Ministry of Finance
in Japan. In order to file our letter of protest with Yokohama customs, we were required
to pay the amount that was assessed. In addition, the Audit Division of Yokohama customs
has recently completed an audit of the period from November 2003 through October 2004.
Although we have not yet been informed of the results of this audit, we may be assessed
for additional duties related to this period, which we anticipate would be a similar
amount to the prior assessment. We would file letters of protest with Yokohama customs in
a similar manner in case of any such assessment.
Seasonality and
Cyclicality
In
addition to general economic factors, we are impacted by seasonal factors and trends such
as major cultural events and vacation patterns. For example, most Asian markets celebrate
their respective local New Year in the first quarter, which generally has a negative
impact on that quarter. We believe that direct selling in Japan, the United States and
Europe is also generally negatively impacted during the month of August, which is in our
third quarter, when many individuals, including our distributors, traditionally take
vacations.
We
have experienced rapid revenue growth in certain new markets following commencement of
operations. This initial rapid growth has often been followed by a short period of stable
or declining revenue, then followed by renewed growth fueled by product introductions, an
increase in the number of active distributors and increased distributor productivity. The
contraction following initial rapid growth has been more pronounced in certain new
markets, due to other factors such as business or economic conditions or distributor
distractions outside the market.
Distributor Information
The
following table provides information concerning the number of active and executive
distributors as of the dates indicated. Active distributors are those distributors and
preferred customers who were resident in the countries in which we operated and purchased
products for resale or personal consumption during the three months ended as of the date
indicated. An executive distributor is an active distributor who has achieved required
monthly personal and group sales volumes.
|
|
As of December 31, 2002
|
|
As of December 31, 2003
|
|
As of December 31, 2004
|
|
|
|
Active
|
|
Executive
|
|
Active
|
|
Executive
|
|
Active
|
|
Executive
|
|
|
|
|
|
|
|
|
|
|
North Asia
|
|
322,000
|
|
17,668
|
|
322,000
|
|
17,013
|
|
337,000
|
|
16,637
|
|
|
Greater China
(1)
|
|
73,000
|
|
3,564
|
|
187,000
|
|
5,991
|
|
229,000
|
|
8,827
|
|
|
North America
|
|
73,000
|
|
2,693
|
|
113,000
|
|
2,861
|
|
134,000
|
|
3,099
|
|
|
South Asia/Pacific
|
|
66,000
|
|
2,972
|
|
69,000
|
|
2,175
|
|
74,000
|
|
2,076
|
|
|
Other Markets
|
|
32,000
|
|
1,018
|
|
34,000
|
|
1,091
|
|
46,000
|
|
1,377
|
|
|
Total
|
|
566,000
|
|
27,915
|
|
725,000
|
|
29,131
|
|
820,000
|
|
32,016
|
|
|
(1)
|
|
Following
the opening of our retail business in China during 2003, active distributors includes
117,000 and 147,000 preferred customers in China and executive distributors include
3,100 and 5,437 employed, full-time sales representatives for the years ended December
31, 2003 and 2004, respectively.
|
-60-
Quarterly Results
The
following table sets forth selected unaudited quarterly data for the periods shown (U.S.
dollars in millions, except per share amounts):
|
|
2003
|
|
2004
|
|
|
|
|
1
st
Quarter
|
|
2
nd
Quarter
|
|
3
rd
Quarter
|
|
4
th
Quarter
|
|
1
st
Quarter
|
|
2
nd
Quarter
|
|
3
rd
Quarter
|
|
4
th
Quarter
|
|
|
|
|
|
|
|
|
Revenue
|
|
$ 219.6
|
|
$ 240.7
|
|
$ 250.2
|
|
$ 275.9
|
|
$ 264.0
|
|
$ 284.2
|
|
$ 283.3
|
|
$ 306.4
|
|
|
Gross profit
|
|
178.0
|
|
195.4
|
|
206.5
|
|
230.0
|
|
220.1
|
|
236.7
|
|
235.7
|
|
254.2
|
|
|
Operating income
|
|
19.7
|
|
25.7
|
|
24.5
|
|
37.4
|
|
23.8
|
|
35.0
|
|
33.6
|
|
33.4
|
|
|
Net income
|
|
12.8
|
|
16.8
|
|
15.1
|
|
23.1
|
|
14.5
|
|
20.3
|
|
20.9
|
|
22.0
|
|
|
Net income per share:
|
|
|
Basic
|
|
0.16
|
|
0.21
|
|
0.19
|
|
0.32
|
|
0.20
|
|
0.28
|
|
0.30
|
|
0.32
|
|
|
Diluted
|
|
0.16
|
|
0.21
|
|
0.19
|
|
0.31
|
|
0.20
|
|
0.28
|
|
0.29
|
|
0.31
|
|
Recent Accounting
Pronouncements
During
the first quarter of 2004, we adopted FASB Interpretation No. 46R, “Consolidation of
Variable Interest Entities, an Interpretation of ARB No. 51.” This accounting
standard became effective during the first quarter of 2004. The adoption of this standard
did not have a significant effect on our financial statements.
In
December 2004, the FASB issued SFAS No. 123R, “Share-Based Payment,” which
requires the expensing of employee options as of the beginning of the first interim
reporting period that begins after June 15, 2005. Consequently, we will begin expensing
employee options during the third quarter of 2005. Until that time, we will continue to
account for stock-based compensation granted to employees according to the provisions of
APB Opinion No. 25. We are currently evaluating the effect of this accounting standard on
our financial statements.
In
November 2004, the FASB issued SFAS No. 151, “Inventory Costs” which requires
certain inventory related costs to be expensed as incurred. This accounting standard is
effective January 1, 2006. We are currently evaluating the effect of this accounting
standard on our financial statements.
Currency Risk and
Exchange Rate Information
A
majority of our revenue and many of our expenses are recognized primarily outside of the
United States, except for inventory purchases which are primarily transacted in U.S.
dollars from vendors in the United States. The local currency of each of our
subsidiary’s primary markets is considered the functional currency. All revenue and
expenses are translated at weighted-average exchange rates for the periods reported.
Therefore, our reported revenue and earnings will be positively impacted by a weakening of
the U.S. dollar and will be negatively impacted by a strengthening of the U.S. dollar.
Media reports have indicated that the Chinese government may begin to allow the RMB to
float more freely against the U.S. dollar and other major currencies. In that event, a
strengthening of the RMB would benefit our reported revenue and profits and a weakening of
the RMB would negatively impact reported revenue and profits. Given the uncertainty of
exchange rate fluctuations, we cannot estimate the effect of these fluctuations on our
future business, product pricing and results of operations or financial condition.
We
seek to reduce our exposure to fluctuations in foreign currency exchange rates through the
use of foreign currency exchange contracts, through intercompany loans of foreign
currency, and through our
-61-
Japanese yen denominated debt. We do not use derivative
financial instruments for trading or speculative purposes. We regularly monitor our
foreign currency risks and periodically take measures to reduce the impact of foreign
exchange fluctuations on our operating results.
Our
foreign currency derivatives are comprised of over-the-counter forward contracts with
major international financial institutions. As of December 31, 2004, we had $82.0 million
of these contracts with expiration dates through December 2005. All of these contracts
were denominated in Japanese yen. For the year ended December 31, 2004, we recorded losses
of $5.0 million in operating income, and losses of $3.2 million, net of tax, in other
comprehensive income related to the fair market valuation of our outstanding forward
contracts. Because of our foreign exchange contracts at December 31, 2004, the impact of a
10% appreciation or 10% depreciation of the U.S. dollar against the Japanese yen would not
represent a material potential loss in fair value, earnings, or cash flows against these
contracts. This potential loss does not consider the underlying foreign currency
transaction or translation exposures to which we are subject.
Following
are the weighted-average currency exchange rates of U.S. $1 into local currency for each
of our international or foreign markets in which revenue exceeded U.S. $5.0 million for at
least one of the quarters listed:
|
|
2003
|
|
2004
|
|
|
|
|
1
st
Quarter
|
|
2
nd
Quarter
|
|
3
rd
Quarter
|
|
4
th
Quarter
|
|
1
st
Quarter
|
|
2
nd
Quarter
|
|
3
rd
Quarter
|
|
4
th
Quarter
|
|
|
|
|
|
|
|
|
Japan
(1)
|
|
118.9
|
|
118.5
|
|
117.3
|
|
108.7
|
|
107.3
|
|
109.6
|
|
109.9
|
|
105.6
|
|
|
Taiwan
|
|
34.6
|
|
34.7
|
|
34.2
|
|
34.0
|
|
33.3
|
|
33.3
|
|
33.9
|
|
32.9
|
|
|
Hong Kong
|
|
7.8
|
|
7.8
|
|
7.8
|
|
7.8
|
|
7.8
|
|
7.8
|
|
7.8
|
|
7.8
|
|
|
South Korea
|
|
1,200.2
|
|
1,208.7
|
|
1,174.6
|
|
1,182.1
|
|
1,171.7
|
|
1,162.0
|
|
1,154.8
|
|
1,091.6
|
|
|
Singapore
|
|
1.7
|
|
1.8
|
|
1.8
|
|
1.7
|
|
1.7
|
|
1.7
|
|
1.7
|
|
1.7
|
|
|
Malaysia
|
|
3.8
|
|
3.8
|
|
3.8
|
|
3.8
|
|
3.8
|
|
3.8
|
|
3.8
|
|
3.8
|
|
|
Thailand
|
|
42.8
|
|
42.2
|
|
41.3
|
|
39.8
|
|
39.2
|
|
39.8
|
|
41.3
|
|
40.2
|
|
|
China
|
|
8.3
|
|
8.3
|
|
8.3
|
|
8.3
|
|
8.3
|
|
8.3
|
|
8.3
|
|
8.3
|
|
|
(1)
|
|
As
of February 28, 2005 the exchange rate of U.S. $1 into the Japanese yen was
approximately 104.5.
|
Note Regarding
Forward-Looking Statements
With
the exception of historical facts, the statements contained in Management’s
Discussion and Analysis of Financial Condition and Results of Operations, are
“forward-looking statements” within the meaning of the Private Securities
Litigation Reform Act of 1995 which reflect our current
expectations and beliefs regarding our future results of operations, performance and
achievements. These statements are subject to risks and uncertainties and are based upon
assumptions and beliefs that may not materialize. These forward-looking statements
include, but are not limited to, statements concerning:
|
|
•
|
|
our belief that we have sufficient liquidity to be able to meet our obligations on both a
short-and long-term basis, and that existing cash together with cash flow from operations
and existing lines of credit will be adequate to fund cash needs;
|
|
|
•
|
|
the
expectation that we will spend $40.0 million to $50.0 million for capital expenditures during
2005;
|
|
|
•
|
|
our plans to manufacture more products in China for export;
|
-62-
|
|
•
|
|
the anticipation that we will continue to declare quarterly cash dividends and that cash
flows from operations will be sufficient to pay future dividends;
|
|
|
•
|
|
our plans to continue to promote certain distributor initiatives and tools, such as
monthly product subscription programs and the BioPhotonic Scanner program;
|
|
|
•
|
|
our anticipation that new direct selling regulations will be adopted in China in the next
several months, and our plans to add additional retail stores throughout the country in
order to obtain a direct selling license under the new regulations;
|
|
|
•
|
|
our
belief that we will be able to obtain a direct selling license under the anticipated new
direct selling regulations in China;
|
|
|
•
|
|
our
belief that the anticipated new direct selling regulations in China will positively
impact our business there;
|
|
|
•
|
|
our expectation that the self-manufacture of product will result in reduced cost of goods
sold, and our plans to manufacture more products in China for export;
|
|
|
•
|
|
our
anticipation that the launch of Pharmanex products in China will have a negative impact
on Hong Kong and Taiwan revenue in 2005;
|
|
|
•
|
|
our anticipation that we will incur expenses of approximately $6.5 million in 2005 related
to a global distributor convention we plan to hold later in 2005;
|
|
|
•
|
|
our
plans to commence operations in Indonesia and Russia;
|
|
|
•
|
|
our anticipation that gross margins as well as selling expenses as a percentage of revenue
will each be slightly lower in 2005 compared to 2004 as a result of our continued
expansion of the BioPhotonic Scanner program around the world; and
|
|
|
•
|
|
our
anticipation that the remittance of permanently reinvested earnings related to our
foreign operations will be postponed indefinitely.
|
In
addition, when used in this report, the words or phrases “will likely result,”
“expect,” “anticipate,” “will continue,” “intend,”
“plan,” “believe” and similar expressions are intended to help
identify forward-looking statements.
We
wish to caution readers that our operating results are subject to various risks and
uncertainties that could cause our actual results and outcomes to differ materially from
those discussed or anticipated. Reference is made to the risks and uncertainties described
below and factors described herein in “Item 1. Business – Risk Factors”
(which contain a more detailed discussion of the risks and uncertainties related to our
business). We also wish to advise readers not to place any undue reliance on the
forward-looking statements contained in this report, which reflect our beliefs and
expectations only as of the date of this report. We assume no obligation to update or
revise these forward-looking statements to reflect new events or circumstances or any
changes in our beliefs or expectations. Some of the risks and uncertainties that might
cause actual results to differ from those anticipated include, but are not limited to, the
following:
-63-
|
|
(a)
|
|
Our
expansion of operations in China is subject to risks and uncertainties. We
continue to be subject to significant regulatory scrutiny and have experienced
challenges including interruption of sales activities at certain stores and
fines being paid in several cases, which in the aggregate have been less than 1%
of revenue in China. Because of restrictions on direct selling activities, we
have implemented a modified business model for this market using retail stores
and an employed sales force. We have, at times, received guidance from local
regulators on conducting our operations including limiting the size of our
training meetings, controlling the activities of our sales employees,
controlling the distribution of product outside of our stores, keeping the
number of sales employees at reasonable levels and limiting the involvement of
our overseas distributors. While we continuously update our operating model to
address this guidance, we believe we could experience similar challenges in the
future as we expand operations in China and continue to work with regulators to
help them understand our business model. Our operations in China may be modified
or otherwise harmed by regulatory changes, subjective interpretations of laws or
an inability to work effectively with national and local government agencies. In
addition, as our number of sales representatives continues to rapidly grow we
could face increasing risks that improper actions by these local sales
employees, or any overseas distributors, in violation of local laws or our
policies could result in regulatory investigations and penalties that could harm
our business.
|
|
|
(b)
|
|
Chinese
regulators have indicated that they intend to publish new direct selling
regulations within the next several months. There can be no assurance that these
regulations will be adopted or, if adopted, that they will benefit us. While we
anticipate we will be able to obtain a direct selling license under any new
proposed regulations, there can be no assurance that we will be able to obtain
such a license should we apply. There has been some uncertainty and confusion
regarding the direction of the new regulations and the type of restrictions or
requirements that may be imposed under such regulations. Although we currently
do not operate a direct selling business in China, our future growth could be
harmed if the regulations are not adopted or are unfavorable, if the adoption or
implementation of new regulations are delayed further than anticipated, or if we
are unable to obtain a license for direct selling under these regulations. In
the event the new regulations prevent us from offering a distributor
compensation model comparable to what we offer in other markets, our business
may be negatively impacted. In addition, if the Chinese government adopts new
direct selling regulations, these regulations could negatively impact our
current business model in China if they incorporate changes that impose
restrictions on us, or if interpretations of existing laws change as a result of
such new regulations which require us to make changes to our business model in
ways that could harm our business in this market.
|
|
|
(c)
|
|
As with any new technology, we have experienced technical issues in
developing and manufacturing the BioPhotonic Scanner. In addition, in March 2003
the FDA questioned the status of the BioPhotonic Scanner as a non-medical
device. We subsequently filed an application with the FDA to have it classified
as a non-medical device. The FDA has not yet acted on our application. There are
various factors that could determine whether the BioPhotonic Scanner is a
medical device including the claims that we or our distributors make about it.
We are facing similar uncertainties and regulatory issues in other markets with
respect to the status of the BioPhotonic Scanner as a non-medical device and the
claims that can be made in using it. A determination in any of these markets
that it is a medical device or that distributors are using it to make medical
claims, this could negatively impact our plans for or use of the BioPhotonic
Scanner in such market. If the launch or use of this tool is delayed or
otherwise inhibited by regulatory issues or actions, or if we are unable to
deliver BioPhotonic Scanners that perform to a standard expected by our
distributors, or if we are unable to make a sufficient number of BioPhotonic
Scanners available to interested distributors at reasonable lease rates, this
could dampen distributor enthusiasm and harm our business. In addition, if
distributors make claims
|
-64-
|
|
|
|
regarding the BioPhotonic Scanner outside of claims
approved by us, or use it in a manner not authorized by us, this could result in
regulatory actions against our business. We are also party to certain litigation
regarding the scope of our license to the technology utilized in the BioPhotonic
Scanner. An adverse ruling in this matter could limit the ability of
distributors who are health professionals to utilize the BioPhotonic Scanner.
|
|
|
(d)
|
|
We
recently have experienced local currency revenue declines in Japan. Because our Japan
business accounts for a majority of our revenue, our business could be harmed if planned
initiatives are not successful and do not generate renewed growth or outside factors
negatively affect our business in Japan. In particular, risks associated with the
BioPhotonic Scanner as discussed herein, increased competitive factors, and
any inability to execute our strategies could negatively impact our business. In
addition, if the BioPhotonic Scanner does not generate distributor excitement or attract
new distributors or customers, this could harm our operating results in Japan.
|
|
|
(e)
|
|
Because
a substantial majority of our sales are generated in Asia, particularly Japan,
significant variations in operating results including revenue, gross margin, and earnings
from those expected could be caused by:
|
|
|
|
•
|
|
renewed
or sustained weakness of Asian economies or consumer confidence;
|
|
|
|
•
|
|
weakening
of foreign currencies, particularly the Japanese yen; or
|
|
|
|
•
|
|
political
unrest or uncertainty in certain Asian markets.
|
|
|
(f)
|
|
The network
marketing and nutritional supplement industries are subject to various laws and
regulations throughout our markets, many of which involve a high level of
subjectivity and are inherently fact-based and subject to interpretation. Recent
negative publicity concerning ephedra (which we have never sold) and other
supplements with controversial ingredients has spurred efforts to change
existing regulations or adopt new regulations in order to impose further
restrictions and regulatory control over the nutritional supplement industry. If
our existing business practices or products, or any new initiatives or products,
are challenged or found to contravene any of these laws by any governmental
agency or other third party, or if there are any changes in regulations
applicable to our business or any of our nutritional products that limit our
ability to market such products, our revenue and profitability may be harmed.
|
|
|
(g)
|
|
Our ability
to retain key and executive level distributors or to sponsor new executive
distributors is critical to our success. Because our products are distributed
exclusively through our distributors and we compete with other direct selling
companies in attracting distributors, our operating results could be adversely
affected if our existing and new business opportunities and products do not
generate sufficient enthusiasm and economic incentive to retain our existing
distributors or to sponsor new distributors on a sustained basis.
|
|
|
(h)
|
|
Due to the
international nature of our business, we are subject from time to time to audits
by the foreign taxing authorities of the various jurisdictions in which we
conduct business throughout the world. These audits sometimes result in
challenges by such taxing authorities as to our methodologies used in
determining our income tax, duties, customs, and other amounts owed in
connection with the importation and distribution of our products. To the extent
we are unable to successfully defend ourselves against such challenges, we may
be required to pay assessments and penalties and increased duties, which may,
individually or in the aggregate, negatively impact our gross margins and
operating results.
|
-65
|
|
(i)
|
|
Production
difficulties and quality control problems could harm our
business.
Occasionally, we have experienced production difficulties with
respect to our products, including the delivery of products that do not meet our
quality control standards. These quality problems have resulted in the past, and
could result in the future, in stock outages or shortages in our markets with
respect to such product, harming our sales and creating inventory write-offs for
unusable product. In addition, these issues can negatively impact distributor
confidence as well as potentially invite additional governmental scrutiny in our
various markets.
|
|
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 Item 7. “Management’s Discussion and Analysis of
Financial Condition and Results of Operations — Currency Risk and Exchange Rate
Information” and Note 15 to the Consolidated Financial Statements.
|
ITEM 8.
|
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
|
|
1.
|
|
Financial
Statements
. Set forth below is the index to the Financial Statements
included in this Item 8:
|
|
|
Page
|
|
|
|
|
|
|
Consolidated Balance Sheets at December 31, 2003 and 2004
|
67
|
|
|
|
|
|
|
Consolidated Statements of Income for the years
ended December 31, 2002, 2003 and 2004
|
68
|
|
|
|
|
|
|
Consolidated Statements of Stockholders' Equity
for the years ended
|
69
|
|
|
|
|
|
|
Consolidated Statements of Cash Flows for the years
ended December 31, 2002, 2003 and 2004
|
70
|
|
|
|
|
|
|
Notes to Consolidated Financial Statements
|
71
|
|
|
|
|
|
|
Report of Independent Registered Public Accounting Firm
|
90
|
|
|
|
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.
|
-66-
Nu Skin Enterprises, Inc.
Consolidated Balance Sheets
(U.S. dollars in thousands, except share amounts)
|
|
December 31,
|
|
|
|
2003
|
|
2004
|
|
|
ASSETS
|
|
|
|
|
|
|
Current assets
|
|
|
Cash and cash equivalents
|
|
$ 122,568
|
|
$ 109,865
|
|
|
Accounts receivable
|
|
15,054
|
|
16,057
|
|
|
Current investments
|
|
—
|
|
10,230
|
|
|
Inventories, net
|
|
83,338
|
|
87,474
|
|
|
Prepaid expenses and other
|
|
60,163
|
|
44,723
|
|
|
|
|
281,123
|
|
268,349
|
|
|
|
|
|
Property and equipment, net
|
|
60,528
|
|
76,511
|
|
|
Goodwill
|
|
118,768
|
|
112,446
|
|
|
Other intangible assets, net
|
|
67,572
|
|
79,005
|
|
|
Other assets
|
|
63,068
|
|
73,426
|
|
|
Total assets
|
|
$ 591,059
|
|
$ 609,737
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
Current liabilities
|
|
|
Accounts payable
|
|
$ 18,816
|
|
$ 25,182
|
|
|
Accrued expenses
|
|
95,068
|
|
107,226
|
|
|
Current portion of long-term debt
|
|
17,915
|
|
18,540
|
|
|
|
|
131,799
|
|
150,948
|
|
|
|
|
|
Long-term debt
|
|
147,488
|
|
132,701
|
|
|
Other liabilities
|
|
21,524
|
|
29,855
|
|
|
Total liabilities
|
|
300,811
|
|
313,504
|
|
|
|
|
|
Commitments and contingencies (Notes 9 and 19)
|
|
|
|
|
|
Stockholders' equity
|
|
Class A common stock - 500 million shares authorized,
$.001 par value, 90.6 million shares issued
|
|
91
|
|
91
|
|
|
Additional paid-in capital
|
|
148,636
|
|
165,177
|
|
|
Treasury stock, at cost - 19.9 million and 20.9 million shares
|
|
(216,847
|
)
|
(273,721
|
)
|
|
Accumulated other comprehensive loss
|
|
(70,849
|
)
|
(71,606
|
)
|
|
Retained earnings
|
|
431,615
|
|
477,912
|
|
|
Deferred compensation
|
|
(2,398
|
)
|
(1,620
|
)
|
|
|
|
290,248
|
|
296,233
|
|
|
Total liabilities and stockholders' equity
|
|
$ 591,059
|
|
$ 609,737
|
|
The accompanying notes are an
integral part of these consolidated financial statements.
-67-
Nu Skin Enterprises, Inc.
Consolidated Statements of Income
(U.S. dollars in thousands, except share amounts)
|
|
Year Ended December 31,
|
|
|
|
2002
|
|
2003
|
|
2004
|
|
|
|
|
|
|
Revenue
|
|
$ 964,067
|
|
$ 986,457
|
|
$ 1,137,864
|
|
|
Cost of sales
|
|
190,868
|
|
176,545
|
|
191,211
|
|
|
|
|
|
Gross profit
|
|
773,199
|
|
809,912
|
|
946,653
|
|
|
|
|
|
Operating expenses:
|
|
|
Selling expenses
|
|
382,159
|
|
407,088
|
|
487,631
|
|
|
General and administrative expenses
|
|
285,229
|
|
289,925
|
|
333,263
|
|
|
Restructuring and other charges
|
|
—
|
|
5,592
|
|
—
|
|
|
|
|
|
Total operating expenses
|
|
667,388
|
|
702,605
|
|
820,894
|
|
|
|
|
|
Operating income
|
|
105,811
|
|
107,307
|
|
125,759
|
|
|
Other income (expense), net
|
|
(2,886
|
)
|
432
|
|
(3,618
|
)
|
|
|
|
|
Income before provision for income taxes
|
|
102,925
|
|
107,739
|
|
122,141
|
|
|
Provision for income taxes
|
|
38,082
|
|
39,863
|
|
44,467
|
|
|
|
|
|
Net income
|
|
$ 64,843
|
|
$ 67,876
|
|
$ 77,674
|
|
|
|
|
|
Net income per share:
|
|
|
Basic
|
|
$ 0.79
|
|
$ 0.86
|
|
$ 1.10
|
|
|
Diluted
|
|
$ 0.78
|
|
$ 0.85
|
|
$ 1.07
|
|
|
|
|
|
Weighted-average common shares outstanding (000s):
|
|
|
Basic
|
|
81,731
|
|
78,637
|
|
70,734
|
|
|
Diluted
|
|
83,128
|
|
79,541
|
|
72,627
|
|
The accompanying notes are an
integral part of these consolidated financial statements.
-68-
Nu Skin Enterprises, Inc.
Consolidated Statements of Stockholders' Equity
(U.S. dollars in thousands, except share amounts)
|
|
Class A
Common Stock
|
|
Class B
Common Stock
|
|
Additional
Paid in Capital
|
|
Treasury Stock
|
|
Accumulated Other
Comprehensive Loss
|
|
Retained
Earnings
|
|
Deferred
Compensation
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2002
|
|
$ 42
|
|
$ 49
|
|
$ 151,379
|
|
$ (62,435
|
)
|
$ (49,485
|
)
|
$ 340,340
|
|
$ —
|
|
$ 379,890
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
64,843
|
|
—
|
|
64,843
|
|
|
Foreign currency translation adjustment
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(10,031
|
)
|
—
|
|
—
|
|
(10,031
|
)
|
Net unrealized losses on foreign
currency cash flow hedges
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(6,567
|
)
|
—
|
|
—
|
|
(6,567
|
)
|
Less: Reclassification adjustment for realized
gains in current earnings
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(2,905
|
)
|
—
|
|
—
|
|
(2,905
|
)
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45,340
|
|
Repurchase of Class A common stock
(Note 10)
|
|
—
|
|
—
|
|
—
|
|
(20,586
|
)
|
—
|
|
—
|
|
—
|
|
(20,586
|
)
|
|
Conversion of shares (Note 10)
|
|
4
|
|
(4
|
)
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
Purchase of long-term assets (Note 20)
|
|
—
|
|
—
|
|
936
|
|
—
|
|
—
|
|
—
|
|
—
|
|
936
|
|
Exercise of distributor and employee
stock options (182,000 shares)
|
|
—
|
|
—
|
|
(2,005
|
)
|
3,266
|
|
—
|
|
—
|
|
—
|
|
1,261
|
|
|
Forfeiture of stock options
|
|
—
|
|
—
|
|
(762
|
)
|
—
|
|
—
|
|
—
|
|
—
|
|
(762
|
)
|
|
Cash dividends
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(19,593
|
)
|
—
|
|
(19,593
|
)
|
|
Balance at December 31, 2002
|
|
46
|
|
45
|
|
149,548
|
|
(79,755
|
)
|
(68,988
|
)
|
385,590
|
|
—
|
|
386,486
|
|
|
|
|
|
Net income
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
67,876
|
|
—
|
|
67,876
|
|
|
Foreign currency translation adjustment
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(1,736
|
)
|
—
|
|
—
|
|
(1,736
|
)
|
Net unrealized losses on foreign
currency cash flow hedges
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(3,171
|
)
|
—
|
|
—
|
|
(3,171
|
)
|
Less: Reclassification adjustment for realized
losses in current earnings
|
|
—
|
|
—
|
|
—
|
|
—
|
|
3,046
|
|
—
|
|
—
|
|
3,046
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
66,015
|
|
Repurchase of Class A common stock
(Note 10)
|
|
—
|
|
—
|
|
—
|
|
(150,009
|
)
|
—
|
|
—
|
|
—
|
|
(150,009
|
)
|
|
Conversion of shares (Note 10)
|
|
45
|
|
(45
|
)
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
Issuance of employee stock awards
|
|
—
|
|
—
|
|
3,113
|
|
—
|
|
—
|
|
—
|
|
(3,113
|
)
|
—
|
|
|
Amortization of deferred compensation
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
715
|
|
715
|
|
Exercise of distributor and employee
stock options (1,258,000 shares)
|
|
—
|
|
—
|
|
(4,025
|
)
|
12,917
|
|
—
|
|
—
|
|
—
|
|
8,892
|
|
|
Cash dividends
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(21,851
|
)
|
—
|
|
(21,851
|
)
|
|
Balance at December 31, 2003
|
|
91
|
|
—
|
|
148,636
|
|
(216,847
|
)
|
(70,849
|
)
|
431,615
|
|
(2,398
|
)
|
290,248
|
|
|
|
|
|
Net income
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
77,674
|
|
—
|
|
77,674
|
|
|
Foreign currency translation adjustment
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(1,402
|
)
|
—
|
|
—
|
|
(1,402
|
)
|
Net unrealized losses on foreign
currency cash flow hedges
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(2,590
|
)
|
—
|
|
—
|
|
(2,590
|
)
|
Less: Reclassification adjustment for realized
losses in current earnings
|
|
—
|
|
—
|
|
—
|
|
—
|
|
3,235
|
|
—
|
|
—
|
|
3,235
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
76,917
|
|
Repurchase of Class A common stock
(Note 10)
|
|
—
|
|
—
|
|
—
|
|
(72,311
|
)
|
—
|
|
—
|
|
—
|
|
(72,311
|
)
|
|
Amortization of deferred compensation
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
778
|
|
778
|
|
|
Purchase of long-term assets (Note 20)
|
|
—
|
|
—
|
|
4,279
|
|
2,624
|
|
—
|
|
—
|
|
—
|
|
6,903
|
|
|
Reduction in carrying value of intangible asset
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(8,750
|
)
|
—
|
|
(8,750
|
)
|
Exercise of employee stock options
(1,834,000 shares)
|
|
—
|
|
—
|
|
3,814
|
|
12,813
|
|
—
|
|
—
|
|
—
|
|
16,627
|
|
|
Tax benefit of options exercised
|
|
—
|
|
—
|
|
8,448
|
|
—
|
|
—
|
|
—
|
|
—
|
|
8,448
|
|
|
Cash dividends
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(22,627
|
)
|
—
|
|
(22,627
|
)
|
|
Balance at December 31, 2004
|
|
$ 91
|
|
$ —
|
|
$ 165,177
|
|
$ (273,721
|
)
|
$ (71,606
|
)
|
$ 477,912
|
|
$ (1,620
|
)
|
$ 296,233
|
|
The accompanying notes are an
integral part of these consolidated financial statements.
-69-
Nu Skin Enterprises, Inc.
Consolidated Statements of Cash Flows
(U.S. dollars in thousands)
|
|
Year Ended December 31,
|
|
|
|
2002
|
|
2003
|
|
2004
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$ 64,843
|
|
$ 67,876
|
|
$ 77,674
|
|
|
Adjustments to reconcile net income to net cash provided
|
|
|
by operating activities:
|
|
|
Depreciation and amortization
|
|
21,602
|
|
22,369
|
|
27,883
|
|
|
Amortization of deferred compensation
|
|
—
|
|
715
|
|
778
|
|
|
(Gain) loss on sale of assets
|
|
(1,328
|
)
|
525
|
|
—
|
|
|
Changes in operating assets and liabilities:
|
|
|
Accounts receivable
|
|
404
|
|
3,860
|
|
(1,003
|
)
|
|
Related parties receivable
|
|
5,971
|
|
—
|
|
—
|
|
|
Inventories, net
|
|
(4,051
|
)
|
4,968
|
|
(4,136
|
)
|
|
Prepaid expenses and other
|
|
(3,674
|
)
|
11,714
|
|
21,869
|
|
|
Other assets
|
|
12,473
|
|
(7,965
|
)
|
(10,372
|
)
|
|
Accounts payable
|
|
3,259
|
|
824
|
|
6,366
|
|
|
Accrued expenses
|
|
14,160
|
|
1,176
|
|
10,910
|
|
|
Related parties payable
|
|
(6,967
|
)
|
—
|
|
—
|
|
|
Other liabilities
|
|
4,424
|
|
2,964
|
|
381
|
|
|
|
|
|
Net cash provided by operating activities
|
|
111,116
|
|
109,026
|
|
130,350
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
Purchase of property and equipment
|
|
(19,026
|
)
|
(23,518
|
)
|
(34,996
|
)
|
|
Proceeds on investment sales
|
|
5,200
|
|
70,775
|
|
185,015
|
|
|
Purchases of investments
|
|
(20,750
|
)
|
(52,800
|
)
|
(195,245
|
)
|
|
Purchase of long-term assets
|
|
(7,505
|
)
|
—
|
|
(2,953
|
)
|
|
|
|
|
Net cash used in investing activities
|
|
(42,081
|
)
|
(5,543
|
)
|
(48,179
|
)
|
|
|
|
|
Cash flows from financing activities:
|
|
|
Payments of cash dividends
|
|
(19,593
|
)
|
(21,851
|
)
|
(22,627
|
)
|
|
Repurchase of shares of common stock
|
|
(14,158
|
)
|
(150,009
|
)
|
(72,311
|
)
|
|
Exercise of distributor and employee stock options
|
|
1,261
|
|
8,892
|
|
16,627
|
|
|
Payments on long-term debt
|
|
—
|
|
—
|
|
(16,241
|
)
|
|
Proceeds from long-term debt
|
|
—
|
|
75,000
|
|
—
|
|
|
Proceeds from revolving credit facility
|
|
—
|
|
20,000
|
|
—
|
|
|
Payments on revolving credit facility
|
|
—
|
|
(20,000
|
)
|
—
|
|
|
|
|
|
Net cash used in financing activities
|
|
(32,490
|
)
|
(87,968
|
)
|
(94,552
|
)
|
|
|
|
|
Effect of exchange rate changes on cash
|
|
(7,677
|
)
|
4,687
|
|
(322
|
)
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
28,868
|
|
20,202
|
|
(12,703
|
)
|
|
|
|
|
Cash and cash equivalents, beginning of period
|
|
73,498
|
|
102,366
|
|
122,568
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$ 102,366
|
|
$ 122,568
|
|
$ 109,865
|
|
The accompanying notes are an
integral part of these consolidated financial statements.
-70-
Nu Skin Enterprises, Inc.
Notes to Consolidated Financial Statements
Nu
Skin Enterprises, Inc. (the “Company”) is a leading, global direct selling
company that develops and distributes premium quality, innovative personal care products
and nutritional supplements that are sold worldwide under the Nu Skin and Pharmanex
brands. The Company also markets technology-related products and services under the Big
Planet brand. The Company reports revenue from five geographic regions: North Asia, which
consists of Japan and South Korea; Greater China, which consists of China, Hong Kong and
Taiwan; North America, which consists of the United States and Canada; South Asia/Pacific,
which consists of Australia, Brunei, Malaysia, New Zealand, the Philippines, Singapore and
Thailand; and Other Markets, which consists of Brazil, Europe, Guatemala, Israel, and
Mexico (the Company’s subsidiaries operating in these countries are collectively
referred to as the “Subsidiaries”).
|
2.
|
|
Summary
of Significant Accounting Policies
|
Consolidation
The
consolidated financial statements include the accounts of the Company and the
Subsidiaries. All significant intercompany accounts and transactions are eliminated in
consolidation.
Use of estimates
The
preparation of these financial statements in conformity with accounting principles
generally accepted in the United States required management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the reporting period. Significant estimates include
reserves for product returns, obsolete inventory, and taxes. Actual results could differ
from these estimates.
Cash and cash equivalents
Cash
equivalents are short-term, highly liquid instruments with original maturities of 90 days
or less.
Reclassifications
Certain
reclassifications have been made to prior-year balances in order to conform to the current
year presentation.
Current investments
Current
investments consist entirely of auction rate municipal bonds classified as available-for-sale
securities. The Company, through its dealers, purchases and sells these securities at par
value, and records them at cost, which approximates fair market value due to their
variable interest rates, which typically reset every 7 to 35 days, and despite the
long-term nature of their stated contractual maturities, along with the Company’s
investment policy and practice to only invest in high investment grade securities, the
Company has the ability to quickly liquidate these securities. As a result, the Company
has no cumulative gross unrealized holding gains (losses) or gross realized gains (losses)
from its current investments. Interest income generated from these current investments is
recorded in other income.
-71-
Nu Skin Enterprises, Inc.
Notes to Consolidated Financial Statements
Prior
to December 31, 2004, such investments had been classified as cash and cash equivalents.
As of December 31, 2004, the Company has revised its classification to report these
securities as current investments in a separate line item on its consolidated balance
sheet. The Company has also made corresponding adjustments to its consolidated statement
of cash flows for all periods presented, to reflect the gross purchases and sales of these
securities as investing activities rather than as a component of cash and cash
equivalents.
Inventories
Inventories
consist primarily of merchandise purchased for resale and are stated at the lower of cost
or market, using the first-in, first-out method. The Company had reserves for obsolete
inventory totaling $5.7 million, $5.4 million and $5.2 million as of December 31, 2002,
2003 and 2004, respectively.
Property and equipment
Property
and equipment are recorded at cost and depreciated using the straight-line method over the
following estimated useful lives:
|
|
|
|
|
|
|
Furniture and fixtures
|
|
5 - 7 years
|
|
|
Computers and equipment
|
|
3 - 5 years
|
|
|
Leasehold improvements
|
|
Shorter of estimated useful life or lease term
|
|
|
BioPhotonic Scanners
|
|
3 years
|
|
|
Vehicles
|
|
3 - 5 years
|
|
Expenditures
for maintenance and repairs are charged to expense as incurred.
Goodwill and other
intangible assets
Under
the provisions
of
Statements of Financial Accounting Standards
(“SFAS”) No. 142
, Goodwill and Other Intangible Assets
(“SFAS
142”), the Company’s goodwill and intangible assets with indefinite useful lives
are no longer amortized, but instead are tested for impairment at least annually. The
Company’s intangible assets with finite lives are recorded at cost and are amortized
over their respective estimated useful lives to their estimated residual values, and are
reviewed for impairment in accordance with SFAS No. 144,
Accounting for the Impairment
or Disposal of Long-Lived Assets
(Note 5). In addition, the Company is required to
make judgments regarding and periodically assesses the useful life of its intangible
assets.
Revenue recognition
Revenue
is recognized when products are shipped, which is when title and risk of loss pass to
independent distributors who are the Company’s customers. A reserve for product
returns is accrued based on historical experience totaling $1.1 million, $1.4 million and
$2.5 million as of December 31, 2002, 2003 and 2004, respectively. The Company generally
requires cash or credit card payment at the point of sale. The Company has determined that
no allowance for doubtful accounts is necessary. Amounts received prior to shipment and
title passage to distributors are recorded as deferred revenue. The global compensation
plan for the Company’s distributors generally does not provide rebates or
-72-
Nu Skin Enterprises, Inc.
Notes to Consolidated Financial Statements
selling
discounts to distributors who purchase its products and services and classifies selling
discounts, if any, as a reduction of revenue.
Advertising expense
Advertising
costs are expensed as incurred. Advertising expense incurred for the years ended December
31, 2002, 2003 and 2004 totaled approximately $2.8 million, $1.4 million and $1.3 million,
respectively.
Research and development
The
Company’s research and development activities are conducted primarily through its
Pharmanex division. Research and development costs are expensed as incurred and totaled
$6.9 million, $6.4 million and $7.7 million in 2002, 2003 and 2004, respectively.
Income taxes
The
Company follows the liability method in accounting for income taxes. Under this method,
deferred tax assets and liabilities are determined based on the differences between
financial reporting and tax bases of assets and liabilities and are measured using the
enacted tax rates and laws that will be in effect when the differences are expected to
reverse. The Company has netted deferred tax assets and deferred tax liabilities by
jurisdiction as of December 31, 2004 and reclassified prior-period balances to conform to
the December 31, 2004 presentation. Valuation allowances are established when necessary to
reduce deferred tax assets to the amounts expected to be ultimately realized. The Company
accounts for any income tax contingencies in accordance with SFAS No. 5,
Accounting for
Contingencies
.
Net income per share
Net
income per share is computed based on the weighted-average number of common shares
outstanding during the periods presented. Additionally, diluted earnings per share data
gives effect to all potentially dilutive common shares that were outstanding during the
periods presented (Note 10). Earnings per share in 2004 were positively impacted by the
repurchase of 10.8 million shares of the Company’s Class A common stock in October
2003 and the repurchase of 3.1 million shares of the Company’s Class A common stock
in July 2004.
Foreign currency
translation
Most
of the Company’s business operations occur outside the United States. The local
currency of each of the Company’s subsidiary’s primary markets is considered its
functional currency. All assets and liabilities are translated into U.S. dollars at
exchange rates existing at the balance sheet dates, revenue and expenses are translated at
weighted-average exchange rates, and stockholders’ equity is recorded at historical
exchange rates. The resulting foreign currency translation adjustments are recorded as a
separate component of stockholders’ equity in the consolidated balance sheets, and
transaction gains and losses are included in other income and expense in the consolidated
financial statements.
-73-
Nu Skin Enterprises, Inc.
Notes to Consolidated Financial Statements
Fair value of financial
instruments
The
carrying value of financial instruments including cash and cash equivalents, accounts
receivable, accounts payable and notes payable approximate fair values. The carrying
amount of long-term debt approximates fair value because the applicable interest rates
approximate current market rates. Fair value estimates are made at a specific point in
time, based on relevant market information.
Stock-based compensation
The
Company measures compensation expense for its stock-based employee compensation plans,
which are described in Note 11. SFAS No. 123,
Accounting for Stock-Based Compensation
(“SFAS 123”), encourages, but does not require, companies to record
compensation cost for stock-based employee compensation plans based on the fair market
value of options granted. The Company has chosen to account for stock- based compensation
granted to employees using the intrinsic value method prescribed in Accounting Principles
Board (“APB”) Opinion No. 25,
Accounting for Stock Issued to Employees
,
and related interpretations. Accordingly, because the grant price equals the market price
on the date of grant for options issued by the Company, no compensation expense is
recognized for stock options issued to employees. However, stock-based compensation
granted to non-employees, such as the Company’s independent distributors and
consultants, is accounted for in accordance with SFAS 123. On December 31, 2002, the
Financial Accounting Standards Board (“FASB”) issued SFAS No. 148
, Accounting
for Stock-Based Compensation – Transition and Disclosure
(“SFAS
148”
),
which amended SFAS 123. SFAS 148 requires more prominent and frequent
disclosures about the effects of stock-based compensation.
In
December 2004, the FASB issued SFAS No. 123R,
Share-Based Payment
, which requires
the expensing of employee options as of the beginning of the first interim reporting
period that begins after June 15, 2005. Consequently, the Company will begin expensing
employee options during its third quarter of 2005 and is currently evaluating the effect
of this accounting standard on its financial statements. Until that time, the Company will
continue to account for its stock-based compensation granted to employees according to the
provisions of APB Opinion No. 25. Had compensation cost for the Company’s stock
options granted to employees been recognized based upon the estimated fair value on the
grant date under the fair value methodology prescribed by SFAS 123, as amended by SFAS
148, the Company’s net earnings and earnings per share would have been as follows
(U.S. dollars in thousands, except per share amounts):
-74-
Nu Skin Enterprises, Inc.
Notes to Consolidated Financial Statements
|
|
December 31,
|
|
|
|
2002
|
|
2003
|
|
2004
|
|
|
|
|
|
Net income, as reported
|
|
$ 64,843
|
|
$ 67,876
|
|
$ 77,674
|
|
|
Deduct: Total stock-based employee compensation
|
|
|
|
|
|
|
|
|
expense determined under fair value based method
|
|
|
for all awards, net of related tax effects
|
|
(5,450
|
)
|
(5,274
|
)
|
(6,224
|
)
|
|
|
|
|
Pro forma net income
|
|
$ 59,393
|
|
$ 62,602
|
|
$ 71,450
|
|
|
|
|
|
Earnings per share:
|
|
|
Basic - as reported
|
|
$ 0.79
|
|
$ 0.86
|
|
$ 1.10
|
|
|
Basic - pro forma
|
|
$ 0.73
|
|
$ 0.80
|
|
$ 1.01
|
|
|
|
|
|
Diluted - as reported
|
|
$ 0.78
|
|
$ 0.85
|
|
$ 1.07
|
|
|
Diluted - pro forma
|
|
$ 0.71
|
|
$ 0.79
|
|
$ 0.98
|
|
Reporting comprehensive
income
Comprehensive
income is defined as the change in equity of a business enterprise during a period from
transactions and other events and circumstances from non-owner sources, and it includes
all changes in equity during a period except those resulting from investments by owners
and distributions to owners,
Accounting for derivative
instruments and hedging activities
The
Company recognizes all derivatives as either assets or liabilities, with the instruments
measured at fair value as required by SFAS No. 133,
Accounting for Derivative
Instruments and Hedging Activities
(“SFAS 133”).
The
Company’s Subsidiaries enter into significant transactions with each other and third
parties that may not be denominated in the respective Subsidiaries’ functional
currencies. The Company regularly monitors its foreign currency risks and seeks to reduce
its exposure to fluctuations in foreign exchange rates through the use of foreign currency
exchange contracts and through certain intercompany loans of foreign currency.
The
Company hedges its exposure to future cash flows from forecasted transactions over a
maximum period of 12 months. Hedge effectiveness is assessed at inception and throughout
the life of the hedge to ensure the hedge qualifies for hedge accounting treatment.
Changes in fair value associated with hedge ineffectiveness, if any, are recorded in the
results of operations currently. In the event that an anticipated transaction is no longer
likely to occur, the Company recognizes the change in fair value of the derivative in its
results of operations currently.
Changes
in the fair value of derivatives are recorded in current earnings or accumulated other
comprehensive loss, depending on the intended use of the derivative and its resulting
designation. The gains and losses in accumulated other comprehensive loss stemming from
these derivatives will be reclassified into earnings in the period during which the hedged
forecasted transaction affects earnings. The fair value of the receivable and payable
amounts related to these unrealized gains and losses is classified as other current assets
and liabilities. The Company does not use such derivative financial
-75-
Nu Skin Enterprises, Inc.
Notes to Consolidated Financial Statements
instruments for
trading or speculative purposes. Gains and losses on certain intercompany loans of foreign
currency are recorded as other income and expense in the consolidated statements of
income.
New pronouncements
During
the first quarter of 2004, the Company adopted FASB Interpretation No. 46R
,
Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51
. This
accounting standard became effective during the first quarter of 2004. The adoption of
this accounting standard did not have a material effect on the Company’s financial
statements.
In
December 2004, the FASB issued SFAS No. 123R,
Share-Based Payment
, which requires
the expensing of employee options as of the beginning of the first interim reporting
period that begins after June 15, 2005. Consequently, the Company will begin expensing
employee options during its third quarter of 2005. Until that time, the Company will
continue to account for its stock-based compensation granted to employees according to the
provisions of APB Opinion No. 25. The Company is currently evaluating the effect of this
accounting standard on its financial statements.
In
November 2004, the FASB issued SFAS No. 151,
Inventory Costs
, which requires
certain inventory-related costs to be expensed as incurred. This accounting standard is
effective January 1, 2006. The Company is currently assessing the effect of this
accounting standard on its financial statements.
|
3.
|
|
Related
Party Transactions
|
The
Company leases corporate office and warehouse space from two entities that are owned by
certain officers and directors of the Company. Total lease payments to these two
affiliated entities were $3.3 million, $3.3 million and $3.6 million for each of the years
ended December 31, 2002, 2003 and 2004 with remaining long-term minimum lease payment
obligations under these operating leases of $27.3 million and $23.5 million at December
31, 2003 and 2004, respectively.
|
4.
|
|
Property
and Equipment
|
Property
and equipment are comprised of the following (U.S. dollars in thousands):
|
|
December 31,
|
|
|
|
2003
|
|
2004
|
|
|
|
|
|
|
Furniture and fixtures
|
|
$ 38,632
|
|
$ 41,121
|
|
|
Computers and equipment
|
|
78,266
|
|
84,598
|
|
|
Leasehold improvements
|
|
36,123
|
|
41,121
|
|
|
BioPhotonic Scanners
|
|
9,378
|
|
28,327
|
|
|
Vehicles
|
|
2,580
|
|
3,021
|
|
|
|
|
164,979
|
|
198,188
|
|
|
Less: accumulated depreciation
|
|
(104,451
|
)
|
(121,677
|
)
|
|
|
|
$ 60,528
|
|
$ 76,511
|
|
Depreciation
of property and equipment totaled $17.2 million, $18.3 million and $22.5 million for the
years ended December 31, 2002, 2003 and 2004, respectively, which includes amortization
expense relating to the BioPhotonic Scanners of approximately $1.0 million and $4.9
million for the years ended December 31, 2003 and 2004, respectively.
-76-
Nu Skin Enterprises, Inc.
Notes to Consolidated Financial Statements
|
5.
|
|
Goodwill
and Other Intangible Assets
|
Goodwill
and other intangible assets consist of the following (U.S. dollars in thousands):
|
|
Carrying Amount at
December 31,
|
|
|
Goodwill and other indefinite life intangible assets:
|
|
2003
|
|
2004
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$ 118,768
|
|
$ 112,446
|
|
|
Trademark and trade names
|
|
22,840
|
|
24,599
|
|
|
Marketing rights
|
|
12,266
|
|
—
|
|
|
Distributor network
|
|
4,081
|
|
—
|
|
|
|
|
$ 157,955
|
|
$ 137,045
|
|
|
|
December 31, 2003
|
|
December 31, 2004
|
|
|
Finite life intangible assets:
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Weighted-average Amortization Period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Developed technology
|
|
$ 22,500
|
|
$ 7,666
|
|
$ 22,500
|
|
$ 8,490
|
|
20 years
|
|
|
Distributor network
|
|
—
|
|
—
|
|
11,598
|
|
5,576
|
|
15 years
|
|
|
Trademarks
|
|
—
|
|
—
|
|
12,203
|
|
5,640
|
|
15 years
|
|
|
Other
|
|
27,201
|
|
13,650
|
|
44,668
|
|
16,857
|
|
12 years
|
|
|
|
|
$ 49,701
|
|
$ 21,316
|
|
$ 90,969
|
|
$ 36,563
|
|
15 years
|
|
Amortization
of finite-life intangible assets totaled $4.4 million, $4.1 million and $5.4 million for
the years ended December 31, 2002, 2003 and 2004, respectively. Annual estimated
amortization expense is expected to approximate $5.5 million for each of the five
succeeding fiscal years.
In
connection with a registration statement the Company filed in October 2003, the Staff of
the Securities and Exchange Commission commented on and sought additional support for the
indefinite life designation of the Company’s trade names, marketing rights and
distributor network assets. Based on the Company’s assessment in responding to these
comments, the Company recorded the following in the second quarter of 2004: (i) a one-time
amortization charge of $1.2 million resulting from retroactive changes in the estimates of
the useful lives of certain intangible assets, which included the assignment of useful
lives to the Company’s distributor network and certain trademarks and trade names
that were previously designated as indefinite lived assets; (ii) an entry to reduce
intangible assets and retained earnings by approximately $8.8 million to reflect a
reduction in the carrying amount of the marketing rights previously purchased from a group
of controlling shareholders to its carryover basis; and (iii) an entry to reclassify
approximately $7.4 million from goodwill to distributor network and trade names and
trademarks to retroactively reflect intangible assets acquired.
As
a result of these changes the Company recorded an additional $0.9 million of amortization
related to these assets through the remainder of 2004 and will continue to recognize an
additional $1.2 million of such amortization per year through the remainder of the useful
lives, which approximate 11 years as of December 31, 2004.
-77-
Nu Skin Enterprises, Inc.
Notes to Consolidated Financial Statements
Goodwill
and indefinite life intangible assets are not amortized, rather they are subject to annual
impairment tests. Annual impairment tests were completed resulting in no impairment
charges for any of the periods shown. Finite life intangibles are amortized over their
useful lives unless circumstances occur that cause the Company to revise such lives or
review such assets for impairment.
Other
assets consist of the following (U.S. dollars in thousands):
|
|
December 31,
|
|
|
|
2003
|
|
2004
|
|
|
|
|
|
|
|
Deferred taxes
|
|
$ 32,936
|
|
$ 34,856
|
|
|
Deposits for noncancelable operating leases
|
|
15,912
|
|
11,636
|
|
|
Deposit for customs assessment (Note 19)
|
|
—
|
|
11,820
|
|
|
Other
|
|
14,220
|
|
15,114
|
|
|
|
|
$ 63,068
|
|
$ 73,426
|
|
Accrued
expenses consist of the following (U.S. dollars in thousands):
|
|
December 31,
|
|
|
|
2003
|
|
2004
|
|
|
|
|
|
|
|
Accrued commission payments to distributors
|
|
$ 39,405
|
|
$ 43,845
|
|
|
Income taxes payable
|
|
7,792
|
|
6,612
|
|
|
Other taxes payable
|
|
8,916
|
|
5,521
|
|
|
Accrued payroll and payroll taxes
|
|
14,618
|
|
11,435
|
|
|
Accrued contingent payable (Note 20)
|
|
—
|
|
8,217
|
|
|
Other accruals
|
|
24,337
|
|
31,596
|
|
|
|
|
$ 95,068
|
|
$ 107,226
|
|
The
Company maintains a $25.0 million revolving credit facility that expires in May 2007.
Drawings on this revolving credit facility may be used for working capital, capital
expenditures and other purposes including repurchases of the Company’s outstanding
shares of Class A common stock. As of December 31, 2004, there were no outstanding
balances under this revolving credit facility.
The
Company also has a $125.0 million multi-currency private uncommitted shelf facility with
Prudential Investment Management, Inc. As of December 31, 2004, we had $70.0 million
outstanding under our shelf facility, $5.0 million of which is included in the current
portion of long-term debt. This long-term debt is U.S. dollar denominated, bears interest
of approximately 4.5% per annum and is amortized in two tranches over five and seven
years. The Company’s long-term debt also includes the long-term portion of Japanese
yen denominated ten-year senior notes issued to the Prudential Insurance Company of
America in 2000. The notes bear interest at an effective rate of 3.0% per annum and are
due October 2010, with annual principal payments that began in October 2004. As of
December 31, 2004, the
-78-
Nu Skin Enterprises, Inc.
Notes to Consolidated Financial Statements
outstanding balance on the notes was 8.3 billion Japanese yen, or
$81.2 million, $13.5 million of which is included in the current portion of long-term
debt. The Japanese notes and the revolving and shelf credit facilities are secured by
guarantees issued by our material subsidiaries or by pledges of 65% to 100% of the
outstanding stock of our material subsidiaries.
Interest
expense relating to the long-term debt totaled $2.4 million, $3.2 million and $5.9 million
for the years ended December 31, 2002, 2003 and 2004, respectively.
The
notes and shelf facility contain other terms and conditions and affirmative and negative
financial covenants customary for credit facilities of this type. As of December 31, 2004,
the Company is in compliance with all financial covenants under the notes and shelf
facility.
Maturities
of all long-term debt at December 31, 2004, based on the year-end exchange rate, are as
follows (U.S. dollars in thousands):
|
Year Ending December 31,
|
|
|
|
|
|
|
2005
|
|
$ 18,540
|
|
|
2006
|
|
28,540
|
|
|
2007
|
|
28,540
|
|
|
2008
|
|
28,540
|
|
|
2009
|
|
23,540
|
|
|
Thereafter
|
|
23,541
|
|
|
Total
|
|
$ 151,241
|
|
The
Company leases office space and computer hardware under noncancelable long-term operating
leases including related party leases (see Note 3). Most leases include renewal options of
at least three years. Minimum future operating lease obligations at December 31, 2004 are
as follows (U.S. dollars in thousands):
|
Year Ending December 31,
|
|
|
|
|
|
|
2005
|
|
$ 12,989
|
|
|
2006
|
|
12,614
|
|
|
2007
|
|
12,733
|
|
|
2008
|
|
12,889
|
|
|
2009
|
|
12,054
|
|
|
Thereafter
|
|
5,564
|
|
|
Total minimum lease payments
|
|
$ 68,843
|
|
Rental
expense for operating leases totaled $21.0 million, $24.2 million and $25.9 million for
the years ended December 31, 2002, 2003 and 2004, respectively.
The
Company’s authorized capital stock consists of 25 million shares of preferred stock,
par value $.001 per share, 500 million shares of Class A common stock, par value $.001 per
share and 100 million
-79-
Nu Skin Enterprises, Inc.
Notes to Consolidated Financial Statements
shares of Class B common stock, par value $.001 per share. The
shares of Class A common stock and Class B common stock are identical in all respects,
except for voting rights and certain conversion rights and transfer restrictions, as
follows: (1) each share of Class A common stock entitles the holder to one vote on matters
submitted to a vote of the Company’s stockholders and each share of Class B common
stock entitles the holder to ten votes on each such matter; (2) stock dividends of Class A
common stock may be paid only to holders of Class A common stock and stock dividends of
Class B common stock may be paid only to holders of Class B common stock; (3) if a holder
of Class B common stock transfers such shares to a person other than a permitted
transferee, as defined in the Company’s Certificate of Incorporation, such shares
will be converted automatically into shares of Class A common stock; and (4) Class A
common stock has no conversion rights; however, each share of Class B common stock is
convertible into one share of Class A common stock, in whole or in part, at any time at
the option of the holder. All Class B shares have been converted to Class A shares.
Weighted-average common
shares outstanding
The
following is a reconciliation of the weighted-average common shares outstanding for
purposes of computing basic and diluted net income per share (in thousands):
|
|
Year Ended December 31,
|
|
|
|
2002
|
|
2003
|
|
2004
|
|
|
|
|
|
Basic weighted-average common shares outstanding
|
|
81,731
|
|
78,637
|
|
70,734
|
|
|
Effect of dilutive securities:
|
|
|
Stock awards and options
|
|
1,397
|
|
904
|
|
1,893
|
|
|
Diluted weighted-average common shares outstanding
|
|
83,128
|
|
79,541
|
|
72,627
|
|
For
the years ended December 31, 2002, 2003 and 2004, other stock options totaling 2.7
million, 2.9 million and 0.6 million, respectively, were excluded from the calculation of
diluted earnings per share because they were anti-dilutive.
Repurchases of common
stock
Since
August 1998, the board of directors has authorized the Company to repurchase up to $90.0
million of the Company’s outstanding shares of Class A common stock on the open
market or in private transactions. The repurchases are used primarily for the
Company’s equity incentive plans and strategic initiatives. During the years ended
December 31, 2002, 2003 and 2004, the Company repurchased approximately 1.2 million, 0.8
million and 0.1 million shares of Class A common stock for an aggregate price of
approximately $14.2 million, $8.4 million and $1.3 million, respectively, under these
repurchase programs. Between August 1998 and December 31, 2004, the Company had
repurchased a total of approximately 8.8 million shares of Class A common stock under this
repurchase program for an aggregate price of approximately $82.9 million.
Additionally,
in October 2003, the Company repurchased approximately 10.8 million shares of Class A
common stock from certain members of the Company’s original stockholder group for
approximately $141.6 million, which included $1.6 million of related expenses. These
stockholders also sold approximately 6.2 million additional shares of Class A common stock
to third-party investors. The transaction also included the agreement among all
participants in the transaction to convert all of their remaining shares of super-voting
Class B common stock to Class A common stock. The terms and
-80-
Nu Skin Enterprises, Inc.
Notes to Consolidated Financial Statements
conditions of the repurchase
were approved by a special committee of the Company’s board of directors comprised
solely of independent directors. The special committee engaged its own financial and legal
advisors in connection with the repurchase transaction. The Company financed the
repurchase with $45.0 million from existing cash balances, approximately $20.0 million
from its revolving credit facility, which was repaid prior to December 31, 2003 and $75.0
million in new long-term debt drawn under the $125.0 million shelf facility.
On
July 30, 2004, the Company purchased approximately 3.1 million shares of common stock from
members of its original stockholder group for an aggregate purchase price of $71.0
million, or $22.62 per share. These stockholders also sold 1.5 million shares to
third-party investors. The Company purchased the shares pursuant to an option that was
obtained by the Company as part of a recapitalization transaction completed in October
2003. The Company filed a registration statement with respect to the shares sold to the
third-party investors.
Conversion of common stock
During
2002 and 2003, the holders of the Class B common stock converted approximately 3.5 million
and 45.4 million shares of Class B common stock to Class A common stock, respectively. The
conversion of 45.4 million shares of Class B common stock in 2003 was part of the
repurchase transaction described above. As of December 31, 2004, all outstanding Class B
common stock had been converted to Class A common stock.
|
11.
|
|
Equity
Incentive Plans
|
During
the year ended December 31, 1996, the Company’s board of directors adopted the Nu
Skin Enterprises, Inc., 1996 Stock Incentive Plan (the “1996 Stock Incentive
Plan”). The 1996 Stock Incentive Plan provides for granting of stock awards and
options to purchase common stock to executives, other employees, independent consultants
and directors of the Company and its Subsidiaries. On February 7, 2003, the board of
directors authorized and the shareholders approved an amendment to the plan increasing the
number of shares available for grant from 8.0 million to 13.0 million. As of December 31,
2004, approximately 9.6 million shares or options have been granted.
In
2001 the Company offered to exchange certain outstanding options to purchase shares of Nu
Skin’s Class A common stock held by eligible optionholders granted under the 1996
Stock Incentive Plan having an exercise price equal to or greater than $10.00 per share
for new options to purchase shares of Nu Skin’s Class A common stock. A total of 90
employees tendered 950,125 options to purchase the Company’s Class A common stock,
which options were cancelled on October 17, 2001, in return for commitments of new grants
on the grant date of April 19, 2002. These new option grants were issued on April 19, 2002
at an exercise price of $12.45 per share.
Effective
November 21, 1996, the Company implemented a one-time distributor equity incentive program
which provided for grants of options to selected distributors for the purchase of
1,605,000 shares of the Company’s Class A common stock. The options were exercisable
at a price of $5.75 per share and vested one year from the effective date. The Company
recorded distributor stock expense of $19.9 million over the vesting period. As of
December 31, 2003, this one-time distributor equity incentive program concluded. At that
date, approximately 1.2 million of these options had been exercised throughout the years
of the program and the remaining options were either cancelled or forfeited.
-81-
Nu Skin Enterprises, Inc.
Notes to Consolidated Financial Statements
The
deferred compensation at December 31, 2004 represents a restricted stock award of 250,000
shares of the Company’s Class A common stock granted to the Company’s Chief
Executive Officer and President in 2003, which vests over four years. The Company is
amortizing this deferred expense ratably over the vesting period. Compensation expense for
this restricted stock award totaled $0.7 million and $0.8 million for the years ended
December 31, 2003 and 2004, respectively.
A
summary of the Company’s stock option plans as of December 31, 2002, 2003 and 2004
and changes during the years then ended, is presented below:
|
|
2002
|
|
2003
|
|
2004
|
|
|
|
Shares
(in 000s)
|
|
Weighted-average
Exercise Price
|
|
Shares
(in 000s)
|
|
Weighted-average
Exercise Price
|
|
Shares
(in 000s)
|
|
Weighted -average
Exercise Price
|
|
|
|
|
|
|
|
|
|
|
Outstanding - beginning of year
|
|
5,347.1
|
|
$ 9.80
|
|
6,994.6
|
|
$ 10.41
|
|
6,941.9
|
|
$ 11.46
|
|
|
Granted at fair value
|
|
2,103.4
|
|
11.90
|
|
1,728.1
|
|
10.80
|
|
1,355.2
|
|
22.15
|
|
|
Exercised
|
|
(204.5
|
)
|
6.34
|
|
(1,289.8
|
)
|
6.82
|
|
(1,655.3
|
)
|
9.97
|
|
|
Forfeited/canceled
|
|
(251.4
|
)
|
13.25
|
|
(491.0
|
)
|
6.34
|
|
(48.7
|
)
|
12.46
|
|
|
Outstanding - end of year
|
|
6,994.6
|
|
10.41
|
|
6,941.9
|
|
11.46
|
|
6,593.1
|
|
14.03
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at year-end
|
|
3,454.0
|
|
$ 9.64
|
|
3,292.7
|
|
$ 11.37
|
|
3,374.0
|
|
$ 11.89
|
|
The
following table summarizes information concerning outstanding and exercisable options at
December 31, 2004:
|
|
Options Outstanding
|
|
Options Exercisable
|
|
|
Exercise Price Range
|
|
Shares
(in 000s)
|
|
Weighted-average
Exercise Price
|
|
Weighted-average
Years Remaining
|
|
Shares
(in 000s)
|
|
Weighted-average
Exercise Price
|
|
|
|
|
|
|
|
|
$0.92 to $5.75
|
|
73.4
|
|
$ 5.40
|
|
3.79
|
|
73.4
|
|
$ 5.40
|
|
|
$6.50 to $11.00
|
|
2,154.0
|
|
8.24
|
|
6.59
|
|
1,535.6
|
|
7.94
|
|
|
$11.37 to $16.00
|
|
2,157.5
|
|
12.30
|
|
7.50
|
|
1,107.7
|
|
12.49
|
|
|
$16.95 to $28.50
|
|
2,208.2
|
|
21.64
|
|
7.40
|
|
657.3
|
|
20.82
|
|
|
|
|
6,593.1
|
|
14.03
|
|
7.13
|
|
3,374.0
|
|
11.89
|
|
The
fair value for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions:
|
|
2002
|
|
2003
|
|
2004
|
|
|
|
|
|
Risk-free interest rate
|
|
3.6%
|
|
2.7%
|
|
2.8%
|
|
|
Expected life
|
|
3.3 years
|
|
3.8 years
|
|
3.9 years
|
|
|
Expected volatility
|
|
52.7%
|
|
54.2%
|
|
45.4%
|
|
|
Expected dividend yield
|
|
2.2%
|
|
2.5%
|
|
1.9%
|
|
The
weighted-average grant date fair values of options granted during 2002, 2003 and 2004 were
$4.18, $3.92 and $7.27, respectively.
-82-
Nu Skin Enterprises, Inc.
Notes to Consolidated Financial Statements
Effective
February 1, 2000, the Company’s board of directors adopted the Employee Stock
Purchase Plan (the “Purchase Plan”), which provides for the issuance of a
maximum of 200,000 shares of Class A common stock. Eligible employees can have up to 15%
of their earnings withheld, up to certain maximums, to be used to purchase shares of the
Company’s Class A common stock on every April 30, July 31, October 31 or January 31
(the “Purchase Date”). The price of the Class A common stock purchased under the
Purchase Plan will be equal to 85% of the lower of the fair market value of the Class A
common stock on the commencement date of each three-month offering period or Purchase
Date. During 2004, approximately 22,000 shares were purchased at prices ranging from
$13.64 to $20.83 per share. At December 31, 2004, approximately 110,000 shares were
available under the Purchase Plan for future issuance.
Consolidated
income before provision for income taxes consists of the following for the years ended
December 31, 2002, 2003 and 2004 (U.S. dollars in thousands):
|
|
2002
|
|
2003
|
|
2004
|
|
|
|
|
|
U.S.
|
|
$ 68,540
|
|
$ 102,341
|
|
$ 85,013
|
|
|
Foreign
|
|
34,385
|
|
5,398
|
|
37,128
|
|
|
Total
|
|
$ 102,925
|
|
$ 107,739
|
|
$ 122,141
|
|
|
|
|
The
provision for current and deferred taxes for the years ended December 31, 2002, 2003 and
2004 consists of the following (U.S. dollars in thousands):
|
|
2002
|
|
2003
|
|
2004
|
|
|
Current
|
|
|
|
|
|
|
|
|
Federal
|
|
$ 2,800
|
|
$ 1,709
|
|
$ (10,702
|
)
|
|
State
|
|
4,548
|
|
3,029
|
|
553
|
|
|
Foreign
|
|
26,957
|
|
57,573
|
|
21,742
|
|
|
|
|
34,305
|
|
62,311
|
|
11,593
|
|
|
Deferred
|
|
|
Federal
|
|
6,819
|
|
16,641
|
|
16,805
|
|
|
State
|
|
(1,268
|
)
|
676
|
|
1,256
|
|
|
Foreign
|
|
(1,774
|
)
|
(39,765
|
)
|
14,813
|
|
|
|
|
3,777
|
|
(22,448
|
)
|
32,874
|
|
|
Provision for income taxes
|
|
$ 38,082
|
|
$ 39,863
|
|
$ 44,467
|
|
The
Company’s foreign taxes paid are high relative to foreign operating income and the
Company’s U.S. taxes paid are low relative to U.S. operating income due largely to
the flow of funds among the Company’s Subsidiaries around the world. As payments for
services, management fees, license arrangements and royalties are made from the
Company’s foreign affiliates to its U.S. corporate headquarters, these payments often
incur withholding and other forms of tax that are generally creditable for U.S. tax
purposes. Therefore, these payments lead to increased foreign effective tax rates and
lower U.S. effective tax rates. Variations (or shifts) occur in the Company’s foreign
and U.S. effective tax rates from year to year depending on several factors including the
impact of global transfer prices and the timing and level of remittances from foreign
affiliates.
-83-
Nu Skin Enterprises, Inc.
Notes to Consolidated Financial Statements
The
principal components of deferred taxes are as follows (U.S. dollars in thousands):
|
|
Year Ended December 31,
|
|
|
|
2003
|
|
2004
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
Inventory differences
|
|
$ 4,362
|
|
$ 2,373
|
|
|
Foreign tax credit
|
|
10,810
|
|
13,417
|
|
|
Accrued expenses not deductible until paid
|
|
25,780
|
|
26,059
|
|
|
Withholding tax
|
|
3,773
|
|
1,088
|
|
|
Minimum tax credit
|
|
18,380
|
|
18,228
|
|
|
Net operating losses
|
|
14,158
|
|
5,209
|
|
|
Controlled foreign corporation net losses
|
|
6,465
|
|
7,664
|
|
|
Capitalized research and development
|
|
8,803
|
|
10,668
|
|
|
Prepaid selling expenses
|
|
10,992
|
|
—
|
|
|
Other
|
|
3,136
|
|
2,771
|
|
|
Gross deferred tax assets
|
|
106,659
|
|
87,477
|
|
|
Deferred tax liabilities:
|
|
|
Exchange gains and losses
|
|
7,762
|
|
7,210
|
|
|
Pharmanex intangibles step-up
|
|
16,256
|
|
15,961
|
|
|
Amortization of intangibles
|
|
4,410
|
|
4,567
|
|
|
Prepaid expenses
|
|
—
|
|
5,153
|
|
|
Other
|
|
4,115
|
|
5,426
|
|
|
Gross deferred tax liabilities
|
|
32,543
|
|
38,317
|
|
|
Deferred taxes, net
|
|
$ 74,116
|
|
$ 49,160
|
|
The components
of deferred taxes, net on a jurisdiction basis are as follows (U.S. dollars in thousands):
|
|
Year Ended December 31,
|
|
|
|
2003
|
|
2004
|
|
|
|
|
|
|
|
|
Net current deferred tax assets
|
|
$ 41,326
|
|
$ 22,215
|
|
|
Net noncurrent deferred tax assets
|
|
32,936
|
|
34,856
|
|
|
Total net deferred tax assets
|
|
74,262
|
|
57,071
|
|
|
|
|
|
|
|
|
Net current deferred tax liabilities
|
|
—
|
|
8
|
|
|
Net noncurrent deferred tax liabilities
|
|
146
|
|
7,903
|
|
|
Total net deferred tax liabilities
|
|
146
|
|
7,911
|
|
|
Deferred taxes, net
|
|
$ 74,116
|
|
$ 49,160
|
|
The
Company has considered projected future taxable income and ongoing tax planning strategies
in determining that no valuation allowance is required.
The
net operating loss carryforwards begin expiring in 2008, while the foreign tax credits begin expiring in 2010. Utilization of these loss and credit carryforwards is subject to annual
limitations; however, management believes that it is more likely than not that the Company
will generate sufficient taxable income in the appropriate carry forward periods to
realize the benefit of the net deferred tax assets.
-84-
Nu Skin Enterprises, Inc.
Notes to Consolidated Financial Statements
The
Company is subject to regular audits by federal, state and foreign tax authorities. These
audits may result in proposed assessments that may result in additional tax liabilities.
The Company accounts for any income tax contingencies in accordance with SFAS No. 5,
Accounting for Contingencies
.
The
actual tax rate for the years ended December 31, 2002, 2003 and 2004 compared to the
statutory U.S. Federal tax rate is as follows:
|
|
Year Ended December 31,
|
|
|
|
2002
|
|
2003
|
|
2004
|
|
|
|
|
|
Income taxes at statutory rate
|
|
35.00
|
%
|
|
35.00
|
%
|
|
35.00
|
%
|
|
|
Foreign tax differential
|
|
.20
|
|
|
(1.80
|
)
|
|
3.11
|
|
|
|
Non-deductible expenses
|
|
.22
|
|
|
.16
|
|
|
.21
|
|
|
|
Branch remittance gains and losses
|
|
(.55
|
)
|
|
(.38
|
)
|
|
(.32
|
)
|
|
|
Distributor stock options and employee stock awards
|
|
—
|
|
|
1.94
|
|
|
—
|
|
|
|
Permanently reinvested controlled foreign corporation income
|
|
—
|
|
|
—
|
|
|
(2.89
|
)
|
|
|
Other
|
|
2.13
|
|
|
2.08
|
|
|
1.30
|
|
|
|
|
|
37.00
|
%
|
|
37.00
|
%
|
|
36.41
|
%
|
|
The
decrease in the effective tax rate in 2004 was due to the Company’s election in 2004
to permanently reinvest a portion of the Company’s earnings from its foreign
operations. The Company anticipates the remittance of these earnings to be postponed
indefinitely.
|
13.
|
|
Employee
Benefit Plan
|
The
Company has a 401(k) defined contribution plan which permits participating employees to
defer up to a maximum of 15% of their compensation, subject to limitations established by
the Internal Revenue Code. Employees who work a minimum of 1,000 hours per year, who have
completed at least one year of service and who are 21 years of age or older are qualified
to participate in the plan. The Company matches 100% of the first 2% and 50% of the next
2% of each participant’s contributions to the plan. Participant contributions are
immediately vested. Company contributions vest based on the participant’s years of
service at 25% per year over four years. The Company recorded compensation expense of
$1.2 million, $1.1 million and $1.3 million for the years ended December 31, 2002, 2003 and
2004, respectively, related to its contributions to the plan.
The
Company has a defined benefit pension plan for its employees in Japan. All employees of Nu
Skin Japan, after certain years of service, are entitled to pension plan benefits when
they terminate employment with Nu Skin Japan. The accrued pension liability was $3.7
million and $4.4 million as of December 31, 2003 and 2004, respectively. Although Nu Skin
Japan has not specifically funded this obligation, Nu Skin Japan believes it maintains
adequate cash balances for this defined benefit pension plan. The Company recorded pension
expense of $0.6 million, $0.7 million and $0.8 million for the years ended December 31, 2002, 2003 and
2004, respectively.
|
14.
|
|
Executive
Deferred Compensation Plan
|
The
Company has an executive deferred compensation plan for select management personnel. Under
this plan, the Company currently makes a contribution of 10% of each participant’s
salary. In addition,
-85-
Nu Skin Enterprises, Inc.
Notes to Consolidated Financial Statements
each participant has the option to defer a portion of their
compensation up to a maximum of 100% of their compensation. Participant contributions are
immediately vested. Company contributions vest based on the earlier of (a) attaining 60
years of age, (b) continuous employment of 20 years or (c) death or disability. The
Company recorded compensation expense of $0.4 million, $0.6 million and $0.7 million for the years
ended December 31, 2002, 2003 and 2004, respectively, related to its contributions to the
plan. The Company had accrued $3.3 million and $4.5 million as of December 31, 2003 and
2004, respectively, related to the Executive Deferred Compensation Plan.
|
15.
|
|
Derivative
Financial Instruments
|
At
December 31, 2003 and 2004, the Company held forward contracts designated as foreign
currency cash flow hedges with notional amounts totaling approximately $64.3 million and
$82.0 million, respectively, to hedge forecasted foreign-currency-denominated intercompany
transactions. All such contracts were denominated in Japanese yen. As of December 31, 2003
and 2004, $3.9 million of net unrealized losses and $3.2 million of net unrealized loss,
net of related taxes, respectively, were recorded in accumulated other comprehensive loss.
The contracts held at December 31, 2004 have maturities through December 2005 and
accordingly, all unrealized gains and losses on foreign currency cash flow hedges included
in accumulated other comprehensive loss will be recognized in current earnings over the
next 12 months. The pre-tax net gain on foreign currency cash flow hedges recorded in
current earnings was $4.5 million for the year ended December 31, 2002, and the pre-tax
net losses on foreign currency cash flow hedges recorded in current earnings were $5.3
million and $5.0 million for the years ended December 31, 2003 and 2004, respectively.
During
2002, 2003 and 2004, the Company did not have any gains or losses related to hedging
ineffectiveness. Additionally, no component of gains and losses was excluded from the
assessment of hedging effectiveness. During 2002, 2003 and 2004, the Company did not have
any gains or losses reclassified into earnings as a result of the discontinuance of cash
flow hedges.
|
16.
|
|
Supplemental
Cash Flow Information
|
Cash
paid for interest totaled $2.3 million, $2.7 million and $4.6 million for the years ended
December 31, 2002, 2003 and 2004, respectively. The increase in cash paid for interest in
2004, compared to prior years, was due to the additional debt discussed in Note 8. Cash
paid for income taxes totaled $18.8 million, $26.6 million and $7.3 million for the years
ended December 31, 2002, 2003 and 2004, respectively. The decrease in cash paid for income
taxes in 2004, compared to prior years, was due to the utilization of foreign tax credits.
The
Company operates in a single reportable operating segment by selling products to a global
network of independent distributors that operates in a seamless manner from market to
market except for its operations in China. In China, the Company utilizes an employed
sales force to sell its products through fixed retail locations. The Company’s
largest expense (selling expenses) is the world-wide commissions and China sales employee
expenses paid on product sales. The Company manages its business primarily by managing its
global sales force. The Company does not use profitability reports on a regional or
divisional basis for making business decisions. However, the Company does recognize
-86-
Nu Skin Enterprises, Inc.
Notes to Consolidated Financial Statements
revenue in five geographic regions: North Asia, Greater China, North America, South
Asia/Pacific and Other Markets.
Revenue
generated in each of these regions is set forth below (U.S. dollars in thousands):
|
|
Year Ended December 31,
|
|
|
|
2002
|
|
2003
|
|
2004
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
North Asia
|
|
$ 593,860
|
|
$ 612,840
|
|
$ 640,110
|
|
|
Greater China
|
|
104,877
|
|
135,535
|
|
229,802
|
|
|
North America
|
|
145,952
|
|
127,599
|
|
145,714
|
|
|
South Asia/Pacific
|
|
91,110
|
|
75,816
|
|
81,742
|
|
|
Other Markets
|
|
28,268
|
|
34,667
|
|
40,496
|
|
|
Total
|
|
$ 964,067
|
|
$ 986,457
|
|
$ 1,137,864
|
|
Revenue generated
by each of its three product lines is set forth below (U.S. dollars in thousands):
|
|
Year Ended December 31,
|
|
|
|
2002
|
|
2003
|
|
2004
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
Nu Skin
|
|
$ 470,567
|
|
$ 476,150
|
|
$ 548,052
|
|
|
Pharmanex
|
|
439,019
|
|
472,107
|
|
567,190
|
|
|
Big Planet
|
|
54,481
|
|
38,200
|
|
22,622
|
|
|
Total
|
|
$ 964,067
|
|
$ 986,457
|
|
$ 1,137,864
|
|
Additional
information as to the Company’s operations in the most significant geographical areas
is set forth below (U.S. dollars in thousands):
Revenue
Revenue
from the Company’s operations in Japan totaled $529,740, $558,654 and $579,504 for
the years ended December 31, 2002, 2003 and 2004, respectively. Revenue from the
Company’s operations in the United States totaled $136,580, $113,340 and $135,710 for
the years ended December 31, 2002, 2003 and 2004, respectively.
Long-lived assets
Long-lived
assets in Japan were $8,451 and $10,556 as of December 31, 2003 and 2004, respectively.
Long-lived assets in the United States were $36,865 and $50,137 as of December 31, 2003
and 2004, respectively.
|
18.
|
|
Restructuring
and Other Charges
|
During the third quarter of 2003, the
Company recorded restructuring and other charges of $5.6 million, including $5.1 million
of expenses relating to an early retirement program and other employee separation charges.
As a result, the Company’s overall headcount was reduced by approximately 130
employees, the majority of which were related to the elimination of positions at the
Company’s U.S. headquarters. These expenses consisted primarily of severance and
other compensation charges. The Company also
-87-
Nu Skin Enterprises, Inc.
Notes to Consolidated Financial Statements
completed the divestiture of its professional
employer organization resulting in a charge of approximately $0.5 million. Revenue from
the professional employer organization totaled $22.0 million and $9.1 million for the
years ended December 31, 2002 and 2003, respectively. As of December 31, 2004, all
restructuring and other charges had been paid.
|
19.
|
|
Commitments
and Contingencies
|
The
Company is subject to governmental regulations pertaining to product formulation, labeling
and packaging, product claims and advertising and to the Company’s direct selling
system. The Company is also subject to the jurisdiction of numerous foreign tax and
customs authorities. Any assertions or determination that either the Company or the
Company’s distributors is not in compliance with existing statutes, laws, rules or
regulations could potentially have a material adverse effect on the Company’s
operations. In addition, in any country of jurisdiction, the adoption of new statutes,
laws, rules or regulations or changes in the interpretation of existing statutes, laws,
rules or regulations could have a material adverse effect on the Company and its
operations. Although management believes that the Company is in compliance, in all
material respects, with the statutes, laws, rules and regulations of every jurisdiction in
which it operates, no assurance can be given that the Company’s compliance with
applicable statutes, laws, rules and regulations will not be challenged by foreign
authorities or that such challenges will not have a material adverse effect on the
Company’s financial position or results of operations or cash flows. The Company and
its Subsidiaries are defendants in litigation and proceedings involving various matters.
In the opinion of the Company’s management, based upon advice of its counsel handling
such litigation and proceedings, adverse outcomes, if any, will not likely result in a
material effect on the Company’s consolidated financial condition, results of
operations or cash flows.
In
October 2004, the Company was assessed by the Yokohama customs authorities in Japan a
total of approximately $9.0 million, net of any recovery of consumption taxes, for duties on
products imported into Japan from October 2002 through October 2003. The value and
methodology the Company used for determining the amount of duties payable for these
periods is consistent with prior years and has been previously reviewed on several
occasions by the audit division of the Japan customs authorities, and reviewed and
approved by the Valuation Department of the Yokohama customs authority. As such, the
Company believes the assessment is improper and has filed letters of protest with Yokohama
customs. The Company expects to receive a reply within the next couple of months. If
necessary, the Company will appeal this issue to the Ministry of Finance in Japan. In
order to file the letter of protest with Yokohama customs, the Company was required to pay
the amount that was assessed. In addition, the Audit Division of Yokohama customs has
recently completed an audit of the period from November 2003 through October 2004. The
Company has not yet been informed of the findings of this recent audit. The Company may be
assessed for additional duties related to this period, which the Company anticipates would
be a similar amount to the prior assessment. The Company would file letters of protest
with Yokohama customs in a similar manner in case of any such assessment.
|
20.
|
|
Purchase
of Long–Term Assets
|
In
March 2002, the Company acquired the exclusive rights to a new laser technology related to
measuring the level of certain antioxidants. The acquisition consisted of cash payments of
$4.8 million (including acquisition costs) and the issuance of 106,667 shares of the
Company’s Class A common stock valued at $936,000. In addition, the acquisition
includes contingent payments up to $8.5 million of cash and up to 1.2 million shares of
the Company’s Class A common stock if certain development and revenue
-88-
Nu Skin Enterprises, Inc.
Notes to Consolidated Financial Statements
targets are
met. During the year ended December 31, 2004, some of these specific development and
revenue targets were met resulting in contingent payments of approximately $5.1 million of
cash of which $2.1 million was paid subsequent to year end, and 525,000 shares of the
Company’s Class A common stock valued at $13.0 million, of which 262,500 shares were
issued subsequent to year end. These amounts have been added to the carrying value of
other finite life intangible assets.
In
April 2002, the Company acquired First Harvest International, LLC, a small dehydrated food
manufacturer. The Company paid a total of $2.7 million including the assumption of certain
liabilities for this transaction.
Quarterly
cash dividends for the years ended December 31, 2003 and 2004 totaled $21.9 million and
$22.6 million, respectively. In February 2005, the board of directors declared a quarterly
cash dividend of $0.09 per share for all classes of common stock to be paid on March 23,
2005 to stockholders of record on March 4, 2005.
In
February 2005 the board of directors authorized the Company to repurchase an additional
$20.0 million of the Company’s outstanding shares of Class A common stock.
On
February 7, 2005, the Company issued a series of Japanese yen denominated senior
promissory notes (the “Notes”) to affiliates of Prudential Investment
Management, Inc. (“Prudential”). The Notes were issued pursuant to its $125.0
million Private Shelf Agreement entered into between the Company and Prudential on August
26, 2003 (the “Shelf Agreement”)
The
aggregate principal amount of the Notes is 3.1 billion Japanese yen, or approximately
$30.0 million as of February 28, 2005, bearing a 1.7% interest rate per annum, with
interest payable semi-annually beginning on April 30, 2005. The final maturity date of the
Notes is April 30, 2014 and principal payments are required annually beginning on April
30, 2008 in equal installments of 445.7 million Japanese yen. The Notes are also governed
by the terms of the Shelf Agreement and amendments thereto, which contain certain
representations, warranties and covenants by the Company, as well as customary conditions
upon which the obligations under the Notes may be accelerated and become due and payable
immediately, or become subject to additional obligations. The proceeds from the Notes may
be used for working capital, capital expenditures and other purposes including repurchases
of the Company’s outstanding shares of Class A common stock.
-89-
Report of Independent
Registered Public Accounting Firm
To the Board of Directors and
Stockholders of Nu Skin Enterprises, Inc.:
We have completed an integrated audit
of Nu Skin Enterprises, Inc.‘s 2004 consolidated financial statements and of its
internal control over financial reporting as of December 31, 2004 and audits of its 2003
and 2002 consolidated financial statements in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Our opinions, based on our audits, are
presented below.
Consolidated financial
statements
In our opinion, the accompanying consolidated
balance sheets and the related consolidated statements of income, of stockholders’
equity and of cash flows present fairly, in all material respects, the financial position
of Nu Skin Enterprises, Inc. and its subsidiaries at December 31, 2004 and 2003, and the
results of their operations and their cash flows for each of the three years in the period
ended December 31, 2004 in conformity with accounting principles generally accepted in the
United States of America. These financial statements are the responsibility of the
Company’s management. Our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in accordance
with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit of financial
statements includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
Internal control over
financial reporting
Also, in our opinion,
management’s assessment, included in the accompanying Management Report on Internal
Control over Financial Reporting appearing in Item 9A, that the Company maintained
effective internal control over financial reporting as of December 31, 2004 based on
criteria established in
Internal Control – Integrated Framework
issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated,
in all material respects, based on those criteria. Furthermore, in our opinion, the
Company maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2004, based on criteria established in
Internal Control
– Integrated Framework
issued by the COSO. The Company’s management is
responsible for maintaining effective internal control over financial reporting and for
its assessment of the effectiveness of internal control over financial reporting. Our
responsibility is to express opinions on management’s assessment and on the
effectiveness of the Company’s internal control over financial reporting based on our
audit. We conducted our audit of internal control over financial reporting in accordance
with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained in all material
respects. An audit of internal control over financial reporting includes obtaining an
understanding of internal control over financial reporting, evaluating management’s
assessment, testing and evaluating the design and operating effectiveness of internal
control, and performing such other procedures as we consider necessary in the
circumstances. We believe that our audit provides a reasonable basis for our opinions.
-90-
A company’s internal control
over financial reporting is a process designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles. A
company’s internal control over financial reporting includes those policies and
procedures that (i) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the
company; (ii) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the
company; and (iii) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s assets
that could have a material effect on the financial statements.
Because of its inherent limitations,
internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
/s/
PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Salt Lake City, Utah
March 15, 2005
-91-
|
ITEM 9.
|
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
|
None.
|
ITEM 9A.
|
|
CONTROLS
AND PROCEDURES
|
Evaluation
of Disclosure Controls and Procedures
.
Under the supervision and with the
participation of our management, including our Chief Executive Officer and Chief Financial
Officer, we evaluated the effectiveness of the design and operation of our disclosure
controls and procedures (as such term is defined in Rule 13a-15(e) under the Securities
Exchange Act of 1934 (the “Exchange Act”)). Disclosure controls and procedures
are the controls and other procedures that we designed to ensure that we record, process,
summarize and report in a timely manner the information we must disclose in reports that
we file with or submit to the Securities and Exchange Commission under the Exchange Act.
Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer
concluded that our disclosure controls and procedures were effective as of the end of the
period covered by this report.
Changes
in Internal Control over Financial Reporting
.
During the fourth quarter of 2004,
there was no change in our internal control over financial reporting (as such term is
defined in Rule 13a-15(f) under the Exchange Act) that has materially affected, or is
reasonably likely to materially affect, our internal control over financial reporting.
Management
Report On Internal Control over Financial Reporting.
Our management is
responsible for establishing and maintaining adequate internal control over financial
reporting. Internal control over financial reporting is defined in Rule 13a-15(f) under
the Exchange Act as a process designed by, or under the supervision of, our principal
executive and principal financial officers and effected by our board of directors,
management and other personnel, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes
in accordance with accounting principles generally accepted in this United States of
America and includes those policies and procedures that:
|
|
•
|
|
pertain
to the maintenance of records that, in reasonable detail, accurately and fairly reflect
the transactions and dispositions of our assets;
|
|
|
•
|
|
provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with accounting principles generally
accepted in this United States of America, and that our receipts and expenditures are
being made only in accordance with authorization of management and directors; and
|
|
|
•
|
|
provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of our assets that could have a material effect on the
financial statements.
|
Because
of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
-92-
Under
the supervision and with the participation of our management, including our principal
executive and principal financial officers, we assessed, as of December 31, 2004, the
effectiveness of our internal control over financial reporting. This assessment was based
on criteria established in the framework in
Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on
our assessment, our management concluded that our internal control over financial
reporting was effective as of December 31, 2004.
Our
assessment of the effectiveness of our internal control over financial reporting as of
December 31, 2004 has been audited by PricewaterhouseCoopers LLP, an independent
registered public accounting firm, as stated in their report which is included in this
Annual Report on Form 10-K.
|
ITEM 9B.
|
|
OTHER
INFORMATION
|
None.
PART III
The
information required by Items 10, 11, 12, 13 and 14 of Part III is hereby incorporated by
reference to our Definitive Proxy Statement filed or to be filed with the Securities and
Exchange Commission for our 2005 Annual Meeting of Stockholders.
PART IV
|
ITEM 15.
|
|
EXHIBITS
AND FINANCIAL STATEMENT SCHEDULES
|
Documents filed as part of this Form
10-K:
|
|
1.
|
|
Financial
Statements.
See Index to Consolidated Financial Statements under Item 8
of Part II.
|
|
|
2.
|
|
Financial
Statement Schedules.
See Index to Consolidated Financial Statements
under Item 8 of Part II.
|
|
|
3.
|
|
Exhibits
:
The following Exhibits are filed with this Form 10-K (reference to the
“Company” shall mean Nu Skin Enterprises, Inc.):
|
-93-
|
Exhibit Number
|
|
Exhibit
Description
|
|
2.1
|
|
Agreement
and Plan of Merger as of March 6, 2002 by and among the Company, Niksun Acquisition
Corporation, a subsidiary of the Company, and Worldwide Nutritional Science, Inc.
(incorporated by reference to Exhibit 2.2 to the Company’s Quarterly Report on Form
10-Q for the quarter ended March 31, 2002).
|
|
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 3.2 to the Company’s Annual Report on Form 10-K for the year
ended December 31, 2003).
|
|
3.3
|
|
Certificate
of Designation, Preferences and Relative Participating, Optional and Other Special Rights
of Preferred Stock and Qualification, Limitations and
Restrictions Thereof.
|
|
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 Registration Statement on Form S-3
(File No. 333-90716)).
|
|
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
|
|
Note
Purchase Agreement dated October 12, 2000, by and between the Company and The Prudential
Insurance Company of America (incorporated by reference to Exhibit 10.1 to the Company’s
Quarterly Report on Form 10-Q for the quarter ended September 30, 2000).
|
|
10.2
|
|
First
Amendment to Note Purchase Agreement between Nu Skin Enterprises, Inc. and The Prudential
Insurance Company of America dated May 1, 2002 (incorporated
by reference to Exhibit No. 10.3 to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2002).
|
|
10.3
|
|
Second
Amendment to Note Purchase Agreement, dated as of October 31, 2003 between the Company
and The Prudential Insurance Company of America (incorporated by reference to Exhibit
10.3 to the Company’s Annual Report on Form 10-K for the year ended December 31,
2003).
|
|
10.4
|
|
Third
Amendment to Note Purchase Agreement, dated as of May 18, 2004, between the Company and
The Prudential Insurance Company of America (incorporated by reference to Exhibit 10.2 to
the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2004).
|
-94-
|
Exhibit Number
|
|
Exhibit
Description
|
|
10.5
|
|
Pledge
Agreement dated October 12, 2000, by and between the Company and State Street Bank and
Trust Company of California, N.A., acting in its capacity as collateral agent
(incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form
10-Q for the quarter ended September 30, 2000).
|
|
10.6
|
|
Pledge
Amendments executed by the Company dated December 31, 2003 (incorporated by reference to
Exhibit 10.5 to the Company’s Annual Report on Form 10-K for the year ended December
31, 2003).
|
|
10.7
|
|
Pledge
Agreement dated as of January 31, 2005 by and among Nu Skin Asia Investment, Inc., a
wholly-owned subsidiary of the Company, and U.S. Bank National Association, as agent for
and on behalf of the Benefited Parties under the Amended and Restated Collateral Agency
and Intercreditor Agreement (referred to below) (incorporated by reference to Exhibit
99.3 to the Company’s Current Report on Form 8-K/A filed on March 10, 2005).
|
|
10.8
|
|
Collateral
Agency Agreement dated October 12, 2000, by and between the Company, State Street Bank
and Trust Company of California, N.A., as Collateral Agent, and the lenders and
noteholders party thereto (incorporated by reference to Exhibit 10.3 to the Company’s
Quarterly Report on Form 10-Q for the quarter ended September 30, 2000).
|
|
10.9
|
|
Amendment
to Collateral Agency and Intercreditor Agreement dated May 10, 2000, among State Street
Bank and Trust Company of California, N.A., as Collateral Agent, The Prudential Insurance
Company of America, as Senior Noteholder and ABN AMRO Bank N.V., as Senior Lender
(incorporated by reference to Exhibit 10.5 to the Company’s Quarterly Report on Form
10-Q for the quarter ended June 30, 2001).
|
|
10.10
|
|
Amended
and Restated Collateral Agency and Intercreditor Agreement, dated as of August 26, 2003,
by and among Nu Skin Enterprises, Inc. and various of its subsidiaries, U.S. Bank
National Association, as Collateral Agent, and various lending institutions (incorporated
by reference to Exhibit No. 10.2 to the Company’s Quarterly Report on Form 10-Q for
the quarter ended September 30, 2003).
|
|
10.11
|
|
Credit
Agreement dated as of May 10, 2001 among the Company, various financial institutions, and
Bank of America, N.A., as Administrative Agent (incorporated by reference to Exhibit 10.4
to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2001).
|
|
10.12
|
|
First
Amendment to the Credit Agreement dated December 14, 2001 dated May 10, 2001 among the
Company, various financial institutions, and Bank of America, N.A. as Administrative
Agent (incorporated by reference to Exhibit 10.43 of the Company’s Annual Report on
Form 10-K for the year ended December 31, 2001).
|
-95-
|
Exhibit Number
|
|
Exhibit
Description
|
|
10.13
|
|
Second
Amendment to Credit Agreement, dated as of October 22, 2003 between the Company, various
financial institutions, and Bank of America, N.A. as Administrative Agent (incorporated
by reference to Exhibit 10.11 to the Company’s Annual Report on Form 10-K for the
year ended December 31, 2003).
|
|
10.14
|
|
Third
Amendment to the Credit Agreement, dated as of May 10, 2004, among the Company, various
financial institutions, and Bank One, N.A. (incorporated by reference to Exhibit 10.1 to
the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2004).
|
|
10.15
|
|
Reconstituted
Stock Purchase Agreement dated as of March 6, 2002 by and between Nutriscan, Inc.,
Worldwide Nutritional Sciences, Inc. and each of the
Stockholders of Nutriscan, Inc. (incorporated by reference to Exhibit 2.1 to the
Company's Quarterly Report on Form 10-Q for the quarter
ended March 31, 2002).
|
|
10.16
|
|
Membership
Interest Purchase Agreement dated as of April 19, 2002, by and among the Company and the
members of First Harvest International, LLC (incorporated by reference to Exhibit 2.3 to
the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2002).
|
|
10.17
|
|
Amendment
and Release Agreement dated as of November 30, 2002, by and among the Company and the
members of First Harvest International, LLC (incorporated by reference to Exhibit 10.10
to the Company’s Annual Report on Form 10-K for the year ended December 31, 2002).
|
|
10.18
|
|
Sale
and Purchase Agreement between the Company and Dató Mohd Nadzmi Bin Mohd Sulleh
dated August 17, 2001 (incorporated by reference to Exhibit 10.1 to the Company’s
Quarterly Report on Form 10-Q for the quarter ended September 30, 2001).
|
|
10.19
|
|
Sale
and Purchase Agreement between the Company and Kiow Kim Yoon, Frankie Kiow dated August
17, 2001 (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly
Report on Form 10-Q for the quarter ended September 30, 2001).
|
|
10.20
|
|
Shareholders
Agreement among the Company, Dató Mohd Nadzmi Bin Mohd Sulleh and Kiow Kim Yoon,
Frankie Kiow dated effective as of September 25, 2001 (incorporated by reference to
Exhibit 10.46 of the Company’s Annual Report on Form 10-K for the year ended
December 31, 2001).
|
|
10.21
|
|
Sale
and Purchase Agreement between Nu Skin Enterprises, Inc. and Dató Mohd Nadzmi Bin Mohd
Salleh entered into the 25th day of June, 2002 to be effective September 28, 2001
(incorporated by reference to Exhibit 10.5 to the Company’s Quarterly Report on Form
10-Q for the quarter ended June 30, 2002).
|
-96-
|
Exhibit Number
|
|
Exhibit
Description
|
|
10.22
|
|
Supplemental
Agreement dated September 28, 2001, to the Sale and Purchase of Shares Agreement dated
August 17, 2001 between Nu Skin Enterprises, Inc. and Mr. Kiow Kim Yoon (incorporated by
reference to Exhibit 10.6 to the Company’s Quarterly Report on Form 10-Q for the
quarter ended June 30, 2002).
|
|
10.23
|
|
Supplemental
Agreement dated September 28, 2001, to the Sale and Purchase of Shares Agreement between
Nu Skin Enterprises, Inc. and Dató Mohd Nadzmi Bin Mohd Salleh (incorporated by
reference to Exhibit 10.11 to the Company’s Quarterly Report on Form 10-Q for the
quarter ended June 30, 2002).
|
|
10.24
|
|
Form
of Memorandum of Charge entered into by Nu Skin Enterprises, Inc. and Dató Mohd Nadzmi
Bin Mohd Salleh and Nu Skin Enterprises, Inc. and Kiow Kim
Yoon, Frankie Kiow (incorporated by reference to Exhibit 10.12 to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 2002).
|
|
10.25
|
|
Management
Services Agreement dated June 20, 2002 between Nu Skin International Management Group,
Inc. and Nu Skin (Malaysia) Sdn Bhd (incorporated by reference to Exhibit 10.7 to the
Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2002).
|
|
10.26
|
|
Distribution
Agreement dated June 20, 2002 between Nu Skin Enterprises Hong Kong, Inc. and Nu Skin
(Malaysia) Sdn Bhd (incorporated by reference to Exhibit 10.8 to the Company’s
Quarterly Report on Form 10-Q for the quarter ended June 30, 2002).
|
|
10.27
|
|
Trademark
Licensing Agreement dated June 20, 2002 between Nu Skin International, Inc. and Nu Skin
(Malaysia) Sdn Bhd (incorporated by reference to Exhibit 10.9 to the Company’s
Quarterly Report on Form 10-Q for the quarter ended June 30, 2002).
|
|
10.28
|
|
License
Agreement dated June 20, 2002 between Nu Skin International, Inc. and Nu Skin (Malaysia)
Sdn Bhd (incorporated by reference to Exhibit 10.10 to the Company’s Quarterly
Report on Form 10-Q for the quarter ended June 30, 2002).
|
|
10.29
|
|
Master
Lease Agreement dated January 16th 2003 by and between the Company and Scrub Oak, LLC
(incorporated by reference to Exhibit 10.28 to the Company’s Annual Report on Form
10-K for the year ended December 31, 2002).
|
|
10.30
|
|
Amendment
No. 1 to the Master Lease Agreement, effective as of July 1, 2003, between Nu Skin
International Inc. and Scrub Oak, LLC (incorporated by reference to Exhibit 10.2 to
the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30,
2003).
|
|
10.31
|
|
Master
Lease Agreement dated January 16, 2003 by and between the Company and Aspen Country, LLC
(incorporated by reference to Exhibit 10.29 to the Company’s Annual Report on Form
10-K for the year ended December 31, 2003).
|
-97-
|
Exhibit Number
|
|
Exhibit
Description
|
|
10.32
|
|
Amendment
No. 1 to the Master Lease Agreement, effective as of July 1, 2003, between Nu Skin
International Inc. and Aspen Country, LLC (incorporated by
reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 2003).
|
|
10.33
|
|
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).
|
|
10.34
|
|
Amendment
in Total and Complete Restatement of Deferred Compensation Plan.
|
|
10.35
|
|
Form
of Deferred Compensation Plan (New Form) with amendment.
|
|
10.36
|
|
Amendment
in Total and Complete Restatement of NSI Compensation Trust.
|
|
10.37
|
|
Second
Amended and Restated Nu Skin Enterprises, Inc. 1996 Stock Incentive Plan
(incorporated by reference to Exhibit 10.39 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1999).
|
|
10.38
|
|
Amendment
No. 1 to the Second Amended and Restated Nu Skin Enterprises, Inc. 1996 Stock Incentive
Plan (incorporated by reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2003).
|
|
10.39
|
|
Base
Form of Master Stock Option Agreement (incorporated by reference to Exhibit 10.44 to the
Company’s Annual Report on Form 10-K for the year ended December 31, 2002).
|
|
10.40
|
|
Form
of Stock Option Agreement (Directors) (incorporated by reference to Exhibit 10.4 to the
Company’s Annual Report on Form 10-K for the year ended December 31, 2001).
|
|
10.41
|
|
Summary
Description of Nu Skin Japan Director Retirement Allowance Plan (incorporated by
reference to Exhibit 10.49 to the Company’s Annual Report on Form 10-K for the year
ended December 31, 2001).
|
|
10.42
|
|
Employment
Letter with Truman Hunt (incorporated by reference to Exhibit 10.49 to the Company’s
Annual Report on Form 10-K for the year ended December 31, 2002).
|
-98-
|
Exhibit Number
|
|
Exhibit
Description
|
|
10.43
|
|
Letter
of Understanding with Corey Lindley effective August 8, 2002 (incorporated by reference
to Exhibit 10.49 to the Company’s Annual Report on Form 10-K for the year ended
December 31, 2002).
|
|
10.44
|
|
Letter
of Understanding with Corey Lindley effective December 22, 2003 (Supplementing Letter of
Understanding effective August 8, 2002) (incorporated by reference to Exhibit 10.47 to
the Company’s Annual Report on Form 10-K for the year ended December 31, 2003).
|
|
10.45
|
|
Consulting
Agreement between the Company and Woodclyffe Group, LLC effective April 1, 2003
(incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form
10-Q for the quarter ended June 30, 2003).
|
|
10.46
|
|
Amendment
#1 to Consulting Agreement dated July 31, 2003 between the Company and Woodclyffe Group,
LLC (incorporated by reference to Exhibit 10.49 to the Company’s Annual Report on
Form 10-K for the year ended December 31, 2003).
|
|
10.47
|
|
Early
Retirement Plan and Related Forms (incorporated by reference to Exhibit 10.1 to the
Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2003).
|
|
10.48
|
|
Amended
and Restated Registration Rights Agreement, dated as of September 18, 2003, by and among
Nu Skin Enterprises, Inc., Sandra N. Tillotson, The Sandra
N. Tillotson Family Trust and the Purchasers signatory thereto (incorporated by reference
to Exhibit 4.7 to the Company's Registration Statement on
Form S-3 (File No. 333-109836)).
|
|
10.49
|
|
Private
Shelf Agreement, dated as of August 26, 2003, between Nu Skin Enterprises, Inc. and
Prudential Investment Management, Inc. (the "Private Shelf
Agreement") (incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report
on Form 10-Q for the quarter ended September 30, 2003).
|
|
10.50
|
|
First
Amendment to Private Shelf Agreement, dated as of October 31, 2003 between the Company
and Prudential Investment Management, Inc. (incorporated by reference to Exhibit 10.53 to
the Company’s Annual Report on Form 10-K for the year ended December 31, 2003).
|
|
10.51
|
|
Second
Amendment to Private Shelf Agreement, dated as of May 18, 2004, between the Company,
Prudential Investment Management, Inc., and the holders of the Series A Senior Notes and
Series B Senior Notes issued under the Private Shelf Agreement (incorporated by reference
to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the quarter ended
June 30, 2004).
|
-99-
|
Exhibit Number
|
|
Exhibit
Description
|
|
10.52
|
|
Series
A Senior Notes Nos. A-1 to A-5 and Series B Senior Notes B-1 to B-5 issued October 31,
2003 by the Company to Prudential Investment Management, Inc. and/or its affiliates
pursuant to the Private Shelf Agreement (incorporated by reference to Exhibit 10.54 to
the Company’s Annual Report on Form 10-K for the year ended December 31, 2003).
|
|
10.53
|
|
Series
C Senior Notes Nos. C-1 and C-2 issued February 7, 2004 by the Company to Prudential
Investment Management, Inc. and/or its affiliates pursuant to the Private Shelf Agreement
(incorporated by reference to Exhibit 99.2 to the Company’s Current Report on Form
8-K filed February 8, 2004).
|
|
10.54
|
|
Stock
Acquisition Agreement, dated as of August 1, 2003, by and among Nu Skin Enterprises,
Inc., Orrin T. Colby, III and Cygnus Resources, Inc.
(incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 2003).
|
|
10.55
|
|
Stock
Repurchase Agreement, dated as of October 22, 2003, between the Company and certain of
its shareholders (incorporated by reference to Exhibit 10.1 to the Company’s Current
Report on Form 8-K filed November 10, 2003).
|
|
10.56
|
|
Registration
Rights Agreement dated as of October 22, 2003, by and among the Company and certain
third-party purchasers of the Company’s stock shareholders (incorporated by
reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed November
10, 2003).
|
|
10.57
|
|
Form
of Lock-up Agreement executed by certain of the Company’s shareholders (incorporated
by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed
November 10, 2003).
|
|
10.58
|
|
Registration
Rights Agreement, dated as of July 26, 2004, by and among the Company and the Purchasers
signatory thereto (incorporated by reference to Exhibit 4.6 to the Company’s
Registration Statement on Form S-3 filed August 23, 2004 (File No. 333-118495)).
|
|
10.59
|
|
Stock
Repurchase Agreement, dated as of July 27, 2004, by and among the Company and the Selling
Stockholders signatory thereto (incorporated by reference to Exhibit 4.8 to the Company’s
Registration Statement on Form S-3 filed August 23, 2004 (File No. 333-118495)).
|
|
10.60
|
|
Nu
Skin International, Inc. 1997 Key Employee Death Benefit Plan (incorporated by reference
to Exhibit 10.59 to the Company's Annual Report on Form 10-K
for the year ended December 31, 2003).
|
|
10.61
|
|
Nu
Skin Enterprises, Inc. 2005 Executive Incentive Plan (incorporated by reference to
Exhibit 99.1 to the Company's Current Report on Form 8-K
filed February 9, 2004).
|
-100-
|
Exhibit Number
|
|
Exhibit
Description
|
|
10.62
|
|
Restricted
Stock Purchase Agreement, dated as of January 17, 2003, between the Company and Truman Hunt (incorporated by
reference to Exhibit 10.61 to the Company’s Annual Report on Form 10-K for the year
ended December 31, 2003).
|
|
10.63
|
|
Employment
Letter with Robert Conlee effective November 26, 2003 (incorporated by reference to
Exhibit 3.2 to the Company’s Annual Report on Form 10-K for the year ended December
31, 2003).
|
|
10.64
|
|
Summary
of Non-management Director compensation.
|
|
10.65
|
|
Amended and Restated Patent License Agreement, dated as of March 7, 2002
by and between the University of Utah Research Foundation and Nutriscan, Inc. and
Interpretive Memorandum of Understanding, dated as of November 30, 2001.
|
|
21.1
|
|
Subsidiaries
of the Company.
|
|
23.1
|
|
Consent
of PricewaterhouseCoopers LLP
|
|
31.1
|
|
Certification
by M. Truman Hunt, President and Chief Executive Officer, pursuant to Rule 13a-14(a) of
the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
31.2
|
|
Certification
by Ritch N. Wood, Chief Financial Officer, pursuant to Rule 13a-14(a) of the Securities
Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
32.1
|
|
Certification
by M. Truman Hunt, President and Chief Executive Officer, pursuant to Section 1350,
Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
|
32.2
|
|
Certification
by Ritch N. Wood, Chief Financial Officer, pursuant to Section 1350, Chapter 63 of Title
18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
-101-
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 15, 2005.
|
|
|
|
NU SKIN ENTERPRISES, INC.
|
|
|
|
|
By:
/s/ M.
Truman Hunt
M. Truman Hunt,
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 15, 2005.
|
Signatures
|
|
Capacity in Which Signed
|
|
|
|
|
|
|
|
/s/ Blake M. Roney
|
|
|
|
|
Blake M. Roney
|
|
Chairman of the Board
|
|
|
|
|
|
|
|
/s/ M. Truman Hunt
|
|
Chief Executive Officer and Director
|
|
|
M. Truman Hunt
|
|
(Principal Executive Officer)
|
|
|
|
|
|
|
|
/s/ Ritch N. Wood
|
|
Chief Financial Officer
|
|
|
Ritch N. Wood
|
|
(Principal Financial Officer and Accounting Officer)
|
|
|
|
|
|
|
|
/s/ Sandra N. Tillotson
|
|
|
Sandra N. Tillotson
|
|
Senior Vice President, Director
|
|
|
|
|
|
|
|
/s/ Daniel W. Campbell
|
|
|
Daniel W. Campbell
|
|
Director
|
|
|
|
|
|
|
|
/s/ E. J. "Jake" Garn
|
|
|
E. J. "Jake" Garn
|
|
Director
|
|
|
|
|
|
|
|
/s/ Paula F. Hawkins
|
|
|
Paula F. Hawkins
|
|
Director
|
|
|
|
|
|
|
|
/s/ Andrew D. Lipman
|
|
|
Andrew D. Lipman
|
|
Director
|
|
|
|
|
|
|
|
/s/ Jose Ferreira, Jr.
|
|
|
Jose Ferreira, Jr.
|
|
Director
|
|
|
|
|
|
|
|
/s/ D. Allen Andersen
|
|
|
|
|
D. Allen Andersen
|
|
Director
|
|
EXHIBIT INDEX
|
Exhibit Number
|
|
Exhibit
Description
|
|
2.1
|
|
Agreement
and Plan of Merger as of March 6, 2002 by and among the Company, Niksun Acquisition
Corporation, a subsidiary of the Company, and Worldwide Nutritional Science, Inc.
(incorporated by reference to Exhibit 2.2 to the Company’s Quarterly Report on Form
10-Q for the quarter ended March 31, 2002).
|
|
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 3.2 to the Company’s Annual Report on Form 10-K for the year
ended December 31, 2003).
|
|
3.3
|
|
Certificate
of Designation, Preferences and Relative Participating, Optional and Other Special Rights
of Preferred Stock and Qualification, Limitations and
Restrictions Thereof.
|
|
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 Registration Statement on Form S-3
(File No. 333-90716)).
|
|
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
|
|
Note
Purchase Agreement dated October 12, 2000, by and between the Company and The Prudential
Insurance Company of America (incorporated by reference to Exhibit 10.1 to the Company’s
Quarterly Report on Form 10-Q for the quarter ended September 30, 2000).
|
|
10.2
|
|
First
Amendment to Note Purchase Agreement between Nu Skin Enterprises, Inc. and The Prudential
Insurance Company of America dated May 1, 2002 (incorporated
by reference to Exhibit No. 10.3 to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2002).
|
|
10.3
|
|
Second
Amendment to Note Purchase Agreement, dated as of October 31, 2003 between the Company
and The Prudential Insurance Company of America (incorporated by reference to Exhibit
10.3 to the Company’s Annual Report on Form 10-K for the year ended December 31,
2003).
|
|
10.4
|
|
Third
Amendment to Note Purchase Agreement, dated as of May 18, 2004, between the Company and
The Prudential Insurance Company of America (incorporated by reference to Exhibit 10.2 to
the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2004).
|
|
Exhibit Number
|
|
Exhibit
Description
|
|
10.5
|
|
Pledge
Agreement dated October 12, 2000, by and between the Company and State Street Bank and
Trust Company of California, N.A., acting in its capacity as collateral agent
(incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form
10-Q for the quarter ended September 30, 2000).
|
|
10.6
|
|
Pledge
Amendments executed by the Company dated December 31, 2003 (incorporated by reference to
Exhibit 10.5 to the Company’s Annual Report on Form 10-K for the year ended December
31, 2003).
|
|
10.7
|
|
Pledge
Agreement dated as of January 31, 2005 by and among Nu Skin Asia Investment, Inc., a
wholly-owned subsidiary of the Company, and U.S. Bank National Association, as agent for
and on behalf of the Benefited Parties under the Amended and Restated Collateral Agency
and Intercreditor Agreement (referred to below) (incorporated by reference to Exhibit
99.3 to the Company’s Current Report on Form 8-K/A filed on March 10, 2005).
|
|
10.8
|
|
Collateral
Agency Agreement dated October 12, 2000, by and between the Company, State Street Bank
and Trust Company of California, N.A., as Collateral Agent, and the lenders and
noteholders party thereto (incorporated by reference to Exhibit 10.3 to the Company’s
Quarterly Report on Form 10-Q for the quarter ended September 30, 2000).
|
|
10.9
|
|
Amendment
to Collateral Agency and Intercreditor Agreement dated May 10, 2000, among State Street
Bank and Trust Company of California, N.A., as Collateral Agent, The Prudential Insurance
Company of America, as Senior Noteholder and ABN AMRO Bank N.V., as Senior Lender
(incorporated by reference to Exhibit 10.5 to the Company’s Quarterly Report on Form
10-Q for the quarter ended June 30, 2001).
|
|
10.10
|
|
Amended
and Restated Collateral Agency and Intercreditor Agreement, dated as of August 26, 2003,
by and among Nu Skin Enterprises, Inc. and various of its subsidiaries, U.S. Bank
National Association, as Collateral Agent, and various lending institutions (incorporated
by reference to Exhibit No. 10.2 to the Company’s Quarterly Report on Form 10-Q for
the quarter ended September 30, 2003).
|
|
10.11
|
|
Credit
Agreement dated as of May 10, 2001 among the Company, various financial institutions, and
Bank of America, N.A., as Administrative Agent (incorporated by reference to Exhibit 10.4
to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2001).
|
|
10.12
|
|
First
Amendment to the Credit Agreement dated December 14, 2001 dated May 10, 2001 among the
Company, various financial institutions, and Bank of America, N.A. as Administrative
Agent (incorporated by reference to Exhibit 10.43 of the Company’s Annual Report on
Form 10-K for the year ended December 31, 2001).
|
|
Exhibit Number
|
|
Exhibit
Description
|
|
10.13
|
|
Second
Amendment to Credit Agreement, dated as of October 22, 2003 between the Company, various
financial institutions, and Bank of America, N.A. as Administrative Agent (incorporated
by reference to Exhibit 10.11 to the Company’s Annual Report on Form 10-K for the
year ended December 31, 2003).
|
|
10.14
|
|
Third
Amendment to the Credit Agreement, dated as of May 10, 2004, among the Company, various
financial institutions, and Bank One, N.A. (incorporated by reference to Exhibit 10.1 to
the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2004).
|
|
10.15
|
|
Reconstituted
Stock Purchase Agreement dated as of March 6, 2002 by and between Nutriscan, Inc.,
Worldwide Nutritional Sciences, Inc. and each of the
Stockholders of Nutriscan, Inc. (incorporated by reference to Exhibit 2.1 to the
Company's Quarterly Report on Form 10-Q for the quarter
ended March 31, 2002).
|
|
10.16
|
|
Membership
Interest Purchase Agreement dated as of April 19, 2002, by and among the Company and the
members of First Harvest International, LLC (incorporated by reference to Exhibit 2.3 to
the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2002).
|
|
10.17
|
|
Amendment
and Release Agreement dated as of November 30, 2002, by and among the Company and the
members of First Harvest International, LLC (incorporated by reference to Exhibit 10.10
to the Company’s Annual Report on Form 10-K for the year ended December 31, 2002).
|
|
10.18
|
|
Sale
and Purchase Agreement between the Company and Dató Mohd Nadzmi Bin Mohd Sulleh
dated August 17, 2001 (incorporated by reference to Exhibit 10.1 to the Company’s
Quarterly Report on Form 10-Q for the quarter ended September 30, 2001).
|
|
10.19
|
|
Sale
and Purchase Agreement between the Company and Kiow Kim Yoon, Frankie Kiow dated August
17, 2001 (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly
Report on Form 10-Q for the quarter ended September 30, 2001).
|
|
10.20
|
|
Shareholders
Agreement among the Company, Dató Mohd Nadzmi Bin Mohd Sulleh and Kiow Kim Yoon,
Frankie Kiow dated effective as of September 25, 2001 (incorporated by reference to
Exhibit 10.46 of the Company’s Annual Report on Form 10-K for the year ended
December 31, 2001).
|
|
10.21
|
|
Sale
and Purchase Agreement between Nu Skin Enterprises, Inc. and Dató Mohd Nadzmi Bin Mohd
Salleh entered into the 25th day of June, 2002 to be effective September 28, 2001
(incorporated by reference to Exhibit 10.5 to the Company’s Quarterly Report on Form
10-Q for the quarter ended June 30, 2002).
|
|
Exhibit Number
|
|
Exhibit
Description
|
|
10.22
|
|
Supplemental
Agreement dated September 28, 2001, to the Sale and Purchase of Shares Agreement dated
August 17, 2001 between Nu Skin Enterprises, Inc. and Mr. Kiow Kim Yoon (incorporated by
reference to Exhibit 10.6 to the Company’s Quarterly Report on Form 10-Q for the
quarter ended June 30, 2002).
|
|
10.23
|
|
Supplemental
Agreement dated September 28, 2001, to the Sale and Purchase of Shares Agreement between
Nu Skin Enterprises, Inc. and Dató Mohd Nadzmi Bin Mohd Salleh (incorporated by
reference to Exhibit 10.11 to the Company’s Quarterly Report on Form 10-Q for the
quarter ended June 30, 2002).
|
|
10.24
|
|
Form
of Memorandum of Charge entered into by Nu Skin Enterprises, Inc. and Dató Mohd Nadzmi
Bin Mohd Salleh and Nu Skin Enterprises, Inc. and Kiow Kim
Yoon, Frankie Kiow (incorporated by reference to Exhibit 10.12 to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 2002).
|
|
10.25
|
|
Management
Services Agreement dated June 20, 2002 between Nu Skin International Management Group,
Inc. and Nu Skin (Malaysia) Sdn Bhd (incorporated by reference to Exhibit 10.7 to the
Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2002).
|
|
10.26
|
|
Distribution
Agreement dated June 20, 2002 between Nu Skin Enterprises Hong Kong, Inc. and Nu Skin
(Malaysia) Sdn Bhd (incorporated by reference to Exhibit 10.8 to the Company’s
Quarterly Report on Form 10-Q for the quarter ended June 30, 2002).
|
|
10.27
|
|
Trademark
Licensing Agreement dated June 20, 2002 between Nu Skin International, Inc. and Nu Skin
(Malaysia) Sdn Bhd (incorporated by reference to Exhibit 10.9 to the Company’s
Quarterly Report on Form 10-Q for the quarter ended June 30, 2002).
|
|
10.28
|
|
License
Agreement dated June 20, 2002 between Nu Skin International, Inc. and Nu Skin (Malaysia)
Sdn Bhd (incorporated by reference to Exhibit 10.10 to the Company’s Quarterly
Report on Form 10-Q for the quarter ended June 30, 2002).
|
|
10.29
|
|
Master
Lease Agreement dated January 16th 2003 by and between the Company and Scrub Oak, LLC
(incorporated by reference to Exhibit 10.28 to the Company’s Annual Report on Form
10-K for the year ended December 31, 2002).
|
|
10.30
|
|
Amendment
No. 1 to the Master Lease Agreement, effective as of July 1, 2003, between Nu Skin
International Inc. and Scrub Oak, LLC (incorporated by reference to Exhibit 10.2 to
the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30,
2003).
|
|
10.31
|
|
Master
Lease Agreement dated January 16, 2003 by and between the Company and Aspen Country, LLC
(incorporated by reference to Exhibit 10.29 to the Company’s Annual Report on Form
10-K for the year ended December 31, 2003).
|
|
Exhibit Number
|
|
Exhibit
Description
|
|
10.32
|
|
Amendment
No. 1 to the Master Lease Agreement, effective as of July 1, 2003, between Nu Skin
International Inc. and Aspen Country, LLC (incorporated by
reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 2003).
|
|
10.33
|
|
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).
|
|
10.34
|
|
Amendment
in Total and Complete Restatement of Deferred Compensation Plan.
|
|
10.35
|
|
Form
of Deferred Compensation Plan (New Form) with amendment.
|
|
10.36
|
|
Amendment
in Total and Complete Restatement of NSI Compensation Trust.
|
|
10.37
|
|
Second
Amended and Restated Nu Skin Enterprises, Inc. 1996 Stock Incentive Plan
(incorporated by reference to Exhibit 10.39 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1999).
|
|
10.38
|
|
Amendment
No. 1 to the Second Amended and Restated Nu Skin Enterprises, Inc. 1996 Stock Incentive
Plan (incorporated by reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2003).
|
|
10.39
|
|
Base
Form of Master Stock Option Agreement (incorporated by reference to Exhibit 10.44 to the
Company’s Annual Report on Form 10-K for the year ended December 31, 2002).
|
|
10.40
|
|
Form
of Stock Option Agreement (Directors) (incorporated by reference to Exhibit 10.4 to the
Company’s Annual Report on Form 10-K for the year ended December 31, 2001).
|
|
10.41
|
|
Summary
Description of Nu Skin Japan Director Retirement Allowance Plan (incorporated by
reference to Exhibit 10.49 to the Company’s Annual Report on Form 10-K for the year
ended December 31, 2001).
|
|
10.42
|
|
Employment
Letter with Truman Hunt (incorporated by reference to Exhibit 10.49 to the Company’s
Annual Report on Form 10-K for the year ended December 31, 2002).
|
|
Exhibit Number
|
|
Exhibit
Description
|
|
10.43
|
|
Letter
of Understanding with Corey Lindley effective August 8, 2002 (incorporated by reference
to Exhibit 10.49 to the Company’s Annual Report on Form 10-K for the year ended
December 31, 2002).
|
|
10.44
|
|
Letter
of Understanding with Corey Lindley effective December 22, 2003 (Supplementing Letter of
Understanding effective August 8, 2002) (incorporated by reference to Exhibit 10.47 to
the Company’s Annual Report on Form 10-K for the year ended December 31, 2003).
|
|
10.45
|
|
Consulting
Agreement between the Company and Woodclyffe Group, LLC effective April 1, 2003
(incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form
10-Q for the quarter ended June 30, 2003).
|
|
10.46
|
|
Amendment
#1 to Consulting Agreement dated July 31, 2003 between the Company and Woodclyffe Group,
LLC (incorporated by reference to Exhibit 10.49 to the Company’s Annual Report on
Form 10-K for the year ended December 31, 2003).
|
|
10.47
|
|
Early
Retirement Plan and Related Forms (incorporated by reference to Exhibit 10.1 to the
Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2003).
|
|
10.48
|
|
Amended
and Restated Registration Rights Agreement, dated as of September 18, 2003, by and among
Nu Skin Enterprises, Inc., Sandra N. Tillotson, The Sandra
N. Tillotson Family Trust and the Purchasers signatory thereto (incorporated by reference
to Exhibit 4.7 to the Company's Registration Statement on
Form S-3 (File No. 333-109836)).
|
|
10.49
|
|
Private
Shelf Agreement, dated as of August 26, 2003, between Nu Skin Enterprises, Inc. and
Prudential Investment Management, Inc. (the "Private Shelf
Agreement") (incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report
on Form 10-Q for the quarter ended September 30, 2003).
|
|
10.50
|
|
First
Amendment to Private Shelf Agreement, dated as of October 31, 2003 between the Company
and Prudential Investment Management, Inc. (incorporated by reference to Exhibit 10.53 to
the Company’s Annual Report on Form 10-K for the year ended December 31, 2003).
|
|
10.51
|
|
Second
Amendment to Private Shelf Agreement, dated as of May 18, 2004, between the Company,
Prudential Investment Management, Inc., and the holders of the Series A Senior Notes and
Series B Senior Notes issued under the Private Shelf Agreement (incorporated by reference
to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the quarter ended
June 30, 2004).
|
|
Exhibit Number
|
|
Exhibit
Description
|
|
10.52
|
|
Series
A Senior Notes Nos. A-1 to A-5 and Series B Senior Notes B-1 to B-5 issued October 31,
2003 by the Company to Prudential Investment Management, Inc. and/or its affiliates
pursuant to the Private Shelf Agreement (incorporated by reference to Exhibit 10.54 to
the Company’s Annual Report on Form 10-K for the year ended December 31, 2003).
|
|
10.53
|
|
Series
C Senior Notes Nos. C-1 and C-2 issued February 7, 2004 by the Company to Prudential
Investment Management, Inc. and/or its affiliates pursuant to the Private Shelf Agreement
(incorporated by reference to Exhibit 99.2 to the Company’s Current Report on Form
8-K filed February 8, 2004).
|
|
10.54
|
|
Stock
Acquisition Agreement, dated as of August 1, 2003, by and among Nu Skin Enterprises,
Inc., Orrin T. Colby, III and Cygnus Resources, Inc.
(incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 2003).
|
|
10.55
|
|
Stock
Repurchase Agreement, dated as of October 22, 2003, between the Company and certain of
its shareholders (incorporated by reference to Exhibit 10.1 to the Company’s Current
Report on Form 8-K filed November 10, 2003).
|
|
10.56
|
|
Registration
Rights Agreement dated as of October 22, 2003, by and among the Company and certain
third-party purchasers of the Company’s stock shareholders (incorporated by
reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed November
10, 2003).
|
|
10.57
|
|
Form
of Lock-up Agreement executed by certain of the Company’s shareholders (incorporated
by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed
November 10, 2003).
|
|
10.58
|
|
Registration
Rights Agreement, dated as of July 26, 2004, by and among the Company and the Purchasers
signatory thereto (incorporated by reference to Exhibit 4.6 to the Company’s
Registration Statement on Form S-3 filed August 23, 2004 (File No. 333-118495)).
|
|
10.59
|
|
Stock
Repurchase Agreement, dated as of July 27, 2004, by and among the Company and the Selling
Stockholders signatory thereto (incorporated by reference to Exhibit 4.8 to the Company’s
Registration Statement on Form S-3 filed August 23, 2004 (File No. 333-118495)).
|
|
10.60
|
|
Nu
Skin International, Inc. 1997 Key Employee Death Benefit Plan (incorporated by reference
to Exhibit 10.59 to the Company's Annual Report on Form 10-K
for the year ended December 31, 2003).
|
|
10.61
|
|
Nu
Skin Enterprises, Inc. 2005 Executive Incentive Plan (incorporated by reference to
Exhibit 99.1 to the Company's Current Report on Form 8-K
filed February 9, 2004).
|
|
Exhibit Number
|
|
Exhibit
Description
|
|
10.62
|
|
Restricted
Stock Purchase Agreement, dated as of January 17, 2003, between the Company and Truman Hunt (incorporated by
reference to Exhibit 10.61 to the Company’s Annual Report on Form 10-K for the year
ended December 31, 2003).
|
|
10.63
|
|
Employment
Letter with Robert Conlee effective November 26, 2003 (incorporated by reference to
Exhibit 3.2 to the Company’s Annual Report on Form 10-K for the year ended December
31, 2003).
|
|
10.64
|
|
Summary
of Non-management Director compensation.
|
|
10.65
|
|
Amended and Restated Patent License Agreement, dated as of March 7, 2002
by and between the University of Utah Research Foundation and Nutriscan, Inc. and
Interpretive Memorandum of Understanding, dated as of November 30, 2001.
|
|
21.1
|
|
Subsidiaries
of the Company.
|
|
23.1
|
|
Consent
of PricewaterhouseCoopers LLP
|
|
31.1
|
|
Certification
by M. Truman Hunt, President and Chief Executive Officer, pursuant to Rule 13a-14(a) of
the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
31.2
|
|
Certification
by Ritch N. Wood, Chief Financial Officer, pursuant to Rule 13a-14(a) of the Securities
Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
32.1
|
|
Certification
by M. Truman Hunt, President and Chief Executive Officer, pursuant to Section 1350,
Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
|
32.2
|
|
Certification
by Ritch N. Wood, Chief Financial Officer, pursuant to Section 1350, Chapter 63 of Title
18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|