57 NU SKIN ENTERPRISES 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. The following is a reconciliation of the weighted average common shares outstanding for purposes of computing basic and diluted net income per share: WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: December 31, December 31, December 31, (in thousands) Year ended 1998 1999 2000 Basic weighted average common shares outstanding 84,894 87,081 85,401 Effect of dilutive securities: Stock awards and options 2,124 812 241 Diluted weighted average common shares outstanding 87,018 87,893 85,642 REPURCHASE OF COMMON STOCK: Since August 1998, the board of directors has authorized the Company to repurchase up to $50.0 million of the Com- pany’s outstanding shares of Class A common stock. The repurchases are used primarily to fund the Company’s equity incentive plans. During the years ended December 31, 1999 and 2000, the Company repurchased approximately 1,364,000 and 1,893,000 shares for an aggregate price of approximately $17.1 million and $12.8 million, respectively. As of December 31, 2000, the Company had repurchased a total of approximately 4,175,000 shares for an aggregate price of approximately $40.0 million. In addition, in March 1999, in connection with the termination of the license and distribution agreements with  Nu Skin USA, the board of directors separately authorized and the Company completed the purchase of approximately 700,000 shares of the Company’s Class A common stock from Nu Skin USA and certain stockholders for approximately $10.0 million. CONVERSION OF COMMON STOCK: In December 1998, the holders of the Class B common stock converted 15.0 million shares of Class B common stock to Class A common stock. A summary of the Company’s stock option plans as of December 31, 1998, 1999 and 2000 and changes during the years then ended, is presented below: Pursuant to the Pharmanex Acquisition, the Company assumed outstanding options under two stock option plans. The options were converted into the right to purchase approximately 261,000 shares of Class A common stock.  Effective November 21, 1996, the Company implemented a one-time distributor equity incentive program which provided for grants of options to selected distributors for the purchase of 1,605,000 shares of the Company’s Class A common stock. The options are exercisable at a price of $5.75 per share and vested one year from the effective date. The Company recorded distributor stock expense of $19.9 million over the vesting period. As of December 31, 2000, approximately 641,000 of these options had been exercised. During the year ended December 31, 1996, the Company’s board of directors adopted the Nu Skin Enterprises, Inc. 1996 Stock Incentive Plan (the “1996 Stock Incentive Plan”). The 1996 Stock Incentive Plan provides for granting of stock awards and options to purchase common stock to executives, other employees, independent consultants and directors of the Company and its Subsidiaries. As of December 31, 2000, approximately 3.5 million shares were available for grant under this plan.  NOTE 14. EQUITY INCENTIVE PLANS 1998 1999 2000 Weighted Weighted Weighted Shares Average  Shares Average Shares Average (in 000s) Exercise Price (in 000s) Exercise Price (in 000s) Exercise Price Outstanding—beginning of year 2,112.3 $ 7.72 3,570.3 $ 10.82 5,071.6 $ 13.53 Granted at fair value 1,890.5 13.87 2,319.1 17.00 1,969.7 7.41 Exercised (394.3) 5.73 (410.2) 5.07 (31.1) 5.59 Forfeited/cancelled (38.2) 10.17 (407.6) 10.17 (1,183.1) 16.04 Outstanding—end of year 3,570.3 10.82 5,071.6 13.53 5,827.1 11.01 Options exercisable at year-end 1,948.5 $ 5.92 2,146.2 $ 6.83 2,056.9 $ 9.65 The weighted-average grant date fair values of options granted during 1998, 1999 and 2000 were $7.88, $10.56 and $4.72, respectively.  Since the Company’s initial public offering in 1996, the Company has granted stock awards of its Class A common stock to employees. In total, approximately 686,000 shares were issued in this program, and the awards vested ratably over a one to four year period. The Company recorded compensation expense of $1.2 million and $2.7 million for the years ended December 31, 1998 and 1999, respectively, and the remaining compensation expense of $2.8 million for the year ended December 31, 2000 relating to these stock awards. Effective February 1, 2000, the Company’s board of directors adopted the Employee Stock Purchase Plan (the “Purchase Plan”), which provides for the issuance of a maxi- mum of 200,000 shares of Class A common stock. Eligible employees can have up to 15% of their earnings withheld, up to certain maximums, to be used to purchase shares of the Company’s Class A common stock on every April 30th, July 31st, October 31st or January 31st (the “Purchase Date”). The price of the Class A common stock purchased under the Purchase Plan will be equal to 85% of the lower of the fair market value of the Class A common stock on the commencement date of each three month offering period or Purchase Date. During 2000, approximately 20,000 shares were purchased at prices ranging from $4.62 to $7.75 per share. At December 31, 2000, approximately 180,000 shares were available under the Purchase Plan for future issuance. NU SKIN ENTERPRISES  58 The Company accounts for stock-based compensation in accordance with the  provisions of APB 25. The Company recorded expense in the amount of $220,000, $579,000 and $703,000 in 1998, 1999 and 2000, respectively, in connection with options granted under the Company’s equity incentive plans. As of December 31, 2000, approx- imately $747,000 remains to be amortized over the remaining vesting periods of the options. Had compensation expense been determined based on the fair value at the grant dates as prescribed in SFAS 123, the Company’s results for the years ended December 31 would have been as follows: The following table summarizes information concerning outstanding and exercisable options at December 31, 2000: The fair value for these options was estimated at the date of grant using a Black- Scholes option pricing model with the following weighted-average assumptions: Options Outstanding Options Exercisable Weighted Weighted Weighted Shares Average Average Yrs. Shares Average Exercise Price Range (in 000s) Exercise Price Remaining (in 000s) Exercise Price $0.92 to $5.75 1,252.2 $ 4.92 5.95 1,229.5 $ 4.94 $6.56 to $11.00 1,996.1 7.43 9.42 21.3 11.00 $12.00 to $16.00 1,447.3 13.55 8.29 449.9 13.61 $17.00 to $28.50 1,131.5 20.80 8.13 356.2 20.84 5,827.1 11.01 8.14 2,056.9 9.65 1998 1999 2000 Pro forma net income (in 000s) $  103,023 $ 84,456 $ 52,430 Pro forma earnings per share: Basic 1.21 0.97 0.61 Diluted 1.18 0.97 0.61 1998 1999 2000 Risk-free interest rate 4.5 % 6.8 % 6.2 % Expected life 3.4 years 2.7 years 4.0 years Expected volatility 48.0 % 80.0 % 85.0 % Expected dividend yield — — —