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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
|X| Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 1998 or
|_| Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934.
NU SKIN ENTERPRISES, INC.
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(Exact name of registrant as specified in its charter)
Delaware 001-12421 87-0565309
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(State or other jurisdiction (Commission File No.) (IRS Employer
of incorporation) Identification No.)
75 West Center Street
Provo, Utah 84601
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(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (801) 345-6100
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of exchange on which registered
Class A Common Stock, $.001 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes|X| No |_|
Based on the closing sales price of the Class A Common Stock on the New
York Stock Exchange on March 26, 1999, the aggregate market value of the voting
stock (Class A and Class B Common Stock) held by non-affiliates of the
Registrant was $704,691,842. For purposes of this calculation, voting stock held
by officers, directors, and affiliates has been excluded.
As of March 25, 1999, 33,165,315 shares of the Registrant's Class A
Common Stock, $.001 par value per share, and 54,606,905 shares of the
Registrant's Class B Common Stock, $.001 par value per share, were outstanding.
Documents incorporated by reference. Portions of the Company's 1998 Annual
Report to Stockholders to be furnished to the stockholders of the Company
pursuant to Rule 14a-3(b) in connection with Registrant's 1999 Annual Meeting of
Stockholders are attached hereto as Exhibit 13, and are incorporated herein by
reference into Parts II and IV of this Form. Portions of the Company's
definitive Proxy Statement for the Registrant's 1999 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 I .......................................................................1
ITEM 1. Business..............................................................1
General...............................................................1
Recent Developments...................................................2
Business Divisions ...................................................4
Product Summary.......................................................6
Distribution System..................................................12
Product Development..................................................17
Sourcing and Production..............................................19
Regional Profiles....................................................20
Competition..........................................................22
Intellectual Property................................................23
Government Regulation................................................23
Employees............................................................27
Risk Factors.........................................................27
ITEM 2. Properties...........................................................35
ITEM 3. Legal Proceedings....................................................35
ITEM 4. Submission of Matters to a Vote of Security Holders.................36
PART II ......................................................................37
ITEM 5. Market for Registrant's Common Equity and Related Stockholder
Matters..........................................................37
ITEM 6. Selected Financial Data..............................................37
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................37
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk ..........37
ITEM 8. Financial Statements and Supplementary Data..........................37
ITEM 9. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure.............................................37
PART III......................................................................38
PART IV ......................................................................38
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.....38
Signatures....................................................................44
i
FORWARD LOOKING STATEMENTS
THIS ANNUAL REPORT ON FORM 10-K, IN PARTICULAR "ITEM 7. MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND
"ITEM 1. BUSINESS," INCLUDE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF
SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. THESE STATEMENTS
REPRESENT THE COMPANY'S EXPECTATIONS OR BELIEFS CONCERNING, AMONG OTHER THINGS,
FUTURE REVENUE, EARNINGS, AND OTHER FINANCIAL RESULTS, PROPOSED ACQUISITIONS AND
NEW PRODUCTS, ENTRY INTO NEW MARKETS, FUTURE OPERATIONS AND OPERATING RESULTS,
FUTURE BUSINESS AND MARKET OPPORTUNITIES. THE COMPANY WISHES TO CAUTION AND
ADVISE READERS THAT THESE STATEMENTS INVOLVE RISK 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 27.
THE COMPANY HAS ENTERED INTO A LETTER OF INTENT TO ACQUIRE BIG PLANET,
INC. AND THE REMAINING PRIVATE AFFILIATES OPERATING IN NORTH AMERICA (OUTSIDE OF
THE UNITED STATES). THIS FORM 10-K CONTAINS INFORMATION CONCERNING THE BUSINESS
OF BIG PLANET, INC. AND THE PRIVATE AFFILIATES AND THE ANTICIPATED EFFECT OF
SUCH PROPOSED ACQUISITIONS ON THE BUSINESS OF THE COMPANY. THE COMPANY IS IN THE
PROCESS OF FINALIZING DEFINITIVE AGREEMENTS WITH RESPECT TO SUCH PROPOSED
ACQUISITIONS. THE PROPOSED ACQUISITIONS ARE SUBJECT TO SEVERAL CONDITIONS
INCLUDING COMPLETION OF DEFINITIVE DOCUMENTATION, RECEIPT OF NECESSARY
REGULATORY AND THIRD-PARTY APPROVALS, COMPLETION OF THE COMPANY'S DUE DILIGENCE
REVIEW, AND APPROVAL BY THE STOCKHOLDERS OF BIG PLANET AND THE PRIVATE
AFFILIATES. THERE CAN BE NO ASSURANCE THAT THE PROPOSED ACQUISITIONS WILL BE
COMPLETED AS PLANNED.
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, Interior Design Nutritionals, "6S Quality Process", and IDN are
trademarks of the Company. Big Planet and InterNetworking are trademarks of Big
Planet, Inc. 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, Inc. (the "Company") is a leading, global direct
selling company that currently distributes premium quality personal care
products and nutritional supplements. Upon completion of the planned acquisition
of Big Planet, Inc. discussed below, the Company will also offer Internet
connectivity, e-commerce, telecommunications, and other technology products and
services to consumers in the United States. The Company currently operates in 27
countries throughout North Asia, Southeast Asia, North America, Europe, and
South America and is reported to be one of the largest direct selling companies
in the world.
The Company distributes its products exclusively through a network
marketing system. The Company currently has a network of nearly 500,000 active
distributors located throughout its 27 markets that purchase products for resale
to consumers and for personal consumption. Nu Skin was among the first direct
selling companies to compensate distributors in their home countries for product
sales around the world. Under the Company's "Global Compensation Plan,"
distributors can develop a seamless network of downline distributors throughout
the world and across divisions. The Company believes that its extensive
distributor force and the Global Compensation Plan provide the Company with a
competitive advantage in gaining quick access to new geographic markets and
rapid market penetration of new products.
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During the past twelve months the Company has taken significant actions
to broaden the Company's business both geographically and across product lines
and to gain greater control over its product and business opportunity offerings.
These actions include:
* The acquisition of Pharmanex, Inc. ("Pharmanex"), a premier
developer of nutritional supplements.
* The expansion of operations into five new markets--Brazil, Sweden,
Denmark, Poland, and the Philippines.
* The acquisition of Nu Skin operations in the United States.
* The execution of a letter of intent to acquire Big Planet, Inc.
("Big Planet") and the Company's other private affiliates
operating in Canada, Mexico, and Guatemala.
These initiatives were designed to leverage the Company's primary asset, its
sales and distribution channel and related expertise, by strengthening existing
product lines, providing the Company with greater control over product and
business opportunity offerings, expanding the Company's geographic markets,
establishing a technology division, fortifying the Company's support
infrastructure, and positioning the Company for further growth.
The acquisition of the United States market and the planned
acquisitions of Big Planet and the remaining private affiliates operating in
North America should also simplify the Nu Skin corporate structure by
consolidating all of Nu Skin's operations under the Company. This should allow
the Company to transition from a geographic management focus to a strategic,
product-based business model along three general product divisions. The
divisions will offer the following three distinct business opportunities, each
specifically designed for the network marketing distribution channel, and each
managed and directed by dedicated, distinct management teams:
Nu Skin Personal Care. The Company's original product line and business
opportunity, offering over 100 premium quality personal care products
in several categories: facial care, body care, hair care, and color
cosmetics, as well as specialty products such as sun protection, oral
hygiene, and fragrance.
Pharmanex. A nutritional supplement division offering a variety of
nutritional supplements in several categories: multi-vitamin and
mineral products and supplements that are currently marketed under the
IDN (Interior Design Nutritional) trademark including LIFEPAK, the
Company's flagship nutritional supplement, five proprietary natural
supplements and a broad line of standardized botanical supplements
acquired in the acquisition of Pharmanex, and a line of sports
nutritional and general health solutions.
Big Planet. A communications and technology products and services
division that offers Internet access and related services, e-commerce,
telecommunications, unified communications, and on-line and CD-ROM
educational products.
Recent Developments
Acquisition of Nu Skin International. At the beginning of 1998, the
Company operated as the exclusive distribution vehicle for NSI in the countries
of Japan, Taiwan, Hong Kong (including Macau), Thailand, and South Korea, and
had the right to expand only into certain other Asian markets including the
Philippines, the People's Republic of China, Vietnam, Singapore, Malaysia, and
Indonesia. In February 1998, the Company commenced operations in the
Philippines. In March 1998, the Company acquired NSI and certain other
affiliated entities for $70.0 million in preferred stock, the issuance of
long-term notes payable to the stockholders of the NSI totaling approximately
$6.2 million, and the assumption of liabilities of approximately $173.8 million
in notes that were distributed by NSI prior to the closing to the NSI
stockholders as a distribution of all previously earned and undistributed "S"
corporation earnings. The preferred stock was subsequently converted into
2,978,159 shares of
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Class A Common Stock after giving effect to the cancellation of 8,504 shares
following an adjustment in the purchase price based on the audited closing
balance sheet of NSI. Through this acquisition, the Company obtained:
* Nu Skin's existing operations in New Zealand, Australia, and ten
countries in Europe, and the right to all other future markets.
* Ownership of all rights to the Nu Skin distributor force,
including all distributor agreements and the Global Compensation
Plan, and all trade names, trademarks, product formulations, and
other intellectual property rights and know how associated with
the Nu Skin business and products, all of which were previously
made available to the Company through a license from NSI.
* Greater control over product development, manufacturing, pricing,
and the strategic development of the Nu Skin products and business
offerings.
Acquisition of Pharmanex. In October 1998, the Company acquired
Pharmanex, a research and development company and manufacturer of natural
nutritional supplements, in exchange for the issuance of approximately 4.0
million shares of the Class A Common Stock of the Company and the assumption of
approximately $34.0 million in liabilities. The Company believes that the
acquisition of Pharmanex provides it with:
* Significant additional product research and development resources
with a staff of more than 40 M.D.and/or Ph.D. scientists and
laboratory facilities in China and the United States.
* Important clinical research and collaboration agreements and other
relationships with several major universities in the United States
and the People's Republic of China ("China") that the Company
believes will enhance its ability to perform cost-effective
clinical trials to help substantiate product claims.
* A line of existing proprietary nutritional and a broad line of
botanical supplements including CHOLESTIN, a nutritional
supplement shown to help maintain healthy cholesterol levels.
* Manufacturing capabilities with the acquisition of an extraction
facility in China.
Acquisition of North American Affiliates. In March 1999, the Company
acquired certain assets of its privately-held affiliate, Nu Skin USA, Inc., and
terminated the exclusive license and distribution agreements it had entered into
with such entity. Prior to this transaction, Nu Skin USA, Inc. had the exclusive
right to sell the Company's products and services within the United States. In
addition, the Company has also entered into a letter of intent to acquire its
other private affiliates operating in Canada, Mexico, and Guatemala (such
affiliates, together with Nu Skin USA, Inc., are hereinafter referred to as the
"North American Affiliates"). The total consideration paid or to be paid in
connection with such transactions includes cash payments of approximately $19.0
million and the assumption of certain liabilities (approximately $8.0 million in
the Nu Skin USA transaction).
Acquisition of Big Planet. In addition, the Company has entered into a
letter of intent to acquire Big Planet, Inc. The consideration will consist of a
cash payment of approximately $14.5 million, the issuance of a three-year
promissory note in the amount of approximately $14.5 million and the assumption
of certain liabilities. In addition, prior to such acquisition, Big Planet will
accelerate the employee stock awards and options of most Big Planet management
personnel and employees and cash them out. Unvested shares and options which are
not accelerated will be converted into shares of, and options to acquire shares
of, the Class A Common Stock of the Company. The Company also will provide
management personnel of Big Planet and certain key employees with certain equity
and cash incentives, some of which will be issued or paid only if Big Planet
achieves certain agreed
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upon performance criteria. The acquisition of Big Planet is subject to the
satisfaction of various conditions, including completion of definitive
documentation, obtaining necessary regulatory and third-party approvals, the
satisfactory completion of the Company's due diligence work, and approval by the
shareholders of Big Planet. The proposed acquisition is expected to be completed
by June 30, 1999. There can be no assurance, however, that all such conditions
will be satisfied or that unanticipated factors will not arise which could cause
the transaction to be delayed or not to be completed. See "Risk Factors - Risks
Related to the Integration of Recent and Contemplated Acquisitions."
Business Divisions
Nu Skin Personal Care
Nu Skin Personal Care is the Company's 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, the Company was the tenth largest cosmetic
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, the
Company was one of the first companies to market topical applications of various
vitamins including Vitamins E, C and A. 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. The Company
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 the Company's highly educated
distributor force to provide consumers with a high level of information and
instruction about the products and guidelines for using them effectively.
Pharmanex
Following the acquisition of Pharmanex, the Company merged its
previously existing Interior Design Nutritional products division ("IDN") with
Pharmanex. The Company believes that combining Pharmanex's research and
development engine and its proprietary nutritional and botanical supplements
with IDN's existing product development resources and vitamin and mineral
products, including IDN's flagship product, LIFEPAK, helps position the Company
to further penetrate the growing nutritional supplement market. The combined
Pharmanex/IDN division offers over 60 nutritional supplements and nutri-food
products.
The Company believes 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. The Company believes that its nutritional supplements are
particularly well suited to network marketing because the average consumer is
often uneducated about nutritional supplements. The Company believes that direct
selling is a more effective method than traditional retailing channels in
educating consumers regarding the benefits of nutritional supplements and
differentiating the quality and benefits of its products from those offered by
competitors. Because there are numerous providers of nutritional supplements of
varying degrees of quality, the Company believes that individual attention and
testimonials by distributors provide information and comfort to a potential
consumer. In January 1999, the Company discontinued selling Pharmanex
nutritional supplements in traditional retail channels where they had been
distributed by Pharmanex prior to its acquisition by the Company. Pharmanex
products are now available exclusively through the Company's distributor force,
which the Company believes can more effectively educate consumers about these
products on a person-to-person basis. Consistent with this personal selling
approach, Pharmanex will allow independent pharmacies to be distributors of its
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products because these smaller pharmacies tend to provide more 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
placebo controlled, double blind studies, in the evaluation and development of
its products and in connection with confirming the efficacy of its products. Two
of the Company's premier products, LIFEPAK, an advanced, uniquely formulated
multivitamin/mineral supplement, and CHOLESTIN, a proprietary nutritional
supplement that promotes healthy cholesterol levels, have been the subject of
recent independent clinical studies that have demonstrated the efficacy of these
products. The Company has also supported the creation of two research centers
for nutritional supplements: the UCLA Center for Human Nutrition/Pharmanex
Phytochemical Laboratory and the Pharmanex Institute for Cardiovascular Health
and Sports Nutrition. The Company believes that the proprietary supplements and
the broad line of botanical supplements acquired in the Pharmanex acquisition
complement the Company's multivitamin and nutritional products and provide the
Company with a strong portfolio of products for both the herbal and non-herbal
segments of the nutritional supplement market.
Big Planet
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 100 million in 1998 to over 200 million by 2001. 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. Big Planet was
founded for the purpose of providing a new business opportunity involving
technology products and services that attempts to:
* Take advantage of the opportunities provided by the rapid growth
of the technology and communication markets;
* Appeal to a new demographic of customers and distributors; and
* Utilize the strength and competitive advantages of the Company's
distribution system to reach new market 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 one-to-one
relationships to improve the way people "learn, communicate, work, shop, and
play.(TM)" The Company believes that there is a high degree of compatibility
between technology products and the Company's distribution system. Big Planet
seeks to leverage the direct selling expertise of the Company's distributor
force to assist the large number of consumers who want to take advantage of
technology's latest offerings but do not know how or are intimidated by
technology's constant innovations. Big Planet's representatives are trained to
provide the assistance and training necessary to help customers understand and
take advantage of the latest products. The Company believes that the combination
of its distribution system, a highly motivated sales force, and the proper
training of its Big Planet distributors will provide the Company with an
opportunity to help take technology to the masses.
Big Planet's product strategy is to offer an integrated suite of
products and services for education, telecommunications, Internet access, and
electronic commerce. Big Planet believes that multiple connections to the home
enhances 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 on-line
purchasing via e-commerce. Big Planet currently generates revenue from providing
Internet access, telecommunications
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products and services including long distance and paging, from sales of a wide
selection of products through its e-commerce store and from sales of various
CD-ROM and on-line educational products.
Product Summary
In 1998, the Company offered products in two distinct categories:
personal care products, mainly marketed under the trademark "Nu Skin," and
nutritional supplements, mainly marketed under the trademark "IDN." The Company
is committed to building its brand name and distributor and customer loyalty by
selling personal care products with advanced formulas and nutritional products
that are backed by science and appeal to broad markets. The Company's product
philosophy is to combine the best of science and nature and include in each of
its products high quality ingredients which provide desired benefits to the
consumer.
The Company does not distribute all of its personal care products and
nutritional products in each market. When commencing operations in a country,
the Company selects a group of initial products to be distributed in such market
and adds additional products as the market matures and develops. The Company
determines which products will be marketed in a specific country based on the
likelihood of the particular product's success in the market as well as
applicable regulatory approvals and requirements. In certain of the Company's
markets, the Company has reformulated products to satisfy certain regulatory
requirements with respect to product ingredients and/or preservatives and to
meet the preferences of consumers in those markets. See "Government Regulation
Regulation of Personal Care Products and Nutritional Supplements." In addition,
the Company will also develop products designed for a particular market when
appropriate. Following the completion of the acquisition of Big Planet, the
Company will also offer Internet and telecommunication products and services.
See "Recent Developments."
Presented below are the dollar amount and percentage of revenue of each
of the two product categories and other sales aid revenue for each of the years
ended December 31, 1996, 1997, and 1998. This table should be read in connection
with the information presented under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations" contained in the
Company's Annual Report to Stockholders, which is incorporated by reference into
this Form 10-K and which discusses the costs associated with generating the
aggregate revenue presented.
Revenue by Product Category
(Dollar Amounts in Thousands)
Year Ended Year Ended Year Ended
December 31, 1996 December 31, 1997 December 31, 1998
------------------- ------------------- -------------------
Product Category $ % $ % $ %
- --------------------------------------- -------- ------ -------- ------ -------- ------
Nu Skin Personal Care.................. $554,974 72.9% $604,078 63.4% $531,915 58.2%
Pharmanex/IDN (Nutritional Supplements) 160,288 21.0 297,300 31.2 334,257 36.6
Sales Aids 46,376 6.1 52,044 5.4 47,322 5.2
-------- ------ -------- ------ -------- ------
Total.......................... $761,638 100.0% $953,422 100.0% $913,494 100.0%
======== ====== ======== ====== ======== ======
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Nu Skin Personal Care Products
The Company's current personal care products are divided into the
following lines: facial care, body care, hair care, color cosmetics, sun
protection, oral hygiene, fragrances, and certain speciality products. The Nu
Skin Personal Care product line consists of over 100 products. The Company also
offers product sets that includea 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 country, 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 line within the Nu Skin
Personal Care division offered by the Company as of December 31, 1998:
Facial Care. The facial care line is the premier line of the Company's
personal care products and consists of 20 different specialized treatment,
cleanser, and moisturizer products. The specialized treatment products utilize
advanced formulas and ingredients designed for specific skin care conditions.
These special treatment products include: MHA REVITALIZING products, which
utilize alpha and beta hydroxy acids to help fight the signs of aging; SKIN
BRIGHTENING COMPLEX, designed to diminish the appearance of discoloration caused
by sun exposure; FACE LIFT WITH ACTIVATOR, a product designed to stimulate and
firm skin; and CLARIFEX PH MUD ACNE TREATMENT.
The goal of the facial care line of cleansers and moisturizers is to
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, and REJUVENATING
CREAM, one the Company's most popular personal care products. Other facial care
products include CLEANSING LOTION, FACIAL SCRUB, EXFOLIANT SCRUB, FACIAL
CLEANSING BAR, CLAY PACK, PH BALANCE FACIAL TONER, NAPCA MOISTURIZER, INTENSIVE
EYE COMPLEX, HPX HYDRATING GEL, CLARIFEX CLEANSING SCRUB, CLARIFEX MUD, and
ALPHA EXTRA FACE.
Body Care. The Company's line of body care products relies on premium
quality ingredients to cleanse and condition skin. The cleansers are formulated
without soap, and the moisturizers contain light but effective humectants and
emollients. The body care line includes 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.
The Company's body care line currently consists of 11 other products:
ANTIBACTERIAL BODY CLEANSING GEL, LIQUID BODY LUFRA, BODY SMOOTHER, HAND LOTION,
NAPCA MOISTURE MIST, BODY BAR, BODY CLEANSING GEL, ENHANCER, JUNGAMALS CRAZY
CROCODILE CLEANER, ALPHA EXTRA BODY, and MHA REVITALIZING BODY LOTION.
Hair Care. The Company's hair care line, HAIRFITNESS, is designed 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, the Company's 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, a revolutionary wheat hydrocolloid complex of conditioning
molecules, designed to enhance hair repair and moisture control aspects: 3 IN 1
SHAMPOO, MOISTURIZING SHAMPOO, BALANCING SHAMPOO, VITAL SHAMPOO, DEEP CLARIFYING
SHAMPOO, GLACIAL THERAPY, WEIGHTLESS CONDITIONER, LUXURIOUS CONDITIONER,
CONDITIONING DETANGLER SPRAY, STYLING GEL, HOLDING SPRAY, and MOUSSE (Styling
Foam). The Company also carries DERMANATOR SHAMPOO, an anti-dandruff shampoo,
and JUNGAMALS TIGER TANGLE TAMER SHAMPOO, a shampoo for children. In 1999, the
Company also plans to introduce 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. The Company's color cosmetic line, NU COLOUR, consists
of 13 products with over 150 SKU's including MOISTURESHADE LIQUID FINISH,
MOISTURESHADE PRESSED POWDER, BLUSH, EYE SHADOW, MASCARA,
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EYELINER, LIP LINER, LIPSTICK, DRAMATTEICS LIP PENCILS, LIP GLOSS, CREME
CONCEALER, FINISHING POWDER, and BROW PENCIL. Nu Skin Personal Care intends to
relaunch the NU COLOUR line in the second quarter of 1999 with new packaging and
new shades.
Sunscreen. The Company's line of SUNRIGHT products is designed to
provide a variety of sun screen protection with non-irritating and non-greasy
products. The sun protection line includes a sun preparation product that
prepares the skin for the drying impact of the sun, five sun screen alternatives
with various levels of SPF, and a sun screen lip balm.
Oral Hygiene. AP-24, a line of oral health care products which
incorporates anti-plaque technology designed to help prevent plaque build-up 24
hours a day, is exclusively licensed to the Company, together with the
associated trademark, for sale in the direct selling channel under the trademark
AP-24. This product line includes AP-24 ANTI-PLAQUE TOOTHPASTE, AP-24
ANTI-PLAQUE MOUTHWASH, AP-24 TRIPLE ACTION DENTAL FLOSS, AP-24 ANTI-PLAQUE
BREATH SPRAY, and AP-24 WHITENING FLUORIDE TOOTHPASTE. The AP-24 oral health
care products for children are designed to make oral care fun for children and
include JUNGAMAL'S TOUGH TUSK TOOTHPASTE and JUNGAMAL'S FLUFFY FLAMINGO FLOSS.
Fragrances. The Company offers a men's and a women's fragrance under
the trademark SAFIRO. In 1998, the Company also introduced BELIEVE, a new
women's fragrance developed with Christie Brinkley.
Specialty Products. Epoch is a unique line of ethnobotanical personal
care products created in cooperation with well known ethnobotanists. These
products, which unite natural compounds used by indigenous cultures with
advanced scientific ingredients, include AVA PUHI SHAMPOO, GLACIAL MARINE MUD,
DEODORANT WITH CITRISOMES, POLISHING BAR, EVERGLIDE FOAMING SHAVE GEL, DESERT
BREEZE AFTERSHAVE, POST SHAVE LOTION FOR WOMEN, and FIREWALKER FOOT CREAM. The
Company also offers a nail care kit.
NUTRIOL, a line of products licensed to the Company for sale in the
direct selling channel and manufactured in Europe, consists of five products:
NUTRIOL HAIR FITNESS PREPARATION, NUTRIOL SHAMPOO, NUTRIOL MASCARA, NUTRIOL
NAIL, and NUTRIOL EYELASH. NUTRIOL represents a product designed to replenish
the hair's vital minerals and elements. Each NUTRIOL product uses
mucopolysaccharide, a patented ingredient.
SCION, is a moderately-priced line of facial care, skin care, and hair
care products that was created for less-developed markets to address the
economic factors in such markets. This line was introduced in several of the
Company's markets in 1998.
Product Sets. The Company currently offers product sets that provide
samples of products from a given product line. These product sets are intended
to encourage increased product trials.
Pharmanex Products
The Company's nutritional supplements are currently distributed under
the brand names Pharmanex and IDN. As the Company integrates Pharmanex with its
existing nutritional supplement business offerings around the world, the Company
anticipates that certain products currently distributed under the IDN brand may
be distributed under the Pharmanex brand name. Such a determination will be made
on a market-by-market basis as the Company transitions to its new divisional
structure.
The Company's nutritional supplements currently are comprised of its
LIFEPAK line of multi-vitamin and mineral nutritional supplements, five
proprietary natural nutritional supplements, a broad-line of botanical
supplements, and additional nutritional products in the following lines: general
wellness, weight-management, nutritious foods and snacks, sports and fitness
products, health solutions for people with special needs, and a water filtration
system. The Company's nutritional products are designed to promote healthy,
active lifestyles
-8-
and general well-being through proper diet, exercise, and nutrition. In Taiwan
and South Korea, LIFEPAK is the official nutritional supplement of the Taiwan
and South Korea Olympic Committee, respectively.
Nutritional products generally require reformulation to satisfy the
strict regulatory requirements of many of the Company's different markets. While
each product's concept and positioning are generally the same, regulatory
differences between markets result in some product ingredient differences. In
addition, certain markets, such as Japan, have preferences and regulations that
favor tablets instead of capsules, which are typically used in the United
States. Regulatory requirements in certain markets may restrict the ability of
the Company to introduce certain products into such markets. See "Government
Regulation - Regulation of Personal Care Products and Nutritional Supplements."
The Company's herbal supplements are standardized, which allows
consumers to obtain a specific, consistent level of the recommended dosage of
the important components of the supplement. Recent studies have found that many
popular herbal supplements are not standardized and vary enormously in content,
which correspondingly varies the effectiveness of the product. Pharmanex uses
its "6S Quality Process" (Selection, Sourcing, Structure, Standardization,
Safety, and Substantiation) to standardize its botanical supplements to at least
one relevant active compound and to formulate its non-herbal products with key
ingredients in amounts designed to enhance the nutritional benefits. The Company
believes that this 6S Quality Process furthers the ability of the Company to
provide the consumer with safe, effective, and consistent products. See "Product
Development - Pharmanex."
The following is a brief description of each of the nutritional product
lines within the combined Pharmanex and IDN division:
General Wellness Multivitamin/Mineral Supplements. The LIFEPAK family
of products, the core IDN nutritional supplement, is designed to provide an
optimum mix of nutrients including vitamins, minerals, antioxidants, and
phytonutrients (natural chemical extracts from plants). The introduction of
LIFEPAK in 1994 resulted in a significant increase in revenue. LIFEPAK is
currently sold in 12 of the Company's markets, including the United States,
Japan, and Taiwan. LIFEPAK is offered in different formulations to meet the
unique needs of women, older adults, and pregnant women.
Additional General Wellness supplements include: VITOX, which
incorporates beta carotene and other important vitamins for overall health; and
IMAGE HNS, an all-around vitamin and antioxidant supplement. THE IDN MASTERS
WELLNESS SUPPLEMENT provides nutrition specifically for an aging generation.
JUNGAMALS LIFEPAK FOR KIDS chewables combine natural flavors and colors and
contain a blend of antioxidants, chelated minerals, and vitamins specifically
tailored for children. The Company also offers LIFE ESSENTIALS, a lower cost,
more general nutritional supplement.
Pharmanex Proprietary Supplements. Pharmanex currently offers five
proprietary natural nutritional supplements: CHOLESTIN; CORDYMAX CS4; TEGREEN
97; ST. JOHNS'; and BIO GINKGO 27/7. CHOLESTIN is a proprietary nutritional
supplement derived from a proprietary strain of red yeast rice. A recent
double-blind, placebo-controlled study conducted at the UCLA Center for Human
Nutrition and published in the February 1999 issue of the American Journal of
Clinical Nutrition demonstrated the effectiveness of CHOLESTIN in helping to
maintain 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 ("DSHEA"). The
Food and Drug Administration ("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. There can be no assurance, however, that the FDA
will not appeal the decision, and, in the event of an appeal, that the Company
would be successful in any such appeal. See "Government Regulation -- Regulation
of Personal Care Products and Nutritional Supplements."
-9-
CORDYMAX CS-4 is a proprietary nutritional supplement designed to help
reduce fatigue. Several clinical trials have been conducted on this product
which have demonstrated that CORDYMAX can help promote vitality and stamina.
CORDYMAX CS-4 is offered as a stand-alone product and in a combination product
with ST. JOHN'S WORT distributed under the trademark BIO ST. JOHNS, which is
designed to promote positive mood and outlook as well as vitality levels. In
addition, the Company also offers BIO GINKGO 27/7, a proprietary ginkgo biloba
extract that promotes blood circulation to the brain, arms, and legs, and
TEGREEN 97, a nutritional supplement that contains a concentrated level of
decaffeinated green tea polyphenols that offer high levels of antioxidant
benefits naturally.
Pharmanex Broadline Botanicals. Pharmanex also currently offers a line
of ten standardized botanical supplements including GINSENG, KAVA KAVA,
ECHINACEA, GARLIC, and HAWTHORN. Botanicals can exhibit substantial differences
in content depending on various factors such as season, climate, soil, method of
harvest, storage, and processing. As a result, botanical products can vary
dramatically in quality and content. Pharmanex's botanical supplements are
standardized to provide consumers with a product that contains a specific,
consistent level of the desired dosage of the important components of the
supplement. In addition, Pharmanex implements quality control processes designed
to enhance the ability of the Company to keep its products pure and free from
insecticides, heavy metals, and other harmful contaminants.
Nutritious and Healthy Snacks. As part of the Company's mission to
promote a healthy lifestyle and long-term wellness, Pharmanex's NUTRI-FOODS line
of products includes FIBERRY FAT-FREE SNACK BARS, and APPEAL, a nutritional
drink containing chelated minerals and vitamins. In addition, the Company offers
a number of other nutritional drinks. SPLASH C with aloe vera is a healthy
beverage providing significant doses of Vitamins C and E as well as calcium in
each serving. Real fruit juice crystals are added to create orange or lemon
flavor. ALOE-MX, a nutritional aloe vera beverage drink, was specifically
produced for the Japanese and other Asian markets.
Sports and Fitness Products. Pharmanex's SPORTRITION line of sports and
fitness products caters to health conscious individuals with active lifestyles.
The line includes the SPORTS NUTRITION SYSTEM, a packaged group of nutritional
supplements offering a comprehensive, flexible program for individuals who
desire to optimize performance. The system includes: LIFEPAK; OVERDRIVE, a
sports supplement that features antioxidants, B vitamins, and chromium chelate;
GLYCOBAR energy bars; and SPORTALYTE, a performance drink formulated to help
supply the necessary carbohydrates, electrolytes, and chelated minerals to
optimize performance. Other products in this line include AMINO BUILD, a
low-fat, high-protein drink mix that is designed to replace nutrients before and
after workouts, and PROGRAM-16 protein bars, a product designed to provide
nutritional support for individuals involved in strenuous exercise.
Health Solutions. Pharmanex products include customized supplementation
addressing the specialized interests of health conscious individuals. These
supplements include: CARTILAGE FORMULA, which contains an advanced blend of
glucosamine to help maintain normal structure and function of healthy joints;
EYE FORMULA, which contains significant levels of beta-carotene and Vitamins C
and E to help maintain the normal structure and function of healthy eyes;
OPTIMUM OMEGA, a pure source of omega 3 fatty acids; NIGHTIME COMPLEX WITH
MELATONIN, to promote normal sleep; FIBRENET and FIBRENET PLUS, fiber
supplements; and NUTRIFI, a product that contains four grams of soluble and
insoluble fibers per serving in a powder that can be added to liquids and foods
to supplement the recommended daily amounts of fiber.
HealthTrim 2000. The HEALTHTRIM 2000 weight management program includes
a line of nutritional products designed to provide nutritional support to weight
conscious individuals marketed under the following product names: APPEAL LITE
HT, APPSIGNAL, APPCHOCOLATES, LIFEPAK TRIM, TRIMPAK, METABOTRIM, and BOTANAME.
Specialty Products. In the fourth quarter of 1998, the Company
introduced a high-performance home water filtration system in Japan. The
FOUNTAIN FRESH filtration system was designed by and is being manufactured
exclusively for the Company by CUNO Incorporated, a worldwide manufacturer of
home and industrial filtration systems.
-10-
Big Planet Products
Upon completion of the proposed Big Planet acquisition, the Company
will add technology and communication products and services to its product
offering. Big Planet 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, communications, and the ability to purchase on-line
through e-commerce. Big Planet was launched in the United States in April 1998.
In connection with its products and service offerings, 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,
UUNet, SkyTel, IBM, Sun Microsystems and other key vendors, to provide simple,
convenient, and reliable technology products and services through one-to-one
relationships provided by the Company's network of distributors. Big Planet's
sales representatives receive commissions based on Big Planet's gross margin on
each sale of products or services, or based on the commission received by Big
Planet with respect to products sold directly by third-party vendors to Big
Planet's customers. Big Planet's products and services are built around the
following core areas: Internet services; telecommunications; unified
communications; e-commerce; and education.
Big Planet's strategy has been to combine the benefits of a direct
marketing approach together with the emerging Internet opportunity to form an
"InterNetworking" company that is committed to improving the way people "learn,
communicate, work, shop, and play.(TM)" The following summarizes Big Planet's
current product and service offerings:
Internet Services. 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. Big Planet outsources Internet access
through a nationwide telecommunications network of over 1,600 dial up access
sites, or "POPS," in cities throughout the United States. Big Planet provides
easy to use, reliable, and competitively priced Internet access, electronic
mail, and content filtration for its sales representatives and consumers. In
October 1998, Big Planet introduced two Internet devices; the IPHONE, an
innovative telephone that provides simple and convenient Internet access via a
phone set; and the APLIOPHONE, a device that connects to the phone and allows
the user to route long-distance calls over the Internet.
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 also plans to offer wireless telecommunication
services in the near future through a contract with a wireless service provider.
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.
Unified Communications. Big Planet currently offers a DYNAMIC WEB PAGE
BUILDER that provides a powerful, yet easy to use tool for creating and
maintaining sophisticated Web sites. DYNAMIC WEB PAGE BUILDER is designed for
small businesses or for a distributor/representative's personal use. Big Planet
is also exploring the possibility and feasibility of potential products that
would integrate the Internet and voice-based messaging.
E-commerce and Computing. The Big Planet on-line store
(www.bpstore.com) provides an on-line shopping environment to Big Planet sales
representatives 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 focus of the store is on computing products,
including Internet appliances like the IPHONE and the APLIOPHONE. Big Planet has
several relationships with other parties which links the Big Planet on-line
store to Web sites such as OnlineOfficeSupplies.com and the FlowerCompany.com.
Representatives earn commissions on purchases by their customers through the
store.
-11-
Education and Training. Big Planet offers a variety of educational and
training products for Big Planet independent sales representatives and their
customers via a combination of the Internet and CD ROM packages. These products
include LEARNING UNIVERSITY, KIDS EDUCATION EXCHANGE, children multi-media
education products, the INTERACTIVE ACHIEVEMENT CENTER, the WORLD BOOK
ENCYCLOPEDIA, and the LEARNING CENTER. Sales Aids
The Company provides an assortment of sales aids to facilitate the
sales of its products. Sales aids include videotapes, promotional clothing,
pens, stationery, business cards, brushes, combs, cotton pads, tissues, 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 consumer refunds beyond 30 days. In
addition, the product return policy is a material aspect of the success of
distributors in developing a retail customer base. The Company's experience with
actual product returns has averaged less than 3.5% 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.
Distribution System
Overview of Distribution System. The foundation of the Company's 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 the Company's Global Compensation Plan,
products are sold exclusively to or through independent distributors who are not
employees of the Company. Because of the nature of the products and services
provided by Big Planet, Big Planet distributors do not buy products for resale
but act as independent sales representatives of Big Planet. Under most network
marketing systems, independent distributors purchase products for resale and for
personal consumption.
Network marketing is an effective vehicle to distribute the Company's
products because:
* A consumer can be educated about a product in person by a
distributor, which the Company believes is more effective than
using television and print advertisements;
* Direct sales allow for actual product testing by a potential
consumer;
* The impact of distributor and consumer testimonials is enhanced;
and
* As compared to other distribution methods, distributors can give
customers higher levels of service and attention, by, among other
things, delivering products directly to a consumer and 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 due to advancements in communications, including telecommunications and
Internet connectivity, and the proliferation of the use of videos and fax
machines. Direct selling companies rely on telecommunications, the Internet, and
videos to project a
-12-
desired image for such companies and their product lines. The Company believes
that high quality sales aids play an important role in the success of
distributor efforts. For this reason, the Company maintains an in-house staff of
video production personnel and video and audio cassette duplication equipment
for timely and cost-effective production of sales materials. In addition, the
Company intends to leverage the expertise of Big Planet management following the
completion of the proposed Big Planet acquisition to implement effective
Internet strategies in each of the Company's product divisions. The Company
believes 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, the Company expects
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. See "Risk Factors -- "Risks Related to
Potential Changes in Business Model."
The Company's network marketing program differs from many other network
marketing programs in several respects. First, the Company was among the first
to develop the ability for distributors to be compensated in their home
countries for sales across the globe. The Company's Global Compensation Plan
allows Company distributors to develop a seamless global network of downline
distributors. Second, the Company's order and fulfillment systems eliminate the
need for distributors to carry significant levels of inventory. Third, 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 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. 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 would be less
as a percentage of revenue than the Company's historic commission levels.
In connection with the proposed acquisition of Big Planet and the
Company's decision to shift to a divisional structure, the Global Compensation
Plan will be re-engineered to allow distributors to develop a seamless global
network of downline distributors across any or all of the Company's divisions.
Currently, distributors can be compensated to some degree for sales in other
divisions. The Company, however, intends to modify the Global Compensation Plan
to simplify this process and increase the ability of distributors to develop a
network of downline distributors across divisions. The Company believes this
will benefit the Company 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 does not penalize a distributor 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. This structure should
also promote cross-selling by distributors across divisions as they recruit
downline members with differing interests because they will still be compensated
for sales generated by such downline members. The re-engineered Global
Compensation Plan will be the same essentially as the existing plan to avoid
confusion, but the structure for commissions on the front-end of the plan (i.e.,
sales by distributors to its direct customers) may be modified for a particular
product division.
The Company's 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. There can be no
assurance that the productivity or number of distributors will be sustained at
current levels or increased in the future. See "Risk Factors -- Reliance upon
Independent Distributors." Furthermore, the Company estimates that, as of
December 31, 1998, approximately 300 distributorships worldwide comprised
Hawaiian Blue Diamond and Blue Diamond executive distributor levels, which are
the Company's two highest executive distributor levels and, together with their
extensive downline networks, account for substantially all of the Company's
revenue. Consequently, the loss of such a high-level distributor or another key
distributor, together
-13-
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 adversely
affect the Company's results of operations.
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 educating new distributors with respect to products, the Global
Compensation Plan, and how to build a successful distributorship. See "Risk
Factors - Reliance upon Independent Distributors."
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, the Company believes
that most of its distributors attempt, with varying degrees of effort and
success, to sponsor additional distributors. Generally, distributors invite
friends, family members, and acquaintances to sales meetings in which Company
products are presented and the Global Compensation Plan is explained. People are
often attracted to become distributors after using Company products and becoming
regular retail customers. Once a person becomes a distributor, he or she is able
to purchase products directly from the Company at wholesale prices for resale to
consumers or for personal consumption. 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 with the Company which obligates the distributor to abide by the
Company's policies and procedures. Additionally, in all countries except Japan,
a new distributor is required to enter into a product purchase agreement with
the Company's local subsidiary, which governs product purchases. In certain of
the Company's markets, distributors are also required to purchase a starter kit,
which includes the Company's policies and procedures and are sold for the
approximate cost of producing the starter kit.
Global Compensation Plan. Management believes that one of the Company's
key competitive advantages is the 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 the Company's personal care products, nutritional supplements, and upon
completion of the proposed acquisition of Big Planet, Big Planet's products and
services, are sold, allowing distributors to receive commissions for global
product sales, rather than merely local product sales. This seamless integration
means that the Company's distributor base has global reach and that the
knowledge and experience of current distributors can be used to build
distributor leadership in new markets. The Global Compensation Plan will be
modified in connection with the Company's shift to a divisional structure to
seamlessly integrate it across all divisions.
Allowing distributors to receive commissions at the same rate for sales
in foreign countries as for sales in their respective home countries and across
each division is a significant benefit to distributors. Distributors benefit
from this because they are not required to establish new distributorships or
requalify for higher levels of commissions within each new country in which they
begin to operate or in each new division, which is frequently the case under the
compensation plans of the Company's major competitors. Under the modified Global
Compensation Plan, a distributor will be 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 divisions.
High Level of Distributor Incentives. Based upon its knowledge of
distributor compensation plans, the Company believes that the Global
Compensation Plan is among the most financially rewarding plans offered to
distributors by network marketing companies. There are two fundamental ways in
which distributors can earn
-14-
money: (i) through retail markups, for which the Company recommends a range from
43% to 60%; and (ii) through a series of commissions on product sales, which can
result in commissions to distributors aggregating up to 58% of a product's
wholesale price. On a global basis, however, commissions have averaged
approximately 39 to 41% of revenue from commissionable sales over the last eight
years. Because Big Planet pays commissions on the gross margins from sales of
services and products, or on commissions received by Big Planet from third
parties with respect to sales from such third parties, as opposed to the
wholesale price, the commissions paid with respect to Big Planet products and
services would be less as a percentage of revenue than the Company's historic
commission levels.
Each product 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, 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 submit a
qualifying letter of intent and achieve specified personal and group sales
volumes for a four-month period of time. To maintain executive status, a
distributor must generally also maintain specified personal and group sales
volumes for a two-to-four month period. An executive's commissions increase
substantially as multiple downline distributors achieve executive status. In
determining commissions, the number of levels of downline distributors that can
be included in an executive's group increases as the number of executive
distributorship directly below the executive increases.
As of the dates indicated below, the Company had the following number
of executive distributors.
Total Number of Executive Distributors
As of December 31,
-------------------------------------------------
Executive Distributors 1994 1995 1996 1997 1998
------------------------ ------ ------ ------ ------ ------
North Asia ............. 3,613 4,017 14,844 16,654 17,311
Southeast Asia ......... 2,778 4,129 6,199 5,642 5,091
Other Markets .......... -- 27 436 393 379
------ ------ ------ ------ ------
Total .................. 6,391 8,173 21,479 22,689 22,781
====== ====== ====== ====== ======
On a monthly basis, the Company evaluates requests for exceptions to
the Global Compensation Plan. While the general policy is to discourage
exceptions, management believes 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 the Company.
Distributor Support. The Company is committed to providing high-level
support services tailored to the needs of its distributors in each market. The
Company meets the needs and builds the loyalty of its distributors with
personalized distributor service, a support staff that assists distributors as
they build networks of downline distributors, and a liberal product return
policy. Because many distributors have only a limited number of hours each week
to concentrate on their Nu Skin business, management believes that maximizing a
distributor's efforts through effective support of each distributor has been and
will continue to be important to the success of the Company.
-15-
Through training meetings, annual conventions, distributor focus
groups, regular telephone conference calls, and personal contacts with
distributors, the Company seeks to understand and satisfy the needs of each
distributor. The Company provides walk-in, telephonic, and computerized product
fulfillment and tracking services that result in user-friendly, timely product
distribution. In addition, the Company is committed to evaluating new ideas in
technology and services, such as automatic product reordering, that the Company
can provide to distributors. The Company currently utilizes voicemail,
teleconferencing, and fax services. Global Internet access (including Company
and product information, ordering abilities, and group and personal sales volume
inquiries) is anticipated to be provided to distributors in the future. Each
walk-in center maintains meeting rooms which distributors may utilize in
training and sponsoring activities.
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 Company's 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 thus prohibited from representing themselves as agents or employees of the
Company. Distributors are obligated to present the Company's products and
business opportunity ethically and professionally. Distributors agree that the
presentation of the Company's business opportunity 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 are prohibited from conducting marketing activities outside of
countries in which the Company conducts business and are not allowed to export
products from one country to another. See "Risk Factors -- Reliance upon
Independent Distributors."
Distributors must represent that the receipt of commissions is based on
retail sales and substantial efforts. Exhibiting commission statements or checks
is prohibited. Sales aids such as videotapes, promotional clothing, pens,
stationery, and other miscellaneous items must be produced or pre-approved by
the Company.
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 name) may be placed in accordance with certain
guidelines in some countries. The Company's logos and names may not be
permanently displayed on physical premises. Distributors may not use the
Company's trademarks or other intellectual property without the Company's
consent.
Products generally may not be sold, and the business opportunity may
not be promoted, in traditional retail environments. Pharmanex has made an
exception to this rule for its nutritional supplements and has allowed such
products to be sold in independently-owned pharmacies and drug stores meeting
certain 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.
Generally, a distributor can receive commission bonuses only if, on a
monthly basis, (i) the distributor achieves at least 100 points (approximately
$100) in personal sales volume, (ii) the distributor documents retail sales to
at least five retail customers, (iii) the distributor sells and/or consumes at
least 80% of personal sales volume, and (iv) the distributor is not in default
of any material policies or procedures.
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, it may either terminate the
distributor's rights completely or 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
-16-
are satisfied, or other appropriate injunctive relief. Distributor terminations
based on violations of the Company's policies and procedures have aggregated
less than 1.0% of the Company's distributor force since inception. 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
cards. 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.
Product Development
The Company is committed to building its brand name and distributor and
customer loyalty by selling premium quality, innovative personal care products
and nutritional supplements that appeal to broad markets. The Company's product
philosophy is to combine the best of science and nature and to include in each
of its products the highest quality ingredients with the greatest amount of
benefit to the consumer. Independent distributors need to have confidence that
they are distributing the best products available that are distinguishable from
"off the shelf" products. The Company is committed to developing and providing
quality products that can be sold at attractive retail prices and allow the
Company to maintain reasonable profit margins.
The Company believes that timely and strategic product introductions
are critical to maintaining the growth of independent distribution channels.
Distributors become enthusiastic about new products and are generally excited to
share new products with their customer base. An expanding product line helps to
attract new distributors and generate additional revenues.
Nu Skin Personal Care. The development philosophy of the Company with
respect to its personal care products is represented by its personal care
products 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. The
Company is also committed to constantly improving its evolving personal care
product formulations to incorporate innovative and proven ingredients into its
product line. Whereas many consumer product companies develop a formula and stay
with that formula for years, and sometimes decades, the Company believes that it
must stay current with product and ingredient evolution to maintain its
reputation for innovation to retain distributor and consumer attention and
enthusiasm. For this reason, the Company continuously evaluates its entire line
of products for possible enhancements and improvements.
Nu Skin Personal Care maintains a laboratory and a staff of
approximately 40 individuals involved in personal care product development. The
Company also relies on an advisory board comprised of recognized authorities in
various disciplines. The Company recently entered into a nine-year
directed-research agreement to form the Nu Skin Center for Dermatological
Research with Stanford University Medical Center's Department of Dermatology
pursuant to which the Company will direct research and clinical trials of Nu
Skin products or materials. The Company also evaluates a significant number of
product ideas that are presented by distributors, vendors, and other outside
sources. The Company believes that strategic relationships with certain vendors
provides important access to innovative product concepts. The Company intends to
continue to develop products tailored to appeal to the particular needs of the
Company's markets.
Pharmanex. From the date it first decided to begin offering nutritional
products, the Company has been committed to providing high quality nutritional
supplements, as typified by the Company's best selling nutritional product,
LIFEPAK. This philosophy has led to the Company's 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, the Company believes that its increased research and
development capabilities will solidify the Company as one of the industry
leaders in developing and distributing high-grade, clinically-substantiated
nutritional supplements. The Company believes that it is one of the few
-17-
nutritional supplement companies in the United States that has a research and
development department patterned after the pharmaceutical industry and believes
that this research and development capability will provide the Company with an
important competitive advantage in this industry. Moreover, because a
substantial portion of its research and development activities are conducted in
China, the Company believes that it should be able to conduct quality research
and development work as well as initial clinical trials at costs that are less
than would be incurred if conducting comparable work in the United States.
In its development of natural and botanical supplements, the Company's
primary research and development goal is to selectively develop proprietary
technologies for the purification and standardization of efficacious
"single-species" herbal products. Selection of a botanical/natural or
nutritional product for development is based on available scientific data
concerning safety and efficacy and consumer need. The Company utilizes its "6S
Quality Process" (Selection, Sourcing, Structure, Standardization, Safety, and
Substantiation) in its development and sourcing activities, which are designed
to provide a precise, standardized, recommended dosage of each beneficial
natural ingredient in every capsule. The "6S Quality Process" generally involves
the following actions:
* Selection. Conducting a scientific review of research and
databases in connection with the selection of potential products
and ingredients, and determining the authenticity, usefulness, and
safety standards for such potential products and ingredients.
* Sourcing. Investigating potential sources, evaluating the quality
of such sources, and performing botanical and chemical evaluations
where appropriate.
* Structure. Determining the structural analyses of natural
compounds and active ingredients.
* Standardization. Standardizing the product to at least one
relative active ingredient.
* Safety. Assessing safety from available research, and, where
necessary, performing additional tests such as microbial tests and
chemical, toxin, and heavy metal analyses.
* Substantiation. Reviewing documented pre-clinical and clinical
trials, and where necessary and appropriate, initiating studies
and clinical trials sponsored by the Company.
The Company employs approximately 50 M.D. and Ph.D.-level scientists at
its dedicated research and development center in Shanghai, China, and at its
Provo, Utah and San Francisco, California offices. The Company also relies on an
advisory board comprised of recognized authorities in various related
disciplines. In addition, the Company evaluates a significant number of product
ideas that are presented by distributors and other outside sources. The Company
believes that strategic relationships with certain vendors also provide
important access to innovative product concepts. The Company has established
collaborative agreements with four established universities and research
institutions in China: Shanghai Medical University, Beijing Medical University,
Institute of Materia Medica, and National Laboratory of Contraceptive and
Devices Research. The staff of each institution includes scientists with
expertise in natural product chemistry, biochemistry, pharmacology, and clinical
studies. Collaborative efforts with these institutions are coordinated with and
validated by the Company's Research and Development Center in Shanghai. The
Company also currently has collaborative research and clinical study programs
with several major university research centers in the United States, including
UCLA, Tufts University, Columbia University, Kansas University, and the Scripps
Institute.
Big Planet. 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 introduction of
new products and services, which Big Planet believes is necessary to maintain
excitement among sales representatives. 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 on-line store.
-18-
Substantially all of the Company's products and services are currently
contracted from third parties. See "Sourcing and Production - Big Planet."
Sourcing and Production
Virtually all of the Company's personal care and nutritional products
are currently produced by manufacturers unaffiliated with the Company in
accordance with specifications provided by the Company or developed by such
manufacturers for the Company. The Company's profit margins, and its ability to
deliver its existing products on a timely basis, are dependent upon the ability
of these outside manufacturers to continue to supply products in a timely and
cost-efficient manner. Furthermore, the Company's ability to enter new markets
and sustain satisfactory levels of sales in each market depends in part upon the
ability of suitable outside manufacturers to reformulate existing products, if
necessary to comply with local regulations or market environments, for
introduction into such markets. Finally, the development of additional new
products in the future will likewise depend in part on the services of suitable
outside manufacturers. The Company has been shifting some of its manufacturing
of products to its foreign markets in order to protect its gross margins during
fluctuations in currency exchange rates. For example, in 1998 the Company
contracted to have LIFEPAK (for Taiwan) manufactured locally in the Taiwanese
market.
Nu Skin Personal Care. The Company currently acquires products or
ingredients for its personal care products from sole suppliers or suppliers that
are considered by the Company to be the superior suppliers of such ingredients.
The Company currently relies on one unaffiliated supplier for approximately 50%
of its personal care products. The Company's contract with this supplier expires
at the end of 2000. The Company believes that, in the event it is unable to
source any products or ingredients from this supplier, the Company could produce
such products or replace such products or substitute ingredients without great
difficulty or prohibitive increases in the cost of goods sold. However, there
can be no assurance that the loss of this supplier would not have a material
adverse effect on the Company's business and results of operations. See "Risk
Factors -- Reliance on Limited Suppliers."
Pharmanex. Substantially all of the Company's nutritional supplements
and ingredients, including LIFEPAK, are produced or provided by third-party
suppliers that are considered by the Company to be the superior suppliers of
such products and/or ingredients. The Company currently relies on one
unaffiliated supplier for approximately 30% of its nutritional supplements. The
Company believes that, in the event it is unable to source any products or
ingredients from this supplier or its other current suppliers other than set
forth below, the Company could produce such products or replace such products or
substitute ingredients without great difficulty or prohibitive increases in the
cost of goods sold. However, there can be no assurance that the loss any of such
suppliers would not have a material adverse effect on the Company's business and
results of operations. In addition, one of the Company's proprietary nutritional
supplements, CordyMax Cs4, is sourced or licensed from a sole supplier of such
product in China pursuant to a ten-year contract. CHOLESTIN is sourced from two
different suppliers pursuant to contracts that expire in 2008 and 2016. The
CHOLESTIN and CordyMax agreements have minimum purchase requirements. In the
event the Company fails to satisfy these minium purchase requirements, it will
be required to pay a penalty. In addition, the Company is required to pay a
termination fee if its wants to terminate the agreements prior to the end of
their respective terms. In the event the Company is unable to source products
from these suppliers, the Company could have difficulty finding another source
of these products. See "Risk Factors - Reliance on Limited Suppliers."
As part of the acquisition of Pharmanex, the Company acquired an
extraction and purification facility located in Huzhou, Zhejiang Province, China
where it currently produces the extracts for its BIOGINKO 27/7 and TEGREEN 97
products and also a certain potential new product.
The Company has focused on a five-step sourcing process for its
proprietary natural supplements, such as CHOLESTIN and BIO GINKO 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 the Company to
employ or engage the
-19-
necessary botanical expertise to identify the species required for a particular
product. The second step involves evaluating the raw material's availability.
The Company focuses on products that utilize raw materials that can be
cultivated in quantities sufficient to produce satisfactory yields. Variables
such as location, seasonal availability, stability, access, and alternative
sources must e considered. 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. The Company has 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, the Company may engage in both forward contracts as well as
contracts with multiple suppliers. As a final step to ensuring quality, the
Company, when possible, physically supervises 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 ingredient in the
material at the harvest site and at the receiving dock.
The Company has contract cultivation areas in China and in Chile.
Because certain of its botanical products such as ST. JOHNS WORT and BIOGINKO
27/7 come from crops that can only be harvested once a year, problems with such
crops could limit the ability of the Company 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, the Company must rely on the accuracy of its
estimates of its product requirements in sourcing these products. If the Company
underestimates its product requirements, it may not be able to re-stock such
product until the next growing season. In order to help alleviate this problem,
the Company is working on sourcing raw materials in both the Northern and
Southern hemisphere to provide for two separate growing seasons. See "Risk
Factors -- Reliance on Limited Suppliers."
Big Planet. Substantially all of the services and products offered by
Big Planet currently are contracted from unaffiliated third parties pursuant to
contractual arrangements. For example, Big Planet has contracted with Qwest
Communications to provide long distance phone services for the Company and
contracted with UUNET for dial-up access. 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 to provide such
services itself until such time as it has developed a sufficient customer base
to make investments in infrastructure and equipment economically feasible.
However, Big Planet's profit margins and its ability to deliver quality service
at competitive prices are dependent 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
i-Phone through its e-commerce services.
Big Planet, however, has invested significantly in its Internet
facilities and customer support in order to add value and differentiate itself
in the market place. Additionally, implementation of operational support systems
allows Big Planet to own the complete relationship with the customer, which
enhances the Company's ability to retain customers and market additional new
products and services.
Regional Profiles
For information on the Company's revenue for each of the geographic
regions in which the Company operated for the years ended December 31, 1996,
1997, and 1998 and other related information, reference is made to "Management's
Discussion and Analysis of Financial Condition and Results of Operations," and
Note 16 to the Company's Consolidated Financial Statements, each of which are
incorporated herein by reference to the Company's 1998 Annual Report to
Stockholders, sections of which are filed herewith as Exhibit 13.
North Asia. The Company's North Asia region currently consists of its
markets in Japan and South Korea. Japan is the Company's largest market with
approximately $654.2 million in revenue in 1998. According to the World
Federation of Direct Selling Associations ("WFDSA"), 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. Management
believes that as many as six million people are involved in direct selling
businesses in Japan. Direct selling is governed by detailed government
regulation in Japan. See "Risk Factors -- Government
-20-
Regulation of Direct Selling Activities." The Company's success to date can be
directly attributed to the growth of its Japanese business in recent years.
While the direct sales market as a whole has remained relatively flat for
several years in Japan, the Company has posted double-digit growth in revenue,
on a local currency basis, each year since the Company entered this market in
1993.
As of December 31, 1998, the Company offered 94 of its 116 personal
care products and 19 of its 62 nutritional supplements, including LIFEPAK and
LIFEPAK Trim, the Company's core nutritional supplements. In addition, in the
fourth quarter of 1998, the Company also introduced a home water filtration
system designed for the Japanese market. With a suggested retail price of
approximately $400, this is the Company's first large-ticket item to be
distributed through its channel. The Company currently offers 59 of its 116
personal care products and six of its 62 nutritional supplements in South Korea.
The Company has not introduced any of the proprietary natural health supplements
or botanical supplements acquired in connection with the recent acquisition of
Pharmanex such as CHOLESTIN and CordyMax Cs-4 in either Japan or South Korea.
Subject to obtaining all necessary regulatory approvals and registrations, the
Company plans to begin to introduce certain of the Pharmanex botanical products
into Japan and South Korea sometime in the second or third quarter of 1999. See
"Risk Factors -- Government Regulation of Personal Care Products and Nutritional
Supplements."
Southeast Asia. The Company's Southeast Asia region currently consists
of its markets in Taiwan, Hong Kong, Thailand, the Philippines, New Zealand, and
Australia. This region has been significantly affected by the Asian economic
crisis, which has severely curtailed consumer spending, particularly in
Thailand. See "Risk Factors -- Economic and Political Conditions in the
Company's Markets."
Taiwan is the largest market in this region with revenue of $ 119.5
million in 1998. According to the WFDSA, 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. Management believes that the
direct selling industry in Taiwan contracted during 1998. The contraction was
more significant in United States dollar terms as a result of the weakening
Taiwanese dollar. Approximately two million people (approximately 10% of the
population) are estimated to be involved in direct selling. Because a large
percentage of its population is involved in direct selling activities, the
Taiwan government regulates direct selling activities to a significant extent.
For example, the Taiwan government has enacted tax legislation aimed at ensuring
proper tax payments by distributors on their transactions with end consumers.
See "Risk Factors -- Government Regulations of Direct Selling Activities." The
Company believes that it is one of the largest direct selling companies in
Taiwan. As of December 31, 1998, the Company offered 94 of its 116 personal care
products and 17of its 62 nutritional supplements in Taiwan.
Other Countries. The Company's Other Countries region currently
consists of the Company's 13 markets in Europe, Brazil, and United States,
which, until March 1999, had been operated by private affiliates. See "Recent
Developments." 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 the Company's
personal care products are sold in Europe. The Company has introduced three to
five of its IDN products in a liminted number of its European markets. The
Company believes the nutritional supplement market provides the Company with its
greatest growth potential in Europe. The Company recently hired a new European
vice president and continues to refine its operations in Europe to fit the
European mold. On March 8, 1999, the Company acquired the Nu Skin operations in
the United States, and plans to acquire Big Planet and the other North American
Affiliates in the second quarter of 1999. Substantially all of the Company
personal care and nutritional supplements are distributed in the United States.
The Company is assuming control over the United States operations at an
important time. The newly combined Pharmanex/IDN division was recently launched
in the United States and Big Planet continues to develop and implement its
technology and telecommunication products and services in the United States.
Following are the weighted average currency exchange rates of $1 into
local currency for each of the Company's markets in which revenue exceeded $5.0
million for at least one of the quarters listed:
-21-
1996 1997 1998
---------------------------------- ---------------------------------- ----------------------------------
1st 2nd 3rd 4th 1st 2nd 3rd 4th 1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Japan(1) 105.8 107.5 109.0 112.9 121.4 119.1 118.1 125.6 128.2 135.9 139.5 119.3
Taiwan 27.4 27.4 27.5 27.5 27.5 27.7 28.4 31.0 32.8 33.6 34.5 32.6
Hong Kong 7.7 7.7 7.7 7.7 7.7 7.7 7.7 7.7 7.7 7.8 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 1,278.9
Thailand 25.2 25.3 25.3 25.5 26.0 25.4 31.5 40.3 45.1 40.3 40.9 37.1
- ------------------
(1) Since January 1, 1992, the highest and lowest exchange rates for the
Japanese yen have been 147.3 and 80.6, respectively.
Competition
Personal Care and Nutritional Products. The markets for personal care
and nutritional products are large and intensely competitive. The Company
competes directly with 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 industry by emphasizing the uniqueness, value and premium
quality of the Company's products and the convenience of the Company's
distribution system. Many of the Company's competitors have much greater name
recognition and financial resources than the Company. In addition, personal care
and nutritional products can be purchased in a wide variety of channels of
distribution. While the Company believes that consumers appreciate the
convenience of ordering products from home through a sales person or through a
catalog, the buying habits of many consumers accustomed to purchasing products
through traditional retail channels are difficult to change. The Company's
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. There can be no assurance that the Company's business and
results of operations will not be affected materially by market conditions and
competition in the future. See "Risk Factors -- Competition."
Technology Products and Services; Telecommunications. The Internet
services and on-line commerce market is new, rapidly evolving, and intensely
competitive. The Company expects competition to intensify further in this market
in the future. Barriers to entry for e-commerce are relatively low as current
and new competitors can launch new Web sites at relatively low cost. Big
Planet's e-commerce 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 on-line services such as America Online and
Microsoft Network, local, regional, and national Internet service providers such
as MindSpring and national telecommunication companies; and other 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 the Company. In addition, the Company understands 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. There
can be no assurance that Big Planet's business and results of operations will
not be affected materially by the intense competition in the Internet market.
See "Risk Factors -- Competition."
The telecommunications industry is highly competitive. Many of the Big
Planet's existing and potential competitors in this market segment have
financial, personnel, marketing, and other resources significantly greater
-22-
than those of the Company or Big Planet, as well as other competitive
advantages. Increased consolidation and strategic alliances in the industry
resulting from the Telecommunications Act of 1996 (the "Telecom Act of 1996")
could give rise to significant new competitors to Big Planet. Competition is
primarily on the basis of pricing, transmission quality, network reliability,
and customer service and support. Big Planet may be at a disadvantage because it
does not have its own facilities and must rely on its ability to acquire quality
and reliable services from third-party vendors at a price that allows it to
resell such services at competitive rates. The ability of Big Planet to compete
effectively in this market will depend upon its ability to maintain high quality
services at prices equal to or below those charged by its competitors. There can
be no assurance that Big Planet or the Company will be able to contract with
third parties to obtain rates that allow it to compete on the basis of price in
the future or that it will be able to successfully compete in this market. See
"Risk Factors - Competition."
Network Marketing Companies. The Company also competes 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 the Company's existing markets is Amway Corporation
and its affiliates. The Company competes for new distributors on the strength of
its multiple business opportunities, product offerings, compensation plan,
management strength, and appeal of its international operations. Management
envisions the entry of many more direct selling organizations into the
marketplace as this channel of distribution expands over the next several years.
There can be no assurance that the Company will be able to successfully meet the
challenges posed by this increased competition. See "Risk Factors--Competition."
Intellectual Property
The Company's major trademarks are registered in the United States and
in many other countries, and the Company considers its trademark protection to
be very important to its business. The major trademarks used by the Company
include the following: Nu Skin, IDN, Pharmanex, LIFEPAK, and Big Planet. The
Company generally registers its important trademarks in the United States and
each market where the Company operates or has plans to operate. In addition, a
number of the Company's products utilize proprietary technologies and
formulations.
Government Regulation
Direct Selling Activities. Direct selling activities are regulated by
various federal, state, and local governmental agencies in the United States and
foreign countries. These laws and regulations are generally intended to prevent
fraudulent or deceptive schemes, often referred to as "pyramid," "money games,"
"business opportunity" or "chain sales" schemes, that promise quick rewards for
little or no effort, require high entry costs, use high pressure recruiting
methods, and/or do not involve legitimate products. The laws and regulations in
the Company's current markets often (i) impose certain cancellation/product
return, inventory buy-backs and cooling-off rights for consumers and
distributors, (ii) require the Company or its distributors to register with the
governmental agency, (iii) impose certain reporting requirements on the Company,
and/or (iv) impose various requirements, such as requiring distributors to have
certain levels of retail sales to qualify to receive commissions, to ensure that
distributors are being compensated for sales of products and not for recruitment
of new distributors. The extent and provisions of these laws, however, vary from
country to country and can impose significant restrictions and limitations on
the Company's business operations. For example, in South Korea, the Company
cannot pay more than 35% of its revenues to its distributors in any given month.
In Germany, the German Commercial Code prohibits the use of direct salespersons
to promote a multi-level marketing arrangement by making the inducement to
purchase products for resale illegal. Accordingly, the Company, through its
German subsidiary, sells its products to consumers through a "commercial agent"
rather than a wholesale distributor. A commercial agent is similar to an
employee. Therefore, Nu Skin is subject to potential tax and social insurance
liability as well as agency law governing the termination of a commercial agent.
Based on research conducted in opening its existing markets (including
assistance from local counsel), the nature and scope of inquiries from
government regulatory authorities, and the Company's history of operations in
-23-
such markets to date, the Company believes that its 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 the Company currently
operates. Certain countries, including Singapore and China, currently have laws
in place that would prohibit or significantly limit the Company from conducting
business in such markets in accordance with its existing business model. There
can be no assurance that the Company will be allowed to conduct business in new
markets or continue to conduct business in each of its existing markets. See
"Risk Factors - Government Regulation of Direct Selling Activities."
Regulation of Personal Care and Nutritional Supplements. The Company's
personal care and nutrition products and related marketing and advertising are
subject to extensive governmental regulation by numerous domestic and foreign
governmental agencies and authorities, including the FDA, the Federal Trade
Commission (the "FTC"), 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 (the "MOHW").
The Company's markets have varied regulations concerning product
formulation, labeling, packaging, and importation. These laws and regulations
often require the Company to, among other things: (i) reformulate products for a
specific market to meet the specific product formulation laws of such country;
(ii) conform product labeling to the regulations in each country; and (iii)
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 MOHW requires the Company to have an import
business license and to register each personal care product imported into Japan.
The Company has also had to reformulate many products to satisfy MOHW
regulations. In Taiwan, all "medicated" cosmetic and pharmaceutical products
require registration. These regulations can limit the ability of the Company to
import certain products into certain of its markets and can delay the
introduction of products into markets as the Company goes through the
registration and approval process for such products. The sale of cosmetic
products is regulated in the European Union ("EU") member states under the EU
Cosmetics Directive, which requires a uniform application for foreign companies
making personal care product sales.
Nutritional supplements are strictly regulated in the Company's
markets. The Company's markets have varied regulations that apply to and
distinguish dietary health supplements from "drugs" or "pharmaceutical
products." For example, the Company's products are regulated by the FDA in the
United States under the Federal Food, Drug and Cosmetic Act (the "FDCA"). The
FDCA 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 ("DSHEA"). DSHEA establishes rules for
determining whether a product is a nutritional supplement. Under DSHEA,
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 market. None of this
infringes, however, upon the FDA's power to remove an unsafe substance from the
market, but the law clearly shifts the burden of proof to the FDA. In Japan,
regulations strictly limit the types of claims and regulations that can be made
regarding the efficacy of nutritional supplements. In the event a product, or an
ingredient in a product, is classified as a drug or pharmaceutical product in
any market, the Company will generally not be able to distribute such product in
such market through its distribution channel because of the strict restrictions
applicable to drug and pharmaceutical products.
Many of the Company's 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. For example, in the United States the Company is unable to make any
claim that any of its nutritional supplements will diagnose, cure, mitigate,
treat, or prevent disease. DSHEA, 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
-24-
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 any claims be substantiated. One of the
strategic purposes of the acquisition of Pharmanex was to provide the Company
with additional resources to enhance the ability of the Company to comply with
these requirements. In Japan, the Company and its distributors are severely
restricted in making any claims concerning the health benefits of the Company's
nutritional supplements. Accordingly, these regulations can limit the ability of
the Company and its distributors to inform consumers of the full benefits of the
Company's products. See "Risk Factors -- Government Regulation of Products and
Marketing; Import Restrictions."
The Company and its vendors are also subject to laws and regulations
governing the manufacturing of its products. For example, in the United States
the FDA regulations establish Good Manufacturing Practices for foo