UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
| [X] | Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2001 or |
| [ ] | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. |
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NU SKIN ENTERPRISES, INC. (Exact name of registrant as specified in its charter) |
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Delaware (State or other jurisdiction of incorporation) |
001-12421 (Commission File No.) |
87-0565309 (IRS Employer Identificaiton No.) |
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75 West Center Street Provo, UT 84601 (Address of principal executive offices, including zip code) Registrant's telephone number, including area code: (801) 345-6100 |
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Title of each class
Class A common stock, $.001 par value |
Name of Exchange on which registered New York Stock Exchange |
Secutities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No
Based on the closing sales price of the Class A common stock on the New York Stock Exchange on March 18, 2002, the aggregate market value of the voting stock (Class A and Class B common stock) held by non-affiliates of the Registrant was approximately $286 million. For purposes of this calculation, voting stock held by executive officers, directors, and stockholders holding more than 10% of the voting stock has been excluded.
As of March 18, 2002, 33,769,717 shares of the Registrant's Class A common stock, $.001 par value per share, and 48,637,043 shares of the Registrant's Class B common stock, $.001 par value per share, were outstanding.
Documents incorporated by reference. Portions of the Registrant's definitive Proxy Statement for the Registrant's 2002 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission within 120 days after the Registrant's fiscal year end are incorporated by reference in Part III of this report.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]
TABLE OF CONTENTS
| PART 1 | -1- | ||
| ITEM 1. | BUSINESS | -1- | |
| General | -1- | ||
| Operating Divisions | -1- | ||
| Nu Skin | -2- | ||
| Pharmanex | -4- | ||
| Big Planet | -7- | ||
| Regional Profiles | -9- | ||
| Distribution System | -11- | ||
| Competition | -16- | ||
| Intellectual Property | -17- | ||
| Government Regulations | -17- | ||
| Employees | -21- | ||
| Risk Factors | -22- | ||
| ITEM 2. | PROPERTIES | -29- | |
| ITEM 3. | LEGAL PROCEEDINGS | -29- | |
| ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS | -30- | |
| PART II | -31- | ||
| ITEM 5. | MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS | -31- | |
| ITEM 6. | SELECTED FINANCIAL DATA | -31- | |
| ITEM 7. | MANAGEMENT'S DISCUSSION AND ANLAYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | -33- | |
| ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK | -46- | |
| ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA | -46- | |
| ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE | -67- | |
| PART III | -67- | ||
| PART IV | -67- | ||
| ITEM 14. | EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K | -67- | |
| SIGNATURES | -73- |
FORWARD LOOKING STATEMENTS
THIS ANNUAL REPORT ON FORM 10-K, IN PARTICULAR "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS," AND "ITEM 1. BUSINESS," INCLUDE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. THESE STATEMENTS REPRESENT THE COMPANY'S EXPECTATIONS OR BELIEFS CONCERNING, AMONG OTHER THINGS, FUTURE REVENUE, EARNINGS, AND OTHER FINANCIAL RESULTS, NEW PRODUCTS, FUTURE OPERATIONS AND OPERATING RESULTS, AND FUTURE BUSINESS AND MARKET OPPORTUNITIES. THE COMPANY WISHES TO CAUTION AND ADVISE READERS THAT THESE STATEMENTS INVOLVE RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THE EXPECTATIONS AND BELIEFS CONTAINED HEREIN. FOR A SUMMARY OF CERTAIN RISKS RELATED TO THE COMPANY'S BUSINESS, SEE "ITEM 1. BUSINESS - RISK FACTORS" BEGINNING ON PAGE 22.
Unless the context requires otherwise, references to the Company are to Nu Skin Enterprises, Inc. and its subsidiaries. In this Annual Report on Form 10-K, references to "dollars" and "$" are to United States dollars. Nu Skin, Pharmanex, "6S Quality Process" and Big Planet are trademarks of the Company. The italicized product names used in this Annual Report on Form 10-K are product names and also, in certain cases, trademarks of the Company.
PART I
| ITEM 1. | BUSINESS |
General
Nu Skin Enterprises ("Nu Skin Enterprises" or the "Company") is a leading, global direct selling company that develops and distributes premium-quality, innovative personal care and nutritional products. The Company also markets and distributes technology, Internet and telecommunications products and services. Nu Skin Enterprises is one of the largest direct selling companies in the world and currently operates in 34 countries throughout Asia, North and South America and Europe. The Company distributes products primarily through a network marketing system. The Company currently has a sales force of approximately 558,000 active independent distributors located throughout its markets who purchase products for resale to consumers and for personal consumption. The Company also operates a small professional employer organization ("PEO") in the United States that offers outsourced employee benefits to small businesses. The Company has incubated these services with a view of potentially launching these services through the Company's network marketing distribution system. The Company currently has no intention to launch the PEO service through its distributors in the foreseeable future.
Operating Divisions
Nu Skin Enterprises has three operating divisions: Nu Skin, which offers personal care products; Pharmanex, which offers nutritional products; and Big Planet, which offers technology, Internet and telecommunications products and services and includes the operations of the PEO. Presented below are the U.S. dollar amounts and percentages of revenue derived by the Company from the sale of Nu Skin products, Pharmanex products and Big Planet products and services for each of the years ended December 31, 1999, 2000 and 2001. This table should be read together with the information presented in "Item 7- Management's Discussion and Analysis of Financial Condition and Results of Operations," which discusses the costs associated with generating the aggregate revenue presented.
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| Revenue by Product Category(1) | ||||||||||||||||||||||||||
| (Dollar Amounts in Thousands) | ||||||||||||||||||||||||||
| Year Ended | Year Ended | Year Ended | ||||||||||||||||||||||||
| December 31, 1999 | December 31, 2000 | December 31, 2001 | ||||||||||||||||||||||||
| Product Category | $ | % | $ | % | $ | % | ||||||||||||||||||||
| Nu Skin | 503,570 | 56.3 | 441,743 | 50.2 | 423,707 | 47.8 | ||||||||||||||||||||
| Pharmanex | 379,241 | 42.4 | 383,823 | 43.6 | 396,306 | 44.8 | ||||||||||||||||||||
| Big Planet (2) | 11,438 | 1.3 | 54,192 | 6.2 | 65,608 | 7.4 | ||||||||||||||||||||
| Total | 894,249 | 100.0 | 879,758 | 100.0 | 885,621 | 100.0 | ||||||||||||||||||||
| –––––––– | –––––––– | –––––––– | –––––––– | –––––––– | –––––––– | |||||||||||||||||||||
| (1) | Over 83% of the Company’s sales are transacted in foreign currencies that are converted to U.S. dollars for financial reporting purposes at weighted average exchange rates. The revenue reported above, therefore, masks local currency revenue growth during 2001 because of foreign currency fluctuations. Foreign currency fluctations negatively impacted reported revenue in 2001 by 8.7% compared to 2000 and positively impacted reported revenue in 2000 by 4.0% compared to 1999. |
| (2) | The Company acquired Big Planet in July 1999. Accordingly, the table above only reflects revenue for the period during which the Company owned Big Planet (i.e., from and after July 13, 1999). Big Planet’s revenue for the year ended December 31, 1999 was $21.8 million. In addition, Big Planet product revenue includes revenue from the PEO in 2000 and 2001. |
Overview. Nu Skin is the Company's original product line and currently consists of premium-quality lines of over 100 personal care products. Nu Skin's strategy is to distribute high quality personal care products and treatments that utilize advanced, innovative formulas. For example, Nu Skin was one of the first companies to market topical applications of various vitamins including Vitamins A, C and E. Other examples include the Nu Skin 180° Anti-Aging Skin Therapy system, a scientifically advanced skin care system designed to fight the signs of aging, and Tru Face Line Corrector, an innovative product utilizing pro-collagen peptides that help soften moderate to deep lines around the mouth, eyes and forehead. Nu Skin uses its educated distributor force to provide consumers with a high level of information and instruction about its products and guidelines for using them most effectively. Nu Skin was an official sponsor of the Salt Lake City 2002 Olympic Games and is an official sponsor of the U.S. Olympic teams through the 2004 Athens summer games.
Nu Skin Products. Nu Skin's personal care products are divided into the following lines: face care, body care, hair care, an ethnobotanical product line, color cosmetics and specialty products. Nu Skin offers products individually and in comprehensive product sets that include a variety of products in each product line.
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The following is a brief description of each product line within the Nu Skin division:
Face Care. The face care line is Nu Skin's premier line of personal care products and consists of over 40 different cleansers, moisturizers and special treatments. Nu Skin's cleansers and moisturizers allow users to cleanse thoroughly without causing dryness and to moisturize with effective humectants. Examples of products in this line include: Rejuvenating Cream, a facial moisturizer and one of Nu Skin's most popular personal care products; pH Balance Facial Toner, a product combining aloe vera and other ingredients designed to prepare the skin for effective moisturization; and a Nutricentials line of products that are fortified with topically applied nutrient building blocks.
Nu Skin's specialized treatment products utilize advanced formulas and ingredients designed for specific skin care conditions. Special treatment products include the scientifically advanced Nu Skin 180° Anti-Aging Skin Therapy system of products. This product utilizes an optimized level of lactic acid with arginine to help fight the signs of aging. Specialty treatments include a variety of other products including Nu Skin White, a line of tone-evening formulations, and Skin Brightening Complex, which is designed to diminish the appearance of discoloration caused by sun exposure and aging.
Body Care. Nu Skin's line of body care products incorporates premium-quality ingredients to cleanse and condition skin. The body care product line consists of eight different cleansers, moisturizers and special treatments. The cleansers are formulated without soaps, which dry the skin, and include Body Bar, a non-soap cleansing bar. Body care 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, which combines multiple hydroxy acids.
Hair Care. Nu Skin introduced a new and improved hair care product line in 2001. Each hair care product is enriched with Nutricentials - potent nutrients and environmental protectants designed to enhance the appearance of the hair and to meet the needs of people with all types of hair. The new hair care line consists of 13 shampoos, conditioners and styling products that utilize ingredients such as sunflower seed extracts, Ceregen, an innovative wheat-based complex of conditioning molecules designed to enhance hair repair, and Quinoa, a protein staple.
Epoch Ethnobotanicals. Epoch is a line of ethnobotanical personal care products created in cooperation with well-known ethnobotanists. These products apply natural compounds that have been traditionally used by indigenous cultures and that have been validated by modern day science. Examples of products in this line include: Glacial Marine Mud, a revitalizing clay mask containing beneficial sea botanicals; Firewalker Foot Cream, created specifically to soothe and rejuvenate tired, aching feet; and Epoch Antiseptic Hand Sanitizer, a product containing lavender that disinfects hands. In 2001, this line was expanded to include IceDancer, a soothing gel that utilizes natural wild mint to help soothe aching legs.
Color Cosmetics. Nu Skin's color cosmetics line, Nu Colour, consists of 13 talc-free products with over 150 SKU's including eye shadow, lipliner, lipsticks, mascara, blush, finishing powder, foundations and concealers.
Specialty Products. Nu Skin has licensed the right to sell Nutriol products in its direct selling channel. Nutriol hair care products include a proprietary ingredient designed to replenish hair with vital minerals and elements. Nu Skin also has an exclusive license in the direct selling channel for 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. The product line includes toothpaste, mouthwash and floss. In addition, Nu Skin offers a line of sun protection products.
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Nu Skin Product Development. From the inception of the Company, Nu Skin's product philosophy has been: "All of the Good and None of the Bad." Nu Skin products are formulated to feature only quality, nurturing ingredients and to avoid shortcuts with unnecessary or unfriendly fillers. Nu Skin is also committed to continuously improving its evolving personal care product formulations to incorporate innovative and proven ingredients into its product line. Recent examples of new products include the Nu Skin 180° Anti-Aging Skin Therapy system, one of the first products to feature hydroxy acids in a comprehensive anti-aging program, and Tru Face Line Corrector, an innovative product that incorporates pro-collagen peptides to help soften medium to deep lines around the mouth, eyes and forehead.
For product development support in personal care, Nu Skin relies on an advisory board comprised of recognized authorities in various disciplines. Nu Skin also has entered into an agreement with Stanford University Medical Center's Department of Dermatology for directed research and clinical trials of Nu Skin products or materials at the Nu Skin Center for Dermatological Research at Stanford University's School of Medicine. Nu Skin also utilizes its strategic relationships with vendors for access to directed research and development work.
Nu Skin Sourcing and Production. In order to maintain high product quality, Nu Skin acquires its ingredients and products from reliable and reputable suppliers that Nu Skin considers to be superior sources of such ingredients and products. For approximately nine years, Nu Skin has acquired ingredients and products from a supplier that currently manufactures approximately 50% of its personal care products. Nu Skin also has ongoing relationships with secondary and tertiary suppliers who supply the remaining products and ingredients. Nu Skin believes that, in the event it is unable to source any products or ingredients from its major supplier, it could produce or replace such products or substitute ingredients without great difficulty or significant increases in the cost of goods sold from its other secondary and tertiary suppliers.
During 2001, Nu Skin also established its own manufacturing facility near Shanghai, China. At this facility, the Company currently manufactures products used primarily for the Company's retail stores in China. A small portion of the output from this facility is exported to other markets.
Pharmanex
Overview. Pharmanex currently offers approximately 50 nutritional products. Pharmanex believes that its scientifically-substantiated nutritional supplements are particularly well-suited to network marketing because the average consumer is often uneducated or confused about nutritional supplements, particularly the importance of scientific substantiation. The direct selling channel can be 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 its products from those offered by competitors. Pharmanex was an official sponsor of the Salt Lake City 2002 Olympic Games and is an official sponsor of the U.S. Olympic teams through the 2004 Athens summer games.
Pharmanex Products. Pharmanex's nutritional supplements currently include the LifePak line of multivitamin, mineral and phytonutrient supplements and a line of self-care nutritional supplements. Pharmanex also offers weight management and sports and fitness products, nutritious beverages and specialty products. Pharmanex has designed its nutritional products to promote healthy, active lifestyles and general well-being when used in conjunction with proper diet and exercise.
The following is a brief description of each of the nutritional product lines within the Pharmanex division:
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Multivitamin/Mineral Supplements. This product line consists of various vitamin, mineral and antioxidant supplements, including LifePak. The LifePak family of products, the core Pharmanex nutritional supplement, is designed to provide a beneficial mix of nutrients including vitamins, minerals, antioxidants and phytonutrients, which are nutrient extracts from plants. In 2001, Pharmanex introduced a reformulated anti-aging version of LifePak. Management believes, based on publicly available data, that LifePak constitutes one of the leading selling multi-vitamin and mineral supplements in the world. Sales of LifePak accounted for approximately 17% of the Company's total revenue in 2001. Pharmanex currently sells LifePak in 14 markets, including the United States, Japan and Taiwan. Pharmanex offers LifePak in different formulations to meet the unique needs of adults generally, women, seniors, teenagers, children and pregnant women.
Self-Care Nutritional Supplements. Pharmanex currently
offers a line of self-care natural nutritional supplements (Pharmanex Solutions)
which are nutritional products designed to meet the personalized needs of the
user in the following areas:
• Energy/Stamina
• Heart Health
• Antioxidant Protection
• Relaxation
• Immune System Support
• Women's Health
• Special Needs
These self-care dietary supplements are designed to provide consumers with a
specific, consistent level of the desired dosage of the important components of
the supplement.
The principal products in this line include Cholestin, CordyMax Cs-4, TeGreen 97, BioGingko 27/7 and Bio St. John's. Several clinical trials 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. BioGinkgo 27/7 is a ginkgo biloba extract from a patented process that promotes blood circulation to the brain, arms and legs. TeGreen 97 is a supplement that contains a concentrated level of decaffeinated green tea polyphenols, potent antioxidants found in green tea. In 2001, the Company introduced a new version of Cholestin into the United States market following an adverse court decision ruling that the prior red-yeast rice version of Cholestin could not be marketed in the United States as a nutritional supplement. The Company continues to market the red-yeast rice version of Cholestin outside of the United States.
Pharmanex recently broadened its Pharmanex self-care line of products to provide simple solutions to complex health issues. This line of products includes: Prostate Formula, a product utilizing standardized saw palmetto extract, Pharmanex's proprietary TeGreen 97 product and other antioxidants; Energy Formula, a product combining three complementary ingredients, including standardized rhodiola, to offer rapid results without the use of harmful stimulants; Cardio Formula, a product utilizing a comprehensive formula that combines five benefits in one easy-to-take product to promote good circulatory health, prevent free radical induced damage to LDL cholesterol and other aspects necessary to maintain a good cardiovascular system; Immune Formula, a product combining standardized echinacea, goldenseal and Vitamin C, as well as beta-sitosterol and Arabinogalactin AG; Hair Formula, designed to promote and maintain healthy hair; and Vein Formula, designed to promote circulatory and leg vein health.
Pharmanex Body Design. Pharmanex Body Design was created by Pharmanex to capitalize on the sports fitness market as well as to create a presence in the large weight management market. The Pharmanex Body Design system, when combined with regular exercise, is one of the few systems that has
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been clinically proven to reduce weight without the use of the stimulant ephedrine. Pharmanex Body Design consists of the following four product lines:
| • | Nutrition Series: This line of products is intended to help consumers build a better body. Products in this line include Pharmanex Body Design meal replacement high protein shakes, bars and soups. |
| • | Lean Series: This line of products is designed for persons trying to lose weight. Products in this line include: Crave Ease, a product that utilizes a proprietary blend of ingredients including Glucosol to help diminish cravings for carbohydrates; fiber supplements marketed under the name FibreNet; Metabotrim, a supplement designed to assist the body’s metabolism of food for maximum energy conversion; and Diene-O-Lean, a product containing conjugated linoleic acid, which was shown in a recent study to significantly reduce body fat mass in a 12-week period. |
| • | Workout Series: This product line is designed for consumers who want to maximize their fitness levels and includes products such as OverDrive, a sports supplement that contains antioxidants, B vitamins and chromium chelate, and Pharmanex High Five, which provides nutritional support for post-exercise muscle recovery. |
Nutritious Beverages. As part of its mission to promote a healthy lifestyle and long-term wellness, Pharmanex's Nutri-Foods product line includes two nutritional drinks, Splash C with aloe vera, a healthy beverage providing significant amounts of Vitamins C and E as well as calcium in each serving, and Appeal, a drink providing carbohydrates, proteins, chelated minerals, vitamins and fiber for energy.
Specialty Products. Pharmanex also offers a high-performance home water filtration system in certain of its Asian markets including Japan and Taiwan. In addition, Pharmanex anticipates introducing diagnostic tools to enable a consumer to monitor the impact of supplementation on body chemistry.
Pharmanex Product Development. Pharmanex is committed to providing high quality, standardized and substantiated nutritional supplements. Pharmanex avoids 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. In addition, Pharmanex implements quality control processes designed to enhance its ability to keep products free from contaminants. Pharmanex believes that it is one of the few nutritional supplement companies in the United States that has a research and development program modeled after the pharmaceutical industry. Pharmanex believes that this research and development capability provides it with an important competitive advantage in the industry. Moreover, because a substantial portion of Pharmanex's research and development activities are conducted in China, it believes that it is able to conduct quality research and development work as well as initial clinical trials in higher numbers due to the significantly lower cost than would be incurred if Pharmanex conducted comparable work in the United States. Pharmanex recently consolidated all of its U.S. based research staff into a new laboratory in Provo, Utah.
Pharmanex utilizes its "6S Quality Process" in its development activities, which is designed to provide a precise, standardized, recommended dosage of each beneficial 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. |
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| • | Sourcing. Investigating potential sources, evaluating the quality of such sources and performing botanical and chemical evaluations where appropriate. |
| • | Structure. Determining the structure 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 Pharmanex. |
Pharmanex employs approximately 50 scientists at its dedicated research and development centers in Shanghai, China and Beijing, China and at its Provo, Utah offices. Pharmanex also has working relationships with 150 other independent scientists including an advisory board comprised of recognized authorities in various related disciplines. In addition, Pharmanex evaluates a significant number of product ideas presented to it by distributors and other outside sources. Pharmanex has established collaborative agreements with two prominent universities and research institutions in China: Shanghai Medical University and Beijing Medical University. The staffs of these institutions include scientists with expertise in natural product chemistry, biochemistry, pharmacology and clinical studies. Pharmanex's research and development center in Shanghai coordinates and validates Pharmanex's collaborative efforts with these institutions. Pharmanex also collaborates with other major universities in the United States and other countries from time to time. Some of the university research centers that Pharmanex has worked with include UCLA, the Rippe Center for Clinical Lifestyle Research, Columbia University, the University of Kansas, the University of Hong Kong School of Medicine, and Taiwan Academia Sinica.
Pharmanex Sourcing and Production. Substantially all of Pharmanex's nutritional supplements and ingredients, including LifePak, are produced or provided by third-party suppliers that Pharmanex considers to be among the best suppliers of such products and/or ingredients. Pharmanex currently relies on two unaffiliated suppliers for approximately 50% of its nutritional supplements. Pharmanex believes that, in the event it were unable to source any products or ingredients from these suppliers or its other current suppliers, it could produce or replace such products or substitute ingredients without great difficulty or significant increases in the cost of goods sold. Pharmanex also maintains an extraction and processing facility located in Huzhou, Zhejiang Province, in China, where it currently produces the extracts for its TeGreen 97 and Reishi products.
Big Planet
Overview. Big Planet offers a suite of telecommunication, Internet and other technology products. Big Planet revenue also reflects the operation of a small PEO in the United States. Big Planet seeks to position itself on the leading edge of the latest technology trends involving the Internet, telecommunications, and other residual "connections" to the home, while utilizing the power of network marketing to introduce consumers to technology products designed to simplify and enhance their lives. The Company believes that technology, Internet and telecommunications products are compatible with its distribution system and that Big Planet attracts a younger demographic of technology oriented entrepreneurs into the Company's network of distributors. Distributors attracted by Big Planet also are increasingly purchasing Nu Skin and Pharmanex products that offer comparatively high levels of commissionable sales volume for resale and personal consumption.
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Big Planet Products. Big Planet has invested in local infrastructure for its Internet and operation support facilities in the United States for hosting Web pages and providing e-mail services. Big Planet also has entered into contractual relationships with several industry-leading technology companies, including Qwest Communications, I-Link, Dell, Nifty Corporation, Eastern Broadband and other key vendors, to provide convenient and reliable technology, Internet and telecommunications products and services. 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.
Internet Services. Big Planet provides dial-up Internet access in the United States to its customers through a variety of separate access plans to cover the needs of a broad demographic group of consumers. Big Planet outsources Internet access in the United States through a nationwide backbone network of more than 3,000 local dial-up access sites, or "POPS," in cities throughout the United States. Big Planet also offers Internet access through third party Internet service providers in Japan and Taiwan that are co-branded with Big Planet. Big Planet currently has approximately 37,000 Internet service customers in the United States and approximately 45,000 customers in its foreign markets. Big Planet also provides a powerful yet easy-to-use tool for creating and maintaining sophisticated Web sites with optional e-commerce capabilities, which is designed for small businesses, including Big Planet representatives.
Telecommunications. Big Planet currently offers domestic and international long distance, paging products and services and personal 800 numbers. Big Planet offers both residential and business long distance services through its relationship with Qwest Communications in the United States, My Line in Japan, and TTN in Taiwan. Big Planet also offers enhanced communications through I-Link's "V-Link" product, which provides enhanced communications capabilities to customers including unified messaging of voicemail, e-mail and fax, and "find-me, follow me" features that allow a single phone call to ring to various different telephone devices such as cellular, office and home.
E-Commerce. The Big Planet online mall at bpstore.com provides an online shopping environment to Big Planet distributors and their customers. The Big Planet Mall 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 and Pharmanex products. Big Planet has entered into agreements that link the Big Planet Mall to Web sites of over 200 online retailers such as OnlineOfficeSupplies.com, Dell, Walmart.com and OfficeMax. Distributors earn commissions on purchases by their customers through the online mall and these affiliate sites. The Big Planet portal, my.bigplanet.com, completes the Internet community that Big Planet provides, offering customers various sources of information such as weather forecasts, stock quotes and other services.
Electric Power. Through a strategic relationship with Planet Electric, a company that develops technologically advanced battery systems, Big Planet provides environmentally friendly and efficient battery systems for cellular phones and bicycles. This technology is utilized in an advanced bicycle, the E-Bike, that incorporates a power-on-demand battery system for unassisted speeds up to 15 miles per hour, lightweight design and quick charging. The E-Bike was developed by Lee Iacocca's company, EV Global Motor Company.
Big Planet Product Development. Big Planet continues to identify and secure contractual relationships with various vendors and suppliers that will enable Big Planet to sell competitively-priced technology, Internet and telecommunications 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 mall.
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Big Planet Sourcing and Production. Except for its Web hosting and Big Planet Mall, substantially all of the services and products offered by Big Planet are currently 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 I-Link to provide voice-over-Internet services.
Professional Employer Organization. In 2000, the Company launched a small professional employer organization ("PEO") that assists small- to mid-sized businesses with non-revenue generating functions, namely human resource services. The business was started as part of an incubation of a concept that the Company had considered launching through the Company's distributor force as a complement to Big Planet's array of services or possibly as the basis of a separate divisional opportunity. The Company currently has no intention to launch the PEO service through its distributors in the foreseeable future. The PEO is a traditional professional employer organization currently offering services in four areas: payroll administration, benefits administration, risk management and human resources. The PEO was launched with minimal capital investment and the Company is not providing any material level of ongoing support for the PEO. At present, the PEO services 65 clients in 10 states, primarily in the Intermountain West region and generated $24.7 million in revenue in 2001.
For information on revenue for each of the geographic regions in which the Company operated for the years ended December 31, 1999, 2000 and 2001, reference is made to "Item 7-Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 17 to the consolidated financial statements included in Item 8.
North Asia. The North Asia region currently consists of the Company's markets in Japan and South Korea. Japan is the Company's largest market with approximately $508 million in revenue in 2001. According to the World Federation of Direct Selling Associations, the direct selling channel in Japan generated sales of approximately $28 billion of goods and services in 2000, making Japan the largest direct selling market in the world. As of December 31, 2001, virtually all of Nu Skin's personal care products and a majority of Pharmanex's nutritional supplements, including LifePak, the Company's leading multi-vitamin and mineral supplement, were available in the Japanese market. Big Planet has introduced various technology products into Japan including "Big Planet powered by @nifty" Internet service offered through Nifty Corporation, computers and a set top Internet device. According to the World Federation of Direct Selling Associations, the direct selling channel in South Korea generated approximately $2.5 billion of goods and services in 2000. The Company's revenue in this market grew 47% to $46 million in 2001. Nu Skin currently offers the majority of its personal care products and Pharmanex currently offers approximately one-half of its nutritional supplements in South Korea.
Southeast Asia. The Company's Southeast Asia region currently consists of the markets in Taiwan, Hong Kong, Singapore, Thailand, the Philippines, New Zealand, Australia, Malaysia and a small retail operation in China. Taiwan is the largest market in this region with revenue of approximately $70 million in 2001. Nu Skin Taiwan is one of the largest direct selling companies in Taiwan. According to the World Federation of Direct Selling Associations, the direct selling channel in Taiwan generated approximately $1.2 billion in sales of goods and services in 2000. Approximately 2.9 million people, which is about 10% of Taiwan's population, are estimated to participate in direct selling. As of December 31, 2001, Nu Skin offered most of its personal care products and Pharmanex offered approximately one-half of its nutritional products in Taiwan. Big Planet currently offers Internet service in Taiwan through a third-party provider and a limited number of other Big Planet Products including telecommunication products. In 2001, the Company's affiliates in Thailand, Hong Kong, Australia and New Zealand posted increased revenue. Revenue in Thailand, Hong Kong, and Australia/New Zealand
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grew by 45%, 18% and 25%, respectively.The Company attributes this growth to good local management in these markets, motivated and productive distributors and international expansion into markets such as Singapore.
In December of 2000, the Company commenced operations in Singapore. The opening of this market was very successful as Singapore generated more than $33 million in sales during its first full year of operations. The Company offers 77 Nu Skin products and three Pharmanex products in this market. In addition, the Company expanded operations into Malaysia in November 2001. Malaysian law requires the Company's Malaysian affiliate to be 70% locally owned. The Company has entered into a Shareholders Agreement with its local partners that allows Nu Skin to manage the day to day operations of the local affiliate, with veto control over all major decisions. In addition, the Company has entered into a Distribution Agreement pursuant to which it sells products to the local affiliate as well as a License Agreement and a Trademark License Agreement pursuant to which the Company receives license fees based on total sales in this market.
The Company currently operates 32 retail branch outlets in China. The Company sells its Scion line of personal care products through these retail branches as well as various third party personal care products. The Company has not yet introduced its premium Nu Skin line of products into this market. Because direct sales activities that use non-employees are currently restricted in China, Nu Skin has established the retail presence as part of the Company's development plans for China. The Company plans to significantly increase the number of stores over the next several years and plans to introduce its global distribution plan into China at such time as the restrictions on direct selling are lifted. It is currently anticipated that these restrictions may be lifted by December 2004.
North America. The North America region consists of the Company's markets in the United States and Canada. According to the World Federation of Direct Selling Associations, the direct selling channel in the United States generated sales of approximately $26 billion of goods and services in 2000, making the United States the second largest direct selling market in the world. In 2001, the Company generated approximately $149 million in revenue in the United States. Substantially all of Nu Skin's personal care products, Pharmanex's nutritional supplements and Big Planet's products and services are available in the United States.
Other Markets. The Other Markets region currently consists of the markets in Europe, Central and South America and Brazil. The Company currently distributes products in 17 countries in Europe. These countries are: the United Kingdom, Ireland, France, Germany, Belgium, Netherlands, Luxembourg, Spain, Portugal, Italy, Austria, Poland, Sweden, Iceland, Norway, Finland and Denmark. The market in Europe experienced healthy growth in 2001, with revenues increasing by 38% to $23 million. The majority of Nu Skin's personal care products are sold in Europe. Pharmanex also has introduced several of its products in the European market. The Company also distributes a limited number of Big Planet products including Global Web Pages. In the first quarter of 2002, the Company also completed an acquisition of a controlling interest in a small direct selling company in Poland. The Company believes that the direct selling model utilized by this acquired company can be developed into a model that will help the Company compete in less developed economies and expand its operations in Eastern Europe, which the Company believes will be among the fastest growing direct selling regions in the world.
The Company has operations in Brazil, Mexico and Guatemala. According to the World Federation of Direct Selling Associations, the direct selling channel in Brazil generated sales of approximately $2.9 billion of goods and services in 2000. Approximately 25% of Nu Skin's personal care products have been introduced in Brazil, along with 15 locally produced products. Neither Big Planet nor Pharmanex has introduced any of its products in Brazil.
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Overview of Distribution System. The foundation of the Company's sales philosophy and distribution system is network marketing. Distributors purchase products for resale to consumers and for personal consumption. Pursuant to the Company's Global Compensation Plan, the Company currently sells products through independent distributors who are not the Company's employees. Because of the nature of Big Planet's products and services, distributors buy a limited number of Big Planet products for resale but primarily act as independent sales representatives of Big Planet and receive a commission on product sales directly from the Company.
The Company's 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 40 to 43% of revenue from commissionable sales over the last eight years. |
| • | The Company was among the first to allow distributors to be compensated on a unified, global basis for product sales of downline-sponsored distributors around the world, and the Company believes it was 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. |
| • | The Company’s order and fulfillment systems eliminate the need for distributors to carry significant levels of inventory by shipping product orders directly to the customer. |
| • | The Company’s technology and Internet investment and initiatives provide its distributors the opportunity to sell products through personalized Web pages and provide useful tools to help distributors better manage their business. |
Network marketing is an effective vehicle to distribute the Company's products because:
| • | Consumers can learn about products in person from distributors, which the Company believes is more effective for premium-quality products than using television and print advertisements; |
| • | Direct sales allow for actual product testing by potential customers; |
| • | There is greater opportunity for distributor and customer testimonials; and |
| • | As compared to other distribution methods, distributors can give customers higher levels of service and attention by, among other things, following up on sales to ensure proper product usage and customer satisfaction and to encourage repeat purchases. |
The Company's revenue depends directly upon the number and productivity of its distributors. Growth in sales volume requires an increase in the productivity of distributors and/or growth in the total number of distributors. As with other direct selling companies, the Company experiences significant turnover among its distributors. The Company estimates that, as of December 31, 2001, nearly 400 distributorships worldwide maintained Team Elite or Blue Diamond executive distributor levels, which are the Company's two highest executive distributor levels and, together with their extensive downline
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networks, account for substantially all of the Company's 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 the Company's business.
Sponsoring. The Company relies on its distributors to sponsor new distributors. While the Company provides, at cost, product samples, brochures, magazines and other sales materials, distributors are primarily responsible for locating and 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 a network marketing structure. Persons that a distributor sponsors are referred to as "downline" or "sponsored" distributors. If downline distributors also sponsor new distributors, they create additional levels in the structure, but their downline distributors remain in the same downline network as their original sponsoring distributor.
Sponsoring activities are not required of distributors and they receive no compensation for sponsoring. However, because of the financial incentives provided to those who succeed in building a distributor network that consumes and resells products, the Company believes that most of its distributors attempt, with varying degrees of effort and success, to sponsor additional distributors. People are often attracted to become distributors after using the Company's products and becoming regular customers. Once a person becomes a distributor, he or she is able to purchase products directly from the Company at wholesale prices. The distributor is also entitled to sponsor other distributors in order to build a network of distributors and product users. A potential distributor must enter into a standard distributor agreement, which obligates the distributor to abide by the Company's policies and procedures.
Global Compensation Plan. The Company believes that one of its key competitive advantages is the Company's 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 products, allowing distributors to receive commissions for global products sales, rather than merely local product sales. The Company has also enhanced the Global Compensation Plan to allow distributors to develop a seamless global network of downline distributors across any or all of the Company's product divisions. Management believes the Company was 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.
The Company's 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, 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 the Company's competitors. Under the 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 management's knowledge of competitors' distributor compensation plans, management believes that the Global Compensation Plan is among the most financially rewarding plans offered to distributors by network marketing companies. Currently, there are two fundamental ways in which distributors can earn money:
| • | Through retail markups on sales of products purchased by distributors at wholesale, and |
| • | Through a series of commissions on product sales. |
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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 have averaged approximately 40 to 43% of revenue from commissionable sales.
Each of the Company's products carries a specified number of sales volume points. Commissions are based on total personal and group sales volume points per month. Sales volume points are essentially based upon a product's wholesale cost, net of any point-of-sales taxes. As a distributor's business expands and as he or she successfully sponsors other distributors into the business who in turn expand their own business, 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 can increase substantially as downline distributors achieve executive status. In determining commissions, the number of levels of downline distributors included in an executive's commissionable group increases as the number of executive distributorships directly below the executive increases.
On a monthly basis, the Company evaluates distributor requests for exceptions to the terms and conditions of the Global Compensation Plan. While the general policy is to discourage exceptions, the Company believes that the flexibility to grant such exceptions is critical in retaining distributor loyalty and dedication.
As of the end of each of the years indicated below, the Company had the following number of executive distributors in the referenced regions:
| Region | 1997 | 1998 | 1999 | 2000 | 2001 | |||||||
| North Asia | 16,654 | 17,311 | 14,601 | 14,968 | 16,891 | |||||||
| Southeast Asia | 5,642 | 5,091 | 3,419 | 3,044 | 4,540 | |||||||
| North America (1) | — | — | 2,547 | 2,632 | 2,419 | |||||||
| Other Markets | 393 | 379 | 438 | 737 | 989 | |||||||
| Total | 22,689 | 22,781 | 21,005 | 21,381 | 24,839 | |||||||
| ––––––– | ––––––– | ––––––– | ––––––– | ––––––– |
| (1) | North America was not part of the Company’s operations until March 1999 when the Company terminated its License Agreement with a private affiliate. |
Distributor Support. The Company is committed to providing high-level support services tailored to the needs of its distributors in each market. The Company attempts to meet the needs and build the loyalty of distributors by providing personalized distributor services, a support staff that assists distributors as they build networks of downline distributors and a liberal product return policy. Because many distributors have only a limited number of hours each week to concentrate on their business, the
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Company believes that maximizing a distributor's efforts by providing effective distributor support has been and will continue to be important to the Company's success.
Through training meetings, annual conventions, distributor focus groups, regular telephone conference calls and other personal contracts with distributors, the Company seeks to understand and satisfy the needs of its distributors. The Company provides walk-in, telephonic and computerized product fulfillment and tracking services that result in user-friendly, timely product distribution. Several walk-in centers maintain meeting rooms which distributors may utilize in training and sponsoring activities. In addition, the Company is committed to evaluating new ideas in technology and services that it can provide to distributors, such as automatic product reordering. The Company currently utilizes voicemail, teleconferencing, fax and Internet services to provide Company and product information and ordering and to handle group and personal sales volume inquiries.
Technology and Internet Initiatives. The Company believes that the Internet has 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, the Company has committed significant resources to enhancing its e-commerce capabilities and the abilities of its distributors to take advantage of the Internet. In Japan, the Company's largest market, the Company set up an Internet order process in 1999. More than 150,000 Japanese distributors have registered to use such service and more than 20% of all sales in Japan occur over the Internet. The Company maintains Web sites in each of its major markets. In order to enhance its Internet and e-commerce capabilities and to allow distributors and retail customers to purchase products from all divisions in a single shopping experience, the Company launched new, enhanced divisional Web sites in the United States in the first quarter of 2001. In addition, the Company introduced a Global Web Page that allows a distributor to have a personalized Web site through which he or she can sell products in many of the Company's more than 30 global markets.
In 2000 and 2001, Pharmanex and Nu Skin also introduced e-commerce initiatives in the United States and Japan. These initiatives allow distributors to acquire a personalized Pharmanex or Nu Skin Web site in these markets, which provides distributors the ability to channel customers to the personalized Web site to gather information on Pharmanex and Nu Skin products and to purchase products. In Japan nearly 50,000 personalized Web sites have been purchased and customized by distributors.
Rules Affecting Distributors. The Company's 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. The 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 agents or employees. The Company requires distributors to present products and business opportunities ethically and professionally. Distributors further agree that their presentations to customers must be consistent with, and limited to, the product claims and representations made in literature distributed by the Company. 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 the Company currently conducts business and further may not export for sale products from one country to another.
Distributors must represent to the Company that their receipt of commissions is based on retail sales and substantial personal sales efforts. Exhibiting commission statements or checks is prohibited. The Company must produce or pre-approve all sales aids used by distributors such as videotapes, audiotapes, brochures, promotional clothing and other miscellaneous items.
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Distributors may not use any form of media advertising to promote products. Products may be promoted only by personal contact or by literature produced or approved by the Company. Generic business opportunity advertisements, without using the Company's name, may be placed in accordance with required guidelines in some countries. The Company's logos and names may not be permanently displayed at any location. Distributors may not use the Company's trademarks or other intellectual property without the Company's consent.
Except in China, products generally may not be sold, and the Company's 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 specified 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.
In order to qualify for commission bonuses, distributors must satisfy certain requirements. Some of these requirements include:
| • | Achieving at least 100 points, which is approximately $100, in personal sales volume, |
| • | Documenting retail sales or customer connections to established levels of retail customers, and |
| • | Selling and/or consuming at least 80% of personal sales volume. |
The Company systematically reviews alleged reports of distributor misbehavior. If the Company determines that a distributor has violated any of the distributor policies or procedures, the Company may terminate the distributor's rights completely. Alternatively, the Company may impose sanctions such as warnings, probation, withdrawal or denial of an award, suspension of privileges of a distributorship, fines, withholding commissions until specified conditions are satisfied or other appropriate injunctive relief. A distributor may voluntarily terminate his/her distributorship at any time.
Payment. Distributors generally pay for products prior to shipment. Accordingly, the Company carries 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. The Company provides an assortment of sales aids to facilitate the sales of its products. In dollar terms, the largest sales aid is the Company's starter kit which includes materials such as product brochures, training materials and order forms. Sales aids include videotapes, audiotapes, brochures, promotional clothing and other miscellaneous items to help create consumer awareness of the Company and its products. Sales aids are priced at the Company's approximate cost, and distributors do not receive commissions on purchases of sales aids.
Product Guarantees. The Company believes that it is among the most consumer-protective companies in the direct selling industry. For 30 days from the date of purchase, the Company's 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 the Company for a refund of 90% of the purchase price for one year, they are encouraged to provide customer
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refunds beyond 30 days. In addition, the Company's product return policy is an important tool used by distributors in developing a retail customer base. The Company's experience with actual product returns has averaged less than 5% of annual revenue through 2001. 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.
Nu Skin and Pharmanex Products. The markets for Nu Skin and Pharmanex products are large and intensely competitive. The Company competes directly with numerous companies that manufacture and market personal care and nutritional products in each of the Company's product categories and product lines. The Company competes with other companies in the personal care and nutritional products indu