FORWARD-LOOKING
STATEMENTS
THIS
ANNUAL REPORT ON FORM 10-K, IN PARTICULAR ITEM 7. MANAGEMENTS DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION, AND ITEM 1.
BUSINESS, INCLUDE FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF
SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. THESE STATEMENTS REPRESENT
OUR EXPECTATIONS OR BELIEFS CONCERNING, AMONG OTHER THINGS, FUTURE REVENUE, EARNINGS,
GROWTH STRATEGIES, NEW PRODUCTS AND INITIATIVES, FUTURE OPERATIONS AND OPERATING RESULTS,
AND FUTURE BUSINESS AND MARKET OPPORTUNITIES. WE UNDERTAKE NO OBLIGATION TO PUBLICLY
UPDATE OR REVISE ANY FORWARD-LOOKING STATEMENT, WHETHER AS A RESULT OF NEW INFORMATION,
FUTURE EVENTS OR OTHERWISE. WE WISH TO CAUTION AND ADVISE READERS THAT THESE STATEMENTS
INVOLVE RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM
THE EXPECTATIONS AND BELIEFS CONTAINED HEREIN. FOR A SUMMARY OF CERTAIN RISKS RELATED TO
OUR BUSINESS, SEE ITEM 1A RISK FACTORS BEGINNING ON PAGE 23.
In this Annual Report on Form
10-K, references to dollars and $ are to United States dollars. Nu
Skin, Pharmanex and Big Planet are our trademarks. The italicized product names used in
this Annual Report on Form 10-K are product names and also, in certain cases, our
trademarks.
PART I
Overview
Nu
Skin Enterprises is a global direct selling company with operations in over 45 markets
throughout Asia, the Americas and Europe. We market premium quality personal care products
under the Nu Skin brand, science-based nutritional supplements under the Pharmanex brand
and technology products and services under the Big Planet brand. We conduct business using
a direct selling model in all of our markets with the exception of Mainland China
(hereinafter China). In China, because of regulatory restrictions, we
implemented a retail business model with employed sales representatives. However, we are
currently integrating direct selling into our business model in this market pursuant to
recently enacted direct selling regulations.
In
2007, we posted revenue of $1.16 billion. As of December 31, 2007, we had a global
network of approximately 755,000 active independent distributors, sales representatives,
and preferred customers, approximately 30,000 of whom were executive level distributors
(including sales representatives in China). Our executive level distributors play an
important leadership role in our distribution network and are critical to the growth and
profitability of our business.
Approximately
86% of our 2007 revenue came from markets outside the United States. Japan accounted for
approximately 38% of our 2007 total revenue and is our largest revenue market. Due to the
size of our foreign operations, our results are often impacted positively or negatively by
foreign currency fluctuations, particularly fluctuations in the Japanese yen. In addition,
our results are impacted by global economic, political and general business conditions.
-1-
We
develop and market branded consumer products that we believe are well suited for direct
selling. Our distributors sell our products by educating consumers about the benefits and
distinguishing characteristics of our products and by offering personalized customer
service. Leveraging our research and development efforts, we continually develop and
introduce new products that enhance our product portfolio. We attempt to attract and
motivate high-caliber, independent distributors because of our focus on product
innovation, our generous global compensation plan and our distributor support programs.
Our
business is subject to various laws and regulations globally, in particular with respect
to network marketing activities, cosmetics, and nutritional supplements. This creates
certain risks for our business, including improper activities by our distributors or our
inability to obtain or maintain necessary product registrations.
Strategies
As
we work to grow our business, we are focused on the following three key strategies:
|
|
|
introducing
unique tools; |
|
|
|
developing
compelling and innovative products under three distinct brands; and |
|
|
|
offering
motivating and rewarding distributor incentives. |
Unique
Tools. We remain committed to providing unique tools and initiatives that help
demonstrate our difference, motivate distributors, and aid in recruiting and product
sales. Providing evidence that our products are efficacious using state-of-the-art
tools is a distinct business advantage. During 2007, we introduced a new branding strategy
supporting this concept titled the difference. demonstrated. Throughout the
year, we benefited from three distributor tools that help demonstrate our difference: the
Galvanic Spa System II, a handheld unit that uses galvanic current to effectively
pull impurities from the skin while driving beneficial ingredients into the skin
helping to treat the visible signs of aging; the Pharmanex BioPhotonic Scanner (the
Scanner), a portable unit based on patented technologies that allows
distributors to non-invasively measure the impact of our nutritional products,
particularly our LifePak line of products; and the Nu Skin ProDerm Skin
Analyzer (the ProDerm Skin Analyzer), a handheld skin imaging and
analysis tool that enables distributors to demonstrate the effectiveness of our skin care
products by providing a visual assessment of various skin attributes together with a
recommended regimen of Nu Skin products.
Innovative
Products. Compelling and innovative products are vital to our success as they
help attract distributors and customers. Our distributors use the innovative features of
our products to build successful sales organizations and attract new customers. Our
product philosophy is largely based on anti-aging and we believe we have a competitive
advantage in this area through our product offerings. We believe we are one of only a few
direct selling companies that has successfully built product equity in both skin care and
nutrition, both key anti-aging categories. Key anti-aging products include:
|
|
|
LifePak,
a family of anti-aging nutritional supplement products aimed at providing optimal
levels of antioxidants, phytonutrients, vitamins, minerals and other vital ingredients
that help promote general wellness; |
|
|
|
g3,
a nutrient-rich juice blend containing a highly concentrated mix of carotenoid
antioxidants and micronutrients with a natural delivery system called lipocarotenes; |
-2-
|
|
|
Nu
Skin 180° Anti-aging Skin Therapy System, designed to combat the visible signs of
aging, specifically targeting improving the appearance of facial lines and wrinkles; |
|
|
|
Tru
Face Essence and Tru Face Essence Ultra, anti-aging products featuring the
ingredient Ethocyn which helps to minimize the natural loss of skin elastin and improve
skin tone; |
|
|
|
MyVictory!
and The Right Approach (TRA), weight management systems that were each
developed for a different lifestyle and diet and which focus on controlling cravings
while boosting metabolism. |
Distributor
Incentives. We are committed to providing generous compensation and incentives to our
distributors in order to motivate them and reward them for distributing our products. We
believe our global sales compensation plan is one of our competitive advantages and we
often refine our plan and add enhancements to help our distributors grow their businesses.
For example, during the year ended December 31, 2007, we launched a gross retail product
(GRP) program targeted at providing additional commissions and early income for new
distributors who are interested in building their sales organizations. In addition, we
have continued to expand and promote product subscription and loyalty programs in many of
our markets that provide incentives for customers who commit to purchase a set amount of
products on a recurring basis. We believe that these programs, along with a concerted
focus on global compensation plan alignment and an increased level of distributor
recognition, goal setting and accountability, will help motivate our distributors to drive
revenue growth.
Our Product Categories
We
have three product categories, each operating under its own brand. We market our
premium-quality personal care products under the Nu Skin brand, science-based nutritional
supplements under the Pharmanex brand, and technology-based products and services under
the Big Planet and Photomax brands.
Presented
below are the U.S. dollar amounts and associated revenue percentages from the sale of Nu
Skin, Pharmanex, and Big Planet products and services for the years ended December 31,
2005, 2006, and 2007. This table should be read in conjunction with the information
presented in Managements Discussion and Analysis of Financial Condition and
Results of Operation, which discusses the costs associated with generating the
aggregate revenue presented.
Revenue by Product
Category
(U.S. dollars in
millions)(1)
|
Year Ended December 31, |
|
Product Category | |
2005 | |
2006 | |
2007 | |
| |
| |
| |
| |
Nu Skin |
|
$ 484.3 |
|
41.0% |
|
$ 454.5 |
|
40.8% |
|
$ 498.5 |
|
43.0% |
|
| |
| |
| |
| |
Pharmanex | |
667.6 |
|
56.5 |
|
632.7 |
|
56.7 |
|
634.2 |
|
54.8 |
|
| |
| |
| |
| |
Big Planet | |
29.0 |
|
2.5 |
|
28.2 |
|
2.5 |
|
25.0 |
|
2.2 |
|
| |
| |
| |
| |
| |
$ 1,180.9 |
|
100.0% |
|
$ 1,115.4 |
|
100.0% |
|
$ 1,157.7 |
|
100.0% |
|
(1) |
|
In
2007, 86% of our sales were transacted in foreign currencies that were then
converted to U.S. dollars for financial reporting purposes at
weighted-average exchange rates. Foreign currency fluctuations positively
impacted reported revenue by approximately 1% in 2007 compared to 2006,
and negatively impacted reported revenue by approximately 1% in 2006
compared to 2005. |
-3-
Nu
Skin. Nu Skin is our original product line and offers premium-quality personal
care products in the areas of core systems, targeted treatments, total care, cosmetics and
our specialty botanical-based Epoch line. Our strategy is to leverage our network
marketing distribution model to establish Nu Skin as an innovative leader in the personal
care market. We are committed to continuously improving and evolving our product
formulations to develop and incorporate innovative and proven ingredients.
In
addition to marketing premium-quality personal care products, we are committed to
developing tools to help distributors market our products more effectively. Under the Nu
Skin brand, we have two unique tools. The first is the Galvanic Spa System II,
which was first introduced in 2002, and has experienced strong growth during the last 18
months. The other tool is the second generation of the ProDerm Skin Analyzer, which
was introduced in the third quarter of 2007 at the companys global convention. This
portable proprietary skin analysis tool allows users to receive a personalized analysis on
four different skin attributes (wrinkles, pore size, skin texture, and discoloration), and
enables distributors to demonstrate the effectiveness of our skin care products by
providing close up skin images and a recommended regimen of Nu Skin products. This unit is
currently available only in the United States and Europe.
The
following table summarizes our Nu Skin product line by category:
Category | |
Description | |
Selected Products | |
|
|
|
Core Daily Systems | |
Regardless of skin type, our core systems provide a
solid foundation for your skin's individual needs.
Our systems are developed to target specific skin
concerns and are made from ingredients
scientifically proven to provide visible results for
concerns ranging from aging to acne. | |
Nu Skin 180° Anti-Aging Skin Therapy System
Nu Skin Tri-Phasic White
Nutricentials
Nu Skin Clear Action Acne Medication System | |
|
|
|
Targeted Treatments |
|
Our customized skin care line focus allows a
customer to tailor product regimens that help
deliver younger looking skin at any age. The
products are developed using cutting-edge ingredient
technologies that target specific skin care needs. |
|
Tru Face Essence Ultra
Tru Face Line Corrector
Tru Face Revealing Gel
Nu Skin Galvanic Spa System II
Enhancer
Celltrex Ultra Recovery Fluid
Celltrex CoQ10 Complete
NAPCA Moisturizer
Polishing Peel Skin Refinisher |
|
|
|
|
Total Care |
|
Our total care line addresses body care. The total
care line can be used by families and the products
are designed to deliver superior benefits from head
to toe for the ultimate sense of total body
wellness. |
|
Body Bar
Liquid Body Lufra
Perennial Intense Body Moisturizer
Dividends Men's Line
AP-24 Dental Care
DailyKind Mild Shampoo and Conditioner |
|
-4-
Category | |
Description | |
Selected Products | |
|
|
|
Cosmetic |
|
The Nu Colour cosmetic line marries the latest
technology with ingredients that are weightless and
pure. The products are targeted to define and
highlight your natural beauty.
|
|
Tinted Moisturizer SPF 15
Finishing Powder
Contouring Lip Gloss
Defining Effects Mascara |
|
|
|
|
EPOCH |
|
Our Epoch line is distinguished by utilizing
traditional knowledge of indigenous cultures for
skin care. Each Epoch product is formulated with
botanical ingredients derived from renewable
resources found in nature. In addition, we
contribute a percentage of our proceeds from Epoch
sales to charitable causes.
|
|
Baobab Body Butter
Sole Solution Foot Treatment
Calming Touch Soothing Skin Cream
Glacial Marine Mud
IceDancer Invigorating Leg Gel
Everglide Foaming Shave Gel
Ava puhi moni Shampoo
Epoch Baby |
|
| |
| |
| |
Pharmanex.
We market a variety of nutritional products comprised of comprehensive
micronutrient supplements, targeted nutritional supplements, weight management
supplements and certain specialty solution products under the Pharmanex brand.
LifePak, our flagship line of micronutrient and phytonutrient
supplements, accounted for 22% of our total revenue and 39% of Pharmanex revenue
in 2007.
Direct
selling has proven to be an extremely effective method of marketing our high-quality
nutritional supplements because our distributors can personally educate consumers on the
quality and benefits of our products, differentiating them from our competitors
offerings. Our strategy for expanding the nutritional supplement business is to introduce
innovative, substantiated products based on extensive research and development and quality
manufacturing. Our product development efforts focus in the areas of anti-aging, weight
management, and general nutrition.
We
continue to market our the Scanner, a tool developed to measure a persons
carotenoid antioxidants using a light source shown into the palm of the hand, to
demonstrate our difference. This is used globally in our business, and is a powerful tool
utilized by our distributors. Several improvements and enhancements have been made to the
unit over the past three years. The latest was introduced at our global distributor
convention held in September. In 2006, we acquired the exclusive rights to use the Scanner
technology in medical settings, and as a result, we own the rights to use the Scanner
within all environments worldwide where allowed by legal and regulatory requirements.
-5-
The
following table summarizes our Pharmanex product line by category:
Category | |
Description | |
Selected Products | |
|
|
|
LifePak and g3 |
|
Our LifePak family of products along with our g3
superfruit juice drink are the basis for general
health and wellness. These products supply a
complete balance of nutrients that our bodies need
to supplement the dietary demands of everyday
living.
|
|
LifePak Family of Products
g3 juice |
|
|
|
|
Weight Management | |
Our weight loss products include supplements as well
as meal replacement shakes. Our new MyVictory!
Program also incorporates an innovative measurement
device and web-based program that allows
participants to track not only how many calories
they are consuming, but also how many they are
expending.
| |
MyVictory! weight management program
The Right Approach (TRA) weight management system
| |
|
|
|
Solutions | |
Our self-care dietary supplements contain
standardized levels of botanical and other active
ingredients that are designed to provide consumers
with targeted wellness benefits.
| |
Tegreen 97
ReishiMax GLp
Marine Omega
Cholestin
CordyMax Cs-4
Cortitrol
Detox Formula
Eye Formula | |
| |
| |
| |
Big Planet and Photomax. We offer technology products and services centered
around two product categories under the Big Planet and Photomax brands: business tools and
digital imaging. Our strategy is to provide simple and innovative technological products.
In
2005, we introduced a web-based digital photo service called Photomax, available on
the web at Photomax.com, which makes it easy for consumers to view, organize and
share digital pictures online. Since 2005, we have added additional products and services
aimed at the preservation of memories.
Our
Big Planet business tools, products and services are designed to help distributors
increase their productivity by leveraging technology in the management of their direct
selling activities. By providing an assortment of business tools, distributors can better
manage and communicate with their sales force and potential customers.
-6-
The
following table summarizes the current Big Planet product line by category:
Category | |
Description | |
Selected Products | |
|
|
|
Digital Imaging |
|
A line of online digital photography and video services
designed for non-technical consumers. |
|
Movie Magic DVD
Photo Book
Photomax Web Site- online photo storage
Maxcast |
|
|
|
|
Business Tools | |
Advanced tools and services that help distributors and
consumers establish an online presence and manage their businesses. | |
Global Web Page
BP Toolbar
Nu Skin Regimen Optimizer
BP Internet Access | |
| |
| |
| |
We
also market a small line of home care products under the Ecosphere brand, designed to
clean and protect the home environment, which include a Water Purifier,
Filtering Showerhead and Surface Wipes. These products are found primarily
in our Asian markets.
Sourcing and Production
Nu
Skin. In order to maintain high product quality, we acquire our ingredients and
contract production of our proprietary products from suppliers and manufacturers that we
believe are reliable, reputable and deliver high quality materials and service. We acquire
ingredients and products from two primary suppliers that currently each manufacture products that represent
approximately 25% of our Nu Skin personal care revenue. We maintain a good relationship
with our suppliers and do not anticipate that either party will terminate the relationship
in the near term. We also have ongoing relationships with secondary and tertiary
suppliers. In the event we become unable to source any products or ingredients from our
major suppliers, we believe that we would be able to produce or replace those products or
substitute ingredients from our secondary and tertiary suppliers without great difficulty
or significant increases to our cost of goods sold. Please refer to Item 1A.
Risk Factors for a discussion of risks and uncertainties associated with our
supplier relationships and with the sourcing of raw materials and ingredients.
We
also established a production facility in Shanghai, where we currently manufacture our
personal care products sold through our retail stores in China, as well as a small portion
of product exported to select other markets. We believe that if the need arose, this plant
could be expandedor other facilities could be built in Chinato produce larger
amounts of inventory for export or as a back up to our existing supply chain.
Pharmanex.
Substantially all of our Pharmanex nutritional supplements and ingredients,
including LifePak, are produced or provided by
third-party suppliers and manufacturers. We rely on two partners for the
majority of our Pharmanex products, one of which supplies products that represent approximately 35% of our nutritional supplement
revenue while the other supplier manufactures products that represent approximately 18% of our nutritional
supplement revenue. In the event we become unable to source any products or ingredients
from these suppliers or from other current vendors, we believe that we would be
able to produce or replace those products or substitute ingredients without
great difficulty or significant increases to our cost of goods sold. Please
refer to Item 1A. Risk Factors for a discussion of certain
risks and uncertainties associated with our supplier relationships, as well as
with the sourcing of raw materials and ingredients.
-7-
We
also maintain a facility located in Zhejiang Province, China, where we produce herbal
extracts for Tegreen 97, ReishiMax GLp and other products sold
globally. In 2005, we completed the build-out of a new manufacturing facility in Zhejiang
Province where we produce some of our Pharmanex nutritional supplements for sale through
our retail stores in China as well as a small portion of product exported to other
markets. In addition, we operate a plant in Shanghai where we manufacture and repair our
Scanners.
Big
Planet. Third parties, pursuant to contractual arrangements, provide the majority
of our Big Planet and Photomax products and services. By acting as a private-labeled agent
for other vendors, we are able to avoid the large capital investment that would be
required to build the infrastructure necessary to fulfill Big Planets product
offerings. However, our profit margins and our ability to deliver quality services at
competitive prices depend upon our ability to negotiate and maintain favorable terms with
third-party providers.
Research and Development
We
continually invest in our research and development capabilities. Our research and
development expenditures were approximately $8 million in 2005, $9 million in 2006 and $10
million in 2007. Because of our commitment to product innovation, we will continue to
commit resources to research and development in the future.
Our
primary research and testing laboratory, adjacent to our office complex in Provo, Utah,
houses both Pharmanex and Nu Skin research facilities and professional and technical
personnel. We also maintain research facilities in China. Much of our Pharmanex research
to date is conducted in China, where we benefit from a well-educated, low-cost, scientific
labor pool that enables us to conduct research and clinical trials at a much lower cost
than would be possible in the United States.
We
also have collaborative relationships with numerous independent scientists, including
scientific advisory boards comprised of recognized authorities in related disciplines for
each of our nutritional and personal care product categories. We also enter into
collaborative arrangements with prominent universities and research institutions in the
United States, Europe and Asia, whose staffs include scientists with expertise in natural
product chemistry, biochemistry, dermatology, pharmacology and clinical studies. Some of
the university research centers with which we have collaborated include Purdue University,
Stanford University, Vanderbilt University, and Tufts University.
In
addition, we evaluate a significant number of product ideas for our Nu Skin and Pharmanex
categories presented by outside sources. We utilize strategic licensing and other
relationships with vendors for access to directed research and development work for
innovative and proprietary offerings.
Geographic Sales Regions
We
currently sell and distribute our products in over 45 markets, employing a direct selling
model in each of our markets except China. We have segregated our markets into five
geographic regions: North Asia, Greater China, Americas, South Asia/Pacific and Europe.
The following table sets forth the revenue for each of the geographic regions for the
years ended December 31, 2005, 2006 and 2007:
-8-
Revenue by Region
|
Year Ended December 31, | |
|
(U.S. dollars in millions) | |
2005 | |
2006 | |
2007 | |
North Asia |
|
$ 649.4 | |
55% |
|
$ 593.8 |
|
53% |
|
$ 585.8 |
|
50% |
|
Greater China | |
236.7 |
|
20 |
|
208.2 |
|
19 |
|
205.0 |
|
18 |
|
Americas | |
162.1 |
|
14 |
|
165.9 |
|
15 |
|
188.3 |
|
16 |
|
South Asia/Pacific | |
86.7 |
|
7 |
|
88.0 |
|
8 |
|
101.4 |
|
9 |
|
Europe | |
46.0 |
|
4 |
|
59.5 |
|
5 |
|
77.2 |
|
7 |
|
| |
$ 1,180.9 |
|
100% |
|
$ 1,115.4
|
|
100% |
|
$ 1,157.7 |
|
100% |
|
Additional
comparative revenue and related financial information is presented in the tables captioned
Segment Information in Note 17 to our Consolidated Financial Statements. The
information from these tables is incorporated by reference in this Report.
North
Asia. The following table provides information on each of the markets in the North
Asia region, including the year it opened, 2007 revenue, and the percentage of our total
2007 revenue for each market:
(U.S. dollars in millions) | |
Year Opened | |
2007 Revenue | |
Percentage of
2007 Revenue | |
|
|
|
|
Japan |
|
1993 |
|
$ 443.7 |
|
38% |
|
South Korea | |
1996 | |
$ 142.1 |
|
12% |
|
| |
| |
| |
| |
Japan
is our largest market and accounted for approximately 38% of total revenue in 2007. We
market most of our Nu Skin and Pharmanex products in Japan, along with a limited number of
Big Planet offerings. In addition, all three product categories offer a limited number of
locally developed products sold exclusively in our Japanese market. In 2007, we introduced
a skin care product specifically for Japan called Duo as well as restaged the Galvanic
Spa System II in the fourth quarter. In 2008, we have plans to launch LifePak
Nano, Tru Face Essence Ultra and incorporate innovative anti-aging
technologies into existing products.
In
South Korea, we offer most of our Nu Skin and Pharmanex products, along with a limited
number of Big Planet services. Product introductions for 2007 included the launch of
Tri-Phasic White, a skin whitening system, as well as a focus on child-specific
nutritional products. During the year, we also moved operations to a new, state-of-the-art
facility in Seoul. In 2008, we plan to introduce Estra, Tru Face Essence Ultra,
and CordyMax.
Greater
China. The following table provides information on each of the markets in
the Greater China region, including the year opened, 2007 revenue, and the percentage of
our total 2007 revenue for each market:
(U.S. dollars in millions) | |
Year Opened | |
2007 Revenue | |
Percentage of
2007 Revenue | |
|
|
|
|
Taiwan |
|
1992 |
|
$ 93.0 |
|
8% |
|
China | |
2003 | |
$ 66.5 |
|
6% |
|
Hong Kong | |
1991 | |
$ 45.5 |
|
4% |
|
| |
| |
| |
| |
-9-
Our
Hong Kong and Taiwan markets operate using our global direct selling business model and
global compensation plan. We offer a robust product offering of the majority of our Nu
Skin and Pharmanex products in Hong Kong and Taiwan, and limited Big Planet products and
services. Approximately half of our revenue in these markets comes from orders through our
monthly product subscription program, which has led to improved retention of customers and
distributors and has helped streamline the ordering process.
In
China, we sell many of our Nu Skin products and a locally produced value line of personal
care products under the Scion brand name. We also sell a select number of Pharmanex
products, including our number one nutritional product, LifePak.
We currently are unable to operate under our global direct selling business model in China as a result of regulatory restrictions on
direct selling activities in this market. Consequently, we have developed a retail sales model that utilizes an employed sales force to sell
products through fixed locations that we are supplementing with a single level direct sales opportunity in those locations where we have
obtained a direct sales license. In addition, we have recently begun engaging contracted sales promoters to sell products through our retail
stores. We rely on our sales force to market and sell products at the various retail locations supported by only minimal advertising and
traditional promotional efforts. Our retail model in China is largely based upon our ability to attract customers to our retail stores through
our sales force, to educate them about our products through frequent training meetings, and to obtain repeat purchases. Our retail model only
allows for product sales to be transacted within our retail stores. While our distributor leaders from other markets are able to introduce customers and sales people to our stores, their promotional
efforts are limited due to the restrictions on direct selling in this market.
We also continue to implement a direct sales opportunity that allows us to engage independent distributors who can sell products
away from our retail stores. We have received licenses and approvals to engage in direct selling activities in the municipalities of
Shanghai and Beijing, and we continue to work to obtain the necessary approvals in Guangdong and other locations in China. The direct
selling licenses allow us to engage an entry-level, non-employee sales force that can sell products away from fixed retail locations.
Since the direct selling regulations prohibit the use of multi-level compensation plans, we compensate these independent distributors
based on their personal selling efforts only. Our current direct sales model is structured in a manner that we believe is complementary
to our existing retail sales model. Our independent direct sellers, for example, can transition into our retail model and become sales
promoters or employees, which can provide them with a more rewarding income opportunity.
During the fourth quarter of 2007, we made significant changes to our China business and infrastructure as we decided to change our strategy
for operating retail stores. We believe we can operate more effectively and efficiently by focusing our business around flagship stores in
major cities. As a result, we plan to open five new flagship stores in the cities of Shanghai, Beijing, Guangzhou, Shenzen, and Xian. As part
of this strategy, we also closed down approximately 70 retail stores scattered throughout the country and terminated approximately 650
corporate employees. In light of recent developments in employment law, we have modified our business model to engage sales promoters under a
service contract as well as offer part-time employment. This will allow us to provide a supplemental income opportunity to individuals who may
not be interested in working full-time in this business.
-10-
Americas.
The following table provides information on each of the markets in the North
America region, including the year opened, 2007 revenue, and the percentage of
our total 2007 revenue for each market:
(U.S. dollars in millions) | |
Year Opened | |
2007 Revenue | |
Percentage of
2007 Revenue | |
|
|
|
|
United States |
|
1984 |
|
$ 167.8 |
|
15% |
|
Canada | |
1990 | |
$ 11.5 |
|
1% |
|
Latin America(1) | |
1994 | |
$ 9.0 |
|
1% |
|
| |
| |
| |
| |
(1) |
|
Latin
America includes Brazil, Costa Rica, El Salvador, Guatemala, Honduras, Mexico
and Venezuela. |
Substantially
all of our Nu Skin and Pharmanex products, as well as our Big Planet products and
services, are available for sale in the United States. In 2007, we introduced the
MyVictory! weight management system, Tru Face Essence Ultra, Baobab Body
Butter, a new version of the ProDerm Skin Analyzer, and restaged the
Galvanic Spa System II. We also held our biennial global convention in Salt Lake
City, Utah during the third quarter of 2007 with approximately 8,500 attendees from around
the world. During 2007, we expanded our operations in this region by opening the Venezuela
market. During 2008, we plan to introduce several new products in the United States
including Fibercleanse and incorporate innovative anti-aging technology into
existing or new products. Additionally, we will continue to pursue growth in the United
States with recently launched products which include Tru Face Essence Ultra, as
well as the restaged Galvanic Spa System II.
South
Asia/Pacific. The following table provides information on each of the
markets in the South Asia/Pacific region, including the year opened, 2007 revenue, and the
percentage of our total 2007 revenue for each market:
(U.S. dollars in millions) | |
Year Opened | |
2007 Revenue | |
Percentage of
2007 Revenue | |
|
|
|
|
Singapore/Malaysia/Brunei |
|
2000/2001/2004 |
|
$ 39.3 |
|
3% |
|
Thailand | |
1997 | |
$ 32.3 |
|
3% |
|
Australia/New Zealand | |
1993 | |
$ 15.8 |
|
1% |
|
Indonesia | |
2005 | |
$ 8.8 |
|
1% |
|
Philippines | |
1998 | |
$ 5.2 |
|
* |
|
| |
| |
| |
| |
We
offer a majority of our Pharmanex and Nu Skin products in the South Asia/Pacific region.
Marketing initiatives in South Asia/Pacific have centered on monthly product subscription
orders, the BioPhotonic Scanner, our g3 nutritional drink, Galvanic Spa
System II, and our TRA weight management system.
-11-
Europe.
The following table provides information on our Europe region, including the
year opened, revenue for 2007, and the percentage of our total 2007 revenue for
the region.
(U.S. dollars in millions) | |
Year Opened | |
2007 Revenue | |
Percentage of
2007 Revenue | |
|
|
|
|
Europe(1) |
|
1995 |
|
$ 77.2 |
|
7% |
|
| |
| |
| |
| |
(1) |
|
Europe
includes Austria, Belgium, Denmark, Finland, France, Germany, Hungary,
Ireland, Iceland, Israel, Italy, the Netherlands, Norway, Poland,
Portugal, Romania, Russia, Slovakia, Spain, Sweden, Switzerland, and the
United Kingdom. |
We
currently operate in 21 countries throughout Northern, Eastern, and Central Europe as well
as in Israel and offer a full range of Nu Skin, Pharmanex and Big Planet products. Various
products and distributor tools have contributed to Europes recent success, including
the Galvanic Spa System II, the Scanner, and g3. We have been
experiencing strong growth in central and eastern European markets. In 2007, we opened
operations in Slovakia and Switzerland. We also plan to commence limited operations in
South Africa in 2008.
Distribution
Overview.
The foundation of our sales philosophy and distribution system is network
marketing. We sell our products through independent distributors who are not
employees, except in China where we sell our products through employed retail
sales representatives. Our distributors generally purchase products from us for
resale to consumers and for personal consumption. We also enjoy a large base of
subscription customers who purchase directly from the company and in doing so
receive a product discount.
Network
marketing is an effective vehicle to distribute our products because:
|
|
|
distributors
can educate consumers about our products in person, which we believe is more effective
for premium-quality, differentiated products than using traditional advertising; |
|
|
|
direct
sales allow for actual product testing by potential customers; |
|
|
|
there
is greater opportunity for distributor and customer testimonials; and |
|
|
|
as
compared to other distribution methods, our distributors can provide customers higher
levels of service and encourage repeat purchases. |
Active
distributors under our global compensation plan are defined as those distributors
who have purchased products for resale or personal consumption during the previous three
months. In addition, we have implemented preferred customer programs in many
of our markets, which allow customers to purchase productsgenerally on a recurring
monthly product subscription basisdirectly from us. We include preferred customers
who have purchased products during the previous three months in our active
distributor numbers. While preferred customers are legally very different from
distributors, both are considered customers of our products.
Executive-level
distributors under our global compensation plan are those distributors who are most
seriously pursuing the direct selling opportunity and must achieve and maintain specified
personal and group sales volumes each month. Once an individual becomes an executive-level
distributor, he or she can begin to take advantage of the benefits of commission payments
on personal and group sales volume. As a result of direct selling restrictions in China,
we have implemented a modified business model utilizing retail stores and an employed
sales force. (See the discussion on China in Geographic Sales Regions.)
Full-time sales representatives are those sales representatives that have completed a
qualification process. Throughout this annual report, we include full-time sales
representatives in China in our executive-level distributor numbers in order
to provide some level of comparison between our China model and our global direct selling
model.
-12-
Our
revenue is highly dependent upon the number and productivity of our distributors. Growth
in sales volume requires an increase in the productivity and/or growth in the total number
of distributors. As of December 31, 2007, we had approximately 755,000 active distributors
of our products and services. Approximately 30,000 of these distributors were
executive-level distributors. As of each of the dates indicated below, we had the
following number of executive distributors in the referenced regions:
Total Number of Executive
Distributors by Region
Region | |
2005 | |
2006 | |
2007 | |
North Asia |
|
16,129 |
|
15,354 |
|
14,845 |
|
Greater China | |
7,134 |
|
6,492 |
|
6,389 |
|
Americas | |
3,893 |
|
4,141 |
|
4,588 |
|
South Asia/Pacific | |
2,043 |
|
2,169 |
|
2,223 |
|
Europe | |
1,272 |
|
1,600 |
|
1,957 |
|
Total | |
30,471 |
|
29,756 |
|
30,002 |
|
Sponsoring.
We rely on our distributors to recruit and sponsor new distributors of our
products. While we provide internet support, product samples, brochures,
magazines, and other sales and marketing materials at cost, distributors are
primarily responsible for recruiting and educating new distributors with respect
to products, our global compensation plan, and how to build a successful
distributorship.
The
sponsoring of new distributors creates multiple levels in a network marketing structure.
Individuals that a distributor sponsors are referred to as downline or
sponsored distributors. If downline distributors also sponsor new
distributors, they create additional levels in the structure, but their downline
distributors remain in the same downline network as their original sponsoring distributor.
Sponsoring
activities are not required of distributors and we do not pay any commissions for
sponsoring new distributors. However, because of the financial incentives provided to
those who succeed in building and mentoring a distributor network that resells and
consumes products, many of our distributors attempt, with varying degrees of effort and
success, to sponsor additional distributors. People often become distributors after using
our products as regular customers. Once a person becomes a distributor, he or she is able
to purchase products directly from us at wholesale prices. The distributor is also
entitled to sponsor other distributors in order to build a network of distributors and
product users. A potential distributor must enter into a standard distributor agreement,
which among other things, obligates the distributor to abide by our policies and
procedures.
Global
Compensation Plan. One of our competitive advantages is our global sales
compensation plan. Under our global compensation plan, a distributor is paid consolidated
monthly commissions in the distributors home country, in local currency, for the
distributors own product sales and for product sales in that distributors
downline distributor network across all geographic markets. Because of restrictions on
direct selling in China, our full-time employed sales representatives there do not
participate in the global compensation plan, but are instead compensated according to a retail
sales model established for that market. Additionally, while
global distributor leaders are compensated based on sales activity of preferred customers
and sales employees in China, sales in China do not accrue to satisfy applicable sales
volume requirements within the global compensation plan.
-13-
Commissions
on the sale of an individual Nu Skin or Pharmanex product can exceed 50% of the wholesale
price. The actual commission payout percentage, however, varies depending on the number of
distributors at each payout level within our global compensation plan. On a global basis,
the overall payout on these products has typically averaged approximately 41% to 44%. We
believe that our commission payout as a percentage of total sales is among the most
generous paid by major direct selling companies.
From
time to time, we make modifications and enhancements to our global compensation plan to
help motivate distributors. In addition, we evaluate a limited number of distributor
requests on a monthly basis for exceptions to the terms and conditions of the global
compensation plan, including volume requirements. While our general policy is to
discourage exceptions, we believe that the flexibility to grant exceptions is critical in
retaining distributor loyalty and dedication and we make exceptions in limited cases as
necessary.
High
Level of Distributor Incentives. Based upon managements knowledge of our
competitors distributor compensation plans, we believe our global compensation plan
is among the most financially rewarding plans offered by leading direct selling companies.
There are two fundamental ways in which our distributors can earn money:
|
|
|
through
retail markups on sales of products purchased by distributors at wholesale; and |
|
|
|
through
a series of commissions on product sales. |
Each
of our products carries a specified number of sales volume points. Commissions are based
on total personal and group sales volume points per month. Sales volume points are
generally based upon a products wholesale cost, net of any point-of-sale taxes. As a
distributors business expands to successfully sponsoring other distributors into the
businesswho in turn expand their own businessesa distributor receives a higher
percentage of commissions. An executives commissions can increase substantially as
multiple downline distributors achieve executive status. In determining commissions, the
number of levels of downline distributors included in an executives commissionable
group increases as the number of executive distributorships directly below the executive
increases.
Distributor
Support. We are committed to providing high-level support services tailored to the
needs of our distributors in each market. We attempt to meet the needs and build the
loyalty of distributors by providing personalized distributor services and by maintaining
a generous product return policy. Because the majority of our distributors are part time
and have only a limited number of hours each week to concentrate on their business, we
believe that maximizing a distributors efforts by providing effective distributor
support has been, and will continue to be, important to our success.
Through
training meetings, distributor conventions, Web-based messages, distributor focus groups,
regular telephone conference calls, and other personal contacts with distributors, we seek
to understand and satisfy the needs of our distributors. We provide walk-in, telephonic,
and Web-based product fulfillment and tracking services that result in user-friendly,
timely product distribution. Several of our walk-in retail centers maintain meeting rooms,
which our distributors may utilize for training and sponsoring activities. Because of our
efficient distribution system, we believe that most of our distributors do not maintain a
significant inventory of our products.
-14-
Rules
Affecting Distributors. We monitor regulations and distributor activity in each
market to ensure our distributors comply with local laws. Our published distributor
policies and procedures establish the rules that distributors must follow in each market.
We also monitor distributor activity to maintain a level playing field for our
distributors, ensuring that some are not disadvantaged by the activities of others. We
require our distributors to present products and business opportunities ethically and
professionally. Distributors further agree that their presentations to customers must be
consistent with, and limited to, the product claims and representations made in our
literature.
Distributors
must represent to us that their receipt of commissions is based on retail sales and
substantial personal sales efforts. We must produce or pre-approve all sales aids used by
distributors such as videotapes, audiotapes, brochures and promotional clothing.
Distributors may not use any form of media advertising to promote products. Products may
be promoted only by personal contact or by literature produced or approved by the company.
Distributors may not use our trademarks or other intellectual property without our
consent.
Our
products may not be sold, and our business opportunities may not be promoted, in
traditional, non-Company owned retail environments. We have made an exception to this rule by allowing some
of our Pharmanex products to be sold in independently owned pharmacies and drug stores
meeting specified requirements. Distributors who own or are employed by a service-related
businesssuch as a doctors office, hair salon or health clubmay make
products available to regular customers as long as products are not displayed visibly to
the general public in a manner to attract the general public into the establishment to
purchase products.
In
order to qualify for commission bonuses, our distributors generally must satisfy specific
requirements including achieving at least 100 points, which is approximately $100 in
personal sales volume per month. In addition, individual markets may have requirements
specific to that country based on regulatory factors. For example, in the United States,
distributors must also:
|
|
|
document
retail sales or customer connections to established numbers of retail customers; and |
|
|
|
sell
and/or consume at least 80% of personal sales volume. |
We
systematically review reports of alleged distributor misbehavior. If we determine one of
our distributors has violated any of our policies or procedures, we may terminate the
distributors rights completely. Alternatively, we may impose sanctions, such as
warnings, probation, withdrawal or denial of an award, suspension of privileges of a
distributorship, fines and/or withholding of commissions until specified conditions are
satisfied, or other appropriate injunctive relief.
Product
Returns. We believe we are among the most consumer-protective companies in the
direct selling industry. While the regulations and our operations vary somewhat from
country to country, we generally follow a similar procedure for product returns. For 30
days from the date of purchase, our product return policy generally allows a retail
customer to return any Nu Skin or Pharmanex product to us directly or to the distributor
through whom the product was purchased for a full refund. After 30 days from the date of
purchase, the end users return privilege is at the discretion of the distributor.
Our distributors can generally return unused products directly to us for a 90% refund for
one year. Through 2007, our experience with actual product returns averaged less than 5%
of annual revenue.
Payment.
Distributors generally pay for products prior to shipment. Accordingly, we carry
minimal accounts receivable. Distributors typically pay for products in cash, by
wire transfer or by credit card. Order takers in the distribution centers, or
retail stores in China receive cash, which represents a significant portion of
all payments.
-15-
Competition
Direct
Selling Companies. We compete with other direct selling organizations, some of
which have a longer operating history and higher visibility, name recognition and
financial resources than we do. The leading direct selling companies in our existing
markets are Avon and Alticor (Amway). We compete for new distributors on the strength of
our multiple business opportunities, product offerings, global compensation plan,
management, and our international operations. In order to successfully compete in this
market and attract and retain distributors, we must maintain the attractiveness of our
business opportunities to our distributors.
Nu
Skin and Pharmanex Products. The markets for our Nu Skin and Pharmanex products
are highly competitive. Our competitors include manufacturers and marketers of personal
care and nutritional products, pharmaceutical companies and other direct selling
organizations, many of which have longer operating histories and greater name recognition
and financial resources than we do. We compete in these markets by emphasizing the
innovation, value and premium quality of our products and the convenience of our
distribution system. We focus on delivering a product whose value can be measured and
provide our distributors with powerful tools that allow them to demonstrate this
effectiveness.
Big
Planet Products and Services. The markets for our Big Planet products and
services are also highly competitive. Many of our competitors for these products and
services have much greater name recognition and financial resources than we do. We compete
in this market by delivering products that are more user friendly than those of our
competitors, by developing unique features and product interfaces, by partnering with
leading technology vendors whose competitive positioning can assist us and by leveraging
our direct selling channel strengths. The market for technology and telecommunication
products is very price sensitive, so we rely on our ability to acquire quality services
from vendors at prices that allow our distributors to sell at competitive prices while
still generating attractive commissions.
Intellectual Property
Our
major trademarks are registered in the United States and in each country where we operate
or have plans to operate, and we consider trademark protection to be very important to our
business. Our major trademarks include Nu Skin, Pharmanex, Big Planet and LifePak.
In addition, a number of our products and tools, including the Scanner, are based on
proprietary technologies and formulations, some of which are patented or licensed from
third parties. We also rely on trade secret protection to protect our proprietary formulas
and know-how. Our business is not substantially dependent on any single licensed
technology from any third party.
Government Regulation
Direct
Selling Activities. Direct selling activities are regulated by various federal,
state and local governmental agencies in the United States and foreign countries. These
laws and regulations are generally intended to prevent fraudulent or deceptive schemes,
often referred to as pyramid schemes, that compensate participants for
recruiting additional participants irrespective of product sales, use high-pressure
recruiting methods and/or do not involve legitimate products. The laws and regulations in
our current markets often:
|
|
|
impose
cancellation/product return, inventory buy-backs and cooling-off rights for consumers and
distributors; |
-16-
|
|
|
require
us or our distributors to register with governmental agencies; |
|
|
|
impose
caps on the amount of commission we can pay; |
|
|
|
impose
reporting requirements; and |
|
|
|
impose
upon us requirements, such as requiring distributors to maintain levels of retail sales
to qualify to receive commissions, to ensure that distributors are being compensated for
sales of products and not for recruiting new distributors. |
The
laws and regulations governing direct selling are modified from time to time, and, like
other direct selling companies, we are subject from time to time to government
investigations in our various markets related to our direct selling activities. This can
require us to make changes to our business model and aspects of our global compensation
plan in the markets impacted by such changes and investigations. Based on research
conducted in existing markets, the nature and scope of inquiries from government
regulatory authorities and our history of operations in those markets to date, we believe
our method of distribution complies in all material respects with the laws and regulations
related to direct selling of the countries in which we currently operate.
The
Federal Trade Commission (FTC) in the United States proposed new regulations in 2005 which
would impose additional written disclosure requirements such as earnings information,
names and telephone numbers of recent purchasers, cancellations and refund policies and
requests for cancellations or refunds within the prior two years, and information on legal
actions against the company and certain affiliates. T.he proposed regulations also would
implement a seven-day waiting period before a person could sign up to become a
distributor. The direct selling industry association has filed comments objecting to many
of the requirements in these proposed regulations and is
working to get the FTC to change its proposal.
As
a result of restrictions in China on direct selling activities, we have implemented a
retail store model utilizing an employed sales force, and we are currently integrating
direct selling in our business model in this market pursuant to recently enacted direct
selling regulations. The regulatory environment in China remains complex. Chinas
direct selling and anti-pyramiding regulations are restrictive and contain various
limitations, including a restriction on the ability to pay multi-level compensation to
independent distributors. Our operations in China have attracted significant regulatory
and media scrutiny since we expanded our operations there in January 2003. Regulations are
subject to discretionary interpretation by municipal and provincial level regulators as
well as local customs and practices. Interpretations of what constitutes permissible
activities by regulators can vary from province to province and can change from time to
time because of the lack of clarity in the rules regarding direct selling activities and
differences in customs and practices in each location.
Because
of the Chinese governments significant concerns about direct selling activities, it
scrutinizes very closely activities of direct selling companies. At times, investigations
and related actions by government regulators have impeded our ability to conduct business
in certain locations, and have resulted in a few cases in fines being paid by our company.
In each of these cases, we have been allowed to recommence operations after the
governments investigation, and no material changes to our business model were
required in connection with these fines and impediments. Please refer to Item 1A.
Risk Factors for more information on the regulatory risks associated with our
business in China.
-17-
The
regulatory environment with respect to direct selling in China remains fluid and the
process for obtaining the necessary governmental approvals to conduct direct selling
continues to evolve. The regulations and processes in some circumstances have been
interpreted differently by different governmental authorities. In order to expand our
direct selling model into additional provinces we currently must obtain a series of
approvals from the Departments of Commerce in such provinces, the Shanghai Department of
Commerce (Nu Skin Chinas supervisory authority), as well as the Departments of
Commerce in each city and district in which we plan to operate. We also are required to
obtain the approval of the State Ministry of Commerce, which is the national governmental
authority overseeing direct selling. In addition, regulators are acting cautiously as they
monitor the roll-out of direct selling, which has made the approval process take longer
than we anticipated. Please refer to Item 1A. Risk Factors for more
information on the risks associated with our planned expansion of direct selling in China.
Regulation
of Our Products. Our Nu Skin and Pharmanex products and related promotional and
marketing activities are subject to extensive governmental regulation by numerous domestic
and foreign governmental agencies and authorities, including the FDA, the FTC, the
Consumer Product Safety Commission, the Department of Agriculture, State Attorneys General
and other state regulatory agencies in the United States, and the Ministry of Health,
Labor and Welfare in Japan and similar government agencies in each market in which we
operate.
Our
personal care products are subject to various laws and regulations that regulate cosmetic
products and set forth regulations for determining whether a product can be marketed as a
cosmetic or requires further approval as a drug. In the United States,
regulation of cosmetics are under the jurisdiction of the FDA. The Food, Drug and Cosmetic
Act defines cosmetics by their intended use, as articles intended to be rubbed,
poured, sprinkled, or sprayed on, introduced into, or otherwise applied to the human body
.. . . for cleansing, beautifying, promoting attractiveness, or altering the
appearance. Among the products included in this definition are skin moisturizers,
perfumes, lipsticks, fingernail polishes, eye and facial makeup preparations, shampoos,
permanent waves, hair colors, toothpastes and deodorants, as well as any material intended
for use as a component of a cosmetic product. Conversely, a product will not be considered
a cosmetic, but may be considered a drug if it is intended for use in the diagnosis, cure,
mitigation, treatment, or prevention of disease, or is intended to affect the structure or
any function of the body. The other markets we operate in have similar regulations. In
Japan, the Ministry of Health, Labor and Welfare regulates the sale and distribution of
cosmetics and requires us to have an import business license and to register each personal
care product imported into Japan. In Taiwan, all medicated cosmetic products
require registration. In China, personal care products are placed into one of two
categories, general and drug. Products in both categories require
submission of formulas and other information with the health authorities, and drug
products require human clinical studies. The product registration process in China for
these products can take from nine to more than 18 months. Such regulations in any given
market can limit our ability to import products and can delay product launches as we go
through the registration and approval process for those products. The sale of cosmetic
products is regulated in the European Union under the European Union Cosmetics Directive,
which requires a uniform application for foreign companies making personal care product
sales.
Our
Pharmanex products are subject to various regulations promulgated by government agencies
in the markets in which we operate. In the United States, we generally market our
nutritional products as foods or dietary supplements. The FDA has jurisdiction over this
regulatory area. Because these products are regulated as foods under the
Dietary Supplement and Health Education Act, we are generally not required to obtain
regulatory approval prior to introducing a product into the United States market. None of
this infringes, however, upon the FDAs power to remove an unsafe substance from the
market. In our foreign markets, the products are generally regulated by similar government
agencies, such as the Ministry of Health and Welfare in Japan, the KFDA in South Korea,
and the Department of Health in Taiwan. We typically market our Pharmanex products in
international markets as foods or health foods under applicable regulatory regimes. In the
event a product, or an ingredient in a product, is classified as a drug or pharmaceutical
product in any market, we will generally not be able to distribute that product in that
market through our distribution channel because of strict restrictions applicable to drug
and pharmaceutical products. China has some of the most restrictive nutritional supplement
product regulations. Products marketed as health foods are subject to
extensive laboratory analysis by governmental authorities, and the product registration
process for these products takes approximately two years. We market both health
foods and general foods in China. Our flagship product, LifePak,
is currently marketed as a general food with only one of the three main capsules having
received health food classification. Currently, general foods is
not an approved category for direct selling; therefore, we will only market LifePak
through our retail stores until final health food classification for
LifePak is obtained for the other two capsules. Additionally, there is some risk
associated with the common practice in China of marketing a product as a general
food while seeking health food classification. If government officials
feel our categorization of our products is inconsistent with product claims, ingredients
or function, this could limit our ability to market such products in China in their
current form.
-18-
The
markets in which we operate all have varied regulations that distinguish foods and
nutritional health supplements from drugs or pharmaceutical
products. Because of the varied regulations, some products or ingredients that are
recognized as a food in certain markets may be treated as a
pharmaceutical in other markets. In Japan, for example, if a specified
ingredient is not listed as a food by the Ministry of Health and Welfare, we
must either modify the product to eliminate or substitute that ingredient, or petition the
government to treat such ingredient as a food. We experience similar issues in our other
markets. This is particularly a problem in Europe where the regulations differ from
country to country. As a result, we must often modify the ingredients and/or the levels of
ingredients in our products for certain markets. In some circumstances, the regulations in
foreign markets may require us to obtain regulatory approval prior to introduction of a
new product or limit our uses of certain ingredients altogether. Because of negative
publicity associated with some supplements, such as ephedra or human growth
hormones (HGH) (which we have never marketed) and other potentially harmful ingredients,
there has been an increased movement in the United States and other markets to expand the
regulation of dietary supplements, which could impose additional restrictions or
requirements in the future.
In
June 2007 the U.S. Food and Drug Administration announced a final rule establishing
regulations to require current good manufacturing practices (cGMP) for dietary
supplements. The rule ensures that dietary supplements are produced in a quality manner,
do not contain contaminants or impurities, and are accurately labeled. The final rule
includes requirements for establishing quality control procedures, designing and
constructing manufacturing plants, and testing ingredients and the finished products. It
also includes requirements for record keeping and handling consumer product complaints. If
dietary supplements contain contaminants or do not contain the dietary ingredient they are
represented to contain, the FDA would consider those products to be adulterated or
misbranded. We are required to comply with the new rule by June 2008. We believe that we
have in place all systems and quality control procedures or will have such in place prior
to the rule becoming effective as to our manufacturing or those of our vendors. Our
business is subject to additional regulations, such as those implementing a new adverse
event reporting system (AERs) effective December 2007,which requires us
to document and track adverse events and report serious adverse events associated with
consumers use of our products.
We
are aware that, in some of our international markets, there has been adverse publicity
concerning products that contain ingredients that have been genetically modified,
(GM) or irradiated. In some markets, the possibility of health risks or
perceived consumer preference thought to be associated with GM or irradiated ingredients
has prompted proposed or actual governmental regulation. We cannot anticipate the extent
to which these or other future regulations in our markets will restrict the use of
ingredients in our products or the impact of any regulations on our business in those
markets. We believe, based upon currently available information, that compliance with
regulatory requirements in this area should not have a material adverse effect on us or
our business. Compliance with GM, irradiation regulations or the like could be expected to
increase the cost of manufacturing certain of our products.
-19-
Most
of our major markets also regulate advertising and product claims regarding the efficacy
of products. This is particularly true with respect to our dietary supplements because we
typically market them as foods or health foods. Accordingly, these regulations can limit
our ability to inform consumers of the full benefits of our products. For example, in the
United States, we are unable to claim that any of our nutritional supplements will
diagnose, cure, mitigate, treat or prevent disease. In most of our foreign markets, we are
not able to make any medicinal claims with respect to our Pharmanex products.
In the United States, the Dietary Supplement Health and Education Act, however, permits
substantiated, truthful and non-misleading statements of nutritional support to be made in
labeling, such as statements describing general well-being resulting from consumption of a
dietary ingredient or the role of a nutrient or dietary ingredient in affecting or
maintaining a structure or a function of the body. Most of the other markets in which we
operate have not adopted similar legislation and we may be subject to more restrictive
limitations on the claims we can make about our products in these markets. For example, in
Japan, our nutritional supplements are marketed as food products, which significantly
limits our ability to make any claims regarding these products.
To
date, we have not experienced any difficulty maintaining our import licenses. However, due
to the varied regulations governing the manufacture and sale of nutritional products in
the various markets, we have found it necessary to reformulate many of our products or
develop new products in order to comply with such local requirements. In 2007, we have had
a couple of products that we were required to remove from one or more markets in Europe
because they were determined to be a drug or contain a novel ingredient. In the United
States, we are also subject to a consent decree with the FTC and various state regulatory
agencies arising out of investigations that occurred in the early 1990s of certain alleged
unsubstantiated product and earnings claims made by our distributors. The consent decree
requires us to, among other things, supplement our procedures to enforce our policies, not
allow our distributors to make earnings representations without making certain average
earnings disclosures, and not allow our distributors to make unsubstantiated product
claims.
Regulation
of Our Business Tools. One of our strategies is to develop
technologically-advanced business tools designed to help our distributors effectively
market our Nu Skin and Pharmanex products. For example, during the last several years we
have introduced the Scanner in many of our markets around the world as well as the
Galvanic Spa System II and the ProDerm Skin Analyzer. These tools are
subject to the regulations of various health, consumer protection and other governmental
authorities around the world. These regulations vary from market to market and affect
whether our business tools are required to be registered as medical devices, the claims
that can be made with respect to these tools, who can use them, and where they can be
used. We have been subject to regulatory inquiries in the United States, Japan, and other
countries with respect to the status of the Scanner as a non-medical device. Any
determination that medical device clearance is required could require us to expend
significant time and resources in order to meet the stringent standards imposed on medical
device companies or prevent us from marketing the product. For example, we are not able to
market the Galavanic Spa System II in Taiwan as a result of the regulatory
restrictions in this market. We are also subject to regulatory constraints on the claims
that can be made with respect to the use of our business tools. In Japan, for example, we
are limited in our ability to tie the Scanner measurement directly to the consumption of
our nutrition products.
Other
Regulatory Issues. As a United States entity operating through subsidiaries in
foreign jurisdictions, we are subject to foreign exchange control, transfer pricing and
custom laws that regulate the flow of funds between us and our subsidiaries and for
product purchases, management services and contractual obligations, such as the payment of
distributor commissions.
-20-
As
is the case with most companies that operate in our product categories, we receive from
time to time inquiries from government regulatory authorities regarding the nature of our
business and other issues, such as compliance with local direct selling, transfer pricing,
customs, taxation, foreign exchange control, securities and other laws. Negative publicity
resulting from inquiries into our operations by United States and state government
agencies in the early 1990s, stemming in part from alleged inappropriate product and
earnings claims by distributors, and in the late 1990s resulting from adverse media
attention in South Korea, harmed our business.
Employees
As
of December 31, 2007, we had approximately 8,700 full- and part-time employees worldwide,
approximately 2,750 of whom are employed as sales representatives in our China operations.
We also had labor contracts with approximately 2,330 potential new sales representatives
in China. None of our employees are represented by a union or other collective bargaining
group, except in China. We believe that our relationship with our employees is good, and
we do not foresee a shortage in qualified personnel necessary to operate our business.
Available Information
Our
Internet address is www.nuskinenterprises.com. We make available free of charge on
or through our Internet Website our annual reports on Form 10-K, quarterly reports on Form
10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished
pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as
reasonably practicable after we electronically file such material with, or furnish it to,
the Securities and Exchange Commission.
Executive Officers
Our
executive officers as of February 29, 2008, are as follows:
Name |
|
|
|
Age |
|
Position |
| |
Blake Roney |
|
|
|
49 |
|
Executive Chairman of the Board |
|
|
Truman Hunt | | |
| 48 |
|
President and Chief Executive Officer | | |
Ritch Wood | | |
| 42 |
|
Chief Financial Officer | | |
Joe Chang | | |
| 55 |
|
Chief Scientific Officer and Executive Vice President, Product Development | | |
Dan Chard | | |
| 43 |
|
Executive Vice President, Distributor Success | | |
Scott Schwerdt | | |
| 50 |
|
President, Americas and Europe | | |
Matthew Dorny | | |
| 44 |
|
General Counsel and Secretary | | |
Set forth
below is the business background of each of our executive officers.
Blake Roney
has served as the executive Chairman of the Board of our public company since we went
public in 1996. Mr. Roney was a founder of Nu Skin International (NSI) in
1984 and served as its Chief Executive Officer and President until our acquisition of NSI
in March 1998. Since our acquisition of NSI, Mr. Roney has retained his position as
the executive Chairman of the Board of our company. He received a B.S. degree from Brigham
Young University.
-21-
Truman
Hunt has served as our President since January 2003 and our Chief Executive Officer
since May 2003. He has also served as a director of our company since May 2003.
Mr. Hunt joined NSI (which we acquired in 1998) in 1994 and has served in various
positions with NSI and our company, including Vice President and General Counsel from 1996
to January 2003 and Executive Vice President from January 2001 until January 2003. Prior
to 1994, Mr. Hunt served as President and Chief Executive Officer of Better Living
Products, Inc., an NSI affiliate involved in the manufacture and distribution of houseware
products sold through traditional retail channels, and he was a securities and business
attorney in private practice. He received a B.S. degree from Brigham Young University and
a J.D. degree from the University of Utah.
Ritch Wood
has served as our Chief Financial Officer since November 2002. Prior to this appointment,
Mr. Wood served as Vice President, Finance from July 2002 to November 2002 and Vice
President, New Market Development from June 2001 to July 2002. Mr. Wood joined NSI in
1993 and has served NSI and our company in various capacities, including Controller,
Pharmanex Division, Director of Finance, New Market Development, and Assistant Director of
Tax. Prior to joining us, he worked for
the accounting firm of Grant Thornton LLP. Mr. Wood earned a B.S. and a Master of
Accountancy degree from Brigham Young University.
Joe
Chang has served as Chief Scientific Officer and Executive Vice President of Product
Development since February 2006. Dr. Chang served as the President of Pharmanex, our
nutritional supplement division, from April 2000 to February 2006. Dr. Chang served as
Vice President of Clinical Studies and Pharmacology of Pharmanex from 1997 until April
2000. He was the President and Chief Scientific Officer of Binary Therapeutics, Inc., a
development stage company in the biotechnology industry, from 1994 until 1997. Dr. Chang
has nearly 20 years of pharmaceutical experience. He received a B.S. degree from
Portsmouth University and a Ph.D. degree from the University of London.
Dan
Chard has served as Executive Vice President of Distributor Success since
February 2006. Prior to serving in this position, Mr. Chard served as President
of Nu Skin Europe from April 2004 to February 2006. Mr. Chard was Vice President of
Marketing and Product Management for the Big Planet Division from September 2002 to March
2004 and Senior Director of Marketing and Product Development for Pharmanex from September
1998 to June 2000. Mr. Chard worked in a variety of strategic management positions
including Senior Vice President of Marketing and Product Management at Broadlane and
Promedix, leaders in the health care supply chain management industry from July 2000 to
August 2002. Mr. Chard worked for PUR Recovery Engineering, a consumer products
manufacturer, from October 1997 to October 1998 as the Director of Marketing, and also
spent six years in marketing management with Pillsbury. Mr. Chard holds a B.A. degree
in Economics from Brigham Young University and an M.B.A. from the University of Minnesota.
Scott Schwerdt
has served as President, Americas and Europe since February 2006. Mr. Schwerdt served
as Regional Vice President of North America and President of Nu Skin Enterprises United
States, Inc. from May 2004 to February 2006. Mr. Schwerdt previously served as the
General Manager of our U.S. operations from May 2001 to May 2004 and as Chief Operating
Officer of our Big Planet division from December 1998 to May 2001. Mr. Schwerdt
joined NSI in 1988 and has held various positions with NSI and with our company, including
Vice President of North America/South Pacific Operations and Vice President of Europe.
Prior to joining us, Mr. Schwerdt was a Senior Resource Manager at the Department of
Defense in Washington, D.C. Mr. Schwerdt received a B.A. degree in International
Relations from Brigham Young University.
Matthew
Dorny has served as our General Counsel and Secretary since January 2003.
Mr. Dorny previously served as Assistant General Counsel from May 1998 to January
2003. Prior to joining us, Mr. Dorny was a shareholder in the law firm of Parr,
Waddoups, Brown, Gee & Loveless in Salt Lake City, Utah. Mr. Dorny received B.A.,
M.B.A. and J.D. degrees from the University of Utah.
-22-
Note
Regarding Forward-Looking Statements. Certain statements made in this
filing under the caption Item 1- Business are forward-looking
statements within the meaning of Section 21E of the Securities Exchange Act of 1934,
as amended (the Exchange Act). In addition, when used in this Report the words
or phrases will likely result, expect, intend,
will continue, anticipate, estimate,
project, believe and similar expressions are intended to identify
forward-looking statements within the meaning of the Exchange Act.
Forward-looking
statements include plans and objectives of management for future operations, including
plans and objectives relating to our products and future economic performance in countries
where we operate. These forward-looking statements involve risks and uncertainties and are
based on certain assumptions that may not be realized. Actual results and outcomes may
differ materially from those discussed or anticipated. We assume no responsibility or
obligation to update these statements to reflect any changes. The forward-looking
statements and associated risks set forth herein relate to, among other things:
|
|
|
our
plans to launch or continue to roll-out or promote various products, tools, and
initiatives; |
|
|
|
the
expectation that our relationship with our current primary suppliers will not end in the
near term, and the belief that we could produce or source our personal care products from
other suppliers and expand manufacturing capabilities in China, and replace our primary
suppliers of Pharmanex products without great difficulty or increased cost; |
|
|
|
our
plans to continue to develop and introduce new, innovative products and to improve and
evolve our existing product formulations; |
|
|
|
our
belief that we will have in place all necessary systems and quality control procedures to
comply with cGMP for dietary supplements; |
|
|
|
our
plans to open additional stores in China, and our plans to commence operations in South
Africa; |
|
|
|
our
belief that compliance with certain regulatory requirements will not have a material
adverse effect on our business; |
|
|
|
our
plans to commit resources to research and development in the future; |
|
|
|
our
belief that providing effective distributor support will be important to our success; |
|
|
|
our
belief that we do not currently foresee a shortage in qualified personnel necessary to
operate our business. |
These
and other forward-looking statements are subject to various risks and uncertainties
including those described below under Risk Factors and in Item 7.
Managements Discussion and Analysis of Financial Condition and Results of
Operation.
-23-
ITEM 1A. |
|
1A. RISK FACTORS |
We
face a number of substantial risks. Our business, financial condition or results of
operations could be harmed by any of these risks. The trading price of our common stock
could decline due to any of these risks, and they should be considered in connection with
the other information contained in this Annual Report on Form 10-K. These risk factors
should be read together with the other items in this Annual Report on Form 10-K, including
Item 1. Business and Item 7. Managements Discussion and Analysis
of Financial Condition and Results of Operation.
Currency exchange
rate fluctuations could lower our revenue and net income.
In
2007, we recognized approximately 86% of our revenue in markets outside of the United
States in each markets respective local currency. We purchase inventory primarily in
the United States in U.S. dollars. In preparing our financial statements, we translate
revenue and expenses in foreign countries from their local currencies into U.S. dollars
using weighted-average exchange rates. If the U.S. dollar strengthens relative to local
currencies, particularly the Japanese yen inasmuch as we generated approximately 38% of
our 2007 revenue in Japan, our reported revenue, gross profit and net income will likely
be reduced. During the last couple of years, we experienced an overall weakening of the
Japanese yen, which has harmed our results. Although the yen has subsequently strengthened
considerably over the last few months, given the global, complex political and economic
dynamics that affect exchange rate fluctuations, we cannot estimate future fluctuations
and the effect these fluctuations may have upon future reported results or our overall
financial condition. In the event the Japanese yen or other foreign currencies weaken, our
results in 2008 would be negatively impacted. Although we attempt to reduce our exposure
to short-term exchange rate fluctuations by using foreign currency exchange rate contracts
for the Japanese yen and the use of yen denominated debt, we cannot be certain these
contracts or any other hedging activity will effectively reduce exchange rate exposure.
Because our Japanese operations
account for a significant part of our business, continued weakness in our business
operations in Japan would harm our business.
Approximately
38% of our 2007 revenue was generated in Japan. We have experienced declines in our
business in this market during the past few years, and it appears many of our direct
selling competitors have seen their businesses in this market contract over the last few
years. We believe our operating results have been negatively impacted by a variety of
factors, including, lack of distributor activity, the unanticipated impact of compensation
plan changes, regulatory issues, and production difficulties. Our financial results would
be harmed and our business could continue to decline if our products, business
opportunity, or planned growth initiatives do not retain and generate continued interest
and enthusiasm among our distributors and consumers in this market. In addition, there
appears to be increased governmental scrutiny of our industry including a recent
regulatory action against a prominent company that has received considerable publicity. As
a result of these factors, this market continues to be a challenging market. We have
implemented several initiatives, including the launch of new products and changes to our
compensation plan, and have other initiatives planned to help renew growth in this market.
If these and other planned initiatives are delayed, or do not generate distributor
excitement or attract new distributors or customers in Japan, or if industry conditions do
not improve, or we experience adverse publicity as a result of the actions of our
distributors, it may limit our prospects for renewed growth in this market and harm our
financial results.
-24-
If we are unable to retain our
existing independent distributors and recruit additional distributors, our revenue will
not increase and may even decline.
We
distribute almost all of our products through our independent distributors (and China
sales representatives) and we depend on them to generate virtually all of our revenue. Our
distributors may terminate their services at any time, and, like most direct selling
companies, we experience high turnover among distributors from year to year. Distributors
who join to purchase our products for personal consumption or for short-term income goals
frequently only stay with us for a short time. Executive distributors who have committed
time and effort to build a sales organization will generally stay for longer periods.
Distributors have highly variable levels of training, skills and capabilities. As a
result, in order to maintain sales and increase sales in the future, we need to continue
to retain existing distributors and recruit additional distributors. To increase our
revenue, we must increase the number of and/or the productivity of our distributors.
We
have experienced periodic declines in both active distributors and executive distributors
in the past. The number of our active and executive distributors may not increase and
could decline again in the future. While we take many steps to help train, motivate, and
retain distributors, we cannot accurately predict how the number and productivity of
distributors may fluctuate because we rely primarily upon our distributor leaders to
recruit, train, and motivate new distributors. Our operating results could be harmed if we
and our distributor leaders do not generate sufficient interest in our business to retain
existing distributors and attract new distributors.
The number and productivity of our
distributors also depends on several additional factors, including:
|
|
|
any
adverse publicity regarding us, our products, our distribution channel, or our
competitors; |
|
|
|
a
lack of interest in, or the technical failure of, existing or new products; |
|
|
|
lack
of a sponsoring story that generates interest for potential new distributors and
effectively draws them into the business; |
|
|
|
the
public's perception of our products and their ingredients; |
|
|
|
the
public's perception of our distributors and direct selling businesses in general; |
|
|
|
our
actions to enforce our policies and procedures; |
|
|
|
any
regulatory actions or charges against us or others in our industry; |
|
|
|
general
economic and business conditions; and |
|
|
|
potential
saturation or maturity levels in a given country or market which could negatively impact
our ability to attract and retain distributors in such market. |
Our
operating results could be adversely affected if our existing and new business
opportunities and incentives, products, business tools and other initiatives do not
generate sufficient enthusiasm and economic incentive to retain our existing distributors
or to sponsor new distributors on a sustained basis. In addition, in our mature markets,
one of the challenges we face is keeping distributor leaders with established businesses
and high income levels motivated and actively engaged in business building activities and
developing new distributor leaders. There can be no assurance that our initiatives such as
the Scanner and Galvanic Spa System II will generate excitement among our
distributors in the long-term or that planned initiatives will be successful in
maintaining distributor activity and productivity or in motivating distributor leaders to
remain engaged in business building and developing new distributor leaders. In addition,
some initiatives may have unanticipated negative impacts on our markets, particularly
changes to our compensation plan. The introduction of a new product or key initiative such
as the Scanner and g3 can also negatively impact other product lines to the extent
our distributor leaders focus their efforts on the new product or initiative.
-25-
Although our distributors are
independent contractors, improper distributor actions that violate laws or regulations
could harm our business.
Distributor
activities in our existing markets that violate governmental laws or regulations could
result in governmental actions against us in markets where we operate, which would harm
our business. Except in China, our distributors are not employees and act independently of
us. We implement strict policies and procedures to ensure our distributors will comply
with legal requirements. However, given the size of our distributor force, we experience
problems with distributors from time to time. For example, product claims made by some of
our distributors in 1990 and 1991 led to an investigation by the FTC in the United States,
which resulted in our entering into a consent decree with the FTC. In addition, recent
rulings by the Korean FTC and by judicial authorities against us and other companies in
Korea indicate that vicarious liability may be imposed on us for the criminal activity of
our independent distributors. During the past year we have experienced an increase in
complaints to consumer protection agencies in Japan related to distributor activities. As
a result, we have performed additional training for distributors in this market to try to
resolve these issues and restructured our compliance operations to provide enhanced
education and training as well as rules compliance. We have also been in contact with
several consumer centers about resolving some distributor inappropriate behavior issues.
If consumer complaints escalate to a government review or if the level of complaints
further increases or does not improve, regulators in Japan could take action against us or
negative media could occur, either of which could harm our business.
Government inquiries,
investigations, and actions could harm our business.
There
has been an increase in governmental scrutiny of our industry in various markets,
including Japan, China, Europe, and the United Kingdom. In the United Kingdom, an action
has been brought against an industry leader by regulators alleging that the company and
its distributor were engaged in activities that violated the anti-pyramid laws. In Japan,
one of the larger direct selling companies in that market was recently required to suspend
sponsoring activities for three months. We understand that regulators in Japan are
increasingly focusing on companies in our industry. Any adverse results in these cases
could spur further reviews and actions with respect to others in the industry. From time
to time, we receive formal and informal inquiries from various government regulatory
authorities about our business and our compliance with local laws and regulations. Any
determination that we or our distributors are not in compliance with existing laws or
regulations could potentially harm our business. Even if governmental actions do not
result in rulings or orders, they potentially could create negative publicity which could
detrimentally affect our efforts to recruit or motivate distributors and attract customers
and, consequently, reduce revenue and net income.
In
the early 1990s, we entered into voluntary consent agreements with the FTC and a few state
regulatory agencies relating to investigations of our distributors product claims
and practices. These investigations centered on alleged unsubstantiated product and
earnings claims made by some of our distributors. We believe that the negative publicity
generated by this FTC action, as well as a subsequent action in the mid-1990s related to
unsubstantiated product claims, harmed our business and results of operation in the United
States. Pursuant to the consent decrees, we agreed, among other things, to supplement our
procedures to enforce our policies, to not allow distributors to make earnings
representations without making additional disclosures relating to average earnings and to
not make, or allow our distributors to make, product claims that were not substantiated.
We have taken various actions, including implementing a more generous inventory buy-back
policy, publishing average distributor earnings information, supplementing our procedures
for enforcing our policies, and reviewing distributor product sales aids, to address the
issues raised by the FTC and state agencies in these investigations. As a result of the
previous investigations, the FTC makes inquiries from time to time regarding our
compliance with applicable laws and regulations and our consent decree. Any further
actions by the FTC or other comparable state or federal regulatory agencies, in the United
States or abroad, could have a further negative impact on us in the future.
-26-
Challenges by private parties to
the form of our network marketing system could harm our business.
We
may be subject to challenges by private parties, including our distributors, to the form
of our network marketing system or elements of our business. For example, class action
lawsuits have recently been brought against some of our competitors that include
allegations that the businesses involve unlawful pyramid schemes. In addition, there have
been allegations made by a consumer protection activist regarding the business models of a
couple of our competitors in the network marketing industry. There can be no assurance
that similar actions or allegations will not be brought against us, which could harm our
business. In addition, adverse rulings in one of these cases could negatively impact our
business if it creates adverse publicity or interprets current regulatory requirements in
a manner that is inconsistent with our current business practices. In the United States,
the network marketing industry and regulatory authorities have generally relied on the
implementation of distributor rules and policies designed to promote retail sales to
protect consumers and to prevent inappropriate activities and to distinguish between
legitimate network marketing distribution plans and unlawful pyramid schemes. We have
adopted rules and policies based on case law, rulings of the FTC, discussions with
regulatory authorities in several states and domestic and global industry standards. Legal
and regulatory requirements concerning network marketing systems, however, involve a high
level of subjectivity, are inherently fact-based and are subject to judicial
interpretation. Because of the foregoing, we can provide no assurance that we would not be
harmed by the application or interpretation of statutes or regulations governing network
marketing, particularly in any civil challenge by a current or former distributor.
Governmental regulations relating
to the marketing and advertising of our products and services, in particular our
nutritional supplements, may restrict or inhibit our ability to sell these products.
Our
products and our related marketing and advertising efforts are subject to extensive
governmental regulations by numerous domestic and foreign governmental agencies and
authorities. These include the FDA, the FTC, the Consumer Product Safety Commission and
the Department of Agriculture in the United States, State Attorneys General and other
state regulatory agencies and the Ministry of Health, Labor and Welfare in Japan along
with similar governmental agencies in other foreign markets where we operate.
Our
markets have varied regulations concerning product formulation, labeling, packaging and
importation. These laws and regulations often require us to, among other things:
|
|
|
reformulate
products for a specific market to meet the specific product formulation laws of that
country; |
|
|
|
conform
product labeling to the regulations in each country; and |
-27-
|
|
|
register
or qualify products with the applicable governmental authority or obtain necessary
approvals or file necessary notifications for the marketing of our products. |
Restrictions
on our ability to introduce products, or delays in introducing products, could reduce
revenue and decrease profitability. Regulators also may prohibit us from making
therapeutic claims about products, regardless of the existence of research and independent
studies that may support such claims. These product claim restrictions could prevent us
from realizing the potential revenue from some of our products.
Increased regulatory scrutiny of
nutritional supplements as well as new regulations that are being adopted in some of our
markets with respect to nutritional supplements could result in more restrictive and
burdensome regulations and harm our results.
There
has been an increasing movement in the United States and other markets to increase the
regulation of dietary supplements, which could impose additional restrictions or
requirements in the future. In several of our markets, including Europe, South Korea and
Hong Kong, new regulations have been adopted or are likely to be adopted in the near-term
that could impose new requirements, make changes in some classifications of supplements
under the regulations, or limit the levels of ingredients we can include and claims we can
make. In addition, there has been increased regulatory scrutiny of nutritional supplements
and marketing claims under existing and new regulations. In Europe for example, we are
unable to market supplements that contain ingredients that have not been previously
marketed in Europe (novel foods) without going through an extensive
registration and approval process. We recently had our g3 product taken off the
market in Denmark because the authorities in Denmark disagreed with our position that the
product was not a novel food. We also recently had to stop selling
Cholestin in the Netherlands and IGG Boost in Denmark based on adverse
determinations by regulators in these markets. Europe is also expected to adopt additional
regulations this fall setting new limits on acceptable maximum levels of vitamins and
minerals. In addition, the FDA recently finalized new GMPs and AERs for the nutritional
supplement industry requiring good manufacturing processes for us and our vendors and
reporting of serious adverse events associated with use of our products. Our operations
could be harmed if new regulations require us to reformulate products or effect new
registrations, if regulatory authorities make determinations that any of our products do
not comply with applicable manufacturing and regulatory requirements, or if we are not
able to effect necessary changes to our products in a timely and efficient manner in order
to respond or comply to new regulations. In addition, our operations could be harmed if
governmental laws or regulations are enacted that restrict the ability of companies to
market or distribute nutritional supplements or impose additional burdens or requirements
on nutritional supplement companies.
Our operations in China are
subject to significant governmental scrutiny and may be harmed by the results of such
scrutiny.
Because
of the governments significant concerns about direct selling activities, government
regulators in China scrutinize very closely activities of direct selling companies or
activities that resemble direct selling. The regulatory environment in China with regards
to direct selling is evolving, and officials in multiple national and local levels in the
Chinese government often exercise significant discretion in deciding how to interpret and
apply applicable regulations. In the past, the government has taken significant actions
against companies that the government found were engaging in direct selling activities in
violation of applicable law, including shutting down their businesses and imposing
substantial fines.
-28-
Our
business in China has been subject to significant governmental scrutiny, and reviews and
investigations by government regulators have at times impeded our ability to conduct
business and have resulted in several cases in fines being paid by us, which in the
aggregate have been less than 1% of our revenue in China. We continue to be subject to
current governmental reviews and investigations, and we may incur similar or more severe
sanctions in the future. Occasionally, we have also been asked to cease sales activity in
some stores while the regulators review our operations. While, in each of these cases, we
have been allowed to recommence operations after the governments review without
material changes to our operations, there is no assurance that this will always be the
case. Even though we have now obtained approval to conduct direct selling in Shanghai and
Beijing, government regulators continue to scrutinize our activities and the activities of
our distributors and sales employees to monitor our compliance with the new regulations
and other applicable regulations as we implement direct selling into our business model.
At times, complaints made by our sales representatives to the government have resulted in
increased scrutiny by the government. Any determination that our operations or activities,
or the activities of our employed sales representatives or distributors, are not in
compliance with applicable regulations could result in the imposition of substantial
fines, extended interruptions of business, termination of necessary licenses and permits,
including our direct selling approvals, or restrictions on our ability to open new stores
or obtain approvals for service centers or expand into new locations, or other actions,
all of which would harm our business.
If recently adopted direct selling
regulations in China are interpreted or enforced by governmental authorities in a manner
that negatively impacts our retail business model or our dual business model there, our
business in China could be harmed.
Chinese
regulators have adopted anti-pyramiding and new direct selling regulations that contain
significant restrictions and limitations, including a restriction on multi-level
compensation for independent distributors selling away from a fixed location. The
regulations also impose various requirements on individuals before they can become direct
sellers, including the passage of an examination, which are more burdensome than in our
other markets and which could negatively impact the willingness of some people to sign up
to become direct sellers. These new regulations are not yet well understood, and there
continues to be some confusion and uncertainty as to the meaning of the new regulations
and their scope, and the specific types of restrictions and requirements imposed under
them. It is difficult to predict how regulators will interpret and enforce these new
regulations and the impact of these new regulations on pending regulatory reviews and
investigations. Our business and our growth prospects would be harmed if Chinese
regulators interpret the anti-pyramiding regulations or direct selling regulations as
applying to our retail store/employed sales representative business model, or if
regulations are interpreted in such a manner that our current method of conducting
business through the use of employed sales representatives or our implementation of direct
selling that is currently underway is found to violate applicable regulations. In
particular, our business would be harmed by any determination that our current method of
compensating our sales employees, including our use of the sales productivity of a sales
employee and the group of sales employees whom he or she trains and supervises as one of
the factors in establishing such sales employees salary and compensation, violates
the restriction on multi-level compensation in the new regulations. Our business could
also be harmed if regulators inhibit our ability to concurrently operate our retail
store/employed sales representative business model and our direct selling business.
-29-
Although we have obtained approval
to conduct direct selling in China, our current governmental approval only allows us to do
so in Shanghai and Beijing. If we are unable to obtain additional necessary national and
local governmental approvals as quickly as we would like, our ability to expand our direct
selling business and grow our business there could be negatively impacted.
We
have completed the required national and local licensing process and commenced direct
selling activities in Beijing and Shanghai. In order to expand our direct selling model
into additional provinces, we currently must obtain a series of approvals from district,
city, provincial and national governmental agencies with respect to each province in which
we wish to expand. The approval process includes a requirement that we establish
service centers that serve primarily as product return locations. If
regulators fail to permit us to build service centers at a rate that meets our growth
demands, this could limit our ability to obtain direct selling approvals in accordance
with anticipated timelines. Because direct selling was only recently authorized in China,
the process for obtaining the necessary governmental approvals to conduct direct selling
continues to evolve. As we are being required to work with such a large number of
provincial, city, district and national governmental authorities, we have found that it is
taking more time than anticipated to work through the approval process with these
authorities. These authorities have broad discretion in interpreting the regulations and
granting necessary approvals. Different governmental authorities have interpreted the
regulations and processes in some circumstances differently. A delay in obtaining
approvals at one level can delay our ability to obtain approvals at the next level. In
addition, we have received some indications from the national government authorities that
they intend to review and monitor the operations of an approved direct selling company
during an evaluation period before granting approvals to such company to expand into
additional provinces as regulators continue to closely monitor the development of direct
selling in China. The complexity of the approval process as well as the governments
continued cautious approach as direct selling develops in China makes it difficult to
predict the timeline for obtaining these approvals. If the results of the
governments evaluation of our direct selling activities in Shanghai results in
further delays in obtaining licenses elsewhere, or if the current processes for obtaining
approvals are delayed further for any reason or are changed or are interpreted differently
than currently understood, our ability to expand direct selling in China and our growth
prospects in this market could be negatively impacted.
Implementing a compensation plan
and business model for our independent distributors in China that is different from other
markets could harm our ability to grow our business in China.
The
direct selling regulations in China impose various limitations and requirements, including
a prohibition on multi-level compensation and a requirement that all distributors pass a
required examination before becoming a distributor. The regulations also impose other
restrictions on direct selling activities that differ from the regulations in our other
markets. As a result, we are implementing a direct selling compensation plan and business
model for the direct sales component of our business that differs from the model we use in
other markets. There can be no assurance that these restrictions will not negatively
impact our ability to provide an attractive business opportunity to distributors in this
market and limit our ability to grow our business in this market. In addition, the
regulations do not allow the sale of general foods through a direct selling business
model. Because some of our supplements, including LifePak, are being marketed as
general foods until we obtain health food status for these products, we will only be able
to sell these products at our stores and not away from the stores until they receive
health food status, which could have a negative impact on our direct selling business.
Intellectual property rights are
difficult to enforce in China.
Chinese
commercial law is relatively undeveloped compared to most of our other major markets, and,
as a result, we may have limited legal recourse in the event we encounter significant
difficulties with patent or trademark infringers. Limited protection of intellectual
property is available under Chinese law, and the local manufacturing of our products may
subject us to an increased risk that unauthorized parties may attempt to copy or otherwise
obtain or use our product formulations. As a result, we cannot assure that we will be able
to adequately protect our product formulations.
-30-
If one of our tools is determined
to be a medical device in a particular geographic market or if our distributors use it for
medical purposes, our ability to continue to market and distribute such tool could be
harmed.
One
of our strategies is to market unique tools that allow our distributors to distinguish our
products, including the Scanner, the Galavanic Spa System II, and the ProDerm
Skin Analyzer. We do not believe the products are medical devices and do not market
them as medical devices. In March 2003, the FDA questioned the status of the Scanner as a
non-medical device. We subsequently filed an application with the FDA to have it
classified as a non-medical device. The FDA has not yet acted on our application. There
are various factors that could determine whether a product is a medical device including
the claims that we or our distributors make about it. We have faced similar uncertainties
and regulatory issues in other markets with respect to the status of one or more of our
tools as a non-medical device and the claims that can be made in using it. For example,
during the past couple of years we have faced regulatory inquiries in Japan, Korea,
Singapore and Thailand regarding distributor claims with respect to the Scanner. We are
not able to market the Galvanic Spa System II in Taiwan due to regulatory
restrictions. There have also been recent legislative proposals in Singapore and Malaysia
relating to the regulation of medical devices which could have an impact on our tools. A
determination in any of these markets that any of our tools are medical devices or that
distributors are using it to make medical claims or perform medical diagnoses or other
activities limited to licensed professionals could negatively impact our ability to use
these tools in a market. Regulatory scrutiny of a tool could also dampen distributor
enthusiasm and hinder the ability of distributors to effectively utilize such tool. In the
event medical device clearance is required in any market, obtaining clearance could
require us to provide documentation concerning its clinical utility and to make some
modifications to its design, specifications and manufacturing process in order to meet
stringent standards imposed on medical device companies. There can be no assurance we
would be able to provide such documentation and make such changes promptly or in a manner
that is satisfactory to regulatory authorities.
Changes to our compensation
arrangements with our distributors could be viewed negatively by some distributors and
could harm our operating results if such changes impact distributor productivity.
We
have implemented a global compensation plan that has some components that differ from
market to market. We modify components of our compensation plan from time to time in an
attempt to keep our compensation plan competitive and attractive to existing and potential
distributors, to address changing market dynamics, to provide incentives to distributors
that we believe will help grow our business, and to address other business needs. Because
of the size of our distributor force and the complexity of our compensation plans, it is
difficult to predict whether such changes will achieve their desired results. For example,
in 2005, we made changes to our compensation plan in Japan that had been successful in
other markets, but did not have the impact in Japan that we anticipated and negatively
impacted our business. China and certain markets in Southeast Asia similarly were
negatively impacted by compensation plan changes in 2005. We are currently planning on
implementing various changes to our compensation plan throughout many of our markets in
2008. In addition, because of the size and complexity of our sales force and compensation
plan, growth in certain markets and changes to our plans have caused compensation rates in
these markets to rise higher than historical levels, which could reduce our operating
income. Although managements objective is to maximize the benefit of compensation
plan expenses, compensation plan changes may be made in the future in these markets with
higher compensation rates in order to maintain overall payout as close to historical
levels as possible. In addition, we will need to make changes to our compensation plan in
South Korea as our average pay-out is beginning to rise above the maximum level allowed by
law. We cannot be certain that the modifications we are making in South Korea or any other
modifications we make to our compensation plans in our other markets will be well received
or achieve their desired results. If our distributors fail to adapt to these changes or
find them unattractive, our business could be harmed.
-31-
If we are unable to successfully
expand and grow operations within our recently opened and developing markets, we may have
difficulty achieving our long-term objectives.
A
significant percentage of our revenue growth over the past decade has been attributable to
our expansion into new markets. Our growth over the next several years depends in part on
our ability to successfully introduce products and tools, and to successfully implement
initiatives in our new and developing markets, including China, Russia, Latin America and
Eastern Europe that will help generate growth. In addition to the regulatory difficulties
we may face in introducing our products, tools, and initiatives in these markets, we could
face difficulties in achieving acceptance of our premium-priced products in developing
markets. In the past, we have struggled to operate successfully in developing markets,
such as Latin America. This may also be the case in Eastern Europe and the other new
markets into which we have recently expanded. If we are unable to successfully expand our
operations within these new markets, our opportunities to grow our business may be
limited, and, as a result, we may not be able to achieve our long-term objectives.
Global political issues
and conflicts could harm our business.
Because
a substantial portion of our business is conducted outside of the United States, our
business is subject to global political issues and conflicts, including terrorism threats,
tensions related to North Korea, political tensions between the Peoples Republic of
China and Taiwan, and other issues. If these conflicts or issues escalate, or if there is
increased anti-American sentiment, this could harm our foreign operations. In addition,
changes and actions by governments in foreign markets, in particular those markets such as
China where capitalism and free market trading is still evolving, could harm our business.
Adverse publicity concerning our
business, marketing plan or products could harm our business and reputation.
The
size of our distribution force and the results of our operations can be particularly
impacted by adverse publicity regarding us, the nature of our distributor network, our
products or the actions of our distributors. Specifically, we are susceptible to adverse
publicity concerning:
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suspicions
about the legality and ethics of network marketing; |
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the
ingredients or safety of our or our competitors' products; |
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regulatory
investigations of us, our competitors and our respective products; |
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the
actions of our current or former distributors; and |
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public
perceptions of direct selling businesses generally. |
In
addition, in the past we have experienced negative publicity that has harmed our business
in connection with regulatory investigations and inquiries. We may receive negative
publicity in the future, and it may harm our business and reputation.
-32-
Inability of new products to gain
distributor and market acceptance could harm our business.
A
critical component of our business is our ability to develop new products that create
enthusiasm among our distributor force. If we are unable to introduce new products our distributor productivity could be harmed. In addition, if any new
products fail to gain market acceptance, are restricted by regulatory requirements or have
quality problems, this would harm our results of operations. Factors that could affect our
ability to continue to introduce new products include, among others, government
regulations, the inability to attract and retain qualified research and development staff,
the termination of third-party research and collaborative arrangements, proprietary
protections of competitors that may limit our ability to offer comparable products and the
difficulties in anticipating changes in consumer tastes and buying preferences.
The loss of key high-level
distributors could negatively impact our distributor growth and our revenue.
As
of December 31, 2007, we had approximately 755,000 active independent distributors, sales
representatives and preferred customers, including approximately 30,000 executive level
distributors or full-time sales representatives. Approximately 480 distributors occupied
the highest distributor level under our global compensation plan as of that date. These
distributors, together with their extensive networks of downline distributors, account for
substantially all of our revenue. As a result, the loss of a high-level distributor or a
group of leading distributors in the distributors network of downline distributors,
whether by their own choice or through disciplinary actions by us for violations of our
policies and procedures, could negatively impact our distributor growth and our revenue.
Laws and regulations may prohibit
or severely restrict our direct sales efforts and cause our revenue and profitability to
decline, and regulators could adopt new regulations that harm our business.
Various
government agencies throughout the world regulate direct sales practices. These laws and
regulations are generally intended to prevent fraudulent or deceptive schemes, often
referred to as pyramid schemes, that compensate participants for recruiting
additional participants irrespective of product sales, use high pressure recruiting
methods and/or do not involve legitimate products. The laws and regulations in our current
markets often:
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impose
order cancellations, product returns, inventory buy-backs and cooling-off rights for
consumers and distributors; |
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require
us or our distributors to register with governmental agencies; |
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impose
caps on the amount of commissions we can pay; |
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impose
reporting requirements to regulatory agencies; and/or |
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require
us to ensure that distributors are not being compensated based upon the recruitment of
new distributors. |
Complying
with these widely varying and sometimes inconsistent rules and regulations can be
difficult and require the devotion of significant resources on our part. If we are unable
to continue business in existing markets or commence operations in new markets because of
these laws, our revenue and profitability will decline. Countries where we currently do
business could change their laws or regulations to negatively affect or completely
prohibit direct sales efforts.
-33-
In
addition, government agencies and courts in the countries where we operate may use their
powers and discretion in interpreting and applying laws in a manner that limits our
ability to operate or otherwise harms our business or adopt new laws or regulations that
could impose additional restrictions. For example, the FTC in the United States has
recently proposed new regulations, which would impose additional restrictive and
burdensome disclosure requirements and a seven-day waiting period before a person could
sign up to become a distributor. The direct selling industry association has filed
comments objecting to many of these requirements and is working to get the FTC to change
its proposal for new regulations. If these regulations were adopted in their current form,
it could have a negative impact on direct selling businesses in the United States
including our business. If any governmental authority were to bring a regulatory
enforcement action against us that interrupts our business, revenue and earnings would
likely suffer.
Increases in duties on our
imported products in our markets outside of the United States or adverse results of tax
audits in our various markets could reduce our revenue, negatively impact our operating
results and harm our competitive position.
Historically,
we have imported most of our products into the countries in which they are ultimately
sold. These countries impose various legal restrictions on imports and typically impose
duties on our products. We are subject from time to time to reviews and audits by the
foreign taxing authorities of the various jurisdictions in which we conduct business
throughout the world. These audits sometimes result in challenges by such taxing
authorities as to our methodologies used in determining our income tax, duties, customs,
and other amounts owed in connection with the importation and distribution of our
products. Currently, customs audits are underway in a number of our markets. We have been
assessed by the Japan customs authorities approximately $25 million for additional duties
on products imported into Japan, and we are currently contesting this assessment.
Effective July 1, 2005, the Company is operating under a new structure in Japan and we are
in the process of negotiating a new advanced pricing agreement with the income tax
authorities in Japan related to our transfer pricing for products being imported into
Japan. In connection with these negotiations, they have requested that we explain our
position in the customs appeal and the difference in our treatment of the
transaction for customs purposes compared to our income tax treatment under the prior
structures. In the event the income tax authorities disagree with our position or
explanation, there is a risk that they could attempt to challenge our income tax position,
which could negatively impact our ability to successfully prosecute our customs
appeal or result in additional income tax assessments.
Governmental authorities may
question our intercompany transfer pricing policies or change their laws in a manner that
could increase our effective tax rate or otherwise harm our business.
As
a U.S. company doing business in international markets through subsidiaries, we are
subject to foreign tax and intercompany pricing laws, including those relating to the flow
of funds between our company and our subsidiaries. Regulators in the United States and in
foreign markets closely monitor our corporate structure and how we effect intercompany
fund transfers. If regulators challenge our corporate structure, transfer pricing
mechanisms or intercompany transfers, our operations may be harmed, and our effective tax
rate may increase. Tax rates vary from country to country, and, if regulators determine
that our profits in one jurisdiction may need to be increased, we may not be able to fully
utilize all foreign tax credits that are generated, which will increase our effective tax
rate. For example, our corporate income tax rate in the United States is 35%. If our
profitability in a higher tax jurisdiction, such as Japan where the corporate tax rate is
currently set at 46%, increases disproportionately to the rest of our business, our
effective tax rate may increase. The various customs, exchange control and transfer
pricing laws are continually changing and are subject to the interpretation of
governmental agencies. Despite our efforts to be aware of and comply with such laws and
changes to and interpretations thereof, there is a risk that we may not continue to
operate in compliance with such laws. We may need to adjust our operating procedures in
response to such changes, and as a result, our business may suffer.
-34-
The loss of suppliers or shortages
in ingredients could harm our business.
We acquire
ingredients and products from two suppliers that each
currently manufacture a significant portion of our Nu Skin personal care products. In
addition, we currently rely on two suppliers for a majority of Pharmanex nutritional
supplement products. In the event we were to lose any of these suppliers and
experience any difficulties in finding or transitioning to alternative suppliers, this
could harm our business. In addition, we obtain some of our products from sole suppliers
that own or control the product formulations or ingredients. We also license the right to
distribute some of our products from third parties. In the event we are unable
to renew these contracts, we may need to discontinue some products or develop substitute
products, which could harm our revenue. In addition, if we experience supply shortages or
regulatory impediments with respect to the raw materials and ingredients we use in our
products, we may need to seek alternative supplies or suppliers. Some of our nutritional
products, including our recently introduced g3 juice, incorporate natural products
that are only harvested once a year and may have limited supplies. If demand exceeds
forecasts, we may have difficulties in obtaining additional supplies to meet the excess
demand until the next growing season. If we are unable to successfully respond to such
issues, our business could be harmed.
Production difficulties
and quality control problems could harm our business.
Occasionally,
we, or our suppliers have experienced production difficulties with respect to our
products, including the delivery of products that do not meet our quality control
standards. These quality problems have resulted in the past, and could result in the
future, in stock outages or shortages in our markets with respect to products, harming our
sales and creating inventory write-offs for unusable product. In addition, these issues
can negatively impact distributor confidence as well as potentially invite additional
governmental scrutiny in our various markets.
We depend on our key personnel,
and the loss of the services provided by any of our executive officers or other key
employees could harm our business and results of operations.
Our
success depends to a significant degree upon the continued contributions of our senior
management, many of whom would be difficult to replace. These employees may voluntarily
terminate their employment with us at any time. We may not be able to successfully retain
existing personnel or identify, hire and integrate new personnel. We do not carry key
person insurance for any of our personnel. Although we have signed offer letters or
written agreements summarizing the compensation terms for some of our senior executives,
we have generally not entered into formal employment agreements with our executive
officers. If we lose the services of our executive officers or key employees for any
reason, our business, financial condition and results of operations could be harmed.
Our markets are intensely
competitive, and market conditions and the strengths of competitors may harm our business.
The
markets for our products are intensely competitive. Our results of operations may be
harmed by market conditions and competition in the future. Many competitors have much
greater name recognition and financial resources than we have, which may give them a
competitive advantage. For example, our Nu Skin products compete directly with branded,
premium retail products. We also compete with other direct selling organizations. The
leading direct selling companies in our existing markets are Avon and Alticor (Amway). We
currently do not have significant patent or other proprietary protection, and our
competitors may introduce products with the same ingredients that we use in our products.
Because of regulatory restrictions concerning claims about the efficacy of dietary
supplements, we may have difficulty differentiating our products from our
competitors products, and competing products entering the nutritional market could
harm our nutritional supplement revenue.
-35-
We also compete with other network marketing companies for distributors. Some of these
competitors have a longer operating history and greater visibility, name recognition and
financial resources than we do. Some of our competitors have also adopted and could
continue to adopt some of our successful business strategies, including our global
compensation plan for distributors. Consequently, to successfully compete in this market
and attract and retain distributors, we must ensure that our business opportunities and
compensation plans are financially rewarding. We have over 20 years of experience in this
industry and believe we have significant competitive advantages, but we cannot assure you
that we will be able to successfully compete in every endeavor in this market.
Product liability claims could
harm our business.
We
may be required to pay for losses or injuries purportedly caused by our products. Although
we have had a very limited number and relatively low financial exposure from product
claims to date, we have experienced difficulty in finding insurers that are willing to
provide product liability coverage at reasonable rates due to insurance industry trends
and the rising cost of insurance generally. As a result, we have elected to self-insure
our product liability risks for our product lines. Until we elect and are able to obtain
product liability insurance, if any of our products are found to cause any injury or
damage, we will be subject to the full amount of liability associated with any injuries or
damages. This liability could be substantial. We cannot predict if and when product
liability insurance will be available to us on reasonable terms.
System failures could harm our
business.
Because
of our diverse geographic operations and our complex distributor compensation plan, our
business is highly dependent on efficiently functioning information technology systems.
These systems and operations are vulnerable to damage or interruption from fires,
earthquakes, telecommunications failures and other events. They are also subject to
break-ins, sabotage, intentional acts of vandalism and similar misconduct. We have adopted
and implemented a Business Continuity/Disaster Recovery Plan. Our primary data sets are
archived and stored at third-party secure sites, but we have not contracted for a
third-party recovery site. Despite any precautions, the occurrence of a natural disaster
or other unanticipated problems could result in interruptions in services and reduce our
revenue and profits.
There is a risk that a SARS like
epidemic could negatively impact our business, particularly in those Asian markets most
affected by such epidemics in recent years.
Our
revenue was negatively impacted in 2003 by the SARS epidemic that hit Asia during that
year. It is difficult to predict the impact on our business, if any, of a recurrence of
SARS, or the emergence of new epidemics. Although such events could generate increased
sales of health/immune supplements and certain personal care products, our direct selling
and retail activities and results of operations could be harmed if the fear of the Avian
Flu, SARS or other communicable diseases that spread rapidly in densely populated areas
causes people to avoid public places and interaction with one another.
-36-
The market price of our common
stock is subject to significant fluctuations due to a number of factors that are beyond
our control.
Our
common stock closed at $17.53 per share on March 31, 2006 and closed at $16.31 per share
on February 15, 2008. During this two-year period, our common stock traded as low as
$13.40 per share and as high as $19.71 per share. Many factors could cause the market
price of our common stock to fall. Some of these factors include:
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fluctuations
in our quarterly operating results; |
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the
sale of shares of Class A common stock by our original or significant stockholders; |
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general
trends in the market for our products; |
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acquisitions
by us or our competitors; |
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economic
and/or currency exchange issues in those foreign countries in which we operate; |
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changes
in estimates of our operating performance or changes in recommendations by securities
analysts; and |
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general
business and political conditions. |
Broad
market fluctuations could also lower the market price of our common stock regardless of
our actual operating performance.
As of February 15, 2008, our
original stockholders, together with their family members, estate planning entities and
affiliates, controlled approximately 33% of the combined stockholder voting power, and
their interests may be different from yours.
The
original stockholders of our company, together with their family members and affiliates,
have the ability to influence the election and removal of the board of directors and, as a
result, future direction and operations of our company. As of February 15, 2008, these
stockholders owned approximately 33% of the voting power of the outstanding shares of
common stock. Accordingly, they may influence decisions concerning business opportunities,
declaring dividends, issuing additional shares of common stock or other securities and the
approval of any merger, consolidation or sale of all or substantially all of our assets.
They may make decisions that are adverse to your interests.
If our stockholders sell a
substantial number of shares of our common stock in the public market, the market price of
our common stock could fall.
Several
of our principal stockholders hold a large number of shares of the outstanding common
stock. Any decision by any of our principal stockholders to aggressively sell their shares
could depress the market price of our common stock. As of February 15, 2008, we had
approximately 63.4 million shares of common stock outstanding. All of these shares are
freely tradable, except for approximately 19 million shares held by certain stockholders
who participated in our October 2003 recapitalization transaction wherein we repurchased
approximately 10.8 million of our shares from our original stockholders and their
affiliates and facilitated the resale of approximately 6.2 million additional shares to a
group of private equity investors. Under the terms of our repurchase these stockholders
agreed that, after the expiration of a two-year lock-up agreement in October 2005, they
would be subject to certain volume limitations with respect to open market transactions.
In the event these lock-up restrictions were removed, the resulting sales could cause the
price of our common stock to decline.
-37-
ITEM 1B. |
|
UNRESOLVED STAFF COMMENTS |
None.
Our
principal properties consist of the following:
Operational
Facilities. These facilities include administrative offices, walk-in centers, and
warehouse/distribution centers. Our operational facilities measuring 50,000 square feet or
more include the following:
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our
worldwide headquarters in Provo, Utah; |
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our
worldwide distribution center/warehouse in Provo, Utah; and |
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our
distribution center in Tokyo, Japan. |
Manufacturing Facilities. Each of
our manufacturing facilities measure 50,000 square feet or more, and include the
following:
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our
nutritional supplement manufacturing facility in Zhejiang Province, China; |
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our
personal care manufacturing facility in Shanghai, China; |
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our
Scanner manufacturing facility in Shanghai, China; and |
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our Vitameal manufacturing facility in Jixi, Heilongjiang Province. |
Retail Stores. As of December 31,
2007, we operated approximately 48 stores throughout China.
Research and Development Centers.
We operate three research and development centers, one in Provo, Utah, one in Shanghai,
China, and one in Beijing, China.
With
the exception of our research and development center in Utah, our nutritional supplement
plant in China, and a few other minor facilities, which we own, we lease the properties
described above. Our headquarters and distribution center in Utah are leased from related
parties. We believe that our existing and planned facilities are adequate for our current
operations in each of our existing markets.
ITEM 3. |
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LEGAL PROCEEDINGS |
Due
to the international nature of our business, we are subject from time to time to reviews
and audits by the foreign taxing authorities of the various jurisdictions in which we
conduct business throughout the world. In 1999, we implemented a duty valuation
methodology with respect to the importation of certain products into Japan. For purposes
of the import transactions at issue, we had taken the position that, under applicable
customs law, there was a sale between the manufacturer and our Japan subsidiary, and that
customs duties should be assessed on the manufacturers invoice. The Valuation
Department of the Yokohama customs authorities reviewed and approved this methodology at
that time, and it had been reviewed on several occasions by the audit division of the
Japan customs authorities since then. In connection with subsequent audits in 2004, the
Yokohama customs authorities assessed us additional duties and penalties on these products
imported into Japan from October 2002 to October 2004, based on a different valuation
methodology than what was previously approved. With respect to the periods under audit,
the customs authorities took the position that the relevant import transaction involved a
sale between our U.S. affiliate and our Japan subsidiary rather than between the
manufacturer and our Japan subsidiary, and that duties should be assessed on the value of
that transaction. We disputed this assessment. We also disputed the amount of duties we
were required to pay on products imported from November of 2004 to June of 2005 for
similar reasons. The total amount assessed or in dispute is approximately $25.0 million,
net of any recovery of consumption taxes. Effective July 1, 2005, we implemented some
modifications to our business structure in Japan and in the United States that we believe
will eliminate any further customs valuation disputes with respect to product imports in
Japan after that time.
-38-
Because
we believe the documentation and legal analysis supports our position and the valuation
methodology we used with respect to the products in dispute had been reviewed and approved
by the customs authorities in Japan, we believe the assessments are improper and we filed
letters of protest with Yokohama customs with respect to this entire amount. Yokohama
customs rejected our letters of protest, and we filed appeals with the Japan Ministry of
Finance. On June 26, 2006, we were advised that the Ministry of Finance had rejected the
appeals filed with their office relating to the imports from October 2002 to October 2004.
On December 22, 2006, we filed a complaint with the Tokyo District Court Civil Action
Section with respect to this period. In January 2007, we were advised that the Ministry of
Finance also rejected our appeal for the imports from November 2004 to June 2005. We filed
a complaint with the Tokyo District Court Civil Action section in July 2007 with respect
to these imports as well. One of the findings noted by the Ministry of Finance in its
decisions was that we had treated the transactions as sales between our U.S. affiliate and
our Japan subsidiary on our corporate income tax return under applicable income tax and
transfer pricing laws. We have paid the $25.0 million in customs duties and assessments,
the amount of which we recorded in Other Assets in our Consolidated Balance
Sheet. To the extent that we are unsuccessful in recovering the amounts assessed and paid,
we will be required to take a corresponding charge to our earnings.
On
May 2, 2007, Bodywise International, LLC, a direct sales company headquartered in Tustin,
California, filed a complaint in the Superior Court of the State of California for Orange
County, naming Pharmanex, Inc., our subsidiary, and several Nu Skin distributors who had
formerly been distributors for Bodywise as defendants. The plaintiff subsequently filed an
amended complaint on May 25, 2007. The complaint alleges that the individual defendants
breached the terms of their distributor agreements by utilizing trade secrets and
violating non-solicitation covenants in connection with the alleged recruitment of
distributors of Bodywise to become Nu Skin distributors. The complaint includes additional
claims against all defendants for intentional interference with contractual relations and
prospective economic advantage, misappropriation of trade secrets, unfair competition, and
unjust enrichments related to the alleged activities. The complaint seeks recovery of
damages in an amount presently unascertained, but which plaintiff estimates will likely
exceed $25 million. We believe the allegations against us are without merit and plan to
vigorously defend the lawsuit. The lawsuit is still in the discovery stage.
In
Taiwan, we were subject to an audit by tax authorities with respect to the deductibility
of distributor commission expenses in that market. In order to avoid the running of the
statute of limitations with respect to the 1999, 2000 and 2001 tax years, the Taiwan tax
authorities disallowed our commission expense deductions for those years and assessed us a
total of approximately $26.0 million. We contested this assessment and in the fourth
quarter of 2007, the Taiwan tax authorities ruled in our favor and allowed the deduction
of the commission expense and reversed the previous assessments.
-39-
ITEM 4. |
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SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
There
were no matters submitted to a vote of the security holders during the fourth quarter of
the fiscal year ended December 31, 2007.
PART II
ITEM 5. |
|
MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES |
Our
Class A common stock is listed on the New York Stock Exchange (NYSE) and
trades under the symbol NUS. The following table is based upon the information
available to us and sets forth the range of the high and low sales prices for our Class A
common stock for the quarterly periods during 2006 and 2007 based upon quotations on the
NYSE.
Quarter Ended | |
High | |
Low | |
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March 31, 2006 |
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$ 19.71 |
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$ 17.00 |
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June 30, 2006 | |
18.40 |
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14.15 |
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September 30, 2006 | |
18.50 |
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13.40 |
|
December 31, 2006 | |
19.42 |
|
17.23 |
|
Quarter Ended | |
High | |
Low | |
|
|
|
March 31, 2007 |
|
$ 19.15 |
|
$ 15.59 |
|
June 30, 2007 | |
18.11 |
|
15.67 |
|
September 30, 2007 | |
17.37 |
|
13.85 |
|
December 31, 2007 | |
18.21 |
|
13.91 |
|
The
market price of our Class A common stock is subject to significant fluctuations in
response to variations in our quarterly operating results, general trends in the market
for our products and product candidates, economic and currency exchange issues in the
foreign markets in which we operate and other factors, many of which are not within our
control. In addition, broad market fluctuations, as well as general economic, business,
regulatory and political conditions may adversely affect the market for our Class A common
stock, regardless of our actual or projected performance.
The
closing price of our Class A common stock on February 15, 2008, was $16.31. The
approximate number of holders of record of our Class A common stock as of February 15,
2008 was 563. This number of holders of record does not represent the actual number of
beneficial owners of shares of our Class A common stock because shares are frequently held
in street name by securities dealers and others for the benefit of individual
owners who have the right to vote their shares.
Dividends
We
declared and paid a $0.10 per share dividend for Class A common stock in March, June,
September and December of 2006, and a $0.105 per share quarterly dividend for Class A
common stock in March, June, September and December of 2007. The board of directors
approved an increase to the quarterly cash dividend to $0.11 per share of Class A common stock on February
4, 2008. This quarterly cash dividend will be paid on March 19, 2008, to stockholders of
record on February 29, 2008. Management believes that cash flows from operations will be
sufficient to fund this and future dividend payments, if any.
-40-
We
expect to continue to pay dividends on our common stock. However, the declaration of
dividends is subject to the discretion of our board of directors and will depend upon
various factors, including our net earnings, financial condition, cash requirements,
future prospects and other factors deemed relevant by our board of directors.
Purchases of Equity
Securities by the Issuer
|
(a) | |
(b) | |
(c) | |
(d) | |
Period | |
Total Number of Shares Purchased | |
Average Price Paid per Share | |
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | |
Approximate Dollar Value of Shares that may yet be Purchased Under
the Plans or Programs (in millions)(1) | |
October 1 - 31, 2007 |
|
|
|
$ |
|
|
|
$ 114.6 |
|
November 1 - 30, 2007 |
|
1,479,540 | |
16.91 |
|
1,478,466 |
|
89.6 |
| |
December 1 - 31, 2007 |
|
|
|
|
|
|
|
89.6 | |
|
Total |
|
1,479,540 |
(2) |
16.91 |
|
1,478,466 |
(1) |
|
In
August 1998, our board of directors approved a plan to repurchase $10.0
million of our Class A common stock on the open market or in private
transactions. Our board has from time to time increased the amount
authorized under the plan and a total amount of approximately $335.0
million is currently authorized. As of December 31, 2007, we had
repurchased approximately $245.4 million of shares under the plan. There
has been no termination or expiration of the plan since the initial date
of approval. |
(2) |
|
We
have authorized the repurchase of shares acquired by our employees and
distributors in certain foreign markets because of regulatory and other
issues that make it difficult and costly for these persons to sell such
shares in the open market. These shares were awarded or acquired in
connection with our initial public offering in 1996. Of the shares listed
in this column, 1,074 shares for November relate to repurchases from such
employees and distributors at an average per share purchase price of
$16.80. |
-41-
Stock Performance Graph
Set
forth below is a line graph comparing the cumulative total stockholder return (stock price
appreciation plus dividends) on the Class A Common Stock with the cumulative total return
of the S&P 500 Index and a market-weighted index of publicly traded peers for the
period from December 31, 2002 through December 31, 2007. The graph assumes that $100 is
invested in each of the Class A Common Stock, the S&P 500 Index, and each of the
indexes of publicly traded peers on December 31, 2002 and that all dividends were
reinvested. The peer group consists of all of the following companies that compete in our
industry and product categories: Avon Products, Inc., Estee Lauder, Natures Sunshine
Products, Inc., Tupperware Corporation, Herbalife LTD., USANA Health Sciences, Inc. and
Alberto Culver Co.
Measured Period
|
Company
|
S&P 500 Index
|
Peer Group Index
|
December 31, 2002 |
|
$ 100 |
.00 |
100 |
.00 |
100 |
.00 |
December 31, 2003 | |
146 |
.38 |
128 |
.68 |
128 |
.69 |
December 31, 2004 | |
220 |
.41 |
142 |
.69 |
142 |
.68 |
December 31, 2005 | |
155 |
.34 |
149 |
.70 |
149 |
.69 |
December 31, 2006 | |
164 |
.72 |
173 |
.34 |
173 |
.34 |
December 31, 2007 | |
152 |
.27 |
182 |
.87 |
199 |
.83 |
-42-
ITEM 6. |
|
SELECTED FINANCIAL DATA |
The
following selected consolidated financial data as of and for the years ended December 31,
2003, 2004, 2005, 2006 and 2007 have been derived from the audited consolidated financial
statements.
|
Year Ended December 31, |
|
|
2003 | |
2004 | |
2005 | |
2006 | |
2007 | |
|
(U.S. dollars in thousands, except per share data and cash dividends) |
|
Income Statement Data: |
|
|
|
|
|
|
|
|
|
|
|
Revenue | |
$ 986,457 |
|
$ 1,137,864 |
|
$ 1,180,930 |
|
$ 1,115,409 |
|
$ 1,157,667 |
|
Cost of sales | |
176,545 |
|
191,211 |
|
206,163 |
|
195,203 |
|
209,283 |
|
Gross profit | |
809,912 |
|
946,653 |
|
974,767 |
|
920,206 |
|
948,384 |
|
Operating expenses: | |
Selling expenses | |
407,088 |
|
487,631 |
|
497,421 |
|
480,136 |
|
496,454 |
|
General and administrative expenses(1) | |
289,925 |
|
333,263 |
|
354,223 |
|
353,412 |
|
361,242 |
|
Restructuring charges | |
5,592 |
|
|
|
|
|
11,115 |
|
19,775 |
|
Impairment of assets and other | |
|
|
|
|
|
|
20,840 |
|
|
|
Total operating expenses | |
702,605 |
|
820,894 |
|
851,644 |
|
865,503 |
|
877,471 |
|
Operating income | |
107,307 |
|
125,759 |
|
123,123 |
|
54,703 |
|
70,913 |
|
Other income (expense), net | |
432 |
|
(3,618 |
) |
(4,172 |
) |
(2,027 |
) |
(2,435 |
) |
Income before provision for income taxes | |
107,739 |
|
122,141 |
|
118,951 |
|
52,676 |
|
68,478 |
|
Provision for income taxes | |
39,863 |
|
44,467 |
|
44,918 |
|
19,859 |
|
24,606 |
|
Net income | |
$ 67,876 |
|
$ 77,674 |
|
$ 74,033 |
|
$ 32,817 |
|
$ 43,872 |
|
Net income per share: | |
Basic | |
$ 0.86 |
|
$ 1.10 |
|
$ 1.06 |
|
$ 0.47 |
|
$ 0.68 |
|
Diluted | |
$ 0.85 |
|
$ 1.07 |
|
$ 1.04 |
|
$ 0.47 |
|
$ 0.67 |
|
Weighted-average common shares outstanding (000s): | |
Basic | |
78,637 |
|
70,734 |
|
70,047 |
|
69,418 |
|
64,783 |
|
Diluted | |
79,541 |
|
72,627 |
|
71,356 |
|
70,506 |
|
65,584 |
|
|
|
|
Balance Sheet Data (at end of period): | |
Cash and cash equivalents and current investments | |
$ 122,568 |
|
$ 120,095 |
|
$ 155,409 |
|
$ 121,353 |
|
$ 92,552 |
|
Working capital | |
149,324 |
|
117,401 |
|
149,098 |
|
109,418 |
|
95,175 |
|
Total assets | |
591,059 |
|
609,737 |
|
678,866 |
|
664,849 |
|
683,243 |
|
Current portion of long-term debt | |
17,915 |
|
18,540 |
|
26,757 |
|
26,652 |
|
31,441 |
|
Long-term debt | |
147,488 |
|
132,701 |
|
123,483 |
|
136,173 |
|
169,229 |
|
Stockholders' equity | |
290,248 |
|
296,233 |
|
354,628 |
|
318,980 |
|
275,009 |
|
Cash dividends declared | |
0.28 |
|
0.32 |
|
0.36 |
|
0.40 |
|
0.42 |
|
|
|
|
Supplemental Operating Data (at end of period): | |
Approximate number of active distributors(2) | |
725,000 |
|
820,000 |
|
803,000 |
|
761,000 |
|
755,000 |
|
Number of executive distributors(2) | |
29,131 |
|
32,016 |
|
30,471 |
|
29,756 |
|
30,002 |
|
(1) |
|
Beginning
in 2006 the Company adopted FAS 123R which resulted in stock-based
compensation expense of $9.3 million in 2006 and $8.1 million in 2007. |
(2) |
|
Active
distributors include preferred customers and distributors purchasing
products directly from us during the three months ended as of the date
indicated. An executive distributor is an active distributor who has
achieved required personal and group sales volumes. |
-43-
ITEM 7. |
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION |
The
following discussion of our financial condition and results of operation should be read in
conjunction with the Consolidated Financial Statements and related Notes thereto, which
are included in this Annual Report on Form 10-K.
Overview
We
are a leading, global direct selling company with 2007 revenue of $1.16 billion and a
global network of approximately 755,000 active independent distributors and preferred
customers who purchase our products for resale and for personal use. Approximately 30,000
of these distributors are executive level distributors, who play an important leadership
role in our distribution network and are critical to the growth of our business. We
develop and market premium-quality personal care products under the Nu Skin brand,
science-based nutritional supplements under the Pharmanex brand, and technology-related
products and services under the Big Planet brand. We currently operate in over 45 markets
throughout Asia, the Americas and Europe.
Our
revenue depends on the number and productivity of our active independent distributors and
executive distributor leaders. We have been successful in attracting and motivating
distributors by:
|
|
|
developing
and marketing innovative, technologically advanced products; |
|
|
|
providing
compelling initiatives, advanced technological tools and strong distributor support; and |
|
|
|
offering
attractive incentives that motivate distributors to build sales organizations. |
Our
distributors market and sell our products and recruit new distributors based on the
distinguishing benefits and innovative characteristics of our products. As a result, it is
vital to our business that we continuously leverage our research and development resources
to develop and introduce innovative products and provide our distributors with an
attractive portfolio of products. We also offer unique initiatives and business tools,
such as our technologically-advanced Pharmanex BioPhotonic Scanner (the
Scanner), to help distributors effectively differentiate our earnings
opportunity and product offering. If we experience delays or difficulties in introducing
compelling products or attractive initiatives or tools into a market, this can have a
negative impact on revenue and distributor recruiting. In addition, as a result of the
global nature of our distributor incentives, the introduction of a new product or key
initiative can negatively impact other markets or product lines to the extent our
distributor leaders focus their efforts on the new product or initiative.
We
have developed a global distributor compensation plan and other incentives designed to
motivate our distributors to market and sell our products and to build sales organizations
around the world and across product lines. Our extensive global distributor network helps
us to rapidly introduce products and penetrate our markets with little up-front
promotional expense. Similar to other companies in our industry, we experience a high
level of turnover among our distributors. As a result, it is important that we regularly
introduce innovative and compelling products and initiatives in order to maintain a
compelling business opportunity that will attract new distributors. In addition, we have
developed and continue to promote in many of our markets product subscription and loyalty
programs that provide incentives for customers to commit to purchase a specific amount of
products on a monthly basis. We believe these subscription programs have improved customer
retention, have had a stabilizing impact on revenue, and have helped generate recurring
sales for our distributors. Subscription orders represented 47% of our revenue in 2007.
-44-
In
2007, we generated approximately 77% of our revenue from our Asian markets, with sales in
Japan representing approximately 38% of revenue. Because of the size of our foreign
operations, operating results can be impacted negatively or positively by factors such as
foreign currency fluctuations, in particular, fluctuations between the Japanese yen and
the U.S. dollar, and economic, political and business conditions around the world. In
addition, our business is subject to various laws and regulations related to network
marketing activities and nutritional supplements that create certain risks for our
business, including improper claims or activities by our distributors and the potential
inability to obtain necessary product registrations. For more information about these
risks and challenges we face, please refer to Note Regarding Forward-Looking
Statements.
Over
the last couple of years we have also taken steps to transform and align our business and
operate more efficiently. We initially took steps in the first quarter of 2006 to
eliminate organization redundancies, revamp administrative support functions, prioritize
investments, and increase efficiencies in our supply chain. These steps involved a
headcount reduction of 225 employees. In the fourth quarter of 2007, we took additional
steps in connection with our transformation efforts to further reduce our overhead and
improve our earnings per share. These steps included simplifying our operations in China
and identifying additional areas for improved operational efficiencies globally. As a
result of these steps, we reduced our headcount globally by approximately 1,000 employees.
We continue to assess our operations and are taking steps to improve gross margins and
selling expenses. We believe these steps will help to generate improved earnings per share
in 2008.
Income Statement
Presentation
We
recognize revenue in five geographic regions and we translate revenue from each
markets local currency into U.S. dollars using weighted-average exchange
rates. The following table sets forth revenue information by region for the periods
indicated. This table should be reviewed in connection with the tables presented under
Results of Operations, which disclose selling expenses and other costs
associated with generating the aggregate revenue presented.
|
Year Ended December 31, | |
Revenue by Region | |
2005 | |
2006 | |
2007 | |
|
(U.S. dollars in millions) | |
North Asia |
|
$ 649.4 |
|
55% |
|
$ 593.8 |
|
53% |
|
$ 585.8 |
|
50% |
|
Greater China | |
236.7 |
|
20 |
|
208.2 |
|
19 |
|
205.0 |
|
18 |
|
Americas | |
162.1 |
|
14 |
|
165.9 |
|
15 |
|
188.3 |
|
16 |
|
South Asia/Pacific | |
86.7 |
|
7 |
|
88.0 |
|
8 |
|
101.4 |
|
9 |
|
Europe | |
46.0 |
|
4 |
|
59.5 |
|
5 |
|
77.2 |
|
7 |
|
| |
$ 1,180.9 |
|
100% |
|
$ 1,115.4 |
|
100% |
|
$ 1,157.7 |
|
100% |
|
Cost
of sales primarily consists of:
|
|
|
cost
of products purchased from third-party vendors, generally in U.S. dollars; |
|
|
|
costs
of self-manufactured products; |
|
|
|
cost
of sales materials which we sell to distributors at or near cost; |
|
|
|
amortization
expenses associated with certain products and services such as the Scanners that are
leased to distributors; |
-45-
|
|
|
freight
cost of shipping products to distributors and import duties for the products; and |
|
|
|
royalties
and related expenses for licensed technologies. |
We
source the majority of our products from third-party manufacturers located in the United
States. Due to Chinese government restrictions on the importation of finished goods
applicable to the current scope of our business in China, we are required to manufacture
the bulk of our own products for distribution in China. Cost of sales and gross profit may
fluctuate as a result of changes in the ratio between self-manufactured products and
products sourced from third-party suppliers. In addition, because we purchase a
significant majority of our goods in U.S. dollars and recognize revenue in local
currencies, we are subject to exchange rate risks in our gross margins. Because our gross
margins vary from product to product and are higher in some markets such as Japan, changes
in product mix and geographic revenue mix can impact our gross margins.
Selling
expenses are our most significant expense and are classified as operating expenses.
Selling expenses include distributor commissions as well as wages, benefits, bonuses and
other labor and unemployment expenses we pay to employed sales representatives in China.
Our global compensation plan, which we employ in all of our markets except China, is an
important factor in our ability to attract and retain distributors. We pay monthly
commissions to several levels of distributors on each product sale based upon a
distributors personal and group product volumes, as well as the group product
volumes of up to six levels of executive distributors in such distributors downline
sales organization. We do not pay commissions on sales materials, which are sold to
distributors at or near cost. Small fluctuations occur in the amount of commissions paid
as the network of distributors actively purchasing products changes from month to month.
However, due to the size of our distributor force of approximately 755,000 active
distributors, the fluctuation in the overall payout is relatively small. The overall
payout has typically averaged from 41% to 44% of global product sales. From time to time,
we make modifications and enhancements to our global compensation plan in an effort to
help motivate distributors and develop leadership characteristics, which can have an
impact on selling expenses.
Distributors
also have the opportunity to make retail profits by purchasing products from us at
wholesale and selling them to customers with a retail mark-up. We do not account for nor
pay additional commissions on these retail mark-ups received by distributors. In many
markets, we also allow individuals who are not distributors, whom we refer to as
preferred customers, to buy products directly from us at wholesale or
discounted prices. We pay commissions on preferred customer purchases to the referring
distributors.
General
and administrative expenses include:
|
|
|
depreciation
and amortization; |
|
|
|
promotion
and advertising; |
-46-
|
|
|
research
and development; and |
|
|
|
other
operating expenses. |
Labor
expenses are the most significant portion of our general and administrative expenses.
Promotion and advertising expenses include costs of distributor conventions held in
various markets worldwide, which we expense in the period in which they are incurred.
Because our various distributor conventions are not always held during each fiscal year,
or in the same period each year, their impact on our general and administrative expenses
may vary from year to year and from quarter to quarter. For example, we held our global
distributor convention in September 2007 and will not have another global convention until
the fall of 2009 as we currently plan to hold a global convention every other year. In
addition, we hold regional conventions and conventions in our major markets at different
times during the year. These conventions have significant expenses associated with them.
Because we have not incurred expenses for these conventions during every fiscal year or in
comparable interim periods, year-over-year comparisons have been impacted accordingly.
Provision
for income taxes depends on the statutory tax rates in each of the jurisdictions in which
we operate. For example, statutory tax rates in 2007 were approximately 17.5% in Hong
Kong, 25% in Taiwan, 27.5% in South Korea, 46% in Japan and 25% in China. For the years
2006 through 2008 we are subject to a reduced tax rate of 13.5% in China, after which time
we will be subject to the full statutory rate. We are subject to taxation in the United
States at the statutory corporate federal tax rate of 35% and we pay taxes in multiple
states within the United States at various tax rates. Our overall effective tax rate was
35.9% for the year ended December 31, 2007.
Critical Accounting
Policies
The
following critical accounting policies and estimates should be read in conjunction with
our audited Consolidated Financial Statements and related Notes thereto. Management
considers the most critical accounting policies to be the recognition of revenue,
accounting for income taxes, accounting for intangible assets and accounting for
stock-based compensation. In each of these areas, management makes estimates based on
historical results, current trends and future projections.
Revenue.
We recognize revenue when products are shipped, which is when title and risk
of loss pass to our independent distributors. With some exceptions in various
countries, we offer a return policy whereby distributors can return unopened and
unused product for up to 12 months subject to a 10% restocking fee. Reported
revenue is net of returns, which have historically been less than 5% of gross
sales. A reserve for product returns is accrued based on historical experience.
We classify selling discounts as a reduction of revenue. Our selling expenses
are computed pursuant to our global compensation plan for our distributors,
which is focused on remunerating distributors based primarily upon the selling
efforts of the distributors and the volume of products purchased by their
downlines, and not their personal purchases.
Income
Taxes. We account for income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes. This statement establishes financial accounting
and reporting standards for the effects of income taxes that result from an
enterprises activities during the current and preceding years. It requires an asset
and liability approach for financial accounting and reporting of income taxes. We pay
income taxes in many foreign jurisdictions based on the profits realized in those
jurisdictions, which can be significantly impacted by terms of intercompany transactions
among our affiliates around the world. Deferred tax assets and liabilities are created in
this process. As of December 31, 2007, we had net deferred tax assets of $72.7 million.
These net deferred tax assets assume sufficient future earnings will exist for their
realization, as well as the continued application of current tax rates. In certain foreign
jurisdictions valuation allowances have been recorded against the deferred tax assets
specifically related to use of net operating losses. When we determine that there is
sufficient taxable income to utilize the net operating losses, the valuation allowances
will be released. In the event we were to determine that we would not be able to realize
all or part of our net deferred tax assets in the future, an adjustment to the deferred
tax assets would be charged to earnings in the period such determination was made.
-47-
In
June 2006, the FASB issued FASB Interpretation Number 48, Accounting for Uncertainty
in Income Taxes an Interpretation of SFAS 109" (FIN 48). We
adopted the provisions of FIN 48 on January 1, 2007. As a result of the implementation of
FIN 48, we recognized a $2.6 million increase in the liability for unrecognized tax
benefits, which was accounted for as a reduction to the January 1, 2007 balances of
retained earnings and additional paid in capital.
We
file income tax returns in the U.S. federal jurisdiction, and various states and foreign
jurisdictions. With a few exceptions, we are no longer subject to U.S. federal, state and
local income tax examination by tax authorities for years before 2004. In major foreign
jurisdictions, we are no longer subject to income tax examinations for years before 2001.
We are currently under examination in certain foreign jurisdictions; however, the final
outcomes of these reviews are not yet determinable.
At
December 31, 2007, we had $31.9 million in unrecognized tax benefits of which $9.1
million, if recognized, would affect the effective tax rate. During the year ended
December 31, 2007, we recognized approximately $0.5 million in interest and penalties. We
had approximately $2.7 million of accrued interest and penalties related to uncertain tax
positions at December 31, 2007. Interest and penalties related to uncertain tax positions
are recognized as a component of income tax expense.
We
are subject to regular audits by federal, state and foreign tax authorities. These audits
may result in additional tax liabilities. We account for such contingent liabilities in
accordance with FIN 48, and believe we have appropriately provided for income taxes for
all years. Several factors drive the calculation of our tax reserves. Some of these
factors include: (i) the expiration of various statutes of limitations; (ii) changes in
tax law and regulations; (iii) issuance of tax rulings; and (iv) settlements with tax
authorities. Changes in any of these factors may result in adjustments to our reserves,
which would impact our reported financial results.
Intangible
Assets. Under the provisions of SFAS No. 142, Goodwill and Other
Intangible Assets (SFAS 142), our goodwill and intangible assets with
indefinite useful lives are not amortized. Our intangible assets with finite lives are
recorded at cost and are amortized over their respective estimated useful lives and are
reviewed for impairment in accordance with SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets (see Note 5 to the Consolidated
Financial Statements).
We
are required to make judgments regarding the useful lives of our intangible assets. With
the implementation of SFAS 142, we determined certain intangible assets to have indefinite
lives based upon our analysis of the requirements of SFAS No. 141, Business
Combinations (SFAS 141) and SFAS 142. Under the provisions of SFAS 142,
we are required to test these assets for impairment at least annually. The annual
impairment tests were completed and did not result in an impairment charge. To the extent
an impairment is identified in the future, we will record the amount of the impairment as
an operating expense in the period in which it is identified.
Stock-Based
Compensation. Effective January 1, 2006, we adopted the fair value
recognition provisions of Financial Accounting Standards No. 123 (revised 2004),
Share-Based Payment (SFAS 123R), using the modified prospective
transition method. Under this method we recognize compensation expense for all share-based
payments granted after January 1, 2006 and prior to but not yet vested as of January 1,
2006, in accordance with SFAS 123R. Under the fair value recognition provisions of SFAS
123R, we recognize stock-based compensation net of any estimated forfeitures on a
straight-line basis over the requisite service period of the award. The fair value of our
stock-based compensation expense is based on estimates using the Black-Scholes
option-pricing model. This option-pricing model requires the input of highly subjective
assumptions including the options expected life, risk-free interest rate, expected
dividends and price volatility of the underlying stock. The stock price volatility
assumption was determined using the historical volatility of our common stock.
-48-
Results of Operation
The
following table sets forth our operating results as a percentage of revenue for the
periods indicated:
|
Year Ended December 31, | |
|
2005 | |
2006 | |
2007 | |
|
|
|
|
Revenue |
|
100.0 |
% |
100.0 |
% |
100.0 |
% |
Cost of sales | |
17.5 |
|
17.5 |
|
18.1 |
|
|
|
|
|
Gross profit | |
82.5 |
|
82.5 |
|
81.9 |
|
| |
Operating expenses: | |
Selling expenses | |
42.1 |
|
43.1 |
|
42.9 |
|
General and administrative expenses | |
30.0 |
|
31.7 |
|
31.2 |
|
Restructuring charges |
|
|
|
0.9 |
|
1.7 |
|
Impairment of assets and other | |
|
|
1.9 |
|
|
|
|
|
|
|
Total operating expenses | |
72.1 |
|
77.6 |
|
75.8 |
|
|
|
|
|
Operating income | |
10.4 |
|
4.9 |
|
6.1 |
|
Other income (expense), net | |
(.3 |
) |
(.2 |
) |
(.2 |
) |
|
|
|
|
Income before provision for income taxes | |
10.1 |
|
4.7 |
|
5.9 |
|
Provision for income taxes | |
3.8 |
|
1.8 |
|
2.1 |
|
|
|
|
|
Net income | |
6.3 |
% |
2.9 |
% |
3.8 |
% |
2007 Compared to 2006
Overview
Revenue
in 2007 increased 4% to $1.16 billion from $1.12 billion in 2006, with foreign currency
exchange fluctuations positively impacting revenue by 1% in 2007 compared to 2006. Revenue
in 2007 was positively impacted by growth in South Korea, Europe, the United States, and
our South Asia markets. The revenue growth from these markets was offset partially by
revenue declines in Japan and China.
Earnings
per share in 2007 were $0.67 compared to $0.47 in 2006 on a diluted basis. Earnings per
share in 2007 and 2006 were impacted by:
|
|
|
restructuring
and impairment charges in the first quarter of 2006 totaling $20.0 million (net of taxes
of $12.0 million), or $0.28 per share, relating to a business transformation initiative
that we implemented during the first quarter; |
-49-
|
|
|
restructuring
charges in the second quarter of 2007 totaling $1.8 million (net of taxes of $1.0
million), or $0.03 per share, relating to a business transformation initiative that we
implemented during the first quarter; |
|
|
|
restructuring
and impairment charges in the fourth quarter of 2007 totaling $10.8 million (net of taxes
of $6.2 million), or $0.17 per share, relating to an additional step in our business
transformation initiative to reduce overhead expenses and streamline operations; |
|
|
|
a
decrease in our gross margin as a result of changing product and geographic sales mix;
and |
|
|
|
the
repurchase of approximately 4.1 million shares of our Class A common stock in 2007. |
In
the fourth quarter of 2007, we took additional steps in connection with our transformation
efforts to further reduce our overhead and improve our earnings per share. These steps
included simplifying our operations in China and identifying additional areas for improved
operational efficiencies globally. As a result of these steps, we reduced our headcount
globally by approximately 1,000 employees. We continue to assess our operations and are
taking steps to improve gross margins and selling expenses. We believe these steps will
help to generate improved earnings per share in 2008.
Revenue
North Asia. The following table
sets forth revenue for the North Asia region and its principal markets (U.S. dollars in
millions):
|
2006 | |
2007 | |
Change | |
|
|
|
|
|
|
|
|
Japan |
|
$ 476.5 |
|
$ 443.7 |
|
(7%) |
|
South Korea | |
117.3 |
|
142.1 |
|
21% |
|
North Asia total | |
$ 593.8 |
|
$ 585.8 |
|
(1%) |
|
Foreign
currency fluctuations did not significantly impact revenue in this region compared to the
prior-year period. The decline in this region is related to the decline in revenue in
Japan, which was offset partially by the increase in revenue in South Korea. Our active
and executive distributor counts decreased 6% and 8%, respectively, in Japan in 2007
compared to 2006. In South Korea, our active and executive distributor counts increased
30% and 17%, respectively, comparing 2007 to 2006.
In
Japan, the continued weakness in sponsoring activity and the resulting declines in active
and executive distributors contributed to the local currency revenue decline of 5% in 2007
compared to 2006. Distributor activity in this market has been soft for the last couple of
years, and we continue to take steps to generate stronger distributor activity and
improved results in this market. During 2007, we implemented a variety of strategic
initiatives and product promotions, effected a change in management, and continued efforts
to improve our corporate image. As we reviewed our business in this market in connection
with the management change, we believe some of our past initiatives have not focused
sufficiently on distributor sponsorship and activity. As a result, we have begun to
implement more aggressive initiatives focused on distributor recruitment and leadership
development. We also have implemented additional changes to our management structure in
this market to improve management and operational alignment. The industry has been in a
decline for several years in Japan and, according to industry sources, the decline appears
to have steepened. We believe it will take time for us to turn the results of this market
and generate renewed growth.
-50-
South
Korea posted strong year-over-year local currency revenue growth of 18%. This growth was
fueled by strong distributor alignment behind our product and distributor initiatives that
have helped maintain a vibrant sponsoring environment for our distributors in this market.
The Galvanic Spa System II and our Nu Skin 180° Anti-Aging Skin Therapy
System helped contribute to growth in our personal care business, while continued
focus on nutrition products including LifePak and g3 positively impacted our
nutrition revenue in this market. We also launched TriPhasic White, a global
top-selling personal care product for us, in 2007.
Greater
China. The following table sets forth revenue for the Greater China region and its
principal markets (U.S. dollars in millions):
|
2006 | |
2007 | |
Change | |
|
|
|
|
|
|
|
|
Taiwan |
|
$ 93.1 | |
$ 93.0 |
|
|
|
China |
|
70.5 |
|
66.5 |
|
(6%) |
|
Hong Kong | |
44.6 |
|
45.5 |
|
2% |
|
Greater China total | |
$ 208.2 |
|
$ 205.0 |
|
(2%) |
|
Foreign
currency exchange rate fluctuations positively impacted revenue in the Greater China
region by 1% in 2007. In China, revenue declined 10%, on a local currency basis, compared
to the prior year as we continue to transition our business model in this market. The
decrease is primarily attributed to a 17% decline in preferred customers and a 6% decline
in our sales force. During 2007, we engaged a new management team for this
market that has been actively assessing our business and taking steps to improve operating
results. This management team has taken steps to simplify our business model in this
market, and to help reduce our overhead and improve profitability.
The business model changes will allow us to engage contracted sales promoters as well as offer part-time employment for sales
representatives nation wide. This will allow us to provide a supplemental income opportunity to individuals who may not be interested in
working full-time in this business as well as reduce our selling expenses, as the amount of social benefits, taxes and unemployment charges
under this model will be lower. We also streamlined our operations in this market by altering our current store strategy. We are opening five
new flagship stores in the cities of Shanghai, Beijing, Guangzhou, Shenzen, and Xian, and we have closed nearly 70 small retail outlets and
branch offices in secondary cities. We believe we can operate more effectively and efficiently by focusing our business around our larger
flagship stores in major cities, complemented with stores that have an improved image in other areas. Our strategic focus in 2008 will be on
implementing our growth initiatives in our key provinces and municipalities, Shanghai, Beijing and Guongdong, which account for more than 50%
of our revenue. In January 2008, we were able to obtain our final approvals to begin direct selling activities in Beijing as well as the
remaining districts in Shanghai which were not included in our first phase of our direct selling application in 2006. We continue to work with
the applicable government agencies in China to obtain the necessary direct selling approvals for Guongdong and other areas in China. Our
overall restructuring efforts also allowed us to reduce our corporate employees in this market by approximately 650 employees.
Local
currency revenue in Taiwan was relatively flat and Hong Kong local currency revenue was up
3% when compared with 2006. Revenue comparisons for Hong Kong are impacted by
approximately $1.6 million in sales to non-Hong Kong distributors attending a regional
convention in this market in 2006. A similar convention was not held in 2007.
-51-
Americas.
The following table sets forth revenue for the Americas region and its principal
markets (U.S. dollars in millions):
|
2006 | |
2007 | |
Change | |
|
|
|
|
|
|
|
|
United States |
|
$ 147.1 |
|
$ 167.8 |
|
14% |
|
Canada | |
10.0 |
|
11.5 |
|
15% |
|
Latin America | |
8.8 |
|
9.0 |
|
2% |
|
Americas total | |
$ 165.9 |
|
$ 188.3 |
|
14% |
|
Revenue
in the United States was positively impacted by several key initiatives implemented in
each of our product categories during the past year. In particular, the Galvanic Spa
System II has been a primary focus of many of our distributor leaders and has helped
drive significant growth in our personal care revenue, with personal care sales up 42%
compared to 2006. We have implemented distributor incentives around the Galvanic Spa
System II to increase the initial earnings opportunity for new distributors, which we
believe has also contributed to the revenue growth. The United States also hosted our
global convention in 2007, which positively impacted revenue in the market by
approximately $5.0 million as a result of product and convention fee revenue from foreign
distributors attending the convention. We also introduced a new weight management product
system in this market in the fourth quarter.
Revenue
in our other markets in this region also saw improvements with Canada having local
currency growth of 9% and Latin America growing 2%. During the year, we elected to close
our offices and facilities in Brazil because of continued operating losses in this market.
While we continue to allow customers to purchase products from the United States for
personal use consumption, we are not engaged in any operations or product promotions in
this market.
South
Asia/Pacific. The following table sets forth revenue for the South Asia/Pacific region
and its principal markets (U.S. dollars in millions):
|
2006 | |
2007 | |
Change | |
|
|
|
|
|
|
|
|
Singapore/Malaysia/Brunei |
|
$ 33.2 |
|
$ 39.3 |
|
18% |
|
Thailand | |
26.5 |
|
32.3 |
|
22% |
|
Australia/New Zealand | |
14.2 |
|
15.8 |
|
11% |
|
Indonesia | |
10.3 |
|
8.8 |
|
(15%) |
|
Philippines | |
3.8 |
|
5.2 |
|
37% |
|
South Asia/Pacific total | |
$ 88.0 |
|
$ 101.4 | |
15% |
|
Foreign
currency exchange rate fluctuations positively impacted revenue in South Asia/Pacific by
10% in 2007 compared to the same prior-year period. All of the markets in this region
experienced growth except for Indonesia. The growth was fueled in part by continued
success of our TRA family of weight loss products and success of our Galvanic
Spa System II. We believe the decrease in Indonesia is largely attributed to the
limited base of distributor leaders in this new market. We often see declines in new
markets after the initial opening as we work to strengthen our base of leaders in a new
market. Active distributors in the region decreased 11% while executive distributors
increased 3% compared to the prior year.
Europe.
The following table sets forth revenue for our Europe region (U.S. dollars in
millions):
|
2006 | |
2007 | |
Change | |
|
|
|
|
|
|
|
|
Europe |
|
$ 59.5 |
|
$ 77.2 |
|
30% |
|
-52-
Foreign
currency exchange rate fluctuations positively impacted revenue in Europe by 2% in 2007
compared to the prior year. On a local currency basis, revenue grew by 27% in 2007
compared to 2006. The strong growth in Europe was primarily a result of distributor
enthusiasm and strong interest in our Galvanic Spa System II and personal care
business, as well as strong growth in our newer Eastern European markets. We believe that
strong alignment of distributor leaders behind our key initiatives, including the
Galvanic Spa System II, has helped contribute to the distributor excitement and
revenue growth. In 2007, we also expanded our operations into Switzerland and Slovakia. In
addition, we plan on commencing limited operations in South Africa in the first quarter of
2008. Our active and executive distributor counts increased by 16% and 22%, respectively,
in 2007 compared to 2006.
Gross
profit
Gross profit
as a percentage of revenue in 2007 decreased to 81.9% from 82.5% in 2006. The decrease is
due in part to a shift in our product mix as our Japan business, which historically has
our strongest gross margins, now represents a smaller percentage of our overall business.
Gross margins have also been impacted by the increase in sales of tools that have lower
margins such as the Galvanic Spa System II and the Scanner, as well as increased
air-freight costs during the year.
Selling
expenses
Selling expenses
decreased as a percentage of revenue to 42.9% in 2007 from 43.1% in 2006. The slight
decrease as a percentage of revenue was due primarily to a reduction in special incentives
in various markets, particularly Japan.
General
and administrative expenses
General and
administrative expenses increased to $361.2 million in 2007 from $353.4 million in 2006,
but decreased as a percentage of revenue to 31.2% in 2007 from 31.7% in 2006. In the
fourth quarter we took additional steps under our transformation initiative to further
reduce our general and administrative expenses. These steps included the closing of
approximately 70 stores in China, and a reduction in headcount of 1,000 employees
globally. We believe these steps will help us to reduce our general and administrative
expenses in 2008 compared to 2007 and improve our operating margins.
Restructuring
charges
During
2007, we recorded restructuring charges of $19.8 million relating to our efforts
to simplify our operations in China and improve operational efficiencies in our corporate
offices and reduce investments in unprofitable markets. Approximately $13.9 million of
these charges related to severance payments to terminated employees and approximately $5.9
million related to leasehold terminations and tax payments related to the closure of our operations in Brazil in 2007.
During
the first quarter of 2006, we recorded restructuring charges of $11.1 million,
primarily relating to our business transformation initiative designed to (i) eliminate
organizational redundancies, (ii) revamp administrative support functions, (iii)
prioritize investments to favor profitable initiatives and markets, and (iv) increase
efficiencies in the supply chain process. As a result, our overall headcount was reduced
by approximately 225 employees, the majority of which related to the elimination of
positions at our U.S. headquarters. These expenses consisted primarily of severance and
other compensation charges.
-53-
Other
income (expense), net
Other income
(expense), net was $2.4 million of expense in 2007 compared to $2.0
million of expense in 2006. The increase in expense was primarily a result of an increase
in interest expense.
Provision
for income taxes
Provision for
income taxes increased to $24.6 million in 2007 from $19.9 million in 2006. The effective
tax rate decreased to 35.9% from 37.7% of pre-tax income in 2006, due primarily to the
expiration of the statute of limitations in certain tax jurisdictions. In connection with our
reconciliation of deferred tax asset and liability accounts at year end, we identified
accounting adjustments related to prior periods. These adjustments were included in our provision for income taxes at year end
and totalled approximately $0.1 million.
Net
income
As
a result of the foregoing factors, net income increased to $43.9 million in 2007 from
$32.8 million in 2006.
2006 Compared to 2005
Overview
Revenue
in 2006 decreased 5% to $1.12 billion from $1.18 billion in 2005. The revenue decrease was
primarily attributable to local currency declines in Japan and China. In addition, foreign
currency exchange fluctuations negatively impacted reported revenue by 1% in 2006 compared
to 2005, particularly as a result of a weakening of the Japanese yen. Revenue in 2006 was
positively impacted by growth in South Korea, Europe, the United States, Indonesia, and a
number of our other markets around the world. Various global initiatives we implemented
during 2006 contributed to the growth in these markets. In 2006, we launched several
products and tools including our second-generation Scanner, our g3 nutrition drink,
and our Nu Skin ProDerm Skin Analyzer (the ProDerm Skin
Analyzer).
Earnings
per share in 2006 were $0.47 compared to $1.04 in 2005 on a diluted basis. In addition to
the negative impact of the decline in revenue, earnings per share in 2007 were also
negatively impacted by several factors, including:
|
|
|
restructuring
and impairment charges in the first quarter of 2006 totaling $20.0 million (net of taxes
of $12.0 million), or $0.28 per share, relating to a business transformation initiative
that we implemented during the first quarter; |
|
|
|
$5.8
million (net of taxes of $3.5 million) in stock-based compensation expense as a result of
the implementation of a new accounting standard requiring the expensing of stock-based
compensation beginning in the first quarter of 2006; |
|
|
|
our
relatively high fixed costs in China combined with revenue declines in that market, as
well as costs associated with the opening of Russia; and |
|
|
|
increased
distributor commission rates in Japan, as more fully described in the section below
entitled, "Selling Expenses." |
-54-
Revenue
North Asia. The following table
sets forth revenue for the North Asia region and its principal markets in 2006 and 2005
(U.S. dollars in millions):
|
2005 | |
2006 | |
Change | |
|
|
|
|
|
|
|
|
Japan |
|
$ 562.0 |
|
$ 476.5 |
|
(15%) |
|
South Korea | |
87.4 |
|
117.3 |
|
34% |
|
North Asia total | |
$ 649.4 |
|
$ 593.8 |
|
(9%) |
|
Foreign
currency fluctuations, particularly a weakening of the Japanese yen throughout the year,
negatively impacted North Asia region revenue by 5% in 2006 compared to 2005. Revenue in
this region was also negatively impacted by an 11% local currency decline in Japan in 2006
compared to 2005. Our active and executive distributor counts decreased 6% and 10%,
respectively, in Japan in 2006 compared to 2005. Our Japan revenue in 2006 was negatively
impacted by a slowdown in our business that started in the latter part of 2005, resulting
from several factors that impacted our sponsoring story for new distributors, including:
|
|
|
modifications
we made to our compensation plan in 2005 that we believe negatively impacted revenue and
distributor counts; |
|
|
|
a
scale-back of the roll-out of our first-generation Scanner during the latter part of 2005
in advance of the April 2006 launch of the second generation Scanner; |
|
|
|
regulatory
challenges related to our nutritional supplements and the Scanner which impact the way in
which we can market certain products; and |
|
|
|
declines
in our personal care revenue as a result of increased attention to our nutritional
business and the Scanner. |
South
Korea has generated significant growth in both our personal care and nutrition businesses.
Local currency revenue in South Korea grew 25% in 2006 compared to 2005, and active and
executive distributor counts grew significantly as well. We believe that these results
were due to strong product and other initiatives, alignment of our distributor leaders
behind these initiatives, and a strong sponsoring environment. Successful launches in 2006
include g3, a reformulated Nu Skin 180° Anti-Aging Skin Therapy system,
and Galvanic Spa System II.
Greater
China. The following table sets forth revenue for the Greater China region and its
principal markets (U.S. dollars in millions):
|
2005 | |
2006 | |
Change | |
|
|
|
|
|
|
|
|
China |
|
$ 102.2 | |
$ 70.5 |
|
(31%) |
|
Taiwan |
|
92.4 |
|
93.1 |
|
1% |
|
Hong Kong | |
42.1 |
|
44.6 |
|
6% |
|
Greater China total | |
$ 236.7 |
|
$ 208.2 |
|
(12%) |
|
Foreign
currency exchange rate fluctuations did not significantly impact revenue in the Greater
China region in 2006. China revenue decreased by 31% in 2006 compared to 2005, and our
executive and active distributor counts decreased 23% and 31%, respectively. Beginning in
the latter part of 2005, we experienced a slowdown in our business and a weakened
sponsoring environment in China. We believe this to be a result of several factors,
including delays in the direct selling licensing process following the enactment of new
direct selling regulations, related consumer uncertainty, and government and media
scrutiny of the direct selling industry, which caused us to take a very conservative
business approach as we worked towards obtaining a direct selling license. These factors,
as well as changes to our compensation plan late in 2005, contributed to the slowdown and
to a loss of some high level sales representatives.
-55-
Local
currency revenue for 2006 in Taiwan was up 4% and Hong Kong local currency revenue was up
3% when compared with 2005. During 2006 these markets benefited from the second
generation Scanner initiative, the launch of g3, and distributor excitement
surrounding business opportunities in China as we work towards rolling out direct selling
there.
Americas.
The following table sets forth revenue for the Americas region and its principal
markets (U.S. dollars in millions):
|
2005 | |
2006 | |
Change | |
|
|
|
|
|
|
|
|
United States |
|
$ 144.5 |
|
$ 147.1 |
|
2% |
|
Canada | |
9.6 |
|
10.0 |
|
4% |
|
Latin America | |
8.0 |
|
8.8 |
|
9% |
|
Americas total | |
$ 162.1 |
|
$ 165.9 |
|
2% |
|
We
believe that growth in the United States was a result of several key initiatives
implemented during 2006. In the second quarter of 2006, we began rolling out the second
generation Scanner and ProDerm Skin Analyzer units into the market. We also
benefited from the 2005 launch of Photomax, our digital imaging service. Each of
these initiatives helped contribute to the revenue growth and the growth of active and
executive distributor counts of 2% and 9%, respectively, in 2006 compared to 2005.
South
Asia/Pacific. The following table sets forth revenue for the South Asia/Pacific region
and its principal markets (U.S. dollars in millions):
|
2005 | |
2006 | |
Change | |
|
|
|
|
|
|
|
|
Singapore/Malaysia/Brunei |
|
$ 41.4 |
|
$ 33.2 |
|
(20%) |
|
Thailand | |
23.7 |
|
26.5 |
|
12% |
|
Australia/New Zealand | |
13.3 |
|
14.2 |
|
7% |
|
Indonesia | |
4.2 |
|
10.3 |
|
145% |
|
Philippines | |
4.1 |
|
3.8 |
|
(7%) |
|
South Asia/Pacific total | |
$ 86.7 |
|
$ 88.0 | |
2% |
|
Foreign
currency exchange rate fluctuations positively impacted revenue in South Asia/Pacific by
4% in 2006 compared to 2005. Revenue growth in this region was attributed to incremental
revenue from our Indonesia market that was opened in August of 2005, and from strong
growth in Thailand and Australia/New Zealand. During the first part of 2006, our
Singapore/Malaysia/Brunei markets suffered declines as our distributor force adjusted to
compensation plan modifications implemented in latter 2005. The initiatives we launched in
these markets helped contribute to improving trends in the second half of the year. Active
distributor counts decreased in the South Asia/Pacific region by 10%, while executive
counts increased 6% in 2006 compared to 2005.
Europe.
The following table sets forth revenue for our Europe region (U.S. dollars in
millions):
|
2005 | |
2006 | |
Change | |
|
|
|
|
|
|
|
|
Europe |
|
$ 46.0 |
|
$ 59.5 |
|
29% |
|
-56-
Revenue
growth in Europe was primarily a result of growth in Germany and France and the expansion
into Israel and Russia. We believe this growth can be attributed to strong alignment of
distributor leaders behind certain initiatives, including the second generation Scanner
and the Galvanic Spa II. During 2006 we also introduced a limited number of
ProDerm Skin Analyzer units into the region. Our active and executive distributor
counts increased by 26% and 17%, respectively, in 2006 compared to 2005.
Gross
profit
Gross profit
as a percentage of revenue in 2006 remained level with 2005 at 82.5%. The negative impact
from a strengthening of the U.S. dollar against the Japanese yen during 2006 was offset by
a positive impact from a decrease in Scanner amortization following our transition to less
expensive second generation Scanners and the write-down of first generation Scanner units
in the first quarter of 2006.
Selling
expenses
Selling expenses
decreased to $480.1 million in 2006 from $497.4 million in 2005, but increased as a
percentage of revenue to 43.1% in 2006 from 42.1% in 2005. The increase as a percentage of
revenue was due primarily to an increase in the average commission rate in Japan in 2006,
resulting from enhancements to our compensation plan which took effect April 1, 2006 and
were designed to bring the average commission rate in that market back to its previous
levels before the implementation of a change in 2005.
General
and administrative expenses
General and
administrative expenses decreased to $353.4 million in 2006 from $354.2 million in 2005,
but increased as a percentage of revenue to 31.7% in 2006 from 30.0% in 2005. The overall
decline in general and administrative expenses in 2006 was a result of our transformation
initiative implemented in 2006 aimed at streamlining our business to reduce overhead.
These savings were offset by other increased costs, including $9.3 million of stock-based
compensation expenses as a result of the adoption of SFAS 123R in 2006, and expenses
associated with the commencement and expansion of operations in new markets, including
Russia and Indonesia. These factors, together with higher fixed expenses in China related
to our retail operations, coupled with lower revenue in China, resulted in the increase in
general and administrative expenses as a percentage of revenue in 2006 compared to 2005.
Restructuring
charges
During
the first quarter of 2006, we recorded restructuring charges of $11.1 million,
primarily relating to our business transformation initiative designed to (i) eliminate
organizational redundancies, (ii) revamp administrative support functions, (iii)
prioritize investments to favor profitable initiatives and markets, and (iv) increase
efficiencies in the supply chain process. As a result, our overall headcount was reduced
by approximately 225 employees, the majority of which related to the elimination of
positions at our U.S. headquarters. These expenses consisted primarily of severance and
other compensation charges.
Impairment
of assets and other
During
the first quarter of 2006, we recorded impairment charges of $20.8 million, primarily
relating to our first generation Scanners. In February 2006, as a result of our launch of
and transition to the S2 Scanner, we determined it was necessary to write down the book
value of the existing inventory of the prior model of the Scanner. The impairment charges
relating to the Scanner recorded during the first quarter of 2006 totaled $19.0 million.
-57-
In
addition, during the first quarter of 2006 we completed a settlement agreement with a Big
Planet vendor to terminate our purchase commitments for video technology for approximately
$1.8 million as we moved away from this technology in our Big Planet business.
Other
income (expense), net
Other income
(expense), net was $2.0 million of expense in 2006 compared to $4.2
million of expense in 2005. Fluctuations in other income (expense), net are impacted by
interest income and expense and foreign exchange fluctuations to the U.S. dollar on the
translation of yen-based bank debt and other foreign denominated intercompany balances
into U.S. dollars for financial reporting purposes.
Provision
for income taxes
Provision for
income taxes decreased to $19.9 million in 2006 from $44.9 million in 2005. The effective
tax rate decreased slightly to 37.7% from 37.8% of pre-tax income in 2006 and 2005,
respectively.
Net
income
As
a result of the foregoing factors, net income decreased to $32.8 million in 2006 from
$74.0 million in 2005.
Liquidity and Capital
Resources
Historically,
our principal uses of cash have included operating expenses, particularly selling
expenses, and working capital (principally inventory purchases), as well as capital
expenditures, stock repurchases, dividends, debt repayment, and the development of
operations in new markets. We have generally relied on cash flow from operations to fund
operating activities, and we have at times incurred long-term debt in order to fund
strategic transactions and stock repurchases.
We
typically generate positive cash flow from operations due to favorable gross margins and
the variable nature of selling expenses, which constitute a significant percentage of
operating expenses. We generated $48.7 million in cash from operations in 2007, compared
to $75.8 million in 2006. This decrease in cash generated from operations is primarily due
to purchases of inventory and the increase in taxes as a result of higher taxable income
in 2007.
As
of December 31, 2007, working capital was $95.2 million compared to $109.4 million as of
December 31, 2006. Our working capital decreased primarily due to a decrease in cash and
cash equivalents. Cash and cash equivalents, plus short-term investments, at December 31,
2007 were $92.6 million compared to $121.4 million at December 31, 2006. The decrease in
cash was primarily the result of repurchases of stock in 2007, the decrease in our cash
generated from operations and the repayment of debt, and was somewhat offset by the
proceeds from long-term debt in 2007.
Capital
expenditures in 2007 totaled $22.7 million, and we anticipate capital expenditures of
approximately $20 million to $25 million for 2008. These capital expenditures are
primarily related to:
|
|
|
purchases
of computer systems and software, including equipment and development
costs; and |
-58-
|
|
|
the
build-out and upgrade of leasehold improvements in our various markets, including retail
stores in China. |
We
currently have debt pursuant to various credit facilities and other borrowings. The
following table summarizes these debt arrangements as of December 31, 2007:
Facility or Arrangement(1) | |
Original Principal Amount | |
Balance as of December 31, 2007(2) | |
Interest Rate | |
Repayment terms | |
|
|
|
|
|
|
|
|
|
|
2000 Japanese yen denominated notes |
|
9.7 billion yen |
|
4.2 billion yen ($37.3 million as of December 31, 2007) |
|
3.0% |
|
Notes due October 2010, with annual principal payments that began in October 2004. |
|
|
|
|
|
|
| |
| |
| |
| |
| |
| |
2003 $205.0 million multi-currency uncommitted shelf facility: | |
| |
| |
| |
| |
| |
U.S. dollar denominated: | |
$50.0 million | |
$30.0 million | |
4.5% | |
Notes due April 2010 with annual principal payments that began in April 2006. | |
|
|
|
|
|
| |
$25.0 million | |
$5.0 million | |
4.0% | |
Notes due April 2008 with annual principal payments that began in October 2004. | |
|
|
|
|
|
| |
$40.0 million | |
$40.0 million | |
6.2% | |
Notes due July 2016 with annual principal payments beginning July 2010. |
|
| |
| |
| |
| |
| |
| |
$40.0 million(3) | |
$40.0 million | |
6.2% | |
Notes due July 2017 with annual principal payments beginning July 2011. |
|
| |
| |
| |
| |
| |
Japanese yen denominated: | |
3.1 billion yen | |
3.1 billion yen ($28.0 million as of December 31, 2007) | |
1.7% | |
Notes due April 2014 with annual principal payments beginning April 2008. | |
|
|
|
|
|
| |
2.7 billion yen | |
2.7 billion yen ($20.3 million as of December 31, 2007) | |
2.6% | |
Notes due September 2017, with annual principal payments beginning September 2011. | |
|
|
|
|
|
| |
| |
| |
| |
| |
2004 $25.0 million revolving credit facility | |
N/A | |
None | |
N/A | |
Credit facility expires May 2010. | |
-59-
(1) |
|
Each
of the credit facilities and arrangements listed in the table are secured
by guarantees issued by our material domestic subsidiaries and by pledges
of 65% of the outstanding stock of our material foreign subsidiaries. |
(2) |
|
The
current portion of our long-term debt (i.e. becoming due in the next 12
months) includes $12.4 million of the balance on our 2000 Japanese yen
denominated notes, $4.0 million of the balance of our 2005 Japanese yen
denominated notes and $15.0 million of the balance on our U.S. dollar
denominated debt under the 2003 multi-currency shelf facility. |
(3) |
|
In
January 2008, $20.0 million of this loan was converted from U.S. dollar to
Japanese yen at an exchange rate of 108.5. The terms of the loan remain
the same, except for the interest rate lowers from 6.2% to 3.3%. |
Our
board of directors has approved a stock repurchase program authorizing us to repurchase
our outstanding shares of Class A common stock on the open market or in private
transactions. The repurchases are used primarily for our equity incentive plans and
strategic initiatives. On November 2, 2007, our board of directors authorized an increase
of $100 million to our ongoing share repurchase authorization. During the year ended
December 31, 2007, we repurchased approximately 4.1 million shares of Class A common stock
under this program for an aggregate amount of approximately $71.1 million. Included in the
4.1 million shares repurchased in 2007, are 1.5 million shares that we repurchased under a $25.0 million
accelerated repurchase transaction during the fourth quarter of 2007. At December 31, 2007, approximately $89.6 million was
still available under the stock repurchase program.
During
each quarter of 2007, our board of directors declared cash dividends of $0.105 per share
on our Class A common stock. These quarterly cash dividends totaled approximately $27.1
million and were paid during 2007 to stockholders of record in 2007. In February 2008, the
board of directors declared a dividend to be paid in March 2008 of $0.11 per share for
Class A common stock. Currently, we anticipate that our board of directors will continue
to declare quarterly cash dividends and that the cash flows from operations will be
sufficient to fund our future dividend payments. However, the continued declaration of
dividends is subject to the discretion of our board of directors and will depend upon
various factors, including our net earnings, financial condition, cash requirements,
future prospects and other factors deemed relevant by our board of directors.
We
believe we have sufficient liquidity to be able to meet our obligations on both a short-
and long-term basis. We currently believe that existing cash balances, future cash flows
from operations and existing lines of credit will be adequate to fund our cash needs on
both a short- and long-term basis. The majority of our historical expenses have been
variable in nature and as such, a potential reduction in the level of revenue would reduce
our cash flow needs. In the event that our current cash balances, future cash flow from
operations and current lines of credit are not sufficient to meet our obligations or
strategic needs, we would consider raising additional funds in the debt or equity markets
or restructuring our current debt obligations. Additionally, we would consider realigning
our strategic plans, including a reduction in capital spending, stock repurchases or
dividend payments.
-60-
Contractual Obligations
and Contingencies
The
following table sets forth payments due by period for fixed contractual obligations as of
December 31, 2007 (U.S. dollars in thousands):
|
Total | |
2008 | |
2009-2010 | |
2011-2012 | |
Thereafter | |
|
| |
| |
| |
| |
| |
Long-term debt obligations |
|
$ 200,670 |
|
$ 31,441 |
|
$ 58,596 |
|
$ 36,670 |
|
$ 73,963 |
|
Capital lease obligations | |
|
|
|
|
|
|
|
|
|
|
Operating lease obligations(1) | |
33,165 |
|
13,194 |
|
15,696 |
|
4,275 |
|
|
|
Purchase obligations | |
102,303 |
|
56,761 |
|
36,450 |
|
6,142 |
|
2,950 |
|
Other long-term liabilities reflected
on the balance sheet(2) | |
|
|
|
|
|
|
|
|
|
|
Total | |
$ 336,138 |
|
$ 101,396 |
|
$ 110,742 |
|
$ 47,087 |
|
$ 76,913 |
|
(1) |
|
Operating
leases include corporate office and warehouse space with two entities that
are owned by certain officers and directors of our company who are also
founding shareholders. Total payments under these leases were $3.8 million
for the year ended December 31, 2007 with remaining long-term obligations
under these leases of $13.7 million. |
(2) |
|
Other
long-term liabilities reflected on the balance sheet of $67.8 million
primarily consisting of long-term tax related balances, in which the
timing of the commitments is uncertain. |
Due
to the international nature of our business, we are subject from time to time to reviews
and audits by the foreign taxing authorities of the various jurisdictions in which we
conduct business throughout the world. In 1999, we implemented a duty valuation
methodology with respect to the importation of certain products into Japan. For purposes
of the import transactions at issue, we had taken the position that, under applicable
customs law, there was a sale between the manufacturer and our Japan subsidiary, and that
customs duties should be assessed on the manufacturers invoice. The Valuation
Department of the Yokohama customs authorities reviewed and approved this methodology at
that time, and it had been reviewed on several occasions by the audit division of the
Japan customs authorities since then. In connection with subsequent audits in 2004, the
Yokohama customs authorities assessed us additional duties and penalties on these products
imported into Japan from October 2002 to October 2004, based on a different valuation
methodology than what was previously approved. With respect to the periods under audit,
the customs authorities took the position that the relevant import transaction involved a
sale between our U.S. affiliate and our Japan subsidiary, rather than a sale between the
manufacturer and our Japan subsidiary, and that duties should be assessed on the value of
that transaction. We disputed this assessment. We also disputed the amount of duties we
were required to pay on products imported from November of 2004 to June of 2005 for
similar reasons. The total amount assessed or in dispute is approximately $25.0 million,
net of any recovery of consumption taxes. Effective July 1, 2005, we implemented some
modifications to our business structure in Japan and in the United States that we believe
will eliminate any further customs valuation disputes on these issues with respect to
product imports in Japan after that time.
Because
we believe the documentation and legal analysis supports our position and the valuation
methodology we used with respect to the products in dispute had been reviewed and approved
by the customs authorities in Japan, we believe the assessments are improper and we filed
letters of protest with Yokohama customs with respect to this entire amount. Yokohama
customs rejected our letters of protest, and we filed appeals with the Japan Ministry of
Finance. On June 26, 2006, we were advised that the Ministry of Finance had rejected the
appeals filed with their office relating to the imports from October 2002 to October 2004.
On December 22, 2006, we filed a complaint with the Tokyo District Court Civil Action
Section to appeal the decision with respect to this period. In January 2007, we were
advised that the Ministry of Finance also rejected our appeal for the imports from
November 2004 to June 2005. We appealed this decision with the court system in Japan in
July 2007. Currently, all appeals are pending with the Tokyo District Court Civil Action
Section. One of the findings cited by the Ministry of Finance in
its decisions was that we had treated the transactions as sales between our U.S. affiliate
and our Japan subsidiary on our corporate income tax return under applicable income tax
and transfer pricing laws. We have paid the $25.0 million in customs duties and
assessments related to all of the amounts at issue, the amount of which we recorded in
Other Assets in our Consolidated Balance Sheet. To the extent that we are
unsuccessful in recovering the amounts assessed and paid, we will be required to take a
corresponding charge to our earnings.
-61-
In
Taiwan, we were subject to an audit by tax authorities with respect to the deductibility
of distributor commission expenses in that market. In order to avoid the running of the
statute of limitations with respect to the 1999, 2000 and 2001 tax years, the Taiwan tax
authorities disallowed our commission expense deductions for those years and assessed us a
total of approximately $26.0 million. In the fourth quarter of 2007, the Taiwan tax
authorities ruled in our favor and concluded the commission expenses were properly
deducted for tax purposes.
On
May 2, 2007, Bodywise International, LLC, a direct sales company headquartered in Tustin,
California, filed a complaint in the Superior Court of the State of California for Orange
County, naming Pharmanex, Inc., our subsidiary, and several Nu Skin distributors who had
formerly been distributors for Bodywise as defendants. The plaintiff subsequently filed an
amended complaint on May 25, 2007. The complaint alleges that the individual defendants
breached the terms of their distributor agreements by utilizing trade secrets and
violating non-solicitation covenants in connection with the alleged recruitment of
distributors of Bodywise to become Nu Skin distributors. The complaint includes additional
claims against all defendants for intentional interference with contractual relations and
prospective economic advantage, misappropriation of trade secrets, unfair competition, and
unjust enrichments related to the alleged activities. The complaint seeks recovery of
damages in an amount presently unascertained, but which plaintiff estimates will likely
exceed $25 million. We believe the allegations against us are without merit and plan to
vigorously defend the lawsuit. The lawsuit is still in the discovery stage.
Seasonality and
Cyclicality
In
addition to general economic factors, we are impacted by seasonal factors and trends such
as major cultural events and vacation patterns. For example, most Asian markets celebrate
their respective local New Year in the first quarter, which generally has a negative
impact on that quarter. We believe that direct selling in Japan, the United States and
Europe is also generally negatively impacted during the third quarter, when many
individuals, including our distributors, traditionally take vacations.
We
have experienced rapid revenue growth in certain new markets following commencement of
operations. This initial rapid growth has often been followed by a short period of stable
or declining revenue, then followed by renewed growth fueled by product introductions, an
increase in the number of active distributors and increased distributor productivity. The
contraction following initial rapid growth has been more pronounced in certain new
markets, due to other factors such as business or economic conditions or distributor
distractions outside the market.
-62-
Distributor Information
The
following table provides information concerning the number of active and executive
distributors as of the dates indicated. Active distributors are those distributors and
preferred customers who were resident in the countries in which we operated and purchased
products for resale or personal consumption directly from us during the three months ended
as of the date indicated. Executive distributors are active distributors who have achieved
required monthly personal and group sales volumes as well as sales representatives in
China who have completed a qualification process.
|
As of December 31, 2005 | |
As of December 31, 2006 | |
As of December 31, 2007 | |
|
Active | |
Executive | |
Active | |
Executive | |
Active | |
Executive | |
|
|
|
|
|
|
|
North Asia |
|
340,000 |
|
16,129 |
|
333,000 |
|
15,354 |
|
335,000 |
|
14,845 |
|
Greater China | |
191,000 |
|
7,134 |
|
155,000 |
|
6,492 |
|
138,000 |
|
6,389 |
|
Americas | |
147,000 |
|
3,893 |
|
150,000 |
|
4,141 |
|
158,000 |
|
4,588 |
|
South Asia/Pacific | |
81,000 |
|
2,043 |
|
73,000 |
|
2,169 |
|
65,000 |
|
2,223 |
|
Europe | |
44,000 |
|
1,272 |
|
50,000 |
|
1,600 |
|
59,000 |
|
1,957 |
|
Total | |
803,000 |
|
30,471 |
|
761,000 |
|
29,756 |
|
755,000 |
|
30,002 |
|
Quarterly Results
The
following table sets forth selected unaudited quarterly data for the periods shown (U.S.
dollars in millions, except per share amounts):
|
2006 | |
2007 | |
|
1st
Quarter | |
2nd
Quarter | |
3rd
Quarter | |
4th
Quarter | |
1st
Quarter | |
2nd
Quarter | |
3rd
Quarter
| |
4th Quarter |
|
|
|
|
|
|
|
|
|
Revenue |
|
$ 265.8 |
|
$ 284.1 |
|
$ 276.3 |
|
$ 289.2 |
|
$ 273.6 |
|
$ 287.2 |
|
$ 290.7 |
|
$ 306.1 |
|
Gross profit | |
218.8 |
|
235.7 |
|
228.0 |
|
237.8 |
|
223.0 |
|
236.2 |
|
238.5 |
|
250.8 |
|
Operating income | |
(15.5) |
|
23.9 |
|
21.0 |
|
25.3 |
|
17.6 |
|
21.0 |
|
19.2 |
|
13.1 |
|
Net income | |
(10.3) |
|
14.1 |
|
13.2 |
|
15.9 |
|
10.5 |
|
13.8 |
|
13.5 |
|
6.0 |
|
Net income per share: | |
Basic | |
(0.15 |
) |
0.20 |
|
0.19 |
|
0.23 |
|
0.16 |
|
0.21 |
|
0.21 |
|
0.09 |
|
Diluted | |
(0.15 |
) |
0.20 |
|
0.19 |
|
0.23 |
|
0.16 |
|
0.21 |
|
0.21 |
|
0.09 |
|
Recent Accounting
Pronouncements
In
September 2006, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 157, Fair Value Measurements (SFAS 157), which
defines fair value, establishes a framework for measuring fair value in accordance with
generally accepted accounting principles and expands disclosures about fair value
measurements. SFAS 157 is effective January 1, 2008. In February 2008, the FASB deferred for one year the effective date
of SFAS 157 only with respect to nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at
fair value in the financial statements on a nonrecurring basis, and removed certain leasing transactions from
the scope of SFAS 157. We do not believe that the adoption of SFAS 157 will have a material impact on our consolidated
financial statements.
In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities including an amendment to FASB Statement No. 115,
(SFAS 159), which permits entities to choose to measure many financial
instruments and certain other items at fair value that are not currently required to be
measured at fair value. SFAS 159 is effective January 1, 2008. We have evaluated the
impact of SFAS 159 and believe it will not significantly impact our consolidated financial
statements.
-63-
In
December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations,
(SFAS 141R), which changes how business combinations are accounted for and
will impact financial statements both on the acquisition date and in subsequent periods.
SFAS 141R is effective January 1, 2009, and will be applied prospectively. The impact of
adopting SFAS 141R will depend on the nature and terms of future acquisitions.
In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated
Financial Statements (SFAS 160), which changes the accounting and
reporting standards for the noncontrolling interests in a subsidiary in consolidated
financial statements. SFAS 160 recharacterizes minority interests as noncontrolling
interests and requires noncontrolling interests to be classified as a component of
shareholders equity. SFAS 160 is effective January 1, 2009 and requires retroactive
adoption of the presentation and disclosure requirements for existing minority interests.
We are currently evaluating the impact of SFAS 160 on our consolidated financial
statements.
Currency Risk and
Exchange Rate Information
A
majority of our revenue and many of our expenses are recognized outside of the United
States, except for inventory purchases, which are primarily transacted in U.S. dollars
from vendors in the United States. The local currency of each of our Subsidiaries
primary markets is considered the functional currency. All revenue and expenses are
translated at weighted-average exchange rates for the periods reported. Therefore, our
reported revenue and earnings will be positively impacted by a weakening of the U.S.
dollar and will be negatively impacted by a strengthening of the U.S. dollar. Given the
large portion of our business derived from Japan, any weakening of the yen negatively
impacts reported revenue and profits, whereas a strengthening of the yen positively
impacts our reported revenue and profits. Given the uncertainty of exchange rate
fluctuations, we cannot estimate the effect of these fluctuations on our future business,
product pricing and results of operations or financial condition.
We
seek to reduce our exposure to fluctuations in foreign currency exchange rates through the
use of foreign currency exchange contracts, through intercompany loans of foreign currency
and through our Japanese yen-denominated debt. We do not use derivative financial
instruments for trading or speculative purposes. We regularly monitor our foreign currency
risks and periodically take measures to reduce the impact of foreign exchange fluctuations
on our operating results.
Our
foreign currency derivatives are comprised of over-the-counter forward contracts with
major international financial institutions. As of December 31, 2007, we did not have any
of these contracts. For the year ended
December 31, 2007, we recorded pre-tax gains of approximately $0.4 million, which were
included in our revenue in Japan, and gains/(losses) of $(0.2) million as of December 31,
2007, net of tax, in other comprehensive income related to the fair market valuation of
our outstanding forward contracts. Based on our foreign exchange contracts at December 31,
2007, the impact of a 10% appreciation or 10% depreciation of the U.S. dollar against the
Japanese yen would not represent a material potential loss in fair value, earnings or cash
flows against these contracts. This potential loss does not consider the underlying
foreign currency transaction or translation exposures to which we are subject.
-64-
Following
are the weighted-average currency exchange rates of U.S. $1 into local currency for each
of our international or foreign markets in which revenue exceeded U.S. $5.0 million for at
least one of the quarters listed:
|
2006 | |
2007 | |
|
1st
Quarter | |
2nd
Quarter | |
3rd
Quarter | |
4th
Quarter | |
1st
Quarter | |
2nd
Quarter | |
3rd
Quarter
| |
4th Quarter |
|
|
|
|
|
|
|
|
|
Japan(1) |
|
116.9 |
|
114.3 |
|
116.3 |
|
117.7 |
|
119.3 |
|
120.8 |
|
117.7 |
|
113.0 |
|
Taiwan | |
32.3 |
|
32.2 |
|
32.8 |
|
32.8 |
|
32.9 |
|
33.1 |
|
32.9 |
|
32.4 |
|
Hong Kong | |
7.8 |
|
7.8 |
|
7.8 |
|
7.8 |
|
7.8 |
|
7.8 |
|
7.8 |
|
7.8 |
|
South Korea | |
975.7 |
|
949.3 |
|
954.8 |
|
937.0 |
|
939.4 |
|
928.9 |
|
927.5 |
|
921.4 |
|
Malaysia | |
3.7 |
|
3.6 |
|
3.7 |
|
3.6 |
|
3.5 |
|
3.4 |
|
3.5 |
|
3.4 |
|
Thailand | |
39.3 |
|
38.1 |
|
37.7 |
|
36.5 |
|
33.9 |
|
32.6 |
|
31.5 |
|
31.2 |
|
China | |
8.1 |
|
8.0 |
|
8.0 |
|
7.9 |
|
7.8 |
|
7.7 |
|
7.6 |
|
7.4 |
|
Singapore | |
1.6 |
|
1.6 |
|
1.6 |
|
1.6 |
|
1.5 |
|
1.5 |
|
1.5 |
|
1.5 |
|
(1) |
|
As
of February 15, 2008, the exchange rate of U.S. $1 into the Japanese yen was
approximately 108. |
Note Regarding
Forward-Looking Statements
With
the exception of historical facts, the statements contained in Managements
Discussion and Analysis of Financial Condition and Results of Operations, are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995 which reflect our current expectations and beliefs regarding
our future results of operations, performance and achievements. These statements are
subject to risks and uncertainties and are based upon assumptions and beliefs that may not
materialize. These forward-looking statements include, but are not limited to, statements
concerning:
|
|
|
our
belief that our transformation efforts will help reduce general and administrative
expenses and help generate improved earnings per share in 2008; |
|
|
|
our
plans to launch or to continue to roll out certain products, tools and other initiatives
in our various markets, and our belief that these initiatives and other recent product
launches and initiatives will positively impact our business going forward; |
|
|
|
our
plans to open additional stores in China and our plans to commence operations in South
Africa; |
|
|
|
our
intention to vigorously defend the Bodywise International, LLC lawsuit; |
|
|
|
our
expectation that we will spend approximately $20 million to $25 million for capital
expenditures during 2008; |
|
|
|
our
belief that our recent business transformation initiative will provide continued savings
going forward; |
|
|
|
our
anticipation that our board of directors will continue to declare quarterly cash
dividends and that the cash flows from operations will be sufficient to fund our future
dividend payments; |
-65-
|
|
|
our
belief that we have sufficient liquidity to be able to meet our obligations on both a
short- and long-term basis and that existing cash balances together with future cash
flows from operations and existing lines of credit will be adequate to fund our cash
needs; |
|
|
|
our
belief that recent modifications to our business structure in Japan and in the United
States should eliminate any further customs valuation disputes with respect to product
imports in Japan. |
In
addition, when used in this report, the words or phrases will likely result,
expect, anticipate, will continue, intend,
plan, believe and similar expressions are intended to help
identify forward-looking statements.
We
wish to caution readers that our operating results are subject to various risks and
uncertainties that could cause our actual results and outcomes to differ materially from
those discussed or anticipated. Reference is made to the risks and uncertainties described
below and factors described herein in Item 1A. Risk Factors (which
contain a more detailed discussion of the risks and uncertainties related to our
business). We also wish to advise readers not to place any undue reliance on the
forward-looking statements contained in this report, which reflect our beliefs and
expectations only as of the date of this report. We assume no obligation to update or
revise these forward-looking statements to reflect new events or circumstances or any
changes in our beliefs or expectations. Some of the risks and uncertainties that might
cause actual results to differ from those anticipated include, but are not limited to, the
following:
(a)
We have experienced revenue declines in Japan over the last couple of years and
continue to face challenges in this market. If we are unable to renew growth in
this market our results could be harmed. Factors that could impact our results
in the market include:
|
|
|
any
weakening of the Japanese yen; |
|
|
|
regulatory
constraints with respect to the claims we can make regarding the efficacy of our products
and tools, which could limit our ability to effectively market them; |
|
|
|
any
further weakening of the direct selling industry in Japan and any negative publicity
associated with increased regulatory scrutiny of the market; |
|
|
|
inappropriate
activities by our distributors and any resulting regulatory actions; |
|
|
|
any
weakness in the economy or consumer confidence and; |
|
|
|
increased
competitive pressures from other direct selling companies and their distributors who
actively seek to solicit our distributors to join their businesses. |
(b)
Our operations in China are subject to significant regulatory scrutiny, and we
have experienced challenges in the past, including interruption of sales
activities at certain stores and fines being paid in some cases. Even though we
have now obtained a direct selling license, we anticipate that government
regulators will continue to scrutinize our activities and the activities of our
distributors and sales employees to monitor our compliance with the new
regulations and other applicable regulations as we integrate direct selling into
our business model. We continue to be subject to current governmental reviews
and investigations. Any determination that our operations or activities, or the
activities of our employed sales representatives or distributors, are not in
compliance with applicable regulations, could result in the imposition of
substantial fines, extended interruptions of business, termination of necessary
licenses and permits, including our direct selling licenses, or restrictions on
our ability to open new stores or obtain approvals for service centers or expand
into new locations, all of which could harm our business.
-66-
(c)
The new direct selling regulations in China are restrictive and there continues
to be some confusion and uncertainty as to the meaning of the new regulations
and the specific types of restrictions and requirements imposed under them. It
is also difficult to predict how regulators will interpret and enforce these new
regulations and the impact of these new regulations on pending regulatory
reviews and investigations. Our business and our growth prospects may be harmed
if Chinese regulators interpret the anti-pyramiding regulations or direct
selling regulations in such a manner that our current method of conducting
business through the use of employed sales representatives violates these
regulations. In particular, our business would be harmed by any determination
that our current method of compensating our sales employees, including our use
of the sales productivity of a sales employee and the group of sales employees
whom he or she trains and supervises as one of the factors in establishing such
sales employees salary and compensation, violates the restriction on
multi-level compensation under the new rules. Our business could also be harmed
if regulators inhibit our ability to concurrently operate our retail
store/employed sales representative business model and our direct selling
business.
(d)
Our ability to retain key and executive level distributors or to sponsor new
executive distributors is critical to our success. Because our products are
distributed exclusively through our distributors and we compete with other
direct selling companies in attracting distributors, our operating results could
be adversely affected if our existing and new business opportunities and
incentives, products, business tools and other initiatives do not generate
sufficient enthusiasm and economic incentive to retain our existing distributors
or to sponsor new distributors on a sustained basis. In addition, in our more
mature markets, one of the challenges we face is keeping distributor leaders
with established businesses and high income levels motivated and actively
engaged in business building activities and in developing new distributor
leaders. There can be no assurance that our initiatives will continue to generate excitement among our distributors in the
long-term or that planned initiatives will be successful in maintaining
distributor activity and productivity or in motivating distributor leaders to
remain engaged in business building and developing new distributor leaders.
(e)
There have been a series of third party actions and governmental actions
involving some of our competitors in the direct selling industry as well. These
actions have generated negative publicity for the industry and likely have
resulted in increased regulatory scrutiny of other companies in the industry.
There can be no assurance that similar allegations will not be made against us.
In addition, adverse rulings in these cases could harm our business if they
create adverse publicity or interpret laws in a manner inconsistent with our
current business practices.
(f)
Distributor activities that violate applicable laws or regulations could result
in government or third party actions against us. We have experienced an increase
in complaints to consumer protection agencies in Japan and have taken steps to
try to resolve these issues including providing additional training and
restructuring our compliance group in Japan. We have also been in contact
with general consumer agencies in Japan. If consumer complaints escalate to a
government review or if the current level of complaints dont improve,
regulators could take action against us.
(g)
As we continue to implement our business transformation initiative, there could
be unintended negative consequences, including business disruptions and/or a
loss of employees. Further, we may not realize the cost improvements and greater
efficiencies as we hope for as a result of this realignment. In addition, as we
continually evaluate strategic reinvestment of any savings generated as a result
of our transformation initiative, we may not ultimately achieve the amount of
savings that we currently anticipate.
-67-
(h)
The network marketing and nutritional supplement industries are subject to
various laws and regulations throughout our markets, many of which involve a
high level of subjectivity and are inherently fact-based and subject to
interpretation. Negative publicity concerning supplements with controversial
ingredients has spurred efforts to change existing regulations or adopt new
regulations in order to impose further restrictions and regulatory control over
the nutritional supplement industry. The FTC in the United States is also
proposing new regulations that would impose new requirements that could be
burdensome. If our existing business practices or products, or any new
initiatives or products, are challenged or found to contravene any of these laws
by any governmental agency or other third party, or if there are any new
regulations applicable to our business that limit our ability to market such
products or impose additional requirements on us, our revenue and profitability
may be harmed.
(i)
Production difficulties and quality control problems could harm our business, in
particular our reliance on third party suppliers to deliver quality products in
a timely manner. Occasionally, we have experienced production
difficulties with respect to our products, including the delivery of products
that do not meet our quality control standards. These quality problems have
resulted in the past, and could result in the future, in stock outages or
shortages in our markets with respect to such products, harming our sales and
creating inventory write-offs for unusable products.
ITEM 7A. |
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
The
information required by Item 7A of Form 10-K is incorporated herein by reference from the
information contained in Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operation Currency Risk and Exchange Rate
Information and Note 15 to the Consolidated Financial Statements.
ITEM 8. |
|
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
1. |
|
Financial
Statements. Set forth below is the index to the Financial Statements
included in this Item 8: |
|
Page | |
|
|
|
Consolidated Balance Sheets at December 31, 2006 and 2007 |
69 |
|
|
|
|
Consolidated Statements of Income for the years
ended December 31, 2005, 2006 and 2007 |
70 |
|
|
|
|
Consolidated Statements of Stockholders' Equity and Comprehensive Income
for the years ended December 31, 2005, 2006 and 2007 |
71 |
|
|
|
|
Consolidated Statements of Cash Flows for the years
ended December 31, 2005, 2006 and 2007 |
72 |
|
|
|
|
Notes to Consolidated Financial Statements |
73 |
|
|
|
|
Report of Independent Registered Public Accounting Firm |
96 |
|
2. |
|
Financial
Statement Schedules: Financial statement schedules have been omitted
because they are not required or are not applicable, or because the
required information is shown in the financial statements or notes
thereto. |
-68-
Nu Skin Enterprises, Inc.
Consolidated Balance Sheets
(U.S. dollars in thousands)
|
December 31, | |
|
2006 | |
2007 | |
ASSETS |
|
|
|
|
|
Current assets | |
Cash and cash equivalents | |
$ 121,353 |
|
$ 87,327 |
|
Current investments | |
|
|
5,225 |
|
Accounts receivable | |
19,421 |
|
23,424 |
|
Inventories, net | |
92,092 |
|
100,792 |
|
Prepaid expenses and other | |
44,093 |
|
49,576 |
|
| |
276,959 |
|
266,344 |
|
| |
|
|
|
|
Property and equipment, net | |
85,883 |
|
88,529 |
|
Goodwill | |
112,446 |
|
112,446 |
|
Other intangible assets, net | |
91,349 |
|
86,163 |
|
Other assts | |
98,212 |
|
129,761 |
|
Total assets | |
$ 664,849 |
|
$ 683,243 |
|
LIABILITIES AND STOCKHOLDERS' EQUITY | |
Current liabilities | |
Accounts payable | |
$ 20,815 |
|
$ 24,108 |
|
Accrued expenses | |
120,074 |
|
115,620 |
|
Current portion of long-term debt | |
26,652 |
|
31,441 |
|
| |
167,541 |
|
171,169 |
|
| |
|
|
|
|
Long-term debt | |
136,173 |
|
169,229 |
|
Other liabilities | |
42,155 |
|
67,836 |
|
Total liabilities | |
345,869 |
|
408,234 |
|
| |
|
|
|
|
Commitments and contingencies (Notes 9 and 20) | |
| |
|
|
|
|
Stockholders' equity | |
Class A common stock - 500 million shares authorized,
$.001 par value, 90.6 million shares issued; | |
91 |
|
91 |
|
Additional paid-in capital | |
199,322 |
|
209,821 |
|
Treasury stock, at cost - 23.7 million and 27.2 million shares | |
(346,889 |
) |
(413,976 |
) |
Accumulated other comprehensive loss | |
(65,107 |
) |
(67,759 |
) |
Retained earnings | |
531,563 |
|
546,832 |
|
| |
318,980 |
|
275,009 |
|
Total liabilities and stockholders' equity | |
$ 664,849 |
|
$ 683,243 |
|
The accompanying notes are an integral part of these
consolidated financial statements.
-69-
Nu Skin Enterprises, Inc.
Consolidated Statements of Income
(U.S. dollars in thousands, except per share amounts)
|
Year Ended December 31, |
|
|
2005 | |
2006 | |
2007 | |
|
|
|
Revenue |
|
$ 1,180,930 |
|
$ 1,115,409 |
|
$ 1,157,667 |
|
Cost of sales | |
206,163 |
|
195,203 |
|
209,283 |
|
|
|
|
Gross profit | |
974,767 |
|
920,206 |
|
948,384 |
|
|
|
|
Operating expenses: | |
Selling expenses | |
497,421 |
|
480,136 |
|
496,454 |
|
General and administrative expenses | |
354,223 |
|
353,412 |
|
361,242 |
|
Restructuring charges | |
|
|
11,115 |
|
19,775 |
|
Impairment of assets and other | |
|
|
20,840 |
|
|
|
|
|
|
Total operating expenses | |
851,644 |
|
865,503 |
|
877,471 |
|
|
|
|
Operating income | |
123,123 |
|
54,703 |
|
70,913 |
|
Other income (expense), net | |
(4,172 |
) |
(2,027 |
) |
(2,435 |
) |
|
|
|
Income before provision for income taxes | |
118,951 |
|
52,676 |
|
68,478 |
|
Provision for income taxes | |
44,918 |
|
19,859 |
|
24,606 |
|
|
|
|
Net income | |
$ 74,033 |
|
$ 32,817 |
|
$ 43,872 |
|
|
|
|
Net income per share: | |
Basic | |
$ 1.06 |
|
$ 0.47 |
|
$ 0.68 |
|
Diluted | |
$ 1.04 |
|
$ 0.47 |
|
$ 0.67 |
|
|
|
|
Weighted-average common shares outstanding (000s): | |
Basic | |
70,047 |
|
69,418 |
|
64,783 |
|
Diluted | |
71,356 |
|
70,506 |
|
65,584 |
|
The
accompanying notes are an integral part of these consolidated financial statements.
-70-
Nu Skin Enterprises, Inc.
Consolidated Statements of Stockholders' Equity and Comprehensive Income
(U.S. dollars in thousands)
|
Class A
Common Stock | |
Additional
Paid in Capital | |
Treasury Stock | |
Accumulated Other
Comprehensive Loss | |
Retained
Earnings | |
Total | |
Balance at January 1, 2005 |
|
$ 91 |
|
$ 163,557 |
|
$ (273,721 |
) |
$ (71,606 |
) |
$ 477,912 |
|
$ 296,233 |
|
| |
Comprehensive income: | |
Net income | |
|
|
|
|
|
|
|
|
74,033 |
|
74,033 |
|
Foreign currency translation adjustment | |
|
|
|
|
|
|
(597 |
) |
|
|
(597 |
) |
Net unrealized gains on foreign currency cash flow hedges | |
|
|
|
|
|
|
5,278 |
|
|
|
5,278 |
|
Less: Reclassification adjustment for realized gains in current earnings | |
|
|
|
|
|
|
(272 |
) |
|
|
(272 |
) |
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
78,442 |
|
Repurchase of Class A common stock (Note 10) | |
|
|
|
|
(24,638 |
) |
|
|
|
|
(24,638 |
) |
Stock-based compensation | |
|
|
907 |
|
|
|
|
|
|
|
907 |
|
Purchase of long-term assets | |
|
|
13,512 |
|
7,695 |
|
|
|
|
|
21,207 |
|
Exercise of employee stock options (666,000 shares) | |
|
|
(349 |
) |
6,526 |
|
|
|
|
|
6,177 |
|
Tax benefit of options exercised | |
|
|
1,708 |
|
|
|
|
|
|
|
1,708 |
|
Cash dividends | |
|
|
|
|
|
|
|
|
(25,408 |
) |
(25,408 |
) |
Balance at December 31, 2005 | |
91 |
|
179,335 |
|
(284,138 |
) |
(67,197 |
) |
526,537 |
|
354,628 |
|
| |
Comprehensive income: | |
Net income | |
|
|
|
|
|
|
|
|
32,817 |
|
32,817 |
|
Foreign currency translation adjustment | |
|
|
|
|
|
|
3,736 |
|
|
|
3,736 |
|
Net unrealized gains on foreign currency cash flow hedges | |
|
|
|
|
|
|
218 |
|
|
|
218 |
|
Less: Reclassification adjustment for realized gains in current earnings | |
|
|
|
|
|
|
(1,864 |
) |
|
|
(1,864 |
) |
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
34,907 |
|
Repurchase of Class A common stock (Note 10) | |
|
|
|
|
(67,452 |
) |
|
|
|
|
(67,452 |
) |
Adjustment related to prior common control merger | |
|
|
8,151 |
|
|
|
|
|
|
|
8,151 |
|
Exercise of employee stock options (519,000 shares) | |
|
|
870 |
|
4,530 |
|
|
|
|
|
5,400 |
|
Tax benefit of options exercised/restricted shares vested | |
|
|
1,836 |
|
|
|
|
|
|
|
1,836 |
|
Stock-based compensation | |
|
|
9,130 |
|
171 |
|
|
|
|
|
9,301 |
|
Cash dividends | |
|
|
|
|
|
|
|
|
(27,791 |
) |
(27,791 |
) |
Balance at December 31, 2006 | |
91 |
|
199,322 |
|
(346,889 |
) |
(65,107 |
) |
531,563 |
|
318,980 |
|
|
|
|
|
|
|
|
|
|
Comprehensive income: | |
Net income | |
|
|
|
|
|
|
|
|
43,872 |
|
43,872 |
|
Foreign currency translation adjustment | |
|
|
|
|
|
|
(2,236 |
) |
|
|
(2,236 |
) |
Net unrealized losses on foreign currency cash flow hedges | |
|
|
|
|
|
|
(152 |
) |
|
|
(152 |
) |
Less: Reclassification adjustment for realized gains in current earnings | |
|
|
|
|
|
|
(264 |
) |
|
|
(264 |
) |
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
41,220 |
|
Repurchase of Class A common stock (Note 10) | |
|
|
|
|
(71,100 |
) |
|
|
|
|
(71,100 |
) |
Exercise of employee stock options (593,000 shares) | |
|
|
1,734 |
|
3,996 |
|
|
|
|
|
5,730 |
|
Tax benefit of options exercised/restricted shares vested | |
|
|
1,770 |
|
|
|
|
|
|
|
1,770 |
|
Stock-based compensation | |
|
|
8,129 |
|
|
|
|
|
|
|
8,129 |
|
Adoption of FIN 48 | |
|
|
(1,117 |
) |
|
|
|
|
(1,458 |
) |
(2,575 |
) |
Vesting of stock awards | |
|
|
(17 |
) |
17 |
|
|
|
|
|
|
|
Cash dividends | |
|
|
|
|
|
|
|
|
(27,145 |
) |
(27,145 |
) |
Balance at December 31, 2007 | |
$ 91 |
|
$ 209,821 |
|
$ (413,976 |
) |
$ (67,759 |
) |
$ 546,832 |
|
$ 275,009 |
|
The accompanying notes are an
integral part of these consolidated financial statements.
-71-
Nu Skin Enterprises, Inc.
Consolidated Statements of Cash Flows
(U.S. dollars in thousands)
|
Year Ended December 31, |
|
|
2005 | |
2006 | |
2007 | |
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
Net income | |
$ 74,033 |
|
$ 32,817 |
|
$ 43,872 |
|
Adjustments to reconcile net income to net cash provided | |
by operating activities: | |
Depreciation and amortization | |
30,459 |
|
29,132 |
|
32,967 |
|
Stock-based compensation | |
907 |
|
9,301 |
|
8,129 |
|
Impairment of Scanner asset | |
|
|
18,984 |
|
|
|
Changes in operating assets and liabilities: | |
Accounts receivable | |
(626 |
) |
(2,786 |
) |
(2,647 |
) |
Inventories, net | |
(11,925 |
) |
163 |
|
(12,312 |
) |
Prepaid expenses and other | |
15,991 |
|
(8,289 |
) |
(4,623 |
) |
Other assets | |
(5,048 |
) |
(9,382 |
) |
(31,662 |
) |
Accounts payable | |
(4,906 |
) |
118 |
|
2,956 |
|
Accrued expenses | |
22,185 |
|
6,234 |
|
(13,112 |
) |
Other liabilities | |
(6,970 |
) |
(497 |
) |
25,085 |
|
| |
Net cash provided by operating activities | |
114,100 |
|
75,795 |
|
48,653 |
|
| |
Cash flows from investing activities: | |
Purchase of property and equipment | |
(30,884 |
) |
(35,680 |
) |
(22,736 |
) |
Proceeds on investment sales | |
170,610 |
|
173,925 |
|
131,525 |
|
Purchases of investments | |
(160,380 |
) |
(173,925 |
) |
(136,750 |
) |
Purchase of long-term assets | |
(5,548 |
) |
(1,981 |
) |
|
|
| |
Net cash used in investing activities | |
(26,202 |
) |
(37,661 |
) |
(27,961 |
) |
| |
Cash flows from financing activities: | |
Payment of cash dividends | |
(25,408 |
) |
(27,791 |
) |
(27,145 |
) |
Repurchase of shares of common stock | |
(24,638 |
) |
(67,452 |
) |
(71,100 |
) |
Exercise of distributor and employee stock options | |
6,177 |
|
5,400 |
|
5,731 |
|
Income tax benefit of options exercised | |
|
|
1,836 |
|
1,770 |
|
Payments on long-term debt | |
(17,074 |
) |
(31,611 |
) |
(31,733 |
) |
Proceeds from long-term debt | |
30,000 |
|
45,000 |
|
64,845 |
|
| |
Net cash used in financing activities | |
(30,943 |
) |
(74,618 |
) |
(57,632 |
) |
| |
Effect of exchange rate changes on cash | |
(11,411 |
) |
2,428 |
) |
2,914 |
|
| |
Net increase (decrease) in cash and cash equivalents | |
45,544 |
|
(34,056 |
) |
(34,026 |
) |
| |
Cash and cash equivalents, beginning of period | |
109,865 |
|
155,409 |
|
121,353 |
|
| |
Cash and cash equivalents, end of period | |
$ 155,409 |
|
$ 121,353 |
|
$ 87,327 |
|
The
accompanying notes are an integral part of these consolidated financial statements.
-72-
Nu Skin Enterprises, Inc.
Notes to Consolidated Financial Statements
Nu
Skin Enterprises, Inc. (the Company) is a leading, global direct selling
company that develops and distributes premium-quality, innovative personal care products
and nutritional supplements that are sold worldwide under the Nu Skin and Pharmanex
brands. The Company also markets technology-related products and services under the Big
Planet brand. The Company reports revenue from five geographic regions: North Asia, which
consists of Japan and South Korea; Greater China, which consists of Mainland China, Hong
Kong, Macau and Taiwan; Americas, which consists of the United States, Canada and Latin
America; South Asia/Pacific, which consists of Australia, Brunei, Indonesia, Malaysia, New
Zealand, the Philippines, Singapore and Thailand; and Europe, which includes several
markets in Europe as well as Israel and Russia (the Companys subsidiaries operating
in these countries are collectively referred to as the Subsidiaries).
2. |
|
Summary
of Significant Accounting Policies |
Consolidation
The
consolidated financial statements include the accounts of the Company and the
Subsidiaries. All significant intercompany accounts and transactions are eliminated in
consolidation.
Use of estimates
The
preparation of these financial statements, in conformity with accounting principles
generally accepted in the United States, required management to make estimates and
assumptions that affected the reported amounts of assets and liabilities, and disclosure
of contingent assets and liabilities, at the date of the financial statements and the
reported amounts of revenue and expenses during the reporting period.
Cash and cash equivalents
Cash
equivalents are short-term, highly liquid instruments with original maturities of 90 days
or less.
Current investments
Current
investments consist entirely of auction rate municipal bonds classified as
available-for-sale securities. The Company, through its dealers, purchases and sells these
securities at par value and records them at cost, which approximates fair market value due
to their variable interest rates, which typically reset every 7 to 35 days and despite the
long-term nature of their stated contractual maturities, along with the Companys
investment policy and practice to only invest in high investment grade securities, the
Company has the ability to quickly liquidate these securities. As a result, the Company
has no cumulative gross unrealized holding gains (losses) or gross realized gains (losses)
from its current investments. Interest income generated from these current investments is
recorded in other income. As of December 31, 2007 current investments were $5.2 million.
There were no current investments as of December 31, 2006.
Inventories
Inventories
consist primarily of merchandise purchased for resale and are stated at the lower of cost
or market, using the first-in, first-out method. The Company had reserves for obsolete
inventory totaling $5.9 million and $5.0 million as of December 31, 2006 and 2007,
respectively.
-73-
Nu Skin Enterprises, Inc.
Notes to Consolidated Financial Statements
Inventories
consist of the following (U.S. dollars in thousands):
|
December 31, |
|
|
2006 | |
2007 | |
|
|
|
Raw materials |
|
$ 24,550 |
|
$ 25,605 |
|
Finished goods | |
67,542 |
|
75,187 |
|
| |
$ 92,092 |
|
$ 100,792 |
|
Property and equipment
Property
and equipment are recorded at cost and depreciated using the straight-line method over the
following estimated useful lives:
|
|
|
|
|
|
Furniture and fixtures |
|
5 - 7 years |
|
Computers and equipment | |
3 - 5 years | |
Leasehold improvements | |
Shorter of estimated useful life or lease term | |
Scanners | |
3 years | |
Vehicles | |
3 - 5 years | |
Expenditures
for maintenance and repairs are charged to expense as incurred. When an asset is sold or
otherwise disposed of, the cost and associated accumulated depreciation are removed from
the accounts and the resulting gain or loss is recognized in the statement of income.
Property and equipment are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of such assets may not be recoverable. An
impairment loss is recognized if the carrying amount of the asset exceeds its fair value.
Goodwill and other
intangible assets
Under
the provisions of Statements of Financial Accounting Standards
(SFAS) No. 142, Goodwill and Other Intangible Assets (SFAS
142), the Companys goodwill and intangible assets with indefinite useful lives
are not amortized, but instead are tested for impairment at least annually. The
Companys intangible assets with finite lives are recorded at cost and are amortized
over their respective estimated useful lives using the straight-line method to their
estimated residual values and are reviewed for impairment in accordance with SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets. In addition, the
Company is required to make judgments regarding and periodically assesses the useful life
of its intangible assets.
Revenue recognition
Revenue
is recognized when products are shipped, which is when title and risk of loss pass to
independent distributors and preferred customers who are the Companys customers. A
reserve for product returns is accrued based on historical experience totaling $2.3
million and $1.9 million as of December 31, 2006 and 2007, respectively. The Company
generally requires cash or credit card payment at the point of sale. The Company has
determined that no allowance for doubtful accounts is necessary. Amounts received prior to
shipment and title passage to distributors are recorded as deferred revenue. The global
compensation plan for the Companys distributors generally does not provide rebates
or selling discounts to distributors who purchase its products and services. The Company
classifies selling discounts and rebates, if any, as a reduction of revenue.
-74-
Nu Skin Enterprises, Inc.
Notes to Consolidated Financial Statements
Advertising expense
Advertising
costs are expensed as incurred. Advertising expense incurred for the years ended December
31, 2005, 2006 and 2007 totaled approximately $2.4 million, $3.9 million and $2.1 million,
respectively.
Research and development
The
Companys research and development activities are conducted primarily through its
Pharmanex division. Research and development costs are included in general and
administrative expenses in the accompanying consolidated statements of income and are
expensed as incurred and totaled $7.5 million, $8.7 million and $10.0 million in 2005,
2006 and 2007, respectively.
Deferred tax assets and
liabilities
The
Company accounts for income taxes in accordance with SFAS 109. This statement establishes
financial accounting and reporting standards for the effects of income taxes that result
from an enterprises activities during the current and preceding years. It requires
an asset and liability approach for financial accounting and reporting of income taxes.
The Company pays income taxes in many foreign jurisdictions based on the profits realized
in those jurisdictions, which can be significantly impacted by terms of intercompany
transactions between the Company and its foreign affiliates. Deferred tax assets and
liabilities are created in this process. As of December 31, 2007, the Company has net
deferred tax assets of $72.7 million. The Company has netted these deferred tax assets and
deferred tax liabilities by jurisdiction. Valuation allowances are established when
necessary to reduce deferred tax assets to the amounts expected to be ultimately realized.
Uncertain Tax Positions
In
June 2006, the FASB issued FASB Interpretation Number 48, Accounting for Uncertainty
in Income Taxes an Interpretation of SFAS 109" (FIN 48). The
Company adopted the provisions of FIN 48 on January 1, 2007. As a result of the
implementation of FIN 48, the Company recognized a $2.6 million increase in the liability
for unrecognized tax benefits, which was accounted for as a reduction to the January 1,
2007 balances of retained earnings and additional paid in capital.
The
Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction, and
various states and foreign jurisdictions. With a few exceptions, the Company is no longer
subject to U.S. federal, state and local income tax examination by tax authorities for
years before 2004. In major foreign jurisdictions, the Company is no longer subject to
income tax examinations for years before 2001. The Company is currently under examination
in certain foreign jurisdictions; however, the final outcomes of these reviews are not yet
determinable.
-75-
Nu Skin Enterprises, Inc.
Notes to Consolidated Financial Statements
A
reconciliation of the beginning and ending amount of unrecognized tax benefits is as
follows (U.S. dollars in thousands):
|
|
Gross Balance at January 1, 2007 |
|
|
$ | 38,130 |
|
Increases related to prior year tax positions | | |
| 1,254 |
|
Decreases related to prior year tax positions | | |
| (6,060 |
) |
Increases related to current year tax positions | | |
| 1,431 |
|
Decreases due to lapse of statutes of limitations | | |
|
(2,880 |
) |
Gross Balance at December 31, 2007 | | |
$ |
31,875 |
|
At December 31, 2007, the Company
had $31.9 million in unrecognized tax benefits of which $9.1 million, if recognized,
would affect the effective tax rate. The Company's unrecognized tax benefits relate to
multiple foreign and domestic jurisdictions. Due to potential increases in unrecognized
tax benefits from the multiple jurisdictions in which the Company operates, as well as
the expiration of various statutes of limitation, it is reasonably possible that our
gross unrecognized tax benefits may change within the next 12 months by a range of
approximately zero to $5 million.
During the year ended December 31,
2007 the Company recognized approximately $0.5 million in interest and penalties. The
Company had approximately $2.7 million of accrued interest and penalties related to
uncertain tax positions at December 31, 2007. Interest and penalties related to uncertain
tax positions are recognized as a component of income tax expense.
Net income per share
Net income per share is computed
based on the weighted-average number of common shares outstanding during the periods
presented. Additionally, diluted earnings per share data gives effect to all potentially
dilutive common shares that were outstanding during the periods presented (Note 10).
Foreign currency translation
Most of the Company's business
operations occur outside the United States. The local currency of each of the Company's
subsidiaries is considered its functional currency. All assets and liabilities are
translated into U.S. dollars at exchange rates existing at the balance sheet dates,
revenue and expenses are translated at weighted-average exchange rates and stockholders'
equity is recorded at historical exchange rates. The resulting foreign currency
translation adjustments are recorded as a separate component of stockholders' equity in
the consolidated balance sheets and transaction gains and losses are included in other
income and expense in the consolidated financial statements.
Fair value of financial instruments
The carrying value of financial
instruments including cash and cash equivalents, accounts receivable and accounts payable
approximate fair values due to the short-term nature of these instruments. The carrying
amount of long-term debt approximates fair value because the applicable interest rates
approximate current market rates. Fair value estimates are made at a specific point in
time, based on relevant market information.
-76-
Nu Skin Enterprises, Inc.
Notes to Consolidated Financial Statements
Stock-based compensation
Effective January 1, 2006, the
Company adopted the fair value recognition provisions of Financial Accounting Standards
("SFAS") No. 123 (revised 2004), Share-Based Payment ("SFAS 123R"), using the modified
prospective transition method and therefore has not restated results for prior periods.
Under this transition method, stock-based compensation expense includes all stock-based
compensation awards granted prior to, but not yet vested as of January 1, 2006, based on
the grant date fair value estimated in accordance with the original provisions of SFAS
No. 123, Accounting for Stock-Based Compensation ("SFAS 123"). Stock-based compensation
expense for all stock-based compensation awards granted after January 1, 2006 is based on
the grant-dated fair value estimated in accordance with the provisions of SFAS 123R. The
Company recognizes these compensation costs, net of an estimated forfeiture rate, on a
straight-line basis over the requisite service period of the award, which is generally
the option vesting term of four years. The Company estimated the forfeiture rate based
on its historical experience.
In March 2005, the Securities and
Exchange Commission (the "SEC") issued Staff Accounting Bulletin No. 107 ("SAB 107")
regarding the SEC's interpretation of SFAS 123R and the valuation of share-based payments
for public companies. The Company applied the provisions of SAB 107 in its adoption of
SFAS 123R.
Prior to the adoption of SFAS 123R
the Company recognized stock based compensation expense in accordance with Accounting
Principles Board Opinion No. 25. Accounting for Stock Issued to Employees ("APB 25").
Accordingly, the Company generally recognized compensation expense only when it granted
options with an exercise price less than the market value of the underlying shares. Any
resulting compensation expense was recognized ratably over the associated service period,
which was generally the option vesting term.
The total compensation expense
related to these plans was approximately $9.3 million and $8.1 million for the years
ended December 31, 2006 and 2007. Prior to the adoption of SFAS 123R, the Company
presented the tax benefit of stock option exercises as a component of operating cash
flows. Upon the adoption of SFAS 123R, tax benefits resulting from tax deductions in
excess of the compensation cost recognized for those options are classified as financing
cash flows. For the year ended December 31, 2007, all stock-based compensation expense
was recorded within general and administrative expenses.
The Company has elected to follow
the transition guidance indicated in Paragraph 81 of FASB Statement No. 123 (revised
2004) for purposes of calculating the pool of excess tax benefits available to absorb
possible future tax deficiencies. As such, the Company has calculated its historical
"APIC pool" of windfall tax benefits using the long-form method. Furthermore, the
Company has elected to use a two-pool approach (segregating employee and nonemployee
awards into two separate pools) when accounting for the pool of windfall tax benefits.
Reporting comprehensive income
Comprehensive income is defined as
the change in equity of a business enterprise during a period from transactions and other
events and circumstances from non-owner sources, and it includes all changes in equity
during a period except those resulting from investments by owners and distributions to
owners.
-77-
Nu Skin Enterprises, Inc.
Notes to Consolidated Financial Statements
Accounting for derivative
instruments and hedging activities
The Company recognizes all
derivatives as either assets or liabilities, with the instruments measured at fair value
as required by SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities
("SFAS 133").
The Company's Subsidiaries enter
into significant transactions with each other and third parties that may not be
denominated in the respective Subsidiaries' functional currencies. The Company regularly
monitors its foreign currency risks and seeks to reduce its exposure to fluctuations in
foreign exchange rates using foreign currency exchange contracts and through certain
intercompany loans of foreign currency.
The Company hedges its exposure to
future cash flows from forecasted transactions over a maximum period of 12 months. Hedge
effectiveness is assessed at inception and throughout the life of the hedge to ensure the
hedge qualifies for hedge accounting treatment. Changes in fair value associated with
hedge ineffectiveness, if any, are recorded in the results of operations currently. In
the event that an anticipated transaction is no longer likely to occur, the Company
recognizes the change in fair value of the derivative in its results of operations
currently.
Changes in the fair value of
derivatives are recorded in current earnings or accumulated other comprehensive loss,
depending on the intended use of the derivative and its resulting designation. The gains
and losses in accumulated other comprehensive loss stemming from these derivatives will
be reclassified into earnings in the period during which the hedged forecasted
transaction affects earnings. The fair value of the receivable and payable amounts
related to these unrealized gains and losses is classified as other current assets and
liabilities. The Company does not use such derivative financial instruments for trading
or speculative purposes. Gains and losses on certain intercompany loans of foreign
currency are recorded as other income and expense in the consolidated statements of
income.
Recent accounting pronouncements
In September 2006, the FASB issued
SFAS No. 157, Fair Value Measurements, which defines fair value, establishes a framework
for measuring fair value in accordance with generally accepted accounting principles and
expands disclosures about fair value measurements. SFAS 157 is effective January 1,
2008. In February 2008, the FASB deferred for one year the effective date
of SFAS 157 only with respect to nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at
fair value in the financial statements on a nonrecurring basis, and removed certain leasing transactions from
the scope of SFAS 157. The Company does not believe that the adoption of SFAS 157 will have a material impact on its consolidated
financial statements.
In February 2007, the FASB issued
SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities -
including an amendment to FASB Statement No. 115, which permits entities to choose to
measure many financial instruments and certain other items at fair value that are not
currently required to be measured at fair value. SFAS 159 is effective January 1, 2008.
The Company has evaluated the impact of SFAS 159 and believes it will not significantly
impact its consolidated financial statements.
In December 2007, the FASB issued
SFAS No. 141 (revised 2007), Business Combinations, ("SFAS 141R"), which changes how
business combinations are accounted for and will impact financial statements both on the
acquisition date and in subsequent periods. SFAS 141R is effective January 1, 2009, and
will be applied prospectively. The impact of adopting SFAS 141R will depend on the
nature and terms of future acquisitions.
-78-
Nu Skin Enterprises, Inc.
Notes to Consolidated Financial Statements
In December 2007, the FASB issued
SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements, which changes
the accounting and reporting standards for the noncontrolling interests in a subsidiary
in consolidated financial statements. SFAS 160 recharacterizes minority interests as
noncontrolling interests and requires noncontrolling interests to be classified as a
component of shareholders' equity. SFAS 160 is effective January 1, 2009 and requires
retroactive adoption of the presentation and disclosure requirements for existing
minority interests. The Company is currently evaluating the impact of SFAS 160 on its
consolidated financial statements.
3. |
|
Related
Party Transactions |
The Company leases corporate office
and warehouse space from two entities that are owned by certain officers and directors of
the Company. Total lease payments to these two affiliated entities were $3.7 million,
$3.7 million and $3.8 million for the years ended December 31, 2005, 2006 and 2007 with
remaining long-term minimum lease payment obligations under these operating leases of
$17.2 million and $13.7 million at December 31, 2006 and 2007, respectively.
4. |
|
Property
and Equipment |
Property and equipment are comprised
of the following (U.S. dollars in thousands):
|
December 31, |
|
|
2006 | |
2007 | |
|
|
|
Furniture and fixtures |
|
$ 49,499 |
|
$ 53,517 |
|
Computers and equipment | |
90,108 |
|
98,107 |
|
Leasehold improvements | |
53,677 |
|
58,584 |
|
Scanners | |
30,291 |
|
28,462 |
|
Vehicles | |
3,255 |
|
2,096 |
|
| |
226,830 |
|
240,766 |
|
Less: accumulated depreciation | |
(140,947 |
) |
(152,237 |
) |
| |
$ 85,883 |
|
$ 88,529 |
|
Depreciation
of property and equipment totaled $24.7 million, $23.7 million and $27.1 million for the
years ended December 31, 2005, 2006 and 2007, respectively, which includes amortization
expense relating to the Scanners of approximately $7.9 million, $7.3 million and $7.8
million for the years ended December 31, 2005, 2006 and 2007, respectively.
5. |
|
Goodwill
and Other Intangible Assets |
Goodwill
and other intangible assets consist of the following (U.S. dollars in thousands):
|
Carrying Amount at
December 31, |
|
Goodwill and indefinite life intangible assets: | |
2006 | |
2007 | |
|
|
|
Goodwill |
|
$ 112,446 |
|
$ 112,446 |
|
Trademarks and trade names | |
24,599 |
|
24,599 |
|
| |
$ 137,045 |
|
$ 137,045 |
|
-79-
Nu Skin Enterprises, Inc.
Notes to Consolidated Financial Statements
|
December 31, 2006 | |
December 31, 2007 | |
|
Finite life intangible assets: |
Gross Carrying
Amount | |
Accumulated
Amortization | |
Gross Carrying
Amount | |
Accumulated
Amortization | |
Weighted-average
Amortization Period | |
|
|
|
|
|
|
Scanner technology |
|
$ 46,482 |
|
$ 6,290 |
|
$ 46,482 |
|
$ 9,323 |
|
18 years |
|
Developed technology |
|
22,500 |
|
10,139 |
|
22,500 |
|
10,963 |
|
20 years |
|
Distributor network | |
11,598 |
|
6,580 |
|
11,598 |
|
7,082 |
|
15 years | |
Trademarks | |
12,452 |
|
6,879 |
|
12,558 |
|
7,510 |
|
15 years | |
Other | |
21,349 |
|
17,743 |
|
21,938 |
|
18,634 |
|
5 years | |
| |
$ 114,381 |
|
$ 47,631 |
|
$ 115,076 |
|
$ 53,512 |
|
15 years | |
Amortization
of finite-life intangible assets totaled $5.7 million, $5.4 million and $5.9 million for
the years ended December 31, 2005, 2006 and 2007, respectively. Annual estimated
amortization expense is expected to approximate $6.0 million for each of the five
succeeding fiscal years.
Goodwill
and indefinite life intangible assets are not amortized, rather they are subject to annual
impairment tests. Annual impairment tests were completed resulting in no impairment
charges for any of the periods shown. Finite life intangibles are amortized over their
useful lives unless circumstances occur that cause the Company to revise such lives or
review such assets for impairment.
Other
assets consist of the following (U.S. dollars in thousands):
|
December 31, |
|
|
2006 | |
2007 | |
|
|
|
Deferred taxes |
|
$ 42,836 |
|
$ 60,057 |
|
Deposits for noncancelable operating leases | |
14,476 |
|
25,023 |
|
Deposit for customs assessment (Note 20) | |
22,648 |
|
24,184 |
|
Other | |
18,252 |
|
20,497 |
|
| |
$ 98,212 |
|
$ 129,761 |
|
Accrued
expenses consist of the following (U.S. dollars in thousands):
|
December 31, |
|
|
2006 | |
2007 | |
|
|
|
Accrued commission payments to distributors |
|
$ 39,142 |
|
$ 41,143 |
|
Income taxes payable | |
9,773 |
|
3,138 |
|
Other taxes payable | |
16,471 |
|
10,890 |
|
Accrued payroll and payroll taxes | |
10,485 |
|
9,742 |
|
Accrued payable to vendors | |
6,428 |
|
9,641 |
|
Accrued severance | |
|
|
5,390 |
|
Other accruals | |
37,775 |
|
35,676 |
|
| |
$ 120,074 |
|
$ 115,620 |
|
-80-
Nu Skin Enterprises, Inc.
Notes to Consolidated Financial Statements
The
Company maintains a $25.0 million revolving credit facility that originally expired in May
2007, and has been extended for 3 years and now expires in May 2010. Drawings on this
revolving credit facility may be used for working capital, capital expenditures and other
purposes including repurchases of the Companys outstanding shares of Class A common
stock. As of December 31, 2007, there were no outstanding balances under this revolving
credit facility.
The
Company maintains a $205.0 million multi-currency private shelf facility with Prudential
Investment Management, Inc. As of December 31, 2007, the Company had $163.3 million
outstanding under its shelf facility, $15.0 million of which is included in the current
portion of long-term debt. Of this long-term debt, $115.0 million is U.S. dollar
denominated, bears interest of approximately 5.2% per annum and the related discount is
amortized in four tranches between five and ten years. The remaining $48.3 million as of
December 31, 2007, is Japanese yen-denominated senior promissory notes in the aggregate
principal amount of 5.8 billion Japanese yen. The notes bear interest of approximately
2.2% per annum, and the related discounts are amortized in two tranches between five and
ten years with interest payable semi-annually. The interest payments on the notes began
April 30, 2005. The final maturity date of the notes is April 20, 2014 and principal
payments are required annually beginning on April 30, 2008 in equal installments of 445.7
million Japanese yen.
The
Companys long-term debt also includes the long-term portion of Japanese yen
denominated ten-year senior notes issued to the Prudential Insurance Company of America in
2000. The notes bear interest at an effective rate of 3.0% per annum and are due October
2010, with annual principal payments that began in October 2004. As of December 31, 2007,
the outstanding balance on the notes was 4.2 billion Japanese yen, or $37.3 million, $16.4
million of which is included in the current portion of long-term debt. The Japanese notes
and the revolving and shelf credit facilities are secured by guarantees issued by the
Companys material subsidiaries or by pledges of 65% of the outstanding stock of the
Companys material foreign subsidiaries.
The
following tables summaries the Companys long-term debt arrangements as of December
31, 2007:
Facility or Arrangement(1) | |
Original Principal Amount | |
Balance as of December 31, 2007(2) | |
Interest Rate | |
Repayment terms | |
|
|
|
|
|
|
|
|
|
|
2000 Japanese yen denominated notes |
|
9.7 billion yen |
|
4.2 billion yen ($37.3 million as of December 31, 2007) |
|
3.0% |
|
Notes due October 2010, with annual principal payments that began in October 2004. |
|
|
|
|
|
|
| |
| |
| |
| |
| |
| |
2003 $205.0 million multi-currency uncommitted shelf facility: | |
| |
| |
| |
| |
| |
U.S. dollar denominated: | |
$50.0 million | |
$30.0 million | |
4.5% | |
Notes due April 2010 with annual principal payments that began in April 2006. | |
-81-
Nu Skin Enterprises, Inc.
Notes to Consolidated Financial Statements
Facility or Arrangement(1) | |
Original Principal Amount | |
Balance as of December 31, 2007(2) | |
Interest Rate | |
Repayment terms | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
$25.0 million | |
$5.0 million | |
4.0% | |
Notes due April 2008 with annual principal payments that began in October 2004. | |
|
|
|
|
|
| |
$40.0 million | |
$40.0 million | |
6.2% | |
Notes due July 2016 with annual principal payments beginning July 2010. |
|
| |
| |
| |
| |
| |
| |
$40.0 million(3) | |
$40.0 million | |
6.2% | |
Notes due July 2017 with annual principal payments beginning July 2011. |
|
| |
| |
| |
| |
| |
Japanese yen denominated: | |
3.1 billion yen | |
3.1 billion yen ($28.0 million as of December 31, 2007) | |
1.7% | |
Notes due April 2014, with annual principal payments beginning April 2008. | |
|
|
|
|
|
| |
2.7 billion yen | |
2.7 billion yen ($20.3 million as of December 31, 2007) | |
2.6% | |
Notes due September 2017, with annual principal payments beginning September 2011. | |
|
|
|
|
|
| |
| |
| |
| |
| |
2004 $25.0 million revolving credit facility | |
N/A | |
None | |
N/A | |
Credit facility expires May 2010. | |
(1) |
|
Each
of the credit facilities and arrangements listed in the table are secured
by guarantees issued by the Companys material domestic subsidiaries
and by pledges of 65% of the outstanding stock of the Companys
material foreign subsidiaries. |
(2) |
|
The
current portion of the Companys long-term debt (i.e. becoming due in
the next 12 months) includes $12.4 million of the balance on the Companys
2000 Japanese yen denominated notes, $4.0 million of the balance of the
Companys 2005 Japanese yen denominated notes and $15.0 million of
the balance on the Companys U.S. dollar denominated debt under the
2003 multi-currency shelf facility |
(3) |
|
In
January 2008, $20.0 million of this loan was converted from U.S. dollar to
Japanese yen at an exchange rate of 108.5. The terms of the loan remain
the same, except for the interest rate lowers from 6.2% to 3.3%. |
Interest
expense relating to debt totaled $5.5 million, $5.1 million and $8.3 million for the years
ended December 31, 2005, 2006 and 2007, respectively.
-82-
Nu Skin Enterprises, Inc.
Notes to Consolidated Financial Statements
The
notes and shelf facility contain other terms and conditions and affirmative and negative
financial covenants customary for credit facilities of this type, including a requirement
to maintain a minimum cash balance of $65.0 million. As of December 31, 2007, the Company
is in compliance with all financial covenants under the notes and shelf facility.
Maturities
of all long-term debt at December 31, 2007, based on the year-end exchange rate, are as
follows (U.S. dollars in thousands):
Year Ending December 31, |
|
|
|
|
|
2008 |
|
$ 31,441 |
|
2009 | |
26,441 |
|
2010 | |
32,155 |
|
2011 | |
18,335 |
|
2012 | |
18,335 |
|
Thereafter | |
73,963 |
|
Total | |
$ 200,670 |
|
The
Company leases office space and computer hardware under noncancelable long-term operating
leases including related party leases (see Note 3). Most leases include renewal options of
at least three years. Minimum future operating lease obligations at December 31, 2007 are
as follows (U.S. dollars in thousands):
Year Ending December 31, |
|
|
|
|
|
2008 |
|
$ 13,194 |
|
2009 | |
9,498 |
|
2010 | |
6,198 |
|
2011 | |
3,335 |
|
2012 | |
940 |
|
Thereafter | |
|
|
Total | |
$ 33,165 |
|
Rental
expense for operating leases totaled $30.5 million, $31.4 million and $32.2 million for
the years ended December 31, 2005, 2006 and 2007, respectively.
The
Companys authorized capital stock consists of 25 million shares of preferred stock,
par value $.001 per share, 500 million shares of Class A common stock, par value $.001 per
share and 100 million shares of Class B common stock, par value $.001 per share. The
shares of Class A common stock and Class B common stock are identical in all respects,
except for voting rights and certain conversion rights and transfer restrictions, as
follows: (1) each share of Class A common stock entitles the holder to one vote on matters
submitted to a vote of the Companys stockholders and each share of Class B common
stock entitles the holder to ten votes on each such matter; (2) stock dividends of Class A
common stock may be paid only to holders of Class A common stock and stock dividends of
Class B common stock may be paid only to holders of Class B common stock; (3) if a holder
of Class B common stock transfers such shares to a person other than a permitted
transferee, as defined in the Companys Certificate of Incorporation, such shares
will be converted automatically into shares of Class A common stock; and (4) Class A
common stock has no conversion rights; however, each share of Class B common stock is
convertible into one share of Class A common stock, in whole or in part, at any time at
the option of the holder. All outstanding Class B shares have been converted to Class A
shares. As of December 31, 2007 and 2006, there were no Preferred or Class B common shares
outstanding.
-83-
Nu Skin Enterprises, Inc.
Notes to Consolidated Financial Statements
Weighted-average common
shares outstanding
The
following is a reconciliation of the weighted-average common shares outstanding for
purposes of computing basic and diluted net income per share (in thousands):
|
Year Ended December 31, |
|
|
2005 | |
2006 | |
2007 | |
|
|
|
|
Basic weighted-average common shares outstanding |
|
70,047 |
|
69,418 |
|
64,783 |
|
Effect of dilutive securities: | |
Stock awards and options | |
1,309 |
|
1,088 |
|
801 |
|
Diluted weighted-average common shares outstanding | |
71,356 |
|
70,506 |
|
65,584 |
|
For
the years ended December 31, 2005, 2006 and 2007, other stock options totaling 2.1
million, 2.8 million and 3.3 million, respectively, were excluded from the calculation of
diluted earnings per share because they were anti-dilutive.
Repurchases of common
stock
Since
August 1998, the board of directors has authorized the Company to repurchase up to $335.0
million of the Companys outstanding shares of Class A common stock on the open
market or in private transactions. The repurchases are used primarily for the
Companys equity incentive plans and strategic initiatives. During the years ended
December 31, 2005, 2006 and 2007, the Company repurchased approximately 1.2 million, 3.8
million and 4.1 million shares of Class A common stock for an aggregate price of
approximately $24.6 million, $67.5 million and $71.1 million, respectively, under these
repurchase programs. Included in the 4.1 million shares repurchased in 2007, are 1.5 million
shares that were repurchased under a $25.0 million accelerated repurchase transaction
during the fourth quarter of 2007. Between
August 1998 and December 31, 2007, the Company repurchased a total of approximately 17.9
million shares of Class A common stock under this repurchase program for an aggregate
price of approximately $245.4 million.
11. |
|
StockBased
Compensation |
At
December 31, 2007, the Company had the following stock-based employee compensation plans:
Equity Incentive Plans
During
the year ended December 31, 1996, the Companys board of directors adopted the Nu
Skin Enterprises, Inc., 1996 Stock Incentive Plan (the 1996 Stock Incentive
Plan). In April 2006, the Companys Board of Directors approved the Nu Skin
Enterprises, Inc. 2006 Stock Incentive Plan (the 2006 Stock Incentive Plan).
This plan was approved by the Companys stockholders at the Companys 2006
Annual Meeting of Stockholders held in May of 2006. The 1996 Stock Incentive Plan and the
2006 Stock Incentive Plan provide for granting of stock awards and options to purchase
common stock to executives, other employees, independent consultants and directors of the
Company and its Subsidiaries. Options granted under the equity incentive plans are
generally non-qualified stock options, but the plans permit some options granted to
qualify as incentive stock options under the U.S. Internal Revenue Code. The
exercise price of a stock option generally is equal to the fair market value of the
Companys common stock on the option grant date. The contractual term of options
granted since 1996 is generally ten years. However, for options granted beginning in the
second quarter of 2006, the contractual term has been shortened to seven years. Currently,
all shares issued upon the exercise of options are from the Companys treasury
shares. With the adoption of the 2006 Stock Incentive Plan, no further grants will be made
under the 1996 Stock Incentive Plan. Under the 2006 Stock Incentive Plan 6.0 million
shares were authorized for issuance.
-84-
Nu Skin Enterprises, Inc.
Notes to Consolidated Financial Statements
In the fourth quarter
of 2007, the compensation committee of the board of directors approved the grant of performance stock options to certain senior level
executives. Vesting for the options is performance based, with the options vesting in two installments if the Company's earnings
per share equal or exceed
the two established performance levels, measured in terms of diluted earnings per share. Fifty percent of the options will vest
upon earnings per share
meeting or exceeding the first performance level and fifty percent of the options will vest upon earnings per share meeting or
exceeding the second performance
level. If the performance levels have not been met on or prior to the 2nd business day following the filing of the Company's
Annual Report on Form 10-K for
the year ended December 31, 2012, then any unvested options shall terminate at such time.
The
pro forma table below reflects net income and basic and diluted net income per share for
the year ended December 31, 2005 had the Company applied the fair value recognition
provisions of SFAS 123R, as follows (in thousands, except per share amounts):
|
December 31, | |
|
| |
2005 | |
Net income, as reported |
|
|
|
$ 74,033 |
|
Less: Stock-based compensation expense determined | |
under the fair-value-based method for all awards, | |
net of related tax effects | |
|
|
(5,823 |
) |
|
| |
| |
Pro forma net income | |
|
|
$ 68,210 |
|
|
| |
| |
Net income per share: | |
Basic - as reported | |
|
|
$ 1.06 |
|
Basic - pro forma | |
|
|
$ 0.97 |
|
|
| |
| |
Diluted - as reported | |
|
|
$ 1.04 |
|
Diluted - pro forma | |
|
|
$ 0.96 |
|
The
fair value of stock option awards was estimated using the Black-Scholes option-pricing
model with the following assumptions and weighted-average fair values as follows:
|
December 31, | |
Stock Options: |
2005 | |
2006 | |
2007 | |
|
|
|
|
Weighted average grant date fair value of grants |
|
$ 10.43 |
|
$ 6.52 |
|
$ 5.51 |
|
Risk-free interest rate(1) |
|
3.9% |
|
4.9% |
|
3.8% |
|
Dividend yield(2) | |
1.6% |
|
2.1% |
|
2.5% |
|
Expected volatility(3) | |
52.6% |
|
44.3% |
|
40.4% |
|
Expected life in months(4) | |
75 months |
|
58 months |
|
59 months |
|
(1) |
|
The
risk-free interest rate is based upon the rate on a zero coupon U.S.
Treasury bill, for periods within the contractual life of the option, in
effect at the time of the grant. |
(2) |
|
The
dividend yield is based on the rolling average of annual stock prices and
the actual dividends paid in the corresponding 12 months. |
-85-
Nu Skin Enterprises, Inc.
Notes to Consolidated Financial Statements
(3) |
|
Expected
volatility is based on the historical volatility of our stock price, over
a period similar to the expected life of the option. |
(4) |
|
The
expected term of the option is based on the simplified method. |
Options
under the plans as of December 31, 2007 and changes during the year ended December 31,
2007 were as follows:
|
Shares
(in thousands) | |
Weighted-average
Exercise Price | |
Weighted-average
Remaining Contractual Term
(in years) | |
Aggregate Intrinsic
Value
(in thousands) | |
Options activity - service based Outstanding at December 31, 2006 |
|
5,863.4 |
|
$ 16.38 |
|
|
|
|
|
Granted | |
523.8 |
|
17.45 |
|
Exercised | |
(556.1 |
) |
10.28 |
|
Forfeited/cancelled/expired | |
(564.7 |
) |
20.05 |
|
Outstanding at December 31, 2007 | |
5,266.4 |
|
16.74 |
|
5.60 |
|
$ 11,462 |
|
Exercisable at December 31, 2007 | |
3,740.8 |
|
15.60 |
|
5.20 |
|
11,435 |
|
| |
|
|
|
|
Options activity - performance based Outstanding at December 31, 2006 | |
|
|
$ |
|
Granted | |
1,435.0 |
|
17.10 |
|
Exercised | |
|
|
|
|
Forfeited/cancelled/expired | |
|
|
|
|
Outstanding at December 31, 2007 | |
1,435.0 |
|
17.10 |
|
6.92 |
|
$ |
|
Exercisable at December 31, 2007 | |
|
|
|
|
|
|
|
|
| |
|
|
|
|
Options activity - all options Outstanding at December 31, 2006 | |
5,863.4 |
|
$ 16.38 |
|
Granted | |
1,958.8 |
|
17.20 |
|
Exercised | |
(556.1 |
) |
10.28 |
|
Forfeited/cancelled/expired | |
(564.7 |
) |
20.05 |
|
|
|
|
Outstanding at December 31, 2007 | |
6,701.4 |
|
16.82 |
|
5.88 |
|
$ 11,462 |
|
Exercisable at December 31, 2007 | |
3,740.8 |
|
15.60 |
|
5.20 |
|
11,435 |
The
aggregate intrinsic value in the table above represents the total pretax intrinsic value
(the difference between the Companys closing stock price on the last trading day of
the respective years and the exercise price, multiplied by the number of in-the-money
options) that would have been received by the option holders had all option holders
exercised their options on December 31, 2007. This amount varies based on the fair market
value of the Companys stock. The total fair value of options vested and expensed was
$4.2 million, net of tax, for the year ended December 31, 2007.
-86-
Nu Skin Enterprises, Inc.
Notes to Consolidated Financial Statements
Cash
proceeds, tax benefits, and intrinsic value related to total stock options exercised
during 2005, 2006 and 2007, were as follows (in millions):
|
2005 | |
2006 | |
2007 | |
|
|
|
|
|
|
|
|
Cash proceeds from stock options exercised |
|
$ 6.2 |
|
$ 5.4 |
|
$ 5.7 |
|
Tax benefit realized for stock options exercised | |
|
|
1.8 |
|
1.8 |
|
Intrinsic value of stock options exercised | |
5.6 |
|
3.7 |
|
3.4 |
|
The
following table summarizes information concerning outstanding and exercisable options at
December 31, 2007:
|
Options Outstanding | |
Options Exercisable | |
Exercise Price Range | |
Shares (in 000s) | |
Weighted-average Exercise Price | |
Weighted-average Years Remaining | |
Shares (in 000s) | |
Weighted-average Exercise Price | |
|
|
|
|
|
|
$0.01 to $6.00 |
|
6.1 |
|
$ 5.40 |
|
0.79 |
|
6.1 |
|
$ 5.40 |
|
$6.01 to $11.00 | |
736.5 |
|
8.32 |
|
3.96 |
|
736.5 |
|
8.32 |
|
$11.01 to $16.00 | |
1,377.7 |
|
12.49 |
|
4.56 |
|
1,332.7 |
|
12.38 |
|
$16.01 to $20.00 | |
2,942.4 |
|
17.48 |
|
6.44 |
|
629.4 |
|
18.27 |
|
$20.01 to $28.50 | |
1,638.7 |
|
23.13 |
|
6.88 |
|
1,036.1 |
|
23.35 |
|
| |
6,701.4 |
|
16.82 |
|
5.88 |
|
3,740.8 |
|
15.60 |
|
Nonvested
restricted stock awards as of December 31, 2007 and changes during the year ended December
31, 2007 were as follows:
|
Number of Shares
(in thousands) | |
Weighted-average Grant
Date Fair Value | |
Nonvested at December 31, 2006 |
|
324.8 |
|
$ 17.42 |
|
| |
|
|
|
|
Granted | |
204.4 |
|
16.49 |
|
Vested | |
(117.9 |
) |
14.65 |
|
Forfeited |
|
(59.3 |
) |
20.35 |
|
|
|
|
|
|
|
Nonvested at December 31, 2007 | |
352.0 |
|
17.30 |
|
As
of December 31, 2007, there was $4.7 million of unrecognized stock-based compensation
expense related to nonvested restricted stock awards. That cost is expected to be
recognized over a weighted-average period of 2.8 years. As of December 31, 2007, there was
$16.0 million of unrecognized stock-based compensation expense related to
nonvested stock option awards. That cost is expected to be recognized over a
weighted-average period of 3.1 years.
-87-
Nu Skin Enterprises, Inc.
Notes to Consolidated Financial Statements
Employee Stock Purchase
Plan
Effective
August 1, 2006, the Company terminated its Employee Stock Purchase Plan. Prior to
terminating the Plan the Company recognized approximately $150,000 in compensation expense
for this plan for the year ended December 31, 2006.
Consolidated
income before provision for income taxes consists of the following for the years ended
December 31, 2005, 2006 and 2007 (U.S. dollars in thousands):
|
2005 | |
2006 | |
2007 | |
|
|
|
|
|
|
|
|
U.S. |
|
$ 70,344 |
|
$ 32,907 |
|
$ 45,235 |
|
Foreign | |
48,607 |
|
19,769 |
|
23,243 |
|
Total | |
$ 118,951 |
|
$ 52,676 |
|
$ 68,478 |
|
The
provision for current and deferred taxes for the years ended December 31, 2005, 2006 and
2007 consists of the following (U.S. dollars in thousands):
|
2005 | |
2006 | |
2007 | |
|
|
|
|
|
|
|
|
Current |
|
|
|
|
|
|
|
Federal | |
$ 1,572 |
|
$ |
|
$ |
|
State | |
1,880 |
|
2,121 |
|
(94 |
) |
Foreign | |
21,495 |
|
24,207 |
|
22,090 |
|
| |
24,947 |
|
26,328 |
|
21,996 |
|
| |
Deferred | |
Federal | |
14,821 |
|
4,115 |
|
(298 |
) |
State | |
(278 |
) |
(1,767 |
) |
2,181 |
|
Foreign | |
5,428 |
|
(8,817 |
) |
727 |
|
| |
19,971 |
|
(6,469 |
) |
2,610 |
|
Provision for income taxes | |
$ 44,918 |
|
$ 19,859 |
|
$ 24,606 |
|
The
Companys foreign taxes paid are high relative to foreign operating income and the
Companys U.S. taxes paid are low relative to U.S. operating income due largely to
the flow of funds among the Companys Subsidiaries around the world. As payments for
services, management fees, license arrangements and royalties are made from the
Companys foreign affiliates to its U.S. corporate headquarters, these payments often
incur withholding and other forms of tax that are generally creditable for U.S. tax
purposes. Therefore, these payments lead to increased foreign effective tax rates and
lower U.S. effective tax rates. Variations (or shifts) occur in the Companys foreign
and U.S. effective tax rates from year to year depending on several factors including the
impact of global transfer prices and the timing and level of remittances from foreign
affiliates.
-88-
Nu Skin Enterprises, Inc.
Notes to Consolidated Financial Statements
The
principal components of deferred taxes are as follows (U.S. dollars in thousands):
|
Year Ended December 31, | |
|
2006 | |
2007 | |
|
|
|
Deferred tax assets: |
|
|
|
|
|
Inventory differences | |
$ 4,583 |
|
$ 3,481 |
|
Stock-based compensation | |
3,079 |
|
5,470 |
|
Accrued expenses not deductible until paid | |
29,467 |
|
23,711 |
|
Minimum tax credit | |
3,985 |
|
7,611 |
|
Net operating losses | |
14,797 |
|
18,190 |
|
Foreign outside basis in controlled foreign corporation | |
9,223 |
|
|
|
Capitalized research and development | |
17,609 |
|
18,779 |
|
Asian marketing rights | |
|
|
2,321 |
|
Other | |
13,407 |
|
44,455 |
|
Gross deferred tax assets | |
96,150 |
|
124,018 |
|
Deferred tax liabilities: | |
Exchange gains and losses | |
9,639 |
|
3,719 |
|
Pharmanex intangibles step-up | |
14,480 |
|
14,696 |
|
Amortization of intangibles | |
4,066 |
|
8,155 |
|
Foreign outside basis in controlled foreign corporation | |
|
|
599 |
|
Prepaid expenses | |
12,137 |
|
11,812 |
|
Other | |
2,692 |
|
1,012 |
|
Gross deferred tax liabilities | |
43,014 |
|
39,993 |
|
Valuation allowance | |
(1,481 |
) |
(11,303 |
) |
Deferred taxes, net | |
$ 51,655 |
|
$ 72,722 |
|
At December 31, 2007, the Company had
foreign operating loss carryforwards of approximately $82.6 million for tax purposes, which will be available to
offset future taxable income. If not used, $50.6 million of carryforwards will expire between 2008 and 2017, while
$32.0 million do not expire. The Company
also had minimum tax credit carryforwards of $7.6 million, which do not expire and capital loss carryforwards of
$1.8 that will expire in 2008.
The valuation
allowance primarily represents amounts for foreign operating loss carry forwards for which
it is more likely than not some portion or all of the deferred tax asset will not be
realized. When the Company determines that there is sufficient taxable income to utilize the net
operating losses, the valuation allowance will be released. The Company relies on certain tax planning strategies
to justify the recognition of a portion of its net operating loss carryforwards.
The components of deferred taxes, net
on a jurisdiction basis are as follows (U.S. dollars in thousands):
|
Year Ended December 31, |
|
|
2006 | |
2007 | |
|
|
|
Net current deferred tax assets |
|
$ 21,294 |
|
$ 23,929 |
|
Net noncurrent deferred tax assets | |
42,836 |
|
60,057 |
|
Total net deferred tax assets | |
64,130 |
|
83,986 |
|
|
|
|
|
Net current deferred tax liabilities | |
4 | |
|
Net noncurrent deferred tax liabilities | |
12,471 |
|
11,264 |
|
Total net deferred tax liabilities | |
12,475 |
|
11,264 |
|
Deferred taxes, net | |
$ 51,655 |
|
$ 72,722 |
|
The
Companys deferred tax assets as of December 31, 2007 and 2006 were increased due to
the implementation of FIN 48.
The
Company is subject to regular audits by federal, state and foreign tax authorities. These
audits may result in proposed assessments that may result in additional tax liabilities.
-89-
Nu Skin Enterprises, Inc.
Notes to Consolidated Financial Statements
The
actual tax rate for the years ended December 31, 2005, 2006 and 2007 compared to the
statutory U.S. Federal tax rate is as follows:
|
Year Ended December 31, |
|
|
2005 | |
2006 | |
2007 | |
|
|
|
|
Income taxes at statutory rate |
|
35.00 |
% |
35.00 |
% |
35.00 |
% |
Non-deductible expenses | |
.55 |
|
.86 |
|
.27 |
|
Branch remittance gains and losses | |
.23 |
|
|
|
|
|
Other | |
1.98 |
|
1.84 |
|
.66 |
|
| |
37.76 |
% |
37.70 |
% |
35.93 |
% |
The
effective tax rate remained nearly constant between 2006 and 2005. The decrease in the
effective tax rate in 2007 compared to 2006 was due primarily to the expiration of the
statute of limitations in certain tax jurisdictions.
13. |
|
Employee
Benefit Plan |
The
Company has a 401(k) defined contribution plan which permits participating employees to
defer up to a maximum of 15% of their compensation, subject to limitations established by
the Internal Revenue Code. Employees who work a minimum of 1,000 hours per year, who have
completed at least one year of service and who are 21 years of age or older are qualified
to participate in the plan. The Company matches 100% of the first 2% and 50% of the next
2% of each participants contributions to the plan. Participant contributions are
immediately vested. Company contributions vest based on the participants years of
service at 25% per year over four years. The Company recorded compensation expense of $1.4
million, $1.4 million and $1.5 million for the years ended December 31, 2005, 2006 and
2007, respectively, related to its contributions to the plan.
The
Company has a defined benefit pension plan for its employees in Japan. All employees of Nu
Skin Japan, after certain years of service, are entitled to pension plan benefits when
they terminate employment with Nu Skin Japan. The accrued pension liability was $4.5
million, $5.0 million and $5.2 million as of December 31, 2005, 2006 and 2007,
respectively. Although Nu Skin Japan has not specifically funded this obligation, Nu Skin
Japan believes it maintains adequate cash balances for this defined benefit pension plan.
The Company recorded pension expense of $0.8 million, $1.0 million and $1.4 million for
the years ended December 31, 2005, 2006 and 2007, respectively. Beginning in 2006, this
plan is accounted for in accordance with Financial Accounting Standards Board
(FASB) Statement No. 158 Employers Accounting for Defined Benefit
Pension and Other Postretirement Plans an amendment of FASB Statements No. 87, 88,
106, and 132(R) (SFAS 158). The adoption of SFAS 158 did not have a
material impact on the Companys consolidated financial statements.
14. |
|
Executive
Deferred Compensation Plan |
The
Company has an executive deferred compensation plan for select management personnel. Under
this plan, the Company currently makes a contribution of up to 10% of each
participants salary. In addition, each participant has the option to defer a portion
of their compensation up to a maximum of 100% of their compensation. Participant
contributions are immediately vested. Company contributions vest based on the earlier of:
(a) attaining 60 years of age; (b) continuous employment of 20 years; or (c) death or
disability. The Company recorded compensation expense of $0.7 million for the years ended
December 31, 2005, 2006 and 2007, respectively, related to its contributions to the plan.
The Company had accrued $6.3 million and $8.4 million as of December 31, 2006 and 2007,
respectively, related to the Executive Deferred Compensation Plan.
-90-
Nu Skin Enterprises, Inc.
Notes to Consolidated Financial Statements
15. |
|
Derivative
Financial Instruments |
At
December 31, 2006 and 2007, the Company held forward contracts designated as foreign
currency cash flow hedges with notional amounts totaling approximately $10.1 million and
none, respectively, to hedge forecasted foreign-currency-denominated intercompany
transactions. All such contracts were denominated in Japanese yen. As of December 31, 2006
and 2007, $0.2 million of net unrealized gain and $(0.2) million of net unrealized loss,
net of related taxes, respectively, were recorded in accumulated other comprehensive loss.
The contracts held at December 31, 2007 have maturities through December 2008, and
accordingly, all unrealized gains and losses on foreign currency cash flow hedges included
in accumulated other comprehensive loss will be recognized in current earnings over the
next 12 months. The pre-tax net (losses)/gains on foreign currency cash flow hedges
recorded in current earnings were ($0.3 million), $3.3 million and $0.4 million for the
years ended December 31, 2005, 2006 and 2007, respectively.
During
2005, 2006 and 2007, the Company did not have any gains or losses related to hedging
ineffectiveness. Additionally, no component of gains and losses was excluded from the
assessment of hedging effectiveness. During 2005, 2006 and 2007, the Company did not have
any gains or losses reclassified into earnings as a result of the discontinuance of cash
flow hedges.
16. |
|
Supplemental
Cash Flow Information |
Cash
paid for interest totaled $5.6 million, $5.6 million and $7.4 million for the years ended
December 31, 2005, 2006 and 2007, respectively. Cash paid for income taxes totaled $15.9
million, $19.4 million and $21.9 million for the years ended December 31, 2005, 2006 and
2007, respectively.
The
Company operates in a single operating segment by selling products to a global network of
independent distributors that operates in a seamless manner from market to market, except
for its operations in Mainland China. In Mainland China, the Company utilizes an employed
sales force to sell its products through fixed retail locations. Selling expenses are the
Companys largest expense comprised of the commissions paid to its worldwide
independent distributors as well as remuneration to its Mainland China sales employees
paid on product sales. The Company manages its business primarily by managing its global
sales force. The Company does not use profitability reports on a regional or divisional
basis for making business decisions. However, the Company does recognize revenue in five
geographic regions: North Asia, Greater China, Americas, South Asia/Pacific and Europe.
-91-
Nu Skin Enterprises, Inc.
Notes to Consolidated Financial Statements
Revenue
generated in each of these regions is set forth below (U.S. dollars in thousands):
|
Year Ended December 31, |
|
Revenue: |
2005 | |
2006 | |
2007 | |
|
|
|
|
North Asia |
|
$ 649,377 |
|
$ 593,789 |
|
$ 585,805 |
|
Greater China | |
236,681 |
|
208,226 |
|
205,026 |
|
Americas | |
162,174 |
|
165,908 |
|
188,256 |
|
South Asia/Pacific | |
86,673 |
|
88,017 |
|
101,417 |
|
Europe | |
46,025 |
|
59,469 |
|
77,163 |
|
Total | |
$ 1,180,930 |
|
$ 1,115,409 |
|
$ 1,157,667 |
|
Revenue generated
by each of the Companys three product lines is set forth below (U.S. dollars in
thousands):
|
Year Ended December 31, |
|
Revenue: |
2005 | |
2006 | |
2007 | |
|
|
|
|
Pharmanex |
|
$ 667,671 |
|
$ 632,705 |
|
$ 634,191 |
|
Nu Skin | |
484,281 |
|
454,480 |
|
498,500 |
|
Big Planet | |
28,978 |
|
28,224 |
|
24,976 |
|
Total | |
$ 1,180,930 |
|
$ 1,115,409 |
|
$ 1,157,667 |
|
Additional
information as to the Companys operations in the most significant geographical areas
is set forth below (U.S. dollars in thousands):
|
Year Ended December 31, |
|
Revenue: |
2005 | |
2006 | |
2007 | |
|
|
|
|
Japan |
|
$ 562,031 |
|
$ 476,466 |
|
$ 443,670 |
|
United States | |
144,555 |
|
147,090 |
|
167,701 |
|
South Korea | |
87,346 |
|
117,323 |
|
142,135 |
|
Taiwan | |
92,412 |
|
93,159 |
|
93,014 |
|
Mainland China | |
102,214 |
|
70,492 |
|
66,493 |
|
|
|
December 31, |
|
Long-lived assets: |
| |
2006 | |
2007 | |
|
|
|
|
Japan |
|
|
|
$ 11,902 |
|
$ 11,907 |
|
United States | |
|
|
43,520 |
|
48,378 |
|
South Korea | |
|
|
1,274 |
|
3,391 |
|
Taiwan | |
|
|
2,686 |
|
3,299 |
|
Mainland China | |
|
|
13,724 |
|
9,908 |
|
18. |
|
Restructuring
charges |
During 2007, the Company
recorded restructuring charges of $19.8 million, relating to its efforts to simplify its operations in China and
improve operational efficiencies in its corporate offices and reduce investments in unprofitable markets. Approximately $13.9
million of these charges
relates to severance payments to terminated employees of which approximately $5.4 million remains accrued at December 31, 2007.
The remaining $5.9 million
relates to leasehold terminations and tax payments related to the Company's closure of its operations in Brazil in 2007, of which
approximately $2.2
million remains accrued at December 31, 2007. The Company expects that substantially all of the restructuring charges
accrued as of December 31,
2007 will be paid during the first quarter of 2008.
-92-
Nu Skin Enterprises, Inc.
Notes to Consolidated Financial Statements
During
the first half of 2006, the Company recorded restructuring charges of $11.1
million, primarily relating to its restructuring initiative designed to (i) eliminate
organizational redundancies, (ii) revamp administrative support functions, (iii)
prioritize investments to favor profitable initiatives and markets, and (iv) increase
efficiencies in the supply chain process. As a result, the Companys overall
headcount was reduced by approximately 225 employees, the majority of which related to the
elimination of positions at the Companys U.S. headquarters. These expenses consisted
primarily of severance and other charges and had all been paid as of December 31, 2006.
19. |
|
Impairment
of assets and other |
During
the first half of 2006, the Company recorded impairment and other charges of $20.8
million, primarily relating to its first generation BioPhotonic Scanners. In February
2006, as a result of the Companys launch of and transition to its second generation
BioPhotonic Scanner, the Company determined it was necessary to write down the book value
of the existing inventory of the prior model of the Scanner. The impairment charges
relating to the Scanner recorded during the quarter ended March 31, 2006 totaled $19.0
million.
In
addition, during the quarter ended March 31, 2006, the Company completed a settlement
agreement with Razorstream, a service provider of video content for its digital product
category, to terminate its purchase commitments for video technology for approximately
$1.8 million.
20. |
|
Commitments
and Contingencies |
The
Company is subject to governmental regulations pertaining to product formulation, labeling
and packaging, product claims and advertising and to the Companys direct selling
system. The Company is also subject to the jurisdiction of numerous foreign tax and
customs authorities. Any assertions or determination that either the Company or the
Companys distributors is not in compliance with existing statutes, laws, rules or
regulations could potentially have a material adverse effect on the Companys
operations. In addition, in any country or jurisdiction, the adoption of new statutes,
laws, rules or regulations or changes in the interpretation of existing statutes, laws,
rules or regulations could have a material adverse effect on the Company and its
operations. Although management believes that the Company is in compliance, in all
material respects, with the statutes, laws, rules and regulations of every jurisdiction in
which it operates, no assurance can be given that the Companys compliance with
applicable statutes, laws, rules and regulations will not be challenged by foreign
authorities or that such challenges will not have a material adverse effect on the
Companys financial position or results of operations or cash flows. The Company and
its Subsidiaries are defendants in litigation and proceedings involving various matters.
In the opinion of the Companys management, based upon advice of its counsel handling
such litigation and proceedings, adverse outcomes, if any, will not likely result in a
material effect on the Companys consolidated financial condition, results of
operations or cash flows.
The
Company is subject to regular audits by federal, state and foreign tax authorities. These
audits may result in additional tax liabilities. The Company believes it has appropriately
provided for income taxes for all years. Several factors drive the calculation of its tax
reserves. Some of these factors include: (i) the expiration of various statutes of
limitations; (ii) changes in tax law and regulations; (iii) issuance of tax rulings; and
(iv) settlements with tax authorities. Changes in any of these factors may result in
adjustments to the Companys reserves, which would impact its reported financial
results.
-93-
Nu Skin Enterprises, Inc.
Notes to Consolidated Financial Statements
In
June 2006, the FASB issued FIN 48, which clarifies the accounting for uncertainty in tax
positions. FIN 48 requires that the Company recognize the impact of a tax position in
the Companys financial statements if that position is more likely than not of being
sustained on audit, based on the technical merits of the position. The provisions of
FIN 48 became effective as of the beginning of the Companys 2007 fiscal year,
with the cumulative effect of the change in accounting principle recorded as an adjustment
to opening retained earnings.
Due
to the international nature of the Companys business, the Company is subject from
time to time to reviews and audits by the foreign taxing authorities of the various
jurisdictions in which it conducts business throughout the world. In 1999, the Company
implemented a duty valuation methodology with respect to the importation of certain
products into Japan. For purposes of the import transactions at issue, the Company had
taken the position that, under applicable customs law, there was a sale between the
manufacturer and the Companys Japanese subsidiary, and that customs duties should be
assessed on the manufacturers invoice. The Valuation Department of the Yokohama
customs authorities reviewed and approved this methodology at that time, and it had been
reviewed on several occasions by the audit division of the Japan customs authorities since
then. In connection with subsequent audits in 2004, the Yokohama customs authorities
assessed the Company additional duties and penalties on these products imported into Japan
from October 2002 to October 2004, based on a different valuation methodology than what
was previously approved. With respect to the periods under audit, the customs authorities
took the position that the relevant import transaction involved a sale between the
Companys U.S. affiliate and its Japan subsidiary and that duties should be assessed
on the value of that transaction. The Company disputed this assessment. The Company also
disputed the amount of duties it was required to pay on products imported from November of
2004 to June of 2005 for similar reasons. The total amount assessed or in dispute is
approximately $25.0 million, net of any recovery of consumption taxes. Effective July 1,
2005, the Company implemented some modifications to the Companys business structure
in Japan and in the United States that the Company believes will eliminate any further
customs valuation disputes with respect to product imports in Japan after that time.
Because
the Company believes the documentation and legal analysis supports its position and the
valuation methodology it used with respect to the products in dispute had been reviewed
and approved by the customs authorities in Japan, the Company believes the assessments are
improper and it filed letters of protest with Yokohama customs with respect to this entire
amount. Yokohama customs rejected the Companys letters of protest, and to follow
proper administrative procedures the Company filed appeals with the Japan Ministry of
Finance. On June 26, 2006, the Company was advised that the Ministry of Finance had
rejected the appeals filed with their office relating to the imports from October 2002 to
October 2004. The Company decided to appeal this issue through the judicial court system
in Japan, and on December 22, 2006 it filed a complaint with the Tokyo District Court
Civil Action Section with respect to this period. In January 2007, the Company was advised
that the Ministry of Finance also rejected its appeal with them for the imports from
November 2004 to June 2005. The Company currently plans to appeal this decision with the
court system in Japan as well. One of the findings cited by the Ministry of Finance in its
decisions was that the Company had treated the transactions as sales between its U.S.
affiliate and its Japan subsidiary on its corporate income tax return under applicable
income tax and transfer pricing laws. The Company has paid the $25.0 million in customs
duties and assessments, the amount of which it recorded in Other Assets in its
Consolidated Balance Sheet. To the extent that the Company is unsuccessful in recovering
the amounts assessed and paid, it will be required to take a corresponding charge to its
earnings.
-94-
Nu Skin Enterprises, Inc.
Notes to Consolidated Financial Statements
In
Taiwan, the Company was currently subject to an audit by tax authorities with respect to
the deductibility of distributor commission expenses in that market. In order to avoid the
running of the statute of limitations with respect to the 1999, 2000 and 2001 tax years,
the Taiwan tax authorities disallowed the Companys commission expense deductions for
those years and assessed the Company a total of approximately $26.0 million. The Company
contested this assessment and in the fourth quarter of 2007 the Taiwan tax authorities
ruled in the Companys favor and allowed the deduction of the commission expenses and
reversed the previous assessments.
Quarterly
cash dividends for the years ended December 31, 2006 and 2007 totaled $27.8 million and
$27.1 million, respectively. In February 2008, the board of directors declared a quarterly
cash dividend of $0.11 per share for all classes of common stock to be paid on March 19,
2008 to stockholders of record on February 29, 2008.
The
following table sets forth selected unaudited quarterly data for the periods shown (U.S.
dollars in millions, except per share amounts):
|
2006 | |
2007 | |
|
1st
Quarter | |
2nd
Quarter | |
3rd
Quarter | |
4th
Quarter | |
1st
Quarter | |
2nd
Quarter | |
3rd
Quarter
| |
4th Quarter |
|
|
|
|
|
|
|
|
|
Revenue |
|
$ 265.8 |
|
$ 284.1 |
|
$ 276.3 |
|
$ 289.2 |
|
$ 273.6 |
|
$ 287.2 |
|
$ 290.7 |
|
$ 306.1 |
|
Gross profit | |
218.8 |
|
235.7 |
|
228.0 |
|
237.8 |
|
223.0 |
|
236.2 |
|
238.5 |
|
250.8 |
|
Operating income | |
(15.5) |
|
23.9 |
|
21.0 |
|
25.3 |
|
17.6 |
|
21.0 |
|
19.2 |
|
13.1 |
|
Net income | |
(10.3) |
|
14.1 |
|
13.2 |
|
15.9 |
|
10.5 |
|
13.8 |
|
13.5 |
|
6.0 |
|
Net income per share: | |
Basic | |
(0.15 |
) |
0.20 |
|
0.19 |
|
0.23 |
|
0.16 |
|
0.21 |
|
0.21 |
|
0.09 |
|
Diluted | |
(0.15 |
) |
0.20 |
|
0.19 |
|
0.23 |
|
0.16 |
|
0.21 |
|
0.21 |
|
0.09 |
|
-95-
Nu Skin Enterprises, Inc.
Notes to Consolidated Financial Statements
Report of Independent
Registered Public Accounting Firm
To the Board of Directors and
Shareholders of Nu Skin Enterprises, Inc.:
In our opinion, the accompanying
consolidated balance sheets and the related consolidated statements of income,
comprehensive income, shareholders equity and cash flows present fairly, in all
material respects, the financial position of Nu Skin Enterprises, Inc. and its
subsidiaries at December 31, 2007 and 2006 and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 2007 in conformity
with accounting principles generally accepted in the United States of America. Also in our
opinion, the Company maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2007, based on criteria established in Internal
Control Integrated Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO). The Companys management is responsible for these
financial statements, for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial reporting,
included in the accompanying Management Report on Internal Control over Financial
Reporting appearing in Item 9A. Our responsibility is to express opinions on these
financial statements and on the Companys internal control over financial reporting
based on our integrated audits. We conducted
our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of material
misstatement and whether effective internal control over financial reporting was
maintained in all material respects. Our audits of the financial statements included
examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation. Our audit
of internal control over financial reporting included obtaining an understanding of
internal control over financial reporting, assessing the risk that a material weakness
exists, and testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audits also included performing such other
procedures as we considered necessary in the circumstances. We believe that our audits
provide a reasonable basis for our opinions.
A companys internal control
over financial reporting is a process designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and
procedures that (i) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the
company; (ii) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the
company; and (iii) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the companys assets
that could have a material effect on the financial statements.
-96-
Because of its inherent limitations,
internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
/s/
PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Salt Lake City, Utah
February 29, 2008
-97-
ITEM 9. |
|
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None.
ITEM 9A. |
|
CONTROLS AND PROCEDURES |
Evaluation
of Disclosure Controls and Procedures. Under the supervision and with the
participation of our management, including our Chief Executive Officer and Chief Financial
Officer, we evaluated the effectiveness of the design and operation of our disclosure
controls and procedures (as such term is defined in Rule 13a-15(e) under the Securities
Exchange Act of 1934 (the Exchange Act)). Disclosure controls and procedures
are the controls and other procedures that we designed to ensure that we record, process,
summarize and report in a timely manner the information we must disclose in reports that
we file with or submit to the Securities and Exchange Commission under the Exchange Act.
Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer
concluded that our disclosure controls and procedures were effective as of the end of the
period covered by this report.
Changes
in Internal Control over Financial Reporting. During the fourth quarter of 2007,
there was no change in our internal control over financial reporting (as such term is
defined in Rule 13a-15(f) under the Exchange Act) that has materially affected, or is
reasonably likely to materially affect, our internal control over financial reporting.
Management
Report on Internal Control over Financial Reporting. Our management is
responsible for establishing and maintaining adequate internal control over financial
reporting. Internal control over financial reporting is defined in Rule 13a-15(f) under
the Exchange Act as a process designed by, or under the supervision of, our principal
executive and principal financial officers and effected by our board of directors,
management and other personnel, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes
in accordance with accounting principles generally accepted in this United States of
America and includes those policies and procedures that:
|
|
|
pertain
to the maintenance of records that, in reasonable detail, accurately and fairly reflect
the transactions and dispositions of our assets; |
|
|
|
provide
reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with accounting principles generally accepted in the
United States of America, and that our receipts and expenditures are being made only in
accordance with authorization of management and directors; and |
|
|
|
provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of our assets that could have a material effect on the
financial statements. |
Because
of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
-98-
Under
the supervision and with the participation of our management, including our principal
executive and principal financial officers, we assessed, as of December 31, 2007, the
effectiveness of our internal control over financial reporting. This assessment was based
on criteria established in the framework in Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on
our assessment, our management concluded that our internal control over financial
reporting was effective as of December 31, 2007.
The
effectiveness of the Company's internal control over financial reporting as of
December 31, 2007 has been audited by PricewaterhouseCoopers LLP, an independent
registered public accounting firm, as stated in their report which appears herein.
ITEM 9B. |
|
OTHER INFORMATION |
On
February 25, 2008 and February 29, 2008, Nu Skin Enterprises, Inc. (the Company) executed amendments
(collectively, the Amendments) to the following loan and credit agreements
(collectively, the Credit Agreements): (i) Note Purchase Agreement dated
October 12, 2000 between the Company and The Prudential Insurance Company of America, as
amended; (ii) Private Shelf Agreement dated as of August 26, 2003 between the Company
and Prudential Investment Management, Inc., as amended (the Private Shelf
Agreement); and (iii) Credit Agreement dated as of May 10, 2001 among the Company, various
financial institutions and the Bank of America, N.A., as Administrative Agent, as amended.
The Amendments provide that for purposes of calculating the minimum
Fixed Charges Coverage ratio the amount of Consolidated Net Income Available for Fixed
Charges for the fiscal quarter ended December 31, 2007 shall be increased by $15 million.
PART III
The
information required by Items 10, 11, 12, 13 and 14 of Part III is hereby incorporated by
reference to our Definitive Proxy Statement filed or to be filed with the Securities and
Exchange Commission for our 2008 Annual Meeting of Stockholders except for certain information required by
Item 10 with respect to our executive officers which is set forth under Item 1 - Business, of this
Annual Report on Form 10-K, and is incorporated herein by reference.
PART IV
ITEM 15. |
|
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES |
Documents filed as part of this Form
10-K:
1. |
Financial Statements. See Index to Consolidated Financial Statements
under Item 8 of Part II. |
2. |
Financial Statement Schedules. N/A |
3. |
Exhibits. References to the Company shall mean Nu Skin
Enterprises, Inc. Exhibits preceded by an asterisk (*) are management contracts
or compensatory plans or arrangements. |
-99-
Exhibit
Number |
|
Exhibit Description |
3.1 |
|
Amended
and Restated Certificate of Incorporation of the Company (incorporated by reference to
Exhibit 3.1 to the Company's Registration Statement on Form
S-1 (File No. 333-12073) (the "Form S-1")). |
3.2 |
|
Certificate
of Amendment to the Amended and Restated Certificate of Incorporation (incorporated by
reference to Exhibit 3.2 to the Companys Annual Report on Form 10-K for the year
ended December 31, 2003). |
3.3 |
|
Certificate
of Designation, Preferences and Relative Participating, Optional and Other Special Rights
of Preferred Stock and Qualification, Limitations and Restrictions Thereof (incorporated
by reference to Exhibit 3.2 to the Companys Annual Report on Form 10-K for the year
ended December 31, 2004). |
3.4 |
|
Amended and Restated Bylaws of the Company (as amended) |
4.1 |
|
Specimen
Form of Stock Certificate for Class A Common Stock (incorporated by reference to Exhibit
4.1 to the Company's Registration Statement on Form S-3
(File No. 333-90716)). |
4.2 |
|
Specimen
Form of Stock Certificate for Class B Common Stock (incorporated by reference to Exhibit
4.2 to the Companys Form S-1). |
10.1 |
|
Note
Purchase Agreement dated October 12, 2000, by and between the Company and The Prudential
Insurance Company of America (incorporated by reference to Exhibit 10.1 to the Companys
Annual Report on Form 10-K for the year ended December 31, 2005). |
10.2 |
|
First
Amendment to Note Purchase Agreement between the Company and The Prudential Insurance
Company of America dated May 1, 2002. |
10.3 |
|
Second
Amendment to Note Purchase Agreement, dated as of October 31, 2003 between the Company
and The Prudential Insurance Company of America (incorporated by reference to Exhibit
10.3 to the Companys Annual Report on Form 10-K for the year ended December 31,
2003). |
10.4 |
|
Third
Amendment to Note Purchase Agreement, dated as of May 18, 2004, between the Company and
The Prudential Insurance Company of America (incorporated by reference to Exhibit 10.2 to
the Companys Quarterly Report on Form 10-Q for the quarter ended June 30, 2004). |
10.5 |
|
Fourth
Amendment to Note Purchase Agreement, dated as of July 28, 2006, between the Company and
The Prudential Insurance Company of America (incorporated by reference to Exhibit 99.1 to
the Companys Current Report on Form 8-K filed on August 23, 2006). |
-100-
10.6 |
|
Fifth
Amendment to Note Purchase Agreement, dated as of October 5, 2006, between the Company
and The Prudential Insurance Company of America (incorporated by reference to Exhibit
99.1 to the Companys Current Report on Form 8-K filed on October 10, 2006). |
10.7 |
|
Sixth
Amendment to Note Purchase Agreement, dated as of November 7, 2007, between the Company
and The Prudential Insurance Company of America (incorporated by reference to Exhibit
99.1 to the Companys Current Report on Form 8-K filed on November 13, 2007). |
10.8 |
|
Credit
Agreement dated as of May 10, 2001 among the Company, various financial institutions, and
Bank of America, N.A., as Administrative Agent (incorporated by reference to Exhibit 10.7
to the Companys Annual Report on Form 10-K for the year ended December 31, 2006). |
10.9 |
|
First
Amendment to the Credit Agreement dated December 14, 2001 dated May 10, 2001 among the
Company, various financial institutions, and Bank of America, N.A. as Administrative
Agent (incorporated by reference to Exhibit 10.8 to the Companys Annual Report on
Form 10-K for the year ended December 31, 2006). |
10.10 |
|
Second
Amendment to Credit Agreement, dated as of October 22, 2003 between the Company, various
financial institutions, and Bank of America, N.A. as Administrative Agent (incorporated
by reference to Exhibit 10.11 to the Companys Annual Report on Form 10-K for the
year ended December 31, 2003). |
10.11 |
|
Third
Amendment to the Credit Agreement, dated as of May 10, 2004, among the Company, various
financial institutions, and Bank One, N.A. (incorporated by reference to Exhibit 10.1 to
the Companys Quarterly Report on Form 10-Q for the quarter ended June 30, 2004). |
10.12 |
|
Fourth
Amendment to the Credit Agreement, dated as of July 28, 2006, among the Company, various
financial institutions, and JP Morgan Chase Bank, N.A. (as successor to Bank One, N.A.
(incorporated by reference to Exhibit 99.2 to the Companys Current Report on Form
8-K filed on August 23, 2006). |
10.13 |
|
Fifth
Amendment to the Credit Agreement, dated as of October 5, 2006, among the Company,
various financial institutions, and JP Morgan Chase Bank, N.A. (as successor to Bank One,
N.A.) (incorporated by reference to Exhibit 99.2 to the Companys Current Report on
Form 8-K filed on October 10, 2006). |
10.14 |
|
Sixth
Amendment to the Credit Agreement, dated as of August 8, 2007, among the Company, various
financial institutions, and JP Morgan Chase Bank, N.A. (as successor to Bank One, N.S.)
(Incorporated by reference to Exhibit 99.1 to the Companys Current Report on Form
8-K filed August 15, 2007). |
-101-
10.15 |
|
Seventh
Amendment to Credit Agreement, dated as of November 7, 2007, among the Company, various
financial institutions, and JP Morgan Chase Bank, N.A. (as successor to Bank One, N.A.)
as administrative agent (incorporated by reference to Exhibit 99.2 to the Companys
Current Report on Form 8-K filed on November 13, 2007.) |
10.16 |
|
Private
Shelf Agreement, dated as of August 26, 2003, between the Company and Prudential
Investment Management, Inc. (the Private Shelf Agreement) (incorporated by
reference to Exhibit 10.2 to the Companys Quarterly Report on Form 10-Q for the
quarter ended September 30, 2003). |
10.17 |
|
First
Amendment to Private Shelf Agreement, dated as of October 31, 2003 between the Company
and Prudential Investment Management, Inc. (incorporated by reference to Exhibit 10.53 to
the Companys Annual Report on Form 10-K for the year ended December 31, 2003). |
10.18 |
|
Second
Amendment to Private Shelf Agreement, dated as of May 18, 2004, between the Company,
Prudential Investment Management, Inc., and the holders of the Series A Senior Notes and
Series B Senior Notes issued under the Private Shelf Agreement (incorporated by reference
to Exhibit 10.3 to the Companys Quarterly Report on Form 10-Q for the quarter ended
June 30, 2004). |
10.19 |
|
Third
Amendment to Private Shelf Agreement dated June 13, 2005 between the Company, Prudential
Investment Management, Inc. and certain other lenders (incorporated by reference to
Exhibit 10.1 to the Companys Quarterly Report on Form 10-Q for the quarter ended
June 30, 2005). |
10.20 |
|
Fourth
Amendment to Private Shelf Agreement dated July 28, 2006 between the Company, Prudential
Investment Management, Inc. and certain other lenders (incorporated by reference to
Exhibit 99.1 to the Companys Current Report on Form 8-K filed on August 23, 2006). |
10.21 |
|
Fifth
Amendment to Private Shelf Agreement dated October 5, 2006 between the Company,
Prudential Investment Management, Inc. and certain other lenders (incorporated by
reference to Exhibit 99.3 to the Companys Current Report on Form 8-K filed on
October 10, 2006). |
10.22 |
Sixth Amendment to Private Shelf Agreement, dated as of November 7, 2007, between the
Company, Prudential Investment Management, Inc. and certain other lenders (incorporated by
reference to Exhibit 99.3 to the Companys Current Report on Form 8-K filed on
November 13, 2007). |
10.23 |
|
Series
A Senior Notes Nos. A-1 to A-5 and Series B Senior Notes B-1 to B-5 issued October 31,
2003 by the Company to Prudential Investment Management, Inc. and/or its affiliates
pursuant to the Private Shelf Agreement (incorporated by reference to Exhibit 10.54 to
the Companys Annual Report on Form 10-K for the year ended December 31, 2003). |
-102-
10.24 |
|
Series
C Senior Notes Nos. C-1 and C-2 issued February 7, 2005 by the Company to Prudential
Investment Management, Inc. and/or its affiliates pursuant to the Private Shelf Agreement
(incorporated by reference to Exhibit 99.2 to the Companys Current Report on Form
8-K filed February 8, 2005). |
10.25 |
Series D Senior Notes Nos. D-1, D-2, D-3 and D-4 issued October 5, 2006 by the Company to
Prudential Investment Management, Inc. and/or its affiliates pursuant to the Private Shelf
Agreement (incorporated by reference to Exhibit 99.4 to the Companys Current Report
on Form 8-K filed October 10, 2006). |
10.26 |
|
Series
E Senior Notes Nos. E-1, E-2, E-3, E-4 and E-5 issued January 19, 2007 by the Company to
Prudential Investment Management, Inc. and/or its affiliates pursuant to the Private
Shelf Agreement (incorporated by reference to Exhibit 99.1 to the Companys Current
Report on Form 8-K filed January 25, 2007). |
10.27 |
|
Pledge
Agreement dated October 12, 2000, by and between the Company and State Street Bank and
Trust Company of California, N.A., acting in its capacity as collateral agent
(incorporated by reference to Exhibit 10.5 to the Companys Annual Report on Form
10-K for the year ended December 31, 2005). |
10.28 |
|
Pledge
Amendments executed by the Company dated December 31, 2003 (incorporated by reference to
Exhibit 10.5 to the Companys Annual Report on Form 10-K for the year ended December
31, 2003). |
10.29 |
|
Series
E Senior Note E-6, issued July 20, 2007, by the Company to Prudential Insurance Company
of America pursuant to the Private Shelf Agreement (incorporated by reference to Exhibit
99.1 to the Companys Current Report on 8-K dated January 8, 2008). |
10.30 |
|
Series
EE Senior Note EE-1, issued January 8, 2008, by the Company to Prudential Insurance
Company of America pursuant to the Private Shelf Agreement (incorporated by reference to
Exhibit 99.2 to the Companys Current Report on 8-K dated January 8, 2008). |
10.31 |
|
Series
F Senior Notes Nos. F-1 and F-2 issued September 28, 2007 by the Company to Prudential
Investment Management, Inc. and/or its affiliates pursuant to the Private Shelf Agreement
(incorporated by reference to Exhibit 10.1 to the Companys Quarterly Report on Form
10-Q for the quarter ended September 30, 2007). |
10.32 |
|
Pledge
Agreement dated as of January 31, 2005 by and among Nu Skin Asia Investment, Inc., a
wholly-owned subsidiary of the Company, and U.S. Bank National Association, as agent for
and on behalf of the Benefited Parties under the Amended and Restated Collateral Agency
and Intercreditor Agreement (referred to below) (incorporated by reference to Exhibit
99.3 to the Companys Current Report on Form 8-K/A filed on March 10, 2005). |
-103-
10.33 |
|
Collateral
Agency Agreement dated October 12, 2000, by and between the Company, State Street Bank
and Trust Company of California, N.A., as Collateral Agent, and the lenders and
noteholders party thereto (incorporated by reference to Exhibit 10.8 to the Companys
Annual Report on Form 10-K for the year ended December 31, 2005). |
10.34 |
|
Amendment
to Collateral Agency and Intercreditor Agreement dated May 10, 2000, among State Street
Bank and Trust Company of California, N.A., as Collateral Agent, The Prudential Insurance
Company of America, as Senior Noteholder and ABN AMRO Bank N.V., as Senior Lender
(incorporated by reference to Exhibit 10.27 to the Companys Annual Report on Form
10-K for the year ended December 31, 2006). |
10.35 |
|
Amended
and Restated Collateral Agency and Intercreditor Agreement, dated as of August 26, 2003,
by and among Nu Skin Enterprises, Inc. and various of its subsidiaries, U.S. Bank
National Association, as Collateral Agent, and various lending institutions (incorporated
by reference to Exhibit No. 10.2 to the Companys Quarterly Report on Form 10-Q for
the quarter ended September 30, 2003). |
10.36 |
|
Master
Lease Agreement dated January 16, 2003, by and between Nu Skin International, Inc. and Scrub Oak, LLC |
10.37 |
|
Amendment
No. 1 to the Master Lease Agreement, effective as of July 1, 2003, between Nu Skin
International Inc. and Scrub Oak, LLC (incorporated by
reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 2003). |
10.38 |
|
Master
Lease Agreement dated January 16, 2003, by and between Nu Skin International, Inc. and Aspen Country, LLC. |
10.39 |
|
Amendment
No. 1 to the Master Lease Agreement, effective as of July 1, 2003, between Nu Skin
International Inc. and Aspen Country, LLC (incorporated by
reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 2003). |
10.40 |
|
University
of Utah Research Foundation and Nu Skin International, Inc. Amended and Restated Patent
License Agreement (Exclusive) Dietary Supplement Preventative Healthcare License dated
July 1, 2006 (incorporated by reference to Exhibit 10.33 to the Companys Annual
Report on Form 10-K for the year ended December 31, 2006). |
10.41 |
|
Agreement
and Plan of Merger among Nu Skin International, Inc., Pharmanex License Acquisition
Corporation, Caroderm, Inc. and certain shareholders of
Caroderm, Inc. dated as of March 7, 2006 (incorporated by reference to
Exhibit 10.58 to the Company's Annual Report on Form 10-K/A
filed March 17, 2006). |
10.42 |
|
Form
of Lock-up Agreement executed by certain of the Companys shareholders (incorporated
by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K filed
November 10, 2003). |
-104-
*10.43 |
|
Form
of Indemnification Agreement to be entered into between the Company and certain of its
officers and directors (incorporated by reference to Exhibit 10.2 to the Companys
Quarterly Report on Form 10-Q for the quarter ended June 30, 2005). |
*10.44 |
|
Amendment
in Total and Complete Restatement of Deferred Compensation Plan. (incorporated by
reference to Exhibit 10.34 to the Companys Annual Report on Form 10-K for the year
ended December 31, 2004). |
*10.45 |
Nu Skin Enterprises, Inc. Deferred Compensation Plan dated December 12, 2005 (incorporated
by reference to Exhibit 99.1 to the Companys Current Report on Form 8-K filed
December 19, 2005). |
*10.46 |
|
Amendment
and Restated Deferred Compensation Plan dated January 1, 2008 (incorporated by reference
to Exhibit 10.5 to the Companys Quarterly Report on Form 10-Q for the quarter ended
September 30, 2007). |
*10.47 |
|
Nu
Skin Enterprises, Inc. Nonqualified Deferred Compensation Trust dated December 12, 2005
(incorporated by reference to Exhibit 99.2 to the Companys Current Report on Form
8-K filed December 19, 2005). |
*10.48 |
|
Second
Amended and Restated Nu Skin Enterprises, Inc. 1996 Stock Incentive Plan (incorporated by
reference to Exhibit 10.28 to the Companys Annual Report on Form 10-K for the year
ended December 31, 2005). |
*10.49 |
|
Form
of Master Stock Option Agreement (1996 Plan). |
*10.50 |
|
Form
of Stock Option Agreement for Directors (1996 Plan) (incorporated by reference to Exhibit
10.43 to the Companys Annual Report on Form 10-K for the year ended December 31,
2006). |
*10.51 |
|
Form
of Contingent Stock Award Agreement for Directors (1996 Plan) (incorporated by reference
to Exhibit 10.55 to the Companys Annual Report on Form 10-K/A filed for the year
ended December 31, 2005). |
*10.52 |
|
Nu
Skin Enterprises, Inc. 2006 Stock Incentive Plan (incorporated by reference to
Exhibit 10.1 to the Company's Current Report on Form 8-K
filed on June 1, 2006). |
*10.53 |
|
Form
of Master Stock Option Agreement (2006 Plan) (incorporated by reference to Exhibit 10.10
to the Companys Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 2006). |
*10.54 |
|
Form
of Master Stock Option Agreement (2006 Plan Performance Option (U.S.)). |
*10.55 |
|
Form
of Master Stock Option Agreement (2006 Plan Performance Option (non-U.S.)). |
-105-
*10.56 |
|
Form
of Master Stock Option Agreement for Directors (2006 Plan) (incorporated by reference to
Exhibit 10.47 to the Companys Annual Report on Form 10-K for the year 2006). |
10.57 |
|
Form
of Revised Director Stock Option Agreement (2006 Plan) (incorporated by reference to
Exhibit 10.3 to the Companys Quarterly Report on Form 10-Q for the quarter ended
June 30, 2007). |
10.58 |
Form of Director Restricted Stock Unit Agreement (2006 Plan) (incorporated by reference to
Exhibit 10.4 to the Companys Quarterly Report on Form 10-Q for the quarter ended
June 30, 2007). |
*10.59 |
|
Form
of Master Restricted Stock Unit Agreement (2006 Plan) (incorporated by reference to
Exhibit 10.11 to the Companys Quarterly Report on Form 10-Q for the quarterly
period ended September 30, 2006). |
*10.60 |
|
Intentionally left blank. |
*10.61 |
|
Nu
Skin Enterprises, Inc. 2006 Senior Executive Incentive Plan (incorporated
by reference to Exhibit 10.2 to the Company's Current
Report on Form 8-K filed on June 1, 2006). |
*10.62 |
|
Performance
Targets and Formulas for 2007 (Approved under the 2006 Senior Executive Incentive Plan)
(incorporated by reference to Exhibit 10.51 to the Companys Annual Report on Form
10-K for the year ended December 31, 2006). |
*10.63 |
|
Performance
Targets and Formulas 2008 (Approved under the 2006 Senior Executive Incentive Plan). |
*10.64 |
|
Nu
Skin Enterprises, Inc. Senior Executive Benefits Policy (incorporated by reference to
Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 2005). |
*10.65 |
|
Summary
Description of Nu Skin Japan Director Retirement Allowance Plan (incorporated by
reference to Exhibit 10.53 to the Companys Annual Report on Form 10-K for the year
2006). |
*10.66 |
|
Nu
Skin International, Inc. 1997 Key Employee Death Benefit Plan (incorporated by reference
to Exhibit 10.59 to the Company's Annual Report on Form 10-K
for the year ended December 31, 2003). |
*10.67 |
|
Employment
Letter between the Company and Truman Hunt dated January 17, 2003. |
*10.68 |
|
Amendment
to Employment Letter with M. Truman Hunt dated September 22, 2005 and Amendment to
provisions of the Companys Executive Incentive Plan with respect to Mr. Hunt
(incorporated by reference to Exhibit 10.1 to the Companys Quarterly Report on Form
10-Q for the quarter ended September 30, 2005). |
-106-
*10.69 |
|
CEO
compensation changes (incorporated by reference to Exhibit 10.7 to the Companys
Quarterly Report on Form 10-Q for the quarter ended March 31, 2006). |
*10.70 |
|
Restricted
Stock Purchase Agreement, dated as of January 17, 2003, between the Company and Truman
Hunt (incorporated by reference to Exhibit 10.61 to the Companys Annual Report on
Form 10-K for the year ended December 31, 2003). |
*10.71 |
|
Employment
Letter with Robert Conlee effective November 26, 2003 (incorporated by reference to
Exhibit 3.2 to the Companys Annual Report on Form 10-K for the year ended December
31, 2003). |
*10.72 |
|
Joseph
Y. Chang Employment Agreement dated April 17, 2006 between Mr. Chang and the
Company (incorporated by reference to Exhibit 10.1 to the Companys current report
on Form 8-K filed on April 18, 2006). |
*10.73 |
|
Daniel
Chard Employment Agreement effective February 13, 2006 between Mr. Chard and the Company
(incorporated by reference to Exhibit 10.61 to the Companys Annual Report on Form
10-K for the year ended December 31, 2006). |
*10.74 |
|
Summary
of Non-management Director compensation (revised effective year 2007) (incorporated by
reference to Exhibit 10.63 to the Companys Annual Report on Form 10-K for the year
ended December 31, 2006). |
*10.75 |
|
Event
Appearance Bonus Guidelines (Approved for Sandra Tillotson in October 2006) (incorporated
by reference to Exhibit 10.67 to the Companys Annual Report on Form 10-K for the
year ended December 31, 2006). |
*10.76 |
|
Andrew
Fan Employment Letter Agreement dated August 10, 2007 between Mr. Fan and the Company
(incorporated by reference to Exhibit 10.7 to the Companys Quarterly Report on Form
10-Q for the quarter ended September 30, 2007). |
*10.77 |
|
Gary
Sumihiro Employment Letter dated March 16, 2007 between Mr. Sumihiro and the Company
(incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form
8-K filed August 9, 2007). |
*10.78 |
|
Form
of Key Employee Covenants (incorporated by reference to Exhibit 10.2 to the Companys
Quarterly Report on Form 10-Q for the quarter ended June 30, 2007). |
*10.79 |
|
Settlement
and Release Agreement for Robert Conlee dated August 18, 2007 (incorporated by reference
to Exhibit 99.1 to the Companys Current Report on Form 8-K filed August 23, 2007). |
*10.80 |
|
Robert
Conlee Letter of Understanding dated July 6, 2007 (incorporated by reference to Exhibit
99.2 to the Companys Current Report on Form 8-K filed August 23, 2007). |
-107-
10.81 |
|
Accelerated
Share Repurchase Agreement between the Company and JP Morgan Chase Bank, N.A.
(incorporated by reference to Exhibit 99.7 to the Companys Current Report on Form
8-K filed November 13, 2007). |
10.82 |
|
Seventh
Amendment to Note Purchase Agreement, dated as of February 25, 2008, between the Company
and The Prudential Insurance Company of America. |
10.83 |
|
Seventh
Amendment to Private Shelf Agreement, dated as of February 25, 2008, between the
Company, Prudential Investment Management, Inc. and certain
other lenders. |
10.84 |
|
Letter
Agreement between the Company and The Prudential Insurance Company of America
(incorporated by reference to Exhibit 99.4 to the Companys Current Report on Form
8-K filed November 7, 2007). |
10.85 |
|
Letter
Agreement among the Company, various financial institutions, and JPMorgan Chase Bank,
N.A. (as successor to Bank of America, N.A.) as administrative agent (incorporated by
reference to Exhibit 99.5 to the Companys Current Report on Form 8-K filed November
7, 2007). |
10.86 |
|
Letter
Agreement among the Company, Prudential Investment Management, Inc. and certain other
lenders (incorporated by reference to Exhibit 99.6 to the Companys Current Report
on Form 8-K filed November 7, 2007). |
10.87 |
|
Eighth Amendment to Credit Agreement, dated as of
February 29, 2008, among the Company, various financial institutions, and JP Morgan Chase Bank, N.A. (as
successor to Bank One, N.A.) as successor administrative agent. |
21.1 |
|
Subsidiaries
of the Company. |
23.1 |
|
Consent
of PricewaterhouseCoopers LLP. |
31.1 |
|
Certification
by M. Truman Hunt, President and Chief Executive Officer, pursuant to Rule 13a-14(a) of
the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. |
31.2 |
|
Certification
by Ritch N. Wood, Chief Financial Officer, pursuant to Rule 13a-14(a) of the Securities
Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002. |
32.1 |
|
Certification
by M. Truman Hunt, President and Chief Executive Officer, pursuant to Section 1350,
Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. |
32.2 |
|
Certification
by Ritch N. Wood, Chief Financial Officer, pursuant to Section 1350, Chapter 63 of Title
18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002. |
-108-
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 February 29, 2008.
|
|
|
NU SKIN ENTERPRISES, INC.
|
|
|
|
By: /s/ M.
Truman Hunt
M. Truman Hunt,
Chief Executive Officer
|
Pursuant to the requirements
of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in
the capacities indicated on February 29, 2008.
Signatures | |
Capacity in Which Signed | |
| |
| |
/s/ Blake M. Roney |
|
|
|
Blake M. Roney | |
Chairman of the Board | |
| |
| |
/s/ M. Truman Hunt | |
Chief Executive Officer and Director | |
M. Truman Hunt | |
(Principal Executive Officer) | |
| |
| |
/s/ Ritch N. Wood | |
Chief Financial Officer | |
Ritch N. Wood | |
(Principal Financial Officer and Accounting Officer) | |
| |
| |
/s/ Sandra N. Tillotson | |
Sandra N. Tillotson | |
Senior Vice President, Director | |
| |
| |
/s/ Steven J. Lund | |
Steven J. Lund | |
Director | |
| |
| |
/s/ Daniel W. Campbell | |
Daniel W. Campbell | |
Director | |
| |
| |
/s/ E. J. "Jake" Garn | |
E. J. "Jake" Garn | |
Director | |
| |
| |
/s/ Christine Day | |
Christine Day | |
Director | |
| |
| |
/s/ Andrew D. Lipman | |
Andrew D. Lipman | |
Director | |
| |
| |
/s/ Desmond C. Wong | |
Desmond C. Wong | |
Director | |
| |
| |
/s/ Patricia Negrón | |
Patricia Negrón | |
Director | |
-109-
Exhibit
Number |
|
Exhibit Description |
3.1 |
|
Amended
and Restated Certificate of Incorporation of the Company (incorporated by reference to
Exhibit 3.1 to the Company's Registration Statement on Form
S-1 (File No. 333-12073) (the "Form S-1")). |
3.2 |
|
Certificate
of Amendment to the Amended and Restated Certificate of Incorporation (incorporated by
reference to Exhibit 3.2 to the Companys Annual Report on Form 10-K for the year
ended December 31, 2003). |
3.3 |
|
Certificate
of Designation, Preferences and Relative Participating, Optional and Other Special Rights
of Preferred Stock and Qualification, Limitations and Restrictions Thereof (incorporated
by reference to Exhibit 3.2 to the Companys Annual Report on Form 10-K for the year
ended December 31, 2004). |
3.4 |
|
Amended and Restated Bylaws of the Company (as amended) |
4.1 |
|
Specimen
Form of Stock Certificate for Class A Common Stock (incorporated by reference to Exhibit
4.1 to the Company's Registration Statement on Form S-3
(File No. 333-90716)). |
4.2 |
|
Specimen
Form of Stock Certificate for Class B Common Stock (incorporated by reference to Exhibit
4.2 to the Companys Form S-1). |
10.1 |
|
Note
Purchase Agreement dated October 12, 2000, by and between the Company and The Prudential
Insurance Company of America (incorporated by reference to Exhibit 10.1 to the Companys
Annual Report on Form 10-K for the year ended December 31, 2005). |
10.2 |
|
First
Amendment to Note Purchase Agreement between the Company and The Prudential Insurance
Company of America dated May 1, 2002. |
10.3 |
|
Second
Amendment to Note Purchase Agreement, dated as of October 31, 2003 between the Company
and The Prudential Insurance Company of America (incorporated by reference to Exhibit
10.3 to the Companys Annual Report on Form 10-K for the year ended December 31,
2003). |
10.4 |
|
Third
Amendment to Note Purchase Agreement, dated as of May 18, 2004, between the Company and
The Prudential Insurance Company of America (incorporated by reference to Exhibit 10.2 to
the Companys Quarterly Report on Form 10-Q for the quarter ended June 30, 2004). |
-110-
10.5 |
|
Fourth
Amendment to Note Purchase Agreement, dated as of July 28, 2006, between the Company and
The Prudential Insurance Company of America (incorporated by reference to Exhibit 99.1 to
the Companys Current Report on Form 8-K filed on August 23, 2006). |
10.6 |
|
Fifth
Amendment to Note Purchase Agreement, dated as of October 5, 2006, between the Company
and The Prudential Insurance Company of America (incorporated by reference to Exhibit
99.1 to the Companys Current Report on Form 8-K filed on October 10, 2006). |
10.7 |
|
Sixth
Amendment to Note Purchase Agreement, dated as of November 7, 2007, between the Company
and The Prudential Insurance Company of America (incorporated by reference to Exhibit
99.1 to the Companys Current Report on Form 8-K filed on November 13, 2007). |
10.8 |
|
Credit
Agreement dated as of May 10, 2001 among the Company, various financial institutions, and
Bank of America, N.A., as Administrative Agent (incorporated by reference to Exhibit 10.7
to the Companys Annual Report on Form 10-K for the year ended December 31, 2006). |
10.9 |
|
First
Amendment to the Credit Agreement dated December 14, 2001 dated May 10, 2001 among the
Company, various financial institutions, and Bank of America, N.A. as Administrative
Agent (incorporated by reference to Exhibit 10.8 to the Companys Annual Report on
Form 10-K for the year ended December 31, 2006). |
10.10 |
|
Second
Amendment to Credit Agreement, dated as of October 22, 2003 between the Company, various
financial institutions, and Bank of America, N.A. as Administrative Agent (incorporated
by reference to Exhibit 10.11 to the Companys Annual Report on Form 10-K for the
year ended December 31, 2003). |
10.11 |
|
Third
Amendment to the Credit Agreement, dated as of May 10, 2004, among the Company, various
financial institutions, and Bank One, N.A. (incorporated by reference to Exhibit 10.1 to
the Companys Quarterly Report on Form 10-Q for the quarter ended June 30, 2004). |
10.12 |
|
Fourth
Amendment to the Credit Agreement, dated as of July 28, 2006, among the Company, various
financial institutions, and JP Morgan Chase Bank, N.A. (as successor to Bank One, N.A.
(incorporated by reference to Exhibit 99.2 to the Companys Current Report on Form
8-K filed on August 23, 2006). |
10.13 |
|
Fifth
Amendment to the Credit Agreement, dated as of October 5, 2006, among the Company,
various financial institutions, and JP Morgan Chase Bank, N.A. (as successor to Bank One,
N.A.) (incorporated by reference to Exhibit 99.2 to the Companys Current Report on
Form 8-K filed on October 10, 2006). |
-111-
10.14 |
|
Sixth
Amendment to the Credit Agreement, dated as of August 8, 2007, among the Company, various
financial institutions, and JP Morgan Chase Bank, N.A. (as successor to Bank One, N.S.)
(Incorporated by reference to Exhibit 99.1 to the Companys Current Report on Form
8-K filed August 15, 2007). |
10.15 |
|
Seventh
Amendment to Credit Agreement, dated as of November 7, 2007, among the Company, various
financial institutions, and JP Morgan Chase Bank, N.A. (as successor to Bank One, N.A.)
as administrative agent (incorporated by reference to Exhibit 99.2 to the Companys
Current Report on Form 8-K filed on November 13, 2007.) |
10.16 |
|
Private
Shelf Agreement, dated as of August 26, 2003, between the Company and Prudential
Investment Management, Inc. (the Private Shelf Agreement) (incorporated by
reference to Exhibit 10.2 to the Companys Quarterly Report on Form 10-Q for the
quarter ended September 30, 2003). |
10.17 |
|
First
Amendment to Private Shelf Agreement, dated as of October 31, 2003 between the Company
and Prudential Investment Management, Inc. (incorporated by reference to Exhibit 10.53 to
the Companys Annual Report on Form 10-K for the year ended December 31, 2003). |
10.18 |
|
Second
Amendment to Private Shelf Agreement, dated as of May 18, 2004, between the Company,
Prudential Investment Management, Inc., and the holders of the Series A Senior Notes and
Series B Senior Notes issued under the Private Shelf Agreement (incorporated by reference
to Exhibit 10.3 to the Companys Quarterly Report on Form 10-Q for the quarter ended
June 30, 2004). |
10.19 |
|
Third
Amendment to Private Shelf Agreement dated June 13, 2005 between the Company, Prudential
Investment Management, Inc. and certain other lenders (incorporated by reference to
Exhibit 10.1 to the Companys Quarterly Report on Form 10-Q for the quarter ended
June 30, 2005). |
10.20 |
|
Fourth
Amendment to Private Shelf Agreement dated July 28, 2006 between the Company, Prudential
Investment Management, Inc. and certain other lenders (incorporated by reference to
Exhibit 99.1 to the Companys Current Report on Form 8-K filed on August 23, 2006). |
10.21 |
|
Fifth
Amendment to Private Shelf Agreement dated October 5, 2006 between the Company,
Prudential Investment Management, Inc. and certain other lenders (incorporated by
reference to Exhibit 99.3 to the Companys Current Report on Form 8-K filed on
October 10, 2006). |
10.22 |
|
Sixth
Amendment to Private Shelf Agreement, dated as of November 7, 2007, between the Company,
Prudential Investment Management, Inc. and certain other lenders (incorporated by
reference to Exhibit 99.3 to the Companys Current Report on Form 8-K filed on
November 13, 2007). |
-112-
10.23 |
|
Series
A Senior Notes Nos. A-1 to A-5 and Series B Senior Notes B-1 to B-5 issued October 31,
2003 by the Company to Prudential Investment Management, Inc. and/or its affiliates
pursuant to the Private Shelf Agreement (incorporated by reference to Exhibit 10.54 to
the Companys Annual Report on Form 10-K for the year ended December 31, 2003). |
10.24 |
|
Series
C Senior Notes Nos. C-1 and C-2 issued February 7, 2005 by the Company to Prudential
Investment Management, Inc. and/or its affiliates pursuant to the Private Shelf Agreement
(incorporated by reference to Exhibit 99.2 to the Companys Current Report on Form
8-K filed February 8, 2005). |
10.25 |
Series D Senior Notes Nos. D-1, D-2, D-3 and D-4 issued October 5, 2006 by the Company to
Prudential Investment Management, Inc. and/or its affiliates pursuant to the Private Shelf
Agreement (incorporated by reference to Exhibit 99.4 to the Companys Current Report
on Form 8-K filed October 10, 2006). |
10.26 |
|
Series
E Senior Notes Nos. E-1, E-2, E-3, E-4 and E-5 issued January 19, 2007 by the Company to
Prudential Investment Management, Inc. and/or its affiliates pursuant to the Private
Shelf Agreement (incorporated by reference to Exhibit 99.1 to the Companys Current
Report on Form 8-K filed January 25, 2007). |
10.27 |
|
Pledge
Agreement dated October 12, 2000, by and between the Company and State Street Bank and
Trust Company of California, N.A., acting in its capacity as collateral agent
(incorporated by reference to Exhibit 10.5 to the Companys Annual Report on Form
10-K for the year ended December 31, 2005). |
10.28 |
|
Pledge
Amendments executed by the Company dated December 31, 2003 (incorporated by reference to
Exhibit 10.5 to the Companys Annual Report on Form 10-K for the year ended December
31, 2003). |
10.29 |
|
Series
E Senior Note E-6, issued July 20, 2007, by the Company to Prudential Insurance Company
of America pursuant to the Private Shelf Agreement (incorporated by reference to Exhibit
99.1 to the Companys Current Report on 8-K dated January 8, 2008). |
10.30 |
|
Series
EE Senior Note EE-1, issued January 8, 2008, by the Company to Prudential Insurance
Company of America pursuant to the Private Shelf Agreement (incorporated by reference to
Exhibit 99.2 to the Companys Current Report on 8-K dated January 8, 2008). |
10.31 |
|
Series
F Senior Notes Nos. F-1 and F-2 issued September 28, 2007 by the Company to Prudential
Investment Management, Inc. and/or its affiliates pursuant to the Private Shelf Agreement
(incorporated by reference to Exhibit 10.1 to the Companys Quarterly Report on Form
10-Q for the quarter ended September 30, 2007). |
-113-
10.32 |
|
Pledge
Agreement dated as of January 31, 2005 by and among Nu Skin Asia Investment, Inc., a
wholly-owned subsidiary of the Company, and U.S. Bank National Association, as agent for
and on behalf of the Benefited Parties under the Amended and Restated Collateral Agency
and Intercreditor Agreement (referred to below) (incorporated by reference to Exhibit
99.3 to the Companys Current Report on Form 8-K/A filed on March 10, 2005). |
10.33 |
|
Collateral
Agency Agreement dated October 12, 2000, by and between the Company, State Street Bank
and Trust Company of California, N.A., as Collateral Agent, and the lenders and
noteholders party thereto (incorporated by reference to Exhibit 10.8 to the Companys
Annual Report on Form 10-K for the year ended December 31, 2005). |
10.34 |
|
Amendment
to Collateral Agency and Intercreditor Agreement dated May 10, 2000, among State Street
Bank and Trust Company of California, N.A., as Collateral Agent, The Prudential Insurance
Company of America, as Senior Noteholder and ABN AMRO Bank N.V., as Senior Lender
(incorporated by reference to Exhibit 10.27 to the Companys Annual Report on Form
10-K for the year ended December 31, 2006). |
10.35 |
|
Amended
and Restated Collateral Agency and Intercreditor Agreement, dated as of August 26, 2003,
by and among Nu Skin Enterprises, Inc. and various of its subsidiaries, U.S. Bank
National Association, as Collateral Agent, and various lending institutions (incorporated
by reference to Exhibit No. 10.2 to the Companys Quarterly Report on Form 10-Q for
the quarter ended September 30, 2003). |
10.36 |
|
Master
Lease Agreement dated January 16, 2003, by and between Nu Skin International, Inc. and Scrub Oak, LLC |
10.37 |
|
Amendment
No. 1 to the Master Lease Agreement, effective as of July 1, 2003, between Nu Skin
International Inc. and Scrub Oak, LLC (incorporated by
reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 2003). |
10.38 |
|
Master
Lease Agreement dated January 16, 2003, by and between Nu Skin International, Inc. and Aspen Country, LLC. |
10.39 |
|
Amendment
No. 1 to the Master Lease Agreement, effective as of July 1, 2003, between Nu Skin
International Inc. and Aspen Country, LLC (incorporated by
reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 2003). |
10.40 |
|
University
of Utah Research Foundation and Nu Skin International, Inc. Amended and Restated Patent
License Agreement (Exclusive) Dietary Supplement Preventative Healthcare License dated
July 1, 2006 (incorporated by reference to Exhibit 10.33 to the Companys Annual
Report on Form 10-K for the year ended December 31, 2006). |
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10.41 |
|
Agreement
and Plan of Merger among Nu Skin International, Inc., Pharmanex License Acquisition
Corporation, Caroderm, Inc. and certain shareholders of
Caroderm, Inc. dated as of March 7, 2006 (incorporated by reference to
Exhibit 10.58 to the Company's Annual Report on Form 10-K/A
filed March 17, 2006). |
10.42 |
|
Form
of Lock-up Agreement executed by certain of the Companys shareholders (incorporated
by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K filed
November 10, 2003). |
*10.43 |
|
Form
of Indemnification Agreement to be entered into between the Company and certain of its
officers and directors (incorporated by reference to Exhibit 10.2 to the Companys
Quarterly Report on Form 10-Q for the quarter ended June 30, 2005). |
*10.44 |
|
Amendment
in Total and Complete Restatement of Deferred Compensation Plan. (incorporated by
reference to Exhibit 10.34 to the Companys Annual Report on Form 10-K for the year
ended December 31, 2004). |
*10.45 |
Nu Skin Enterprises, Inc. Deferred Compensation Plan dated December 12, 2005 (incorporated
by reference to Exhibit 99.1 to the Companys Current Report on Form 8-K filed
December 19, 2005). |
*10.46 |
|
Amendment
and Restated Deferred Compensation Plan dated January 1, 2008 (incorporated by reference
to Exhibit 10.5 to the Companys Quarterly Report on Form 10-Q for the quarter ended
September 30, 2007). |
*10.47 |
|
Nu
Skin Enterprises, Inc. Nonqualified Deferred Compensation Trust dated December 12, 2005
(incorporated by reference to Exhibit 99.2 to the Companys Current Report on Form
8-K filed December 19, 2005). |
*10.48 |
|
Second
Amended and Restated Nu Skin Enterprises, Inc. 1996 Stock Incentive Plan (incorporated by
reference to Exhibit 10.28 to the Companys Annual Report on Form 10-K for the year
ended December 31, 2005). |
*10.49 |
|
Form
of Master Stock Option Agreement (1996 Plan). |
*10.50 |
|
Form
of Stock Option Agreement for Directors (1996 Plan) (incorporated by reference to Exhibit
10.43 to the Companys Annual Report on Form 10-K for the year ended December 31,
2006). |
*10.51 |
|
Form
of Contingent Stock Award Agreement for Directors (1996 Plan) (incorporated by reference
to Exhibit 10.55 to the Companys Annual Report on Form 10-K/A filed for the year
ended December 31, 2005). |
*10.52 |
|
Nu
Skin Enterprises, Inc. 2006 Stock Incentive Plan (incorporated by reference to
Exhibit 10.1 to the Company's Current Report on Form 8-K
filed on June 1, 2006). |
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*10.53 |
|
Form
of Master Stock Option Agreement (2006 Plan) (incorporated by reference to Exhibit 10.10
to the Companys Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 2006). |
*10.54 |
|
Form
of Master Stock Option Agreement (2006 Plan Performance Option (U.S.)). |
*10.55 |
|
Form
of Master Stock Option Agreement (2006 Plans Performance Option (non-U.S.)). |
*10.56 |
|
Form
of Master Stock Option Agreement for Directors (2006 Plan) (incorporated by reference to
Exhibit 10.47 to the Companys Annual Report on Form 10-K for the year 2006). |
10.57 |
|
Form
of Revised Director Stock Option Agreement (2006 Plan) (incorporated by reference to
Exhibit 10.3 to the Companys Quarterly Report on Form 10-Q for the quarter ended
June 30, 2007). |
10.58 |
Form of Director Restricted Stock Unit Agreement (2006 Plan) (incorporated by reference to
Exhibit 10.4 to the Companys Quarterly Report on Form 10-Q for the quarter ended
June 30, 2007). |
*10.59 |
|
Form
of Master Restricted Stock Unit Agreement (2006 Plan) (incorporated by reference to
Exhibit 10.11 to the Companys Quarterly Report on Form 10-Q for the quarterly
period ended September 30, 2006). |
*10.60 |
|
Intentionally left blank. |
*10.61 |
|
Nu
Skin Enterprises, Inc. 2006 Senior Executive Incentive Plan (incorporated
by reference to Exhibit 10.2 to the Company's Current
Report on Form 8-K filed on June 1, 2006). |
*10.62 |
|
Performance
Targets and Formulas for 2007 (Approved under the 2006 Senior Executive Incentive Plan)
(incorporated by reference to Exhibit 10.62 to the Companys Annual Report on Form
10-K for the year ended December 31, 2006). |
*10.63 |
|
Performance
Targets and Formulas 2008 (Approved under the 2006 Senior Executive Incentive Plan). |
*10.64 |
|
Nu
Skin Enterprises, Inc. Senior Executive Benefits Policy (incorporated by reference to
Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 2005). |
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*10.65 |
|
Summary
Description of Nu Skin Japan Director Retirement Allowance Plan (incorporated by
reference to Exhibit 10.53 to the Companys Annual Report on Form 10-K for the year
2006). |
*10.66 |
|
Nu
Skin International, Inc. 1997 Key Employee Death Benefit Plan (incorporated by reference
to Exhibit 10.59 to the Company's Annual Report on Form 10-K
for the year ended December 31, 2003). |
*10.67 |
|
Employment
Letter between the Company and Truman Hunt dated January 17, 2003. |
*10.68 |
|
Amendment
to Employment Letter with M. Truman Hunt dated September 22, 2005 and Amendment to
provisions of the Companys Executive Incentive Plan with respect to Mr. Hunt
(incorporated by reference to Exhibit 10.1 to the Companys Quarterly Report on Form
10-Q for the quarter ended September 30, 2005). |
*10.69 |
|
CEO
compensation changes (incorporated by reference to Exhibit 10.7 to the Companys
Quarterly Report on Form 10-Q for the quarter ended March 31, 2006). |
*10.70 |
|
Restricted
Stock Purchase Agreement, dated as of January 17, 2003, between the Company and Truman
Hunt (incorporated by reference to Exhibit 10.61 to the Companys Annual Report on
Form 10-K for the year ended December 31, 2003). |
*10.71 |
|
Employment
Letter with Robert Conlee effective November 26, 2003 (incorporated by reference to
Exhibit 3.2 to the Companys Annual Report on Form 10-K for the year ended December
31, 2003). |
*10.72 |
|
Joseph
Y. Chang Employment Agreement dated April 17, 2006 between Mr. Chang and the
Company (incorporated by reference to Exhibit 10.1 to the Companys current report
on Form 8-K filed on April 18, 2006). |
*10.73 |
|
Daniel
Chard Employment Agreement effective February 13, 2006 between Mr. Chard and the Company
(incorporated by reference to Exhibit 10.61 to the Companys Annual Report on Form
10-K for the year ended December 31, 2006). |
*10.74 |
|
Summary
of Non-management Director compensation (revised effective year 2007) (incorporated by
reference to Exhibit 10.63 to the Companys Annual Report on Form 10-K for the year
ended December 31, 2006). |
*10.75 |
|
Event
Appearance Bonus Guidelines (Approved for Sandra Tillotson in October 2006) (incorporated
by reference to Exhibit 10.67 to the Companys Annual Report on Form 10-K for the
year ended December 31, 2006). |
*10.76 |
|
Andrew
Fan Employment Letter Agreement dated August 10, 2007 between Mr. Fan and the Company
(incorporated by reference to Exhibit 10.7 to the Companys Quarterly Report on Form
10-Q for the quarter ended September 30, 2007). |
-117-
*10.77 |
|
Gary
Sumihiro Employment Letter dated March 16, 2007 between Mr. Sumihiro and the Company
(incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form
8-K filed August 9, 2007). |
*10.78 |
|
Form
of Key Employee Covenants (incorporated by reference to Exhibit 10.2 to the Companys
Quarterly Report on Form 10-Q for the quarter ended June 30, 2007). |
*10.79 |
|
Settlement
and Release Agreement for Robert Conlee dated August 18, 2007 (incorporated by reference
to Exhibit 99.1 to the Companys Current Report on Form 8-K filed August 23, 2007). |
*10.80 |
|
Robert
Conlee Letter of Understanding dated July 6, 2007 (incorporated by reference to Exhibit
99.2 to the Companys Current Report on Form 8-K filed August 23, 2007). |
10.81 |
|
Accelerated
Share Repurchase Agreement between the Company and JP Morgan Chase Bank, N.A.
(incorporated by reference to Exhibit 99.7 to the Companys Current Report on Form
8-K filed November 13, 2007). |
10.82 |
|
Seventh
Amendment to Note Purchase Agreement, dated as of February 25, 2008, between the Company
and The Prudential Insurance Company of America. |
10.83 |
|
Seventh
Amendment to Private Shelf Agreement, dated as of February 25, 2008, between the
Company, Prudential Investment Management, Inc. and certain
other lenders. |
10.84 |
|
Letter
Agreement between the Company and The Prudential Insurance Company of America
(incorporated by reference to Exhibit 99.4 to the Companys Current Report on Form
8-K filed November 7, 2007). |
10.85 |
|
Letter
Agreement among the Company, various financial institutions, and JPMorgan Chase Bank,
N.A. (as successor to Bank of America, N.A.) as administrative agent (incorporated by
reference to Exhibit 99.5 to the Companys Current Report on Form 8-K filed November
7, 2007). |
10.86 |
|
Letter
Agreement among the Company, Prudential Investment Management, Inc. and certain other
lenders (incorporated by reference to Exhibit 99.6 to the Companys Current Report
on Form 8-K filed November 7, 2007). |
10.87 |
|
Eighth Amendment to Credit Agreement, dated as of
February 29, 2008, among the Company, various financial institutions, and JP Morgan Chase Bank, N.A. (as
successor to Bank One, N.A.) as successor administrative agent. |
21.1 |
|
Subsidiaries
of the Company. |
23.1 |
|
Consent
of PricewaterhouseCoopers LLP. |
31.1 |
|
Certification
by M. Truman Hunt, President and Chief Executive Officer, pursuant to Rule 13a-14(a) of
the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. |
-118-
31.2 |
|
Certification
by Ritch N. Wood, Chief Financial Officer, pursuant to Rule 13a-14(a) of the Securities
Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002. |
32.1 |
|
Certification
by M. Truman Hunt, President and Chief Executive Officer, pursuant to Section 1350,
Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. |
32.2 |
|
Certification
by Ritch N. Wood, Chief Financial Officer, pursuant to Section 1350, Chapter 63 of Title
18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002. |
-119-