A majority of the Company’s revenue and many of the Company’s expenses are recognized primarily outside of the United States except for inventory purchases which are primarily transacted in U.S. dollars from vendors in the United States. Each sub- sidiary’s local currency is considered the functional currency. All revenue and expenses are translated at weighted average exchange rates for the periods reported. Therefore, the Company’s reported sales 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 uncertainty of exchange rate fluctuations, the Company cannot estimate the effect of these fluctuations on the Company’s future business, product pricing, results of operations or financial condition. However, because a majority of the Com- pany’s revenue is realized in local currencies and the majority of the Company’s cost  of sales is denominated in U.S. dollars, the Company’s gross profits will be positively affected by a weakening in the U.S. dollar and will be negatively affected by a strength- ening in the U.S. dollar. The Company seeks to reduce its exposure to fluctuations in foreign exchange rates by creating offsetting positions through the use of foreign cur- rency exchange contracts and through intercompany loans of foreign currency. The Company does not use such derivative financial instruments for trading or speculative purposes. The Company regularly monitors its foreign currency risks and periodically takes measures to reduce the impact of foreign exchange fluctuations on the Company’s operating results. The Company’s foreign currency derivatives are comprised of over-the-counter for- ward contracts with major international financial institutions. As of December 31, 2000, the primary currency for which the Company had net underlying foreign currency exchange rate exposure was the Japanese yen. Based on the Company’s foreign exchange contracts at December 31, 2000 as discussed in Note 17 of the Notes to the Consolidated Financial Statements, the impact of a 10% appreciation or 10% depreciation of the U.S. dollar against the Japanese yen would not represent a material potential loss in fair value, earnings or cash flows against such contracts. This potential loss does not consider the underlying foreign currency transaction or translation exposures of the Company. CURRENCY RISK AND  EXCHANGE RATE INFORMATION 45 NU SKIN ENTERPRISES With the exception of historical facts, the statements contained in this Report and 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 (the “Reform Act”) which reflect the Company’s current expectations and beliefs regarding the future results of operations, performance and achievements of the Company. These statements are subject to risks and uncertainties and are based upon assumptions and beliefs that may not materialize. These forward-looking state- ments include, but are not limited to, statements concerning: (1) the Company’s belief QUARTERLY EXCHANGE RATES 1998 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter  Japan 128.2 135.9 139.5 119.3 Taiwan 32.8 33.6 34.5 32.6 Hong Kong 7.7 7.8 7.8 7.8 South Korea 1,585.7 1,392.6 1,327.0 1,278.9 1999 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter  Japan 116.8 120.8 112.4 104.1 Taiwan 32.6 32.7 32.0 31.7 Hong Kong 7.8 7.8 7.8 7.8 South Korea 1,197.6 1,189.4 1,195.2 1,170.9 2000 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter  Japan (1) 107.1 106.7 107.7 110.1 Taiwan 30.8 30.6 31.1 32.4 Hong Kong 7.8 7.8 7.8 7.8 South Korea 1,124.8 1,115.6 1,115.4 1,165.0 (1) As of March 1, 2001 the exchange rate of US $1 into the Japanese yen was approximately 117.0. NOTE REGARDING  FORWARD-LOOKING STATEMENTS  (b) There can be no assurances that the business initiatives and strategies that have helped stabilize revenue in Japan during the end of 2000 will stabilize operations or renew growth on a sustained basis or will have a similar effect in other markets such as Taiwan. Many of the initiatives have only been recently introduced and there is still uncertainty concerning the long-term effect of these initiatives. In addition, there is a (a) Because a substantial majority of the Company’s sales are generated from the Asian regions, particularly from Japan and Taiwan, significant variations in operating results including revenue, gross margin and earnings from those expected could be caused by (i) renewed or sustained weakness of Asian economies or consumer confidence, and (ii) weakening of foreign currencies, particularly the Japanese yen, and any inability to implement forward contracts and other hedging strategies to manage foreign currency risk. The Company wishes to caution readers that the risks and uncertainties set forth below, and the other risks and factors described herein and in the Company’s other filings with the Securities and Exchange Commission (which contain a more detailed discussion of the risks and uncertainties related to the Company’s business) could cause (and in some cases in the past have caused) the Company’s actual results and outcomes to differ mate- rially from those discussed or anticipated. The Company also wishes to advise readers not to place any undue reliance on such forward-looking statements, which reflect the Company’s beliefs and expectations only as of the date of this report. The Company assumes no obligation to update or revise these forward-looking statements to reflect new events or circumstances or any changes in its beliefs or expectations. Important factors, risks and uncertainties that might cause actual results to differ from those anticipated include, but are not limited to, the following: (f) The Company’s operations could also be affected by the following risks: (i) adverse business or political conditions, continued competitive pressure, (ii) the maturity of the direct sales channel in certain of the Company’s markets, (iii) changes in laws and regula- tions (including any increased government regulation of direct selling activities and products in existing and future markets such as the People’s Republic of China, or changes in U.S. or foreign tax regulations), and (iv) the Company’s reliance on outside manufacturers. In addition, when used in this report, the words or phrases, “will likely result,” “expects,” “anticipates,” “will continue,” “intends,” “plans,” “believes,” “the Company or management believes,” and similar expressions are intended to help identify forward- looking statements. (2) management’s belief that the Company’s global convention and initiatives planned for the United States will help reverse the recent decline in revenue; (3) the expectation that the Company will spend $28.0 million for capital expenditures in 2001; (4) the belief that the Company is unlikely to pay any further contingent payments to the former NSI Stockholders; and (5) the anticipation that cash will be sufficient to pay future dividends. that existing cash and cash flow from operations will be adequate to fund cash needs; risk that the continued refinement and implementation of the Company’s divisional strategy, Internet initiatives and promotions could create renewed confusion or uncer- tainty among distributors and not increase distributor productivity. (c) Risks and uncertainties associated with the Company’s e-commerce initiatives. These risks include: (i) uncertainty concerning the degree to which such initiatives will increase and sustain levels of distributor interest, activity or retention or generate incre- mental revenue growth, and (ii) the risk of technological problems or development issues that could interrupt or delay such initiatives and impede distributor enthusiasm or increase the costs of such initiatives. (d) The ability of the Company to retain its key and executive level distributors. The Company has experienced a reduction in the number of active and executive distrib- utors. Because the Company’s products are distributed exclusively through its distributors, the Company’s operating results could be adversely affected if the Company’s existing and new business opportunities and products do not generate sufficient economic incentive to retain its existing distributors or to sponsor new distributors on a sustained basis, or if the Company receives adverse publicity. (e) Risks associated with the Company’s new product offerings planned for 2001 and launched at its global convention, including: (i) the risk that such products will not gain market acceptance or meet the Company’s expectations as a result of increased competition, (ii) the risk that sales from such product offerings could reduce sales of existing products and not generate significant incremental revenue growth or help increase distributor numbers and productivity, and (iii) any legal or regulatory restrictions that might delay or prevent the Company from offering its new products into all of its markets or limit the ability of the Company to effectively market such products. NU SKIN ENTERPRISES  46 Following are the weighted average currency exchange rates of US $1 into local currency for each of the Company’s international or foreign markets in which revenue exceeded US $5.0 million for at least one of the quarters listed: