53 NU SKIN ENTERPRISES requires companies to recognize all derivatives as either assets or liabilities, with the instruments measured at fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on the intended use of the derivative and its resulting designation. The statement is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. The Company will adopt SFAS 133 by January 1, 2001. The Company does not anticipate that the adoption of SFAS 133 will have a significant impact on its consolidated financial statements. On March 26, 1998, the Company completed the acquisition (the “NSI Acquisition”) of the capital stock of NSI, NSI affiliates in Europe, South America, Australia and New Zealand and certain other NSI affiliates (the “Acquired Entities”) for $70.0 million in preferred stock and long-term notes payable to the stockholders of the Acquired Entities (the “NSI Stockholders”) totaling approximately $6.2 million. In addition, contin- gent upon NSI and the Company meeting specific earnings growth targets, the Company agreed to pay up to $100.0 million in cash during the subsequent four year period to the NSI Stockholders. The Company and NSI met specific earnings growth targets in 1998 resulting in a contingent payment to the NSI Stockholders of $25.0 million. The Company and NSI did not meet specific earnings growth targets for the years ended December 31, 1999 and 2000. Contingent upon NSI and the Company meeting specific earnings growth targets during 2001, the Company may pay up to $75.0 million in cash over the next year to the NSI Stockholders. However, management believes it is unlikely that such contingency payments will be made. The contingent consideration of $25.0 million earned in 1998 was paid in the second quarter of 1999 and has been accounted for as an adjust- ment to the purchase price and allocated to the assets and liabilities of the Acquired Entities. Any additional contingent consideration paid over the next year, if any, will be accounted for in a similar manner. Also, as part of the NSI Acquisition, the Acquired Entities’ S corporation status was terminated, and the Acquired Entities declared distri- butions to the stockholders that included all of the Acquired Entities’ previously earned and undistributed taxable S corporation earnings (the “S Distribution Notes”). The  S Distribution Notes assumed as part of the NSI Acquisition totaled approximately $171.3 million and, in addition, the Company incurred acquisition costs totaling  On October 16, 1998, the Company completed the acquisition of privately-held Generation Health Holdings, Inc., the parent company of Pharmanex, Inc. (the “Phar- manex Acquisition”), for $77.6 million, which consisted of approximately 3.6 million shares of the Company’s Class A common stock, including approximately 261,000 shares issuable upon exercise of options assumed by the Company (Note 14). Also, as part of the In connection with the restatement of the Company’s consolidated financial state- ments for 1997, the portion of the NSI Acquisition and the resulting Preferred Stock issued to the common control group is reflected as if such stock had been issued on the date of the Company’s incorporation on September 4, 1996. On May 5, 1998, the stock- holders of the Company approved the automatic conversion of the Preferred Stock issued in the NSI Acquisition into 2,978,159 shares of Class A common stock. NOTE 4. ACQUISITION OF PHARMANEX, INC. For the portion of the NSI Acquisition accounted for in a manner similar to a pooling of interests, the excess of purchase price paid over the book value of the net assets acquired was recorded as a reduction of stockholders’ equity. For the portion of the NSI Acquisition accounted for by the purchase method,  the Company recorded inventory step-up of $21.6 million and intangible assets of $34.8 million. During 1998, the inventory step-up was fully amortized and the Company recorded amortization of intangible assets totaling $1.6 million, $2.6 million and $2.5 million during 1998, 1999 and 2000, respectively. The NSI Acquisition was accounted for by the purchase method of accounting, except for that portion of the Acquired Entities under common control of a group of stockholders, which portion was accounted for in a manner similar to a pooling of interests. The common control group is comprised of the NSI Stockholders who are immediate family members. The minority interest, which represents the ownership interests of the NSI Stockholders who are not immediate family members, was acquired during the NSI Acquisition. Prior to the NSI Acquisition, a portion of the Acquired Entities’ net income, capital contributions and distributions (including cash dividends and S Distribution Notes) had been allocated to the minority interest. $3.0 million. The net assets acquired totaling $90.4 million include net deferred tax  liabilities totaling $7.4 million recorded upon the conversion of the Acquired Entities from S to C corporations. Pharmanex Acquisition, the Company assumed approximately $34.0 million in liabilities, the majority of which was settled in cash in connection with the closing, and incurred acquisition costs totaling $1.3 million.  The Pharmanex Acquisition was accounted for by the purchase method of accounting. The Company recorded inventory step-up of $3.7 million and intangible assets of $92.4 million. In addition, the Company allocated $13.6 million to purchased in-process research and development based on a discounted cash-flow method reflecting the stage of completion of the related projects. During 1998, the in-process research and development amount was fully written off and the Company recorded amortization of intangible assets totaling $1.3 million, $6.9 million and $7.2 million during 1998, 1999 and 2000, respectively. The Company recorded amortization of inventory step up of $0.4 million and $3.3 million during 1998 and 1999, respectively. On March 8, 1999, NSI terminated its distribution license and various other license agreements and other intercompany agreements with Nu Skin USA and paid Nu Skin USA a $10.0 million termination fee. Also, on that same date, through a newly formed wholly-owned subsidiary, the Company acquired selected assets of Nu Skin USA in exchange for assuming various accounts payable of Nu Skin USA.  NOTE 5. ACQUISITION OF CERTAIN  ASSETS OF NU SKIN USA, INC. The acquisition of the selected assets and assumption of liabilities and the termi- nation of these agreements has been recorded for the consideration paid, except for the portion of Nu Skin USA which is under common control of a group of stockholders, which portion has been recorded at predecessor basis. NOTE 6. ACQUISITION OF BIG PLANET, INC. On July 13, 1999, the Company completed the acquisition of Big Planet, Inc.  (“Big Planet”) for $29.2 million, which consisted of a cash payment of $14.6 million and a note payable of $14.6 million (the “Big Planet Acquisition”). In addition, the Company loaned Big Planet approximately $4.5 million immediately prior to the closing to redeem the option holders and certain management stockholders of Big Planet. The Big Planet Acquisition was accounted for by the purchase method of account- ing. The Company recorded intangible assets of $47.0 million which will be amortized The purchase prices paid by the affiliated entities for the purchase of product and marketing materials are determined pursuant to the Distribution Agreement between the Company and the affiliated entities. The selling prices to these affiliated entities of products and marketing materials were determined pursuant to the Wholesale Distrib- ution Agreements between the Company and these affiliated entities. Trademark royalty fees and license fees were charged pursuant to the Trademark/Trade Name License Agreement between the Company and these affiliated entities and the Licensing and Sales Agreement between the Company and these affiliated entities, respectively. The independent distributor commission program is managed by the Company. Charges to the affiliated entities were based on a worldwide commission fee of 42% of product revenue, which covers commissions paid to distributors on a worldwide basis and the direct costs of administering the global compensation plan. Management and support certain assets of Nu Skin USA (see Note 5) and the acquisition of the North American Affiliates in 1999, the Company had transactions with these affiliated entities. The trans- actions with these entities were as follows: (1) The Company sold products and market- ing materials. (2) The Company collected trademark royalty fees from these entities on products bearing NSI trademarks that are not purchased from NSI. (3) The Company entered into a distribution agreement with each independent distributor. (4) The Com- pany collected license fees from these entities for the right to use the distributors, and for the right to use the Company’s distribution system and other related intangibles.  (5) The Company operates a global commission plan whereby distributors’ commissions are determined by aggregate worldwide purchases made by downline distributors. Thus, commissions on purchases from the Company earned by distributors located in geographic areas outside those held by the Company were remitted to the Company, which then forwarded these commissions to the distributors. (6) The Company collected fees for management and support services provided to these entities. NOTE 7. RELATED PARTY TRANSACTIONS SCOPE OF RELATED PARTY ACTIVITY: Prior to the acquisition of over a period of 20 years. The Company recorded amortization on the intangible assets relating to the Big Planet Acquisition of $1.1 million and $2.3 million during 1999 and 2000, respectively. Big Planet incurred operating losses of approximately $25.0 million for the year ended December 31, 2000. NU SKIN ENTERPRISES  54 NOTE 3. ACQUISITION OF NSI AND  CERTAIN AFFILIATES