<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 2, 1999
REGISTRATION NO. 333-78415
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
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. [ ]
------------------------
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.
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<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 JUNE 2, 1999
PROSPECTUS
10,000,000 SHARES
NUSKIN LOGO
CLASS A COMMON STOCK
------------------------
All of the shares of Class A 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 28, 1999, the last sale price of the Class A common stock
as reported on the New York Stock Exchange was $18 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]
[STATEMENT ON THE TOP OF THE PAGE CONTAINING THE FOLLOWING TEXT: "OUR MISSION IS
TO ACT AS A FORCE FOR GOOD THROUGHOUT THE WORLD. WE ACHIEVE THIS GOAL BY SELLING
EXCEPTIONAL PRODUCTS, PROVIDING REWARDING DIRECT SELLING OPPORTUNITIES AND
SUPPORTING DISTRIBUTORS, STOCKHOLDERS, CONSUMERS AND EMPLOYEES IN WAYS THAT
IMPROVE THEIR QUALITY OF LIFE."
MOVING ACROSS THE MIDDLE OF THE PAGE, THE PHARMANEX LOGO ABOVE A PICTURE OF
LABORATORY EQUIPMENT AND PACKAGES OF PHARMANEX PRODUCTS; THE BIG PLANET LOGO
BELOW A PICTURE OF A PERSONAL COMPUTER MONITOR AND KEYBOARD; AND THE NU SKIN
LOGO ABOVE A PICTURE OF VARIOUS NU SKIN PERSONAL CARE PRODUCTS.
THE FOLLOWING WORDS AND/OR PHRASES ARE PRESENTED RANDOMLY ACROSS THE BOTTOM
THIRD OF THE PAGE: "OPPORTUNITY," "TECHNOLOGY," "BEAUTY," "ALL OF THE GOOD, NONE
OF THE BAD," "HEALTH" AND "NATURE."]
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Forward-Looking Statements.................................. 3
Prospectus Summary.......................................... 4
Risk Factors................................................ 9
Use of Proceeds............................................. 21
Price Range of Class A Common Stock......................... 21
Dividend Policy............................................. 21
Capitalization.............................................. 22
Selected Consolidated Financial Data........................ 23
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 25
Business.................................................... 39
Management.................................................. 69
Principal and Selling Stockholders.......................... 72
Description of Capital Stock................................ 80
Certain United States Federal Tax Considerations for
Non-United States Holders................................. 84
Underwriting................................................ 87
Where You Can Find More Information About Nu Skin
Enterprises............................................... 90
Incorporation of Information We File with The SEC........... 91
Legal Matters............................................... 91
Experts..................................................... 92
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.
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<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 our current Asian markets in 1999 and early
2000 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).............. 34,765,751 shares of Class A common stock
53,008,600 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 15, 1999, giving effect to the anticipated conversion of 1,598,305
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 3,348,315 shares issuable upon the exercise of stock
options outstanding as of May 15, 1999 at a weighted average exercise
price of $11.75 per share, and
- 5,955,993 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>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
---------------------------------------------------- -------------------
1994 1995 1996 1997 1998 1998 1999
-------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenue........................ $330,680 $435,855 $761,638 $953,422 $913,494 $227,863 $233,751
Cost of sales.................. 76,012 101,474 171,187 191,218 188,457 45,689 41,017
Cost of sales -- amortization
of inventory step-up......... -- -- -- -- 21,600 -- --
-------- -------- -------- -------- -------- -------- --------
Gross profit................... 254,668 334,381 590,451 762,204 703,437 182,174 192,734
-------- -------- -------- -------- -------- -------- --------
Operating expenses:
Distributor incentives....... 104,994 139,495 282,588 362,195 331,448 83,127 87,649
Selling, general and
administrative............. 86,931 115,950 168,706 201,880 202,150 48,071 58,005
Distributor stock expense.... -- -- 1,990 17,909 -- -- --
In-process research and
development................ -- -- -- -- 13,600 -- --
-------- -------- -------- -------- -------- -------- --------
Total operating expenses....... 191,925 255,445 453,284 581,984 547,198 131,198 145,654
-------- -------- -------- -------- -------- -------- --------
Operating income............... $ 62,743 $ 78,936 $137,167 $180,220 $156,239 $ 50,976 $ 47,080
======== ======== ======== ======== ======== ======== ========
Net income(1).................. $ 44,717 $ 49,947 $ 84,712 $118,493 $103,917 $ 33,675 $ 30,835
======== ======== ======== ======== ======== ======== ========
Net income per share:
Basic........................ $ 0.57 $ 0.63 $ 1.07 $ 1.42 $ 1.22 $ 0.41 $ 0.35
Diluted...................... $ 0.54 $ 0.61 $ 1.02 $ 1.36 $ 1.19 $ 0.39 $ 0.35
Weighted average common shares
outstanding:
Basic........................ 78,660 78,660 79,194 83,331 84,894 82,004 87,706
Diluted...................... 82,459 82,459 83,001 87,312 87,018 86,316 89,175
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
---------------------------------------------------- AS OF MARCH 31,
1994 1995 1996 1997 1998 1999
-------- -------- -------- -------- -------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............ $ 63,550 $ 84,000 $214,823 $174,300 $188,827 $160,016
Working capital...................... 65,446 56,801 143,308 123,220 164,597 120,174
Total assets......................... 119,908 182,154 380,482 405,004 606,433 575,750
Total debt........................... -- -- 71,487 136,200 153,279 136,037
Stockholders' equity................. 63,849 68,363 113,495 94,892 254,642 267,421
</TABLE>
7
<PAGE> 9
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF MARCH 31,
---------------------------------------------------- -------------------
1994 1995 1996 1997 1998 1998 1999
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER OPERATING DATA(2):
Number of active
distributors................. 182,000 260,000 397,000 448,000 470,000 460,000 509,000
Number of executive
distributors................. 6,391 8,173 21,479 22,689 22,781 23,371 23,849
</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 1994, 1995, 1996 and 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, 1995 or for the three-month periods ended March 31, 1998 and 1999.
(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. The
increase in the number of active and executive distributors from December
31, 1998 to March 31, 1999 is primarily due to 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
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<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 $23.0 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 -- Recent Strategic 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 Generals' offices in several
states and the FTC, and based on industry standards required by domestic and
global direct sales associations. Legal and regulatory requirements concerning
network marketing systems, however, involve a high level of subjectivity, are
inherently fact based and are subject to judicial interpretation. For example,
in a 1996 case, Webster v. Omnitrition, the Ninth Circuit Court of Appeals ruled
that the existence of rules patterned after the rules reviewed by the FTC in the
Amway case do not establish as a matter of law that a network marketing system
is legal. The court indicated that a company may need to introduce evidence that
the rules and policies are enforced and actually serve to deter inventory
loading and encourage retail sales in order to demonstrate that a particular
network marketing system is lawful. The Ninth Circuit also raised questions and
issues concerning the effectiveness of the rules at issue in that case and
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 among 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 nutritional supplement CHOLESTIN, which is derived
from the fermentation of red yeast on rice substrate, has received recent
publicity. In response to this publicity, we believe that competitors have
introduced competing red yeast products. 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.
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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 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% 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
$1.0 million per claim and $1.0 million annual aggregate limit and an umbrella
policy with a $40.0 million per claim and a $40.0 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. In addition, 3.7 million
shares of Class A common stock were issued in connection with the Pharmanex
acquisition. These shares will be available for resale on the public market
pursuant to Rule 144 under the Securities Act in October 1999. Upon completion
of this offering, we will have outstanding an aggregate of 87,774,351 shares of
Class A common stock and Class B common stock, including 47,765,824 restricted
shares held by persons who may be deemed affiliates of the Company. The
restricted shares may in the future be sold without registration
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under the Securities Act of 1933 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.
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 $96.0
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
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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 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
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application of laws or regulations from jurisdictions whose laws do not
currently apply to Big Planet's business, could harm its business.
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 TELECOMMUNICATIONS
SERVICES.
The telecommunications industry is highly competitive. Big Planet's
existing and potential competitors in this market segment, including AT&T
Corporation, MCI WorldCom, Inc. 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 permitted by the
Telecommunications Act of 1996 could give rise to significant new competitors to
Big Planet. Big Planet competes primarily on the basis of pricing, transmission
quality, network reliability and customer service and support. Big Planet may be
at a disadvantage because it relies upon the telecommunication facilities
provided by other carriers 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 WorldCom, Inc. 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 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.
19
<PAGE> 21
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.
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.
20
<PAGE> 22
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 28, 1999................ $22.88 $15.50
</TABLE>
On May 28, 1999, the closing price of our Class A common stock as reported
by the New York Stock Exchange was $18. The number of holders of record of our
Class A common stock and Class B common stock as of May 15, 1999 was 925. 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.
21
<PAGE> 23
CAPITALIZATION
The following table sets forth our cash and cash equivalents, our short and
long-term debt and our capitalization as of March 31, 1999. 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 MARCH 31, 1999
--------------------
(IN THOUSANDS)
<S> <C>
Cash and cash equivalents................................... $160,016
========
Current portion of long-term debt........................... $ 52,323
========
Long-term debt.............................................. $ 83,714
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, 33,172,950 shares issued
and outstanding(1)..................................... 33
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................................ 129,386
Accumulated other comprehensive income.................... (44,300)
Retained earnings......................................... 188,899
Deferred compensation(2).................................. (6,652)
--------
Total stockholders' equity.................................. 267,421
--------
Total capitalization........................................ $351,135
========
</TABLE>
- -------------------------
(1) Excludes:
- 67,044 shares of Class A common stock issuable pursuant to contingent
stock awards and 3,368,672 shares issuable upon the exercise of stock
options outstanding as of March 31, 1999 at a weighted average
exercise price of $11.68 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.
22
<PAGE> 24
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
as of March 31, 1998 and 1999 and for the years ended 1994 and 1995 and for the
three months ended March 31, 1998 and 1999 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>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
---------------------------------------------------- -------------------
1994 1995 1996 1997 1998 1998 1999
-------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenue........................ $330,680 $435,855 $761,638 $953,422 $913,494 $227,863 $233,751
Cost of sales.................. 76,012 101,474 171,187 191,218 188,457 45,689 41,017
Cost of sales -- amortization
of inventory step-up......... -- -- -- -- 21,600 -- --
-------- -------- -------- -------- -------- -------- --------
Gross profit................... 254,668 334,381 590,451 762,204 703,437 182,174 192,734
-------- -------- -------- -------- -------- -------- --------
Operating expenses:
Distributor incentives....... 104,994 139,495 282,588 362,195 331,448 83,127 87,649
Selling, general and
administrative............. 86,931 115,950 168,706 201,880 202,150 48,071 58,005
Distributor stock expense.... -- -- 1,990 17,909 -- -- --
In-process research and
development................ -- -- -- -- 13,600 -- --
-------- -------- -------- -------- -------- -------- --------
Total operating expenses....... 191,925 255,445 453,284 581,984 547,198 131,198 145,654
-------- -------- -------- -------- -------- -------- --------
Operating income............... 62,743 78,936 137,167 180,220 156,239 50,976 47,080
Other income (expense), net.... (394) 650 10,771 8,973 13,599 2,185 1,864
-------- -------- -------- -------- -------- -------- --------
Income before provision for
income taxes and minority
interest..................... 62,349 79,586 147,938 189,193 169,838 53,161 48,944
Provision for income taxes..... 10,071 19,141 49,526 55,707 62,840 16,405 18,109
Minority interest(1)........... 7,561 10,498 13,700 14,993 3,081 3,081 --
-------- -------- -------- -------- -------- -------- --------
Net income(2).................. $ 44,717 $ 49,947 $ 84,712 $118,493 $103,917 $ 33,675 $ 30,835
======== ======== ======== ======== ======== ======== ========
Net income per share:
Basic........................ $ 0.57 $ 0.63 $ 1.07 $ 1.42 $ 1.22 $ 0.41 $ 0.35
Diluted...................... $ 0.54 $ 0.61 $ 1.02 $ 1.36 $ 1.19 $ 0.39 $ 0.35
Weighted average common shares
outstanding:
Basic........................ 78,660 78,660 79,194 83,331 84,894 82,004 87,706
Diluted...................... 82,459 82,459 83,001 87,312 87,018 86,316 89,175
</TABLE>
23
<PAGE> 25
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF
---------------------------------------------------- MARCH 31,
1994 1995 1996 1997 1998 1999
-------- -------- -------- -------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents...... $ 63,550 $ 84,000 $214,823 $174,300 $188,827 $160,016
Working capital................ 65,446 56,801 143,308 123,220 164,597 120,174
Total assets................... 119,908 182,154 380,482 405,004 606,433 575,750
Short-term notes payable to
stockholders................. -- -- 71,487 19,457 -- --
Long-term notes payable to
stockholders................. -- -- -- 116,743 -- --
Short-term debt................ -- -- -- -- 14,545 52,323
Long-term debt................. -- -- -- -- 138,734 83,714
Stockholders' equity........... 63,849 68,363 113,495 94,892 254,642 267,421
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF MARCH 31,
---------------------------------------------------- -------------------
1994 1995 1996 1997 1998 1998 1999
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER OPERATING DATA(3):
Number of active
distributors............ 182,000 260,000 397,000 448,000 470,000 460,000 509,000
Number of executive
distributors............ 6,391 8,173 21,479 22,689 22,781 23,371 23,849
</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 1994, 1995, 1996 and 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, 1995 or for the three-month periods ended March 31, 1998 and 1999.
(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. The
increase in the number of active and executive distributors from December
31, 1998 to March 31, 1999 is primarily due to the inclusion of distributors
formerly licensed to our affiliate Nu Skin USA.
24
<PAGE> 26
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>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
-------------------------- ----------------
REGION 1996 1997 1998 1998 1999
------ ------ ------ ------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
North Asia........................ $502.4 $673.6 $665.5 $157.1 $173.1
Southeast Asia.................... 183.7 225.3 159.7 46.1 37.0
Other Markets..................... 75.5 54.5 88.3 24.7 23.7
------ ------ ------ ------ ------
$761.6 $953.4 $913.5 $227.9 $233.8
====== ====== ====== ====== ======
</TABLE>
Revenue generated in North Asia represented 74% of total revenue generated
during the three months ended March 31, 1999. Our operations in Japan generated
98% of the North Asia revenue during the three months ended March 31, 1999.
Revenue from the Southeast Asia operations generated 16% of total revenue
generated during the three months ended March 31, 1999. Our operations in Taiwan
generated 76% of the Southeast Asia revenue during the three months ended March
31, 1999. Revenue generated in Other Markets represented the remaining 10% of
total revenue generated during the three months ended March 31, 1999. The
majority of the Other Markets revenue during the three months ended March 31,
1999 was generated from sales to and license fees from our North American
private affiliates, which we have now 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
25
<PAGE> 27
rates fluctuate, our gross margin will fluctuate. In general, however, costs of
sales move proportionate to revenue.
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.
26
<PAGE> 28
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 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. On May 31, 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>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
-------------------------- ----------------
1996 1997 1998 1998 1999
------ ------ ------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Revenue................................... $761.6 $953.4 $913.5 $227.9 $233.8
Cost of sales............................. 171.2 191.2 188.5 45.7 41.0
Cost of sales -- amortization of inventory
step-up................................. -- -- 21.6 -- --
------ ------ ------ ------ ------
Gross profit.............................. 590.4 762.2 703.4 182.2 192.8
------ ------ ------ ------ ------
Operating expenses:
Distributor incentives.................. 282.6 362.2 331.4 83.1 87.7
Selling, general and administrative..... 168.7 201.9 202.2 48.1 58.0
Distributor stock expense............... 2.0 17.9 -- -- --
In-process research and development..... -- -- 13.6 -- --
------ ------ ------ ------ ------
Total operating expenses............. 453.3 582.0 547.2 131.2 145.7
------ ------ ------ ------ ------
Operating income.......................... 137.1 180.2 156.2 51.0 47.1
Other income (expense), net............... 10.8 9.0 13.6 2.2 1.8
------ ------ ------ ------ ------
Income before provision for income taxes
and minority interest................... 147.9 189.2 169.8 53.2 48.9
Provision for income taxes................ 49.5 55.7 62.8 16.4 18.1
Minority interest......................... 13.7 15.0 3.1 3.1 --
------ ------ ------ ------ ------
Net income................................ $ 84.7 $118.5 $103.9 $ 33.7 $ 30.8
====== ====== ====== ====== ======
Unaudited supplemental data(1):
Income before pro forma provision for
income taxes and minority interest... $147.9 $189.2 $169.8 $ 53.2
Pro forma provision for income taxes.... 54.7 71.9 66.0 19.6
Pro forma minority interest............. 8.6 9.3 1.9 1.9
------ ------ ------ ------
Pro forma net income.................... $ 84.6 $108.0 $101.9 $ 31.7
====== ====== ====== ======
</TABLE>
27
<PAGE> 29
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
-------------------------- ----------------
1996 1997 1998 1998 1999
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Revenue................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales............................. 22.5 20.1 20.6 20.1 17.6
Cost of sales -- amortization of inventory
step-up................................. -- -- 2.4 -- --
------ ------ ------ ------ ------
Gross profit.............................. 77.5 79.9 77.0 79.9 82.4
------ ------ ------ ------ ------
Operating expenses:
Distributor incentives.................. 37.1 38.0 36.3 36.4 37.5
Selling, general and administrative..... 22.1 21.2 22.1 21.1 24.8
Distributor stock expense............... .3 1.9 -- -- --
In-process research and development..... -- -- 1.5 -- --
------ ------ ------ ------ ------
Total operating expenses............. 59.5 61.1 59.9 57.5 62.3
------ ------ ------ ------ ------
Operating income.......................... 18.0 18.8 17.1 22.4 20.1
Other income (expense), net............... 1.4 .9 1.5 1.0 .8
------ ------ ------ ------ ------
Income before provision for income taxes
and minority interest................... 19.4 19.7 18.6 23.4 20.9
Provision for income taxes................ 6.5 5.8 6.9 7.2 7.7
Minority interest......................... 1.8 1.5 .3 1.4 --
------ ------ ------ ------ ------
Net income................................ 11.1% 12.4% 11.4% 14.8% 13.2%
====== ====== ====== ====== ======
Unaudited supplemental data(1):
Income before pro forma provision for
income taxes and minority interest... 19.4% 19.7% 18.6% 23.4%
Pro forma provision for income taxes.... 7.2 7.5 7.2 8.6
Pro forma minority interest............. 1.1 .9 .2 .9
------ ------ ------ ------
Pro forma net income.................... 11.1% 11.3% 11.2% 13.9%
====== ====== ====== ======
</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 and for the three-month
period ended March 31, 1998.
THE THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THE THREE MONTHS ENDED MARCH
31, 1998
REVENUE increased 2.6% to $233.8 million from $227.9 million for the
three-month period ended March 31, 1999 compared with the same period in 1998.
The increase in revenue resulted primarily from the favorable impact of
strengthening foreign currencies relative to the U.S. dollar during the first
quarter of 1999 compared to the same period in 1998.
Revenue in North Asia, which consists of Japan and South Korea, increased
10.1% to $173.0 million for the three-month period ended March 31, 1999, from
$157.1 million for the same period in 1998. This increase was primarily due to
the revenue increase in Japan of 9.7% for the three-month period ended March 31,
1999 compared with the same period in 1998. This increase in revenue in Japan
resulted from the strengthening of the Japanese yen relative to the U.S. dollar
during the three-month period ended March 31, 1999 compared to the same period
in 1998. Revenue in Japan for the three-month period ended March 31, 1999 in
Japanese yen remained constant compared to the same period in 1998 due primarily
to the continued economic recession in Japan. Revenue in South Korea during the
three-month period ended March 31, 1999 increased 36.7% compared to the same
period in 1998 as a result of both a strengthening of the South Korean won and a
22.9% increase in revenue on a local currency basis.
28
<PAGE> 30
Revenue in Southeast Asia, which consists of Taiwan, Thailand, Hong Kong,
the Philippines, Australia and New Zealand, totaled $37.0 million for the
three-month period ended March 31, 1999, a decrease of 19.7% from revenue of
$46.1 million for the same period in 1998. This decrease in revenue resulted
primarily from a decline of 18.9% in revenue in Taiwan. Our operations in Taiwan
have continued to suffer the impact of increased competition, and the PRC's
temporary ban on direct selling, where many Taiwanese distributors had hoped to
expand their businesses. In addition, our operations in Thailand and the
Philippines have continued to be impacted negatively by the region's economic
recession.
Revenue in our other markets, which include the United Kingdom, Germany,
Italy, the Netherlands, France, Belgium, Spain, Portugal, Ireland, Austria,
Poland, Denmark, Sweden, Brazil, the United States and sales to and license fees
from our remaining private affiliates, decreased 4.0% to $23.7 million for the
three-month period ended March 31, 1999 from $24.7 million for the same period
in 1998. This modest decrease was primarily due to increased revenue generated
by our North American private affiliates during the first quarter of 1998 as a
result of a successful global convention held during the first quarter of 1998
which was not repeated during the first quarter of 1999.
GROSS PROFIT as a percentage of revenue was 82.4% for the three-month
period ended March 31, 1999 compared to 79.9% for the same period in 1998. The
increase in the gross profit as a percentage of revenue for the three-month
period ended March 31, 1999 resulted from the strengthening of the Japanese yen
and other Asian currencies relative to the U.S. dollar, higher margin sales to
distributors in the United States following the termination of our license
agreement with Nu Skin USA, local manufacturing efforts and reduced duty rates.
We purchase a significant majority of goods in U.S. dollars and recognize
revenue in local currency and are consequently subjected to exchange rate risks
in our gross margins.
DISTRIBUTOR INCENTIVES as a percentage of revenue increased to 37.5% for
the three-month period ended March 31, 1999 from 36.4% for the same period in
1998. The primary reason for this increase in the first quarter of 1999 was that
following the termination of the license agreement with Nu Skin USA, we began
selling products directly to distributors in the United States and paying the
requisite commissions related to those sales.
SELLING, GENERAL AND ADMINISTRATIVE expenses as a percentage of revenue
increased to 24.8% for the three-month period ended March 31, 1999 from 21.1%
for the same period in 1998. In dollar terms, selling, general and
administrative expenses increased to $58.0 million for the three-month period
ended March 31, 1999 from $48.1 million for the same period in 1998. This
increase as a percentage of revenue and in dollar terms was due to stronger
foreign currencies in the first quarter of 1999 which resulted in higher
expenses in foreign markets, additional overhead expenses relating to the
operations in the United States and an additional $3.5 million in amortization
of intangible assets and inventory step-up resulting from our acquisitions of Nu
Skin International and Pharmanex.
OPERATING INCOME decreased 7.6% to $47.1 million for the three-month period
ended March 31, 1999 from $51.0 million for the same period in 1998. Operating
margin decreased to 20.1% for the three-month period ended March 31, 1999 from
22.4% for the same period in 1998. The operating income and margin decreases
resulted primarily from the increases in distributor incentives and selling,
general and administrative expenses and was partially offset by the gross margin
improvement during the first quarter of 1999.
OTHER INCOME was $1.8 million for the three-month period ended March 31,
1999 and $2.2 million for the same period in 1998. We recognized hedging gains
from forward contracts and intercompany loans in both the first quarters of 1999
and 1998. The hedging gains and interest income on our cash balances in the
first quarter of 1999 were partially offset by the interest expense relating to
our outstanding debt.
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PROVISION FOR INCOME TAXES increased 10.4% to $18.1 million for the
three-month period ended March 31, 1999 from $16.4 million for the same period
in 1998 due to an increase in the effective tax rate from 30.9% during the first
quarter of 1998 to 37.0% for the first quarter of 1999 and is partially offset
by higher income during the first quarter of 1998. This 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 the first quarter
of 1999.
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 $2.9 million or 8.6% to $30.8 million for the
three-month period ended March 31, 1999 from $33.7 million for the same period
in 1998 due to the increased distributor incentives, selling, general and
administrative expenses and income taxes. Net income as a percentage of revenue
decreased to 13.2% for the three-month period ended March 31, 1999 from 14.8%
for the same period in 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 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 had
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,
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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 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
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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 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
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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 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.
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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 operations in 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 three months ended March 31, 1999, we
generated $10.9 million from operations compared to using $2.3 million during
the three months ended March 31, 1998. This increase in cash generated from
operations primarily related to reduced purchases of inventory during the first
quarter of 1999 compared to the same period in 1998. 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 March 31, 1999, working capital was $120.2 million compared to $164.6
million as of December 31, 1998. This decrease is primarily due to the increase
at March 31, 1999 in the current portion of long-term debt. Cash and cash
equivalents at March 31, 1999 and December 31, 1998 were $160.0 million and
$188.8 million, respectively.
Capital expenditures, primarily for equipment, computer systems and
software, office furniture and leasehold improvements, were $3.4 million for the
three months ended March 31, 1999, and $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 $35.0
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 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 March 31, 1999. 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.
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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 and payments totaling $14.5 million were made during the first
quarter of 1999 relating to the $180.0 million credit facility. As of March 31,
1999, the balance relating to the $180.0 million credit facility totaled $136.0
million of which approximately $52.3 million is due in 2000 and approximately
$83.7 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 plus an
applicable margin 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 the applicable Tokyo Inter-Bank Offer Rate plus an applicable
margin. 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. We are currently 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, 2000 with a possible extension
upon approval of the lender. There were no outstanding balances under this
credit facility at December 31, 1998 and March 31, 1999.
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 March 31, 1999, we had repurchased 997,954 shares for an aggregate
price of approximately $12.2 million. In addition, in March 1999, the board of
directors separately authorized and Nu Skin Enterprises completed the purchase
of approximately 700,000 shares of our Class A common stock from Nu Skin USA and
certain stockholders for approximately $10.0 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.
In March 1999, Nu Skin International terminated its distribution license
and various other license agreements with Nu Skin USA and paid Nu Skin USA a
$10.0 million termination fee. We also, through a newly formed wholly-owned
subsidiary, acquired selected assets of Nu Skin USA and assumed approximately
$8.0 million of Nu Skin USA liabilities in March 1999.
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 $25.1
million at December 31, 1998 and March 31, 1999, respectively. In addition, we
had related party receivables of $22.3 million and $23.1 million, respectively,
at those dates. Related party balances outstanding in excess of 60 days bear
interest at a rate of 2% above the U.S. prime rate. As of March 31, 1999, no
material related party payables or receivables had been outstanding for more
than 60 days.
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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. Through the remainder of 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 50 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 the
remainder of 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 the remainder of 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
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.
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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.
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 1999
---------------------------------------- ---------------------------------------- -------
1ST 2ND 3RD 4TH 1ST 2ND 3RD 4TH 1ST
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
------- ------- ------- ------- ------- ------- ------- ------- -------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <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 $233.8
Gross profit.................... 179.0 195.3 194.4 193.5 182.2 151.5 164.9 204.9 192.8
Operating income................ 38.3 46.7 45.7 49.6 51.0 29.6 37.4 38.3 47.1
Net income...................... 25.7 30.0 30.7 32.0 33.7 22.0 25.5 22.8 30.8
Net income per share:
Basic....................... 0.31 0.36 0.37 0.39 0.41 0.26 0.30 0.26 0.35
Diluted..................... 0.29 0.34 0.35 0.37 0.39 0.25 0.30 0.26 0.35
</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,
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<PAGE> 39
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 March 31, 1999, 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 March 31, 1999 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 1999
------- -------
4TH 1ST
QUARTER QUARTER
------- -------
<S> <C> <C>
Japan(1)............. 119.3 116.8
Taiwan............... 32.6 32.6
Hong Kong............ 7.8 7.8
South Korea.......... 1,278.9 1,197.6
Thailand............. 37.1 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.
38
<PAGE> 40
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. On May 31, 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
39
<PAGE> 41
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
40
<PAGE> 42
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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<PAGE> 43
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 our current Asian markets in 1999 and early 2000,
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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<PAGE> 44
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 identification numbers assigned to their distributors 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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<PAGE> 45
REVENUE BY PRODUCT CATEGORY
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED THREE MONTHS
DECEMBER 31, DECEMBER 31, DECEMBER 31, ENDED
1996 1997 1998 MARCH 31, 1999
---------------- ---------------- ---------------- ----------------
OPERATING DIVISIONS $ % $ % $ % $ %
------------------- -------- ----- -------- ----- -------- ----- -------- -----
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Nu Skin Personal
Care............... $554,974 72.9% $604,078 63.4% $531,915 58.2% $130,344 55.8%
Pharmanex/IDN(1)
(Nutritional
Supplements)....... 160,288 21.0 297,300 31.2 334,257 36.6 71,068 30.4
Sales Aids........... 46,376 6.1 52,044 5.4 47,322 5.2 32,339 13.8
-------- ----- -------- ----- -------- ----- -------- -----
Total........... $761,638 100.0% $953,422 100.0% $913,494 100.0% $233,751 100.0%
======== ===== ======== ===== ======== ===== ======== =====
</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
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<PAGE> 46
- Enhance our online ordering process to further attract new customers and
help retain existing customers by providing a simplified order process.
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:
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.
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<PAGE> 47
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 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
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flagship product, LIFEPAK, helps position us to penetrate further the growing
nutritional supplement 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 chemistry research center located at Shanghai Medical University in the
PRC, and
- A clinical and pharmacology 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 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 Japan, Taiwan, Hong Kong and South Korea in 1999
and early 2000, 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
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- Increase efficiency by continuing to vertically integrate the
development, sourcing and manufacturing of its products to improve
margins and reduce costs.
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, mineral and phytonutrient 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 botanical 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 botanical
supplements are not standardized and vary enormously in content, which
correspondingly affects the effectiveness of such products. Pharmanex uses its
"6S Quality Process," which refers to "selection," "sourcing," "structure,"
"standardization," "safety" and "substantiation," to standardize its five
natural nutritional supplements and many of its other botanical supplements to
provide a consistent level of the desired dosage of the active compounds of such
botanical supplements. Pharmanex is in the process of implementing its 6S
Quality Process with respect to its other botanical 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 the fermentation of a
strain of red yeast on rice substrate. A recent double-blind, placebo-controlled
study conducted at the UCLA Center for Human Nutrition and published in the
February 1999 issue of the American Journal of Clinical
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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 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 reduce fatigue. CORDYMAX CS-4 is
offered as a stand-alone product and in a combination product with St. John's
Wort, a positive mood enhancer, distributed under the trademark BIO ST. JOHN'S.
In addition, we offer BIOGINKGO 27/7, a ginkgo biloba extract that promotes
blood circulation to the brain, arms and legs, and TEGREEN 97, a supplement that
contains a concentrated level of decaffeinated green tea polyphenols that offer
high antioxidant levels.
Pharmanex Broadline Botanicals. Pharmanex also currently offers a line of
ten standardized botanical supplements including PANAX 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, 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
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research and development capabilities will solidify us as one of the industry
leaders in developing and distributing high-grade, clinically substantiated
nutritional supplements.
We believe that we are one of the few nutritional supplement companies in
the United States that has a research and development program modeled after the
pharmaceutical industry. We believe that this research and development
capability 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.
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 profile of natural compounds and
active ingredients.
- Standardization. Standardizing the product to at least one biologically
relevant active ingredient.
- Safety. Assessing safety from available research, and, where necessary,
performing additional tests such as microbial tests and chemical analyses
for toxins and heavy metals.
- Substantiation. Reviewing documented pre-clinical and clinical trials,
and, where necessary and appropriate, initiating studies and clinical
trials sponsored by 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 three established universities and research
institutions in the PRC: Shanghai Medical University, Beijing Medical University
and the Institute of Materia Medica. The staffs of these institutions include
scientists with expertise in natural product chemistry, biochemistry,
pharmacology and clinical studies. 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 and the University of Kansas.
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 among 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
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event we were unable to source any products or ingredients from this supplier or
our other current suppliers other 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, the PRC, where we
currently produce the extracts for our BIOGINKGO 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 BIOGINKGO 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 BIOGINKGO 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
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$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 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 through new
affiliate relationships, and
- Strengthen its product offerings by enhancing current services and
expanding into new product categories, possibly including entertainment
and home security.
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 also offers
CD-ROM-Based educational products.
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 and other key vendors,
to provide convenient and reliable technology products and services. Big
Planet's distributors receive commissions based on Big Planet's gross margin on
each sale of products or services, including monthly recurring service charges,
or based on the commission received by Big Planet with respect to products sold
directly by third-party vendors to Big Planet's customers. 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 backbone network of approximately 2,000 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 online
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 approximately
2,000 "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, the three
months ended March 31, 1998 and 1999 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 and approximately $169.6 million for the three months
ended March 31, 1999. 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.
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Although industry sources estimate that approximately 2.5 million people are
involved in direct selling in Japan, we believe that as many as six million
people may be involved in 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 1999 and early 2000.
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 and $28.0 million for the three months ended March 31, 1999. 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 had hoped to
expand their businesses. The contraction was more significant in U.S. 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
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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.
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
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- As compared to other distribution methods, distributors can give
customers higher levels of service and attention by, among other things,
following up on sales to ensure proper product usage and customer
satisfaction and to encourage repeat purchases.
Direct selling as a distribution channel has been enhanced in the past
decade by advancements in communications, including telecommunications and
Internet connectivity, and the proliferation of the use of videos and 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
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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. 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
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- 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 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 DECEMBER 31, AS OF
---------------------------------------- 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
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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 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% 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 markets are new, rapidly evolving and intensely competitive. We
expect competition to intensify further in these markets in the future. Barriers
to entry for e-commerce are relatively low as current and new competitors can
launch new Web sites at relatively low costs. Big Planet's online shopping
services also compete with other channels of distribution, including catalogue
sales and traditional retail sales. Big Planet currently or potentially competes
with other companies for its Internet 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 telecommunications companies such as AT&T Corporation, MCI
WorldCom, Inc. and Sprint Corporation, and
- Numerous e-commerce Web sites such as Amazon.com and Buy.com.
Many of Big Planet's competitors have much greater name recognition and
financial resources than 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 permitted by 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 relies upon
telecommunications facilities provided by other carriers 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"
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 provides 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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<PAGE> 68
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 alleged 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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<PAGE> 69
LEGAL PROCEEDINGS
In February 1999, a federal district judge in Utah ruled that CHOLESTIN,
one of our Pharmanex natural nutritional supplements, could be legally sold as a
nutritional supplement under the Dietary Supplement Health and Education Act of
1994. The FDA had previously challenged the status of CHOLESTIN as a dietary
supplement, claiming it was a drug and could not be marketed without FDA
approval. The FDA has since appealed to the Tenth Circuit Court of Appeals
seeking to overturn the district court's decision. If the decision is
overturned, 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 of 1933 and the
Securities Exchange Act of 1934, common law fraud and violations of the Utah
Consumer Sales Practices Act. The plaintiffs in the case also seek injunctive
relief as well as disgorgement of profits and restitution to the plaintiffs of
earnings, profits and other compensation. In June 1997, the court denied 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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<PAGE> 70
MANAGEMENT
Our directors, executive officers and presidents of Nu Skin Enterprises'
key subsidiaries as of May 20, 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.............. 48 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
Andrew D. Lipman........... 47 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> 71
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> 72
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.
Andrew D. Lipman has served as a director of our company since May 1999.
Since 1998, Mr. Lipman has been a partner and head of the Telecommunications
Group of Swidler Berlin Shereff Friedman, LLP, a Washington D.C. law firm. He is
currently Vice Chairman of the firm. From 1987-1997, Mr. Lipman also served as
Senior Vice President for Legal and Regulatory Affairs for MFS Communications
Co., a competitive telecommunications provider. He received a B.A. degree from
the University of Rochester and a J.D. degree from Stanford University. Mr.
Lipman's law firm has in the past provided legal services to Big Planet.
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> 73
PRINCIPAL AND SELLING STOCKHOLDERS+
The following table sets forth, as of May 15, 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 1,364,970 3,981,779 11.5 16,129,232 30.4 29.3
Nancy L. Roney(4)........................ 3,035,234 836,056 2,199,178 6.3 8,351,534 15.8 15.2
Nedra D. Roney(5)........................ 3,993,461 1,231,813 2,761,648 7.9 10,280,046 19.4 18.7
Sandra N. Tillotson(6)................... 2,621,912 1,070,382 1,551,530 4.5 6,892,557 13.0 12.5
Craig S. Tillotson(7).................... 1,373,006 860,834 512,172 1.5 3,874,585 7.3 7.0
R. Craig Bryson(8)....................... 1,280,006 774,453 505,554 1.5 3,818,741 7.2 6.9
Kathleen D. Bryson(9).................... 694,503 429,789 264,714 * 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 1,057,827 19,641,413
Sandra N. Tillotson......................................... 10,863,445 1,210,382 9,653,063
Steven J. Lund.............................................. 3,472,252 407,000 3,065,252
Brooke B. Roney............................................. 3,482,166 555,015 2,927,151
Keith R. Halls.............................................. 379,600 193,082 186,518
</TABLE>
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<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>
Kalleen Lund(11)......................... 557,710 359,000 198,710 * 1,315,446 2.5 2.4
Brooke B. Roney(12)...................... 910,077 713,672 196,405 * 2,642,664 5.0 4.7
Denice R. Roney(13)...................... 534,367 436,164 98,203 * 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 * -- -- --
Andrew D. Lipman(18)..................... -- -- -- -- -- -- --
Renn M. Patch(19)........................ 13,400 -- 13,400 * -- -- --
Takashi Bamba(20)........................ 12,750 -- 12,750 * -- -- --
John Chou(21)............................ 12,965 -- 12,965 * -- -- --
Safeco Corporation(22)................... 1,966,700 -- 1,966,700 * -- -- --
Kirk V. Roney(23)........................ 857,420 713,672 143,748 * 1,925,322 3.6 3.4
Melanie K. Roney(24)..................... 509,610 427,736 81,874 * 962,661 1.8 1.7
Rick A. Roney(25)........................ 356,836 356,836 -- -- 246,427 * *
Burke F. Roney(26)....................... 349,287 349,287 -- -- -- * *
Park R. Roney(27)........................ 356,836 356,836 -- -- 185,773 * *
The MAR Trust(28)........................ 92,678 92,678 -- -- 37,322 * *
The WFA Trust(29)........................ 18,004 18,004 -- -- -- -- --
The All R's Trust(30).................... 32,296 32,296 -- -- -- -- --
The Blake M. and Nancy L.
Roney Foundation(31)................... 307,143 307,143 -- -- -- -- --
The Rose Foundation(32).................. 25,000 25,000 -- -- 275,000 * *
The Nedra Roney Fixed Charitable
Trust(33).............................. 125,000 45,000 80,000 * 125,000 * *
NR Rhino Company, L.C.(34)............... 5,000 5,000 -- -- 1,495,000 2.8 2.6
The SNT Trust(35)........................ 30,000 30,000 -- -- 122,893 * *
The DVNM Trust(36)....................... 10,000 10,000 -- -- 160,258 * *
The Sandra N. Tillotson Foundation(37)... 25,000 15,000 10,000 * 20,000 * *
The Sandra N. Tillotson Fixed
Charitable Trust(38)................... 250,000 200,000 50,000 * -- -- --
SNT Rhino Company, L.C.(39).............. 100,000 100,000 -- -- 900,000 1.7 1.6
The Steven J. and Kalleen Lund
Foundation(40)......................... 163,000 143,000 20,000 * 55,571 * *
The Steven J. and Kalleen Lund Fixed
Charitable Trust(41)................... 75,000 75,000 -- -- -- -- --
S & K Rhino Company, L.C.(42)............ 50,000 50,000 -- -- 100,000 * *
The Brooke Brennan and Denice Renee Roney
Foundation(43)......................... 158,657 158,657 -- -- -- -- --
The Kirk and Melanie Roney Fixed
Charitable Trust(44)................... 75,000 75,000 -- -- -- -- --
The Kirk V. and Melanie K. Roney
Foundation(45)......................... 66,800 66,800 -- -- -- -- --
The K and A Halls Trust(46).............. 78,082 78,082 -- -- 10,000 * *
The Keith Ray and Anna Lisa Massaro Halls
Foundation(47)......................... 19,375 16,053 3,322 * 9,357 * *
The Keith and Anna Lisa Halls Fixed
Charitable Trust(48)................... 12,500 12,500 -- -- -- -- --
K & A Rhino Company, L.C.(49)............ 15,000 15,000 -- -- -- -- --
The Halls Family Trust(50)............... 7,626 7,626 -- -- -- -- --
The CST Trust(51)........................ 15,000 15,000 -- -- 55,826 * *
The Craig S. Tillotson Foundation(52).... 30,000 20,000 10,000 * 31,600 * *
The Craig S. Tillotson Fixed Charitable
Trust(53).............................. 90,000 90,000 -- -- 22,500 * *
</TABLE>
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<PAGE> 75
<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>
CST Rhino Company, L.C.(54).............. 75,000 75,000 -- -- 425,000 * *
The C & K Trust(55)...................... 51,381 51,381 -- -- 51,381 * *
The Bryson Foundation(56)................ 34,000 10,125 23,875 * 33,500 * *
The Bryson Fixed Charitable Trust(57).... 75,000 75,000 -- -- -- -- --
CKB Rhino Company, L.C.(58).............. 25,000 25,000 -- -- 25,000 * *
Bear Stearns Account 2000(59)............ 20,806 7,518 13,288 * -- -- *
Bank Julius Baer & Co Ltd................ 99,875 10,073 89,802 * -- -- *
Lana Baumeister(59)...................... 2,659 1,002 1,657 * -- -- *
Bay City Capital LLC(59)................. 6,817 2,572 4,245 * -- -- *
Bay City Capital Fund I LP(59)........... 8,603 3,246 5,357 * -- -- *
The Burdick Family Revocable Trust(59)... 415,108 156,604 258,504 * -- -- *
Canpartners Investments IV LLC........... 22,941 8,657 14,284 * -- -- *
Caramia LLC.............................. 19,194 7,244 11,950 * -- -- *
Centrum Bank AG(59)...................... 59,540 22,470 37,070 * -- -- *
Michael Chang(59)........................ 151,365 57,125 94,240 * -- -- *
Chase Venture Capital Associates......... 327,226 123,496 203,730 * -- -- *
Cynthia J. Cohn Revocable Trust.......... 891 335 556 * -- -- *
Florence Cohn(59)........................ 5,319 2,006 3,313 * -- -- *
Gerald L. Cohn Revocable Trust UAD
12/17/84(59)........................... 48,500 18,302 30,198 * -- -- *
Hannah S. and Samuel A. Cohn Memorial
Foundation Trust....................... 1,188 448 740 * -- -- *
Lawrence B. Cohn(59)..................... 594 223 371 * -- -- *
Diekman Revocable Trust DTD 6/95 John D.
Diekman and Susan P. Diekman
Trustees(59)........................... 11,398 4,301 7,097 * -- -- *
Carl Djerassi Trustee of the Carl
Djerassi Charitable Remainder Unitrust
DTD 3/27/91(59)........................ 74,813 28,234 46,579 * -- -- *
Experta-Bil.............................. 13,643 5,147 8,496 * -- -- *
F L P Trust No. 10(59)................... 101,071 38,143 62,928 * -- -- *
F L P Trust No. 11(59)................... 101,071 38,143 62,928 * -- -- *
John C. Fieschko And Theresa L. Fieschko
Living Trust DTD 11/24/92(59).......... 10,968 4,138 6,830 * -- -- *
John Griffin(59)......................... 25,069 4,728 20,341 * -- -- *
John Hursh(59)........................... 1,624 612 1,012 * -- -- *
Lawrence Klein(59)....................... 1,324 499 825 * -- -- *
John W. Lewis............................ 154,662 22,161 132,501 * -- -- *
Stephen J. Lewis......................... 168,764 33,241 135,523 * -- -- *
Lombard Odier & CIE(59).................. 144,489 54,529 89,960 * -- -- *
M & D Precision Science Group Limited
Partnership I(59)...................... 265,271 100,114 165,157 * -- -- *
John E. McHugh & Brenda McHugh Tenancy by
the Entireties(59)..................... 3,253 1,226 1,594 * -- -- *
Diane W. Middlebrook, Trustee of the
Diane W. Middlebrook Charitable
Remainder Unitrust DTD 03/04/97(59).... 4,244 1,601 2,643 * -- -- *
Regan Miles(59).......................... 6,651 1,182 5,469 * -- -- *
Morrow Family Revocable Trust(59)........ 12,221 4,611 7,610 * -- -- *
Edward A. Newman(59)..................... 2,659 1,002 1,657 * -- -- *
Patrick Noonan(59)....................... 940 354 586 * -- -- *
PG Partners(59).......................... 62,674 22,645 40,029 * -- -- *
Post Balanced Fund LP(59)................ 43,395 15,680 27,715 * -- -- *
Post High Yield Fund LP(59).............. 2,972 1,075 1,897 * -- -- *
Post Holdings LLC(59).................... 56,398 20,377 36,021 * -- -- *
</TABLE>
74
<PAGE> 76
<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>
Post Total Return Fund LP(59)............ 4,161 1,504 2,657 * -- -- *
Martin I. Ravin(59)...................... 594 223 371 * -- -- *
Martin I. Ravin Irrevocable Trust(59).... 297 111 186 * -- -- *
Reichmuth & Co(59)....................... 1,779 671 1,108 * -- -- *
Craig Ritchey............................ 37,921 7,387 30,534 * -- -- *
Shelley Cohn Schmidt Revocable Trust..... 594 223 371 * -- -- *
Triaxis Trust AG(59)..................... 62,673 23,652 39,021 * -- -- *
Peter Whitman (59)....................... 882 295 587 * -- -- *
Whitney Equity Partners LP............... 327,226 123,496 203,730 * -- -- *
Blake Winchell, Trustee of The Blake
Winchell Revocable Trust............... 10,968 4,138 6,830 * -- -- *
Woodfield Financial Consortium(59)....... 35,073 13,236 21,837 * -- -- *
</TABLE>
<TABLE>
All directors and officers as a group
(18 persons)(60). 10,536,169 3,853,958 6,682,211 19.2 31,138,816 58.7 56.3
<S> <C> <C> <C> <C> <C> <C> <C>
</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. Shares to be sold in the offering exclude
shares which may be sold by the selling stockholders to the underwriters
upon exercise of the overallotment option. If the underwriters exercise
their over-allotment option, the underwriters will purchase 20% of the
overallotment shares from the former stockholders of Generation Health
Holdings, Inc. and 80% of the over-allotment shares from the other selling
stockholders. Of the 80% to be purchased from the other selling
stockholders, the first 143,000 shares of such 80% will be purchased from
Steven J. Lund and his wife, Kalleen Lund, and the remainder, if any, will
be purchased from Blake B. Roney, Nancy L. Roney, Nedra D. Roney, Sandra N.
Tillotson, Craig S. Tillotson, R. Craig Bryson, Steven J. Lund, Kalleen
Lund, Brooke B. Roney, Denice R. Roney, Keith R. Halls, Anna Lisa Massaro
Halls, Kirk V. Roney, Melanie K. Roney, Rick A. Roney and Park R. Roney, in
accordance with agreed-upon percentages set forth in the stockholders
agreement among such 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 as set forth in footnote (31) 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 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. Blake M. Roney is the husband of Nancy L. Roney and the brother of
Nedra D. Roney, Brooke B. Roney, Kirk V. Roney, Rick A. Roney, Burke F.
Roney and Park R. Roney.
(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 as set forth
in footnote (31) below; and 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 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;
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<PAGE> 77
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 (32). Nedra D. Roney is the
sister of Blake M. Roney, Brooke B. Roney, Kirk V. Roney, Rick A. Roney,
Burke F. Roney and Park R. Roney.
(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 co-trustee and
with respect to which she shares voting and investment power as set forth
below in footnote (38); 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 (37); 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 (54). Ms. Tillotson is the sister of
Kathleen D. Bryson.
(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 (52); 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 he shares voting and
investment power as set forth below in footnote (53); 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 power as set forth below in
footnote (39); 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-trustee and with
respect to which he shares voting and investment power as set forth below
in footnote (56); 75,000 shares of Class A common stock held indirectly as
co-trustee and with respect to which he shares voting and investment power
as set forth below in footnote (57). Mr. Bryson is the husband of Kathleen
D. Bryson.
(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 as set forth below in footnote (56);
75,000 shares of Class A common stock held indirectly as co-trustee and
with respect to which she shares voting and investment power as set forth
below in footnote (57). Ms. Bryson is the wife of R. Craig Bryson and the
sister of Sandra N. Tillotson.
(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 (55);
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 set forth below in footnote (40); 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 as set forth below
in footnote (41). Mr. Lund is the husband of Kalleen Lund.
(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 as set forth below in footnote (40); 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 as set forth below in footnote
(41). 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
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<PAGE> 78
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 as set forth below in footnote (43). Brooke B. Roney is
the husband of Denice R. Roney and the brother of Blake M. Roney, Nedra D.
Roney, Kirk V. Roney, Rick A. Roney, Burke F. Roney and Park R. Roney.
(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 as set forth
below in footnote (43). 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 (58); 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 as set
forth below in footnote (47); 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 as set forth below in footnote (48).
(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 co-trustee and with respect to which she
shares voting and investment power as set forth below in footnote (47); 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 as set
forth below in footnote (48).
(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
pursuant to presently exercisable non-qualified stock options granted to
each of them.
(18) Does not include 2,500 shares of Class A common stock or 12,500 shares of
Class A common stock which may be acquired by Mr. Lipman pursuant to a
presently exercisable non-qualified stock option granted to him in
connection with his appointment to the board of directors on May 20, 1999.
(19) Includes 6,500 shares of Class A common stock which may be acquired by Mr.
Patch pursuant to presently exercisable non-qualified stock options.
(20) Includes 6,250 shares of Class A common stock which may be acquired by Mr.
Bamba pursuant to presently exercisable non-qualified stock options.
(21) Includes 6,250 shares of Class A common stock which may be acquired by Mr.
Chou pursuant to presently exercisable non-qualified stock options.
(22) 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.
(23) Includes shares beneficially owned or deemed to be owned beneficially by
Kirk V. Roney prior to the offering as follows: 347,810 shares of Class A
common stock and 962,661 shares of Class B common stock held directly;
367,810 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
(24); 75,000 shares of Class A common stock held indirectly as co-trustee
and with respect to which he shares voting and investment power as set
forth below in footnote (44); and 66,800 shares of Class A common stock
held indirectly as co-trustee and with respect to which he shares voting
and investment power as set forth below in footnote (45).
(24) Includes shares beneficially owned or deemed to be owned beneficially by
Melanie K. Roney prior to the offering as follows: 367,810 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 as set forth
below in footnote (44); 66,800 shares of Class A common stock held
indirectly as co-trustee and with respect to which she shares voting and
investment power as set forth below in footnote (45).
(25) Includes shares beneficially owned or deemed to be owned beneficially by
Rick A. Roney prior to the offering as follows: 356,836 shares of Class A
common stock and 158,344 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
77
<PAGE> 79
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.
(26) 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.
(27) 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.
(28) 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.
(29) 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 common stock owned
by such entity.
(30) 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 common stock owned
by such entity.
(31) 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).
(32) 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).
(33) 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.
(34) 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.
(35) 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.
(36) 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.
(37) 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 and Class B common stock owned by such entity as
reported above in footnote (6).
(38) Sandra N. Tillotson is the trustee and L.S. McCullough is the independent
trustee of The Sandra N. Tillotson Fixed Charitable Trust and they 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).
(39) 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).
(40) 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 and Class B common stock owned by such entity as
reported above in footnotes (10) and (11).
(41) Steven J. Lund and Kalleen Lund are co-trustees and L.S. McCullough is the
independent trustee of The Steven J. and Kalleen Lund 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
(10) and (11).
(42) 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.
(43) Brooke B. Roney and Denice R. Roney are co-trustees and L.S. McCullough is
the independent trustee 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).
(44) Kirk V. Roney and Melanie K. Roney are co-trustees and L.S. McCullough is
the independent trustee 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 footnotes (23) and
(24).
(45) Kirk V. and Melanie K. Roney are co-trustees of The Kirk V. and Melanie K.
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
(23) and (24).
(46) 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.
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<PAGE> 80
(47) 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 and Class B common stock owned by such
entity as reported above in footnotes (14) and (15).
(48) Keith R. Halls and Anna Lisa Massaro Halls are co-trustees and L.S.
McCullough is the independent trustee 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).
(49) 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
common stock owned by such entity.
(50) 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 common stock owned by such entity.
(51) Robert L. Stayner is the trustee of The CST Trust and has sole voting and
investment power with respect to shares of Class A and Class B common stock
owned by such entity.
(52) 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 and Class B common stock reported above in footnote
(7).
(53) Craig S. Tillotson is the trustee and Lee M. Brower is the independent
trustee of The Craig S. Tillotson Fixed Charitable Trust and they share
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).
(54) 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.
(55) 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 and Class B common
stock owned by such entity as reported above in footnote (10) above.
(56) R. Craig Bryson and Kathleen D. Bryson are co-trustees The Bryson
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 footnotes (8) and (9).
(57) R. Craig Bryson and Kathleen D. Bryson are co-trustees and Robert L.
Stayner is the independent trustee 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.
(58) 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 and Class
B common stock owned by such entity as reported above in footnote (14).
(59) This selling stockholder has requested that his, her or its shares be
withdrawn from the offering if the gross price to public is less than
$20.00 per share of Class A common stock before deducting underwriters'
discounts and commissions. Shares withdrawn from the offering by any
selling stockholder will be reallocated pro rata first to the former
stockholders of Generation Health Holdings, Inc. who elect to participate
in the offering and second to the other selling stockholders.
(60) Includes 290,575 shares of Class A common stock which may be acquired upon
exercise of presently exercisable options.
79
<PAGE> 81
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 15, 1999, we had 33,167,446 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 15, 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 15, 1999 was 925. 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 $10.0 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 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.
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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" 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
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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 notice under the Securities and
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Exchange Laws of Japan will be made with the director of Kanto local finance
bureau 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 mostly by the selling stockholders and the
rest by us.
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, with certain exceptions, 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.
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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
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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.
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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,
- Quarterly Report on Form 10-Q for the three months ended March 31, 1999,
- 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.
91
<PAGE> 93
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.
92
<PAGE> 94
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,
and at March 31, 1999 (unaudited)......................... F-3
Consolidated Statements of Income for the years ended
December 31, 1996, 1997 and 1998, and the three months
ended March 31, 1998 (unaudited) and 1999 (unaudited)..... F-4
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1996, 1997 and 1998, and the
three months ended March 31, 1999 (unaudited)............. F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1997 and 1998, and the three months
ended March 31, 1998 (unaudited) and 1999 (unaudited)..... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 95
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> 96
NU SKIN ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- MARCH 31,
1997 1998 1999
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents................................ $174,300 $188,827 $ 160,016
Accounts receivable...................................... 11,074 13,777 14,913
Related parties receivable............................... 23,008 22,255 23,070
Inventories, net......................................... 69,491 79,463 72,706
Prepaid expenses and other............................... 38,716 50,475 51,227
-------- -------- ---------
316,589 354,797 321,932
Property and equipment, net................................ 27,146 42,218 41,932
Other assets, net.......................................... 61,269 209,418 211,886
-------- -------- ---------
Total assets............................................... $405,004 $606,433 $ 575,750
======== ======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable......................................... $ 23,259 $ 17,903 $ 16,275
Accrued expenses......................................... 140,615 132,723 108,094
Related parties payable.................................. 10,038 25,029 25,066
Current portion of long-term debt........................ -- 14,545 52,323
Current portion of notes payable to stockholders......... 19,457 -- --
-------- -------- ---------
193,369 190,200 201,758
Long-term debt, less current portion....................... -- 138,734 83,714
Other liabilities.......................................... -- 22,857 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, 33,709,251 and 33,172,950
shares issued and outstanding......................... 12 34 33
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 55
Additional paid-in capital............................... 115,053 146,781 129,386
Accumulated other comprehensive income................... (28,578) (43,604) (44,300)
Retained earnings........................................ 17,788 158,064 188,899
Deferred compensation.................................... (9,455) (6,688) (6,652)
-------- -------- ---------
94,892 254,642 267,421
-------- -------- ---------
Total liabilities and stockholders' equity.......... $405,004 $606,433 $ 575,750
======== ======== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 97
NU SKIN ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------ -------------------
1996 1997 1998 1998 1999
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue................................. $761,638 $953,422 $913,494 $227,863 $233,751
Cost of sales........................... 171,187 191,218 188,457 45,689 41,017
Cost of sales -- amortization of
inventory step-up..................... -- -- 21,600 -- --
-------- -------- -------- -------- --------
Gross profit............................ 590,451 762,204 703,437 182,174 192,734
-------- -------- -------- -------- --------
Operating expenses:
Distributor incentives................ 282,588 362,195 331,448 83,127 87,649
Selling, general and administrative... 168,706 201,880 202,150 48,071 58,005
Distributor stock expense............. 1,990 17,909 -- -- --
In-process research and development
(Note 4)........................... -- -- 13,600 -- --
-------- -------- -------- -------- --------
Total operating expenses................ 453,284 581,984 547,198 131,198 145,654
-------- -------- -------- -------- --------
Operating income........................ 137,167 180,220 156,239 50,976 47,080
Other income (expense), net............. 10,771 8,973 13,599 2,185 1,864
-------- -------- -------- -------- --------
Income before provision for income taxes
and minority interest................. 147,938 189,193 169,838 53,161 48,944
Provision for income taxes (Note 12).... 49,526 55,707 62,840 16,405 18,109
Minority interest....................... 13,700 14,993 3,081 3,081 --
-------- -------- -------- -------- --------
Net income.............................. $ 84,712 $118,493 $103,917 $ 33,675 $ 30,835
======== ======== ======== ======== ========
Net income per share (Note 2):
Basic................................. $ 1.07 $ 1.42 $ 1.22 $ .41 $ .35
Diluted............................... $ 1.02 $ 1.36 $ 1.19 $ .39 $ .35
Weighted average common shares
outstanding:
Basic................................. 79,194 83,331 84,894 82,004 87,706
Diluted............................... 83,001 87,312 87,018 86,316 89,175
Unaudited pro forma data (Note 12):
Income before pro forma provision for
income taxes and minority
interest........................... $147,938 $189,193 $169,838 $ 53,161
Pro forma provision for income
taxes.............................. 54,752 71,856 65,998 19,563
Pro forma minority interest........... 8,630 9,299 1,947 1,947
-------- -------- -------- --------
Pro forma net income.................. $ 84,556 $108,038 $101,893 $ 31,651
======== ======== ======== ========
Pro forma net income per share:
Basic................................. $ 1.07 $ 1.30 $ 1.20 $ .39
Diluted............................... $ 1.02 $ 1.24 $ 1.17 $ .37
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 98
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
Net income (unaudited)..................... -- -- -- -- -- -- 30,835
Foreign currency translation adjustments
(unaudited).............................. -- -- -- -- -- (696) --
Total comprehensive income (unaudited).....
Amortization of deferred compensation
(unaudited).............................. -- -- -- -- -- -- --
Termination of Nu Skin USA license fee
(Note 18) (unaudited).................... -- -- -- -- (6,444) -- --
Repurchase of 781 shares of Class A common
stock (unaudited)........................ -- -- (1) -- (11,765) -- --
Exercise of distributor and employee stock
options (unaudited)...................... -- -- -- -- 814 -- --
------- --- --- ---- -------- -------- --------
Balance at March 31, 1999 (unaudited)...... $ -- $-- $33 $ 55 $129,386 $(44,300) $188,899
======= === === ==== ======== ======== ========
<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
Net income (unaudited)..................... -- 30,835
Foreign currency translation adjustments
(unaudited).............................. -- (696)
--------
Total comprehensive income (unaudited)..... 30,139
Amortization of deferred compensation
(unaudited).............................. 686 686
Termination of Nu Skin USA license fee
(Note 18) (unaudited).................... (650) (7,094)
Repurchase of 781 shares of Class A common
stock (unaudited)........................ -- (11,766)
Exercise of distributor and employee stock
options (unaudited)...................... -- 814
-------- --------
Balance at March 31, 1999 (unaudited)...... $ (6,652) $267,421
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 99
NU SKIN ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------------- -------------------
1996 1997 1998 1998 1999
-------- --------- --------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income...................................... $ 84,712 $ 118,493 $ 103,917 $ 33,675 $ 30,835
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization................. 9,615 8,809 15,768 3,105 7,217
Amortization of deferred compensation......... 2,488 23,247 3,626 1,015 686
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 3,081 --
Changes in operating assets and liabilities:
Accounts receivable......................... (5,939) (614) (900) (6,448) (730)
Related parties receivable.................. (4,097) (2,726) 1,215 (5,651) (815)
Inventories, net............................ (6,060) (10,206) (3,556) (9,709) 8,891
Prepaid expenses and other.................. (10,132) (24,641) (7,248) (6,432) (554)
Other assets................................ (24,814) (23,161) (4,100) (3,075) (399)
Accounts payable............................ (1,682) 3,336 (8,767) 50 (1,628)
Accrued expenses and other liabilities...... 82,844 31,058 (8,973) (23,223) (32,609)
Related parties payable..................... 1,733 (29,986) (10,703) 11,295 37
-------- --------- --------- -------- --------
Net cash provided by (used in) operating
activities.................................. 142,368 108,602 118,560 (2,317) 10,931
-------- --------- --------- -------- --------
Cash flows from investing activities:
Purchase of property and equipment.............. (9,172) (14,389) (18,320) (2,982) (3,417)
Purchase of Pharmanex, net of cash acquired..... -- -- (28,750) -- --
Payments for lease deposits..................... (562) (3,457) (633) (1,502) (1,218)
Receipt of refundable lease deposits............ 98 120 1,650 108 26
-------- --------- --------- -------- --------
Net cash used in investing activities......... (9,636) (17,726) (46,053) (4,376) (4,609)
-------- --------- --------- -------- --------
Cash flows from financing activities:
Payments on long-term debt...................... -- -- (41,634) -- (14,545)
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) -- (11,766)
Exercise of distributor and employee stock
options....................................... -- -- 1,961 -- 814
Payment to stockholders for notes payable (Note
5)............................................ (15,000) (71,487) (180,000) (3,722) --
Termination of Nu Skin USA license fee (Note
18)........................................... -- -- -- -- (10,000)
-------- --------- --------- -------- --------
Net cash provided by (used in) financing
activities.................................. 5,378 (110,859) (48,684) (3,722) (35,497)
-------- --------- --------- -------- --------
Effect of exchange rate changes on cash......... (7,287) (20,540) (9,296) (4,816) 364
-------- --------- --------- -------- --------
Net increase (decrease) in cash and cash
equivalents................................. 130,823 (40,523) 14,527 (15,231) (28,811)
Cash and cash equivalents, beginning of
period........................................ 84,000 214,823 174,300 174,300 188,827
-------- --------- --------- -------- --------
Cash and cash equivalents, end of period........ $214,823 $ 174,300 $ 188,827 $159,069 $160,016
======== ========= ========= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 100
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> 101
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, and $12,000,000 (unaudited) as of March 31, 1999.
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> 102
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> 103
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> 104
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.
Interim results (unaudited)
The accompanying consolidated balance sheet at March 31, 1999, the related
consolidated statements of income and of cash flows for the three months ended
March 31, 1998 and 1999, and the related statement of stockholders' equity for
the three months ended March 31, 1999 are unaudited. In the opinion of
management, these statements have been prepared on the same basis as the audited
financial statements and include all normal recurring adjustments necessary for
the fair statement of the results of interim periods. The data disclosed in
these notes to the consolidated financial statements at such date or for such
periods are also unaudited.
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
F-11
<PAGE> 105
NU SKIN ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
inventory step-up was fully amortized and the Company recorded amortization of
intangible assets totaling $1.6 million and $0.7 million (unaudited) during 1998
and for the three months ended March 31, 1999, respectively.
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 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 and $1.8 million (unaudited) during 1998 and for the three months ended
March 31, 1999, respectively, and the Company recorded amortization of inventory
step up of $1.0 million (unaudited) for the three months ended March 31, 1999.
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.
F-12
<PAGE> 106
NU SKIN ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 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, and $11,213,000 (unaudited) for the three months ended March
31, 1999.
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.
F-13
<PAGE> 107
NU SKIN ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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, and $500,000
(unaudited) for the three months ended March 31, 1999.
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, and $5.3
million (unaudited) for the three months ended March 31, 1999.
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.
F-14
<PAGE> 108
NU SKIN ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. PROPERTY AND EQUIPMENT
Property and equipment are comprised of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- MARCH 31,
1997 1998 1999
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Furniture and fixtures........................ $ 25,587 $ 30,997 $ 30,408
Computers and equipment....................... 36,836 44,267 45,604
Leasehold improvements........................ 8,068 13,874 15,709
Vehicles...................................... 745 1,153 1,175
-------- -------- --------
71,236 90,291 92,896
Less: accumulated depreciation................ (44,090) (48,073) (50,964)
-------- -------- --------
$ 27,146 $ 42,218 $ 41,932
======== ======== ========
</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,
and $3,590,000 (unaudited) for the three months ended March 31, 1999.
7. OTHER ASSETS
Other assets consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- MARCH 31,
1997 1998 1999
------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Goodwill and intangibles....................... $ 7,563 $147,246 $150,746
Deposits for noncancelable operating leases.... 9,127 10,282 11,027
Distribution rights............................ 8,750 8,750 8,752
Deferred taxes................................. 30,399 42,747 43,661
Other.......................................... 7,815 6,023 6,339
------- -------- --------
63,654 215,048 220,525
Less: accumulated amortization................. (2,385) (5,630) (8,639)
------- -------- --------
$61,269 $209,418 $211,886
======= ======== ========
</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, and $2,514,000
(unaudited) for the three months ended March 31, 1999. 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, and $109,000 (unaudited) for the three months ended March 31,
1999.
F-15
<PAGE> 109
NU SKIN ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. ACCRUED EXPENSES
Accrued expenses consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- MARCH 31,
1997 1998 1999
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Income taxes payable.......................... $ 53,079 $ 40,726 $ 17,688
Accrued commission payments to distributors... 36,289 36,431 41,766
Other taxes payable........................... 16,496 11,646 11,715
Other accruals................................ 34,751 43,920 36,925
-------- -------- --------
$140,615 $132,723 $108,094
======== ======== ========
</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 and $136.0 million (unaudited) at March 31, 1999.
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 then outstanding lenders. Interest expense on the credit
facility totaled $4.7 million for the year ended December 31, 1998, and $1.5
million (unaudited) for the three months ended March 31, 1999.
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 and at March 31, 1999 (unaudited), 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 and at March 31, 1999 (unaudited).
F-16
<PAGE> 110
NU SKIN ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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,
and $3,991,000 (unaudited) for the three months ended March 31, 1999.
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 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
F-17
<PAGE> 111
NU SKIN ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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
F-18
<PAGE> 112
NU SKIN ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 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
F-19
<PAGE> 113
NU SKIN ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------ ---------------
1996 1997 1998 1998 1999
------ ------ ------ ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Basic weighted average common shares outstanding.... 79,194 83,331 84,894 82,004 87,706
Effect of dilutive securities:
Stock awards and options.......................... 3,807 3,981 2,124 4,312 1,469
------ ------ ------ ------ ------
Diluted weighted average common shares
outstanding....................................... 83,001 87,312 87,018 86,316 89,175
====== ====== ====== ====== ======
</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.
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. As of March 31, 1999, the
Company had repurchased 997,954 shares for an aggregate price of approximately
$12.2 million (unaudited).
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.
F-20
<PAGE> 114
NU SKIN ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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-21
<PAGE> 115
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-22
<PAGE> 116
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, and approximately $53.5 million (unaudited) at March 31,
1999, 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, and $2.5 million
(unaudited) for the three months ended March 31, 1999. 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. These contracts at March 31, 1999 have maturities through September
1999 (unaudited).
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, and $55.0 million (unaudited) for the three months ended March 31,
1999. 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, and $0.8 million (unaudited) for the three months ended
March 31, 1999.
At December 31, 1998, the intercompany loan from Nu Skin Japan to the
Company totaled approximately $82.0 million and $78.2 million (unaudited) at
March 31, 1999. The Company recorded exchange gains totaling $2.8 million
resulting from this intercompany loan for the year ended December 31, 1998.
There were no exchange gains or losses resulting from this intercompany loan for
the three months ended March 31, 1999 (unaudited). There was no loan at December
31, 1997 from Nu Skin Japan to the Company.
F-23
<PAGE> 117
NU SKIN ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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, and $3,290,000
(unaudited) for the three months ended March 31, 1999. 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, and $38,874,000 (unaudited) for
the three months ended March 31, 1999.
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
F-24
<PAGE> 118
NU SKIN ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------------- ---------------------
1996 1997 1998 1998 1999
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUE
North Asia..................... $ 502,381 $ 673,582 $ 665,523 $ 157,073 $ 173,048
Southeast Asia................. 336,783 412,524 320,606 84,821 67,781
Other Markets.................. 266,368 314,048 294,947 71,987 67,401
Eliminations................... (343,894) (446,732) (367,582) (86,018) (74,479)
--------- --------- --------- --------- ---------
Totals............... $ 761,638 $ 953,422 $ 913,494 $ 227,863 $ 233,751
========= ========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------------- ---------------------
1996 1997 1998 1998 1999
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING INCOME
North Asia..................... $ 88,347 $ 117,302 $ 89,075 $ 33,042 $ 28,120
Southeast Asia................. 52,224 46,195 19,385 6,926 8,732
Other Markets.................. 4,134 19,684 46,994 1,332 4,371
Eliminations................... (7,538) (2,961) 785 9,676 5,857
--------- --------- --------- --------- ---------
Totals............... $ 137,167 $ 180,220 $ 156,239 $ 50,976 $ 47,080
========= ========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- MARCH 31,
1997 1998 1999
-------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
TOTAL ASSETS
North Asia....................................... $104,488 $ 167,867 $ 120,482
Southeast Asia................................... 176,570 110,518 97,776
Other Markets.................................... 211,663 500,299 464,766
Eliminations..................................... (87,717) (172,251) (107,274)
-------- --------- ---------
Totals................................. $405,004 $ 606,433 $ 575,750
======== ========= =========
</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,
and $169,630 (unaudited) for the three months ended March 31, 1999. 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, and $28,007
(unaudited) for the three months ended March 31, 1999. 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, and $63,143 (unaudited) for the three months ended
March 31, 1999.
F-25
<PAGE> 119
NU SKIN ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Long-lived assets
Long-lived assets in Japan were $11,001 and $20,242 as of December 31, 1997
and 1998, respectively, and $21,490 (unaudited) as of March 31, 1999. Long-lived
assets in Taiwan were $3,087 and $2,466 as of December 31, 1997 and 1998,
respectively, and $2,421 (unaudited) as of March 31, 1999. Long-lived assets in
the United States were $55,557 and $213,856 as of December 31, 1997 and 1998,
respectively, and $215,659 (unaudited) as of March 31, 1999.
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 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 anticipates closing the acquisition of Big Planet, Inc. and the
Company's remaining affiliates in Canada, Mexico and Guatemala within 90 days.
On March 8, 1999, NSI terminated its distribution license and various other
license agreements and other intercompany agreements with Nu Skin USA, Inc. and
paid Nu Skin USA, Inc. a $10.0 million (unaudited) termination fee. Also, on
that same date, through a newly formed wholly-owned subsidiary, the Company
acquired selected assets of Nu Skin USA, Inc. and assumed approximately $8.0
million (unaudited) of Nu Skin USA, Inc. liabilities.
The acquisition of the selected assets and assumption of liabilities and
the termination of these agreements relating to Nu Skin USA, Inc. has been
recorded for the consideration paid, except for that portion of Nu Skin USA,
Inc. which is under common control of a group of stockholders, which portion
will be recorded at predecessor basis.
The acquisition of Big Planet, Inc. is expected to be accounted for by the
purchase method of accounting. The acquisition of 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-26
<PAGE> 120
[INSIDE BACK COVER OF PROSPECTUS.]
[Moving clockwise beginning on the top left corner of the page, a picture
of a man and a woman using a laptop computer together; a picture of a research
scientist looking into a microscope surrounded by other laboratory equipment; a
picture of a woman holding a Nu Skin Personal Care product; a picture of a man
and a woman discussing Pharmanex products in the setting of a pharmacy; stylized
picture of the earth and a finger pressing a button; and a picture of various Nu
Skin Personal Care products.]
<PAGE> 121
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
10,000,000 SHARES
LOGO
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> 122
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............................. 150,000*
Accounting Fees and Expenses................................ 100,000*
Legal Fees and Expenses..................................... 220,000*
Blue Sky Fees and Expenses.................................. 5,000*
Transfer Agent's Fees and Expenses.......................... 18,500*
Miscellaneous Expenses...................................... 30,000*
--------
Total..................................................... $643,702+
========
</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> 123
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
10.1 Promissory Note dated April 1, 1999 issued by Big Planet,
Inc. to Nu Skin Enterprises, Inc. in the amount of
$7,500,000
10.2 Stock Pledge Agreement dated April 1, 1999 by and between Nu
Skin USA, Inc. and Nu Skin Enterprises, Inc.
10.3 Form of Amendment No. 2 to Amended and Restated Stockholders
Agreement dated May 12, 1999 by and among Nu Skin
Enterprises, Inc. and certain of its stockholders
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 on September
16, 1996 (Registration No. 333-12073) and incorporated herein by reference.
** To be filed by amendment.
+ Filed previously.
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
II-2
<PAGE> 124
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.
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> 125
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 Amendment No. 1 to
the Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Provo, State of Utah, on June 1, 1999.
NU SKIN ENTERPRISES, INC.
By: /s/ STEVEN J. LUND
---------------------------------------
Steven J. Lund
Its: Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 1 to the Registration Statement on Form S-3 has been signed
below on June 1, 1999 by the following persons in the capacities indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
* Chairman of the Board June 1, 1999
- --------------------------------------------- of Directors
Blake M. Roney
/s/ STEVEN J. LUND President and Chief Executive Officer June 1, 1999
- --------------------------------------------- and Director (Principal Executive
Steven J. Lund Officer)
* Chief Financial Officer (Principal June 1, 1999
- --------------------------------------------- Financial and Accounting Officer)
Corey B. Lindley
* Director June 1, 1999
- ---------------------------------------------
Sandra N. Tillotson
* Director June 1, 1999
- ---------------------------------------------
Brooke B. Roney
* Director June 1, 1999
- ---------------------------------------------
Keith R. Halls
* Director June 1, 1999
- ---------------------------------------------
Max L. Pinegar
* Director June 1, 1999
- ---------------------------------------------
E.J. "Jake" Garn
</TABLE>
II-4
<PAGE> 126
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
* Director June 1, 1999
- ---------------------------------------------
Paula Hawkins
* Director June 1, 1999
- ---------------------------------------------
Daniel W. Campbell
Director
- ---------------------------------------------
Andrew D. Lipman
*By: /s/ STEVEN J. LUND
- ---------------------------------------------
Steven J. Lund
Attorney-in-Fact
</TABLE>
II-5
<PAGE> 127
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...................................................
10.1 Promissory Note dated April 1, 1999 issued by Big Planet,
Inc. to Nu Skin Enterprises, Inc. in the amount of
$7,500,000..................................................
10.2 Stock Pledge Agreement dated April 1, 1999 by and between Nu
skin USA, Inc. and Nu Skin Enterprises, Inc.................
10.3 Form of Amendment No. 2 to Amended and Restated Stockholders
Agreement dated May 12, 1999 by and among Nu Skin
Enterprises, Inc. and certain of its stockholders...........
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 filed on September 16,
1996 (Registration No. 333-12073) and incorporated herein by reference.
** To be filed by amendment.
+ Filed previously.
<PAGE> 1
EXHIBIT 5.1
[LeBoeuf, Lamb, Greene & MacRae, L.L.P. Letterhead]
June 2, 1999
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Registration Statement on Form S-3 (File No. 333-78415)
of Nu Skin Enterprises, Inc.
Dear Ladies and Gentlemen:
We are acting as counsel to Nu Skin Enterprises, Inc., a Delaware
corporation the ("Company"), in connection with the proposed issuance and sale
of 10,000,000 shares of the Company's Class A Common Stock, par value $.001 per
share (the "Class A Common Stock"), pursuant to the Registration Statement filed
with the Securities and Exchange Commission (the "Commission") on May 14, 1999
and amended by Amendment No. 1 filed June 2, 1999 (the "Registration
Statement"). Capitalized terms not otherwise defined herein have the meaning set
forth in the Registration Statement.
We have examined such corporate records, certificates and other documents
as we have considered necessary for the purposes hereof. In such examination, we
have assumed the genuineness of all signatures, the authenticity of all
documents submitted to us as originals, the conformity to the original documents
of all documents submitted to us as copies and the authenticity of the originals
of such copies. As to any facts material to our opinion, we have, when relevant
facts were not independently established, relied upon the aforesaid records,
certificates and documents.
Based on the foregoing, we are of the opinion that upon the issuance and
delivery of the Class A Common Stock and payment therefor in the manner
described in the Registration Statement and in accordance with the terms of the
U.S. Purchase Agreement (the form of which is filed as Exhibit 1.1 to the
Registration Statement) and the Japanese Purchase Agreement, the Class A Common
Stock will be duly authorized, validly issued, fully paid and nonassessable.
Our opinion set forth herein is limited in all cases to matters arising
under the Delaware General Corporation Law. We consent to the use of this
opinion as an Exhibit to the Registration Statement and to the reference to our
firm under the caption "Legal Matters" in the Prospectus that is a part of the
Registration Statement. In giving such consent, we do not thereby concede that
we are within the category of persons whose consent is required under Section 7
of the Securities Act of 1933, as amended, or the rules and regulations of the
Commission thereunder.
Very truly yours,
/s/ LeBoeuf, Lamb, Greene & MacRae, L.L.P.
<PAGE> 1
EXHIBIT 10.1
PROMISSORY NOTE
$7,500,000 April 1, 1999
FOR VALUE RECEIVED, the undersigned, BIG PLANET, INC., a Utah
corporation ("Big Planet"), agrees to pay to the order of NU SKIN ENTERPRISES,
INC., a Delaware corporation, at 75 West Center Street, Provo, Utah 84601, or at
such other place as the holder (the "Holder") of this Note may from time to time
designate in writing, without setoff, in lawful money of the United States of
America, the principal sum of SEVEN MILLION FIVE HUNDRED THOUSAND DOLLARS
($7,500,000), or such portion of said principal sum as may be advanced by the
Holder in its sole discretion as indicated on the attached Schedule A to be
completed by the Holder each time the Holder makes an additional advance under
this Note, together with interest on such principal sum and any other amounts
due under this Note.
1. Interest. Commencing on the date of this Note and continuing until
all principal and interest due under this Note are paid in full, the outstanding
principal balance of this Note shall bear interest at the rate of one percent
over the "Prime Rate." "Prime Rate" means the prime rate or base rate reported
in the Money Rates column or section of The Wall Street Journal as being the
prime rate or base rate on corporate loans at large U.S. money center commercial
banks (whether or not such rate has actually been charged by any such bank). If
The Wall Street Journal ceases publication of the prime rate or the base rate,
"Prime Rate" shall mean the rate of interest from time to time announced by
Zions First National Bank ("Zions"), Salt Lake City, Utah, as its prime rate or
base rate. If Zions discontinues the practice of announcing a prime rate or base
rate, "Prime Rate" shall mean the highest rate charged by Zions on short-term,
unsecured loans to its most creditworthy large corporate borrowers. If The Wall
Street Journal (a) publishes more than one prime rate or base rate, the higher
or highest of such rates shall apply, or (b) publishes a retraction or
correction of such rate, the rate reported in such retraction or correction
shall apply. The "Prime Rate" shall be adjusted on and as of the effective date
of any change in the prime rate or base rate concerned. Interest shall accrue
daily and be calculated on the basis of a three hundred sixty (360) day year and
the actual number of days elapsed in any partial calendar month.
2. Payment. The principal balance of this Note and any accrued and
unpaid interest thereon shall be due and payable on demand. Unless the Holder
shall otherwise elect, each payment made under this Note shall be applied first
to costs and expenses incurred in connection with the enforcement of this Note
and interest due under this Note, and any balance shall be applied to reduce the
principal balance of this Note.
3. Late or Partial Payments. Any payment required under this Note,
under the "Pledge Agreement," as defined in Paragraph 5, or under any other
agreement entered into in connection with this Note that is not made when due,
shall bear interest payable on demand, both before and after judgment, at the
rate of fifteen percent (15.0%) per annum (the "Default Rate"). The acceptance
by the Holder of any payment that is less than the entire amount then due under
this Note shall be on account only and shall not constitute a waiver of the
obligation of the undersigned to pay such entire amount. The failure of the
undersigned to pay the entire amount then due under this Note shall be and
continue to be an event of default under this Note, notwithstanding the
acceptance by the Holder of less than such entire amount on account, and the
Holder shall thereafter, until such entire amount is paid (and notwithstanding
acceptance
-1-
<PAGE> 2
by the Holder thereafter of further sums on account or otherwise), be entitled
to exercise all rights and remedies provided for in this Note on the occurrence
of an event of default under this Note. The acceptance by the Holder of any
amount due under this Note after the same is due shall not constitute a waiver
of the right to require prompt payment, when due, of all other amounts due under
this Note or to declare that an event of default has occurred under this Note
with respect to any other amount not paid when due.
4. Default. If any payment required under this Note is not made when
due, or if an event of default occurs under the Pledge Agreement or material
breach under any other agreement entered into in connection with this Note, the
entire unpaid principal balance of this Note, together with all accrued but
unpaid interest and any late charges due under this Note, shall, at the option
of the Holder, become due and payable without presentment, demand, protest or
notice of any kind, all of which are expressly waived by the undersigned and all
endorsers, guarantors, sureties, accommodation parties and other persons at any
time liable for all or any portion of the indebtedness evidenced by this Note,
and shall thereafter earn interest, both before and after judgment, at the
Default Rate. Any forbearance, failure or delay by the Holder in exercising any
right or remedy under this Note or otherwise available to the Holder shall not
be deemed to be a waiver of such right or remedy, nor shall any single or
partial exercise of any right or remedy preclude the further exercise of such
right or remedy. The undersigned shall pay all costs and expenses incurred by
the Holder in connection with the enforcement of this Note (regardless of the
particular nature of such costs and expenses and whether incurred before or
after the initiation of suit or before or after judgment), including, without
limitation, court costs and attorneys' fees and costs.
5. Security. This Note is secured as provided in the Pledge Agreement
(the "Pledge Agreement"), dated of even date with this Note, executed by Nu Skin
USA, Inc., the holder of 29,000,000 outstanding shares of Big Planet's Series A
Preferred Stock, $.001 par value per share (the "Shares"), and creating a lien
on the Shares as more fully described in the Pledge Agreement.
6. Miscellaneous. The undersigned and all endorsers, guarantors,
sureties, accommodation parties and other persons at any time liable for all or
any portion of the indebtedness evidenced by this Note consent to all extensions
of time, renewals, waivers or modifications that may be granted by the Holder
with respect to the payment or other provisions of this Note, the release of all
or any portion of any security given in connection with this Note, with or
without substitution, and the release of any party liable under this Note. If
this Note is executed by more than one person, each of such persons shall be
jointly and severally liable for all of the obligations evidenced by this Note.
Time is of the essence with respect to all obligations of the undersigned under
this Note. The unenforceability or invalidity of any provision of this Note
shall not affect the enforceability or validity of any other provision of this
Note. The terms of this Note shall bind the undersigned and inure to the benefit
of the Holder and its respective heirs, successors, assigns and legal
representatives. The Holder may, in its sole discretion, assign part or all of
its interest under this Note at any time or from time to time. This Note shall
be governed by Utah law. This Note, the Pledge Agreement and any other written
agreement entered into in connection with this Note are a final expression of
the agreement between the Holder and the undersigned and may not be contradicted
by evidence of any alleged oral agreement. Acceptance of this Note by the Holder
of this Note shall be deemed to constitute an agreement by such Holder with all
provisions of this Note.
-2-
<PAGE> 3
THE UNDERSIGNED has executed and delivered this Note on the date set
forth below, to be effective as of the date first set forth above.
BIG PLANET, INC., a
Utah corporation
By: /s/ Richard W. King
-----------------------------------
Date: April 1, 1999 Name: Richard W. King
Title:
-3-
<PAGE> 4
SCHEDULE A
SCHEDULE OF ADVANCES
Date Amount of Advance Principal Balance
- ---- ----------------- -----------------
-4-
<PAGE> 1
EXHIBIT 10.2
STOCK PLEDGE AGREEMENT
THIS STOCK PLEDGE AGREEMENT (the "Pledge Agreement") is entered into
effective as of this 1st day of April, 1999, by and between Nu Skin Enterprises,
Inc., a Delaware corporation, and any of its successors, assigns, transferees,
conveyees or purchasers (the "Secured Party"), and Nu Skin USA, Inc., a Delaware
corporation (the "Pledgor").
RECITALS
WHEREAS, the Secured Party has agreed to make a loan to Big Planet,
Inc., a Utah corporation ("Big Planet"), of $7,500,000 (the "Loan"), and Big
Planet has agreed to deliver to the Secured Party a promissory note,
substantially in the form attached hereto as Exhibit "A", in the amount of
$7,500,000 (the "Promissory Note"); and
WHEREAS, the Secured Party is willing to make the Loan only upon
receiving adequate security therefor, and the Pledgor, which owns over
29,000,000 shares of Big Planet's outstanding Series A Preferred Stock, $.001
par value per share, desires to pledge such Shares as collateral to secure Big
Planet's obligations under the Promissory Note in order that Big Planet can
obtain necessary financing to fund its operations.
NOW, THEREFORE, in consideration of the premises set forth above, the
mutual covenants and agreements set forth hereinbelow, and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
1. GRANT OF SECURITY INTEREST. The Pledgor hereby pledges to the
Secured Party and hereby grants to the Secured Party a security interest (the
"Security Interest") in all of the Pledgor's right, title and interest in and to
the following collateral (collectively, the "Collateral"):
(a) 29,000,000 shares of Series A Preferred Stock, $.001 par
value per share, that are evidenced by or included in the stock certificates
described on Exhibit "B" attached hereto, together with any substitutes therefor
(the "Pledged Shares");
(b) all dividends, cash, options, warrants, rights, instruments
and other property, or proceeds from time to time received, receivable or
otherwise distributed in respect of or in exchange for any and all of the
Pledged Shares; and
(c) all proceeds, products, rents and profits of or from any and
all of the foregoing.
2. SECURITY FOR PROMISSORY NOTE. This Pledge Agreement secures, and the
Collateral is collateral security for, the prompt payment of the Promissory Note
when due or otherwise payable and the performance in full of all obligations of
Big Planet as set forth in such Promissory Note (collectively, "Big Planet's
Obligations").
3. DELIVERY OF PLEDGED SHARES. Upon execution of this Pledge Agreement,
the Pledgor shall promptly deliver and transfer possession of the original
certificate(s) representing the Pledged Shares (the "Certificates") to the
Secured Party to be held by the Secured Party, or its appointed agent for and on
behalf of the Secured Party, until termination of this Pledge Agreement or
disposition of the Collateral as provided herein. The Certificates shall be
accompanied by duly executed assignments on
-1-
<PAGE> 2
stock powers in blank, substantially in the form attached hereto as Exhibit "C".
The Pledgor shall perform all acts as the Secured Party may reasonably request
so as to perfect and maintain a valid security interest for the Secured Party in
the Collateral.
4. NO ASSUMPTION. Notwithstanding any of the foregoing provisions, this
Pledge Agreement shall not in any way be deemed to obligate the Secured Party,
any purchaser at any foreclosure sale under this Pledge Agreement, or any other
person or entity to assume any of Big Planet's Obligations or the Pledgor's
obligations under this Pledge Agreement unless the Secured Party, such purchaser
or such other person or entity otherwise expressly agrees in writing to assume
any or all of Big Planet's Obligations.
5. VOTING OF PLEDGED SHARES. Unless an Event of Default (as that term
is defined in Section 10 below) has occurred and is continuing:
(a) The Pledgor shall be entitled to exercise any and all voting
and other rights pertaining to all or any part of the Pledged Shares for any
purpose not inconsistent with the terms of this Pledge Agreement.
(b) The Secured Party or any agent of the Secured Party shall
execute and deliver, or cause to be executed and delivered, to the Pledgor all
proxies and other instruments reasonably requested by the Pledgor in writing for
the purpose of enabling the Pledgor to exercise the voting and other rights that
she is entitled to exercise pursuant to this Section 5.
6. REPRESENTATIONS AND WARRANTIES. The Pledgor represents and warrants
that:
(a) The Pledgor is the owner of the Pledged Shares and, with
respect to any Collateral to be acquired by the Pledgor on the Pledged Shares,
will be the owner of such Collateral, in each case free and clear of any liens
or encumbrances, except for the liens created by this Pledge Agreement. No
effective financing statement or other document or instrument similar in effect
covering all or any part of the Collateral is on file in any recording or filing
office, except such as may have been recorded or filed in favor of the Secured
Party relating to this Pledge Agreement.
(b) The execution and delivery of this Pledge Agreement and the
delivery of the Certificates to the Secured Party create a valid and perfected
first priority lien on and security interest in the Collateral, enforceable
against all third parties and securing the performance of the Pledgor's
Obligations, and all filings and other actions necessary or desirable to perfect
and protect such liens and security interests have been duly made or taken by
the Pledgor.
(c) All of the Certificates, instruments and other documents
constituting, evidencing or representing Collateral shall be promptly delivered
to the Secured Party upon execution of this Pledge Agreement.
(d) The Pledged Shares are duly authorized, validly issued,
fully paid and non-assessable.
(e) There is no agreement or arrangement restricting the
transfer of the Pledged Shares or the transfer of any other Collateral, except
as provided in this Pledge Agreement.
-2-
<PAGE> 3
(f) There is no suit, proceeding or other legal action or
proceeding against the Pledgor or the Certificates that involves or affects, or
that may involve or affect, any of the Collateral.
7. COVENANTS OF PLEDGOR.
(a) Affirmative Covenants. So long as any of Big Planet's
Obligations shall remain unpaid or unperformed, the Pledgor shall do the
following at the Pledgor's own cost and expense:
(i) mark conspicuously each Certificate evidencing or
representing any of the Pledged Shares, and at the request of the Secured Party,
each of the Pledgor's records pertaining to the Pledged Shares or the
Certificates, with a legend, in form and substance satisfactory to the Secured
Party, indicating that the Certificate is subject to the Security Interest
granted to the Secured Party by this Pledge Agreement;
(ii) deliver to the Secured Party promptly upon receipt
all notes, certificates, instruments and other documents constituting,
evidencing or representing any of the Collateral, duly endorsed or accompanied
by instruments of transfer or assignment on stock powers duly executed in blank,
in each case with signatures guaranteed and otherwise in form and substance
satisfactory to the Secured Party;
(iii) execute and file such financing or continuation
statements, and such amendments to those statements, and such other documents,
instruments or notices, as may be necessary or desirable, or as the Secured
Party may request, in order to perfect and preserve the pledges, liens and the
Security Interest granted or purported to be granted to the Secured Party by
this Pledge Agreement;
(iv) promptly notify the Secured Party in writing of any
lien or claim made or asserted against any of the Collateral and take all steps
necessary or proper, or, in the judgment of the Secured Party, advisable, to
preserve all of the Secured Party's rights in the Collateral;
(v) furnish to the Secured Party from time to time written
statements and schedules further identifying and describing the Collateral and
other reports in connection with the Collateral requested by the Secured Party,
all in reasonable detail;
(vi) advise the Secured Party promptly, in sufficient
written detail, of any substantial change in the Collateral, and of the
occurrence of any event that could materially and adversely affect the value of
the Collateral or the validity or priority of the liens and the Security
Interest granted to the Secured Party by this Pledge Agreement;
(vii) comply with all rules and regulations of each
governmental body or agency and all decisions, rulings, orders and awards of
each arbitrator applicable to the Collateral or any part of the Collateral or to
the Pledgor;
(viii) promptly pay and discharge before they become
delinquent, all taxes assessed, levied or imposed upon or relating to, and all
claims against the Collateral (or any part of the Collateral) or the Pledgor, if
the failure to so pay could adversely affect the value of the Collateral or the
validity or
-3-
<PAGE> 4
priority of the liens or the Security Interest granted to the Secured Party by
this Pledge Agreement, except those contested in good faith and for which
adequate reserves are maintained;
(ix) permit representatives of the Secured Party at any
time during normal business hours to inspect and make abstracts from the
Pledgor's records relating to the Collateral;
(x) perform and observe all of the terms and provisions of
the Collateral to be performed or observed by the Pledgor, except as otherwise
provided by applicable law;
(xi) subject to Section 10 below, collect all amounts due
or to become due to the Pledgor under the Collateral and otherwise enforce her
rights under and in respect of the Collateral;
(xii) furnish to the Secured Party promptly upon receipt
copies of all notices, requests and other documents or instruments received by
the Pledgor under or in respect of the Collateral (or any part of the
Collateral) and from time to time (A) furnish to the Secured Party the
information and reports regarding those obligations requested by the Secured
Party and (B) at the request of the Secured Party, make the demands and requests
for information or action that the Pledgor is entitled to make under the
Collateral;
(xiii) notify the Secured Party of any change in the
Pledgor's name within ten (10) days of such change; and
(xiv) give the Secured Party fifteen (15) days prior
written notice of any change in the Pledgor's chief place of business, chief
executive office or residence, or the office where the Pledgor keeps her records
regarding the Collateral.
(xv) Pledgor agrees that in the event any amounts are paid
by Pledgor to the Secured Party pursuant to this Pledge Agreement or the
Promissory Note, Pledgor's liability hereunder and thereunder shall continue in
full force and effect in the event that all or any part of any such payment is
thereafter recovered as a preference or fraudulent transfer under any applicable
bankruptcy or insolvency law.
(b) Negative Covenants. So long as any of Big Planet's
Obligations shall remain unpaid or unperformed, the Pledgor shall not do any of
the following without the prior written approval of the Secured Party:
(i) transfer any of the Collateral, whether by operation
of law or otherwise;
(ii) create, incur, assume or suffer to exist any lien on
or in respect of any of the Collateral, except pursuant to this Pledge Agreement
or the Promissory Note;
(iii) use, store or keep any of the Collateral or records
relating to the Collateral in any location other than those expressly permitted
by this Pledge Agreement; or
-4-
<PAGE> 5
(iv) take any action in connection with any of the
Collateral that could materially and adversely affect the value of the
Collateral (or any part thereof) or the validity or priority of the liens or the
Security Interest granted to the Secured Party by this Pledge Agreement.
(v) Pledgor shall not challenge or institute any
proceedings, or allow the institution of any proceedings, to challenge the
validity, binding effect or enforceability of this Pledge Agreement.
8. SECURED PARTY MAY PERFORM. If the Pledgor fails to perform any
agreement contained herein, the Secured Party may itself perform, or cause the
performance of, such agreement, and all costs and expenses of the Secured Party
incurred in connection therewith shall promptly be payable to the Secured Party
by the Pledgor under Section 11 below.
9. STANDARD OF CARE.
(a) The powers conferred on the Secured Party hereunder are
solely to protect its interests in the Collateral and shall not impose any duty
upon it to exercise any such powers. Except for the exercise of reasonable care
in the custody of the Collateral in its possession and the accounting for any
monies actually received by it hereunder, the Secured Party shall have no duty
as to the Collateral or as to the taking of any necessary steps to preserve
rights against prior parties or any other rights pertaining to the Collateral.
The Secured Party shall be deemed to have exercised reasonable care in the
custody and preservation of the Collateral in its possession if such Collateral
is accorded treatment substantially equal to that accorded by the Secured Party
to its own property of a similar nature.
(b) Whenever this Pledge Agreement or any other document,
instrument or agreement contemplated hereby provides that the Secured Party is
permitted or required to make a decision in the "discretion" or the "sole
discretion" (or other similar terms) of the Secured Party, the Secured Party
shall be entitled to consider only such interests and factors as it desires, and
the Secured Party shall have no duty or obligation to give any consideration to
any interest of or factors affecting the Pledgor or any other person or entity.
10. REMEDIES.
(a) In the event of a default in the payment or performance of
any of the Pledgor's Obligations or upon the occurrence of any event of default
under or breach of any representation, warranty or covenant in this Pledge
Agreement or any event of default under the Promissory Note (each an "Event of
Default"), in the sole discretion of the Secured Party, without demand or
notice, all or any part of any indebtedness evidenced by the Promissory Note
shall become immediately due and payable. Upon the occurrence of an Event of
Default, the Secured Party may exercise all rights to which it is entitled under
this Pledge Agreement or which are otherwise available to it and exercise all
the rights and remedies of a secured party upon default under the Uniform
Commercial Code as in effect in any relevant jurisdiction (the "UCC") (whether
or not the UCC applies to the affected Collateral). Without limiting the
generality of the foregoing, the Secured Party may immediately transfer into or
register in its name instruments, certificates or documents evidencing or
constituting all or part of the Collateral without notice to the Pledgor and
immediately apply the Collateral against Big Planet's Obligations and the
Secured Party's costs of collection until Big Planet's Obligations and the
Secured Party's costs of collection are satisfied in full, notwithstanding any
rights Pledgor may have under the UCC. Without limiting any of the foregoing,
the
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<PAGE> 6
Secured Party may in its sole discretion, without notice, demand for performance
or advertisement (all of each such notices, demands or advertisement are hereby
expressly waived), collect, receive, appropriate and realize upon the Collateral
and/or sell, assign, grant an option or options to purchase or otherwise dispose
of the Collateral or any part thereof in one or more parcels at public or
private sale, at or on any exchange or broker's board or at any of the Secured
Party's offices or elsewhere, for cash, on credit or for future delivery without
assumption of credit risk, free of any claims or rights, at such time or times
and at such price or prices and upon such other terms and conditions as the
Secured Party may deem commercially reasonable, irrespective of the impact of
any such sales on the market price of the Collateral. The Secured Party may be
the purchaser of any or all of the Collateral at any such sale and the Secured
Party, for itself or on behalf of any other person or entity, shall be entitled,
for the purpose of bidding and making settlement or payment of the purchase
price for all or any part of the Collateral sold at any such sale, to use and
apply any of Big Planet's Obligations as a credit on account of the purchase
price for any Collateral payable by the Secured Party at such sale. Each
purchaser at any such sale shall hold the property sold absolutely free from any
claim or right on the part of the Pledgor, and the Pledgor hereby waives all
rights of redemption, stay and appraisal that the Pledgor now has or may at any
time in the future have under any rule of equity, law or statute now existing or
hereafter enacted. The Pledgor agrees that, to the extent notice of sale shall
be required by applicable law, at least ten (10) days notice to the Pledgor of
the time and place of any public sale or the time after which any private sale
is to be made shall constitute reasonable notification. The Secured Party shall
not be obligated to make any sale of the Collateral regardless of whether notice
of sale has been given. The Secured Party may adjourn any public or private sale
from time to time by announcement at the time and place fixed therefor in the
notice thereof, and such sale may, without further notice, be made at the time
and place to which it was so adjourned. Without limiting the generality of the
foregoing, the Secured Party may at any time appropriate and apply (directly or
by way of set-off) to the payment of Big Planet's Obligations all amounts
representing dividends or distributions then or thereafter in the possession of
the Secured Party.
(b) The Pledgor recognizes that, by reason of certain
prohibitions contained in the Securities Act of 1933, as amended (the
"Securities Act"), and applicable state securities laws, rules and regulations,
the Secured Party may be compelled, with respect to any sale of all or any part
of the Collateral conducted without prior registration or qualification of such
Collateral under the Securities Act and such state securities laws, rules and
regulations, to limit purchases to those persons or entities who will agree,
among other things, to acquire the Collateral for their own account, for
investment and not with a view to the distribution or resale thereof. The
Pledgor acknowledges that any such private sales may be at prices and on terms
and conditions less favorable than those obtainable through a public sale
without such restrictions (including, without limitation, a public offering made
pursuant to a registration statement filed under the Securities Act) and,
notwithstanding such circumstances, the Pledgor agrees that any such private
sale shall be deemed to have been made in a commercially reasonable manner and
that the Secured Party shall have no obligation to engage in public sales and
shall have no obligation to delay the sale of any of the Collateral for the
period of time necessary to permit the Pledgor to register any of the Pledged
Shares that constitute a portion of the Collateral or any other item of
Collateral for a form of public sale requiring registration under the Securities
Act or under applicable state securities laws, rules and regulations, even if
the Pledgor would, or should, agree to so register those Pledged Shares or other
items of Collateral.
11. APPLICATION OF PROCEEDS. Except as expressly provided elsewhere in
this Pledge Agreement, all proceeds received by the Secured Party in respect of
any sale of, collection from, or other
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<PAGE> 7
realization upon all or any part of the Collateral may, in the sole discretion
of the Secured Party, be held by the Secured Party as Collateral for, or then,
or at any other time thereafter, be applied in full or in part by the Secured
Party against, the Pledgor's Obligations in the following order of priority:
(a) to pay or reimburse in full the costs and expenses of such
sale, collection or other realization, including, without limitation, reasonable
compensation to the Secured Party and its agents and counsel, and all other
costs, expenses, obligations and other liabilities incurred or paid by the
Secured Party in connection therewith, and all amounts for which the Secured
Party is entitled to indemnification hereunder and all advances made by the
Secured Party hereunder for the account of the Pledgor, and to the payment of
all costs and expenses paid or incurred by the Secured Party in connection with
the exercise of any right or remedy hereunder, all in accordance with this
Section 11;
(b) to pay all other obligations and thereafter in such order as
the Secured Party shall elect; and
(c) to pay to or upon the order of the Pledgor, or to whomsoever
may be lawfully entitled to receive the same or as a court of competent
jurisdiction may direct, the balance of the proceeds.
12. INDEMNITY AND EXPENSES.
(a) The Pledgor shall indemnify the Secured Party and its
Related Persons (as that term is defined below) (individually, an "Indemnified
Person" and, collectively, the "Indemnified Persons") against all losses, costs,
expenses (including attorneys' fees and expenses), judgments, fines, amounts
paid in settlement and other liabilities incurred, suffered or paid by the
Indemnified Persons (collectively, "Indemnified Expenses") in connection with
any threatened, pending or completed claim, action, suit, complaint,
investigation, inquiry or other proceeding, whether civil, criminal,
administrative or investigative, that is or was brought or threatened against
any Indemnified Person by reason of or in connection with actions taken or
omitted to be taken by one or more Indemnified Persons in the performance of the
exercise of the rights and powers or performance of the obligations of the
Secured Party under this Pledge Agreement or otherwise in connection with this
Pledge Agreement, except that the Pledgor shall have no liability under this
Section 12 with respect to any Indemnified Expenses to the extent the liability
results from the fraud or willful misconduct of the Indemnified Person, as
determined by a final judgment or final adjudication. For purposes of this
Pledge Agreement, the term "Related Persons" means, with respect to any person,
any other person that directly or indirectly controls or is controlled by or is
under common control with the specified person and the direct or indirect
controlling persons, principals, partners, trustees, stockholders, officers,
directors, employees, independent contractors and agents for or of any of the
foregoing.
(b) To the fullest extent permitted by applicable law, the
Pledgor shall, from time to time, advance Indemnified Expenses to an Indemnified
Person prior to the final disposition of the action upon receipt by the Pledgor
of an undertaking by or on behalf of the Indemnified Person to repay such amount
if it shall be determined that the Indemnified Person is not entitled to be
indemnified as authorized in this Section 12.
(c) The Pledgor shall pay to the Secured Party upon demand the
amount of any and all costs and expenses, including, without limitation, the
reasonable fees and expenses of its counsel and of
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<PAGE> 8
any experts and agents, that the Secured Party may incur in connection with (i)
the administration of this Pledge Agreement or the Promissory Note, (ii) the
custody or preservation of, or the sale of, collection from, or other
realization upon, any of the Collateral, (iii) the exercise or enforcement of
any of the rights of the Secured Party hereunder or under the Promissory Note,
or (iv) the failure by the Pledgor to perform or observe any of the provisions
hereof or of the Promissory Note.
13. WAIVERS BY PLEDGOR, ETC.
(a) The Pledgor agrees that Big Planet's Obligations hereunder
are irrevocable, absolute, independent and unconditional and shall not be
affected by any circumstance that constitutes a legal or equitable discharge of
a guarantor or surety other than indefeasible payment in full of Big Planet's
Obligations. In furtherance of the foregoing and without limiting the generality
thereof, the Pledgor agrees as follows:
(i) The Secured Party, for itself or on behalf of any
other person or entity, may from time to time, without notice or demand and
without affecting the validity or enforceability of this Pledge Agreement and
without giving rise to any limitation, impairment or discharge of the Pledgor's
liability or obligations hereunder, (A) create, increase, renew, extend,
accelerate or otherwise change the time, place, manner or terms of payment of
Big Planet's Obligations, (B) settle, compromise, release or discharge, or
accept or refuse any offer of performance with respect to, or substitutions for,
Big Planet's Obligations or any agreement relating thereto and/or subordinate
the payment of the same to the payment of any other obligation, (C) request and
accept guaranties of any of Big Planet's Obligations and take and hold other
security for the payment of Big Planet's Obligations, (D) release, exchange,
compromise, subordinate or modify, with or without consideration, any other
security for payment of Big Planet's Obligations, any guaranties of Big Planet's
Obligations, or any other obligation of any person or entity with respect to Big
Planet's Obligations, (E) enforce and apply any other security now or hereafter
held by or for the benefit of the Secured Party or any other person or entity in
respect of Big Planet's Obligations and direct the order or manner of sale
thereof, or the exercise of any other right or remedy that the Secured Party or
any other person or entity, may have against any such security, as the Secured
Party in its sole discretion may determine, consistent with the terms of any
applicable security agreement, including, without limitation, application of the
Collateral against and in satisfaction Big Planet's Obligations, and even though
such action operates to impair or extinguish any right of reimbursement or
subrogation or other right or remedy of the Pledgor against another party or any
other security for Big Planet's Obligations (and the Pledgor expressly
acknowledges that such exercise of a right or remedy that impairs or
extinguishes the Pledgor's right of reimbursement or subrogation would create a
possible defense by the Pledgor against any liability hereunder, but the Pledgor
expressly and knowingly waives any such defense), and (F) exercise any other
rights available to the Secured Party or any other person or entity under the
Promissory Note, at law or in equity; and
(ii) this Pledge Agreement and the obligations of the
Pledgor hereunder shall be valid and enforceable and shall not be subject to any
limitation, impairment or discharge for any reason (other than indefeasible
payment and performance in full of Big Planet's Obligations), including, without
limitation, the occurrence of any of the following, whether or not the Pledgor
shall have had notice or knowledge of any of them: (A) any failure to assert or
enforce or any agreement not to assert or enforce, or the stay or enjoining, by
order of court, by operation of law or otherwise, of the exercise or enforcement
of, any claim or demand or any right, power or remedy with respect to Big
Planet's Obligations or any
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<PAGE> 9
agreement relating thereto, or with respect to any guaranty of or other security
for the payment of Big Planet's Obligations, (B) any waiver, amendment or
modification of, or any consent to departure from, any of the terms or
provisions (including, without limitation, provisions relating to events of
default) of the Promissory Note, this Pledge Agreement or any agreement,
document or instrument executed pursuant hereto or thereto, or of any guaranty
or other security for Big Planet's Obligations, (C) Big Planet's Obligations, or
any agreement relating thereto, at any time being found to be illegal, invalid
or unenforceable in any respect, (D) the application of payments received from
any source to the payment of indebtedness other than Big Planet's Obligations,
even though the Secured Party or any other person or entity might have elected
to apply such payment to any part or all of Big Planet's Obligations, (E) any
failure to perfect or continue perfection of a security interest in any other
collateral that secures any of Big Planet's Obligations, (F) any defenses,
set-offs or counterclaims that the related obligor may allege or assert against
the Secured Party in respect of Big Planet's Obligations, including, without
limitation, failure of consideration, breach of warranty, payment, statute of
frauds, statute of limitations, accord and satisfaction, and usury, and (G) any
other act, thing or omission, or delay to do any other act or thing, that may or
might in any manner or to any extent vary the risk of the Pledgor obligors in
respect of Big Planet's Obligations.
(b) The Pledgor hereby waives for the benefit of the Secured
Party:
(i) any right to require the Secured Party, as a condition
of payment or performance by the Pledgor, to (A) proceed against any guarantor
of the Pledgor or any other person or entity, (B) proceed against or exhaust any
other security held from any guarantor of Big Planet's Obligations or any other
person or entity, (C) proceed against or have resort to any balance of any
deposit account or credit on the books of the Secured Party or any other person
or entity, or (D) pursue any other remedy in the power of the Secured Party or
any other person or entity whatsoever;
(ii) any defense arising by reason of the incapacity, lack
of authority or any disability or other defense, including, without limitation,
any defense based on or arising out of the lack of validity or the
unenforceability of Big Planet's Obligations or any agreement or instrument
relating thereto or by reason of the cessation of the liability;
(iii) any defense based upon any statute or rule of law
that provides that the obligation of a surety must be neither larger in amount
nor in other respects more burdensome than that of the principal;
(iv) any defense based upon the errors or omissions of the
Secured Party or any other person or entity in the administration of Big
Planet's Obligations, except behavior that amounts to fraud or wilful
misconduct;
(v) (A) any principles or provisions of law, statutory or
otherwise, that are or might be in conflict with the terms of this Pledge
Agreement and any legal or equitable discharge of Big Planet's Obligations
hereunder, (B) the benefit of any statute of limitations affecting the Pledgor's
liability hereunder or the enforcement hereof, (C) any rights to set-offs,
recoupments and counterclaims, and (D) promptness, diligence and any requirement
that the Secured Party or any other person or entity protect, secure, perfect or
insure any other lien or security interest or any property subject thereto;
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<PAGE> 10
(vi) notices, demands, presentments, protests, notices of
protest, notices of dishonor and notices of any action or inaction, notices of
default under the Promissory Note or any agreement or instrument related
thereto, notices of any renewal, extension or modification of Big Planet's
Obligations or any agreement related thereto, notices of any extension of credit
to the Pledgor and notices of any of the matters referred to in Section 13(b)(v)
above and any right to consent to any thereof; and
(vii) to the fullest extent permitted by applicable law,
any defenses or benefits that may be derived from or afforded by law that limit
the liability of or exonerate guarantors or sureties in general, or that may
conflict with the terms of this Pledge Agreement.
14. CONTINUING SECURITY INTEREST; TRANSFER OF OBLIGATIONS.
(a) This Pledge Agreement shall create a continuing security
interest in the Collateral and shall (i) remain in full force and effect until
the indefeasible payment and performance in full of Big Planet's Obligations,
(ii) be binding upon the Pledgor and her successors and assigns, and (iii)
inure, together with the rights and remedies of the Secured Party hereunder, to
the benefit of the Secured Party and its successors, assigns, transferees,
conveyees and purchasers. Without limiting the generality of the foregoing
clause (iii), the Secured Party may assign or otherwise transfer totally to
another person or entity all or any part of the Secured Party's right, title and
interest in Big Planet's Obligations, and such other person or entity shall
thereupon become vested with all the benefits in respect thereof granted to the
Secured Party herein or otherwise.
(b) Upon the indefeasible payment and performance in full of Big
Planet's Obligations, the liens and the Security Interest granted hereby shall
terminate and all rights to the Collateral shall revert to the Pledgor. Upon any
such termination, the Secured Party shall, at the Pledgor's expense, execute and
deliver to the Pledgor such documents and instruments as the Pledgor shall
reasonably request to evidence such termination.
15. FAILURE OR INDULGENCE NOT WAIVER; REMEDIES CUMULATIVE. No
failure or delay on the part of the Secured Party in the exercise of any power,
right or privilege hereunder shall impair such power, right or privilege or be
construed to be a waiver of any default or acquiescence therein, nor shall any
single or partial exercise of any such power, right or privilege preclude any
other or further exercise thereof or of any other power, right or privilege. All
rights and remedies existing under this Pledge Agreement are cumulative to, and
not exclusive of, any rights or remedies otherwise available.
16. COSTS AND EXPENSES. Pledgor shall on the date hereof pay all costs
and expenses of the Secured Party in connection with the preparation and
negotiation of this Pledge Agreement and the Promissory Note. The Pledgor shall
pay all costs and expenses, including, without limitation, reasonable attorneys'
fees and expenses, incurred by or on behalf of the Secured Party in the
enforcement of this Pledge Agreement and the Promissory Note.
17. 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 two (2) business
days after being sent by registered or certified mail, return receipt requested,
postage prepaid, and addressed to the intended recipient as set forth below:
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<PAGE> 11
o If to the Pledgor:
Nu Skin USA, Inc.
75 West Center Street
Provo, Utah 84601
Telephone: (801) 345-6100
o If to the Secured Party:
Nu Skin Enterprises, inc
75 West Center Street
Provo, Utah 84601
Attention: M. Truman Hunt
Telephone: (801) 345-6100
Facsimile: (801) 345-3099
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). Any party may change the address to
which notices, requests, demands, claims and other communications hereunder are
to be delivered by giving the other party notice in the manner herein set forth.
18. NO WAIVERS; REMEDIES; SPECIFIC PERFORMANCE.
No failure or delay by any party in exercising any right, power
or privilege under this Pledge Agreement shall operate as a waiver of the right,
power or privilege. A single or partial exercise of any right, power or
privilege shall not preclude any other or further exercise of the right, power
or privilege or the exercise of any other right, power or privilege hereunder.
The rights and remedies provided in this Pledge Agreement shall be cumulative
and not exclusive of any rights or remedies provided by applicable law.
19. AMENDMENTS, ETC. No amendment, modification, termination or waiver
of any provision of this Pledge Agreement, and no consent to any departure by a
party to this Pledge Agreement from any provision hereof, shall be effective
unless it shall be in writing and signed and delivered by the other parties to
this Pledge Agreement, and then it shall be effective only in the specific
instance and for the specific purpose for which it is given.
20. SUCCESSORS AND ASSIGNS.
(a) As further provided in Section 14, the Secured Party may
assign or transfer its rights and delegate its obligations under this Pledge
Agreement; such assignee or transferee shall accept those rights and assume
those obligations for the benefit of the Secured Party in writing in form
reasonably satisfactory to the Pledgor. Thereafter, without any further action
by any person or entity, all references in this Pledge Agreement to "Secured
Party", and all comparable references, shall be deemed to be references to the
assignee or transferee, but the Pledgor shall not be released from any
obligation or liability under this Pledge Agreement.
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<PAGE> 12
(b) Except as provided in Section 20(a) above, no party may
assign or transfer its rights under this Pledge Agreement. Any delegation in
contravention of this Section 20(b) shall be void ab initio and shall not
relieve the delegating party of any duty or obligation under this Pledge
Agreement.
(c) The provisions of this Pledge Agreement shall be binding
upon and inure to the benefit of the parties to this Pledge Agreement and their
respective successors and permitted assigns, transferees, conveyees and
purchasers.
21. GOVERNING LAW. This Pledge Agreement shall be governed by and
construed in accordance with the internal laws of the State of Utah. All rights
and obligations of the parties hereto shall be in addition to and not in
limitation of those provided by applicable law.
22. COUNTERPARTS; EFFECTIVENESS. This Pledge Agreement may be signed by
facsimile in any number of counterparts, each of which shall be deemed to be an
original, with the same effect as if all signatures were on the same instrument.
23. SEVERABILITY OF PROVISIONS. Any provision of this Pledge Agreement
that is prohibited or unenforceable in any jurisdiction shall, as to that
jurisdiction, be ineffective to the extent of the prohibition or
unenforceability without invalidating the remaining provisions of this Pledge
Agreement or affecting the validity or enforceability of the prohibited or
unenforceable provision in any other jurisdiction.
24. HEADINGS AND REFERENCES. Section headings in this Pledge Agreement
are included herein for convenience of reference only and do not constitute a
part of this Pledge Agreement for any other purpose. References to parties and
Sections in this Pledge Agreement are references to the parties to or the
Sections of this Pledge Agreement, as the case may be, unless the context shall
require otherwise.
25. ENTIRE AGREEMENT. Except as otherwise specifically provided in this
Section 25, this Pledge Agreement and the documents and instruments referenced
herein embody the entire agreement and understanding of the respective parties
and supersedes all prior agreements and understandings with respect to the
subject matter of those documents. The Pledgor and the Secured Party shall
remain subject to the Promissory Note in accordance with the terms thereof.
26. SURVIVAL. Except as otherwise specifically provided in this Pledge
Agreement, each representation, warranty or covenant contained herein or made
pursuant to this Pledge Agreement shall survive the execution of this Pledge
Agreement and shall remain in full force and effect, notwithstanding any
investigation or notice to the contrary or any waiver by any other party of a
related condition precedent to the performance by such other party of an
obligation under this Pledge Agreement.
27. EXCLUSIVE JURISDICTION. Each of the Pledgor and the Secured Party
(a) agrees that any legal action with respect to this Pledge Agreement shall be
brought exclusively in the courts of the State of Utah or in the United States
District Court for the District of Utah, (b) accepts for itself and in respect
of its property, generally and unconditionally, the jurisdiction of those
courts, and (c) irrevocably waives any objection, including, without limitation,
any objection to the laying of venue or based on the grounds of forum non
conveniens, that it may now or hereafter have to the bringing of any legal
action in those jurisdictions; provided, however, that each of the Pledgor and
the Secured Party may assert in a
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<PAGE> 13
legal action in any other jurisdiction or venue each mandatory defense, third
party claim or similar claim that, if not so asserted in such action, may not be
asserted in an original legal action in the courts referred to in clause (a) of
this Section 27.
28. WAIVER OF JURY TRIAL. Each party waives any right to a trial by
jury in any action to enforce or defend any right under this Pledge Agreement or
any amendment, instrument, document or agreement delivered, or that in the
future may be delivered, in connection with this Pledge Agreement, and agrees
that any action shall be tried before a court and not before a jury.
29. NON-RECOURSE AGAINST SECURED PARTY CONTROLLING PERSONS. No
recourse under this Pledge Agreement shall be had against any "controlling
person" (within the meaning of Section 20 of the Exchange Act) of the Secured
Party or the shareholders, directors, officers, employees, agents and affiliates
of the Secured Party or such controlling persons, whether by the enforcement of
any assessment or by any legal or equitable proceeding, or by virtue of any rule
or regulation, it being expressly agreed and acknowledged that no personal
liability whatsoever shall attach to, be imposed on or otherwise be incurred by
such controlling person, shareholder, director, officer, employee, agent or
affiliate, as such, for any obligations of the Secured Party under this Pledge
Agreement or the Promissory Note or for any claim based on, in respect of or by
reason of, such obligations or their creation.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
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<PAGE> 14
IN WITNESS WHEREOF, the undersigned have executed this Pledge Agreement
as of the date first above written.
THE PLEDGOR: THE SECURED PARTY:
NU SKIN USA, INC. NU SKIN ENTERPRISES, INC.
By: /s/ Keith R. Halls By: /s/ Steven J. Lund
----------------------------- -----------------------------------
Keith R. Halls Steven J. Lund
Its: President Its: Chief Executive Officer
[Exhibits omitted.]
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<PAGE> 1
EXHIBIT 10.3
AMENDMENT NO. 2 TO
AMENDED AND RESTATED STOCKHOLDERS AGREEMENT
This Amendment No.2 to the Amended and Restated Stockholders Agreement
(this "Amendment") is entered into as of May 12, 1999 by and among the
Stockholders who have executed the signature pages of this Amendment and Nu Skin
Enterprises, Inc., a corporation organized under the laws of the State of
Delaware (the "Company"). This Amendment shall be binding upon each person who
executes this Amendment notwithstanding the fact that any other Stockholders
fail or refuse to execute this Amendment. The capitalized terms used in this
Amendment and not otherwise defined herein shall have the meanings given such
terms in the Amended and Restated Stockholders Agreement dated November 28,
1997, as previously amended by Amendment No. 1 to such agreement (hereinafter
the "Amended and Restated Stockholders Agreement").
RECITALS
A. WHEREAS, the Company is proposing to undertake the registration of
shares for resale by the Stockholders and the former stockholders of Pharmanex,
Inc. pursuant to an underwritten public offering (the "Proposed Public
Offering"); and
B. WHEREAS, the Company is willing to continue to proceed with the
Proposed Public Offering only if the Stockholders agree to extend certain resale
restrictions set forth in the Amended and Restated Stockholders Agreement;
NOW, THEREFORE, in consideration of the premises and the mutual
agreements set forth herein and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the Parties hereto
irrevocably agree as follows:
1. Section 2.2 Lock-up Agreement is hereby amended to lengthen the
lock-up period for all Stockholders other than the trusts identified on Schedule
B. Accordingly Section 2.2 is amended to read in its entirety as follows:
"2.2 Lock-up Agreement. Notwithstanding any provision of this
Agreement to the contrary, except for Transfers pursuant to Sections 3
and 5, from and after the date hereof each Stockholder (other than the
trusts identified on Schedule B) will not, without the prior written
consent of the Company, jointly or individually, Transfer, offer, make
any short sale of, contract to sell, lend, grant any option for the
purchase of, or otherwise dispose of, directly or indirectly, any
Shares owned of record or beneficially by such Stockholder until June
30, 2000 (the "Initial Lock-up Period"); provided, however, that the
Initial Lock-up Period shall be further extended until up to December
31, 2000 (the "Extended Lock-up Period") with respect to any
Stockholder who, together with any of such Stockholder's Stockholder
Controlled Entities, receives additional gross proceeds (the
"Additional Sale Proceeds") from the sale of shares in one or any
combination of public offerings (excluding the sale of up to 9 million
shares in the Proposed Public Offering, but including any shares in
excess of 9 million shares sold in the Proposed Public Offering),
private placements, or any Company share repurchases (with each
Stockholder eligible to participate in any private placements or share
repurchases at a level at least equal to that Stockholder's
<PAGE> 2
percentage equity ownership interest in the Company immediately
preceding the Company's initial public offering). The extent of the
Extended Lock-up Period shall be determined by multiplying six months
by a fraction (the "Extended Lock-up Fraction"). The numerator of the
Extended Lockup Fraction shall be equal to the actual Additional Sale
Proceeds received by the Stockholder divided by $120 million. The
denominator of the Extended Lock-up Fraction shall be equal to the
Stockholder's percentage ownership interest in the Company immediately
preceding the Company's initial public offering. For example, if a
Stockholder received Additional Sale Proceeds of $5 million, and that
Stockholder's percentage ownership interest prior to the initial
public offering were 5%, then the Extended Lock-up Period would run
for 5 months, calculated as follows:
$5 million/$120 million
-----------------------
6 months x .05 = 5 months
If any Stockholder elects not to participate in a liquidity event that
generates Additional Sale Proceeds, then the lock-up period for that
Stockholder shall expire on June 30, 2000. In the event Additional
Sale Proceeds exceed $120 million, then the Extended Lock-up Period
shall be subject to an additional negotiated extension."
2. Section 2.3 Post Lock-up Selling Restrictions is hereby amended
as follows:
(a) Section 2.3 is hereby amended to provide that the Restricted
Resale Period for each Stockholder (other than the trusts identified on Schedule
B to the Amended and Restated Stockholders Agreement) shall expire one year from
the expiration of the Extended Lock-up Period with respect to that Stockholder
and that the Restricted Resale Period for the trusts identified on Schedule B
would expire on the earlier of December 31, 2001 or the date the Restricted
Resale Period ends for any other Stockholder. Accordingly, the first sentence of
Section 2.3 is amended to read in its entirety as follows:
"2.3 Post Lock-up Selling Restrictions. Except as otherwise
provided herein, for a one year period following the expiration of the
Initial Lock-up Period or the Extended Lock-up Period, whichever is
the last to expire as it applies to each Stockholder (the "Restricted
Resale Period"), all sales of Shares in a public resale pursuant to
Section 4(1) of the Securities Act or Rule 144 promulgated thereunder
or pursuant to any other exempt transaction under the Securities Act,
shall not exceed in any calendar quarter the Stockholder's specified
Rule 144 Allotment (as defined below). Notwithstanding the foregoing,
the Restricted Resale Period for the trusts identified on Schedule B
would run from March 26, 1999 through the earlier to occur of (a)
December 31, 2001, and (b) the date the Restricted Resale Period
expires for any other stockholder."
(b) The Stockholders agree that the provisions of subparagraphs
2.3.1 through 2.3.6 apply to all public resales whether effected pursuant to
Rule 144, Section 4(1) of the Securities Act or any other available exemption.
(c) Section 2.3.7 is hereby amended to read in its entirety as
set forth below to clarify the terms of such subparagraph:
"2.3.7. Following the expiration of the Restricted Resale Period,
each Stockholder agrees not to sell in public resales more shares in
any calendar quarter than the greater of (a) one percent of the
outstanding shares of Class A Common Stock as shown by the most recent
report or statement published by the Company, and (b) the average
reported weekly volume of trading in the Class A Common Stock
determined in accordance with the provisions of Rule 144(e)."
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<PAGE> 3
(d) All other terms and conditions of the first paragraph of
Section 2.3 of the Amended and Restated Stockholders Agreement and its
subparagraphs (2.3.1 through 2.3.7) shall remain in full force and effect.
3. Effect of Amendment. This Amendment amends the Amended and
Restated Stockholders Agreement only to the extent expressly provided herein.
Pursuant to Section 12.5 of the Amended and Restated Stockholders Agreement,
this Amendment shall be binding upon each of the Stockholders who elects to
execute this Amendment even if one or more of the Stockholders fail or refuse to
execute this Amendment. To the extent provisions of the Amended and Restated
Stockholders Agreement are not expressly modified or amended by this Agreement,
such unamended provisions shall continue in full force and effect and shall be
construed together with the amendments set forth herein as the entire agreement
of the parties hereto. The Amendment shall not apply to any Stockholder who does
not execute this Amendment, but such Stockholder shall remain subject to and
obligated under the terms of the Amended and Restated Stockholders Agreement,
without giving effect to this Amendment, and this Amendment shall in no way be
interpreted as limiting the obligations or restrictions in the Amended and
Restated Stockholders Agreement with respect to any Stockholder who does not
execute this Amendment Agreement. In the event a Proposed Public Offering is not
completed by November 1, 1999, or if prior to such date the Company provides
written notice to the Stockholders that it has elected not to proceed with the
Proposed Public Offering, then the amendments set forth in Sections 1 and 2
hereof shall expire and no longer be of any force or effect from November 1,
1999 (if a secondary offering has not been completed by such date) or the date
of such written notice (in the event the Company provides written notice it has
elected not to proceed with such offering).
4. Liquidity Events. In consideration of the redemption of 20,000
shares of Class A Common Stock by the Company from each of Kirk Roney and Rick
Roney at a purchase price of $16.00 per share, each of Kirk Roney and Rick Roney
agree to execute and be bound by the terms of the Amendment No. 1 to Amended and
Restated Stockholders Agreement. Upon execution of such amendment, each of Kirk
Roney and Rick Roney shall have the same right to participate in any private or
public liquidity events as the other Stockholders. Each Stockholder hereby
agrees that the right to participate in liquidity events shall be subject to the
following terms.
4.1 The 9 million shares allocated to the Stockholders party to
the Amended and Restated Stockholder Agreement in the Proposed Public Offering
shall be allocated among the Stockholders, together with their respective
Stockholder Controlled Entities, in accordance with the percentages set forth on
Schedule A to the Amended and Restated Stockholders Agreement, including any
additional shares that may be allocated as a result of the Pharmanex
stockholders not selling their entire allotment, or as a result of the exercise
of the over-allotment option by the underwriters. In the event a Stockholder,
together with his or her respective Stockholder Controlled Entities, agrees at
the request of the underwriters to sell less than his or her applicable
percentage as set forth in Schedule A of the 9 million shares, he or she shall
have the right to receive a larger and priority allocation of any additional
shares in order to bring his or her percentage of the total shares allocated to
him or her up to the percentage set forth in Schedule A to the Amended and
Restated Stockholders Agreement.
4.2 Subject to agreeing to any terms and conditions the Company
may impose with respect to any such private liquidity event as set forth in
Section 4.3 below, a Stockholder, together with his or respective Stockholder
Controlled Entities, shall have the right to participate in any Company
sponsored private placements or share repurchases by the Company at a level at
least equal to that
-3-
<PAGE> 4
Stockholder's percentage equity ownership interest in the Company immediately
preceding the Company's initial public offering.
4.3 The Company may require as a condition to the right to
participate in any future liquidity event, that a Stockholder and his or her
Stockholder Controlled Entities, agree to such terms and conditions as may be
requested by the Company for all Stockholders, including any extensions of the
Extended Lock-up Period and the Restricted Selling Periods; provided, however,
that with respect to any liquidity event that occurs prior to June 30, 2000, the
provisions of Section 2.2 and 2.3, as amended above, shall determine the length
of any extension of the Extended Lock-up Period and Restricted Resale Period
unless the Additional Sales Proceeds are in excess of $120 million, in which
event the Company may negotiate a further extension of such selling
restrictions.
5. Counterparts. This Amendment may be executed by facsimile and by
any number of counterparts, each of which shall be deemed to be an original, but
all of which together shall constitute one agreement. Each counterpart may
consist of a number of copies each signed by less than all, but together signed
by all of the Parties hereto.
-4-
<PAGE> 5
SIGNATURE PAGE OF AMENDMENT NO. 2
TO AMENDED AND RESTATED STOCKHOLDERS AGREEMENT
IN WITNESS WHEREOF, this Amendment has been signed by duly authorized
signatories of the Parties hereto and is binding upon the Parties hereto as of
the date first above written.
NU SKIN ENTERPRISES, INC.,
a Delaware Corporation
By:
------------------------------------------
Its:
-----------------------------------------
---------------------------------------------
Blake M. Roney, individually
---------------------------------------------
Nancy L. Roney, individually
THE ALL R'S TRUST
By:
------------------------------------------
L. S. McCullough
Its: Trustee
THE B & N RONEY TRUST
By:
------------------------------------------
L. S. McCullough
Its: Trustee
THE WFA TRUST
By:
------------------------------------------
L. S. McCullough
Its: Trustee
S-1
<PAGE> 6
SIGNATURE PAGE OF AMENDMENT NO. 2
TO AMENDED AND RESTATED STOCKHOLDERS AGREEMENT
BNASIA, LTD.
By:
------------------------------------------
Blake M. Roney
Its: General Partner
By:
------------------------------------------
Nancy L. Roney
Its: General Partner
THE BLAKE M. AND NANCY L. RONEY FOUNDATION
By:
------------------------------------------
Blake M. Roney
Its: Trustee
By:
------------------------------------------
Nancy L. Roney
Its: Trustee
THE ONE FOUNDATION
By:
------------------------------------------
Blake M. Roney
Its: Trustee
By:
------------------------------------------
Nancy L. Roney
Its: Trustee
By:
------------------------------------------
Keith R. Halls
Its: Trustee
S-2
<PAGE> 7
SIGNATURE PAGE OF AMENDMENT NO. 2
TO AMENDED AND RESTATED STOCKHOLDERS AGREEMENT
B & N RHINO COMPANY, L.C.
By:
------------------------------------------
Craig F. McCullough
Its: Manager
---------------------------------------------
Nedra D. Roney, individually
---------------------------------------------
Rick A. Roney, individually
---------------------------------------------
Burke F. Roney, individually
---------------------------------------------
Park R. Roney, individually
THE MAR TRUST
By:
------------------------------------------
Tom D. Branch
Its: Trustee
THE NR TRUST
By:
------------------------------------------
Tom D. Branch
Its: Trustee
S-3
<PAGE> 8
SIGNATURE PAGE OF AMENDMENT NO. 2
TO AMENDED AND RESTATED STOCKHOLDERS AGREEMENT
THE ROSE FOUNDATION
By:
------------------------------------------
Nedra D. Roney
Its: Trustee
By:
------------------------------------------
Tom D. Branch
Its: Trustee
THE NEDRA RONEY FIXED CHARITABLE TRUST
By:
------------------------------------------
Tom D. Branch
Its: Trustee
NR RHINO COMPANY, L.C.
By:
------------------------------------------
Craig F. McCullough
Its: Manager
---------------------------------------------
Sandra N. Tillotson, individually
THE SNT TRUST
By:
------------------------------------------
Lee M. Brower
Its: Trustee
THE DVNM TRUST
By:
------------------------------------------
Lee M. Brower
Its: Trustee
S-4
<PAGE> 9
SIGNATURE PAGE OF AMENDMENT NO. 2
TO AMENDED AND RESTATED STOCKHOLDERS AGREEMENT
THE CWN TRUST
By:
------------------------------------------
Lee M. Brower
Its: Trustee
THE DPN TRUST
By:
------------------------------------------
Craig S. Tillotson
Its: Trustee
By:
------------------------------------------
Lee M. Brower
Its: Trustee
THE GNT TRUST
By:
------------------------------------------
Craig S. Tillotson
Its: Trustee
By:
------------------------------------------
Lee M. Brower
Its: Trustee
THE LMB TRUST
By:
------------------------------------------
Lee M. Brower
Its: Trustee
S-5
<PAGE> 10
SIGNATURE PAGE OF AMENDMENT NO. 2
TO AMENDED AND RESTATED STOCKHOLDERS AGREEMENT
THE SANDRA N. TILLOTSON FOUNDATION
By:
------------------------------------------
Sandra N. Tillotson
Its: Trustee
By:
------------------------------------------
Lee M. Brower
Its: Trustee
THE SANDRA N. TILLOTSON FIXED
CHARITABLE TRUST
By:
------------------------------------------
Sandra N. Tillotson
Its: Trustee
By:
------------------------------------------
L. S. McCullough
Its: Independent Trustee
SNT RHINO COMPANY, L.C.
By:
------------------------------------------
Craig S. Tillotson
Its: Manager
---------------------------------------------
Steven J. Lund, individually
---------------------------------------------
Kalleen Lund, individually
SKASIA, LTD.
By:
------------------------------------------
Steven J. Lund
Its: General Partner
S-6
<PAGE> 11
SIGNATURE PAGE OF AMENDMENT NO. 2
TO AMENDED AND RESTATED STOCKHOLDERS AGREEMENT
By:
------------------------------------------
Kalleen Lund
Its: General Partner
THE S AND K LUND TRUST
By:
------------------------------------------
Blake M. Roney
Its: Trustee
THE STEVEN J. AND KALLEEN LUND FOUNDATION
By:
------------------------------------------
Steven J. Lund
Its: Trustee
By:
------------------------------------------
Kalleen Lund
Its: Trustee
THE STEVEN AND KALLEEN LUND FIXED
CHARITABLE TRUST
By:
------------------------------------------
Steven J. Lund
Its: Trustee
By:
------------------------------------------
Kalleen Lund
Its: Trustee
By:
------------------------------------------
L. S. McCullough
Its: Independent Trustee
S & K RHINO COMPANY, L.C.
By:
------------------------------------------
Craig F. McCullough
Its: Manager
S-7
<PAGE> 12
SIGNATURE PAGE OF AMENDMENT NO. 2
TO AMENDED AND RESTATED STOCKHOLDERS AGREEMENT
---------------------------------------------
Brooke B. Roney, individually
---------------------------------------------
Denice R. Roney, individually
BDASIA, LTD.
By:
------------------------------------------
Brooke B. Roney
Its: General Partner
By:
------------------------------------------
Denice R. Roney
Its: General Partner
THE B AND D RONEY TRUST
By:
------------------------------------------
Blake M. Roney
Its: Trustee
THE BROOKE BRENNAN AND DENICE RENEE
RONEY FOUNDATION
By:
------------------------------------------
Brooke B. Roney
Its: Trustee
By:
------------------------------------------
Denice R. Roney
Its: Trustee
---------------------------------------------
Kirk V. Roney, individually
S-8
<PAGE> 13
SIGNATURE PAGE OF AMENDMENT NO. 2
TO AMENDED AND RESTATED STOCKHOLDERS AGREEMENT
---------------------------------------------
Melanie K. Roney, individually
KMASIA, LTD.
By:
------------------------------------------
Kirk V. Roney
Its: General Partner
By:
------------------------------------------
Melanie K. Roney
Its: General Partner
THE K AND M RONEY TRUST
By:
------------------------------------------
Rick A. Roney
Its: Trustee
THE KIRK V. AND MELANIE K. RONEY FOUNDATION
By:
------------------------------------------
Kirk V. Roney
Its: Trustee
By:
------------------------------------------
Melanie K. Roney
Its: Trustee
THE KIRK AND MELANIE RONEY FIXED
CHARITABLE TRUST
By:
------------------------------------------
Kirk V. Roney
Its: Trustee
S-9
<PAGE> 14
SIGNATURE PAGE OF AMENDMENT NO. 2
TO AMENDED AND RESTATED STOCKHOLDERS AGREEMENT
By:
------------------------------------------
Melanie K. Roney
Its: Trustee
By:
------------------------------------------
L. S. McCullough
Its: Trustee
K & M RHINO COMPANY, L.C.
By:
------------------------------------------
Craig F. McCullough
Its: Manager
---------------------------------------------
Keith R. Halls, individually
---------------------------------------------
Anna Lisa Massaro Halls, individually
KAASIA, LTD.
By:
------------------------------------------
Keith R. Halls
Its: General Partner
By:
------------------------------------------
Anna Lisa Halls
Its: General Partner
THE K AND A HALLS TRUST
By:
------------------------------------------
Michael Lee Halls
Its: Trustee
S-10
<PAGE> 15
SIGNATURE PAGE OF AMENDMENT NO. 2
TO AMENDED AND RESTATED STOCKHOLDERS AGREEMENT
By:
------------------------------------------
Dennis Morgan
Its: Trustee
THE HALLS FAMILY TRUST
By:
------------------------------------------
Michael Lee Halls
Its: Trustee
By:
------------------------------------------
Dennis Morgan
Its: Trustee
THE KEITH AND ANNA LISA HALLS FIXED
CHARITABLE TRUST
By:
------------------------------------------
Keith R. Halls
Its: Trustee
By:
------------------------------------------
Anna Lisa Halls
Its: Trustee
By:
------------------------------------------
L. S. McCullough
Its: Independent Trustee
THE KEITH RAY AND ANNA LISA MASSARO
HALLS FOUNDATION
By:
------------------------------------------
Keith R. Halls
Its: Trustee
By:
------------------------------------------
Anna Lisa Halls
Its: Trustee
S-11
<PAGE> 16
SIGNATURE PAGE OF AMENDMENT NO. 2
TO AMENDED AND RESTATED STOCKHOLDERS AGREEMENT
K & A RHINO COMPANY, L.C.
By:
------------------------------------------
Craig F. McCullough
Its: Manager
---------------------------------------------
Craig S. Tillotson, individually
THE CST TRUST
By:
------------------------------------------
Robert L. Stayner
Its: Trustee
THE JS TRUST
By:
------------------------------------------
Lee M. Brower
Its: Trustee
THE JT TRUST
By:
------------------------------------------
Lee M. Brower
Its: Trustee
THE CB TRUST
By:
------------------------------------------
Lee M. Brower
Its: Trustee
THE CM TRUST
By:
------------------------------------------
Lee M. Brower
Its: Trustee
S-12
<PAGE> 17
SIGNATURE PAGE OF AMENDMENT NO. 2
TO AMENDED AND RESTATED STOCKHOLDERS AGREEMENT
THE BCT TRUST
By:
------------------------------------------
Lee M. Brower
Its: Trustee
THE ST TRUST
By:
------------------------------------------
Lee M. Brower
Its: Trustee
THE NJR TRUST
By:
------------------------------------------
Lee M. Brower
Its: Trustee
THE RLS TRUST
By:
------------------------------------------
Lee M. Brower
Its: Trustee
THE RBZ TRUST
By:
------------------------------------------
Lee M. Brower
Its: Trustee
S-13
<PAGE> 18
SIGNATURE PAGE OF AMENDMENT NO. 2
TO AMENDED AND RESTATED STOCKHOLDERS AGREEMENT
THE LB TRUST
By:
------------------------------------------
Lee M. Brower
Its: Trustee
THE CRAIG S. TILLOTSON FOUNDATION
By:
------------------------------------------
Craig S. Tillotson
Its: Trustee
By:
------------------------------------------
Lee M. Brower
Its: Trustee
THE CRAIG S. TILLOTSON FIXED CHARITABLE TRUST
By:
------------------------------------------
Craig S. Tillotson
Its: Trustee
By:
------------------------------------------
Lee M. Brower
Its: Independent Trustee
CST RHINO COMPANY, L.C.
By:
------------------------------------------
Sandra N. Tillotson
Its: Manager
---------------------------------------------
R. Craig Bryson, individually
---------------------------------------------
Kathleen D. Bryson, individually
S-14
<PAGE> 19
SIGNATURE PAGE OF AMENDMENT NO. 2
TO AMENDED AND RESTATED STOCKHOLDERS AGREEMENT
RCKASIA, LTD.
By:
------------------------------------------
R. Craig Bryson
Its: General Partner
By:
------------------------------------------
Kathleen D. Bryson
Its: General Partner
THE C AND K TRUST
By:
------------------------------------------
Steven J. Lund
Its: Trustee
THE BRYSON FOUNDATION
By:
------------------------------------------
R. Craig Bryson
Its: Trustee
By:
------------------------------------------
Kathleen D. Bryson
Its: Trustee
THE BRYSON FIXED CHARITABLE TRUST
By:
------------------------------------------
R. Craig Bryson
Its: Trustee
By:
------------------------------------------
Kathleen D. Bryson
Its: Trustee
By:
------------------------------------------
Robert L. Stayner
Its: Independent Trustee
S-15
<PAGE> 20
CKB RHINO COMPANY, L.C.
By:
------------------------------------------
Keith R. Halls
Its: Manager
THE RICK AND KIMBERLY RONEY VARIABLE
CHARITABLE REMAINDER UNITRUST
By:
------------------------------------------
James Blaylock
Its: Trustee
THE RICK AND KIMBERLY RONEY FIXED
CHARITABLE UNITRUST
By:
------------------------------------------
Rick A. Roney
Its: Trustee
By:
------------------------------------------
Kimberly Roney
Its: Trustee
By:
------------------------------------------
L.S. McCullough
Its: Independent Trustee
S-16
<PAGE> 1
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 Nu Skin 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
June 1, 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, relating
to the financial statements of Nu Skin Acquired Entities, which appears in such
Prospectus. We also consent to the references to us under the heading "Experts"
in such Prospectus.
GRANT THORNTON LLP
Provo, Utah
June 1, 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
