39 NU SKIN ENTERPRISES December 31,  December 31, December 31, RESULTS OF OPERATIONS (CONTINUED) Year ended 1998 1999  2000 Revenue 100.0 % 100.0 % 100.0 % Cost of sales 20.6 17.0 17.0 Cost of sales—amortization of inventory step-up 2.4 — — Gross profit 77.0 83.0 83.0 Operating expenses: Distributor incentives 36.3 38.8 39.2 Selling, general and administrative 22.1 29.7 33.5 In-process research and development 1.5 — — Total operating expenses 59.9 68.5 72.7 Operating income 17.1 14.5 10.3 Other income (expense), net 1.5 (.1) .7 Income before provision for income taxes and minority interest 18.6 14.4 11.0 Provision for income taxes 6.9 4.7 4.0 Minority interest .3 — — Net income 11.4 % 9.7 % 7.0 % Unaudited supplemental data (1) : Income before pro forma provision for income taxes and minority interest 18.6 % Pro forma provision for income taxes 7.2 Pro forma minority interest .2 Pro forma net income 11.2 % (1) Reflects adjustment for federal and state income taxes as if the Company’s subsidiaries had been taxed as C corporations rather than as S corporations for the year ended December 31, 1998. NU SKIN ENTERPRISES  40 2000 COMPARED TO 1999 REVENUE in 2000 decreased 1.6% to $879.8 million from $894.3 million in 1999. The decrease in revenue was due to lower revenue results in Japan and Taiwan, which was partially offset by increased revenue in the United States from the operations of Big Planet, as discussed below. Fluctuations in foreign currency exchange rates positively impacted revenue for 2000 by approximately 4%. Revenue in North Asia decreased 5.5% to $585.4 million compared to $619.3 million in 1999. This decrease in revenue was due to revenue in Japan decreasing 8.0% to $554.2 million in 2000 from $602.4 million in 1999. In local currency terms, revenue in Japan was 12.5% lower in 2000 versus the prior year. The decrease in revenue in Japan is largely due to continuing challenges with distributor productivity and competition faced by the Company in 1999 and early in the year 2000 as discussed in the 1999 to 1998 comparisons. In addition, economic uncertainty in Japan negatively impacted revenue. In 2000, the Company undertook several initiatives to help stabilize revenue in Japan, including the launch of the Pharmanex business opportunity for distributors early in the year, increased focus on its automatic delivery program and the launch of the Pharmanex web site product (ePharmanex) late in the year and other initiatives. The Company believes these initiatives helped stabilize revenue in the latter half of this year as local currency revenue in Japan in the fourth quarter of 2000 increased slightly compared to the fourth quarter of 1999. The overall decline in revenue in Japan in 2000 was some- what offset by an increase in revenue in South Korea of 84.6% to $31.2 million in 2000 from $16.9 million in 1999. The revenue increase in South Korea was primarily due to significant new product launches in 2000 including Pharmanex’s weight management products and Nu Skin 180˚, ™ as well as an overall increase in the number of executive level distributors.  Revenue in Southeast Asia totaled $119.5 million for the year ended December 31, 2000, down from revenue of $140.1 million for the year ended December 31, 1999, a decrease of $20.6 million or 14.7%. This decline in revenue was primarily a result of revenue in Taiwan decreasing 19.5% to $83.4 million in 2000 from $103.6 million in 1999. The Company’s operations in Taiwan have continued to suffer the impact of increased competition and an overall decline in sales in the direct selling industry in Taiwan, which management believes is largely due to economic concerns throughout Southeast Asia. In addition, direct selling as a distribution channel has significantly penetrated the Tai- GROSS PROFIT as a percentage of revenue remained constant at 83.0% for the years ended December 31, 2000 and 1999. The Company’s gross margin in 2000 was positively impacted by the strengthening of the Japanese yen and other Asian currencies relative to the U.S. dollar, higher margin sales to distributors in the United States follow- ing the termination of the Company’s license agreement with Nu Skin USA, increased local manufacturing efforts and reduced duty rates. The Company purchases a signifi- Revenue in the Company’s other markets, which include its European, Latin American and Brazilian operations, increased 12.6% to $19.1 million in 2000. This increase is largely due to a 35% increase in local currency revenue in Europe, more than making up for the negative currency impact experienced in Europe in 2000 from 1999. Revenue in North America, consisting of the United States and Canada, increased 32.1% to $155.8 million in 2000, from $117.9 million in 1999. This increase in revenue is due to the inclusion of a full year of operations of Big Planet following its acquisition in July 1999 as well as a full year of operations of the Company’s North America sales operations following the termination of the license agreements in March 1999. Revenue in the Big Planet division increased $32.9 million due to the timing of the acquisition as well as growth within Big Planet in the year 2000. In addition, revenue in North America, exclusive of Big Planet, increased by $5.0 million due to a full year of revenue from sales to distributors in North America during 2000, following the early 1999 acquisi- tions. Revenue in the United States decreased sequentially during the last two quarters of the year primarily as a result of the termination of Big Planet’s iPhone giveaway and weaker than anticipated sales during the fourth quarter holiday season. The Company made the strategic decision to terminate the iPhone giveaway in order to improve operating profits. Management is optimistic that the Company’s global convention in the first quarter of 2001, new product launches and other initiatives planned for the United States will help reverse this revenue trend in 2001. wanese market. The revenue decline in Southeast Asia was partially offset by the open- ing of the market in Singapore which generated $1.0 million in revenue in one month of operation in 2000. In addition, the revenue from the Company’s retail operations opened in China in 2000 was $1.2 million. Other markets in the region such as Hong Kong, Thailand, the Philippines, Australia and New Zealand were slightly down in 2000 versus 1999 due largely to economic uncertainty in the region as well as a negative foreign currency impact for the year.