NU SKIN ENTERPRISES, INC.
10-Ks and 10-Qs
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UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
(Mark
One)
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þ
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 FOR THE FISCAL YEAR ENDED DECEMBER 31,
2009
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OR
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¨
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934.
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Commission
file number: 001-12421
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NU
SKIN ENTERPRISES, INC.
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(Exact
name of registrant as specified in its charter)
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Delaware
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87-0565309
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(State
or other jurisdiction of incorporation or organization)
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75
WEST CENTER STREET
PROVO
UT 84601
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(IRS
Employer Identification No.)
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(Address
of principal executive offices, including zip code)
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Registrant’s telephone number,
including area code: (801) 345-1000
Securities registered pursuant to
Section 12(b) of the Act:
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Title of each class
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Name of exchange on which
registered
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Class
A common stock, $.001 par value
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New
York Stock Exchange
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Securities registered pursuant to
Section 12(g) of the Act: None
Indicate by check mark if the
registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act. Yes
þ
No
¨
Indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or Section
15(d) of the Act. Yes
¨
No
þ
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
þ
No
¨
Indicate by check mark whether the
Registrant has submitted electronically and posted on its corporate Website, if
any, every Interactive Data File required to be submitted and posted pursuant to
Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12
months (or for such shorter period that the Registrant was required to submit
and post such files). Yes
¨
No
¨
Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of Regulation S-K(§229.405 of this
chapter) 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.
¨
Indicate by check mark whether the
Registrant is a large accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of “large
accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule
12b-2 of the Exchange Act.
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Large
accelerated filer
þ
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Accelerated filer
¨
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Non-accelerated
filer
¨
(Do not check if a smaller
reporting company)
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Smaller Reporting
Company
¨
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Indicate by check mark whether the
Registrant is a shell company (as defined in Rule 12b-2 of the
Act). Yes
¨
No
þ
Based on the closing sales price of the
Class A common stock on the New York Stock Exchange on June 30, 2009, the
aggregate market value of the voting stock held by non-affiliates of the
Registrant was approximately $753.0 million. All executive officers
and directors of the Registrant, and all stockholders holding more than 10% of
the Registrant’s outstanding voting stock, other than institutional investors,
such as registered investment companies, eligible to file beneficial ownership
reports on Schedule 13G, have been deemed, solely for the purpose of the
foregoing calculation, to be “affiliates” of the Registrant.
As of February 12, 2010, 62,396,343
shares of the Registrant’s Class A common stock, $.001 par value per share, and
no shares of the Registrant’s Class B common stock, $.001 par value per share,
were outstanding.
Documents incorporated by
reference
. Portions of the Registrant’s definitive Proxy
Statement for the Registrant’s 2010 Annual Meeting of Stockholders to be filed
with the Securities and Exchange Commission within 120 days after the
Registrant’s fiscal year end are incorporated by reference in Part III of this
report.
TABLE
OF CONTENTS
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PART
I
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-1-
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ITEM
1.
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-1-
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-8-
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ITEM
1A.
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ITEM
1B.
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ITEM
2.
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ITEM
3.
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ITEM
4.
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PART
II
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ITEM
5.
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ITEM
6.
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ITEM
7.
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ITEM
7A.
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ITEM
8.
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ITEM
9.
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ITEM
9A.
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ITEM
9B.
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PART
III
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ITEM
10.
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ITEM
11.
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ITEM
12.
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ITEM
13.
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ITEM
14.
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PART
IV
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ITEM
15.
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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 OPERATION,” AND “ITEM 1. BUSINESS,” INCLUDE
“FORWARD-LOOKING STATEMENTS” WITHIN THE MEANING OF SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED. THESE STATEMENTS REPRESENT OUR
EXPECTATIONS OR BELIEFS CONCERNING, AMONG OTHER THINGS, FUTURE REVENUE,
EARNINGS, GROWTH STRATEGIES, NEW PRODUCTS AND INITIATIVES, FUTURE OPERATIONS AND
OPERATING RESULTS, AND FUTURE BUSINESS AND MARKET OPPORTUNITIES. WE
UNDERTAKE NO OBLIGATION TO PUBLICLY UPDATE OR REVISE ANY FORWARD-LOOKING
STATEMENT, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE,
EXCEPT AS REQUIRED BY LAW. WE WISH TO CAUTION AND ADVISE READERS THAT
THESE STATEMENTS INVOLVE RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS
TO DIFFER MATERIALLY FROM THE EXPECTATIONS AND BELIEFS CONTAINED
HEREIN. FOR A SUMMARY OF CERTAIN RISKS RELATED TO OUR BUSINESS, SEE
“ITEM 1A – RISK FACTORS” BEGINNING ON PAGE 22.
In
this Annual Report on Form 10-K, references to “dollars” and “$” are to United
States dollars.
Nu
Skin, Pharmanex and AgeLOC are our trademarks. The italicized product
names used in this Annual Report on Form 10-K are product names and also, in
certain cases, our trademarks.
All
references to our “distributors” in this Annual Report on Form 10-K include our
independent distributors and preferred customers, and our sales employees and
contractual sales promoters in China. All references to “executive distributors”
include our independent distributors and China sales employees who have
completed certain qualification requirements.
We are a
leading, global direct selling company with operations in 50 markets
worldwide. We develop and distribute innovative, premium-quality
anti-aging personal care products and nutritional supplements under our Nu Skin
and Pharmanex brands, respectively. We strive to secure competitive
advantage in four key areas: our people, our products, the culture we promote,
and the business opportunities we offer. In 2009, our 25
th
year
of operations, we posted record revenue of $1.33 billion. Revenue in
2009 grew 7% based on the success of strong product innovation and distributor
initiatives.
As of
December 31, 2009, we had a
global network of over
761,000 active distributors. Approximately 33,000 of our distributors
were qualified sales leaders we refer to as “executive
distributors.” Our executive distributors play a critical leadership
role in the growth and development of our business.
Approximately
84% of our 2009 revenue came from our markets outside of the United
States. While we have become more geographically diverse over the
past decade, Japan, our largest revenue market, accounted for approximately 35%
of our 2009 total revenue. Due to the size of our foreign operations,
our results are often impacted positively or negatively by foreign currency
fluctuations, particularly fluctuations in the Japanese yen. In
addition, our results are impacted by global economic, political, demographic
and business trends and conditions.
Our
business is subject to various laws and regulations globally, particularly with
respect to our product categories as well as our direct selling distribution
channel, sometimes referred to as “network marketing” or “multi-level
marketing”. Accordingly, we face certain risks, including risks
associated with potential improper activities of our distributors or any
inability to obtain necessary product registrations.
Operating
in the highly competitive direct selling, personal care and nutritional
supplement industries, our success depends on our ability to attract and retain
both distributors and consumers with our innovative products. Our
greatest competitive strengths continue to be found in our people, our products,
our culture and our opportunity.
Our
People.
We distribute all of our products exclusively through
our distributors as opposed to retail stores or mail order
catalogs. Consequently, our most significant asset is our extensive
global network of distributors who enable us to rapidly introduce products and
penetrate our markets with little upfront promotional cost. Our
revenue is highly dependent upon the number and productivity of our
distributors. As of December 31, 2009, we had a
global network of over
761,000 active distributors. Approximately 33,000 of our
distributors were executive distributors, who are most seriously pursuing the
direct selling opportunity and play a critical leadership role for our network
of distributors.
Our
Products.
Compelling and innovative products are vital to our
success as they help attract distributors and customers. Our research
and development team, including more than 75 in-house scientists, collaborate to
create products with innovative features that deliver real results and benefits
and improve people’s lives. Our distributors use the innovative
features of our products to build successful sales organizations and attract new
customers. Our product strategy is focused on
anti-aging. As aging is best addressed both externally and
internally, we believe we are well positioned as one of the few companies that
has successfully built brand equity and balanced revenue in both skin care and
nutrition. We currently offer a wide range of anti-aging
products. Our new ageLOC based products are formulated to target both
the signs and the ultimate sources of aging. We believe our ageLOC
anti-aging platform will continue to bridge the categories of skin care and
nutrition to deliver a unique, more comprehensive approach to
anti-aging.
Our
Culture.
From our inception over 25 years ago, Nu Skin
Enterprises' mission has been to improve people's lives—through our quality
products, our rewarding business opportunities and by promoting an uplifting and
enriching culture. Our mission statement encourages people to be a
“force for good” in the world around them. Our culture unites our
distributors, customers and employees in innovative humanitarian efforts, the
most significant of which are our Nourish the Children initiative that provides
our distributors the ability to donate meals to starving children, and our Force
for Good Foundation that supports many charitable causes that benefit
children. In short, we believe that people are attracted to
organizations that focus on more than just financial incentives. We
encourage our distributors and our employees to live each day with an
understanding that together we have the opportunity to make the world a better
place.
Our
Opportunity.
We provide
individuals with the opportunity to essentially operate their own business, with
very little start-up cost. A distributor may build a sales organization and
customer base in any country where we conduct business. To attract
and retain the most capable sales leaders, we are committed to providing a
generous and compelling distributor compensation plan. Historically, our
distributor compensation plan has paid out to distributors approximately 42% of
commissionable sales.
We believe this level
of payout is among the most generous compensation plans in direct
selling. Periodically, we refine our plan and add enhancements to
help our distributors grow their businesses. We also offer incentive
trips and recognition events for distributors that reach key levels in our
compensation plan. In addition, we have continued to expand and
promote product subscription and loyalty programs that provide incentives for
customers who commit to purchase a set amount of products on a recurring
basis.
We have
two primary product categories, each operating under its own
brand. We market our premium-quality personal care products under the
Nu Skin brand and our science-based nutritional supplements under the Pharmanex
brand.
Presented
below are the U.S. dollar amounts and associated revenue percentages from the
sale of Nu Skin, Pharmanex, and other products and services for the years ended
December 31, 2007, 2008, and 2009. This table should be read in
conjunction with the information presented in
“Item 7. Management’s Discussion and
Analysis of Financial Condition and Results of Operation,”
which
discusses the factors impacting revenue trends and the costs associated with
generating the aggregate revenue presented.
Revenue
by Product Category
(U.S.
dollars in millions)
(1)
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Year
Ended December 31,
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Product
Category
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2007
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2008
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2009
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Nu
Skin
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$ | 498.5 | 43.0 | % | $ | 633.4 | 50.8 | % | $ | 752.7 | 56.5 | % | ||||||||||||
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Pharmanex
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634.2 | 54.8 | 597.7 | 47.9 | 565.6 | 42.5 | ||||||||||||||||||
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Other
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25.0 | 2.2 | 16.5 | 1.3 | 12.8 | 1.0 | ||||||||||||||||||
| $ | 1,157.7 | 100.0 | % | $ | 1,247.6 | 100.0 | % | $ | 1,331.1 | 100.0 | % | |||||||||||||
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(1)
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In
2009, 84% of our sales were transacted in foreign currencies that were
then converted to U.S. dollars for financial reporting purposes at
weighted-average exchange rates. Foreign currency fluctuations
had no material impact on reported revenue in 2009 compared to
2008. Foreign currency fluctuations negatively impacted
reported revenue by approximately 3% in 2008 compared to
2007.
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Nu
Skin.
Nu Skin is the brand of our original product line and
offers premium-quality anti-aging personal care products. Our
strategy is to leverage our network marketing distribution model to establish Nu
Skin as an innovative leader in the anti-aging personal care
market. We are committed to continuously improving and evolving our
product formulations to develop and incorporate innovative and proven
ingredients.
Our new
ageLOC anti-aging skin care products are designed to target both the signs and
the ultimate sources of aging. Research for our ageLOC platform has
identified and targeted what we call Youth Gene Clusters, functional groups of
genes that regulate how we appear to age. We incorporate this
research into ageLOC products that have been demonstrated to support and reset
Youth Gene Clusters to function in more youthful patterns of
activity. Our ageLOC products provide both corrective and
preventative benefits in preserving youth and in reducing the signs of
aging.
Another
innovative product that positively impacted our revenue growth over the past
four years is the
Galvanic Spa
System.
The
Galvanic
Spa
instrument emits a very mild electrical current. When the
Galvanic Spa System
is used
to apply products that carry either positively or negatively charged active
ingredients, product efficacy improves dramatically. The
Galvanic Spa System
is an
ideal direct selling product because our distributors can easily demonstrate its
benefits. This helps them to recruit new customers and
distributors. Our
Galvanic Spa System
,
Galvanic Spa Gels
, and
associated products accounted for approximately 19% of our total revenue and 33%
of Nu Skin revenue in 2009. In early 2010, we introduced an
ageLOC Edition
Galvanic Spa System II
to
capitalize on enthusiasm for ageLOC generally. This newest spa is
more user-friendly and improves the amount of ingredients delivered to the
skin. We plan to launch this improved
ageLOC Edition
Galvanic Spa System II
to our
distributor force globally in 2010.
The
following table summarizes our Nu Skin product line by category:
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Category
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Description
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Selected
Products
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Core
Systems
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Regardless
of skin type, our core systems provide a solid foundation for our
customers’ individual skin care needs. Our systems are
developed to target specific skin concerns and are made from ingredients
scientifically proven to provide visible results for concerns ranging from
aging to acne.
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ageLOC
Transformation
ageLOC
Future Serum
ageLOC
Elements
Nu
Skin 180º Anti-Aging Skin Therapy System
Nu
Skin Tri-Phasic White
Nutricentials
Nu
Skin Clear Action Acne Medication System
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Targeted
Treatments
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Our customized
skin care line allows a customer to tailor product regimens that help
deliver younger looking skin at any age. The products are
developed using cutting-edge ingredient technologies that target specific
skin care needs.
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ageLOC
Edition Galvanic Spa System II
Galvanic
Spa Gels with ageLOC
Tru
Face Essence Ultra
Tru
Face Line Corrector
Enhancer
Skin Conditioning Gel
Celltrex
Ultra Recovery Fluid
Celltrex
CoQ10 Complete
NAPCA
Moisturizer
Polishing
Peel Skin Refinisher
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Total
Care
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Our
total care line addresses body, hair and oral care. The total
care line can be used by families and the products are designed to deliver
superior benefits from head to toe for the ultimate sense of total body
wellness.
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Body
Bar
Liquid
Body Lufra
Perennial
Intense Body Moisturizer
Dividends
Men’s Care
AP-24
Dental Care
Nu
Skin Renu Hair Mask
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Cosmetic
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The
Nu
Colour
cosmetic line
products are targeted to define and highlight your natural
beauty.
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Tinted
Moisturizer SPF 15
Finishing
Powder
Contouring
Lip Gloss
Defining
Effects Mascara
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Epoch
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Our
Epoch
line is distinguished by
utilizing traditional knowledge of indigenous cultures for skin
care. Each
Epoch
product is formulated with
botanical ingredients derived from renewable resources found in
nature. In addition, we contribute a percentage of our proceeds
from
Epoch
sales to charitable
causes.
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Baobab
Body Butter
Sole
Solution Foot Treatment
Calming
Touch Soothing Skin Cream
Glacial
Marine Mud
IceDancer
Invigorating Leg Gel
Everglide
Foaming Shave Gel
Ava
puhi moni Shampoo
Epoch
Baby Hibiscus Hair & Body Wash
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Pharmanex.
We
market a variety of anti-aging nutritional products under our Pharmanex
brand. Direct selling has proven to be an extremely effective method
of marketing our high-quality nutritional supplements because our distributors
can personally educate consumers on the quality and benefits of our products,
differentiating them from our competitors’ offerings.
LifePak
, our flagship line of
micronutrient supplements, accounted for 18% of our total revenue and 43% of
Pharmanex revenue in 2009.
Our
strategy for our nutritional supplement business is to continue to introduce
innovative, substantiated anti-aging products based on extensive research and
development and quality manufacturing. In addition, we provide tools
such as our technologically advanced
Pharmanex BioPhotonic Scanner
to measure and demonstrate the positive impact of our key nutritional
products. In 2010, we plan to introduce our first ageLOC nutritional
products designed to address the internal sources of aging. We
believe the addition of ageLOC nutritional products will continue to bridge the
two key anti-aging categories of skin care and nutrition to deliver a unique,
more comprehensive approach to anti-aging.
The
following table summarizes our Pharmanex product line by category:
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Category
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Description
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Selected
Products
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Nutritionals
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Pharmanex
nutritional products supply a broad spectrum of micronutrients that our
bodies need as a foundation for a lifetime of optimal
health. Our
LifePak
family of
products along with our
g3
superfruit juice are
the top-selling products in our nutritionals line.
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LifePak
family of
products
g3
juice
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Solutions
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Our
targeted solutions supplements contain standardized levels of botanical
and other active ingredients that are formulated for consumers to meet the
demands of everyday life.
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Tegreen
97
ReishiMax
GLp
MarineOmega
Cholestin
CordyMax
Cs-4
Cortitrol
Detox
Formula
Eye
Formula
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Weight
Management
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Our
weight management products include supplements as well as meal replacement
shakes.
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The Right Approach (TRA)
weight management system
MyVictory!
weight
management program
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Vitameal
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A
highly nutritious meal that can be purchased and donated through our
Nourish the Children initiative to feed starving children or purchased for
personal food storage.
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Vitameal
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Other.
We
also offer a limited number of other products and services, including digital
content storage, water purifiers and other household products. We
also have integrated technology into other areas of our business and offer
advanced tools and services that help distributors establish an online presence
and manage their business. These “other” categories of products
represented only a small percentage of our revenue in 2009 and will not likely
be an area of focus in the next few years.
Sourcing
and Production
Nu
Skin.
In order to maintain high product quality, we acquire
our ingredients and contract production of our proprietary products from
suppliers and manufacturers that we believe are reliable, reputable and deliver
high quality materials and service. Our
ageLOC Edition Galvanic Spa System
II
is procured from a single vendor who owns certain patent rights
associated with such product. We believe our agreements with this
vendor are sufficiently long-term and exclusive. However, to continue
offering this product category following any termination of our relationship
with this vendor, we would need to develop a new galvanic unit and source it
from another supplier. We also acquire ingredients and products from
one other supplier that currently manufactures products representing
approximately 30% of our Nu Skin personal care revenue in 2009. We
maintain a good relationship with our suppliers and do not anticipate that
either party will terminate the relationship in the near term. We
also have ongoing relationships with secondary and tertiary
suppliers. Please refer to
“Item 1A - Risk Factors”
for
a discussion of risks and uncertainties associated with our supplier
relationships and with the sourcing of raw materials and
ingredients.
We also
established a production facility in Shanghai, where we currently manufacture
our personal care products sold in China, as well as a small portion of product
exported to select other markets. We believe that if the need arose, this plant
could be expanded or other facilities could be built in China to produce larger
amounts of inventory for export or as a back up to our existing supply
chain.
Pharmanex.
Substantially
all of our Pharmanex nutritional supplements and ingredients, including LifePak,
are produced or provided by third-party suppliers and
manufacturers. We rely on two partners for the majority of our
Pharmanex products, one of which supplies products that represent approximately
35% of our nutritional supplement revenue while the other supplier manufactures
products that represent approximately 20% of our nutritional supplement revenue
in 2009. In the event we become unable to source any products or
ingredients from these suppliers or from other current vendors, we believe that
we would be able to produce or replace those products or substitute ingredients
without great difficulty or significant increases to our cost of goods
sold. Please refer to
“Item 1A. – Risk Factors”
for a discussion of certain risks and uncertainties associated with our
supplier relationships, as well as with the sourcing of raw materials and
ingredients.
We also
maintain a facility in Zhejiang Province, China, where we produce some of our
Pharmanex nutritional supplements for sale in China and herbal extracts used to
produce
Tegreen 97
,
ReishiMax GLp
and other
products sold globally.
Research
and Development
We
continually invest in our research and development capabilities. Our
research and development expenditures were $10.0
million, $9.6 million
and $10.4 million in 2007, 2008 and 2009, respectively. These amounts
do not include salary and overhead expenses for our internal research and
development activities. Because of our commitment to product
innovation, we plan to continue to commit resources to research and development
in the future. As we invest in our ageLOC platform of products, we
expect an increase in our research and development expenditures over the next
couple of years.
The Nu
Skin Center for Anti-Aging Research, our primary research and testing laboratory
located adjacent to our office complex in Provo, Utah, houses both Pharmanex and
Nu Skin research facilities and professional and technical
personnel. We are currently in the preliminary planning phase of
building a state-of-the-art innovation center adjacent to our corporate
headquarters, a portion of which will be dedicated to research and
development. We believe this facility will cost approximately $40 million
and will take roughly two years to complete. We also maintain
research facilities in China. Much of our Pharmanex research is
conducted in China, where we benefit from a well-educated, low-cost, scientific
labor pool that enables us to conduct research at a much lower cost than would
be possible in the United States.
We have
joint research projects with numerous independent scientists, including
scientific advisory boards comprised of recognized authorities in related
disciplines for each of our nutritional and personal care product categories. We
also fund and collaborate on basic research projects with researchers from
prominent universities and research institutions in the United States, Europe
and Asia, whose staffs include scientists with basic research expertise in
natural product chemistry, biochemistry, dermatology, pharmacology and clinical
studies.
In
addition, we evaluate a significant number of product ideas for our Nu Skin and
Pharmanex categories presented by outside sources. We utilize
strategic licensing and other relationships with vendors for access to directed
research and development work for innovative and proprietary
offerings.
Intellectual
Property
Our major
trademarks are registered in the United States and in each country where we
operate or have plans to operate, and we consider trademark protection to be
very important to our business. Our major trademarks include Nu
Skin®, our fountain logos, Pharmanex®, ageLOC™, LifePak® and Galvanic
Spa®. In addition, a number of our products, including the
ageLOC Edition Galvanic Spa System
II
and
Pharmanex
BioPhotonic Scanner
, are based on proprietary technologies and
formulations, some of which are patented or licensed from third
parties. We also rely on trade secret protection to protect our
proprietary formulas and other proprietary information.
Geographic
Sales Regions
We
currently sell and distribute our products in 50 markets. We have
segregated our markets into five geographic regions: North Asia,
Americas, Greater China, Europe, and South Asia/Pacific. The
following table sets forth the revenue for each of the geographic regions for
the years ended December 31, 2007, 2008 and 2009:
|
Year
Ended December 31,
|
||||||||||||||||||||||||
|
(U.S.
dollars in millions)
|
2007
|
2008
|
2009
|
|||||||||||||||||||||
|
North
Asia
|
$ | 585.8 | 50 | % | $ | 594.5 | 48 | % | $ | 606.1 | 45 | % | ||||||||||||
|
Americas
|
188.3 | 16 | 223.9 | 18 | 260.9 | 20 | ||||||||||||||||||
|
Greater
China
|
205.0 | 18 | 210.0 | 17 | 210.4 | 16 | ||||||||||||||||||
|
Europe
|
77.2 | 7 | 111.6 | 9 | 133.6 | 10 | ||||||||||||||||||
|
South
Asia/Pacific
|
101.4 | 9 | 107.6 | 8 | 120.1 | 9 | ||||||||||||||||||
| $ | 1,157.7 | 100 | % | $ | 1,247.6 | 100 | % | $ | 1,331.1 | 100 | % | |||||||||||||
Additional
comparative revenue and related financial information is presented in the tables
captioned
“Segment
Information”
in Note 17 to our Consolidated Financial
Statements. The information from these tables is incorporated by
reference in this Report.
North
Asia
.
The following
table provides information on each of the markets in the North Asia region,
including the year it opened, 2009 revenue, and the percentage of our total 2009
revenue for each market:
|
(U.S.
dollars in millions)
|
Year
Opened
|
2009
Revenue
|
Percentage
of
2009
Revenue
|
|||
|
Japan
|
1993
|
$ | 461.9 | 35% | ||
|
South
Korea
|
1996
|
$ | 144.2 | 11% | ||
Japan is
our largest market and accounted for approximately 35% of total revenue in 2009.
We market most of our Nu Skin and Pharmanex products in Japan, along with a
limited number of other offerings. In addition, all product
categories offer a limited number of locally developed products sold exclusively
in our Japanese market. In December 2009, we introduced our
ageLOC Future
Serum.
In 2010, we plan to introduce the
ageLOC Transformation
skin
care system and ageLOC products designed to address the internal sources of
aging
.
The
direct selling environment in Japan continues to be difficult as the industry
has been on the decline for several years and regulatory and media scrutiny have
increased. Please refer to
“Government Regulation”
and
“Item 1A. – Risk
Factors”
for a discussion of risks and uncertainties associated with
challenges in the Japan market.
In South
Korea, we offer most of our Nu Skin and Pharmanex products, along with a limited
number of other offerings. In 2010, we plan to introduce the
ageLOC Transformation
skin
care system
.
Americas
.
The following
table provides information on each of the markets in the Americas region,
including the year opened, 2009 revenue, and the percentage of our total 2009
revenue for each market:
|
(U.S.
dollars in millions)
|
Year
Opened
|
2009
Revenue
|
Percentage
of
2009
Revenue
|
|||
|
United
States
|
1984
|
$ | 218.6 | 16% | ||
|
Canada
|
1990
|
$ | 23.5 | 2% | ||
|
Latin
America
(1)
|
1994
|
$ | 18.8 | 1% | ||
|
(1)
|
Latin
America includes Colombia, Costa Rica, El Salvador, Guatemala, Honduras,
Mexico and Venezuela.
|
Substantially
all of our Nu Skin and Pharmanex products, as well as limited other products and
services, are available for sale in the United States. In 2009, we
introduced the
ageLOC
Transformation
skin care system. In 2010, we plan to begin
introducing ageLOC products designed to address the internal sources of
aging. In 2009, we opened operations in Colombia.
Greater
China.
The following table provides information on each of the
markets in the Greater China region, including the year opened, 2009 revenue,
and the percentage of our total 2009 revenue for each market:
|
(U.S.
dollars in millions)
|
Year
Opened
|
2009
Revenue
|
Percentage
of
2009
Revenue
|
|||
|
Taiwan
|
1992
|
$ | 91.7 | 7% | ||
|
China
|
2003
|
$ | 71.1 | 5% | ||
|
Hong
Kong
|
1991
|
$ | 47.6 | 4% | ||
Our Hong
Kong and Taiwan markets operate using our global direct selling business model
and global compensation plan. We offer a robust product offering of
the majority of our Nu Skin and Pharmanex products and limited other products
and services in Hong Kong and Taiwan, although one of our flagship Nu Skin
products, the
Galvanic Spa
System II
is not approved for sale in Taiwan. Approximately half of our
revenue in these markets comes from orders through our monthly product
subscription program, which has led to improved retention of customers and
distributors and has helped streamline the ordering process.
In China,
we sell many of our Nu Skin products and a locally produced value line of
personal care products under the
Scion
brand
name. We also sell a select number of Pharmanex products, including
our number one nutritional product,
LifePak.
We
currently are unable to fully operate under our global direct selling business
model in China as a result of regulatory restrictions on direct selling
activities in this market. Consequently, we have developed a retail
sales model that utilizes an employed sales force and contractual sales
promoters to sell products through fixed locations that we are supplementing
with a single level direct sales opportunity in those locations where we have
obtained a direct sales license. We rely on our sales force to market
and sell products at the various retail locations supported by only minimal
advertising and traditional promotional efforts. Our retail model in
China is largely based upon our ability to attract customers to our retail
stores through our sales force, to educate them about our products through
frequent training meetings, and to obtain repeat purchases.
We also continue to implement a direct
sales opportunity that allows us to engage independent direct sellers who can
sell products away from our retail stores. We have received licenses
and approvals to engage in direct selling activities in the municipalities of
Shanghai, Beijing and in five cities in the Guangdong province, and we continue
to work to obtain the necessary approvals in other locations in
China. The direct selling licenses allow us to engage an entry-level,
non-employee sales force that can sell products away from fixed retail
locations. Our current direct sales model is structured in a manner
that we believe is complementary to our existing retail sales
model.
Europe
.
The following
table provides information on our Europe region, including the year opened,
revenue for 2009, and the percentage of our total 2009 revenue for the
region.
|
(U.S.
dollars in millions)
|
Year
Opened
|
2009
Revenue
|
Percentage
of
2008
Revenue
|
|||
|
Europe
region
(1)
|
1995
|
$ | 133.6 | 10% | ||
|
(1)
|
Europe
includes Austria, Belgium, Czech Republic, Denmark, Finland, France,
Germany, Hungary, Ireland, Iceland, Israel, Italy, Luxembourg, the
Netherlands, Norway, Poland, Portugal, Romania, Russia, Slovakia, South
Africa, Spain, Sweden, Switzerland, Turkey
and the United
Kingdom.
|
We
currently operate and offer a full range of Nu Skin and Pharmanex products in 26
countries throughout Northern, Eastern, and Central Europe as well as in Israel
and South Africa. In 2010, we plan to introduce the
ageLOC Transformation
skin
care system and ageLOC products designed to address the internal sources of
aging in this region
.
Various products
and distributor tools have contributed to Europe’s recent success, including the
Galvanic Spa System II
,
the
Pharmanex BioPhotonic
Scanner
, and
g3.
We have been
experiencing strong growth in Central and Eastern European
markets. In 2009, we opened operations in Turkey.
South
Asia/Pacific.
The following table provides information on each
of the markets in the South Asia/Pacific region, including the year opened, 2009
revenue, and the percentage of our total 2009 revenue for each
market:
|
(U.S.
dollars in millions)
|
Year
Opened
|
2009
Revenue
|
Percentage
of
2009
Revenue
|
|||
|
Singapore/Malaysia/Brunei
|
2000/2001/2004
|
$ | 49.2 | 4% | ||
|
Thailand
|
1997
|
$ | 38.8 | 3% | ||
|
Australia/New
Zealand
|
1993
|
$ | 14.2 | 1% | ||
|
Indonesia
|
2005
|
$ | 10.7 | 1% | ||
|
Philippines
|
1998
|
$ | 7.2 | 1% | ||
We offer a majority of our Pharmanex
and Nu Skin products in the South Asia/Pacific region. In 2010, we
plan to introduce the
ageLOC
Transformation
skin care system and ageLOC products designed to address
the internal sources of aging in this region
.
Marketing
initiatives in South Asia/Pacific have centered on monthly product subscription
orders and the
Galvanic Spa
System II
.
Overview
.
The foundation of
our sales philosophy and distribution system is network marketing. We
sell our products through distributors who are not employees, except in China
where we sell our products through employed retail sales representatives,
contractual sales promoters and independent direct sellers. Our
distributors generally purchase products from us for resale to consumers and for
personal consumption. We also sell products directly to preferred
customers at discounted monthly subscription prices.
Network
marketing is an effective vehicle to distribute our products
because:
|
|
•
|
distributors
can educate consumers about our products in person, which we believe is
more effective for premium-quality, differentiated products than using
traditional advertising;
|
|
|
•
|
direct
sales allow for actual product demonstrations and testing by potential
customers;
|
|
|
•
|
there
is greater opportunity for distributor and customer testimonials;
and
|
|
|
•
|
as
compared to other distribution methods, our distributors can provide
customers higher levels of service and encourage repeat
purchases.
|
“Active
distributors” under our global compensation plan are defined as those
distributors who have purchased products for resale or personal consumption
during the previous three months. In addition, we have implemented
“preferred customer” programs in many of our markets, which allow customers to
purchase products directly from us, generally on a recurring monthly product
subscription basis. We include preferred customers who have purchased
products during the previous three months in our “active distributor”
numbers. While preferred customers are legally very different from
distributors, both are considered customers of our products.
“Executive
distributors” under our global compensation plan must achieve and maintain
specified personal and group sales volumes each month. Once an
individual becomes an executive distributor, he or she can begin to take
advantage of the benefits of commission payments on personal and group sales
volume. As a result of direct selling restrictions in China, we have
implemented a modified business model utilizing sales employees and contractual
sales promoters in our retail stores in addition to independent direct
sellers. (See the discussion on China in “Geographic Sales
Regions.”)
Our
revenue is highly dependent upon the number and productivity of our
distributors. Growth in sales volume requires an increase in the
productivity and/or growth in the total number of distributors. As of
December 31, 2009, we had a
global network of over
761,000 active distributors. Approximately 33,000 of our distributors
were executive distributors. As of each of the dates indicated below,
we had the following number of active and executive distributors in the
referenced regions: Our number of active distributors has
historically fluctuated from year to year based on various factors, including
our business model transition in China, efforts to train and discipline
distributors in Japan and changes in promotions.
Total
Number of Active and Executive Distributors by Region
|
As
of December 31, 2007
|
As
of December 31, 2008
|
As
of December 31, 2009
|
|||||||||
|
Active
|
Executive
|
Active
|
Executive
|
Active
|
Executive
|
||||||
|
North
Asia
|
335,000
|
14,845
|
326,000
|
13,937
|
319,000
|
14,144
|
|||||
|
Americas
|
158,000
|
4,588
|
171,000
|
4,876
|
171,000
|
5,522
|
|||||
|
Greater
China
|
138,000
|
6,389
|
115,000
|
6,323
|
106,000
|
6,938
|
|||||
|
Europe
|
59,000
|
1,957
|
83,000
|
2,911
|
94,000
|
3,385
|
|||||
|
South
Asia/Pacific
|
65,000
|
2,223
|
66,000
|
2,541
|
71,000
|
2,950
|
|||||
|
Total
|
755,000
|
30,002
|
761,000
|
30,588
|
761,000
|
32,939
|
|||||
Sponsoring
.
We rely on our
distributors to recruit and sponsor new distributors of our
products. While we provide internet support, product samples,
brochures, magazines, and other sales and marketing materials at cost,
distributors are primarily responsible for recruiting and educating new
distributors with respect to products, our global compensation plan, and how to
build a successful distributorship.
The
sponsoring of new distributors creates multiple levels in a network marketing
structure. Individuals that a distributor sponsors are referred to as
“downline” or “sponsored” distributors. If downline distributors also
sponsor new distributors, they create additional levels in the structure, but
their downline distributors remain in the same downline network as their
original sponsoring distributor.
Sponsoring
activities are not required of distributors and we do not pay any commissions
for sponsoring new distributors. However, because of the financial
incentives provided to those who succeed in building and mentoring a distributor
network that resells and consumes products, many of our distributors attempt,
with varying degrees of effort and success, to sponsor additional
distributors. People often become distributors after using our
products as regular customers. Once a person becomes a distributor,
he or she is able to purchase products directly from us at wholesale
prices. The distributor is also entitled to sponsor other
distributors in order to build a network of distributors and product
users. A potential distributor must enter into a standard distributor
agreement, which among other things, obligates the distributor to abide by our
policies and procedures.
Global
Compensation Plan
.
One of our
competitive advantages is our global sales compensation plan. Under
our global compensation plan, a distributor is paid consolidated monthly
commissions in the distributor’s home country, in local currency, for the
distributor’s own product sales and for product sales in that distributor’s
downline distributor network across all geographic markets. Because
of restrictions on direct selling in China, our sales employees and contractual
sales promoters there do not participate in the global compensation plan, but
are instead compensated according to a compensation model established for that
market.
Commissions
on the sale of an individual Nu Skin or Pharmanex product can exceed 50% of the
wholesale price, except in a limited number of markets where commissions are
limited by law.
The
actual commission payout percentage, however, varies depending on the number of
distributors at each payout level within our global compensation
plan. Historically, our distributor compensation plan has paid out to
distributors approximately 42% of commissionable sales.
We believe that our
commission payout as a percentage of total sales is among the most generous paid
by major direct selling companies.
From time
to time, we make modifications and enhancements to our global compensation plan
to help motivate distributors. In 2008 and 2009, we successfully
launched modifications to our compensation plan worldwide designed to improve
commission payments early in the distributor lifecycle. In addition,
we evaluate a limited number of distributor requests on a monthly basis for
exceptions to the terms and conditions of the global compensation plan,
including volume requirements. While our general policy is to
discourage exceptions, we believe that the flexibility to grant exceptions is
critical in retaining distributor loyalty and dedication and we make exceptions
in limited cases as necessary.
High Level of
Distributor Incentives
.
Based upon
management’s knowledge of our competitors’ distributor compensation plans, we
believe our global compensation plan is among the most financially rewarding
plans offered by leading direct selling companies. There are two fundamental
ways in which our distributors can earn money:
|
|
•
|
through
retail markups on sales of products purchased by distributors at
wholesale; and
|
|
|
|
|
|
•
|
through
a series of commissions on product
sales.
|
Each of
our products carries a specified number of sales volume
points. Commissions are based on total personal and group sales
volume points per month. Sales volume points are generally based upon
a product’s wholesale cost, net of any point-of-sale taxes. As a
distributor’s business expands to successfully sponsoring other distributors
into the business, who in turn expand their own businesses, a distributor
receives a higher percentage of commissions. An executive’s
commissions can increase substantially as multiple downline distributors achieve
executive status. In determining commissions, the number of levels of
downline distributors included in an executive’s commissionable group increases
as the number of executive distributorships directly below the executive
increases.
Distributor
Support
.
We are committed
to providing high-level support services tailored to the needs of our
distributors in each market. We attempt to meet the needs and build
the loyalty of distributors by providing personalized distributor services and
by maintaining a generous product return policy. Because the majority
of our distributors are part time and have only a limited number of hours each
week to concentrate on their business, we believe that maximizing a
distributor’s efforts by providing effective distributor support has been, and
will continue to be, important to our success.
Through
training meetings, distributor conventions, web-based messages, distributor
focus groups, regular telephone conference calls, and other personal contacts
with distributors, we seek to understand and satisfy the needs of our
distributors. We provide walk-in, telephonic, and Web-based product
fulfillment and tracking services that result in user-friendly, timely product
distribution. Several of our walk-in retail centers maintain meeting
rooms, which our distributors may utilize for training and sponsoring
activities. Because of our efficient distribution system, we believe
that most of our distributors do not maintain a significant inventory of our
products.
Payments
.
Distributors
generally pay for products prior to shipment. Accordingly, we carry
minimal accounts receivable. Distributors typically pay for products
in cash, by wire transfer or by credit card.
Product
Returns
.
We believe we are
among the most consumer-protective companies in the direct selling
industry. While the regulations and our operations vary somewhat from
country to country, we generally follow a similar procedure for product
returns. For 30 days from the date of purchase, our product return
policy generally allows a retail customer to return any Nu Skin or Pharmanex
product to us directly or to the distributor through whom the product was
purchased for a full refund. After 30 days from the date of purchase,
the end user’s return privilege is at the discretion of the
distributor. Our distributors can generally return unused products
directly to us for a 90% refund for one year. Through 2009, our
experience with actual product returns averaged less than 5% of annual
revenue.
Rules Affecting
Distributors
.
We monitor
regulations and distributor activity in each market to ensure our distributors
comply with local laws. Our published distributor policies and
procedures establish the rules that distributors must follow in each
market. We also monitor distributor activity to maintain a level
playing field for our distributors, ensuring that some are not disadvantaged by
the activities of others. We require our distributors to present
products and business opportunities ethically and
professionally. Distributors further agree that their presentations
to customers must be consistent with, and limited to, the product claims and
representations made in our literature.
Distributors
must represent to us that their receipt of commissions is based on retail sales
and substantial personal sales efforts. We must also monitor sales
aids used by distributors such as videotapes, audiotapes, brochures and
promotional clothing to help ensure they comply with applicable laws and
regulations. 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. Distributors may not use our trademarks or other
intellectual property without our consent.
Our
products may not be sold, and our business opportunities may not be promoted, in
traditional, non-Company owned retail environments. We have made an
exception to this rule by allowing some of our Pharmanex products to be sold in
independently owned pharmacies and drug stores meeting specified
requirements. Distributors who own or are employed by a
service-related business, such as a doctor’s office, hair salon or health club,
may make products available to regular customers as long as products are not
displayed visibly to the general public in a manner to attract the general
public into the establishment to purchase products.
In order
to qualify for commission bonuses, our distributors generally must satisfy
specific requirements including achieving at least 100 points, which is
approximately $100 in personal sales volume per month. In addition,
individual markets may have requirements specific to that country based on
regulatory factors. For example, in the United States, distributors
must also:
|
|
•
|
document
retail sales or customer connections to established numbers of retail
customers; and
|
|
|
|
|
|
•
|
sell
and/or consume at least 80% of personal sales
volume.
|
We
systematically review reports of alleged distributor misbehavior. If
we determine one of our distributors has violated any of our policies or
procedures, we may terminate the distributor’s rights
completely. Alternatively, we may impose sanctions, such as warnings,
probation, withdrawal or denial of an award, suspension of privileges of a
distributorship, fines and/or withholding of commissions until specified
conditions are satisfied, or other appropriate injunctive relief.
From our
inception over 25 years ago, Nu Skin Enterprises' mission has been to improve
people's lives—through our quality products, our rewarding business
opportunities and by promoting an uplifting and enriching culture. Our
mission statement encourages people to be a “force for good” in the world around
them. Our culture unites our distributors, customers and employees in
innovative humanitarian efforts, the most significant of which are our Nourish
the Children initiative that provides our distributors the ability to donate
meals to starving children, and our Force for Good Foundation that supports many
charitable causes that benefit children. In short, we believe that people
are attracted to organizations that focus on more than just financial
incentives. We encourage our distributors and our employees to live each
day with an understanding that together we have the opportunity to make the
world a better place.
Nourish the
Children.
In 2002, we introduced an innovative humanitarian
initiative, Nourish the Children, which applies the power of our distribution
network to help address the problem of hunger and malnutrition. We
sell a highly nutritious meal replacement product under the brand, “VitaMeal,”
and encourage our distributors, customers and employees to purchase VitaMeal and
donate their purchase to charitable organizations that specialize in
distributing food to alleviate famine and poverty. Distributors earn
commissions on sales of Vitameal to distributors in their downline and their
customers. For every eight packages of VitaMeal purchased and donated, we donate
an additional package. Since 2002, our distributors, customers and
employees have joined together to donate more than 150 million meals to
malnourished children in various locations throughout the world.
Force for Good
Foundation.
The original Force for Good campaign was
introduced in conjunction with the Nu Skin
Epoch
product line in 1996.
This unique brand of skin and hair care products was developed in partnership
with the world's leading ethnobotanists. A donation of 25 cents from
the sale of each
Epoch
product was directed to preserve the environments, languages, lifestyles, and
traditions of indigenous people around the world. Today, the Force
for Good Foundation provides support for charitable efforts throughout the
globe, with a special emphasis on addressing the humanitarian needs of
children. Charitable projects supported by the Force for Good
Foundation, our Company, our employees, and our distributors include helping to
provide crucial heart surgeries for children in Southeast Asia and China,
supporting schools for children in need, helping farmers in Malawi be trained to
grow more crops to better support the needs of their families, and other
projects.
Direct Selling
Companies
.
We compete with
other direct selling organizations, some of which have a longer operating
history and higher visibility, name recognition and financial resources than we
do. The leading direct selling companies in our existing markets are
Avon and Alticor (Amway). We compete for new distributors on the
strength of our multiple business opportunities, product offerings, global
compensation plan, management, and our international operations. In
order to successfully compete in this market and attract and retain
distributors, we must maintain the attractiveness of our business opportunities
to our distributors.
Nu Skin and
Pharmanex Products
.
The markets for
our Nu Skin and Pharmanex products are highly competitive. Our
competitors include manufacturers and marketers of personal care and nutritional
products, pharmaceutical companies and other direct selling organizations, many
of which have longer operating histories and greater name recognition and
financial resources than we do. We compete in these markets by
emphasizing the innovation, value and premium quality of our products and the
convenience of our distribution system. We focus on delivering a
product whose value can be measured and provide our distributors with powerful
tools that allow them to demonstrate this effectiveness.
Direct Selling
Activities
.
Direct selling
activities are regulated by various federal, state and local governmental
agencies in the United States and foreign countries. Laws and
regulations in Japan, Korea and China are particularly restrictive and
difficult. These laws and regulations are generally intended to
prevent fraudulent or deceptive schemes, often referred to as “pyramid” schemes,
that compensate participants for recruiting additional participants irrespective
of product sales, use high-pressure recruiting methods and/or do not involve
legitimate products. The laws and regulations in our current markets
often:
|
|
•
|
impose
cancellation/product return, inventory buy-backs and cooling-off rights
for consumers and distributors;
|
|
|
•
|
require
us or our distributors to register with governmental
agencies;
|
|
|
•
|
impose
caps on the amount of commission we can
pay;
|
|
|
|
|
•
|
impose
reporting requirements; and
|
|
|
•
|
impose
upon us requirements, such as requiring distributors to maintain levels of
retail sales to qualify to receive commissions, to ensure that
distributors are being compensated for sales of products and not for
recruiting new distributors.
|
The laws
and regulations governing direct selling are modified from time to time, and,
like other direct selling companies, we are subject from time to time to
government investigations in our various markets related to our direct selling
activities. This can require us to make changes to our business model
and aspects of our global compensation plan in the markets impacted by such
changes and investigations.
Regulators in Japan have increased
their scrutiny of our industry. Several direct sellers in Japan have
been penalized for actions of their distributors that violated applicable
regulations, including one prominent international direct selling company that
was suspended from sponsoring activities for three months in 2008, and another
large Japanese direct selling company that was suspended from sponsoring
activities for six months in 2009. In addition, Japanese media has
reported on increased political pressure on lawmakers supporting our
industry.
We
continue to experience a high level of general inquiries regarding our company
and complaints to consumer protection centers in Japan and have taken steps to
try to resolve these issues including providing additional training to our
distributors
and
restructuring our compliance group in Japan. We have seen
improvements in some prefectures, but not in others. In 2009, we
received one written and one oral warning from Consumer Centers in two
prefectures raising concerns about our distributor training and number of
general inquiries and complaints. We are implementing additional
steps to reinforce our distributor education and training in Japan to help
address these concerns. If consumer complaints escalate to a
government review or if the current level of complaints does not improve, there
is an increased likelihood that regulators could take action against us or we
could receive negative media attention, either of which could harm our
business.
As a
result of restrictions in China on direct selling activities, we have
implemented a retail store model utilizing an employed sales force and
contractual sales promoters, and we are currently integrating direct selling in
our business model in this market pursuant to applicable direct selling
regulations. The regulatory environment in China remains
complex. China’s direct selling and anti-pyramiding regulations are
restrictive and contain various limitations, including a restriction on the
ability to pay multi-level compensation to independent distributors. Our
operations in China have attracted significant regulatory and media scrutiny
since we expanded our operations there in January 2003. Regulations are subject
to discretionary interpretation by municipal and provincial level regulators as
well as local customs and practices. Interpretations of what constitutes
permissible activities by regulators can vary from province to province and can
change from time to time because of the lack of clarity in the rules regarding
direct selling activities and differences in customs and practices in each
location.
Because
of the Chinese government’s significant concerns about direct selling
activities, it scrutinizes very closely activities of direct selling companies.
At times, investigations and related actions by government regulators have
impeded our ability to conduct business in certain locations, and have resulted
in a few cases where we have paid fines. In each of these cases, we
have been allowed to recommence operations after the government’s investigation,
and no material changes to our business model were required in connection with
these fines and impediments.
Please refer to
“Item 1A. Risk Factors”
for
more information on the regulatory risks associated with our business in
China.
The regulatory environment with respect
to direct selling in China remains fluid and the process for obtaining the
necessary governmental approvals to conduct direct selling continues to
evolve. The regulations and processes in some circumstances have been
interpreted differently by different governmental
authorities. In order to expand our direct selling model into
additional provinces we currently must obtain a series of approvals from the
Departments of Commerce in such provinces, the Shanghai Department of Commerce
(our supervisory authority), as well as the Departments of Commerce in each city
and district in which we plan to operate. We also are required to
obtain the approval of the State Ministry of Commerce, which is the national
governmental authority overseeing direct selling. In addition,
regulators are acting cautiously as they monitor the roll-out of direct selling,
which has made the approval process take longer than we anticipated.
Please refer to
“Item 1A. Risk Factors”
for
more information on the risks associated with our planned expansion of direct
selling in China.
Regulation of Our
Products
.
Our Nu Skin and
Pharmanex products and related promotional and marketing activities are subject
to extensive governmental regulation by numerous domestic and foreign
governmental agencies and authorities, including the FDA, the FTC, the Consumer
Product Safety Commission, the Department of Agriculture, State Attorneys
General and other state regulatory agencies in the United States, and the
Ministry of Health, Labor and Welfare in Japan and similar government agencies
in each market in which we operate.
Our
personal care products are subject to various laws and regulations that regulate
cosmetic products and set forth regulations for determining whether a product
can be marketed as a “cosmetic” or requires further approval as an
over-the-counter (OTC) drug. In the United States, regulation of cosmetics are
under the jurisdiction of the FDA. The Food, Drug and Cosmetic Act
defines cosmetics by their intended use, as “articles intended to be rubbed,
poured, sprinkled, or sprayed on, introduced into, or otherwise applied to the
human body . . . for cleansing, beautifying, promoting attractiveness, or
altering the appearance.” Among the products included in this
definition are skin moisturizers, perfumes, lipsticks, fingernail polishes, eye
and facial makeup preparations, shampoos, permanent waves, hair colors,
toothpastes and deodorants, as well as any material intended for use as a
component of a cosmetic product. Conversely, a product will not be
considered a cosmetic, but may be considered an (OTC) drug if it is intended for
use in the diagnosis, cure, mitigation, treatment, or prevention of disease, or
is intended to affect the structure or any function of the body. A product’s
intended use can be inferred from marketing or product claims. The
other markets in which we operate have similar regulations. In Japan,
the Ministry of Health, Labor and Welfare regulates the sale and distribution of
cosmetics and requires us to have an import business license and to register
each personal care product imported into Japan. In Taiwan, all
“medicated” cosmetic products require registration. In China,
personal care products are placed into one of two categories, “general” and
“drug.” Products in both categories require submission of formulas
and other information with the health authorities, and drug products require
human clinical studies. The product registration process in China for
these products can take from nine to more than 18 months. Such
regulations in any given market can limit our ability to import products and can
delay product launches as we go through the registration and approval process
for those products. The sale of cosmetic products is regulated in the
European Union under the European Union Cosmetics Directive, which requires a
uniform application for foreign companies making personal care product
sales
.
Our
Pharmanex products are subject to various regulations promulgated by government
agencies in the markets in which we operate. In the United States, we
generally market our nutritional products as conventional foods or dietary
supplements. The FDA has jurisdiction over this regulatory
area. Because these products are regulated under the Dietary
Supplement and Health Education Act, we are generally not required to obtain
regulatory approval prior to introducing a product into the United States
market. None of this infringes, however, upon the FDA’s power to
remove from the market any product it determines to be unsafe or an unapproved
drug. In our foreign markets, the products are generally regulated by
similar government agencies, such as the Ministry of Health, Labor and Welfare
in Japan, the KFDA in South Korea, and the Department of Health in
Taiwan. We typically market our Pharmanex products in international
markets as foods or health foods under applicable regulatory
regimes. In the event a product, or an ingredient in a product, is
classified as a drug or pharmaceutical product in any market, we will generally
not be able to distribute that product in that market through our distribution
channel because of strict restrictions applicable to drug and pharmaceutical
products. China has some of the most restrictive nutritional
supplement product regulations. Products marketed as “health foods” are subject
to extensive laboratory and clinical analysis by governmental authorities, and
the product registration process for these products may take two years or
more. We market both “health foods” and “general foods” in
China. Our flagship product,
LifePak
, is currently
marketed as a general food, as only two of the three main capsules having
received “health food” classification. Currently, “general foods” is
not an approved category for direct selling; therefore, we will only market
LifePak
through our
retail stores until final “health food” classification for
LifePak
is obtained for the
other capsule. Additionally, there is some risk associated with the
common practice in China of marketing a product as a “general food” while
seeking “health food” classification. If government officials feel
our categorization of our products is inconsistent with product claims,
ingredients or function, this could end or limit our ability to market such
products in China in their current form.
The
markets in which we operate all have varied regulations that distinguish foods
and nutritional health supplements from “drugs” or “pharmaceutical
products.” Because of the varied regulations, some products or
ingredients that are recognized as a “food” in certain markets may be treated as
a “pharmaceutical” in other markets. In Japan, for example, if a
specified ingredient is not listed as a “food” by the Ministry of Health and
Welfare, we must either modify the product to eliminate or substitute that
ingredient, or petition the government to treat such ingredient as a
food. We experience similar issues in our other
markets. This is particularly a problem in Europe where the
regulations differ from country to country. As a result, we must
often modify the ingredients and/or the levels of ingredients in our products
for certain markets. In some circumstances, the regulations in
foreign markets may require us to obtain regulatory approval prior to
introduction of a new product or limit our uses of certain ingredients
altogether. Because of negative publicity associated with some
supplements, there has been an increased movement in the United States and other
markets to expand the regulation of dietary supplements, which could impose
additional restrictions or requirements in the future. In general,
the regulatory environment is becoming more complex with increasingly strict
regulations each year.
Effective
June 2008, the U.S. Food and Drug Administration established regulations to
require current good manufacturing practices (cGMP) for dietary
supplements. The regulations ensure that dietary supplements are
produced in a quality manner, do not contain contaminants or impurities, and are
accurately labeled. The regulations include requirements for establishing
quality control procedures for us and our vendors and supliers, designing and
constructing manufacturing plants, and testing ingredients and finished
products. The regulations also include requirements for record
keeping and handling consumer product complaints. If dietary
supplements contain contaminants or do not contain the dietary ingredient they
are represented to contain, the FDA would consider those products to be
adulterated or misbranded. Our business is subject to additional FDA
regulations, such as those implementing an adverse event reporting system
(“AER’s”) effective December 2007, which requires us to document and track
adverse events and report serious adverse events associated with consumers’ use
of our products. Compliance with these regulations has increased and
may further increase the cost of manufacturing certain of our products as we
work with our vendors to assure they are in compliance.
Most of
our major markets also regulate advertising and product claims regarding the
efficacy of products. Accordingly, these regulations can limit our
ability to inform consumers of the full benefits of our products. For
example, in the United States, we are unable to claim that any of our
nutritional supplements will diagnose, cure, mitigate, treat or prevent
disease. In most of our foreign markets, we are not able to make any
“medicinal” claims with respect to our Pharmanex products. In the
United States, the Dietary Supplement Health and Education Act, however, permits
substantiated, truthful and non-misleading statements of nutritional support to
be made in labeling, such as statements describing general well-being resulting
from consumption of a dietary ingredient or the role of a nutrient or dietary
ingredient in affecting or maintaining a structure or a function of the
body. Most of the other markets in which we operate have not adopted
similar legislation and we may be subject to more restrictive limitations on the
claims we can make about our products in these markets. For example,
in Japan, our nutritional supplements are marketed as food products, which
significantly limits our ability to make any claims regarding these
products.
To date,
we have not experienced any difficulty maintaining our import
licenses. However, due to the varied regulations governing the
manufacture and sale of nutritional products in the various markets, we have
found it necessary to reformulate many of our products or develop new products
in order to comply with such local requirements. In the United
States, we are also subject to a consent decree with the FTC and various state
regulatory agencies arising out of investigations that occurred in the early
1990s of certain alleged unsubstantiated product and earnings claims made by our
distributors. The consent decree requires us to, among other things,
supplement our procedures to enforce our policies, not allow our distributors to
make earnings representations without making certain average earnings
disclosures, and not allow our distributors to make unsubstantiated product
claims. Compliance with the anti terrorism regulations of the US has
caused some delays in customs but these situations have been resolved by working
with the US customs officials and training our vendors and market staff in the
guidelines. The FTC recently approved, effective December 1, 2009,
revisions to its Guides Concerning the Use of Endorsements and Testimonials in
Advertising, or Guides, that impose disclosure of typical results and any
material connections between an endorser and the company they are endorsing.
We also
develop technologically-advanced business tools designed to help our
distributors effectively market our Nu Skin and Pharmanex
products. For example, during the last several years we have
introduced our
Pharmanex
BioPhotonic Scanner
in many of our markets around the world as well as
our
Galvanic Spa
System
. These tools are subject to the regulations of various health,
consumer protection and other governmental authorities around the
world. These regulations vary from market to market and affect
whether our business tools are required to be registered as medical devices, the
claims that can be made with respect to these tools, who can use them, and where
they can be used. We have been subject to regulatory inquiries in the
United States, Japan, and other countries with respect to the status of the
Pharmanex BioPhotonic
Scanner
as a non-medical device. Any determination that
medical device clearance is required for one of our tools could require us to
expend significant time and resources in order to meet the stringent standards
imposed on medical device companies or prevent us from marketing the
product. For example, we are not able to market the
Galavanic Spa System
in
Taiwan or Colombia as a result of the regulatory restrictions in these
markets. We are also subject to regulatory constraints on the claims
that can be made with respect to the use of our business tools.
Other Regulatory
Issues
.
As a United
States entity operating through subsidiaries in foreign jurisdictions, we are
subject to foreign exchange control, transfer pricing and customs laws that
regulate the flow of funds between us and our subsidiaries and for product
purchases, management services and contractual obligations, such as the payment
of distributor commissions.
As is the
case with most companies that operate in our product categories, we receive from
time to time inquiries from government regulatory authorities regarding the
nature of our business and other issues, such as compliance with local direct
selling, transfer pricing, customs, taxation, foreign exchange control,
securities and other laws. Negative publicity resulting from
inquiries into our operations by the United States and state government agencies
in the early 1990s, stemming in part from alleged inappropriate product and
earnings claims by distributors, and in the late 1990s resulting from adverse
media attention in South Korea, harmed our business.
As of
December 31, 2009, we had approximately 3,400 full- and part-time employees
worldwide. This does not include approximately 2,600 individuals who were
employed as sales representatives in our China operations. We also
had labor contracts with approximately 2,900 potential new sales representatives
in China. None of our employees are represented by a union or other
collective bargaining group, except in China and a small number of employees in
Japan. We believe that our relationship with our employees is good,
and we do not foresee a shortage in qualified personnel necessary to operate our
business.
Available
Information
Our
Internet address is
www.nuskinenterprises.com
. We
make available free of charge on or through our Internet Website our annual
reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form
8-K, and amendments to those reports filed or furnished pursuant to Section
13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably
practicable after we electronically file such material with, or furnish it to,
the Securities and Exchange Commission (the “SEC”). The public may
read and copy any materials we file with the SEC at the SEC’s Public Reference
Room at 100 F Street, NE, Washington, DC 20549. The public may obtain
information on the operation of the Public Reference Room by calling the SEC at
1–800–SEC–0330. The SEC maintains an internet site at
http://www.sec.gov that contains reports, proxy and information statements, and
other information regarding issuers that file electronically with the
SEC.
Executive
Officers
Our executive officers as of February
26, 2010, are as follows:
|
Name
|
Age
|
Position
|
||
|
Blake
Roney
|
51
|
Chairman
of the Board
|
||
|
Truman
Hunt
|
50
|
President
and Chief Executive Officer
|
||
|
Ritch
Wood
|
44
|
Chief
Financial Officer
|
||
|
Joe
Chang
|
57
|
Chief
Scientific Officer and Executive Vice President, Product
Development
|
||
|
Dan
Chard
|
45
|
President,
Global Sales and Operations
|
||
|
Scott
Schwerdt
|
52
|
President,
Americas, Europe and South Pacific
|
||
|
Matthew
Dorny
|
46
|
General
Counsel and Secretary
|
||
|
Ashok
Pahwa
|
54
|
Chief
Marketing Officer
|
Set forth below is the business
background of each of our executive officers.
Blake Roney
founded our
company in 1984 and served as its president through 1996. Mr. Roney
currently serves as the Chairman of the Board, a position he has held since our
company became public in 1996. Mr. Roney is also a trustee of the Force for
Good Foundation, a charitable organization that was established in 1996 by Mr.
Roney and the other founders of our company to help encourage and drive the
philanthropic efforts of our company, its employees, its distributors and its
customers to enrich the lives of others. He received a B.S. degree from Brigham
Young University.
Truman Hunt
has served as our
President since January 2003 and our Chief Executive Officer since May
2003. He has also served as a director of our company since May
2003. Mr. Hunt joined our company in 1994 and has served in
various positions, including Vice President and General Counsel from 1996 to
January 2003 and Executive Vice President from January 2001 until January
2003. He received a B.S. degree from Brigham Young University and a
J.D. degree from the University of Utah.
Ritch Wood
has served as
our Chief Financial Officer since November 2002. Prior to this
appointment, Mr. Wood served as Vice President, Finance from July 2002 to
November 2002 and Vice President, New Market Development from June 2001 to July
2002. Mr. Wood joined our company in 1993 and has served in
various capacities. Prior to joining us, he worked for the accounting
firm of Grant Thornton LLP. Mr. Wood earned a B.S. and a Master
of Accountancy degree from Brigham Young University.
Joe Chang
has served as Chief
Scientific Officer and Executive Vice President of Product Development since
February 2006. Dr. Chang served as President of our Pharmanex
division from April 2000 to February 2006. Dr. Chang served as Vice
President of Clinical Studies and Pharmacology of Pharmanex from 1997 until
April 2000. Dr. Chang has nearly 20 years of pharmaceutical
experience. He received a B.S. degree from Portsmouth University and
a Ph.D. degree from the University of London.
Daniel Chard
has served as
President of Global Sales and Operations since May 2009. Prior to
serving in this position, Mr. Chard served as Executive Vice President of
Distributor Success from February 2006 to May 2009 and President of Nu Skin
Europe from April 2004 to February 2006. Mr. Chard also served
as Vice President of Marketing and Product Management of Big Planet, our
technology products and services division, from May 2003 to April 2004 and as
Senior Director of Marketing and Product Development at
Pharmanex. Prior to joining us in 1998, Mr. Chard worked in a
variety of strategic marketing positions in the consumer products
industry. Mr. Chard holds a B.A. degree in Economics from
Brigham Young University and an M.B.A. from the University of
Minnesota.
Scott Schwerdt
has
served as President, Americas, Europe and South Pacific since February
2006. Mr. Schwerdt served as Regional Vice President of North
America and President of Nu Skin Enterprises United States, Inc. from May 2004
to February 2006. Mr. Schwerdt previously served as the General
Manager of our U.S. operations from May 2001 to May
2004. Mr. Schwerdt joined our company in 1988 and has held
various positions, including Vice President of North America/South Pacific
Operations and Vice President of Europe. Mr. Schwerdt received a
B.A. degree in International Relations from Brigham Young
University.
Matthew Dorny
has served as
our General Counsel and Secretary since January 2003. Mr. Dorny
previously served as Assistant General Counsel from May 1998 to January
2003. Prior to joining us, Mr. Dorny was a securities and
business attorney in private practice in Salt Lake City,
Utah. Mr. Dorny received B.A., M.B.A. and J.D. degrees from the
University of Utah.
Ashok Pahwa
has served as
Chief Marketing Officer since June 2008. Mr. Pahwa has over 25 years of
marketing experience in the direct selling and consumer products
industries. Prior to joining us, Mr. Pahwa was Vice President of Global
Marketing and Sales at Wall Street Institute, a global English language training
company, from February 2006 to January 2008. Mr. Pahwa served as Vice
President of New Businesses at Avon Products, Inc., a global direct seller of
personal care products, from 2003 to 2006. He also served in various
positions at Mary Kay Cosmetics, a global direct seller of personal care
products, from 1993 until 2003. He spent more than ten years with
Publicis/Bloom and Ogilvy & Mather, global advertising agencies. Mr.
Pahwa holds a bachelor’s degree in economics from the University of Delhi, a
master’s degree in management studies from the University of Bombay and a
master’s degree in business administration from Texas Tech
University.
Note Regarding
Forward-Looking Statements.
Certain statements made in this
filing under the caption “Item 1- Business” are “forward-looking statements”
within the meaning of Section 21E of the Securities Exchange Act of 1934, as
amended (the “Exchange Act”). In addition, when used in this Report
the words or phrases “will likely result,” “expect,” “intend,” “will continue,”
“anticipate,” “estimate,” “project,” “believe” and similar expressions are
intended to identify “forward-looking statements” within the meaning of the
Exchange Act.
Forward-looking
statements include plans and objectives of management for future operations,
including plans and objectives relating to our products and future economic
performance in countries where we operate. These forward-looking
statements involve risks and uncertainties and are based on certain assumptions
that may not be realized. Actual results and outcomes may differ
materially from those discussed or anticipated. We assume no
responsibility or obligation to update these statements to reflect any
changes. The forward-looking statements and associated risks set
forth herein relate to, among other things:
|
|
•
|
our
plans and expectations regarding our initiatives, strategies, development
and launch of new products, and other innovation efforts;
|
|
|
•
|
our
expectations regarding our suppliers and our ability to replace them if
needed;
|
|
|
•
|
our
expectations and beliefs regarding government regulations of our
industry and our ability to comply with such
regulations;
|
|
|
•
|
our
expectations and beliefs regarding our distributors and our compensation
plan; and
|
|
|
•
|
our
beliefs regarding the availability of qualified
personnel.
|
These and other forward-looking statements are subject to various risks and uncertainties including those described below under “Risk Factors” and in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation.”
We
face a number of substantial risks. Our business, financial condition or results
of operations could be harmed by any of these risks. The trading price of our
common stock could decline due to any of these risks, and they should be
considered in connection with the other information contained in this Annual
Report on Form 10-K. These risk factors should be read together with the other
items in this Annual Report on Form 10-K, including “Item 1. Business” and “Item
7. Management’s Discussion and Analysis of Financial Condition and Results of
Operation.”
Difficult
economic conditions could harm our business.
Global
economic conditions continue to be challenging. Although there are
signs of economic recovery, it is not possible for us to predict the extent and
timing of any improvement in global economic conditions. Even with
continued growth in many of our markets during this period, the economic
downturn could adversely impact our business in the future by causing a decline
in demand for our products, particularly if the economic conditions are
prolonged or worsen. In addition, such economic conditions may adversely impact
access to capital for us and our suppliers, may decrease our distributors'
ability to obtain or maintain credit cards, and may otherwise adversely impact
our operations and overall financial condition.
Currency
exchange rate fluctuations could impact our financial results.
In 2009,
approximately 84% of our sales occurred in markets outside of the United States
in each market’s respective local currency. We purchase inventory primarily in
the United States in U.S. dollars. In preparing our financial statements, we
translate revenue and expenses in our markets outside the United States from
their local currencies into U.S. dollars using weighted average exchange rates.
If the U.S. dollar strengthens relative to local currencies, particularly the
Japanese yen which accounted for approximately 35% of our 2009 revenue, our
reported revenue, gross profit and net income will likely be reduced. Foreign
currency fluctuations, particularly with respect to the Japanese yen given the
amount of yen denominated debt on our balance sheet, can also result in losses
and gains resulting from translation of foreign currency denominated balances on
our balance sheet. Given the complex global political and economic dynamics that
affect exchange rate fluctuations, it is difficult to predict future
fluctuations and the effect these fluctuations may have upon future reported
results or our overall financial condition.
Because our Japanese operations
account for a significant part of our business, continued weakness in our
business operations in Japan could harm our business.
Approximately
35% of our 2009 revenue was generated in Japan. We have experienced local
currency revenue declines in Japan over the last several years and continue to
face challenges in this market. Although we have seen improving trends in Japan
over the last several quarters, these trends may not continue or may reverse.
Factors
that
could impact our results in the market include:
|
•
|
continued
or increased levels of regulatory and media scrutiny and any regulatory
actions taken by regulators, or any adoption of more restrictive
regulations, in response to such
scrutiny;
|
|
•
|
significant
weakening of the Japanese yen;
|
|
•
|
increased
regulatory constraints
with
respect
to the claims we can make regarding the efficacy of products and tools,
which could limit our ability to effectively market
them;
|
|
•
|
risks
that the new initiatives we are implementing in Japan, which are patterned
after successful initiatives implemented in other markets, will not have
the same level of success in Japan, may not generate renewed growth or
increased productivity among our distributors, and may cost more or
require more time to implement than we have
anticipated;
|
|
•
|
inappropriate
activities by our distributors and any resulting regulatory actions
against us or our distributors;
|
|
•
|
any
weakness in the economy or consumer confidence;
and
|
|
•
|
increased
competitive pressures from other direct selling companies and their
distributors who actively seek to solicit our distributors to join their
businesses.
|
Regulators
in Japan have increased their scrutiny of the direct selling industry and our
business in Japan could be harmed if we are not able to successfully limit the
number of general inquires regarding our company and complaints received by
consumer protection centers.
Regulators
in Japan have increased their scrutiny of our industry. Several direct sellers
in Japan have been penalized for actions of distributors that violated
applicable regulations, including one prominent international direct selling
company that was suspended from sponsoring activities for three months in 2008,
and another large Japanese direct selling company that was suspended from
sponsoring activities for six months in 2009. In addition, Japanese media has
reported on increased political pressure on lawmakers supporting our
industry.
We
continue to experience a high level of general inquiries regarding our company
and
complaints to consumer protection centers in Japan and have taken steps to try
to resolve these issues including providing additional training to distributors
and restructuring our compliance group in Japan. We have seen
improvements in some prefectures, but not in others. In 2009, we
received one written and one oral warning from Consumer Centers in two
prefectures raising concerns about our distributor training and number of
general inquiries and complaints. We are implementing additional
steps to reinforce our distributor education and training in Japan to help
address these concerns. If consumer complaints escalate to a
government review or if the current level of complaints does not improve, there
is an increased likelihood that regulators could take action against us or we
could receive negative media attention, either of which could harm our
business. Japan is currently implementing a national organization of
consumer centers, which may increase scrutiny of our business and
industry.
If we are unable to retain our
existing distributors and recruit additional distributors, our revenue will not
increase and may even decline.
We
distribute almost all of our products through our distributors and we depend on
them to generate virtually all of our revenue. Our distributors may terminate
their services at any time, and, like most direct selling companies, we
experience high turnover among distributors from year to year. Distributors who
join to purchase our products for personal
consumption
or for
short-term income goals frequently only stay with us for a short time. Executive
distributors who have committed time and effort to build a sales organization
will generally stay for longer periods. Distributors have highly variable levels
of training, skills and capabilities. As a result, in order to maintain sales
and increase sales in the future, we need to continue to retain existing
distributors and recruit additional distributors. To increase our revenue, we
must increase the number of and/or the productivity of our
distributors.
We have
experienced periodic declines in both active distributors and executive
distributors in the past. The number of our active and executive distributors
may not increase and could decline again in the future. While we take many steps
to help train, motivate, and retain distributors, we cannot accurately predict
how the number and productivity of distributors may fluctuate because we rely
primarily upon our distributor leaders to recruit, train, and motivate new
distributors. Our operating results could be harmed if we and our distributor
leaders do not generate sufficient interest in our business to retain existing
distributors and attract new distributors.
The number and productivity of our
distributors could be harmed by several additional factors,
including:
▪ any adverse publicity
regarding us, our products, our distribution channel, or our
competitors;
▪ lack of interest in, or the
technical failure of, existing or new products;
|
|
▪
|
lack
of a sponsoring story that generates interest for potential new
distributors and effectively draws them into the
business;
|
▪ any negative public
perception of our products and their ingredients;
▪ any negative public
perception of our distributors and direct selling businesses in
general;
▪ our actions to enforce our
policies and procedures;
▪ any regulatory actions or
charges against us or others in our industry;
▪ general economic and
business conditions; and
|
|
▪
|
potential
saturation or maturity levels in a given country or market which could
negatively impact our ability to attract and retain distributors in such
market.
|
Although
our distributors are independent contractors, improper distributor actions that
violate laws or regulations could harm our business.
Distributor
activities that violate applicable laws or regulations could result in
government or third party actions against us, which could harm our business.
Except in China, our distributors are not employees and act independently of us.
We implement strict policies and procedures to ensure our distributors will
comply with legal requirements. However, given the size of our distributor
force, we experience problems with distributors from time to time. For example,
product claims made by some of our distributors in 1990 and 1991 led to an
investigation by the FTC in the United States, which resulted in our entering
into a consent decree with the FTC. In addition, rulings by the South Korean FTC
and by judicial authorities against us and other companies in South Korea
indicate that vicarious liability may be imposed on us for the criminal activity
of our distributors. In addition, we have seen some increase in sales aids and
promotional material being produced by distributors and distributor groups in
some markets which places an increased burden on us to monitor compliance of
such materials and increases the risk of materials that violate our policies and
applicable regulations. As we expand internationally, our distributors may
attempt to anticipate which markets we will open in the future and may begin
marketing and sponsoring activities in markets where we are not qualified to
conduct business. If we are unable to address this issue, we could face fines or
other legal action.
Laws
and regulations may prohibit or severely restrict our direct sales efforts and
cause our revenue and profitability to decline, and regulators could adopt new
regulations that harm our business.
Various
government agencies throughout the world regulate direct sales practices. Laws
and regulations in Japan, Korea and China are particularly restrictive and
difficult. These laws and regulations are generally intended to prevent
fraudulent or deceptive schemes, often referred to as “pyramid” schemes, that
compensate participants for recruiting additional participants irrespective of
product sales, use high pressure recruiting methods and/or do not involve
legitimate products. The laws and regulations in our current markets
often:
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impose
order cancellations, product returns, inventory buy-backs and cooling-off
rights for consumers and
distributors;
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require
us or our distributors to register with government
agencies;
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impose
caps on the amount of commissions we can pay;
and/or
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require
us to ensure that distributors are not being compensated based upon the
recruitment of new distributors.
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Complying
with these widely varying and sometimes inconsistent rules and regulations can
be difficult and may require the devotion of significant resources on our part.
If we are unable to continue business in existing markets or commence operations
in new markets because of these laws, our revenue and profitability may decline.
In addition, countries where we currently do business could change their laws or
regulations to negatively affect or completely prohibit direct sales
efforts.
Challenges
to the form of our network marketing system or other regulatory compliance
issues could harm our business.
We may be
subject to challenges by government entities or private parties, including our
distributors, to the form of our network marketing system or elements of our
business. There has been an increase in government scrutiny of our industry in
various markets, including Japan, China, Europe, and the United Kingdom. From
time to time, we receive formal and informal inquiries from various government
regulatory authorities about our business and our compliance with local laws and
regulations. For example, we have received notice from Belgium authorities
alleging that we have violated the anti-pyramid regulations in that market. Any
regulatory or other challenges regarding us or others in our industry could harm
our business if they create adverse publicity, increase scrutiny of our
industry, detrimentally affect our efforts to recruit or motivate distributors
and attract customers, or interpret laws in a manner inconsistent with our
current business practices.
In the
early 1990s, we entered into voluntary consent agreements with the FTC and a few
state regulatory agencies relating to investigations of our distributors’
product claims and practices. These investigations centered on alleged
unsubstantiated product and earnings claims made by some of our distributors. We
believe that the negative publicity generated by this FTC action, as well as a
subsequent action in the mid-1990s related to unsubstantiated product claims,
harmed our business and results of operation in the United States. Pursuant to
the consent decrees, we agreed, among other things, to supplement our procedures
to enforce our policies, to not allow distributors to make earnings
representations without making additional disclosures relating to average
earnings and to not make, or allow our distributors to make, product claims that
were not substantiated. We have taken various actions, including implementing a
more generous inventory buy-back policy, publishing average distributor earnings
information, supplementing our procedures for enforcing our policies, and
reviewing distributor product sales aids, to address the issues raised by the
FTC and state agencies in these investigations. As a result of the previous
investigations, the FTC makes inquiries from time to time regarding our
compliance with applicable laws and regulations and our consent decree. Any
further actions by the FTC or other comparable state or federal regulatory
agencies, in the United States or abroad, could have a further negative impact
on us in the future. Because legal and regulatory requirements concerning our
industry involve a high level of subjectivity and are inherently fact-based and
subject to judicial interpretation, we can provide no assurance that we would
not be harmed by the application or interpretation of statutes or regulations
governing network marketing, particularly in any civil challenge by a current or
former distributor.
Government regulations relating to
the marketing and advertising of our products and services may restrict, inhibit
or delay our ability to sell these products and harm our
business.
Our
products and our related marketing and advertising efforts are subject to
numerous domestic and foreign government agencies’ and authorities’ laws and
extensive regulations, which govern the ingredients and products that may be
marketed without registration as a drug and the claims, that may be made
regarding such products. Many of these laws and regulations involve a high level
of subjectivity and are inherently fact-based and subject to interpretation. If
these laws and regulations restrict, inhibit or delay our ability to introduce
or market our products or limit the claims we are able to make regarding our
products, our business may be harmed. During recent years authorities’
enforcement activity and interpretation of these regulations suggest a greater
allowance for scientific-based and substantiated claims when not involving
specific drug or disease claims. As a result, as companies have
developed new and innovative products, there has been a trend towards more
aggressive claims and the inclusion of greater science regarding the marketing
of cosmetic and nutritional products. We believe in order to remain competitive
we need to have similarly compelling claims. Because there is a
degree of subjectivity in determing whether materials or statements constitute
product claims and whether they involve improper drug claims, our claims and our
interpretation of applicable regulations may be challenged, which could harm our
business. This is a particular risk with respect to our ageLOC line
of products based on our novel approach to these products and our focus on genes
and sources of aging in both our scientific explanation for support of our
products as well as our marketing claims. If regulators take a more
restrictive stance regarding such claims, alter their enforcement priorities, or
determine that any of our claims violate applicable regulations, we could be
fined or forced to modify our claims or stop selling a
product.
New
regulations governing the marketing and sale of nutritional supplements could
harm our business.
There has
been an increasing movement in the United States and other markets to increase
the regulation of dietary supplements, which could impose additional
restrictions or requirements in the future. In several of our markets, including
Europe, South Korea and Hong Kong, new regulations have been adopted or are
likely to be adopted in the near-term that could impose new requirements, make
changes in some classifications of supplements under the regulations, or limit
the levels of ingredients we can include and claims we can make. In addition,
there has been increased regulatory scrutiny of nutritional supplements and
marketing claims under existing and new regulations. In Europe for example, we
are unable to market supplements that contain ingredients that were not marketed
prior to May 1997 in Europe (“novel foods”) without going through an extensive
registration and pre-market approval process. Europe is also expected to adopt
additional regulations setting new limits on acceptable maximum levels of
vitamins and minerals. In the United States, the FTC has recently approved,
effective December 1, 2009, revisions to its Guides Concerning the Use of
Endorsements and Testimonials in Advertising, or Guides, that impose disclosure
of typical results and any material connections between an endorser and the
company they are endorsing. If we or our distributors fail to comply with these
Guides the FTC could bring an enforcement action against us and we could be
fined and/or forced to alter alter our operations. Our operations also could be
harmed if new laws or regulations are enacted that restrict our ability of
companies to market or distribute nutritional supplements or impose additional
burdens or requirements on nutritional supplement companies or requires us to
reformulate our products.
If
we are found not to be in compliance with Good Manufacturing Practices our
operations could be harmed.
FDA
regulations on Good Manufacturing Practices and Adverse Event Reporting
requirements for the nutritional supplement industry have recently gone into
effect and require good manufacturing processes for us and our vendors and
reporting of serious adverse events associated with consumer use of our
products. Our operations could be harmed if regulatory authorities make
determinations that we or our vendors are not in compliance with the new
regulations. In addition, compliance with these regulations has increased and
may further increase the cost of manufacturing certain of our products as we
work with our vendors to assure they are in compliance.
Our operations in China are subject
to significant government scrutiny and may be harmed by the results of such
scrutiny.
Because
of the government’s significant concerns about direct selling activities,
government regulators in China closely scrutinize activities of direct selling
companies or activities that resemble direct selling. The regulatory environment
in China with regards to direct selling is evolving, and officials in multiple
national and local levels in the Chinese government often exercise broad
discretion in deciding how to interpret and apply applicable regulations. In the
past, the government has taken significant actions against companies that the
government found were engaging in direct selling activities in violation of
applicable law, including shutting down their businesses and imposing
substantial fines.
Our
operations in China are subject to significant regulatory scrutiny, and we have
experienced challenges in the past, including interruption of sales activities
at certain stores and fines being paid in some cases. Although we have now
obtained direct selling licenses in a limited number of provinces, government
regulators continue to scrutinize our activities and the activities of our sales
employees, contractual sales promoters and direct sellers to monitor our
compliance with applicable regulations as we integrate direct selling into our
business model. We continue to be subject to government reviews and
investigations. At times, complaints made by our sales representatives to the
government have resulted in increased scrutiny by the government. Any
determination that our operations or activities, or the activities of our sales
employees, contractual sales promoters or direct sellers, are not in compliance
with applicable regulations could result in substantial fines, extended
interruptions of business, termination of necessary licenses and permits,
including our direct selling licenses, or restrictions on our ability to open
new stores, obtain approvals for service centers or expand into new locations,
all of which could harm our business.
If direct selling regulations in
China are interpreted or enforced by government authorities in a manner that
negatively impacts our retail business model or our dual business model there,
our business in China could be harmed.
Chinese
regulators have adopted anti-pyramiding and direct selling regulations that
contain significant restrictions and limitations, including a restriction on
multi-level compensation for independent distributors selling away from a fixed
location. The regulations also impose various requirements on individuals before
they can become direct sellers, including the passage of an examination, which
are more burdensome than in our other markets and which could negatively impact
the willingness of some people to sign up to become direct sellers. There
continues to be some confusion and uncertainty as to the interpretation and
enforcement of the regulations and their scope, and the specific types of
restrictions and requirements imposed under them. Our business and our growth
prospects would be harmed if Chinese regulators interpret the anti-pyramiding
regulations or direct selling regulations in such a manner that our current
method of conducting business through the use of sales employees, contractual
sales promoters and direct sellers violates these regulations. In particular,
our business would be harmed by any determination that our current method of
compensating our sales employees and contractual sales promoters, including our
use of the sales productivity of an individual and the group of individuals whom
he or she trains and supervises in establishing salary and compensation,
violates the restriction on multi-level compensation under the rules. Our
business could also be harmed if regulators inhibit our ability to concurrently
operate our business model, which includes retail stores, sales employees,
contractual sales promoters and direct sellers.
If we are unable to obtain additional
necessary national and local government approvals in China as quickly as we
would like, our ability to expand our direct selling business and grow our
business there could be negatively impacted.
We have
completed the required national and local licensing process and commenced direct
selling activities in Beijing and Shanghai, Shenzhen City and four cities in the
Guangdong province. In order to expand our direct selling model into additional
provinces, we currently must obtain a series of approvals from district, city,
provincial and national government agencies with respect to each province in
which we wish to expand. The process for obtaining the necessary government
approvals to conduct direct selling continues to evolve. As we are being
required to work with such a large number of provincial, city, district and
national government authorities, we have found that it is taking more time than
anticipated to work through the approval process with these authorities. The
complexity of the approval process as well as the government’s continued
cautious approach as direct selling develops in China makes it difficult to
predict the timeline for obtaining these approvals. If the results of the
government’s evaluation of our direct selling activities result in further
delays in obtaining licenses elsewhere, or if the current processes for
obtaining approvals are delayed further for any reason or are changed or are
interpreted differently than currently understood, our ability to expand direct
selling in China and our growth prospects in this market, could be negatively
impacted.
Our compensation plan and business
model for our distributors in China differs from other markets could harm our
ability to grow our business in China.
The
direct selling regulations in China impose various limitations and requirements,
including a prohibition on multi-level compensation and a requirement that all
distributors pass a required examination before becoming a distributor. The
regulations also impose other restrictions on direct selling activities that
differ from the regulations in our other markets. As a result, our direct
selling compensation plan and business model for the direct sales component of
our business differs from the model we use in other markets. There can be no
assurance that these restrictions will not negatively impact our ability to
provide an attractive business opportunity to distributors in this market and
limit our ability to grow our business in this market. In addition, the
regulations do not allow the sale of general foods through a direct selling
business model. Because some of our supplements, including
LifePak,
are currently
marketed as general foods pending approval as health foods these products cannot
currently be approved for sale through our direct selling
channel. Failure of these products to receive health food status or
direct selling product approval in a timely manner could have a negative impact
on our direct selling business.
The
loss of suppliers or shortages in ingredients could harm our
business.
We
acquire ingredients and products from two suppliers that each currently
manufactures a significant portion of our Nu Skin personal care products. In
addition, we currently rely on two suppliers for a majority of Pharmanex
nutritional supplement products. In the event we were to lose any of these
suppliers and experience any difficulties in finding or transitioning to
alternative suppliers, this could harm our business. In addition, we obtain some
of our products from sole suppliers that own or control the product
formulations, ingredients, or other intellectual property rights associated with
such products. These products include our
Galvanic Spa System II
and
True Face Essence
products, two of our better selling products. We also license the right to
distribute some of our products from third parties. In the event we are unable
to renew these contracts, we may need to discontinue some products or develop
substitute products, which could harm our revenue. In addition, if we experience
supply shortages or regulatory impediments with respect to the raw materials and
ingredients we use in our products, we may need to seek alternative supplies or
suppliers. Some of our nutritional products, including
g3
juice, incorporate natural
products that are only harvested once a year and may have limited supplies. If
demand exceeds forecasts, we may have difficulties in obtaining additional
supplies to meet the excess demand until the next growing season. If we are
unable to successfully respond to such issues, our business could be
harmed.
Product
diversion to certain markets, including China, may have a negative impact on our
business.
From time
to time, we see our product being sold through online or other distribution
channels in certain markets. Although the Company has taken steps to
control this activity for products sold in China, this issue continues to be a
significant challenge. Product diversion causes confusion regarding
our distribution channels and negatively impacts our distributors’ ability to
retail our products. It also creates a negative impression regarding the
viability of the business opportunity for our distributors and sales
representatives, which can harm our ability to recruit new distributors and
sales representatives. In addition, in some cases, product diversion schemes may
also involve illegal importation, investment or other activities. If we are
unable to effectively address this issue or if diversion increases, our business
could be harmed.
Intellectual
property rights are difficult to enforce in China.
Chinese
commercial law is relatively undeveloped compared to most of our other major
markets, and, as a result, we may have limited legal recourse in the event we
encounter significant difficulties with patent or trademark infringers. Limited
protection of intellectual property is available under Chinese law, and the
local manufacturing of our products may subject us to an increased risk that
unauthorized parties may attempt to copy or otherwise obtain or use our product
formulations. As a result, we cannot assure that we will be able to adequately
protect our product formulations.
If our
Galvanic Spa
System
or
Pharmanex
BioPhotonic Scanner
are
determined to be a medical device in a particular geographic market or if our
distributors use it for medical purposes, our ability to continue to market and
distribute such tools could be harmed.
One of
our strategies is to market unique and innovative products and tools that allow
our distributors to distinguish our products, including the
Galvanic Spa System
and the
Pharmanex BioPhotonic
Scanner
. We do not
believe these products are medical devices and do not market them to our
distributors as medical devices. In March 2003, the FDA questioned whether the
Pharmanex BioPhotonic
Scanner
was a non-medical device. We subsequently filed an application
with the FDA to have it affirmatively classified as a non-medical device. The
FDA has not yet acted on our application. There are various factors that could
determine whether a product is a medical device including the claims that we or
our distributors make about it. We have faced similar uncertainties and
regulatory issues in other markets with respect to the status of the
Galvanic Spa System
and the
Pharmanex BioPhotonic
Scanner
as non-medical
devices and the claims that can be made in using them. For example, we have
faced regulatory inquiries in Japan, Korea, Singapore and Thailand regarding
distributor claims with respect to the
Pharmanex BioPhotonic
Scanner
. We have received similar inquiries regarding our
Galvanic Spa System
in Korea,
Thailand and the United States. While we have successfully worked with
regulators to resolve these matters in the past, we may not be able to do so in
the future and our business could be negatively impacted. We are not able to
market the
Galvanic Spa System
in Taiwan due to similar regulatory restrictions. There have also been
legislative proposals in Singapore and Malaysia relating to the regulation of
medical devices which could have an impact on these two products. In
an effort to allow registration of the
Galvanic Spa System
in
Indonesia, we are working with our vendor to obtain certification of its
facilities for medical device manufacturing. A determination in any of these
markets that the
Galvanic Spa
System
or the
Pharmanex
BioPhotonic
Scanner
are medical devices
or that distributors are using them to make medical claims or perform medical
diagnoses or other activities limited to licensed professionals or approved
medical devices could negatively impact our ability to use these products in a
market. Regulatory scrutiny of a product could also dampen distributor
enthusiasm and hinder the ability of distributors to effectively utilize such
product. In the event medical device clearance is required in any market,
obtaining clearance could require us to provide documentation concerning its
manufacturing, clinical utility and to make some modifications to its design,
specifications and manufacturing process in order to meet stringent standards
imposed on medical device companies. There can be no assurance we would be able
to provide the required medical device documentation, prove clinical utility in
a manner sufficient to obtain medical device approval or make such changes
promptly or in a manner that is satisfactory to regulatory authorities. If we
obtained such medical device approval in order to sell a product in one market,
such approval may be used as precedent to a claim in another market that such
approval should likewise be required in such market.
Changes to our distributor
compensation arrangements could be viewed negatively by some distributors, could
fail to achieve desired long-term results and have a negative impact on
revenue.
Our
distributor compensation plan includes some components that differ from market
to market. We modify components of our compensation plan from time to time in an
attempt to keep our compensation plan competitive and attractive to existing and
potential distributors, to address changing market dynamics, to provide
incentives to distributors that we believe will help grow our business, to
conform to local regulations and to address other business needs. Because of the
size of our distributor force and the complexity of our compensation plans, it
is difficult to predict how such changes will be viewed by distributors and
whether such changes will achieve their desired results. For example, certain
changes we made to our compensation plan in 2005, which had been successful in
several markets, did not achieve anticipated results in Japan, China and certain
markets in Southeast Asia and negatively impacted our business. We recently
implemented compensation plan modifications in most of our markets. Although
initial results of these modifications have been generally positive, there are
risks that the compensation plan modifications will not be well received or
achieve desired long-term results and that the transition could have a negative
impact on revenue.
If we are unable to successfully
expand and grow operations within our recently opened and developing markets, we
may have difficulty achieving our long-term objectives.
A
significant percentage of our revenue growth over the past decade has been
attributable to our expansion into new markets. Our growth over the next several
years depends in part on our ability to successfully introduce products and
tools, and to successfully implement initiatives in our new and developing
markets, including China, Russia, Latin America and Eastern Europe that will
help generate growth. In addition to the regulatory difficulties we may face in
introducing our products and initiatives in these markets, we could face
difficulties in achieving acceptance of our premium-priced products in
developing markets. In the past, we have struggled to operate profitably in
developing markets, such as Latin America. This may also be the case in Eastern
Europe and the other new markets into which we have recently expanded. If we are
unable to successfully expand our operations within these new markets, our
opportunities to grow our business may be limited, and, as a result, we may not
be able to achieve our long-term objectives.
Adverse
publicity concerning our business, marketing plan or products could harm our
business and reputation.
The size
of our distribution force and the results of our operations can be particularly
impacted by adverse publicity regarding us, the nature of our distributor
network, our products or the actions of our distributors. Specifically, we are
susceptible to adverse publicity concerning:
▪ suspicions about the
legality and ethics of network marketing;
▪ the ingredients or safety of
our or our competitors' products;
▪ regulatory investigations of
us, our competitors and our respective products;
▪ the actions of our current
or former distributors; and
▪ public perceptions of direct
selling generally.
In the
past, we have experienced negative publicity that has harmed our business in
connection with regulatory investigations and inquiries. In addition, critics of
our industry and other individuals who want to pursue an agenda, have in the
past and may in the future utilize the internet, the press and other means to
publish criticisms of the industry, our company and our competitors, or make
allegations regarding our business and operations, or the business and
operations of our competitors. We or others in our industry may receive similar
negative publicity or allegations in the future, and it may harm our business
and reputation.
Any
failure of our internal controls over financial reporting or our compliance
efforts could harm our financial and operating results or result in fines or
penalties if our employees or distributors violate any material laws or
regulations.
We have
implemented internal controls to help ensure the accuracy of our financial
reporting and have implemented compliance policies and programs to help ensure
that our employees and distributors comply with applicable laws and
regulations. Our internal audit team regularly audits our internal
controls and various aspects of our business and we regularly assess the
effectiveness of our internal controls. In addition, our independent
external auditor audits our controls and provides its opinion regarding the
effectiveness of our controls. There can be no assurance, however, that
these internal or external assessments and audits will identify all significant
or material weaknesses in our internal controls. If we fail to
identify a material weakness or if we fail to correct any noted weakness, there
would be a risk that we may have to restate financial statements if the material
weakness resulted in a material misstatement in our financial
results.
From time
to time, we may initiate further investigations into our business
operations based on the results of these audits or complaints, questions, or
allegations made by employees or other parties regarding our business practices
and operations. In addition, our business and operations may be
investigated by applicable government authorities. In the event any
of these investigations identify material violations of applicable laws by our
employees or distributors, we could be subject to adverse publicity, fines,
penalties or loss of licenses or permits.
Inability
of new products and other initiatives to gain distributor and market acceptance
could harm our business.
Our
ability to retain key and executive level distributors or to sponsor new
executive distributors is critical to our success. Because our products are
distributed exclusively through our distributors and we compete with other
direct selling companies in attracting distributors, our operating results could
be adversely affected if our existing and new business opportunities and
incentives, products, business tools and other initiatives do not generate
sufficient enthusiasm and economic incentive to retain our existing distributors
or to sponsor new distributors on a sustained basis. Factors that could affect
our ability to continue to introduce new products include, among others,
government regulations, the inability to attract and retain qualified research
and development staff, the termination of third-party research and collaborative
arrangements, proprietary protections of competitors that may limit our ability
to offer comparable products and the difficulties in anticipating changes in
consumer tastes and buying preferences. In addition, in our more mature markets,
one of the challenges we face is keeping distributor leaders with established
businesses and high income levels motivated and actively engaged in business
building activities and in developing new distributor leaders. There can be no
assurance that our initiatives will continue to generate excitement among our
distributors in the long-term or that planned initiatives will be successful in
maintaining distributor activity and productivity or in motivating distributor
leaders to remain engaged in business building and developing new distributor
leaders. Some initiatives may have unanticipated negative impacts on our
distributors, particularly changes to our compensation plan. The introduction of
a new product or key initiative can also negatively impact other product lines
to the extent our distributor leaders focus their efforts on the new product or
initiative. In addition, if any of our products, such as our ageLOC products,
fail to gain distributor acceptance, we could see an increase in returns because
of our generous return policy.
The
loss of key high-level distributors could negatively impact our distributor
growth and our revenue.
As of
December 31, 2009, we had over 761,000 active
distributors. Approximately 33,000 of our distributors were executive
distributors. Approximately 455 distributors occupied the highest
distributor level under our global compensation plan as of that date. These
distributors, together with their extensive networks of downline distributors,
account for substantially all of our revenue. As a result, the loss of a
high-level distributor or a group of leading distributors in the distributor’s
network of downline distributors, whether by their own choice or through
disciplinary actions by us for violations of our policies and procedures, could
negatively impact our distributor growth and our revenue.
We
are currently involved in disputes regarding customs assessments in Japan and
any adverse rulings in these matters could require us to take charges to our
earnings.
As
previously reported, we are currently involved in litigation in Japan with the
Ministry of Finance with respect to additional customs assessments made by
Yokohama Customs for the period of October 2002 through July 2005. The aggregate
amount of those assessments is yen 2.7 billion Japanese (approximately $29.0
million as of December 31, 2009), net of any recovery of consumption taxes. We
believe that the documentation and legal analysis support our position and have
taken action in the court system in Japan to overturn these assessments. The
litigation on this matter is ongoing and we believe the court will likely decide
this matter in the next year. If we receive a decision that is unfavorable, we
may appeal the decision, however we would likely be required to take a charge to
our earnings for the amount assessed.
In July
2005, we changed our operating structure in Japan and believed that these
changes would eliminate further valuation disputes with Yokohama Customs as the
new structure eliminated the issues that were the basis of the litigation and
valuation disputes. However, in October 2009 we received notice from Yokohama
Customs that they were assessing additional duties, penalties and interest for
the period of October 2006 through November 2008 following an audit. The total
amount of such assessments is yen 1.5 billion Japanese (approximately $17.5
million as of December 31, 2009), net of any recovery of consumption taxes. The
basis for such additional assessment is different from, and unrelated to, the
issues that are being litigated in the current litigation with the Ministry of
Finance. Following our review of the assessments and after consulting with our
legal and customs advisors, we strongly believe that the additional assessments
are improper and are not supported by any legal or factual basis. We filed
letters of protest with Yokohama Customs, which were rejected. We plan to
appeal the matter to the Ministry of Finance in Japan. To the extent
that we are unsuccessful in recovering the amounts assessed and paid, we will be
required to take a corresponding charge to our earnings.
In
addition, we are currently being required to pay a higher rate of duties on all
current imports, which we are similarly disputing. Because we believe that the
higher rate being assessed is improper, we are currently planning on only
expensing the portion of the duties we believe is supported under applicable
customs law, and recording the additional payment as a receivable on our
books.
Government
authorities may question our tax positions or transfer pricing policies or
change their laws in a manner that could increase our effective tax rate or
otherwise harm our business.
As a U.S.
company doing business in international markets through subsidiaries, we are
subject to various tax and intercompany pricing laws, including those relating
to the flow of funds between our company and our subsidiaries. From time to
time, we are audited by tax regulators in the United States and in our foreign
markets. If regulators challenge our tax positions, corporate structure,
transfer pricing mechanisms or intercompany transfers, we may be subject to
fines and payment of back taxes, our effective tax rate may increase and our
operations may be harmed. Tax rates vary from country to country, and, if
regulators determine that our profits in one jurisdiction may need to be
increased, we may not be able to fully utilize all foreign tax credits that are
generated, which will increase our effective tax rate. For example, our
corporate income tax rate in the United States is 35%. If our profitability in a
higher tax jurisdiction, such as Japan where the corporate tax rate is currently
set at 45%, increases disproportionately to the rest of our business, our
effective tax rate may increase. The various customs, exchange control and
transfer pricing laws are continually changing and are subject to the
interpretation of government agencies. Despite our efforts to be aware of and
comply with such laws and changes to and interpretations thereof, there is a
risk that we may not continue to operate in compliance with such laws. We may
need to adjust our operating procedures in response to such changes, and as a
result, our business may suffer.
In
addition, due to the international nature of our business, we are subject from
time to time to reviews and audits by the foreign taxing authorities of other
jurisdictions in which we conduct business throughout the world.
We
may be held responsible for certain taxes or assessments relating to the
activities of our distributors, which could harm our financial condition and
operating results.
Our
distributors are subject to taxation, and in some instances, legislation or
governmental agencies impose an obligation on us to collect taxes, such as value
added taxes, and to maintain appropriate records. In addition, we are subject to
the risk in some jurisdictions of being responsible for social security and
similar taxes with respect to our distributors. In the event that local laws and
regulations or the interpretation of local laws and regulations change to
require us to treat our independent distributors as employees, or that our
distributors are deemed by local regulatory authorities in one or more of the
jurisdictions in which we operate to be our employees rather than independent
contractors under existing laws and interpretations, we may be held responsible
for social security and related taxes in those jurisdictions, plus any related
assessments and penalties, which could harm our financial condition and
operating results.
Production
difficulties and quality control problems could harm our business.
Production
difficulties and quality control problems and our reliance on third party
suppliers to deliver quality products in a timely manner could harm our
business. Occasionally, we have experienced production difficulties with respect
to our products, including the delivery of products that do not meet our quality
control standards. These quality problems have resulted in the past, and could
result in the future, in stock outages or shortages in our markets with respect
to such products, harming our sales and creating inventory write-offs for
unusable products. We recently experienced unprecedented demand for our limited
offering of our new
ageLOC
Transformation
skin care system. In addition this is the first time that
we are launching a product globally on such a condensed launch schedule, which
has added increased pressure on our supply chain. If we are not able to
accurately forecast sales levels on a market by market basis, or are unable to
produce a sufficient supply to meet such demand globally, we could have
stockouts which could negatively impact enthusiasm of our
distributors.
We
recently experienced unprecedented demand for our limited offering of our new
ageLOC Transformation
skin care system. In addition this is the first time that we are launching a
product globally on such a condensed launch schedule, which has added increased
pressure on our supply chain. If we are not able to accurately forecast sales
levels on a market by market basis, or are unable to produce a sufficient supply
to meet such demand globally, we could have stockouts which could negatively
impact enthusiasm of our distributors.
We depend on our key personnel, and
the loss of the services provided by any of our executive officers or other key
employees could harm our business and results of operations.
Our
success depends to a significant degree upon the continued contributions of our
senior management, many of whom would be difficult to replace. In addition,
expatriates serve in key management positions in several of our foreign markets,
including Japan and China. These employees may voluntarily terminate their
employment with us at any time. We may not be able to successfully retain
existing personnel or identify, hire and integrate new personnel. We do not
carry key person insurance for any of our personnel. Although we have signed
offer letters or written agreements summarizing the compensation terms for some
of our senior executives, we have generally not entered into formal employment
agreements with our executive officers. If we lose the services of our executive
officers or key employees for any reason, our business, financial condition and
results of operations could be harmed.
Our
markets are intensely competitive, and market conditions and the strengths of
competitors may harm our business.
The
markets for our products are intensely competitive. Our results of operations
may be harmed by market conditions and competition in the future. Many
competitors have much greater name recognition and financial resources than we
have, which may give them a competitive advantage. For example, our Nu Skin
products compete directly with branded, premium retail products. We also compete
with other direct selling organizations. Some of the leading direct
selling companies in our existing markets are Herbalife, Mary Kay, Oriflame,
Melaleuca, Avon and Amway. We currently do not have significant patent or other
proprietary protection, and our competitors may introduce products with the same
ingredients that we use in our products. Because of regulatory restrictions
concerning claims about the efficacy of personal care products and dietary
supplements, we may have difficulty differentiating our products from our
competitors’ products, and competing products entering the personal care and
nutritional market could harm our revenue.
We also
compete with other network marketing companies for distributors. Some of these
competitors have a longer operating history and greater visibility, name
recognition and financial resources than we do. Some of our competitors have
also adopted and could continue to adopt some of our successful business
strategies, including our global compensation plan for distributors.
Consequently, to successfully compete in this market and attract and retain
distributors, we must ensure that our business opportunities and compensation
plans are financially rewarding. We are beginning our 26
th
year
in this industry and believe we have significant competitive advantages, but we
cannot assure you that we will be able to successfully compete in every endeavor
in this market.
Product
liability claims could harm our business.
We may be
required to pay for losses or injuries purportedly or actually caused by our
products. Although historically we have had a very limited number and relatively
low financial exposure from product claims, we have experienced difficulty in
finding insurers that are willing to provide product liability coverage at
reasonable rates due to insurance industry trends and the rising cost of
insurance generally. As a result, we have elected to self-insure our product
liability risks for our product lines. Until we elect and are able at reasonable
rates to obtain product liability insurance, if any of our products are found to
cause any injury or damage, we will be subject to the full amount of liability
associated with any injuries or damages. This liability could be substantial and
may exceed our reserves. We cannot predict if and when product liability
insurance will be available to us on reasonable terms.
System
failures could harm our business.
Because
of our diverse geographic operations and our complex distributor compensation
plan, our business is highly dependent on efficiently functioning information
technology systems. These systems and operations are vulnerable to damage or
interruption from fires, earthquakes, telecommunications failures and other
events. They are also subject to break-ins, sabotage, intentional acts of
vandalism and similar misconduct. We have adopted and implemented a Business
Continuity/Disaster Recovery Plan. Our primary data sets are archived and stored
at third-party secure sites, and we are currently setting up a recovery site for
certain critical data and operations. Despite any precautions, the occurrence of
a natural disaster or other unanticipated problems could result in interruptions
in services and reduce our revenue and profits.
Epidemics and other global health
risks could negatively impact our business.
Our
revenue was negatively impacted in 2003 by the SARS epidemic that hit Asia
during that year. More recently, the H1N1 flu has been identified as a potential
global health risk. It is difficult to predict the impact on our business, if
any, of a recurrence of SARS, or the emergence of new epidemics, such as avian
flu or H1N1 flu. Although such events could generate increased sales of health
and immune supplements and certain personal care products, our direct selling
and retail activities and results of operations could be harmed if the fear of
any communicable and rapidly spreading disease results in travel restrictions or
causes people to avoid group meetings or gatherings or interaction with other
people. In addition, most of our Pharmanex nutritional supplement revenue is
generated from products that are encapsulated in bovine- and/or porcine-sourced
gel capsules. If we experience production difficulties, quality control
problems, or shortages in supply in connection with bovine or porcine related
health concerns, this could result in additional risk of product shortages or
write-offs of inventory that no longer can be used. We may be unable to
introduce our products in some markets if we are unable to obtain the necessary
regulatory approvals or if any product ingredients are prohibited, which could
harm our business.
The
market price of our common stock is subject to significant fluctuations due to a
number of factors that are beyond our control.
Our
common stock closed at $16.59 per share on February 1, 2008 and closed at $23.39
per share on February 1, 2010. During this two-year period, our common stock
traded as low as $7.90 per share and as high as $28.78 per share. Many factors
could cause the market price of our common stock to fall. Some of these factors
include:
▪ fluctuations in our
quarterly operating results;
▪ the sale of shares of Class
A common stock by our original or significant stockholders;
▪ general trends in the market
for our products;
▪ acquisitions by us or our
competitors;
|
|
▪
|
economic
and/or currency exchange issues in markets in which we
operate;
|
|
|
▪
|
changes
in estimates of our operating performance or changes in recommendations by
securities analysts; and
|
▪ general business and
political conditions.
Broad
market fluctuations could also lower the market price of our common stock
regardless of our actual operating performance.
As of December 31, 2009, our original
stockholders, together with their family members, estate planning entities and
affiliates, controlled approximately 30% of the combined stockholder voting
power, and their interests may be different from yours.
The
original stockholders of our company, together with their family members and
affiliates, have the ability to influence the election and removal of the board
of directors and, as a result, our future direction and operations. As of
December 31, 2009, these stockholders owned approximately 28% of the voting
power of the outstanding shares of common stock. Accordingly, they may influence
decisions concerning business opportunities, declaring dividends, issuing
additional shares of common stock or other securities and the approval of any
merger, consolidation or sale of all or substantially all of our assets. They
may make decisions that are adverse to your interests.
If
our stockholders sell a substantial number of shares of our common stock in the
public market, the market price of our common stock could fall.
Several
of our principal stockholders hold a large number of shares of the outstanding
common stock. A decision by any of our principal stockholders to aggressively
sell their shares could depress the market price of our common stock. As of
December 31, 2009, we had approximately 62,761,485 million shares of common
stock outstanding. All of these shares are freely tradable, except for
approximately 16.5 million shares held by certain founding stockholders who
entered into lock-up agreements with us in connection with the repurchase of
shares in 2003. Under the terms of these lock-up agreements, they are subject to
certain volume limitations with respect to open market transactions. We have the
discretion to waive or terminate these restrictions. In the event these lock-up
restrictions were terminated, our stock price could be harmed if these
stockholders sold large amounts of stock over a short period of
time.
None.
Our principal properties consist of the
following:
Operational
Facilities
. These facilities include administrative offices,
walk-in centers, and warehouse/distribution centers. Our operational
facilities measuring 30,000 square feet or more include the
following:
|
|
•
|
our
worldwide headquarters in Provo,
Utah;
|
|
|
|
|
•
|
our
worldwide distribution center/warehouse in Provo, Utah;
and
|
|
|
•
|
our
distribution center in Tokyo,
Japan.
|
Manufacturing
Facilities
. Each of our manufacturing facilities measure
30,000 square feet or more, and include the following:
|
|
•
|
our
nutritional supplement manufacturing facility in Zhejiang Province,
China;
|
|
|
•
|
our
personal care manufacturing facility in Shanghai,
China;
|
|
|
•
|
our
Vitameal manufacturing facility in Jixi, Heilongjiang
Province;
|
|
|
•
|
our
herbal extraction facility in Zhejiang
Province.
|
Retail
Stores
. As of December 31, 2009, we operated 41 stores
throughout China.
Research and Development
Centers
. We operate three research and development centers,
one in Provo, Utah, one in Shanghai, China, and one in Beijing,
China. We are currently in the preliminary planning phase of building
a state-of-the-art innovation center adjacent to our corporate
headquarters. We believe this facility will cost approximately $40
million and will take roughly two years to complete.
With the exception of our research and
development center in Utah, our nutritional supplement plant in China, and a few
other minor facilities, which we own, we lease the properties described
above. Our headquarters and distribution center in Utah are leased
from related parties. We believe that our existing and planned
facilities are adequate for our current operations in each of our existing
markets.
Due to
the international nature of our business, we are subject from time to time to
reviews and audits by the foreign taxing authorities of the various
jurisdictions in which we conduct business throughout the world. As
previously reported, we are currently involved in litigation in Japan with the
Ministry of Finance with respect to additional customs assessments made by
Yokohama Customs for the period of October 2002 through July 2005. The aggregate
amount of those assessments is yen 2.7 billion Japanese (approximately $29.0
million as of December 31, 2009), net of any recovery of consumption taxes. We
believe that the documentation and legal analysis support our position and have
taken action in the court system in Japan to overturn these assessments. The
litigation on this matter is ongoing and we believe the court will likely decide
this matter in the next year. If we receive a decision that is unfavorable, we
may appeal the decision, however, we would likely be required to take a charge
to our earnings for the amount assessed.
In July
2005, we changed our operating structure in Japan and believed that these
changes would eliminate further valuation disputes with Yokohama Customs as the
new structure eliminated the issues that were the basis of the litigation and
valuation disputes. However, in October 2009 we received notice from Yokohama
Customs that they were assessing additional duties, penalties and interest for
the period of October 2006 through November 2008 following an audit. The total
amount of such assessments is yen 1.5 billion Japanese (approximately $17.5
million as of December 31, 2009), net of any recovery of consumption taxes. The
basis for such additional assessment is different from, and unrelated to, the
issues that are being litigated in the current litigation with the Ministry of
Finance. Following our review of the assessments and after consulting with our
legal and customs advisors, we strongly believe that the additional assessments
are improper and are not supported by any legal or factual basis. We filed
letters of protest with Yokohama Customs, which were rejected. We plan to
appeal the matter to the Ministry of Finance in Japan. To the extent
that we are unsuccessful in recovering the amounts assessed and paid, we will be
required to take a corresponding charge to our earnings.
In
addition, we are currently being required to pay a higher rate of duties on all
current imports, which we are similarly disputing. Because we believe that the
higher rate being assessed is improper, we are currently planning on only
expensing the portion of the duties we believe is supported under applicable
customs law, and recording the additional payment as a receivable on our
books.
There
were no matters submitted to a vote of the security holders during the fourth
quarter of the fiscal year ended December 31, 2009.
|
MARKET FOR
REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY
SECURITIES
|
Our Class A common stock is listed on
the New York Stock Exchange (“NYSE”) and trades under the symbol
“NUS.” The following table is based upon the information available to
us and sets forth the range of the high and low sales prices for our Class A
common stock for the quarterly periods during 2008 and 2009 based upon
quotations on the NYSE.
|
Quarter
Ended
|
High
|
Low
|
||||||
|
March
31,
2008
|
$ | 19.99 | $ | 14.51 | ||||
|
June
30,
2008
|
19.12 | 14.91 | ||||||
|
September
30,
2008
|
17.83 | 14.51 | ||||||
|
December
31,
2008
|
16.34 | 8.42 | ||||||
|
Quarter
Ended
|
High
|
Low
|
||||||
|
March
31,
2009
|
$ | 11.56 | $ | 7.90 | ||||
|
June
30,
2009
|
15.70 | 10.05 | ||||||
|
September
30,
2009
|
18.80 | 14.69 | ||||||
|
December
31,
2009
|
28.78 | 18.23 | ||||||
The market price of our Class A common
stock is subject to significant fluctuations in response to variations in our
quarterly operating results, general trends in the market for our products and
product candidates, economic and currency exchange issues in the foreign markets
in which we operate and other factors, many of which are not within our
control. In addition, broad market fluctuations, as well as general
economic, business, regulatory and political conditions may adversely affect the
market for our Class A common stock, regardless of our actual or projected
performance.
The closing price of our Class A common
stock on February 1, 2010, was $23.39. The approximate number of
holders of record of our Class A common stock as of February 1, 2010 was
686. This number of holders of record does not represent the actual
number of beneficial owners of shares of our Class A common stock because shares
are frequently held in “street name” by securities dealers and others for the
benefit of individual owners who have the right to vote their
shares.
Dividends
We declared and paid a $0.11 per share
dividend for Class A common stock in March, June, September and December of
2008, and a $0.115 per share quarterly dividend for Class A common stock in
March, June, September and December of 2009. The board of directors
has approved an increased quarterly cash dividend of $0.125 per share of Class A
common stock to be paid on March 17, 2010, to stockholders of record on February
26, 2010. Management believes that cash flows from operations will be
sufficient to fund this and future dividend payments, if any.
We expect to continue to pay dividends
on our common stock. However, the declaration of dividends is subject
to the discretion of our board of directors and will depend upon various
factors, including our net earnings, financial condition, cash requirements,
future prospects and other factors deemed relevant by our board of
directors.
|
|
Purchases
of Equity Securities by the Issuer
|
|
(a)
|
(b)
|
(c)
|
(d)
|
|||||||||||||
|
Period
|
Total
Number
of
Shares Purchased
|
Average
Price Paid per Share
|
Total
Number of Shares Purchased as Part of Publicly Announced Plans or
Programs
|
Approximate
Dollar Value of Shares that may yet be Purchased Under the Plans or
Programs
(in
millions)
(1)
|
||||||||||||
|
October
1 – 31,
2009
|
— | $ | — | — | $ | 69.9 | ||||||||||
|
November
1 – 30, 2009
|
38,514 | 26.39 | 38,300 | 68.8 | ||||||||||||
|
December
1 – 31,
2009
|
235,726 | 27.24 | 230,000 | 62.5 | ||||||||||||
|
Total
|
274,240 | (2) | 27.12 | 268,300 | ||||||||||||
|
(1)
|
In
August 1998, our board of directors approved a plan to repurchase $10.0
million of our Class A common stock on the open market or in private
transactions. Our board has from time to time increased the
amount authorized under the plan and a total amount of approximately
$335.0 million is currently authorized. As of December 31,
2009, we had repurchased approximately $272.5 million of shares under the
plan. There has been no termination or expiration of the plan
since the initial date of approval.
|
|
(2)
|
We
have authorized the repurchase of shares acquired by our employees and
distributors in certain foreign markets because of regulatory and other
issues that make it difficult or costly for these persons to sell such
shares in the open market. These shares were awarded or
acquired in connection with our initial public offering in
1996. Of the shares listed in this column, 214 shares in
November at an average price per share of $21.45 and 5,726 shares in
December at an average price per share of $23.47, relate to repurchases
from such employees and
distributors.
|
Stock
Performance Graph
Set forth
below is a line graph comparing the cumulative total stockholder return (stock
price appreciation plus dividends) on the Class A Common Stock with the
cumulative total return of the S&P 500 Index, a market-weighted index of
publicly traded peers used in last year’s report (the “Old Peer
Group”), and a market-weighted index of a new peer group of publicly
traded peers (the “New Peer Group”) for the period from December 31, 2004
through December 31, 2009. The graph assumes that $100 is invested in
each of the Class A Common Stock, the S&P 500 Index, and each of the indexes
of publicly traded peers on December 31, 2004 and that all dividends were
reinvested. We have omitted Nature’s Sunshine Products, Inc. from our
New Peer Group. We believe Nature’s Sunshine Products, Inc. no longer
provides a meaningful comparison of stock price performance due to the delisting
of its stock from Nasdaq, and subsequent revocation of its stock registration by
the Securities and Exchange Commission. The New Peer Group consists
of all of the following companies, which compete in our industry and product
categories and were included in our Old Peer Group: Avon Products, Inc., Estee
Lauder, Tupperware Corporation, Herbalife LTD., USANA Health Sciences, Inc. and
Alberto Culver Co. The Old Peer Group consists of all of the
companies included in the New Peer Group as well as Nature’s Sunshine Products,
Inc.
|
Measured
Period
|
Company
|
S&P
500 Index
|
Old
Peer Group Index
|
New
Peer Group Index
|
||||||||||||
|
December
31, 2004
|
$ | 100.00 | $ | 100.00 | $ | 100.00 | $ | 100.00 | ||||||||
|
December
31, 2005
|
70.48 | 104.91 | 84.20 | 84.15 | ||||||||||||
|
December
31, 2006
|
74.74 | 121.48 | 100.75 | 101.17 | ||||||||||||
|
December
31, 2007
|
69.09 | 128.16 | 117.16 | 117.87 | ||||||||||||
|
December
31, 2008
|
45.22 | 80.74 | 79.28 | 79.77 | ||||||||||||
|
December
31, 2009
|
120.10 | 102.10 | 115.90 | 116.64 | ||||||||||||
The following selected consolidated
financial data as of and for the years ended December 31, 2005, 2006, 2007, 2008
and 2009 have been derived from the audited consolidated financial
statements.
|
Year
Ended December 31,
|
||||||||||||||||||||
|
2005
|
2006
|
2007
|
2008
|
2009
|
||||||||||||||||
|
(U.S.
dollars in thousands, except per share data and cash
dividends)
|
||||||||||||||||||||
|
Income Statement
Data
:
|
||||||||||||||||||||
|
Revenue
|
$ | 1,180,930 | $ | 1,115,409 | $ | 1,157,667 | $ | 1,247,646 | $ | 1,331,058 | ||||||||||
|
Cost
of
sales
|
206,163 | 195,203 | 209,283 | 228,597 | 243,648 | |||||||||||||||
|
Gross
profit
|
974,767 | 920,206 | 948,384 | 1,019,049 | 1,087,410 | |||||||||||||||
|
Operating
expenses:
|
||||||||||||||||||||
|
Selling
expenses
|
497,421 | 480,136 | 496,454 | 529,368 | 550,637 | |||||||||||||||
|
General
and administrative expenses
(1)
|
354,223 | 353,412 | 361,242 | 364,253 | 378,336 | |||||||||||||||
|
Restructuring
charges
|
— | 11,115 | 19,775 | — | 10,724 | |||||||||||||||
|
Impairment
of assets and
other
|
— | 20,840 | — | — | — | |||||||||||||||
|
Total
operating
expenses
|
851,644 | 865,503 | 877,471 | 893,621 | 939,697 | |||||||||||||||
|
Operating
income
|
123,123 | 54,703 | 70,913 | 125,428 | 147,713 | |||||||||||||||
|
Other
income (expense),
net
|
(4,172 | ) | (2,027 | ) | (2,435 | ) | (24,775 | ) | (6,589 | ) | ||||||||||
|
Income
before provision for income taxes
|
118,951 | 52,676 | 68,478 | 100,653 | 141,124 | |||||||||||||||
|
Provision
for income
taxes
|
44,918 | 19,859 | 24,606 | 35,306 | 51,279 | |||||||||||||||
|
Net
income
|
$ | 74,033 | $ | 32,817 | $ | 43,872 | $ | 65,347 | $ | 89,845 | ||||||||||
|
Net
income per share:
|
||||||||||||||||||||
|
Basic
|
$ | 1.06 | $ | 0.47 | $ | 0.68 | $ | 1.03 | $ | 1.42 | ||||||||||
|
Diluted
|
$ | 1.04 | $ | 0.47 | $ | 0.67 | $ | 1.02 | $ | 1.40 | ||||||||||
|
Weighted-average
common shares outstanding (000s):
|
||||||||||||||||||||
|
Basic
|
70,047 | 69,418 | 64,783 | 63,510 | 63,333 | |||||||||||||||
|
Diluted
|
71,356 | 70,506 | 65,584 | 64,132 | 64,296 | |||||||||||||||
|
Balance Sheet Data
(at
end of period)
:
|
||||||||||||||||||||
|
Cash
and cash equivalents and current investments
|
$ | 155,409 | $ | 121,353 | $ | 92,552 | $ | 114,586 | $ | 158,045 | ||||||||||
|
Working
capital
|
149,098 | 109,418 | 95,175 | 124,036 | 152,731 | |||||||||||||||
|
Total
assets
|
678,866 | 664,849 | 683,243 | 709,772 | 748,449 | |||||||||||||||
|
Current
portion of long-term debt
|
26,757 | 26,652 | 31,441 | 30,196 | 35,400 | |||||||||||||||
|
Long-term
debt
|
123,483 | 136,173 | 169,229 | 158,760 | 121,119 | |||||||||||||||
|
Stockholders’
equity
|
354,628 | 318,980 | 275,009 | 316,180 | 375,687 | |||||||||||||||
|
Cash
dividends
declared
|
0.36 | 0.40 | 0.42 | 0.44 | 0.46 | |||||||||||||||
|
Supplemental Operating
Data
(at end of period)
:
|
||||||||||||||||||||
|
Approximate
number of active distributors
(2)
|
803,000 | 761,000 | 755,000 | 761,000 | 761,000 | |||||||||||||||
|
Number
of executive distributors
(2)
|
30,471 | 29,756 | 30,002 | 30,588 | 32,939 | |||||||||||||||
|
(1)
|
In
2006, the Company began recording stock-based compensation as an expense
as required by accounting standards. Total equity compensation
expense was $9.3 million, $8.1 million, $7.3 million and $10.0 million in
2006, 2007, 2008 and 2009,
respectively.
|
|
(2)
|
Active
distributors include preferred customers and distributors purchasing
products directly from us during the three months ended as of the date
indicated. An executive distributor is an active distributor
who has achieved required personal and group sales
volumes.
|
|
I
TE
M 7.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
The following discussion of our
financial condition and results of operation should be read in conjunction with
the Consolidated Financial Statements and related Notes thereto, which are
included in this Annual Report on Form 10-K.
Overview
We are a
leading, global direct selling company with operations in 50 markets
worldwide. We develop and distribute innovative, premium-quality
anti-aging personal care products and nutritional supplements under our Nu Skin
and Pharmanex brands, respectively. We strive to secure competitive
advantage in four key areas: our people, our products, the culture we promote,
and the business opportunities we offer. In 2009, our 25
th
year
of operations, we posted record revenue of $1.33 billion. Revenue in
2009 grew 7% based on the success of strong product innovation and distributor
initiatives. As of December 31, 2009, we had a
global network of over
761,000
active
sales representatives we refer to as “distributors.” Approximately
33,000 of our distributors were qualified sales leaders we refer to as
“executive distributors.” Our executive distributors play a critical
leadership role in the growth and development of our
business. Approximately 84% of our 2009 revenue came from markets
outside the United States. While we have become more geographically
diverse over the past decade, Japan, our largest revenue market, accounted for
approximately 35% of our 2009 total revenue. Due to the size of our
foreign operations, our results are often impacted positively or negatively by
foreign currency fluctuations, particularly fluctuations in the Japanese
yen. In addition, our results are generally impacted by global
economic, political, demographic and business conditions.
Our
revenue depends on the number and productivity of our active distributors and
executive distributor leaders. We have been successful in attracting
and motivating distributors by:
• developing
and marketing innovative, technologically and scientifically advanced
products;
• providing
compelling initiatives and strong distributor support; and
• offering
attractive incentives that motivate distributors to build sales
organizations.
Our distributors market and sell our
products and recruit new distributors based on the distinguishing benefits and
innovative characteristics of our products. As a result, it is vital
to our business that we continuously leverage our research and development
resources to develop and introduce innovative products and provide our
distributors with an attractive portfolio of products. At our global
convention in October 2009, we introduced our most technologically-advanced skin
care system to date,
ageLOC
Transformation
, including
ageLOC Future Serum
, a
stand-alone anti-aging serum. These ageLOC products are designed to
support and reset Youth Gene Clusters, functional groups of genes that regulate
how we appear to age, to function in more youthful patterns of
activity. We also offer unique initiatives, products, and business
tools, such as our
Galvanic
Spa System II
, including the new
ageLOC Edition
, and
technologically-advanced
Pharmanex BioPhotonic
Scanner
, to help distributors effectively differentiate our earnings
opportunity and product offering. Any delays or difficulties in
introducing compelling products or attractive initiatives or tools into our
markets may have a negative impact on our revenue and distributor
recruiting.
We have
developed a global distributor compensation plan and other incentives designed
to motivate our distributors to market and sell our products and to build sales
organizations around the world and across product lines. In 2008 and
2009, we implemented modifications to our compensation plan to improve
commission payments early in the distributor lifecycle. The initial
results from these modifications have been positive. We continue to
evaluate further changes to our compensation plan to help increase distributor
productivity and earnings potential However, there are always risks
associated with making changes to our compensation plan as there is a degree of
uncertainty as to how distributors will react to such changes and whether such
changes will impact distributor activity in unanticipated ways.
Our extensive global distributor
network helps us to rapidly introduce products and penetrate our markets with
little up-front promotional expense. Similar to other companies in
our industry, we experience a high level of turnover among our
distributors. As a result, it is important that we regularly
introduce innovative and compelling products and initiatives in order to
maintain a compelling business opportunity that will attract new
distributors. We have also developed, and continue to promote in many
of our markets, product subscription and loyalty programs that provide
incentives for customers to commit to purchase a specific amount of products on
a monthly basis. We believe these subscription programs have improved
customer retention, have had a stabilizing impact on revenue, and have helped
generate recurring sales for our distributors. Subscription orders
represented 50% of our revenue in 2009.
Global
economic conditions continue to be challenging, with decreased levels of
consumer confidence and spending and access to capital. Although
there are signs of economic recovery, the extent and timing of any improvement
in global economic conditions are unclear and there are concerns that conditions
could deteriorate further. To date, we have been fortunate that these
economic conditions have not negatively impacted our operations
significantly. Despite difficult economic conditions, we experienced
healthy growth in each of our regions in 2009. While we are not
immune to contractions in consumer spending, we believe we have benefited from
the nature of our distribution model and strong execution around a demonstrative
product/opportunity initiative, which has helped offset to some degree the
impact of the decline in consumer spending. As a direct selling
company, we offer a direct selling opportunity that allows an individual to
supplement his/her income by selling our products and building a sales
organization to market and sell our products. As the economy and the
labor market decline, we find that there can be an increase in the number of
people interested in becoming distributors in order to supplement their
income. We believe that this increase in interest in our direct
selling opportunity coupled with the strong marketing position of our new ageLOC
products and
Galvanic Spa
System II
have helped us to continue growing our business in these
difficult economic conditions. However, if the economic problems are
prolonged or worsen, we expect that we could see a negative impact on our
business as distributors may have a more difficult time selling products and
finding new customers. In addition, such economic conditions may
adversely impact access to capital for us and our suppliers, may decrease our
distributors' ability to obtain or maintain credit cards, and may otherwise
adversely impact our operations and overall financial condition.
Our
business is subject to various laws and regulations globally, particularly with
respect to network marketing activities, cosmetics, and nutritional
supplements. Accordingly, we face certain risks, including any
improper claims or activities of our distributors or any inability to obtain or
maintain necessary product registrations. For example, regulators in
Japan have increased their scrutiny of our industry. Several direct
sellers in Japan have been penalized for actions of their distributors that
violated applicable regulations, including one prominent international direct
selling company that was suspended from sponsoring activities for three months
in 2008, and another large Japanese direct selling company that was suspended
from sponsoring activities for six months in 2009. In addition,
Japanese media has reported on increased political pressure on lawmakers
supporting our industry. We continue to experience a high level of
general inquiries regarding our company and complaints to consumer protection
centers in Japan and have taken steps to try to resolve these issues including
providing additional training to our distributors and restructuring our
compliance group in Japan. We have seen improvements in some perfectures,
but not in others. In 2009, we received one written and one oral warning
from Consumer Centers in two prefectures raising concerns about our distributor
training and number of general inquiries and complaints. We are
implementing additional steps to reinforce our distributor education and
training in Japan to help address these concerns. If consumer
complaints escalate to a government review or if the current level of complaints
does not improve, there is an increased likelihood that regulators could take
action against us or we could receive negative media attention, either of which
could harm our business. For more information about the risks and
challenges we face, please refer to the
“Note Regarding Forward-Looking
Statements.”
Income
Statement Presentation
We recognize revenue in five geographic
regions and we translate revenue from each market’s local currency into U.S.
dollars using weighted-average exchange rates. The following table
sets forth revenue information by region for the periods
indicated. This table should be reviewed in connection with the
tables presented under “Results of Operations,” which disclose selling expenses
and other costs associated with generating the aggregate revenue
presented.
Revenue
by Region
|
Year
Ended December 31,
|
||||||||||||||||||||||||
|
(U.S.
dollars in millions)
|
2007
|
2008
|
2009
|
|||||||||||||||||||||
|
North
Asia
|
$ | 585.8 | 50 | % | $ | 594.5 | 48 | % | $ | 606.1 | 45 | % | ||||||||||||
|
Americas
|
188.3 | 16 | 223.9 | 18 | 260.9 | 20 | ||||||||||||||||||
|
Greater
China
|
205.0 | 18 | 210.0 | 17 | 210.4 | 16 | ||||||||||||||||||
|
Europe
|
77.2 | 7 | 111.6 | 9 | 133.6 | 10 | ||||||||||||||||||
|
South
Asia/Pacific
|
101.4 | 9 | 107.6 | 8 | 120.1 | 9 | ||||||||||||||||||
| $ | 1,157.7 | 100 | % | $ | 1,247.6 | 100 | % | $ | 1,331.1 | 100 | % | |||||||||||||
Cost of
sales primarily consists of:
• cost
of products purchased from third-party vendors, generally in U.S.
dollars;
• costs
of self-manufactured products;
• cost
of sales materials which we sell to distributors at or near cost;
•
amortization
expenses associated with certain products and services such as the
Pharmanex BioPhotonic
Scanners
that are leased to distributors;
•
freight cost of shipping products to distributors and import duties for the
products; and
•
royalties and related expenses for licensed technologies.
We source the majority of our products
from third-party manufacturers located in the United States. Due to
Chinese government restrictions on the importation of finished goods applicable
to the current scope of our business in China, we are required to manufacture
the bulk of our own products for distribution in China. Cost of sales and gross
profit may fluctuate as a result of changes in the ratio between
self-manufactured products and products sourced from third-party
suppliers. In addition, because we purchase a significant majority of
our goods in U.S. dollars and recognize revenue in local currencies, we are
subject to exchange rate risks in our gross margins. Because our
gross margins vary from product to product and are higher in some markets such
as Japan, changes in product mix and geographic revenue mix can impact our gross
margins.
Selling expenses are our most
significant expense and are classified as operating expenses. Selling
expenses include distributor commissions as well as wages, benefits, bonuses and
other labor and unemployment expenses we pay to sales employees in China. Our
global compensation plan, which we employ in all of our markets except China, is
an important factor in our ability to attract and retain
distributors. We pay monthly commissions to several levels of
distributors on each product sale based upon a distributor’s personal and group
product volumes, as well as the group product volumes of up to six levels of
executive distributors in such distributor’s downline sales
organization. We do not pay commissions on sales materials, which are
sold to distributors at or near cost. Small fluctuations occur in the
amount of commissions paid as the network of distributors actively purchasing
products changes from month to month. However, due to the size of our
distributor force of approximately 761,000 active distributors, the fluctuation
in the overall payout is relatively small. The overall payout has
typically averaged between 41% and 44% of global product sales. From
time to time, we make modifications and enhancements to our global compensation
plan in an effort to help motivate distributors and develop leadership
characteristics, which can have an impact on selling expenses.
Distributors also have the opportunity
to make retail profits by purchasing products from us at wholesale and selling
them to customers with a retail mark-up. We do not account for nor
pay additional commissions on these retail mark-ups received by
distributors. In many markets, we also allow individuals who are not
distributors, whom we refer to as “preferred customers”, to buy products
directly from us at wholesale or discounted prices. We pay commissions on
preferred customer purchases to the referring distributors.
General
and administrative expenses include:
• wages
and benefits;
• rents
and utilities;
• depreciation
and amortization;
• promotion
and advertising;
• professional
fees;
• travel;
• research
and development; and
• other
operating expenses.
Labor expenses are the most significant
portion of our general and administrative expenses. Promotion and
advertising expenses include costs of distributor conventions held in various
markets worldwide, which we expense in the period in which they are
incurred. Because our various distributor conventions are not always
held during each fiscal year, or in the same period each year, their impact on
our general and administrative expenses may vary from year to year and from
quarter to quarter. For example, we held our global distributor
convention in October 2009 and do not expect to have another global convention
until the fall of 2011 as we currently plan to hold a global convention every
other year. In addition, we hold regional conventions and conventions
in our major markets at different times during the year. These
conventions have significant expenses associated with them. Because
we have not incurred expenses for these conventions during every fiscal year or
in comparable interim periods, year-over-year comparisons have been impacted
accordingly.
Provision for income taxes depends on
the statutory tax rates in each of the jurisdictions in which we
operate. For example, statutory tax rates in 2009 were approximately
17.5% in Hong Kong, 25% in Taiwan, 24.25% in South Korea, 45% in Japan and 25%
in China. We are subject to taxation in the United States at the
statutory corporate federal tax rate of 35% and we pay taxes in multiple states
within the United States at various tax rates. Our overall effective
tax rate was 36.3% for the year ended December 31, 2009.
Critical
Accounting Policies
The
following critical accounting policies and estimates should be read in
conjunction with our audited Consolidated Financial Statements and related Notes
thereto. Management considers our critical accounting policies to be
the recognition of revenue, accounting for income taxes, accounting for
intangible assets and accounting for stock-based compensation. In
each of these areas, management makes estimates based on historical results,
current trends and future projections.
Revenue
. We
recognize revenue when products are shipped, which is when title and risk of
loss pass to our distributors. With some exceptions in various
countries, we offer a return policy whereby distributors can return unopened and
unused product for up to 12 months subject to a 10% restocking
fee. Reported revenue is net of returns, which have historically been
less than 5% of annual revenue. A reserve for product returns is
accrued based on historical experience. We classify selling discounts
as a reduction of revenue. Our selling expenses are computed pursuant
to our global compensation plan for our distributors, which is focused on
remunerating distributors based primarily upon the selling efforts of the
distributors and the volume of products purchased by their downlines, and not
their personal purchases.
Income
Taxes
. We account for income taxes in accordance with the
Income Taxes Topic of the Financial Accounting Standards Codification
.
These standards establish
financial accounting and reporting standards for the effects of income taxes
that result from an enterprise’s activities during the current and preceding
years. We take an asset and liability approach for financial
accounting and reporting of income taxes. We pay income taxes in many
foreign jurisdictions based on the profits realized in those jurisdictions,
which can be significantly impacted by terms of intercompany transactions among
our affiliates around the world. Deferred tax assets and liabilities
are created in this process. As of December 31, 2009, we had net
deferred tax assets of $61.3 million. These net deferred tax assets
assume sufficient future earnings will exist for their realization, as well as
the continued application of current tax rates. In certain foreign
jurisdictions valuation allowances have been recorded against the deferred tax
assets specifically related to use of net operating losses. When we
determine that there is sufficient taxable income to utilize the net operating
losses, the valuation allowances will be released. In the event we
were to determine that we would not be able to realize all or part of our net
deferred tax assets in the future, an adjustment to the deferred tax assets
would be charged to earnings in the period such determination was
made.
We file income tax returns in the U.S.
federal jurisdiction, and various states and foreign
jurisdictions. We are currently under examination by the United
States Internal Revenue Service (the “IRS”) for the 2005, 2006, 2007 and 2008
tax years. With a few exceptions, we are no longer subject to U.S.
federal, state and local income tax examination by tax authorities for years
before 2005. For the tax year 2009, we entered into a voluntary
program with the IRS called Compliance Assurance Process (“CAP”).The objective
of CAP is to contemporaneously work with the IRS to achieve federal tax
compliance and resolve all or most of the issues prior to filing of the tax
return. We may elect to continue participating in CAP for future tax
years and may withdraw from the program at any time. In major foreign
jurisdictions, we are no longer subject to income tax examinations for years
before 2003. Along with the IRS examination, we are currently under
examination in certain foreign jurisdictions; however, the outcomes of these
reviews are not yet determinable.
At December 31, 2009, we had $28.3
million in unrecognized tax benefits of which $4.4 million, if recognized, would
affect the effective tax rate. In comparison, at December 31, 2008,
we had $30.9 million in unrecognized tax benefits of which $5.8 million, if
recognized, would affect the effective tax rate. During each of the years ended
December 31, 2009 and December 31, 2008, we recognized approximately $0.1
million and $0.5 million in interest and penalties. We had
approximately $3.3 million and $3.2 million of accrued interest and penalties
related to uncertain tax positions at December 31, 2009 and December 31,
2008. Interest and penalties related to uncertain tax positions are
recognized as a component of income tax expense.
We are subject to regular audits by
federal, state and foreign tax authorities. These audits may result
in additional tax liabilities. We account for such contingent
liabilities in accordance with relevant accounting standards and believe we have
appropriately provided for income taxes for all years. Several
factors drive the calculation of our tax reserves. Some of these
factors include: (i) the expiration of various statutes of limitations; (ii)
changes in tax law and regulations; (iii) issuance of tax rulings; and (iv)
settlements with tax authorities. Changes in any of these factors may
result in adjustments to our reserves, which would impact our reported financial
results.
Intangible
Assets
. Acquired intangible assets may represent
indefinite-lived assets, determinable-lived intangibles, or goodwill. Of these,
only the costs of determinable-lived intangibles are amortized to expense over
their estimated life. The value of indefinite-lived intangible assets and
residual goodwill is not amortized, but is tested at least annually for
impairment. Our impairment testing for goodwill is performed separately from our
impairment testing of indefinite-lived intangibles. We test goodwill for
impairment, at least annually, by reviewing the book value compared to the fair
value at the reportable unit level. We test individual indefinite-lived
intangibles at least annually by reviewing the individual book values compared
to the fair value. Considerable management judgment is necessary to
measure fair value. We did not recognize any impairment charges for goodwill or
intangible assets during the periods presented.
Stock-Based
Compensation
. All share-based payments to employees are recognized in the
financial statements based on their fair values using an option-pricing model at
the date of grant. We use a Black-Scholes-Merton option-pricing model to
calculate the fair value of options. Stock based compensation expense is
recognized net of any estimated forfeitures on a straight-line basis over the
requisite service period of the award.
Results
of Operations
The
following table sets forth our operating results as a percentage of revenue for
the periods indicated:
|
Year
Ended December 31,
|
||||||||||||
|
2007
|
2008
|
2009
|
||||||||||
|
Revenue
|
100.0 | % | 100.0 | % | 100.0 | % | ||||||
|
Cost
of
sales
|
18.1 | 18.3 | 18.3 | |||||||||
|
Gross
profit
|
81.9 | 81.7 | 81.7 | |||||||||
|
Operating
expenses:
|
||||||||||||
|
Selling
expenses
|
42.9 | 42.4 | 41.4 | |||||||||
|
General
and administrative
expenses
|
31.2 | 29.2 | 28.4 | |||||||||
|
Restructuring
charges
|
1.7 | — | 0.8 | |||||||||
|
Total
operating
expenses
|
75.8 | 71.6 | 70.6 | |||||||||
|
Operating
income
|
6.1 | 10.1 | 11.1 | |||||||||
|
Other
income (expense),
net
|
(.2 | ) | (2.0 | ) | (0.5 | ) | ||||||
|
Income
before provision for income
taxes
|
5.9 | 8.1 | 10.6 | |||||||||
|
Provision
for income
taxes
|
2.1 | 2.9 | 3.8 | |||||||||
|
Net
income
|
3.8 | % | 5.2 | % | 6.8 | % | ||||||
2009
Compared to 2008
Overview
Revenue in 2009 increased 6% to $1.33
billion from $1.25 billion in 2008. The introduction of our
ageLOC
Transformation
skin care
system at our global distributor convention held in Los Angeles during the
fourth quarter contributed to a boost to revenue during this period.
Foreign currency exchange fluctuations did not materially impact on revenue in
2009 compared to 2008. Revenue in 2009 was positively impacted by growth
in all of our regions, driven largely by strong sales of our personal care
products, including the
Galvanic Spa System II
with
ageLOC Galvanic Spa
Gels
and our new
ageLOC
Transformation
skin care
system, as well as successful promotions of other key products. Despite
improving trends in Japan, we continued to see declines in our local currency
revenue in that market.
Earnings per share in 2009 increased to
$1.40 compared to $1.02 in 2008 on a diluted basis. The increase in earnings is
largely the result of increased revenue, as discussed above, and transformation
initiatives we have executed over the last several years to transform and align
our business and operate more efficiently. Earnings per share in 2009
and 2008 were also impacted by:
|
|
•
|
foreign
currency transaction losses in 2008 of approximately $11.9 million (net of
taxes of $6.5 million), or $.19 per share, as foreign currencies shifted
dramatically during the year; and
|
|
|
•
|
restructuring
charges in 2009 totaling $6.8 million (net of taxes of $3.9 million), or
$.11 per share, relating to further transformation initiatives to reduce
overhead, primarily in Japan.
|
|
|
Revenue
|
North
Asia
. The following table sets forth revenue for the North
Asia region and its principal markets (U.S. dollars in millions):
|
2008
|
2009
|
Change
|
||||||||||
|
Japan
|
$ | 443.7 | $ | 461.9 | 4% | |||||||
|
South
Korea
|
150.8 | 144.2 | (4%) | |||||||||
|
North
Asia
total
|
$ | 594.5 | $ | 606.1 | 2% | |||||||
Foreign currency fluctuations
positively impacted revenue by 3% in this region compared to the prior-year
period. Currency fluctuations positively impacted revenue in Japan by
10% and negatively impacted revenue in Korea by 16% in 2009. Our
active and executive distributor counts decreased 10% and 5%, respectively, in
Japan in 2009 compared to 2008. In South Korea, our active and executive
distributor counts increased 18% and 20%, respectively, comparing 2009 to
2008.
Local currency revenue in Japan
declined 6% in 2009 compared to 2008. We continue to experience some
weakness in this challenging market, as evidenced by the declines in both our
active and executive distributors. The direct selling environment in Japan
continues to be very difficult as the industry has been in a decline for several
years. Most direct selling companies were seeing their businesses
contract in this market. Increased regulatory and media scrutiny of
the industry continues to negatively impact the industry and our
business. As a result of this increased scrutiny, we continue to
focus on distributor compliance and have also been more cautious in both our
corporate and our distributor’s marketing activities. Despite these
challenges, we have experienced an improving trend in revenue comparisons for
the last few quarters due largely to the implementation of distributor
initiatives that have been successful in other markets as well as strong product
promotions in the last-half of 2009. The product promotions and
distributor enthusiasm surrounding the launch of our
ageLOC
Transformation
skin care
system and new
ageLOC Edition
Galvanic Spa
in the fourth quarter in particular contributed to stronger
fourth quarter revenue. Local currency revenue in Japan decreased 1%
year-over-year in the fourth quarter. Although we are encouraged by
these trend improvements in our Japan market, we believe that we may continue to
see modest local currency revenue declines during 2010 based on continued
weakness in distributor numbers, the promotional nature of some of the revenue
generated in connection with the launch of our ageLOC
products, and our
anticipation that difficult regulatory conditions will continue throughout
2010.
South Korea posted strong
year-over-year local currency revenue growth of 12%. This growth was
fueled by strong distributor alignment behind our product and distributor
initiatives, maintaining a vibrant sponsoring environment for our distributors
and spurring significant growth in our active and executive
distributors. This revenue growth was more than offset
by weakening of the Korean won during 2009. As the Korean won continues to
fluctuate, it may positively or negatively impact our
results.
We
launched our
ageLOC
Transformation
skincare
system in South Korea during the first quarter of 2010, and believe this product
will have a positive impact on revenue in 2010.
Americas
. The
following table sets forth revenue for the Americas region and its principal
markets (U.S. dollars in millions):
|
2008
|
2009
|
Change
|
||||||||||
|
United
States
|
$ | 192.1 | $ | 218.6 | 14% | |||||||
|
Canada
|
16.2 | 23.5 | 45% | |||||||||
|
Latin
America
|
15.6 | 18.8 | 21% | |||||||||
|
Americas
total
|
$ | 223.9 | $ | 260.9 | 17% | |||||||
In 2009, we continued to experience
strong growth in the United States, driven particularly by our highly
demonstrable personal care products, including our
Galvanic Spa System II
with
ageLOC Galvanic Spa
Gels
and our new
ageLOC
Transformation
skin care system and
ageLOC Edition Galvanic Spa System
II.
Revenue in 2009 was positively impacted by approximately
$11.0 million as a result of product sales and convention fee revenue from
foreign distributors attending our biannual global convention in Los
Angeles. Active distributors in the United States decreased 3% and
executive distributors increased 12% compared to the prior-year
period.
Revenue increased by 45% in Canada and
by 21% in Latin America in 2009 compared to 2008,
respectively. Revenue continued to be driven primarily by the success
of our
Galvanic Spa System
II
and
ageLOC Galvanic
Spa Gels
in these markets. Our growth in Latin America is also attributed
to our expansion into Colombia during the second quarter of 2009.
Greater
China
. The following table sets forth revenue for the Greater
China region and its principal markets (U.S. dollars in millions):
|
2008
|
2009
|
Change
|
||||||||||
|
Taiwan
|
$ | 92.3 | $ | 91.7 | 1% | |||||||
|
China
|
65.3 | 71.1 | 9% | |||||||||
|
Hong
Kong
|
52.4 | 47.6 | (9%) | |||||||||
|
Greater
China
total
|
$ | 210.0 | $ | 210.4 | ─ | |||||||
Foreign currency exchange rate
fluctuations positively impacted revenue in the Greater China region by 1% in
2009. Local currency revenue in Taiwan was up 4% in 2009 compared to
2008. The executive distributor count in Taiwan was up 9% compared to
the prior-year period, while the number of active distributors was up 12% when
compared to the prior-year period. In Taiwan, due to regulatory
restrictions, we continue to be unable to market the
Galvanic Spa System II
, which
has been a primary growth initiative in our other markets.
On a local currency basis, revenue in
Mainland China increased 7% in 2009 compared to 2008. Mainland China
reported a 27% decline in our preferred customers compared to the prior-year
period and a 9% increase in the number of sales representatives. The
year-over-year increase in revenue in Mainland China was the result of strong
sales of the
Galvanic Spa
System II
, which we fully launched in the first quarter of 2009,
successful sales initiatives and the adoption of our revised business
model. We continue to focus our efforts on managing our sales force
to ensure compliance with our policies and local regulations in this
market.
Hong Kong local currency revenue was
down 9% in 2009 compared to 2008 primarily as a result of a reduction in sales
of products to sales employees in Mainland China who had been purchasing
products in 2008 from Hong Kong that were not available in Mainland China such
as our
Galvanic Spa System
II
. Executive distributors in Hong Kong were up 15% and the
active distributors in Hong Kong were down 4% compared to 2008.
Europe
. The
following table sets forth revenue for our Europe region (U.S. dollars in
millions):
|
2008
|
2009
|
Change
|
||||||||||
|
Europe
|
$ | 111.6 | $ | 133.6 | 20% | |||||||
Foreign
currency exchange rate fluctuations negatively impacted revenue in Europe by 6%
in 2009 compared to the prior year. On a local currency basis,
revenue in Europe grew by 26% in 2009 compared to 2008. The strong
growth in Europe was driven by strong sales force leadership and sustained
interest in our
Galvanic Spa
System II
and our products supported by the
Pharmanex BioPhotonic
Scanner
, particularly in Eastern Europe where we have recently expanded
our business, as well as growth in Russia and South Africa. We also began
initial marketing activities in Turkey during the second quarter of
2009. Our active and executive distributor counts in our Europe
region increased by 12% and 16%, respectively, in 2009 compared to
2008.
South
Asia/Pacific
. The following table sets forth revenue for the
South Asia/Pacific region and its principal markets (U.S. dollars in
millions):
|
2008
|
2009
|
Change
|
||||||||||
|
Singapore/Malaysia/Brunei
|
$ | 43.8 | $ | 49.2 | 12% | |||||||
|
Thailand
|
34.6 | 38.8 | 12% | |||||||||
|
Australia/New
Zealand
|
13.3 | 14.2 | 7% | |||||||||
|
Indonesia
|
8.9 | 10.7 | 20% | |||||||||
|
Philippines
|
7.0 | 7.2 | 3% | |||||||||
|
South
Asia/Pacific total
|
$ | 107.6 | $ | 120.1 | 12% | |||||||
Foreign currency exchange rate
fluctuations negatively impacted revenue in South Asia/Pacific by 5% in 2009
compared to the same prior-year period. All of the markets in this
region experienced growth. The growth was driven largely by continued
strong sales of our
TRA
family of weight loss products and our
Galvanic Spa System II
, as
well as successful distributor leadership initiatives. We also
successfully launched enhancements to our sales compensation plan in these
markets, which we believe helped contribute to increased distributor
productivity. Executive distributors in the region increased 16%
while active distributors increased 9% compared to the prior year.
Gross
profit
Gross profit as a percentage of revenue
in 2009 remained level with 2008 at 81.7%. We anticipate that our
gross profit as a percentage of revenue will increase slightly in 2010, based on
improved margins on our ageLOC products and efforts to reduce other costs in our
supply chain, including freight costs.
Selling
expenses
Selling expenses decreased as a
percentage of revenue to 41.4% in 2009 from 42.4% in 2008. The
decrease as a percentage of revenue was due primarily to modifications to our
compensation plan to improve the alignment of our compensation plan incentives
around more productive distributor activity. In 2010, we plan to
begin including the costs of incentive trips and other rewards earned by
distributors in the selling expense category, which will result in these
expenses increasing slightly as a percentage of revenue in
2010. Previously, these expenses were recorded in general and
administrative expenses.
General and administrative
expenses
General and administrative expenses
decreased as a percentage of revenue to 28.4% in 2009 from 29.2% in 2008,
primarily as a result of increased revenue and our transformation to better
leverage our overhead costs as we grow our revenue. General and
administrative expenses were also positively impacted by our transformation
efforts to reduce our overhead and general and administration expenses in
Japan.
Restructuring
charges
During
2009, we recorded restructuring charges of $10.7 million primarily related to
transformation efforts in Japan designed to improve operational efficiencies and
align organizationally in Japan with how we are organized globally in our other
markets.
Other income (expense),
net
Other income (expense), net
was
$6.6 million of expense in 2009 compared to $24.8 million of expense in
2008. Of this 2008 amount, approximately $18.4 million relates to
foreign currency transaction losses related to our yen-denominated debt as the
Japanese yen strengthened from 111.45 at December 31, 2007 to 90.73 at December
31, 2008. Because it is impossible to predict foreign currency
fluctuations, we cannot estimate the degree to which our other income expense
will be impacted in the future. Other income (expense), net also
includes approximately $6.9 million and $7.8 million in interest expense during
2009 and 2008, respectively.
Provision for income
taxes
Provision for income taxes increased to
$51.3 million in 2009 from $35.3 million in 2008. The effective tax rate
increased to 36.3% in 2009 from 35.1% of pre-tax income in 2008. The
higher income tax rate was due to a reduced benefit relating to the expiration
of the statute of limitations in 2009 compared to 2008.
Net
income
As a result of the foregoing factors,
net income increased to $89.8 million in 2009 from $65.3 million in
2008.
2008
Compared to 2007
Overview
Revenue in 2008 increased 8% to $1.25
billion from $1.16 billion in 2007, with foreign currency exchange fluctuations
positively impacting revenue by 3% in 2008 compared to 2007. Revenue
in 2008 was positively impacted by growth in South Korea, Europe, the United
States, and our South Asia markets. We also saw declines in our
business in Japan and China, which negatively impacted financial
results.
Earnings per share in 2008 increased to
$1.02 compared to $0.67 in 2007 on a diluted basis. The increase in earnings was
primarily a result of our transformation initiatives to improve operational
efficiencies as evidenced by the improvements in selling expenses and general
and administrative expenses as a percentage of revenue and the increase in
revenue. Earnings per share in 2008 and 2007 were also impacted
by:
|
|
•
|
foreign
currency transaction losses in 2008 of approximately $11.9 million (net of
taxes of $6.5 million), or $.19 per share, as foreign currencies shifted
dramatically during the year;
|
|
|
•
|
restructuring
charges in 2007 totaling $12.6 million (net of taxes of $7.2 million), or
$0.20 per share, relating to our business transformation initiative to
reduce overhead expenses and streamline operations;
and
|
|
|
•
|
the
repurchase of approximately 4.1 million shares of our Class A common stock
in 2007.
|
|
|
Revenue
|
North
Asia
. The following table sets forth revenue for the North
Asia region and its principal markets (U.S. dollars in millions):
|
2007
|
2008
|
Change
|
||||||||||
|
Japan
|
$ | 443.7 | $ | 443.7 | ─ | |||||||
|
South
Korea
|
142.1 | 150.8 | 6% | |||||||||
|
North
Asia
total
|
$ | 585.8 | $ | 594.5 | 1% | |||||||
Foreign currency fluctuations
positively impacted revenue by 5% in this region compared to the prior-year
period. Currency fluctuations were most significant during the last
quarter of 2008, when the average Japanese yen rate strengthened 11% and the
average Korean won rate weakened by 28%. Our active and executive
distributor counts decreased 10% and 12%, respectively, in Japan in 2008
compared to 2007. In South Korea, our active and executive distributor counts
increased 19% and 13%, respectively, comparing 2008 to 2007.
Local currency revenue in Japan
declined 12% in 2008 compared to 2007. Weakness in our distributor
numbers in this market as evidenced by the declines in both active and executive
distributors contributed to this decline as well as the regulatory and industry
challenges discussed above. In response to this regulatory
environment and, as a result of increases in the number of complaints to
consumer centers regarding the activities of some of our distributors, we
increased our focus on distributor compliance and training. Some of
the actions we took to address activities of distributor groups that were having
higher levels of complaints contributed to the declines in our
revenue. We also engaged in less aggressive product promotions in
2008 than we had in 2007.
South Korea posted strong
year-over-year local currency revenue growth of 24%. This
growth was fueled by strong growth in our active and executive distributors and
successful product launches.
Americas
. The
following table sets forth revenue for the Americas region and its principal
markets (U.S. dollars in millions):
|
2007
|
2008
|
Change
|
||||||||||
|
United
States
|
$ | 167.8 | $ | 192.1 | 14% | |||||||
|
Canada
|
11.5 | 16.2 | 41% | |||||||||
|
Latin
America
|
9.0 | 15.6 | 73% | |||||||||
|
Americas
total
|
$ | 188.3 | $ | 223.9 | 19% | |||||||
We experienced strong growth in the
United States particularly in the personal care brand. The revenue
growth was driven by interest in our
Galvanic Spa System II
as
well as complementary products such as
Galvanic Spa Gels
,
Tru Face Essence Ultra
and
Tru Face Line
Corrector
, which provide highly demonstrable results and generate
significant consumer interest. In the fourth quarter, we launched our
ageLOC Galvanic Spa
Gels
incorporating our innovative new ageLOC anti-aging
technology. Revenue in 2007 was positively impacted by approximately
$5.0 million as a result of product and convention fee revenue from foreign
distributors attending our biannual global convention in 2007. Active
distributors in the United States increased 4% and executive distributors
increased 8% compared to the prior-year period.
Revenue increased by 41% in Canada and
by 73% in Latin America in 2008 compared to 2007, respectively. The
growth in Latin America was largely due to our opening of operations in
Venezuela and strength in our Mexico market. Similar to the United States,
revenue growth in Canada and Latin America was driven by the strong sales in our
Nu Skin brand personal care products.
Greater
China
. The following table sets forth revenue for the Greater
China region and its principal markets (U.S. dollars in millions):
|
2007
|
2008
|
Change
|
||||||||||
|
Taiwan
|
$ | 93.0 | $ | 92.3 | (1%) | |||||||
|
China
|
66.5 | 65.3 | (2%) | |||||||||
|
Hong
Kong
|
45.5 | 52.4 | 15% | |||||||||
|
Greater
China
total
|
$ | 205.0 | $ | 210.0 | 2% | |||||||
Foreign currency exchange rate
fluctuations positively impacted revenue in the Greater China region by 5% in
2008. On a local currency basis, revenue in Mainland China decreased
10% in 2008 compared to 2007. Our revenue decline in Mainland China was
primarily the result of a 25% decline in our preferred customers compared to the
prior-year period and a 3% decline in the number of sales representatives.
Given the regulatory environment in China, we continued to be cautious in our
promotions and the sales activities of our sales representatives. At the
end of 2007, we also adjusted our store strategy to focus our business around
plaza stores in major cities, which resulted in the closure of nearly 70 of our
smaller stores in this market. In 2008, we opened new plaza stores in
Shanghai and Guangzhou as part of this strategy. Additionally, we
modified our business model to engage sales promoters under a service contract
as well as offer part-time employment. These business model changes were
made in order to allow us to provide a supplemental income opportunity to
individuals who may not be interested in working full-time in this business as
well as reduce our selling expenses, as the amount of social benefits, taxes and
unemployment charges under this model will be lower. While we believe that
these adjustments to our store strategy and business model may have had a small
negative impact on our revenue during the first part of the year as our sales
representatives and preferred customers adapted to them, they significantly
improved our profitability in this market during 2008 and 2009.
In the fourth quarter of 2008, we
introduced the
Galvanic Spa
System II
to a limited number of sales leaders in Mainland
China. The launch generated excitement among our sales force and
helped to improve our revenue trend, with revenue declining only 1% in the
fourth quarter.
Local currency revenue in Taiwan was
down 5% in 2008 compared to 2007. We believe that the decline in
Taiwan was primarily attributed to regulatory restrictions that currently
prevent us from marketing the
Galvanic Spa System II
in
this market and a softening of sales of our weight loss products. The
executive distributor count in Taiwan was up 3% compared to the prior-year
period, while the number of active distributors was down 13% when compared to
the prior-year period. Hong Kong local currency revenue was up 15% in
2008 compared to 2007, primarily as a result of the strength of our personal
care initiatives. Executive distributors in Hong Kong were down 5%
and the active distributors in Hong Kong were up 1% compared to
2007.
Europe
. The
following table sets forth revenue for our Europe region (U.S. dollars in
millions):
|
2007
|
2008
|
Change
|
||||||||||
|
Europe
|
$ | 77.2 | $ | 111.6 | 45% | |||||||
Foreign
currency exchange rate fluctuations positively impacted revenue in Europe by 9%
in 2008 compared to the prior year. On a local currency basis,
revenue in Europe grew by 36% in 2008 compared to 2007. The strong
growth in Europe was primarily a result of distributor enthusiasm and strong
interest in our
Galvanic Spa
System II
and personal care business, as well as strong growth in our
newer Eastern European markets. We believe that strong alignment of
distributor leaders behind our key initiatives, including the
Galvanic Spa System II
, has
helped contribute to the distributor excitement and revenue
growth. In 2008, we also expanded our operations into the Czech
Republic and South Africa. Our active and executive distributor
counts increased by 43% and 49%, respectively, in 2008 compared to
2007.
South
Asia/Pacific
. The following table sets forth revenue for the
South Asia/Pacific region and its principal markets (U.S. dollars in
millions):
|
2007
|
2008
|
Change
|
||||||||||
|
Singapore/Malaysia/Brunei
|
$ | 39.3 | $ | 43.8 | 11% | |||||||
|
Thailand
|
32.3 | 34.6 | 7% | |||||||||
|
Australia/New
Zealand
|
15.8 | 13.3 | (16%) | |||||||||
|
Indonesia
|
8.8 | 8.9 | 1% | |||||||||
|
Philippines
|
5.2 | 7.0 | 35% | |||||||||
|
South
Asia/Pacific total
|
$ | 101.4 | $ | 107.6 | 6% | |||||||
Foreign currency exchange rate
fluctuations positively impacted revenue in South Asia/Pacific by 1% in 2008
compared to the same prior-year period. All of the markets in this
region experienced growth except for Australia/New Zealand. The
growth was fueled in part by continued success of our
TRA
family of weight loss
products during the first part of the year and success of our
Galvanic Spa System
II
. The decline in Australia/New Zealand was largely related
to a transition away from
Photomax
, which has not
proven to be a strong, long-term business initiative for our distributors.
Executive distributors
in the region increased 14% while active distributors increased 1% compared to
the prior year.
Gross
profit
Gross profit as a percentage of revenue
in 2008 decreased to 81.7% from 81.9% in 2007. The decrease was due
in part to a shift in our product mix as our Japan business, which historically
has our strongest gross margins, represented a smaller percentage of our overall
business. Gross margins were also impacted by the increase in sales of the
Galvanic Spa System II,
which
has a slightly lower margin.
Selling
expenses
Selling expenses decreased as a
percentage of revenue to 42.4% in 2008 from 42.9% in 2007. The slight decrease
as a percentage of revenue was due primarily to modifications to our
compensation plan as discussed above.
General and administrative
expenses
General and administrative expenses
decreased as a percentage of revenue to 29.2% in 2008 from 31.2% in
2007. The improvement relates to restructuring efforts to reduce
general and administrative levels and improve efficiencies.
Restructuring
charges
During
2007, we recorded restructuring charges of $19.8 million relating to our efforts
to simplify our operations in China and improve operational efficiencies in our
corporate offices and reduce investments in unprofitable
markets. Approximately $13.9 million of these charges related to
severance payments to terminated employees and approximately $5.9 million
related to leasehold terminations and expenses related to the closure of our
operations in Brazil in 2007.
Other income (expense),
net
Other income (expense), net
was
$24.8 million of expense in 2008 compared to $2.4 million of expense in
2007. Of this amount, approximately $18.4 million relates to foreign
currency transaction losses related to our yen-denominated debt as the Japanese
yen strengthened from 111.45 at December 31, 2007 to 90.73 at December 31,
2008. In addition, we recorded foreign currency transaction losses
with respect to our intercompany receivables and payables with certain of our
international affiliates, including markets that are newly opened or have
remained in a loss position since inception. Generally, foreign
currency transaction losses with these affiliates would be offset by gains
related to the foreign currency transactions of our yen-based bank
debt. However, during 2008, the Japanese yen strengthened against the
U.S. dollar while most foreign currencies weakened against the U.S.
dollar. Other income (expense), net also includes approximately $7.8
million in interest expense during 2008.
Provision for income
taxes
Provision for income taxes increased to
$35.3 million in 2008 from $24.6 million in 2007. The effective tax rate
decreased to 35.1% from 35.9% of pre-tax income in 2007. The lower
tax rate was due primarily to the expiration of the statute of limitations in
certain tax jurisdictions. In connection with our reconciliation of
deferred tax asset and liability accounts at year end, we identified accounting
adjustments related to prior periods. These adjustments were included
in our provision for income taxes at 2007 year end and totaled approximately
$0.1 million.
Net
income
As a result of the foregoing factors,
net income increased to $65.3 million in 2008 from $43.9 million in
2007.
Liquidity
and Capital Resources
Historically, our principal uses of
cash have included operating expenses, particularly selling expenses, and
working capital (principally inventory purchases), as well as capital
expenditures, stock repurchases, dividends, debt repayment, and the development
of operations in new markets. We have generally relied on cash flow
from operations to fund operating activities, and we have at times incurred
long-term debt in order to fund strategic transactions and stock
repurchases.
We typically generate positive cash
flow from operations due to favorable gross margins and the variable nature of
selling expenses, which constitute a significant percentage of operating
expenses. We generated $133.9 million in cash from operations in 2009
compared to $103.3 million in 2008. This increase in cash generated
from operations is primarily due to the increase in revenue in 2009 as well as
increased profitability from our restructuring efforts.
As of
December 31, 2009, working capital was $152.7 million compared to $124.0 million
as of December 31, 2008. Our working capital increased primarily due
to an increase in cash and cash equivalents. Cash and cash
equivalents at December 31, 2009 were $158.0 million compared to $114.6 million
at December 31, 2008. The increase in cash was primarily the result
of the increase in our cash generated from operations in 2009.
Capital expenditures in 2009 totaled
$20.2 million, and we anticipate capital expenditures of approximately $30
million to $35 million for 2010. These capital expenditures are
primarily related to:
|
|
•
|
the
build-out and upgrade of leasehold improvements in our various markets,
including retail stores in China, as well as costs associated with
building a new innovation center on our Provo
campus.
|
|
|
•
|
the
build-out and upgrade of leasehold improvements in our various markets,
including retail stores in China, as well as costs associated with
building a new innovation center on our Provo
campus.
|
We
currently have debt pursuant to various credit facilities and other
borrowings. The following table summarizes these debt arrangements as
of December 31, 2009:
|
Facility
or
Arrangement
(1)
|
Original
Principal
Amount
|
Balance
as of
December 31, 2009
(2)
|
Interest
Rate
|
Repayment
terms
|
|||||
|
2000
Japanese yen-denominated notes
|
9.7
billion yen
|
1.4
billion yen ($14.9 million as of December 31, 2009)
|
3.0% |
Notes
due October 2010, with annual principal payments that began in October
2004.
|
|||||
| 2003 $205.0 million multi-currency uncommitted shelf facility: | |||||||||
|
U.S.
dollar
denominated:
|
$50.0
million
|
$10.0
million
|
4.5% |
Notes
due April 2010 with annual principal payments that began in April
2006.
|
|||||
|
$40.0
million
|
$40.0
million
|
6.2% |
Notes
due July 2016 with annual principal payments beginning July
2010.
|
||||||
|
$20.0
million
|
$20.0
million
|
6.2% |
Notes
due January 2017 with annual principal payments beginning January
2011.
|
||||||
|
Japanese yen
denominated:
|
3.1
billion yen
|
2.2
billion yen ($23.9 million as of December 31, 2009)
|
1.7% |
Notes
due April 2014, with annual principal payments that began in April
2008.
|
|||||
|
2.3
billion yen
|
2.3
billion yen ($24.4 million as of December 31, 2009)
|
2.6% |
Notes
due September 2017, with annual principal payments beginning September
2011.
|
||||||
|
2.2
billion yen
|
2.2
billion yen ($23.3 million as of December 31, 2009)
|
3.3% |
Notes
due January 2017, with annual principal payments beginning January
2011.
|
||||||
|
2004
$25.0 million revolving credit facility
|
N/A
|
None
|
N/A |
Credit
facility expires May 2010.
|
|||||
| 2009 $100.0 million uncommitted muliti-currency shelf facility |
N/A
|
None | N/A | ||||||
|
(1)
|
Each
of the credit facilities and arrangements listed in the table are secured
by guarantees issued by our material domestic subsidiaries and by pledges
of 65% of the outstanding stock of our material foreign
subsidiaries.
|
|
(2)
|
The
current portion of our long-term debt (i.e. becoming due in the next 12
months) includes $14.9 million of the balance on our 2000 Japanese
yen-denominated notes, $4.8 million of the balance of our 2005 Japanese
yen-denominated notes and $15.7 million of the balance on our U.S. dollar
denominated debt under the 2003 multi-currency shelf
facility.
|
Our board of directors has approved a
stock repurchase program authorizing us to repurchase our outstanding shares of
Class A common stock on the open market or in private transactions. The
repurchases are used primarily for our equity incentive plans and strategic
initiatives. On November 2, 2007, our board of directors authorized an increase
of $100 million to our ongoing share repurchase authorization. During
the year ended December 31, 2009, we repurchased approximately 1.2 million
shares of Class A common stock under this program for an aggregate amount of
approximately $21.1 million. At December 31, 2009, approximately
$62.5 million was still available under the stock repurchase
program.
During each quarter of 2009, our board
of directors declared cash dividends of $0.115 per share on our Class A common
stock. These quarterly cash dividends totaled approximately $29.0
million and were paid during 2009 to stockholders of record in
2009. In February 2010, the board of directors declared a dividend to
be paid in March 2010 of $0.125 per share for Class A common
stock. Currently, we anticipate that our board of directors will
continue to declare quarterly cash dividends and that the cash flows from
operations will be sufficient to fund our future dividend
payments. However, the continued declaration of dividends is subject
to the discretion of our board of directors and will depend upon various
factors, including our net earnings, financial condition, cash requirements,
future prospects and other factors deemed relevant by our board of
directors.
We believe we have
sufficient liquidity to be able to meet our obligations on both a short- and
long-term basis. We currently believe that existing cash balances,
future cash flows from operations and existing lines of credit will be adequate
to fund our cash needs on both a short- and long-term basis. The
majority of our historical expenses have been variable in nature and as such, a
potential reduction in the level of revenue would reduce our cash flow
needs. In the event that our current cash balances, future cash flow
from operations and current lines of credit are not sufficient to meet our
obligations or strategic needs, we would consider raising additional funds in
the debt or equity markets or restructuring our current debt
obligations. Additionally, we would consider realigning our strategic
plans, including a reduction in capital spending, stock repurchases or dividend
payments.
Contractual
Obligations and Contingencies
The
following table sets forth payments due by period for fixed contractual
obligations as of December 31, 2009 (U.S. dollars in thousands):
|
Total
|
2010
|
2011-2012 | 2013-2014 |
Thereafter
|
||||||||||||||||
|
Long-term
debt obligations
|
$ | 156,519 | $ | 35,400 | $ | 40,342 | $ | 40,342 | $ | 40,435 | ||||||||||
|
Capital
lease
obligations
|
— | — | — | — | — | |||||||||||||||
|
Operating
lease obligations
(1)
|
63,266 | 18,617 | 25,804 | 18,337 | 508 | |||||||||||||||
|
Purchase
obligations
|
127,201 | 74,426 | 46,747 | 5,885 | 143 | |||||||||||||||
|
Other
long-term liabilities reflected
on the balance sheet
(2)
|
— | — | — | — | — | |||||||||||||||
|
Total
|
$ | 346,986 | $ | 128,443 | $ | 112,893 | $ | 64,564 | $ | 41,086 | ||||||||||
|
(1)
|
Operating
leases include corporate office and warehouse space with two entities that
are owned by certain officers and directors of our company who are also
founding shareholders. Total payments under these leases were
$3.8 million for the year ended December 31, 2009 with remaining long-term
obligations under these leases of $6.6
million.
|
|
(2)
|
Other
long-term liabilities reflected on the balance sheet of $66.4 million
primarily consisting of long-term tax related balances, in which the
timing of the commitments is
uncertain.
|
Due to the international nature of our
business, we are subject from time to time to reviews and audits by the foreign
taxing authorities of the various jurisdictions in which we conduct business
throughout the world. As previously reported, we are currently
involved in litigation in Japan with the Ministry of Finance with respect to
additional customs assessments made by Yokohama Customs for the period of
October 2002 through July 2005. The aggregate amount of those assessments is yen
2.7 billion Japanese (approximately $29.0 million as of December 31, 2009), net
of any recovery of consumption taxes. We believe that the documentation and
legal analysis support our position and have taken action in the court system in
Japan to overturn these assessments. The litigation on this matter is ongoing
and we believe the court will likely decide this matter in the next year. If we
receive a decision that is unfavorable, we may appeal the decision, however, we
would likely be required to take a charge to our earnings for the amount
assessed.
In July 2005, we changed our operating
structure in Japan and believed that these changes would eliminate further
valuation disputes with Yokohama Customs as the new structure eliminated the
issues that were the basis of the litigation and valuation disputes. However, in
October 2009 we received notice from Yokohama Customs that they were assessing
additional duties, penalties and interest for the period of October 2006 through
November 2008 following an audit. The total amount of such assessments is yen
1.5 billion Japanese (approximately $17.5 million as of December 31, 2009), net
of any recovery of consumption taxes. The basis for such additional assessment
is different from, and unrelated to, the issues that are being litigated in the
current litigation with the Ministry of Finance. Following our review of the
assessments and after consulting with our legal and customs advisors, we
strongly believe that the additional assessments are improper and are not
supported by any legal or factual basis. We filed letters of protest with
Yokohama Customs, which were rejected. We plan to appeal the matter to the
Ministry of Finance in Japan. To the extent that we are unsuccessful in
recovering the amounts assessed and paid, we will be required to take a
corresponding charge to our earnings.
In addition, we are currently being
required to pay a higher rate of duties on all current imports, which we are
similarly disputing. Because we believe that the higher rate being assessed is
improper, we are currently planning on only expensing the portion of the duties
we believe is supported under applicable customs law, and recording the
additional payment as a receivable on our books.
Seasonality
and Cyclicality
In addition to general economic
factors, we are impacted by seasonal factors and trends such as major cultural
events and vacation patterns. For example, most Asian markets
celebrate their respective local New Year in the first quarter, which generally
has a negative impact on that quarter. We believe that direct selling
in Japan, the United States and Europe is also generally negatively impacted
during the third quarter, when many individuals, including our distributors,
traditionally take vacations.
We have experienced rapid revenue
growth in certain new markets following commencement of
operations. This initial rapid growth has often been followed by a
short period of stable or declining revenue, then followed by renewed growth
fueled by product introductions, an increase in the number of active
distributors and increased distributor productivity. The contraction
following initial rapid growth has been more pronounced in certain new markets,
due to other factors such as business or economic conditions or distributor
distractions outside the market.
Distributor
Information
The following table provides
information concerning the number of active and executive distributors as of the
dates indicated. Active distributors are those distributors and
preferred customers who were resident in the countries in which we operated and
purchased products for resale or personal consumption directly from us during
the three months ended as of the date indicated. Executive
distributors are active distributors who have achieved required monthly personal
and group sales volumes as well as sales representatives in China who have
completed a qualification process.
|
As
of December 31, 2007
|
As
of December 31, 2008
|
As
of December 31, 2009
|
|||||||||
|
Active
|
Executive
|
Active
|
Executive
|
Active
|
Executive
|
||||||
|
North
Asia
|
335,000
|
14,845
|
326,000
|
13,937
|
319,000
|
14,144
|
|||||
|
Americas
|
158,000
|
4,588
|
171,000
|
4,876
|
171,000
|
5,522
|
|||||
|
Greater
China
|
138,000
|
6,389
|
115,000
|
6,323
|
106,000
|
6,938
|
|||||
|
Europe
|
59,000
|
1,957
|
83,000
|
2,911
|
94,000
|
3,385
|
|||||
|
South
Asia/Pacific
|
65,000
|
2,223
|
66,000
|
2,541
|
71,000
|
2,950
|
|||||
|
Total
|
755,000
|
30,002
|
761,000
|
30,588
|
761,000
|
32,939
|
|||||
Quarterly
Results
The following table sets forth selected
unaudited quarterly data for the periods shown (U.S. dollars in millions, except
per share amounts):
|
2008
|
2009
|
|||||||||||||||||||||||||||||||
|
1
st
Quarter
|
2
nd
Quarter
|
3
rd
Quarter
|
4
th
Quarter
|
1
st
Quarter
|
2
nd
Quarter
|
3
rd
Quarter
|
4
th
Quarter
|
|||||||||||||||||||||||||
|
Revenue
|
$ | 298.1 | $ | 321.7 | $ | 310.3 | $ | 317.6 | $ | 296.2 | $ | 322.6 | $ | 334.2 | $ | 378.1 | ||||||||||||||||
|
Gross
profit
|
243.9 | 262.4 | 253.3 | 259.4 | 242.4 | 261.9 | 272.1 | 311.0 | ||||||||||||||||||||||||
|
Operating
income
|
27.4 | 28.9 | 30.3 | 38.8 | 20.2 | 34.4 | 40.9 | 52.2 | ||||||||||||||||||||||||
|
Net
income
|
13.5 | 20.6 | 16.8 | 14.5 | 11.8 | 22.1 | 25.6 | 30.3 | ||||||||||||||||||||||||
|
Net
income per share:
|
||||||||||||||||||||||||||||||||
|
Basic
|
0.21 | 0.32 | 0.26 | 0.23 | 0.19 | 0.35 | 0.41 | 0.48 | ||||||||||||||||||||||||
|
Diluted
|
0.21 | 0.32 | 0.26 | 0.23 | 0.19 | 0.35 | 0.40 | 0.47 | ||||||||||||||||||||||||
Recent
Accounting Pronouncements
In June 2009, the Financial Accounting
Standards Board (the "FASB") voted to approve the FASB Accounting Standards
Codification ("Codification") as the single source of authoritative
nongovernmental U.S. generally accepted accounting principles. The Codification
was effective for us commencing July 1, 2009. The FASB Codification does not
change U.S. generally accepted accounting principles, but combines all
authoritative standards into a comprehensive online database.
Effective January 1, 2009, we
adopted the fair value measurement provisions as required by the Fair Value
Measurements and Disclosures Topic of Codification, as it relates to
non-recurring, nonfinancial assets and liabilities. The adoption of these
provisions did not have an impact on our Consolidated Financial
Statements.
Effective
January 1, 2009, we adopted the provisions relating to the accounting for
business combinations as required by the Business Combinations Topic of the
Codification. These provisions will impact our financial statements both on the
acquisition date and in subsequent periods and will be applied prospectively.
The impact of adopting these provisions will depend on the nature and terms of
future acquisitions.
Effective January 1, 2009, we
adopted the provisions for the accounting and reporting of noncontrolling
interests in a subsidiary in consolidated financial statements as required by
the Consolidations Topic of the Codification. These provisions recharacterize
minority interests as noncontrolling interests and require noncontrolling
interests to be classified as a component of shareholders’ equity. These
provisions require retroactive adoption of the presentation and disclosure
requirements for existing minority interests. The adoption of these provisions
had no impact on our consolidated results of operations or financial
condition.
Effective
January 1, 2009, we adopted enhanced disclosures about how and why we use
derivative instruments, how they are accounted for, and how they affect our
financial performance as required by the Derivatives and Hedging Topic of the
Codification. The enhanced disclosures had no impact on our financial condition,
results of operations or cash flows.
Effective
June 30, 2009, we adopted the subsequent event provisions of the
Codification. These provisions provide guidance on management’s assessment of
subsequent events. The adoption of these provisions did not have an impact on
our Consolidated Financial Statements.
Currency
Risk and Exchange Rate Information
A majority of our revenue and many of
our expenses are recognized outside of the United States, except for inventory
purchases, which are primarily transacted in U.S. dollars from vendors in the
United States. The local currency of each of our Subsidiaries’
primary markets is considered the functional currency. All revenue
and expenses are translated at weighted-average exchange rates for the periods
reported. Therefore, our reported revenue and earnings will be
positively impacted by a weakening of the U.S. dollar and will be negatively
impacted by a strengthening of the U.S. dollar. Given the large
portion of our business derived from Japan, any weakening of the yen negatively
impacts reported revenue and profits, whereas a strengthening of the yen
positively impacts our reported revenue and profits. Given the
uncertainty of exchange rate fluctuations, it is difficult to predict the effect
of these fluctuations on our future business, product pricing and results of
operation or financial condition. However, based on current exchange rate
levels, we currently anticipate that foreign currency fluctuations will have a
negative impact on reported revenue in 2010.
We may seek to reduce our exposure to
fluctuations in foreign currency exchange rates through the use of foreign
currency exchange contracts, through intercompany loans of foreign currency and
through our Japanese yen-denominated debt. We do not use derivative
financial instruments for trading or speculative purposes. We
regularly monitor our foreign currency risks and periodically take measures to
reduce the impact of foreign exchange fluctuations on our operating
results. At December 31, 2009, we held forward contracts designated
as foreign currency cash flow hedges with notional amounts totaling
approximately $3.0 million to hedge forecasted foreign-currency-denominated
intercompany transactions. At December 31, 2008, we did not hold any
forward contracts designated as foreign currency cash flow hedges.
Following
are the weighted-average currency exchange rates of U.S. $1 into local currency
for each of our international or foreign markets in which revenue exceeded U.S.
$5.0 million for at least one of the quarters listed:
|
2008
|
2009 | |||||||||||||||||||||||
|
1
st
Quarter
|
2
nd
Quarter
|
3
rd
Quarter
|
4
th
Quarter
|
1
st
Quarter
|
2
nd
Quarter
|
3
rd
Quarter
|
4
th
Quarter
|
|
||||||||||||||||
|
Japan
(1)
|
105.0 | 104.6 | 107.6 | 95.7 | 93.6 | 97.3 | 93.5 | 89.9 | ||||||||||||||||
|
Taiwan.
|
31.5 | 30.4 | 31.2 | 33.0 | 34.0 | 33.1 | 32.8 | 32.3 | ||||||||||||||||
|
Hong
Kong
|
7.8 | 7.8 | 7.8 | 7.8 | 7.8 | 7.8 | 7.8 | 7.8 | ||||||||||||||||
|
South
Korea
|
956.4 | 1,017.3 | 1,063.1 | 1,360.6 | 1,418.4 | 1,282.8 | 1,237.3 | 1,167.4 | ||||||||||||||||
|
Malaysia
|
3.2 | 3.2 | 3.3 | 3.6 | 3.6 | 3.5 | 3.5 | 3.4 | ||||||||||||||||
|
Thailand
|
31.0 | 32.3 | 33.9 | 34.9 | 35.3 | 34.7 | 34.0 | 33.3 | ||||||||||||||||
|
China
|
7.2 | 7.0 | 6.8 | 6.8 | 6.8 | 6.8 | 6.8 | 6.8 | ||||||||||||||||
|
Singapore
|
1.4 | 1.4 | 1.4 | 1.5 | 1.5 | 1.5 | 1.4 | 1.4 | ||||||||||||||||
|
Canada
|
1.0 | 1.0 | 1.0 | 1.2 | 1.2 | 1.2 | 1.1 | 1.1 | ||||||||||||||||
|
(1)
|
As
of February 12, 2010, the exchange rate of U.S. $1 into the Japanese yen
was approximately 89.99.
|
Note
Regarding Forward-Looking Statements
With the
exception of historical facts, the statements contained in Management’s
Discussion and Analysis of Financial Condition and Results of Operations are
“forward-looking statements” within the meaning of the Private Securities
Litigation Reform Act of 1995 which reflect our current expectations and beliefs
regarding our future results of operations, performance and
achievements. These statements are subject to risks and uncertainties
and are based upon assumptions and beliefs that may not
materialize. These forward-looking statements include, but are not
limited to, statements concerning:
|
|
•
|
our
plans and expectations regarding our initiatives, strategies, development
and launch of new products, and other innovation efforts;
|
|
|
•
|
our
expectations and beliefs regarding government regulations of our
industry and our ability to comply with such
regulations;
|
|
|
•
|
our
expectations and beliefs regarding our distributors and our compensation
plan; and
|
|
|
•
|
our
expectation that we will spend approximately $30 million to $35 million
for capital expenditures during
2010;
|
|
|
•
|
our
expectation and plans regarding
conventions;
|
|
|
•
|
our
expectations regarding gross profit and selling
expenses;
|
|
|
•
|
our
anticipation that our board of directors will continue to declare
quarterly cash dividends and that the cash flows from operations will be
sufficient to fund our future dividend
payments;
|
|
|
•
|
our
belief that we have appropriately provided for income taxes for all
years;
|
|
|
•
|
our
belief that we have sufficient liquidity to be able to meet our
obligations on both a short- and long-term basis and that existing cash
balances together with future cash flows from operations and existing
lines of credit will be adequate to fund our cash needs;
and
|
|
|
•
|
our
beliefs regarding our Japan customs matter;
and
|
|
|
•
|
our
expectations regarding the effect of foreign currency
fluctuations.
|
In
addition, when used in this report, the words or phrases “will likely result,”
“expect,” “anticipate,” “will continue,” “intend,” “plan,” “believe” and similar
expressions are intended to help identify forward-looking
statements.
We wish to caution readers that our
operating results are subject to various risks and uncertainties that could
cause our actual results and outcomes to differ materially from those discussed
or anticipated. Reference is made to the risks and uncertainties
described below and factors described herein in
“Item 1A. - Risk Factors”
(which contains a more detailed discussion of the risks and uncertainties
related to our business). We also wish to advise readers not to place
any undue reliance on the forward-looking statements contained in this report,
which reflect our beliefs and expectations only as of the date of this
report. We assume no obligation to update or revise these
forward-looking statements to reflect new events or circumstances or any changes
in our beliefs or expectations, except as required by law. Some of
the risks and uncertainties that might cause actual results to differ from those
anticipated include, but are not limited to, the following:
(a)
Global economic conditions continue to be challenging. Although there
are signs of economic recovery, it is not possible for us to predict the extent
and timing of any improvement in global economic conditions. Even
with continued growth in many of our markets during this period, the economic
downturn could adversely impact our business in the future by causing a decline
in demand for our products, particularly if the economic conditions are
prolonged or worsen. In addition, such economic conditions may adversely impact
access to capital for us and our suppliers, may decrease our distributors'
ability to obtain or maintain credit cards, and may otherwise adversely impact
our operations and overall financial condition.
(b) Due
to the international nature of our business, we are exposed to the fluctuations
of numerous currencies. We purchase inventory primarily in the United States in
U.S. dollars. In preparing our financial statements, we translate revenue and
expenses in our markets outside the United States from their local currencies
into U.S. dollars using weighted average exchange rates. Our results could be
negatively impacted if the U.S. dollar strengthens relative to these
currencies.
(c) We
have experienced revenue declines in Japan over the last several years and
continue to face challenges in this market. If we are unable to renew growth in
this market our results could be harmed. Factors that could impact our results
in the market include:
|
•
|
continued
or increased levels of regulatory and media scrutiny and any regulatory
actions taken by regulators, or any adoption of more restrictive
regulations, in response to such
scrutiny;
|
|
•
|
any
weakening of the Japanese yen;
|
|
•
|
regulatory
constraints with respect to the claims we can make regarding the efficacy
of products and tools, which could limit our ability to effectively market
them;
|
|
•
|
risks
that the new initiatives we are implementing in Japan, which are patterned
after successful initiatives implemented in other markets, will not have
the same level of success in Japan, may not generate renewed growth or
increased productivity among our distributors, and may cost more or
require more time to implement than we have
anticipated;
|
|
•
|
inappropriate
activities by our distributors and any resulting regulatory
actions;
|
|
•
|
any
weakness in the economy or consumer confidence;
and
|
|
•
|
increased
competitive pressures from other direct selling companies and their
distributors who actively seek to solicit our distributors to join their
businesses.
|
(d)
Distributor activities that violate applicable laws or regulations could result
in government or third party actions against us. We continue to experience
a high level of general inquiries regarding our company and complaints to
consumer protection centers in Japan and have taken steps to try to resolve
these issues including providing additional training to our distributors and
restructuring our compliance group in Japan. We have seen improvements in
some prefectures, but not in others. In 2009, we received one written and
one oral warning from Consumer Centers in two prefectures raising concerns
about our distributor training and number of general inquiries and
complaints. We are implementing additional steps to reinforce our
distributor education and training in Japan to help address these
concerns. Japan is currently implementing a national organization
of consumer protection centers, which may increase scrutiny of our business and
industry.
(e) Our
operations in China are subject to significant regulatory scrutiny, and we have
experienced challenges in the past, including interruption of sales activities
at certain stores and fines being paid in some cases. Even though we have
obtained direct selling licenses in a limited number of provinces, government
regulators continue to scrutinize our activities and the activities of our
employed sales representatives, contractual sales promoters and direct sellers
to monitor our compliance with applicable regulations as we integrate direct
selling into our business model. Any determination that our operations or
activities, or the activities of our employed sales representatives, contractual
sales promoters or direct sellers, are not in compliance with applicable
regulations, could result in the imposition of substantial fines, extended
interruptions of business, termination of necessary licenses and permits,
including our direct selling licenses, or restrictions on our ability to open
new stores or obtain approvals for service centers or expand into new locations,
all of which could harm our business.
(f) The
direct selling regulations in China are restrictive and there continues to be
some confusion and uncertainty as to the meaning of the regulations and the
specific types of restrictions and requirements imposed under them. It is also
difficult to predict how regulators will interpret and enforce these
regulations. Our business and our growth prospects may be harmed if Chinese
regulators interpret the anti-pyramiding regulations or direct selling
regulations in such a manner that our current method of conducting business
through the use of employed sales representatives, contractual sales promoters
and direct sellers violates these regulations. In particular, our business would
be harmed by any determination that our current method of compensating our
employed sales representatives and contractual sales promoters, including our
use of the sales productivity of an individual and the group of individuals whom
he or she trains and supervises in establishing salary and compensation,
violates the restriction on multi-level compensation under the rules. Our
business could also be harmed if regulators inhibit our ability to concurrently
operate our business model, which includes retail stores, employed sales
representatives, contractual sales promoters and direct sellers.
(g) Our
ability to retain key and executive level distributors or to sponsor new
executive distributors is critical to our success. Because our products are
distributed exclusively through our distributors and we compete with other
direct selling companies in attracting distributors, our operating results could
be adversely affected if our existing and new business opportunities and
incentives, products, business tools and other initiatives do not generate
sufficient enthusiasm and economic incentive to retain our existing distributors
or to sponsor new distributors on a sustained basis. In addition, in our more
mature markets, one of the challenges we face is keeping distributor leaders
with established businesses and high income levels motivated and actively
engaged in business building activities and in developing new distributor
leaders. There can be no assurance that our initiatives will continue to
generate excitement among our distributors in the long-term or that planned
initiatives will be successful in maintaining distributor activity and
productivity or in motivating distributor leaders to remain engaged in business
building and developing new distributor leaders.
(h) There
have been a series of third party actions and governmental actions involving
some of our competitors in the direct selling industry. These actions have
generated negative publicity for the industry and likely have resulted in
increased regulatory scrutiny of other companies in the industry. In addition,
we have received notice from Belgium authorities claiming we have violated the
anti-pyramid regulations in that market. Adverse rulings in any of these cases
could harm our business if they create adverse publicity or interpret laws in a
manner inconsistent with our current business practices.
(i) We
recently implemented compensation plan modifications in most of our
markets. Although initial results of these modifications have been
generally positive, the size of our distributor force and the complexity of our
compensation plans make it difficult to predict whether such changes will
achieve their desired long-term results. There are risks that the
compensation plan modifications will not be well received or achieve desired
long-term results and that the transition could have a negative impact on
revenue. If our distributors fail to adapt to these changes or find them
unattractive, our business could be harmed.
(j) The
network marketing and nutritional supplement industries are subject to various
laws and regulations throughout our markets, many of which involve a high level
of subjectivity and are inherently fact-based and subject to interpretation.
Negative publicity concerning supplements with controversial ingredients has
spurred efforts to change existing regulations or adopt new regulations in order
to impose further restrictions and regulatory control over the nutritional
supplement industry. If our existing business practices or products, or any new
initiatives or products, are challenged or found to contravene any of these laws
by any governmental agency or other third party, or if there are any new
regulations applicable to our business that limit our ability to market such
products or impose additional requirements on us, our revenue and profitability
may be harmed.
(k) Our
revenue was negatively impacted in 2003 by the SARS epidemic that hit Asia
during that year. More recently, human cases of H1N1 flu, originating in Latin
America, have been identified as potential global health risks. It is difficult
to predict the impact on our business, if any, of a recurrence of SARS, or the
emergence of new epidemics, such as avian flu or H1N1 flu. Although such events
could generate increased sales of health and immune supplements and certain
personal care products, our direct selling and retail activities and results of
operations could be harmed if the fear of any communicable and rapidly spreading
disease results in travel restrictions or causes people to avoid group meetings
or gatherings or interaction with other people. In addition, most of
our Pharmanex nutritional supplement revenue is generated from products that are
encapsulated in bovine- and/or porcine-sourced gel capsules. If we experience
production difficulties, quality control problems, or shortages in supply in
connection with bovine or porcine related health concerns, this could result in
additional risk of product shortages or write-offs of inventory that no longer
can be used. In addition, we may be unable to introduce our products
in some markets if we are unable to obtain the necessary regulatory approvals or
if any product ingredients are prohibited, which could harm our
business.
(l)
Production difficulties and quality control problems could harm our business, in
particular our reliance on third party suppliers to deliver quality products in
a timely manner. Occasionally, we have experienced production difficulties with
respect to our products, including the delivery of products that do not meet our
quality control standards. These quality problems have resulted in the past, and
could result in the future, in stock outages or shortages in our markets with
respect to such products, harming our sales and creating inventory write-offs
for unusable products. We recently experienced unprecedented demand for our
limited offering of our new
ageLOC Transformation
skin
care system. In addition this is the first time that we are launching a product
globally on such a condensed launch schedule, which has added increased pressure
on our supply chain. If we are not able to accurately forecast sales levels on a
market by market basis, or are unable to produce a sufficient supply to meet
such demand globally, we could have stockouts which could negatively impact
enthusiasm of our distributors.
(m)
Historically, most of our products have been imported from the United States
into the countries in which they are ultimately sold. These countries impose
various legal restrictions on imports and typically impose duties on our
products. We may be subject to prospective or retrospective increases in duties
on our products imported into our markets outside of the United States, which
could adversely impact our results. We recently received a new assessment from
Yokohama Customs in Japan as described above under the heading “Contractual
Obligations and Contingencies”. If we are not able to resolve this
assessment or if we lose the litigation with respect to our previous assessment,
we will be required to take a large charge to earnings. In addition, our current
duty rates in Japan would lower our gross margins.
|
I
TEM
7A.
|
QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
|
The information required by Item 7A of
Form 10-K is incorporated herein by reference from the information contained in
Item 7. “Management’s Discussion and Analysis of Financial Condition
and Results of Operation - Currency Risk and Exchange Rate Information” and Note
15 to the Consolidated Financial Statements.
|
1.
|
Financial
Statements
. Set forth below is the index to the
Financial Statements included in this Item
8:
|
|
Page
|
||
|
Consolidated
Balance Sheets at December 31, 2008 and 2009
|
72
|
|
|
Consolidated
Statements of Income for the years ended December 31, 2007, 2008 and
2009
|
73
|
|
|
Consolidated
Statements of Stockholders’ Equity and Comprehensive Income for the years
ended December 31, 2007, 2008 and 2009
|
74
|
|
|
Consolidated
Statements of Cash Flows for the years ended December 31, 2007, 2008 and
2009
|
75
|
|
|
Notes
to Consolidated Financial Statements
|
76
|
|
|
Report
of Independent Registered Public Accounting Firm
|
101
|
|
|
2.
|
Financial Statement
Schedules
: Financial statement schedules have been
omitted because they are not required or are not applicable, or because
the required information is shown in the financial statements or notes
thereto.
|
NU
SKIN ENTERPRISES, INC.
(U.S.
dollars in thousands)
|
December
31,
|
||||||||
|
2008
|
2009
|
|||||||
|
ASSETS
|
||||||||
|
Current
assets
|
||||||||
|
Cash
and cash equivalents
|
$ | 114,586 | $ | 158,045 | ||||
|
Accounts
receivable
|
16,496 | 22,513 | ||||||
|
Inventories,
net
|
114,378 | 105,661 | ||||||
|
Prepaid
expenses and other
|
44,944 | 51,724 | ||||||
| 290,404 | 337,943 | |||||||
|
Property
and equipment, net
|
82,336 | 79,356 | ||||||
|
Goodwill
|
112,446 | 112,446 | ||||||
|
Other
intangible assets, net
|
87,888 | 81,968 | ||||||
|
Other
assets
|
136,698 | 136,736 | ||||||
|
Total
assets
|
$ | 709,772 | $ | 748,449 | ||||
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
||||||||
|
Current
liabilities
|
||||||||
|
Accounts payable
|
$ | 20,378 | $ | 25,292 | ||||
|
Accrued
expenses
|
115,794 | 124,520 | ||||||
|
Current
portion of long-term debt
|
30,196 | 35,400 | ||||||
|
|
166,368 | 185,212 | ||||||
|
Long-term
debt
|
158,760 | 121,119 | ||||||
|
Other
liabilities
|
68,464 | 66,431 | ||||||
|
Total
liabilities
|
393,592 | 372,762 | ||||||
|
Commitments
and contingencies (Notes 9 and 19)
|
||||||||
|
Stockholders’
equity
|
||||||||
|
Class A common stock – 500
million shares authorized,
$.001
par value, 90.6 million shares issued
|
91 | 91 | ||||||
|
Additional
paid-in capital
|
218,928 | 232,219 | ||||||
|
Treasury
stock, at cost – 27.2 and 27.8 million shares
|
(417,017 | ) | (433,567 | ) | ||||
|
Accumulated
other comprehensive loss
|
(70,061 | ) | (68,134 | ) | ||||
|
Retained
earnings
|
584,239 | 645,078 | ||||||
| 316,180 | 375,687 | |||||||
|
Total liabilities and stockholders’ equity
|
$ | 709,772 | $ | 748,449 | ||||
The
accompanying notes are an integral part of these consolidated financial
statements.
-72-
NU
SKIN ENTERPRISES, INC.
(U.S.
dollars in thousands, except per share amounts)
|
Year
Ended December 31,
|
|||||||||||
|
2007
|
2008
|
2009
|
|||||||||
|
Revenue
|
$ | 1,157,667 | $ | 1,247,646 | $ | 1,331,058 | |||||
|
Cost
of sales
|
209,283 | 228,597 | 243,648 | ||||||||
|
Gross
profit
|
948,384 | 1,019,049 | 1,087,410 | ||||||||
|
Operating
expenses:
|
|||||||||||
|
Selling
expenses
|
496,454 | 529,368 | 550,637 | ||||||||
|
General
and administrative expenses
|
361,242 | 364,253 | 378,336 | ||||||||
|
Restructuring
charges
|
19,775 | — | 10,724 | ||||||||
|
Total
operating expenses
|
877,471 | 893,621 | 939,697 | ||||||||
|
Operating
income
|
70,913 | 125,428 | 147,713 | ||||||||
|
Other
income (expense), net (Note 22)
|
(2,435 | ) | (24,775 | ) | (6,589 | ) | |||||
|
Income
before provision for income taxes
|
68,478 | 100,653 | 141,124 | ||||||||
|
Provision
for income taxes
|
24,606 | 35,306 | 51,279 | ||||||||
|
Net
income
|
$ | 43,872 | $ | 65,347 | $ | 89,845 | |||||
|
Net
income per share:
|
|||||||||||
|
Basic
|
$ | 0.68 | $ | 1.03 | $ | 1.42 | |||||
|
Diluted
|
$ | 0.67 | $ | 1.02 | $ | 1.40 | |||||
|
Weighted-average
common shares outstanding (000s):
|
|||||||||||
|
Basic
|
64,783 | 63,510 | 63,333 | ||||||||
|
Diluted
|
65,584 | 64,132 | 64,296 | ||||||||
The
accompanying notes are an integral part of these consolidated financial
statements.
-73-
NU
SKIN ENTERPRISES, INC.
Consolidated
Statements of Stockholders’ Equity and Comprehensive Income
(U.S.
dollars in thousands)
|
Class
A Common Stock
|
Additional
Paid-in Capital
|
Treasury
Stock
|
Accumulated
Other Comprehensive Loss
|
Retained
Earnings
|
Total
|
|||||||||||||
|
Balance
at January 1, 2007
|
$ | 91 | $ | 199,322 | $ | (346,889 | ) | $ | (65,107 | ) | $ | 531,563 | $ | 318,980 | ||||
|
Comprehensive
income:
|
||||||||||||||||||
|
Net income
|
— | — | — | — | 43,872 | 43,872 | ||||||||||||
|
Foreign currency translation
adjustment
|
— | — | — | (2,236 | ) | — | (2,236 | ) | ||||||||||
|
Net unrealized losses on
foreign currency cash flow hedges
|
— | — | — | (152 | ) | — | (152 | ) | ||||||||||
|
Less: Reclassification adjustment for realized
gains in current earnings
|
— | — | — | (264 | ) | — | (264 | ) | ||||||||||
|
Total comprehensive
income
|
41,220 | |||||||||||||||||
|
Repurchase
of Class A common stock (Note 10)
|
— | — | (71,100 | ) | — | — | (71,100 | ) | ||||||||||
|
Exercise
of employee stock options (593,000 shares)/vesting of stock
awards
|
— | 1,717 | 4,013 | — | — | 5,730 | ||||||||||||
|
Excess
tax benefit from equity awards
|
— | 1,770 | — | — | — | 1,770 | ||||||||||||
|
Stock-based
compensation
|
— | 8,129 | — | — | — | 8,129 | ||||||||||||
|
Adoption
of FIN 48
|
— | (1,117 | ) | — | — | (1,458 | ) | (2,575 | ) | |||||||||
|
Cash
dividends
|
— | — | — | — | (27,145 | ) | (27,145 | ) | ||||||||||
|
Balance
at December 31, 2007
|
91 | 209,821 | (413,976 | ) | (67,759 | ) | 546,832 | 275,009 | ||||||||||
|
Comprehensive
income:
|
||||||||||||||||||
|
Net income
|
— | — | — | — | 65,347 | 65,347 | ||||||||||||
|
Foreign currency translation
adjustment
|
— | — | — | (2,302 | ) | — | (2,302 | ) | ||||||||||
|
Total comprehensive
income
|
63,045 | |||||||||||||||||
|
Repurchase
of Class A common stock (Note 10)
|
— | — | (6,093 | ) | — | — | (6,093 | ) | ||||||||||
|
Exercise
of employee stock options (401,000)
|
— | 772 | 3,052 | — | — | 3,824 | ||||||||||||
|
Excess
tax benefit from equity awards
|
— | 1,062 | — | — | — | 1,062 | ||||||||||||
|
Stock-based
compensation
|
— | 7,273 | — | — | — | 7,273 | ||||||||||||
|
Cash
dividends
|
— | — | — | — | (27,940 | ) | (27,940 | ) | ||||||||||
|
Balance
at December 31, 2008
|
91 | 218,928 | (417,017 | ) | (70,061 | ) | 584,239 | 316,180 | ||||||||||
|
Comprehensive
income:
|
||||||||||||||||||
|
Net income
|
— | — | — | — | 89,845 | 89,845 | ||||||||||||
|
Foreign currency translation
adjustment
|
1,830 | — | 1,830 | |||||||||||||||
|
Net unrealized gains on foreign
currency cash
flow
hedges
|
— | — | — | 97 | — | 97 | ||||||||||||
|
Total comprehensive
income
|
91,772 | |||||||||||||||||
|
Repurchase
of Class A common stock (Note 10)
|
— | — | (21,144 | ) | — | — | (21,144 | ) | ||||||||||
|
Exercise
of employee stock options (614,000)/vesting
of
stock awards
|
— | 1,633 | 4,594 | — | — | 6,227 | ||||||||||||
|
Excess
tax benefit from equity awards
|
— | 1,669 | — | — | — | 1,669 | ||||||||||||
|
Stock-based
compensation
|
— | 9,989 | — | — | — | 9,989 | ||||||||||||
|
Cash
dividends
|
— | — | — | — | (29,006 | ) | (29,006 | ) | ||||||||||
|
Balance
at December 31, 2009
|
$ | 91 | $ | 232,219 | $ | (433,567 | ) | $ | (68,134 | ) | $ | 645,078 | $ | 375,687 | ||||
The
accompanying notes are an integral part of these consolidated financial
statements.
-74-
NU
SKIN ENTERPRISES, INC.
(U.S.
dollars in thousands)
|
Year
Ended December 31,
|
||||||||||||
|
2007
|
2008
|
2009
|
||||||||||
|
Cash
flows from operating activities:
|
||||||||||||
|
Net income
|
$ | 43,872 | $ | 65,347 | $ | 89,845 | ||||||
|
Adjustments to reconcile net
income to net cash provided
by
operating activities:
|
||||||||||||
|
Depreciation
and amortization
|
32,967 | 30,393 | 28,557 | |||||||||
|
Foreign
currency (gains)/losses
|
(4,471 | ) | 18,409 | (1,966 | ) | |||||||
|
Stock-based
compensation
|
8,129 | 7,273 | 9,989 | |||||||||
|
Deferred taxes
|
13,774 | (4,078 | ) | 12,350 | ||||||||
|
Changes
in operating assets and liabilities:
|
||||||||||||
|
Accounts
receivable
|
(2,647 | ) | 7,069 | (7,043 | ) | |||||||
|
Inventories,
net
|
(12,312 | ) | (14,910 | ) | 9,740 | |||||||
|
Prepaid
expenses and other
|
(1,989 | ) | 4,260 | (3,850 | ) | |||||||
|
Other
assets
|
(14,441 | ) | 1,699 | (18,690 | ) | |||||||
|
Accounts payable
|
2,956 | (6,139 | ) | 3,602 | ||||||||
|
Accrued expenses
|
(8,641 | ) | (3,250 | ) | 8,598 | |||||||
|
Other liabilities
|
(8,544 | ) | (2,766 | ) | 2,812 | |||||||
|
Net cash provided by operating
activities
|
48,653 | 103,307 | 133,944 | |||||||||
|
Cash
flows from investing activities:
|
||||||||||||
|
Purchase of property and
equipment
|
(22,736 | ) | (16,007 | ) | (20,215 | ) | ||||||
|
Proceeds on investment
sales
|
131,525 | 19,135 | — | |||||||||
|
Purchases of
investments
|
(136,750 | ) | (13,910 | ) | — | |||||||
|
Net cash used in investing
activities
|
(27,961 | ) | (10,782 | ) | (20,215 | ) | ||||||
|
Cash
flows from financing activities:
|
||||||||||||
|
Payment
of cash dividends
|
(27,145 | ) | (27,940 | ) | (29,006 | ) | ||||||
|
Repurchase
of shares of common stock
|
(71,100 | ) | (6,094 | ) | (21,144 | ) | ||||||
|
Exercise
of distributor and employee stock options
|
5,731 | 3,824 | 6,227 | |||||||||
|
Income
tax benefit of options exercised
|
1,770 | 227 | 1,101 | |||||||||
|
Payments
on long-term debt
|
(31,733 | ) | (32,711 | ) | (30,188 | ) | ||||||
|
Proceeds
from long-term debt
|
64,845 | — | — | |||||||||
|
Net cash used in financing
activities
|
(57,632 | ) | (62,694 | ) | (73,010 | ) | ||||||
|
Effect
of exchange rate changes on cash
|
2,914 | (2,572 | ) | 2,740 | ||||||||
|
Net
increase (decrease) in cash and cash equivalents
|
(34,026 | ) | 27,259 | 43,459 | ||||||||
|
Cash
and cash equivalents, beginning of period
|
121,353 | 87,327 | 114,586 | |||||||||
|
Cash
and cash equivalents, end of period
|
$ | 87,327 | $ | 114,586 | $ | 158,045 | ||||||
The
accompanying notes are an integral part of these consolidated financial
statements.
-75-
NU
SKIN ENTERPRISES, INC.
Notes to
Concolidated Financial Statements
1. The
Company
Nu Skin Enterprises, Inc. (the
“Company”) is a leading, global direct selling company that develops and
distributes premium-quality, innovative personal care products and nutritional
supplements that are sold worldwide under the Nu Skin and Pharmanex brands and a
small number of other products and services. The Company reports
revenue from five geographic regions: North Asia, which consists of
Japan and South Korea; Americas, which consists of the United States, Canada and
Latin America; Greater China, which consists of Mainland China, Hong Kong, Macau
and Taiwan; Europe, which consists of several markets in Europe as well as
Israel, Russia and South Africa; and South Asia/Pacific, which consists of
Australia, Brunei, Indonesia, Malaysia, New Zealand, the Philippines, Singapore
and Thailand (the Company’s subsidiaries operating in these countries are
collectively referred to as the “Subsidiaries”).
2. Summary
of Significant Accounting Policies
Consolidation
The consolidated financial statements
include the accounts of the Company and the Subsidiaries. All
significant intercompany accounts and transactions are eliminated in
consolidation.
Use
of estimates
The preparation of these financial
statements, in conformity with accounting principles generally accepted in the
United States of America, required management to make estimates and assumptions
that affected the reported amounts of assets and liabilities, and disclosure of
contingent assets and liabilities, at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting
period.
Cash
and cash equivalents
Cash equivalents are short-term, highly
liquid instruments with original maturities of 90 days or less.
Inventories
Inventories consist primarily of
merchandise purchased for resale and are stated at the lower of cost or market,
using the first-in, first-out method. The Company had reserves for
obsolete inventory totaling
$5.8
million and $6.4 million as of December 31, 2008 and 2009,
respectively.
Inventories consist of the following
(U.S. dollars in thousands):
|
December
31,
|
|||||||||
|
2008
|
2009 | ||||||||
|
Raw
materials
|
$ | 33,182 | $ | 31,557 | |||||
|
Finished
goods
|
81,196 | 74,104 | |||||||
| $ | 114,378 | $ | 105,661 | ||||||
NU
SKIN ENTERPRISES, INC.
Notes to
Concolidated Financial Statements
Property
and equipment
Property and equipment are recorded at
cost and depreciated using the straight-line method over the following estimated
useful lives:
|
Furniture
and fixtures
|
5 -
7 years
|
|||
|
Computers
and equipment
|
3
- 5 years
|
|||
|
Leasehold
improvements
|
Shorter
of estimated useful life or lease term
|
|||
|
Scanners
|
3
years
|
|||
|
Vehicles
|
3 -
5 years
|
Expenditures for maintenance and
repairs are charged to expense as incurred. When an asset is sold or
otherwise disposed of, the cost and associated accumulated depreciation are
removed from the accounts and the resulting gain or loss is recognized in the
statement of income. Property and equipment are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of such assets may not be recoverable. An impairment
loss is recognized if the carrying amount of the asset exceeds its fair
value.
Goodwill
and other intangible assets
Acquired
intangible assets may represent indefinite-lived assets, determinable-lived
intangibles, or goodwill. Of these, only the costs of determinable-lived
intangibles are amortized to expense over their estimated life. The value of
indefinite-lived intangible assets and residual goodwill is not amortized, but
is tested at least annually for impairment. Our impairment testing for goodwill
is performed separately from our impairment testing of indefinite-lived
intangibles. We test goodwill for impairment, at least annually, by reviewing
the book value compared to the fair value at the reportable unit level. We test
individual indefinite-lived intangibles at least annually by reviewing the
individual book values compared to the fair value. Considerable management
judgment is necessary to measure fair value. We did not recognize any impairment
charges for goodwill or intangible assets during the periods
presented.
Revenue
recognition
Revenue is recognized when products are
shipped, which is when title and risk of loss pass to independent distributors
and preferred customers who are the Company’s customers. A reserve
for product returns is accrued based on historical experience totaling $2.1
million and $2.9 million as of December 31, 2008 and 2009,
respectively. The Company generally requires cash or credit card
payment at the point of sale. The Company has determined that no
allowance for doubtful accounts is necessary. Amounts received prior
to shipment and title passage to distributors are recorded as deferred
revenue. The global compensation plan for the Company’s distributors
generally does not provide rebates or selling discounts to distributors who
purchase its products and services. The Company classifies selling
discounts and rebates, if any, as a reduction of revenue.
Advertising
expenses
Advertising costs are expensed as
incurred. Advertising expense incurred for the years ended December
31, 2007, 2008 and 2009 totaled approximately $2.1 million, $1.7 million and
$2.0 million, respectively.
NU
SKIN ENTERPRISES, INC.
Notes to
Concolidated Financial Statements
Selling expenses
Selling expenses are the Company’s most
significant expense and are classified as operating expenses. Selling
expenses include distributor commissions as well as wages, benefits, bonuses and
other labor and unemployment expenses the Company pays to sales employees in
China. The Company pays monthly commissions to several levels of
distributors on each product sale based upon a distributor’s personal and group
product volumes, as well as the group product volumes of up to six levels of
executive distributors in such distributor’s downline sales
organization. The Company does not pay commissions on sales
materials.
The Company’s distributors may make
retail profits by purchasing the products from the Company at wholesale and
selling them to customers with a retail mark-up. The Company does not
account for nor pay additional commissions on these retail mark-ups received by
distributors. In many markets, the Company also allows individuals
who are not distributors, referred to as “preferred customers,” to buy products
directly from the Company at wholesale or discounted prices. The
Company pays commissions on preferred customer purchases to the referring
distributors.
Research
and development
The Company’s research and development
activities are conducted primarily through its Pharmanex
division. Research and development costs are included in general and
administrative expenses in the accompanying consolidated statements of income
and are expensed as incurred and totaled $10.0 million, $9.6 million and $10.4
million in 2007, 2008 and 2009, respectively.
Deferred
tax assets and liabilities
The Company accounts for income taxes
in accordance with the Income Taxes Topic of the Financial Accounting Standards
Codification. These standards establish financial accounting and reporting
standards for the effects of income taxes that result from an enterprise’s
activities during the current and preceding years. The Company takes an
asset and liability approach for financial accounting and reporting of income
taxes. The Company pays income taxes in many foreign jurisdictions based
on the profits realized in those jurisdictions, which can be significantly
impacted by terms of intercompany transactions between the Company and its
foreign affiliates. Deferred tax assets and liabilities are created in
this process. As of December 31, 2009, the Company has net deferred tax
assets of $61.3 million. The Company has netted these deferred
tax assets and deferred tax liabilities by jurisdiction. Valuation allowances
are established when necessary to reduce deferred tax assets to the amounts
expected to be ultimately realized.
Uncertain
Tax Positions
In June 2006, the FASB issued
interpretative guidance addressing uncertain tax positions. The
Company adopted the provisions of this guidance on January 1,
2007. As a result of the implementation the Company recognized a $2.6
million increase in the liability for unrecognized tax benefits, which was
accounted for as a reduction to the January 1, 2007, balances of retained
earnings and additional paid-in capital.
NU
SKIN ENTERPRISES, INC.
Notes to
Concolidated Financial Statements
The
Company files income tax returns in the U.S. federal jurisdiction, and various
states and foreign jurisdictions. The Company is currently under
examination by the United States Internal Revenue Service (the “IRS”) for the
2006 and 2007 tax years. With a few exceptions, the Company is no
longer subject to state and local income tax examination by tax authorities for
years before 2005. In major foreign jurisdictions, the Company is no
longer subject to income tax examinations for years before
2002. Along with the IRS examination, the Company is currently under
examination in certain foreign jurisdictions; however, the outcomes of those
reviews are not yet determinable.
A
reconciliation of the beginning and ending amount of unrecognized tax benefits
is as follows (U.S. dollars in thousands):
|
Gross
Balance at January 1, 2007
|
$ | 38,130 | ||
|
Increases
related to prior year tax positions
|
1,254 | |||
|
Decreases
related to prior year tax positions
|
(6,060 | ) | ||
|
Increases
related to current year tax positions
|
1,431 | |||
|
Decreases
due to lapse of statutes of limitations
|
(2,880 | ) | ||
|
Gross
Balance at December 31, 2007
|
$ | 31,875 | ||
|
Gross
Balance at January 1, 2008
|
$ | 31,875 | ||
|
Increases
related to current year tax positions
|
1,494 | |||
|
Settlements
|
(14 | ) | ||
|
Decreases
due to lapse of statutes of limitations
|
(5,977 | ) | ||
|
Currency
adjustments
|
3,537 | |||
|
Gross
Balance at December 31, 2008
|
$ | 30,915 | ||
|
Gross
Balance at January 1, 2009
|
$ | 30,915 | ||
|
Increases
related to prior year tax positions
|
2 | |||
|
Increases
related to current year tax positions
|
3,618 | |||
|
Settlements
|
(946 | ) | ||
|
Decreases
due to lapse of statutes of limitations
|
(4,858 | ) | ||
|
Currency
adjustments
|
(456 | ) | ||
|
Gross
Balance at December 31, 2009
|
$ | 28,275 |
At
December 31, 2009, the Company had $28.3 million in unrecognized tax benefits of
which $4.4 million, if recognized, would affect the effective tax
rate. In comparison, at December 31, 2008 the Company had $30.9
million in unrecognized tax benefits of which $5.8 million, if recognized, would
affect the effective tax rate. The Company’s unrecognized tax
benefits relate to multiple foreign and domestic jurisdictions. Due
to potential increases in unrecognized tax benefits from the multiple
jurisdictions in which the Company operates, as well as the expiration of
various statutes of limitation, it is reasonably possible that the Company’s
gross unrecognized tax benefits, net of foreign currency adjustments, may change
within the next 12 months by a range of approximately $17 to $20
million.
During
each of the years ended December 31, 2009, 2008 and 2007, the Company recognized
approximately $0.1 million, $0.5 million and $0.5 million, respectively in
interest and penalties. The Company had approximately $3.3 million,
$3.2 million and $2.7 million of accrued interest and penalties related to
uncertain tax positions at December 31, 2009, 2008 and 2007, respectively.
Interest and penalties related to uncertain tax positions are recognized as a
component of income tax expense.
NU
SKIN ENTERPRISES, INC.
Notes to
Concolidated Financial Statements
Net
income per share
Net income per share is computed based
on the weighted-average number of common shares outstanding during the periods
presented. Additionally, diluted earnings per share data gives effect
to all potentially dilutive common shares that were outstanding during the
periods presented (Note 10).
Foreign
currency translation
Most of the Company’s business
operations occur outside the United States. The local currency of
each of the Company’s subsidiaries is considered its functional
currency. All assets and liabilities are translated into U.S. dollars
at exchange rates existing at the balance sheet dates, revenue and expenses are
translated at weighted-average exchange rates and stockholders’ equity is
recorded at historical exchange rates. The resulting foreign currency
translation adjustments are recorded as a separate component of stockholders’
equity in the consolidated balance sheets and transaction gains and losses are
included in other income and expense in the consolidated financial
statements.
Fair
value of financial instruments
The carrying value of financial
instruments including cash and cash equivalents, accounts receivable and
accounts payable approximate fair values due to the short-term nature of these
instruments. The carrying amount of long-term debt approximates fair value
because the applicable interest rates approximate current market rates.
Fair value estimates are made at a specific point in time, based on relevant
market information.
The FASB
Codification defines fair value as the price that would be received to sell an
asset or paid to transfer a liability in the principal or most advantageous
market for the asset or liability in an orderly transaction between market
participants at the measurement date. On a quarterly basis, the Company measures
at fair value certain financial assets, including cash equivalents and
available-for-sale securities. Accounting standards specify a hierarchy of
valuation techniques based on whether the inputs to those valuation techniques
are observable or unobservable. Observable inputs reflect data obtained
from independent sources, while unobservable inputs reflect the Company’s market
assumptions. These two types of inputs have created the following
fair-value hierarchy:
▪
Level 1 – quoted prices in active markets for identical assets or
liabilities;
▪
Level 2 – inputs, other than the quoted prices in active markets, that are
observable either directly or indirectly;
▪
Level 3 – unobservable inputs based on the Company’s own
assumptions.
Accounting
standards permit companies, at their option, to choose to measure many financial
instruments and certain other items at fair value. The Company has elected
to not fair value existing eligible items.
NU
SKIN ENTERPRISES, INC.
Notes to
Concolidated Financial Statements
Stock-based
compensation
All
share-based payments, including grants of stock options and restricted stock
units, are required to be recognized in our financial statements based upon
their respective grant date fair values. The Black-Scholes option pricing model
is used to estimate the fair value of stock options. The determination of the
fair value of stock options is affected by our stock price and a number of
assumptions, including expected volatility, expected life, risk-free interest
rate and expected dividends. We use historical volatility as the expected
volatility assumption required in the Black-Scholes model. The expected life of
the stock options is based on historical data trended into the future. The
risk-free interest rate assumption is based on observed interest rates
appropriate for the expected terms of our stock options. The fair value of
our restricted stock units is based on the closing market price of our stock on
the date of grant less our expected dividend yield. We recognize stock-based
compensation net of any estimated forfeitures on a straight-line basis over the
requisite service period of the award.
The total compensation expense related to equity compensation plans was
approximately $8.1 million, $7.3 million and $10.0 million for the years ended
December 31, 2007, 2008 and 2009. For the years ended December 31, 2007, 2008
and 2009, all stock-based compensation expense was recorded within general and
administrative expenses.
Reporting
comprehensive income
Comprehensive income is defined as the
change in equity of a business enterprise during a period from transactions and
other events and circumstances from non-owner sources, and it includes all
changes in equity during a period except those resulting from investments by
owners and distributions to owners.
Accounting
for derivative instruments and hedging activities
The Company recognizes all derivatives
as either assets or liabilities, with the instruments measured at fair
value.
The Company’s Subsidiaries enter into
significant transactions with each other and third parties that may not be
denominated in the respective Subsidiaries’ functional
currencies. The Company regularly monitors its foreign currency risks
and seeks to reduce its exposure to fluctuations in foreign exchange rates using
foreign currency exchange contracts and through certain intercompany loans of
foreign currency.
The Company hedges its exposure to
future cash flows from forecasted transactions over a maximum period of 12
months. Hedge effectiveness is assessed at inception and throughout
the life of the hedge to ensure the hedge qualifies for hedge accounting
treatment. Changes in fair value associated with hedge
ineffectiveness, if any, are recorded in the results of operations
currently. In the event that an anticipated transaction is no longer
likely to occur, the Company recognizes the change in fair value of the
derivative in its results of operations currently.
NU
SKIN ENTERPRISES, INC.
Notes to
Concolidated Financial Statements
Changes
in the fair value of derivatives are recorded in current earnings or accumulated
other comprehensive loss, depending on the intended use of the derivative and
its resulting designation. The gains and losses in accumulated other
comprehensive loss stemming from these derivatives will be reclassified into
earnings in the period during which the hedged forecasted transaction affects
earnings. The fair value of the receivable and payable amounts
related to these unrealized gains and losses is classified as other current
assets and liabilities. The Company does not use such derivative
financial instruments for trading or speculative purposes. Gains and
losses on certain intercompany loans of foreign currency are recorded as other
income and expense in the consolidated statements of income.
Recent
accounting pronouncements
In June 2009, the Financial Accounting Standards Board (the "FASB") voted to
approve the FASB Accounting Standards Codification ("Codification") as the
single source of authoritative nongovernmental U.S. generally accepted
accounting principles. The Codification was effective for the Company commencing
July 1, 2009. The FASB Codification does not change U.S. generally accepted
accounting principles, but combines all authoritative standards into a
comprehensive online database.
Effective
January 1, 2009, the Company adopted the fair value measurement provisions
as required by the Fair Value Measurements and Disclosures Topic of
Codification, as it relates to non-recurring, nonfinancial assets and
liabilities. The adoption of these provisions did not have an impact on the
Company's Consolidated Financial Statements.
Effective
January 1, 2009, the Company adopted the provisions relating to the
accounting for business combinations as required by the Business Combinations
Topic of the Codification. These provisions will impact its financial statements
both on the acquisition date and in subsequent periods and will be applied
prospectively. The impact of adopting these provisions will depend on the nature
and terms of future acquisitions.
Effective January 1, 2009, the Company adopted the provisions for the
accounting and reporting of noncontrolling interests in a subsidiary in
consolidated financial statements as required by the Consolidations Topic of the
Codification. These provisions recharacterize minority interests as
noncontrolling interests and require noncontrolling interests to be classified
as a component of shareholders’ equity. These provisions require retroactive
adoption of the presentation and disclosure requirements for existing minority
interests. The adoption of these provisions had no impact on the Company's
consolidated results of operations or financial condition.
Effective
January 1, 2009, the Company adopted enhanced disclosures about how and why
it uses derivative instruments, how they are accounted for, and how they affect
the Company's financial performance as required by the Derivatives and Hedging
Topic of the Codification. The enhanced disclosures had no impact on the
Company's financial condition, results of operations or cash flows.
Effective
June 30, 2009, the Company adopted the subsequent event provisions of the
Codification. These provisions provide guidance on management’s assessment of
subsequent events. The adoption of these provisions did not have an impact on
the Company's Consolidated Financial Statements.
NU
SKIN ENTERPRISES, INC.
Notes to
Concolidated Financial Statements
3. Related
Party Transactions
The Company leases corporate office and
warehouse space from two entities that are owned by certain officers and
directors of the Company. Total lease payments to these two
affiliated entities were $3.8 million, $3.8 million and $3.9 million for
the years ended December 31, 2007, 2008 and 2009 with remaining long-term
minimum lease payment obligations under these operating leases of $10.5 million
and $6.6 million at December 31, 2008 and 2009, respectively.
4. Property
and Equipment
Property and equipment are comprised of
the following (U.S. dollars in thousands):
|
December
31,
|
|||||||||
|
2008
|
2009
|
||||||||
|
Furniture
and
fixtures
|
$ | 51,783 | $ | 54,261 | |||||
|
Computers
and
equipment
|
101,592 | 91,481 | |||||||
|
Leasehold
improvements
|
64,885 | 68,780 | |||||||
|
Scanners
|
22,444 | 18,784 | |||||||
|
Vehicles
|
1,682 | 1,943 | |||||||
| 242,386 | 235,249 | ||||||||
|
Less:
accumulated
depreciation
|
(160,050 | ) | (155,893 | ) | |||||
| $ | 82,336 | $ | 79,356 | ||||||
Depreciation of property and equipment
totaled $27.1 million, $24.4 million and $21.8 million for the years ended
December 31, 2007, 2008 and 2009, respectively, which includes amortization
expense relating to the Scanners of approximately $7.8 million, $6.7 million and
$5.2 million for the years ended December 31, 2007, 2008 and 2009,
respectively.
5. Goodwill
and Other Intangible Assets
Goodwill and other intangible assets
consist of the following (U.S. dollars in thousands):
|
Carrying
Amount at
December
31,
|
||||||||
|
Goodwill
and indefinite life intangible assets:
|
2008
|
2009
|
||||||
|
Goodwill
|
$ | 112,446 | $ | 112,446 | ||||
|
Trademarks and trade names
|
24,599 | 24,599 | ||||||
| $ | 137,045 | $ | 137,045 | |||||
NU SKIN ENTERPRISES, INC
.
Notes to
Concolidated Financial Statements
|
December
31, 2008
|
December
31, 2009
|
||||||||||||||||
|
Finite
life intangible assets:
|
Gross
Carrying Amount
|
Accumulated
Amortization
|
Gross
Carrying Amount
|
Accumulated
Amortization
|
Weighted-average Amortization
Period
|
||||||||||||
|
Scanner
technology
|
$ | 46,482 | $ | 12,356 | $ | 46,482 | $ | 15,390 |
18
years
|
||||||||
|
Developed
technology
|
22,500 | 11,788 | 22,500 | 12,612 |
20
years
|
||||||||||||
|
Distributor
network
|
11,598 | 7,583 | 11,598 | 8,085 |
15
years
|
||||||||||||
|
Trademarks
|
13,016 | 8,160 | 13,316 | 8,837 |
15
years
|
||||||||||||
|
Other
|
29,216 | 19,636 | 29,755 | 21,358 |
5 years
|
||||||||||||
| $ | 122,812 | $ | 59,523 | $ | 123,651 | $ | 66,282 |
15
years
|
|||||||||
Amortization of finite-life intangible assets totaled
$5.9 million, $6.0 million and $6.8 million for the years
ended December 31, 2007, 2008 and 2009, respectively. Annual
estimated amortization expense is expected to approximate $6.0 million for each
of the five succeeding fiscal years.
All of the Company’s goodwill is based
in the U.S. Goodwill and indefinite life intangible assets are not
amortized, rather they are subject to annual impairment tests. Annual
impairment tests were completed resulting in no impairment charges for any of
the periods shown. Finite life intangibles are amortized over their
useful lives unless circumstances occur that cause the Company to revise such
lives or review such assets for impairment.
6. Other
Assets
Other assets consist of the following
(U.S. dollars in thousands):
|
December
31,
|
||||||||
|
2008
|
2009
|
|||||||
|
Deferred
taxes
|
$ | 66,427 | $ | 49,030 | ||||
|
Deposits
for noncancelable operating leases
|
24,184 | 20,713 | ||||||
|
Deposit
for customs assessment (Note
19)
|
29,707 | 46,476 | ||||||
|
Other
|
16,380 | 20,517 | ||||||
| $ | 136,698 | $ | 136,736 | |||||
7. Accrued
Expenses
Accrued expenses consist of the
following (U.S. dollars in thousands):
|
December
31,
|
||||||||
|
2008
|
2009
|
|||||||
|
Accrued
commissions and other payments to distributors
|
$ | 47,819 | $ | 50,332 | ||||
|
Income
taxes
payable
|
4,067 | — | ||||||
|
Other
taxes
payable
|
9,682 | 5,596 | ||||||
|
Accrued
payroll and payroll
taxes
|
14,432 | 12,790 | ||||||
|
Accrued
payable to
vendors
|
9,494 | 12,438 | ||||||
|
Accrued
severance
|
482 | 2,537 | ||||||
|
Other
accrued employee
expenses
|
7,722 | 15,800 | ||||||
|
Other
|
22,096 | 25,027 | ||||||
| $ | 115,794 | $ | 124,520 | |||||
NU
SKIN ENTERPRISES, INC.
Notes to
Concolidated Financial Statements
The
following tables summarize the Company’s long-term debt arrangements as of
December 31, 2009:
|
Facility
or
Arrangement
(1)
|
Original
Principal
Amount
|
Balance
as of
December 31, 2009
(2)
|
Interest
Rate
|
Repayment
terms
|
|||||
|
2000
Japanese yen-denominated notes
|
9.7
billion yen
|
1.4
billion yen ($14.9 million as of December 31, 2009)
|
3.0% |
Notes
due October 2010, with annual principal payments that began in October
2004.
|
|||||
| 2003 $205.0 million multi-currency uncommitted shelf facility: | |||||||||
|
U.S.
dollar
denominated:
|
$50.0
million
|
$10.0
million
|
4.5% |
Notes
due April 2010 with annual principal payments that began in April
2006.
|
|||||
|
$40.0
million
|
$40.0
million
|
6.2% |
Notes
due July 2016 with annual principal payments beginning July
2010.
|
||||||
|
$20.0
million
|
$20.0
million
|
6.2% |
Notes
due January 2017 with annual principal payments beginning January
2011.
|
||||||
|
Japanese yen
denominated:
|
3.1
billion yen
|
2.2
billion yen ($23.9 million as of December 31, 2009)
|
1.7% |
Notes
due April 2014, with annual principal payments that began in April
2008.
|
|||||
|
2.3
billion yen
|
2.3
billion yen ($24.4 million as of December 31, 2009)
|
2.6% |
Notes
due September 2017, with annual principal payments beginning September
2011.
|
||||||
|
2.2
billion yen
|
2.2
billion yen ($23.3 million as of December 31, 2009)
|
3.3% |
Notes
due January 2017, with annual principal payments beginning January
2011.
|
||||||
|
2004
$25.0 million revolving credit facility
|
N/A
|
None
|
N/A |
Credit
facility expires May 2010.
|
|||||
| 2009 $100.0 million uncommitted muliti-currency shelf facility |
N/A
|
None | N/A | ||||||
NU
SKIN ENTERPRISES, INC.
Notes to
Concolidated Financial Statements
|
(1)
|
Each
of the credit facilities and arrangements listed in the table are secured
by guarantees issued by our material domestic subsidiaries and by pledges
of 65% of the outstanding stock of our material foreign
subsidiaries.
|
|
(2)
|
The
current portion of our long-term debt (i.e., becoming due in the next 12
months) includes $14.9 million of the balance on our 2000 Japanese
yen-denominated notes, $4.8 million of the balance of our 2005 Japanese
yen-denominated notes and $15.7 million of the balance on our U.S. dollar
denominated debt under the 2003 multi-currency shelf
facility.
|
Interest expense relating to debt
totaled $8.3 million, $7.7 million and $6.9 million for the years ended December
31, 2007, 2008 and 2009, respectively.
The notes and shelf facility contain
other terms and conditions and affirmative and negative financial covenants
customary for credit facilities of this type, including a requirement to
maintain a minimum cash balance of $65.0 million. As of December 31,
2009, the Company is in compliance with all financial covenants under the notes
and shelf facility.
Maturities
of all long-term debt at December 31, 2009, based on the year-end exchange rate,
are as follows (U.S. dollars in thousands):
|
Year
Ending December 31,
|
||||
|
2010
|
$ | 35,400 | ||
|
2011
|
20,171 | |||
|
2012
|
20,171 | |||
|
2013
|
20,171 | |||
|
2014
|
20,171 | |||
|
Thereafter
|
40,435 | |||
|
Total
|
$ | 156,519 | ||
NU
SKIN ENTERPRISES, INC.
Notes to
Concolidated Financial Statements
9. Lease
Obligations
The Company leases office space and
computer hardware under noncancelable long-term operating leases including
related party leases (see Note 3). Most leases include renewal
options of at least three years. Minimum future operating lease
obligations at December 31, 2009 are as follows (U.S. dollars in
thousands):
|
Year
Ending December 31,
|
||||
|
2010
|
$ | 18,617 | ||
|
2011
|
14,561 | |||
|
2012
|
11,243 | |||
|
2013
|
10,189 | |||
|
2014
|
8,148 | |||
|
Thereafter
|
508 | |||
|
Total
|
$ | 63,266 | ||
Rental expense for operating leases
totaled $32.2 million, $33.5 million and $33.8 million for the years ended
December 31, 2007, 2008 and 2009, respectively.
10. Capital
Stock
The Company’s authorized capital stock
consists of 25 million shares of preferred stock, par value $.001 per share, 500
million shares of Class A common stock, par value $.001 per share, and 100
million shares of Class B common stock, par value $.001 per
share. The shares of Class A common stock and Class B common stock
are identical in all respects, except for voting rights and certain conversion
rights and transfer restrictions, as follows: (1) each share of Class A common
stock entitles the holder to one vote on matters submitted to a vote of the
Company’s stockholders and each share of Class B common
stock
entitles the holder to ten votes on each such matter; (2) stock dividends of
Class A common stock may be paid only to holders of Class A common stock and
stock dividends of Class B common stock may
be paid
only to holders of Class B common stock; (3) if a holder of Class B common stock
transfers such shares to a person other than a permitted transferee, as defined
in the Company’s Certificate of Incorporation, such shares will be converted
automatically into shares of Class A common stock; and (4) Class A common stock
has no conversion rights; however, each share of Class B common stock is
convertible into one share of Class A common stock, in whole or in part, at any
time at the option of the
holder. All
outstanding Class B shares have been converted to Class A shares. As
of December 31, 2009 and 2008, there were no preferred or Class B common shares
outstanding.
Weighted-average
common shares outstanding
The following is a reconciliation of
the weighted-average common shares outstanding for purposes of computing basic
and diluted net income per share (in thousands):
|
Year
Ended December 31,
|
|||||
|
2007
|
2008
|
2009
|
|||
|
Basic
weighted-average common shares outstanding
|
64,783
|
63,510
|
63,333
|
||
|
Effect
of dilutive securities:
Stock
awards and
options
|
801
|
622
|
963
|
||
|
Diluted
weighted-average common shares outstanding
|
65,584
|
64,132
|
64,296
|
||
NU
SKIN ENTERPRISES, INC.
Notes to
Concolidated Financial Statements
For the years ended December 31, 2007, 2008 and 2009, other stock options totaling 3.3 million, 5.0 million and 4.8 million, respectively, were excluded from the calculation of diluted earnings per share because they were anti-dilutive.
Repurchases
of common stock
Since August 1998, the board of
directors has authorized the Company to repurchase up to $335.0 million of the
Company’s outstanding shares of Class A common stock on the open market or in
private transactions. The repurchases are used primarily for the
Company’s equity incentive plans and strategic initiatives. During
the years ended December 31, 2007, 2008 and 2009, the Company repurchased
approximately 4.1 million, 0.4 million and 1.2 million shares of Class A common
stock for an aggregate price of approximately $71.1 million, $6.1 million and
$21.1 million, respectively, under these repurchase
programs. Included in the 4.1 million shares repurchased in 2007, are
1.5 million shares that the Company repurchased under a $25.0 million
accelerated repurchase transaction during the fourth quarter of
2007. Between August 1998 and December 31, 2009, the Company
repurchased a total of approximately 19.6 million shares of Class A common stock
under this repurchase program for an aggregate price of approximately $272.5
million.
11. Stock–Based
Compensation
At December 31, 2009, the Company had
the following stock-based employee compensation plans:
Equity
Incentive Plans
During the year ended December 31,
1996, the Company’s board of directors adopted the Nu Skin Enterprises, Inc.,
1996 Stock Incentive Plan (the “1996 Stock Incentive Plan”). In April
2006, the Company’s Board of Directors approved the Nu Skin Enterprises, Inc.
2006 Stock Incentive Plan (the “2006 Stock Incentive Plan”). This
plan was approved by the Company’s stockholders at the Company’s 2006 Annual
Meeting of Stockholders held in May of 2006. The 1996 Stock Incentive
Plan and the 2006 Stock Incentive Plan provide for granting of stock awards and
options to purchase common stock to executives, other employees, independent
consultants and directors of the Company and its
Subsidiaries. Options granted under the equity incentive plans are
generally non-qualified stock options, but the plans permit some options granted
to qualify as “incentive stock options” under the U.S. Internal Revenue
Code. The exercise price of a stock option generally is equal to the
fair market value of the Company’s common stock on the option grant
date. The contractual term of options granted since 1996 is generally
ten years. However, for options granted beginning in the second
quarter of 2006, the contractual term has been shortened to seven
years. Currently, all shares issued upon the exercise of options are
from the Company’s treasury shares. With the adoption of the 2006
Stock Incentive Plan, no further grants will be made under the 1996 Stock
Incentive Plan. Under the 2006 Stock Incentive Plan 6.0 million
shares were authorized for issuance.
In the
fourth quarter of 2007, the compensation committee of the board of directors
approved the grant of performance stock options to certain senior level
executives. Vesting for the options is performance based, with the options
vesting in two installments if the Company’s earnings per share equal or exceed
the two established performance levels, measured in terms of diluted earnings
per share. Fifty percent of the options will vest upon earnings per share
meeting or exceeding the first performance level and fifty percent of the
options will vest upon earnings per share meeting or exceeding the second
performance level. If the performance levels have not been met on or prior to
the 2nd business day following the filing of the Company’s Annual Report on Form
10-K for the year ended December 31, 2012, then any unvested options shall
terminate at such time. As of December 31, 2009, fifty percent of the
performance levels were met, which resulted in compensation expense of $3.8
million.
NU
SKIN ENTERPRISES, INC.
Notes to
Concolidated Financial Statements
The fair
value of stock option awards was estimated using the Black-Scholes
option-pricing model with the following assumptions and weighted-average fair
values as follows:
|
December
31,
|
||||||||||||
|
Stock
Options
:
|
2007
|
2008
|
2009
|
|||||||||
|
Weighted
average grant date fair value of grants
|
$ | 5.51 | $ | 4.69 | $ | 2.84 | ||||||
|
Risk-free
interest rate
(1)
|
3.8% | 3.0% | 2.3% | |||||||||
|
Dividend
yield
(2)
|
2.5% | 2.6% | 3.2% | |||||||||
|
Expected
volatility
(3)
|
40.4% | 36.1% | 40.7% | |||||||||
|
Expected
life in months
(4)
|
59
months
|
58
months
|
69
months
|
|||||||||
|
(1)
|
The risk-free interest rate is
based upon the rate on a zero coupon U.S. Treasury bill, for periods
within the contractual life of the option, in effect at the time of the
grant.
|
|
(2)
|
The
dividend yield is based on the rolling average of annual stock prices and
the actual dividends paid in the corresponding 12
months.
|
|
(3)
|
Expected
volatility is based on the historical volatility of our stock price, over
a period similar to the expected life of the
option.
|
|
(4)
|
The
expected term of the option is based on the historical employee exercise
behavior, the vesting terms of the respective option, and a contractual
life of either seven or ten years.
|
NU
SKIN ENTERPRISES, INC.
Notes to
Concolidated Financial Statements
Options
under the plans as of December 31, 2009 and changes during the year ended
December 31, 2009 were as follows:
|
Shares
(in
thousands)
|
Weighted-average
Exercise Price
|
Weighted-
average Remaining Contractual Term
(in
years)
|
Aggregate
Intrinsic Value
(in
thousands)
|
|||||||||||||
|
Options
activity – service based
|
||||||||||||||||
|
Outstanding
at December 31,
2008
|
4,868.0 | $ 16.87 | ||||||||||||||
|
Granted
|
1,816.3 | 9.50 | ||||||||||||||
|
Exercised
|
(576.7 | ) | 13.55 | |||||||||||||
|
Forfeited/cancelled/expired
|
(315.6 | ) | 18.15 | |||||||||||||
|
Outstanding
at December 31,
2009
|
5,792.0 | 14.82 | 4.84 | $ 69,783 | ||||||||||||
|
Exercisable
at December 31,
2009
|
3,377.1 | 17.25 | 4.04 | 32,498 | ||||||||||||
|
Options
activity – performance based
|
||||||||||||||||
|
Outstanding
at December 31,
2008
|
1,805.0 | $ 17.08 | ||||||||||||||
|
Granted
|
75.0 | 13.98 | ||||||||||||||
|
Exercised
|
(37.5 | ) | 13.98 | |||||||||||||
|
Forfeited/cancelled/expired
|
(100.0 | ) | 16.69 | |||||||||||||
|
Outstanding
at December 31,
2009
|
1,742.5 | 17.03 | 5.08 | $ 17,138 | ||||||||||||
|
Exercisable
at December 31,
2009
|
12.5 | 13.98 | 6.34 | 161 | ||||||||||||
|
Options
activity – all options
|
||||||||||||||||
|
Outstanding
at December 31,
2008
|
6,673.0 | $ 16.93 | ||||||||||||||
|
Granted
|
1,891.3 | 9.68 | ||||||||||||||
|
Exercised
|
(614.2 | ) | 13.57 | |||||||||||||
|
Forfeited/cancelled/expired
|
(415.6 | ) | 17.80 | |||||||||||||
|
Outstanding
at December 31,
2009
|
7,534.5 | 15.33 | 4.89 | $ 86,921 | ||||||||||||
|
Exercisable
at December 31,
2009
|
3,389.6 | 17.23 | 4.05 | 32,659 | ||||||||||||
The aggregate intrinsic value in the
table above represents the total pretax intrinsic value (the difference between
the Company’s closing stock price on the last trading day of the respective
years and the exercise price, multiplied by the number of in-the-money options)
that would have been received by the option holders had all option holders
exercised their options on December 31, 2009. This amount varies
based on the fair market value of the Company’s stock. The total fair
value of options vested and expensed was $4.7 million, net of tax, for the year
ended December 31, 2009.
Cash proceeds, tax benefits, and
intrinsic value related to total stock options exercised during 2007, 2008 and
2009, were as follows (in millions):
|
December
31,
|
||||||||||||
|
2007
|
2008
|
2009
|
||||||||||
|
Cash
proceeds from stock options exercised
|
$ | 5.7 | $ | 3.8 | $ | 6.2 | ||||||
|
Tax
benefit realized for stock options exercised
|
1.8 | 1.2 | 2.9 | |||||||||
|
Intrinsic
value of stock options exercised
|
3.4 | 0.2 | 8.2 | |||||||||
NU
SKIN ENTERPRISES, INC.
Notes to
Concolidated Financial Statements
Nonvested restricted stock awards as of December 31, 2009 and changes during the year ended December 31, 2009 were as follows:
|
Number
of Shares
(in
thousands)
|
Weighted-average
Grant Date Fair Value
|
|||||||
|
Nonvested
at December 31, 2008
|
365.8 | $ 17.27 | ||||||
|
Granted
|
175.5 | 15.82 | ||||||
|
Vested
|
(185.2 | ) | 16.30 | |||||
|
Forfeited
|
(15.8 | ) | 15.54 | |||||
|
Nonvested
at December 31, 2009
|
340.3 | 17.12 | ||||||
As of
December 31, 2009, there was $4.2 million of unrecognized stock-based
compensation expense related to nonvested restricted stock
awards. That cost is expected to be recognized over a
weighted-average period of 3.0 years. As of December 31, 2009, there
was $10.8 million of unrecognized stock-based compensation expense related to
nonvested stock option awards. That cost is expected to be
recognized over a weighted-average period of 2.3 years.
12. Income
Taxes
Consolidated income before provision
for income taxes consists of the following for the years ended December 31,
2007, 2008 and 2009 (U.S. dollars in thousands):
|
2007
|
2008 |
2009
|
|
|||||||||
|
U.S.
|
$ | 45,235 | $ | 52,756 | $ | 71,338 | ||||||
|
Foreign
|
23,243 | 47,897 | 69,786 | |||||||||
|
Total
|
$ | 68,478 | $ | 100,653 | $ | 141,124 | ||||||
The
provision for current and deferred taxes for the years ended December 31, 2007,
2008 and 2009 consists of the following (U.S. dollars in
thousands):
|
2007
|
2008
|
2009
|
||||||||||
|
Current
|
||||||||||||
|
Federal
|
$ | — | $ | 10,524 | $ | 9,409 | ||||||
|
State
|
(94 | ) | 2,620 | 1,690 | ||||||||
|
Foreign
|
22,090 | 22,408 | 27,784 | |||||||||
| 21,996 | 35,552 | 38,883 | ||||||||||
|
Deferred
|
||||||||||||
|
Federal
|
(298 | ) | 713 | 14,266 | ||||||||
|
State
|
2,181 | (345 | ) | 937 | ||||||||
|
Foreign
|
727 | (614 | ) | (2,807 | ) | |||||||
| 2,610 | (246 | ) | 12,396 | |||||||||
|
Provision
for income
taxes
|
$ | 24,606 | $ | 35,306 | $ | 51,279 | ||||||
NU
SKIN ENTERPRISES, INC.
Notes to
Concolidated Financial Statements
The
Company’s foreign taxes paid are high relative to foreign operating income and
the Company’s U.S. taxes paid are low relative to U.S. operating income due
largely to the flow of funds among the Company’s Subsidiaries around the
world. As payments for services, management fees, license
arrangements and royalties are made from the Company’s foreign affiliates to its
U.S. corporate headquarters, these payments often incur withholding and other
forms of tax that are generally creditable for U.S. tax
purposes. Therefore, these payments lead to increased foreign
effective tax rates and lower U.S. effective tax rates. Variations
(or shifts) occur in the Company’s foreign and U.S. effective tax rates from
year to year depending on several factors. These factors include the
impact of global transfer prices, the timing and level of remittances from
foreign affiliates, profits and losses in various markets, in the valuation of
deferred tax assets or liabilities, or changes in tax laws, regulations,
accounting principles, or interpretations thereof.
The
principal components of deferred taxes are as follows (U.S. dollars in
thousands):
|
Year
Ended December 31,
|
||||||||
|
2008
|
2009
|
|||||||
|
Deferred
tax assets:
|
||||||||
|
Inventory
differences
|
$ | 4,335 | $ | 3,777 | ||||
|
Foreign
tax credit and other foreign benefits
|
33,058 | 34,717 | ||||||
|
Stock-based
compensation
|
6,127 | 8,251 | ||||||
|
Accrued
expenses not deductible until paid
|
27,389 | 25,211 | ||||||
|
Foreign
currency exchange
|
9,267 | 8,934 | ||||||
|
Net
operating losses
|
14,752 | 14,430 | ||||||
|
Capitalized
research and development
|
21,481 | 19,175 | ||||||
|
Asian
marketing rights
|
1,710 | 1,095 | ||||||
|
Exchange
gains and loses
|
2,513 | — | ||||||
|
Other
|
7,925 | 5,839 | ||||||
|
Gross
deferred tax assets
|
128,557 | 121,429 | ||||||
|
Deferred
tax liabilities:
|
||||||||
|
Exchange
gains and losses
|
— | 3,299 | ||||||
|
Pharmanex
intangibles step-up
|
14,105 | 13,514 | ||||||
|
Amortization
of intangibles
|
5,911 | 8,768 | ||||||
|
Foreign outside basis in controlled foreign corporation
|
10,465 | 10,137 | ||||||
|
Prepaid expenses
|
11,239 | 11,239 | ||||||
|
Other
|
1,262 | 2,025 | ||||||
|
Gross
deferred tax liabilities
|
42,982 | 48,982 | ||||||
|
Valuation
allowance
|
(9,254 | ) | (11,150 | ) | ||||
|
Deferred
taxes, net
|
$ | 76,321 | $ | 61,297 | ||||
At December 31, 2009, the Company had
foreign operating loss carryforwards of approximately $67.0 million for tax
purposes, which will be available to offset future taxable income. If not
used, $31.7 million of carryforwards will expire between 2010 and 2019, while
$35.3 million do not expire.
The valuation allowance primarily
represents amounts for foreign operating loss carryforwards for which it is more
likely than not some portion or all of the deferred tax asset will not be
realized. In making such determination, the Company considers all available
positive and negative evidence, including future reversals of existing taxable
temporary difference, projected future taxable income, tax planning strategies
and recent financial operations. When the Company determines that
there is sufficient taxable income to utilize the net operating losses, the
valuation will be released which would reduce the provision for income
taxes.
NU
SKIN ENTERPRISES, INC.
Notes to
Concolidated Financial Statements
The components of deferred taxes, net
on a jurisdiction basis are as follows (U.S. dollars in
thousands):
|
Year
Ended December 31,
|
||||||||
|
2008
|
2009
|
|||||||
|
Net
current deferred tax assets
|
$ | 23,105 | $ | 23,541 | ||||
|
Net
noncurrent deferred tax assets
|
66,426 | 49,030 | ||||||
|
Total net deferred tax
assets
|
89,531 | 72,571 | ||||||
|
Net
current deferred tax liabilities
|
— | — | ||||||
|
Net
noncurrent deferred tax liabilities
|
13,210 | 11,274 | ||||||
|
Total
net deferred tax liabilities
|
13,210 | 11,274 | ||||||
|
Deferred
taxes, net
|
$ | 76,321 | $ | 61,297 | ||||
The Company’s deferred tax assets as of
December 31, 2009 decreased due to the utilization of certain deferred tax
assets relating primarily to amortization of intangibles and accrued
expenses.
The
Company is subject to regular audits by federal, state and foreign tax
authorities. These audits may result in proposed assessments that may
result in additional tax liabilities.
The
actual tax rate for the years ended December 31, 2007, 2008 and 2009 compared to
the statutory U.S. Federal tax rate is as follows:
|
Year
Ended December 31,
|
||||||
|
2007
|
2008
|
2009
|
||||
|
Income
taxes at statutory rate
|
35.00
|
% |
35.00
|
% |
35.00
|
% |
|
Non-deductible
expenses
|
.27
|
.23
|
.24
|
|||
|
Other
|
.66
|
(.15
|
) |
1.10
|
||
|
35.93
|
% |
35.08
|
% |
36.34
|
% | |
The decrease in the effective tax rate
from 2008 compared to 2007 was due primarily to the expiration of the statute of
limitations in certain tax jurisdictions. The increase in the
effective tax rate in 2009 compared to 2008 was due to a reduced benefit
relating to the expiration of the statute of limitations.
13. Employee
Benefit Plan
The Company has a 401(k) defined
contribution plan which permits participating employees to defer up to a maximum
of 100% of their compensation, subject to limitations established by the
Internal Revenue Service. Employees age 18 and older are eligible to
contribute to the plan starting the first of the month following their date of
hire. After completing at least one year of service, employees age 21 and
older are eligible to receive the Company’s matching funds. The Company
matches 100% of the first 2% and 50% of the next 2% of each participant’s
contributions to the plan. Participant contributions are immediately
vested. Company contributions vest based on the participant’s years of
service at 25% per year over four years. Therefore, matching funds for
employees with four or more years of service are 100% vested immediately upon
contribution. The Company recorded compensation expense of $1.5
million, $1.3 million and $1.7 million for the years ended December 31, 2007,
2008 and 2009, respectively, related to its contributions to the plan.
Beginning January 1, 2009, the following changes were made to the 401(k) defined
contribution plan:
NU
SKIN ENTERPRISES, INC.
Notes to
Concolidated Financial Statements
|
|
▪
|
all
employees age 18 and older are eligible to contribute to the plan and
receive the Company’s matching funds starting the first of the month
following their date of hire;
|
|
|
▪
|
the
Company matches 100% of the first 1% and 50% of the next 5% of each
participant’s contributions to the plan;
and
|
|
|
▪
|
the
Company’s match is 100% vested after the completion of 2 years of
service.
|
The Company has a defined benefit
pension plan for its employees in Japan. All employees of Nu Skin
Japan, after certain years of service, are entitled to pension plan benefits
when they terminate employment with Nu Skin Japan. The accrued
pension liability was $5.2 million, $6.9 million and $5.9 million as of December
31, 2007, 2008 and 2009, respectively. Although Nu Skin Japan has not
specifically funded this obligation, Nu Skin Japan believes it maintains
adequate cash balances for this defined benefit pension plan. The
Company recorded pension expense of $1.4 million, $0.9 million and $0.6 million
for the years ended December 31, 2007, 2008 and 2009, respectively.
14. Executive
Deferred Compensation Plan
The Company has an executive deferred
compensation plan for select management personnel. Under this plan,
the Company may make a contribution of up to 10% of a participant’s
salary. In addition, each participant has the option to defer a
portion of their compensation up to a maximum of 80% of their
compensation. Participant contributions are immediately
vested. Company contributions vest based on the earlier
of: (a) attaining 60 years of age; (b) continuous employment of 20
years; or (c) death or disability. The Company recorded compensation
expense of $0.7 million, $0.8 million and $1.1 million for the years ended
December 31, 2007, 2008 and 2009, respectively, related to its contributions to
the plan. The Company had accrued $6.2 million and $10.0 million as
of December 31, 2008 and 2009, respectively, related to the Executive Deferred
Compensation Plan. Company contributions now vest on the earlier
of: (a) attaining 60 years of age; (b) 50% after ten years of service
and 5% each year of service thereafter; and (c) death or
disability.
15. Derivative
Financial Instruments
At December 31, 2008, the Company held
no forward contracts designated as foreign currency cash flow hedges to hedge
forecasted foreign-currency-denominated intercompany transactions and no net
unrealized loss was recorded in accumulated other comprehensive
loss. At December 31, 2009, the Company held forward contracts
designated as foreign currency cash flow hedges with notional amounts totaling
approximately $3.0 million to hedge forecasted foreign-currency-denominated
intercompany transactions and $0.1 million net unrealized gain, net of related
taxes, was recorded in accumulated other comprehensive loss.
The contracts held at December 31, 2009, have maturities through January 2010,
and accordingly, all unrealized gains and losses on foreign currency cash flow
hedges included in accumulated other comprehensive loss will be recognized in
current earnings over the next 12 months. The pre-tax net (losses)/gains
on foreign currency cash flow hedges recorded in current earnings were $0.4
million, none, and none for the years ended December 31, 2007, 2008 and 2009,
respectively.
NU
SKIN ENTERPRISES, INC.
Notes to
Concolidated Financial Statements
16. Supplemental
Cash Flow Information
Cash paid for interest totaled $7.4
million, $7.9 million and $7.0 million for the years ended December 31, 2007,
2008 and 2009, respectively. Cash paid for income taxes totaled $21.9 million,
$27.2 million and $36.8 million for the years ended December 31, 2007, 2008 and
2009, respectively.
17. Segment
Information
The Company operates in a single
operating segment by selling products to a global network of independent
distributors that operates in a seamless manner from market to market, except
for its operations in Mainland China. In Mainland China, the Company
utilizes an employed sales force, contractual sales promoters and direct sellers
to sell its products through fixed retail locations. Selling expenses
are the Company’s largest expense comprised of the commissions paid to its
worldwide independent distributors as well as remuneration to its Mainland China
sales employees, promoters and direct sellers paid on product
sales. The Company manages its business primarily by managing its
global sales force. The Company does not use profitability reports on
a regional or divisional basis for making business
decisions. However, the Company does recognize revenue in five
geographic regions: North Asia, Americas, Greater China, Europe and South
Asia/Pacific.
Revenue
generated in each of these regions is set forth below (U.S. dollars in
thousands):
| Year Ended December 31 | |||||||||||||
|
Revenue:
|
2007
|
2008
|
2009
|
||||||||||
|
North
Asia
|
$ | 585,805 | $ | 594,548 | $ | 606,113 | |||||||
|
Americas
|
188,256 | 223,902 | 260,865 | ||||||||||
|
Greater
China
|
205,026 | 209,968 | 210,379 | ||||||||||
|
Europe
|
77,163 | 111,572 | 133,578 | ||||||||||
|
South
Asia/Pacific
|
101,417 | 107,656 | 120,123 | ||||||||||
|
Total
|
$ | 1,157,667 | $ | 1,247,646 | $ | 1,331,058 | |||||||
Revenue generated by each of the
Company’s product lines is set forth below (U.S. dollars in
thousands):
|
Year
Ended December 31,
|
||||||||||||
|
Revenue:
|
2007
|
2008
|
2009
|
|||||||||
|
Nu
Skin
|
$ | 498,500 | $ | 633,411 | $ | 752,681 | ||||||
|
Pharmanex
|
634,191 | 597,714 | 565,592 | |||||||||
|
Other
|
24,976 | 16,521 | 12,785 | |||||||||
|
Total
|
$ | 1,157,667 | $ | 1,247,646 | $ | 1,331,058 | ||||||
NU
SKIN ENTERPRISES, INC.
Notes to
Concolidated Financial Statements
Additional information as to the
Company’s operations in the most significant geographical areas is set forth
below (U.S. dollars in thousands):
|
Year
Ended December 31,
|
||||||||||||
|
Revenue:
|
2007
|
2008
|
2009
|
|||||||||
|
Japan
|
$ | 443,670 | $ | 443,714 | $ | 461,914 | ||||||
|
United
States
|
167,701 | 192,140 | 218,557 | |||||||||
|
South
Korea
|
142,135 | 150,834 | 144,199 | |||||||||
|
Europe
|
67,315 | 96,573 | 111,862 | |||||||||
|
Taiwan
|
93,014 | 92,297 | 91,727 | |||||||||
|
Mainland
China
|
66,493 | 65,329 | 71,086 | |||||||||
|
December
31,
|
||||||||
|
Long-lived
assets:
|
2008
|
2009
|
||||||
|
Japan
|
$ | 9,891 | $ | 8,079 | ||||
|
United
States
|
45,940 | 42,378 | ||||||
|
South
Korea
|
2,007 | 3,654 | ||||||
|
Europe
|
2,220 | 3,005 | ||||||
|
Taiwan
|
3,050 | 1,758 | ||||||
|
Mainland
China
|
10,747 | 11,841 | ||||||
18. Restructuring
Charges
During
2009, the Company recorded restructuring charges of $10.7 million, related to
restructuring of its Japan operations, including an approximate 30% headcount
reduction as well as facility relocations and closures. $7.4 million of
these charges related to severance payments to terminated employees and $3.3
million related to facility relocation or closing costs. The majority of
these severance charges are related to a voluntary employment reduction
program. The restructuring charges for facility relocation or closing
costs related to costs incurred during 2009 for leases terminated in that
period.
During
2007, the Company recorded restructuring charges of $19.8 million, relating to
its efforts to simplify its operations in China and improve operational
efficiencies in its corporate offices and reduce investments in unprofitable
markets. Approximately $13.9 million of these charges relates to
severance payments to terminated employees of which approximately $5.4 million
remained accrued at December 31, 2007. The remaining $5.9 million
relates to leasehold terminations and tax payments related to the Company’s
closure of its operations in Brazil in 2007, of which approximately $2.2 million
remained accrued at December 31, 2007. The Company paid all of the
restructuring charges accrued as of December 31, 2007, during the first quarter
of 2008.
NU
SKIN ENTERPRISES, INC.
Notes to
Concolidated Financial Statements
19. Commitments
and Contingencies
The Company is subject to governmental
regulations pertaining to product formulation, labeling and packaging, product
claims and advertising and to the Company’s direct selling
system. The Company is also subject to the jurisdiction of numerous
foreign tax and customs authorities. Any assertions or determination
that either the Company or the Company’s distributors is not in compliance with
existing statutes, laws, rules or regulations could potentially have a material
adverse effect on the Company’s operations. In addition, in any
country or jurisdiction, the adoption of new statutes, laws, rules or
regulations or changes in the interpretation of existing statutes, laws, rules
or regulations could have a material adverse effect on the Company and its
operations. Although management believes that the Company is in
compliance, in all material respects, with the statutes, laws, rules and
regulations of every jurisdiction in which it operates, no assurance can be
given that the Company’s compliance with applicable statutes, laws, rules and
regulations will not be challenged by foreign authorities or that such
challenges will not have a material adverse effect on the Company’s financial
position or results of operations or cash flows. The Company and its
Subsidiaries are defendants in litigation and proceedings involving various
matters. In the opinion of the Company’s management, based upon
advice of its counsel handling such litigation and proceedings, adverse
outcomes, if any, will not likely result in a material effect on the Company’s
consolidated financial condition, results of operations or cash
flows.
The Company is subject to regular
audits by federal, state and foreign tax authorities. These audits
may result in additional tax liabilities. The Company believes it has
appropriately provided for income taxes for all years. Several
factors drive the calculation of its tax reserves. Some of these
factors include: (i) the expiration of various statutes of limitations; (ii)
changes in tax law and regulations; (iii) issuance of tax rulings; and (iv)
settlements with tax authorities. Changes in any of these factors may
result in adjustments to the Company’s reserves, which would impact its reported
financial results.
In June 2006, the FASB issued
interpretative guidance clarifying the accounting for uncertainty in tax
positions. The guidance requires that the Company recognize the impact of a tax
position in the Company’s financial statements if that position is more likely
than not of being sustained on audit, based on the technical merits of the
position. The provisions of this guidance became effective as of the beginning
of the Company’s 2007 fiscal year, with the cumulative effect of the change in
accounting principle recorded as an adjustment to opening retained
earnings.
Due to the international nature of the
Company’s business, it is subject from time to time to reviews and audits by the
foreign taxing authorities of the various jurisdictions in which it conducts
business throughout the world. As previously reported, the Company is
currently involved in litigation in Japan with the Ministry of Finance with
respect to additional customs assessments made by Yokohama Customs for the
period of October 2002 through July 2005. The aggregate amount of those
assessments is yen 2.7 billion Japanese (approximately $29.0 million as of
December 31, 2009), net of any recovery of consumption taxes. The Company
believes that the documentation and legal analysis support its position and has
taken action in the court system in Japan to overturn these assessments. The
litigation on this matter is ongoing and the Company believes the court will
likely decide this matter in the next year. If the Company receives a decision
that is unfavorable, it may appeal the decision, however, it would likely be
required to take a charge to its earnings for the amount assessed.
NU
SKIN ENTERPRISES, INC.
Notes to
Concolidated Financial Statements
In July
2005, the Company changed its operating structure in Japan and believed that
these changes would eliminate further valuation disputes with Yokohama Customs
as the new structure eliminated the issues that were the basis of the litigation
and valuation disputes. However, in October 2009, the Company received notice
from Yokohama Customs that they were assessing additional duties, penalties and
interest for the period of October 2006 through November 2008 following an
audit. The total amount of such assessments is yen 1.5 billion Japanese
(approximately $17.5 million as of December 31, 2009), net of any recovery of
consumption taxes. The basis for such additional assessment is different from,
and unrelated to, the issues that are being litigated in the current litigation
with the Ministry of Finance. Following the Company’s review of the assessments
and after consulting with its legal and customs advisors, the Company strongly
believes that the additional assessments are improper and are not supported by
any legal or factual basis. The Company filed letters of protest with
Yokohama Customs, which were rejected. The Company plans to appeal the
matter to the Ministry of Finance in Japan. At the request of the Yokohama
Customs, the Company has prepared additional information for them to consider.
To the extent that the Company is unsuccessful in recovering the amounts
assessed and paid, it will be required to take a corresponding charge to its
earnings.
In addition, the Company is currently
being required to pay a higher rate of duties on all current imports, which it
is similarly disputing. Because the Company believes that the higher rate being
assessed is improper, the Company is currently planning on only expensing the
portion of the duties it believes is supported under applicable customs law, and
recording the additional payment as a receivable on its books.
In November 2008, the U.S. Internal
Revenue Service began an audit of the Company’s 2006 and 2007 tax
years. The Company anticipates this audit will be completed by
approximately June 2010.
20. Dividends
per Share
Quarterly cash dividends for the years
ended December 31, 2008 and 2009 totaled $27.9 million and $29.0 million,
respectively. In February 2010, the board of directors declared a
quarterly cash dividend of $0.125 per share for all classes of common stock to
be paid on March 17, 2010 to stockholders of record on February 26,
2010.
21. Quarterly
Results
The following table sets forth selected
unaudited quarterly data for the periods shown (U.S. dollars in millions, except
per share amounts):
|
2008
|
2009
|
|||||||||||||||||||||||||||||||
|
1
st
Quarter
|
2
nd
Quarter
|
3
rd
Quarter
|
4
th
Quarter
|
1
st
Quarter
|
2
nd
Quarter
|
3
rd
Quarter
|
4
th
Quarter
|
|||||||||||||||||||||||||
|
Revenue
|
$ | 298.1 | $ | 321.7 | $ | 310.3 | $ | 317.6 | $ | 296.2 | $ | 322.6 | $ | 334.2 | $ | 378.1 | ||||||||||||||||
|
Gross
profit
|
243.9 | 262.4 | 253.3 | 259.4 | 242.4 | 261.9 | 272.1 | 311.0 | ||||||||||||||||||||||||
|
Operating
income
|
27.4 | 28.9 | 30.3 | 38.8 | 20.2 | 34.4 | 40.9 | 52.2 | ||||||||||||||||||||||||
|
Net
income
|
13.5 | 20.6 | 16.8 | 14.5 | 11.8 | 22.1 | 25.6 | 30.3 | ||||||||||||||||||||||||
|
Net
income per share:
|
||||||||||||||||||||||||||||||||
|
Basic
|
0.21 | 0.32 | 0.26 | 0.23 | 0.19 | 0.35 | 0.41 | 0.48 | ||||||||||||||||||||||||
|
Diluted
|
0.21 | 0.32 | 0.26 | 0.23 | 0.19 | 0.35 | 0.40 | 0.47 | ||||||||||||||||||||||||
NU
SKIN ENTERPRISES, INC.
Notes to
Concolidated Financial Statements
22. Other
income (expense), net
Other income (expense), net
was
$6.6 million of expense in 2009 compared to $24.8 million of expense in
2008. Of this 2008 amount, approximately $18.4 million relates to
foreign currency transaction losses related to the Company’s yen-denominated
debt as the Japanese yen strengthened from 111.45 at December 31, 2007 to 90.73
at December 31, 2008. In addition, the Company recorded foreign
currency transaction losses with respect to its intercompany receivables and
payables with certain of its international affiliates, including markets that
are newly opened or have remained in a loss position since
inception. Generally, foreign currency transaction losses with these
affiliates would be offset by gains related to the foreign currency transactions
of the Company’s yen-based bank debt. However, during 2008, the
Japanese yen strengthened against the U.S. dollar while most foreign currencies
weakened against the U.S. dollar. Other income (expense), net also
includes approximately $6.9 million, $7.8 million and $8.5 million in interest
expense during 2009, 2008 and 2007, respectively. It is impossible to
predict foreign currency fluctuations. The Company cannot estimate
the degree to which its operations will be impacted in the future, but it
remains subject to these currency risks. However, the majority of these
transaction losses are non-cash, non-operating losses.
Report
of Independent Registered Public Accounting Firm
To
the Board of Directors
and Shareholders of Nu Skin Enterprises, Inc.:
In our
opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, shareholder's equity and
comprehensive income, and cash flows present fairly, in all material respects,
the financial position of Nu Skin Enterprises, Inc and its subsidiaries at
December 31, 2009 and December 31, 2008, and the results of their operations and
their cash flows for each of the three years in the period ended December 31,
2009 in conformity with accounting principles generally accepted in the United
States of America. Also in our opinion, the Company maintained, in
all material respects, effective internal control over financial reporting as of
December 31, 2009, based on criteria established in Internal Control -
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). The Company's management is responsible
for these financial statements, for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting, included in the accompanying Management's
Report on Internal Control over Financial Reporting, appearing in Item
9A. Our responsibility is to express opinions on these financial
statements and on the Company's internal control over financial reporting based
on our integrated audits. We conducted our audits in accordance with
the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audits
to obtain reasonable assurance about whether the financial statements are free
of material misstatement and whether effective internal control over financial
reporting was maintained in all material respects. Our audits of the
financial statements included examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. Our audit of
internal control over financial reporting included obtaining an understanding of
internal control over financial reporting, assessing the risk that a material
weakness exists, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk. Our
audits also included performing such other procedures as we considered necessary
in the circumstances. We believe that our audits provide a reasonable basis for
our opinions.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal
control over financial reporting includes those policies and procedures that
(i) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of
the company; (ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and
(iii) provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use, or disposition of the company’s assets that
could have a material effect on the financial statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers
LLP
PricewaterhouseCoopers
LLP
Salt Lake
City, Utah
February
26, 2010
|
ITEM 9
.
|
CHANGES IN AND
DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
|
None.
Evaluation of
Disclosure Controls and Procedures
.
Under the
supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, we evaluated the effectiveness of
the design and operation of our disclosure controls and procedures (as such term
is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the
“Exchange Act”)). Disclosure controls and procedures are the controls
and other procedures that we designed to ensure that we record, process,
summarize and report in a timely manner the information we must disclose in
reports that we file with or submit to the Securities and Exchange Commission
under the Exchange Act. Based on this evaluation, our Chief Executive
Officer and our Chief Financial Officer concluded that our disclosure controls
and procedures were effective as of the end of the period covered by this
report.
Changes in
Internal Control over Financial Reporting
.
During the fourth
quarter of 2009, there was no change in our internal control over financial
reporting (as such term is defined in Rule 13a-15(f) under the Exchange Act)
that has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
Management’s
Report on Internal Control over Financial Reporting
.
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting. Internal control over financial
reporting is defined in Rule 13a-15(f) under the Exchange Act as a process
designed by, or under the supervision of, our principal executive and principal
financial officers and effected by our board of directors, management and other
personnel, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with accounting principles generally accepted in the
United States of America and includes those policies and procedures
that:
|
|
•
|
pertain
to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of our
assets;
|
|
|
•
|
provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with accounting
principles generally accepted in the United States of America, and that
our receipts and expenditures are being made only in accordance with
authorization of management and directors;
and
|
|
|
•
|
provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of our assets that could have
a material effect on the financial
statements.
|
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
Under the
supervision and with the participation of our management, including our
principal executive and principal financial officers, we assessed, as of
December 31, 2009, the effectiveness of our internal control over financial
reporting. This assessment was based on criteria established in the
framework in
Internal
Control-Integrated Framework
issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on our assessment,
our management concluded that our internal control over financial reporting was
effective as of December 31, 2009.
The effectiveness of our internal
control over financial reporting as of December 31, 2009 has been audited by
PricewaterhouseCoopers LLP, an independent registered public accounting firm, as
stated in their report which appears herein.
None.
The information required by Items 10,
11, 12, 13 and 14 of Part III is hereby incorporated by reference to our
Definitive Proxy Statement filed or to be filed with the Securities and Exchange
Commission for our 2010 Annual Meeting of Stockholders except for certain
information required by Item 10 with respect to our executive officers which is
set forth under Item 1 – Business, of this Annual Report on Form 10-K, and is
incorporated herein by reference.
|
ITEM 15
.
|
EXHIBITS AND FINANCIAL
STATEMENT SCHEDULES
|
Documents
filed as part of this Form 10-K:
|
|
1.
|
Financial
Statements
. See Index to Consolidated Financial
Statements under Item 8 of Part II.
|
|
|
2.
|
Financial Statement
Schedules
. N/A
|
|
|
3.
|
Exhibits
. References
to the “Company” shall mean Nu Skin Enterprises, Inc. Exhibits
preceded by an asterisk (*) are management contracts or compensatory plans
or arrangements. Unless otherwise noted, the SEC exhibits number for
exhibits incorporated by reference is
001-12421.
|
|
|
|
3.1
|
Amended
and Restated Certificate of Incorporation of the Company (incorporated by
reference to Exhibit 3.1 to the Company’s Registration Statement on Form
S-1 (File No. 333-12073) (the “Form S-1”)).
|
|
3.2
|
Certificate
of Amendment to the Amended and Restated Certificate of
Incorporation.
|
|
3.3
|
Certificate
of Designation, Preferences and Relative Participating, Optional and Other
Special Rights of Preferred Stock and Qualifications, Limitations and
Restrictions Thereof (incorporated by reference to Exhibit 3.3 to the
Company’s Annual Report on Form 10-K for the year ended December 31,
2004).
|
|
3.4
|
Amended
and Restated Bylaws of the Company (as amended) (incorporated by reference
to Exhibit 3.4 to the Company’s Annual Report on Form 10-K for the year
ended December 31, 2007).
|
|
3.5
|
Amendment
to the Amended and Restated Bylaws of the Company (incorporated by
reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed
on January 7, 2008).
|
|
4.1
|
Specimen
Form of Stock Certificate for Class A Common Stock (incorporated by
reference to Exhibit 4.1 to the Company’s Registration Statement on Form
S-3 (File No. 333-90716)).
|
|
4.2
|
Specimen
Form of Stock Certificate for Class B Common Stock (incorporated by
reference to Exhibit 4.2 to the Company’s Form S-1).
|
|
10.1
|
Note
Purchase Agreement, dated October 12, 2000, by and between the Company and
The Prudential Insurance Company of America (incorporated by reference to
Exhibit 10.1 to the Company’s Annual Report on Form 10-K for the year
ended December 31, 2005).
|
|
10.2
|
First
Amendment to Note Purchase Agreement, dated May 1, 2002, between the
Company and The Prudential Insurance Company of America (incorporated by
reference to Exhibit 10.2 of the Company’s Annual Report on Form 10-K for
the year ended December 31, 2007).
|
|
10.3
|
Second
Amendment to Note Purchase Agreement, dated as of October 31, 2003 between
the Company and The Prudential Insurance Company of America (incorporated
by reference to Exhibit 10.3 to the Company’s Annual Report on Form 10-K
for the year ended December 31, 2003).
|
|
10.4
|
Third
Amendment to Note Purchase Agreement, dated as of May 18, 2004, between
the Company and The Prudential Insurance Company of America (incorporated
by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form
10-Q for the quarter ended June 30, 2004).
|
|
10.5
|
Fourth
Amendment to Note Purchase Agreement, dated as of July 28, 2006, between
the Company and The Prudential Insurance Company of America (incorporated
by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K
filed on August 23, 2006).
|
|
10.6
|
Fifth
Amendment to Note Purchase Agreement, dated as of October 5, 2006, between
the Company and The Prudential Insurance Company of America (incorporated
by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K
filed on October 10, 2006).
|
|
10.7
|
Sixth
Amendment to Note Purchase Agreement, dated as of November 7, 2007,
between the Company and The Prudential Insurance Company of America
(incorporated by reference to Exhibit 99.1 to the Company’s Current Report
on Form 8-K filed on November 13, 2007).
|
|
10.8
|
Seventh
Amendment to Note Purchase Agreement, dated as of February 25, 2008,
between the Company and The Prudential Insurance Company of America
(incorporated by reference to Exhibit 10.82 to the Company’s Annual Report
on Form 10-K for the year ended December 31, 2007).
|
|
10.9
|
Letter
Agreement between the Company and The Prudential Insurance Company of
America (incorporated by reference to Exhibit 99.4 to the Company’s
Current Report on Form 8-K filed November 13, 2007).
|
|
10.10
|
Letter
Agreement dated October 1, 2009, between the Company and The Prudential
Insurance Company of America.
|
|
10.11
|
Credit
Agreement, dated as of May 10, 2001, among the Company, various financial
institutions, and Bank of America, N.A., as Administrative Agent
(incorporated by reference to Exhibit 10.7 to the Company’s Annual Report
on Form 10-K for the year ended December 31, 2006).
|
|
10.12
|
First
Amendment to Credit Agreement, dated as of December 14, 2001, among the
Company, various financial institutions, and Bank of America, N.A. as
Administrative Agent (incorporated by reference to Exhibit 10.8 to the
Company’s Annual Report on Form 10-K for the year ended December 31,
2006).
|
|
10.13
|
Second
Amendment to Credit Agreement, dated as of October 22, 2003 between the
Company, various financial institutions, and Bank of America, N.A. as
Administrative Agent (incorporated by reference to Exhibit 10.11 to the
Company’s Annual Report on Form 10-K for the year ended December 31,
2003).
|
|
10.14
|
Third
Amendment to Credit Agreement, dated as of May 10, 2004, among the
Company, various financial institutions, and Bank One, N.A. as
Administrative Agent (incorporated by reference to Exhibit 10.1
to the Company’s Quarterly Report on Form 10-Q for the quarter ended June
30, 2004).
|
|
10.15
|
Fourth
Amendment to Credit Agreement, dated as of July 28, 2006, among the
Company, various financial institutions, and JPMorgan Chase Bank, N.A. as
Administrative Agent (as successor to Bank One, N.A.) (incorporated by
reference to Exhibit 99.2 to the Company’s Current Report on Form 8-K
filed on August 23, 2006).
|
|
10.16
|
Fifth
Amendment to Credit Agreement, dated as of October 5, 2006, among the
Company, various financial institutions, and JPMorgan Chase Bank, N.A. as
Administrative Agent (as successor to Bank One, N.A.) (incorporated by
reference to Exhibit 99.2 to the Company’s Current Report on Form 8-K
filed on October 10, 2006).
|
|
10.17
|
Sixth
Amendment to Credit Agreement, dated as of August 8, 2007, among the
Company, various financial institutions, and JPMorgan Chase Bank, N.A. as
Administrative Agent (as successor to Bank One, N.A.) (incorporated by
reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K
filed August 15, 2007).
|
|
10.18
|
Seventh
Amendment to Credit Agreement, dated as of November 7, 2007, among the
Company, various financial institutions, and JPMorgan Chase Bank, N.A. as
Administrative Agent (as successor to Bank One, N.A.) (incorporated by
reference to Exhibit 99.2 to the Company’s Current Report on Form 8-K
filed on November 13, 2007).
|
|
10.19
|
Eighth
Amendment to Credit Agreement, dated as of February 29, 2008, among the
Company, various financial institutions, and JPMorgan Chase Bank, N.A. as
Administrative Agent (as successor to Bank One, N.A.) (incorporated by
reference to Exhibit 10.87 to the Company’s Annual Report on Form 10-K for
the year ended December 31, 2007).
|
|
10.20
|
Ninth
Amendment to Credit Agreement dated as of August 25, 2009, among the
Company, various financial institutions, and JPMorgan Chase Bank, N.A. (as
successor to Bank One N.A.) as successor administrative agent
(incorporated by reference to Exhibit 99.1 to the Company’s Current Report
on Form 8-K filed on August 31, 2009).
|
|
10.21
|
Letter
Agreement among the Company, various financial institutions, and JPMorgan
Chase Bank, N.A. as Administrative Agent (as successor to Bank One, N.A.)
(incorporated by reference to Exhibit 99.5 to the Company’s Current Report
on Form 8-K filed November 13, 2007).
|
|
10.22
|
Private
Shelf Agreement, dated as of August 26, 2003, between the Company and
Prudential Investment Management, Inc. (the “Private Shelf Agreement”)
(incorporated by reference to Exhibit 10.20 to the Company’s Annual report
on Form 10-K for the year ended December 31, 2008).
|
|
10.23
|
First
Amendment to the Private Shelf Agreement, dated as of October 31, 2003
between the Company and Prudential Investment Management, Inc.
(incorporated by
reference to Exhibit 10.53 to the Company’s Annual Report on Form 10-K for
the year ended December 31, 2003).
|
|
10.24
|
Second
Amendment to the Private Shelf Agreement, dated as of May 18, 2004,
between the Company, Prudential Investment Management, Inc., and the
holders of the Series A Senior Notes and Series B Senior Notes issued
under the Private Shelf Agreement (incorporated by reference to Exhibit
10.3 to the Company’s Quarterly Report on Form 10-Q for the quarter ended
June 30, 2004).
|
|
10.25
|
Third
Amendment to the Private Shelf Agreement dated June 13, 2005 between the
Company, Prudential Investment Management, Inc. and certain other lenders
(incorporated by reference to Exhibit 10.1 to the Company’s Quarterly
Report on Form 10-Q for the quarter ended June 30,
2005).
|
|
10.26
|
Fourth
Amendment to the Private Shelf Agreement dated July 28, 2006 between the
Company, Prudential Investment Management, Inc. and certain other lenders
(incorporated by reference to Exhibit 99.3 to the Company’s Current Report
on Form 8-K filed on August 23, 2006).
|
|
10.27
|
Fifth
Amendment to the Private Shelf Agreement dated October 5, 2006 between the
Company, Prudential Investment Management, Inc. and certain other lenders
(incorporated by reference to Exhibit 99.3 to the Company’s Current Report
on Form 8-K filed on October 10, 2006).
|
|
10.28
|
Sixth
Amendment to the Private Shelf Agreement, dated as of November 7, 2007,
between the Company, Prudential Investment Management, Inc. and certain
other lenders (incorporated by reference to Exhibit 99.3 to the Company’s
Current Report on Form 8-K filed on November 13, 2007).
|
|
10.29
|
Seventh
Amendment to the Private Shelf Agreement, dated as of February 25, 2008,
between the Company, Prudential Investment Management, Inc. and certain
other lenders (incorporated by reference to Exhibit 10.83 to the Company’s
Annual Report on Form 10-K for the year ended December 31,
2007).
|
|
10.30
|
Multi-Currency
Private Shelf Agreement dated as of October 1, 2009, between the Company,
Prudential Investment Management, Inc. and certain other
lenders.
|
|
10.31
|
Letter
Agreement among the Company, Prudential Investment Management, Inc. and
certain other lenders (incorporated by reference to Exhibit 99.6 to the
Company’s Current Report on Form 8-K filed November 13,
2007).
|
|
10.32
|
Letter
Agreement dated October 1, 2009, among the Company, Prudential Investment
Management, Inc. and certain other lenders.
|
|
10.33
|
Series
A Senior Notes Nos. A-1 to A-5 and Series B Senior Notes B-1 to B-5 issued
October 31, 2003 by the Company to Prudential Investment Management, Inc.
and/or its affiliates pursuant to the Private Shelf Agreement
(incorporated by reference to Exhibit 10.54 to the Company’s Annual Report
on Form 10-K for the year ended December 31, 2003).
|
|
10.34
|
Series
C Senior Notes Nos. C-1 and C-2 issued February 7, 2005 by the Company to
Prudential Investment Management, Inc. and/or its affiliates pursuant to
the Private Shelf Agreement (incorporated by reference to Exhibit 99.2 to
the Company’s Current Report on Form 8-K filed February 8,
2005).
|
|
10.35
|
Series
D Senior Notes Nos. D-1, D-2, D-3 and D-4 issued October 3, 2006 by the
Company to Prudential Investment Management, Inc. and/or its affiliates
pursuant to the Private Shelf Agreement (incorporated by reference to
Exhibit 99.4 to the Company’s Current Report on Form 8-K filed October 10,
2006).
|
|
10.36
|
Series
E Senior Notes Nos. E-1, E-2, E-3, E-4 and E-5 issued January 19, 2007 by
the Company to Prudential Investment Management, Inc. and/or its
affiliates pursuant to the Private Shelf Agreement (incorporated by
reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K
filed January 25, 2007).
|
|
10.37
|
Series
E Senior Note E-6, issued July 20, 2007, by the Company to Prudential
Insurance Company of America pursuant to the Private Shelf Agreement
(incorporated by reference to Exhibit 99.1 to the Company’s Current Report
on 8-K filed January 14, 2008).
|
|
10.38
|
Series
EE Senior Note EE-1, issued January 8, 2008, by the Company to Prudential
Insurance Company of America pursuant to the Private Shelf Agreement
(incorporated by reference to Exhibit 99.2 to the Company’s Current Report
on 8-K filed January 14, 2008).
|
|
10.39
|
Series
F Senior Notes Nos. F-1 and F-2 issued September 28, 2007 by the Company
to Prudential Investment Management, Inc. and/or its affiliates pursuant
to the Private Shelf Agreement (incorporated by reference to Exhibit 10.1
to the Company’s Quarterly Report on Form 10-Q for the quarter ended
September 30, 2007).
|
|
10.40
|
Accelerated
Share Repurchase Agreement dated November 7, 2007, between the Company and
JP Morgan Chase Bank, N.A. (incorporated by reference to Exhibit 99.7 to
the Company’s Current Report on Form 8-K filed November 13,
2007).
|
|
10.41
|
Pledge
Agreement dated October 12, 2000, by and between the Company and State
Street Bank and Trust Company of California, N.A., acting in its capacity
as collateral agent (incorporated by reference to Exhibit 10.5 to the
Company’s Annual Report on Form 10-K for the year ended December 31,
2005).
|
|
10.42
|
Pledge
Amendments executed by the Company dated December 31, 2003 (incorporated
by reference to Exhibit 10.5 to the Company’s Annual Report on Form 10-K
for the year ended December 31, 2003).
|
|
10.43
|
Pledge
Agreement dated as of January 31, 2005 by and among Nu Skin Asia
Investment, Inc., a wholly-owned subsidiary of the Company, and U.S. Bank
National Association, as agent for and on behalf of the Benefited Parties
under the Amended and Restated Collateral Agency and Intercreditor
Agreement (referred to below) (incorporated by reference to Exhibit 99.3
to the Company’s Current Report on Form 8-K/A filed on March 10,
2005).
|
|
10.44
|
Amended
and Restated Collateral Agency and Intercreditor Agreement, dated as of
August 26, 2003, by and among Nu Skin Enterprises, Inc. and various of its
subsidiaries, U.S. Bank National Association, as Collateral Agent, and
various lending institutions (incorporated by reference to Exhibit 10.40
to the Company’s Annual Report on Form 10-K for the year ended December
31, 2008).
|
|
10.45
|
Master
Lease Agreement dated January 16, 2003, by and between Nu Skin
International, Inc. and Scrub Oak, LLC (incorporated by reference to
Exhibit 10.36 to the Company’s Annual Report on Form 10-K for the year
ended December 31, 2007).
|
|
10.46
|
Amendment
No. 1 to the Master Lease Agreement, effective as of July 1, 2003, between
Nu Skin International, Inc. and Scrub Oak, LLC (incorporated by reference
to Exhibit 10.42 to the Company’s Annual Report on Form 10-K for the year
ended December 31, 2008).
|
|
10.47
|
Master
Lease Agreement dated January 16, 2003, by and between Nu Skin
International, Inc. and Aspen Country, LLC (incorporated by reference to
Exhibit 10.38 to the Company’s Annual Report on Form 10-K for the year
ended December 31, 2007).
|
|
10.48
|
Amendment
No. 1 to the Master Lease Agreement, effective as of July 1, 2003, between
Nu Skin International Inc. and Aspen Country, LLC (incorporated by
reference to Exhibit 10.44 to the Company’s Annual Report on Form 10-K for
the year ended December 31, 2008).
|
|
10.49
|
Amendment
No. 2 to the Master Lease Agreement, effective as of July 1, 2008, between
Nu Skin International, Inc. and Aspen Country, LLC (incorporated by
reference to Exhibit 10.45 to the Company’s Annual Report on Form 10-K for
the year ended December 31, 2008).
|
|
10.50
|
University
of Utah Research Foundation and Nu Skin International, Inc. Amended and
Restated Patent License Agreement (Exclusive) Dietary Supplement
Preventative Healthcare License dated July 1, 2006 (incorporated by
reference to Exhibit 10.33 to the Company’s Annual Report on Form 10-K for
the year ended December 31, 2006).
|
|
10.51
|
Form
of Lock-up Agreement executed by certain of the Company’s shareholders
(incorporated by reference to Exhibit 10.47 to the Company’s Annual Report
on Form 10-K for the year ended December 31, 2008).
|
|
*10.52
|
Form
of Indemnification Agreement to be entered into between the Company and
certain of its officers and directors (incorporated by reference to
Exhibit 10.48 to the Company’s Annual Report on Form 10-K for the year
ended December 31, 2008).
|
|
*10.53
|
Amended
and Restated Deferred Compensation Plan, effective as of January 1, 2008
(incorporated by reference to Exhibit 10.5 to the Company’s Quarterly
Report on Form 10-Q for the quarter ended September 30,
2007).
|
|
*10.54
|
Amendment
to the Deferred Compensation Plan, effective as of January 1, 2009
(incorporated by reference to Exhibit 10.50 to the Company’s Annual Report
on Form 10-K for the year ended December 31, 2008).
|
|
*10.55
|
Nu
Skin Enterprises, Inc. Nonqualified Deferred Compensation Trust dated
December 14, 2005 (incorporated by reference to Exhibit 99.2 to the
Company’s Current Report on Form 8-K filed December 19,
2005).
|
|
*10.56
|
Second
Amended and Restated Nu Skin Enterprises, Inc. 1996 Stock Incentive Plan
(incorporated by reference to Exhibit 10.28 to the Company’s Annual Report
on Form 10-K for the year ended December 31, 2005).
|
|
*10.57
|
Form
of Master Stock Option Agreement (1996 Plan) (incorporated by reference to
Exhibit 10.49 to the Company’s Annual Report on Form 10-K for the year
ended December 31, 2007).
|
|
*10.58
|
Form
of Stock Option Agreement for Directors (1996 Plan) (incorporated by
reference to Exhibit 10.48 to the Company’s Annual Report on Form 10-K for
the year ended December 31, 2006).
|
|
*10.59
|
Nu
Skin Enterprises, Inc. 2006 Stock Incentive Plan (incorporated by
reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K
filed on June 1, 2006).
|
|
*10.60
|
Form
of Master Stock Option Agreement (2006 Plan) (incorporated by reference to
Exhibit 10.10 to the Company’s Quarterly Report on Form 10-Q for the
quarterly period ended September 30,
2006).
|
|
*10.61
|
Form
of Master Stock Option Agreement (2006 Plan Performance Option (U.S.))
(incorporated by reference to Exhibit 10.54 to the Company’s Annual Report
on Form 10-K for the year ended December 31, 2007).
|
|
*10.62
|
Form
of Master Stock Option Agreement (2006 Plan Performance Option (non-U.S.))
(incorporated by reference to Exhibit 10.55 to the Company’s Annual Report
on Form 10-K for the year ended December 31, 2007).
|
|
*10.63
|
Form
of Master Stock Option Agreement for Directors (2006 Plan) (incorporated
by reference to Exhibit 10.59 to the Company’s Annual Report on Form 10-K
for the year ended December 31, 2008).
|
|
*10.64
|
Form
of Director Restricted Stock Unit Agreement (2006 Plan) (incorporated by
reference to Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q
for the quarter ended June 30, 2007).
|
|
*10.65
|
Form
of Master Restricted Stock Unit Agreement (2006 Plan) (incorporated by
reference to Exhibit 10.11 to the Company’s Quarterly Report on Form 10-Q
for the quarterly period ended September 30, 2006).
|
|
*10.66
|
Nu
Skin Enterprises, Inc. 2006 Senior Executive Incentive Plan (incorporated
by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K
filed on June 1, 2006).
|
|
*10.67
|
Performance
Targets and Formulas 2008 (Approved under the 2006 Senior Executive
Incentive Plan) (incorporated by reference to Exhibit 10.63 to the
Company’s Annual Report on Form 10-K for the year ended December 31,
2007).
|
|
*10.68
|
Performance
Targets and Formulas for 2009 (Approved under the 2006 Senior Executive
Incentive Plan) (incorporated by reference to Exhibit 10.64 to the
Company’s Annual Report on Form 10-K for the year ended December 31,
2008).
|
|
*10.69
|
Nu
Skin Enterprises, Inc. Senior Executive Benefits Policy, effective as of
July 21, 2005 (incorporated by reference to Exhibit 10.3 to the Company’s
Quarterly Report on Form 10-Q for the quarter ended June 30,
2005).
|
|
*10.70
|
Summary
Description of Nu Skin Japan Director Retirement Allowance Plan
(incorporated by reference to Exhibit 10.52 to the Company’s Annual Report
on Form 10-K for the year 2006).
|
|
*10.69
|
Nu
Skin International, Inc. 1997 Key Employee Death Benefit Plan
(incorporated by reference to Exhibit 10.59 to the Company’s Annual Report
on Form 10-K for the year ended December 31, 2003).
|
|
*10.70
|
Employment
Letter between the Company and Truman Hunt dated January 17, 2003
(incorporated by reference to Exhibit 10.67 to the Company’s Annual Report
on Form 10-K for the year ended December 31, 2007).
|
|
*10.71
|
Summary
of Modifications to Truman Hunt’s Employment Letter (incorporated by
reference to Exhibit 10.69 to the Company’s Annual Report on Form 10-K for
the year ended December 31, 2008).
|
|
*10.72
|
Joseph
Y. Chang Employment Agreement dated November 9, 2009, between Mr. Chang
and the Company (incorporated by reference to Exhibit 10.2 to the
Company’s Quarterly Report on Form 10-Q for the quarter ended September
30, 2009).
|
|
*10.73
|
Daniel
Chard Employment Agreement effective February 13, 2006 between Mr. Chard
and the Company (incorporated by reference to Exhibit 10.61 to the
Company’s Annual Report on Form 10-K for the year ended December 31,
2006).
|
|
*10.74
|
Summary
of Modifications to Dan Chard’s Employment Letter (incorporated by
reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q
for the quarter ended March 31, 2009).
|
|
*10.75
|
Summary
of Non-management Director Standard Compensation (effective January 1,
2007) (incorporated by reference to Exhibit 10.63 to the Company’s Annual
Report on Form 10-K for the year ended December 31,
2006).
|
|
*10.76
|
Event
Appearance Bonus Guidelines (Approved for Sandra Tillotson in October
2006) (incorporated by reference to Exhibit 10.68 to the Company’s Annual
Report on Form 10-K for the year ended December 31,
2006).
|
|
*10.77
|
Ashok
Pahwa Employment Letter dated May 8, 2008, between Mr. Pahwa and the
Company (incorporated by reference to Exhibit 10.74 to the Company’s
Annual Report on Form 10-K for the year ended December 31,
2008).
|
|
*10.78
|
Gary
Sumihiro Employment Letter dated March 16, 2007 between Mr. Sumihiro and
the Company (incorporated by reference to Exhibit 10.1 to the Company’s
Quarterly Report on Form 10-Q for the quarter that ended June 30,
2007).
|
|
*10.79
|
Gary
Sumihiro Settlement and Release Agreement dated March 1, 2009, between Mr.
Sumihiro and the Company (incorporated by reference to Exhibit 10.1 to the
Company’s Quarterly Report on Form 10-Q for the quarter ended March 31,
2009).
|
|
*10.80
|
Gary
Sumihiro Consulting Agreement dated March 1, 2009, between Mr. Sumihiro
and the Company (incorporated by reference to Exhibit 10.2 to the
Company’s Quarterly Report on Form 10-Q for the quarter ended March 31,
2009).
|
|
*10.81
|
Form
of Key Employee Covenants (incorporated by reference to Exhibit 10.2 to
the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30,
2007).
|
|
21.1
|
Subsidiaries
of the Company.
|
|
23.1
|
Consent
of PricewaterhouseCoopers LLP.
|
|
31.1
|
Certification
by M. Truman Hunt, President and Chief Executive Officer, pursuant to Rule
13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
31.2
|
Certification
by Ritch N. Wood, Chief Financial Officer, pursuant to Rule 13a-14(a) of
the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
|
|
32.1
|
Certification
by M. Truman Hunt, President and Chief Executive Officer, pursuant to
Section 1350, Chapter 63 of Title 18, United States Code, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
32.2
|
Certification
by Ritch N. Wood, Chief Financial Officer, pursuant to Section 1350,
Chapter 63 of Title 18, United States Code, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of
2002.
|
Pursuant to the requirements of Section
13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized on February 26, 2010.
| NU SKIN ENTERPRISES, INC. | |||
|
|
By:
|
/s/ M. Truman Hunt | |
| M. Truman Hunt, Chief Executive Officer | |||
Pursuant to the requirements of the
Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities indicated on
February 26, 2010.
|
Signatures
|
Capacity
in Which Signed
|
|
|
/s/
Blake M. Roney
|
Chairman
of the Board
|
|
|
Blake
M. Roney
|
||
|
/s/
M. Truman Hunt
|
President
and Chief Executive Officer and Director
|
|
|
M.
Truman Hunt
|
(Principal
Executive Officer)
|
|
|
/s/
Ritch N. Wood
|
Chief
Financial Officer
|
|
|
Ritch
N. Wood
|
(Principal
Financial Officer and Accounting Officer)
|
|
|
/s/
Sandra N. Tillotson
|
Senior
Vice President, Director
|
|
|
Sandra
N. Tillotson
|
||
|
/s/
Steven J. Lund
|
Director
|
|
|
Steven
J. Lund
|
||
|
/s/
Daniel W. Campbell
|
Director
|
|
|
Daniel
W. Campbell
|
||
|
/s/
E.J. “Jake” Garn
|
Director
|
|
|
E.
J. “Jake” Garn
|
||
|
/s/
Andrew D. Lipman
|
Director
|
|
|
Andrew
D. Lipman
|
||
|
/s/
Patricia A. Negr
ó
n
|
Director
|
|
|
Patricia
A. Negr
ó
n
|
||
|
/s/
David D. Ussery
|
Director
|
|
|
David
D. Ussery
|
||
|
/s/
Thomas R. Pisano
|
Director
|
|
|
Thomas
R. Pisano
|
||
|
/s/
Nevin N. Andersen
|
Director
|
|
|
Nevin
N. Andersen
|
-113-
TABLE OF CONTENTS
Part IItem 1. BusinessItem 1A . Risk FactorsItem 1B. Unresolved Staff CommentsItem 2. PropertiesItem 3. Legal ProceedingsItem 4. Submission Of Matters To A Vote Of Security HoldersPart IIItem 5. Market For Registrant S Common Equity, Related Stockholder Matters and Issuer Purchases Of Equity SecuritiesItem 6. Selected Financial DataItem 8. Financial Statements and Supplementary DataItem 9 . Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9A. Controls and ProceduresItem 9B . Other InformationPart IIIPart IVItem 15 . Exhibits and Financial Statement Schedules