UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
| Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, | |
| Transition report pursuant to |
Commission file number: 001-12421
| NU SKIN ENTERPRISES, INC. (Exact name of registrant as specified in its charter) | |||
| Delaware | |||
(State or other jurisdiction of incorporation) | (IRS Employer Identification No.) | ||
| 75 West Center Street Provo, UT 84601 (Address of principal executive offices, including zip code) |
Registrant's telephone number, including area code: (801) 345-6100
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Name of exchange on which registered | |||
| Class A common stock, $.001 par value | New York Stock Exchange | |||
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes X xNo¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. |X|¨
Indicate by check mark whether the Registrant is an accelerated filefiler (as defined in Rule 12b-2 of the Act). Yes |X| xNo |_|¨
Based on the closing sales price of the Class A common stock on the New York Stock Exchange on June 28, 2002,30, 2003, the aggregate market value of the voting stock (Class A and Class B common stock) held by non-affiliates of the Registrant was approximately $727$451 million. For purposes of this calculation, voting stock held by executive officers, directors, and stockholders holding more than 10% of the voting stock has been excluded.
As of February 28, 2003, 36,389,35027, 2004, 71,149,539 shares of the Registrant’s Class A common stock, $.001 par value per share, and 44,467,8546,466 shares of the Registrant’s Class B common stock, $.001 par value per share, were outstanding.
Documents incorporated by reference. Portions of the Registrant’s definitive Proxy Statement for the Registrant’s 20032004 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission within 120 days after the Registrant’s fiscal year end are incorporated by reference in Part III of this report.
TABLE OF CONTENTS
| PART 1 | -1- |
| ITEM 1 | BUSINESS | -1- |
| -2- |
| Sourcing and Production |
| ITEM 2 | PROPERTIES |
| ITEM 3 | LEGAL PROCEEDINGS |
| ITEM 4 |
| SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
| PART II |
| ITEM 5 | MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS |
| ITEM 6 | SELECTED FINANCIAL DATA |
| ITEM 7 | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
| ITEM 7A | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
| ITEM 8 | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
| ITEM 9 | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
| ITEM 9A | CONTROLS AND PROCEDURES | -85- |
| PART III | -85- |
| -85- |
| ITEM 15 |
| EXHIBITS, FINANCIAL AND REPORTS ON FORM 8-K |
| SIGNATURES |
i
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 AND OTHER FINANCIAL RESULTS, 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 20.23.
In this Annual Report on Form 10-K, references to “dollars” and “$” are to United States dollars. Nu Skin, Pharmanex, “6S Quality Process” 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.
General
Nu Skin Enterprises is a leading, global direct selling company. We develop and distribute premium-quality, innovative personal care products and nutritional supplements whichthat are sold worldwide under the Nu Skin and Pharmanex brands. TechnologyWe also market technology products and distributor business services and a line of home care products are marketed under the Big Planet brand. We are one of the largest direct selling companies in the world with 20022003 revenue of $964$986 million and a globalaglobal network of approximately 566,000678,000 active independent distributors. Approximately 28,00029,000 of our active distributors have achieved executive distributor status under our Global Compensation Plan.status. Our executive distributors play an important leadership role in our distribution network and are critical to the growth and profitability of our business. We currently operate in more than 30 countries throughout Asia, the Americas and Europe.Europe, and we recognize approximately 89% of our revenue in markets outside the United States, with our Japanese operations accounting for approximately 57% of our revenue. Because of the size of our foreign operations, our operating results can be negatively impacted by such factors as weakening of foreign currencies, regulatory issues and poor economic or political conditions in those markets.
We develop and market branded consumer products that we believe are well suitedwell-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 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 portfolio of premium products.product portfolio. We are able to attract and motivate high-caliber independent distributors because of our focus on developing innovative products, our attractive global compensation system and our advanced technological distributor support. The direct selling and nutritional supplement industries, however, are subject to extensive governmental
-1- regulations throughout the world, which impose some restrictions on our business and create the risk that we could be fined or have our operations suspended if we fail to comply with these regulations.Our Product Divisions
We have three product divisions: Nu Skin, which offers personal care products; Pharmanex, which offers nutritional products; and Big Planet, which offers distributor related business services and
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home care products, which currently include an environmentally-friendly line of cleaninghigh-technology products and a water filtration system.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, 2000, 2001, 2002, and 2002.2003. 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(in millions)(1)
| Revenue by Product Category (in millions)(1) | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Year Ended December 31, 2001 | Year Ended December 31, 2002 | Year Ended December 31, 2003 | |||||||||||
| Product Category | $ | % | $ | % | $ | % | |||||||
| Nu Skin | 423.7 | 47.8 | 470.6 | 48.8 | 476.2 | 48.3 | |||||||
| Pharmanex | 396.3 | 44.8 | 439.0 | 45.5 | 472.1 | 47.8 | |||||||
| Big Planet | 65.6 | 7.4 | 54.5 | 5.7 | 38.2 | 3.9 | |||||||
| Total | 885.6 | 100.0 | 964.1 | 100.0 | 986.5 | 100.0 | |||||||
| (1) | In |
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 personal care and other advanced 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 while excluding those that we believe are detrimental to consumers. For example, we recently introducedClear Action Acne Treatment SystemTru Face Essence, a facial firming serum that restores youthful contours to treat the full spectrum of cosmetic effects that breakouts can have on the skin.face and neck area. Other examples include ourPerennial Intense Body MoisturizerTru Face Revealing Gel, a rich lotiondaily treatment that helpsrefines skin retain moisture as it faces the adverse effects of harsh cold or dry climates,appearance for a radiant complexion andEpoch BabyAva Puhi Moni Anti-Dandruff Shampoo, an “ethnobotanical” line of baby products based on the traditionalshampoo that combines ancient use of plants by indigenous cultures.with modern day science. Our educated distributor force provides consumers with detailed
-2- 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. Nu Skin offers products individually and in comprehensive product sets that include a variety of products in each product line. The following table summarizes the current Nu Skin product line by category. Revenue percentages in the table are for the year ended December 31, -3- Pharmanex. We currently offer approximately 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. To further extend our research capability, we have research center in Shanghai, China. This approximately 12,000 square foot facility will house Pharmanex research scientists and is one of three research and development centers (Shanghai, Beijing, and We are continuously looking for ways to help our distributors market our products more effectively. In Another marketing tool for our distributors that we are promoting is an automatic reordering program whereby customers can subscribe for automatic monthly delivery of products. This program is well-suited for Pharmanex products, particularly theLifePakdaily supplement line, which come in one-month supply packages. We have found that our distributors are able to generate a higher rate of repeat customers through the use We have developed a “6S Quality Process” to standardize our nutritional -4- • • • • • • The following table summarizes the current Pharmanex product lines by category. Revenue percentages in the table are for the year ended December 31, Big Planet. -6- We also offer telecommunications and Internet services as a way of providing more opportunities to create commissionable spending, including Internet access and website hosting, domestic and international long distance telecommunications services and personal 800 numbers. Big Planet recently modified its strategy relating to these technology services. Effective July 1, 2003 we moved from a wholesaler of telecommunication services to a commissioned agent, allowing us to increase our operating profit margin on these services service. We also offer an affiliate online shopping website called the Big Planet Mall (www.bpmall.com). Moving forward, we will continue to actively review other existing product lines for opportunities to improve operating margins. In addition, in August 2003, Big Planet sold its professional employer organization (“PEO”), allowing Big Planet to focus on product initiatives that produce higher margins and that are more closely aligned with our long-term technology vision. Big Planet also offers business tools designed to allow our distributors The following table summarizes the current Big Planet product lines by category. Revenue percentages in the table are for the year ended December 31, Nu Skin. Due to Chinese government restrictions on the importation and sale of -8- The recent identification of bovine spongiform encephalopathy (BSE), or Mad Cow Disease, in one cow in the United States has not resulted in the suspension of importation licenses for our personal care products in any of our markets. However, Mainland China has suspended the importation of any finished goods or bulk cosmetic products from the United States, irrespective of whether or not they contain bovine-derived ingredients. Since substantially all of our personal care products sold through our retail stores in Mainland 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 Mainland China. Pharmanex. Substantially all of our Pharmanex revenue is generated from products that are encapsulated in gel capsules that are produced with bovine materials. In late 2003, bovine spongiform encephalopathy (BSE), or 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, includingLifePak for the Japanese market. There are certain sourcing, regulatory and other risks associated with the implementation of these measures. For a more detailed discussion of the risks to our business associated with BSE, please refer to the section below entitled “Risk Factors”. 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. Big Planet. -9- Distributors receive commissions based on our gross margin on each sale of Big Planet products or services, including monthly recurring service charges, or based on the commission received by us with respect to products sold directly by We continually invest in our research and development capabilities. Our research and development expenditures were approximately 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 75 scientists at our dedicated research and development centers in Shanghai, China and Beijing, China and at our Provo, Utah offices. We also have working relationships with other independent scientists including an advisory board comprised of recognized authorities in various related disciplines. In addition, we evaluate a significant number of product ideas presented to us by outside sources. We have established collaborative arrangements with two prominent universities and research institutions in Mainland China: Shanghai Medical University and Beijing Medical University. The staffs of these institutions include scientists with expertise in natural product chemistry, biochemistry, pharmacology and clinical studies. Our research and development center in Shanghai coordinates and validates our collaborative efforts with these institutions. We also occasionally collaborate with other major universities in the United States and other countries. Some of the university research centers that we have worked with include UCLA, the Rippe Center for Clinical Lifestyle Research, Columbia University, the University of Kansas, the University of Hong Kong School of Medicine and Taiwan Academia Sinica. For product development support in 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 trials of Nu Skin products and materials. These activities are conducted at the Nu Skin Center for Dermatological Research at Stanford -10- For information on revenue for each of the geographic regions in which we operated for the years ended December 31, North According to the World Federation of Direct Selling Associations, the direct selling channel in South Korea generated sales of approximately A significant component of our growth strategy is to continue to enter into and expand new markets, particularly Mainland China. Mainland China has restrictions that prevent us from operating our direct sales business model there. Therefore, we have adopted a retail sales model there in which an employed sales force sells products through fixed retail locations. We rely on this employed sales force to market and sell products at the various fixed retail locations supported by only modest advertising and promotional efforts. In January 2003, we significantly increased the number of retail locations we operate in Mainland China to 100 stores, and in late 2003 we further expanded our retail operations into five new cities. In addition, we introduced our Nu Skin-branded products to the market. Our revenue in Mainland China was approximately $38 million in 2003, with $18 million of revenue in the fourth quarter. Our retail model in Mainland China is largely based upon our ability to attract customers to our retail stores, to educate them about our products and to obtain repeat purchases from these customers. We currently sell -11- 32 Nu Skin products and an additional 58 personal care products marketed under local brand names. All product sales are transacted within our retail stores. Our employed sales force earns base pay and related benefits, as well as a bonus based upon their 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 significantly limited due to the restrictions on direct selling in this market. The number of full-time sales representatives we employ in Mainland China was 3,100 as of December 31, 2003. We enter into labor contracts with all potential new sales representatives, only a small percentage of which complete the qualification process and become full-time sales representatives. We provide these potential new sales representatives with a minimum base pay and other labor benefits. As of December 31, 2003, we had approximately 9,100 of such sales employees not yet considered full-time sales representatives. As a result of its admission to the World Trade Organization, Mainland China has agreed to establish regulations regarding sales away from fixed retail locations by December 2004. If we view these new regulations to be an enhancement to our retail business model, we may revise our business model in Mainland China to alter our remuneration plan for our employed sales force, incorporate the use of a non-employee sales force and/or limit our reliance on retail stores. Subject to appropriate changes in direct selling laws, we believe that Mainland China could become one of the largest direct selling markets in the world over the next several years. Our operations in Mainland China are subject to a complex political and regulatory environment and we have been subject to significant regulatory scrutiny since expanding our operations in January 2003. See “Government Regulation” for more information on these regulatory issues. North America. The North America region consists of our markets in the United States and Canada. According to the World Federation of Direct Selling Associations, the direct selling channel in the United States generated sales of approximately $28.7 billion of goods and services in 2002, making the United States the largest direct selling market in the world. In 2003, we generated approximately $113 million in revenue in the United States. Substantially all of our Nu Skin personal care products, our Pharmanex nutritional supplements and our Big Planet products and services are available in the United States. As of December 31, 2003, we had 2,577 executive distributors in the United States, which accounted for 90% of the total executive distributors within North America. South Asia/Pacific. The South Asia/Pacific region currently consists of our markets in Thailand, the Philippines, Australia/New Zealand and Singapore/Malaysia. According to the World Federation of Direct Selling Associations, the direct selling channel in Thailand generated sales of approximately $512 million of goods and services in 2002. In 2003, we generated approximately $23 million in revenue in Thailand. In December 2000, we commenced operations in Singapore. We offer Nu Skin products and a limited number of Pharmanex products, includingLifePak, in this market. In addition, we expanded operations into Malaysia in November 2001. Because Malaysian law requires our Malaysian affiliate to be 70% locally-owned, we have entered into a -12- selling channel in Other According to the World Federation of Direct Selling Associations, the direct selling channel in Brazil generated sales of approximately We believe that network marketing is an effective vehicle to distribute our products because: In Mainland 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. Throughout this Annual Report on Form 10-K, we include full-time sales representatives in Mainland 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. In addition, we have implemented a “preferred customer” program in Mainland China, and throughout this report we include these preferred customers in our “active distributor” numbers. While "preferred customers" are legally very different from distributors, both are considered customers of our products. Our revenue is highly dependent upon the number and productivity of our 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. -14- Sponsoring. 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 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 Commissions on High Level of Distributor -15- 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 essentially based upon a product’s wholesale cost, net of any point-of-sales 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 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. 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, annual conventions, Technology and Internet Initiatives. Rules Affecting Distributors. -16- 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 Mainland 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: 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, withholding commissions until specified conditions are satisfied or other appropriate injunctive relief. Except in Mainland China, our distributors are independent contractors who may terminate their distributorship at any time. Product Guarantees. -17- Nu Skin and Pharmanex Products. Big Planet Products and Direct Selling compete for new distributors on the strength of our multiple business opportunities, product offerings, 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. 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 andLifePak. In addition, a number of our products 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. Direct Selling Activities. -18- The laws and regulations governing direct selling are modified from time to Based on our research conducted in opening 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. concerns about direct selling activities, it scrutinizes very closely activities of direct selling companies and any activities that appear to suggest that direct selling activities are occurring. 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 and continue to review our retail business model in Mainland China, we expect that they will provide ongoing recommendations and/or direction as to our method of operations. Regulatory provisions require us to obtain a license for each store that we operate in Mainland China, and regulators have broad discretion in approving these licenses. On January 8, 2003, we significantly expanded our operations in Mainland China, modified the remuneration program for sales employees and began selling Nu Skin products. This activity stimulated heightened scrutiny by both the media as well as government regulators regarding our method of operation and the activities of some distributors residing outside of Mainland China. The government inquiries into our business have been largely focused on whether or not we are engaging in any direct selling activities in Mainland China. At times, these reviews and related actions by government regulators have caused, and Regulators also periodically provide guidance and direction on certain aspects of our operations. This guidance has -19- work to have a reasonable number of sales employees per store and focus in the near term on increasing the productivity of our sales employees rather than increasing the number of sales employees in each store. We have made and continue to make modifications to our operations to incorporate this guidance into our operations. We anticipate that our business in Mainland China will continue to be scrutinized by the government, due principally to our direct selling model used in other Regulation of Our Our Pharmanex products are strictly regulated in the markets in which we operate. These markets have varied regulations that apply to and distinguish nutritional health supplements from “drugs” or “pharmaceutical products.” For example, our products are regulated by the FDA of the United States under the Federal Food, Drug and Cosmetic Act. The Federal Food, Drug and Cosmetic Act has been amended several times with respect to nutritional supplements, most recently by the Nutrition Labeling and Education Act and the Dietary Supplement Health and Education Act. The Dietary Supplement Health and Education Act establishes rules for determining whether a product is a dietary supplement. Under this statute, dietary supplements are regulated more like foods than drugs, are not subject to the food additive provisions of the law, and are generally not required to obtain regulatory approval prior to being introduced to the market. None of this infringes, however, upon the FDA’s power to remove an unsafe substance from the market. In the event a product, or an ingredient in a product, is classified as a drug or pharmaceutical product in any market, 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. -20- the regulation of vitamins and minerals within nations of the European Union, entered into force. However, such harmonization may not be fully realized because of the Directive’s current exclusion of upper and lower levels as well as some sources of ingredients. Moreover, the legality of the Directive is being challenged in the UK courts. Other EU initiatives which may 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, particularly dietary supplements. Accordingly, these regulations can limit our ability and that of our distributors to inform consumers of the full benefits of our products. For example, in the United States, we are unable to make any claim that any of our nutritional supplements will diagnose, cure, mitigate, treat or prevent disease. The Dietary Supplement Health and Education Act, however, permits substantiated, truthful and non-misleading statements of nutritional support to be made in labeling, such as statements describing general well-being resulting from consumption of a dietary ingredient or the role of a nutrient or dietary ingredient in affecting or maintaining a structure or a function of the body. In addition, all product claims must be substantiated. In Japan, our nutritional supplements are marketed as food products, which significantly limits our ability to make claims regarding the products. To date, we have not experienced any difficulty maintaining our import licenses, but we have experienced complications regarding food and drug regulations for our nutritional products. Many of our products have required reformulation to comply with local requirements. In addition, in Europe there is no uniform legislation governing the manufacture and sale of nutritional products. Complex legislation governing the manufacturing and sale of nutritional products in Europe has inhibited our ability to gain quick access to this market for our nutritional supplements. Recently, we have started to expand our nutritional product offering into more European markets by either reformulating existing products or developing new products to comply with local regulations. 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 1990s of certain Other Regulatory Issues. 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. Although to date none of these inquiries has resulted in a finding materially adverse to us, 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 -21- and earnings claims by distributors, and in the late 1990s resulting from adverse media attention in South Korea, harmed our business and results of operations. As of December 31, Our Internet address iswww.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 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 it operates. 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: -22- 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.” 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 foreign currency exchange contracts for the Japanese yen, we cannot be certain these contracts or any other hedging activity will effectively reduce exchange rate exposure. Because our Japanese operations account for Approximately -23- from $26.2 billion in 1998 to approximately If we are unable to retain our existing independent distributors and recruit additional distributors, our revenue will not We distribute almost all of our products through our independent distributors, and we depend on them The number and productivity of our distributors also depends on several additional factors, including: In addition, we may face saturation or maturity levels in a given country or market. This is of particular concern in Taiwan, where industry sources have estimated that over 10% of the population is already involved in some form of direct selling. The maturity of several of our markets could also affect our ability to attract and retain distributors in those markets. 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 In addition, some If Because of concerns about the potential number of sales employees -25- regulators fail to approve licenses for new stores at a rate that meets our growth demands, this could harm our growth potential. As a 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. Manufacturing and Our If our laser-based scanner is determined to be a medical device in a particular geographic market, this could inhibit or delay our ability to market the scanner in such market. We believe that our laser-based scanner can be marketed in the United States as a non-medical device. However, the FDA has questioned the status of the scanner as a non-medical device. If the FDA were to make a determination that the scanner is a medical device, or if it determines that our distributors are using the scanner to make medical claims, we would be required to obtain FDA clearance to market the scanner as a medical device, which could delay significantly or otherwise inhibit our ability and the ability of our distributors to use the scanner in the United States. In addition, we are facing similar uncertainties and regulatory issues in other markets, including Japan, with respect to the status of the scanner as a non-medical device, which could delay or inhibit our ability to introduce the scanner in these markets. Although we are in the process of preparing an application for FDA clearance to market the scanner as a medical device in the United States in the event such clearance is required, obtaining FDA clearance or similar clearance in other markets could require us to provide documentation concerning the clinical utility of the scanner and to make some modifications to the design, specifications and manufacturing process of the scanner 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 also subject to regulatory restrictions that limit the claims or representations that we and our distributors can make about the scanner because we are not using it as a medical Our products and our related marketing and advertising efforts are subject to extensive Our markets have varied regulations concerning product formulation, labeling, packaging and importation. These laws and regulations often require us to, among other things: -27- Failure to introduce products or delays in introducing products could reduce revenue and decrease profitability. Regulators also may prohibit us from making therapeutic claims about products, 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. The recent discovery of Bovine Spongiform Encephalopathy (BSE), commonly referred to as “Mad Cow Disease”, in the United States could harm our business if we are not able to successfully implement contingency plans to address regulatory issues surrounding BSE. Some countries, including Japan, have banned the importation or sale of products that contain bovine materials sourced from locations where BSE has been identified. Approximately 90% of our Pharmanex revenue, accounting for over 40% of our total revenue, is generated from products that are encapsulated in gel capsules that are currently produced with bovine materials. We have recently been sourcing substantially all of our bovine materials, used primarily in the gel capsules of our nutritional supplements, from India and the United States, which were both BSE-free countries. At the end of December 2003, a single cow imported from Canada into the United States was found to have BSE, which has prompted some countries to temporarily suspend imports of beef and bovine related products from the United States as they review the situation. We have implemented alternative production plans to utilize gelatin capsules sourced from BSE-free countries or non-bovine gelatin capsules, and produce certain products in tablet form, which we believe will allow us to avoid material stock outages of our major products. If we experience production difficulties, quality control problems, or shortages in supply, this could result in stock outages of key products or customer satisfaction issues, which could harm our business. In the event that the BSE issue is not resolved satisfactorily in the United States in a timely manner or if BSE becomes an issue in other countries, 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 bovine-sourced gelatin capsules or, alternatively, if consumers react negatively to our switching from capsules to tablets on some products as part of our contingency plans. 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 fail to obtain the necessary regulatory approvals or if any product ingredients are Recent negative publicity concerning stimulant-based supplements have If we are unable to 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 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: 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 Failure 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 fail to introduce new products planned for introduction, 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 In the early 1990s, we entered into voluntary consent In addition, we are susceptible to -30- The loss of key high-level distributors could negatively impact our distributor growth and our revenue. 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: 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. -31- 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 Increases in duties on our imported products in our 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 increase duties on imports and, as a result, reduce our profitability and harm our competitive position relative to locally produced goods. Governmental authorities may question our As a For approximately ten years, we have acquired ingredients and products from one unaffiliated supplier that currently manufactures approximately -32- 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 only have one formal employment agreement with Joseph Chang, President of Pharmanex. Takashi Bamba, President of Nu Skin Japan, retired at the end of 2003 and was replaced by Robert Conlee, President of our North Asia region. 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 Nu Skin and Pharmanex 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 cannot assure you that we will be able to successfully compete in this market. There is uncertainty whether the SARS epidemic could return, particularly in those Asian markets most affected by the epidemic in 2003. It is difficult to predict the impact, if any, of a recurrence of a SARS epidemic on our business. 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. 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 -33- 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. In April 2002, we adopted a Business Continuity/Disaster Recovery Plan, which is in the process of being implemented. All of our 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 market price of our Class A common stock is subject to significant fluctuations due to a number of factors Our Class A common stock closed at $8.99 per share on March 1, 2002 and closed at $19.15 per share on February 27, 2004. During this two-year period, our as high as $20.61 per share. Many factors could cause the market price of our Class A common stock to fall. Some of these factors Broad market fluctuations could also lower the market price of our Class A common stock regardless of our actual operating performance. -34- Our original stockholders, together with their family members, estate planning entities and Prior to However, this original stockholders group, together with their family members and affiliates, continue to have the ability to 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 As of -35- These stockholders also agreed that, after the expiration of the two-year lock-up agreement in October 2005, they will be subject to We generally lease our warehouse, office or distribution facilities in each geographic region in which we currently have operations. We believe that our existing and planned facilities are adequate for our current operations in each of There were no matters submitted to a vote of the security holders during the fourth quarter of the fiscal year ended December 31, PART II Our Class A common stock is listed on the New York Stock Exchange (“NYSE”) and trades under the symbol “NUS.” 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 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 -37- of December 31, 2003. These remaining Class B shares will be converted to Class A shares in connection with our annual shareholder meeting to be held in May 2004. We declared and paid a 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. Equity Compensation Plan Information The following table provides information as of December 31, The following selected consolidated financial data as of and for the years ended December 31, of goodwill and other indefinite-lived intangibles for all periods presented prior to adoption, net income would have been The following discussion of our financial condition and results of operations should be read in conjunction with the We are a leading, global direct selling We currently operate in over 30 countries throughout Asia, North and South America and Europe. In 2003, approximately 89% of our revenue was generated in markets outside of the United States and is translated into U.S. dollars from each market’s local currency using quarterly weighted average exchange rates. Approximately 84% of our revenue was generated from our Asia markets, with revenue from Japan representing approximately 57% of our revenue. As a result, our financial results can be negatively impacted by the weakening of foreign currencies relative to the U.S. dollar and economic and business conditions in Asia, particularly in Japan. 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. -40- Our revenue depends upon the number and productivity of independent distributors who purchase products and sales materials from us in their local currency for resale to their customers or for personal use. Our business and the direct selling and nutritional supplement industries are subject to extensive governmental regulations throughout the world, which impose some restrictions on our business and create certain business risks, including the imposition of fines or suspension of our operations if we fail to comply with such regulations. Some of the more significant regulatory risks facing our business today include regulatory risks in We source the States. In connection with our operations in Mainland China, we acquired a manufacturing facility in Mainland China and are manufacturing our own products for distribution in Mainland China. Cost of sales primarily consists of the cost of products purchased from “selling expenses” as “distributor incentives” in our financial statements. The reason for the change in title is because the sales representatives in Mainland China are employees, as opposed to independent distributors. General and administrative expenses (previously referred to as selling, general and administrative Provision for income taxes depends on the statutory tax rates in each of the 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 -42- of Income Taxes. We account for income taxes in accordance with 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 between us and our foreign 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. We are required to make judgments regarding the useful life of The following table sets forth our operating results as a percentage of revenue for the periods indicated: 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 and will continue to have a positive impact on gross and operating margins going forward. Revenue in 2003 was positively impacted by significant revenue growth from our expanded operations in Mainland 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 Mainland China, the positive impact on revenue results in 2002 from distributor enthusiasm surrounding and incentives related to our planned expansion of operations in Mainland China, and geo-political conflicts and weak economic conditions. After two -44- 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 have transitioned our production to non-bovine capsules and tablets and expect all of our key Pharmanex products to remain in stock. Although we expect these measures to result in some additional expenses for production costs, inventory write-offs and expedited shipping fees during the first quarter of 2004, we do not believe that these expenses will have a material impact on our overall projected 2004 financial results. North Asia. The following table sets forth revenue for the North Asia region and its principal markets (U.S. dollars in millions): 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 sales incentive 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): Revenue in Greater China increased primarily as a result of the expansion of operations in Mainland China. Foreign currency fluctuations from 2002 to 2003 did not have a notable impact on this region. Revenue in Mainland China was $38.5 million in 2003, following our expansion of retail operations and the introduction of Nu Skin branded products in Mainland China in January 2003. On a sequential basis, revenue in Mainland 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 Mainland 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 Mainland China. As our business expands in Mainland China, we continue to experience government scrutiny due to our international reputation as a direct selling company. Although we conduct retail operations and not direct selling operations in Mainland China, we expect the government scrutiny -45- to continue throughout 2004 when new direct selling laws and regulations are anticipated. For a more detailed discussion of the risks and challenges we face in Mainland China, please refer to “Notes Regarding Forward-Looking Statements”. We currently operate in a total of 23 cities in 8 provinces in Mainland China. The increase in revenue in Mainland 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 Mainland 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): 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 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. The North America region was also negatively impacted by year-over-year hedging losses of approximately $5.3 million in 2003 compared to hedging gains of $4.5 million in 2002 related to foreign currency forward contracts. 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 Pharmanex 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 Pharmanex BioPhotonic Scanner as a non-medical device. We believe the scanner can be marketed as a non-medical device, but the FDA has not responded yet to our request to classify the scanner as a non-medical device. In the event the FDA concludes that the scanner requires medical device clearance, this could delay or inhibit our ability to market the scanner. We currently intend to contest any conclusion by the FDA that the scanner is a medical device. -46- South Asia/Pacific. The following table sets forth revenue for the South Asia/Pacific region and its principal markets (U.S. dollars in millions): 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 Mainland 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): 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. 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 Mainland China and the positive impact of fluctuations in foreign currency in 2003 compared to 2002. We anticipate these factors will continue to positively impact gross profit throughout 2004 with gross margins expected to range from 83.0% to 84.0% in 2004 consistent with our reported gross margin of 83.4% during the fourth quarter of 2003. 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 Mainland 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. We anticipate these factors will continue to impact our -47- selling expenses throughout 2004 with selling expenses expected to range from 42.0% to 43.0% similar to reported results during the fourth quarter of 2003, which were 42.2%. 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 Mainland 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. We anticipate incurring distributor convention expenses of approximately $6.5 million in 2004 relating to our global distributor convention in the United States in the first quarter and approximately $4.0 million relating to our 2004 Japan distributor convention in the fourth quarter, which represents an overall increase in 2004 of approximately $6.5 million in convention expenses compared to 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), netwas$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. We anticipate interest expense increasing to approximately $6.0 million in 2004 from approximately $3.0 million in 2003 resulting from additional debt incurred in October 2003. 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. 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. -48- Revenue Overview. Revenue in 2002 increased 9% to $964.1 million from $885.6 million in 2001 primarily due to the growth in the North and In local currency, revenue in Japan increased 7%. Revenue growth in Japan was driven by continued leveraging of technology tools for distributors as well as by successful product introductions and growth in automated orders. Reported U.S. dollar results reflect the negative impact of currency fluctuations. Greater China. The following table sets forth revenue for the North America. The following table sets forth revenue -49- This decrease in the North America region is due to the decline in revenue in the United South Asia/Pacific. The following table sets forth revenue for the South Asia/Pacific region and its principal markets (U.S. dollars in millions): Excluding the impact of This increase in revenue is primarily due to a 13% increase in revenue in Europe in U.S. dollars compared to the prior year. Excluding the impact of changes in exchange rates, our revenue in Europe increased approximately 4% compared to 2001 and in Latin America revenue increased 5% compared to 2001. Gross profit as a percentage of revenue remained nearly constant at 80.2% in 2002 compared to 79.9% in 2001. The slight negative impact of fluctuations in foreign currency in 2002 was offset by a decrease of revenue related to low margin Big Planet products and services in 2002. We purchase a significant majority of our goods in U.S. dollars and recognize revenue in local currencies. Consequently, we are subject to exchange rate risks in our gross margins. -50- Selling expenses (previously referred to as distributor incentives) as a percentage of revenue increased to 39.6% in 2002 from 39.2% in 2001. In U.S. dollars, General and administrative expenses (previously referred to as selling, general and administrative Other income (expense), net Other income (expense), netwas Provision for income taxes Provision for income taxes increased to $38.1 million in 2002 from $29.5 million in 2001. This increase was largely due to the increases in operating income as compared to the prior year. The effective tax rate remained at 37.0% of pre-tax income for 2002 and 2001. Net income As a result of the foregoing factors, net income increased to $64.8 million in 2002 from $50.3 million in 2001. Liquidity and Capital Resources Historically, our principal needs for funds have been for operating expenses including We typically generate positive cash flow from operations due to favorable gross margins, the variable nature of As of December 31, Capital expenditures, primarily for equipment, including the Pharmanex BioPhotonic Scanner, computer systems and software, office furniture and leasehold improvements, were In August 2003, we entered into a $125.0 million multi-currency private uncommitted shelf facility with Prudential Investment Management, Inc. We utilized a portion of this shelf facility and a portion of the revolving credit facility in a transaction in October 2003 involving the repurchase of our shares of Class A common stock noted below. This portion of the long-term debt is U.S. dollar denominated, bears interest of approximately 4.5% per annum and will be amortized in two tranches over five and seven years. As of December 31, 2003, there were no outstanding balances -52- In addition to the $75.0 million currently outstanding under our long-term shelf facility, our long-term debt 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 3.03% per annum and are due October 2010, with annual principal payments beginning in October 2004. As of December 31, 2003, the outstanding balance on the notes was 9.7 billion Japanese yen, or $90.4 million, $12.9 million of which is included in the current portion of long-term debt. The Japanese notes and the revolving and shelf credit In October 2003, we repurchased approximately 10.8 million shares of Class A common stock from certain members of our original stockholder group for approximately $141.6 million, which includes $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 Since August 1998, our board of directors has authorized us to repurchase up to $90.0 million of our outstanding shares of Class A common stock. The repurchases are used primarily to fund our equity incentive plans. During the year ended December 31, During each quarter of We believe we have sufficient liquidity to be able to meet our obligations on both a -53- 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 and a reduction in the level of stock repurchases or dividend payments. The following table sets forth payments due by period for fixed contractual obligations as of December 31, 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. 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. -54- The following table sets forth selected unaudited quarterly data for the periods shown: In November 2002, the FASB issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” We In In December 2003, the FASB issued Interpretation No. -55- 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. 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 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, 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: -56- With the exception of historical facts, the statements contained in Management’s Discussion and Analysis of Financial Condition and Results of Operations, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Reform Act”) which reflect 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: In addition, when used in this report, the words or phrases “will likely result,” “expect,” “anticipate,” “will continue,” “intend,” “plan,” 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. 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: -57- 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. -59- Nu Skin Enterprises, Inc. The accompanying notes are an integral part of these consolidated financial statements. Nu Skin Enterprises, Inc. The accompanying notes are an integral part of these consolidated financial statements. Nu Skin Enterprises, Inc. The accompanying notes are an integral part of these consolidated financial statements. Nu Skin Enterprises, Inc. The accompanying notes are an integral part of these consolidated financial statements. -64- Nu Skin Enterprises, Inc. Nu Skin Enterprises, Inc. (the “Company”) is a leading, global direct selling Consolidation The consolidated financial statements include the accounts of the Company and the Subsidiaries. All significant intercompany accounts and transactions are eliminated in consolidation. Use of estimates The preparation of these financial statements in conformity with accounting principles generally accepted in the United States of America required management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of 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. 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 Property and equipment Property and equipment are recorded at cost and depreciated using the straight-line method over the following estimated useful lives: -65- Nu Skin Enterprises, Inc. Expenditures for maintenance and repairs are charged to expense as incurred. Goodwill and other intangible assets The Company Revenue recognition Revenue is recognized when products are shipped, which is when title passes to independent distributors who are the Company’s customers. A reserve for product returns is accrued based on historical experience. The Company generally requires cash or credit card payment at the point of sale. The Company has determined that no allowance for doubtful accounts is necessary. Amounts received prior to shipment and title passage to distributors are recorded as deferred revenue. Advertising expense Advertising costs are expensed as incurred. Advertising expense incurred for the -66- Nu Skin Enterprises, Inc. Research and development The Company’s research and development activities are conducted primarily through its Pharmanex division. Research and development costs are expensed as 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. 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. Foreign currency translation Most of the Company’s business operations occur outside the United States. Fair value of financial instruments The carrying value of financial instruments including cash and cash equivalents, accounts receivable, 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, 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 -67- Nu Skin Enterprises, Inc. 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 No. 123. On December 31, 2002, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 148, Accounting for Stock Based Compensation – Transition and Disclosure, Reporting comprehensive income Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from nonowner sources, and it includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. Accounting for derivative instruments and hedging activities 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. -68- Nu Skin Enterprises, Inc. 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 New pronouncements In November 2002, the FASB issued Interpretation No. 45,Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. The Company In In December 2003, the FASB issued Interpretation No. 3. Related Party Transactions Certain relationships with stockholder distributors Two -69- Nu Skin Enterprises, Inc. Loan to stockholder On May 3, 2002, a $5.0 million loan to a non-management stockholder was repaid, together with accrued interest, with approximately 440,000 shares of the Company’s Class A common stock. Promissory Note On August 14, 2002, the Company paid the remaining balance (approximately $6.0 million) of the promissory note issued by the Company to a related party in connection with the Company’s acquisition of Big Planet, Inc. in 1999. In addition, the Company negotiated a settlement of a receivable from a related party by accepting a cash payment of $2.4 million to satisfy an obligation related to outstanding distributor stock options, which obligation was previously payable upon exercise of each outstanding stock option. Lease agreements 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 for each of the years ended December 31, 2001, 2002 and 2003 with remaining long-term obligations under these operating leases of $29.8 million and $27.3 million at December 31, 2002 and 2003, respectively. Property and equipment are comprised of the following (U.S. dollars in thousands): Depreciation of property and equipment totaled Goodwill and other intangible assets consist of the following (U.S. dollars in thousands): -70- Nu Skin Enterprises, Inc. Amortization of The Company adopted SFAS No. 142 effective January 1, 2002. Under the new standard, goodwill and indefinite life intangible assets are no longer amortized but are subject to annual impairment tests. Other intangible assets with finite lives, such as developed technology, will continue to be amortized over their useful lives. The transitional and annual impairment tests were completed and did not result in an impairment charge. In accordance with SFAS No. 142, prior period amounts were not restated. A reconciliation of the previously reported net income and earnings per share for the Nu Skin Enterprises, Inc.2002:2003:2Category Description Selected Products Daily Skin Care
44% of Nu Skin division revenueOur premier line of daily skin care products consists of face and body products including cleansers, toners, moisturizers, specialty products and moisturizers,body care.NutricentalsNutricentials products fortified with topically applied nutrients uniquely position this line.Night Supply Nourishing
CreamNaPCA MoisturizerLiquid Body Bar
Enhancer
Celltrex Ultra
Perennial Intense Body Moisturizer MoisturizerAdvanced Skin Treatments 21%23% of Nu Skin division revenueOur advanced skin treatments are formulateddesigned to help prevent and reversesupplement the signsbenefits of aging and environmental stress as well as treat breakouts on the skin.a daily skin care routine, featuring products with ingredients scientifically proven to provide visible results for specific skin care needs from anti-aging to acne.Nu Skin 180º180° Anti-Aging
Skin TherapyTru-FaceTru Face Line Corrector
Tru Face Essence
Tru Face Revealing Gel
Nu Skin Galvanic Spa System II
Nu Skin Clear Action Acne
Treatment SystemEthnobotanicals
7% of Nu Skin division revenueOurEpoch line is distinguished by utilizing the inclusiontraditions of indigenous culture. Each Epoch product is formulated with botanical ingredients used by indigenous cultures.derived from renewable resources found in nature. In addition, we contribute a percentage of our proceeds fromEpoch sales to charitable causes.Epoch Baby
Glacial Marine Mud
Ava Puhi Moni Shampoo
Ice Dancer Leg Gel
Fire Walker Foot CreamOther — AdvancedOther-Advanced Products28%26% of Nu Skin division revenueOur personal care portfolio also includes daily use products such as hair care and color cosmetics. DailyKind Mild Shampoo
FreeFall Detangling Spray
Nutriol Hair Fitness Prep
Sunright Lip Balm
Nu Colour Skin Beneficial
Tinted Moisturizer5065 Pharmanex nutritional products. We are committed to providing our customers with high-quality, standardized and scientifically substantiated nutritional supplements. Pharmanex nutritional supplements include our flagshipLifePak line of micronutrient and phytonutrient supplements, which we currently sell in all of our major markets.LifePaksales accounted for 19.7%20% of our total revenue and 43.2%43% of Pharmanex revenue in 2002.2003. 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-beingwell being when used in conjunction with proper diet and exercise.recently completed the build-out of a3Provo)Provo, Utah) in the Pharmanex division. Our product development efforts are focused in the area of anti-aging, weight management and other health issues related to nutrition.nutrition issues. We avoid the use ofrecently introducedReishiMax GLP, which promotes a healthy immune system,TRA, a weight management system, andIgG Boost,a colostrum supplement utilizing patented technology we recently acquired. We have never included stimulants, such as ephedra related products, andor anabolic steroids (and precursors) in our products. Any ingredients that are proven conclusively to have any long-term addictive or harmful effects are not considered for product development, even if the short-term effects may be desirable.2002,2003, we completed the acquisition of a company with exclusive rights tointroduced a patented laser-based scanning tool that can measuremeasures the level of carotenoids (a powerful antioxidant). in skin tissue. We believe we are the first nutritionalnutrition company to make available a non-invasive tool that will measure the level of tissue antioxidant carotenoids after regular nutritional supplementation. We made a limited number of thesecurrently lease over 600 scanners available to our top distributors in the United States, in February 2003, and anticipate making more of them available to other distributors during 20032004 as we complete our development of a final production model. We currently plan to lease the scanners to our distributors at a monthly lease rate ofranging from $199 to $299 per month. We have placed scanners in our walk-in centers in Taiwan, Hong Kong and certain of our markets in Southeast Asia and Europe. We are currently evaluating the scanner for potential introduction in these and other international markets in 2004, subject to favorable results in the U.S.of regulatory reviews and compliance with applicable regulations in foreign markets.ourof this program.supplements and provide a consistent level of the desired active compounds in our products.supplements. We believe that this 6S Quality Process enhances our ability to provide consumers with safe, effective and consistent products. The 6S Quality Process generally involves the following steps:SelectionSelection.. 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.SourcingSourcing.. Investigating potential sources, evaluating the quality of sources and performing botanical and chemical evaluations where appropriate.StructureStructure.. Determining the structural profile of natural compounds and active ingredients.StandardizationStandardization.. 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. SubstantiationSubstantiation.. Reviewing documented pre-clinical and clinical trials and, where necessary and appropriate, initiating studies and clinical trials sponsored by Pharmanex. Following our acquisition of First Harvest International, LLC, Pharmanex began sellingalso sells aVitameal dehydrated food product.product made with a blend of enriched rice and lentils.Vitameals are a highly nutritious food product used forand designed to serve as an emergency food supply. Pharmanex also suppliesVitameal as part of a humanitarian relief effort designed to satisfy the nutritional needs of children at risk of starvation. We also providehave implemented a program that provides a convenient way for distributors to donateVitameal 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 18 months, we have provided over 7 million meals to starving children through this program.4-5-2002:2003:Category Description Selected Products Micronutrient Supplements
43% of Pharmanex division revenueOurLifePak family of daily supplements is designed to provide a beneficial mix of nutrients including vitamins, minerals and antioxidants. LifePak
LifePakWomen
LifePakPrime
LifePakTrim
LifePakTeenTargeted Nutritional Solutions 35%37% of Pharmanex division revenueOur self-care dietary supplements contain consistent levels of botanical ingredients that are designed to provide consumers with targeted wellness benefits. ReishiMax
Cortitrol
Cholestin
CordyMaxCs-4
TeGreen97
BioGingko27/7
ImmuneFormulaWeight Management 13%11% of Pharmanex division revenueOur Body DesignTRA ephedra-free line of weight-management products was created to capitalize on the sports fitness market as well as to create a presence in the growing weight management category.TRA supplements are complementary to any diet program that is currently on the market.TRA
Overdrive
FibreNet
CraveEaseBody Design meal replacement productsOther — SpecialtyOther--Specialty Products
9% of Pharmanex division revenueOur portfolio of other nutritional products includes healthy drinks and other specialty wellness products. SplashC
Appeal
AloeDrink.Big Planet offers innovative high technology products and services that appeal to mass markets often underserved by other companies because of the common complexities of high-tech products. We believe our Big Planet technology products help to attract a new, more technologically sophisticated demographic of distributors to our business. We believe that a significant number of these individuals are people who would not ordinarily be attracted to a more conventional direct sales business. However, our experience indicates that, upon joining our business, many distributors attracted by our Big Planet products and services also begin to purchase and distribute our Nu Skin and Pharmanex products. Our strategy for Big Planet moving forward is to expand the Big Planet product mix to include high-margin, high-technology products that focus on ease of use and that have application in broader markets across multiple geographies. This approach will allow Big Planet to achieve greater distribution through Nu Skin Enterprises’ global distributor network and to profit from the higher margins associated with product categories such as software. For example, Big Planet recently announced the upcoming release of a cutting-edge Internet security software tool designed to protect Internet users from unauthorized access to their private information through “spyware” and other invasive devices.andto increase their customers to “powerproductivity by leveraging technology in the management of their businesses” with products that generate commissionable distributor sales volume.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 also have the ability to configure their individual websites to customize their marketing efforts and to conduct e-commerce activities across our product lines,line, by seamlessly integrating their sites and online ordering capabilities with our websites and back-end fulfillment systems. Online orders placed by a customer are credited to the appropriate distributor and are automatically routed through our electronic ordering system, and products are shipped by us directly to the customer. We believe this web-based approach greatly simplifies and enhances the ordering experience for our distributors and their customers while at the same time helping to reduce our overall operating costs. Other Big Planet products designed to enhance distributor activity include 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.5 Other As part of an overall business development initiative, Big Planet technology products and services designed to generate commissionable sales for distributors include our Internet access and website hosting, domestic and international long distance telecommunications services, and personal 800 numbers. Our Internet services include web hosting and Internet access offered to our customersalso manages product development in the United States through more than 3,000 local dial-up access sites. In Japan and Taiwan, we offer Internet access through third-party Internet service providers who co-brand their services with Big Planet. We also offer an affiliate online shopping website called the Big Planet Mall (www.bpmall.com). We believe our Big Planet “power your business” products help to attract a new, more technologically sophisticated demographic of distributors to our business. We believe that a significant number of these individuals are people who would not ordinarily be attracted to a more conventional direct sales business. Our experience indicates that upon joining our business, many distributors attracted by our Big Planet products and services will also begin to purchase and distribute our Nu Skin and Pharmanex products, which offer comparatively high levels of commissionable sales volume. In this way, we believe Big Planet helps to drive revenue for our other product lines. Our strategy for Big Planet has been to expand the Big Planet product mix to include higher margin products and improve margins on its key technology products. For example, Big Planet recently entered thegrowing home-care market and will continue to develop and offerproduct segment. Past initiatives have included developing environmentally friendly cleaning products in this segment going forward.under the Ecosphere brand name. Products in this segment willalso include environmentally-friendly cleaningwater filtration products and air and water filtration systems. As of January 1, 2003,other potential home-care categories. These products are not marketed under the Big Planet under theEcospherebrand will take responsibility for the Pharmanex water filtration product. Water and air filtration are future development categories for Big Planet under theEcosphere brand.name. Since 2000, we have incubated a small professional employer organization that provides small to mid-sized businesses with outsourced payroll administration, benefits administration, risk management and human resources services. We do not plan to market the professional employer organization service through our distributors or actively expand this business in the foreseeable future.-7-2002:2003(1):6Category Description Selected Products Internet Services 42%46% of Big Planet division revenueOur Internet service products include dial-up Internet access, web hosting and other Internet tools and services. Business Center (U.S.)
Personal Website (Japan)
Global Web Page (other)
ISP for USU.S. - by Qwest
ISP for Japan - by NiftyTelecommunications 16%8% of Big Planet division revenueWe offer competitively-priced telecommunicationscompetitively priced telecommunication services and enhanced telecommunication services.Simplify Home
Simplify One
QwestHome Care 2%27% of Big Planet division revenueOur current home care offering includes such products as laundry detergent, all purpose and glass and mirror cleaners. Ecosphere Laundry
Ecosphere Dish
Ecosphere Surface
Ecosphere Glass & Mirror
Water Purifiers(1) Professional Employer Organization (PEO)40% of Big Planet division revenueOur in 2003 also included $9.1 million from our professional employer organization provides small to mid-sized businesses with outsourced payroll administration, benefits administration, risk management and human resources services.PEOwhich was divested in July of 2003. Sourcing and Production
. In order to maintain high product quality, we acquire our ingredients and products from suppliers that we believe are reliable, reputable and provide us with ingredients and products we believe to be of high quality. For approximately ten years, we have acquired ingredients and products from one unaffiliated supplier that currently manufactures approximately 45%39% of our Nu Skin personal care products. Our contract with our major supplier is for a one-year term that automatically renews 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.7products,finished goods for our method of operation, we established our own manufacturing facility in Shanghai, China in 2001. At this facility, we currently manufacture our personal care products sold through our retail stores in Mainland China. A small portion of the output from this facility is exported to our other markets. If necessary, this facility could be expanded or other facilities could be built in Mainland 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.. Substantially all of our Pharmanex nutritional supplements and ingredients, includingLifePak, are produced or provided by third-partythird party suppliers that we consider to be among the best suppliers of these products and ingredients. We currently rely on two unaffiliated suppliers, one of which supplies 41%approximately 39% and the other of which supplies 26%approximately 28% 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. We also maintain an extraction and processing facility located in Zhejiang Province, China, where we currently produce the extracts for ourTeGreen 97 andReishiMax products.. Other than web hosting, email, online distributor tools and Big Planet Mall, nearly all of the Big Planet services and products we offer are currently contracted or sourced from unaffiliated third-partiesthird parties pursuant to contractual arrangements. For example, we have contracted with Qwest Communications to provide long distance telephone and Internet access services. By contracting to provide these services or by acting as a reseller ofcommisioned agent for these services, we are able to avoid the large capital deployment and 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-partythird party providers.third-partythird party vendors to our distributors and customers. In addition to the online business tools we have developed internally, we source complementary tools from third-partythird party vendors to enhance our suite of distributor tools. We also source and manufacture our home-care products through various third-partythird party vendors.Research and Development
$9 million in 2000 and were approximately $7 million in each of 2001 and 2002.2002 and were approximately $6 million in 2003. The majority of our recent research and development activity has been directed towards our Pharmanex products. Much of our Pharmanex research to date has been conducted in Mainland China, where we benefit from a very 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 recently openedalso 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. Research and development costs are expensed as incurred.8University'sUniversity’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 innovative product concepts. We recently entered into a development agreement with Cosmix Molecular Biologicals GmbH, a pharmaceutical research group in Germany, to strengthen our ingredient portfolio in key cosmetic categories.Geographic Sales Regions
2000, 2001, 2002, and 2002,2003, please refer to "Management's“Management’s Discussion and Analysis of Financial Condition and Results of Operations"Operations” and Note 17 to our consolidated financial statements.Asia.Asia. The North Asia region currently consists of our markets in Japan and South Korea. Japan is our largest market globally with revenue of approximately $530$559 million in 2002.2003. According to the World Federation of Direct Selling Associations, the direct selling channel in Japan generated sales of approximately $22.8$24.5 billion of goods and services in 2000,2002, making Japan the second largest direct selling market in the world. Despite our revenue growth in Japan, the overall size of the direct selling channel in Japan has been negatively impacted over the last several years by economic and competitive conditions. Substantially all of our Nu Skin personal care products and a majority of our Pharmanex nutritional supplements, includingLifePak, our leading multi-vitamin and mineral supplement, are available in the Japanese market. WeIn 2003, we introduced in JapanReishiMax GLP, a Pharmanex product that promotes a healthy immune system andTru Face Essence, a facial firming serum from our Nu Skin division that restores youthful contours to the face and neck area.Tru Face Essence is now one of the top revenue generating products for the Nu Skin division.We have also introduced a number of our Big Planet technology products and services into Japan including Internet service offered through a third-partythird party provider, personalized websites, computers and online business tools.$2.9$4.6 billion of goods and services in 2001.2002. Our revenue in this market was approximately $64$59 million in 2002.2003. We currently offer the majority of our Nu Skin personal care products and approximately one-half of our Pharmanex nutritional supplements in South Korea.9Southeast Asia.Greater China. Our Southeast AsiaThe Greater China region currently consists of theour markets in Taiwan, Hong Kong, Singapore, Thailand, the Philippines, New Zealand, Australia, Malaysia and our retail operationoperations in Mainland China. Taiwan is thewas our largest revenue generating market in this region during 2003 with revenue of approximately $79$73 million in 2002.2003. Nu Skin Taiwan is one of the largest direct selling companies in Taiwan. According to the World Federation of Direct Selling Associations, the direct selling channel in Taiwan generated approximately $1.2$1.3 billion in sales of goods and services in 2000,2002, and approximatelyover three million people (over 10% of Taiwan'sTaiwan’s population), are estimated to participate in direct selling. We offer most of our Nu Skin personal care products and approximately one-half of our Pharmanex nutritional products, includingLifePak, in Taiwan. We currently offer Big Planet branded Internet service in Taiwan through a third-partythird party provider and a limited number of our other Big Planet products.shareholders'shareholders’ agreement with local partners that allows us to manage the day-to-day operations of the local affiliate, with veto control over all major decisions. In addition, we have entered licensing and distribution agreements with the local affiliate pursuant to which we sell products and receive license fees based on total sales to distributors in this market. Because of our ability to control the operations of our Malaysian affiliate, we consolidate all of the revenue from this market in our top-line revenue. The opening of Singapore and Malaysia has contributed significantly to our growth in Southeast Asia. In 2002,2003, combined revenue from Singapore and Malaysia was approximately $64$37 million. A significant component of our growth strategy is to continue to enter into and expand new markets, particularly China. China has restrictions that prevent us from operating our direct sales business model in China. Therefore, we have adopted a retail sales model to expand our operations in China in which an employed sales force sells products through fixed retail locations. We rely on this employed sales force to market and sell products at the various fixed retail locations supported by modest advertising and promotional efforts. In January 2003, we significantly increased the number of retail locations we operate to 100 stores. In addition, we introduced our Nu Skin-branded products to the market. Our retail model in China is largely based upon our ability to attract customers to our retail stores, to educate them about our products, and to obtain repeat purchases from these customers. All product sales are transacted within our retail stores. Our employed sales force earns base pay and related benefits, as well as a commission based upon their 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 significantly limited due to the restrictions on direct selling in this market. As a result of its admission to the World Trade Organization, China has agreed to establish regulations regarding sales away from fixed retail locations by December 2004. If we view these new regulations to be an enhancement to our retail business model, we may revise our business model in China to alter our remuneration plan for our employed sales force, incorporate the use of a non-employee sales force and/or limit our reliance on retail stores. Subject to appropriate changes in direct selling laws, we believe that China could become one of the largest direct selling markets in the world over the next five to seven years. Our operations in China are subject to a complex political and regulatory environment and we have been subject to significant regulatory scrutiny since expanding our operations in January 2003. See "Government Regulation" for more information on these regulatory issues.10North America. The North America region consists of our markets in the United States and Canada. According to the World Federation of Direct Selling Associations, the directthe United StatesSingapore and Malaysia generated combined sales of approximately $26.7$1.2 billion of goods and services in 2001, making the United States the largest direct selling market in the world. In 2002, we generated approximately $137 million in revenue in the United States. Substantially all of our Nu Skin personal care products, our Pharmanex nutritional supplements and our Big Planet products and services are available in the United States. As of December 31, 2002, we had 2,176 executive distributors in the United States, which accounted for 81% of the total executive distributors within North America. Our strategy for the United States market is to focus on initiatives centered around Pharmanex and Nu Skin products, such as the scanner, to help drive sales of Pharmanex and Nu Skin products and increase the number of distributors promoting and distributing our products.2002.Markets.Markets. Our Other Markets currently consist of the markets in Europe, Central America and Brazil. We currently distribute products in 17 countries in Central and Southern Europe and Scandinavia, including the United Kingdom, Ireland, France, Germany, Belgium, the Netherlands, Luxembourg, Spain, Portugal, Italy, Austria, Poland, Sweden, Iceland, Norway, Finland and Denmark. In 2002,2003, our revenue from our European markets was approximately $26$32 million. The majority of our Nu Skin personal care products and several of our Pharmanex products, includingLifePak, are sold in Europe. We also distribute a limited number of Big Planet products in the European market. We have additional small operations in Brazil, Mexico and Guatemala.$2.5$2.0 billion of goods and services in 2001. Approximately 25% of our Nu Skin personal care products2002. We have been introduced in Brazil, along with 15 locally produced products. In the first quarter of 2002, we acquiredrecently implemented a controlling interest in a small direct selling company in Poland. We believe that themodified direct selling model utilized byin Brazil that we believe provides an attractive opportunity for distributors in that market. We also believe that this companymodel can be developed into a modeluseful prototype that will 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 worldWorld over the next several years. Approximately 45% of our Nu Skin personal care products have been introduced in Brazil, along with 41 locally produced products.Distribution
DistributionOverview.Overview. The foundation of our sales philosophy and distribution system is network marketing. Except in Mainland China, we currently sell substantially all of our products through independent distributors who are not our employees. 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.•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; and11-13-•as compared to other distribution methods, our distributors can provide customers higher levels of service and attention by, among other things, following up on sales to ensure proper product usage and customer satisfaction and to encourage repeat purchases.distributors.distributors and sales representatives. Growth in sales volume requires an increase in the productivity of distributors and/or growth in the total number of distributors.distributors and sales representatives. As of December 31, 2002,2003, we had approximately 566,000678,000 active distributors of our products and services.services, including 117,000 preferred customers in Mainland China. An active distributor is a distributor or preferred customer who has purchased products for resale or personal consumption during the previous three months. Approximately 28,00029,000 of these active distributors had achieved "executive level" status.“executive level” status, including 3,100 employed full-time sales representatives in Mainland China. Executive level distributors are the 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 Mainland China, 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. 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 RegionRegion19981999200020012002North Asia17,31114,60114,96816,89117,668Southeast Asia5,0913,4193,0444,5406,536North America(1)--2,5472,6322,4192,693Other Markets3794387379891,018 Total22,78121,00521,38124,83927,915Total Number of Executive Distributors by Region
Region 1999 2000 2001 2002 2003 North Asia 14,601 14,968 16,891 17,668 17,013 Greater China 2,988 2,609 2,698 3,564 5,991 (1) North America 2,547 2,632 2,419 2,693 2,861 South Asia/Pacific 431 435 1,842 2,972 2,175 Other Markets 438 737 989 1,018 1,091 Total 21,005 21,381 24,839 27,915 29,131 (1) North America was not partFollowing the opening of our operations until March 1999 when we terminated our license agreement with one of our private affiliates, thereby acquiring its North American operations.retail business in Mainland China during 2003, executive distributors includes 3,100 employed, full-time sales representatives.. We rely on our distributors to recruit and sponsor new distributors of our products. While we provide product samples, brochures, magazines and other sales materials at cost, distributors are primarily responsible for recruiting and educating new distributors with respect to products, the Global Compensation Plan and how to build a successful distributorship.12Plan.Plan. We believe that one of our key competitive advantages is our Global Compensation Plan. Under our Global Compensation Plan, distributors are paid consolidated monthly commissions in the distributor’s home country, in local currency, for their 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 Mainland China, our sales employees within Mainland China do not participate in the Global Compensation Plan, but are compensated according to a retail sales model established for that market. Additionally, while distributor leaders are compensated forbased on sales activity of preferred customers and sales employees in Mainland China, sales in Mainland China do not accrue to satisfy applicable sales volume requirements within the Global Compensation Plan.ourthe sale of an individual Nu Skin andor Pharmanex productsproduct can reach approximately 58% of an individual product’sthe wholesale price. However,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 havehas typically averaged approximately 40%41% to 43% of product revenue over the past ten years.. We believe that our commission payout as a percentage of total sales is among the most generous paid by major direct selling companies. Commissions are paid on the sales of Big Planet products and services as a percentage of our gross margins on those products. For Big Planet products and services purchased directly from our third party vendors by our distributors or customers, the commission is based on the total commission Big Planet receives from third parties with respect to those sales. Accordingly, the commissions paid to distributors of Big Planet products and services are less as a percentage of revenue than for our Nu Skin and Pharmanex products.Incentives.Incentives. Based upon management’s knowledge of our competitors’ distributor compensation plans, we believe that the 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.. 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 of13web basedweb-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 sponsoring activities. Because of our efficient distribution system, we do not believe that most of our distributors maintain a significant inventory of our products.. 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. In Japan, approximately 23% of our sales during 2002 occurred over the Internet. In addition, weWe 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 more than 30 global markets.. 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. In addition, we generally participate in local direct selling associations and agree to abide by the policies required of those associations. 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.14•document retail sales or customer connections to established numbers of retail customers; and•sell and/or consume at least 80% of personal sales volume.. 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 useruser’s return privilege is in the discretion of the distributor. Our distributors however, 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 2002. 2003.Payment.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 when orders are personally picked up by one of our distributors.Competition
. 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. While we believe that consumers appreciate the convenience of ordering products from home through a sales person or through a catalog, the buying habits of many consumers accustomed to purchasing products through traditional retail channels are difficult to change.Services.Services. The markets for our Big Planet products and services are 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 offering convenient access to a varietydelivering products that are more user-friendly than those of our competitors, developing unique features and product interfaces, partnering with leading technology Internetvendors whose competitive positioning can assist us, and telecommunications services and products at competitive prices with a high level of customer service.leveraging our direct selling channel strengths. The market for technology and telecommunication products is very price sensitive, and many products are offered by our competitors with little or no margin.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.Companies.Companies. We also 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). We15Intellectual Property
Government Regulation
. 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:•impose cancellation/product return, inventory buy backs and cooling off rights for consumers and distributors;•require us or our distributors to register with governmental agencies;•impose reporting requirements; and•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.time to address concern of regulators.time. For example, in South Korea new regulations were recently adopted that, among other things, restrict multi-level marketing companies from imposing certain personal sales quotaquotas to obtain or maintain a distributorship or favorable compensation rates, modify product return requirements so that productproducts must be returned within a shorter period of time, and require thedirect sales companies to show sufficient insurance or guarantee to reimburse customers and/or distributors for cancelled or unfilled orders. We have had to make some modifications to our compensation plan and policies to address some of these new rules. Currently, a significant area of regulatory risk and uncertainty involves our operations in China. Because Mainland China has restrictions on direct selling activities that prevent us from direct selling products through independent contractors, we have implemented a retail store model utilizing an employed sales force. The regulatory environment in Mainland China is complex. Existing regulations are subject to discretionary interpretation by municipal and provincial level regulators. Because of the government’s significant16continuecould cause in the future, an obstruction to cause, a temporary obstruction in our ability to conduct business, including an inability to conduct sales activityand have resulted in a limited number of stores.several cases in minor fines being paid by our Company. Fewer than 10% of our stores in Mainland China have been affected by these temporary obstructions. Nevertheless, if regulators continueIn each of these cases, we have been allowed to take actions that obstructrecommence operations after the government's review. For a more detailed discussion of the risks to our ability to conduct sales activity at these orbusiness associated with our other storesoperations in China, our business could be harmed.please refer to the section below entitled, "Risk Factors".leadled to minor modifications in the method of remuneration for some of our sales employees and the size of the training meetings for sales employees. Additionally, regulators have expressed some concerns about the number of sales employees per store in some locations and have recommended that wemarkets.markets as well as growth in revenue there. We also expect to receive continued guidance and direction as we work with regulators to address their concerns. We anticipate fully complying with the direction we receive as we work to establish a regulatory foundation from which we can build a long termlong-term successful business in Mainland China. Because of the similar experience of direct selleringselling companies in this market, we have expected such reviews and prepared for this level of scrutiny. We believe that such reviews at an early stage in our business will lead to a better understanding of our business in the long term. Additionally, we anticipate that in the next several years, new laws and regulations will be established that we believe will have ana positive impact on our business. In connection with its admission to the World Trade Organization, Mainland China has agreed to establish regulations regarding sales away from fixed locations by December 2004. We are uncertain, however, as to what specific impact these regulations will have on our business there.Nu Skin and Pharmanex 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, and 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. We must also reformulate many products to satisfy other Ministry of Health, Labor and Welfare regulations. In Taiwan, all “medicated” cosmetic and pharmaceutical products require registration. These regulations 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.17The European Parliament recently voted in favor of adopting a Directive onOn August 1, 2003, the EU Food Supplements Directive, aiming to harmonizeharmonize this areaaffect the marketing of legislation in Europe.our Pharmanex products are the proposed Regulation on Nutrition and Health Claims, the amendment of the existing Medicinal Products Directive to include traditional herbal medical products and to extend the definition of “medicinal products” to all pharmacological, immunilogical and metabolic action.distributor practicesalleged 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.Big Planet Regulation. Our Big Planet telecommunications products and services are subject to varying degrees of telecommunications regulation in each of the jurisdictions in the United States as well as in each foreign country in which we offer telecommunications services. In the United States, domestic telecommunications service and international communications services in the United States are subject to the provisions of the Communications Act, as amended by the Telecommunications Act of 1996, and Federal Communications Commission, or the FCC, regulations and rules adopted thereunder, as well as applicable laws and regulations of the various states. Big Planet is registered as a telecommunications provider in all 50 states.18 Our professional employer organization is also subject to various regulations at both national and local levels. As a result, our professional employer organization interfaces with various governmental entities including the Occupational Safety and Health Administration, the Department of Labor, the Immigration and Naturalization Service and the Internal Revenue Service relating to the services it provides.. As a United States entity operating through subsidiaries in foreign jurisdictions, we are subject to foreign exchange control and transfer pricing 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. We believe that we are operating in compliance with all applicable foreign exchange control and transfer pricing laws.Employees
Employees2002,2003, we had approximately 3,950 full7,158 full- and part-time employees, approximately 3503,100 of whom are employed full-time sales representatives in our Mainland China operations. We also had labor contracts with an additional 9,122 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 are 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
StatementsStatements.. 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,”“believe” and similar expressions are intended to identify “forward-looking statements” within the meaning of the Exchange Act.19•Our belief that we could produce or source our personal care products from other suppliers and replace our primary suppliers of Pharmanex products without great difficulty or increased cost;•Our plans to continue developing new products and improving and evolving our existing product formulations;•Our plans to continue to enter and expand new markets and to successfully operate a retail business in China;•Our belief that China will become one of the largest direct selling markets in the world over the next several years and our anticipation that we will be able to successfully navigate the regulatory challenges in this market;•Our plans to launch the scanner in the United States and elsewhere to promote Pharmanex products;•The belief that Eastern Europe will be among the fastest growing direct selling regions in the world and our intended expansion of operations across Eastern Europe; and•Our belief that we are in material compliance with applicable laws and regulations in the countries in which we operate.Risk Factors
Risks Related to Our Business2002,2003, we recognized approximately 86%89% of our revenue in non-Unitedmarkets outside of the United States markets in each market’s respective local currencies.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 57% of our 2003 revenue in Japan, our reported revenue, gross profit and net income will likely be reduced. Our 2003 operating results could be harmed if the Japanese yen weakens from current levels. Given our inability to predict the degree of exchange rate fluctuations, we cannot estimate the effect these fluctuations may have upon future reported results product pricing or our overall financial condition. Although we attempt to reduce our exposure to short-term exchange rate fluctuations by using20over 50%a majority of our business, any adverse changes in our business operations in Japan would harm our business.55%57% of our 20022003 revenue was generated in Japan. Various factors could harm our business in Japan, includingsuch as worsening of economic conditions. Economic conditions in Japan have been poor in recent years and may worsen or not improve. In addition,Many of our competitors have seen their businesses contract in the last few years. The volume of goods sold through the direct selling marketchannel has decreased$22.8$24.5 billion in 20002002, we believe primarily as a result of difficult economic conditions. We believe our growth rate duringoperating results have been negatively impacted in the latter half of 2002 was negatively impactedpast in part because of economic conditions. Continued or worsening economic and political conditions in Japan could further impact our revenue and net income. In addition, our operations in Japanwe also face significant competition from existing and new competitors.competitors in Japan. Our operationsfinancial results would also be harmed if our products, business opportunity or planned growth initiatives fail to retain and generate continued interest and enthusiasm among our distributors and consumers in this market and fail to attract new distributors.market.increase.increase and may even decline.directly for substantiallyto 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 independent distributors. To increase our revenue, we must increase the number of and/or the productivity of our distributors. Although we experienced an increase in executive and active distributors in 2002, we We have experienced periodic declines from time to time in both active distributors and executive distributors in the past. In 2002,Our growth depends upon our active distributors grew by 1.4% while our executive distributors grew by 12.4%. In orderability to continue to grow the business in 2003 and beyond, we believe we will need to be more effective in growingincrease the number of active distributors as well asand executive distributors. However, the number of our active and executive distributors may not increase and could decline once again in the future. WeWhile 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 existing distributorsdistributor leaders to recruit, train and motivate new distributors. Our operating results could be harmed if we and our existing and new business opportunities and products do notdistributor leaders fail to generate sufficient interest in our business to retain existing distributors and attract new distributors.•adverse publicity regarding us, our products, our distribution channel or our competitors;•failure to motivate our distributors with new products;•the public's perception of our products and their ingredients;•the public's perception of our distributors and direct selling businesses in general; and•general economic and business conditions.21If we fail to effectively implement our expansion of operations in China, our business in other markets could be harmed.-24- Distributor excitement about the prospects of participating in China has spurred growth in many of our markets outside of China, particularly in Asia. If our China initiatives fail to meet expectations, or if the risks and uncertainties described herein harm our business or result in any distributor uncertainty or changes in our business plans, our international distributors could become distracted with such issues, be disappointed with lower than expected results, and lose the enthusiasm that has driven recent growth, which would harm our business in markets outside of China. In addition, if we are not able to effectively keep distributors focused on their home markets while they work on participating in China, this could harm our business in these markets.rapidly evolving, and can be subjectively appliedofficials in the Chinese government often exercise discretion in deciding how to interpret and interpreted. Our recently expanded operations, our global direct selling business model, and the participation and activities of non-China distributors in this market has resulted in regulatory scrutiny of our activities, which is not unexpected.apply applicable regulations. We have made some modifications to our business model and policies in response to concerns expressed by governmental authorities.authorities prior to and since we opened for business in January 2003. At times, these reviews and related actions by government regulators have caused, and continuecould cause in the future, obstructions to cause a temporary obstruction in our ability to conduct business, including an inabilityand have resulted in several cases in minor fines being paid by us. Occasionally, we have been asked to conductcease sales activity in a limited numbersome stores while the regulators review our operations. In each of stores.these cases, we have been allowed to recommence operations after the government’s review.non-Chinaof 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. 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. In addition, we continue to be subject to the risk that our foreign distributors may conduct business in China in a prohibited manner and bring about negative media or regulatory actions. Any determination that our operations or activities, or the activities of our foreignemployed sales representatives or distributors living outside of China, are not in compliance with applicable regulations could negatively 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, or other actions, all of which would harm our business and our reputation with Chinese regulators.business.we are not able to hire saleregulators prevent us from hiring sales employees and openor opening new stores in China as quickly as we would like, our ability to grow our business there could be negatively impacted.per store,we could hire in some cities, regulators in a few cities in China haveinitially recommended that we maintain a reasonable level of sales employees per store. If the level of employees per store that regulators determine to be reasonable is less than we anticipate or believe reasonable, or if regulators otherwise impose restrictions on the number of sales employees we may have,hire, our per store salesrevenue could be negatively impacted, and wewhich could be forced to open more stores than we anticipated, which couldreduce our revenue or slow our growth rate in China. RegulatoryAdditionally, 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. If22Restrictions on direct selling activitiesIf we are unable to successfully manage rapid growth in China, require us to employour operations may be harmed.local sales force that markets and sells our products from retail store locations, and we have limited previous experience in managing retail stores or an employed sales force. The current regulatory environment in China prohibitsresult of Chinese regulations prohibiting us from implementing our direct selling distribution model there. As a result, in order to expand in this market,China, we have establishedopened over 100 of our own retail stores and hired approximately 2,500 employees as of March 1, 2003. Operating these retail stores in China involves expenses associated with hiring additional sales personnel, entering into leases for commercial spacea large and maintaining sufficient inventory to supply these stores. We have invested approximately $10 million in expanding the number of retail stores. If our retail model is not successful, we may not recover our investment. We have limited prior experience in managing retail stores or anrapidly growing employed sales force and accordingly, we cannot assure you that we will be able to do so successfully.force. In addition, we must train a large number of employees, most of whom have not previously been traineddue to provide a level of customer service that we are accustomed to providing to our customers. If we are unable to effectively manage our retail stores or employees, our government relations may be compromised and operations in China may be harmed.Because of regulations that require us to locally manufacture products we sellimport restrictions in China, we have invested financial resources in our own manufacturing facility,built and we cannot assure you that we will be successful in managing these operations. Chinese regulations require that we sell locally manufactured products. As a result, we have builtoperate our own manufacturing plant to produce the products that we sell in stores.our stores in China. We have no previousspent approximately $10 million to date building our stores and factory and expect to spend an additional $7 to $10 million in the next year. We have limited experience in operating manufacturing productsfacilities and dealing with an employed sales force, and we cannot assure you that we will be successful in managing these operations. In addition, we have implemented processesable to successfully manage rapid expansion of manufacturing operations and procedures to ensure adequate quality control for our products, but we cannota rapidly growing and dynamic sales force. We also can not assure you that these standardswe 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 met consistentlycompromised and any failure to maintain the quality associated with our brand could harm our reputation and revenue potential.operations in China may be harmed.regulatoryproduction cost issues associated with our planned laser-based scanner could negatively impact the success of our scanner program and our ability to make a sufficient number of scanners available to interested distributors, which could harm our business.announcementintroduction of our plans to introduce a laser-based scanner that measures the levels of caratenoid antioxidants in the skin has generated considerable enthusiasm among some of our distributors, particularly in the United States. We have not had experience in developing, manufacturing and marketing sophisticated technology products such as the scanner and are working on a very short development time table.scanner. As with any new technology, we have experienced delays and technical and production cost issues in developing a large-scale production model that meets required specifications and performs at a consistent level. We are currently only manufacturing 40 to 50 units each week at a cost of approximately $7,500 per unit. If we are unable to timely resolve developmenttechnical issues or otherwise fail to deliver scanners that perform to a standard expected by our distributors or incur any delays in makingif we are unable to make a sufficient number of scanners available to interested distributors at reasonable lease rates, we could dampen distributor enthusiasm and harm our business, particularly in the United States where many distributors have been focusing their marketing activities around the introduction of the scanner. InBecause 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 fails for any reason.23-26-device. One ofdevice, which could adversely impact our distributors recently received an inquiry from the FDA questioning the status of the scanner as a non-medical device. We have been advised by our legal counsel that the scanner is not a medical device. If the FDA were to make a determination or formally assert that the scanner is a medical device, or if it determines that our distributors are using the scanner to make medical claims or diagnosis, the FDA could delay significantly or otherwise inhibit the use of the scannersuccess in the United States. Also, our ability to introduce and use the scanner in some markets outside of the United States may be negatively impacted by local governmental regulations that may apply to tools such asutilizing the scanner. Any delay, restriction or limitation of our anticipated use of this tool caused by regulatory issues could harm our business, particularly in the United States where we have experienced the strongest interest in the scanner.Government regulationGovernmental regulations relating to the marketing and advertising of our products and services, in particular our nutritional supplements, may restrict or inhibit our ability to market and sell these products and could harm our business.products.government regulationgovernmental regulations by numerous domestic and foreign governmental agencies and authorities. These include the FDA, the FTC, the Consumer Product Safety Commission and the United States Department of Agriculture in the United States, State Attorneys General and other state regulatory agencies and the Ministry of Health, Labor and Welfare in Japan along with similar governmentgovernmental agencies in other foreign markets where we operate. We also believe that the regulatory attitude towards dietary supplements in the United States, Japan and other markets is worsening.prohibited. For example, we stopped marketingprohibited, which could harm our productCholestin (the red yeast rice version) as a dietary supplement in the United States because the FDA believedCholestin qualified as a drug and therefore required FDA approval before it could be sold in the United States. Our marketsbusiness.varied regulations concerning product formulation, labeling, packaging and importation. Thesespurred efforts to change existing laws and regulations often require uswith respect to among other things:•reformulate products for a specific market to meet the specific product formulation laws of that country;•conform product labeling to the regulations in each country; and•register or qualify products with the applicable government authority or obtain necessary approvals or file necessary notifications for the marketing of our products. Failure to introduce products or delaysnutritional supplements that, if successful, could result in introducing products could reduce revenuemore restrictive and decrease profitability. Regulators also may prohibit us from making therapeutic claims about products despite research and independent studies supporting these claims. These product claim restrictions could prevent us from realizing the potential revenue fromburdensome regulations. There have been some of our products. Moreover, a number ofrecent injuries and deaths have occurred recently that have been attributed to the use of nutritional supplements that contain ingredients that are controversial.controversial and have generated negative publicity. This publicity has resulted in efforts to adopt new regulations applicable to nutritional supplements that could impose further restrictions and regulatory controls over the nutritional supplement industry. Although we are committed not to not marketingmarket nutritional supplements that contain any stimulants, steroids or other substances that are controversial and 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 these controversial ingredients.24-28-2001 and 2002recent years was due in part to our successful expansion of operations into Singapore, Malaysia and Malaysia.Mainland China. Moreover, our growth over the next several years depends on our ability to successfully introduce our products and our distribution system into new markets, including further development of Mainland China and Eastern Europe. In addition to the regulatory difficulties we may face in accessinggaining 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 China and 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.•the legality of network marketing;•the ingredients or safety of our or our competitors' products;•regulatory investigations of us, our competitors and our respective products;•the actions of our current or former distributors; and•public perceptions of direct selling businesses generally.usour entering into a consent decree with the FTC. Distributors often desire to enter a market before we have received approval to do business in order to gain an advantage in the market. Improper distributor activity in new geographic markets can be particularly harmful to our ability to ultimately enter these markets, which is of a particular concern in China, given the current restrictions on direct selling activities and the political climate in that market.FTC as described below.25-29- in 2002, 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 loss of key research and development staff from our divisions, the termination of third-partythird party research and collaborative arrangements, proprietary protections of competitors that may limit our ability to offer comparable products and any failure to anticipate changes in consumer tastes and buying preferences. any of our distributors are not in compliance with existing laws or regulations could potentially harm our business. Even if governmental actions do not result in rulings or orders, they potentially could create negative publicity. Negative publicity could detrimentally affect our efforts to recruit or motivate distributors and attract customers and, consequently, could reduce revenue and net income.decreesagreements with the FTC and other state regulatory agencies relating to investigations of our distributors’ product claims and practices. These investigations centered around allegedly 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 separatesubsequent action in the mid 1990smid-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.government initiatedgovernment-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 net operations. We have As of December 31, 2003, we had approximately 566,000678,000 active distributors and 28,00029,000 executive distributors. Approximately 431385 distributors currently occupy the highest distributor level under our Global Compensation Plan. 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.26•impose order cancellations, product returns, inventory buy-backs and cooling-off rights for consumers and distributors;•require us or our distributors to register with governmental agencies;•impose reporting requirements to regulatory agencies; and/or•required us to ensure that distributors are not being compensated based upon the recruitment of new distributors.fact basedfact-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.non-Unitedmarkets outside of the United States markets could reduce our revenue and harm our competitive position. In some countries,27such as China, government regulations may prevent importation of our products altogether or require us to locally manufacture or source a significant portion of our products.intercompanyinter-company transfer pricing policies or change their laws in a manner that could increase our effective tax rate or otherwise harm our business.United StatesU.S. company doing business in international markets through our subsidiaries, we are subject to foreign tax and intercompanyinter-company 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 intercompanyinter-company fund transfers. If regulators challenge our corporate structure, transfer pricing mechanisms or intercompanyinter-company 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 42%, increases disproportionately to the rest of our business, our effective tax rate may increase. We cannot assure you that we will continue operating in compliance with all applicable customs, exchange control and transfer pricing laws, despite our efforts to be aware of and comply with such laws. If these laws change, we may need to adjust our operating procedures and our business may suffer.LosingThe loss of suppliers or rights to sell products could harm our business.45%39% of our Nu Skin personal care products. We currently rely on two unaffiliated suppliers, one of which supplies 41%approximately 39% and the other of which supplies 26%approximately 28% of our Pharmanex nutritional supplements. We obtain some of our nutritional supplements from sole suppliers in China. We also license the right to distribute some of our products from third parties. Because of the concentrated nature of our suppliers and manufacturers, the loss of any of these suppliers or manufacturers, or the failure of suppliers to meet our needs, could restrict our ability to produce or distribute some products and harm our revenue as a result.28whichthat are beyond our control, including but not limited to variations incontrol.quarterly operating results, market trends related to our productsClass A common stock traded as low as $7.10 per share and economic and currency exchange issues in the foreign markets we operate.are: include:•fluctuations in our quarterly operating results;•the sale of shares of Class A common stock by our original or significant stockholders;•general trends in the market for our products;•acquisitions by us or our competitors;•economic and/or currency exchange issues in those foreign countries in which we operate;•changes in estimates of our operating performance or changes in recommendations by securities analysts; and29•general business and political conditions. In addition, we have publicly disclosed our five-year growth projectionsthese long-term projections are inherently risky and uncertain. If we fail to meet the metrics contained in those projections, our stock price may be harmed.The holders of our Class B common stockaffiliates, control over 90%approximately 44% of the combined stockholder voting power, and third parties willtheir interests may be unabledifferent from yours.gain control of our company through purchases of Class A common stock. TheOctober 2003, the original stockholders of our company,Company, together with their family members and affiliates, collectively owned more than 90% of the combined voting power of the outstanding shares of Class A common stock and Class B common stock. These stockholders held all of the outstanding Class B common stock, which has ten-to-one voting privileges over shares of the Class A common stock. In connection with a stock repurchases transaction in October 2003, these stockholders agreed to convert all of their Class B common stock into Class A common stock.controlinfluence the election and removal of the board of directors and, as a result, future direction and operations withoutof our company. Currently, these stockholders own approximately 44% of the supporting votevoting power of any other stockholder. Consequently, these original stockholders, together with their family members and affiliates, are able to controlthe outstanding shares of Class A common stock. Accordingly, they may influence decisions aboutconcerning 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. These stockholders own all outstanding shares of Class B common stock, which have ten-to-one voting privileges over shares of Class A common stock. They may make decisions that are adverse to your interests. Currently, these stockholders and their affiliates collectively own shares that represent more than 90% of the combined voting power of the outstanding shares of both classes of common stock. As long as these stockholders are majority stockholders, third parties will not be able to obtain control of our company through open-market purchases of shares of our Class A common stock.Approximately 33 million shares, or 41% of our total outstanding shares, are restricted from immediate resale but may be sold into the market in the near future, which could affect the market price of our Class A common stock.stock and the Class B common stock that are convertible into Class A common stock. Some of the original stockholders have been actively selling shares on the open market. Additional sales by these stockholders or aAny decision by any of the otherour principal stockholders to aggressively sell their shares could depress the market price of our Class A common stock.DecemberJanuary 31, 2002,2004, we had 81,070,63970,974,819 shares of common stock outstanding. All of these shares are freely tradeable,tradable, except for approximately 3328 million shares held by the certain stockholders who participated in our recent public offering. TheseOctober 2003 recapitalization transaction wherein we repurchased approximately 10.8 million of our shares will become eligiblefrom our original stockholders and their affiliates and facilitated their resale of approximately 6.2 million additional shares to sell in the public market in July 2004.a group of private equity investors. Under the lock-up arrangements, theseterms of our repurchase, our original stockholders agreed that they will not sell or otherwise dispose of any shares of Class A common stock on the open market or securities convertible into or exchangeable for our Class A common stock, without the prior written consent of the underwriters and thea majority of our independent directors prior to July 26, 2004.October 22, 2005. This agreement is subject to the following exceptions:•charitable donations in the second year of up to 500,000 shares in the aggregate by these stockholders to a charitable organization;• of common stock to these stockholders from fixed charitable remainder trusts established by the selling stockholder;30•transfers of common stock to immediate family members or related persons or estate planning entities;•sales of shares of which the selling stockholder is deemed to have beneficial ownership but whose interest presents no opportunity to profit from the shares being sold; and•transfers of shares by lenders under an existing pledge of shares as security for a loan of approximately $20 million to Nedra D. Roney in the case of a default under the loan or in connection with a refinancing thereof. We have also entered into a separate lock-up arrangement with the original shareholders pursuant to which these shareholders agreean existing call option for 2 million shares granted by one of our original stockholders, Sandra Tillotson, or an existing put option for up to 3.5 million shares obtained by Ms. Tillotson in a recent transaction; andthecertain volume restrictions set forth under Rule 144 on the sale of shares, which shares would otherwise be eligible for unlimited sale under the securities laws.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.ITEM 2. PROPERTIES ITEM 2. PROPERTIESitsour existing markets. The following table summarizes, as of December 31, 2002,2003, our major leased office and distribution facilities:Location Function Approximate Square Sq. Ft.FeetProvo, Utah(1) Distribution center 198,000 Provo, Utah*Utah(1)Distribution centerCorporate offices198,000125,000Provo, Utah*Corporate offices125,000Los Angeles, California Warehouse 35,000 Yokohama, Japan Warehouse 40,000 Yokohama, JapanWarehouse40,000Tokyo, Japan Call center/distribution center 56,000 Tokyo, Japan Central office/distribution center 28,000 Taipei, Taiwan Central office/distribution center 37,000 Taoyuan, Taiwan Warehouse/distribution center 47,000 Ontario, Canada Office/warehouse 31,000 Ontario, CanadaVenlo, NetherlandsOffice/warehouseWarehouse/offices31,00020,000Venlo, NetherlandsWarehouse/offices20,000Seoul, South Korea Corporate offices 29,000 Shanghai, China Manufacturing 69,000 Shanghai,Zhejiang Province, ChinaManufacturing 69,00016,140(1) These facilities are leased from related parties. * These facilities are leased from related parties.-36-31 We also operate an extraction and purification facility located in Zhejiang Province, in China, where we produce extracts for ourTeGreen 97 andReishi products. We currently also lease approximately 140,000130,000 square feet of office and retail space in Mainland China in more than 120100 different locations in connection with our retail business in this market.market, as well as approximately 151,000 square feet of administrative office space.ITEM 3. LEGAL PROCEEDINGS ITEM 3. LEGAL PROCEEDINGS In January 2000, We are not currently a derivative lawsuit captionedKaren Kindt, on behalf of Nu Skin Enterprises, Inc. v. Blake Roney, et. al. was filed in the Court of Chancery in the State of Delaware in and for New Castle County against certain membersparty nor is any of our boardproperty currently the subject of directors alleging a breach of fiduciary duty and self-dealing in connection with our acquisition of Nu Skin International in 1998 and the termination of the license agreements with Nu Skin USA, Inc. and acquisition of Big Planet in 1999. Our board of directors appointed a special litigation committee to investigate the validity of the complaint. After an exhaustive and thorough review of the allegations, the special committee made a report to our board of directors. Based on the findings by the special committee, we have moved to dismiss the complaint. The motion is pending. In January 2003, we filed a memorandum in support of our motion to dismiss.any material pending legal proceedings.ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
2002.2003.32ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Our Class B common stock has no established trading market. The following table is based upon the information available to us and sets forth the range of the high and low sales prices for our Class A common stock for the quarterly periods during 20012002 and 20022003 based upon quotations on the NYSE.Quarter EndedHighLowMarch 31, 2001$ 8.94$ 5.25June 30, 20018.506.90September 30, 20018.696.30December 31, 20018.836.55Quarter Ended High Low March 31, 2002 $ 11.19 $ 7.10 June 30, 2002 14.86 10.01 September 30, 2002 14.25 8.50 December 31, 2002 13.09 9.67 Quarter EndedHighLowMarch 31, 2002$ 11.19$ 7.10June 30, 200214.8610.01September 30, 200214.258.50December 31, 200213.099.67Quarter 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 28, 200327, 2004, was $10.52.$19.15. The approximate number of holders of record of our Class A common stock and Class B common stock as of February 28, 200327, 2004 was 818 and 37, respectively.815. 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 have a small number of outstanding Class B shares held by one individual that were not converted to Class A shares as$0.05$0.06 per share dividend for all classes of common stock in March, June, September and December of 2001,2002, and a $0.06$0.07 per share quarterly dividend for all classes of common stock in March, June, September and December of 2002. In February 2003, the2003. The board of directors declared a quarterly cash dividend of $0.07$0.08 per share for all classes of common stock.share. The quarterly cash dividend will be paid on March 26, 2003,24, 2004, to stockholders of record on March 7, 2003.5, 2004. Management believes that cash flows from operations will be sufficient to fund this and future dividend payments, if any.3320022003 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 7,005,000 (1) $ 10.68 4,952,000 (2) Equity compensation plans not approved
by security holders -- $ -- -- Total 7,005,000 $ 10.68 4,952,000 Plan Category(1)NumberDoes not include information for options assumed in connection with acquisitions by us of securities tobe issuedother companies. As of December 31, 2003, a total of 66,000 shares of Class A common stock were issuable upon exercise
of outstandingsuch assumed options,warrants and rights(a)Weighted-average
at a weighted-average exercise price ofoutstanding options,warrants and rights(b)Numberper share of securities$7.62. All of these shares correspond to options we assumed in our acquisition of Pharmanex.remaining(2) Consists of 4,819,000 shares available for
future issuance under equitycompensation plans(excluding securities reflectedin column (a))(c)Equity compensation plans approved by security holders6,785,000(1)(2)$ 10.881,726,000(4)Equity compensation plans not approved by security holders251,000(3)$ 1.87-- Total7,036,000$ 10.561,726,000(1)Includes 71,000 shares issuable under the Generation Health Holdings, Inc.Company's Second Amended and Restated 1996 Stock Incentive Plan and Scientific Advisory Board Option Plan which were assumed by us when we acquired Generation Health Holdings, Inc., the parent of Pharmanex. These plans were approved by the stockholders of Generation Health Holdings, Inc.(2)Includes 707,000133,000 shares issuable upon exercise of options granted by Nu Skin International, Inc.available for future issuance under the 1996 Distributor Stock Option Plan. We assumed this plan when we acquired Nu Skin International. We had previously granted an option to Nu Skin International prior to our public offering which was allocated to distributors of Nu Skin International pursuant to the plan. This plan was approved by the stockholders of Nu Skin International.(3)Consists of an option grant to an officer of our company prior to our initial public offering, which is currently fully vested.(4)Currently 152,000 shares are remaining for issuance under theCompany's 2000 Employee Stock Purchase Plan. The authorized shares purchasable by participants under the 2000 Employee Stock Purchase Plan may be increased by 75,000 shares each year beginning in 2003 throughand ending in 2009. In February 2003, our board of directors approved a 5 million share increase in our exisiting stock incentive plan subject to stockholder approval at our annual meeting of stockholders.34-38-ITEM 6. SELECTED FINANCIAL DATA ITEM 6. SELECTED FINANCIAL DATA1998, 1999, 2000, 2001, 2002 and 20022003 have been derived from the audited consolidated financial statements.Year Ended December 31,19981999200020012002(U.S. dollars in thousands, except per share data)Income Statement Data:Revenue$ 913,494$ 894,249$ 879,758$ 885,621$ 964,067Cost of sales188,457151,681149,342178,083190,868Cost of sales - amortization of inventory step-up21,600--------Gross profit703,437742,568730,416707,538773,199Operating expenses: Distributor incentives331,448346,951345,259347,452382,159 Selling, general and administrative202,150265,770294,744288,605285,229 In-process research and development13,600-------- Total operating expenses547,198612,721640,003636,057667,388Operating income156,239129,84790,41371,481105,811Other income (expense), net13,599(1,411)5,9938,380(2,886)Income before provision for income taxes and minority interest169,838128,43696,40679,861102,925Provision for income taxes62,84041,74234,70629,54838,082Minority interest(1)3,081--------Net income(2)$ 103,917$ 86,694$ 61,700$ 50,313$ 64,843Net income per share: Basic$ 1.22$ 1.00$ 0.72$ 0.60$ 0.79 Diluted$ 1.19$ 0.99$ 0.72$ 0.60$ 0.78Weighted average common shares outstanding (000s): Basic84,89487,08185,40183,47281,731 Diluted87,01887,89385,64283,91583,128Cash Flow Data:Cash provided by (used in): Operating activities$ 118,560$ 30,299$ 43,388$ 74,417$ 111,116 Investing activities(46,053)(43,988)(22,970)(15,126)(26,531) Financing activities(48,684)(73,484)(65,292)(33,765)(32,490)Balance Sheet Data(at end of period):Cash and cash equivalents$ 188,827$ 110,162$ 63,996$ 75,923$ 120,341Working capital164,59774,561122,835152,513180,639Total assets606,433643,215590,803582,352611,838Short-term debt14,54555,889------Long-term debt138,73489,41984,88473,71881,732Stockholders’ equity254,642309,379366,733379,890386,486Supplemental Operating Data(at end of period):Approximate number of active distributors(3)470,000510,000497,000558,000566,000Number of executive distributors(3)22,78121,00521,38124,83927,915Year Ended December 31, 1999 2000 2001 2002 2003 (U.S. dollars in thousands, except per share data) Income Statement Data: Revenue $ 894,249 $ 879,758 $ 885,621 $ 964,067 $ 986,457 Cost of sales 151,681 149,342 178,083 190,868 176,545 Gross profit 742,568 730,416 707,538 773,199 809,912 Operating expenses: Selling expenses 346,951 345,259 347,452 382,159 407,088 General and administrative expenses 265,770 294,744 288,605 285,229 289,925 Restructuring and other charges -- -- -- -- 5,592 Total operating expenses 612,721 640,003 636,057 667,388 702,605 Operating income 129,847 90,413 71,481 105,811 107,307 Other income (expense), net (1,411 ) 5,993 8,380 (2,886 ) 432 Income before provision for income taxes 128,436 96,406 79,861 102,925 107,739 Provision for income taxes 41,742 34,706 29,548 38,082 39,863 Net income(1) $ 86,694 $ 61,700 $ 50,313 $ 64,843 $ 67,876 Net income per share: Basic $ 1.00 $ 0.72 $ 0.60 $ 0.79 $ 0.86 Diluted $ 0.99 $ 0.72 $ 0.60 $ 0.78 $ 0.85 Weighted average common shares outstanding (000s): Basic 87,081 85,401 83,472 81,731 78,637 Diluted 87,893 85,642 83,915 83,128 79,541
Balance Sheet Data (at end of period): Cash and cash equivalents $ 110,162 $ 63,996 $ 75,923 $ 120,341 $ 122,568 Working capital 74,561 122,835 152,513 180,639 143,568 Total assets 643,215 590,803 582,352 611,838 623,747 Current portion of long-term debt 55,889 -- -- -- 17,915 Long-term debt 89,419 84,884 73,718 81,732 147,488 Stockholders' equity 309,379 366,733 379,890 386,486 290,248 Supplemental Operating Data (at end of period): Approximate number of active distributors(2) 510,000 497,000 558,000 566,000 678,000 Number of executive distributors(2) 21,005 21,381 24,839 27,915 29,131 (1) Minority interest represents the ownership interests in Nu Skin International held by individuals who are not immediate family members of the majority-interest holders. We purchased the minority interest as part of our acquisition of Nu Skin International.(2)For 1998, net income includes a non-recurring charge of $14 million due to the write-off of in-process research and development as a result of our acquisition of Pharmanex. In January 2002, we adopted SFAS No. 142, "Goodwill and Other Intangible Assets." Assuming no amortization35 $107 million, $93 million, $68 million and $57 million for each of the years ended December 31, 1998, 1999, 2000, and 2001, respectively.(3)(2)Active distributors are those distributors who were resident in the countries in which we operated and who purchased products during the three months ended as of the date indicated. An executive distributor is an active distributor who has achieved required personal and group sales volumes. Following the opening for retail business in Mainland China during 2003, active distributors includes 117,000 preferred customers and executive distributors includes 3,100 employed, full-time sales representatives. 36-39-ITEM 77.MANAGEMENT'SMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSconsolidated financial statementsConsolidated Financial Statements and related notesNotes thereto, which are included in this Annual Report.Report on Form 10-K.Overview
Overviewcompany that developscompany. We develop and distributesdistribute premium-quality, innovative personal care products and nutritional supplements whichthat are sold worldwide under the Nu Skin and Pharmanex brands. In addition, we offer distributor related businessWe also market technology products and services and a line of home care products which are sold under the Big Planet brand. We sell our products throughhad revenue of $986 million in 2003 and a global network of approximately 566,000678,000 active independent distributors. TheseApproximately 29,000 of our active distributors have achieved executive distributor status under our Global Compensation Plan. Our executive distributors play an important leadership role in our distribution network and are critical to the growth and profitability of our business. 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 theour products and by providing personalized customer service. Through 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 portfolio of premium products. We are able to attract and motivate high-caliber independent distributors because of our focus on developing innovative products, our attractive global compensation system and our advanced technological distributor support.Year Ended December 31, Revenue by Region 2001 2002 2003 (U.S. dollars in millions) North Asia $ 553.9 63% $ 593.9 62% $ 617.7 63% Greater China 93.4 10 104.9 11 135.5 14 North America 155.9 18 145.9 15 122.8 12 South Asia/Pacific 56.9 6 91.1 9 75.8 8 Other Markets 25.5 3 28.3 3 34.7 3 $ 885.6 100% $ 964.1 100% $ 986.5 100% The majorityInformation concerning the number of active and executive distributors for the past three years is provided below under the heading “Distributor Information.” Because we distribute almost all of our revenue is realizedproducts through our independent distributors, our failure to retain our existing distributors and recruit additional distributors could have an adverse effect on our revenue.markets outsideMainland China where we are not allowed to operate using our direct selling model and we continue to be subject to regulatory scrutiny, uncertainty regarding the status of our Pharmanex Biophotonic Scanner as a non-medical device in the United States and is translated into U.S. dollars from each market's local currency 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 "ResultsJapan, and efforts to enact more stringent laws and regulations related to nutritional supplements as a result of Operations," which disclose distributor incentives and other costsadverse publicity related to deaths associated with generatingephedrine, a supplement we have never marketed.aggregate revenue presented.Year Ended December 31,Region200020012002(U.S. dollars in millions)North Asia$ 585.4$ 553.9$ 593.9Southeast Asia119.5150.3196.0North America155.8155.9145.9Other Markets19.125.528.3$ 879.8$ 885.6$ 964.1 Revenue generated in North Asia represented 62%majority of total revenue generated during the year ended December 31, 2002. Our operations in Japan generated 89% of the North Asia revenue during the same period. Revenueour products from Southeast Asia operations represented 20% of total revenue generated during the year ended December 31, 2002. Our revenue in Southeast Asia includes revenue from Singapore, where we commenced operations in December 2000, and Malaysia, where we commenced operations in November 2001. Revenue generated in North America represented 15% of total revenue generated during the year ended December 31, 2002. Our operationsmanufacturers located in the United States generated 94% of the North America revenue during that period.third-partythird party vendors, generally in U.S. dollars, and the freight cost of shipping these products to distributors, as well as import duties for the products. Cost of sales also includes the cost of sales materials sold to distributors at or near cost. Sales materials sold to distributors at or near cost are generally purchased in local currencies. Additionally, our technology and telecommunications products and services carry a significantly lower gross margin than our personal care and nutritional products. As the sales mix changes between product categories and sales materials, cost of sales and gross profit may fluctuate to some degree due primarily to the margin on each product line. Also, as currencyBecause we purchase a significant majority of our goods in U.S. dollars and recognize revenue in local currencies, we are subject to exchange rates fluctuate,rate risks in our gross margin will fluctuate.margins.37 Distributor incentives, Selling expenses (previously referred to as distributor incentives), classified as operating expenses, are our most significant expense. Distributor incentivesOur global sales compensation plan is an important factor in our ability to attract and retain distributors. Selling expenses are paid to several levels of distributors on each product sale. The amount of the incentive paid varies depending on the purchaser’s position within our Global Compensation Plan. Distributor incentivesSelling expenses are paid monthly and are based upon a distributor’s personal and group salesproduct volumes, as well as the group salesproduct volumes of up to six levels of executive distributors in their downline sales organizations. Distributors also have the opportunity to make retail profits by selling the products they purchase 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 to their customers and do not recognize any revenue or commission expense from these retail sales by distributors to their retail customers. In some markets, we allow individuals who are not distributors to buy products directly from us at preferred prices. We pay commissions to the referring distributors and sales employees on these sales made directly by us to the “preferred customers.” Small fluctuations occur in the amount of incentives paid as the network of distributors actively purchasing products changes from month to month. However, due to the size of our distributor force of approximately 566,000678,000 active distributors, the fluctuation in the overall payout is relatively small. The overall payout averageshas typically averaged from 41% to 43% of global product sales. We also make modifications and enhancements to our compensation plan to help motivate distributors and develop leadership characteristics, which can have an impact on selling expenses. Sales materials and starter kits are not subject to distributor incentives.selling expenses. We previously referred to Selling,-41-expensesexpenses) include wages and benefits, depreciation and amortization, rents and utilities, travel, promotion and advertising including costs of distributor conventions, which are expensed in the period in which they are incurred, research and development, professional fees and other operating expenses. See Note 2The most significant portion of our “Consolidated Financial Statements”general and administrative expenses is labor expenses, which accounts for a descriptionmajority of significant accounting policies including implementation of Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwillour total general and Other Intangible Assets.”administrative expenses.countriesjurisdictions in which we operate. For example, statutory tax rates are 16% in Hong Kong, 25% in Taiwan, 31%30% in South Korea, 46% in Japan and 42%33% in Japan.Mainland China; however, we are currently benefiting from a tax holiday in Mainland China. We are subject to taxation in the United States at a statutory corporate federal tax rate of 35% making our overall tax rate effectively 37%.and we also pay taxes in various states. However, we receive foreign tax credits in the United States for the amount of foreign taxes actually paid in a given period, which are utilized to reduce taxes in the United States to the extent allowed. We have historically experienced high effective foreign tax rates in comparison to the overall effective tax rate, which is due to the impact of: (1) foreign activities with pre-tax losses that provide a tax benefit in the United States, but not in the foreign jurisdictions; (2) higher tax rates in certain foreign jurisdictions, particularly Japan, which accounts for a significant portion of the foreign pre-tax income each year; and (3) the effect of foreign withholding taxes, which factor into the total tax provision, but are not based on income. We experienced a higher foreign tax rate in 2003 compared to 2002 and 2001 due to reduced taxable foreign income, coupled with consistent foreign withholding taxes, which are non-income based taxes. Our effective U.S. tax rates in comparison to our overall effective tax rate are lower due to the impact of applicable foreign tax credits in the U.S. income tax expense breakdown. We operate From September 1999 to August 2003, we operated a professional employer organization that outsourcesoutsourced personnel and benefit services to small businesses in the United States. We sold the professional employer organization during the third quarter of 2003. Revenue for the professional employer organization consistsconsisted of service fees paid by its clients. We currently have no intention to launch our professional employer organization service through our distributors in the foreseeable future. For our professional employer organization, cost of sales includesincluded the direct costs, such as salaries, wages and other benefits, associated with the worksite employees.Critical Accounting Policies
assets and accounting for the impact of foreign currencies.assets. In each of these areas, management makes estimates based on historical results, current trends and future projections.Revenue.Revenue.We recognize revenue when products are shipped, which is when title passes to our independent distributors. WeWith 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 5.0%5% of gross sales. A reserve for product returns is accrued based on historical experience. As We classify all selling discounts as a reductionJanuary 1, 2002, we adopted EITF 01-09, which relates to the classification in the Statement of Income of certain promotional items. The impact of the adoption of EITF 01-09 did not have a material impact on our financial statements. In the event that certain expenses, including our distributor incentives, were deemed to be reductions of revenue rather than operating expenses, our reported revenue would be reduced as would our operating expenses. However, since our global distributor compensation planrevenue. Our Global Compensation Plan for our distributors doesis focused on remunerating distributors based upon the selling efforts of the distributors and their downline, and not provide rebates or selling discounts totheir personal purchases.38distributors who purchase our products and services, we believe that no adjustment to reported revenue and operating expenses is necessary.affiliates and us.affiliates. Deferred tax assets and liabilities are created in this process. As of December 31, 2002,2003, we have net deferred tax assets of $49.2$74.1 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 assetassets in the future, an adjustment to the deferred tax assetassets would be charged to earnings in the period such determination was made.We adoptedUnder the provisions of SFASStatements of Financial Accounting Standards No. 142 “Goodwill("SFAS 142"), "Goodwill and Other Intangible Assets” effective January 1, 2002.Assets," our goodwill and intangible assets with indefinite useful lives are no longer amortized, but instead are tested for impairment at least annually. In addition, our intangible assets with definite lives are recorded at cost and are amortized over their respective estimated useful lives to their estimated residual vales, and are reviewed for impairment in accordance with SFAS No. 142 no longer requires the amortization of goodwill and other indefinite lived intangibles. As a result, operating results144, "Accounting for the year ended December 31, 2002 were impacted by a $10.5 million eliminationImpairment or Disposal of such amortization. AsLong-Lives Assets" (Note 5).December 31, 2002, we had approximately $158 million of unamortized goodwill and other indefinite-lifeour intangible assets. UnderWith the provisionsimplementation of SFAS No. 142, we are requireddetermined certain intangible assets 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 amountindefinite lives based upon our analysis of the impairment as an operating expense in the period in which it is identified.Foreign Currency Fluctuations. We operate in more than 30 countriesrequirements of SFAS 141 and generate the majority of our revenue and income in foreign currencies in international markets. Consequently, significant fluctuations in foreign currencies, particularly the Japanese yen, will have an impact on reported results. We seek to reduce our exposure to fluctuations in foreign currency exchange rates through intercompany loans of foreign currency, our Japanese yen denominated debt, and the use of derivative financial instruments to hedge certain forecasted transactions142 as well as receivablesan independent third party evaluation of such lives, which was conducted in 2001. These intangible assets include our trademarks and payables denominatedtrade names, our distributor network, and our marketing rights to operate the Nu Skin business in various foreign currencies. We currently accountmarkets. In connection with a registration statement we filed in October 2003, the Staff of the Securities and Exchange Commission has commented on and sought additional support for derivative financial instruments in accordance with SFAS No. 133, “Accounting for Derivative Instrumentsthe indefinite life designation of these assets. This review is on-going and Hedging Activities.” Weif it is determined that any of these assets has a finite life, we would amortize the value of that asset over the remainder of such finite life, which annual amortization expense we do not utilize derivatives for trading or speculative purposes. Hedge effectiveness is documented, assessed and monitored.believe would be material to our operating results. The amortization expense would be a non-cash expense that would not impact the Company’s cash flow from operations.39-43-Results of Operations
Year Ended December 31, 2001 2002 2003 Revenue 100.0 % 100.0 % 100.0 % Cost of sales 20.1 19.8 17.9 Gross profit 79.9 80.2 82.1 Operating expenses: Selling expenses 39.2 39.6 41.3 General and administrative expenses 32.6 29.6 29.4 Restructuring and other charges -- -- 0.5 Total operating expenses 71.8 69.2 71.2 Operating income 8.1 11.0 10.9 Other income (expense), net .9 (.3 ) -- Income before provision for income taxes 9.0 10.7 10.9 Provision for income taxes 3.3 4.0 4.0 Net income 5.7 % 6.7 % 6.9 % 2003 Compared to 2002
Year Ended2002 2003 Change Japan $ 529.8 $ 558.7 5 % South Korea 64.1 59.0 (8 ) North Asia total $ 593.9 $ 617.7 4 2002 2003 Change Taiwan $ 78.9 $ 73.1 (7 %) Mainland China 2.0 38.5 1,825 Hong Kong 24.0 23.9 -- Greater China total $ 104.9 $ 135.5 29 200020012002Revenue100.0%100.0%100.0%Cost of sales17.020.119.8Gross profit83.079.980.2Operating expenses: Distributor incentives39.239.239.6 Selling, general and administrative33.532.629.6Total operating expenses72.771.869.2Operating income10.38.111.0Other income (expense), net.7.9(.3)Income before provision for income taxes11.09.010.7Provision for income taxes4.03.34.0Net income7.0%5.7%6.7%2002 2003 Change United States $ 136.6 $ 113.4 (17 %) Canada 9.4 9.4 -- North America total $ 146.0 $ 122.8 (16 ) 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 ) 2002 2003 Change Europe $ 25.6 $ 31.9 25 % Latin America 2.7 2.8 4 Other Markets total $ 28.3 $ 34.7 23 2002 Compared to 2001
Southeast AsiaSouth Asia/Pacific regions as discussed below, which was somewhat offset by the decline in the North America region. Excluding the impact of changes in exchange rates, we experienced growth of 10% for 2002 compared to the prior year. Successful new product introductions, the addition of Singapore and Malaysia in the last two years and distributor interest surrounding our expansion of retail operations in Mainland China contributed to revenue growth in 2002.Revenue inNorth Asia. The following table sets forth revenue for the North Asia increased 7% to $593.9 millionregion and its principal markets (U.S. dollars in 2002 from $553.9 million in 2001. In Japan, revenue increased 4% to $529.7 million in 2002 from $508.1 million in 2001.millions):2001 2002 Change Japan $ 508.1 $ 529.8 4 % South Korea 45.8 64.1 40 North Asia total $ 553.9 $ 593.9 7 In South Korea, revenue increased 40% to $64.1 million in 2002 from $45.8 million in 2001. In local currency, revenue in South Korea increased 35%. Revenue growth in South Korea was driven by a 22% increase in executive distributors as well as successful product introductions. Our revenue growth in South Korea, which grew 67% in local currency in 2001, slowed in the second half of 2002 as a result of increased government regulations and political changes as well as weakening in the overall direct selling industry and the economy. Infourth quarter, local currency revenueGreater China region and its principal markets (U.S. dollars in Japan and South Korea was 4% and 5% higher, respectively, compared to the fourth quarter of 2001. Over our ten year history in Japan, the economy of Japan has been stagnant. While such economic times may benefit recruitment of new distributors, more severe economic challenges could negatively impact overall revenue.millions):2001 2002 Change Taiwan $ 70.2 $ 78.9 12 % Hong Kong 21.7 24.0 11 Mainland China 1.5 2.0 33 Greater China total $ 93.4 $ 104.9 12 40 Revenue in Southeast Asia increased 30% to $196.0 million in 2002 from $150.3 million in 2001. Excluding the impact of changes in exchange rates, our revenue in Southeast Asia increased 31% in 2002 compared to the prior year. Distributor interest surrounding our expansion of retail operations in Mainland China, which commenced in January 2003, and the opening of the Malaysian market in November 2001 spurred the growth in this region. The combined revenue of Singapore and Malaysia increased 62% to $64.3 million in 2002 from $39.6 million in 2001 primarily as a result of the inclusion of a full year of operations in Malaysia in our 2002 results. Revenue in Taiwan increased 12% to $78.9 million in 2002 from $70.2 million in 2001. In local currency, revenue in Taiwan increased 15%. Revenue growth in Taiwan was driven by a 27% increase in executive distributors primarily related to distributor enthusiasm throughout the Southeast AsiaGreater China region resulting from the opening of Malaysia and planned retail expansion of operations in Mainland China. Additionally,in Hong Kong increased 11% to $24.0 million in 2002 from $21.7 million in 2001 and revenue in Thailand increased 98% to $13.0 million in 2002 from $6.6 million in 2001.As distributors leader focus on our expansion in China, we believe that revenue in Singapore and Malaysia may decline in 2003, while revenue in Taiwan and Hong Kong remains relatively level, which we believe should be more than offset byfor the increase in revenue in China. The significant interest and activity created in China by our expansion of operations has resulted in heightened scrutiny by both the media as well as government regulators in China regarding our method of operation. Actions by regulators in some locations have caused and will continue to cause some obstructions in our ability to do business, including an inability to conduct sales activity in a limited number of stores. Fewer than 10% of our stores in China have been affected by this disruption of sales activity. Regulators also have provided guidance and direction on certain aspects of our operations. For example, regulators have expressed some concerns about the number of sales employees per store in some locations and have recommended that we work to have a reasonable number of sales employees per store and focus in the near term on increasing the productivity of our sales employees rather than increasing the number of sales employees in each store. It is difficult to assess the short and long term impact of these actions and reviews. However, we continue to believe that we can generally achieve our targeted results for this market in 2003 as previously disclosed, subject to the length and severity of these reviews as well as other operating and market factors. We do believe, however, that these reviews are a necessary part of establishing a solid regulatory foundation upon which future growth can occur. Revenue in North America consisting of the United Statesregion and Canada, decreased 6% to $145.9 millionits principal markets (U.S. dollars in 2002 from $155.9 million in 2001.millions):2001 2002 Change United States $ 149.0 $ 136.6 (8 %) Canada 6.9 9.4 36 North America total $ 155.9 $ 146.0 (6 ) States declining 8% to $136.6 million in 2002 from $149.0 million in 2001.States. The decrease in the United States is due to declines in Big Planet, including a decline of $8.9 million in 2002 in our core Big Planet revenue and a $2.7 million decline from our professional employer organization as we implemented initiatives centered on the more profitable personal care and nutritional supplement product categories. Our strategy for Big Planet has been to augment our technology products with high margin products such as home cleaning products and to improve margins on key technology products such as our telecommunication products and ISP service. For the year, Nu Skin and Pharmanex revenue was flat, although revenue increased 19% in the fourth quarter of 2002 compared to the same period in 2001. These decreases were somewhat offset by anthe increase in revenue in Canada.2001 2002 Change Singapore/Malaysia $ 39.6 $ 64.3 62 % Thailand 6.6 13.0 97 Australia/New Zealand 7.2 11.0 53 Philippines 3.5 2.8 (20 ) South Asia/Pacific total $ 56.9 $ 91.1 60 34%changes in Canada to $9.4 millionexchange rates, our revenue in South Asia/Pacific increased 58% in 2002 from $7.0 millioncompared to the prior year. Distributor interest surrounding our expansion of retail operations in 2001.Mainland China, which commenced in January 2003 and the opening of the Malaysian market in November 2001 spurred the growth in this region. The combined revenue of Singapore and Malaysia increased primarily as a result of the inclusion of a full year of operations in Malaysia in our 2002 results and distributor activity spurred over our plans to expand in Mainland China.Revenue inOther Markets. The following table sets forth revenue for our Other Markets which include our European and Latin American operations, increased 11% to $28.3 million(U.S. dollars in 2002 from $25.5 million in 2001.millions):2001 2002 Change Europe $ 22.7 $ 25.6 13 % Latin America 2.8 2.7 (4 ) Other Markets total $ 25.5 $ 28.3 11 41Gross profitDistributor incentivesSelling expensesdistributor incentivesselling expenses increased to $382.2 million in 2002 from $347.5 million in 2001. The decline in revenue from Big Planet products and services, which pay lower commissions than our personal care and nutritional supplement product categories, contributed to the increase in distributor incentivesselling expenses during 2002.Selling,General and administrative expenses expenses) as a percentage of revenue decreased to 29.6% in 2002 from 32.6% in 2001. Without the impact of $10.5 million of amortization of intangibles recorded in 2001, which was not recorded in 2002 due to the implementation of SFAS No. 142, selling, general and administrative expenses as a percentage of revenue would have been 31.4% in 2001. In 2002, we generated higher revenue while maintaining operating expenses primarily due to improved efficiencies from our cost-saving technology and automated reordering initiatives which allowed us to reduce labor expense as a percentage of revenue. These efficiencies in 2002, combined with the additional selling, general and administrative expenses of approximately $4.0 million we incurred in 2001 for a distributor convention held in Japan, which was not held in 2002, contributed to the remaining decrease in selling, general and administrative expenses as a percentage of revenue. In U.S. dollar terms, selling, general and administrative expenses decreased to $285.2 million in 2002 from $288.6 million in 2001. $2.9$2.9 million of expense in 2002 compared to $8.4 million of income in 2001. The decrease in other income (expense), net 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. In 2001, the net $8.4 million of income primarily included foreign exchange gains due to a weakened Japanese yen relative to the U.S. dollar over 2000, while the net $2.9 million of expense in 2002 was due to a strengthened Japanese yen relative to the U.S. dollar over 2001. Net income increased primarily because of the factors noted above in “revenue,” “gross profit” and “selling, general and administrative” and was somewhat offset by the factors noted in “distributor incentives,” “other income (expense), net” and “provision for income taxes” above.2001 Compared to 2000Revenue in 2001 increased 1% to $885.6 million from $879.8 million in 2000 primarily due to the growth in the Southeast Asia region and increased revenue from our professional employer organization business in the United States. Revenue in 2001 was negatively impacted by a weakening of foreign currencies against the U.S. dollar. Excluding the impact of changes in exchange rates, we experienced growth of 9% for 2001 compared to the prior year.42 Revenue in North Asia decreased 5% to $553.9 million in 2001 from $585.4 million in 2000. The decrease in revenue was due to revenue in Japan decreasing 8% to $508.1 million in 2001 from $554.2 million in 2000. This decrease is directly attributable to a 13% weakening in the Japanese yen for 2001 compared to the prior year. In local currency, revenue in Japan increased 3% in 2001. In 2001, the success of key Nu Skin and Pharmanex products launched as well as the successful promotion of the automatic reordering programs and the initiation of personalized web sites drove growth in Japan. The decline in revenue in Japan in U.S. dollars was partially offset by an increase in revenue in South Korea of 47% to $45.8 million in 2001 from $31.2 million in 2000. In local currency, revenue in South Korea was 67% higher in 2001 compared to the prior year. The continued revenue growth in South Korea is attributed primarily to an improving economy as well as a rebound in the direct selling industry as a whole in South Korea. In addition, we successfully launched several new products and successfully promoted our automatic repurchasing program. Revenue in Southeast Asia increased 26% to $150.3 million in 2001 from $119.5 million in 2000. Excluding the impact of changes in exchange rates, our revenue in Southeast Asia increased 33% in 2001 compared to the prior year. The increase in revenue resulted primarily from a full year of operations in Singapore, which generated $34.6 million in 2001 compared to $1.0 million in 2000 following the opening of operations in Singapore in December 2000, as well as the commencement of operations in Malaysia in November 2001, which generated an additional $5.0 million in revenue. Success in Singapore and Malaysia has also contributed to modest growth in other markets in the Southeast Asia region, such as Hong Kong, Thailand and Australia. These increases, however, were somewhat offset by the results in Taiwan, which decreased 16% to $70.2 million in 2001 from $83.4 million in 2000. In local currency, revenue in Taiwan decreased 9% in 2001 from the prior year. Management believes, however, that sequential quarterly revenue totals indicate an overall maturity of direct selling in that market. Local currency revenue in Taiwan increased 5% during the second quarter of 2001 compared to the first quarter of 2001, due in part to seasonal trends, decreased 1% from the second quarter of 2001 to the third quarter of 2001 and increased 2% from the third quarter of 2001 to the fourth quarter of 2001 due in part to seasonal trends.-51- Revenue in North America, consisting of the United States and Canada, remained nearly constant at $155.9 million in 2001 compared to $155.8 million in 2000. Revenue in the United States increased slightly to $149.0 million in 2001 from $148.6 million in the prior year. Revenue in the United States in 2001 includes an additional $16.6 million of revenue generated from our professional employer organization over the prior year. In addition, the international convention held in the United States in February 2001 generated approximately $5.0 million in revenue from sales to international distributors attending the convention. More than offsetting this additional revenue in the United States, revenue from our core business in the United States was negatively impacted by distributor uncertainty relating to the our divisional strategies and the decreased focus on unprofitable products such as the free iPhone promotion and some of our I-Link telecommunications products. Revenue in Other Markets, which include our European and Latin American operations, increased 34% to $25.5 million in 2001 from $19.1 million in 2000. This increase in revenue is due to a 38% increase in revenue in Europe in U.S. dollars compared to the prior year. Excluding the impact of changes in exchange rates, our revenue in Europe increased approximately 42% during 2001 compared to the prior year.Gross profit as a percentage of revenue decreased to 79.9% in 2001 compared to 83.0% in 2000. The decrease in gross profit percentage resulted primarily from the weakening of the Japanese yen and other currencies relative to the U.S. dollar, which negatively impacted margins by 1.4%. Also the increased revenue relating to our professional employer organization, which carries significantly lower gross43margins than our other products negatively impacted margins by 2.1%. These factors were partially offset by 0.4% gross margin improvement in Nu Skin and Pharmanex products.Distributor incentives as a percentage of revenue remained constant at 39.2% in 2001 and 2000. Distributor incentives increased 1% to $347.5 million in 2001 from $345.3 million in 2000 as a result of the slight revenue increase in 2001. Prior to 2000, we restructured a portion of our compensation plan for distributors, adding short-term incentives designed to attract new distributor leaders. Management believes these changes in our compensation plan have helped to strengthen our active and executive distributors, which have increased to 558,000 and 24,800 in 2001 from 497,000 and 21,400 in 2000, respectively.Selling, general and administrative expenses as a percentage of revenue decreased to 32.6% in 2001 from 33.5% in 2000. Selling, general and administrative expenses decreased to $288.6 million in 2001 from $294.7 million in 2000. The decreases resulted primarily from a weaker Japanese yen in 2001 as well as our cost-saving initiatives, which included reductions in headcount and occupancy costs. Offsetting these lower expenses were the costs incurred during the first quarter of 2001 for our international distributor convention in the United States which added approximately $5.0 million in selling, general and administrative expenses. The international convention is held every 18 months and accordingly, year 2000 results did not include convention expenses.Other income (expense), net increased $2.4 million in 2001 compared to the prior year. This increase related primarily to a $2.3 million gain from the sale of an interest in our Malaysian subsidiary due to local ownership requirements.Provision for income taxes decreased to $29.6 million in 2001 from $34.7 million in 2000. This decrease was largely due to a decrease in operating income as compared to the prior year, offset by an increase in the effective tax rate from 36% in 2000 to 37% in 2001.Net income decreased to $50.3 million in 2001 from $61.7 million in 2000. Net income decreased primarily because of the factors noted above in “gross profit” and “distributor incentives” and was somewhat offset by the factors noted in “revenue,” “selling, general and administrative,” “other income (expense), net” and “provision for income taxes” above.distributor incentives,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.distributor incentives,selling expenses, which constitute a significant percentage of operating expenses, and minimal capital requirements. We generated $111.1$109.0 million in cash from operations in 20022003 compared to $74.4$111.1 million in 2001.2002. This increasedecrease in cash generated from operations in 20022003 compared to the prior-year period is primarilylargely related to increased operating profitsthe timing of payments of a higher amount of accrued expenses, including income taxes and commissions to distributors, during the year ended December 31, 2003, compared to the same prior-year period. These accrued expenses were substantially higher at December 31, 2002 than the amounts accrued at December 31, 2001 because revenue and profitability were significantly higher in 2002 with taxes paid in 2002 remaining relatively constant with taxes paid in 2001, in part duecompared to 2001. The negative impact of these timing differences was somewhat offset by our utilization of foreign tax credits.improved cash flow from inventory efficiencies.2002,2003, working capital was $180.6$143.6 million compared to $152.5$180.6 million as of December 31, 2001.2002. Cash and cash equivalents at December 31, 20022003 were $120.3$122.6 million and were $75.9$120.3 million at December 31, 2001.2002, following the use of $45.0 million of our cash to repurchase shares of our common stock in October 2003 and $20.0 million to pay off our revolving credit facility. This increasedecrease in cash balancesworking capital was primarily due to the increase in cash from operations.accrued liabilities and in the current portion of long-term debt. 44 On March 6, 2002, we paid $4.8 million, including transaction costs, to acquire rights to technology to be used in a portable laser-based tool for measuring the level of certain antioxidants. In addition to the cash payment, the purchase price also included the issuance of 106,667 shares of our Class A common stock valued at approximately $900,000, and contingent payments approximating $8.5 million and up to 1.2 million shares of our Class A common stock if specific development and revenue targets are met. On April 19, 2002, we acquired First Harvest International, LLC, a small dehydrated food manufacturer. We paid a total of $2.7 million including the assumption of certain liabilities for this transaction. We have also agreed to pay a 1% royalty on the sale of First Harvest International products.$19.0$23.5 million for the year ended December 31, 2002.2003. In addition, we anticipate capital expenditures in 20032004 of approximately $25$30 million to $30$35 million to further enhance our infrastructure, including enhancements to computer systems and Internet related software, in order to expand our Internet capabilities, purchase of the portable laser based tools mentioned above, as well as further expansion of our retail stores, manufacturing and related infrastructure in China.Mainland China and approximately $15 million to $20 million in purchases of additional Pharmanex BioPhotonic Scanners, which we lease to our distributors. Our long-term debt consists of 9.7 billion Japanese yen-denominated ten-year senior notes issued to the Prudential Insurance Company of America. The notes bear interest at an effective rate of 3.03% per annum and are due October 2010, with annual principal payments beginning October 2004. As of December 31, 2002, the outstanding balance on the notes was 9.7 billion Japanese yen, or $81.7 million. On May 10, 2001, we entered into We maintain a $60.0$30.0 million revolving credit agreement, or the revolving credit facility with Bank of America, N.A. and Bank One, Utah, N.A. for which Bank of America, N.A. acted as agent. 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. Per the terms of the agreement, the revolving credit facility was reduced to $45.0 million on May 10, 2002, and will be further reduced to $30.0 million on May 10, 2003. The revolving credit facility is set to expire on May 10, 2004. Thererelating to theunder our revolving credit facility asfacility. As of December 31, 2002.2003, we had $75.0 million outstanding under our shelf facility, $5.0 million of which is included in the current portion of long-term debt.facilityfacilities are both secured by a guaranty ofguarantees issued by our material subsidiaries and by a pledge of 65% to 100% of the outstanding stock of Nu Skin Japan Company Limited, our operating subsidiarymaterial foreign subsidiaries.Japan.the transaction to convert all of their remaining shares of super-voting Class B common stock to Class A common stock and their agreement not to sell shares on the open market for two years subject to certain exceptions. We financed the repurchase with $45.0 million from existing cash balances, approximately $20.0 million from our 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. The terms and conditions of the repurchase were approved by a special committee of our board of directors comprised solely of independent directors. The special committee engaged its own financial and legal advisors in connection with the repurchase transaction.2002,2003, in addition to the transaction referenced above, we repurchased approximately 1.20.8 million shares of Class A common stock for an aggregate amount of approximately $14.2$8.4 million. As ofBetween August 1998 and December 31, 2002,2003, we had repurchased a total of approximately 7.98.7 million shares of Class A common stock for an aggregate price of approximately $73.2$81.6 million.2002,2003, our board of directors declared cash dividends of $0.06$0.07 per share for all classes of common stock. These quarterly cash dividends totaled approximately $19.6$21.9 million and were paid during 20022003 to stockholders of record in 2002.2003. On February 3, 2003,January 28, 2004, the board of directors declared a dividend to be paid during the first quarterin March 2004 of 2003 of $0.07$0.08 per share for all classes of common stock. In addition, 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 $0.08 per share in 2004, dividends for the year will total approximately $24.0 million. 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.45 We had related party payables of $.2 million and $7.1 million at December 31, 2002 and 2001, respectively. This decrease in related party payables was due to us paying the remaining balance of approximately $6.0 million on the note issued in our acquisition of Big Planet in 1999. We had related party receivables of $.6 million and $13.0 million at December 31, 2002 and 2001, respectively. This balance at December 31, 2001 is partly related to an outstanding obligation from a private affiliate related to our distributor stock option program. The private affiliate is controlled by Blake M. Roney, Brooke B. Roney, Steven J. Lund and Sandra N. Tillotson, officers and directors of Nu Skin Enterprises. This related party receivable at December 31, 2001 is also partly related to a $5.0 million loan to a significant shareholder, who is the sister of Blake M. Roney and Brooke B. Roney, directors and officers of Nu Skin Enterprises. The decrease in related party receivables was due to the repayment of this $5.0 million loan, together with accrued interest, and the prepayment of approximately $2.4 million to satisfy the outstanding obligations related to our distributor stock option program. The shareholder loan of $5.0 million, which was entered into in 1997, was repaid with shares of our Class A common stock on May 3, 2002 in accordance with the terms of the loan.shortshort- and long-term basis. We currently believe that existing cash balances together with future cash flows from operations will be adequate to fund theour cash needs relating to the implementation of our strategic plans.needs. The majority of our historical expenses arehave been variable in nature and as such, a potential reduction in the level of revenue would reduce our cash flow needs. However,Within the past year, however, fixed costs associated with our retail store expansion in Mainland China and our manufacture of Pharmanex BioPhotonic Scanners have increased our capital needs beyond our historical business model. In the event that our current cash balances, future cash flow from20022003 (U.S. dollars in thousands):Total0-3 Years4-5 YearsAfter 5YearsLong-term debt$ 81,732$ 23,352$ 23,352$ 35,028Capital lease obligationsNilNilNilNilOperating leases(1)59,64432,08814,29713,259Unconditional purchase obligations(2)****Other long-term obligations(2)****Total contractual cash obligations$ 141,376$ 55,440$ 37,649$ 48,287Total 2004 2005-2006 2007-2008 Thereafter Long-term debt obligations $ 165,403 $ 17,915 $ 45,830 $ 55,830 $ 45,828 Capital lease obligations -- -- -- -- -- Operating lease obligations(1) 60,358 11,088 21,080 18,861 9,329 Purchase obligations(2) 61,651 36,235 17,002 1,894 6,520 Other long-term liabilities reflected on balance sheet(3) -- -- -- -- -- Total $ 287,412 $ 65,238 $ 83,912 $ 76,585 $ 61,677 (1) Operating leases includes corporate office and warehouse space with two entities that are owned by certain officers and directors of our company.company who are also founding shareholders. Total payments under these leases were $3.3 million for the year ended December 31, 20022003 with remaining long-term obligations under these leases of $29.8$27.3 million.(2) We enter into ordinary purchase, supplyThe Company is also party to acquisition agreements pursuant to which contingent payments of up to $8.5 million and consulting or other contracts1.2 million shares of the Company's Class A common stock may be made if certain development and revenue targets are met.(3) Other long-term liabilities reflected on the balance sheet primarily consist of long-term tax related balances, which totaled $52.8 million as part of our ongoing operations. As of December 31, 2002, there were no material unconditional purchase obligations (commitments to purchase products or services regardless of our need for such products) or other long-term obligations (fixed obligations which extend beyond 12 months). We do have a material commitment to issue shares of stock and cash to the sellers of the laser based technology upon the attainment of certain development and performance targets as explained above.2003.Seasonality
46SeasonalityDistributor Information
As of December 31, 2001 As of December 31, 2002 As of December 31, 2003 Active Executive Active Executive Active Executive North Asia 319,000 16,891 322,000 17,668 321,000 17,013 Greater China(1) 74,000 2,698 73,000 3,564 187,000 5,991 North America 76,000 2,419 73,000 2,693 70,000 2,861 South Asia/Pacific 63,000 1,842 66,000 2,972 68,000 2,175 Other Markets 26,000 989 32,000 1,018 32,000 1,091 Total 558,000 24,839 566,000 27,915 678,000 29,131 As(1)Following the opening of December 31, 2000As of December 31, 2001As of December 31, 2002ActiveExecutiveActiveExecutiveActiveExecutiveNorth Asia301,00014,968319,00016,891322,00017,668Southeast Asia100,0003,044137,0004,540139,0006,536North America74,0002,63276,0002,41973,0002,693Other Markets22,00073726,00098932,0001,018Total497,00021,381558,00024,839566,00027,915our retail business in Mainland China during 2003, active distributors includes 117,000 preferred customers and executive distributors includes 3,100 employed, full-time sales representatives. Quarterly Results
200120021stQuarter2ndQuarter3rdQuarter4thQuarter1stQuarter2ndQuarter3rdQuarter4thQuarter(U.S. dollars in millions, except per share amounts)Revenue$ 210.3$ 218.6$ 224.2$ 232.6$ 216.1$ 244.9$ 252.9$ 250.2Gross profit167.7175.3178.3186.2172.0196.3203.2201.7Operating income13.020.219.718.620.530.425.929.0Net income12.611.612.513.612.918.015.918.0Net income per share: Basic0.150.140.150.160.160.220.200.22 Diluted0.150.140.150.160.160.220.190.222002 2003 1st
Quarter 2nd
Quarter 3rd
Quarter 4th
Quarter 1st
Quarter 2nd
Quarter 3rd
Quarter 4th
Quarter (U.S. dollars in millions, except per share amounts)
Revenue $ 216.1 $ 244.9 $ 252.9 $ 250.2 $ 219.6 $ 240.7 $ 250.2 $ 275.9 Gross profit 172.0 196.3 203.2 201.7 178.0 195.4 206.5 230.0 Operating income 20.5 30.4 25.9 29.0 19.7 25.7 24.5 37.4 Net income 12.9 18.0 15.9 18.0 12.8 16.8 15.1 23.1 Net income per share: Basic 0.16 0.22 0.20 0.22 0.16 0.21 0.19 0.32 Diluted 0.16 0.22 0.19 0.22 0.16 0.21 0.19 0.31 Recent Accounting Pronouncements
In May 2002, the FASB issued SFAS No. 145, "Rescission of SFAS Nos. 4, 44, and 64, Amendment of SFAS 13, and Technical Corrections" as of April 2002. The adoption of SFAS No. 145 had no impact on our financial statements. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." We have adopted this standard and it had no impact on our financial statements.47 In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure, an amendment of FASB Statement No. 123," which addresses the accounting for alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. SFAS No. 148 also amends the disclosure requirements of SFAS No. 123 to require prominent disclosures about the method of accounting for stock-based employee compensation and the effect of the method used to report the results. We have adopted SFAS No. 148 and it did not have a significant effect on our financial statements.are currently evaluatinghave adopted this standard and doit did not believe it will have a significant impacteffect on our financial statements.JanuaryApril 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities,” which is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. We have adopted this standard and it did not have a significant effect on our financial statements.46, "Consolidation46R, “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51."” This accounting standard will become effective beginning with the first quarter of 2004. We are currently evaluating this standard and do not believe itthe adoption of this standard will have a significant impacteffect on our financial statements.Currency Risk and Exchange Rate Information
EachThe local currency of each of our subsidiary’s local currencyprimary 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. For example, in 2001,Media reports have indicated that the Japanese yen significantly weakened, which reduced our operating results on aChinese government may begin to allow the RMB to float more freely against the U.S. dollar and other major currencies. A strengthening of the RMB would benefit our reported basis.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.2002,2003, we had $124.6$64.3 million of these contracts with expiration dates through December 2003.2004. All of these contracts were denominated in Japanese yen. For the year ended December 31, 2002,2003, we recorded $4.5losses of $5.3 million of gains in operating income, and $6.6losses of $3.2 million, net of lossestax, in other comprehensive income related to the fair market valuation onof our outstanding forward contracts. Based onBecause of our foreign exchange contracts at December 31, 2002,2003, 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.48200120021stQuarter2ndQuarter3rdQuarter4thQuarter1stQuarter2ndQuarter3rdQuarter4thQuarterJapan(1)118.3122.6121.5123.8132.5126.9119.3122.3Taiwan32.533.434.634.535.034.433.934.8Hong Kong7.87.87.87.87.87.87.87.8South Korea1,272.51,305.51,291.61,287.11,314.91,261.41,192.21,217.8Singapore1.71.81.81.81.81.81.81.8Malaysia(2)--------3.83.83.83.82002 2003 1st
Quarter 2nd
Quarter 3rd
Quarter 4th
Quarter 1st
Quarter 2nd
Quarter 3rd
Quarter 4th
Quarter Japan(1) 132.5 126.9 119.3 122.3 118.9 118.5 117.3 108.7 Taiwan 35.0 34.4 33.9 34.8 34.6 34.7 34.2 34.0 Hong Kong 7.8 7.8 7.8 7.8 7.8 7.8 7.8 7.8 South Korea 1,314.9 1,261.4 1,192.2 1,217.8 1,200.2 1,208.7 1,174.6 1,182.1 Singapore 1.8 1.8 1.8 1.8 1.7 1.8 1.8 1.7 Malaysia 3.8 3.8 3.8 3.8 3.8 3.8 3.8 3.8 Thailand 43.7 42.7 42.1 43.4 42.8 42.2 41.3 39.8 China(2) -- -- -- -- 8.3 8.3 8.3 8.3 (1) As of February 28, 200327, 2004 the exchange rate of U.S. $1 into the Japanese yen was approximately 117.6.109.0.(2) We commenced retail operations in Malaysia during the fourth quarter of 2001.Mainland China in January 2003.Note Regarding Forward-Looking Statements
•our belief that existing cash and cash flow from operations will be adequate to fund cash needs;•our belief that we can meet our targeted results in China;•the expectation that we will spend $25 to $30 million for capital expenditures during 2003; and•the anticipation that cash will be sufficient to pay future dividends.“believe,”“believe” and similar expressions are intended to help identify forward-looking statements.-– 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 beliefs49(a) Because a substantial majority of our sales are generated from the Asian regions, 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,•failure of planned initiatives to generate continued interest and enthusiasm among distributors in these markets or to attract new distributors, or•any problems with ourOur expansion of operations in China, which has spurred growth in other Asia markets, and any other distractions caused by the expansion of operations in China.(b)Our expansion of operations inMainland China is subject to risks and uncertainties. We have been subject to significant regulatorregulatory scrutiny (See "Resultsand have experienced challenges including interruption of Operations -- 2002 Compared to 2001 - Revenue”)sales activities at certain stores and minor fines being paid in several cases. 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 receivedguidance 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 these concerns, we believe we could experience similar challenges in the future as we expand operations in Mainland China and continue to work with regulators to help them understand our business model. Our operations in Mainland 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, actions by overseas distributors or local sales employees in violation of local laws could harm our efforts. 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 not previously operated a large number of retail outlets and we cannot assure that we will be able to do so effectively.(c) (b)Our announcement of the development of a tool that non-invasively measures caratenoid antioxidant levels in the skin has generated significant interest among distributors, particularly the United States. This tool is still in the final development stages. As with any new technology, we have experienced delaystechnical, production and technicalcost issues in developing the Pharmanex BioPhotonic Scanner. In addition, the FDA has questioned its status as a production model.non-medical device, and we are facing similar uncertainties and regulatory issues in other markets, including Japan, with respect to the status of the scanner as a non-medical device, which could delay or negatively impact our plans for the scanner in these markets. If the full launch or use of this tool is delayed or otherwise inhibited by production or development issues, this could harm our business. In addition, one of our distributors received a communication fromor if the FDA questioning the status ofor other domestic or foreign government agency takes formal action to prevent us from distributing the scanner as a non-medical device. If the FDA were to determine or formally challenge the statusdevice, this could delay our distribution of the scanner this could delay or inhibit our ability to use the scanner, which couldand harm our business in the United States.business.(d) (c)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: (d) 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 basedfact-based and subject to interpretation. Recent negative publicity concerning stimulant-based supplements 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, our revenue and profitability may be harmed.50-58-(e) There is uncertainty whether the SARS epidemic or other communicable diseases could return this winter, particularly in those Asian markets most affected by the epidemic earlier in 2003. It is difficult to predict the impact, if any, of a recurrence of SARS on our business. Although such an event could generate increased sales of health/immune supplements and personal care products, our direct selling and retail activities and results of operations could be harmed if the fear of SARS causes people to avoid public places and interaction with one another. (f) Many countries have banned the importation of products that contain bovine materials sourced from locations where Bovine Spongiform Encephalopathy (BSE), commonly referred to as “mad cow disease”, has been identified. The recent discovery of BSE in a single cow in the United States prompted Japan and certain other countries to ban the importation of bovine products, including supplements encapsulated in bovine-sourced capsules. In the event we are unable to successfully continue meeting product demand with non-bovine capsules or tablets in these markets as a result of supply issues or production problems, or if we experience quality problems, this could harm our business. (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 excitemententhusiasm and economic incentive to retain our existing distributors or to sponsor new distributors on a sustained basis.(f)ITEM 7A.The network marketing and nutritional supplement industries receive negative publicity from time to time. There is a risk that we could continue to receive negative publicity in the future related to our marketing practices or new initiatives or products. Any such publicity could negatively impact our ability to successfully sponsor new distributors and grow revenue.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
1. Financial Statements. Set forth below is the index to the Financial Statements included in this Item 8:1. Financial Statements. Set forth below is the index to the Financial Statements included in this Item 8: Page PageConsolidated Balance Sheets at December 31, 20012002 and 200220035261Consolidated Statements of Income for the years
ended December 31, 2001, 2002 and 20035362 December 31, 2000, 2001 and 2002Consolidated Statements of Stockholders' Equity for the years ended
December 31, 2001, 2002 and 20035463 December 31, 2000, 2001 and 2002Consolidated Statements of Cash Flows for the years ended
December 31, 2001, 2002 and 20035564 December 31, 2000, 2001 and 2002Notes to Consolidated Financial Statements 5665Report of Independent AccountantsAuditors71842. 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. 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.-60-51
Consolidated Balance Sheets
(U.S. dollars in thousands, except share amounts)December 31,20012002ASSETSCurrent assets Cash and cash equivalents$ 75,923$ 120,341 Accounts receivable19,31818,914 Related parties receivable12,961562 Inventories, net84,25588,306 Prepaid expenses and other45,40448,316237,861276,439Property and equipment, net57,35555,342Goodwill114,791118,768Other intangible assets, net64,71469,181Other assets107,63192,108 Total assets$ 582,352$ 611,838LIABILITIES AND STOCKHOLDERS’ EQUITYCurrent liabilities Accounts payable$ 14,733$ 17,992 Accrued expenses63,49377,653 Related parties payable7,12215585,34895,800Long-term debt73,71881,732Other liabilities43,39647,820 Total liabilities202,462225,352Stockholders’ equity Class A common stock - 500,000,000 shares authorized, $.001 par value, 33,615,230 and 35,707,785 shares issued and outstanding3336 Class B common stock - 100,000,000 shares authorized, $.001 par value, 48,849,040 and 45,362,854 shares issued and outstanding4945 Additional paid-in capital88,95369,803 Accumulated other comprehensive loss(49,485)(68,988) Retained earnings340,340385,590379,890386,486 Total liabilities and stockholders’ equity$ 582,352$ 611,838December 31, 2002 2003 ASSETS Current assets Cash and cash equivalents $ 120,341 $ 122,568 Accounts receivable 18,914 15,054 Inventories, net 88,306 83,338 Prepaid expenses and other 48,878 53,777 276,439 276,737 Property and equipment, net 55,342 60,528 Goodwill 118,768 118,768 Other intangible assets, net 69,181 67,572 Other assets 92,108 100,142 Total assets $ 611,838 $ 623,747 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable $ 17,992 $ 18,816 Accrued expenses 77,808 96,438 Current portion of long-term debt -- 17,915 95,800 133,169 Long-term debt 81,732 147,488 Other liabilities 47,820 52,842 Total liabilities 225,352 333,499 Stockholders' equity Class A common stock - 500,000,000 shares authorized, $.001 par value, 35,707,785 and 70,700,497 shares issued and outstanding 36 71 Class B common stock - 100,000,000 shares authorized, $.001 par value, 45,362,854 and 6,466 shares issued and outstanding 45 -- Additional paid-in capital 69,803 (68,191 ) Accumulated other comprehensive loss (68,988 ) (70,849 ) Retained earnings 385,590 431,615 Deferred compensation -- (2,398 ) 386,486 290,248 Total liabilities and stockholders' equity $ 611,838 $ 623,747 52-61-
Consolidated Statements of Income
(U.S. dollars in thousands, except per share amounts)Year Ended December 31,200020012002Revenue$ 879,758$ 885,621$ 964,067Cost of sales149,342178,083190,868Gross profit730,416707,538773,199Operating expenses: Distributor incentives345,259347,452382,159 Selling, general and administrative294,744288,605285,229Total operating expenses640,003636,057667,388Operating income90,41371,481105,811Other income (expense), net5,9938,380(2,886)Income before provision for income taxes96,40679,861102,925Provision for income taxes34,70629,54838,082Net income$ 61,700$ 50,313$ 64,843Net income per share: Basic$ 0.72$ 0.60$ 0.79 Diluted$ 0.72$ 0.60$ 0.78Weighted average common shares outstanding (000s): Basic85,40183,47281,731 Diluted85,64283,91583,128Year Ended December 31, 2001 2002 2003 Revenue $ 885,621 $ 964,067 $ 986,457 Cost of sales 178,083 190,868 176,545 Gross profit 707,538 773,199 809,912 Operating expenses: Selling expenses 347,452 382,159 407,088 General and administrative expenses 288,605 285,229 289,925 Restructuring and other charges -- -- 5,592 Total operating expenses 636,057 667,388 702,605 Operating income 71,481 105,811 107,307 Other income (expense), net 8,380 (2,886 ) 432 Income before provision for income taxes 79,861 102,925 107,739 Provision for income taxes 29,548 38,082 39,863 Net income $ 50,313 $ 64,843 $ 67,876 Net income per share: Basic $ 0.60 $ 0.79 $ 0.86 Diluted $ 0.60 $ 0.78 $ 0.85 Weighted average common shares outstanding (000s): Basic 83,472 81,731 78,637 Diluted 83,915 83,128 79,541 53-62-
Consolidated Statements of Stockholders’ Equity
(U.S. dollars in thousands, except share amounts)Class ACommonStockClass BCommonStockAdditionalPaid-InCapitalAccumulatedOtherComprehensiveLossRetainedEarningsDeferredCompensationTotalStockholders’EquityBalance at January 1, 2000$ 32$ 55$ 119,652$ (48,220)$ 244,758$ (6,898)$ 309,379Net income--------61,700--61,700Foreign currency translation adjustments------2,873----2,873Total comprehensive income------------64,573Repurchase of 1,893,000 shares of Class A common stock(2)--(12,763)------(12,765)Conversion of shares1(1)----------Amortization of deferred compensation----------5,2525,252Exercise of distributor and employee stock options----294------294Forfeiture of employee stock awards and stock options----(899)----899--Balance at December 31, 20003154106,284(45,347)306,458(747)366,733Net income--------50,313--50,313Foreign currency translation adjustments------(8,298)----(8,298)Net unrealized gains on foreign currency cash flow hedges------8,776----8,776Net gain reclassified into current earnings------(4,616)----(4,616)Total comprehensive income46,175Repurchase of 2,491,000 shares of Class A common stock(3)--(18,136)------(18,139)Conversion of shares5(5)----------Amortization of deferred compensation----------747747Exercise of distributor and employee stock options----805------805Cash dividends--------(16,431)--(16,431)Balance at December 31, 2001334988,953(49,485)340,340--379,890Net income--------64,843--64,843Foreign currency translation adjustments------(10,031)----(10,031)Net unrealized losses on foreign currency cash flow hedges------(6,567)----(6,567)Net gain reclassified into current earnings------(2,905)----(2,905)Total comprehensive income45,340Repurchase of 1,682,000 shares of Class A common stock (Notes 3 and 10)(1)--(20,585)------(20,586)Conversion of shares4(4)----------Purchase of long-term assets----936------936Exercise of distributor and employee stock options----1,261------1,261Forfeiture of stock options----(762)------(762)Cash dividends--------(19,593)--(19,593)Balance at December 31, 2002$ 36$ 45$ 69,803$ (68,988)$ 385,590$ --$ 386,486The accompanying notes are an integral part of these consolidated financial statements.54Nu Skin Enterprises, Inc.Consolidated Statements of Cash Flows(U.S. dollars in thousands)Year Ended December 31,200020012002Cash flows from operating activities: Net income$ 61,700$ 50,313$ 64,843 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization32,35031,67921,602 Amortization of deferred compensation5,252747-- Gain on sale of assets--(2,328)(1,328) Changes in operating assets and liabilities: Accounts receivable(31)(1,127)404 Related parties receivable3,2482155,971 Inventories, net3,736(2,240)(4,051) Prepaid expenses and other7,875(891)(3,674) Other assets(21,400)8,49112,473 Accounts payable(6,848)(1,104)3,259 Accrued expenses(40,492)(10,706)14,160 Related parties payable(6,039)(1,898)(6,967) Other liabilities4,0373,2664,424 Net cash provided by operating activities43,38874,417111,116Cash flows from investing activities: Purchase of property and equipment(23,030)(15,126)(19,026) Purchase of long-term assets----(7,505) Payments for lease deposits(195)---- Receipt of refundable lease deposits255---- Net cash used in investing activities(22,970)(15,126)(26,531)Cash flows from financing activities: Payments of cash dividends--(16,431)(19,593) Repurchase of shares of common stock(12,765)(18,139)(14,158) Exercise of distributor and employee stock options2948051,261 Proceeds from long-term debt90,000---- Payments on long-term debt(142,821)---- Net cash used in financing activities(65,292)(33,765)(32,490)Effect of exchange rate changes on cash(1,292)(13,599)(7,677) Net increase (decrease) in cash and cash equivalents(46,166)11,92744,418Cash and cash equivalents, beginning of period110,16263,99675,923Cash and cash equivalents, end of period$ 63,996$ 75,923$ 120,341Class A Common Stock Class B Common Stock Additional Paid-In Capital Accumulated Other Comprehensive Loss Retained Earnings Deferred Compensation Total Stockholders' Equity Balance at January 1, 2001 $ 31 $ 54 $ 106,284 $ (45,347 ) $ 306,458 $ (747 ) $ 366,733 Net income -- -- -- -- 50,313 -- 50,313 Foreign currency translation adjustments -- -- -- (8,298 ) -- -- (8,298 ) Net unrealized gains on foreign currency cash flow hedges -- -- -- 8,776 -- -- 8,776 Net gain reclassified into current earnings -- -- -- (4,616 ) -- -- (4,616 ) Total comprehensive income 46,175 Repurchase of 2,491,000 shares of Class A common stock (3 ) -- (18,136 ) -- -- -- (18,139 ) Conversion of shares 5 (5 ) -- -- -- -- -- Amortization of deferred compensation -- -- -- -- -- 747 747 Exercise of distributor and employee stock options -- -- 805 -- -- -- 805 Cash dividends -- -- -- -- (16,431 ) -- (16,431 ) Balance at December 31, 2001 33 49 88,953 (49,485 ) 340,340 -- 379,890 Net income -- -- -- -- 64,843 -- 64,843 Foreign currency translation adjustments -- -- -- (10,031 ) -- -- (10,031 ) Net unrealized losses on foreign currency cash flow hedges -- -- -- (6,567 ) -- -- (6,567 ) Net gain reclassified into current earnings -- -- -- (2,905 ) -- -- (2,905 ) Total comprehensive income 45,340 Repurchase of 1,682,000 shares of Class A common stock
(Notes 3 and 10) (1 ) -- (20,585 ) -- -- -- (20,586 ) Conversion of shares 4 (4 ) -- -- -- -- -- Purchase of long-term assets -- -- 936 -- -- -- 936 Exercise of distributor and employee stock options -- -- 1,261 -- -- -- 1,261 Forfeiture of stock options -- -- (762 ) -- -- -- (762 ) Cash dividends -- -- -- -- (19,593 ) -- (19,593 ) Balance at December 31, 2002 36 45 69,803 (68,988 ) 385,590 -- 386,486 Net income -- -- -- -- 67,876 -- 67,876 Foreign currency translation adjustments -- -- -- (1,736 ) -- -- (1,736 ) Net unrealized losses on foreign currency cash flow hedges -- -- -- (3,171 ) -- -- (3,171 ) Net loss reclassified into current earnings -- -- -- 3,046 -- -- 3,046 Total comprehensive income 66,015 Repurchase of 11,622,000 shares of Class A common stock
(Note 10) (12 ) -- (149,997 ) -- -- -- (150,009 ) Conversion of shares 45 (45 ) -- -- -- -- -- Issuance of employee stock awards -- -- 3,113 -- -- (3,113 ) -- Amortization of deferred compensation -- -- -- -- -- 715 715 Exercise of distributor and employee stock options 2 -- 8,890 -- -- -- 8,892 Cash dividends -- -- -- -- (21,851 ) -- (21,851 ) Balance at December 31, 2003 $ 71 $ -- $ (68,191 ) $ (70,849 ) $ 431,615 $ (2,398 ) $ 290,248 55-63-
Consolidated Statements of Cash Flows
(U.S. dollars in thousands)Year Ended December 31, 2001 2002 2003 Cash flows from operating activities: Net income $ 50,313 $ 64,843 $ 67,876 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 31,679 21,602 22,369 Amortization of deferred compensation 747 -- 715 (Gain)/loss on sale of assets (2,328 ) (1,328 ) 525 Changes in operating assets and liabilities: Accounts receivable (1,127 ) 404 3,860 Related parties receivable 215 5,971 -- Inventories, net (2,240 ) (4,051 ) 4,968 Prepaid expenses and other (891 ) (3,674 ) 11,714 Other assets 8,491 12,473 (7,965 ) Accounts payable (1,104 ) 3,259 824 Accrued expenses (10,706 ) 14,160 1,176 Related parties payable (1,898 ) (6,967 ) -- Other liabilities 3,266 4,424 2,964 Net cash provided by operating activities 74,417 111,116 109,026 Cash flows from investing activities: Purchase of property and equipment (15,126 ) (19,026 ) (23,518 ) Purchase of long-term assets -- (7,505 ) -- Net cash used in investing activities (15,126 ) (26,531 ) (23,518 ) Cash flows from financing activities: Payments of cash dividends (16,431 ) (19,593 ) (21,851 ) Repurchase of shares of common stock (18,139 ) (14,158 ) (150,009 ) Exercise of distributor and employee stock options 805 1,261 8,892 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 (33,765 ) (32,490 ) (87,968 ) Effect of exchange rate changes on cash (13,599 ) (7,677 ) 4,687 Net increase in cash and cash equivalents 11,927 44,418 2,227 Cash and cash equivalents, beginning of period 63,996 75,923 120,341 Cash and cash equivalents, end of period $ 75,923 $ 120,341 $ 122,568
Notes to Consolidated Financial Statements1. The Company
company thatcompany. The Company develops and distributes premium-quality, innovative personal care products and nutritional supplements through a large network of independent distributors.that are sold worldwide under the Nu Skin and Pharmanex brands. The Company also distributesmarkets technology and telecommunications products and services through its distributors.and a line of home care products under the Big Planet brand. The Company reports revenue from fourfive geographic regions: North Asia, which consists of Japan and South Korea; Southeast Asia,Greater China, which consists of Australia,Mainland China, Hong Kong (including Macau), Malaysia, New Zealand, the Philippines, Singapore, Taiwan and Thailand;Taiwan; North America, which consists of the United States and Canada; South Asia/Pacific, which consists of Australia, Malaysia, New Zealand, the Philippines, Singapore and Thailand; and Other Markets, which consists of the Company’s markets in Brazil, Europe, Guatemala and Mexico (the Company’s subsidiaries operating in these countries are collectively referred to as the “Subsidiaries”).2. Summary of Significant Accounting Policies
ConsolidationInventories$2.8 million, $6.7 million, $5.7 million and $5.7$5.4 million as of December 31, 2000, 2001, 2002 and 2002,2003, respectively.
Notes to Consolidated Financial StatementsFurniture and fixtures 5 - 7 years Computers and equipment 3 - 5 years Leasehold improvements Shorter of estimated useful life or lease term Vehicles 3 - 5 years 56Nu Skin Enterprises, Inc.Notes to Consolidated Financial StatementsIn July 2001,Under the Financial Accounting Standards Board (“FASB”) issued StatementsprovisionsofStatements of Financial Accounting Standards No. 141 (“SFAS 141”),Business Combinations, and No. 142 (“SFAS 142”),Goodwill and Other Intangible Assets. SFAS 141 requires that, the purchase method of accounting be used for all business combinations initiated after June 30, 2001 as well as all purchase method business combinations completed after June 30, 2001. SFAS 141 also specifies criteria that must be met in order for intangible assets acquired in a purchase method business combination to be recognized and reported apart from goodwill. SFAS 142 requires thatCompany’s goodwill and intangible assets with indefinite useful lives are no longer be amortized, but instead beare tested for impairment at least annually in accordance withannually. In addition, the provisions of SFAS 142. SFAS 142 also requires thatCompany’s intangible assets with definite lives beare 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).adoptedis required to make judgments regarding the provisionsuseful life of its intangible assets. With the implementation of SFAS 141 immediately and142, the Company determined certain intangible assets to have indefinite lives based upon its analysis of the requirements of SFAS 142 effective January 1, 2002 (Note 5).as well as an independent third party evaluation of such lives, which was conducted in 2001. These intangible assets include trademarks and trade names, distributor network, and marketing rights to operate the Company’s business in various foreign markets. In connection with a registration statement the Company filed in October 2003, the Staff of the Securities and Exchange Commission has commented on and sought additional support for the indefinite life designation of these assets. This review is on-going and if it is determined that any of these assets has a finite life, the Company would amortize the value of that asset over the remainder of such finite life, which annual amortization expense the Company does not believe would be material to its operating results. The amortization expense would be a non-cash expense that would not impact the Company’s cash flow from operations.In addition, the Company operates a professional employer organization (“PEO”) that outsources personnelOur global compensation plan for our distributors does not provide rebates or selling discounts to distributors who purchase our products and benefits to small businesses in the United States. Revenueservices.PEO consists of service fees paid by its clients. Cost of sales for the PEO includes the direct costs (such as salaries, wages and other benefits) associated with the worksite employees. In Septemberyears ended December 31, 2001, the Emerging Issues Task Force (“EITF”) issued EITF 01-09,Accounting for Consideration Given by a Vendor to a Customer or Reseller of the Vendor’s Products, which addresses the accounting for consideration given by a vendor to a customer or a reseller of the vendor’s products. The Company adopted EITF 01-09 effective January 1, 2002 and such adoption did not have a significant impact on its financial statements.2003 totaled approximately $1.8 million, $2.8 million and $1.4 million, respectively.
Notes to Consolidated Financial Statementsincurred.incurred and totaled $7.1 million, $6.9 million and $6.4 million in 2001, 2002 and 2003 respectively.57Nu Skin Enterprises, Inc.Notes to Consolidated Financial StatementsEach Subsidiary’sThe 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.related parties receivable, accounts payable, related parties 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.stockstock- based compensation granted to employees using the intrinsic value method prescribed in Accounting
Notes to Consolidated Financial Statements, which amended SFAS No. 123. SFAS No. 148 requires more prominent and frequent disclosures about the effects of stock-based compensation. 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 been recognized based upon the estimated fair value on the grant date under the fair value methodology prescribed by SFAS No. 123, as amended by SFAS No. 148, the Company’s net earnings and earnings per share would have been as follows (U.S. dollars in thousands, except per share amounts):58December 31, 2001 2002 2003 Net income, as reported $ 50,313 $ 64,843 $ 67,876 Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects (1,886 ) (5,450 ) (5,274 ) Pro forma net income 48,427 59,393 62,602 Earnings per share: Basic - as reported $ 0.60 $ 0.79 $ 0.86 Basic - pro forma $ 0.58 $ 0.73 $ 0.80 Diluted - as reported $ 0.60 $ 0.78 $ 0.85 Diluted - pro forma $ 0.58 $ 0.71 $ 0.79 Nu Skin Enterprises, Inc.Notes to Consolidated Financial StatementsDecember 31,200020012002Net income, as reported$ 61,700$ 50,313$ 64,843Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects(5,484)(1,886)(5,450)Pro forma net income$ 56,216$ 48,427$ 59,393Earnings per share: Basic - as reported$ 0.72$ 0.60$ 0.79 Basic - pro forma$ 0.66$ 0.58$ 0.73 Diluted - as reported$ 0.72$ 0.60$ 0.78 Diluted - pro forma$ 0.66$ 0.58$ 0.71 As of January 1, 2001, the The Company has adopted Statement of Financial Accounting Standards No. 133 (“SFAS 133”),Accounting for Derivative Instruments and Hedging Activities. The statement requires companies to recognizerecognizes all derivatives as either assets or liabilities, with the instruments measured at fair value.value as required by Statement of Financial Accounting Standards No. 133 (“SFAS 133”).
Notes to Consolidated Financial Statementseach period in current earnings or accumulated other comprehensive income,loss, depending on the intended use of the derivative and its resulting designation. The adoptiongains 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 SFAS 133 didthe receivable and payable amounts related to these unrealized gains and losses is classified as other current assets and liabilities. The Company does not have a significant impactuse such derivative financial 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 Company’s consolidated financial statements. (Note 15)statements of income. In May 2002, the FASB issued SFAS No. 145,Rescission of SFAS Nos. 4, 44, and 64, Amendment of SFAS 13, and Technical Corrections as of April 2002. The adoption of SFAS No. 145 had no impact on its financial statements. In June 2002, the FASB issued SFAS No. 146,Accounting for Costs Associated with Exit or Disposal Activities. The Company has adopted this standard and its adoption did not have a significant effect on its financial statements.is currently evaluatinghas adopted this standard however,and it doesdid not believe its adoption will have a significant effect on its financial statements.JanuaryApril 2003, the FASB issued SFAS No. 149,Amendment of Statement 133 on Derivative Instruments and Hedging Activities, which is effective for contracts entered into or modified after June 30, 2003, and for hedging relationships designated after June 30, 2003. The Company has adopted this standard and it did not have a significant effect on its financial statements.46,46R, Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51. This accounting standard will become effective beginning with the first quarter of 2004. The Company is currently evaluating this standard, however, it does not believe itthe adoption of this standard will have a significant effect on its financial statements.59Nu Skin Enterprises, Inc.Notes to Consolidated Financial Statements major stockholders of the Company have been independent distributors for the Company since 1984. These stockholders are partners in an entity whichthat receives substantial commissions from the Company, including commissions relating to sales within the countries in which the Company operates.Company. By agreement, the Company pays commissions to this partnership at the highest level of distributor compensation. The commissions paid to this partnership relating to sales within the countries in which the Company operates were $3.4 million, $3.5 million, $3.3 million and $3.3$3.2 million for the years ended December 31, 2000, 2001, 2002 and 2002,2003, respectively.
Notes to Consolidated Financial StatementsLease agreements 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 $2.7 million, $3.3 million and $3.3 million for the years ended December 31, 2000, 2001 and 2002, respectively, with remaining long-term obligations under these leases of $19.8 million and $29.8 million at December 31, 2001 and 2002, respectively. The increase was primarily related to entering into mid to long-term lease agreements for properties that were previously month-to-month contracts as the previous leases for these properties had expired and the Company was negotiating new leases.4. Property and Equipment
December 31,20012002Furniture and fixtures$ 36,089$ 37,747Computers and equipment70,86981,351Leasehold improvements25,47928,032Vehicles1,6561,939134,093149,069Less: accumulated depreciation(76,738)(93,727)$ 57,355$ 55,342December 31, 2002 2003 Furniture and fixtures $ 37,747 $ 38,632 Computers and equipment 81,351 87,644 Leasehold improvements 28,032 36,123 Vehicles 1,939 2,580 149,069 164,979 Less: accumulated depreciation (93,727 ) (104,451 ) $ 55,342 $ 60,528 60Nu Skin Enterprises, Inc.Notes to Consolidated Financial Statements$17.0 million, $16.6 million, $17.2 million and $17.2$18.3 million for the years ended December 31, 2000, 2001, 2002 and 2002,2003, respectively.5. Goodwill and Other Intangible Assets
Carrying Amount atDecember 31,Goodwill and other indefinite life intangible assets:20012002 Goodwill$ 114,791$ 118,768 Trademarks and tradenames22,22822,493 Marketing rights12,26612,266 Other4,0814,081$ 153,366$ 157,608
Notes to Consolidated Financial StatementsCarrying Amount at
December 31,Goodwill and other indefinite life intangible assets: 2002 2003 Goodwill $ 118,768 $ 118,768 Trademarks and tradenames 22,493 22,840 Marketing rights 12,266 12,266 Distributor network 4,081 4,081 $ 157,608 $ 157,955 December 31, 2001December 31, 2002Other finite life intangible assets:Gross CarryingAmountAccumulatedAmortizationGross CarryingAmountAccumulatedAmortization Developed technology$ 22,500$ 6,017$ 22,500$ 6,841 Other16,4656,80925,10510,423$ 38,965$ 12,826$ 47,605$ 17,264 December 31, 2002 December 31, 2003 Other finite life intangible assets: Gross Carrying
Amount Accumulated
Amortization Gross Carrying
Amount Accumulated
Amortization Developed technology $ 22,500 $ 6,841 $ 22,500 $ 7,666 Other 25,105 10,423 27,201 13,650 $ 47,605 $ 17,264 $ 49,701 $ 21,316 goodwill andfinite-lived intangible assets totaled $15.3$4.8 million, $15.1$4.4 million and $4.4$4.1 million for the years ended December 31, 2000, 2001, 2002 and 2002,2003, respectively. Annual estimated amortization expense is expected to approximate $3.6$4.5 million for each of the five succeeding fiscal years.yearsyear ended December 31, 2000 and 2001, to the amounts adjusted for the reduction of amortization expense, net of the related income tax effect, is as follows (U.S. dollars in thousands, except per share amounts):200020012001Reported net income $ 61,700$ 50,313 Add: amortization adjustment 6,4536,3526,352
Adjusted$ 56,665 Adjusted$ 68,153$ 56,665 Reported basic EPS $ .72$ .60 Add: amortization adjustment .08 .08
Adjusted$ .68 Adjusted$ .80$ .68 Reported diluted EPS $ .72$ .60 Add: amortization adjustment .08 .08
Adjusted$ .68 Adjusted$ .80$ .6861-71-
Notes to Consolidated Financial Statements
Other assets consist of the following (U.S. dollars in thousands):
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7. Accrued Expenses
Accrued expenses consist of the following (U.S. dollars in thousands):
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8. Long-Term Debt
On October 12, 2000, the The Company refinanced the remaining balance of its then existing credit facility with the proceeds ofmaintains a private placement of 9.7 billion Japanese yen-denominated ten-year senior notes (the “Notes”) to The Prudential Insurance Company of America. The Notes bear interest at an effective rate of 3.03% per annum and are due October 2010, with principal payments beginning October 2004. The outstanding balance on the Notes was 9.7 billion Japanese yen, or $73.7 million and $81.7 million as of December 31, 2001 and 2002, respectively.
Interest expense relating to the long-term debt totaled $4.8 million, $2.5 million and $2.4 million for the years ended December 31, 2000, 2001 and 2002, respectively.
The Notes contain other terms and conditions and affirmative and negative financial covenants customary for credit facilities of this type. As of December 31, 2002, the Company is in compliance with all financial covenants under the Notes.
On May 10, 2001, the Company entered into a $60.0$30.0 million revolving credit agreement (the “Revolving Credit Facility”)facility with Bank of America, N.A. and Bank One, Utah, N.A. for which Bank of America, N.A. acted as agent. The proceedsDrawings 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. The Revolving Credit Facility was reduced to $45.0 million on May 10, 2002 and is further reduced to $30.0 million on May 10, 2003. The Revolving Credit Facilityrevolving credit facility is set to expire on May 10, 2004. There
In August 2003, the Company entered into a $125.0 million multi-currency private uncommitted shelf facility with Prudential Investment Management, Inc. The Company utilized a portion of this shelf facility and a portion of the revolving credit facility in a transaction involving the repurchase of its shares of Class A common stock, see Note 10. This portion of the long-term debt is U.S. dollar denominated, bears interest of approximately 4.5% per annum and will be amortized in two tranches over five and seven years. As of December 31, 2003, there were no outstanding balances relatingunder the revolving credit facility. As of December 31, 2003, the Company had $75.0 million outstanding under the shelf facility, $5.0 million of which is included in the current portion of long-term debt.
The Company’s debt also includes Japanese yen-denominated ten-year senior notes issued to The Prudential Insurance Company of America in 2000. These notes bear interest at an effective rate of 3.03% per annum and are due October 2010, with annual principal payments beginning in October 2004. The outstanding balance on the Revolving Credit Facilitynotes was 9.7 billion Japanese yen, or $81.7 million and $90.4 million as of December 31, 20012002 and 2002.2003, respectively. As of December 31, 2003, the current portion of this long-term debt was $12.9 million. The Japanese notes and the revolving and shelf credit facilities are
62-72-
Nu Skin Enterprises, Inc.
Notes to Consolidated Financial Statements
The Japanese notes and the revolving credit facility are both secured by a guaranty of ourguarantees issued by the Company’s material subsidiariesSubsidiaries and by a pledge of 65% to 100% of the outstanding stock of Nu Skin Japanits material foreign Subsidiaries.
Interest expense relating to the long-term debt totaled $2.5 million, $2.4 million and $3.2 million for the years ended December 31, 2001, 2002 and 2003, 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, 2003, the Company Limited,is in compliance with all financial covenants under the Company’s operating subsidiary in Japan.notes and shelf facility.
Maturities of all long-term debt at December 31, 20022003, based on the year end exchange rate, are as follows (U.S. dollars in thousands):
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9. Lease Obligations
The Company leases office space and computer hardware under noncancelable long-term operating leases. Most leases include renewal options of up to three years. Minimum future operating lease obligations at December 31, 20022003 are as follows (U.S. dollars in thousands):
| Year Ending December 31, | |||
|---|---|---|---|
| 2004 | $ 11,088 | ||
| 2005 | 10,713 | ||
| 2006 | 10,367 | ||
| 2007 | 9,727 | ||
| 2008 | 9,134 | ||
| Thereafter | 9,329 | ||
| Total minimum lease payments | $ 60,358 | ||
Rental expense for operating leases totaled $20.7 million, $19.2 million, $21.0 million and $21.0$24.2 million for the years ended December 31, 2000, 2001, 2002 and 2002,2003, 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 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
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Notes to Consolidated Financial Statements
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. Substantially all of the Class B shares were converted to Class A shares in November 2003 and by May 2004 all remaining shares will be converted.
63
Nu Skin Enterprises, Inc.Notes to Consolidated Financial Statements
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, | |||||||
|---|---|---|---|---|---|---|---|
| 2001 | 2002 | 2003 | |||||
| Basic weighted average common shares outstanding | 83,472 | 81,731 | 78,637 | ||||
| Effect of dilutive securities: | |||||||
| Stock awards and options | 443 | 1,397 | 904 | ||||
| Diluted weighted average common shares outstanding | 83,915 | 83,128 | 79,541 | ||||
For the years ended December 31, 2001, 2002 and 2003, other stock options totaling 2.8 million, 2.7 million and 2.9 million, respectively, were excluded from the calculation of diluted earnings per share because they were anti-dilutive.
RepurchaseRepurchases 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. The repurchases are used primarily to fund the Company’s equity incentive plans. During the years ended December 31, 2000, 2001, 2002 and 2002,2003, the Company repurchased approximately 1.9 million, 2.5 million, 1.2 million and 1.20.8 million shares of Class A common stock for an aggregate price of approximately $12.8 million, $18.1 million, and $14.2 million respectively. As ofand $8.4 million, respectively, in addition to the transaction referenced below. Between August 1998 and December 31, 2002,2003, the Company had repurchased a total of approximately 7.98.7 million shares of Class A common stock for an aggregate price of approximately $73.2$81.6 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
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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.
Conversion of common stock
During 2001, 2002 and 2002,2003, the holders of the Class B common stock converted approximately 4.6 million, 3.5 million and 3.545.4 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 was part of the repurchase transaction described above. As of December 31, 2003, all but 6,466 shares of the outstanding Class B common stock had been converted to Class A common stock and by May 2004, these remaining shares will be converted to Class A common stock.
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. The Company has a totalOn February 7, 2003, the board of 8.0 milliondirectors authorized and the shareholders approved an amendment to the plan increasing the number of shares available for grant under this plan.from 8 million to 13 million. As of December 31, 2002,2003, approximately 6.48.2 million shares have been granted.
On September 17, 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 arewere 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, 2002,2003, this one-time distributor equity incentive program concluded. At that date, approximately 898,0001.2 million of these options had been exercised.exercised throughout the years of the program and the remaining options were either cancelled or forfeited.
64
Nu Skin Enterprises, Inc.Notes to Consolidated Financial Statements
Pursuant to the acquisition of Pharmanex in 1998, the Company assumed outstanding options under two stock option plans. The options were converted into the right to purchase approximately 261,000 shares of the Company’s Class A common stock.
-75- Nu Skin Enterprises, Inc.
Notes to Consolidated Financial Statements
The deferred compensation at December 21, 2003 represents a restricted stock award of 250,000 shares of the Company’s Class A common stock granted to the Company’s newly appointed Chief Executive Officer and President in 2003, which vests over four years. The Company is amortizing this deferred expense over the vesting period. Compensation expense for this restricted stock award totaled $0.7 million in 2003.
A summary of the Company’s stock option plans as of December 31, 2000, 2001, 2002 and 20022003 and changes during the years then ended, is presented below:
| 2001 | 2002 | 2003 | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 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 | 5,838.9 | $ 10.89 | 5,177.1 | $ 9.84 | 6,824.6 | $ 10.46 | |||||||
| Granted at fair value | 902.5 | 7.49 | 2,103.4 | 11.90 | 1,728.1 | 10.82 | |||||||
| Exercised | (138.0 | ) | 5.76 | (204.5 | ) | 6.34 | (1,289.8 | ) | 6.82 | ||||
| Forfeited/canceled | (1,426.3 | ) | 13.03 | (251.4 | ) | 13.25 | (491.0 | ) | 6.34 | ||||
| Outstanding - end of year | 5,177.1 | 9.84 | 6,824.6 | 10.46 | 6,771.9 | 11.54 | |||||||
| Options exercisable at year-end | 2,501.7 | $ 9.76 | 3,349.1 | $ 9.60 | 3,225.0 | $ 11.44 | |||||||
The following table summarizes information concerning outstanding and exercisable options at December 31, 2002:2003:
| 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 | 89.2 | $ 5.40 | 4.79 | 89.2 | $ 5.40 | |||||||
| $6.50 to $11.00 | 2,974.5 | 8.21 | 7.42 | 1,650.1 | 7.84 | |||||||
| $11.50 to $16.00 | 2,838.7 | 12.38 | 8.31 | 926.9 | 12.79 | |||||||
| $17.00 to $28.50 | 869.5 | 20.82 | 7.49 | 558.8 | 20.82 | |||||||
| 6,771.9 | 11.54 | 7.49 | 3,225.0 | 11.44 | ||||||||
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:
| 2001 | 2002 | 2003 | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Risk-free interest rate | 4.5 | % | 3.6 | % | 2.7 | % | ||||
| Expected life | 2.9 | years | 3.3 | years | 3.8 | years | ||||
| Expected volatility | 60.0 | % | 52.7 | % | 54.2 | % | ||||
| Expected dividend yield | 2.8 | % | 2.2 | % | 2.3 | % | ||||
-76- Nu Skin Enterprises, Inc.
Notes to Consolidated Financial Statements
The weighted-average grant date fair values of options granted during 2000, 2001, 2002 and 20022003 were $3.41, $3.12, $4.18 and $4.18,$3.92, respectively.
65
Nu Skin Enterprises, Inc.Notes to Consolidated Financial Statements
Following the Company’s initial public offering in 1996, the Company has granted stock awards of its Class A common stock to employees. In total, approximately 686,000 shares were issued in this program, and the awards vested ratably over a one to four year period. The Company recorded compensation expense of $2.8 million for the year ended December 31, 2000, relating to these stock awards.
Effective February 1, 2000, the Company’s board of directors adopted the Employee Stock Purchase Plan (the “Purchase Plan”), which provides for the issuance of a maximum of 200,000 shares of Class A common stock. Eligible employees can have up to 15% of their earnings withheld, up to certain maximums, to be used to purchase shares of the Company’s Class A common stock on every April 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 2002,2003, approximately 12,00019,000 shares were purchased at prices ranging from $6.08$7.61 to $8.29$9.72 per share. At December 31, 2002,2003, approximately 152,000133,000 shares were available under the Purchase Plan for future issuance.
Consolidated income before provision for income taxes consists of income earned primarily from international operations.the following for the years ended December 31, 2001, 2002 and 2003 (U.S. dollars in thousands):
| 2001 | 2002 | 2003 | |||||
|---|---|---|---|---|---|---|---|
| U.S. | $ 45,266 | $ 68,540 | $ 102,341 | ||||
| Foreign | 34,595 | 34,385 | 5,398 | ||||
| Total | $ 79,861 | $ 102,925 | $ 107,739 | ||||
The provision for current and deferred taxes for the years ended December 31, 2000, 2001, 2002 and 20022003 consists of the following (U.S. dollars in thousands):
| 2001 | 2002 | 2003 | |||||
|---|---|---|---|---|---|---|---|
| Current | |||||||
| Federal | $ 1,812 | $ 2,800 | $ 1,709 | ||||
| State | 2,078 | 4,548 | 3,049 | ||||
| Foreign | 25,529 | 26,957 | 57,573 | ||||
| 29,419 | 34,305 | 62,311 | |||||
| Deferred | |||||||
| Federal | 3,330 | 6,819 | 16,641 | ||||
| State | (242 | ) | (1,268 | ) | 676 | ||
| Foreign | (2,959 | ) | (1,774 | ) | (39,765 | ) | |
| 129 | 3,777 | (22,448 | ) | ||||
| Provision for income taxes | $ 29,548 | $ 38,082 | $ 39,863 | ||||
66-77-
Nu Skin Enterprises, Inc.
Notes to Consolidated Financial Statements
The principal components of deferred tax assets are as follows (U.S. dollars in thousands):
| December 31, 2002 | December 31, 2003 | ||||
|---|---|---|---|---|---|
| Deferred tax assets: | |||||
| Inventory differences | $ 5,878 | $ 4,390 | |||
| Foreign tax credit | 26,286 | 10,810 | |||
| Distributor stock options and employee stock awards | 4,484 | 48 | |||
| Capitalized legal and professional | 793 | 679 | |||
| Accrued expenses not deductible until paid | 21,931 | 20,097 | |||
| Withholding tax | 3,587 | 3,773 | |||
| Minimum tax credit | 16,143 | 18,380 | |||
| Foreign deferred tax assets | -- | 18,919 | |||
| Net operating losses | 3,122 | 1,103 | |||
| Controlled foreign corporation net losses | 5,962 | 6,465 | |||
| Capitalized research and development | 6,856 | 8,803 | |||
| Prepaid selling expenses | 10,385 | 10,992 | |||
| Other | -- | 2,200 | |||
| Total deferred tax assets | 105,427 | 106,659 | |||
| Deferred tax liabilities: | |||||
| Foreign deferred tax | 20,846 | -- | |||
| Exchange gains and losses | 9,881 | 7,762 | |||
| Pharmanex intangibles step-up | 16,542 | 16,256 | |||
| Amortization of intangibles | 2,975 | 4,410 | |||
| Other | 6,005 | 4,115 | |||
| Total deferred tax liabilities | 56,249 | 32,543 | |||
| Deferred taxes, net | $ 49,178 | $ 74,116 | |||
The components of deferred taxes, net on a classified basis are as follows (U.S. dollars in thousands):
Year Ended December 31, | |||||
|---|---|---|---|---|---|
| 2002 | 2003 | ||||
| Current deferred tax assets | $ 39,719 | $ 36,649 | |||
| Noncurrent deferred tax assets | 65,708 | 70,010 | |||
| Total deferred tax assets | 105,427 | 106,659 | |||
| Current deferred tax liabilities | 10,665 | 1,369 | |||
| Noncurrent deferred tax liabilities | 45,584 | 31,174 | |||
| Total deferred tax liabilities | 56,249 | 32,543 | |||
| Deferred taxes, net | $ 49,178 | $ 74,116 | |||
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 expire in 2018, while the foreign tax credits expire during the years 20032004 and 2005. Utilization of these loss and credit carryforwards is subject to 2005. Managementannual limitations; however, management believes that it is more likely than not that the Company will generate sufficient
-78- Nu Skin Enterprises, Inc.
Notes to Consolidated Financial Statements
taxable income in the appropriate carry forward periods to realize the benefit of the net deferred tax assets.
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.
67
Nu Skin Enterprises, Inc.Notes to Consolidated Financial Statements
The actual tax rate for the years ended December 31, 2000, 2001, 2002 and 20022003 compared to the statutory U.S. Federal tax rate is as follows:
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
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’s contribution totaled $979,000, $1,038,000, $1,249,000 and $1,249,000$1,125,000 for the years ended December 31, 2000, 2001, 2002 and 2002,2003, respectively.
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, 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’s contribution totaled $332,000, $338,000, $367,000 and $367,000$554,000 for the years ended December 31, 2000, 2001, 2002 and 2003, respectively. The Company had accrued $1.6 million and $3.3 million as of December 31, 2002 respectively.and 2003, respectively, related to the Executive Deferred Compensation Plan.
-79- Nu Skin Enterprises, Inc.
Notes to Consolidated Financial Statements15. Derivative Financial Instruments
The Company’s Subsidiaries enter into significant transactions with each other and third parties which may not be denominated in the respective Subsidiaries’ functional currencies. The Company seeks to reduce its exposure to fluctuations in foreign exchange rates through the use of foreign currency exchange contracts and through certain intercompany loans of foreign currency. The Company does not use such derivative financial instruments for trading or speculative purposes. The Company regularly monitors its foreign currency risks and periodically takes measures to reduce the impact of foreign exchange fluctuations on the Company’s operating results. Gains and losses on certain intercompany loans of foreign currency are recorded as other income and expense in the consolidated statements of income.
At December 31, 20012002 and 2002,2003, the Company held forward contracts designated as foreign currency cash flow hedges with notional amounts totaling approximately $55.0$124.6 million and $124.6$64.3 million, respectively, to hedge foreign currencyforecasted foreign-currency-denominated intercompany transactions. All such contracts were denominated in Japanese yen. As of January 1, 2001,December 31, 2002 and 2003, $3.7 million of net unrealized losses and $3.9 million of net unrealized loss, net of related taxes, respectively, were recorded in accumulated other comprehensive loss. The contracts held at December 31, 2003 have maturities through December 2004 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 Company adopted SFAS 133.next 12 months. The adoption of SFAS 133
68
Nu Skin Enterprises, Inc.Notes to Consolidated Financial Statements
did not have a significant impact on the Company’s Consolidated Financial Statements. Thepre-tax net gains on foreign currency cash flow hedges recorded in current earnings were $7.6 million and $4.5 million for the years ended December 31, 2001 and 2002, respectively. Prior torespectively, and the adoption of SFAS 133, the Company heldpre-tax net loss on foreign currency forward contracts which were marked to market andcash flow hedges recorded net gains in other income of $4.5current earnings was $5.3 million for the year ended December 31, 2000. Those contracts held at December 31,2003.
During 2001, 2002 and 2003, the Company did not have maturities through Decemberany gains or losses related to hedging ineffectiveness. Additionally, no component of gains and losses was excluded from the assessment of hedging effectiveness. During 2001, 2002 and 2003, and accordingly, all unrealizedthe Company did not have any gains on foreign currencyor losses reclassified into earnings as a result of the discontinuance of cash flow hedges included in accumulated other comprehensive loss at December 31, 2002 will be recognized in current earnings over the next twelve-month period.hedges.
Cash paid for interest totaled $4.2 million, $2.4 million, $2.3 million and $2.3$2.7 million for the years ended December 31, 2000, 2001, 2002 and 2002,2003, respectively. Cash paid for income taxes totaled $30.9 million, $18.4 million, $18.8 million and $18.8$26.6 million for the years ended December 31, 2000, 2001, 2002 and 2002,2003, respectively.
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.market except for our operations in Mainland China. In Mainland China, we utilize an employed sales force to sell our products through fixed retail locations. The Company’s largest expense (selling expenses) is the commissions and Mainland China sales employee expenses paid on product sales through this distributor network.sales. The Company manages its business primarily by managing thisits global distributor network.sales force. The Company does not prepare or use profitability reports on a segment basis for making business decisions. However, the Company does
-80- Nu Skin Enterprises, Inc.
Notes to Consolidated Financial Statements
recognize revenue from sales to distributors in fourfive geographic regions: North Asia, Southeast 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, | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2001 | 2002 | 2003 | ||||||
| Revenue | ||||||||
| North Asia | $ 553,910 | $ 593,860 | $ 617,677 | |||||
| Greater China | 93,405 | 104,877 | 135,535 | |||||
| North America | 155,935 | 145,952 | 122,762 | |||||
| South Asia/Pacific | 56,885 | 91,110 | 75,816 | |||||
| Other Markets | 25,486 | 28,268 | 34,667 | |||||
| Total | $ 885,621 | $ 964,067 | $ 986,457 | |||||
Revenue generated by each of its three product lines is set forth below (U.S. dollars in thousands):
| Year Ended December 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2001 | 2002 | 2003 | ||||||
| Revenue | ||||||||
| Nu Skin | $ 423,707 | $ 470,567 | $ 476,150 | |||||
| Pharmanex | 396,307 | 439,019 | 472,107 | |||||
| Big Planet | 65,607 | 54,481 | 38,200 | |||||
| Total | $ 885,621 | $ 964,067 | $ 986,457 | |||||
Additional information as to the Company'sCompany’s operations in differentthe most significant geographical areas is set forth below (U.S. dollars in thousands):
Revenue
Revenue
Revenue from the Company’s operations in Japan totaled $554,210, $508,141, $529,740 and $529,740$558,654 for the years ended December 31, 2000, 2001, 2002 and 2002,2003, respectively. Revenue from the Company’s operations in the United States totaled $148,578, $148,975, $136,580 and $136,580$113,340 for the years ended December 31, 2000, 2001, 2002 and 2002,2003, respectively.
Long-lived assets
Long-lived assets in Japan were $18,863$20,210 and $20,210$18,553 as of December 31, 20012002 and 2002,2003, respectively. Long-lived assets in the United States were $293,854$276,030 and $276,030$286,659 as of December 31, 20012002 and 2002,2003, respectively.
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
69-81-
Nu Skin Enterprises, Inc.
Notes to Consolidated Financial Statements
Company also completed the divestiture of its professional employer organization resulting in a charge of approximately $0.5 million. Revenue from the professional employer organization totaled $24.7 million, $22.0 million and $9.1 million for the years ended December 31, 2001, 2002 and 2003, respectively.
The components of restructuring and other charges are summarized as follows (U.S. dollars in thousands):
| Total Incurred During the Third Quarter 2003 | Amounts Paid in 2003 | Accrued as of December 31, 2003 | |||||
|---|---|---|---|---|---|---|---|
| Severance and other compensation | $ 5,067 | $ 4,114 | $ 953 | ||||
| Other | 525 | 415 | 110 | ||||
| Total | $ 5,592 | $ 4,529 | $ 1,063 | ||||
This amount accrued as of December 31, 2003 is included within accrued liabilities, the majority of which is expected to be paid by March 31, 2004.
The Company is subject to governmental regulations pertaining to product formulation, labeling and packaging, product claims and advertising and to the Company’s direct selling system. The Company is also subject to the jurisdiction of numerous foreign tax authorities. Any assertions or determination that either the Company or the Company’s distributors is not in compliance with existing statutes, laws, rules or regulations could potentially have a material adverse effect on the Company’s operations. In addition, in any country 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.
On In March 6, 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 approximately $900,000. In addition, the acquisition includes contingent cash payments up to $8.5 million and up to 1.2 million shares of the Company’s Class A common stock if certain development and revenue targets are met.
Nu Skin Enterprises, Inc. On-82-
Notes to Consolidated Financial Statements
In April 19, 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. The Company has agreed to pay a 1% royalty on the sale of these products.
On February 3, 2003, In January 2004, the board of directors declared a quarterly cash dividend of $0.07$0.08 per share for all classes of common stock to be paid inon March 2003.24, 2004 to stockholders of record on March 5, 2004.
70-83-
PricewaterhouseCoopers LLP
|
REPORT OF INDEPENDENT
ACCOUNTANTSAUDITORS
To the Board of Directors and Stockholders of Nu Skin Enterprises, Inc.:
In our opinion, the accompanying consolidated balance sheets andsheetsand the related consolidated statements of income, stockholders’ equity and cash flows present fairly, in all material respects, the financial position of Nu Skin Enterprises, Inc. and its subsidiaries at December 31, 20012002 and 2002,2003, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2002 in2003in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial 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.
As discussed in Note 25 to the consolidated financial statements, effective January 1, 2002, the Company changed its method of accounting for goodwill in accordance with Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Salt Lake City, Utah
February 3, 2003
71
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSUREMarch 15, 2004
-84- None. Evaluation of Disclosure Controls and Procedures. Changes in Internal ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE ITEM 9A. CONTROLS AND PROCEDURES PART IIIThe information required by Items 10, 11, 12 and 13 of Part III is hereby incorporated by reference to our Definitive Proxy Statement filed or to be filed with the Securities and Exchange Commission not later than April 30, 2003.ITEM 14. 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 Rules 13a-14(c)13a-15(e) and 15d-14(c)15d-15(e) under the Securities Exchange Act of 1934) as of a date within 90 days prior to the filing date of this report.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.Commission under the Exchange Act. Based on this evaluation, our Chief Executive Officer and our Principal AccountingChief Financial Officer concluded that as of the date of their evaluation, our disclosure controls and procedures were effective.effective as of the end of the period covered by this report.ControlsControl Over Financial Reporting.. There were During the fourth quarter of 2003, there was no significant changes madechange in our internal controlscontrol over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that has materially affected, or in other factors that could significantlyis reasonably likely to materially affect, our internal controls subsequent to the date of their evaluation.control over financial reporting.PART III
72 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 not later than April 30, 2004.PART IV
ITEM 15. EXHIBITS FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K
| EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K |
| (a) | 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. |
-85- -86- -87- -88- Addendum to Distributor Agreement dated as of March 18, 1986 by and among Nu Skin International, Inc., Clara and James McDermott, Craig Tillotson and Craig Bryson -89- Employment Agreement by and between Pharmanex and Joseph Chang Amendment in Total and Complete Restatement of Deferred Compensation Plan -90- -91- -92- 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 NU SKIN ENTERPRISES, INC. 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 Agreement and Plan of Merger as of March 6, 2002 by and among the Company, Niksun Acquisition Corporation, a subsidiary of the Company, Worldwide Nutritional Science, Inc. as Senior Lender Kim Yoon Addendum to Distributor Agreement dated as of March 18, 1986 by and among Nu Skin International, Inc., Clara and James McDermott, Craig Tillotson and Craig Bryson Employment Agreement by and between Pharmanex and Joseph Chang Amendment in Total and Complete Restatement of Deferred Compensation Plan 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).Exhibit NumberNumber 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, Worldwide Nutritional Science, Inc. incorporated(incorporated by reference to Exhibit 2.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2002.2002).3.1 Amended and Restated Certificate of Incorporation of the Company incorporated(incorporated by reference to Exhibit 3.1 to the Company's Registration Statement on Form S-1 (File No. 333-12073) (the "Form S-1")).3.2 Certificate of Amendment to the Amended and Restated Certificate of Incorporation, incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1998.Incorporation.3.3 Certificate of Designation, Preferences and Relative Participating, Optional and Other Special Rights of Preferred Stock and Qualification, Limitations and Restrictions Thereof incorporated(incorporated by reference to Exhibit 3.3 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1998.1998).3.4 Amended and Restated Bylaws of the Company incorporated(incorporated by reference to Exhibit 3.2 to the Company’sCompany's Form S-1.S-1).4.1 Specimen Form of Stock Certificate for Class A Common Stock incorporated(incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-3 (File No. 333-90716) (the "Form S-3")).4.2 Specimen Form of Stock Certificate for Class B Common Stock incorporated(incorporated by reference to Exhibit 4.2 to the Company’s Form S-1.S-1).10.1 Note Purchase Agreement dated October 12, 2000, by and between the Company and The Prudential Insurance Company of America incorporated(incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2000.2000).7310.2 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. 10.4 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(incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2000.2000).10.5 Pledge Amendments executed by the Company dated December 31, 2003. 10.3ExhibitNumber Exhibit Description 10.6 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(incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2000.2000).10.410.7Amendment 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(incorporated by reference to Exhibit 10.5 to the Company'sCompany’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2001.2001).10.510.8Amended 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 10Q for the quarter ended September 30, 2003). 10.9 Credit Agreement dated as of May 10, 2001 among the Company, various financial institutions, and Bank of America, N.A., as Administrative Agent incorporated(incorporated by reference to Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2001.2001).10.610.10First Amendment dated December 14, 2001 to the Credit Agreement dated May 10, 2001 among the Company, various financial institutions, and Bank of America, N.A. as Administrative Agent incorporated(incorporated by reference to Exhibit 10.43 toof the Company'sCompany’s Annual Report on Form 10-K for the year ended December 21, 2001.31, 2001).10.710.11FirstSecond Amendment to Note PurchaseCredit Agreement, dated as of October 22, 2003 between the Company, various financial institutions, and The Prudential Insurance CompanyBank 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 quarterly period ended June 30, 2002.N.A. as Administrative Agent.10.810.12Reconstituted 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(incorporated by reference to Exhibit No. 2.1 to the Company's Quarterly Report on Form 10-Q for the quarterly periodquarter ended March 31, 2002.2002).10.910.13Membership Interest Purchase Agreement dated as of April 19, 2002, by and among the Company and the members of First Harvest International, LLC incorporated(incorporated by reference to Exhibit No. 2.3 to the Company’s Quarterly Report on Form 10-Q for the quarterly periodquarter ended March 31, 2002.2002).Exhibit Number Exhibit Description 10.1010.14Amendment and Release Agreement dated as of November 30, 2002, by and among the Company and the members of First Harvest International, LLC.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).10.1110.15Sale and Purchase Agreement between the Company and DatoDató Mohd Nadzmi Bin Mohd Sulleh dated the 17th day of August 17, 2001 incorporated(incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2001.2001).7410.1210.16Sale and Purchase Agreement between the Company and Kiow Kim Yoon, Frankie Kiow dated the 17th day of August 17, 2001 incorporated(incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2001.2001).10.1310.17Shareholders Agreement among the Company, DatoDató Mohd Nadzmi Bin Mohd Sulleh and Kiow Kim Yoon Frankie Kiow dated effective as of September 25, 2001 incorporated(incorporated by reference to Exhibit 10.46 toof the Company'sCompany’s Annual Report on Form 10-K for the year ended December 31, 2001.2001).10.1410.18Sale & Purchase Agreement between the CompanyNu Skin Enterprises, Inc. and Datuk Mohd Nadzmi Bin Mohd Salleh entered into the 25th day of June, 2002 to be effective September 28, 2001 incorporated(incorporated by reference to Exhibit 10.5 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2002.2002).10.1510.19Supplemental Agreement dated AugustSeptember 28, 2001, to the Sale and Purchase of Shares Agreement dated August 17, 2001 between the CompanyNu Skin Enterprises, Inc. and Mr. Kiow Kim Yoon incorporated(incorporated by reference to Exhibit 10.6 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2002.2002).10.1610.20Supplemental Agreement dated September 28, 2001, to the Sale and Purchase of Shares Agreement between the CompanyNu Skin Enterprises, Inc. and Dato’ Mohd Nadzmi Bin Mohd Salleh incorporated(incorporated by reference to Exhibit 10.11 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2002.2002).10.1710.21Form of Memorandum of Charge entered into by the CompanyNu Skin Enterprises, Inc. and Dato'Dato’ Mohd Nadzmi Bin Kohd Salleh and the CompanyNu Skin Enterprises, Inc. and Kiow Kim Yoon, Frankie incorporated(incorporated by reference to Exhibit 10.12 to the Company'sCompany’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2002.2002).10.1810.22Management Services Agreement dated June 20, 2002 between Nu Skin International Management Group, Inc. and Nu Skin (Malaysia) Sdn Bhd incorporated(incorporated by reference to Exhibit 10.7 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2002.2002).Exhibit Number Exhibit Description 10.1910.23Distribution Agreement dated June 20, 2002 between Nu Skin Enterprises Hong Kong, Inc. and Nu Skin (Malaysia) Sdn Bhd incorporated(incorporated by reference to Exhibit 10.8 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2002.2002).10.2010.24Trademark Licensing Agreement dated June 20, 2002 between Nu Skin International, Inc. and Nu Skin (Malaysia) Sdn Bhd incorporated(incorporated by reference to Exhibit 10.9 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2002.2002).10.2110.25License Agreement dated June 20, 2002 between Nu Skin International, Inc. and Nu Skin (Malaysia) Sdn Bhd incorporated(incorporated by reference to Exhibit 10.10 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2002.2002).10.2210.26Form of Amended and Restated Stockholders Agreement dated as of November 28, 1997, incorporated by reference to Exhibit 10.25 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1997.7510.23Amendment No. 1 to Amended and Restated Stockholders Agreement dated as of November 28, 1997, incorporated by reference to Exhibit 10.55 to the Company's Annual Report on Form 10-K for the year ended December 31, 1998.10.24Amendment No. 2 to Amended and Restated Stockholders Agreement, incorporated by reference to Exhibit 10.31 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1999.10.25incorporated(incorporated by reference to Exhibit No. 10.50 to Amendment No. 2 to the Company Registration Statement on Form S-3 filed July 22, 2002 (File No. 333-90716)).10.2610.27Stock Purchase Agreement between Nedra Roney and the CompanyNu Skin Enterprises, Inc. dated May 3, 2002 incorporated(incorporated by reference to Exhibit 10.4 to the Company'sCompany’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2002.2002).10.2710.28Distributor Stock Option Payment Agreement incorporated(incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2002.2002).10.2810.29Master Lease Agreement dated January 16th 2003 by and between the Company and Scrub Oak, LLC.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).10.2910.30Amendment No. 1 to the Master Lease Agreement, dated January 16theffective as of July 1, 2003, bybetween Nu Skin International Inc. and between the Company and Aspen Country,Scrub Oak, LLC10.30Promissory noted dated July 5, 2001 executed by Joseph Chang in favor of the Company, incorporated (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended JuneSeptember 30, 2000.10.31 Trust DeedMaster Lease Agreement dated July 5, 2001 executedJanuary 16, 2003 by Joseph Chang in favor ofand between the Company incorporatedand Aspen Country, LLC (incorporated by reference to Exhibit 10.310.29 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2003).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 JuneSeptember 30, 2000.2003).10.32ExhibitPromissory Note dated October 25, 2001 executed by Lori Bush in favor of the Company incorporated by reference to NumberExhibit 10.31 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2001.Description10.33Trust Deed dated October 25, 2001 executed by Lori Bush in favor of the Company incorporated by reference to Exhibit 10.32 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2001.10.3410.33Form of Indemnification Agreement to be entered into by and among the Company and certain of its officers and directors incorporated(incorporated by reference to Exhibit 10.1 to the Company’s Form S-1.S-1).10.3510.34Employment Agreement, dated May 1, 1993, by and between Nu Skin Japan and Takashi Bamba incorporated by reference to Exhibit 10.4 to the Company’s Form S-1.7610.36incorporated(incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2000.10.3710.35Amendment to Employment Agreement by and between Pharmanex and Joseph Chang incorporated(incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2001.2001).10.3810.36Form of Stock Option Agreement (Directors) , incorporated (incorporated by reference to Exhibit 10.4 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2001.2001).10.3910.37Option Agreement by and between the Company and M. Truman Hunt incorporated by reference to Exhibit 10.19 to the Company's Form S-1.10.40incorporated(incorporated by reference to Exhibit 10.48 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1998.10.4110.38Form of Deferred Compensation Plan (New Form) , incorporated (incorporated by reference to Exhibit 10.49 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1998.1998).10.4210.39Amendment in Total and Complete Restatement of NSI Compensation Trust incorporated(incorporated by reference to Exhibit 10.50 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1998.1998).10.4310.40Second Amended and Restated Nu Skin Enterprises, Inc. 1996 Stock Incentive Plan (corrected version) , incorporated (incorporated by reference to Exhibit 10.39 to the Company'sCompany’s Annual Report on Form 10-K for the year ended December 31, 1999.1999).10.4410.41Amendment 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). 10.42 Base Form of Master Stock Option Agreement.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).10.4510.43Summary Description of Nu Skin Japan Director Retirement Allowance Plan incorporated(incorporated by reference to Exhibit 10.49 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2001.2001).Exhibit Number Exhibit Description 10.4610.44Country/Region Executive-Incentive Plan incorporated(incorporated by reference to Exhibit No.10.4910.49 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2001.2001).10.4710.45Deferred Compensation Plan dated as of October 16, 2000 between Nu Skin International, Inc. and Max L. Pinegar (IncorporatedEmployment Letter with Truman Hunt (incorporated by reference to Exhibit No. 10.5110.49 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2002).10.46 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). 10.47 Letter of Understanding with Corey Lindley effective December 22, 2003 (Supplementing Letter of Understanding effective August 8, 2002). 10.48 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). 10.49 Amendment No. 2#1 to Consulting Agreement dated July 31, 2003 between the Company and Woodclyffe Group, LLC.10.50 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). 10.51 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 filed on July 22, 2002 (File No. 333-90716))October 20, 2003).10.4810.52Private Shelf Agreement, dated as of August 26, 2003, between Nu Skin Enterprises, Inc. 's Executive Bonus Plan. 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).10.4910.53Employment Letter with Truman Hunt.7710.50LetterFirst Amendment to Private Shelf Agreement, dated as of Understanding with Corey Lindley.10.54 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. 21.1ExhibitNumber Exhibit Description 10.55 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). 10.56 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). 10.57 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). 10.58 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). 10.59 Nu Skin International, Inc. 1997 Key Employee Death Benefit Plan 10.60 Nu Skin Enterprises, Inc. Executive Incentive Plan, last revised January 1, 2004. 10.61 Restricted Stock Purchase Agreement between the Company and Truman Hunt. 10.62 Employment Letter with Robert Conlee effective November 26, 2003. 21.1 Subsidiaries of the Company. 23.1 Consent of PricewaterhouseCoopers LLP.LLP99.131.1Certification ofby M. Truman Hunt, President and Chief Executive Officer.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 2002.99.231.2Certification ofby Ritch N. Wood, Chief Financial Officer.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. Exhibit Number Exhibit Description (b)32.2TheCertification 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. (b) On October 23, 2003, the Company did not filefiled a current reportCurrent Report on Form 8-K duringunder Item 12, “Results of Operations and Financial Condition”, wherein the quarterCompany furnished its press release announcing its results of operations for the three and nine months ended December 31, 2002.September 30, 2003.On October 23, 2003, the Company filed a Current Report on Form 8-K under Item 5, “Other Events”, wherein the company reported the execution of an agreement to repurchase approximately 10.8 million shares of its common stock from certain members of the company’s original shareholder group, as well as the negotiation by the same shareholder group of a private sale of approximately 6.2 million additional shares of common stock to third party investors. On October 27, 2003, the Company filed a Current Report on Form 8-K under Item 5, “Other Events”, wherein the company reported the closing of the previously announced stock repurchase and private resale of common stock, and also reported the names of the participating shareholders and post-transaction beneficial ownership of shares. On November 17, 2003, the Company filed a Current Report on Form 8-K under Item 9, “Regulation FD Disclosure”, wherein the company furnished a copy of a mid-year report containing financial highlights for the first six months of 2003 being presented to investors and analysts. 78-93-SIGNATURES
SIGNATURES4, 2003.15, 2004.
By: /s/ M. Truman Hunt
M. Truman Hunt, Chief Executive OfficerNU SKIN ENTERPRISES, INC.By: /s/ Steven J. Lund Steven J. Lund, Chief Executive Officer4, 2003.15, 2004.SignatureSignaturesCapacity in Which Signed /s/ Blake M. Roney Blake M. Roney Chairman of the Board /s/ Steven J. LundM. Truman HuntChief Executive Officer and Director Steven J. LundM. 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/ Brooke B. Roney Brooke B. Roney Senior Vice President, Director /s/ Max L. PinegarMax L. PinegarSenior Vice President, Director/s/ Daniel W. Campbell Daniel W. Campbell Director Daniel W. CampbellDirector/s/ E. J. "Jake" Garn E. J. "Jake" Garn Director /s/ Paula F. Hawkins Paula F. Hawkins Director Paula F. HawkinsDirector/s/ Andrew D. Lipman Andrew D. Lipman Director Andrew D. Lipman/s/ Jose Ferreira, Jr.Jose Ferreira, Jr. Director EXHIBIT INDEX
Exhibit DirectorNumber Exhibit Description /s/ Takashi BambaDirectorTakashi Bamba79CERTIFICATION I, Steven J. Lund, Chief Executive Officer of the registrant, certify that:1.I have reviewed this annual report on Form 10-K of Nu Skin Enterprises, Inc.;2.2.1Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;3.Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;4.The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:a)designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;b)evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); andc)presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;5.The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):a)all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; andb)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and6.The registrant’s other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.Date: March 4, 2003/s/ Steven J. LundSignatureChief Executive Officer80CERTIFICATIONI, Ritch N. Wood, Chief Financial Officer of the registrant, certify that:1.I have reviewed this annual report on Form 10-K of Nu Skin Enterprises, Inc.;2.Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;3.Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;4.The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:a)designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;b)evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); andc)presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;5.The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):a)all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; andb)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and6.The registrant’s other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.Date: March 4, 2003/s/ Ritch N. WoodSignatureChief Financial Officer81EXHIBIT INDEXExhibitNumberExhibit Description2.1incorporated(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(incorporated by reference to Exhibit 3.1 to the Company's Registration Statement on Form S-1 (File No. 333-12073) (the "Form S-1")).3.2 Certificate of Amendment to the Amended and Restated Certificate of Incorporation, incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1998.Incorporation.3.3 Certificate of Designation, Preferences and Relative Participating, Optional, and Other Special Rights of Preferred Stock and Qualification, Limitations and Restrictions Thereof incorporated(incorporated by reference to Exhibit 3.3 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1998.1998).3.4 Amended and Restated Bylaws of the Company incorporated(incorporated by reference to Exhibit 3.2 to the Company's Form S-1.S-1).4.1 Specimen Form of Stock Certificate for Class A Common Stock incorporated(incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-3 (File No. 333-90716) (the "Form S-3")).4.2 Specimen Form of Stock Certificate for Class B Common Stock incorporated(incorporated by reference to Exhibit 4.2 to the Company’s Form S-1.S-1).10.1 Note Purchase Agreement dated October 12, 2000, by and between the Company and The Prudential Insurance Company of America incorporated(incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2000.2000).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. 10.4 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(incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2000.2000).EXHIBIT INDEX
Exhibit Number Exhibit Description 10.5 Pledge Amendments executed by the Company dated December 31, 2003. 10.310.6Collateral 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(incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2000.2000).10.410.7Amendment 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., 82incorporated(incorporated by reference to Exhibit 10.5 to the Company'sCompany’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2001.10.510.8Amended 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 10Q for the quarter ended September 30, 2003). 10.9 Credit Agreement dated as of May 10, 2001 among the Company, various financial institutions, and Bank of America, N.A., as Administrative Agent incorporated(incorporated by reference to Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2001.2001).10.610.10First Amendment dated December 14, 2001 to the Credit Agreement dated May 10, 2001 among the Company, various financial institutions, and Bank of America, N.A. as Administrative Agent incorporated(incorporated by reference to Exhibit 10.43 of the Company'sCompany’s Annual Report on Form 10-K for the year ended December 31, 2001. ..2001).10.710.11FirstSecond Amendment to Note PurchaseCredit Agreement, dated as of October 22, 2003 between Nu Skin Enterprises, Inc.the Company, various financial institutions, and The Prudential Insurance CompanyBank 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 quarterly period ended June 30, 2002.N.A. as Administrative Agent.10.810.12Reconstituted Stock Purchase Agreement dated as of March 6, 2002 by and between Nutriscan, Inc., Worldwide Nutritional Sciences, Inc. and each of the Stockholders of Nutricscan,Nutriscan, Inc. incorporated(incorporated by reference to Exhibit No. 2.1 to the Company's Quarterly Report on Form 10-Q for the quarterly periodquarter ended March 31, 2002.2002).10.910.13Membership Interest Purchase Agreement dated as of April 19, 2002, by and among the Company and the members of First Harvest International, LLC incorporated(incorporated by reference to Exhibit No. 2.3 to the Company’s Quarterly Report on Form 10-Q for the quarterly periodquarter ended March 31, 2002.2002).EXHIBIT INDEX
Exhibit Number Exhibit Description 10.1010.14Amendment and Release Agreement dated as of November 30, 2002, by and among the Company and the members of First Harvest International, LLC.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).10.1110.15Sale and Purchase Agreement between the Company and DatoDató Mohd Nadzmi Bin Mohd Sulleh dated the 17th day of August 17, 2001 incorporated(incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2001.2001).10.1210.16Sale and Purchase Agreement between the Company and Kiow Kim Yoon, Frankie Kiow dated the 17th day of August 17, 2001 incorporated(incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2001.2001).10.1310.17Shareholders Agreement among the Company, DatoDató Mohd Nadzmi Bin Mohd Sulleh and Kiow Kim Yoon Frankie Kiow dated effective as of September 25, 2001 incorporated(incorporated by reference to Exhibit 10.46 of the Company'sCompany’s Annual Report on Form 10-K for the year ended December 31, 2001. ..2001).10.1410.18Sale & Purchase Agreement between Nu Skin Enterprises, Inc. and Datuk Mohd Nadzmi Bin Mohd Salleh entered into the 25th day of June, 2002 to be effective September 28, 2001 incorporated(incorporated by reference to Exhibit 10.5 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2002.2002).10.1510.19Supplemental Agreement dated AugustSeptember 28, 2001, to the Sale and Purchase of Shares Agreement dated August 17, 2001 between Nu Skin Enterprises, Inc. and Mr. Kiow83incorporated(incorporated by reference to Exhibit 10.6 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2002.10.1610.20Supplemental Agreement dated September 28, 2001, to the Sale and Purchase of Shares Agreement between Nu Skin Enterprises, Inc. and Dato’ Mohd Nadzmi Bin Mohd Salleh incorporated(incorporated by reference to Exhibit 10.11 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2002.2002).10.1710.21Form of Memorandum of Charge entered into by Nu Skin Enterprises, Inc. and Dato'Dato’ Mohd Nadzmi Bin Kohd Salleh and Nu Skin Enterprises, Inc. and Kiow Kim Yoon, Frankie incorporated(incorporated by reference to Exhibit 10.12 to the Company'sCompany’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2002.2002).10.1810.22Management Services Agreement dated June 20, 2002 between Nu Skin International Management Group, Inc. and Nu Skin (Malaysia) Sdn Bhd incorporated(incorporated by reference to Exhibit 10.7 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2002.2002).EXHIBIT INDEX
Exhibit Number Exhibit Description 10.1910.23Distribution Agreement dated June 20, 2002 between Nu Skin Enterprises Hong Kong, Inc. and Nu Skin (Malaysia) Sdn Bhd incorporated(incorporated by reference to Exhibit 10.8 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2002.2002).10.2010.24Trademark Licensing Agreement dated June 20, 2002 between Nu Skin International, Inc. and Nu Skin (Malaysia) Sdn Bhd incorporated(incorporated by reference to Exhibit 10.9 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2002.2002).10.2110.25License Agreement dated June 20, 2002 between Nu Skin International, Inc. and Nu Skin (Malaysia) Sdn Bhd incorporated(incorporated by reference to Exhibit 10.10 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2002.2002).10.2210.26Form of Amended and Restated Stockholders Agreement dated as of November 28, 1997, incorporated by reference to Exhibit 10.25 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1997.10.23Amendment No. 1 to Amended and Restated Stockholders Agreement dated as of November 28, 1997, incorporated by reference to Exhibit 10.55 to the Company's Annual Report on Form 10-K for the year ended December 31, 1998.10.24Amendment No. 2 to Amended and Restated Stockholders Agreement, incorporated by reference to Exhibit 10.31 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1999.10.25incorporated(incorporated by reference to Exhibit No. 10.50 to Amendment No. 2 to the Company Registration Statement on Form S-3 filed July 22, 2002 (File No. 333-90716)).10.2610.27Stock Purchase Agreement between Nedra Roney and Nu Skin Enterprises, Inc. dated May 3, 2002 incorporated(incorporated by reference to Exhibit 10.4 to the Company'sCompany’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2002.2002).8410.2710.28Distributor Stock Option Payment Agreement incorporated(incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2002.2002).10.2810.29Master Lease Agreement dated January 16th 2003 by and between the Company and Scrub Oak, LLC.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).10.2910.30Amendment No. 1 to the Master Lease Agreement, dated January 16theffective as of July 1, 2003, bybetween Nu Skin International Inc. and between the Company and Aspen Country,Scrub Oak, LLC10.30Promissory noted dated July 5, 2001 executed by Joseph Chang in favor of the Company, incorporated (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended JuneSeptember 30, 2000.10.31 Trust DeedMaster Lease Agreement dated July 5, 2001 executedJanuary 16, 2003 by Joseph Chang in favor ofand between the Company incorporatedand Aspen Country, LLC (incorporated by reference to Exhibit 10.310.29 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2003).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 JuneSeptember 30, 2000.2003).EXHIBIT INDEX
10.32ExhibitPromissory Note dated October 25, 2001 executed by Lori Bush in favor of the Company incorporated by reference to NumberExhibit 10.31 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2001.Description10.33Trust Deed dated October 25, 2001 executed by Lori Bush in favor of the Company incorporated by reference to Exhibit 10.32 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2001.10.3410.33Form of Indemnification Agreement to be entered into by and among the Company and certain of its officers and directors incorporated(incorporated by reference to Exhibit 10.1 to the Company’s Form S-1.S-1).10.3510.34Employment Agreement, dated May 1, 1993, by and between Nu Skin Japan and Takashi Bamba incorporated by reference to Exhibit 10.4 to the Company’s Form S-1.10.36incorporated(incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2000.10.3710.35Amendment to Employment Agreement by and between Pharmanex and Joseph Chang incorporated(incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2001.2001).10.3810.36Form of Stock Option Agreement (Directors) , incorporated (incorporated by reference to Exhibit 10.4 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2001.2001).10.3910.37Option Agreement by and between the Company and M. Truman Hunt incorporated by reference to Exhibit 10.19 to the Company's Form S-1.8510.40incorporated(incorporated by reference to Exhibit 10.48 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1998.10.4110.38Form of Deferred Compensation Plan (New Form) , incorporated (incorporated by reference to Exhibit 10.49 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1998.1998).10.4210.39Amendment in Total and Complete Restatement of NSI Compensation Trust incorporated(incorporated by reference to Exhibit 10.50 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1998.1998).10.4310.40Second Amended and Restated Nu Skin Enterprises, Inc. 1996 Stock Incentive Plan (corrected version) , incorporated (incorporated by reference to Exhibit 10.39 to the Company'sCompany’s Annual Report on Form 10-K for the year ended December 31, 1999.1999).10.4410.41Amendment 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). 10.42 Base Form of Master Stock Option Agreement.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).10.4510.43Summary Description of Nu Skin Japan Director Retirement Allowance Plan incorporated(incorporated by reference to Exhibit 10.49 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2001.2001).EXHIBIT INDEX
Exhibit Number Exhibit Description 10.4610.44Country/Region Executive-Incentive Plan incorporated(incorporated by reference to Exhibit No.10.4910.49 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2001.2001).10.4710.45Deferred Compensation Plan dated as of October 16, 2000 between Nu Skin International, Inc. and Max L. Pinegar (IncorporatedEmployment Letter with Truman Hunt (incorporated by reference to Exhibit No. 10.51 to Amendment No. 210.49 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2002).10.46 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). 10.47 Letter of Understanding with Corey Lindley effective December 22, 2003 (Supplementing Letter of Understanding effective August 8, 2002). 10.48 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). 10.49 Amendment #1 to Consulting Agreement dated July 31, 2003 between the Company and Woodclyffe Group, LLC. 10.50 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). 10.51 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 filed)filed October 20, 2003).10.4810.52Private Shelf Agreement, dated as of August 26, 2003, between Nu Skin Enterprises, Inc. 's Executive Bonus Plan. 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).10.4910.53Employment Letter with Truman Hunt.First Amendment to Private Shelf Agreement, dated as of October 31, 2003 between the Company and Prudential Investment Management, Inc. 10.5010.54Series 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. EXHIBIT INDEX
LetterExhibitNumber Exhibit Description 10.55 Stock Acquisition Agreement, dated as of Understanding with Corey Lindley.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).21.110.5610.57 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). 10.58 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). 10.59 Nu Skin International, Inc. 1997 Key Employee Death Benefit Plan 10.60 Nu Skin Enterprises, Inc. Executive Incentive Plan, last revised January 1, 2004. 10.61 Restricted Stock Purchase Agreement between the Company and Truman Hunt. 10.62 Employment Letter with Robert Conlee effective November 26, 2003. 21.1 Subsidiaries of the Company. 23.1 Consent of PricewaterhouseCoopers LLP.LLP99.131.1Certification ofby M. Truman Hunt, President and Chief Executive Officer.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 2002.99.231.2Certification ofby Ritch N. Wood, Chief Financial Officer.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. 86EXHIBIT INDEXExhibit Number Exhibit Description 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.