SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
-----------------
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
OR
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______________ TO ______________
Commission file number 001-12421
Nu Skin Enterprises, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 87-0565309
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
75 West Center Street, Provo, Utah 84601
(Address of Principal Executive Offices) (Zip Code)
(801) 345-6100
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ____
As of July 15, 1999, 33,017,563 shares of the Company's Class A Common
Stock, $.001 par value per share, and 54,606,905 shares of the Company's Class B
Common Stock, $.001 par value per share, were outstanding.
<PAGE>
NU SKIN ENTERPRISES, INC.
1999 FORM 10-Q QUARTERLY REPORT - SECOND QUARTER
TABLE OF CONTENTS
Page
Part I. Financial Information
Item 1. Financial Statements:
Consolidated Balance Sheets.................................2
Consolidated Statements of Income...........................3
Consolidated Statements of Cash Flows.......................4
Notes to Consolidated Financial Statements .................5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................11
Item 3. Quantitative and Qualitative Disclosures about Market Risk....17
Part II. Other Information
Item 1. Legal Proceedings............................................17
Item 2. Changes in Securities........................................17
Item 3. Defaults upon Senior Securities..............................17
Item 4. Submission of Matters to a Vote of Security Holders..........17
Item 5. Other Information............................................18
Item 6. Exhibits and Reports on Form 8-K.............................18
Signatures .............................................................20
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Nu Skin Enterprises, Inc.
Consolidated Balance Sheets
(in thousands, except share amounts)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(Unaudited)
June 30, December 31,
1999 1998
------------- ------------
ASSETS
Current assets
<S> <C> <C>
Cash and cash equivalents $ 146,793 $ 188,827
Accounts receivable 14,552 13,777
Related parties receivable 29,079 22,255
Inventories, net 71,028 79,463
Prepaid expenses and other 64,626 50,475
------------- ------------
326,078 354,797
Property and equipment, net 46,103 42,218
Other assets, net 213,910 209,418
------------- ------------
Total assets $ 586,091 $ 606,433
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 21,245 $ 17,903
Accrued expenses 119,191 132,723
Related parties payable -- 25,029
Current portion of long-term debt 52,323 14,545
------------- ------------
192,759 190,200
Long-term debt, less current portion 82,603 138,734
Other liabilities 22,857 22,857
------------- ------------
Commitments and contingencies
Stockholders' equity
Preferred stock - 25,000,000 shares authorized, $.001 par value,
no shares issued and outstanding -- --
Class A common stock - 500,000,000 shares authorized, $.001
par value, 33,025,265 and 33,709,251 shares issued and
outstanding 33 34
Class B common stock - 100,000,000 shares authorized, $.001
par value, 54,606,905 shares issued and outstanding 55 55
Additional paid-in capital 127,061 146,781
Retained earnings 210,907 158,064
Deferred compensation (5,945) (6,688)
Accumulated other comprehensive income (44,239) (43,604)
------------- ------------
287,872 254,642
------------- ------------
Total liabilities and stockholders' equity $ 586,091 $ 606,433
============= ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
3
<PAGE>
Nu Skin Enterprises, Inc.
Consolidated Statements of Income (Unaudited)
(in thousands, except per share amounts)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Three Six Six
Months Ended Months Ended Months Ended Months Ended
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue $ 211,286 $ 209,051 $ 445,037 $ 436,914
Cost of sales 36,019 44,602 77,036 90,291
Cost of sales - amortization of inventory
step-up (Note 2) -- 12,960 -- 12,960
------------ ------------ ------------ ------------
Gross profit 175,267 151,489 368,001 333,663
------------ ------------ ------------ ------------
Operating expenses
Distributor incentives 81,640 75,271 169,289 158,398
Selling, general and administrative 61,220 46,630 119,225 94,701
------------ ------------ ------------ ------------
Total operating expenses 142,860 121,901 288,514 253,099
------------ ------------ ------------ ------------
Operating income 32,407 29,588 79,487 80,564
Other income (expense), net 1,980 5,309 3,844 7,494
------------ ------------ ------------ ------------
Income before provision for income taxes
and minority interest 34,387 34,897 83,331 88,058
Provision for income taxes 12,379 12,912 30,488 29,317
Minority interest -- -- -- 3,081
------------ ------------ ------------ ------------
Net income $ 22,008 $ 21,985 $ 52,843 $ 55,660
============ ============ ============ ============
Net income per share (Note 6):
Basic $ .25 $ .26 $ .60 $ .67
Diluted $ .25 $ .25 $ .60 $ .64
Weighted average common shares outstanding :
Basic 87,158 83,842 87,466 82,928
Diluted 88,425 87,303 88,750 86,812
Pro forma data:
Income before pro forma provision for
income taxes and minority interest $ 88,058
Pro forma provision for income taxes (Note 5) 32,475
Pro forma minority interest 1,947
------------
Pro forma net income $ 53,636
============
Pro forma net income per share (Note 6):
Basic $ .65
Diluted $ .62
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
4
<PAGE>
Nu Skin Enterprises, Inc.
Consolidated Statements of Cash Flows (Unaudited)
(in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Six
Months Ended Months Ended
June 30, June 30,
1999 1998
------------- ------------
Cash flows from operating activities:
<S> <C> <C>
Net income $ 52,843 $ 55,660
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 14,014 6,066
Amortization of deferred compensation 1,393 1,889
Amortization of inventory step-up -- 12,960
Income applicable to minority interest -- 3,081
Changes in operating assets and liabilities:
Accounts receivable (369) 882
Related parties receivable (6,824) 2,815
Inventories, net 9,644 (2,484)
Prepaid expenses and other (13,953) (10,048)
Other assets (5,093) (9,170)
Accounts payable 3,342 (11,236)
Accrued expenses (21,512) (15,988)
Related parties payable (29) 16,060
------------- ------------
Net cash provided by operating activities 33,456 50,487
------------- ------------
Cash flows from investing activities:
Purchase of property and equipment (11,699) (12,127)
Payments for lease deposits (1,274) (1,634)
Receipt of refundable lease deposits 161 786
------------- ------------
Net cash used in investing activities (12,812) (12,975)
------------- ------------
Cash flows from financing activities:
Repurchase of shares of common stock (15,541) --
Exercise of distributor and employee stock options 2,264 --
Termination of Nu Skin USA license fee (10,000) --
Payment to stockholders under the NSI Acquisition (Note 2) (25,000) --
Payments on long-term debt (14,545) (41,634)
Proceeds from long-term debt -- 181,538
Payment to stockholders for notes payable -- (180,000)
------------- ------------
Net cash used in financing activities (62,822) (40,096)
------------- ------------
Effect of exchange rate changes on cash 144 (15,490)
------------- ------------
Net decrease in cash and cash equivalents (42,034) (18,074)
Cash and cash equivalents, beginning of period 188,827 174,300
------------- ------------
Cash and cash equivalents, end of period $ 146,793 $ 156,226
============= ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
5
<PAGE>
Nu Skin Enterprises, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
1. THE COMPANY
Nu Skin Enterprises, Inc. (the "Company"), is a network marketing
company involved in the distribution and sale of premium quality,
innovative personal care and nutritional products. The Company
distributes Nu Skin brand products in markets throughout the world. The
Company's operations throughout the world are divided into three
segments: North Asia, which consists of Japan and South Korea; Southeast
Asia, which consists of Taiwan, Thailand, Hong Kong (including Macau),
the Philippines, Australia, and New Zealand; and Other Markets, which
consists of the United Kingdom, Austria, Belgium, Denmark, France,
Germany, Iceland, Italy, Ireland, Poland, Portugal, Spain, Sweden, the
Netherlands, Brazil, Canada, Mexico, Guatemala and the United States
(the Company's subsidiaries operating in these countries are
collectively referred to as the "Subsidiaries").
As discussed in Note 2, the Company completed the NSI Acquisition on
March 26, 1998. Prior to the NSI Acquisition, each of the Subsidiaries
elected to be treated as an S corporation. In connection with the NSI
Acquisition, the Acquired Entities' S corporation status was terminated,
and the Acquired Entities declared distributions to the stockholders
that included all of the Acquired Entities' previously earned and
undistributed taxable S corporation earnings totaling $87.1 million in
1997 and $37.6 million in 1998 (the "S Distribution Notes").
As discussed in Note 3, the Company completed the Pharmanex Acquisition
on October 16, 1998, which enhanced the Company's involvement with the
distribution and sale of nutritional products.
In February 1999, the Company announced its intent to acquire Big
Planet, Inc. ("Big Planet"), an Internet-based company that offers
Internet connectivity, e-commerce, telecommunications and other
technology products and services to consumers in North America. As
discussed in Note 12, this acquisition was completed following the end
of the second quarter. As discussed in Note 4, in March 1999, Nu Skin
International, a subsidiary of the Company, terminated its distribution
license and various other license agreements and other intercompany
agreements with Nu Skin USA, Inc. (Nu Skin USA"). Also, in March 1999,
through a newly formed wholly-owned subsidiary, the Company acquired
selected assets of Nu Skin USA. In May 1999, the Company acquired Nu
Skin Canada, Inc., Nu Skin Mexico, Inc. and Nu Skin Guatemala, Inc.
(collectively, the "North American Affiliates").
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Rule 10-01 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of
management, the accompanying unaudited consolidated financial statements
contain all adjustments, consisting of normal recurring adjustments,
considered necessary for a fair statement of the Company's financial
information as of June 30, 1999 and December 31, 1998 and for the three
and six-month periods ended June 30, 1999 and 1998. The results of
operations of any interim period are not necessarily indicative of the
results of operations to be expected for the fiscal year. For further
information, refer to the consolidated financial statements and
accompanying footnotes included in the Company's annual report on Form
10-K for the year ended December 31, 1998.
2. ACQUISITION OF NU SKIN INTERNATIONAL, INC. AND CERTAIN AFFILIATES
On March 26, 1998, the Company completed the acquisition (the "NSI
Acquisition") of the capital stock of Nu Skin International, Inc.
("NSI"), NSI affiliates operating in Europe, Australia and New Zealand
and certain other NSI affiliates (the "Acquired Entities") for $70.0
million in preferred stock and long-term notes payable to the
stockholders of the Acquired Entities (the "NSI Stockholders") totaling
approximately $6.2 million. In addition, contingent upon NSI and the
Company meeting specific earnings growth targets, the Company may pay up
to $25.0 million in cash per year over a four-year period to the NSI
Stockholders. A payment of $25.0 million was paid on April 1, 1999 to
6
<PAGE>
Nu Skin Enterprises, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
the NSI Stockholders based on NSI and the Company meeting specific
earnings growth targets for the year ended December 31, 1998. Also, as
part of the NSI Acquisition, the Company assumed approximately $171.3
million in S Distribution Notes and incurred acquisition costs totaling
$3.0 million. The net assets acquired totaling $90.4 million include net
deferred tax liabilities totaling $7.4 million recorded upon the
conversion of the Acquired Entities from S to C corporations. All
contingent consideration paid will be accounted for as an adjustment to
the purchase price and allocated to the Acquired Entities' assets and
liabilities.
The NSI Acquisition was accounted for by the purchase method of
accounting, except for that portion of the Acquired Entities under
common control of a group of stockholders, which portion was accounted
for in a manner similar to a pooling of interests. The common control
group is comprised of the NSI Stockholders who are immediate family
members. The minority interest, which represents the ownership interests
of the NSI Stockholders who are not immediate family members, was
acquired during the NSI Acquisition. Prior to the NSI Acquisition, a
portion of the Acquired Entities' net income, capital contributions and
distributions (including cash dividends and S Distribution Notes) had
been allocated to the minority interest.
For the portion of the NSI Acquisition accounted for by the purchase
method of accounting, the Company recorded inventory step-up of $21.6
million and intangible assets of $34.8 million. During 1998, the
inventory step-up was fully amortized. For the three and six-month
periods ended June 30, 1999, the Company recorded amortization of
intangible assets relating to the NSI Acquisition of $0.6 million and
$1.3 million, respectively, and for the three and six-month periods
ended June 30, 1998, the Company recorded amortization of $0.5 million
for those same intangible assets.
For the portion of the NSI Acquisition accounted for in a manner similar
to a pooling of interests, the excess of purchase price paid over the
book value of the net assets acquired was recorded as a reduction of
stockholders' equity.
In connection with the presentation of the Company's consolidated
financial statements for the first quarter of 1998, the portion of the
NSI Acquisition and the resulting Preferred Stock issued to the common
control group is reflected as if such stock had been issued on the date
of the Company's incorporation on September 4, 1996. On May 5, 1998, the
stockholders of the Company approved the automatic conversion of the
Preferred Stock issued in the NSI Acquisition into 2,986,663 shares of
Class A Common Stock. Under the terms of the NSI Acquisition, the
2,986,663 shares of Class A Common Stock were adjusted down by 8,504
shares in June 1998.
3. ACQUISITION OF PHARMANEX, INC.
On October 16, 1998, the Company completed the acquisition of
privately-held Generation Health Holdings, Inc., the parent company of
Pharmanex, Inc. ("Pharmanex"), for $77.6 million, which consisted of
approximately 4.0 million shares of the Company's Class A Common Stock,
including 261,008 shares issuable upon exercise of options assumed by
the Company (the "Pharmanex Acquisition"). Contingent upon Pharmanex
meeting specific revenue and other requirements, approximately 565,000
of the 4.0 million shares are being held in escrow and will be returned
to the Company if such requirements are not met within one year from the
date of the Pharmanex Acquisition. The contingent shares issued, if any,
will be accounted for as an adjustment to the purchase price and
allocated to the acquired assets and liabilities. Also, as part of the
Pharmanex Acquisition, the Company assumed approximately $34.0 million
in liabilities and incurred acquisition costs totaling $1.3 million. The
net assets acquired totaling $3.6 million include net deferred tax
assets totaling $0.8 million. In connection with the closing of the
Pharmanex Acquisition, the Company paid approximately $29.0 million
relating to the assumed liabilities.
The Pharmanex Acquisition was accounted for by the purchase method of
accounting. The Company recorded inventory step-up of $3.7 million and
intangible assets of $92.4 million. In addition, the Company allocated
$13.6 million to purchased in-process research and development based on
a discounted cash-flow method reflecting the stage of completion of the
related projects. During 1998, the in-process research and development
amount was fully written off. For the three
7
<PAGE>
Nu Skin Enterprises, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
and six-month periods ended June 30, 1999, the Company recorded
amortization of intangible assets relating to the Pharmanex Acquisition
of $1.7 million and $3.5 million and amortization of inventory step-up
relating to the Pharmanex Acquisition of $0.9 million and $1.9 million,
respectively.
Pro forma results as if the Pharmanex Acquisition had occurred at
January 1, 1998 have not been presented because the results are not
considered material.
4. ACQUISITION OF CERTAIN ASSETS OF NU SKIN USA, INC.
On March 8, 1999, NSI terminated its distribution license and various
other license agreements and other intercompany agreements with Nu Skin
USA, Inc. and paid Nu Skin USA a $10.0 million termination fee. Also, on
that same date, through a newly formed wholly-owned subsidiary, the
Company acquired selected assets of Nu Skin USA, including approximately
620,000 shares of Class A Common Stock of the Company, for $8.7 million
and the assumption of approximately $8.0 million of Nu Skin USA
liabilities.
The acquisition of the selected assets and assumption of liabilities and
the termination of these agreements has been recorded for the
consideration paid, except for the portion of Nu Skin USA which is under
common control of a group of stockholders, which portion has been
recorded at predecessor basis.
5. INCOME TAXES
As a result of the NSI Acquisition described in Note 2, the Acquired
Entities are no longer treated as S corporations for U.S. Federal income
tax purposes. The consolidated statements of income include a pro forma
presentation for income taxes, including the effect on minority
interest, which would have been recorded as if the Acquired Entities had
been taxed as C corporations rather than as S corporations for the
three-month period ended March 31, 1998.
6. NET INCOME PER SHARE
Net income per share and pro forma net income per share are 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 dilutive potential common shares that were
outstanding during the periods presented.
7. DERIVATIVE FINANCIAL INSTRUMENTS
The Company's Subsidiaries enter into significant transactions with each
other and third parties which may not be denominated in the respective
Subsidiaries' functional currencies. The Company seeks to reduce its
exposure to fluctuations in foreign exchange rates by creating
offsetting positions through the use of foreign currency exchange
contracts and through certain intercompany loans of foreign currency.
The Company does not use such derivative financial instruments for
trading or speculative purposes. The Company regularly monitors its
foreign currency risks and periodically takes measures to reduce the
impact of foreign exchange fluctuations on the Company's operating
results. Gains and losses on foreign currency forward contracts and
certain intercompany loans of foreign currency are recorded as other
income and expense in the consolidated statements of income.
At June 30, 1999 and December 31, 1998, the Company held foreign
currency forward contracts with notional amounts totaling approximately
$39.9 million and $46.3 million, respectively, to hedge foreign currency
items. These contracts do not qualify as hedging transactions and,
accordingly, have been marked to market. The net gains on foreign
currency forward contracts were $0.1 million and $1.5 million for the
three-month periods ended June 30, 1999 and 1998, respectively, and were
$2.6 million and $3.4 million for the six-month periods ended June 30,
1999
8
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Nu Skin Enterprises, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
and 1998, respectively. These contracts at June 30, 1999 have maturities
through December 1999.
8.8 REPURCHASE OF COMMON STOCK
During the three and six-month periods ended June 30, 1999, the Company
repurchased approximately 220,000 and 1,002,000 shares, respectively, of
Class A common stock from Nu Skin USA as described in Note 4, open
market repurchases and certain stockholders for approximately $3.7
million and $15.5 million, respectively.
9. COMPREHENSIVE INCOME
The components of comprehensive income, net of related tax, for the
three and six-month periods ended June 30, 1999 and 1998, were as
follows (in thousands):
<TABLE>
<CAPTION>
Three Three Six Six
Months Ended Months Ended Months Ended Months Ended
June 30, 1999 June 30, 1998 June 30, 1999 June 30, 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net income $ 22,008 $ 21,985 $ 52,843 $ 55,660
Other comprehensive income, net of tax:
Foreign currency translation adjustments 61 (9,114) (635) (13,567)
------------- ------------- ------------- -------------
Comprehensive income $ 22,069 $ 12,871 $ 52,208 $ 42,093
============= ============= ============= =============
</TABLE>
10. SEGMENT INFORMATION
During 1998, the Company adopted Statement of Financial Accounting
Standards No. 131 ("SFAS 131"), Disclosures about Segments of an
Enterprise and Related Information. As described in Note 1, the
Company's operations throughout the world are divided into three
reportable segments: North Asia, Southeast Asia and Other Markets.
Segment data includes intersegment revenue, intersegment profit and
operating expenses and intersegment receivables and payables. The
Company evaluates the performance of its segments based on operating
income. Information as to the operations of the Company in each of the
three segments is set forth below (in thousands):
<TABLE>
<CAPTION>
Three Three Six Six
Months Ended Months Ended Months Ended Months Ended
June 30, 1999 June 30, 1998 June 30, 1999 June 30, 1998
------------- ------------- ------------- -------------
Revenue
<S> <C> <C> <C> <C>
North Asia $ 143,356 $ 147,952 $ 316,404 $ 305,025
Southeast Asia 69,980 77,645 137,761 162,466
Other Markets 82,582 74,470 149,983 146,457
Eliminations (84,632) (91,016) (159,111) (177,034)
------------- ------------- ------------- -------------
Totals $ 211,286 $ 209,051 $ 445,037 $ 436,914
============= ============= ============= =============
Operating Income
North Asia $ 22,516 $ 27,744 $ 50,636 $ 60,786
Southeast Asia 7,329 3,548 16,061 10,474
Other Markets 1,123 446 5,494 1,778
Eliminations 1,439 (2,150) 7,296 7,526
------------- ------------- ------------- -------------
Totals $ 32,407 $ 29,588 $ 79,487 $ 80,564
============= ============= ============= =============
</TABLE>
9
<PAGE>
Nu Skin Enterprises, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
As of As of
June 30, December 31,
1999 1998
------------- -------------
Total Assets
North Asia $ 103,579 $ 167,867
Southeast Asia 118,223 110,518
Other Markets 468,048 500,299
Eliminations (103,759) (172,251)
------------- -------------
Totals $ 586,091 $ 606,433
============= =============
Information as to the Company's operation in different geographical
areas is set forth below (in thousands):
Revenue
Revenue from the Company's operations in Japan totaled $139,232 and
$145,386 for the three-month periods ended June 30, 1999 and 1998,
respectively, and totaled $308,862 and $299,959 for the six-month
periods ended June 30, 1999 and 1998, respectively. Revenue from the
Company's operations in Taiwan totaled $25,918 and $29,050 for the
three-month periods ended June 30, 1999 and 1998, respectively, and
totaled $53,925 and $63,587 for the six-month periods ended June 30,
1999 and 1998, respectively. Revenue from the Company's operations in
the United States (which includes intercompany revenue) totaled $77,374
and $71,577 for the three-month periods ended June 30, 1999 and 1998,
respectively, and totaled $140,517 and $140,721 for the six-month
periods ended June 30, 1999 and 1998, respectively.
Long-lived assets
Long-lived assets in Japan were $26,454 and $20,242 as of June 30, 1999
and December 31, 1998, respectively. Long-lived assets in Taiwan were
$2,476 and $2,466 as of June 30, 1999 and December 31, 1998,
respectively. Long-lived assets in the United States were $213,611 and
$213,856 as of June 30, 1999 and December 31, 1998, respectively.
11. NEW ACCOUNTING STANDARDS
Reporting on the Costs of Start-Up Activities
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5 ("SOP 98-5"), Reporting on the Costs
of Start-Up Activities. The statement is effective for fiscal years
beginning after December 15, 1998. The statement requires costs of
start-up activities and organization costs to be expensed as incurred.
The Company has adopted SOP 98-5 for calendar year 1999. The adoption of
SOP 98-5 did not materially affect the Company's consolidated financial
statements.
Accounting for Derivative Instruments and Hedging Activities
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133 ("SFAS 133"), Accounting for
Derivative Instruments and Hedging Activities. The statement requires
companies to recognize all derivatives as either assets or liabilities,
with the instruments measured at fair value. The accounting for changes
in fair value, gains or losses, depends on the intended use of the
derivative and its resulting designation. The statement is effective for
all fiscal quarters of fiscal years beginning after June 15, 1999. The
Company will adopt SFAS 133 by January 1, 2000. The Company is currently
evaluating the impact the adoption of SFAS 133 will have on the
Company's consolidated financial statements.
12. SUBSEQUENT EVENTS
On July 13, 1999, the Company completed the acquisition of Big Planet
for approximately $37.0 million. The acquisition of Big Planet is
expected to be accounted for by the purchase method of accounting.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
1999 compared to 1998
Revenue increased 1.1% and 1.9% to $211.3 million and $445.0 million
from $209.1 million and $436.9 million for the three and six-month periods ended
June 30, 1999, compared with the same periods in 1998.
Revenue in North Asia, which consists of Japan and South Korea,
decreased 3.1% to $143.3 million for the three-month period ended June 30, 1999,
from $148.0 million for the same period in 1998. This decrease was primarily due
to the revenue decrease in Japan of 4.2% for the three-month period ended June
30, 1999, compared with the same period in 1998. Revenue in North Asia for the
six-month period ended June 30, 1999 increased 3.7% to $316.4 million from
$305.0 million for the same period in 1998. This increase was due to the 9.7%
increase in revenue in Japan for the first quarter of 1999 compared to the same
period of 1998 which was largely due to a stronger Japanese yen during the
period, and offset by the decrease in revenue in Japan during the second quarter
of 1999. During the second quarter the Company experienced a 15.0% decrease in
local currency revenue in Japan from the second quarter of the prior year. This
decrease was somewhat offset by an 11.0% increase in the strength of the
Japanese Yen during the same period. The local currency decline in revenue in
Japan is largely due to delays in marketing several Pharmanex nutritional
supplements, along with other challenges which included among other things,
distributor uncertainty related to the global implementation of a new divisional
business model with an enhanced compensation plan in connection with the
integration of Pharmanex and Big Planet, and issues concerning the Company's
compensation plan requirements, which became increasingly difficult for
distributors to reach as consumer confidence continued to lag. Revenue in South
Korea during the three and six-month periods ended June 30, 1999 increased 60.7%
and 48.9%, respectively, compared to the same period in 1998 as a result of both
a strengthening of the South Korean won and a 37.3% and 30.3% increase in local
currency growth for the same periods following several quarters of extensive
educational training programs and the launch of new nutritional products in that
market.
Revenue in Southeast Asia, which consists of Taiwan, Thailand, Hong Kong
(including Macau), the Philippines, Australia and New Zealand, totaled $34.8
million and $71.9 million for the three and six-month periods ended June 30,
1999, a decrease of 11.8% and 16.0% from revenue of $39.5 million and $85.6
million for the same periods in 1998, respectively. This decrease in revenue
resulted primarily from a decline of 10.8% and 15.2% in revenue in Taiwan for
the three and six-month periods ended June 30, 1999, compared to the same
periods in 1998, respectively. The Company's operations in Taiwan have continued
to suffer the impact of increased competition and the temporary ban on direct
selling in the People's Republic of China (the "PRC"), where many Taiwanese
distributors hoped to expand their businesses. In addition, the Company's
operations in Thailand and Hong Kong have been impacted negatively by the
region's economic recession. Revenue in the Philippines increased 24.5 % over
the second quarter of 1998 and revenue in Australia and New Zealand remained
constant with prior year second quarter revenue.
Revenue in the Company's other markets, which include the United
Kingdom, Germany, Iceland, Italy, the Netherlands, France, Belgium, Spain,
Portugal, Ireland, Austria, Poland, Denmark, Sweden, Brazil, Canada, Mexico,
Guatemala and the United States, increased 53.2% and 22.6% to $33.1 million and
$56.8 million for the three and six-month periods ended June 30, 1999, compared
to $21.6 million and $46.3 million for the same periods in 1998, respectively.
This increase in revenue was primarily due to the additional revenue stream from
sales in the United States resulting from the termination of the Company's
license agreement with Nu Skin USA, which occurred in March 1999.
Gross profit as a percentage of revenue was 83.0% and 82.7% for the
three and six-month periods ended June 30, 1999, compared to 72.5% and 76.4% for
the same periods in 1998. The increase in the gross profit as a percentage of
revenue for the three and six-month periods ended June 30, 1999 resulted from
the strengthening of the Japanese yen and other Asian currencies relative to the
U.S. dollar, higher margin sales to distributors in the United States following
the termination of the Company's license agreement with Nu Skin USA, local
manufacturing efforts and reduced duty rates. In addition, in the second quarter
of 1998, the Company recorded amortization of inventory step-up related to the
NSI Acquisition of $13.0 million, which did not recur in 1999. The Company
purchases a significant majority of goods in U.S. dollars and recognizes revenue
in local currency and is consequently subjected to exchange rate risks in its
gross margins.
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Distributor incentives as a percentage of revenue increased to 38.6% and
38.0% for the three and six-month periods ended June 30, 1999 from 36.0% and
36.3% for the same periods in 1998. The primary reason for this increase in 1999
was due to the Company beginning to sell products to distributors in the United
States and paying the requisite commissions related to those sales.
Selling, general and administrative expenses as a percentage of revenue
increased to 29.0% and 26.8% for the three and six-month periods ended June 30,
1999 from 22.3% and 21.7% for the same periods in 1998. In dollar terms,
selling, general and administrative expenses increased to $61.2 million and
$119.2 million for the three and six-month periods ended June 30, 1999 from
$46.6 million and $94.7 million for the same periods in 1998. This increase as a
percentage of revenue and in dollar terms was due to stronger foreign currencies
in 1999 which resulted in higher expenses in foreign markets, additional
overhead expenses relating to the operations in the United States and an
additional $7.1 million during the first six months of 1999 in amortization
resulting from the Company's acquisitions of NSI and Pharmanex.
Operating income increased 9.5% to $32.4 million for the three-month
period ended June 30, 1999 from $29.6 million for the same period in 1998 and
operating margin increased to 15.3% from 14.2% for the same periods. Operating
income decreased 1.3% to $79.5 million for the six-month period ended June 30,
1999 from $80.6 million for the same period in 1998 and operating margin
decreased to 17.9% from 18.4% for the same periods. In general, operating income
and margins have declined due to the increases in distributor incentives and
selling, general and administrative expenses resulting from the NSI Acquisition
and termination of the Company's license agreement with Nu Skin USA more than
offsetting better gross margins. The increase in operating income and margin for
the three-month period ended June 30, 1999 was due primarily to the $13.0
million amortization of inventory step-up charge in the second quarter of 1998,
which did not recur in 1999.
Other income decreased 62.7% and 48.7% to $2.0 million and $3.8 million
for the three and six-month periods ended June 30, 1999 from $5.3 million and
$7.5 million for the same periods in 1998, respectively. This decrease was
primarily due to the strong hedging gains recorded in the second quarter of 1998
from forward contracts and intercompany loans resulting from a weakened Japanese
yen in relation to the U.S. dollar.
Provision for income taxes decreased 4.1% to $12.4 million for the
three-month period ended June 30, 1999 from $12.9 million for the same period in
1998. This decrease is due to the reduced effective tax rate from 37.0% in the
second quarter of 1998 to 36.0% in the second quarter of 1999. Provision for
income taxes increased 4.0% to $30.5 million for the six-month period ended June
30, 1999 from $29.3 million for the same period in 1998. This increase is due to
the lower tax rate in the first quarter of 1998 resulting from NSI and its
affiliates being taxed as S corporations rather than as C corporations during
the first quarter of 1998. The pro forma provision for income taxes presents
income taxes as if NSI and its affiliates had been taxed as C corporations
rather than as S corporations for the three-month period ended March 31, 1998.
Minority interest represents the ownership interest of NSI held by
individuals who are not immediate family members. The minority interest was
purchased as part of the NSI Acquisition on March 26, 1998.
Net income remained constant at $22.0 million for the three-month
periods ended June 30, 1999 and 1998 and net income as a percentage of revenue
remained nearly constant at 10.4% and 10.5% for the same periods. Net income
decreased 5.1% to $52.8 million for the six-month period ended June 30, 1999
from $55.7 million for the same period in 1998 and net income as a percentage of
revenue decreased to 11.9% from 12.7% for the same periods. Net income remained
constant for the three-month periods ended June 30, 1999 and 1998 due to the
improved gross margins that were offset by increased selling, general and
administrative expenses and reduced other income. Net income decreased for the
six-month period ended June 30, 1999 compared to the same period in 1998 due to
the same factors as the three-month periods and the minority interest from the
NSI Acquisition recorded in the first quarter of 1998.
Liquidity and Capital Resources
Historically, the Company's principal needs for funds have been for
distributor incentives, working capital (principally inventory purchases),
operating expenses, capital expenditures and the development of
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operations in new markets. The Company has generally relied entirely on cash
flow from operations to meet its business objectives without incurring long-term
debt to unrelated third parties to fund operating activities.
The Company generates significant cash flow from operations due to
favorable gross margins and minimal capital requirements. Additionally, the
Company does not generally extend credit to distributors but requires payment
prior to shipping products. This process eliminates the need for significant
accounts receivable from distributors. During the first quarter of each year,
the Company pays significant accrued income taxes in many foreign jurisdictions
including Japan. These large cash payments somewhat offset the significant cash
generated in the first quarter. During the six-month period ended June 30, 1999,
the Company generated $33.5 million from operations compared to $50.5 million
generated during the six-month period ended June 30, 1998. This decrease in cash
generated from operations primarily related to reduced net income in 1999
compared to 1998, excluding amortization from the NSI and Pharmanex
acquisitions.
As of June 30, 1999, working capital was $133.3 million compared to
$164.6 million as of December 31, 1998. This decrease is primarily due to the
increase at June 30, 1999 in the current portion of long-term debt. Cash and
cash equivalents at June 30, 1999 and December 31, 1998 were $146.8 million and
$188.8 million, respectively.
Capital expenditures, primarily for equipment, computer systems and
software, office furniture and leasehold improvements, were $11.7 million for
the six-month period ended June 30, 1999. In addition, the Company anticipates
additional capital expenditures in 1999 of approximately $20.0 million to
further enhance its infrastructure, including enhancements to computer systems
and software and call-center facilities in order to accommodate anticipated
future growth.
In March 1998, the Company completed the NSI Acquisition. Pursuant to
the terms of the NSI Acquisition, NSI and the Company met earnings growth
targets in 1998 resulting in a contingent payment payable to the NSI
stockholders of $25.0 million as of December 31, 1998. Contingent upon NSI and
the Company meeting earnings growth targets over the next three years, the
Company may pay up to $25.0 million in cash in each of the next three years to
the NSI stockholders. The contingent consideration of $25.0 million earned in
1998 was paid in the second quarter of 1999 and has been accounted for as an
adjustment to the purchase price and allocated to the assets and liabilities of
NSI and its previously private affiliates. Any additional contingent
consideration paid over the next three years, if any, will be accounted for in a
similar manner.
In May 1998, the Company and its Japanese subsidiary Nu Skin Japan
entered into a $180.0 million credit facility with a syndicate of financial
institutions for which ABN-AMRO, N.V. acted as agent. This credit facility was
used to satisfy liabilities which were assumed as part of the NSI Acquisition.
The Company borrowed $110.0 million and Nu Skin Japan borrowed the Japanese yen
equivalent of $70.0 million denominated in local currency. Payments totaling
$41.6 million were made during the second quarter of 1998 and payments totaling
$14.5 million were made during the first quarter of 1999 relating to the $180.0
million credit facility. As of June 30, 1999, the balance relating to the $180.0
million credit facility totaled $134.9 million of which approximately $52.3
million is due in 2000 and approximately $82.6 million will be due in 2001. The
U.S. portion of the credit facility bears interest at either a base rate as
specified in the credit facility plus an applicable margin or the London
Inter-Bank Offer Rate plus an applicable margin, in the borrower's discretion.
The Japanese portion of the credit facility bears interest at the applicable
Tokyo Inter-Bank Offer Rate plus an applicable margin. The maturity date for the
credit facility is three years from the borrowing date, with a possible
extension of the maturity date upon approval of the lenders. The credit facility
provides that the amounts borrowed are to be used for general corporate
purposes. The Company is currently in compliance with all financial and other
covenants under the credit facility. During 1998, the Company entered into a
$10.0 million revolving credit agreement with ABN-AMRO, N.V. which was extended
for an additional year in May 1999. Advances are available under the agreement
through May 18, 2000 with a possible extension upon approval of the lender.
There were no outstanding balances under this credit facility at June 30, 1999.
During 1998, the board of directors authorized the Company to repurchase
up to $20.0 million of the Company's outstanding shares of Class A common stock.
As of June 30, 1999, the Company had repurchased 1,298,354 shares for an
aggregate price of approximately $17.3 million. In addition, in March 1999, the
board of directors separately authorized and the Company completed the purchase
of
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approximately 700,000 shares of the Company's Class A common stock from Nu Skin
USA and certain stockholders for approximately $10.0 million as part of the
asset purchase agreement.
As part of the Pharmanex Acquisition, the Company assumed approximately
$34.0 million in liabilities and incurred acquisition costs totaling $1.3
million. The net assets acquired totaling $3.6 million include net deferred tax
assets totaling $0.8 million. In connection with the closing of the Pharmanex
Acquisition, the Company paid approximately $29.0 million relating to the
assumed liabilities.
In March 1999, NSI terminated its distribution license and various
other license agreements and other intercompany agreements with Nu Skin USA and
paid Nu Skin USA a $10.0 million termination fee. The Company also, through a
newly formed wholly-owned subsidiary, acquired selected assets of Nu Skin USA
and assumed approximately $8.0 million of Nu Skin USA's liabilities in March
1999. In May 1999, the Company completed the acquisition of its private
affiliates Nu Skin Canada, Nu Skin Mexico and Nu Skin Guatemala for
approximately $2.0 million in cash (inclusive of cash distributed by the
acquired entities prior to closing) and assumed net liabilities of up to $4.0
million.
In July 1999, the Company completed the acquisition of its affiliate Big
Planet for an aggregate of approximately $37.0 million, of which approximately
$14.5 million is payable in the form of a promissory note and approximately
$22.5 million is payable in cash. In addition, the Company loaned Big Planet
approximately $9.4 million to fund Big Planet operations through the closing of
the acquisition. Big Planet incurred operating losses of approximately $22.0
million in 1998 and the Company anticipates Big Planet will continue to incur
operating losses in the foreseeable future.
The Company had related party payables of $25.0 million at December 31,
1998. The Company had no related party payables at June 30, 1999. In addition,
the Company had related party receivables of $29.1 million and $22.3 million at
June 30, 1999 and December 31, 1998, respectively. Related party balances
outstanding in excess of 60 days bear interest at a rate of 2% above the U.S.
prime rate. As of June 30, 1999, no material related party payables or
receivables had been outstanding for more than 60 days.
Management considers the Company to be liquid and able to meet its
obligations on both a short and long-term basis. The Company currently believes
existing cash balances together with future cash flows from operations will be
adequate to fund cash needs relating to the implementation of its strategic
plans.
Year 2000
The Company has developed a comprehensive plan to address Year 2000
issues. In connection with this plan, the Company has established a committee
that is responsible for assessing and testing its systems to identify Year 2000
issues, and overseeing the upgrade or remediation of non-compliant Year 2000
systems. This committee reports on a regular basis to the Company's executive
management team and the audit committee of the board of directors on the
progress and status of the plan and the Year 2000 issues affecting the Company.
To date, the Company has completed a broad scope assessment and audit of
its information technology systems and non-information technology systems to
identify and prioritize potential Year 2000 issues. The Company is nearing
completion of a micro-based assessment designed to identify specific Year 2000
issues at the hardware, software and processing levels. Through this process,
the Company has identified potential Year 2000 issues in its information
systems, and is in the process of addressing these issues through upgrades and
other remediation. The Company has completed the micro-based assessment and
remediation of substantially all of its significant in-house corporate systems
and is in the process of performing integration tests of the remediated systems.
The Company recently completed the testing of its most significant in-house
system and expects to complete the integration testing of its other systems by
the beginning of the fourth quarter. The Company is also continuing its
micro-based assessment and remediation of systems in its foreign offices and of
its desktop applications and computers. The Company is in the process of
evaluating the Year 2000 readiness of recently-acquired Big Planet, Inc. and the
actions taken to date by Big Planet to assess and remediate any Year 2000
issues. The Company currently estimates that the cost of all upgrades related to
Year 2000 issues, including scheduled upgrades intended primarily to increase
efficiencies within the Company and also address Year 2000 issues, is
anticipated to be approximately $8.0 million through the remainder of 1999,
which the Company anticipates will be funded by cash from operations. To date,
the Company has spent approximately $5.0 million.
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Through the remainder of 1999, the Company will continue to run broad scope
tests of its in-house systems to confirm that the Company has adequately
identified and addressed all Year 2000 issues and continue its work on the
systems of the Company's foreign offices and Big Planet.
As part of the Year 2000 plan, the Company is also assessing and
monitoring its vendors and suppliers and other third parties for Year 2000
readiness. The committee has sent questionnaires to these third parties seeking
their assessment and evaluation of their own Year 2000 readiness and has
received responses back from a substantial majority of these third parties.
Members of the committee have also visited in person the Company's key vendors
and suppliers to assess the Year 2000 readiness of such suppliers and vendors
and to share Year 2000 information and plans for contingencies. The Company will
continue the follow-up with third party vendors throughout the remainder of
1999.
Based on the Company's evaluation of the Year 2000 issues affecting the
Company, management believes that Year 2000 readiness of the Company's vendors
and suppliers and related contingency plans, which is beyond the Company's
control, is currently the most significant area of risk, particularly in its
foreign markets. Management does not believe it is possible at this time to
quantify or estimate the most reasonable worst case Year 2000 scenario. However,
the Company has begun to formulate contingency plans to limit, to the extent
possible, interruption of the Company's operations arising from the failure of
third parties to be Year 2000 compliant as the Company moves forward in the
implementation of its Year 2000 plan. The Company will continue to work with
third parties as indicated above to further evaluate and quantify this risk and
will continue the development of contingency plans throughout the remainder of
1999 as this process moves forward. There can be no assurance, however, that the
Company will be able to successfully identify and remedy all Year 2000 issues or
develop contingency plans for all Year 2000 issues that could, directly or
indirectly, harm its operations, some of which are beyond the Company's control.
In particular, the Company cannot predict or evaluate domestic and foreign
governments' and utility companies' preparation for the Year 2000 or the
readiness of other third parties (domestic and foreign) that do not have
relationships with the Company, and the resulting impact that the failure of
such parties to be Year 2000 compliant may have on the economy in general and on
its business.
The foregoing discussion of the Year 2000 issues contains
forward-looking statements that represent the Company's current expectations or
beliefs. These forward-looking statements are subject to risks and uncertainties
that could cause outcomes to be different from those currently anticipated
including those risks identified under the heading "Note Regarding
Forward-looking Statements."
Currency Risk and Exchange Rate Information
A majority of the Company's revenue and many of its expenses are
recognized primarily outside of the United States except for inventory purchases
which are primarily transacted in U.S. dollars from vendors in the United
States. Each subsidiary's local currency is considered the functional currency.
All revenue and expenses are translated at weighted average exchange rates for
the periods reported. Therefore, the Company's reported sales and earnings will
be positively impacted by a weakening of the U.S. dollar and will be negatively
impacted by a strengthening of the U.S. dollar.
Given the uncertainty of exchange rate fluctuations, the Company cannot
estimate the effect of these fluctuations on its future business, product
pricing, results of operations or financial condition. However, because a
majority of the Company's revenue is realized in local currencies and the
majority of its cost of sales is denominated in U.S. dollars, the Company's
gross profits will be positively affected by a weakening in the U.S. dollar and
will be negatively affected by a strengthening in the U.S. dollar. The Company
seeks to reduce its exposure to fluctuations in foreign exchange rates by
creating offsetting positions through the use of foreign currency exchange
contracts and through intercompany loans of foreign currency. The Company does
not use such derivative financial instruments for trading or speculative
purposes. The Company regularly monitors its foreign currency risks and
periodically take measures to reduce the impact of foreign exchange fluctuations
on its operating results.
The Company's foreign currency derivatives are comprised of
over-the-counter forward contracts with major international financial
institutions. As of June 30, 1999, the primary currency for which the Company
had net underlying foreign currency exchange rate exposure was the Japanese yen.
Based on the Company's foreign exchange contracts at June 30, 1999 as discussed
in Note 7 of the notes to the Consolidated Financial Statements, the impact of a
10% appreciation or 10% depreciation of the U.S. dollar
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against the Japanese yen would not result in significant other income or expense
recorded in the Consolidated Statements of Income.
Outlook
Management believes that the acquisitions of Pharmanex, Big Planet and
Nu Skin operations in the United States should positively impact the Company's
long-term revenue and earnings growth rates. However, over the next few
quarters, management believes that while modest sequential revenue increases are
possible, earnings will be relatively constant on a sequential basis. Management
currently anticipates gross margins to stabilize on a sequential basis during
the remainder of 1999 as the Company continues selling products directly to U.S.
distributors rather than recognizing lower margin intercompany revenue, as well
as continued local manufacturing efforts and the resulting reduced duty rates.
Management also anticipates that distributor incentives as a percentage of
revenue will continue to be higher in 1999 due to paying commissions to U.S.
based distributors. Selling, general and administrative expenses will generally
be higher throughout 1999 as compared to 1998 due to increased amortization of
intangible assets acquired in the acquisitions of Pharmanex and NSI, as well as
stronger foreign currencies. In addition, overhead related to the acquired U.S.
operations as well as Big Planet will increase the Company's selling, general
and administrative expenses.
The foregoing outlook section contains forward-looking statements that represent
the Company's current expectations or beliefs concerning future operating
results. These forward-looking statements are subject to risks and uncertainties
that could cause outcomes to be different from those currently anticipated
including those risks identified below under the heading "Note Regarding
Forward-looking Statements."
Note Regarding Forward-Looking Statements
Certain statements made above, in particular in the Liquidity and
Capital Resources section, the Year 2000 section, the Outlook section and Note
12 to the Consolidated Financial Statements included herein, are
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995 (the "Reform Act"). In addition, when used in this
report, the words or phrases, "will likely result," "expects," "anticipates,"
"will" "intends," "plans," "believes," "the Company [or management] believes,"
and similar expressions are intended to identify forward looking statements.
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. The forward-looking
statements and associated risks described in this filing relate to, among other
things, (i) the Company's expectation that it will be able to rely entirely on
cash flow from operations to fund its business objectives without incurring
long-term debt to unrelated third parties, (ii) the Company's expectations
concerning its ability to identify and remediate or address any Year 2000
related issues, including with third parties, as more fully described under the
Year 2000 section above, (iii) the Company's expectation concerning its ability
to develop viable contingency or back up plans in the event any of its systems
or the systems of its vendors or suppliers are not Year 2000 compliant, (iv) the
Company's expectation that it will be able to fund its Year 2000 program from
cash from operations, (v) management's belief that the Company is liquid and
able to meet its obligations both on a short and long-term basis, (vi) the
anticipation that long term revenue and earnings will be positively impacted by
recent acquisitions, (vii) management's belief that earnings will remain
relatively constant on a sequential basis during the next few quarters, (viii)
management's anticipation that gross margins will stabilize and that distributor
incentives, selling, general and administrative expenses will generally be
higher , and (ix) the Company's plan to implement forward contracts and other
hedging strategies to manage foreign currency risks.
Important factors and risks that might cause actual results to differ
from those anticipated include, but are not limited to: (a) lower than expected
revenue, revenue growth, earnings, cash flow from operations and gross margins
because of adverse economic, business or political conditions, increased
competition, adverse publicity in the Company's markets, particularly Japan and
Taiwan, or the Company's inability, for any reason, to open new markets,
introduce new products, implement its marketing and local sourcing initiatives
and other strategic plans as well as the potential negative effect of
distributor actions such as decreased selling efforts or increased turnover; (b)
continued difficulties in integrating the business of Pharmanex and Big Planet
with the Company's operations and the related shift to product-based divisions,
(c) variations in operating results including revenue, gross margin and earnings
caused by renewed or sustained weakness of Asian economies, particularly Japan,
fluctuation in foreign currencies particularly the yen, and any reductions in
number or productivity of distributors; (d) the risk that the Company's new
business opportunities and new product offerings, including Pharmanex and Big
Planet, will not gain
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market acceptance or meet the Company's expectations; (e) the Company's
inability to favorably implement forward contracts and other hedging strategies
to manage foreign currency risk; (f) delays in introducing Pharmanex and Big
Planet products as a result of unanticipated problems and the significant laws
and regulations applicable to nutritional supplements and the products and
services offered by Big Planet, which could delay or prevent the Company from
introducing certain of such products into its markets; (g) the inability of the
Company to gain market acceptance of new products; (h) increased expenditures
required to address the Year 2000 issue if the Company's technology requirements
change or unforseen problems are discovered; (i) risks that the Company's and
its vendors' plans to remedy Year 2000 issues may be inadequate which could
result in disruptions of the Company's business; (j) increased government
regulation of direct selling activities and products in existing and future
markets such as the PRC's restrictions on direct selling; (k) management's
inability to effectively manage the Company's growth; (l) the risk that the
Tenth Circuit Court of Appeals could overturn the recent federal district court
ruling allowing the Company to sell Cholestin as a dietary supplement, which
ruling has been appealed by the Food and Drug Administration; (m) risks inherent
in the importation, regulation and sale of personal care and nutritional
products in the Company's markets including product liability issues; (n) the
Company's reliance on and the concentration of outside manufacturers; (o)
taxation and transfer pricing issues, including the Company's inability to fully
use its foreign tax credits; and (p) unanticipated increases in the costs of
supplies of products and overhead expenses. For a more detailed discussion of
risks and uncertainties related to the Company's business, please refer to the
Company's Form 10-K for the year ended December 31, 1998, and any amendments
thereto, the Company's most recent Registration Statement on Form S-3 and other
documents filed by the Company with the Securities and Exchange Commission.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by Item 3 of Part I of Form 10-Q is
incorporated herein by reference from the section entitled "Currency Risk and
Exchange Rate Information" in "Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations" of Part I and also in Note 7 to
the Financial Statements contained in Item 1 of Part I.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Reference is made to the Company's Annual Report on Form 10-K and its
Quarterly Report on Form 10-Q for information concerning the legal proceedings.
There have been no material developments in these proceedings since the date of
the filing of the Quarterly Report on Form 10-Q for the quarter ended March 31,
1999.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Stockholders was held on May 4, 1999. At
the Annual Meeting, Blake M. Roney, Steven J. Lund, Sandra N. Tillotson, Keith
R. Halls, Brooke B. Roney, Max L. Pinegar, E.J. "Jake" Garn, Paula Hawkins and
Daniel W. Campbell were elected to serve as directors of the Company until the
next annual meeting of stockholders or until their successors are duly elected.
Each director was elected by a plurality of votes in accordance with the
Delaware General Corporation Law. There was no solicitation in opposition to
management's director nominees. The following chart reflects the vote tabulation
with respect to each director nominee. The figures reported reflect votes cast
by holders of the Company's Class A Common Stock and Class B Common Stock. Each
share of Class A Common Stock entitles its holder to one vote, and each share of
Class B Common Stock entitles its holder to ten votes.
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Name of Director Nominee Votes For Votes Withheld
- -------------------------- ----------- --------------
Blake M. Roney 494,304,673 46,898
Steven J. Lund 494,304,673 46,898
Sandra N. Tillotson 494,304,673 46,898
Keith R. Halls 494,304,673 46,898
Brooke B. Roney 494,304,673 46,898
Max L. Pinegar 493,104,673 1,246,898
E.J. "Jake" Garn 494,304,673 46,898
Paula Hawkins 494,304,673 46,898
Daniel W. Campbell 494,304,673 46,898
The stockholders also approved the Company's Second Amended and Restated
1996 Stock Incentive Plan with 475,477,489 votes voted in favor of the
amendment, 1,850,242 votes cast against, 13,133,968 abstentions and 3,889,872
broker non-votes. The stockholders also ratified the appointment of
PricewaterhouseCoopers LLP as the Company's independent public accountants, with
491,1138,548 votes being cast for, 9,504 votes being cast against, as well as
3,228,519 abstentions.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Regulation S-K
Number Description
2.1 Agreement and Plan of Merger and Reorganization dated
May 3, 1999 between and among Nu Skin Enterprises, Inc.,
Big Planet Holdings, Inc., Big Planet, Inc., Nu Skin
USA, Inc., Richard W. King, Kevin V. Doman and Nathan W.
Ricks. (Incorporated by reference to Exhibit 2.1 to the
Company's Current Report on Form 8-K filed on July 28,
1999).
2.2 First Amendment to Agreement and Plan of Merger and
Reorganization dated July 2, 1999 between and among Nu
Skin Enterprises, Inc., Big Planet Holdings, Inc., Big
Planet, Inc., Maple Hills Investment, Inc. (formerly Nu
Skin USA, Inc.), Richard W. King, Kevin V. Doman and
Nathan W. Ricks. (Incorporated by reference to Exhibit
2.2 to the Company's Current Report on Form 8-K filed on
July 28, 1999).
10.1 Note and Pledge Agreement with William McGlashan Jr.
10.2 Employment Agreement between Pharmanex and William
McGlashan Jr.
10.3 Agreement and Plan of Merger dated as of May 3, 1999 by
and among Nu Skin Enterprises, Inc., NSC Sub, Inc., NSG
Sub, Inc., NSM Sub, Inc., NFB Sub, Inc., Nu Skin Canada,
Inc., Nu Skin Guatemala, Inc., Nu Skin Guatemala, S.A.,
Nu Skin Mexico, Inc., Nu Skin Mexico, S.A. de C.V., Nu
Family Benefits Insurance Brokerage, Inc. and certain
stockholders. (Incorporated by reference to Exhibit 2.1
to the Company's Current Report on Form 8-K filed on
June 25, 1999).
10.4 First Amendment to Indemnification Limitation Agreement
dated as of May 3, 1999 between Nu Skin Enterprises,
Inc., Nu Skin USA, Inc., and the Stockholders of the
acquired entities identified therein (incorporated by
reference to exhibit 10.1 to the Company's Current
Report on Form 8- K filed on July 28, 1999).
27.1 Financial Data Schedule - Six Months Ended June 30, 1999
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(b) Reports on Form 8-K. The Company filed an Amendment No. 1 to a
Current Report on Form 8-K/A dated April 16, 1999 to amend an earlier Current
Report on Form 8-K related to the acquisition of Generation Health Holdings,
Inc. in October 1998. The Company also filed a Current Report on Form 8-K on
June 25, 1999 reporting the acquisition of the North American Affiliates.
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SIGNATURES
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 this 2nd day of
August, 1999.
NU SKIN ENTERPRISES, INC.
By: /s/ Corey B. Lindley
Corey B. Lindley
Its: Chief Financial Officer
(Principal Financial and Accounting
Officer)
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EXHIBIT INDEX
2.1 Agreement and Plan of Merger and Reorganization dated
May 3, 1999 between and among Nu Skin Enterprises, Inc.,
Big Planet Holdings, Inc., Big Planet, Inc., Nu Skin
USA, Inc., Richard W. King, Kevin V. Doman and Nathan W.
Ricks. (Incorporated by reference to Exhibit 2.1 to the
Company's Current Report on Form 8-K filed on July 28,
1999).
2.2 First Amendment to Agreement and Plan of Merger and
Reorganization dated July 2, 1999 between and among Nu
Skin Enterprises, Inc., Big Planet Holdings, Inc., Big
Planet, Inc., Maple Hills Investment, Inc. (formerly Nu
Skin USA, Inc.), Richard W. King, Kevin V. Doman and
Nathan W. Ricks. (Incorporated by reference to Exhibit
2.2 to the Company's Current Report on Form 8-K filed on
July 28, 1999).
10.1 Note and Pledge Agreement with William McGlashan Jr.
10.2 Employment Agreement between Pharmanex and William
McGlashan Jr.
10.3 Agreement and Plan of Merger dated as of May 3, 1999 by
and among Nu Skin Enterprises, Inc., NSC Sub, Inc., NSG
Sub, Inc., NSM Sub, Inc., NFB Sub, Inc., Nu Skin Canada,
Inc., Nu Skin Guatemala, Inc., Nu Skin Guatemala, S.A.,
Nu Skin Mexico, Inc., Nu Skin Mexico, S.A. de C.V., Nu
Family Benefits Insurance Brokerage, Inc. and certain
stockholders. (Incorporated by reference to Exhibit 2.1
to the Company's Current Report on Form 8-K filed on
June 25, 1999).
10.4 First Amendment to Indemnification Limitation Agreement
dated as of May 3, 1999 between Nu Skin Enterprises,
Inc., Nu Skin USA, Inc., and the Stockholders of the
acquired entities identified therein (incorporated by
reference to exhibit 10.1 to the Company's Current
Report on Form 8- K filed on July 28, 1999).
27.1 Financial Data Schedule - Six Months Ended June 30, 1999
21
PROMISSORY NOTE
$1,500,000 June 23, 1999
FOR VALUE RECEIVED, the undersigned, William E. McGlashan, Jr., an
individual residing at 627 Marina Boulevard, San Francisco, CA 94123 agrees to
pay to the order of NU SKIN ENTERPRISES, INC., a Delaware corporation, at 75
West Center Street, Provo, Utah 84601, or at such other place as the holder (the
"Holder") of this Note may from time to time designate in writing, without
setoff, in lawful money of the United States of America, the principal sum of
ONE MILLION FIVE HUNDRED THOUSAND DOLLARS ($1,500,000) together with interest on
such principal sum and any other amounts due under this Note.
1. Interest. Commencing on the date of this Note and continuing until
all principal and interest due under this Note are paid in full, the outstanding
principal balance of this Note shall bear interest at the rate of 5.8% percent
per annum. Interest shall accrue daily and be calculated on the basis of a three
hundred sixty (360) day year and the actual number of days elapsed in any
partial calendar month.
2. Payment. Accrued interest shall be due and payable in semi-annual
installements due on the 15th day of April and October each year, commencing on
October 15, 1999. The entire principal balance of this Note, together with any
accrued and unpaid interest thereon and any other fees, costs or expenses
payable hereunder, shall be due and payable on the earlier to occur of the
following: (i) June 15, 2004, (ii) the 180th day following the date of the
undersigned's voluntary termination of employment with the Pharmanex, Inc.,
(iii) the one year anniversary of the date of the termination of the employment
of the undersigned by Pharmanex, Inc. if Pharmanex terminates such employment
other than for "cause" (as defined in the undersigned's employment agreement),
and (iv) the 30th day following the date of the termination of the employment of
the undersigned by Pharmanex, Inc. if Pharmanex terminates such employment for
"cause" (as defined in the undersigned's employment agreement); provided, in the
event of a "change in control" (as defined in Schedule A), this Note shall in no
event become due and payable prior to the third annual anniversary of the date
of such change in control. In addition, in the event the Loan to Value Ratio (as
defined in the Pledge Agreement) of the shares of Class A Common Stock securing
this Note ever exceeds the Applicable Limit as set forth below, then the
undersigned shall repay within 15 days of written notice from the Holder such
amount of principal and interest as may be necessary to lower the Loan to Value
Ratio to the Applicable Limit or less. For purposes hereof, the Applicable Limit
shall mean .83; provided, however the Applicable Limit shall be reduced to .50
if at any time the undersigned sells any shares of Class A Common Stock and does
not use 100% of such proceeds to reduce the principal amount of this Note.
Unless the Holder shall otherwise elect, each payment made under this Note shall
be applied first to costs and expenses incurred in connection with the
enforcement of this Note and interest due under this Note, and any balance shall
be applied to reduce the principal balance of this Note.
3. Late or Partial Payments. Any payment required under this Note, under
the "Pledge Agreement" as defined in Paragraph 5, or under any other agreement
entered into in connection with this Note that is not made when due, shall bear
interest payable on demand, both before and after judgment, at the rate of
fifteen percent (15.0%) per annum (the "Default Rate"). The acceptance by the
Holder of any payment that is less than the entire amount then due under this
Note shall be on account only and shall not constitute a waiver of the
obligation of the undersigned to pay such entire amount. The failure of the
undersigned to pay the entire amount then due under this Note shall be and
continue to be an event of
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default under this Note, notwithstanding the acceptance by the Holder of less
than such entire amount on account, and the Holder shall thereafter, until such
entire amount is paid (and notwithstanding acceptance by the Holder thereafter
of further sums on account or otherwise), be entitled to exercise all rights and
remedies provided for in this Note, the Pledge Agreement and the Mortgage on the
occurrence of an event of default under this Note. The acceptance by the Holder
of any amount due under this Note after the same is due shall not constitute a
waiver of the right to require prompt payment, when due, of all other amounts
due under this Note or to declare that an event of default has occurred under
this Note with respect to any other amount not paid when due.
4. Default. If any payment required under this Note is not made when
due, if an event of default occurs under the Pledge Agreement or Mortgage, the
undesigned fails to promptly grant a valid mortgage or trust deed on the
residential property to be purchased by the undersigned, if it is purchased by
the undersigned, or a material breach under any other agreement entered into in
connection with this Note occurs, the entire unpaid principal balance of this
Note, together with all accrued but unpaid interest and any late charges due
under this Note, shall, at the option of the Holder, become due and payable
without presentment, demand, protest or notice of any kind, all of which are
expressly waived by the undersigned and all endorsers, guarantors, sureties,
accommodation parties and other persons at any time liable for all or any
portion of the indebtedness evidenced by this Note, and shall thereafter earn
interest, both before and after judgment, at the Default Rate, provided,
however, that the Default Rate shall not apply until notice of an event of
default has been given by the Holder to the undersigned in the manner set forth
in the Pledge Agreement. Any forbearance, failure or delay by the Holder in
exercising any right or remedy under this Note or otherwise available to the
Holder shall not be deemed to be a waiver of such right or remedy, nor shall any
single or partial exercise of any right or remedy preclude the further exercise
of such right or remedy. The undersigned shall pay all reasonable costs and
expenses incurred by the Holder in connection with the enforcement of this Note
(regardless of the particular nature of such costs and expenses and whether
incurred before or after the initiation of suit or before or after judgment),
including, without limitation, court costs and attorneys' fees and costs.
5. Security. This Note is secured as provided in the Pledge Agreement
(the "Pledge Agreement"), dated of even date with this Note, executed by the
undersigned. In addition, this Note shall be secured by a mortgage or trust deed
(the "Mortgage") on any residential property owned by the undersigned or
hereafter acquired, and the undersigned agrees to execute a trust deed or
mortgage on such property in a form acceptable to the Holder. The Holder agrees
that Mortgage shall be subordinate to the trust deed or mortgage securing the
primary loan used to finance the purchase of such residential property.
6. Miscellaneous. The undersigned and all endorsers, guarantors,
sureties, accommodation parties and other persons at any time liable for all or
any portion of the indebtedness evidenced by this Note consent to all extensions
of time, renewals, waivers or modifications that may be granted by the Holder
with respect to the payment or other provisions of this Note, the release of all
or any portion of any security given in connection with this Note, with or
without substitution, and the release of any party liable under this Note. If
this Note is executed by more than one person, each of such persons shall be
jointly and severally liable for all of the obligations evidenced by this Note.
Time is of the essence with respect to all obligations of the undersigned under
this Note. The unenforceability or invalidity of any provision of this Note
shall not affect the enforceability or validity of any other provision of this
Note. The terms of this Note shall bind the undersigned and inure to the benefit
of the Holder and its respective heirs, successors, assigns and legal
representatives. The Holder may, in its sole discretion, assign part or all of
its interest
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under this Note at any time or from time to time. This Note shall be governed by
Utah law. This Note, the Pledge Agreement and any other written agreement
entered into in connection with this Note are a final expression of the
agreement between the Holder and the undersigned and may not be contradicted by
evidence of any alleged oral agreement.
THE UNDERSIGNED has executed and delivered this Note on the date set
forth below, to be effective as of the date first set forth above.
WILLIAM E. MCGLASHAN, JR.
Date: June ____, 1999 William E. McGlashan, Jr.
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Schedule A
For purposes of this Note, a change in control shall mean any of the following
events that occur during the term of this Note:
(1) An acquisition (other than directly from Nu Skin Enterprises, Inc.
(hereinafter the "Company") ) of any voting securities of the Company (the
"Voting Securities") by any "Person" (as the term person is used for purposes of
Section 13(d) or 14(d) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act")) immediately after which such Person has 'Beneficial Ownership'
(within the meaning of Rule 13d-3 promulgated under the Exchange Act) of more
than 50% of the combined voting power of the Company's then outstanding Voting
Securities; provided, however, in determining whether a Change in Control has
occurred, Voting Securities which are acquired in a "Non-Control Acquisition"
(as defined below) shall not constitute an acquisition which would cause a
Change in Control. A "Non-Control Acquisition" shall mean an acquisition by (A)
an employee benefit plan (or a trust forming a part thereof) maintained by (i)
the Company or (ii) any corporation or other Person of which a majority of its
voting power or its equity securities or equity interest is owned directly or
indirectly by the Company (a "Company Subsidiary"), (B) the Company or any
Company Subsidiary, (C) any Person in connection with a "Non-Control
Transaction" (as defined below), or (D) any holder of the Class B Common Stock
of the Company;
(2) Approval by stockholders of the Company of:
(A) A merger, consolidation or reorganization involving
the Company, unless
(i) the stockholders of the Company immediately
before such merger, consolidation or reorganization own, directly
or indirectly, immediately following such merger, consolidation
or reorganization, at least fifty percent (50%) of the combined
voting power of the outstanding voting securities of the
corporation resulting from merger or consolidation or
reorganization (the "Surviving Corporation") in substantially the
same proportion as their ownership of the Voting Securities
immediately before such merger, consolidation or reorganization;
or
(ii) the individuals who were members of the
Incumbent Board immediately prior to the execution of the
agreement providing for such merger, consolidation or
reorganization constitute at least two-thirds of the members of
the board of directors of the Surviving Corporation; or
(iii) one or more holders of the Class B Common
Stock own in the aggregate at least 50% of the combined voting
power of the outstanding voting securities of the Surviving
Corporation.
A transaction described in clauses (i), (ii) or (iii) shall herein be
referred to as a "Non-Control Transaction;"
(B) A complete liquidation or dissolution of the
Company; or
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(C) An agreement for the sale or other disposition
of all or substantially all of the assets of the Company to any
Person (other than a transfer to a Company Subsidiary) or to a
Company controlled by one or more holders of the Class B Common
Stock.
Notwithstanding the foregoing, a Change of Control shall not be deemed
to occur solely because any person (the "Subject Person") acquired Beneficial
Ownership of more than the permitted amount of the outstanding voting securities
as a result of the acquisition of voting securities by the Company which, by
reducing the number of voting securities outstanding, increases the proportional
number of shares beneficially owned by the Subject Person; provided, however,
that if a Change in Control would occur (but for the operation of this sentence)
as a result of the acquisition of voting securities by the Company, and after
such share acquisition by the Company, the Subject Person becomes the Beneficial
Owner of any additional voting securities which increases the percentage of the
then outstanding voting securities beneficially owned by the Subject Person,
then a Change in Control shall occur.
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STOCK PLEDGE AGREEMENT
THIS STOCK PLEDGE AGREEMENT (the "Pledge Agreement") is entered into as
of this 21st day of June, 1999, by and between Nu Skin Enterprises, Inc., a
Delaware corporation, and any of its successors, assigns, transferees, conveyees
or purchasers (the "Secured Party"), and William E.
McGlashan, Jr. (the "Pledgor").
RECITALS
WHEREAS, the Secured Party has agreed to make a loan to the Pledgor of
One Million Five Hundred Thousand Dollars ($1,500,000.00) (the "Loan"), and the
Pledgor has agreed to deliver to the Secured Party a promissory note,
substantially in the form attached hereto as Exhibit "A", in the amount of One
Million Five Hundred Thousand Dollars ($1,500,000.00) (the "Promissory Note");
WHEREAS, the Secured Party is willing to make the Loan only upon
receiving adequate security therefor, including, but not limited to, a pledge of
shares of the Secured Party's Class A common stock, par value $.001 per share
(the "Class A Common Stock"), by the Pledgor to the Secured Party as collateral
to secure the Pledgor's obligations under the Promissory Note; and
WHEREAS, in consideration of the Loan, the Pledgor desires to pledge
shares of Class A Common Stock owned by him as security for his obligations
under the Promissory Note.
NOW, THEREFORE, in consideration of the premises set forth above, the
mutual covenants and agreements set forth hereinbelow, and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
1. GRANT OF SECURITY INTEREST. The Pledgor hereby pledges to the Secured
Party and hereby grants to the Secured Party a security interest (the "Security
Interest") in all of the Pledgor's right, title and interest in and to the
following collateral (collectively, the "Collateral"):
(a) the One Hundred Sixty-Five Thousand Eight Hundred Five
(165,805) shares of Class A Common Stock that are evidenced by or included in
the stock certificates described on Exhibit "B" attached hereto or which are
held in the name of LaSalle National Bank, as escrow agent under the terms of
that certain Escrow Agreement dated October 16, 1999 to the extent of Plegor's
interest in such escrow shares, together with any substitutes therefor (the
"Pledged Shares");
(b) all dividends, cash, options, 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 and all of the Pledged Shares;
and
(c) all proceeds, products, rents and profits of or from any and
all of the foregoing.
2. SECURITY FOR PROMISSORY NOTE. This Pledge Agreement secures, and the
Collateral is collateral security for, the prompt payment of all obligations
under the Promissory Note when due or otherwise payable and the performance in
full of all obligations of the Pledgor as set forth in such Promissory Note and
this Agreement (collectively, the "Pledgor's Obligations").
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3. DELIVERY OF PLEDGED SHARES. Upon execution of this Pledge Agreement,
the Pledgor shall promptly deliver and transfer possession of the original
certificate(s) representing the Pledged Shares (the "Certificates") to the
Secured Party to be held by the Secured Party, or its appointed agent for and on
behalf of the Secured Party, until termination of this Pledge Agreement or
disposition of the Collateral as provided herein. The Secured Party acknowledges
that a portion of the securities are being held in escrow pursuant to the terms
of the Agreement and Plan of Merger and Reorganization by and among Secured
Party, Sage Acquisition Corporation and Generation Health Holdings, Inc. Pledgor
agrees to instruct the escrow agent to deliver any shares released from such
escrow accounts directly to Secured Party. The Certificates shall be accompanied
by duly executed assignments on stock powers in blank, substantially in the form
attached hereto as Exhibit "C". The Pledgor shall perform all acts as the
Secured Party may reasonably request so as to perfect and maintain a valid
security interest for the Secured Party in the Collateral including executing
any necessary UCC filings.
4. NO ASSUMPTION. Notwithstanding any of the foregoing provisions, this
Pledge Agreement shall not in any way be deemed to obligate the Secured Party,
any purchaser at any foreclosure sale under this Pledge Agreement, or any other
person or entity to assume any of the Pledgor's Obligations or any other
liability or obligation under this Pledge Agreement or the Promissory Note
unless the Secured Party, such purchaser or such other person or entity
otherwise expressly agrees in writing to assume any or all of the Pledgor's
Obligations or any such other liability or obligation. In the event of
foreclosure by the Secured Party, the Pledgor shall remain bound and obligated
to perform the Pledgor's Obligations and all other obligations of the Pledgor
under this Pledge Agreement and the Promissory Note, and neither the Secured
Party nor any other person or entity shall be deemed to have assumed any of the
Pledgor's Obligations or any such other obligation, except as provided in this
Section 4.
5. VOTING OF PLEDGED SHARES. Unless an Event of Default (as that term is
defined in Section 11 below) has occurred and is continuing:
(a) The Pledgor shall be entitled to exercise any and all voting
and other rights pertaining to all or any part of the Pledged Shares for any
purpose not inconsistent with the terms of this Pledge Agreement.
(b) The Secured Party or any agent of the Secured Party shall
execute and deliver, or cause to be executed and delivered, to the Pledgor all
proxies and other instruments reasonably requested by the Pledgor in writing for
the purpose of enabling the Pledgor to exercise the voting and other rights that
he is entitled to exercise pursuant to this Section 5.
6. REPRESENTATIONS AND WARRANTIES. The Pledgor represents and warrants
that:
(a) The Pledgor is the owner of the Pledged Shares and, with
respect to any Collateral to be acquired by the Pledgor on the Pledged Shares,
will be the owner of such Collateral, in each case free and clear of any liens
or encumbrances, except for the liens created by this Pledge Agreement and the
lien created by the Merger Agreement and the related escrow arrangement pursuant
to which a portion of the Pledged Shares are held. No effective financing
statement or other document or instrument similar in effect covering all or any
part of the Collateral is on file in any recording or filing office, except such
as may have been recorded or filed in favor of the Secured Party relating to
this Pledge Agreement.
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(b) The execution and delivery of this Pledge Agreement and the
delivery of the Certificates to the Secured Party create a valid and perfected
first priority lien on and security interest in the Collateral, enforceable
against all third parties and securing the performance of the Pledgor's
Obligations, and all filings and other actions necessary or desirable to perfect
and protect such liens and security interests have been duly made or taken by
the Pledgor.
(c) Except as otherwise expressly contemplated by this Pledge
Agreement, all of the Certificates, instruments and other documents
constituting, evidencing or representing Collateral shall be promptly delivered
to the Secured Party upon execution of this Pledge Agreement.
(d) The Pledged Shares are duly authorized, validly issued, fully
paid and non-assessable.
(e) Other than the Stockholders Letter dated as of October 6, 1998
by and among Secured Party and Pledgor, there is no agreement or arrangement
restricting the transfer of the Pledged Shares or the transfer of any other
Collateral, except as provided in this Pledge Agreement.
(f) There is no suit, proceeding or other legal action or
proceeding against the Pledgor or the Certificates that involves or affects, or
that may involve or affect, any of the Collateral.
7. COVENANTS OF PLEDGOR.
(a) Affirmative Covenants. So long as any of the Pledgor's
Obligations shall remain unpaid or unperformed, the Pledgor shall do the
following at the Pledgor's own cost and expense:
(i) deliver to the Secured Party promptly upon receipt all
proceeds of the Pledged Shares or other Collateral including all notes,
certificates, instruments and other documents constituting, evidencing or
representing any of the Collateral, duly endorsed or accompanied by instruments
of transfer or assignment on stock powers duly executed in blank, in each case
with signatures guaranteed and otherwise in form and substance satisfactory to
the Secured Party;
(ii) execute and file such financing or continuation
statements, and such amendments to those statements, and such other documents,
instruments or notices, as may be necessary or desirable, or as the Secured
Party may request, in order to perfect and preserve the pledges, liens and the
Security Interest granted or purported to be granted to the Secured Party by
this Pledge Agreement;
(iii) promptly notify the Secured Party in writing of any lien
or claim made or asserted against any of the Collateral and take all steps
necessary or proper, or, in the judgment of the Secured Party, advisable, to
preserve all of the Secured Party's rights in the Collateral;
(iv) advise the Secured Party promptly, in sufficient written
detail of the occurrence of any event that could materially and adversely affect
the value of the Collateral or the validity or priority of the liens and the
Security Interest granted to the Secured Party by this Pledge Agreement;
(v) comply with all rules and regulations of each governmental
body or agency and all decisions, rulings, orders and awards of each arbitrator
applicable to the Collateral or any part of the Collateral or to the Pledgor;
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(vi) promptly pay and discharge before they become delinquent,
all taxes assessed, levied or imposed upon or relating to, and all claims
against the Collateral (or any part of the Collateral) or the Pledgor, if the
failure to so pay could adversely affect the value of the Collateral or the
validity or priority of the liens or the Security Interest granted to the
Secured Party by this Pledge Agreement, except those contested in good faith and
for which adequate reserves are maintained;
(vii) give the Secured Party fifteen (15) days prior written
notice of any change in the Pledgor's chief place of business, chief executive
office or residence, or the office where the Pledgor keeps his records regarding
the Collateral;
(viii)Pledgor agrees that in the event any amounts are paid by
Pledgor to the Secured Party pursuant to this Pledge Agreement or the Promissory
Note, Pledgor's liability hereunder and thereunder shall continue in full force
and effect in the event that all or any part of any such payment is thereafter
recovered as a preference or fraudulent transfer under any applicable bankruptcy
or insolvency law; and
(ix) Pledgor agrees that in the event the Loan to Value Ratio
as defined in Section 7(b) below ever exceeds the Applicable Limit, Pledgor
shall within 15 days of written notice from Secured Party repay such amount of
accrued interest and principal as may be necessary to cause the Loan to Value
Ratio to decrease to the Applicable Limit or less, or provide Secured Party with
additional Collateral that is acceptable to Secured Party in its sole discretion
and that provides sufficient additional security to secure the Pledgor's
Obligations, as determined by Secured Party in its sole discretion. For purposes
of this Agreement the "Applicable Limit" shall be .833; provided, however, in
the event the Pledgor sells any shares of Class A Common Stock and does not use
100% of the proceeds to reduce the amount of principal and interest payable
under the Promissory Note, whether due or not, then the Applicable Limit shall
be reduced to .50.
(b) Negative Covenants. So long as any of the Pledgor's Obligations
shall remain unpaid or unperformed, the Pledgor shall not do any of the
following without the prior written approval of the Secured Party:
(i) transfer any of the Collateral, whether by operation of
law or otherwise; provided, however, the Pledgor may sell and transfer shares of
the Class A Common Stock in the event (a) that the Loan to Value Ratio (as
defined below) is less than .50, after giving effect to the proposed transfer or
sale of shares, or (b) such transfer is a bona fide sale of such shares for fair
market value to an unaffiliated purchaser, the Loan to Value Ratio remains below
.83, and 100% of the proceeds from such sale are used to reduce the principal
and interest payable under the Promissory Note, whether due or not. Provided the
above Loan to Value Ratio requirements are met, Pledgor may request the release
of pledged shares to Pledgor for sale, and the shares shall be released
promptly, provided that Secured Party is satisfied with the mechanism in place
to deliver any required proceeds of a sale to Secured Party.
(ii) create, incur, assume or suffer to exist any lien on or
in respect of any of the Collateral, except pursuant to this Pledge Agreement or
the Promissory Note;
(iii) use, store or keep any of the Collateral or records
relating to the Collateral in any location other than those expressly permitted
by this Pledge Agreement; or
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(iv) take any action in connection with any of the Collateral
that could materially and adversely affect the value of the Collateral (or any
part thereof) or the validity or priority of the liens or the Security Interest
granted to the Secured Party by this Pledge Agreement.
(v) Pledgor shall not challenge or institute any proceedings,
or allow the institution of any proceedings, to challenge the validity, binding
effect or enforceability of this Pledge Agreement.
For purposes of this Agreement, Loan to Value Ratio shall mean the quotient of
(A) the aggregate amount of the Pledgor's Obligations outstanding as of the date
of the determination, including any and all accrued interest, fees, costs and
expenses, divided by (B) the product of the average closing sales price of the
Class A Common Stock for the twenty consecutive trading days immediately
preceding the date of the determination as reported on the New York Stock
Exchange, multiplied by the number of shares of Class A Common Stock held as
collateral hereunder as of the date of the determination of the Loan to Value
Ratio (after giving effect to any proposed transfer or sale of shares).
8. GRANT OF POWER OF ATTORNEY. The Pledgor and his respective successors
and assigns hereby irrevocably constitute and appoint each of M. Truman Hunt and
Corey B. Lindley, and their respective successors, as the Pledgor's true and
lawful attorney-in-fact, to act in the name, place and stead of the Pledgor,
with full power of substitution, to take any action and to make, execute,
convert to, swear to, acknowledge, record and file any financing statements,
certificates, documents or instruments of any character or nature that the
Secured Party may deem necessary or desirable fully to carry out the provisions
of this Pledge Agreement, including, without limitation:
(a) to ask, demand, collect, sue for, recover, compound, receive
and give acquittance and receipts for monies due and to become due under or in
respect of the Collateral;
(b) to receive, endorse and collect all documents or instruments
made payable to the Pledgor representing any payment of profits, dividends or
any other distribution in respect of the Collateral;
(c) to file any claims or take any action or institute any
proceedings that the Secured Party may deem necessary or desirable for the
collection of any of the Collateral or otherwise to enforce the rights of the
Secured Party with respect to any of the Collateral;
(d) to execute and file any financing statements that the Secured
Party deems necessary or appropriate;
(e) to do, at the Secured Party's option and the Pledgor's sole
cost and expense, at any time or from time to time, all acts and things that the
Secured Party deems reasonably necessary or convenient to protect, preserve or
realize upon the Collateral (or any part thereof) and the Secured Party's liens
or security interest therein in order to effect the intent of this Pledge
Agreement, all as fully and effectively as Pledgor might do; and
(f) to transfer the Collateral and related stock certificates to
the Secured Party and transfer the Collateral on the stock records of the
Secured Party to the Secured Party.
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The power of attorney granted herein is coupled with an interest and is
irrevocable.
9. SECURED PARTY MAY PERFORM. If the Pledgor fails to perform any
agreement contained herein, the Secured Party may itself perform, or cause the
performance of, such agreement, and all costs and expenses of the Secured Party
incurred in connection therewith shall promptly be payable to the Secured Party
by the Pledgor under Section 12 below.
10. STANDARD OF CARE.
(a) The powers conferred on the Secured Party hereunder are solely
to protect its interests in the 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 the Collateral in its possession, meeting its obligations under
Section 5 above, and the accounting for any monies actually received by it
hereunder, the Secured Party shall have no duty as to the Collateral or as to
the taking of any necessary steps to preserve rights against prior parties or
any other rights pertaining to the Collateral. The Secured Party shall be deemed
to have exercised reasonable care in the custody and preservation of the
Collateral in its possession if such Collateral is accorded treatment
substantially equal to that accorded by the Secured Party to its own property of
a similar nature.
(b) Whenever this Pledge Agreement or any other document,
instrument or agreement contemplated hereby provides that the Secured Party is
permitted or required to make a decision in the "discretion" or the "sole
discretion" (or other similar terms) of the Secured Party, the Secured Party
shall be entitled to consider only such interests and factors as it desires, and
the Secured Party shall have no duty or obligation to give any consideration to
any interest of or factors affecting the Pledgor or any other person or entity.
11. REMEDIES.
(a) In the event of
(i) an "Event of Default" as defined in the Promissory
Note, or
(ii) any breach of any representation, warranty,
covenant or obligation set forth in this Pledge
Agreement that is not cured within 20 days after written
notice from the Secured Party (each of the events set
forth in (i) and (ii) is hereinafter referred to as an
"Event of Default"),
then, in the sole discretion of the Secured Party, without demand or notice, all
or any part of any indebtedness evidenced by the Promissory Note shall become
immediately due and payable. Upon the occurrence of an Event of Default, the
Secured Party may exercise all rights to which it is entitled under this Pledge
Agreement or which are otherwise available to it and exercise all the rights and
remedies of a secured party upon default under the Uniform Commercial Code as in
effect in any relevant jurisdiction (the "UCC") (whether or not the UCC applies
to the affected Collateral). Without limiting the generality of the foregoing,
the Secured Party may immediately transfer into or register in its name
instruments, certificates or documents evidencing or constituting all or part of
the Collateral without notice to the Pledgor and immediately apply the
Collateral against the Pledgor's Obligations and the Secured Party's
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costs of collection using a value equal to 80% of the average per share closing
sale price of the Class A Common Stock as reported on the New York Stock
Exchange for the twenty consecutive trading days ending the trading day
immediately prior to such transfer until the Pledger's Obligations and the
Secured Party's costs of collection are satisfied in full, notwithstanding any
rights Pledgor may have under the UCC, all of which the Pledgor hereby waives.
The Pledgor hereby irrevocably consents to any such transfer. Without limiting
any of the foregoing, the Secured Party may in its sole discretion, without
notice, demand for performance or other demand, or advertisement (all of each
such notices, demands or advertisement are hereby expressly waived) collect,
receive, appropriate and realize upon the Collateral and/or sell, assign, grant
an option or options to purchase or otherwise dispose of the Collateral or any
part thereof in one or more parcels at public or private sale, at or on any
exchange or broker's board or at any of the Secured Party's offices or
elsewhere, for cash, on credit or for future delivery without assumption of
credit risk, free of any claims or rights, at such time or times and at such
price or prices and upon such other terms and conditions as the Secured Party
may deem commercially reasonable, irrespective of the impact of any such sales
on the market price of the Collateral. The Secured Party may be the purchaser of
any or all of the Collateral at any such sale at a price equal to 80% of the
average per share closing sale price of the Class A Common Stock as reported on
the New York Stock Exchange for the twenty consecutive trading days ending the
trading day immediately prior to the date of such sale and the Secured Party,
for itself or on behalf of any other person or entity, shall be entitled, for
the purpose of bidding and making settlement or payment of the purchase price
for all or any part of the Collateral sold at any such sale, to use and apply
any of the Pledgor's Obligations at a price equal to 80% of the average per
share closing sale price of the Class A Common Stock as reported on the New York
Stock Exchange for the twenty consecutive trading days ending the trading day
immediately prior to the date of such sale as a credit on account of the
purchase price for any Collateral payable by the Secured Party 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 the Pledgor, and the Pledgor hereby
waives all rights of redemption, stay and appraisal that the Pledgor now has or
may at any time in the future have under any rule of equity, law or statute now
existing or hereafter enacted. The Pledgor agrees that, to the extent notice of
sale shall be required by applicable law, at least ten (10) days notice to the
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. The Secured
Party shall not be obligated to make any sale of the Collateral regardless of
whether notice of sale has been given. The Secured Party may adjourn any public
or private sale from time to time by announcement at the time and place fixed
therefor in the notice thereof, and such sale may, without further notice, be
made at the time and place to which it was so adjourned. The Pledgor hereby
waives any and all rights and claims against the Secured Party arising because
of the value of 80% of the average per share closing sale price of the Class A
Common Stock as reported on the New York Stock Exchange for the twenty
consecutive trading days ending the trading day immediately prior to such
transfer being used by the Secured Party in applying the Collateral against the
Pledgor's Obligations and related costs of collection or because the price at
which any of the Collateral may have been sold at a private sale was less than
the price that might have been obtained at a public sale, even if the Secured
Party accepts the first offer received and does not offer such Collateral to
more than one offeree. Without limiting the generality of the foregoing, the
Secured Party may at any time appropriate and apply (directly or by way of
set-off) to the payment of the Pledgor's Obligations all amounts representing
dividends or distributions then or thereafter in the possession of the Secured
Party.
(b) The Pledgor recognizes that, by reason of certain prohibitions
contained in the Securities Act of 1933, as amended (the "Securities Act"), and
applicable state securities laws, rules and
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regulations, the Secured Party may be compelled, with respect to any sale of all
or any part of the Collateral conducted without prior registration or
qualification of such Collateral under the Securities Act and such state
securities laws, rules and regulations, to limit purchases to those persons or
entities who will agree, among other things, to acquire the Collateral for their
own account, for investment and not with a view to the distribution or resale
thereof. The Pledgor acknowledges that any such private sales may be at prices
and on terms and conditions less favorable than those obtainable through a
public sale without such restrictions (including, without limitation, a public
offering made pursuant to a registration statement filed under the Securities
Act) and, notwithstanding such circumstances, the Pledgor agrees that any such
private sale shall be deemed to have been made in a commercially reasonable
manner and that the Secured Party shall have no obligation to engage in public
sales and shall have no obligation to delay the sale of any of the Collateral
for the period of time necessary to permit the Pledgor to register any of the
Pledged Shares that constitute a portion of the Collateral or any other item of
Collateral for a form of public sale requiring registration under the Securities
Act or under applicable state securities laws, rules and regulations, even if
the Pledgor would, or should, agree to so register those Pledged Shares or other
items of Collateral.
12. APPLICATION OF PROCEEDS. Except as expressly provided elsewhere in
this Pledge Agreement, all proceeds received by the Secured Party in respect of
any sale of, collection from, or other realization upon all or any part of the
Collateral may, in the sole discretion of the Secured Party, be held by the
Secured Party as Collateral for, or then, or at any other time thereafter, be
applied in full or in part by the Secured Party against, the Pledgor's
Obligations in the following order of priority:
(a) to pay or reimburse in full the costs and expenses of such
sale, collection or other realization, including, without limitation, reasonable
compensation to the Secured Party and its agents and counsel, and all other
costs, expenses, obligations and other liabilities incurred or paid by the
Secured Party in connection therewith, and all amounts for which the Secured
Party is entitled to indemnification hereunder and all advances made by the
Secured Party hereunder for the account of the Pledgor, and to the payment of
all costs and expenses paid or incurred by the Secured Party in connection with
the exercise of any right or remedy hereunder, all in accordance with this
Section 12;
(b) to pay the Pledgor's Obligations; and
(c) to pay to or upon the order of the Pledgor, or to whomsoever
may be lawfully entitled to receive the same or as a court of competent
jurisdiction may direct, the balance of the proceeds.
13. INDEMNITY AND EXPENSES.
(a) The Pledgor shall indemnify the Secured Party and its Related
Persons (as that term is defined below) (individually, an "Indemnified Person"
and, collectively, the "Indemnified Persons") against all losses, costs,
expenses (including attorneys' fees and expenses), judgments, fines, amounts
paid in settlement and other liabilities incurred, suffered or paid by the
Indemnified Persons (collectively, "Indemnified Expenses") in connection with
any threatened, pending or completed claim, action, suit, complaint,
investigation, inquiry or other proceeding, whether civil, criminal,
administrative or investigative, that is or was brought or threatened against
any Indemnified Person by reason of or in connection with actions taken or
omitted to be taken by one or more Indemnified Persons in the performance of the
exercise of the rights and powers or performance of the obligations of the
Secured Party
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under this Pledge Agreement or otherwise in connection with this Pledge
Agreement, except that the Pledgor shall have no liability under this Section 13
with respect to any Indemnified Expenses to the extent the liability results
from the fraud or willful misconduct of the Indemnified Person, as determined by
a final judgment or final adjudication. For purposes of this Pledge Agreement,
the term "Related Persons" means, with respect to any person, any other person
that directly or indirectly controls or is controlled by or is under common
control with the specified person and the direct or indirect controlling
persons, principals, partners, trustees, stockholders, officers, directors,
employees, independent contractors and agents for or of any of the foregoing and
the attorneys-in-fact referenced in Section 8 hereof.
(b) To the fullest extent permitted by applicable law, the Pledgor
shall, from time to time, advance Indemnified Expenses to an Indemnified Person
prior to the final disposition of the action upon receipt by the Pledgor of an
undertaking by or on behalf of the Indemnified Person to repay such amount if it
shall be determined that the Indemnified Person is not entitled to be
indemnified as authorized in this Section 13.
(c) The Pledgor shall pay to the Secured Party upon demand the
amount of any and all costs and expenses, including, without limitation, the
reasonable fees and expenses of its counsel and of any experts and agents, that
the Secured Party may incur in connection with (i) the administration of this
Pledge Agreement or the Promissory Note after a default, (ii) the sale of,
collection from, or other realization upon, any of the Collateral, (iii) the
exercise or enforcement of any of the rights of the Secured Party hereunder or
under the Promissory Note, or (iv) the failure by the Pledgor to perform or
observe any of the provisions hereof or of the Promissory Note.
14. WAIVERS BY PLEDGOR, ETC.
(a) The Pledgor agrees that the Pledgor's Obligations hereunder are
irrevocable, absolute, independent and unconditional and shall not be affected
by any circumstance that constitutes a legal or equitable discharge of a
guarantor or surety other than indefeasible payment in full of the Pledgor's
Obligations. In furtherance of the foregoing and without limiting the generality
thereof, the Pledgor agrees as follows:
(i) The Secured Party, for itself or on behalf of any other
person or entity, may from time to time, without notice or demand and without
affecting the validity or enforceability of this Pledge Agreement and without
giving rise to any limitation, impairment or discharge of the Pledgor's
liability or obligations hereunder, (A) create, increase, renew, extend,
accelerate or otherwise change the time, place, manner or terms of payment of
the Pledgor's Obligations, (B) settle, compromise, release or discharge, or
accept or refuse any offer of performance with respect to, or substitutions for,
the Pledgor's Obligations or any agreement relating thereto and/or subordinate
the payment of the same to the payment of any other obligation, (C) request and
accept guaranties of any of the Pledgor's Obligations and take and hold other
security for the payment of the Pledgor's Obligations, (D) release, exchange,
compromise, subordinate or modify, with or without consideration, any other
security for payment of the Pledgor's Obligations, any guaranties of the
Pledgor's Obligations, or any other obligation of any person or entity with
respect to the Pledgor's Obligations, (E) enforce and apply any other security
now or hereafter held by or for the benefit of the Secured Party or any other
person or entity in respect of the Pledgor's Obligations and direct the order or
manner of sale thereof, or the exercise of any other right or remedy that the
Secured Party or any other person or entity, may have against any such security,
as the Secured Party in its sole discretion may
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determine consistent with the terms of any applicable security agreement,
including, without limitation, application of the Collateral against and in
satisfaction the Pledgor's Obligations valuing the Collateral at a price equal
to 80% of the average per share closing sale price of the Class A Common Stock
as reported on the New York Stock Exchange for the twenty consecutive trading
days ending the trading day immediately prior to the date of the applicable
event, foreclosure on any such security pursuant to one or more judicial or
nonjudicial sales, whether or not every aspect of any such sale is commercially
reasonable, and even though such action operates to impair or extinguish any
right of reimbursement or subrogation or other right or remedy of the Pledgor
against another party or any other security for the Pledgor's Obligations (and
the Pledgor expressly acknowledges that such exercise of a right or remedy that
impairs or extinguishes the Pledgor's right of reimbursement or subrogation
would create a possible defense by the Pledgor against any liability hereunder,
but the Pledgor expressly and knowingly waives any such defense), and (F)
exercise any other rights available to the Secured Party or any other person or
entity under the Promissory Note, at law or in equity; and
(ii) this Pledge Agreement and the obligations of the Pledgor
hereunder shall be valid and enforceable and shall not be subject to any
limitation, impairment or discharge for any reason (other than indefeasible
payment and performance in full of the Pledgor's Obligations), including,
without limitation, the occurrence of any of the following, whether or not the
Pledgor shall have had notice or knowledge of any of them: (A) any failure to
assert or enforce or any agreement not to assert or enforce, or the stay or
enjoining, by order of court, by operation of law or otherwise, of the exercise
or enforcement of, any claim or demand or any right, power or remedy with
respect to the Pledgor's Obligations or any agreement relating thereto, or with
respect to any guaranty of or other security for the payment of the Pledgor's
Obligations, (B) any waiver, amendment or modification of, or any consent to
departure from, any of the terms or provisions (including, without limitation,
provisions relating to events of default) of the Promissory Note, this Pledge
Agreement or any agreement, document or instrument executed pursuant hereto or
thereto, or of any guaranty or other security for the Pledgor's Obligations, (C)
the Pledgor's Obligations, or any agreement relating thereto, at any time being
found to be illegal, invalid or unenforceable in any respect, (D) the
application of payments received from any source to the payment of indebtedness
other than the Pledgor's Obligations, even though the Secured Party or any other
person or entity might have elected to apply such payment to any part or all of
the Pledgor's Obligations, (E) any failure to perfect or continue perfection of
a security interest in any other collateral that secures any of the Pledgor's
Obligations, (F) any defenses, set-offs or counterclaims that the related
obligor may allege or assert against the Secured Party in respect of the
Pledgor's Obligations, including, without limitation, failure of consideration,
breach of warranty, payment, statute of frauds, statute of limitations, accord
and satisfaction, and usury, and (G) any other act, thing or omission, or delay
to do any other act or thing, that may or might in any manner or to any extent
vary the risk of the Pledgor obligors in respect of the Pledgor's Obligations.
(b) The Pledgor hereby waives for the benefit of the Secured Party:
(i) any right to require the Secured Party, as a condition of
payment or performance by the Pledgor, to (A) proceed against any guarantor of
the Pledgor or any other person or entity, (B) proceed against or exhaust any
other security held from any guarantor of the Pledgor's Obligations or any other
person or entity, (C) proceed against or have resort to any balance of any
deposit account or credit on the books of the Secured Party or any other person
or entity, or (D) pursue any other remedy in the power of the Secured Party or
any other person or entity whatsoever;
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(ii) any defense arising by reason of the incapacity, lack of
authority or any disability or other defense, including, without limitation, any
defense based on or arising out of the lack of validity or the unenforceability
of the Pledgor's Obligations or any agreement or instrument relating thereto or
by reason of the cessation of the liability;
(iii) any defense based upon any statute or rule of law that
provides that the obligation of a surety must be neither larger in amount nor in
other respects more burdensome than that of the principal;
(iv) any defense based upon the errors or omissions of the
Secured Party or any other person or entity in the administration of the
Pledgor's Obligations, except behavior that amounts to fraud or wilful
misconduct;
(v) (A) any principles or provisions of law, statutory or
otherwise, that are or might be in conflict with the terms of this Pledge
Agreement and any legal or equitable discharge of the Pledgor's Obligations
hereunder, (B) the benefit of any statute of limitations affecting the Pledgor's
liability hereunder or the enforcement hereof, (C) any rights to set-offs,
recoupments and counterclaims, and (D) promptness, diligence and any requirement
that the Secured Party or any other person or entity protect, secure, perfect or
insure any other lien or security interest or any property subject thereto;
(vi) notices, demands, presentments, protests, notices of
protest, notices of dishonor and notices of any action or inaction, notices of
default under the Promissory Note or any agreement or instrument related
thereto, notices of any renewal, extension or modification of the Pledgor's
Obligations or any agreement related thereto, notices of any extension of credit
to the Pledgor and notices of any of the matters referred to in Section 14(b)(v)
above and any right to consent to any thereof; and
(vii) to the fullest extent permitted by applicable law, any
defenses or benefits that may be derived from or afforded by law that limit the
liability of or exonerate guarantors or sureties in general, or that may
conflict with the terms of this Pledge Agreement.
15. CONTINUING SECURITY INTEREST; TRANSFER OF OBLIGATIONS.
(a) This Pledge Agreement shall create a continuing security
interest in the Collateral and shall (i) remain in full force and effect until
the indefeasible payment and performance in full of the Pledgor's Obligations,
(ii) be binding upon the Pledgor and his successors and assigns, and (iii)
inure, together with the rights and remedies of the Secured Party hereunder, to
the benefit of the Secured Party and its successors, assigns, transferees,
conveyees and purchasers. Without limiting the generality of the foregoing
clause (iii), the Secured Party may assign or otherwise transfer totally to
another person or entity all or any part of the Secured Party's right, title and
interest in the Pledgor's Obligations, and such other person or entity shall
thereupon become vested with all the benefits in respect thereof granted to the
Secured Party herein or otherwise.
(b) Upon the indefeasible payment and performance in full of the
Pledgor's Obligations, the liens and the Security Interest granted hereby shall
terminate and all rights to the Collateral shall revert to the Pledgor. Upon any
such termination, the Secured Party shall, at the Pledgor's expense, execute and
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deliver to the Pledgor such documents and instruments as the Pledgor shall
reasonably request to evidence such termination.
16. FAILURE OR INDULGENCE NOT WAIVER; REMEDIES CUMULATIVE. No failure or
delay on the part of the 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 Pledge Agreement are cumulative to, and not
exclusive of, any rights or remedies otherwise available.
17. COSTS AND EXPENSES. The Pledgor shall pay all reasonable costs and
expenses, including, without limitation, reasonable attorneys' fees and
expenses, incurred by or on behalf of the Secured Party in the enforcement of
this Pledge Agreement and the Promissory Note.
18. NOTICES. All notices, requests, demands, claims and other
communications hereunder shall be in writing. Any notice, request, demand, claim
or other communication hereunder shall be deemed duly given two (2) business
days after being sent by registered or certified mail, return receipt requested,
postage prepaid, and addressed to the intended recipient as set forth below:
o If to the Pledgor:
William E. McGlashan, Jr.
627 Marina Blvd.
San Francisco, CA 94123
Telephone: (415) 931-8836
Facsimile: (415) 931-8839
o If to the Secured Party:
Nu Skin Enterprises, Inc.
75 West Center Street
Provo, Utah 84601
Attention: M. Truman Hunt
Telephone: (801) 345-5060
Facsimile: (801) 345-3099
Any party may send any notice, request, demand, claim or other communication
hereunder to the intended recipient at the address set forth above using any
other means (including personal delivery, expedited courier, messenger service,
telecopy, ordinary mail or electronic mail). Any party may change the address to
which notices, requests, demands, claims and other communications hereunder are
to be delivered by giving the other party notice in the manner herein set forth.
19. NO WAIVERS; REMEDIES; SPECIFIC PERFORMANCE.
(a) No failure or delay by any party in exercising any right, power
or privilege under this Pledge Agreement shall operate as a waiver of the right,
power or privilege. A single or partial exercise
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of any right, power or privilege shall not preclude any other or further
exercise of the right, power or privilege or the exercise of any other right,
power or privilege hereunder. The rights and remedies provided in this Pledge
Agreement shall be cumulative and not exclusive of any rights or remedies
provided by applicable law.
(b) In view of the uniqueness of the transactions contemplated
hereby, the parties agree that the Secured Party would not have an adequate
remedy at law for money damages in the event that this Pledge Agreement is not
performed by the Pledgor in accordance with its terms, and therefore the parties
agree that the Secured Party shall be entitled to specific enforcement of the
terms of this Pledge Agreement in addition to any other remedy to which it may
be entitled, at law or in equity.
20. AMENDMENTS, ETC. No amendment, modification, termination or waiver
of any provision of this Pledge Agreement, and no consent to any departure by a
party to this Pledge Agreement from any provision hereof, shall be effective
unless it shall be in writing and signed and delivered by the other parties to
this Pledge Agreement, and then it shall be effective only in the specific
instance and for the specific purpose for which it is given.
21. SUCCESSORS AND ASSIGNS.
(a) As further provided in Section 15, the Secured Party may assign
or transfer its rights and delegate its obligations under this Pledge Agreement;
such assignee or transferee shall accept those rights and assume those
obligations for the benefit of the Secured Party in writing in form reasonably
satisfactory to the Pledgor. Thereafter, without any further action by any
person or entity, all references in this Pledge Agreement to "Secured Party",
and all comparable references, shall be deemed to be references to the assignee
or transferee, but the Pledgor shall not be released from any obligation or
liability under this Pledge Agreement.
(b) Except as provided in Section 21(a) above, no party may assign
or transfer its rights under this Pledge Agreement. Any delegation in
contravention of this Section 21(b) shall be void ab initio and shall not
relieve the delegating party of any duty or obligation under this Pledge
Agreement.
(c) The provisions of this Pledge Agreement shall be binding upon
and inure to the benefit of the parties to this Pledge Agreement and their
respective successors and permitted assigns, transferees, conveyees and
purchasers.
22. GOVERNING LAW. This Pledge Agreement shall be governed by and
construed in accordance with the internal laws of the State of Utah. All rights
and obligations of the parties hereto shall be in addition to and not in
limitation of those provided by applicable law.
23. COUNTERPARTS; EFFECTIVENESS. This Pledge Agreement may be signed in
any number of counterparts, each of which shall be deemed to be an original,
with the same effect as if all signatures were on the same instrument.
24. SEVERABILITY OF PROVISIONS. Any provision of this Pledge Agreement
that is prohibited or unenforceable in any jurisdiction shall, as to that
jurisdiction, be ineffective to the extent of the prohibition or
unenforceability without invalidating the remaining provisions of this Pledge
Agreement
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or affecting the validity or enforceability of the prohibited or unenforceable
provision in any other
jurisdiction.
25. HEADINGS AND REFERENCES. Section headings in this Pledge Agreement
are included herein for convenience of reference only and do not constitute a
part of this Pledge Agreement for any other purpose. References to parties and
Sections in this Pledge Agreement are references to the parties to or the
Sections of this Pledge Agreement, as the case may be, unless the context shall
require otherwise.
26. ENTIRE AGREEMENT. Except as otherwise specifically provided in this
Section 26, this Pledge Agreement and the documents and instruments referenced
herein embody the entire agreement and understanding of the respective parties
and supersedes all prior agreements and understandings with respect to the
subject matter of those documents. The Pledgor and the Secured Party shall
remain subject to the Promissory Note in accordance with the terms thereof.
27. SURVIVAL. Except as otherwise specifically provided in this Pledge
Agreement, each representation, warranty or covenant contained herein or made
pursuant to this Pledge Agreement shall survive the execution of this Pledge
Agreement and shall remain in full force and effect, notwithstanding any
investigation or notice to the contrary or any waiver by any other party of a
related condition precedent to the performance by such other party of an
obligation under this Pledge Agreement.
28. EXCLUSIVE JURISDICTION. Each of the Pledgor and the Secured Party
(a) agrees that any legal action with respect to this Pledge Agreement shall be
brought exclusively in the courts of the State of Utah or in the United States
District Court for the District of Utah, (b) accepts for itself and in respect
of its property, generally and unconditionally, the jurisdiction of those
courts, and (c) irrevocably waives any objection, including, without limitation,
any objection to the laying of venue or based on the grounds of forum non
conveniens, that it may now or hereafter have to the bringing of any legal
action in those jurisdictions; provided, however, that each of the Pledgor and
the Secured Party may assert in a legal action in any other jurisdiction or
venue each mandatory defense, third party claim or similar claim that, if not so
asserted in such action, may not be asserted in an original legal action in the
courts referred to in clause (a) of this Section 28.
29. WAIVER OF JURY TRIAL. Each party waives any right to a trial by jury
in any action to enforce or defend any right under this Pledge Agreement or any
amendment, instrument, document or agreement delivered, or that in the future
may be delivered, in connection with this Pledge Agreement, and agrees that any
action shall be tried before a court and not before a jury.
30. NON RECOURSE AGAINST SECURED PARTY CONTROLLING PERSONS. No recourse
under this Pledge Agreement shall be had against any "controlling person"
(within the meaning of Section 20 of the Exchange Act) of the Secured Party or
the shareholders, directors, officers, employees, agents and affiliates of the
Secured Party or such controlling persons, whether by the enforcement of any
assessment or by any legal or equitable proceeding, or by virtue of any rule or
regulation, it being expressly agreed and acknowledged that no personal
liability whatsoever shall attach to, be imposed on or otherwise be incurred by
such controlling person, shareholder, director, officer, employee, agent or
affiliate, as such, for any obligations of the Secured Party under this Pledge
Agreement or the Promissory Note or for any claim based on, in respect of or by
reason of, such obligations or their creation.
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31. SPOUSAL CONSENT. The Pledgor's spouse shall execute and deliver the
Spousal Consent form substantially in the form attached hereto as Exhibit "D".
Such executed form shall be delivered to the Secured Party on the date hereof.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
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IN WITNESS WHEREOF, the undersigned have executed this Pledge Agreement
as of the date first above written.
THE PLEDGOR: THE SECURED PARTY:
WILLIAM E. MCGLASHAN, JR. NU SKIN ENTERPRISES, INC.
________________________________ By:__________________________
Its:_________________________
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AMENDED AND RESTATED
WILLIAM MCGLASHAN, JR.
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT (the "Agreement") dated as of June 21, 1999,
between PHARMANEX, INC., a Delaware corporation ("Company"), and WILLIAM
MCGLASHAN, JR. ("Executive").
WHEREAS, the Company is a wholly owned subsidiary of Generation
Health Holdings, Inc.;
WHEREAS, in connection with the transactions contemplated by that
certain Agreement and Plan of Merger and Reorganization between Generation
Health Acquisitions, Corp., Nu Skin Enterprises, Inc. ("Parent") and Generation
Health Holdings, Inc., dated as of October 5, 1998 ("Merger Agreement"), the
Company became an indirect wholly owned subsidiary of the Parent;
WHEREAS, following the transactions contemplated by the Merger
Agreement, the Company wished to have the Executive continue to provide services
under the terms of an Employment Agreement dated October 5, 1999 (the " Original
Employment Agreement").
WHEREAS, the Company and Executive wish to amend and restate the
terms of the Original Employment Agreement,
NOW, THEREFORE, in consideration of the covenants and agreements
hereinafter set forth, the parties hereto agree as follows:
1. EFFECTIVENESS OF AGREEMENT
1.1. General. This Agreement shall become effective as of the date
hereof and shall replace in its entirety the Original Employment Agreement,
recognizing the effectiveness of the Original Employment Agreement from the date
of its execution until the date hereof.
2. EMPLOYMENT AND DUTIES
2.1. General. The Company hereby employs the Executive, and the
Executive agrees to serve, as President of the Company, upon the terms and
conditions herein contained. In such capacity, Executive shall report directly
to the Chief Executive Officer of the Parent. The Executive shall perform such
other duties and services for the Company and the Parent as may be reasonably
designated from time to time by the Parent and as are consistent with
Executive's title. The Executive agrees to serve the Company faithfully and to
the best of his ability under the direction of the Parent.
2.2. Exclusive Services. Except as may otherwise be approved in
advance by the Board of Directors of the Company ("Board"), and except during
vacation periods and reasonable periods of absence due to sickness, personal
injury or other disability, the Executive shall devote his full working time
throughout the Employment Term (as defined below) to the services required of
him hereunder. The Executive shall render his services exclusively to the
Company during the Employment Term, and shall use his best efforts, judgment and
energy to improve and advance the business and interests of the Company in a
manner consistent with the duties of his position. Executive may participate in
charitable and philanthropic activities so long as they don't interfere with his
duties hereunder.
2.3. Term of Employment. The Executive's employment under this
Agreement shall commence as of the Effective Time (as defined in the Merger
Agreement) and shall terminate on the earlier of (a) December 31, 2001, or (b)
the termination of the Executive's employment pursuant to this Agreement. The
period commencing as of the Effective Time and ending on December 31, 2001 or
such earlier date on which Executive's employment with the Company terminates,
is hereinafter referred to as the "Employment Term". Executive may terminate his
employment with the Company at any time and for any reason upon twelve (12)
months prior written notice to the Company.
2.4. Reimbursement of Expenses. The Company shall reimburse the
Executive for reasonable travel and other business expenses incurred by him in
the fulfillment of his duties hereunder upon presentation by the Executive of an
itemized account of such expenditures, in accordance with the Parent's policies
and procedures.
2.5. Termination of Prior Agreements. Executive agrees and
acknowledges that, upon the Effective Time, all prior employment agreement,
compensation and incentive arrangements and rights to acquire equity of the
Company (except as provided expressly herein and except for options expressly
assumed by Parent in the Merger Agreement and except for the Indemnity Agreement
between Executive and Generation Health Holdings, Inc. (unless Executive and the
Company enter into a replacement Indemnification Agreement in form and substance
satisfactory to Executive)) are cancelled in their entirety and are of no
further force or effect.
3. SALARY
3.1. Base Salary. From the date hereof, the Executive shall be
entitled to receive a base salary ("Base Salary") at a rate of $260,000 per
annum, payable twice monthly in arrears in equal installments in accordance with
the Parent's payroll practices.
3.2. Annual Review. The Executive's Base Salary shall be reviewed
for potential increase by the Parent, based upon the Executive's performance,
not less often than annually. Any positive adjustments in Base Salary effected
as a result of such review shall be made by the Parent in its sole discretion;
provided, however, that during the three year period of the Employment Term
only, the Executive shall receive a minimum increase of ten percent (10%) per
annum.
3.3. Bonus. During his employment under this Agreement, the
Executive shall be entitled to participate in Parent's Cash Incentive Plan
("Bonus Plan"), under which the Executive shall be entitled to participate at
the highest level available to executives of the Parent and to receive bonuses
of up to 190% of his Base Salary annually, based on his level of achievement of
the applicable performance criteria. During the Employment Term, however,
Executive's semi-annual bonuses shall not be less than $80,500, provided that
any bonus paid in September 1999 shall not be less than $54,000. Any bonus will
be paid in cash in accordance with of the terms and conditions of the Bonus
Plan. If Executive would have been entitled to a bonus under this Section for
any bonus period (January 1 to June 30, and July 1 to December 31) but for the
fact that he is no longer employed by the Company on a bonus payment date (March
15 or September 15), as opposed to during a bonus period, other than as a result
of a termination for Cause or Executive's resignation, then Executive shall
nonetheless be entitled to and be paid the applicable bonus.
4. LONG-TERM INCENTIVE COMPENSATION.
The Company will provide the Executive with the following long-term
incentive compensation arrangement in accordance with the terms of Parent's 1996
Incentive Stock Option Plan ("Stock Option Plan").
(a) As soon as practicable after the date hereof, Parent will
grant the Executive nonqualified stock options ("Options") to acquire 450,000
shares of Parent common stock ("Shares"); 120,000 of the Options will be
designated Series A Options ("Series A Options"), 150,000 of the Options will be
designated Series B Options ("Series B Options") and 180,000 of the Options will
be designated Series C Options ("Series C Options"), in each case with an
exercise price equal to $17.00 per share.
(b) For each of the three fiscal years of the Company
beginning with fiscal year 1999 ("Performance Period"), one-third of each of the
Series A, Series B and Series C Options will vest (and become exercisable) at
the end of each fiscal year if the following conditions are satisfied: (i) the
Pharmanex/IDN Gross Profit objectives for such fiscal year for such series and
set forth on Appendix A (which may be equitably adjusted from time to time, in
the sole determination of Parent's Board of Directors acting reasonably and in
good faith, to reflect significant changes and developments in the Company's
operations resulting from acquisitions or dispositions of other companies or
business) ("Gross Profit") are met or exceeded,and (ii) the Executive is
employed by the Company or an affiliate continuously until the last day of such
fiscal year. For purposes of this Agreement, Gross Profit of the Company shall
be calculated by the Parent=s independent certified public accountants in
accordance with generally accepted accounting principles. In the event that
Parent's Board of Directors determines that an increase in the Gross Profit
objectives is warranted in accordance with the foregoing, such objectives shall
be adjusted upward by an amount equal to the annualized gross profit results for
the acquired company in the year of acquisition, plus the lesser of (i) 10% ten
percent per annum to reflect a modest anticipated growth rate, or (ii) the
average historical growth rate in gross profit of the acquired company during
the acquired company's prior three fiscal years.
Moreover, if any one-third installment of such Options have not
become exercisable in accordance with the immediately preceding paragraph, such
Options shall become vested and exercisable at the earlier to occur, if any, of
the following dates or events:
(i) the end of any subsequent fiscal year in the Performance
Period if the cumulative Gross Profit objectives for the period ending
with the end of such fiscal year as set forth on Appendix A are met or
exceeded; provided that the Executive is employed by the Company
continuously until the last day of such fiscal year; or
(ii) the date which is seven years after the Effective Time;
provided the Executive is employed by the Company continuously until
such date.
Notwithstanding the foregoing, upon the occurrence of a change of
control of the Parent (as defined in the Stock Option Plan), all unvested
Options will become immediately vested and exercisable; provided the Executive
is employed by the Company or an affiliate on such date.
(c) Unless the Company determines otherwise, the Executive
shall forfeit all Options, whether or not vested, if the Executive's employment
with the Company or any of its affiliates is terminated for Cause or, if
following termination of the Executive's employment with the Company or any of
its affiliates for any other reason, the Company determines that, during the
period of the Executive's employment, circumstances existed which would have
entitled the Company or any such affiliate to terminate the Executive's
employment for Cause and the Company notifies Executive of such determination in
writing no later than ninety (90) days after termination of Executive's
employment with the Company.
(d) In connection with the grant of the Options, the Company
and the Executive shall enter into an award document which shall set forth the
term of the Options, the procedures for exercising the Options and such other
terms as the Company may determine, in its reasonable discretion, are necessary
and appropriate; provided, however, that notwithstanding the foregoing the
Options shall have the longest term permissible under the Stock Option Plan.
5. EMPLOYEE BENEFITS
The Executive shall, during his employment under this Agreement, be
included to the extent eligible thereunder in all employee benefit plans,
programs or arrangements (including, without limitation, any plans, programs or
arrangements providing for retirement benefits, profit sharing, disability
benefits, health and life insurance, or vacation and paid holidays) that shall
be established or adopted by the Company or the Parent for, or made available
to, the Company's or the Parent's senior executives. In addition, the Company
shall furnish the Executive with the following benefits during his employment
under this Agreement:
(a) reimburse up to $6,500 per annum for expenses with
respect to his participation in the Young President=s
Organization ("YPO"). In addition, every year
Executive shall be entitled to attend one YPO
University one week session and receive reimbursement
therefor; and
(b) the payment of Executive's reasonable relocation
expenses incurred in connection with any move of the
Company's principal headquarters at any time during
the term of this Agreement in accordance with the
policies of the Parent; and
(c) Four (4) weeks vacation per annum; and
(d) at the Company's expense, maintain an executive
quality apartment or condominium in Provo, Utah for
use in connection with Company business.
6. TERMINATION OF EMPLOYMENT
6.1. Termination Without Cause.
6.1.1. General. Subject to the provisions of Sections 6.1.3 and
6.1.4, if, prior to the expiration of the Employment Term, the Executive's
employment is terminated by the Company without Cause (as defined below), the
Company shall continue to pay the Executive the Base Salary (at the rate in
effect on the date of such termination) for twelve (12) months (such period
being referred to hereinafter as the "Severance Period"), at such intervals as
the same would have been paid had the Executive remained in the active service
of the Company. The Executive shall have no further right to receive any other
compensation or benefits after such termination or resignation of employment,
except as determined in accordance with the terms of the employee benefit plans
or programs of the Company or as provided in this Agreement. In addition, the
Executive may, but only within twelve (12) months after he ceases to be an
employee, exercise his Options to the extent they have vested. To the extent
that the Executive is not otherwise entitled to exercise the Options at the date
of such termination, or if he fails to exercise the Options within the time
specified in the preceding sentence, such Options will terminate.
6.1.2 To the extent that any of the Options would have vested at
the end of the fiscal year in which Executive is terminated under Section 4 of
this Agreement but for the termination of the Executive without Cause, then
notwithstanding Section 6.1.1 hereof, such Options shall vest when the necessary
calculations under Section 4 have been completed, and Executive shall have
twelve (12) months from such determination date to exercise the Options. The
Company shall notify Executive within ten days after the necessary calculations
under Section 4 have been completed (which calculations shall be made no later
than ninety (90) days after the fiscal year in question) as to whether any of
the Options have vested. This provision shall survive termination of the
Agreement.
6.1.3. Conditions Applicable to the Severance Period. If, during
the Severance Period, the Executive breaches any of his obligations under
Section 8, the Company may, upon written notice to the Executive, terminate the
Severance Period and cease to make any further payments or provide any benefits
described in Section 6.1.1.
6.1.4. Death During Severance Period. In the event of the
Executive's death during the Severance Period, payments of Base Salary under
Section 6.1.1 shall continue to be made during the remainder of the Severance
Period to the beneficiary designated in writing for this purpose by the
Executive or, if no such beneficiary is specifically designated, to the
Executive's estate.
6.1.5. Date of Termination. The date of termination of
employment without Cause shall be the date specified in a written notice of
termination to the Executive as the last day of the Executive's employment.
6.1.6. Constructive Termination. The term "Constructive
Termination" means:
(a) the continued assignment to Executive of any duties or
the continued material reduction in Executive's duties,
either of which is materially inconsistent with
Executive's position with the Company, for thirty (30)
calendar days after Executive's delivery of written
notice to the Company objecting to such assignment or
reduction; or
(b) the relocation of the principal place for the rendering
of Executive's services hereunder to a location more
than twenty (20) miles from Los Angeles or the Company's
initial business offices in the San Francisco Area; or
(c) a material reduction in compensation and benefits under
this Agreement, which remains in effect for thirty (30)
calendar days after Executive delivers written notice to
the company of such material reduction.
None of the foregoing will constitute a Constructive Termination to the
extent mutually agreed upon in advance of the occurrence thereof by the
Executive and the Company. A Constructive Termination will be treated as a
termination of the Executive by the Company without Cause.
6.2. Termination for Cause; Resignation.
6.2.1. General. If, prior to the expiration of the Employment
Term, the Executive's employment is terminated by the Company for Cause, or the
Executive resigns from his employment hereunder, the Executive shall be entitled
only to payment of his Base Salary as then in effect through and including the
date of termination or resignation. In the event the Executive resigns Executive
may, but only within twelve (12) months after he ceases to be an employee,
exercise his Options to the extent they have vested. The Executive shall have no
further right to receive any other compensation or benefits after such
termination or resignation of employment, except as determined in accordance
with the terms of the employee benefit plans or programs of the Company or as
provided in this Agreement.
6.2.2. Date of Termination. The date of termination for Cause
shall be the date specified in a written notice of termination to the Executive
as the last day of the Executive's employment. The date of resignation shall be
the date specified in the written notice of resignation from the Executive to
the Company as the last day of the Executive's employment, or if no date is
specified therein, twelve (12) months after receipt by the Company of written
notice of resignation from the Executive.
6.3. Cause. Termination for "Cause" shall mean termination of the Executive's
employment because of:
(a) any act or omission that constitutes a material breach by
the Executive of any of his obligations under this Agreement, which
breach is materially injurious to the Company;
(b) the willful and continued failure or refusal of the
Executive to substantially perform the duties required of him in his
position with the Company, which failure is not cured within twenty
(20) days following written notice of such failure;
(c) any willful violation by the Executive of any material law
or regulation applicable to the business of the Company or any of its
subsidiaries or affiliates, or the Executive's conviction of, or a plea
of nolo contendre to, a felony, or any willful perpetration by the
Executive of a common law fraud; or
(d) any other willful misconduct by the Executive that is
materially injurious to the financial condition or business reputation
of, or is otherwise materially injurious to, the Company or any of its
subsidiaries or affiliates.
7. DEATH OR DISABILITY
In the event of termination of employment by reason of death or
Disability (as hereinafter defined), the Executive (or his estate, as
applicable) shall be entitled to Base Salary through the date of termination.
Other benefits shall be determined in accordance with the terms of the benefit
plans maintained by the Company, and the Company shall have no further
obligation hereunder. In addition, the Executive (or his estate or the person or
persons to whom the Options may have been transferred by will or by the laws of
decent and distribution, as applicable) may, but only within twelve months after
Executive ceases to be an employee, exercise Executive's Options to the extent
Executive was entitled to exercise such Options on the date of his death or on
the date he is terminated by the Company by reason of Disability (all of which
shall be terminations without Cause). To the extent that the Executive was not
otherwise entitled to exercise the Options on such date, or if he (or his estate
or the person or persons to whom the Options may have been transferred by will
or by the laws of decent and distribution, as applicable) fails to exercise the
Options within the time specified in the preceding sentence, such Options will
terminate. For purposes of this Agreement, "Disability" means a physical or
mental disability or infirmity of the Executive, as determined by a physician of
recognized standing selected by the Company, that prevents (or, in the opinion
of such physician, is reasonably expected to prevent) the normal performance of
his duties as an employee of the Company for any continuous period of 180 days,
or for 180 days during any one 12-month period.
8. CONFIDENTIALITY; NONCOMPETITION; NONSOLICITATION
8.1. Key-Employee Covenants. The Executive agrees to perform his
obligations and duties and to be bound by the terms of the Key-Employee
Covenants attached hereto as Appendix B which are incorporated by reference and
which shall be in force unless otherwise expressly modified by this Agreement.
(a) Executive agrees that the period of non-competition set
forth in Section 8 of the Key-Employee Covenants is lengthened from six
months to one year. The Company, or the Parent may extend the period of
non-competition set forth in Section 8 of the Key-Employee Covenants
for up to an additional two (2) years thereafter, provided that (i)
where Executive has either voluntarily resigned his employment with the
Company or his employment is terminated for Cause, within thirty (30)
days of the termination of the applicable non-competition period the
Company or the Parent notifies the Executive in writing that it wishes
to so extend the period of non-competition for an additional one-year
period, (ii) where Executive's employment with the Company is
terminated without Cause or as a result of the expiration of the term
of this Agreement (where Executive does not continue in the employ of
the Company), the Company notifies the Executive in writing within
sixty (60) days of the termination of Executive's employment hereunder,
that it wishes to so extend the period of non-competition and specifies
therein whether such extension shall be for a one (1) or two (2) year
period, and (iii) the Company pays Executive for each year that it
decides to extend the period of non-competition an amount equal to
fifty percent (50%) of Executive's most recent Base Salary, which
amount shall be payable by the Company twice monthly over the period in
question.
8.2. Certain Remedies. Without intending to limit the remedies
available to the Company, the Executive agrees that a breach of any of the
covenants contained in the Key-Employee Covenants may result in material and
irreparable injury to the Company or its subsidiaries or affiliates for which
there is no adequate remedy at law, that it will not be possible to measure
damages for such injuries precisely and that, in the event of such a breach or
threat thereof, the Company shall be entitled to seek a temporary restraining
order or a preliminary or permanent injunction, or both, without bond or other
security, restraining the Executive from engaging in activities prohibited by
the Key-Employee Covenants or such other relief as may be required specifically
to enforce any of the covenants in the Key-Employee Covenants. Such injunctive
relief in any court shall be available to the Company in lieu of, or prior to or
pending determination in, any arbitration proceeding.
9. ARBITRATION
Any dispute or controversy arising under or in connection with this
Agreement that cannot be mutually resolved by the parties hereto shall be
settled exclusively by arbitration pursuant to the rules of the American
Arbitration Association in Salt Lake City, Utah before three arbitrators of
exemplary qualifications and stature. Each party hereto shall choose an
independent arbitrator meeting such qualifications within ten (10) business days
after demand for arbitration is made and such independent arbitrators shall
mutually agree as to the third arbitrator meeting such qualifications within
twenty (20) business days after demand for arbitration is made. If such
arbitrators cannot come to an agreement as to the third arbitrator by such date,
the American Arbitration Association shall appoint the third arbitrator in
accordance with its rules and the qualification requirements set forth in this
section. Judgment may be entered on the arbitrator's award in any court having
jurisdiction. The parties hereby agree that the arbitrators shall be empowered
to enter an equitable decree mandating specific enforcement of the terms of this
Agreement. The party that prevails in any arbitration hereunder shall be
reimbursed by the other party hereto for any reasonable legal fees and
out-of-pocket expenses directly attributable to such arbitration, and such other
party shall bear all expenses of the arbitrators. Upon the request of a party,
the arbitration award shall specify the factual and legal basis for the award.
10. MISCELLANEOUS
10.1. Communications. All notices and other communications given or
made pursuant hereto shall be in writing and shall be deemed to have been duly
given or made as of the date delivered or on the fifth business day after mailed
if delivered personally or mailed by registered or certified mail (postage
prepaid, return receipt requested) to the party at the following addresses (or
at such other address for a party as shall be specified by like notice, except
that notices of changes of address shall be effective upon receipt):
(a) if to the Company:
c/o Nu Skin Enterprises, Inc.
75 West Center Street
Provo, Utah 84601
Tel: (801) 345-6100
Fax: (801) 345-3099
Attention: Truman Hunt, Esq.
with copies to:
Shearman & Sterling
555 California Street, Suite 2000
San Francisco, CA 94104
Attention: Kevin Kennedy, Esq.
Telephone: (415) 616-1100
Facsimile: (415) 616-1199
(b) if to the Executive:
627 Marina Boulevard
San Francisco, CA 94109
Tel: (415) 931-8836
Fax: (415) 931-8839
10.2. Waiver of Breach; Severability.
(a) The waiver by the Executive or the Company of a breach of
any provision of this Agreement by the other party hereto shall not operate or
be construed as a waiver or any subsequent breach by either party.
(b) The parties hereto recognize that the laws and public
policies of various jurisdictions may differ as to the validity and
enforceability of covenants similar to those set forth herein. It is the
intention of the parties that the provisions hereof be enforced to the fullest
extent permissible under the laws and policies of each jurisdiction in which
enforcement may be sought, and that the unenforceability (or the modification to
conform to such laws or policies) of any provisions hereof shall not render
unenforceable, or impair, the remainder of the provisions hereof. Accordingly,
if at the time of enforcement of any provision hereof, a court of competent
jurisdiction holds that the restrictions stated herein are unreasonable under
circumstances then existing, the parties hereto agree that the maximum period,
scope, or geographic area reasonable under such circumstances will be
substituted for the stated period, scope or geographical area and that such
court shall be allowed to revise the restrictions contained herein to cover the
maximum period, scope and geographical area permitted by law.
10.3. Assignment; Successors. No right, benefit or interest
hereunder shall be assigned, encumbered, charged, pledged, hypothecated or be
subject to any setoff or recoupment by the Executive. This Agreement shall inure
to the benefit of and be binding upon the successors and assigns of the Company;
provided, however that the Company may not assign this Agreement without
Executive's consent.
10.4. Entire Agreement. This Agreement and the Appendices
attached hereto, which are incorporated herein by this reference, contain the
entire agreement of the parties with respect to the subject matter hereof, and
on and after the Effective Time, and except as otherwise set forth herein,
supersedes all prior agreements, promises, covenants, arrangements,
communications, representations and warranties between them, whether written or
oral, with respect to the subject matter hereof.
10.5. Cancellation of Options. As consideration for entering
into this Agreement, the Executive agrees to cancel and waive all rights and
interest that he may have to the options described in Appendix C effective as of
the Effective Time.
10.6. Withholding. The payment of any amount pursuant to this
Agreement shall be subject to applicable withholding and payroll taxes, and such
other deductions as may be required under the Company's employee benefit plans,
if any.
10.7. Governing Law. This Agreement shall be governed by, and
construed with, the law of the
State of Utah.
10.8. Headings. The headings in this Agreement are for
convenience only and shall not be used to interpret or construe any of its
provisions.
10.9. Counterparts. 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 one and the same instrument.
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Agreement to
be duly executed, the Parent has agreed and accepted terms hereof, and the
Executive has hereunto set his hand, as of the day and year first above written.
PHARMANEX, INC.
By:
Name:
Title:
Agreed and accepted as to its duties pursuant to this Agreement:
NU SKIN ENTERPRISES, INC.
By:
Name:
Title:
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