<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 14, 1999
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
NU SKIN ENTERPRISES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 87-0565309
(STATE OR JURISDICTION OF INCORPORATION OR (I.R.S. EMPLOYER IDENTIFICATION NUMBER)
ORGANIZATION)
75 WEST CENTER STREET STEVEN J. LUND, PRESIDENT
PROVO, UTAH 84601 NU SKIN ENTERPRISES, INC.
(801) 345-6100 75 WEST CENTER STREET
PROVO, UTAH 84601
(801) 345-6100
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, (NAME, AND ADDRESS, INCLUDING ZIP CODE, AND
INCLUDING AREA TELEPHONE NUMBER,
CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) INCLUDING AREA CODE, OF AGENT FOR SERVICE)
</TABLE>
COPIES TO:
<TABLE>
<S> <C> <C>
NOLAN S. TAYLOR, ESQ. M. TRUMAN HUNT, ESQ. KEVIN P. KENNEDY, ESQ.
LEBOEUF, LAMB, GREENE & MACRAE, NU SKIN ENTERPRISES, INC. SHEARMAN & STERLING
L.L.P. 75 WEST CENTER STREET 1550 EL CAMINO REAL
1000 KEARNS BUILDING PROVO, UTAH 84601 MENLO PARK, CALIFORNIA 94025
136 SOUTH MAIN STREET (801) 345-6100 (650) 330-2200
SALT LAKE CITY, UTAH 84101-1685
(801) 320-6700
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
PROPOSED
MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(1)(2) PRICE FEE
- -----------------------------------------------------------------------------------------------------------------------------
Class A common stock, par
value $.001 per share...... 11,500,000 shares $18.68 $214,820,000 $59,720
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The amount to be registered and the proposed maximum aggregate offering
price also include the number and offering price of any shares initially
offered or sold outside the United States that are thereafter sold or resold
in the United States. Offers and sales of shares outside the United States
are being made pursuant to the exemption afforded by Rule 901 of Regulation
S and this Registration Statement shall not be deemed effective with respect
to such offers and sales.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) based upon the average of the high and low prices of
Nu Skin Enterprises' Class A common stock on May 13, 1999 as reported on the
New York Stock Exchange Composite Tape.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(a), MAY
DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED MAY 14, 1999
PROSPECTUS
10,000,000 SHARES
[NU SKIN ENTERPRISES LOGO]
CLASS A COMMON STOCK
------------------------
All of the shares of common stock are being sold by stockholders of Nu Skin
Enterprises. The U.S. underwriters are offering 9,000,000 shares in the United
States and Canada and the Japanese manager is offering 1,000,000 shares in
Japan.
The Class A common stock trades on the New York Stock Exchange under the
symbol "NUS." On May 13, 1999, the last sale price of the Class A common stock
as reported on the New York Stock Exchange was $18 9/16 per share.
INVESTING IN THE CLASS A COMMON STOCK INVOLVES RISKS WHICH ARE DESCRIBED IN
THE "RISK FACTORS" SECTION BEGINNING ON PAGE 9 OF THIS PROSPECTUS.
------------------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- -----
<S> <C> <C>
Public Offering Price...................................... $ $
Underwriting Discount...................................... $ $
Proceeds, before expenses, to selling stockholders......... $ $
</TABLE>
The U.S. underwriters may also purchase up to an additional 1,500,000
shares from the selling stockholders at the public offering price, less the
underwriting discount, within 30 days from the date of this prospectus to cover
over-allotments.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The shares of Class A common stock will be ready for delivery in New York,
New York on or about , 1999.
------------------------
MERRILL LYNCH & CO.
MORGAN STANLEY DEAN WITTER
ADAMS, HARKNESS & HILL, INC.
DONALDSON, LUFKIN & JENRETTE
LEHMAN BROTHERS
U.S. BANCORP PIPER JAFFRAY
------------------------
The date of this prospectus is , 1999.
<PAGE> 3
[INSIDE FRONT COVER]
[LOGOS OF NU SKIN PERSONAL CARE, PHARMANEX AND BIG PLANET DEPICTED IN A CIRCLE]
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.......................................... 4
Risk Factors................................................ 9
Use of Proceeds............................................. 22
Price Range of Class A Common Stock......................... 22
Dividend Policy............................................. 22
Capitalization.............................................. 23
Selected Consolidated Financial Data........................ 24
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 26
Business.................................................... 38
Management.................................................. 68
Principal and Selling Stockholders.......................... 71
Description of Capital Stock................................ 78
Certain United States Federal Tax Considerations for
Non-United States Holders................................. 82
Underwriting................................................ 85
Where You Can Find More Information About Nu Skin
Enterprises............................................... 88
Incorporation of Information We File with The SEC........... 89
Legal Matters............................................... 89
Experts..................................................... 90
Index to Consolidated Financial Statements.................. F-1
</TABLE>
-------------------------
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements. We have based these
forward-looking statements on our current expectations about future events.
These forward-looking statements are subject to risks and uncertainties about
our business, which are more fully described in "Risk Factors" beginning on page
9. This prospectus contains forward-looking statements concerning the planned
acquisition of our affiliate Big Planet, Inc. This proposed acquisition is
subject to the satisfaction of certain conditions including the satisfactory
completion of our due diligence investigation and the receipt of regulatory and
third-party approvals. The proposed acquisition may never be consummated.
-------------------------
The names "Nu Skin," "Pharmanex," "Interior Design Nutritionals," "IDN" and
"6S Quality Process" are trademarks of Nu Skin Enterprises or its affiliates.
"Big Planet" and "InterNetworking" are trademarks of Big Planet. The product
names in all capital letters used in this prospectus are product names and also,
in certain cases, trademarks of Nu Skin Enterprises or its affiliates. All other
trademarks and trade names used in this prospectus are the property of their
respective owners. -------------------------
You should rely only on the information contained or incorporated by
reference in this prospectus. We have not, and the selling stockholders and the
underwriters have not, authorized any other person to provide you with different
information. If anyone provides you with different or inconsistent information,
you should not rely on it. We are not, and the selling stockholders and the
underwriters are not, making an offer to sell these securities in any
jurisdiction where the offer or sale is not permitted. You should assume that
the information appearing in this prospectus is accurate as of the date on the
front cover of this prospectus only. Our business, financial condition, results
of operations and prospects may have changed since that date.
3
<PAGE> 5
PROSPECTUS SUMMARY
This summary may not contain all the information that may be important to
you. You should read the entire prospectus, including the consolidated financial
statements and related notes included elsewhere in this prospectus, before
buying our stock. The terms "Nu Skin Enterprises," "our company" and "we" as
used in this prospectus refer to "Nu Skin Enterprises, Inc." and its
subsidiaries as a combined entity, except where it is made clear that such terms
mean only the parent company. Unless we indicate otherwise, the information
contained in this prospectus assumes no exercise of the underwriters' option to
purchase additional shares from the selling stockholders.
NU SKIN ENTERPRISES, INC.
Nu Skin Enterprises is a leading, global direct selling company that
develops and distributes premium-quality, innovative personal care products and
nutritional supplements. Recently, we entered into an agreement to acquire our
affiliate, Big Planet, Inc., an Internet service provider that also offers
Internet devices, Web site development and hosting, online shopping and
telecommunications products and services. We are one of the largest direct
selling companies in the world with 1998 revenue of $913.5 million and a global
network of over 500,000 active distributors. We currently operate in 27
countries throughout Asia, North and South America and Europe.
We believe our premium-quality products and services are well suited for
our network marketing distribution channel. Distributors market and sell our
products through educating consumers about the benefits and distinguishing
characteristics of our products and providing personalized customer support.
We believe we have been one of the fastest growing global network marketing
companies over the last five years. Our revenue grew at a compounded annual
growth rate of 28.9% from $330.7 million in 1994 to $913.5 million in 1998.
Largely because of the depreciation of Asian currencies against the U.S. dollar
and the Asian economic recession, revenue in 1998 declined by 4.2% from 1997.
Our number of active distributors has expanded from 182,000 at the end of 1994
to over 500,000 today.
RECENT STRATEGIC DEVELOPMENTS
We have undertaken a number of strategic initiatives since the beginning of
1998, which are designed to broaden our business both geographically and across
product lines, simplify our management and corporate structure, diversify our
revenue base and enhance our growth prospects. These initiatives include:
- Acquiring all of our previously private affiliates, including Nu Skin
operations in North America, the right to enter all unopened markets and
all Nu Skin distribution, product and intellectual property rights
throughout the world.
- Acquiring Pharmanex, Inc., a premier developer of nutritional
supplements. This acquisition enhanced our ability to develop innovative
nutritional supplements and to apply high scientific standards to
substantiate product safety and efficacy.
- Entering into an agreement to acquire Big Planet, a network marketer of
technology products and services. The acquisition of Big Planet should
enable us to attract a broader base of distributors and to offer our
global distributor force an opportunity to participate in the dynamic
business trends created by the Internet. We anticipate completing this
acquisition by June 30, 1999.
- Expanding our operations into five additional countries, including
Brazil, one of the world's largest direct selling markets.
4
<PAGE> 6
OPERATING STRENGTHS
- Established Global Network of Over 500,000 Distributors. We believe our
highly supported global distributor network enables us to quickly
penetrate markets with new and existing products and positions us to
effectively launch new product divisions in the future.
- Distinct Branded Product Divisions. We offer distinct, branded products
and business opportunities through our separate divisions, Nu Skin
Personal Care and Pharmanex. Upon the completion of the acquisition of
Big Planet, we will have three divisions, each led by a dedicated
management team with extensive product and industry expertise.
- Innovative, Premium-Quality Product Offerings. We believe we have
developed an extensive portfolio of innovative, premium-quality products
that appeal to broad markets and lead to repeat purchases. We believe
that our expertise and research and product development relationships
should enable us to continue developing and introducing new, innovative
products.
- Seamless Global Distributor Compensation Plan. We believe our
compensation plan is among the most financially rewarding plans offered
to distributors by network marketing companies. We believe we are the
first major network marketing company to allow distributors to be fully
compensated for global sales of downline-sponsored distributors across
separately branded product divisions.
GROWTH STRATEGY
- Introduce Pharmanex and Big Planet in Existing Markets. We intend to
leverage our global distributor network to launch Pharmanex and Big
Planet in countries in which we currently operate. We successfully
launched Pharmanex in the United States in February 1999 and plan to
launch Pharmanex throughout Asia by the end of 1999 and Big Planet in
Japan during the next 18 months.
- Develop New Products. We intend to continue to develop new, innovative
products and services in order to enhance the appeal of each of our
product offerings and business opportunities.
- Generate Increased Brand Awareness and Customer Loyalty. We intend to
increase brand awareness and customer loyalty by increasing our
promotional and public relations efforts. We plan to continue to conduct
and promote clinical research and capitalize on collaborative research
and development arrangements with major universities and research
centers.
- Increase Product Penetration in Existing Markets. We intend to further
penetrate our existing markets, particularly those in Europe and South
America, by introducing many of our existing products not yet available
in those markets.
- Leverage Internet Communications. With the completion of the Big Planet
acquisition, we intend to leverage Big Planet's existing Internet
infrastructure to further develop our e-commerce capabilities and
strengthen our communications link to distributors and customers. We
believe that this will enable us to better attract and retain
distributors and customers. In addition, we believe that the Internet
provides us with a valuable tool for online ordering, product education
and business development.
HOW TO REACH US
Our principal executive offices are located at 75 West Center Street,
Provo, Utah 84601. Our telephone number at that address is (801) 345-6100. Nu
Skin Enterprises is incorporated in Delaware.
5
<PAGE> 7
THE OFFERING
Class A common stock
offered by the selling
stockholders:
U.S. Offering............ 9,000,000 shares
Japanese Offering........ 1,000,000 shares
Total............... 10,000,000 shares of Class A common stock
Shares Outstanding Before
and After the
Offering(1).............. 34,756,818 shares of Class A common stock
53,034,737 shares of Class B common stock
Use of Proceeds............ Nu Skin Enterprises will not receive any proceeds
from this offering.
Risk Factors............... See "Risk Factors" and the other information
included in this prospectus for a discussion of
factors you should carefully consider before
deciding to invest in shares of the Class A common
stock.
Voting Rights.............. The shares of Class A common stock and Class B
common stock are identical in all respects, except:
- Holders of Class A common stock have one vote per
share while holders of Class B common stock have
ten votes per share, and
- Class B common stock may be converted into Class
A common stock at any time on a one-for-one
basis.
Following this offering, beneficial owners of our
Class B common stock will have more than 90% of the
combined voting power of our common stock. See
"Description of Capital Stock" for more information
about our Class A and Class B common stock.
New York Stock Exchange
Symbol................... "NUS"
- -------------------------
(1) Shares outstanding before and after this offering are based on the number of
shares of Class A common stock and Class B common stock actually outstanding
as of May 3, 1999, giving effect to the anticipated conversion of 1,572,168
shares of Class B common stock into Class A common stock, and exclude:
- 67,044 shares of Class A common stock issuable pursuant to contingent
stock awards and 3,346,572 shares issuable upon the exercise of stock
options outstanding as of May 3, 1999 at a weighted average exercise
price of $11.72 per share, and
- 5,963,493 shares of Class A common stock available for future grant or
issuance under our various stock incentive plans.
6
<PAGE> 8
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
The following tables set forth our summary consolidated and other financial
information. The consolidated financial statements for the periods prior to
December 31, 1998 have been combined and restated for the acquisition of Nu Skin
International, Inc. and affiliates operating in Europe, Australia and New
Zealand.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1994 1995 1996 1997 1998
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenue................................. $330,680 $435,855 $761,638 $953,422 $913,494
Cost of sales........................... 76,012 101,474 171,187 191,218 188,457
Cost of sales -- amortization of
inventory step-up..................... -- -- -- -- 21,600
-------- -------- -------- -------- --------
Gross profit............................ 254,668 334,381 590,451 762,204 703,437
-------- -------- -------- -------- --------
Operating expenses:
Distributor incentives................ 104,994 139,495 282,588 362,195 331,448
Selling, general and administrative... 86,931 115,950 168,706 201,880 202,150
Distributor stock expense............. -- -- 1,990 17,909 --
In-process research and development... -- -- -- -- 13,600
-------- -------- -------- -------- --------
Total operating expenses................ 191,925 255,445 453,284 581,984 547,198
-------- -------- -------- -------- --------
Operating income........................ $ 62,743 $ 78,936 $137,167 $180,220 $156,239
======== ======== ======== ======== ========
Net income(1)........................... $ 44,717 $ 49,947 $ 84,712 $118,493 $103,917
======== ======== ======== ======== ========
Net income per share:
Basic................................. $ 0.57 $ 0.63 $ 1.07 $ 1.42 $ 1.22
Diluted............................... $ 0.54 $ 0.61 $ 1.02 $ 1.36 $ 1.19
Weighted average common shares
outstanding:
Basic................................. 78,660 78,660 79,194 83,331 84,894
Diluted............................... 82,459 82,459 83,001 87,312 87,018
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
----------------------------------------------------
1994 1995 1996 1997 1998
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............... $ 63,550 $ 84,000 $214,823 $174,300 $188,827
Working capital......................... 65,446 56,801 143,308 123,220 164,597
Total assets............................ 119,908 182,154 380,482 405,004 606,433
Total debt.............................. -- -- 71,487 136,200 153,279
Stockholders' equity.................... 63,849 68,363 113,495 94,892 254,642
</TABLE>
7
<PAGE> 9
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
----------------------------------------------------
1994 1995 1996 1997 1998
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
OTHER OPERATING DATA(2):
Number of active distributors........... 182,000 260,000 397,000 448,000 470,000
Number of executive distributors........ 6,391 8,173 21,479 22,689 22,781
</TABLE>
- ---------------
(1) Net income:
- For 1996 includes a one-time charge of $2.0 million and for 1997
includes a one-time charge of $17.9 million, both related to the
non-cash and nonrecurring expenses associated with stock option grants
made to our distributors in connection with our initial public
offering,
- For 1998 includes a nonrecurring charge of $21.6 million due to the
step-up of inventory as a result of our acquisition of Nu Skin
International and a nonrecurring charge of $13.6 million due to the
write-off of in-process research and development as a result of our
acquisition of Pharmanex, and
- For 1996, 1997 and the first quarter of 1998 reflects Nu Skin
International and its private affiliates, which we acquired in March
1998, being taxed as S Corporations during these periods.
Assuming Nu Skin International and its private affiliates were taxed as C
Corporations and excluding these one-time and nonrecurring charges, net
income would have been $85.8 million in 1996, $119.1 million in 1997 and
$123.3 million in 1998. There were no significant nonrecurring expenses in
1994 or 1995.
(2) Active distributors are those distributors who were resident in the
countries in which we operated and purchased products during the three
months ended as of the date indicated. An executive distributor is an active
distributor who has achieved required personal and group sales volumes. As
of March 31, 1999, the number of active distributors increased to over
500,000 primarily because of the inclusion of distributors formerly licensed
to our affiliate Nu Skin USA, Inc.
8
<PAGE> 10
RISK FACTORS
You should carefully consider the following risk factors as well as the
other information included and incorporated by reference in this prospectus
before deciding to invest in shares of the Class A common stock.
The following are risks that we currently face in our business. Later in
this section we discuss risks that we may face upon completing the planned Big
Planet acquisition.
ADVERSE ECONOMIC AND POLITICAL CONDITIONS IN SOME OF OUR ASIAN MARKETS,
PARTICULARLY JAPAN, COULD HARM OUR BUSINESS.
Economic and political conditions in our Asian markets have deteriorated in
recent years and may not improve or may worsen. In 1998, our revenue declined by
4.2% from 1997 in part because of economic conditions in these markets.
Continued or worsening economic and political conditions in Asia could further
reduce our revenue. We are particularly susceptible to the adverse effects of
economic and political conditions in Japan, which accounted for approximately
70% of our 1998 revenue. Many countries in Asia have experienced and may
continue to experience:
- Declining stock and currency markets,
- Mounting bad bank debt,
- Bankruptcies involving large businesses,
- High unemployment,
- Excess manufacturing capacity,
- Declining demand for foreign goods, and
- Political unrest.
Any one or more of these events could harm our business.
CURRENCY EXCHANGE RATE FLUCTUATIONS COULD LOWER OUR REPORTED REVENUE AND NET
INCOME.
We recognize most of our revenue in non-United States markets using local
currencies. We purchase inventory primarily in the United States and in U.S.
dollars. In preparing our financial statements, we translate our revenue and
expenses in these countries from their local currencies into U.S. dollars using
weighted average exchange rates. If the U.S. dollar strengthens relative to
local currencies, our revenue and net income will likely diminish. For example,
the weakening of the Japanese yen relative to the U.S. dollar negatively affects
our revenue and net income because approximately 70% of our revenue is derived
from the Japanese market. The 4.2% decrease in our 1998 revenue from 1997
resulted largely from decreases in the value of the Japanese yen relative to the
U.S. dollar.
Given the uncertainty of exchange rate fluctuations, we cannot estimate the
effect these fluctuations may have upon our future business, product pricing,
results of operations or financial condition. However, because nearly all of our
revenue is realized in local currencies and the majority of our cost of sales is
denominated in U.S. dollars, our gross profits will be positively affected by a
weakening in the U.S. dollar and will be negatively affected by a strengthening
of the U.S. dollar. Although we attempt to reduce our exposure to exchange rate
fluctuations by using foreign currency exchange contracts, we cannot be certain
these contracts or any other hedging activity will effectively reduce our
exchange rate exposure.
IF THE NUMBER OR PRODUCTIVITY OF OUR INDEPENDENT DISTRIBUTORS DOES NOT INCREASE,
OUR REVENUE WILL NOT INCREASE.
We distribute our products exclusively through independent distributors,
and we depend upon them directly for substantially all of our revenue. As a
result, to increase our revenue, our distributors
9
<PAGE> 11
must increase in number and/or become more productive. We cannot assure you that
our distributors will increase or maintain their number or productivity. Over
the past several years, the rate of increase in the number of our distributors
has slowed. This trend may continue. Our distributors may terminate their
services to us at any time, and we experience high turnover among our
distributors from year to year. We also cannot accurately predict how the number
and productivity of our distributors may fluctuate because we rely upon existing
distributors to sponsor and train new distributors and to motivate new and
existing distributors. The number and productivity of our distributors depend on
several additional factors, including:
- Adverse publicity regarding us, our products or our competitors,
- The public's perception of our products and their ingredients,
- The public's perception of our distributors and direct selling businesses
in general,
- General economic and business conditions, and
- Local holidays and customary vacation periods in some countries.
In addition, the number of distributors as a percentage of the population in a
given country or market could theoretically reach levels that become difficult
to exceed due to the finite number of persons inclined to pursue a direct
selling business opportunity. This is of particular concern in Taiwan, where
industry sources have estimated that up to 10% of the population is already
involved in some form of direct selling.
ADVERSE PUBLICITY COULD REDUCE THE SIZE OF OUR DISTRIBUTION FORCE AND
CONSEQUENTLY REDUCE OUR REVENUE.
In the past, adverse publicity has harmed our business operations.
Additional adverse publicity in the future could reduce the size of our
distribution force and consequently reduce our revenue. Specifically, we are
susceptible to adverse publicity concerning:
- The legality of network marketing,
- The quality of our company's and competitors' products and product
ingredients,
- Regulatory investigations of our company or competitors and their
respective products, and
- Public perception of direct selling businesses generally.
Distributor actions that result in adverse publicity could also harm our
business. Because our distributors are independent contractors and not
employees, we cannot provide to them the same level of direction, motivation and
oversight as we would to our employees. We may have difficulties enforcing our
policies and procedures governing our distributors because of their
independence, their large number and regulations in some countries that limit
our ability to monitor and control the sales practices of distributors or
terminate relationships with distributors.
GOVERNMENT INQUIRIES, INVESTIGATIONS AND ACTIONS COULD HARM OUR BUSINESS.
From time to time we receive inquiries from various government regulatory
authorities about our business and our compliance with local laws and
regulations. Also, our subsidiaries are periodically reviewed and audited by
various governmental agencies. Any assertion or determination that we, our
subsidiaries or any of our distributors is not in compliance with existing laws
or regulations could potentially harm our business. Even if governmental actions
against us do not result in rulings or orders against us, they potentially could
create negative publicity for us. Negative publicity could detrimentally affect
our efforts to motivate and recruit new distributors and, consequently, reduce
our revenue and net income.
In addition, we are susceptible to government initiated campaigns that do
not rise to the level of formal regulations. For example, the Korean government,
several Korean trade groups and members of Korean media initiated campaigns in
1997 and 1998 urging Korean consumers not to purchase
10
<PAGE> 12
luxury or foreign goods. We believe that these campaigns, and the related media
attention they received, together with the economic recession in the Korean
economy, significantly harmed our Korean business. Our revenue from our Korean
operation decreased by 84.6% in 1998 as compared to 1997. We cannot assure you
that similar government, trade group or media actions will not occur again in
Korea or in other countries where we operate and that such events will not
similarly harm our operations.
THE LOSS OF KEY HIGH-LEVEL DISTRIBUTORS COULD REDUCE OUR REVENUE.
Although we have over 500,000 distributors, we estimate that approximately
300 distributors currently occupy the highest levels under our Global
Compensation Plan. These distributors, together with their extensive networks of
downline-sponsored distributors, account for substantially all of our revenue.
As a result, the loss of a high-level distributor or a group of leading
distributors in such distributor's network of downline distributors could
significantly reduce our revenue. See "Business -- Distribution System" for a
more detailed discussion of our distribution system under our Global
Compensation Plan.
FAILING TO SUCCESSFULLY INTEGRATE OUR RECENT OR FUTURE ACQUISITIONS COULD HARM
OUR BUSINESS AND RESULTS OF OPERATIONS.
We face significant challenges integrating into our operations our recent
acquisitions of Nu Skin International, Pharmanex and our other affiliates in
North America. The completion of our proposed acquisition of Big Planet will
increase these challenges. Our failure to successfully integrate our
acquisitions into our recent or future business could lower the revenue,
earnings and business synergies we expect from such acquisitions. Some of the
challenges we have faced and may continue to face include:
- Increasing strain on our management team to effectively manage a
worldwide business that is growing in complexity and diversity and which
will require, among other things, developing additional expertise and
hiring and integrating new management personnel,
- Incorporating Pharmanex products successfully into our direct sales
distribution system, and
- The fact that accounting for completed and proposed acquisitions could
reduce our reported earnings.
WE MAY NOT COMPLETE OUR PLANNED ACQUISITION OF BIG PLANET, AND, EVEN IF WE DO
COMPLETE THIS ACQUISITION, WE MAY NOT BE ABLE TO OPERATE BIG PLANET PROFITABLY.
We cannot assure you that the Big Planet acquisition will ever be
consummated or that the benefits and business synergies we anticipate from this
acquisition will ever materialize. We will not complete our proposed acquisition
of Big Planet until a number of conditions are satisfied, including:
- Completing our due diligence investigation of Big Planet, and
- Receiving various federal and state government and third-party approvals.
Even if we do complete this acquisition, we may never be able to operate Big
Planet profitably or effectively market its products and services through our
network marketing system. We may face difficulty selling Big Planet's price
sensitive products and services through our network marketing system. Big Planet
incurred operating losses of approximately $22 million in 1998, and we
anticipate further operating losses in the foreseeable future. We may be unable
to increase Big Planet's sales and reduce its costs to reverse such operating
losses. We may not be able to successfully leverage Big Planet's existing
Internet infrastructure to further strengthen our link to distributors and
customers. See "Business -- Strategic Recent Developments" for a more detailed
discussion of our proposed acquisition of Big Planet.
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IF CHOLESTIN IS DETERMINED TO BE A DRUG REQUIRING FDA APPROVAL, OUR SALES OF
CHOLESTIN WILL DECREASE AND OUR BUSINESS WILL BE HARMED.
A federal district judge ruled in February 1999 that the Pharmanex product
CHOLESTIN could be sold as a nutritional supplement and is not a drug requiring
Federal Drug Administration approval. In April 1999, the FDA asked the Tenth
Circuit Court of Appeals to overturn the district court's decision. If the FDA
succeeds in its appeal and CHOLESTIN is determined to be a drug that cannot be
marketed without FDA approval, we will be unable to sell CHOLESTIN as a dietary
supplement in the United States. This would likely diminish distributor morale.
See "Business -- Legal Proceedings" for more information about this litigation.
LAWS AND REGULATIONS MAY PROHIBIT OR SEVERELY RESTRICT OUR DIRECT SALES EFFORTS
AND CAUSE OUR SALES AND PROFITABILITY TO DECLINE.
Various government agencies throughout the world regulate direct sales
practices, intending generally to prevent fraud. If we are unable to continue
our business in our existing markets or commence operations in new markets
because of these laws, our revenue and profitability will decline. The People's
Republic of China and Singapore currently have laws that prohibit all direct
sellers from conducting business in such markets. Other countries in which we
currently do business could change their laws or regulations to negatively
affect or prohibit completely our direct sales efforts. Additionally, government
agencies and courts in the countries where we operate may use their powers and
discretion in interpreting and applying laws in a manner that limits our ability
to operate or otherwise harms our business. Also, if any governmental authority
brings a regulatory enforcement action against us that interrupts our direct
sales efforts, our business could suffer. See "Business -- Government
Regulation" for additional discussion of regulations and laws governing our
direct sales practices.
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. We are currently
subject to litigation commenced by certain Canadian distributors in 1993 which
involves claims under federal securities laws and state anti-pyramid laws. An
adverse judicial decision in such lawsuit, a determination that our marketing
system constitutes a security, or the initiation of additional lawsuits
challenging the legality of our network marketing system would harm our
business. In the United States, the network marketing industry and regulatory
authorities have generally relied on the implementation of distributor rules and
policies designed to promote retail sales, to protect consumers and to prevent
inappropriate activities such as inventory loading in order to distinguish
between legitimate network marketing distribution plans and unlawful pyramid
schemes. We have adopted rules and policies based on those the Federal Trade
Commission found acceptable in reviewing the legality of Amway Corporation's
marketing system. We have also adopted our rules and policies based on
negotiations and discussions with the Attorney General's offices in several
states and the FTC, and based on industry standards required by domestic and
global direct sales associations. Legal and regulatory requirements concerning
network marketing systems, however, involve a high level of subjectivity, are
inherently fact based, and are subject to judicial interpretation. For example,
in a 1996 case, Webster v. Omnitrition, the Ninth Circuit Court of Appeals ruled
that the existence of rules patterned after the rules reviewed by the FTC in the
Amway case do not establish as a matter of law that a network marketing system
is legal. The court indicated that a company may need to introduce evidence that
the rules and policies are enforced and actually serve to deter inventory
loading and encourage retail sales in order to demonstrate that a particular
network marketing system is lawful. The Ninth Circuit also raised questions and
issues concerning the effectiveness of the rules at issue in that case and
remanded the case back to the trial court. These issues have not been
definitively addressed by either a regulatory body or court since Webster v.
Omnitrition. Because of the foregoing, we cannot assure you that we will not be
harmed by the application or interpretation of statutes or regulations governing
network marketing.
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GOVERNMENT REGULATION OF OUR PERSONAL CARE AND NUTRITIONAL PRODUCTS MAY RESTRICT
OUR ABILITY TO INTRODUCE THESE PRODUCTS IN SOME MARKETS AND COULD HARM OUR
BUSINESS AS A RESULT.
Our products and our related marketing and advertising efforts are subject
to extensive government regulation. We may be unable to introduce our products
in some markets if we fail to obtain needed regulatory approvals, or if any
product ingredients are prohibited. Failure to introduce or delays in
introducing our products could reduce our revenue and decrease our
profitability. Regulators also may prohibit us from making therapeutic claims
about our products even if we have research and independent studies supporting
such claims. These product claim restrictions could lower sales of some
products. See "Business -- Government Regulation" for more information about
government regulation of our personal care and nutritional products.
FOREIGN LAWS GOVERNING INTERCOMPANY FUND TRANSFERS COULD HARM OUR BUSINESS.
As a United States company doing business abroad through our subsidiaries,
we are subject to foreign tax, exchange control and transfer pricing laws that
regulate the flow of funds between our company and our subsidiaries. Local
regulators may closely monitor our structure as a foreign corporation and how we
effect intercompany fund transfers. If local regulators challenge our corporate
structure or our intercompany transfers, our operations may be harmed. We
further cannot assure you that we will continue operating in compliance with all
foreign 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.
INCREASES IN DUTIES ON OUR IMPORTED PRODUCTS IN OUR NON-UNITED STATES MARKETS
WOULD REDUCE OUR REVENUE AND COULD HARM OUR COMPETITIVE POSITION.
Historically, we have imported most of our products into the countries in
which they are ultimately sold. These countries impose various legal
restrictions on imports and typically impose duties on our products. In any
given country, regulators may increase duties on imports and as a result reduce
our revenue and harm our competitive position compared to locally produced
goods. In some countries, government regulators have or may prevent importing
our products altogether.
LOSING ANY OF OUR LIMITED SUPPLIERS OR RIGHTS TO SELL OUR PRODUCTS COULD HARM
OUR BUSINESS.
We currently acquire products and ingredients from the sole suppliers or
from the suppliers we consider to be the best suppliers of our products and
ingredients. We also license the right to distribute some of our products from
third parties. Losing any of these suppliers or licenses could restrict our
ability to produce or distribute our products and harm our sales as a result. We
obtain some of our botanical products from plants that can only be harvested
once a year. As a result, problems growing a certain plant in a given year could
limit our ability to produce a product with ingredients derived from that plant.
See "Business -- Operating Divisions -- Pharmanex -- Pharmanex Sourcing and
Production" for a more detailed discussion of our product suppliers.
WE COULD LOSE OUR ABILITY TO SELL CHOLESTIN OR CORDYMAX CS-4 OR BE SUBJECT TO
SIGNIFICANT PENALTIES FOR FAILING TO MEET MINIMUM PURCHASE REQUIREMENTS.
We have entered into license agreements that enable us to distribute
CHOLESTIN and CORDYMAX CS-4, both well-publicized Pharmanex products. If we fail
to satisfy minimum purchase requirements under these license agreements or
otherwise default on our obligations, we could be required to pay a penalty of
up to approximately $7.5 million in connection with our CHOLESTIN contracts and
up to approximately $2.0 million in connection with the CordyMax Cs-4 contract
and be deemed to be in default of such contracts. If any of these licenses is
terminated as a result and we are no longer able to sell CHOLESTIN or CORDYMAX
CS-4, our growth prospects would be harmed.
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OUR MARKETS ARE INTENSELY COMPETITIVE, AND MARKET CONDITIONS AND THE STRENGTHS
OF OUR COMPETITORS MAY HARM OUR BUSINESS.
The markets for our personal care and nutritional products are intensely
competitive. We also compete with other network marketing companies for
distributors. Our business and results of operations may be harmed by market
conditions and competition in the future. Many of our competitors have much
greater name recognition and financial resources than we have, which may give
them a competitive advantage. Also, we currently do not have significant patent
or other proprietary protection for our products, and our competitors may
introduce products with the same natural ingredients and herbs as we use in our
products. For example, our health supplement CHOLESTIN, which contains red yeast
rice, has received recent publicity. In response to this publicity, we believe
that competitors have introduced competing products using red yeast rice.
Because of restrictions under regulatory requirements concerning claims we can
make about dietary supplements, we may have a difficult time differentiating our
products from our competitors' products. Accordingly, as a result of these
competing products entering the market, our sales of CHOLESTIN and other natural
supplements could suffer. See "Business -- Competition." for more information
about the competitive nature of our markets.
WE MAY FAIL TO ACCURATELY IDENTIFY AND RESOLVE SIGNIFICANT YEAR 2000 PROBLEMS
WITHIN OUR BUSINESS, OR IMPORTANT SUPPLIERS MAY BE UNABLE TO SUPPLY GOODS AND
SERVICES BECAUSE OF YEAR 2000 PROBLEMS.
Many currently installed computer systems and software products are coded
to accept only two-digit entries in the date code field. Beginning on January 1,
2000, these code fields will need to accept four-digit entries to distinguish
21st century dates from 20th century dates. Many companies' software and/or
computer systems may need to be upgraded or replaced in order to correctly
process dates beginning in 2000 and to comply with the Year 2000 requirements.
We may not accurately identify all potential Year 2000 problems within our
business, and the corrective measures we may implement may be ineffective or
incomplete. Any such problems could interrupt our operations and cause our
revenue to decrease. Similar problems and consequences could result if any of
our key vendors and suppliers, such as technology and telecommunication service
providers, manufacturers and suppliers, experience Year 2000 problems. We are
particularly vulnerable to the Year 2000 readiness of our vendors and suppliers
in our foreign markets. We also cannot control or otherwise predict the Year
2000 readiness of foreign governments, utility companies and other parties
unrelated to us that could impact our operations. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations" for additional
discussion of Year 2000 issues as they affect our business. See also "-- Big
Planet's business could be harmed by Year 2000 compliance issues" for additional
discussion of Year 2000 issues as they affect Big Planet's business.
IF WE FAIL TO SUCCESSFULLY INTEGRATE THE INTERNET INTO OUR EXISTING OPERATIONS,
OUR BUSINESS MAY BE HARMED.
We believe that direct selling companies will need to adapt their business
models to integrate the Internet into their operations as more and more
consumers purchase goods and services using the Internet instead of traditional
retail and direct sales channels. We cannot assure you that we, or our
distributors, will be able to adequately adapt to using new technology or sales
channels or effectively integrate the Internet into our direct sales practices.
If we or our distributors fail to adequately adapt to the Internet we could lose
our ability to compete with others in the industry and our business would be
harmed. See "Business -- Distribution System" for more information about our
plans to integrate the Internet into our existing operations.
THE HOLDERS OF OUR CLASS B COMMON STOCK CONTROL OVER 90% OF THE COMBINED VOTING
POWER, AND THIRD PARTIES WILL BE UNABLE TO GAIN CONTROL OF OUR COMPANY THROUGH
PURCHASES OF CLASS A COMMON STOCK.
The ten original stockholders of our company together with their family
members and affiliates have the ability to control the election of our board of
directors, and, as a result, our future direction and
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operations, without the supporting vote of any other stockholder. These
stockholders together with their family members and affiliates are able to
control decisions about future acquisitions and other business opportunities,
declaring dividends and issuing additional shares of Class A common stock or
other securities. These stockholders own shares of our Class B common stock,
which shares have ten-to-one voting privileges over shares of Class A common
stock. Currently, these stockholders and their affiliates collectively own 100%
of the outstanding shares of the Class B common stock, which represents more
than 90% of the combined voting power of the outstanding shares of both classes
of our common stock. As long as these stockholders are our majority
stockholders, third parties will not be able to obtain control of our company
through open-market purchases of shares of Class A common stock.
WE MAY BE UNABLE TO BENEFIT FULLY FROM FOREIGN TAX CREDITS AND, AS A RESULT, MAY
PAY MORE CORPORATE TAX THAN OTHER UNITED STATES COMPANIES MUST PAY.
If we are unable to utilize fully our foreign corporate tax credits, we may
pay a higher overall corporate tax rate on our worldwide operations than we
would if we operated only in the United States. Our company is taxed in the
United States, where we are incorporated, at a statutory corporate federal tax
rate of 35.0% plus any applicable state income taxes. Each of our subsidiaries,
however, is taxed in the country in which it operates, at a rate that may vary
above or below our current United States tax rate. For example, our subsidiary
in Japan has historically been subject to a tax rate of approximately 57%. We
are eligible to receive foreign tax credits in the United States for the amount
of foreign taxes actually paid in a given period. However, since our operations
in Japan have grown disproportionately to the rest of our operations, we have
for the past two years been unable to take advantage fully of our foreign tax
credits in the United States. As a result, we have paid an overall effective tax
rate on our worldwide operations that exceeds the statutory rate in the United
States. This foreign tax situation could grow worse and our effective tax rate
could rise still further if our Japanese business continues to grow at a
disproportionate rate compared to the rest of our business.
PRODUCT LIABILITY CLAIMS EXCEEDING OUR PRODUCT LIABILITY INSURANCE COVERAGE
COULD HARM OUR BUSINESS.
We may be required to pay for losses or injuries caused by our products. If
our product liability insurance coverage fails to cover fully future product
liability claims, we could be required to pay substantial monetary damages,
which could harm our business. We currently maintain an insurance policy
covering product liability claims against our company and our affiliates with a
$1 million per claim and $1 million annual aggregate limit and an umbrella
policy with a $40 million per claim and a $40 million annual aggregate limit.
SHARES ELIGIBLE FOR FUTURE SALE COULD AFFECT THE MARKET PRICE OF OUR CLASS A
COMMON STOCK.
If our stockholders sell a substantial number of shares of our Class A
common stock in the public market following this offering, 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 B common stock. A decision by
one or more of these stockholders to convert such shares into Class A common
stock, which conversion could happen at any time, and sell their shares could
lower the market price of the Class A common stock. Upon completion of this
offering, we will have outstanding an aggregate of 87,791,555 shares of Class A
common stock and Class B common stock, including 47,785,824 restricted shares
held by persons who may be deemed affiliates of the Company. The restricted
shares may in the future be sold without registration under the Securities Act
to the extent permitted by Rule 144 under the Securities Act or any applicable
exemption under the Securities Act. In connection with this offering, we, our
executive officers and directors, the selling stockholders and certain of our
other stockholders have agreed that, subject to certain exceptions, we will not
sell, offer or contract to sell any shares of common stock without the prior
written consent of Merrill Lynch & Co., for a period of 90 days after the date
of this prospectus.
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The following are additional risks that we may face upon completing our
planned Big Planet acquisition pertaining to the offering of Internet services
and devices, online shopping, Web site hosting and development and other
technology products and services.
BIG PLANET'S CURRENT OBLIGATIONS TO MAKE MINIMUM PURCHASES OF PRODUCTS, SERVICES
AND EQUIPMENT COULD HARM ITS BUSINESS.
Big Planet has agreed to purchase technology and telecommunications
products, services and equipment from several suppliers. Under these agreements,
Big Planet is committed to make minimum purchases totaling approximately $96
million over the next five years. Big Planet is obligated to make these payments
or aggregate termination payments of up to $32.0 million regardless of whether
it is able to develop sufficient consumer demand for resale of these products
and services or whether it needs the additional equipment it has agreed to
purchase. Big Planet's failure to make these payments could place it in default
of its supplier contracts and jeopardize its supplier relationships and ability
to obtain needed products, services and equipment in the future on favorable
terms.
BIG PLANET'S EXPANSION OUTSIDE THE UNITED STATES MAY BE RESTRICTED OR PROHIBITED
BY THE REGULATORY ENVIRONMENT IN NON-UNITED STATES MARKETS.
If Big Planet is unable to implement its business model in foreign markets
due to existing or new regulations in such markets, its growth prospects could
be harmed. Big Planet's ability to provide Internet access and online shopping
and sell Internet devices and telecommunications products and services may be
restricted or prohibited in some foreign markets. Foreign regulations range from
permissive to restrictive depending on the country. For example, some countries,
such as Korea, may impose restrictions on the level of foreign ownership in
companies providing telecommunications services. Some countries do not permit
private competition in the provision of public switched voice communications
services. Some countries may also regulate different services than those
regulated in the United States, including, but not limited to, Internet access
service. Big Planet and other similarly situated United States-based carriers
may be prohibited from providing telecommunications services in these markets,
restricting its opportunities for expansion in these markets. Because we are
still in the process of completing the acquisition of Big Planet, our plans for
introducing Big Planet products and services into our foreign markets are in the
preliminary stages. As a result, we are still in the process of analyzing the
various laws and regulations in our markets and the possible effect of such laws
on our ability to introduce these products and services into such markets. We
cannot assure you that such laws will not limit or restrict our ability to
provide Big Planet products and services in some markets or result in delays in
our anticipated timelines for introducing such products.
BIG PLANET MAY BE LIABLE FOR INFORMATION DISSEMINATED THROUGH ITS INTERNET
ACCESS SERVICE.
If Big Planet becomes liable for information provided by its users and
carried on its Internet access service, Big Planet could be directly harmed and
may be forced to implement new measures to reduce its exposure to this
liability. The law relating to the liability of online services companies for
information carried on or disseminated through their services is currently
unsettled. Claims could be made against online services companies under both
United States and foreign law for defamation, libel, invasion of privacy,
negligence, copyright or trademark infringement, or other theories based on the
nature and content of materials accessed through their services. Several private
lawsuits currently are pending that seek to impose liability upon other online
services companies. In addition, federal, state and foreign legislation has been
proposed that imposes liability or prohibits the transmission over the Internet
of different types of information. These lawsuits and proposed legislation may
require us to expend substantial resources and/or to discontinue selected
service offerings. In addition, the increased attention focused upon liability
issues as a result of these lawsuits and legislative proposals could harm our
reputation or otherwise impact the growth of our business. We plan to carry
liability
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insurance, but it may not be adequate to compensate us fully if we become liable
for information carried on or through our service. Any costs incurred as a
result of this liability or asserted liability could harm our business.
SYSTEM FAILURES COULD HARM BIG PLANET'S BUSINESS.
The future success of Big Planet's proposed Internet, Web hosting and
development, telecommunications and other technology products and services
business will depend on the efficient and uninterrupted operation of its
computer and communications hardware and software systems. Substantially all of
Big Planet's computer hardware for operating its service currently is located at
its facilities in Provo, Utah. These systems and operations are vulnerable to
damage or interruption from fires, earthquakes, telecommunication failures and
other events. They are also subject to break-ins, sabotage, intentional acts of
vandalism and similar misconduct. Despite any precautions we may take, the
occurrence of a natural disaster or other unanticipated problems at Big Planet's
facility could result in interruptions in its services and reduce its revenue
and profits in the future.
NEW AND EXISTING REGULATION OF THE INTERNET COULD HARM BIG PLANET'S BUSINESS.
Big Planet is subject to the same federal, state and local laws as other
companies conducting business on the Internet. Today there are relatively few
laws specifically directed towards online services. However, because of the
increasing popularity and use of the Internet and online services, it is
possible that laws and regulations will be adopted with respect to the Internet
or online services. These laws and regulations could cover issues such as online
contracts, user privacy, freedom of expression, pricing, fraud, content and
quality of products and services, taxation, advertising, intellectual property
rights and information security. Applicability to the Internet of existing laws
governing issues such as property ownership, copyrights and other intellectual
property issues, taxation, libel, obscenity and personal privacy is uncertain.
The vast majority of these laws were adopted prior to the advent of the Internet
and related technologies and, as a result, do not contemplate or address the
unique issues of the Internet and related technologies. The Telecommunications
Reform Act of 1996, via the Communications Decency Act, imposes criminal
penalties on anyone who distributes obscene communications on the Internet
knowing that the recipient of the communications is under 18 years of age. Other
nations, including Germany, have taken actions to restrict the free flow of
material deemed to be objectionable on the Internet. Most of such laws that do
reference the Internet, including the recently passed Digital Millennium
Copyright Act, have not yet been interpreted by the courts and their
applicability and reach are therefore uncertain.
Several states have proposed legislation that would limit the uses of
personal user information gathered online or require online services to
establish privacy policies. The Federal Trade Commission also has recently
settled a proceeding with one online service regarding the manner in which
personal information is collected from users and provided to third parties.
Changes to existing laws or the passage of new laws intended to address these
issues could directly affect the way Big Planet does business or could create
uncertainty in the marketplace. This could reduce demand for its services or
increase the cost of doing business. In addition, because we intend to market
our products and services worldwide, foreign jurisdictions may claim that we are
required to comply with their laws. Our failure to comply with foreign laws
could subject us to penalties ranging from fines to bans on our ability to offer
our products and services.
In the United States, companies are required to qualify as foreign
corporations in states where they are conducting business. As an Internet
company, it is unclear in which states Big Planet is actually conducting
business. Our failure to qualify as a foreign corporation in a jurisdiction
where we are required to do so could subject us to taxes and penalties for the
failure to qualify and could result in our inability to enforce contracts in
those jurisdictions. Any new legislation or regulation, or the application of
laws or regulations from jurisdictions whose laws do not currently apply to Big
Planet's business, could harm its business.
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BIG PLANET WILL DEPEND ON THE DEVELOPMENT AND MAINTENANCE OF THE WEB
INFRASTRUCTURE.
The success of Big Planet's service will depend largely on the development
and maintenance of the Web infrastructure. This includes maintenance of a
reliable network backbone with the necessary speed, data capacity and security,
as well as timely development of complementary products such as high speed
modems, for providing reliable Web access and services. Because global commerce
and the online exchange of information is new and evolving, we cannot predict
whether the Web will prove to be a viable commercial marketplace in the long
term. The Web has experienced, and is likely to continue to experience,
significant growth in the number of users and amount of traffic. If the Web
continues to experience increased number of users, increased frequency of use or
increased bandwidth requirements, the Web infrastructure may be unable to
support the demands placed on it. In addition, the performance of the Web may be
harmed by increased users or bandwidth requirements.
The Web has experienced a variety of outages and other delays as a result
of damage to portions of its infrastructure, and it could face outages and
delays in the future. This might include outages and delays resulting from the
"Year 2000" problem. See "-- Big Planet's business could be harmed by Year 2000
compliance issues." These outages and delays could reduce the level of Web
usage. In addition, the Web could lose its viability because of delays in the
development or adoption of new standards and protocols to handle increased
levels of activity or because of increased governmental regulation. The
infrastructure and complementary products or services necessary to make the Web
a viable commercial marketplace for the long term may not be developed
successfully or in a timely manner. Even if these products or services are
developed, the Web may not become a viable commercial marketplace for products
and services such as those that Big Planet offers.
BIG PLANET FACES SIGNIFICANT COMPETITION IN THE MARKET FOR TELECOMMUNICATION
SERVICES.
The telecommunications industry is highly competitive. Big Planet's
existing and potential competitors in this market segment, including AT&T
Corporation, MCI Communications Corp. and Sprint Corporation, have financial,
personnel, marketing and other resources significantly greater than those of Big
Planet or our company, as well as other competitive advantages. Increased
consolidation and strategic alliances in the industry resulting from the
Telecommunications Act of 1996 could give rise to significant new competitors to
Big Planet. We compete primarily on the basis of pricing, transmission quality,
network reliability and customer service and support. Big Planet may be at a
disadvantage because it does not have its own telecommunication facilities and
must rely on its ability to acquire quality and reliable services from
third-party vendors at a price that allows it to resell such services at
competitive rates. The ability of Big Planet to compete effectively in this
market will depend upon its ability to maintain high quality services at prices
equal to or below those charged by its competitors. We cannot assure you that we
or Big Planet will be able to contract with third parties to obtain rates
allowing us to compete on the basis of price in the future or that we will be
able to successfully compete in this market.
BIG PLANET IS SUBJECT TO POTENTIAL HARMFUL EFFECTS OF UNITED STATES REGULATION
OF ITS TELECOMMUNICATIONS SERVICES.
As a provider of long distance, wireless and other telecommunications
services, Big Planet is subject to varying degrees of federal and state
regulation in the United States and similar regulations in foreign countries
into which Big Planet may expand its operations. We cannot assure you that
future regulatory, judicial and legislative changes in any of Big Planet's
markets will not harm Big Planet's business. We also cannot assure you that
domestic regulators or third parties will not raise material issues with regard
to Big Planet's compliance or that noncompliance with applicable regulations or
that regulatory actions against Big Planet will not harm its business. See
"Business -- Government Regulation" for a more detailed discussion of government
regulation of Big Planet's telecommunications services.
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BIG PLANET'S BUSINESS COULD BE HARMED BY YEAR 2000 COMPLIANCE ISSUES.
Although Big Planet believes it will be Year 2000 compliant, it may be
wrong. If it is wrong, it could face unexpected expenses fixing Year 2000
problems or unanticipated Web site outages, either of which could harm Big
Planet's business. It also uses third-party equipment and software that may not
be Year 2000 compliant. Big Planet is unable to make contingency plans covering
the possibility that a significant number of the computers constituting the
Internet may fail to properly process dates for the year 2000 and that there may
be a systemwide slowdown or breakdown. Any interruption or significant
degradation of Internet operations, whether due to Year 2000 problems or
otherwise, could harm Big Planet's business.
BIG PLANET WILL NEED TO KEEP PACE WITH RAPID TECHNOLOGICAL CHANGES TO REMAIN
COMPETITIVE.
The market in which Big Planet competes is characterized by rapidly
changing technology, evolving industry standards, frequent new service and
product introductions and enhancements and changing customer demands. These
market characteristics are worsened by the emerging nature of the Internet and
the apparent need of companies from a multitude of industries to offer Web-based
products and services. Big Planet's future success therefore will depend on its
ability to adapt to rapidly changing technologies, to adapt its services to
evolving industry standards and to continually improve the performance, features
and reliability of its service. Failure to adapt to such changes would harm its
business. In addition, the widespread adoption of new Internet, networking or
telecommunications technologies or other technological changes could require
substantial expenditures to modify or adapt its services or infrastructure.
BIG PLANET MAY FACE SIGNIFICANT COMPETITION IN MARKETS FOR INTERNET ACCESS,
ONLINE SHOPPING, WEB SITE HOSTING AND DEVELOPMENT AND RELATED SERVICES.
The market for Internet access and devices, online shopping, Web site
hosting and development and related services is highly competitive. There are no
substantial barriers to entry and we anticipate that competition will continue
to intensify as the use of the Internet grows. The tremendous growth and
potential market size of the Internet access and e-commerce markets has
attracted many new start-ups as well as existing businesses from different
industries. Current and prospective competitors include other national, regional
and local Internet service providers, long distance and local exchange
telecommunications companies, wireless communications providers and online
service providers.
- Internet Service Providers. According to industry sources, there are over
4,000 Internet Service Providers in the United States and Canada as of
1998, consisting of national, regional and local providers. Big Planet's
current primary competitors include other Internet Service Providers with
a significant national presence, such as America Online, Microsoft
Network, Earthlink and MindSpring. While we believe that Big Planet's
network marketing sales channel distinguishes it from these competitors,
all of these competitors have significantly greater market share, brand
recognition, and financial, technical and personnel resources than Big
Planet.
- Telecommunications Carriers. The major long distance companies including
AT&T Corporation, MCI Communications Corp. and Sprint Corporation offer
Internet access services and compete with Big Planet. The recent sweeping
reforms in the federal regulation of the telecommunications industry have
created greater opportunities for such telecommunications companies to
enter the Internet connectivity market. These telecommunications
carriers, in addition to their substantially greater network coverage,
market presence, and financial, technical and personnel resources, also
have larger existing commercial customer bases than Big Planet.
- Online Service Providers. The dominant online service providers,
including Microsoft Network, America Online and Prodigy, Inc. have all
entered the Internet access business by
19
<PAGE> 21
engineering their current proprietary networks to include Internet access
capabilities. Big Planet competes with these services providers, which
currently are focused on the consumer marketplace and offer their own
content, including chat rooms, news updates, searchable reference
databases, special interest groups and online shopping.
FORWARD-LOOKING STATEMENTS.
Under the captions "Prospectus Summary," "Business" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations" there
are "forward-looking statements" within the meaning of Section 21E of the
Securities Exchange Act of 1934 and Section 27A of the Securities Act of 1933.
These sections and the foregoing "Risk Factors" section contain discussions of
some of the factors that could cause actual results to differ materially. In
addition, when used in this prospectus the words or phrases "will likely
result," "expects," "intends," "will continue," "is anticipated," "estimates,"
"projects," "management believes," "we believe" and similar expressions are
intended to identify "forward-looking statements" within the meaning of the
Exchange Act and the Securities Act.
Forward-looking statements include plans and objectives of management for
future operations. These forward-looking statements involve risks and
uncertainties and are based on assumptions that may not be realized. Actual
results and outcomes may differ materially from those discussed or anticipated.
The forward-looking statements and associated risks set forth herein relate to,
among other things, the:
- Proposed acquisition of Big Planet,
- Proposed introduction of Pharmanex and Big Planet in our existing
markets,
- The shift to a strategic, product-based divisional operating structure
and related modifications of our Global Compensation Plan,
- Expansion of our market share in our current markets,
- Our entrance into new markets,
- Development of new products and new product lines designed for the
network marketing distribution channel and tailored to appeal to the
particular needs of consumers in specific markets,
- Stimulation of product sales by introducing new products and
reintroducing existing products with improvements,
- Creation of innovative, premium-quality products through the research and
development capabilities of Pharmanex,
- Establishment of relationships with major universities and research
centers to assist in nutritional product development and testing,
- Establishment of agreements to expand our products and Big Planet's
products and services offered for sale on the Internet,
- Enhancement and expansion of Big Planet's Internet services and devices,
Web site development and hosting, online shopping and telecommunications
products and services,
- Promotion of distributor growth, retention and leadership through local
market initiatives,
- Upgrading of our technological resources to support distributors,
including using the Internet in distributing products,
- Utilization of technological advancements to improve our direct selling
efforts, and
- Obtaining of regulatory approvals for our products.
20
<PAGE> 22
All forward-looking statements are subject to known and unknown risks and
uncertainties, including those discussed in the above-referenced Risk Factors,
that could cause actual results to differ materially from historical results and
those presently anticipated or projected. We wish to caution readers not to
place undue reliance on any such forward-looking statements, which speak only as
of the date made.
21
<PAGE> 23
USE OF PROCEEDS
Nu Skin Enterprises will not receive any proceeds from the sale of Class A
common stock offered by the selling stockholders.
PRICE RANGE OF CLASS A COMMON STOCK
Our Class A common stock has been trading publicly on the New York Stock
Exchange under the symbol "NUS" since November 22, 1996. The following table is
based upon 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
indicated.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
1997
First Quarter....................................... $30.88 $23.00
Second Quarter...................................... $28.25 $23.63
Third Quarter....................................... $27.19 $19.31
Fourth Quarter...................................... $24.44 $16.00
1998
First Quarter....................................... $25.75 $15.75
Second Quarter...................................... $28.69 $15.50
Third Quarter....................................... $19.25 $10.19
Fourth Quarter...................................... $25.63 $10.31
1999
First Quarter....................................... $25.25 $17.75
Second Quarter, through May 13, 1999................ $22.88 $18.13
</TABLE>
On May 13, 1999, the closing price of our Class A common stock as reported
by the New York Stock Exchange was $18 9/16. The number of holders of record of
our Class A common stock and Class B common stock as of May 3, 1999 was 918.
This number 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.
DIVIDEND POLICY
Nu Skin Enterprises has not paid or declared any cash dividends on its
common stock. We currently anticipate that we will retain all of our earnings
for use in the operation and expansion of our business. We may from time to time
re-evaluate our dividend policy. Any future decisions as to cash dividends will
depend upon our earnings and financial position, our ability to comply with
financial covenants in our credit facility and other factors that our board of
directors may deem appropriate.
22
<PAGE> 24
CAPITALIZATION
The following table sets forth our cash and cash equivalents, our short and
long-term debt, and our capitalization as of December 31, 1998. This table
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the financial statements,
related notes and other financial information included elsewhere in this
prospectus.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1998
-----------------------
(IN THOUSANDS)
<S> <C>
Cash and cash equivalents................................... $188,827
========
Current portion of long-term debt........................... $ 14,545
========
Long-term debt.............................................. $138,734
Stockholders' equity:
Preferred Stock, par value $.001 per share, 25,000,000
shares authorized, no shares issued and outstanding.... --
Class A common stock, par value $.001 per share,
500,000,000 shares authorized, 33,709,257 shares issued
and outstanding(1)..................................... 34
Class B common stock, par value $.001 per share,
100,000,000 shares authorized, 54,606,905 shares issued
and outstanding........................................ 55
Additional paid in capital................................ 146,781
Accumulated other comprehensive income.................... (43,604)
Retained earnings......................................... 158,064
Deferred compensation(2).................................. (6,688)
--------
Total stockholders' equity.................................. 254,642
--------
Total capitalization........................................ $393,376
========
</TABLE>
- -------------------------
(1) Excludes:
- 67,044 shares of Class A common stock issuable pursuant to contingent
stock awards and 3,616,053 shares issuable upon the exercise of stock
options outstanding as of December 31, 1998 at a weighted average
exercise price of $11.27 per share, and
- 5,963,493 shares of Class A common stock available for future grant or
issuance under our stock incentive plans.
(2) Reflects deferred compensation expenses related to the award of employee
restricted stock awards and the grant of options to our distributors.
23
<PAGE> 25
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data as of December 31, 1997
and 1998 and for the years ended December 31, 1996, 1997 and 1998 have been
derived from the audited consolidated financial statements included elsewhere in
this prospectus. The financial data as of December 31, 1994, 1995 and 1996 and
for the years ended 1994 and 1995 are unaudited but, in our opinion, include all
necessary information to present fairly the information included therein. Our
consolidated financial statements for all periods presented before December 31,
1998 have been combined and restated for the acquisition of Nu Skin
International and affiliates operating in Europe, Australia and New Zealand.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1994 1995 1996 1997 1998
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenue............................. $330,680 $435,855 $761,638 $953,422 $913,494
Cost of sales....................... 76,012 101,474 171,187 191,218 188,457
Cost of sales -- amortization of
inventory step-up................. -- -- -- -- 21,600
-------- -------- -------- -------- --------
Gross profit........................ 254,668 334,381 590,451 762,204 703,437
-------- -------- -------- -------- --------
Operating expenses:
Distributor incentives............ 104,994 139,495 282,588 362,195 331,448
Selling, general and
administrative................. 86,931 115,950 168,706 201,880 202,150
Distributor stock expense......... -- -- 1,990 17,909 --
In-process research and
development.................... -- -- -- -- 13,600
-------- -------- -------- -------- --------
Total operating expenses............ 191,925 255,445 453,284 581,984 547,198
-------- -------- -------- -------- --------
Operating income.................... 62,743 78,936 137,167 180,220 156,239
Other income (expense), net......... (394) 650 10,771 8,973 13,599
-------- -------- -------- -------- --------
Income before provision for income
taxes and minority interest....... 62,349 79,586 147,938 189,193 169,838
Provision for income taxes.......... 10,071 19,141 49,526 55,707 62,840
Minority interest(1)................ 7,561 10,498 13,700 14,993 3,081
-------- -------- -------- -------- --------
Net income(2)....................... $ 44,717 $ 49,947 $ 84,712 $118,493 $103,917
======== ======== ======== ======== ========
Net income per share:
Basic............................. $ 0.57 $ 0.63 $ 1.07 $ 1.42 $ 1.22
Diluted........................... $ 0.54 $ 0.61 $ 1.02 $ 1.36 $ 1.19
Weighted average common shares
outstanding:
Basic............................. 78,660 78,660 79,194 83,331 84,894
Diluted........................... 82,459 82,459 83,001 87,312 87,018
</TABLE>
24
<PAGE> 26
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
--------------------------------------------------------
1994 1995 1996 1997 1998
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........... $ 63,550 $ 84,000 $214,823 $174,300 $188,827
Working capital..................... 65,446 56,801 143,308 123,220 164,597
Total assets........................ 119,908 182,154 380,482 405,004 606,433
Short term notes payable to
stockholders...................... -- -- 71,487 19,457 --
Long term notes payable to
stockholders...................... -- -- -- 116,743 --
Short term debt..................... -- -- -- -- 14,545
Long term debt...................... -- -- -- -- 138,734
Stockholders' equity................ 63,849 68,363 113,495 94,892 254,642
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
--------------------------------------------------------
1994 1995 1996 1997 1998
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
OTHER OPERATING DATA(3):
Number of active distributors....... 182,000 260,000 397,000 448,000 470,000
Number of executive distributors.... 6,391 8,173 21,479 22,689 22,781
</TABLE>
- -------------------------
(1) Minority interest represents the ownership interest of Nu Skin International
held by individuals who are not immediate family members. The minority
interest was purchased as part of the acquisition of Nu Skin International
on March 26, 1998.
(2) Net income:
- For 1996 includes a one-time charge of $2.0 million and for 1997
includes a one-time charge of $17.9 million, both related to the
non-cash and nonrecurring expenses associated with stock option grants
made to our distributors in connection with our initial public
offering,
- For 1998 includes a nonrecurring charge of $21.6 million due to the
step-up of inventory as a result of our acquisition of Nu Skin
International and a nonrecurring charge of $13.6 million due to the
write-off of in-process research and development as a result of our
acquisition of Pharmanex, and
- For 1996, 1997 and the first quarter of 1998 reflects Nu Skin
International and its private affiliates, which we acquired in March
1998, being taxed as S Corporations during these periods.
Assuming Nu Skin International and its private affiliates were taxed as C
Corporations and excluding these one-time and nonrecurring charges, net
income would have been $85.8 million in 1996, $119.1 million in 1997 and
$123.3 million in 1998. There were no significant nonrecurring expenses in
1994 or 1995.
(3) Active distributors are those distributors who were resident in the
countries in which we operated and purchased products during the three
months ended as of the date indicated. An executive distributor is an active
distributor who has achieved required personal and group sales volumes. As
of March 31, 1999, the number of active distributors increased to over
500,000 primarily because of the inclusion of distributors formerly licensed
to our affiliate Nu Skin USA.
25
<PAGE> 27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition and results of
operations should be read in conjunction with the consolidated financial
statements and the related notes thereto, which are included in this prospectus.
GENERAL
Nu Skin Enterprises is a leading, global direct selling company involved in
the distribution and sale of premium-quality, innovative personal care and
nutritional products. Recently, we entered into an agreement to acquire our
affiliate Big Planet, an Internet service provider that also offers Internet
devices, Web site development and hosting, online shopping and
telecommunications products and services.
Our revenue is primarily dependent upon the efforts of a network of
independent distributors who purchase products and sales materials from us in
their local currency for resale to our customers or for personal use. We
recognize revenue when products are shipped and title passes to these
independent distributors. Revenue is net of returns, which have historically
been less than 5.0% of gross sales. Distributor incentives are paid to several
levels of distributors on each product sale. The amount and recipient of the
incentive varies depending on the purchaser's position within the Global
Compensation Plan. These incentives are classified as operating expenses. The
following table sets forth revenue information for the time periods indicated.
This table should be reviewed in connection with the tables presented under
"-- Results of Operations," which disclose distributor incentives and other
costs associated with generating the aggregate revenue presented.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
REGION 1996 1997 1998
------ ------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
North Asia........................................... $502.4 $673.6 $665.5
Southeast Asia....................................... 183.7 225.3 159.7
Other Markets........................................ 75.5 54.5 88.3
------ ------ ------
$761.6 $953.4 $913.5
====== ====== ======
</TABLE>
Revenue generated in North Asia represented 73% of total revenue generated
during 1998. Our operations in Japan generated 98% of the North Asia revenue.
Revenue from the Southeast Asia operations generated 17% of total revenue
generated in 1998. Our operations in Taiwan generated 75% of the Southeast Asia
revenue. Revenue generated in Other Markets represented the remaining 10% of
total revenue generated in 1998. The majority of the Other Market revenue in
1998 was generated from sales to and license fees from our North American
private affiliates, which we subsequently acquired.
Cost of sales primarily consists of the cost of products purchased from
third-party vendors (generally in U.S. dollars), the freight cost of shipping
these products to distributors as well as duties related to the importation of
such products. Additionally, cost of sales includes the cost of sales materials
sold to distributors at or near cost. Sales materials are generally purchased in
local currencies. 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 as well as varying import duty
rates levied on imported product lines. In each of our current markets, duties
are generally higher on nutritional products than on personal care products.
Also, as currency exchange rates fluctuate, our gross margin will fluctuate. In
general, however, costs of sales move proportionate to revenue.
26
<PAGE> 28
Distributor incentives are our most significant expense. Distributor
incentives are paid to distributors on a monthly basis based upon their personal
and group sales volume as well as the group sales volume of up to six levels of
executive distributors in their downline sales organization. These incentives
are computed each month based on the sales volume and network of our global
distributor force. 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, with over 500,000
active distributors, the fluctuation in the overall payout is relatively small.
The overall payout averages from 39% to 41% of global product sales. Sales
materials and starter kits as well as sales to our recently acquired North
American private affiliates are not subject to distributor incentives.
Distributor incentives include the cost of computing and paying commissions as
well as the cost of incentive programs for distributors including an annual trip
to Hawaii for our leading distributors. These additional costs average
approximately 1% of revenue.
In the fourth quarter of 1996, we implemented a one-time distributor equity
incentive program. This global program provided for the granting of options to
distributors to purchase 1.6 million shares of our Class A common stock. The
number of options each distributor received was based on his or her performance
and productivity through August 31, 1997. The options are exercisable at a price
of $5.75 per share and vested on December 31, 1997. We recorded a $2.0 million
charge in 1996 and recorded additional charges in 1997 of $17.9 million for the
non-cash and nonrecurring expenses associated with this program. There are
currently no plans to repeat this or similar distributor stock incentive
programs.
Selling, general and administrative expenses include wages and benefits,
rents and utilities, travel and entertainment, promotion and advertising,
research and development and professional fees.
Provision for income taxes is dependent on the statutory tax rates in each
of the countries in which Nu Skin Enterprises operates. For example, statutory
tax rates are 16.0% in Hong Kong, 25.0% in Taiwan, 30.1% in South Korea and
57.9% in Japan. However, the statutory tax rate in Japan was reduced to 54.3%
for fiscal years beginning in 1999. We operate a regional business center in
Hong Kong, which bears inventory obsolescence and currency exchange risks. Any
income or loss incurred by the regional business center is not subject to
taxation in Hong Kong. In addition, since the incorporation of Nu Skin
Enterprises in 1996, we have been subject to taxation in the United States,
where we are incorporated, at a statutory corporate federal tax rate of 35.0%.
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.
Minority interest represents the ownership interest of Nu Skin
International held by individuals who are not immediate family members. The
minority interest was purchased as part of the acquisition of Nu Skin
International on March 26, 1998.
In March 1998, we completed the acquisition of the capital stock of Nu Skin
International and our other previously private affiliates in Europe, Australia
and New Zealand. Inasmuch as a portion of Nu Skin International and such
affiliates were under common control, our consolidated financial statements have
been combined and restated as if our company and Nu Skin International and such
affiliates had been combined during all periods presented. We allocated $43.6
million of the purchase price to goodwill, intellectual property and other
intangible assets.
In October 1998, we acquired Generation Health Holdings, Inc., the parent
of Pharmanex. With the acquisition of Pharmanex, we increased our nutritional
product development and formulation capabilities. In connection with the
Pharmanex acquisition, we allocated $92.4 million to goodwill, intellectual
property and other intangible assets and $13.6 million to purchased in-process
research and development. During 1998, we fully wrote off the in-process
research and development amount.
In February 1999, we announced our intent to acquire Big Planet and our
remaining private affiliates in Canada, Mexico and Guatemala. Our subsidiary Nu
Skin International also announced its
27
<PAGE> 29
intent to terminate the distribution and related licenses with Nu Skin USA. In
March 1999, Nu Skin International terminated its distribution license and
various other license agreements and other intercompany agreements with Nu Skin
USA and paid Nu Skin USA a $10.0 million termination fee. We also acquired
selected assets of Nu Skin USA in March 1999 through a newly formed wholly-owned
subsidiary and assumed approximately $8.0 million of Nu Skin USA liabilities. In
May 1999, we completed the acquisition of our affiliates in Canada, Mexico and
Guatemala.
RESULTS OF OPERATIONS
The following tables set forth operating results and operating results as a
percentage of revenue, respectively, for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1996 1997 1998
------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
Revenue..................................................... $761.6 $953.4 $913.5
Cost of sales............................................... 171.2 191.2 188.5
Cost of sales -- amortization of inventory step-up.......... -- -- 21.6
------ ------ ------
Gross profit................................................ 590.4 762.2 703.4
------ ------ ------
Operating expenses:
Distributor incentives.................................... 282.6 362.2 331.4
Selling, general and administrative....................... 168.7 201.9 202.2
Distributor stock expense................................. 2.0 17.9 --
In-process research and development....................... -- -- 13.6
------ ------ ------
Total operating expenses............................... 453.3 582.0 547.2
------ ------ ------
Operating income............................................ 137.1 180.2 156.2
Other income (expense), net................................. 10.8 9.0 13.6
------ ------ ------
Income before provision for income taxes and minority
interest.................................................. 147.9 189.2 169.8
Provision for income taxes.................................. 49.5 55.7 62.8
Minority interest........................................... 13.7 15.0 3.1
------ ------ ------
Net income.................................................. $ 84.7 $118.5 $103.9
====== ====== ======
Unaudited supplemental data(1):
Income before pro forma provision for income taxes and
minority interest...................................... $147.9 $189.2 $169.8
Pro forma provision for income taxes...................... 54.7 71.9 66.0
Pro forma minority interest............................... 8.6 9.3 1.9
------ ------ ------
Pro forma net income...................................... $ 84.6 $108.0 $101.9
====== ====== ======
</TABLE>
28
<PAGE> 30
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1996 1997 1998
------ ------ ------
<S> <C> <C> <C>
Revenue..................................................... 100.0% 100.0% 100.0%
Cost of sales............................................... 22.5 20.1 20.6
Cost of sales -- amortization of inventory step-up.......... -- -- 2.4
------ ------ ------
Gross profit................................................ 77.5 79.9 77.0
------ ------ ------
Operating expenses:
Distributor incentives.................................... 37.1 38.0 36.3
Selling, general and administrative....................... 22.1 21.2 22.1
Distributor stock expense................................. .3 1.9 --
In-process research and development....................... -- -- 1.5
------ ------ ------
Total operating expenses............................... 59.5 61.1 59.9
------ ------ ------
Operating income............................................ 18.0 18.8 17.1
Other income (expense), net................................. 1.4 .9 1.5
------ ------ ------
Income before provision for income taxes and minority
interest.................................................. 19.4 19.7 18.6
Provision for income taxes.................................. 6.5 5.8 6.9
Minority interest........................................... 1.8 1.5 .3
------ ------ ------
Net income.................................................. 11.1% 12.4% 11.4%
====== ====== ======
Unaudited supplemental data(1):
Income before pro forma provision for income taxes and
minority interest...................................... 19.4% 19.7% 18.6%
Pro forma provision for income taxes...................... 7.2 7.5 7.2
Pro forma minority interest............................... 1.1 .9 .2
------ ------ ------
Pro forma net income...................................... 11.1% 11.3% 11.2%
====== ====== ======
</TABLE>
- -------------------------
(1) Reflects adjustment for federal and state income taxes as if our
subsidiaries had been taxed as C corporations rather than as S corporations
for the years ended December 31, 1996, 1997 and 1998.
1998 COMPARED TO 1997
REVENUE decreased 4.2% to $913.5 million from $953.4 million for the years
ended December 31, 1998 and 1997, respectively. The decrease in revenue resulted
primarily from significant weakening of the Japanese yen and other Asian
currencies relative to the U.S. dollar, an increasing competitive environment in
Taiwan and the economic recession in Asia, particularly in South Korea and
Thailand. These factors more than offset the increase in revenue from our other
markets including license fees from and product sales to our private North
American affiliated entities.
Revenue in North Asia, which consists of Japan and South Korea, decreased
1.2% to $665.5 million from $673.6 million for the years ended December 31, 1998
and 1997, respectively. The economic recession and a weakened currency in South
Korea resulted in a significant decline in South Korean revenue from $74.2
million for the year ended December 31, 1997 to $11.4 million in 1998. This
revenue decline was partially offset by revenue in Japan which increased from
$599.4 million for the year ended December 31, 1997 to $654.2 million in 1998.
In spite of the economic recession in Japan, our company recorded increases in
revenue in Japan of 9.1% in U.S. dollar terms and 17.6% in local currency terms
from 1997 to 1998. This increase is attributed to continued growth of the
personal care and nutritional product lines and a strong Japanese distributor
force.
Revenue in Southeast Asia, which consists of Taiwan, Thailand, Hong Kong,
the Philippines, Australia and New Zealand, totaled $159.7 million for the year
ended December 31, 1998, down from revenue of $225.3 million for the year ended
December 31, 1997, a decrease of 29.1%. Our
29
<PAGE> 31
operations in Taiwan have continued to suffer the impact of increased
competition, currency devaluation and the PRC's temporary ban on direct selling,
where many Taiwanese distributors hoped to expand their businesses, which
resulted in a decline in revenue from $168.6 million in 1997 to $119.5 million
in 1998. In addition, our operations in Thailand have been impacted negatively
by Thailand's economic recession and currency devaluation resulting in a revenue
decrease to $8.3 million in 1998 from $22.8 million in 1997.
The declines in North and Southeast Asia were partially offset by aggregate
revenue increases in our other markets, which include the United Kingdom,
Germany, Italy, the Netherlands, France, Belgium, Spain, Portugal, Ireland,
Austria, Poland, Denmark, Sweden, Brazil and product sales to and license fees
from our North American private affiliates. Aggregate revenue in these markets
increased to $88.3 million for the year ended December 31, 1998 from $54.5
million for the year ended December 31, 1997, an increase of 62.0%. These
increases were primarily due to increased revenue from our North American
private affiliates following a successful global convention held in the first
quarter of 1998, as well as increased sales from the openings of our operations
in Poland, Denmark, Sweden and Brazil in 1998 and the introduction of
nutritional products in several European markets in 1998.
GROSS PROFIT as a percentage of revenue was 77.0% for the year ended
December 31, 1998 compared to 79.9% for the year ended December 31, 1997. The
amortization of the step-up of inventory from the Nu Skin International
acquisition increased cost of sales by $21.6 million for the year ended December
31, 1998. Without this nonrecurring charge, gross profit as a percentage of
revenue would have been 79.4% for the year ended December 31, 1998. Nu Skin
Enterprises purchases goods in U.S. dollars and recognizes revenue in local
currency and is consequently subjected to exchange rate risks in its gross
margins. The negative pressure on gross margins, primarily due to weakened
currencies throughout our Asian markets, was somewhat offset by gross margin
improvement as a result of price increases in certain markets in 1998. In
addition, increased local manufacturing, including the local manufacturing in
Taiwan of LIFEPAK, our leading nutritional product, improved and stabilized
gross margins.
DISTRIBUTOR INCENTIVES as a percentage of revenue decreased to 36.3% for
the year ended December 31, 1998 from 38.0% for the year ended December 31,
1997. The primary reason for this decrease was increased revenue in 1998 from
product sales to and license fees from our North American private affiliates
which was not subject to incentives being paid by Nu Skin Enterprises.
SELLING, GENERAL AND ADMINISTRATIVE expenses as a percentage of revenue
increased to 22.1% for the year ended December 31, 1998 from 21.2% for the year
ended December 31, 1997. This increase as a percentage of revenue was primarily
due to weakened Asian currencies and continued U.S. dollar-based selling,
general and administrative expenses. In dollar terms, selling, general and
administrative expenses increased slightly from $201.9 million in 1997 to $202.2
million in 1998.
DISTRIBUTOR STOCK EXPENSE of $17.9 million for the year ended December 31,
1997 reflects a one-time grant of distributor stock options at an exercise price
of $5.75 per share, 25% of the per share offering price in our initial public
offering completed in November 1996. This non-cash expense is nonrecurring and
was only recorded in the fourth quarter of 1996 and in each of the four quarters
of 1997. There are currently no plans to repeat this or other similar
distributor stock incentive programs.
IN-PROCESS RESEARCH AND DEVELOPMENT expense of $13.6 million for the year
ended December 31, 1998 reflects a one-time expense for research and development
intangible assets purchased in the Pharmanex acquisition during the fourth
quarter of 1998. This non-cash expense is nonrecurring and was only recorded in
the fourth quarter of 1998.
OPERATING INCOME decreased 13.3% to $156.2 million for the year ended
December 31, 1998 from $180.2 million in 1997. Operating margin decreased to
17.1% in 1998 from 18.8% in 1997. The
30
<PAGE> 32
operating income and margin decreases resulted from declines in U.S. dollar
revenue in North and Southeast Asia, lower gross margins as a result of
significant weakening in foreign currencies in North and Southeast Asia and by
the nonrecurring amortization of inventory step-up and in-process research and
development expenses recorded in our other markets in 1998, and was partially
offset by the distributor stock expense recorded in 1997.
OTHER INCOME increased to $13.6 million for the year ended December 31,
1998 from $9.0 million for the year ended December 31, 1997. The increase was
primarily caused by Japanese yen-based hedging gains from forward contracts and
intercompany loans during 1998.
PROVISION FOR INCOME TAXES increased to $62.8 million for the year ended
December 31, 1998 from $55.7 million for the year ended December 31, 1997 due to
an increase in the effective tax rate from 29.4% in 1997 to 37.0% in 1998, which
more than offset the decreased operating income in 1998 compared to 1997. The
increase in the effective tax rate is due to Nu Skin International and its
affiliates being taxed as C corporations rather than as S corporations during
most of 1998. The pro forma provision for income taxes decreased to $66.0
million for the year ended December 31, 1998 from $71.9 million for the year
ended December 31, 1997 due to decreased income in 1998. The pro forma provision
for income taxes presents income taxes as if Nu Skin International and its
affiliates had been taxed as C corporations rather than as S corporations for
the years ended December 31, 1998 and 1997.
MINORITY INTEREST represents the ownership interest of Nu Skin
International held by individuals who are not immediate family members. The
minority interest was purchased as part of the acquisition of Nu Skin
International on March 26, 1998.
NET INCOME decreased by $14.6 million to $103.9 million for the year ended
December 31, 1998 compared with the same period in 1997 primarily due to the
amortization of inventory step-up and in-process research and development
expense recorded in 1998 partially offset by distributor stock expense recorded
in 1997. Net income as a percentage of revenue decreased to 11.4% for the year
ended December 31, 1998 as compared to 12.4% for the same period in 1997.
1997 COMPARED TO 1996
REVENUE increased 25.2% to $953.4 million from $761.6 million for the years
ended December 31, 1997 and 1996, respectively. The increase in revenue resulted
primarily from continued revenue growth in North and Southeast Asia related to
the personal care and nutritional product lines.
Revenue in North Asia, which consists of Japan and South Korea, increased
34.1% to $673.6 million from $502.4 million for the years ended December 31,
1997 and 1996, respectively. Revenue in Japan increased from $380.0 million for
the year ended December 31, 1996 to $599.4 million in 1997. This increase in
revenue was primarily a result of continued growth of the personal care and
nutritional product lines, which grew 43.8% and 94.9%, respectively, in 1997 and
1996. Additionally, revenue in Japan increased following a distributor
convention held in the first quarter of 1997 and the sponsorship of the Japan
Supergames featuring National Basketball Association stars in the third quarter
of 1997. Offsetting revenue growth in North Asia was the decrease in revenue in
South Korea from $122.3 million in 1996 to $74.2 million in 1997, which was
primarily due to government and media actions targeted at sellers of foreign or
luxury goods, volatile economic conditions and a weakened currency in South
Korea.
Revenue in Southeast Asia, which consists of Taiwan, Thailand, Hong Kong,
Australia and New Zealand increased to $225.3 million for the year ended
December 31, 1997 from revenue of $183.7 million for the year ended December 31,
1996, an increase of 22.6%. Revenue in Taiwan increased to $168.6 million in
1997 from $154.5 million in 1996, an increase of 9.1%, primarily as a result of
growth in nutritional product sales following the late 1996 introduction of
LIFEPAK, our
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<PAGE> 33
leading nutritional supplement. In addition, our operations in Thailand
commenced in March 1997 and generated revenue of $22.8 million in 1997. Revenue
in Hong Kong increased to $21.3 million in 1997 from $17.0 million in 1996 as a
result of growth in nutritional product sales following the introduction of
LIFEPAK in the first quarter of 1997.
The increases in North and Southeast Asia were partially offset by an
aggregate revenue decrease in our other markets, which include the United
Kingdom, Germany, Italy, the Netherlands, France, Belgium, Spain, Portugal,
Ireland, Austria and product sales to and license fees from our North American
private affiliates. Aggregate revenue in these markets decreased to $54.5
million for the year ended December 31, 1997 from $75.5 million for the year
ended December 31, 1996, a decrease of 27.8%. These decreases were primarily due
to higher revenue recorded in 1996 as a result of a successful global convention
held in 1996 by our North American private affiliates.
GROSS PROFIT as a percentage of revenue was 79.9% for the year ended
December 31, 1997 compared to 77.5% for the year ended December 31, 1996. Gross
margin improvement resulted from price increases throughout North and Southeast
Asia which occurred during the second quarter of 1997. In addition, increased
local manufacturing efforts were designed to improve and stabilize gross
margins.
DISTRIBUTOR INCENTIVES as a percentage of revenue increased to 38.0% for
the year ended December 31, 1997 from 37.1% for the year ended December 31,
1996. The primary reason for this increase was decreased revenue in 1997 from
product sales to and license fees from our North American private affiliates
which was not subject to incentives being paid by Nu Skin Enterprises.
SELLING, GENERAL AND ADMINISTRATIVE expenses as a percentage of revenue
decreased to 21.2% for the year ended December 31, 1997 from 22.1% for the year
ended December 31, 1996. In dollar terms, selling, general and administrative
expenses increased from $168.7 million in 1996 to $201.9 million in 1997. This
increase, in dollar terms, was primarily due to increased promotion expenses of
approximately $4.0 million resulting from the expense of sponsoring the Japan
Supergames and approximately $2.0 million resulting from distributor conventions
held during the first quarter of 1997. In addition, other general and
administrative expenses were higher in 1997 as a result of expenses of operating
as a public company and as a result of increased spending in each of our markets
to support current operations. These increased costs were offset as a percentage
of revenue by increased operating efficiencies as our revenue increased.
DISTRIBUTOR STOCK EXPENSE of $17.9 million and $2.0 million for the years
ended December 31, 1997 and 1996, respectively, reflects a one-time grant of
distributor stock options at an exercise price of $5.75 per share, 25% of the
per share offering price in our initial public offering completed in November
1996. This non-cash expense is nonrecurring and was only recorded in the fourth
quarter of 1996 and in each of the four quarters of 1997.
OPERATING INCOME increased 31.3% to $180.2 million for the year ended
December 31, 1997 from $137.1 million in 1996. Operating margin increased to
18.8% in 1997 from 18.0% in 1996. The operating income and margin increases
resulted from increases in U.S. dollar revenue in North and Southeast Asia and
improved gross margins as a result of price changes during the second quarter of
1997 in North and Southeast Asia, which were partially offset by the $17.9
million distributor stock expense recorded in 1997.
OTHER INCOME decreased to $9.0 million for the year ended December 31, 1997
from $10.8 million for the year ended December 31, 1996. The decrease was
primarily caused by the exchange losses relating to intercompany balances
denominated in foreign currencies offset by hedging gains from forward contracts
and intercompany loans.
PROVISION FOR INCOME TAXES increased to $55.7 million for the year ended
December 31, 1997 from $49.5 million for the year ended December 31, 1996 due to
increased income that was offset partially by the decrease in the effective tax
rate to 29.4% from 33.5% for the same periods. The
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<PAGE> 34
decrease in the effective tax rate is due to our termination of our S
corporation status during 1996. The pro forma provision for income taxes
increased to $71.9 million for the year ended December 31, 1997 from $54.7
million for the year ended December 31, 1996 due to increased income in 1997.
The pro forma provision for income taxes presents income taxes as if Nu Skin
International and its affiliates had been taxed as C corporations rather than as
S corporations for the years ended December 31, 1997 and 1996.
MINORITY INTEREST represents the ownership interest of Nu Skin
International held by individuals who are not immediate family members. The
minority interest was purchased as part of the acquisition of Nu Skin
International on March 26, 1998.
NET INCOME increased by $33.8 million to $118.5 million for the year ended
December 31, 1997 compared with the same period in 1996 due primarily to the
increase in revenue and improvements in gross margins in 1997 partially offset
by distributor stock expense recorded in 1997. Net income as a percentage of
revenue increased to 12.4% for the year ended December 31, 1997 as compared to
11.1% for the same period in 1996.
LIQUIDITY AND CAPITAL RESOURCES
Historically, our principal needs for funds have been for distributor
incentives, working capital (principally inventory purchases), operating
expenses, capital expenditures and the development of new markets. Nu Skin
Enterprises has generally relied entirely on cash flow from operations to meet
its business objectives without incurring long-term debt to unrelated third
parties to fund operating activities.
Nu Skin Enterprises generates significant cash flow from operations due to
favorable gross margins and minimal capital requirements. Additionally, we do
not generally extend credit to distributors but require payment prior to
shipping products. This process eliminates the need for significant accounts
receivable from distributors. During the first quarter of each year, our company
pays significant accrued income taxes in many foreign jurisdictions including
Japan. These large cash payments generally more than offset significant cash
generated in the first quarter. During the year ended December 31, 1998, we
generated $118.6 million from operations compared to $108.6 million generated
during the year ended December 31, 1997. Cash generated from operations in 1997
was affected by the repayment of significant related party payables to our North
American private affiliates. In addition, we had reduced purchases of
inventories and other assets in 1998.
As of December 31, 1998, working capital was $164.6 million compared to
$123.2 million as of December 31, 1997. This increase is largely due to
increased cash balances as well as increased inventory levels and other current
assets. Cash and cash equivalents at December 31, 1998 and 1997 were $188.8
million and $174.3 million, respectively.
Capital expenditures, primarily for equipment, computer systems and
software, office furniture and leasehold improvements, were $18.3 million and
$14.4 million for the years ended December 31, 1998 and 1997, respectively. In
addition, Nu Skin Enterprises anticipates capital expenditures in 1999 of
approximately $40.0 million to further enhance its infrastructure, including
enhancements to computer systems and software and call-center facilities in
order to accommodate anticipated future growth.
In March 1998, we completed the acquisition of Nu Skin International and
its affiliates in Europe, Australia and New Zealand for $70.0 million in
preferred stock, which subsequently converted into Class A common stock, and
long-term notes payable to the stockholders of Nu Skin International and such
affiliates totaling approximately $6.2 million. Also, as part of the Nu Skin
International acquisition, Nu Skin Enterprises assumed approximately $171.3
million in S distribution notes and incurred acquisition costs totaling $3.0
million. During the second quarter of 1998, the S distribution notes and
long-term notes payable to the Nu Skin International stockholders were paid
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<PAGE> 35
in full with proceeds from the credit facility described below. In addition, Nu
Skin International and Nu Skin Enterprises met earnings growth targets in 1998
resulting in a contingent payment payable to the Nu Skin International
stockholders of $25.0 million as of December 31, 1998. Contingent upon Nu Skin
International and Nu Skin Enterprises meeting earnings growth targets over the
next three years, we may pay up to $25.0 million in cash in each of the next
three years to the Nu Skin International stockholders. The contingent
consideration of $25.0 million earned in 1998 was paid in the second quarter of
1999 and has been accounted for as an adjustment to the purchase price and
allocated to the assets and liabilities of Nu Skin International and its
previously private affiliates. Any additional contingent consideration paid over
the next three years, if any, will be accounted for in a similar manner.
In May 1998, Nu Skin Enterprises and its Japanese subsidiary Nu Skin Japan
Co., Ltd. entered into a $180.0 million credit facility with a syndicate of
financial institutions for which ABN-AMRO, N.V. acted as agent. This credit
facility was used to satisfy liabilities which were assumed as part of the Nu
Skin International acquisition. Nu Skin Enterprises borrowed $110.0 million and
Nu Skin Japan borrowed the Japanese yen equivalent of $70.0 million denominated
in local currency. Payments totaling $41.6 million were made during the second
quarter of 1998 relating to the $180.0 million credit facility. As of December
31, 1998, the balance relating to the $180.0 million credit facility totaled
$153.3 million of which approximately $14.5 million was paid in 1999,
approximately $53.5 million is due in 2000 and approximately $85.4 million will
be due in 2001. The U.S. portion of the credit facility bears interest at either
a base rate as specified in the credit facility or the London Inter-Bank Offer
Rate plus an applicable margin, in the borrower's discretion. The Japanese
portion of the credit facility bears interest at either a base rate as specified
in the credit facility or the Tokyo Inter-Bank Offer Rate plus an applicable
margin, in the borrower's discretion. The maturity date for the credit facility
is three years from the borrowing date, with a possible extension of the
maturity date upon approval of the lenders. The credit facility provides that
the amounts borrowed are to be used for general corporate purposes. As of
December 31, 1998, we were in compliance with all financial and other covenants
under the credit facility. During 1998, we entered into a $10.0 million
revolving credit agreement with ABN-AMRO, N.V. Advances are available under the
agreement through May 18, 1999 with a possible extension upon approval of the
lender. There were no outstanding balances under this credit facility at
December 31, 1998.
During 1998, the board of directors authorized Nu Skin Enterprises to
repurchase up to $20.0 million of our outstanding shares of Class A common
stock. As of December 31, 1998, we had repurchased 917,254 shares for an
aggregate price of approximately $10.5 million. In addition, in March 1999, the
board of directors separately authorized the purchase of 620,000 shares of our
Class A common stock from a related party for $8.7 million.
As part of the Pharmanex acquisition, we assumed approximately $34.0
million in liabilities and incurred acquisition costs totaling $1.3 million. The
net assets acquired totaling $3.6 million include net deferred tax assets
totaling $0.8 million. In connection with the closing of the Pharmanex
acquisition, Nu Skin Enterprises paid approximately $29.0 million relating to
the assumed liabilities.
We have entered into an agreement to acquire our affiliate Big Planet for
an aggregate of approximately $37.0 million, of which approximately $14.5
million is payable in the form of a promissory note and approximately $22.5
million is payable in cash. We currently expect this transaction to close by
June 30, 1999. We have also agreed to loan to Big Planet up to $7.5 million to
fund its operations through the closing of the acquisition. Big Planet incurred
operating losses of approximately $22.0 million in 1998 and we anticipate Big
Planet will continue to incur operating losses in the foreseeable future.
Nu Skin Enterprises had related party payables of $25.0 million and $10.0
million at December 31, 1998 and 1997, respectively. In addition, we had related
party receivables of $22.3 million and $23.0 million, respectively, at those
dates. Related party balances outstanding in
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<PAGE> 36
excess of 60 days bear interest at a rate of 2% above the U.S. prime rate. As of
December 31, 1998, no material related party payables or receivables had been
outstanding for more than 60 days.
We lease office space and computer hardware under noncancellable long-term
operating leases. Minimum future operating lease obligations at December 31,
1998 were $29.6 million with minimum obligations for 1999 of $8.9 million.
We consider Nu Skin Enterprises to be liquid and able to meet its
obligations on both a short and long-term basis. We currently believe existing
cash balances together with future cash flows from operations will be adequate
to fund cash needs relating to the implementation of our strategic plans.
YEAR 2000
Nu Skin Enterprises has developed a comprehensive plan to address Year 2000
issues. In connection with this plan, our company has established a committee
that is responsible for assessing and testing our systems to identify Year 2000
issues, and overseeing the upgrade or remediation of non-compliant Year 2000
systems. This committee reports on a regular basis to our executive management
team and the audit committee of the board of directors on the progress and
status of the plan and the Year 2000 issues affecting us.
To date, we have completed a broad scope assessment and audit of our
information technology systems and non-information technology systems to
identify and prioritize potential Year 2000 issues and are currently performing
a micro-based assessment designed to identify specific Year 2000 issues at the
hardware, software and processing levels. Through this process, we have
identified potential Year 2000 issues in our information systems, and we are in
the process of addressing these issues through upgrades and other remediation.
We currently estimate that the cost of all upgrades related to Year 2000 issues,
including scheduled upgrades intended primarily to increase efficiencies within
Nu Skin Enterprises and also address Year 2000 issues, is anticipated to be
approximately $10.0 million through 1999, which we anticipate will be funded by
cash from operations. To date, we have spent approximately $3.0 million. We
currently anticipate that we will complete the micro-based analysis and
remediation on all of our significant in-house systems by the third quarter of
1999. In 1999, we will continue to run broad scope tests of our in-house systems
to confirm that we have adequately addressed all Year 2000 issues and continue
our work on the systems of our foreign offices.
As part of the Year 2000 plan, we are also assessing and monitoring our
vendors and suppliers and other third parties for Year 2000 readiness. To date
the committee has sent questionnaires to these third parties seeking their
assessment and evaluation of their own Year 2000 readiness and has received
responses back from a substantial majority of these third parties. Members of
the committee have already begun follow-up calls to our top fifty vendors and
plan to visit our significant suppliers and vendors in person for purposes of
evaluating their Year 2000 readiness and sharing Year 2000 information. Nu Skin
Enterprises will continue the follow-up with third party vendors throughout
1999.
Based on our evaluation of the Year 2000 issues affecting Nu Skin
Enterprises, we believe that Year 2000 readiness of our vendors and suppliers,
which is beyond our control, is currently the most significant area of risk,
particularly in our foreign markets. We do not believe it is possible at this
time to quantify or estimate the most reasonable worst case Year 2000 scenario.
However, we are beginning to formulate contingency plans to limit, to the extent
possible, interruption of our operations arising from the failure of third
parties to be Year 2000 compliant as we move forward in the implementation of
our Year 2000 plan. We will continue to work with third parties as indicated
above to further evaluate and quantify this risk and will continue the
development of contingency plans throughout 1999 as this process moves forward.
There can be no assurance, however, that we will be able to successfully
identify and develop contingency plans for all Year 2000 issues that could,
directly or indirectly, harm our operations, some of which are beyond our
control. In particular, we cannot predict or evaluate domestic and foreign
governments' and utility companies' preparation for the Year 2000 or the
readiness of other third parties (domestic and foreign) that do not have
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<PAGE> 37
relationships with us, and the resulting impact that the failure of such parties
to be Year 2000 compliant may have on the economy in general and on our
business.
The foregoing discussion of the Year 2000 issues contains forward-looking
statements that represent our current expectations or beliefs. These
forward-looking statements are subject to risks and uncertainties that could
cause outcomes to be different from those currently anticipated including those
risks identified in "Risk Factors."
SEASONALITY AND CYCLICALITY
In addition to general economic factors, the direct selling industry is
impacted by seasonal factors and trends such as major cultural events and
vacation patterns. For example, Japan, Taiwan, Hong Kong, South Korea and
Thailand celebrate their respective local New Year in our first quarter. We
believe that direct selling in Japan and Europe is also generally negatively
impacted during the month of August, which is in our third quarter, when many
individuals traditionally take vacations.
Nu Skin Enterprises has experienced rapid revenue growth in most of its new
markets from the commencement of operations. In Japan, Taiwan and Hong Kong, the
initial rapid growth was followed by a short period of stable or declining
revenue followed by renewed growth fueled by new product introductions, an
increase in the number of active distributors and increased distributor
productivity. In South Korea, Nu Skin Enterprises experienced a significant
decline in its 1997 revenue from revenue in 1996 and experienced additional
quarterly sequential declines in 1998. Revenue in Thailand also decreased
significantly after the commencement of operations in March 1997. We believe
that the revenue declines in South Korea and Thailand were partly due to normal
business cycles in new markets, but were primarily due to volatile economic
conditions and weakened currencies in those markets. Revenue declines in South
Korea also resulted from government and media actions targeted at sellers of
foreign and luxury goods. In addition, we may experience variations on a
quarterly basis in our results of operations, as new products are introduced and
new markets are opened. No assurance can be given that our revenue growth rate
in new markets where Nu Skin operations have not commenced will follow this
pattern.
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QUARTERLY RESULTS
The following table sets forth certain unaudited quarterly data for the
periods shown, restated for the Nu Skin International acquisition.
<TABLE>
<CAPTION>
1997 1998
---------------------------------------- ----------------------------------------
1ST 2ND 3RD 4TH 1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
------- ------- ------- ------- ------- ------- ------- -------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue.................................... $224.2 $245.9 $243.1 $240.2 $227.9 $209.1 $217.9 $258.7
Gross profit............................... 179.0 195.3 194.4 193.5 182.2 151.5 164.9 204.9
Operating income........................... 38.3 46.7 45.7 49.6 51.0 29.6 37.4 38.3
Net income................................. 25.7 30.0 30.7 32.0 33.7 22.0 25.5 22.8
Net income per share:
Basic.................................. 0.31 0.36 0.37 0.39 0.41 0.26 0.30 0.26
Diluted................................ 0.29 0.34 0.35 0.37 0.39 0.25 0.30 0.26
</TABLE>
CURRENCY RISK AND EXCHANGE RATE INFORMATION
A majority of our revenue and many of our expenses are recognized primarily
outside of the United States except for inventory purchases which are primarily
transacted in U.S. dollars from vendors in the United States. Each subsidiary's
local currency is considered the functional currency. All revenue and expenses
are translated at weighted average exchange rates for the periods reported.
Therefore, our reported sales and earnings will be positively impacted by a
weakening of the U.S. dollar and will be negatively impacted by a strengthening
of the U.S. dollar.
Given the uncertainty of exchange rate fluctuations, we cannot estimate the
effect of these fluctuations on our future business, product pricing, results of
operations or financial condition. However, because a majority of our revenue is
realized in local currencies and the majority of our cost of sales is
denominated in U.S. dollars, our gross profits will be positively affected by a
weakening in the U.S. dollar and will be negatively affected by a strengthening
in the U.S. dollar. We seek to reduce our exposure to fluctuations in foreign
exchange rates by creating offsetting positions through the use of foreign
currency exchange contracts and through intercompany loans of foreign currency.
We do not use such 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.
Nu Skin Enterprises' foreign currency derivatives are comprised of
over-the-counter forward contracts with major international financial
institutions. As of December 31, 1998, the primary currency for which we had net
underlying foreign currency exchange rate exposure was the Japanese yen. Based
on our foreign exchange contracts at December 31, 1998 as discussed in Note 14
of the notes to the Consolidated Financial Statements included in this
prospectus, the impact of a 10% appreciation or 10% depreciation of the U.S.
dollar against the Japanese yen would not result in significant other income or
expense recorded in the Consolidated Statements of Income.
Following are the weighted average currency exchange rates of US$1 into
local currency for each of our markets in which revenue exceeded US$5.0 million
for at least one of the quarters listed:
<TABLE>
<CAPTION>
1996 1997 1998
------------------------------------- ------------------------------------- ---------------------------
1ST 2ND 3RD 4TH 1ST 2ND 3RD 4TH 1ST 2ND 3RD
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Japan(1)............. 105.8 107.5 109.0 112.9 121.4 119.1 118.1 125.6 128.2 135.9 139.5
Taiwan............... 27.4 27.4 27.5 27.5 27.5 27.7 28.4 31.0 32.8 33.6 34.5
Hong Kong............ 7.7 7.7 7.7 7.7 7.7 7.7 7.7 7.7 7.7 7.8 7.8
South Korea.......... 782.6 786.5 815.5 829.4 863.9 889.6 894.8 1,097.0 1,585.7 1,392.6 1,327.0
Thailand............. 25.2 25.3 25.3 25.5 26.0 25.4 31.5 40.3 45.1 40.3 40.9
<CAPTION>
1998
-------
4TH
QUARTER
-------
<S> <C>
Japan(1)............. 119.3
Taiwan............... 32.6
Hong Kong............ 7.8
South Korea.......... 1,278.9
Thailand............. 37.1
</TABLE>
- -------------------------
(1) Since January 1, 1992, the highest and lowest exchange rates for the
Japanese yen have been 147.3 and 80.6, respectively.
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BUSINESS
GENERAL
Nu Skin Enterprises is a leading, global direct selling company that
develops and distributes premium-quality, innovative personal care products and
nutritional supplements. Recently, we entered into an agreement to acquire our
affiliate, Big Planet, an Internet service provider that also offers Internet
devices, Web site development and hosting, online shopping and
telecommunications products and services. We are one of the largest direct
selling companies in the world and currently operate in 27 countries throughout
Asia, North and South America and Europe. We currently have a network of over
500,000 active distributors.
RECENT STRATEGIC DEVELOPMENTS
We have undertaken a number of strategic initiatives since the beginning of
1998 which are designed to broaden our business both geographically and across
product lines, simplify our management and corporate structure, diversify our
revenue base and enhance our growth prospects.
ACQUISITION OF NU SKIN AFFILIATES. At the beginning of 1998, we operated as
the exclusive distribution vehicle for our affiliate Nu Skin International in
the countries of Japan, Taiwan, Hong Kong (including Macau), Thailand and South
Korea. We also had the right to expand into the Philippines, the PRC, Vietnam,
Singapore, Malaysia and Indonesia.
In March 1998, we acquired Nu Skin International and most of our other
previously private affiliates. Through this acquisition, we obtained:
- Nu Skin's existing operations in New Zealand, Australia and ten countries
in Europe, and the right to enter all unopened markets,
- Ownership of all rights to the Nu Skin distributor force, including all
distributor agreements and the Global Compensation Plan, all trade names,
trademarks, product formulations and other intellectual property rights
associated with the Nu Skin business and products, and
- Greater control over product development, manufacturing, pricing and the
strategic development of the Nu Skin products and business opportunity
offerings.
In March 1999, our subsidiary Nu Skin International terminated its
exclusive license and distribution agreements with Nu Skin USA related to Nu
Skin operations in the United States and we commenced operations in the United
States through a new wholly-owned subsidiary. In May 1999, we acquired our other
private affiliates operating in Canada, Mexico and Guatemala. As a result of
these acquisitions, we now own all of the Nu Skin entities operating everywhere
in the world and the right to expand into all future markets. We believe that
the acquisitions of our Nu Skin affiliates will simplify our corporate structure
by consolidating all of our Nu Skin operations under Nu Skin Enterprises.
ACQUISITION OF PHARMANEX. In October 1998, we acquired Pharmanex, a
research and development company and manufacturer of nutritional supplements.
The acquisition of Pharmanex provides us with:
- Substantial additional product research and development resources, a
staff of approximately 30 scientists, working relationships with
approximately 20 additional independent scientists and research centers
in the PRC and the United States. These resources enhance our ability to
continue to be an innovator of high quality nutritional supplements and
our ability to apply
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<PAGE> 40
high scientific standards to assure product standardization and substantiate
product safety and efficacy,
- Important clinical research and collaboration agreements and other
relationships with several major universities in the United States and
the PRC, which we believe will enhance our ability to perform
cost-effective clinical trials to help demonstrate product efficacy and
to substantiate product claims,
- A line of existing natural nutritional supplements including CHOLESTIN, a
well-publicized nutritional supplement shown to help promote healthy
cholesterol levels, as well as a broad line of standardized botanical
supplements, and
- Global sourcing capabilities and an extraction facility in the PRC.
PROPOSED ACQUISITION OF BIG PLANET. In addition, we have entered into an
agreement to acquire Big Planet, an Internet service provider that also offers
Internet devices, Web site development and hosting, online shopping and
telecommunications products and services. The acquisition of Big Planet will
enable us to attract a broader base of distributors and to offer our
distributors a chance to participate in the dynamic business trends created by
the Internet. Big Planet distributors can assist and instruct their customers in
obtaining the latest technology products and services. During 1998, Nu Skin USA
funded the operations of Big Planet in exchange for an 85% ownership interest in
Big Planet. Prior to our acquisition of Nu Skin International, Nu Skin
International agreed in principle to a license agreement and operating
relationship with Big Planet pursuant to which Big Planet received the
opportunity to access and use Nu Skin distributors in the United States. Big
Planet's operations were launched in April 1998 at which time several of our
leading distributors began pursuing the Big Planet business opportunity.
We anticipate completing the Big Planet acquisition by June 30, 1999
subject to satisfaction of closing conditions and receipt of regulatory
approvals. We cannot assure you, however, that we will be able to complete the
acquisition of Big Planet. See "Risk Factors -- We may not complete our planned
acquisition of Big Planet, and, even if we do complete this acquisition, we may
not be able to operate Big Planet profitably" for more information about risks
related to Big Planet and the proposed acquisition.
EXPANSION OF OPERATIONS INTO ADDITIONAL COUNTRIES. Over the past several
years we have successfully commenced operations in most of the major direct
selling markets throughout the world. During 1998, we expanded our operations
into five additional countries: Brazil, Sweden, Denmark, Poland and the
Philippines. Brazil is one of the largest direct selling markets in the world.
In 1999, we plan to enter two new markets, Iceland and Norway.
CREATION OF DISTINCT, BRANDED PRODUCT DIVISIONS. In connection with our
recent acquisitions, we are transitioning from managing our business based on a
geographic model to managing our business based on product lines. Our three
product-based divisions will offer three distinct business opportunities. Each
of these business opportunities is specifically designed for the network
marketing distribution channel, and each division will be managed and directed
by a distinct management team.
- Nu Skin Personal Care is our original product division, offering over 100
premium-quality personal care products that incorporate advanced formulas
and high quality ingredients in several categories: facial care, body
care, hair care and color cosmetics, as well as specialty products such
as sun protection, oral hygiene and fragrances.
- Pharmanex is our nutrition division, which incorporates our existing IDN
(Interior Design Nutritionals) business and offers over 60 nutritional
supplements in several categories: multivitamin and mineral products and
supplements currently marketed under our IDN
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trademark, including LIFEPAK, our flagship nutritional supplement; five
natural nutritional supplements and a broad line of standardized
botanical supplements that we acquired in the Pharmanex acquisition; and
a line of sports nutritional and general health solutions.
- Big Planet is an Internet service provider that also offers Internet
devices, Web site development and hosting, online shopping and
telecommunications products and services. Big Planet currently has
approximately 25,000 Internet service subscribers, approximately 15,000
long distance customers and hosts approximately 9,000 Web sites.
OPERATING STRENGTHS
We believe that our historical operating experience, our recent and planned
acquisitions and our shift toward a strategic, product-based divisional
operating structure combine to give us the following operating strengths and
competitive advantages:
ESTABLISHED GLOBAL NETWORK OF OVER 500,000 DISTRIBUTORS. Over the past 15
years we have established a global network of over 500,000 independent
distributors. We believe this network enables us to quickly enter new geographic
markets, achieve rapid penetration for new products and launch new divisions. We
provide a high level of personalized distributor support services that meet the
needs and build the loyalty of our distributors as they build networks of
downline distributors. For example, we will continue to make investments in
technology and other corporate infrastructure designed to make it easier for
distributors to build and manage a profitable business. By leveraging our other
operating strengths, we intend to continue to create and maintain a business
climate to promote growth in the number of our executive level distributors and
increase distributor retention, motivation and profitability.
DISTINCT, BRANDED PRODUCT DIVISIONS. Each of our separate, branded product
divisions has a dedicated management team with extensive product and industry
experience. For each division, the management team focuses on creating an
attractive business opportunity for distributors, leading expansion into new
markets, developing premium-quality products and increasing brand awareness and
customer loyalty. The presidents of each of our Nu Skin Personal Care, Pharmanex
and Big Planet divisions will have global profit and loss responsibility for
their businesses. Each president will report directly to our chief executive
officer to ensure that management direction is coordinated across divisions.
While senior management in each division concentrates on the operations of that
division, its efforts are supported by our corporate management's expertise in
managing the network marketing channel and providing distributor support. Our
corporate personnel additionally support division management in such areas as
distributor management, finances, legal matters and human resources. We believe
that the divisional structure will enable us to continuously renew the business
opportunities of each division. Our branded product divisions should enable us
to attract a broader base of distributors who can pursue the divisional business
opportunity of greatest interest to them. This divisional structure will enable
us in the future to launch other new business opportunities in new industries.
INNOVATIVE, PREMIUM-QUALITY PRODUCT OFFERINGS. We believe we have developed
an extensive portfolio of innovative, premium-quality products that appeal to
broad markets and lead to repeat purchases. Furthermore, we are committed to
continuously developing new, innovative premium-quality products. We believe
this will increase brand recognition and distributor and customer loyalty. We
sell personal care products with advanced formulas and high quality ingredients
and nutritional products that are backed by scientific research. Big Planet
currently provides convenient and reliable technology products and services
through several leading technology companies. We believe we will be able to
continue developing innovative products because of our product development
expertise and our third-party research and development relationships.
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SEAMLESS GLOBAL DISTRIBUTOR COMPENSATION PLAN. We believe our Global
Compensation Plan is among the most financially rewarding plans offered to
distributors by network marketing companies. The plan can result in commissions
to distributors aggregating up to 58% of the wholesale price of personal care
and nutritional products. On a global basis, our commissions have averaged
approximately 39% to 41% of revenue from commissionable sales over the last
eight years. The Global Compensation Plan is seamlessly integrated across all
markets in which distributors sell our products, allowing distributors to
receive credit for global product sales rather than merely local product sales.
We have enhanced our Global Compensation Plan to allow distributors to develop a
seamless global network of downline distributors across all of our product
divisions. We believe we are the first major network marketing company to fully
compensate distributors for these cross-border and cross-divisional sales. We
believe this flexibility will benefit us by allowing distributors to focus on
one division while still being eligible to be compensated for sales generated by
their downline distributors in other divisions. By developing a compensation
plan and structure that do not penalize distributors for focusing on one
division, distributors will be better able to develop expertise in an area of
interest to them, which should allow them to provide a greater level of service
to their downline distributors and customers. This structure will also promote
distributor sales across divisions as distributors recruit downline distributors
with interests in different business opportunities.
GROWTH STRATEGY
Our growth strategy, designed to capitalize on our operating strengths, is
to generate revenue and earnings growth and improve operating performance as
follows:
INTRODUCE PHARMANEX AND BIG PLANET IN EXISTING MARKETS. We intend to
leverage our existing global distributor network to launch Pharmanex and Big
Planet in countries in which we have other operations. We successfully launched
our new Pharmanex division in the United States in February 1999 and anticipate
launching Pharmanex throughout Asia by the end of 1999, and in other markets
during the next 18 months. Many of our existing markets, including Taiwan, Japan
and Germany, have large markets for herbal supplements. We believe the Pharmanex
division will enable us to further penetrate these markets.
Big Planet began operations in the United States in April 1998. Upon
completing our acquisition of Big Planet, we will continue to develop and refine
the Big Planet division in the United States and then move this division into
Japan within the next 18 months subject to obtaining regulatory approvals and
licenses. Big Planet will provide us with an entirely new category of technology
products and services that we believe will attract a new demographic of
customers and distributors.
DEVELOP NEW PRODUCTS. We intend to continue to develop new, innovative
products and services in all divisions in order to enhance the appeal of each of
our product offerings and business opportunities. New products tend to increase
sales by existing distributors and attract new distributors. We plan to continue
evaluating and enhancing our Nu Skin Personal Care products and introduce a new
innovative alpha hydroxy acid treatment system. Through the additional product
research and development resources we acquired in the Pharmanex acquisition, we
intend to develop new nutritional supplements and to substantiate product claims
and efficacy. For example, Pharmanex has under development a product designed to
promote healthy bone structure for women. Upon completing our Big Planet
acquisition, we plan to improve Big Planet's Internet facilities and operational
platforms and explore new relationships with product suppliers and vendors so
Big Planet can offer additional products and services.
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GENERATE INCREASED BRAND AWARENESS AND CUSTOMER LOYALTY. We intend to
increase brand awareness and loyalty and sales to new and existing customers,
through:
- Increased promotional and public relations efforts focused on the Nu Skin
Personal Care, Pharmanex and Big Planet brands, including using celebrity
spokespersons such as Christie Brinkley, sponsoring the Nippon Challenge,
the Japanese contender for the 2000 America's Cup Regatta, engaging in
community support programs and generating clinical data suitable for
publication,
- Product research collaboration arrangements with major universities and
research centers, including the UCLA Center for Human Nutrition/Pharmanex
Phytochemical Laboratory and the Nu Skin Center for Dermatological
Research at Stanford University Medical Center, to develop new product
offerings and generate credible clinical data, and
- Implementing systems designed to promote repeat purchases, including
monthly automatic reordering and delivery.
INCREASE PRODUCT PENETRATION IN EXISTING MARKETS. Our strategy in the near
term will be to focus on expanding our direct selling market share in countries
where we currently have operations. We intend to further penetrate our existing
markets, particularly those in Europe and South America, by introducing existing
products not yet available in those markets. For example, in Brazil to date we
have only introduced 25 of over 100 possible Nu Skin Personal Care products, and
no Pharmanex products or services. In the long term, we will continue to
evaluate the growth prospects for direct selling in large developing markets
such as the PRC, India and Eastern Europe.
LEVERAGE INTERNET COMMUNICATIONS. Upon the completion of the Big Planet
acquisition, we intend to leverage Big Planet's existing Internet infrastructure
to further develop our e-commerce capabilities and strengthen our communications
link to distributors and customers. We believe this enhanced communications
platform will enable us to further attract and retain distributors and
customers. For example, we are currently establishing a system that will allow
customers to use an identification number assigned to their distributor to
access our Web sites and order products. This should ensure that the distributor
is compensated for the sale and improve customer retention by providing the
customer a means of directly contacting us.
OPERATING DIVISIONS
We currently have two operating divisions: Nu Skin Personal Care, which
offers our personal care line of products, and Pharmanex, which offers our
nutritional supplements, including our IDN products. Upon the completion of the
planned acquisition of Big Planet, Big Planet will become a third division that
offers technology and telecommunications products and services.
Presented below are the dollar amount and percentage of revenue of our Nu
Skin Personal Care products, Pharmanex/IDN products and sales aids for each of
the years ended December 31, 1996, 1997, and 1998. 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.
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REVENUE BY PRODUCT CATEGORY
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1997 1998
---------------- ---------------- ----------------
OPERATING DIVISIONS $ % $ % $ %
------------------- -------- ----- -------- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Nu Skin Personal Care.............. $554,974 72.9% $604,078 63.4% $531,915 58.2%
Pharmanex/IDN(1) (Nutritional
Supplements)..................... 160,288 21.0 297,300 31.2 334,257 36.6
Sales Aids......................... 46,376 6.1 52,044 5.4 47,322 5.2
-------- ----- -------- ----- -------- -----
Total......................... $761,638 100.0% $953,422 100.0% $913,494 100.0%
======== ===== ======== ===== ======== =====
</TABLE>
- -------------------------
(1) We acquired Pharmanex in October 1998, and we formally launched its products
in the United States through our distributors in February 1999. Accordingly,
the nutritional supplement revenue reflected in this table is composed
almost entirely of sales from our IDN nutritional supplement line which
constituted our nutritional product line prior to the Pharmanex acquisition.
NU SKIN PERSONAL CARE
Overview. Nu Skin Personal Care is our original product line and business
opportunity and currently consists of premium-quality lines of over 100 personal
care products in the areas of facial care, body care, hair care, skin whiteners,
and color cosmetics, as well as specialty products such as sun protection, oral
hygiene, and fragrances. According to the WWD Beauty Report International, at
the end of 1997 we were the tenth largest cosmetics company in Asia.
Nu Skin Personal Care's strategy is to distribute high quality personal
care products and treatments that utilize advanced formulas. For example, we
were one of the first companies to market topical applications of various
vitamins including Vitamins A, C and E. Other examples include the MHA
REVITALIZING products, which utilize alpha and beta hydroxy acids to fight the
signs of aging, and CELLTREX, a concentrated solution of aloe vera and other
ingredients, designed to improve the skin's moisture content. We recently
entered into a nine-year contract with Stanford University for directed research
on skin care products and established the Nu Skin Center for Dermatological
Research at Stanford University's School of Medicine. Nu Skin Personal Care also
seeks to take advantage of our educated distributor force to provide consumers
with a high level of information and instruction about our products and
guidelines for using them effectively.
In furtherance of this strategy, Nu Skin Personal Care intends to:
- Relaunch the NU COLOUR cosmetics line in 1999 with improvements to
shades, packaging and market positioning,
- Develop and introduce new products that utilize advanced technologies and
high quality ingredients, including a new, innovative treatment system to
reduce the appearance of fine lines and wrinkles,
- Direct research and clinical studies at the recently established Nu Skin
Center for Dermatological Research at Stanford University's School of
Medicine to assist in the development of new products and clinically
prove effectiveness of new and existing products, and
- Enhance our online ordering process to further attract new customers and
help retain existing customers by providing a simplified order process.
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Nu Skin Personal Care Products. Our current personal care products are
divided into the following lines: facial care, body care, hair care, color
cosmetics, sun protection, oral hygiene, fragrances, and speciality products.
The Nu Skin Personal Care product line consists of over 100 products. We also
offer product sets that include a variety of products in each product line as
well as small, sample-size packages to facilitate product sampling by potential
consumers. The product sets are especially popular during the opening phase of a
new market, when distributors and consumers are anxious to purchase a variety of
products, and during holiday and gift giving seasons in each market.
The following is a brief description of each product line within the Nu
Skin Personal Care division offered as of December 31, 1998:
Facial Care. The facial care line is the premier line of our personal care
products and consists of 20 different cleansers, moisturizers and special
treatments. Our cleansers and moisturizers allow users to cleanse thoroughly
without causing dryness and to moisturize with effective humectants that allow
the skin to attract and retain vital water. These products include: CELLTREX, a
concentrated solution of aloe vera and other ingredients, designed to improve
the skin's moisture content; REJUVENATING CREAM, a facial moisturizer and one of
our most popular personal care products; and PH BALANCE FACIAL TONER, a product
combining aloe vera and other ingredients. Our specialized treatment products
utilize advanced formulas and ingredients designed for specific skin care
conditions. Special treatment products include MHA REVITALIZING products, which
utilize alpha and beta hydroxy acids to help fight the signs of aging; and SKIN
BRIGHTENING COMPLEX, designed to lighten skin color and diminish the appearance
of discoloration caused by sun exposure and aging.
Body Care. Our line of body care products incorporates premium-quality
ingredients to cleanse and condition skin. The body care product line consists
of 12 different cleansers, moisturizers and special treatments. The cleansers
are formulated without soaps, which dry the skin. Our moisturizers contain light
but effective humectants and emollients. The body care line's special treatments
include DERMATIC EFFECTS, a body contouring lotion containing extracts of
hibiscus and malvaceae that has been clinically demonstrated to aid in
preventing the appearance of cellulite and aging skin, and MHA REVITALIZING BODY
LOTION. Other popular products in this line include BODY SMOOTHER, a
moisturizing lotion, BODY BAR, a non-soap cleansing bar, and BODY CLEANSING GEL.
Hair Care. We have designed our hair care line, HAIRFITNESS, to meet the
needs of people with all types of hair and hair problems. Focusing on the
condition of the scalp and its impact on hair quality, our hair care products
use water-soluble conditioners like panthenol to reduce build-up on the scalp
and to promote healthy hair. HAIRFITNESS includes 12 products featuring CEREGEN,
an innovative wheat-based complex of conditioning molecules designed to enhance
hair repair. In April 1999, we introduced a hair care line, KANURE, specifically
designed and formulated for the Brazilian market to address the natural
properties of severely dry and curly hair.
Color Cosmetics. Our color cosmetics line, NU COLOUR, consists of 13
talc-free products with over 150 SKU's including eye shadow, lipliner,
lipsticks, mascara, blush and finishing powder. Nu Skin Personal Care intends to
commence the relaunch of the NU COLOUR line in the second quarter of 1999 with
new packaging and new shades.
Sun Protection. We have designed our line of SUNRIGHT products to provide a
variety of levels of sun screen protection with non-irritating and non-greasy
ingredients. The sun protection line includes a sun preparation product that
prepares the skin for the drying impact of the sun, five sun screen alternatives
with various levels of SPF, and a sun screen lip balm.
Oral Hygiene. We have been exclusively licensed to offer for sale in the
direct selling channel a line of oral health care products under the trademark
AP-24. AP-24 incorporates anti-plaque
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technology designed to help prevent plaque build-up 24 hours a day. The product
line includes various oral health care products including toothpaste, mouthwash
and floss.
Fragrances. We offer fragrances under the trademarks SAFIRO and BELIEVE, a
new women's fragrance developed with Christie Brinkley.
Specialty Products. EPOCH is a line of ethnobotanical personal care
products created in cooperation with well known ethnobotanists. These products
unite natural compounds used by indigenous cultures with advanced scientific
ingredients. This product line consists of various products including GLACIAL
MARINE MUD, a revitalizing clay mask containing beneficial sea botanicals, EPOCH
ANTISEPTIC HAND SANITIZER, a product containing lavender that disinfects hands,
and FIREWALKER FOOT CREAM, created specifically to soothe and rejuvenate tired,
aching feet.
NUTRIOL is another line of products that we have been licensed to sell in
the direct selling channel. The NUTRIOL product line is manufactured in Europe
and consists of five products: NUTRIOL HAIR FITNESS PREPARATION, NUTRIOL
SHAMPOO, NUTRIOL MASCARA, NUTRIOL NAIL and NUTRIOL EYELASH. NUTRIOL is a product
designed to replenish vital minerals and elements. Each NUTRIOL product uses
mucopolysaccharide, a patented ingredient.
Nu Skin Personal Care Product Development. The product development
philosophy for Nu Skin Personal Care is represented by our slogan: "All of the
Good and None of the Bad." Nu Skin personal care products do not contain soaps
and other harsh cleansers that can dry and irritate skin, undesirable oils such
as lanolin, elements known to be irritating and pore clogging, and conditioning
agents that leave heavy residues. We are also committed to continuously
improving our evolving personal care product formulations to incorporate
innovative and proven ingredients into our product line. A recent example of our
product development capability is IDEALEYES, one of the first products to
stabilize Vitamin C in liquid form for topical application.
For product development support in personal care, we rely on an advisory
board comprised of recognized authorities in various disciplines. We also
recently entered into a nine-year directed-research agreement and formed the Nu
Skin Center for Dermatological Research with Stanford University Medical
Center's Department of Dermatology. Under this collaborative arrangement, we
will direct research and clinical trials of Nu Skin products or materials. We
also evaluate a significant number of product ideas presented by distributors,
vendors, and other outside sources. We believe our strategic relationships with
vendors provide important access to innovative product concepts. We intend to
continue developing products tailored to appeal to the particular needs of our
markets.
Nu Skin Personal Care Sourcing and Production. We currently acquire
products or ingredients for our personal care products from sole suppliers or
suppliers that we consider to be the superior sources of such ingredients. We
currently rely on one unaffiliated supplier for approximately 50% of our
personal care products. Our contract with this supplier expires at the end of
2000. We believe that, in the event we are unable to source any products or
ingredients from this supplier, we could produce or replace such products or
substitute ingredients without great difficulty or significant increases in the
cost of goods sold.
PHARMANEX
Overview. Following the acquisition of Pharmanex, we merged our previously
existing Interior Design Nutritionals, or IDN, product division with Pharmanex.
We believe that combining Pharmanex's research and development abilities and its
nutritional and botanical supplements with IDN's existing product development
resources and vitamin and mineral products, including its flagship product,
LIFEPAK, helps position us to penetrate further the growing nutritional
supplement
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market. The combined Pharmanex/IDN division currently offers over 60 nutritional
supplements and nutri-food products.
We believe that the nutritional supplement market is expanding throughout
the world because of changing dietary patterns, an increasingly health-conscious
population, and a growing amount of scientific evidence supporting the benefits
of using vitamin and natural self-care products and supplements. We also believe
that the Pharmanex/IDN nutritional supplements are particularly well-suited to
network marketing because the average consumer is often uneducated about
nutritional supplements. We believe that direct selling is a more effective
method than traditional retailing channels to educate consumers about the
benefits of nutritional supplements and to differentiate the quality and
benefits of our products from those offered by competitors. Because there are
numerous providers of nutritional supplements of varying degrees of quality, we
believe that individual attention and testimonials by distributors provide
information and comfort to a potential consumer. In January 1999, Pharmanex
discontinued selling nutritional supplements in traditional retail channels
where they had been distributed before we acquired Pharmanex. Pharmanex products
are now available exclusively through our distributor network, which we believe
can educate consumers more effectively about these products on a
person-to-person basis. Consistent with this personal selling approach,
Pharmanex will allow small, independent pharmacies to retail its products
because these pharmacies tend to provide personalized service and accommodate
the flow of information to consumers on a person-to-person basis.
Pharmanex utilizes available scientific literature, existing research and
clinical studies, and its own research work and clinical studies, including
chemistry, toxicology, pharmacology and placebo-controlled, double-blind
studies, to evaluate and develop its products and to confirm their safety and
efficacy. Two Pharmanex/IDN products, LIFEPAK, an advanced, uniquely formulated
multivitamin/ mineral supplement, and CHOLESTIN, a nutritional supplement that
promotes healthy cholesterol levels, have been tested in recent independent
clinical studies that have demonstrated the efficacy of these products.
Pharmanex also has established or supported the creation of the following
research centers for nutritional supplements:
- The UCLA Center for Human Nutrition/Pharmanex Phytochemical Laboratory,
- The Pharmanex Institute for Cardiovascular Health and Sports Nutrition,
- A research center located at Shanghai Medical University in the PRC, and
- A research center located at Beijing Medical University in the PRC.
We believe that Pharmanex's nutritional supplements and broad line of
botanical supplements complement the IDN multivitamin and nutritional products
and provide us with a strong portfolio of products for both the botanical and
non-botanical segments of the nutritional supplement market.
To further penetrate existing markets and expand into new markets,
Pharmanex intends to:
- Introduce Pharmanex into several new countries in 1999, including Japan,
Taiwan, Hong Kong, South Korea and New Zealand, subject to regulatory
approvals.
- Introduce new, innovative products based on extensive research and
development,
- Expand relationships with major universities and research centers to
develop new supplements and publish research studies to confirm the
efficacy of its products, and
- Increase efficiency by continuing to vertically integrate the
development, sourcing and manufacturing of its products to improve
margins and reduce costs.
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Pharmanex Products. Our nutritional supplements are currently distributed
under the brand names PHARMANEX and IDN. As we continue to integrate Pharmanex
with our existing nutritional supplement business around the world, we
anticipate that a number of products currently distributed under the IDN brand
may be distributed under the PHARMANEX brand name.
Our nutritional supplements currently include the LIFEPAK line of
multivitamin and mineral nutritional supplements, five natural nutritional
supplements and a broad-line of botanical supplements and general health
solutions. We also offer nutritional products in the following lines: general
wellness, weight-management, nutritious foods and snacks, sports and fitness
products and a water filtration system. We have designed our nutritional
products to promote healthy, active lifestyles and general well-being when used
in conjunction with proper diet and exercise. In Taiwan and South Korea, LIFEPAK
is the official nutritional supplement of each of the Taiwan and South Korea
Olympic Committees.
We must often reformulate our nutritional products to satisfy strict
regulatory requirements in many of our different markets. While each product's
concept and positioning are generally the same, regulatory differences between
markets result in some product ingredient differences. For example, Japanese
regulations mandate the use of tablets instead of capsules, which are typically
used in the United States. See "-- Government Regulation" for more information
about government regulation of our nutritional products.
Our herbal supplements are standardized, allowing consumers to obtain a
specific, consistent level of the recommended dosage of the important components
of the supplement. Recent studies have found that many popular herbal
supplements are not standardized and vary enormously in content, which
correspondingly varies the effectiveness of such products. Pharmanex uses its
"6S Quality Process," which refers to "selection," "sourcing," "structure,"
"standardization," "safety," and "substantiation," to standardize its herbal
supplements to provide a consistent level of the desired dosage of the active
compounds of such herbal supplements. We believe that this 6S Quality Process
enhances our ability to provide consumers with safe, effective, and consistent
products. See "-- Pharmanex -- Pharmanex Product Development" for a more
detailed discussion of the 6S Quality Process. The following is a brief
description of each of the nutritional product lines within the combined
Pharmanex/IDN division:
General Wellness Multivitamin/Mineral Supplements. This product line
consists of various vitamin, mineral and antioxidant supplements, including
LIFEPAK. The LIFEPAK family of products, the core IDN nutritional supplement, is
designed to provide a beneficial mix of nutrients including vitamins, minerals,
antioxidants, and phytonutrients, which are nutrient extracts from plants. The
introduction of LIFEPAK in the United States in 1992 and Japan in 1995 resulted
in a significant increase in our revenue. We currently sell LIFEPAK in 12 of our
markets, including the United States, Japan and Taiwan. We offer LIFEPAK in
different formulations to meet the unique needs of women, older adults and
pregnant women.
Pharmanex Natural Nutritional Supplements. Pharmanex currently offers five
natural nutritional supplements: CHOLESTIN, CORDYMAX Cs-4, TEGREEN 97, BIO ST.
JOHN'S and BIOGINKGO 27/7.
CHOLESTIN is a nutritional supplement derived from a strain of red yeast
rice. A recent double-blind, placebo-controlled study conducted at the UCLA
Center for Human Nutrition and published in the February 1999 issue of the
American Journal of Clinical Nutrition demonstrated the effectiveness of
CHOLESTIN in helping to promote healthy cholesterol levels. In February 1999, a
Federal District Court judge ruled that CHOLESTIN could be legally sold as a
nutritional supplement under the Dietary Supplement Health and Education Act of
1994. The FDA had previously challenged the status of CHOLESTIN as a dietary
supplement, claiming it was a drug and could not be
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marketed without FDA approval. The FDA has appealed the decision. See "Risk
Factors -- If CHOLESTIN is determined to be a drug requiring FDA approval, our
sales of CHOLESTIN will decrease and our business will be harmed," for further
discussion of this risk.
CORDYMAX Cs-4 is a nutritional supplement designed to help reduce fatigue.
Several clinical trials have been conducted on this product which have
demonstrated that CORDYMAX CS-4 can help promote stamina. CORDYMAX CS-4 is
offered as a stand-alone product and in a combination product with St. John's
Wort, a positive mood enhancer, distributed under the trademark BIO ST. JOHN'S.
In addition, we offer BIO GINKGO 27/7, a ginkgo biloba extract that promotes
blood circulation to the brain, arms, and legs, and TEGREEN 97, a supplement
that contains a concentrated level of decaffeinated green tea polyphenols that
offer high antioxidant levels.
Pharmanex Broadline Botanicals. Pharmanex also currently offers a line of
ten standardized botanical supplements including GINSENG, KAVA KAVA, ECHINACEA,
GARLIC, and HAWTHORN. Botanicals can exhibit substantial differences in content
depending on various factors such as season, climate, soil, method of harvest,
storage, and processing. As a result, botanical products can vary dramatically
in quality and content. Pharmanex's botanical supplements are standardized to
provide consumers with a product that contains a specific, consistent level of
the desired dosage of the important components of the supplement. In addition,
Pharmanex implements quality control processes designed to enhance its ability
to keep products free from contaminants.
Nutritious and Healthy Snacks. As part of its mission to promote a healthy
lifestyle and long-term wellness, Pharmanex's NUTRI-FOODS product line includes
nutritional drinks such as ALOE FOUNTAIN, which contains organically grown aloe
vera, and SPLASH C with aloe vera, a healthy beverage providing significant
doses of Vitamins C and E as well as calcium in each serving. This product line
also includes meal supplements such as nutritious snack bars.
Sports and Fitness Products. The SPORTRITION line of sports and fitness
products caters to health conscious individuals with active lifestyles. This
product line consists of a packaged group of nutritional supplements offering a
comprehensive, flexible program for individuals who desire to improve athletic
performance. Products in the Sportrition line include OVERDRIVE, a sports
supplement that features antioxidants, B vitamins, and chromium chelate and
PROGRAM-16 protein bars, designed to provide nutritional support for individuals
involved in strenuous exercise.
HealthTrim 2000. The HEALTHTRIM 2000 weight management program includes a
line of nutritional products designed to provide nutritional support to weight
conscious individuals. These products include fiber supplements marketed under
the product names FIBRENET and FIBRENET PLUS, and LIFEPAK TRIM, a
multivitamin/mineral supplement, and other related products.
Specialty Products. In the fourth quarter of 1998, we introduced a
high-performance home water filtration system in Japan. The FOUNTAIN FRESH
filtration system was designed by and is being manufactured exclusively for us
by CUNO Incorporated, a worldwide manufacturer of home and industrial filtration
systems.
Pharmanex Product Development. Since we first began offering nutritional
products, we have been committed to providing high quality nutritional
supplements, as typified by our best-selling nutritional product, LIFEPAK. This
philosophy has led to our commitment to avoid stimulants and any ingredients
that are reported to have any long-term addictive or harmful effects, even if
the short-term effects may be desirable. Through the acquisition of Pharmanex,
we believe that our increased research and development capabilities will
solidify us as one of the industry leaders in developing and distributing
high-grade, clinically substantiated nutritional supplements.
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We believe that we are one of the few nutritional supplement companies in
the United States that has a research and development department patterned after
the pharmaceutical industry. We believe that this research and development
capability will provide us with an important competitive advantage in this
industry. Moreover, because a substantial portion of Pharmanex's research and
development activities are conducted in the PRC, we believe that we should be
able to conduct quality research and development work as well as initial
clinical trials at significantly less cost than would be incurred if we
conducted comparable work in the United States.
In our development of natural and botanical supplements, our primary
research and development goal is to selectively develop proprietary technologies
for the purification and standardization of efficacious "single-species" herbal
products. Selection of a botanical/natural or nutritional product for
development is based on available scientific data concerning safety and efficacy
and consumer need. We utilize our "6S Quality Process" in our development
activities, which is designed to provide a precise, standardized, recommended
dosage of each beneficial natural ingredient in every capsule. The 6S Quality
Process generally involves the following steps:
- SELECTION. Conducting a scientific review of research and databases in
connection with the selection of potential products and ingredients, and
determining the authenticity, usefulness, and safety standards for such
potential products and ingredients.
- SOURCING. Investigating potential sources, evaluating the quality of such
sources, and performing botanical and chemical evaluations where
appropriate.
- STRUCTURE. Determining the structural analyses of natural compounds and
active ingredients.
- STANDARDIZATION. Standardizing the product to at least one relative
active ingredient.
- SAFETY. Assessing safety from available research, and, where necessary,
performing additional tests such as microbial tests and chemical, toxin,
and heavy metal analyses.
- SUBSTANTIATION. Reviewing documented pre-clinical and clinical trials,
and where necessary and appropriate, initiating studies and clinical
trials sponsored by us.
Pharmanex now employs approximately 45 scientists at our dedicated research
and development center in Shanghai, the PRC, and at our Provo, Utah and San
Francisco, California offices. We also have working relationships with 20 other
independent scientists and rely on an advisory board comprised of recognized
authorities in related disciplines. In addition, we evaluate a significant
number of product ideas presented to us by distributors and other outside
sources. We believe that our strategic relationships with vendors also provide
important access to innovative product concepts. We have established
collaborative agreements with four established universities and research
institutions in the PRC: Shanghai Medical University, Beijing Medical
University, Institute of Materia Medica, and National Laboratory of
Contraceptive and Devices Research. 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 currently have collaborative research and clinical study
programs with several major university research centers in the United States,
including UCLA, the Rippe Center for Clinical Lifestyle Research, Columbia
University, the University of Kansas, and the Scripps Institute.
PHARMANEX SOURCING AND PRODUCTION. Substantially all of our nutritional
supplements and ingredients, including LIFEPAK, are produced or provided by
third-party suppliers that we consider to be the best suppliers of such products
and/or ingredients. We currently rely on one unaffiliated supplier for
approximately 30% of our nutritional supplements. We believe that, in the event
we were unable to source any products or ingredients from this supplier or our
other current suppliers other
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than as described below, we could produce or replace such products or substitute
ingredients without great difficulty or significant increases in the cost of
goods sold. However, we cannot assure you that the loss of any such suppliers
would not harm our business and results of operations.
We obtain one of our nutritional supplements, CORDYMAX CS-4, from a sole
supplier in the PRC pursuant to a contract expiring in 2006. We obtain another
product, CHOLESTIN, from two different suppliers pursuant to contracts that
expire in 2008 and 2016. The CHOLESTIN and CORDYMAX CS-4 contracts have minimum
purchase requirements. In the event we fail to satisfy these minimum purchase
requirements, we will be required to pay a penalty of up to approximately $2.0
million in connection with our CORDYMAX CS-4 contract and up to approximately
$7.5 million in connection with our CHOLESTIN contracts. In the event we are
unable to source products from these suppliers, we could have difficulty finding
another source of these products.
As part of the acquisition of Pharmanex, we acquired an extraction and
purification facility located in Huzhou, Zhejiang Province, PRC where we
currently produce the extracts for our BIO GINKGO 27/7 and TEGREEN 97 products.
We have focused on a five-step sourcing process for our natural nutritional
supplements, such as TEGREEN 97 and BIO GINKGO 27/7, to ensure product quality.
The first step in this process is to identify the sources of raw material from
among many different species. This requires us to employ or engage the necessary
botanical expertise to identify the species required for a particular product.
The second step is to evaluate the raw material's availability. We concentrate
on products that utilize raw materials that can be cultivated in quantities
sufficient to produce satisfactory yields. We consider variables such as
location, seasonal availability, stability, access and alternative sources. Once
the sources of supply have been identified, the third step is to evaluate their
quality, which can differ significantly not just by source, but by time of
harvest and method of harvest. We have found that steps two and three require an
on-the-ground presence and local expertise to be done properly. Step four is to
identify the source of supply. To ensure raw material supply, we may engage in
both forward contracts as well as contracts with multiple suppliers. As a final
step to ensure quality, we, when possible, physically supervise the harvest and
shipment of all raw materials and bulk extract purchased. This activity involves
not only visual inspection, but also chemical analysis of the level of active
ingredients in the material at the harvest site and at the receiving dock.
We have contract cultivation areas in the PRC and in Chile. Because some of
our natural and botanical products such as BIO ST. JOHN'S and BIO GINKGO 27/7
come from crops that can only be harvested once a year, problems with such crops
could limit our ability to produce products associated with that plant species
during a poor harvest year. In addition, as these products can only be produced
once a year, we must rely on the accuracy of our estimates of product
requirements in sourcing these products. If we underestimate our product
requirements, we may not be able to re-stock such product until the next growing
season. To help mitigate this problem, we are continuing to work on sourcing raw
materials in both the Northern and Southern hemispheres to provide for two
separate growing seasons.
BIG PLANET
Overview. The Internet is rapidly emerging as a global medium for
communications, sharing information and electronic commerce. An industry
analyst, International Data Corporation, estimates that the number of Web users
will grow from approximately 140 million at the end of 1998 to approximately 400
million by the end of 2002. Industry analysts further estimate that the value of
e-commerce transactions totaled approximately $58 billion in 1998 and will reach
approximately $730 billion in 2002. The recent growth of the Internet and
electronic commerce is effecting significant changes in information delivery and
product purchasing. In addition, deregulation of
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telecommunications and the growth in wireless communications have resulted in
changes and opportunities in the telecommunications markets. We recently entered
into an agreement to acquire our affiliate Big Planet, which provides us a new
business opportunity involving technology products and services allowing us to:
- Take advantage of the opportunities provided by the rapid growth of the
technology and communication markets,
- Appeal to a broader base of customers and distributors, and
- Utilize the strength and competitive advantages of our distribution
system to reach new segments of the marketplace.
The core strategy of Big Planet is to be an "InterNetworking" company that
combines the global Internet revolution with the power of network marketing. We
believe that technology products are highly compatible with our distribution
system and that Big Planet provides a compelling business opportunity for
technology-oriented entrepreneurs desiring to participate in the Internet
revolution. Big Planet leverages the direct selling expertise of our distributor
force to provide high levels of service to its customers in a product area that
is often confusing to consumers. Big Planet trains its distributors to educate
consumers as needed to help them understand and take advantage of the latest
technology products. We believe that Big Planet's strategy of providing products
and services through a properly trained and motivated sales force will provide
us the opportunity to take technology to a broad market.
Big Planet seeks to differentiate itself from other Internet,
telecommunications and technology providers in three respects by:
- Basing its customer acquisition strategy upon person-to-person
communication and referrals, which Big Planet believes is an effective
means of securing customers in a business environment that is often
confusing to consumers,
- Providing high levels of customer support through both corporate support
staff and through Big Planet distributors, and
- Becoming a single source provider of Internet and telecommunications
products and services, giving consumers one source they can turn to for
Internet devices, connectivity, online shopping and long distance
services.
Big Planet believes that multiple connections to the home will enhance
customer retention by providing a broad range of integrated services. Big
Planet's communication and technology products and services are designed
specifically for consumers and small businesses who desire a responsive,
single-source provider of Internet connectivity, communications and online
shopping both for our products and third-party products. Distributors earn
commissions on purchases through the Big Planet online store, bpstore.com. Big
Planet currently generates revenue from:
- Providing Internet access and sales of Internet access devices,
- Sales of telecommunications products and services including long distance
and paging,
- Web site development and hosting, and
- Sales of a wide selection of products through the Big Planet online
store.
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In furtherance of its strategies, Big Planet intends to:
- Increase its online shopping potential by adding to the number of
products offered through the Big Planet online store,
- Strengthen its product offerings by enhancing current services and
expanding into new product categories, possibly including entertainment
and home security, and
- Provide a single online bill for all services provided to its customers.
Big Planet Products. Upon completion of the proposed Big Planet
acquisition, we will add technology and communication products and services to
our product offerings. Big Planet, which was launched in April 1998, currently
provides technology and communication products and services in both standalone
and packaged bundles designed specifically for consumers and small businesses
who desire a responsive, single-source provider of Internet connectivity,
Internet devices, online shopping and telecommunications.
Big Planet has invested significantly in its Internet facilities and
operation support facilities. Big Planet also has entered into contractual
relationships with several industry-leading technology companies, including
Qwest Communications, AT&T Wireless, UUNet, SkyTel, IBM, Sun Microsystems and
other key vendors, to provide convenient and reliable technology products and
services. Big Planet's sales representatives receive commissions based on Big
Planet's gross margin on each sale of products or services, or based on the
commission received by Big Planet with respect to products sold directly by
third-party vendors to Big Planet's customers. Big Planet's products and
services are built around the following core areas: providing Internet access,
offering other Internet services and devices, Web site development and hosting,
online shopping and telecommunications products and services.
Internet Connectivity and Access Devices. Big Planet provides dial-up
Internet services to its customers through three separate access plans designed
to cover the needs of a broad demographic group of consumers. As with many other
Internet service providers, Big Planet outsources Internet access through a
nationwide telecommunications network of over 1,800 dial up access sites, or
"POPS," in cities throughout the United States. Big Planet currently has
approximately 25,000 Internet service customers. Big Planet provides easy to
use, reliable and competitively priced Internet access, electronic mail and
content filtration for its distributors and consumers.
Big Planet has introduced the following Internet devices:
- The IPHONE, an innovative telephone that provides simple and convenient
Internet access via a touch screen phone with a built-in monitor and
keyboard, and
- The APLIOPHONE, a device that connects to a phone and allows the user to
route long-distance calls over the Internet.
Web Site Development and Hosting. Big Planet provides a powerful, yet easy
to use tool for creating and maintaining sophisticated Web sites. Big Planet
currently hosts approximately 9,000 Web sites primarily for individuals and
small businesses.
Telecommunications. Big Planet currently offers domestic and international
long distance, prepaid calling cards, paging products and services, and personal
800 numbers. Big Planet offers both residential and business long distance
services through its relationship with Qwest Communications. Big Planet
currently provides long distance service to approximately 15,000 customers. Big
Planet has entered into an agreement to offer wireless telecommunication
services through AT&T Wireless. Big Planet also has a business relationship with
SkyTel which allows Big Planet to sell SkyTel's prepaid paging products,
including SkyTel's BEEPWEARPRO pager watch.
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Online Shopping. The Big Planet online store provides an online shopping
environment to Big Planet distributors and their customers. The Big Planet store
was initially opened in September 1998 and currently offers access to a wide
selection of products and services from numerous different vendors in addition
to Nu Skin Personal Care and Pharmanex products. A key category within the store
is computing products, including Internet appliances like the iPhone and the
AplioPhone. Big Planet has several relationships with other parties which link
the Big Planet online store to Web sites such as pharmanex.com,
OnlineOfficeSupplies.com, ccvideo.com, ccmusic.com and Flowerclub.com.
Distributors earn commissions on purchases by their customers through the store.
Big Planet Product Development. To date, Big Planet's product development
has focused on developing its Internet facilities and operational systems in
order to develop operational and support platforms necessary to ensure
consistent services and provide for the introduction of new products and
services. Big Planet seeks to identify and secure contractual relationships with
various vendors and suppliers that will enable Big Planet to sell
competitively-priced technology products and services through its distribution
channel. In addition, Big Planet is committed to identifying and securing
contractual relationships with various vendors and suppliers for a wide
selection of products for sale through its online store. Big Planet is
evaluating the next generation of Internet devices including set top boxes,
Internet telephones and cellular phones that connect to the Internet. In
addition, one of Big Planet's vendors is developing the next generation iPhone
and an iPhone appropriate for the Japanese market. Big Planet is working with
technology partners to develop other products and services for the home,
including home security and satellite television.
Big Planet Sourcing and Production. Because the Internet is the key
component of Big Planet's business and strategy of controlling its customer
relationships, Big Planet has made a significant investment in building a
state-of-the-art network operations center which serves as the central platform
for its Internet services, Web site hosting services and its online store.
Similar to other Internet service providers, Big Planet outsources dial-up
Internet access through a nationwide telecommunications network of over 1,800
"POPS" in cities throughout the United States with a contract with UUNet and
other key backbone providers. Except for its Internet services, Web hosting and
online shopping platform, substantially all of the services and products offered
by Big Planet are contracted or sourced from unaffiliated third parties pursuant
to contractual arrangements. For example, Big Planet has contracted with Qwest
Communications to provide long distance phone services and AT&T Wireless to
provide wireless communications. By acting as a reseller of these services, Big
Planet is able to avoid the large capital deployment and investment that would
be required to build the infrastructure necessary to provide such services.
However, Big Planet's profit margins and its ability to deliver quality service
at competitive prices depend upon its ability to negotiate and maintain
favorable terms with such third-party providers. Big Planet also contracts with
or enters into various business relationships with various unaffiliated parties
to acquire the right to distribute unique and innovative products, such as the
iPhone through its online store.
REGIONAL PROFILES
For information on our revenue for each of the geographic regions in which
we operated for the years ended December 31, 1996, 1997, and 1998 and other
related information, we refer you to "Management's Discussion and Analysis of
Financial Condition and Results of Operations," and Note 16 to our consolidated
financial statements found elsewhere in this prospectus.
NORTH ASIA. Our North Asia region currently consists of our markets in
Japan and South Korea. Japan is our largest market with approximately $654.2
million in revenue in 1998. According to the World Federation of Direct Selling
Associations, the direct selling channel in Japan generated sales of
approximately $30 billion of goods and services in 1997, making Japan the
largest direct selling market in the world. Although industry sources estimate
that approximately 2.5 million people were involved in direct selling in Japan,
we believe that as many as six million people may be involved in
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direct selling businesses in Japan. Direct selling is governed by detailed
government regulation in Japan. Much of our success to date can be attributed to
the growth of our Japanese business in recent years. While the direct sales
market as a whole has remained relatively flat for several years in Japan, we
have posted double-digit percentage growth in revenue, on a local currency
basis, each year since we entered this market in 1993. In addition, in 1999 we
plan to open a new operations center outside of Tokyo where we will relocate our
order processing and distributor support functions. We believe this will improve
customer service while increasing efficiencies and lowering occupancy costs.
As of December 31, 1998, in Japan we offered virtually all of our personal
care products and nearly one third of our nutritional supplements, including
LIFEPAK and LIFEPAK TRIM, our core nutritional supplements. In addition, in the
fourth quarter of 1998, we introduced a home water filtration system designed
for the Japanese market. With a suggested retail price of approximately $450,
this is our first large-ticket item to be distributed through our network
marketing channel. We currently offer a majority of our personal care products
and approximately 10% of our nutritional supplements in South Korea. We have not
introduced any of the natural nutritional supplements or botanical supplements
that we acquired in our recent acquisition of Pharmanex such as CHOLESTIN and
CORDYMAX CS-4 in either Japan or South Korea. We currently intend to begin
introducing these products in these markets in 1999.
SOUTHEAST ASIA. Our Southeast Asia region currently consists of our markets
in Taiwan, Hong Kong, Thailand, the Philippines, New Zealand, and Australia.
This region has been significantly affected by the Asian economic recession,
which has severely curtailed consumer spending, particularly in Thailand.
Taiwan is our largest market in this region with revenue of $119.5 million
in 1998. According to the World Federation of Direct Selling Associations, the
direct selling channel in Taiwan generated approximately $1.7 billion in sales
of goods and services in 1996, of which approximately 43% were nutritional
products. We believe that the direct selling industry in Taiwan contracted
during 1998 due in part to the economic recession in the region and the PRC's
decision to temporarily ban direct selling where many Taiwanese distributors
hoped to expand their businesses. The contraction was more significant in United
States dollar terms as a result of the weakening Taiwanese dollar. Approximately
two million people, which is about 10% of the population, are estimated to be
involved in direct selling. Taiwan's government strictly regulates direct
selling activities. For example, Taiwan's government has enacted tax legislation
aimed to ensure proper tax payments by distributors on product sales to
consumers. We believe that we are one of the largest direct selling companies in
Taiwan. As of December 31, 1998, we offered most of our personal care products
and approximately one third of our nutritional supplements in Taiwan.
OTHER MARKETS. Our Other Markets region currently consists of our markets
in Europe, which, until March 1998, had been operated by private affiliates, our
North American markets, which, until May 1999, had been operated by private
affiliates, and Brazil. In March 1999, we terminated our license agreement with
our affiliate Nu Skin USA which, prior to this termination, had the exclusive
right to sell our products within the United States. Accordingly, the only
revenue we recognized in 1998 from sales in the United States related to license
fees paid to us for use of the Nu Skin trademarks and trade names and revenue
from sales of our products to Nu Skin USA. These fees and revenue accounted for
a majority of the revenue in our Other Markets in 1998. Going forward we will
recognize all revenue from sales of our products in the United States. According
to the World Federation of Direct Selling Associations, the direct selling
channel in the United States generated sales of approximately $22 billion of
goods and services in 1997, making the United States the second largest direct
selling market in the world. According to the World Federation of Direct Selling
Associations, approximately 9.3 million people are involved in direct selling
businesses in the United States. Substantially all of our personal care products
and nutritional supplements are distributed in the United States.
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The European markets first opened in 1995 with the opening of the United
Kingdom, Belgium, the Netherlands, France and Germany. Since that initial
opening, an additional eight markets have been opened in Europe, including
Sweden, Denmark and Poland in 1998. Approximately 75 of our personal care
products are sold in Europe. We have introduced several of our IDN products in a
limited number of our European markets. We believe the nutritional supplement
market provides us with our greatest growth potential in Europe. We recently
hired a new European vice president and continue to refine our operations in
Europe to fit European practices and preferences.
In November 1998 we opened the Brazilian market, which is our first market
in South America. According to the World Federation of Direct Selling
Associations, the direct selling channel in Brazil generated sales of
approximately $4.0 billion of goods and services in 1997, prior to the recent
currency devaluation, making Brazil the third largest direct selling market in
the world. According to the World Federation of Direct Selling Associations
there are approximately 1.8 million people involved in direct selling in Brazil.
Approximately 25% of the personal care products have been introduced in Brazil,
along with 15 locally produced products. We have not yet introduced our
nutritional products into the Brazilian market.
DISTRIBUTION SYSTEM
OVERVIEW OF DISTRIBUTION SYSTEM. The foundation of our sales philosophy and
distribution system is network marketing. Under most network marketing systems,
distributors purchase products for resale to consumers and for personal
consumption. Pursuant to our Global Compensation Plan, we currently sell
products exclusively through independent distributors who are not our employees.
Our network marketing program differs from many other network marketing programs
in several respects.
- The Global Compensation Plan is among the most financially rewarding
plans offered to distributors by network marketing companies and can
result in commissions to distributors aggregating up to 58% of a personal
care or nutritional product's wholesale price. On a global basis,
commissions have averaged approximately 39 to 41% of revenue from
commissionable sales over the last eight years.
- We were among the first to allow distributors to be compensated for
product sales of downline-sponsored distributors around the world, and we
believe we are now the first major network marketing company to allow
distributors to be fully compensated for product sales of
downline-sponsored distributors globally across all operating divisions.
- Our order and fulfillment systems eliminate the need for distributors to
carry significant levels of inventory.
Network marketing is an effective vehicle to distribute our products
because:
- Consumers can learn about products in person from distributors, which we
believe is more effective for premium-quality products than using
television and print advertisements,
- Direct sales allow for actual product testing by potential customers,
- There is greater opportunity for distributor and customer testimonials,
and
- As compared to other distribution methods, distributors can give
customers higher levels of service and attention, by, among other things,
following up on sales to ensure proper product usage and customer
satisfaction and to encourage repeat purchases.
Direct selling as a distribution channel has been enhanced in the past
decade by advancements in communications, including telecommunications and
Internet connectivity, and the proliferation of
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the use of videos and fax machines. For this reason, we maintain an in-house
staff of video production personnel for timely and cost-effective production of
sales materials. In addition, we intend to leverage Big Planet's existing
Internet infrastructure following the completion of the proposed Big Planet
acquisition to implement effective Internet strategies in each of our product
divisions. We believe that the Internet will become an increasingly important
business factor as more and more consumers purchase products over the Internet
as opposed to traditional retail and direct sales channels. As a result, we
expect that direct sellers will need to adapt their business models to integrate
the Internet into their operations to remain successful. Management is committed
to fully utilizing current and future technological advances to continue
enhancing the effectiveness of direct selling.
Because of the nature of Big Planet's products and services, Big Planet
distributors do not buy products for resale but act as independent sales
representatives of Big Planet. Upon completion of the Big Planet acquisition, we
will sell products through the Big Planet online store in a manner allowing
distributors to be compensated for online purchases by their customers.
Big Planet does not pay commissions on the wholesale price but on the gross
margins from sales of services and products. If products and services are
purchased directly by distributors or customers from third parties with
contractual relationships with Big Planet, the commission is based on the total
commission that Big Planet receives from such third parties with respect to such
sales. Accordingly, commissions paid with respect to Big Planet products and
services are significantly less as a percentage of revenue than our historic
commission levels.
Our revenue depends directly upon the efforts of distributors. Growth in
sales volume requires an increase in the productivity of distributors and/or
growth in the total number of distributors. We cannot assure you that the
productivity or number of distributors will be sustained at current levels or
increased in the future. Furthermore, we estimate that, as of December 31, 1998,
approximately 300 distributorships worldwide maintained Hawaiian Blue Diamond or
Blue Diamond executive distributor levels, which are our two highest executive
distributor levels, and, together with their extensive downline networks,
account for substantially all of our revenue. Consequently, the loss of a
high-level distributor, together with a group of leading distributors in such
distributor's downline network, or the loss of a significant number of
distributors for any reason, could harm our business.
SPONSORING. We rely on our distributors to sponsor new distributors. While
we provide, at cost, product samples, brochures, magazines, and other sales
materials, distributors are primarily responsible for educating new distributors
with respect to products, the Global Compensation Plan, and how to build a
successful distributorship.
The sponsoring of new distributors creates multiple levels in the network
marketing structure. Persons whom a distributor sponsors are referred to as
"downline" or "sponsored" distributors. If downline distributors also sponsor
new distributors, they create additional levels in the structure, but their
downline distributors remain in the same downline network as their original
sponsoring distributor.
Sponsoring activities are not required of distributors. However, because of
the financial incentives provided to those who succeed in building a distributor
network that consumes and resells products, we believe that most of our
distributors attempt, with varying degrees of effort and success, to sponsor
additional distributors. Generally, distributors invite acquaintances to sales
meetings in which they present our products and explain the Global Compensation
Plan. 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 or receive
product rebates.
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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.
Additionally, in most countries except Japan, a new distributor is required to
enter into a product purchase agreement with our local subsidiary, which governs
product purchases. In some of our markets, we require distributors to purchase a
starter kit, which includes our policies and procedures, for the approximate
cost of producing the starter kit.
GLOBAL COMPENSATION PLAN. We believe that one of our key competitive
advantages is our Global Compensation Plan. Distributors receive higher levels
of commissions as they advance under the Global Compensation Plan. The Global
Compensation Plan is seamlessly integrated across all markets in which
distributors sell our products, allowing distributors to receive commissions for
global product sales, rather than merely local product sales. We have also
enhanced our Global Compensation Plan to allow distributors to develop a
seamless global network of downline distributors across any or all of our
product divisions. We believe we are the first major network marketing company
to allow distributors to be fully compensated for global sales of
downline-sponsored distributors across separately branded product divisions.
We believe that our enhanced Global Compensation Plan benefits us by
allowing distributors to focus on one division while still being compensated for
sales generated by their downline distributors in other divisions. Our
distributors may develop expertise in areas of particular interest, and better
serve their customers as a result, without being penalized if their
downline-sponsored distributors have different interests in other product
divisions. Our enhanced plan should also encourage distributors to sell products
and sponsor new distributors across all product divisions because they are fully
compensated for such activities. Under the enhanced Global Compensation Plan, we
leverage the knowledge and experience of current distributors to build
distributor leadership in new markets and across product divisions.
Our distributors benefit significantly from receiving commissions at the
same rate for sales in foreign countries as for sales in their respective home
countries and across product divisions. In addition, our distributors are not
required to establish new distributorships or requalify for higher levels of
commissions within each new country in which they begin to operate, which is
frequently the case under the compensation plans of many of our competitors.
Under the modified Global Compensation Plan, distributors are paid consolidated
monthly commissions in the distributor's home country, in local currency, for
product sales in that distributor's global downline distributor network across
all product divisions.
HIGH LEVEL OF DISTRIBUTOR INCENTIVES. Based upon our knowledge of
competitors' distributor compensation plans, we believe that the Global
Compensation Plan is among the most financially rewarding plans offered to
distributors by network marketing companies. Currently, there are three
fundamental ways in which distributors can earn money:
- Through retail markups on personal care and nutritional products sold
wholesale, for which we recommend a range from 43% to 60%,
- Through rebates on nutritional product retail sales in the United States
to a distributor's retail customers which range from 20% to 30% of such
products' retail price, and
- Through a series of commissions on product sales.
Commissions on personal care and nutritional products can result in
commissions aggregating up to 58% of a product's wholesale price. On a global
basis, commissions on personal care and
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nutritional products have averaged approximately 39 to 41% of revenue from
commissionable sales over the last eight years.
Big Planet pays commissions on the gross margins from sales of products and
services. If products and services are purchased directly by distributors or
customers from third parties which have contractual relationships with Big
Planet, the commission is based on the total commission Big Planet receives from
such third parties with respect to such sales. As a result, the commissions paid
to distributors of Big Planet products and services would be significantly less
as a percentage of revenue than our historic commission levels.
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-sale taxes. As a distributor's retail business expands and as he
or she successfully sponsors other distributors into the business who in turn
expand their own businesses, he or she receives a higher percentage of
commissions.
Once a distributor becomes an executive-level distributor, the distributor
can begin to take full advantage of the benefits of commission payments on
personal and group sales volume. To achieve executive status, a distributor must
achieve specified personal and group sales volumes for a required period of
time. To maintain executive status, a distributor must generally also maintain
specified personal and group sales volumes. An executive's commissions increase
substantially as downline distributors achieve executive status. In determining
commissions, the number of levels of downline distributors included in an
executive's group increases as the number of executive distributorships directly
below the executive increases.
On a monthly basis, we evaluate distributor requests for exceptions to the
terms and conditions of the Global Compensation Plan. While the general policy
is to discourage exceptions, we believe that the flexibility to grant such
exceptions is critical in retaining distributor loyalty and dedication. In each
market, distributor services personnel evaluate each such instance and make
appropriate recommendations to us.
As of the dates indicated below, we had the following number of executive
distributors:
TOTAL NUMBER OF EXECUTIVE DISTRIBUTORS
<TABLE>
<CAPTION>
AS OF
AS OF DECEMBER 31, MARCH 31,
---------------------------------------- ---------
1994 1995 1996 1997 1998 1999
----- ----- ------ ------ ------ ---------
<S> <C> <C> <C> <C> <C> <C>
EXECUTIVE DISTRIBUTORS
North Asia................................ 3,613 4,017 14,844 16,654 17,311 16,530
Southeast Asia............................ 2,778 4,129 6,199 5,642 5,091 4,087
Other Markets(1).......................... -- 27 436 393 379 3,232
----- ----- ------ ------ ------ ------
Total................................... 6,391 8,173 21,479 22,689 22,781 23,849
===== ===== ====== ====== ====== ======
</TABLE>
- -------------------------
(1) Upon the termination of the Nu Skin USA distribution license in March 1999,
we added 2,757 executive level distributors in the United States.
DISTRIBUTOR SUPPORT. We are committed to providing high-level support
services tailored to the needs of our distributors in each market. We meet the
needs and build the loyalty of our distributors with personalized distributor
service, a support staff that assists distributors as they build networks of
downline distributors, and a liberal product return policy. Because many
distributors have only a limited number of hours each week to concentrate on
their Nu Skin business, we believe that
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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, distributor focus groups,
regular telephone conference calls, and 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 centers maintain meeting rooms which distributors may utilize in
training and sponsoring activities. In addition, we are committed to evaluating
new ideas in technology and services that we can provide to distributors, such
as automatic product reordering. We currently utilize voicemail,
teleconferencing, and fax services. We anticipate that global Internet access,
including company and product information, ordering abilities, and group and
personal sales volume inquiries, will be available to distributors in the
future.
RULES AFFECTING DISTRIBUTORS. Our standard distributor agreement, policies
and procedures, and compensation plan contained in every starter and/or
introductory kit outline the scope of permissible distributor marketing
activities. Our distributor rules and guidelines are designed to provide
distributors with maximum flexibility and opportunity within the bounds of
governmental regulations regarding network marketing and prudent business
policies and procedures. Distributors are independent contractors and are
expressly prohibited from representing themselves as our agents or employees. We
require that distributors present our products and business opportunities
ethically and professionally. Distributors further agree that their
presentations to customers must be consistent with, and limited to, the product
claims and representations made in literature distributed by us. Under most
regulations governing nutritional supplements, no medical claims may be made
regarding the products, nor may distributors prescribe any particular product as
suitable for any specific ailment. Even though sponsoring activities can be
conducted in many countries, distributors may not conduct marketing activities
outside of countries in which we currently conduct business and further may not
export for sale products from one country to another.
Distributors must represent to us that their receipt of commissions is
based on retail sales and substantial personal sales efforts. Exhibiting
commission statements or checks is prohibited. We must produce or pre-approve
all sales aids used by distributors such as videotapes, audio tapes, brochures,
promotional clothing, and other miscellaneous items.
Distributors may not use any form of media advertising to promote products.
Products may be promoted only by personal contact or by literature produced or
approved by us. Generic business opportunity advertisements, without using our
name, may be placed in accordance with required guidelines in some countries.
Our logos and names may not be permanently displayed at any location.
Distributors may not use our trademarks or other intellectual property without
our consent.
Products generally may not be sold, and our business opportunities may not
be promoted, in traditional retail environments. Pharmanex has made an exception
to this rule and has allowed its products to be sold in independently-owned
pharmacies and drug stores meeting our requirements. Additionally, distributors
may not sell at conventions, trade shows, flea markets, swap meets, and similar
events. Distributors who own or are employed by a service-related business such
as a doctor's office, hair salon, or health club, may make products available to
regular customers as long as products are not displayed visibly to the general
public in such a way as to attract the general public into the establishment to
purchase products.
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Generally, a distributor can receive commission bonuses on nutritional and
personal care products only if, on a monthly basis, the distributor:
- Achieves at least 100 points, which is approximately $100, in personal
sales volume,
- Documents retail sales to at least five retail customers,
- Sells and/or consumes at least 80% of personal sales volume, and
- Is not in default of any material policies or procedures.
We systematically review alleged reports of distributor misbehavior. If we
determine that a distributor has violated any of the 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 or penalties,
withholding commissions until specified conditions are satisfied, or other
appropriate injunctive relief. A distributor may voluntarily terminate his/her
distributorship at any time.
PAYMENT. Distributors generally pay for products prior to shipment.
Accordingly, we carry minimal accounts receivable. Distributors typically pay
for products in cash, by wire transfer, and by credit card. Cash, which
represents a significant portion of all payments, is received by order takers in
the distribution centers when orders are personally picked up by a distributor.
SALES AIDS. We provide an assortment of sales aids to facilitate the sales
of our products. In dollar terms, the largest sales aid is our starter kit which
includes materials such as product brochures, training materials and order
forms. Sales aids include videotapes, audiotapes, brochures, promotional
clothing, pens, stationery, business cards, brushes, combs, cotton pads,
tissues, and other miscellaneous items to help create consumer awareness of our
company and products. Sales aids are priced at our approximate cost, and
distributors do not receive commissions on purchases of sales aids.
PRODUCT GUARANTEES. We believe that we are among the most
consumer-protective companies in the direct selling industry. For 30 days from
the date of purchase, our product return policy allows a retail purchaser to
return any product to the distributor through whom the product was purchased for
a full refund. After 30 days from the date of purchase, the return privilege is
in the discretion of the distributor. Because distributors may return unused and
resalable products to us for a refund of 90% of the purchase price for one year,
they are encouraged to provide consumer refunds beyond 30 days. In addition, our
product return policy is an important tool used by our distributors in
developing a retail customer base. Our experience with actual product returns
has averaged less than 5.0% of annual revenue through 1998. Because many of Big
Planet's products and services are provided directly to consumers by third-party
vendors, the same 30-day return privilege does not apply to products purchased
by consumers from such vendors unless such vendors otherwise agree.
COMPETITION
PERSONAL CARE AND NUTRITIONAL PRODUCTS. The markets for personal care and
nutritional products are large and intensely competitive. We compete directly
with companies that manufacture and market personal care and nutritional
products in each of our product categories and product lines. We compete with
other companies in the personal care and nutritional products industry by
emphasizing the innovation, value, and premium-quality of our products and the
convenience of our distribution system. Many of our competitors have much
greater name recognition and financial resources than we have. In addition,
personal care and nutritional products can be purchased in a wide variety of
channels of distribution. While we believe that consumers appreciate the
convenience of ordering
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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. Our product offerings in each product
category are also relatively small compared to the wide variety of products
offered by many other personal care and nutritional product companies. We cannot
assure you that our business and results of operations will not be harmed by
market conditions and competition in the future.
TECHNOLOGY PRODUCTS AND SERVICES AND TELECOMMUNICATIONS. Upon the
completion of our acquisition of Big Planet, we will compete in markets for
technology and telecommunications products and services. The Internet services
and e-commerce commerce market is new, rapidly evolving, and intensely
competitive. We expect competition to intensify further in this market in the
future. Barriers to entry for e-commerce are relatively low as current and new
competitors can launch new Web sites at relatively low costs. Big Planet's
online shopping services also compete with other channels of distribution,
including catalogue sales and traditional retail sales. Big Planet currently or
potentially competes with other companies for its Internet services and
products, including:
- Established online services providers such as America Online and
Microsoft Network,
- Local, regional, and national Internet service providers such as
MindSpring and Earthlink,
- National telecommunication companies such as AT&T Corporation, MCI
Communications Corp. and Sprint Corporation, and
- Numerous e-commerce Web sites such as Amazon.com and Buy.com.
Many of Big Planet's competitors have much greater name recognition and
financial resources than Big Planet or our company. In addition, we understand
that some e-commerce vendors have elected to sell products for little or no
gross margins and to generate revenue through the sale of advertising. Big
Planet would have a difficult time competing based on price with such vendors
because its distribution system results in a commission payment based on such
sales. We cannot assure you that Big Planet's business and results of operations
will not be harmed by the intense competition in the Internet market.
The telecommunications industry is highly competitive. Many of Big Planet's
existing and potential competitors in this market segment have financial,
personnel, marketing, and other resources significantly greater than those of
Big Planet or our company, as well as other competitive advantages. Increased
consolidation and strategic alliances in the industry resulting from the
Telecommunications Act of 1996 could give rise to significant new competitors to
Big Planet. Competition in the telecommunications industry is primarily on the
basis of pricing, transmission quality, network reliability, and customer
service and support. Big Planet may be at a disadvantage because it does not
have its own telecommunications facilities and must rely on its ability to
acquire quality and reliable services from third-party vendors at a price that
allows it to resell such services at competitive rates. The ability of Big
Planet to compete effectively in this market will depend upon its ability to
maintain high quality services at prices equal to or below those charged by its
competitors. We cannot assure you that we or Big Planet will be able to contract
with third parties to obtain rates allowing us to compete on the basis of price
in the future or that we will be able to successfully compete in this market.
NETWORK MARKETING 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. The leading network
marketing company in our existing markets is Amway Corporation and its
affiliates. We compete for new distributors on the strength of our multiple
business opportunities, product offerings, Global Compensation Plan, management
strength, and appeal of our
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international operations. We envision the entry of many more direct selling
organizations into the marketplace as this distribution channel expands over the
next several years. We cannot assure you that we will be able to successfully
meet the challenges posed by this increased competition.
INTELLECTUAL PROPERTY
Our major trademarks are registered in the United States and in many other
countries, and we consider our trademark protection to be very important to our
business. The major trademarks we use include the following: Nu Skin, Interior
Design Nutritionals, IDN, Pharmanex, and LIFEPAK. Big Planet and InterNetworking
are trademarks of Big Planet. We generally register our important trademarks in
the United States and each market where we operate or have plans to operate. In
addition, a number of our products are based on proprietary technologies and
formulations.
GOVERNMENT REGULATION
DIRECT SELLING ACTIVITIES. Direct selling activities are regulated by
various federal, state, and local governmental agencies in the United States and
foreign countries. These laws and regulations are generally intended to prevent
fraudulent or deceptive schemes, often referred to as "pyramid," "money games,"
"business opportunity" or "chain sales" schemes, that promise quick rewards for
little or no effort, require high entry costs, use high pressure recruiting
methods, and/or do not involve legitimate products. The laws and regulations in
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/or
- Impose upon us requirements, such as requiring distributors to maintain
levels of retail sales to qualify to receive commissions, to ensure that
distributors are being compensated for sales of products and not for
recruiting new distributors.
The extent and provisions of these laws, however, vary from country to country
and can impose significant restrictions and limitations on our business
operations. For example, in South Korea, we cannot pay more than 35% of our
revenue to our distributors in any given month. In Germany, the German
Commercial Code prohibits using direct salespersons to promote multi-level
marketing arrangements by making the inducement to purchase products for resale
illegal. Accordingly, we, through our German subsidiary, sell our products to
consumers through a "commercial agent" rather than a distributor. A commercial
agent is similar to an employee. As a result, in Germany we are subject to
potential tax and social insurance liability as well as agency laws governing
the termination of commercial agents.
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 such 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. The
PRC currently has laws in place that prohibit us from conducting business in
such market using our existing business model. The PRC recently announced its
intention to lift this temporary ban in 2003. We cannot assure you that we will
be allowed to conduct business in new markets or continue to conduct business in
each of our existing markets. See "Risk Factors -- Laws and regulations may
prohibit or severely restrict our direct sales efforts and cause our sales and
profitability to decline" for additional discussion of the regulatory
environment for network marketing.
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REGULATION OF PERSONAL CARE AND NUTRITIONAL SUPPLEMENTS. Our personal care
and nutritional products and related promotional and marketing activities are
subject to extensive governmental regulation by numerous domestic and foreign
governmental agencies and authorities. These include the FDA, the Federal Trade
Commission, the Consumer Product Safety Commission, and the United States
Department of Agriculture in the United States, and the Ministry of Health and
Welfare in Japan.
Our markets have varied regulations concerning product formulation,
labeling, packaging, and importation. These laws and regulations often require
us to, among other things:
- Reformulate products for a specific market to meet the specific product
formulation laws of such 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 such products.
For example, in Japan, the Ministry of Health and Welfare requires us to have an
import business license and to register each personal care product imported into
Japan. We also reformulated many products to satisfy other Ministry of Health
and Welfare regulations. In Taiwan, all "medicated" cosmetic and pharmaceutical
products require registration. These regulations can limit 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 such
products. The sale of cosmetic products is regulated in the European Union
member states under the European Union Cosmetics Directive, which requires a
uniform application for foreign companies making personal care product sales.
Nutritional supplements are strictly regulated in our markets. Our 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 nutritional supplement. Under this statute,
nutritional 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 undergo regulatory clearance 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 such product in such market through our
distribution channel because of strict restrictions applicable to drug and
pharmaceutical products. For example, the FDA has recently appealed the decision
of a federal district court that CHOLESTIN, a Pharmanex product, could be sold
as a nutritional supplement under the Dietary Supplement Health and Education
Act. If the FDA succeeds in overturning the district court's decision, we will
be unable to sell CHOLESTIN without first obtaining FDA approval. For more
information regarding this appeal by the FDA, see "Risk Factors -- If CHOLESTIN
is determined to be a drug requiring FDA approval, our sales of CHOLESTIN will
decrease and our business will be harmed" and "-- Legal Proceedings."
Many of our existing markets also regulate product claims and advertising.
These laws regulate the types of claims and representations that can be made
regarding the efficacy of products, particularly dietary supplements.
Accordingly, these regulations can limit our distributors' ability to inform
consumers of the full benefits of our products. One of the strategic purposes of
our acquisition
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of Pharmanex was to obtain additional resources to enhance our ability to comply
with these requirements.
In Japan, we and our distributors are severely restricted in making any
claims concerning the health benefits of our nutritional supplements. 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. The FDA recently issued a
proposed rule concerning these issues.
The FTC similarly requires that product claims be substantiated. In 1994,
our affiliate, Nu Skin International, and three of its distributors entered into
a consent decree with the FTC with respect to its investigation of product
claims and distributor practices. As part of the settlement of this
investigation, Nu Skin International paid approximately $1.0 million to the FTC.
In August 1997, Nu Skin International reached a settlement with the FTC with
respect to product claims and its compliance with the 1994 consent decree,
pursuant to which settlement Nu Skin International paid $1.5 million to the FTC.
We and our vendors are also subject to laws and regulations governing the
manufacturing of our products. For example, in the United States the FDA
regulations establish Good Manufacturing Practices for foods and drugs. The FDA
has also proposed detailed Good Manufacturing Practices for nutritional
supplements; however, no such regulations have yet been adopted.
To date, we have not experienced any difficulty maintaining our import
licenses but have experienced complications regarding health and safety and food
and drug regulations for 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 this market has inhibited our ability to gain quick
access to this market for our nutritional supplements. These conditions could
continue to delay sales of our nutritional supplements in these markets,
particularly Germany, which already has a large nutritional, herbal and dietary
products industry. Currently, we are only marketing our core nutritional
products in a limited number of countries in our European market.
TELECOMMUNICATIONS REGULATION. Following the completion of our planned
acquisition of Big Planet, we, through Big Planet, will be subject to varying
degrees of telecommunications regulation in each of the jurisdictions in which
we operate. As a nondominant carrier in the United States, our provision of
international and domestic long distance telecommunications services is
generally regulated on a streamlined basis. Despite recent trends toward
deregulation, some countries do not currently permit competition in the
provision of public switched voice telecommunications services.
United States Regulation of Domestic and International Telecommunications
Services. In the United States, Big Planet's provision of domestic
telecommunications service is subject to the provisions of the Communications
Act, as amended by the Telecommunications Act of 1996, and Federal
Communications Commission regulations adopted thereunder, as well as the
applicable laws and regulations of the various states. The FCC exercises
jurisdiction over all facilities of, and services offered by, telecommunications
common carriers to the extent those facilities are used to provide, originate or
terminate interstate or international communications. State regulatory
commissions retain some jurisdiction over the same facilities and services to
the extent they are used to originate or
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terminate intrastate common carrier communications. The FCC and relevant state
authorities regulate the ownership of transmission facilities, the provision of
services, and the terms and conditions under which such services are provided.
Nondominant carriers such as Big Planet are required by federal and state law
and regulations to file tariffs listing the rates, terms, and conditions for the
services they provide. In addition, Big Planet is subject to contribution
requirements for federal and state universal service funds, which serve to fund
affordable telephone service in designated sectors.
With regard to regulation of international telecommunications services in
the United States, common carriers, such as Big Planet, are required to obtain
authority under Section 214 of the Communications Act and are subject to a
variety of international service regulations, including the FCC's International
Settlements Policy, which governs permissible arrangements between United States
carriers and their foreign correspondents to settle the cost of terminating
traffic on each other's networks and settlement rates, and rules requiring the
filing of international tariffs, carrier contracts, including foreign carrier
agreements, and traffic and revenue reports.
Regulation of Telecommunications Services in Foreign Countries. Many
overseas telecommunications markets are undergoing dramatic changes as a result
of privatization and deregulation. In Europe, the regulation of the
telecommunications industry is governed at a supranational level by the European
Union, which has developed a regulatory framework aimed at ensuring an open,
competitive telecommunications market. Each European Union member state has a
different regulatory regime, and the requirements for Big Planet to obtain
necessary licenses vary considerably from one member state to another and are
likely to change as competition is permitted in new service sectors. In other
overseas markets, Big Planet would be subject to the regulatory regimes in each
of the countries in which it seeks to conduct business. Local regulations range
from permissive to restrictive, depending upon the country. Despite recent
trends toward deregulation, some countries do not currently permit competition
in the provision of public switched voice telecommunications services, which
will limit Big Planet's and other similarly situated United States-based
carriers' ability to provide telecommunication services in some markets. For
additional discussion of telecommunications regulations, see "Risk
Factors -- Big Planet is subject to potential harmful effects of regulation of
its telecommunications services" and "Risk Factors -- Big Planet's expansion
outside the United States may be restricted or prohibited by the regulatory
environment in non-United States markets."
Internet Access. In the United States, Internet service providers are
generally considered "enhanced service providers" and are exempt from federal
and state regulations governing common carriers. Accordingly, Big Planet's
provision of Internet access services is currently exempt from tariff,
certification, and rate regulation. Nevertheless, regulations governing
disclosure of confidential information, copyright, excise tax, and other
requirements that may apply to Big Planet's provision of Internet access
services could be adopted in the future. In addition, the applicability of
existing laws governing many of these issues to the Internet is uncertain. The
majority of such laws were adopted prior to the advent of the Internet and
related technologies and do not address unique issues associated with the
Internet and related technologies. We cannot assure you that our operations will
not be adversely affected by the adoption of any such laws or the application of
existing laws to the Internet. In addition, we cannot assure you that regulatory
requirements in markets outside of the United States will not harm our ability
to implement Internet services in such markets. Some countries, including Japan,
presently regulate Internet access service as a telecommunications service under
existing telecommunications laws in some circumstances. To that extent, Big
Planet's Internet access service might be subject to regulations similar to the
regulations of telecommunications carriers in such countries. See "Risk
Factors -- Big Planet is subject to potential harmful effects of regulation of
its telecommunications services." For additional information regarding
regulations governing the Internet, see "Risk Factors -- Big Planet may be
liable for information disseminated
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through its Internet access services" and "Risk Factors -- New and existing
regulation of the Internet could harm Big Planet's business."
OTHER REGULATORY ISSUES. 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 our company for product purchases, management services, and
contractual obligations such as the payment of distributor commissions. We
believe that we operate in compliance with all applicable foreign exchange
control and transfer pricing laws. However, we cannot assure you that we will
continue to be found to be operating in compliance with foreign exchange control
and transfer pricing laws, or that such laws will not be modified, which, as a
result, may require changes in our operating procedures.
As is the case with most companies that operate in our product categories,
we have from time to time received inquiries from government regulatory
authorities regarding the nature of our business and other issues such as
compliance with local direct selling, customs, taxation, foreign exchange
control, securities, and other laws. Although to date none of these inquiries
has resulted in a finding materially adverse to us, adverse publicity resulting
from inquiries into our operations by United States and state government
agencies in the early 1990s, stemming in part from inappropriate product and
earnings claims by distributors, and in the mid 1990s resulting from adverse
media attention in South Korea, harmed our business and results of operations.
We cannot assure you that we will not face similar inquiries in the future,
which, either as a result of findings adverse to us or as a result of adverse
publicity resulting from the instigation of such inquiries, could harm our
business and results of operations.
Based on our experience and research and the nature and scope of inquiries
from government regulatory authorities, we believe that we are in material
compliance with all regulations applicable to us. Despite this belief, we could
be found not to be in material compliance with existing regulations as a result
of, among other things, the considerable interpretative and enforcement
discretion given to regulators or misconduct by independent distributors.
Any assertion or determination that we or our distributors are not in
compliance with existing laws or regulations could harm our business and results
of operations. In addition, in any country or jurisdiction, the adoption of new
laws or regulations or changes in the interpretation of existing laws or
regulations could generate negative publicity and/or harm our business and
results of operations. Government agencies and courts in any of our markets
could use their discretionary powers and authority to interpret and apply laws
in a manner that would limit our ability to operate or otherwise harm our
business. We cannot determine the effect, if any, that future governmental
regulations or administrative orders may have on our business and results of
operations. Governmental regulations in countries where we plan to commence or
expand operations may prevent, delay, or limit market entry of certain products
or require the reformulation of such products. Regulatory action, whether or not
it results in a final determination adverse to us, has the potential to create
negative publicity, with detrimental effects on the motivation and recruitment
of distributors and, consequently, on our sales and earnings.
EMPLOYEES
As of March 31, 1999, we had approximately 2,200 full-time and part-time
employees. None of the employees is represented by a union or other collective
bargaining group. We believe our relationship with our employees is good, and we
do not currently foresee a shortage in qualified personnel needed to operate our
business. As of March 31, 1999, Big Planet had approximately 400 employees.
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LEGAL PROCEEDINGS
In February 1999, a federal district judge in Utah ruled that CHOLESTIN,
one of our Pharmanex natural nutritional supplements that is derived from red
yeast rice, could be legally sold as a nutritional supplement under the Dietary
Supplement Health and Education Act of 1994. The FDA had previously challenged
the status of CHOLESTIN as a dietary supplement, claiming it was a drug and
could not be marketed without FDA approval. The FDA has since appealed to the
Tenth Circuit Court of Appeals seeking to overturn the district court's
decision. If the decision is overturned, we will not be able to sell CHOLESTIN
without FDA approval. See "Risk Factors -- If CHOLESTIN is determined to be a
drug requiring FDA approval, our sales of Cholestin will decrease and our
business will be harmed" for additional information regarding this legal
proceeding.
In March 1993, a class action lawsuit entitled Natalie Capone on behalf of
Herself and All Others Similarly Situated v. Nu Skin Canada, Inc., Nu Skin
International, Inc., Blake Roney, et al., was filed against Nu Skin
International and affiliated parties in federal district court in Utah alleging
violations of the anti-fraud provisions of the Securities Act and the Exchange
Act, common law fraud and violations of the Utah Consumer Sales Practices Act.
The plaintiffs in the case also seek injunctive relief as well as disgorgement
of profits and restitution to the plaintiffs of earnings, profits and other
compensation. In June 1997, the court denied Nu Skin International's motion for
summary judgment but also denied the plaintiff's motion to certify a similarly
situated class of distributors. However, in May 1998 the court granted the
plaintiff's motion to certify a similarly situated class of distributors based
on more limited non-reliance claims under the Securities Act and the Utah Anti-
Pyramid statute. The case continues in discovery. We intend to continue to
vigorously defend against this action.
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MANAGEMENT
Our directors, executive officers and presidents of Nu Skin Enterprises'
key subsidiaries as of March 31, 1999 were as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Blake M. Roney............. 41 Chairman of the Board of Directors
Steven J. Lund............. 45 President and Chief Executive Officer,
Director
Sandra N. Tillotson........ 42 Senior Vice President, Director
Brooke B. Roney............ 36 Senior Vice President, Director
Keith R. Halls............. 41 Senior Vice President and Secretary, Director
Renn M. Patch.............. 49 Chief Operating Officer
Corey B. Lindley........... 34 Chief Financial Officer
M. Truman Hunt............. 40 Vice President and General Counsel
William E. McGlashan, 35 President, Pharmanex
Jr.......................
Richard W. King(1)......... 42 President, Big Planet
Michael D. Smith........... 53 Vice President of North Asia
Grant F. Pace.............. 47 Vice President of Southeast Asia and Greater
China
Takashi Bamba.............. 63 President, Nu Skin Japan
John Chou.................. 53 President, Nu Skin Taiwan
Daniel W. Campbell......... 44 Director
E.J. "Jake" Garn........... 66 Director
Paula Hawkins.............. 72 Director
Max L. Pinegar............. 67 Director
</TABLE>
- -------------------------
(1) Richard W. King will not become an executive officer of Nu Skin Enterprises
until completion of the Big Planet acquisition.
Blake M. Roney has served as Chairman of the Board since our inception. Mr.
Roney was a founder of Nu Skin International in 1984 and served as its Chief
Executive Officer and President until we acquired Nu Skin International in March
1998. Since our acquisition of Nu Skin International, Mr. Roney has served as
the Chairman of the Board of our company and each of its subsidiaries. He
received a B.S. degree from Brigham Young University.
Steven J. Lund has been President, Chief Executive Officer and a director
of our company since its inception. Mr. Lund was a founding shareholder of Nu
Skin International and served as the Executive Vice President of Nu Skin
International until we acquired Nu Skin International. Mr. Lund previously
worked as an attorney in private practice. He received a B.A. degree from
Brigham Young University and a J.D. degree from Brigham Young University.
Sandra N. Tillotson has served as a director of our company since its
inception and as Senior Vice President from May 1998. Ms. Tillotson was a
founding shareholder and Vice President of Nu Skin International from its
formation until it was acquired by our company. She earned a B.S. degree from
Brigham Young University.
Brooke B. Roney has served as a director of our company since its inception
and as a Senior Vice President since May 1998. Mr. Roney was a founding
shareholder and Vice President and director of Nu Skin International from its
inception until it was acquired by our company.
Keith R. Halls has served as Secretary and a director of our company since
its inception and as a Senior Vice President since May 1998. Mr. Halls was a
director, Vice President and shareholder of Nu Skin International from its
formation until it was acquired by our company. Mr. Halls continues to serve as
a director of our subsidiaries. Mr. Halls is a Certified Public Accountant. Mr.
Halls received a
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<PAGE> 70
B.A. degree from Stephen F. Austin State University and a B.S. degree from
Brigham Young University.
Renn M. Patch has been Chief Operating Officer of our company since its
inception. From 1992 until March 1998, he served as Vice President of Global
Operations and Assistant General Manager of Nu Skin International. From 1991 to
1992, he served as Director of Government Affairs of Nu Skin International.
Prior to joining Nu Skin International in 1991, Mr. Patch was associated with
the Washington, D.C. consulting firm of Parry and Romani Associates. Mr. Patch
earned a B.A. degree from the University of Minnesota, a J.D. degree from
Hamline University School of Law and an LL.M. degree from Georgetown University.
Corey B. Lindley has been the Chief Financial Officer of our company since
its inception. From 1993 to 1996, he served as Managing Director, International,
of Nu Skin International. Mr. Lindley worked as the International Controller of
Nu Skin International from 1991 to 1994. From 1990 to 1991, he served as
Assistant Director of Finance of Nu Skin International. Mr. Lindley is a
Certified Public Accountant. Prior to joining Nu Skin International in 1990, he
worked for the accounting firm of Deloitte and Touche LLP. He earned a B.S.
degree from Brigham Young University and an M.B.A. degree from Utah State
University.
M. Truman Hunt has served as Vice President and General Counsel since May
1998. He served as Vice President of Legal Affairs and Investor Relations from
our company's inception until May 1998. He also served as Counsel to the
President of Nu Skin International from 1994 until 1996. From 1991 to 1994, Mr.
Hunt served as President and Chief Executive Officer of Better Living Products,
Inc., a Nu Skin International affiliate involved in the manufacture and
distribution of houseware products sold through traditional retail channels.
Prior to that time, he was a securities and business attorney in private
practice. He received a B.S. degree from Brigham Young University and a J.D.
degree from the University of Utah.
William E. McGlashan, Jr. has served as the President of Pharmanex since
founding the company in February 1994. Prior to founding Pharmanex, in October
1993 Mr. McGlashan co-founded Generation Ventures, a firm which initiates and
funds China-related ventures, and served as its Chief Executive Officer. Mr.
McGlashan was employed by Bain Capital from 1990-1992. Mr. McGlashan received
his B.A. degree from Yale University and his M.B.A. degree from the Stanford
Graduate School of Business.
Richard W. King has served as President of Big Planet since its inception
in 1997. From August 1996 to September 1997, Mr. King was president of Night
Technologies International, Inc. From August 1993 to April 1996, Mr. King was an
Executive Vice President of Novell, Inc., a leading network software company.
Mr. King was responsible for NetWare, Novell's flagship product. Mr. King
received a B.S. degree in Computer Science from Brigham Young University.
Michael D. Smith has been our Vice President of North Asia since December
1997. Mr. Smith was Vice President of Operations for our company from its
inception until December 1997. He also served previously as Vice President of
North Asian Operations for Nu Skin International. In addition, he served as
General Counsel of Nu Skin International from 1992 to 1996 and as Director of
Legal Affairs of Nu Skin International from 1989 to 1992. He earned B.S. and
M.A. degrees from Brigham Young University and a J.D. degree from the University
of Utah.
Grant F. Pace has served as Vice President of Southeast Asia and Greater
China since December 1997. From 1992 to 1997, he was Regional Vice
President-Direct Selling in the Asian region for Sara Lee, and from 1988 to 1992
he was President and Regional Managing Director, Southeast Asia for Avon
Products, Inc. He received a J.D. degree from Brigham Young University and an
M.B.A. degree from Harvard University.
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<PAGE> 71
Takashi Bamba has served as President and/or General Manager of Nu Skin
Japan since 1993. Prior to joining Nu Skin Japan in 1993, Mr. Bamba was
President and Chief Executive Officer of Avon Products Co., Ltd., the
publicly-traded Japanese subsidiary of Avon Products, Inc., from 1988 to 1993.
He received a B.A. degree from Yokohama National University.
John Chou has served as President and/or General Manager of Nu Skin Taiwan,
Inc. since 1991. Prior to joining Nu Skin Taiwan in 1991, he spent 21 years in
international marketing and management with 3M Taiwan Ltd., Amway Taiwan and
Universal PR Co. Mr. Chou is the Chairman of the Taiwan ROC Direct Selling
Association. He is also a member of Kiwanis International, and the Taiwan
American Chamber of Commerce. He received a B.A. degree from Tan Kang University
in Taipei, Taiwan.
Daniel W. Campbell has served as a director of our company since March
1997. Mr. Campbell has been a Managing General Partner of EsNet, Ltd. since
1994. From 1992 to 1994, Mr. Campbell was the Senior Vice President and Chief
Financial Officer of WordPerfect Corporation and prior to that was a partner of
Price Waterhouse LLP. He received a B.S. degree from Brigham Young University.
E.J. "Jake" Garn has served as a director of our company since March 1997.
Senator Garn has been Vice Chairman of Huntsman Corporation, one of the largest
privately-held companies in the United States, since 1993. He currently serves
as a director for Morgan Stanley Dean Witter Advisors, a mutual fund company;
United Space Alliance Board, a prime contractor for the space shuttle; and
Franklin Covey & Co., Inc., a provider of time management seminars and products.
From 1974 to 1993, Senator Garn was a member of the United States Senate and
served on numerous senate committees. He received a B.A. degree from the
University of Utah.
Paula Hawkins has served as a director of our company since March 1997.
Senator Hawkins is the principal of Paula Hawkins & Associates, Inc., a
management consulting company, since 1988. From 1980 to 1986, Senator Hawkins
was a member of the United States Senate and served on numerous senate
committees.
Max L. Pinegar has served as a director of our company since its inception.
Mr. Pinegar served as a Senior Vice President from May 1998 until his retirement
in November 1998. He also served as General Manager of Nu Skin International
from 1989 and as Vice President of Nu Skin International from 1992 until he
retired in November 1998. He received a B.A. degree from Brigham Young
University and an M.B.A. degree from the University of Utah.
Blake M. Roney and Brooke B. Roney are brothers. We are not aware of any
other family relationships among any directors or executive officers. Our
Certificate of Incorporation contains provisions eliminating or limiting the
personal liability of directors for violations of a director's fiduciary duty to
the extent permitted by the Delaware General Corporation Law.
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<PAGE> 72
PRINCIPAL AND SELLING STOCKHOLDERS+
The following table sets forth, as of May 3, 1999, certain information
regarding the beneficial ownership of the Class A common stock and Class B
common stock prior to and after the offering (assuming no exercise of the
underwriters' over-allotment option) by:
- Each person (or group of affiliated persons) who is known by us to own
beneficially more than 5% of the outstanding shares of either the Class A
common stock or the Class B common stock,
- Each of our directors,
- Our chief executive officer and each of our seven most highly compensated
executive officers determined in accordance with Rule 402 of Regulation
S-K,
- Each selling stockholder, and
- All executive officers and directors of Nu Skin Enterprises as a group.
Unless otherwise indicated in the footnotes to the table (i) the business
address of the 5% stockholders is 75 West Center Street, Provo, Utah 84601, and
(ii) the stockholders have direct beneficial ownership and sole voting and
investment power with respect to the shares beneficially owned.
<TABLE>
<CAPTION>
CLASS B
CLASS A COMMON TOTAL
COMMON STOCK(1)(2) STOCK(1)(2) COMMON STOCK
---------------------------------------- ------------------ ------------
OWNED TO BE
PRIOR SOLD TO BE OWNED VOTING POWER
TO THE IN THE AFTER THE OWNED PRIOR TO AND AFTER THE
DIRECTORS, EXECUTIVE OFFICERS, OFFERING OFFERING OFFERING AFTER THE OFFERING OFFERING
5% STOCKHOLDERS --------- --------- ---------------- ------------------ ------------
AND SELLING STOCKHOLDERS NUMBER NUMBER NUMBER % NUMBER % %
------------------------------ --------- --------- --------- ---- ---------- ---- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Blake M. Roney(3)........................ 5,346,749 1,324,000 4,022,749 11.6 16,129,232 30.4 29.3
Nancy L. Roney(4)........................ 3,035,234 815,571 2,219,663 6.4 8,351,534 15.7 15.2
Nedra D. Roney(5)........................ 3,993,461 1,194,700 2,798,761 8.1 10,280,046 19.4 18.7
Sandra N. Tillotson(6)................... 2,621,912 1,037,500 1,584,412 4.6 6,892,557 13.0 12.5
Craig S. Tillotson(7).................... 1,373,006 836,200 536,806 1.5 3,874,585 7.3 7.0
R. Craig Bryson(8)....................... 1,280,006 749,819 530,187 1.5 3,818,741 7.2 6.9
Kathleen D. Bryson(9).................... 694,503 417,472 277,031 * 1,926,121 3.6 3.5
Steven J. Lund(10)....................... 928,801 551,381 377,420 1.1 2,626,702 5.0 4.7
</TABLE>
(continued on following page)
- ---------------
+ The following table sets forth the pecuniary interest in the shares being
offered by our executive officers, their spouses and children and any trusts
or foundations for which any of them is a beneficiary in this offering. We
have presented this information in an effort to clarify our executive
officers' economic interest in this offering. The following table is provided
for clarification purposes only.
<TABLE>
<CAPTION>
CLASS A AND CLASS A
CLASS B COMMON CLASS A AND
COMMON STOCK STOCK TO BE CLASS B COMMON
OWNED SOLD STOCK OWNED
NAME PRIOR TO OFFERING IN THE OFFERING AFTER THE OFFERING
---- ----------------- --------------- ------------------
<S> <C> <C> <C>
Blake M. Roney.............................................. 20,699,240 1,016,857 19,682,383
Sandra N. Tillotson......................................... 10,863,445 1,177,500 9,685,945
Steven J. Lund.............................................. 3,472,252 407,000 3,065,252
Brooke B. Roney............................................. 3,482,166 534,343 2,947,823
Keith R. Halls.............................................. 379,600 193,082 186,518
</TABLE>
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<PAGE> 73
<TABLE>
<CAPTION>
CLASS B
CLASS A COMMON TOTAL
COMMON STOCK(1)(2) STOCK(1)(2) COMMON STOCK
---------------------------------------- ------------------ ------------
OWNED TO BE
PRIOR SOLD TO BE OWNED VOTING POWER
TO THE IN THE AFTER THE OWNED PRIOR TO AND AFTER THE
DIRECTORS, EXECUTIVE OFFICERS, OFFERING OFFERING OFFERING AFTER THE OFFERING OFFERING
5% STOCKHOLDERS --------- --------- ---------------- ------------------ ------------
AND SELLING STOCKHOLDERS NUMBER NUMBER NUMBER % NUMBER % %
------------------------------ --------- --------- --------- ---- ---------- ---- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Kalleen Lund(11)......................... 557,710 359,000 198,710 * 1,315,446 2.5 2.4
Brooke B. Roney(12)...................... 910,077 693,000 217,077 * 2,642,664 5.0 4.7
Denice R. Roney(13)...................... 534,367 425,828 108,539 * 1,321,332 2.5 2.4
Keith R. Halls(14)....................... 156,875 153,553 3,322 * 210,875 * *
Anna Lisa Massaro Halls(15).............. 135,500 132,178 3,322 * 189,116 * *
Max L. Pinegar(16)....................... 35,327 -- 35,327 * -- -- --
Daniel W. Campbell(17)................... 15,000 -- 15,000 * -- -- --
E.J. "Jake" Garn(17)..................... 15,000 -- 15,000 * -- -- --
Paula Hawkins(17)........................ 15,000 -- 15,000 * -- -- --
Renn M. Patch(18)........................ 13,400 -- 13,400 * -- -- --
Takashi Bamba(19)........................ 12,750 -- 12,750 * -- -- --
John Chou(20)............................ 12,965 -- 12,965 * -- -- --
Safeco Corporation(21)................... 1,966,700 -- 1,966,700 * -- -- --
Kirk V. Roney(22)........................ 877,420 693,000 184,420 * 1,925,322 3.6 3.4
Melanie K. Roney(23)..................... 476,210 384,000 92,210 * 962,661 1.8 1.7
Rick A. Roney(24)........................ 346,500 346,500 -- -- 256,762 * *
Burke F. Roney(25)....................... 346,500 346,500 -- -- 2,787 * *
Park R. Roney(26)........................ 346,500 346,500 -- -- 196,109 * *
The MAR Trust(27)........................ 90,000 90,000 -- -- 39,999 * *
The WFA Trust(28)........................ 18,004 18,004 -- -- -- -- --
The All R's Trust(29).................... 32,296 32,296 -- -- -- -- --
The Blake M. and Nancy L.
Roney Foundation(30)................... 307,143 307,143 -- -- -- -- --
The Rose Foundation(31).................. 25,000 25,000 -- -- 275,000 * *
The Nedra Roney Fixed Charitable
Trust(32).............................. 125,000 45,000 80,000 * 125,000 * *
NR Rhino Company, L.C.(33)............... 5,000 5,000 -- -- 1,495,000 2.8 2.6
The SNT Trust(34)........................ 30,000 30,000 -- -- 122,893 * *
The DVNM Trust(35)....................... 10,000 10,000 -- -- 160,258 * *
The Sandra N. Tillotson Foundation(36)... 25,000 15,000 10,000 * 20,000 * *
The Sandra N. Tillotson Fixed
Charitable Trust(37)................... 250,000 200,000 50,000 * -- -- --
SNT Rhino Company, L.C.(38).............. 100,000 100,000 -- -- 900,000 1.7 1.6
The Steven J. and Kalleen Lund
Foundation(39)......................... 163,000 143,000 20,000 * 55,571 * *
The Steven J. and Kalleen Lund Fixed
Charitable Trust(40)................... 75,000 75,000 -- -- -- -- --
S & K Rhino Company, L.C.(41)............ 50,000 50,000 -- -- 100,000 * *
The Brooke Brennan and Denice Renee'
Roney Foundation(42)................... 158,657 158,657 -- -- -- -- --
The Kirk and Melanie Roney Fixed
Charitable Trust(43)................... 75,000 75,000 -- -- -- -- --
The K and A Halls Trust(44).............. 78,082 78,082 -- -- 10,000 * *
The Keith Ray and Anna Lisa Massaro Halls
Foundation(45)......................... 19,375 16,053 3,322 * 9,357 * *
The Keith and Anna Lisa Halls Fixed
Charitable Trust(46)................... 12,500 12,500 -- -- -- -- --
K & A Rhino Company, L.C.(47)............ 15,000 15,000 -- -- -- -- --
The Halls Family Trust(48)............... 7,626 7,626 -- -- -- -- --
The CST Trust(49)........................ 15,000 15,000 -- -- 55,826 * *
The Craig S. Tillotson Foundation(50).... 30,000 20,000 10,000 * 31,600 * *
The Craig S. Tillotson Fixed Charitable
Trust(51).............................. 90,000 90,000 -- -- 22,500 * *
CST Rhino Company, L.C.(52).............. 75,000 75,000 -- -- 425,000 * *
The C & K Trust(53)...................... 51,381 51,381 -- -- 51,381 * *
</TABLE>
72
<PAGE> 74
<TABLE>
<CAPTION>
CLASS B
CLASS A COMMON TOTAL
COMMON STOCK(1)(2) STOCK(1)(2) COMMON STOCK
---------------------------------------- ------------------ ------------
OWNED TO BE
PRIOR SOLD TO BE OWNED VOTING POWER
TO THE IN THE AFTER THE OWNED PRIOR TO AND AFTER THE
DIRECTORS, EXECUTIVE OFFICERS, OFFERING OFFERING OFFERING AFTER THE OFFERING OFFERING
5% STOCKHOLDERS --------- --------- ---------------- ------------------ ------------
AND SELLING STOCKHOLDERS NUMBER NUMBER NUMBER % NUMBER % %
------------------------------ --------- --------- --------- ---- ---------- ---- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
The Bryson Foundation(54)................ 34,000 10,125 23,875 * 33,500 * *
The Bryson Fixed Charitable Trust(55).... 75,000 75,000 -- -- -- -- --
CKB Rhino Company, L.C.(56).............. 25,000 25,000 -- -- 25,000 * *
All directors and officers as a group (17
persons)(57)........................... 9,964,414 3,759,434 6,776,735 19.5 31,138,816 58.7 56.3
</TABLE>
- -------------------------
* Less than 1%.
(1) Each share of Class B common stock is convertible at any time at the option
of the holder into one share of Class A common stock and each share of
Class B common stock is automatically converted into one share of Class A
common stock upon the transfer of such share of Class B common stock to any
person who is not a Permitted Transferee as defined in the Company's
Certificate of Incorporation. If the underwriters exercise their
over-allotment option, shares will be sold by Steven J. Lund and
the remaining shares will be allocated on a pro rata basis among
the remaining selling stockholders.
(2) Prior to the offering, certain Selling Stockholders will convert shares of
Class B common stock to Class A common stock to be sold in the offering.
(3) Includes shares beneficially owned or deemed to be owned beneficially by
Blake M. Roney prior to the offering as follows: 2,311,515 shares of Class
A common stock and 7,601,534 shares of Class B common stock held directly;
2,311,514 shares of Class A common stock and 7,601,534 shares of Class B
common stock held directly by Blake M. Roney's wife, Nancy L. Roney, with
respect to which he may be deemed to share voting and investment power as
set forth in footnote (4) below; 307,143 shares of Class A common stock
held indirectly as co-trustee and with respect to which he shares voting
and investment power with his wife Nancy L. Roney as set forth in footnote
(30) below; 416,577 shares of Class A common stock and 750,000 shares of
Class B common stock held indirectly as co-trustee and with respect to
which he shares voting and investment power with his wife, Nancy L. Roney;
and 176,164 shares of Class B common stock held indirectly as trustee and
with respect to which he has sole voting and investment power.
(4) Includes shares beneficially owned or deemed to be owned beneficially by
Nancy L. Roney prior to the offering as follows: 2,311,514 shares of Class
A common stock and 7,601,534 shares of Class B common stock held directly;
307,143 shares of Class A common stock held indirectly as co-trustee and
with respect to which she shares voting and investment power with her
husband, Blake M. Roney as set forth in footnote (30) below; and 416,577
shares of Class A common stock and 750,000 shares of Class B common stock
held indirectly by as co-trustee and with respect to which she shares
voting and investment power with her husband, Blake M. Roney. Nancy L.
Roney is the wife of Blake M. Roney.
(5) Includes shares beneficially owned or deemed to be owned beneficially by
Nedra D. Roney prior to the offering as follows: 3,968,461 shares of Class
A common stock and 10,005,046 shares of Class B common stock directly; and
25,000 shares of Class A common stock and 275,000 shares of Class B common
stock held indirectly as co-trustee and with respect to which she shares
voting and investment power as set forth below in footnote (31).
(6) Includes shares beneficially owned or deemed to be owned beneficially by
Ms. Tillotson prior to the offering as follows: 2,271,912 shares of Class A
common stock and 6,447,557 shares of Class B common stock held directly;
250,000 shares of Class A common stock held indirectly as trustee and with
respect to which she has sole voting and investment power as set forth
below in footnote (37); 25,000 shares of Class A common stock and 20,000
shares of Class B common stock held indirectly as co-trustee and with
respect to which she shares voting and investment power as set forth below
in footnote (36); 75,000 shares of Class A common stock and 425,000 shares
of Class B common stock held indirectly as manager of a limited liability
company and with respect to which she has sole voting and investment power
as set forth below in footnote (52).
(7) Includes shares beneficially owned or deemed to be owned beneficially by
Mr. Tillotson prior to the offering as follows: 1,153,006 shares of Class A
common stock and 2,802,321 shares of Class B common stock held directly;
30,000 shares of Class A common stock and 31,600 shares of Class B common
stock held indirectly as co-trustee and with respect to which he shares
voting and investment power as set forth below in footnote (50); 90,000
shares of Class A common stock and 22,500 shares of Class B common stock
held indirectly as trustee and with respect to which Mr. Tillotson has sole
voting and investment power as set forth below in footnote (51); 100,000
shares of Class A common stock and 900,000 shares of Class B common stock
held indirectly as manager of a limited liability company and with respect
to which he has sole voting and investment
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<PAGE> 75
power as set forth below in footnote (38); and 118,164 shares of Class B
common stock held indirectly as co-trustee and with respect to which he
shares voting and investment power.
(8) Includes shares beneficially owned or deemed to be owned beneficially by
Mr. Bryson prior to the offering as follows: 585,503 shares of Class A
common stock and 1,892,620 shares of Class B common stock held directly;
585,503 shares of Class A common stock and 1,892,621 shares of Class B
common stock held by Mr. Bryson's wife, Kathleen D. Bryson, with respect to
which he may be deemed to share voting and investment power as set forth
below in footnote (9); and 34,000 shares of Class A common stock and 33,500
shares of Class B common stock held indirectly as co-trustees and with
respect to which he shares voting and investment power with his wife,
Kathleen D. Bryson, as set forth below in footnote (54); 75,000 shares of
Class A common stock held indirectly as co-trustee and with respect to
which he shares voting and investment power with his wife, Kathleen D.
Bryson, as set forth below in footnote (55).
(9) Includes shares beneficially owned or deemed to be owned beneficially by
Ms. Bryson prior to the offering as follows: 585,503 shares of Class A
common stock and 1,892,621 shares of Class B common stock held directly;
and 34,000 shares of Class A common stock and 33,500 shares of Class B
common stock held indirectly as co-trustees and with respect to which she
shares voting and investment power with her husband, R. Craig Bryson as set
forth below in footnote (54); 75,000 shares of Class A common stock held
indirectly as co-trustee and with respect to which she shares voting and
investment power with her husband, R. Craig Bryson, as set forth below in
footnote (55).
(10) Includes shares beneficially owned or deemed to be owned beneficially by
Mr. Lund prior to the offering as follows: 319,710 shares of Class A common
stock and 1,259,875 shares of Class B common stock held directly; 319,710
shares of Class A common stock and 1,259,875 shares of Class B common stock
held by Mr. Lund's wife, Kalleen Lund, with respect to which he may be
deemed to share voting and investment power as set forth below in footnote
(11); 51,381 shares of Class A common stock and 51,381 shares of Class B
common stock held indirectly as trustee and with respect to which he has
sole voting and investment power as set forth below in footnote (53);
163,000 shares of Class A common stock and 55,571 shares of Class B common
stock held indirectly as co-trustee and with respect to which he shares
voting and investment power with his wife, Kalleen Lund as set forth below
in footnote (39); and 75,000 shares of Class A common stock held indirectly
as co-trustee and with respect to which he shares voting and investment
power with his wife, Kalleen Lund, as set forth below in footnote (40).
(11) Includes shares beneficially owned or deemed to be owned beneficially by
Ms. Lund prior to the offering as follows: 319,710 shares of Class A common
stock and 1,259,875 shares of Class B common stock held directly; 163,000
shares of Class A common stock and 55,571 shares of Class B common stock
held indirectly as co-trustee and with respect to which she shares voting
and investment power with her husband, Steven J. Lund as set forth below in
footnote (39); and 75,000 shares of Class A common stock held indirectly as
co-trustee and with respect to which she shares voting and investment power
with her husband, Steven J. Lund, as set forth below in footnote (40). Ms.
Lund is the wife of Steven J. Lund.
(12) Includes shares beneficially owned or deemed to be owned beneficially by
Brooke B. Roney prior to the offering as follows: 375,710 shares of Class A
common stock and 1,321,332 shares of Class B common stock held directly;
375,710 shares of Class A common stock and 1,321,332 shares of Class B
common stock held by his wife, Denice R. Roney, with respect to which he
may be deemed to share voting and investment power as set forth below in
footnote (13); 158,657 shares of Class A common stock held indirectly as
co-trustee and with respect to which he shares voting and investment power
with his wife, Denice R. Roney, as set forth below in footnote (42).
(13) Includes shares beneficially owned or deemed to be owned beneficially by
Denice R. Roney prior to the offering as follows: 375,710 shares of Class A
common stock and 1,321,332 shares of Class B common stock held directly;
158,657 shares of Class A common stock held indirectly as co-trustee and
with respect to which she shares voting and investment power with her
husband, Brooke D. Roney, as set forth below in footnote (42). Denice R.
Roney is the wife of Brooke B. Roney.
(14) Includes shares beneficially owned or deemed to be owned beneficially by
Mr. Halls prior to the offering as follows: 100,000 shares of Class A
common stock and 176,518 shares of Class B common stock held directly;
25,000 shares of Class A common stock and 25,000 shares of Class B common
stock held indirectly by him as the manager of a limited liability company
and with respect to which he has sole voting and investment power as set
forth below in footnote (56); 19,375 shares of Class A common stock and
9,357 shares of Class B common stock held indirectly by him as co-trustee
and with respect to which he shares voting and investment power with Anna
Lisa Massaro Halls as set forth below in footnote (45); and 12,500 shares
of Class A common stock held indirectly by him as co-trustee and with
respect to which he shares voting and investment power with Anna Lisa
Massaro Halls as set forth below in footnote (46).
(15) Includes shares beneficially owned or deemed to be owned beneficially by
Ms. Halls prior to the offering as follows: 103,625 shares of Class A
common stock and 179,759 shares of Class B common stock held directly;
19,375 shares of Class A common stock and 9,357 shares of Class B common
stock held indirectly by her as
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<PAGE> 76
co-trustee and with respect to which she shares voting and investment power
with Keith R. Halls as set forth below in footnote (45); and 12,500 shares
of Class A common stock held indirectly by her as co-trustee and with
respect to which she shares voting and investment power with Keith R. Halls
as set forth below in footnote (46).
(16) Includes 9,000 shares of Class A common stock which may be acquired by Mr.
Pinegar pursuant to a presently exercisable non-qualified stock option.
(17) Includes 12,500 shares of Class A common stock which may be acquired by
each outside director pursuant to presently exercisable non-qualified stock
options granted to each of them.
(18) Includes 6,500 shares of Class A common stock which may be acquired by Mr.
Patch pursuant to presently exercisable non-qualified stock options.
(19) Includes 6,250 shares of Class A common stock which may be acquired by Mr.
Bamba pursuant to presently exercisable non-qualified stock options.
(20) Includes 6,250 shares of Class A common stock which may be acquired by Mr.
Chou pursuant to presently exercisable non-qualified stock options.
(21) The information regarding the number of shares beneficially owned or deemed
to be beneficially owned by Safeco Corporation was taken from a Schedule
13G filed by that entity with the Securities and Exchange Commission dated
February 11, 1999. The business address of Safeco Corporation is 4333
Brooklyn Avenue N.E., Seattle, Washington 98185.
(22) Includes shares beneficially owned or deemed to be owned beneficially by
Kirk V. Roney prior to the offering as follows: 401,210 shares of Class A
common stock and 962,661 shares of Class B common stock held directly;
401,210 shares of Class A common stock and 962,661 shares of Class B common
stock held by his wife, Melanie K. Roney, with respect to which he may be
deemed to share voting and investment power as set forth below in footnote
(23); 75,000 shares of Class A common stock held indirectly as co-trustee
and with respect to which he shares voting and investment power with his
wife, Melanie K. Roney, and L.S. McCullough, as set forth below in footnote
(43).
(23) Includes shares beneficially owned or deemed to be owned beneficially by
Melanie K. Roney prior to the offering as follows: 401,210 shares of Class
A common stock and 962,661 shares of Class B common stock held directly;
and 75,000 shares of Class A common stock held indirectly as co-trustee and
with respect to which she shares voting and investment power with her
husband, Kirk V. Roney, and L.S. McCullough, as set forth below in footnote
(43).
(24) Includes shares beneficially owned or deemed to be owned beneficially by
Rick A. Roney prior to the offering as follows: 346,500 shares of Class A
common stock and 168,680 shares of Class B common stock held directly;
88,082 shares of Class B common stock as trustee and with respect to which
he has sole voting and investment power. Rick A. Roney is a brother of
Blake M. Roney, Nedra D. Roney, Brooke B. Roney, Kirk V. Roney, Burke F.
Roney and Park R. Roney.
(25) Burke F. Roney is a brother of Blake M. Roney, Nedra D. Roney, Brooke B.
Roney, Kirk V. Roney, Rick A. Roney and Park R. Roney.
(26) Park R. Roney is a brother of Blake M. Roney, Nedra D. Roney, Brooke B.
Roney, Kirk V. Roney, Rick A. Roney and Burke F. Roney.
(27) Tom Branch is the trustee of The MAR Trust and has sole voting and
investment power with respect to the shares of Class A and Class B common
stock owned by such entity.
(28) L.S. McCullough is the trustee of The WFA Trust and has sole voting and
investment power with respect to the shares of Class A and Class B common
stock owned by such entity.
(29) L.S. McCullough is the trustee of The All R's Trust and has sole voting and
investment power with respect to the shares of Class A and Class B common
stock owned by such entity.
(30) Blake M. Roney and Nancy L. Roney are co-trustees of The Blake M. and Nancy
L. Roney Foundation and share voting and investment power with respect to
shares of Class A common stock owned by such entity as reported above in
footnotes (3) and (4).
(31) Nedra D. Roney and Tom Branch are co-trustees of The Rose Foundation and
share voting and investment power with respect to the shares of Class A and
Class B common stock owned by such entity as reported above in footnote
(5).
(32) Tom Branch is the trustee of The Nedra Roney Fixed Charitable Trust and has
sole voting and investment power with respect to the shares of Class A and
Class B common stock owned by such entity.
(33) Craig F. McCullough is the manager of NR Rhino Company, L.C. and has sole
voting and investment power with respect to the shares of Class A and Class
B common stock owned by such entity.
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(34) Lee M. Brower is the trustee of The SNT Trust and has sole voting and
investment power with respect to the shares of Class A and Class B common
stock owned by such entity.
(35) Lee M. Brower is the trustee of The DVNM Trust and has sole voting and
investment power with respect to the shares of Class A and Class B common
stock owned by such entity.
(36) Sandra N. Tillotson and Lee M. Brower are co-trustees of The Sandra N.
Tillotson Foundation and share voting and investment power with respect to
the shares of Class A common stock owned by such entity as reported above
in footnote (6).
(37) Sandra N. Tillotson is the sole trustee of The Sandra N. Tillotson Fixed
Charitable Trust and has sole voting and investment power with respect to
the shares of Class A common stock owned by such entity as reported above
in footnote (6).
(38) Craig S. Tillotson is the manager of SNT Rhino Company, L.C. and has sole
voting and investment power with respect to the shares of Class A and Class
B common stock owned by such entity as reported above in footnote (7).
(39) Steven J. Lund and Kalleen Lund are co-trustees of The Steven J. and
Kalleen Lund Foundation and share voting and investment power with respect
to the shares of Class A common stock owned by such entity as reported
above in footnotes (10) and (11).
(40) Steven J. Lund and Kalleen Lund are co-trustees of The Steven J. and
Kalleen Lund Fixed Charitable Trust and share voting and investment power
with respect to the shares of Class A and Class B common stock owned by
such entity as reported above in footnotes (10) and (11).
(41) Craig F. McCullough is the manager of S & K Rhino Company, L.C. and has
sole voting and investment power with respect to the shares of Class A and
Class B common stock owned by such entity.
(42) Brooke B. Roney and Denice R. Roney are co-trustees of The Brooke Brennan
and Denice Renee Roney Foundation and share voting and investment power
with respect to the Class A common stock owned by such entity as reported
above in footnotes (12) and (13).
(43) Kirk V. Roney and Melanie K. Roney are co-trustees of The Kirk and Melanie
Roney Fixed Charitable Trust and share voting and investment power with
respect to the Class A common stock owned by such entity as reported above
in footnote (22) and (23).
(44) Michael L. Halls and Dennis Morgan are co-trustees of The K and A Halls
Trust and share voting and investment power with respect to the shares of
Class A and Class B common stock owned by such entity.
(45) Keith R. Halls and Anna Lisa Massaro Halls are co-trustees of The Keith Ray
and Anna Lisa Massaro Halls Foundation and share voting and investment
power with respect to the Class A common stock owned by such entity as
reported above in footnotes (14) and (15).
(46) Keith R. Halls and Anna Lisa Massaro Halls are co-trustees of The Keith and
Anna Lisa Halls Fixed Charitable Trust and share voting and investment
power with respect to the Class A common stock owned by such entity as
reported above in footnotes (14) and (15).
(47) Craig F. McCullough is the manager of K & A Rhino Company, L.C. and has
sole voting and investment power with respect to the shares of Class A and
Class B common stock owned by such entity.
(48) Michael L. Halls and Dennis Morgan are co-trustees of The Halls Family
Trust and share voting and investment power with respect to the shares of
Class A and Class B common stock owned by such entity.
(49) Robert L. Stayner is the trustee of The CST Trust and has sole voting and
investment power with respect to shares of Class A common stock owned by
such entity.
(50) Craig S. Tillotson and Lee M. Brower are co-trustees of The Craig S.
Tillotson Foundation and share voting and investment power with respect to
the shares of Class A common stock and Class B common stock reported above
in footnote (7).
(51) Craig S. Tillotson is the trustee of The Craig S. Tillotson Fixed
Charitable Trust and has sole voting and investment power with respect to
shares of Class A and Class B common stock owned by such entity as reported
above in footnote (7).
(52) Sandra N. Tillotson is the manager of CST Rhino Company, L.C. and has sole
voting and investment power with respect to the shares of Class A and Class
B common stock owned by such entity as reported above in footnote (6)
above.
(53) Steven J. Lund is the trustee of The C & K Trust and has sole voting and
investment power with respect to the shares of Class A common stock owned
by such entity as reported above in footnote (10) above.
(54) R. Craig Bryson and Kathleen D. Bryson are co-trustees of The Bryson
Foundation and share voting and investment power with respect to the shares
of Class A common stock owned by such entity as reported above in footnotes
(8) and (9).
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(55) R. Craig Bryson and Kathleen D. Bryson are co-trustees of The Bryson Fixed
Charitable Trust and share voting and investment power with respect to the
shares of Class A common stock owned by such entity as reported above in
footnotes (8) and (9) above.
(56) Keith R. Halls is the manager of CKB Rhino Company, L.C. and has sole
voting and investment power with respect to the shares of Class A common
stock owned by such entity as reported above in footnote (14).
(57) Includes 290,575 shares of Class A common stock which may be acquired upon
exercise of presently exercisable options.
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DESCRIPTION OF CAPITAL STOCK
GENERAL
As of the date of this prospectus, the authorized capital stock of Nu Skin
Enterprises consists of 500,000,000 shares of Class A common stock, 100,000,000
shares of Class B common stock, and 25,000,000 shares of preferred stock. As of
May 3, 1999, we had 33,184,650 shares of Class A common stock issued and
outstanding and 54,606,905 shares of Class B common stock issued and
outstanding. Of the authorized shares of preferred stock, no shares of preferred
stock were outstanding as of May 3, 1999.
The following description of our capital stock is a summary and is subject
to and qualified in its entirety by reference to the provisions of our
Certificate of Incorporation.
COMMON STOCK
The approximate number of holders of record of our Class A common stock and
Class B common stock as of May 3, 1999 was 918. The shares of Class A common
stock and Class B common stock are identical in all respects, except for voting
and conversion rights and transfer restrictions regarding the shares of the
Class B common stock, as described below.
VOTING RIGHTS. Each share of Class A common stock entitles the holder to
one vote on each matter submitted to a vote of our stockholders and each share
of Class B common stock entitles the holder to ten votes on each such matter,
including the election of directors. There is no cumulative voting. Except as
required by applicable law, holders of Class A common stock and holders of Class
B common stock will vote together on all matters submitted to a vote of the
stockholders. With respect to certain corporate changes, such as liquidations,
reorganizations, recapitalizations, mergers, consolidations and sales of
substantially all of our assets, holders of Class A common stock and holders of
Class B common stock will vote together as a single class and the approval of
66 2/3% of the outstanding voting power is required to authorize or approve such
transactions.
Any action that can be taken at a meeting of the stockholders may be taken
by written consent without a meeting if we receive consents signed by
stockholders having the minimum number of votes that would be necessary to
approve the action at a meeting at which all shares entitled to vote on the
matter were present. This could permit holders of Class B common stock to take
all actions required to be taken by the stockholders without providing the other
stockholders an opportunity to make nominations or raise other matters at a
meeting. The right to take action by less than unanimous written consent expires
at such time as there are no shares of Class B common stock outstanding.
DIVIDENDS. Holders of Class A common stock and holders of Class B common
stock are entitled to receive dividends at the same rate if, as and when such
dividends are declared by our board of directors out of assets legally available
therefor after payment of dividends required to be paid on shares of preferred
stock, if any.
If a dividend or distribution payable in Class A common stock is made on
the Class A common stock, we must also make a pro rata and simultaneous dividend
or distribution on the Class B common stock payable in shares of Class B common
stock. Conversely, if a dividend or distribution payable in Class B common stock
is made on the Class B common stock, we must also make a pro rata and
simultaneous dividend or distribution on the Class A common stock payable in
shares of Class A common stock.
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RESTRICTIONS ON TRANSFER. If a holder of Class B common stock transfers
such shares, whether by sale, assignment, gift, bequest, appointment or
otherwise, to a person other than a permitted transferee (as defined in our
Certificate of Incorporation) such shares will be converted automatically into
shares of Class A common stock. In the case of a pledge of shares of Class B
common stock to a financial institution, such shares will not be deemed to be
transferred unless and until a foreclosure occurs.
CONVERSION. The Class A common stock has no conversion rights. The Class B
common stock is convertible into shares of Class A common stock, in whole or in
part, at any time and from time to time at the option of the holder, on the
basis of one share of Class A common stock for each share of Class B common
stock converted. In the event of a transfer of shares of Class B common stock to
any person other than a "Permitted Transferee," as defined in the Certificate of
Incorporation, each share of Class B common stock so transferred automatically
will be converted into one share of Class A common stock. Each share of Class B
common stock will also automatically convert into one share of Class A common
stock if, on the record date for any meeting of the stockholders, the number of
shares of Class B common stock then outstanding is less than 10% of the
aggregate number of shares of Class A common stock and Class B common stock then
outstanding.
LIQUIDATION. In the event of liquidation, after payment of the debts and
other liabilities of our company and after making provision for the holders of
preferred stock, if any, our remaining assets will be distributable ratably
among holders of Class A common stock and holders of Class B common stock
treated as a single class.
MERGERS AND OTHER BUSINESS COMBINATIONS. Upon the merger or consolidation
of our company, holders of each class of common stock are entitled to receive
equal per share payments or distributions, except that in any transaction in
which shares of capital stock are distributed, such shares may differ as to
voting rights to the extent and only to the extent that the voting rights of the
Class A common stock and the Class B common stock differ at that time. We may
not dispose of all or any substantial part of our assets to, or merge or
consolidate with, any person, entity or "group," as that term is defined in Rule
13d-5 of the Securities Exchange Act of 1934, which beneficially owns in the
aggregate 10% or more of the outstanding common stock of our company without the
affirmative vote of the holders, other than such "related person," of not less
that 66 2/3% of the voting power of outstanding Class A common stock and Class B
common stock voting as a single class. For the sole purpose of determining the
66 2/3% vote, a "related person" will also include the seller or sellers from
whom the related person acquired, during the preceding six months, at least 5%
of the outstanding shares of Class A common stock in a single transaction or
series of related transactions pursuant to one or more agreements or other
arrangements (and not through a brokers' transaction), but only if such seller
or sellers have beneficial ownership of shares of common stock having a fair
market value in excess of $10 million in the aggregate following such
disposition to such related person. This 66 2/3% voting requirement is not
applicable, however, if:
- The proposed transaction is approved by a vote of not less than a
majority of our directors who are neither affiliated nor associated with
the related person (or the seller of shares to the related person as
described above), or
- In the case of a transaction pursuant to which the holders of common
stock are entitled to receive cash, property, securities or other
consideration, the cash or fair market value of the property, securities
or other consideration to be received per share in such transaction is
not less than the higher of (A) the highest price per share paid by the
"related person" for any of its holdings of common stock within the
two-year period immediately prior to the announcement of the proposed
transaction or (B) the highest closing sale price during the
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30-day period immediately preceding such date or during the 30-day period
immediately preceding the date on which the related person became a
related person, whichever is higher.
OTHER PROVISIONS. Holders of the Class A common stock and holders of Class
B common stock are not entitled to preemptive rights. Neither the Class A common
stock nor the Class B common stock may be subdivided or combined in any manner
unless the other class is subdivided or combined in the same proportion.
TRANSFER AGENT AND REGISTRAR. The Transfer Agent and Registrar for the
Class A common stock is American Stock Transfer and Trust Company.
LISTING. The Class A common stock is traded on the New York Stock Exchange
under the trading symbol "NUS." There is currently no public market for the
Class B common stock.
PREFERRED STOCK
The board of directors is authorized, subject to any limitations prescribed
by the Delaware General Corporation Law or the rules of the New York Stock
Exchange or other organizations on whose systems our stock may be quoted or
listed, to provide for the issuance of shares of preferred stock in one or more
series, to establish from time to time the number of shares to be included in
each such series, to fix the rights, powers, preferences and privileges of the
shares of each wholly unissued series and any qualifications, limitations or
restrictions thereon, and to increase or decrease the number of shares of such
series, without any further vote or action by the stockholders. The approval of
the holders of at least 66 2/3% of the combined voting power of the outstanding
shares of common stock, however, is required for the issuance of shares of
preferred stock that have the right to vote for the election of directors under
ordinary circumstances or to elect 50% or more of the directors under any
circumstances. Depending upon the terms of the preferred stock established by
our board of directors, any or all series of preferred stock could have
preference over the common stock with respect to dividends and other
distributions and upon liquidation of our company or could have voting or
conversion rights that could adversely affect the holders of the outstanding
common stock. In addition, the preferred stock could delay, defer or prevent a
change of control of our company. We have no present plans to issue any shares
of preferred stock.
OTHER CHARTER AND BYLAW PROVISIONS
Special meetings of stockholders may be called only by the majority
stockholders, the board of directors or the President or Secretary of our
company. Except as otherwise required by law, stockholders, in their capacity as
such, are not entitled to request or call a special meeting of the stockholders.
Our stockholders are required to provide advance notice of nominations of
directors to be made at, and of business proposed to be brought before, a
meeting of the stockholders. The failure to deliver proper notice within the
periods specified in our Amended and Restated Bylaws will result in the denial
of the stockholder of the right to make such nominations or propose such action
at the meeting.
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW
We are a Delaware corporation and are subject to the provisions of Section
203 of the Delaware General Corporation Law regulating corporate takeovers. This
law prevents certain Delaware corporations, including those whose securities are
listed on the New York Stock Exchange, from engaging, under certain
circumstances, in a "business combination" with an "interested stockholder"
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for three years following the date that such stockholder became an "interested
stockholder," unless the "business combination" or "interested stockholder" is
approved in a prescribed manner. An "interested stockholder" is a stockholder
who, together with affiliates and associates, within the prior three years did
own 15% or more of the corporation's outstanding voting stock. A Delaware
corporation may "opt out" of the provisions of Section 203 of the Delaware
General Corporation Law with an express provision in its original certificate of
incorporation or an express provision in its certificate of incorporation or
bylaws resulting from a stockholders' amendment approved by at least a majority
of the outstanding voting shares. We have not "opted out" of the provisions of
this law.
INDEMNIFICATION AND LIMITATION OF LIABILITY OF DIRECTORS AND OFFICERS
To the fullest extent permitted by the Delaware General Corporation Law,
our Certificate of Incorporation and Bylaws provide that we shall indemnify and
advance expenses to each of our directors, officers, employees and agents. We
believe the foregoing provisions are necessary to attract and retain qualified
persons as directors and officers. We have entered into separate indemnification
agreements with each of our directors and executive officers in order to
effectuate such provisions. Our Certificate of Incorporation also provides for,
to the fullest extent permitted by the Delaware General Corporation Law,
elimination or limitation of liability of directors for breach of their
fiduciary duty to us or our stockholders.
REGISTRATION RIGHTS
Under the Stockholders' Agreement, as amended, between and among certain Nu
Skin Enterprises original stockholders, we have granted such stockholders
registration rights permitting each of such original stockholders to register
his or her shares of Class A common stock, subject to certain restrictions, on
any registration statement filed by our company until such original stockholder
has sold a specified value of shares of Class A common stock. In connection with
the acquisition of Pharmanex, we have granted demand and piggyback registration
rights, subject to certain restrictions, to the former stockholders of
Pharmanex.
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CERTAIN UNITED STATES FEDERAL TAX
CONSIDERATIONS FOR NON-UNITED STATES HOLDERS
The following is a general discussion of certain United States federal
income and estate tax consequences of the ownership and disposition of Class A
common stock that may be relevant to you if you are a non-U.S. Holder. In
general a "non-U.S. Holder" is any holder of Class A common stock other than:
- A citizen or resident of the United States,
- A corporation, partnership or other entity created or organized in the
United States or under the laws of the United States or of any state,
- An estate, the income of which is includable in gross income for United
States federal income tax purposes regardless of its source, or
- A trust if (a) a court within the United States is able to exercise
primary supervision over the administration of the trust and (b) one or
more United States persons have the authority to control all substantial
decisions of the trust.
This discussion is a summary of certain aspects of current United States
federal income and estate taxation and is for general information only. This
discussion does not address aspects of United States federal taxation other than
income and estate taxation and does not address all aspects of income and estate
taxation, nor does it consider any specific facts or circumstances that may
apply to a particular non-U.S. Holder (including certain United States
expatriates). Accordingly, offerees of Class A common stock are urged to consult
their tax advisers regarding the United States federal, state, local and
non-United States income and other tax consequences of holding and disposing of
shares of Class A common stock.
If you are an individual, you may, subject to certain exceptions, be deemed
to be a United States resident (as opposed to a non-resident alien) by virtue of
being present in the United States for at least 31 days in the calendar year and
for an aggregate of at least 183 days during a three-year period ending in the
current calendar year (counting for such purposes all of the days present in the
current year, one-third of the days present in the immediate preceding year, and
one-sixth of the days present in the second preceding year). In addition, an
alien may be treated as a resident alien if he or she (1) meets a lawful
permanent residence test or (2) elects to be treated as a United States resident
and meets the test in the immediately preceding sentence in the immediately
following year. Resident aliens are subject to United States federal income tax
as if they were United States citizens.
DIVIDENDS. If dividends are paid on the Class A common stock, as a non-U.S.
Holder, you will be subject to United States withholding tax at a 30% rate (or a
lower rate prescribed by an applicable tax treaty) unless the dividends are
either (1) considered effectively connected with a trade or business carried on
by you within the United States, or alternatively, (2) if certain tax treaties
apply, considered attributable to a permanent establishment in the United States
maintained by you if certain income tax treaties apply.
Under currently effective United States Treasury regulations (the "Current
Regulations"), if we have no definitive knowledge regarding your tax status, we
must withhold tax at the rate of 30% on all dividend payments if your address is
outside the United States. For these purposes, under the Current Regulations,
dividends paid to an address in a foreign country generally are presumed to be
paid to a resident of that country absent knowledge to the contrary. Under
United States Treasury regulations generally effective for payments made after
December 31, 2000 (the "Final Regulations"), such presumption is eliminated.
Further, to claim the benefit of an applicable treaty rate, you
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will be required to file the appropriate United States Internal Revenue Service
form 1001 or form W-8BEN (or substitute form) with the United States. In
addition, under the Final Regulations, in the case of Class A common stock held
by a foreign partnership, (1) the certification requirement will generally be
applied to the partners of the partnership and (2) the partnership will be
required to provide certain information, including a United States taxpayer
identification number. The Final Regulations also provide look-through rules for
tiered partnerships. If you are eligible for a reduced rate of United States
withholding tax pursuant to a tax treaty, you may obtain a refund of any excess
amounts withheld by filing an appropriate claim for refund with the Internal
Revenue Service.
Dividends that are considered effectively connected with a United States
trade or business or attributable to a United States permanent establishment
generally will not be subject to United States withholding tax if you file the
appropriate U.S. Internal Revenue Service form 4224 or W-8ECI (or substitute
form) with us (which form, under the Final Regulations, will require you to
provide a United States taxpayer identification number). You will be taxed on
such dividends for United States federal income tax purposes on a net income
basis, in the same manner as if you were a resident of the United States. If you
are a corporation, you may be subject to an additional branch profits tax at a
rate of 30% (or such lower rate as may be specified by an applicable treaty).
SALE OF CLASS A COMMON STOCK. As a non-U.S. Holder, you will not be subject
to United States federal income tax on any gain realized upon the disposition of
such holder's shares of Class A common stock unless: (1)(a) the gain is
considered effectively connected with a trade or business carried on by you
within the United States, or alternatively, (b) if certain tax treaties apply,
the gain is considered attributable to a permanent establishment in the United
States maintained by you (and in either case, the branch profits tax discussed
above may also apply if you are a corporation); (2) you are an individual who
holds shares of Class A common stock as a capital asset and you are present in
the United States for 183 days or more in the taxable year of disposition, and
certain other conditions are met; or (3) we are or have been a United States
real property holding corporation (a "USRPHC") for United States federal income
tax purposes (which we do not believe that we currently are or are likely to
become) at any time within the shorter of the five-year period preceding such
disposition or your holding period. If we are or were to become a USRPHC at any
time during this period, gains realized upon a disposition of Class A common
stock by you would not be subject to United States federal income tax, provided
you did not directly or indirectly own more than 5% of the Class A common stock
during this period generally and that the Class A common stock had been
regularly traded on an established securities market.
ESTATE TAX. If you are an individual who is not a citizen or resident (as
defined for United States federal estate tax purposes) of the United States at
the time of death, Class A common stock will be includable in your gross estate
for United States federal estate tax purposes (unless an applicable estate tax
treaty provides otherwise), and therefore may be subject to United States
federal estate tax.
BACKUP WITHHOLDING, INFORMATION REPORTING AND OTHER REPORTING
REQUIREMENTS. We must report annually to the Internal Revenue Service and to
each of you the amount of dividends paid to, and the tax withheld with respect
to, each of you. These reporting requirements apply regardless of whether
withholding was reduced or eliminated by an applicable tax treaty. Copies of
this information also may be made available under the provisions of a specific
treaty or agreement with the tax authorities in the country in which the
non-U.S. Holder resides or is established.
Under the Current Regulations, United States backup withholding tax (which
generally is imposed at the rate of 31% on certain payments to persons that fail
to furnish the information required under the United States information
reporting requirements) and information reporting requirements (other than those
discussed above) generally will not apply to dividends paid on
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Class A common stock if you have an address outside the United States. Backup
withholding and information reporting generally will apply to dividends paid on
shares of Class A common stock to a non-U.S. Holder if you have an address in
the United States, or if you fail to establish an exemption or to provide
certain other information to the payor. Under the Final Regulations, however, if
you fail to certify your status in accordance with the requirements of the Final
Regulations, you may be subject to United States backup withholding on payments
of dividends.
The payment of proceeds from the disposition of Class A common stock to or
through a United States office of a broker will be subject to information
reporting and backup withholding unless you, under penalties of perjury,
certify, among other things, your status as a non-U.S. Holder or otherwise
establish an exemption. The payment of proceeds from the disposition of Class A
common stock to or through a non-U.S. office of a non-U.S. broker generally will
be subject to information reporting, but not backup withholding, if the broker
is a United States person, a "controlled foreign corporation" for United States
federal income tax purposes or a foreign person 50% or more of whose gross
income from certain periods is effectively connected with a United States trade
or business. Information reporting and not backup withholding will not apply if
the broker has documentary evidence in its files that the owner is a non-U.S.
Holder (and the broker has no actual knowledge of the country).
Backup withholding is not an additional tax. Any amounts withheld under the
backup withholding rules from a payment to you will be refunded or credited
against the your United States federal income tax liability, if any, provided
that the required information is furnished to the Internal Revenue Service in a
timely manner.
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UNDERWRITING
GENERAL
We intend to offer our Class A common stock in the United States through a
number of U.S. underwriters. Merrill Lynch, Pierce, Fenner & Smith Incorporated,
Morgan Stanley & Co. Incorporated, Adams, Harkness & Hill, Inc., Donaldson,
Lufkin & Jenrette Securities Corporation, Lehman Brothers, Inc. and U.S. Bancorp
Piper Jaffray, Inc. are acting as U.S. representatives of each of the U.S.
underwriters named below. Subject to the terms and conditions set forth in a
U.S. purchase agreement among our company, the selling stockholders and the U.S.
underwriters, and concurrently with the sale of 1,000,000 shares of Class A
common stock to Merrill Lynch Japan Incorporated, as the Japanese manager, the
selling stockholders have agreed to sell to the U.S. underwriters, and each of
the U.S. underwriters severally and not jointly has agreed to purchase from the
selling stockholders, the number of shares of Class A common stock set forth
opposite its name below.
<TABLE>
<CAPTION>
NUMBER OF
SHARES
U.S. UNDERWRITERS ---------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated..................................
Morgan Stanley & Co. Incorporated...........................
Adams, Harkness & Hill, Inc.................................
Donaldson, Lufkin & Jenrette Securities Corporation.........
Lehman Brothers, Inc........................................
U.S. Bancorp Piper Jaffray, Inc.............................
--------
Total......................................... 9,000,000
========
</TABLE>
We and the selling stockholders have also entered into a Japanese
underwriting agreement with the Japanese manager. Subject to the terms and
conditions set forth in the Japanese underwriting agreement, and concurrently
with the sale of 9,000,000 shares of Class A common stock to the U.S.
underwriters pursuant to the U.S. purchase agreement, the selling stockholders
have agreed to sell to the Japanese manager, and the Japanese manager has agreed
to purchase from the selling stockholders, an aggregate of 1,000,000 shares of
Class A common stock. The public offering price per share and the total
underwriting discount per share of Class A common stock are identical under the
U.S. purchase agreement and the Japanese underwriting agreement.
In the U.S. purchase agreement and the Japanese underwriting agreement, the
several U.S. underwriters and the Japanese manager, respectively, have agreed,
subject to the terms and conditions set forth in those agreements, to purchase
all of the shares of Class A common stock being sold under the terms of each
such agreement if any of the shares of Class A common stock being sold under the
terms of such agreement are purchased. In the event of a default by an
underwriter, the U.S. purchase agreement and the Japanese underwriting agreement
provide that, in certain circumstances, the purchase commitments of the
nondefaulting underwriters may be increased or the U.S. purchase agreement
and/or the Japanese underwriting agreement may be terminated. The closings with
respect to the sale of shares of Class A common stock to be purchased by the
U.S. underwriters and the Japanese manager are conditioned upon one another.
All of the shares to be offered in this offering have been registered under
the Securities Act. With regards to the offering in Japan, a filing of a
securities registration statement and amendments
85
<PAGE> 87
thereto under the Securities and Exchange Laws of Japan has also been made with
the Minister of Finance of Japan. The Japanese manager has agreed that the
offering in Japan will be a public offering without listing in Japan and will be
governed by Japanese laws and regulations.
We and the selling stockholders have agreed to indemnify the U.S.
underwriters and the Japanese manager against some liabilities, including some
liabilities under the Securities Act and other applicable securities laws, or to
contribute to payments the U.S. underwriters and Japanese manager may be
required to make in respect of those liabilities.
The shares of Class A common stock are being offered by the several
underwriters, subject to prior sale, when, as and if issued to and accepted by
them, subject to approval of certain legal matters by counsel for the
underwriters and certain other conditions. The underwriters reserve the right to
withdraw, cancel or modify such offer and to reject orders in whole or in part.
COMMISSIONS AND DISCOUNTS
The U.S. representatives have advised us and the selling stockholders that
the U.S. underwriters propose initially to offer the shares of Class A common
stock to the public at the public offering price set forth on the cover page of
this prospectus, and to certain dealers at such price less a concession not in
excess of $ per share of Class A common stock. The U.S. underwriters may
allow, and such dealers may reallow, a discount not in excess of $ per share
of Class A common stock to certain other dealers. After the public offering, the
public offering price, concession and discount may change.
The following table shows the per share and total underwriting discount to
be paid by the selling stockholders to the U.S. underwriters and the Japanese
manager and the proceeds before expenses to the selling stockholders. This
information is presented assuming either no exercise or full exercise by the
U.S. underwriters and the Japanese manager of their over-allotment options.
<TABLE>
<CAPTION>
WITHOUT WITH
PER SHARE OPTION OPTION
--------- ------- ------
<S> <C> <C> <C>
Public Offering Price.................................. $ $ $
Underwriting Discount.................................. $ $ $
Proceeds, before expenses, to the selling
stockholders......................................... $ $ $
</TABLE>
The expenses of the offering, exclusive of the underwriting discount, are
estimated at $ and are payable by the selling stockholders.
INTERSYNDICATE AGREEMENT
The U.S. underwriters and the Japanese manager have entered into an
intersyndicate agreement that provides for the coordination of their activities.
Under the terms of the intersyndicate agreement, the U.S. underwriters and the
Japanese manager are permitted to sell shares of our Class A common stock to
each other for purposes of resale at the public offering price, less an amount
not greater than the selling concession. Under the terms of the intersyndicate
agreement, the U.S. underwriters and any dealer to whom they sell shares of our
Class A common stock will not offer to sell or sell shares of our Class A common
stock to Japanese persons or to persons they believe intend to resell to
Japanese persons, and the Japanese manager and any dealer to whom they sell
shares of Class A common stock will not offer to sell or sell shares of Class A
common stock to non-Japanese or to persons they believe intend to resell to
non-Japanese persons, except in the case of transactions under the terms of the
intersyndicate agreement.
86
<PAGE> 88
OVER-ALLOTMENT OPTION
The selling stockholders have granted an option to the U.S. underwriters,
exercisable for 30 days after the date of this prospectus, to purchase up to an
aggregate of 1,500,000 additional shares of our Class A common stock at the
public offering price set forth on the cover page of this prospectus, less the
underwriting discount. The U.S. underwriters may exercise this option solely to
cover over-allotments, if any, made on the sale of our Class A common stock
offered hereby. To the extent that the U.S. underwriters exercise this option,
each U.S. underwriter will be obligated, subject to certain conditions, to
purchase a number of additional shares of our Class A common stock proportionate
to such U.S. underwriter's initial amount reflected in the foregoing table. No
over-allotment option has been granted under the Japanese underwriters
agreement.
NO SALES OF SIMILAR SECURITIES
We, our executive officers and directors, all of the selling stockholders
and certain other stockholders have agreed, with certain exceptions, without the
prior written consent of Merrill Lynch on behalf of the underwriters for a
period of 90 days after the date of this prospectus, not to directly or
indirectly:
- Offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant for the sale of, lend or otherwise dispose of or
transfer any shares of our Class A common stock or securities convertible
into or exchangeable or exercisable for or repayable with our Class A
common stock, whether now owned or later acquired by the person executing
the agreement or with respect to which the person executing the agreement
later acquires the power of disposition, or file a registration statement
under the Securities Act relating to any shares of our Class A common
stock or
- Enter into any swap or other agreement that transfers, in whole or in
part, the economic consequence of ownership of our Class A common stock
whether any such swap or transaction is to be settled by delivery of our
Class A common stock or other securities, in cash or otherwise.
NEW YORK STOCK EXCHANGE LISTING
Our Class A common stock is listed on the New York Stock Exchange under the
symbol "NUS." The shares of Class A common stock sold in the offering in Japan
will not be listed on any stock exchange in Japan and will not be registered
with the Japan Securities Dealers Association as shares to be traded in the
Japanese over-the-counter market. Therefore, there will be no public market in
Japan for the trading of such shares.
PRICE STABILIZATION AND SHORT POSITIONS
Until the distribution of our Class A common stock is completed, rules of
the SEC may limit the ability of the underwriters and certain selling group
members to bid for and purchase our Class A common stock. As an exception to
these rules, the U.S. representatives are permitted to engage in transactions
that stabilize the price of our Class A common stock. Such transactions consist
of bids or purchases for the purpose of pegging, fixing or maintaining the price
of our Class A common stock.
If the underwriters create a short position in our Class A common stock in
connection with the offering, i.e., if they sell more shares of our Class A
common stock than are set forth on the cover page of this prospectus, the U.S.
representatives may reduce that short position by purchasing our
87
<PAGE> 89
Class A common stock in the open market. The U.S. representatives may also elect
to reduce any short position by exercising all or part of the over-allotment
option described above.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases.
Neither our company nor any of the underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of our Class A common stock. In addition,
neither our company nor any of the underwriters makes any representation that
the U.S. representatives will engage in such transactions or that such
transactions, once commenced, will not be discontinued without notice.
WHERE YOU CAN FIND MORE INFORMATION ABOUT
NU SKIN ENTERPRISES
We file reports, proxy statements and other information with the Securities
and Exchange Commission. Our SEC filings are also available over the Internet at
the SEC's Web site at http://www.sec.gov. You may also read and copy any
document we file at the SEC's public reference rooms in Washington, D.C., New
York, New York and Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for
more information on the public reference rooms and their copy charges. You may
also inspect our SEC reports and other information at the New York Stock
Exchange, 20 Broad Street, New York, New York 10005.
We have filed a registration statement on Form S-3 with the SEC covering
the Class A common stock. For further information on Nu Skin Enterprises and our
Class A common stock, you should refer to our registration statement and its
exhibits. This prospectus summarizes material provisions of contracts and other
documents that we refer you to. Since the prospectus may not contain all the
information that you may find important, you should review the full text of
those documents.
88
<PAGE> 90
INCORPORATION OF INFORMATION WE FILE WITH THE SEC
The SEC allows us to "incorporate by reference" the information we file
with them, which means:
- Incorporated documents are considered part of the prospectus,
- We can disclose important information to you by referring you to those
documents, and
- Information that we file with the SEC will automatically update and
supersede this prospectus.
We incorporate by reference the documents listed below which were filed
with the SEC under the Securities Exchange Act of 1934, the "Exchange Act":
- Annual Report on Form 10-K for the fiscal year ended December 31, 1998,
- Current Report on Form 8-K filed on February 9, 1999,
- Current Report on Form 8-K filed on March 23, 1999, and
- Current Report on Form 8-K/A filed on April 13, 1999.
We also incorporate by reference each of the following documents that we
will file with the SEC after the date of this prospectus but before all the
Class A common stock offered by this prospectus has been sold:
- Reports filed under Section 13(a) and (c) of the Exchange Act,
- Definitive proxy or information statements filed under Section 14 of the
Exchange Act in connection with any subsequent stockholders' meeting, and
- Any reports filed under Section 15(d) of the Exchange Act.
You may request a copy of any filings referred to above (excluding
exhibits) at no cost, by contacting us at the following address:
Nu Skin Enterprises, Inc.
75 West Center Street
Provo, Utah 84601
(801) 345-6100
Attention: Investor Relations
LEGAL MATTERS
The validity of our Class A common stock offered hereby will be passed upon
for us by LeBoeuf, Lamb, Greene & MacRae, L.L.P., Salt Lake City, Utah. Certain
legal matters relating to our Class A common stock will be passed upon for the
underwriters by Shearman & Sterling, Menlo Park, California. Shearman & Sterling
has in the past provided, and may continue to provide, legal services to Nu Skin
Enterprises.
89
<PAGE> 91
EXPERTS
The consolidated financial statements of Nu Skin Enterprises at December
31, 1997 and 1998 and for each of the three years in the period ended December
31, 1998, included in this prospectus, except as they relate to Nu Skin
International and its affiliates including those operating in Europe, Australia
and New Zealand as of December 31, 1997 and for the years ended December 31,
1997 and 1996, have been audited by PricewaterhouseCoopers LLP, independent
accountants, as set forth in their report thereon appearing elsewhere in this
prospectus, and insofar as they relate to Nu Skin International and its
affiliates including those operating in Europe, Australia and New Zealand as of
December 31, 1997 and for the years ended December 31, 1997 and 1996 have been
audited by Grant Thornton LLP, independent accountants, whose report thereon
appears herein. Such financial statements have been so included in reliance on
the reports of such independent accountants given on the authority of such firms
as experts in auditing and accounting.
90
<PAGE> 92
NU SKIN ENTERPRISES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants........................... F-2
Consolidated Balance Sheets at December 31, 1997 and 1998... F-3
Consolidated Statements of Income for the years ended
December 31, 1996, 1997 and 1998.......................... F-4
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1996, 1997 and 1998.............. F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1997 and 1998.......................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 93
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Nu Skin Enterprises, Inc.
In our opinion, based upon our audits and the report of other auditors, the
accompanying consolidated balance sheets and the related consolidated statements
of income, of stockholders' equity and of cash flows present fairly, in all
material respects, the financial position of Nu Skin Enterprises, Inc. and its
subsidiaries at December 31, 1997 and 1998, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1998, in conformity with generally accepted accounting principles. 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 did not audit the financial statements of the Acquired Entities
(Note 3), which statements reflect total assets of $127.0 million at December
31, 1997, and total revenue of $265.0 million and $308.9 million for the years
ended December 31, 1996 and 1997, respectively. Those statements were audited by
other auditors whose report thereon has been furnished to us, and our opinion
expressed herein, insofar as it relates to the amounts included for the Acquired
Entities, is based solely on the report of the other auditors. We conducted our
audits of these statements in accordance with generally accepted auditing
standards 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 and the report of other auditors provide a reasonable basis for the
opinion expressed above.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Salt Lake City, Utah
February 17, 1999
F-2
<PAGE> 94
NU SKIN ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1997 1998
-------- --------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents................................. $174,300 $188,827
Accounts receivable....................................... 11,074 13,777
Related parties receivable................................ 23,008 22,255
Inventories, net.......................................... 69,491 79,463
Prepaid expenses and other................................ 38,716 50,475
-------- --------
316,589 354,797
Property and equipment, net................................. 27,146 42,218
Other assets, net........................................... 61,269 209,418
-------- --------
Total assets................................................ $405,004 $606,433
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable.......................................... $ 23,259 $ 17,903
Accrued expenses.......................................... 140,615 132,723
Related parties payable................................... 10,038 25,029
Current portion of long-term debt......................... -- 14,545
Current portion of notes payable to stockholders.......... 19,457 --
-------- --------
193,369 190,200
Long-term debt, less current portion........................ -- 138,734
Other liabilities........................................... -- 22,857
Notes payable to stockholders, less current portion......... 116,743 --
Minority interest........................................... -- --
Commitments and contingencies (Notes 10 and 17)
Stockholders' equity
Preferred stock -- 25,000,000 shares authorized, $.001 par
value, 1,941,331 and no shares issued and
outstanding............................................ 2 --
Class A common stock -- 500,000,000 shares authorized,
$.001 par value, 11,758,011 and 33,709,251 shares
issued and outstanding................................. 12 34
Class B common stock -- 100,000,000 shares authorized,
$.001 par value, 70,280,759 and 54,606,905 shares
issued and outstanding................................. 70 55
Additional paid-in capital................................ 115,053 146,781
Accumulated other comprehensive income.................... (28,578) (43,604)
Retained earnings......................................... 17,788 158,064
Deferred compensation..................................... (9,455) (6,688)
-------- --------
94,892 254,642
-------- --------
Total liabilities and stockholders' equity........... $405,004 $606,433
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 95
NU SKIN ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Revenue.................................................... $761,638 $953,422 $913,494
Cost of sales.............................................. 171,187 191,218 188,457
Cost of sales -- amortization of inventory step-up......... -- -- 21,600
-------- -------- --------
Gross profit............................................... 590,451 762,204 703,437
-------- -------- --------
Operating expenses:
Distributor incentives................................... 282,588 362,195 331,448
Selling, general and administrative...................... 168,706 201,880 202,150
Distributor stock expense................................ 1,990 17,909 --
In-process research and development (Note 4)............. -- -- 13,600
-------- -------- --------
Total operating expenses................................... 453,284 581,984 547,198
-------- -------- --------
Operating income........................................... 137,167 180,220 156,239
Other income (expense), net................................ 10,771 8,973 13,599
-------- -------- --------
Income before provision for income taxes and minority
interest................................................. 147,938 189,193 169,838
Provision for income taxes (Note 12)....................... 49,526 55,707 62,840
Minority interest.......................................... 13,700 14,993 3,081
-------- -------- --------
Net income................................................. $ 84,712 $118,493 $103,917
======== ======== ========
Net income per share (Note 2):
Basic.................................................... $ 1.07 $ 1.42 $ 1.22
Diluted.................................................. $ 1.02 $ 1.36 $ 1.19
Weighted average common shares outstanding:
Basic.................................................... 79,194 83,331 84,894
Diluted.................................................. 83,001 87,312 87,018
Unaudited pro forma data (Note 12):
Income before pro forma provision for income taxes and
minority interest..................................... $147,938 $189,193 $169,838
Pro forma provision for income taxes..................... 54,752 71,856 65,998
Pro forma minority interest.............................. 8,630 9,299 1,947
-------- -------- --------
Pro forma net income..................................... $ 84,556 $108,038 $101,893
======== ======== ========
Pro forma net income per share:
Basic.................................................... $ 1.07 $ 1.30 $ 1.20
Diluted.................................................. $ 1.02 $ 1.24 $ 1.17
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 96
NU SKIN ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED
CLASS A CLASS B ADDITIONAL OTHER
CAPITAL PREFERRED COMMON COMMON PAID-IN COMPREHENSIVE RETAINED
STOCK STOCK STOCK STOCK CAPITAL INCOME EARNINGS
------- --------- ------- ------- ---------- ------------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996................. $ 5,595 $ (2,858) $ 65,626
Net income................................. -- -- 84,712
Foreign currency translation adjustments... -- (3,196) --
Total comprehensive income.................
Reorganization and termination of S
corporation status (Note 1).............. (4,550) $ 80 $ 1,209 -- 3,261
Net proceeds from the offering and
conversion of shares by stockholders
(Notes 1 and 11)......................... -- $12 (8) 98,829 -- --
Contributed capital........................ 1,570 -- -- -- -- --
Purchase of Acquired Entities (Note 3)..... (2,615) $ 2 -- -- 2,613 -- --
Dividends.................................. -- -- -- -- -- -- (65,139)
Issuance of notes payable to
stockholders............................. -- -- -- -- -- -- (86,487)
Issuance of distributor stock options...... -- -- -- -- 33,039 -- --
Issuance of employee stock awards.......... -- -- -- -- 13,280 -- --
Amortization of deferred compensation...... -- -- -- -- -- -- --
------- --- --- ---- -------- -------- --------
Balance at December 31, 1996............... -- 2 12 72 148,970 (6,054) 1,973
Net income................................. -- -- -- -- -- -- 118,493
Foreign currency translation adjustments... -- -- -- -- -- (22,524) --
Total comprehensive income.................
Conversion of shares from Class B to Class
A........................................ -- -- 2 (2) -- -- --
Repurchase of 1,416 shares of Class A
common stock (Note 11)................... -- -- (2) -- (20,260) -- --
Adjustment to distributor stock options
(Note 11)................................ -- -- -- -- (2,546) -- --
Forfeitures of employee stock awards....... -- -- -- -- (1,181) -- --
Amortization of deferred compensation...... -- -- -- -- -- -- --
Contributed capital........................ -- -- -- -- 7,383 -- --
Dividends.................................. -- -- -- -- (19,026) -- (46,054)
Issuance of employee stock awards and
options.................................. -- -- -- -- 1,713 -- --
Issuance of notes payable to
stockholders............................. -- -- -- -- -- -- (56,624)
------- --- --- ---- -------- -------- --------
Balance at December 31, 1997............... -- 2 12 70 115,053 (28,578) 17,788
Net income................................. -- -- -- -- -- -- 103,917
Foreign currency translation adjustments... -- -- -- -- -- (15,026) --
Total comprehensive income.................
Amortization of deferred compensation...... -- -- -- -- -- -- --
Issuance of notes payable to
stockholders............................. -- -- -- -- -- -- (24,413)
Purchase of Acquired Entities and
termination of S corporation status...... -- 1 -- -- (22,144) -- 60,772
Purchase of Pharmanex (Note 4)............. -- -- 4 -- 78,710 -- --
Repurchase of 917 shares of Class A common
stock (Note 11).......................... -- -- -- -- (10,549) -- --
Exercise of distributor and employee stock
options.................................. -- -- -- -- 1,961 -- --
Conversion of preferred stock (Note 3)..... -- (3) 3 -- -- -- --
Conversion of shares from Class B to Class
A........................................ -- -- 15 (15) -- -- --
Contingent payments to stockholders (Note
5)....................................... -- -- -- -- (16,250) -- --
------- --- --- ---- -------- -------- --------
Balance at December 31, 1998............... $ -- $-- $34 $ 55 $146,781 $(43,604) $158,064
======= === === ==== ======== ======== ========
<CAPTION>
TOTAL
DEFERRED STOCKHOLDERS'
COMPENSATION EQUITY
------------ -------------
<S> <C> <C>
Balance at January 1, 1996................. $ 68,363
Net income................................. 84,712
Foreign currency translation adjustments... (3,196)
--------
Total comprehensive income................. 81,516
Reorganization and termination of S
corporation status (Note 1).............. --
Net proceeds from the offering and
conversion of shares by stockholders
(Notes 1 and 11)......................... 98,833
Contributed capital........................ 1,570
Purchase of Acquired Entities (Note 3)..... --
Dividends.................................. (65,139)
Issuance of notes payable to
stockholders............................. (86,487)
Issuance of distributor stock options...... $(20,688) 12,351
Issuance of employee stock awards.......... (13,280) --
Amortization of deferred compensation...... 2,488 2,488
-------- --------
Balance at December 31, 1996............... (31,480) 113,495
Net income................................. -- 118,493
Foreign currency translation adjustments... -- (22,524)
--------
Total comprehensive income................. 95,969
Conversion of shares from Class B to Class
A........................................ -- --
Repurchase of 1,416 shares of Class A
common stock (Note 11)................... -- (20,262)
Adjustment to distributor stock options
(Note 11)................................ (690) (3,236)
Forfeitures of employee stock awards....... 1,181 --
Amortization of deferred compensation...... 23,247 23,247
Contributed capital........................ -- 7,383
Dividends.................................. -- (65,080)
Issuance of employee stock awards and
options.................................. (1,713) --
Issuance of notes payable to
stockholders............................. -- (56,624)
-------- --------
Balance at December 31, 1997............... (9,455) 94,892
Net income................................. -- 103,917
Foreign currency translation adjustments... -- (15,026)
--------
Total comprehensive income................. 88,891
Amortization of deferred compensation...... 3,626 3,626
Issuance of notes payable to
stockholders............................. -- (24,413)
Purchase of Acquired Entities and
termination of S corporation status...... -- 38,629
Purchase of Pharmanex (Note 4)............. (859) 77,855
Repurchase of 917 shares of Class A common
stock (Note 11).......................... -- (10,549)
Exercise of distributor and employee stock
options.................................. -- 1,961
Conversion of preferred stock (Note 3)..... -- --
Conversion of shares from Class B to Class
A........................................ -- --
Contingent payments to stockholders (Note
5)....................................... -- (16,250)
-------- --------
Balance at December 31, 1998............... $ (6,688) $254,642
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 97
NU SKIN ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1996 1997 1998
-------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income.................................................. $ 84,712 $ 118,493 $ 103,917
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................... 9,615 8,809 15,768
Amortization of deferred compensation....................... 2,488 23,247 3,626
Amortization of inventory step-up........................... -- -- 21,600
Write-off of in-process research and development............ -- -- 13,600
Income applicable to minority interest...................... 13,700 14,993 3,081
Changes in operating assets and liabilities:
Accounts receivable....................................... (5,939) (614) (900)
Related parties receivable................................ (4,097) (2,726) 1,215
Inventories, net.......................................... (6,060) (10,206) (3,556)
Prepaid expenses and other................................ (10,132) (24,641) (7,248)
Other assets.............................................. (24,814) (23,161) (4,100)
Accounts payable.......................................... (1,682) 3,336 (8,767)
Accrued expenses and other liabilities.................... 82,844 31,058 (8,973)
Related parties payable................................... 1,733 (29,986) (10,703)
-------- --------- ---------
Net cash provided by operating activities................. 142,368 108,602 118,560
-------- --------- ---------
Cash flows from investing activities:
Purchase of property and equipment.......................... (9,172) (14,389) (18,320)
Purchase of Pharmanex, net of cash acquired................. -- -- (28,750)
Payments for lease deposits................................. (562) (3,457) (633)
Receipt of refundable lease deposits........................ 98 120 1,650
-------- --------- ---------
Net cash used in investing activities..................... (9,636) (17,726) (46,053)
-------- --------- ---------
Cash flows from financing activities:
Payments on long-term debt.................................. -- -- (41,634)
Proceeds from capital contributions......................... 1,570 11,358 --
Proceeds from long-term debt................................ -- -- 181,538
Net proceeds from the offering (Note 1)..................... 98,833 -- --
Dividends paid.............................................. (80,025) (30,468) --
Repurchase of shares of common stock........................ -- (20,262) (10,549)
Exercise of distributor and employee stock options.......... -- -- 1,961
Payment to stockholders for notes payable (Note 5).......... (15,000) (71,487) (180,000)
-------- --------- ---------
Net cash provided by (used in) financing activities....... 5,378 (110,859) (48,684)
-------- --------- ---------
Effect of exchange rate changes on cash..................... (7,287) (20,540) (9,296)
-------- --------- ---------
Net increase (decrease) in cash and cash equivalents........ 130,823 (40,523) 14,527
Cash and cash equivalents, beginning of period.............. 84,000 214,823 174,300
-------- --------- ---------
Cash and cash equivalents, end of period.................... $214,823 $ 174,300 $ 188,827
======== ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 98
NU SKIN ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY
Nu Skin Enterprises, Inc. (the "Company"), is a network marketing company
involved in the distribution and sale of premium quality, innovative personal
care and nutritional products. The Company distributes Nu Skin brand products in
markets throughout the world. The Company's operations are divided into three
segments: North Asia, which consists of Japan and South Korea; Southeast Asia,
which consists of Taiwan, Thailand, Hong Kong (including Macau), the
Philippines, Australia, and New Zealand; and Other Markets, which consists of
the United Kingdom, Austria, Belgium, Denmark, France, Germany, Italy, Ireland,
Poland, Portugal, Spain, Sweden, the Netherlands, Brazil (the Company's
subsidiaries operating in these countries are collectively referred to as the
"Subsidiaries") and product sales to and license fees from the Company's North
American private affiliates.
The Company was incorporated on September 4, 1996 as a holding company and
acquired certain of the Subsidiaries (the "Initial Subsidiaries") through a
reorganization (the "Reorganization") which occurred November 20, 1996. On
November 27, 1996, the Company completed its initial public offerings of
4,750,000 shares of Class A common stock and received net proceeds of $98.8
million (the "Offerings").
As discussed in Note 3, the Company completed the NSI Acquisition on March
26, 1998. Prior to the Reorganization and the NSI Acquisition, each of the
Subsidiaries elected to be treated as an S corporation. In connection with the
Reorganization, the Initial Subsidiaries' S corporation status was terminated on
November 19, 1996, and the Company declared a distribution to the stockholders
that included all of the Initial Subsidiaries' previously earned and
undistributed taxable S corporation earnings totaling $86.5 million. In
connection with the NSI Acquisition, the Acquired Entities' S corporation status
was terminated, and the Acquired Entities declared distributions to the
stockholders that included all of the Acquired Entities' previously earned and
undistributed taxable S corporation earnings totaling $87.1 million in 1997 and
$37.6 million in 1998 (the "S Distribution Notes").
Inasmuch as a portion of the Acquired Entities were under common control
(Note 3), the Company's consolidated financial statements for 1996 and 1997 have
been combined and restated as if the Company and the Acquired Entities had been
combined during all periods presented.
Also in connection with the NSI Acquisition, on December 31, 1997, NSI
carved-out and distributed the net assets of its USA division ("Nu Skin USA") to
the NSI Stockholders. Immediately prior to this distribution, NSI declared a
distribution to the NSI Stockholders that included all of Nu Skin USA's
previously earned and undistributed taxable S corporation earnings totaling
$49.1 million. This distribution and all other historical transactions of Nu
Skin USA are excluded from the restatement of the Company's consolidated
financial statements for 1996 and 1997.
As discussed in Note 4, the Company completed the Pharmanex acquisition on
October 16, 1998, which enhanced the Company's involvement with the distribution
and sale of nutritional products.
As discussed in Note 18, in February 1999, the Company announced its intent
to acquire Big Planet, Inc., an Internet-based company that offers Internet
connectivity, e-commerce, telecommunications and other technology products and
services to consumers in North America. The Company
F-7
<PAGE> 99
NU SKIN ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
also announced its intent to acquire certain assets of Nu Skin USA, Inc. and to
acquire the Company's remaining affiliates in Canada, Mexico and Guatemala.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation
The consolidated financial statements include the accounts of the Company
and the Subsidiaries. All significant intercompany accounts and transactions are
eliminated in consolidation.
Use of estimates
The preparation of these financial statements in conformity with generally
accepted accounting principles 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 revenues 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, using the first-in, first-out method, or market.
The Company had reserves for obsolete inventory totaling $11,000,000,
$13,500,000 and $13,600,000 as of December 31, 1996, 1997 and 1998,
respectively.
Property and equipment
Property and equipment are recorded at cost and depreciated using the
straight-line method over the following estimated useful lives:
<TABLE>
<S> <C>
Furniture 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
</TABLE>
Expenditures for maintenance and repairs are charged to expense as
incurred.
Other assets
Other assets consist primarily of deferred tax assets, deposits for
noncancelable operating leases, distribution rights, goodwill and long-term
intangibles acquired in the NSI Acquisition (Note 3) and the Pharmanex
Acquisition (Note 4). These intangibles are amortized on the straight-line basis
over the estimated useful lives of the assets. The Company assesses the
recoverability of long-lived assets
F-8
<PAGE> 100
NU SKIN ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
by determining whether the amortization of the balance over its remaining life
can be recovered through undiscounted future operating cash flows attributable
to the assets.
Revenue recognition
Revenue is recognized when products are shipped and 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.
Research and development
The Company's research and development activities are conducted primarily
out of its research and development facility located in Shanghai, China.
Research and development costs are expensed as incurred.
Income taxes
The Company has adopted Statement of Financial Accounting Standards No. 109
("SFAS 109"), Accounting for Income Taxes. Under SFAS 109, the liability method
is used 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.
Net income per share
In 1997, the Company adopted Statement of Financial Accounting Standards
No. 128 ("SFAS 128"), Earnings per Share. SFAS 128 specifies the computation,
presentation and disclosure requirements for earnings per share data, and
requires the restatement of earnings per share data in prior periods. SFAS 128
also requires the presentation of both basic and diluted earnings per share data
for entities with complex capital structures. Diluted earnings per share data
gives effect to all dilutive potential common shares that were outstanding
during the periods presented. Net income per share for the year ended December
31, 1996 is computed assuming that the Company's Reorganization and the
resultant issuance of Class B common stock occurred as of January 1, 1996.
Foreign currency translation
Most of the Company's business operations occur outside of the United
States. Each Subsidiary's local currency is considered the functional currency.
Since a substantial portion of the Company's inventories are purchased with U.S.
dollars in the United States and since the Company is incorporated in the United
States, all assets and liabilities are translated into U.S. dollars at exchange
rates existing at the balance sheet dates, revenues 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
F-9
<PAGE> 101
NU SKIN ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
stockholders' equity in the consolidated balance sheets, and transaction gains
and losses are included in other income and expense in the consolidated
financial statements.
Fair value of financial instruments
The fair value of financial instruments including cash and cash
equivalents, accounts receivable, related parties receivable, accounts payable,
related parties payable and notes payable approximate book 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 of time, based on relevant market information.
Stock-based compensation
The Company measures compensation expense for its stock-based employee
compensation plans using the intrinsic value method prescribed by Accounting
Principles Board Opinion No. 25 ("APB 25"), Accounting for Stock Issued to
Employees, and provides pro forma disclosures of net income and net income per
share as if the fair value based method prescribed by Statement of Financial
Accounting Standards No. 123 ("SFAS 123"), Accounting for Stock-Based
Compensation, had been applied in measuring compensation expense (Note 11).
Reporting Comprehensive Income
During the first quarter of 1998, the Company adopted Statement of
Financial Accounting Standards No. 130 ("SFAS 130"), 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 the Costs of Computer Software Developed or Obtained for Internal
Use
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1 ("SOP 98-1"), Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use. The statement is
effective for fiscal years beginning after December 15, 1998. Earlier
application is encouraged in fiscal years for which annual financial statements
have not been issued. The statement defines which costs of computer software
developed or obtained for internal use are capital and which costs are expensed.
The Company adopted SOP 98-1 effective January 1998. The adoption of SOP 98-1
does not materially affect the Company's consolidated financial statements.
Reporting on the Costs of Start-Up Activities
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5 ("SOP 98-5"), Reporting on the Costs of
Start-Up Activities. The statement is effective for fiscal years beginning after
December 15, 1998. The statement requires costs of start-up activities and
organization costs to be expensed as incurred. The Company will adopt SOP 98-5
for calendar year 1999. The adoption of SOP 98-5 will not materially affect the
Company's consolidated financial statements.
F-10
<PAGE> 102
NU SKIN ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Accounting for Derivative Instruments and Hedging Activities
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("SFAS 133"), Accounting for Derivative
Instruments and Hedging Activities. The statement requires companies to
recognize all derivatives as either assets or liabilities, with the instruments
measured at fair value. Changes in the fair value of derivatives are recorded
each period in current earnings or other comprehensive income, depending on the
intended use of the derivative and its resulting designation. The statement is
effective for all fiscal quarters of fiscal years beginning after June 15, 1999.
The Company will adopt SFAS 133 by January 1, 2000. The Company is currently
evaluating the impact the adoption of SFAS 133 will have on its consolidated
financial statements.
3. ACQUISITION OF NU SKIN INTERNATIONAL, INC. ("NSI") AND CERTAIN AFFILIATES
On March 26, 1998, the Company completed the acquisition (the "NSI
Acquisition") of the capital stock of NSI, NSI affiliates in Europe, South
America, Australia and New Zealand and certain other NSI affiliates (the
"Acquired Entities") for $70.0 million in preferred stock and long-term notes
payable to the stockholders of the Acquired Entities (the "NSI Stockholders")
totaling approximately $6.2 million. In addition, contingent upon NSI and the
Company meeting specific earnings growth targets, the Company may pay up to
$25.0 million in cash per year over a four year period to the NSI Stockholders.
Also, as part of the NSI Acquisition, the Company assumed approximately $171.3
million in S Distribution Notes and incurred acquisition costs totaling $3.0
million. The net assets acquired totaling $90.4 million include net deferred tax
liabilities totaling $7.4 million recorded upon the conversion of the Acquired
Entities from S to C corporations. All contingent consideration paid will be
accounted for as an adjustment to the purchase price and allocated to the
Acquired Entities' assets and liabilities.
The NSI Acquisition was accounted for by the purchase method of accounting,
except for that portion of the Acquired Entities under common control of a group
of stockholders, which portion was accounted for in a manner similar to a
pooling of interests. The common control group is comprised of the NSI
Stockholders who are immediate family members. The minority interest, which
represents the ownership interests of the NSI Stockholders who are not immediate
family members, was acquired during the NSI Acquisition. Prior to the NSI
Acquisition, a portion of the Acquired Entities' net income, capital
contributions and distributions (including cash dividends and S Distribution
Notes) had been allocated to the minority interest.
For the portion of the NSI Acquisition accounted for by the purchase
method, the Company recorded inventory step-up of $21.6 million and intangible
assets of $34.8 million. During 1998, the inventory step-up was fully amortized
and the Company recorded amortization of intangible assets totaling $1.6
million.
For the portion of the NSI Acquisition accounted for in a manner similar to
a pooling of interests, the excess of purchase price paid over the book value of
the net assets acquired was recorded as a reduction of stockholders' equity.
In connection with the restatement of the Company's consolidated financial
statements for 1996 and 1997, the portion of the NSI Acquisition and the
resulting Preferred Stock issued to the common control group is reflected as if
such stock had been issued on the date of the Company's incorporation on
September 4, 1996. On May 5, 1998, the stockholders of the Company approved the
automatic
F-11
<PAGE> 103
NU SKIN ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
conversion of the Preferred Stock issued in the NSI Acquisition into 2,986,663
shares of Class A common stock. Under the terms of the NSI Acquisition, the
2,986,663 shares of Class A common stock were adjusted down by 8,504 shares in
June 1998.
4. ACQUISITION OF PHARMANEX, INC.
On October 16, 1998, the Company completed the acquisition of
privately-held Generation Health Holdings, Inc., the parent company of
Pharmanex, Inc. (the "Pharmanex Acquisition"), for $77.6 million, which
consisted of approximately 4.0 million shares of the Company's Class A common
stock, including 261,008 shares issuable upon exercise of options assumed by the
Company (Note 11). Contingent upon Pharmanex meeting specific revenue and other
requirements, approximately 565,000 of the 4.0 million shares are being held in
escrow and will be returned to the Company if such requirements are not met
within one year from the date of the Pharmanex Acquisition. The contingent
shares issued, if any, will be accounted for as an adjustment to the purchase
price and allocated to the acquired assets and liabilities. Also, as part of the
Pharmanex Acquisition, the Company assumed approximately $34.0 million in
liabilities and incurred acquisition costs totaling $1.3 million. The net assets
acquired totaling $3.6 million include net deferred tax assets totaling $0.8
million. In connection with the closing of the Pharmanex Acquisition, the
Company paid approximately $29.0 million relating to the assumed liabilities.
The Pharmanex Acquisition was accounted for by the purchase method of
accounting. The Company recorded inventory step-up of $3.7 million and
intangible assets of $92.4 million. In addition, the Company allocated $13.6
million to purchase in-process research and development based on a discounted
cash-flow method reflecting the stage of completion of the related projects.
During 1998, the in-process research and development amount was fully written
off and the Company recorded amortization of intangible assets totaling $1.3
million.
Pro forma results as if the Pharmanex Acquisition had occurred at January
1, 1998 have not been presented because the results are not considered material.
5. RELATED PARTY TRANSACTIONS
Scope of related party activity
The Company has transactions with affiliated entities that are under common
control. The entities are Nu Skin USA, Nu Skin Canada, Nu Skin Mexico and Nu
Skin Guatemala. The transactions with these entities are as follows: (1) In
addition to selling products to consumers in its geographic territories, the
Company sells products and marketing materials to affiliated entities in
geographic areas outside those held by the Company (primarily the USA, Canada,
Mexico and Guatemala). (2) The Company collects trademark royalty fees on
products bearing NSI trademarks and marketed outside the Company's geographic
areas that are not purchased from NSI. (3) The Company enters into a
distribution agreement with each independent distributor. (4) The Company
collects license fees from affiliated entities outside its geographical regions
for the right to use the distributors, and for the right to use the Company's
distribution system and other related intangibles. (5) The Company operates a
global commission plan whereby distributors' commissions are determined by
aggregate worldwide purchases made by down-line distributors. Thus, commissions
on purchases from the Company earned by distributors located in geographic areas
outside those held by the Company are remitted to the Company, which then
forwards these commissions to the
F-12
<PAGE> 104
NU SKIN ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
distributors. (6) The Company collects fees for management and support services
provided to affiliated entities outside its geographic areas.
The purchase prices paid by the affiliated entities for the purchase of
product and marketing materials are determined pursuant to the Distribution
Agreement between the Company and the affiliated entities. The selling prices to
these affiliated entities of products and marketing materials are determined
pursuant to the Wholesale Distribution Agreements between the Company and these
affiliated entities. Trademark royalty fees and license fees are charged
pursuant to the Trademark/ Trade name License Agreement between the Company and
these affiliated entities and the Licensing and Sales Agreement between the
Company and these affiliated entities, respectively. The independent distributor
commission program is managed by the Company. Charges to the affiliated entities
are based on a worldwide commission fee of 42% of product revenue which covers
commissions paid to distributors on a worldwide basis and the direct costs of
administering the global compensation plan. Management and support services fees
are billed to the affiliated entities pursuant to the Management Services
Agreement between the Company and the affiliated entities and consist of all
direct expenses incurred by the Company and indirect expenses allocated to the
affiliated entities based on its net sales. The sales revenue, royalties,
licenses and management fees charged to the affiliated entities are recorded as
revenue in the consolidated statements of income and totaled $68,556,000,
$53,135,000 and $72,691,000 for the years ended December 31, 1996, 1997 and
1998, respectively.
Notes payable to stockholders
In connection with the Reorganization described in Note 1, the aggregate
undistributed taxable S corporation earnings of the Initial Subsidiaries were
$86.5 million. These earnings were distributed in the form of promissory notes
bearing interest at 6.0% per annum. From proceeds from the Offerings, $15.0
million was used to pay a portion of the notes, and the remaining balance of
$71.5 million with the related accrued interest of $1.6 million was paid on
April 4, 1997.
In connection with the NSI Acquisition described in Notes 1 and 3, the
Company assumed S Distribution Notes totaling $171.3 million and long-term notes
payable to the NSI Stockholders totaling $6.2 million, both bearing interest at
6.0% per annum. These amounts were paid in full, including accrued interest of
$3.3 million, during the second quarter of 1998. Prior to the NSI Acquisition,
the Acquired Entities paid $2.5 million of the S Distribution Notes, plus
accrued interest of $1.8 million.
Certain relationships with stockholder distributors
Two major stockholders of the Company have been independent distributors
for the Company since 1984. These stockholders are partners in an entity which
receives substantial commissions from the Company, including commissions
relating to sales within the countries in which the Company operates. By
agreement, the Company pays commissions to this partnership at the highest level
of distributor compensation to allow the stockholders to use their expertise and
reputations in network marketing to further develop the Company's distributor
force, rather than focusing solely on their own distributor organizations. The
commissions paid to this partnership relating to sales within the countries in
which the Company operates were $1,200,000, $1,100,000 and $800,000 for the
years ended December 31, 1996, 1997 and 1998, respectively.
F-13
<PAGE> 105
NU SKIN ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Loan to stockholder
In December 1997, the Company loaned $5.0 million to a non-management
stockholder. The loan is secured by 349,406 shares of Class B common stock, and
matures in December 2000. Interest accrues at a rate of 6.0% per annum on this
loan. The loan may be repaid by transferring to the Company the shares pledged
to secure the loan. The loan balance, including accrued interest, totaled $5.0
million and $5.3 million at December 31, 1997 and 1998, respectively.
Contingent payments to stockholders under the NSI Acquisition
The Company and NSI met specific earnings growth targets for the year ended
December 31, 1998 that resulted in $25.0 million of contingent consideration
payable to the NSI Stockholders. The contingent consideration is payable in
April 1999. In addition, contingent upon NSI and the Company meeting specific
earnings growth targets, the Company may pay up to $25.0 million in cash per
year over the next three years to the NSI Stockholders.
Lease agreements
The Company leases corporate office and warehouse space from two affiliated
entities. The Company then sub-leases a portion of the corporate office and
warehouse space to Nu Skin USA, Inc. and Big Planet, Inc. These lease
transactions between the Company and affiliated entities approximate fair market
value.
6. PROPERTY AND EQUIPMENT
Property and equipment are comprised of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1997 1998
------- -------
<S> <C> <C>
Furniture and fixtures...................................... $25,587 $30,997
Computers and equipment..................................... 36,836 44,267
Leasehold improvements...................................... 8,068 13,874
Vehicles.................................................... 745 1,153
------- -------
71,236 90,291
Less: accumulated depreciation.............................. (44,090) (48,073)
------- -------
$27,146 $42,218
======= =======
</TABLE>
Depreciation of property and equipment totaled $8,733,000, $8,060,000 and
$11,543,000 for the years ended December 31, 1996, 1997 and 1998, respectively.
F-14
<PAGE> 106
NU SKIN ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. OTHER ASSETS
Other assets consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1998
------- --------
<S> <C> <C>
Goodwill and intangibles.................................... $ 7,563 $147,246
Deposits for noncancelable operating leases................. 9,127 10,282
Distribution rights......................................... 8,750 8,750
Deferred taxes.............................................. 30,399 42,747
Other....................................................... 7,815 6,023
------- --------
63,654 215,048
Less: accumulated amortization.............................. (2,385) (5,630)
------- --------
$61,269 $209,418
======= ========
</TABLE>
The goodwill and intangible assets are being amortized on a straight-line
basis over their estimated useful lives ranging from 4 to 20 years. Amortization
of goodwill and intangible assets totaled $726,000, $311,000 and $3,248,000 for
the years ended December 31, 1996, 1997 and 1998, respectively. The distribution
rights asset is being amortized on a straight-line basis over its estimated
useful life of 20 years. Amortization of the distribution rights asset totaled
$156,000, $438,000 and $438,000 for the years ended December 31, 1996, 1997 and
1998, respectively.
8. ACCRUED EXPENSES
Accrued expenses consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1997 1998
-------- --------
<S> <C> <C>
Income taxes payable........................................ $ 53,079 $ 40,726
Accrued commission payments to distributors................. 36,289 36,431
Other taxes payable......................................... 16,496 11,646
Other accruals.............................................. 34,751 43,920
-------- --------
$140,615 $132,723
======== ========
</TABLE>
9. LONG-TERM DEBT
On May 8, 1998, the Company and its Japanese subsidiary Nu Skin Japan Co.,
Ltd. entered into a $180.0 million credit facility with a syndicate of financial
institutions for which ABN-AMRO, N.V. acted as agent. This unsecured credit
facility was used to satisfy Company liabilities which were assumed as part of
the NSI Acquisition. The Company borrowed $110.0 million and Nu Skin Japan Co.,
Ltd. borrowed the Japanese yen equivalent of $70.0 million denominated in local
currency. The outstanding balance on the credit facility was $153.3 million at
December 31, 1998.
The U.S. portion of the credit facility bears interest at either a base
rate as specified in the credit facility or the London Inter-Bank Offer Rate
plus an applicable margin, in the borrower's discretion. The Japanese portion of
the credit facility bears interest at either a base rate as specified in the
credit facility or the Tokyo Inter-Bank Offer Rate plus an applicable margin, in
the borrower's
F-15
<PAGE> 107
NU SKIN ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
discretion. The maturity date for the credit facility is three years from the
borrowing date, with a possible extension of the maturity date upon approval of
the then outstanding lenders. Interest expense on the credit facility totaled
$4.7 million for the year ended December 31,1998.
The credit facility contains other terms and conditions and affirmative and
negative financial covenants customary for credit facilities of this type. As of
December 31, 1998, the Company has continued to comply with all financial
covenants under the credit facility.
During 1998, the Company entered into a $10.0 million revolving credit
agreement with ABN-AMRO, N.V. Advances are available under the agreement through
May 18, 1999. There were no outstanding balances under the credit facility at
December 31, 1998.
Maturities of long-term debt at December 31, 1998 are as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
------------------------
<S> <C>
1999..................................... $ 14,545
2000..................................... 53,359
2001..................................... 85,375
--------
Total.................................... $153,279
========
</TABLE>
10. 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, 1998 are as
follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
------------------------
<S> <C>
1999...................................... $ 8,882
2000...................................... 6,821
2001...................................... 5,185
2002...................................... 5,017
2003...................................... 3,685
-------
Total minimum lease payments.............. $29,590
=======
</TABLE>
Rental expense for operating leases totaled $12,558,000, $15,518,000 and
$15,969,000 for the years ended December 31, 1996, 1997 and 1998, respectively.
11. STOCKHOLDERS' EQUITY
The Company's capital stock consists of Preferred Stock, Class A common
stock and Class B common stock. The shares of Class A common stock and Class B
common stock are identical in all respects, except for voting rights and certain
conversion rights and transfer restrictions, as follows: (1) each share of Class
A common stock entitles the holder to one vote on matters submitted to a vote of
the Company's stockholders and each share of Class B common stock entitles the
holder to ten votes on each such matter; (2) stock dividends of Class A common
stock may be paid only to holders of Class A common stock and stock dividends of
Class B common stock may be paid only to
F-16
<PAGE> 108
NU SKIN ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
EQUITY INCENTIVE PLANS
Effective November 21, 1996, the Company implemented a one-time distributor
equity incentive program. This program provided for grants of options to
selected distributors for the purchase of 1,605,000 shares of the Company's
previously issued Class A common stock. The number of options each distributor
ultimately received was based on their performance and productivity through
August 31, 1997. The options are exercisable at a price of $5.75 per share and
vested on December 31, 1997. The related compensation expense was deferred in
the Company's financial statements and was expensed to the statement of income
as distributor stock expense ratably through December 31, 1997. As of December
31, 1998, 392,417 of the 1,605,000 stock options had been exercised.
The Company recorded compensation expense using the fair value method
prescribed by SFAS 123 based upon the best available estimate of the number of
shares that were expected to be issued to each distributor at the measurement
date, revised as necessary if subsequent information indicated that actual
forfeitures were likely to differ from initial estimates. Any options forfeited
were reallocated and resulted in an additional compensation charge.
As a part of this program, 600,000 options were sold to affiliated entities
at fair value in exchange for notes receivable totaling $12,351,000. As the
number of distributor stock options to be issued to each distributor was revised
through August 31, 1997, the options allocated to the affiliated entities were
adjusted to 480,000 and the notes receivable were adjusted to $9,115,000. The
affiliated entities are repaying these notes as distributors exercise their
options. The notes receivable balance totaled $9,115,000 and $6,251,000 as of
December 31, 1997 and 1998, respectively.
Prior to the Offerings, the Company's stockholders contributed 1,250,000
shares of the Company's Class A common stock to the Company and other affiliated
entities held by them for issuance to employees of the Company and other
affiliated entities as a part of an employee equity incentive plan. Equity
incentives granted or awarded under this plan will vest over four years.
Compensation expense related to equity incentives granted to employees of the
Company and other Nu Skin entities who perform services on behalf of the Company
will be recognized by the Company ratably over the vesting period.
Approximately 743,000 of the 1,250,000 shares were contributed to
affiliated entities and the remaining 507,000 shares were contributed to the
Company. In November 1996, the Company granted 462,791 shares to certain
employees. The Company has recorded deferred compensation expense of $10,773,000
related to these stock awards and is recognizing such expense ratably over the
vesting period. As of December 31, 1998, 217,606 of the stock awards had vested
and 16,970 of the stock awards had been forfeited.
F-17
<PAGE> 109
NU SKIN ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1996 Stock Incentive Plan
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. A
total of 7,500,000 shares of Class A common stock have been reserved for
issuance under the 1996 Stock Incentive Plan.
In 1996, the Company granted stock awards to certain employees for an
aggregate of 109,000 shares of Class A common stock and in 1997 the Company
granted additional stock awards to certain employees and directors in the amount
of 55,459 shares of Class A common stock. The Company has recorded deferred
compensation expense of $3,780,000 related to these stock awards and is
recognizing such expense ratably over the vesting period. As of December 31,
1998, 83,463 of the stock awards had vested and 34,378 of the stock awards had
been forfeited.
In 1997, the Company granted options to purchase 298,500 shares of Class A
common stock to certain employees and directors pursuant to the 1996 Stock
Incentive Plan. Of the 298,500 options granted, 30,000 options vested in May
1997 and 265,500 options vest ratably over a period of four years. All options
granted in 1997 will expire ten years from the date of grant. The exercise price
of the options was set at $20.88 per share. The Company has recorded deferred
compensation expense of $578,000 related to the options and is recognizing such
expense ratably over the vesting periods. As of December 31, 1998, none of these
298,500 stock options had been exercised.
During 1998, the Company granted options to purchase 507,500 shares of
Class A common stock to certain employees and directors of the Company pursuant
to the 1996 Stock Incentive Plan. Of the 507,500 options granted, 500,000
options vest ratably over a period of four years and expire ten years from the
date of grant and 7,500 vest in one year from the date of grant and expire in
ten years or six months after termination from service as a director. The
exercise price of the 500,000 options was set at $13.91 per share and the
exercise price of the 7,500 options was set at $28.50 per share. No compensation
expense has been recorded related to these options. As of December 31, 1998,
none of these 507,500 stock options had been exercised.
Additionally in 1998, the Company granted options to purchase 1,080,000
shares of Class A common stock to certain employees pursuant to the 1996 Stock
Incentive Plan. All of the 1,080,000 options vest seven years from the date of
grant and expire ten years from the date of grant. Subject to the Company
meeting certain revenue and profitability benchmarks, the vesting of these
options may be accelerated over the three-year period ended December 31, 2001.
The exercise price of the options was set at $17.00 per share. No compensation
expense has been recorded related to these options. As of December 31, 1998,
none of these 1,080,000 stock options had been exercised.
Generation Health Holdings, Inc. 1996 Stock Option Plan
In connection with the Pharmanex Acquisition (Note 4), the Company assumed
the Generation Health Holdings, Inc. 1996 Stock Option Plan. Under this plan,
the Company assumed options to purchase 261,008 shares of Class A common stock
granted to certain employees of Pharmanex. In accordance with the terms of the
plan, 173,785 of these options vested immediately due to the involuntary
termination of certain employees. The value of these vested options was included
as an acquisition cost in the Pharmanex Acquisition. The remaining 87,223
options vest ratably over periods
F-18
<PAGE> 110
NU SKIN ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ranging from 1 to 5 years. The exercise prices of the options range from $.92 to
$10.03 per share. The Company has recorded deferred compensation expense of
$859,000 related to the 87,223 unvested options and is recognizing such expense
ratably over the vesting periods. As of December 31, 1998, 1,863 of these
261,008 stock options had been exercised.
SFAS 123 pro forma disclosures
The Company's pro forma net income would have been $118,413,000 and
$103,023,000 for the years ended December 31, 1997 and 1998, respectively, if
compensation expense had been measured under the fair value method prescribed by
SFAS 123. The Company's pro forma basic and diluted net income per share for the
year ended December 31, 1997 would not have changed had compensation expense
been measured under the fair value method. The Company's pro forma basic and
diluted net income per share for the year ended December 31, 1998 would have
been $1.21 and $1.18, respectively, had compensation expense been measured under
the fair value method.
The fair value of the options granted during 1997 was estimated at $10.55
per share as of the date of grant using the Black-Scholes option pricing model
with the following assumptions: risk-free interest rate of 6%; expected life of
4 years; expected volatility of 46%; and expected dividend yield of 0%.
The fair values of the options granted during 1998 ranged from $13.51 to
$22.16 per share, and were estimated as of the dates of grant using the
Black-Scholes option pricing model with the following assumptions: risk-free
interest rate of 4.5%; expected life of 2 to 4 years; expected volatility of
48%; and expected dividend yield of 0%.
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):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1996 1997 1998
------ ------ ------
<S> <C> <C> <C>
Basic weighted average common shares outstanding............ 79,194 83,331 84,894
Effect of dilutive securities:
Stock awards and options.................................. 3,807 3,981 2,124
------ ------ ------
Diluted weighted average common shares outstanding.......... 83,001 87,312 87,018
====== ====== ======
</TABLE>
Repurchase of common stock
In December 1997, the Company repurchased 1,415,916 shares of Class A
common stock from certain original stockholders for an aggregate price of
approximately $20.3 million. Such shares were converted from Class B common
stock to Class A common stock prior to or upon purchase, and were repurchased in
connection with the entering into of an amended and restated stockholders
agreement by the original stockholders providing for, among other things, a
one-year extension of the original lock-up provisions applicable to such
original stockholders.
F-19
<PAGE> 111
NU SKIN ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
During 1998, the Board of Directors authorized the Company to repurchase up
to $20.0 million of the Company's outstanding shares of Class A common stock. As
of December 31, 1998, the Company had repurchased 917,254 shares for an
aggregate price of approximately $10.5 million.
Conversion of common stock
In December 1998, the holders of the Class B common stock converted 15.0
million shares of Class B common stock to Class A common stock.
12. INCOME TAXES
Consolidated income before provision for income taxes consists of income
earned primarily from international operations. The provision for current and
deferred taxes for the years ended December 31, 1996, 1997 and 1998 consists of
the following (in thousands):
<TABLE>
<CAPTION>
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Current
Federal.................................................. $ 331 $ 3,332 $ 3,695
State.................................................... 32 124 3,580
Foreign.................................................. 56,929 76,553 72,317
-------- -------- --------
57,292 80,009 79,592
Deferred
Federal.................................................. (1,929) (24,317) (10,712)
State.................................................... -- (30) (48)
Foreign.................................................. (2,398) 45 947
Change in tax status..................................... (3,439) -- (6,939)
-------- -------- --------
Provision for income taxes............................... $ 49,526 $ 55,707 $ 62,840
======== ======== ========
</TABLE>
Prior to the Company's Reorganization and the NSI Acquisition described in
Note 1, the Subsidiaries elected to be taxed as S corporations whereby the
income tax effects of the Subsidiaries' activities accrued directly to their
stockholders; therefore, adoption of SFAS 109 required no establishment of
deferred income taxes since no material differences between financial reporting
and tax bases of assets and liabilities existed. Concurrent with the Company's
Reorganization and the NSI Acquisition, the Company terminated the S corporation
elections of its Subsidiaries. As a result, deferred income taxes under the
provisions of SFAS 109 were established.
F-20
<PAGE> 112
NU SKIN ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The principal components of deferred tax assets are as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1998
------------ ------------
<S> <C> <C>
Deferred tax assets:
Inventory reserve......................................... $ 1,773 $ 5,195
Foreign tax credit........................................ 19,268 33,969
Distributor stock options and employee stock awards....... 6,992 6,020
Capitalized legal and professional........................ -- 5,990
Accrued expenses not deductible until paid................ 7,002 10,144
Withholding tax........................................... 5,692 7,291
Minimum tax credit........................................ 3,555 869
Net operating losses...................................... -- 12,621
-------- --------
Total deferred tax assets.............................. 44,282 82,099
-------- --------
Deferred tax liabilities:
Withholding tax........................................... 5,692 8,871
Exchange gains and losses................................. 1,679 3,032
NSI inventory step-up..................................... -- 11,176
Pharmanex intangibles step-up............................. -- 11,445
Other..................................................... 143 1,520
-------- --------
Total deferred tax liabilities......................... 7,514 36,044
-------- --------
Valuation allowance......................................... (4,700) (12,166)
-------- --------
Deferred taxes, net......................................... $ 32,068 $ 33,889
======== ========
</TABLE>
The valuation allowance primarily represents a reserve against a portion of
the deferred tax asset related to foreign tax credits.
The consolidated statements of income include a pro forma presentation for
income taxes, including the effect on minority interest, which would have been
recorded if the Company's Subsidiaries had been taxed as C corporations for all
periods presented. A reconciliation of the Company's pro forma effective tax
rate for the years ended December 31, 1996, 1997 and 1998 compared to the
statutory U.S. Federal tax rate is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1996 1997 1998
----- ----- -----
<S> <C> <C> <C>
Income taxes at statutory rate.............................. 35.00% 35.00% 35.00%
Foreign tax credit limitation (benefit)..................... -- 2.41 4.40
Cumulative effect of change in tax status................... -- -- (4.09)
Pharmanex in-process research and development............... -- -- 2.80
Non-deductible expenses..................................... .75 .15 .83
Other....................................................... 1.26 .42 (1.94)
----- ----- -----
37.01% 37.98% 37.00%
===== ===== =====
</TABLE>
F-21
<PAGE> 113
NU SKIN ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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
$454,000, $647,000 and $829,000 for the years ended December 31, 1996, 1997 and
1998, respectively.
14. 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 by creating offsetting positions 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 foreign currency forward contracts and certain intercompany loans of
foreign currency are recorded as other income and expense in the consolidated
statements of income.
At December 31, 1997 and 1998, the Company held foreign currency forward
contracts with notional amounts totaling approximately $51.0 million and $46.3
million, respectively, to hedge foreign currency items. These contracts do not
qualify as hedging transactions and, accordingly, have been marked to market.
The net gains on foreign currency forward contracts were $5.6 million and $2.6
million for the years ended December 31, 1997 and 1998, respectively. There were
no significant gains or losses on foreign currency forward contracts for the
year ended December 31, 1996. These contracts at December 31, 1998 have
maturities through July 1999.
At December 31, 1997 and 1998, the intercompany loan from Nu Skin Japan to
Nu Skin Hong Kong totaled approximately $92.5 million and $57.3 million,
respectively. The Company recorded exchange gains totaling $7.8 million and $2.2
million resulting from this intercompany loan for the years ended December 31,
1997 and 1998, respectively.
At December 31, 1998, the intercompany loan from Nu Skin Japan to the
Company totaled approximately $82.0 million. The Company recorded exchange gains
totaling $2.8 million resulting from this intercompany loan for the year ended
December 31, 1998. There was no loan at December 31, 1997 from Nu Skin Japan to
the Company.
15. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest totaled $84,000, $251,000 and $3,731,000 for the
years ended December 31, 1996, 1997 and 1998, respectively. Cash paid for income
taxes totaled $18,133,000, $73,905,000 and $77,271,000 for the years ended
December 31, 1996, 1997 and 1998, respectively.
F-22
<PAGE> 114
NU SKIN ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Noncash investing and financing activities
For the year ended December 31, 1996, noncash investing and financing
activities were as follows: (1) $86.5 million distribution to the stockholders
of the Initial Subsidiaries (Note 1). (2) $1.2 million of additional paid-in
capital contributed by the stockholders of the Initial Subsidiaries in exchange
for shares of Class B common stock in connection with the termination of the
Initial Subsidiaries' S corporation status. (3) $33.0 million of additional
paid-in capital and $20.7 million of deferred compensation recorded related to
the issuance of 1,605,000 options to distributors to purchase shares of Class A
common stock. 600,000 of these options were sold to affiliated entities in
exchange for notes receivable totaling $12.4 million (Note 11).
For the year ended December 31, 1997, noncash investing and financing
activities were as follows: (1) $87.1 million distribution to the stockholders
of the Acquired Entities (Note 1). (2) Adjustment to the distributor stock
options to reallocate 120,000 options initially allocated to affiliated entities
and a related reduction in the notes receivable of $3.2 million (Note 11).
For the year ended December 31, 1998, noncash investing and financing
activities were as follows: (1) $37.6 million distribution to the stockholders
of the Acquired Entities (Note 1). (2) Purchase of Acquired Entities for $70.0
million in Preferred Stock and $6.2 million in long-term notes payable. Net
assets acquired totaled $90.4 million and assumed liabilities totaled $171.3
(Note 3). (3) $25.0 million in contingent consideration issued to the NSI
Stockholders. $8.8 million of the contingent payment was recorded as an increase
in intangible assets and $16.2 million of the contingent payment was recorded as
a reduction of stockholders' equity (Notes 3 and 5). (4) Purchase of Pharmanex
for $77.6 million in Class A common stock and $0.2 million in cash. Net assets
acquired totaled $3.6 million and assumed liabilities totaled $34.0 million
(Note 4).
16. SEGMENT INFORMATION
During 1998, the Company adopted Statement of Financial Accounting
Standards No. 131 ("SFAS 131"), Disclosures about Segments of an Enterprise and
Related Information. As described in Note 1, the Company's operations throughout
the world are divided into three reportable segments: North Asia, Southeast Asia
and Other Markets. Segment data includes intersegment revenue, intersegment
profit and operating expenses and intersegment receivables and payables. The
Company evaluates the performance of its segments based on operating income.
Information as to the operations of the Company in each of the three segments is
set forth below (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
REVENUE
North Asia.................................. $ 502,381 $ 673,582 $ 665,523
Southeast Asia.............................. 336,783 412,524 320,606
Other Markets............................... 266,368 314,048 294,947
Eliminations................................ (343,894) (446,732) (367,582)
--------- --------- ---------
Totals............................ $ 761,638 $ 953,422 $ 913,494
========= ========= =========
</TABLE>
F-23
<PAGE> 115
NU SKIN ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
OPERATING INCOME
North Asia.................................. $ 88,347 $ 117,302 $ 89,075
Southeast Asia.............................. 52,224 46,195 19,385
Other Markets............................... 4,134 19,684 46,994
Eliminations................................ (7,538) (2,961) 785
--------- --------- ---------
Totals............................ $ 137,167 $ 180,220 $ 156,239
========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1997 1998
--------- ---------
<S> <C> <C>
TOTAL ASSETS
North Asia.............................................. $ 104,488 $ 167,867
Southeast Asia.......................................... 176,570 110,518
Other Markets........................................... 211,663 500,299
Eliminations............................................ (87,717) (172,251)
--------- ---------
Totals........................................ $ 405,004 $ 606,433
========= =========
</TABLE>
Information as to the Company's operation in different geographical areas
is set forth below (in thousands):
Revenue
Revenue from the Company's operations in Japan totaled $380,044, $599,375
and $654,168 for the years ended December 31, 1996, 1997 and 1998, respectively.
Revenue from the Company's operations in Taiwan totaled $154,564, $168,568 and
$119,511 for the years ended December 31, 1996, 1997 and 1998, respectively.
Revenue from the Company's operations in the United States (which includes
intercompany revenue) totaled $252,111, $301,217 and $280,115 for the years
ended December 31, 1996, 1997 and 1998, respectively.
Long-lived assets
Long-lived assets in Japan were $11,001 and $20,242 as of December 31, 1997
and 1998, respectively. Long-lived assets in Taiwan were $3,087 and $2,466 as of
December 31, 1997 and 1998, respectively. Long-lived assets in the United States
were $55,557 and $213,856 as of December 31, 1997 and 1998, respectively.
17. COMMITMENTS AND CONTINGENCIES
The Company is subject to governmental regulations pertaining to product
formulation, labeling and packaging, product claims and advertising and to the
Company's direct selling system. The Company is also subject to the jurisdiction
of numerous foreign tax authorities. These tax authorities regulate and restrict
various corporate transactions, including intercompany transfers. The Company
believes that the tax authorities in Japan and South Korea are particularly
active in challenging the tax structures and intercompany transfers of foreign
corporations. Any assertions or determination that
F-24
<PAGE> 116
NU SKIN ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 or
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.
18. SUBSEQUENT EVENTS
In February 1999, the Company announced its intent to acquire Big Planet,
Inc., selected assets of Nu Skin USA, Inc. and the Company's remaining
affiliates in Canada, Mexico and Guatemala for approximately $40.0 million in
cash, $14.5 million in a three-year note and the assumption of certain
liabilities. The selected assets to be acquired from Nu Skin USA, Inc. include
approximately 620,000 shares of the Company's Class A common stock (Note 11).
The Company concluded the Nu Skin USA, Inc. transaction in March 1999 and
anticipates closing the remaining transactions within 90 days.
The acquisition of Big Planet, Inc. is expected to be accounted for by the
purchase method of accounting. The acquisition of selected assets from Nu Skin
USA, Inc. and the Company's remaining affiliates in Canada, Mexico and Guatemala
will be recorded for the consideration paid, except for the portion of these
affiliates under common control of a group of stockholders, which portion will
be at the predecessor basis.
F-25
<PAGE> 117
[INSIDE BACK COVER OF PROSPECTUS.]
[LOGOS OF NU SKIN PERSONAL CARE, PHARMANEX AND BIG PLANET DEPICTED IN A CIRCLE]
<PAGE> 118
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
10,000,000 SHARES
NU SKIN ENTERPRISES, INC.
CLASS A COMMON STOCK
-----------------------
P R O S P E C T U S
-----------------------
MERRILL LYNCH & CO.
MORGAN STANLEY DEAN WITTER
ADAMS, HARKNESS & HILL, INC.
DONALDSON, LUFKIN & JENRETTE
LEHMAN BROTHERS
U.S. BANCORP PIPER JAFFRAY
, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 119
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The estimated expenses of the issuance and distribution are as follows:
<TABLE>
<S> <C>
SEC Registration Fee........................................ $ 59,720
NASD Fee.................................................... 21,982
NYSE Listing Fee............................................ 38,500*
Printing and Engraving Expenses............................. 100,000*
Accounting Fees and Expenses................................ 100,000*
Legal Fees and Expenses..................................... 150,000*
Blue Sky Fees and Expenses.................................. 5,000*
Transfer Agent's Fees and Expenses.......................... 3,500
Miscellaneous Expenses...................................... 30,000*
--------
Total..................................................... $508,702+
========
</TABLE>
- -------------------------
* Estimated expense.
+ Payable 10% by the Company and 90% by certain selling stockholders.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article 10 of the Company's Certificate of Incorporation and Article 5 of
the Company's Bylaws require indemnification to the fullest extent permitted by
Section 145 of the Delaware General Corporation Law. Section 145 of the DGCL
provides that a corporation may indemnify directors and officers as well as
other employees and individuals against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
in connection with specified actions, suits or proceedings, whether civil,
criminal, administrative, or investigative (other than action by or in the right
of the corporation a "derivative action"), if they acted in good faith and in a
manner they reasonably believed to be in or not opposed to the best interests of
the corporation and, with respect to any criminal action or proceeding, had no
reasonable cause to believe their conduct was unlawful. A similar standard is
applicable in the case of derivative actions, except that indemnification only
extends to expenses (including attorneys' fees) incurred in connection with the
defense or settlement of such actions, and the statute requires court approval
before there can be any indemnification where the person seeking indemnification
has been found liable to the corporation. Indemnification provided by or granted
pursuant to Section 145 of the DGCL is not exclusive of other indemnification
that may be granted by a corporation's bylaws, any agreement, any vote of
stockholders or disinterested directors or otherwise. Article 5 of the Company's
Bylaws provides for indemnification consistent with the requirements of Section
145 of the DGCL.
Section 145 of the DGCL also permits a corporation to purchase and maintain
insurance on behalf of directors and officers. Article 5 of the Company's Bylaws
permits it to purchase such insurance on behalf of its directors and officers.
Article 7 of the Company's Certificate of Incorporation provides for, to
the fullest extent permitted by the DGCL, elimination or limitation of liability
of directors to the Company or its stockholders for breach of fiduciary duty as
a director. Section 102(b)(7) of the DGCL permits a corporation to provide in
its certificate of incorporation that a director of the corporation shall not be
personally liable to the corporation or its stockholders for monetary damages
for breach of fiduciary duties as a director, except for liability (i) for any
breach of a director's duty of loyalty to the
II-1
<PAGE> 120
corporation or its stockholders; (ii) for acts or omissions not in good faith or
which involve international misconduct or a knowing violation of law; (iii) for
improper payment of dividends or redemptions of shares; or (iv) for any
transaction from which the director derives an improper personal benefit.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
+1.1 Form of Purchase Agreement
2.1 Agreement and Plan of Merger and Reorganization dated May 3,
1999 by and among Nu Skin Enterprises, Inc., Big Planet
Holdings, Inc., Big Planet, Inc., Nu Skin USA, Inc., Richard
W. King, Kevin Doman and Nathan W. Ricks
*4.1 Specimen Form of Stock Certificate for Class A Common Stock
*4.2 Amended and Restated Certificate of Incorporation of Nu Skin
Enterprises, Inc.
+5.1 Opinion of LeBoeuf, Lamb, Greene & MacRae, L.L.P. regarding
legality of the securities covered by this Registration
Statement
23.1 Consent of PricewaterhouseCoopers LLP, independent
accountants
23.2 Consent of Grant Thornton LLP, independent accountants
+23.3 Consent of LeBoeuf, Lamb, Green & MacRae, L.L.P. (included
in legal opinion -- see Exhibit 5.1)
24 Power of Attorney (included with the signatures in Part II
of this Registration Statement)
99.1 Report of Grant, Thornton LLP, independent accountants
</TABLE>
- -------------------------
* Filed previously as Exhibit 4.1 and 3.1 to the Form S-1 filed (Registration
No. 333-12073) and incorporated herein by reference.
+ To be filed by amendment.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and each filing of an employee benefit plan's
annual report pursuant to Section 15(d) of the Securities Exchange Act of 1934)
that is incorporated by reference in the registration statement shall be deemed
to be a new registration statement relating to the securities offered therein,
and the offering of such securities at the time shall be deemed to be the
initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-2
<PAGE> 121
The undersigned hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) of
94) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-3
<PAGE> 122
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Provo, State of Utah, on May 12, 1999.
NU SKIN ENTERPRISES, INC.
By: /s/ STEVEN J. LUND
---------------------------------------
Steven J. Lund
Its: Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS: that each person whose signature appears
below hereby constitutes and appoints Steven J. Lund and M. Truman Hunt, and
each of them, his true and lawful attorneys-in-fact and agents, with full power
of substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments to the Registration
Statement, and to file the same, with all exhibits thereto, and other documents
in connection therewith, with the Securities and Exchange Commission, granting
each of said attorneys-in-fact and agents full power and authority to do and
perform each and every act and thing requisite and necessary to be done in and
about the premises, as full to all intents and purposes as he might or could do
in person, hereby ratifying and confirming all that said attorneys-in-fact and
agents or any of them, or their substitute, may lawfully do or cause to be done
by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement on Form S-3 has been signed below on May 12, 1999 by
the following persons in the capacities indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ BLAKE M. RONEY Chairman of the Board May 12, 1999
- --------------------------------------------- of Directors
Blake M. Roney
/s/ STEVEN J. LUND President and Chief Executive Officer May 12, 1999
- --------------------------------------------- and Director (Principal Executive
Steven J. Lund Officer)
/s/ COREY B. LINDLEY Chief Financial Officer (Principal May 12, 1999
- --------------------------------------------- Financial and Accounting Officer)
Corey B. Lindley
/s/ SANDRA N. TILLOTSON Director May 12, 1999
- ---------------------------------------------
Sandra N. Tillotson
/s/ BROOKE B. RONEY Director May 12, 1999
- ---------------------------------------------
Brooke B. Roney
</TABLE>
II-4
<PAGE> 123
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ KEITH R. HALLS Director May 12, 1999
- ---------------------------------------------
Keith R. Halls
/s/ MAX L. PINEGAR Director May 12, 1999
- ---------------------------------------------
Max L. Pinegar
/s/ E.J. "JAKE" GARN Director May 12, 1999
- ---------------------------------------------
E.J. "Jake" Garn
/s/ PAULA HAWKINS Director May 12, 1999
- ---------------------------------------------
Paula Hawkins
/s/ DANIEL W. CAMPBELL Director May 12, 1999
- ---------------------------------------------
Daniel W. Campbell
</TABLE>
II-5
<PAGE> 124
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER EXHIBIT DESCRIPTION NUMBER
- ------- ------------------- ------
<C> <S> <C>
+1.1 Form of Purchase Agreement..................................
2.1 Agreement and Plan of Merger and Reorganization dated May 3,
1999 by and among Nu Skin Enterprises, Inc., Big Planet
Holdings, Inc., Big Planet, Inc., Nu Skin USA, Inc., Richard
W. King, Kevin Doman and Nathan W. Ricks....................
*4.1 Specimen Form of Stock Certificate for Class A Common
Stock.......................................................
*4.2 Amended and Restated Certificate of Incorporation of Nu Skin
Enterprises, Inc.
+5.1 Opinion of LeBoeuf, Lamb, Greene & MacRae, L.L.P. regarding
legality of the securities covered by this Registration
Statement...................................................
23.1 Consent of PricewaterhouseCoopers LLP, independent
accountants.................................................
23.2 Consent of Grant Thornton LLP, independent accountants......
+23.3 Consent of LeBoeuf, Lamb, Green & MacRae, L.L.P. (included
in legal opinion -- see Exhibit 5.1)........................
24 Power of Attorney (included with the signatures in Part II
of this Registration Statement).............................
99.1 Report of Grant Thornton LLP, independent accountants
</TABLE>
- -------------------------
* Filed previously as Exhibits 4.1 and 3.1 to Form S-1 (Registration No.
333-12073) and incorporated herein by reference.
+ To be filed by amendment.
<PAGE> 1
EXHIBIT 2.1
================================================================================
AGREEMENT AND PLAN OF MERGER AND REORGANIZATION
BETWEEN AND AMONG
NU SKIN ENTERPRISES, INC.,
BIG PLANET HOLDINGS, INC.,
BIG PLANET, INC. ,
NU SKIN USA, INC.,
RICHARD W. KING,
KEVIN V. DOMAN,
AND
NATHAN W. RICKS
DATED MAY 3, 1999
================================================================================
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C> <C>
1. DEFINITIONS............................................................................................. 1
2. ACCELERATION AND REDEMPTION OF RESTRICTED STOCK AWARDS AND OPTIONS...................................... 7
2.1 Acceleration and Redemption of Options Held by Big Planet
Employees Pursuant to Amended and Restated 1998 Equity Plan................................ 7
2.2 Acceleration and Redemption of King and Doman Redemption Shares................................ 7
2.3 Acceleration and Redemption of Ricks Redemption Shares......................................... 8
2.4 Redemption of Big Planet Common................................................................ 8
3. THE MERGER.............................................................................................. 8
3.1 Effective Time, Closing, Closing Date.......................................................... 8
3.2 Effects of the Merger; Subsequent Actions...................................................... 9
3.3 Certificate of Incorporation................................................................... 9
3.4 Bylaws......................................................................................... 9
3.5 Directors...................................................................................... 9
3.6 Officers....................................................................................... 9
3.7 Conversion of Shares........................................................................... 9
3.8 Merger Consideration; Adjustment of Merger Consideration; Net Asset Difference.................10
3.9 Stockholders Meeting...........................................................................11
3.10 BP Holdings Shares.............................................................................12
4. DISSENTING SHARES...................................................................................... 12
4.1 Exchange of Certificates...................................................................... 12
5. REPRESENTATIONS AND WARRANTIES OF BIG PLANET............................................................13
5.1 Organization and Qualification of Big Planet...................................................13
5.2 Authorization of Transaction...................................................................13
5.3 Non-Contravention..............................................................................13
5.4 Brokers' Fees..................................................................................14
5.5 Title to Assets................................................................................14
5.6 Subsidiaries...................................................................................14
5.7 Territorial Restrictions.......................................................................14
5.8 Financial Statements...........................................................................14
5.9 Events Subsequent to Date of Financial Statements..............................................14
5.10 Undisclosed Liabilities........................................................................16
5.11 Legal Compliance; Permits......................................................................16
5.12 Tax Matters....................................................................................17
</TABLE>
-i-
<PAGE> 3
TABLE OF CONTENTS CONT'D
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C> <C>
5.13 Real Property..................................................................................18
5.14 Intellectual Property..........................................................................19
5.15 Tangible Assets................................................................................21
5.16 Inventory......................................................................................21
5.17 Contracts......................................................................................21
5.18 Distributors and Customers.....................................................................22
5.19 Suppliers; Vendors; Raw Materials..............................................................23
5.20 Notes and Accounts Receivable..................................................................23
5.21 Powers of Attorney.............................................................................23
5.22 Insurance......................................................................................23
5.23 Litigation.....................................................................................23
5.24 Product Warranty...............................................................................24
5.25 Product Liability..............................................................................24
5.26 Employees......................................................................................24
5.27 Employee Benefits..............................................................................24
5.28 Guaranties.....................................................................................25
5.29 Environmental, Health, and Safety Matters......................................................25
5.30 Certain Business Relationships With Big Planet.................................................26
5.31 Capitalization.................................................................................26
5.32 Disclosure.....................................................................................27
6. REPRESENTATIONS AND WARRANTIES OF BP HOLDINGS AND NU SKIN ENTERPRISES...................................27
6.1 Organization of BP Holdings and Nu Skin Enterprises............................................27
6.2 Authorization of Transaction...................................................................27
6.3 Non-Contravention..............................................................................27
6.4 Brokers' Fees..................................................................................28
6.5 Acquisition Intent.............................................................................28
6.6 Disclosure.....................................................................................28
7. PRE-CLOSING COVENANTS...................................................................................28
7.1 General........................................................................................28
7.2 Notices, Consents and Regulatory Approvals.....................................................28
7.3 Operation of Business..........................................................................29
7.4 Preservation of Business.......................................................................29
7.5 Full Access....................................................................................29
7.6 Notice of Developments.........................................................................29
7.7 Exclusivity....................................................................................29
</TABLE>
-ii-
<PAGE> 4
TABLE OF CONTENTS CONT'D
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C> <C>
8.1 Conditions to Obligations of BP Holdings and Nu Skin Enterprises...............................29
8.2 Conditions to Obligations of Big Planet........................................................31
8.3 Conditions to Obligations of Nu Skin USA...................................................... 32
8.4 Conditions to Obligations of King, Doman, and Ricks........................................... 33
9. TERMINATION OF AGREEMENT................................................................................34
10. ADDITIONAL REPRESENTATIONS; COVENANTS AFTER CLOSING.....................................................34
10.1 Arbitration....................................................................................34
10.2 Representations and Warranties of Nu Skin USA..................................................35
10.3 Representations and Warranties of King, Doman, and Ricks.......................................37
10.4 Covenants Nu Skin USA, King, Doman, and Ricks..................................................38
10.5 Voting Agreement and Grant of Irrevocable Proxy................................................39
10.6 Non-Competition................................................................................39
10.7 Non-Solicitation of Employees..................................................................40
10.8 Indemnification................................................................................41
10.9 Survival of Representations and Warranties.....................................................42
10.10 Equity and Other Incentives....................................................................43
10.11 Repayment of Debt..............................................................................43
11. MISCELLANEOUS...........................................................................................43
11.1 Press Releases and Public Announcements........................................................43
11.2 No Third-Party Beneficiaries...................................................................43
11.3 Entire Agreement...............................................................................43
11.4 Succession and Assignment......................................................................43
11.5 Counterparts...................................................................................44
11.6 Headings.......................................................................................44
11.7 Notices........................................................................................44
11.8 Governing Law..................................................................................45
11.9 Amendments and Waivers.........................................................................45
11.10 Severability...................................................................................45
11.11 Expenses.......................................................................................45
11.12 Construction...................................................................................45
11.13 Incorporation of Recitals, Exhibits, and Schedules.............................................46
11.14 Specific Performance...........................................................................46
11.15 Submission to Jurisdiction.....................................................................46
11.16 Recovery of Litigation Costs...................................................................46
</TABLE>
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<PAGE> 5
EXHIBITS AND SCHEDULES:
EXHIBIT "A" -- CERTIFICATE OF MERGER
EXHIBIT "B" -- ARTICLES OF MERGER
EXHIBIT "C" -- FORM OF NU SKIN ENTERPRISES NOTE
EXHIBIT "D" -- INDEMNIFICATION LIMITATION AGREEMENT AND FIRST AMENDMENT
TO INDEMNIFICATION LIMITATION AGREEMENT
EXHIBIT "E" -- FINANCIAL STATEMENTS
EXHIBIT "F" -- GOVERNMENTAL AGENCIES
EXHIBIT "G" -- EQUITY AND OTHER INCENTIVES
DISCLOSURE SCHEDULE
Section 5.3
Section 5.5
Section 5.7
Section 5.9.10
Section 5.9.18
Section 5.9.19
Section 5.9.21
Section 5.11
Section 5.12.1
Section 5.13.2
Section 5.14.1
Section 5.14.2
Section 5.14.3
Section 5.14.3.4
Section 5.14.4
Section 5.17
Section 5.17.1
Section 5.17.2
Section 5.17.3
Section 5.17.4
Section 5.17.5
Section 5.17.6
Section 5.17.7
Section 5.17.8
Section 5.17.9
Section 5.17.10
Section 5.17.11
Section 5.17.12
Section 5.17.13
Section 5.17.14
Section 5.18
Section 5.19
Section 5.22
Section 5.23
Section 5.24
Section 5.27.1
Section 5.31
Section 8.14
Section 10.11
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<PAGE> 6
AGREEMENT AND PLAN OF MERGER AND REORGANIZATION
This Agreement and Plan of Merger and Reorganization (the "Agreement")
is entered into as of May 3, 1999, between and among Nu Skin Enterprises, Inc.,
a Delaware corporation ("Nu Skin Enterprises"), Big Planet Holdings, Inc., a
Delaware corporation ("BP Holdings"), Big Planet, Inc., a Utah corporation ("Big
Planet"), Nu Skin USA, Inc., a Delaware corporation ("Nu Skin USA"), Richard W.
King, an individual ("King"), Kevin V. Doman, an individual ("Doman"), and
Nathan W. Ricks, an individual ("Ricks"). Nu Skin Enterprises, BP Holdings, Big
Planet, Nu Skin USA, King, Doman, and Ricks are referred to herein,
collectively, as the "Parties" and, individually, as a "Party."
RECITALS
A. WHEREAS, the Board of Directors of BP Holdings and the Board of
Directors of Big Planet have approved the merger of Big Planet with and into BP
Holdings (the "Merger"), as set forth in this Agreement, and the Board of
Directors of Big Planet has approved the Reorganization (as that term is defined
below); and
B. WHEREAS, the Board of Directors of Big Planet has, in light of and
subject to the terms and conditions set forth herein, (i) determined that (a)
the consideration to be paid by Big Planet in connection with the deemed
exercise and cash-out of all options to purchase shares of Big Planet Common (as
defined below) in the Reorganization (as defined below) that are held by Big
Planet employees and the cash consideration to be paid by Big Planet to the
holders of restricted stock awards of Big Planet Common, and the consideration
to be paid by Big Planet to Ricks for the Ricks Redemption Shares (as defined
below), is fair to Big Planet and to the holders of such options, awards, and
capital stock, as the case may be, (b) the Reorganization is otherwise in the
best interests of Big Planet and its stockholders, and (c) the Merger is
otherwise in the best interests of Big Planet and its stockholders, and (ii)
approved and adopted this Agreement and the transactions contemplated hereby and
has recommended the approval and adoption of this Agreement and the transactions
contemplated herein by the stockholders of Big Planet.
NOW, THEREFORE, in consideration of the premises and mutual agreements
set forth herein, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Parties agree as follows:
SECTION 1
DEFINITIONS
1. DEFINITIONS.
"Affiliate" has the meaning set forth in Rule 12b-2 of the regulations
promulgated under the Securities Exchange Act of 1934, as amended; provided,
however, that, except as otherwise provided herein, (a) with respect to Nu Skin
Enterprises, BP Holdings, or Nu Skin International, Inc., a Utah corporation, it
shall not include Big Planet or Nu Skin USA, and (b) with respect to Big Planet
or Nu Skin USA, it shall not include Nu Skin Enterprises, BP Holdings, or Nu
Skin International, Inc., a Utah corporation.
<PAGE> 7
"Affiliated Group" means any affiliated group within the meaning of
Code Section 1504(a) or any similar group defined under a similar provision of
state, local, or foreign law.
"Basis" means any past or present fact, situation, circumstance,
status, condition, activity, practice, plan, occurrence, event, incident,
action, failure to act, or transaction that forms or could form the basis for
any specified consequence.
"BP Holdings" has the meaning set forth in the preface above.
"BP Holdings Common" means the Common Stock, $0.001 par value per
share, of BP Holdings.
"Big 5 Accountant" has the meaning as set forth in Section 3.8.2 below.
"Big Planet" has the meaning set forth in the preface above.
"Big Planet Common" means the Common Stock, $0.001 par value per share,
of Big Planet.
"Big Planet Series A Preferred" means the Series A Preferred Stock,
$0.001 par value per share, of Big Planet.
"CERCLA" has the meaning set forth in Section 5.29.5 below.
"Certificates" has the meaning set forth in Section 4.1 below.
"Closing" has the meaning set forth in Section 3.1 below.
"Closing Agreement" has the meaning set forth in Section 5.12.6 below.
"Closing Balance Sheet" has the meaning set forth in Section 3.8.2
below.
"Closing Date" has the meaning set forth in Section 3.1 below.
"COBRA" means the requirements of Part 6 of Subtitle B of Title I of
ERISA and Code Section 4980B.
"Code" means the Internal Revenue Code of 1986, as amended.
"Company Representations" shall have the meaning set forth in Section
10.2.5 below.
"Delaware Act" means the Delaware General Corporation Law, as amended.
"Delaware Filing" has the meaning set forth in Section 3.1 below.
"Delaware Secretary" means the Delaware Secretary of State.
"Disclosure Schedule" has the meaning set forth in Section 5 below.
-2-
<PAGE> 8
"Dissenting Shares" has the meaning set forth in Section 4 below.
"Doman" means Kevin V. Doman.
"Doman Redemption Shares" has the meaning set forth in Section 2.2.2
below.
"Draft Closing Balance Sheet" has the meaning set forth in Section
3.8.1 below.
"Effective Time" has the meaning set forth in Section 3.1 below.
"Employee Benefit Plan" means any Employee Pension Benefit Plan,
Employee Welfare Benefit Plan or any fringe benefit or other retirement, bonus,
or incentive plan or program.
"Employee Option Shares" has the meaning set forth in Section 2.1
below.
"Employee Pension Benefit Plan" has the meaning set forth in ERISA
Section 3(2).
"Employee Welfare Benefit Plan" has the meaning set forth in ERISA
Section 3(1).
"Environmental, Health, and Safety Requirements" shall mean all
federal, state, local and foreign statutes, regulations, ordinances and other
provisions having the force or effect of law, all judicial and administrative
orders and determinations, and pollution or protection of the environment,
including without limitation all those relating to the presence, use,
production, generation, handling, transportation, treatment, storage, disposal,
distribution, labeling, testing, processing, discharge, release, threatened
release, control, or cleanup of any hazardous materials, substances or wastes,
chemical substances or mixtures, pesticides, pollutants, contaminants, toxic
chemicals, petroleum products or byproducts, asbestos, polychlorinated
biphenyls, noise or radiation, each as amended and as now or hereafter in
effect.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"ERISA Affiliate" means each entity that is treated as a single
employer with Big Planet for purposes of Code Section 414.
"Escrow Agreement" means the Escrow Agreement dated as of March 8, 1999
between and among Nu Skin Enterprises, Nu Skin USA and U.S. Bank National
Association and certain stockholders of Nu Skin USA.
"Escrow Amount" means that certain Escrow Amount as defined in the
Escrow Agreement.
"Financial Statements" has the meaning set forth in Section 5.8 below.
"First Amendment to Indemnification Limitation Agreement" means that
certain first amendment to the Indemnification Limitation Agreement dated as of
May 3, 1999 signed by Nu Skin Enterprises, Nu Skin USA, King, Doman, Ricks, and
certain other parties.
"GAAP" means United States generally accepted accounting principles as
in effect from time to time.
-3-
<PAGE> 9
"Hart-Scott-Rodino Act" means the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended.
"Indemnification Limitation Agreement" means that certain
Indemnification Limitation Agreement dated March 8, 1999 signed by Nu Skin
Enterprises, Nu Skin USA, King, Doman, Ricks, and certain other parties.
Subsequent to the execution of this Agreement the parties to the Indemnification
Limitation Agreement anticipate entering into an Amended and Restated
Indemnification Limitation Agreement, which will amend and restate the
Indemnification Limitation Agreement to reflect the amendment made thereto by
the First Amendment to Indemnification Limitation Agreement.
"Indemnified Party" shall have the meaning set forth in 10.8.1 below.
"Indemnifying Parties" shall have the meaning set forth in 10.8 below.
"Intellectual Property" means (a) all inventions (whether patentable or
unpatentable and whether or not reduced to practice), all improvements thereto,
and all patents, patent applications, and patent disclosures, together with all
reissuances, continuations, continuations-in-part, revisions, extensions, and
re-examinations thereof, (b) all trademarks, service marks, trade dress, logos,
trade names, and corporate names, together with all translations, adaptations,
derivations, and combinations thereof and including all goodwill associated
therewith, and all applications, registrations, and renewals in connection
therewith, (c) all copyrightable works, all copyrights, and all applications,
registrations, and renewals in connection therewith, (d) all mask works and all
applications, registrations, and renewals in connection therewith, (e) all trade
secrets and confidential business information (including ideas, research and
development, know-how, formulas, compositions, manufacturing and production
processes and techniques, technical data, designs, drawings, specifications,
customer and supplier lists, pricing and cost information, and business and
marketing plans and proposals), (f) all computer software (including data and
related documentation), (g) all other proprietary rights, and (h) all copies and
tangible embodiments thereof (in whatever form or recorded on whatever medium).
"King" means Richard W. King.
"King Redemption Shares" has the meaning set forth in Section 2.2.1
below.
"Knowledge" means actual knowledge of officers and directors, and
employees with responsibility for the subject matter, after reasonable
investigation.
"Legal Action" means any action, suit, proceeding, hearing,
investigation, charge, complaint, claim, demand, or notice.
"Liability" means any liability (whether known or unknown, whether
asserted or unasserted, whether absolute or contingent, whether accrued or
unaccrued, whether liquidated or unliquidated, and whether due or to become
due), including any liability for Taxes.
"Merger" has the meaning set forth in Recital A above.
"Merger Consideration" has the meaning set forth in Section 3.8 below.
"Multi-employer Plan" has the meaning set forth in ERISA Section 3(37).
-4-
<PAGE> 10
"Net Asset Difference" has the meaning set forth in Section 3.8 below.
"Net Assets" means the excess of the book value of the assets of an
entity over the liabilities of the entity as determined in accordance with GAAP.
"Nu Skin Enterprises" means Nu Skin Enterprises, Inc., a Delaware
corporation.
"Nu Skin Enterprises Class A Common" means the Class A Common Stock,
$0.001 par value per share, of Nu Skin Enterprises.
"Nu Skin Enterprises Note" has the meaning set forth in Section 3.7.3
below.
"Nu Skin USA" means Nu Skin USA, Inc., a Delaware corporation and
holder of the Big Planet Series A Preferred and certain shares of Big Planet
Common.
"Ordinary Course of Business" means the ordinary course of business
consistent with past custom and practice (including with respect to quantity and
frequency).
"Parties" and "Party" have the meanings set forth in the preface above.
"Paying Agent" has the meaning set forth in Section 4.1 below.
"PBGC" means the Pension Benefit Guaranty Corporation.
"Person" means an individual, a partnership, a corporation, an
association, a joint stock company, a trust, a joint venture, an unincorporated
organization, or a governmental entity (or any department, agency, or political
subdivision thereof).
"Plan" has the meaning set forth in Section 2.1 below.
"Recipients" has the meaning set forth in Section 3.8.1 below.
"Reorganization" has the meaning set forth in Section 2 below.
"Ricks" means Nathan W. Ricks.
"Ricks Options" has the meaning set forth in Section 2.3 below.
"Ricks Redemption Shares" has the meaning set forth in Section 2.3
below.
"Securities Filings" shall have the meaning set forth in Section 10.2.6
below.
"Security Interest" means any mortgage, pledge, lien, encumbrance,
charge, or other security interest, other than (a) mechanic's, materialmen's,
and similar liens, (b) liens for Taxes not yet due and payable or for Taxes that
the taxpayer is contesting in good faith through appropriate proceedings, (c)
purchase money liens and liens securing rental payments under capital lease
arrangements, and (d) other
-5-
<PAGE> 11
liens arising in the Ordinary Course of Business and not incurred in connection
with the borrowing of money.
"Stockholders Meeting" has the meaning set forth in Section 3.9.1
below.
"Subsidiary" means any corporation with respect to which a specified
Person (or a Subsidiary thereof) owns a majority of the common stock or has the
power to vote or direct the voting of sufficient Securities to elect a majority
of the directors.
"Surviving Corporation" has the meaning set forth in Section 3 below.
"SWDA" has the meaning set forth in Section 5.29.5 below.
"Tax" or "Taxes" means any federal, state, county, local, or foreign
taxes, charges, fees, levies or other assessments, including all net income,
gross receipts, license, payroll, employment, excise, severance, stamp, business
and occupation, premium, windfall profits, environmental (including taxes under
Code Section 59A), customs duties, capital stock, franchise, gains, profits,
withholding, social security (or similar), unemployment, disability, real
property, personal property, sales, use, transfer, registration, value added, ad
valorem, alternative or add-on minimum, estimated, or other tax of any kind
whatsoever, imposed by any governmental authority including any interest,
penalty, or addition thereto, whether disputed or not and any expenses incurred
in connection with the determination, settlement or litigation of any tax
liability.
"Tax Returns" means any return, declaration, report, claim for refund,
or information return or statement relating to Taxes, including, where permitted
or required, combined or consolidated returns for any group of entities that
includes Big Planet and any schedule thereto, and including any amendment
thereof.
"Tax Ruling" has the meaning set forth in Section 5.12.6 below.
"Utah Act" means the Utah Revised Business Corporations Act, as
amended.
"Utah Division" means the Utah Department of Commerce, Division of
Corporations and Commercial Code.
"Utah Filing" has the meaning set forth in Section 3.1 below.
"Year 2000 Basket" shall have the meaning set forth in Section 10.8.1
below.
"Year 2000 Compliant" shall mean with respect to Big Planet's products,
internal systems, including hardware, software, firmware, telecommunications
systems, management information systems and other systems, that such products
and systems accurately process Date Data (including, but not limited to,
calculating, comparing, and sequencing) for, into, and between the twentieth and
twenty-first centuries, and the years 1999 and 2000, including leap year
calculations. The term "Date Data" shall mean any data or input that includes an
indication of or reference to date and that is stored information and internal
to functionality. Date calculations involving either a single century or
multiple centuries will neither cause an abnormal ending nor generate incorrect
or unexpected results. When sorting by date, all records will
-6-
<PAGE> 12
be sorted in accurate sequence. As used in the immediately preceding sentence,
accurate sequence means, by way of example and without limitation, that records
will be read, written and sorted in ascending order so that the year 1999 will
be before the year 2000.
SECTION 2
THE REORGANIZATION
2. ACCELERATION AND REDEMPTION OF RESTRICTED STOCK AWARDS AND OPTIONS. The
transactions described in this Section 2 are referred to herein, collectively,
as the "Reorganization."
2.1 Acceleration and Redemption of Options Held by Big Planet Employees
Pursuant to Amended and Restated 1998 Equity Plan. Immediately prior to the
Effective Time and without any action on the part of the holders of options to
acquire shares of Big Planet Common pursuant to Big Planet's Amended and
Restated 1998 Equity Plan (the "Plan"), the vesting of all options to purchase
shares of Big Planet Common currently held pursuant to the Plan (the "Employee
Option Shares") will be accelerated and deemed exercised in accordance with the
terms of the Plan, and the Employee Option Shares will be redeemed by Big Planet
for a redemption price equal to (a) $0.50 per share (b) less the applicable
exercise price and (c) any amounts required to be withheld by Big Planet for
applicable tax withholdings. The redemption price for the Employee Option Shares
will be paid by Company check or other acceptable form of payment.
2.2 Acceleration and Redemption of King and Doman Redemption Shares.
2.2.1 King Redemption Shares. Immediately prior to the
Effective Time, the vesting of all shares of Big Planet Common underlying the
restricted stock award currently held by King (the "King Redemption Shares")
will be accelerated and the King Redemption Shares will be redeemed by Big
Planet for a redemption price equal to (a) $0.50 per share, (b) less any amount
required to be withheld by Big Planet for applicable tax withholdings, and (c)
less the amount of any debt due and owing by King to either Big Planet or Nu
Skin Enterprises (which debt has been agreed to be repaid at the Closing
pursuant to Section 10.11 below). The redemption price for the King Redemption
Shares will be paid by wire transfer or other immediately available funds.
2.2.2 Doman Redemption Shares; Debt Repayment. Immediately
prior to the Effective Time, the vesting of all shares of Big Planet Common
underlying the restricted stock award currently held by Doman (the "Doman
Redemption Shares") will be accelerated and the Doman Redemption Shares will be
redeemed by Big Planet for a redemption price equal to (a) $0.50 per share, (b)
less any amount required to be withheld by Big Planet for applicable tax
withholdings, and (c) less the amount of any debt due and owing by Doman to
either Big Planet or Nu Skin Enterprises (which debt has been agreed to be
repaid pursuant to Section 10.11 below); provided, however, that Doman can, at
his option, elect to defer the repayment of such debt (plus all accrued interest
thereon) for one (1) year from the Closing Date, at which time Doman shall repay
all debt then due and owing to either Big Planet or Nu Skin Enterprises in cash.
All such debt (plus all accrued interest thereon) shall be secured by any and
all future equity awards granted to Doman. Any proceeds received by Doman with
respect to such equity awards shall immediately be paid to Nu Skin Enterprises
until such debt and all accrued interest thereon has been paid in full. In the
event Doman has not paid such debt in full within one (1) year from the Closing
Date, Nu Skin Enterprises
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may, in its sole discretion, retain and cancel, and not deliver to Doman upon
vesting, a number of shares of its capital stock underlying such equity awards
and having a value equal to the principal amount of such debt (plus all accrued
interest thereon) and any other out-of-pocket fees or expenses incurred by Nu
Skin Enterprises in connection herewith. The number of shares of capital stock
to be retained and canceled shall be determined by dividing the total aggregate
amount of principal, accrued interest, and fees by the average closing sale
price of such shares as reported on the New York Stock Exchange for the twenty
(20) trading day period ending on the trading day immediately prior to the
Company's election to retain and cancel such shares. Doman shall be responsible
for any tax consequences or Liability resulting from the debt repayment
mechanism set forth in this Section 2.2.2. The redemption price for the Doman
Redemption Shares will be paid by wire transfer or other immediately available
funds.
2.3 Acceleration and Redemption of the Ricks Redemption Shares. Prior
to the Effective Time, the vesting of all of the options held by Ricks to
acquire shares of Big Planet Common (which options are not held pursuant to the
Plan) (the "Ricks Options") will be accelerated and deemed exercised (with the
shares of Big Planet Common issued to Ricks upon the exercise thereof being
referred to herein as the "Ricks Redemption Shares"). The Ricks Redemption
Shares will be redeemed by Big Planet immediately prior to the Effective Time
for a redemption price equal to (a) $0.50 per share, (b) less the exercise price
for each of the Ricks Options, and (c) less the amount of any debt due and owing
by Ricks to either Big Planet or Nu Skin Enterprises (which debt has been agreed
to be repaid at the Closing pursuant to Section 10.11 below). The redemption
price for the Ricks Redemption Shares will be paid by wire transfer or other
immediately available funds.
2.4 Redemption of Big Planet Common. Immediately prior to the Effective
Time, all outstanding shares of Big Planet Common (other than the King
Redemption Shares, the Doman Redemption Shares, and the Ricks Redemption Shares)
granted pursuant to vested restricted stock awards or not otherwise referenced
in this Section 2 shall be accelerated and redeemed by Big Planet for a
redemption price equal to (a) $0.50 per share, (b) less any amount required to
be withheld by Big Planet for applicable tax withholdings, and (c) less the
amount of any debt due and owing by the holder thereof to either Big Planet or
Nu Skin Enterprises.
SECTION 3
THE MERGER
3. THE MERGER. At the Effective Time and upon the terms and subject to the
conditions of this Agreement, the Utah Act, and the Delaware Act, Big Planet
shall be merged with and into BP Holdings, whereupon the separate corporate
existence of Big Planet shall cease and BP Holdings shall continue as the
surviving corporation (the "Surviving Corporation") under the name "Big Planet,
Inc."
3.1 Effective Time; Closing; Closing Date. As soon as practicable after
the satisfaction or waiver of the conditions set forth in Section 8 below, the
Parties will file a Certificate of Merger with the Delaware Secretary in the
form attached hereto as Exhibit "A" and make all other filings or recordings
required by the Delaware Act in connection with the Merger. In addition, as soon
as practicable after the satisfaction or waiver of the conditions set forth in
Section 8 below and concurrently with the filing of the Certificate of Merger
with the Delaware Secretary, the Parties will file Articles of Merger in the
form attached hereto as Exhibit "B" with the Utah Division and make all other
filings or recordings required by
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the Utah Act in connection with the Merger. The Merger shall become effective at
such time a Certificate of Merger is duly filed with the Delaware Secretary (the
"Delaware Filing") and Articles of Merger are duly filed with the Utah Division
(the "Utah Filing"), or at such later time as is specified in the Delaware
Filing (the "Effective Time"). In connection with the making of the Delaware
Filing and the Utah Filing, a closing (the "Closing") shall be held at the
offices of LeBoeuf, Lamb, Greene & MacRae, L.L.P., 1000 Kearns Building, 136
South Main Street, Salt Lake City, Utah 84101-1685, or such other place as the
Parties shall agree, for the purpose of confirming the satisfaction or waiver of
the conditions set forth in Section 8 below and effecting the closing of the
Reorganization and the Merger. The date on which the Closing is held is referred
to herein as the "Closing Date".
3.2 Effects of the Merger; Subsequent Actions. The Merger shall have
the effects set forth under the Delaware Act and the Utah Act. Without limiting
the generality of the foregoing, and subject thereto, at the Effective Time, all
the properties, rights, privileges, powers, and franchises of Big Planet shall
vest in the Surviving Corporation, and all debts, liabilities, and duties of Big
Planet shall become the debts, liabilities, and duties of the Surviving
Corporation. If, at any time after the Effective Time, the Surviving Corporation
shall consider or be advised that any deeds, bills of sale, assignments,
assurances, or any other actions or things are necessary or desirable to vest,
perfect, or confirm of record or otherwise in the Surviving Corporation its
right, title, or interest in, to, or under any of the rights, properties, or
assets of Big Planet acquired or to be acquired by the Surviving Corporation as
a result of or in connection with the Merger, or otherwise to carry out this
Agreement or any of the transactions contemplated herein, the officers and
directors of the Surviving Corporation shall be authorized to execute and
deliver, in the name and on behalf of Big Planet, all such deeds, bills of sale,
assignments, and assurances and to take and do, in the name and on behalf of
each such corporation or otherwise, all such other actions and things as may be
necessary or desirable to vest, perfect, or confirm of record or otherwise any
and all right, title, and interest in, to, and under such rights, properties, or
assets of the Surviving Corporation or otherwise to carry out this Agreement and
the transactions contemplated hereby.
3.3 Certificate of Incorporation. The Certificate of Incorporation of
BP Holdings in effect immediately prior to the Effective Time, as amended
pursuant to the Merger, shall be the Certificate of Incorporation of the
Surviving Corporation until amended in accordance with the Delaware Act or other
applicable law.
3.4 Bylaws. The Bylaws of BP Holdings in effect immediately prior to
the Effective Time, as amended pursuant to the Merger, shall be the Bylaws of
the Surviving Corporation until amended in accordance with the Delaware Act or
other applicable law.
3.5 Directors. The directors of BP Holdings at the Effective Time shall
be the initial directors of the Surviving Corporation, each to hold office in
accordance with the Certificate of Incorporation and Bylaws of the Surviving
Corporation and until his or her successor is duly elected and qualified.
3.6 Officers. The officers of BP Holdings at the Effective Time shall
be the initial officers of the Surviving Corporation, each to hold office in
accordance with the Certificate of Incorporation and Bylaws of the Surviving
Corporation and until his or her successor is duly appointed and qualified.
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3.7 Conversion of Shares.
3.7.1 Big Planet Series A Preferred. Each share of Big Planet
Series A Preferred issued and outstanding and held by the holder thereof (as
evidenced in the records of Big Planet) immediately prior to the Effective Time
(other than shares of Big Planet Series A Preferred held in the treasury of Big
Planet and other than any Dissenting Shares) shall be canceled and extinguished
and be converted into the right to receive (i) cash in the amount of $0.50 per
share and (ii) a promissory note (the "Nu Skin Enterprises Note") in the
original principal amount of $0.50 per share. The Nu Skin Enterprises Note shall
be substantially in the form attached hereto as Exhibit "C" and shall be payable
over three (3) years in equal quarterly payments of principal and interest with
interest accruing at six and one-half percent (6.50%) per annum. The aggregate
original principal amount of the Nu Skin Enterprises Note shall be equal to (x)
$0.50 multiplied by (y) the number of shares of Big Planet Series A Preferred
held by the holder of the Nu Skin Enterprises Note. As provided in the Nu Skin
Enterprises Note, Nu Skin Enterprises may set off against the Nu Skin
Enterprises Note all adjustments to the Merger Consideration pursuant to Section
3.8 below and all amounts from time to time owing to Nu Skin Enterprises or BP
Holdings or any of their respective Affiliates (other than Nu Skin USA) by Nu
Skin USA or others, subject to the limitations and restrictions set forth in the
Indemnification Limitation Agreement, a copy of which is attached hereto as
Exhibit "D", as the same has been amended by the First Amendment to
Indemnification Limitation Agreement, a copy of which is also attached hereto as
Exhibit "D".
3.7.2 Big Planet Common. Any shares of Big Planet Common that
have not been redeemed as provided in Section 2 above prior to the Effective
Time will be converted at the Effective Time into the right to receive cash in
the amount of $0.50 per share.
3.8 Merger Consideration; Adjustment of Merger Consideration; Net Asset
Difference. The cash and the Nu Skin Enterprises Note (referred to in Section
3.7.1 above) to be paid and issued pursuant to Section 3.7 above and all cash
paid pursuant to Section 2 above in connection with the Reorganization are,
collectively, referred to herein as the "Merger Consideration"; provided,
however, that the Merger Consideration shall be adjusted as provided in the
immediately following sentence. If the Net Assets of Big Planet, as reflected on
the Closing Date Balance Sheet are less than Big Planet's Net Assets on December
31, 1998 by an amount in excess of $200,000 (which excess, if any, is referred
to herein as the "Net Asset Difference"), the Merger Consideration shall be
adjusted dollar-for-dollar in an amount equal to the Net Asset Difference, and
Nu Skin Enterprises shall be entitled to an adjustment in the Merger
Consideration in an amount equal to the Net Asset Difference; provided, however,
that for purposes of calculating the Net Asset Difference, (a) $7,899,528 in
related-party receivables shall be excluded from the December 31, 1998 Balance
Sheet and (b) a total of up to $7,500,000 in loans made by Nu Skin Enterprises
to Big Planet shall be excluded from the Closing Date Balance Sheet, in
determining the Net Asset Difference. Any adjustment in the Merger Consideration
resulting from a Net Asset Difference, as determined in accordance with this
Section 3.8, may, in Nu Skin Enterprises' sole discretion, be effected by (i)
offsets against the Nu Skin Enterprises Note, (ii) disbursements of funds from
the Escrow Amount in accordance with the Escrow Agreement, or (iii) offsets
against King's, Doman's, or Ricks' right to receive equity incentives and cash
bonuses earned and owing to them as provided by Exhibit "G" attached hereto. Any
adjustment to the Merger Consideration resulting from a Net Asset Difference, as
determined in accordance with this Section 3.8, shall not be subject to the
applicable basket or cap set forth in the Indemnification Limitation Agreement,
as amended by the First Amendment to Indemnification Limitation Agreement.
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<PAGE> 16
3.8.1 Draft Closing Date Balance Sheet. Within sixty (60) days
after the date of the Closing, Nu Skin Enterprises will prepare and deliver to
Nu Skin USA, King, Doman, and Ricks (collectively, the "Recipients") a draft
unaudited consolidated balance sheet (the "Draft Closing Date Balance Sheet") of
Big Planet as of the date of the Closing (determined on a pro forma basis as
though the Parties had not consummated the transactions contemplated by this
Agreement). Nu Skin Enterprises will prepare the Draft Closing Date Balance
Sheet in accordance with GAAP applied on a basis consistent with the preparation
of Big Planet's December 31, 1998 balance sheet; provided, however, that assets,
liabilities, gains, losses, revenues, and expenses in interim periods or as of
dates other than year-end (which normally are determined through the application
of so-called interim accounting conventions or procedures) will be determined,
for purposes of the Draft Closing Date Balance Sheet, through full application
of the procedures used in preparing Big Planet's December 31, 1998 balance
sheet.
3.8.2 Objections to Draft Closing Date Balance Sheet;
Appointment of "Big 5" Accounting Firm. If the Recipients have any objections to
the Draft Closing Date Balance Sheet, they shall deliver a detailed statement
describing their objections to Nu Skin Enterprises within thirty (30) days after
receiving the Draft Closing Date Balance Sheet. Nu Skin Enterprises and the
Recipients will then use reasonable efforts to resolve any such objections
themselves. If Nu Skin Enterprises and the Recipients do not agree on a final
resolution of such objections within thirty (30) days after Nu Skin Enterprises
receive the Recipients' statement describing their objections, Nu Skin
Enterprises shall appoint one of the so-called "Big 5" national accounting firms
to resolve any remaining objections to the Draft Closing Date Balance Sheet;
provided, however, that the "Big 5" accounting firm so appointed shall not at
that time be engaged by Nu Skin Enterprises to provide it with auditing services
(the "'Big 5' Accountant"). The appointment of the "Big 5" Accountant by Nu Skin
Enterprises, as provided by this Section 3.8.2, and the determinations and
conclusions of the "Big 5" Accountant pursuant hereto, shall be conclusive and
binding upon the Parties. Nu Skin Enterprises will revise the Draft Closing Date
Balance Sheet, as appropriate, to reflect the resolution of any objections
thereto pursuant to this Section 3.8.2. For purposes of this Agreement, the term
"Closing Date Balance Sheet" shall mean the Draft Closing Date Balance Sheet
together with any revisions made thereto by Nu Skin Enterprises pursuant to this
Section 3.8.2. In the event Nu Skin Enterprises and the Recipients submit any
unresolved objections to the Draft Closing Balance Sheet to the "Big 5"
Accountant for resolution as provided above in this Section 3.8.2, Nu Skin
Enterprises and the Recipients will share equally the fees and expenses of the
"Big 5" Accountant.
3.9 Stockholders Meeting. As soon as practicable after the date of this
Agreement, Big Planet shall in accordance with the Utah Act and any other
applicable law:
3.9.1 establish and give any required notices of a record date
for the taking of action by written consent or duly call, give notice of,
convene, and hold an annual or special meeting of its stockholders (such action
or meeting, the "Stockholders Meeting") for the purpose of considering and
taking action upon this Agreement and the transactions contemplated hereby,
including the Reorganization and the Merger;
3.9.2 include in any proxy statement delivered to the
stockholders of Big Planet the recommendation of Big Planet's Board of Directors
that the stockholders of Big Planet vote in favor of the approval and adoption
of this Agreement and the transactions contemplated hereby, including the
Reorganization and the Merger; and
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3.9.3 use its reasonable best efforts to obtain the necessary
approvals by its stockholders of this Agreement and the transactions
contemplated hereby, including the Reorganization and the Merger.
3.10 BP Holdings Shares. Each share of BP Holdings Common issued and
outstanding at the Effective Time shall remain issued and outstanding shares of
BP Holdings, as the Surviving Corporation following the Merger, and shall
continue to be held by Nu Skin Enterprises.
SECTION 4
DISSENTING SHARES; EXCHANGE OF SHARES
4. DISSENTING SHARES. Notwithstanding anything in this Agreement to the
contrary, shares of Big Planet Common or Big Planet Series A Preferred
outstanding immediately prior to the Effective Time and held by a holder who has
not voted in favor of the Merger or consented thereto in writing and who has
demanded appraisal for such shares of Big Planet Common or Big Planet Series A
Preferred in accordance with the Utah Act ("Dissenting Shares") shall not be
converted pursuant to Section 3.7 above unless such holder fails to perfect or
withdraws or otherwise loses his, her, or its right to appraisal under the Utah
Act. If such holder fails to perfect or withdraws or loses his, her, or its
right to appraisal, such shares of Big Planet Common or Big Planet Series A
Preferred shall be treated as if they were not Dissenting Shares and had been
converted as of the Effective Time pursuant to Section 3.7 above.
4.1 Exchange of Certificates. From and after the Effective Time, Nu
Skin Enterprises shall act as paying agent (the "Paying Agent") in effecting the
payment of the Merger Consideration upon surrender of certificates (the
"Certificates") that, prior to the Effective Time, represented shares of Big
Planet Common or Big Planet Series A Preferred. Upon the surrender of each such
Certificate formerly representing shares of Big Planet Common or Big Planet
Series A Preferred, the Paying Agent shall pay the holder of such Certificate
the Merger Consideration to be paid to such holder pursuant to Section 3.7 above
in exchange therefor, and such Certificate shall forthwith be canceled. Until so
surrendered and exchanged, each such Certificate (other than Certificates
representing Dissenting Shares or shares of Big Planet Common or Big Planet
Series A Preferred held by Big Planet) shall represent solely the right to
receive the Merger Consideration into which such certificate may be converted
pursuant to Section 3.7 above. No interest shall be paid or shall accrue on the
Merger Consideration. If the Merger Consideration (or any portion thereof) is to
be delivered to any Person other than the Person in whose name the Certificate
formerly representing shares of Big Planet Common or Big Planet Series A
Preferred surrendered in exchange therefor is registered, it shall be a
condition to such exchange that the Certificate so surrendered shall be properly
endorsed or otherwise be in proper form for transfer and that the Person
requesting such exchange shall pay to the Paying Agent any transfer or other
taxes required by reason of the payment of the Merger Consideration to a Person
other than the registered holder of the Certificate surrendered, or shall
establish to the satisfaction of the Paying Agent that such tax has been paid or
is not applicable.
4.1.1 Deposit of Merger Consideration. Nu Skin Enterprises
shall hold in trust the Merger Consideration to which holders of shares of Big
Planet Common or Big Planet Series A Preferred shall be entitled at the
Effective Time.
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4.1.2 Letter of Transmittal and Instructions. Promptly after
the Effective Time, Big Planet will, or will request the Paying Agent to, mail
to each record holder of Certificates that immediately prior to the Effective
Time represented shares of Big Planet Common or Big Planet Series A Preferred a
form of letter of transmittal and instructions for use in surrendering such
Certificates and receiving the Merger Consideration in exchange therefor.
4.1.3 No Transfers After Effective Time. After the Effective
Time, there shall be no transfers on the stock transfer books of the Surviving
Corporation of any shares of Big Planet Common or Big Planet Series A Preferred.
If, after the Effective Time, Certificates formerly representing shares of Big
Planet Common or Big Planet Series A Preferred are presented to the Surviving
Corporation or the Paying Agent, they shall be canceled and exchanged for the
Merger Consideration, as provided in this Section 4, subject to the Utah Act and
other applicable law in the case of Dissenting Shares.
SECTION 5
REPRESENTATIONS AND WARRANTIES OF BIG PLANET
5. REPRESENTATIONS AND WARRANTIES OF BIG PLANET. Big Planet represents and
warrants to each of BP Holdings and Nu Skin Enterprises that the statements
contained in this Section 5 are correct and complete as of the date of this
Agreement and will be true and correct as of the Closing Date (as though made
then and as though the Closing Date were substituted for the date of this
Agreement throughout this Section 5), except as set forth in the disclosure
schedule attached to this Agreement and initialed by the Parties (the
"Disclosure Schedule"). The Disclosure Schedule will be arranged in paragraphs
corresponding to the numbered paragraphs contained in this Section 5 and as
referenced in Sections 8.1.4 and 10.11 below. Nu Skin Enterprises and BP
Holdings shall have the right to rely on the following representations and
warranties notwithstanding any investigation or inquiry conducted by them
relating to the business of Big Planet and no such investigation shall limit or
in any way restrict the indemnification obligations of Nu Skin USA, King, Doman,
or Ricks under Section 10.8 below.
5.1 Organization and Qualification of Big Planet. Big Planet is a
corporation duly organized, validly existing, and in good standing under the
laws of the State of Utah and is qualified in each state or jurisdiction in
which the nature of its business or assets requires it to be so qualified except
to the extent a failure to so qualify would not have a material adverse effect
on the business of Big Planet, taken as a whole.
5.2 Authorization of Transaction. Big Planet has full power and
authority (including full corporate power and authority) to execute and deliver
this Agreement and to perform its obligations hereunder. Without limiting the
generality of the foregoing, the Board of Directors of Big Planet has duly
authorized the execution, delivery, and performance of this Agreement by Big
Planet. This Agreement constitutes the valid and legally binding obligation of
Big Planet, enforceable in accordance with its terms and conditions.
5.3 Non-Contravention. Except as set forth in Section 5.3 of the
Disclosure Schedule, neither the execution and the delivery of this Agreement,
nor the consummation of the transactions contemplated hereby (including the
Reorganization and the Merger), will (i) violate any constitution, statute,
regulation, rule, injunction, judgment, order, decree, ruling, charge, or other
restriction of any government,
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<PAGE> 19
governmental agency, or court to which Big Planet is subject or any provision of
the articles of incorporation or bylaws of Big Planet; or (ii) without the prior
specific written approval of Nu Skin Enterprises after the date hereof, conflict
with, result in a breach of, constitute a default under, result in the
acceleration of, create in any party the right to accelerate, terminate, modify,
or cancel, or require any notice under any material agreement, contract, lease,
license, instrument, or other arrangement to which Big Planet is a party or by
which it is bound or to which any of its assets is subject (or result in the
imposition of any Security Interest upon any of its assets); or (iii) without
the prior written approval of Nu Skin Enterprises after the date hereof,
conflict with or violate or cause the termination or suspension of any license,
permit, authority, certificate, or approval issued by any governmental agency or
authority and held by Big Planet. Except as listed in Section 5.3 of the
Disclosure Schedule, Big Planet has caused to be filed all notices and
applications for authorization, consent, or approval required pursuant to the
applicable requirements of the Communications Act of 1934, as amended, and
applicable state telecommunications laws in order for the Parties to consummate
the transactions contemplated by this Agreement (including, but not limited to,
the Reorganization and the Merger).
5.4 Brokers' Fees. Big Planet has no Liability or obligation to pay any
fees or commissions to any broker, finder, or agent with respect to the
transactions contemplated by this Agreement for which BP Holdings or Nu Skin
Enterprises could become liable or obligated.
5.5 Title to Assets. Except as set forth in Section 5.5 of the
Disclosure Schedule, Big Planet has good and marketable title to, a valid
leasehold interest in, or license to, the properties and assets used by it in
the business, located on its premises, or shown on the Financial Statements or
acquired after the date thereof, free and clear of all Security Interests or
restrictions on transfer, except for properties and assets disposed of in the
Ordinary Course of Business since the date of the Financial Statements. The
assets of Big Planet as of the date hereof and as of the Closing Date constitute
all of the assets necessary to operate the business of Big Planet as currently
conducted.
5.6 Subsidiaries. Big Planet has no Subsidiaries.
5.7 Territorial Restrictions. Except as set forth in Section 5.7 of the
Disclosure Schedule, Big Planet is not restricted by any written agreement or
understanding with any other Person from carrying on its business anywhere in
the world.
5.8 Financial Statements. Attached hereto as Exhibit "E" are the
following financial statements of Big Planet (collectively, the "Financial
Statements"): (i) an audited balance sheet and audited statements of income,
changes in stockholders' equity, and cash flow as of and for the fiscal year
ended December 31, 1998, and (ii) an unaudited balance sheet and unaudited
statements of income, changes in stockholder equity, and cash flow as of and for
the three (3) month period ended March 31, 1999. The Financial Statements have
been prepared in accordance with GAAP (except that they contain no footnotes
disclosing information not otherwise disclosed in the Disclosure Schedule and
the unaudited statement may be subject to normal and customary adjustments)
applied on a consistent basis throughout the periods covered thereby, present
fairly the financial condition of Big Planet as of such dates and the results of
the operations of Big Planet for such periods, are correct and complete, and are
consistent with the books and records of Big Planet (which books and records are
also correct and complete).
5.9 Events Subsequent to Date of Financial Statements. Except as
otherwise approved in writing by Nu Skin Enterprises, after the date hereof,
since March 31, 1999, there has not been any
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<PAGE> 20
material adverse change in the business, financial condition, operations,
results of operations, or future prospects of Big Planet. Without limiting the
generality of the foregoing, since that date:
5.9.1 Big Planet has not sold, leased, transferred, or
assigned any of its assets, tangible or intangible, outside the Ordinary Course
of Business;
5.9.2 Big Planet has not entered into any agreement, contract,
lease, or license (or series of related agreements, contracts, leases, or
licenses) outside the Ordinary Course of Business involving more than $10,000
individually or $100,000 in the aggregate;
5.9.3 No Person (including Big Planet) has accelerated,
terminated, materially modified, or canceled any agreement, contract, lease, or
license (or series of related agreements, contracts, leases, or licenses)
involving more than $10,000 individually or $100,000 in the aggregate to which
Big Planet is a party or by which it is bound;
5.9.4 Big Planet has not imposed any Security Interest upon
any of its assets, tangible or intangible;
5.9.5 Big Planet has not made any capital expenditure (or
series of related capital expenditures) outside the Ordinary Course of Business
and involving more than $10,000 individually or $100,000 in the aggregate;
5.9.6 Big Planet has not made any capital investment in, any
loan to, or any acquisition of the securities or assets of, any other Person (or
series of related capital investments, loans, or acquisitions) involving more
than $10,000 individually or $100,000 in the aggregate;
5.9.7 Big Planet has not issued any note, bond, or other debt
security or created, incurred, assumed, or guaranteed any indebtedness for
borrowed money or capitalized lease obligations either involving more than
$10,000 individually or $100,000 in the aggregate;
5.9.8 Big Planet has not delayed or postponed the payment of
accounts payable and other Liabilities outside the Ordinary Course of Business;
5.9.9 Big Planet has not canceled, compromised, waived, or
released any right or claim (or series of related rights or claims) outside the
Ordinary Course of Business and involving more than $10,000 individually or
$100,000 in the aggregate;
5.9.10 Except as described in Section 5.9.10 of the Disclosure
Schedule, Big Planet has not granted any license or sublicense of any rights
under or with respect to any Intellectual Property outside the Ordinary Course
of Business;
5.9.11 there has been no change made or authorized in the
Articles of Incorporation or Bylaws of Big Planet;
5.9.12 Big Planet has not issued, sold, or otherwise disposed
of any of its capital stock, or granted any options, warrants, or other rights
to purchase or obtain (including upon conversion, exchange, or exercise) any of
its capital stock;
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5.9.13 Except as contemplated herein, Big Planet has not
declared, set aside, or paid any dividend or made any distribution with respect
to its capital stock (whether in cash or in kind) or redeemed, purchased, or
otherwise acquired any of its capital stock;
5.9.14 Big Planet has not experienced any damage, destruction,
or loss (whether or not covered by insurance) to any of its assets or property
in excess of $20,000;
5.9.15 Big Planet has not made any loan to, or entered into
any other transaction with, any of its directors, officers, or employees outside
the Ordinary Course of Business;
5.9.16 Big Planet has not entered into any employment contract
or collective bargaining agreement (whether written or oral), or modified the
terms of any existing such contract or agreement;
5.9.17 Big Planet has not granted any increase in the base
compensation of any of its directors, officers, or employees outside the
Ordinary Course of Business;
5.9.18 Except as set forth in Section 5.9.18 of the Disclosure
Schedule, Big Planet has not adopted, amended, modified, or terminated any
bonus, profit-sharing, incentive, severance, or other plan, contract, or
commitment for the benefit of any of its directors, officers, or employees (or
taken any such action with respect to any other Employee Benefit Plan);
5.9.19 Except as set forth in Section 5.9.19 of the Disclosure
Schedule, no officer of Big Planet has received an increase in salary in excess
of $5,000;
5.9.20 Big Planet has not made or pledged to make any material
charitable or other capital contribution;
5.9.21 Except as disclosed in Section 5.9.21 of the Disclosure
Schedule, there has not been any other occurrence, event, incident, action,
failure to act, or transaction involving Big Planet that has had or that could
reasonably be expected to have a material adverse effect on the business of Big
Planet, taken as a whole; and
5.9.22 Big Planet has not committed to any of the foregoing.
5.10 Undisclosed Liabilities. Big Planet has no Liability (and there is
no Basis for any present or to its Knowledge, future action, suit, proceeding,
hearing, investigation, charge, complaint, claim, or demand against it giving
rise to any Liability), except for (i) Liabilities set forth on the face of the
balance sheet included in the Financial Statements (rather than in any notes
thereto) and (ii) Liabilities that have arisen after March 31, 1999 in the
Ordinary Course of Business (none of which results from, arises out of, relates
to, is in the nature of, or was caused by any breach of contract, breach of
warranty, tort, infringement, or violation of law).
5.11 Legal Compliance; Permits. Except for any failures to comply that
individually or in the aggregate would not have a material adverse effect on the
business of Big Planet, taken as a whole, Big Planet and its predecessors and
Affiliates have complied in all respects with all applicable laws (including
rules, regulations, codes, plans, injunctions, judgments, orders, decrees,
rulings, and charges thereunder) of all federal, state, local, and foreign
governments (and all agencies thereof), and with the terms and
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conditions of all material licenses, permits, certificates, approvals, and
authorities issued by any governmental agency or authority, and no action, suit,
proceeding, hearing, investigation, charge, complaint, claim, demand, or notice
has been filed or commenced against any of them alleging any failure so to
comply. Except as disclosed in Section 5.11 of the Disclosure Schedule, Big
Planet has obtained and currently possesses all material licenses, permits,
certificates, authorities and approvals necessary to operate its business as
currently conducted including, without limitation, all required domestic and
international telecommunications and electronic commerce licenses, permits,
certificates, approvals and authorities. Subject to receipt of the approvals
noted in Section 5.11 of the Disclosure Schedule, all such licenses, permits,
certificates, approvals and authorities will be validly transferred to BP
Holdings or its subsidiaries in connection with the Merger.
5.12 Tax Matters.
5.12.1 Big Planet has filed all Tax Returns that it was
required to file. All such Tax Returns were correct and complete in all
respects. Except for taxes that will be due and owing for calendar year 1999,
all Taxes due and owed by Big Planet have been paid. Except as set forth in
Section 5.12.1 of the Disclosure Schedule, Big Planet currently is not the
beneficiary of any extension of time within which to file any Tax Return. No
claim has ever been made by any taxing authority in a jurisdiction where Big
Planet does not file Tax Returns that it is or may be subject to taxation by
that jurisdiction. There are no Security Interests on any of the assets or
properties of Big Planet that arose in connection with any failure (or alleged
failure) to pay any Tax.
5.12.2 Big Planet has withheld and paid all Taxes required to
have been withheld and paid in connection with amounts paid or owing to any
employee, independent contractor, creditor, stockholder, or other third-party.
5.12.3 Neither Big Planet nor any employee responsible for Tax
matters expects any taxing authority to assess any additional Taxes for any
period for which Tax Returns have been filed. There is no dispute or claim
concerning any Tax Liability of Big Planet either (i) claimed or raised by any
taxing authority in writing or (ii) as to which any of Big Planet and the
directors and officers (and employees responsible for Tax matters) of Big Planet
has Knowledge based upon personal contact with any agent of such taxing
authority. Big Planet has delivered to BP Holdings correct and complete copies
of all federal income Tax Returns, examination reports, and statements of
deficiencies assessed against or agreed to by Big Planet since January 1, 1998.
None of Big Planet's Tax Returns are the subject of an audit.
5.12.4 Big Planet has not waived any statute of limitations
for the assessment of any Taxes or agreed to any extension of time with respect
to a Tax assessment or deficiency.
5.12.5 No power of attorney currently in force has been
granted by Big Planet concerning any Tax matter.
5.12.6 Big Planet has not received a Tax Ruling (as that term
is defined below) or entered into a Closing Agreement (as that term is defined
below) with any taxing authority that would have a continuing adverse effect
after the Closing Date. "Tax Ruling" shall mean a written ruling of a taxing
authority relating to Taxes. "Closing Agreement" shall mean a written and
legally binding agreement with a taxing authority relating to Taxes.
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5.12.7 The unpaid Taxes of Big Planet (i) did not, as of March
31, 1999, exceed the reserve for Tax Liability (rather than any reserve for
deferred Taxes established to reflect timing differences between book and Tax
income) set forth on the face of the balance sheet included in the Financial
Statements (rather than in any notes thereto) (excluding, however, any taxes
that are incurred as a result of the transactions contemplated by this Agreement
being treated as a sale of assets) and (ii) do not exceed that reserve as
adjusted for the passage of time up to the Closing Date in accordance with the
past custom and practice of Big Planet in filing its Tax Returns.
5.12.8 Big Planet is not a party to any Tax allocation or
sharing agreement. Big Planet (i) has not been a member of an Affiliated Group
filing a consolidated federal income Tax Return or (ii) has no Liability for the
Taxes of any Person (other than Big Planet) under Reg. Section 1.1502-6 (or any
similar provision of state, local, or foreign law), as a transferee or
successor, by contract, or otherwise.
5.13 Real Property.
5.13.1 Big Planet does not now own and has never owned any
real property.
5.13.2 Section 5.13.2 of the Disclosure Schedule lists and
describes briefly all real property leased or subleased to Big Planet except for
real estate subleased or leased to Big Planet by Nu Skin Enterprises, its
subsidiary Nu Skin International, Inc., or any of their respective Affiliates.
Big Planet has delivered to BP Holdings correct and complete copies of the
leases and subleases listed in 5.13.2 of the Disclosure Schedule (as amended to
date). With respect to each lease and sublease listed in 5.13.2 of the
Disclosure Schedule:
5.13.2.1 the lease or sublease is legal, valid,
binding, enforceable, and in full force and effect;
5.13.2.2 the lease or sublease will continue to be
legal, valid, binding, enforceable, and in full force and effect on identical
terms following the consummation of the transactions contemplated hereby
(including the Reorganization and the Merger), subject to receipt of any
required third-party consents or approvals and possible renegotiation of the
lease or sublease terms (subject to the prior written approval thereof by Nu
Skin Enterprises) disclosed in Section 5.13.2 or Section 5.17 of the Disclosure
Schedule;
5.13.2.3 Big Planet is not and, to Big Planet's
Knowledge, no other party to the lease or sublease is in breach or default
thereunder, and no event has occurred that, with notice or lapse of time, would
constitute a breach or default by such party or permit termination,
modification, or acceleration thereunder;
5.13.2.4 Big Planet has not and, to Big Planet's
Knowledge, no other party to the lease or sublease has repudiated any provision
thereof;
5.13.2.5 there are no disputes, oral agreements, or
forbearance programs in effect as to the lease or sublease;
5.13.2.6 Big Planet has not assigned, transferred,
conveyed, mortgaged, deeded in trust, or encumbered any interest in the
leasehold or subleasehold; and
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5.13.2.7 all facilities leased or subleased by Big
Planet have received all approvals of governmental authorities (including
licenses and permits) required in connection with the operation of Big Planet's
business and have been operated and maintained in accordance with all applicable
laws, rules, and regulations.
5.14 Intellectual Property.
5.14.1 Big Planet owns free of encumbrances or has the right
to use pursuant to license, sublicense, agreement, or permission all
Intellectual Property necessary for the operation of the business of Big Planet
as presently conducted and as presently proposed to be conducted. Except as set
forth in Section 5.14.1 of the Disclosure Schedule, each item of Intellectual
Property owned or used by Big Planet immediately prior to the Closing will be
owned or available for use by Big Planet on identical terms and conditions
immediately subsequent to the Closing. Big Planet has taken all necessary and
desirable action to maintain and protect each item of Intellectual Property that
it owns or uses.
5.14.2 Except as set forth in Section 5.14.2 of the Disclosure
Schedule, Big Planet has not infringed upon, misappropriated, or otherwise
violated any Intellectual Property rights of third-parties, and none of Big
Planet or its directors and officers (or employees with responsibility for
Intellectual Property matters) has ever received any charge, complaint, claim,
demand, or notice alleging any such infringement, misappropriation, or violation
(including any claim that Big Planet must license or refrain from using any
Intellectual Property rights of any third-party). To the Knowledge of Big
Planet, no third-party has infringed upon, misappropriated, or otherwise
violated any Intellectual Property rights of Big Planet.
5.14.3 Section 5.14.3 of the Disclosure Schedule identifies
each patent or registration that has been issued to Big Planet with respect to
any of its Intellectual Property, identifies each pending patent application or
application for registration that Big Planet has made with respect to any of its
Intellectual Property, and identifies each material license, agreement, or other
permission that Big Planet has granted to any third-party with respect to any of
its Intellectual Property (together with any exceptions thereto). Big Planet has
delivered or has made available or will make available to Nu Skin Enterprises
correct and complete copies of all such patents, registrations, applications,
licenses, agreements, and permissions (as amended to date) and has made
available or will make available to Nu Skin Enterprises correct and complete
copies of all other written documentation evidencing ownership and prosecution
(if applicable) of each such item. Section 5.14.3 of the Disclosure Schedule
also identifies each material trade name or unregistered trademark used by Big
Planet in connection with its business. With respect to each item of
Intellectual Property required to be identified in 5.14.3 of the Disclosure
Schedule:
5.14.3.1 Big Planet possesses all right, title, and
interest in and to its proprietary Intellectual Property free and clear of any
Security Interest, license, or other restriction;
5.14.3.2 Each item of Big Planet's proprietary
Intellectual Property (and to its knowledge without inquiry of third-parties)
each item of non-proprietary Intellectual Property is not subject to any
outstanding injunction, judgment, order, decree, ruling, or charge;
5.14.3.3 No action, suit, proceeding, hearing,
investigation, charge, complaint, claim, or demand is pending or, to the
Knowledge of Big Planet, is threatened that challenges the legality, validity,
enforceability, use, or ownership of the item; and
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5.14.3.4 Except as generally disclosed in Section
5.14.3.4 of the Disclosure Schedule with respect to Big Planet's distributors
and specifically disclosed with respect to other Persons, Big Planet has never
agreed to indemnify any Person for or against any infringement,
misappropriation, or other conflict with respect to the item.
5.14.4 Section 5.14.4 of the Disclosure Schedule identifies
each material license, sublicense, agreement or permission with any Person
relating to any Intellectual Property used by Big Planet. Big Planet has
delivered to BP Holdings or Nu Skin Enterprises correct and complete copies of
all such licenses, sublicenses, agreements, and permissions (as amended to
date). Except as set forth in Section 5.14.4 of the Disclosure Schedule, with
respect to each such license, sublicense, agreement or permission identified in
5.14.4 of the Disclosure Schedule:
5.14.4.1 The license, sublicense, agreement, or
permission is legal, valid, binding, enforceable, and in full force and effect;
5.14.4.2 The license, sublicense, agreement, or
permission will continue to be legal, valid, binding, enforceable, and in full
force and effect on identical terms following the consummation of the
transactions contemplated hereby (including the Reorganization and the Merger);
5.14.4.3 Big Planet has not and, to its Knowledge, no
other party to any such license, sublicense, agreement, or permission is in
breach or default, and no event has occurred that, with notice or lapse of time,
would constitute a breach or default or permit termination, modification, or
acceleration thereunder;
5.14.4.4 Big Planet has not and, to its Knowledge, no
other party to any such license, sublicense, agreement, or permission has
repudiated any provision thereof;
5.14.4.5 Neither the license, sublicense, agreement or
permission nor (to its knowledge without inquiry of third-parties) the
underlying item of Intellectual Property is subject to any outstanding
injunction, judgment, order, decree, ruling, or charge;
5.14.4.6 No action, suit, proceeding, hearing,
investigation, charge, complaint, claim, or demand is pending or, to the
Knowledge of Big Planet, is threatened that challenges the legality, validity,
or enforceability of the license, sublicense, agreement, permission or
underlying item of Intellectual Property; and
5.14.4.7 Big Planet has not granted any sublicense or
similar right with respect to any such license, sublicense, agreement, or
permission other than in the Ordinary Course of Business.
5.14.5 To the Knowledge of Big Planet, Big Planet will not
interfere with, infringe upon, misappropriate, or otherwise violate any
Intellectual Property rights of third-parties as a result of the continued
operation of its business as presently conducted and as presently proposed to be
conducted.
5.14.6 Big Planet has no Knowledge of any new products,
inventions, procedures, or methods of manufacturing or processing that any
competitors or other third-parties have developed that reasonably could be
expected to supersede or make obsolete any product or process of Big Planet.
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5.15 Tangible Assets. Big Planet owns or leases all tangible assets
used in its business. Each such tangible asset is free from patent defects, has
been maintained in accordance with normal industry practice, is in good
operating condition and repair (subject to normal wear and tear), and is
suitable for the purposes for which it presently is used.
5.16 Inventory. All of the inventory of Big Planet consists of
manufactured and purchased goods in process, and finished goods, all of which
are merchantable and fit for the purpose for which they were procured or
manufactured, and none of which is slow-moving, obsolete, damaged, or defective,
subject only to the reserve for inventory write-down set forth on the face of
the balance sheet included in the Financial Statements (rather than in any notes
thereto) as adjusted for the passage of time through the Closing Date in
accordance with the past custom and practice of Big Planet.
5.17 Contracts. Section 5.17 of the Disclosure Schedule lists the
following contracts and other agreements to which Big Planet is a party:
5.17.1 any agreement (or group of related agreements) for the
lease of personal property to or from any Person providing for lease payments in
excess of $10,000 per annum;
5.17.2 any agreement (or group of related agreements) for the
purchase, sale, or license (in-bound or out-bound) of raw materials,
commodities, supplies, products, or other personal property, or for the
furnishing or receipt of services, the performance of which will extend over a
period of more than one (1) year, result in a loss to Big Planet, or involve
consideration in excess of $10,000;
5.17.3 any agreement concerning any partnership, joint
venture, or strategic alliance;
5.17.4 except as set forth in Section 5.17.4 of the Disclosure
Schedule, Big Planet is not a party to any agreement (or group of related
agreements) under which it has created, incurred, assumed, or guaranteed any
indebtedness for borrowed money, or any capitalized lease obligation, in excess
of $10,000 or under which it has imposed a Security Interest on any of its
assets, tangible or intangible;
5.17.5 any agreement concerning confidentiality or
non-competition except confidentiality agreements with network marketing
distributors and employees;
5.17.6 any agreement between Big Planet and any Affiliates of
Big Planet;
5.17.7 any profit sharing, stock option, stock award, stock
purchase, stock appreciation, deferred compensation, severance, or other plan or
arrangement for the benefit of Big Planet's current or former directors,
officers, or employees;
5.17.8 any collective bargaining agreement;
5.17.9 any agreement for the employment of any individual on a
full-time, part-time, consulting, or other basis providing annual compensation
in excess of $10,000 or providing severance benefits;
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5.17.10 any agreement under which Big Planet has advanced or
loaned any amount to any of its directors, officers, or employees outside the
Ordinary Course of Business;
5.17.11 any agreement under which the consequences of a
default or termination could have or could reasonably be expected to have a
material adverse effect on the business, financial condition, operations,
results of operations, or future prospects of Big Planet;
5.17.12 any other agreement (or group of related agreements)
the performance of which involves consideration in excess of $10,000;
5.17.13 any agreements with any telecommunications providers,
Internet service providers, licensors of technology (including software), web
page designers and service providers, consumer finance or credit card finance
companies, or any agreements related to electronic commerce transactions in
excess of $10,000; or
5.17.14 all contracts and other agreements to which Big Planet
is a party and that require Big Planet to make minimum purchases thereunder or
that contain minimum purchase obligations in excess of $250,000 in any twelve
(12) month period, and, except as set forth in Section 5.17.14 of the Disclosure
Schedule, Big Planet is not a party to any contract or other agreement that
requires it to make minimum purchases or that contains minimum purchase
obligations in excess of $250,000 in any twelve (12) month period.
Big Planet has delivered to BP Holdings or Nu Skin Enterprises a correct and
complete copy of each written agreement listed in Section 5.17 of the Disclosure
Schedule (as each such agreement has been amended to date) and a written summary
setting forth the terms and conditions of each oral agreement referred to in
Section 5.17 of the Disclosure Schedule. Except as set forth in Section 5.17 of
the Disclosure Schedules, with respect to each such agreement: (i) the agreement
is legal, valid, binding, enforceable, and in full force and effect; (ii)
subject to the required consents from applicable third-parties, the agreement
will continue to be legal, valid, binding, enforceable, and in full force and
effect on identical terms following the consummation of the transactions
contemplated hereby (including the Reorganization and the Merger); (iii) Big
Planet is not and, to its Knowledge, no other Person is in breach or default,
and no event has occurred that with notice or lapse of time would constitute a
breach or default, or permit termination, modification, or acceleration, under
the agreement; and (iv) Big Planet has not and, to its Knowledge, no other party
under the agreement has notified Big Planet that such party has, repudiated any
provision of the agreement.
5.18 Distributors and Customers. Section 5.18 of the Disclosure
Schedule sets forth (i) the names and addresses of all executive level and above
distributors and all customers of Big Planet that ordered goods and services
from Big Planet with an aggregate value for each such distributor and customer
of $5,000 or more during the last twelve (12) months and (ii) the amount for
which each such customer was invoiced during such period. Big Planet has not
received any notice or has no reason to believe that any significant distributor
or customer of Big Planet (A) has ceased, or will cease, to use the products,
goods, or services of Big Planet, (B) has substantially reduced or will
substantially reduce the purchase of products, goods, or services of Big Planet,
or (C) has sought, or is seeking, to reduce the price it will pay for products,
goods, or services of Big Planet, including in each case after the consummation
of the transactions contemplated hereby. To the Knowledge of Big Planet, no
executive level or above distributor of Big Planet has threatened to take any
action described in the preceding sentence as a result of the
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consummation of the transactions contemplated by this Agreement. Big Planet has
no arrangements or agreements with any of its distributors that are not offered
to all of its distributors generally.
5.19 Suppliers; Vendors; Raw Materials. Section 5.19 of the Disclosure
Schedule sets forth (i) the names and addresses of all suppliers from whom Big
Planet ordered supplies, products, merchandise, and other goods and services
with an aggregate purchase price for each such supplier of $10,000 or more
during the last twelve (12) months, and (ii) the amount for which each such
supplier invoiced Big Planet during such period. Big Planet has not received any
notice or has no reason to believe that there has been any material adverse
change in the price of such raw materials, supplies, products, merchandise, or
other goods or services, or that any such supplier will not sell raw materials,
supplies, products, merchandise, and other goods to Big Planet at any time after
the Closing Date on terms and conditions similar to those used in its current
sales to Big Planet, subject to general and customary price increases. To the
Knowledge of Big Planet, no supplier of Big Planet described in clause (i) of
the first sentence of this Section 5.19 has otherwise threatened to take any
action described in the preceding sentence as a result of the consummation of
the transactions contemplated by this Agreement.
5.20 Notes and Accounts Receivable. All notes and accounts receivable
of Big Planet are reflected properly on its books and records, are valid
receivables subject to no set-offs or counterclaims, are current and
collectible, and will be collected in accordance with their terms at their
recorded amounts, subject only to the reserve for bad debts set forth on the
face of the balance sheet included in the Financial Statements (rather than in
any notes thereto) as adjusted for the passage of time through the Closing Date
in accordance with the past custom and practice of Big Planet.
5.21 Powers of Attorney. There are no outstanding powers of attorney
executed on behalf of Big Planet.
5.22 Insurance. Section 5.22 of the Disclosure Schedule lists all
insurance policies to which Big Planet is a party. Each of Big Planet's
insurance policies (i) is legal, valid binding, enforceable, and in full force
and effect; (ii) will continue to be legal, valid, binding, enforceable, and in
full force and effect on identical terms following the consummation of the
transactions contemplated hereby (including the Reorganization and the Merger);
(iii) is not in default, nor is any party thereto in material breach thereof,
(including with respect to the payment of premiums or the giving of notices),
and no event has occurred that, with notice or the lapse of time, would
constitute such a breach or default, or permit termination, modification, or
acceleration under the policy; and (iv) has never been repudiated nor has any
party to such policy repudiated any provision thereof.
5.22.1 Big Planet has been covered since October 1997 by
insurance in scope and amount customary and reasonable for the business during
the aforementioned period. Section 5.22 of the Disclosure Schedule describes any
self-insurance arrangements affecting Big Planet.
5.23 Litigation. Section 5.23 of the Disclosure Schedule sets forth
each instance in which Big Planet (i) is subject to any outstanding injunction,
judgment, order, decree, ruling, or charge, or (ii) is a party or, to the
Knowledge of Big Planet, is threatened to be made a party to any action, suit,
proceeding, hearing, or investigation of, in, or before any court or
quasi-judicial or administrative agency of any federal, state, local, or foreign
jurisdiction or before any arbitrator. Except as set forth in Section 5.23 of
the Disclosure Schedule, none of the actions, suits, proceedings, hearings, and
investigations set forth in Section 5.23 of the Disclosure Schedule could result
or could reasonably be expected to result in any
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adverse change in the business, financial condition, operations, results of
operations, or future prospects of Big Planet. Neither Big Planet nor any of its
directors or officers (and employees with responsibility for litigation matters)
has any reason to believe that any such action, suit, proceeding, hearing, or
investigation may be brought or threatened against Big Planet.
5.24 Product Warranty. Each product sold, leased, distributed, or
delivered by Big Planet has conformed in all material respects with all
applicable contractual commitments and all express and implied warranties, and
Big Planet has no Liability (and there is no Basis for any present or future
action, suit, proceeding, hearing, investigation, charge, complaint, claim, or
demand against it giving rise to any Liability) for replacement or repair of
such products or other damages in connection with such products, subject only to
the reserve for product warranty claims set forth on the face of the balance
sheet included in the Financial Statements (rather than in any notes thereto) as
adjusted for the passage of time through the Closing Date in accordance with the
past custom and practice of Big Planet. No product sold, leased, distributed, or
delivered by Big Planet is subject to any guaranty, warranty, or other indemnity
beyond the applicable standard terms and conditions of sale or lease. Section
5.24 of the Disclosure Schedule includes copies of the standard terms and
conditions of sale or lease for Big Planet (containing applicable guaranty,
warranty, and indemnity provisions).
5.25 Product Liability. Big Planet has no Liability (and there is no
Basis for any present or future action, suit, proceeding, hearing,
investigation, charge, complaint, claim, or demand against it giving rise to any
Liability) arising out of any injury to individuals or property as a result of
the ownership, possession, or use of any product sold, leased, distributed, or
delivered by Big Planet.
5.26 Employees. Big Planet is not a party to or bound by any collective
bargaining agreement, nor has it experienced any strikes, grievances, claims of
unfair labor practices, or other collective bargaining disputes. Big Planet has
not committed any unfair labor practice. Neither Big Planet nor any of its
directors or officers (and employees with responsibility for employment matters)
has any Knowledge of any organizational effort presently being made or
threatened by or on behalf of any labor union with respect to any of the
employees of Big Planet. There are no administrative charges or legal actions
against Big Planet concerning alleged employment discrimination, harassment or
other employment related matters, pending or threatened, before the U.S. Equal
Employment Opportunity Commission or any court or other governmental or
regulatory body or authority.
5.27 Employee Benefits.
5.27.1 Section 5.27.1 of the Disclosure Schedule lists each
Employee Benefit Plan that Big Planet maintains or to which Big Planet
contributes or has any obligation to contribute.
5.27.1.1 Each such Employee Benefit Plan (and each
related trust, insurance contract, or fund) complies in form and in operation in
all material respects with the applicable requirements of ERISA, the Code, and
all other applicable laws.
5.27.1.2 All required reports and descriptions
(including Form 5500 Annual Reports, summary annual reports, PBGC-1's, and
summary plan descriptions) have been timely filed and distributed appropriately
with respect to each such Employee Benefit Plan. The requirements of COBRA have
been met in all material respects with respect to each such Employee Benefit
Plan that is an Employee Welfare Benefit Plan.
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5.27.1.3 All contributions (including all employer
contributions and employee salary reduction contributions) that are due have
been paid to each such Employee Benefit Plan and all contributions for any
period ending on or before the Closing Date that are not yet due have been paid
to each such Employee Pension Benefit Plan or accrued in accordance with the
past custom and practice of Big Planet and are listed on schedule 5.27.1 of the
Disclosure Schedule. All premiums or other payments for all periods ending on or
before the Closing Date have been paid with respect to each such Employee
Benefit Plan that is an Employee Welfare Benefit Plan.
5.27.1.4 Each such Employee Benefit Plan that is an
Employee Pension Benefit Plan intending to meet the requirements of a "qualified
plan" under Code Section 401(a) is listed as such on Section 5.27.1 of the
Disclosure Schedule, is so qualified, and has received, within the last two (2)
years, a favorable determination letter from the Internal Revenue Service that
it is a "qualified plan," and Big Planet is not aware of any facts or
circumstances that could result in the revocation of such determination letter.
5.27.1.5 The market value of assets under each such
Employee Benefit Plan that is an Employee Pension Benefit Plan (other than any
Multi-employer Plan) equals or exceeds the present value of all vested and
non-vested Liabilities thereunder determined in accordance with PBGC methods,
factors, and assumptions applicable to an Employee Pension Benefit Plan
terminating on the date for determination.
5.27.1.6 Big Planet has delivered to BP Holdings
correct and complete copies of the plan documents and summary plan descriptions,
the most recent determination letter received from the Internal Revenue Service,
Form 5500 Annual Reports, and all related schedules for the past three (3) years
and any interim financial statement or actuarial valuations issued subsequent to
the last available Form 5500, and all related trust agreements, insurance
contracts, and other funding agreements that implement each such Employee
Benefit Plan.
5.27.2 With respect to each Employee Benefit Plan that Big
Planet and any ERISA Affiliate maintains or ever has maintained or to which any
of them contributes, ever has contributed, or ever has been required to
contribute, no such Employee Benefit Plan is or has been subject to Title IV of
ERISA or is a Multi-employer Plan and neither Big Planet nor any ERISA Affiliate
has, or is expected to have, any Liability with respect thereto.
5.27.3 Big Planet does not maintain or contribute to, has
never maintained or contributed to, or has ever been required to contribute to,
any Employee Welfare Benefit Plan providing medical, health, or life insurance
or other welfare-type benefits for current or future retired or terminated
employees, their spouses, or their dependents (other than in accordance with
Code Section 4980B).
5.28 Guaranties. Big Planet is not a guarantor or otherwise liable for
any Liability or obligation (including indebtedness) of any other Person.
5.29 Environmental, Health, and Safety Matters.
5.29.1 Big Planet and its predecessors and Affiliates have
complied and are in compliance in each case in all material respects with all
Environmental, Health, and Safety Requirements.
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5.29.2 Without limiting the generality of the foregoing, Big
Planet and its predecessors and Affiliates have obtained and complied with, and
are in compliance with, in each case in all material respects, all permits,
licenses, and other authorizations that are required pursuant to Environmental,
Health, and Safety Requirements for the occupation of its facilities and the
operation of its business.
5.29.3 Neither Big Planet nor its predecessors or Affiliates
have received any written or oral notice, report, or other information regarding
any actual or alleged violation of Environmental, Health, and Safety
Requirements, or any liabilities or potential liabilities (whether accrued,
absolute, contingent, unliquidated, or otherwise), including any investigatory,
remedial, or corrective obligations, relating to any of them or its facilities
arising under Environmental, Health, and Safety Requirements.
5.29.4 None of the following exists at any property or
facility owned or operated by Big Planet: (i) underground storage tanks, (ii)
asbestos-containing material in any form or condition, (iii) materials or
equipment containing polychlorinated biphenyls, or (iv) landfills, surface
impoundments, or disposal areas.
5.29.5 Big Planet has not treated, stored, disposed of,
arranged for or permitted the disposal of, transported, handled, or released any
substance, including, without limitation, any hazardous substance, or owned or
operated any property or facility (and no such property or facility is
contaminated by any such substance) in a manner that has given or would give
rise to Liabilities, including any Liability for response costs, corrective
action costs, personal injury, property damage, natural resources damages, or
attorney fees, pursuant to the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended ("CERCLA"), the Solid Waste
Disposal Act, as amended ("SWDA"), or any other Environmental, Health, and
Safety Requirements.
5.29.6 Neither Big Planet nor any of its predecessors or
Affiliates has, either expressly or by operation of law, assumed or undertaken
any Liability, including, without limitation, any obligation for corrective or
remedial action, of any other Person relating to Environmental, Health, and
Safety Requirements.
5.29.7 No facts, events, or conditions relating to the past or
present facilities, properties, or operations of Big Planet or any of its
predecessors or Affiliates will prevent, hinder, or limit continued compliance
with Environmental, Health, and Safety Requirements, give rise to any
investigatory, remedial, or corrective obligations pursuant to Environmental,
Health, and Safety Requirements, or give rise to any other Liabilities pursuant
to Environmental, Health, and Safety Requirements, including, without
limitation, any relating to onsite or offsite releases or threatened releases of
hazardous materials, substances, or wastes, personal injury, property damage, or
natural resources damage.
5.30 Certain Business Relationships With Big Planet. No officer of Big
Planet has been involved in any business arrangement or relationship other than
an employment relationship with Big Planet during the past twelve (12) months,
and none of Big Planet's officers, directors, or employees and their respective
Affiliates owns any asset, tangible or intangible, that is used in the business
of Big Planet.
5.31 Capitalization. The entire authorized capital stock of Big Planet
consists of 110,000,000 shares of Big Planet Common, $0.001 par value per share,
of which a total of 3,857,553 shares are issued and outstanding and 40,000,000
shares of Big Planet Series A Preferred, $0.001 par value per share, of which a
total of 29,163,243 shares are issued and outstanding. All of the issued and
outstanding shares
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of Big Planet capital stock have been duly authorized, are validly issued, fully
paid, and non-assessable, and are held of record by the respective stockholders
as set forth on Section 5.31 of the Disclosure Schedule. Except as contemplated
by this Agreement and the Exhibits attached hereto, there are no outstanding or
authorized options, warrants, purchase rights, subscription rights, conversion
rights, exchange rights, co-sale rights, pre-emptive rights, or other contracts
or commitments that could require Big Planet to issue, sell, or otherwise cause
to become outstanding any additional shares of its capital stock. Except as
contemplated by this Agreement and the Exhibits attached hereto, there are no
outstanding or authorized stock appreciation, phantom stock, profit
participation, or similar rights with respect to Big Planet. There are no voting
trusts, proxies, or other agreements or understandings with respect to the
voting of the capital stock of Big Planet.
5.32 Disclosure. The representations and warranties contained in this
Section 5 do not contain any untrue statement of a material fact or omit to
state any material fact necessary in order to make the statements and
information contained in this Section 5 not misleading.
SECTION 6
REPRESENTATIONS AND WARRANTIES OF BP HOLDINGS
AND NU SKIN ENTERPRISES
6. REPRESENTATIONS AND WARRANTIES OF BP HOLDINGS AND NU SKIN ENTERPRISES. BP
Holdings and Nu Skin Enterprises each represent and warrant to Big Planet that
the statements contained in this Section 6 are correct and complete as of the
date of this Agreement and will be true and correct as of the Closing Date (as
though made then and as though the Closing Date were substituted for the date of
this Agreement throughout this Section 6). Big Planet shall have the right to
rely on the following representations and warranties notwithstanding any
investigation or inquiry conducted by it relating to the business of Nu Skin
Enterprises and BP Holdings.
6.1 Organization of BP Holdings and Nu Skin Enterprises. Each of BP
Holdings and Nu Skin Enterprises is a corporation duly organized, validly
existing, and in good standing under the laws of its jurisdiction of
incorporation. BP Holdings is a newly formed, wholly-owned subsidiary of Nu Skin
Enterprises and has conducted no business prior to the date hereof.
6.2 Authorization of Transaction. Each of BP Holdings and Nu Skin
Enterprises has full power and authority (including full corporate power and
authority) to execute and deliver this Agreement and to perform its obligations
hereunder. This Agreement constitutes the valid and legally binding obligation
of each of BP Holdings and Nu Skin Enterprises, enforceable in accordance with
its terms and conditions.
6.3 Non-Contravention. Neither the execution and the delivery of this
Agreement, nor the consummation of the transactions contemplated hereby
(including the Reorganization and Merger), will (i) violate any constitution,
statute, regulation, rule, injunction, judgment, order, decree, ruling, charge,
or other restriction of any government, governmental agency, or court to which
either BP Holdings or Nu Skin Enterprises is subject or any provision of its
Articles or Certificate of Incorporation or Bylaws, or (ii) conflict with,
result in a breach of, constitute a default under, result in the acceleration
of, create in any Person the right to accelerate, terminate, modify, or cancel,
or require any notice under any agreement, contract, lease, license, instrument,
or other arrangement to which BP Holdings or Nu Skin Enterprises
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is a party or by which it is bound or to which any of its assets is subject.
Except for the filing of a Notification and Report Form for Certain Mergers and
Acquisitions required under the Hart-Scott-Rodino Act, neither BP Holdings nor
Nu Skin Enterprises needs to give any notice to, make any filing with, or obtain
any authorization, consent, or approval of any government or governmental agency
in order for the Parties to consummate the Merger.
6.4 Brokers' Fees. BP Holdings and Nu Skin Enterprises have no
Liability or obligation to pay any fees or commissions to any broker, finder, or
agent with respect to the transactions contemplated by this Agreement for which
Big Planet could become liable or obligated.
6.5 Acquisition Intent. Nu Skin Enterprises does not currently intend
to sell off, spin out, or otherwise dispose of the equity interests it is
acquiring or will hold in, or the assets of, Big Planet or BP Holdings
subsequent to the Closing.
6.6 Disclosure. The representations and warranties contained in
Sections 6.1, 6.2, 6.3, 6.4, and 6.5 do not contain any untrue statement of
material fact or omit to state any material fact necessary in order to make the
statements and information contained in this Section 6 not misleading.
SECTION 7
PRE-CLOSING COVENANTS
7. PRE-CLOSING COVENANTS. The Parties agree as follows with respect to the
period between the execution of this Agreement and the Closing:
7.1 General. Each of the Parties will use its commercially reasonable
best efforts to take all action and to do all things necessary, proper, or
advisable in order to consummate and make effective the transactions
contemplated by this Agreement (including satisfaction, but not waiver, of the
closing conditions set forth in Section 8.
7.2 Notices, Consents and Regulatory Approvals. Big Planet will give
any notices to third parties, and Big Planet will use its reasonable best
efforts to obtain any third-party consents, that BP Holdings or Nu Skin
Enterprises may request or that are required in order to consummate the
transactions contemplated herein. Each of the Parties will give any notices to,
make any filings with, and use its commercially reasonable best efforts to
obtain any authorizations, consents, and approvals of governments and
governmental agencies in connection with the transactions referred to in this
Agreement. Without limiting the generality of the foregoing, each of the Parties
will file any Notification and Report Forms and related materials that it may be
required to file with the Federal Trade Commission and the Antitrust Division of
the United States Department of Justice under the Hart-Scott-Rodino Act, will
use its commercially reasonable best efforts to obtain an early termination of
the applicable waiting period, and will make any further filings pursuant
thereto that may be necessary, proper, or advisable in connection therewith.
Each of the Parties agrees to cooperate, in good faith, with the other Parties
in obtaining consents and approvals from governmental authorities, including,
without limitation, approvals from state and federal telecommunications
regulatory agencies, including, without limitation, the consent and approval of
the governmental agencies listed on Exhibit "F" attached hereto.
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7.3 Operation of Business. Big Planet will not engage in any practice,
take any action, or enter into any transaction outside the Ordinary Course of
Business without the prior written approval of Nu Skin Enterprises after the
date hereof. Without limiting the generality of the foregoing, without the prior
written approval of Nu Skin Enterprises, Big Planet will not (i) declare, set
aside, or pay any dividend or make any distribution with respect to its capital
stock or redeem, purchase, or otherwise acquire any of its capital stock, (ii)
otherwise engage in any practice, take any action, or enter into any transaction
of the sort described in Section 5.9 above, or (iii) enter into any contract or
agreement outside the Ordinary Course of Business, or any contract or agreement
in the Ordinary Course of Business, that involves the payment of more than
$100,000 in consideration or that has any minimum purchase requirements or
obligations.
7.4 Preservation of Business. Without the prior written approval of Nu
Skin Enterprises after the date hereof, Big Planet will keep its business,
properties, and assets substantially intact, including its present operations,
physical facilities, working conditions, relationships with distributors,
lessors, licensors, suppliers, customers, employees, and governmental
authorities, as well as its licenses, permits, certificates, authorities, and
approvals.
7.5 Full Access. Big Planet will permit representatives of BP Holdings
and Nu Skin Enterprises to have full access to all premises, properties, assets,
personnel, books, records (including Tax records), contracts, and documents of
or pertaining to Big Planet or its business or operations.
7.6 Notice of Developments. Each Party will give prompt written notice
to the other Parties of any material adverse development causing a breach of any
of its own representations and warranties in respective Sections of this
Agreement above. No disclosure by Big Planet pursuant to this Section 7.6,
however, shall be deemed to amend or supplement the Disclosure Schedule or to
prevent or cure any misrepresentation, breach of warranty, or breach of
covenant.
7.7 Exclusivity. Big Planet will not (i) solicit, initiate, or
encourage the submission of any proposal or offer from any Person relating to
the acquisition of any capital stock or other Securities, or any substantial
portion of the assets, of Big Planet (including any acquisition structured as a
merger, consolidation, or share exchange), or (ii) participate in any
discussions or negotiations regarding, furnish any information with respect to,
assist or participate in, or facilitate in any other manner any effort or
attempt by any Person to do or seek any of the foregoing. Big Planet will notify
BP Holdings and Skin Enterprises immediately if any Person makes any proposal,
offer, inquiry, or contact with respect to any of the foregoing.
SECTION 8
CONDITIONS TO OBLIGATIONS TO CLOSE
8.1 Conditions to Obligations of BP Holdings and Nu Skin Enterprises.
The obligations of BP Holdings and Nu Skin Enterprises to consummate the
transactions to be performed by them in connection with the Closing are subject
to satisfaction of the following conditions any or all of which may be waived in
writing by BP Holdings and Nu Skin Enterprises, in their sole discretion, prior
to the Closing:
8.1.1 the representations and warranties set forth in Section
5 above and Section 10 below that are qualified by materiality shall be true and
correct in all respects at and as of the Closing Date
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and the representations and warranties set forth in Section 5 above and Section
10 below that are not qualified by materiality shall be true in all material
respects at and as of the Closing Date;
8.1.2 Big Planet, Nu Skin USA, King, Doman, and Ricks shall
have performed and complied with all of their respective covenants hereunder in
all material respects through the Closing Date;
8.1.3 Big Planet, Nu Skin USA, King, Doman, and Ricks shall
have procured all of the third-party and governmental consents and approvals
specified in Section 7 above;
8.1.4 no action, suit, or proceeding shall be pending or, to
Big Planet's Knowledge, threatened before any court or quasi-judicial or
administrative agency of any federal, state, local, or foreign jurisdiction or
before any arbitrator wherein an unfavorable injunction, judgment, order,
decree, ruling, or charge would (i) prevent consummation of any of the
transactions contemplated by this Agreement, (ii) cause any of the transactions
contemplated by this Agreement to be rescinded following consummation, or (iii)
except as disclosed in Section 8.1.4 of the Disclosure Schedule, affect
adversely the right of BP Holdings or Nu Skin Enterprises to operate the former
business of Big Planet;
8.1.5 the Reorganization shall have been consummated;
8.1.6 the transactions contemplated herein shall have been
approved by the Board of Directors and shareholders of Big Planet;
8.1.7 Big Planet shall have delivered to BP Holdings and Nu
Skin Enterprises a certificate to the effect that each of the conditions
specified in Sections 8.1.1 through 8.1.6 above are satisfied in all respects;
8.1.8 all applicable waiting periods (and any extensions
thereof) under the Hart-Scott-Rodino Act shall have expired or otherwise been
terminated;
8.1.9 BP Holdings and Nu Skin Enterprises shall have received
from counsel to Big Planet an opinion in form and substance reasonably
acceptable to BP Holdings and Nu Skin Enterprises and their counsel, addressed
to BP Holdings and Nu Skin Enterprises and dated as of the Closing Date;
8.1.10 all actions to be taken by Big Planet in connection
with consummation of the transactions contemplated hereby and all certificates,
opinions, instruments, and other documents required to effect the transactions
contemplated hereby will be reasonably satisfactory in form and substance to BP
Holdings and Nu Skin Enterprises;
8.1.11 BP Holdings and Nu Skin Enterprises shall have
completed their due diligence investigation of Big Planet and the information
gathered in such investigation shall be satisfactory to BP Holdings and Nu Skin
Enterprises, in their sole and absolute discretion;
8.1.12 Big Planet shall not have experienced any event or
events that individually or in the aggregate, in the reasonable judgment of Nu
Skin Enterprises, constitutes a material adverse change in Big Planet's
financial condition, business or prospects;
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8.1.13 the contracts with Amteva Technologies, Inc. and UUNET
Technologies, Inc. will be renegotiated in a manner satisfactory to Nu Skin
Enterprises, and the non-binding letter of intent with TelQuest Satellite
Services LLC will be resolved in a manner satisfactory to Nu Skin Enterprises
and no contract or agreement shall be entered into with TelQuest Satellite
Services LLC without the prior written consent of Nu Skin Enterprises;
8.1.14 an Amended and Restated Indemnification Limitation
Agreement (which shall reflect the terms of the Indemnification Limitation
Agreement, as amended by the First Amendment to Indemnification Limitation
Agreement) shall have been entered into subsequent to the execution of this
Agreement and shall be originally executed by each of the Stockholders (as that
term is defined in the First Amendment to Indemnification Limitation Agreement)
who executed the Indemnification Limitation Agreement, and a copy thereof shall
have been delivered to BP Holdings and Nu Skin Enterprises; and
8.1.15 Nu Skin USA shall have contributed all of its right,
title, and interest in and to the leasehold improvements at the Big Planet
operations center to Big Planet.
Either BP Holdings or Nu Skin Enterprises may waive any condition specified in
this Section 8.1 if it executes a writing so stating at or prior to the Closing
Date.
8.2 Conditions to Obligations of Big Planet. The obligation of Big
Planet to consummate the transactions to be performed by it in connection with
the Closing is subject to satisfaction of the following conditions, any or all
of which may be waived in writing by Big Planet, in its sole discretion, prior
to the Closing:
8.2.1 the representations and warranties set forth in Section
6 above shall be true and correct in all material respects at and as of the
Closing Date;
8.2.2 BP Holdings and Nu Skin Enterprises shall have performed
and complied with all of their respective covenants hereunder in all material
respects through the Closing Date;
8.2.3 no action, suit, or proceeding shall be pending or, to
the Knowledge of Nu Skin Enterprises or Big Planet Holdings, threatened before
any court or quasi-judicial or administrative agency of any federal, state,
local, or foreign jurisdiction or before any arbitrator wherein an unfavorable
injunction, judgment, order, decree, ruling, or charge would (i) prevent
consummation of any of the transactions contemplated by this Agreement, or (ii)
cause any of the transactions contemplated by this Agreement to be rescinded
following consummation (and no such injunction, judgment, order, decree, ruling,
or charge shall be in effect);
8.2.4 the Board of Directors and stockholder of BP Holdings
shall have approved the transactions contemplated in this Agreement;
8.2.5 BP Holdings and Nu Skin Enterprises shall have delivered
to Big Planet a certificate to the effect that each of the conditions specified
in Section 8.2.1 through 8.2.4 above are satisfied in all respects;
8.2.6 all applicable waiting periods (and any extensions
thereof) under the Hart-Scott-Rodino Act shall have expired or otherwise been
terminated;
8.2.7 Big Planet shall have received from counsel to BP
Holdings and Nu Skin Enterprises an opinion in form and substance reasonably
acceptable to Big Planet and its counsel, addressed to Big Planet and dated as
of the Closing Date;
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8.2.8 if the Parties are otherwise prepared to close the
transactions contemplated by this Agreement at a time at which Big Planet has
not competed the renegotiation of the contracts with Amteva Technologies, Inc.
or UUNET Technologies, Inc. (as contemplated by Section 8.1.13 above), Nu Skin
Enterprises shall agree to defer the Closing for an additional thirty (30) days
(or such lesser number of days agreed to by Big Planet) in order to allow Big
Planet to attempt to complete the renegotiation of such contracts.
8.2.9 all actions to be taken by BP Holdings and Nu Skin
Enterprises in connection with the consummation of the transactions contemplated
hereby and all certificates, opinions, instruments and other documents required
to effect the transactions contemplated hereby will be reasonably satisfactory
in form and substance to Big Planet.
Big Planet may waive any condition specified in this Section 8.2 if it executes
a writing so stating at or prior to the Closing Date.
8.3 Conditions to Obligations of Nu Skin USA. The obligations of Nu
Skin USA to consummate the transactions to be performed by it in connection with
the Closing are subject to satisfaction of the following conditions, any or all
of which may be waived in writing by Nu Skin USA, in its sole discretion, prior
to the Closing:
8.3.1 The representations and warranties set forth in Section
6 above shall be true and correct in all material respects at and as of the
Closing Date;
8.3.2 Big Planet, BP Holdings, and Nu Skin Enterprises shall
have performed and complied with all of their respective covenants hereunder in
all material respects through the Closing Date;
8.3.3 No action, suit, or proceeding shall be pending or, to
the Knowledge of Nu Skin Enterprises or Big Planet Holdings, threatened before
any court or quasi-judicial or administrative agency of any federal, state,
local, or foreign jurisdiction or before any arbitrator wherein an unfavorable
injunction, judgment, order, decree, ruling, or charge would (i) prevent
consummation of any of the transactions contemplated by this Agreement, or (ii)
cause any of the transactions contemplated by this Agreement to be rescinded
following consummation (and no such injunction, judgment, order, decree, ruling,
or charge shall be in effect);
8.3.4 The Board of Directors and stockholder of BP Holdings
shall have approved the transactions contemplated in this Agreement;
8.3.5 All applicable waiting periods (and any extensions
thereof) under the Hart-Scott-Rodino Act shall have expired or otherwise been
terminated; and
8.3.6 All actions to be taken by BP Holdings and Nu Skin
Enterprises in connection with the consummation of the transactions as
contemplated hereby and all certificates, instruments, and other documents
required to effect the transactions contemplated hereby will be reasonably
satisfactory in form and substance to Nu Skin USA.
8.4 Conditions to Obligations of King, Doman, and Ricks. The
obligations of King, Doman, and Ricks to consummate the transactions to be
performed by them in connection with the Reorganization
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are subject to satisfaction of the following conditions, any or all of which may
be waived by King, Doman, and Ricks, individually or collectively and in their
sole discretion, by executing a writing so stating at or prior the Closing:
8.4.1 The representations and warranties set forth in Section
6 above shall be true and correct in all material respects at and as of the
Closing Date;
8.4.2 Big Planet, BP Holdings, and Nu Skin Enterprises shall
have performed and complied with all of their respective covenants hereunder in
all material respects through the Closing Date;
8.4.3 No action, suit or proceeding shall be pending or
threatened before any court or quasi-judicial or administrative agency of any
federal, state, local, or foreign jurisdiction or before any arbitrator wherein
an unfavorable injunction, judgment, order, decree, ruling, or charge would (i)
prevent consummation of the Reorganization, or (ii) cause the Reorganization to
be rescinded following consummation (and no such injunction, judgment, order,
decree, ruling, or charge shall be in effect);
8.4.4 The Board of Directors and stockholder of BP Holdings
shall have approved the Reorganization;
8.4.5 The Reorganization shall have been consummated; and
8.4.6 All actions to be taken by BP Holdings and Nu Skin
Enterprises in connection with the consummation of the transactions as
contemplated hereby and all certificates, opinions, instruments and other
documents required to effect the transactions contemplated hereby will be
reasonably satisfactory in form and substance to King, Doman, and Ricks.
SECTION 9
TERMINATION
9. TERMINATION OF AGREEMENT. Certain of the Parties may terminate this Agreement
as provided below:
9.1 The Parties hereto may terminate this Agreement by mutual written
consent at any time prior to the Closing;
9.2 BP Holdings or Nu Skin Enterprises may terminate this Agreement by
giving written notice to Big Planet on or before the sixtieth (60th) day
following the date of this Agreement if either BP Holdings or Nu Skin
Enterprises is not satisfied with the results of its continuing business, legal,
and accounting due diligence regarding Big Planet;
9.3 Either BP Holdings or Nu Skin Enterprises may terminate this
Agreement by giving written notice to Big Planet at any time prior to the
Closing (i) in the event Big Planet or Nu Skin USA, or King, Doman, or Ricks has
breached any representation, warranty, or covenant contained in this Agreement
in any material respect; provided, however, that Nu Skin Enterprises or BP
Holdings has notified the breaching Party of the breach, and the breach has
continued without cure for a period of thirty (30) days
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after the notice of breach; or (ii) if the Closing shall not have occurred on or
before August 15, 1999, by reason of the failure of any condition precedent
under Section 8.1 above (unless the failure results primarily from BP Holdings
or Nu Skin Enterprises itself breaching any representation, warranty, or
covenant contained in this Agreement); and
9.4 Big Planet may terminate this Agreement by giving written notice to
BP Holdings or Nu Skin Enterprises at any time prior to the Closing (i) in the
event either BP Holdings or Nu Skin Enterprises has breached any material
representation, warranty, or covenant contained in this Agreement in any
material respect; provided, however, that Big Planet has notified Nu Skin
Enterprises and Big Planet of the breach, and the breach has continued without
cure for a period of thirty (30) days after the notice of breach; or (ii) if the
Closing shall not have occurred on or before August 15, 1999, by reason of the
failure of any condition precedent under Section 8 above (unless the failure
results primarily from Big Planet itself breaching any representation, warranty,
or covenant contained in this Agreement).
9.5 King, Doman, or Ricks may terminate their respective obligations
under this Agreement by giving written notice to Big Planet, BP Holdings, and Nu
Skin Enterprises at any time prior to the Closing (i) in the event either BP
Holdings or Nu Skin Enterprises has breached any material representation,
warranty, or covenant contained in this Agreement in any material respect;
provided, however, that King, Doman, or Ricks have notified Big Planet, BP
Holdings, and Nu Skin Enterprises of the breach, and the breach has continued
without cure for a period of thirty (30) days after the notice of breach; or
(ii) if the Closing shall not have occurred on or before August 15, 1999, by
reason of the failure of any condition precedent under Section 8 above (unless
the failure results primarily from King, Doman, or Ricks breaching any
representation, warranty, or covenant contained in this Agreement.
9.6 If this Agreement is terminated pursuant to this Section 9, all
rights and obligations of the Parties hereunder shall terminate without any
Liability of any Party to any other Party (except for any Liability of any Party
then in breach).
SECTION 10
ADDITIONAL REPRESENTATIONS, WARRANTIES AND AGREEMENTS;
COVENANTS AFTER CLOSING
10. ADDITIONAL AGREEMENTS; COVENANTS AFTER CLOSING.
10.1 Arbitration. Except for actions for equitable relief such as
injunctions and specific performance or as otherwise provided in this Agreement,
any dispute or claim arising under or relating to this Agreement shall be
resolved by final and binding arbitration, before a panel of three (3)
arbitrators, which arbitration proceeding shall be conducted exclusively in Salt
Lake City, Utah (unless otherwise agreed by the Parties in writing), under the
Commercial Arbitration Rules of the American Arbitration Association, and
judgment on the award rendered may be entered in any court having jurisdiction.
Any Party may initiate an arbitration proceeding under this Section 10.1.
10.2 Representations and Warranties of Nu Skin USA. Nu Skin USA
represents and warrants to each of BP Holdings and Nu Skin Enterprises that the
statements contained in this Section 10.2 are correct and complete as of the
date of this Agreement and will be true and correct as of the Closing Date
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(as though made then and as though the Closing Date were substituted for the
date of this Agreement throughout this Section 10.2), as follows:
10.2.1 Organization and Qualification of Nu Skin USA. Nu Skin
USA is a corporation duly organized, validly existing, and in good standing
under the laws of the State of Delaware and is qualified in each state or
jurisdiction in which the nature of its business or assets requires it to be so
qualified.
10.2.2. Authorization of Transaction. Nu Skin USA has full
power and authority (including full corporate power and authority) to execute
and deliver this Agreement and to perform its obligations hereunder. Without
limiting the generality of the foregoing, the Board of Directors and the
requisite number of stockholders of Nu Skin USA has duly authorized the
execution, delivery, and performance of this Agreement by Nu Skin USA. This
Agreement constitutes the valid and legally binding obligation of Nu Skin USA,
enforceable in accordance with its terms and conditions.
10.2.3 Non-contravention. Neither the execution and the
delivery of this Agreement, nor the consummation of the transactions
contemplated hereby (including the Reorganization and the Merger), will (i)
violate any constitution, statute, regulation, rule, injunction, judgment,
order, decree, ruling, charge, or other restriction of any government,
governmental agency, or court to which Nu Skin USA is subject or any provision
of the Certificate of Incorporation or bylaws of Nu Skin USA; or (ii) conflict
with, result in a breach of, constitute a default under, result in the
acceleration of, create in any party the right to accelerate, terminate, modify,
or cancel, or require any notice under any agreement, contract, lease, license,
instrument, or other arrangement to which Nu Skin USA is a party or by which it
is bound or to which any of its assets is subject (or result in the imposition
of any Security Interest upon any of its assets); or (iii) conflict with or
violate or cause the termination or suspension of any license, permit,
authority, certificate, or approval issued by any governmental agency or
authority and held by Nu Skin USA. Nu Skin USA does not need to give any notice
to, make any filing with, or obtain any authorization, consent, or approval of
any government or governmental agency or authority in order for the Parties to
consummate the transactions contemplated by this Agreement (including the
Reorganization and the Merger).
10.2.4 Brokers' Fees. Nu Skin USA has no Liability or
obligation to pay any fees or commissions to any broker, finder, or agent with
respect to the transactions contemplated by this Agreement for which BP Holdings
or Nu Skin Enterprises could become liable or obligated.
10.2.5 Company Representations. The representations and
warranties of Big Planet made in Section 5 of this Agreement (the "Company
Representations") which are qualified as to materiality are true and correct and
the Company Representations which are not so qualified are true and correct in
all material respects, in each case, as of the date of this Agreement and as of
the Closing Date as though newly made at and as of that time.
10.2.6 Securities Filings. Nu Skin USA hereby acknowledges
that Nu Skin Enterprises has delivered to it a copy of (i) the Nu Skin
Enterprises' Annual Report on Form 10-K for the year ended December 31, 1998 and
(ii) Current Reports on Form 8-K dated March 23, 1999, February 4, 1999, and
October 16, 1998 (collectively, the "Securities Filings"). Nu Skin USA, has
received and is in possession of the Securities Filings and has reviewed the
Securities Filings and such other information regarding Nu Skin Enterprises and
its business and business plan as Nu Skin USA deems relevant to make an informed
decision to enter into the transactions contemplated herein. Nu Skin USA
together with its legal, tax and
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financial advisers have investigated Nu Skin Enterprises and its business and
have negotiated the transactions contemplated herein and have independently
determined to enter into such transactions. No representation is being or has
been made by Nu Skin Enterprises or its advisers to Nu Skin USA regarding the
tax or other effects to Nu Skin USA of the transactions contemplated herein.
Notwithstanding the foregoing, Nu Skin USA shall be entitled to rely on the
representations and warranties made by BP Holdings and Nu Skin Enterprises as
set forth in Section 6 above and nothing herein shall limit or diminish Nu Skin
USA's right to rely on such representations and warranties.
10.2.7 Litigation. There is no action, suit, claim,
investigation or proceeding (or, to its Knowledge, any basis for any person to
assert any claim likely to result in liability or any other adverse
determination) pending against, or to its Knowledge, threatened against or
affecting it or its properties before any court or arbitrator or any
administrative, regulatory or governmental body, or any agency or official which
in any manner challenges or seeks to prevent, enjoin, alter or delay the
transactions contemplated hereby. As of the date hereof, neither it nor its
properties is subject to any order, writ, judgment, injunction, decree,
determination or award which would prevent or delay the consummation of the
transactions contemplated hereby.
10.2.8 Title to Big Planet Series A Preferred. Nu Skin USA has
good and marketable title to all of the shares of Big Planet Series A Preferred
and Big Planet Common held of record or beneficially by it, free and clear of
all Security Interests or restrictions on transfer.
10.2.9 Investment Representations. Nu Skin USA hereby
represents and warrants to each of BP Holdings and Nu Skin Enterprises as
follows:
10.2.9.1 Nu Skin USA is capable of evaluating the
merits and risks of the transactions contemplated by this Agreement and has the
capacity to protect its own interests and to bear the economic risk of the
transactions contemplated herein. Nu Skin USA has conducted all of the due
diligence and investigation on BP Holdings and Nu Skin Enterprises and their
respective officers and directors that it deemed necessary or proper in
evaluating whether to enter into this Agreement and the transactions
contemplated hereby. In addition, Nu Skin USA has reviewed the books and records
of BP Holdings and Nu Skin Enterprises and has obtained such information as it
has considered relevant and important in making a decision to enter into this
Agreement and the transactions contemplated herein. Nu Skin USA has also had an
opportunity to ask questions of the officers and directors of BP Holdings and Nu
Skin Enterprises, which questions have been answered to its complete and full
satisfaction. Nu Skin USA relying solely on such investigation in determining
whether to enter into this Agreement and the transactions contemplated hereby.
10.2.9.2 Nu Skin USA is entering into this Agreement
and the transactions contemplated hereby for its own account, not as a nominee
or agent, and not with the view to, or for any resale or redistribution of any
of Nu Skin Enterprise's securities involved in any of the transactions
contemplated herein.
10.2.9.3 Nu Skin USA has received and read the
Securities Filings.
10.2.10 Disclosure. The representations and warranties
contained in Sections 10.2.1 through 10.2.9 above do not contain any untrue
statement of material fact or omit to state any material fact necessary in order
to make the statements and information contained in this Section 10.2 not
misleading.
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10.3 Representations and Warranties of King, Doman, and Ricks. Each of
King, Doman, and Ricks hereby represent and warrant to Big Planet, Nu Skin
Enterprises, and BP Holdings that the statements contained in this Section 10.3
are correct and complete as of the date of this Agreement and will be true and
correct as of the Closing Date (as though made then and as though the Closing
Date were substituted for the date of this Agreement throughout this Section
10.3), as follows:
10.3.1 Authority. He has the legal capacity and all necessary
right, power and authority to execute and deliver this Agreement, to perform his
obligations hereunder and to consummate the transactions contemplated hereby
without any consent, approval, power, authority or participation of or from his
spouse, partner or other Affiliate.
10.3.2 Valid Execution and Delivery. This Agreement has been
duly and validly executed and delivered by him and constitutes his legal, valid
and binding agreement and obligation enforceable against him in accordance with
its terms. He has good and marketable title to the shares of Big Planet Common,
restricted stock awards of Big Planet Common or options to acquire Big Planet
Common owned by him free and clear of any claims, restrictions, liens or
encumbrances.
10.3.3 Non-Contravention. The execution, delivery and
performance by him of this Agreement and the consummation of the transactions
contemplated hereby do not and will not (i) contravene or conflict with or
constitute a violation of any provision of any law, regulation, judgment,
injunction, order or decree binding upon or applicable to him or any of his
properties; (ii) conflict with, or result in the breach or termination of any
provision of or constitute a default (with or without the giving of notice or
the lapse of time or both) under, or give rise to any right of termination,
cancellation, or loss of any benefit to which he is entitled under any provision
of any agreement, contract, license or other instrument binding upon him or any
of his properties, or allow the acceleration of the performance of, any of his
obligations under any indenture, mortgage, deed of trust, lease, license,
contract, instrument or other agreement to which he is a party or by which he or
any of his properties is subject or bound; or (iii) result in the creation or
imposition of any liens, security interests, pledges, mortgages, encumbrances or
claims of third-parties on any of his assets, except in the case of clauses (i),
(ii) and (iii) for any such contraventions, conflicts, violations, breaches,
terminations, defaults, cancellations, losses, accelerations and liens which
would not individually or in the aggregate materially interfere with the
consummation of the transactions contemplated by this Agreement.
10.3.4 Affiliate and Governmental Authorities. The execution,
delivery and performance by him of this Agreement and the consummation of the
transactions contemplated hereby by him require no action by or in respect of,
or filing with, any affiliate, governmental body, agency, official or authority.
10.3.5 Litigation. There is no action, suit, claim,
investigation or proceeding (or, to his Knowledge, any basis for any person to
assert any claim likely to result in liability or any other adverse
determination) pending against, or to his Knowledge, threatened against or
affecting him or his properties before any court or arbitrator or any
administrative, regulatory or governmental body, or any agency or official which
in any manner challenges or seeks to prevent, enjoin, alter or delay the
transactions contemplated hereby. As of the date hereof, neither he nor his
properties is subject to any order, writ, judgment, injunction, decree,
determination or award which would prevent or delay the consummation of the
transactions contemplated hereby.
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10.3.6 Company Representations. The Company Representations
which are qualified as to materiality are true and correct and the Company
Representations which are not so qualified are true and correct in all material
respects, in each case, as of the date of this Agreement and as of the Closing
as though newly made at and as of that time.
10.3.7 King, Doman, and Ricks Disclosure. Each of King, Doman,
and Ricks are capable of evaluating the merits and risks of the transactions
contemplated by this Agreement and have the capacity to protect their own
interests and to bear the economic risk of the transactions contemplated herein.
King, Doman, and Ricks have each conducted all of the due diligence and
investigation on BP Holdings and Nu Skin Enterprises and their respective
officers and directors that they deemed necessary or proper in evaluating
whether to enter into this Agreement and the transactions contemplated hereby.
In addition, each of King, Doman, and Ricks have reviewed the books and records
of BP Holdings and Nu Skin Enterprises and have obtained such information as
they have considered relevant and important in making a decision to enter into
this Agreement and the transactions contemplated herein. King, Doman, and Ricks
have also had an opportunity to ask questions of the officers and directors of
Big Planet regarding the redemptions contemplated by Sections 2.2, 2.3, and 2.4
above, respectively, in connection with the Reorganization, which questions have
been answered to their complete and full satisfaction. King, Doman, and Ricks
are relying solely on such investigation in determining whether to enter into
this Agreement and the transactions contemplated hereby. Furthermore, King,
Doman, and Ricks, with their respective legal, tax, and financial advisers, have
negotiated the transactions contemplated herein and have independently
determined to enter into the Reorganization, as contemplated hereby. King,
Doman, and Ricks alone, or with the assistance of their respective legal, tax,
and financial advisers, are knowledgeable and experienced in financial and
business matters and are capable of making an informed decision to enter into
the transactions contemplated hereby. No representation is being or has been
made by BP Holdings or Nu Skin Enterprises, or any of their advisers, agents, or
representatives, to King, Doman, or Ricks regarding the tax or other effects to
them of the transactions contemplated herein. Notwithstanding the foregoing,
King, Doman, and Ricks shall be entitled to rely on the representations and
warranties made by BP Holdings and Nu Skin Enterprises, as set forth in Section
6 above, and nothing herein shall limit or diminish King's, Doman's, or Ricks'
right to rely on such representations and warranties.
10.3.8 Title to Restricted Stock Awards and Ricks Options.
King and Doman have good and marketable title to the restricted stock awards
described in Sections 2.2 and 2.3 above, and Ricks has good and marketable title
to the Ricks Options, in each case free and clear of all Security Interests or
restrictions on transfer.
10.3.9 Disclosure. The representations and warranties
contained in Sections 10.3.1 through 10.3.8 above do not contain any untrue
statement of material fact or omit to state any material fact necessary in order
to make the statements and information contained in this Section 10.3 not
misleading.
10.4 Covenants of Nu Skin USA, King, Doman, and Ricks. Each of Nu Skin
USA King, Doman, and Ricks hereby agree as follows:
10.4.1 Except as provided for herein, not to (either directly
or indirectly) sell, transfer, pledge, assign, hypothecate or otherwise dispose
of, or enter into any contract, option or other arrangement or understanding
with respect to the sale, transfer, pledge, assignment, hypothecation or other
disposition of their shares of Big Planet Common or Big Planet Series A
Preferred owned by them or which they have the right to acquire or enter into
any discussions or negotiations with any third-parties with respect to any of
the foregoing:
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10.4.2 Except as provided for herein, not to (either directly
or indirectly) grant any proxies with respect to any of the shares of Big Planet
Common or Big Planet Series A Preferred owned by them or which they have the
right to acquire, as the case may be, deposit any such shares into a voting
trust or enter into a voting agreement with respect to any such shares;
10.4.3 Except as provided for herein, not to (either directly
or indirectly) take any action which would make any of their representations or
warranties herein untrue or incorrect in any material respect; and
10.4.4 Deliver to Big Planet in connection with the
Reorganization and the Closing of the Merger as provided herein, the original
stock certificates representing all shares of Big Planet Common or Big Planet
Series A Preferred owned of record or beneficially by them and to be redeemed in
the Reorganization or converted and exchanged in the Merger with original stock
powers executed in blank transferring all redeemed shares to Big Planet and
together with originally executed assignments of any options to acquire shares
of Big Planet Common or Big Planet Series A Preferred.
10.5 Voting Agreement and Grant of Irrevocable Proxy. Each of Nu Skin
USA, King, Doman, and Ricks hereby consents to and approves all of the terms of
this Agreement and the Reorganization and the Merger and the other agreements
delivered pursuant hereto, and agrees to vote all of his or its shares of Big
Planet Common or Big Planet Series A Preferred and any other voting securities
of Big Planet that he or it may own, or have the power to vote (i) in favor of
the approval and adoption of the Merger and the Reorganization at any meeting of
the stockholders of Big Planet; (ii) in any manner consistent with the terms of
the Merger and the Reorganization; and (iii) against any other mergers,
recapitalizations, business combinations, sales of assets, liquidations or
similar transactions involving Big Planet, or any other matters which would be
inconsistent with this Agreement or the other transactions contemplated by the
Merger and the Reorganization. In furtherance of such voting agreement, each of
them hereby revokes any and all previous proxies with respect to any of Big
Planet Common or Big Planet Series A Preferred owned by him or it and hereby
grants to Nu Skin Enterprises an irrevocable proxy and irrevocably appoints Nu
Skin Enterprises or its designees, with full power of substitution, as his or
its attorney and proxy to vote all of the shares of Big Planet Common or Big
Planet Series A Preferred owned by him or it, as the case may be, and any other
voting securities of Big Planet that any of them may own, at any meeting of the
stockholders of Big Planet however called, or in connection with any action by
written consent by the stockholders of Big Planet. Each of them acknowledges and
agrees that such proxy is coupled with an interest, constitutes, among other
things, an inducement for BP Holdings and Nu Skin Enterprises to enter into this
Agreement, is irrevocable and shall not be terminated by operation of law or
otherwise upon the occurrence of any event (other than the termination of this
Agreement) and that no subsequent proxies will be given (and if given will not
be effective). Each of them shall execute such instruments or take such further
actions as may be necessary to cause the shares of Big Planet Common or Big
Planet Series A Preferred owned by him or it, as the case may be, and any other
voting securities of Big Planet which he or it may own, to be voted as directed
by Nu Skin Enterprises pursuant to such proxy. Any such proxy shall terminate
upon the termination of this Agreement in accordance with its terms.
10.6 Non-Competition. Each of Nu Skin USA, King, Doman, and Ricks agree
that Big Planet's (and its successor's) successful operation depends, to a great
extent, on special knowledge and expertise possessed by each of them in the
business of marketing and selling computer, Internet, telecommunications, and
other products and services through electronic commerce or network or
multi-level marketing. Consequently, as further consideration of the
transactions contemplated herein and Big Planet's agreement to purchase the King
Redemption Shares, the Doman Redemption Shares, and the Ricks Redemption
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Shares, each of Nu Skin USA, King, Doman, and Ricks for a period of one (1) year
following the Closing, agrees not to engage, directly or indirectly, personally
or as an employee, agent, consultant, partner, manager, member, officer,
director, shareholder or otherwise, in any business activities (i) involving the
providing of computer, Internet, or telecommunications services or products
through network or multi-level marketing, or (ii) any other business that is
competitive with the network marketing business then conducted by Big Planet or
its successors, nor shall they entice, induce or encourage any of Big Planet's
officers or directors, other employees, consultants or independent contractors
to engage in any activity that, were it done by King, Doman, or Ricks, would
violate any provision of this Section 10.6; provided, that their ownership of
one percent (1%) or less of the outstanding stock of any corporation listed on
the New York or American Stock Exchange or included in the National Association
of Securities Dealers Automated Quotation System shall not be considered to be a
violation of this Section 10.6. This Section 10.6 shall apply only with respect
to any state, foreign country or geographic area or region in which Big Planet
or its successors does business during the term of the covenants contained in
this Section 10.6. Each of Nu Skin USA, King, Doman, and Ricks expressly agrees
and acknowledges that (w) this covenant not to compete is reasonable as to time
and geographic scope and area and does not place any unreasonable burden on
them, (x) the general public will not be harmed as a result of the enforcement
of this covenant not to compete, (y) each of them has requested or has had the
opportunity to request that his personal legal counsel review this covenant not
to compete, and (z) each of them understands and hereby agrees to each and every
term and condition of this covenant not to compete.
10.7 Non-Solicitation of Employees. In consideration of the covenants
and agreements of Big Planet and Nu Skin Enterprises contained herein, and as a
further inducement to cause Big Planet and Nu Skin Enterprises to enter into
this Agreement, each of Nu Skin USA, King, Doman, and Ricks agrees that for a
period of one (1) year after the Closing of the Merger he or it shall not,
directly or indirectly, for his or its own account or the account of any other
person or entity with which he or it shall become associated in any capacity or
in which he or it shall have any ownership interest, (a) solicit for employment
or employ any person who, at any time during the preceding twelve (12) months,
is or was employed as a director level or above employee by Big Planet or any of
its successors, regardless of whether such employment is direct or through an
entity with which such person is employed or associated, or otherwise
intentionally interfere with the relationship of Big Planet or any of its
successors with any person who or which is at the time employed by Big Planet or
any of its successors, or (b) induce any director level or above employee of Big
Planet or any of its successors to engage in any activity that such employee is
prohibited from engaging in under any agreement between such employee and Big
Planet or any of its successors or to terminate their employment with Big Planet
or any of its successors. The foregoing shall not prohibit any person or entity
with which King or Doman may be affiliated from hiring an employee or former
employee of Big Planet or any of its successors, provided that such hiring
results exclusively and directly from such employee's affirmative response to a
general advertisement effort (such as an ad in a newspaper) by such person or
entity (with no encouragement or recommendation, directly or indirectly, by
either King or Doman of such person to respond to such advertisement effort or
apply for any job opening), and, provided further, that neither King nor Doman
shall have any personal contact or communication, directly or indirectly, with
any such employee regarding any such job opening prior to his or her being hired
by such person or entity.
10.8 Indemnification. As an inducement for Nu Skin Enterprises to enter
into this Agreement, each of Nu Skin USA, King, Doman, and Ricks (collectively,
the "Indemnifying Parties") shall:
10.8.1 Indemnify, defend and hold harmless Nu Skin
Enterprises, Big Planet (and its successor), and each of their respective
Affiliates (other than Nu Skin USA), including BP Holdings, who
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are Parties to this Agreement and each of their respective officers, directors,
and agents (each an "Indemnified Party") from and against any and all losses,
damages, claims, liabilities, actions, causes of action, costs, expenses
(including attorney's fees) investigations, proceedings, demands, obligations,
equitable remedies, or judgments (collectively, "Losses") arising out of or
relating to (i) any breach of any of the representations and warranties of Big
Planet, Nu Skin USA, King, Doman, or Ricks contained in this Agreement, (ii) any
breach of any covenant or agreement of Nu Skin USA, King, Doman, or Ricks
contained in this Agreement, (iii) any brokerage fees, commissions, or finders'
fees payable on the basis of any action taken by Big Planet or any of its
Affiliates (other than Nu Skin Enterprises or BP Holdings), (iv) any Liability
for Taxes of Big Planet relating to any periods beginning prior to the Closing
Date and ending prior to or on the Closing Date or arising out of or incurred as
a result of the transactions contemplated by this Agreement and any Liability of
Big Planet under Section 5.12 above (and any Liability to Nu Skin Enterprises
and Big Planet Holdings for matters related to this clause (iv) shall exist
independent of Liability under clause (i) of this Section 10.8.1), (v) any
downward adjustment to the Merger Consideration as provided for herein
(provided, however, that any such downward adjustment shall not be subject to
the basket or cap set forth in the Indemnification Limitation Agreement, as
amended by the First Amendment to Indemnification Limitation Agreement), (vi)
any Liabilities not reflected on the balance sheet of Big Planet dated March 31,
1999 arising from or relating to the actions or inactions of Big Planet prior to
the Closing Date, (vii) any costs, expenses, or Losses in excess of $450,000
(the "Year 2000 Basket") incurred by Nu Skin Enterprises or BP Holdings or any
of their respective Affiliates (a) to make any of the products or internal
systems of Big Planet Year 2000 Compliant (including, but not limited to, all
internal costs and expenses incurred, whether or not budgeted, and all
third-party out-of-pocket costs and expenses incurred; provided, however, that
with respect to any internal costs and expenses incurred for salaries and
associated expenses of employees who are not engaged full-time in making such
products or internal systems Year 2000 Compliant, such costs and expenses will
be reasonably allocated in accordance with the amount of time actually devoted
to such efforts) or (b) as a result of any of the products or internal systems
of Big Planet not being Year 2000 Compliant, (viii) any judgment or any costs or
expenses, including attorneys' fees (both before, during, and after trial)
incurred by Nu Skin Enterprises or BP Holdings in connection with the lawsuit
captioned Netscape Communications Corporation v. Big Planet, Inc., et al.,
pending in the United States District Court, Northern District of California
(San Jose Division), Case No. C-99-20144 (JW) (PVT)(ARB), and (ix) any and all
Losses suffered or incurred by an Indemnified Party by reason of or in
connection with any claim or cause of action or Legal Action of any third party
to the extent arising out of any action, inaction, event, condition, Liability,
or obligation of any of the Indemnifying Parties occurring or existing prior to
the Closing Date.
10.8.2 An Indemnified Party shall give the Indemnifying
Parties notice of any matter that an Indemnified Party has determined has given
or could give rise to a right of indemnification under this Agreement, within
sixty (60) days of such determination, stating the amount of the Loss, if known,
and method of computation thereof, and containing a reference to the provisions
of this Agreement in respect of which such right of indemnification is claimed
or arises; provided, however, that the failure to provide such notice shall not
release the Indemnifying Parties from any of their obligations under this
Section 10 except to the extent the Indemnifying Parties are materially
prejudiced by such failure and shall not relieve the Indemnifying Parties from
any other obligation or Liability that they may have to any Indemnified Party
otherwise than under this Section 10. The obligations and liabilities of the
Indemnifying Parties under this Section 10 with respect to Losses arising from
claims of any third-party which are subject to the indemnification provided for
in this Section 10 ("Third-Party Claims") shall be governed by and contingent
upon the following additional terms and conditions: if an Indemnified Party
shall receive notice of any Third-Party Claim, the Indemnified Party shall give
the Indemnifying Parties notice of such Third-
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Party Claim within thirty (30) days of the receipt by the Indemnified Party of
such notice; provided, however, that the failure to provide such notice shall
not release the Indemnifying Parties from any of their obligations under this
Section 10 except to the extent the Indemnifying Parties are materially
prejudiced by such failure and shall not relieve the Indemnifying Parties from
any other obligation or Liability that they may have to any Indemnified Party
otherwise than under this Section 10. If the Indemnifying Parties acknowledge in
writing their obligation to indemnify the Indemnified Party hereunder against
any Losses that may result from such Third-Party Claim, then the Indemnifying
Parties shall be entitled to assume and control the defense of such Third-Party
Claim at their expense and through counsel of their choice if they give notice
of their intention to do so to the Indemnified Party within five (5) days of the
receipt of such notice from the Indemnified Party; provided, however, that if
there exists or is reasonably likely to exist a conflict of interest that would
make it inappropriate in the judgment of the Indemnified Party, in its sole and
absolute discretion, for the same counsel to represent both the Indemnified
Party and the Indemnifying Parties then the Indemnified Party shall be entitled
to retain its own counsel, in each jurisdiction for which the Indemnified Party
determines counsel is required, at the expense of the Indemnifying Parties. In
the event the Indemnifying Parties exercise the right to undertake any such
defense against any such Third-Party Claim as provided above, the Indemnified
Party shall cooperate with the Indemnifying Parties in such defense and make
available to the Indemnifying Parties, at the Indemnifying Parties' expense, all
witnesses, pertinent records, materials and information in the Indemnified
Party's possession or under the Indemnified Party's control relating thereto as
is reasonably required by the Indemnifying Parties. Similarly, in the event the
Indemnified Party is, directly or indirectly, conducting the defense against any
such Third-Party Claim, the Indemnifying Parties shall cooperate with the
Indemnified Party in such defense and make available to the Indemnified Party,
at the Indemnifying Parties' expense, all such witnesses, records, materials and
information in the Indemnifying Parties' possession or under the Indemnifying
Parties' control relating thereto as is reasonably required by the Indemnified
Party. No such Third-Party Claim may be settled by the Indemnifying Parties
without the prior written consent of the Indemnified Party.
10.8.3 The respective liability of the Indemnifying Parties
under this Section 10.8 shall be limited and restricted as provided by the
Indemnification Limitation Agreement, as amended by the First Amendment to
Indemnification Limitation Agreement; provided, however, that any claims brought
by an Indemnified Party against any of the Indemnifying Parties for a breach of
any of the representations and warranties contained in Sections 10.2.2, 10.2.8,
10.3.1, or 10.3.8 above or based upon fraud shall not be subject to the
restrictions and limitations set forth in Indemnification Limitation Agreement,
as amended by the First Amendment to Indemnification Limitation Agreement;
provided further, however, that (a) claims for indemnification under clause
(vii) of Section 10.8.1 above shall not be subject to the $250,000 basket
provided for in the Indemnification Limitation Agreement, as amended by the
First Amendment to Indemnification Limitation Agreement, but rather shall be
subject to the Year 2000 Basket (but shall nevertheless be subject to the
$17,500,000 cap set forth in Section 1.1 of the Indemnification Limitation
Agreement) , and (b) claims for indemnification under clause (viii) of Section
10.8.1 above shall not be subject to the $250,000 basket provided for in the
Indemnification Limitation Agreement, as amended by the First Amendment to
Indemnification Limitation Agreement, but rather shall be subject to the
Netscape Litigation Basket (as that term is defined in the First Amendment to
Indemnification Limitation Agreement) (but shall nevertheless be subject to the
$17,500,000 cap set forth in Section 1.1 of the Indemnification Limitation
Agreement).
10.9 Survival of Representations and Warranties. All of the
representations and warranties of the Parties contained in this Agreement shall
survive the Closing (even if the damaged Party knew or had reason to know of any
misrepresentation or breach of warranty or covenant at the time of the Closing)
and shall continue in full force and effect until the second anniversary of the
Closing Date.
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10.10 Equity and Other Incentives. In consideration of the covenants
and agreements of King, Doman, and Ricks contained herein, and as a further
inducement to cause King, Doman, and Ricks to enter into this Agreement, Nu Skin
Enterprises agrees at the Closing to comply with the requirements of Exhibit "G"
attached hereto.
10.11 Repayment of Debt. As set forth in Section 2.2.1 above, at the
Closing King agrees to pay to Big Planet and Nu Skin Enterprises all amounts
borrowed from and due and owing to such entities immediately prior to the
Closing. Doman agrees to pay to Big Planet and Nu Skin Enterprises all amounts
borrowed from and due and owing to such entities immediately prior to the
Closing as set forth in Section 2.2.2 above. In addition, Ricks agrees to pay to
Big Planet and Nu Skin Enterprises all amounts borrowed from and due and owing
to such entities immediately prior to the Closing as set forth in Section 2.2.3
above. A list of all such amounts borrowed from and due and owed by King, Doman,
and Ricks immediately prior to the Closing is set forth in Section 10.11 of the
Disclosure Schedule.
SECTION 11
MISCELLANEOUS
11. MISCELLANEOUS.
11.1 Press Releases and Public Announcements. Nu Skin Enterprises may
issue press releases and make public announcements relating to the subject
matter of this Agreement prior to the Closing without the prior written approval
of the other Parties. No other Party may make any press release or other
announcement concerning this Agreement or any transactions contemplated herein
without the consent of Nu Skin Enterprises.
11.2 No Third-Party Beneficiaries. This Agreement shall not confer any
rights or remedies upon any Person other than the Parties and their respective
successors and permitted assigns.
11.3 Entire Agreement. This Agreement (including the documents referred
to herein) and all Exhibits and Schedules attached hereto constitute the entire
agreement between the Parties and supersedes any prior understandings,
agreements, or representations by or between or among the Parties (whether
written or oral), to the extent they related in any way to the subject matter
hereof.
11.4 Succession and Assignment. This Agreement shall be binding upon
and inure to the benefit of the Parties and their respective successors and
permitted assigns. No Party may assign either this Agreement or any of its
rights, interests, or obligations hereunder without the prior written approval
of the other Parties; provided, however, that BP Holdings and Nu Skin
Enterprises may (i) assign any or all of their rights and interests hereunder to
one or more of their Affiliates and (ii) designate one or more of their
Affiliates to perform its obligations hereunder (in any or all of which cases BP
Holdings nonetheless shall remain responsible for the performance of all of its
obligations hereunder).
11.5 Counterparts. This Agreement may be executed by facsimile and in
counterparts, each of which shall be deemed an original, but all of which, when
taken together, shall constitute one and the same instrument.
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11.6 Headings. The Section and subsection headings contained in this
Agreement are inserted for convenience only and shall not affect in any way the
meaning or interpretation of this Agreement.
11.7 Notices. All notices, requests, demands, claims, and other
communications hereunder shall be in writing. Any notice, request, demand,
claim, or other communication hereunder shall be deemed duly given if (and then
two (2) business days after) it is sent by registered or certified mail, return
receipt requested, postage prepaid, and addressed to the intended recipient as
set forth below:
<TABLE>
<S> <C>
If to Big Planet: with a copy to:
Big Planet, Inc. Holland & Hart, LLP
75 West Center 215 South State Street, Suite 500
Provo, Utah 84601 Salt Lake City, Utah 84111
Attention: Richard W. King Attention: David R. Rudd, Esq.
E-Mail Address: [email protected] Fax No.: (801) 364-9124
E-Mail Address: [email protected]
If to King: If to Doman:
Richard W. King Kevin V. Doman
1932 West 1600 North 1320 East 140 South
Provo, Utah 84604 Lindon, Utah 84042
Fax No.: (801) 375-2614 E-Mail Address: [email protected]
E-Mail Address: [email protected]
If to Ricks: with a copy to:
Nathan W. Ricks Rob Hicks, Esq.
7561 South Quicksilver Drive 1162 North 1050 East
Salt Lake City, Utah 84121 Orem, Utah 84097
Fax No.: (801) 943-7554 Fax No.: (801) 434-7497
E-Mail Address: [email protected] E-Mail Address: [email protected]
If to Nu Skin Enterprises: with a copy to:
c/o Nu Skin Enterprises, Inc. LeBoeuf, Lamb, Greene & MacRae, L.L.P.
75 West Center Street 136 South Main Street, Suite 1000
Provo, Utah 84601 Salt Lake City, Utah 84101-1685
Attention: M. Truman Hunt, Esq. Attention: Nolan S. Taylor, Esq.
Fax No.: (801) 345-3099 Fax No.: (801) 359-8256
E-Mail Address: [email protected] E-Mail Address: [email protected]
</TABLE>
Any Party may send any notice, request, demand, claim, or other communication
hereunder to the intended recipient at the address set forth above using any
other means (including personal delivery, expedited courier, messenger service,
telecopy, ordinary mail, or electronic mail), but no such notice, request,
demand, claim, or other communication shall be deemed to have been duly given
unless and until it actually is received by the intended recipient or receipt is
confirmed electronically or by mail. Any Party
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<PAGE> 50
may change the address to which notices, requests, demands, claims, and other
communications hereunder are to be delivered by giving the other Parties notice
in the manner herein set forth.
11.8 Governing Law. This Agreement shall be governed by and construed
in accordance with the domestic laws of the State of Utah without giving effect
to any choice or conflict of law provision or rule (whether of the State of Utah
or any other jurisdiction) that would cause the application of the laws of any
jurisdiction other than the State of Utah.
11.9 Amendments and Waivers. No amendment of any provision of this
Agreement shall be valid unless the same shall be in writing and signed by each
of the Parties.
11.10 Severability. Any term or provision of this Agreement that is
invalid or unenforceable in any situation in any jurisdiction shall not affect
the validity or enforceability of the remaining terms and provisions hereof or
the validity or enforceability of the offending term or provision in any other
situation or in any other jurisdiction.
11.11 Expenses. Nu Skin USA shall pay all costs and expenses
(including, but not limited to, legal and accounting fees and expenses) incurred
by it or by Big Planet with respect to or in connection with the transactions
contemplated herein, including any fees that may be assessed by any third-party
for its consent hereto or the grant of any assignment required hereby. Big
Planet also agrees that it has not paid any amount to any third-party, and will
not pay any amount to any third-party with respect to any of the costs and
expenses of Big Planet (including any of its legal fees and expenses) in
connection with this Agreement or any of the transactions contemplated hereby.
Notwithstanding the foregoing, Nu Skin Enterprises and Nu Skin USA will share
equally the cost of any filing fee paid in connection with any Hart-Scott-Rodino
Act filing or any fee paid in connection with the transfer or reissuance of any
permit, license, certificate, approval, or authority used in Big Planet's
business.
11.12 Construction. The Parties have participated jointly in the
negotiation and drafting of this Agreement. In the event an ambiguity or
question of intent or interpretation arises, this Agreement shall be construed
as if drafted jointly by the Parties and no presumption or burden of proof shall
arise favoring or disfavoring any Party by virtue of the authorship of any of
the provisions of this Agreement. Any reference to any federal, state, local, or
foreign statute or law shall be deemed also to refer to all rules and
regulations promulgated thereunder, unless the context requires otherwise. The
word "including" shall mean "including without limitation." Nothing in the
Disclosure Schedule shall be deemed adequate to disclose an exception to a
representation or warranty made herein unless the Disclosure Schedule identifies
the exception with particularity and describes the relevant facts in detail.
Without limiting the generality of the foregoing, the mere listing (or inclusion
of a copy) of a document or other item shall not be deemed adequate to disclose
an exception to a representation or warranty made herein (unless the
representation or warranty has to do with the existence of the document or other
item itself). The Parties intend that each representation, warranty, and
covenant contained herein shall have independent significance. If any Party has
breached any representation, warranty, or covenant contained herein in any
respect, the fact that there exists another representation, warranty, or
covenant relating to the same subject matter (regardless of the relative levels
of specificity) that the Party has not breached shall not detract from or
mitigate the fact that the Party is in breach of the first representation,
warranty, or covenant.
11.13 Incorporation of Recitals, Exhibits, and Schedules. The above
Recitals and all Exhibits and Schedules identified in or attached to this
Agreement are deemed to be incorporated herein by reference and made a part
hereof.
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<PAGE> 51
11.14 Specific Performance. Each Party acknowledges and agrees that the
other Parties would be damaged irreparably in the event any of the provisions of
this Agreement are not performed in accordance with their specific terms or
otherwise are breached. Accordingly, each Party agrees that the other Parties
shall be entitled, without the necessity of posting a bond or proving actual
damages, to an injunction or injunctions to prevent breaches of the provisions
of this Agreement and to enforce specifically this Agreement and the terms and
provisions hereof in any action instituted in any court of the United States or
any state thereof having jurisdiction over the Parties and the matter (subject
to the provisions set forth in Section 11.15 below), in addition to any other
remedy to which it may be entitled, at law or in equity.
11.15 Submission to Jurisdiction. Each Party submits to the
jurisdiction of any state or federal court sitting in Salt Lake City or Provo,
Utah, in any action or proceeding arising out of or relating to this Agreement
and agrees that all claims in respect of the action or proceeding may be heard
and determined in any such court. Each Party also agrees not to bring any action
or proceeding arising out of or relating to this Agreement in any other court.
Each Party waives any defense of inconvenient forum to the maintenance of any
action or proceeding so brought and waives any bond, surety, or other security
that might be required of any other Party with respect thereto.
11.16 Recovery of Litigation Costs. If any legal action or other
proceedings is brought for the enforcement of this Agreement, or because of an
alleged dispute, breach, default, or misrepresentation in connection with any of
the provisions of this Agreement, the successful or prevailing Party or Parties
shall be entitled to recover reasonable attorneys' fees and other costs incurred
in that action or proceeding, in addition to any other relief to which it or
they may be entitled.
[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
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IN WITNESS WHEREOF, the Parties have caused this Agreement and Plan of
Merger and Reorganization to be signed as of the day and year first above
written.
NU SKIN ENTERPRISES, INC.
By: /s/ M. TRUMAN HUNT
--------------------------------------
M. Truman Hunt
Its: Vice President and General Counsel
BIG PLANET HOLDINGS, INC.
By: /s/ M. TRUMAN HUNT
--------------------------------------
M. Truman Hunt
Its: Secretary
BIG PLANET, INC.
By: /s/ RICHARD W. KING
--------------------------------------
Richard W. King
Its: President
/s/ RICHARD W. KING
-----------------------------------------
Richard W. King
/s/ KEVIN V. DOMAN
-----------------------------------------
Kevin V. Doman
/s/ NATHAN W. RICKS
-----------------------------------------
Nathan W. Ricks
NU SKIN USA, INC.
By: /s/ STEVEN J. LUND
-----------------------------------------
Its:
------------------------------------
[Schedules and Exhibits Omitted]
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EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-3 of our report dated February 17, 1999,
relating to the financial statements of NuSkin Enterprises, Inc., which appears
in such Prospectus. We also consent to the references to us under the heading
"Experts" in such Prospectus.
PriceWaterhouseCoopers LLP
Salt Lake City, Utah
May 12, 1999
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-3 of our report dated April 1, 1998, which
appears in such Prospectus. We also consent to the reference to us under the
heading "Experts" in such Prospectus.
GRANT THORNTON LLP
Provo, Utah
May 12, 1999
<PAGE> 1
REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
Boards of Directors
Nu Skin Acquired Entities
We have audited the accompanying combined balance sheets of Nu Skin Acquired
Entities (collectively, the Entities) as of December 31, 1997 and 1996, and the
related combined statements of earnings, shareholders' equity (deficit), and
cash flows for the years ended December 31, 1997, 1996 and 1995. These financial
statements are the responsibility of the Entities' management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the combined financial position of Nu Skin Acquired
Entities as of December 31, 1997 and 1996, and the combined results of their
operations and their combined cash flows for the years ended December 31, 1997,
1996 and 1995, in conformity with generally accepted accounting principles.
GRANT THORNTON LLP
Provo, Utah
April 1, 1998
