TABLE OF
CONTENTS
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Our Product Categories |
-3- |
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Sourcing and Production |
-7- |
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Research and Development |
-8- |
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Geographic Sales Regions |
-9- |
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Intellectual Property |
-18- |
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Government Regulation |
-18- |
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Available Information |
-22- |
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ITEM 1A. |
RISK FACTORS |
-23- |
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ITEM 1B. |
UNRESOLVED STAFF COMMENTS |
-35- |
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ITEM 3. |
LEGAL PROCEEDINGS |
-36- |
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ITEM 4. |
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
-37- |
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ITEM 5. |
MARKET FOR REGISTRANTS COMMON EQUITY,
RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
-37- |
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ITEM 6. |
SELECTED FINANCIAL DATA |
-39- |
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ITEM 7. |
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS |
-40- |
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ITEM 7A. |
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK |
-64- |
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ITEM 8. |
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
-64- |
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ITEM 9. |
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE |
-90- |
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ITEM 9A. |
CONTROLS AND PROCEDURES |
-90- |
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ITEM 9B. |
OTHER INFORMATION |
-91- |
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ITEM 15. |
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES |
-93- |
-i-
FORWARD-LOOKING
STATEMENTS
THIS
ANNUAL REPORT ON FORM 10-K, IN PARTICULAR ITEM 7. MANAGEMENTS DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, 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, 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. 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 23.
In this Annual Report on Form
10-K, references to dollars and $ are to United States dollars. Nu
Skin, Pharmanex, and Big Planet 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.
PART I
ITEM 1. BUSINESS
Overview
Nu
Skin Enterprises is a leading, global direct selling company with operations in 41
countries throughout Asia, the Americas and Europe. We develop and distribute premium
quality, innovative personal care products and nutritional supplements that are sold
worldwide under the Nu Skin and Pharmanex brands. We also market technology-related
products and services under the Big Planet brand. We operate through a direct selling
model in all of our markets except Mainland China (hereinafter China), where
we currently use a retail business model with employed sales representatives because of
regulatory restrictions on direct selling activities. We are currently in the process of
applying for a direct selling license in China pursuant to recently enacted regulations
that will enable us to begin to adapt our current business model there to include a direct
selling component, assuming we receive the required license.
We
are one of the leading direct selling companies in the world with 2005 revenue of $1.2
billion. As of December 31, 2005, we had a global network of approximately 803,000
active independent distributors, sales representatives, and preferred customers,
approximately 30,000 of whom were executive level distributors or full-time sales
representatives. Our executive level distributors and full-time sales representatives play
an important leadership role in our distribution network and are critical to the growth
and profitability of our business.
We
recognized approximately 88% of our revenue in markets outside the United States in 2005.
Our Japanese operations accounted for approximately 48% of our 2005 revenue, although this
markets contribution to our overall revenue is lower compared to prior years as a
result of our expansion into and growth in other markets. Because of the size of our
foreign operations, our operating results can be
-1-
impacted positively or negatively by
economic, political and business conditions around the world as well as by foreign
currency fluctuations, particularly in Japan and other Asian markets.
We
develop and market branded consumer products that we believe are well-suited for direct
selling. Our distributors market and sell our products by educating consumers about the
benefits and distinguishing characteristics of our products and by providing personalized
customer service. Through dedicated research and development, we continually develop and
introduce new products and enhance our existing line of products to provide our
distributors with a differentiated product portfolio. We believe that we are able to
attract and motivate high-caliber independent distributors because of our focus on
developing innovative products, our attractive global compensation plan and our advanced
technological distributor support.
Our
business is subject to various laws and regulations throughout the world, in particular
with respect to network marketing activities and nutritional supplements. This creates
certain risks for our business, including improper activities by our distributors or any
inability to obtain necessary product registrations.
Our
strategy for growing our business over the last few years has focused on three key areas:
|
|
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expansion
into new markets; |
|
|
|
introduction
of unique tools and initiatives to motivate distributors and improve retention; and |
|
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development
of compelling and innovative products. |
During
2005, we continued our efforts to expand into additional new markets and grow operations
in recently opened markets. We commenced operations in Indonesia in August of 2005, and we
recently opened business in Romania. We also plan to commence operations in Russia during
the first half of 2006. We also further expanded our presence in China by opening stores
and operations in many new cities. We currently have stores in 92 cities throughout China.
We also introduced certain key Pharmanex products into China in January 2005.
We
also remain committed to providing our distributors with unique tools and initiatives that
motivate distributors and help them attract and retain customers and other distributors.
These tools reflect our focus on delivering a product offering with a Measurable
Difference. During 2005, we continued to expand the use of the
Pharmanex® BioPhotonic Scanner (the Scanner) in the United
States and key international markets including Japan. The Scanner is based on patented
technologies that allow our distributors to non-invasively measure the impact of our
nutritional products on overall nutritional status. At our global convention held in the
United States in October 2005, we unveiled the second-generation model of the Scanner
(called the S2 or the "Scanner") which is smaller, more portable and faster than its
predecessor in terms of scan and calibration time. We also recently
announced plans to launch the Nu Skin® ProDerm Skin Analyzer, a
handheld skin imaging and analysis tool that will enable our distributors to demonstrate
the efficacy of our skin care products by providing a visual and quantifiable assessment
of important skin characteristics. In addition, we have continued to expand and promote
product subscription and loyalty programs in many of our markets that provide incentives
for customers to commit to purchase a set amount of products on a monthly basis. We
believe these programs have improved customer retention in many of our markets.
Compelling
and innovative products and initiatives are vital to our company because they help to
motivate our distributors and make them more effective. As a result, we continue to focus
on the
-2-
development and introduction of innovative products and reformulated products in
order to help expand our business in existing markets. Our product development philosophy
across all three product categories is to develop products and related initiatives that
allow customers to live better, longer. Some of the products introduced in the
last year include:
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|
|
g3, a nutrient-rich juice blend containing a highly concentrated mix of carotenoid
antioxidants and micronutrients with a natural delivery system called
Lipocarotenes; |
|
|
|
LifePak Nano,
a new formula of LifePak featuring novel, proprietary nano-carotenoid
antioxidants delivered through a unique lipid system that maximizes nutrient absorption; |
|
|
|
NanoCoQ10,
a supplement using cutting-edge nano technology to deliver highly bioavailable coenzyme
Q10; |
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|
a second generation of our top-selling Nu Skin 180º Anti-aging Skin Therapy System; |
|
|
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Celltrex CoQ10
Complete, a topical antioxidant network for the skin that combines coenzyme Q10 with
colorless carotenoids and vitamins C and E; |
|
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|
Epoch Sole
Solution Foot Treatment, an ethnobotanical cream for dry, cracked skin; and |
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Photomax, an online digital imaging service that allows consumers to preserve,
organize, share and enjoy their photographs. |
Our Product Categories
We
have three product categories, each distinguished by its own brand. We market our
premium-quality personal care products under the Nu Skin brand, science-based nutritional supplements
under the Pharmanex brand and technology-based products and services under the Big Planet
brand.
Presented
below are the U.S. dollar amounts and percentages of revenue from the sale of Nu Skin,
Pharmanex and Big Planet products and services for the years ended December 31, 2003, 2004
and 2005. This table should be read in conjunction with the information presented in
Managements Discussion and Analysis of Financial Condition and Results of
Operations, which discusses the costs associated with generating the aggregate
revenue presented.
Revenue by Product
Category
(U.S. dollars in
millions)(1)
|
Year Ended December 31, |
|
Product Category | |
2003 | |
2004 | |
2005 | |
| |
| |
| |
| |
Nu Skin |
|
$ 476.2 |
|
48.3 |
% |
$ 548.1 |
|
48.2 |
% |
$ 484.3 |
|
41.0 |
% |
| |
| |
| |
| |
Pharmanex | |
472.1 |
|
47.8 |
|
567.2 |
|
49.8 |
|
667.6 |
|
56.5 |
|
| |
| |
| |
| |
Big Planet | |
38.2 |
|
3.9 |
|
22.6 |
|
2.0 |
|
29.0 |
|
2.5 |
|
| |
| |
| |
| |
| |
$ 986.5 |
|
100.0 |
% |
$ 1,137.9 |
|
100.0 |
% |
$ 1,180.9 |
|
100.0 |
% |
(1) |
|
In
2005, 88% of our sales were transacted in foreign currencies that were
converted to U.S. dollars for financial reporting purposes at
weighted-average exchange rates. Foreign currency fluctuations positively
impacted reported revenue by approximately 1% in 2005, compared to 2004,
and positively impacted reported revenue by approximately 4% in 2004,
compared to 2003. |
-3-
Nu
Skin. Nu Skin is our original product line and offers premium-quality personal
care products in the areas of advanced skin treatments, daily skin care, ethnobotanical
treatments and other advanced personal care products. Our strategy is to leverage our
network marketing distribution model to establish Nu Skin as an innovative leader in the
personal care market. We are committed to continuously improving and evolving our product
formulations to incorporate innovative and proven ingredients. In 2005, we introduced
several new products and tools, including a new version of Nu Skin 180°,
Celltrex CoQ10 Complete and Epoch Sole Solution Foot Treatment.
In
addition to marketing premium-quality personal care products, we are committed to
developing tools to help distributors market our products more effectively. In 2004, for
example, we introduced the Nu Skin® Regimen Optimizer, a proprietary
software tool that integrates decades of skin care expertise into an easy-to-use, mobile
product recommendation tool. We also provided our distributor centers around the world
with a third-party skin imaging camera called the VISIA Complexion Analysis System,
helping distributors tailor product recommendations to their customers specific
needs. By mid-2006, we plan to begin the global launch of a proprietary skin imaging and
assessment system, a patent-pending handheld skin analysis tool called the Nu
Skin® ProDerm Skin Analyzer, which we unveiled at our October 2005
global distributor convention. This tool is designed to provide users with a visual and
quantifiable assessment of skin characteristics such as wrinkles, texture, discoloration
and pores, enabling distributors to help customers determine their skin care needs and
quantifiably measure the effect of their skin care regimens.
Our
leading product categories in the Nu Skin division are advanced skin treatments and daily skin care. The following table summarizes the current Nu Skin product line by category:
Category | |
Description | |
Selected Products | |
|
|
|
Advanced Skin Treatments | |
Our advanced skin treatments are designed to target specific
skin care needs with ingredients scientifically proven to provide visible results for concerns
ranging from aging to acne. | |
Nu Skin 180° Anti-Aging Skin Therapy System
Tru Face Line Corrector
Tru Face Essence
Tru Face Revealing Gel
Nu Skin Galvanic Spa System II
Nu Skin Clear Action Acne Medication System
Nu Skin Tri-Phasic White | |
|
|
|
Daily Skin Care |
|
Our daily skin care line consists of face and body
products, including cleansers, toners, moisturizers, specialty products and body care. Nutricentials
products, fortified with topically applied nutrients, uniquely position this line. |
|
Night Supply NourishingCream
Liquid Body Bar
Enhancer Skin Conditioning Gel
Celltrex Ultra Recovery Fluid
Celltrex CoQ10 Complete
Perennial Intense Body Moisturizer |
|
-4-
Category | |
Description | |
Selected Products | |
|
|
|
Ethnobotanicals |
|
Our Epoch line is distinguished by utilizing the
traditions of indigenous cultures. 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. |
|
Epoch Baby
Calming Touch
Glacial Marine Mud
Ava puhi moni Shampoo
IceDancer Invigorating Leg
Gel
FireWalker Moisturizing Foot Cream
Sole Solution |
|
|
|
|
Color Cosmetics | |
Our Nu Colour line complements our skin care offerings
through a variety of premium-quality cosmetics. | |
Nu Colour Cosmetics
Skin Beneficial Tinted Moisturizer
Bronzing Pearls
Replenishing Lipstick
Eye Makeup Remover | |
|
|
|
|
Scion | |
Available in certain markets, Scion is a line of personal care products that provides value-oriented solutions to meet basic grooming needs with quality
ingredients. | |
Scion Toothpaste
Scion Two-In-One Shampoo
Scion Hand and Body Wash
Scion Moisturizing Body Lotion | |
|
|
|
|
Other Products | |
Our personal care portfolio also includes daily-use products for hair care, scalp treatment and sun protection. | |
DailyKind Mild Shampoo
FreeFall Detangling Spray
Nutriol Hair Fitness
Sunright Lip Balm | |
|
|
|
|
| |
| |
| |
Pharmanex.
We market a variety of Pharmanex nutritional products comprised of
comprehensive micronutrient supplements, targeted nutritional supplements,
weight management supplements and certain specialty products. Pharmanex products
include our flagship line of LifePak micronutrient and phytonutrient
supplements, which accounted for 27% of our total revenue and 47% of Pharmanex
revenue in 2005.
Direct
selling has proven to be an extremely effective method of marketing our high-quality
nutritional supplements because our distributors are able to personally educate consumers
on the quality and benefits of our products, differentiating them from competitors
offerings. Our strategy for expanding our nutritional supplement business is to introduce
innovative, substantiated products based on extensive research and development and quality
manufacturing. Our product development efforts are focused in the areas of anti-aging,
weight management and other nutrition issues. In 2005, we introduced several new products,
including g3 juice and LifePak nano.
In
line with our commitment to provide distributors with tools that will help them market our
products more effectively, we introduced the Scanner in 2003 and have since supplied it to
nearly all of our global markets. At our global convention held in the United States in
October 2005, we unveiled the second-generation model of the Scanner which is smaller,
more portable and faster than its predecessor in terms of scan and calibration time. We
launched the S2 in the United States and China in February 2006 and plan to introduce it
in Japan and other markets later this year. Until recently, our license for the Scanner technology did not permit us to use
the Scanner in a medical setting. However, as a result of
a recent transaction that we completed, we now own the rights to use the Scanner
technology within all environments, including in a medical setting. This
provides us with an increased marketing opportunity for our sales force to promote and
sell our nutritional supplements. It also opens up new clinical research opportunities for
us to further evaluate the application of the Scanner technology in nutrition science.
-5-
The
following table summarizes the current Pharmanex product lines by category:
Category | |
Description | |
Selected Products | |
|
|
|
Micronutrient Supplements |
|
Our daily supplements are designed to provide a beneficial mix of nutrients including vitamins, minerals and antioxidants. |
|
LifePak Family of Products
g3 juice |
|
|
|
|
Targeted Nutritional Solutions | |
Our self-care dietary supplements contain consistent levels of botanical ingredients that are designed to provide consumers with targeted wellness benefits. | |
Tegreen 97
ReishiMax GLp
MarineOmega
Cholestin
CordyMax Cs-4
Cortitrol
BioGingko 27/7
IgG Boost
Estera Women | |
|
|
|
Weight Management | |
Our TRA ephedra-free line of weight management products was
created to capitalize on the growing weight management category. TRA supplements complement
any diet program that is currently on the market. | |
OverDrive
FibreNet
TRA
| |
|
|
|
Other - Specialty Products | |
Our portfolio of other nutritional products includes healthy drinks and other specialty wellness products, including our VitaMeal dehydrated food product. | |
Splash C
Appeal
AloeDrink | |
|
|
|
|
| |
| |
| |
Big Planet. We offer high-technology products and services centered around
two product categories under the Big Planet brand: digital photography and business tools.
We evaluate emerging trends in technology and develop easy-to-use products that are
designed to capitalize on these trends. Our strategy is to provide innovative products
designed specifically for non-technical people, which we believe is an underserved market
due to the usual complexity of high-tech products.
Our
current development focus centers around the digital photography market, where the
convergence of trends in digital cameras, mass storage and the Internet offers a unique
opportunity to provide products and services that make it easy for consumers to preserve,
organize, share and enjoy their photographs. In
-6-
2005, we introduced a Web-based digital
photo service called Photomax.com, which makes it easy for consumers to view,
organize and share digital pictures online. Other products in this category include
Photo Saver CD, a service in which we convert traditional photographs and slides to
digital format and store them on a CD, and Movie Magic DVD and Picture Show
DVD, services that transform digital photos into personalized movies or slide shows.
Our
Big Planet business tools, products and services are designed to help distributors
increase their productivity by leveraging technology in the management of their direct
selling activities. These products include individual, personalized distributor Web sites
hosted by Big Planet that grant customers easy and convenient access to information about
our products and services. Distributors can manage content on their individual Web sites,
customizing their marketing efforts and conducting e-commerce activities across our
product lines.
The
following table summarizes the current Big Planet product lines by category:
Category | |
Description | |
Selected Products | |
|
|
|
Digital Photography |
|
A line of digital photography services designed for non-technical consumers. |
|
Picture Show DVD
Movie Magic DVD
Photo Saver CD
Photomax Web site - online photo storage |
|
|
|
|
Business Tools | |
Advanced tools and services that help distributors and consumers establish an online presence and manage their businesses. | |
Global Web Page
BP Mall
ISP for U.S. - by Qwest
ISP for Japan - by Nifty
BP Internet Security | |
| |
| |
| |
We
also market a line of home care products under the Ecosphere brand, which are designed to
clean and protect the home environment and include the Water Purifier, Filtering
Showerhead, and Surface Wipes. These products are sold primarily in our Asian
markets.
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 that we believe are reliable, reputable,
and deliver us high quality materials and service. For more than
10 years, we have acquired ingredients and products from one primary supplier that
currently manufactures approximately 31% of our Nu Skin personal care products. Our
contract with our supplier is for a one-year term that automatically renews each year for
an additional one-year term unless either party terminates the contract. We maintain a
good relationship with our supplier and do not anticipate that either party will terminate
the contract in the near term. We also have ongoing relationships with secondary and
tertiary suppliers who supply almost all of our remaining products and ingredients. In the
event we become unable to source any products or ingredients from our major supplier, we
believe that we would be able to produce or replace those products or substitute
ingredients from our secondary and tertiary suppliers without great difficulty or
significant increases to our cost of goods sold. 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.
-7-
In
2001, we established our own production facility in Shanghai, where we currently
manufacture the personal care products sold through our retail stores in China, as well as
a small portion of product that is exported to other markets. If the need arose, this
plant could be expandedor other facilities could be built in Chinato produce
larger amounts of inventory for export as a back-up to our usual supply chain.
Pharmanex.
Substantially all of our Pharmanex nutritional supplements and ingredients,
including LifePak, are produced or provided by industry-leading
third-party suppliers. We rely on two partners for the majority of our Pharmanex
products, one of which supplies approximately 35% and the other of which
supplies approximately 22% of our nutritional supplements. 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 located in Zhejiang Province, China, where we produce herbal
extracts for Tegreen 97, ReishiMax GLp and other products sold
globally. In 2005, we completed the build-out of a new manufacturing facility in Zhejiang
Province where we produce some of our Pharmanex nutritional supplements for sale through
our retail stores in China. Adjacent to this site, we are in the process of building a new
herbal extract plant that will replace the existing facility. We are also planning to
build a nutritional supplement manufacturing and exporting facility in China that is
scheduled to be online by mid-2008.
We
initially relied on a third-party manufacturer to produce our Scanner units, but in
December 2004 we opened a plant in Shanghai where we now manufacture the Scanners
ourselves. This facility will allow us to produce sufficient Scanners to support current
and future demands in our markets.
Big
Planet. Other than Web hosting, our on-line digital photography services and
online distributor tools, nearly all Big Planet products and services are provided by
third parties pursuant to contractual arrangements. By acting as a private-labeled agent
for other vendors, we are able to avoid the large capital investment that would be
required to build the infrastructure necessary to fulfill Big Planets product
offerings. However, our profit margins and our ability to deliver quality services at
competitive prices depend upon our ability to negotiate and maintain favorable terms with
third-party providers. In connection with our Big Planet digital photography services, we
are developing our own internal infrastructure for some of these offerings.
Research and Development
We
continually invest in our research and development capabilities. Our research and development expenditures
were approximately $6 million in 2003, $8 million in 2004 and $8 million in 2005. Because
of our commitment to product innovation, we will continue to commit resources to research
and development in the future.
Our
primary research laboratory, adjacent to our office complex in Provo, Utah, houses both
Pharmanex and Nu Skin research facilities and technical personnel. We also maintain
research facilities in China. Much of our Pharmanex research to date has been
conducted in China, where we benefit from a well-educated, low-cost labor pool that
enables us to conduct research and clinical trials at a much lower cost than would be
possible in the United States.
-8-
We
also have collaborative relationships with numerous independent scientists, including
scientific advisory boards comprised of recognized authorities in various related
disciplines for each of our nutritional and personal care product categories. We maintain
collaborative arrangements with prominent universities and research institutions in the
United States, Europe and Asia, whose staffs include scientists with expertise in natural
product chemistry, biochemistry, dermatology, pharmacology and clinical studies. Some of
the university research centers with which we have worked include UC Davis, UCLA, Stanford
University, Vanderbilt University, Tufts University, Columbia University, the University
of Kansas, the University of Hong Kong School of Medicine and Taiwan Academia Sinica.
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.
In
order to provide high-quality nutritional supplements, Pharmanex utilizes a unique 6S
Quality Process® in our development and sourcing activities. The 6S Quality
Process enhances our ability to provide consumers with safe, effective and consistent
products and involves the following steps:
|
|
|
Selection.
Conducting a scientific review of research and databases in connection with the
selection of potential products and ingredients and determining the authenticity,
usefulness and safety standards for potential products and ingredients. |
|
|
|
Sourcing.
Investigating potential sources, evaluating the quality of sources and performing
botanical and chemical evaluations where appropriate. |
|
|
|
Structure.
Determining the structural profile of natural compounds and active ingredients. |
|
|
|
Standardization.
Standardizing the products dosage of biologically relevant active ingredients.
|
|
|
|
Safety.
Assessing safety from available research and, where necessary, performing additional
testssuch as microbial tests and chemical analysesfor toxins and heavy
metals. |
|
|
|
Substantiation.
Reviewing documented pre-clinical and clinical trials and, where necessary and
appropriate, initiating studies and clinical trials sponsored by Pharmanex. |
Geographic Sales Regions
We
currently sell and distribute our products in 41 markets, employing a direct selling model
in each of our markets except China. Our operations are divided into five geographic
regions: North Asia, Greater China, North America, South Asia/Pacific and Other Markets.
The following table sets forth the revenue for each of the geographic regions for the
years ended December 31, 2003, 2004 and 2005:
-9-
Revenue by Region
|
Year Ended December 31, | |
|
(U.S. dollars in millions) | |
2003 | |
2004 | |
2005 | |
North Asia |
|
$ 612.8 |
|
62% |
|
$ 640.1 |
|
56% |
|
$ 649.4 |
|
55% |
|
Greater China | |
135.5 |
|
14 |
|
229.8 |
|
20 |
|
236.7 |
|
20 |
|
North America | |
127.6 |
|
13 |
|
145.7 |
|
13 |
|
154.1 |
|
13 |
|
South Asia/Pacific | |
75.8 |
|
8 |
|
81.8 |
|
7 |
|
86.7 |
|
7 |
|
Other Markets | |
34.8 |
|
3 |
|
40.5 |
|
4 |
|
54.0 |
|
5 |
|
| |
$ 986.5 |
|
100% |
|
$ 1,137.9
|
|
100% |
|
$ 1,180.9 |
|
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 was opened, 2005 revenue and the percentage of our
total 2005 revenue for each market:
(U.S. dollars in millions) | |
Year Opened | |
2005 Revenue | |
Percentage of
2005 Revenue | |
|
|
|
|
Japan |
|
1993 |
|
$ 562.0 |
|
48% |
|
South Korea | |
1996 | |
$ 87.4 |
|
7% |
|
| |
| |
| |
| |
Japan
is our largest market and accounted for approximately 48% of total revenue in 2005. We
market most of our Nu Skin and Pharmanex products in Japan, along with a limited number of
Big Planet offerings. In addition, all three product categories offer a limited number of
locally developed products sold exclusively in our Japanese market. In November 2004, we
launched the Scanner in Japan, completing that roll-out during 2005, and plan to launch
the new S2 Scanner in 2006. We also plan to launch g3 nutritional juice (subject to regulatory approval) and the Nu
Skin® Proderm Skin Anlayzer in 2006.
In
South Korea, we offer most of our Nu Skin and Pharmanex products, along with a limited
number of Big Planet services. During 2005, we made the Scanner available in our walk-in
centers and to distributors through the Scanner lease program.
Greater
China. The following table provides information on each of the markets in
the Greater China region, including the year it was opened, 2005 revenue and the
percentage of our total 2005 revenue for each market:
(U.S. dollars in millions) | |
Year Opened | |
2005 Revenue | |
Percentage of
2005 Revenue | |
|
|
|
|
China |
|
2003 |
|
$ 102.2 |
|
9% |
|
Taiwan | |
1992 | |
$ 92.4 |
|
8% |
|
Hong Kong | |
1991 | |
$ 42.1 |
|
4% |
|
| |
| |
| |
| |
Our
Hong Kong and Taiwan operations are aligned with our global direct selling business model
and our global compensation plan. We offer a robust product offering of the majority of
our Nu Skin and Pharmanex products in Hong Kong and Taiwan, and only limited Big Planet
products and services. The majority 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 streamlined the ordering process.
-10-
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. During 2005 we began selling several key
Pharmanex products, including LifePak, and we also placed Scanners in each of our
140 retail stores. Our plans in 2006 include the launch of the S2 Scanner, g3
nutritional juice, and the Nu Skin® ProDerm Skin Analyzer.
We
currently do not 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 which utilizes an employed sales
force to sell products through fixed retail locations. We rely on this employed 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
employed sales force, to educate them about our products through frequent training
meetings, and to obtain repeat purchases from the sales employees and their customers. Our
model only allows for product sales to be transacted within our retail stores. We
currently have 140 retail locations in operation. The compensation and salary of an
employed sales representative is determined based on a variety of factors including the
sales productivity of the sales representative and the other representatives he trains and
supervises. While our distributor leaders from other markets are able to introduce
customers and sales people to our stores, their promotional efforts are limited due to the
restrictions on direct selling in this market.
We
employed approximately 3,800 full-time sales representatives in China as of December 31,
2005. Although we enter into labor contracts with all potential new sales representatives,
only a small percentage complete the qualification process, become full-time sales
representatives and continue as such for an extended period of time. We provide these
potential new sales representatives with a minimum base pay and other labor benefits. As
of December 31, 2005, we had approximately 6,600 of such sales employees not yet
considered full-time sales representatives.
In
September of 2005, the Chinese government announced the adoption of new direct selling
regulations that allow sales away from a fixed location through independent contractors,
subject to various requirements and restrictions, including restrictions on the ability to
pay multi-level compensation. These regulations are not clear in many respects and are
subject to various interpretations. In accordance with these new regulations, we have
applied for a direct selling license. If and when we obtain a required direct selling
license, we plan to begin to adapt our current business model to include a direct selling
component that will allow us to engage independent contractors who will be able to sell
our products away from a fixed location. We currently anticipate that we will be able to
conduct direct selling in several leading provinces and municipalities by the end of 2006,
and in additional provinces and municipalities in 2007. Since the new regulations prohibit
the use of multi-level compensation plans for direct selling, these independent
contractors engaged in direct selling will be compensated for their personal selling
efforts only. We plan, however, to continue to operate our retail store/employed sales
representative model because we believe it provides us with more flexibility in the manner
in which we can operate throughout China and compensate our sales representatives given
the restrictions in the new direct selling regulations. For more information concerning
the regulatory risks associated with our operations in China, see Item 1A. Risk
Factors If recently adopted direct selling regulations in China are interpreted or
enforced by governmental authorities in a manner that negatively impacts our current
business model or our planned dual business model there, or if we are unable to obtain a
direct selling license under these regulations, our business in China would be
harmed.
-11-
In
addition, the new direct selling regulations require us to maintain service
centers in any area where we desire to conduct direct selling activities. We expect
that our retail stores and offices will qualify as service centers, but we plan to add
additional small service centers in 2006 and 2007. The number of service centers to be
added will depend upon our development strategy as well as governmental guidelines that
are still being developed at the local, provincial, city and/or district levels throughout
China.
North
America. The following table provides information on each of the markets in the
North America region, including the year it was opened, 2005 revenue and the percentage of
our total 2005 revenue for each market:
(U.S. dollars in millions) | |
Year Opened | |
2005 Revenue | |
Percentage of
2005 Revenue | |
|
|
|
|
United States |
|
1984 |
|
$ 144.5 |
|
12% |
|
Canada | |
1990 | |
$ 9.6 |
|
1% |
|
| |
| |
| |
| |
Substantially
all of our Nu Skin and Pharmanex products, as well as our Big Planet products and
services, are available for sale in the United States. The Scanner has been a significant
focus for us as an important distributor business tool in the United States since its
initial introduction in 2003. Coupled with a focus on growing monthly product subscription
revenue, the Scanner has been an important factor in the growth of our Pharmanex business
in the United States over the last few years. We plan to launch the S2 Scanner and the Nu
Skin® ProDerm Skin Analyzer during 2006.
South
Asia/Pacific. The following table provides information on each of the
markets in the South Asia/Pacific region, including the year it was opened, 2005 revenue
and the percentage of our total 2005 revenue for each market:
(U.S. dollars in millions) | |
Year Opened | |
2005 Revenue | |
Percentage of
2005 Revenue | |
|
|
|
|
Singapore/Malaysia/Brunei |
|
2000/2001/2004 |
|
$ 41.4 |
|
4% |
|
Thailand | |
1997 | |
$ 23.7 |
|
2% |
|
Australia/New Zealand | |
1993 | |
$ 13.3 |
|
1% |
|
Indonesia | |
2005 | |
$ 4.2 |
|
* |
|
Philippines | |
1998 | |
$ 4.1 |
|
* |
|
| |
| |
| |
| |
We
offer a majority of our Pharmanex and Nu Skin products but very few Big Planet products in
South Asia/Pacific. Marketing initiatives in South Asia/Pacific have centered around
monthly product subscription orders and the Scanner, which is available in many of our
walk-in centers in this region. We commenced operations in Indonesia in August 2005.
Other
Markets. The following table provides information on each of the markets in the
Other Markets region, including the year it was opened, revenue for 2005 and the
percentage of our total 2005 revenue for each market:
-12-
(U.S. dollars in millions) | |
Year Opened | |
2005 Revenue | |
Percentage of
2005 Revenue | |
|
|
|
|
Europe(1) |
|
1995 |
|
$ 46.0 |
|
4% |
|
Latin America and Other(2) | |
1994 | |
$ 8.0 |
|
1% |
|
| |
| |
| |
| |
(1) |
|
Europe
includes Austria, Belgium, Denmark, Finland, France, Germany, Hungary,
Ireland, Iceland, Israel, Italy, the Netherlands, Norway, Poland,
Portugal, Spain, Sweden and the United Kingdom. |
(2) |
|
Latin
America and Other includes Brazil, El Salvador, Guatemala, Honduras and Mexico. |
We
currently operate in 18 countries throughout Western, Southern, and Central Europe and
offer a full range of Nu Skin, Pharmanex and Big Planet products.
Over
the past year, we continued to invest in our Latin American markets. As a result, we have
seen significant growth to our business in Mexico during the past 18 months, due largely
to modifications to our compensation model there that have attracted strong distributor
leaders. We also continue to invest in our European markets and we recently commenced
operations in Hungary and Romania. We plan to commence operations in Russia during the
second quarter of 2006 and are looking into other Eastern European markets as well.
Distribution
Overview.
The foundation of our sales philosophy and distribution system is network
marketing. We sell our products through independent distributors who are not
employees, except in China where we sell our products through employed retail sales
representatives. Our distributors generally purchase products from us for resale
to consumers and for personal consumption. Because of the nature of our Big
Planet products and services, distributors buy a limited number of our Big
Planet products for resale but primarily act as independent sales
representatives for our products and receive a commission on product sales from
us.
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 television and print
advertisements; |
|
|
|
direct
sales allow for actual product 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 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 productsgenerally on a monthly product
subscription basisdirectly from us. Throughout this annual report, we include
preferred customers who have purchased products for resale or personal consumption 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.
-13-
Executive-level
distributors under our global compensation plan are those distributors who are most
seriously pursuing the direct selling opportunity and must achieve and maintain specified
personal and group sales volumes for a required period of time. Once an individual becomes
an executive-level distributor, he or she can begin to take full 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 retail
stores and an employed sales force. (See the discussion on China in Geographic Sales
Regions.) Employed full-time sales representatives are those sales representatives
that have completed a qualification process. These sales representatives have a monthly
volume commitment that is about 50% of the dollar amount of an executive-level
distributors monthly volume commitment under our global compensation plan.
Throughout this annual report, we include full-time sales representatives in China in our
executive-level distributor numbers in order to provide some level of
comparison between our China model and our global direct selling model.
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, 2005, we had approximately 803,000 active distributors
of our products and services. Approximately 30,000 of these distributors were
executive-level distributors. As of each of the dates indicated below, we had the
following number of executive distributors in the referenced regions:
Total Number of Executive
Distributors by Region
Region | |
2003 | |
2004 | |
2005 | |
North Asia |
|
17,013 |
|
16,637 |
|
16,129 |
|
Greater China | |
5,991 |
(1) |
8,827 |
(1) |
7,134 |
(1) |
North America | |
2,861 |
|
3,099 |
|
3,443 |
|
South Asia/Pacific | |
2,175 |
|
2,076 |
|
2,043 |
|
Other Markets | |
1,091 |
|
1,377 |
|
1,722 |
|
Total | |
29,131 |
|
32,016 |
|
30,471 |
|
(1) |
|
These
numbers include employed, full-time sales representatives in China of 3,100,
5,437 and 3,787 for 2003, 2004 and 2005, respectively. |
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 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 are often attracted to become
distributors after using our products and becoming 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 obligates the distributor to abide by our
policies and procedures.
-14-
Global
Compensation Plan. One of our key competitive advantages is our global sales
compensation plan. Under our global compensation plan, a distributor is paid consolidated
monthly commissions in the distributors home country, in local currency, for the
distributors own product sales and for product sales in that distributors
downline distributor network across all geographic markets. Because of restrictions on
direct selling in China, our full-time employed sales representatives there do not
participate in the global compensation plan, but are compensated according to a retail
sales model established for that market. Additionally, while global distributor leaders
are compensated based on sales activity of preferred customers and sales employees in
China, sales in China do not accrue to satisfy applicable sales volume requirements within
the global compensation plan.
Commissions
on the sale of an individual Nu Skin or Pharmanex product can reach approximately 58% of
the wholesale price. The actual payout percentage, however, varies depending on a
distributors level within the global compensation plan. On a global basis, the
overall payout on these products has typically averaged approximately 41% to 43%. 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 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.
High
Level of Distributor Incentives. Based upon managements 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 products wholesale cost, net of any point-of-sale taxes. As a
distributors business expands to successfully sponsoring other distributors into the
businesswho in turn expand their own businessesa distributor receives a higher
percentage of commissions. An executives commissions can increase substantially as
multiple downline distributors achieve executive status. In determining commissions, the
number of levels of downline distributors included in an executives 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 distributors efforts by providing effective distributor
support has been, and will continue to be, important to our success.
-15-
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 computerized 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 do not believe that most of our distributors maintain a
significant inventory of our products.
Rules
Affecting Distributors. We closely 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 produce or pre-approve all sales aids used by
distributors such as videotapes, audiotapes, brochures and promotional clothing.
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 us.
Distributors may not use our trademarks or other intellectual property without our
consent.
Except
in China, products generally may not be sold, and our business opportunities may not be
promoted, in traditional 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 businesssuch as a doctors office, hair salon or health
clubmay 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 concerns. For example, in the United States,
distributors must also:
-16-
|
|
|
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
distributors 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.
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 users 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 2004, our experience with actual product returns averaged less than 5%
of annual revenue.
Payment.
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. Cash, which represents a significant portion of
all payments, is received by order takers in the distribution centers or retail
stores in China when orders are placed.
Competition
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.
Big
Planet Products and Services. The markets for our Big Planet products and
services are also highly competitive. Many of our competitors for these products and
services have much greater name recognition and financial resources than we do. We compete
in this market by delivering products that are more user friendly than those of our
competitors, by developing unique features and product interfaces, by partnering with
leading technology vendors whose competitive positioning can assist us and by leveraging
our direct selling channel strengths. The market for technology and telecommunication
products is very price sensitive, so we rely on our ability to acquire quality services
from vendors at prices that allow our distributors to sell at competitive prices while
still generating attractive commissions.
-17-
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, Pharmanex, Big Planet and LifePak.
In addition, a number of our products and tools, including the 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 know-how. Our business is not substantially dependent on any single licensed
technology from any third party.
Government Regulation
Direct
Selling Activities. Direct selling activities are regulated by various federal,
state and local governmental agencies in the United States and foreign countries. 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
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. Based on research
conducted in existing markets, the nature and scope of inquiries from government
regulatory authorities and our history of operations in those markets to date, we believe
our method of distribution complies in all material respects with the laws and regulations
related to direct selling of the countries in which we currently operate.
As
a result of restrictions in China on direct selling activities that prevent us from direct
selling our products through independent contractors, we have implemented a retail store
model utilizing an employed sales force. The regulatory environment in China is complex.
Because we operate a direct selling model outside of China, our operations in China have
attracted significant regulatory and media scrutiny since we expanded our operations there
in January 2003. China recently adopted new direct selling and anti-pyramiding regulations
that are restrictive and contain various limitations, including a restriction on the
ability to pay multi-level compensation to independent distributors. Regulations are
subject to discretionary interpretation by municipal and provincial level regulators.
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 clearly
defined rules regarding direct selling activities.
-18-
Because
of the Chinese governments significant concerns about direct selling activities, it
scrutinizes very closely activities of direct selling companies. The scrutiny has
increased following adoption of the new direct selling and anti-pyramiding regulations and
our business continues to be subject to reviews and investigations by municipal and
provincial level regulators. At times, investigations and related actions by government
regulators have caused an obstruction to our ability to conduct business in certain
locations, and have resulted in a few cases in fines being paid by our company. In each of
these cases, we have been allowed to recommence operations after the governments
investigation, and no material changes to our business model were required in connection
with these fines and obstructions. We also expect to receive continued guidance and
direction as we work with regulators to address our business model and any changes we make
to comply with the new direct selling regulations. For more information on the
regulatory risks associated with our business in China, see the risk factor under
Item 1A. Risk Factors entitled Our operations in China have
been subject to significantly governmental scrutiny, and our operations in China may be
harmed by the results of such scrutiny.
In
accordance with the new direct selling regulations, we have applied for a direct selling
license. It is not clear when direct selling licenses will be issued and how the
government is processing these applications. If and when we receive a direct selling
license, we plan to augment our current business model by adding a direct selling
component that will allow us to begin to engage independent contractors who will be able
to sell our products away from a fixed location. We plan on maintaining our retail
store/employed sales representative model because we believe it provides us with more
flexibility in the manner in which we can operate throughout China and compensate our
sales representatives. For more information on the risks that these regulations could
have on our business, see the risk factor under Item 1A. Risk Factors
entitled If recently adopted direct selling regulations in China are
interpreted or enforced by governmental authorities in a manner that negatively impacts
our current business model or our planned dual business model there, or if we are unable to
obtain a direct selling license under these regulations, our business in China could be
harmed.
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 United States 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. For example, in Japan, the Ministry of Health, Labor and
Welfare requires us to have an import business license and to register each personal care
product imported into Japan. In Taiwan, all medicated cosmetic and
pharmaceutical 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 in the markets in which we operate.
In the United States, laboratory analysis by governmental authorities, and the product
registration process for these products are regulated by the Food and Drug Administration.
Because our products are regulated more like foods 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 FDAs power to remove an unsafe substance from the market. In our foreign
markets, the products are generally regulated by similar government agencies, such as the
Ministry of Health and Welfare in Japan 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 analysis
by governmental authorities, and the product registration process for these products takes
approximately two years. We market both health foods and general
foods in China. Our flagship product, LifePak, is currently marketed as a general
food with only one of the three main capsules having received health food
classification. Currently, general foods is not an approved category for
direct selling and, therefore if final health food classification for LifePak is not
obtained for this two other capsules in the product prior to our initiation of direct selling
activities in this market, we will only market LifePak through our stores as we do today.
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 product is inconsistent
with product claims, ingredients or function, this could limit our ability to market such
products in China in their current form.
-19-
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
considered 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. 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. Because of recent negative publicity associated with some supplements, such
as ephedra (which we have never marketed) and other potentially harmful
ingredients, 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.
Most
of our major markets also regulate advertising and product claims regarding the efficacy
of products. This is particularly true with respect to our dietary supplements because we
typically market them as foods or health foods. 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. In addition,
all product claims must be substantiated.
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.
-20-
Regulation
of Our Business Tools. One of our strategies is to develop
technologically-advanced business tools designed to help our distributors effectively
market our Nu Skin and Pharmanex products. For example, during the last three years we
have introduced the Scanner in many of our markets around the world. We are also
planning to introduce the Nu Skin® ProDerm Skin Analyzer in our
markets beginning in 2006. 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 Scanner
as a non-medical device. Any determination that medical device clearance is required could
require us to expend significant time and resources in order to meet the stringent
standards imposed on medical device companies. We are also subject to regulatory
constraints on the claims that can be made with respect to the use of our business tools.
In Japan, for example, we are limited in our ability to tie the Scanner measurement
directly to the consumption of our nutrition products. We expect to face similar
regulatory issues in Japan and other markets with respect to the Nu Skin®
ProDerm Skin Analyzer as we launch it this year.
Other
Regulatory Issues. As a United States entity operating through subsidiaries in
foreign jurisdictions, we are subject to foreign exchange control, transfer pricing and
custom laws that regulate the flow of funds between our subsidiaries and us 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 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.
Employees
As
of December 31, 2005, we had approximately 9,000 full- and part-time employees,
approximately 3,800 of whom are employed as full-time sales representatives in our China
operations. We also had labor contracts with approximately 6,600 potential
new sales representatives, only a small percentage of whom are expected to complete the
qualification process and become full-time sales representatives. None of our employees is
represented by a union or other collective bargaining group, with the exception of the
limited number of employees involved in our operations in Brazil. 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.
-21-
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.
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:
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our
plans with respect to the launch of the S2 Scanner and the Nu Skin® ProDerm Skin
Analyzer in various markets; |
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the
expectation that our relationship with our current primary suppliers will not end in the
near term, and the belief that we could produce or source our personal care products from
other suppliers and expand manufacturing capabilities in China, and replace our primary
suppliers of Pharmanex products without great difficulty or increased cost; |
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our
plans to build and open a nutritional supplement manufacturing facility in China for
export by mid-2008; |
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our
belief that we can produce sufficient Scanners in our new manufacturing facility in China
to support current and future demands in our markets; |
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our
plans to continue to develop new, innovative products and to improve and evolve our
existing product formulations; |
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our
plans to commit resources to research and development in the future; |
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our
belief that providing effective distributor support will be important to our success; |
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our
plans to continue to enter and expand new markets, including Russia and other Eastern
European markets; |
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our
plans to add a direct selling component to our business model in China; and |
-22-
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our
belief that we do not currently foresee a shortage in qualified personnel necessary to
operate our business. |
These
and other forward-looking statements are subject to various risks and uncertainties
including those described below under Risk Factors and in Item 7.
Managements Discussion and Analysis of Financial Condition and Results of
Operations.
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. Managements Discussion and Analysis
of Financial Condition and Results of Operations.
Currency exchange rate
fluctuations could lower our revenue and net income.
In
2005, we recognized approximately 88% of our revenue in markets outside of the United
States in each markets 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 foreign countries 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 inasmuch as we generated approximately 48% of
our 2005 revenue in Japan, our reported revenue, gross profit and net income will likely
be reduced. During the latter-half of 2005, we experienced a significant weakening of the
Japanese yen, which harmed our results. Given the global, complex political and economic
dynamics that affect exchange rate fluctuations, we cannot estimate future fluctuations
and the effect these fluctuations may have upon future reported results or our overall
financial condition. In the event the Japanese yen or other foreign currencies continue to
weaken or do not return to previous levels, our results in 2006 would be negatively
impacted. Although we attempt to reduce our exposure to short-term exchange rate
fluctuations by using foreign currency exchange rate contracts for the Japanese yen, we
cannot be certain these contracts or any other hedging activity will effectively reduce
exchange rate exposure. In addition, the Chinese government has recently allowed the yuan
to float against the U.S. dollar to a small degree, which will result in exchange rate
risk for our Chinese operations as well.
Because our Japanese operations
account for a majority of our business, adverse changes in our business operations in
Japan would harm our business.
Approximately
48% of our 2005 revenue was generated in Japan. We have experienced some softness in our
business in this market during the past six months, and many of our competitors have seen
their businesses in this market contract in the last few years. We believe our operating
results have been negatively impacted by a variety of factors, including the unanticipated
impact of compensation plan changes, regulatory issues, as well as economic and political
conditions. In addition, we continue to face increasing competition from existing and new
competitors in Japan. Our financial results would be harmed if our products, business
opportunity or planned growth initiatives do not retain and generate continued interest
and enthusiasm among our distributors and consumers in this market. If the BioPhotonic
Scanner, the ProDerm Skin Analyzer and other planned initiatives are delayed, impacted by regulatory constraints or
do not generate
distributor excitement or attract new distributors or customers in Japan, it may limit our
prospects for growth in that market and harm our financial results.
-23-
If we are unable to retain our
existing independent distributors and recruit additional distributors, our revenue will
not increase and may even decline.
We
distribute almost all of our products through our independent distributors (including
China sales representatives) 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. 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 also depends on several additional
factors, including:
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any
adverse publicity regarding us, our products, our distribution channel or our competitors; |
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a
lack of interest in, or the technical failure of, existing or new products; |
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the
public's perception of our products and their ingredients; |
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the
public's perception of our distributors and direct selling businesses in general; |
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our
actions to enforce our policies and procedures; |
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general
economic and business conditions; and |
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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. |
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. For example, the introduction of the
Scanner, changes in compensation incentives (particularly in the United States) and focus
on automatic delivery programs have helped generate growth in many of our markets. There
can be no assurance that such initiatives will generate excitement among our distributors
in the long-term or that planned initiatives tied to the Scanner in markets like the
United States, where the Scanner was introduced more than three years ago, will be
successful in maintaining distributor activity and productivity. In addition, some
initiatives may have unanticipated negative impacts on our markets. For example, during
the past year certain modifications we made to compensation incentives in China, Japan and
Singapore were not received or understood well by some distributors, resulting in
unanticipated negative impacts on distributor numbers and revenue in these markets. The
introduction of a new product or key initiative such as the Scanner can also negatively
impact other product lines to the extent our distributor leaders focus their efforts on
the new product or initiative.
-24-
Our operations in China have been
subject to significant governmental scrutiny, and our operations in China may be harmed by
the results of such scrutiny.
Because of the governments
significant concerns about direct selling activities, government regulators in China
scrutinize very closely activities of direct selling companies or activities that resemble
direct selling. This scrutiny has increased following adoption of the new direct selling
and anti-pyramiding 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. Although China has recently adopted new direct selling regulations,
which will allow direct selling activities by companies who have received the appropriate
direct selling licenses, we have not received such licenses or authorizations yet.
Consequently, we have not implemented our direct sales model in China, but are continuing
to use a business model that utilizes retail stores and an employed sales force that we
believe complies with applicable regulations. Frequently, individuals, including our
competitors, complain to local regulatory agencies that our China business model violates
applicable regulations on direct selling. In addition, some of our distributors from
outside of China and some of our employed sales representatives have engaged in activities
in this market that violated our policies. As a result, we have been subject to, and
continue to be subject to, various inquires and investigations by local and provincial
regulators regarding our business model and the activities of our sales representatives.
These reviews and investigations by government regulators have at times obstructed our
ability to conduct business and have resulted in several cases in fines being paid by us,
which in the aggregate have been less than 1% of our revenue in China. We may incur similar or more severe sanctions in the future.
Occasionally, we have also been asked to cease sales activity in some stores while the
regulators review our operations. While, in each of these cases, we have been allowed to
recommence operations after the governments review without material changes to our
operations, there is no assurance that this will always be the case. Our operations or
results of operations also could be harmed if the results of current reviews or
investigations of our operations or activities of our sales representatives delay or
impact our ability to obtain a direct selling license.
With
the adoption of new direct selling and anti-pyramiding regulations, the regulatory
environment in China is evolving, and officials in the Chinese government often exercise
significant discretion in deciding how to interpret and apply applicable regulations.
Although we have worked closely with both national and local governmental agencies in
implementing our plans, our efforts to comply with local laws may be harmed by the rapidly
evolving regulatory climate, concerns about activities resembling direct selling, and any
subjective or restrictive interpretation of applicable laws as discussed below, including
the new direct selling regulations. Any determination that our operations or activities,
or the activities of our employed sales representatives or distributors living outside of
China, are not in compliance with applicable regulations could result in the imposition of
substantial fines, extended interruptions of business, restrictions on our ability to
obtain a direct selling license, open new stores or obtain approvals for service centers
or expand into new locations, changes to our business model, the termination of required
licenses to conduct business, limitations on the number of sales persons we can employ, or
other actions, all of which would harm our business.
If recently adopted direct selling
regulations in China are interpreted or enforced by governmental authorities in a manner
that negatively impacts our current business model or our planned dual business model there,
or if we are unable to obtain a direct selling license under these regulations, our
business in China would be harmed.
Towards
the end of 2005, Chinese regulators adopted anti-pyramiding and new direct selling
regulations. These regulations contain significant restrictions and limitations, including
a restriction on multi-level compensation for independent distributor selling away from a
fixed location. Although we have applied for a direct selling license and anticipate that
we will be able to obtain a direct selling license under these regulations, there can be
no assurance that we will be able to obtain such a license. The timing, the factors taken
into consideration and the process that the government will follow in processing
applications and granting direct selling licenses are not clear, and our future growth in
China could be harmed if we do not receive a direct selling license, or if the direct
selling application process is delayed further than anticipated. These new regulations are
not yet well understood, and there continues to be some confusion and uncertainty as to
the meaning of the new regulations and their scope, and the specific types of restrictions
and requirements imposed under them. It is also difficult to predict how regulators will
interpret and enforce these new regulations and the impact of these new regulations on
pending regulatory reviews and investigations. Our business and our growth prospects would
be harmed if Chinese regulators interpret the anti-pyramiding regulations or direct
selling regulations as applying to our retail store/employed sales representative business
model, or if regulations are interpreted in such a manner that our current method of
conducting business through the use of employed sales representatives or our planned
implementation of direct selling is found to violate applicable regulations. In
particular, our business would be harmed by any determination that our current method of
compensating our sales employees, including our use of the sales productivity of a sales
employee and the group of sales employees whom he or she trains and supervises as one of the
factors in establishing such sales employee's salary and compensation, violates the restriction on
multi-level compensation in the new regulations. Our business could also be harmed if
regulators inhibit our ability to concurrently operate our retail store/employed sales
representative business model and our planned direct selling business. In addition, there
can be no assurance that we will be able to successfully grow our business through direct
selling activities given the restrictive nature of the new direct selling regulations.
If we are unable to obtain approvals for service centers in China as quickly as we
would like, our ability to grow our business there could be negatively impacted.
-25-
The
new direct selling regulations and supplemental rules recently adopted in China require us
to establish a service center in each area where we conduct direct selling activities. We
will be required to obtain approval from local governmental authorities for each service
center we intend to establish. The local approval processes vary and remain uncertain in
some areas. The local governmental officials also have broad discretion in approving these
service centers. If regulators fail to approve licenses for service centers at a rate that
meets our growth demands, this could limit our ability to obtain direct selling licenses
in some provinces and harm our business.
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 you that we will be
able to adequately protect our product formulations.
If the BioPhotonic Scanner is
determined to be a medical device in a particular geographic market or if our distributors
use it for medical diagnostic purposes, this could harm our ability to utilize it.
In
March 2003, the FDA questioned the status of the BioPhotonic Scanner as a non-medical
device. We subsequently filed an application with the FDA to have it classified as a
non-medical device. The FDA has not yet acted on our application. There are various
factors that could determine whether the BioPhotonic Scanner 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 BioPhotonic
Scanner as a non-medical device and the claims that can be made in using it. For example,
during the past year we faced regulatory inquiries in Japan, Korea and Singapore regarding
distributor claims with respect to the Scanner. A determination in any of these markets
that it is a medical device or that distributors are using it to make medical claims or
perform medical diagnoses could negatively impact our plans for or use of the BioPhotonic
Scanner in such market. Regulatory scrutiny of the Scanner may also dampen distributor
enthusiasm and hinder the ability of distributors to effectively utilize the Scanner. In
the event medical device clearance is required in any market, obtaining clearance could
require us to provide documentation concerning its 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 such documentation and make such changes promptly or in a manner
that is satisfactory to regulatory authorities.
-26-
Technical and regulatory issues
associated with the Nu Skin® ProDerm Skin Analyzer
could negatively impact the success of this program, which could harm our business.
Our
plans to introduce the Nu Skin® ProDerm Skin Analyzer in our various
markets are subject to risks and uncertainties. We are currently in the process of
finalizing the hardware and software design specifications, and if we experience
difficulties or delays in completing this process that prevent us from meeting our launch
schedules, our business may be harmed. Our plans are also subject to regulatory risks,
particularly in Japan, where we are currently working through the regulatory process for
the planned introduction of the ProDerm Skin Analyzer in that market. It appears
that regulatory restrictions in Japan may impose limitations on the use of this tool and
on claims that may be made in connection with its use. Such limitations in Japan or any
other markets could weaken the ability of our distributors to utilize this tool in
building their businesses, and could dampen distributor enthusiasm surrounding it.
Governmental regulations relating
to the marketing and advertising of our products and services, in particular our
nutritional supplements, may restrict or inhibit our ability to sell these products.
Our
products and our related marketing and advertising efforts are subject to extensive
governmental regulations by numerous domestic and foreign governmental agencies and
authorities. These include the FDA, the FTC, the Consumer Product Safety Commission and
the Department of Agriculture in the United States, State Attorneys General and other
state regulatory agencies and the Ministry of Health, Labor and Welfare in Japan along
with similar governmental agencies in other foreign markets where we operate.
Our
markets have varied regulations concerning product formulation, labeling, packaging and
importation. These laws and regulations often require us to, among other things:
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reformulate
products for a specific market to meet the specific product formulation laws of that
country; |
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conform
product labeling to the regulations in each country; and |
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register
or qualify products with the applicable governmental authority or obtain necessary
approvals or file necessary notifications for the marketing of our products. |
Restrictions
on or our ability to introduce products, or delays in introducing products, could reduce
revenue and decrease profitability. Regulators also may prohibit us from making
therapeutic claims about products, regardless of the existence of research and independent
studies that may support such claims. These product claim restrictions could prevent us
from realizing the potential revenue from some of our products.
-27-
Recent negative publicity
concerning supplements with certain controversial ingredients has spurred efforts to
change existing laws and regulations with respect to nutritional supplements that, if
successful, could result in more restrictive and burdensome regulations.
There
have been some recent injuries and deaths that have been attributed to the use of
nutritional supplements that contain ephedra (which we have never sold) and other
controversial ingredients that have generated negative publicity. Because of this negative
publicity, 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. Although we are committed to not market nutritional
supplements that contain any substances such as ephedra that are controversial and that
could pose health risks, our operations could be harmed if governmental laws or
regulations are enacted that restrict the ability of companies to market or distribute
nutritional supplements or impose additional burdens or requirements on nutritional
supplement companies as a result of public reaction to the recent injuries and deaths
caused by supplements that do contain such ingredients.
If we are unable to successfully
expand operations in any of the new markets we have currently targeted, 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. For example, the revenue growth we experienced in 2003 and
2004 was due in part to our successful expansion of operations into China. Moreover, our
growth over the next several years depends in part on our ability to successfully
introduce our products and our distribution system into new markets, including Russia and
further development of China and Eastern Europe. In addition to the regulatory
difficulties we may face in gaining access into these new markets, we could face
difficulties in achieving acceptance of our premium-priced products in developing markets.
In the past, we have struggled to operate successfully in developing country markets, such
as Latin America. This may also be the case in Eastern Europe and the other new markets
into which we currently intend to expand. If we are unable to successfully expand our
operations into 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. In
addition, sometimes the opening of a new market or the introduction of a key initiative in
a market can have a negative impact on other markets if it attracts the attention and time
of key executive distributor leaders from other markets.
Global political issues
and conflicts could harm our business.
Because
a substantial portion of our business is conducted outside of the United States, our
business is subject to global political issues and conflicts, including terrorism threats,
tensions related to North Korea, political tensions between the Peoples Republic of
China and Taiwan, and other issues. If these conflicts or issues escalate, or if there is
increased anti-American sentiment, this could harm our foreign operations. In addition,
changes and actions by governments in foreign markets, in particular those markets such as
China where capitalism and free market trading is still evolving, could harm our business.
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 legality of our distributor network, our
products or the actions of our distributors. Specifically, we are susceptible to adverse
publicity concerning:
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suspicions
about the legality and ethics of network marketing; |
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the
ingredients or safety of our or our competitors' products; |
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regulatory
investigations of us, our competitors and our respective products; |
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the
actions of our current or former distributors; and |
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public
perceptions of direct selling businesses generally. |
In
addition, in the past we have experienced negative publicity that has harmed our business
in connection with regulatory investigations and inquiries. We may receive negative
publicity in the future, and it may harm our business and reputation.
Although our distributors are
independent contractors, improper distributor actions that violate laws or regulations
could harm our business.
Distributor
activities in our existing markets that violate governmental laws or regulations could
result in governmental actions against us in markets where we operate. 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, which resulted in our entering into a consent
decree with the FTC as described below.
Inability of new products to gain
distributor and market acceptance could harm our business.
A
critical component of our business is our ability to develop new products that create
enthusiasm among our distributor force. If we are unable to introduce new products planned
for introduction, our distributor productivity could be harmed. In addition, if any new
products fail to gain market acceptance, are restricted by regulatory requirements or have
quality problems, this would harm our results of operations. 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.
Government inquiries,
investigations, and actions could harm our business.
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. Any
determination that we or our distributors are not in compliance with existing laws or
regulations could potentially harm our business. Even if governmental actions do not
result in rulings or orders, they potentially could create negative publicity which could
detrimentally affect our efforts to recruit or motivate distributors and attract customers
and, consequently, reduce revenue and net income.
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 operations 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.
-29-
In
addition, we are susceptible to government-initiated campaigns that do not rise to the
level of formal regulations. For example, the South Korean government, several South
Korean trade groups and members of the South Korean media initiated campaigns in 1997 and
1998 urging South Korean consumers not to purchase luxury or foreign goods. We believe
that these campaigns and the related media attention they received, together with the
economic recession that occurred in the late 1990s in the South Korean economy,
significantly harmed our South Korean business. We cannot assure you that similar
government, trade group or media actions will not occur again in South Korea or in other
countries where we operate or that such events will not similarly harm our operations.
The loss of key high-level
distributors could negatively impact our distributor growth and our revenue.
As
of December 31, 2005, we had approximately 803,000 active independent distributors, sales
representatives and preferred customers, including approximately 30,000 executive level
distributors or full-time sales representatives. Approximately 446 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 distributors 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.
Laws and regulations may prohibit
or severely restrict our direct sales efforts and cause our revenue and profitability to
decline.
Various
government agencies throughout the world regulate direct sales practices. 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
order cancellations, product returns, inventory buy-backs and cooling-off rights for
consumers and distributors; |
|
|
|
require
us or our distributors to register with governmental agencies; |
|
|
|
impose
reporting requirements to regulatory agencies; and/or |
|
|
|
require
us to ensure that distributors are not being compensated based upon the recruitment of
new distributors. |
-30-
Complying
with these widely varying and sometimes inconsistent rules and regulations can be
difficult and 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 will decline. Countries where we currently do
business could change their laws or regulations to negatively affect or prohibit
completely direct sales efforts. In addition, government agencies and courts in the
countries where we operate may use their powers and discretion in interpreting and
applying laws in a manner that limits our ability to operate or otherwise harms our
business. If any governmental authority were to bring a regulatory enforcement action
against us that interrupts our business, revenue and earnings would likely suffer.
Challenges by private parties to
the form of our network marketing system could harm our business.
We
may be subject to challenges by private parties, including our distributors, to the form
of our network marketing system or elements of our business. In the United States, the
network marketing industry and regulatory authorities have generally relied on the
implementation of distributor rules and policies designed to promote retail sales to
protect consumers and to prevent inappropriate activities and to distinguish between
legitimate network marketing distribution plans and unlawful pyramid schemes. We have
adopted rules and policies based on case law, rulings of the FTC, discussions with
regulatory authorities in several states and domestic and global industry standards. Legal
and regulatory requirements concerning network marketing systems, however, involve a high
level of subjectivity, are inherently fact-based and are subject to judicial
interpretation. Because of the foregoing, 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.
Increases
in duties on our imported products in our markets outside of the United States or adverse results of tax audits in our various markets
could
reduce our revenue, negatively impact our operating results and harm our competitive position.
Historically, we have
imported most of our products 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 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. These audits sometimes result in challenges by such taxing
authorities as to our methodologies used in determining our income tax, duties, customs,
and other amounts owed in connection with the importation and distribution of our
products. Currently, customs audits are underway in a number of our markets. We were
recently assessed by the Japan customs authorities for additional duties on products
imported into Japan, and we are currently contesting this assessment. Audits are also
often focused on whether or not certain expenses are deductible for tax purposes in a
given country. In Taiwan, we are currently subject to an audit by tax authorities with
respect to the deductibility of distributor commission expenses in that market. In order
avoid the running of the statute of limitations with respect to the 1999 and 2000 tax
years, the Taiwan tax authorities have disallowed our commission expense deductions for
those years and assessed us a total of approximately $18.7 million. We are contesting this
assessment and are in discussions with the tax authorities in an effort to resolve this
matter. To the extent we are unable to successfully defend ourselves against such audits
and reviews, we may be required to pay assessments and penalties and increased duties,
which may, individually or in the aggregate, negatively impact our gross margins and
operating results.
-31-
Governmental authorities may
question our intercompany 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 foreign tax and intercompany pricing laws, including those relating to the flow
of funds between our company and our subsidiaries. Regulators in the United States and in
foreign markets closely monitor our corporate structure and how we effect intercompany
fund transfers. If regulators challenge our corporate structure, transfer pricing
mechanisms or intercompany transfers, our operations may be harmed, and our effective tax
rate may increase. 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 46%, 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
governmental 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.
The loss of suppliers could harm
our business.
For
approximately ten years, we have acquired ingredients and products from a supplier that
currently manufactures approximately 31% of our Nu Skin personal care products. In
addition, we currently rely on two suppliers for a majority of Pharmanex nutritional
supplement products, one of which supplies approximately 35% and the other of which
supplies approximately 22%. 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.
We also license the right to distribute some of our products from third parties. Although
none of these products individually represent a substantial portion of our revenue, 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.
If we are unable to successfully respond to such issues our business could be harmed.
Production difficulties
and quality control problems 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 products, harming our sales and creating
inventory write-offs for unusable product. In addition, these issues can negatively impact
distributor confidence as well as potentially invite additional governmental scrutiny in
our various markets.
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. 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.
-32-
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. The
leading direct selling companies in our existing markets are Avon and Alticor (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 dietary
supplements, we may have difficulty differentiating our products from our
competitors products, and competing products entering the nutritional market could
harm our nutritional supplement 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 have over 20 years of experience in this
market 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 caused by our products. Although
we have had a very limited product claims history, we have recently 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 core product
lines. Until we elect and are able 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. 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
a Business Continuity/Disaster Recovery Plan, which is in the process of being
implemented. Our primary data sets are archived and stored at third-party secure sites,
but we have not contracted for a third-party recovery site. 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.
-33-
There is uncertainty whether the
SARS or other epidemics could return or arise, particularly in those Asian markets most
affected by such epidemics in recent years.
Our
revenue was negatively impacted in 2003 by the SARS epidemic that hit Asia during that
year. It is difficult to predict the impact on our business, if any, of a recurrence of
SARS or other epidemic or the emergence of new epidemics. Although such an event could
generate increased sales of health/immune supplements and certain personal care products,
our direct selling and retail activities and results of operations could be harmed if the
fear of SARS or other communicable diseases that spread rapidly in densely populated areas
causes people to avoid public places and interaction with one another.
The market price of our Class A
common stock is subject to significant fluctuations due to a number of factors that are
beyond our control.
Our
Class A common stock closed at $20.15 per share on March 31, 2004 and closed at $18.08 per
share on February 28, 2006. During this two-year period, our Class A common stock traded
as low as $15.35 per share and as high as $28.15 per share. Many factors could cause the
market price of our Class A 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 those foreign countries in which we operate; |
-34-
|
|
|
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 Class A common stock
regardless of our actual operating performance.
As of February 28, 2006, our
original stockholders, together with their family members, estate planning entities and
affiliates, controlled approximately 26% 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, future direction and operations of our company. As of February 28, 2006, these
stockholders owned approximately 26% of the voting power of the outstanding shares of
Class A common stock. Accordingly, they may influence decisions concerning business
opportunities, declaring dividends, issuing additional shares of Class A 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 Class A common stock in the public market, the market
price of our Class A common stock could fall.
Several
of our principal stockholders hold a large number of shares of the outstanding Class A
common stock. Any decision by any of our principal stockholders to aggressively sell their
shares could depress the market price of our Class A common stock. As of February 28,
2006, we had approximately 70.2 million shares of Class A common stock outstanding. All of
these shares are freely tradable, except for approximately 18 million shares held by
certain stockholders who participated in our October 2003 recapitalization transaction
wherein we repurchased approximately 10.8 million of our shares from our original
stockholders and their affiliates and facilitated their resale of approximately 6.2
million additional shares to a group of private equity investors. Under the terms of our
repurchase, our original stockholders agreed to a two-year lock-up that expired on
October 22, 2005. These stockholders also agreed that, after the expiration of the
two-year lock-up agreement in October 2005, they will be subject to certain volume
limitations with respect to open market transactions. In the event these lock-up
restrictions were removed, the resulting sales could cause the price of our Class A common
stock to decline.
ITEM 1B. |
|
UNRESOLVED STAFF COMMENTS |
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 50,000 square feet or
more include the following:
|
|
|
our
worldwide headquarters in Provo, Utah; |
|
|
|
our
worldwide distribution center/warehouse in Provo, Utah; and |
-35-
|
|
|
our
distribution center in Tokyo, Japan. |
Manufacturing Facilities. Each of
our manufacturing facilities measure 50,000 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; and |
|
|
|
our
Scanner manufacturing facility in Shanghai, China. |
Retail Stores. We currently operate
140 stores in 30 provinces throughout China, measuring a total of approximately 296,010
square feet.
Research and Development Centers.
We operate three research and development centers, one in Provo, Utah, one in Shanghai,
China, and one in Beijing, China.
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.
ITEM 3. |
|
LEGAL
PROCEEDINGS |
On
October 29, 2004, a motion for preliminary injunction was filed by Caroderm, Inc.
(Caroderm) in the action Caroderm, Inc. and University of Utah Research
Foundation v. Nu Skin Enterprises, Inc., Niksun Acquisition Corporation, et. al.,
Third Judicial District Court, Salt Lake County, State of Utah. The complaint was filed in
this action on July 16, 2004 by Caroderm, which is a separate licensee of the technology
utilized in the Scanner. The motion and complaint alleged that we are in
violation of the terms of our license because of alleged use of the Scanner for medical
diagnostic purposes or in medical clinical settings. The complaint and motion sought
an order of the court enjoining and restraining us and requiring us to take steps to stop
the use of the Scanner by our distributors for medical diagnostic purposes or in a medical
clinical setting in excess of our granted field of use. After a five-day bench trial held the week of April 25, 2005,
the court denied Caroderms claim for injunctive relief. Caroderm subsequently
appealed this decision. On March 7, 2006, we signed an Agreement and Plan of Merger
pursuant to which we acquired Caroderm. As a result, Caroderms appeal was subsequently dismissed.
-36-
ITEM 4. |
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS |
There
were no matters submitted to a vote of the security holders during the fourth quarter of
the fiscal year ended December 31, 2005.
PART II
ITEM 5. |
|
MARKET FOR REGISTRANTS 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 2004 and 2005 based upon quotations on the
NYSE.
Quarter Ended | |
High | |
Low | |
|
|
|
March 31, 2004 |
|
$ 21.97 |
|
$ 16.65 |
|
June 30, 2004 | |
25.91 |
|
20.55 |
|
September 30, 2004 | |
28.15 |
|
23.03 |
|
December 31, 2004 | |
25.75 |
|
16.27 |
|
Quarter Ended | |
High | |
Low | |
|
|
|
March 31, 2005 |
|
$ 25.55 |
|
$ 20.07 |
|
June 30, 2005 | |
24.62 |
|
20.57 |
|
September 30, 2005 | |
25.86 |
|
18.95 |
|
December 31, 2005 | |
19.29 |
|
15.35 |
|
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 28, 2006, was $18.08. The
approximate number of holders of record of our Class A common stock as of February 28,
2006 was 610. 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 $0.08 per share dividend for Class A common stock in March, June,
September and December of 2004, and a $0.09 per share quarterly dividend for Class A
common stock in March, June, September and December of 2005. The board of directors
declared a quarterly cash dividend of $0.10 per share of Class A common stock on February
1, 2006. This quarterly cash dividend will be paid on March 22, 2006, to stockholders of
record on March 3, 2006. Management believes that cash flows from operations will be
sufficient to fund this and future dividend payments, if any.
-37-
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, 2005 |
|
65,000 |
|
$ 17.25 |
|
65,000 |
|
$ 56.6 |
|
November 1 - 30, 2005 |
|
185,074 |
|
$ 17.17 |
|
184,000 |
|
$ 53.6 |
| |
December 1 - 31, 2005 |
|
70,000 |
|
$ 17.59 |
|
70,000 |
|
$ 52.5 | |
|
Total |
|
320,074 |
(2) |
$ 17.28 |
|
319,000 |
(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 $160.0 million is currently authorized. As of December
31, 2005, we had repurchased approximately $107.5 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 in
certain foreign markets because of regulatory and other issues that make it
difficult and 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, 1,074 shares for November
relate to repurchases from such employees at an average per share purchase price
of $17.25. |
-38-
ITEM 6. |
|
SELECTED
FINANCIAL DATA |
The
following selected consolidated financial data as of and for the years ended December 31,
2001, 2002, 2003, 2004 and 2005 have been derived from the audited consolidated financial
statements.
|
Year Ended December 31, |
|
|
2001 | |
2002 | |
2003 | |
2004 | |
2005 | |
|
(U.S. dollars in thousands, except per share data) |
|
Income Statement Data: |
|
|
|
|
|
|
|
|
|
|
|
Revenue | |
$ 885,621 |
|
$ 964,067 |
|
$ 986,457 |
|
$ 1,137,864 |
|
$ 1,180,930 |
|
Cost of sales | |
178,083 |
|
190,868 |
|
176,545 |
|
191,211 |
|
206,163 |
|
Gross profit | |
707,538 |
|
773,199 |
|
809,912 |
|
946,653 |
|
974,767 |
|
Operating expenses: | |
Selling expenses | |
347,452 |
|
382,159 |
|
407,088 |
|
487,631 |
|
497,421 |
|
General and administrative expenses | |
288,605 |
|
285,229 |
|
289,925 |
|
333,263 |
|
354,223 |
|
Restructuring and other charges | |
|
|
|
|
5,592 |
|
|
|
|
|
Total operating expenses | |
636,057 |
|
667,388 |
|
702,605 |
|
820,894 |
|
851,644 |
|
Operating income | |
71,481 |
|
105,811 |
|
107,307 |
|
125,759 |
|
123,123 |
|
Other income (expense), net | |
8,380 |
|
(2,886 |
) |
432 |
|
(3,618 |
) |
(4,172 |
) |
Income before provision for income taxes | |
79,861 |
|
102,925 |
|
107,739 |
|
122,141 |
|
118,951 |
|
Provision for income taxes | |
29,548 |
|
38,082 |
|
39,863 |
|
44,467 |
|
44,918 |
|
Net income(1) | |
$ 50,313 |
|
$ 64,843 |
|
$ 67,876 |
|
$ 77,674 |
|
$ 74,033 |
|
Net income per share: | |
Basic | |
$ 0.60 |
|
$ 0.79 |
|
$ 0.86 |
|
$ 1.10 |
|
$ 1.06 |
|
Diluted | |
$ 0.60 |
|
$ 0.78 |
|
$ 0.85 |
|
$ 1.07 |
|
$ 1.04 |
|
Weighted-average common shares outstanding (000s): | |
Basic | |
83,472 |
|
81,731 |
|
78,637 |
|
70,734 |
|
70,047 |
|
Diluted | |
83,915 |
|
83,128 |
|
79,541 |
|
72,627 |
|
71,356 |
|
|
|
|
Balance Sheet Data (at end of period): | |
Cash and cash equivalents and current investments | |
$ 75,923 |
|
$ 120,341 |
|
$ 122,568 |
|
$ 120,095 |
|
$ 155,409 |
|
Working capital | |
153,495 |
|
181,942 |
|
149,324 |
|
117,401 |
|
149,098 |
|
Total assets | |
546,024 |
|
577,794 |
|
591,059 |
|
609,737 |
|
678,866 |
|
Current portion of long-term debt | |
|
|
|
|
17,915 |
|
18,540 |
|
26,757 |
|
Long-term debt | |
73,718 |
|
81,732 |
|
147,488 |
|
132,701 |
|
123,483 |
|
Stockholders' equity | |
379,890 |
|
386,486 |
|
290,248 |
|
296,233 |
|
354,628 |
|
|
|
|
Supplemental Operating Data (at end of period): | |
Approximate number of active distributors(2) | |
558,000 |
|
566,000 |
|
725,000 |
|
820,000 |
|
803,000 |
|
Number of executive distributors(2) | |
24,839 |
|
27,915 |
|
29,131 |
|
32,016 |
|
30,471 |
|
(1) |
|
In January 2002, we adopted SFAS 142, Goodwill and Other Intangible
Assets. Assuming no amortization of goodwill and other indefinite lived
intangibles for all periods presented prior to adoption, net income would have
been $57.0 million for the year ended December 31, 2001. For 2003, net income
includes a pre-tax, non-recurring charge of $5.6 million due to restructuring
and other charges incurred during the third quarter. |
(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. Following the opening of our
retail business in China during 2003, active distributors includes 117,000,
147,000 and 116,000 preferred customers in China and executive distributors
includes 3,100, 5,437 and 3,787 employed, full-time sales representatives for
the years ended December 31, 2003, 2004 and 2005, respectively. |
-39-
ITEM 7. |
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION |
The
following discussion of our financial condition and results of operations 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 2005 revenue of $1.18 billion and a
global network of over 800,000 active independent product distributors and preferred
customers who purchase our products for resale and for personal use. Approximately 30,000
of these distributors are executive level distributors, who play an important leadership
role in our distribution network and are critical to the growth of our business. We
develop and market premium-quality personal care products under the Nu Skin brand,
science-based nutritional supplements under the Pharmanex brand, and technology-related
products and services under the Big Planet brand. We currently operate in 41 markets
throughout Asia, the Americas and Europe.
Our
revenue depends on the number and productivity of our active independent distributors and
executive distributor leaders. We have been successful in attracting and motivating
distributors by:
|
|
|
developing
and marketing innovative, technologically advanced products; |
|
|
|
providing
compelling initiatives, advanced technological tools and strong distributor support; and |
|
|
|
offering
attractive incentives that motivate distributors to build sales organizations. |
Our
distributors market and sell our products 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.
We also offer unique initiatives and business tools, such as our technologically-advanced
Pharmanex® BioPhotonic Scanner (the Scanner), to help distributors
effectively differentiate our earnings opportunity and product offering. If we experience
delays or difficulties in introducing compelling products or attractive initiatives or
tools into a market, this can have a negative impact on revenue.
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. Our global compensation plan helps
us to rapidly introduce products and penetrate our markets with little up-front
promotional expense. As a result of the global nature of our distributor incentives,
however, the opening of a new market or the introduction of a new product or key
initiative such as the Scanner, however, can negatively impact other markets or product
lines to the extent our distributor leaders focus their efforts on the new market,
product, or initiative. We have also continued to expand and promote product subscription and loyalty
programs in many of our markets 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
42% of our revenue in 2005 compared to 29% in the prior year.
-40-
In
2005, we generated approximately 82% of our revenue from our Asian markets, with sales in
Japan representing approximately 48% of revenue. Because of the size of our foreign
operations, operating results can be impacted negatively or positively by factors such as
foreign currency fluctuations, in particular fluctuations between the Japanese yen and the
U.S. dollar, and economic, political and business conditions around the world. In
addition, our business is subject to various laws and regulations, in particular
regulations related to network marketing activities and nutritional supplements that
create certain risks for our business, including improper claims or activities by our
distributors and potential inability to obtain necessary product registrations. For more
information about these risks and challenges we face, please refer to Note Regarding
Forward-Looking Statements.
Income Statement
Presentation
We
recognize revenue in five geographic regions and we translate revenue from each
markets local currency into U.S. dollars using quarterly 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.
|
Year Ended December 31, | |
Revenue by Region | |
2003 | |
2004 | |
2005 | |
|
(U.S. dollars in millions) | |
North Asia |
|
$ 612.8 |
|
62% |
|
$ 640.1 |
|
56% |
|
$ 649.4 |
|
55% |
|
Greater China | |
135.5 |
|
14 |
|
229.8 |
|
20 |
|
236.7 |
|
20 |
|
North America | |
127.6 |
|
13 |
|
145.7 |
|
13 |
|
154.1 |
|
13 |
|
South Asia/Pacific | |
75.8 |
|
8 |
|
81.8 |
|
7 |
|
86.7 |
|
7 |
|
Other Markets | |
34.8 |
|
3 |
|
40.5 |
|
4 |
|
54.0 |
|
5 |
|
| |
$ 986.5 |
|
100% |
|
$ 1,137.9 |
|
100% |
|
$ 1,180.9 |
|
100% |
|
Cost
of sales primarily consists of:
|
|
|
cost
of products purchased from third-party vendors, generally in U.S. dollars; |
|
|
|
manufacturing
costs of self-manufactured products; |
|
|
|
the
cost of sales materials which we sell to distributors at or near cost; |
|
|
|
the
amortization expenses associated with certain products and services such as the Scanners
that are leased to distributors; |
|
|
|
the
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. We are also considering plans to
manufacture more products in China for export in order to reduce our cost of sales. 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.
-41-
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 our employed sales representatives 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
distributors personal and group product volumes, as well as the group product
volumes of up to six levels of executive distributors in such distributors 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 over 800,000 active
distributors, the fluctuation in the overall payout is relatively small. The overall
payout has typically averaged from 41% to 43% of global product sales. From time to time,
we make modifications and enhancements to our global compensation plan 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 pay commissions
on these retail sales by distributors nor do we recognize any revenue from these retail
sales. 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
prices. We pay commissions on preferred customer purchases to the referring distributors.
General
and administrative expenses include:
|
|
|
depreciation
and amortization; |
|
|
|
promotion
and advertising; |
|
|
|
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,
their impact on our general and administrative expenses may vary from year to year. For
example, we have typically held our global distributor convention and our Japan
distributor convention, our two most expensive conventions, every 18 months. Therefore, we
have not incurred expenses for these conventions during every fiscal year or in comparable
interim periods and year-over-year comparisons have been impacted accordingly. We held
global distributor conventions in February 2004 and October 2005 and Japan distributor
conventions in February 2003 and November 2004. We held a Japan
distributor convention in March 2006. In the future, we plan to begin holding global
conventions every 24 months instead of every 18 months.
-42-
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 2005 were approximately 17.5% in Hong
Kong, 25% in Taiwan, 27.5% in South Korea, 46% in Japan and 24% in China. In China, we
benefited from a tax holiday until the end of 2005. We will be subject to a reduced tax
rate of 50% of the statutory rate in China for 2006, 2007 and 2008, after which time we
will be subject to the full statutory rate. 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.
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 the most critical accounting policies to be the recognition of revenue,
accounting for income taxes and accounting for intangible assets. 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 independent 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 gross
sales. A reserve for product returns is accrued based on historical experience.
We classify selling discounts as a reduction of revenue. Our global compensation plan for our distributors
is focused on remunerating distributors based upon the selling efforts of the
distributors and their downlines, and not their personal purchases.
Income
Taxes. We account for income taxes in accordance with Statements of
Financial Accounting Standards (SFAS) No. 109, Accounting for Income
Taxes. This statement establishes financial accounting and reporting standards for
the effects of income taxes that result from an enterprises activities during the
current and preceding years. It requires 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, 2005, we had net deferred tax assets of $31.3 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. We have considered projected future taxable
income and ongoing tax planning strategies in determining the extent of valuation
allowances required. 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.
Our
foreign taxes paid are high relative to foreign operating income and our U.S. taxes paid
are low relative to U.S. operating income due largely to the flow of funds among our
subsidiaries around the world. As payments for services, management fees, license
arrangements and royalties are made from our foreign affiliates to our 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 our foreign and U.S. effective tax rates from year to year depending on several
factors, including the impact of global transfer prices and the timing and level of
remittances from foreign affiliates.
-43-
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 SFAS No. 5, Accounting for Contingencies 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. The Financial Accounting Standards Board is currently considering changes to
accounting for uncertain tax positions. Because the nature and extent of these changes are
not fully known, we are not able to predict the impact on our tax contingency reserves, if
any.
Intangible
Assets. Under the provisions of SFAS No. 142, Goodwill and Other
Intangible Assets (SFAS 142), our goodwill and intangible assets with
indefinite useful lives are no longer amortized. Our intangible assets with definite lives
are recorded at cost and are amortized over their respective estimated useful lives and
are reviewed for impairment in accordance with SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets (see Note 5 to the Consolidated
Financial Statements).
We
are required to make judgments regarding the useful life of our intangible assets. For
example, with the recent completion of the earnout payments in connection with the
acquisition of Scanner-related technology, we have recorded an intangible asset of
approximately $42.0 million, which we are amortizing over the life of the patent related
to the technology. With the implementation of SFAS 142, we determined certain intangible
assets to have indefinite lives based upon our analysis of the requirements of SFAS No.
141, Business Combinations (SFAS 141) and SFAS 142. Under the
provisions of SFAS 142, we are required to test these assets for impairment at least
annually. The annual impairment tests have been completed and did not result in an
impairment charge. To the extent an impairment is identified in the future, we will record
the amount of the impairment as an operating expense in the period in which it is
identified.
-44-
Results of Operation
The
following table sets forth our operating results as a percentage of revenue for the
periods indicated:
|
Year Ended December 31, | |
|
2003 | |
2004 | |
2005 | |
|
|
|
|
Revenue |
|
100.0 |
% |
100.0 |
% |
100.0 |
% |
Cost of sales | |
17.9 |
|
16.8 |
|
17.5 |
|
|
|
|
|
Gross profit | |
82.1 |
|
83.2 |
|
82.5 |
|
| |
Operating expenses: | |
Selling expenses | |
41.3 |
|
42.9 |
|
42.1 |
|
General and administrative expenses | |
29.4 |
|
29.3 |
|
30.0 |
|
Restructuring and other charges |
|
.5 |
|
|
|
|
|
|
|
|
|
Total operating expenses | |
71.2 |
|
72.2 |
|
72.1 |
|
|
|
|
|
Operating income | |
10.9 |
|
11.0 |
|
10.4 |
|
Other income (expense), net | |
|
|
(.3 |
) |
(.3 |
) |
|
|
|
|
Income before provision for income taxes | |
10.9 |
|
10.7 |
|
10.1 |
|
Provision for income taxes | |
4.0 |
|
3.9 |
|
3.8 |
|
|
|
|
|
Net income | |
6.9 |
% |
6.8 |
% |
6.3 |
% |
2005 Compared to 2004
Overview
Revenue
in 2005 increased 4% to $1.18 billion from $1.14 billion in 2004. The revenue increase
in 2005 was a result of year-over-year growth in Korea, Taiwan, Europe and the United
States, and expansion into Indonesia. The revenue increase is also attributable in part to
a 1% positive impact of changes in foreign currency exchange rates. During 2005, we continued to see the positive impact
of our Scanner and monthly product subscription programs. Subscription orders represented
42% of our revenue in 2005, compared to 29% in the prior year. We believe that these
programs are strengthening our recurring revenue base and are improving customer retention
rates, as well as helping our distributor leaders build their sales organizations.
Reported revenue in 2005 was negatively impacted by a weakening of the
Japanese yen during the second half of the year which declined from 111.62 yen to the
U.S. dollar on July 1, 2005 to 117.94 yen to the U.S. dollar on December 31, 2005. Revenue growth in 2005 was also negatively
impacted by declines in local currency revenue in China and Japan in the second half of
the year. Our active and executive distributor counts were down 2% and 5% in 2005
compared to 2004, respectively, primarily due to declines in China and Japan as discussed
below.
Earnings
per share in 2005 decreased by 3%, or $0.03 per share, compared to 2004, primarily as a result of a lower gross
margin, higher general and administrative expenses and a higher effective tax rate.
-45-
Revenue
North Asia. The following table
sets forth revenue for the North Asia region and its principal markets (U.S. dollars in
millions):
|
2004 | |
2005 | |
Change | |
|
|
|
|
|
|
|
|
Japan |
|
$ 574.4 |
|
$ 562.0 |
|
(2%) |
|
South Korea | |
65.7 |
|
87.4 |
|
33% |
|
North Asia total | |
$ 640.1 |
|
$ 649.4 |
|
1% |
|
Revenue
in Japan decreased 2% in 2005 compared to 2004 and was negatively impacted 1% by changes
in foreign currency exchange rates following a significant weakening of the Japanese yen
during the second half of the year. In local currency, revenue in Japan decreased 1% as a
result of a local currency decline in the second half of the year. This decline was a
result of the following:
|
|
|
modifications
to distributor incentives that appear to have negatively impacted revenue later in the
second half of the year and resulted in declines in executive distributors; |
|
|
|
a
slower than expected market response to our roll-out of the Scanner program during 2005
due to regulatory contstraints; and |
|
|
|
our
scale-back of the Scanner roll-out and related promotional campaigns during the latter
part of 2005 in anticipation of the 2006 launch of the second-generation model of the
Scanner (the S2 or the "Scanner"). |
In
2005 we made some modifications to our compensation plan in Japan similar to changes that
had been successfully implemented previously in other markets, including the United
States. Upon review of our second-half results in Japan, it appears that the changes in
incentives did not have the same positive impact as they did in other markets and
contributed to the decline in revenue. Effective April 1, 2006, we are implementing some
enhancements to distributor incentives in Japan in order to address the negative impacts
resulting from previous modifications. We believe that these initiatives will have a
positive impact on our business in this market.
While
we have successfully dealt with regulatory restrictions in the past with respect to our
nutritional sales in Japan, the regulatory environment appears to have resulted in a
slower than expected response to our 2005 Scanner roll-out in Japan. Our nutritional
supplements are sold as foods in Japan, which limits the claims we can make with respect
to such products, including an inability to claim that our products increase antioxidant
levels. In addition, although we are able to link the Scanner measurement to a more
general nutritional assessment (which we are not able to do in most of our other markets),
we are not able to link it to a specific measure of carotenoid antioxidant levels. We are
also limited in our ability to tie the Scanner measurement directly to the consumption of
our nutrition products.
In
addition to launching the S2 Scanner in Japan in 2006, subject to regulatory approval we plan to launch our g3
nutritional juice, which contains a highly concentrated mix of several types of
antioxidants including carotenoid antioxidants. We anticipate that these initiatives will
positively impact our nutritional revenue in this market. We are also planning to launch
our Nu Skin® ProDerm Skin Analyzer, a handheld skin analysis tool. Based on
recent discussions with Japanese regulators, there are indications that certain
limitations may be imposed on the use of the ProDerm tool. It appears that we will
be able to use the ProDerm to provide close-up skin images, but we may not be able
to use the ProDerm to provide a score that quantifies skin condition and attributes as will be the case in other markets.
-46-
South
Korea generated its eighth consecutive quarter of year-over-year growth in the fourth
quarter of 2005, with local currency revenue growth of 19% in 2005 compared to 2004 as
well as significant growth in our active and executive distributor counts. We believe that
these results are due to strong product and other initiatives and alignment of our
distributor leaders behind these initiatives.
Greater
China. The following table sets forth revenue for the Greater China region and its
principal markets (U.S. dollars in millions):
|
2004 | |
2005 | |
Change | |
|
|
|
|
|
|
|
|
China |
|
$ 105.6 |
|
$ 102.2 |
|
(3%) |
|
Taiwan |
|
82.8 |
|
92.4 |
|
12% |
|
Hong Kong | |
41.4 |
|
42.1 |
|
2% |
|
Greater China total | |
$ 229.8 |
|
$ 236.7 |
|
3% |
|
Revenue
growth in Greater China was primarily a result of year-over-year growth in Taiwan. The
region also benefited from a 2% positive impact of changes in foreign currency exchange
rates.
China
revenue decreased by 3% in 2005 compared to 2004. We experienced sequential growth in our
business in China during the first half of the year following the introduction of
Pharmanex products and the Scanner. Our business declined, however, during the second half
of the year as a result of changes we made to our compensation plan in China in July of
2005 in order to prepare for anticipated direct selling regulations in that
market. These changes negatively impacted our revenue during the second half of the year
as our sales representatives adapted to them. In addition, in September, the Chinese
government announced the adoption of the new direct selling regulations. Consumer
uncertainty regarding the impact of the new regulations increased following publication of
the new regulations, also negatively impacting our sales during the second half of the
year. These issues contributed to a 30% decline in our sales representative count in 2005
compared to 2004.
With
the adoption of the new direct selling regulations, we have applied for a direct selling
license with the Chinese government, and the application process is ongoing. While the
timing of the application process is uncertain, we plan to begin to adapt our current
retail business model to include a direct selling component if and when we are able to
obtain a direct selling license. This will allow us to engage independent contractors who
will be able to sell products away from a fixed location. The new regulations prohibit the
use of multi-level compensation plans for direct selling, however, so we will compensate
the independent contractors based on their personal selling efforts only. We plan,
however, to maintain our retail store/employed sales representative model because we
believe it provides us with more flexibility in the manner in which we conduct business in
China, including the manner in which we compensate our full-time sales representatives.
For a discussion of the risks to our business and uncertainties associated with the
adoption of the new regulations in China, please refer to the section below entitled
Note Regarding Forward-Looking Statements.
In 2006, we
plan to launch the S2 Scanner and g3 juice. We also plan to launch the Nu Skin®
ProDerm Skin Analysis tool, which we believe will help reinvigorate enthusiasm for
our Nu Skin products following declines in Nu Skin sales during the past year as sales
leaders shifted their focus towards Pharmanex products. We also plan to continue to invest
resources in continued expansion and build-out of our infrastructure in China.
Taiwan
and Hong Kong each generated revenue growth in 2005 compared to the prior year. In local
currency, Taiwan grew 8% in 2005 compared to 2004, driven by success with the Scanner
program. We saw a leveling of business in Taiwan during the second half of the year, with
revenue down in the fourth quarter on a year-over-year basis. Fourth quarter revenue in
Hong Kong was also down year-over-year in the fourth quarter, due to Pharmanex sales to
China sales representatives shifting to China with the 2005 launch of Pharmanex products
in that market.
-47-
North
America. The following table sets forth revenue for the North America region and its
principal markets (U.S. dollars in millions):
|
2004 | |
2005 | |
Change | |
|
|
|
|
|
|
|
|
United States |
|
$ 135.7 |
|
$ 144.5 |
|
6% |
|
Canada | |
10.0 |
|
9.6 |
|
(4%) |
|
North America total | |
$ 145.7 |
|
$ 154.1 |
|
6% |
|
Revenue
in the United States grew 6% in 2005 compared to 2004 and was positively impacted by:
|
|
|
our
monthly product subscription program; and |
|
|
|
the
launch of a number of new, innovative Pharmanex, Nu Skin and Big Planet products. |
In
early 2005 we launched Photomax, a Big Planet digital imaging service, and during
the fourth quarter of 2005 we launched a newly reformulated LifePak product. In
2006, we plan to launch the S2 Scanner and the Nu Skin® ProDerm skin analysis
tool in the United States in order to help drive further revenue growth.
South
Asia/Pacific. The following table sets forth revenue for the South Asia/Pacific region
and its principal markets (U.S. dollars in millions):
|
2004 | |
2005 | |
Change | |
|
|
|
|
|
|
|
|
Singapore/Malaysia/Brunei |
|
$ 40.0 |
|
$ 41.4 |
|
3% |
|
Thailand | |
25.6 |
|
23.7 |
|
(7%) |
|
Australia/New Zealand | |
13.1 |
|
13.3 |
|
2% |
|
Indonesia | |
|
|
4.2 |
|
|
|
Philippines | |
3.1 |
|
4.1 |
|
32% |
|
South Asia/Pacific total | |
$ 81.8 |
|
$ 86.7 |
|
6% |
|
Revenue
in South Asia/Pacific increased 6% in 2005 compared to 2004, and was positively impacted
1% by changes in foreign currency exchange rates. The increase in local currency revenue
in this region was due primarily to revenue generated in Indonesia following its August
2005 opening. Revenue growth in Singapore/Malaysia/Brunei was somewhat offset by declines
in the second half of the year as some of our distributor leaders in these markets focused
their attention on business opportunities in Indonesia and away from their home markets,
as well as negative impacts from modifications to distributor incentives implemented in
September of 2005. Following four years of solid growth in Thailand, our business softened
in 2005.
-48-
Other Markets. The following table
sets forth revenue for our Other Markets (U.S. dollars in millions):
|
2004 | |
2005 | |
Change | |
|
|
|
|
|
|
|
|
Europe |
|
$ 36.6 |
|
$ 46.0 |
|
26% |
|
Latin America | |
3.9 |
|
8.0 |
|
105% |
|
Other Markets total | |
$ 40.5 |
|
$ 54.0 |
|
33% |
|
Revenue
growth in Europe was a result of success with the Scanner, our product subscription
program, and expansion into Eastern Europe. These initiatives positively impacted
distributor leadership, resulting in a 27% growth in our executive distributor count.
Following modifications to our business model in Latin America two years ago, we have
experienced rapid growth in that region in terms of revenue and distributor numbers,
particularly in Mexico. Towards the end of 2005, we began to experience a slowing of
growth rates in this region.
Gross
profit
Gross profit
as a percentage of revenue decreased to 82.5% in 2005, compared to 83.2% in 2004, as a
result of increased amortization costs associated with the continued global expansion of
the Scanner, and the strengthening of the U.S. dollar, particularly against the Japanese
yen, during the second half of the year.
Selling
expenses
Selling expenses
as a percentage of revenue decreased to 42.1% in 2005 from 42.9% in 2004.
Selling expenses increased to $497.4 million from $487.6 million in 2004. The decrease in
selling expenses as a percentage of revenue is due primarily to the following:
|
|
|
short-term
sales incentives paid in Japan in 2004 that were not paid in 2005; |
|
|
|
the
continued global expansion of the Scanner program, as no commissions are paid on lease
revenue; and |
|
|
|
slightly
lower incentive expenses in China. |
General
and administrative expenses
General and
administrative expenses as a percentage of revenue increased to 30.0% in 2005 from 29.3%
in 2004. General and administrative expenses increased to $354.2 million in 2005 from
$333.3 million in 2004. General and administrative expenses in 2005 were impacted by the
incremental costs associated with our investment in various growth initiatives, including
further development of China, Latin America and Europe, new market openings, and the
global expansion of the Scanner program. Beginning in 2006, we will be required to begin
expensing stock-based compensation granted to employees as a result of new accounting
rules. Had we recognized compensation cost for stock options in 2005 according to the
methodology prescribed under the new rules, our general and administrative expenses would
have been approximately $9.4 million higher that year.
In addition, we recently announced plans to implement a restructuring initiative during the first half of 2006
designed to (i) eliminate
organizational redundancies, (ii) revamp administrative support functions, (iii) prioritize investments to favor
profitable initiatives and markets, and
(iv) increase efficiencies in the supply chain process. In connection with this initiative, we expect to
incur employee severance costs of approximately
$10 to $20 million and $5 million related to various other streamlining intitiatves. Additionally, in February
2006, as a result of our launch of and
transition to our second-generation BioPhotonic Scanner, we determined it would be necessary to write down
the book value of the existing inventory of the
prior model of the Scanner of approximately $20 million. As a result of these initiatives, we expect to incur a
total cost of $30 to $40 million
on a pre-tax basis in the first half of 2006, and we anticipate that approximately $10 to $20 million of the
restructuring charges will result in
future cash expenditures. We expect that this initiative will result in cost savings that will enable us to
improve the profitability of our business and
allow us to invest in new growth initiatives.
-49-
Other
income (expense), net
Other income
(expense), net was $4.2 million of expense in 2005 compared to $3.6
million of expense in 2004. Fluctuations in other income (expense), net are impacted by
interest expense and foreign exchange fluctuations to the U.S. dollar on the translation
of yen-based bank debt and other foreign denominated intercompany balances into U.S.
dollars for financial reporting purposes. The increase in other expense in 2005 was
primarily a result of foreign exchange fluctuations.
Provision
for income taxes
Provision for
income taxes increased to $44.9 million in 2005 from $44.5 million in 2004. The effective
tax rate increased to 37.8% from 36.4% of pre-tax income in 2005 and 2004, respectively.
This increase in the effective tax rate was due to an increase in the amount of
nondeductible executive compensation, reconciliation of U.S. and foreign income tax
payable amounts and other nondeductible expenses related to equity compensation.
Net
income
As
a result of the foregoing factors, net income decreased to $74.0 million in 2005 from
$77.7 million in 2004.
-54-
2004 Compared to 2003
Overview
Revenue
in 2004 increased 15% to $1,137.9 million from $986.5 million in 2003. Excluding the
impact of changes in foreign currency exchange rates, we would have experienced a revenue
increase of 11% for 2004 compared to 2003. The revenue increase in 2004 was a result of
significant revenue growth in China, as well as solid revenue growth in the United States,
Taiwan and Hong Kong. During 2004 we continued to see the positive impact of our
BioPhotonic Scanner and monthly product subscription programs. We continued to expand our
use of the BioPhotonic Scanner in the United States and initiated lease programs in other
key markets including Japan in November 2004. Subscription orders represented 29% of our
revenue in 2004 compared to 24% in the prior year. Revenue growth in
2004 was negatively impacted by a decline in local currency revenue in Japan.
These
factors also contributed to a $0.22 increase in earnings per share in 2004 compared to
2003. Earnings per share for 2003 included the impact of a $0.04 per share, one-time
restructuring charge. The growth in earnings per share was also positively impacted by the
repurchase of 10.8 million and 3.1 million shares of our Class A common stock in October
2003 and July 2004, respectively.
Revenue
North
Asia. The following table sets forth revenue for the North Asia region and its principal
markets (U.S. dollars in millions):
|
2003 | |
2004 | |
Change | |
|
|
|
|
|
|
|
|
Japan |
|
$ 553.8 |
|
$ 574.4 |
|
4% |
|
South Korea | |
59.0 |
|
65.7 |
|
11% |
|
North Asia total | |
$ 612.8 |
|
$ 640.1 |
|
4% |
|
Excluding
the impact of changes in foreign currency exchange rates, revenue in North Asia decreased
1% in 2004 compared to 2003. In local currency, revenue in Japan decreased 3%. Revenue in
Japan during 2004 was negatively impacted by the absence of a compelling growth driver for
our distributors during most of the year as a result of regulatory uncertainty associated
with the BioPhotonic Scanner that prevented us from introducing it until November 2004.
Revenue was also negatively impacted by:
|
|
|
key
distributor leaders spending time in other markets pending the launch of the BioPhotonic
Scanner; |
|
|
|
stock outages resulting from product quality and regulatory challenges we faced during
2004, including BSE (or mad cow disease) issues in the first quarter, which required us to
convert many of our dietary supplements for sale in Japan from bovine-based capsules to
tablets and non-bovine based capsules; and |
In
South Korea, our local currency revenue grew 7% in 2004 compared to 2003 primarily as a
result of continued growth in our active distributors. We believe that strong initiatives
and distributor support contributed to the growth in this market despite the difficult
regulatory and economic conditions in South Korea.
Greater
China. The following table sets forth revenue for the Greater China region and its
principal markets (U.S. dollars in millions):
|
2003 | |
2004 | |
Change | |
|
|
|
|
|
|
|
|
China |
|
$ 38.5 |
|
$ 105.6 |
|
174% |
|
Taiwan |
|
73.1 |
|
82.8 |
|
13% |
|
Hong Kong | |
23.9 |
|
41.4 |
|
73% |
|
Greater China total | |
$ 135.5 |
|
$ 229.8 |
|
70% |
|
Revenue
growth in Greater China was a result of the continued expansion of operations in China, as
well as strong growth in Hong Kong and Taiwan. Currencies in China and Hong Kong are
generally pegged to the U.S. dollar, minimizing the impact of foreign currency
fluctuations on this region.
China
revenue grew by 174% compared to 2003. We continued to successfully grow our business in
China as a result of:
|
|
|
expansion
of our sales representatives, based in part upon the attractiveness of the opportunity
for employment with us in the market; |
-51-
|
|
|
successful
product launches and promotions; and |
|
|
|
a
robust economy, with a focus on international brands and opportunities. |
Following a period of rapid
sequential growth in China in 2003 and the first half of 2004, however, revenue declined
slightly in the third quarter of 2004 compared to the second quarter, and then stabilized
sequentially in the fourth quarter. Also, the number of sales representatives remained
essentially level during the second half of the year. This softening in the second half of
the year is attributed to a softening of the recruiting environment for new customers and
sales representatives after an initial 18 months of rapid sequential growth. This
softening was also largely the result of our taking actions against sales representatives who
had violated company policies. Due to increased media and government scrutiny of
activities related to direct selling and direct selling companies operating in China in
advance of new direct selling regulations, we focused more on training our sales
representatives and enforcing our sales policies that prohibit improper promotion of our
business, and less on implementing aggressive growth initiatives. This emphasis resulted
in disciplinary actions against, or termination of employment of, sales representatives
who had violated these policies, and contributed to the lack of growth in our revenue, our
customers and our sales representative numbers during the second half of 2004. We believe, however, that our long-term
growth prospects were enhanced due to these actions. Results
in China were also negatively impacted by uncertainties and delays with respect to the new
direct selling regulations and related negative and confusing media coverage.
Hong
Kong and Taiwan each generated strong growth in revenue and in the number of executive and
active distributors in 2004. Modifications we made to our compensation plan in early 2004
in these markets to promote the development of executive distributors, as well as
continued growth in monthly product subscription orders, contributed to the growth in
revenue in these markets. The revenue increases in these markets were also due in part to
continued enthusiasm for business prospects in China and the use of the BioPhotonic
Scanner, particularly in Taiwan. In addition, revenue in Hong Kong was positively impacted
by sales of products to sales representatives from China for personal consumption,
particularly to those sales representatives attending our third quarter sales convention
in Hong Kong.
North
America. The following table sets forth revenue for the North America region and its
principal markets (U.S. dollars in millions):
|
2003 | |
2004 | |
Change | |
|
|
|
|
|
|
|
|
United States |
|
$ 118.2 |
|
$ 135.7 |
|
15% |
|
Canada | |
9.4 |
|
10.0 |
|
6% |
|
North America total | |
$ 127.6 |
|
$ 145.7 |
|
14% |
|
Revenue
in the United States grew 15% in 2004 compared to 2003 and was positively impacted by:
|
|
|
the
BioPhotonic Scanner program; |
|
|
|
our
monthly product subscription program; |
|
|
|
the
launch of a number of new, innovative Pharmanex and Nu Skin products; and |
|
|
|
$5.8
million in sales to international distributors at our global convention held in the U.S.
in February 2004, which did not occur in 2003. |
These initiatives resulted in a 36%
increase in Pharmanex revenue and a 4% increase in Nu Skin revenue in 2004 compared to
2003, excluding sales to international distributors at our global distributor
convention. These initiatives also continued to enhance distributor
enthusiasm and sponsorship as well as increase retention. The number of executive
distributors grew 10% in 2004 compared to 2003. The growth in revenue in Pharmanex and Nu
Skin in the United States was partially offset by a decline in Big Planet revenue,
primarily as a result of our strategic elimination of low margin products and services
that generated approximately $11.0 million in revenue in 2003. Over the last couple of
years, Big Planet has focused on eliminating low margin products while developing and
introducing new products and services with margins comparable to Nu Skin and Pharmanex
products.
-52-
In
addition, in connection with the global roll-out of the BioPhotonic Scanner program, some
of our key U.S. distributor leaders spent time promoting the BioPhotonic Scanner in
international markets. This negatively impacted revenue and distributor activity in the
United States during the last half of the year as revenue and distributor statistics were
relatively flat sequentially.
South
Asia/Pacific. The following table sets forth revenue for the South Asia/Pacific region
and its principal markets (U.S. dollars in millions):
|
2003 | |
2004 | |
Change | |
|
|
|
|
|
|
|
|
Singapore/Malaysia/Brunei |
|
$ 36.7 |
|
$ 40.0 |
|
9% |
|
Thailand | |
22.7 |
|
25.6 |
|
13% |
|
Australia/New Zealand | |
13.5 |
|
13.1 |
|
(3%) |
|
Philippines | |
2.9 |
|
3.1 |
|
7% |
|
South Asia/Pacific total | |
$ 75.8 |
|
$ 81.8 |
|
8% |
|
Excluding
the impact of changes in foreign currency exchange rates, revenue in South Asia/Pacific
increased 4% in 2004 compared to 2003. The increase in local currency revenue in this
region was due primarily to revenue growth in Thailand as well as an increase in combined
Singapore/Malaysia revenue. We have experienced solid growth in Thailand for the last four
years, but revenue was down 13% in local currency in the fourth quarter compared to prior
year results. We launched the BioPhotonic Scanner program in Thailand in late 2004 to help
improve distributor activity and revenue in this market. Our focus on our monthly product
subscription programs, growth in our nutrition business, and the BioPhotonic Scanner
contributed to the revenue increases in Malaysia and Singapore. The revenue increases in
these markets were slightly offset by a decrease in revenue in combined Australia/New
Zealand.
Other
Markets. The following table sets forth revenue for our Other Markets (U.S. dollars in
millions):
|
2003 | |
2004 | |
Change | |
|
|
|
|
|
|
|
|
Europe |
|
$ 32.0 |
|
$ 36.6 |
|
14% |
|
Latin America | |
2.8 |
|
3.9 |
|
39% |
|
Other Markets total | |
$ 34.8 |
|
$ 40.5 |
|
16% |
|
The
16% increase in Other Markets was primarily due to a 14% increase in revenue in Europe,
which was mostly attributed to the favorable impact of foreign currency fluctuations in
2004 compared to 2003. We experienced higher local currency growth in Europe during the
second half of 2004, and in 2004 active distributors and executive distributors grew 25%
and 17%, respectively over 2003. Although our
-53-
Latin America business accounts for a small
part of our business, we have made efforts to grow our business there as well as in other
developing countries around the world. As a result of these efforts, revenue in Mexico was
up 54% in local currency in 2004 compared to 2003, and the executive distributor count
grew by 149%.
Gross
profit
Gross
profit as a percentage of revenue increased to 83.2% in 2004 compared to 82.1% in 2003.
Our gross profit was positively impacted by the shift away from low margin Big Planet
revenue to higher margin Nu Skin and Pharmanex products, strong gross margins in China
resulting from in-house manufacturing in that market, and the positive impact of
fluctuations in foreign currency exchange rates in 2004 compared to 2003. During 2004, we
continued to expand the BioPhotonic Scanner program in the U.S. and in our international
markets. Lease revenue from BioPhotonic Scanners has significantly lower margins than our
personal care and nutritional supplement products, as we lease them on essentially a
break-even basis.
Selling
expenses
Selling
expenses as a percentage of revenue increased to 42.9% in 2004 from
41.3% in 2003. Selling expenses increased to $487.6 million in 2004 from $407.1 million in
2003. The increase in selling expenses as a percentage of revenue is due in part to higher
costs associated with our employed sales representatives in China. The increase in selling expenses as a
percent of revenue was also due to a short-term increase in distributor incentives in
Japan in the fourth quarter of 2004. This increase in incentives resulted from the
implementation of new components to our compensation plan in this market while certain
existing components were transitioned out over several months.
General
and administrative expenses
General and administrative expenses as a percentage of revenue decreased
slightly to 29.3% in 2004 from 29.4% in 2003. General and administrative
expenses increased to $333.3 million in 2004 from $289.9 million in 2003. The
U.S. dollar increase during 2004 in general and administrative expenses was
primarily due to the incremental costs associated with significantly larger
retail operations in China versus the prior year, stronger foreign currencies
against the U.S. dollar, and higher distributor convention expenses.
Other
income (expense), net
Other
income (expense), net was $3.6 million of expense in 2004 compared to
$0.4 million of income in 2003. This increase in other income (expense), net of $4.0
million is primarily related to increased interest expenses due to additional debt we
entered into during 2003.
Provision
for income taxes
Provision
for income taxes increased to $44.5 million in 2004 from $39.9 million in 2003. This
increase was largely due to the increase in operating income as compared to the prior
year. The effective tax rate decreased to 36.4% from 37.0% of pre-tax income in 2004 and
2003, respectively. This decrease in the effective tax rate was largely due to our
election in 2004 to permanently reinvest some of our earnings related to our foreign
operations. We anticipate the remittance of these earnings to be postponed indefinitely.
Net
income
As
a result of the foregoing factors, net income increased to $77.7 million in 2004 from
$67.9 million in 2003.
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 and dividends, 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 $114.1 million in cash from operations in 2005, compared
to $130.4 million in 2004. This decrease in cash generated from operations is due to the
timing of inventory purchases in 2005 compared to 2004, the timing of payments for income
taxes and other liabilities accrued at the end of 2004 and 2005, and lower net income in
2005 compared to 2004.
As
of December 31, 2005, working capital was $149.1 million compared to $117.4 million as of
December 31, 2004. Our working capital increased primarily due to the increase in cash and
cash equivalents. Cash and cash equivalents at December 31, 2005 were $155.4 million
compared to $109.9 million at December 31, 2004. Our cash balance was positively impacted
by $121.3 million in cash flows from operations during 2005, as well as by $6.2 million
from the exercise of employee stock options, $30.0 million of new debt and $10.2 million
of net proceeds on investment sales. The additions to our cash balance were offset by the
use of approximately $30.9 million for capital expenditures, $24.6 million for repurchase
of shares of our common stock, $25.4 million for the payment of dividends and $17.1
million for the repayment of debt.
Capital
expenditures in 2005 totaled $30.9 million, and we anticipate capital expenditures of
approximately $40 million to $45 million for 2006. These capital expenditures are
primarily related to:
|
|
|
the
build-out of manufacturing facilities and additional retail stores in China, as well as
other leasehold improvements in our various markets; |
|
|
|
purchases
of Scanners; and |
|
|
|
purchases of
computer systems and software. |
-55-
We
currently have long-term debt pursuant to various credit facilities and other borrowings.
The following table summarizes these long-term debt arrangements as of December 31, 2005:
Facility or Arrangement(1) | |
Original Principal Amount | |
Balance as of December 31, 2005(2) | |
Interest Rate | |
Repayment terms | |
|
|
|
|
|
|
|
|
|
|
2000 Japanese yen denominated notes |
|
9.7 billion yen |
|
6.9 billion yen ($58.8 million as of December 31, 2005) |
|
3.0% |
|
Notes due October 2010, with annual principal payments that began in October 2004. |
|
|
|
|
|
|
| |
| |
| |
| |
| |
| |
2003 $125.0 million multi-currency uncommitted shelf facility: | |
| |
| |
| |
| |
| |
U.S. dollar denominated: | |
$50.0 million | |
$50.0 million | |
4.5% | |
Notes due April 2010 with annual principal payments beginning April 2006. | |
| |
| |
| |
| |
| |
| |
$25.0 million | |
$15.0 million | |
4.0% | |
Notes due April 2008 with annual principal payments that began in October 2004. | |
|
|
|
|
|
| |
| |
| |
| |
| |
Japanese yen denominated: | |
3.1 billion yen | |
3.1 billion yen ($26.4 million as of December 31, 2005) | |
1.7% | |
Notes due April 2014, with annual principal payments beginning April 2008. | |
|
|
|
|
|
| |
| |
| |
| |
| |
2004 $25.0 million revolving credit facility | |
N/A | |
$0 | |
N/A | |
Credit facility expires May 2007 | |
(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% to 100% 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 $11.9 million of the balance on our 2000 Japanese yen
denominated notes and $15.0 million of the balance on our U.S. dollar
denominated debt under the 2003 multi-currency uncommitted 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. During the year ended December 31, 2005, we repurchased
approximately 1.2 million shares of Class A common stock under this program for an
aggregate amount of approximately $24.6 million. Currently, approximately $52.5 million is
available under the stock repurchase program for repurchases.
During
each quarter of 2005, our board of directors declared cash dividends of $0.09 per share on
our Class A common stock. These quarterly cash dividends totaled approximately $25.2
million and were paid during 2005 to stockholders of record in 2005. In February 2006, the
board of directors declared a dividend to be paid in March 2006 of $0.10 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 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.
-56-
We
believe we have sufficient liquidity to be able to meet our obligations on both a
short-term and long-term basis. We currently believe that existing cash balances together
with future cash flows from operations and existing lines of credit will be adequate to
fund our cash needs. 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, 2005 (U.S. dollars in thousands):
|
Total | |
2006 | |
2007-2008 | |
2009-2010 | |
Thereafter | |
|
| |
| |
| |
| |
| |
Long-term debt obligations(1) |
|
$ 150,240 |
|
$ 26,757 |
|
$ 57,293 |
|
$ 51,072 |
|
$ 15,118 |
|
Capital lease obligations | |
|
|
|
|
|
|
|
|
|
|
Operating lease obligations(2) | |
45,667 |
|
13,645 |
|
19,292 |
|
10,845 |
|
1,885 |
|
Purchase obligations | |
65,707 |
|
43,238 |
|
15,663 |
|
5,940 |
|
866 |
|
Other long-term liabilities reflected
on the balance sheet(3) | |
|
|
|
|
|
|
|
|
|
|
Total | |
$ 261,614 |
|
$ 83,640 |
|
$ 92,248 |
|
$ 67,857 |
|
$ 17,869 |
|
(1) |
Long-term debt excludes estimated interest payments under these obligations
since a significant portion of our long-term debt is Japanese yen denominated.
We anticipate interest expense on this long-term debt to be similar to our 2005
interest expense, which was $5.6 million. In February 2005, we made an
additional borrowing under our shelf facility in Japanese yen denominated senior
notes in the amount of 3.1 billion yen (see Note 8 to the Consolidated Financial
Statements). |
(2) |
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 $3.7 million for
the year ended December 31, 2005 with remaining long-term obligations under
these leases of $19.8 million. |
(3) |
Other long-term liabilities reflected on the balance sheet do not constitute fixed contractual obligations and primarily consist of
long-term tax related balances, which totaled $41.7 million as of December 31,
2005. |
-57-
In 1999, we implemented a duty valuation methodology with respect to the importation of certain products into Japan. The Valuation Department
of the Yokohama customs authority reviewed and approved this methodology at that time, and it has been reviewed on several occasions by the audit division
of the Japan customs authority since then. In connection with recent audits, the Yokohama customs authorities have assessed us additional duties and
penalties on these products imported into Japan from October 2002 to October 2004, based on a different valuation methodology than that which was
previously approved. We have disputed this assessment. We have also disputed the amount of duties we were required to pay on products imported from
November of 2004 to June of 2005. The total amount assessed or in dispute is approximately $25.0 million as of December 31, 2005, net of any recovery of
consumption taxes. Effective July 1, 2005, we implemented some modifications to our business structure in Japan and in the United States that we believe
will eliminate any further customs valuation disputes with respect to product imports in Japan after that time.
Because the valuation methodology we used with respect to the products in dispute was reviewed and approved by the Japan customs authority, we
believe the assessments are improper and have filed letters of protest with Yokohama customs authority with respect to this entire amount. The Yokohama
customs authority has not accepted our letters of protest to date, and to follow proper administrative procedures, we have filed appeals with the Japan
Ministry of Finance. To the extent necessary, we plan to continue to file protests and appeals within the appropriate governmental channels concerning
this issue. We may also choose to use the judicial court system in Japan if necessary to bring this issue to a resolution. In order to file our letters
of protest, we were required to pay the $25.0 million in customs duties and assessments, the amount of which we recorded in "Other Assets" in our
Consolidated Balance Sheet. We have filed requests for refunds for this entire amount along with our letters of protest. 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.
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 full-time sales
representatives in China who have completed a qualification process and receive a salary,
labor benefits and bonuses based on their personal sales efforts.
-58-
|
As of December 31, 2003 | |
As of December 31, 2004 | |
As of December 31, 2005 | |
|
Active | |
Executive | |
Active | |
Executive | |
Active | |
Executive | |
|
|
|
|
|
|
|
North Asia |
|
322,000 |
|
17,013 |
|
337,000 |
|
16,637 |
|
340,000 |
|
16,129 |
|
Greater China | |
187,000 |
|
5,991 |
|
229,000 |
|
8,827 |
|
191,000 |
|
7,134 |
|
North America | |
113,000 |
|
2,861 |
|
134,000 |
|
3,099 |
|
136,000 |
|
3,443 |
|
South Asia/Pacific | |
69,000 |
|
2,175 |
|
74,000 |
|
2,076 |
|
81,000 |
|
2,043 |
|
Other Markets | |
34,000 |
|
1,091 |
|
46,000 |
|
1,377 |
|
55,000 |
|
1,722 |
|
Total | |
725,000 |
|
29,131 |
|
820,000 |
|
32,016 |
|
803,000 |
|
30,477 |
|
Quarterly Results
The
following table sets forth selected unaudited quarterly data for the periods shown (U.S.
dollars in millions, except per share amounts):
|
2004 | |
2005 | |
|
1st
Quarter | |
2nd
Quarter | |
3rd
Quarter | |
4th
Quarter | |
1st
Quarter | |
2nd
Quarter | |
3rd
Quarter
| |
4th Quarter |
|
|
|
|
|
|
|
|
|
Revenue |
|
$ 264.0 |
|
$ 284.2 |
|
$ 283.3 |
|
$ 306.4 |
|
$ 289.3 |
|
$ 310.1 |
|
$ 290.8 |
|
$ 290.7 |
|
Gross profit | |
220.1 |
|
236.7 |
|
235.7 |
|
254.2 |
|
239.7 |
|
256.1 |
|
239.3 |
|
239.7 |
|
Operating income | |
23.8 |
|
35.0 |
|
33.6 |
|
33.4 |
|
28.8 |
|
37.0 |
|
30.0 |
|
27.3 |
|
Net income | |
14.5 |
|
20.3 |
|
20.9 |
|
22.0 |
|
17.7 |
|
22.8 |
|
17.7 |
|
15.8 |
|
Net income per share: | |
Basic | |
0.20 |
|
0.28 |
|
0.30 |
|
0.32 |
|
0.25 |
|
0.33 |
|
0.25 |
|
0.22 |
|
Diluted | |
0.20 |
|
0.28 |
|
0.29 |
|
0.31 |
|
0.25 |
|
0.32 |
|
0.25 |
|
0.22 |
|
Recent Accounting
Pronouncements
In December 2004, the Financial Accounting Standards Board issued SFAS No. 123R, Share-Based Payment, which requires the expensing of employee
options beginning the first fiscal year that begins after June 15, 2005. Consequently, we will begin expensing employee options during the first quarter
of 2006 and anticipate recording an additional stock option expense of approximately $2.0 million per quarter in 2006. Through 2005, we continued to
account for stock-based compensation granted to employees according to the provisions of APB Opinion No. 25.
Currency Risk and
Exchange Rate Information
A
majority of our revenue and many of our 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. 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. The
Chinese government is beginning to allow the yuan to float more freely against the U.S.
dollar and other major currencies. A strengthening of the yuan would benefit our reported
revenue and profits and a weakening of the yuan would negatively impact reported revenue
and profits. In addition, in recent months we have seen a weakening of the Japanese yen
against the U.S. dollar. Any further weakening of the yen would negatively impact reported
revenue and profits. Given the uncertainty of exchange rate fluctuations, we cannot
estimate the effect of these fluctuations on our future business, product pricing and
results of operations or financial condition.
-59-
We
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.
Our
foreign currency derivatives are comprised of over-the-counter forward contracts with
major international financial institutions. As of December 31, 2005, we had contracts with
notional amounts totaling $23.7 million with expiration dates through December 2006. All
of these contracts were denominated in Japanese yen. For the year ended December 31, 2005,
we recorded losses of $0.3 million in operating income, and gains of $5.3 million, net of
tax, in other comprehensive income related to the fair market valuation of our outstanding
forward contracts. Because of our foreign exchange contracts at December 31, 2005, 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 these contracts. This potential loss does not consider the underlying foreign
currency transaction or translation exposures to which we are subject.
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:
|
2004 | |
2005 | |
|
1st
Quarter | |
2nd
Quarter | |
3rd
Quarter | |
4th
Quarter | |
1st
Quarter | |
2nd
Quarter | |
3rd
Quarter
| |
4th Quarter |
|
|
|
|
|
|
|
|
|
Japan(1) |
|
$ 107.3 |
|
$ 109.6 |
|
$ 109.9 |
|
$ 105.6 |
|
$ 104.5 |
|
$ 107.5 |
|
$ 111.3 |
|
$ 117.3 |
|
Taiwan | |
33.3 |
|
33.3 |
|
33.9 |
|
32.9 |
|
31.5 |
|
31.4 |
|
32.3 |
|
33.4 |
|
Hong Kong | |
7.8 |
|
7.8 |
|
7.8 |
|
7.8 |
|
7.8 |
|
7.8 |
|
7.8 |
|
7.8 |
|
South Korea | |
1,171.7 |
|
1,162.0 |
|
1,154.8 |
|
1,091.6 |
|
1,022.4 |
|
1,008.4 |
|
1,029.4 |
|
1,036.0 |
|
Malaysia | |
3.8 |
|
3.8 |
|
3.8 |
|
3.8 |
|
3.8 |
|
3.8 |
|
3.8 |
|
3.8 |
|
Thailand | |
39.2 |
|
39.8 |
|
41.3 |
|
40.2 |
|
38.6 |
|
40.1 |
|
41.3 |
|
41.0 |
|
China | |
8.3 |
|
8.3 |
|
8.3 |
|
8.3 |
|
8.3 |
|
8.3 |
|
8.1 |
|
8.1 |
|
(1)
As of March 15, 2006 the exchange rate of U.S. $1 into the Japanese yen was
approximately 117.26.
Note Regarding
Forward-Looking Statements
With
the exception of historical facts, the statements contained in Managements
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
expectation that the self-manufacture of product will result in reduced cost of goods
sold, and our plans to manufacture more products in China for export; |
|
|
|
our
plans to launch certain products, tools, initiatives and incentives in our various
markets, such as the S2 Scanner and the Nu Skin® ProDerm Skin Analyzer, and our
belief that these initiatives will positively impact our business in these markets; |
-60-
|
|
|
our
plans to augment our current business model in China with a direct selling component; |
|
|
|
our
plans to continue to invest resources in continued expansion and build-out of our infrasctructure in China; |
|
|
|
our
plans to implement certain organizational restructuring initiatives; |
|
|
|
the
expectation that we will spend $40 million to $45 million for capital expenditures during
2006; |
|
|
|
the
anticipation that we will continue to declare quarterly cash dividends and that cash
flows from operations will be sufficient to pay future dividends; |
|
|
|
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 together with cash flow from operations
and existing lines of credit will be adequate to fund cash needs; |
|
|
|
our
plans to continue protesting and appealing assessments by the Yokohama customs authority
for duties on products imported into Japan; and |
|
|
|
our
belief that recent modifications to our business structure in Japan and in the United
States should eliminate any further customs valuation disputes with respect to product
imports in Japan. |
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 1. Business Risk Factors
(which contain 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. 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) |
|
Because
a substantial majority of our sales are generated in Asia, particularly Japan,
significant variations in operating results including revenue, gross margin and
earnings from those expected could be caused by: |
|
|
|
|
continued
weakening of the Japanese yen; |
|
|
|
|
regulatory
constraints with respect to the claims we can make with respect to the efficacy of our
products and tools; |
|
|
|
|
increasing
competitive pressures; |
|
|
|
|
renewed
or sustained weakness of Asian economies or consumer confidence; |
|
|
|
|
political
unrest or uncertainty; or |
-61-
|
|
|
|
natural
disasters or epidemics. |
|
(b) |
|
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 minor fines being paid in some cases. Because of current
restrictions on direct selling activities, we have implemented a modified
business model for this market using retail stores and an employed sales force.
Our operations in China may be modified or otherwise harmed by regulatory
changes, subjective interpretations of laws or an inability to work effectively
with national and local government agencies. In addition, we could face risks
that any improper actions by our local sales employees, or any overseas
distributors, in violation of local laws or our policies could result in
regulatory investigations and penalties that could harm our business. |
|
(c) |
|
Towards
the end of 2005, Chinese regulators adopted anti-pyramiding and new direct
selling regulations. Although we have applied for a direct selling license and
anticipate that we will be able to obtain a direct selling license under these
regulations, there can be no assurance that we will be able to obtain such a
license. Our future growth in China could be harmed if we do not receive a
direct selling license or if the direct selling application process is delayed
further than anticipated. These new regulations are not yet well understood,
and there continues to be some confusion and uncertainty as to the meaning of
the new 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 new regulations. We anticipate that regulatory
scrutiny of companies engaged in direct selling may increase following the
implementation of these new 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 or our
planned implementation of direct selling violates these regulations, including
the restrictions on the use of multi-level compensation plans for distributors.
Our business could also be harmed if regulators inhibit our ability to
concurrently operate our retail store/employed sales representative business
model and our planned direct selling business. |
|
(d) |
|
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. For example,
the introduction of the Scanner, changes in compensation incentives and focus
on automatic delivery programs have helped generate growth in many of our
markets. There can be no assurance that such initiatives will continue to
generate excitement among our distributors in the long-term or that planned
initiatives tied to the Scanner in markets like the United States where the
Scanner was introduced more than three years ago will be successful in
maintaining distributor activity and productivity. In addition, some
initiatives may have unanticipated negative impacts on our markets. For
example, during the past year certain modifications were made to compensation
incentives in China, Japan, and Singapore that appear not to have been as well
received by some distributors as expected, contributing to declines in
distributor numbers and revenue results. |
-62-
|
(e) |
|
Our
use of the Scanner is subject to regulatory risks and uncertainties in our
various markets. For example, in March 2003 the United States Food and Drug
Administration (the FDA) questioned its status as a non-medical
device and we subsequently filed an application with the FDA to have the
Scanner classified as a non-medical device. The FDA has not yet acted on our
application. There are various factors that could determine whether the Scanner
is a medical device, including the claims that we or our distributors make
about it. We face similar regulatory issues in other markets with respect to
the status of the Scanner as a non-medical device and the claims that can be
made in using it. For example, during the past year we faced regulatory
inquiries in Singapore, Korea and Japan regarding distributor claims with
respect to the Scanner. Although these matters have not resulted in any adverse
action against us, our revenue in any market going forward could be negatively
impacted if we face similar issues in the future or if such inquiries weaken
distributor enthusiasm surrounding the Scanner. A determination in any market
that the Scanner is a medical device or that distributors are using it to make
medical claims could negatively impact our ability to use the Scanner in such
market. In addition, if distributors make claims regarding the Scanner outside
of claims approved by us, or use it in a manner not authorized by us, this
could result in regulatory actions against our business. |
|
(f) |
|
Our
plans to introduce the Nu Skin® ProDerm skin analysis tool
in our various markets are subject to risks and uncertainties. We are currently
in the process of finalizing the hardware and software design specifications,
and if we experience difficulties or delays in completing this process that
prevent us from meeting our launch schedules, our business may be harmed. Our
plans are also subject to regulatory risks, particularly in Japan, where we are
currently working through the regulatory process for the planned introduction
of the ProDerm tool in that market. There is a risk that regulatory
authorities in Japan may impose limitations on the use of this tool and on
claims that may be made in connection with its use. Such limitations in Japan
or any other markets could weaken the ability of our distributors to utilize
this tool in building their businesses, and could dampen distributor enthusiasm
surrounding it. |
|
(g) |
|
As
we prepare to begin operations in Russia and prepare for the implementation of
direct selling regulations in China, we anticipate that some distributor
leaders in other markets will shift their focus away from their home markets
and towards business prospects in these two markets. This shift of focus of
distributor leaders can negatively impact distributor leadership and growth in
these other markets and consequently negatively impact revenue. In addition, if
Russia and China are not as successful as the distributor leaders from these
other markets anticipate, this can also dampen distributor enthusiasm. |
|
(h) |
|
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.
Recent negative publicity concerning certain 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 changes in regulations applicable to our business or any of
our nutritional products that limit our ability to market such products, our
revenue and profitability may be harmed. |
-63-
|
(i) |
|
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. These audits
sometimes result in challenges by such taxing authorities as to our
methodologies used in determining our income tax, duties, customs, and other
amounts owed in connection with the importation and distribution of our
products. For example, we were recently assessed by the Japan customs
authorities for additional duties on products imported into Japan, and we are
currently contesting this assessment. Audits are also often focused on whether
or not certain expenses are deductible for tax purposes in a given country.
Currently, audits are underway with respect to this issue in a number of our
markets, including Taiwan. To the extent we are unable to successfully defend
ourselves against such audits and reviews, we may be required to pay
assessments and penalties and increased duties, which may, individually or in
the aggregate, negatively impact our gross margins and operating results. |
|
(j) |
|
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. |
ITEM 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. Managements Discussion and Analysis of
Financial Condition and Results of Operations Currency Risk and Exchange Rate
Information and Note 15 to the Consolidated Financial Statements.
ITEM 8. |
|
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
|
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, 2004 and 2005 |
64 |
|
|
|
|
Consolidated Statements of Income for the years
ended December 31, 2003, 2004 and 2005 |
65 |
|
|
|
|
Consolidated Statements of Stockholders' Equity
for the years ended |
66 |
|
|
|
|
Consolidated Statements of Cash Flows for the years
ended December 31, 2003, 2004 and 2005 |
67 |
|
|
|
|
Notes to Consolidated Financial Statements |
68 |
|
|
|
|
Report of Independent Registered Public Accounting Firm |
86 |
|
|
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. |
-64-
Nu Skin Enterprises, Inc.
Consolidated Balance Sheets
(U.S. dollars in thousands, except share amounts)
|
December 31, | |
|
2004 | |
2005 | |
ASSETS |
|
|
|
|
|
Current assets | |
Cash and cash equivalents | |
$ 109,865 |
|
$ 155,409 |
|
Current investments | |
10,230 |
|
|
|
Accounts receivable | |
16,057 |
|
16,683 |
|
Inventories, net | |
87,474 |
|
99,399 |
|
Prepaid expenses and other | |
44,723 |
|
36,663 |
|
| |
268,349 |
|
308,154 |
|
| |
|
|
|
|
Property and equipment, net | |
76,511 |
|
84,053 |
|
Goodwill | |
112,446 |
|
112,446 |
|
Other intangible assets, net | |
79,005 |
|
91,137 |
|
Other assts | |
73,426 |
|
83,076 |
|
Total assets | |
$ 609,737 |
|
$ 678,866 |
|
LIABILITIES AND STOCKHOLDERS' EQUITY | |
Current liabilities | |
Accounts payable | |
$ 25,182 |
|
$ 20,276 |
|
Accrued expenses | |
107,226 |
|
112,023 |
|
Current portion of long-term debt | |
18,540 |
|
26,757 |
|
| |
150,948 |
|
159,056 |
|
| |
|
|
|
|
Long-term debt | |
132,701 |
|
123,483 |
|
Other liabilities | |
29,855 |
|
41,699 |
|
Total liabilities | |
313,504 |
|
324,238 |
|
| |
|
|
|
|
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 | |
165,177 |
|
180,839 |
|
Treasury stock, at cost - 20.9 million and 20.5 million shares | |
(273,721 |
) |
(284,138 |
) |
Accumulated other comprehensive loss | |
(71,606 |
) |
(67,197 |
) |
Retained earnings | |
477,912 |
|
526,537 |
|
Deferred compensation | |
(1,620 |
) |
(1,504 |
) |
| |
296,233 |
|
354,628 |
|
Total liabilities and stockholders' equity | |
$ 609,737 |
|
$ 678,866 |
|
The
accompanying notes are an integral part of these consolidated financial statements.
-65-
Nu Skin Enterprises, Inc.
Consolidated Statements of Income
(U.S. dollars in thousands, except per share amounts)
|
Year Ended December 31, |
|
|
2003 | |
2004 | |
2005 | |
|
|
|
Revenue |
|
$ 986,457 |
|
$ 1,137,864 |
|
$ 1,180,930 |
|
Cost of sales | |
176,545 |
|
191,211 |
|
206,163 |
|
|
|
|
Gross profit | |
809,912 |
|
946,653 |
|
974,767 |
|
|
|
|
Operating expenses: | |
Selling expenses | |
407,088 |
|
487,631 |
|
497,421 |
|
General and administrative expenses | |
289,925 |
|
333,263 |
|
354,223 |
|
Restructuring and other charges | |
5,592 |
|
|
|
|
|
|
|
|
Total operating expenses | |
702,605 |
|
820,894 |
|
851,644 |
|
|
|
|
Operating income | |
107,307 |
|
125,759 |
|
123,123 |
|
Other income (expense), net | |
432 |
|
(3,618 |
) |
(4,172 |
) |
|
|
|
Income before provision for income taxes | |
107,739 |
|
122,141 |
|
118,951 |
|
Provision for income taxes | |
39,863 |
|
44,467 |
|
44,918 |
|
|
|
|
Net income | |
$ 67,876 |
|
$ 77,674 |
|
$ 74,033 |
|
|
|
|
Net income per share: | |
Basic | |
$ 0.86 |
|
$ 1.10 |
|
$ 1.06 |
|
Diluted | |
$ 0.85 |
|
$ 1.07 |
|
$ 1.04 |
|
|
|
|
Weighted-average common shares outstanding (000s): | |
Basic | |
78,637 |
|
70,734 |
|
70,047 |
|
Diluted | |
79,541 |
|
72,627 |
|
71,356 |
|
The
accompanying notes are an integral part of these consolidated financial statements.
-66-
Nu Skin Enterprises, Inc.
Consolidated Statements of Stockholders' Equity
(U.S. dollars in thousands)
|
Class A
Common Stock | |
Class B
Common Stock | |
Additional
Paid in Capital | |
Treasury Stock | |
Accumulated Other
Comprehensive Loss | |
Retained
Earnings | |
Deferred
Compensation | |
Total | |
|
|
|
|
|
|
|
|
|
Balance at January 1, 2003 |
|
$ 46 |
|
$ 45 |
|
$ 149,548 |
|
$ (79,755 |
) |
$ (68,988 |
) |
$ 385,590 |
|
$ |
|
$ 386,486 |
|
|
|
|
|
|
|
|
|
|
Net income | |
|
|
|
|
|
|
|
|
|
|
67,876 |
|
|
|
67,876 |
|
Foreign currency translation adjustment | |
|
|
|
|
|
|
|
|
(1,736 |
) |
|
|
|
|
(1,736 |
) |
Net unrealized losses on foreign currency cash flow hedges | |
|
|
|
|
|
|
|
|
(3,171 |
) |
|
|
|
|
(3,171 |
) |
Less: Reclassification adjustment for realized losses in current earnings | |
|
|
|
|
|
|
|
|
3,046 |
|
|
|
|
|
3,046 |
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
66,015 |
|
Repurchase of Class A common stock (Note 10) | |
|
|
|
|
|
|
(150,009 |
) |
|
|
|
|
|
|
(150,009 |
) |
Conversion of shares (Note 10) | |
45 |
|
(45 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of employee stock awards | |
|
|
|
|
3,113 |
|
|
|
|
|
|
|
(3,113 |
) |
|
|
Amortization of deferred compensation | |
|
|
|
|
|
|
|
|
|
|
|
|
715 |
|
715 |
|
Exercise of distributor and employee stock options (1,258,000 shares) | |
|
|
|
|
(4,025 |
) |
12,917 |
|
|
|
|
|
|
|
8,892 |
|
Cash dividends | |
|
|
|
|
|
|
|
|
|
|
(21,851 |
) |
|
|
(21,851 |
) |
Balance at December 31, 2003 | |
91 |
|
|
|
148,636 |
|
(216,847 |
) |
(70,849 |
) |
431,615 |
|
(2,398 |
) |
290,248 |
|
| |
Net income | |
|
|
|
|
|
|
|
|
|
|
77,674 |
|
|
|
77,674 |
|
Foreign currency translation adjustment | |
|
|
|
|
|
|
|
|
(1,402 |
) |
|
|
|
|
(1,402 |
) |
Net unrealized losses on foreign currency cash flow hedges | |
|
|
|
|
|
|
|
|
(2,590 |
) |
|
|
|
|
(2,590 |
) |
Less: Reclassification adjustment for realized losses in current earnings | |
|
|
|
|
|
|
|
|
3,235 |
|
|
|
|
|
3,235 |
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
76,917 |
|
Repurchase of Class A common stock (Note 10) | |
|
|
|
|
|
|
(72,311 |
) |
|
|
|
|
|
|
(72,311 |
) |
Amortization of deferred compensation | |
|
|
|
|
|
|
|
|
|
|
|
|
778 |
|
778 |
|
Purchase of long-term assets (Note 20) | |
|
|
|
|
4,279 |
|
2,624 |
|
|
|
|
|
|
|
6,903 |
|
Reduction in carrying value of intangible asset | |
|
|
|
|
|
|
|
|
|
|
(8,750 |
) |
|
|
(8,750 |
) |
Exercise of employee stock options (1,834,000 shares) | |
|
|
|
|
3,814 |
|
12,813 |
|
|
|
|
|
|
|
16,627 |
|
Tax benefit of options exercised | |
|
|
|
|
8,448 |
|
|
|
|
|
|
|
|
|
8,448 |
|
Cash dividends | |
|
|
|
|
|
|
|
|
|
|
(22,627 |
) |
|
|
(22,627 |
) |
Balance at December 31, 2004 | |
91 |
|
|
|
165,177 |
|
(273,721 |
) |
(71,606 |
) |
477,912 |
|
(1,620 |
) |
296,233 |
|
| |
Net income | |
|
|
|
|
|
|
|
|
|
|
74,033 |
|
|
|
74,033 |
|
Foreign currency translation adjustment | |
|
|
|
|
|
|
|
|
(597 |
) |
|
|
|
|
(597 |
) |
Net unrealized gains on foreign currency cash flow hedges | |
|
|
|
|
|
|
|
|
5,278 |
|
|
|
|
|
5,278 |
|
Less: Reclassification adjustment for realized losses in current earnings | |
|
|
|
|
|
|
|
|
(272 |
) |
|
|
|
|
(272 |
) |
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
78,442 |
|
Repurchase of Class A common stock (Note 10) | |
|
|
|
|
|
|
(24,638 |
) |
|
|
|
|
|
|
(24,638 |
) |
Issuance of employee stock awards | |
|
|
|
|
1,023 |
|
|
|
|
|
|
|
1,023 |
) |
|
|
Mark to market stock awards | |
|
|
|
|
(232 |
) |
|
|
|
|
|
|
232 |
|
|
|
Amortization of deferred compensation | |
|
|
|
|
|
|
|
|
|
|
|
|
907 |
|
907 |
|
Purchase of long-term assets (Note 20) | |
|
|
|
|
13,512 |
|
7,695 |
|
|
|
|
|
|
|
21,207 |
|
Exercise of employee stock options (666,000 shares) | |
|
|
|
|
(349 |
) |
6,526 |
|
|
|
|
|
|
|
6,177 |
|
Tax benefit of options exercised | |
|
|
|
|
1,708 |
|
|
|
|
|
|
|
|
|
1,708 |
|
Cash dividends | |
|
|
|
|
|
|
|
|
|
|
(25,408 |
) |
|
|
25,408 |
|
Balance at December 31, 2005 | |
$ 91 |
|
$ |
|
$ 180,839 |
|
$ (284,138 |
) |
$ (67,197 |
) |
$ 526,537 |
|
$ (1,504 |
) |
$ 354,628 |
|
The accompanying notes are an
integral part of these consolidated financial statements.
-68-
Nu Skin Enterprises, Inc.
Consolidated Statements of Cash Flows
(U.S. dollars in thousands)
|
Year Ended December 31, |
|
|
2003 | |
2004 | |
2005 | |
Cash flows from operating activities: |
|
|
|
|
|
|
|
Net income | |
$ 67,876 |
|
$ 77,674 |
|
$ 74,033 |
|
Adjustments to reconcile net income to net cash provided | |
by operating activities: | |
Depreciation and amortization | |
22,369 |
|
27,883 |
|
30,459 |
|
Amortization of deferred compensation | |
715 |
|
778 |
|
907 |
|
Loss on sale of assets | |
525 |
|
|
|
|
|
Changes in operating assets and liabilities: | |
Accounts receivable | |
3,860 |
|
(1,003 |
) |
(626 |
) |
Inventories, net | |
4,968 |
|
(4,136 |
) |
(11,925 |
) |
Prepaid expenses and other | |
11,714 |
|
21,869 |
|
15,991 |
|
Other assets | |
(7,965 |
) |
(10,372 |
) |
(5,048 |
) |
Accounts payable | |
824 |
|
6,366 |
|
(4,906 |
) |
Accrued expenses | |
1,176 |
|
10,910 |
|
22,185 |
|
Other liabilities | |
2,964 |
|
381 |
|
(6,970 |
) |
| |
Net cash provided by operating activities | |
109,026 |
|
130,350 |
|
114,100 |
|
| |
Cash flows from investing activities: | |
Purchase of property and equipment | |
(23,518 |
) |
(34,996 |
) |
(30,884 |
) |
Proceeds on investment sales | |
70,775 |
|
185,015 |
|
170,610 |
|
Purchases of investments | |
(52,800 |
) |
(195,245 |
) |
(160,380 |
) |
Purchase of long-term assets | |
|
|
(2,953 |
) |
(5,548 |
) |
| |
Net cash used in investing activities | |
(5,543 |
) |
(48,179 |
) |
(26,202 |
) |
| |
Cash flows from financing activities: | |
Payment of cash dividends | |
(21,851 |
) |
(22,627 |
) |
(25,408 |
) |
Repurchase of shares of common stock | |
(150,009 |
) |
(72,311 |
) |
(24,638 |
) |
Exercise of distributor and employee stock options | |
8,892 |
|
16,627 |
|
6,177 |
|
Payments on long-term debt | |
|
|
(16,241 |
) |
(17,074 |
) |
Proceeds from long-term debt | |
75,000 |
|
|
|
30,000 |
|
Proceeds from revolving credit facility | |
20,000 |
|
|
|
|
|
Payments on revolving credit facility | |
(20,000 |
) |
|
|
|
|
| |
Net cash used in financing activities | |
(87,968 |
) |
(94,552 |
) |
(30,943 |
) |
| |
Effect of exchange rate changes on cash | |
4,687 |
|
(322 |
) |
(11,411 |
) |
| |
Net increase (decrease) in cash and cash equivalents | |
20,202 |
|
(12,703 |
) |
45,544 |
|
| |
Cash and cash equivalents, beginning of period | |
102,366 |
|
122,568 |
|
109,865 |
|
| |
Cash and cash equivalents, end of period | |
$ 122,568 |
|
$; 109,865 |
|
$ 155,409 |
|
The
accompanying notes are an integral part of these consolidated financial statements.
-69-
Nu Skin Enterprises, Inc.
Notes to Consolidated Financial Statements
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. The Company also markets technology-related products and services under the Big
Planet brand. The Company reports revenue from five geographic regions: North Asia, which
consists of Japan and South Korea; Greater China, which consists of China, Hong
Kong, Macau and Taiwan; North America, which consists of the United States and Canada;
South Asia/Pacific, which consists of Australia, Brunei, Indonesia, Malaysia, New Zealand,
the Philippines, Singapore and Thailand; and Other Markets, which consists of Brazil,
Europe, Guatemala/Central America, Israel and Mexico (the Companys 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, required management to make estimates and
assumptions that affect 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. Significant
estimates include reserves for product returns, obsolete inventory and taxes. Actual
results could differ from these estimates.
Cash and cash equivalents
Cash
equivalents are short-term, highly liquid instruments with original maturities of 90 days
or less.
Current investments
Current
investments consist entirely of auction rate municipal bonds classified as
available-for-sale securities. The Company, through its dealers, purchases and sells these
securities at par value and records them at cost, which approximates fair market value due
to their variable interest rates, which typically reset every 7 to 35 days and despite the
long-term nature of their stated contractual maturities, along with the Companys
investment policy and practice to only invest in high investment grade securities, the
Company has the ability to quickly liquidate these securities. As a result, the Company
has no cumulative gross unrealized holding gains (losses) or gross realized gains (losses)
from its current investments. Interest income generated from these current investments is
recorded in other income.
-69-
Nu Skin Enterprises, Inc.
Notes to Consolidated Financial Statements
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 $5.2 million and $5.8 million as of December 31, 2004 and 2005,
respectively.
Inventories
consist of the following (U.S. dollars in thousands):
|
December 31, |
|
|
2004 | |
2005 | |
|
|
|
Raw materials |
|
$ 16,855 |
|
$ 20,941 |
|
Finished goods | |
70,619 |
|
78,458 |
|
| |
$ ; 87,474 |
|
$ 99,399 |
|
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.
Goodwill and other
intangible assets
Under
the provisions of Statements of Financial Accounting Standards
(SFAS) No. 142, Goodwill and Other Intangible Assets (SFAS
142), the Companys goodwill and intangible assets with indefinite useful lives
are no longer amortized, but instead are tested for impairment at least annually. The
Companys intangible assets with finite lives are recorded at cost and are amortized
over their respective estimated useful lives to their estimated residual values and are
reviewed for impairment in accordance with SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets (Note 5). In addition, the Company is required to
make judgments regarding and periodically assesses the useful life of its intangible
assets.
Revenue recognition
Revenue
is recognized when products are shipped, which is when title and risk of loss pass to
independent distributors who are the Companys customers. A reserve for product
returns is accrued based on historical experience totaling $2.5 million and $2.1 million
as of December 31, 2004 and 2005, 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
Companys distributors generally does not provide rebates or selling discounts to
distributors who purchase its products and services. The Company classifies selling
discounts, if any, as a reduction of revenue.
-70-
Nu Skin Enterprises, Inc.
Notes to Consolidated Financial Statements
Advertising expense
Advertising
costs are expensed as incurred. Advertising expense incurred for the years ended December
31, 2003, 2004 and 2005 totaled approximately $1.4 million, $1.3 million and $2.4 million,
respectively.
Research and development
The
Companys research and development activities are conducted primarily through its
Pharmanex division. Research and development costs are expensed as incurred and totaled
$6.4 million, $7.7 million and $7.5 million in 2003, 2004 and 2005, respectively.
Income taxes
The
Company follows the liability method in accounting for income taxes. Under this method,
deferred tax assets and liabilities are determined based on the differences between
financial reporting and tax bases of assets and liabilities and are measured using the
enacted tax rates and laws that will be in effect when the differences are expected to
reverse. The Company nets 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. The Company accounts for any
income tax contingencies in accordance with SFAS No. 5, Accounting for
Contingencies.
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). Earnings per share in 2004 and 2005 were positively impacted
by the repurchase of 10.8 million shares of the Companys Class A common stock in
October 2003 and the repurchase of 3.1 million shares of the Companys Class A common
stock in July 2004.
Foreign currency
translation
Most
of the Companys business operations occur outside the United States. The local
currency of each of the Companys 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.
-71-
Nu Skin Enterprises, Inc.
Notes to Consolidated Financial Statements
Fair value of financial
instruments
The
carrying value of financial instruments including cash and cash equivalents, accounts
receivable, accounts payable and notes payable approximate fair values. 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.
Stock-based compensation
SFAS
No. 123, Accounting for Stock-Based Compensation (SFAS 123),
encourages, but does not require, companies to record compensation cost for stock-based
employee compensation plans based on the fair market value of options granted. The Company
has chosen to account for stock-based compensation granted to employees using the
intrinsic value method prescribed in Accounting Principles Board (APB) Opinion
No. 25, Accounting for Stock Issued to Employees, and related interpretations.
Accordingly, because the grant price equals the market price on the date of grant for
options issued by the Company, no compensation expense is recognized for stock options
issued to employees. However, stock-based compensation granted to non-employees, such as
the Companys independent distributors and consultants, is accounted for in
accordance with SFAS 123. SFAS No. 148, Accounting for Stock-Based Compensation
Transition and Disclosure (SFAS 148), which amended SFAS 123,
requires more prominent and frequent disclosures about the effects of stock-based
compensation, which have been presented herein.
In
December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No.
123R, Share-Based Payment, which requires the expensing of employee options
beginning the first fiscal year that begins after June 15, 2005. Consequently, the Company
will begin expensing employee options during its first quarter of 2006 and anticipates
recording an additional stock option expense of approximately $2.0 million per quarter in
2006. Through 2005, the Company continued to account for its stock-based compensation
granted to employees according to the provisions of APB Opinion No. 25. Had compensation
cost for the Companys stock options granted to employees been recognized based upon
the estimated fair value on the grant date under the fair value methodology prescribed by
SFAS 123, as amended by SFAS 148, the Companys net earnings and earnings per share
would have been as follows (U.S. dollars in thousands, except per share amounts):
|
December 31, |
|
|
2003 | |
2004 | |
2005 | |
|
|
|
|
Net income, as reported |
|
$ 67,876 |
|
$ 77,674 |
|
$ 74,033 |
|
Deduct: Total stock-based employee method expense
determined under fair value based method
for all awards, net of related tax effect | |
(5,274 |
) |
(6,224 |
) |
(5,823 |
) |
|
|
|
|
Pro forma net income | |
$ 62,602 |
|
$ 71,450 |
|
$ 68,210 |
|
|
|
|
|
Earnings per share: | |
Basic - as reported | |
$ 0.86 |
|
$ 1.10 |
|
$ 1.06 |
|
Basic - pro forma | |
$ 0.80 |
|
$ 1.01 |
|
$ 0.97 |
|
|
|
|
|
Diluted - as reported | |
$ 0.85 |
|
$ 1.07 |
|
$ 1.04 |
|
Diluted - pro forma | |
$ 0.79 |
|
$ 0.98 |
|
$ 0.96 |
|
-72-
Nu Skin Enterprises, Inc.
Notes to Consolidated Financial Statements
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 as required by SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities (SFAS 133).
The
Companys 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.
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.
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 $3.3 million, $3.6 million and $3.7 million for each of the years
ended December 31, 2003, 2004 and 2005 with remaining long-term minimum lease payment
obligations under these operating leases of $23.5 million and $19.8 million at December
31, 2004 and 2005, respectively.
-73-
Nu Skin Enterprises, Inc.
Notes to Consolidated Financial Statements
4. |
|
Property
and Equipment |
Property
and equipment are comprised of the following (U.S. dollars in thousands):
|
December 31, |
|
|
2004 | |
2005 | |
|
|
|
Furniture and fixtures |
|
$ 41,121 |
|
$ 44,769 |
|
Computers and equipment | |
84,598 |
|
88,619 |
|
Leasehold improvements | |
41,121 |
|
45,663 |
|
Scanners | |
28,327 |
|
37,363 |
|
Vehicles | |
3,021 |
|
3,140 |
|
| |
198,188 |
|
219,554 |
|
Less: accumulated depreciation | |
(121,677 |
) |
(135,501 |
) |
| |
$ 76,511 |
|
$ 84,053 |
|
Depreciation
of property and equipment totaled $18.3 million, $22.5 million and $24.7 million for the
years ended December 31, 2003, 2004 and 2005, respectively, which includes amortization
expense relating to the Scanners of approximately $1.0 million, $4.9 million and $7.9
million for the years ended December 31, 2003, 2004 and 2005, 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: | |
2004 | |
2005 | |
|
|
|
Goodwill |
|
$ 112,446 |
|
$ 112,446 |
|
Trademarks and trade names | |
24,599 |
|
24,599 |
|
| |
$ 137,045 |
|
$ 137,045 |
|
|
December 31, 2004 | |
December 31, 2005 | |
|
Finite life intangible assets: | |
Gross Carrying
Amount | |
Accumulated
Amortization | |
Gross Carrying
Amount | |
Accumulated
Amortization | |
Weighted-average
Amortization Period | |
|
|
|
|
|
|
Scanner technology |
|
$ 23,840 |
|
$ 1,099 |
|
$ 42,435 |
|
$ 3,304 |
|
18 years |
|
Developed technology |
|
22,500 |
|
8,490 |
|
22,500 |
|
9,314 |
|
20 years |
|
Distributor network | |
11,598 |
|
5,576 |
|
11,598 |
|
6,078 |
|
15 years | |
Trademarks | |
12,203 |
|
5,640 |
|
12,345 |
|
6,255 |
|
15 years | |
Other | |
20,828 |
|
15,758 |
|
19,873 |
|
17,262 |
|
5 years | |
| |
$ 90,969 |
|
$ 36,563 |
|
$ 108,751 |
|
$ 42,213 |
|
15 years | |
Amortization
of finite-life intangible assets totaled $4.1 million, $5.4 million and $5.7 million for
the years ended December 31, 2003, 2004 and 2005, respectively. Annual estimated
amortization expense is expected to approximate $7.0 million for each of the five
succeeding fiscal years.
-74-
Nu Skin Enterprises, Inc.
Notes to Consolidated Financial Statements
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.
Other
assets consist of the following (U.S. dollars in thousands):
|
December 31, |
|
|
2004 | |
2005 | |
|
|
|
Deferred taxes |
|
$ 34,856 |
|
$ 31,804 |
|
Deposits for noncancelable operating leases | |
11,636 |
|
13,397 |
|
Deposit for customs assessment (Note 19) | |
11,820 |
|
22,853 |
|
Other | |
15,114 |
|
15,022 |
|
| |
$ 73,426 |
|
$ 83,076 |
|
Accrued
expenses consist of the following (U.S. dollars in thousands):
|
December 31, | |
|
|
2004 | |
2005 | |
|
|
|
Accrued commission payments to distributors |
|
$ 43,845 |
|
$ 41,820 |
|
Income taxes payable | |
6,612 |
|
8,880 |
|
Other taxes payable | |
5,521 |
|
15,649 |
|
Accrued payroll and payroll taxes | |
11,435 |
|
11,405 |
|
Accrued contingent payable (Note 20) | |
8,217 |
|
|
|
Other accruals | |
31,596 |
|
34,269 |
|
| |
$ 107,226 |
|
$ 112,023 |
|
The
Company maintains a $25.0 million revolving credit facility that expires in May 2007.
Drawings on this revolving credit facility may be used for working capital, capital
expenditures and other purposes including repurchases of the Companys outstanding
shares of Class A common stock. As of December 31, 2005, there were no outstanding
balances under this revolving credit facility.
The
Company also has a $125.0 million multi-currency private uncommitted shelf facility with
Prudential Investment Management, Inc. As of December 31, 2005, the Company had $91.4
million outstanding under its shelf facility, $15.0 million of which is included in the
current portion of long-term debt. $65.0 million of this long-term debt is U.S. dollar
denominated, bears interest of approximately 4.5% per annum and is amortized in two
tranches over five and seven years. The remaining $26.4 million as of December 31, 2005,
is Japanese yen-denominated senior promissory notes in the aggregate principal amount of
3.1 billion Japanese yen, which were issued on February 7, 2005. The notes bear interest
of 1.7% per annum, with interest payable semi-annually. The interest payments on the notes
began April 30, 2005. The final maturity date of the notes is April 20, 2014 and principal
payments are required annually beginning on April 30, 2008 in equal installments of 445.7
million Japanese yen.
-75-
Nu Skin Enterprises, Inc.
Notes to Consolidated Financial Statements
The
Companys long-term debt also includes the long-term portion of Japanese yen
denominated ten-year senior notes issued to the Prudential Insurance Company of America in
2000. The notes bear interest at an effective rate of 3.0% per annum and are due October
2010, with annual principal payments that began in October 2004. As of December 31, 2005,
the outstanding balance on the notes was 6.9 billion Japanese yen, or $58.8 million, $11.8
million of which is included in the current portion of long-term debt. The Japanese notes
and the revolving and shelf credit facilities are secured by guarantees issued by our
material subsidiaries or by pledges of 65% to 100% of the outstanding stock of our
material subsidiaries.
Interest
expense relating to the long-term debt totaled $3.2 million, $5.9 million and $5.5 million
for the years ended December 31, 2003, 2004 and 2005, respectively.
The
notes and shelf facility contain other terms and conditions and affirmative and negative
financial covenants customary for credit facilities of this type. As of December 31, 2005,
the Company is in compliance with all financial covenants under the notes and shelf
facility.
Maturities
of all long-term debt at December 31, 2005, based on the year-end exchange rate, are as
follows (U.S. dollars in thousands):
Year Ending December 31, |
|
|
|
|
|
2006 |
|
$ 26,757 |
|
2007 | |
26,757 |
|
2008 | |
30,536 |
|
2009 | |
25,536 |
|
2010 | |
25,536 |
|
Thereafter | |
15,118 |
|
Total | |
$ 150,240 |
|
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, 2005 are
as follows (U.S. dollars in thousands):
Year Ending December 31, |
|
|
|
|
|
2006 |
|
$ 13,645 |
|
2007 | |
11,103 |
|
2008 | |
8,189 |
|
2009 | |
5,537 |
|
2010 | |
5,308 |
|
Thereafter | |
1,885 |
|
Total | |
$ 45,667 |
|
Rental
expense for operating leases totaled $24.2 million, $25.9 million and $30.5 million for
the years ended December 31, 2003, 2004 and 2005, respectively.
-76-
Nu Skin Enterprises, Inc.
Notes to Consolidated Financial Statements
The
Companys 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 Companys 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 Companys 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.
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, |
|
|
2003 | |
2004 | |
2005 | |
|
|
|
|
Basic weighted-average common shares outstanding |
|
78,637 |
|
70,734 |
|
70,047 |
|
Effect of dilutive securities: | |
Stock awards and options | |
904 |
|
1,893 |
|
1,309 |
|
Diluted weighted-average common shares outstanding | |
79,541 |
|
72,627 |
|
71,356 |
|
For
the years ended December 31, 2003, 2004 and 2005, other stock options totaling 2.9
million, 0.6 million and 2.1 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 $160.0
million of the Companys outstanding shares of Class A common stock on the open
market or in private transactions. The repurchases are used primarily for the
Companys equity incentive plans and strategic initiatives. During the years ended
December 31, 2003, 2004 and 2005, the Company repurchased approximately 0.8 million, 0.1
million and 1.2 million shares of Class A common stock for an aggregate price of
approximately $8.4 million, $1.3 million and $24.6 million, respectively, under these
repurchase programs. Between August 1998 and December 31, 2005, the Company had
repurchased a total of approximately 10.0 million shares of Class A common stock under
this repurchase program for an aggregate price of approximately $107.5 million.
Additionally,
in October 2003, the Company repurchased approximately 10.8 million shares of Class A
common stock from certain members of the Companys original stockholder group for
approximately $141.6 million, which included $1.6 million of related expenses. These
stockholders also sold approximately 6.2 million additional shares of Class A common stock
to third-party investors. The Company financed the repurchase with $45.0 million from
existing cash balances, approximately $20.0 million from its revolving credit facility,
which was repaid prior to December 31, 2003 and $75.0 million in new long-term debt drawn
under the $125.0 million shelf facility.
-77-
Nu Skin Enterprises, Inc.
Notes to Consolidated Financial Statements
On
July 30, 2004, the Company purchased approximately 3.1 million shares of common stock from
members of its original stockholder group for an aggregate purchase price of $71.0
million, or $22.62 per share. These stockholders also sold 1.5 million shares to
third-party investors.
Conversion of common stock
During
2003, the holders of the Class B common stock converted approximately 45.4 million shares
of Class B common stock to Class A common stock, respectively. The conversion of 45.4
million shares of Class B common stock in 2003 was part of the repurchase transaction
described above. As of December 31, 2004, all outstanding Class B common stock had been
converted to Class A common stock.
11. |
|
Equity
Incentive Plans |
During
the year ended December 31, 1996, the Companys 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. On February 7, 2003, the board of
directors authorized and the shareholders approved an amendment to the plan increasing the
number of shares available for grant from 8.0 million to 13.0 million. As of December 31,
2005, approximately 11.0 million shares or options have been granted.
The
deferred compensation at December 31, 2005 represents the following restricted stock
awards:
|
|
|
A
restricted stock award of 250,000 shares of the Companys Class A common stock
granted to the Companys Chief Executive Officer and President in 2003, which vests
over four years; |
|
|
|
A
restricted stock award of up to 25,000 shares of the Companys Class A common stock
granted to an employee of the Company in June of 2005 with a 4-year cliff vest and a
maximum value limited to $1.0 million. The value of the award fluctuates based on the
Companys stock price and as a result the deferred compensation expense is
re-measured and adjusted each quarter for this award; and |
|
|
|
A
restricted stock award of up to 20,000 shares of the Companys Class A common stock
granted to an employee of the Company in June of 2005 with a 4-year cliff vest and a
maximum value limited to $0.5 million. The value of the award fluctuates based on the
Companys stock price and as a result, the deferred compensation expense is
re-measured and adjusted each quarter for this award. |
The
Company is amortizing the deferred compensation expense ratably over the respective
vesting period of each award. The combined compensation expense for all of the foregoing
restricted stock awards totaled $0.7 million, $0.8 million and $0.9 million for the years
ended December 31, 2003, 2004 and 2005, respectively.
-78-
Nu Skin Enterprises, Inc.
Notes to Consolidated Financial Statements
A
summary of the Companys stock option plans as of December 31, 2003, 2004 and 2005
and changes during the years then ended, is presented below:
|
2003 | |
2004 | |
2005 | |
|
Shares (in 000s) | |
Weighted-average
Exercise Price | |
Shares (in
000s) | |
Weighted-average
Exercise Price | |
Shares (in
000s) | |
Weighted-average
Exercise Price | |
|
|
|
|
|
|
|
Outstanding - beginning of year |
|
6,994.6 |
|
$ 10.41 |
|
6,941.9 |
|
$ 11.46 |
|
6,593.1 |
|
$ 14.03 |
|
Granted at fair value | |
1,728.1 |
|
10.80 |
|
1,355.2 |
|
22.15 |
|
1,379.8 |
|
22.04 |
|
Exercised | |
(1,289.8 |
) |
6.82 |
|
(1,655.3 |
) |
9.97 |
|
(666.4 |
) |
9.17 |
|
Forfeited/canceled | |
(491.0 |
) |
6.34 |
|
(48.7 |
) |
12.46 |
|
(544.3 |
) |
18.87 |
|
Outstanding - end of year | |
6,941.9 |
|
11.46 |
|
6,593.1 |
|
14.03 |
|
6,762.2 |
|
15.99 |
|
|
|
|
|
|
|
|
Options exercisable at year-end | |
3,292.7 |
|
$ 11.37 |
|
3,374.0 |
|
$ 11.89 |
|
3,533.5 |
|
$ 13.05 |
|
The
following table summarizes information concerning outstanding and exercisable options at
December 31, 2005:
|
Options Outstanding | |
Options Exercisable | |
Exercise Price Range | |
Shares (in 000s) | |
Weighted-average Exercise Price | |
Weighted-average Years Remaining | |
Shares (in 000s) | |
Weighted-average Exercise Price | |
|
|
|
|
|
|
$0.92 to $5.75 |
|
61.3 |
|
$ 5.26 |
|
2.79 |
|
61.3 |
|
$ 5.26 |
|
$6.50 to $11.00 | |
1,482.2 |
|
8.38 |
|
5.95 |
|
1,180.0 |
|
8.15 |
|
$11.37 to $16.00 | |
1,924.1 |
|
12.30 |
|
6.55 |
|
1,415.5 |
|
12.39 |
|
$16.95 to $28.50 | |
3,294.6 |
|
21.76 |
|
7.99 |
|
876.7 |
|
21.25 |
|
| |
6,762.2 |
|
15.99 |
|
7.09 |
|
3,533.5 |
|
13.05 |
|
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:
|
2003 | |
2004 | |
2005 | |
|
|
|
|
|
|
|
|
Risk-free interest rate |
|
2.7% |
|
2.8% |
|
3.9% |
|
Expected life | |
3.8 years |
|
3.9 years |
|
6.2 years |
|
Expected volatility | |
54.2% |
|
45.4% |
|
52.6% |
|
Expected dividend yield | |
2.5% |
|
1.9% |
|
1.6% |
|
The
weighted-average grant date fair values of options granted during 2003, 2004 and 2005 were
$3.92, $7.27 and $10.43, respectively.
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 maximum 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 30, July 31, October 31 or January 31 (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 2005, approximately 36,000 shares were purchased at prices
ranging from $14.31 to $18.87 per share. At December 31, 2005, approximately 74,925 shares were available under the Purchase Plan for future issuance.
-79-
Nu Skin Enterprises, Inc.
Notes to Consolidated Financial Statements
Consolidated
income before provision for income taxes consists of the following for the years ended
December 31, 2003, 2004 and 2005 (U.S. dollars in thousands):
|
2003 | |
2004 | |
2005 | |
|
|
|
|
|
|
|
|
U.S. |
|
$ 102,341 |
|
$ 85,013 |
|
$ 70,344 |
|
Foreign | |
5,398 |
|
37,128 |
|
48,607 |
|
Total | |
$ 107,739 |
|
$ 122,141 |
|
$ 118,951 |
|
The
provision for current and deferred taxes for the years ended December 31, 2003, 2004 and
2005 consists of the following (U.S. dollars in thousands):
|
2003 | |
2004 | |
2005 | |
|
|
|
|
|
|
|
|
Current |
|
|
|
|
|
|
|
Federal | |
$ 1,709 |
|
$ (10,702 |
) |
$ 1,572 |
|
State | |
3,029 |
|
553 |
|
1,880 |
|
Foreign | |
57,573 |
|
21,742 |
|
21,495 |
|
| |
62,311 |
|
11,593 |
|
24,947 |
|
| |
Deferred | |
Federal | |
16,641 |
|
16,805 |
|
14,821 |
|
State | |
676 |
|
1,256 |
|
(278 |
) |
Foreign | |
(39,765 |
) |
14,813 |
|
5,428 |
|
| |
(22,448 |
) |
32,874 |
|
19,971 |
|
Provision for income taxes | |
$ 39,863 |
|
$ 44,467 |
|
$ 44,918 |
|
The
Companys foreign taxes paid are high relative to foreign operating income and the
Companys U.S. taxes paid are low relative to U.S. operating income due largely to
the flow of funds among the Companys Subsidiaries around the world. As payments for
services, management fees, license arrangements and royalties are made from the
Companys 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 Companys foreign
and U.S. effective tax rates from year to year depending on several factors including the
impact of global transfer prices and the timing and level of remittances from foreign
affiliates.
-80-
Nu Skin Enterprises, Inc.
Notes to Consolidated Financial Statements
The
principal components of deferred taxes are as follows (U.S. dollars in thousands):
|
Year Ended December 31, | |
|
2004 | |
2005 | |
|
|
|
Deferred tax assets: |
|
|
|
|
|
Inventory differences | |
$ 2,373 |
|
$ 3,303 |
|
Foreign tax differential | |
13,417 |
|
|
|
Accrued expenses not deductible until paid | |
26,059 |
|
17,020 |
|
Withholding tax | |
1,088 |
|
1,428 |
|
Minimum tax credit | |
18,228 |
|
16,428 |
|
Net operating losses | |
6,448 |
|
6,767 |
|
Foreign outside basis in controlled foreign corporation | |
7,664 |
|
14,651 |
|
Capitalized research and development | |
10,668 |
|
15,087 |
|
Other | |
2,771 |
|
3,964 |
|
Gross deferred tax assets | |
87,477 |
|
76,434 |
|
Deferred tax liabilities: | |
Exchange gains and losses | |
7,210 |
|
9,164 |
|
Pharmanex intangibles step-up | |
15,961 |
|
15,009 |
|
Amortization of intangibles | |
4,567 |
|
3,325 |
|
Prepaid expenses | |
5,153 |
|
11,665 |
|
Other | |
5,426 |
|
6,003 |
|
Gross deferred tax liabilities | |
38,317 |
|
45,166 |
|
Valuation allowance | |
(1,239 |
) |
(2,214 |
) |
Deferred taxes, net | |
$ 49,160 |
|
$ 31,268 |
|
The components
of deferred taxes, net on a jurisdiction basis are as follows (U.S. dollars in thousands):
|
Year Ended December 31, |
|
|
2004 | |
2005 | |
|
|
|
Net current deferred tax assets |
|
$ 22,215 |
|
$ 13,987 |
|
Net noncurrent deferred tax assets | |
34,856 |
|
31,804 |
|
Total net deferred tax assets | |
57,071 |
|
45,791 |
|
|
|
|
|
Net current deferred tax liabilities | |
8 | |
|
Net noncurrent deferred tax liabilities | |
7,903 |
|
14,523 |
|
Total net deferred tax liabilities | |
7,911 |
|
14,523 |
|
Deferred taxes, net | |
$ 49,160 |
|
$ 31,268 |
|
The
Companys deferred tax assets as of December 31, 2005 and 2004 were reduced by a
valuation allowance relating to tax benefits of certain foreign subsidiaries with
operating losses where it is more likely than not, that the deferred tax assets will not
be realized. The Company has available foreign net operating losses that begin expiring in
2006.
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.
-81-
Nu Skin Enterprises, Inc.
Notes to Consolidated Financial Statements
The
actual tax rate for the years ended December 31, 2003, 2004 and 2005 compared to the
statutory U.S. Federal tax rate is as follows:
|
Year Ended December 31, |
|
|
2003 | |
2004 | |
2005 | |
|
|
|
|
Income taxes at statutory rate |
|
35.00 |
% |
35.00 |
% |
35.00 |
% |
Foreign tax differential | |
(1.80 |
) |
3.11 |
|
|
|
Non-deductible expenses | |
.16 |
|
.21 |
|
.55 |
|
Branch remittance gains and losses | |
(.38 |
) |
(.32 |
) |
.23 |
|
Distributor stock options and employee stock awards | |
1.94 |
|
|
|
|
|
Permanently reinvested controlled foreign corporation income | |
|
|
(2.89 |
) |
|
|
Other | |
2.08 |
|
1.30 |
|
1.98 |
|
| |
37.00 |
% |
36.41 |
% |
37.76 |
% |
The
increase in the effective tax rate in 2005 compared to 2004 was due to an increase in the
amount of nondeductible executive compensation, reconciliation of U.S. and foreign income
tax payable amounts and other nondeductible expenses related to equity compensation. This
decrease in the effective tax rate in 2004 compared to 2003 was due to the Companys
election to permanently reinvest a portion of the Companys earnings from its foreign
operations. The Company anticipates the remittance of these earnings to be postponed
indefinitely. Such earnings would be subject to U.S. taxation if repatriated to the U.S.
13. |
|
Employee
Benefit Plan |
The
Company has a 401(k) defined contribution plan which permits participating employees to
defer up to a maximum of 15% of their compensation, subject to limitations established by
the Internal Revenue Code. Employees who work a minimum of 1,000 hours per year, who have
completed at least one year of service and who are 21 years of age or older are qualified
to participate in the plan. The Company matches 100% of the first 2% and 50% of the next
2% of each participants contributions to the plan. Participant contributions are
immediately vested. Company contributions vest based on the participants years of
service at 25% per year over four years. The Company recorded compensation expense of $1.1
million, $1.3 million and $1.4 million for the years ended December 31, 2003, 2004 and
2005, respectively, related to its contributions to the plan.
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 $3.7
million, $4.4 million and $4.5 million as of December 31, 2003, 2004 and 2005,
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 $0.7 million, $0.8 million and $0.8 million for
the years ended December 31, 2003, 2004 and 2005, respectively.
14. |
|
Executive
Deferred Compensation Plan |
The
Company has an executive deferred compensation plan for select management personnel. Under
this plan, the Company currently makes a contribution of 10% of each participants
salary. In addition, each participant has the option to defer a portion of their
compensation up to a maximum of 100% 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 $0.6 million, $0.7 million and $0.7 million for
the years ended December 31, 2003, 2004 and 2005, respectively, related to its
contributions to the plan. The Company had accrued $4.5 million and $5.5 million as of
December 31, 2004 and 2005, respectively, related to the Executive Deferred Compensation
Plan.
-82-
Nu Skin Enterprises, Inc.
Notes to Consolidated Financial Statements
15. |
|
Derivative
Financial Instruments |
At
December 31, 2004 and 2005, the Company held forward contracts designated as foreign
currency cash flow hedges with notional amounts totaling approximately $82.0 million and
$23.7 million, respectively, to hedge forecasted foreign-currency-denominated intercompany
transactions. All such contracts were denominated in Japanese yen. As of December 31, 2004
and 2005, $3.2 million of net unrealized loss and $1.8 million of net unrealized gain, net
of related taxes, respectively, were recorded in accumulated other comprehensive loss. The
contracts held at December 31, 2005, have maturities through December 2006, 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 on foreign currency cash flow hedges recorded in
current earnings were $5.3 million, $5.0 million and $0.3 million for the years ended
December 31, 2003, 2004 and 2005, respectively.
During
2003, 2004 and 2005, the Company did not have any gains or losses related to hedging
ineffectiveness. Additionally, no component of gains and losses was excluded from the
assessment of hedging effectiveness. During 2003, 2004 and 2005, the Company did not have
any gains or losses reclassified into earnings as a result of the discontinuance of cash
flow hedges.
16. |
|
Supplemental
Cash Flow Information |
Cash
paid for interest totaled $2.7 million, $4.6 million and $5.6 million for the years ended
December 31, 2003, 2004 and 2005, respectively. The increase in cash paid for interest in
2004, compared to prior years, was due to the additional debt discussed in Note 8. Cash
paid for income taxes totaled $26.6 million, $7.3 million and $15.9 million for the years
ended December 31, 2003, 2004 and 2005, respectively. The increase in cash paid for income
taxes in 2005, compared to prior years, was due primarily to the timing of tax payments in
foreign jurisdictions.
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 to sell its
products through fixed retail locations. Selling expenses are the Company's largest expense comprised of the commissions to its worldwide independent
distributors as well as remuneration to its Mainland China sales employees 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, Greater China, North America, South Asia/Pacific and Other Markets.
-83-
Nu Skin Enterprises, Inc.
Notes to Consolidated Financial Statements
Revenue
generated in each of these regions is set forth below (U.S. dollars in thousands):
|
Year Ended December 31, |
|
Revenue: |
2003 | |
2004 | |
2005 | |
|
|
|
|
North Asia |
|
$ 612,840 |
|
$ 640,110 |
|
$ 649,377 |
|
Greater China | |
135,535 |
|
229,802 |
|
236,681 |
|
North America | |
127,599 |
|
145,714 |
|
154,153 |
|
South Asia/Pacific | |
75,816 |
|
81,742 |
|
86,673 |
|
Other Markets | |
34,667 |
|
40,496 |
|
54,046 |
|
Total | |
$ 986,457 |
|
$ 1,137,864 |
|
$ 1,180,930 |
|
Revenue generated
by each of the Companys three product lines is set forth below (U.S. dollars in
thousands):
|
Year Ended December 31, |
|
Revenue: |
2003 | |
2004 | |
2005 | |
|
|
|
|
Pharmanex |
|
$ 472,107 |
|
$ 567,190 |
|
$ 667,671 |
|
Nu Skin | |
476,150 |
|
548,052 |
|
484,281 |
|
Big Planet | |
38,200 |
|
22,622 |
|
28,978 |
|
Total | |
$ 986,457 |
|
$ 1,137,864 |
|
$ 1,180,930 |
|
Additional
information as to the Companys operations in the most significant geographical areas
is set forth below (U.S. dollars in thousands):
|
Year Ended December 31, |
|
Revenue: |
2003 | |
2004 | |
2005 | |
|
|
|
|
Japan |
|
$ 558,654 |
|
$ 579,504 |
|
$ 562,031 |
|
United States | |
113,340 |
|
135,710 |
|
144,555 |
|
Mainland China | |
38,470 |
|
105,576 |
|
102,214 |
|
|
|
December 31, |
|
Long-lived assets: |
| |
2004 | |
2005 | |
|
|
|
|
Japan |
|
|
|
$ 10,556 |
|
$ 14,234 |
|
United States | |
|
|
50,137 |
|
37,235 |
|
Mainland China | |
|
|
12,896 |
|
15,104 |
|
18. |
|
Restructuring
and Other Charges |
In
2003, the Company recorded restructuring and other charges of $5.6 million. These expenses
consisted primarily of severance and other compensation charges.
-84-
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 accounts for such contingent liabilities in accordance with SFAS No. 5, "Accounting for Contingencies" and believes it has 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 the Company's reserves, which would impact its reported financial results. The Financial Accounting
Standards Board is currently considering changes to accounting for uncertain tax positions. Because the nature and extent of these changes are not fully
known, the Company is not able to predict the impact on its tax contingency reserves, if any.
Nu Skin Enterprises, Inc.
Notes to Consolidated Financial Statements
In 1999, the Company implemented a duty valuation methodology with respect to the importation of certain products into Japan. The Valuation
Department of the Yokohama customs authority reviewed and approved this methodology at that time, and it has been reviewed on several occasions by the
audit division of the Japan customs authority since then. In connection with recent audits, the Yokohama customs authorities have assessed the Company
additional duties and penalties on these products imported into Japan from October 2002 to October 2004, based on a different valuation methodology than
that which was previously approved. The Company has disputed this assessment. The Company has also disputed the amount of duties it was required to pay
on products imported from November of 2004 to June of 2005. The total amount assessed or in dispute is approximately $25.0 million as of December 31,
2005, net of any recovery of consumption taxes. Effective July 1, 2005, The Company implemented some modifications to its business structure in Japan and
in the United States that it believes will eliminate any further customs valuation disputes with respect to product imports in Japan after that time.
Because the valuation methodology the Company used with respect to the products in dispute was reviewed and approved by the Japan customs authority,
the Company believes the assessments are improper and has filed letters of protest with Yokohama customs authority with respect to this entire amount. The
Yokohama customs authority has not accepted the Company's letters of protest to date, and to follow proper administrative procedures the Company has filed
appeals with the Japan Ministry of Finance. To the extent necessary, the Company plans to continue to file protests and appeals within the appropriate
governmental channels concerning this issue. The Company may also choose to use the judicial court system in Japan if necessary to bring this issue to a
resolution. In order to file its letters of protest, the Company was required to pay the $25.0 million in customs duties and assessments, the amount of
which it recorded in "Other Assets" in its Consolidated Balance Sheet. The Company has filed requests for refunds for this entire amount along with its
letters of protest. To the extent that the Company is unsuccessful in recovering the amounts assessed and paid, the Company will be required to take a
corresponding charge to its earnings.
-85-
Nu Skin Enterprises, Inc.
Notes to Consolidated Financial Statements
In Taiwan, the Company is currently subject to an audit by tax authorities with respect to the deductibility of distributor commission expenses in
that market. In order avoid the running of the statute of limitations with respect to the 1999 and 2000 tax years, the Taiwan tax authorities have
disallowed the Company's commission expense deductions for those years and assessed the Company a total of approximately $18.7 million. The Company is
contesting this assessment and is in discussions with the tax authorities in an effort to resolve this matter. Based on its understanding of this matter,
management does not believe that it is probable that the Company will incur a loss relating to this matter and accordingly has not provided any related reserves.
20. |
|
Purchase
of LongTerm Assets |
In March 2002, the Company acquired the exclusive rights to a new light-source technology related to measuring the level of certain antioxidants.
The acquisition consisted of cash payments of $4.8 million (including acquisition costs) and the issuance of 106,667 shares of the Company's Class A common
stock valued at approximately $0.9 million. In addition, the acquisition included contingent payments of up to $8.5 million of cash and up to 1.2 million
shares of the Company's Class A common stock if certain development and revenue targets are met. In 2004, some of these specific development and revenue
targets were met resulting in contingent payments owed of approximately $5.1 million of cash (of which $2.1 million was paid in 2005) and 525,000 shares
(of which 262,500 shares were issued in 2005) of the Company's Class A common stock valued at approximately $13 million. During the first half of 2005,
all of the remaining specific development and revenue targets were met. As a result, the Company made the final contingent payments of approximately $3.4
million of cash and 675,000 shares of the Company's Class A common stock valued at approximately $15.2 million. The total payments of $8.5 million of cash
and the value of the 1.2 million shares of stock have been added to the carrying value of other finite lived intangible assets.
Quarterly
cash dividends for the years ended December 31, 2004 and 2005 totaled $22.6 million and
$25.4 million, respectively. In February 2006, the board of directors declared a quarterly
cash dividend of $0.10 per share for all classes of common stock to be paid on March 22,
2006 to stockholders of record on March 3, 2006.
On March 7, 2006, the Company acquired Caroderm Inc. for $4.0 million. As a result of the acquisition, the Company acquired Caroderm's license to
use the Scanner technology within the professional medical community. As the sole asset of Caroderm was its
license and field of use rights with respect to the Scanner technology, all the consideration paid will be allocated to that asset and amortized over the
period of the remaining license agreements related to the Scanner.
-86-
In addition, the Company recently announced plans to implement a restructuring initiative during the first half of 2006 designed to (i) eliminate
organizational redundancies, (ii) revamp administrative support functions, (iii) prioritize investments to favor profitable initiatives and markets, and
(iv) increase efficiencies in the supply chain process. In connection with this initiative, the Company expects to incur employee severance costs of
approximately $10 to $20 million and $5 million related to various other streamlining intitiatves. Additionally, in February 2006, as a result of the
Company's launch of and transition to its second-generation BioPhotonic Scanner, the Company determined it would be necessary to write down the book value
of the existing inventory of the prior model of the Scanner of approximately $20 million. The Company anticipates that approximately $10 to $20 million of
the restructuring charges will result in future cash expenditures.
-87-
Report of Independent
Registered Public Accounting Firm
To the Board of Directors and
Stockholders of Nu Skin Enterprises, Inc.:
We have completed integrated audits
of Nu Skin Enterprises, Inc.s 2005 and 2004 consolidated financial statements and of
its internal control over financial reporting as of December 31, 2005 and an audit of its
2003 consolidated financial statements in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Our opinions, based on our audits, are
presented below.
Consolidated financial
statements
In our opinion, the accompanying consolidated
balance sheets and the related consolidated statements of income, of stockholders
equity and of cash flows present fairly, in all material respects, the financial position
of Nu Skin Enterprises, Inc. and its subsidiaries at December 31, 2005 and 2004, and the
results of their operations and their cash flows for each of the three years in the period
ended December 31, 2005 in conformity with accounting principles generally accepted in the
United States of America. These financial statements are the responsibility of the
Companys management. Our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in accordance
with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit of financial
statements includes 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. We believe that our audits provide a reasonable basis for our opinion.
Internal control over
financial reporting
Also, in our opinion,
managements assessment, included in the accompanying Management Report on Internal
Control over Financial Reporting appearing in Item 9A, that the Company maintained
effective internal control over financial reporting as of December 31, 2005 based on
criteria established in Internal Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated,
in all material respects, based on those criteria. Furthermore, in our opinion, the
Company maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2005, based on criteria established in Internal Control
Integrated Framework issued by the COSO. The Companys management is
responsible for maintaining effective internal control over financial reporting and for
its assessment of the effectiveness of internal control over financial reporting. Our
responsibility is to express opinions on managements assessment and on the
effectiveness of the Companys internal control over financial reporting based on our
audit. We conducted our audit of internal control over financial reporting in accordance
with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained in all material
respects. An audit of internal control over financial reporting includes obtaining an
understanding of internal control over financial reporting, evaluating managements
assessment, testing and evaluating the design and operating effectiveness of internal
control, and performing such other procedures as we consider necessary in the
circumstances. We believe that our audit provides a reasonable basis for our opinions.
-88-
A companys 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
companys 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 companys 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
March 16, 2006
-89-
ITEM 9. |
|
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None.
ITEM 9A. |
|
CONTROLS AND PROCEDURES |
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 2005,
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
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 this 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 this
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.
-90-
Under
the supervision and with the participation of our management, including our principal
executive and principal financial officers, we assessed, as of December 31, 2005, 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, 2005.
Our
assessment of the effectiveness of our internal control over financial reporting as of
December 31, 2005 has been audited by PricewaterhouseCoopers LLP, an independent
registered public accounting firm, as stated in their report which is included in this
Annual Report on Form 10-K.
ITEM 9B. |
|
OTHER INFORMATION |
Richard King Severance Arrangement
On March 2, 2006, we agreed to a
severance arrangement with Richard King, who was serving as our Chief Information Officer, in connection with his
anticipated termination of employment. The severance arrangement provides that Mr. King will
continue to be employed until June 9, 2006, at which time his employment will terminate
and he will be paid a lump sum severance payment of $137,108.
The foregoing does not constitute a
complete summary of the terms of the severance arrangement with Mr. King, and reference
is made to the complete text of the severance letter, which is attached as Exhibit 10.59
to this report and incorporated by reference in this Item 9B.
Lori Bush Severance Arrangement
On March 10, we entered into a
severance arrangement with Lori Bush, who had previously been serving as the President
of our Nu Skin division. The severance arrangement provides for the following: (i)
termination of employment as of March 31, 2006; (ii) severance payment of $800,000,
payable in monthly installments over an 18-month period, during which time Ms. Bush may
not work for a competing direct selling company; (iii) a mutual release and waiver of
claims related to Ms. Bush's employment; and (iv) the at-will consulting engagement of
Ms. Bush as chair of the Nu Skin Personal Care Scientific Advisory Board, with an annual
retainer of $25,000 per year.
The foregoing does not constitute a
complete summary of the terms of the severance arrangement with Ms. Bush, and reference
is made to the complete text of the severance letter, which is attached as Exhibit 10.60
to this report and incorporated by reference in this Item 9B.
Caroderm Acquisition
On March 7, 2006, we entered into an
Agreement and Plan of Merger (the "Merger Agreement") through our wholly-owned subsidiary
Nu Skin International, Inc. ("NSI"), by and among NSI, Pharmanex License Acquisition
Corporation, a wholly-owned subsidiary of NSI, Caroderm Inc. ("Caroderm"), and certain
shareholders of Caroderm. Pursuant to the Merger Agreement, Caroderm was merged with and
into Pharmanex and the total consideration payable by us in connection with the Merger is
$4,000,000. Prior to the merger, Caroderm and we each owned a license to the technology
utilized in the Scanner permitting mutually
exclusive fields of use. Caroderm's license permitted the use of the Scanner technology
within the professional medical community. As a result of the merger, we acquired
Caroderm's license and field of use.
-91-
It is also contemplated that our
existing license with respect to the Scanner technology, which has been filed previously
with the Securities Exchange Commission as a material contract, will be amended to
include the following field of use:
"FIELD OF USE" shall mean the use of
the licensed technology for the non-invasive measurement of carotenoids and similar or
related compounds in human skin including related research; however, the above filed of
use does not include the use of the technology for identifying, imaging, locating, and/or
diagnosing skin lesions or skin malignancies in human patients. The above field of use
does not include veterinary applications; however, it is agreed that licensee may use
laboratory, in vitro, and in vivo animal model methods to research, develop and validate
licensed products and licensed processes. For avoidance of doubt, human skin is defined
as the continuous external membrane (integument) enveloping the body and consisting of
the epidermis and dermis, hair, nails, sebaceous glands, sweat glands, and mammary
glands; the skin does not include mucosal tissue such as the lining of the mouth.
The foregoing does not constitute a
complete summary of the terms of the Merger Agreement, and reference is made to the
complete text of the Merger Agreement, which is attached as Exhibit 10.58 to this report
and incorporated by reference in this Item 9B.
Team Elite Travel Policy
On March 13, 2006, Compensation
Committee of our Board of Directors adopted a travel policy with respect to the annual
Team Elite distributor trip. It is currently our practice to conduct an annual
international trip for those independent distributors that have achieved "Team Elite" status
within our distributor compensation plan. Certain members of our senior management
accompany Team Elite members on this trip in an effort promote contact and relationship
building between senior management and Team Elite members. Members of company management
are often accompanied by their spouses in an effort to promote a family atmosphere at
these events. In recognition of this, we adopted a policy providing that we will pay for
travel, lodging, and certain other costs for the spouses of certain senior managers
attending the Team Elite trip.
PART III
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 2005 Annual Meeting of Stockholders.
-92-
PART IV
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. See Index to Consolidated Financial
Statements under Item 8 of Part II. |
3. |
|
Exhibits: References to the Company shall mean Nu Skin Enterprises, Inc. Exhibits preceeded by an asterisk
(*) are management contracts or compensatory plans or arrangements. |
-93-
Exhibit Number |
|
Exhibit Description |
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 (incorporated
by reference to Exhibit 3.2 to the Companys Annual Report on Form 10-K for the year
ended December 31, 2003). |
3.3 |
|
Certificate
of Designation, Preferences and Relative Participating, Optional and Other Special Rights
of Preferred Stock and Qualification, Limitations and Restrictions Thereof (incorporated
by reference to Exhibit 3.2 to the Companys Annual Report on Form 10-K for the year
ended December 31, 2004). |
3.4 |
|
Amended
and Restated Bylaws of the Company (incorporated by reference to Exhibit 3.2 to the
Company's Form S-1). |
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. |
10.2 |
|
First
Amendment to Note Purchase Agreement between the Company and The Prudential
Insurance Company of America dated May 1, 2002 (incorporated
by reference to Exhibit No. 10.3 to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2002). |
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 Companys 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 Companys Quarterly Report on Form 10-Q for the quarter ended June 30, 2004).
|
-94-
Exhibit Number |
|
Exhibit Description |
10.5 |
|
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. |
10.6 |
|
Pledge
Amendments executed by the Company dated December 31, 2003 (incorporated by reference to
Exhibit 10.5 to the Companys Annual Report on Form 10-K for the year ended December
31, 2003). |
10.7 |
|
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 Companys Current Report on Form 8-K/A filed on March 10, 2005). |
10.8 |
|
Collateral
Agency Agreement dated October 12, 2000, by and between the Company, State Street Bank
and Trust Company of California, N.A., as Collateral Agent, and the lenders and
noteholders party thereto. |
10.9 |
|
Amendment
to Collateral Agency and Intercreditor Agreement dated May 10, 2000, among State Street
Bank and Trust Company of California, N.A., as Collateral Agent, The Prudential Insurance
Company of America, as Senior Noteholder and ABN AMRO Bank N.V., as Senior Lender
(incorporated by reference to Exhibit 10.5 to the Companys Quarterly Report on Form
10-Q for the quarter ended June 30, 2001). |
10.10 |
|
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 No. 10.2 to the Companys Quarterly Report on Form 10-Q for
the quarter ended September 30, 2003). |
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 10.4
to the Companys Quarterly Report on Form 10-Q for the quarter ended June 30, 2001). |
10.12 |
|
First
Amendment to the Credit Agreement dated December 14, 2001 dated May 10, 2001 among the
Company, various financial institutions, and Bank of America, N.A. as Administrative
Agent (incorporated by reference to Exhibit 10.43 of the Companys Annual Report on
Form 10-K for the year ended December 31, 2001). |
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 Companys Annual Report on Form 10-K for the
year ended December 31, 2003). |
-95-
Exhibit Number |
|
Exhibit Description |
10.14 |
|
Third
Amendment to the Credit Agreement, dated as of May 10, 2004, among the Company, various
financial institutions, and Bank One, N.A. (incorporated by reference to Exhibit 10.1 to
the Companys Quarterly Report on Form 10-Q for the quarter ended June 30, 2004). |
10.15 |
|
Shareholders
Agreement among the Company, Dató Mohd Nadzmi Bin Mohd Sulleh and Kiow Kim Yoon
Frankie Kiow dated effective as of September 25, 2001 (incorporated by reference to
Exhibit 10.46 of the Companys Annual Report on Form 10-K for the year ended
December 31, 2001). |
10.16 |
|
Master
Lease Agreement dated January 16th 2003 by and between the Company and Scrub Oak, LLC
(incorporated by reference to Exhibit 10.28 to the Companys Annual Report on Form
10-K for the year ended December 31, 2002). |
10.17 |
|
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 10.2 to
the Companys Quarterly Report on Form 10-Q for the quarter ended September 30,
2003). |
10.18 |
|
Master
Lease Agreement dated January 16, 2003 by and between the Company and Aspen Country, LLC
(incorporated by reference to Exhibit 10.29 to the Companys Annual Report on Form
10-K for the year ended December 31, 2003). |
10.19 |
|
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 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 2003). |
*10.20 |
|
Form
of Indemnification Agreement entered into by and among the Company and certain of its
officers and directors (incorporated by reference to Exhibit 10.1 to the Companys
Form S-1). |
*10.21 |
|
Form
of Indemnification Agreement to be entered into between the Company and certain of its
officers and directors (incorporated by reference to Exhibit 10.2 to the Companys
Quarterly Report on Form 10-Q for the quarter ended June 30, 2005). |
-96-
Exhibit Number |
|
Exhibit Description |
*10.22 |
|
Amendment
in Total and Complete Restatement of Deferred Compensation Plan. (incorporated by
reference to Exhibit 10.34 to the Company's Annual Report on
Form 10-K for the year ended December 31, 2004). |
*10.23 |
|
Form
of Deferred Compensation Plan (New Form) with amendment (incorporated by reference to
Exhibit 10.35 to the Companys Annual Report on Form 10-K for the year ended
December 31, 2004). |
*10.24 |
|
Form
of Amendment to the Deferred Compensation Plan (incorporated by reference to Exhibit 99.3
to the Companys Current Report on Form 8-K filed December 19, 2005). |
*10.25 |
|
Amendment
in Total and Complete Restatement of NSI Compensation Trust (incorporated by reference to
Exhibit 10.36 to the Companys Annual Report on Form 10-K for the year ended
December 31, 2004). |
*10.26 |
|
Nu
Skin Enterprises, Inc. Deferred Compensation Plan dated December 12, 2005 (incorporated
by reference to Exhibit 99.1 to the Companys Current Report on Form 8-K filed
December 19, 2005). |
*10.27 |
|
Nu
Skin Enterprises, Inc. Nonqualified Deferred Compensation Trust dated December 12, 2005
(incorporated by reference to Exhibit 99.2 to the Companys Current Report on Form
8-K filed December 19, 2005). |
*10.28 |
|
Second
Amended and Restated Nu Skin Enterprises, Inc. 1996 Stock Incentive Plan. |
*10.29 |
|
Amendment
No. 1 to the Second Amended and Restated Nu Skin Enterprises, Inc. 1996 Stock Incentive
Plan (incorporated by reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2003). |
*10.30 |
|
Base
Form of Master Stock Option Agreement (incorporated by reference to Exhibit 10.44 to the
Companys Annual Report on Form 10-K for the year ended December 31, 2002). |
*10.31 |
|
Form
of Stock Option Agreement (Directors) (incorporated by reference to Exhibit 10.4 to the
Companys Annual Report on Form 10-K for the year ended December 31, 2001). |
*10.32 |
|
Summary
Description of Nu Skin Japan Director Retirement Allowance Plan (incorporated by
reference to Exhibit 10.49 to the Companys Annual Report on Form 10-K for the year
ended December 31, 2001). |
*10.33 |
|
Employment
Letter with Truman Hunt (incorporated by reference to Exhibit 10.49 to the Companys
Annual Report on Form 10-K for the year ended December 31, 2002). |
-97-
Exhibit Number |
|
Exhibit Description |
*10.34 |
|
Amendment
to Employment Letter with M. Truman Hunt dated September 22, 2005 and Amendment to
provisions of the Companys Executive Incentive Plan with respect to Mr. Hunt
(incorporated by reference to Exhibit 10.1 to the Companys Quarterly Report on Form
10-Q for the quarter ended September 30, 2005). |
*10.35 |
|
Letter
of Understanding with Corey Lindley effective August 8, 2002 (incorporated by reference
to Exhibit 10.49 to the Companys Annual Report on Form 10-K for the year ended
December 31, 2002). |
*10.36 |
|
Letter
of Understanding with Corey Lindley effective December 22, 2003 (Supplementing Letter of
Understanding effective August 8, 2002) (incorporated by reference to Exhibit 10.47 to
the Companys Annual Report on Form 10-K for the year ended December 31, 2003). |
*10.37 |
|
Amendment
to Letter of Understanding with Corey Lindley as of March 25, 2005 (incorporated by
reference to Exhibit 10.3 to the Companys Quarterly Report on Form 10-Q for the
quarter ended March 31, 2005). |
10.38 |
|
Amended
and Restated Registration Rights Agreement, dated as of September 18, 2003, by and among
Nu Skin Enterprises, Inc., Sandra N. Tillotson, The Sandra
N. Tillotson Family Trust and the Purchasers signatory thereto (incorporated by reference
to Exhibit 4.7 to the Company's Registration Statement on
Form S-3 (File No. 333-109836)). |
10.39 |
|
Private
Shelf Agreement, dated as of August 26, 2003, between Nu Skin Enterprises, Inc. and
Prudential Investment Management, Inc. (the "Private Shelf
Agreement") (incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report
on Form 10-Q for the quarter ended September 30, 2003). |
10.40 |
|
First
Amendment to 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 Companys Annual Report on Form 10-K for the year ended December 31, 2003). |
-98-
Exhibit Number |
|
Exhibit Description |
10.41 |
|
Second
Amendment to 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 Companys Quarterly Report on Form 10-Q for the quarter ended
June 30, 2004). |
10.42 |
|
Third
Amendment to 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 Companys Quarterly Report on Form 10-Q for the quarter ended
June 30, 2005). |
10.43 |
|
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 Companys Annual Report on Form 10-K for the year ended December 31, 2003). |
10.44 |
|
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 Companys Current Report on Form
8-K filed February 8, 2005). |
10.45 |
|
Stock
Repurchase Agreement, dated as of October 22, 2003, between the Company and certain of
its shareholders (incorporated by reference to Exhibit 10.1 to the Companys Current
Report on Form 8-K filed November 10, 2003). |
10.46 |
|
Registration
Rights Agreement dated as of October 22, 2003, by and among the Company and certain
third-party purchasers of the Companys stock shareholders (incorporated by
reference to Exhibit 10.1 to the Companys Current Report on Form 8-K filed November
10, 2003). |
10.47 |
|
Form
of Lock-up Agreement executed by certain of the Companys shareholders (incorporated
by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K filed
November 10, 2003). |
10.48 |
|
Registration
Rights Agreement, dated as of July 26, 2004, by and among the Company and the Purchasers
signatory thereto (incorporated by reference to Exhibit 4.6 to the Companys
Registration Statement on Form S-3 filed August 23, 2004 (File No. 333-118495)). |
-99-
Exhibit Number |
|
Exhibit Description |
10.49 |
|
Stock
Repurchase Agreement, dated as of July 27, 2004, by and among the Company and the Selling
Stockholders signatory thereto (incorporated by reference to Exhibit 4.8 to the Companys
Registration Statement on Form S-3 filed August 23, 2004 (File No. 333-118495)). |
*10.50 |
|
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). |
*10.51 |
|
Nu
Skin Enterprises, Inc. 2005 Executive Incentive Plan (incorporated by reference to
Exhibit 99.1 to the Company's Current Report on Form 8-K
filed February 9, 2005). |
*10.52 |
|
Restricted
Stock Purchase Agreement, dated as of January 17, 2003, between the Company and Truman
Hunt (incorporated by reference to Exhibit 10.61 to the Companys Annual Report on
Form 10-K for the year ended December 31, 2003). |
*10.53 |
|
Employment
Letter with Robert Conlee effective November 26, 2003 (incorporated by reference to
Exhibit 3.2 to the Companys Annual Report on Form 10-K for the year ended December
31, 2003). |
*10.54 |
|
Summary
of Non-management Director compensation. |
*10.55 |
|
Form of Contingent
Stock Award Agreement (Director Award). |
10.56 |
|
Amended
and Restated Patent License Agreement, dated as of March 7, 2002 by and between the
University of Utah Research Foundation and Nutriscan, Inc. and Interpretive Memorandum of
Understanding, dated as of November 30, 2001 (incorporated by reference to Exhibit 10.65
to the Companys Annual Report on Form 10-K for the year ended December 31, 2004). |
*10.57 |
|
Nu
Skin Enterprises, Inc. Senior Executive Benefits Policy (incorporated by reference to
Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 2005). |
10.58 |
|
Agreement
and Plan of Merger among Nu Skin International, Inc., Pharmanex License Acquisition
Corporation, Caroderm, Inc. and certain shareholders of
Caroderm, Inc. dated as of March 7, 2006. |
*10.59 |
|
Severance
letter with Richard King dated March 2, 2006. |
*10.60 |
|
Severance
letter with Lori Bush dated March 10, 2006. |
*10.61 |
|
Summary
of Team Elite Travel Policy. |
21.1 |
|
Subsidiaries
of the Company. |
23.1 |
|
Consent
of PricewaterhouseCoopers LLP |
-100-
Exhibit Number |
|
Exhibit Description |
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. |
-102-
SIGNATURE
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 March 17, 2006.
|
|
|
NU SKIN ENTERPRISES, INC.
|
|
|
|
By: /s/ Ritch N. Wood
Ritch N. Wood,
Chief Financial Officer
|
-103-
Exhibit Number |
|
Exhibit Description |
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 (incorporated
by reference to Exhibit 3.2 to the Companys Annual Report on Form 10-K for the year
ended December 31, 2003). |
3.3 |
|
Certificate
of Designation, Preferences and Relative Participating, Optional and Other Special Rights
of Preferred Stock and Qualification, Limitations and Restrictions Thereof (incorporated
by reference to Exhibit 3.2 to the Companys Annual Report on Form 10-K for the year
ended December 31, 2004). |
3.4 |
|
Amended
and Restated Bylaws of the Company (incorporated by reference to Exhibit 3.2 to the
Company's Form S-1). |
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. |
10.2 |
|
First
Amendment to Note Purchase Agreement between the Company and The Prudential
Insurance Company of America dated May 1, 2002 (incorporated
by reference to Exhibit No. 10.3 to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2002). |
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 Companys 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 Companys Quarterly Report on Form 10-Q for the quarter ended June 30, 2004).
|
-103-
Exhibit Number |
|
Exhibit Description |
10.5 |
|
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. |
10.6 |
|
Pledge
Amendments executed by the Company dated December 31, 2003 (incorporated by reference to
Exhibit 10.5 to the Companys Annual Report on Form 10-K for the year ended December
31, 2003). |
10.7 |
|
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 Companys Current Report on Form 8-K/A filed on March 10, 2005). |
10.8 |
|
Collateral
Agency Agreement dated October 12, 2000, by and between the Company, State Street Bank
and Trust Company of California, N.A., as Collateral Agent, and the lenders and
noteholders party thereto. |
10.9 |
|
Amendment
to Collateral Agency and Intercreditor Agreement dated May 10, 2000, among State Street
Bank and Trust Company of California, N.A., as Collateral Agent, The Prudential Insurance
Company of America, as Senior Noteholder and ABN AMRO Bank N.V., as Senior Lender
(incorporated by reference to Exhibit 10.5 to the Companys Quarterly Report on Form
10-Q for the quarter ended June 30, 2001). |
10.10 |
|
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 No. 10.2 to the Companys Quarterly Report on Form 10-Q for
the quarter ended September 30, 2003). |
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 10.4
to the Companys Quarterly Report on Form 10-Q for the quarter ended June 30, 2001). |
10.12 |
|
First
Amendment to the Credit Agreement dated December 14, 2001 dated May 10, 2001 among the
Company, various financial institutions, and Bank of America, N.A. as Administrative
Agent (incorporated by reference to Exhibit 10.43 of the Companys Annual Report on
Form 10-K for the year ended December 31, 2001). |
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 Companys Annual Report on Form 10-K for the
year ended December 31, 2003). |
-104-
Exhibit Number |
|
Exhibit Description |
10.14 |
|
Third
Amendment to the Credit Agreement, dated as of May 10, 2004, among the Company, various
financial institutions, and Bank One, N.A. (incorporated by reference to Exhibit 10.1 to
the Companys Quarterly Report on Form 10-Q for the quarter ended June 30, 2004). |
10.15 |
|
Shareholders
Agreement among the Company, Dató Mohd Nadzmi Bin Mohd Sulleh and Kiow Kim Yoon
Frankie Kiow dated effective as of September 25, 2001 (incorporated by reference to
Exhibit 10.46 of the Companys Annual Report on Form 10-K for the year ended
December 31, 2001). |
10.16 |
|
Master
Lease Agreement dated January 16th 2003 by and between the Company and Scrub Oak, LLC
(incorporated by reference to Exhibit 10.28 to the Companys Annual Report on Form
10-K for the year ended December 31, 2002). |
10.17 |
|
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 10.2 to
the Companys Quarterly Report on Form 10-Q for the quarter ended September 30,
2003). |
10.18 |
|
Master
Lease Agreement dated January 16, 2003 by and between the Company and Aspen Country, LLC
(incorporated by reference to Exhibit 10.29 to the Companys Annual Report on Form
10-K for the year ended December 31, 2003). |
10.19 |
|
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 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 2003). |
*10.20 |
|
Form
of Indemnification Agreement entered into by and among the Company and certain of its
officers and directors (incorporated by reference to Exhibit 10.1 to the Companys
Form S-1). |
*10.21 |
|
Form
of Indemnification Agreement to be entered into between the Company and certain of its
officers and directors (incorporated by reference to Exhibit 10.2 to the Companys
Quarterly Report on Form 10-Q for the quarter ended June 30, 2005). |
-105-
Exhibit Number |
|
Exhibit Description |
*10.22 |
|
Amendment
in Total and Complete Restatement of Deferred Compensation Plan. (incorporated by
reference to Exhibit 10.34 to the Company's Annual Report on
Form 10-K for the year ended December 31, 2004). |
*10.23 |
|
Form
of Deferred Compensation Plan (New Form) with amendment (incorporated by reference to
Exhibit 10.35 to the Companys Annual Report on Form 10-K for the year ended
December 31, 2004). |
*10.24 |
|
Form
of Amendment to the Deferred Compensation Plan (incorporated by reference to Exhibit 99.3
to the Companys Current Report on Form 8-K filed December 19, 2005). |
*10.25 |
|
Amendment
in Total and Complete Restatement of NSI Compensation Trust (incorporated by reference to
Exhibit 10.36 to the Companys Annual Report on Form 10-K for the year ended
December 31, 2004). |
*10.26 |
|
Nu
Skin Enterprises, Inc. Deferred Compensation Plan dated December 12, 2005 (incorporated
by reference to Exhibit 99.1 to the Companys Current Report on Form 8-K filed
December 19, 2005). |
*10.27 |
|
Nu
Skin Enterprises, Inc. Nonqualified Deferred Compensation Trust dated December 12, 2005
(incorporated by reference to Exhibit 99.2 to the Companys Current Report on Form
8-K filed December 19, 2005). |
*10.28 |
|
Second
Amended and Restated Nu Skin Enterprises, Inc. 1996 Stock Incentive Plan. |
*10.29 |
|
Amendment
No. 1 to the Second Amended and Restated Nu Skin Enterprises, Inc. 1996 Stock Incentive
Plan (incorporated by reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2003). |
*10.30 |
|
Base
Form of Master Stock Option Agreement (incorporated by reference to Exhibit 10.44 to the
Companys Annual Report on Form 10-K for the year ended December 31, 2002). |
*10.31 |
|
Form
of Stock Option Agreement (Directors) (incorporated by reference to Exhibit 10.4 to the
Companys Annual Report on Form 10-K for the year ended December 31, 2001). |
*10.32 |
|
Summary
Description of Nu Skin Japan Director Retirement Allowance Plan (incorporated by
reference to Exhibit 10.49 to the Companys Annual Report on Form 10-K for the year
ended December 31, 2001). |
*10.33 |
|
Employment
Letter with Truman Hunt (incorporated by reference to Exhibit 10.49 to the Companys
Annual Report on Form 10-K for the year ended December 31, 2002). |
-106-
Exhibit Number |
|
Exhibit Description |
*10.34 |
|
Amendment
to Employment Letter with M. Truman Hunt dated September 22, 2005 and Amendment to
provisions of the Companys Executive Incentive Plan with respect to Mr. Hunt
(incorporated by reference to Exhibit 10.1 to the Companys Quarterly Report on Form
10-Q for the quarter ended September 30, 2005). |
*10.35 |
|
Letter
of Understanding with Corey Lindley effective August 8, 2002 (incorporated by reference
to Exhibit 10.49 to the Companys Annual Report on Form 10-K for the year ended
December 31, 2002). |
*10.36 |
|
Letter
of Understanding with Corey Lindley effective December 22, 2003 (Supplementing Letter of
Understanding effective August 8, 2002) (incorporated by reference to Exhibit 10.47 to
the Companys Annual Report on Form 10-K for the year ended December 31, 2003). |
*10.37 |
|
Amendment
to Letter of Understanding with Corey Lindley as of March 25, 2005 (incorporated by
reference to Exhibit 10.3 to the Companys Quarterly Report on Form 10-Q for the
quarter ended March 31, 2005). |
10.38 |
|
Amended
and Restated Registration Rights Agreement, dated as of September 18, 2003, by and among
Nu Skin Enterprises, Inc., Sandra N. Tillotson, The Sandra
N. Tillotson Family Trust and the Purchasers signatory thereto (incorporated by reference
to Exhibit 4.7 to the Company's Registration Statement on
Form S-3 (File No. 333-109836)). |
10.39 |
|
Private
Shelf Agreement, dated as of August 26, 2003, between Nu Skin Enterprises, Inc. and
Prudential Investment Management, Inc. (the "Private Shelf
Agreement") (incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report
on Form 10-Q for the quarter ended September 30, 2003). |
10.40 |
|
First
Amendment to 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 Companys Annual Report on Form 10-K for the year ended December 31, 2003). |
-107-
Exhibit Number |
|
Exhibit Description |
10.41 |
|
Second
Amendment to 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 Companys Quarterly Report on Form 10-Q for the quarter ended
June 30, 2004). |
10.42 |
|
Third
Amendment to 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 Companys Quarterly Report on Form 10-Q for the quarter ended
June 30, 2005). |
10.43 |
|
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 Companys Annual Report on Form 10-K for the year ended December 31, 2003). |
10.44 |
|
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 Companys Current Report on Form
8-K filed February 8, 2005). |
10.45 |
|
Stock
Repurchase Agreement, dated as of October 22, 2003, between the Company and certain of
its shareholders (incorporated by reference to Exhibit 10.1 to the Companys Current
Report on Form 8-K filed November 10, 2003). |
10.46 |
|
Registration
Rights Agreement dated as of October 22, 2003, by and among the Company and certain
third-party purchasers of the Companys stock shareholders (incorporated by
reference to Exhibit 10.1 to the Companys Current Report on Form 8-K filed November
10, 2003). |
10.47 |
|
Form
of Lock-up Agreement executed by certain of the Companys shareholders (incorporated
by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K filed
November 10, 2003). |
10.48 |
|
Registration
Rights Agreement, dated as of July 26, 2004, by and among the Company and the Purchasers
signatory thereto (incorporated by reference to Exhibit 4.6 to the Companys
Registration Statement on Form S-3 filed August 23, 2004 (File No. 333-118495)). |
-109-
Exhibit Number |
|
Exhibit Description |
10.49 |
|
Stock
Repurchase Agreement, dated as of July 27, 2004, by and among the Company and the Selling
Stockholders signatory thereto (incorporated by reference to Exhibit 4.8 to the Companys
Registration Statement on Form S-3 filed August 23, 2004 (File No. 333-118495)). |
*10.50 |
|
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). |
*10.51 |
|
Nu
Skin Enterprises, Inc. 2005 Executive Incentive Plan (incorporated by reference to
Exhibit 99.1 to the Company's Current Report on Form 8-K
filed February 9, 2005). |
*10.52 |
|
Restricted
Stock Purchase Agreement, dated as of January 17, 2003, between the Company and Truman
Hunt (incorporated by reference to Exhibit 10.61 to the Companys Annual Report on
Form 10-K for the year ended December 31, 2003). |
*10.53 |
|
Employment
Letter with Robert Conlee effective November 26, 2003 (incorporated by reference to
Exhibit 3.2 to the Companys Annual Report on Form 10-K for the year ended December
31, 2003). |
*10.54 |
|
Summary
of Non-management Director compensation. |
*10.55 |
|
Form of Contingent
Stock Award Agreement (Director Award). |
10.56 |
|
Amended
and Restated Patent License Agreement, dated as of March 7, 2002 by and between the
University of Utah Research Foundation and Nutriscan, Inc. and Interpretive Memorandum of
Understanding, dated as of November 30, 2001 (incorporated by reference to Exhibit 10.65
to the Companys Annual Report on Form 10-K for the year ended December 31, 2004). |
*10.57 |
|
Nu
Skin Enterprises, Inc. Senior Executive Benefits Policy (incorporated by reference to
Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 2005). |
10.58 |
|
Agreement
and Plan of Merger among Nu Skin International, Inc., Pharmanex License Acquisition
Corporation, Caroderm, Inc. and certain shareholders of
Caroderm, Inc. dated as of March 7, 2006. |
*10.59 |
|
Severance
letter with Richard King dated March 2, 2006. |
*10.60 |
|
Severance
letter with Lori Bush dated March 10, 2006. |
*10.61 |
|
Summary
of Team Elite Travel Policy. |
21.1 |
|
Subsidiaries
of the Company. |
23.1 |
|
Consent
of PricewaterhouseCoopers LLP |
-108-
Exhibit Number |
|
Exhibit Description |
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. |
-109-
Exhibit 10.1 to NSE FORM 10-K 2005 Note Purchase Agreement
NU SKIN ENTERPRISES,
INC.
JP¥9,706,500,000
3.03% Senior Notes due
October 12, 2010
_________________
NOTE PURCHASE AGREEMENT
_________________
Dated October 12, 2000
NU SKIN ENTERPRISES,
INC.
One Nu Skin Plaza
75 West Center Street
Provo, Utah 84601
3.03% Senior Notes due
October 12, 2010
October 12, 2000
TO THE PURCHASER LISTED IN
THE ATTACHED SCHEDULE A:
Ladies and Gentlemen:
Nu Skin Enterprises, Inc., a Delaware
corporation (the Company), agrees with you as follows:
1. AUTHORIZATION OF
NOTES.
The Company will authorize the issue
and sale of JP¥ 9,706,500,000 aggregate principal amount of its Senior Notes due
October 12, 2010 (the Notes, such term to include any such notes issued
in substitution therefor pursuant to Section 13 of this Agreement). The Notes shall be
substantially in the form set out in Exhibit 1, with such changes therefrom, if
any, as may be approved by you and the Company. The Notes shall at all times be guaranteed
by all current and future Material Domestic Subsidiaries of the Company (the
Subsidiary Guarantors) pursuant to the Subsidiary Guaranty and
shall at all times be secured by a pledge of the Pledged Securities of each Material
Foreign Subsidiary pursuant to the Pledge Agreement. Certain capitalized terms used in
this Agreement are defined in Schedule B; references to a Schedule or
an Exhibit are, unless otherwise specified, to a Schedule or an Exhibit
attached to this Agreement.
2. SALE AND PURCHASE OF
NOTES.
Subject to the terms and conditions
of this Agreement and the Collateral Documents, the Company will issue and sell to you and
you will purchase from the Company, at the Closing provided for in Section 3, Notes in the
principal amount specified opposite your name in Schedule A at the purchase price
of 100% of the principal amount thereof.
3. CLOSING.
The sale and purchase of the Notes to
be purchased by you shall occur at the offices of OMelveny & Myers LLP, 400
South Hope Street, Los Angeles, California 90071, at 8:00 a.m., Los Angeles time, at a
closing (the Closing) on October 12, 2000. At the Closing the Company
will deliver to you the Notes to be purchased by you in the form of a single Note (or such
greater number of Notes in denominations of at least the Yen-equivalent of $100,000 as you
may request) dated the date of the Closing and registered in your name (or in the name of
your nominee), against delivery by you to the Company or its order of immediately
available funds in the amount of the purchase price therefor by wire transfer of
immediately available funds as set forth in a funding instruction letter delivered by the
Company to you at least two Business Days prior to the Closing. If at the Closing the
Company shall fail to tender such Notes to you as provided above in this Section 3, or any
of the conditions specified in Section 4 shall not have been fulfilled to your
satisfaction, you shall, at your election, be relieved of all further obligations under
this Agreement, without thereby waiving any rights you may have by reason of such failure
or such nonfulfillment.
4. CONDITIONS TO CLOSING.
Your obligation to purchase and pay
for the Notes to be sold to you at the Closing is subject to the fulfillment to your
satisfaction, prior to or at the Closing, of the following conditions:
4.1 Representations and
Warranties.
The representations and warranties of
the Company in this Agreement and the Collateral Documents shall be correct in all
material respects when made and at the time of the Closing.
4.2 Performance; No
Default.
The Company and its Restricted
Subsidiaries shall have performed and complied in all material respects with all
agreements and conditions contained in this Agreement and the Collateral Documents
required to be performed or complied with by them prior to or at the Closing and after
giving effect to the issue and sale of the Notes (and the application of the proceeds
thereof as contemplated by Section 5.14) no Default or Event of Default shall have
occurred and be continuing. Neither the Company nor any Restricted Subsidiary shall have
entered into any transaction since the date of the Memorandum that would have been
prohibited by Section 10 hereof had such Section applied since such date.
4.3 Officers
Certificate.
The Company shall have delivered to
you an Officers Certificate, dated the date of the Closing, certifying that the
conditions specified in Sections 4.1, 4.2, 4.9, 4.13(a) and 4.13(b) have been fulfilled.
4.4 Opinions of Counsel.
You shall have received opinions in
form and substance satisfactory to you, dated the date of the Closing (a) from
Shearman & Sterling, special New York counsel for the Company and the Subsidiary
Guarantors, substantially in the form set forth in Exhibit 4.4(a) and covering such
other matters incident to the transactions contemplated hereby as you or your counsel may
reasonably request (and the Company and the Subsidiary Guarantors hereby instruct Shearman
& Sterling to deliver such opinion to you), (b) from Tokyo Aoyama Law Office,
special Japanese counsel for the Company and Nu Skin Japan Co., Ltd., substantially in the
form set forth in Exhibit 4.4(b) and covering such other matters incident to the
transactions contemplated hereby as you or your counsel may reasonably request (and the
Company and the Subsidiary Guarantors hereby instruct Tokyo Aoyama Law Office to deliver
such opinion to you, (c) from the Companys and the Subsidiary
Guarantors in-house counsel, substantially in the form set forth in Exhibit
4.4(c) and covering such other matters incident to the transactions contemplated
hereby as you or your counsel may reasonably request (and the Company hereby instructs its
in-house counsel to deliver such opinion to you), and (d) from OMelveny
& Myers LLP, your special counsel in connection with such transactions, substantially
in the form set forth in Exhibit 4.4(d) and covering such other matters incident to
such transactions as you may reasonably request.
4.5 Purchase Permitted
By Applicable Law, etc.
On the date of the Closing your
purchase of Notes shall (i) be permitted by the laws and regulations of each
jurisdiction to which you are subject, without recourse to provisions (such as Section
1405(a)(8) of the New York Insurance Law) permitting limited investments by insurance
companies without restriction as to the character of the particular investment,
(ii) not violate any applicable law or regulation (including, without
limitation, Regulation T, U or X of the Board of Governors of the Federal Reserve System),
and (iii) not subject you to any tax, penalty or liability under or pursuant
to any applicable law or regulation, which law or regulation was not in effect on the date
hereof. If requested by you, you shall have received an Officers Certificate
certifying as to such matters of fact as you may reasonably specify to enable you to
determine whether such purchase is so permitted.
4.6 [Reserved].
4.7 Payment of Special
Counsel Fees.
Without limiting the provisions of
Section 15.1, the Company shall have paid on or before the Closing the fees, charges
and disbursements of your special counsel referred to in Section 4.4 to the extent
reflected in a statement of such counsel rendered to the Company at least one Business Day
prior to the Closing.
4.8 Private Placement
Number.
A Private Placement Number issued by
Standard & Poors CUSIP Service Bureau (in cooperation with the Securities
Valuation Office of the National Association of Insurance Commissioners) shall have been
obtained for the Notes.
4.9 Changes in Corporate
Structure.
Except as specified in Schedule
4.9, the Company shall not have changed its jurisdiction of incorporation or been a
party to any merger or consolidation and shall not have succeeded to all or any
substantial part of the liabilities of any other entity, at any time following the date of
the most recent financial statements referred to in Schedule 5.5.
4.10 Proceedings and
Documents.
All corporate and other proceedings
in connection with the transactions contemplated by this Agreement, the Collateral
Documents and all documents and instruments incident to such transactions shall be
satisfactory to you and your special counsel, and you and your special counsel shall have
received all such counterpart originals or certified or other copies of such documents as
you or they may reasonably request.
4.11 Delivery of Company
Documents.
On or before the date of the Closing,
the Company shall have delivered to you and your special counsel each, unless otherwise
noted, dated the date of the Closing:
(a)
Certified copies of the Companys Certificate of Incorporation, together
with a good standing certificate from the Secretary of State of the State of
Delaware, each to be dated a recent date prior to the date of the Closing;
(b)
Copies of the Companys Bylaws, certified as of the date of the Closing by
its corporate secretary or an assistant secretary;
(c)
Resolutions of the Board of Directors of the Company approving and authorizing
the execution, delivery and performance of the Notes, this Agreement, the
Collateral Documents to which the Company is a party and any other documents,
instruments and certificates required to be executed by the Company in
connection therewith, each certified by the Companys corporate secretary
or an assistant secretary as being in full force and effect without modification
or amendment;
(d)
Signature and incumbency certificates of the officers of the Company executing
the documents referred to in item (c) above, and any other documents,
instruments and certificates required to be executed by the Company in
connection herewith or therewith; and
(e)
Such other documents as you or your special counsel may reasonably request.
4.12 Delivery of
Subsidiary Guarantor Documents.
On or before the date of the Closing,
each Subsidiary Guarantor shall have delivered to you and your special counsel each,
unless otherwise noted, dated the date of the Closing:
(a)
Certified copies of such Subsidiary Guarantors Articles or Certificate of
Incorporation, together with a good standing certificate from the Secretary of
State of the State of the jurisdiction of its incorporation, each to be dated as
of a recent date prior to the date of Closing;
(b)
Copies of such Subsidiary Guarantors Bylaws, certified as of the date of
the Closing by its corporate secretary or an assistant secretary;
(c)
Resolutions of the Board of Directors of such Subsidiary Guarantor approving and
authorizing the execution, delivery and performance of the Subsidiary
Guaranty and any other documents, instruments and certificates required to be
executed by such Subsidiary Guarantor in connection therewith, each certified by
its corporate secretary or an assistant secretary as being in full force and
effect without modification or amendment;
(d)
Signature and incumbency certificates of the officers of such Subsidiary
Guarantor executing the documents referred to in item (c) above, and any other
documents, instruments and certificates required to be executed by such
Subsidiary Guarantor in connection therewith; and
(e)
Such other documents as you or your special counsel may reasonably request.
4.13 Execution and Delivery of the Subsidiary Guaranty, the Pledge Agreement and the Collateral Agency, Intercreditor Agreement, and the ABN
Amro Release of
Guarantors.
(a)
On or prior to the date of the Closing, the Subsidiary Guaranty shall have been
duly executed and delivered by each Subsidiary Guarantor and shall be in full
force and effect and you shall have received an executed copy thereof.
(b)
On or prior to the date of the Closing, the Pledge Agreement shall have been
duly executed and delivered by the Pledgors and the Collateral Agent and shall
be in full force and effect, you shall have received an executed copy thereof,
and all actions shall have been taken as may be necessary or desirable to give
to the Collateral Agent, for the ratable benefit of the holders of the Notes and
the other Senior Secured Creditors, a valid and perfected first priority Lien on
and security interest in the Pledged Securities.
(c)
On or prior to the date of the Closing, the Collateral Agency and Intercreditor
Agreement shall have been duly executed and delivered by the Collateral Agent,
you and each of the other Senior Secured Creditors, and shall have been
acknowledged by the Company and each of its Restricted Subsidiaries, and such
agreement shall be in full force and effect and you shall have received an
executed copy thereof.
(d)
On or prior to the date of the Closing, the ABN Amro Release of Guarantors shall
have been duly executed and delivered by ABN Amro N.V., releasing Nu Skin Korea,
Co., Ltd., Nu Skin Korea, Inc. and Nu Skin Japan Co., Ltd. from the ABN Amro
Subsidiary Guaranty.
4.14 UCC Searches.
The Company shall have delivered to
the Collateral Agent certified copies of UCC Requests for Information or copies (Form
UCC-11), or a similar search report certified by a party acceptable to the Collateral
Agent, dated a recent date prior to the Closing, listing all effective financing
statements which name the Company (under its present name and any previous names) as the
debtor and which are filed in any jurisdiction.
4.15 UCC Financing
Statements.
The Company shall have delivered to
the Collateral Agent UCC financing statements or other similar instruments or documents,
duly executed by the Company with respect to the Pledged Securities, in appropriate form
for filing under the Uniform Commercial Code as in effect in all jurisdictions as may be
necessary or, in the opinion of the Collateral Agent, desirable to perfect the security
interests created in the Pledged Securities pursuant to the Pledge Agreement.
5. REPRESENTATIONS AND
WARRANTIES OF THE COMPANY.
The Company represents and warrants
to you that:
5.1 Organization; Power
and Authority.
The Company is a corporation duly
organized, validly existing and in good standing under the laws of its jurisdiction of
incorporation, and is duly qualified as a foreign corporation and is in good standing in
each jurisdiction in which such qualification is required by law, other than those
jurisdictions as to which the failure to be so qualified or in good standing could not,
individually or in the aggregate, reasonably be expected to have a Material Adverse
Effect. The Company has the corporate power and authority to own or hold under lease the
properties it purports to own or hold under lease, to transact the business it transacts
and proposes to transact, to execute and deliver this Agreement, the Collateral Documents
to which it is a party and the Notes, and to perform the provisions hereof and thereof.
5.2 Authorization, etc.
This Agreement, the Notes and the
Collateral Documents to which the Company is a party have been duly authorized by all
necessary corporate action on the part of the Company, and this Agreement and each of the
Collateral Documents to which it is a party constitutes, and upon execution and delivery
thereof each Note will constitute, a legal, valid and binding obligation of the Company
enforceable against the Company in accordance with its terms, except as such
enforceability may be limited by (a) applicable bankruptcy, insolvency,
reorganization, moratorium or other similar laws affecting the enforcement of
creditors rights generally, and (b) general principles of equity (regardless
of whether such enforceability is considered in a proceeding in equity or at law).
5.3 Disclosure.
The Company, through its agent, Banc
of America Securities LLC, has delivered to you a copy of a Private Placement Memorandum,
dated September, 2000 (the Memorandum), relating to the transactions
contemplated hereby. The Memorandum fairly describes, in all material respects, the
general nature of the business and principal properties of the Company and the Restricted
Subsidiaries. Except as disclosed in Schedule 5.3, this Agreement, the Collateral
Documents, the Memorandum, the documents, certificates or other writings delivered to you
by or on behalf of the Company in connection with the transactions contemplated hereby and
the financial statements listed in Schedule 5.5, taken as a whole, do not
contain any untrue statement of a material fact or omit to state any material fact
necessary to make the statements therein not misleading in light of the circumstances
under which they were made. Except as disclosed in the Memorandum, the Form 10-K filed by
the Company with the Securities and Exchange Commission for the period ended December 31,
1999 or in any Form 10-Q, Form 8-K or other report filed by the Company with the
Securities and Exchange Commission for any period subsequent to the period ended December
31, 1999 or as expressly described in Schedule 5.3 or in one of the documents,
certificates or other writings identified therein, or in the financial statements listed
in Schedule 5.5, since December 31, 1999, there has been no change in the financial
condition, operations, business, properties or prospects of the Company or any Subsidiary
except changes that individually or in the aggregate could not reasonably be expected to
have a Material Adverse Effect. There is no fact known to the Company that could
reasonably be expected to have a Material Adverse Effect that has not been set forth
herein or in the Memorandum or in the other documents, certificates and other writings
delivered to you by or on behalf of the Company.
5.4 Organization and
Ownership of Shares of Subsidiaries; Affiliates.
(a)
Schedule 5.4 contains (except as noted therein) complete and correct
lists (i) of the Companys Subsidiaries, showing, as to each
Subsidiary, the correct name thereof, the jurisdiction of its organization, the
percentage of shares of each class of its capital stock or similar equity
interests outstanding owned by the Company and each other Subsidiary and whether
such Subsidiary is a Restricted Subsidiary or an Unrestricted Subsidiary, and
whether such Subsidiary is a Material Subsidiary, (ii) of the
Companys Affiliates, other than Subsidiaries, and (iii) of the
Companys directors and senior officers.
(b)
All of the outstanding shares of capital stock or similar equity interests of
each Subsidiary shown in Schedule 5.4 as being owned by the Company and
its Subsidiaries have been validly issued, are fully paid and nonassessable and
are owned by the Company or another Subsidiary free and clear of any Lien
(except for Permitted Liens, directors qualifying shares, shares required
to be owned by Persons pursuant to applicable foreign laws regarding foreign
ownership, or as otherwise disclosed in Schedule 5.4).
(c)
Each Subsidiary identified in Schedule 5.4 is a corporation or other
legal entity duly organized, validly existing and in good standing under the
laws of its jurisdiction of organization, and is duly qualified as a foreign
corporation or other legal entity and is in good standing in each jurisdiction
in which such qualification is required by law, other than those jurisdictions
as to which the failure to be so qualified or in good standing could not,
individually or in the aggregate, reasonably be expected to have a Material
Adverse Effect. Each such Subsidiary has the corporate or other power and
authority to own or hold under lease the properties it purports to own or hold
under lease and to transact the business it transacts and proposes to transact.
(d)
No Material Subsidiary, is a party to, or otherwise subject to any legal
restriction or any agreement (other than this Agreement, the agreements listed
on Schedule 5.4 and customary limitations imposed by corporate law
statutes) restricting the ability of such Material Subsidiary to pay dividends
out of profits or make any other similar distributions of profits to the Company
or any of its Subsidiaries that owns outstanding shares of capital stock or
similar equity interests of such Material Subsidiary.
5.5 Financial Statements.
The Company has delivered to you
copies of the financial statements of the Company and the Restricted Subsidiaries listed
on Schedule 5.5. All of said financial statements (including in each case the
related schedules and notes) fairly present in all material respects the consolidated
financial position of the Company and the Restricted Subsidiaries as of the respective
dates specified in such Schedule and the consolidated results of their operations and cash
flows for the respective periods so specified and have been prepared in accordance with
GAAP consistently applied throughout the periods involved except as set forth in the notes
thereto (subject, in the case of any interim financial statements, to normal year-end
adjustments).
5.6 Compliance with
Laws, Other Instruments, etc.
The execution, delivery and
performance by the Company of this Agreement, the Collateral Documents to which it is a
party and the Notes will not (i) contravene, result in any breach of, or constitute a
default under, or result in the creation of any Lien in respect of any property of the
Company or any Subsidiary under, any indenture, mortgage, deed of trust, loan, note
purchase or credit agreement, corporate charter or bylaws, or any other Material
agreement, lease or instrument to which the Company or any Subsidiary is bound or by which
the Company or any Subsidiary or any of their respective properties may be bound or
affected, (ii) conflict with or result in a breach of any of the terms, conditions
or provisions of any order, judgment, decree or ruling of any court, arbitrator or
Governmental Authority applicable to the Company or any Subsidiary, or (iii)
violate any provision of any statute or other rule or regulation of any Governmental
Authority applicable to the Company or any Subsidiary.
5.7 Governmental
Authorizations, etc.
No consent, approval or authorization
of, or registration, filing or declaration with, any Governmental Authority is required in
connection with the execution, delivery or performance by the Company or any of its
Restricted Subsidiaries of this Agreement, the Collateral Documents or the Notes.
5.8 Litigation;
Observance of Agreements, Statutes and Orders.
(a)
Except as disclosed in Schedule 5.8, there are no actions, suits or
proceedings pending or, to the knowledge of the Company, threatened against or
affecting the Company or any Subsidiary or any property of the Company or any
Subsidiary in any court or before any arbitrator of any kind or before or by any
Governmental Authority that, individually or in the aggregate, could reasonably
be expected to have a Material Adverse Effect.
(b)
Neither the Company nor any Restricted Subsidiary is in default under any term
of any agreement or instrument to which it is a party or by which it is bound,
or any order, judgment, decree or ruling of any court, arbitrator or
Governmental Authority or is in violation of any applicable law, ordinance, rule
or regulation (including without limitation Environmental Laws) of any
Governmental Authority, which default or violation, individually or in the
aggregate, could reasonably be expected to have a Material Adverse Effect.
5.9 Taxes.
The Company and its Subsidiaries have
filed all tax returns that are required to have been filed in any jurisdiction (other than
those tax returns which individually or collectively are not Material), and have paid all
taxes shown to be due and payable on such returns and all other taxes and assessments
levied upon them or their properties, assets, income or franchises, to the extent such
taxes and assessments have become due and payable and before they have become delinquent,
except for any taxes and assessments (i) the amount of which is not
individually or in the aggregate Material, or (ii) the amount, applicability
or validity of which is currently being contested in good faith by appropriate proceedings
and with respect to which the Company or a Subsidiary, as the case may be, has established
adequate reserves in accordance with GAAP. The Company knows of no basis for any other tax
or assessment that could reasonably be expected to have a Material Adverse Effect. The
charges, accruals and reserves on the books of the Company and its Subsidiaries in respect
of Federal, state or other taxes for all fiscal periods are adequate in accordance with
GAAP. The Federal income tax liabilities of the Company and its Subsidiaries have been
resolved with the Internal Revenue Service and paid for all fiscal years up to and
including the fiscal year ending on December 31, 1996.
5.10 Title to Property;
Leases.
The Company and the Restricted
Subsidiaries have good and sufficient title to their respective properties that
individually or in the aggregate are Material, including all such properties reflected in
the most recent audited balance sheet referred to in Section 5.5 or purported to have been
acquired by the Company or any Restricted Subsidiary after said date (except as sold or
otherwise disposed of in the ordinary course of business), in each case free and clear of
Liens prohibited by this Agreement or the Collateral Documents. All leases that
individually or in the aggregate are Material are valid and subsisting and are in full
force and effect in all material respects.
5.11 Licenses, Permits,
etc.
Except as disclosed in
Schedule 5.11,
(a)
the Company and the Restricted Subsidiaries own or possess all licenses,
permits, franchises, authorizations, patents, copyrights, service marks,
trademarks and trade names, or rights thereto, that individually or in the
aggregate are Material, without any known Material conflict with the rights of
others;
(b)
to the best knowledge of the Company, no product of the Company infringes in any
material respect any license, permit, franchise, authorization, patent,
copyright, service mark, trademark, trade name or other right owned by any other
Person; and
(c)
to the best knowledge of the Company, there is no Material violation by any
Person of any right of the Company or any Restricted Subsidiary with respect to
any patent, copyright, service mark, trademark, trade name or other right owned
or used by the Company or any Restricted Subsidiary.
5.12 Compliance with
ERISA.
(a)
The Company and each ERISA Affiliate have operated and administered each Plan in
compliance with all applicable laws except for such instances of noncompliance
as have not resulted in and could not reasonably be expected to result in a
Material Adverse Effect. Neither the Company nor any ERISA Affiliate has
incurred any liability pursuant to Title I or IV of ERISA or the penalty or
excise tax provisions of the Code relating to employee benefit plans (as defined
in Section 3 of ERISA), and no event, transaction or condition has occurred or
exists that could reasonably be expected to result in the incurrence of any such
liability by the Company or any ERISA Affiliate, or in the imposition of any
Lien on any of the rights, properties or assets of the Company or any ERISA
Affiliate, in either case pursuant to Title I or IV of ERISA or to such penalty
or excise tax provisions or to Section 401(a)(29) or 412 of the Code, other
than such liabilities or Liens as would not be, individually or in the
aggregate, Material.
(b)
Neither the Company nor any ERISA Affiliate maintains a single employer
plan or a Multiemployer Plan that is subject to Title IV of ERISA.
(c)
The Company and its ERISA Affiliates have not incurred withdrawal liabilities
(and are not subject to contingent withdrawal liabilities) under
section 4201 or 4204 of ERISA in respect of Multiemployer Plans that
individually or in the aggregate are Material.
(d)
The expected postretirement benefit obligation (determined as of the last day of
the Companys most recently ended fiscal year in accordance with Financial
Accounting Standards Board Statement No. 106, without regard to liabilities
attributable to continuation coverage mandated by section 4980B of the Code) of
the Company and its Subsidiaries is not Material or has otherwise been disclosed
in the most recent consolidated financial statements of the Company and its
Subsidiaries referenced in Section 5.5 of this Agreement.
(e)
The execution and delivery of this Agreement and the Collateral Documents and
the issuance and sale of the Notes hereunder will not involve any transaction
that is subject to the prohibitions of section 406 of ERISA or in
connection with which a tax could be imposed pursuant to
section 4975(c)(1)(A)-(D) of the Code. The representation by the Company in
the first sentence of this Section 5.12(e) is made in reliance upon and subject
to the accuracy of your representation in Section 6.2 as to the sources of the
funds used to pay the purchase price of the Notes to be purchased by you.
5.13 Private Offering by
the Company.
Neither the Company nor anyone acting
on its behalf has offered the Notes or any similar securities for sale to, or solicited
any offer to buy any of the same from, or otherwise approached or negotiated in respect
thereof with, any Person other than you and not more than 18 other Institutional
Investors, each of which has been offered the Notes or any similar securities at a private
sale for investment. Neither the Company nor anyone acting on its behalf has taken, or
will take, any action that would subject the issuance or sale of the Notes to the
registration requirements of Section 5 of the Securities Act.
5.14 Use of Proceeds;
Margin Regulations.
The Company will apply the proceeds
of the sale of the Notes to repay Indebtedness of the Company and its Subsidiaries
(including repayment in full and termination of the Existing Credit Facility) and for
other general corporate purposes (including repurchases of stock of the Company);
provided that no part of the proceeds from the sale of the Notes hereunder will be
used, directly or indirectly, so as to involve the Company or any holder of a Note in a
violation of Regulation U of the Board of Governors of the Federal Reserve System (12 CFR
221) or Regulation X of said Board (12 CFR 224), or to involve any broker or dealer in a
violation of Regulation T of said Board (12 CFR 220). Margin stock does not constitute
more than 5% of the value of the consolidated assets of the Company and its Subsidiaries
and the Company does not have any present intention that margin stock will constitute more
than 5% of the value of such assets. As used in this Section, the term margin
stock shall have the meanings assigned to them in said Regulation U.
5.15 Existing
Indebtedness; Future Liens.
(a)
Except as described therein, Schedule 5.15 sets forth a complete and
correct list of all outstanding Indebtedness, separately listed for each such
item of Indebtedness of $2,000,000 or more, of the Company and the Restricted
Subsidiaries as of the date of the Closing.
(b)
(i) Neither the Company nor any Restricted Subsidiary is in default in the
payment of any principal or interest on any Indebtedness of the Company or such
Restricted Subsidiary, and (ii) no event or condition exists with respect to any
Indebtedness of the Company or any Restricted Subsidiary that would permit (or
that with notice or the lapse of time, or both, would permit) one or more
Persons to cause such Indebtedness to become due and payable before its stated
maturity or before its regularly scheduled dates of payment, except for
Indebtedness described in clauses (i) and (ii) which, in aggregate principal
amount, does not exceed $5,000,000.
(c)
Neither the Company nor any Restricted Subsidiary has agreed or consented to
cause or permit in the future (upon the happening of a contingency or otherwise)
any of its property, whether now owned or hereafter acquired, to be subject to a
Lien not permitted by Section 10.3.
5.16 Foreign Assets
Control Regulations, etc.
Neither the sale of the Notes by the
Company hereunder nor its use of the proceeds thereof will violate the Trading with the
Enemy Act, as amended, or any of the foreign assets control regulations of the United
States Treasury Department (31 CFR, Subtitle B, Chapter V, as amended) or any enabling
legislation or executive order relating thereto.
5.17 Status under
Certain Statutes.
Neither the Company nor any
Restricted Subsidiary is subject to regulation under the Investment Company Act of 1940,
as amended, the Public Utility Holding Company Act of 1935, as amended, the Interstate
Commerce Act, as amended, or the Federal Power Act, as amended.
5.18 Environmental
Matters.
Neither the Company nor any of its
Subsidiaries has knowledge of any claim or has received any notice of any claim, and no
proceeding has been instituted raising any claim against the Company or any of its
Subsidiaries or any of their respective real properties now or formerly owned, leased or
operated by any of them or other assets, alleging any damage to the environment or
violation of any Environmental Laws, except, in each case, such as could not reasonably be
expected to result in a Material Adverse Effect. Except as otherwise disclosed to you in
writing,
(a)
neither the Company nor any of its Subsidiaries has knowledge of any facts which
would give rise to any claim, public or private, of violation of Environmental
Laws or damage to the environment emanating from, occurring on or in any way
related to real properties now or formerly owned, leased or operated by any of
them or to other assets or their use, except, in each case, such as could not
reasonably be expected to result in a Material Adverse Effect;
(b)
neither the Company nor any of its Subsidiaries has stored any Hazardous
Materials on real properties now or formerly owned, leased or operated by any of
them in a manner contrary to any Environmental Laws and has not disposed of any
Hazardous Materials in a manner contrary to any Environmental Laws, in each case
in any manner that could reasonably be expected to result in a Material Adverse
Effect; and
(c)
all buildings on all real properties now owned, leased or operated by the
Company or any of its Subsidiaries are in compliance with all applicable
Environmental Laws, except where failure to comply could not reasonably be
expected to result in a Material Adverse Effect.
6.
REPRESENTATIONS OF THE PURCHASER.
6.1 Purchase for
Investment.
You represent that you are an
institutional accredited investor within the meaning of subparagraphs (1),
(2), (3) or (7) of Rule 501(a) promulgated under the Securities Act. You represent that
you are purchasing the Notes for your own account or for one or more separate accounts
maintained by you or for the account of one or more pension or trust funds and not with a
view to the distribution thereof, provided that the disposition of your or their
property shall at all times be within your or their control. You understand that the Notes
have not been registered under the Securities Act and may be resold only if registered
pursuant to the provisions of the Securities Act or if an exemption from registration is
available, except under circumstances where neither such registration nor such an
exemption is required by law, and that the Company is not required to register the Notes.
6.2 Source of Funds.
You represent that at least one of
the following statements is an accurate representation as to each source of funds (a
Source) to be used by you to pay the purchase price of the Notes to be
purchased by you hereunder:
(a)
the Source is an insurance company general account within the
meaning of Department of Labor Prohibited Transaction Exemption
(PTE) 95-60 (issued July 12, 1995) and there is no employee benefit
plan, treating as a single plan all plans maintained by the same employer or
employee organization, with respect to which the amount of the general account
reserves and liabilities for all contracts held by or on behalf of such plan,
exceed ten percent (10%) of the total reserves and liabilities of such general
account (exclusive of separate account liabilities) plus surplus, as set forth
in the NAIC Annual Statement filed with your state of domicile; or
(b)
the Source is either (i) an insurance company pooled separate account, within
the meaning of PTE 90-1 (issued January 29, 1990), or (ii) a bank collective
investment fund, within the meaning of the PTE 91-38 (issued July 12, 1991) and,
except as you have disclosed to the Company in writing pursuant to this
paragraph (b), no employee benefit plan or group of plans maintained by the same
employer or employee organization beneficially owns more than 10% of all assets
allocated to such pooled separate account or collective investment fund; or
(c)
the Source constitutes assets of an investment fund (within the
meaning of Part V of the QPAM Exemption) managed by a qualified
professional asset manager or QPAM (within the meaning of Part
V of the QPAM Exemption), no employee benefit plans assets that are
included in such investment fund, when combined with the assets of all other
employee benefit plans established or maintained by the same employer or by an
affiliate (within the meaning of Section V(c)(1) of the QPAM Exemption) of such
employer or by the same employee organization and managed by such QPAM, exceed
20% of the total client assets managed by such QPAM, the conditions of Part I(c)
and (g) of the QPAM Exemption are satisfied, neither the QPAM nor a person
controlling or controlled by the QPAM (applying the definition of
control in Section V(e) of the QPAM Exemption) owns a 5% or more
interest in the Company and (i) the identity of such QPAM and
(ii) the names of all employee benefit plans whose assets are
included in such investment fund have been disclosed to the Company in writing
pursuant to this paragraph (c); or
(d)
the Source is a governmental plan; or
(e)
the Source does not include assets of any employee benefit plan, other than a
plan exempt from the coverage of ERISA.
As used in this Section 6.2, the
terms employee benefit plan, governmental plan and
separate account shall have the respective meanings assigned to such
terms in Section 3 of ERISA.
7. INFORMATION AS TO
COMPANY.
7.1 Financial and
Business Information.
The Company shall deliver to each
holder of Notes that is an Institutional Investor:
(a)
Quarterly Statements within 60 days (or if sooner, on the date
consolidated statements are required to be delivered to any other creditor of
the Company) after the end of each quarterly fiscal period in each fiscal year
of the Company (other than the last quarterly fiscal period of each such fiscal
year), duplicate copies of,
(i)
a consolidated and a consolidating balance sheet of the Company and its
Subsidiaries as at the end of such quarter, and
(ii)
consolidated and consolidating statements of income, changes in
shareholders equity and cash flows of the Company and its Subsidiaries,
for such quarter and (in the case of the second and third quarters) for the
portion of the fiscal year ending with such quarter,
setting forth in each case in
comparative form the figures for the corresponding periods in the previous fiscal year,
all in reasonable detail, prepared in accordance with GAAP applicable to quarterly
financial statements generally, and certified by a Senior Financial Officer as fairly
presenting, in all material respects, the financial position of the companies being
reported on and their results of operations and cash flows, subject to changes resulting
from year-end adjustments; provided that delivery within the time period specified
above of copies of the Companys Quarterly Report on Form 10-Q prepared in compliance
with the requirements therefor and filed with the Securities and Exchange Commission shall
be deemed to satisfy the requirements of this Section 7.1(a) to provide consolidated
financial statements so long as such Quarterly Report on Form 10-Q includes the
consolidated financial statements identified in clauses (i) and (ii) above;
provided further that such consolidating financial statements shall show the
elimination of all Unrestricted Subsidiaries and the resultant consolidated financial
statements of the Company and its Restricted Subsidiaries;
(b)
Annual Statements within 120 days (or if sooner, on the date
consolidated statements are required to be delivered to any other creditor of
the Company) after the end of each fiscal year of the Company, duplicate copies
of,
(i)
a consolidated and a consolidating balance sheet of the Company and its
Subsidiaries, as at the end of such year, and
(ii)
consolidated and consolidating statements of income, changes in
shareholders equity and cash flows of the Company and its Subsidiaries,
for such year,
setting forth in each case in
comparative form the figures for the previous fiscal year, all in reasonable detail,
prepared in accordance with GAAP, which consolidated financial statements shall be
accompanied by an opinion thereon of independent certified public accountants of
recognized national standing, which opinion shall state that such consolidated financial
statements present fairly, in all material respects, the financial position of the
companies being reported upon and their results of operations and cash flows and have been
prepared in conformity with GAAP, and that the examination of such accountants in
connection with such consolidated financial statements has been made in accordance with
generally accepted auditing standards, and that such audit provides a reasonable basis for
such opinion in the circumstances, and which consolidating financial statements shall be
certified by a Senior Financial Officer as fairly presenting, in all material respects,
the financial position of the companies being reported on and their results of operations
and cash flows, subject to changes resulting from year-end adjustments; provided
that the delivery within the time period specified above of the Companys Annual
Report on Form 10-K for such fiscal year (together with the Companys annual report
to shareholders, if any, prepared pursuant to Rule 14a-3 under the Exchange Act) prepared
in accordance with the requirements therefor and filed with the Securities and Exchange
Commission shall be deemed to satisfy the requirements of this Section 7.1(b) to provide
consolidated financial statements so long as such Annual Report on Form 10-K includes the
consolidated financial statements identified in clauses (i) and (ii) above;
provided further that such consolidating financial statements shall show the
elimination of all Unrestricted Subsidiaries and the resultant consolidated financial
statements of the Company and its Restricted Subsidiaries;
(c)
SEC and Other Reports promptly upon their becoming available, one
copy of (i) each financial statement, report, notice or proxy statement
sent by the Company or any Subsidiary to public securities holders generally,
and (ii) each regular or periodic report, each registration
statement (without exhibits except as expressly requested by such holder), and
each prospectus and all amendments thereto filed by the Company or any
Subsidiary with the Securities and Exchange Commission and of all press releases
and other statements made available generally by the Company or any Material
Domestic Subsidiary to the public concerning developments that are Material;
(d)
Notice of Default or Event of Default promptly, and in any event
within five days, after a Responsible Officer becoming aware of the existence of
any Default or Event of Default or that any Person has given any notice or taken
any action with respect to a claimed default hereunder or that any Person has
given any notice or taken any action with respect to a claimed default of the
type referred to in Section 11(f), a written notice specifying the nature and
period of existence thereof and what action the Company is taking or proposes to
take with respect thereto;
(e)
ERISA Matters promptly, and in any event within fifteen days after
a Responsible Officer becoming aware of any of the following, a written notice
setting forth the nature thereof and the action, if any, that the Company or an
ERISA Affiliate proposes to take with respect thereto:
(i)
with respect to any Plan, any reportable event, as defined in
section 4043(b) of ERISA and the regulations thereunder, for which notice
thereof has not been waived pursuant to such regulations as in effect on the
date hereof, which could reasonably be expected to have a Material Adverse
Effect; or
(ii)
the taking by the PBGC of steps to institute, or the threatening by the PBGC of
the institution of, proceedings under section 4042 of ERISA for the
termination of, or the appointment of a trustee to administer, any Plan, or the
receipt by the Company or any ERISA Affiliate of a notice from a Multiemployer
Plan that such action has been taken by the PBGC with respect to such
Multiemployer Plan, which could reasonably be expected to have a Material
Adverse Effect; or
(iii)
any event, transaction or condition that could result in the incurrence of any
liability by the Company or any ERISA Affiliate pursuant to Title I or IV of
ERISA or the penalty or excise tax provisions of the Code relating to employee
benefit plans, or in the imposition of any Lien on any of the rights, properties
or assets of the Company or any ERISA Affiliate pursuant to Title I or IV of
ERISA or such penalty or excise tax provisions, if such liability or Lien, taken
together with any other such liabilities or Liens then existing, could
reasonably be expected to have a Material Adverse Effect;
(f)
Notices from Governmental Authority promptly, and in any event
within 30 days of receipt thereof, copies of any notice to the Company or any
Subsidiary from any Federal or state Governmental Authority relating to any
order, ruling, statute or other law or regulation that could reasonably be
expected to have a Material Adverse Effect; and
(g)
Requested Information with reasonable promptness, such other data
and information relating to the business, operations, affairs, financial
condition, assets or properties of the Company or any of its Subsidiaries or
relating to the ability of the Company to perform its obligations hereunder and
under the Notes as from time to time may be reasonably requested by any such
holder of Notes, including without limitation, such information as is required
by Rule 144A promulgated under the Securities Act to be delivered to a
prospective transferee of the Notes.
7.2 Officers
Certificate.
Each set of financial statements
delivered to a holder of Notes pursuant to Section 7.1 hereof shall be accompanied by a
certificate of a Senior Financial Officer setting forth:
(a)
Covenant Compliance the information (including detailed
calculations) required in order to establish whether the Company was in
compliance with the requirements of Section 10.2 through Section 10.6 hereof,
inclusive, during the quarterly or annual period covered by the statements then
being furnished (including with respect to each such Section, where applicable,
the calculations of the maximum or minimum amount, ratio or percentage, as the
case may be, permissible under the terms of such Sections, and the calculation
of the amount, ratio or percentage then in existence); and
(b)
Event of Default a statement that such officer has reviewed the
relevant terms hereof and has made, or caused to be made, under his or her
supervision, a review of the transactions and conditions of the Company and its
Subsidiaries from the beginning of the quarterly or annual period covered by the
statements then being furnished to the date of the certificate and that such
review shall not have disclosed the existence during such period of any
condition or event that constitutes a Default or an Event of Default or, if any
such condition or event existed or exists (including, without limitation, any
such event or condition resulting from the failure of the Company or any
Subsidiary to comply with any Environmental Law), specifying the nature and
period of existence thereof and what action the Company shall have taken or
proposes to take with respect thereto.
7.3 Inspection.
The Company shall permit the
representatives of each holder of Notes that is an Institutional Investor:
(a)
No Default if no Default or Event of Default then exists, at the
expense of such holder and upon reasonable prior notice to the Company, to visit
the principal executive office of the Company, to discuss the affairs, finances
and accounts of the Company and its Subsidiaries with the Companys
officers, and (with the consent of the Company, which consent will not be
unreasonably withheld) its independent public accountants, and (with the consent
of the Company, which consent will not be unreasonably withheld) to visit the
other offices and properties of the Company and each Restricted Subsidiary, all
at such reasonable times during business hours and as often as may be reasonably
requested in writing; and
(b)
Default if a Default or Event of Default then exists, at the
expense of the Company to visit and inspect any of the offices or properties of
the Company or any Subsidiary, to examine all their respective books of account,
records, reports and other papers, to make copies and extracts therefrom, and to
discuss their respective affairs, finances and accounts with their respective
officers and independent public accountants (and by this provision the Company
authorizes said accountants to discuss the affairs, finances and accounts of the
Company and its Subsidiaries), all at such reasonable times and as often as may
be requested.
8.
PREPAYMENT OF THE NOTES.
8.1 Required Prepayments.
The Company shall make principal
prepayments on the Notes on the dates and in the amounts set forth below:
Prepayment
Date Amount
|
|
October 12, 2004 |
|
JP¥1,386,642,857 |
|
October 12, 2005 | |
JP¥1,386,642,857 | |
October 12, 2006 | |
JP¥1,386,642,857 | |
October 12, 2007 | |
JP¥1,386,642,858 | |
October 12, 2008 | |
JP¥1,386,642,857 | |
October 12, 2009 | |
JP¥1,386,642,857 | |
; provided that upon any
partial prepayment of the Notes pursuant to Section 8.2 or purchase of the Notes permitted
by Section 8.5, the principal amount of each required prepayment of the Notes
becoming due under this Section 8.1 on and after the date of such prepayment or
purchase, as well as the payment required at maturity, shall be reduced in the same
proportion as the aggregate unpaid principal amount of the Notes is reduced as a result of
such prepayment or purchase.
8.2 Optional Prepayments
with Make-Whole Amount.
(a)
Prepayment Amount. The Company may, at its option, upon notice as
provided below, prepay on any Business Day all, or from time to time any part
of, the Notes in an amount not less than 5% of the aggregate principal amount of
the Notes then outstanding in the case of a partial prepayment, at 100% of the
principal amount so prepaid, plus accrued interest thereon, plus the Make-Whole
Amount determined for the prepayment date with respect to such principal amount.
(b)
Notice. The Company will give each holder of Notes written notice of each
optional prepayment under this Section 8.2 not less than 30 days and not more
than 60 days prior to the Business Day fixed for such prepayment. Each such
notice shall specify the prepayment date, the aggregate principal amount of the
Notes to be prepaid on such date, the principal amount of each Note held by such
holder to be prepaid (determined in accordance with Section 8.3), and the
interest to be paid on the prepayment date with respect to such principal amount
being prepaid, and shall be accompanied by a certificate of a Senior Financial
Officer as to the estimated Make-Whole Amount due in connection with such
prepayment (calculated as if the date of such notice were the date of the
prepayment), setting forth the details of such computation. Two Business Days
prior to such prepayment, the Company shall deliver to each holder of Notes a
certificate of a Senior Financial Officer specifying the calculation of such
Make-Whole Amount as of the specified prepayment date.
8.3 Allocation of
Partial Prepayments.
In the case of each partial
prepayment of the Notes, the principal amount of the Notes to be prepaid shall be
allocated among all of the Notes at the time outstanding in proportion, as nearly as
practicable, to the respective unpaid principal amounts thereof not theretofore called for
prepayment.
8.4 Maturity; Surrender,
etc.
In the case of each prepayment of
Notes pursuant to this Section 8, the principal amount of each Note to be prepaid shall
mature and become due and payable on the date fixed for such prepayment, together with
interest on such principal amount accrued to such date and the applicable Make-Whole
Amount, if any. From and after such date, unless the Company shall fail to pay such
principal amount when so due and payable, together with the interest and Make-Whole
Amount, if any, as aforesaid, interest on such principal amount shall cease to accrue. Any
Note paid or prepaid in full shall be surrendered to the Company and cancelled and shall
not be reissued, and no Note shall be issued in lieu of any prepaid principal amount of
any Note.
8.5 Purchase of Notes.
The Company will not and will not
permit any Affiliate to purchase, redeem, prepay or otherwise acquire, directly or
indirectly, any of the outstanding Notes except upon the payment or prepayment of the
Notes in accordance with the terms of this Agreement and the Notes. The Company will
promptly cancel all Notes acquired by it or any Affiliate pursuant to any payment,
prepayment or purchase of Notes pursuant to any provision of this Agreement and no Notes
may be issued in substitution or exchange for any such Notes.
8.6 Make-Whole Amount.
The term Make-Whole
Amount means, with respect to any Note, an amount equal to the excess, if any,
of the Discounted Value of the Remaining Scheduled Payments with respect to the Called
Principal of such Note over the amount of such Called Principal; provided that the
Make-Whole Amount may in no event be less than zero. For the purposes of determining the
Make-Whole Amount, the following terms have the following meanings:
Called Principal
means, with respect to any Note, the principal of such Note that is to be prepaid pursuant
to Section 8.2 or has become or is declared to be immediately due and payable
pursuant to Section 12.1, as the context requires.
Discounted Value
means, with respect to the Called Principal of any Note, the amount obtained by
discounting all Remaining Scheduled Payments with respect to such Called Principal from
their respective scheduled due dates to the Settlement Date with respect to such Called
Principal, in accordance with accepted financial practice and at a discount factor
(applied on the same periodic basis as that on which interest on the Notes is payable)
equal to the Reinvestment Yield with respect to such Called Principal.
Reinvestment Yield
means, with respect to the Called Principal of any Note, (i) the rate of the benchmark
Japanese Government Bond reported, as of 10:00 a.m. (New York time)on the second Business
Day preceding the Settlement Date with respect to such Called Principal, on the display
designated as Page 0#JPBMK= on the Reuters Screen (or such other display as
may replace Page 0#JPBMK= on the Reuters Screen) for the benchmark Japanese
Government Bond having a maturity equal to the Remaining Average Life of such Called
Principal as of such Settlement Date, or (ii) if such rate is note reported as of such
time or the rate reported is not ascertainable, the average of the rates as determined by
at least three recognized market makers in the Japanese Government Bond market. Such rate
will be determined, if necessary, by interpolating linearly between (1) the benchmark
Japanese Government Bond with the maturity closest to and greater than the Remaining
Average life, and (2) the benchmark Japanese Government Bond with the maturity closest to
and less than the Remaining Average Life.
Remaining Average
Life means, with respect to any Called Principal, the number of years
(calculated to the nearest one-twelfth year) obtained by dividing (i) such Called
Principal into (ii) the sum of the products obtained by multiplying (a) the
principal component of each Remaining Scheduled Payment with respect to such Called
Principal by (b) the number of years (calculated to the nearest one-twelfth year)
that will elapse between the Settlement Date with respect to such Called Principal and the
scheduled due date of such Remaining Scheduled Payment.
Remaining Scheduled
Payments means, with respect to the Called Principal of any Note, all payments
of such Called Principal and interest thereon that would be due after the Settlement Date
with respect to such Called Principal if no payment of such Called Principal were made
prior to its scheduled due date, provided that if such Settlement Date is not a
date on which interest payments are due to be made under the terms of the Notes, then the
amount of the next succeeding scheduled interest payment will be reduced by the amount of
interest accrued to such Settlement Date and required to be paid on such Settlement Date
pursuant to Section 8.2 or 12.1.
Settlement Date
means, with respect to the Called Principal of any Note, the date on which such Called
Principal is to be prepaid pursuant to Section 8.2 or has become or is declared to be
immediately due and payable pursuant to Section 12.1, as the context requires.
9. AFFIRMATIVE COVENANTS.
The Company covenants that so long as
any of the Notes are outstanding:
9.1 Compliance with Law.
The Company will and will cause each
of its Subsidiaries to comply with all laws, ordinances or governmental rules or
regulations to which each of them is subject, including, without limitation, Environmental
Laws, and will obtain and maintain in effect all licenses, certificates, permits,
franchises and other governmental authorizations necessary to the ownership of their
respective properties or to the conduct of their respective businesses, in each case to
the extent necessary to ensure that non-compliance with such laws, ordinances or
governmental rules or regulations or failures to obtain or maintain in effect such
licenses, certificates, permits, franchises and other governmental authorizations could
not, individually or in the aggregate, reasonably be expected to have a Material Adverse
Effect.
9.2 Insurance.
The Company will and will cause each
of the Restricted Subsidiaries to maintain, with financially sound and reputable insurers,
insurance with respect to their respective properties and businesses against such
casualties and contingencies, of such types, on such terms and in such amounts (including
deductibles, co-insurance and self-insurance, if adequate reserves are maintained with
respect thereto) as is customary in the case of entities of established reputations
engaged in the same or a similar business and similarly situated.
9.3 Maintenance of
Properties.
The Company will and will cause each
of the Restricted Subsidiaries to maintain and keep, or cause to be maintained and kept,
their respective properties in good repair, working order and condition (other than
ordinary wear and tear), so that the business carried on in connection therewith may be
properly conducted at all times, provided that this Section shall not prevent the
Company or any Restricted Subsidiary from discontinuing the operation and the maintenance
of any of its properties if such discontinuance is desirable in the conduct of its
business and the Company has concluded that such discontinuance could not, individually or
in the aggregate, reasonably be expected to have a Material Adverse Effect.
9.4 Payment of Taxes and
Claims.
The Company will and will cause each
of its Subsidiaries to file all tax returns required to be filed in any jurisdiction and
to pay and discharge all taxes shown to be due and payable on such returns and all other
taxes, assessments, governmental charges, or levies imposed on them or any of their
properties, assets, income or franchises, to the extent such taxes and assessments have
become due and payable and before they have become delinquent and all claims for which
sums have become due and payable that have or might become a Lien on properties or assets
of the Company or any Subsidiary, provided that neither the Company nor any
Subsidiary need pay any such tax or assessment or claims if (i) the amount,
applicability or validity thereof is contested by the Company or such Subsidiary on a
timely basis in good faith and in appropriate proceedings, and the Company or such
Subsidiary has established adequate reserves therefor in accordance with GAAP on the books
of the Company or such Subsidiary, or (ii) the nonpayment of all such taxes
and assessments and claims in the aggregate could not reasonably be expected to have a
Material Adverse Effect.
9.5 Corporate Existence,
etc.
The Company will at all times
preserve and keep in full force and effect its corporate existence. Subject to Section
10.2, the Company will at all times preserve and keep in full force and effect the
corporate existence of each Restricted Subsidiary (unless merged into the Company or a
Restricted Subsidiary) and all rights and franchises of the Company and the Restricted
Subsidiaries unless, in the good faith judgment of the Company, the termination of or
failure to preserve and keep in full force and effect such corporate existence, right or
franchise could not, individually or in the aggregate, have a Material Adverse Effect.
9.6 Security; Execution
of Pledge Agreement and Subsidiary Guaranty.
(a)
The Notes and other Senior Secured Indebtedness will be secured by the Pledged
Securities of each Material Foreign Subsidiary. Within 5 days after the Company
or any of its Restricted Subsidiaries acquires a Material Foreign Subsidiary or
within 5 days after the Company delivers consolidating financial statements
pursuant to Section 7.1 showing that any of Companys existing Subsidiaries
has become a Material Foreign Subsidiary, the Company shall cause the Pledged
Securities of such Material Foreign Subsidiary to be pledged pursuant to a
supplement to the Pledge Agreement (unless a pledge of such Pledged Securities
(x) is legally unobtainable or (y) the consent of a governmental authority is
required in order to obtain such pledge and such consent has not been obtained
after the Companys commercially reasonable efforts to obtain such consent,
and Company delivers an opinion of outside counsel, in form and substance
reasonably satisfactory to the holders of the Notes and their counsel, to the
effect that such pledge was not legally obtainable or such consent was not
obtained). The Company shall promptly take all actions as may be necessary or
desirable to give to the Collateral Agent, for the ratable benefit of the
holders of the Notes and the other Senior Secured Creditors, a valid and
perfected first priority Lien on and security interest in the Pledged Securities
of such Material Foreign Subsidiary and shall promptly deliver to the holders of
the Notes (i) a supplement to the Pledge Agreement executed by each
Pledgor of the Pledged Securities of such Material Foreign Subsidiary,
(ii) a certificate executed by the secretary or an assistant secretary of
each Pledgor as to (a) the incumbency and signatures of the officers of
such Pledgor executing the supplement to the Pledge Agreement, and (b)
the fact that the attached resolutions of the Board of Directors of such Pledgor
authorizing the execution, delivery and performance of the supplement to the
Pledge Agreement are in full force and effect and have not been modified or
rescinded, (iii) at the request of a holder of any Note, a favorable
opinion of counsel, in form and substance reasonably satisfactory to the holders
of the Notes and their counsel, as to (a) the due organization and good
standing of such Pledgor, (b) the due authorization, execution and
delivery by such Pledgor of the supplement to the Pledge Agreement, (c)
the enforceability of the supplement to the Pledge Agreement, and (d)
such other matters as the Required Holders may reasonably request, all of the
foregoing to be satisfactory in form and substance to the holders of the Notes
and their counsel; provided that the opinion described in this clause
(iii) may be given by the Companys in-house counsel and may contain
reasonable assumptions, if necessary, relating to the fact that such counsel may
not be admitted to practice law in the applicable jurisdiction, and (iv)
such other assurances, certificates, documents, consents or opinions as the
Required Holders reasonably may require.
(b)
Within 5 days after the Company or any of its Restricted Subsidiaries acquires a
Material Domestic Subsidiary or within 5 days after the Company delivers
consolidating financial statements pursuant to Section 7.1 showing that any of
Companys existing Subsidiaries has become a Material Domestic Subsidiary
(but not later than the time when such Material Domestic Subsidiary provides a
guaranty or co-obligor agreement to the lenders party to any Significant Credit
Facility) the Company will (x) cause such Material Domestic Subsidiary to
execute and deliver to the holders of the Notes a counterpart of the Subsidiary
Guaranty, and (y) if the lenders party to such Significant Credit Facility are
not then party to the Collateral Agency and Intercreditor Agreement (either
directly or through their agent) cause such lenders (either directly or through
their agent) to become party to the Collateral Agency and Intercreditor
Agreement. The Company shall promptly deliver to the holders of the Notes,
together with such counterpart of the Subsidiary Guaranty (i) certified
copies of such Material Domestic Subsidiarys Articles or Certificate of
Incorporation, together with a good standing certificate from the Secretary of
State of the jurisdiction of its incorporation, each to be dated a recent date
prior to their delivery to the holders of the Notes, (ii) a copy of such
Material Domestic Subsidiarys Bylaws, certified by its corporate secretary
or an assistant corporate secretary as of a recent date prior to their delivery
to the holders of the Notes, (iii) a certificate executed by the
secretary or an assistant secretary of such Material Domestic Subsidiary as to
(a) the incumbency and signatures of the officers of such Material
Domestic Subsidiary executing the counterpart of the Subsidiary Guaranty, and
(b) the fact that the attached resolutions of the Board of Directors of
such Material Domestic Subsidiary authorizing the execution, delivery and
performance of the counterpart of the Subsidiary Guaranty are in full force and
effect and have not been modified or rescinded, (iv) at the request of a
holder of any Note, a favorable opinion of counsel to the Company and such
Material Domestic Subsidiary, in form and substance reasonably satisfactory to
the holders of the Notes and their counsel, as to (a) the due
organization and good standing of such Material Domestic Subsidiary, (b)
the due authorization, execution and delivery by such Material Domestic
Subsidiary of the counterpart of the Subsidiary Guaranty, (c) the
enforceability of the counterpart of the Material Domestic Subsidiary, and
(d) such other matters as the Required Holders may reasonably request,
all of the foregoing to be satisfactory in form and substance to the holders of
the Notes and their counsel; provided, that the opinion described in
clause (iv) above may be given by the Companys in-house counsel and
may contain reasonable assumptions, if necessary, relating to the fact that
counsel to the Company and such Material Domestic Subsidiary may not be admitted
to practice law in the applicable jurisdiction, and (v) such other assurances,
certificates, documents, consents or opinions as the Required Holders reasonably
may require.
9.7 Termination of the
Existing Credit Facility and Related Liens.
Within 5 Business Days of the date of
Closing, the Company will provide you with satisfactory evidence that the Company has (i)
repaid in full all Indebtedness outstanding under the Existing Credit Facility, (ii)
terminated any commitments to lend or make other extensions of credit under the Existing
Credit Facility, (iii) delivered to the Collateral Agent all documents or instruments
necessary to release all Liens securing Indebtedness or other obligations of the Company
under the Existing Credit Facility, and (iv) made arrangements satisfactory to the
Collateral Agent with respect to the cancellation of any letters of credit outstanding
under the Existing Credit Facility.
10. NEGATIVE COVENANTS.
The Company covenants that so long as
any of the Notes are outstanding:
10.1 Transactions with
Affiliates.
The Company will not and will not
permit any Restricted Subsidiary to enter into, directly or indirectly, any Material
transaction or Material group of related transactions (including without limitation the
purchase, lease, sale or exchange of properties of any kind or the rendering of any
service) with any Affiliate (other than the Company or another Restricted Subsidiary),
except as approved by a majority of the disinterested directors of the Company, and upon
fair and reasonable terms no less favorable to the Company or such Restricted Subsidiary
than would be obtainable in a comparable arms-length transaction with a Person not
an Affiliate; provided that the foregoing restrictions shall not apply to Standard
Securitization Undertakings effected as part of a Permitted Securitization Program.
10.2 Merger,
Consolidation, Sale of Assets, etc.
(a)
The Company will not and will not permit any Restricted Subsidiary to
consolidate with or merge with any other Person unless immediately after giving
effect to any consolidation or merger no Default or Event of Default would exist
and:
(i)
in the case of a consolidation or merger of a Restricted Subsidiary, (x) the
Company or another Restricted Subsidiary is the surviving or continuing
corporation, (y) the surviving or continuing corporation is or immediately
becomes a Restricted Subsidiary, or (z) such consolidation or merger, if
considered as the sale of the assets of such Restricted Subsidiary to such other
Person, would be permitted by Section 10.2(c); and
(ii)
in the case of a consolidation or merger of the Company, the successor
corporation or surviving corporation which results from such
consolidation or merger (the surviving corporation), if not
the Company, (A) is a solvent U.S. corporation, (B) executes and delivers to
each holder of the Notes its assumption of (x) the due and punctual payment of
the principal of and premium, if any, and interest on all of the Notes, and (y)
the due and punctual performance and observation of all of the covenants in this
Agreement, the Collateral Documents and the Notes to be performed or observed by
the Company, and (C) furnishes to each holder of the Notes an opinion of
counsel, reasonably satisfactory to the Required Holders, to the effect that the
instrument of assumption has been duly authorized, executed and delivered and
constitutes the legal, valid and binding contract and agreement of the surviving
corporation enforceable in accordance with its terms, except as enforcement of
such terms may be limited by bankruptcy, insolvency, reorganization, moratorium
and similar laws affecting the enforcement of creditors rights generally
and by general equitable principles.
(b)
The Company will not sell, lease (as lessor) or otherwise transfer all or
substantially all of its assets in a single transaction or series of
transactions to any Person unless immediately after giving effect thereto no
Default or Event of Default would exist and:
(i)
the successor corporation to which all or substantially all of the
Companys assets have been sold, leased or transferred (the
successor corporation) is a solvent U.S. corporation, and
(ii)
the successor corporation executes and delivers to each holder of the Notes its
assumption of the due and punctual payment of the principal of and premium, if
any, and interest on all of the Notes, and the due and punctual performance and
observation of all of the covenants in this Agreement, the Collateral Documents
and the Notes to be performed or observed by the Company and shall furnish to
such holders an opinion of counsel, reasonably satisfactory to the Required
Holders, to the effect that the instrument of assumption has been duly
authorized, executed and delivered and constitutes the legal, valid and binding
contract and agreement of such successor corporation enforceable in accordance
with its terms, except as enforcement of such terms may be limited by
bankruptcy, insolvency, reorganization, moratorium and similar laws affecting
the enforcement of creditors rights generally and by general equitable
principles.
No such conveyance, transfer or lease
of all or substantially all of the assets of the Company shall have the effect of
releasing the Company or any successor corporation that shall theretofore have become such
in the manner prescribed in this Section 10.2 from its liability under this Agreement or
the Notes.
(c)
The Company will not, and will not permit any Restricted Subsidiary to, sell,
lease (as lessor), transfer, abandon or otherwise dispose of assets to any
Person; provided that the foregoing restrictions do not apply to:
(i)
the sale, lease, transfer or other disposition of assets of the Company to a
Restricted Subsidiary or of a Restricted Subsidiary to the Company or another
Restricted Subsidiary;
(ii)
the sale in the ordinary course of business of inventory held for sale, or
equipment, fixtures, supplies or materials that are no longer required in the
operation of the business of the Company or any Restricted Subsidiary or are
obsolete;
(iii)
the sale of property of the Company or any Restricted Subsidiary and the
Companys or any Restricted Subsidiarys subsequent lease, as lessee,
of the same property, within 270 days following the acquisition or construction
of such property;
(iv)
the sale of assets of the Company or any Restricted Subsidiary for cash or other
property to a Person or Persons (other than an Affiliate) if (A) such assets
(valued at net book value) do not constitute a substantial part of
the assets of the Company and the Restricted Subsidiaries, (B) in the opinion of
a Responsible Officer of the Company, the sale is for fair value and is in the
best interests of the Company, and (C) immediately after giving effect to the
transaction, no Default or Event of Default would exist; or
(v)
the sale of assets meeting the conditions set forth in clauses (B) and (C) of
subparagraph (iv) above, as long as the net proceeds from such sale in excess of
a substantial part of the assets of the Company and the Restricted Subsidiaries
are (x) applied within 270 days of the date of receipt to the acquisition of
productive assets useful and intended to be used in the operation of the
business of the Company or the Restricted Subsidiaries, or (y) used to repay any
Indebtedness of the Company (which in the case of the Notes shall be with the
Make-Whole Amount) or the Restricted Subsidiaries (other than Indebtedness that
is in any manner subordinated in right of payment or security in any respect to
Indebtedness evidenced by the Notes, Indebtedness owing to the Company, any of
its Subsidiaries or any Affiliate and Indebtedness in respect of any revolving
credit or similar credit facility providing the Company or any of the Restricted
Subsidiaries with the right to obtain loans or other extensions of credit from
time to time, except to the extent that in connection with such payment of
Indebtedness the availability of credit under such credit facility is
permanently reduced not later than 270 days after the date of receipt of such
proceeds by an amount not less than the amount of such proceeds applied to the
payment of such Indebtedness).
(d)
For purposes of Section 10.2(c), a sale of assets will be deemed to involve a
substantial part of the assets of the Company and the
Restricted Subsidiaries if the book value of such assets, together with all
other assets sold during such fiscal year (except those assets sold pursuant to
clauses (i) through (iii) of Section 10.2(c)), exceeds 10% of the Consolidated
Total Assets of the Company and the Restricted Subsidiaries determined as of the
end of the immediately preceding fiscal year.
(e)
The Company will not, and will not permit any Restricted Subsidiary to, issue
shares of stock (or any options or warrants to purchase stock or other
Securities exchangeable for or convertible into stock) of any Restricted
Subsidiary except (i) to the Company, (ii) to a Wholly-Owned Restricted
Subsidiary, (iii) to any Restricted Subsidiary that owns equity in the
Restricted Subsidiary issuing such equity, or (iv) with respect to a Restricted
Subsidiary that is a partnership or joint venture, to any other Person who is a
partner or equity owner if such issuance is made pursuant to the terms of the
Joint Venture Agreement or Partnership Agreement entered into in connection with
the formation of such partnership or joint venture; provided, that
Restricted Subsidiaries may issue directors qualifying shares and shares
required to be issued by any applicable foreign law regarding foreign ownership
requirements. The Company will not, and will not permit any Restricted
Subsidiary to sell, transfer or otherwise dispose of its interest in any stock
(or any options or warrants to purchase stock or other Securities exchangeable
for or convertible into stock) of any Restricted Subsidiary (except to the
Company or a Wholly-Owned Restricted Subsidiary) unless such sale, transfer or
disposition would be permitted under Section 10.2(c).
10.3 Liens.
The Company will not and will not
permit any of the Restricted Subsidiaries to directly or indirectly create, incur, assume
or permit to exist (upon the happening of a contingency or otherwise) any Lien on or with
respect to any property or asset (including, without limitation, any document or
instrument in respect of goods or accounts receivable) of the Company or any Restricted
Subsidiary, whether now owned or hereafter acquired, or any income or profits therefrom
(unless the Company makes, or causes to be made, effective provision whereby the Notes
will be equally and ratably secured with any and all other obligations thereby secured,
such security to be pursuant to an agreement reasonably satisfactory to the Required
Holders and, in any such case, the Notes shall have the benefit, to the fullest extent
that, and with such priority as, the holders of the Notes may be entitled under applicable
law, of any equitable Lien on such property), except for the following (which are
collectively referred to as Permitted Liens):
(a)
Liens for taxes, assessments or other governmental charges which are not yet
delinquent or that are being contested in good faith;
(b)
Liens incidental to the conduct of business or the ownership of properties and
assets (including landlords, carriers, warehousemens,
mechanics materialmens, and other similar Liens) and Liens to secure
the performance of bids, tenders, leases or trade contracts, or to secure
statutory obligations (including obligations under workers compensation,
unemployment insurance and other social security legislation), surety or appeal
bonds or other Liens incurred in the ordinary course of business and not in
connection with the borrowing of money;
(c)
Liens resulting from judgments, unless such judgments are not, within 60 days,
discharged or stayed pending appeal, or shall not have been discharged within 60
days after the expiration of any such stay;
(d)
Liens securing Indebtedness of a Restricted Subsidiary owed to the Company or to
a Wholly-Owned Restricted Subsidiary;
(e)
Liens in existence at Closing and reflected in Schedule 10.3 hereto;
(f)
minor survey exceptions and the like which do not Materially detract from the
value of such property;
(g)
leases, subleases, easements, rights of way, restrictions and other similar
charges or encumbrances incidental to the ownership of property or assets or the
ordinary conduct of the Companys or any of the Restricted
Subsidiaries businesses, provided that the aggregate of such Liens
do not Materially detract from the value of such property;
(h)
Liens (i) existing on property at the time of its acquisition or construction by
the Company or a Restricted Subsidiary and not created in contemplation thereof;
(ii) on property created contemporaneously with its acquisition or within 180
days of the acquisition or completion of construction or improvement thereof to
secure the purchase price or cost of construction or improvement thereof,
including such Liens arising under Capital Leases; or (iii) existing on property
of a Person at the time such Person is acquired by, consolidated with, or merged
into the Company or a Restricted Subsidiary and not created in contemplation
thereof; provided that such Liens shall attach solely to the property
acquired or constructed and the principal amount of the Indebtedness secured by
the Lien shall not exceed the principal amount of such Indebtedness just prior
to the time such Person is consolidated with or merged into the Company or a
Restricted Subsidiary;
(i)
Liens on receivables of the Company or a Restricted Subsidiary and the related
assets of the type specified in clauses (A) through (D) in the definition of
Permitted Securitization Program in connection with any Permitted
Securitization Program;
(j)
Liens in favor of the holders of the Notes and the other Senior Secured
Creditors party to the Collateral Agency and Intercreditor Agreement in
connection with the pledge of the Pledged Securities of each Material Foreign
Subsidiary;
(k)
bankers Liens and similar Liens (including set-off rights) in respect of
bank deposits; provided, however, that any such Liens held by
parties to the Collateral Agency and Intercreditor Agreement will be governed by
and subject to the Collateral Agency and Intercreditor Agreement;
(l)
Liens in favor of customs and revenue authorities as a matter of law to secure
payment of custom duties and in connection with the importation of goods in the
ordinary course of the Companys and its Subsidiaries business;
(m)
any Lien renewing, extending or replacing Liens permitted by Sections 10.3(e),
(h), and (i), provided that (i) the principal amount of the
Indebtedness secured is neither increased nor the maturity thereof changed to an
earlier date, (ii) such Lien is not extended to any other property, and
(iii) immediately after such extension, renewal or refunding, no Default
or Event of Default would exist; and
(n)
other Liens securing Indebtedness not otherwise permitted by paragraphs (a)
through (m) of this Section 10.3, provided that Priority Indebtedness
shall not, at any time, exceed an amount equal to 13% of Consolidated Net Worth.
Any Lien originally incurred in
compliance with paragraph (n) of this Section 10.3 may be renewed, extended or replaced so
long as the conditions set forth in subparagraphs (i), (ii) and (iii)
of paragraph (m) of this Section 10.3 are satisfied.
10.4 Minimum
Consolidated Net Worth.
The Company will not, at any time, permit
Consolidated Net Worth to be less than the sum of (i) $271,935,200, (ii) an
aggregate amount equal to 60% of Consolidated Net Income (but, in each case, only if a
positive number) earned in (a) the six months ended December 31, 2000, and (b) each
complete fiscal year thereafter, and (iii) 50% of the net proceeds realized by the
Company and its Restricted Subsidiaries from the sale of Equity Securities
subsequent to June 30, 2000, excluding issuances of Equity Securities upon exercise
of employee stock options or rights under any employee benefit plans (excluding such
exercise by any Person who owns greater than 5% of the Equity Securities of the Company),
issuances of Equity Securities in connection with acquisitions by the Company and its
Restricted Subsidiaries, and reissuances of up to $60,000,000 of treasury securities
purchased by the Company after the date of Closing.
10.5 Limitation on
Indebtedness.
(a)
The Company will not permit at any time (i) the ratio of Total
Indebtedness to EBITDA for the four most recently ended fiscal quarters of the
Company to be greater than 1.85 to 1.0, or (ii) Priority Indebtedness to
exceed 13% of Consolidated Net Worth.
(b)
The Company will not, and will not permit any Restricted Subsidiary to, incur,
create or assume any Term Debt during the one year period immediately following
the Closing unless (i) the aggregate principal amortization of all such Term
Debt in any year does not exceed $30,000,000, and (ii) such Term Debt has at the
time of issuance a longer average life to maturity than the remaining average
life to maturity of the Notes then outstanding.
(c)
The Company will not, and will not permit any Restricted Subsidiary to, incur,
assume or create any Indebtedness under any Significant Credit Facility unless
each of the lenders under such Significant Credit Facility immediately becomes a
party to the Collateral Agency and Intercreditor Agreement.
10.6 Minimum Fixed
Charges Coverage.
The Company will not permit, as of
the end of each fiscal quarter of the Company, the ratio of Consolidated Income Available
for Fixed Charges to Fixed Charges, for the period consisting of such fiscal quarter and
the preceding three fiscal quarters, to be less than 2.75 to 1.0.
10.7 Nature of the
Business.
The Company will not, and will not
permit any Restricted Subsidiary, to engage in any business if, as a result, the general
nature of the business of the Company and the Restricted Subsidiaries, taken as a whole,
which would then be engaged in by the Company and the Restricted Subsidiaries would be
substantially changed from the general nature of the business engaged in by the Company
and the Restricted Subsidiaries, taken as a whole, on the date of the Closing.
10.8 Designation of
Restricted and Unrestricted Subsidiaries.
The Company may designate in writing
to each of the holders of the Notes any Unrestricted Subsidiary as a Restricted Subsidiary
and may designate in writing to each of the holders of the Notes any Restricted Subsidiary
as an Unrestricted Subsidiary; provided that (i) no such designation of a
Restricted Subsidiary as an Unrestricted Subsidiary shall be effective unless (A) such
designation is treated as a transfer under Section 10.2 and such designation is permitted
by Section 10.2, and (B) such Subsidiary does not own any stock, other equity interest or
Indebtedness of the Company or a Restricted Subsidiary; and (ii) no such designation shall
be effective unless, immediately after giving effect thereto no Default or Event of
Default would exist; provided, further, that any Subsidiary that has been
designated as a Restricted Subsidiary or an Unrestricted Subsidiary may not thereafter be
redesignated as a Restricted Subsidiary or an Unrestricted Subsidiary, as the case may be,
more than once; and provided, further, that no Securitization Entity
shall be a Restricted Subsidiary unless designated as such by the Company. Notwithstanding
anything to the contrary in this Agreement, upon any Unrestricted Subsidiary becoming a
Material Subsidiary, it shall immediately be deemed to be a Restricted Subsidiary.
10.9 Limitation on Swap
Agreements.
The Company will not, and will not
permit any Restricted Subsidiary to, have any obligations (contingent or otherwise)
existing or arising under any Swap Agreement, unless such obligations are (or were)
entered into by such Person in the ordinary course of business for the purpose of
mitigating risks associated with liabilities, commitments or assets held by such Person,
and not for purposes of speculation.
10.10 Limitation on
Restricted Payments.
The Company will not, and will not
permit any Restricted Subsidiary to, do any of the following if a Default or Event of
Default exists or would exist immediately after giving effect thereto:
(a)
Declare or pay any dividends, either in cash or property, on any shares of
capital stock of any class of the Company or any Restricted Subsidiary (except
(i) dividends or other distributions payable solely in shares of common stock,
and (ii) dividends and distributions paid by a Restricted Subsidiary solely to
the Company or a Wholly-Owned Restricted Subsidiary); or
(b)
Directly or indirectly, or through any Restricted Subsidiary, purchase, redeem
or retire any shares of capital stock of any class of the Company or any
Restricted Subsidiary or any warrants, rights or options to purchase or acquire
any shares of capital stock of the Company or any Restricted Subsidiary; or
(c)
Make any other payment or distribution, either directly or indirectly or through
any Restricted Subsidiary, in respect of capital stock of any class of the
Company or any Restricted Subsidiary (except payments and distributions made by
a Restricted Subsidiary solely to the Company or a Wholly-Owned Restricted
Subsidiary).
10.11 Most Favored
Lender.
If the Company creates, incurs or
assumes any Term Debt within the one year period immediately following the Closing,
and any such Term Debt has financial or operational covenants other than as set forth in
this Section 10, or more favorable to the lender or creditor thereunder than those set
forth in this Section 10, then this Section 10 shall be deemed to be automatically amended
to include such other or more favorable covenants, such amendment to be effective as of
the date of such incurrence, creation or assumption, and such other or more favorable
covenants as incorporated into this Section 10 may not thereafter be modified without the
written consent of the Required Holders.
11. EVENTS OF DEFAULT.
An Event of
Default shall exist if any of the following conditions or events shall occur and
be continuing:
(a)
the Company defaults in the payment of any principal or Make-Whole Amount, if
any, on any Note when the same becomes due and payable, whether at maturity or
at a date fixed for prepayment or by declaration or otherwise; or
(b)
the Company defaults in the payment of any interest on any Note or any amount
payable under Section 14.4 for more than five Business Days after the same
becomes due and payable; or
(c)
the Company defaults in the performance of or compliance with any term contained
in Section 10; or
(d)
the Company or any of its Subsidiaries defaults in the performance of or
compliance with any term contained herein (other than those referred to in
paragraphs (a), (b) and (c) of this Section 11) or in any Collateral
Document and such default is not remedied within 30 days after the earlier of
(i) a Responsible Officer obtaining actual knowledge of such
default, and (ii) the Company or such Subsidiary receiving written
notice of such default from any holder of a Note (any such written notice to be
identified as a notice of default and to refer specifically to this
paragraph (d) of Section 11); or
(e)
any representation or warranty made in writing by or on behalf of the Company or
any Subsidiary Guarantor or by any officer of the Company or any Subsidiary
Guarantor in this Agreement, the Collateral Documents or in any writing
furnished in connection with the transactions contemplated hereby or thereby
proves to have been false or incorrect in any material respect on the date as of
which made; or
(f)
(i) the Company or any Restricted Subsidiary is in default (as principal
or as guarantor or other surety) in the payment of any principal of or premium
or make-whole amount or interest on any Indebtedness beyond any period of grace
provided with respect thereto, or (ii) the Company or any Restricted
Subsidiary is in default for more than 20 Business Days in the performance of or
compliance with any term of any evidence of any Indebtedness or of any mortgage,
indenture or other agreement relating thereto or any other condition exists, and
as a consequence of such default or condition (x) such Indebtedness has become,
or has been declared (or one or more Persons are entitled to declare such
Indebtedness to be) due and payable before its stated maturity or before its
regularly scheduled dates of payment, or (y) one or more Persons have the right
to require the Company or any Restricted Subsidiary to purchase or repay such
Indebtedness, or (iii) as a consequence of the occurrence or continuation
of any event or condition (other than the passage of time or the right of the
holder of Indebtedness to convert such Indebtedness into equity interests), (x)
the Company or any Restricted Subsidiary has become obligated to purchase or
repay any Indebtedness before its regular maturity or before its regularly
scheduled dates of payment, or (y) one or more Persons have exercised any right
to require the Company or any Restricted Subsidiary to purchase or repay such
Indebtedness, provided that the aggregate amount of all foregoing
Indebtedness with respect to which a payment, performance or compliance default
shall have occurred or a failure or other event causing or permitting the
purchase or repayment by the Company or any Restricted Subsidiary shall have
occurred exceeds $7,500,000; or
(g)
the Company or any Material Subsidiary (i) is generally not paying,
or admits in writing its inability to pay, its debts as they become due,
(ii) files, or consents by answer or otherwise to the filing against
it of, a petition for relief or reorganization or arrangement or any other
petition in bankruptcy, for liquidation or to take advantage of any bankruptcy,
insolvency, reorganization, moratorium or other similar law of any jurisdiction,
(iii) makes an assignment for the benefit of its creditors,
(iv) consents to the appointment of a custodian, receiver, trustee
or other officer with similar powers with respect to it or with respect to any
substantial part of its property, (v) is adjudicated as insolvent or
to be liquidated, or (vi) takes corporate action for the purpose of
any of the foregoing; or
(h)
a court or governmental authority of competent jurisdiction enters an order
appointing, without consent by the Company or any Material Subsidiary, a
custodian, receiver, trustee or other officer with similar powers with respect
to it or with respect to any substantial part of its property, or constituting
an order for relief or approving a petition for relief or reorganization or any
other petition in bankruptcy or for liquidation or to take advantage of any
bankruptcy or insolvency law of any jurisdiction, or ordering the dissolution,
winding-up or liquidation of the Company or any Material Subsidiary, or any such
petition shall be filed against the Company or any Material Subsidiary and such
petition shall not be dismissed within 60 days; or
(i)
a final judgment or judgments for the payment of money aggregating in excess of
$10,000,000 are rendered against one or more of the Company and any Restricted
Subsidiary and which judgments are not, within 60 days after entry thereof,
bonded, discharged or stayed pending appeal, or are not discharged within 60
days after the expiration of such stay; or
(j)
the Subsidiary Guaranty ceases to be in full force and effect with respect to
any Material Domestic Subsidiary, or any Material Domestic Subsidiary contests
the validity thereof; or
(k)
the Pledge Agreement ceases to be in full force and effect with respect to any
Material Foreign Subsidiary, any Pledgor contests the validity of the Pledge
Agreement, or the Collateral Agent shall fail to have a valid, perfected and
enforceable first priority security interest in the Pledged Securities; or
(l)
[Reserved.]
(m)
(i) any Plan shall fail to satisfy the minimum funding standards of ERISA
or the Code for any plan year or part thereof or a waiver of such standards or
extension of any amortization period is sought or granted under section 412
of the Code, (ii) a notice of intent to terminate any Plan shall have been
or is reasonably expected to be filed with the PBGC or the PBGC shall have
instituted proceedings under ERISA section 4042 to terminate or appoint a
trustee to administer any Plan or the PBGC shall have notified the Company or
any ERISA Affiliate that a Plan may become a subject of any such proceedings,
(iii) the aggregate amount of unfunded benefit liabilities
(within the meaning of section 4001(a)(18) of ERISA) under all Plans, determined
in accordance with Title IV of ERISA, shall exceed 5% of Consolidated Net Worth
as of the end of the most recently ended fiscal quarter of the Company,
(iv) the Company or any ERISA Affiliate shall have incurred or is
reasonably expected to incur any liability pursuant to Title I or IV of ERISA or
the penalty or excise tax provisions of the Code relating to employee benefit
plans, (v) the Company or any ERISA Affiliate withdraws from any Multiemployer
Plan, or (vi) the Company or any of its Subsidiaries establishes or amends any
employee welfare benefit plan that provides post-employment welfare benefits in
a manner that would increase the liability of the Company or any of its
Subsidiaries thereunder; and any such event or events described in clauses (i)
through (vi) above, either individually or together with any other such event or
events, could reasonably be expected to have a Material Adverse Effect.
As used in Section 11(m), the terms
employee benefit plan and employee welfare benefit
plan shall have the respective meanings assigned to such terms in Section 3 of
ERISA.
12. REMEDIES ON DEFAULT,
ETC.
12.1 Acceleration.
(a)
If an Event of Default with respect to the Company described in
paragraph (g) or (h) of Section 11 (other than an Event of Default
described in clause (i) of paragraph (g) or described in clause
(vi) of paragraph (g) by virtue of the fact that such clause
encompasses clause (i) of paragraph (g)) has occurred, all the Notes
then outstanding shall automatically become immediately due and payable.
(b)
If any other Event of Default has occurred and is continuing, any holder or
holders of more than 50% in principal amount of the Notes at the time
outstanding may at any time at its or their option, by notice or notices to the
Company, declare all the Notes then outstanding to be immediately due and
payable.
(c)
If any Event of Default described in paragraph (a) or (b) of Section 11 has
occurred and is continuing, any holder or holders of Notes at the time
outstanding affected by such Event of Default may at any time, at its or their
option, by notice or notices to the Company, declare all the Notes held by it or
them to be immediately due and payable.
Upon any Notes becoming due and
payable under this Section 12.1, whether automatically or by declaration, such Notes
will forthwith mature and the entire unpaid principal amount of such Notes, plus
(x) all accrued and unpaid interest thereon and (y) the Make-Whole Amount
determined in respect of such principal amount (to the full extent permitted by applicable
law), shall all be immediately due and payable, in each and every case without
presentment, demand, protest or further notice, all of which are hereby waived. The
Company acknowledges, and the parties hereto agree, that each holder of a Note has the
right to maintain its investment in the Notes free from repayment by the Company (except
as herein specifically provided for) and that the provision for payment of a Make-Whole
Amount by the Company in the event that the Notes are prepaid or are accelerated as a
result of an Event of Default, is intended to provide compensation for the deprivation of
such right under such circumstances.
12.2 Other Remedies.
If any Default or Event of Default
has occurred and is continuing, and irrespective of whether any Notes have become or have
been declared immediately due and payable under Section 12.1, the holder of any Note at
the time outstanding may proceed to protect and enforce the rights of such holder by an
action at law, suit in equity or other appropriate proceeding, whether for the specific
performance of any agreement contained herein, in the Collateral Documents or in any Note,
or for an injunction against a violation of any of the terms hereof or thereof, or in aid
of the exercise of any power granted hereby or thereby or by law or otherwise.
12.3 Rescission.
At any time after any Notes have been
declared due and payable pursuant to clause (b) or (c) of Section 12.1, the Required
Holders, by written notice to the Company, may rescind and annul any such declaration and
its consequences, and at any time after any Notes have become due and payable pursuant to
clause (a) of Section 12.1, the holders of all Notes then outstanding, by written notice
to the Company, may rescind acceleration of the Notes resulting from the occurrence of an
Event of Default described in paragraph (h) of Section 11, if in each case (i) the
Company has paid all overdue interest on the Notes, all principal of and Make-Whole
Amount, if any, on any Notes that are due and payable and are unpaid other than by reason
of such declaration, and all interest on such overdue principal and Make-Whole Amount, if
any, and (to the extent permitted by applicable law) any overdue interest in respect of
the Notes, at the Default Rate, (ii) all Events of Default and Defaults, other than
non-payment of amounts that have become due solely by reason of such declaration or
acceleration, have been cured or have been waived pursuant to Section 17, and
(iii) no judgment or decree has been entered for the payment of any monies due
pursuant hereto or to the Notes. No rescission and annulment under this Section 12.3 will
extend to or affect any subsequent Event of Default or Default or impair any right
consequent thereon.
12.4 No Waivers or
Election of Remedies, Expenses, etc.
No course of dealing and no delay on
the part of any holder of any Note in exercising any right, power or remedy shall operate
as a waiver thereof or otherwise prejudice such holders rights, powers or remedies.
No right, power or remedy conferred by this Agreement, the Collateral Documents or by any
Note upon any holder thereof shall be exclusive of any other right, power or remedy
referred to herein or therein or now or hereafter available at law, in equity, by statute
or otherwise. Without limiting the obligations of the Company under Section 15, the
Company will pay to the holder of each Note on demand such further amount as shall be
sufficient to cover all costs and expenses of such holder incurred in any enforcement or
collection under this Section 12, including, without limitation, reasonable
attorneys fees, expenses and disbursements.
13. REGISTRATION;
EXCHANGE; SUBSTITUTION OF NOTES.
13.1 Registration of
Notes.
The Company shall keep at its
principal executive office a register for the registration and registration of transfers
of Notes. The name and address of each holder of one or more Notes, each transfer thereof
and the name and address of each transferee of one or more Notes shall be registered in
such register. Prior to due presentment for registration of transfer, the Person in whose
name any Note shall be registered shall be deemed and treated as the owner and holder
thereof for all purposes hereof, and the Company shall not be affected by any notice or
knowledge to the contrary. The Company shall give to any holder of a Note that is an
Institutional Investor promptly upon request therefor, a complete and correct copy of the
names and addresses of all registered holders of Notes.
13.2 Transfer and
Exchange of Notes.
Upon surrender of any Note at the
principal executive office of the Company for registration of transfer or exchange (and in
the case of a surrender for registration of transfer, duly endorsed or accompanied by a
written instrument of transfer duly executed by the registered holder of such Note or his
attorney duly authorized in writing and accompanied by the address for notices of each
transferee of such Note or part thereof), the Company shall execute and deliver, at the
Companys expense (except as provided below), one or more new Notes (as requested by
the holder thereof) in exchange therefor, in an aggregate principal amount equal to the
unpaid principal amount of the surrendered Note. Each such new Note shall be payable to
such Person as such holder may request and shall be substantially in the form of
Exhibit 1. Each such new Note shall be dated and bear interest from the date
to which interest shall have been paid on the surrendered Note or dated the date of the
surrendered Note if no interest shall have been paid thereon. The Company may require
payment of a sum sufficient to cover any stamp tax or governmental charge imposed in
respect of any such transfer of Notes. Notes shall not be transferred in denominations of
less than the Yen-equivalent of $100,000, provided that if necessary to enable the
registration of transfer by a holder of its entire holding of Notes, one Note may be in a
denomination of less than the Yen-equivalent of $100,000. Any transferee, by its
acceptance of a Note registered in its name (or the name of its nominee), shall be deemed
to have made the representations set forth in Section 6 and to have become a party to the
Collateral Agency and Intercreditor Agreement. Each transferee of a Note which was not
previously a holder of the Notes under this Agreement and which is not incorporated under
the laws of the United States of America or a state thereof shall, within three Business
Days of becoming a holder, deliver to the Company such certificate and other evidence as
the Company may reasonably request to establish that such holder is entitled to receive
payments under the Notes without deduction or withholding of any United States federal
income taxes.
13.3 Replacement of
Notes.
Upon receipt by the Company of
evidence reasonably satisfactory to it of the ownership of and the loss, theft,
destruction or mutilation of any Note (which evidence shall be, in the case of an
Institutional Investor, notice from such Institutional Investor of such ownership and such
loss, theft, destruction or mutilation), and
(a)
in the case of loss, theft or destruction, of indemnity reasonably satisfactory
to it (provided that if the holder of such Note is, or is a nominee for,
an original Purchaser or another holder of a Note with a minimum net worth of at
least $100,000,000, such Persons own unsecured agreement of indemnity
shall be deemed to be satisfactory), or
(b)
in the case of mutilation, upon surrender and cancellation thereof,
the Company at its own expense shall
execute and deliver, in lieu thereof, a new Note, dated and bearing interest from the date
to which interest shall have been paid on such lost, stolen, destroyed or mutilated Note
or dated the date of such lost, stolen, destroyed or mutilated Note if no interest shall
have been paid thereon.
14. PAYMENTS ON NOTES.
14.1 Place of Payment.
Subject to Section 14.2, payments of
principal, Make-Whole Amount, if any, and interest becoming due and payable on the Notes
shall be made in Provo, Utah at the principal office of the Company in such jurisdiction.
The Company may at any time, by notice to each holder of a Note, change the place of
payment of the Notes so long as such place of payment shall be either the principal office
of the Company in such jurisdiction or the principal office of a bank or trust company in
such jurisdiction.
14.2 Home Office Payment.
So long as you or your nominee shall
be the holder of any Note, and notwithstanding anything contained in Section 14.1 or in
such Note to the contrary, the Company will pay all sums becoming due on such Note for
principal, Make-Whole Amount, if any, and interest by the method and at the address
specified for such purpose below your name in Schedule A, or by such other method
or at such other address as you shall have from time to time specified to the Company in
writing for such purpose, without the presentation or surrender of such Note or the making
of any notation thereon, except that upon written request of the Company made concurrently
with or reasonably promptly after payment or prepayment in full of any Note, you shall
surrender such Note for cancellation, reasonably promptly after any such request, to the
Company at its principal executive office or at the place of payment most recently
designated by the Company pursuant to Section 14.1. Prior to any sale or other disposition
of any Note held by you or your nominee you will, at your election, either endorse thereon
the amount of principal paid thereon and the last date to which interest has been paid
thereon or surrender such Note to the Company in exchange for a new Note or Notes pursuant
to Section 13.2. The Company will afford the benefits of this Section 14.2 to any
Institutional Investor that is the direct or indirect transferee of any Note purchased by
you under this Agreement and that has made the same agreement relating to such Note as you
have made in this Section 14.2.
14.3 Obligation to Make
Payments in Yen.
The obligation of the Company to make
payments in Yen of the principal, applicable Make-Whole Amount, if any, and interest
becoming due and payable on the Notes and any other amounts due hereunder or under the
Notes as provided in Section 14.2, (a) shall not be discharged or satisfied by
any tender, or any recovery pursuant to any judgment, which is expressed in or converted
into any currency other than Yen, except to the extent that such tender or recovery shall
result in the actual receipt by the holders of the Notes of the full amount of Yen
expressed to be payable in respect of the principal, applicable Make-Whole Amount, if any,
in respect of and interest on the Notes and all other amounts due hereunder or under the
Notes, (b) shall be enforceable as an alternative or additional cause of action for
the purpose of recovering in Yen the amount, if any, by which such actual receipt shall
fall short of the full amount of Yen so expressed to be payable, and (c) shall
not be affected by judgment being obtained for any other sum due under this Agreement or
on any Note.
14.4 Payments Free and
Clear of Taxes.
(a)
Payments. The Company will pay all amounts of principal of, applicable
Make-Whole Amount, if any, and interest on the Notes, and all other amounts
payable hereunder or under the Notes, without set-off or counterclaim and free
and clear of, and without deduction or withholding for or on account of, all
present and future income, stamp, documentary and other taxes and duties, and
all other levies, imposts, charges, fees, deductions and withholdings, now or
hereafter imposed, levied, collected, withheld or assessed by any Governmental
Authority (except net income taxes and franchise taxes in lieu of net income
taxes imposed on any holder of any Note by its jurisdiction of incorporation or
the jurisdiction in which its applicable lending office is located) (all such
non-excluded taxes, duties, levies, imposts, duties, charges, fees, deductions
and withholdings being hereinafter called Taxes). If any
Taxes are required to be withheld from any amounts payable to a holder of any
Notes, the amounts so payable to such holder shall be increased to the extent
necessary to yield such holder (after payment of all Taxes) interest on any such
other amounts payable hereunder at the rates or in the amounts specified in this
Agreement and the Notes. Whenever any Taxes are payable by the Company, as
promptly as possible thereafter, the Company shall send to each holder of the
Notes, a certified copy of an original official receipt received by the Company
showing payment thereof. If the Company fails to pay any Taxes when due to the
appropriate taxing authority or fails to remit to each holder of the Notes the
required receipts or other required documentary evidence, the Company shall
indemnify each holder of the Notes for any taxes (including interest or
penalties) that may become payable by such holder as a result of any such
failure. The obligations of the Company under this subsection 14.4(a) shall
survive the payment and performance of the Notes and the termination of this
Agreement.
(b)
Withholding Exemption Certificates. On or prior to the Closing Date, each
holder of the Notes which is not organized under the laws of the United States
of America or a state thereof shall deliver to the Company such certificates and
other evidence as the Company may reasonably request to establish that such
holder is entitled to receive payments under the Notes without deduction or
withholding of any United States federal income taxes. Each such holder further
agrees (i) promptly to notify the Company of any change of circumstances
(including any change in any treaty, law or regulation) which would prevent such
holder from receiving payments under the Notes without any deduction or
withholding of such taxes, and (ii) on or before the date that any certificate
or other form delivered by such holder under this subsection 14.4(b) expires or
becomes obsolete or after the occurrence of any event requiring a change in the
most recent such certificate or form previously delivered by such holder, to
deliver to the Company a new certificate or form, certifying that such holder is
entitled to receive payments under the Notes without deduction or withholding of
such taxes. If any holder of the Notes which is not organized under the laws of
the United States of America or a state thereof fails to provide to the Company
pursuant to this subsection 14.4(b) (or in the case of a transferee of a Note,
Section 13.2) any certificates or other evidence required by such provision to
establish that such holder is, at the time it becomes a holder, entitled to
receive payments under the Notes without deduction or withholding of any United
States federal income taxes, such holder shall not be entitled to any
indemnification under subsection 14.4(a) for any Taxes imposed on such holder.
15.
EXPENSES, ETC.
15.1 Transaction
Expenses.
Whether or not the transactions
contemplated hereby are consummated, the Company will pay all costs and expenses
(including reasonable attorneys fees of one special counsel and, if reasonably
required, local or other counsel) incurred by the Collateral Agent and you in connection
with such transactions and in connection with any amendments, waivers or consents under or
in respect of this Agreement, the Collateral Documents or the Notes (whether or not such
amendment, waiver or consent becomes effective), including, without limitation: (a)
the costs and expenses incurred in enforcing or defending (or determining whether or how
to enforce or defend) any rights under this Agreement, the Collateral Documents or the
Notes or in responding to any subpoena or other legal process or informal investigative
demand issued in connection with this Agreement, the Collateral Documents or the Notes, or
by reason of being a holder of any Note, and (b) the costs and expenses, including
financial advisors fees, incurred in connection with the insolvency or bankruptcy of
the Company or any Subsidiary or in connection with any work-out or restructuring of the
transactions contemplated hereby, by the Collateral Documents and by the Notes. The
Company will pay, and will save you and each other holder of a Note harmless from, all
claims in respect of any fees, costs or expenses if any, of brokers and finders (other
than those retained by you).
15.2 Survival.
The obligations of the Company under
this Section 15 will survive the payment or transfer of any Note, the enforcement,
amendment or waiver of any provision of this Agreement, the Collateral Documents or the
Notes, and the termination of this Agreement and the Collateral Documents.
16. SURVIVAL OF
REPRESENTATIONS AND WARRANTIES; ENTIRE AGREEMENT.
All representations and warranties
contained herein and in the Collateral Documents shall survive the execution and delivery
of this Agreement, the Collateral Documents and the Notes, the purchase or transfer by you
of any Note or portion thereof or interest therein and the payment of any Note, and may be
relied upon by any subsequent holder of a Note, regardless of any investigation made at
any time by or on behalf of you or any other holder of a Note. All statements contained in
any certificate or other instrument delivered by or on behalf of the Company pursuant to
this Agreement or the Collateral Documents shall be deemed representations and warranties
of the Company under this Agreement. Subject to the preceding sentence, this Agreement,
the Collateral Documents and the Notes embody the entire agreement and understanding
between you and the Company and supersede all prior agreements and understandings relating
to the subject matter hereof.
17. AMENDMENT AND WAIVER.
17.1 Requirements.
This Agreement, the Collateral
Documents and the Notes may be amended, and the observance of any term hereof or thereof
may be waived (either retroactively or prospectively), with (and only with) the written
consent of the Company and the Required Holders, except that (a) no amendment or
waiver of any of the provisions of Section 1, 2, 3, 4, 5, 6 or 21 hereof, or any
defined term (as it is used therein), will be effective as to you unless consented to by
you in writing, and (b) no such amendment or waiver may, without the written
consent of the holder of each Note at the time outstanding affected thereby,
(i) subject to the provisions of Section 12 relating to acceleration or
rescission, change the amount or time of any prepayment or payment of principal of, or
reduce the rate or change the time of payment or method of computation of interest or of
the Make-Whole Amount on, the Notes, (ii) change the percentage of the
principal amount of the Notes the holders of which are required to consent to any such
amendment or waiver, or (iii) amend any of Sections 8, 11(a), 11(b), 12, 17 or
20.
17.2 Solicitation of
Holders of Notes.
(a)
Solicitation. The Company will provide each holder of the Notes
(irrespective of the amount of Notes then owned by it) with sufficient
information, sufficiently far in advance of the date a decision is required, to
enable such holder to make an informed and considered decision with respect to
any proposed amendment, waiver or consent in respect of any of the provisions
hereof or of the Notes. The Company will deliver executed or true and correct
copies of each amendment, waiver or consent effected pursuant to the provisions
of this Section 17 to each holder of outstanding Notes promptly following
the date on which it is executed and delivered by, or receives the consent or
approval of, the requisite holders of Notes.
(b)
Payment. The Company will not directly or indirectly pay or cause to be
paid any remuneration, whether by way of supplemental or additional interest,
fee or otherwise, or grant any security, to any holder of Notes as consideration
for or as an inducement to the entering into by any holder of Notes of any
waiver or amendment of any of the terms and provisions hereof unless such
remuneration is concurrently offered, or such security is concurrently offered
to be granted, on the same terms, ratably to each holder of Notes then
outstanding even if such holder did not consent to such waiver or amendment.
17.3 Binding Effect, etc.
Any amendment or waiver consented to
as provided in this Section 17 applies equally to all holders of Notes and is binding
upon them and upon each future holder of any Note and upon the Company without regard to
whether such Note has been marked to indicate such amendment or waiver. No such amendment
or waiver will extend to or affect any obligation, covenant, agreement, Default or Event
of Default not expressly amended or waived or impair any right consequent thereon. No
course of dealing between the Company and the holder of any Note nor any delay in
exercising any rights hereunder or under any Note shall operate as a waiver of any rights
of any holder of such Note. As used herein, the term this Agreement and
the Collateral Documents and references thereto shall mean this Agreement and
the Collateral Documents, respectively, as they may from time to time be amended or
supplemented.
17.4 Notes held by
Company, etc.
Solely for the purpose of determining
whether the holders of the requisite percentage of the aggregate principal amount of Notes
then outstanding approved or consented to any amendment, waiver or consent to be given
under this Agreement or the Notes, or have directed the taking of any action provided
herein or in the Notes to be taken upon the direction of the holders of a specified
percentage of the aggregate principal amount of Notes then outstanding, Notes directly or
indirectly owned by the Company or any of its Affiliates shall be deemed not to be
outstanding.
18. NOTICES.
All notices and communications
provided for hereunder shall be in writing and sent (a) by telecopy if the
sender on the same day sends a confirming copy of such notice by a recognized overnight
delivery service (charges prepaid), or (b) by registered or certified mail
with return receipt requested (postage prepaid), or (c) by a recognized
overnight delivery service (with charges prepaid). Any such notice must be sent:
(a)
if to you or your nominee, to you or it at the address specified for such
communications in Schedule A, or at such other address as you or it shall
have specified to the Company in writing,
(b)
if to any other holder of any Note, to such holder at such address as such other
holder shall have specified to the Company in writing, or
(c)
if to the Company, to the Company at One Nu Skin Plaza, 75 West Center Street,
Provo, Utah 84601 to the attention of the Chief Financial Officer, or at such
other address as the Company shall have specified to the holder of each Note in
writing.
Notices under this Section 18 will be
deemed given only when actually received.
19. REPRODUCTION OF
DOCUMENTS.
This Agreement, the Collateral
Documents and all documents relating thereto, including, without limitation,
(a) consents, waivers and modifications that may hereafter be executed,
(b) documents received by you at the Closing (except the Notes themselves),
and (c) financial statements, certificates and other information previously or
hereafter furnished to you, may be reproduced by you by any photographic, photostatic,
microfilm, microcard, miniature photographic or other similar process and you may destroy
any original document so reproduced. The Company agrees and stipulates that, to the extent
permitted by applicable law, any such reproduction shall be admissible in evidence as the
original itself in any judicial or administrative proceeding (whether or not the original
is in existence and whether or not such reproduction was made by you in the regular course
of business) and any enlargement, facsimile or further reproduction of such reproduction
shall likewise be admissible in evidence. This Section 19 shall not prohibit the Company
or any other holder of Notes from contesting any such reproduction to the same extent that
it could contest the original, or from introducing evidence to demonstrate the inaccuracy
of any such reproduction.
20. CONFIDENTIAL
INFORMATION.
For the purposes of this Section 20,
Confidential Information means information delivered to you by or on behalf of
the Company or any Subsidiary in connection with the transactions contemplated by or
otherwise pursuant to this Agreement that is proprietary in nature and that was clearly
marked or labeled or otherwise adequately identified when received by you as being
confidential information of the Company or such Subsidiary, provided that such term
does not include information that (a) was publicly known or otherwise known to
you prior to the time of such disclosure, (b) subsequently becomes publicly
known through no act or omission by you or any person acting on your behalf,
(c) otherwise becomes known to you other than through disclosure (x) by
the Company or any Subsidiary, or (y) by another Person known by you to be bound by a
confidentiality agreement with the Company, or (d) constitutes financial statements
delivered to you under Section 7.1 that are otherwise publicly available. You will
maintain the confidentiality of such Confidential Information in accordance with
procedures adopted by you in good faith to protect confidential information of third
parties delivered to you, provided that you may deliver or disclose Confidential
Information to (i) your directors, officers, employees, agents, attorneys and
affiliates (to the extent such disclosure reasonably relates to the administration of the
investment represented by your Notes), (ii) your financial advisors and other
professional advisors who agree to hold confidential the Confidential Information
substantially in accordance with the terms of this Section 20, (iii) any other
holder of any Note, (iv) any Institutional Investor to which you sell or offer
to sell such Note or any part thereof or any participation therein (if such Person has
agreed in writing prior to its receipt of such Confidential Information to be bound by the
provisions of this Section 20), (v) any Person from which you offer to
purchase any security of the Company (if such Person has agreed in writing prior to its
receipt of such Confidential Information to be bound by the provisions of this
Section 20), (vi) any federal or state regulatory authority having
jurisdiction over you, (vii) the National Association of Insurance
Commissioners or any similar organization, or any nationally recognized rating agency that
requires access to information about your investment portfolio or (viii) any
other Person to which such delivery or disclosure may be necessary or appropriate
(w) to effect compliance with any law, rule, regulation or order applicable to
you, (x) in response to any subpoena or other legal process (provided that you
give prompt notice to the Company of such subpoena or legal process to the extent you are
legally permitted to do so), (y) in connection with any litigation to which
you are a party, or (z) if an Event of Default has occurred and is continuing,
to the extent you may reasonably determine such delivery and disclosure to be necessary or
appropriate in the enforcement or for the protection of the rights and remedies under your
Notes, this Agreement and the Collateral Documents. Each holder of a Note, by its
acceptance of a Note, will be deemed to have agreed to be bound by and to be entitled to
the benefits of this Section 20 as though it were a party to this Agreement. On reasonable
request by the Company in connection with the delivery to any holder of a Note of
information required to be delivered to such holder under this Agreement or requested by
such holder (other than a holder that is a party to this Agreement or its nominee), such
holder will enter into an agreement with the Company embodying the provisions of this
Section 20.
21. SUBSTITUTION OF
PURCHASER.
You shall have the right to
substitute any one of your Affiliates as the purchaser of the Notes that you have agreed
to purchase hereunder, by written notice to the Company, which notice shall be signed by
both you and such Affiliate, shall contain such Affiliates agreement to be bound by
this Agreement and shall contain a confirmation by such Affiliate of the accuracy with
respect to it of the representations set forth in Section 6. Upon receipt of such notice,
wherever the word you is used in this Agreement (other than in this Section
21), such word shall be deemed to refer to such Affiliate in lieu of you. In the event
that such Affiliate is so substituted as a purchaser hereunder and such Affiliate
thereafter transfers to you all of the Notes then held by such Affiliate, upon receipt by
the Company of notice of such transfer, wherever the word you is used in this
Agreement (other than in this Section 21), such word shall no longer be deemed to
refer to such Affiliate, but shall refer to you, and you shall have all the rights of an
original holder of the Notes under this Agreement.
22. JUDICIAL PROCEEDINGS.
22.1 Consent to
Jurisdiction.
The Company irrevocably submits to
the non-exclusive jurisdiction of any New York State or United States federal court
sitting in New York City, and irrevocably waives its own forum, over any suit, action or
proceeding arising out of or relating to this Agreement or any Note. The Company
irrevocably waives, to the fullest extent it may effectively do so under applicable law,
any objection which it may have or hereafter have to the laying of the venue of any such
suit, action or proceeding brought in any such court and any claim that any such suit,
action or proceeding brought in any such court has been brought in an inconvenient forum.
The Company agrees, to the fullest extent it may effectively do so under applicable law,
that a final judgment in any such suit, action or proceeding brought in such court shall
be conclusive and binding upon the Company and may be enforced in the courts of the United
States, the State of New York (or any other courts to the jurisdiction of which the
Company is or may be subject) by a suit upon such judgment, provided that service
of process is effected on the Company in one of the manners specified below or as
otherwise permitted by law.
22.2 Service of Process.
The Company hereby consents to
process being served in any suit, action or proceeding of the nature referred to in
Section 22.1 by the mailing of a copy thereof by registered or certified air mail, postage
prepaid, return receipt requested, to the address of the Company set forth in Section 18.
The Company irrevocably waives, to the fullest extent it may effectively do so under
applicable law, all claim of error by reason of any such service and agrees that such
service (a) shall be deemed in every respect effective service of process upon
the Company in any such suit, action or proceeding, and (b) shall, to the
fullest extent permitted by law, be taken and held to be valid personal service upon the
Company.
22.3 No Limitation on
Service or Suit.
Nothing in this Section 22 shall
affect the right of any holder of the Notes to serve process in any manner permitted by
law or limit the right of any holder of the Notes to bring proceedings against the Company
in the courts of any jurisdiction or jurisdictions or to enforce in any lawful manner a
judgment obtained in one jurisdiction in any other jurisdiction.
23. MISCELLANEOUS.
23.1 Successors and
Assigns.
All covenants and other agreements
contained in this Agreement and the Collateral Documents by or on behalf of any of the
parties hereto or thereto bind and inure to the benefit of their respective successors and
assigns (including, without limitation, any subsequent holder of a Note) whether so
expressed or not.
23.2 Payments Due on
Non-Business Days.
Anything in this Agreement, the
Collateral Documents or the Notes to the contrary notwithstanding, any payment of
principal of or Make-Whole Amount or interest on any Note that is due on a date other than
a Business Day shall be made on the next succeeding Business Day without including the
additional days elapsed in the computation of the interest payable on such next succeeding
Business Day.
23.3 Severability.
Any provision of this Agreement or
the Collateral Documents that is prohibited or unenforceable in any jurisdiction shall, as
to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability
without invalidating the remaining provisions hereof or thereof, and any such prohibition
or unenforceability in any jurisdiction shall (to the full extent permitted by law) not
invalidate or render unenforceable such provision in any other jurisdiction.
23.4 Construction.
Each covenant contained herein shall
be construed (absent express provision to the contrary) as being independent of each other
covenant contained herein, so that compliance with any one covenant shall not (absent such
an express contrary provision) be deemed to excuse compliance with any other covenant.
Where any provision herein refers to action to be taken by any Person, or which such
Person is prohibited from taking, such provision shall be applicable whether such action
is taken directly or indirectly by such Person.
23.5 Counterparts.
This Agreement and the Collateral
Documents may be executed in any number of counterparts, each of which shall be an
original but all of which together shall constitute one instrument. Each counterpart may
consist of a number of copies hereof, each signed by less than all, but together signed by
all, of the parties hereto.
23.6 Governing Law.
This Agreement shall be construed and
enforced in accordance with, and the rights of the parties shall be governed by, the law
of the State of New York excluding choice-of-law principles of the law of such State
(other than Section 5-1401 of the New York General Obligations Law) that would require the
application of the laws of a jurisdiction other than such State.
_________________
If
you are in agreement with the foregoing, please sign the form of agreement on the
accompanying counterpart of this Agreement and return it to the Company, whereupon the
foregoing shall become a binding agreement between you and the Company.
Very truly yours,
NU SKIN ENTERPRISES, INC.
By: /s/ Corey B. Lindley
Name: Corey B. Lindley
Title: Executive Vice President and
Chief
Financial Officer
The foregoing is hereby agreed to as
of the date thereof.
THE
PRUDENTIAL INSURANCE COMPANY OF AMERICA
By:
Name:
Title: Vice President
SCHEDULE A
INFORMATION RELATING
TO PURCHASER
Principal
Amount of
Name and Address of
Purchaser Notes to be Purchased
THE PRUDENTIAL INSURANCE
COMPANY OF AMERICA
¥9,706,500,000
(1)
Bank: |
|
All payments by wire transfer of immediately available funds to:
Bank of New York
Tokyo, Japan Account: Bank of New
York, NY Account No.: 4800023950 Sub-Account: Prudential Global Funding
Sub-Account No.: 8033804238
|
Each such wire transfer shall set
forth the name of the Company, and a reference to 3.03% Senior Notes due 2010, PPN 67018T
A* 6, INV_____, and the due date and application (as among principal, interest and
Make-Whole Amount) of the payments being made.
(2)
All notices of payments and written confirmations of such wire transfers:
The Prudential Insurance
Company of America
c/o Prudential Capital Group
Gateway Center Three
100 Mulberry
Street
Newark, New Jersey
07102-4077
Attention: Manager, Investment Operations Group
Telephone: (973) 802-5260
Facsimile: (973) 802-8055
(3)
All other communications:
The Prudential Insurance
Company of America
c/o Prudential Capital Group Corporate Finance
Four Embarcadero
Center, Suite 2700
San Francisco, California 94111-4180
Attention: Managing Director
Telephone: (415) 291-5058
Facsimile: (415) 421-6233
SCHEDULE
B
DEFINED TERMS
As used herein, the following terms
have the respective meanings set forth below or set forth in the Section hereof following
such term:
ABN Amro Facility means the $10,000,000 credit facility evidenced by that
certain Grid Note dated as of May 24, 2000 executed by the Company in favor of ABN Amro
Bank N.V., as such Grid Note may be amended, supplemented or modified from time to time.
ABN Amro Release of
Guarantors means the Release of Guarantors executed by ABN Amro Bank N.V.
ABN Amro Subsidiary Guaranty
means that certain Subsidiary Guaranty, dated as of July 22, 1998, executed by certain
subsidiaries of the Company, in favor of ABN Amro Bank N.V. in connection with the ABN
Amro Facility.
Affiliate means,
at any time, (a) with respect to any Person, any other Person that at such time directly
or indirectly through one or more intermediaries Controls, or is Controlled by, or is
under common Control with, such first Person, and (b) with respect to the Company and its
Subsidiaries, any Person beneficially owning or holding, directly or indirectly, 5% or
more of any class of voting or equity interests of the Company or any of its Subsidiaries
or any corporation of which the Company and its Subsidiaries beneficially own or hold, in
the aggregate, directly or indirectly, 5% or more of any class of voting or equity
interests. As used in this definition, Control means the possession,
directly or indirectly, of the power to direct or cause the direction of the management
and policies of a Person, whether through the ownership of voting securities, by contract
or otherwise. Unless the context otherwise clearly requires, any reference to an
Affiliate is a reference to an Affiliate of the Company.
Business Day means
(a) for the purposes of Section 8.6 only, any day other than a Saturday, a Sunday
or a day on which commercial banks in Tokyo, Japan are required or authorized to be
closed, and (b) for the purposes of any other provision of this Agreement, any day
other than a Saturday, a Sunday or a day on which commercial banks in New York, New York
are required or authorized to be closed.
Capital Lease
means, at any time, a lease with respect to which the lessee is required concurrently to
recognize the acquisition of an asset and the incurrence of a liability in accordance with
GAAP.
Closing is
defined in Section 3.
Code means the
Internal Revenue Code of 1986, as amended from time to time, and the rules and regulations
promulgated thereunder from time to time.
Collateral Agency and
Intercreditor Agreement means the Collateral Agency and Intercreditor Agreement,
substantially in the form of Exhibit 4.13(c) hereto, by and among the Collateral
Agent, you and each of the other Senior Secured Creditors, and acknowledged by the Company
and the Subsidiary Guarantors, as such agreement may be amended, supplemented or modified
from time to time.
Collateral Agent
means State Street Bank and Trust Company of California, N.A., acting in its capacity as
collateral agent under the Collateral Agency and Intercreditor Agreement, together with
its successors and assigns.
Collateral
Documents means the Pledge Agreement, the Subsidiary Guaranty, the Collateral
Agency and Intercreditor Agreement, and all other documents, evidencing, securing or
relating to the Notes, the payment of the indebtedness evidenced by the Notes and all
other amounts due from the Company or any Restricted Subsidiary evidenced or secured by
this Agreement, the Notes or the Collateral Documents.
Company means Nu
Skin Enterprises, Inc., a Delaware corporation.
Confidential
Information is defined in Section 20.
Consolidated Income
Available for Fixed Charges means, with respect to any period, Consolidated Net
Income for such period plus all amounts deducted in the computation thereof on account of
(a) Fixed Charges, and (b) taxes imposed on or measured by income or excess profits of the
Company and the Restricted Subsidiaries.
Consolidated Net
Income means, with respect to any period, the net income (or loss) of the
Company and the Restricted Subsidiaries for such period (taken as a cumulative whole), as
determined in accordance with GAAP, after eliminating all offsetting debits and credits
between the Company and the Restricted Subsidiaries and all other items required to be
eliminated in the course of the preparation of consolidated financial statements of the
Company and the Restricted Subsidiaries in accordance with GAAP.
Consolidated Net
Worth means, at any time, (a) the consolidated stockholders equity of the
Company and the Restricted Subsidiaries, as defined according to GAAP, less (b) the
sum of (i) to the extent included in clause (a), all amounts attributable to minority
interests, if any, in the securities of Restricted Subsidiaries, and (ii) the amount by
which Restricted Investments exceed 20% of the amount determined in clause (a).
Consolidated
Total Assets means, at any date of determination, on a consolidated
basis for the Company and the Restricted Subsidiaries, total assets, determined in
accordance with GAAP.
Credit Facility
means any credit facility providing for the borrowing of money or the issuance of letters
of credit (a) for the Company, or (b) for any Restricted Subsidiary, if its obligations
under such credit facility are guaranteed by the Company.
Default means an
event or condition the occurrence or existence of which would, with the lapse of time or
the giving of notice or both, become an Event of Default.
Default Rate means
that rate of interest that is 2% per annum above the rate of interest stated in clause (a)
of the first paragraph of the Notes.
Dollars and the
symbol $ mean the lawful money of the United States of America.
Domestic
Subsidiary means, at any time, each Subsidiary of the Company (a) which is
created, organized or domesticated in the United States or under the law of the United
States or any state or territory thereof, (b) which was included as a member of the
Companys affiliated group in the Companys most recent consolidated United
States federal income tax return, or (c) the earnings of which were includable in the
taxable income of the Company or any other Domestic Subsidiary (to the extent of the
Companys and/or such other Domestic Subsidiarys ownership interest of such
Subsidiary) in the Companys most recent consolidated United States federal income
tax return.
EBITDA means, with
respect to any period, the sum of (i) Consolidated Net Income for such period without
giving effect to extraordinary gains and losses, gains and losses resulting from changes
in GAAP and one time non-recurring income and expenses resulting from acquisitions and
similar events, plus (ii) to the extent deducted in the calculation of
Consolidated Net Income, the amount of all interest expense, depreciation expense,
amortization expense, and income tax expense; provided that EBITDA will include or
exclude, as applicable, acquisitions and divestitures of Restricted Subsidiaries or other
business units on a pro forma basis as if such acquisitions or divestitures occurred on
the first day of the applicable period.
Environmental Laws
means any and all Federal, state, local, and foreign statutes, laws, regulations,
ordinances, rules, judgments, orders, decrees, permits, concessions, grants, franchises,
licenses, agreements or governmental restrictions relating to pollution and the protection
of the environment or the release of any materials into the environment, including but not
limited to those related to hazardous substances or wastes, air emissions and discharges
to waste or public systems.
Equity Securities
of any Person means (a) all common stock, Preferred Stock, participations, shares,
partnership interest, membership interest or other equity interest in and of such Person
(regardless of how designated and whether or not voting or non-voting), and (b) all
warrants, options and other rights to acquire any of the foregoing.
ERISA means the
Employee Retirement Income Security Act of 1974, as amended from time to time, and the
rules and regulations promulgated thereunder from time to time in effect.
ERISA Affiliate
means any trade or business (whether or not incorporated) that is treated as a single
employer together with the Company under section 414 of the Code.
Event of Default
is defined in Section 11.
Exchange Act means
the Securities Exchange Act of 1934, as amended.
Existing Credit
Facility means the $180,000,000 Credit Agreement dated as of May 8, 1998 by and
among the Company, Nu Skin Japan Co., Ltd., the lenders named therein, and ABN Amro Bank
N.V., as agent for such lenders, as such agreement may have been amended, supplemented or
modified from time to time.
Fixed Charges
means, with respect to any period, the sum of (i) Interest Expense for such period, and
(ii) Lease Rentals for such period.
Foreign Subsidiary
means, at any time, each Subsidiary of the Company that is not a Domestic Subsidiary.
GAAP means
generally accepted accounting principles as in effect from time to time in the United
States of America.
Governmental
Authority means
(a)
the government of
(i)
the United States of America or any State or other political subdivision
thereof, or
(ii)
Japan or any political subdivision thereof, or
(iii)
any jurisdiction in which the Company or any Subsidiary conducts all or any part
of its business, or which asserts jurisdiction over any properties of the
Company or any Subsidiary, or
(b)
any entity exercising executive, legislative, judicial, regulatory or
administrative functions of, or pertaining to, any such government.
Guaranty means,
with respect to any Person, any obligation (except the endorsement in the ordinary course
of business of negotiable instruments for deposit or collection) of such Person
guaranteeing or in effect guaranteeing any indebtedness, dividend or other obligation of
any other Person in any manner, whether directly or indirectly, including (without
limitation) obligations incurred through an agreement, contingent or otherwise, by such
Person:
(a)
to purchase such indebtedness or obligation or any property constituting
security therefor;
(b)
to advance or supply funds (i) for the purchase or payment of such
indebtedness or obligation, or (ii) to maintain any working capital or
other balance sheet condition or any income statement condition of any other
Person or otherwise to advance or make available funds for the purchase or
payment of such indebtedness or obligation;
(c)
to lease properties or to purchase properties or services primarily for the
purpose of assuring the owner of such indebtedness or obligation of the ability
of any other Person to make payment of the indebtedness or obligation; or
(d)
otherwise to assure the owner of such indebtedness or obligation against loss in
respect thereof.
In any computation of the
indebtedness or other liabilities of the obligor under any Guaranty, the indebtedness or
other obligations that are the subject of such Guaranty shall be assumed to be direct
obligations of such obligor.
Hazardous Material
means any and all pollutants, toxic or hazardous wastes or any other substances that might
pose a hazard to health or safety, the removal of which may be required or the generation,
manufacture, refining, production, processing, treatment, storage, handling,
transportation, transfer, use, disposal, release, discharge, spillage, seepage, or
filtration of which is or shall be restricted, prohibited or penalized by any applicable
law (including, without limitation, asbestos, urea formaldehyde foam insulation and
polychlorinated biphenyls).
holder means, with
respect to any Note, the Person in whose name such Note is registered in the register
maintained by the Company pursuant to Section 13.1.
Indebtedness with
respect to any Person means, at any time, without duplication,
(a)
its liabilities for borrowed money and its redemption obligations in respect of
mandatorily redeemable Preferred Stock;
(b)
its liabilities for the deferred purchase price of property acquired by such
Person (excluding accounts payable arising in the ordinary course of business
but including all liabilities created or arising under any conditional sale or
other title retention agreement with respect to any such property);
(c)
all liabilities appearing on its balance sheet in accordance with GAAP in
respect of Capital Leases;
(d)
all liabilities for borrowed money secured by any Lien with respect to any
property owned by such Person (whether or not it has assumed or otherwise become
liable for such liabilities);
(e)
Securitization Debt; and
(f)
any Guaranty (other than the Subsidiary Guaranty) of such Person with respect to
liabilities of a type described in any of clauses (a) through (e) hereof.
Indebtedness of any Person shall
include all obligations of such Person of the character described in clauses (a) through
(f) to the extent such Person remains legally liable in respect thereof notwithstanding
that any such obligation is deemed to be extinguished under GAAP.
Institutional
Investor means (a) any original purchaser of a Note, and (b)
any bank, trust company, savings and loan association or other financial institution, any
pension plan, any investment company, any insurance company, any broker or dealer, or any
other similar financial institution or entity, regardless of legal form, holding more than
the Yen-equivalent of $2,000,000 of the aggregate principal amount of the Notes then
outstanding or more than 20% of the aggregate principal amount of the Notes then
outstanding.
Interest Expense
means, with respect to the Company and the Restricted Subsidiaries for any period, the
sum, determined on a consolidated basis in accordance with GAAP, of (a) all interest paid,
accrued or scheduled for payment on the Indebtedness of the Company and the Restricted
Subsidiaries during such period (including interest attributable to Capital Leases),
plus (b) all fees in respect of outstanding letters of credit paid, accrued or
scheduled for payment by the Company and the Restricted Subsidiaries during such period.
Investment means
any investment, made in cash or by delivery of property, by the Company or any Restricted
Subsidiary (a) in any Person, whether by acquisition of stock, Indebtedness or other
obligation or Security, or by loan, Guaranty, advance, capital contribution or otherwise;
or (b) in any property.
Lease Rentals
means, with respect to any period, the sum of the rental and other obligations required to
be paid during such period by the Company or any Restricted Subsidiary as lessee under all
leases of real or personal property (other than Capital Leases) as determined on a
consolidated basis for the Company and the Restricted Subsidiaries in accordance with
GAAP.
Lien means, with
respect to any Person, any mortgage, lien, pledge, charge, security interest or other
encumbrance, or any interest or title of any vendor, lessor, lender or other secured party
to or of such Person under any conditional sale or other title retention agreement or
Capital Lease, upon or with respect to any property or asset of such Person (including in
the case of stock, stockholder agreements, voting trust agreements and all similar
arrangements).
Make-Whole Amount
is defined in Section 8.6.
Material or
Materially means material or materially, as the case may be, in
relation to the business, operations, affairs, financial condition, assets, properties or
prospects of the Company and the Restricted Subsidiaries taken as a whole.
Material Adverse
Effect means a material adverse effect on (a) the business, operations,
affairs, financial condition, assets or properties of the Company and the Restricted
Subsidiaries taken as a whole, or (b) the ability of the Company and the Restricted
Subsidiaries, taken as a whole, to perform their obligations under this Agreement, the
Notes and the Collateral Documents, or (c) the validity or enforceability of this
Agreement, the Notes or any of the Collateral Documents.
Material Domestic
Subsidiary means each Domestic Subsidiary of the Company that also is a Material
Subsidiary.
Material Foreign
Subsidiary means each Foreign Subsidiary of the Company that also is a Material
Subsidiary.
Material
Subsidiaries means, at any time, (a) Nu Skin Japan Co., Ltd., a Japanese
corporation, Nu Skin International, Inc., a Utah corporation, Nu Skin Hong Kong, Inc., a
Utah corporation, Nu Skin Taiwan, Inc., a Utah corporation, and Nu Skin United States,
Inc., a Delaware corporation; and (b) each other Subsidiary of the Company which (i) had
revenues during the four most recently ended fiscal quarters equal to or greater than 5.0%
of the consolidated total revenues of the Company and its Subsidiaries during such period,
or (ii) is an obligor under any Guaranty with respect to the Indebtedness of the Company
under any Significant Credit Facility.
Memorandum is
defined in Section 5.3.
Multiemployer Plan
means any Plan that is a multiemployer plan (as such term is defined in
section 4001(a)(3) of ERISA).
New Notes means
the senior notes expected to be issued by the Company in connection with a private
placement of an additional $60,000,000 of Term Debt.
Notes is
defined in Section 1.
Officers
Certificate means a certificate of a Senior Financial Officer or of any other
officer of the Company whose responsibilities extend to the subject matter of such
certificate.
PBGC means the
Pension Benefit Guaranty Corporation referred to and defined in ERISA or any successor
thereto.
Permitted Securitization
Program means any transaction or series of transactions that may be entered into
by the Company or any Restricted Subsidiary pursuant to which the Company or any
Restricted Subsidiary may sell, convey or otherwise transfer to (i) a Securitization
Entity (in the case of a transfer by the Company or any Restricted Subsidiary) and (ii)
any other Person (in the case of a transfer by a Securitization Entity), or may grant a
security interest in, any receivables (whether now existing or arising or acquired in the
future) of the Company or any Restricted Subsidiary, and any assets related thereto
including (A) all collateral securing such receivables, (B) all contracts and contract
rights and all guarantees or other obligations in respect of such receivables, (C)
proceeds of such receivables, and (D) other assets (including contract rights) that are
customarily transferred or in respect of which security interests are customarily granted
in connection with asset securitization transactions involving receivables;
provided that the resultant Securitization Debt, together with all other Priority
Indebtedness then outstanding, shall not exceed the amount of Priority Indebtedness
permitted by Section 10.5(a)(ii).
Person means an
individual, partnership, corporation, limited liability company, association, trust,
unincorporated organization, or a government or agency or political subdivision thereof.
Plan means an
employee benefit plan (as defined in section 3(3) of ERISA) that is or, within
the preceding five years, has been established or maintained, or to which contributions
are or, within the preceding five years, have been made or required to be made, by the
Company or any ERISA Affiliate or with respect to which the Company or any ERISA Affiliate
may have any liability.
Pledge Agreement
means the Pledge Agreement, in substantially the form of Exhibit 4.13(b) hereto,
dated as of the date hereof, executed and delivered by the Pledgors and the Collateral
Agent, as amended, supplemented and modified from time to time.
Pledged Securities
means (a) the Equity Securities described in Schedule I attached to the Pledge
Agreement and the Equity Securities of each Person that becomes a Material Foreign
Subsidiary, including all securities convertible into, and rights, warrants, options and
other rights to purchase or otherwise acquire, any of the foregoing now or hereafter owned
by such Pledgor, and the certificates or other instruments representing any of the
foregoing and any interest of such Pledgor in the entries on the books of any securities
intermediary pertaining thereto (the Pledged Shares), and all
dividends, distributions, returns of capital, cash, warrants, option, rights, instruments,
right to vote or manage the business of such Person pursuant to organizational documents
governing the rights and obligations of the stockholders, and other property or proceeds
from time to time received, receivable or otherwise distributed in respect of or in
exchange for any or all of such Pledged Shares; provided, that the Pledged Shares
shall not include any Equity Securities of such issuer in excess of the number of shares
or other equity interests of such issuer possessing up to but not exceeding 65% of the
voting power of all classes of Equity Securities entitled to vote of such issuer, and all
dividends, cash, warrants, rights, instruments and other property or proceeds from time to
time received, receivable or otherwise distributed in respect of or in exchange for any or
all of such Equity Securities; and (b) to the extent not covered by clause (a) above, all
proceeds of any or all of the foregoing.
Pledgor means each
Person who pledges Pledged Securities under the Pledge Agreement.
Preferred Stock
means any class of capital stock of a corporation that is preferred over any other class
of capital stock of such corporation as to the payment of dividends or the payment of any
amount upon liquidation or dissolution of such corporation.
Priority
Indebtedness means (without duplication) the sum of (a) any unsecured
Indebtedness of the Restricted Subsidiaries other than (i) guarantees under the Subsidiary
Guaranty, (ii) Indebtedness of a Restricted Subsidiary if (x) the Company has guaranteed
such Indebtedness or is a primary obligor of such Indebtedness, and (y) the holder of such
Indebtedness becomes a party to the Collateral Agency and Intercreditor Agreement
(provided that until the holder of such Indebtedness becomes a party to the
Collateral Agency and Intercreditor Agreement, such Indebtedness will be considered
Priority Indebtedness), and (iii) Indebtedness owed to the Company or any other Restricted
Subsidiary, and (b) Indebtedness of the Company and its Restricted Subsidiaries secured by
a Lien not permitted by paragraphs (a) through (m) of Section 10.3, and
(c) Securitization Debt.
property or
properties means and includes each and every interest in any property
or asset, whether tangible or intangible and whether real, personal or mixed.
QPAM Exemption
means Prohibited Transaction Class Exemption 84-14 issued by the United States Department
of Labor.
Required Holders
means, at any time, the holders of more than 50% in principal amount of the Notes at the
time outstanding (exclusive of Notes then owned by the Company or any of its Affiliates).
Responsible
Officer means any Senior Financial Officer and any other officer of the Company
or its Subsidiaries with responsibility for the administration of the relevant portion of
this Agreement or the Collateral Documents.
Restricted
Investments means all Investments except any of the following: (i) property to
be used in the ordinary course of business; (ii) assets arising from the sale of goods and
services in the ordinary course of business; (iii) Investments in one or more Restricted
Subsidiaries or any Person that immediately becomes a Restricted Subsidiary; (iv)
Investments existing at the date of Closing; (v) Investments in obligations, maturing
within one year, issued by or guaranteed by the United States of America, or an agency
thereof, or Canada, or any province thereof; (vi) Investments in tax-exempt
obligations, maturing within one year, which are rated in one of the top two rating
classifications by at least one national rating agency; (vii) Investments in certificates
of deposit or bankers acceptances maturing within one year issued by Bank of America
or other commercial banks which are rated in one of the top two rating classifications by
at lest one national rating agency; (viii) Investments in commercial paper, maturing
within 270 days, rated in one of the top two rating classifications by at least one
national rating agency; (ix) Investments in repurchase agreements; (x) treasury stock;
(xi) Investments in money market instrument programs which are classified as current
assets in accordance with GAAP; (xii) Investments in foreign currency risk hedging
contracts used in the ordinary course of business; and (xiii) Investments in
Securitization Entities.
Restricted
Subsidiary means any Subsidiary (a) at least a majority of the voting securities
of which are owned by the Company and/or one or more Wholly-Owned Restricted Subsidiaries,
and (b) which the Company has not designated as an Unrestricted Subsidiary in accordance
with Section 10.8; provided that upon any Unrestricted Subsidiary becoming a
Material Subsidiary, it shall immediately be deemed to be a Restricted Subsidiary.
Securities Act
means the Securities Act of 1933, as amended from time to time.
Security has the
meaning set forth in section 2(l) of the Securities Act.
Securitization
Debt for the Company and the Restricted Subsidiaries shall mean, in connection
with any Permitted Securitization Program, (a) any amount as to which any Securitization
Entity or other Person has recourse to the Company or any Restricted Subsidiary with
respect to such Permitted Securitization Program by way of a Guaranty and (b) the amount
of any reserve account or similar account or asset shown as an asset of the Company or a
Restricted Subsidiary under GAAP that has been pledged to any Securitization Entity or any
other Person in connection with such Permitted Securitization Program.
Securitization
Entity means a wholly-owned Subsidiary (other than a Restricted Subsidiary)
of the Company (or another Person in which the Company or any of its Subsidiaries makes an
investment and to which the Company or any of its Subsidiaries transfers receivables and
related assets) that engages in no activities other than in connection with the financing
of receivables and that is designated by the Board of Directors of the Company (as
provided below) as a Securitization Entity (i) no portion of the Indebtedness or any other
obligations (contingent or otherwise) of which (A) is guaranteed by the Company or any of
its Subsidiaries (excluding guarantees of obligations (other than the principal of, and
interest on, Indebtedness) pursuant to Standard Securitization Undertakings), (B) is
recourse to or obligates the Company or any of its Subsidiaries in any way other than
pursuant to Standard Securitization Undertakings, or (C) subjects any property or asset of
the Company or any other Subsidiary of the Company, directly or indirectly, continently or
otherwise, to the satisfaction thereof, other than pursuant to Standard Securitization
Undertakings, (ii) with which neither the Company nor any of its Subsidiaries has any
material contract, agreement, arrangement or understanding other than on terms no less
favorable to the Company or such Subsidiary than those that might be obtained at the time
from Persons that are not Affiliates of the Company, other than fees payable in the
ordinary course of business in connection with servicing receivables of such entity, and
(iii) to which neither the Company nor any of its Subsidiaries has any obligation to
maintain or preserve such entitys financial condition or cause such entity to
achieve certain levels of operating results.
Senior Financial
Officer means the chief financial officer, principal accounting officer,
treasurer or comptroller of the Company.
Senior Secured
Creditor means (a) each holder of a Note, (b) each holder of a New Note, and (c)
each lender under a Significant Credit Facility, including the lenders under the ABN
Amro Facility.
Senior Secured
Indebtedness means the Indebtedness of the Company under (a) this Agreement and
the Notes, (b) the New Notes, and (c) any Significant Credit Facility (including, without
limitation, Indebtedness of the Company under the ABN Amro Facility.
Significant Credit
Facility means (a) any Credit Facility that has at least $7,500,000 available to
be borrowed and/or outstanding at any time, and (b) any Credit Facility if the aggregate
amount available to be borrowed and/or outstanding under all of the Credit Facilities
exceeds $25,000,000 at any time; provided that the term Significant Credit
Facility shall not include any Priority Indebtedness to the extent that such
Priority Indebtedness is permitted by Section 10.5(a)(ii), any Indebtedness secured by a
Lien permitted by Section 10.3(h), or any Indebtedness secured by a Lien renewing,
extending or replacing Liens as described in Section 10.3(m).
Standard Securitization
Undertakings means representations, warranties, covenants and indemnities
entered into by the Company or any of its Subsidiaries that are reasonably customary in a
receivables securitization transaction.
Subsidiary means,
as to any Person, (a) any corporation of which more than 50% of the issued and outstanding
Equity Securities having ordinary voting power to elect a majority of the Board of
Directors of such corporation (irrespective of whether at the time capital stock of any
other class or classes of such corporation shall or might have voting power upon the
occurrence of any contingency) is at the time directly or indirectly owned or controlled
by such Person, by such Person and one or more of its Subsidiaries or by one or more of
such Persons other Subsidiaries, (b) any partnership, joint venture, limited
liability company or other association of which more than 50% of the equity interest
having the power to vote, direct or control the management of such partnership, joint
venture, limited liability company or other association is at the time owned and
controlled by such Person, by such Person and one or more of the other Subsidiaries or by
one or more of such Persons other Subsidiaries, or (c) any other Person included in
the financial statements of such Person on a consolidated basis.. Unless the context
otherwise clearly requires, any reference to a Subsidiary is a reference to a
Subsidiary of the Company.
Subsidiary
Guarantors means all current and future Material Domestic Subsidiaries of
the Company.
Subsidiary
Guaranty means that certain Subsidiary Guaranty, substantially in the form of
Exhibit 4.13(a) hereto, dated as of the date hereof, executed and delivered by the
Subsidiary Guarantors, as amended, supplemented and modified from time to time.
Swap Agreement
means (a) any and all rate swap transactions, basis swaps, forward rate transactions,
interest rate options, forward foreign exchange transactions, cap transactions, floor
transactions, collar transactions, currency swap transactions, cross-currency rate swap
transactions, currency options, or any other similar transactions or any combination of
any of the foregoing (including any options to enter into any of the foregoing), provided
that any such transaction is governed by or subject to a Master Agreement, and (b) any and
all transactions of any kind, and the related confirmations, which are subject to the
terms and conditions of, or governed by, any form of master agreement published by the
International Swaps and Derivatives Association, Inc., or any other master agreement
published by any successor organization thereto (any such master agreement, together with
any related schedules, as amended, restated, extended, supplemented or otherwise modified
in writing from time to time, a Master Agreement), including any such
obligations or liabilities under any Master Agreement.
Taxes is
defined in Section 14.4(a).
Term Debt means
any Indebtedness of Company or any Restricted Subsidiary other than (a) Credit Facilities
providing for the borrowing of money or the issuance of letters of credit on a revolving
basis or for working capital, (b) Priority Indebtedness, and (c) Indebtedness secured by
Liens permitted by paragraphs (a) through (m) of Section 10.3.
Total
Indebtedness means, at any date of determination, the sum of (i) the
total of all Indebtedness of the Company and the Restricted Subsidiaries outstanding on
such date, after eliminating all offsetting debits and credits between the Company and the
Restricted Subsidiaries and all other items required to be eliminated in the course of the
preparation of consolidated financial statements of the Company and the Restricted
Subsidiaries in accordance with GAAP, plus (ii) the aggregate amount of
Indebtedness of the Company to any of its Restricted Subsidiaries that is not subordinated
to the Notes pursuant to a subordination agreement substantially in the form set forth in
Exhibit 2.
Unrestricted
Subsidiary means any Subsidiary which is designated as an Unrestricted
Subsidiary on Schedule 5.4 attached hereto or is designated as such in writing by
the Company to each of the holders of the Notes pursuant to Section 10.8; provided
that no Material Subsidiary shall be an Unrestricted Subsidiary.
Wholly-Owned Restricted
Subsidiary means, at any time, (a) with respect to Domestic Subsidiaries, any
Restricted Subsidiary one hundred percent (100%) of all of the equity interests (except
directors qualifying shares) and voting interests of which are owned by any one or
more of the Company and the Companys other wholly-owned Restricted Subsidiaries at
such time, and (b) with respect to Foreign Subsidiaries, any Restricted Subsidiary
ninety-five percent (95%) of all of the equity interests (except directors
qualifying shares) and voting interests of which are owned by any one or more of the
Company and the Companys other Wholly-Owned Restricted Subsidiaries at such time.
Yen and
¥ mean the lawful currency of Japan and, in relation to any payment
under this Agreement, same day or immediately available funds.
Exhibit 10.5 to NSE FORM 10-K 2005 Pledge Agreement
NU SKIN ENTERPRISES,
INC.
PLEDGE AGREEMENT
This
PLEDGE AGREEMENT (this Agreement) is dated as of October 12, 2000 and
is entered into by and among Nu Skin Enterprises, Inc., a Delaware corporation
(Company), each Additional Pledgor that may become a party hereto after
the date hereof in accordance with Section 16 hereof (each of Company and each Additional
Pledgor being a Pledgor and collectively Pledgors),
and State Street Bank and Trust Company of California, N.A. (Secured
Party), as agent for and on behalf of the other Benefitted Parties party to the
Collateral Agency and Intercreditor Agreement referred to below.
PRELIMINARY STATEMENTS
A.
The Prudential Insurance Company of America (Prudential) is
purchasing an aggregate principal amount of JP¥9,706,500,000 of
Companys Senior Secured Notes due October 12, 2010 (the
Notes) pursuant to that certain Note Purchase Agreement dated
as of October 12, 2000 by and between Company and Prudential (such agreement, as
it may hereafter be amended, supplemented or otherwise modified from time to
time, being the Note Purchase Agreement, the terms
defined therein and not otherwise defined herein being used herein as therein
defined), and it is desired that the obligations of Company under the Note
Purchase Agreement and the Notes be secured hereunder.
B.
The Note Purchase Agreement requires Company to (i) pledge, or cause a pledge
of, 65% of the Equity Securities of each Material Foreign Subsidiary to Secured
Party, for the ratable benefit of the Benefitted Parties (as defined in the
Collateral Agency and Intercreditor Agreement), as security for the Notes, and
(ii) take all actions as may be necessary or desirable to give to Secured Party,
for the ratable benefit of the Benefitted Parties, a valid and perfected first
priority Lien on and security interest in the Pledged Collateral.
C.
Secured Party, Prudential and each of the other Benefitted Parties have entered
into that certain Collateral Agency and Intercreditor Agreement dated as of
October 12, 2000 (such agreement, as it may hereafter be amended, supplemented
or otherwise modified from time to time, being the Collateral Agency
and Intercreditor Agreement).
D.
Company is the legal and beneficial owner of all of the Equity Securities of Nu
Skin Japan Co., Ltd., a Japanese corporation (Nu Skin Japan).
E.
It is a condition precedent to Prudentials obligation to purchase and pay
for the Notes that Pledgors shall have granted the security interest and
undertaken the obligations contemplated by this Agreement and the Note Purchase Agreement.
F.
This Agreement, the Note Purchase Agreement and each of the other documents
relating to the Secured Obligations (as defined in Section 2) are hereinafter
referred to collectively as the Senior Secured Loan
Documents.
NOW,
THEREFORE, in consideration of the premises and in order to induce Prudential to purchase
and for the Notes under the Note Purchase Agreement, and for other good and valuable
consideration, the receipt and adequacy of which are hereby acknowledged, each Pledgor
hereby agrees with Secured Party as follows:
SECTION
1. Pledge of Security. Each Pledgor hereby pledges and assigns to
Secured Party, and hereby grants to Secured Party a first priority security interest in,
all of such Pledgors right, title and interest in and to the following (the
Pledged Collateral):
(a)
the Equity Securities described in Schedule I attached hereto for such
Pledgor and the Equity Securities of each Person that becomes a Material Foreign
Subsidiary, including all securities convertible into, and rights, warrants,
options and other rights to purchase or otherwise acquire, any of the foregoing
now or hereafter owned by such Pledgor, and the certificates or other
instruments representing any of the foregoing and any interest of such Pledgor
in the entries on the books of any securities intermediary pertaining thereto
(the Pledged Shares), and all dividends, distributions,
returns of capital, cash, warrants, option, rights, instruments, right to vote
or manage the business of such Person pursuant to organizational documents
governing the rights and obligations of the stockholders, and other property or
proceeds from time to time received, receivable or otherwise distributed in
respect of or in exchange for any or all of such Pledged Shares; provided
that the Pledged Shares shall not include any Equity Securities of such issuer
in excess of the number of shares or other equity interests of such issuer
possessing up to but not exceeding 65% of the voting power of all classes of
Equity Securities entitled to vote of such issuer, and all dividends, cash,
warrants, rights, instruments and other property or proceeds from time to time
received, receivable or otherwise distributed in respect of or in exchange for
any or all of such Equity Securities; and
(b)
to the extent not covered by clause (a) above, all proceeds of any or all of the
foregoing Pledged Collateral. For purposes of this Agreement, the term
proceeds includes whatever is receivable or received when
Pledged Collateral or proceeds are sold, exchanged, collected or otherwise
disposed of, whether such disposition is voluntary or involuntary.
SECTION
2. Security for Obligations. This Agreement secures, and the Pledged
Collateral is collateral security for, the prompt payment or performance in full when due,
whether at stated maturity, by required prepayment, declaration, acceleration, demand or
otherwise (including the payment of amounts that would become due but for the operation of
the automatic stay under Section 362(a) of the Bankruptcy Code, 11 U.S.C. §362(a) or
any similar or comparable laws of jurisdictions outside the United States), of all
obligations and liabilities of every nature of Pledgors now or hereafter existing under or
arising out of or in connection with the Obligations (as defined in the Collateral Agency
and Intercreditor Agreement) and all extensions or renewals thereof, whether for
principal, interest (including without limitation interest that, but for the filing of a
petition in bankruptcy with respect to any Pledgor, would accrue on such Obligations,
whether or not a claim is allowed against
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SECTION
2. Security for Obligations. This Agreement secures, and the Pledged
Collateral is collateral security for, the prompt payment or performance in full when due,
whether at stated maturity, by required prepayment, declaration, acceleration, demand or
otherwise (including the payment of amounts that would become due but for the operation of
the automatic stay under Section 362(a) of the Bankruptcy Code, 11 U.S.C. §362(a) or
any similar or comparable laws of jurisdictions outside the United States), of all
obligations and liabilities of every nature of Pledgors now or hereafter existing under or
arising out of or in connection with the Obligations (as defined in the Collateral Agency
and Intercreditor Agreement) and all extensions or renewals thereof, whether for
principal, interest (including without limitation interest that, but for the filing of a
petition in bankruptcy with respect to any Pledgor, would accrue on such Obligations,
whether or not a claim is allowed against
SECTION
3. Delivery of Pledged Collateral. All certificates or instruments
representing or evidencing the Pledged Collateral shall be delivered to and held by or on
behalf of Secured Party and shall be in suitable form for transfer by delivery or, as
applicable, shall be accompanied by each Pledgors endorsement, where necessary, or
duly executed instruments of transfer or assignment in blank, all in form and substance
satisfactory to Secured Party. Upon the occurrence and during the continuation of a
Triggering Event (as defined in the Collateral Agency and Intercreditor Agreement),
Secured Party shall have the right, without notice to Pledgors, to transfer to or to
register in the name of Secured Party or any of its nominees any or all of the Pledged
Collateral; provided that if the Triggering Event is the result of the institution
of an involuntary Bankruptcy Proceeding against the Company, any Subsidiary Guarantor or
any Material Foreign Subsidiary (an Involuntary Proceeding), Secured
Party shall not have such right until such proceeding continues for at least 60
consecutive days. In addition, Secured Party shall have the right at any time to exchange
certificates or instruments representing or evidencing Pledged Collateral for certificates
or instruments of smaller or larger denominations.
SECTION 4. Representations and Warranties. Each Pledgor represents and warrants as follows:
(a)
Due Authorization, etc. of Pledged Shares. All of the Pledged Shares
described on Schedule I for such Pledgor have been duly authorized and
validly issued and are fully paid and non-assessable.
(b)
Description of Pledged Shares. The Pledged Shares constitute 65% of the
voting power of all classes of Equity Securities of each issuer thereof, and
there are no outstanding warrants, options or other rights to purchase, or other
agreements outstanding with respect to, or property that is now or hereafter
convertible into, or that requires the issuance or sale of, any Pledged Shares.
(c)
Ownership of Pledged Collateral. Such Pledgor is the legal, record and
beneficial owner of the Pledged Collateral free and clear of any Lien except for
Permitted Liens.
3
(d)
Governmental Authorizations. No authorization, approval or other action
by, and no notice to or filing with, any governmental authority or regulatory
body is required for either (i) the pledge by such Pledgor of the Pledged
Collateral pursuant to this Agreement and the grant by such Pledgor of the
security interest granted hereby, (ii) the execution, delivery or
performance of this Agreement by such Pledgor, or (iii) the exercise by
Secured Party of the voting or other rights, or the remedies in respect of the
Pledged Collateral, provided for in this Agreement (except as may be required in
connection with a disposition of Pledged Collateral by laws affecting the
offering and sale of securities generally).
(e)
Perfection. The pledge of the Pledged Collateral pursuant to this
Agreement creates a valid and perfected first priority security interest in the
Pledged Collateral, securing the payment of the Secured Obligations.
(f)
Margin Regulations. The pledge of the Pledged Collateral pursuant to this
Agreement does not violate Regulation T, U or X of the Board of Governors of the
Federal Reserve System.
(g)
Other Information. All information heretofore, herein or hereafter
supplied to Secured Party by or on behalf of such Pledgor with respect to the
Pledged Collateral is accurate and complete in all respects.
SECTION 5. Transfers and Other Liens; Additional Pledged Collateral; etc. Each Pledgor shall:
(a)
not, except as expressly permitted by the Senior Secured Loan Documents,
(i) sell, assign (by operation of law or otherwise) or otherwise dispose
of, or grant any option with respect to, any of the Pledged Collateral,
(ii) create or suffer to exist any Lien upon or with respect to any of the
Pledged Collateral, except for Permitted Liens, or (iii) permit any issuer of
Pledged Shares to merge or consolidate unless all the outstanding Equity
Securities of the surviving or resulting corporation is, upon such merger or
consolidation, pledged hereunder and no cash, securities or other property is
distributed in respect of the outstanding Equity Securities of any other
constituent corporation; provided, if the surviving or resulting
corporation is a foreign corporation, then such Pledgor shall only be required
to pledge outstanding Equity Securities of such surviving or resulting
corporation possessing up to but not exceeding 65% of the voting power of all
classes of Equity Securities of such issuer entitled to vote;
4
(b)
(i) cause each issuer of Pledged Shares not to issue any Equity Securities
in addition to or in substitution for the Pledged Shares issued by such issuer,
except to such Pledgor or as otherwise permitted by the Senior Secured Loan
Documents, (ii) pledge hereunder, immediately upon its acquisition
(directly or indirectly) thereof, any and all additional Equity Securities of
each issuer of Pledged Shares, and (iii) pledge hereunder, immediately upon
its acquisition (directly or indirectly) thereof, any and all Equity Securities
of any Person that, after the date of this Agreement, becomes, as a result of
any occurrence, a Material Foreign Subsidiary; provided, notwithstanding
anything contained in clause (ii) or this clause (iii) to the contrary, such
Pledgor shall only be required to pledge the outstanding Equity Securities up to
but not exceeding 65% of the voting power of all classes of Equity Securities of
such controlled foreign corporation entitled to vote;
(c)
promptly deliver to Secured Party all written notices received by it with
respect to the Pledged Collateral (other than customary notices received from a
governmental or regulatory body and customary and routine notices received from
the issuer of the Pledged Shares in the ordinary course of business); and
(d)
pay promptly when due all taxes, assessments and governmental charges or levies
imposed upon, and all claims against, the Pledged Collateral, except to the
extent the validity thereof is being contested in good faith; provided
that such Pledgor shall in any event pay such taxes, assessments, charges,
levies or claims not later than five days prior to the date of any proposed sale
under any judgment, writ or warrant of attachment entered or filed against such
Pledgor or any of the Pledged Collateral as a result of the failure to make such
payment.
SECTION 6. Further Assurances; Pledge Amendments.
(a)
Each Pledgor agrees that from time to time, at the expense of such Pledgor, such
Pledgor will promptly execute and deliver all further instruments and documents,
and take all further action, that may be necessary or desirable, or that Secured
Party may request, in order to perfect and protect any security interest granted
or purported to be granted hereby or to enable Secured Party to exercise and
enforce its rights and remedies hereunder with respect to any Pledged
Collateral. Without limiting the generality of the foregoing, each Pledgor will:
(i) execute and file such financing or continuation statements, or
amendments thereto, and such other instruments or notices, as may be necessary
or desirable, or as Secured Party may reasonably request, in order to perfect
and preserve the security interests granted or purported to be granted hereby
and (ii) at Secured Partys request, appear in and defend any action
or proceeding that may affect such Pledgors title to or Secured
Partys security interest in all or any part of the Pledged Collateral.
Each Pledgor hereby authorizes Secured Party to file one or more financing or
continuation statements, and amendments thereto, relative to all or any part of
the Pledged Collateral without the signature of such Pledgor. Such Pledgor
agrees that a carbon, photographic or other reproduction of this Agreement or of
a financing statement signed by such Pledgor shall be sufficient as a financing
statement and may be filed as a financing statement in any and all
jurisdictions.
5
(b)
Each Pledgor further agrees that it will, upon obtaining any additional shares
of stock or other Equity Securities required to be pledged hereunder as provided
in the Note Purchase Agreement, promptly (and in any event within five Business
Days) deliver to Secured Party a Pledge Amendment, duly executed by Pledgor, in
substantially the form of Schedule II annexed hereto (a Pledge
Amendment), in respect of the additional Pledged Shares to be pledged
pursuant to this Agreement. Upon each delivery of a Pledge Amendment to Secured
Party, the representations and warranties contained in Section 4 hereof shall be
deemed to have been made by such Pledgor as to the Pledged Collateral described
in such Pledge Amendment. Pledgor hereby authorizes Secured Party to attach each
Pledge Amendment to this Agreement and agrees that all Pledged Shares listed on
any Pledge Amendment delivered to Secured Party shall for all purposes hereunder
be considered Pledged Collateral; provided that the failure of such
Pledgor to execute a Pledge Amendment with respect to any additional Pledged
Shares pledged pursuant to this Agreement shall not impair the security interest
of Secured Party therein or otherwise adversely affect the rights and remedies
of Secured Party hereunder with respect thereto.
SECTION
7. Voting Rights; Dividends; Etc.
(a)
So long as no Triggering Event shall have occurred and be continuing:
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(i)
each Pledgor shall be entitled to exercise any and all voting and other
consensual rights pertaining to the Pledged Collateral or any part thereof for
any purpose not inconsistent with the terms of the Senior Secured Loan
Documents; provided, however, that such Pledgor shall not exercise
or refrain from exercising any such right if Secured Party or Required Creditors
shall have notified such Pledgor that, in Secured Partys or Required
Creditors judgment, such action would have a material adverse effect on
the value of the Pledged Collateral or any part thereof; and provided,
further, that such Pledgor shall give Secured Party and each Senior
Secured Party at least five Business Days prior written notice of the
manner in which it intends to exercise, or the reasons for refraining from
exercising, any such right (it being understood, however, that neither
(A) the voting by such Pledgor of any Pledged Shares for or such
Pledgors consent to the election of directors at a regularly scheduled
annual or other meeting of stockholders or with respect to incidental matters at
any such meeting, nor (B) such Pledgors consent to or approval of any
action otherwise not prohibited under this Agreement and each of the other
Senior Secured Loan Documents shall be deemed inconsistent with the terms of any
Senior Secured Loan Document within the meaning of this Section 7(a)(i), and no
notice of any such voting or consent need be given to Secured Party); |
6
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(ii)
each Pledgor shall be entitled to receive and retain, and to utilize free and
clear of the lien of this Agreement, any and all dividends, other distributions
and interest paid in respect of the Pledged Collateral; provided,
however, that any and all dividends, other distributions and interest
paid or payable other than in cash in respect of, and instruments and other
property received, receivable or otherwise distributed in respect of, or in
exchange for, any Pledged Collateral shall be, and shall forthwith be delivered
to Secured Party to hold as, Pledged Collateral and shall, if received by such
Pledgor, be received in trust for the benefit of Secured Party, be segregated
from the other property or funds of such Pledgor and be forthwith delivered to
Secured Party as Pledged Collateral in the same form as so received (with all
necessary indorsements); and |
|
(iii)
Secured Party shall promptly execute and deliver (or cause to be executed and
delivered) to each Pledgor all such proxies, dividend payment orders and other
instruments as such Pledgor may from time to time reasonably request for the
purpose of enabling such Pledgor to exercise the voting and other consensual
rights which it is entitled to exercise pursuant to paragraph (i) above and to
receive the dividends, other distributions, principal or interest payments which
it is authorized to receive and retain pursuant to paragraph (ii) above. |
(b)
Upon the occurrence and during the continuation of a Triggering Event (other
than an Involuntary Proceeding) or upon the occurrence and continuation of an
Involuntary Proceeding for at least 60 consecutive days and during the
continuation of such Involuntary Proceeding:
|
(i)
upon written notice from Secured Party to Pledgors, all rights of Pledgors to
exercise the voting and other consensual rights which it would otherwise be
entitled to exercise pursuant to Section 7(a)(i) shall cease, and all such
rights shall thereupon become vested in Secured Party who shall thereupon have
the sole right to exercise such voting and other consensual rights; |
|
(ii)
all rights of Pledgors to receive the dividends and interest payments which it
would otherwise be authorized to receive and retain pursuant to Section 7(a)(ii)
shall cease, and all such rights shall thereupon become vested in Secured Party
who shall thereupon have the sole right to receive and hold as Pledged
Collateral such dividends, other distributions and interest payments; and |
|
(iii)
all dividends, principal, interest payments and other distributions which are
received by Pledgors contrary to the provisions of paragraph (ii) of this
Section 7(b) shall be received in trust for the benefit of Secured Party, shall
be segregated from other funds of Pledgors and shall forthwith be paid over to
Secured Party as Pledged Collateral in the same form as so received (with any
necessary indorsements). |
7
(c)
In order to permit Secured Party to exercise the voting and other consensual
rights which it may be entitled to exercise pursuant to Section 7(b)(i) and to
receive all dividends and other distributions which it may be entitled to
receive under Section 7(a)(ii) or Section 7(b)(ii), (i) each Pledgor shall
promptly execute and deliver (or cause to be executed and delivered) to Secured
Party all such proxies, dividend payment orders and other instruments as Secured
Party may from time to time reasonably request and (ii) without limiting
the effect of the immediately preceding clause (i), each Pledgor hereby grants
to Secured Party an irrevocable proxy to vote the Pledged Shares and to exercise
all other rights, powers, privileges and remedies to which a holder of the
Pledged Shares would be entitled (including, without limitation, giving or
withholding written consents of shareholders, calling special meetings of
shareholders and voting at such meetings), which proxy shall be effective,
automatically and without the necessity of any action (including any transfer of
any Pledged Shares on the record books of the issuer thereof) by any other
Person (including the issuer of the Pledged Shares or any officer or agent
thereof), upon the occurrence of a Triggering Event (other than an Involuntary
Proceeding) or the occurrence and continuation of an Involuntary Proceeding for
at least 60 consecutive days and which proxy shall only terminate upon the
payment in full of the Secured Obligations.
SECTION
8. Secured Party Appointed Attorney-in-Fact. Each Pledgor hereby
irrevocably appoints Secured Party as such Pledgors attorney-in-fact, with full
authority in the place and stead of such Pledgor and in the name of such Pledgor, Secured
Party or otherwise, from time to time in Secured Partys discretion to take any
action and to execute any instrument that Secured Party may deem necessary or advisable to
accomplish the purposes of this Agreement, including without limitation:
(a)
to file one or more financing or continuation statements, or amendments thereto,
relative to all or any part of the Pledged Collateral without the signature of
Pledgor;
(b)
upon the occurrence and during the continuation of a Triggering Event (other
than an Involuntary Proceeding) or upon the occurrence and continuation of an
Involuntary Proceeding for at least 60 consecutive days and during the
continuation of such Involuntary Proceeding, to ask, demand, collect, sue for,
recover, compound, receive and give acquittance and receipts for moneys due and
to become due under or in respect of any of the Pledged Collateral;
(c)
upon the occurrence and during the continuation of a Triggering Event (other
than an Involuntary Proceeding) or upon the occurrence and continuation of an
Involuntary Proceeding for at least 60 consecutive days and during the
continuation of such Involuntary Proceeding, to receive, endorse and collect any
instruments made payable to Pledgor representing any dividend, principal or
interest payment or other distribution in respect of the Pledged Collateral or
any part thereof and to give full discharge for the same;
8
(d)
upon the occurrence and during the continuation of a Triggering Event (other
than an Involuntary Proceeding) or upon the occurrence and continuation of an
Involuntary Proceeding for at least 60 consecutive days and during the
continuation of such Involuntary Proceeding, to file any claims or take any
action or institute any proceedings that Secured Party may deem necessary or
desirable for the collection of any of the Pledged Collateral or otherwise to
enforce the rights of Secured Party with respect to any of the Pledged
Collateral;
(e)
to pay or discharge taxes or Liens (other than Permitted Liens) levied or placed
upon or threatened against the Pledged Collateral, the legality or validity
thereof and the amounts necessary to discharge the same to be determined by
Secured Party in its sole discretion, any such payments made by Secured Party to
become obligations of such Pledgor to Secured Party, due and payable immediately
without demand; and
(f)
upon the occurrence and during the continuation of a Triggering Event (other
than an Involuntary Proceeding) or upon the occurrence and continuation of an
Involuntary Proceeding for at least 60 consecutive days and during the
continuation of such Involuntary Proceeding, generally to sell, transfer,
pledge, make any agreement with respect to or otherwise deal with any of the
Pledged Collateral as fully and completely as though Secured Party were the
absolute owner thereof for all purposes, and to do, at Secured Partys
option and such Pledgors expense, at any time or from time to time, all
acts and things that Secured Party deems necessary to protect, preserve or
realize upon the Pledged Collateral and Secured Partys security interest
therein in order to effect the intent of this Agreement, all as fully and
effectively as such Pledgor might do.
SECTION
9. Secured Party May Perform. If any Pledgor fails to perform any
agreement contained herein, Secured Party may itself perform, or cause performance of,
such agreement, and the expenses of Secured Party incurred in connection therewith shall
be payable by such Pledgor under Section 13(b).
SECTION
10. Standard of Care. The powers conferred on Secured Party hereunder
are solely to protect its interest in the Pledged Collateral and shall not impose any duty
upon it to exercise any such powers. Except for the exercise of reasonable care in the
custody of any Pledged Collateral in the Secured Partys possession and the
accounting for moneys actually received by it hereunder, Secured Party shall have no duty
as to any Pledged Collateral, it being understood by the parties hereto that Secured Party
shall have no responsibility for (a) ascertaining or taking action with respect to
calls, conversions, exchanges, maturities, tenders or other matters relating to any
Pledged Collateral, whether or not Secured Party or any Senior Secured Creditor has or is
deemed to have knowledge of such matters, (b) taking any necessary steps (other than
steps taken in accordance with the standard of care set forth above to maintain possession
of the Pledged Collateral) to preserve rights against any prior parties or any other
rights pertaining to any Pledged Collateral, (c) taking any necessary steps to
collect or realize upon the Secured Obligations or any guarantee therefor, or any part
thereof, or any of the Pledged Collateral, or (d) initiating any action to protect
the Pledged Collateral against the possibility of a decline in market value. Secured Party
shall be deemed to have exercised reasonable care in the custody and preservation of
Pledged Collateral in its possession if such Pledged Collateral is accorded
9
treatment
substantially equal to that which Secured Party accords its own property consisting of
negotiable securities.
SECTION
11. Remedies.
(a)
If any Triggering Event (other than Involuntary Proceeding) shall have occurred
and be continuing or any Involuntary Proceeding shall have occurred and be
continuing for at least 60 consecutive days, Secured Party may exercise in
respect of the Pledged Collateral, in addition to all other rights and remedies
provided for herein or otherwise available to it, all the rights and remedies of
a secured party on default under the Uniform Commercial Code as in effect in any
relevant jurisdiction (the UCC) (whether or not the UCC
applies to the affected Pledged Collateral), and Secured Party may also in its
sole discretion, without notice except as specified below, sell the Pledged
Collateral or any part thereof in one or more parcels at public or private sale,
at any exchange or brokers board or at any of Secured Partys offices
or elsewhere, for cash, on credit or for future delivery, at such time or times
and at such price or prices and upon such other terms as Secured Party may deem
commercially reasonable, irrespective of the impact of any such sales on the
market price of the Pledged Collateral. Secured Party or any Senior Secured
Creditor may be the purchaser of any or all of the Pledged Collateral at any
such sale and Secured Party, as agent for and representative of the Benefitted
Parties, shall be entitled, for the purpose of bidding and making settlement or
payment of the purchase price for all or any portion of the Pledged Collateral
sold at any such public sale, to use and apply any of the Secured Obligations as
a credit on account of the purchase price for any Pledged Collateral payable by
Secured Party or any Senior Secured Creditor at such sale. Each purchaser at any
such sale shall hold the property sold absolutely free from any claim or right
on the part of Pledgors, and each Pledgor hereby waives (to the extent permitted
by applicable law) all rights of redemption, stay and/or appraisal which it now
has or may at any time in the future have under any rule of law or statute now
existing or hereafter enacted. Each Pledgor agrees that, to the extent notice of
sale shall be required by law, at least ten days notice to Pledgor of the
time and place of any public sale or the time after which any private sale is to
be made shall constitute reasonable notification. Secured Party shall not be
obligated to make any sale of Pledged Collateral regardless of notice of sale
having been given. Secured Party may adjourn any public or private sale from
time to time by announcement at the time and place fixed therefor, and such sale
may, without further notice, be made at the time and place to which it was so
adjourned. Each Pledgor hereby waives any claims against Secured Party arising
by reason of the fact that the price at which any Pledged Collateral may have
been sold at such a private sale was less than the price which might have been
obtained at a public sale, even if Secured Party accepts the first offer
received and does not offer such Pledged Collateral to more than one offeree. If
the proceeds of any sale or other disposition of the Pledged Collateral are
insufficient to pay all the Secured Obligations, Pledgors shall be jointly and
severally liable for the deficiency and the fees of any attorneys employed by
Secured Party or any Senior Secured Creditor to collect such deficiency.
10
(b)
Each Pledgor recognizes that, by reason of certain prohibitions contained in the
Securities Act of 1933, as from time to time amended (the Securities
Act), and applicable state securities laws, Secured Party may be
compelled, with respect to any sale of all or any part of the Pledged Collateral
conducted without prior registration or qualification of such Pledged Collateral
under the Securities Act and/or such state securities laws, to limit purchasers
to those who will agree, among other things, to acquire the Pledged Collateral
for their own account, for investment and not with a view to the distribution or
resale thereof. Each Pledgor acknowledges that any such private sales may be at
prices and on terms less favorable than those obtainable through a public sale
without such restrictions (including, without limitation, a public offering made
pursuant to a registration statement under the Securities Act) and each Pledgor
agrees that any such private sale shall be deemed to have been made in a
commercially reasonable manner and that Secured Party shall have no obligation
to engage in public sales and no obligation to delay the sale of any Pledged
Collateral for the period of time necessary to permit the issuer thereof to
register it for a form of public sale requiring registration under the
Securities Act or under applicable state securities laws, even if such issuer
would, or should, agree to so register it.
(c)
If Secured Party determines to exercise its right to sell any or all of the
Pledged Collateral, upon written request, each Pledgor shall and shall cause
each issuer of any Pledged Shares to be sold hereunder from time to time to
furnish to Secured Party all such information as Secured Party may request in
order to determine the number of shares and other instruments included in the
Pledged Collateral which may be sold by Secured Party in exempt transactions
under the Securities Act and the rules and regulations of the Securities and
Exchange Commission thereunder, as the same are from time to time in effect.
SECTION
12. Application of Proceeds. Except as expressly provided elsewhere in
this Agreement, all proceeds received by Secured Party in respect of any sale of,
collection from, or other realization upon all or any part of the Pledged Collateral shall
be applied as provided in the Collateral Agency and Intercreditor Agreement.
SECTION
13. Indemnity and Expenses.
(a)
Pledgors jointly and severally agree to indemnify Secured Party and each Senior
Secured Creditor from and against any and all claims, losses and liabilities in
any way relating to, growing out of or resulting from this Agreement and the
transactions contemplated hereby (including, without limitation, enforcement of
this Agreement), except to the extent such claims, losses or liabilities result
solely from Secured Partys or such Senior Secured Creditors gross
negligence or willful misconduct as finally determined by a court of competent
jurisdiction.
(b)
Pledgors jointly and severally agree to pay to Secured Party upon demand the
amount of any and all costs and expenses, including the reasonable fees and
expenses of counsel and of any experts and agents, that Secured Party may incur
in connection with (i) the administration of this Agreement and the
Collateral Agency and Intercreditor Agreement, (ii) the custody or
preservation of, or the sale of, collection from, or other realization upon, any
of the Pledged Collateral, (iii) the exercise or enforcement of any of the
rights of Secured
11
Party hereunder and under the Collateral Agency and
Intercreditor Agreement, or (iv) the failure by any Pledgor to perform or
observe any of the provisions hereof.
SECTION
14. Continuing Security Interest; Transfer of Loans. This Agreement
shall create a continuing security interest in the Pledged Collateral and shall
(a) remain in full force and effect until the payment in full of all Secured
Obligations, the cancellation or termination of all commitments under each Senior Secured
Loan Document, and the cancellation or expiration of all outstanding Letters of Credit (as
defined in the Collateral Agency and Intercreditor Agreement), (b) be binding upon
Pledgor, its successors and assigns, and (c) inure, together with the rights and
remedies of Secured Party hereunder, to the benefit of Secured Party and its successors,
transferees and assigns. Upon the payment in full of all Secured Obligations, the
cancellation or termination of all commitments under each Senior Secured Loan Document,
and the cancellation or expiration of all outstanding Letters of Credit, the security
interest granted hereby shall terminate and all rights to the Pledged Collateral shall
revert to Pledgors. Upon any such termination Secured Party will, at Pledgors
expense, execute and deliver to Pledgors such documents as Pledgors shall reasonably
request to evidence such termination.
SECTION
15. Secured Party as Agent.
(a)
Secured Party has been appointed to act as Secured Party hereunder by the
Benefitted Parties. Secured Party shall be obligated, and shall have the right
hereunder, to make demands, to give notices, to exercise or refrain from
exercising any rights, and to take or refrain from taking any action (including,
without limitation, the release or substitution of Pledged Collateral), solely
in accordance with this Agreement and the other Senior Secured Loan Documents;
provided that Secured Party shall exercise, or refrain from exercising,
any remedies provided for in Section 11 in accordance with the instructions of
Requisite Creditors (as defined in the Collateral Agency and Intercreditor
Agreement). In furtherance of the foregoing provisions of this Section 15, each
Senior Secured Creditor, by its acceptance of the benefits hereof, agrees that
it shall have no right individually to realize upon any of the Pledged
Collateral hereunder, it being understood and agreed by such Senior Secured
Creditor that all rights and remedies hereunder may be exercised solely by
Secured Party for the benefit of the Benefitted Parties in accordance with the
terms of this Section 15.
(b)
Secured Party shall at all times be the same Person that is Collateral Agent
under the Collateral Agency and Intercreditor Agreement. Written notice of
resignation by the Collateral Agent pursuant to subsection 4(h) of the
Collateral Agency and Intercreditor Agreement shall also constitute notice of
resignation as Secured Party under this Agreement; removal of the Collateral
Agent pursuant to subsection 4(h) of the Collateral Agency and Intercreditor
Agreement shall also constitute removal as Secured Party under this Agreement;
and appointment of a successor Collateral Agent pursuant to subsection 4(h) of
the Collateral Agency and Intercreditor Agreement shall also constitute
appointment of a successor Secured Party under this Agreement. Upon the
acceptance of any appointment as Collateral Agent under subsection 4(h) of the
Collateral Agency and Intercreditor Agreement by a successor Collateral Agent,
that successor Collateral Agent shall thereupon succeed to and become vested
with all the rights, powers, privileges and duties of the retiring or removed
Secured Party under this Agreement, and the retiring or removed Secured Party
under this Agreement
12
shall promptly (i) transfer to such successor Secured
Party all sums, securities and other items of Collateral held hereunder,
together with all records and other documents necessary or appropriate in
connection with the performance of the duties of the successor Secured Party
under this Agreement, and (ii) execute and deliver to such successor
Secured Party such amendments to financing statements, and take such other
actions, as may be necessary or appropriate in connection with the assignment to
such successor Secured Party of the security interests created hereunder,
whereupon such retiring or removed Secured Party shall be discharged from its
duties and obligations under this Agreement. After any retiring or removed
Agents resignation or removal hereunder as Secured Party, the provisions
of this Agreement shall inure to its benefit as to any actions taken or omitted
to be taken by it under this Agreement while it was Secured Party hereunder.
(c)
Secured Party shall not be deemed to have any duty whatsoever with respect to
any Additional Senior Lender (as defined in the Collateral Agency and
Intercreditor Agreement) until Secured Party shall have received written notice
in form and substance satisfactory to Secured Party from a Pledgor or such
Additional Senior Lender as to the existence and terms of the applicable Senior
Secured Loan Documents.
SECTION
16. Additional Pledgors. Company shall be the initial Pledgor hereunder. From
time to time subsequent to the date hereof, Subsidiary Guarantors may become parties
hereto as additional Pledgors (each an Additional Pledgor) by executing
a counterpart of this Agreement substantially in the form of Schedule III annexed
hereto. Upon delivery of any such counterpart to Secured Party, notice of which is hereby
waived by Pledgors, each such Additional Pledgor shall be a Pledgor and shall be as fully
a party hereto as if such Additional Pledgor were an original signatory hereto. Each
Pledgor expressly agrees that its obligations arising hereunder shall not be affected or
diminished by the addition or release of any other Pledgor hereunder, nor by any election
of Secured Party or any Senior Secured Creditor not to cause any Subsidiary
Guarantor to become an Additional Pledgor hereunder. This Agreement shall be fully
effective as to any Pledgor that is or becomes a party hereto regardless of whether any
other Person becomes or fails to become or ceases to be a Pledgor hereunder.
SECTION
17. Amendments; Etc. No amendment, modification, termination or waiver of any
provision of this Agreement, and no consent to any departure by any Pledgor therefrom,
shall in any event be effective unless the same shall be in writing and signed by Secured
Party and, in the case of any such amendment or modification, by Pledgors. Any such waiver
or consent shall be effective only in the specific instance and for the specific purpose
for which it was given.
SECTION
18. Notices. Any notice or other communication herein required or permitted to
be given shall be in writing and may be personally served or sent by telefacsimile or
United States mail or courier service and shall be deemed to have been given when
received. For the purposes hereof, the address of each party hereto shall be as set forth
under such partys name on the signature pages hereof or as such other address as
shall be designated by such party in a written notice delivered to the other party hereto.
13
SECTION
19. Failure or Indulgence Not Waiver; Remedies Cumulative. No failure or
delay on the part of Secured Party in the exercise of any power, right or privilege
hereunder shall impair such power, right or privilege or be construed to be a waiver of
any default or acquiescence therein, nor shall any single or partial exercise of any such
power, right or privilege preclude any other or further exercise thereof or of any other
power, right or privilege. All rights and remedies existing under this Agreement are
cumulative to, and not exclusive of, any rights or remedies otherwise available.
SECTION
20. Severability. In case any provision in or obligation under this Agreement
shall be invalid, illegal or unenforceable in any jurisdiction, the validity, legality and
enforceability of the remaining provisions or obligations, or of such provision or
obligation in any other jurisdiction, shall not in any way be affected or impaired
thereby.
SECTION
21. Headings. Section and subsection headings in this Agreement are included
herein for convenience of reference only and shall not constitute a part of this Agreement
for any other purpose or be given any substantive effect.
SECTION
22. Governing Law; Terms. THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS
OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN
ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK (INCLUDING, WITHOUT
LIMITATION, SECTION 5-1401 OF THE GENERAL OBLIGATIONS LAW OF THE STATE OF NEW YORK),
WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES, EXCEPT TO THE EXTENT THAT THE UCC PROVIDES
THAT THE PERFECTION OF THE SECURITY INTEREST HEREUNDER, OR REMEDIES HEREUNDER, IN RESPECT
OF ANY PARTICULAR PLEDGED COLLATERAL ARE GOVERNED BY THE LAWS OF A JURISDICTION OTHER THAN
THE STATE OF NEW YORK. Unless otherwise defined herein or in the Note Purchase Agreement,
terms used in Articles 8 and 9 of the Uniform Commercial Code in the State of New York are
used herein as therein defined. The rules of construction set forth in Section 23.4 of the
Note Purchase Agreement shall be applicable to this Agreement mutatis mutandis.
SECTION
23. Consent to Jurisdiction and Service of Process. ALL JUDICIAL
PROCEEDINGS BROUGHT AGAINST ANY PLEDGOR ARISING OUT OF OR RELATING TO THIS AGREEMENT, OR
ANY OBLIGATIONS HEREUNDER, MAY BE BROUGHT IN ANY STATE OR FEDERAL COURT OF COMPETENT
JURISDICTION IN THE STATE , COUNTY AND CITY OF NEW YORK. BY EXECUTING AND DELIVERING THIS
AGREEMENT, EACH PLEDGOR, FOR ITSELF AND IN CONNECTION WITH ITS PROPERTIES, IRREVOCABLY
(I) ACCEPTS GENERALLY AND UNCONDITIONALLY THE NONEXCLUSIVE JURISDICTION AND VENUE OF
SUCH COURTS; (II) WAIVES ANY DEFENSE OF FORUM NON CONVENIENS;
(III) AGREES THAT SERVICE OF ALL PROCESS IN ANY SUCH PROCEEDING IN ANY SUCH COURT MAY
BE MADE BY REGISTERED OR CERTIFIED MAIL, RETURN RECEIPT REQUESTED, TO SUCH PLEDGOR AT ITS
ADDRESS PROVIDED IN ACCORDANCE WITH SECTION 18; (IV) AGREES THAT SERVICE AS
PROVIDED IN CLAUSE (III) ABOVE IS SUFFICIENT TO CONFER PERSONAL JURISDICTION OVER SUCH
PLEDGOR IN ANY SUCH PROCEEDING IN ANY SUCH COURT, AND
14
OTHERWISE CONSTITUTES EFFECTIVE AND
BINDING SERVICE IN EVERY RESPECT; (V) AGREES THAT SECURED PARTY RETAINS THE RIGHT TO
SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO BRING PROCEEDINGS AGAINST SUCH
PLEDGOR IN THE COURTS OF ANY OTHER JURISDICTION; AND (VI) AGREES THAT THE PROVISIONS
OF THIS SECTION 23 RELATING TO JURISDICTION AND VENUE SHALL BE BINDING AND
ENFORCEABLE TO THE FULLEST EXTENT PERMISSIBLE UNDER NEW YORK GENERAL OBLIGATIONS LAW
SECTION 5-1402 OR OTHERWISE.
SECTION
24. Waiver of Jury Trial. PLEDGORS AND SECURED PARTY HEREBY AGREE TO
WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON
OR ARISING OUT OF THIS AGREEMENT. The scope of this waiver is intended to be
all-encompassing of any and all disputes that may be filed in any court and that relate to
the subject matter of this transaction, including without limitation contract claims, tort
claims, breach of duty claims, and all other common law and statutory claims. Each Pledgor
and Secured Party acknowledge that this waiver is a material inducement for such Pledgor
and Secured Party to enter into a business relationship, that each Pledgor and Secured
Party have already relied on this waiver in entering into this Agreement and that each
will continue to rely on this waiver in their related future dealings. Each Pledgor and
Secured Party further warrant and represent that each has reviewed this waiver with its
legal counsel, and that each knowingly and voluntarily waives its jury trial rights
following consultation with legal counsel. THIS WAIVER IS IRREVOCABLE, MEANING THAT IT MAY
NOT BE MODIFIED EITHER ORALLY OR IN WRITING (OTHER THAN BY A MUTUAL WRITTEN WAIVER
SPECIFICALLY REFERRING TO THIS SECTION 24 AND EXECUTED BY EACH OF THE PARTIES
HERETO), AND THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS
OR MODIFICATIONS TO THIS AGREEMENT. In the event of litigation, this Agreement may be
filed as a written consent to a trial by the court.
SECTION
25. Counterparts. This Agreement may be executed in one or more counterparts
and by different parties hereto in separate counterparts, each of which when so executed
and delivered shall be deemed an original, but all such counterparts together shall
constitute but one and the same instrument; signature pages may be detached from multiple
separate counterparts and attached to a single counterpart so that all signature pages are
physically attached to the same document.
[Remainder
of page intentionally left blank]
15
IN
WITNESS WHEREOF, Pledgors and Secured Party have caused this Agreement to be duly
executed and delivered by their respective officers thereunto duly authorized as of the
date first written above.
NU SKIN ENTERPRISES,
INC.,
as Pledgor
By: /s/ Corey B. Lindley
Name: Corey B. Lindley
Title: Executive Vice President and
Chief Financial Officer
Notice Address
One Nu Skin Plaza
75 West Center Street
Provo, Utah 84601
Attention: General Counsel
Facsimile: (801) 345-6099
S-1
STATE STREET BANK AND TRUST
COMPANY OF CALIFORNIA, N.A.,
as Secured Party
By: /s/ Stephen Rivero
Name: Stephen Rivero
Title: Vice President
Notice Address
State Street Bank and
Trus
Company of California, N.A.
633 West 5th Street, 12th Floor
Los Angeles, California 90071
Attention: Corporate Trust Department
Facsimile: (213) 362-7357
S-2
SCHEDULE I
PLEDGED SHARES
Attached to and forming a part of the Pledge Agreement dated as of October 12, 2000 between Nu Skin Enterprises, Inc., as Pledgor, and State
Street Bank and Trust Company of California, N.A., as Secured Party.
Issuer | |
Class of Stock | |
Stock
Certificate Nos.
| |
Par
Value | |
Number of Shares | |
Number of
Shares Issued
and Outstanding
| |
Percentage
Represented by
Pledged Shares | |
Holder of Shares
Not Pledged | |
|
|
|
|
|
|
|
|
Nu Skin Japan Co., Ltd. |
|
Common |
|
3A-001 |
|
¥50,000 |
|
2,340 |
|
3,600 |
|
65% |
|
Pledgor |
|
III-A-1
Exhibit 10.8 to NSE FORM 10-K Collateral Agency and Intercreditor Agreement
COLLATERAL AGENCY AND
INTERCREDITOR AGREEMENT
This
COLLATERAL AGENCY AND INTERCREDITOR AGREEMENT (this Agreement), dated
as of October 12, 2000, is entered into among the Senior Noteholder listed on the
signature pages hereof (together with assignees of such Senior Noteholder, the
Senior Noteholders), the Senior Lender listed on the signature pages
hereof (together with any assignees of such Senior Lender, the Senior
Lenders), any Additional Creditors that may become parties to this Agreement
(either directly or through their agent), and State Street Bank and Trust Company of
California, N.A., in its capacity as collateral agent for the Senior Noteholders, the
Senior Lenders and the Additional Creditors (the Collateral Agent).
R E C I T A L S
A.
Nu Skin Enterprises, Inc., a Delaware corporation (the
Company), will issue and sell to the Senior Noteholder its
3.03% Senior Notes due October 12, 2010 in the aggregate principal amount of
JP¥9,706,500,000 (the Senior Noteholder Notes) pursuant
to that certain Note Purchase Agreement, dated as of October 12, 2000 (as the
same may be amended, supplemented or otherwise modified from time to time, the
Note Purchase Agreement), between the Company and the Senior
Noteholder.
B.
The Senior Lender (i) has made and may from time to time make loans up to an
aggregate principal amount of US$10,000,000 to the Company pursuant to that
certain Grid Note, dated May 24, 2000, executed by the Company in favor of the
Senior Lender, and (ii) may from time to time issue letters of credit for the
account of the Company pursuant to that certain Master Letter of Credit
Agreement and Addendum, each dated as of August 4, 2000, between the Company and
the Senior Lender (such Grid Note and Master Letter of Credit Agreement and
Addendum, as the same may be amended, supplemented or otherwise modified or
renewed or replaced from time to time, including any increase in the amount of
the obligations thereunder, the Credit Documents).
C.
Each of the Material Domestic Subsidiaries of the Company (together with any
future Material Domestic Subsidiaries entering into a guaranty agreement with
respect to the Obligations (as defined below), the Subsidiary
Guarantors) have entered into a guaranty agreement pursuant to which
the Subsidiary Guarantors guarantee to the Senior Lenders the payment and
performance of all of the Companys obligations under the Credit Documents
(as such guaranty agreement may be modified, amended, renewed or replaced,
including any increase in the amount guaranteed thereunder, the Bank
Obligation Guaranty).
D.
Pursuant to the Note Purchase Agreement, the Subsidiary Guarantors will enter
into a guaranty agreement pursuant to which the Subsidiary Guarantors will
guarantee to the Senior Noteholders the payment of the Noteholder Obligations
and the payment and performance of all of the Companys obligations under
the Note Purchase Agreement and the Senior Notes (as such guaranty agreement may
be modified, amended, renewed or replaced, including any increase in the amount
guaranteed thereunder, the Note Obligation Guaranty).
-1-
E.
The Company may enter into additional note purchase agreements and/or credit
agreements with investors and/or lenders which become party to this Agreement
(such investors and lenders, together with the lenders referred to in the next
sentence, the Additional Creditors) the obligations under
which (the Additional Company Obligations) will be guaranteed
by one or more of the Subsidiary Guarantors (the Additional Subsidiary
Guaranties). In addition, one or more Subsidiary Guarantors may become
direct obligors to lenders which become party to this Agreement and therefore
are Additional Creditors, and the obligations of such Subsidiary Guarantors to
such lenders (the Direct Subsidiary Obligations and together
with the Additional Company Obligations, the Additional
Obligations) will be guaranteed by the Company and the other
Subsidiary Guarantors.
F.
The Bank Obligation Guaranty, the Note Obligation Guaranty, any Additional
Subsidiary Guaranty and any Direct Subsidiary Obligation are each hereinafter
referred to as a Subsidiary Guaranty. The Credit Documents,
the Note Purchase Agreement and any additional note purchase agreements and/or
credit agreements with investors and/or lenders which become party to this
Agreement are hereinafter referred to, collectively, as the Senior Loan
Documents.
G.
The Company has secured all present and future obligations to the Senior
Noteholders under the Senior Noteholder Notes and the Note Purchase Agreement
(all such obligations, including, without limitation, principal, interest,
Make-Whole Amounts, fees and indemnities, being referred to herein as the
Senior Noteholder Obligations) and all present and future
obligations to the Senior Lenders, including, without limitation, principal,
interest, letter of credit obligations (including Contingent L/C Obligations),
break-funding amounts, fees and indemnities (the Senior Lender
Obligations) and may secure all Additional Obligations, pursuant to
the terms of that certain Pledge Agreement dated as of the date hereof between
the Company and the Collateral Agent (the Pledge Agreement)
and any similar documents executed after the date hereof, as the same may be
amended, supplemented or modified from time to time (the Security
Documents). The Senior Noteholder Obligations, the Senior Lender
Obligations and the Additional Obligations are collectively referred to as the
Obligations). The Senior Noteholders, the Senior Lenders and
the Additional Creditors are sometimes collectively referred to as the
Benefitted Parties and individually referred to as a
Benefitted Party. The Pledge Agreement grants to the
Collateral Agent, for the ratable benefit of the Benefitted Parties, a valid,
perfected and enforceable first priority lien on and a security interest in 65%
of the equity securities of certain foreign subsidiaries of the Company
(hereinafter all of such collateral, together with all rights to payment under
any Subsidiary Guaranty, shall be referred to collectively as the
Collateral).
H.
The Senior Noteholders, the Senior Lenders and the Additional Creditors wish to
set forth their understandings and agreements regarding their respective rights
and priorities with respect to amounts recovered through the exercise of any
right of set off, payments received after a Triggering Event (as defined in
Section 2(a), below) and proceeds of the Collateral.
I.
Capitalized terms used herein without being defined shall have the meanings set
forth in the Note Purchase Agreement.
-2-
NOW,
THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged and the mutual covenants and promises set forth herein, each of the
parties to this Agreement agrees as follows:
1.
Sharing.
(a)
The liens of the Collateral Agent relating to the Collateral shall be held by
the Collateral Agent for the benefit of the Benefitted Parties, and any proceeds
realized in respect thereof shall be shared by the Benefitted Parties and
distributed in accordance with the rights and priorities set forth in this
Agreement. Any Collateral Proceeds, Triggering Event Balances, Triggering Event
Payments or Setoff Proceeds (as such terms are defined in Section 2(b)) shall be
shared by the Benefitted Parties and distributed in accordance with the rights
and priorities set forth in this Agreement. As used herein, the term
Triggering Event means (a) the occurrence and continuation of
a Bankruptcy Proceeding (as defined below) with respect to the Company, any
Subsidiary Guarantor or any Material Foreign Subsidiary, (b) the Collateral
Agents receipt of a written notice that the unpaid principal amount of any
of the Obligations has been declared to be then due and payable by the holder or
holders thereof prior to the due date as a result of an event of default, or (c)
any exercise of any right of setoff or bankers lien by any Benefitted
Party. As used herein, the term Bankruptcy Proceeding means,
with respect to any Person, a general assignment of such Person for the benefit
of its creditors, or the institution by or against such Person of any proceeding
seeking relief as debtor, or seeking to adjudicate such Person as bankrupt or
insolvent, or seeking reorganization, arrangement, adjustment or composition of
such Person or its debts, under any law relating to bankruptcy, insolvency,
reorganization or relief of debtors, or seeking appointment of a receiver,
trustee, custodian or other similar official for such Person or for any
substantial part of its property.
(b)
Notwithstanding anything to the contrary set forth herein, any Collateral
Proceeds, Triggering Event Balances, Triggering Event Payments or Setoff
Proceeds which are to be remitted to any Benefitted Party on account of
Obligations which are Contingent L/C Obligations (as defined below) shall be
remitted to the Collateral Agent to be held in a separate cash collateral
account (the L/C Account) by the Collateral Agent and
distributed by the Collateral Agent only in accordance with this Section 1(b).
In the event, and upon the condition that, any Contingent L/C Obligation becomes
an absolute obligation of the Company upon the honoring of a draw under any
Letter of Credit (as defined below), upon receipt of written direction from the
applicable Benefitted Party, the Collateral Agent shall withdraw from the L/C
Account and shall pay over to the Benefitted Party (or issuing bank on behalf of
such Benefitted Party) that honored such draw an amount equal to the Withdrawal
Amount (as defined below) with respect to the amount of such draw together with
interest on such Withdrawal Amount at the rate earned while on deposit in the
L/C Account. In the event that the Collateral Agent receives written notice that
any Contingent L/C Obligation lapses on account of the expiration or other
termination of the applicable Letter of Credit, an amount equal to the
Withdrawal Amount with respect to such lapsed Contingent L/C Obligation,
together with interest on account of such amount at the rate earned while on
deposit in the L/C Account, shall be released from the L/C Account and shall be
distributed by the Collateral Agent to the Benefitted Parties in accordance with
clause third of Section 2(c). As used herein
Withdrawal Amount means the product of (a) the quotient of
(i) the amount of a Contingent L/C Obligation which has then become an absolute
obligation on account of a draw or the amount of a Contingent L/C Obligation
which
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has lapsed on account of the expiration or termination of the applicable
Letter of Credit, as the case may be, over (ii) the total amount of all
Contingent L/C Obligations, and (b) the total amount then deposited in the L/C
Account.
As
used herein, the term Contingent L/C Obligations means any and all
contingent obligations of the Company to reimburse the issuers of Letters of Credit for
drawings under such Letters of Credit.
As
used herein, the term Letter of Credit means a letter of credit issued
by a Benefitted Party, or an issuing bank on behalf of a Benefitted Party, for the account
of the Company or any of the Subsidiary Guarantors pursuant to the Credit Documents or any
additional credit agreements with lenders which become party to this Agreement.
2. |
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Cash Collateral Account; Application of Proceeds |
(a) |
|
The Collateral Agent has established an interest-bearing demand deposit cash
collateral account subject to the lien and security interest created by the
Security Documents (the Cash Collateral Account) in the name
of the Collateral Agent into which the proceeds, payments and amounts described
in subsections (b)(i), (b)(ii), (b)(iii) and (b)(iv) below shall be deposited
and from which only the Collateral Agent may effect withdrawals. Such amounts
shall be held by the Collateral Agent in the Cash Collateral Account and shall
be distributed from time to time by the Collateral Agent in accordance with
Section 2(c) below. |
(b) |
|
The following proceeds, payments and amounts shall be deposited and held by the
Collateral Agent in the Cash Collateral Account and shall be distributed from
time to time by the Collateral Agent in accordance with Section 2(c) below: |
(i) |
|
any proceeds of any collection, recovery, receipt, appropriation, realization or
sale of any or all of the Collateral or the enforcement of the Security
Documents (the Collateral Proceeds) received by the
Collateral Agent or any Benefitted Party; |
(ii) |
|
any amounts held in the Cash Collateral Account at the time a Triggering Event
occurs (the Triggering Event Balances); |
(iii) |
|
any payments received or otherwise realized by any Benefitted Party in respect
of any Obligations on or after the date on which a Triggering Event has occurred
(the Triggering Event Payments); and |
(iv) |
|
any amounts received or recovered by any Benefitted Party through any exercise
of any right of setoff or bankers lien at any time on or after the
occurrence of a Triggering Event (whether by law, contract or otherwise) (the
Setoff Proceeds). |
Each Benefitted Party agrees to deliver any Collateral Proceeds, any Triggering Event Balances, any Triggering Event Payments and
any Setoff Proceeds to the Collateral
Agent within two (2) Business Days after receipt (other than pursuant to subsection (c)
below) of such Collateral Proceeds, Triggering Event Balances, Triggering Event Payments
or Setoff Proceeds.
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(c)
The Collateral Agent shall distribute the proceeds described in subsections
(b)(i), (b)(ii), (b)(iii) and (b)(iv) above which are held in the Cash
Collateral Account to the Collateral Agent and the Benefitted Parties in
accordance with the following priorities:
|
first,
to the reasonable costs and expenses of the Collateral Agent incurred in connection with
the maintenance of the Cash Collateral Account and any collection, recovery, receipt,
appropriation, legal proceeding (whether by or against any such party), realization or
sale of any or all of the Collateral or the enforcement of the Security Documents;
|
|
second,
after payment in full of all amounts set forth in item first, to the Benefitted
Parties in payment of any and all amounts owed to the Benefitted Parties for reimbursement
of amounts paid by them to the Collateral Agent in accordance with Section 4(g) pro
rata in proportion to such amounts owed to such Benefitted Parties;
|
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third,
after payment in full of all amounts set forth in item second, to the payment and
permanent reduction of the principal amount of the outstanding Obligations and the
Contingent L/C Obligations, pro rata, based on the proportion that the
principal amount of such outstanding Obligations and Contingent L/C Obligations held by
each Benefitted Party at such time bears to the sum of the principal amount of all such
Obligations and Contingent L/C Obligations;
|
|
fourth,
after payment in full of all amounts set forth in item third, to the payment and
permanent reduction of the amount of the outstanding Obligations representing interest,
pro rata, based on the proportion that such outstanding Obligations representing interest
held by each Benefitted Party at such time bears to the sum of all such Obligations
representing interest;
|
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fifth,
after payment in full of all amounts set forth in item fourth, to the payment and
permanent reduction of all other outstanding Obligations not representing principal,
Contingent L/C Obligations or interest, pro rata, based on the proportion that such
outstanding Obligations not representing principal, Contingent L/C Obligations or interest
held by each Benefitted Party at such time bears to the sum of all such Obligations not
representing principal, Contingent L/C Obligations or interest; and
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sixth,
after payment in full of all amounts set forth in item fifth, to or at the
direction of the Company or as a court of competent jurisdiction may otherwise direct.
|
-5-
The
Collateral Agent shall make such distributions promptly after the deposit of any
Collateral Proceeds, Triggering Event Balances, Triggering Event Payments or Setoff
Proceeds into the Cash Collateral Account. A Benefitted Partys pro rata share of the
Obligations on any distribution date shall be determined by assuming that all Obligations
are denominated in U.S. Dollars based upon the quoted spot rate at which the Collateral
Agents principal office offers to exchange any applicable currency for U.S. Dollars
at 11:00 A.M. (local time at such principal office) on the Business Day preceding such
distribution date (the Applicable Exchange Rate). For any distribution,
the Collateral Agent shall exchange the relevant portion of such distribution into the
applicable currency and make each such distribution in the applicable currency.
3.
Payment of Obligations; Distributions Recovered.
(a)
The Company and each of the Subsidiary Guarantors agree that any amounts
received by a Benefitted Party and delivered by such Benefitted Party to the
Collateral Agent pursuant to the terms of this Agreement will not be deemed to
be a payment in respect of any Obligations owing to such Benefitted Party until
such Benefitted Party receives its pro rata share of such amount from the
Collateral Agent and then only to the extent of the actual payment and receipt
of such pro rata share.
(b)
Notwithstanding anything to the contrary contained in this Agreement, in each
case in which any proceeds (or the value thereof) or payments are recovered as a
preferential or otherwise voidable payment (whether by a trustee in bankruptcy
or otherwise) from the party (the Distributor) which
distributed those proceeds to another party or parties under this Agreement,
each party (a Distributee) to whom any of those proceeds were
ultimately distributed shall, upon the Distributors notice of the recovery
to the Distributee, return to the Distributor an amount equal to the
Distributees ratable share of the amount recovered, together with a
ratable share of interest thereon to the extent the Distributor is required to
pay interest thereon computed on the amount to be returned from the date of the
recovery. For purposes of this Agreement, proceeds means any
payment (whether made voluntarily or involuntary) from any source, including,
without limitation, any offset of any deposit or other indebtedness, any
security (including, without limitation, any guaranty or any collateral) or
otherwise.
4.
The Collateral Agent.
(a)
By execution and delivery hereof, each Benefitted Party hereby appoints State
Street Bank and Trust Company of California, N.A. as Collateral Agent and its
representative hereunder and under the Security Documents and authorizes the
Collateral Agent to act as such hereunder and thereunder on behalf of each such
Benefitted Party. The Collateral Agent agrees to act as such upon the express
conditions contained in this Agreement. In performing its functions and duties
under this Agreement and the Security Documents, the Collateral Agent shall act
solely as agent of the Benefitted Parties to the extent, but only to the extent,
provided in this Agreement and does not assume, and shall not be deemed to have
assumed, any obligation towards or relationship of agency, fiduciary or trust
with or for any other Person, other than as set forth in the Security Documents.
(b)
The Collateral Agent shall take any action with respect to the Collateral and/or
the Security Documents only as directed in accordance with Section 5(a) hereof;
provided that the
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Collateral Agent shall not be obligated to follow any
directions given in accordance with Section 5(a) hereof to the extent that the
Collateral Agent has received advice from its counsel to the effect that such
directions are in conflict with any provisions of law, this Agreement, the
Security Documents or any order of any court or administrative agency;
provided further that the Collateral Agent shall not, under any
circumstances, be liable to any Benefitted Party or any other person for
following the written directions received in accordance with Section 5(a)
hereof. Any directions given pursuant to Section 5(a) hereof may be withdrawn or
modified by the party or parties who originally gave such directions by
delivering written notice of withdrawal or modification to the Collateral Agent
prior to the time when the Collateral Agent takes any action pursuant to such
directions.
(c)
Each Benefitted Party authorizes the Collateral Agent to take such action on
such Benefitted Partys behalf and to exercise such powers hereunder as are
specifically delegated to the Collateral Agent by the terms hereof and of the
Security Documents, together with such powers as are reasonably incidental
thereto. The Collateral Agent shall have only those duties and responsibilities
that are expressly specified in this Agreement and the Security Documents, and
it may perform such duties by or through its agents or employees. Nothing in
this Agreement or the Security Documents, express or implied, is intended to or
shall be construed as imposing upon the Collateral Agent any obligations in
respect of this Agreement or such Security Documents except as expressly set
forth herein.
(d)
The Collateral Agent shall not be responsible to any Benefitted Party for the
execution, effectiveness, genuineness, validity, perfection, enforceability,
collectibility, value or sufficiency of the Collateral or the Security Documents
or for any representations, warranties, recitals or statements made in any
document executed in connection with the Obligations or made in any written or
oral statement or in any financial or other statements, instruments, reports,
certificates or any other documents in connection herewith or therewith
furnished or made by or on behalf of the Company and its subsidiaries to any
Benefitted Party or be required to ascertain or inquire as to the performance or
observance by the Company or any of its subsidiaries or any other pledgor or
guarantor of any of the terms, conditions, provisions, covenants or agreements
contained in any document executed in connection with the Obligations or of the
existence or possible existence of any Triggering Event.
(e)
The Collateral Agent shall not be liable to any Benefitted Party for any action
taken or omitted hereunder or under the Security Documents or in connection
herewith or therewith except to the extent caused by the Collateral Agents
gross negligence or willful misconduct. The Collateral Agent shall be entitled
to rely, and shall be fully protected in relying, upon any written statement,
instrument or document believed by it to be genuine and correct and to have been
signed or sent by the proper person or persons and, except as otherwise
specifically provided in this Agreement, shall be entitled to rely upon the
written direction of the Required Creditors (as defined in Section 5(a))
certifying that the persons signing such direction constitute the Required
Creditors, and shall be entitled to rely and shall be fully protected in
relying on opinions and judgments of counsel, accountants, experts and other
professional advisors selected by it in good faith and with due care. The
Collateral Agent shall be entitled to refrain from exercising any power,
discretion or authority vested in it under this Agreement or the Security
Documents unless and until it has obtained the directions in accordance with
Section 5(a) hereof with respect to the matters covered thereby. The Collateral
Agent shall be entitled to request
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from each Benefitted Party a certificate
setting out the amount of the respective Obligations held by it (including,
without limitation, amounts representing principal, Contingent L/C Obligations
or interest of such Obligations for purposes of calculating distributions
pursuant to Section 2(c)).
(f)
Each Benefitted Party agrees not to take any action whatsoever to enforce any
term or provision of the Security Documents or to enforce any of its rights in
respect of the Collateral, in each case except through the Collateral Agent
acting in accordance with this Agreement.
(g)
The Company and each of its subsidiaries which is party to this Agreement, by
its execution of the signature page of this Agreement, agrees to pay and save
the Collateral Agent harmless from liability for payment of all costs and
expenses of the Collateral Agent in connection with this Agreement and the
Security Documents, other than liabilities, costs and expenses resulting from
the Collateral Agents gross negligence or willful misconduct. Each
Benefitted Party severally agrees to indemnify the Collateral Agent, pro
rata (to the extent set forth in the penultimate sentence of this Section
4(g)), to the extent the Collateral Agent shall not have been reimbursed by or
on behalf of the Company or from proceeds of the Collateral or otherwise, from
and against any and all liabilities, obligations, losses, damages, penalties,
actions, judgments, suits, costs, reasonable expenses (including, without
limitation, reasonable counsel fees and disbursements) or disbursements of any
kind or nature whatsoever which may be imposed on, incurred by or asserted
against the Collateral Agent in performing its duties hereunder or under the
Security Documents in its capacity as the Collateral Agent in any way relating
to or arising out of this Agreement, the Security Documents and/or the
Collateral; provided that no Benefitted Party shall be liable for any
portion of such liabilities, obligations, losses, damages, penalties, actions,
judgments, suits, costs, expenses or disbursements resulting from the Collateral
Agents gross negligence, willful misconduct or breach of the express terms
of this Agreement. For purposes of this Section 4(g), any pro rata
calculation shall be on the basis of the outstanding principal amount of the
Obligations (determined by assuming that all Obligations are denominated in U.S.
Dollars based upon the Applicable Exchange Rate) held by or for each Benefitted
Party at the time of the act, omission or transaction giving rise to the
reimbursement or indemnity required by this Section 4(g). The provisions of this
Section 4(g) shall survive the payment in full of all the Obligations and the
termination of this Agreement and all other documents executed in connection
with the Obligations.
(h)
The Collateral Agent may resign at any time by giving sixty (60) days
prior written notice thereof to the Benefitted Parties and the Company, subject
to the acceptance of its appointment by a successor Collateral Agent
simultaneously with or prior to any resignation of the Collateral Agent. Upon
any such notice of resignation, the Required Creditors (as defined in Section
5(a) below) shall have the right to appoint a successor Collateral Agent. The
Collateral Agent may be removed at any time with or without cause, by an
instrument in writing delivered to the Collateral Agent, the Company and the
other Benefitted Parties by the Required Creditors (as defined in Section 5(a)
below). Upon the acceptance of any appointment as Collateral Agent hereunder by
a successor Collateral Agent, such successor Collateral Agent shall thereupon
succeed to and become vested with all the rights, powers, privileges and duties
of the retiring or removed Collateral Agent, and the retiring or removed
Collateral Agent shall be discharged from its duties and obligations under this
Agreement and the Security Documents; provided, however, that the
retiring or removed Collateral Agent will continue to remain liable for all acts
of, or the omission to act by, such retiring or removed Collateral Agent which
occurred prior to such
-8-
retirement or removal. If no successor Collateral Agent
shall have been so appointed and shall have accepted such appointment within
forty-five (45) days after the retiring Collateral Agents giving of notice
of resignation, then, upon five days prior written notice to the Company
and the Benefitted Parties, the retiring Collateral Agent may, on behalf of the
Benefitted Parties, appoint a successor Collateral Agent, which shall be a bank
or trust company organized under the laws of the United States or any state
thereof (or under the laws of a foreign country and having a branch or agency
located in the United States) having a combined capital and surplus of at least
$500,000,000, and the short term unsecured debt obligations of which are rated
at least P-1 by Moodys Investors Service or A-1 by Standard &
Poors, or any affiliate of such bank. After any retiring or removed
Collateral Agents resignation or removal hereunder as Collateral Agent,
the provisions of this Agreement shall inure to its benefit as to any actions
taken or omitted to be taken by it while it was the Collateral Agent under this
Agreement and the Security Documents.
(i)
Except as expressly set forth herein, the Collateral Agent and each of its
affiliates may accept deposits from, lend money to and generally engage in any
kind of banking, trust, financial advisory or other business with the Company or
any affiliate thereof, and may accept fees and other consideration from the
Company or any affiliate thereof for services in connection with this Agreement
and otherwise without having to account for the same to any Benefitted Party.
(j)
The Collateral Agent shall not be liable for or by reason of (i) any failure or
defect in the registration, filing or recording of any of the Security
Documents, or any notice, caveat or financing statement with respect to the
foregoing, or (ii) any failure to do any act necessary to constitute, perfect
and maintain the priority of the security interest created by the Security
Documents.
(k)
Notwithstanding anything to the contrary contained in this Agreement or any
document executed in connection with any of the Obligations, the Collateral
Agent, unless it shall have actual knowledge thereof, shall not be deemed to
have any knowledge of any Triggering Event unless and until it shall have
received written notice from the Company or any Benefitted Party describing such
Triggering Event in reasonable detail (including, to the extent known, the date
of occurrence of the same).
(l)
Upon receipt by the Collateral Agent of any direction by the Required Creditors,
all of the Benefitted Parties will be bound by such direction.
5.
Relating to Defaults and Remedies.
(a)
The Required Creditors may, after any Triggering Event (other than an
Involuntary Proceeding) has occurred (or upon the occurrence and continuation of
an Involuntary Proceeding for at least 60 consecutive days) and by giving the
Collateral Agent written notice of such election, instruct and cause the
Collateral Agent to exercise its rights and remedies under the Security
Documents. The Collateral Agent shall follow the instructions of the Required
Creditors with respect to the enforcement action to be taken. For purposes of
this Agreement, the term Required Creditors shall mean the
Benefitted Parties holding, in the aggregate, more than 50% of the sum of (a)
the face amount of any commitments for undrawn Letters of Credit plus (b)
the outstanding funded principal amount of the Obligations (such amounts to be
determined by assuming that all such commitments and Obligations are denominated
in U.S.
-9-
Dollars based upon the Applicable Exchange Rate). For purposes of the
foregoing definitions, any Benefitted Party that has purchased a participation
in the Obligations owing to another Benefitted Party shall be deemed to be the
holder of the amount of such Obligations which are the subject of such
participation.
(b)
Notwithstanding anything to the contrary contained in this Agreement, the
Collateral Agent shall not commence or otherwise take any action or proceeding
to enforce any Collateral Document or to realize upon any or all of the
Collateral unless and until the Collateral Agent has received instructions in
accordance with Section 5(a) above. Upon receipt by the Collateral Agent of any
such instructions, the Collateral Agent shall seek to enforce the Security
Documents and to realize upon the Collateral in accordance with such
instructions; provided that the Collateral Agent shall not be obligated
to follow any such directions as to which the Collateral Agent has received a
written opinion of its counsel to the effect that such directions are in
conflict with any provisions of law, this Agreement, the Security Documents or
any order of any court or administrative agency, and the Collateral Agent shall
not, under any circumstances, be liable to any Benefitted Party or any other
Person for following the written directions received in accordance with Section
5(a) above.
(c)
The duties and responsibilities of the Collateral Agent hereunder shall consist
of and be limited to (i) selling, releasing, surrendering, realizing upon or
otherwise dealing with, in any manner and in any order, all or any portion of
the Collateral, (ii) exercising or refraining from exercising any rights,
remedies or powers of the Collateral Agent under this Agreement or the Security
Documents or under applicable law in respect of all or any portion of the
Collateral, (iii) making any demands or giving any notices under the Security
Documents, (iv) effecting amendments to and granting waivers under the Security
Documents in accordance with the terms hereof, and (v) maintaining the Cash
Collateral Account under its exclusive dominion and control for the benefit of
the Benefitted Parties and making deposits therein and withdrawals therefrom as
necessary to effect the provisions of this Agreement.
(d)
In the event that the Collateral Agent proceeds to foreclose upon, collect, sell
or otherwise dispose of or take any other action with respect to any or all of
the Collateral or to enforce any provisions of the Security Documents or takes
any other action pursuant to this Agreement or any provision of the Security
Documents or requests directions from the Required Creditors as provided herein,
upon the request of the Collateral Agent or any Benefitted Party, each of the
Benefitted Parties agrees that such Benefitted Party (or any agent of or
representative for such Benefitted Party) shall promptly notify the Collateral
Agent in writing, as of any time that the Collateral Agent may specify in such
request, (i) of the aggregate amount of the respective Obligations then owing to
such Benefitted Party as of such date and (ii) such other information as the
Collateral Agent may reasonably request.
(e)
Promptly after the Collateral Agent receives written notice of the occurrence of
any Triggering Event pursuant to Section 2(a), it shall promptly send copies of
such notice to each of the Benefitted Parties.
(f)
The Collateral Agent shall not be obliged to expend its own funds in performing
its obligations under this Agreement and shall be entitled to require that the
Benefitted Parties provide it with sufficient funds prior to taking any action
required under this Agreement.
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6.
Third Party Beneficiaries. This Agreement is solely for the benefit of
the parties hereto and their respective successors and assigns, and neither the
Company nor any other person or entity, including, without limitation, any
guarantor of the obligations of the Company, are intended to be third party
beneficiaries hereunder or to have any right, benefit, priority or interest
under, or shall have any right to enforce this Agreement.
7.
Relation of Creditors. This Agreement is entered into solely for the
purposes set forth herein, and no Benefitted Party assumes any responsibility to
any other party hereto to advise such other party of information known to such
other party regarding the financial condition of the Company or any of its
subsidiaries or of any other circumstances bearing upon the risk of nonpayment
of any Obligation. Each Benefitted Party specifically acknowledges and agrees
that nothing contained in this Agreement is or is intended to be for the benefit
of the Company or any of its subsidiaries and nothing contained herein shall
limit or in any way modify any of the obligations of the Company or any
Subsidiary Guarantor to the Benefitted Parties.
8.
Acknowledgment of Guaranties. Each party expressly acknowledges the
existence and validity of the Note Obligation Guaranty and the Bank Obligation
Guaranty, agrees not to contest or challenge the validity of the Note Obligation
Guaranty or the Bank Obligation Guaranty and agrees that the judicial or other
determination of the invalidity of the Note Obligation Guaranty or the Bank
Obligation Guaranty shall not affect the provisions of this Agreement.
9.
Notice of Certain Events. Each Benefitted Party agrees that upon the
occurrence of a Triggering Event, it shall promptly notify the Collateral Agent
of the occurrence of such Triggering Event. In addition, each Benefitted Party
agrees to provide to the Collateral Agent the amount and currency of its
Obligations at such reasonable times as may be necessary to determine such
Benefitted Partys pro rata share of the outstanding principal amount of
the Obligations.
10.
Miscellaneous.
(a)
Notices. All notices and other communications provided for herein,
(including, without limitation, any modifications of, or waivers or consents
under this Agreement) shall be sent (i) by telecopy if the sender on the same
day sends a confirming copy of such notice by a recognized overnight delivery
service (charges prepaid), or (ii) by registered or certified mail with return
receipt requested (postage prepaid), or (iii) by a recognized overnight delivery
service (with charges prepaid) to the intended recipient at the address for
notices specified beneath the signature of such party hereto; or as to any party
at such other address as shall be designated by such party in a notice to each
other party. Except as otherwise provided in this Agreement, all such
communication shall be deemed to have been duly given when actually received.
(b)
Amendments, Waivers, Consents. All amendments, waivers or consents of any
provision of this Agreement shall be effective only if the same shall be in
writing and signed by all of the Benefitted Parties.
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(c)
Releases of Collateral. The parties hereto agree that the Collateral
Agent shall release all or any portion of the Collateral (other than in
connection with the exercise of its rights and remedies pursuant to Section 5)
only upon the receipt by the Collateral Agent of (i) a written approval from the
Required Creditors, or (ii) so long as no event of default exists under any
Senior Loan Document and releasing such Collateral is not prohibited by any
Senior Loan Document, an Officers Certificates of the Company and any
applicable Subsidiary Guarantor, which shall be true and correct, (x) stating
that the Collateral subject to such disposition is being sold, transferred or
otherwise disposed of in compliance with the terms of each of the Senior Loan
Documents, and (y) specifying the Collateral being sold, transferred or
otherwise disposed of in the proposed transaction. Upon the receipt of such
written approval or Officers Certificates (so long as the Collateral Agent
has no reason to believe that the Officers Certificates delivered with
respect to such disposition are not true and correct), the Collateral Agent
shall, at the Companys expense, execute and deliver such releases of its
security interest in such Collateral to be released, and provide a copy of such
releases to each of the Benefitted Parties. In connection therewith, the
Benefitted Parties hereby irrevocably authorize the Collateral Agent from time
to time to release such Collateral or consent to such release in accordance with
the terms of this Agreement. Notwithstanding anything provided herein to the
contrary, no release of security shall in any way affect the guaranties by the
Material Domestic Subsidiaries of the Obligations, which guaranties shall
continue to remain in full force and effect after any such release.
Upon
the receipt of such Officers Certificate, Secured Party shall, at such
Pledgors expense, execute and deliver such releases of its security interest in such
Collateral which is to be so sold, transferred or disposed of, as may be reasonably
requested by such Pledgor.
(d)
Successors and Assigns. This Agreement shall be binding upon and inure to
the benefit of the parties hereto and their respective successors and assigns.
At the time of any assignment of all or any portion of the Senior Noteholder
Obligations by a Senior Noteholder or of all or any portion of the Senior Lender
Obligations by a Senior Lender or of all or any portion of the Additional
Obligations by any Additional Creditor, such assigning Senior Noteholder, Senior
Lender or Additional Creditor, as the case may be, shall cause its assignee
(each an Additional Benefitted Party) to execute a
Counterpart Collateral Agency and Intercreditor Agreement substantially in the
form attached hereto as Exhibit A (a Counterpart) and
become a party to this Agreement.
(e)
Additional Creditors. Upon the execution of a Counterpart by any
Additional Creditors (either directly or through their agents) and delivery of
such Counterpart to the other parties hereto, such entity or entities shall be
as fully a party to this Agreement as a Benefitted Party as if such entity or
entities were an original signatory hereof without any action required to be
taken by any other party hereto, provided that each such entity or entities
shall execute this Agreement simultaneously with the Subsidiary Guarantors
execution and delivery to it or them of a Subsidiary Guaranty. Each other party
to this Agreement expressly agrees that its rights and obligations arising
hereunder shall continue after giving effect to the addition of such Additional
Creditors as parties to this Agreement.
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(f)
Captions. The captions and Section headings appearing herein are included
solely for convenience of reference and are not intended to affect the
interpretation of any provision of this Agreement.
(g)
Conflicts. In the event of a conflict between the terms of this Agreement
and the terms of any of the Security Documents, the terms of this Agreement
shall control.
(h)
Counterparts. This Agreement may be executed in any number of
counterparts, all of which taken together will constitute one and the same
instrument and any of the parties hereto may execute this Agreement by signing
any such counterpart.
(i)
GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAW OF THE STATE OF NEW YORK APPLICABLE TO CONTRACTS MADE
AND PERFORMED IN THE STATE OF NEW YORK.
(j)
Merger. This Agreement and the Security Documents supersede all prior
agreements, written or oral, among the parties with respect to the subject
matter of such agreements.
(k)
Independent Investigation. None of the Collateral Agent or any of the
Benefitted Parties, nor any of their respective directors, officers, agents or
employees, shall be responsible to any of the others for the solvency or
financial condition of the Company or the ability of the Company to repay any of
the Obligations, or for the value, sufficiency, existence or ownership of any of
the Collateral, or the statements of the Company, oral or written, or for the
validity, sufficiency or enforceability of any of the Obligations or any
document or agreement executed or delivered in connection with or pursuant to
any of the foregoing. Each Benefitted Party has entered into its respective
financial agreements with the Company based upon its own independent
investigation, and makes no warranty or representation to the other, nor does it
rely upon any representation by any of the others, with respect to the matters
identified or referred to in this Section.
(l)
Severability. In case any one or more of the provisions contained in this
Agreement shall be invalid, illegal or unenforceable in any respect, the
validity, legality and enforceability of the remaining provisions of this
Agreement shall not in any way be affected or impaired thereby.
(m)
Effect of Bankruptcy or Insolvency. This Agreement shall continue in
effect notwithstanding the bankruptcy or insolvency of any party hereto or the
Company or any of its Subsidiaries.
[Remainder of page
intentionally left blank]
-13-
IN
WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first
set forth above.
STATE
STREET BANK AND TRUST COMPANY OF CALIFORNIA, N.A.,
as
Collateral Agent
By: /s/ /s/Stephen Rivero
Name: Stephen Rivero
Title: Vice President
Address
for Notices:
|
State Street Bank and Trust
Company of California, N.A.
633 West 5th Street, 12th Floor
Los Angeles, California 90071
Attention: Corporate Trust Department
Facsimile: (213) 362-7357 |
-S-1-
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA,
as Senior Noteholder
By:
Name:
Title:
Address
for Notices:
|
The
Prudential Insurance Company of America
c/o Prudential Capital Group Corporate Finance
Four Embarcadero Center, Suite 2700
San Francisco, California 94111
Attention: Managing Director
Facsimile: (415) 421-6233 |
-S-2-
ABN AMRO BANK N.V.,
as Senior Lender
By:
Name:
Title:
By:
Name:
Title:
Address
for Notices:
ABN
AMRO Bank N.V.
208 South LaSalle Street, Suite 1500
Chicago, IL 60604-1003
Attention: Credit Administration
Facsimile: (312) 992-5111
with
a copy to:
ABN
AMRO Bank N.V.
101 California Street, Suite 4550
San Francisco, CA 94111-5812
Attention: Gina Brusatori
Facsimile: (415) 362-3524
-S-3-
EACH OF THE UNDERSIGNED HEREBY
ACKNOWLEDGES AND CONSENTS TO THE FOREGOING, INCLUDING, WITHOUT LIMITATION, SECTION 3. EACH
OF THE UNDERSIGNED HEREBY CONSENTS TO THE RELEASE BY THE COLLATERAL AGENT TO THE
BENEFITTED PARTIES OF ANY INFORMATION PROVIDED TO OR OBTAINED BY THE COLLATERAL AGENT
UNDER OR IN CONNECTION WITH THE SECURITY DOCUMENTS. EACH OF THE UNDERSIGNED HEREBY
COVENANTS TO PAY TO THE COLLATERAL AGENT FROM TIME TO TIME REASONABLE REMUNERATION FOR ITS
SERVICES HEREUNDER AND WILL PAY OR REIMBURSE THE COLLATERAL AGENT UPON ITS REQUEST FOR ALL
REASONABLE EXPENSES, DISBURSEMENTS AND ADVANCES INCURRED OR MADE BY THE COLLATERAL AGENT
IN THE ADMINISTRATION OR EXECUTION OF THE COLLATERAL AGENCY HEREBY CREATED (INCLUDING THE
REASONABLE COMPENSATION AND THE DISBURSEMENTS OF ITS COUNSEL AND ALL OTHER ADVISERS AND
ASSISTANTS NOT REGULARLY IN ITS EMPLOY) BOTH BEFORE ANY DEFAULT HEREUNDER AND THEREAFTER
UNTIL ALL DUTIES OF THE COLLATERAL AGENT HEREUNDER SHALL BE FINALLY AND FULLY PERFORMED
EXCEPT ANY SUCH EXPENSE, DISBURSEMENT OR ADVANCE AS MAY ARISE OUT OF OR RESULT FROM THE
COLLATERAL AGENTS GROSS NEGLIGENCE OR WILLFUL MISCONDUCT. THE UNDERSIGNED HEREBY
AGREES TO PROVIDE TO EACH OF THE BENEFITTED PARTIES TRUE AND CORRECT COPIES OF ALL
NOTICES, CERTIFICATES, SCHEDULES AND OTHER INFORMATION PROVIDED TO THE COLLATERAL AGENT
PURSUANT TO THIS AGREEMENT AND THE SECURITY DOCUMENTS.
NU SKIN ENTERPRISES, INC.
By: /s/ Corey B. Lindley
Name: Corey B. Lindley
Title: Executive Vice President and
Chief Financial Officer
NU SKIN INTERNATIONAL,
INC.
NU SKIN HONG KONG, INC.
NU SKIN TAIWAN, INC.
NU SKIN UNITED STATES, INC.
By: /s/ Corey B. Lindley
Name: Corey B. Lindley
Title: Vice President
Address for Notices:
One
Nu Skin Plaza
75
West Center Street
Provo, Utah 84601
Attention: General Counsel
Facsimile:(801) 345-6099
-S-4-
EXHIBIT A
Counterpart Collateral
Agency and Intercreditor Agreement
IN
WITNESS WHEREOF, the undersigned has caused this Counterpart Collateral Agency and
Intercreditor Agreement, dated as of ________, 20__ (this Counterpart), to be
duly executed and delivered by its duly authorized officer. Upon execution and delivery of
this Counterpart to Collateral Agent, the undersigned shall be an Additional Benefitted
Party under the Collateral Agency and Intercreditor Agreement [and shall be as fully a
party to the Collateral Agency and Intercreditor Agreement as if such Additional
Benefitted Party were an original signatory to the Collateral Agency and Intercreditor
Agreement].
[Name
of Additional Benefitted Party]
By:
Name:
Title:
-A-1-
Exhibit 10.28 to NSE 2005 FORM 10-K Second Amended and Restated NSE 1996 Stock Incentive Plan
SECOND
AMENDED AND RESTATED
NU SKIN ENTERPRISES,
INC.
1996 STOCK INCENTIVE PLAN
1. PURPOSE
1.1
The purpose of the Second Amended and Restated Nu Skin Enterprises, Inc. 1996 Stock
Incentive Plan (the Plan) is to provide incentives to specified individuals
whose performance, contributions and skills add to the value of Nu Skin Enterprises, Inc.
(the Company) and its affiliated companies. The Company also believes that the
Plan will facilitate attracting, retaining and motivating employees, directors and
consultants of high caliber and potential. This Second Amended and Restated Nu Skin
Enterprises, Inc. 1996 Stock Incentive Plan amends and restates the Amended and Restated
Nu Skin Asia Pacific, Inc. 1996 Stock Incentive Plan dated December 9, 1996 and includes
amendments previously adopted by the Board of Directors on February 11, 1999.
1.2
Plan participants shall include those officers, directors, employees and consultants of
the Company and subsidiaries who, in the opinion of the Committee, are making or are in a
position to make substantial contributions to the Company by their ability and efforts.
2. DEFINITIONS
2.1
For purposes of the Plan, the following terms shall have the following meanings, unless
the context clearly indicates to the contrary.
(a)
Award means a grant of Restricted Stock, Contingent Stock, an
Option, or an SAR.
(b)
Award Agreement means the agreement approved by the Committee
evidencing an Award to a Grantee.
(c)
Board means the Companys Board of Directors.
(d)
Code means the Internal Revenue Code of 1986, as amended.
-1-
(e)
Committee means the members of the Board until the Compensation
Committee of the Board is appointed, and after the Compensation Committee is
appointed means the members of the Compensation Committee of the Board, who are
outside directors (within the meaning of Section 162(m) of the Code
and any regulations or rulings promulgated thereunder) to the extent required
for purposes of compliance with such Code Section, and disinterested
persons (within the meaning of Rule 16b-3 of the Exchange Act), to the
extent required for compliance with such Rule.
(f)
Company means Nu Skin Enterprises, Inc.
(g)
Consultant means any individual who provides services to the Company
as an independent contractor and not as an Employee or Director.
(h)
Contingent Stock means stock which will be issued to a Grantee upon
the attainment of certain conditions pursuant to Section 9 hereof.
(i)
Director(s) means a member or the members of the Board.
(j)
Employee means any individual who is an employee of the Company, a
Parent or Subsidiary.
(k)
Exchange Act means the Securities Exchange Act of 1934, as amended.
(l)
Fair Market Value of a Share means on, or with respect to, any given
date:
(i)
If the Shares are listed on a national stock exchange, the closing market price
of such Shares as reported on the composite tape for issues listed on such
exchange on such date or, if no trade shall have been reported for such date, on
the next preceding date on which there were trades reported; provided, that if
no such quotation shall have been made within the ten business days preceding
such date, Fair Market Value shall be determined under (iii) below.
(ii)
If the Shares are not listed on a national stock exchange but are traded on the
over-the-counter market, the mean between the closing dealer bid and asked price
of such Shares as reported by the National Association of Securities Dealers
through their Automated Quotation System for such date, or if no quotations
shall have been made on such date, on the next preceding date on which there
were quotations; provided, that, if such quotations shall have been made within
the ten business days preceding such date, Fair Market Value shall be determined
under (iii) below.
-2-
(iii)
If (i) and (ii) do not apply, the Fair Market Value of a Share shall be
determined without regard to any control premium or discount for lack of control
(except as otherwise required by Section 422 of the Code) by the Committee in
good faith consistent with the valuation of the Company as provided by a third
party appraiser for other corporate purposes before adjustments or any discounts
applied due to lack of marketability. The Committee may rely upon the most
recent valuation (if it is based on a date within 3 months of the valuation
date) and there shall be no requirement to cause a more recent valuation to be
made (except as may be required for purposes of Section 422 of the Code). If no
such valuation exists, the Committee may engage a third party appraiser to
prepare the valuation.
(m)
Grantee means an Employee, Director of the Company, a Parent or any
Subsidiary or Consultant who has received an Award.
(n)
Incentive Stock Option shall have the same meaning as given to the
term by Section 422 of the Code and any regulations or rulings promulgated
thereunder.
(o)
Non-qualified Stock Option means any Option granted pursuant to
Section 7 which when awarded by the Committee was not intended to be, or does
not qualify as, an Incentive Stock Option.
(p)
Option means the right to purchase from the Company a stated number
of Shares at a specified Option Price. The Option may be granted to an Employee,
Director or Consultant subject to the terms of this Plan, and such other
conditions and restrictions as the Committee deems appropriate. Each Option
shall be designated by the Committee to be either an Incentive Stock Option or a
Non-qualified Stock Option. Only Employees may be granted Incentive Stock
Options.
(q)
Option Agreement means the Award Agreement pursuant to which an
Option is granted under Section 7.
(r)
Option Price means the purchase price per Share under an Option, as
described in Section 7.
(s)
Parent means any corporation (other than the Company) in an unbroken
chain of corporations ending with the Company if, at the time of the granting of
an Option, each of the corporations (other than the Company) owns stock
possessing 50% or more of the total combined voting power of all classes of
stock in one of the other corporations in such chain within the meaning of
Section 424(e) of the Code and any regulations or rulings promulgated
thereunder.
(t)
Plan means Amended and Restated Nu Skin Asia Pacific, Inc. 1996
Stock Incentive Plan, as evidenced herein and as amended from time to time.
-3-
(u)
Restricted Stock means Shares issued, subject to restrictions, to a
Grantee pursuant to Section 10.
(v)
SAR means a stock appreciation right which provides a Grantee a
potential right to a payment based on the appreciation in the fair market value
of a Share granted pursuant to Section 8.
(w)
SEC means the U.S. Securities and Exchange Commission.
(x)
Section 16 Person means a person who is an insider
within the meaning of Section 16(b) of the Exchange Act with respect to
transactions involving equity securities of the Company, including the Shares.
(y)
Share means one share of the Companys Class A common stock,
$.001 par value.
(z)
Subsidiary means any corporation in an unbroken chain of
corporations beginning with the Company if, at the time of the granting of the
Option, each of the corporations (other than the last corporation) in the
unbroken chain owns stock possessing 50% or more of the total combined voting
power of all classes of stock in one of the other corporations in such chain,
within the meaning of Section 424(f) of the Code and any regulations or rulings
promulgated thereunder.
3. ADMINISTRATION
3.1 The Plan shall be administered by the Committee. The Committee shall have full and final authority in its discretion to:
(a)
conclusively interpret the provisions of the Plan and to decide all questions of
fact arising in its application;
(b)
determine the individuals to whom Awards shall be made under the Plan;
(c)
determine the type of Award to be made to such individuals and the amount, size
and terms of each Award;
(d)
determine the time when Awards will be granted to such individuals; and
(e)
make all other determinations necessary or advisable for the administration of
the Plan.
-4-
4. SHARES SUBJECT TO THE
PLAN
4.1 The Shares subject to Awards under the Plan shall not exceed in the aggregate 8,000,000 Shares.
4.2 Shares may be authorized and unissued Shares or treasury Shares.
4.3
Except as provided herein, any Shares subject to an Award, which Award for any reason
expires or is terminated unexercised as to such Shares shall again be available under the
Plan.
5. PARTICIPANTS
5.1
Awards permitted pursuant to this Plan which are Incentive Stock Options may only be made
to Employees (including Directors who are also Employees). All other Awards permitted
pursuant to the Plan may only be made to Employees, Directors or Consultants.
6. AWARDS UNDER THE PLAN
6.1
Awards under the Plan may be in the form of Options (both Non-qualified Stock Options and
Incentive Stock Options), Contingent Stock, Restricted Stock, and SARs and any combination
of the above.
6.2
The maximum number of Awards that may be awarded to any one Employee, Director or
Consultant during the life of the Plan shall be 10% of the total Shares reserved for
issuance under the Plan.
7. STOCK OPTIONS
7.1
The Committee in its sole discretion shall designate whether an Option is to be an
Incentive Stock Option or a Non-qualified Stock Option. The Committee may grant both
Incentive Stock Options and Non-qualified Stock Options to the same individual. However,
where both an Incentive Stock Option and a Non-qualified Stock Option are awarded at one
time, such Options shall be deemed to have been awarded in separate grants, shall be
clearly identified, and in no event will the exercise of one such Option affect the right
to exercise the other such Option except to the extent so provided in the Award Agreement
as determined by the Committee.
-5-
7.2
Options granted pursuant to the Plan shall be authorized by the Committee under terms and
conditions approved by the Committee, not inconsistent with this Plan or Exchange Act Rule
16b-3(c), and shall be evidenced by Option Agreements in such form as the Committee shall
from time to time approve, which Option Agreements shall contain or shall be subject to
the following terms and conditions, whether or not such terms and conditions are
specifically included therein:
(a)
The Option Price of an Incentive Stock Option shall not be less than 100% of the
Fair Market Value of a Share on the day the Option is granted, as determined by
the Committee. The Option Price of a Non-qualified Stock Option shall be such
price as determined by the Committee in its discretion, which price may be more
or less than the Fair Market Value of a Share on the day the Option is granted.
Notwithstanding the immediately preceding sentence, the Award Agreement for a
Non-qualified Stock Option at the Committees sole discretion, may, but
need not, provide for a reduction of the Option Price by dividends paid on a
Share during the period the Option is outstanding and unexercised, but in no
event shall the Option Price be less than the par value of such Share.
(b)
Each Option Agreement shall state the period or periods of time, as determined
by the Committee, within which the Option may be exercised by the Grantee, in
whole or in part, provided such period shall not commence earlier than six
months after the date of the grant of the Option and not later than ten years
after the date of the grant of the Option. The Committee shall have the power to
permit in its discretion an acceleration of previously determined exercise
terms, subject to the terms of this Plan, to the extent permitted by Exchange
Act Rule 16b-3(c), and under such circumstances and upon such terms and
conditions as deemed appropriate and which are not inconsistent with Exchange
Act Rule 16b-3(c)(1).
(c)
An Option may be exercised, in whole or in part, by giving written notice of
exercise to the Company specifying the number of Shares to be purchased. Shares
purchased upon exercise of an Option shall be paid for in full at the time of
purchase in the form of cash unless the Committee has adopted rules authorizing
a different method of exercise as set forth below that have not been rescinded
and that apply to the Options being exercised. The Committee shall have the
authority, as it may determine to be appropriate from time to time, to adopt
rules governing the exercise of Options that may provide for payment to be made
(i) in Shares already owned by the Grantee having a Fair Market Value equal to
the purchase price, (ii) by delivery (on a form prescribed by the Committee) of
an irrevocable direction to a securities broker approved by the Committee to
sell Shares and to deliver all or part of the sales proceeds to the Company in
payment of all or part of the purchase price and any withholding taxes, (iii) by
the delivery (on a form prescribed by the Committee) of an irrevocable direction
to pledge Shares to a securities broker or lender approved by the Committee as
security for a loan and to deliver all or part of the loan proceeds to the
Company in payment of all or part of the purchase price and any withholding
taxes, or (iv) such other method or form of consideration as may be determined
to be appropriate by the Committee
-7-
consistent with applicable laws, rules and
regulations, including a true cashless or net exercise procedure. The adoption
of such rules by the Committee shall not provide any Grantee with any vested
right to exercise Options pursuant to the methods or form of consideration set
forth in such rules. The Committee may rescind any rule governing the exercise
of Options at any time, and upon such rescission, no Grantee shall have any
further rights to exercise Options pursuant to the methods or form of
consideration set forth in such rule. In addition, the Committee shall have the
right to provide in any rule adopted pursuant hereto that (i) such rule shall
only apply to designated Options or grants of Options, (ii) such rule shall
apply to all Options generally, or (iii) prior Committee approval, which may be
granted or withheld in its sole discretion, shall be required with respect to
such exercise method or form of consideration. The Committee shall have no
obligation to make the rules applicable to all Grantees or to all Options. The
Committee shall have no obligation to adopt rules providing for any of the above
methods of exercise or forms of consideration.
(d)
Notwithstanding anything herein to the contrary, the aggregate Fair Market Value
(determined as of the time the Option is granted) of Incentive Stock Options for
any Employee which may become first exercisable in any calendar year shall not
exceed $100,000.
(e)
Notwithstanding anything herein to the contrary, no Incentive Stock Option shall
be granted to any individual if, at the time the Option is to be granted, the
individual owns stock possessing more than 10% of the total combined voting
power of all classes of stock of the Company unless at the time such Option is
granted the Option Price is at least 110% of the Fair Market Value of the stock
subject to the Option and such Option by its terms is not exercisable after the
expiration of five years from the date such Option is granted.
(f)
Each Option Agreement for an Incentive Stock Option shall contain such other
terms, conditions and provisions as the Committee may determine to be necessary
or desirable in order to qualify such Option as an incentive stock option within
the meaning of Section 422 of the Code, or any amendment thereof, substitute
therefor, or regulation thereunder. Subject to the limitations of Section 18,
and without limiting any provisions hereof, the Committee shall have the power
without further approval to amend the terms of any Option for Grantees.
7.3
If any Option is not granted, exercised, or held pursuant to the provisions of the Plan or
Section 422 of the Code applicable to an Incentive Stock Option, it will be considered to
be a Non-qualified Stock Option to the extent that any or all of the grant is in conflict
with such provisions.
7.4
An Option may be terminated (subject to any shorter periods set forth in an individual
Option Agreement by the Committee, in its sole discretion) as follows:
(a)
During the period of continuous employment or service as a Consultant with the
Company or Subsidiary, an Option will be terminated only if it has been fully
exercised or it has expired by its terms.
-8-
(b)
In the event of termination of employment as an Employee or service as a
Director or Consultant for any reason, the Option will terminate upon the
earlier of (i) the full exercise of the Option, (ii) the expiration of the
Option by its terms, or (iii) except as provided in Section 7.4(c), no more than
one year (three months for Incentive Stock Options) following the date of
employment termination (or termination of service as a Director or Consultant)
for Non-qualified Stock Options. For purposes of the Plan, a leave of absence
approved by the Company shall not be deemed to be termination of employment
except with respect to an Incentive Stock Option as required to comply with
Section 422 of the Code and the regulations issued thereunder.
(c)
If a Grantees employment as an Employee, or service as a Director or
Consultant, terminates by reason of death or disability prior to the termination
of an Option, such Option may be exercised to the extent that the Grantee shall
have been entitled to exercise it at the time of death or disability, as the
case may be, by the Grantee, the estate of the Grantee or the person or persons
to whom the Option may have been transferred by will or by the laws of descent
and distribution for the period set forth in the Option Agreement, but no more
than three years following the date of such death or disability, provided,
however, with respect to an Incentive Stock Option, such right must be
exercised, if at all, within one year after the date of such death or
disability.
8. STOCK APPRECIATION
RIGHTS
8.1
SARs shall be evidenced by Award Agreements for SARs in such form, and not inconsistent
with this Plan or Exchange Act Rule 16b-3(c)(1), as the Committee shall approve from time
to time, which Award Agreements shall contain in substance the following terms and
conditions as discussed in Sections 8.2 through 8.4.
8.2
An SAR may be, but is not required to be, granted in connection with an Option. An SAR
shall entitle the Grantee, subject to such terms and conditions determined by the
Committee, to receive, upon surrender of the SAR, all or a portion of the excess of (i)
the Fair Market Value of a specified number of Shares at the time of the surrender, as
determined by the Committee, over (ii) 100% of the Fair Market Value of such Shares at the
time the SAR was granted less any dividends paid on such Shares while the SAR was
outstanding but unexercised.
8.3
SARs shall be granted for a period of not less than one year nor more than ten years, and
shall be exercisable in whole or in part, at such time or times and subject to such other
terms and conditions as shall be prescribed by the Committee at the time of grant, subject
to the following:
(a)
No SAR shall be exercisable, in whole or in part, during the one year period
starting with the date of grant; and
-8-
(b)
SARs will be exercisable only during a Grantees employment by, or service
as a Consultant for, the Company or a Subsidiary, except that in the discretion
of the Committee an SAR may be made exercisable for up to three months after the
Grantees employment, or service as a Director or Consultant, is terminated
for any reason other than death, retirement or disability. In the event that a
Grantees employment as an Employee, or service as a Director or
Consultant, is terminated as a result of death, retirement or disability without
having fully exercised such Grantees SARs, the Grantee or such
Grantees beneficiary may have the right to exercise the SARs during their
term within a period of 6 months after the date of such termination to the
extent that the right was exercisable at the date of such termination, or during
such other period and subject to such terms as may be determined by the
Committee. Subject to the limitations of Section 18, the Committee in its sole
discretion may reserve the right to accelerate previously determined exercised
terms, within the terms of the Plan, under such circumstances and upon such
terms and conditions as it deems appropriate.
(c)
The Committee shall establish such additional terms and conditions, without
limiting the foregoing, as it determines to be necessary or desirable to avoid
short-swing trading liability in connection with an SAR within the
meaning of Section 16(b) of the Exchange Act.
(d)
The Committee, in its sole discretion, may establish different time periods than
specified above for any individual or group of individual Awards.
8.4
Upon exercise of an SAR, payment shall be made within ninety days in the form of common
stock of the Company (at Fair Market Value on the date of exercise), cash, or a
combination thereof, as the Committee may determine.
9. CONTINGENT STOCK
AWARDS
9.1
Contingent Stock Awards under the Plan shall be evidenced by Award Agreements for
Contingent Stock in such form and not inconsistent with this Plan as the Committee shall
approve from time to time, which Award Agreements shall contain in substance the terms and
conditions described in Sections 9.2 through 9.5.
9.2
The Committee shall determine the number of Shares subject to a Contingent Stock Award to
be granted to an Employee, Director or Consultant based on the past or expected impact the
Employee, Director or Consultant has had or can have on the financial well-being of the
Company and other factors deemed by the Committee to be appropriate.
-9-
9.3
Contingent Stock Awards made pursuant to this Plan shall be subject to such terms,
conditions, and restrictions, including without limitation, substantial risks of
forfeiture and/or attainment of performance objectives, and for such period or periods as
shall be set forth in the Award Agreement as determined by the Committee at the time of
grant. The Committee shall have the power to permit, in its discretion, an acceleration of
the expiration of the applicable restriction period with respect to any part or all of the
Award to any Grantee. The Committee shall have the power to make a Contingent Stock Award
that is not subject to vesting or any other contingencies in recognition of an
Employees, Directors or Consultants prior service and financial impact
on the Company. During the restriction period, the Grantee shall not have the rights of a
shareholder.
9.4
The Award Agreement for the Contingent Stock Award shall specify the terms and conditions
upon which any restrictions on the right to receive Shares representing Contingent Stock
Awards under the Plan shall lapse, as determined by the Committee. Upon the lapse of such
restrictions, Shares shall be issued to the Grantee or such Grantees legal
representative.
9.5
In the event of a Grantees termination of employment as an Employee, or service as a
Director or Consultant, whichever is applicable, for any reason prior to the lapse of
restrictions applicable to a Contingent Stock Award made to such Grantee and unless
otherwise provided for herein by this Plan or as provided for in the Award Agreement for
Contingent Stock, all rights to Shares as to which there still remain unlapsed
restrictions shall be forfeited by such Grantee to the Company without payment or any
consideration by the Company, and neither the Grantee nor any successors, heirs, assigns
or personal representatives of such Grantees shall thereafter have any further rights or
interest in such Shares.
10. RESTRICTED STOCK
AWARDS
10.1
Restricted Stock Awards under the Plan shall be evidenced by Award Agreements for
Restricted Stock in such form, and not inconsistent with this Plan, as the Committee shall
approve from time to time, which Award Agreements shall contain in substance the terms and
conditions described in Sections 10.2 through 10.6.
10.2
The Committee shall determine the number of Shares subject to a Restricted Stock Award to
be granted to an Employee, Director or Consultant based on the past or expected impact the
Employee, Director or Consultant has had or can have on the financial well-being of the
Company and other factors deemed by the Committee to be appropriate.
-10-
10.3
Restricted Stock Awards made pursuant to this Plan shall be subject to such terms,
conditions, and restrictions, including without limitation, substantial risks of
forfeiture and/or attainment of performance objectives, and for such period or periods as
set forth in the Award Agreement as determined by the Committee at the time of grant. The
Committee shall have the power to permit, in its discretion, an acceleration of the
expiration of the applicable restriction period with respect to any part or all of the
Award to any Grantee. Upon issuance of a Restricted Stock Award, Shares will be issued in
the name of the Grantee. During the restriction period, Grantee shall have the rights of a
shareholder for all such Shares of Restricted Stock, including the right to vote and the
right to receive dividends thereon as paid.
10.4
Each certificate evidencing stock subject to Restricted Stock Awards shall bear an
appropriate legend referring to the terms, conditions and restrictions applicable to such
Shares. Any attempt to dispose of Shares of Restricted Stock in contravention of such
terms, conditions and restrictions shall be ineffective. The Committee may adopt rules
which provide that the certificates evidencing such Shares may be held in custody by a
bank or other institution, or that the Company may itself hold such Shares in custody,
until the restrictions thereon shall have lapsed and may require as a condition of any
Award that the Grantee shall have delivered a stock power endorsed in blank relating to
the Shares of Restricted Stock covered by such Award.
10.5
The Award Agreement for Restricted Stock shall specify the terms and conditions upon which
any restrictions on the right to receive shares representing Restricted Stock awarded
under the Plan shall lapse as determined by the Committee. Upon the lapse of such
restrictions, Shares which have not been delivered to the Grantee or such Grantees
legal representative shall be delivered to such Grantee or such Grantees legal
representative.
10.6
In the event of a Grantees termination of employment as an Employee, or service as a
Director or Consultant, whichever is applicable, for any reason prior to the lapse of
restrictions applicable to a Restricted Stock Award made to such Grantee and unless
otherwise provided for herein by this Plan or as provided for in the Award Agreement for
Restricted Stock, all rights to Shares as to which there remain unlapsed restrictions
shall be forfeited by such Grantee to the Company without payment or any consideration by
the Company, and neither the Grantee nor any successors, heirs, assigns or personal
representatives of such Grantee shall thereafter have any further rights or interest in
such Shares.
-11-
11. GENERAL RESTRICTIONS
11.1
The Plan and each Award under the Plan shall be subject to the requirement that, if at any
time the Committee shall determine that (i) the listing, registration or qualification of
the Shares subject or related thereto upon any securities exchange or under any state or
federal law, (ii) the consent or approval of any government regulatory body, or (iii) an
agreement by the Grantee of an Award with respect to the disposition of Shares, is
necessary or desirable as a condition of, or in connection with the Plan or the granting
of such Award or the issue or purchase of Shares thereunder, the Plan will not be
effective and/or the Award may not be consummated in whole or in part unless such listing,
registration, qualification, consent, approval or agreement shall have been effected or
obtained free of any conditions not acceptable to the Committee.
11.2
The authority of the Committee under Section 3 to include forfeiture
provisions in Award Agreements is hereby confirmed. The Committee may provide in any
Award Agreement for the forfeiture of the Awards governed by such Award Agreement and the
benefits derived therefrom, in the event the Grantee takes actions or engages in conduct
that is harmful or contrary to, or not in the best interests of, the Company. Such
forfeiture may include, without limitation, (a) the cancellation of unexercised Options
and/or SARs and the forfeiture or repayment to the Company of any gain realized from the
exercise of any Options and/or SARs, and (b) forfeiture, or repayment of the value, of any
shares of stock granted as Restricted Stock or Contingent Stock or the forfeiture or
repayment to the Company of any proceeds received from the sale thereof. The Committee
shall have broad discretion in defining what actions and conduct constitute forfeiture
events which may include, without limitation, (i) conduct related to the Grantees
employment for which either criminal or civil penalties may be sought, (ii) the commission
of an act of fraud or intentional misrepresentation, (iii) embezzlement or
misappropriation or conversion of assets or opportunities of the Company, (iv) accepting
employment with or serving as a consultant, adviser or in any other capacity to, or having
any ownership interest in, a person or entity that is in competition with or acting
against the interest of the Company, or any solicitation of employees or distributors, (v)
disclosing or misusing any confidential or proprietary information of the Company in
violation of the Key Employee Covenants, or any other non-disclosure agreement with the
Company or other duty of confidentiality or the Companys insider trading policy, or
(vi) any other actions or conduct of Grantee that the Committee determines in good faith
are harmful or contrary to, or not in the best interests of, the Company. The Committee
shall have broad discretion and authority to determine the scope, duration and terms of
any such forfeiture provisions. The Committee, or its duly appointed agent, may waive any
or all of the restrictions authorized under this subsection whenever it (or its duly
appointed agent) determines in its sole discretion that such action is in the best
interests of the Company. For purposes of this Section 11 references to the Company refers
collectively to the Company and all of its Subsidiaries.
-12-
12. RIGHTS OF A
SHAREHOLDER
12.1
The Grantee of any Award under the Plan shall have no rights as a shareholder with respect
thereto unless and until certificates for Shares of common stock are issued to such
Grantee, except for the rights provided in Section 10 as it pertains to Restricted Stock
Awards.
13. RIGHTS TO TERMINATE
EMPLOYMENT
13.1
Nothing in the Plan or in any agreement entered into pursuant to the Plan shall confer
upon any Grantee the right to continue in the employment as an Employee, or service as a
Director or Consultant, of the Company or a Subsidiary or affect any right which the
Company or its Subsidiary may have to terminate the employment, or service as a Director
or Consultant, of such Grantee.
14. WITHHOLDING OF TAXES
14.1
Whenever the Company proposes, or is required, to issue or transfer Shares under the Plan,
the Company shall have the right to require the Grantee to remit to the Company an amount,
or a number of shares, sufficient to satisfy any federal, state and/or local withholding
tax requirements prior to the delivery of any certificate or certificates for such Shares.
Whenever under the Plan payments are to be made in cash, such payments shall be net of an
amount sufficient to satisfy any federal, state and/or local withholding tax requirements.
15. NON-ASSIGNABILITY
15.1
No Award or benefit under the Plan shall be assignable or transferable by the Grantee
thereof except by will or by the laws of descent and distribution. During the life of the
Grantee, such Award shall be exercisable only by such person or by such persons
guardian or legal representative.
16. NON-UNIFORM
DETERMINATIONS
16.1
The Committees determination under the Plan (including, without limitation,
determinations of the persons to receive Awards, the form, amount and timing of such
Awards, the terms and conditions of such Awards and the Award Agreements evidencing same,
and the establishment of values and performance targets) need not be uniform and may be
made by the Committee selectively among persons who receive, or are eligible to receive,
Awards under the Plan, whether or not such persons are similarly situated.
-13-
17. ADJUSTMENTS
17.1
If the Class A Common Stock of the Company is subdivided or combined into a greater or
smaller number of shares or if the Company shall issue any shares of Class A Common Stock
as a stock dividend on its outstanding Class A Common Stock, the number of shares
deliverable upon the exercise or vesting of any Awards granted hereunder shall be
appropriately increased or decreased proportionately, and appropriate adjustments shall be
made in the purchase price per share to reflect such subdivision, combination or stock
dividend.
17.2
In the event of a consolidation of the Company, a merger in which the Company is not the
surviving entity, or the sale of all or substantially all of the Company assets, the
exercisability of any or all outstanding Awards shall automatically be accelerated so that
such Awards would be exercisable or vested in full immediately prior to the effective date
of such consolidation, merger or asset sale. However, no such acceleration shall occur if
and to the extent any outstanding Awards are, in connection with such consolidation,
merger, or asset sale, either to be assumed by the successor corporation (or parent
thereof or to be replaced with a comparable Award to purchase shares of the capital stock
of the successor corporation (or a parent thereof). The determination of such Award
comparability shall be made by the Committee, and such determination shall be final,
binding and conclusive. Immediately following any such consolidation, merger or asset,
sale, the Awards, to the extent not previously exercised or vested, shall terminate and
cease to be outstanding, except to the extent assumed by the successor corporation (or
parent thereof) in connection with such consolidation, merger or asset sale. If any
outstanding Award hereunder is assumed in connection with any such consolidation, merger
or asset sale, then such Award shall be appropriately adjusted, immediately after such
consolidation, merger or asset sale, to apply to the number and class of securities which
would have been issuable to the Grantee upon consummation of such consolidation, merger,
or asset sale if the Awards had been exercised or vested immediately prior to any such
transaction, and appropriate adjustment shall also be made to the exercise price for such
Awards, as applicable, provided the aggregate exercise price shall remain the same. This
Plan shall not in any way affect the right of the Company to adjust, reclassify,
reorganize or otherwise change its capital or business structure or to merge, consolidate,
dissolve, liquidate, or sell or transfer any part of its business or assets.
17.3
In the event of a recapitalization or reorganization of the Company (other than a
consolidation, merger or asset sale described in Section 17.2 above) pursuant to which
securities of the Company or of another entity are issued with respect to the outstanding
shares of the Companys Class A Common Stock, a Grantee, upon exercising an Award or
an Award becoming vested, shall be entitled to receive for the purchase price paid upon
such exercise the securities the Grantee would have received if the Grantee had exercised
the Award or the Award had vested prior to such recapitalization or reorganization.
-14-
18. AMENDMENT
18.1
The Plan may be amended by the Board, without Shareholder approval, at any time in any
respect, unless Shareholder approval of the amendment in question is required under
Delaware law, the Code, any exemption from Section 16 of the Exchange Act (including
without limitation SEC Rule 16b-3) for which the Company intends Section 16 Persons to
qualify, any national securities exchange system on which the Shares are then listed or
reported, by any regulatory body having jurisdiction with respect to the Plan, or any
other applicable laws, rules or regulations.
18.2
The termination or modification or amendment of the Plan shall not, without the consent of
a Grantee, affect a Grantees rights under an Award previously granted.
Notwithstanding the foregoing, however, the Company reserves the right to terminate the
Plan in whole or in part, at any time and for any reason, provided that appropriate
compensation, as determined in the sole and absolute discretion of the Committee, is made
to Grantees with respect to Awards previously granted.
19. EFFECT ON OTHER PLAN
19.1
Participation in this Plan shall not affect a Grantees eligibility to participate in
any other benefit or incentive plan of the Company, and any Awards made pursuant to this
Plan shall not be used in determining the benefits provided under any other plan of the
Company unless specifically provided.
20. DURATION OF PLAN
20.1
The Plan shall remain in effect until all Awards under the Plan have been satisfied by the
issuance of Shares or the payment of cash, but no Awards shall be granted more than ten
years after the date the Plan is adopted by the Company. The Second Amended and Restated
1996 Stock Incentive Plan amends and restates the Amended and Restated 1996 Stock
Incentive Plan, as previously amended, effective as of March 31, 1999 subject to
shareholders approval.
21. FUNDING OF THE PLAN
21.1
This Plan shall be unfunded. The Company shall not be required to establish any special or
separate fund or to make any other segregation of assets to assure the payment of any
Award under this Plan, and payment of Awards shall be on the same basis as the claims of
the Companys general creditors. In no event shall interest be paid or accrued on any
Award including unpaid installments of Awards.
-15-
22. PLAN STATUS
22.1
This Plan is intended to satisfy the requirements of a 16b-3 plan under the Exchange Act.
22.2 This
Plan is intended to qualify as a plan under Rule 701 issued pursuant to The Securities Act
of 1933, as amended.
23. GOVERNING LAW
23.1
The laws of the State of Delaware shall govern, control and determine all questions
arising with respect to the Plan and the interpretation and validity of its respective
provisions.
NU SKIN ENTERPRISES, INC.
/s/
Steven J. Lund
By: Steven J. Lund
Its: President
ATTEST:
/s/ Keith R.
Halls
Its: Secretary
-16-
Exhibit 10.54 to NSE FORM 10-K 2005 Contingent Stock Award Agreement
CONTINGENT STOCK AWARD
AGREEMENT
(Director Award)
THIS
AGREEMENT is entered into effective as of ____________ by and between Nu Skin Enterprises,
Inc., a Delaware corporation, and
_______________
(Director).
1.
Definitions. All capitalized terms in this Agreement shall have the
meaning assigned to them in this Agreement.
1.1 |
|
Agreement
shall mean this Contingent Stock Award Agreement. |
1.2 |
|
Award
Shares shall have the meaning assigned to such term in Section 2.1. |
1.3 |
|
Code
shall mean the Internal Revenue Code of 1986, as amended. |
1.4 |
|
Committee
shall mean the committee of the Board of Directors that administers the Plan. |
1.5 |
|
Common
Stock shall mean the Class A Common Stock of Nu Skin Enterprises, Inc. |
1.6 |
|
Contingent
Stock Award shall mean the contingent stock award represented by this Agreement. |
1.7 |
|
Corporation
shall mean Nu Skin Enterprises, Inc. and each of its Subsidiaries (as defined in the
Plan). |
1.8 |
|
Director
shall mean the Director identified in the first paragraph of this Agreement. |
1.9 |
|
Plan
shall mean the Corporation's Second Amended and Restated 1996 Stock Incentive Plan. |
1.10 |
|
Vesting
Period shall have the meaning set forth in Section 2.1. |
2.
Grant of Contingent Stock Award.
2.1
Grant of Stock Award. The Corporation hereby grants to Director the right to
receive 2,500 shares of Common Stock (the Award Shares). The Award Shares
shall vest on the following dates (the Vesting Dates) and in the following
amounts provided that Director remains serving as a director of the Corporation during the
period commencing on the date of this Agreement and ending on each of the respective
Vesting Dates (the Vesting Period) except as otherwise provided in Section 5:
Date
Number of Award Shares
Six months from Grant 1,250
Day Prior to Annual Meeting 1,250
2.2
Delivery of Certificates. Within a reasonable time following each Vesting Date, the
Corporation shall issue and deliver a certificate or certificates for the Award Shares
that vested on such Vesting Date in the name of Director if Director has remained a
director of the Corporation during the Vesting Period with respect to such Award Shares.
2.3
Stockholder Rights. Until such time as a certificate for the Award Shares is
actually issued following the Vesting Date, the Award Shares shall not be treated as
issued and outstanding and Director shall have no rights (including voting, dividend and
liquidation rights) with respect to the Award Shares or as a stockholder.
3.
Securities Law Compliance. Director represents that Director is familiar
with the Companys filings with the SEC and has received a copy of the
prospectus. Director hereby acknowledges that Director is aware of the risks
associated with the Award Shares and that there can be no assurance the price of
the Common Stock will not decrease in the future. Director hereby acknowledges
no representations or statements have been made to Director concerning the value
or potential value of the Common Stock. Director acknowledges that Director has
relied only on information contained in the Prospectus and has received no
representations, written or oral, from the Corporation or its Directors,
attorneys or agents, other than those contained in the Prospectus or this
Agreement. Director acknowledges that the Company has made no representations
concerning the tax and other effects of this Contingent Stock Award and Director
represents that Director has consulted with Directors own tax and other
advisors concerning the tax and other effects of the Contingent Stock Award.
4.
Transfer Restrictions. Director shall not transfer, sell, assign,
encumber, pledge, grant a security interest in or otherwise dispose of this
Contingent Stock Award, any rights under this Agreement, or any of the Award
Shares that are subject to this Contingent Stock Award. Any such transfer, sale,
assignment, encumbrance, pledge, security interest or disposition shall be void
and shall result in the automatic termination of this Contingent Stock Award and
this Agreement. The restrictions on the Award Shares set forth in this Section 4
shall terminate upon receipt of a certificate for such shares following the
vesting of such shares in accordance with the vesting schedule set forth in
Section 2.1.
5.
Termination.
5.1
Termination of Service as Director. In the event the Director ceases to serve as a
director for any reason prior to the full vesting of the Contingent Stock Award, the
Contingent Stock Award granted hereunder shall immediately terminate in full with respect
to any Award Shares which have not vested and Director shall not receive any of such Award
Shares.
6.
Governing Plan Document. This Agreement incorporates by reference all of
the terms and conditions of the Plan as presently existing and as hereafter
amended. Director expressly acknowledges and agrees that the terms and
provisions of this Agreement are subject in all respects to the provisions of
the Plan. Director also hereby expressly acknowledges, agrees and represents as
follows:
(a)
Acknowledges receipt of a copy of the Plan and represents that Director is
familiar with the provisions of the Plan, and that Director enters into this
Agreement subject to all of the provisions of the Plan.
(b)
Recognizes that the Committee has been granted complete authority to administer
the Plan in its sole discretion, and agrees to accept all decisions related to
the Plan and all interpretations of the Plan made by the Committee as final and
conclusive upon Director and upon all persons at any time claiming any interest
through Director in this Contingent Stock Award or any Award Shares granted
hereunder.
(c)
Acknowledges and understands that the establishment of the Plan and the
existence of this Agreement are not sufficient, in and of themselves, to exempt
Director from the requirements of Section 16(b) of the Exchange Act and any
rules or regulations promulgated thereunder, and that Director (to the extent
Section 16(b) applies to Director) shall not be exempt from such requirements
pursuant to Rule 16b-3 unless and until Director shall comply with all
applicable requirements of Rule 16b-3, including without limitation, the
possible requirement that Director must not sell or otherwise dispose of any
share of Common Stock acquired hereby unless and until a period of at least six
months shall have elapsed between the date upon which such Contingent Stock
Award was granted to Director and the date upon which Director desires to sell
or otherwise dispose of any share of Common Stock acquired under this award.
7.
Representations And Warranties. As a condition to the receipt of any
Award Shares upon vesting, the Corporation may require Director to make any
representations and warranties to the Corporation that legal counsel to the
Corporation may determine to be required or advisable under any applicable law
or regulation, including without limitation, representations and warranties that
the shares of Common Stock are being acquired only for investment and without
any present intention or view to sell or distribute any such shares.
8.
Compliance With Law And Regulations. The obligations of the Corporation
hereunder are subject to all applicable federal and state laws and to the rules,
regulations and other requirements of the Securities and Exchange Commission,
any stock exchange upon which the Common Stock is then listed and any other
government or regulatory agency.
9.
Taxes. As a condition to the issuance of any Award Shares
upon vesting, Director shall remit to the Corporation the amount of cash
necessary to pay any withholding taxes associated therewith, if any, or make
other arrangements acceptable to the Corporation, in the Corporations sole
discretion, for the payment of any withholding taxes.
10.
General Provisions.
10.1 Assignment. Director may not assign any of his/her rights under this Agreement.
10.2 No Service Contract. Nothing in this Agreement or in the Plan shall confer upon Director any right to continue in the service of
the Corporation for any period of specific duration.
10.3
Notices. Any notice required to be given under this Agreement shall be in writing
and shall be deemed effective upon personal delivery or upon deposit in the U.S. mail,
registered or certified, postage prepaid and properly addressed to the party entitled to
such notice at the address indicated below such partys signature line on this
Agreement or at such other address as such party may designate by ten (10) days advance
written notice under this section to all other parties to this Agreement.
10.4
No Waiver. The failure of the Corporation in any instance to exercise any rights
under this Agreement,, shall not constitute a waiver of any other rights that may
subsequently arise under the provisions of this Agreement or any other agreement between
the Corporation and Director. No waiver of any breach or condition of this Agreement shall
be deemed to be a waiver of any other or subsequent breach or condition, whether of like
or different nature.
11. Miscellaneous
Provisions.
11.1
Director Undertaking. Director hereby agrees to take whatever additional action and
execute whatever additional documents the Corporation may deem necessary or advisable in
order to carry out or effect one or more of the obligations or restrictions imposed on
either Director or the Award Shares pursuant to the provisions of this Agreement.
11.2
Agreement is Entire Contract. This Agreement constitutes the entire contract
between the parties hereto with regard to the subject matter hereof. This Agreement is
made pursuant to the provisions of the Plan and shall in all respects be construed in
conformity with the terms of the Plan.
11.3
Governing Law. This Agreement shall be governed by, and construed in accordance
with, the laws of the State of Utah without resort to that States conflict-of-laws
rules. In the event of any legal proceeding involving this Agreement, the prevailing party
shall be entitled to recover its legal fees and expenses (including reasonable
attorneys fees).
11.4
Counterparts. This Agreement may be executed in counterparts, each of which shall
be deemed to be an original, but all of which together shall constitute one and the same
instrument.
IN
WITNESS WHEREOF, the parties have executed this Agreement on the day and year first
indicated above.
Nu
Skin Enterprises, Inc.
By:
______________________________
Title:
______________________________
Director
_________________
Name:
Address:
Exhibit 10.55 to NSE FORM 10-K Non-Management Director Compensation
NON-MANAGEMENT DIRECTOR
COMPENSATION
It is currently the Company's policy
to compensate non-management members of its Board of Directors as follows:
|
|
$35,000 for
Board service |
|
|
$10,000 for
service as Lead Independent Director |
|
|
$15,000 for
Audit Committee Chair |
|
|
$10,000 for
Compensation Committee Chair and Nominating/Corporate Governance Committee Chair |
|
|
$1,500 per
Board meeting attended |
|
|
$1,500 per
committee meeting attended |
|
|
$1,000 per
committee meeting attended by chairperson (in addition to $1,500 above) |
|
|
2,500 contingent stock
award upon election to the Board that vest in two equal annual installments provided the director remains serving as a director as follows:
six months from grant 1,250
day prior to annual meeting 1,250 |
|
|
10,000 option
grant per year (vests on the day before the next annual stockholders meeting) |
Exhibit 10.58 2005 NSE FORM 10-K Caroderm Agreement
AGREEMENT AND PLAN OF
MERGER
among
NU SKIN INTERNATIONAL,
INC.
a Utah corporation
PHARMANEX LICENSE
ACQUISITION CORPORATION
a Utah corporation and
a wholly-owned
subsidiary of Nu Skin
International, Inc.
CARODERM, INC.
a Utah corporation
and
CERTAIN SHAREHOLDERS
OF CARODERM, INC.
Dated as of
March 7, 2006
AGREEMENT AND PLAN OF
MERGER
THIS
AGREEMENT AND PLAN OF MERGER (this Agreement) dated as of March 7, 2006 by and
among Nu Skin International, Inc., a Utah corporation (Parent), Pharmanex
License Acquisition Corporation, a Utah corporation and a wholly-owned subsidiary of
Parent (Purchaser), Caroderm, Inc., a Utah corporation (Caroderm),
and the following shareholders of Caroderm: E. Dallin Bagley, Werner Gellermann and Paul
S. Bernstein (such shareholders collectively, the Shareholders). Reference is
made to Article IX for the definitions of certain terms used in this Agreement.
In
consideration of the mutual agreements contained in this Agreement, and for other good and
valuable consideration, the value, receipt and sufficiency of which are acknowledged, the
parties agree as follows:
ARTICLE I
THE MERGER
1.1
The Merger. Subject to the terms and conditions of this Agreement, at the Effective
Time, Caroderm will be merged with Purchaser (the Merger) in accordance with
the provisions of the Revised Business Corporation Act of the State of Utah (the
Utah Act). Following the Merger, the Purchaser will continue as the surviving
corporation (the Surviving Corporation) and the separate corporate existence
of Caroderm will cease. Caroderm and Purchaser are sometimes referred to collectively
herein as the Constituent Corporations.
1.2
The Closing. The closing of the Merger contemplated by this Agreement (the
Closing or Closing Date) will take place upon execution of this
Agreement by each of the parties hereto.
1.3
Effective Time. According to the terms of this Agreement, on the Closing Date (or
on such other date as the parties may agree), Caroderm and Purchaser will file with the
Utah Division of Corporations and Commercial Code (the Utah Division)
appropriate articles of merger (the Articles of Merger) and make all other
filings or recordings required by the Utah Act in connection with the Merger. The Merger
will be consummated on the later of the date on which the Articles of Merger have been
filed with the Utah Division or such time as is agreed upon by the parties and specified
in the Articles of Merger. The time the Merger becomes effective in accordance with the
Utah Act is referred to in this Agreement as the Effective Time.
1.4
Effects of the Merger. The Merger will have the effects set forth in this Agreement
and Section 16-10a-1106 of the Utah Act. Without limiting the generality of the foregoing,
as of the Effective Time, the Surviving Corporation will succeed to all the properties,
rights, privileges, powers, franchises and assets of the Constituent Corporations, and all
debts, liabilities and duties of the Constituent Corporations will become debts,
liabilities and duties of the Surviving Corporation.
1.5
Organizational Documents. At the Effective Time, the articles of incorporation and
bylaws of Purchaser (as in effect immediately prior to the Effective Time) will become the
articles of incorporation and bylaws of the Surviving Corporation until thereafter amended
in accordance with their respective terms and the Utah Act.
1.6
Directors and Officers. The directors and the officers of Purchaser at the
Effective Time will be the initial directors and officers of the Surviving Corporation and
will hold office from the Effective Time in accordance with the articles of incorporation
and bylaws of the Surviving Corporation until their respective successors are duly elected
or appointed and qualified.
1
1.7 Conversion of Shares. As of the Effective Time, by virtue of the Merger and without any action on the part of Caroderm,
Parent or Purchaser:
|
1.7.1
Merger Consideration. Each of the shares of Caroderms capital stock (other
than any Dissenting Shares) issued and outstanding immediately prior to the Effective Time
(such aggregate number of common shares, the Caroderm Shares) will be
converted into the right to receive cash in an aggregate amount equal to the Per Share
Merger Consideration. The Per Share Merger Consideration shall consist of the
aggregate cash sum of Four Million Dollars ($4,000,000), subject to the Holdback (the
Merger Consideration), divided by the Caroderm Shares.
|
|
1.7.2
Conversion of Shares of Purchaser. Each issued and outstanding share of capital
stock of Purchaser shall be converted into one share of common stock of the Surviving
Corporation.
|
1.8
Funding of Holdback. At the Closing, Parent shall deduct Two Million Dollars
($2,000,000) from the Merger Consideration and withhold such amount for future
distribution in accordance with the provisions of Section 7.3.3. Such amount shall be
withheld, on a pro rata basis, from the Merger Consideration otherwise deliverable to
Caroderms shareholders on delivery of their Caroderm Stock Certificates in
accordance with Section 2.1.
ARTICLE II
PAYMENT
2.1
Surrender of Caroderm Stock Certificates. From and after the Effective Time, each
holder of a stock certificate that immediately prior to the Effective Time represented
outstanding Caroderm Shares (a Caroderm Stock Certificate) will be entitled to
receive in exchange therefor, upon surrender thereof to Parent, the Per Share Merger
Consideration into which the Caroderm Shares evidenced by such Caroderm Stock Certificate
were converted pursuant to the Merger. No interest will be payable on the Per Share Merger
Consideration to be paid to any holder of a Caroderm Stock Certificate irrespective of the
time at which such Caroderm Stock Certificate is surrendered for exchange.
2.2
Caroderm Stock Certificate Surrender Procedures; Transmittals. No later than five
(5) business days after the Effective Time, Caroderm will have mailed to each record
holder of a Caroderm Stock Certificate a letter of transmittal in a form mutually
agreeable to the parties, including instructions for use in effecting the surrender of
Caroderm Stock Certificates for the Per Share Merger Consideration to which such holder is
entitled. Upon the surrender to Parent of a Caroderm Stock Certificate together with a
duly executed and completed letter of transmittal and all other documents and other
materials required by Parent to be delivered in connection therewith, following the
Effective Time, the holder will be entitled to receive the aggregate Per Share Merger
Consideration into which the Caroderm Stock Certificate so surrendered has been converted
in accordance with the provisions of this Agreement. Until so surrendered, each
outstanding Caroderm Stock Certificate will be deemed from and after the Effective Time,
for all corporate purposes, to evidence the right to receive the aggregate Per Share
Merger Consideration into which the Caroderm Shares represented by such Caroderm Stock
Certificate have been converted in accordance with the provisions of this Agreement.
2
2.3
Transfer Books. The stock transfer books of Caroderm will be closed at the
Effective Time, and no transfer of any Caroderm Shares will thereafter be recorded on any
of the stock transfer books. In the event of a transfer of ownership of any Caroderm
Shares prior to the Effective Time that is not registered in Caroderms stock
transfer records at the Effective Time, the Per Share Merger Consideration into which such
Caroderm Shares have been converted in the Merger will be paid to the transferee in
accordance with the provisions of Section 2.2 only if the Caroderm Stock Certificate is
surrendered as provided in Section 2.2 and accompanied by all documents required to
evidence and effect such transfer (including evidence of payment of any applicable stock
transfer taxes).
2.4
Dissenters Rights. Notwithstanding anything in this Agreement to the contrary,
Caroderm Shares outstanding immediately prior to the Effective Time and held by a holder
who has not voted in favor of the Merger or consented thereto in writing and who has
complied with all of the relevant provisions of Section 16-10a-1301 et. seq. of the Utah
Act regarding appraisal for such shares (Dissenting Shares), will not be
converted into a right to receive the Per Share Merger Consideration, unless such holder
fails to perfect or withdraws or otherwise loses its right to appraisal. Each holder of
Dissenting Shares who becomes entitled to payment for such Dissenting Shares under the
provisions of the Utah Act, will receive payment thereof from the Surviving Corporation
and such Dissenting Shares will no longer be outstanding and will automatically be
canceled and retired and will cease to exist.
2.5
Lost Caroderm Stock Certificates. If any Caroderm Stock Certificate has been lost,
stolen or destroyed, upon the making of an affidavit (in form and substance reasonably
acceptable to Parent) of that fact by the person making such a claim, Parent will deliver
in exchange for the affidavit representing such lost, stolen or destroyed Caroderm Stock
Certificate the Per Share Merger Consideration pursuant to Section 2.2.
2.6
No Rights as Stockholder. From and after the Effective Time, the holders of
Caroderm Stock Certificates will cease to have any rights as a stockholder of the
Surviving Corporation except as otherwise expressly provided in this Agreement or by
applicable Laws, and Parent will be entitled to treat each Caroderm Stock Certificate that
has not yet been surrendered for exchange solely as evidence of the right to receive the
aggregate Per Share Merger Consideration to which such holder is entitled.
2.7
Escheat. Neither Parent, Purchaser nor Caroderm will be liable to any former holder
of Caroderm Shares for any portion of the Per Share Merger Consideration delivered to any
public official pursuant to any applicable abandoned property, escheat or similar Law. In
the event any Caroderm Stock Certificate has not been surrendered for the Merger
Consideration prior to the sixth anniversary of the Closing Date, or prior to such earlier
date as of which such Caroderm Stock Certificate or the Per Share Merger Consideration
payable upon the surrender thereof would otherwise escheat to or become the property of
any Governmental Entity, then the Per Share Merger Consideration otherwise payable upon
the surrender of such Caroderm Stock Certificate will, to the extent permitted by
applicable Law, become the property of the Surviving Corporation, free and clear of all
rights, interests and adverse claims of any person.
2.8
Accounting. Upon the request of any Shareholder, but not more often than once in
any six-month period, Parent shall provide to the Shareholders an accounting of all
payments of Merger Consideration to holders of the Caroderm Shares.
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ARTICLE III
REPRESENTATIONS AND
WARRANTIES OF PARENT
Parent
or Purchaser, as set forth below, hereby represents and warrants to Caroderm and the
Shareholders as follows:
3.1
Corporate Organization; Officers and Directors. Parent is a corporation duly
organized, validly existing and in good standing under the laws of the State of Utah and
has full corporate power and authority to carry on its business as now conducted.
Purchaser is a corporation duly organized, validly existing and in good standing under the
laws of the State of Utah and has full corporate power and authority to carry on its
business as now conducted. Parent directly owns and has power to vote all of the
outstanding capital stock of Purchaser. Purchaser was formed for the purpose of effecting
the Merger and has not conducted, and will not conduct, any business prior to the
Effective Time other than that which is necessary to effectuate the Merger.
3.2
Authority Relative to this Agreement; No Violation.
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3.2.1
Authority. Each of Parent and Purchaser has the corporate power to enter into this
Agreement, to carry out its obligations hereunder, to perform and comply with all the
terms and conditions hereof to be performed and complied with by it, and to consummate the
transactions contemplated hereby. The execution and delivery of this Agreement, the
performance and compliance with all the terms and conditions hereof to be performed and
complied with, and the consummation of the transactions contemplated hereby, by Parent and
Purchaser have been duly authorized by all requisite corporate action on the part of each
of Parent and Purchaser. This Agreement has been duly and validly executed and delivered
by each of Parent and Purchaser and is the legal, valid and binding obligation of each of
Parent and Purchaser enforceable against each of them in accordance with its terms. Any
reference in this Article III to an agreement being enforceable shall be
deemed to be qualified to the extent such enforceability is subject to (i) laws of general
application relating to bankruptcy, insolvency, reorganization, moratorium and the relief
of debtors, and similar laws affecting creditors rights and remedies generally, and
(ii) the availability of specific performance, injunctive relief and other equitable
remedies, regardless of whether enforcement is sought in a proceeding at law or in equity.
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3.2.2
Compliance with Organizational Documents and Laws. Neither the execution and
delivery of this Agreement by Parent and Purchaser, the performance and compliance by
Parent and Purchaser of and with the terms and conditions hereof to be performed and
complied with by Parent and Purchaser, nor the consummation by Parent and Purchaser of the
transactions contemplated hereby will (i) violate, conflict with or result in a breach of,
any provision of the Organizational Documents of Parent or Purchaser or (ii) assuming that
the approvals referred to in Section 3.3 are obtained, (A) violate, conflict with or
result in a breach of any Law applicable to Parent or Purchaser or any of the respective
properties or assets of Parent or Purchaser, which violation, conflict or breach is
material to Parent or Purchaser or could prevent or materially delay Parent or Purchaser
from consummating the transactions contemplated hereby.
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3.3
Consents and Approvals. There are no consents, approvals or authorizations of or
designations, declarations or filings with any Governmental Entities or any other person
on the part of Parent required for the validity of the execution and delivery by Parent
and Purchaser of this Agreement or the performance and compliance by them of and with the
terms and conditions of this Agreement to be performed and complied with by them or the
consummation of the transactions contemplated hereby, other than (i) the filing of the
Articles of Merger in accordance with the Utah Act, (ii) compliance with
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any applicable
requirements of the Securities Act and the Exchange Act and (iii) such actions as may be
required under any applicable state securities or blue sky laws.
ARTICLE IV
REPRESENTATIONS AND
WARRANTIES OF CARODERM AND THE SHAREHOLDERS
Except
as set forth on the Disclosure Schedule, Caroderm and the Shareholders, jointly and
severally, hereby represent and warrant to Parent and Purchaser as follows:
4.1
Organization and Qualification. Caroderm is a corporation duly organized, validly
existing and in good standing under the laws of the State of Utah and has full corporate
power and authority to carry on its business as now being conducted. Caroderm is duly
qualified as a foreign corporation to do business, and is in good standing, in each
jurisdiction wherein the character of its properties owned or leased or the nature of its
activities makes such qualification legally required, except where the failure to be so
qualified would not, taken together, have a Material Adverse Effect. Copies of the
Caroderm Organizational Documents, as in effect on the date hereof, including all
amendments thereto, have been previously delivered by Caroderm to Parent. Caroderms
current and former officers and/or directors consist exclusively of the Shareholders and
Robert McClane.
4.2
Capitalization. There are 10,000,000 duly authorized shares of Caroderm common
stock, no par value, of which 2,025,946 shares are issued and outstanding. All of the
issued and outstanding shares of capital stock of Caroderm have been duly authorized and
are validly issued, fully paid, and nonassessable. Section 4.2 of the Disclosure Schedule
sets forth the name of each holder of Caroderm Shares and the number of Caroderm Shares
held by such holder. There are no outstanding options, warrants, calls, stock appreciation
rights or other rights, or convertible debt or security, or any share reserved for
issuance or any arrangement, subscription agreement, plan, or commitment, relating to the
issued (including treasury stock) or unissued capital stock or other securities of
Caroderm granted or made by Caroderm or to which Caroderm is a party. Caroderm has no
option, equity incentive or similar plan. Caroderm is not a party or subject to any
agreement or understanding and, to the Knowledge of Caroderm or the Shareholders, other
than in connection with this Agreement, there is no agreement or understanding between any
persons that affects or relates to the voting or giving of written consents with respect
to any securities of Caroderm or the voting by any director or shareholder of Caroderm. No
shareholder of Caroderm or any Affiliate thereof is indebted to Caroderm, and Caroderm is
not indebted to any of its shareholders or any Affiliate thereof. Caroderm is not under
any contractual or other obligation to register any of its presently outstanding
securities or any of its securities that could have been issued in the future. There are
no rights of refusal, co-sale rights or registration rights granted by Caroderm with
respect to any of Caroderms capital stock. Each shareholder of Caroderm that is an
individual is either a citizen or a resident of the United States and, in either case, is
not subject to federal backup withholding taxes.
4.3
Subsidiaries. Caroderm has no subsidiaries. Caroderm does not directly or
indirectly own any equity or similar interest in, or any interest convertible into or
exchangeable or exercisable for any equity or similar interest in, any corporation,
partnership, limited liability company, joint venture or other business association or
entity.
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4.4
Authority Relative to this Agreement; No Violation; Consents.
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4.4.1
Authority; Approval; Due Execution. Caroderm has the corporate power to enter into
this Agreement, to carry out its obligations hereunder, to perform and comply with all the
terms and conditions hereof to be performed and complied with by it, and to consummate the
transactions contemplated hereby. The execution and delivery of this Agreement by
Caroderm, the performance and compliance with all the terms and conditions hereof to be
performed and complied with by Caroderm, and the consummation by Caroderm of the
transactions contemplated hereby have been duly authorized by all requisite corporate
action on the part of Caroderm, including approval of the Merger by the holders of at
least ninety-six percent (96%) of the Caroderm Shares. The approval by the holders of such
percentage of Caroderm Shares, voting together as a single class, is sufficient to approve
the Merger in accordance with the requirements of the Utah Act and Caroderms
Organizational Documents. The Board of Directors of Caroderm, by unanimous written consent
effective February 17, 2006, (i) determined that this Agreement, the Merger and the
transactions contemplated thereby are advisable and in the best interests of holders of
Caroderm Shares, and (ii) resolved to recommend to holders of Caroderm Shares that such
holders approve and adopt the Merger and this Agreement. This Agreement has been duly and
validly executed and delivered by Caroderm and is a legal, valid and binding obligation of
Caroderm enforceable against Caroderm in accordance with its terms. Any reference in this
Article IV to an agreement being enforceable shall be deemed to be qualified
to the extent such enforceability is subject to (i) laws of general application relating
to bankruptcy, insolvency, reorganization, moratorium and the relief of debtors, and
similar laws affecting creditors rights and remedies generally, and (ii) the
availability of specific performance, injunctive relief and other equitable remedies,
regardless of whether enforcement is sought in a proceeding at law or in equity.
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4.4.2
Compliance with Organizational Documents and Laws. Except as disclosed in Section
4.4.2 of the Disclosure Schedule, neither the execution and delivery of this Agreement by
Caroderm, the performance and compliance by Caroderm of and with the terms and conditions
hereof to be performed and complied with by it, nor the consummation by Caroderm of the
transactions contemplated hereby will: (i) violate, conflict with or result in a breach
of, any provision of the Organizational Documents of Caroderm; or (ii) assuming that the
approvals referred to in Section 4.6 are obtained, (A) violate, conflict with or result in
a breach of any Law applicable to Caroderm or any of the properties or assets of Caroderm,
which violation, conflict or breach is material to Caroderm or could prevent Caroderm from
consummating the transactions hereby or (B) violate, conflict with, result in a breach of,
result in the impairment of, constitute a default (or an event which, with notice or lapse
of time, or both, would constitute a default) under, result in the termination of,
accelerate the performance required by, result in the creation or imposition of any Lien
upon any of the properties or assets of Caroderm under, or require any consent, approval,
waiver, exemption, amendment, authorization, notice or filing under, any of the terms,
conditions or provisions of, any Material Contract to which Caroderm is a party or by
which any of its properties or assets may be bound or affected, except for Liens created
by or through Parent or Purchaser.
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4.5
Financial Statements, Financial Condition and Books and Records of Caroderm.
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4.5.1
Caroderm Financial Statements. Caroderm has delivered to Purchaser the following
financial statements (all such financial statements collectively, the Financial
Statements): (i) the unaudited consolidated balance sheet of Caroderm and the
related unaudited consolidated statement of cash flows as of and for the years ended
December 31, 2005, December 31, 2004 and December 31, 2003, and the unaudited consolidated
statement of operations and shareholders equity as of and for the years ended
December 31, 2005, December 31, 2004 and December 31, 2003; and (ii) the unaudited
consolidated balance sheet of Caroderm (the Most Recent Balance Sheet), and
the related unaudited consolidated statement of cash flows as of and for the month ended
January 31, 2006 and the unaudited consolidated statement of operations and
shareholders equity as of and for the month ended January 31, 2006 (such preceding
financial statements collectively, the Most Recent Financial Statements). The
Financial Statements are true and correct, have been prepared consistently from year to
year and, with respect to statements of operations and cash flows, present fairly in all
material respects the results of operations of Caroderm for the respective periods
covered, and with respect to balance sheets, present fairly in all material respects the
consolidated financial condition of Caroderm as of their respective dates; provided
however that the Most Recent Financial Statements are subject to year-end adjustments
which will not be material. Section 4.5.1 of the Disclosure Schedule sets forth all of
Caroderms liabilities and indebtedness.
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4.5.2
Books and Records. The books of account, minute books, stock record books, and
other records of Caroderm that have been provided to Parent are complete and correct in
all material respects. The minute books of Caroderm contain accurate records of all
corporate action taken by Caroderms shareholders, its Board of Directors, and the
committees of its Board of Directors. At the Effective Time, all of those books and
records will be in the possession of the Surviving Corporation. Caroderm maintains
appropriate and sufficient financial records that allow it to properly and completely
prepare the Financial Statements and other financial reports.
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4.6
No Consents. There are no consents, approvals or authorizations of or designations,
declarations or filings with any Governmental Entities or any other person on the part of
Caroderm required for the validity of the execution and delivery by Caroderm of this
Agreement or the performance and compliance by it of and with the terms and conditions of
this Agreement to be performed and complied with by it or the consummation of the
transactions contemplated hereby, other than as set forth in Section 4.6 of the Disclosure
Schedule.
4.7
Absence of Material Changes or Events. Except as disclosed in Section 4.7 of the
Disclosure Schedule, since the date of the Most Recent Balance Sheet, Caroderm has
conducted its business only in the ordinary course, and since the date of the Most Recent
Balance Sheet, there has been no Material Adverse Effect on Caroderms business,
assets or operations. Except as referred to in this Agreement or as disclosed in Section
4.7 of the Disclosure Schedule, Caroderm has not entered into or agreed to enter into any
transaction, agreement or commitment, suffered the occurrence of any event or events or
experienced any change in financial condition, business, results of operations or
otherwise that, in the aggregate, has (i) interfered with its normal and usual operations
of the business or business prospects of the business or (ii) resulted in a Material
Adverse Effect on its business, assets, operations, prospects or condition (financial or
other) or could reasonably be expected to have such a Material Adverse Effect.
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4.8
Taxes and Tax Returns. Except as set forth in Section 4.5.1 of the Disclosure
Schedule, Caroderm has filed all federal, state and local Tax and information returns
which are required to be filed by it and such returns are true and correct. Except as set
forth in Section 4.5.1 of the Disclosure Schedule, Caroderm has paid all Taxes, interest
and penalties, if any, reflected in such Tax returns or otherwise due and payable by it.
Caroderm has no Knowledge of any material additional assessments or any basis therefor.
The reserve for Tax liability (rather than any reserve for deferred Taxes established to
reflect timing differences between book and Tax income) on the balance sheet of Caroderm
as of the Most Recent Balance Sheet accurately reflects all liabilities of Caroderm for
such Taxes or other governmental charges. Except as set forth in Section 4.5.1 of the
Disclosure Schedule, Caroderm has withheld or collected from each payment made to its
employees and other service providers the amount of all Taxes required to be withheld or
collected therefrom and has paid over such amounts to the appropriate taxing authorities.
Any Tax deficiencies proposed as a result of any governmental audits have been paid or
settled, there are no present disputes or audits as to Taxes payable by Caroderm and, to
Caroderms Knowledge, no such additional Taxes or audits have been proposed or
threatened.
4.9
Employees.
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4.9.1
Agreements; Benefit Plans. Caroderm does not sponsor, maintain or contribute to,
and has never sponsored, maintained or contributed to or incurred any obligation or
liability under any pension, retirement, profit-sharing, life, health, accident or other
employee benefit plan, practice, policy or arrangement, including, but not limited to, any
employee benefit plan within the meaning of Section 3(3) of ERISA. No other Person that is
treated as a single employer with Caroderm under Section 414(b), (c), (m) or (o) of the
Code has ever maintained, sponsored or contributed to any employee benefit plan that is
subject to Title IV of ERISA or Section 412 of the Code.
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4.9.2
Employees; Compensation. Section 4.9.2 of the Disclosure Schedule sets forth a true
and correct list of all of Caroderms employees, together with each employees
annual rate of compensation (including all bonus amounts paid to such employees since
December 31, 2004). Except as set forth in Section 4.9.2 of the Disclosure Schedule: (i)
as of the date of this Agreement, no officer or employee of Caroderm has obtained any
binding and effective commitment of Caroderm to pay to him or her any amounts following
the Effective Date (other than amounts owed to any such employee for services rendered
during the normal pay period ending on or prior to the Closing Date), (ii) Caroderm is not
obligated to provide health or welfare benefits to retirees or other former employees of
Caroderm or any other employer, or their dependents, (iii) Caroderm is not a party to any
collective bargaining agreement or other labor agreement with any union or labor
organization or to any conciliation agreement with the Department of Labor, the Equal
Employment Opportunity Commission or any federal, state or local agency which requires
equal employment opportunities or affirmative action in employment, and (iv) there is no
strike, dispute, slowdown, work stoppage or lockout pending against or involving Caroderm.
Included in Section 4.9.2 of the Disclosure Schedule is a list of all employees and
officers of Caroderm for which Caroderm does not have such a nondisclosure agreement. To
the Knowledge of Caroderm or the Shareholders, no employee (or person performing similar
functions) of Caroderm is in violation of any such agreement or any employment agreement,
noncompetition agreement, patent disclosure agreement, invention assignment agreement,
proprietary information agreement or other contract or agreement relating to the
relationship of such employee with Caroderm or any other party. All employees of Caroderm
are employed on an at will basis, and are eligible to work and are lawfully
employed in the United States. Except as contemplated herein and except as disclosed on
Section 4.9.2 of the Disclosure Schedule, no officer or employee has a right to severance
benefits or other payouts as a result of the transactions contemplated hereby. Section
4.9.2 of the Disclosure Schedule sets
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forth the practice of Caroderm with respect to
payment of severance benefits to terminated employees.
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4.10
Brokers Fees. Neither Caroderm nor any of its officers or directors has
employed any broker, finder or investment banker or incurred any liability for any
brokers fees, financial advisory fees, investment bankers or finders
fees in connection with any of the transactions contemplated by this Agreement.
4.11
Litigation. Except as set forth in Section 5.4 of this Agreement, there are no
outstanding orders, judgments, injunctions, awards or decrees of any court, governmental
agency or authority or arbitration tribunal by which Caroderm is bound, or to which any of
its assets, properties, securities or businesses is subject. As of the date hereof there
are no actions, suits, claims, legal, administrative or arbitral proceedings or
investigations, pending or, to the Knowledge of Caroderm or the Shareholders, threatened
against Caroderm or any of its assets or properties.
4.12
Authorizations; Compliance with Laws. Caroderm holds all authorizations, permits,
licenses, variances, exemptions, orders and approvals required by Governmental Entities
for the lawful conduct of its business taken as a whole, to own or hold under lease the
properties and assets it owns or holds under lease and to perform all of its obligations
under the agreements to which it is a party (the Permits), except for such
authorizations, permits, licenses, variances, exemptions, orders and approvals which the
failure to hold, taken together, would not have a Material Adverse Effect. Caroderm is in
compliance with the terms of the Permits except where the failure to be in such compliance
will not, taken together, have a Material Adverse Effect. Caroderm is and has been in
compliance with all federal, state, local and foreign laws, rules, regulations,
ordinances, decrees and orders applicable to the operation of its business, to its
employees, or to its property, except where the failure to comply would, individually or
in the aggregate, not have a Material Adverse Effect. Caroderm has not received any
written notification of any asserted present or past unremedied material failure by
Caroderm to comply with any of such laws, rules, ordinances, decrees or orders.
4.13
Absence of Defaults. Caroderm is not in default under or in violation of any
provision of its Organizational Documents, or in material default or violation of any
Material Contract and, to the Knowledge of Caroderm or the Shareholders, no event has
occurred which, with notice, lapse of time and/or action by a third party, would
constitute or result in such a default or violation, except where such default or
violation would not have a Material Adverse Effect.
4.14
Material Contracts. Except as set forth in Section 4.14 of the Disclosure Schedule,
as of the date of this Agreement, Caroderm is not a party to any of the following (the
Material Contracts). True copies of such Material Contracts, including all
amendments and supplements thereto, have been delivered to Parent:
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4.14.1
any contract or agreement with any current or former officer, director, or principal
stockholder, or any partnership, corporation, limited liability company, joint venture, or
other entity with which any such person is an Affiliate;
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4.14.2
any contract or agreement with any labor union or association representing any employee;
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4.14.3
any indenture, mortgage, promissory note, loan agreement or other agreement or commitment for the borrowing of money or
for a line of credit;
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4.14.4
any lease, sublease or other agreement pursuant to which it is a lessee of or holds or operates any real or personal
property owned by any third party;
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4.14.5
any option or other executory agreement or other agreement with remaining obligations
thereunder to purchase or acquire any interest in assets or property other than in the
ordinary course of business;
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4.14.6
any option or other executory agreement or other agreement with remaining obligations
thereunder to sell or dispose of any interest in assets or property other than in the
ordinary course of business;
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4.14.7
any contract or agreement relating to joint ventures or similar arrangements by which the
assets, properties, rights, or business is affected;
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4.14.8
any license of rights of or by Caroderm;
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4.14.9
any contract or agreement which could reasonably be expected to result in a payment by Caroderm;
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4.14.10
any contract or agreement under which Caroderm has the obligation to issue or sell any
security;
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4.14.11
any contract or agreement under which Caroderm currently provides, or may, in the future,
provide services or currently sells or distributes or may, in the future, sell or
distribute any products to others;
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4.14.12
any employment agreement, whether express or implied, or any other agreement for services
that contains severance or termination pay liabilities or obligations; and
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4.14.13
any Material Contract that contains a noncompetition or exclusivity agreement or other
arrangement that would prevent Caroderm from carrying on its business as currently
conducted anywhere in the world.
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4.15
Insurance Policies. Caroderm has no insurance policies.
4.16
Intellectual Property.
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4.16.1
Caroderm Intellectual Property. Section 4.16.1 of the Disclosure Schedule sets
forth an accurate and complete list of all United States and foreign (a) patents, patent
rights, patent applications, and continuing (continuation, divisional, or
continuation-in-part) applications, re-issues, extensions, renewals, and re-examinations
thereof and patents issued thereon (Patents); (b) registered and material
unregistered trademarks and service marks, trademark and service mark rights, trade names,
and domain names (Marks); (c) registered and material unregistered copyrights;
(d) trade secrets and inventions, whether patentable or unpatentable; (e) other
intellectual, industrial, or proprietary rights; (f) pending applications for and
registrations of any of the foregoing; and (g) license rights to any of the foregoing
(collectively Intellectual Property); that are owned by Caroderm (the
Caroderm Intellectual Property).
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4.16.2
Sublicenses or Other Liens. Except as set forth in Section 4.16.2 of the Disclosure
Schedule, Caroderm has not granted any licenses, sublicenses, or other rights under or to,
nor do any other Liens exist upon, any of the Caroderm Intellectual Property, including
but not limited to that certain Patent License Agreement that was entered into between the
University of Utah Research Foundation, a Utah non-profit corporation (the
University), and Spectrotek, L.C. and was subsequently assigned to Caroderm
(the Caroderm Patent License).
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4.16.3
Adverse Claims Regarding Ownership and Validity of Patent Rights. Except as set
forth in Section 4.16.3 of the Disclosure Schedule, neither Caroderm nor any
Shareholder has Knowledge of any claim (a) challenging the Universitys ownership of
the patent(s) licensed to Caroderm under the Caroderm Patent License or suggesting that
any other Person has any claim of legal or beneficial ownership with respect to those
Patent(s), nor to the Knowledge of Caroderm and each Shareholder is there a reasonable
basis for any such claim; (b) challenging the validity or enforceability of the patent(s)
licensed to Caroderm under the Caroderm Patent License, nor to the Knowledge of Caroderm
and each Shareholder is there a reasonable basis for any such claim; or (c) asserting or
suggesting that any Person other than Caroderm has any rights within the scope of the
rights granted to Caroderm under the Caroderm Patent License, nor to the Knowledge of
Caroderm and each Shareholder is there a reasonable basis for any such claim.
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4.16.4
No Violation. Except as set forth in Section 4.16.4 of the Disclosure Schedule, to
the Knowledge of Caroderm and each Shareholder, no person is materially infringing,
misappropriating, diluting, or otherwise violating any Caroderm Intellectual Property,
including but not limited to practicing any technology, producing any products, or
providing any services that misappropriate or otherwise infringe upon Caroderms
rights under the Caroderm Patent License.
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4.17
Environmental Matters. (i) Caroderm is and has been in compliance with all
applicable Environmental Laws; (ii) Caroderm is not subject to any liability under any
Environmental Law; and (iii) Caroderm has not received any notice from any governmental
body alleging that Caroderm is or may be in violation of, or liable under, any
Environmental Law.
4.18
Labor. There are no material labor disputes, employee grievances or disciplinary
actions pending or, to the Knowledge of Caroderm or the Shareholders, threatened against
or involving Caroderm or any of its present or former employees. Caroderm has complied
with all provisions of law relating to employment and employment practices, terms and
conditions of employment, wages and hours that are material to the business of Caroderm,
and Caroderm is not engaged in any unfair labor practice and has no liability for any
arrears of wages or Taxes or penalties for failure to comply with any such provisions of
law. There is no labor strike, dispute, slowdown or stoppage pending or, to the Knowledge
of Caroderm or the Shareholders, threatened against or affecting Caroderm, and Caroderm
has not experienced any material work stoppage or other labor difficulty since its
incorporation. No collective bargaining agreement is binding on Caroderm. Neither Caroderm
nor the Shareholders has any Knowledge of any organizational efforts presently being made
or threatened by or on behalf of any labor union with respect to Caroderms
employees.
4.19
Insider Interests. Except as set forth in the Disclosure Schedule, (i) no
shareholder or officer, director or employee of Caroderm has any interest (other than as a
holder of Caroderm capital stock) in any material real property, personal property,
technology or intellectual property rights used in or directly pertaining to
Caroderms business, including, without limitation, inventions, patents, trademarks
or trade names, or in any material agreement, contract, arrangement or obligation relating
to Caroderm, its present or prospective business or its operations; (ii) there are no
material agreements, understandings or proposed transactions between Caroderm and any of
its officers, directors, shareholders or Affiliates; and (iii) Caroderm and its officers
and directors have no material ownership or management
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interest in any entity that
presently provides any material services, produces and/or sells any material products or
product lines, or engages in any material activity that is the same, similar to or
competitive with any activity or business in which Caroderm is now engaged.
4.20
Full Disclosure. No information provided by Caroderm to Parent or Purchaser in this
Agreement (including, but not limited to, the Financial Statements and all information in
the Disclosure Schedule and the other exhibits hereto) contains any untrue statement of a
material fact or omits to state a material fact necessary in order to make the statements
so made or information so delivered not misleading.
ARTICLE V
ADDITIONAL AGREEMENTS
5.1
Additional Agreements; Further Assurances. Subject to the terms and conditions
herein provided, each of the parties hereto agrees to use commercially reasonable efforts
to take, or cause to be taken, all action and to do, or cause to be done, all things
necessary, proper or advisable on the part of such party, to consummate and make effective
the transactions contemplated by this Agreement at the earliest practicable date,
including using its commercially reasonable best efforts to obtain all required consents,
approvals, waivers, exemptions, amendments and authorizations, give all notices, and make
or effect all filings, registrations, applications, designations and declarations; and
each party shall cooperate fully with the other (including by providing any necessary
information) with respect to the foregoing. Caroderm and Parent each will make
commercially reasonable efforts to conduct its business so that its representations and
warranties shall be true and correct at the Effective Time with the same force and effect
as if such representations and warranties were made anew at and as of the Effective Time.
In the event any claim, action, suit, investigation or other proceeding by any
Governmental Entity or other person is commenced which questions the validity or legality
of the Merger or any of the other transactions contemplated hereby or seeks damages in
connection therewith, the parties agree to cooperate and use commercially reasonable
efforts to defend against such claim, action, suit, investigation or other proceeding and,
if an injunction or other order is issued in any such action, suit, or other proceeding,
to use all reasonable efforts to have such injunction or other order lifted, and to
cooperate reasonably regarding any other impediment to the consummation of the
transactions contemplated by this Agreement. Each party shall give prompt written notice
to the other of (i) the occurrence or failure to occur of any event which occurrence or
failure has caused or could reasonably be expected to cause any representation or warranty
of Caroderm or Parent as the case may be, contained in this Agreement to be untrue or
inaccurate at any time from the date hereof to the Effective Time or that will result in
the failure to satisfy any of the conditions specified in Article V and (ii) any failure
of Caroderm or Parent as the case may be, to comply with or satisfy any covenant,
condition or agreement to be complied with or satisfied by it hereunder.
5.2
Publicity. Subject to compliance with applicable Laws, neither Caroderm nor Parent
will, prior to the Effective Time, issue, or permit to be issued any press release or
other announcement or public disclosure of matters related to this Agreement or the
transactions contemplated hereby without the prior written consent of the other party,
except as may be required by applicable Law, court process or by obligations pursuant to
any applicable listing agreement of Parent. To the extent disclosure is required, the
parties agree to consult with each other and give to each other the opportunity to review
and comment on any such disclosure. Caroderm acknowledges and agrees that the disclosure
of this Agreement and the transactions contemplated hereby by Parent (i) on a Form 8-K
filed with the Securities and Exchange Commission at any time after the date hereof, or
(ii) in a customary press release or on a customary analyst call, will not be violation of
this Section 5.2. Parent and Purchaser agree that Caroderm may
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disclose matters related to
this Agreement and the transactions contemplated hereby to Caroderm shareholders who shall
not be under any confidentiality obligations in connection therewith.
5.3
Releases; Lawsuit and Appeal.
5.3.1 Lawsuit and Appeal. Notwithstanding any other representation or warranty of
Caroderm in this Agreement, and
notwithstanding any other provision
of this Agreement, Caroderm acknowledges that it is entering into this Agreement with full
knowledge of the pending litigation between Caroderm and Affiliates of Parent, which is
described as follows:
(a)
On or about July 16, 2004, Caroderm filed a lawsuit against Nu Skin Enterprises,
Inc. and Niksun Acquisition Corporation (collectively Nu Skin) in
Third Judicial District Court of Salt Lake County, State of Utah, Case No.
040914826 (the Lawsuit) concerning a licensing dispute over certain
technology licensed from the University.
(b)
The Lawsuit concluded with a five-day trial, after which the Court entered Final
Judgment in favor of Nu Skin on June 9, 2005, denying all claims brought by
Caroderm and granting Nu Skins request for a declaratory judgment
(Judgment), which was supported by detailed Findings of Fact and
Conclusions of Law.
(c)
On June 21, 2005, Caroderm filed a Notice of Appeal, appealing the Judgment, and
on July 11, 2005, Caroderm filed its Docketing Statement in the Utah Court of
Appeals, Appeal No. 20050559 (Appeal), which Appeal is currently
pending.
5.3.2
Caroderm Release.
Except as set forth in this Agreement (including with respect to payment of, and liability for,legal fees and costs of Parent and
Purchaser), Caroderm and the Shareholders hereby release and forever discharge Nu Skin,
Parent, Purchaser, and their respective officers, directors, shareholders,
representatives, employees, counsel, insurers, agents, assigns, and Affiliates from and
against any and all claims (including those in law or equity), demands, rights,
obligations, debts, expenses, liabilities, damages, including attorneys fees, defenses, or
causes of action, whether or not alleged, recited, described, or currently asserted,
whether known or unknown, suspected or unsuspected, fixed or contingent, which they have,
may have, or could assert against the other, arising out of, concerning, or relating to
the Lawsuit or the Appeal.
5.3.3
Parent Release. Except as otherwise set forth in this Agreement (including with respect to payment of, and liability for, legal fees and costs of Caroderm
and the Shareholders), Parent and Purchaser hereby release and forever discharge Caroderm
and its officers, directors, shareholders, representatives, employees, counsel, agents,
assigns, and Affiliates from and against any and all claims (including those in law or
equity), demands, rights, obligations, debts, expenses, liabilities, damages, including
attorneys fees, defenses, or causes of action, whether or not alleged, recited, described,
or currently asserted, whether known or unknown, suspected or unsuspected, fixed or
contingent, which they have, may have, or could assert against the other, arising out of,
concerning, or relating to the Lawsuit or the Appeal.
5.4
Confidentiality;
Non-competition. For a period of two (2) years from the date hereof, each of the Shareholders agrees that he shall not:
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(a)
disclose any information related to either of Caroderms or Nu Skins
respective businesses, including, but not limited to, inventions, ideas,
technical data, trade secrets, research, products, services, development,
processes, designs, drawings, engineering, marketing, client or customer lists,
vendor or supplier lists, finances and personnel information; or |
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(b)
without the express prior written consent of Purchaser, directly or indirectly,
own, manage, control or participate (including in a consulting, advisory or
other similar role) in the ownership, management or control of, or be related or
otherwise affiliated in any manner (including as an employee) with any business
that (i) competes with the former business of Caroderm and (ii) utilizes the
Raman technology that is the subject of the Caroderm Patent License. |
Notwithstanding the foregoing, the
Shareholders shall have no confidentiality obligations with respect to information that
(i) was publicly known and made generally available in the public domain prior to the date
hereof; (ii) becomes publicly known and made generally available after the date hereof
through no action or inaction of any Shareholder; (iii) is obtained by a Shareholder from
a third party without a breach of such third partys obligations of confidentiality;
or (iv) is required to be disclosed by applicable law.
5.5
Acknowledgement of Shareholders. Each of the Shareholders agrees and acknowledges
that the time limitation and the
geographic scope on the restrictions in Section 5.4 are reasonable. The Shareholders also
acknowledge and agree that the limitations in Section 5.4 are reasonably necessary for the
protection of Purchaser and its Affiliates and that, through the transactions contemplated
in this Agreement, the Shareholders will receive adequate consideration for any loss of
opportunity associated therewith. In the event that any term, word, clause, phrase,
provision, restriction, or section of Section 5.4 is more restrictive than permitted by
the law of the jurisdiction in which Purchaser and/or its Affiliates seeks enforcement,
the provisions of Section 5.4 will be limited but only to the extent that a judicial
determination finds the same to be unreasonable or otherwise unenforceable.
Notwithstanding any judicial determination that any term, word, clause, phrase, provision
or restriction of Section 5.4 is not specifically enforceable, the parties intend that
Purchaser and its Affiliates will nonetheless be entitled to recover monetary damages as a
result of any breach thereof. Each of the Shareholders agrees that a breach by any of the
Shareholders of Section 5.4 will cause irreparable injury to Purchaser and/or its
Affiliates not adequately compensable in monetary damages alone or through other legal
remedies. Therefore, in the event of a breach, Purchaser or its Affiliates shall be
entitled to preliminary and permanent injunctive relief, specific performance, and other
equitable relief, in addition to damages and all other available remedies.
ARTICLE VI
REQUIRED DELIVERIES IN
CONNECTION WITH THIS AGREEMENT
Required
Deliveries in Connection with this Agreement. The parties, as applicable, shall
deliver the following in connection with the execution of this Agreement:
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6.1
Caroderm Approval. Caroderm shall have obtained a written consent of shareholders
approving the Merger and all of the transactions contemplated by this Agreement from
holders of at least ninety-six percent (96%) of the Caroderm Shares.
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6.2
Opinion of Counsel for Caroderm. Parent shall have received the opinion letter of
Blackburn & Stoll, counsel for Caroderm, dated the Closing Date, substantially in the
form of Exhibit A.
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6.3
Board Approval. Caroderm shall have obtained a written consent of its directors
approving the Merger and all of the transactions contemplated by this Agreement.
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6.4
Termination and Release Agreements. Each of the Shareholders shall have executed
and delivered to Parent a Termination and Release Agreement, in the form attached as
Exhibit B hereto.
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6.5
Caroderm Certificates. Parent shall have received a certificate of the Secretary of
Caroderm, in form and substance customary for transactions of the type contemplated
hereby, as to the authenticity and effectiveness of the actions of Caroderms Board
of Directors and holders of Caroderm Shares authorizing the Merger and the transactions
contemplated by this Agreement. Parent shall have also received a certificate of the Chief
Executive Officer of Caroderm, in form and substance customary for transactions of the
type contemplated hereby, confirming that (i) the representations and warranties set forth
in Article IV hereof, including, without limitation, the representations and warranties
set forth in Section 4.5 above, are true and correct; and (ii) that, as of the Closing
Date, Caroderm: (A) shall have satisfied all accrued or outstanding liabilities, including
without limitation all fees and costs, legal and otherwise, related to the Merger, the
Lawsuit and the Appeal, (B) has no accounts receivable, and (C) has never had revenues
attributable to sales of services or products.
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6.6
Capitalization Spreadsheet. Parent shall have received from Caroderm a spreadsheet
(the Spreadsheet), attached as Exhibit C, which spreadsheet shall be
dated as of the Closing Date and shall set forth, as of the Closing Date and immediately
prior to the Effective Time, the following true and correct factual information relating
to holders of Caroderm Shares: (i) the names of all of Caroderms shareholders; and
(ii) the number of Caroderm Shares held by such persons and the respective certificate
numbers.
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6.7
Termination of Agreements and Employee and Consulting Relationships. Caroderm shall
terminate the employment of its sole employee immediately prior to the Effective Time.
Caroderm shall terminate each consulting agreement to which it is a party prior to the
Effective Time. The agreements set forth on Exhibit D hereto shall have been
terminated as of the Effective Time (pursuant to the agreements set forth in Section 6.4
above).
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6.8
Dismissal of Appeal. Caroderm shall prepare and deliver a Stipulated Dismissal of
Appeal (Dismissal), dismissing the Appeal with prejudice. Such Dismissal shall
be filed with the Utah Court of Appeals on the Closing Date.
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6.9
Consent of University of Utah Research Foundation. The parties shall have received
a written consent from the University acknowledging and agreeing that the transactions
contemplated by this Agreement will not result in the termination, revocation or
modification of any material provision or right under either of (i) the Caroderm Patent
License., or (ii) that certain Amended and Restated Patent License Agreement between the
University and Nutriscan, Inc. (such agreements collectively, the License
Agreements).
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6.10
Amended License Agreement. Parent (or an Affiliate of Parent) and the University
shall have entered into a new patent license agreement, or an amendment(s) to the License
Agreements (or, in the discretion of Parent, shall have agreed upon the form of such an
agreement to be entered into following execution of this Agreement), the terms of which
are agreeable to Parent in its sole discretion, related to the technology that is the
subject of the License Agreements. Caroderm shall have paid to the University all unpaid
license fees owing to the University pursuant to the Caroderm Patent License as of the
Closing Date.
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6.11
Tax Returns. Following the Closing, Purchaser shall cause the Surviving Corporation
to file final, separate income Tax returns for Caroderm covering the period through the
Closing Date, which Tax returns shall include any taxable income earned through and
including the Closing Date. Prior to filing such returns, Purchaser shall provide copies
of the returns to Sellers for their review and comment. All such returns shall be prepared
in a manner consistent with Caroderms historic Tax reporting practices. To the
extent provided in Section 7.3.2.1(iii) below, the Shareholders shall indemnify Purchaser
for any Taxes shown as due on such returns.
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ARTICLE VII
TERMINATION AND
WAIVER; INDEMNIFICATION
7.1
Fees and Expenses. All fees and expenses incurred in connection with the
transactions contemplated hereby will be paid by the party incurring such expenses.
7.2
Waiver. At any time, the parties hereto may (i) extend the time for the performance
of any of the obligations or other acts of the other parties hereto, (ii) waive any
inaccuracies in the representations and warranties contained herein or in any document
delivered pursuant hereto or (iii) except as prohibited by law, waive compliance with any
of the agreements or conditions contained herein that are for the benefit of such party or
its shareholders. Any agreement on the part of a party hereto to any such extension or
waiver shall be valid if set forth in an instrument in writing signed on behalf of such
party.
7.3 Indemnification.
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7.3.1
Survival of Representations and Warranties. All of the representations and
warranties of Caroderm and Parent contained in this Agreement shall survive the Closing
and continue in full force and effect until two years following the Closing Date (the
Survival Period).
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7.3.2
Indemnification Provisions for Benefit of Parent.
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7.3.2.1
Subject to the limitations set forth in this Article VII, from and after the Closing, the
Parent, Purchaser, the Surviving Corporation, their officers, directors and Affiliates
(including each of the successors, assigns and agents of the foregoing) (the Parent
Indemnified Parties) shall be indemnified and held harmless from and against, and
shall be reimbursed solely through the Holdback for the following liabilities and Losses
(the Indemnified Losses):
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(i) |
any and all Losses arising out of any inaccuracy or misrepresentation in, or
breach of, any representation or warranty made by Caroderm or the Shareholders
in this Agreement, together with the Disclosure Schedules, or in any document
delivered in connection with Agreement by Caroderm or the Shareholders; |
(ii) |
any and all Losses arising out of any failure by Caroderm or the Shareholders
to perform or comply, in whole or in part, with any covenant or agreement in
this Agreement; |
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(iii) |
all liability for Taxes of Caroderm (including, without limitation, any and all
liability associated with the matter disclosed in Section 4.5.1 of the
Disclosure Schedule) assessed during or attributable to any taxable period
ending on or prior to the Closing Date (and for any taxable period beginning
before the Closing Date and ending after the Closing Date, the portion ending at
the end of the Closing Date) to the extent such Taxes exceed the reserve for Tax
liability (rather than any reserve for deferred Taxes established to reflect
timing differences between book and Tax income) set forth as a current liability
on the face of the Most Recent Balance Sheet (rather than in any notes thereto); |
(iv) |
any Loss resulting from a claim, demand, cause of action, suit, proceeding,
hearing or investigation by any person or entity relating to Caroderms
operations on or before the Closing Date (including, without limitation, any and
all actions relating to the issuance of shares of capital stock of Caroderm, the
approval of the transactions contemplated by this Agreement, or the matters
identified on Schedule 4.7 of the Disclosure Schedule); and |
(v) |
any expenses of Caroderm incurred in connection with the transactions
contemplated hereby; |
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provided,
however, that Parent Indemnified Parties shall not have any right to be indemnified from
and against any losses resulting from, arising out of, relating to, in the nature of, or
caused by any of the matters set forth in Section 7.3.2.1 (i) (v) until the Parent
Indemnified Parties have suffered, in the aggregate, Losses by reason of all such breaches
in excess of the Threshold (at which point Parent Indemnified Parties will be entitled to
indemnification as described above in this Section 7.3.2.1, including the first $25,000 of
such Losses); and |
provided
further, that in no event shall the aggregate amount paid to the Parent Indemnified
Parties exceed the Holdback.
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7.3.2.2
The Parent Indemnified Parties shall be indemnified through the portion of the Merger
Consideration constituting the Holdback. A Parent Indemnified Party shall not be entitled
to be reimbursed with respect to any claims made by the Parent Indemnified Party after the
expiration of the Survival Period. To claim indemnification through the Holdback, Parent
must reasonably believe in good faith that there are potential Indemnified Losses that are
likely to result in actual Indemnified Losses provide notice to the Representative (the
Claim Notice) setting forth the estimated amount of such potential Indemnified
Losses (the Reserve Amount) and the facts and circumstances on which such
Reserve Amount is based. The Representative may dispute any Reserve Amount contained in
the Claim Notice provided, however, that the Representative shall have notified Parent in
writing of each disputed item, specifying the amount thereof in dispute, the calculation
of the disputed amount and setting forth, in reasonable detail, the basis for such
dispute, within 30 calendar days of the Representatives receipt of the Claim Notice.
The Representative shall be deemed to have agreed with all other items and amounts
contained in the Claim Notice. In the event of such a dispute, Parent and the
Representative shall attempt in good faith to reconcile their differences. If Parent and
the Representative are unable to reach a resolution within 30 calendar days after receipt
by Parent of the Representatives written notice of dispute,
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Parent and the
Representative shall submit the items remaining in dispute for resolution under Section
7.3.4.
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7.3.3
Indemnity Holdback. The Holdback shall consist of Two Million Dollars
($2,000,000) of the Merger Consideration to be withheld by the Parent at the Closing and,
to the extent all or any portion of the Holdback becomes payable to the Caroderm
shareholders pursuant to the provisions of this Section 7.3.3, shall be paid to the
Caroderm shareholders, on a pro rata basis, as an element of the Merger Consideration.
Nothing contained in this Agreement shall be construed to limit any rights of the Parent
Indemnified Parties for full indemnification or otherwise against any Caroderm shareholder
severally with respect to the failure of such Caroderm shareholder to have good, valid and
marketable title to any Caroderm Shares held by holder as represented herein, free and
clear of all Liens or to have the full right, capacity and authority to vote all of such
Caroderm Shares in favor of the Merger and any other transaction contemplated by this
Agreement; provided that in no event shall any Caroderm shareholder have liability to the
Parent Indemnified Parties for Losses in excess of the Merger Consideration payable to
such Caroderm shareholder. On expiration of one year from the date hereof, One Million
Dollars ($1,000,000) of the Holdback less any (i) amounts used to compensate a Parent
Indemnified Party as provided in this Article VII and (ii) amounts constituting a Reserve
Amount at such time, shall be distributed to the Caroderm shareholders, pro rata in
proportion to the amount each was entitled to receive of the Merger Consideration. On
expiration of the Survival Period, all remaining amounts in the Holdback that have not
been used to compensate a Parent Indemnified Party as provided in this Article VII or
which do not constitute a Reserve Amount, shall be distributed to the Caroderm
shareholders, pro rata in proportion to the amount each was entitled to receive of the
Merger Consideration. Notwithstanding the foregoing, if, prior to the first anniversary of
the Closing Date, the Shareholders shall have delivered to Purchaser from each of the
holders of Caroderm Shares a consent to the Merger (in the form delivered by the
Shareholders to Purchaser in connection with the approval of the Merger), then, on the
first anniversary of the Closing Date, the entire Holdback, less any (i) amounts used to
compensate a Parent Indemnified Party as provided in this Article VII and (ii) amounts
constituting a Reserve Amount at such time, shall be distributed to the Caroderm
shareholders. On resolution of the claim underlying any Reserve Amount or on expiration of
Survival Period without a formal proceeding having been filed against the Parent
Indemnified Parties with respect to the underlying claim, any Reserve Amounts shall be
distributed to the shareholders of Caroderm in the same proportion as set forth above. On
any distribution from the Holdback, interest or other earnings accrued on the Holdback
amount shall be allocated between Parent and the shareholders of Caroderm based on the
respective portions of the Holdback amount otherwise received by them pursuant to this
section. Notwithstanding the foregoing, any two or more Caroderm shareholders may agree to
allocate as between themselves any payments to be received by such shareholders from
Parent and Parent shall make payment according to such allocation if Parent is instructed
to do so in a writing signed by the Caroderm shareholders in question.
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7.3.4
Procedure for Indemnification.
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7.3.4.1
A Parent Indemnified Party shall give a Claim Notice of any claim for indemnification
under this Article VII (a Claim) to the Representative, on behalf of the
indemnifying parties, reasonably promptly after the assertion against a Parent Indemnified
Party of any claim by a third party (a Third Party Claim) or, if such Claim is
not in respect of a Third Party Claim, reasonably promptly after the discovery of facts on
which the Parent Indemnified Party intends to base a Claim for indemnification pursuant to
Article VII; provided, however, that the failure or delay to so notify the Representative
shall not relieve the indemnifying party of any obligation or liability that
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the
indemnifying party may have to the Parent Indemnified Party except to the extent that the
Representative demonstrates that the indemnifying parties ability to defend or
resolve such Claim is adversely affected thereby. Any such Claim Notice shall describe the
facts and circumstances on which the asserted Claim for indemnification is based and shall
specify how such Parent Indemnified Party intends to recover such funds pursuant to this
Agreement and the basis for the determination of the amount which the Parent Indemnified
Party intends to recover.
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7.3.4.2
If, within 30 days of the receipt by the Representative of a Claim Notice, the
Representative contests in writing to the Parent Indemnified Party that Losses identified
in such Claim Notice constitute indemnifiable Claims (the Representative
Notice), then the Parent Indemnified Party and the Representative, acting in good
faith, shall attempt to reach agreement with respect to the contested portions of such
Claims. Unless a Claim is contested within such 30-day period, the Parent Indemnified
Party shall, subject to the other terms of this Article VII, be paid the amount of the
Losses related to such Claim or the uncontested portion thereof. The Representative shall
not object to any Claim unless (i) it believes in good faith that the Parent Indemnified
Party is not entitled to be indemnified with respect to the Losses specified therein, or
(ii) it lacks sufficient information to assess the validity or amount of the Claim. If the
Representative objects to a Claim on the basis that it lacks sufficient information, it
shall promptly request from the Parent Indemnified Party any additional information
reasonably necessary for it to assess such Claim and the Parent Indemnified Party shall,
to the extent the Parent Indemnified Party reasonably can, provide additional information
reasonably requested. Upon receipt of such additional information, the Representative
shall review it as soon as reasonably practicable and notify the Parent Indemnified Party
of any withdrawal or modification of the objection. If the Parent Indemnified Party and
the Representative are unable to reach agreement with respect to any contested Claims
within 45 days of the delivery of the Representative Notice, the matter shall be settled
by binding arbitration in Salt Lake City, Utah as set forth below. All claims shall be
settled in accordance with the Commercial Arbitration Rules then in effect of the American
Arbitration Association (the AAA Rules). The Representative and the Parent
Indemnified Party shall each designate one arbitrator within 15 days after the termination
of such 45-day period. The Representative and the Parent Indemnified Party shall cause
such designated arbitrators mutually to agree upon and designate a third arbitrator;
provided, however, that (i) failing such agreement within 70 days of delivery of the
Representative Notice, the third arbitrator shall be appointed in accordance with the AAA
Rules and (ii) if either the Representative or the Parent Indemnified Party fails to
timely designate an arbitrator, the dispute shall be resolved by the one arbitrator timely
designated. The fees and expenses of the arbitrators shall be paid one-half by the Parent
and one-half by the shareholders of Caroderm (from the Holdback amounts or otherwise). The
Representative and the Parent Indemnified Party shall cause the arbitrators to decide the
matter to be arbitrated pursuant hereto within 30 days after the appointment of the last
arbitrator. The final decision of the majority of the arbitrators shall be furnished to
the Representative and the Parent Indemnified Party in writing and shall constitute the
conclusive determination of the issue in question binding upon the Representative, the
shareholders of Caroderm, and the Parent Indemnified Party, and shall not be contested by
any of them. Such decision may be used in a court of law only for the purpose of seeking
enforcement of the arbitrators decision.
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7.3.4.3
The indemnifying party will have the right to defend the Parent Indemnified Party against
the Third Party Claim at the indemnifying partys sole expense with counsel of its
choice reasonably satisfactory to the Parent Indemnified Party so long as the indemnifying
party conducts the defense of the Third Party Claim actively and diligently; provided,
however, that, notwithstanding the foregoing, Parent may elect to assume the defense and
handle any such Third Party Claim if it determines in good faith that the resolution of
such Third Party Claim could result in a material adverse impact on the business,
operations, assets, liabilities (absolute, accrued, contingent or otherwise), condition
(financial or otherwise) or prospects of Parent; and provided further that the
indemnifying person is also a person against whom the Third Party Claim is made and the
Parent Indemnified Party determines in good faith that joint representation would be
inappropriate). The Parent Indemnified Party may retain separate co-counsel and
participate in the defense of the Third Party Claim which shall be at the Parent
Indemnified Partys sole cost and expense so long as the indemnifying party conducts
the defense of the Third Party Claim actively and diligently. The Parent Indemnified Party
will not consent to the entry of any judgment or enter into any settlement with respect to
the Third Party Claim without the prior written consent of the indemnifying party, and the
indemnifying party will not consent to the entry of any judgment or enter into any
settlement with respect to the Third Party Claim without the prior written consent of the
Parent Indemnified Party which consent shall not be unreasonably withheld.
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7.3.5
Indemnification Provision for Benefit of the Caroderm shareholders. In the event
Parent breaches any of its covenants, representations and warranties contained in this
Agreement, provided that any of the shareholders of Caroderm or the Representative makes a
written claim for indemnification against Parent (in the same manner as provided for with
respect to a Parent Indemnified Party) within the Survival Period (or any time on or
before the date that is thirty (30) months following the Closing Date if the covenant in
question relates to the non-payment of the Merger Consideration), then Parent agrees to
indemnify each of the shareholders of Caroderm and any director, officer, representative
or agent thereof (the Caroderm Indemnified Parties) from and against any
Losses (including, with respect to payment of, and liability for, attorneys; fees and
costs of the Caroderm Indemnified Parties) the Caroderm Indemnified Parties may suffer
through and after the date of the claim for indemnification resulting from, arising out
of, relating to or caused by the breach; provided however that Parent shall not have any
obligation to indemnify the Caroderm Indemnified Parties from and against any losses
resulting from, arising out of, relating to, in the nature of, or caused by the breach of
any representation or warranty until the Caroderm Indemnified Parties have suffered, in
the aggregate, Losses by reason of all such breaches in excess of the Threshold (at which
point Parent will be obligated to indemnify the Caroderm Indemnified Parties from and
against all such Losses, including the first $25,000 of such Losses); provided however,
that in no event shall the aggregate amount paid to the Caroderm Indemnified Parties
exceed Two Million Dollars ($2,000,000) plus the amount of all attorneys fees and
related costs actually incurred by the Caroderm Indemnified Parties prevailing in an
action to enforce any obligation or covenant hereunder. Any notice to be delivered
pursuant to this Section by any Caroderm Indemnified Party may be delivered by the
Representative on behalf of such Caroderm Indemnified Party. The procedures set forth in
Section 7.3.4 shall be fully applicable with respect to claims by a Caroderm Indemnified
Party or the Representative, subject to appropriate changes to properly denominate the
correct parties.
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7.3.6
Cooperation. If requested by the indemnifying party, the indemnified party shall,
at the expense of the indemnifying party, reasonably cooperate in the defense or
prosecution of any suit, action, claim, proceeding or investigation for which such
indemnifying party is being called upon to indemnify the indemnified party pursuant to
this Section, and the indemnified party shall furnish such records, information and
testimony and attend all such conferences, discovery proceedings, hearings, trials and
appeals as may be reasonably requested in connection therewith and, if appropriate, the
indemnified party shall make any reasonable counterclaim against the party asserting such
suit, action, claim, proceeding or investigation or any reasonably cross-complaint against
any person in connection therewith and the indemnified party further agrees to take such
other actions as it deems reasonable pursuant to any request by an indemnifying party to
reduce or eliminate any Losses for which the indemnifying party would have responsibility.
Without limiting the foregoing, Caroderm and the Shareholders agree that each will
cooperate fully in the dismissal of the Appeal, by, among other things, filing any
documents reasonably necessary related to the termination of the litigation between
Caroderm and Nu Skin.
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7.3.7
Sole Remedy. This Section 7.3 constitutes the sole remedy any Party may have with
respect to any breach of the representations, warranties and covenants contained in this
Agreement, except as specifically provided in Section 8.3.
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7.3.8
Caroderm Representative. E. Dallin Bagley (or such other person or entity that
shall be designated by E. Dallin Bagley) shall serve as the representative of Caroderm
and/or the Caroderm shareholders with respect to any matters arising pursuant to this
Section 7 (the Representative). The Representative is hereby fully authorized
with respect to the Holdback to: (i) receive all notices or other documents given or to be
given by Parent under this Agreement; (ii) receive and accept service of legal process in
connection with any claim or other proceeding arising under this Agreement; (iii)
undertake, compromise, defend and settle any such suit or proceeding; (iv) engage special
counsel, accountants and other advisors and incur such other expenses in connection with
any matter arising under this Agreement as the Representative deems appropriate; (v) take
such other action as the Representative may deem appropriate, including without
limitation, (A) taking any actions required or permitted under this Agreement to protect
or enforce the Caroderm shareholders rights, and (B) all such other matters as the
Representative may deem necessary or appropriate to carry out the intents and purposes of
this Agreement.
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ARTICLE VIII
GENERAL PROVISIONS
8.1
Notices. No notice or other communication shall be deemed given unless sent in any
of the manners, and to the attention of the persons, specified in this Section 8.1. All
notices and other communications hereunder shall be in writing and shall be deemed given
or delivered to any party (i) upon delivery to the address of such party specified below
if delivered personally, (ii) one business day after being sent by reputable overnight
courier (charges prepaid) or (iii) five business days after being sent by registered or
certified mail (return receipt requested), in any case to the parties at the following
addresses or telecopy numbers (followed promptly by personal, courier or certified or
registered mail delivery) (or at such other addresses for a party as will be specified by
like notice):
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To
Caroderm and the Caroderm Representative:
Caroderm,
Inc.
2350 Oakhill Drive
Holladay, Utah 84121
Fax No.: (801) 274-8009
Attn.: E. Dallin Bagley
with
a copy to:
Blackburn & Stoll
257 East 200 South, Suite 800
Salt Lake City, Utah 84111
Fax No.: (801) 578-3552
Attn: Eric L. Robinson
To Parent and Purchaser:
Nu Skin International, Inc.
75 West Center Street
8th Floor
Provo, Utah 84601
Fax No.: (801) 345-3899
Attn.: D. Matthew Dorny
with
a copy to:
Parr Waddoups Brown Gee & Loveless
185 South State Street, Suite 1300
Salt Lake City, Utah 84111
Fax No.: (801) 532-7750
Attn.: Brian G. Lloyd
8.2
VENUE. EACH OF THE PARTIES SUBMITS TO THE EXCLUSIVE JURISDICTION OF ANY STATE OR
FEDERAL COURT SITTING IN UTAH IN ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO
THIS AGREEMENT AND AGREES THAT ALL CLAIMS IN RESPECT OF THE ACTION OR PROCEEDING MAY BE
HEARD AND DETERMINED IN ANY SUCH COURT. EACH PARTY ALSO AGREES NOT TO BRING ANY ACTION OR
PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT IN ANY OTHER COURT. EACH OF THE
PARTIES WAIVES ANY DEFENSE OF INCONVENIENT FORUM TO THE MAINTENANCE OF ANY ACTION OR
PROCEEDING SO BROUGHT AND WAIVES ANY BOND, SURETY, OR OTHER SECURITY THAT MIGHT BE
REQUIRED OF ANY OTHER PARTY WITH RESPECT THERETO. ANY PARTY MAY MAKE SERVICE ON ANY OTHER
PARTY BY SENDING OR DELIVERING A COPY OF THE PROCESS TO THE PARTY TO BE SERVED AT THE
ADDRESS AND IN THE MANNER PROVIDED FOR THE GIVING OF NOTICES IN SECTION 8.1. EACH PARTY
AGREES THAT A FINAL JUDGMENT IN ANY ACTION OR PROCEEDING SO BROUGHT SHALL BE CONCLUSIVE
AND MAY BE ENFORCED BY SUIT ON THE JUDGMENT OR IN ANY OTHER MANNER PROVIDED BY LAW OR IN
EQUITY.
22
8.3
Specific Performance and Other Remedies. The parties hereto acknowledge that the
rights of each party to consummate the transactions contemplated hereby are special,
unique and of extraordinary character, and that, in the event that any party violates or
fails or refuses to perform any covenant or agreement made by it herein, the non-breaching
party may be without an adequate remedy at law. The parties agree, therefore, that in the
event that any party violates or fails or refuses to perform any covenant or agreement
made by such party herein, the non-breaching party or parties may, subject to the terms of
this Agreement and in addition to any remedies at law for damages or other relief,
institute and prosecute an action in any court of competent jurisdiction to enforce
specific performance of such covenant or agreement or seek any other equitable relief. The
prevailing party in any such proceeding shall be entitled to reimbursement for all its
costs and expenses (including reasonable attorneys fees) relating to such proceeding from
the non-prevailing party.
8.4
Interpretation. The headings contained in this Agreement are for reference purposes
only and shall not affect in any way the meaning or interpretation of this Agreement.
8.5
Miscellaneous. This Agreement (including the documents and instruments referred to
herein) (i) constitutes the entire agreement between the parties hereto in respect of the
subject matter hereof and supersedes all other prior agreements and understandings, both
written and oral, among the parties hereto with respect to such subject matter, (ii) is
not intended to confer upon any other person any rights or remedies hereunder, (iii) shall
be governed in all respects, including validity, interpretation and effect, by the
internal law, not the law of conflicts, of the State of Utah and (iv) may not be amended,
modified or supplemented except by written agreement of the parties hereto. This Agreement
may be executed in two or more counterparts each of which shall be deemed an original but
all of which together shall constitute but a single agreement.
8.6
Assignment. This Agreement (including the documents and instruments referred to
herein) may not be assigned by any party. This Agreement shall be binding upon and shall
inure to the benefit of the parties hereto and their permitted successors and assigns, and
any reference to a party hereto shall also be a reference to a permitted successor or
assign.
8.7
Language. The language used in this Agreement shall be deemed to be the language
chosen by the parties hereto to express their mutual intent, and no rule of strict
construction shall be applied against any person.
8.8
Severability. Any provision hereof which is prohibited or unenforceable in any
jurisdiction will, as to such jurisdiction, be ineffective to the extent of such
prohibition or unenforceability without invalidating the remaining provisions hereof, and
any such prohibition or unenforceability in any jurisdiction will not invalidate or render
unenforceable such provision in any other jurisdiction. To the extent permitted by law,
the parties hereto waive any provision of law, which renders any such provision prohibited
or unenforceable in any respect.
ARTICLE IX
DEFINITIONS
As used in the Agreement, the terms
below shall have the meanings set forth below.
AAA Rules is
defined in Section 7.3.4.2.
23
Affiliate means
any person (i) that directly or indirectly, through one or more intermediaries, controls
or is controlled by, or is under common control with, an other person, (ii) that directly
or beneficially owns or holds ten percent (10%) or more of any equity interest in the
other person or (iii) ten percent (10%) or more of whose voting stock is owned directly or
beneficially or held by the other person.
Appeal is
defined in Section 5.3.1.
Articles of Merger
is defined in Section 1.3.
Benefit Plans
is defined in Section 4.9.1.
Caroderm is
defined in the first page hereof.
Caroderm Indemnified
Parties is defined in Section 7.3.5.
Caroderm Patent
License is defined in Section 4.16.2
Caroderm
Shares is defined in Section 1.7.1.
Caroderm Stock
Certificate is defined in Section 2.1.
Claim is
defined in Section 7.3.4.1.
Claim Notice
is defined in Section 7.3.2.2.
Closing is
defined in Section 1.2.
Closing Date
is defined in Section 1.2.
Code means the
United States Internal Revenue Code of 1986, as amended.
Constituent
Corporations is defined in Section 1.1.
Disclosure
Schedule means the schedule delivered by Caroderm and the Shareholders to Parent
simultaneously with the execution and delivery of this Agreement.
Dismissal is
defined in Section 6.7.
Dissenting
Shares is defined in Section 2.4.
Effective
Time is defined in Section 1.3.
Environmental Law
means any and all existing federal, international, state or local statutes, laws,
regulations, ordinances, orders, policies, or decrees and the like, relating to public
health or safety, pollution or protection of human health or the environment, including
natural resources, including but not limited to the Clean Air Act, 42 U.S.C. 7401 et seq.,
the Clean Water Act, 33 U.S.C. 1251 et seq., the Resource Conservation Recovery Act
(RCRA), 42 U.S.C. 6901 et seq., the Toxic Substances Control Act, 15 U.S.C.
2601 et seq., and the Comprehensive Environmental Response, Compensation and Liability Act
(CERCLA), 42 U.S.C. 9601 et seq. and any similar or implementing state or
local law, or any common law, which governs: (i) the existence, clean-up, removal and/or
remedy of contamination or threat of contamination on or about real property; (ii) the
emission, discharge or release, of hazardous
24
materials or contaminants into the
environment; (iii) the control of hazardous materials or contaminants; or (iv) the use,
generation, transport, treatment, storage, disposal, removal, recycling, handling or
recovery of hazardous materials.
ERISA means the
Employee Retirement Income Security Act of 1974, as amended.
Exchange Act means
the Securities Exchange Act of 1934, as amended (together with the rules and regulations
promulgated thereunder).
Financial
Statements is defined in Section 4.5.1.
GAAP means the
United States generally accepted accounting principles, as consistently applied.
Governmental
Entities means, collectively, any court, tribunal, arbitrator, authority,
agency, commission, official or other instrumentality of the United States, any foreign
country or any state, county, city or other political subdivision.
Holdback is
defined in Section 7.3.3.
Indemnified
Losses is defined in Section 7.3.2.1.
Intellectual
Property is defined in Section 4.16.
Judgment is
defined in Section 5.3.1.
Knowledge means
the actual knowledge of the officers and directors of a party or the knowledge that such
officer or director would reasonably be expected to have or obtain through the due
performance of their duties; provided that the Knowledge of prior officers and directors
of acquired entities shall not be attributed to the current officers and directors under
this definition.
Laws means,
collectively, any domestic (federal, state, or local) or foreign law, statute, ordinance,
rule, regulation, judgment, decree, order, writ, permit or license of any Governmental
Entity.
Lawsuit is
defined in Section 5.3.1.
License
Agreements is defined in Section 6.8.
Liens means all
mortgages, liens, pledges, claims, charges, security interests or other encumbrances.
Losses shall mean
all damages, dues, penalties, fines, costs, amounts paid in settlement, liabilities
(whether liquidated or accrued), obligations, Taxes, liens, losses, expenses, and fees,
including court costs and reasonable attorneys fees and expenses including, but not
limited to, those arising from or relating to actions, suits, proceedings, hearings,
investigations, charges, complaints, claims, demands, injunctions, judgments, orders,
decrees and rulings including, without limitation, with respect to attorneys fees and
other costs and expenses incurred in connection with the enforcement of this Agreement.
Losses shall be computed net of (i) any insurance proceeds actually received from
insurance maintained by the Indemnified Party or any third party (without consideration of
deductibles) for the event or occurrence giving rise to the Losses, and (ii) any amounts
actually received from any third parties based on claims related to the event or
occurrence giving rise to the Losses that the Indemnified Party has against such third
parties which reduce the Losses that would otherwise be sustained.
25
Marks is
defined in Section 4.16.1.
Material Adverse
Effect means any change, effect, occurrence or state of facts that is materially
adverse to the business, financial condition, operations or results of operations of a
person and its Subsidiaries, taken as a whole; provided, however, that the following are
excluded from the definition of Material Adverse Effect and from the
determination of whether such a Material Adverse Effect has occurred: (i) changes in Laws
(including without limitation, common law, rules and regulations or the interpretation
thereof) or applicable accounting regulations and principles; or (ii) any change in the
relationship of a person and its Subsidiaries with their respective employees, customers
and suppliers, which change results directly from the announcement, pendency, or
consummation of the transactions and actions contemplated in this Agreement.
Material
Contracts is defined in Section 4.14.
Merger is defined
in the Section 1.1.
Merger
Consideration is defined in Section 1.7.1.
Most Recent Balance
Sheet is defined in Section 4.5.1.
Nu Skin is
defined in Section 5.3.1.
Organizational
Documents means the articles or certificate of incorporation, articles or
certificate of formation, bylaws, operating agreement, limited liability company agreement
or other similar formation and/or governing documents.
Parent is defined
in the first page hereof.
Parent Indemnified
Parties is defined in Section 7.3.2.1.
Patents is
defined in Section 4.16.1.
Per Share Merger
Consideration is defined in Section 1.7.1.
Permits is
defined in Section 4.12.
person means an
individual, a corporation, a limited liability company, a partnership, an association, a
trust or any other entity or organization.
Purchaser is
defined in the first page hereof.
Representative
is defined in Section 7.3.8.
Representative
Notice is defined in Section 7.3.4.2.
Reserve
Amount is defined in Section 7.3.2.2.
Reserve Amount Notice
is defined in Section 7.3.2.2.
SEC means the
United States Securities and Exchange Commission.
26
Securities Act
means the Securities Act of 1933, as amended (together with the rules and regulations
promulgated thereunder).
Spreadsheet
is defined in Section 6.5.
Subsidiary means
an entity that is controlled either directly or indirectly by the person or in which the
person directly or indirectly owns or controls more than fifty percent of its equity.
Survival
Period is defined in Section 7.3.1.
Surviving
Corporation is defined in Section 1.1.
Taxes means (i)
all federal, state, county, local, foreign and other taxes of any kind whatsoever
(including, without limitation, income, profits, premium, estimated, excise, sales, use,
occupancy, license, gross receipts, franchise, ad valorem, severance, capital levy,
production, transfer, payroll, stamp, occupation, withholding, employment, unemployment,
disability, social security, real property, personal property, transfer import duties and
other governmental charges and assessments), whether or not measured in whole or in part
by net income, and including deficiencies, interest, additions to tax and penalties with
respect thereto, whether disputed or not and (ii) any liability for the payment of any
amount of the type described in the immediately preceding clause (iii) as a result of
being (A) a transferee within the meaning of Section 6901 of the Code (or any
other applicable law) of another person, (B) a member of an affiliated, consolidated,
unitary or combined group for any period, or otherwise by operation of law, or (C)
pursuant to a tax sharing, tax allocation, or tax indemnity agreement.
Third Party Claim
is defined in Section 7.3.4.1.
Threshold shall
mean Twenty Five Thousand Dollars ($25,000).
University is
defined in Section 4.16.2.
Utah Act is
defined in Section 1.1.
Utah Division
is defined in Section 1.3.
[remainder
of page intentionally left blank; signature page follows]
27
IN
WITNESS WHEREOF, Parent, Purchaser, Caroderm and the Shareholders have caused this
Agreement to be signed as of the date first written above by their respective officers or
representatives thereunto duly authorized.
PARENT:
Nu Skin International,
Inc.
By: /s/ Ritch N. Wood
Name: Ritch N. Wood
Title: CFO
PURCHASER:
Pharmanex License
Acquisition Corporation
By: /s/ Ritch N. Wood
Name: Ritch N. Wood
Title: Vice President
CARODERM:
Caroderm, Inc.
By: /s/ Dallin Bagley
Name: Dallin Bagley
Title: President
SHAREHOLDERS:
/s/ E. Dallin Bagley
E. Dallin Bagley
/s/ Werner Gellermann
Werner Gellermann
/s/ Paul S. Bernstein
Paul S. Bernstein
Exhibit 10.59 to NSE FORM 10-K King Termination Agreement
March 2, 2006
Dear Richard:
It is our understanding that you will
terminate your employment with Nu Skin Enterprises effective June 9, 2006.
The following have been agreed to by
Yourself and Nu Skin:
1. |
By March 1, 2006 you will vacate the 9th floor office. |
2. |
Nu Skin
will continue to employ you until June 9, 2006. |
3. |
Nu Skin will pay you a severance total of $200,000 minus the time employed from
March 1, 2006 to June 9, 2006. A lump sum payment of $137,108 will be made to
you after June 9, 2006 once Nu Skin receives a signed severance agreement. |
4. |
You will have 90 days after June 9, 2006 to exercise any vested stock options |
5. |
You will retain your cell phone and lap top computer. You will transfer the cell
phone service to your personal account no later than one week from June 9, 2006.
You will also allow removal from your lap top any software owned and licensed by
Nu Skin by June 9, 2006. |
6. |
You will transfer your Big Planet e-mail account paid by the company to your
personal account within two weeks after March 1, 2006. |
7. |
Between March 1, 2006
and June 9, 2006 you will be available to the company to assist with any
transition needs. |
8. |
You will continue use of your current Nu Skin e-mail
address during the March 1, 2006 to June 9, 2006 time period. |
9. |
You will have
access to the employee store under the standing VP benefit arrangements until
June 9, 2007. |
10. |
If you become employed by another company prior to June 9,
2006, all benefits will cease as of that date and a prorated severance amount
for the period remaining until June 9, 2006 will be paid you. |
If you have any questions please feel
free to contact me.
Sincerely,
/s/ Ritch Wood
Ritch Wood
CFO Nu Skin
Enterprises
Exhibit 10.60 to 2005 FORM 10-K NSE Bush Severance Agreement
March 10, 2006
Lori Bush
75 West Center
Provo, Utah 84601
RE:
Severance Package
Dear Lori,
This
letter sets forth the terms of your severance package. We propose to enter into a
Separation Agreement that would include terms customary to key employee terminations. The
agreement would include the following terms:
|
|
Your
employment will end on March 31, 2006. |
|
|
The company would extend a severance benefit of $800,000, payable in monthly installments
during an 18-month non-competition period. This sum would encompass all of the individual
elements that potentially impact the calculation of a severance benefit. |
|
|
A non-competition covenant would prohibit you from working for a competing direct selling
company for 18 months following termination of employment. This provision would not
prohibit your employment by a company not involved in direct selling. In the event of your
engagement with a company that competes in the companys product categories, however,
you recognize that such an engagement may create conflicts of interest that would require
termination of the consulting relationship described below. |
|
|
The
agreement would include a mutual release and waiver of claims related to your employment
and termination thereof. |
|
|
You would confirm your ongoing agreement to abide by key employee covenants with respect
to assignment of work product, confidentiality, and any others that extend beyond your
employment term. |
|
|
As of April 1, 2006, you would be engaged as a consultant and as chair of the Nu Skin
Personal Care Scientific Advisory Board (the Board). The terms of this
engagement are set forth below. This engagement would be terminable at will by either you
or the company. Your activity as a consultant and on the Board would be under the
direction of Joe Chang, Chief Scientific Officer. |
|
|
As a consultant and Board chair, you will receive an annual retainer of $25,000/year. This
retainer would cover your activities as Board chair and will also compensate you for
speaking appearances at the companys global convention as well as one other
convention or distributor event each year, whether domestic or foreign. This retainer
provides the company with 96 hours/year of your services, which, at the companys
discretion, may not necessarily be applied evenly throughout the year. |
|
|
For additional days of service requested by the company, you will receive a fee of
$1,500/day for working days, and $750/day for days of travel. All of your pre-approved
travel expenses will be reimbursed by the company. Your air travel will be business or
first class. |
|
|
During your tenure on the Board, you will be entitled to an allotment of products
consistent with the policy in effect for corporate Vice Presidents. In addition, you will
be entitled to use the Sundance cabin for up to 10 days/year, provided the company owns or
leases the cabin and provided your use of the cabin is consistent with policies in effect
for Vice Presidents. |
|
|
The company understands that you are writing a book on skincare that is intended to
compliment Nu Skins product philosophy. We understand that you would like to sell
the book rights to Nu Skin for $75,000. The company will consider this possibility and, if
the company elects to proceed, will pay half of the purchase rights after reviewing an
outline and rough draft of the book, with the balance upon satisfactory completion. |
Please
confirm your agreement with the terms set forth herein by executing a copy of this letter
in the space provided below so that we can prepare a definitive Separation Agreement.
Very
truly yours,
/s/ Truman Hunt
Truman Hunt
President
and Chief Executive Officer
Agreed this 10th day of
March, 2006.
/s/ Lori Bush
Lori Bush
Exhibit 10.61 to NSE 2005 FORM 10-K Summary of Team Elite Travel Policy
SUMMARY OF TEAM ELITE
TRAVEL POLICY
The following is a summary of a
travel policy adopted by the Compensation Committee of the Companys Board of
Directors on March 13, 2006 with respect to the annual Team Elite distributor trip:
It is currently the Companys
practice to conduct an annual international trip for those independent distributors that
have achieved Team Elite status within the Companys distributor
compensation plan. Certain members of senior management of the Company accompany Team
Elite members on this trip in an effort promote contact and relationship building between
senior management and Team Elite members. Members of Company management are often
accompanied by their spouses in an effort to promote a family atmosphere at these events.
In recognition of this, the Company has adopted a policy providing that the Company will
pay for travel, lodging, and certain other costs for the spouses of certain senior
managers attending the Team Elite trip.
Exhibit 21.1 to NSE 2005 Form 10-K
EXHIBIT 21.1
SUBSIDIARIES OF
REGISTRANT
Big Planet, Inc., a
Delaware corporation
First Harvest International, LLC, a
Utah limited liability company
Jixi Nu Skin Vitameal
Co., Ltd., a Chinese corporation
Niksun Acquisition
Corporation, a Delaware corporation
NSE Korea Ltd., a
Delaware corporation
NSE Korea, Ltd., a Korean
corporation
NSE Products, Inc., a
Delaware corporation
Nu Family Benefits
Insurance Brokerage, Inc., a Utah corporation
Nu Skin Argentina, Inc., a Utah
corporation with an Argentine branch
Nu Skin Asia Investment,
Inc., a Delaware corporation
Nu Skin Belgium, NV, a
Belgium corporation
Nu Skin Brazil, Ltda., a
Brazilian corporation
Nu Skin Canada, Inc., a
Utah corporation
Nu Skin Chile, S.A., a
Chilean corporation
Nu Skin (China) Daily-Use and Health
Products Co., Ltd., Chinese company
Nu Skin Enterprises
Australia, Inc., a Utah corporation
Nu Skin Enterprises Hong
Kong, Inc., a Delaware corporation
Nu Skin Enterprises
Hungary Trading, KFT, a Hungarian corporation
Nu Skin Enterprises New
Zealand, Inc., a Utah corporation
Nu Skin Enterprises
Poland Sp. z.o.o., a Polish corporation
Nu Skin Enterprises RS, Ltd., a
Russian limited liability company
Nu Skin Enterprises
Singapore Pte. Ltd., a Singapore corporation
Nu Skin France, SARL, a
French corporation
Nu Skin Germany, GmbH, a
German corporation
Nu Skin Guatemala, S.A., a
Guatemalan corporation
Nu Skin International
Management Group, Inc., a Utah corporation
Nu Skin International,
Inc., a Utah Corporation
Nu Skin Israel, Inc, a Delaware
corporation
Nu Skin Italy, Srl, an
Italian corporation
Nu Skin Japan Company
Limited, a Japanese corporation
Nu Skin Japan, Ltd., a
Japanese corporation
Nu Skin Malaysia Holdings
Sdn. Bhd., a Malaysian corporation
Nu Skin (Malaysia) Sdn.
Bhd., a Malaysian corporation
Nu Skin Mexico, S.A. de C.V., a
Mexican corporation
Nu Skin Netherlands,
B.V., a Netherlands corporation
Nu Skin New Caledonia
EURL, a New Caledonian corporation
Nu Skin Norway AS, a
Norwegian corporation
Nu Skin Enterprises
(Thailand), Ltd., a Delaware corporation
Nu Skin Enterprises (Thailand),
Ltd., a Thailand corporation
Nu Skin Enterprises Philippines,
Inc., a Delaware corporation with a Philippines branch
Nu Skin Poland Sp.
z.o.o., a Polish corporation
Nu Skin Scandinavia A.S.,
a Denmark corporation
Nu Skin (Shanghai)
Management Co., Ltd., a Chinese corporation
Nu Skin Spain, S.L., a
Spain corporation
Nu Skin Taiwan, Inc., a
Utah corporation
Nu Skin U.K., Ltd., a
United Kingdom corporation
Nu Skin Enterprises
United States, Inc., a Delaware corporation
NuSkin Pharmanex (B) Sdn
Bhd, a Brunei corporation
Nutriscan, Inc., a Utah
corporation
Pharmanex
Electronic-Optical Technology (Shanghai) Co., Ltd., a Chinese corporation
Pharmanex (Huzhou) Health
Products Co., Ltd., a Chinese corporation
Pharmanex License
Acquisition Corporation, a Utah Corporation
Pharmanex, LLC, a Delaware limited
liability company
PT.
Nu Skin Distribution Indonesia, an Indonesian corporation
PT.
Nusa Selaras Indonesia, an Indonesian corporation
Zhejiang Cinogen
Pharmaceutical Co., Ltd., a Chinese corporation
Exhibit 23.1 to 2005 NSE Form 10-K Consent of Accounting Firm
Exhibit 23.1
CONSENT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the
incorporation by reference in the Registration Statements on Form S-3 (Nos. 333-12073,
333-118495, and 333-123469) and in the Registration Statements on Form S-8 (Nos.
333-48611, 333-68407, 333-95033, 333-102327, 333-124764, and 333-130304) of Nu Skin
Enterprises, Inc. of our report dated March 16, 2006 relating to the financial statements,
managements assessment of the effectiveness of internal control over financial
reporting and the effectiveness of internal control over financial reporting, which
appears in this Form 10-K.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Salt Lake City, UT
March
16, 2006
Exhibit 31.1 10-K 2005 NSE
EXHIBIT 31.1
SECTION
302 CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I,
M. Truman Hunt, Chief Executive Officer of the registrant, certify that:
1.
I have reviewed this annual report on Form 10-K of Nu Skin Enterprises, Inc;
2.
Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and
for, the periods presented in this report;
4.
The registrants other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
(b)
Designed such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, 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;
(c)
Evaluated the effectiveness of the registrants disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
(d)
Disclosed in this report any change in the registrants internal control
over financial reporting that occurred during the registrants most recent
fiscal quarter (the registrants fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrants internal control over financial
reporting; and
5.
The registrants other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to the
registrants auditors and the audit committee of the registrants
board of directors (or persons performing the equivalent functions):
(a)
All significant deficiencies and material weaknesses in the design or operation
of internal control over financial reporting which are reasonably likely to
adversely affect the registrants ability to record, process, summarize and
report financial information; and
(b)
Any fraud, whether or not material, that involves management or other employees
who have a significant role in the registrants internal control over
financial reporting.
Date: March 17, 2006 |
|
/s/ M. Truman Hunt
M. Truman Hunt
Chief Executive Officer |
Exhibit 31-2 10-K 2005 NSE
EXHIBIT 31.2
SECTION
302 CERTIFICATION OF CHIEF FINANCIAL OFFICER
I,
Ritch N. Wood, Chief Financial Officer of the registrant, certify that:
1.
I have reviewed this annual report on Form 10-K of Nu Skin Enterprises, Inc;
2.
Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and
for, the periods presented in this report;
4.
The registrants other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
(b)
Designed such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, 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;
(c)
Evaluated the effectiveness of the registrants disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
(d)
Disclosed in this report any change in the registrants internal control
over financial reporting that occurred during the registrants most recent
fiscal quarter (the registrants fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrants internal control over financial
reporting; and
5.
The registrants other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to the
registrants auditors and the audit committee of the registrants
board of directors (or persons performing the equivalent functions):
(a)
All significant deficiencies and material weaknesses in the design or operation
of internal control over financial reporting which are reasonably likely to
adversely affect the registrants ability to record, process, summarize and
report financial information; and
(b)
Any fraud, whether or not material, that involves management or other employees
who have a significant role in the registrants internal control over
financial reporting.
Date: March 17, 2006 |
|
/s/ Ritch N. Wood
Ritch N. Wood
Chief Financial Officer |
Exhibit 32.1 10-K 2005 NSE
EXHIBIT 32.1
SECTION 1350
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
CERTIFICATION PURSUANT
TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TOSECTION
906 OF THE SARBANES-OXLEY
ACT OF 2002
In
connection with the annual report of Nu Skin Enterprises, Inc. (the
Company) on Form 10-K for the period ended December 31, 2005, as filed
with the Securities and Exchange Commission on the date hereof (the Report),
I, M. Truman Hunt, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C.
§ 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to
the best of my knowledge:
1.
The Report fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934; and
2.
The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
Date: March 17, 2006
/s/ M. Truman Hunt
M. Truman
Hunt
Chief Executive Officer
Exhibit 32.2 10-K 2005 NSE
EXHIBIT 32.2
SECTION 1350
CERTIFICATION OF CHIEF FINANCIAL OFFICER
CERTIFICATION PURSUANT
TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TOSECTION
906 OF THE SARBANES-OXLEY
ACT OF 2002
In
connection with the annual report of Nu Skin Enterprises, Inc. (the
Company) on Form 10-K for the period ended December 31, 2005, as filed
with the Securities and Exchange Commission on the date hereof (the Report),
I, Ritch N. Wood, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C.
§ 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to
the best of my knowledge:
1.
The Report fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934; and
2.
The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
Date: March 17, 2006
/s/ Ritch N. Wood
Ritch N. Wood
Chief Financial Officer