AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 4, 1997
FILE NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
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NU SKIN ASIA PACIFIC, INC.
(Exact Name of Registrant as Specified in Its Charter)
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DELAWARE 5122 87-0565309
(State or Jurisdiction of (Primary Standard (I.R.S. Employer
Incorporation or Industrial Identification No.)
Organization) Classification Code
Number)
75 WEST CENTER STREET
PROVO, UTAH 84601
(801) 345-6100
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
STEVEN J. LUND, PRESIDENT
NU SKIN ASIA PACIFIC, INC.
75 WEST CENTER STREET
PROVO, UTAH 84601
(801) 345-6100
(Name, and address, including zip code, and telephone number,
including area code, of agent for service)
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COPIES TO:
NOLAN S. TAYLOR, ESQ. M. TRUMAN HUNT, ESQ. WILLIAM H. HINMAN, JR., ESQ.
LeBoeuf, Lamb, Greene & MacRae, L.L.P. Nu Skin Asia Pacific, Shearman & Sterling
1000 Kearns Building Inc. 555 California Street, Suite
136 South Main Street 75 West Center Street 2000
Salt Lake City, Utah 84101-1685 Provo, Utah 84601 San Francisco, CA 94104
(801) 320-6700 (801) 345-6100 (415) 616-1100
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
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If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. / /
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
CALCULATION OF REGISTRATION FEE
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED(1)(2) SHARE PRICE(3) FEE(3)
Class A Common Stock, $.001 par value............. 8,050,000 $26.8125 $215,840,625 $65,407
(1) All 8,050,000 shares are being offered by certain stockholders of the
Company, including 840,000 shares and 210,000 shares which the U.S.
Underwriters and the International Managers, respectively, have the option
to purchase from certain stockholders to cover over-allotments, if any.
(2) The amount of shares registered also includes any shares initially offered
or sold outside the United States that are thereafter sold or resold in the
United States. Offers and sales of shares outside the United States are
being made pursuant to the exemption afforded by Rule 901 of Regulation S
and this Registration Statement shall not be deemed effective with respect
to such offers and sales.
(3) Pursuant to Rule 457(c), the proposed maximum offering price per share and
registration fee are based upon the average of the high and low prices of
the Registrant's Class A Common Stock on June 3, 1997, as reported on The
New York Stock Exchange, Inc. consolidated transaction system.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED JUNE 4, 1997
P_R_O_S_P_E_C_T_U_S
7,000,000 SHARES
[NU SKIN LOGO]
CLASS A COMMON STOCK
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All of the shares of Class A Common Stock, par value $.001 per share (the
"Class A Common Stock"), of Nu Skin Asia Pacific, Inc., a Delaware corporation
(the "Company"), offered hereby are being offered by certain stockholders of the
Company (the "Selling Stockholders"). See "Principal and Selling Stockholders."
Of the 7,000,000 shares of Class A Common Stock offered hereby, 5,600,000 shares
are being offered initially in the United States and Canada by the U.S.
Underwriters (the "U.S. Offering"), and 1,400,000 shares are being offered
initially in a concurrent offering outside the United States and Canada by the
International Managers (the "International Offering," together with the U.S.
Offering, the "Offerings"). See "Underwriting."
Each share of Class A Common Stock entitles its holder to one vote, and each
share of Class B Common Stock (the "Class B Common Stock," together with the
Class A Common Stock, the "Common Stock") of the Company entitles its holder to
ten votes. All of the shares of Class B Common Stock are held by the Selling
Stockholders and certain of their affiliates. After consummation of the
Offerings, the Selling Stockholders and such affiliates will beneficially own
shares of Common Stock having approximately 97.2% of the combined voting power
of the outstanding shares of Common Stock (approximately 97.0% if the
underwriters' over-allotment options are exercised in full). Each share of Class
B Common Stock is convertible into one share of Class A Common Stock at the
option of the holder of Class B Common Stock and in certain other instances. See
"Description of Capital Stock--Common Stock--Conversion."
The Class A Common Stock is traded on the New York Stock Exchange under the
symbol "NUS." On June 3, 1997, the last reported sale price of the Class A
Common Stock was $26 3/4 per share.
SEE "RISK FACTORS," BEGINNING ON PAGE 11, FOR A DISCUSSION OF CERTAIN
FACTORS WHICH SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE SECURITIES
OFFERED HEREBY.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
PRICE TO UNDERWRITING PROCEEDS TO SELLING
PUBLIC DISCOUNT(1) STOCKHOLDERS(2)
Per Share....................................... $ $ $
Total (3)....................................... $ $ $
(1) The Company and the Selling Stockholders have agreed to indemnify the U.S.
Underwriters and the International Managers against certain liabilities,
including liabilities under the Securities Act of 1933, as amended. See
"Underwriting."
(2) Before deducting expenses of the Offerings, which are payable by the Selling
Stockholders and estimated to be $600,000.
(3) Certain of the Selling Stockholders have granted the U.S. Underwriters and
the International Managers options, exercisable within 30 days after the
date hereof, to purchase up to 840,000 and 210,000 additional shares of
Class A Common Stock, respectively, solely to cover over-allotments, if any.
If such options are exercised in full, the total Price to Public,
Underwriting Discount and Proceeds to Selling Stockholders will be $ ,
$ and $ , respectively. See "Underwriting."
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The shares of Class A Common Stock offered hereby are offered by the
Underwriters, subject to prior sale, when, as and if issued to and accepted by
them, subject to approval of certain legal matters by counsel for the
Underwriters and certain other conditions. The Underwriters reserve the right to
withdraw, cancel or modify such offer and to reject orders in whole or in part.
It is expected that delivery of certificates for the shares of Class A Common
Stock will be made in New York, New York on or about , 1997.
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MERRILL LYNCH & CO.
MORGAN STANLEY DEAN WITTER
NOMURA SECURITIES INTERNATIONAL, INC.
PAINEWEBBER INCORPORATED
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THE DATE OF THIS PROSPECTUS IS JUNE , 1997.
[COMPANY LOGO AND THE WORDS "SCIENCE," "NATURE" AND "BEST OF SCIENCE &
NATURE."]
Certain persons participating in these offerings may engage in transactions that
stabilize, maintain or otherwise affect the price of the Class A Common Stock.
Such transactions may include stabilizing and the purchase of shares of Class A
Common Stock to cover syndicate short positions. For a description of these
activities, see "Underwriting."
2
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN
CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND THE FINANCIAL STATEMENTS AND
NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE NOTED,
ALL INFORMATION IN THIS PROSPECTUS ASSUMES NO EXERCISE OF THE UNDERWRITERS'
OVER-ALLOTMENT OPTIONS. AS USED HEREIN, "NU SKIN ASIA PACIFIC" OR THE "COMPANY"
MEANS NU SKIN ASIA PACIFIC, INC. AND THE SUBSIDIARIES. THE "SUBSIDIARIES" MEANS
NU SKIN HONG KONG, INC. ("NU SKIN HONG KONG"), NU SKIN JAPAN COMPANY, LIMITED
("NU SKIN JAPAN"), NU SKIN KOREA, INC. ("NU SKIN KOREA"), NU SKIN TAIWAN, INC.
("NU SKIN TAIWAN") AND NU SKIN PERSONAL CARE (THAILAND) LIMITED ("NU SKIN
THAILAND"), COLLECTIVELY. UNTIL SEPTEMBER 30, 1994, THE COMPANY'S FISCAL YEAR
ENDED ON SEPTEMBER 30 OF EACH YEAR. AS OF OCTOBER 1, 1994, THE COMPANY CHANGED
ITS FISCAL YEAR END TO DECEMBER 31 OF EACH YEAR, BEGINNING WITH THE FISCAL YEAR
ENDED DECEMBER 31, 1995.
THE COMPANY
Nu Skin Asia Pacific is a rapidly growing network marketing company involved
in the distribution and sale of premium quality, innovative personal care and
nutritional products. The Company is the exclusive distribution vehicle for Nu
Skin International, Inc. ("Nu Skin International" or "NSI") in the countries of
Japan, Taiwan, Hong Kong (including Macau), South Korea and Thailand, where the
Company currently has operations, and in Indonesia, Malaysia, the People's
Republic of China ("PRC"), the Philippines, Singapore and Vietnam, where
operations have not commenced.
The Company believes it is one of the fastest growing network marketing
companies in Asia. Revenue increased 69.9% to $211.0 million for the three
months ended March 31, 1997 from $124.2 million for the same period in 1996. Net
income increased 38.5% to $20.5 million for the three months ended March 31,
1997 from $14.8 million for the same period in 1996. Revenue increased 89.2% to
$678.6 million for the year ended December 31, 1996 from $358.6 million in 1995.
Operating expenses have increased with the growth of the Company's revenue. Net
income increased 103.2% to $81.7 million for the year ended December 31, 1996
from $40.2 million in 1995. The Company's network of independent distributors
has grown since the Company's inception in 1991 to more than 400,000 active
distributors as of March 31, 1997. See "Risk Factors--Managing Growth."
A great deal of the Company's success to date is the result of the growth of
its Japanese business, which can be attributed to an increasing awareness of the
Nu Skin and IDN brands. Significant revenue was recognized from the outset of
the Company's operations in Japan in 1993 due to the immediate attention given
to the market by leading NSI distributors from around the world. Japan has
continued to post strong financial results for the Company, with revenue
increasing by approximately 64% in U.S. dollars and 90% in local currency for
1996 compared to 1995 and by approximately 55% in U.S. dollars and 76% in local
currency for the three months ended March 31, 1997 compared to the same period
in 1996. Given the size of the direct selling market in Japan and the growing
Japanese demand for the Company's premium quality and innovative products,
management believes that there is still significant opportunity for revenue
growth in this market.
The Company's product philosophy is to combine the best of science and
nature in developing premium quality, innovative personal care and nutritional
products which are specifically designed for the network marketing distribution
channel. The Company offers products in two distinct categories: personal care
products, marketed under the trademark "Nu Skin," and nutritional products,
marketed under the trademark "Interior Design Nutritionals" ("IDN"). The Nu Skin
personal care product lines include facial care, body care, hair care and color
cosmetics, as well as specialty products such as sun protection, oral hygiene
and fragrances. The IDN product lines include nutritional supplements,
nutritious and healthy snacks, sports and fitness nutritional products and
botanical supplements.
In Japan, Taiwan and Hong Kong, the Company currently offers most of the Nu
Skin personal care products and approximately one-third of the Interior Design
Nutritionals products, including LIFEPAK, the
3
core IDN nutritional supplement. In South Korea and Thailand, the Company
currently offers approximately one-half and one-third, respectively, of the Nu
Skin personal care products, including most of the Nu Skin core facial and hair
care products, and none of the nutritional products. The Company believes that
it can significantly grow its business and attract new customers by expanding
its product offerings in each of its markets to include more of the existing Nu
Skin personal care and IDN products. In addition to expanding its product
offerings with existing Nu Skin personal care and IDN products, the Company
intends to introduce new products tailored to specific markets.
The distribution of products through the network marketing and other direct
selling channels has grown significantly in recent years. The World Federation
of Direct Selling Associations ("WFDSA") reports that, since 1990, worldwide
direct distribution of goods and services to consumers has increased 76%,
resulting in the sale of nearly $80 billion of goods and services in 1996.
According to the WFDSA, $35 billion of goods and services were sold by its
members in 1996 through direct selling channels in the markets in which the
Company currently operates, which represents 44% of the global volume of direct
sales by its members.
OPERATING STRENGTHS AND GROWTH STRATEGY
The Company believes that its success to date is due to its reputation and
commitment to provide a wide range of premium quality, innovative personal care
and nutritional products and an appealing global business opportunity for
persons interested in establishing a direct sales business. Specifically, the
Company's operating strengths include (i) its premium product offerings, (ii) a
unique global distributor compensation plan (the "Global Compensation Plan"),
which compensates distributors for product sales in downline distribution
networks in any country in which NSI and its affiliates operate, (iii) a
comparatively high level of distributor incentives paid to independent
distributors under the Global Compensation Plan, (iv) a systematic market
development program, (v) individual distributor attention and other distributor
support programs and (vi) an experienced management team at both the Company and
the Subsidiaries. See "Business--Operating Strengths." Consideration of the
Company's operating strengths must be tempered by consideration of various risks
which impact or may impact the Company and its operations. See "Risk Factors."
The Company's primary objective is to capitalize on its operating strengths
to become a leading distributor of consumer products in each of its markets. The
Company intends to pursue this strategy by (i) introducing new products, (ii)
opening new markets, (iii) attracting new distributors and enhancing distributor
productivity and (iv) increasing brand awareness and loyalty. See
"Business--Growth Strategy." Consideration of the Company's growth strategy
should be made in connection with a consideration of the risks associated with
such growth strategy. See "Risk Factors."
RELATIONSHIP WITH NU SKIN INTERNATIONAL
NSI, founded in 1984 and based in Provo, Utah, is engaged in selling
personal care and nutritional products and, together with its affiliates,
comprises one of the largest network marketing organizations in the world. NSI
has provided, and will continue to provide, a high level of support services to
the Company, including product development, distributor support services,
marketing and other managerial support services. Management believes that the
Company's relationship with NSI has allowed the Company to increase revenue and
net income at rates that otherwise may not have been possible. Since distributor
agreements are entered into between NSI and distributors, all of the
distributors who generate revenue for the Company are distributors of NSI. The
Company primarily relies on NSI to enforce distributor policies and procedures.
NSI's distributor network is licensed by NSI to the Subsidiaries. See "Risk
Factors-- Reliance Upon Independent Distributors of NSI" and "--Relationship
with and Reliance on NSI; Potential Conflicts of Interest."
4
RECENT EVENTS
THE REORGANIZATION. The Company was incorporated on September 4, 1996. On
November 20, 1996, the stockholders of Nu Skin Japan, Nu Skin Taiwan, Nu Skin
Hong Kong, Nu Skin Korea and Nu Skin Thailand contributed their shares of
capital stock to the capital of the Company in a transaction (the
"Reorganization") intended to qualify under Section 351 of the Internal Revenue
Code of 1986, as amended (the "Code"), in exchange for shares of the Company's
Class B Common Stock, par value $.001 per share (the "Class B Common Stock").
Prior to the Reorganization, all of the outstanding shares of the Subsidiaries
were held by these stockholders. As a result of the Reorganization, each of the
Subsidiaries became a wholly-owned subsidiary of the Company.
THE INITIAL PUBLIC OFFERINGS. In November 1996, the Company and certain
stockholders sold a total of 10,465,000 shares of Class A Common Stock in
underwritten public offerings (the "Initial Underwritten Offerings"). The
Company issued and sold 4,750,000 shares of Class A Common Stock as part of this
transaction. In December 1996, in non-underwritten offerings (the "Rule 415
Offerings," and, together with the Initial Underwritten Offerings, the "Initial
Public Offerings") pursuant to Rule 415 of the Securities Act of 1933, as
amended (the "1933 Act"): (i) NSI offered to qualifying NSI distributors options
(the "Distributor Options") to purchase 1,605,000 shares of Class A Common
Stock; (ii) the Company offered 1,605,000 shares of Class A Common Stock to be
issued upon the exercise of the Distributor Options; (iii) the Company offered
to its employees 150,959 shares of Class A Common Stock in connection with the
awarding of employee stock bonus awards; and (iv) NSI and certain of its
affiliates offered 1,250,000 shares of Class A Common Stock to their employees
as stock bonus awards. The Distributor Options are expected to become
exercisable in January 1998 and will remain exercisable until December 31, 2001.
5
THE OFFERINGS
Class A Common Stock offered by the
Selling Stockholders(1):
U.S. Offering........................ 5,600,000 shares
International Offering............... 1,400,000 shares
Total............................ 7,000,000 shares
Common Stock to be outstanding after the
Offerings(1):
Class A Common Stock(2)(3)(4)........ 18,723,011 shares
Class B Common Stock(2)(4)........... 64,696,675 shares
Total Common Stock(3)............ 83,419,686 shares
New York Stock Exchange symbol........... "NUS"
Use of proceeds.......................... The Company will not receive any of the proceeds
from the Offerings.
Voting rights............................ The Class A Common Stock and Class B Common
Stock vote as a single class on all matters,
except as otherwise required by law, with each
share of Class A Common Stock entitling its
holder to one vote and each share of Class B
Common Stock entitling its holder to ten votes.
In all other respects the holders of Class A
Common Stock and the holders of Class B Common
Stock have equal rights. All of the shares of
Class B Common Stock are owned by the Selling
Stockholders and certain of their affiliates.
After the consummation of the Offerings, the
Selling Stockholders and certain of their
affiliates will beneficially own shares of
Common Stock having approximately 97.2% of the
combined voting power of the outstanding shares
of Common Stock (approximately 97.0% if the
underwriters' over-allotment options are
exercised in full).
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(1) Assumes no exercise of the underwriters' over-allotment options aggregating
1,050,000 shares of Class A Common Stock, which have been granted by certain
of the Selling Stockholders.
(2) Gives effect to the conversion by the Selling Stockholders prior to the
Offerings of 7,000,000 shares of Class B Common Stock into shares of Class A
Common Stock for issuance and sale in the Offerings.
(3) Does not include: (i) 4,000,000 shares of Class A Common Stock reserved for
issuance pursuant to the Nu Skin Asia Pacific, Inc. 1996 Stock Incentive
Plan (the "1996 Stock Incentive Plan"), including 150,959 shares of Class A
Common Stock issuable pursuant to employee stock bonus awards granted by the
Company to certain employees pursuant to this Plan; (ii) 1,605,000 shares of
Class A Common Stock that are held as treasury shares by the Company and are
reserved for issuance upon the exercise of the Distributor Options granted
to NSI and offered to NSI distributors in connection with the Rule 415
Offerings; and (iii) 250,825 shares of Class A Common Stock subject to a
stock option which was granted to an executive officer of the Company. See
"Management--1996 Stock Incentive Plan," "Certain Relationships and Related
Transactions" and "Shares Eligible for Future Sale."
(4) All shares of Class B Common Stock are currently held by the Selling
Stockholders and certain of their affiliates, and each such share is
convertible at any time into one share of Class A Common
6
Stock and converts automatically into one share of Class A Common Stock (i)
upon a transfer to a person other than a Selling Stockholder or certain
other stockholders of the Company, and (ii) if the number of shares of Class
B Common Stock becomes less than 10% of the aggregate number of shares of
Common Stock outstanding. See "Description of Capital Stock--Common Stock--
Conversion."
FORWARD-LOOKING STATEMENTS
Statements made herein under the captions "--Operating Strengths and Growth
Strategy," "Risk Factors--Seasonality and Cyclicality; Variations in Operating
Results," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "--Seasonality and Cyclicality," "--Outlook,"
"Business--Operating Strengths," "--Growth Strategy," "--Country Profiles," are
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995 (the "Reform Act"). In addition, when used in this
Prospectus the words or phrases "will likely result," "expects," "intends,"
"will continue," "is anticipated," "estimates," "projects," "management
believes," "the Company believes" and similar expressions are intended to
identify "forward-looking statements" within the meaning of the Reform Act.
Forward-looking statements include plans and objectives of management for future
operations, including plans and objectives relating to the products and the
future economic performance and financial results of the Company. The
forward-looking statements and associated risks set forth herein relate to the:
(i) expansion of the Company's market share in its current markets; (ii)
Company's entrance into new markets; (iii) development of new products and new
product lines tailored to appeal to the particular needs of consumers in
specific markets; (iv) stimulation of product sales by introducing new products;
(v) opening of new offices, walk-in distribution centers and distributor support
centers in certain markets; (vi) promotion of distributor growth, retention and
leadership through local initiatives; (vii) upgrading of the Company's
technological resources to support distributors; (viii) obtaining of regulatory
approvals for certain products, including LIFEPAK; (ix) stimulation of product
purchases by inactive distributors through direct mail campaigns; (x) retention
of the Company's earnings for use in the operation and expansion of the
Company's business; and (xi) development of brand awareness and loyalty. All
forward-looking statements are subject to certain risks and uncertainties,
including those discussed under the caption "Risk Factors" herein, that could
cause actual results to differ materially from historical results and those
presently anticipated or projected. The Company wishes to caution readers not to
place undue reliance on any such forward-looking statements, which speak only as
of the date made. The Company wishes to advise readers that the important
factors listed under the caption "Risk Factors" could affect the Company's
financial performance and could cause the Company's actual results for future
periods to differ materially from any views or statements expressed with respect
to future periods. Important factors and risks that might cause such differences
include, but are not limited to, factors related to the Company's reliance upon
independent distributors of NSI, the potential effects of adverse publicity, the
potential negative impact of distributor actions, currency risks, seasonal and
cyclical trends, variations in operating results, government regulation of
direct selling activities, government regulation of products and marketing,
other regulatory issues, the Company's reliance on certain distributors, the
potential divergence of interests between distributors and the Company, the
Company's entering new markets, managing the Company's growth, the possible
adverse effects on the Company of a change in the status of Hong Kong, the
Company's relationship with and reliance on NSI, potential conflicts of interest
between the Company and NSI, control of the Company by the Selling Stockholders
and certain of their affiliates, the anti-takeover effects of dual classes of
common stock, certain charter, contractual and statutory provisions, the adverse
impact on the Company's operating results of the Distributor Option program,
product returns, regulatory and taxation risks, the Company's reliance on and
the concentration of outside manufacturers, the Company's reliance on the
operations of and dividends and distributions from the Subsidiaries, taxation
and transfer pricing, the potential increase in distributor compensation
expense, product liability issues, market conditions and competition, the
Company's operations outside the U.S., import restrictions, duties on and
regulation of consumer goods, and the absence of dividends. In light of
7
the significant uncertainties inherent in forward-looking statements, the
inclusion of any such statement should not be regarded as a representation by
the Company or any other person that the objectives or plans of the Company will
be achieved. See "Risk Factors."
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NU SKIN-REGISTERED TRADEMARK-, INTERIOR DESIGN NUTRITIONALS-TM-,
IDN-REGISTERED TRADEMARK-, A LOGO CONSISTING OF AN IMAGE OF A GOLD FOUNTAIN WITH
THE WORDS "NU SKIN" BELOW IT, AND A LOGO CONSISTING OF THE STYLIZED LETTERS
"IDN" IN BLACK AND RED ARE TRADEMARKS OF NSI WHICH ARE LICENSED TO THE COMPANY.
THE ITALICIZED PRODUCT NAMES USED IN THIS PROSPECTUS ARE PRODUCT NAMES AND ALSO,
IN CERTAIN CASES, TRADEMARKS AND ARE THE PROPERTY OF NSI. ALL OTHER TRADENAMES
AND TRADEMARKS APPEARING IN THIS PROSPECTUS ARE THE PROPERTY OF THEIR RESPECTIVE
HOLDERS. SEE "BUSINESS--RELATIONSHIP WITH NSI--TRADEMARK/TRADENAME LICENSE
AGREEMENTS," "--LICENSING AND SALES AGREEMENTS" AND "--KOREAN OPERATING
AGREEMENTS." THE PRINCIPAL EXECUTIVE OFFICES OF THE COMPANY ARE LOCATED AT 75
WEST CENTER STREET, PROVO, UTAH 84601, AND THE COMPANY'S TELEPHONE NUMBER IS
(801) 345-6100.
IN THIS PROSPECTUS, REFERENCES TO "DOLLARS" AND "$" ARE TO UNITED STATES
DOLLARS, AND THE TERMS "UNITED STATES" AND "U.S." MEAN THE UNITED STATES OF
AMERICA, ITS STATES, TERRITORIES, POSSESSIONS AND ALL AREAS SUBJECT TO ITS
JURISDICTION, REFERENCES TO "YEN" AND "Y" ARE TO JAPANESE YEN, AND REFERENCES TO
"WON" ARE TO SOUTH KOREAN WON.
8
SUMMARY CONSOLIDATED FINANCIAL AND OTHER INFORMATION
The following tables set forth summary consolidated, pro forma and other
financial information of the Company.
THREE
MONTHS
ENDED
YEAR ENDED SEPTEMBER 30, YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------- ------------------------------- ---------
1992 1993 1994 1994(1) 1995 1996 1996
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
INCOME STATEMENT DATA:
Revenue........................................... $ 42,919 $ 110,624 $ 254,637 $ 264,440 $ 358,609 $ 678,596 $ 124,185
Cost of sales..................................... 14,080 38,842 86,872 82,241 96,615 193,158 34,815
--------- --------- --------- --------- --------- --------- ---------
Gross profit...................................... 28,839 71,782 167,765 182,199 261,994 485,438 89,370
Operating expenses:
Distributor incentives.......................... 14,659 40,267 95,737 101,372 135,722 249,613 46,181
Selling, general and administrative............. 10,065 27,150 44,566 48,753 67,475 105,477 20,027
Distributor stock expense....................... -- -- -- -- -- 1,990 --
--------- --------- --------- --------- --------- --------- ---------
Operating income.................................. 4,115 4,365 27,462 32,074 58,797 128,358 23,162
Other income (expense), net....................... 160 133 443 (394) 511 2,833 274
--------- --------- --------- --------- --------- --------- ---------
Income before provision for income taxes.......... 4,275 4,498 27,905 31,680 59,308 131,191 23,436
Provision for income taxes........................ 1,503 417 10,226 10,071 19,097 49,494 8,686
--------- --------- --------- --------- --------- --------- ---------
Net income........................................ $ 2,772 $ 4,081 $ 17,679 $ 21,609 $ 40,211 $ 81,697 $ 14,750
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Pro forma net income per share(2)................. $ .50 $ 1.01 $ .18
Pro forma weighted average common shares
outstanding...................................... 80,518 81,060 80,518
1997
---------
INCOME STATEMENT DATA:
Revenue........................................... $ 210,994
Cost of sales..................................... 60,741
---------
Gross profit...................................... 150,253
Operating expenses:
Distributor incentives.......................... 80,543
Selling, general and administrative............. 34,483
Distributor stock expense....................... 4,477
---------
Operating income.................................. 30,750
Other income (expense), net....................... 1,770
---------
Income before provision for income taxes.......... 32,520
Provision for income taxes........................ 12,032
---------
Net income........................................ $ 20,488
---------
---------
Pro forma net income per share(2)................. $ .24
Pro forma weighted average common shares
outstanding...................................... 85,416
THREE
MONTHS
YEAR ENDED ENDED MARCH
DECEMBER 31, 31,
-------------------- -----------
1995 1996 1996
--------- --------- -----------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
PRO FORMA INCOME STATEMENT DATA(3)(4):
Revenue................................................................................ $ 358,609 $ 678,596 $ 124,185
Cost of sales.......................................................................... 96,615 193,158 34,815
--------- --------- -----------
Gross profit........................................................................... 261,994 485,438 89,370
Operating expenses:
Distributor incentives............................................................... 135,722 249,613 46,181
Selling, general and administrative.................................................. 74,433 111,802 21,740
--------- --------- -----------
Operating income....................................................................... 51,839 124,023 21,449
Other income (expense), net(5)......................................................... (2,298) 3,602 341
--------- --------- -----------
Income before provision for income taxes............................................... 49,541 127,625 21,790
Provision for income taxes............................................................. 19,005 44,700 7,631
--------- --------- -----------
Net income............................................................................. $ 30,536 $ 82,925 $ 14,159
--------- --------- -----------
--------- --------- -----------
Net income per share(6)................................................................ $ .36 $ .97 $ .17
Weighted average common shares outstanding............................................. 85,377 85,377 85,377
1997
---------
PRO FORMA INCOME STATEMENT DATA(3)(4):
Revenue................................................................................ $ 210,994
Cost of sales.......................................................................... 60,741
---------
Gross profit........................................................................... 150,253
Operating expenses:
Distributor incentives............................................................... 80,543
Selling, general and administrative.................................................. 34,483
---------
Operating income....................................................................... 35,227
Other income (expense), net(5)......................................................... 1,770
---------
Income before provision for income taxes............................................... 36,997
Provision for income taxes............................................................. 13,689
---------
Net income............................................................................. $ 23,308
---------
---------
Net income per share(6)................................................................ $ .27
Weighted average common shares outstanding............................................. 85,377
AS OF
MARCH 31, 1997
-------------------
(IN THOUSANDS)
BALANCE SHEET DATA(7):
Cash and cash equivalents..................................................................................... $ 196,798
Working capital............................................................................................... 77,936
Total assets.................................................................................................. 342,078
Short term notes payable to stockholders...................................................................... 71,487
Short term note payable to NSI................................................................................ 10,000
Stockholders' equity.......................................................................................... 129,998
9
AS OF
AS OF SEPTEMBER 30, AS OF DECEMBER 31, MARCH 31,
------------------------------- ------------------------------- ---------
1992 1993 1994 1994 1995 1996 1996
--------- --------- --------- --------- --------- --------- ---------
OTHER INFORMATION(8):
Number of active distributors................ 33,000 106,000 152,000 170,000 236,000 377,000 293,000
Number of executive distributors............. 649 2,788 5,835 6,083 7,550 20,483 10,323
1997
---------
OTHER INFORMATION(8):
Number of active distributors................ 404,000
Number of executive distributors............. 23,449
- ------------------------------
(1) The information for the year ended December 31, 1994 is not included in the
Company's Consolidated Financial Statements included elsewhere in this
Prospectus. Such information has been presented for comparative purposes
only.
(2) Reflects the weighted average number of common shares and common share
equivalents outstanding during the periods presented assuming that the
Company's Reorganization and the resultant issuance of 80,250,000 shares of
Class B Common Stock occurred as of January 1, 1995. The weighted average
number of common shares and common share equivalents include: (i) an option
granted to an executive officer of the Company to purchase 267,500 shares of
Class A Common Stock prior to the Reorganization; (ii) the sale of 4,750,000
shares of Class A Common Stock by the Company in connection with the Initial
Underwritten Offerings; (iii) the grant of awards for 109,000 shares of
Class A Common Stock to certain employees of the Company during November and
December 1996; and (iv) the award of 41,959 additional shares of Class A
Common Stock to certain employees of the Company during January 1997.
(3) As part of the Reorganization, several actions occurred which impacted the
comparability of the historical financial results of the Company with the
future results of the Company. Therefore, a pro forma presentation has been
prepared to provide comparative data. The unaudited pro forma income
statement data reflect the Reorganization as if such event had occurred as
of January 1, 1995, and the following adjustments: (i) the amortization over
a 20-year period of a $25.0 million payment, consisting of $5.0 million in
cash and $20.0 million in notes, to NSI for the exclusive rights to
distribute NSI products in Thailand, Indonesia, Malaysia, the PRC, the
Philippines, Singapore and Vietnam (the "License Fee"); (ii) the recognition
by the Company of additional charges of $4.4 million for the year ended
December 31, 1995, $4.0 million for the year ended December 31, 1996 and
$1.1 million for the three months ended March 31, 1996, relating to certain
support services provided to the Company by NSI and an NSI affiliate and
certain other charges related to operating as a public company; (iii)
estimated annual compensation expense of $1.2 million related to the
employee stock bonus awards granted to employees of the Company, NSI and its
affiliates; and (iv) adjustments for U.S. Federal and state income taxes as
if the Company had been taxed as a C corporation rather than as an S
corporation since inception.
(4) The unaudited pro forma income statement data do not reflect the estimated
non-cash compensation expense totaling $19.9 million in connection with the
one-time grant of the Distributor Options at an exercise price of $5.75 per
share. $2.0 million of such expense was recorded as actual distributor stock
expense for the year ended December 31, 1996. An additional $4.5 million of
such expense was recorded for the three months ended March 31, 1997. Neither
of these expenses has been included in the pro forma presentation. The
granting and vesting of the Distributor Options are conditioned upon
distributor performance under the Global Compensation Plan and the NSI 1996
Distributor Stock Option Plan. The vesting of the Distributor Options is
scheduled to occur on December 31, 1997.
(5) Pro forma other income and expense includes: (i) increased interest expense
of $2.7 million for the year ended December 31, 1995 relating to the
issuance of promissory notes (the "S Distribution Notes") of $86.5 million
from the Subsidiaries' earned and undistributed S corporation earnings
through the date of the termination of the Subsidiaries' S corporation
status; (ii) increased interest expense of $0.9 million for the year ended
December 31, 1995 and $0.1 million for the year ended December 31, 1996 and
for the three months ended March 31, 1996, respectively, relating to the
issuance of $20.0 million in notes as partial payment of the License Fee
payable to NSI; and (iii) increased interest income of $0.8 million for the
year ended December 31, 1995, $0.8 million for the year ended December 31,
1996 and $0.2 million for the three months ended March 31, 1996 relating to
a note receivable from NSI with an estimated principal balance of $13.1
million as consideration for the Distributor Options.
(6) Reflects, as if all shares had been issued as of January 1, 1995, the
following: (i) 80,250,000 common shares outstanding and common share
equivalents after giving effect to the Reorganization; (ii) the sale by the
Company of 4,750,000 shares of Class A Common Stock in the Initial
Underwritten Offerings; (iii) the grant of awards for 109,000 shares of
Class A Common Stock to certain employees of the Company; and (iv) an option
granted to an executive officer of the Company to purchase 267,500 shares of
Class A Common Stock. Supplemental income per share, calculated as if $25.0
million of the proceeds from the Initial Underwritten Offerings were used to
repay notes payable, had a dilutive effect of less than 2% and, therefore,
is not presented.
(7) As of March 31, 1997, the balance owing to NSI relating to the License Fee
was $10.0 million, and the balance of S Distribution Notes payable to the
Selling Stockholders and certain of their affiliates in respect of the
earned and undistributed taxable S corporation earnings and capital at
November 19, 1996 was $71.5 million. On April 4, 1997, the Company paid the
$71.5 million balance of the S Distribution Notes, together with related
accrued interest expense of $1.6 million thereon.
(8) Active distributors are those distributors who are resident in the countries
in which the Company operates and who have purchased products during the
three months ended as of the date indicated, rounded to the nearest
thousand. An executive distributor is an active distributor who has
submitted a qualifying letter of intent to become an executive distributor,
achieved specified personal and group sales volumes for a four month period
and maintained such specified personal and group sales volumes thereafter.
10
RISK FACTORS
AN INVESTMENT IN THE CLASS A COMMON STOCK INVOLVES SPECIAL CONSIDERATIONS
AND SIGNIFICANT RISKS, INCLUDING, BUT NOT LIMITED TO, THOSE DISCUSSED OR
REFERRED TO BELOW. PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING
RISKS AND INFORMATION IN CONJUNCTION WITH THE OTHER INFORMATION CONTAINED IN
THIS PROSPECTUS BEFORE ACQUIRING SHARES OF CLASS A COMMON STOCK. THE STATEMENTS
IN THIS SECTION THAT ARE NOT HISTORICAL FACTS ARE FORWARD-LOOKING STATEMENTS.
THESE FORWARD-LOOKING STATEMENTS INVOLVE CERTAIN RISKS AND UNCERTAINTIES. ACTUAL
RESULTS AND OUTCOMES MAY DIFFER MATERIALLY FROM THOSE DISCUSSED IN THIS SECTION.
FACTORS THAT MIGHT CAUSE SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THE
RISKS AND IMPORTANT FACTORS DISCUSSED BELOW.
RELIANCE UPON INDEPENDENT DISTRIBUTORS OF NSI
The Company distributes its products exclusively through independent
distributors who have contracted directly with NSI to become distributors.
Consequently, the Company does not contract directly with distributors but
licenses its distribution system and distributor force from NSI. Distributor
agreements with NSI are voluntarily terminable by distributors at any time. The
Company's revenue is directly dependent upon the efforts of these independent
distributors, and any growth in future sales volume will require an increase in
the productivity of these distributors and/or growth in the total number of
distributors. As is typical in the direct selling industry, there is turnover in
distributors from year to year, which requires the sponsoring and training of
new distributors by existing distributors to maintain or increase the overall
distributor force and motivate new and existing distributors. The Company
experiences seasonal decreases in distributor sponsoring and product sales in
some of the countries in which the Company operates because of local holidays
and customary vacation periods. The size of the distribution force can also be
particularly impacted by general economic and business conditions and a number
of intangible factors such as adverse publicity regarding the Company or NSI, or
the public's perception of the Company's products, product ingredients, NSI's
distributors or direct selling businesses in general. Historically, the Company
has experienced periodic fluctuations in the level of distributor sponsorship
(as measured by distributor applications). However, because of the number of
factors that impact the sponsoring of new distributors, and the fact that the
Company has little control over the level of sponsorship of new distributors,
the Company cannot predict the timing or degree of those fluctuations. There can
be no assurance that the number or productivity of the Company's distributors
will be sustained at current levels or increased in the future. In addition, the
number of distributors as a percent of the population in a given country or
market could theoretically reach levels that become difficult to exceed due to
the finite number of persons inclined to pursue a direct selling business
opportunity. This is of particular concern in Taiwan, where industry sources
have estimated that up to 10% of the population is already involved in some form
of direct selling.
Since distributor agreements are entered into between NSI and distributors,
all of the distributors who generate revenue for the Company are distributors of
NSI. See "--Relationship with and Reliance on NSI; Potential Conflicts of
Interest." Because distributors are independent contractors of NSI, neither NSI
nor the Company is in a position to provide the same level of direction,
motivation and oversight as either would with respect to its own employees. The
Company relies on NSI to enforce distributors policies and procedures. Although
NSI has a compliance department responsible for the enforcement of the policies
and procedures that govern distributor conduct, it can be difficult to enforce
these policies and procedures because of the large number of distributors and
their independent status, as well as the impact of regulations in certain
countries that limit the ability of NSI and the Company to monitor and control
the sales practices of distributors.
POTENTIAL EFFECTS OF ADVERSE PUBLICITY
The size of the distribution force and the results of the Company's
operations can be particularly impacted by adverse publicity regarding the
Company or NSI, or their competitors, including publicity
11
regarding the legality of network marketing, the quality of the Company's
products and product ingredients or those of its competitors, regulatory
investigations of the Company or the Company's competitors and their products,
distributor actions and the public's perception of NSI's distributors and direct
selling businesses generally.
In 1991 and 1992, NSI was the subject of investigations by various
regulatory agencies of eight states. All of the investigations were concluded
satisfactorily. However, the publicity associated with the investigations
resulted in a material adverse impact on NSI's results of operations. The denial
by the Malaysian government in 1995 of the Company's business permit
applications due to distributor actions resulted in adverse publicity for the
Company. In South Korea, a coalition of consumer groups recently announced a
public boycott against the Company's largest international competitor in this
market. These groups have claimed that this competitor has violated South Korean
laws barring comparisons between products and made unjustified environmental
claims about its products. Various trade groups have also attacked this
competitor's direct marketing methods. In addition, the South Korean government
and certain consumer and trade organizations have expressed concerns which have
attracted media attention regarding South Korean consumption of luxury and
foreign products, in general. Although the Company has not been subject to
similar attacks, the Company believes that the adverse publicity resulting from
these claims and media campaigns has and may continue to adversely affect the
direct selling industry and the Company's South Korean operations. See
"--Seasonality and Cyclicality; Variations in Operating Results." There can be
no assurance that the Company will not be subject to adverse publicity in the
future as a result of regulatory investigations or actions, whether of the
Company or its competitors, distributor actions, actions of competitors or other
factors or that such adverse publicity will not have a material adverse effect
on the Company's business or results of operations. See "--Government Regulation
of Direct Selling Activities," "--Government Regulation of Products and
Marketing," "--Other Regulatory Issues" and "--Entering New Markets."
POTENTIAL NEGATIVE IMPACT OF DISTRIBUTOR ACTIONS
Distributor actions can negatively impact the Company and its products. From
time to time, the Company receives inquiries from regulatory agencies
precipitated by distributor actions. For example, in October 1995, the Company's
business permit applications were denied by the Malaysian government as the
result of activities by certain NSI distributors before required government
approvals could be secured. NSI subsequently terminated the distributorship
rights of some of the distributors involved and elected to withdraw from the
Malaysian market for a period of time. The denial by the Malaysian government of
the Company's business permit applications resulted in adverse publicity for the
Company. See "--Other Regulatory Issues." Distributor activities in other
countries in which the Company has not commenced operations may similarly result
in an inability to secure, or delay in securing required regulatory and business
permits. See "Business--New Market Opportunities." In addition, the publicity
which can result from a variety of potential distributor activities such as
inappropriate earnings claims, product representations or improper importation
of Nu Skin products from other markets, can make the sponsoring and retaining of
distributors more difficult, thereby negatively impacting sales. See
"--Potential Effects of Adverse Publicity." Furthermore, the Company's business
and results of operations could be adversely affected if NSI terminates a
significant number of distributors or certain distributors who play a key role
in the Company's distribution system. There can be no assurance that these or
other distributor actions will not have a material adverse effect on the
Company's business or results of operations.
CURRENCY RISKS
The Company's foreign-derived sales and selling, general and administrative
expenses are converted to U.S. dollars for reporting purposes. Consequently, the
Company's reported earnings are significantly impacted by changes in currency
exchange rates, generally increasing with a weakening dollar and decreasing with
a strengthening dollar. In addition, the Company purchases inventory from NSI in
12
U.S. dollars and assumes currency exchange rate risk with respect to such
purchases. Local currency in Japan, Taiwan, Hong Kong, South Korea and Thailand
is generally used to settle non-inventory transactions with NSI. Given the
uncertainty of the extent of exchange rate fluctuations, the Company cannot
estimate the effect of these fluctuations on its future business, product
pricing, results of operations or financial condition. However, because nearly
all of the Company's revenue is realized in local currencies and the majority of
its cost of sales is denominated in U.S. dollars, the Company's gross profits
will be positively affected by a weakening in the U.S. dollar and will be
negatively affected by a strengthening in the U.S. dollar.
The Company believes that a variety of complex factors impact the value of
local currencies relative to the U.S. dollar including, without limitation,
interest rates, monetary policies, political environments, and relative economic
strengths. The Company believes that an increase in the short-term interest rate
by the U.S. Federal Reserve Board in early 1997 contributed to the strengthening
of the U.S. dollar against the yen in the first four months of 1997. In order to
partially offset the anticipated effect of these currency fluctuations, the
Company announced a price increase on certain of its products of between 5% and
9% on average. Even though the U.S. dollar has recently weakened against the
yen, management has elected to continue with the previously announced price
increases. There can be no assurance that these price increases will not
adversely affect the Company's results of operations by decreasing consumer
demand for the Company's products or that the Company will be able to effect
additional price increases in the future to offset the impact of future currency
fluctuations. There can be no assurance that future currency fluctuations will
not result in similar concerns or adversely affect the performance of the price
of the Class A Common Stock. Although the Company tries to reduce its exposure
to fluctuations in foreign exchange rates by using hedging transactions, such
transactions may not entirely offset the impact of currency fluctuations.
Accordingly, in the face of a strengthening of the U.S. dollar, the Company's
earnings will be adversely affected. The Company does not use hedging
transactions for trading or speculative purposes. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Currency
Fluctuation and Exchange Rate Information."
SEASONALITY AND CYCLICALITY; VARIATIONS IN OPERATING RESULTS
While neither seasonal nor cyclical variations have materially affected the
Company's results of operations to date, the Company believes that its rapid
growth may have overshadowed these factors. Accordingly, there can be no
assurance that seasonal or cyclical variations will not materially adversely
affect the Company's results of operations in the future.
The direct selling industry in Asia is impacted by certain seasonal trends
such as major cultural events and vacation patterns. For example, sales are
generally affected by local New Year celebrations in Japan, Taiwan, Hong Kong,
South Korea and Thailand, which occur in the Company's first quarter. Management
believes that direct selling in Japan is also generally negatively impacted
during August, when many individuals traditionally take vacations.
Generally, the Company has experienced rapid revenue growth in each new
market from the commencement of operations. In Japan, Taiwan and Hong Kong, the
initial rapid revenue growth was followed by a short period of stable or
declining revenue followed by renewed growth fueled by new product
introductions, an increase in the number of active distributors and increased
distributor productivity. The Company believes that a similar pattern is
currently occurring in its operations in South Korea, where the Company
anticipates a significant decline in its second quarter revenue from revenue in
the first quarter of 1997. The Company expects that this anticipated decline in
South Korean revenue will be offset by revenue gains in the Company's other
markets in the second quarter. The Company believes that the anticipated revenue
decline is partially reflective of the typical business cycle experienced in new
markets and partially the result of other factors specific to South Korea. These
other factors include recent activities by the South Korean government and
campaigns by a coalition of consumer protection and trade organizations against
producers of luxury and foreign goods, in general, and certain network marketing
13
companies, in particular, that have drawn negative media attention. Although the
Company has not been the focus of these campaigns, management believes that they
have negatively impacted the business environment generally. See "--Potential
Effects of Adverse Publicity." An additional factor which the Company believes
may be responsible for the anticipated second quarter revenue decline in South
Korea includes the choice by certain key distributors to focus their energies on
other recently-opened markets, including Thailand.
In addition, the Company may experience variations on a quarterly basis in
its results of operations, as new products are introduced and new markets are
opened. There can be no assurance that current revenue and productivity trends
will be maintained in any of these markets or that future results of operations
will follow historical performance. Furthermore, no assurances can be given that
the Company's revenue growth rate in Thailand, which commenced operations in
March 1997, or in new markets where operations have not commenced, will follow
this pattern.
GOVERNMENT REGULATION OF DIRECT SELLING ACTIVITIES
Direct selling activities are regulated by various governmental agencies.
These laws and regulations are generally intended to prevent fraudulent or
deceptive schemes, often referred to as "pyramid" or "chain sales" schemes, that
promise quick rewards for little or no effort, require high entry costs, use
high pressure recruiting methods and/or do not involve legitimate products. In
Japan, the Company's distribution system is regulated under the "Door-to-Door"
Sales Law, which requires the submission of specific information concerning the
Company's business and products and which provides certain cancellation and
cooling-off rights for consumers and new distributors. Management has been
advised by counsel that in some respects Japanese laws are becoming more
restrictive with respect to direct selling in Japan. In Taiwan, the Fair Trade
Law (and the Enforcement Rules and Supervisory Regulations of Multi-Level Sales)
requires the Company to comply with registration procedures and also provides
distributors with certain rights regarding cooling-off periods and product
returns. The Company also complies with South Korea's strict Door-to-Door Sales
Act, which requires, among other things, the regular reporting of revenue, the
registration of distributors together with the issuance of a registration card,
and the maintaining of a current distributor registry. This law also limits the
amount of commissions that a registered multi-level marketing company can pay to
its distributors to 35% of revenue in a given month. In Thailand, general fair
trade laws impact direct selling and multi-level marketing activities.
In April 1997, the South Korean Ministry of Trade, Industry and Energy
("MOTIE") commenced a review of the largest foreign and domestic-owned network
marketing companies in South Korea, including Nu Skin Korea. The purposes of the
review were stated to be to monitor how companies are operating and to audit
current business practices. Although the MOTIE has not issued a report in
connection with the industry or Nu Skin Korea, the Company does not believe that
this review will adversely affect its ability to conduct business in South
Korea.
Based on research conducted in opening its existing markets (including
assistance from local counsel), the nature and scope of inquiries from
government regulatory authorities and the Company's history of operations in
such markets to date, the Company believes that its method of distribution is in
compliance in all material respects with the laws and regulations relating to
direct selling activities of all of the countries in which the Company currently
operates. Many countries, however, including Singapore, one of the Company's
potential markets, currently have laws in place that would prohibit the Company
and NSI from conducting business in such markets. There can be no assurance that
the Company will be allowed to conduct business in each of the new markets or
continue to conduct business in each of its existing markets licensed from NSI.
See "--Entering New Markets."
14
GOVERNMENT REGULATION OF PRODUCTS AND MARKETING; IMPORT RESTRICTIONS
The Company and NSI are subject to or affected by extensive governmental
regulations not specifically addressed to network marketing. Such regulations
govern, among other things, (i) product formulation, labeling, packaging and
importation, (ii) product claims and advertising, whether made by the Company,
NSI or NSI distributors, (iii) fair trade and distributor practices, (iv) taxes,
transfer pricing and similar regulations that affect foreign taxable income and
customs duties, and (v) regulations governing foreign companies generally.
With the exception of a small percentage of revenues in Japan, virtually all
of the Company's sales historically have been derived from products purchased
from NSI. All of those products historically have been imported into the
countries in which they were ultimately sold. The countries in which the Company
currently conducts business impose various legal restrictions on imports. In
Japan, the Japanese Ministry of Health and Welfare ("MOHW") requires the Company
to possess an import business license and to register each personal care product
imported into the country. Packaging and labeling requirements are also
specified. The Company has had to reformulate many products to satisfy MOHW
regulations. In Japan, nutritional foods, drugs and quasi-drugs are all strictly
regulated. The chief concern involves the types of claims and representations
that can be made regarding the efficacy of nutritional products. In Taiwan, all
"medicated" cosmetic and pharmaceutical products require registration. In Hong
Kong and Macau, "pharmaceutical" products are strictly regulated. In South
Korea, the Company is subject to and has obtained the mandatory certificate of
confirmation as a qualified importer of cosmetics under the Pharmaceutical
Affairs Law as well as additional product approvals for each of the 45
categories of cosmetic products which it imports. Each new cosmetic product
undergoes a 60-day post-customs inspection during which, in addition to
compliance with ingredient requirements, each product is inspected for
compliance with South Korean labeling requirements. There can be no assurance
that these or other applicable regulations will not prevent the Company from
introducing new products into its markets or require the reformulation of
existing products.
In Thailand, personal care products are regulated by the Food and Drug
Association and the Ministry of Public Health and all of the Nu Skin personal
care products introduced in this market have qualified for simplified approval
procedures under Thai law.
The Company has not experienced any difficulty maintaining its import
licenses but has experienced complications regarding health and safety and food
and drug regulations for nutritional products. Many products require
reformulation to comply with local requirements. In addition, new regulations
could be adopted or any of the existing regulations could be changed at any time
in a manner that could have a material adverse effect on the Company's business
and results of operations. Duties on imports are a component of national trade
and economic policy and could be changed in a manner that would be materially
adverse to the Company's sales and its competitive position compared to
locally-produced goods, in particular in countries such as Taiwan, where the
Company's products are already subject to high customs duties. In addition,
import restrictions in certain countries and jurisdictions limit the Company's
ability to import products from NSI. In some jurisdictions, such as the PRC,
regulators may prevent the importation of Nu Skin and IDN products altogether.
Present or future health and safety or food and drug regulations could delay or
prevent the introduction of new products into a given country or marketplace or
suspend or prohibit the sale of existing products in such country or
marketplace.
OTHER REGULATORY ISSUES
As a U.S. entity operating through subsidiaries in foreign jurisdictions,
the Company is subject to foreign exchange control and transfer pricing laws
that regulate the flow of funds between the Subsidiaries and the Company, as
well as the flow of funds to NSI for product purchases, management services and
contractual obligations such as payment of distributor commissions. The Company
believes that it operates in compliance with all applicable customs, foreign
exchange control and transfer pricing laws. However,
15
there can be no assurance that the Company will continue to be found to be
operating in compliance with foreign customs, exchange control and transfer
pricing laws, or that such laws will not be modified, which, as a result, may
require changes in the Company's operating procedures.
As is the case with most network marketing companies, NSI and the Company
have from time to time received inquiries from various government regulatory
authorities regarding the nature of their business and other issues such as
compliance with local business opportunity and securities laws. Although to date
none of these inquiries has resulted in a finding materially adverse to the
Company or NSI, adverse publicity resulting from inquiries into NSI operations
by certain government agencies in the early 1990's, stemming in part out of
inappropriate product and earnings claims by distributors, materially adversely
affected NSI's business and results of operations. There can be no assurance
that the Company or NSI will not face similar inquiries in the future which,
either as a result of findings adverse to the Company or NSI or as a result of
adverse publicity resulting from the instigation of such inquiries, could have a
material adverse effect on the Company's business and results of operations. See
"--Potential Effects of Adverse Publicity."
The Subsidiaries are periodically subject to reviews and audits by various
governmental agencies, particularly in new markets, where the Company has
experienced high rates of growth. Recently, the South Korean Ministry of Trade,
Industry and Energy commenced an examination of the largest foreign and domestic
owned network marketing companies in South Korea, including Nu Skin Korea. The
purposes of the examination were stated to be to monitor how companies are
operating and to audit current business practices. In addition, Nu Skin Korea is
currently subject to an audit by South Korean customs authorities. Management
believes that this audit, the focus of which is to review customs valuation
issues and inter-company payments is, in large measure, the result of Nu Skin
Korea's rapid growth and its position as the largest importer of cosmetics and
personal care products in South Korea. In addition, no assurances can be given
that Nu Skin Korea will not, as a result of the audit, be assessed additional
customs duties based on an increase in customs valuation of imported products or
will not be subject to other regulatory review, or in the event that these risks
materialize, will not be subject to adverse publicity. Nevertheless, the Company
believes its operations are in compliance in all material respects with local
laws. See "--Potential Negative Impact of Distributor Actions." Management
believes that other major importers of cosmetic products are also the focus of
regulatory reviews by South Korean authorities.
Businesses which are more than 50% owned by non-citizens are not permitted
to operate in Thailand unless they have an Alien Business Permit, which is
frequently difficult to obtain. The Company is currently operating under the
Treaty of Amity and Economic Relations between Thailand and the United States.
Under the Treaty of Amity, an Alien Business Permit is not required if a
Thailand business is owned by an entity organized in the United States, a
majority of whose owners are U.S. citizens or entities. From time to time, it
has been reported that certain Thailand government officials have considered
supporting the termination of the Treaty of Amity. There can be no assurance
that, if the Treaty of Amity were terminated, the Company would be able to
obtain an Alien Business Permit and continue operations in Thailand.
Based on the Company's and NSI's experience and research (including
assistance from counsel) and the nature and scope of inquiries from government
regulatory authorities, the Company believes that it is in material compliance
with all regulations applicable to the Company. Despite this belief, either the
Company or NSI could be found not to be in material compliance with existing
regulations as a result of, among other things, the considerable interpretative
and enforcement discretion given to regulators or misconduct by independent
distributors. In 1994, NSI and three of its distributors entered into a consent
decree with the United States Federal Trade Commission (the "FTC") with respect
to its investigation of certain product claims and distributor practices,
pursuant to which NSI paid approximately $1 million to settle the FTC
investigation. NSI is currently in discussions with the FTC regarding its
compliance with such consent decree and other product issues raised by the FTC.
NSI recently voluntarily agreed to recall and rewrite virtually all of its sales
and marketing materials to address FTC concerns. NSI has also offered
16
a monetary settlement, which proposal is currently under review by the FTC. Even
though neither the Company nor the Subsidiaries has encountered similar
regulatory concerns, there can be no assurances that the Company and the
Subsidiaries will not be subject to similar inquiries and regulatory
investigations or disputes and the effects of any adverse publicity resulting
therefrom. Any assertion or determination that either the Company, NSI or any
NSI distributors are not in compliance with existing laws or regulations could
potentially have a material adverse effect on the Company's business and results
of operations. In addition, in any country or jurisdiction, the adoption of new
laws or regulations or changes in the interpretation of existing laws or
regulations could generate negative publicity and/or have a material adverse
effect on the Company's business and results of operations. The Company cannot
determine the effect, if any, that future governmental regulations or
administrative orders may have on the Company's business and results of
operations. Moreover, governmental regulations in countries where the Company
plans to commence or expand operations may prevent, delay or limit market entry
of certain products or require the reformulation of such products. Regulatory
action, whether or not it results in a final determination adverse to the
Company or NSI, has the potential to create negative publicity, with detrimental
effects on the motivation and recruitment of distributors and, consequently, on
the Company's sales and earnings. See "--Potential Effects of Adverse
Publicity," "--Entering New Markets" and "Business--Government
Regulation--Regulation of Products and Marketing."
RELIANCE ON CERTAIN DISTRIBUTORS; POTENTIAL DIVERGENCE OF INTERESTS BETWEEN
DISTRIBUTORS AND THE COMPANY
The Company's Global Compensation Plan allows distributors to sponsor new
distributors. The sponsoring of new distributors creates multiple distributor
levels in the network marketing structure. Sponsored distributors are referred
to as "downline" distributors within the sponsoring distributor's "downline
network." If downline distributors also sponsor new distributors, additional
levels of downline distributors are created, with the new downline distributors
also becoming part of the original sponsor's "downline network." As a result of
this network marketing distribution system, distributors develop relationships
with other distributors, both within their own countries and internationally.
The Company believes that its revenue is generated from thousands of distributor
networks. However, the Company estimates that, as of March 31, 1997,
approximately 340 distributorships worldwide comprised NSI's two highest
executive distributor levels (Hawaiian Blue Diamond and Blue Diamond
distributors). These distributorships have developed extensive downline networks
which consist of thousands of sub-networks. Together with such networks, these
distributorships account for substantially all of the Company's revenue.
Consequently, the loss of such a high-level distributor or another key
distributor together with a group of leading distributors in such distributor's
downline network, or the loss of a significant number of distributors for any
reason, could adversely affect sales of the Company's products, impair the
Company's ability to attract new distributors and adversely impact earnings.
Under the Global Compensation Plan, a distributor receives commissions based
on products sold by the distributor and by participants in the distributor's
worldwide downline network, regardless of the country in which such participants
are located. The Company, on the other hand, receives revenues based almost
exclusively on sales of products to distributors within the Company's markets.
So, for example, if a distributor located in Japan sponsors a distributor in
Europe, the Japanese distributor could receive commissions based on the sales
made by the European distributor, but the Company would not receive any revenue
since the products would have been sold outside of the Company's markets. The
interests of the Company and distributors therefore diverge somewhat in that the
Company's primary objective is to maximize the amount of products sold within
the Company's markets, while the distributors' objective is to maximize the
amount of products sold by the participants in the distributors' worldwide
downline networks. The Company and NSI have observed that the commencement of
operations in a new country tends to distract the attention of distributors from
the established markets for a period of time while key distributors begin to
build their downline networks within the new country. NSI is currently
contemplating opening operations in additional countries outside of the
Company's markets. To the extent distributors
17
focus their energies on establishing downline networks in these new countries,
and decrease their focus on building organizations within the Company's markets,
the Company's business and results of operations could be adversely affected.
Furthermore, the Company itself is currently contemplating opening new markets.
In the event distributors focus on these new markets, sales in existing markets
might be adversely affected. There can be no assurance that these new markets
will develop or that any increase in sales in new markets will not be more than
offset by a decrease in sales in the Company's existing markets.
ENTERING NEW MARKETS
As part of its growth strategy, the Company has acquired from NSI the right
to act as NSI's exclusive distribution vehicle in Indonesia, Malaysia, the PRC,
the Philippines, Singapore and Vietnam. The Company has undertaken a preliminary
review of the laws and regulations to which its operations would be subject in
Indonesia, Malaysia, the PRC, the Philippines, Singapore and Vietnam. Given
existing regulatory environments and economic conditions, the Company's entrance
into Singapore and Vietnam is not anticipated in the short to mid-term. The
regulatory and political climate in the other countries for which the Company
has the right to act as NSI's exclusive distributor is such that a replication
of the Company's current operating structure cannot be guaranteed. Because the
Company's personal care and nutritional product lines are positioned as premium
product lines, the market potential for the Company's product lines in
relatively less developed countries, such as the PRC and Vietnam, remains to be
determined. Modifications to each product line may be needed to accommodate the
market conditions in each country, while maintaining the integrity of the
Company's products. No assurance can be given that the Company and NSI, upon
which the Company is largely dependent for product development assistance, will
be able to successfully reformulate Nu Skin and IDN product lines in any of the
Company's new markets to attract local consumers.
Each of the proposed new markets will present additional unique difficulties
and challenges. The PRC, for example, has proven to be a particularly difficult
market for foreign corporations due to its extensive government regulation and
the historical political tenets of the PRC government. In order to enter the
market in the PRC, the Company may be required to create a joint venture
enterprise with a Chinese entity and to establish a local manufacturing
presence, which will entail a significant investment on the Company's part. The
Company will likely have to apply for licenses on a province by province basis
and the repatriation of the Company's profits will be subject to restrictions on
currency conversion and the fluctuations of the government controlled exchange
rate. In addition, because distribution systems in the PRC are greatly
fragmented, the Company may be forced to use business models significantly
different from those used by the Company in more developed countries. The lack
of a comprehensive legal system and the uncertainties of enforcement of existing
legislation and laws could also have an adverse effect on the Company's proposed
business in the PRC.
The other potential new markets also present significant regulatory,
political and economic obstacles to the Company. In Singapore, for example,
network marketing is currently illegal and is not permitted under any
circumstances. Although the Company believes that this restriction will
eventually be relaxed or repealed, no assurance can be given that such
regulation will not remain in place and that the Company will not be permanently
prevented from initiating sales in Singapore. In addition, Malaysia has
governmental guidelines that have the effect of limiting foreign ownership of
direct selling companies operating in Malaysia to no more than 30%. There can be
no assurance that the Company will be able to properly structure Malaysian
operations to comply with this policy. In October of 1995, the Company's
business permit applications were denied by the Malaysian government as a result
of activities by certain NSI distributors. Therefore, the Company believes that
although significant opportunities exist to expand its operations into new
markets, there can be no assurance that these or other difficulties will not
prevent the Company from realizing the benefits of this opportunity.
18
MANAGING GROWTH
The Company has experienced rapid growth since operations in Hong Kong
commenced in 1991. The management challenges imposed by this growth include
entry into new markets, growth in the number of employees and distributors,
expansion of facilities necessary to accommodate growth and additions and
modifications to the Company's product lines. To manage these changes
effectively, the Company may be required to hire additional management and
operations personnel and to improve its operational, financial and management
systems. For example, the dramatic growth in South Korea has led to operational
strains. While the Company is currently implementing numerous programs to
address these issues, there can be no assurance that the rapid growth in South
Korea will not result in further operational strains or that the Company's other
markets will not experience similar problems in the future that could adversely
affect the Company's business and results of operations.
POSSIBLE ADVERSE EFFECT ON THE COMPANY OF A CHANGE IN THE STATUS OF HONG KONG
The Company has offices and a portion of its operations in the British Crown
Colony of Hong Kong. Effective July 1, 1997, the exercise of sovereignty over
Hong Kong will be transferred from the Government of the United Kingdom of Great
Britain and Northern Ireland (the "United Kingdom") to the government of the PRC
pursuant to the Sino-British Joint Declaration on the Question of Hong Kong (the
"Joint Declaration") and Hong Kong will become a Special Administrative Region
(SAR) of the PRC. The Joint Declaration provides that Hong Kong will be directly
under the authority of the government of the PRC but Hong Kong will enjoy a high
degree of autonomy except in foreign and defense affairs, and that Hong Kong
will be vested with executive, legislative and independent judicial power. The
Joint Declaration also provides that the current social and economic systems in
Hong Kong will remain unchanged for 50 years after June 30, 1997 and that Hong
Kong will retain the status of an international financial center. Although sales
in Hong Kong accounted for less than 5% of the Company's revenues for the year
ended December 31, 1996, Hong Kong serves as the location for the Company's
regional offices and an important base of operations for many of the Company's
most successful distributors whose downline distributor networks extend into
other Asian markets. Any adverse effect on the social, political or economic
systems in Hong Kong resulting from this transfer could have a material adverse
effect on the Company's business and results of operations. Although the Company
does not anticipate any material adverse change in the business environment in
Hong Kong resulting from the 1997 transfer of sovereignty, the Company has
formulated contingency plans to transfer the Company's regional office to
another jurisdiction in the event that the Hong Kong business environment is so
affected.
RELATIONSHIP WITH AND RELIANCE ON NSI; POTENTIAL CONFLICTS OF INTEREST
NSI has ownership and control of the NSI trademarks, tradenames, the Global
Compensation Plan, distributor lists and related intellectual property and
know-how (collectively, the "Licensed Property"), and licenses to the Company
rights to use the Licensed Property in certain markets. NSI and its affiliates
currently operate in 15 countries, excluding the countries in which the Company
currently operates, and will continue to market and sell Nu Skin personal care
and IDN nutritional products in these countries, as well as in additional
countries outside of the Company's markets, through the network marketing
channel. Thus the Company cannot use the NSI trademarks to expand into other
markets for which the Company does not currently have a license without first
obtaining additional licenses or other rights from NSI. There can be no
assurance that NSI will make any additional markets available to the Company or
that the terms of any new licenses from NSI will be acceptable to the Company.
NSI has licensed to the Company, through the Subsidiaries, rights to
distribute Nu Skin and IDN products and to use the Licensed Property in the
Company's markets, and Nu Skin International Management Group, Inc. ("NSIMG"),
an affiliate of NSI, will provide management support services to the Company and
the Subsidiaries, pursuant to distribution, trademark/tradename license,
licensing and sales, and management services agreements (the "Operating
Agreements"). The Company relies on NSI for
19
research, development, testing, labeling and regulatory compliance for products
sold to the Company under the distribution agreements, and virtually all of the
Company's revenues are derived from products and sales aids purchased from NSI
pursuant to these agreements. NSIMG provides the Company with a variety of
management and consulting services, including, but not limited to, management,
legal, financial, marketing and distributor support/training, public relations,
international expansion, human resources, strategic planning, product
development and operations administration services. Each of the Operating
Agreements (other than the distribution, trademark/tradename license and
licensing and sales agreements for Nu Skin Korea, which have shorter terms), is
for a term ending December 31, 2016, and is subject to renegotiation after
December 31, 2001, in the event that the Selling Stockholders and their
affiliates, on a combined basis, no longer beneficially own a majority of the
combined voting power of the outstanding shares of Common Stock of the Company
or of the common stock of NSI. The Company is almost completely dependent on the
Operating Agreements to conduct its business, and in the event NSI is unable or
unwilling to perform its obligations under the Operating Agreements, or
terminates the Operating Agreements as provided therein, the Company's business
and results of operations will be adversely affected. See
"Business--Relationship with NSI."
Upon consummation of the Offerings, approximately 97.2% of the combined
voting power of the outstanding shares of Common Stock will be held by the
Selling Stockholders and certain of their affiliates (approximately 97.0% if the
underwriters' over-allotment options are exercised in full). Consequently, the
Selling Stockholders and certain of their affiliates will have the ability,
acting in concert, to elect all directors of the Company and approve any action
requiring approval by a majority of the stockholders of the Company. Certain of
the Selling Stockholders also own 100% of the outstanding shares of NSI. As a
result of this ownership, the Selling Stockholders who are also shareholders of
NSI will consider the short-term and the long-term impact of all stockholder
decisions on the consolidated financial results of NSI and the Company. See
"--Control by Selling Stockholders and Certain of their Affiliates;
Anti-Takeover Effects of Dual Classes of Common Stock."
The Operating Agreements were approved by the Board of Directors of the
Company, which was, except with respect to the approval of the Operating
Agreements with Nu Skin Thailand, composed entirely of individuals who were also
officers and shareholders of NSI at the time of approval. The Operating
Agreements with Nu Skin Thailand were approved by a majority of the
disinterested directors of the Company. In addition, some of the executive
officers of the Company are also executive officers of NSI. It is expected that
a number of the Company's executive officers will continue to spend a portion of
their time on the affairs of NSI, for which they will continue to receive
compensation from NSI.
Concurrently with the Initial Underwritten Offerings, the Company purchased
from NSI for $25.0 million the exclusive rights to distribute Nu Skin and IDN
products in Thailand, Indonesia, Malaysia, the PRC, the Philippines, Singapore
and Vietnam. The Company has paid $15.0 million of this amount, and the
remaining $10.0 million of this amount is due in January 1998.
In view of the substantial relationships between the Company and NSI,
conflicts of interest may exist or arise with respect to existing and future
business dealings, including, without limitation, the relative commitment of
time and energy by the executive officers to the respective businesses of the
Company and NSI, potential acquisitions of businesses or properties, the
issuance of additional securities, the election of new or additional directors
and the payment of dividends by the Company. There can be no assurance that any
conflicts of interest will be resolved in favor of the Company. Under Delaware
and Utah law, a person who is a director of both the Company and NSI owes
fiduciary duties to both corporations and their respective shareholders. As a
result, persons who are directors of both the Company and NSI are required to
exercise their fiduciary duties in light of what they believe to be best for
each of the companies and its shareholders. See "Certain Relationships and
Related Transactions."
20
CONTROL BY SELLING STOCKHOLDERS AND CERTAIN OF THEIR AFFILIATES; ANTI-TAKEOVER
EFFECT OF DUAL CLASSES OF COMMON STOCK
Because of the relationship between the Company and NSI, management elected
to structure the capitalization of the Company in such a manner as to minimize
the possibility of a change in control of the Company without the consent of the
Selling Stockholders and certain of their affiliates. Consequently, the shares
of Class B Common Stock enjoy ten to one voting privileges over the shares of
Class A Common Stock until the outstanding shares of Class B Common Stock
constitute less than 10% of the total outstanding shares of Common Stock. The
Selling Stockholders and their affiliates collectively own 100% of the
outstanding shares of the Class B Common Stock, which, following the
consummation of the Offerings, will represent approximately 97.2% of the
combined voting power of the outstanding shares of Common Stock (approximately
97.0% if the underwriters' over-allotment options are exercised in full).
Accordingly, the Selling Stockholders and certain of their affiliates, acting
fully or partially in concert, will have the ability to control the election of
the Board of Directors of the Company and thus the direction and future
operations of the Company without the supporting vote of any other stockholder
of the Company, including decisions regarding acquisitions and other business
opportunities, the declaration of dividends and the issuance of additional
shares of Class A Common Stock and other securities. NSI is a privately-held
company, all of the shares of which are owned by certain of the Selling
Stockholders. As long as the shareholders of NSI are majority stockholders of
the Company, assuming they act in concert, third parties will not be able to
obtain control of the Company through purchases of shares of Class A Common
Stock. See "Principal and Selling Stockholders" and "Description of Capital
Stock."
ADVERSE IMPACT ON COMPANY INCOME DUE TO DISTRIBUTOR OPTION PROGRAM
Prior to the Initial Public Offerings, the Selling Stockholders and certain
of their affiliates converted 1,605,000 shares of Class B Common Stock to Class
A Common Stock and contributed such shares of Class A Common Stock to the
Company. The Company granted to NSI options to purchase such shares of Class A
Common Stock (the "Distributor Options"), and NSI offered these options to
qualifying distributors of NSI. The Exercise Price for each Distributor Option
is $5.75, which is 25% of the initial price per share to the public of the Class
A Common Stock in the Initial Public Offerings. The vesting of the Distributor
Options is subject to certain conditions, and the Distributor Options have been
registered along with the shares of Class A Common Stock underlying such
Distributor Options pursuant to Rule 415 under the 1933 Act. See
"Business--Distributor Option Program".
The Company estimates a total pre-tax non-cash compensation expense of $19.9
million in connection with the grant of the Distributor Options. This non-cash
compensation expense will result in a corresponding impact on net income and net
income per share, which may also result in a corresponding impact on the market
price of the Class A Common Stock. See "Shares Eligible for Future Sale."
RELIANCE ON AND CONCENTRATION OF OUTSIDE MANUFACTURERS
Virtually all the Company's products are sourced through NSI and are
produced by manufacturers unaffiliated with NSI. The Company currently has
little or no direct contact with these manufacturers. The Company's profit
margins and its ability to deliver its existing products on a timely basis are
dependent upon the ability of NSI's outside manufacturers to continue to supply
products in a timely and cost-efficient manner. Furthermore, the Company's
ability to enter new markets and sustain satisfactory levels of sales in each
market is dependent in part upon the ability of suitable outside manufacturers
to reformulate existing products, if necessary to comply with local regulations
or market environments, for introduction into such markets. Finally, the
development of additional new products in the future will likewise be dependent
in part on the services of suitable outside manufacturers.
The Company currently acquires products or ingredients from sole suppliers
or suppliers that are considered by the Company to be the superior suppliers of
such ingredients. The Company believes that, in the event it is unable to source
any products or ingredients from its current suppliers, the Company could
produce such products or replace such products or substitute ingredients without
great difficulty or
21
prohibitive increases in the cost of goods sold. However, there can be no
assurance that the loss of such a supplier would not have a material adverse
effect on the Company's business and results of operations.
With respect to sales to the Company, NSI currently relies on two
unaffiliated manufacturers to produce approximately 70% and 80% of its personal
care and nutritional products, respectively. NSI has a written agreement with
the primary supplier of the Company's personal care products that expires at the
end of 1997. An extension to such contract is currently being negotiated. NSI
does not currently have a written contract with the primary supplier of the
Company's nutritional products. The Company believes that in the event that
NSI's relationship with any of its key manufacturers is terminated, NSI will be
able to find suitable replacement manufacturers. However, there can be no
assurance that the loss of either manufacturer would not have a material adverse
effect on the Company's business and results of operations.
RELIANCE ON OPERATIONS OF AND DIVIDENDS AND DISTRIBUTIONS FROM SUBSIDIARIES
The Company is a holding company without operations of its own or
significant assets other than ownership of 100% of the capital stock of each of
the Subsidiaries. Accordingly, an important source of the Company's income will
be dividends and other distributions from the Subsidiaries. Each of the
Subsidiaries has its operations in a country other than the United States, the
country in which the Company is organized. In addition, each of the Subsidiaries
receives its revenues in the local currency of the country or jurisdiction in
which it is situated. As a consequence, the Company's ability to obtain
dividends or other distributions is subject to, among other things, restrictions
on dividends under applicable local laws and regulations, and foreign currency
exchange regulations of the country or jurisdictions in which the Subsidiaries
operate. The Subsidiaries' ability to pay dividends or make other distributions
to the Company is also subject to their having sufficient funds from their
operations legally available for the payment of such dividends or distributions
that are not needed to fund their operations, obligations or other business
plans. Because the Company will be a stockholder of each of the Subsidiaries,
the Company's claims as such will generally rank junior to all other creditors
of and claims against the Subsidiaries. In the event of a Subsidiary's
liquidation, there may not be assets sufficient for the Company to recoup its
investment in such Subsidiary.
TAXATION RISKS AND TRANSFER PRICING
The Company is subject to taxation in the United States, where it is
incorporated, at a statutory corporate federal tax rate of 35.0% plus any
applicable state income taxes. In addition, each Subsidiary is subject to
taxation in the country in which it operates, currently ranging from a statutory
tax rate of 57.9% in Japan to 16.5% in Hong Kong. The Company is eligible to
receive foreign tax credits in the U.S. for the amount of foreign taxes actually
paid in a given period. In the event that the Company's operations in high tax
jurisdictions such as Japan grow disproportionately to the rest of the Company's
operations, the Company will be unable to fully utilize its foreign tax credits
in the U.S., which could, accordingly, result in the Company paying a higher
overall effective tax rate on its worldwide operations.
Because the Subsidiaries operate outside of the United States, the Company
is subject to the jurisdiction of numerous foreign tax authorities. In addition
to closely monitoring the Subsidiaries' locally based income, these tax
authorities regulate and restrict various corporate transactions, including
intercompany transfers. The Company believes that the tax authorities in Japan
and South Korea are particularly active in challenging the tax structures of
foreign corporations and their intercompany transfers. The Company is currently
undergoing audits in South Korea. See "--Government Regulation of Products and
Marketing; Import Restrictions" and --"Other Regulatory Issues." Although the
Company believes that its tax and transfer pricing structures are in compliance
in all material respects with the laws of every jurisdiction in which it
operates, no assurance can be given that these structures will not be challenged
by foreign tax authorities or that such challenges or any required changes in
such structures will not have a material adverse effect on the Company's
business or results of operations.
22
INCREASE IN DISTRIBUTOR COMPENSATION EXPENSE
Under the Licensing and Sales Agreements (the "Licensing and Sales
Agreements") between each of the Subsidiaries and NSI, the Company, through its
Subsidiaries, is contractually obligated to pay a distributor commission expense
of 42% of commissionable product sales (with the exception of South Korea where,
due to government regulations, the Company uses a formula based upon a maximum
payout of 35% of commissionable product sales). The Licensing and Sales
Agreements provide that the Company is to satisfy this obligation by paying
commissions owed to local distributors. In the event that these commissions
exceed 42% of commissionable product sales, the Company is entitled to receive
the difference from NSI. In the event that the commissions paid are lower than
42%, the Company must pay the difference to NSI. Under this formulation, the
Company's total commission expense is fixed at 42% of commissionable product
sales in each country (except for South Korea). The 42% figure has been set on
the basis of NSI's experience over the past eight years during which period
actual commissions paid in a given year together with the cost of administering
the Global Compensation Plan have ranged between 41% and 43% of commissionable
product sales for such year (averaging approximately 42%). In the event that
actual commissions payable to distributors from sales in the Company's markets
vary from these historical results, whether as a result of changes in
distributor behavior or changes to the Global Compensation Plan or in the event
that NSI's cost of administering the Global Compensation Plan increases or
decreases, the Licensing and Sales Agreements provide that the intercompany
settlement figure may be modified to more accurately reflect actual results.
This could result in the Company becoming obligated to make greater settlement
payments to NSI under the Licensing and Sales Agreements. Such additional
payments could adversely affect the Company's results of operations. Because the
Company licenses the right to use the Global Compensation Plan from NSI, the
structure of the plan, including commission rates, is under the control of NSI.
PRODUCT LIABILITY
The Company may be subject, under applicable laws and regulations, to
liability for loss or injury caused by its products. The Company's Subsidiaries
are currently covered for product liability claims to the extent of and under
insurance programs maintained by NSI for their benefit and for the benefit of
its affiliates purchasing NSI products. Accordingly, NSI maintains a policy
covering product liability claims for itself and its affiliates with a $1
million per claim and $1 million annual aggregate limit and an umbrella policy
with a $40 million per claim and $40 million annual aggregate limit. Although
the Company has not been the subject of material product liability claims and
the laws and regulations providing for such liability in the Company's markets
appear to have been seldom utilized, no assurance can be given that the Company
may not be exposed to future product liability claims, and, if any such claims
are successful, there can be no assurance that the Company will be adequately
covered by insurance or have sufficient resources to pay such claims. The
Company does not currently maintain its own product liability policy.
COMPETITION
The markets for personal care and nutritional products are large and
intensely competitive. The Company competes directly with companies that
manufacture and market personal care and nutritional products in each of the
Company's product lines. The Company competes with other companies in the
personal care and nutritional products industry by emphasizing the value and
premium quality of the Company's products and the convenience of the Company's
distribution system. Many of the Company's competitors have much greater name
recognition and financial resources than the Company. In addition, personal care
and nutritional products can be purchased in a wide variety of channels of
distribution. While the Company believes that consumers appreciate the
convenience of ordering products from home through a sales person or through a
catalog, the buying habits of many consumers accustomed to purchasing products
through traditional retail channels are difficult to change. The Company's
product offerings in each product category are also relatively small compared to
the wide variety of products offered by many other personal care and nutritional
product companies. There can be no assurance that
23
the Company's business and results of operations will not be affected materially
by market conditions and competition in the future.
The Company also competes with other direct selling organizations, some of
which have longer operating histories and higher visibility, name recognition
and financial resources. The leading network marketing company in the Company's
markets is Amway Corporation and its affiliates. The Company competes for new
distributors on the basis of the Global Compensation Plan and its premium
quality products. Management envisions the entry of many more direct selling
organizations into the marketplace as this channel of distribution expands over
the next several years. The Company has been advised that certain large,
well-financed corporations are planning to launch direct selling enterprises
which will compete with the Company in certain of its product lines. There can
be no assurance that the Company will be able to successfully meet the
challenges posed by this increased competition.
The Company competes for the time, attention and commitment of its
independent distributor force. Given that the pool of individuals interested in
the business opportunities presented by direct selling tends to be limited in
each market, the potential pool of distributors for the Company's products is
reduced to the extent other network marketing companies successfully recruit
these individuals into their businesses. Although management believes that the
Company offers an attractive business opportunity, there can be no assurance
that other network marketing companies will not be able to recruit the Company's
existing distributors or deplete the pool of potential distributors in a given
market.
OPERATIONS OUTSIDE THE UNITED STATES
The Company's revenues and most of its expenses are recognized primarily
outside of the United States. Therefore, the Company is subject to transfer
pricing regulations and foreign exchange control, taxation, customs and other
laws. The Company's operations may be materially and adversely affected by
economic, political and social conditions in the countries in which it operates.
A change in policies by any government in the Company's markets could adversely
affect the Company and its operations through, among other things, changes in
laws, rules or regulations, or the interpretation thereof, confiscatory
taxation, restrictions on currency conversion, currency repatriation or imports,
or the expropriation of private enterprises. Although the general trend in these
countries has been toward more open markets and trade policies and the fostering
of private business and economic activity, no assurance can be given that the
governments in these countries will continue to pursue such policies or that
such policies will not be significantly altered in future periods. This could be
especially true in the event of a change in leadership, social or political
disruption or upheaval, or unforeseen circumstances affecting economic,
political or social conditions or policies. The Company is aware of news
releases in South Korea in 1996, for example, reporting comments by political
figures proposing restrictions on foreign direct sellers designed to protect the
market share of local companies. There can be no assurance that such activities,
or other similar activities in the Company's markets, will not result in passage
of legislation or the enactment of policies which could materially adversely
affect the Company's operations in these markets. In addition, the Company's
ability to expand its operations into the new markets for which it has received
an exclusive license to distribute NSI products will directly depend on its
ability to secure the requisite government approvals and comply with the local
government regulations in each of those countries. The Company has in the past
experienced difficulties in obtaining such approvals as a result of certain
actions taken by its distributors, and no assurance can be given that these or
similar problems will not prevent the Company from commencing operations in
those countries. See "--Entering New Markets."
ANTI-TAKEOVER EFFECTS OF CERTAIN CHARTER, CONTRACTUAL AND STATUTORY PROVISIONS
The Board of Directors is authorized, subject to certain limitations, to
issue without further consent of the stockholders up to 25,000,000 shares of
preferred stock with rights, preferences and privileges designated by the Board
of Directors. See "Description of Capital Stock--Preferred Stock." In addition,
the Company's Certificate of Incorporation requires the approval of 66 2/3% of
the outstanding voting power of the Class A Common Stock and the Class B Common
Stock to authorize or approve certain change of control
24
transactions. See "Description of Capital Stock--Common Stock--Voting Rights"
and "--Mergers and Other Business Combinations." The Company's Certificate of
Incorporation and Bylaws also contain certain provisions that limit the ability
to call special meetings of stockholders and the ability of stockholders to
bring business before or to nominate directors at a meeting of stockholders. See
"Description of Capital Stock-- Other Charter and Bylaw Provisions." Pursuant to
the 1996 Stock Incentive Plan, in the event of certain change of control
transactions the Board of Directors has the right, under certain circumstances,
to accelerate the vesting of options and the expiration of any restriction
periods on stock awards. See "Management--1996 Stock Incentive Plan." Finally,
the Operating Agreements with NSI and NSIMG are subject to renegotiation after
December 31, 2001 upon a change of control of the Company. Any of these actions,
provisions or requirements could have the effect of delaying, deferring or
preventing a change of control of the Company. See "Business--Relationship with
NSI--General Provisions."
The Company is subject to the provisions of Section 203 of the General
Corporation Law of the State of Delaware (the "Anti-Takeover Law") regulating
corporate takeovers. The Anti-Takeover Law prevents certain Delaware
corporations, including those whose securities are listed on the New York Stock
Exchange, from engaging, under certain circumstances, in a "business
combination" (which includes a merger of more than 10% of the corporations'
assets) with an "interested stockholder" (a stockholder who, together with
affiliates and associates, within the prior three years did own 15% or more of
the corporation's outstanding voting stock) for three years following the date
that such stockholder became an "interested stockholder," unless the "business
combination" or "interested stockholder" is approved in a prescribed manner. A
Delaware corporation may "opt out" of the Anti-Takeover Law with an express
provision in its original certificate of incorporation or an express provision
in its certificate of incorporation or bylaws resulting from a stockholders'
amendment approved by at least a majority of the outstanding voting shares. The
Company has not "opted out" of the provisions of the Anti-Takeover Law.
SHARES ELIGIBLE FOR FUTURE SALE
Sales of a substantial number of shares of Class A Common Stock in the
public market following the Offerings could adversely affect the market price
for the Class A Common Stock. See "Description of Capital Stock" and "Shares
Eligible for Future Sale."
ABSENCE OF DIVIDENDS
The Company does not anticipate that any dividends will be declared on its
Common Stock in the immediate future. The Company intends from time to time to
re-evaluate this policy based on its net income and its alternative uses for
retained earnings, if any. Any future declaration of dividends will be subject
to the discretion of the Board of Directors of the Company and subject to
certain limitations under the General Corporation Law of the State of Delaware.
The timing, amount and form of dividends, if any, will depend, among other
things, on the Company's results of operations, financial condition, cash
requirements and other factors deemed relevant by the Board of Directors of the
Company. There can be no assurance regarding the timing or payment of any future
dividends by the Company. It is anticipated that any dividends, if declared,
will be paid in U.S. dollars. The Company, as a holding company, will be
dependent on the earnings and cash flow of, and dividends and distributions
from, the Subsidiaries to pay any cash dividends or distributions on the Class A
Common Stock that may be authorized by the Board of Directors of the Company.
See "--Reliance on Operations of and Dividends and Distributions from
Subsidiaries" and "Dividend Policy."
25
USE OF PROCEEDS
All of the shares of Class A Common Stock to be sold in the Offerings are
being sold by the Selling Stockholders, who will also bear the expenses of the
Offerings. Consequently, the Company will not receive any of the proceeds from
the Offerings.
DIVIDEND POLICY
The Company does not anticipate that any dividends will be declared on its
Common Stock in the immediate future. The Company intends from time to time to
re-evaluate this policy based on its net income and its alternative uses for
retained earnings, if any. Any future declaration of dividends will be subject
to the discretion of the Board of Directors of the Company and subject to
certain limitations under the General Corporation Law of the State of Delaware
(the "DGCL"). The timing, amount and form of dividends, if any, will depend,
among other things, on the Company's results of operations, financial condition,
cash requirements and other factors deemed relevant by the Board of Directors of
the Company. It is anticipated that any dividends, if declared, will be paid in
U.S. dollars. The Company, as a holding company, will be dependent on the
earnings and cash flow of, and dividends and distributions from, the
Subsidiaries to pay any cash dividends or distributions on the Class A Common
Stock that may be authorized by the Board of Directors of the Company. See
"Certain United States Tax Consequences to Non-United States Holders." Holders
of Class A Common Stock and holders of Class B Common Stock will share equally
in any dividends declared by the Board of Directors. See "Risk Factors--Absence
of Dividends" and "--Reliance on Operations of and Dividends and Distributions
from Subsidiaries" and "Description of Capital Stock--Common Stock--Dividends"
and "--Preferred Stock."
PRICE RANGE OF CLASS A COMMON STOCK
The Company's Class A Common Stock trades on the NYSE under the symbol "NUS"
and was listed for the first time on November 21, 1996. Prior to that date,
there was no public market for the Company's Class A Common Stock. The following
table is based upon information available to the Company and sets forth the
range of the high and low sales prices for the Company's Class A Common Stock.
SALES PRICE
--------------------
HIGH LOW
--------- ---------
1996
- -------------------------------------------------------------------------------------
Fourth Quarter (from November 21, 1996).............................................. $ 30.88 $ 26.50
1997
- -------------------------------------------------------------------------------------
First Quarter........................................................................ $ 30.88 $ 23.00
Second Quarter (through June 3, 1997)................................................ $ 28.25 $ 23.75
The approximate number of holders of record of the Company's Class A Common
Stock as of May 31, 1997 was 541. This number does not represent the actual
number of beneficial owners of shares of the Company's 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. The last reported sale price of the Class A Common Stock on the New York
Stock Exchange on June 3, 1997, was $26.75
26
CAPITALIZATION
The following table sets forth the cash and cash equivalents, the short-term
debt and capitalization of the Company as of March 31, 1997, and as adjusted to
reflect the conversion by the Selling Stockholders of 7,000,000 shares of Class
B Common Stock into shares of Class A Common Stock for sale in the Offerings.
Since the Company will not receive any proceeds from the Offerings, no
additional adjustments to its capitalization will occur as a result of the
Offerings. The information below should be read in conjunction with the
Consolidated Financial Statements and the related notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the pro forma financial statements included elsewhere in this
Prospectus.
AS OF MARCH 31, 1997
----------------------
AS
ACTUAL ADJUSTED
---------- ----------
(IN THOUSANDS, EXCEPT
SHARE AMOUNTS)
Cash and cash equivalents(1).............................................................. $ 196,798 $ 196,798
---------- ----------
---------- ----------
Short-term notes payable to related parties(1)............................................ $ 81,487 $ 81,487
---------- ----------
---------- ----------
Stockholders' equity:
Preferred Stock, par value $.001 per share, 25,000,000 shares authorized, no shares
issued and outstanding................................................................ $ -- $ --
Class A Common Stock, par value $.001 per share, 500,000,000 shares authorized,
11,723,011 and 18,723,011 shares issued and outstanding actual and as adjusted,
respectively(2)....................................................................... 12 19
Class B Common Stock, par value $.001 per share, 100,000,000 shares authorized,
71,696,675 and 64,696,675 shares issued and outstanding actual and as adjusted,
respectively.......................................................................... 72 65
Additional paid-in capital.............................................................. 137,876 137,876
Cumulative foreign currency translation adjustment...................................... (9,023) (9,023)
Retained earnings....................................................................... 31,981 31,981
Deferred compensation(3)................................................................ (17,781) (17,781)
Note receivable from NSI(3)............................................................. (13,139) (13,139)
---------- ----------
Total stockholders' equity............................................................ 129,998 129,998
---------- ----------
Total capitalization.................................................................. $ 129,998 $ 129,998
---------- ----------
---------- ----------
- ------------------------------
(1) On April 4, 1997, the Company paid the $71.5 million balance on the S
Distribution Notes. The remaining $10.0 million note payable to NSI related
to the License Fee is due January 15, 1998.
(2) Excludes 1,605,000 shares of Class A Common Stock held by the Company and
reserved for issuance upon exercise of the Distributor Options.
(3) Reflects estimated deferred compensation expense related to the Distributor
Options and employee stock awards of $17.8 million and a note receivable
from NSI for the Distributor Options with an estimated principal balance of
$13.1 million.
27
SELECTED CONSOLIDATED FINANCIAL AND OTHER INFORMATION
The following selected consolidated financial data and other information as
of December 31, 1995 and 1996 and for the fiscal year ended September 30, 1994,
for the three months ended December 31, 1994 and for the years ended December
31, 1995 and 1996 have been derived from the Company's Consolidated Financial
Statements, which have been audited by Price Waterhouse LLP, independent
accountants, included elsewhere in this Prospectus. The pro forma income
statement data for the fiscal years ended December 31, 1995 and 1996 and for the
three months ended March 31, 1996 have been derived from the Company's Unaudited
Pro Forma Consolidated Statements of Income, included elsewhere in this
Prospectus. The consolidated financial data as of September 30, 1993 and 1994
and as of December 31, 1994 are derived from the consolidated financial
statements of the Company, which have been audited but are not contained herein.
The financial data as of September 30, 1992 and for the fiscal year ended
September 30, 1992 and for the year ended December 31, 1994 and as of March 31,
1997 and for the three months ended March 31, 1996 and 1997 are unaudited.
Interim results, in the opinion of management, include all adjustments
(consisting solely of normal recurring adjustments) necessary to present fairly
the financial information for such periods; however, such results are not
necessarily indicative of the results which may be expected for any other
interim period or for a full year. This information should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements and the
related notes thereto included elsewhere in this Prospectus.
THREE
MONTHS
THREE MONTHS ENDED
YEAR ENDED SEPTEMBER 30, ENDED YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------- DECEMBER 31, ------------------------------- ---------
1992 1993 1994 1994 1994(1) 1995 1996 1996
--------- --------- --------- ------------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
INCOME STATEMENT DATA:
Revenue........................... $ 42,919 $ 110,624 $ 254,637 $ 73,562 $ 264,440 $ 358,609 $ 678,596 $ 124,185
Cost of sales..................... 14,080 38,842 86,872 19,607 82,241 96,615 193,158 34,815
--------- --------- --------- ------------- --------- --------- --------- ---------
Gross profit...................... 28,839 71,782 167,765 53,955 182,199 261,994 485,438 89,370
Operating expenses:
Distributor incentives.......... 14,659 40,267 95,737 27,950 101,372 135,722 249,613 46,181
Selling, general and
administrative................ 10,065 27,150 44,566 13,545 48,753 67,475 105,477 20,027
Distributor stock expense....... -- -- -- -- -- -- 1,990 --
--------- --------- --------- ------------- --------- --------- --------- ---------
Operating income.................. 4,115 4,365 27,462 12,460 32,074 58,797 128,358 23,162
Other income (expense), net....... 160 133 443 (813) (394) 511 2,833 274
--------- --------- --------- ------------- --------- --------- --------- ---------
Income before provision for income
taxes........................... 4,275 4,498 27,905 11,647 31,680 59,308 131,191 23,436
Provision for income taxes........ 1,503 417 10,226 2,730 10,071 19,097 49,494 8,686
--------- --------- --------- ------------- --------- --------- --------- ---------
Net income........................ $ 2,772 $ 4,081 $ 17,679 $ 8,917 $ 21,609 $ 40,211 $ 81,697 $ 14,750
--------- --------- --------- ------------- --------- --------- --------- ---------
--------- --------- --------- ------------- --------- --------- --------- ---------
Pro forma net income per share(2)............................................................ $ .50 $ 1.01 $ .18
Pro forma weighted average common shares outstanding......................................... 80,518 81,060 80,518
1997
---------
INCOME STATEMENT DATA:
Revenue........................... $ 210,994
Cost of sales..................... 60,741
---------
Gross profit...................... 150,253
Operating expenses:
Distributor incentives.......... 80,543
Selling, general and
administrative................ 34,483
Distributor stock expense....... 4,477
---------
Operating income.................. 30,750
Other income (expense), net....... 1,770
---------
Income before provision for income
taxes........................... 32,520
Provision for income taxes........ 12,032
---------
Net income........................ $ 20,488
---------
---------
Pro forma net income per share(2). $ .24
Pro forma weighted average common 85,416
28
YEAR ENDED THREE MONTHS
DECEMBER 31, ENDED MARCH 31,
-------------------- --------------------
1995 1996 1996 1997
--------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
PRO FORMA INCOME STATEMENT DATA(3)(4):
Revenue......................................................................... $ 358,609 $ 678,596 $ 124,185 $ 210,994
Cost of sales................................................................... 96,615 193,158 34,815 60,741
--------- --------- --------- ---------
Gross profit.................................................................... 261,994 485,438 89,370 150,253
Operating expenses:
Distributor incentives........................................................ 135,722 249,613 46,181 80,543
Selling, general and administrative........................................... 74,433 111,802 21,740 34,483
--------- --------- --------- ---------
Operating income................................................................ 51,839 124,023 21,449 35,227
Other income(expense), net(5)................................................... (2,298) 3,602 341 1,770
--------- --------- --------- ---------
Income before provision for income taxes........................................ 49,541 127,625 21,790 36,997
Provision for income taxes...................................................... 19,005 44,700 7,631 13,689
--------- --------- --------- ---------
Pro forma net income............................................................ $ 30,536 $ 82,925 $ 14,159 $ 23,308
--------- --------- --------- ---------
--------- --------- --------- ---------
Pro forma net income per share.................................................. $ .36 $ .97 $ .17 $ .27
Weighted average common shares outstanding(6)................................... 85,377 85,377 85,377 85,377
AS OF SEPTEMBER 30, AS OF DECEMBER 31,
------------------------------- -------------------------------
1992 1993 1994 1994 1995 1996
--------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
BALANCE SHEET DATA(7):
Cash and cash equivalents.................................. $ 1,553 $ 14,591 $ 18,077 $ 16,288 $ 63,213 $ 207,106
Working capital............................................ 1,026 (504) 15,941 26,680 47,863 66,235
Total assets............................................... 10,236 41,394 71,565 61,424 118,228 331,715
Short term notes payable to stockholders................... -- -- -- -- -- 71,487
Short term note payable to NSI............................. -- -- -- -- -- 10,000
Long term note payable to NSI.............................. -- -- -- -- -- 10,000
Stockholders' equity....................................... 2,749 6,926 24,934 33,861 61,771 107,792
AS OF MARCH
31,
1997
-----------
BALANCE SHEET DATA(7):
Cash and cash equivalents.................................. $ 196,798
Working capital............................................ 77,936
Total assets............................................... 342,078
Short term notes payable to stockholders................... 71,487
Short term note payable to NSI............................. 10,000
Long term note payable to NSI.............................. --
Stockholders' equity....................................... 129,998
AS OF
AS OF SEPTEMBER 30, AS OF DECEMBER 31, MARCH 31,
------------------------------- ------------------------------- ---------
1992 1993 1994 1994 1995 1996 1996
--------- --------- --------- --------- --------- --------- ---------
OTHER INFORMATION(8):
Number of active distributors.......................... 33,000 106,000 152,000 170,000 236,000 377,000 293,000
Number of executive distributors....................... 649 2,788 5,835 6,083 7,550 20,483 10,323
1997
---------
OTHER INFORMATION(8):
Number of active distributors.......................... 404,000
Number of executive distributors....................... 23,449
- ------------------------------
(1) The information for the year ended December 31, 1994 is not included in the
Company's Consolidated Financial Statements included elsewhere in this
Prospectus. Such information has been presented for comparative purposes
only.
(2) Reflects the weighted average number of common shares and common share
equivalents outstanding during the periods presented assuming that the
Company's Reorganization and the resultant issuance of 80,250,000 shares of
Class B Common Stock occurred as of January 1, 1995. The weighted average
number of common shares and common share equivalents include: (i) an option
granted to an executive officer of the Company to purchase 267,500 shares of
Class A Common Stock prior to the Reorganization; (ii) the sale of 4,750,000
shares of Class A Common Stock by the Company in connection with the Initial
Underwritten Offerings; (iii) the grant of awards for 109,000 shares of
Class A Common Stock to certain employees of the Company during November and
December 1996; and (iv) the award of 41,959 additional shares of Class A
Common Stock to certain employees of the Company during January 1997.
(3) As part of the Reorganization, several actions occurred which impacted the
comparability of the historical financial results of the Company with the
future results of the Company. Therefore, a pro forma presentation has been
prepared to provide comparative data. The unaudited pro forma income
statement data reflect the Reorganization as if such event had occurred as
of January 1, 1995, and the following adjustments: (i) the amortization over
a 20-year period of a $25.0 million payment, consisting of $5.0 million in
cash and $20.0 million in notes, to NSI for the exclusive rights to
distribute NSI products in Thailand, Indonesia, Malaysia, the PRC, the
Philippines, Singapore and Vietnam; (ii) the recognition by the Company of
additional charges of $4.4 million for the year ended December 31, 1995,
$4.0 million for the year ended December 31, 1996 and $1.1 million for the
three months ended March 31, 1996, relating to certain support services
provided to the Company by NSI and an NSI affiliate and certain other
charges related to operating as a public company; (iii) estimated annual
compensation expense of $1.2 million related to the employee stock bonus
awards granted to employees of the Company, NSI and its affiliates; and (iv)
adjustments for U.S. Federal and state income taxes as if the Company had
been taxed as a C corporation rather than as an S corporation since
inception.
29
(4) The unaudited pro forma income statement data do not reflect the estimated
non-cash compensation expense totaling $19.9 million in connection with the
one-time grant of the Distributor Options at an exercise price of $5.75 per
share. $2.0 million of such expense was recorded as actual distributor stock
expense for the year ended December 31, 1996. An additional $4.5 million of
such expense was recorded for the three months ended March 31, 1997. Neither
of these expenses has been included in the pro forma presentation. The
granting and vesting of the Distributor Options are conditioned upon
distributor performance under the Global Compensation Plan and the NSI 1996
Distributor Stock Option Plan. The vesting of the Distributor Options is
scheduled to occur on December 31, 1997.
(5) Pro forma other income and expense includes: (i) increased interest expense
of $2.7 million for the year ended December 31, 1995 relating to the
issuance of the S Distribution Notes of $86.5 million from the Subsidiaries'
earned and undistributed S corporation earnings through the date of the
termination of the Subsidiaries' S corporation status; (ii) increased
interest expense of $0.9 million for the year ended December 31, 1995 and
$0.1 million for the year ended December 31, 1996 and for the three months
ended March 31, 1996, respectively, relating to the issuance of $20.0
million in notes as partial payment of the License Fee payable to NSI; and
(iii) increased interest income of $0.8 million for the year ended December
31, 1995, $0.8 million for the year ended December 31, 1996 and $0.2 million
for the three months ended March 31, 1996 relating to a note receivable from
NSI with an estimated principal balance of $13.1 million as consideration
for the Distributor Options.
(6) Reflects, as if all shares had been issued as of January 1, 1995, the
following: (i) 80,250,000 common shares outstanding and common share
equivalents after giving effect to the Reorganization; (ii) the sale by the
Company of 4,750,000 shares of Class A Common Stock in the Initial
Underwritten Offerings; (iii) the grant of awards for 109,000 shares of
Class A Common Stock to certain employees of the Company; and (iv) an option
granted to an executive officer of the Company to purchase 267,500 shares of
Class A Common Stock. Supplemental income per share, calculated as if $25.0
million of the proceeds from the Initial Underwritten Offerings were used to
repay notes payable, had a dilutive effect of less than 2% and, therefore,
is not presented.
(7) As of March 31, 1997, the balance owing to NSI relating to the License Fee
was $10.0 million, and the balance of S Distribution Notes payable to the
Selling Stockholders and certain of their affiliates in respect of the
earned and undistributed taxable S corporation earnings and capital at
November 19, 1996 was $71.5 million. On April 4, 1997, the Company paid the
$71.5 million balance of the S Distribution Notes, together with the related
accrued interest expense of $1.6 million thereon.
(8) Active distributors are those distributors who are resident in the countries
in which the Company operates and who have purchased products during the
three months ended as of the date indicated, rounded to the nearest
thousand. An executive distributor is an active distributor who has
submitted a qualifying letter of intent to become an executive distributor,
achieved specified personal and group sales volumes for a four month period
and maintained such specified personal and group sales volumes thereafter.
30
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the Company's financial condition and results of
operations should be read in conjunction with the Consolidated Financial
Statements and the related notes thereto included elsewhere in this Prospectus.
GENERAL
Nu Skin Asia Pacific is a network marketing company involved in the
distribution and sale of premium quality, innovative personal care and
nutritional products. The Company is the exclusive distribution vehicle for Nu
Skin International in the countries of Japan, Taiwan, Hong Kong (including
Macau), South Korea and Thailand, where the Company currently has operations,
and in Indonesia, Malaysia, the PRC, the Philippines, Singapore and Vietnam,
where operations have not commenced. Until September 30, 1994, the Company's
fiscal year ended on September 30 of each year. As of October 1, 1994, the
Company changed its fiscal year end to December 31 of each year, beginning with
the fiscal year ended December 31, 1995.
The Company's revenue is primarily dependent upon the efforts of a network
of independent distributors who purchase products and sales materials from the
Company in their local currency and who constitute the Company's customers. The
Company recognizes revenue when products are shipped and title passes to these
independent distributors. Revenue is net of returns, which have historically
been less than 3.0% of gross sales. Distributor incentives are paid to several
levels of distributors on each product sale. The amount and recipient of the
incentive varies depending on the purchaser's position within the Global
Compensation Plan. These incentives are classified as operating expenses. The
following table sets forth revenue information for the time periods indicated.
This table should be reviewed in connection with the tables presented under
"Results of Operations" which disclose distributor incentives and other costs
associated with generating the aggregate revenue presented.
THREE MONTHS ENDED
DATE YEAR ENDED DECEMBER 31, MARCH 31,
OPERATIONS ------------------------------- --------------------
COUNTRY COMMENCED 1994 1995 1996 1996 1997
- --------------------------------------------- ------------------ --------- --------- --------- --------- ---------
(IN MILLIONS)
Japan........................................ April 1993 $ 172.9 $ 231.5 $ 380.0 $ 75.4 $ 116.7
Taiwan....................................... January 1992 79.2 105.4 154.6 32.4 46.3
South Korea.................................. February 1996 -- -- 122.4 11.1 40.0
Hong Kong.................................... September 1991 10.9 17.1 17.0 4.2 4.2
Thailand..................................... March 1997 -- -- -- -- 2.7
Sales to NSI affiliates(1)................... January 1993 1.4 4.6 4.6 1.1 1.1
--------- --------- --------- --------- ---------
Total revenue.............................. $ 264.4 $ 358.6 $ 678.6 $ 124.2 $ 211.0
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
- ------------------------
(1) Includes revenue from the sale of certain products to NSI affiliates in
Australia and New Zealand.
Revenue generated in Japan and Taiwan represented 55.3% and 21.9%,
respectively, of total revenue generated during the three months ended March 31,
1997. The Company's South Korean operations, which commenced in February 1996,
generated 19.0% of total revenue for the three months ended March 31, 1997.
Revenue generated in Hong Kong during the three months ended March 31, 1997
represented 2.0% of total Company revenue. Revenue from the first month of
operations in Thailand represented 1.3% of total Company revenue for the three
months ended March 31, 1997. Operating expenses have increased in each country
with the growth of the Company's revenue.
Cost of sales primarily consists of the cost of products purchased from NSI
(in U.S. dollars) as well as duties related to the importation of such products.
Additionally, cost of sales includes the cost of sales
31
materials sold to distributors at or near cost. Sales materials are generally
purchased in local currencies. As the sales mix changes between product
categories and sales materials, cost of sales and gross profit may fluctuate to
some degree due primarily to varying import duty rates levied on imported
product lines. In each of the Company's current markets, duties are generally
higher on nutritional products than on personal care products. Also, as currency
exchange rates fluctuate, the Company's gross margin will fluctuate. In general,
however, costs of sales move proportionately with revenue.
Distributor incentives are the Company's most significant expense. Pursuant
to the Operating Agreements with NSI, the Company and the Subsidiaries are
contractually obligated to pay a distributor commission expense of 42.0% of
commissionable product sales (with the exception of South Korea, where, due to
government regulations, the Company uses a formula based upon a maximum payout
of 35.0% of commissionable product sales). The Licensing and Sales Agreements
provide that the Company is to satisfy this obligation by paying commissions
owed to local distributors. In the event that these commissions exceed 42.0% of
commissionable product sales, the Company is entitled to receive the difference
from NSI. In the event that the commissions paid are lower than 42.0%, the
Company must pay the difference to NSI. Under this formulation, the Company's
total commission expense is fixed at 42.0% of commissionable product sales in
each country (except for South Korea). The 42.0% figure has been set on the
basis of NSI's experience over the past eight years which indicates that actual
commissions paid in a given year and the costs of administering the Global
Compensation Plan (which have historically not exceeded 2% of revenue) together
have averaged approximately 42.0% of commissionable product sales per year
during such period. Because the Company's revenue includes sales of both
commissionable and non-commissionable items, distributor incentives as a
percentage of total revenue have ranged from approximately 36.8% to 38.4% since
December 31, 1994. Non-commissionable items consist of sales materials and
starter kits as well as sales to NSI affiliates in Australia and New Zealand.
In the fourth quarter of 1996, NSI and the Company implemented a one-time
distributor equity incentive program. This global program provides for the
granting of options to distributors to purchase 1.6 million shares of the
Company's currently outstanding Class A Common Stock. The number of options each
distributor receives will be based on their performance and productivity through
August 31, 1997. The options are exercisable at a price of $5.75 per share and
will vest on December 31, 1997. As anticipated, the Company recorded a $2.0
million charge for the year ended December 31, 1996 and a $4.5 million charge
for the three months ended March 31, 1997 and expects additional charges in 1997
of approximately $13.4 million for the non-cash and non-recurring expenses
associated with this program.
Selling, general and administrative expenses include wages and benefits,
rents and utilities, travel and entertainment, promotion and advertising and
professional fees, as well as license and management fees paid to NSI and NSIMG.
Pursuant to the Operating Agreements, the Company contracts for management
support services from NSIMG, for which the Company pays a fee equal to an
allocation of expenses plus 3.0% of such expenses. In addition, the Company pays
to NSI a license fee of 4.0% of the Company's revenue from sales to distributors
(excluding sales of starter kits) for the use of NSI's distributor lists,
distribution system and certain related intangibles.
Provision for income taxes is dependent on the statutory tax rates in each
of the countries in which the Company operates. Statutory tax rates in the
countries in which the Company has operations are 16.5% in Hong Kong, 25.0% in
Taiwan, 30.0% in Thailand, 30.1% in South Korea and 57.9% in Japan. The Company
operates a regional business center in Hong Kong, which bears inventory
obsolescence and currency exchange risks. Any income or loss incurred by the
regional business center is not subject to taxation in Hong Kong. In addition,
since the Reorganization, the Company is subject to taxation in the United
States, where it is incorporated, at a statutory corporate federal tax rate of
35.0%. However, the Company receives foreign tax credits in the U.S. for the
amount of foreign taxes actually paid in a given period, which are utilized to
reduce taxes payable in the United States. See "Risk Factors--Taxation Risks and
Transfer Pricing."
32
RESULTS OF OPERATIONS
The following tables set forth (i) operating results, and (ii) operating
results as a percentage of revenue, respectively, for the periods indicated.
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------- --------------------
1994 1995 1996 1996 1997
--------- --------- --------- --------- ---------
(IN MILLIONS)
Revenue.............................................................. $ 264.4 $ 358.6 $ 678.6 $ 124.2 $ 211.0
Cost of sales........................................................ 82.2 96.6 193.2 34.8 60.7
--------- --------- --------- --------- ---------
Gross profit......................................................... 182.2 262.0 485.4 89.4 150.3
Operating expenses:
Distributor incentives............................................. 101.4 135.7 249.6 46.2 80.5
Selling, general and administrative................................ 48.8 67.5 105.4 20.0 34.5
Distributor stock expense.......................................... -- -- 2.0 -- 4.5
--------- --------- --------- --------- ---------
Operating income..................................................... 32.0 58.8 128.4 23.2 30.8
Other income (expense), net.......................................... (.4) .5 2.8 .3 1.7
--------- --------- --------- --------- ---------
Income before provision for income taxes............................. 31.6 59.3 131.2 23.5 32.5
Provision for income taxes(1)........................................ 10.0 19.1 49.5 8.7 12.0
--------- --------- --------- --------- ---------
Net income........................................................... $ 21.6 $ 40.2 $ 81.7 $ 14.8 $ 20.5
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Unaudited supplemental data(1):
Net income before pro forma provision for income taxes............. $ 31.6 $ 59.3 $ 131.2 $ 23.5
Pro forma provision for income taxes............................... 11.5 22.8 46.0 8.2
--------- --------- --------- ---------
Net income after pro forma provision for income taxes.............. $ 20.1 $ 36.5 $ 85.2 $ 15.3
--------- --------- --------- ---------
--------- --------- --------- ---------
THREE MONTHS
ENDED MARCH 31,
YEAR ENDED DECEMBER 31,
------------------------------- --------------------
1994 1995 1996 1996 1997
--------- --------- --------- --------- ---------
Revenue............................................................. 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales....................................................... 31.1 26.9 28.5 28.0 28.8
--------- --------- --------- --------- ---------
Gross profit........................................................ 68.9 73.1 71.5 72.0 71.2
Operating expenses:
Distributor incentives............................................ 38.4 37.8 36.8 37.2 38.2
Selling, general and administrative............................... 18.4 18.8 15.5 16.1 16.3
Distributor stock expense......................................... -- -- .3 -- 2.1
--------- --------- --------- --------- ---------
Operating income.................................................... 12.1 16.5 18.9 18.7 14.6
Other income (expense), net......................................... (.1) .1 .4 .2 .8
--------- --------- --------- --------- ---------
Income before provision for income taxes............................ 12.0 16.6 19.3 18.9 15.4
Provision for income taxes(1)....................................... 3.8 5.3 7.3 7.0 5.7
--------- --------- --------- --------- ---------
Net income.......................................................... 8.2% 11.3% 12.0% 11.9% 9.7%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Unaudited supplemental data(1):
Net income before pro forma provision for income taxes............ 12.0% 16.6% 19.3% 18.9%
Pro forma provision for income taxes.............................. 4.3 6.4 6.8 6.6
--------- --------- --------- ---------
Net income after pro forma provision for income taxes............. 7.7% 10.2% 12.5% 12.3%
--------- --------- --------- ---------
--------- --------- --------- ---------
- --------------------------
(1) Reflects adjustments for U.S. Federal and state income taxes as if the
Company had been taxed as a C corporation rather than as an S corporation
since inception. No adjustment is required for 1997 because the Company has
been taxed as a C corporation for this period.
33
THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THE THREE MONTHS ENDED MARCH 31,
1996
REVENUE increased 70% to $211.0 million from $124.2 million for the three
months ended March 31, 1997 compared with the same period in 1996. This increase
is primarily attributable to several factors. First, revenue in Japan increased
by $41.3 million, or 55%. This increase in revenue was primarily a result of
continued growth of the IDN product line as well as increased sales following a
distributor convention held in the first quarter of 1997. Second, revenue in
Taiwan increased by $13.9 million, or 43%, primarily as a result of growth in
IDN sales following the late 1996 introduction of LIFEPAK. Third, revenue in
South Korea increased by $28.9 million, primarily as a result of a full quarter
of operations in 1997 as compared to a partial quarter in 1996 following the
commencement of operations in February. Fourth, the opening of business in
Thailand in the first quarter of 1997 resulted in an additional $2.7 million in
revenue. Revenue in Hong Kong remained constant at $4.2 million.
GROSS PROFIT as a percentage of revenue was 71.2% and 72.0% for the three
months ended March 31, 1997 and 1996, respectively. This decrease reflected the
strengthening of the U.S. dollar and the commencement of operations in South
Korea in 1996. The Company purchases goods in U.S. dollars and recognizes
revenue in local currency and is consequently subjected to exchange rate risks
in its gross margins. The full quarter of operations in South Korea in 1997 also
impacted gross profit as a percentage of revenue due to South Korean regulations
which result in higher prices on imported products as compared to other markets.
DISTRIBUTOR INCENTIVES as a percentage of revenue increased to 38.2% for the
three months ended March 31, 1997 from 37.2% for the three months ended March
31, 1996. The primary reason for this increase was a more developed distributor
network in South Korea in 1997, which resulted in incentive payments closer to
the 35.0% maximum Korean statutory limit. In addition, sales of
non-commissionable items throughout the Company in 1997 were smaller as a
percentage of sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES as a percentage of revenue
increased to 16.3% for the three months ended March 31, 1997 from 16.1% for the
three months ended March 31, 1996. This increase was primarily due to increased
promotion expenses of $2.0 million resulting from the first quarter distributor
conventions and was offset somewhat by economies of scale gained as the
Company's revenue increased.
DISTRIBUTOR STOCK EXPENSE of $4.5 million reflects the one-time grant of the
distributor stock options at an exercise price of $5.75 per share. This non-cash
expense is non-recurring and an estimated $4.5 million will be recorded each
quarter in 1997.
OPERATING INCOME increased 33% to $30.8 million from $23.2 million for the
three months ended March 31, 1997 compared with the same period in 1996. This
increase was caused primarily by an increase in revenue. Operating margin
decreased from 18.7% to 14.6% for the three months ended March 31, 1997 compared
with the same period in 1996. This margin decrease was caused primarily by the
distributor stock expense, increased distributor incentives and lower gross
margins.
OTHER INCOME increased by $1.4 million for the three months ended March 31,
1997 compared with the same period in 1996. The increase was primarily caused by
a net increase in interest income generated through the short-term investment of
cash over interest expense related to the S Distribution Notes payable to
stockholders, along with approximately $0.5 million of unrealized exchange gains
resulting from forward exchange contracts.
PROVISION FOR INCOME TAXES increased to $12.0 million from $8.7 million for
the three months ended March 31, 1997 compared with the same period in 1996 due
to increased income. The effective tax rate was 37.0% for the three months ended
March 31, 1997 and 1996.
NET INCOME increased by $5.7 million to $20.5 million from $14.8 million for
the three months ended March 31, 1997 compared with the same period in 1996 due
primarily to increased revenue. Net income as a percentage of revenue decreased
to 9.7% for the three months ended March 31, 1997 as compared to 11.9% for the
same period in 1996 due to the reduction in operating margin.
34
YEAR ENDED DECEMBER 31, 1996 COMPARED TO THE YEAR ENDED DECEMBER 31, 1995
REVENUE was $678.6 million during 1996, an increase of 89.2% from revenue of
$358.6 million recorded during 1995. This increase is primarily attributable to
several factors. First, revenue in Japan increased by $148.5 million, or 64.1%.
This increase in revenue was primarily a result of the continued success of
nutritional, color cosmetics and HAIRFITNESS products, which were introduced in
October 1995. Revenue growth in Japan was partially offset by the strengthening
of the U.S. dollar relative to the Japanese yen during 1996. Second, revenue in
Taiwan increased by $49.2 million, or 46.7%, primarily as a result of the
introduction of color cosmetics and other products, including LIFEPAK in October
1996, along with the opening of a new distribution and walk-in center in Nankan,
Taiwan. Third, in February 1996, Nu Skin Korea commenced operations and
generated revenue of $122.4 million for 1996. Finally, revenue in Hong Kong
decreased by $0.1 million during 1996 as compared to 1995, due to several
leading Hong Kong distributors continuing to focus on other Asian markets.
GROSS PROFIT as a percentage of revenue was 71.5% and 73.1% during 1996 and
1995, respectively. This decline reflected the strengthening of the U.S. dollar,
the introduction of nutritional products in Japan and the commencement of
operations in South Korea in 1996. Nutritional products are generally subject to
higher duties than other products marketed by the Company, which yields lower
gross profit as a percentage of revenue. The commencement of operations in South
Korea also impacted gross profit as a percentage of revenue due to South Korean
regulations which result in higher prices on imported products than in other
markets.
DISTRIBUTOR INCENTIVES as a percentage of revenue declined from 37.8% for
1995 to 36.8% for 1996. The primary reason for this decline was increased
revenue from South Korea where local regulations limit the incentives which can
be paid to South Korean distributors.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES as a percentage of revenue
declined from 18.8% during 1995 to 15.5% during 1996. This decrease was
primarily due to economies of scale gained as the Company's revenue increased.
DISTRIBUTOR STOCK EXPENSE of $2.0 million reflects the one-time grant of the
distributor stock options at an exercise price of $5.75 per share. This non-cash
expense is non-recurring and an estimated $4.5 million will be recorded each
quarter in 1997.
OPERATING INCOME during 1996 increased to $128.4 million, an increase of
118.4% from the $58.8 million of operating income recorded during 1995.
Operating income as a percentage of revenue increased from 16.5% to 18.9%. This
increase was caused primarily by lower selling, general and administrative
expenses as a percentage of revenue.
OTHER INCOME increased by $2.3 million during 1996 as compared to 1995. The
increase was primarily caused by an increase in interest income generated
through the short-term investment of cash.
PRO FORMA PROVISION FOR INCOME TAXES increased to $46.0 million during 1996
compared to $22.8 million during 1995. The effective tax rate decreased to 35.0%
in 1996 as compared to 38.4% for 1995. The Company generated excess foreign tax
credits in 1995 which did not continue in 1996.
NET INCOME AFTER PRO FORMA PROVISION FOR INCOME TAXES increased by $48.7
million to $85.2 million during 1996 compared to $36.5 million during 1995. Pro
forma net income as a percentage of revenue increased to 12.5% for 1996 as
compared to 10.2% for 1995.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO THE YEAR ENDED DECEMBER 31, 1994
REVENUE was $358.6 million during 1995, an increase of 35.6% from the $264.4
million of revenue recorded during 1994. This increase was due primarily to an
increased number of active and executive level distributors in each market,
which was the primary factor contributing to a $58.6 million increase in revenue
in Japan, a $26.2 million increase in revenue in Taiwan and a $6.2 million
increase in revenue in
35
Hong Kong. Nutritional products, color cosmetics products and a new line of
HAIRFITNESS products were introduced in Japan in the fourth quarter of 1995,
accounting for $25.0 million of the $58.6 million increase. Additionally, the
Company benefitted by the strengthening of the Japanese yen during 1995. Revenue
in Taiwan and Hong Kong increased as a result of a higher volume of sales of
color cosmetics, which were introduced in late 1994, and other personal care
products. Additionally, certain new product introductions by NSI affiliates in
Australia and New Zealand led to a $3.2 million increase in revenue from sales
to affiliated entities.
GROSS PROFIT as a percentage of revenue increased from 68.9% in 1994 to
73.1% in 1995. The increase in gross profit resulted from a reduction in product
costs on purchases from NSI, the weakening of the U.S. dollar relative to the
Japanese yen and other cost savings related to inventory shipping and handling.
DISTRIBUTOR INCENTIVES as a percentage of revenue decreased from 38.4% in
1994 to 37.8% in 1995. This decline was primarily attributable to an increase in
revenue in 1995 from non-commissionable sales materials and sales to NSI
affiliates.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES as a percentage of revenue
increased to 18.8% during 1995 from 18.4% during 1994. This increase was
primarily due to a one-time cost incurred in February 1995 in connection with
moving the Company's Japanese facilities into a larger, more accessible office
and distributor center in Tokyo, Japan.
OPERATING INCOME increased to $58.8 million in 1995 from $32.0 million in
1994, an increase of 83.8%. Operating income as a percentage of revenue
increased to 16.5% from 12.1%. The increase was primarily the result of the
product cost reductions discussed above.
OTHER INCOME increased by approximately $0.9 million during 1995 as compared
to 1994. This increase was primarily caused by the disposal of property and
equipment related to a move to new facilities during 1994, and an increase in
interest income generated through the short term investment of cash.
PRO FORMA PROVISION FOR INCOME TAXES increased to $22.8 million during 1995
as compared to $11.5 million for 1994. The effective tax rate was 38.4% in 1995
as compared to 36.4% in 1994.
NET INCOME AFTER PRO FORMA PROVISION FOR INCOME TAXES increased by $16.4
million to $36.5 million during 1995 as compared to $20.1 million for 1994. Net
income as a percentage of revenue increased to 10.2% during 1995 as compared to
7.7% for 1994.
UNAUDITED PRO FORMA CONSOLIDATED RESULTS OF OPERATIONS
As part of the Reorganization, several actions occurred which impacted the
comparability of the historical financial results of the Company with the future
results of the Company. Therefore, a pro forma presentation has been prepared to
provide comparative data. The following adjustments reflect the Reorganization
as if such event had occurred as of January 1, 1995, and are reflected in the
unaudited pro forma consolidated financial information set forth below: (i) the
amortization over a 20-year period of a $25.0 million payment, consisting of
$5.0 million in cash and $20.0 million in notes, to NSI for the exclusive rights
to distribute Nu Skin and IDN products in Thailand, Indonesia, Malaysia, the
PRC, the Philippines, Singapore and Vietnam; (ii) the recognition by the Company
of additional charges of $4.0 million relating to certain support services
provided to the Company by NSI and an NSI affiliate and certain other charges
related to operating as a public company; (iii) estimated annual compensation
expense of $1.2 million related to the employee stock bonus awards granted to
employees of the Company; and (iv) adjustment for U.S. Federal and state income
taxes as if the Company had been taxed as a C corporation rather than as an S
corporation since inception. The unaudited pro forma combined financial
information set forth below does not reflect the estimated non-cash compensation
expense of $19.9 million in connection with the one-time grant of the
Distributor Options at an exercise price of $5.75 per share. The Distributor
Options include conditions related to the achievement of performance goals and
will vest on December 31, 1997.
36
The following table sets forth the percentage of revenue represented by the
specific components of income and expense on a pro forma basis for the periods
presented.
THREE MONTHS
YEAR ENDED DECEMBER ENDED MARCH
31, 1996 31, 1996
------------------- --------------
Revenue............................................................. 100.0% 100.0%
Cost of sales....................................................... 28.5 28.0
----- -------
Gross profit........................................................ 71.5 72.0
Operating expenses:
Distributor incentives............................................ 36.8 37.2
Selling, general and administrative............................... 16.5 17.5
----- -------
Operating income.................................................... 18.2 17.3
Other income (expense), net......................................... .5 .3
----- -------
Income before provision for income taxes............................ 18.7 17.6
Provision for income taxes.......................................... 6.6 6.2
----- -------
Net income.......................................................... 12.1% 11.4%
----- -------
----- -------
The Company is subject to taxation in the United States, where it is
incorporated, at a statutory corporate federal tax rate of 35%. In addition,
each Subsidiary is subject to taxation in the country in which it operates. The
Company receives foreign tax credits for the amount of foreign taxes actually
paid in a given period, which may be utilized to reduce taxes paid in the United
States. In the event that the Company's operations in high tax jurisdictions
such as Japan grow disproportionately to the rest of the Company's operations,
the Company will be unable to fully utilize its foreign tax credits in the U.S.
which could, accordingly, result in the Company paying a higher overall
effective tax rate on its worldwide operations.
LIQUIDITY AND CAPITAL RESOURCES
The Company underwent the Reorganization and the Initial Underwritten
Offerings in November 1996. In connection with the Initial Underwritten
Offerings, the Company raised $98.8 million in net proceeds. As of the date of
the Reorganization, the aggregate undistributed taxable S corporation earnings
of the Subsidiaries were $86.5 million. The Subsidiaries' earned and
undistributed S corporation earnings through the date of termination of the
Subsidiaries' S corporation status were distributed in the form of the S
Distribution Notes, promissory notes bearing interest at 6.0% per annum. From
the proceeds of the Initial Underwritten Offerings, $15.0 million was used to
pay a portion of the S Distribution Notes, leaving an unpaid S Distribution Note
balance of $71.5 million at March 31, 1997. On April 4, 1997 the Company paid
the $71.5 million balance on the S Distribution Notes, together with related
accrued interest expense of $1.6 million.
In November 1996, the Company purchased from NSI the distribution rights to
seven new markets. These markets include Thailand, where operations commenced in
March 1997, and, Indonesia, Malaysia, the PRC, the Philippines, Singapore and
Vietnam, where operations have not commenced. These rights were purchased for
$25.0 million, of which $5.0 million was paid from the proceeds of the Initial
Underwritten Offerings. During the three months ended March 31, 1997, an
additional $10.0 million was paid. At March 31, 1997, the Company had a $10.0
million short term obligation due January 15, 1998 related to the purchase of
these rights. Interest accrues at a rate of 6.0% per annum on amounts due under
this obligation.
The Company anticipates using the remaining $78.8 million in net proceeds
from the Initial Underwritten Offerings for new market development, introducing
new products, enhancing the Company's technological infrastructure, establishing
additional office and distribution centers and for other general corporate
purposes.
37
The Company generates significant cash flow from operations due to its
significant growth, high margins and minimal capital requirements. Additionally,
the Company does not extend credit to distributors, but requires payment prior
to shipping products and accordingly does not have accounts receivable from
distributors. During the three months ended March 31, 1997, the Company
generated $3.3 million of cash from operations compared to $15.0 million during
the three months ended March 31, 1996, respectively. The decrease in cash flow
from operations is primarily due to the payment of income taxes during the first
quarter of 1997 and the build-up of inventories to support future market
demands.
As of March 31, 1997, working capital was $77.9 million compared to $66.2
million as of December 31, 1996, respectively. Cash and cash equivalents at
March 31, 1997 were $196.8 million compared to $207.1 million at December 31,
1996.
Historically, the Company's principal need for funds has been for
distributor incentives, working capital (principally inventory purchases),
capital expenditures and the development of new markets. The Company has
generally relied entirely on cash flow from operations to meet its business
objectives without incurring long term debt to unrelated third parties.
Capital expenditures, primarily for equipment, computer systems and
software, office furniture and leasehold improvements, were $1.1 million and
$1.0 million for the three months ended March 31, 1997 and 1996, respectively.
In addition, the Company anticipates capital expenditures through 1998 of an
additional $23.9 million to further enhance its infrastructure, including
computer systems and software, warehousing facilities and walk-in distributor
centers in order to accommodate future growth.
As a part of the Company's and NSI's strategy to motivate distributors with
equity incentives, the Company sold to NSI an option to purchase 1.6 million
shares of the Company's currently outstanding Class A Common Stock. NSI
purchased the option with a 10-year note payable to the Company bearing interest
at 6.0% per annum with an estimated principal balance of $13.1 million. It is
anticipated that the note will be repaid as distributors begin to exercise their
options beginning in 1998.
Under the Operating Agreements with NSI, the Company records related party
receivables and payables. The Company had related party payables of $70.0
million and $46.3 million at March 31, 1997 and December 31, 1996, respectively.
In addition, the Company had related party receivables of $7.7 million and $8.0
million, respectively, at those dates. Related party balances outstanding in
excess of 60 days bear interest at a rate of 2% above the U.S. prime rate. As of
March 31, 1997, no material related party payables or receivables had been
outstanding for more than 60 days.
Management considers the Company to be liquid and able to meet its
obligations on both a short and long-term basis. Management believes existing
cash balances together with future cash flows from operations will be adequate
to fund cash needs relating to the implementation of the Company's strategic
plans, including opening new markets and funding the notes payable to NSI
related to the purchase of the distribution rights.
SEASONALITY AND CYCLICALITY
While neither seasonal nor cyclical variations have materially affected the
Company's results of operations to date, the Company believes that its rapid
growth may have overshadowed these factors. Accordingly, there can be no
assurance that seasonal or cyclical variations will not materially adversely
affect the Company's results of operations in the future.
The direct selling industry is impacted by certain seasonal trends such as
major cultural events and vacation patterns. For example, Japan, Taiwan, Hong
Kong, South Korea and Thailand celebrate their respective local New Year in the
Company's first quarter. Management believes that direct selling in Japan is
also generally negatively impacted during August, when many individuals
traditionally take vacations.
38
Generally, the Company has experienced rapid revenue growth in each new
market from the commencement of operations. In Japan, Taiwan and Hong Kong, the
initial rapid growth was followed by a short period of stable or declining
revenue followed by renewed growth fueled by new product introductions, an
increase in the number of active distributors and increased distributor
productivity. The Company believes that a similar pattern is currently occurring
in its operations in South Korea, where the Company anticipates a significant
decline in its second quarter revenue from revenue in the first quarter of 1997.
See "--Outlook." In addition, the Company may experience variations on a
quarterly basis in its results of operations, as new products are introduced and
new markets are opened. No assurance can be given that the Company's revenue
growth rate in Thailand, which commenced operations in March 1997, or in new
markets where operations have not commenced, will follow this pattern.
QUARTERLY RESULTS
The following table sets forth certain unaudited quarterly data for the
periods shown.
1995 1996
-------------------------------------------------- -------------------------------------
4TH 1ST
1ST QUARTER 2ND QUARTER 3RD QUARTER QUARTER(1) QUARTER(2) 2ND QUARTER 3RD QUARTER
----------- ----------- ----------- ----------- ----------- ----------- -----------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Revenue.......................... $ 77.7 $ 80.5 $ 83.2 $ 117.2 $ 124.2 $ 163.5 $ 183.6
Gross profit..................... 57.3 59.7 60.3 84.7 89.4 117.4 130.9
Operating income................. 13.5 15.0 12.8 17.5 23.2 31.9 37.5
Net income....................... 9.3 10.3 8.1 12.5 14.8 20.3 25.2
Net income per share(4).......... 0.11 0.13 0.10 0.16 0.18 0.25 0.32
1997
-----------
1ST
4TH QUARTER QUARTER(3)
----------- -----------
Revenue.......................... $ 207.3 $ 211.0
Gross profit..................... 147.7 150.3
Operating income................. 35.8 30.8
Net income....................... 21.4 20.5
Net income per share(4).......... 0.26 0.24
- ------------------------------
(1) LIFEPAK, NU COLOUR and HAIRFITNESS products were introduced in Japan during
October 1995.
(2) The Company commenced operations in South Korea in February 1996.
(3) The Company commenced operations in Thailand in March 1997.
(4) Net income per share is computed based on 80,517,500 shares of Common Stock
and Common Stock equivalents outstanding prior to the Reorganization and the
Initial Underwritten Offerings and 82,689,000 weighted average shares of
Common Stock outstanding for the fourth quarter of 1996 and 85,415,600 for
the first quarter of 1997.
CURRENCY FLUCTUATION AND EXCHANGE RATE INFORMATION
The Company's revenues and most of its expenses are recognized primarily
outside of the United States. Each entity's local currency is considered its
functional currency. All revenue and expenses are translated at weighted average
exchange rates for the periods reported. Therefore, the Company's reported sales
and earnings will be positively impacted by a weakening of the U.S. dollar and
will be negatively impacted by a strengthening of the U.S. dollar.
The Company purchases inventory from NSI in U.S. dollars and assumes
currency exchange rate risk with respect to such purchases. Local currency in
Japan, Taiwan, Hong Kong, South Korea and Thailand is generally used to settle
non-inventory transactions with NSI. Given the uncertainty of exchange rate
fluctuations, the Company cannot estimate the effect of these fluctuations on
its future business, product pricing, results of operations or financial
condition. However, because nearly all of the Company's revenue is realized in
local currencies and the majority of its cost of sales is denominated in U.S.
dollars, the Company's gross profits will be positively affected by a weakening
in the U.S. dollar and will be negatively affected by a strengthening in the
U.S. dollar. In order to offset recent strengthening of the U.S. dollar, the
Company implemented price increases of from 5% to 9% on average during the
second quarter of 1997. There can be no assurance that the Company will be able
to effect additional price increases in the future to offset the impact of
future currency fluctuations. In addition, the Company reduces a portion of its
exposure to fluctuations in foreign exchange rates by creating offsetting
positions through the use of foreign currency exchange contracts. The Company
does not use such financial instruments for trading or speculative purposes. The
Company regularly monitors its foreign currency risks and periodically takes
measures to reduce the impact of foreign exchange fluctuations on the Company's
operating results.
39
Following are the weighted average currency exchange rates of $1 into local
currency for each of the Company's markets for the quarters listed:
1995 1996
-------------------------------------------------- -------------------------------------
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER 1ST QUARTER 2ND QUARTER 3RD QUARTER
----------- ----------- ----------- ----------- ----------- ----------- -----------
Japan(1).............................. 96.2 84.4 94.2 101.5 105.8 107.5 109.0
Taiwan................................ 26.2 25.6 27.0 27.2 27.4 27.4 27.5
Hong Kong............................. 7.7 7.7 7.7 7.7 7.7 7.7 7.7
South Korea(1)........................ 786.9 763.1 765.6 769.1 782.6 786.5 815.5
Thailand.............................. 24.9 24.6 24.9 25.1 25.2 25.3 25.3
1997
-----------
4TH QUARTER 1ST QUARTER
----------- -----------
Japan(1).............................. 112.9 121.4
Taiwan................................ 27.5 27.5
Hong Kong............................. 7.7 7.7
South Korea(1)........................ 829.4 863.9
Thailand.............................. 25.5 26.0
- ------------------------------
(1) Between December 31, 1996 and May 15, 1997, the exchange rates of $1 into
Japanese yen and South Korean won achieved highs of 127.1 yen and 899.0 won,
respectively, and lows of 115.4 yen and 839.4 won, respectively. Since
January 1, 1992, the highest and lowest exchange rates for the Japanese yen
have been 134.8 and 80.6, respectively, and for the South Korean won have
been 899.0 and 755.8, respectively.
OUTLOOK
Management believes that implementation of its business strategies will lead
to continued growth in local currency revenue in Japan, Taiwan and Hong Kong.
The Company currently anticipates that sequential revenue in South Korea will
decline significantly in the second quarter compared to the first quarter of
1997 while the local distributor leadership develops and the global distributor
leadership focuses attention on the Thailand market opening, as well as their
own local markets. The Company expects that this anticipated decline in South
Korean revenue will be offset by revenue gains in the Company's other markets in
the second quarter.
The Company believes that the anticipated revenue decline is partially
reflective of the typical business cycle experienced in new markets and
partially the result of other factors specific to South Korea. These other
factors include recent activities by the South Korean government and campaigns
by a coalition of consumer protection and trade organizations against producers
of luxury and foreign goods, in general, and certain network marketing
companies, in particular, that have drawn negative media attention. Although the
Company has not been the focus of these campaigns, management believes that the
media attention has negatively impacted the business environment generally. See
"--Potential Effects of Adverse Publicity." An additional factor which the
Company believes may contribute to the anticipated second quarter revenue
decline in South Korea is the focus of key distributors on other recently-opened
markets, including Thailand. Management expects the planned introduction into
the South Korean market of IDN products in late 1997 to stimulate revenue growth
in South Korea. The future productivity of Thailand is difficult to assess
because operations commenced in March 1997. In addition, the Company will incur
additional selling, general and administrative expenses in 1997 compared to 1996
because of a full year's operations as a public company. Management currently
anticipates that the distributor equity program will result in a distributor
stock expense estimated at $17.9 million in 1997 and will not continue
thereafter.
The statements made above in this section under the caption "Outlook" that
are not historical facts are "forward-looking statements" as defined in the
Reform Act. 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. Factors that
might cause such differences include, but are not limited to, risks and
uncertainties associated with management of the Company's growth, the Company's
dependence on independent distributors and the effects on distributors of the
NSI distributor equity program, potential adverse effects of the Company's
planned price increases on sales and distributor growth, the Company's planned
expansion into new markets and the introduction of new products in the Company's
existing markets, fluctuations in foreign currency values relative to the U.S.
dollar and risks inherent in the importation and regulation and sale of products
in the Company's markets. See "Risk Factors."
40
BUSINESS
GENERAL
Nu Skin Asia Pacific is a rapidly growing network marketing company involved
in the distribution and sale of premium quality, innovative personal care and
nutritional products. The Company is the exclusive distribution vehicle for NSI
in the countries of Japan, Taiwan, Hong Kong (including Macau), South Korea and
Thailand, where the Company currently has operations, and in Indonesia,
Malaysia, the PRC, the Philippines, Singapore and Vietnam, where operations have
not commenced.
The Company believes it is one of the fastest growing network marketing
companies in Asia. Revenue increased 69.9% to $211.0 million for the three
months ended March 31, 1997 from $124.2 million for the same period in 1996. Net
income increased 38.5% to $20.5 million for the three months ended March 31,
1997 from $14.8 million for the same period in 1996. Revenue increased 89.2% to
$678.6 million for the year ended December 31, 1996 from $358.6 million in 1995.
Operating expenses have increased with the growth of the Company's revenue. Net
income increased 103.2% to $81.7 million for the year ended December 31, 1996
from $40.2 million in 1995. The Company's network of independent distributors
has grown since the Company's inception in 1991 to more than 400,000 active
distributors as of March 31, 1997. See "Risk Factors--Managing Growth."
A great deal of the Company's success to date can be directly attributed to
the growth of its Japanese business in recent years. Significant revenue was
recognized from the outset of the Company's operations in Japan in 1993 due to
the immediate attention given to the market by leading NSI distributors from
around the world. Japan has continued to post strong financial results for the
Company, with revenue increasing by approximately 64% in U.S. dollars and 90% in
local currency for 1996 compared to 1995 and by approximately 55% in U.S.
dollars and 76% in local currency for the three months ended March 31, 1997
compared to the same period in 1996. Given the size of the direct selling market
in Japan and the growing Japanese demand for the Company's products, management
believes that there is still significant opportunity for expansion of its share
of this market.
The Company's product philosophy is to combine the best of science and
nature in developing premium quality, innovative personal care and nutritional
products which are specifically designed for the network marketing distribution
channel. The Company offers products in two distinct categories: personal care
products, marketed under the trademark "Nu Skin," and nutritional products,
marketed under the trademark "Interior Design Nutritionals or "IDN"." The Nu
Skin personal care product lines include facial care, body care, hair care and
color cosmetics, as well as specialty products such as sun protection, oral
hygiene and fragrances. The IDN product lines include nutritional supplements,
nutritious and healthy snacks, sports and fitness nutritional products, and
botanical supplements.
In Japan, Taiwan and Hong Kong, the Company currently offers most of the Nu
Skin personal care products and approximately one-third of the IDN products
including LIFEPAK, the core IDN nutritional supplement. In South Korea and
Thailand, the Company currently offers approximately one-half and one-third,
respectively, of the Nu Skin personal care products and none of the nutritional
products. The Company believes that it can significantly grow its business and
attract new customers by expanding its product offerings in each of its markets
to include more of the existing Nu Skin personal care and IDN products. In
addition to expanding its product offerings with existing Nu Skin personal care
and IDN products, the Company intends to introduce new products tailored to
specific markets.
OPERATING STRENGTHS
The Company believes that its success is due to its reputation and its
commitment to provide a wide range of premium quality, innovative personal care
and nutritional products and an appealing global business opportunity for
persons interested in establishing a direct sales business. The Company has been
able to achieve rapid, sustained and profitable growth by capitalizing on the
following operating strengths:
41
PREMIUM PRODUCT OFFERINGS. The Company is committed to continue building
its brand name and distributor and customer loyalty by selling premium quality,
innovative personal care and nutritional products that appeal to broad markets
and the universal desire for health and beauty. This commitment is illustrated
by the Company's personal care products slogan "All of the Good and None of the
Bad" and its nutritional products slogan "Adding Life to Years." The Company
offers products designed for the direct selling channel by focusing on
innovative consumable products which build loyalty and lead to repeat purchases.
Management believes that the Company's focus on innovative products supports its
distributors' demonstrative and educational sales techniques.
GLOBAL DISTRIBUTOR COMPENSATION PLAN. The Company believes that one of the
strengths of the Global Compensation Plan is its seamless integration across all
markets in which Nu Skin and IDN products are sold. By entering into
international sponsoring agreements with NSI, distributors are authorized to
sponsor new distributors in each country where NSI or the Company has
operations. This allows distributors to receive commissions for sales in foreign
countries at the same rate as for sales in their home country. This is a
significant benefit to distributors because they are not required to establish
new distributorships or requalify for higher levels of commissions within each
new country in which they begin to operate. The seamless integration of the
Global Compensation Plan means that distributor knowledge and experience can be
used to rapidly build distributor leadership in new markets. See "Risk
Factors--Reliance Upon Independent Distributors of NSI."
HIGH LEVEL OF DISTRIBUTOR INCENTIVES. The Company believes that the Global
Compensation Plan is among the most financially rewarding plans offered to
distributors by network marketing companies and consequently tends to attract a
high caliber of distributors. There are two fundamental ways in which
distributors can earn money: (i) through retail markups, for which the Company
recommends a range from 43% to 60%; and (ii) through a series of commissions on
each product sale which can result in commissions to distributors aggregating up
to 58% of such product's wholesale price. On a global basis, however,
commissions have averaged 42% of revenue from commissionable sales over the last
eight years. See "Risk Factors--Increase in Distributor Compensation Expense."
NEW MARKET DEVELOPMENT PROGRAM. The Company has developed a low cost,
disciplined approach to opening new markets. Each market opening is preceded by
a thorough analysis of economic and political conditions, regulatory standards
and other business, tax and legal issues. Prior to a market opening, the
Company's management team, in conjunction with NSI support personnel, local
legal counsel and tax advisors, works to obtain all necessary regulatory
approvals and establish facilities capable of meeting distributor needs. This
market development approach, combined with the Global Compensation Plan, which
motivates distributors to train and sponsor other distributors to sell products
in new markets, has enabled the Company to quickly and successfully open new
markets. See "Risk Factors--Entering New Markets."
DISTRIBUTOR SUPPORT PROGRAMS. The Company is committed to providing a high
level of support services tailored to the needs of its distributors in each
market. The Company meets the needs and builds the loyalty of its distributors
with personalized distributor service and a support staff that assists
distributors as they build networks of downline distributors. The Company
provides walk-in, telephonic and computerized product fulfillment and tracking
services that result in user-friendly, timely product distribution. Distributors
purchase directly from the Company, are not required to maintain inventories to
supply down line distributors and are supported by a liberal product return
policy. In addition, each walk-in center maintains meeting rooms which
distributors may utilize in training and sponsoring activities.
RELATIONSHIP WITH NSI. NSI, founded in 1984 and based in Provo, Utah, is
engaged in selling personal care and nutritional products and, together with its
affiliates, comprises one of the largest network marketing organizations in the
world. NSI has provided, and will continue to provide, a high level of support
services to the Company, including product development, marketing and other
managerial support services. Management believes that the Company's relationship
with NSI has allowed the Company to
42
increase revenue and net income at rates that otherwise may not have been
possible. Since distributor agreements are entered into between NSI and
distributors, all of the distributors who generate revenue for the Company are
distributors of NSI. The Company primarily relies on NSI to enforce distributor
policies and procedures. NSI's distributor network is licensed by NSI to the
Subsidiaries. See "Risk Factors-- Relationship with and Reliance on NSI;
Potential Conflicts of Interest."
EXPERIENCED MANAGEMENT TEAM. The Company's senior management team, members
of which founded NSI, has been instrumental in successfully managing the growth
in revenue and net income experienced by the Company to date. The Company has
also attracted experienced local general managers or presidents to oversee
operations in Japan, Taiwan, Hong Kong, South Korea and Thailand. The local
general managers are frequently recognized as industry leaders and are
experienced in dealing with governmental and regulatory agencies.
Consideration of the Company's operating strengths should be made in
connection with various risks, including risks associated with the Company's
reliance on its independent distributors and the effect on the Company's
operations of adverse publicity regarding the Company and actions of
distributors, risks associated with product liability and government regulation
of the Company's products, marketing plan and direct selling generally, the
Company's reliance on NSI and on outside manufacturers, competition and the
adverse impact on net income of an increase in distributor compensation expense.
See "Risk Factors."
GROWTH STRATEGY
The Company's primary objective is to capitalize on its operating strengths
to become a leading distributor of premium quality consumer products in each of
its markets. Specifically, the Company's strategy to increase revenue and net
income is as follows:
INTRODUCE NEW PRODUCTS. Because new products tend to increase sales by
existing distributors and attract new distributors, the Company intends to
continue introducing existing and new Nu Skin personal care and IDN products.
The Company first introduced nutritional products, for example, in Japan in 1995
where they have grown to represent approximately 32% of revenue. In addition the
Company introduced LIFEPAK in Taiwan and Hong Kong in October 1996 and January
1997, respectively. The Company expects to launch a number of IDN products,
including LIFEPAK, in South Korea by the end of 1997, subject to regulatory
approval. The Company also intends to introduce products tailored to specific
demographic and geographic market segments and will consider introducing
entirely new product categories in the future. See "Risk Factors--Government
Regulation of Products and Marketing."
OPEN NEW MARKETS. The Company will continue to pursue attractive new market
opportunities. In March 1997, the Company commenced operations in Thailand. The
Company has made significant progress in its development efforts in the
Philippines and anticipates a potential opening in the first half of 1998. The
Company has conducted preliminary investigations on the feasibility of
commencing operations in Indonesia, Malaysia, the PRC, Singapore and Vietnam.
The Company believes that these countries may represent significant markets for
the future expansion of its operations, provided that the Company can secure the
required regulatory and business permits. See "Risk Factors--Entering New
Markets," "--Potential Negative Impact of Distributor Actions," "--Government
Regulation of Direct Selling Activities" and "--Government Regulation of
Products and Marketing."
ATTRACT NEW DISTRIBUTORS AND ENHANCE DISTRIBUTOR PRODUCTIVITY. To date, the
Company has enjoyed significant growth in the number of its executive
distributors (defined as those active distributors whose group of downline
distributors meet certain monthly qualification requirements). By leveraging its
operating strengths, the Company intends to continue to create and maintain a
business climate to promote the growth in the number of executive distributors
and to increase distributor retention, motivation and productivity. In addition,
the Company will pursue growth in the number of executive distributors by
43
continuing to work with NSI to enhance the Global Compensation Plan,
implementing an innovative distributor equity incentive program, opening 2 or
more new distributor walk-in centers by the end of 1997 to provide a local
presence in additional key cities, enhancing distributor training and
recognition programs, and targeting inactive distributors via direct marketing
who may still have an interest in the Company's business opportunity or
products. See "Business--Distribution System."
INCREASE BRAND AWARENESS AND LOYALTY. The Company intends to increase brand
awareness and loyalty, and sales to new and existing consumers, through (i)
increasing marketing and promotional efforts focused on the Nu Skin and IDN
brands, including the use of celebrity spokespersons such as Christie Brinkley,
the 1995-1996 Miss Thailand and high profile Olympic and world class athletes,
(ii) increased use of respected professional product advisers to promote
existing products and develop new product offerings, (iii) increasing the
availability of sample packages, (iv) emphasizing product "systems," such as the
HAIRFITNESS system of various shampoos and conditioners, which leads to the
purchase of multiple products rather than a single product, and (v) implementing
systems designed to promote repeat product purchases.
Consideration of the Company's growth strategy should be made in connection
with certain risks associated with such growth strategy including risks related
to opening new markets and managing growth, conducting operations outside of the
United States, managing currency risks and complying with import restrictions
and government regulations regarding the Company's products, marketing plan, and
direct selling generally. See "Risk Factors."
FORWARD-LOOKING STATEMENTS
The statements in this section under the captions "Business--General,"
"--Operating Strengths" and "--Growth Strategy" that are not historical facts
are "forward-looking statements" as defined in the Reform Act. 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. Factors that might cause
such differences include, but are not limited to, risks and uncertainties
associated with management of the Company's growth, the Company's dependence on
independent distributors and the effects on distributors of the NSI distributor
equity program, potential adverse effects of the Company's planned price
increases on sales and distributor growth, the Company's planned expansion into
new markets and the introduction of new products in the Company's existing
markets, fluctuations in foreign currency values relative to the U.S. dollar,
risks inherent in the importation and regulation and sale of products in the
Company's markets. See "Risk Factors."
INDUSTRY OVERVIEW
The distribution of products through the network marketing and other direct
selling channels has grown significantly in recent years. The WFDSA reports
that, since 1990, worldwide direct distribution of goods and services to
consumers has increased 76%, resulting in the sale of nearly $80 billion of
goods and services in 1996. According to the WFDSA, $35 billion of goods and
services were sold by its members in 1996 through direct selling channels in the
markets in which the Company currently operates, which represents 44% of the
global volume of direct sales by its members. The Company believes that extended
family relationships, the family culture and the extended social networks common
in Asian countries are particularly well suited to the Company's network
marketing methods. The Company also believes that a variety of recent social and
economic changes which have occurred throughout Asia have had a positive impact
on the Company's revenues and net income. Trends that have benefited the Company
include the emergence of a greater interest on the part of some Asians in
pursuing more independent entrepreneurial activities outside traditional
business settings, an increase in the number of Asian women joining the work
force and an increase in the number of Asians seeking supplemental income from
alternative sources.
The Asian retail market is generally characterized by fragmented
distribution and numerous small retailers. In Japan, these problems are further
exacerbated by the multi-tiered, traditional Japanese
44
distribution system which has proven difficult for many foreign manufacturers to
penetrate. Outside of Japan, the general lack of a developed distribution
infrastructure throughout Asia has fostered and encouraged the growth of direct
selling as a significant distribution channel. Given this environment, the
Company believes that the high level of personal service provided by direct
selling companies, including convenient in-home demonstrations, easy-access
product ordering, timely delivery and generous product return policies, provides
additional value to consumers. In addition, rapidly growing Asian economies and
a growing demand in Asia for Western brand name products has fueled the growth
and demand for high quality consumer products.
COUNTRY PROFILES
The following table sets forth the Company's revenue and the total number of
active distributors for each of the countries in which the Company operated for
the years ended December 31, 1995 and 1996 and for the three months ended March
31, 1996 and 1997. This table should be reviewed in connection with the
information presented under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operations," which discusses the costs
associated with generating the aggregate revenue presented.
THREE MONTHS
YEAR ENDED DECEMBER ENDED
31, MARCH 31,
---------------------- ----------------------
COUNTRY 1995 1996 1996 1997
- ----------------------------------------------------------------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Revenue:
Japan........................................................ $ 231,540 $ 380,044 $ 75,373 $ 116,662
Taiwan....................................................... 105,415 154,564 32,378 46,313
South Korea(1)............................................... -- 122,337 11,137 40,005
Hong Kong.................................................... 17,046 17,037 4,243 4,225
Thailand(2).................................................. -- -- -- 2,729
---------- ---------- ---------- ----------
Total(3)................................................. $ 354,001 $ 673,982 $ 123,131 $ 209,934
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Active Distributors(4)(5):
Japan........................................................ 147,000 215,000 166,000 229,000
Taiwan....................................................... 75,000 91,000 84,000 85,000
South Korea(1)............................................... -- 57,000 30,000 57,000
Hong Kong.................................................... 14,000 14,000 13,000 14,000
Thailand(2).................................................. -- -- -- 19,000
---------- ---------- ---------- ----------
Total.................................................... 236,000 377,000 293,000 404,000
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
- ------------------------
(1) The Company commenced operations in South Korea in February 1996.
(2) The Company commenced operations in Thailand in March 1997.
(3) Total revenue does not include sales of certain products to NSI affiliates
in Australia and New Zealand of $4.6 million in 1995 and in 1996 and $1.1
million for the first three months of 1996 and for the same period in 1997.
Operating expenses have increased with the growth of the Company's revenue.
(4) The term "Active Distributors" includes only those distributors who
purchased products from the Company during the three months ended as of the
date indicated.
(5) Numbers are rounded to the nearest thousand.
45
The following table sets forth certain estimated economic and demographic
data in each of the Company's markets. Although the Company believes that the
following table provides a useful basis for evaluating the relative size and
growth of the economies and populations of the countries in which the Company
operates, no assurance can be given that economic or population data in a
particular country will indicate what the Company's results of operations will
be in that country.
1996 GDP 1996 GDP
1996 POPULATION (IN BILLIONS OF PER CAPITA (IN REAL GDP GROWTH
COUNTRY (IN MILLIONS) $) $) 1996/1995 (%)
- ----------------------------------------------- ----------------- --------------- --------------- -----------------
Japan.......................................... 125.5 $ 4,575.2 $ 36,456 3.6
Taiwan......................................... 21.5 270.5 12,583 5.6
South Korea.................................... 45.3 497.6 10,984 6.9
Hong Kong...................................... 6.3 158.7 25,108 4.6
Thailand....................................... 61.8 185.0 2,993 6.7
- ------------------------
Source: World Information Services; Country Data Forecasts, March 1997.
JAPAN. The Company, through its subsidiary Nu Skin Japan, commenced
operations in Japan in April 1993. According to the WFDSA, the direct selling
channel in Japan generated sales of approximately $30 billion of goods and
services in 1996, making Japan the largest direct selling market in the world.
Management believes that as many as six million people are involved in direct
selling businesses in Japan. Direct selling is well-understood in Japan and is
governed by detailed government regulation. See "Risk Factors--Government
Regulation of Direct Selling Activities" and "--Government Regulation of
Products and Marketing."
A great deal of the Company's success to date can be directly attributed to
the growth of its Japanese business in recent years. Significant revenue was
recognized from the outset of the Company's operations in Japan due to the
immediate attention given to the market by leading NSI distributors from around
the world. Japan has continued to post strong financial results for the Company,
with revenue increasing by approximately 64% in U.S. dollars and 90% in local
currency for 1996 compared to 1995 and by approximately 55% in U.S. dollars and
76% in local currency for the three months ended March 31, 1997 compared to the
same period in 1996. Management believes that the increase for the three months
ended March 31, 1997 was primarily the result of a doubling of executive
distributors in Japan during this period and the increasing demand for IDN
products, which accounted for 32% of revenue for the period. Furthermore, given
the size of the direct selling market in Japan and the growing Japanese demand
for the Company's products, management believes that there is still significant
opportunity for revenue growth in this market. Nu Skin Japan currently offers 62
of the 89 Nu Skin personal care products and 11 of the 36 IDN products,
including LIFEPAK, the core IDN product. Additionally, Nu Skin Japan also offers
4 popular skin lightening products and 7 additional face care products designed
specifically for Japanese consumers.
In support of the Company's growth strategy, Nu Skin Japan intends to (i)
focus on internal country development by opening offices in additional Japanese
cities, thereby increasing consumer awareness and enhancing the Company's image,
(ii) expand development capacity to develop more products that are particularly
suited to the Japanese market, (iii) continue to expand the current product
offerings in Japan to include additional Nu Skin personal care and IDN products,
and (iv) enhance corporate support of distributors by upgrading information
technology resources.
TAIWAN. The Company, through its subsidiary Nu Skin Taiwan, commenced
operations in Taiwan in January 1992. According to the WFDSA, the direct selling
channel in Taiwan generated approximately $2 billion in sales of goods and
services in 1995, of which 43% were nutritional products. Currently, two million
people (approximately 10% of the population) are estimated to be involved in
direct selling. Since a significant percentage of its population is involved in
direct selling activities, the Taiwanese government regulates direct selling
activities to a significant extent. For example, the Taiwan government has
enacted
46
tax legislation aimed at ensuring proper tax payments by distributors on their
transactions with end consumers. See "Risk Factors--Government Regulations of
Direct Selling Activities" and "--Government Regulation of Products and
Marketing."
Revenue growth in Taiwan has averaged 47% per year since the commencement of
operations in 1992. The Company believes that the recent increase in sales is
primarily due to (i) the opening of walk-in centers in Kaohsiung and Taichung,
(ii) increased distributor training and recognition, and (iii) increased product
offerings. Based on information provided by the Taiwan Direct Selling
Association, as of 1995, Nu Skin Taiwan had captured approximately 31% and 1% of
the market for personal care products and nutritional supplements, respectively,
sold through the direct selling channel. Nu Skin Taiwan currently offers 61 of
the 89 Nu Skin personal care products and 10 of the 36 IDN products.
In support of the Company's growth strategy, Nu Skin Taiwan intends to (i)
capitalize on the size of the nutritional supplements market by promoting the
recently introduced LIFEPAK product and expanding the current product offerings
in Taiwan to include additional Nu Skin personal care and IDN products, in
particular FIBRENET, which, subject to regulatory approval, is scheduled for
introduction in Taiwan by the end of 1997, (ii) focus more resources on product
development specifically for the Taiwan market, and (iii) enhance corporate
support of distributors by upgrading information technology resources.
HONG KONG. The Company, through its subsidiary Nu Skin Hong Kong, commenced
operations in Hong Kong in September 1991. According to the WFDSA, the direct
selling channel in Hong King generated approximately $78 million in sales of
goods and services in 1995. Hong Kong represents an important market in the
structure of the Asian region because it serves as the location of the Company's
regional office and is an important base of operations for many of the Company's
most successful distributors, whose downline distributor networks extend into
other Asian markets. Nu Skin Hong Kong currently offers 84 of the 89 Nu Skin
personal care products and 16 of the 36 IDN products.
Hong Kong is currently a British Crown Colony and is scheduled to become a
Special Administrative Region (SAR) of the PRC effective July 1, 1997. The
further integration of the Hong Kong economy and political system with the
economy and political system of the PRC could have an impact on the Company's
business in Hong Kong. See "Risk Factors--Possible Adverse Effect on the Company
of a Change in the Status of Hong Kong."
In February 1995, Macau, a Portuguese colony scheduled to become an SAR of
the PRC in 1999, was opened as a new market. Revenue figures for Macau are
combined with those of Hong Kong. Macau represents the smallest of the Company's
markets in population with just under 500,000 residents. The Company's Macau
office operates under the direction of Nu Skin Hong Kong.
In support of the Company's growth strategy, Nu Skin Hong Kong intends to
(i) promote distributor growth, retention and leadership development through
local initiatives, (ii) capitalize on the size of the nutritional supplements
market by promoting the recently introduced LIFEPAK product and expanding the
current product offerings in Hong Kong to include additional Nu Skin personal
care and IDN products, and (iii) stimulate purchases from inactive distributors
through direct mail campaigns.
SOUTH KOREA. The Company, through its subsidiary Nu Skin Korea, commenced
operations in South Korea in February 1996. According to the WFDSA, the direct
selling channel in South Korea generated approximately $1.7 billion in sales of
goods and services in 1995. South Korea's direct sales legislation, which went
into effect in July 1995, requires companies to comply with numerous provisions,
such as local registration, reporting of certain operating results and
dissemination to distributors of certain information regarding the laws. See
"Risk Factors--Government Regulations of Direct Selling Activities" and
"--Government Regulation of Products and Marketing."
The Company had sales in South Korea of approximately $122 million and $40
million for 1996 and the first three months of 1997, respectively, making the
Company the second largest direct seller in the country. Nu Skin Korea currently
offers 43 of the 89 Nu Skin personal care products and none of the IDN
47
products. Nu Skin Korea was among the first foreign-owned firms to register and
begin operations under the new direct selling legislation. Management believes
that significant competition may soon enter the South Korean market. See "Risk
Factors--Competition."
The Company believes that revenue from its South Korean operations is
following a pattern similar to that experienced by the Company in certain of its
other markets, where initial rapid revenue growth has been followed by a short
period of stable or declining revenue. The Company anticipates a significant
decline in its second quarter revenue in South Korea from revenue in the first
quarter of 1997. The Company expects that this anticipated decline in South
Korean revenue will be offset by revenue gains in the Company's other markets in
the second quarter.
The Company believes that the anticipated revenue decline is partially
reflective of the typical business cycle experienced in new markets and
partially the result of other factors specific to Korea. These other factors
include recent activities by the South Korean government and campaigns by a
coalition of consumer protection and trade organizations against producers of
luxury and foreign goods, in general, and certain network marketing companies,
in particular, that have drawn negative media attention. Although the Company
has not been the focus of these campaigns, management believes that the media
attention has negatively impacted the business environment generally. See
"--Potential Effects of Adverse Publicity." An additional factor which the
Company believes may contribute to the anticipated second quarter revenue
decline in South Korea is the focus of key distributors on other recently-opened
markets, including Thailand.
In support of the Company's growth strategy, Nu Skin Korea intends to (i)
continue the strategic introduction of Nu Skin personal care products in each
quarter of 1997 and introduce IDN products, including LIFEPAK, by late 1997,
(ii) engage in targeted promotional and public relations activities designed to
address concerns regarding the current business environment for direct selling
companies, (iii) promote the development of local distributor leadership,
including focused training efforts, compensation plan modifications and the
introduction of distributor productivity programs, (iv) engage in the local
manufacturing of certain products to partially alleviate concerns about the high
level of goods being imported into South Korea by the Company, and (v) build the
local distributor support infrastructure, including the hiring of key staff
members and adding additional walk-in centers in major South Korean cities to
support the Company's rapid growth to date.
THAILAND. The Company, through its subsidiary, Nu Skin Thailand, commenced
operations in Thailand on March 13, 1997. According to the WFDSA, direct sales
in 1996 totaled $800 million in Thailand, making it the fourteenth largest
direct selling market worldwide. The Company's opening in Thailand was supported
by more than 200 of NSI's highest ranking distributors, many of whom are from
Taiwan and other Asian markets. Nu Skin Thailand currently offers 26 of the 89
Nu Skin personal care products and none of the IDN products.
In Thailand, the Company intends to (i) systematically introduce additional
Nu Skin personal care products throughout the remainder of 1997, (ii) promote
the Company's brand image through public relations efforts, including the
endorsement of Nu Skin personal care products by the 1995-1996 Miss Thailand,
(iii) train new distributors in the most effective methods of marketing the
Company's products and in becoming effective leaders within the Global
Compensation Plan framework, and (iv) build the Company's infrastructure to
support growth in the market by adding additional walk-in centers in strategic
locations in Bangkok and in other major cities.
NEW MARKET OPPORTUNITIES
The Company has developed a low cost, disciplined approach to opening new
markets. Each market opening is preceded by a thorough analysis of economic and
political conditions, regulatory standards and other business, tax and legal
issues. Prior to a market opening, the Company's management team, in conjunction
with NSI support personnel, local legal counsel and tax advisors, works to
obtain all necessary
48
regulatory approvals and establish facilities capable of meeting distributor
needs. This approach, combined with NSI's global distributor compensation plan
(the "Global Compensation Plan"), which motivates distributors to sponsor and
train other distributors to sell products in new markets, has enabled the
Company to quickly and successfully open new markets.
The Company, as a matter of policy, does not announce the timing of its
opening of new markets. The Company has the right to be the exclusive
distributor of NSI products in Indonesia, Malaysia, the PRC, the Philippines,
Singapore and Vietnam. The Company believes that these countries collectively
represent significant markets for future expansion. There are, however,
significant risks and uncertainties associated with this expansion. The
regulatory and political climate in these potential markets is such that a
replication of the Company's current operating structure cannot be guaranteed.
For example, Malaysia has governmental guidelines that have the effect of
limiting foreign ownership of direct selling companies operating in Malaysia to
no more than 30%. In addition, because the Company's personal care and
nutritional product lines are positioned as premium product lines, the market
potential for the Company's product lines in relatively less developed
countries, such as the PRC and Vietnam, remains to be determined. Modifications
to each product line may be needed to accommodate the market conditions in each
country, while maintaining the integrity of the Company's products. No
assurances can be given that the Company will be able to make such
modifications. Given existing regulatory environments and economic conditions,
the Company's entrance into Singapore and Vietnam is not anticipated in the
short to mid-term. See "Risk Factors--Entering New Markets" and "--Government
Regulation of Products and Marketing; Import Restrictions."
The following table sets forth certain estimated economic and demographic
data in each of the countries for which the Company has an exclusive license but
in which the Company has not commenced operations. Although the Company believes
that the following table provides a useful basis for evaluating the relative
size and growth of the economies and populations of the countries in which the
Company intends to operate, no assurance can be given that economic or
population data in a particular country will indicate what the Company's results
of operations will be in that country.
1996 GDP 1996 GDP REAL GDP
1996 POPULATION (IN BILLIONS OF PER CAPITA (IN GROWTH
COUNTRY (IN MILLIONS) $) $) 1996/1995 (%)
- --------------------------- --------------- --------------- --------------- -------------
Indonesia.................. 197.4 224.5 $ 1,137 7.8
Malaysia................... 20.5 97.2 4,751 8.2
PRC........................ 1,236.0 808.2 654 9.7
Philippines................ 72.0 83.2 1,156 5.5
Singapore.................. 3.0 93.2 30,771 7.0
Vietnam.................... 76.3 26.1 342 9.3
- ------------------------
SOURCE: World Information Services; Country Data Forecasts, March 1997.
INDONESIA. Although historically not open to foreign investment
opportunities, Indonesia has experienced a recent update emphasis on
deregulation and private enterprise and an average annual growth in GDP of 6%
from 1985 to 1994. The Indonesian Direct Selling Association reports that there
are 750,000 participants in direct selling in the country. Management believes
that the combination of the above factors creates an attractive opportunity for
expansion.
MALAYSIA. According to the WFDSA, more than $640 million in goods and
services were sold through the direct selling channel in Malaysia in 1995. There
are currently numerous direct selling companies operating in Malaysia. In
October 1995, the Company's business permit applications were denied by the
Malaysian government as the result of activities by certain NSI distributors
before required government approvals could be secured. See "Risk
Factors--Potential Negative Impact of Distributor Actions" and "--Potential
Effects of Adverse Publicity." Management is reevaluating the time frame in
which it will reapproach the Malaysian market.
49
PRC. With the PRC's large population and the Company's success in the
neighboring and Chinese-speaking countries of Hong Kong and Taiwan, management
believes that the PRC will be an attractive market for the Company. The PRC
government and local jurisdictions have recently initiated rules and regulations
for network marketing companies. The Company is actively researching these and
other issues including potential manufacturing alternatives related to the
commencement of operations in the PRC. The Company believes that it will be able
to comply with these regulations in operating a network marketing business in
the PRC. See "--Government Regulation--Regulation of Products and Marketing;
Import Restrictions."
PHILIPPINES. Even though the per capita GDP in the Philippines is low, the
Company believes that there is demand for premium personal care and nutrition
products, especially near Manila, the capital city, which, in 1996, had a
population of 10 million. Management believes that nearly $500 million of goods
and services are sold annually through the direct selling channel and that more
than 20 international direct selling companies currently operating in the
Philippines.
SINGAPORE. In Singapore, relatively high levels of GDP per capita indicate
that the country enjoys strong consumer buying power and a dynamic market
structure similar to, yet smaller than, Hong Kong. Although direct selling
activities are permitted, currently network marketing is not allowed in
Singapore. Accordingly, the Company's entrance into Singapore is not anticipated
in the short to mid-term. See "--Government Regulation--Regulation of Products
and Marketing; Import Restrictions."
VIETNAM. The Company believes that there is little or no direct selling
activity in Vietnam. However, the country is moving towards a market-based
economy and has recently adopted a freely convertible currency. The Company
anticipates that the increase in free enterprise will help to develop the direct
selling channel. However, given existing regulatory, environmental and economic
conditions, the Company's entrance into Vietnam is not anticipated in the short
to mid-term.
DISTRIBUTION SYSTEM
OVERVIEW OF DISTRIBUTION SYSTEM. The foundation of the Company's sales
philosophy and distribution system is network marketing. Under most network
marketing systems, distributors purchase products for retail sale and personal
consumption. Pursuant to the Global Compensation Plan, products are sold
exclusively to or through independent distributors who are not employees of the
Company or NSI. Distributors contract directly with NSI, and NSI makes such
distributors available to the Company through Licensing and Sales Agreements.
See "--Relationship with NSI" and "Certain Relationships and Related
Transactions."
Network marketing is an effective vehicle to distribute the Company's
products because (i) a consumer can be educated about a product in person by a
distributor, which is more direct than the use of television and print
advertisements; (ii) direct sales allow for actual product testing by a
potential consumer; (iii) the impact of distributor and consumer testimonials is
enhanced; and (iv) as compared to other distribution methods, distributors can
give customers higher levels of service and attention, by, among other things,
delivering products directly to a consumer and following up on sales to ensure
proper product usage and customer satisfaction, and to encourage repeat
purchases. Under most network marketing systems, independent distributors
purchase products for resale and for personal consumption.
Direct selling as a distribution channel has been enhanced in the past
decade due to advancements in communications, including telecommunications, and
the proliferation of the use of videos and fax machines. Direct selling
companies can now produce high quality videos for use in product education,
demonstrations and sponsoring sessions that project a desired image for the
Company and the product line. Management believes that high quality sales aids
play an important role in the success of distributor efforts. For this reason,
NSI maintains an in-house staff of video production personnel and video and
audio cassette duplication equipment for timely and cost-effective production of
sales materials. These facilities
50
and expertise are available for the Company's use. Management is committed to
fully utilizing current and future technological advances to continue enhancing
the effectiveness of direct selling.
NSI's network marketing program differs from many other network marketing
programs in several respects. First, the Global Compensation Plan allows NSI
distributors to develop a seamless global network of downline distributors.
Second, NSI's order and fulfillment systems eliminate the need for distributors
to carry significant levels of inventory. Third, the Global Compensation Plan is
among the most financially rewarding plans offered to distributors by network
marketing companies, and can result in commissions to distributors aggregating
up to 58% of a product's wholesale price. On a global basis, commissions have
averaged 42% of revenue from commissionable sales over the last eight years.
Because the Company licenses the right to use the Global Compensation Plan from
NSI, the structure of the plan, including commission rates, is largely under the
control of NSI. See "Risk Factors--Increase in Distributor Compensation
Expense."
The Company's revenue is directly dependent upon the efforts of
distributors. Growth in sales volume requires an increase in the productivity of
distributors and/or growth in the total number of distributors. Because the
distributors have contracted directly with NSI, the Company primarily relies on
NSI to enforce distributor policies and procedures. There can be no assurance
that the productivity or number of distributors will be sustained at current
levels or increased in the future. See "Risk Factors--Reliance Upon Independent
Distributors of NSI." Furthermore, the Company estimates that, as of March 31,
1997, approximately 340 distributorships worldwide comprised NSI's Hawaiian Blue
Diamond and Blue Diamond executive distributor levels, which are NSI's two
highest executive distributor levels and, together with their extensive downline
networks, account for substantially all of the Company's revenue. Consequently,
the loss of such a high-level distributor or another key distributor, together
with a group of leading distributors in such distributor's downline network, or
the loss of a significant number of distributors for any reason, could adversely
affect the Company's results of operations. See "Risk Factors--Reliance on
Certain Distributors; Potential Divergence of Interests between Distributors and
the Company."
SPONSORING. The Company relies solely on NSI distributors to sponsor new
distributors. While the Company provides, at cost, product samples, brochures,
magazines and other sales materials, distributors are primarily responsible for
educating new distributors with respect to products, the Global Compensation
Plan, and how to build a successful distributorship.
The sponsoring of new distributors creates multiple levels in the network
marketing structure. Persons whom a distributor sponsors are referred to as
"downline" or "sponsored" distributors. If downline distributors also sponsor,
they create additional levels in the structure, but their downline distributors
remain part of the same downline network as their original sponsoring
distributor. See "Risk Factors--Reliance on Certain Distributors; Potential
Divergence of Interests between Distributors and the Company."
Sponsoring activities are not required of distributors. However, because of
the financial incentives provided to those who succeed in building a distributor
network, the Company believes that most of its distributors attempt, with
varying degrees of effort and success, to sponsor additional distributors.
Generally, distributors invite friends, family members and acquaintances to
sales meetings where Company products are presented and where the Global
Compensation Plan is explained. People are often attracted to become
distributors after using Company products and becoming regular retail customers.
Once a person becomes a distributor, he or she is able to purchase products
directly from the Company at wholesale prices for resale to consumers or for
personal consumption. 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
with NSI which obligates the distributor to abide by NSI's policies and
procedures. Additionally, in all countries except Japan, a new distributor is
required to enter into a product purchase agreement with the Company's local
subsidiary, which governs product purchases. In Japan, Taiwan and Hong Kong,
distributors are also required to purchase a starter kit, which includes NSI's
policies and procedures, for between $55 and $85, which
51
essentially represents the cost of producing the starter kit. In South Korea and
Thailand, distributors are not required to purchase a starter kit.
GLOBAL COMPENSATION PLAN. Management believes that one of the Company's key
competitive advantages is the Global Compensation Plan, which it licenses from
NSI. Distributors receive higher levels of commissions as they advance under the
Global Compensation Plan. The Global Compensation Plan is seamlessly integrated
across all markets in which Nu Skin personal care and IDN products are sold,
which allows distributors to receive commissions for global product sales,
rather than merely local product sales. This seamless integration means that the
Company's distributor base has global reach and that the knowledge and
experience resident in current distributors can be used to build distributor
leadership in new markets. Outside of the Company's markets, NSI currently has
affiliated operations in the U.S., the United Kingdom, Puerto Rico, Canada,
Australia, New Zealand, Ireland, Germany, France, the Netherlands, Belgium,
Italy, Spain, Mexico and Guatemala. Allowing distributors to receive commissions
at the same rate for sales in foreign countries as for sales in their home
country is a significant benefit to distributors because they are not required
to establish new distributorships or requalify for higher levels of commissions
within each new country in which they begin to operate, which is frequently the
case under the compensation plans of the Company's major competitors. Under the
Global Compensation Plan, a distributor is paid consolidated monthly commissions
in the distributor's home country, in local currency, for product sales in that
distributor's global downline distributor network. Current and future
distributor lists have been licensed by NSI to the Company pursuant to Licensing
and Sales Agreements. See "--Relationship with NSI" and "Certain Relationships
and Related Transactions."
The Global Compensation Plan allows an individual the opportunity to develop
a business, the success of which is based upon that individual's level of
commitment, time, enthusiasm, personal skills, contacts, and motivation. For
many, a distributorship is a very small business, in which products may be
purchased primarily for personal consumption and for resale to relatively few
customers. For others, a distributorship becomes a full-time occupation.
HIGH LEVEL OF DISTRIBUTOR INCENTIVES. Based upon its knowledge of network
marketing distributor compensation plans, the Company believes that the Global
Compensation Plan is among the most financially rewarding plans offered to
distributors by network marketing companies. There are two fundamental ways in
which distributors can earn money: (i) through retail markups, for which the
Company recommends a range from 43% to 60%; and (ii) through a series of
commissions on product sales, which can result in commissions to distributors
aggregating up to 58% of such product's wholesale price. On a global basis,
however, commissions have averaged 42% of revenue from commissionable sales over
the last eight years. See "Risk Factors--Increase in Distributor Compensation
Expense."
Each product 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 essentially based upon a product's wholesale cost, net of any
point of sale taxes. As a distributor's retail business expands and as he or she
successfully sponsors other distributors into the business who in turn expand
their own businesses, he or she receives a higher percentage of commissions.
Once a distributor becomes an executive, the distributor can begin to take
full advantage of the benefits of commission payments on personal and group
sales volume. To achieve executive status, a distributor must submit a
qualifying letter of intent and achieve specified personal and group sales
volumes for a four-month period of time. To maintain executive status, a
distributor must generally also maintain specified personal and group sales
volumes each month. An executive's commissions increase substantially as
multiple downline distributors achieve executive status. In determining
commissions, the number of levels of downline distributors that can be included
in an executive's group increases as the number of executive distributorships
directly below the executive increases.
52
As of the dates indicated below, the Company had the following number of
executive distributors:
TOTAL NUMBER OF EXECUTIVE DISTRIBUTORS
AS OF DECEMBER 31, AS OF MARCH 31,
------------------------------------------------------- --------------------
COUNTRY 1992 1993 1994 1995 1996 1996 1997
- ---------------------------------------------------- ----------- --------- --------- --------- --------- --------- ---------
Japan............................................... -- 2,459 3,613 4,017 10,169 6,252 12,535
Taiwan.............................................. 551 1,170 2,093 3,014 5,098 3,579 5,251
South Korea......................................... -- -- -- -- 4,675 -- 5,112
Thailand............................................ -- -- -- -- -- -- --
Hong Kong........................................... 164 275 377 519 541 492 551
--- --------- --------- --------- --------- --------- ---------
Total............................................. 715 3,904 6,083 7,550 20,483 10,323 23,449
--- --------- --------- --------- --------- --------- ---------
--- --------- --------- --------- --------- --------- ---------
On a monthly basis, the Company and NSI evaluate requests for exceptions to
the Global Compensation Plan. While the general policy is to discourage
exceptions, management believes that the flexibility to grant such exceptions is
critical in retaining distributor loyalty and dedication. In each market,
distributor services personnel evaluate each such instance and appropriate
recommendations are made to NSI.
DISTRIBUTOR SUPPORT. The Company is committed to providing a high level of
support services tailored to the needs of its distributors in each market. The
Company meets the needs and builds the loyalty of its distributors with
personalized distributor service, a support staff that assists distributors as
they build networks of downline distributors, and a liberal product return
policy. Because many distributors have only a limited number of hours each week
to concentrate on their Nu Skin business, management believes that maximizing a
distributor's efforts through effective support of each distributor has been and
will continue to be important to the success of the Company.
Through training meetings, annual conventions, distributor focus groups,
regular telephone conference calls and personal contacts with distributors, the
Company seeks to understand and satisfy the needs of each distributor. The
Company provides walk-in, telephonic and computerized product fulfillment and
tracking services that result in user-friendly, timely product distribution. In
addition, the Company is committed to evaluating new ideas in technology and
services, such as automatic product reordering, that the Company can provide to
distributors. The Company currently utilizes voicemail, teleconferencing and fax
services. Global Internet access (including Company and product information,
ordering abilities and group and personal sales volume inquiries) is anticipated
to be provided to distributors in the future. Each walk-in center maintains
meeting rooms which distributors may utilize in training and sponsoring
activities.
RULES AFFECTING DISTRIBUTORS. NSI's standard distributor agreement,
policies and procedures, and compensation plan contained in every starter and/or
introductory kit outline the scope of permissible distributor marketing
activities. The Company's distributor rules and guidelines are designed to
provide distributors with maximum flexibility and opportunity within the bounds
of governmental regulations regarding network marketing. Distributors are
independent contractors and are thus prohibited from representing themselves as
agents or employees of NSI or the Company. Distributors are obligated to present
the Company's products and business opportunity ethically and professionally.
Distributors agree that the presentation of the Company's business opportunity
must be consistent with, and limited to, the product claims and representations
made in literature distributed by the Company. No medical claims may be made
regarding the products, nor may distributors prescribe any particular product as
suitable for any specific ailment. Even though sponsoring activities can be
conducted in many countries, distributors are prohibited from conducting
marketing activities outside of countries in which NSI and the Company conduct
business and are not allowed to export products from one country to another. See
"Risk Factors-- Potential Negative Impact of Distributor Actions."
53
Distributors must represent that the receipt of commissions is based on
substantial efforts. Exhibiting commission statements or checks is prohibited.
Sales aids such as videotapes, promotional clothing, pens, stationary and other
miscellaneous items must be produced or pre-approved by the Company or NSI.
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. Generic business opportunity advertisements (without
using either the Company or the NSI names) may be placed in accordance with
certain guidelines in some countries. NSI logos and names may not be permanently
displayed on physical premises. Distributors may not use NSI trademarks or other
intellectual property of NSI without NSI's consent.
Products may not be sold, and the business opportunity may not be promoted,
in traditional retail environments such as food markets, pharmacies and
drugstores. Nor may business be conducted at conventions, trade shows, flea
markets, swap meets, and similar events. Distributors who own or are employed by
a service-related business such as a doctor's office, hair salon, or health
club, may make products available to regular customers as long as products are
not displayed visibly to the general public in such a way as to attract the
general public into the establishment to purchase products.
Generally, distributors can receive commission bonuses only if, on a monthly
basis (i) the distributor achieves at least 100 points (approximately U.S. $100)
in personal sales volume, (ii) the distributor documents retail sales to at
least five retail customers, (iii) the distributor sells and/or consumes at
least 80% of personal sales volume, and (iv) the distributor is not in default
of any material policies or procedures.
NSI systematically reviews alleged reports of distributor misbehavior. If
NSI determines that a distributor has violated any of the distributor policies
or procedures, it may either terminate the distributor's rights completely or
impose sanctions such as warnings, probation, withdrawal or denial of an award,
suspension of privileges of a distributorship, fines or penalties, withholding
commissions until specified conditions are satisfied, or other appropriate
injunctive relief. Distributor terminations based on violations of NSI's
policies and procedures have aggregated less than 1% of the Company's
distributor force since inception. Distributors may voluntarily terminate their
distributorship at any time.
PAYMENT. Distributors generally pay for products prior to shipment.
Accordingly, the Company carries no accounts receivable from distributors.
Distributors pay for products in one of several ways. Cash, which represents a
large portion of all payments, is received by order takers in the distribution
center when orders are personally picked up by a distributor. In addition, in
Japan cash is sent through the mail using a postal cash envelope. The Company
also accepts payment through the use of credit cards. This method of payment is
very popular in Hong Kong and Taiwan and is expected to increase in popularity
in South Korea. Another form of payment utilized in Japan is a Tososhin card,
which is essentially a distributor credit card utilized to place orders. Bank
wire transfers are also popular throughout Asia, particularly in Japan.
PRODUCT SUMMARY
The Company offers products in two distinct categories: personal care
products, marketed under the trademark "Nu Skin," and nutritional products,
marketed under the trademark "Interior Design Nutritionals" (IDN). The Company
is entitled to distribute NSI products in specified Asian countries pursuant to
a Regional Distribution Agreement. See "--Relationship with NSI" and "Risk
Factors--Relationship with and Reliance on NSI; Potential Conflicts of
Interest." NSI markets 89 different personal care and 36 different nutritional
products, of which 84 and 19, respectively, were available in at least one of
the Company's markets as of March 31, 1997. Nearly all products sold by the
Company are purchased from NSI, with the exception of a line of 11 personal care
products which are produced locally in Japan. In addition to products, the
Company offers a variety of sales aids, including items such as starter kits,
introductory kits, brochures, product catalogs, videotape and personal care
accessories. See "Risk Factors--Product Liability."
54
The following chart indicates how many of the Nu Skin personal care and IDN
products were available as of March 31, 1997 in each of the Company's current
markets.
NU SKIN PERSONAL CARE AND IDN PRODUCT OFFERINGS
PRODUCTS OFFERED BY THE COMPANY
TOTAL PRODUCTS ---------------------------------------------------
PRODUCT CATEGORIES/PRODUCT LINES OFFERED JAPAN TAIWAN HONG KONG SOUTH KOREA
- ---------------------------------------------------------- --------------- ------------ ----------- ----------- -----------
Nu Skin Personal Care:
Facial Care............................................. 20 13(1) 13 18 11
Body Care............................................... 12 10 9 12 7
Hair Care............................................... 14 13 13 13 12
Color Cosmetics......................................... 13 10 10 13 8
Specialty............................................... 30 16 16 28 5
-- -- -- -- --
Total................................................. 89 62 61 84 43
-- -- -- -- --
-- -- -- -- --
IDN:
Nutritional Supplements................................. 16 4 3 3 --
Nutritious and Healthy Snacks........................... 8 2 4 5 --
Sports and Fitness Nutritional Products................. 4 1 -- -- --
Botanical Supplements................................... 8 4 3 8 --
-- -- -- -- --
Total................................................. 36 11 10 16 --
-- -- -- -- --
-- -- -- -- --
PRODUCT CATEGORIES/PRODUCT LINES THAILAND
- ---------------------------------------------------------- -------------
Nu Skin Personal Care:
Facial Care............................................. 9
Body Care............................................... 7
Hair Care............................................... 10
Color Cosmetics......................................... 0
Specialty............................................... 0
--
Total................................................. 26
--
--
IDN:
Nutritional Supplements................................. --
Nutritious and Healthy Snacks........................... --
Sports and Fitness Nutritional Products................. --
Botanical Supplements................................... --
--
Total................................................. --
--
--
- ------------------------
(1) In Japan, the Company also sells 11 locally sourced personal care products.
Presented below are the dollar amount and percentage of revenue of each of
the two product categories and other sales aid revenue for the years ended
December 31, 1995 and 1996 and the three months ended March 31, 1997.
REVENUE BY PRODUCT CATEGORY
THREE MONTHS ENDED
YEAR ENDED DECEMBER YEAR ENDED DECEMBER
31, 1995 31, 1996 MARCH 31, 1997
--------------------- --------------------- ---------------------
PRODUCT CATEGORY $ % $ % $ %
- ------------------------------------------------ ---------- --------- ---------- --------- ---------- ---------
(DOLLARS IN THOUSANDS)
Nu Skin personal care........................... $ 303,387 84.6% $ 493,609 72.8% $ 144,954 68.7%
IDN............................................. 23,959 6.7 138,593 20.4 53,556 25.4
Sales aids...................................... 31,263 8.7 46,394 6.8 12,484 5.9
---------- --------- ---------- --------- ---------- ---------
Total......................................... $ 358,609 100.0% $ 678,596 100.0% $ 210,994 100.0%
---------- --------- ---------- --------- ---------- ---------
---------- --------- ---------- --------- ---------- ---------
NU SKIN PERSONAL CARE PRODUCTS
The Company's current Nu Skin personal care products category is divided
into the following lines: facial care, body care, hair care and color cosmetics,
as well as specialty products, such as sun protection, oral hygiene and
fragrances. Each of the Subsidiaries markets a variety of the 89 personal care
products currently offered by NSI. The Company also offers product sets that
include a variety of products in each product line as well as small, sample-size
packages to facilitate product sampling by potential consumers. The product sets
are especially popular during the opening phase of a new country, where
distributors and consumers are anxious to purchase a variety of products, and
during holiday and gift giving seasons in each market. The Company anticipates
the introduction of additional personal care products into each market, based on
the likelihood of the particular product's success in the market as well as
applicable regulatory approvals. See "Risk Factors--Government Regulation of
Products and Marketing."
55
The Nu Skin personal care products offered in Taiwan and Hong Kong are
substantially the same formulations of the products offered by NSI in the U.S.
In Japan and South Korea, however, most of the products have been reformulated
to satisfy certain regulatory requirements with respect to product ingredients
and preservatives and to meet the preferences of Japanese and South Korean
consumers.
The following is a brief description of each line within the Nu Skin
personal care product category offered by the Company as of March 31, 1997:
FACIAL CARE. The goal of the facial care line is to allow users to cleanse
thoroughly without causing dryness and to moisturize with effective humectants
that allow the skin to attract and retain vital water. The Company's facial care
line currently consists of 20 different products: CLEANSING LOTION, FACIAL
SCRUB, EXFOLIANT SCRUB, FACIAL CLEANSING BAR, CLAY PACK, PH BALANCE FACIAL
TONER, NAPCA MOISTURIZER, REJUVENATING CREAM, CELLTREX (called HYLATREX in Japan
and South Korea), INTENSIVE EYE COMPLEX, HPX HYDRATING GEL, FACE LIFT AND
ACTIVATOR (two formulas for sensitive and normal skin), JUNGAMALS LIP BALM,
CLARIFEX CLEANSING SCRUB, CLARIFEX MUD, ALPHA EXTRA FACE, NU COLOUR EYE MAKEUP
REMOVER, MHA REVITALIZING LOTION, MHA REVITALIZING LOTION with SPF 15 and
INTERIM MHA DIMINISHING GEL. In addition, Nu Skin Japan also offers a line of
four popular skin lightening products and seven additional facial care products
designed particularly for Japanese consumers.
BODY CARE. The Company's line of body care products relies on premium
quality ingredients to cleanse and condition skin. The cleansers are uniquely
formulated without soap, and the moisturizers contain light but effective
humectants and emollients. The Company's body care line currently consists of 12
products: ANTIBACTERIAL BODY CLEANSING GEL, LIQUID BODY LUFRA, BODY SMOOTHER,
HAND LOTION, NAPCA MOISTURE MIST, BODY BAR, BODY CLEANSING GEL, ENHANCER,
JUNGAMALS CRAZY CROCODILE CLEANER, ALPHA EXTRA BODY, MHA REVITALIZING BODY
LOTION and DERMATIC EFFECTS BODY CONTOURING LOTION.
HAIR CARE. The Company's hair care line, HAIRFITNESS, is designed to meet
the needs of people with all types of hair and hair problems. Focusing on the
condition of the scalp and its impact on hair quality, the Company's hair care
products use water-soluble conditioners like panthenol to reduce build-up on the
scalp and to promote healthy hair. HairFitness includes 12 products featuring
ceregen, a revolutionary wheat hydrocolloid complex of conditioning molecules
that have been shown to have dramatic hair repair and moisture control aspects:
3 IN 1 SHAMPOO, MOISTURIZING SHAMPOO, BALANCING SHAMPOO, VITAL SHAMPOO, DEEP
CLARIFYING SHAMPOO, GLACIAL THERAPY, WEIGHTLESS CONDITIONER, LUXURIOUS
CONDITIONER, CONDITIONING DETANGLER SPRAY, STYLING GEL, HOLDING SPRAY and MOUSSE
(Styling Foam). The Company also carries DERMANATOR SHAMPOO and JUNGAMALS TIGER
TANGLE TAMER SHAMPOO.
COLOR COSMETICS. In the latter part of 1995, the Company introduced NU
COLOUR, a new line of color cosmetics, in Hong Kong, Taiwan and Japan. The NU
COLOUR line consists of 13 products with 106 SKU's including MOISTURESHADE
LIQUID FINISH (10), MOISTURESHADE PRESSED POWDER (8), BLUSH (9), EYE SHADOW
(10), MASCARA (2), EYELINER (7), LIP LINER (11), LIPSTICK (32), DRAMATTEICS LIP
PENCILS (6), LIP GLOSS, CREME CONCEALER (5), FINISHING POWDER and BROW PENCIL
(4).
SPECIALTY PRODUCTS. The Company recently introduced a product line labeled
EPOCH, a unique line of ethnobotanical personal care products created in
cooperation with well known ethnobotanists. These products, which unite natural
compounds used by indigenous cultures with advanced scientific ingredients,
include GLACIAL MARINE MUD, DEODORANT WITH CITRISOMES, POLISHING BAR, LEAFCLEAN
HAND WASH, EVERGLIDE FOAMING SHAVE GEL, DESERT BREEZE AFTERSHAVE, POST SHAVE
LOTION FOR WOMEN, INFUSIONS HERBAL BATH, EMULSIONS and FIREWALKER MOISTURIZING
FOOT CREAM. EPOCH was launched in August 1996 in Hong Kong, in October 1996 in
Taiwan and in February 1997 in Japan. GLACIAL MARINE MUD is exclusively licensed
to NSI for sale in the direct selling channel.
NUTRIOL, a line of products exclusively licensed to NSI for sale in the
direct selling channel and manufactured in Europe, consists of five products:
NUTRIOL HAIR FITNESS PREPARATION, NUTRIOL SHAMPOO,
56
NUTRIOL MASCARA, NUTRIOL NAIL and NUTRIOL EYELASH. NUTRIOL represents a product
designed to replenish the hair's vital minerals and elements. Each NUTRIOL
product uses mucopolysaccharide, a patented ingredient.
The Company's line of SUNRIGHT products is designed to provide a variety of
sun screen protection with non-irritating and non-greasy products. The sun
protection line includes a sun preparation product that prepares the skin for
the drying impact of the sun, five sun screen alternatives with various levels
of SPF, and a sun screen lip balm. In the Asian market, the Company's sun care
line is currently available in Hong Kong and Japan. At present, SUNRIGHT PRIME
PRE & POST SUN MOISTURIZER and SUNRIGHT LIP BALM are not available in Japan.
AP-24, a line of oral health care products which incorporates anti-plaque
technology designed to help prevent plaque build-up 24 hours a day, is
exclusively licensed to the Company, together with the associated trademark, for
sale in the direct selling channel under the trademark AP-24. This product line
includes AP-24 ANTI-PLAQUE TOOTHPASTE, AP-24 ANTI-PLAQUE MOUTHWASH, AP-24 TRIPLE
ACTION DENTAL FLOSS and AP-24 ANTI-PLAQUE BREATH SPRAY. These products are
currently available in Hong Kong and Taiwan. The AP-24 oral health care products
for kids offers products designed to make oral care fun for children, including
JUNGAMAL'S TOUGH TUSK TOOTHPASTE and JUNGAMAL'S FLUFFY FLAMINGO FLOSS.
The Company offers a men's and a women's fragrance under the Nu Skin
trademark SAFIRO. The Company also offers a NAIL CARE KIT.
PRODUCT SETS. The Company currently offers product sets that include a
sampling of products from a given product line. These package configurations are
intended to encourage increased product trials.
INTERIOR DESIGN NUTRITIONALS
The IDN product category is comprised of 36 products in the following lines:
nutritional supplements, nutritious and healthy snacks, sports and fitness
nutritional products and botanical supplements. IDN is designed to promote
healthy, active lifestyles and general well-being through proper diet, exercise
and nutrition. Although less developed in the Asian market than the Nu Skin
personal care category, each of the Subsidiaries, except Nu Skin Korea and Nu
Skin Thailand, markets a variety of the IDN products offered by NSI. In the
United States, the IDN division is an official licensee of the U.S. Olympic
Committee.
The Company believes that the nutritional supplement market is expanding in
Asia because of changing dietary patterns, a health-conscious population and
recent reports supporting the benefits of using vitamin and mineral nutritional
supplements. This product line is particularly well suited to network marketing
because the average consumer is often uneducated regarding nutritional products.
The Company believes that network marketing is a more efficient method than
traditional retailing channels in educating consumers regarding the benefits of
nutritional products. Because of the numerous over-the-counter vitamin and
mineral supplements in Asia, the Company is confident that individual attention
and testimonials by distributors will provide information and comfort to a
potential consumer.
IDN products generally require reformulation to satisfy the strict
regulatory requirements of each Asian market. While each product's concept and
positioning are generally the same, regulatory differences between U.S. and
Asian markets result in some product ingredient differences. See "Risk Factors--
Government Regulation of Products and Marketing." In addition, Asian preferences
and regulations favor tablets instead of gel caps, which are typically used in
the U.S.
The following is a brief description of each of the IDN product lines:
NUTRITIONAL SUPPLEMENTS. LIFEPAK and LIFEPAK TRIM, the core IDN nutritional
supplements, are designed to provide an optimum mix of nutrients including
vitamins, minerals, antioxidants and phytonutrients (natural chemical extracts
from plants). The introduction of LIFEPAK in Japan in October 1995 resulted in a
significant increase in revenue and currently represents approximately 20% of
the Company's
57
revenue in Japan. LIFEPAK was launched in Taiwan and Hong Kong in October 1996
and January 1997, respectively.
Additional nutritional supplements include: VITOX, which incorporates beta
carotene and other important vitamins for overall health; METABOTRIM, which
provides B vitamins and chromium chelate; OPTIMUM OMEGA, a pure source of omega
3 fatty acids; IMAGE HNS, an all-around vitamin and antioxidant supplement; and
OPTIGAR Q, a blend of co-enzyme Q10 and deodorized garlic. The Company also
offers FIBRENET, FIBRENET PLUS and DIENE-O-LEAN as a part of its nutritional
supplements offerings. The IDN MASTERS WELLNESS SUPPLEMENT provides nutrition
specifically for an aging generation. JUNGAMALS CHILDREN'S CHEWABLES combine
natural flavors and colors and contain a unique blend of antioxidants, chelated
minerals, and vitamins specifically tailored for children. NutriFi contains four
grams of soluble and insoluble fibers per serving in a powder that can be added
to liquids and foods to supplement the recommended daily amounts of fiber.
As an enhancement to the core IDN nutritional supplements, LIFEPAK and
LIFEPAK TRIM, NSI recently introduced LIFEPAK WOMEN and LIFEPAK PRIME. These
products address the more specific nutritional needs of women and the aging
generation. Also recently launched by NSI were LIFE ESSENTIALS, a lower cost,
more general nutritional supplement, and NIGHTIME COMPLEX WITH MELATONIN, a
sleep aid. The Company is currently evaluating the feasibility of introducing
these products into its markets.
NUTRITIOUS AND HEALTHY SNACKS. As part of the Company's mission to promote
a healthy lifestyle and long-term wellness, IDN includes FIBERRY FAT-FREE SNACK
BARS and APPEAL LITE, a nutritional drink containing chelated minerals and
vitamins. The Company also offers BREAKBARS and POCKET FUEL, nutritious snacks
which provide carbohydrates, protein and fiber. In addition, the Company offers
a number of other nutritional drinks. HOT & HEALTHY, unlike traditional hot
drinks, is 100% caffeine-free and contains beneficial ingredients such as Korean
Panax Ginseng and grape seed extract. SPLASH C with juice crystals is a healthy
beverage providing significant doses of vitamins C and E as well as calcium in
each serving. Real fruit juice crystals are added to create orange or lemon
flavor.
SPORTS AND FITNESS NUTRITIONAL PRODUCTS. To cater to health conscious
individuals with active lifestyles, the IDN SPORTS NUTRITION SYSTEM offers a
comprehensive, flexible program for individuals who desire to optimize
performance on an individual basis. The system includes LIFEPAK, OVERDRIVE, a
sports supplement licensed by the U.S. Olympic Committee that features
antioxidants, B vitamins and chromium chelate, GLYCOBAR energy bars, and
SPORTALYTE performance drink to help supply the necessary carbohydrates,
electrolytes and chelated minerals to optimize performance. AMINOBUILD is a low
fat high protein drink mix that is designed to replace nutrients before and
after workouts.
BOTANICAL SUPPLEMENTS. Botanical supplements are designed for those who
seek the benefits of natural herb and plant extracts. These supplements include
BOTANAGAR, BOTANAVOX, BOTANAFLOR, BOTANAZYME, BOTANAEASE, BOTANAGUARD,
BOTANAVIVE and BOTANAME. Each supplement addresses a range of issues, including:
alertness, digestive maintenance, dietary health support, regular sleep habits,
weight management and antioxidant support.
SALES AIDS
The Company provides an assortment of sales aids to facilitate the sales of
its products. Sales aids include videotapes, promotional clothing, pens,
stationery, business cards, brushes, combs, cotton pads, tissues, and other
miscellaneous items to help create consumer awareness of the Company and its
products. Sales aids are priced at the Company's approximate cost and are not
commissionable items (I.E., distributors do not receive commissions on purchases
of sales aids).
58
PRODUCT GUARANTEES
The Company believes that it is among the most consumer protective companies
in the direct selling industry. For 30 days from the date of purchase, the
Company's product return policy allows a retail purchaser to return any product
to the distributor through whom the product was purchased for a full refund.
After 30 days from the date of purchase, the return privilege is at the
discretion of the distributor. Because distributors may return unused and
resalable products to the Company for a refund of 90% of the purchase price for
one year, they are encouraged to provide consumer refunds beyond 30 days. In
addition, the product return policy is a material aspect of the success of
distributors in developing a retail customer base. The Company's experience with
actual product returns has averaged less than 3.0% of revenue through March 31,
1997.
PRODUCT DEVELOPMENT AND PRODUCTION
PRODUCT DEVELOPMENT PHILOSOPHY. The Company is committed to building its
brand name and distributor and customer loyalty by selling premium quality,
innovative personal care and nutritional products that appeal to broad markets.
This commitment is illustrated by the Company's personal care products slogan
"All of the Good and None of the Bad" and its nutritional products slogan
"Adding Life to Years." The Company's product philosophy is to combine the best
of science and nature and to include in each of its products the highest quality
ingredients. For example, Nu Skin products do not contain soaps and other harsh
cleansers that can dry and irritate skin, undesirable oils such as lanolin,
elements known to be irritating and pore clogging, volatile alcohols such as
ethyl alcohol, and conditioning agents that leave heavy residues. This
philosophy has led to the Company being one of the only personal care companies
in Japan to disclose every ingredient to consumers. This philosophy has also led
to the Company's commitment to avoid any ingredients in nutritional supplements
that are reported to have any long-term addictive or harmful effects, even if
short-term effects may be desirable. Independent distributors need to have
confidence that they are distributing the best products available in order to
have a sense of pride in their association with the Company and to have products
that are distinguishable from "off the shelf" products. NSI and the Company are
committed to developing and providing quality products that can be sold at an
attractive retail price and allow the Company to maintain reasonable profit
margins.
NSI is also committed to constantly improving its evolving product
formulations to incorporate innovative and proven ingredients into its product
line. Whereas many consumer product companies develop a formula and stay with
that formula for years, and sometimes decades, NSI believes that it must stay
current with product and ingredient evolution to maintain its reputation for
innovation to retain distributor and consumer attention and enthusiasm. For this
reason, NSI continuously evaluates its entire line of products for possible
enhancements and improvements.
In addition, the Company believes that timely and strategic product
introductions are critical to maintaining the growth of independent distribution
channels. Distributors become enthusiastic about new products and are generally
excited to share new products with their customer base. An expanding product
line helps to attract new distributors and generate additional revenues.
NSI maintains a laboratory and a staff of approximately 90 individuals
involved in product development. NSI also relies on an advisory board comprised
of recognized authorities in various disciplines. In addition, NSI and the
Company evaluate a significant number of product ideas that are presented by
distributors and other outside sources. NSI believes that strategic
relationships with certain vendors also provide important access to innovative
product concepts. The Company will continue to develop products tailored to
appeal to the particular needs of the Company's markets.
Historically, one of the reasons for the success of Nu Skin personal care
product line has been its gender neutral positioning. This product positioning
substantially expands the size of the traditional skin and hair care market.
NSI's IDN line of products has historically been positioned to be age neutral.
However, with a substantial distributor and user base established, the Company
believes that it can further increase its market share in both the personal care
and the nutritional products categories by introducing age and gender specific
products, additional vitamin products targeted to seniors, and personal care
products targeted to either men or women.
59
PRODUCTION. Although the Company is investigating the possibility of
manufacturing certain products within specific markets, virtually all the
Company's products are currently sourced through NSI and are produced by
manufacturers unaffiliated with NSI. The Company currently has little or no
direct contact with these manufacturers. The Company's profit margins and its
ability to deliver its existing products on a timely basis are dependent upon
the ability of NSI's outside manufacturers to continue to supply products in a
timely and cost-efficient manner. Furthermore, the Company's ability to enter
new markets and sustain satisfactory levels of sales in each market is dependent
in part upon the ability of suitable outside manufacturers to reformulate
existing products, if necessary to comply with local regulations or market
environments, for introduction into such markets. Finally, the development of
additional new products in the future will likewise be dependent in part on the
services of suitable outside manufacturers.
The Company currently acquires products or ingredients from sole suppliers
or suppliers that are considered by the Company to be the superior suppliers of
such ingredients. The Company believes that, in the event it is unable to source
any products or ingredients from its current suppliers, the Company could
produce such products or replace such products or substitute ingredients without
great difficulty or prohibitive increases in the cost of goods sold. However,
there can be no assurance that the loss of such a supplier would not have a
material adverse effect on the Company's business and results of operations.
With respect to products purchased by the Company from NSI, NSI currently
relies on two unaffiliated manufacturers to produce approximately 70% and 80% of
its personal care and nutritional products, respectively. NSI has a written
contract with the primary supplier of the Company's personal care products that
expires at the end of 1997. An extension to such contract is currently being
negotiated. NSI does not currently have a written contract with the primary
supplier of the Company's nutritional products. The Company believes that in the
event that NSI's relationship with any of its key manufacturers is terminated,
NSI will be able to find suitable replacement manufacturers. However, there can
be no assurance that the loss of either manufacturer would not have a material
adverse effect on the Company's business and results of operations. See "Risk
Factors--Reliance on and Concentration of Outside Manufacturers."
RELATIONSHIP WITH NSI
Upon consummation of the Offerings, approximately 97.2% of the combined
voting power of the outstanding shares of Common Stock will be held by the
shareholders of NSI and their affiliates (approximately 97.0% if the
underwriters' over-allotment options are exercised in full). As a result, when
acting as stockholders of the Company, these shareholders of NSI and their
affiliates will consider the short-term and long-term impact of all stockholder
decisions on the consolidated financial results of NSI and the Company. See
"Risk Factors--Relationship with and Reliance on NSI; Potential Conflicts of
Interest." In addition, the Company has entered into distribution,
trademark/tradename license, licensing and sales, and management services
agreements (the "Operating Agreements") with NSI and with Nu Skin International
Management Group, Inc. ("NSIMG"), a Delaware corporation also controlled by the
shareholders of NSI, summary descriptions of which are set forth below. Such
summaries are qualified in their entirety by reference to the Operating
Agreements in effect and as they may be amended from time to time. In the future
the Company may enter into amendments to the Operating Agreements or additional
agreements with NSI or NSIMG. The Company intends to seek the approval of a
majority of its independent directors for any amendment to the Operating
Agreements and any new agreement which the Company believes to be of material
importance to the Company and as to which the Company and NSI or NSIMG have
conflicting interests. The Company is almost completely dependent on the
Operating Agreements to conduct its business, and in the event NSI is unable or
unwilling to perform its obligations under the Operating Agreements, or
terminates the Operating Agreements as provided therein, the Company's business
and results of operations will be adversely affected. See "Risk
Factors--Relationship with and Reliance on NSI; Potential Conflicts of
Interest."
DISTRIBUTION AGREEMENTS. The Company has entered into a regional
distribution agreement (the "Regional Distribution Agreement") with NSI, through
Nu Skin Hong Kong, pursuant to which NSI has
60
granted to the Company the exclusive right to sell and distribute Nu Skin
personal care or IDN products and sales aids in the Company's markets. Nu Skin
Japan, Nu Skin Taiwan, Nu Skin Korea and Nu Skin Thailand have each entered into
wholesale distribution agreements (the "Wholesale Distribution Agreements") with
Nu Skin Hong Kong, pursuant to which each such Subsidiary has been granted the
right to sell and distribute Nu Skin personal care and IDN products in its
respective country. The following discussion summarizes the terms of the
Regional Distribution Agreement and the Wholesale Distribution Agreements for
each of the Subsidiaries, other than the Wholesale Distribution Agreement for Nu
Skin Korea, which is discussed below.
The Company has the right to purchase any Nu Skin personal care or IDN
products, subject to unavailability due to local regulatory requirements. See
"--Government Regulation." Purchases are made by submission of a purchase order
to NSI, which NSI must accept unless it has insufficient inventory to fill the
order. In determining whether it has sufficient inventory to fill a given order,
NSI is required to treat the Company on a parity basis with its other
affiliates.
The prices for products are governed by a price schedule which is subject to
change by NSI from time to time upon at least 30 days advance notice. NSI pays
ordinary freight and the Company pays handling, excise taxes and customs duties
on the products the Company orders. In order to assist NSI in planning its
inventory and pricing, the Company is required to provide NSI with certain
business plans and reports of its sales and prices to independent distributors.
The Company, through its subsidiary Nu Skin Hong Kong, purchases virtually
all of its products from NSI. Nu Skin Hong Kong pays for its purchases from NSI
under the Regional Distribution Agreement in U.S. dollars, while the other
Subsidiaries pay for their purchases from Nu Skin Hong Kong under the Wholesale
Distribution Agreements in their local currency. Nu Skin Hong Kong therefore
bears significant currency exchange risk as a result of purchases from NSI on
behalf of the other Subsidiaries. See "Risk Factors--Currency Risks."
The Company is responsible for paying for and obtaining government approvals
and registrations necessary for importation of Nu Skin personal care and IDN
products into its markets. In addition, the Company is responsible for obtaining
any government approvals, including any filings and notifications, necessary for
the effectiveness of the Regional Distribution Agreement and the Wholesale
Distribution Agreements or for the parties performance thereunder. See "Risk
Factors--Government Regulation of Products and Marketing; Import Restrictions."
NSI is generally responsible for paying for the research, development and
testing of the products sold to the Company, including any product
reformulations needed to comply with local regulatory requirements. NSI warrants
as to the merchantability of, and its title to, such products. NSI has further
indemnified the Company from losses and liability relating to claims arising out
of alleged or actual defects in the design, manufacture or content of its
products. NSI is required to maintain insurance covering claims arising from the
use of its products and to cause each Subsidiary to be a named insured on such
insurance policy. See "Risk Factors--Product Liability."
The Company is prohibited from selling Nu Skin personal care and IDN
products outside of the countries for which it has an exclusive distribution
license, except that the Company may sell certain Nu Skin personal care and IDN
products to NSI affiliates in Australia and New Zealand. In addition, the
Company is prohibited from selling products which directly or indirectly compete
with Nu Skin personal care and IDN products in any country without NSI's prior
consent, which consent will not be unreasonably withheld or delayed. The Company
may sell non-competing products without restriction.
The Company may manufacture products which do not compete with Nu Skin
personal care and IDN products without restriction but may not manufacture
products which compete directly or indirectly with Nu Skin personal care and IDN
products without NSI's prior consent, which consent will not be
61
unreasonably withheld or delayed. Any products manufactured by the Company
carrying an NSI trademark will be subject to the Trademark/Tradename License
Agreements with NSI described below and will require the payment to NSI of
certain royalties as set forth therein. If NSI discontinues a product that the
Company would like to continue to sell, the Company may elect to manufacture the
product itself or through a third party manufacturer unless NSI has a competing
product. In this event, NSI has agreed to license the product formulation and
any associated trademarks and tradenames to the Company pursuant to the
Trademark/Tradename License Agreements described below.
When the Company determines to commence operations in Indonesia, Malaysia,
the Philippines, the PRC, Singapore or Vietnam, NSI has agreed under the
Regional Distribution Agreement to enter into new Trademark/Tradename License
Agreements and Licensing and Sales Agreements and to cause NSIMG to enter into
new Management Services Agreements, in each case substantially similar to those
described below, with the Company or subsidiaries operating in such countries.
See "Risk Factors-- Entering New Markets."
TRADEMARK/TRADENAME LICENSE AGREEMENTS. The following discussion summarizes
the terms of the Trademark/Tradename License Agreements for each of the
Subsidiaries, other than the Trademark/ Tradename License Agreement for Nu Skin
Korea, which is discussed below. Pursuant to the Trademark/ Tradename License
Agreements, NSI has granted to each Subsidiary an exclusive license to use in
its market the Nu Skin and IDN trademarks, the individual product trademarks
used on Nu Skin personal care and IDN products and any NSI tradenames. Each of
the Subsidiaries may thus use the licensed trademarks and tradenames on products
and commercial materials not purchased from NSI, including locally sourced
products and commercial materials and products and commercial materials
manufactured by such subsidiary and may grant a sub-license, with the consent of
NSI, for the licensed trademarks and tradenames in its market. In addition, each
Subsidiary has the right to export such products and commercial materials into
other Company markets with NSI's consent, which consent shall not be
unreasonably withheld or delayed.
The Company pays a royalty to NSI for use of the licensed trademarks and
tradenames on products, starter and introductory kits and commercial materials
not purchased from NSI, including locally sourced products and commercial
materials and products and commercial materials manufactured by the Company. The
royalty is paid monthly and is equal to 5% of the Company's revenues from such
products and commercial materials for such month generally and a total of 8%
where NSI owns the formula or has exclusive rights in the subject market for
such products or commercial materials.
NSI is responsible for securing and maintaining trademark registrations in
the territory covered by each Trademark/Tradename Agreement. NSI has agreed to
take such actions as the Company may reasonably request to protect its and the
Company's rights to the licensed trademarks from infringement and related claims
and has indemnified the Company from losses and liability resulting from such
claims.
LICENSING AND SALES AGREEMENTS. Currently, all distributor agreements are
entered into between the distributor and NSI rather than with the Company.
Therefore, the Company does not own the distributor lists or the distribution
system, the Global Compensation Plan, copyrights and related intangibles.
Consequently, each of the Subsidiaries has entered into a Licensing and Sales
Agreement with NSI. The following discussion summarizes the terms of the
Licensing and Sales Agreement for each of the Subsidiaries, other than the
Licensing and Sales Agreement for Nu Skin Korea, which is discussed below.
The Licensing and Sales Agreements include a license to the Company to use
the distributor lists, the Global Compensation Plan, know how, distributor
system and related intellectual property exclusively in its markets. The Company
pays a license fee to NSI of 4% of the Company's revenue from product sales
(excluding starter and introductory kits) to NSI distributors for the use of
such licensed property. The Company may not grant a sublicense for the licensed
property.
62
The Company is required to use the Global Compensation Plan to distribute
any products, except as NSI may agree to modify the plan in accordance with
local requirements. The Company must comply with all policies implemented by NSI
under the Global Compensation Plan. This is necessary to ensure global
consistency in NSI's operations. The Company must also employ all NSI policies
relating to commissions payable to, and other relationships with, NSI
distributors.
The Company and the Subsidiaries are contractually obligated to pay a
distributor commission expense of 42% of commissionable product sales. The
Licensing and Sales Agreements provide that the Company is to satisfy this
obligation by paying commissions owed to local distributors. In the event that
these commissions exceed 42% of commissionable product sales, the Company is
entitled to receive the difference from NSI. In the event that the commissions
paid are lower than 42%, the Company must pay the difference to NSI. Under this
formulation, the Company's total commission expense is fixed at 42% of
commissionable product sales in each country. The 42% figure has been set on the
basis of NSI's experience over the past eight years which indicates that actual
commissions paid in a given year together with the cost of administering the
Global Compensation Plan average approximately 42% of commissionable product
sales for such year. In the event that actual commissions payable to
distributors from sales in the Company's markets vary from these historical
results, whether as a result of changes in distributor behavior or changes to
the Global Compensation Plan or in the event that NSI's cost of administering
the Global Compensation Plan increases or decreases, the Licensing and Sales
Agreements provide that the settlement of distributor commission expense between
the Company and NSI may be modified to more accurately reflect actual results.
See "Risk Factors--Potential Increase in Distributor Compensation Expense."
In addition to payments to local distributors, the Company is generally
responsible for distributor support and relations within Japan, Taiwan, Hong
Kong and Thailand. The Company has agreed to use its best efforts to support the
development of NSI's distributor network in its markets by purchasing starter or
introductory kits from NSI and selling them to potential NSI distributors.
NSI has agreed to take such actions as the Company may reasonably request to
protect its and the Company's rights to the property licensed under the
Licensing and Sales Agreements from infringement and related claims and has
indemnified the Company from losses and liability resulting from such claims.
Both NSI and the Company are required to maintain insurance coverage adequate to
insure their assets and financial stability. NSI is responsible for ensuring
that the property licensed under the Licensing and Sales Agreements complies
with local laws and regulations, including direct selling laws. See "Risk
Factors--Government Regulation of Direct Selling Activities."
MANAGEMENT SERVICES AGREEMENTS. The following discussion summarizes the
terms of the Management Services Agreements which each of the Subsidiaries have
entered into with NSIMG. Pursuant to the Management Services Agreements, NSIMG
has agreed to provide a variety of management and support services to each
Subsidiary. These services include management, legal, financial, marketing and
distributor support/training, public relations, international expansion, human
resources, strategic planning, product development and operations administration
services. Most of NSI's senior management personnel and most employees who deal
with international issues are employees of NSIMG.
Generally, the management and support services are provided by employees of
NSI and NSIMG acting through NSIMG either (i) on a temporary basis in a specific
consulting role or (ii) on a full-time basis in a management position in the
country in which the services are required. The Management Services Agreements
do not cover the services of many of the Company's executive officers. See
"Management--Executive Compensation."
GENERAL PROVISIONS. The Operating Agreements (other than the Korean
Operating Agreements discussed below) are each for a term ending on December 31,
2016, and, after December 31, 2001, will be subject to renegotiation in the
event that members of the families of, or trusts or foundations established by
or for the benefit of the stockholders of the Subsidiaries prior to the Initial
Public Offerings on a
63
combined basis no longer beneficially own a majority of the combined voting
power of the outstanding shares of common stock of the Company or of NSI. Each
Operating Agreement is subject to termination by either party in the event of:
(i) a material breach by the other party which remains uncured for a period of
60 days after notice thereof; (ii) the bankruptcy or insolvency of the other
party; or (iii) entry of a judgment by a court of competent jurisdiction against
the other party in excess of $25,000,000. Each Operating Agreement to which NSI
is a party and each Operating Agreement to which NSIMG is a party is further
subject to termination by NSI or NSIMG, respectively, upon 30 days notice in the
event of a change of control of the Subsidiary party thereto and by such
Subsidiary upon 30 days notice in the event of a change of control of NSI or
NSIMG, respectively. Each Operating Agreement provides that neither party may
assign its rights thereunder without the consent of the other party. Each
Operating Agreement is governed by Utah law. Any dispute arising under an
Operating Agreement is to be settled by arbitration conducted in Utah in
accordance with the applicable rules of the American Arbitration Association, as
supplemented by the commercial arbitration procedures for international
commercial arbitration.
KOREAN OPERATING AGREEMENTS. In addition to the Management Services
Agreement with NSIMG described above, Nu Skin Korea has entered into a Wholesale
Distribution Agreement with Nu Skin Hong Kong and a Trademark/Tradename License
Agreement and a Licensing and Sales Agreement with NSI (the "Korean Operating
Agreements").
WHOLESALE DISTRIBUTION AGREEMENT. Pursuant to its Wholesale Distribution
Agreement with Nu Skin Hong Kong, Nu Skin Korea has been granted the right to
sell and distribute Nu Skin personal care and IDN products in South Korea. Under
the Wholesale Distribution Agreement, Nu Skin Korea has the right to purchase
any Nu Skin personal care or IDN products that have been made available for the
South Korean market. Purchases are made by submission of purchase orders to NSI
through Nu Skin Hong Kong, which purchase orders must be accepted if there is
sufficient inventory to fill such order. Nu Skin Korea pays handling, excise
taxes and customs duties on the products it orders.
Nu Skin Korea is responsible for paying for and obtaining government
approvals and registrations necessary for importation of Nu Skin personal care
and IDN products into South Korea and the effectiveness of the Wholesale
Distribution Agreement. See "Risk Factors--Government Regulation of Products and
Marketing."
Nu Skin Korea's Wholesale Distribution Agreement prohibits it from selling
Nu Skin personal care and IDN products outside of South Korea. In addition, Nu
Skin Korea is prohibited from selling or manufacturing products which directly
or indirectly compete with Nu Skin personal care or IDN products without NSI's
prior consent.
The term of Nu Skin Korea's Wholesale Distribution Agreement is continuous
unless terminated by either party. The Wholesale Distribution Agreement is
subject to termination by either party: (i) upon 90 days written notice without
cause; (ii) in the event of the default in the performance of a material
obligation under the agreement by the other party which remains uncured for a
period of 60 days after notice thereof; (iii) entry of a judgment against Nu
Skin Korea or placement of a lien, security interest or encumbrance on the
assets of Nu Skin Korea or NSI; (iv) a substantial change in ownership or
control of Nu Skin Korea; or (v) a violation by either party of any provision of
the Wholesale Distribution Agreement. The Wholesale Distribution Agreement is
subject to termination by Nu Skin Hong Kong upon the bankruptcy or insolvency of
Nu Skin Korea. Nu Skin Korea may not assign its rights under the Wholesale
Distribution Agreement without the consent of Nu Skin Hong Kong. The Wholesale
Distribution Agreement is governed by Utah law, and any dispute arising
thereunder is to be settled by arbitration conducted in Utah in accordance with
the applicable rules of the American Arbitration Association, as supplemented by
the commercial arbitration procedures for international commercial arbitration.
TRADEMARK/TRADENAME LICENSE AGREEMENT. Pursuant to its Trademark/Tradename
License Agreement with NSI, NSI has granted to Nu Skin Korea an exclusive
license to use in its market the Nu Skin personal care and IDN trademarks, the
individual product trademarks used on Nu Skin personal care and IDN
64
products and any NSI tradenames. Nu Skin Korea may not grant a sub-license for
the licensed trademarks and tradenames in its market.
Nu Skin Korea pays a royalty to NSI for use of the licensed trademarks and
tradenames on products, starter and introductory kits and commercial materials
not purchased from NSI, including locally sourced products and commercial
materials and products and commercial materials manufactured by Nu Skin Korea.
The royalty is paid monthly and is equal to 5% of Nu Skin Korea's revenues from
such products and commercial materials for such month generally and 8% of such
revenues where NSI owns the formula or has exclusive rights in the subject
market for such products or commercial materials.
Nu Skin Korea is responsible for obtaining any government approvals,
including any filings and notifications, necessary for the effectiveness of the
Trademark/Tradename License Agreement or for the parties performance thereunder.
Nu Skin Korea has agreed to cooperate with NSI as reasonably requested to
protect NSI's rights in the licensed trademarks and tradenames. Nu Skin Korea's
liability in any infringement and related actions is limited to the amount of
license fees due to NSI under its Trademark/ Tradename License Agreement.
Nu Skin Korea's Trademark/Tradename License Agreement is for an initial term
ending in February 2001, subject to automatic renewal for additional 5-year
terms unless terminated by either party. The Trademark/Tradename License
Agreement is subject to termination by either party in the event of a material
breach by the other party which remains uncured for a period of 90 days after
notice thereof, including (i) the bankruptcy or insolvency of the other party;
(ii) entry of a judgment against Nu Skin Korea or placement of a lien, security
interest or encumbrance on the assets of Nu Skin Korea or NSI; (iii) a
substantial change in ownership or control of Nu Skin Korea; or (iv) a violation
by either party of any provision of the Trademark/Tradename License Agreement.
The Trademark/Tradename License Agreement is further subject to termination by
NSI upon the government expropriation of any assets of Nu Skin Korea or NSI
relating to Nu Skin Korea's activities under the agreement. Nu Skin Korea may
not assign its rights under the Trademark/Tradename License Agreement without
the consent of NSI. The Trademark/ Tradename License Agreement is governed by
Utah law, and any dispute arising under the Trademark/ Tradename License
Agreement is to be settled by arbitration conducted in Utah in accordance with
the applicable rules of the American Arbitration Association, as supplemented by
the commercial arbitration procedures for international commercial arbitration.
LICENSING AND SALES AGREEMENT. Nu Skin Korea has entered into a Licensing
and Sales Agreement with NSI which includes a license to Nu Skin Korea to use
the distributor lists, the Global Compensation Plan, know how, distributor
system and related intellectual property exclusively in its markets. Nu Skin
Korea pays a license fee to NSI of 4% of its revenue from product sales
(excluding introductory kits) to NSI distributors for the use of such licensed
property. Nu Skin Korea may not grant a sublicense for the licensed property.
Pursuant to its Licensing and Sales Agreement with NSI, Nu Skin Korea is
obligated to pay commissions to local distributors, using a formula based upon a
maximum payout of 35% of commissionable product sales. In addition to payments
of local commissions, Nu Skin Korea is generally responsible for distributor
support and relations within South Korea. Nu Skin Korea has agreed to use its
best efforts to support the development of NSI's distributor network in South
Korea by purchasing starter or introductory kits from NSI and selling them to
potential NSI distributors.
NSI has warranted to its title to the property licensed under the Licensing
and Sales Agreements and that Nu Skin Korea's use of such property will not
constitute an infringement of the right of any third party, and has indemnified
the Company from losses and liability relating to any breach of such warranties.
The provisions of Nu Skin Korea's Licensing and Sales Agreement with respect
to term, termination, assignment, governing law and arbitration are
substantially the same as for its Trademark/Tradename License Agreement.
65
MUTUAL INDEMNIFICATION AGREEMENT. The Company and NSI have entered into a
mutual indemnification agreement pursuant to which NSI has agreed to indemnify
the Company for certain claims, losses and liabilities relating to the
operations of the Subsidiaries prior to the Reorganization and the Company has
agreed to indemnify NSI for certain claims, losses and liabilities relating to
the operations of the Subsidiaries after the Reorganization.
COMPETITION
PERSONAL CARE AND NUTRITIONAL PRODUCTS. The markets for personal care and
nutritional products are large and intensely competitive. The Company competes
directly with companies that manufacture and market personal care and
nutritional products in each of the Company's product categories. The Company
competes with other companies in the personal care and nutritional products
industry by emphasizing the value and premium quality of the Company's products
and the convenience of the Company's distribution system. Many of the Company's
competitors have much greater name recognition and financial resources than the
Company. In addition, personal care and nutritional products can be purchased in
a wide variety of channels of distribution. While the Company believes that
consumers appreciate the convenience of ordering products from home through a
sales person or through a catalog, the buying habits of many consumers
accustomed to purchasing products through traditional retail channels are
difficult to change. The Company's product offerings in each product category
are also relatively small compared to the wide variety of products offered by
many other personal care and nutritional product companies. There can be no
assurance that the Company's business and results of operations will not be
affected materially by market conditions and competition in the future.
NETWORK MARKETING COMPANIES. The Company also competes with other direct
selling organizations, some of which have a longer operating history and higher
visibility, name recognition and financial resources. The leading network
marketing company in the Company's markets is Amway Corporation and its
affiliates. The Company competes for new distributors on the basis of the Global
Compensation Plan and its premium quality products. Management envisions the
entry of many more direct selling organizations into the marketplace as this
channel of distribution expands over the next several years. The Company has
been advised that certain large, well-financed corporations are planning to
launch direct selling enterprises which will compete with the Company in certain
of its product lines. There can be no assurance that the Company will be able to
successfully meet the challenges posed by this increased competition. See "Risk
Factors--Competition."
GOVERNMENT REGULATION
DIRECT SELLING ACTIVITIES. Direct selling activities are regulated by
various governmental agencies. These laws and regulations are generally intended
to prevent fraudulent or deceptive schemes, often referred to as "pyramid" or
"chain sales" schemes, that promise quick rewards for little or no effort,
require high entry costs, use high pressure recruiting methods and/or do not
involve legitimate products. In Japan, the Company's distribution system is
regulated under the "Door-to-Door" Sales Law, which requires the submission of
specific information concerning the Company's business and products and which
provides certain cancellation and cooling-off rights for consumers and new
distributors. In Taiwan, the Fair Trade Law (and the Enforcement Rules and
Supervisory Regulations of Multi-Level Sales) requires the Company to comply
with registration procedures and also provides distributors with certain rights
regarding cooling-off periods and product returns. The Company also complies
with South Korea's strict Door-to-Door Sales Act, which requires, among other
things, the regular reporting of revenue, the registration of distributors
together with the issuance of a registration card, and the maintaining of a
current distributor registry. This law also limits the amount of sponsoring
bonuses that a registered multi-level marketing company can pay to its
distributors to 35% of revenue in a given month. In Thailand, currently there
are no laws (other than general fair trade laws) directly regulating direct
selling or multi-level marketing activities.
66
See "Risk Factors--Potential Effects of Adverse Publicity" and "--Government
Regulation of Direct Selling Activities; Import Restrictions."
Based on research conducted in opening its existing markets (including
assistance from local counsel), the nature and scope of inquiries from
government regulatory authorities and the Company and NSI's history of
operations in such markets to date, the Company and NSI believe that their
method of distribution is in compliance in all material respects with the laws
and regulations relating to direct selling activities of the countries in which
the Company and NSI currently operate. Even though management believes that laws
governing direct selling are generally becoming more permissive in certain Asian
countries, many countries, including Singapore, one of the Company's potential
markets, currently have laws in place that would prohibit the Company and NSI
from conducting business in such markets. There can be no assurance that the
Company will be allowed to conduct business in each of the new markets or
continue to conduct business in each of its existing markets licensed from NSI.
See "Risk Factors-- Entering New Markets."
REGULATION OF PRODUCTS AND MARKETING. The Company and NSI are subject to or
affected by extensive governmental regulations not specifically addressed to
network marketing. Such regulations govern, among other things, (i) product
formulation, labeling, packaging and importation, (ii) product claims and
advertising, whether made by the Company, NSI or NSI distributors, (iii) fair
trade and distributor practices, (iv) taxes, transfer pricing and similar
regulations that affect foreign taxable income and customs duties, and (v)
regulations governing foreign companies generally.
The Japanese MOHW requires the Company to possess an import business license
and to register each personal care product imported into Japan. Packaging and
labeling requirements are also specified. The Company has had to reformulate
many products to satisfy MOHW regulations. In Japan, nutritional foods, drugs
and quasi-drugs are all strictly regulated. The chief concern involves the types
of claims and representations that can be made regarding the efficacy of
nutritional products. The Company's successful introduction of IDN products in
Japan was achieved by utilizing the combined efforts of NSI's technical staff as
well as external consultants.
In Taiwan, all "medicated" cosmetic and pharmaceutical products require
registration. Non-medicated cosmetic products, such as shampoo and hair
conditioner, require no registration.
In Hong Kong, cosmetic products not classified as "drugs" nor as
"pharmaceutical products" are not subject to statutory registrations, packaging
and labeling requirements apart from the Trade Descriptions Ordinance. In Macau,
"pharmaceutical" products are strictly regulated; general products are not
subject to registration requirements.
In South Korea, the Company is subject to and has obtained the mandatory
certificate of confirmation as a qualified importer of cosmetics under the
Pharmaceutical Affairs Law as well as additional product approvals for each of
the 45 categories of cosmetic products which it imports. Each new cosmetic
product undergoes a 60-day post-customs inspection where, in addition to
compliance with ingredient requirements, each product is inspected for
compliance with South Korean labeling requirements.
In Thailand, personal care products are regulated by the Food and Drug
Association, and all of the initial NSI personal care products to be introduced
in Thailand have qualified for simplified registration procedures under Thai
law.
REGULATION OF POTENTIAL MARKETS. Each of the proposed new markets will
present additional unique difficulties and challenges. The PRC, for example, has
proven to be a particularly difficult market for foreign corporations due to its
extensive government regulation and the historical political tenets of the PRC
government. In order to enter the market in the PRC, the Company may be required
to create a joint venture enterprise with a Chinese entity and to establish a
local manufacturing presence, which will entail a significant investment on the
Company's part. The Company will likely have to apply for licenses on a province
by province basis and the repatriation of the Company's profits will be subject
to restrictions on
67
currency conversion and the fluctuations of the government controlled exchange
rate. In addition, because distribution systems are greatly fragmented, the
Company may be forced to use business models significantly different from those
used by the Company in more developed countries. The lack of a comprehensive
legal system and the uncertain and sporadic enforcement of existing legislation
and laws could also have an adverse effect on the Company's proposed business in
the PRC.
The other potential new markets also present significant regulatory,
political and economic obstacles to the Company. In Singapore, for example,
network marketing is currently illegal and is not permitted under any
circumstances. Although the Company believes that this restriction will
eventually be relaxed or repealed, no assurance can be given that such
regulation will not remain in place and that the Company will not be permanently
prevented from initiating sales in Singapore. In addition, Malaysia has
governmental guidelines that have the effect of limiting foreign ownership of
direct selling companies operating in Malaysia to no more than 30%. There can be
no assurance that the Company will be able to properly structure Malaysian
operations to comply with this policy. In October of 1995, the Company's
business permit applications were denied by the Malaysian government as a result
of activities by certain NSI distributors. Therefore, the Company believes that
although significant opportunities exist to expand its operations into new
markets, there can be no assurance that these or other difficulties will not
prevent the Company from realizing the benefits of this opportunity.
OTHER REGULATORY ISSUES. As a U.S. entity operating through subsidiaries in
foreign jurisdictions, the Company is subject to foreign exchange control and
transfer pricing laws that regulate the flow of funds between the Subsidiaries
and the Company as well as the flow of funds to NSI for product purchases,
management services, and contractual obligations such as the payment of
distributor commissions. In South Korea, in particular, the Company has come
under the scrutiny of regulators because of the manner in which the Company and
Nu Skin Korea implement the Global Compensation Plan. Pursuant to the Global
Compensation Plan, Nu Skin Korea currently pays commissions to distributors in
South Korea on both their local and foreign product sales. Similarly,
commissions on product sales in South Korea by other distributors are paid by
their local NSI affiliate. The Company believes that it operates in compliance
with all applicable foreign exchange control and transfer pricing laws. However,
there can be no assurance that the Company will continue to be found to be
operating in compliance with foreign exchange control and transfer pricing laws,
or that such laws will not be modified, which, as a result, may require changes
in the Company's operating procedures.
As is the case with most companies which operate in the Company's product
segment, NSI and the Company have from time to time received inquiries from
various government regulatory authorities regarding the nature of their
businesses and other issues such as compliance with local direct selling,
customs, taxation, foreign exchange control, securities and other laws. Although
to date none of these inquiries has resulted in a finding materially adverse to
the Company or NSI, adverse publicity resulting from inquiries into NSI's
operations by certain government agencies in the early 1990's, stemming in part
out of inappropriate product and earnings claims by distributors, materially
adversely affected NSI's business and results of operations. There can be no
assurance that the Company or NSI will not face similar inquiries in the future,
which, either as a result of findings adverse to the Company or NSI or as a
result of adverse publicity resulting from the instigation of such inquiries,
could have a material adverse effect on the Company's business and results of
operations. See "Risk Factors--Potential Effects of Adverse Publicity."
The Subsidiaries are periodically subject to reviews and audits by various
governmental agencies, particularly in new markets, where the Company has
experienced high rates of growth. Recently, the South Korean Ministry of Trade,
Industry and Energy commenced an examination of the largest domestic and
foreign-owned network marketing companies in South Korea, including Nu Skin
Korea. The purposes of the examination were stated to be to monitor how
companies are operating and to audit current business practices. In addition, Nu
Skin Korea is currently subject to an audit by South Korean customs authorities.
Management believes that this audit, the focus of which is to review customs
valuation issues and inter-
68
company payments is, in large measure, the result of Nu Skin Korea's rapid
growth and its position as the largest importer of cosmetics and personal care
products in South Korea. No assurance can be given that Nu Skin Korea will not,
as a result of these audits, be assessed additional customs duties based on an
increase in customs valuation of imported products or will not be subject to
other regulatory review, or in the event that these risks materialize, will not
be subject to adverse publicity. Nevertheless, the Company believes its
operations are in compliance in all material respects with local laws. See "Risk
Factors-- Potential Negative Impact of Distributor Actions." Management believes
that other major importers of cosmetic products are also the focus of regulatory
reviews by South Korean authorities.
Under Thai law, businesses which are more than 50% owned by non-citizens are
not permitted to operate unless they have an Alien Business Permit, which is
frequently difficult to obtain. The Company is currently operating under the
Treaty of Amity and Economic Relations between Thailand and the United States
(the "Treaty of Amity"). Under the Treaty of Amity, an Alien Business Permit is
not required if a Thailand business is owned by an entity organized in the
United States, a majority of whose owners are U.S. citizens or entities. From
time to time, it has been reported that certain Thailand government officials
have considered supporting the termination of the Treaty of Amity. The Company
could face particular difficulties in continuing operations in Thailand if the
Treaty of Amity were terminated and the Company were forced to obtain an Alien
Business Permit.
Based on the Company's and NSI's experience and research (including
assistance from counsel) and the nature and scope of inquiries from government
regulatory authorities, the Company and NSI believe that they are in material
compliance with all regulations applicable to them. Despite this belief, either
the Company or NSI could be found not to be in material compliance with existing
regulations as a result of, among other things, the considerable interpretative
and enforcement discretion given to regulators or misconduct by independent
distributors. In 1994, NSI and three of its distributors entered into a consent
decree with the Federal Trade Commission (the "FTC") with respect to its
investigation of certain product claims and distributor practices, pursuant to
which NSI paid approximately $1 million to settle the FTC investigation. NSI is
currently in discussions with the FTC regarding its compliance with such consent
decree and other product issues raised by the FTC. NSI recently voluntarily
agreed to recall and rewrite virtually all of its sales and marketing materials
to address FTC concerns. NSI has also offered a monetary settlement, which
proposal is currently under review by the FTC. Even though neither the Company
nor the Subsidiaries have encountered similar regulatory concerns, there can be
no assurances that the Company and the Subsidiaries will not be subject to
similar inquiries and regulatory investigations or disputes and the effects of
any adverse publicity resulting therefrom. Any assertion or determination that
either the Company, NSI or any NSI distributors are not in compliance with
existing laws or regulations could have a material adverse effect on the
Company's business and results of operations. In addition, in any country or
jurisdiction, the adoption of new laws or regulations or changes in the
interpretation of existing laws or regulations could generate negative publicity
and/or have a material adverse effect on the Company's business and results of
operations. The Company cannot determine the effect, if any, that future
governmental regulations or administrative orders may have on the Company's
business and results of operations. Moreover, governmental regulations in
countries where the Company plans to commence or expand operations may prevent,
delay or limit market entry of certain products or require the reformulation of
such products. Regulatory action, whether or not it results in a final
determination adverse to the Company or NSI, has the potential to create
negative publicity, with detrimental effects on the motivation and recruitment
of distributors and, consequently, on the Company's sales and earnings. See
"Risk Factors--Potential Effects of Adverse Publicity" and "--Entering New
Markets."
EMPLOYEES
As of May 31, 1997, the Company had approximately 950 full-time and
part-time employees. None of the employees is represented by a union or other
collective bargaining group. The Company believes its relationship with its
employees is good, and does not currently foresee a shortage in qualified
personnel needed to operate the business. Each Subsidiary is directed by an
experienced manager.
69
PROPERTIES
In each of its current markets, the Company has established a central office
for the local administrative staff directed by a general manager. These offices
also have a training room for distributor and employee use and an adjoining
distribution center where distributors can place, pay for and pick up orders. In
Japan, Taiwan, and South Korea, additional pick up centers have been added to
provide better service to distributors and meet the increasing demand for
product. In Hong Kong, the Company maintains a distributor business center where
established distributors can use office space for training and sponsoring
activities at cost.
In addition to the Company's corporate headquarters in Provo, Utah, the
following table summarizes, as of May 31, 1997, the Company's leased office and
distribution facilities in each country where the Company currently has
operations.
APPROXIMATE SQUARE
LOCATION FUNCTION FEET
- --------------------------------------------- ------------------------------------ -------------------
Tokyo, Japan................................. Central office/distribution center 35,000
Osaka, Japan................................. Distribution center/office 13,400
Taipei, Taiwan............................... Center office/distribution center 22,000
Kaohsiung, Taiwan............................ Distribution center/office 9,500
Taichung, Taiwan............................. Distribution center/office 17,000
Nankan, Taiwan............................... Warehouse/distribution center 36,000
Causeway Bay, Hong Kong...................... Central office/distribution 19,000
center/distributor business
center/regional office
Tsing Yi, Hong Kong.......................... Warehouse 10,000
Macau........................................ Distribution center/office 2,000
Seoul, South Korea........................... Central office/distribution center 30,000
Seoul, South Korea........................... Distribution center 7,000
Kyungki-Do, South Korea...................... Warehouse 16,000
Pusan, South Korea........................... Distribution center 10,000
Bangkok, Thailand............................ Central office/distribution center 8,200
Bangkok, Thailand............................ Distribution center 1,700
LEGAL PROCEEDINGS
The Company is not a party to any litigation or other legal proceedings or
investigations which is expected to have a material adverse effect on its
financial condition or results of operations, nor are any such proceedings known
to be contemplated.
70
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
As of May 31, 1997, the directors and executive officers of the Company and
key managers of the Subsidiaries were as follows:
NAME AGE POSITION
- ----------------------- ----------- -------------------------------------------------------------
Blake M. Roney 39 Chairman of the Board
Steven J. Lund 43 President, Chief Executive Officer and Director
Renn M. Patch 46 Chief Operating Officer
Corey B. Lindley 32 Chief Financial Officer
Michael D. Smith 51 Vice President of Operations
M. Truman Hunt 38 Vice President of Legal Affairs and Investor Relations
Keith R. Halls 39 Secretary and Director
Takashi Bamba 61 President, Nu Skin Japan Company, Limited
John Chou 51 President, Nu Skin Taiwan, Inc.
S.T. Han 54 President, Nu Skin Korea, Inc.
George Mak 43 President, Nu Skin Hong Kong, Inc.
Sandra N. Tillotson 40 Director
Brooke B. Roney 35 Director
Kirk V. Roney 43 Director
Max L. Pinegar 65 Director
E.J. "Jake" Garn 64 Director
Paula Hawkins 70 Director
Daniel W. Campbell 42 Director
A brief biographical summary of each of the Company's directors and
executive officers and the key managers of the Subsidiaries follows:
BLAKE M. RONEY has served as the Chairman of the Board since the Company's
inception and is a founder of Nu Skin International Inc., an affiliate of the
Company ("NSI"). He has also served as President, Chief Executive Officer and
Chairman of the Board of NSI and certain of its affiliated entities since their
respective inceptions. He received a B.S. degree from Brigham Young University.
He is the brother of Kirk V. Roney and Brooke B. Roney.
STEVEN J. LUND has been the President, Chief Executive Officer and a
Director of the Company since its inception. Mr. Lund has also served as
Executive Vice President and a Director of NSI since 1985 and as Vice President
and Secretary of certain NSI affiliated entities since their respective
inceptions. Mr. Lund previously worked as an attorney in private practice. He
received a B.A. degree from Brigham Young University and a J.D. degree from
Brigham Young University's J. Reuben Clark Law School.
RENN M. PATCH has been the Chief Operating Officer of the Company since its
inception. Since 1992 he has been Vice President of Global Operations and
Assistant General Manager of NSI. From 1991 to 1992, he served as Director of
Government Affairs of NSI. Prior to joining NSI in 1991, Mr. Patch was
associated with the Washington, D.C. consulting firm of Parry and Romani
Associates. Mr. Patch earned a B.A. degree from the University of Minnesota, a
J.D. degree from Hamline University School of Law and an L.L.M. degree from
Georgetown University.
COREY B. LINDLEY has been the Chief Financial Officer of the Company since
its inception. From 1993 to 1996, he served as Managing Director, International
of NSI. Mr. Lindley worked as the International Controller of NSI from 1991 to
1994 and lived in Hong Kong and Japan during that time. From 1990 to 1991, he
served as Assistant Director of Finance of NSI. Mr. Lindley is a Certified
Public Accountant.
71
Prior to joining NSI in 1990, he worked for the accounting firm of Deloitte and
Touche. He earned a B.S. degree from Brigham Young University and an M.B.A.
degree from Utah State University.
MICHAEL D. SMITH has been the Vice President of Operations for the Company
since its inception. He has also served as Vice President of Asian Operations of
NSI since February 1996. Prior to that time, he served as General Counsel of NSI
from 1992 to 1996 and as Director of Legal Affairs of NSI from 1989 to 1992. He
earned B.S. and M.A. degrees from Brigham Young University and a J.D. degree
from the University of Utah.
M. TRUMAN HUNT has served as the Vice President of Legal Affairs and
Investor Relations since the Company's inception. He has also served as Counsel
to the President of NSI since 1994. From 1991 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. Prior to that time, 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.
KEITH R. HALLS has served as the Secretary and a Director of the Company
since its inception. He has also served as General Vice President and a Director
of NSI since 1992. He served as Director of Finance of NSI from 1986 to 1992.
Mr. Halls is a Certified Public Accountant. Mr. Halls received a B.A. degree
from Stephen F. Austin State University and a B.S. degree from Brigham Young
University.
TAKASHI BAMBA has served as the President and/or General Manager of Nu Skin
Japan since 1993. Prior to joining Nu Skin Japan in 1993, Mr. Bamba served five
years as President and CEO of Avon Products Co., Ltd., the publicly traded
Japanese subsidiary of Avon Products, Inc. Prior to working at Avon Products
Co., Ltd., he spent 17 years at Avon Products, Inc. He received a B.A. degree
from Yokohama National University.
JOHN CHOU has served as the President and/or General Manager of Nu Skin
Taiwan since 1991. Prior to joining Nu Skin Taiwan in 1991, he spent twenty-one
years in international marketing and management with 3M Taiwan Ltd., Amway
Taiwan and Universal PR Co. Mr. Chou is a standing director of the Taiwan ROC
Direct Selling Association. He is also a member of the Kiwanis International,
and the Taiwan American Chamber of Commerce. He received a B.A. degree from Tan
Kang University in Taipei, Taiwan.
S.T. HAN has served as the President and/or General Manager of Nu Skin Korea
since 1995. Prior to joining Nu Skin Korea in 1995, Mr. Han spent four years as
the Executive Managing Director of Woosung Film Co., the exclusive distributor
of Konica film in South Korea. He also worked for Amway Korea, Ltd. during that
Company's start-up phase of operations in 1991. Mr. Han graduated with a B.A.
degree from ChungAng University.
GEORGE MAK has served as the President and/or General Manager of Nu Skin
Hong Kong since 1991. Prior to joining Nu Skin Hong Kong in 1991, Mr. Mak worked
for Johnson & Johnson as a personnel and administration manager for Hong Kong
and Shanghai from 1989 to 1991. Prior to joining Johnson & Johnson he worked for
10 years in the human resources and accounting fields. He earned an M.B.A.
degree from the University of East Asia, Macau. Mr. Mak has submitted his
resignation effective July 1, 1997.
SANDRA N. TILLOTSON has served as a Director of the Company since its
inception. She was a founder of NSI and has also served as General Vice
President of NSI since 1992 and a Director of NSI since its inception and as a
Director and an executive officer of certain of NSI's affiliated entities since
their respective inceptions. She served as Vice President of Corporate Services
of NSI from 1984 to 1992. She earned a B.S. degree from Brigham Young
University.
BROOKE B. RONEY has served as a Director of the Company since its inception.
He was a founder of NSI and has also served as General Vice President and a
Director of NSI since 1992 and as a Director and an executive officer of certain
of NSI's affiliated entities since their respective inceptions. He served as
Vice President of Distribution of NSI from 1984 to 1992. He is the brother of
Blake M. Roney and Kirk V. Roney.
72
KIRK V. RONEY has served as a Director of the Company since its inception.
He has also served as General Vice President of NSI since 1992 and a Director of
NSI since 1984, and as a Director and an executive officer of certain of NSI's
affiliated entities since their respective inceptions. He served as Vice
President of Planning and Development of NSI from 1984 to 1992. He earned an
M.I.M. degree from the American Graduate School of International Management. He
earned an M.A. degree from Central Michigan University and a B.A. from Brigham
Young University. He is the brother of Blake M. Roney and Brooke B. Roney.
MAX L. PINEGAR has served as a Director of the Company since September 1996.
He has also served as General Manager of NSI since 1989 and as Vice President of
NSI since 1992. He received a B.A. degree from Brigham Young University and an
M.B.A. degree from the University of Utah.
E.J. "JAKE" GARN has served as a Director of the Company since March 1997.
Senator Garn has been Vice Chairman of Huntsman Corporation, one of the largest
privately-held companies in the U.S., since 1993. He currently serves as a
director for Dean Witter Funds, John Alden Life Insurance Company and Franklin
Quest & Co., Inc. From 1974 to 1993, Senator Garn was a member of the United
States Senate and served on numerous senate committees. He received a B.A.
degree from the University of Utah.
PAULA HAWKINS has served as a Director of the Company since March 1997.
Senator Hawkins has been a principal of Paula Hawkins & Associates, Inc., a
management consulting company, since its inception. From 1980 to 1986, Senator
Hawkins was a member of the United States Senate and served on numerous senate
committees.
DANIEL W. CAMPBELL has served as a Director of the Company since March 1997.
Mr. Campbell has been a Managing General Partner of EsNet, Ltd. since 1994. From
1992 to 1994, Mr. Campbell was the Senior Vice President and Chief Financial
Officer of WordPerfect Corporation and prior to that was a Partner of Price
Waterhouse LLP. He received a B.S. degree from Brigham Young University.
COMPENSATION OF DIRECTORS
Directors who do not receive compensation as officers or employees of the
Company, NSI or its affiliates are paid an annual fee of $25,000 and a fee of
$1,000 for each meeting of the Board of Directors or any committee meeting
thereof that they attend.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation commitee members are Keith R. Halls, Max L. Pinegar, Paula
Hawkins and Daniel W. Campbell. Mr. Halls is the Chairman of the Compensation
Commitee. Mr. Halls is currently the Secretary of the Company. Mr. Halls has
entered into a Stockholders' Agreement with the Company and certain other of its
stockholders. See "Certain Relationships and Related Transactions--Stockholders
Agreement." Mr. Halls is also a stockholder of NSI and Mr. Pinegar is an
executive officer of NSI, which provides the Company with substantially all of
its products, its distributor network and other support services. See "Certain
Relationships and Related Transactions--Operating Agreements; Relationship with
NSI." Several members of the Company's Board of Directors are also directors of
NSI and have set or will set compensation for certain executive officers of the
Company who have been or may in the future be executive officers of NSI.
EXECUTIVE COMPENSATION
The following table sets forth a summary of all compensation awarded or paid
to or earned by the chief executive officer and the four other most highly
compensated executive officers of the Company in the last fiscal year for
services rendered in all capacities to the Company for the fiscal years ended
December 31, 1995 and 1996. Except for the employee stock bonus awards
referenced elsewhere herein, no options or long-term incentive plan awards were
granted or made to the referenced executive officers during the referenced
periods, except as provided below.
73
The Company was formed in September 1996, and consequently paid no
compensation to the executive officers named in the table below during the
fiscal year ended December 31, 1995 and during the first eight months of the
fiscal year ended December 31, 1996. However, salary, bonus and other
compensation is presented in the table below for 1995 and 1996 based on payments
by NSI and the Subsidiaries and, for the last quarter of 1996, by the Company to
the named executive officers as if the Company had been in existence during all
of 1995 and 1996. During 1995 and 1996, Messrs. Bamba and Chou were, and
continue to be, employed full time as the General Managers and/or Presidents of
Nu Skin Japan and Nu Skin Taiwan, respectively, and received all of their
compensation from the Company through these Subsidiaries. During 1995 and 1996,
Messrs. Lund, Smith and Patch were, and Messrs. Lund and Patch continue to be,
executive officers of NSI. The compensation presented in the table below
reflects an allocation of the time spent by Messrs. Lund and Patch providing
services to the Company and the Subsidiaries during 1995 and 1996 and by Mr.
Smith providing such services during 1996. These salaries and bonuses are in
addition to any amounts received by these officers from NSI in return for their
services to NSI.
SUMMARY COMPENSATION TABLE
LONG TERM
ANNUAL COMPENSATION COMPENSATION
------------------------------------------------ -------------
OTHER ANNUAL RESTRICTED ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION STOCK AWARDS COMPENSATION
- -------------------------------------------- --------- ---------- ---------- ------------- ------------- -------------
Steven J. Lund.............................. 1996 $ 259,973 $ 89,345(1) $ -- $ -- $ --
President and Chief Executive Officer 1995 236,364 82,529(1) -- -- --
Takashi Bamba............................... 1996 364,138 174,557(2) 195,401(3) 13,000(4) 3,297(5)
President, Nu Skin Japan 1995 361,028 105,563(2) 98,063(3) -- 3,297(5)
John Chou................................... 1996 211,000 56,232(2) 77,897(6) 13,000(4) --
President, Nu Skin Taiwan 1995 185,370 75,786(2) 63,730(6) -- --
Michael D. Smith............................ 1996 157,812 13,090(1) 25,676(7) 14,000(4) 24,390(8)
Vice President of Operations 1995 -- -- -- -- --
Renn M. Patch............................... 1996 98,638 20,437(1) 13,800(7) 14,000(4) 5,542(8)
Chief Operating Officer 1995 97,175 104,765(9) 18,750(10) -- --
- ------------------------
(1) Cash bonus paid to the recipient not pursuant to a formal bonus plan.
(2) Cash bonus paid during the year reported pursuant to a cash bonus long term
incentive plan for the Presidents of the Subsidiaries.
(3) Includes deferred portion of a bonus accrued during the year reported
pursuant to a cash bonus long term incentive plan for the Presidents of the
Subsidiaries and annual lease payments for an automobile.
(4) Employee stock bonus awards granted in 1996 by the Company pursuant to the
1996 Stock Incentive Plan. The awards vest 25% per year beginning in
November 1997.
(5) Annual premium for pension insurance policy.
(6) Includes deferred portion of a bonus accrued during the year reported
pursuant to a cash bonus long term incentive plan for the Presidents of the
Subsidiaries and annual payments for an automobile and club dues.
(7) Includes deferred portion of a bonus accrued during the year reported not
pursuant to a formal bonus plan.
74
(8) Includes compensation in the form of the cash value of the use of certain
NSI-owned property and other perquisites.
(9) Noncash bonus paid to Mr. Patch, not pursuant to a formal bonus plan.
(10) Includes $16,500 of accrued deferred compensation and $2,250 of vested
deferred compensation awarded to Mr. Patch under NSI's deferred compensation
plan.
EMPLOYMENT AGREEMENTS
Messrs. Bamba, Chou and Han have entered into employment agreements with Nu
Skin Japan, Nu Skin Taiwan and Nu Skin Korea, respectively. Under these
agreements, these individuals are paid an annual salary and receive various
other benefits. These individuals, together with Mr. Mak, are also entitled to
participate in a cash bonus long-term incentive plan.
Mr. Bamba is employed as the President of Nu Skin Japan at a 1997 annual
salary of approximately $394,000. This salary is subject to annual review. Under
the terms of his employment agreement, Mr. Bamba is entitled to reimbursement of
business-related expenses, the use of an automobile provided by Nu Skin Japan,
and participation in any retirement plan offered by Nu Skin Japan. Mr. Bamba
also has the right under his employment agreement to have Nu Skin Japan purchase
a country club membership and pay related dues, although he has not exercised
this right. Mr. Bamba is also provided with a private insurance plan paid for by
Nu Skin Japan provided the premium for such private insurance plan does not
exceed Y300,000 per year. Under his employment agreement, Mr. Bamba has agreed
to certain confidentiality obligations. The term of Mr. Bamba's employment is
indefinite, subject to termination by Mr. Bamba or Nu Skin Japan upon three
months' notice.
Mr. Chou is employed as the President of Nu Skin Taiwan at a 1997 annual
salary of approximately $230,000. Under the terms of his employment agreement,
Mr. Chou is entitled to health insurance paid for in part by Nu Skin Taiwan. Nu
Skin Taiwan also provides Mr. Chou with a monthly car allowance. The term of Mr.
Chou's employment agreement currently extends until June 1997. Under his
employment agreement, Mr. Chou has agreed to certain confidentiality
obligations.
Mr. Han is employed as the President of Nu Skin Korea at a 1997 annual
salary of approximately $140,000. Under the terms of his employment agreement,
Mr. Han is entitled to the use of an automobile and driver provided by Nu Skin
Korea, as well as medical insurance and pension benefits. Mr. Han's employment
is for a three year term ending January 1, 1999, subject to the right of Nu Skin
Korea or Mr. Han to terminate the agreement on 60 days' advance notice. Once Mr.
Han had been employed by Nu Skin Korea for 12 months, he became entitled to
receive, upon termination, severance pay equal to two months' salary for each
consecutive year of service. Under his employment agreement, Mr. Han has agreed
to certain confidentiality and noncompetition obligations.
1996 STOCK INCENTIVE PLAN
Prior to the Initial Public Offerings, the Board of Directors of the Company
adopted the Nu Skin Asia Pacific, Inc. 1996 Stock Incentive Plan, as amended
(the "1996 Stock Incentive Plan"). The stockholders approved the 1996 Stock
Incentive Plan in the Company's May 15, 1997 Annual Meeting. The purpose of the
1996 Stock Incentive Plan is to attract and retain executives, other employees,
independent consultants and directors who are important to the success and
growth of the Company and to ensure that their interests are aligned with the
interests of the stockholders of the Company.
ADMINISTRATION. The 1996 Stock Incentive Plan is administered by the 1996
Stock Incentive Plan Committee (the "Plan Committee"). The Plan Committee
consists of the members of the Compensation Committee of the Board of Directors.
The Plan Committee will determine, from time to time, the individuals to whom
awards shall be made, the type of awards, and the amount, size and terms of each
75
award. The Plan Committee will make all other determinations necessary or
advisable for the administration of the 1996 Stock Incentive Plan.
AWARDS. Awards under the 1996 Stock Incentive Plan may be in the form of
options (both nonqualified stock options ("NQSOs") and incentive stock options
("ISOs")), contingent stock, restricted stock, and stock appreciation rights
("SARs"), or such other forms as the Plan Committee in its discretion may deem
appropriate. The maximum number of awards that may be issued to any one person
during the life of the 1996 Stock Incentive Plan shall be limited to 10% of the
shares reserved for issuance under the 1996 Stock Incentive Plan. The number of
shares which may be issued under the 1996 Stock Incentive Plan as well as the
terms of any outstanding awards may be equitably adjusted by the Plan Committee
in the event of a stock split, stock dividend, recapitalization, merger,
consolidation, combination or similar events. In general, any shares subject to
an option or right which for any reason expires or is terminated unexercised
shall again be available under the 1996 Stock Incentive Plan. No awards may be
granted more than ten years after the effective date of the 1996 Stock Incentive
Plan.
NUMBER OF SHARES. A total of 4,000,000 shares of the Class A Common Stock
have been authorized to be issued pursuant to the 1996 Stock Incentive Plan. The
Company issued stock bonus awards from these shares to executive officers of the
Company following the Initial Public Offerings. Messrs. Takashi Bamba, John
Chou, S.T. Han and George Mak received stock bonus awards of 13,000, 13,000,
1,800 and 9,000 shares of Class A Common Stock, respectively. In addition,
Messrs. Renn M. Patch, Corey B. Lindley and Michael D. Smith have each received
stock bonus awards from NSI of 13,000 shares of Class A Common Stock. These
awards vest ratably over four years following the date of grant, provided the
executive officer remains in the employment of the Company.
PLAN AMENDMENT. The Board of Directors may amend the 1996 Stock Incentive
Plan, without stockholder approval, anytime in any respect unless stockholder
approval of the amendment in question is required under Delaware law, the Code,
certain exemptions from Section 16 of the Securities Exchange Act of 1934, as
amended (the "1934 Act"), any national securities exchange system on which the
shares are then listed or reported, by any regulatory body having jurisdiction
with respect to the 1996 Stock Incentive Plan, or other applicable laws, rules
or regulations. No amendment to the 1996 Stock Incentive Plan may alter or
impair any award granted under the 1996 Stock Incentive Plan without the consent
of the holders thereof. The 1996 Stock Incentive Plan may be terminated at any
time by the Board of Directors.
OPTIONS. The 1996 Stock Incentive Plan provides for the grant of ISOs to
employees and NQSOs to employees and independent consultants. In the case of
ISOs, the exercise price of an option may not be less than 100% of the fair
market value of a share of Class A Common Stock at the time of grant (or 110% of
such fair market value if the optionee owns more than 10% of the total voting
power of all classes of Company stock outstanding at the time of grant). In the
case of NQSOs, the exercise price of an option may not be less than 85% of the
fair market value of a share of Class A Common Stock at the time of grant. The
Plan Committee may provide for a reduction in the exercise price of a NQSO by
dividends paid on a share of Class A Common Stock while the NQSO is outstanding.
Options will be exercisable for a term determined by the Plan Committee provided
such exercise shall occur not earlier than six months and not later than ten
years (five years if the optionee owns more than ten percent of the total voting
power of all classes of Company Stock outstanding at the time of grant) after
the grant of the option. The aggregate fair market value of ISO's (determined at
the time of grant) granted to an employee which may become first exercisable in
any one calendar year shall not exceed $100,000. If any option is not granted,
exercised, or held pursuant to the provisions applicable to an ISO, it will be
considered to be an NQSO to the extent that any or all of the grant is in
conflict with such provisions. The Plan Committee has the power to permit
acceleration of previously determined exercise terms under certain circumstances
and upon such terms and conditions as the Plan Committee deems appropriate. See
"Risk Factors--Anti-Takeover Effects of Certain Charter, Contractual and
Statutory Provisions."
76
CONTINGENT STOCK. The Plan Committee will determine the amount of
contingent stock to be granted to a participant based on the past or expected
impact the participant has had or can have on the financial well being of the
Company and other factors determined by the Plan Committee to be appropriate. A
participant receiving an award of contingent stock will receive the stock upon
the satisfaction of certain objectives. Contingent stock awards made pursuant to
the 1996 Stock Incentive Plan will be subject to such terms, conditions and
restrictions, including obtainment of performance objectives, for such period or
periods as may be determined by the Plan Committee at the time of grant. The
Plan Committee in its discretion may permit acceleration of the expiration of
the applicable restriction period with respect to part or all of the award to
any participant. See "Risk Factors--Anti-Takeover Effects of Certain Charter,
Contractual and Statutory Provisions."
RESTRICTED STOCK. The Plan Committee will determine the amount of
restricted stock to be granted to a participant based on the past or expected
impact the participant has had or can have on the financial well being of the
Company and other factors deemed by the Plan Committee to be appropriate.
Restricted stock is issued to the participant subject to forfeiture if certain
objectives are not met. Restricted stock awards made pursuant to the 1996 Stock
Incentive Plan shall be subject to the terms, conditions and restrictions,
including the payment of performance objectives, and for such period or periods
as will be determined by the Plan Committee at the time of grant. The Plan
Committee in its discretion may permit acceleration of the expiration of the
applicable restriction period with respect to part or all of the award to any
participant. See "Risk Factors--Anti-Takeover Effects of Certain Charter,
Contractual and Statutory Provisions." Shares of restricted stock may not be
sold, assigned, transferred, pledged, hypothecated or otherwise disposed of,
except by will or the laws of descent and distribution, for such period provided
in the participant's award agreement.
SARS. SARs are rights to receive cash or shares of Company stock, or a
combination thereof, as the Plan Committee may determine in an amount equal to
the excess of (i) the fair market value of the stock with respect to which the
SAR is exercised, or (ii) 100% of the fair market value of such stock at the
time the SAR was granted, less any dividends paid on such shares while the SAR
was outstanding. No cash consideration will be received by the Company for the
grant of any SAR. No SAR may be granted for a period of less than one year or
greater than ten years. SARs may be exercised at such time and subject to such
terms and conditions as are prescribed by the Plan Committee at the time of
grant, subject to certain limitations (including that no SAR shall be
exercisable within one year after the date of grant).
FEDERAL INCOME TAX CONSEQUENCES. The participant recognizes no taxable gain
or loss when an incentive stock option is granted or exercised. If the shares
acquired upon the exercise of an incentive stock option are held for at least
one year after exercise and two years after grant (the "Holding Period"), the
participant recognizes any gain or loss recognized upon such sale as long-term
capital gain or loss and the Company is not entitled to a deduction. If the
shares are not held for the Holding Period, the gain is ordinary income to the
participant to the extent of the difference between the exercise price and the
fair market value of the Class A Common Stock on the date the option is
exercised and any excess is capital gain. Also, in such circumstances, the
Company is entitled to a deduction equal to the amount of any ordinary income
recognized by the participant.
The participant recognizes no taxable income and the Company receives no
deduction when a nonqualified stock option is granted. Upon exercise of a
nonqualified stock option, the participant recognizes ordinary income and the
Company is entitled to a deduction equal to the difference between the exercise
price and the fair market value of the shares on the date of exercise. The
participant recognizes as a capital gain or loss any subsequent profit or loss
realized on the sale or exchange of any shares disposed of or sold.
A participant granted restricted stock or contingent stock is not required
to include the value of such shares in income until the first time such
participant's rights in the shares are transferable or are not subject to
substantial risk of forfeiture, whichever occurs earlier, unless such
participant timely files an
77
election under Code Section 83(b) to be taxed on the receipt of the shares. In
either case, the amount of such ordinary income will be equal to the excess of
the fair market value of the shares at the time the income is recognized over
the amount (if any) paid for the shares. The Company is entitled to a deduction,
in the amount of the ordinary income recognized by the participant, for the
Company's taxable year in which the participant recognizes such income.
Upon the grant of an SAR, the participant recognizes no taxable income and
the Company receives no deduction. The participant recognizes ordinary income
and the Company is entitled to a deduction at the time of exercise equal to the
cash and the fair market value of shares payable upon such exercise.
Under certain circumstances, an accelerated vesting or cash out of stock
options, or accelerated lapse of restrictions on other awards, in connection
with a change in control of the Company might be deemed an "excess parachute
payment" for purposes of the golden parachute tax provisions of Code Section
280G. To the extent it is so considered, the participant may be subject to a 20%
excise tax and the Company may be denied a tax deduction.
Code Section 162(m) limits to $1,000,000 per year the federal income tax
deduction available to a public company for compensation paid to any of its
chief executive officer and four other highest paid executive officers. However,
Section 162(m) provides an exception from its limitation for certain
"performance based" compensation if various requirements are satisfied. The 1996
Stock Incentive Plan contains provisions which are intended to satisfy these
requirements for awards made at the time the Company is considered a public
company and which otherwise are "performance based" compensation.
BONUS INCENTIVE PLAN
The Company has adopted a bonus incentive plan for the Presidents of the
Subsidiaries. This bonus incentive plan is patterned after a similar plan under
which Messrs. Bamba, Chou, Han and Mak were compensated prior to the Initial
Public Offerings. Under the new bonus incentive plan, Messrs. Bamba, Chou, Han
and Mak are entitled to receive an annual cash bonus based upon the prior year's
operating results of the Subsidiary for which they are responsible. Participants
in this bonus incentive plan are able to receive a bonus equal to 100% of their
respective salaries, conditioned on meeting certain performance criteria and
subject to cash availability and approval of the Executive Committee Board of
Directors of the Company. One half of this bonus is payable by February 15 of
the year following the year in which the bonus is earned and the remaining one
half is deferred and vests ratably over 10 years or at age 65, whichever occurs
first.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
S CORPORATION DISTRIBUTION
Prior to the Reorganization, each Subsidiary elected to be treated as an "S"
corporation under Subchapter S of the Code and comparable state tax laws. On
November 19, 1996, the Subsidiaries' S corporation status was terminated (the "S
Termination Date"). Prior to the S Termination Date, the Company declared a
distribution to certain of the Selling Stockholders and their affiliates that
included all of the Subsidiaries' previously earned and undistributed S
corporation earnings through the S Termination Date (the "S Corporation
Distribution"). As of the date of the Reorganization, the Subsidiaries'
aggregate undistributed taxable S corporation earnings were $86.5 million. The S
Corporation Distribution was distributed in the form of promissory notes bearing
interest at 6% per annum. On April 4, 1997, the Company paid the outstanding S
Distribution Note balance of $71.5 million together with the related interest
expense due. The stockholders of the Company prior to the Initial Public
Offerings, which include Messrs. Blake M. Roney, Steven J. Lund and Keith R.
Halls, who serve as officers of the Company, are the holders of the S
Distribution Notes.
78
CONTROL BY SELLING STOCKHOLDERS
Upon consummation of the Offerings, approximately 97.2% of the combined
voting power of the outstanding shares of Common Stock will be held by the
Selling Stockholders and certain of their affiliates (approximately 97.0% if the
underwriters' over-allotment options are exercised in full). Consequently, the
Selling Stockholders and certain of their affiliates will have the ability,
acting in concert, to elect all directors of the Company and approve any action
requiring approval by a majority of the stockholders of the Company. Certain of
the Selling Stockholders, including Messrs. Blake M. Roney, Steven J. Lund and
Keith R. Halls, also own 100% of the outstanding shares of NSI. As a result of
this ownership, these stockholders will consider the short-term and the
long-term impact of all stockholder decisions on the consolidated financial
results of NSI and the Company. The interests of NSI, on the one hand, and of
the Company, on the other hand, may differ from time to time. See "Risk
Factors--Relationship with and Reliance on NSI; Potential Conflicts of Interest"
and "--Control by Selling Stockholders and Certain of Their Affiliates;
Anti-Takeover Effect of Dual Classes of Common Stock."
OPERATING AGREEMENTS; RELATIONSHIP WITH NSI
NSI has licensed to the Company, through the Subsidiaries, rights to
distribute NSI products and to use certain NSI property in the Company's
markets, and NSIMG, an NSI affiliate, provides management support services to
the Company and the Subsidiaries, pursuant to the Operating Agreements with the
Subsidiaries, which include distribution, trademark/tradename license, licensing
and sales, and management services agreements. Virtually all of the products
sold by the Company are purchased from NSI pursuant to distribution agreements.
The Company also manufactures itself, or through third-party manufacturers,
certain products and commercial materials which it then sells using NSI
trademarks or tradenames licensed under trademark/tradename license agreements.
In addition, the Company does not have its own sales or distribution network but
licenses the right to use NSI's distribution network and the Global Compensation
Plan pursuant to licensing and sales agreements. NSIMG also provides a broad
range of management, administrative and technical support to the Company
pursuant to management services agreements. See "Business--Relationship with
NSI."
During the year ended December 31, 1996, NSI and NSIMG charged the Company
approximately $185.5 million and $4.2 million, respectively, for goods and
services provided to the Company under the Operating Agreements. During the
three months ended March 31, 1997, NSI and NSIMG charged the Company
approximately $66.7 million and $1.8 million, respectively, for goods and
services provided to the Company under the Operating Agreements. See
Consolidated Financial Statements and the related notes thereto.
The Operating Agreements were approved by the Board of Directors of the
Company, which was, except with respect to the approval of the Operating
Agreements for Nu Skin Thailand, composed entirely of officers and shareholders
of NSI at the time of each such approval. In addition, two of the executive
officers of the Company, including the Chief Executive Officer, are also
executive officers of NSI. It is expected that they will continue to spend a
portion of their time on the affairs of NSI, for which they will continue to
receive compensation from NSI in addition to amounts received from the Company
for services to the Company. See "Risk Factors--Relationship with and Reliance
on NSI; Potential Conflicts of Interest" and "Business--Relationship with NSI."
During 1996, Nu Skin Japan paid NSI a royalty of 8% of the revenue from
sales of products manufactured by a third party manufacturer under a license
agreement between Nu Skin Japan and NSI. In the three months ended March 31,
1997, Nu Skin Japan paid NSI $.7 million in royalties under this agreement.
Pursuant to wholesale distribution agreements, Nu Skin Hong Kong distributes
certain NSI products to Nu Skin Personal Care Australia, Inc. and Nu Skin New
Zealand, Inc., affiliates of NSI. Pursuant to
79
these agreements, Nu Skin Hong Kong was paid approximately $1.1 million during
the three months ended March 31, 1997 by Nu Skin Personal Care Australia, Inc.
and Nu Skin New Zealand, Inc.
Concurrently with the Initial Underwritten Offerings, the Company purchased
from NSI for $25.0 million the exclusive rights to distribute NSI products in
Thailand, Indonesia, Malaysia, the PRC, the Philippines, Singapore and Vietnam.
As of March 31, 1997, the Company had paid $15.0 million of this amount. In
addition, the Company and NSI have entered into a mutual indemnification
agreement pursuant to which NSI has agreed to indemnify the Company for certain
claims, losses and liabilities relating to the operations of the Subsidiaries
prior to the Reorganization, and the Company has agreed to indemnify NSI for
certain claims, losses and liabilities relating to the operations of the
Subsidiaries after the Reorganization. Messrs. Blake M. Roney, Steven J. Lund
and Keith R. Halls, who serve as officers of the Company, are stockholders of
NSI. See "Business--Relationship with NSI."
STOCKHOLDERS' PARTNERSHIP
Craig Bryson and Craig S. Tillotson are major stockholders of the Company
and have been NSI distributors since 1984. Messrs. Bryson and Tillotson are
partners in an entity (the "Partnership") which receives substantial commissions
from NSI, including commissions on sales generated within the Company's markets.
For the year ended December 31, 1996, total commissions paid to the Partnership
on sales originating in the Company's then open markets (Japan, Taiwan, Hong
Kong and South Korea) were approximately $1.2 million. By agreement, NSI pays
commissions to the Partnership at the highest level of commissions available to
distributors. Management believes that this arrangement allows Messrs. Bryson
and Tillotson the flexibility of using their expertise and reputations in
network marketing circles to sponsor, motivate and train distributors to benefit
NSI's distributor force generally, without having to focus solely on their own
organizations.
STOCKHOLDERS' AGREEMENT
The Selling Stockholders and certain of their affiliates have entered into a
stockholders' agreement with the Company (the "Stockholders' Agreement"). Upon
consummation of the Offerings, the Selling Stockholders and certain of their
affiliates will beneficially own shares having approximately 97.2% of the
combined voting power of the outstanding shares of Common Stock (approximately
97.0% if the underwriters' over-allotment options are exercised in full). In
order to ensure the qualification of the Reorganization under Section 351 of the
Code, the Selling Stockholders and certain of their affiliates have agreed not
to transfer any shares they own through November 28, 1997 without the consent of
the Company except for certain transfers relating to the funding of the
Distributor Options and the grant of the employee stock bonus awards. The
Company has consented to the Offerings and, in connection with the Offerings,
the Selling Stockholders will enter into an amendment to the Stockholders
Agreement providing for lock-up periods ranging from 6 months to two years
depending on relative participation in the Offerings and imposing significant
additional limits on the stockholders' ability to sell securities for an
additional five years from the expiration of these lockups. See "Shares Eligible
for Future Sale." After such date and subject to any volume limitations imposed
by Rule 144, no such stockholder is permitted to transfer in any one-year period
a number of shares equal to the greater of (i) 10% of the total number of shares
of Common Stock originally issued to such stockholder in connection with the
Reorganization, or (ii) 1.25% of the total Common Stock issued and outstanding
at the time of such proposed transfer. The Selling Stockholders and certain of
their affiliates have been granted registration rights by the Company permitting
each such stockholder to register his or her shares of Class A Common Stock,
subject to certain restrictions, on any registration statement filed by the
Company until such stockholder has sold a specified value of shares of Class A
Common Stock. See "Description of Capital Stock--Registration Rights."
80
AGREEMENTS AND ARRANGEMENTS WITH MANAGEMENT
Prior to the Initial Underwritten Offerings, the Company entered into
indemnification agreements with its officers and directors indemnifying them
against liability incurred by them in the course of their service to the
Company. Pursuant to the 1996 Stock Incentive Plan, as of May 31, 1997, the
Company had granted stock bonus awards to certain executive officers of the
Company for an aggregate of 150,959 shares of Class A Common Stock. The shares
of Class A Common Stock underlying each of these stock bonus awards will be
issued to the recipient of the award at a rate of 25% per year commencing in
November 1997, subject to certain restrictions. See "Management--1996 Stock
Incentive Plan--Number of Shares." In January 1994, NSI stockholders agreed to
grant M. Truman Hunt an option, which became immediately exercisable upon
consummation of the Reorganization, to purchase 267,500 shares of Class A Common
Stock at an aggregate exercise price of $500,000, which reflects the agreed upon
fair market value of this equity interest in January 1994. As of May 31, 1997,
Mr. Hunt had exercised a portion of this option and purchased 16,675 shares of
Class A Common Stock, which he then sold in the Initial Underwritten Offerings.
The Company has employment agreements with certain of its executive officers.
See "Management--Employment Agreements."
DISTRIBUTOR OPTIONS
Prior to the Rule 415 Offerings, the Selling Stockholders and certain of
their affiliates converted 1,605,000 shares of Class B Common Stock into Class A
Common Stock and contributed such shares to the Company for use in implementing
an NSI distributor equity incentive program, and the Company granted to NSI the
Distributor Options to acquire such 1,605,000 shares of Class A Common Stock.
NSI is offering the Distributor Options to qualifying distributors of NSI in
connection with the Rule 415 Offerings. The Distributor Options are subject to
certain conditions related to distributor performance and will vest on December
31, 1997. The Company will record distributor stock expense for the Distributor
Options. See "Shares Eligible for Future Sale."
81
PRINCIPAL AND SELLING STOCKHOLDERS+
The following table sets forth, as of May 31, 1997, certain information
regarding the beneficial ownership of the Class A Common Stock and Class B
Common Stock prior to and after the Offerings (assuming no exercise of the
underwriters' over-allotment options) by (a) each person known by the Company to
own beneficially more than 5% of either the outstanding shares of Class A Common
Stock or Class B Common Stock; (b) each of the Company's directors; (c) each of
the executive officers whose names appear in the summary compensation table; (d)
each Selling Stockholder; and (e) all directors and executive officers as a
group. The business address of the 5% stockholders is 75 West Center Street,
Provo, Utah 84601.
CLASS A
COMMON STOCK(1)(2) CLASS B
-------------------------------------------- COMMON STOCK(1)(2)
-----------------------
OWNED TO BE OWNED AFTER
PRIOR TO TO BE SOLD OWNED PRIOR TO AND
THE IN THE THE OFFERINGS
OFFERINGS OFFERINGS -------------------- AFTER THE OFFERINGS(3)
DIRECTORS, EXECUTIVE OFFICERS, 5% ---------- ---------- % -----------------------
STOCKHOLDERS AND SELLING STOCKHOLDERS NUMBER NUMBER NUMBER -- NUMBER %
- ------------------------------------------- ---------- ---------- --------- ------------ ---------
Blake M. Roney(4).......................... 853,564 853,564 -- -- 19,775,485 30.6
Nedra D. Roney(5).......................... 300,000 300,000 -- -- 13,913,895 21.5
Sandra N. Tillotson(6)..................... 722,719 722,719 -- -- 7,836,791 12.1
Craig S. Tillotson(7)...................... 596,545 596,545 -- -- 3,814,512 5.9
R. Craig Bryson(8)......................... 665,620 665,620 -- -- 4,260,116 6.6
Steven J. Lund(9).......................... 372,662 372,662 -- -- 3,871,990 6.0
Brooke B. Roney(10)........................ 633,066 633,066 -- -- 2,863,685 4.4
Kirk V. Roney(11).......................... 558,066 558,066 -- -- 2,688,685 4.2
Keith R. Halls(12)......................... 340,817 340,817 -- -- 868,074 1.3
Max L. Pinegar(13)......................... 14,000 -- 14,000 * -- --
Daniel W. Campbell......................... -- -- -- -- -- --
E.J. "Jake" Garn........................... -- -- -- -- -- --
Paula Hawkins.............................. -- -- -- -- -- --
(CONTINUED ON FOLLOWING PAGE)
TOTAL
COMMON STOCK
-----------------
VOTING POWER
AFTER THE
OFFERINGS
DIRECTORS, EXECUTIVE OFFICERS, 5% -----------------
STOCKHOLDERS AND SELLING STOCKHOLDERS %
- ------------------------------------------- -----------------
Blake M. Roney(4).......................... 29.7
Nedra D. Roney(5).......................... 20.9
Sandra N. Tillotson(6)..................... 11.8
Craig S. Tillotson(7)...................... 5.7
R. Craig Bryson(8)......................... 6.4
Steven J. Lund(9).......................... 5.8
Brooke B. Roney(10)........................ 4.3
Kirk V. Roney(11).......................... 4.0
Keith R. Halls(12)......................... 1.3
Max L. Pinegar(13)......................... *
Daniel W. Campbell......................... --
E.J. "Jake" Garn........................... --
Paula Hawkins.............................. --
(CONTINUED ON FOLLOWING PAGE)
- ------------------------
+ The Selling Stockholders consist of certain individuals together with
various estate planning entities. The following table identifies each
individual selling directly and/or through an estate planning entity formed
by such individual, and aggregates the number of shares being sold by each
such individual, whether directly, through an estate planning entity or
entities or some combination thereof. The following table is provided for
clarification purposes only and assumes no exercise of the over-allotment
options.
NAME NUMBER OF SHARES OFFERED
- -------------------------------------------------------------------- ------------------------
Nedra D. Roney...................................................... 1,278,325
Sandra N. Tillotson................................................. 1,053,464
Blake M. Roney...................................................... 893,715
R. Craig Bryson..................................................... 665,620
Craig S. Tillotson.................................................. 665,620
Kirk V. Roney....................................................... 633,066
Brooke B. Roney..................................................... 633,066
Steven J. Lund...................................................... 402,511
Keith R. Halls...................................................... 293,280
Brooke F. Roney..................................................... 185,111
Park R. Roney....................................................... 185,111
Rick A Roney........................................................ 111,111
82
CLASS A
COMMON STOCK(1)(2) CLASS B
-------------------------------------------- COMMON STOCK(1)(2)
-----------------------
OWNED TO BE OWNED AFTER
PRIOR TO TO BE SOLD OWNED PRIOR TO AND
THE IN THE THE OFFERINGS
OFFERINGS OFFERINGS -------------------- AFTER THE OFFERINGS(3)
DIRECTORS, EXECUTIVE OFFICERS, 5% ---------- ---------- % -----------------------
STOCKHOLDERS AND SELLING STOCKHOLDERS NUMBER NUMBER NUMBER -- NUMBER %
- ------------------------------------------- ---------- ---------- --------- ------------ ---------
Renn M. Patch(14).......................... 14,000 -- 14,000 * -- --
Michael D. Smith(15)....................... 14,000 -- 14,000 * -- --
Takashi Bamba(16).......................... 13,000 -- 13,000 * -- --
John Chou(17).............................. 13,215 -- 13,215 * -- --
Rick A. Roney(18).......................... 111,111 111,111 -- -- 706,438 1.1
Burke F. Roney(19)......................... 185,111 185,111 -- -- 398,462 *
Park R. Roney(20).......................... 185,111 185,111 -- -- 398,462 *
BNASIA, Ltd.(21)........................... 438,564 438,564 -- -- 19,614,321 30.3
RCKASIA, Ltd.(22).......................... 590,620 590,620 -- -- 4,185,116 6.5
The Blake M. and Nancy L. Roney
Foundation(23)........................... 400,000 400,000 -- -- -- --
The S and K Lund Trust(24)................. 15,000 15,000 -- -- 73,082 *
The Nedra Roney Foundation(25)............. 300,000 300,000 -- -- -- --
The Sandra N. Tillotson Foundation(26)..... 50,000 50,000 -- -- -- --
CST Rhino Company, L.C.(27)................ 25,000 25,000 -- -- 475,000 *
The Sandra N. Tillotson Fixed Charitable
Trust(28)................................ 125,000 125,000 -- -- 125,000 *
The Craig S. Tillotson Foundation(29)...... 70,000 70,000 -- -- -- --
The Craig S. Tillotson Fixed Charitable
Trust(30)................................ 55,000 55,000 -- -- 57,500 *
SNT Rhino Company, L.C.(31)................ 50,000 50,000 -- -- 950,000 1.5
The Bryson Foundation(32).................. 75,000 75,000 -- -- -- --
SKASIA, Ltd.(33)........................... 210,511 210,511 -- -- 2,934,240 4.5
The All R's Trust(34)...................... 15,151 15,151 -- -- 60,605 *
The Steven and Kalleen Lund Fixed
Charitable Trust(35)..................... 20,000 20,000 -- -- 55,000 *
The Steven J. and Kalleen Lund
Foundation(36)........................... 127,000 127,000 -- -- -- --
BDASIA, Ltd.(37)........................... 563,266 563,266 -- -- 2,863,685 4.4
The Brooke Brennan and Denice Renee Roney
Foundation(38)........................... 69,800 69,800 -- -- -- --
KMASIA, Ltd.(39)........................... 547,616 547,616 -- -- 2,615,935 4.0
The Kirk V. and Melanie K. Roney
Foundation(40)........................... 8,200 8,200 -- -- -- --
The Kirk and Melanie Roney Fixed Charitable
Trust(41)................................ 2,250 2,250 -- -- 72,750 *
KAASIA, Ltd.(42)........................... 215,780 215,780 -- -- 347,478 *
The MAR Trust(43).......................... 37,037 37,037 -- -- 167,727 *
The Nedra Roney Fixed Charitable
Trust(44)................................ 50,000 50,000 -- -- 200,000 *
The Keith and Anna Lisa Halls Fixed
Charitable Trust(45)..................... 7,500 7,500 -- -- 5,000 *
The Keith Ray and Anna Lisa Massaro Halls
Foundation(46)........................... 30,500 30,500 -- -- -- --
(CONTINUED ON FOLOWING PAGE)
TOTAL
COMMON STOCK
-----------------
VOTING POWER
AFTER THE
OFFERINGS
DIRECTORS, EXECUTIVE OFFICERS, 5% -----------------
STOCKHOLDERS AND SELLING STOCKHOLDERS %
- ------------------------------------------- -----------------
Renn M. Patch(14).......................... *
Michael D. Smith(15)....................... *
Takashi Bamba(16).......................... *
John Chou(17).............................. *
Rick A. Roney(18).......................... 1.1
Burke F. Roney(19)......................... *
Park R. Roney(20).......................... *
BNASIA, Ltd.(21)........................... 29.5
RCKASIA, Ltd.(22).......................... 6.3
The Blake M. and Nancy L. Roney
Foundation(23)........................... --
The S and K Lund Trust(24)................. *
The Nedra Roney Foundation(25)............. --
The Sandra N. Tillotson Foundation(26)..... --
CST Rhino Company, L.C.(27)................ *
The Sandra N. Tillotson Fixed Charitable
Trust(28)................................ *
The Craig S. Tillotson Foundation(29)...... --
The Craig S. Tillotson Fixed Charitable
Trust(30)................................ *
SNT Rhino Company, L.C.(31)................ 1.4
The Bryson Foundation(32).................. --
SKASIA, Ltd.(33)........................... 4.4
The All R's Trust(34)...................... *
The Steven and Kalleen Lund Fixed
Charitable Trust(35)..................... *
The Steven J. and Kalleen Lund
Foundation(36)........................... --
BDASIA, Ltd.(37)........................... 4.3
The Brooke Brennan and Denice Renee Roney
Foundation(38)........................... --
KMASIA, Ltd.(39)........................... 3.9
The Kirk V. and Melanie K. Roney
Foundation(40)........................... --
The Kirk and Melanie Roney Fixed Charitable
Trust(41)................................ *
KAASIA, Ltd.(42)........................... *
The MAR Trust(43).......................... *
The Nedra Roney Fixed Charitable
Trust(44)................................ *
The Keith and Anna Lisa Halls Fixed
Charitable Trust(45)..................... *
The Keith Ray and Anna Lisa Massaro Halls
Foundation(46)........................... --
(CONTINUED ON FOLOWING PAGE)
83
CLASS A
COMMON STOCK(1)(2) CLASS B
-------------------------------------------- COMMON STOCK(1)(2)
-----------------------
OWNED TO BE OWNED AFTER
PRIOR TO TO BE SOLD OWNED PRIOR TO AND
THE IN THE THE OFFERINGS
OFFERINGS OFFERINGS -------------------- AFTER THE OFFERINGS(3)
DIRECTORS, EXECUTIVE OFFICERS, 5% ---------- ---------- % -----------------------
STOCKHOLDERS AND SELLING STOCKHOLDERS NUMBER NUMBER NUMBER -- NUMBER %
- ------------------------------------------- ---------- ---------- --------- ------------ ---------
B&N Rhino Company, L.C.(47)................ 40,000 40,000 -- -- 460,000 *
NR Rhino Company, L.C.(48)................. 891,288 891,288 -- -- 608,712 *
S&K Rhino Company, L.C.(49)................ 30,000 30,000 -- -- 120,000 *
K&A Rhino Company, L.C.(50)................ 2,500 2,500 -- -- 12,500 *
K&M Rhino Company, L.C.(51)................ 75,000 75,000 -- -- 175,000 *
The K&A Halls Trust(52).................... 37,000 37,000 -- -- 51,082 *
The SNT Trust(53).......................... 188,150 188,150 -- -- 161,383 *
The DVNM Trust(54)......................... 211,670 211,670 -- -- 179,807 *
The CST Trust(55).......................... 94,075 94,075 -- -- 80,692 *
Craig F. McCullough(56).................... 1,038,788 1,038,788 -- -- 1,376,212 2.1
Lee M. Brower(57).......................... 399,820 399,820 -- -- 1,718,352 2.7
All directors and officers as a group (18
persons)(58)............................. 3,809,149 3,480,894 328,255 1.7 37,904,711 58.6
TOTAL
COMMON STOCK
-----------------
VOTING POWER
AFTER THE
OFFERINGS
DIRECTORS, EXECUTIVE OFFICERS, 5% -----------------
STOCKHOLDERS AND SELLING STOCKHOLDERS %
- ------------------------------------------- -----------------
B&N Rhino Company, L.C.(47)................ *
NR Rhino Company, L.C.(48)................. *
S&K Rhino Company, L.C.(49)................ *
K&A Rhino Company, L.C.(50)................ *
K&M Rhino Company, L.C.(51)................ *
The K&A Halls Trust(52).................... *
The SNT Trust(53).......................... *
The DVNM Trust(54)......................... *
The CST Trust(55).......................... *
Craig F. McCullough(56).................... 2.1
Lee M. Brower(57).......................... 2.6
All directors and officers as a group (18
persons)(58)............................. 56.9
- ------------------------
* Less than 1%
(1) Each share of Class B Common Stock is convertible at any time at the option
of the holder into one share of Class A Common Stock and each share of Class
B Common Stock is automatically converted into one share of Class A Common
Stock upon the transfer of such share of Class B Common Stock to any person
who is not a Permitted Transferee, as defined in the Stockholders Agreement
among the Selling Stockholders, certain of their affiliates and the Company.
See "Certain Relationships and Related Transactions."
(2) Prior to the Offerings, the Selling Stockholders will convert shares of
Class B Common Stock to Class A Common Stock to be sold in the Offerings.
(3) Does not reflect the exercise of the options granted by certain of the
Selling Stockholders to the Underwriters exercisable for 30 days after the
date of this Prospectus to purchase up to 1,050,000 additional shares of
Class A Common Stock to cover over-allotments, if any, at the offering
price, less the underwriting discount. Upon the exercise in full of the
Underwriters' over-allotment options, such Selling Stockholders will convert
shares of Class B Common Stock into 1,050,000 shares of Class A Common Stock
for issuance to the Underwriters pursuant to such options.
(4) Includes shares beneficially owned or deemed to be owned beneficially by
Blake M. Roney prior to the Offerings as follows: 438,564 shares of Class A
Common Stock and 19,614,321 shares of Class B Common Stock as general
partner of BNASIA, Ltd., a limited partnership, and with respect to which he
shares voting and investment power with his wife Nancy L. Roney as set forth
in footnote (21) below; 15,000 shares of Class A Common Stock and 161,165
shares of Class B Common Stock as trustee and with respect to which he has
sole voting and investment power; and 400,000 shares of Class A Common Stock
as co-trustee and with respect to which he shares voting and investment
power with Nancy L. Roney as reported in footnote (23) below. If the
Underwriters' over-allotment options are exercised in full, BNASIA, Ltd., of
which Blake M. Roney and Nancy L. Roney are the general partners and who
share voting and investment power, will sell to the Underwriters upon
exercise of the over-allotment options, an additional 825,000 shares of
Class A Common Stock, converted from Class B Common Stock, in which event
the number and percentage of shares of Class A Common Stock To Be Owned
After the Offerings by Blake M. Roney would be 0 shares and 0%, the number
and percentage of shares of Class B Common Stock Owned After the Offerings
would be 18,950,485 shares and 29.8% and the Voting Power After the
Offerings would be 28.9%.
84
Blake M. Roney is the Chairman of the Board of Directors of the Company, and
Chairman of the Board of Directors, an executive officer and a shareholder
of NSI.
(5) Includes shares beneficially owned or deemed to be owned beneficially by
Nedra D. Roney prior to the Offerings as follows: 13,913,895 shares of Class
B Common Stock directly and with respect to which she has sole voting and
investment power; and 300,000 shares of Class A Common Stock as co-trustee
and with respect to which she shares voting and investment power as reported
in footnote (25) below. If the Underwriters' over-allotment options are
exercised in full, the number and percentage of shares of Class A Common
Stock To Be Owned After the Offerings by Nedra D. Roney would be 0 shares
and 0%, the number and percentage of shares of Class B Common Stock Owned
After the Offerings would be 13,913,895 shares and 21.9% and the Voting
Power After the Offerings would be 21.2%. Nedra D. Roney is a Director and
shareholder of NSI.
(6) Includes shares beneficially owned or deemed to be owned beneficially by
Sandra N. Tillotson prior to the Offerings as follows: 428,644 shares of
Class A Common Stock and 7,156,099 shares of Class B Common Stock directly
and with respect to which she has sole voting and investment power; 219,075
shares of Class A Common Stock and 205,692 shares of Class B Common Stock as
trustee and with respect to which she has sole voting and investment power;
50,000 shares of Class A Common Stock as co-trustee and with respect to
which she shares voting and investment power; and 25,000 shares of Class A
Common Stock and 475,000 shares of Class B Common Stock as manager of a
limited liability company and with respect to which she has sole voting and
investment power. If the Underwriters' over-allotment options are exercised
in full, the number and percentage of shares of Class A Common Stock To Be
Owned After the Offerings by Sandra N. Tillotson would be 0 shares and 0%,
the number and percentage of shares of Class B Common Stock Owned After the
Offerings would be 7,836,791 shares and 12.3% and the Voting Power After the
Offerings would be 11.9%. Sandra N. Tillotson is a Director of the Company,
and a Director, executive officer and shareholder of NSI.
(7) Includes shares beneficially owned or deemed to be owned beneficially by
Craig S. Tillotson prior to the Offerings as follows: 421,545 shares of
Class A Common Stock and 2,541,367 shares of Class B Common Stock directly
and with respect to which he has sole voting and investment power; 125,000
shares of Class A Common Stock and 57,500 shares of Class B Common Stock as
trustee and with respect to which he has sole voting and investment power;
265,645 shares of Class B Common Stock as co-trustee and with respect to
which he shares voting and investment power; 50,000 shares of Class A Common
Stock and 950,000 shares of Class B Common Stock as manager of a limited
liability company and with respect to which he has sole voting and
investment power. If the Underwriters' over-allotment options are exercised
in full, the number and percentage of shares of Class A Common Stock To Be
Owned After the Offerings by Craig S. Tillotson would be 0 shares and 0%,
the number and percentage of shares of Class B Common Stock Owned After the
Offerings would be 3,814,513 shares and 6.0% and the Voting Power After the
Offerings would be 5.8%. Craig S. Tillotson is a shareholder of NSI.
(8) Includes shares beneficially owned or deemed to be owned beneficially by R.
Craig Bryson prior to the Offerings as follows: 590,620 shares of Class A
Common Stock and 4,185,116 shares of Class B Common Stock as general partner
of RCKASIA, Ltd., a limited partnership, and with respect to which he shares
voting and investment power with his wife Kathleen D. Bryson as reported in
footnote (22) below; 75,000 shares of Class A Common Stock and 75,000 shares
of Class B Common Stock as co-trustee and with respect to which he shares
voting and investment power with Kathleen D. Bryson. If the Underwriters'
over-allotment options are exercised in full, the number and percentage of
shares of Class A Common Stock To Be Owned After the Offerings by R. Craig
Bryson would be 0 shares and 0%, the number and percentage of shares of
Class B Common Stock Owned After the Offerings would be 4,260,116 shares and
6.7% and the Voting Power After the Offerings would be 6.5%. R. Craig Bryson
is a shareholder of NSI.
(9) Includes shares beneficially owned or deemed to be owned beneficially by
Steven J. Lund prior to the Offerings as follows: 210,511 shares of Class A
Common Stock and 2,934,240 shares of Class B Common Stock as general partner
of SKASIA, Ltd., a limited partnership, and with respect to which
85
he shares voting and investment power with his wife Kalleen Lund; 15,151
shares of Class A Common Stock and 882,750 shares of Class B Common Stock as
trustee and with respect to which he has sole voting and investment power;
147,000 shares of Class A Common Stock and 55,000 shares of Class B Common
Stock as co-trustee and with respect to which he shares voting and
investment power with Kalleen Lund. If the Underwriters' over-allotment
options are exercised in full, SKASIA, Ltd., of which Steven J. Lund and
Kalleen Lund are the general partners and who share voting and investment
power, will sell to the Underwriters upon exercise of the over-allotment
options, an additional 225,000 shares of Class A Common Stock, converted
from Class B Common Stock, in which event the number and percentage of
shares of Class A Common Stock To Be Owned After the Offerings by Steven J.
Lund would be 0 shares and 0%, the number and percentage of shares of Class
B Common Stock Owned After the Offerings would be 3,646,990 shares and 5.7%
and the Voting Power After the Offerings would be 5.6%. Steven J. Lund is a
Director, President and Chief Executive Officer of the Company, and a
Director, executive officer and shareholder of NSI.
(10) Includes shares beneficially owned or deemed to be owned beneficially by
Brooke B. Roney prior to the Offerings as follows: 563,266 shares of Class A
Common Stock and 2,863,685 shares of Class B Common Stock as general partner
of BDASIA, Ltd., a limited partnership, and with respect to which he shares
voting and investment power with his wife Denice R. Roney; and 69,800 shares
of Class A Common Stock as co-trustee and with respect to which he shares
voting and investment power with Denice R. Roney. If the Underwriters'
over-allotment options are exercised in full, the number and percentage of
shares of Class A Common Stock To Be Owned After the Offerings by Brooke B.
Roney would be 0 shares and 0%, the number and percentage of shares of Class
B Common Stock Owned After the Offerings would be 2,863,685 shares and 4.5%
and the Voting Power After the Offerings would be 4.4%. Brooke B. Roney is a
Director of the Company, and a Director, executive officer and shareholder
of NSI.
(11) Includes shares beneficially owned or deemed to be owned beneficially by
Kirk V. Roney prior to the Offerings as follows: 547,616 shares of Class A
Common Stock and 2,615,935 shares of Class B Common Stock as general partner
of KMASIA, Ltd., a limited partnership, and with respect to which he shares
voting and investment power with his wife Melanie K. Roney; 8,200 shares of
Class A Common Stock as co-trustee and with respect to which he shares
voting and investment power with Melanie K. Roney; and 2,250 shares of Class
A Common Stock and 72,750 shares of Class B Common Stock as co-trustee and
with respect to which he shares voting and investment power with Melanie K.
Roney and Lee S. McCullough. If the Underwriters' over-allotment options are
exercised in full, the number and percentage of shares of Class A Common
Stock To Be Owned After the Offerings by Kirk V. Roney would be 0 shares and
0%, the number and percentage of shares of Class B Common Stock Owned After
the Offerings would be 2,688,685 shares and 4.2% and the Voting Power After
the Offerings would be 4.1%. Kirk V. Roney is a Director of the Company, and
a Director, executive officer and shareholder of NSI.
(12) Includes shares beneficially owned or deemed to be owned beneficially by
Keith R. Halls prior to the Offerings as follows: 215,780 shares of Class A
Common Stock and 347,478 shares of Class B Common Stock as general partner
of KAASIA, Ltd., a limited partnership, and with respect to which he shares
voting and investment power with his wife Anna Lisa Massaro Halls; 50,000
shares of Class B Common Stock as the manager of a limited liability company
and with respect to which he has sole voting and investment power; 87,037
shares of Class A Common Stock and 465,596 shares of Class B Common Stock as
trustee and with respect to which he has sole voting and investment power;
and 38,000 shares of Class A Common Stock and 5,000 shares of Class B Common
Stock as co-trustee and with respect to which he shares voting and
investment power with Anna Lisa Massaro Halls. If the Underwriters'
over-allotment options are exercised in full, the number and percentage of
shares of Class A Common Stock To Be Owned After the Offerings by Keith R.
Halls would be 0 shares and 0%, the number and percentage of shares of Class
B Common Stock Owned After the Offerings would be 868,074 shares and 1.4%
and the Voting Power After the Offerings would be 1.3%. Keith R.
86
Halls is a Director and Secretary of the Company, and a Director, executive
officer and shareholder of NSI.
(13) Includes shares beneficially owned or deemed to be owned beneficially by
Max L. Pinegar as follows: 1,000 shares of Class A Common stock directly and
with respect to which he has sole voting and investment power; and 13,000
shares of Class A Common Stock issuable to Mr. Pinegar as an employee stock
bonus award which will vest ratably, according to its terms, over four years
following the date of the award. Max L. Pinegar is a Director of the
Company, and an executive officer of NSI.
(14) Includes shares beneficially owned or deemed to be owned beneficially by
Renn M. Patch as follows: 1,000 shares of Class A Common Stock directly and
with respect to which he has sole voting and investment power; and 13,000
shares of Class A Common Stock issuable to Mr. Patch as an employee stock
bonus award which will vest ratably, according to its terms, over four years
following the date of the award. Renn M. Patch is Chief Operating Officer of
the Company, and an executive officer of NSI.
(15) Includes shares beneficially owned or deemed to be owned beneficially by
Michael D. Smith as follows: 1,000 shares of Class A Common Stock directly
and with respect to which he has sole voting and investment power; and
13,000 shares of Class A Common Stock issuable to Mr. Smith as an employee
stock bonus award which will vest ratably, according to its terms, over four
years following the date of the award. Michael D. Smith is Vice President of
Operations of the Company.
(16) Includes shares beneficially owned or deemed to be owned beneficially by
Takashi Bamba as follows: 13,000 shares of Class A Common Stock issuable to
Mr. Bamba as an employee stock bonus award which will vest ratably,
according to its terms, over four years following the date of the award.
Takashi Bamba is President of Nu Skin Japan.
(17) Includes shares beneficially owned or deemed to be owned beneficially by
John Chou as follows: 215 shares of Class A Common Stock directly and with
respect to which he has sole voting and investment power; and 13,000 shares
of Class A Common Stock issuable to Mr. Chou as an employee stock bonus
award which will vest ratably, according to its terms, over four years
following the date of the award. John Chou is President of Nu Skin Taiwan.
(18) Includes shares beneficially owned or deemed to be owned beneficially by
Rick A. Roney prior to the Offerings as follows: 111,111 shares of Class A
Common Stock and 618,356 shares of Class B Common Stock directly and with
respect to which he has sole voting and investment power; 88,082 shares of
Class B Common Stock as trustee and with respect to which he has sole voting
and investment power. If the Underwriters' over-allotment options are
exercised in full, the number and percentage of shares of Class A Common
Stock To Be Owned After the Offerings by Rick A. Roney would be 0 shares and
0%, the number and percentage of shares of Class B Common Stock Owned After
the Offerings would be 706,438 shares and 1.1% and the Voting Power After
the Offerings would be 1.1%. Rick A. Roney is a brother of Blake M. Roney,
Nedra D. Roney, Brooke B. Roney, Kirk V. Roney, Burke F. Roney and Park R.
Roney.
(19) Includes shares beneficially owned or deemed to be owned beneficially by
Burke F. Roney prior to the Offerings as follows: 185,111 shares of Class A
Common Stock and 398,462 shares of Class B Common Stock directly and with
respect to which he has sole voting and investment power. If the
Underwriters' over-allotment options are exercised in full, the number and
percentage of shares of Class A Common Stock To Be Owned After the Offerings
by Burke F. Roney would be 0 shares and 0%, the number and percentage of
shares of Class B Common Stock Owned After the Offerings would be 398,462
shares and less than one percent and the Voting Power After the Offerings
would be less than one percent. Burke F. Roney is a brother of Blake M.
Roney, Nedra D. Roney, Brooke B. Roney, Kirk V. Roney, Rick A. Roney and
Park R. Roney.
(20) Includes shares beneficially owned or deemed beneficially owned by Park R.
Roney prior to the Offerings as follows: 185,111 shares of Class A Common
Stock and 398,462 shares of Class B Common Stock directly and with respect
to which he has sole voting and investment power. If the Underwriters'
over-allotment options are exercised in full, the number and percentage of
shares of Class A Common Stock To Be Owned After the Offerings by Park R.
Roney would be 0 shares and
87
0%, the number and percentage of shares of Class B Common Stock Owned After
the Offerings would be 398,462 shares and less than one percent and the
Voting Power After the Offerings would be less than one percent. Park R.
Roney is a brother of Blake M. Roney, Nedra D. Roney, Brooke B. Roney, Kirk
V. Roney, Rick A. Roney and Burke F. Roney.
(21) Includes 438,564 shares of Class A Common Stock and 19,614,321 shares of
Class B Common Stock owned by BNASIA, Ltd., a limited partnership of which
Blake M. Roney and his wife Nancy L. Roney are the general partners and who
share voting and investment power. If the Underwriters' over-allotment
options are exercised in full, BNASIA, Ltd. will sell, pursuant to the
Offerings, an additional 825,000 shares of Class A Common Stock, converted
from Class B Common Stock, in which event the number and percentage of
shares of Class A Common Stock To Be Owned After the Offerings by BNASIA,
Ltd. would be 0 shares and 0%, the number and percentage of shares of Class
B Common Stock Owned After the Offerings would be 18,789,321 shares and
29.5% and the Voting Power After the Offerings would be 28.5%.
(22) Includes 590,620 shares of Class A Common Stcok and 4,185,116 shares of
Class B Common Stock owned by RCKASIA, Ltd., a limited partnership of which
R. Craig Bryson and his wife Kathleen D. Bryson are the general partners and
who share voting and investment power. If the Underwriters' over-allotment
options are exercised in full, the number and percentage of shares of Class
A Common Stock To Be Owned After the Offerings by RCKASIA, Ltd. would be 0
shares and 0%, the number and percentage of shares of Class B Common Stock
Owned After the Offerings would be 4,185,116 shares and 6.6% and the Voting
Power After the Offerings would be 6.4%.
(23) Blake M. Roney and Nancy L. Roney are co-trustees of the Blake M. and
Nancy L. Roney Foundation and share voting and investment power with respect
to shares of Class A Common Stock owned by such entity as reported in
footnote (4) above. If the Underwriters' over-allotment options are
exercised in full, the number and percentage of shares of Class A Common
Stock To Be Owned After The Offerings by the Blake M. and Nancy L. Roney
Foundation would be 0 and 0%, the number and percentage of shares of Class B
Common Stock Owned After the Offerings would be 0 and 0% and the Voting
Power After the Offerings would be 0%.
(24) Blake M. Roney is the trustee of the S and K Lund Trust and has sole
voting and investment power with respect to shares of Class A and Class B
Common Stock owned by such entity as reported in footnote (4) above. If the
Underwriters' over-allotment options are exercised in full, the number and
percentage of shares of Class A Common Stock To Be Owned After The Offerings
by the S and K Lund Trust would be 0 and 0%, the number and percentage of
shares of Class B Common Stock Owned After the Offerings would be 73,082 and
less than one percent and the Voting Power After the Offerings would be less
than one percent.
(25) Nedra D. Roney is a co-trustee of the Nedra Roney Foundation and shares
voting and investment power with respect to the shares of Class A Common
Stock owned by such entity as reported in footnote (5) above. If the
Underwriters' over-allotment options are exercised in full, the number and
percentage of shares of Class A Common Stock To Be Owned After The Offerings
by the Nedra Roney Foundation would be 0 and 0%, and the number and
percentage of shares of Class B Common Stock Owned After the Offerings would
be 0 and 0% and the Voting Power After the Offerings would be 0%.
(26) Sandra N. Tillotson and Lee M. Brower are co-trustees of the Sandra N.
Tillotson Foundation and share voting and investment power with respect to
the shares of Class A Common Stock owned by such entity as reported in
footnotes (6) and (57) hereof. If the Underwriters' over-allotment options
are exercised in full, the number and percentage of shares of Class A Common
Stock to be Owned After The Offerings by the Sandra N. Tillotson Foundation
would be 0 and 0%, and the number and percentage of shares of Class B Common
Stock Owned After the Offerings would be 0 and 0% and the Voting Power After
the Offerings would be 0%.
(27) Sandra N. Tillotson is the manager of CST Rhino Company, L.C. and has sole
voting and investment power with respect to the shares of Class A and Class
B Common Stock owned by such entity as
88
reported in footnote (6) above. If the Underwriters' over-allotment options
are exercised in full, the number and percentage of shares of Class A Common
Stock To Be Owned After The Offerings by CST Rhino, L.C. would be 0 and 0%,
and the number and percentage of shares of Class B Common Stock Owned After
the Offerings would be 475,000 and less than one percent and the Voting
Power After the Offerings would be less than one percent.
(28) Sandra N. Tillotson is a co-trustee of the Sandra N. Tillotson Fixed
Charitable Trust and shares voting and investment power with respect to the
shares of Class A Common Stock owned by such entity as reported in footnote
(6) above. If the Underwriters' over-allotment options are exercised in
full, the number and percentage of shares of Class A Common Stock To Be
Owned After The Offerings by the Sandra N. Tillotson Fixed Charitable Trust
would be 0 and 0%, and the number and percentage of shares of Class B Common
Stock Owned After the Offerings would be 125,000 and less than one percent
and the Voting Power After the Offerings would be less than one percent.
(29) Craig S. Tillotson and Lee M. Brower are co-trustees of the Craig S.
Tillotson Foundation and share voting and investment power with respect to
shares of Class A Common Stock owned by such entity as reported in footnotes
(7) and (57) hereof. If the Underwriters' over-allotment options are
exercised in full, the number and percentage of Class A Common Stock To Be
Owned After The Offerings by the Craig S. Tillotson Foundation would be 0
and 0%, and the number and percentage of shares of Class B Common Stock
Owned After the Offerings would be 0 and 0% and the Voting Power After the
Offerings would be 0%.
(30) Craig S. Tillotson and Lee M. Brower are co-trustees of the Craig S.
Tillotson Fixed Charitable Trust and share voting and investment power with
respect to shares of Class A and Class B Common Stock owned by such entity
as reported in footnotes (7) and (57) hereof. If the underwriters'
over-allotment options are exercised in full, the number and percentage of
Class A Common Stock to be Owned After The Offerings by the Craig S.
Tillotson Fixed Charitable Trust would be 0 and 0%, and the number and
percentage of shares of Class B Common Stock Owned After the Offerings would
be 57,500 and less than one percent and the Voting Power After the Offerings
would be less than one percent.
(31) Craig S. Tillotson is the manager of SNT Rhino Company, L.C. and has sole
voting and investment power with respect to the shares of Class A and Class
B Common Stock owned by such entity as reported in footnote (7) above. If
the underwriters' over-allotment options are exercised in full, the number
and percentage of Class A Common Stock to be Owned After The Offerings by
SNT Rhino Company, L.C. would be 0 and 0%, and the number and percentage of
Class B Common Stock Owned After the Offerings would be 950,000 and 1.5% and
the Voting Power After the Offerings would be 1.4%.
(32) R. Craig Bryson and Kathleen D. Bryson are co-trustees of The Bryson
Foundation and share voting and investment power with respect to the shares
of Class A Common Stock owned by such entity as reported in footnote (8)
above. If the underwriters' over-allotment options are exercised in full,
the number and percentage of Class A Common Stock to be Owned After The
Offerings by The Bryson Foundation would be 0 and 0%, and the number and
percentage of shares of Class B Common Stock Owned After the Offerings would
be 0 and 0% and the Voting Power After the Offerings would be 0%.
(33) Steven J. Lund and Kalleen Lund are the general partners of SKASIA, Ltd.
and share voting and investment power with respect to shares of Class A and
Class B Common Stock owned by such entity as reported in footnote (9) above.
If the underwriters' over-alloted options are exercised in full, SKASIA,
Ltd. will sell to the Underwriters upon exercise of the over-allotment
option, an additional 225,000 shares of Class A Common Stock converted from
Class B Common Stock to Class A Common Stock, in which event the number and
percentage of shares of Class A Common Stock to be Owned After the Offerings
would be 0 and 0% and the number and percentage of shares of Class B Common
Stock Owned After the Offerings would be 2,709,240 and 4.3% and the Voting
Power After the Offerings would be 4.1%.
89
(34) Steven J. Lund is the trustee of the All R's Trust and has sole voting and
investment power with respect to the shares of Class A and Class B Common
Stock owned by such entity as reported in footnote (9) above. If the
underwriters' over-allotment options are exercised in full, the number and
percentage of shares of Class A Common Stock to be Owned After the Offerings
would be 0 and 0% and the number and percentage of shares of Class B Common
Stock Owned After the Offerings would be 60,605 and less than one percent
and the Voting Power After the Offerings would be less than one percent.
(35) Steven J. Lund and Kalleen Lund are the co-trustees of The Steven J. and
Kalleen Lund Fixed Charitable Trust and share voting and investment power
with respect to the shares of Class A and Class B Common Stock owned by such
entity as reported in footnote (9) above. If the underwriters'
over-allotment options are exercised in full, the number and percentage of
shares of Class A Common Stock to be Owned After the Offerings would be 0
and 0% and the number and percentage of shares of Class B Common Stock Owned
After the Offerings would be 55,000 and less than one percent and the Voting
Power After the Offerings would be less than one percent.
(36) Steven J. Lund and Kalleen Lund are the co-trustees of The Steven and
Kalleen Lund Foundation and share voting and investment power with respect
to the shares of Class A Common Stock owned by such entity as reported in
footnote (9) above. If the underwriters' over-allotment option is exercised
in full, the number and percentage of Class A Common Stock to be Owned After
the Offering would be 0 and 0% and the number and percentage of shares of
Class B Common Stock Owned After the Offerings would be 0 and 0% and the
Voting Power After the Offerings would be 0%.
(37) Brooke and Denice Roney are the general partners of BDASIA. Ltd. and share
voting and investment power with respect to the shares of Class A and Class
B Common Stock owned by such entity as reported in footnote (10) above. If
the underwriters' over-allotment options are exercised in full, the number
and percentage of shares of Class A Common Stock To Be Owned After the
Offerings would be 0 and 0% and the number and percentage of shares of Class
B Common Stock Owned After the Offerings would be 2,863,685 and 4.4% and the
Voting Power After the Offerings would 4.4%.
(38) Brooke B. Roney and Denice R. Roney are the co-trustees of The Brooke
Brennan and Denice Renee Roney Foundation and share voting and investment
power with respect to the Class A Common Stock owned by such entity as
reported in footnote (10) above. If the underwriters' over-allotment options
are exercised in full, the number and percentage of shares of Class A Common
Stock To Be Owned After the Offerings would be 0 and 0% and the number and
percentage of shares of Class B Common Stock Owned After the Offerings would
be 0 and 0% and the Voting Power After the Offerings would 0%.
(39) Kirk V. Roney and Melanie K. Roney are the general partners of KMASIA,
Ltd. and share voting and investment power with respect to the shares of
Class A and Class B Common Stock owned by such entity as reported in
footnote (11) above. If the underwriters' over-allotment options are
exercised in full, the number and percentage of shares of Class A Common
Stock To Be Owned After the Offerings would be 0 and 0% and the number and
percentage of shares of Class B Common Stock Owned After the Offerings would
be 2,615,935 and 4.1% and the Voting Power After the Offerings would be
4.0%.
(40) Kirk V. Roney and Melanie K. Roney are the co-trustees of The Kirk V. and
Melanie K. Roney Foundation and share voting and investment power with
respect to Class A Common Stock owned by such entity as reported in footnote
(11) above. If the underwriters' over-allotment options are exercised in
full, the number and percentage of shares of Class A Common Stock To Be
Owned After the Offerings would be 0 and 0% and the number and percentage of
shares of Class B Common Stock Owned After the Offerings would be 0 and 0%
and the Voting Power After the Offerings would be 0%.
(41) Kirk V. Roney and Melanie K. Roney are co-trustees of The Kirk and Melanie
Roney Fixed Charitable Trust and share voting and investment power with
respect to the shares of Class A Common Stock owned by such entity as
reported in footnote (11) above. If the underwriters' over-
90
allotment options are exercised in full, the number and percentage of shares
of Class A Common Stock To Be Owned After the Offerings would be 0 and 0%
and the number and percentage of shares of Class B Common Stock Owned After
the Offerings would be 72,750 and less than one percent and the Voting Power
After the Offerings would be less than one percent.
(42) Keith R. Halls and Anna Lisa Halls are the general partners of KAASIA,
Ltd. and share voting and investment power with respect to the shares of
Class A and Class B Common Stock owned by such entity as reported in
footnote (12) above. If the underwriters' over-allotment options are
exercised in full, the number and percentage of shares of Class A Common
Stock To Be Owned After the Offerings would be 0 and 0% and the number and
percentage of shares of Class B Common Stock Owned After the Offerings would
347,478 and less than one percent and the Voting Power After the Offerings
would be less than one percent.
(43) Keith R. Halls is the trustee of the MAR Trust and has sole voting and
investment power with respect to the shares of Class A and Class B Common
Stock owned by such entity as reported in footnote (12) above. If the
underwriters' over-allotment options are exercised in full, the number and
percentage of shares of Class A Common Stock To Be Owned After the Offerings
would be 0 and 0% and the number and percentage of shares of Class B Common
Stock Owned After the Offerings would be 167,727 and less than one percent
and the Voting Power After the Offerings would be less than one percent.
(44) Keith R. Halls is a co-trustee of The Nedra Roney Fixed Charitable Trust
and shares voting and investment power with respect to the shares of Class A
and Class B Common Stock owned by such entity. If the underwriters'
over-allotment options are exercised in full, the number and percentage of
shares of Class A Common Stock To Be Owned After the Offerings would be 0
and 0% and the number and percentage of shares of Class B Common Stock Owned
After the Offerings would be 200,000 and less than one percent and the
Voting Power After the Offerings would be less than one percent.
(45) Keith R. Halls and Anna Lisa Halls are the co-trustees of The Keith and
Anna Lisa Halls Fixed Charitable Trust and share voting and investment power
with respect to the shares of Class A and Class B Common Stock owned by such
entity as reported in footnote (12) above. If the underwriters'
over-allotment options are exercised in full, the number and percentage of
shares of Class A Common Stock To Be Owned After the Offerings would be 0
and 0% and the number and percentage of shares of Class B Common Stock Owned
After the Offerings would be 5,000 and less than one percent and the Voting
Power After the Offerings would be less than one percent.
(46) Keith R. Halls and Anna Lisa Massaro Halls are co-trustees of The Keith
Ray and Anna Lisa Massaro Halls Foundation and share voting and investment
power with respect to the shares of Class A Common Stock owned by such
entity as reported in footnote (12) above. If the underwriters' over-
allotment options are exercised in full, the number and percentage of shares
of Class A Common Stock To Be Owned After the Offerings would be 0 and 0%
and the number and percentage of shares of Class B Common Stock Owned After
the Offerings would be 0 and 0% and Voting Power After the Offerings would
be 0%.
(47) Craig F. McCullough is the manager of B&N Rhino Company, L.C. and has sole
voting and investment power with respect to the shares of Class A and Class
B Common Stock owned by such entity as reported in footnote (56) below. If
the underwriters' over-allotment options are exercised in full, the number
and percentage of shares of Class A Common Stock To Be Owned After the
Offerings would be 0 and 0% and the number and percentage of shares of Class
B Common Stock Owned After the Offerings would be 460,000 and less than one
percent and the Voting Power After the Offerings would be less than one
percent.
(48) Craig F. McCullough is the manager of NR Rhino Company, L.C. and has sole
voting and investment power with respect to the shares of Class A and Class
B Common Stock owned by such entity as reported in footnote (56) below. If
the underwriters' over-allotment options are exercised in full, the number
and percentage of shares of Class A Common Stock To Be Owned After the
Offerings would
91
be 0 and 0% and the number and percentage of shares of Class B Common Stock
Owned After the Offerings would be 608,712 and 1.0% and the Voting Power
After the Offerings would be less than one percent.
(49) Craig F. McCullough is the manager of S&K Rhino Company, L.C. and has the
sole voting and investment power with respect to the shares of Class A and
Class B Common Stock owned by such entity as reported in footnote (56)
below. If the underwriters' over-allotment options are exercised in full,
the number and percentage of shares of Class A To Be Owned After the
Offerings would be 0 and 0% and the number and percentage of shares of Class
B Common Stock Owned After the Offerings would be 120,000 and less than one
percent and the Voting Power After the Offerings would be less than one
percent.
(50) Craig F. McCullough is the manager of K&A Rhino Company, L.C. and has sole
voting and investment power with respect to the shares of Class A and Class
B Common Stock owned by such entity as reported in footnote (56) below. If
the underwriters' over-allotment options are exercised in full, the number
and percentage of shares of Class A Common Stock To Be Owned After the
Offerings would be 0 and 0% and the number and percentage of shares of Class
B Common Stock Owned After the Offerings would be 12,500 and less than one
percent and the Voting Power After the Offerings would be less than one
percent.
(51) Craig F. McCullough is the manager of K&M Rhino Company, L.C. and has the
sole voting and investment power with respect to the shares of Class A and
Class B Common Stock owned by such entity as reported in footnote (56)
below. If the underwriters' over-allotment options are exercised in full,
the number and percentage of shares of Class A Common Stock To Be Owned
After the Offerings would be 0 and 0% and the number and percentage of
shares of Class B Common Stock Owned After the Offerings would be 175,000
and less than one percent and the Voting Power After the Offerings would be
less than one percent.
(52) If the underwriters' over-allotment options are exercised in full, the
number and percentage of shares of Class A Common Stock To Be Owned After
the Offerings by the K&A Halls Trust would be 0 and 0% and the number and
percentage of shares of Class B Common Stock Owned After the Offerings would
be 51,082 and less than one percent and the Voting Power After the Offerings
would be less than one percent.
(53) Lee M. Brower is the trustee of the SNT Trust and has sole voting and
investment power with respect to the shares of Class A and Class B Common
Stock owned by such entity and reported in footnote (57) below. If the
underwriters' over-allotment options are exercised in full, the number and
percentage of shares of Class A Common Stock To Be Owned After the Offerings
would be 0 and 0% and the number and percentage of shares of Class B Common
Stock Owned After the Offerings would be 161,383 and less than one percent
and the Voting Power After the Offerings would be less than one percent.
(54) Lee M. Brower is the trustee of the DVNM Trust and has sole voting and
investment power with respect to the shares of Class A and Class B Common
Stock owned by such entity and reported in footnote (57) below. If the
underwriters' over-allotment options are exercised in full, the number and
percentage of shares of Class A Common Stock To Be Owned After the Offerings
would be 0 and 0% and the number and percentage of shares of Class B Common
Stock Owned After the Offerings would be 179,807 and less than one percent
and the Voting Power After the Offerings would be less than one percent.
(55) Sandra N. Tillotson is the trustee of the CST Trust and has sole voting
and investment power with respect to the shares of Class A and Class B
Common Stock owned by such entity as reported above in footnote (6). If the
underwriters' over-allotment options are exercised in full, the number and
percentage of shares of Class A Common Stock To Be Owned After the Offerings
would be 0 and 0% and the number and percentage of shares of Class B Common
Stock Owned After the Offerings would be 80,692 and less than one percent
and the Voting Power After the Offerings would be less than one percent.
92
(56) Includes 1,038,788 shares of Class A Common Stock and 1,376,212 shares of
Class B Common Stock beneficially owned or deemed to be owned beneficially
by Craig F. McCullough prior to the Offerings as the manager of certain
limited liability companies as reported in footnotes (47)-(51) above. If the
underwriters' over-allotment options are exercised in full, the number and
percentage of shares of Class A Common Stock To Be Owned After the Offerings
would be 0 and 0% and the number and percentage of shares of Class B Common
Stock Owned After the Offerings would be 1,376,212 and 2.2% and the Voting
Power After the Offerings would be 2.1%.
(57) Includes 399,820 shares of Class A Common Stock and 1,718,352 shares of
Class B Common Stock owned or deemed to be owned beneficially by Lee M.
Brower prior to the Offerings as the trustee of certain trusts and
foundations, and 519,820 shares of Class A Common Stock as co-trustee of
certain foundations as reported in footnotes (26), (29), (30), (53) and (54)
above. If the underwriters' over-allotment options are exercised in full,
the number and percentage of shares of Class A Common Stock To Be Owned
After the Offerings would be 0 and 0% and the number and percentage of
shares of Class B Common Stock Owned After the Offerings would be 1,718,352
and 2.7% and the Voting Power After the Offerings would be 2.6%.
(58) Class A Common Stock owned prior to the Offerings includes 250,825 shares
of Class A Common Stock subject to a stock option which has been granted to
an executive officer of the Company and which is exercisable within 60 days
of the Offerings. If the underwriters' over-allotment options are exercised
in full, an additional 1,050,000 shares of Class A Common Stock will be
converted from Class B Common Stock, in which event the number and
percentage of shares of Class A Common Stock To Be Owned After the Offerings
by all directors and officers as a group would be 328,255 shares and less
than one percent, the number and percentage of shares of Class B Common
Stock Owned After the Offerings would be 36,854,711 shares and 57.9% and the
Voting Power After the Offerings would be 56.1%.
93
SHARES ELIGIBLE FOR FUTURE SALE
Unless otherwise specified herein, the following information assumes no
exercise of the overallotment options granted to the Underwriters in connection
with the Offerings.
Upon completion of the Offerings, the Company will have 18,723,011 shares of
Class A Common Stock issued and outstanding. All of these shares are freely
tradeable without restriction or further registration under the 1933 Act, unless
held by "affiliates" of the Company, as that term is defined in Rule 144 under
1933 Act ("Rule 144"). The Company also currently has outstanding approximately
1,855,825 stock options and 150,959 employee stock bonus awards. Of the stock
options, the 1,605,000 shares of Class A Common Stock issuable upon exercise of
the Distributor Options and the 150,959 employee stock bonus awards have been
registered under the 1933 Act and will accordingly, upon exercise and vesting,
be freely tradeable subject to the affiliate restrictions contained in Rule 144.
The Distributor Options will become exercisable in January 1998 and the employee
stock bonus awards will vest at a rate of 25% per year commencing in November
1997.
In addition, upon completion of the Offerings, the Company will have
64,696,675 shares of Class B Common Stock issued and outstanding, each share of
which is convertible at any time into one share of Class A Common Stock. The
64,696,675 shares of Class B Common Stock and the remaining 250,825 shares
underlying the Company's outstanding stock options are "restricted" shares
within the meaning of Rule 144. Restricted shares may not be resold in the
public market except in compliance with the registration requirements of the
1933 Act or pursuant to an exemption therefrom, including the exemption provided
by Rule 144. As currently in effect, Rule 144 provides that a person (or persons
whose shares are aggregated) who has beneficially owned "restricted" shares of
the Common Stock for at least one year will be entitled to sell on the open
market in broker's transactions within any three-month period a number of shares
that does not exceed the greater of (i) 1% of the outstanding shares of the
Class A Common Stock or (ii) the average weekly trading volume in the Class A
Common Stock on the open market during the four calendar weeks preceding such
sale. Sales under Rule 144, as currently in effect, are also subject to certain
notice requirements and the availability of current public information about the
Company. Under Rule 144, the holders of the Class B Common Stock are deemed to
have acquired such shares on November 20, 1996. Accordingly, under Rule 144 and
pursuant to the volume limitations of such rule, the holders of the Class B
Common Stock would, in the absence of the limitations outlined below, be able to
commence reselling their shares of Common Stock on November 20, 1997.
In addition to the limitations imposed on the resale of restricted
securities by the 1933 Act, the holders of approximately 2/3 of the shares of
Class B Common Stock have agreed pursuant to the amended Stockholder's Agreement
entered into in connection with the Offerings, not to resell any of their shares
of Common Stock for two years following the date of the Offerings. The
stockholders holding the remaining 1/3 of the shares of Class B Common Stock
have agreed pursuant to the amended Stockholder's Agreement not to resell any of
their shares of Common Stock for 6 months following the date of the Offerings if
the Underwriters' overallotment options are not exercised in full and for two
years if such overallotment options are exercised in full. Upon the expiration
of these lockup periods, the amended Stockholder's Agreement will impose
significant additional limits on the extent to which the stockholders can sell
their shares of Common Stock for an additional five year period. The Selling
Stockholders have also entered into a separate lockup arrangement with the
Underwriters in connection with the Offerings. See "--Underwriting."
An aggregate of approximately 3,849,041 shares remain available for future
option grants and other equity awards under the 1996 Stock Incentive Plan. See
"Management--1996 Stock Incentive Plan." The Company intends to file a
registration statement on Form S-8 under the 1933 Act to register all of the
shares of Class A Common Stock reserved for issuance under the 1996 Stock
Incentive Plan. Such registration statement is expected to be filed as soon as
practicable and will become automatically effective upon filing. Shares issued
under the 1996 Stock Incentive Plan after such registration statement is filed
94
may thereafter be sold in the open market, subject to the Rule 144 volume
limitations applicable to affiliates and any transfer restrictions imposed on
the date of the grant.
DESCRIPTION OF CAPITAL STOCK
GENERAL
As of the date of this Prospectus, the authorized capital stock of the
Company consists of 500,000,000 shares of Class A Common Stock, par value $.001
per share, and 100,000,000 shares of Class B Common Stock, par value $.001 per
share, and 25,000,000 shares of Preferred Stock, par value $.001 per share
("Preferred Stock"). Following the Offerings (assuming no exercise of the
over-allotment options granted to the underwriters), the Company will have
18,723,011 shares of Class A Common Stock issued and outstanding. This number
includes (i) 7,000,000 shares of Class A Common Stock to be issued upon
conversion of 7,000,000 shares of Class B Common Stock and sold by the Selling
Stockholders in the Offerings, and excludes (a) 3,849,041 shares of Class A
Common Stock reserved for issuance pursuant to the 1996 Stock Incentive Plan;
(b) 250,825 shares of Class A Common Stock subject to a stock option which was
granted to an executive officer of the Company; (c) 1,605,000 shares issuable
upon exercise of the Distributor Options; and (d) 150,959 shares issuable
pursuant to employee stock bonus awards. In addition, upon completion of the
Offerings, the Company will have 64,696,675 shares of Class B Common Stock
issued and outstanding, all of which are held of record by the Selling
Stockholders and certain of their affiliates. Of the authorized shares of
Preferred Stock, no shares of Preferred Stock are outstanding. The following
description is a summary and is subject to and qualified in its entirety by
reference to the provisions of the Company's Amended and Restated Certificate of
Incorporation (the "Certificate of Incorporation") filed as an exhibit to the
Registration Statement of which this Prospectus forms a part.
COMMON STOCK
The approximate number of holders of record of the Company's Class A Common
Stock and Class B Common Stock as of May 31, 1997 was 541 and 58, respectively.
Those numbers may not represent the actual number of beneficial owners of shares
of the Company's Class A Common Stock and Class B 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. 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
regarding the shares of the Class B Common Stock, as described below.
VOTING RIGHTS. Each share of Class A Common Stock entitles the holder to
one vote on each matter submitted to a vote of the Company's stockholders and
each share of Class B Common Stock entitles the holder to ten votes on each such
matter, including the election of directors. There is no cumulative voting.
Except as required by applicable law, holders of Class A Common Stock and
holders of Class B Common Stock will vote together on all matters submitted to a
vote of the stockholders. With respect to certain corporate changes, such as
liquidations, reorganizations, recapitalizations, mergers, consolidations and
sales of substantially all of the Company's assets, holders of Class A Common
Stock and holders of Class B Common Stock will vote together as a single class
and the approval of 66 2/3% of the outstanding voting power is required to
authorize or approve such transactions. See "Risk Factors--Control by Selling
Stockholders and certain of their affiliates; Anti-Takeover Effect of Dual
Classes of Common Stock" and "--Anti-Takeover Effects of Certain Charter,
Contractual and Statutory Provisions."
Any action that can be taken at a meeting of the stockholders may be taken
by written consent in lieu of a meeting if the Company receives consents signed
by stockholders having the minimum number of votes that would be necessary to
approve the action at a meeting at which all shares entitled to vote on the
matter were present. This could permit holders of Class B Common Stock to take
all actions required to be taken by the stockholders without providing the other
stockholders an opportunity to make nominations or
95
raise other matters at a meeting. The right to take action by less than
unanimous written consent expires at such time as there are no shares of Class B
Common Stock outstanding.
DIVIDENDS. Holders of Class A Common Stock and holders of Class B Common
Stock are entitled to receive dividends at the same rate if, as and when such
dividends are declared by the Board of Directors of the Company out of assets
legally available therefor after payment of dividends required to be paid on
shares of Preferred Stock, if any.
If a dividend or distribution payable in Class A Common Stock is made on the
Class A Common Stock, the Company must also make a pro rata and simultaneous
dividend or distribution on the Class B Common Stock payable in shares of Class
B Common Stock. Conversely, if a dividend or distribution payable in Class B
Common Stock is made on the Class B Common Stock, the Company must also make a
pro rata and simultaneous dividend or distribution on the Class A Common Stock
payable in shares of Class A Common Stock. See "Risk Factors--Absence of
Dividends" and "Dividend Policy."
RESTRICTIONS ON TRANSFER. If a holder of Class B Common Stock transfers
such shares, whether by sale, assignment, gift, bequest, appointment or
otherwise, to a person other than a permitted transferee (as defined in the
Company's Certificate of Incorporation) such shares will be converted
automatically into shares of Class A Common Stock. In the case of a pledge of
shares of Class B Common stock to a financial institution, such shares will not
be deemed to be transferred unless and until a foreclosure occurs.
CONVERSION. The Class A Common Stock has no conversion rights. The Class B
Common Stock is convertible into shares of Class A Common Stock, in whole or in
part, at any time and from time to time at the option of the holder, on the
basis of one share of Class A Common Stock for each share of Class B Common
Stock converted. In the event of a transfer of shares of Class B Common Stock to
any person other than a Permitted Transferee each share of Class B Common Stock
so transferred automatically will be converted into one share of Class A Common
Stock. Each share of Class B Common Stock will also automatically convert into
one share of Class A Common Stock if, on the record date for any meeting of the
stockholders, the number of shares of Class B Common Stock then outstanding is
less than 10% of the aggregate number of shares of Class A Common Stock and
Class B Common Stock then outstanding.
LIQUIDATION. In the event of liquidation, after payment of the debts and
other liabilities of the Company and after making provision for the holders of
Preferred Stock, if any, the remaining assets of the Company will be
distributable ratably among holders of Class A Common Stock and holders of Class
B Common Stock treated as a single class.
MERGERS AND OTHER BUSINESS COMBINATIONS. Upon the merger or consolidation
of the Company, holders of each class of Common Stock are entitled to receive
equal per share payments or distributions, except that in any transaction in
which shares of capital stock are distributed, such shares may differ as to
voting rights to the extent and only to the extent that the voting rights of the
Class A Common Stock and the Class B Common Stock differ at that time. The
Company may not dispose of all or any substantial part of the assets of the
Company to, or merge or consolidate with, any person, entity or "group" (as
defined in Rule 13d-5 of the 1934 Act), which beneficially owns in the aggregate
10% or more of the outstanding Common Stock of the Company (a "Related Person")
without the affirmative vote of the holders, other than such Related Person, of
not less that 66 2/3% of the voting power of outstanding Class A Common Stock
and Class B Common Stock voting as a single class. For the sole purpose of
determining the 66 2/3% vote, a Related Person will also include the seller or
sellers from whom the Related Person acquired, during the preceding six months,
at least 5% of the outstanding shares of Class A Common Stock in a single
transaction or series of related transactions pursuant to one or more agreements
or other arrangements (and not through a brokers' transaction), but only if such
seller or sellers have beneficial ownership of shares of Common Stock having a
fair market value in excess of $10 million in the aggregate following such
disposition to such Related Person. This 66 2/3% voting requirement is not
applicable, however, if (i) the proposed transaction is approved by a vote of
not less than a majority of the directors of the
96
Company who are neither affiliated nor associated with the Related Person (or
the seller of shares to the Related Person as described above) or (ii) in the
case of a transaction pursuant to which the holders of Common Stock are entitled
to receive cash, property, securities or other consideration, the cash or fair
market value of the property, securities or other consideration to be received
per share in such transaction is not less than the higher of (A) the highest
price per share paid by the Related Person for any of its holdings of Common
Stock within the two-year period immediately prior to the announcement of the
proposed transaction or (B) the highest closing sale price during the 30-day
period immediately preceding such date or during the 30-day period immediately
preceding the date on which the Related Person became a Related Person,
whichever is higher. See "Risk Factors--Anti-Takeover Effects of Certain
Charter, Contractual and Statutory Provisions."
OTHER PROVISIONS. Holders of the Class A Common Stock and holders of Class
B Common Stock are not entitled to preemptive rights. Neither the Class A Common
Stock nor the Class B Common Stock may be subdivided or combined in any manner
unless the other class is subdivided or combined in the same proportion.
TRANSFER AGENT AND REGISTRAR. The Transfer Agent and Registrar for the
Class A Common Stock is American Stock Transfer and Trust Company.
LISTING. The Class A Common Stock is traded on the New York Stock Exchange
under the trading symbol "NUS." There is currently no public market for the
Company's Class B Common Stock.
PREFERRED STOCK
The Board of Directors is authorized, subject to any limitations prescribed
by the DGCL or the rules of the New York Stock Exchange or other organizations
on whose systems stock of the Company may be quoted or listed, to provide for
the issuance of additional shares of Preferred Stock in one or more series, to
establish from time to time the number of shares to be included in each such
series, to fix the rights, powers, preferences and privileges of the shares of
each wholly unissued series and any qualifications, limitations or restrictions
thereon, and to increase or decrease the number of shares of such series,
without any further vote or action by the stockholders. The approval of the
holders of at least 66 2/3% of the combined voting power of the outstanding
shares of Common Stock, however, is required for the issuance of shares of
Preferred Stock that have the right to vote for the election of directors under
ordinary circumstances or to elect 50% or more of the directors under any
circumstances. Depending upon the terms of the Preferred Stock established by
the Company's Board of Directors, any or all series of Preferred Stock could
have preference over the Common Stock with respect to dividends and other
distributions and upon liquidation of the Company or could have voting or
conversion rights that could adversely affect the holders of the outstanding
Common Stock. In addition, the Preferred Stock could delay, defer or prevent a
change of control of the Company. See "Risk Factors--Anti-Takeover Effects of
Certain Charter, Contractual and Statutory Provisions." The Company has no
present plans to issue any shares of Preferred Stock.
OTHER CHARTER AND BYLAW PROVISIONS
Special meetings of stockholders may be called only by the majority
stockholders, the Company's Board of Directors, the President or the Secretary.
Except as otherwise required by law, stockholders, in their capacity as such,
are not entitled to request or call a special meeting of the stockholders.
Stockholders of the Company are required to provide advance notice of
nominations of directors to be made at, and of business proposed to be brought
before, a meeting of the stockholders. The failure to deliver proper notice
within the periods specified in the Company's Amended and Restated Bylaws (the
"Bylaws") will result in the denial of the stockholder of the right to make such
nominations or propose
97
such action at the meeting. See "Risk Factors--Anti-Takeover Effects of Certain
Charter, Contractual and Statutory Provisions."
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW
The Company is a Delaware corporation and is subject to the provisions of
Section 203 of the DGCL (the "Anti-Takeover Law") regulating corporate
takeovers. The Anti-Takeover Law prevents certain Delaware corporations,
including those whose securities are listed on the New York Stock Exchange, from
engaging, under certain circumstances, in a "business combination" with an
"interested stockholder" (a stockholder who, together with affiliates and
associates, within the prior three years did own 15% or more of the
corporation's outstanding voting stock) for three years following the date that
such stockholder became an "interested stockholder," unless the "business
combination" or "interested stockholder" is approved in a prescribed manner. A
Delaware corporation may "opt out" of the Anti-Takeover Law with an express
provision in its original certificate of incorporation or an express provision
in its certificate of incorporation or bylaws resulting from a stockholders'
amendment approved by at least a majority of the outstanding voting shares. The
Company has not "opted out" of the provisions of the Anti-Takeover Law. See
"Risk Factors--Anti-Takeover Effects of Certain Charter, Contractual and
Statutory Provisions."
INDEMNIFICATION AND LIMITATION OF LIABILITY OF DIRECTORS AND OFFICERS
To the fullest extent permitted by the DGCL, the Company's Certificate of
Incorporation and Bylaws provide that the Company shall indemnify and advance
expenses to each of its directors, officers, employees and agents. The Company
believes the foregoing provisions are necessary to attract and retain qualified
persons as directors and officers. The Company has entered into separate
indemnification agreements with each of its directors and executive officers in
order to effectuate such provisions. See "Certain Relationships and Related
Transactions." The Company's Certificate of Incorporation also provides for, to
the fullest extent permitted by the DGCL, elimination or limitation of liability
of directors for breach of their fiduciary duty to the Company or its
stockholders.
REGISTRATION RIGHTS
Under the Stockholders' Agreement, the Selling Stockholders have been
granted registration rights by the Company permitting each of such Selling
Stockholders to register his or her shares of Class A Common Stock, subject to
certain restrictions, on any registration statement filed by the Company until
such Selling Stockholder had sold a specified value of shares of Class A Common
Stock. These registration rights will be terminated upon the closing of the
Offerings. See "Certain Relationships and Related Transactions."
98
CERTAIN UNITED STATES TAX CONSEQUENCES
TO NON-UNITED STATES HOLDERS
The following is a general discussion of certain United States federal
income and estate tax consequences of the ownership and disposition of Class A
Common Stock by a Non-U.S. Holder. For this purpose, a "Non-U.S. Holder" is any
person who is, for United States federal income tax purposes, a foreign
corporation, a non-resident alien individual, a foreign partnership or a foreign
estate or trust. This discussion does not address all aspects of United States
federal income and estate taxes and does not deal with foreign, state and local
consequences that may be relevant to such Non-U.S. Holders in light of their
personal circumstances. Furthermore, this discussion is based on provisions of
the Code, existing and proposed regulations promulgated thereunder and
administrative and judicial interpretations thereof, as of the date hereof, all
of which are subject to change (possibly with retroactive effect). Each
prospective purchaser of Class A Common Stock is advised to consult a tax
advisor with respect to current and possible future tax consequences of
acquiring, holding and disposing of Class A Common Stock as well as any tax
consequences that may arise under the laws of any U.S. state, municipality or
other taxing jurisdiction.
An individual may, subject to certain exceptions, be deemed to be a resident
alien (as opposed to a non-resident alien) by virtue of being present in the
United States for 183 days or more during the calendar year or on at least 31
days in the calendar year and for an aggregate of at least 183 days during a
three-year period ending in the current calendar year (counting for such
purposes all of the days present in the current year, one-third of the days
present in the immediately preceding year, and one-sixth of the days present in
the second preceding year). Resident aliens are subject to U.S. federal tax as
if they were U.S. citizens.
DIVIDENDS
Dividends paid to a Non-U.S. Holder of Class A Common Stock generally will
be subject to withholding of United States federal income tax either at a rate
of 30% of the gross amount of the dividends or at such lower rate as may be
specified by an applicable income tax treaty. However, dividends that are
effectively connected with the conduct of a trade or business by the Non-U.S.
Holder within the United States and, where a tax treaty applies, are
attributable to a United States permanent establishment of the Non-U.S. Holder,
are not subject to the withholding tax (provided the Non-U.S. Holder files
appropriate documentation, including, under current law, IRS Form 4224, with the
payor of the dividend), but instead are subject to United States federal income
tax on a net income basis at applicable graduated individual or corporate rates.
Any such effectively connected dividends received by a foreign corporation may,
under certain circumstances, be subject to an additional "branch profits tax" at
a 30% rate or such lower rate as may be specified by an applicable income tax
treaty.
Under current law, dividends paid to an address outside the United States
are presumed to be paid to a resident of such country (unless the payer has
knowledge to the contrary) for purposes of the withholding discussed above and
for purposes of determining the applicability of a tax treaty rate. However,
under proposed Treasury regulations not currently in effect, in the case of
dividends paid after December 31, 1997 (December 31, 1999 in the case of
dividends paid to accounts in existence on or before the date that is 60 days
after the proposed regulations are published as final regulations), a Non-U.S.
Holder of Class A Common Stock who wishes to claim the benefit of an applicable
treaty rate would be required to satisfy applicable certification and other
requirements either directly or through an intermediary. In addition, backup
withholding, as discussed below, may apply in certain circumstances if
applicable certification and other requirements are not met.
A Non-U.S. Holder of Class A Common Stock eligible for a reduced rate of
United States withholding tax pursuant to an income tax treaty may obtain a
refund of any excess amounts withheld by filing an appropriate claim for refund
with the Internal Revenue Service (the "IRS").
99
GAIN ON DISPOSITION OF COMMON STOCK
A Non-U.S. Holder will generally not be subject to United States federal
income tax with respect to gain recognized on a sale or other disposition of
Class A Common Stock unless (i) the gain is effectively connected with a trade
or business of the Non-U.S. Holder in the United States, and, where a tax treaty
applies, is attributable to a United States permanent establishment of the
Non-U.S. Holder, (ii) in the case of a Non-U.S. Holder who is an individual and
holds the Class A Common Stock as a capital asset, such holder is present in the
United States for 183 or more days in the taxable year of the sale or other
disposition and certain other conditions are met, or (iii) the Company is or has
been a "U.S. real property holding corporation" for United States federal income
tax purposes. The Company believes it is not and does not anticipate becoming a
"U.S. real property holding corporation" for United States federal income tax
purposes.
If an individual Non-U.S. Holder falls under clause (i) above, he will,
unless an applicable treaty provides otherwise, be taxed on his net gain derived
from the sale under regular graduated United States federal income tax rates. If
an individual Non-U.S. Holder falls under clause (ii) above, he will be subject
to a flat 30% tax on the gain derived from the sale, which may be offset by
certain United States capital losses.
If a Non-U.S. Holder that is a foreign corporation falls under clause (i)
above, it will be taxed on its gain under regular graduated United States
federal income tax rates and may be subject to an additional branch profits tax
at a 30% rate, unless it qualifies for a lower rate under an applicable income
tax treaty.
FEDERAL ESTATE TAX
Class A Common Stock held by an individual Non-U.S. Holder at the time of
death will be included in such holder's gross estate for United States federal
estate tax purposes, unless an applicable estate tax treaty provides otherwise.
INFORMATION REPORTING AND BACKUP WITHHOLDING TAX
The Company must report annually to the IRS and to each Non-U.S. Holder the
amount of dividends paid to such holder and the tax withheld with respect to
such dividends, regardless of whether withholding was required. Copies of the
information returns reporting such dividends and withholding may also be made
available to the tax authorities in the country in which the Non-U.S. Holder
resides under the provisions of an applicable income tax treaty.
A backup withholding tax is imposed at the rate of 31% on certain payments
to persons that fail to furnish certain identifying information to the payor.
Under current law, backup withholding generally will not apply to dividends paid
to a Non-U.S. Holder at an address outside the United States (unless the payer
has knowledge that the payee is a U.S. person), but generally will apply to
dividends paid on Class A Common Stock at addresses inside the United States to
Non-U.S. Holders that fail to provide certain identifying information in the
manner required. However, under proposed Treasury regulations not currently in
effect, in the case of dividends paid after December 31, 1997 (December 31, 1999
in the case of dividends paid to accounts in existence on or before the date
that is 60 days after the proposed regulations are published as final
regulations), a Non-U.S. Holder generally would be subject to backup withholding
at a 31% rate, unless certain certification procedures (or, in the case of
payments made outside the United States with respect to an offshore account,
certain documentary evidence procedures) are complied with, directly or through
an intermediary or a Non-U.S. Holder otherwise establishes an exemption from
backup withholding.
Payment of the proceeds of a sale of Class A Common Stock by or through a
United States office of a broker is subject to both backup withholding and
information reporting unless the beneficial owner provides the payor with its
name and address and certifies under penalties of perjury that it is a Non-U.S.
100
Holder, or otherwise establishes an exemption. In general, backup withholding
and information reporting will not apply to a payment of the proceeds of a sale
of Class A Common Stock by or through a foreign office of a foreign broker. If,
however, such broker is, for United States federal income tax purposes a U.S.
person, a controlled foreign corporation, or a foreign person that derives 50%
or more of its gross income for certain periods from the conduct of a trade or
business in the United States, such payments will be subject to information
reporting, but not backup withholding, unless (i) such broker has documentary
evidence in its records that the beneficial owner is a Non-U.S. Holder and
certain other conditions are met, or (ii) the beneficial owner otherwise
establishes an exemption.
Any amounts withheld under the backup withholding rules generally will be
allowed as a refund or a credit against such holder's U.S. federal income tax
liability provided the required information is furnished in a timely manner to
the IRS.
101
UNDERWRITING
The U.S. Underwriters named below (the "U.S. Underwriters"), acting through
their U.S. representatives, Merrill Lynch, Pierce, Fenner & Smith Incorporated
("Merrill Lynch"), Morgan Stanley & Co., Incorporated, Nomura Securities
International, Inc. and Paine Webber Incorporated (collectively, the "U.S.
Representatives"), have severally agreed, subject to the terms and conditions of
a U.S. Purchase Agreement (the "U.S. Purchase Agreement") with the Company and
the Selling Stockholders to purchase from the Selling Stockholders the number of
shares of Class A Common Stock set forth opposite their respective names below.
NUMBER OF
U.S. UNDERWRITERS SHARES
- --------------------------------------------------------------------------------- ----------
Merrill Lynch, Pierce, Fenner & Smith
Incorporated...........................................................
Morgan Stanley & Co. Incorporated................................................
Nomura Securities International, Inc.............................................
PaineWebber Incorporated.........................................................
----------
Total........................................................................ 5,600,000
----------
----------
The Company and the Selling Stockholders have also entered into an
International Purchase Agreement (the "International Purchase Agreement" and
together with the U.S. Purchase Agreement, the "Purchase Agreements") with
certain underwriters outside the United States and Canada (the "International
Managers"), for whom Merrill Lynch International, Morgan Stanley & Co.
International Limited, Nomura International plc and PaineWebber Incorporated are
acting as representatives (the "Lead International Managers" and together with
the U.S. Representatives, the "Representatives"). Subject to the terms and
conditions set forth in the International Purchase Agreement, the Selling
Stockholders have agreed to sell to the International Underwriters, and the
International Underwriters have severally agreed to purchase, an aggregate of
1,400,000 shares of Class A Common Stock pursuant to Regulation S ("Regulation
S") under the 1933 Act.
In each Purchase Agreement, the Underwriters named therein have agreed,
subject to the terms and conditions set forth in such Purchase Agreement, to
purchase all of the shares of Class A Common Stock being sold pursuant to such
Purchase Agreement if any of the shares of Class A Common Stock being sold
pursuant to such Purchase Agreement are purchased. Under certain circumstances,
under the U.S. or International Purchase Agreements, the commitments of
non-defaulting Underwriters may be increased. Each Purchase Agreement provides
that the Selling Stockholders are not obligated to sell, and the U.S.
Underwriters and the International Managers are not obligated to purchase, the
shares of Class A Common Stock under the terms of each Purchase Agreement unless
the shares of Class A Common Stock to be sold pursuant to the Purchase
Agreements are contemporaneously sold.
The initial public offering price per share and the total underwriting
discount per share are identical under the U.S. Purchase Agreement and the
International Purchase Agreement.
The Company and the Selling Stockholders have been informed that the U.S.
Underwriters and the International Managers have entered into an Intersyndicate
Agreement dated the date hereof (the "Intersyndicate Agreement") which provides
for the coordination of their activities. Under the terms of
102
the Intersyndicate Agreement, the U.S. Underwriters and the International
Managers are permitted to sell shares of Class A Common Stock to each other.
The Company and the Selling Stockholders have been informed that, under the
terms of the Intersyndicate Agreement (i) the U.S. Underwriters and any dealer
to whom they sell shares of Class A Common Stock will not offer to sell or
resell shares of Class A Common Stock to persons who are non-U.S. or
non-Canadian persons or to persons they believe intend to resell to persons who
are non-U.S. or non-Canadian persons, and (ii) the International Managers and
any dealer to whom they sell shares of Class A Common Stock will not offer to
sell or resell shares of Class A Common Stock to U.S. or Canadian persons, or to
persons they believe intend to resell to persons who are U.S. or Canadian
persons, except in each case for transactions pursuant to the Intersyndicate
Agreement, which, among other things, permits the Underwriters to purchase from
each other and offer for resale such number of shares of Class A Common Stock as
the selling Underwriter or Underwriters and the purchasing Underwriter or
Underwriters may agree. As used in this section, "United States Person" shall
mean any person who is a "United States Person," as such term is defined in
Regulation S, which includes (i) any natural person resident in the United
States, (ii) any estate or trust of which any executor, administrator or trustee
is a United States Person, with certain exceptions relating to estates governed
by foreign law and trusts of which no beneficiary is a United States Person,
(iii) any agency or branch of a foreign entity located in the United States,
(iv) any non-discretionary account (other than an estate or trust) held by a
dealer or other fiduciary for the benefit or account of a United States Person,
(v) any discretionary account incorporated in the United States, with certain
exceptions relating to accounts held for the benefit or account of non-United
States Persons and (vi) any corporation or partnership incorporated or organized
under the laws of any foreign jurisdiction by a United States Person principally
for the purpose of investing in securities not registered under the 1933 Act,
unless it is organized or incorporated, and owned, by accredited investors (as
defined in Rule 501(a) under the 1933 Act) who are not natural persons, estates
or trusts. In accordance with Regulation S, "United States Person" as used
herein does not include (i) any agency or branch of a United States Person
located outside of the United States that is engaged in the business of banking
or insurance and is subject to substantive banking or insurance regulation in
the jurisdiction where located or (ii) any employee benefit plan established and
administered in accordance with the law and customary practice of a country
other than the United States. "Canadian Person" shall mean any individual who is
resident in Canada or any corporation, pension, profit-sharing or other trust or
entity organized under or governed by the laws of Canada or any political
subdivision thereof (other than a foreign branch or office of any Canadian
Corporation), and shall include, respectively, any Canadian branch or office of
a person other than a Canadian Person. "United States" shall mean the United
States of America, its territories, its possessions and all areas subject to its
jurisdiction. "Canada" shall mean the provinces of Canada, its territories, its
possessions and all areas subject to its jurisdiction.
Certain of the Selling Stockholders have granted the U.S. Underwriters and
the International Managers options exercisable for 30 days after the date of
this Prospectus to purchase up to 840,000 and 210,000 additional shares of Class
A Common Stock, respectively, to cover over-allotments, if any, at the public
offering price, less the underwriting discount. To the extent that the U.S.
Underwriters and International Managers exercise such options, each of the U.S.
Underwriters and International Managers will have a firm commitment, subject to
certain conditions, to purchase approximately the same percentage of the option
shares that the number of shares to be purchased initially by that Underwriter
is of the number of shares of Common Stock initially purchased by the U.S.
Underwriters and International Managers.
The U.S. Representatives have advised the Company and the Selling
Stockholders that the U.S. Underwriters propose to offer the shares of Class A
Common Stock to the public initially at the public offering price set forth on
the cover page of this Prospectus, and to certain dealers at such price less a
concession not in excess of $ per share. The U.S. Underwriters may allow,
and such dealers may
103
reallow, a discount not in excess of $ per share on sales to certain other
dealers. After the public offering of the Class A Common Stock, the public
offering price, concession and discount may be changed.
The Company and the Selling Stockholders have agreed to indemnify the U.S.
Underwriters and the International Managers against certain liabilities which
may be incurred in connection with the offering of the Class A Common Stock and
the exercise of the over-allotment options, including liabilities under the 1933
Act and other applicable securities laws.
Without the consent of Merrill Lynch, the Company's executive officers and
directors and the Selling Stockholders have agreed that they will not, for a
period of 365 days following the date of this Prospectus, directly or
indirectly, offer to sell, grant any option for the sale of, or otherwise
dispose of, any shares of Common Stock or any securities convertible into or
exchangeable or exercisable for any such shares. The Company has agreed to a
similar restriction for a period of 90 days. The foregoing agreements are
subject to certain exceptions. See "Shares Eligible for Future Sale."
Until the distribution of the Common Stock is completed, rules of the
Securities and Exchange Commission may limit the ability of the Underwriters and
certain selling group members to bid for and purchase the Common Stock. As an
exception to these rules, the Representatives are permitted to engage in certain
transactions that stabilize the price of the Class A Common Stock. Such
transactions consist of bids or purchases for the purpose of pegging, fixing or
maintaining the price of the Class A Common Stock.
If the Underwriters create a short position in the Common Stock in
connection with the Offerings, i.e., if they sell more shares of Class A Common
Stock than are set forth on the cover page of this Prospectus, the
Representatives may reduce that short position by purchasing Class A Common
Stock in the open market. The Representatives may also elect to reduce any short
position by exercising all or part of the over-allotment options described
above.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the Class A Common Stock to be
higher than it might be in the absence of such purchases.
Neither the Company, the Selling Stockholders nor any of the Underwriters
makes any representation or prediction as to the direction or magnitude of any
effect that the transactions described above may have on the price of the Class
A Common Stock. In addition, neither the Company, the Selling Stockholders nor
any of the Underwriters makes any representation that the Representatives will
engage in such transactions or that such transactions, once commenced, will not
be discontinued without notice.
The U.S. Representatives have informed the Company that the U.S.
Underwriters do not intend to confirm sales of Class A Common Stock offered
hereby to any accounts over which they exercise discretionary authority.
104
LEGAL MATTERS
The validity of the issuance of the shares of Class A Common Stock offered
hereby will be passed upon for the Company and the Selling Stockholders by
LeBoeuf, Lamb, Greene & MacRae, L.L.P., a limited liability partnership
including professional corporations, Salt Lake City, Utah. Certain legal matters
will be passed upon for the U.S. Underwriters and the International Managers by
Shearman & Sterling, San Francisco, California.
EXPERTS
The consolidated financial statements of Nu Skin Asia Pacific, Inc. at
December 31, 1995 and 1996 and for the year ended September 30, 1994, the three
months ended December 31, 1994 and the years ended December 31, 1995 and 1996
included in this Prospectus have been so included in reliance on the report of
Price Waterhouse LLP, independent accountants, given on the authority of said
firm as experts in auditing and accounting.
ADDITIONAL INFORMATION
The Company has filed a Registration Statement on Form S-1, of which this
Prospectus is a part, with the Securities and Exchange Commission (the
"Commission") under the 1933 Act with respect to the shares of Class A Common
Stock offered hereby. This Prospectus does not contain all the information set
forth in the Registration Statement and the exhibits and schedules thereto. For
further information with respect to the Company and the Class A Common Stock
offered hereby, reference is made to the Registration Statement, including the
financial schedules and exhibits filed therewith. Statements made in this
Prospectus as to the contents of any contract, agreement or other documents are
not necessarily complete, and, in each instance, reference is made to the copy
of such document filed as an exhibit to the Registration Statement or otherwise
with the Commission. Each such statement shall be deemed qualified in its
entirety by such reference.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports and other information with the Commission. The
Registration Statement and the exhibits thereto, as well as any such reports and
other information to be filed by the Company with the Commission, may be
inspected and copied at the public reference facilities of the Commission, 450
Fifth Street, N.W., Washington D.C. 20549, and at the Commission's offices at 7
World Trade Center, Suite 1300, New York, New York 10048 and 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661-2311. Copies of such material can be
obtained from the public reference section of the Commission at 450 Fifth
Street, N.W., Washington D.C. 20549 at prescribed rates. The Commission also
maintains a site on the World Wide Web, the address of which is
http:\\www.sec.gov that contains reports, proxy and information statements and
other information regarding issuers, such as the Company, that file
electronically with the Commission. Such reports and other information may also
be inspected at the offices of the New York Stock Exchange, 20 Broad Street, New
York, New York 10005.
105
NU SKIN ASIA PACIFIC, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
---------
CONSOLIDATED FINANCIAL STATEMENTS:
Report of Independent Accountants........................................................................ F-2
Consolidated Balance Sheets at December 31, 1995 and 1996, and at March 31, 1997 (unaudited)............. F-3
Consolidated Statements of Income for the year ended September 30, 1994, the three months ended December
31, 1994, the years ended December 31, 1995 and 1996, and the three months ended March 31, 1996
(unaudited) and 1997 (unaudited)....................................................................... F-4
Consolidated Statements of Stockholders' Equity for the year ended September 30, 1994, the three months
ended December 31, 1994, the years ended December 31, 1995 and 1996, and the three months ended March
31, 1997 (unaudited)................................................................................... F-5
Consolidated Statements of Cash Flows for the year ended September 30, 1994, the three months ended
December 31, 1994, the years ended December 31, 1995 and 1996, and the three months ended March 31,
1996 (unaudited) and 1997 (unaudited).................................................................. F-6
Notes to Consolidated Financial Statements............................................................... F-7
UNAUDITED PRO FORMA DATA:
Unaudited Pro Forma Consolidated Statement of Income for the Year Ended December 31, 1995................ F-19
Unaudited Pro Forma Consolidated Statement of Income for the Year Ended December 31, 1996................ F-20
Unaudited Pro Forma Consolidated Statement of Income for the Three Months Ended March 31, 1996........... F-21
Notes to Unaudited Pro Forma Consolidated Statements of Income........................................... F-22
All schedules are omitted because they are not applicable or the required
information is shown in the consolidated financial statements or notes thereto.
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Nu Skin Asia Pacific, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, of stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of Nu Skin Asia
Pacific, Inc. and its subsidiaries at December 31, 1995 and 1996, and the
results of their operations and their cash flows for the year ended September
30, 1994, the three months ended December 31, 1994, and the years ended December
31, 1995 and 1996, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Salt Lake City, Utah
February 19, 1997
F-2
NU SKIN ASIA PACIFIC, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 31,
--------------------
1995 1996
--------- --------- MARCH 31, PRO FORMA
1997 EQUITY AMOUNTS
----------- (NOTE 2)
MARCH 31,
(UNAUDITED) 1997
-------------------
(UNAUDITED)
ASSETS
Current assets
Cash and cash equivalents................................... $ 63,213 $ 207,106 $ 196,798
Accounts receivable......................................... 3,242 8,937 11,600
Related parties receivable.................................. 1,793 7,974 7,669
Inventories, net............................................ 32,662 44,860 54,749
Prepaid expenses and other.................................. 3,410 11,281 19,200
--------- --------- -----------
104,320 280,158 290,016
Property and equipment, net................................... 6,904 8,884 8,725
Other assets, net............................................. 7,004 42,673 43,337
--------- --------- -----------
Total assets............................................ $ 118,228 $ 331,715 $ 342,078
--------- --------- -----------
--------- --------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable............................................ $ 4,395 $ 6,592 $ 7,211
Accrued expenses............................................ 23,313 79,518 53,347
Related parties payable..................................... 28,749 46,326 70,035
Notes payable to stockholders............................... -- 71,487 71,487
Note payable to NSI, current portion........................ -- 10,000 10,000
--------- --------- -----------
56,457 213,923 212,080
--------- --------- -----------
Note payable to NSI, less current portion..................... -- 10,000 --
--------- --------- -----------
Commitments and contingencies (Notes 8 and 12)
Stockholders' equity
Capital stock............................................... 4,550 -- --
Preferred stock--25,000,000 shares authorized, $.001 par
value, no shares issued and outstanding................... -- -- --
Class A common stock--500,000,000 shares authorized, $.001
par value, 11,723,011 shares issued and outstanding....... -- 12 12 $ 19
Class B common stock--100,000,000 shares authorized, $.001
par value, 71,696,675 shares issued and outstanding....... -- 72 72 65
Additional paid-in capital.................................. -- 137,876 137,876
Cumulative foreign currency translation adjustment.......... (2,940) (5,963) (9,023)
Retained earnings........................................... 60,161 11,493 31,981
Deferred compensation....................................... -- (22,559) (17,781)
Note receivable from NSI.................................... -- (13,139) (13,139)
--------- --------- -----------
61,771 107,792 129,998
--------- --------- -----------
Total liabilities and stockholders' equity.............. $ 118,228 $ 331,715 $ 342,078
--------- --------- -----------
--------- --------- -----------
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
NU SKIN ASIA PACIFIC, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS YEAR ENDED DECEMBER THREE MONTHS ENDED
YEAR ENDED ENDED 31, MARCH 31,
SEPTEMBER 30, DECEMBER 31, ---------------------- ----------------------
1994 1994 1995 1996 1996 1997
------------- ------------ ---------- ---------- ---------- ----------
(UNAUDITED)
Revenue...................................... $ 254,637 $ 73,562 $ 358,609 $ 678,596 $ 124,185 $ 210,994
Cost of sales................................ 86,872 19,607 96,615 193,158 34,815 60,741
------------- ------------ ---------- ---------- ---------- ----------
Gross profit................................. 167,765 53,955 261,994 485,438 89,370 150,253
------------- ------------ ---------- ---------- ---------- ----------
Operating expenses
Distributor incentives..................... 95,737 27,950 135,722 249,613 46,181 80,543
Selling, general and administrative........ 44,566 13,545 67,475 105,477 20,027 34,483
Distributor stock expense.................. -- -- -- 1,990 -- 4,477
------------- ------------ ---------- ---------- ---------- ----------
Total operating expenses..................... 140,303 41,495 203,197 357,080 66,208 119,503
------------- ------------ ---------- ---------- ---------- ----------
Operating income............................. 27,462 12,460 58,797 128,358 23,162 30,750
Other income (expense), net.................. 443 (813) 511 2,833 274 1,770
------------- ------------ ---------- ---------- ---------- ----------
Income before provision for income taxes..... 27,905 11,647 59,308 131,191 23,436 32,520
Provision for income taxes
(Note 10).................................. 10,226 2,730 19,097 49,494 8,686 12,032
------------- ------------ ---------- ---------- ---------- ----------
Net income................................... $ 17,679 $ 8,917 $ 40,211 $ 81,697 $ 14,750 $ 20,488
------------- ------------ ---------- ---------- ---------- ----------
------------- ------------ ---------- ---------- ---------- ----------
Pro forma net income per share
(Note 2)................................... $ .50 $ 1.01 $ .18 $ .24
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Pro forma weighted average common shares
outstanding................................ 80,518 81,060 80,518 85,416
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Unaudited pro forma data:
Income before pro forma provision for
income taxes............................. $ 27,905 $ 11,647 $ 59,308 $ 131,191 $ 23,436
Pro forma provision for income taxes
(Note 10)................................ 10,391 4,041 22,751 45,945 8,207
------------- ------------ ---------- ---------- ----------
Income after pro forma provision for income
taxes.................................... $ 17,514 $ 7,606 $ 36,557 $ 85,246 $ 15,229
------------- ------------ ---------- ---------- ----------
------------- ------------ ---------- ---------- ----------
Pro forma net income per share
(Note 2)................................. $ .45 $ 1.05 $ .19
---------- ---------- ----------
---------- ---------- ----------
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
NU SKIN ASIA PACIFIC, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
CUMULATIVE
FOREIGN
ADDITIONAL CURRENCY
CAPITAL CLASS A CLASS B PAID-IN TRANSLATION RETAINED DEFERRED
STOCK COMMON STOCK COMMON STOCK CAPITAL ADJUSTMENT EARNINGS COMPENSATION
----------- ------------- ------------- ----------- ----------- ----------- -------------
Balance at October 1, 1993... $ 1,300 $ 102 $ 5,524
Net change in cumulative
foreign currency
translation adjustment..... -- 329 --
Net income................... -- -- 17,679
----------- ----------- -----------
Balance at September 30,
1994....................... 1,300 431 23,203
Net change in cumulative
foreign currency
translation adjustment..... -- 10 --
Net income................... -- -- 8,917
----------- ----------- -----------
Balance at December 31,
1994....................... 1,300 441 32,120
Contributed capital.......... 3,250 -- --
Dividends.................... -- -- (12,170)
Net change in cumulative
foreign currency
translation adjustment..... -- (3,381) --
Net income................... -- -- 40,211
----------- ----------- -----------
Balance at December 31,
1995....................... 4,550 (2,940) 60,161
Reorganization and
termination of S
corporation status (Note
1)......................... (4,550) $ 80 $ 1,209 -- 3,261
Net proceeds from the Initial
Underwritten Offerings and
conversion of shares by
stockholders (Note 1)...... -- $ 12 (8) 98,829 -- --
Dividends.................... -- -- -- -- -- (47,139)
Issuance of notes payable to
stockholders (Note 3)...... -- -- -- -- -- (86,487)
Net change in cumulative
foreign currency
translation adjustment..... -- -- -- -- (3,023) --
Issuance of distributor stock
options (Note 9)........... -- -- -- 33,039 -- -- $ (17,910)
Issuance of employee stock
awards (Note 9)............ -- -- -- 4,799 -- -- (4,649)
Net income................... -- -- -- -- -- 81,697 --
----------- --- --- ----------- ----------- ----------- -------------
Balance at December 31,
1996....................... -- 12 72 137,876 (5,963) 11,493 (22,559)
Net change in cumulative
foreign currency
translation adjustment
(unaudited)................ -- -- -- -- (3,060) -- --
Amortization of deferred
compensation (unaudited)... -- -- -- -- -- -- 4,778
Net income (unaudited)....... -- -- -- -- -- 20,488 --
----------- --- --- ----------- ----------- ----------- -------------
Balance at March 31, 1997
(unaudited)................ $ -- $ 12 $ 72 $ 137,876 $ (9,023) $ 31,981 $ (17,781)
----------- --- --- ----------- ----------- ----------- -------------
----------- --- --- ----------- ----------- ----------- -------------
NOTE TOTAL
RECEIVABLE STOCKHOLDERS'
FROM NSI EQUITY
----------- -------------
Balance at October 1, 1993... $ 6,926
Net change in cumulative
foreign currency
translation adjustment..... 329
Net income................... 17,679
-------------
Balance at September 30,
1994....................... 24,934
Net change in cumulative
foreign currency
translation adjustment..... 10
Net income................... 8,917
-------------
Balance at December 31,
1994....................... 33,861
Contributed capital.......... 3,250
Dividends.................... (12,170)
Net change in cumulative
foreign currency
translation adjustment..... (3,381)
Net income................... 40,211
-------------
Balance at December 31,
1995....................... 61,771
Reorganization and
termination of S
corporation status (Note
1)......................... --
Net proceeds from the Initial
Underwritten Offerings and
conversion of shares by
stockholders (Note 1)...... 98,833
Dividends.................... (47,139)
Issuance of notes payable to
stockholders (Note 3)...... (86,487)
Net change in cumulative
foreign currency
translation adjustment..... (3,023)
Issuance of distributor stock
options (Note 9)........... $ (13,139) 1,990
Issuance of employee stock
awards (Note 9)............ -- 150
Net income................... -- 81,697
----------- -------------
Balance at December 31,
1996....................... (13,139) 107,792
Net change in cumulative
foreign currency
translation adjustment
(unaudited)................ -- (3,060)
Amortization of deferred
compensation (unaudited)... -- 4,778
Net income (unaudited)....... -- 20,488
----------- -------------
Balance at March 31, 1997
(unaudited)................ $ (13,139) $ 129,998
----------- -------------
----------- -------------
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
NU SKIN ASIA PACIFIC, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
THREE MONTHS YEAR ENDED DECEMBER THREE MONTHS ENDED
YEAR ENDED ENDED 31, MARCH 31,
SEPTEMBER 30, DECEMBER 31, -------------------- --------------------
1994 1994 1995 1996 1996 1997
------------- ------------- --------- --------- --------- ---------
(UNAUDITED)
Cash flows from operating activities:
Net income................................. $ 17,679 $ 8,917 $ 40,211 $ 81,697 $ 14,750 $ 20,488
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities:
Depreciation and amortization............ 1,401 358 2,012 3,274 334 1,099
Loss on disposal of property and
equipment.............................. 90 1,093 12 381 -- --
Amortization of deferred compensation.... -- -- -- 2,140 -- 4,778
Changes in operating assets and
liabilities:
Accounts receivable.................... (1,006) 165 (2,174) (5,695) (1,027) (2,663)
Related parties receivable............. (25,288) 11,108 16,077 (6,181) 1,331 305
Inventories, net....................... 158 (939) (17,106) (12,198) (2,163) (9,889)
Prepaid expenses and other............. (890) (836) 51 (7,871) 958 (7,919)
Other assets........................... 277 (20) (2,994) (10,361) 101 (1,040)
Accounts payable....................... 884 279 765 2,197 (1,769) 619
Accrued expenses....................... 13,106 (4,384) 9,936 56,205 8,579 (26,171)
Related parties payable................ 3,475 (16,442) 18,193 17,577 (6,057) 23,709
------------- ------------- --------- --------- --------- ---------
Net cash provided by (used in) operating
activities............................. 9,886 (701) 64,983 121,165 15,037 3,316
------------- ------------- --------- --------- --------- ---------
Cash flows from investing activities:
Purchase of property and equipment......... (1,766) (417) (5,422) (5,672) (1,038) (1,122)
Proceeds from disposal of property and
equipment................................ 25 14 48 41 -- --
Payment to NSI for distribution rights..... -- -- -- (5,000) -- (10,000)
Payments for lease deposits................ (614) (677) (701) (562) -- (58)
Receipt of refundable lease deposits....... 153 -- 22 98 -- 122
------------- ------------- --------- --------- --------- ---------
Net cash used in investing activities.... (2,202) (1,080) (6,053) (11,095) (1,038) (11,058)
------------- ------------- --------- --------- --------- ---------
Cash flows from financing activities:
Payments on related party loans............ (4,350) -- -- -- -- --
Proceeds from capital contributions........ -- -- 3,250 -- -- --
Net proceeds from the Initial Underwritten
Offerings (Note 1)....................... -- -- -- 98,833 -- --
Dividends paid............................. -- -- (12,170) (47,139) (9,500) --
Payment to stockholders for S distribution
notes (Note 3)........................... -- -- -- (15,000) -- --
------------- ------------- --------- --------- --------- ---------
Net cash provided by (used in) financing
activities............................. (4,350) -- (8,920) 36,694 (9,500) --
------------- ------------- --------- --------- --------- ---------
Effect of exchange rate changes on cash.... 152 (8) (3,085) (2,871) 144 (2,566)
------------- ------------- --------- --------- --------- ---------
Net increase (decrease) in cash and cash
equivalents.............................. 3,486 (1,789) 46,925 143,893 4,643 (10,308)
Cash and cash equivalents, beginning of
period................................... 14,591 18,077 16,288 63,213 63,213 207,106
------------- ------------- --------- --------- --------- ---------
Cash and cash equivalents, end of period... $ 18,077 $ 16,288 $ 63,213 $ 207,106 $ 67,856 $ 196,798
------------- ------------- --------- --------- --------- ---------
------------- ------------- --------- --------- --------- ---------
Supplemental cash flow information:
Interest paid.............................. $ 81 $ 6 $ 119 $ 84 $ 23 $ --
------------- ------------- --------- --------- --------- ---------
------------- ------------- --------- --------- --------- ---------
- ------------------------------
Supplemental schedule of non-cash investing and financing activities in 1996:
$20.0 million note payable to NSI issued as partial consideration for the
$25.0 million purchase of distribution rights from NSI.
$86.5 million of interest bearing S distribution notes issued in 1996, of
which $71.5 million remains unpaid at December 31, 1996 (Note 3).
$1.2 million of additional paid-in capital contributed by the existing
stockholders of their interest in the Subsidiaries in exchange for all
shares of the Class B common stock in connection with the Company's
termination of its S corporation status (Note 1).
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
NU SKIN ASIA PACIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY
Nu Skin Asia Pacific, Inc. (the "Company") is a network marketing company
involved in the distribution and sale of premium quality, innovative personal
care and nutritional products. The Company is the exclusive distribution vehicle
for Nu Skin International, Inc. ("NSI") in the countries of Japan, Taiwan, Hong
Kong (including Macau), South Korea and Thailand, where the Company currently
has operations (collectively referred to as the "Subsidiaries"), and in
Indonesia, Malaysia, the PRC, the Philippines, Singapore and Vietnam, where
operations have not yet commenced. Additionally, the Company sells products to
NSI affiliates in Australia and New Zealand. NSI was founded in 1984 and is one
of the largest network marketing companies in the world. NSI owns the Nu Skin
trademark and provides the products and marketing materials to each of its
affiliates. Nu Skin International Management Group, Inc. ("NSIMG"), an NSI
affiliate, has provided, and will continue to provide, a high level of support
services to the Company, including product development, marketing, legal,
accounting and other managerial services.
The Company was incorporated on September 4, 1996. It was formed as a
holding company and acquired the Subsidiaries through a reorganization which
occurred on November 20, 1996. Prior to the reorganization, each of the
Subsidiaries elected to be treated as an S corporation. In connection with the
reorganization, the Subsidiaries' S corporation status was terminated on
November 19, 1996, and the Company declared a distribution to the stockholders
that included all of the Subsidiaries' previously earned and undistributed
taxable S corporation earnings totaling $86.5 million.
Prior to the reorganization, the Company, NSI, NSIMG and other NSI
affiliates operated under the control of a group of common stockholders.
Inasmuch as the Subsidiaries that were acquired were under common control, the
Company's consolidated financial statements include the Subsidiaries' historical
balance sheets and related statements of income, of stockholders' equity and of
cash flows for all periods presented.
On November 27, 1996 the Company completed its initial public offerings of
4,750,000 shares of Class A common stock and received net proceeds of $98.8
million (the "Initial Underwritten Offerings").
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.
CHANGE IN FISCAL YEAR
In October 1994, the Company's Board of Directors approved a change in the
Company's fiscal year end from September 30 to December 31. The change became
effective as of October 1, 1994.
USE OF ESTIMATES
The preparation of these financial statements in conformity with generally
accepted accounting principles required management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Significant estimates include reserves for product returns,
obsolete inventory and taxes. Actual results could differ from these estimates.
F-7
NU SKIN ASIA PACIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH AND CASH EQUIVALENTS
Cash equivalents are short-term, highly liquid instruments with original
maturities of 90 days or less.
INVENTORIES
Inventories consist of merchandise purchased for resale and are stated at
the lower of cost using the first-in, first-out method or market.
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
Shorter of estimated useful life or lease
Leasehold improvements term
Vehicles 3 - 5 years
Expenditures for maintenance and repairs are charged to expense as incurred.
OTHER ASSETS
Other assets consist primarily of deposits for noncancelable operating
leases and distribution rights purchased from NSI. Distribution rights are
amortized on the straight-line basis over the estimated useful life of the
asset. The Company assesses the recoverability of long-lived assets by
determining whether the unamortized balance can be recovered through
undiscounted future operating cash flows attributable to the assets.
PRO FORMA EQUITY AMOUNTS
The pro forma equity amounts on the consolidated balance sheet at March 31,
1997 reflect the conversion of 7.0 million shares of Class B common stock to
Class A common stock prior to the planned public offering of these shares by
certain stockholders.
REVENUE RECOGNITION
Revenue is recognized when products are shipped and title passes to
independent distributors who are the Company's customers. A reserve for product
returns is accrued based on historical experience. The Company generally
requires cash 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.
INCOME TAXES
Effective October 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109 ("SFAS 109"), ACCOUNTING FOR INCOME TAXES. Under
SFAS 109, the liability method is used in accounting for income taxes. Under
this method, deferred tax assets and liabilities are determined based
F-8
NU SKIN ASIA PACIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
on the differences between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse.
Prior to the Company's reorganization described in Note 1, the Subsidiaries
elected to be taxed as S corporations whereby, for U.S. federal tax purposes,
the income tax effects of the Subsidiaries' activities accrued directly to their
stockholders. Therefore, adoption of SFAS 109 required no establishment of
deferred income taxes since no material differences existed between financial
reporting and tax bases of assets and liabilities for foreign tax purposes.
Concurrent with the Company's reorganization, the Company terminated the S
corporation elections of its Subsidiaries. As a result, U.S. deferred income
taxes under the provisions of SFAS 109 were established.
PRO FORMA NET INCOME PER SHARE
Pro forma net income per share is computed based on the weighted average
number of common shares and common share equivalents outstanding during the
periods presented assuming that the Company's reorganization and the resultant
issuance of 80.3 million shares of Class B common stock occurred as of January
1, 1995.
FOREIGN CURRENCY TRANSLATION
All business operations of the Company occur outside of the United States.
Each entity's local currency is considered its functional currency. Since a
substantial portion of the Company's inventories are purchased with U.S. dollars
from the United States and since the Company is incorporated in the United
States, all assets and liabilities are translated into U.S. dollars at exchange
rates existing at the balance sheet dates, revenues 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 in the consolidated financial statements.
INDUSTRY SEGMENT AND GEOGRAPHIC AREA
The Company operates in a single industry, which is the direct selling of
skin care, hair care and nutritional products, and in a single geographic area,
which is the Asia Pacific Region.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of financial instruments including cash and cash equivalents,
accounts receivable, related parties receivable, accounts payable, accrued
expenses, related parties payable and notes payable approximate book values.
STOCK-BASED COMPENSATION
The Company has adopted Statement of Financial Accounting Standards No. 123
("SFAS 123"), ACCOUNTING FOR STOCK-BASED COMPENSATION. The Company measures
compensation expense for its stock-based employee compensation plans using the
intrinsic value method prescribed by Accounting Principles Board Opinion No. 25
("APB 25"), ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and will, when material,
provide pro forma disclosures of net income and net income per share as if the
fair value-based method prescribed by SFAS 123 had been applied in measuring
compensation expense.
F-9
NU SKIN ASIA PACIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NEW ACCOUNTING STANDARDS
The Company is required to adopt Statement of Financial Accounting Standards
No. 128 ("SFAS 128"), EARNINGS PER SHARE, during the fourth quarter of 1997.
SFAS 128 specifies the computation, presentation and disclosure requirements for
earnings per share. The Company does not believe that the adoption of SFAS 128
will have a material effect on the Company's method of calculation or display of
earnings per share amounts.
INTERIM RESULTS (UNAUDITED)
The accompanying consolidated balance sheet at March 31, 1997, the related
consolidated statements of income and of cash flows for the three months ended
March 31, 1996 and 1997, and the related statement of stockholders' equity for
the three months ended March 31, 1997 are unaudited. In the opinion of
management, these statements have been prepared on the same basis as the audited
financial statements and include all normal recurring adjustments necessary for
the fair statement of the results of interim periods. The data disclosed in
these notes to the consolidated financial statements at such date or for such
periods are also unaudited.
3. RELATED PARTY TRANSACTIONS
SCOPE OF RELATED PARTY ACTIVITY
The Company has extensive and pervasive transactions with affiliated
entities that are under common control. These transactions are as follows: (1)
Through its Hong Kong entity, the Company purchases a substantial portion of its
inventories from affiliated entities (primarily NSI). (2) In addition to selling
products to consumers in its geographic territories, the Company, through its
Hong Kong entity, sells products and marketing materials to affiliated entities
in geographic areas outside those held by the Company (primarily Australia and
New Zealand). (3) The Company pays trademark royalty fees to NSI on products
bearing NSI trademarks and marketed in the Company's geographic areas that are
not purchased from NSI. (4) NSI enters into a distribution agreement with each
independent distributor. The Company pays license fees to NSI for the right to
use the lists of distributors within its geographical regions, and for the right
to use the NSI distribution system and other related intangibles. (5) The
Company participates in a global compensation plan established by the NSI
distribution agreement whereby distributors' commissions are determined by
aggregate worldwide purchases made by down-line distributors. Thus, commissions
on purchases from the Company earned by distributors located in geographic areas
outside those held by the Company are remitted to NSI, which then forwards these
commissions to the distributors. (6) The Company pays fees for management and
support services provided by NSIMG.
The purchase prices paid by Nu Skin Hong Kong for the purchase of product
and marketing materials from NSI are determined pursuant to the Regional
Distribution Agreement. The selling prices to the Subsidiaries of products and
marketing materials are determined pursuant to the Wholesale Distribution
Agreements between Nu Skin Hong Kong and the other Subsidiaries. Trademark
royalty fees and license fees are payable pursuant to the Trademark/Tradename
License Agreement between the Subsidiaries and NSI and the Licensing and Sales
Agreement between the Subsidiaries and NSI, respectively. The independent
distributor commission program is managed by NSI. Charges to the Company are
based on a worldwide commission fee of 42% which covers commissions paid to
distributors on a worldwide basis and the direct costs of administering the
global compensation plan. Management and support services fees are
F-10
NU SKIN ASIA PACIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. RELATED PARTY TRANSACTIONS (CONTINUED)
billed to the Company by NSIMG pursuant to the Management Services Agreement
between the Company, the Subsidiaries and NSIMG and consist of all direct
expenses incurred by NSIMG on behalf of the Company and indirect expenses of
NSIMG allocated to the Company based on its net sales.
Total commission fees (including those paid directly to distributors within
the Company's geographic territories) are recorded as distributor incentives in
the consolidated statements of income. Trademark royalty fees, license fees and
management fees are included in selling, general and administrative expenses in
the consolidated statements of income.
In November 1996, the Company purchased from NSI the distribution rights to
seven new markets in the region. These markets include Thailand, where
operations commenced in March 1997, and in Indonesia, Malaysia, the PRC, the
Philippines, Singapore and Vietnam, where operations have not yet commenced.
These rights were purchased for $25.0 million of which $5.0 million was paid
from proceeds from the Initial Underwritten Offerings. At December 31, 1996, the
Company had a $10.0 million short term obligation, due January 15, 1997, and a
$10.0 million long term obligation, due January 15, 1998, related to the
purchase of these rights. At March 31, 1997, the Company had a $10.0 million
(unaudited) short term obligation related to the purchase of these rights.
Interest accrues at a rate of 6.0% per annum on amounts due under this
obligation.
NOTES PAYABLE TO STOCKHOLDERS
In connection with the reorganization described in Note 1, the aggregate
undistributed taxable S corporation earnings of the Subsidiaries were $86.5
million. These earnings were distributed in the form of promissory notes which
are expected to be paid during 1997 and which bear interest at 6.0% per annum.
From proceeds of the Initial Underwritten Offerings, $15.0 million was used to
pay a portion of the notes, leaving an unpaid notes payable to stockholders
balance of $71.5 million at December 31, 1996 and March 31, 1997 (unaudited).
Interest expense of $536,000 and $1,064,000 (unaudited) was recorded for the
year ended December 31, 1996 and for the three months ended March 31, 1997,
respectively, and is included in accrued expenses. See Note 13.
F-11
NU SKIN ASIA PACIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. RELATED PARTY TRANSACTIONS (CONTINUED)
RELATED PARTY TRANSACTIONS
The following summarizes the Company's transactions with related parties (in
thousands):
THREE MONTHS
YEAR ENDED ENDED YEAR ENDED DECEMBER 31,
SEPTEMBER 30, DECEMBER 31, -----------------------
PRODUCT PURCHASES 1994 1994 1995 1996
- ----------------------------------------- ------------- ------------- ---------- ----------- THREE MONTHS
ENDED MARCH
31, 1997
-------------
(UNAUDITED)
Beginning inventories.................... $ 14,775 $ 14,617 $ 15,556 $ 32,662 $ 44,860
Inventory purchases from affiliates...... 61,409 11,608 69,821 157,413 57,890
Other inventory purchases and value added
locally................................ 25,305 8,938 43,900 47,943 12,740
------------- ------------- ---------- ----------- -------------
Total products available for sale........ 101,489 35,163 129,277 238,018 115,490
Less: Cost of sales...................... (86,872) (19,607) (96,615) (193,158) (60,741)
------------- ------------- ---------- ----------- -------------
Ending inventories....................... $ 14,617 $ 15,556 $ 32,662 $ 44,860 $ 54,749
------------- ------------- ---------- ----------- -------------
------------- ------------- ---------- ----------- -------------
THREE MONTHS YEAR ENDED
YEAR ENDED ENDED DECEMBER 31,
SEPTEMBER 30, DECEMBER 31, ------------------------
RELATED PARTIES PAYABLE TRANSACTIONS 1994 1994 1995 1996
- ----------------------------------------- ------------- ------------- ----------- ----------- THREE MONTHS
ENDED MARCH
31, 1997
-------------
(UNAUDITED)
Beginning related parties payable........ $ 27,873 $ 26,998 $ 10,556 $ 28,749 $ 46,326
Inventory purchases from affiliates...... 61,409 11,608 69,821 157,413 57,890
Distributor incentives................... 95,737 27,950 135,722 249,613 80,543
Less: Distributor incentives paid to
distributors within the Company's
markets................................ (68,880) (19,837) (105,642) (197,614) (65,240)
License fees............................. 9,252 2,750 13,158 25,221 8,038
Trademark royalty fees................... -- 19 2,694 2,882 800
Management fees.......................... 1,449 499 2,066 4,189 1,800
Proceeds from (payments for) related
party loans............................ (4,350) -- -- -- --
Less: Payments to related parties........ (95,492) (39,431) (99,626) (224,127) (60,122)
------------- ------------- ----------- ----------- -------------
Ending related parties payable........... $ 26,998 $ 10,556 $ 28,749 $ 46,326 $ 70,035
------------- ------------- ----------- ----------- -------------
------------- ------------- ----------- ----------- -------------
RELATED PARTIES RECEIVABLE AND PAYABLE BALANCES
The Company has receivable and payable balances with related parties in
Australia and New Zealand, and with NSI and NSIMG. Related parties balances
outstanding greater than 60 days bear interest at the prime rate plus 2%. Since
no significant balances have been outstanding greater than 60 days, no related
parties interest income or interest expense has been recorded in the
consolidated financial statements. Sales to related parties were $2,288,000 for
the year ended September 30, 1994, $855,000 for the three months ended December
31, 1994, $4,608,000 and $4,614,000 for the years ended December 31, 1995 and
1996, respectively, and $1,100,000 (unaudited) for the three months ended March
31, 1997.
F-12
NU SKIN ASIA PACIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. RELATED PARTY TRANSACTIONS (CONTINUED)
CERTAIN RELATIONSHIPS WITH STOCKHOLDER DISTRIBUTORS
Two major stockholders of the Company have been NSI distributors since 1984.
These stockholders are partners in an entity which receives substantial
commissions from NSI, including commissions relating to sales within the
countries in which the Company operates. By agreement, NSI pays commissions to
this partnership at the highest level of distributor compensation to allow the
stockholders to use their expertise and reputations in network marketing to
further develop NSI's distributor force, rather than focusing solely on their
own distributor organizations. The commissions paid to this partnership relating
to sales within the countries in which the Company operates were $1,100,000 for
the year ended September 30, 1994, $270,000 for the three months ended December
31, 1994, $1,100,000 and $1,200,000 for the years ended December 31, 1995 and
1996, respectively, and $290,000 (unaudited) for the three months ended March
31, 1997.
4. PROPERTY AND EQUIPMENT
Property and equipment are comprised of the following (in thousands):
DECEMBER 31,
--------------------
1995 1996
--------- --------- MARCH 31,
1997
-----------
(UNAUDITED)
Furniture and fixtures..................................... $ 3,593 $ 3,175 $ 5,226
Computers and equipment.................................... 5,060 7,480 7,484
Leasehold improvements..................................... 2,221 4,737 3,165
Vehicles................................................... 152 200 204
--------- --------- -----------
11,026 15,592 16,079
Less: accumulated depreciation............................. (4,122) (6,708) (7,354)
--------- --------- -----------
$ 6,904 $ 8,884 $ 8,725
--------- --------- -----------
--------- --------- -----------
Depreciation of property and equipment totaled $1,401,000 for the year ended
September 30, 1994, $358,000 for the three months ended December 31, 1994,
$2,012,000 and $3,118,000 for the years ended December 31, 1995 and 1996,
respectively, and $787,000 (unaudited) for the three months ended March 31,
1997.
5. OTHER ASSETS
Other assets consist of the following (in thousands):
DECEMBER 31,
--------------------
1995 1996
--------- --------- MARCH 31,
1997
-----------
(UNAUDITED)
Deposits for noncancelable operating leases................. $ 5,738 $ 9,962 $ 10,774
Distribution rights, net of accumulated amortization........ -- 24,844 24,532
Other....................................................... 1,266 7,867 8,031
--------- --------- -----------
$ 7,004 $ 42,673 $ 43,337
--------- --------- -----------
--------- --------- -----------
F-13
NU SKIN ASIA PACIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. OTHER ASSETS (CONTINUED)
The $25.0 million distribution rights asset is being amortized on a
straight-line basis over its estimated useful life of twenty years. Amortization
expense totaled $156,000 for the year ended December 31, 1996 and $312,000
(unaudited) for the three months ended March 31, 1997.
6. ACCRUED EXPENSES
Accrued expenses consist of the following (in thousands):
DECEMBER 31,
--------------------
1995 1996
--------- --------- MARCH 31,
1997
-----------
(UNAUDITED)
Income taxes payable....................................... $ 17,463 $ 54,233 $ 30,079
Other taxes payable........................................ 798 9,194 8,113
Other accruals............................................. 5,052 16,091 15,155
--------- --------- -----------
$ 23,313 $ 79,518 $ 53,347
--------- --------- -----------
--------- --------- -----------
7. LINE OF CREDIT
During 1995, the Company entered into an $8,000,000 revolving credit
agreement (bearing interest at an annual rate of 12%) with a financial
institution in South Korea. Advances were available under the agreement through
July 1, 1996. There were no outstanding balances under the credit facility at
December 31, 1995.
8. LEASE OBLIGATIONS
The Company leases office space and computer hardware under noncancelable
long-term operating leases. Most leases include renewal options of up to three
years. Minimum future operating lease obligations at December 31, 1996 are as
follows (in thousands):
YEAR ENDING DECEMBER 31,
- -----------------------------------------------------------------------------------
1997......................................................................... $ 4,131
1998......................................................................... 2,745
1999......................................................................... 1,965
2000......................................................................... 1,321
2001......................................................................... --
---------
Total minimum lease payments....................................................... $ 10,162
---------
---------
Rental expense for operating leases totaled $5,848,000 for the year ended
September 30, 1994, $1,639,000 for the three months ended December 31, 1994,
$9,470,000 and $8,260,000 for the years ended December 31, 1995 and 1996,
respectively, and $2,150,000 (unaudited) for the three months ended March 31,
1997.
9. STOCKHOLDERS' EQUITY
The Company's capital stock consists of preferred stock, Class A common
stock, and Class B common stock. The shares of Class A common stock and Class B
common stock are identical in all respects, except
F-14
NU SKIN ASIA PACIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. STOCKHOLDERS' EQUITY (CONTINUED)
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 Company's 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 Company's' 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.
STOCKHOLDER CONTROL
As of December 31, 1996, a group of common stockholders owned all of the
outstanding shares of Class B common stock, which represented 98.4% of the
combined voting rights of all outstanding common stock. Accordingly, these
stockholders, acting as a group, control the election of the entire Board of
Directors and decisions with respect to the Company's dividend policy, the
Company's access to capital, mergers or other business combinations involving
the Company, the acquisition or disposition of assets by the Company and any
change in control of the Company.
EQUITY INCENTIVE PLANS
Effective November 21, 1996, NSI and the Company implemented a one-time
distributor equity incentive program. This program provided for grants of
options to selected distributors for the purchase of 1,605,000 shares of the
Company's previously issued Class A common stock. The number of options each
distributor will ultimately receive will be based on their performance and
productivity through August 31, 1997. The options are exercisable at a price of
$5.75 per share and will vest on December 31, 1997. The related compensation
expense has been deferred in the Company's financial statements and is being
expensed to the statement of income as distributor stock expense ratably through
December 31, 1997.
The Company has recorded compensation expense based upon the best available
estimate of the number of shares that are expected to be issued to each
distributor at the measurement date, and will revise such expense, as necessary,
if subsequent information indicates that actual forfeitures are likely to differ
from initial estimates. The compensation expense will be adjusted quarterly over
the vesting period for subsequent changes in the expected or actual outcome. Any
options forfeited may be reallocated and result in an additional compensation
charge.
As a part of this program, the Company sold an option to NSI to purchase
shares underlying distributor options for consideration of a 10-year note,
bearing interest at 6.0% per annum, with an estimated principal balance of $13.1
million. It is anticipated that NSI will repay this note as distributors begin
to exercise their options in 1998.
Prior to the Initial Underwritten Offerings, the Company's stockholders
contributed to NSI and other Nu Skin entities (excluding the Company) 1,250,000
shares of the Company's Class A common stock held by them for issuance to
employees of NSI and other Nu Skin entities as a part of an employee equity
incentive plan. Equity incentives granted or awarded under this plan will vest
over four years. Compensation expense related to equity incentives granted to
employees of NSI and other Nu Skin entities who
F-15
NU SKIN ASIA PACIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. STOCKHOLDERS' EQUITY (CONTINUED)
perform services on behalf of the Company will be recognized by the Company
ratably over the vesting period.
In November and December 1996, the Company made stock bonus awards to
certain of its employees for an aggregate of 109,000 shares of Class A common
stock and in January 1997 the Company made additional stock bonus awards to
certain of its employees for an aggregate of 41,959 shares (unaudited) of Class
A common stock. The Company has recorded deferred compensation expense related
to these stock awards and is recognizing such expense ratably over the vesting
period.
Prior to the reorganization, NSI agreed to grant one of the Company's
executives an option to purchase 267,500 shares of the Company's Class A common
stock which became exercisable at the date of the reorganization. The exercise
price of this option was set at the estimated fair market value of this equity
interest on the date the option was granted. This executive exercised the
portion of this option underlying 16,675 shares during November 1996.
10. INCOME TAXES
Consolidated income before provision for income taxes consists of income
earned solely from international operations. The provision for current and
deferred taxes for the year ended December 31, 1996 consists of the following
(in thousands):
Current
Federal.......................................................... $ 331
State............................................................ --
Foreign.......................................................... 56,929
Deferred
Federal.......................................................... (1,929)
State............................................................ --
Foreign.......................................................... (2,398)
Change in U.S. tax status........................................ (3,439)
---------
Provision for income taxes..................................... $ 49,494
---------
---------
As a result of the Company's reorganization described in Note 1, the Company
will no longer be treated as an S corporation for U.S. Federal income tax
purposes. Accordingly, the provision for income taxes recorded in the statement
of income for the year ended December 31, 1996 consists of the following: (1)
the cumulative income tax effect from recognition of the deferred tax assets at
the date of S corporation termination; (2) the provision for income taxes for
the period November 20, 1996 through December 31, 1996 as a U.S. C corporation;
and (3) income taxes in foreign countries for the Subsidiaries during the year.
The provision for income taxes for the year ended September 30, 1994, for
the three months ended December 31, 1994 and for the year ended December 31,
1995 primarily represent income taxes in foreign countries as U.S. Federal
income taxes were levied at the stockholder level.
F-16
NU SKIN ASIA PACIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. INCOME TAXES (CONTINUED)
The principal components of deferred tax assets were as follows (in
thousands):
NOVEMBER 20, DECEMBER 31,
1996 1996
DECEMBER 31, ------------- ------------
1995
-------------
(PRO FORMA)
Deferred tax assets:
Inventory reserve............................... $ 414 $ 1,455 $ 1,971
Product return reserve.......................... 115 1,183 1,562
Depreciation.................................... 866 1,535 1,592
Foreign tax credit.............................. -- -- 1,234
Exchange gains and losses....................... 389 -- --
Uniform capitalization.......................... 1,696 713 763
Distributor stock options and employee stock
awards........................................ -- -- 749
Accrued expenses not deductible until paid...... 123 5,037 6,739
Minimum tax credit.............................. -- -- 330
Other........................................... 61 -- --
------ ------ ------------
Total deferred tax assets....................... $ 3,664 $ 9,923 $ 14,940
------ ------ ------------
Deferred tax liabilities:
Withholding tax................................. $ -- $ 3,944 $ 4,148
Net foreign deferred tax asset.................. -- 1,021 2,572
Exchange gains and losses....................... -- 443 399
Other........................................... -- 55 55
------ ------ ------------
Total deferred tax liabilities.................. -- 5,463 7,174
------ ------ ------------
Net deferred tax assets......................... $ 3,664 $ 4,460 $ 7,766
------ ------ ------------
------ ------ ------------
PRO FORMA PROVISION FOR INCOME TAXES
The consolidated statements of income include a pro forma presentation for
income taxes which would have been recorded if the Company had been taxed as a C
corporation for all periods presented.
A reconciliation of the Company's pro forma effective tax rate compared to
the statutory U.S. Federal tax rate is as follows:
YEAR ENDED DECEMBER
YEAR ENDED THREE MONTHS 31,
SEPTEMBER 30, ENDED DECEMBER --------------------
1994 31, 1994 1995 1996
--------------- --------------- --------- ---------
Income taxes at statutory rate.............. 35.00% 35.00% 35.00% 35.00%
Foreign tax credit limitation (benefit)..... 1.97 (0.42) 2.69 --
Non-deductible expenses..................... .27 .11 .67 .06
Other....................................... -- -- -- (.04)
----- ----- --------- ---------
37.24% 34.69% 38.36% 35.02%
----- ----- --------- ---------
----- ----- --------- ---------
F-17
NU SKIN ASIA PACIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. FINANCIAL INSTRUMENTS
The Company's Subsidiaries enter into significant transactions with each
other, NSI and third parties which may not be denominated in the respective
Subsidiaries' functional currencies. The Company reduces its exposure to
fluctuations in foreign exchange rates by creating offsetting positions through
the use of foreign currency exchange contracts. The Company currently does not
use such financial instruments for trading or speculative purposes. The Company
regularly monitors its foreign currency exposures to minimize the impact of
foreign exchange fluctuations on the Company's operating results.
At December 31, 1995, the Company held foreign currency forward contracts
with notional amounts totaling $1,000,000 to hedge foreign currency items. There
were no significant estimated unrealized gains or losses on these contracts.
These contracts all had maturities prior to December 31, 1996. The Company did
not hold any foreign currency forward contracts at December 31, 1996. At March
31, 1997, the Company held foreign currency forward contracts with notional
amounts totaling $14,500,000 (unaudited). There were no significant estimated
unrealized gains or losses on these contracts. These contracts all have
maturities prior to December 31, 1997.
12. COMMITMENTS AND CONTINGENCIES
The Company is subject to governmental regulations pertaining to product
formulation, labeling and packaging, product claims and advertising and to the
Company's direct selling system. The Company is also subject to the jurisdiction
of numerous foreign tax authorities. These tax authorities regulate and restrict
various corporate transactions, including intercompany transfers. The Company
believes that the tax authorities in Japan and South Korea are particularly
active in challenging the tax structures and intercompany transfers of foreign
corporations. Any assertions or determination that either the Company, NSI or
any of NSI's distributors is not in compliance with existing statutes, laws,
rules or regulations could potentially have a material adverse effect on the
Company's operations. In addition, in any country or jurisdiction, the adoption
of new statutes, laws, rules or regulations or changes in the interpretation of
existing statutes, laws, rules or regulations could have a material adverse
effect on the Company and its operations. Although management believes that the
Company is in compliance, in all material respects, with the statutes, laws,
rules and regulations of every jurisdiction in which it operates, no assurance
can be given that the Company's compliance with applicable statutes, laws, rules
and regulations will not be challenged by foreign authorities or that such
challenges will not have a material adverse effect on the Company's financial
position or results of operations or cash flows.
13. SUBSEQUENT EVENTS
On April 4, 1997, the Company paid the entire balance on the notes payable
to stockholders of $71.5 million together with the related accrued interest of
$1.6 million (unaudited). As described in Note 1, these notes originated in
connection with the reorganization in which the Subsidiaries' S corporation
status was terminated and the Company declared a distribution to the
stockholders that included all of the Subsidiaries' previously earned and
undistributed taxable S corporation earnings totaling $86.5 million.
F-18
NU SKIN ASIA PACIFIC, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
PRO FORMA
FOR THE
REORGANIZATION
AND THE
INITIAL
PRO FORMA UNDERWRITTEN
ACTUAL ADJUSTMENTS OFFERINGS
---------- ----------- --------------
Revenue........................................................................ $ 358,609 $ -- $ 358,609
Cost of sales.................................................................. 96,615 -- 96,615
---------- ----------- --------------
Gross profit................................................................... 261,994 261,994
---------- ----------- --------------
Operating expenses(d)
Distributor incentives....................................................... 135,722 -- 135,722
Selling, general and administrative.......................................... 67,475 6,958(a) 74,433
---------- ----------- --------------
Total operating expenses....................................................... 203,197 6,958 210,155
---------- ----------- --------------
Operating income............................................................... 58,797 (6,958) 51,839
Other income (expense), net.................................................... 511 (2,809 (b) (2,298 )
---------- ----------- --------------
Income before provision for income taxes....................................... 59,308 (9,767 ) 49,541
Provision for income taxes..................................................... 19,097 (92 (c) 19,005
---------- ----------- --------------
Net income..................................................................... $ 40,211 $ (9,675 ) $ 30,536
---------- ----------- --------------
---------- ----------- --------------
Net income per share........................................................... $ .50 $ .36
---------- --------------
---------- --------------
Weighted average common shares outstanding..................................... 80,518 85,377
---------- --------------
---------- --------------
The accompanying notes are an integral part of these unaudited
pro forma consolidated financial statements.
F-19
NU SKIN ASIA PACIFIC, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
PRO FORMA
FOR THE
REORGANIZATION
AND THE
INITIAL
PRO FORMA UNDERWRITTEN
ACTUAL ADJUSTMENTS OFFERINGS
---------- ----------- --------------
Revenue................................................................. $ 678,596 $ -- $ 678,596
Cost of sales........................................................... 193,158 -- 193,158
---------- ----------- --------------
Gross profit............................................................ 485,438 -- 485,438
---------- ----------- --------------
Operating expenses
Distributor incentives................................................ 249,613 -- 249,613
Selling, general and administrative................................... 105,477 6,325(a) 111,802
Distributor stock expense............................................. 1,990 (1,990)(d) --
---------- ----------- --------------
Total operating expense................................................. 357,080 4,335 361,415
---------- ----------- --------------
Operating income........................................................ 128,358 (4,335) 124,023
Other income (expense), net............................................. 2,833 769(b) 3,602
---------- ----------- --------------
Income before provision for income taxes................................ 131,191 (3,566) 127,625
Provision for income taxes.............................................. 49,494 (4,794)(c) 44,700
---------- ----------- --------------
Net income.............................................................. $ 81,697 $ 1,228 $ 82,925
---------- ----------- --------------
---------- ----------- --------------
Net income per share.................................................... $ 1.01 $ .97
---------- --------------
---------- --------------
Weighted average common shares outstanding.............................. 81,060 85,377
---------- --------------
---------- --------------
The accompanying notes are an integral part of these unaudited
pro forma consolidated financial statements.
F-20
NU SKIN ASIA PACIFIC, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
PRO FORMA
FOR THE
REORGANIZATION
AND THE
INITIAL
PRO FORMA UNDERWRITTEN
ACTUAL ADJUSTMENTS OFFERINGS
---------- ----------- --------------
Revenue............................................................. $ 124,185 $ -- $ 124,185
Cost of sales....................................................... 34,815 -- 34,815
---------- ----------- --------------
Gross profit........................................................ 89,370 -- 89,370
---------- ----------- --------------
Operating expenses(d)
Distributor incentives............................................ 46,181 -- 46,181
Selling, general and administrative............................... 20,027 1,713(a) 21,740
---------- ----------- --------------
Total operating expenses............................................ 66,208 1,713 67,921
---------- ----------- --------------
Operating income.................................................... 23,162 (1,713) 21,449
Other income (expense), net......................................... 274 67(b) 341
---------- ----------- --------------
Income before provision for income taxes............................ 23,436 (1,646) 21,790
Provision for income taxes.......................................... 8,686 (1,055)(c) 7,631
---------- ----------- --------------
Net income.......................................................... $ 14,750 $ (591) $ 14,159
---------- ----------- --------------
---------- ----------- --------------
Net income per share................................................ $ .18 $ .17
---------- --------------
---------- --------------
Weighted average common shares outstanding.......................... 80,518 85,377
---------- --------------
---------- --------------
The accompanying notes are an integral part of these unaudited
pro forma consolidated financial statements.
F-21
NU SKIN ASIA PACIFIC, INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
NOTE 1--BASIS OF PRESENTATION
As part of the reorganization and the Initial Underwritten Offerings
discussed in Note 1 to the Consolidated Financial Statements, several actions
occurred which impacted the comparability of the historical financial results of
the Company with the future results of the Company. Therefore, a pro forma
presentation has been prepared to provide comparative data. The unaudited pro
forma consolidated statements of income data reflect the reorganization and the
Initial Underwritten Offerings as if all conditions to these transactions had
occurred as of January 1, 1995. These data do not necessarily reflect the
results of operations of the Company that would have resulted had such
transactions actually been consummated as of such date. Also, these data are not
necessarily indicative of the future results of operations of the Company.
NOTE 2--PRO FORMA ADJUSTMENTS
The pro forma adjustments reflect the following:
(a) Reflects the amortization of the distribution rights acquired from
NSI. Amortization will be recorded on a straight-line basis over the
estimated useful life of twenty years. Also reflects estimated annual
compensation expense of $1.2 million related to the employee stock bonus
awards granted to employees of the Company, NSI and its affiliates. Also
reflects additional costs of $4.4 million for the year ended December 31,
1995, $4.0 million for the year ended December 31, 1996 and $1.1 million for
the three months ended March 31, 1996, relating to certain support services
provided to the Company by NSI and NSIMG and certain other charges related
to operating as a public company. These costs include additional
infrastructure, operating and accounting systems, and business processes as
well as the additional outside services inherent in supporting a public
entity.
(b) Reflects interest expense for the $20.0 million note payable to NSI
issued in connection with the purchase of distribution rights. The note
bears interest at 6.0% per annum and is due and payable within 14 months
from the date of issuance. Also reflects interest expense of $2.7 million
for the year ended December 31, 1995 relating to the $86.5 million notes
payable to stockholders. The notes bear interest at 6.0% per annum. Also
reflects interest income for the note receivable from NSI with an estimated
principal balance of $13.1 million issued in connection with the sale of an
option to NSI to purchase shares underlying distributor options. The note
bears interest at 6.0% per annum and is due and payable ten years from the
date of issuance.
(c) Reflects adjustments for U.S. Federal and state income taxes as if
the Company had been taxed as a C corporation rather than as an S
corporation since inception. Also reflects the tax effect of pro forma
adjustments on earnings.
(d) The unaudited pro forma consolidated statements of income data does
not reflect the estimated non-cash compensation expense of $19.9 million in
connection with the one-time grant of distributor options at an exercise
price of $5.75 per share. $1,990,000 of such expense was recorded as actual
distributor stock expense for the year ended December 31, 1996.
NOTE 3--PRO FORMA NET INCOME PER SHARE
Pro forma net income per share data reflects 80,250,000 shares of common
stock outstanding and common stock equivalents after giving effect to the
reorganization and an option granted to an executive officer of the Company to
purchase 267,500 shares of Class A Common Stock. Also reflects the sale of
4,750,000 shares of Class A common stock by the Company and the grant of awards
for 109,000 shares of Class A common stock to employees of the Company.
Supplemental income per share, calculated as if $25.0 million of the proceeds
from the Initial Underwritten Offerings were used to pay down notes payable, had
a dilutive effect of less than 2% and, therefore, is not presented.
F-22
[COMPANY LOGO WITH THE WORDS "BEAUTY, HEALTH & OPPORTUNITY"
AND "BEAUTY," "HEALTH" AND "OPPORTUNITY."]
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THE PROSPECTUS. IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY, THE SELLING STOCKHOLDERS OR THE
UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY, THE CLASS A COMMON STOCK IN ANY JURISDICTION
WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS
NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS
OF THE COMPANY SINCE THE DATE HEREOF.
--------------
TABLE OF CONTENTS
PAGE
----
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 11
Use of Proceeds........................................................... 27
Dividend Policy........................................................... 27
Price Range of Class A Common Stock....................................... 27
Capitalization............................................................ 28
Selected Consolidated Financial and Other Information..................... 29
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 32
Business.................................................................. 42
Management................................................................ 72
Principal and Selling Stockholders........................................ 83
Shares Eligible for Future Sale........................................... 95
Description of Capital Stock.............................................. 96
Certain United States Tax Consequences to Non-United States Holders....... 100
Underwriting.............................................................. 103
Legal Matters............................................................. 106
Experts................................................................... 106
Additional Information.................................................... 106
Index to Consolidated Financial Statements................................ F-1
7,000,000 SHARES
[NU SKIN LOGO]
CLASS A COMMON STOCK
-----------------
PROSPECTUS
-------------------
MERRILL LYNCH & CO.
MORGAN STANLEY DEAN WITTER
NOMURA SECURITIES
INTERNATIONAL, INC.
PAINEWEBBER INCORPORATED
JUNE , 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The estimated expenses of the issuance and distribution, all of which are
payable by the Selling Stockholders, are as follows.
SEC Registration Fee...................................................... $ 65,407
NASD Fee.................................................................. 22,085
Stock Exchange Listing.................................................... 50,000*
Printing and Engraving.................................................... 150,000*
Accounting Fees and Expenses.............................................. 50,000*
Legal Fees and Expenses................................................... 200,000*
Blue Sky Fees and Expenses................................................ 10,000*
Transfer Agent's Fees and Expenses........................................ 5,000*
Miscellaneous Expenses.................................................... 47,508*
---------
Total................................................................... $ 600,000
---------
---------
- ------------------------
* estimate
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article 10 of the Company's Certificate of Incorporation and Article 5 of
the Company's Bylaws require indemnification to the fullest extent permitted by
Section 145 of DGCL. Section 145 of the DGCL provides that a corporation may
indemnify directors and officers as well as other employees and individuals
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred in connection with specified
actions, suits or proceedings, whether civil, criminal, administrative, or
investigative (other than action by or in the right of the corporation a
"derivative action"), if they acted in good faith and in a manner they
reasonably believed to be in or not opposed to the best interests of the
corporation and, with respect to any criminal action or proceeding, had no
reasonable cause to believe their conduct was unlawful. A similar standard is
applicable in the case of derivative actions, except that indemnification only
extends to expenses (including attorneys' fees) incurred in connection with the
defense or settlement of such actions, and the statute requires court approval
before there can be any indemnification where the person seeking indemnification
has been found liable to the corporation. Indemnification provided by or granted
pursuant to Section 145 of the DGCL is not exclusive of other indemnification
that may be granted by a corporation's bylaws, any agreement, any vote of
stockholders or disinterested directors or otherwise. Article 5 of the Company's
Bylaws provides for indemnification consistent with the requirements of Section
145 of the DGCL. Reference is made to Exhibits 3.1 and 3.2 to this Registration
Statement for the complete text of, respectively, Article 10 of the Company's
Certificate of Incorporation and Article 5 of the Company's Bylaws.
Section 145 of the DGCL also permits a corporation to purchase and maintain
insurance on behalf of directors and officers. Article 5 of the Company's Bylaws
permits it to purchase such insurance on behalf of its directors and officers.
Article 7 of the Company's Certificate of Incorporation provides for, to the
fullest extent permitted by the DGCL, elimination or limitation of liability of
directors to the Company or its stockholders for breach of fiduciary duty as a
director. Section 102(b)(7) of the DGCL permits a corporation to provide in its
certificate of incorporation that a director of the corporation shall not be
personally liable to the corporation or its stockholders for monetary damages
for breach of fiduciary duties as a director, except
II-1
for liability (i) for any breach of a director's duty of loyalty to the
corporation or its stockholders; (ii) for acts or omissions not in good faith or
which involve international misconduct or a knowing violation of law; (iii) for
improper payment of dividends or redemptions of shares; or (iv) for any
transaction from which the director derives an improper personal benefit.
Reference is made to Exhibit 3.1 to this Registration Statement for the complete
text of Article 7 of the Company's Certificate of Incorporation.
Reference is made to the form of U.S. Purchase Agreement filed as Exhibit
1.1 to this Registration Statement which provides for the indemnification of the
directors and officers of the Company signing this Registration Statement and
certain controlling persons of the Company against certain liabilities,
including those arising under the 1933 Act, in certain instances by the
Underwriters.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Prior to the Initial Underwritten Offerings, the shareholders of Nu Skin
Japan, Nu Skin Korea, Nu Skin Taiwan, Nu Skin Hong Kong and Nu Skin Thailand
contributed their shares of capital stock to the capital of the Company in a
transaction intended to qualify under Section 351 of the Internal Revenue Code
of 1986, as amended (the "Code"), in exchange for shares of the Company's Class
B Common Stock (the "Reorganization"). Prior to the Reorganization, all of the
outstanding shares of capital stock of the Subsidiaries were held by the Selling
Stockholders and certain of their affiliates. The Reorganization resulted in
each of the Subsidiaries becoming a wholly-owned subsidiary of the Company. In
January 1997, the Company issued 8,011 shares to three individuals pursuant to
Regulation S.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES.
(a) Exhibits
*1.1 Form of U.S. Purchase Agreement
**2.1 Form of Contribution Agreement
**3.1 Amended and Restated Certificate of Incorporation of the Company
**3.2 Amended and Restated Bylaws of the Company
**4.1 Specimen Form of Stock Certificate for Class A Common Stock
**4.2 Specimen Form of Stock Certificate for Class B Common Stock
*5.1 Opinion of LeBoeuf, Lamb, Greene & MacRae, L.L.P. regarding legality of
the securities covered by this Registration Statement
**10.1 Form of Indemnification Agreement entered into by and among the Company
and certain of its officers and directors
**10.2 Stockholders Agreement, dated as of November 20, 1996, by and among the
initial stockholders of the Company
**10.3 Employment Contract, dated December 12, 1991, by and between the Company
and John Chou
**10.4 Employment Agreement, dated May 1, 1993, by and between the Company and
Takashi Bamba
**10.5 Service Agreement, dated January 1, 1996, by and between the Company and
Sung-Tae Han
**10.6 Form of Purchase and Sale Agreement between Nu Skin Hong Kong and NSI
**10.7 Form of Licensing and Sales Agreement between NSI and each Subsidiary
(other than Nu Skin Korea)
**10.8 Form of Regional Distribution Agreement between NSI and Nu Skin Hong Kong
**10.9 Form of Wholesale Distribution Agreement between Nu Skin Hong Kong and
each Subsidiary (other than Nu Skin Korea)
**10.10 Form of Trademark/Tradename License Agreement between NSI and each
Subsidiary (other than Nu Skin Korea)
**10.11 Form of Management Services Agreement between NSIMG and each Subsidiary
II-2
*10.12 Licensing and Sales Agreement between NSI and Nu Skin Korea
**10.13 Form of Independent Distributor Agreement by and between NSI and
Independent Distributors in Hong Kong/Macau
**10.14 Form of Independent Distributor Agreement by and between NSI and
Independent Distributors in Japan
**10.15 Form of Independent Distributor Agreement by and between NSI and
Independent Distributors in South Korea
**10.16 Form of Independent Distributor Agreement by and between NSI and
Independent Distributors in Taiwan and Thailand
**10.17 Nu Skin Asia Pacific, Inc. 1996 Stock Incentive Plan
**10.18 Form of Bonus Incentive Plan for Subsidiary Presidents
**10.19 Option Agreement between the Company and M. Truman Hunt
**10.20 Form of Mutual Indemnification Agreement between the Company and NSI
**10.21 Manufacturing Sublicense Agreement, dated July 27, 1995, between NSI and
Nu Skin Japan
***10.22 Licensing and Sales Agreement between NSI and Nu Skin Thailand dated March
12, 1997
***10.23 Wholesale Distribution Agreement between Nu Skin Hong Kong and Nu Skin
Thailand dated March 12, 1997
***10.24 Trademark/Tradename Licensing Agreement between NSI and Nu Skin Thailand
dated March 12, 1997
***10.25 Management Services Agreement between NSIMG and Nu Skin Thailand dated
March 12, 1997
*10.26 Wholesale Distribution Agreement between Nu Skin Hong Kong and Nu Skin
Korea
*10.27 Trademark/Tradename License Agreement between NSI and Nu Skin Korea
**21.1 Subsidiaries of the Company
*23.1 Consent of Price Waterhouse LLP, independent accountants
*23.2 Consent of LeBoeuf, Lamb, Green & MacRae, L.L.P. (included in legal
opinion--see Exhibit 5.1)
*24 Power of Attorney (included with the signatures in Part II of this
Registration Statement)
- ------------------------
* Filed herewith
** Incorporated by reference to the Company's Registration Statement on Form
S-1 (File No. 333-12073).
*** Incorporated by reference to the Company's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1997.
II-3
ITEM 17. UNDERTAKINGS.
(a) Insofar as indemnification for liabilities arising under the 1933 Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the 1933 Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction on the question whether such indemnification by it is against
public policy as expressed in the 1933 Act and will be governed by the final
adjudication of such issue.
(b) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the 1933 Act, the
information omitted from the form of prospectus filed as a part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rules 424(b)(1) or (4) or
497(h) under the 1933 Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the 1933 Act,
each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial BONA FIDE offering thereof.
II-4
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Provo,
State of Utah on June 4, 1997.
NU SKIN ASIA PACIFIC, INC.
By: /s/ STEVEN J. LUND
-----------------------------------------
Steven J. Lund
Its: PRESIDENT AND CHIEF EXECUTIVE OFFER
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed below on June 4, 1997 by the following
persons in the capacities indicated. Each person whose signature appears below
hereby appoints and constitutes Blake M. Roney and Steven J. Lund, as his or her
attorney-in-fact, with full power of substitution, for him or her in any and all
capacities, to execute in the name and on behalf of such person any amendment to
this Registration Statement and to file the same, with exhibits thereto, and
other documents in connection therewith, making such changes in this
Registration Statement as the person so acting deems appropriate, hereby
ratifying and confirming all that said attorney-in-fact, or his substitute may
do or cause to be done by virtue hereof.
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
/s/ BLAKE M. RONEY
- ------------------------------ Chairman of the Board of June 4, 1997
Blake M. Roney Directors
President and Chief
/s/ STEVEN J. LUND Executive Officer and
- ------------------------------ Director (Principal June 4, 1997
Steven J. Lund Executive Officer)
/s/ COREY B. LINDLEY Chief Financial Officer
- ------------------------------ (Principal Financial and June 4, 1997
Corey B. Lindley Accounting Officer)
/s/ SANDRA N. TILLOTSON
- ------------------------------ Director June 4, 1997
Sandra N. Tillotson
/s/ KEITH R. HALLS
- ------------------------------ Director June 4, 1997
Keith R. Halls
/s/ BROOKE B. RONEY
- ------------------------------ Director June 4, 1997
Brooke B. Roney
II-5
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
/s/ KIRK V. RONEY
- ------------------------------ Director June 4, 1997
Kirk V. Roney
/s/ MAX L. PINEGAR
- ------------------------------ Director June 4, 1997
Max L. Pinegar
/s/ E.J. "JAKE" GARN
- ------------------------------ Director June 4, 1997
E.J. "Jake" Garn
/s/ PAULA HAWKINS
- ------------------------------ Director June 4, 1997
Paula Hawkins
/s/ DANIEL W. CAMPBELL
- ------------------------------ Director June 4, 1997
Daniel W. Campbell
II-6
INDEX TO EXHIBITS
PAGINATION BY
SEQUENTIAL
EXHIBIT NUMBERING
NUMBER EXHIBIT DESCRIPTION SYSTEM
- ------ ----------------------------------------------------------------------------------------
*1.1 Form of U.S. Purchase Agreement...........................................
**2.1 Form of Contribution Agreement............................................
**3.1 Amended and Restated Certificate of Incorporation of the Company..........
**3.2 Amended and Restated Bylaws of the Company................................
**4.1 Specimen Form of Stock Certificate for Class A Common Stock...............
**4.2 Specimen Form of Stock Certificate for Class B Common Stock...............
*5.1 Opinion of LeBoeuf, Lamb, Greene & MacRae, L.L.P. regarding legality of
the securities covered by this Registration Statement...................
**10.1 Form of Indemnification Agreement entered into by and among the Company
and certain of its officers and directors...............................
**10.2 Stockholders Agreement, dated as of November 20, 1996, by and among the
initial stockholders of the Company.....................................
**10.3 Employment Contract, dated December 12, 1991, by and between the Company
and John Chou...........................................................
**10.4 Employment Agreement, dated May 1, 1993, by and between the Company and
Takashi Bamba...........................................................
**10.5 Service Agreement, dated January 1, 1996, by and between the Company and
Sung-Tae Han............................................................
**10.6 Form of Purchase and Sale Agreement between Nu Skin Hong Kong and NSI.....
**10.7 Form of Licensing and Sales Agreement between NSI and each Subsidiary
(other than Nu Skin Korea)..............................................
**10.8 Form of Regional Distribution Agreement between NSI and Nu Skin Hong
Kong....................................................................
**10.9 Form of Wholesale Distribution Agreement between Nu Skin Hong Kong and
each Subsidiary (other than Nu Skin Korea)..............................
**10.10 Form of Trademark/Tradename License Agreement between NSI and each
Subsidiary (other than Nu Skin Korea)...................................
**10.11 Form of Management Services Agreement between NSIMG and each Subsidiary...
*10.12 Licensing and Sales Agreement between NSI and Nu Skin Korea...............
**10.13 Form of Independent Distributor Agreement by and between NSI and
Independent Distributors in Hong Kong/Macau.............................
**10.14 Form of Independent Distributor Agreement by and between NSI and
Independent Distributors in Japan.......................................
**10.15 Form of Independent Distributor Agreement by and between NSI and
Independent Distributors in South Korea.................................
**10.16 Form of Independent Distributor Agreement by and between NSI and
Independent Distributors in Taiwan and Thailand.........................
**10.17 Nu Skin Asia Pacific, Inc. 1996 Stock Incentive Plan......................
**10.18 Form of Bonus Incentive Plan for Subsidiary Presidents....................
**10.19 Option Agreement between the Company and M. Truman Hunt...................
PAGINATION BY
SEQUENTIAL
EXHIBIT NUMBERING
NUMBER EXHIBIT DESCRIPTION SYSTEM
- ------ ----------------------------------------------------------------------------------------
**10.20 Form of Mutual Indemnification Agreement between the Company and NSI......
**10.21 Manufacturing Sublicense Agreement, dated July 27, 1995, between NSI and
Nu Skin Japan...........................................................
***10.22 Licensing and Sales Agreement between NSI and Nu Skin Thailand dated March
12, 1997................................................................
***10.23 Wholesale Distribution Agreement between Nu Skin Hong Kong and Nu Skin
Thailand dated March 12, 1997...........................................
***10.24 Trademark/Tradename Licensing Agreement between NSI and Nu Skin Thailand
dated March 12, 1997....................................................
***10.25 Management Services Agreement between NSIMG and Nu Skin Thailand dated
March 12, 1997..........................................................
*10.26 Wholesale Distribution Agreement between Nu Skin Hong Kong and Nu Skin
Korea...................................................................
*10.27 Trademark/Tradename License Agreement between NSI and Nu Skin Korea.......
**21.1 Subsidiaries of the Company...............................................
*23.1 Consent of Price Waterhouse LLP, independent accountants..................
*23.2 Consent of LeBoeuf, Lamb, Green & MacRae, L.L.P. (included in legal
opinion--see Exhibit 5.1)...............................................
*24 Power of Attorney (included with the signatures in Part II of this
Registration Statement).................................................
- ------------------------
* Filed herewith
** Incorporated by reference to the Company's Registration Statement on Form
S-1 (File No. 333-12073).
*** Incorporated by reference to the Company's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1997.
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
Nu Skin Asia Pacific, Inc.
A Delaware Corporation
5,600,000 Shares of Class A Common Stock
U.S. PURCHASE AGREEMENT
Dated: _____ __, 1997
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
NU SKIN ASIA PACIFIC, INC.
A DELAWARE CORPORATION
5,600,000 SHARES OF CLASS A COMMON STOCK
(PAR VALUE $.001 PER SHARE)
U.S. PURCHASE AGREEMENT
_____ __, 1997
MERRILL LYNCH & CO.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
Morgan Stanley Dean Witter
Nomura Securities International, Inc.
PaineWebber Incorporated
as U.S. Representatives of the several U.S. Underwriters
c/o Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
North Tower
World Financial Center
New York, New York 10281-1209
Ladies and Gentlemen:
The stockholders of Nu Skin Asia Pacific, Inc., a Delaware Corporation (the
"Company") named in Schedule B hereto (collectively, the "Selling
Stockholders"), propose to sell severally to the U.S. Underwriters named in
Schedule A hereto (collectively, the "U.S. Underwriters", which term shall also
include any underwriter substituted as hereinafter provided in Section 10
hereof), for whom Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch") and Morgan Stanley Dean Witter, Nomura
Securities International, Inc. and PaineWebber Incorporated are acting as
representatives (in such capacity, the "U.S. Representatives"), an aggregate of
5,600,000 shares of Class A Common Stock, par value $.001 per share, of the
Company (the "Common Stock") as set forth in the appropriate column of
Schedule B. Such shares of Common Stock are to be sold to each U.S. Underwriter
acting severally and not jointly, in such amounts as are set forth on Schedule A
opposite the name of such U.S. Underwriter. The Selling Stockholders also grant
to the U.S. Underwriters, acting severally and not jointly, the option described
in Section 2(b) hereof to purchase all or any part of 840,000 additional shares
of
1
Common Stock to cover over-allotments, if any. The aforesaid 5,600,000 shares
of Common Stock (the "Initial U.S. Securities") to be purchased by the U.S.
Underwriters and all or any part of the 840,000 shares of Common Stock subject
to the option described in Section 2(b) hereof (the "U.S. Option Securities")
are hereinafter called, collectively, the "U.S. Securities".
It is understood that the Company and the Selling Stockholders are
concurrently entering into an agreement dated the date hereof (the
"International Purchase Agreement") providing for the sale by the Selling
Stockholders of an aggregate of 1,400,000 shares of Common Stock (the
"Initial International Securities") through arrangements with certain
underwriters outside the United States and Canada, (the "International
Managers") for whom Merrill Lynch International, Morgan Stanley Dean Witter,
Nomura International plc and PaineWebber Incorporated are acting as lead
managers (the "Lead Managers") and the grant by the Selling Stockholders to
the International Managers, acting severally and not jointly, of an option to
purchase all or any part of the International Managers' pro rata portion of
up to 210,000 additional shares of Common Stock solely to cover
over-allotments, if any (the "International Option Securities" and, together
with the U.S. Option Securities the "Option Securities"). The Initial
International Securities and the International Option Securities are
hereinafter called the "International Securities." It is understood that the
Selling Stockholders are not obligated to sell, and the U.S. Underwriters are
not obligated to purchase, any Initial U.S. Securities unless all of the
Initial International Securities are contemporaneously purchased by the
International Managers or purchasers procured by them.
The U.S. Underwriters and the International Managers are hereinafter
collectively called the "Underwriters," the Initial U.S. Securities and the
Initial International Securities are hereinafter collectively called the
"Initial Securities," and the U.S. Securities and the International Securities
are hereinafter collectively called the "Securities."
The Underwriters will concurrently enter into an Intersyndicate Agreement
of even date herewith (the "Intersyndicate Agreement") providing for the
coordination of certain transactions among the Underwriters under the direction
of the Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated.
The Company and the Selling Stockholders understand that the U.S.
Underwriters propose to make a public offering of the U.S. Securities as soon as
the U.S. Representatives deem advisable after this Agreement has been executed
and delivered.
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-1 (No. 333-_______) covering
the registration of the Securities under the Securities Act of 1933, as amended
(the "1933 Act"), including the related preliminary prospectus or prospectuses.
Promptly after execution and delivery of this Agreement, the Company will either
(i) prepare and file a prospectus in accordance with the provisions of Rule 430A
("Rule 430A") of the rules and regulations of the Commission under the 1933 Act
(the "1933 Act Regulations") and paragraph (b) of Rule
2
424 ("Rule 424(b)") of the 1933 Act Regulations or (ii) if the Company has
elected to rely upon Rule 434 ("Rule 434") of the 1933 Act Regulations, prepare
and file a term sheet (a "Term Sheet") in accordance with the provisions of Rule
434 and Rule 424(b). Two forms of prospectus are to be used in connection with
the offering and sale of the Securities: one relating to the International
Securities (the "Form of International Prospectus"), and one relating to the
U.S. Securities (the "Form of U.S. Prospectus"). The information included in
the Form of U.S. Prospectus or in any Term Sheet relating thereto, as the case
may be, that was omitted from such registration statement at the time it became
effective but that is deemed to be part of such registration statement at the
time it became effective (a) pursuant to paragraph (b) of Rule 430A is referred
to as "Rule 430A Information" or (b) pursuant to paragraph (d) of Rule 434 is
referred to as "Rule 434 Information." Each Form of U.S. Prospectus used before
such registration statement became effective, and any Form of U.S. Prospectus
that omitted, as applicable, the Rule 430A Information or the Rule 434
Information, that was used after such effectiveness and prior to the execution
and delivery of this Agreement, and any International Prospectus of even date
relating to the International Securities, is herein called a "preliminary
prospectus." Such registration statement, including the exhibits thereto and
schedules thereto at the time it became effective and including the Rule 430A
Information and the Rule 434 Information, as applicable, is herein called the
"Registration Statement." Any registration statement filed pursuant to Rule
462(b) of the 1933 Act Regulations is herein referred to as the "Rule 462(b)
Registration Statement," and after such filing the term "Registration Statement"
shall include the Rule 462(b) Registration Statement. The final Form of U.S.
Prospectus and the final Form of International Prospectus in the forms first
furnished to the Underwriters for use in connection with the offering of the
Securities are herein called the "U.S. Prospectus" and the "International
Prospectus," respectively, and, collectively, the "Prospectuses." If Rule 434
is relied on, the term "U.S. Prospectus" shall refer to the U.S. preliminary
prospectus dated ___________, 1997 together with the Term Sheet and all
references in this Agreement to the date of such Prospectus shall mean the date
of the Term Sheet. For purposes of this Agreement, all references to the
Registration Statement, any U.S. preliminary prospectus, the U.S. Prospectus or
any Term Sheet relating thereto or any amendment or supplement to any of the
foregoing shall be deemed to include the copy filed with the Commission pursuant
to its Electronic Data Gathering, Analysis and Retrieval system ("EDGAR").
SECTION 1. Representations and Warranties.
(a) REPRESENTATIONS AND WARRANTIES BY THE COMPANY. The Company represents
and warrants to each U.S. Underwriter as of the date hereof, as of the Closing
Time referred to in Section 2(c) hereof, and as of each Date of Delivery (if
any) referred to in Section 2(b) hereof, and agrees with each U.S. Underwriter,
as follows:
(i) COMPLIANCE WITH REGISTRATION REQUIREMENTS. Each of the
Registration Statement and any Rule 462(b) Registration Statement has
become effective under the 1933 Act and no stop order suspending the
effectiveness of the Registration Statement or any Rule 462(b) Registration
Statement has been issued under the 1933 Act and no
3
proceedings for that purpose have been instituted or are pending or, to the
knowledge of the Company, are contemplated by the Commission, and any
request on the part of the Commission for additional information has been
complied with.
At the respective times the Registration Statement, any Rule
462(b) Registration Statement and any post-effective amendments
thereto became effective and at the Closing Time (and, if any U.S.
Option Securities are purchased, at the Date of Delivery), the
Registration Statement, the Rule 462(b) Registration Statement and any
amendments and supplements thereto complied and will comply at these
times in all material respects with the requirements of the 1933 Act
and the 1933 Act Regulations and did not and will not contain an
untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements
therein not misleading. Neither of the Prospectuses nor any
amendments or supplements thereto, at the time the Prospectuses or any
amendments or supplements were issued and at the Closing Time (and, in
the case of the U.S. Prospectus, if any U.S. Option Securities are
purchased, at the Date of Delivery), included or will include an
untrue statement of a material fact or omitted or will omit to state a
material fact necessary in order to make the statements therein, in
the light of the circumstances under which they were made, not
misleading. If Rule 434 is used, the Company will comply with the
requirements of Rule 434 and the U.S. Prospectus shall not be
"materially different", as such term is used in Rule 434, from the
prospectus included in the Registration Statement at the time it
became effective. The representations and warranties in this
subsection shall not apply to statements in or omissions from the
Registration Statement or U.S. Prospectus made in reliance upon and in
conformity with information furnished to the Company in writing by any
U.S. Underwriter through the U.S. Representatives expressly for use in
the Registration Statement or the U.S. Prospectus.
Each U.S. preliminary prospectus and the prospectus filed as part
of the Registration Statement as originally filed or as part of any
amendment thereto, or filed pursuant to Rule 424 under the 1933 Act,
complied when so filed in all material respects with the 1933 Act
Regulations and each U.S. preliminary prospectus and the U.S.
Prospectus delivered to the Underwriters for use in connection with
this offering was identical to the electronically transmitted copies
thereof filed with the Commission pursuant to EDGAR, except to the
extent permitted by Regulation S-T.
(ii) INDEPENDENT ACCOUNTANTS. The accountants who certified the
financial statements and supporting schedules included in the Registration
Statement are independent public accountants as required by the 1933 Act
and the 1933 Act Regulations.
(iii) FINANCIAL STATEMENTS. The financial statements included in the
4
Registration Statement and the Prospectuses, together with the related
schedules and notes, present fairly the financial position of the Company
and Nu Skin Japan Limited, Nu Skin Korea, Inc., Nu Skin Taiwan, Inc., Nu
Skin Hong Kong, Inc. and Nu Skin Personal Care (Thailand) Limited
(collectively, the "Subsidiaries") Subsidiaries at the dates indicated and
the statement of operations, stockholders' equity and cash flows of the
Company and the Subsidiaries for the periods specified; said financial
statements have been prepared in conformity with generally accepted
accounting principles in the United States ("GAAP") applied on a consistent
basis throughout the periods involved. The supporting schedules included
in the Registration Statement present fairly in accordance with GAAP the
information required to be stated therein. The selected financial data and
the summary financial information included in the Prospectuses present
fairly the information shown therein and have been compiled on a basis
consistent with that of the audited financial statements included in the
Registration Statement. The pro forma financial statements and the related
notes thereto included in the Registration Statement and the Prospectuses
present fairly the information shown therein, have been prepared in
accordance with the Commission's rules and guidelines with respect to pro
forma financial statements and have been properly compiled on the bases
described therein, and the assumptions used in the preparation thereof are
reasonable and the adjustments used therein are appropriate to give effect
to the transactions and circumstances referred to therein.
(iv) NO MATERIAL ADVERSE CHANGE IN BUSINESS. Since the respective
dates as of which information is given in the Registration Statement and
the Prospectuses, except as otherwise stated therein, (A) there has been no
material adverse change in the condition, financial or otherwise, or in the
earnings, business affairs or business prospects of the Company and its
Subsidiaries considered as one enterprise, whether or not arising in the
ordinary course of business (a "Material Adverse Effect"), (B) there have
been no transactions entered into by the Company or any of its
Subsidiaries, other than those in the ordinary course of business, which
are material with respect to the Company and its Subsidiaries considered as
one enterprise, and (C) except for the S Corporation Distribution, there
has been no dividend or distribution of any kind declared, paid or made by
the Company on any class of its capital stock.
(v) GOOD STANDING OF THE COMPANY. The Company has been duly organized
and is validly existing as a corporation in good standing under the laws of
the State of Delaware and has corporate power and authority to own, lease
and operate its properties and to conduct its business as described in the
Prospectuses and to enter into and perform its obligations under this
Agreement and the International Purchase Agreement; and the Company is duly
qualified as a foreign corporation to transact business and is in good
standing in each other jurisdiction in which such qualification is
required, whether by reason of the ownership or leasing of property or the
conduct of business, except where the failure so to qualify or to be in
good standing would not result in a Material Adverse Effect.
5
(vi) GOOD STANDING OF SUBSIDIARIES. Each of the Subsidiaries has been
duly organized and is validly existing as a corporation in good standing
(or has such comparable corporate status as may be applicable in its
jurisdiction of incorporation) under the laws of the jurisdiction of its
incorporation (in the case of Nu Skin Japan Company, Limited being both the
state of Delaware and the country of Japan, in the case of Nu Skin Korea,
Inc. being both the state of Delaware and the country of South Korea and in
the case of Nu Skin Personal Care (Thailand) Limited being both the state
of Delaware and the country of Thailand), has corporate power and authority
to own, lease and operate its properties and to conduct its business as
described in the Prospectuses and is duly qualified as a foreign
corporation to transact business and is in good standing in each
jurisdiction in which such qualification is required, whether by reason of
the ownership or leasing of property or the conduct of business, except
where the failure so to qualify or to be in good standing would not result
in a Material Adverse Effect; except as otherwise disclosed in the
Registration Statement, all of the issued and outstanding capital stock of
each such Subsidiary has been duly authorized and validly issued, is fully
paid and non-assessable and is owned by the Company directly, free and
clear of any security interest, mortgage, pledge, lien, encumbrance, claim
or equity; none of the outstanding shares of capital stock of any
Subsidiary was issued in violation of the preemptive or similar rights of
any securityholder of such Subsidiary. The Subsidiaries are the only
subsidiaries of the Company and the Subsidiaries are the only subsidiaries
listed on Exhibit 21 to the Registration Statement.
(vii) CAPITALIZATION. The authorized, issued and outstanding capital
stock of the Company upon consummation of the Reorganization will be as set
forth in the U.S. and the International Prospectuses in the column entitled
"As Adjusted" under the caption "Capitalization" (except for subsequent
issuances, if any, pursuant to this Agreement and the International
Purchase Agreement, pursuant to reservations, agreements or employee
benefit plans referred to in the Prospectuses or pursuant to the exercise
of convertible securities or options referred to in the Prospectuses).
(viii) AUTHORIZATION OF AGREEMENT. This Agreement and the
International Purchase Agreement have been duly authorized, executed and
delivered by the Company.
(ix) AUTHORIZATION AND DESCRIPTION OF SECURITIES. The shares of
issued and outstanding capital stock of the Company, including the
Securities to be purchased by the Underwriters from the Selling
Stockholders, have been duly authorized and validly issued and are fully
paid and non-assessable; none of the outstanding shares of capital stock,
including the Securities to be purchased by the Underwriters from the
Selling Stockholders, was issued in violation of the preemptive or other
similar rights of any securityholder of the Company; the Common Stock
conforms to all statements relating thereto contained in the Prospectuses
and such description conforms to the rights set forth in the instruments
defining the same; no holder of the Securities will be subject to personal
liability by reason of being such a holder.
6
(x) ABSENCE OF DEFAULTS AND CONFLICTS. Neither the Company nor any of
its Subsidiaries is in violation of its charter or by-laws or comparable
governing documents or in default in the performance or observance of any
obligation, agreement, covenant or condition contained in any contract,
indenture, mortgage, deed of trust, loan or credit agreement, note, lease
or other agreement or instrument to which the Company or any of its
Subsidiaries is a party or by which it or any of them may be bound, or to
which any of the property or assets of the Company or any Subsidiary is
subject (collectively, "Agreements and Instruments") except for such
defaults that would not result in a Material Adverse Effect; and the
execution, delivery and performance of this Agreement and the International
Purchase Agreement and the consummation of the transactions contemplated in
this Agreement and the International Purchase Agreement and in the
Registration Statement and compliance by the Company with its obligations
under this Agreement and the International Purchase Agreement have been
duly authorized by all necessary corporate action and do not and will not,
whether with or without the giving of notice or passage of time or both,
conflict with or constitute a breach of, or default or Repayment Event (as
defined below) under, or result in the creation or imposition of any lien,
charge or encumbrance upon any property or assets of the Company or any
Subsidiary pursuant to, the Agreements and Instruments (except for such
conflicts, breaches or defaults or liens, charges or encumbrances that
would not result in a Material Adverse Effect), nor will such action result
in any violation of the provisions of the charter or by-laws of the Company
or comparable governing documents of any Subsidiary or any applicable law,
statute, rule, regulation, judgment, order, writ or decree of any
government, government instrumentality or court, domestic or foreign,
having jurisdiction over the Company or any Subsidiary or any of their
assets, properties or operations. As used herein, a "Repayment Event"
means any event or condition which gives the holder of any note, debenture
or other evidence of indebtedness (or any person acting on such holder's
behalf) the right to require the repurchase, redemption or repayment of all
or a portion of such indebtedness by the Company or any Subsidiary.
(xi) ABSENCE OF LABOR DISPUTE. No labor dispute with the employees or
distributors of the Company or any of its affiliates exists or, to the
knowledge of the Company, is imminent, and the Company is not aware of any
existing or imminent labor disturbance by the employees of any of its or
any Subsidiary's principal suppliers, manufacturers, customers or
contractors, which, in either case, may reasonably be expected to result in
a Material Adverse Effect.
(xii) ABSENCE OF PROCEEDINGS. There is no action, suit, proceeding,
inquiry or investigation before or brought by any court or governmental
agency or body, domestic or foreign, now pending, or, to the knowledge of
the Company, threatened, against or affecting the Company or any
Subsidiary, which is required to be disclosed in the Registration Statement
(other than as disclosed therein), or which would reasonably be expected by
the Company to result in a Material Adverse Effect, or which would
reasonably be expected by the Company to materially and adversely
7
affect the properties or assets thereof or the consummation of the
transactions contemplated in this Agreement and the International Purchase
Agreement or the performance by the Company of its obligations hereunder or
thereunder; the aggregate of all pending legal or governmental proceedings
to which the Company or any Subsidiary is a party or of which any of their
respective property or assets is the subject which are not described in the
Registration Statement, including ordinary routine litigation incidental to
the business, is not reasonably expected to result in a Material Adverse
Effect.
(xiii) ACCURACY OF EXHIBITS. There are no contracts or documents
which are required to be described in the Registration Statement or the
Prospectuses or to be filed as exhibits thereto which have not been so
described and filed as required.
(xiv) POSSESSION OF INTELLECTUAL PROPERTY. The Company and its
Subsidiaries own or possess, or can acquire on reasonable terms, adequate
patents, patent rights, licenses, inventions, copyrights, know-how
(including trade secrets and other unpatented and/or unpatentable
proprietary or confidential information, systems or procedures),
trademarks, service marks, trade names or other intellectual property
(collectively, "Intellectual Property") necessary to carry on the business
now operated by them, and neither the Company nor any of its Subsidiaries
has received any notice or is otherwise aware of any infringement of or
conflict with asserted rights of others with respect to any Intellectual
Property or of any facts or circumstances which would render any
Intellectual Property invalid or inadequate to protect the interest of the
Company or any of its Subsidiaries therein, and which infringement or
conflict (if the subject of any unfavorable decision, ruling or finding) or
invalidity or inadequacy, singly or in the aggregate, would result in a
Material Adverse Effect.
(xv) ABSENCE OF FURTHER REQUIREMENTS. No filing with, or
authorization, approval, consent, license, order, registration,
qualification or decree of, any court or governmental authority or agency
is necessary or required for the performance by the Company of its
obligations hereunder, in connection with the sale of the Securities under
this Agreement and the International Purchase Agreement, or the
consummation of the transactions contemplated in the Prospectuses, this
Agreement and the International Purchase Agreement, except such as have
been already obtained or as may be required under the 1933 Act or the 1933
Act Regulations and foreign or state securities or blue sky laws obtained
or as may be required.
(xvi) POSSESSION OF LICENSES AND PERMITS. The Company and its
Subsidiaries possess such permits, licenses, approvals, consents and other
authorizations (collectively, "Governmental Licenses") issued by the
appropriate federal, state, local or foreign regulatory agencies or bodies
necessary to conduct the business now operated by them, except where the
failure to possess such Governmental Licenses would not, singly or in the
aggregate, have a Material Adverse Effect; the Company and its Subsidiaries
are in compliance with the terms and conditions of all such Governmental
Licenses, except where the failure so to comply would not, singly or in
8
the aggregate, have a Material Adverse Effect; all of the Governmental
Licenses are valid and in full force and effect, except when the invalidity
of such Governmental Licenses or the failure of such Governmental Licenses
to be in full force and effect would not have a Material Adverse Effect;
and neither the Company nor any of its Subsidiaries has received any notice
of proceedings relating to the revocation or modification of any such
Governmental Licenses which, singly or in the aggregate, if the subject of
an unfavorable decision, ruling or finding, would result in a Material
Adverse Effect.
(xvii) TITLE TO PROPERTY. The Company and its Subsidiaries have good
and marketable title to all real property owned by the Company and its
Subsidiaries and good title to all other properties owned by them, in each
case, free and clear of all mortgages, pledges, liens, security interests,
claims, restrictions or encumbrances of any kind except such as (a) are
described in the Prospectuses or (b) do not, singly or in the aggregate,
materially affect the value of such property and do not interfere with the
use made and proposed to be made of such property by the Company or any of
its Subsidiaries; and all of the leases and subleases material to the
business of the Company and its Subsidiaries, considered as one enterprise,
and under which the Company or any of its Subsidiaries holds properties
described in the Prospectuses, are in full force and effect, and neither
the Company nor any Subsidiary has any notice of any material claim of any
sort that has been asserted by anyone adverse to the rights of the Company
or any Subsidiary under any of the leases or subleases mentioned above, or
affecting or questioning the rights of the Company or such Subsidiary to
the continued possession of the leased or subleased premises under any such
lease or sublease.
(xviii) ENVIRONMENTAL LAWS. Except as described in the Registration
Statement and except as would not, singly or in the aggregate, result in a
Material Adverse Effect, (A) neither the Company nor any of its
Subsidiaries is in violation of any federal, state, local or foreign
statute, law, rule, regulation, ordinance, code, policy or rule of common
law or any judicial or administrative interpretation thereof, including any
judicial or administrative order, consent, decree or judgment, relating to
pollution or protection of human health, the environment (including,
without limitation, ambient air, surface water, groundwater, land surface
or subsurface strata) or wildlife, including, without limitation, laws and
regulations relating to the release or threatened release of chemicals,
pollutants, contaminants, wastes, toxic substances, hazardous substances,
petroleum or petroleum products (collectively, "Hazardous Materials") or to
the manufacture, processing, distribution, use, treatment, storage,
disposal, transport or handling of Hazardous Materials (collectively,
"Environmental Laws"), (B) the Company and its Subsidiaries have all
permits, authorizations and approvals required under any applicable
Environmental Laws and are each in compliance with their requirements, (C)
there are no pending or threatened administrative, regulatory or judicial
actions, suits, demands, demand letters, claims, liens, notices of
noncompliance or violation, investigation or proceedings relating to any
Environmental Law against the Company or any of its Subsidiaries and (D)
there
9
are no events or circumstances that might reasonably be expected to form
the basis of an order for clean-up or remediation, or an action, suit or
proceeding by any private party or governmental body or agency, against or
affecting the Company or any of its Subsidiaries relating to Hazardous
Materials or any Environmental Laws.
(xix) REGISTRATION RIGHTS. Except as described in the Prospectuses,
there are no persons with registration rights or other similar rights to
have any securities registered pursuant to the Registration Statement or
otherwise registered by the Company under the 1933 Act.
(xx) CERTAIN TRANSACTIONS. There are no business relationships or
related-party transactions of the nature described in Item 404 of
Regulation S-K involving the Company and any other persons referred to in
said Item 404 that are required to be disclosed in the U.S. Prospectus and
that have not been so disclosed.
(xxi) OPERATING AGREEMENTS. The Licensing and Sales Agreements, the
Regional Distribution Agreement, the Wholesale Distribution Agreements, the
Trademark/Tradename License Agreements and the Management Services
Agreements, each dated November 20, 1996 (as amended, modified or
supplemented from time to time, collectively, the "Operating Agreements"),
to which one or more of the Subsidiaries (other than Nu Skin Thailand) is a
party, and the Licensing and Sales Agreement, the Wholesale Distribution
Agreement, the Trademark/Tradename License Agreement and the Management
Services Agreement, each dated March 12, 1997, to which Nu Skin Thailand is
a party (all such agreements, in each case as amended, modified or
supplemented from time to time, being referred to collectively as the
"Operating Agreements") (i) have been duly authorized by all necessary
corporate action on the part of the Company and the Subsidiaries, (ii) do
not conflict with or result in a breach of or (with or without the giving
of notice, lapse of time or both) constitute a default under, the
certificate of incorporation of the Company or comparable governing
document of any Subsidiary or any material agreement to which the Company
or any Subsidiary is a party or by which any of their properties are bound
(except for such conflicts, breaches or defaults, that would not have a
Material Adverse Effect) and (iii) have been or by the Closing Time (as
hereinafter defined) will have been duly executed and delivered by one or
more of the Subsidiaries and constitute or will constitute legal, valid and
binding obligations of the Company and the Subsidiaries, enforceable
against them in accordance with their terms.
(b) REPRESENTATIONS AND WARRANTIES BY THE SELLING STOCKHOLDERS. Each
Selling Stockholder (or Back-Stopped Selling Stockholder (as defined in Section
6(a)), as the case may be) severally represents and warrants to each U.S.
Underwriter as of the date hereof, as of the Closing Time, and, if the Selling
Stockholder is selling U.S. Option Securities on a Date of Delivery, as of each
such Date of Delivery, and agrees with each U.S. Underwriter, as follows:
10
(i) ACCURATE DISCLOSURE. To the best knowledge of each Back-Stopped
Selling Stockholder, the representations and warranties of the Company
contained in Section 1(a) hereof are true and correct; such Back-Stopped
Selling Stockholder has reviewed and is familiar with the Registration
Statement and the Prospectuses and neither the Prospectuses nor any
amendments or supplements thereto (including any prospectus wrapper)
includes any untrue statement of a material fact or omits to state a
material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading; each
Selling Stockholder is not prompted to sell the Securities to be sold by
such Selling Stockholder hereunder by any information concerning the
Company or any Subsidiary of the Company which is not set forth in the
Prospectuses.
(ii) AUTHORIZATION OF AGREEMENTS. Each Selling Stockholder has the
full right, power and authority to enter into this Agreement, the
International Purchase Agreement, and a Power of Attorney and Custody
Agreement (the "Power of Attorney and Custody Agreement") and to sell,
transfer and deliver the Securities to be sold by such Selling Stockholder
hereunder and under the International Purchase Agreement. The execution
and delivery of this Agreement, the International Purchase Agreement, and
the Power of Attorney and Custody Agreement and the sale and delivery of
the Securities to be sold by such Selling Stockholder and the consummation
of the transactions contemplated herein and therein and compliance by such
Selling Stockholder with its obligations hereunder and thereunder have been
duly authorized by such Selling Stockholder and do not and will not,
whether with or without the giving of notice or passage of time or both,
conflict with or constitute a breach of, or default under, or result in the
creation or imposition of any tax, lien, charge or encumbrance upon the
Securities to be sold by such Selling Stockholder or any property or assets
of such Selling Stockholder pursuant to any contract, indenture, mortgage,
deed of trust, loan or credit agreement, note, license, lease or other
agreement or instrument to which such Selling Stockholder is a party or by
which such Selling Stockholder may be bound, or to which any of the
property or assets of such Selling Stockholder is subject, nor will such
action result in any violation of the provisions of the charter or by-laws
or other organizational instrument of such Selling Stockholder, if
applicable, or any applicable treaty, law, statute, rule, regulation,
judgment, order, writ or decree of any government, government
instrumentality or court, domestic or foreign, having jurisdiction over
such Selling Stockholder or any of its properties.
(iii) GOOD AND MARKETABLE TITLE. Such Selling Stockholder has and
will at the Closing Time and, if any Option Securities are purchased, on
the Date of Delivery have good and marketable title to the Securities to be
sold by such Selling Stockholder hereunder and under the International
Purchase Agreement, free and clear of any security interest, mortgage,
pledge, lien, charge, claim, equity or encumbrance of any kind, other than
pursuant to this Agreement and the International Purchase Agreement; and
upon delivery of such Securities and payment of the purchase price therefor
as herein and therein contemplated, assuming each such Underwriter has no
11
notice of any adverse claim, each of the Underwriters will receive good and
marketable title to the Securities purchased by it from such Selling
Stockholder, free and clear of any security interest, mortgage, pledge,
lien, charge, claim, equity or encumbrance of any kind.
(iv) DUE EXECUTION OF POWER OF ATTORNEY AND CUSTODY AGREEMENT. Such
Selling Stockholder has duly executed and delivered, in the form heretofore
furnished to the U.S. Representatives, the Power of Attorney and Custody
Agreement with Keith R. Halls and M. Truman Hunt, or either of them, as
attorneys-in-fact (the "Attorneys-in-Fact") and American Stock Transfer and
Trust Company, as custodian (the "Custodian"); the Custodian is authorized
to deliver the Securities to be sold by such Selling Stockholder hereunder
and to accept payment therefor; and each Attorney-in-Fact is authorized to
execute and deliver this Agreement and the International Purchase Agreement
and the certificate referred to in Section 5(l) or that may be required
pursuant to Sections 5(s) and 5(t) on behalf of such Selling Stockholder,
to sell, assign and transfer to the Underwriters the Securities to be sold
by such Selling Stockholder hereunder and thereunder, [to determine the
purchase price to be paid by the U.S. Underwriters to such Selling
Stockholder, as provided in Section 2(a) hereof,] to authorize the delivery
of the Securities to be sold by such Selling Stockholder hereunder and
thereunder, to accept payment therefor, and otherwise to act on behalf of
such Selling Stockholder in connection with this Agreement and the
International Purchase Agreement.
(v) ABSENCE OF MANIPULATION. Such Selling Stockholder has not taken,
and will not take, directly or indirectly, any action which is designed to
or which has constituted or which might reasonably be expected to cause or
result in stabilization or manipulation of the price of any security of the
Company to facilitate the sale or resale of the Securities.
(vi) ABSENCE OF FURTHER REQUIREMENTS. No filing with, or consent,
approval, authorization, order, registration, qualification or decree of,
any court or governmental authority or agency, domestic or foreign, is
necessary or required for the performance by each Selling Stockholder of
its obligations under this Agreement or the International Purchase
Agreement or under the Power of Attorney and Custody Agreement, or in
connection with the sale and delivery of the Securities or the consummation
of the transactions contemplated by this Agreement and the International
Purchase Agreement, except such as may have previously been made or
obtained or as may be required under the 1933 Act or the 1933 Act
Regulations or state securities laws.
(vii) RESTRICTION ON SALE OF SECURITIES. During a period of 365 days
from the date of the U.S. Prospectus, such Selling Stockholder, on its own
behalf and on behalf of all corporations, limited liability companies,
partnerships, trusts, foundations and similar entities for which such
Selling Stockholder has investment power, will not, without the prior
written consent of Merrill Lynch (i) offer, pledge, sell, contract to
12
sell, sell any option or contract to purchase, purchase any option or
contract to sell, grant any option, right or warrant to purchase or
otherwise transfer or dispose of, directly or indirectly, any share of
Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock or file any registration statement under the
1933 Act with respect to any of the foregoing or (ii) enter into any swap
or any other agreement or any transaction that transfers, in whole or in
part, directly or indirectly, the economic consequence of ownership of the
Common Stock, whether any such swap or transaction described in clause (i)
or (ii) above is to be settled by delivery of Common Stock or such other
securities, in cash or otherwise. The foregoing sentence shall not apply
to the Securities to be sold hereunder or under the International Purchase
Agreement.
(viii) CERTIFICATES SUITABLE FOR TRANSFER. Certificates for all of
the Securities to be sold by such Selling Stockholder pursuant to this
Agreement or the International Purchase Agreement in suitable form for
transfer by delivery or accompanied by duly executed instruments of
transfer or assignment in blank with signatures guaranteed, have been
placed in custody with the Custodian with irrevocable conditional
instructions to deliver such Securities to the Underwriters pursuant to
this Agreement or the International Purchase Agreement.
(ix) NO ASSOCIATION WITH NASD. Neither such Selling Stockholder nor
any of his or her affiliates directly, or indirectly through one or more
intermediaries, controls, or is controlled by, or is under common control
with, or has any other association with (within the meaning of Article I,
Section 1(m) of the By-laws of the National Association of Securities
Dealers, Inc.), any member firm of the National Association of Securities
Dealers, Inc.
(c) OFFICER'S CERTIFICATES. Any certificate signed by any officer of the
Company or any of its Subsidiaries delivered to Merrill Lynch, the U.S.
Representatives or to counsel for the U.S. Underwriters shall be deemed a
representation and warranty by the Company to each U.S. Underwriter as to the
matters covered thereby; and any certificate signed by or on behalf of the
Selling Stockholders as such and delivered to Merrill Lynch, the U.S.
Representatives or to counsel for the U.S. Underwriters pursuant to the terms of
this Agreement shall be deemed a representation and warranty by such Selling
Stockholder to each U.S. Underwriter as to the matters covered thereby.
13
SECTION 2 SALE AND DELIVERY TO THE U.S. UNDERWRITERS; CLOSING.
(a) INITIAL SECURITIES. On the basis of the representations and
warranties herein contained and subject to the terms and conditions herein set
forth, each Selling Stockholder agrees, severally and not jointly, to sell to
each U.S. Underwriter, and each U.S. Underwriter agrees, severally and not
jointly, to purchase from each Selling Stockholder, at the price per share set
forth in Schedule C, that proportion of the number of Initial U.S. Securities
set forth in Schedule B opposite the name of such Selling Stockholder, as the
case may be, which the number of Initial U.S. Securities set forth in Schedule A
opposite the name of such U.S. Underwriter, plus any additional number of
Initial U.S. Securities which such U.S. Underwriter may become obligated to
purchase pursuant to the provisions of Section 10 hereof, bears to the total
number of Initial U.S. Securities, subject, in each case, to such adjustments
among the U.S. Underwriters as Merrill Lynch in its sole discretion shall make
to eliminate any sales or purchases of fractional securities.
(b) U.S. OPTION SECURITIES. In addition, on the basis of the
representations and warranties herein contained and subject to the terms and
conditions herein set forth, the Selling Stockholders specified in Schedule B as
selling U.S. Option Securities acting severally and not jointly, hereby grant an
option to the U.S. Underwriters, severally and not jointly, to purchase up to an
aggregate of 840,000 additional shares of Common Stock, as set forth in Schedule
B, at the price per share set forth in Schedule C, less an amount per share
equal to any dividends or distributions declared by the Company and payable on
the Initial Securities but not payable on the Option Securities. The option
hereby granted will expire 30 days after the date hereof and may be exercised in
whole or in part from time to time only for the purpose of covering over-
allotments which may be made in connection with the offering and distribution of
the Initial U.S. Securities upon notice by Merrill Lynch to the Selling
Stockholders, setting forth the number of U.S. Option Securities as to which the
several U.S. Underwriters are then exercising the option and the time and date
of payment and delivery for such U.S. Option Securities. Any such time and date
of delivery for the U.S. Option Securities (a "Date of Delivery") shall be
determined by Merrill Lynch, but shall not be later than seven full business
days after the exercise of said option, nor in any event prior to the Closing
Time, as hereinafter defined. If the option is exercised as to all or any
portion of the U.S. Option Securities, each of the U.S. Underwriters, acting
severally and not jointly, will purchase that proportion of the total number of
Option Securities then being purchased which the number of Initial U.S.
Securities set forth in Schedule A opposite the name of such U.S. Underwriter
bears to the total number of Initial U.S. Securities, subject in each case to
such adjustments as Merrill Lynch in its discretion shall make to eliminate any
sales or purchases of fractional shares.
(c) PAYMENT. Payment of the purchase price for, and delivery of
certificates for, the Initial U.S. Securities shall be made at the offices of
Shearman & Sterling, 599 Lexington Avenue, New York, New York 10022-6069, or at
such other place as shall be agreed upon by Merrill Lynch, the Company and the
Selling Stockholders, at 9:30 A.M. (New York Time) on the third (fourth, if the
pricing occurs after 4:30 P.M. (Eastern time) on any given day) business day
after the date hereof (unless postponed in accordance with the provisions of
14
Section 10), or such other time not later than ten business days after such date
as shall be agreed upon by Merrill Lynch, the Company and the Selling
Stockholders (such time and date of payment and delivery being herein called
"Closing Time").
In addition, in the event that any or all of the U.S. Option Securities are
purchased by the U.S. Underwriters, payment of the purchase price for, and
delivery of certificates for, such U.S. Option Securities shall be made at the
above-mentioned offices, or at such other place as shall be agreed upon by
Merrill Lynch, the Company and the Selling Stockholders, on each Date of
Delivery as specified in the notice from Merrill Lynch to the Company and the
Selling Stockholders.
Payment shall be made to the Selling Stockholders by wire transfer of
immediately available funds to bank accounts designated by the Custodian
pursuant to each Selling Stockholder's Power of Attorney and Custody Agreement,
against delivery to the U.S. Representatives for the respective accounts of the
U.S. Underwriters of certificates for the U.S. Securities to be purchased by
them. It is understood that each U.S. Underwriter has authorized the U.S.
Representatives, for its account, to accept delivery of, receipt for, and make
payment of the purchase price for, the Initial U.S. Securities and the U.S.
Option Securities, if any, which it has agreed to purchase. Merrill Lynch,
individually and not as representative of the U.S. Underwriters, may (but shall
not be obligated to) make payment of the purchase price for the Initial U.S.
Securities or the U.S. Option Securities, if any, to be purchased by any U.S.
Underwriter whose funds have not been received by the Closing Time or the
relevant Date of Delivery, as the case may be, but such payment shall not
relieve such U.S. Underwriter from its obligations hereunder.
(d) DENOMINATIONS; REGISTRATION. Certificates for the Initial U.S.
Securities and the U.S. Option Securities, if any, shall be in such
denominations and registered in such names as the U.S. Representatives may
request in writing at least one full business day before the Closing Time or the
relevant Date of Delivery, as the case may be. The certificates for the Initial
U.S. Securities and the U.S. Option Securities, if any, will be made available
for examination and packaging by the U.S. Representatives in The City of New
York not later than 10:00 A.M. (Eastern time) on the business day prior to the
Closing Time or the relevant Date of Delivery, as the case may be.
SECTION 3 COVENANTS OF THE COMPANY. The Company covenants with each U.S.
Underwriter as follows:
(a) COMPLIANCE WITH SECURITIES REGULATIONS AND COMMISSION REQUESTS.
The Company, subject to Section 3(b), will comply with the requirements of
Rule 430A or Rule 434, as applicable, and will notify Merrill Lynch
immediately, and confirm the notice in writing, (i) when any post-effective
amendment to the Registration Statement shall become effective, or any
supplement to the U.S. Prospectus or any amended U.S. Prospectus shall have
been filed, (ii) of the receipt of any comments from the Commission,
(iii) of any request by the Commission for any amendment to the
Registration Statement or any amendment or supplement to the U.S.
Prospectus or for
15
additional information, and (iv) of the issuance by the Commission of any
stop order suspending the effectiveness of the Registration Statement or of
any order preventing or suspending the use of any preliminary prospectus,
or of the suspension of the qualification of the Securities for offering or
sale in any jurisdiction, or of the initiation or threatening of any
proceedings for any of such purposes. The Company will promptly effect the
filings necessary pursuant to Rule 424(b) and will take such steps as it
deems necessary to ascertain promptly whether the form of prospectus
transmitted for filing under Rule 424(b) was received for filing by the
Commission and, in the event that it was not, it will promptly file such
prospectus. The Company will make every reasonable effort to prevent the
issuance of any stop order in the United States and, if any stop order is
issued, to obtain the lifting thereof at the earliest possible moment.
(b) FILING OF AMENDMENTS. The Company will give Merrill Lynch notice
of its intention to file or prepare any amendment to the Registration
Statement (including any filing under Rule 462(b)), any Term Sheet or any
amendment, supplement or revision to either the prospectus included in the
Registration Statement at the time it became effective or to the U.S. or
the International Prospectuses, will furnish Merrill Lynch with copies of
any such documents a reasonable amount of time prior to such proposed
filing or use, as the case may be, and will not file or use any such
document to which Merrill Lynch or counsel for the U.S. Underwriters shall
object.
(c) DELIVERY OF REGISTRATION STATEMENTS. The Company has furnished
or will deliver to the U.S. Representatives and counsel for the U.S.
Underwriters, without charge, signed copies of the Registration Statement
as originally filed and of each amendment thereto (including exhibits filed
therewith or incorporated by reference therein) and signed copies of all
consents and certificates of experts, and will also deliver to the U.S.
Representatives, without charge, a conformed copy of the Registration
Statement as originally filed and of each amendment thereto (without
exhibits) for each of the U.S. Underwriters. The copies of the
Registration Statement and each amendment thereto furnished to the U.S.
Underwriters will be identical to the electronically transmitted copies
thereof filed with the Commission pursuant to EDGAR, except to the extent
permitted by Regulation S-T.
(d) DELIVERY OF PROSPECTUSES. The Company has delivered to each U.S.
Underwriter, without charge, as many copies of each preliminary prospectus
as such U.S. Underwriter reasonably requested, and the Company hereby
consents to the use of such copies for purposes permitted by the 1933 Act.
The Company will furnish to each U.S. Underwriter, without charge, during
the period when the U.S. Prospectus is required to be delivered under the
1933 Act or the Securities Exchange Act of 1934 (the "1934 Act"), such
number of copies of the U.S. Prospectus (as amended or supplemented) as
such U.S. Underwriter may reasonably request. The U.S. Prospectus and any
amendments or supplements thereto furnished to the U.S. Underwriters will
be identical to the electronically transmitted copies thereof filed with
16
the Commission pursuant to EDGAR, except to the extent permitted by
Regulation S-T.
(e) CONTINUED COMPLIANCE WITH SECURITIES LAWS. The Company will
comply with the 1933 Act and the 1933 Act Regulations so as to permit the
completion of the distribution of the Securities as contemplated in this
Agreement and the International Purchase Agreement and in the Prospectuses.
If at any time when a prospectus is required by the 1933 Act to be
delivered in connection with sales of the Securities, any event shall occur
or condition shall exist as a result of which it is necessary, in the
opinion of counsel for the U.S. Underwriters or for the Company, to amend
the Registration Statement or amend or supplement any Prospectus in order
that such Prospectus will not include any untrue statements of a material
fact or omit to state a material fact necessary in order to make the
statements therein not misleading in the light of the circumstances
existing at the time it is delivered to a purchaser, or if it shall be
necessary, in the opinion of such counsel, at any such time to amend the
Registration Statement or amend or supplement any Prospectus in order to
comply with the requirements of the 1933 Act or the 1933 Act Regulations,
the Company will (i) with respect to the U.S. Prospectus, promptly prepare
and file with the Commission, subject to Section 3(b), such amendment or
supplement as may be necessary to correct such statement or omission or to
make the Registration Statement or the U.S. Prospectus comply with such
requirements, (ii) with respect to the International Prospectus, supplement
such prospectus to correct such statement or omission and (iii) furnish to
the Underwriters such number of copies of such amendments or supplements as
the Underwriters may reasonably request.
(f) RULE 158. The Company will timely file such reports pursuant to
the 1934 Act as are necessary in order to make generally available to its
securityholders as soon as practicable an earnings statement for the
purposes of, and to provide the benefits contemplated by, the last
paragraph of Section 11(a) of the 1933 Act.
(g) LISTING. The Company will use its best efforts to effect the
listing of the Securities on the New York Stock Exchange.
(h) RESTRICTION ON SALE OF SECURITIES. During a period of 90 days
from the date of the U.S. Prospectus, the Company will not, without the
prior written consent of Merrill Lynch, (i) directly or indirectly, offer,
pledge, sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant
to purchase or otherwise transfer or dispose of any share of Common Stock
or any securities convertible into or exercisable or exchangeable for
Common Stock or file any registration statement under the 1933 Act with
respect to any of the foregoing or (ii) enter into any swap or any other
agreement or any transaction that transfers, in whole or in part, directly
or indirectly, the economic consequence of ownership of the Common Stock,
whether any such swap or transaction described in clause (i) or (ii) above
is to be settled by delivery of Common Stock or such other securities, in
cash or otherwise. The foregoing sentence shall not
17
apply to (A) the Securities to be sold hereunder or under the International
Purchase Agreement, (B) any shares of Common Stock issued by the Company
upon the exercise of an option or warrant or the conversion of any security
outstanding on the date hereof and referred to in the Prospectuses, or (C)
any shares of Common Stock issued or options to purchase Common Stock
granted pursuant to existing employee benefit plans of the Company referred
to in the Prospectuses.
(i) REPORTING REQUIREMENTS. The Company, during the period when the
U.S. Prospectus is required to be delivered under the 1933 Act or the 1934
Act, will file all documents required to be filed with the Commission
pursuant to the 1934 Act within the time periods required by the 1934 Act
and the rules and regulations of the Commission thereunder.
SECTION 4 PAYMENT OF EXPENSES. (a) EXPENSES. The Company will pay
or cause to be paid all expenses incident to the performance of the
obligations of the Company and of the Selling Stockholders under this
Agreement, including (i) the preparation by the Company, printing and
filing in the United States of the Registration Statement (including
financial statements and exhibits) as originally filed and in the United
States of each amendment thereto, (ii) the preparation, printing and
delivery to the Underwriters of this Agreement, the Intersyndicate
Agreement, any Agreement among Underwriters and such other documents as
may be required in connection with the offering, purchase, sale or
delivery of the Securities, (iii) the preparation, issuance and delivery
of the certificates for the Securities to the Underwriters, including
any stock or other transfer taxes and any stamp or other duties payable
upon the sale or delivery of the Securities to the Underwriters and the
transfer of the Securities between the U.S. Underwriters and the
International Managers (iv) the fees and disbursements of the Company's
counsel, accountants and other advisors and the Selling Stockholders'
counsel, accountants and other advisors, (v) the qualification of the
Securities under securities laws in accordance with the provisions of
Section 3(f) hereof, including filing fees and the reasonable fees and
disbursements of counsel for the U.S. Underwriters in connection
therewith and in connection with the preparation of the Blue Sky Survey
and any supplement thereto, (vi) the printing and delivery to the
Underwriters of copies of each preliminary prospectus, any Term Sheets
and of the Prospectuses and any amendments or supplements thereto, (vii)
the preparation, printing and delivery to the U.S. Underwriters of
copies of the Blue Sky Survey and any supplement thereto, (viii) the
fees and expenses of any transfer agent or registrar for the Securities,
(ix) the filing fees incident to, and the reasonable fees and
disbursements of counsel to the U.S. Underwriters in connection with,
the review by the National Association of Securities Dealers, Inc. (the
"NASD") of the terms of the sale of the Securities, and (x) the fees and
expenses incurred in connection with the listing of the Securities on
the New York Stock Exchange.
(b) TERMINATION OF AGREEMENT. If this Agreement is terminated by the U.S.
Representatives in accordance with the provisions of Section 5, Section 9(a)(i)
or Section 11 hereof, the Selling Stockholders shall reimburse the U.S.
Underwriters for all of their out-of-pocket expenses, including the reasonable
fees and disbursements of counsel for the U.S. Underwriters. Except as provided
in this Section 4 and in Sections 6 and 7 hereof, the
18
Company shall not be responsible for paying the out-of-pocket expenses of the
U.S. Underwriters.
(c) ALLOCATION OF EXPENSES. The provisions of this Section shall not
affect any agreement that the Company and the Selling Stockholders may make for
the sharing of such costs and expenses.
SECTION 5 CONDITIONS OF U.S. UNDERWRITERS' OBLIGATIONS. The obligations of
the several U.S. Underwriters hereunder are subject to the accuracy of the
representations and warranties of the Company and the Selling Stockholders
contained in Section 1 hereof or in certificates of any officer of the Company
or any Subsidiary of the Company or by or on behalf of any Selling Stockholder
delivered pursuant to the provisions hereof, to the performance by the Company
of its covenants and other obligations hereunder, and to the following further
conditions:
(a) EFFECTIVENESS OF REGISTRATION STATEMENT. The Registration
Statement, including any Rule 462(b) Registration Statement, has become
effective and at Closing Time no stop order suspending the effectiveness of
the Registration Statement shall have been issued under the 1933 Act or
proceedings therefor initiated or threatened by the Commission, and any
request on the part of the Commission for additional information shall have
been complied with to the reasonable satisfaction of counsel for the U.S.
Underwriters. A prospectus containing the Rule 430A Information shall have
been filed with the Commission in accordance with Rule 424(b) (or a post-
effective amendment providing such information shall have been filed and
declared effective in accordance with the requirements of Rule 430A) or, if
the Company has elected to rely upon Rule 434, a Term Sheet shall have been
filed with the Commission in accordance with Rule 424(b).
(b) OPINION OF COUNSEL FOR THE COMPANY. At Closing Time, the U.S.
Representatives shall have received the favorable opinion, dated as of
Closing Time, of LeBoeuf, Lamb, Greene & MacRae, L.L.P. counsel for the
Company, in form and substance satisfactory to counsel for the U.S.
Underwriters, together with signed or reproduced copies of such letter for
each of the other U.S. Underwriters to the effect set forth in Exhibit A
hereto and to such further effect as counsel for the U.S. Underwriters may
reasonably request.
(c) OPINION OF GENERAL COUNSEL TO THE COMPANY. At Closing Time, the
U.S. Representatives shall have received the favorable opinion, dated as of
Closing Time, of the General Counsel of the Company, in form and substance
satisfactory to counsel for the U.S. Underwriters, together with signed or
reproduced copies of such letter for each of the other U.S. Underwriters to
the effect set forth in Exhibit B hereto and to such further effect as
counsel for the U.S. Underwriters may reasonably request.
(d) OPINION OF COUNSEL FOR THE SELLING STOCKHOLDERS. At Closing
Time, the
19
U.S. Representatives shall have received the favorable opinion, dated as of
Closing Time, of LeBoeuf, Lamb, Greene & MacRae, L.L.P., counsel for the
Selling Stockholders, in form and substance satisfactory to counsel for the
U.S. Underwriters, together with signed or reproduced copies of such letter
for each of the other U.S. Underwriters to the effect set forth in Exhibit
C hereto and to such further effect as counsel for the U.S. Underwriters
may reasonably request.
(e) OPINION OF JAPANESE COUNSEL FOR THE COMPANY. At Closing Time,
the U.S. Representatives shall have received the favorable opinion, dated
as of Closing Time, of Tokyo Aoyama Law Office, Japanese counsel for the
Company, in form and substance satisfactory to counsel for the U.S.
Underwriters, together with signed or reproduced copies of such letter for
each of the other U.S. Underwriters to the effect set forth in Exhibit D
hereto and to such further effect as counsel for the U.S. Underwriters may
reasonably request.
(f) OPINION OF HONG KONG COUNSEL FOR THE COMPANY. At Closing Time,
the U.S. Representatives shall have received the favorable opinion, dated
as of Closing Time, of Baker & McKenzie, Hong Kong counsel for the Company,
in form and substance satisfactory to counsel for the U.S. Underwriters,
together with signed or reproduced copies of such letter for each of the
other U.S. Underwriters to the effect set forth in Exhibit E hereto and to
such further effect as counsel for the U.S. Underwriters may reasonably
request.
(g) OPINION OF TAIWANESE COUNSEL FOR THE COMPANY. At Closing Time,
the U.S. Representatives shall have received the favorable opinion, dated
as of Closing Time, of Lee & Li, Taiwanese counsel for the Company, in form
and substance satisfactory to counsel for the U.S. Underwriters, together
with signed or reproduced copies of such letter for each of the other U.S.
Underwriters to the effect set forth in Exhibit F hereto and to such
further effect as counsel for the U.S. Underwriters may reasonably request.
(h) OPINION OF SOUTH KOREAN COUNSEL FOR THE COMPANY. At Closing
Time, the U.S. Representatives shall have received the favorable opinion,
dated as of Closing Time, of Kim & Chang, South Korean counsel for the
Company, in form and substance satisfactory to counsel for the U.S.
Underwriters, together with signed or reproduced copies of such letter for
each of the other U.S. Underwriters to the effect set forth in Exhibit G
hereto and to such further effect as counsel for the U.S. Underwriters may
reasonably request.
(i) OPINION OF THAI COUNSEL FOR THE COMPANY. At Closing Time, the
U.S. Representatives shall have received the favorable opinion, dated as of
Closing Time, of Anek & Associates, Thai counsel for the company, in form
and substance satisfactory to counsel for the U.S. Underwriters, together
with signed or reproduced copies of such letter for each of the other U.S.
Underwriters to the effect set forth in Exhibit H hereto and to such
further effect as counsel for the U.S. Underwriters may
20
reasonably request.
(j) OPINION OF COUNSEL FOR U.S. UNDERWRITERS. At Closing Time, the
U.S. Representatives shall have received the favorable opinion, dated as of
Closing Time, of Shearman & Sterling, counsel for the U.S. Underwriters,
together with signed or reproduced copies of such letter for each of the
other Underwriters with respect to the matters set forth in clauses (i),
(iii), (vi), (vii) (solely as to preemptive or other similar rights arising
by operation of law or under the charter or by-laws of the Company), (viii)
through (x), inclusive, (xii), (xiii) (solely as to the information in the
Prospectus under "Description of Capital Stock--Common Stock") and the
penultimate paragraph of Exhibit A hereto. In giving such opinion such
counsel may rely, as to all matters governed by the laws of jurisdictions
other than the law of the State of New York, the federal law of the United
States and the General Corporation Law of the State of Delaware, upon the
opinions of counsel satisfactory to the U.S. Representatives. Such counsel
may also state that, insofar as such opinion involves factual matters, they
have relied, to the extent they deem proper, upon certificates of officers
of the Company and its Subsidiaries and certificates of public officials.
(k) OFFICERS' CERTIFICATE. At Closing Time, there shall not have
been, since the date hereof or since the respective dates as of which
information is given in the Prospectuses, any material adverse change in
the condition, financial or otherwise, or in the earnings, business affairs
or business prospects of the Company and its Subsidiaries considered as one
enterprise, whether or not arising in the ordinary course of business, and
the U.S. Representatives shall have received a certificate of the President
or a Vice President of the Company and of the chief financial or chief
accounting officer of the Company, dated as of the Closing Time, to the
effect that (i) there has been no such material adverse change, (ii) the
representations and warranties in Section 1(a) hereof are true and correct
with the same force and effect as though expressly made at and as of
Closing Time, (iii) the Company has complied with all agreements and
satisfied all conditions on its part to be performed or satisfied at or
prior to Closing Time, and (iv) no stop order suspending the effectiveness
of the Registration Statement has been issued and no proceedings for that
purpose have been instituted or are pending or are contemplated by the
Commission.
(l) CERTIFICATE OF SELLING STOCKHOLDERS. At Closing Time, the U.S.
Representatives shall have received a certificate of an Attorney-in-Fact on
behalf of each Selling Stockholder, dated as of Closing Time, to the
effect that (i) the representations and warranties of each Selling
Stockholder contained in Section 1(b) hereof are true and correct in all
respects with the same force and effect as though expressly made at and as
of Closing Time and (ii) each Selling Stockholder has complied in all
material respects with all agreements and all conditions on its part to be
performed under this Agreement and the International Purchase Agreement at
or prior to Closing Time.
(m) ACCOUNTANT'S COMFORT LETTER. At the time of the execution of
this
21
Agreement, the U.S. Representatives shall have received from Price
Waterhouse L.L.P. a letter dated such date, in form and substance
satisfactory to the U.S. Representatives, together with signed or
reproduced copies of such letter for each of the other U.S. Underwriters
containing statements and information of the type ordinarily included in
accountants' "comfort letters" to underwriters with respect to the
financial statements and certain financial information contained in the
Registration Statement and the Prospectuses.
(n) BRING-DOWN COMFORT LETTER. At Closing Time, the U.S.
Representatives shall have received from Price Waterhouse L.L.P. a letter,
dated as of Closing Time, to the effect that they reaffirm the statements
made in the letter furnished pursuant to subsection (m) of this Section,
except that the specified date referred to shall be a date not more than
three business days prior to Closing Time.
(o) APPROVAL OF LISTING. At Closing Time, the Securities shall have
been approved for listing on the New York Stock Exchange, subject only to
official notice of issuance.
(p) NO OBJECTION. The NASD has confirmed that it has not raised any
objection with respect to the fairness and reasonableness of the
underwriting terms and arrangements.
(q) LOCK-UP AGREEMENTS. At the date of this Agreement, the U.S.
Representatives shall have received an agreement substantially in the form
of Exhibit I hereto signed by the persons listed on Schedule D hereto.
(r) PURCHASE OF INITIAL INTERNATIONAL SECURITIES. Contemporaneously
with the purchase by the U.S. Underwriters of the Initial U.S. Securities
under this Agreement, the International Managers shall have purchased the
Initial International Securities under the International Purchase
Agreement.
(s) CONDITIONS TO PURCHASE OF THE U.S. OPTION SECURITIES. In the
event that the U.S. Underwriters exercise their option provided in
Section 2(b) hereof to purchase all or any portion of the U.S. Option
Securities, the representations and warranties of the Company and the
Selling Stockholders contained herein and the statements in any
certificates furnished by the Company, any Subsidiary of the Company and
the Selling Stockholders hereunder shall be true and correct as of each
Date of Delivery and, at the relevant Date of Delivery, the U.S.
Representatives shall have received:
(i) OFFICERS' CERTIFICATE. A certificate, dated such Date
of Delivery, of the President or a Vice President of the Company and
of the chief financial or chief accounting officer of the Company
confirming that the certificate delivered at the Closing Time pursuant
to Section 5(k) hereof remains true and correct as of such Date of
Delivery.
22
(ii) CERTIFICATE OF SELLING STOCKHOLDERS. A certificate,
dated such Date of Delivery, of an Attorney-in-Fact on behalf of each
Selling Stockholder confirming that the certificate delivered at
Closing Time pursuant to Section 5(l) remains true and correct as of
such Date of Delivery.
(iii) OPINION OF COUNSEL FOR COMPANY. The favorable opinion
of counsel for the Company, in form and substance satisfactory to
counsel for the U.S. Underwriters, dated such Date of Delivery,
relating to the Option Securities to be purchased on such Date of
Delivery and otherwise to the same effect as the opinion required by
Section 5(b) hereof.
(iv) OPINION OF GENERAL COUNSEL FOR THE COMPANY. The
favorable opinion of the Company's General Counsel, in form and
substance satisfactory to counsel for the U.S. Underwriters, dated
such Date of Delivery, relating to the Option Securities to be
purchased on such Date of Delivery and otherwise to the same effect as
the opinion required by Section 5(c) hereof.
(v) OPINION OF COUNSEL FOR THE SELLING STOCKHOLDERS. The
favorable opinion of LeBoeuf, Lamb, Greene & Macrae, L.L.P., counsel
for the Selling Stockholders, in form and substance satisfactory to
counsel for the U.S. Underwriters, dated such Date of Delivery,
relating to the Option Securities to be purchased on such Date of
Delivery and otherwise to the same effect as the opinion required by
Section 5(d) hereof.
(vi) OPINION OF JAPANESE COUNSEL FOR COMPANY. The favorable
opinion of Japanese counsel for the Company, in form and substance
satisfactory to counsel for the U.S. Underwriters, dated such Date of
Delivery, relating to the Option Securities to be purchased on such
Date of Delivery and otherwise to the same effect as the opinion
required by Section 5(e) hereof.
(vii) OPINION OF HONG KONG COUNSEL FOR THE COMPANY. The
favorable opinion of Hong Kong counsel for the Company, in form and
substance satisfactory to counsel for the U.S. Underwriters, dated
such Date of Delivery, relating to the Option Securities to be
purchased on such Date of Delivery and otherwise to the same effect as
the opinion required by Section 5(f) hereof.
(viii) OPINION OF TAIWANESE COUNSEL FOR THE COMPANY. The
favorable opinion of Taiwanese counsel for the Company, in form and
substance satisfactory to counsel for the U.S. Underwriters, dated
such Date of Delivery, relating to the Option Securities to be
purchased on such Date of Delivery and otherwise to the same effect as
the opinion required by Section 5(g) hereof.
(ix) OPINION OF SOUTH KOREAN COUNSEL FOR THE COMPANY. The
favorable opinion of South Korean counsel for the Company, in form and
23
substance satisfactory to counsel for the U.S. Underwriters, dated
such Date of Delivery, relating to the Option Securities to be
purchased on such Date of Delivery and otherwise to the same effect
as the opinion required by Section 5(h) hereof.
(x) OPINION OF THAI COUNSEL FOR THE COMPANY. The favorable
opinion of Thai counsel for the Company, in form and substance
satisfactory to counsel for the U.S. Underwriters, dated such Date of
Delivery, relating to the Option Securities to be purchased on such
Date of Delivery and otherwise to the same effect as the opinion
required by Section 5(i) hereof.
(xi) OPINION OF COUNSEL FOR THE U.S. UNDERWRITERS. The
favorable opinion of Shearman & Sterling, counsel for the U.S.
Underwriters, dated such Date of Delivery, relating to the Option
Securities to be purchased on such Date of Delivery and otherwise to
the same effect as the opinion required by Section 5(j) hereof.
(xii) BRING-DOWN COMFORT LETTER. A letter from Price
Waterhouse L.L.P., in form and substance satisfactory to the U.S.
Representatives and dated such Date of Delivery, substantially in the
same form and substance as the letter furnished to the U.S.
Representatives pursuant to Section 5(n) hereof, except that the
"specified date" in the letter furnished pursuant to this paragraph
shall be a date not more than five days prior to such Date of
Delivery.
(t) ADDITIONAL DOCUMENTS. At Closing Time and at each Date of
Delivery counsel for the U.S. Underwriters shall have been furnished with such
documents and opinions as they may reasonably require for the purpose of
enabling them to pass upon the issuance and sale of the Securities as herein
contemplated, or in order to evidence the accuracy of any of the representations
or warranties, or the fulfillment of any of the conditions, herein contained;
and all proceedings taken by the Company and the Selling Stockholders in
connection with the sale of the Securities as herein contemplated shall be
reasonably satisfactory in form and substance to the U.S. Representatives and
counsel for the U.S. Underwriters.
(u) TERMINATION OF AGREEMENT. If any condition specified in this
Section shall not have been fulfilled when and as required to be fulfilled, this
Agreement, or, in the case of any condition to the purchase of U.S. Option
Securities on a Date of Delivery which is after the Closing Time, the
obligations of the several U.S. Underwriters to purchase the relevant Option
Securities, may be terminated by the U.S. Representatives by notice to the
Company at any time at or prior to Closing Time or such Date of Delivery, as the
case may be, and such termination shall be without liability of any party to
any other party except as provided in Section 4 and except that Sections 1, 6, 7
and 8 shall survive any such termination and remain in full force and effect.
24
SECTION 6 INDEMNIFICATION.
(a) INDEMNIFICATION OF U.S. UNDERWRITERS. The Company and the Selling
Stockholders, jointly (except as provided in clause (2) below) and severally,
agree to indemnify and hold harmless each U.S. Underwriter and each person, if
any, who controls any U.S. Underwriter within the meaning of Section 15 of the
1933 Act or Section 20 of the 1934 Act as follows:
(1) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, arising out of any untrue statement or alleged
untrue statement of a material fact contained in the Registration Statement
(or any amendment thereto), including the Rule 430A Information and the
Rule 434 Information, if applicable, or the omission or alleged omission
therefrom of a material fact required to be stated therein or necessary to
make the statements therein not misleading or arising out of any untrue
statement or alleged untrue statement of a material fact included in any
preliminary prospectus or the Prospectuses (or any amendment or supplement
thereto), or the omission or alleged omission therefrom of a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading;
(2) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, to the extent of the aggregate amount paid in
settlement of any litigation, or any investigation or proceeding by any
governmental agency or body, commenced or threatened, or of any claim
whatsoever based upon any such untrue statement or omission, or any such
alleged untrue statement or omission; PROVIDED that any such settlement is
effected with the written consent of (A) the Company, to the extent
indemnification pursuant to this Section 6(a)(2) is sought from the
Company, and (B) each Selling Stockholder, to the extent indemnification
pursuant to this Section 6(a)(2) is sought from such Selling Stockholder;
and
(3) against any and all expense whatsoever, as incurred (including
the fees and disbursements of counsel chosen by Merrill Lynch), reasonably
incurred in investigating, preparing or defending against any litigation,
or any investigation or proceeding by any governmental agency or body,
commenced or threatened, or any claim whatsoever based upon any such untrue
statement or omission, or any such alleged untrue statement or omission
hereof, to the extent that any such expense is not paid under clauses (1)
or (2) above;
PROVIDED, HOWEVER, that (x) this indemnity agreement shall not apply to any
loss, liability, claim, damage or expense to the extent arising out of any
untrue statement or omission or alleged untrue statement or omission made in
reliance upon and in conformity with written information furnished to the
Company by any U.S. Underwriter through Merrill Lynch or expressly for use in
the Registration Statement (or any amendment thereto), including the Rule 430A
Information and the Rule 434 Information, if applicable, or any U.S. preliminary
prospectus or the U.S. Prospectus (or any amendment or supplement thereto); (y)
the
25
aggregate liability of each Selling Stockholder under this Section 6 (together
with any liability of such Selling Stockholder under Section 6 of the
International Purchase Agreement shall be limited to an amount equal to the net
proceeds (after deducting the aggregate Underwriters' discount, but before
deducting expenses) received by such Selling Stockholder from the sale of his or
her Securities pursuant to this Agreement and the International Purchase
Agreement and (z) each Selling Stockholder other than the Back-Stopped Selling
Stockholders (such other Selling Stockholders being referred to herein as the
"Limited Selling Stockholders") will be liable in any case only to the extent
that any such loss, liability, claim, damage or expense arises out of or is
based upon statements in or omissions from the Registration Statement (or any
amendment thereto) based upon information furnished to the Company by such
Limited Selling Stockholder expressly for use therein; and PROVIDED, FURTHER,
that the Company and the Selling Stockholders shall not be liable to any U.S.
Underwriter under this subsection (a) with respect to any U.S. preliminary
prospectus to the extent that any loss, claim, damage or liability of such U.S.
Underwriter results from the fact that such U.S. Underwriter sold U.S.
Securities to a person to whom there was not given or sent, at or prior to the
written confirmation of such sale, a copy of the U.S. Prospectus or of the U.S.
Prospectus as then amended or supplemented in any case where such delivery is
required by the Securities Act if the Company has previously furnished copies
thereof to such U.S. Underwriter and the loss, claim, damage or liability of
such U.S. Underwriter results from an untrue statement or omission of a material
fact contained in the U.S. preliminary prospectus which was corrected in the
U.S. Prospectus (as amended or supplemented).
In making a claim for indemnification under this Section 6 (other than
pursuant to clause (a)(4) of this Section 6) or contribution under Section 7
hereof by the Company or the Selling Stockholders, the indemnified parties
may proceed against either (1) the Company and the Selling Stockholders
jointly, (2) the Selling Stockholders only or (3) the Company only, but may
not proceed solely against Blake M. Roney, Steven J. Lund and Keith R. Halls
and the trusts, partnerships, foundations, corporations, limited liability
companies and similar Selling Stockholder entities for which these
individuals have investment power (the "Back-Stopped Selling Stockholders"),
except as set forth below. In the event that the indemnified parties are
entitled to seek indemnity or contribution hereunder against any loss,
liability, claim, damage and expense to which this paragraph applies then, as
a precondition to any indemnified party obtaining indemnification or
contribution from any Back-Stopped Selling Stockholder, the indemnified
parties shall first obtain a final judgment from a trial court that such
indemnified parties are entitled to indemnity or contribution under this
Agreement from the Company and the Selling Stockholders with respect to such
loss, liability, claim, damage or expense (the "Final Judgment") and shall
seek to satisfy such Final Judgment in full from the Company by making a
written demand upon the Company for such satisfaction. Only in the event
such Final Judgment shall remain unsatisfied in whole or in part 45 days
following the date of receipt by the Company of such demand shall any
indemnified party have the right to take action to satisfy such Final
Judgment by making demand directly on the Back-Stopped Selling Stockholders
(but only if and to the extent the Company has not already satisfied such
Final Judgment, whether by settlement, release or otherwise). The
indemnified parties may exercise this right to first seek to obtain payment
from the Company and thereafter obtain payment from the Back-Stopped Selling
Stockholders without regard to the pursuit by any
26
party of its rights to the appeal of such Final Judgment. The indemnified
parties shall, however, be relieved of their obligation to first obtain a Final
Judgment against the Company to seek to obtain payment from the Company with
respect to such Final Judgment or, having sought such payment, to wait such 45
days after failure by the Company to immediately satisfy any such Final Judgment
if (A) the Company files a petition for relief under the United States
Bankruptcy Code (the "Bankruptcy Code"), (B) an order for relief is entered
against the Company in an involuntary case under the Bankruptcy Code, (C) the
Company makes an assignment for the benefit of its creditors, (D) any court
orders or approves the appointment of a receiver or custodian for the Company or
a substantial portion of its assets, or (E) the loss, liability, claim, damage
or expense arises out of or is based upon statements in or omissions from the
Registration Statement (or any amendment thereto) based upon information
furnished to the Company by a Back-Stopped Selling Stockholder for use therein.
The foregoing provisions of this paragraph are not intended to require any
indemnified party to obtain a Final Judgment against the Company, or the Selling
Stockholders before obtaining reimbursement of expenses pursuant to clause
(a)(3) of this Section 6. However, the indemnified parties shall first seek to
obtain such reimbursement in full from the Company by making a written demand
upon the Company for such reimbursement. Only in the event such expenses shall
remain unreimbursed in whole or in part 45 days following the date of receipt by
the Company of such demand shall any indemnified party have the right to receive
reimbursement of such expenses from the Back-Stopped Selling Stockholders by
making written demand directly on the Back-Stopped Selling Stockholders (but
only if and to the extent the Company has not already satisfied the demand for
reimbursement, whether by settlement, release or otherwise). The indemnified
parties shall, however, be relieved of their obligation to first seek to obtain
such reimbursement in full from the Company or, having made written demand
therefor, to wait such 45 days after failure by the Company to immediately
reimburse such expenses if (I) the Company files a petition for relief under
the Bankruptcy Code, (II) an order for relief is entered against the Company in
an involuntary case under the Bankruptcy Code, (III) the Company makes an
assignment for the benefit of its creditors, (IV) any court orders or approves
the appointment of a receiver or custodian for the Company or a substantial
portion of its assets, or (V) the loss, liability, claim, damage or expense
arises out of or is based upon statements in or omissions from the Registration
Statement (or any amendment thereto) based upon information furnished to the
Company by a Back-Stopped Selling Stockholder for use therein. Notwithstanding
anything to the contrary contained herein, the provisions of this paragraph
shall not apply to any claim for indemnity pursuant to clause (a)(2) of this
Section 6 if the indemnified parties are entitled to seek indemnity under such
clause (a)(2) from any Selling Stockholder with respect to a settlement that has
not been effected with the written consent of the Company.
(b) INDEMNIFICATION OF COMPANY, DIRECTORS AND OFFICERS AND SELLING
STOCKHOLDERS. Each U.S. Underwriter severally agrees to indemnify and hold
harmless the Company, its directors, each of its officers who signed the
Registration Statement, and each person, if any, who controls the Company within
the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act, and
each Selling Stockholder against any and all loss, liability, claim, damage and
expense described in the indemnity contained in subsection (a) of this Section,
as incurred, but only with respect to untrue statements or omissions, or alleged
untrue
27
statements or omissions, made in the Registration Statement (or any amendment
thereto), including the Rule 430A Information and the Rule 434 Information, if
applicable, or any U.S. preliminary prospectus or the U.S. Prospectus (or any
amendment or supplement thereto) in reliance upon and in conformity with written
information furnished to the Company by such U.S. Underwriter through the U.S.
Representatives expressly for use in the Registration Statement (or any
amendment thereto) or such preliminary prospectus or the U.S. Prospectus (or any
amendment or supplement thereto).
(c) ACTIONS AGAINST PARTIES; NOTIFICATION. Each indemnified party shall
give notice as promptly as reasonably practicable to each indemnifying party of
any action commenced against it in respect of which indemnity may be sought
hereunder, but failure to so notify an indemnifying party shall not relieve such
indemnifying party from any liability hereunder to the extent it is not
materially prejudiced as a result thereof and in any event shall not relieve it
from any liability which it may have otherwise than on account of this indemnity
agreement. In the case of parties indemnified pursuant to Section 6(a) above,
counsel for the indemnified parties shall be selected by Merrill Lynch, and, in
the case of parties indemnified pursuant to Section 6(b) above, counsel for the
indemnified parties shall be selected by the Company; PROVIDED, HOWEVER, that in
each such case, such counsel shall be reasonably satisfactory to the
indemnifying party. An indemnifying party may participate at its own expense in
the defense of any such action; provided, however, that counsel for the
indemnifying party shall not (except with the consent of the indemnified party)
also be counsel for the indemnified party. In no event shall the indemnifying
parties be liable for fees and expenses of more than one counsel (in addition to
any local counsel) separate from their own counsel for all indemnified parties
in connection with any one action or separate but similar or related actions in
the same jurisdiction arising out of the same general allegations or
circumstances. No indemnifying party shall, without the prior written consent
of the indemnified parties, settle or compromise or consent to the entry of any
judgment with respect to any litigation, or any investigation or proceeding by
any governmental agency or body, commenced or threatened, or any claim
whatsoever in respect of which indemnification or contribution could be sought
under this Section 6 or Section 7 hereof (whether or not the indemnified parties
are actual or potential parties thereto), unless such settlement, compromise or
consent (i) includes an unconditional release of each indemnified party from all
liability arising out of such litigation, investigation, proceeding or claim and
(ii) does not include a statement as to or an admission of fault, culpability or
a failure to act by or on behalf of any indemnified party.
(d) SETTLEMENT WITHOUT CONSENT IF FAILURE TO REIMBURSE. If at any time an
indemnified party shall have requested an indemnifying party to reimburse the
indemnified party for fees and expenses of counsel, such indemnifying party
agrees that it shall be liable for any settlement of the nature contemplated by
Section 6(a)(2) or Section 6(a)(3) effected without its written consent if (i)
such settlement is entered into more than 45 days after receipt by such
indemnifying party of the aforesaid request, (ii) such indemnifying party shall
have received notice of the terms of such settlement at least 30 days prior to
such settlement being entered into and (iii) such indemnifying party shall not
have reimbursed such indemnified party in accordance with such request prior to
the date of such settlement.
28
(e) OTHER AGREEMENTS WITH RESPECT TO INDEMNIFICATION. The provisions of
this Section shall not affect any agreement between the Company and the Selling
Stockholders with respect to indemnification.
SECTION 7. CONTRIBUTION. If the indemnification provided for in
Section 6 hereof is for any reason unavailable to or insufficient to hold
harmless an indemnified party in respect of any losses, liabilities, claims,
damages or expenses referred to therein, then each indemnifying party shall
contribute to the aggregate amount of such losses, liabilities, claims, damages
and expenses incurred by such indemnified party, as incurred, (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Company and the Selling Stockholders on the one hand and the U.S. Underwriters
on the other hand from the offering of the Securities pursuant to this Agreement
or (ii) if the allocation provided by clause (i) is not permitted by applicable
law, in such proportion as is appropriate to reflect not only the relative
benefits referred to in clause (i) above but also the relative fault of the
Company and the Selling Stockholders on the one hand and of the U.S.
Underwriters on the other hand in connection with the statements or omissions,
which resulted in such losses, liabilities, claims, damages or expenses, as well
as any other relevant equitable considerations.
The relative benefits received by the Company and the Selling Stockholders
on the one hand and the U.S. Underwriters on the other hand in connection with
the offering of the U.S. Securities pursuant to this Agreement shall be deemed
to be in the same respective proportions as the total net proceeds from the
offering of the U.S. Securities pursuant to this Agreement (before deducting
expenses) received by the Selling Stockholders and the total underwriting
discount received by the U.S. Underwriters, in each case as set forth on the
cover of the U.S. Prospectus, or, if Rule 434 is used, the corresponding
location on the Term Sheet, bear to the aggregate initial public offering price
of the U.S. Securities as set forth on such cover.
The relative fault of the Company and the Selling Stockholders on the one
hand and the U.S. Underwriters on the other hand shall be determined by
reference to, among other things, whether any such untrue or alleged untrue
statement of a material fact or omission or alleged omission to state a material
fact relates to information supplied by the Company or the Selling Stockholders
or by the U.S. Underwriters and the parties' relative intent, knowledge, access
to information and opportunity to correct or prevent such statement or omission.
The Company, the Selling Stockholders and the U.S. Underwriters agree that
it would not be just and equitable if contribution pursuant to this Section 7
were determined by pro rata allocation (even if the U.S. Underwriters were
treated as one entity for such purpose) or by any other method of allocation
which does not take account of the equitable considerations referred to above in
this Section 7. The aggregate amount of losses, liabilities, claims, damages
and expenses incurred by an indemnified party and referred to above in this
Section 7 shall be deemed to include any legal or other expenses reasonably
incurred by such indemnified party in investigating, preparing or defending
against any litigation, or any investigation or proceeding by any governmental
agency or body, commenced or threatened,
29
or any claim whatsoever based upon any such untrue or alleged untrue statement
or omission or alleged omission.
Notwithstanding the provisions of this Section 7, no U.S. Underwriter shall
be required to contribute any amount in excess of the amount by which the total
price at which the U.S. Securities underwritten by it and distributed to the
public were offered to the public exceeds the amount of any damages which such
U.S. Underwriter has otherwise been required to pay by reason of any such untrue
or alleged untrue statement or omission or alleged omission.
No person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the 1933 Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation.
For purposes of this Section 7, each person, if any, who controls a U.S.
Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of
the 1934 Act shall have the same rights to contribution as such U.S.
Underwriter, and each director of the Company, each officer of the Company who
signed the Registration Statement, and each person, if any, who controls the
Company or any Selling Stockholder within the meaning of Section 15 of the 1933
Act or Section 20 of the 1934 Act shall have the same rights to contribution as
the Company or such Selling Stockholder, as the case may be. The U.S.
Underwriters' respective obligations to contribute pursuant to this Section 7
are several in proportion to the number of Initial U.S. Securities set forth
opposite their respective names in Schedule A hereto and not joint.
The provisions of this Section shall not affect any agreement between the
Company and the Selling Stockholders with respect to contribution.
SECTION 8. REPRESENTATIONS, WARRANTIES AND AGREEMENTS TO SURVIVE
DELIVERY. All representations, warranties and agreements contained in this
Agreement or in certificates of officers of the Company or any of its
Subsidiaries or the Selling Stockholders submitted pursuant hereto, shall remain
operative and in full force and effect, regardless of any investigation made by
or on behalf of any U.S. Underwriter or controlling person, or by or on behalf
of the Company or the Selling Stockholders, and shall survive delivery of the
Securities to the U.S. Underwriters.
30
SECTION 9. TERMINATION OF AGREEMENT
(a) TERMINATION; GENERAL. The U.S. Representatives may terminate this
Agreement, by notice to the Company and the Selling Stockholders, at any time at
or prior to Closing Time (i) if there has been, since the time of execution of
this Agreement or since the respective dates as of which information is given in
the U.S. Prospectus, any material adverse change in the condition, financial or
otherwise, or in the earnings, business affairs or business prospects of the
Company and its Subsidiaries considered as one enterprise, whether or not
arising in the ordinary course of business, or (ii) if there has occurred any
material adverse change in the financial markets in the United States or the
other international financial markets, any outbreak of hostilities or escalation
thereof or other calamity or crisis or any change or development involving a
prospective change in national or international political, financial or economic
conditions, in each case the effect of which is such as to make it, in the
judgment of the U.S. Representatives, impracticable to market the Securities or
to enforce contracts for the sale of the Securities, or (iii) if trading in any
securities of the Company has been suspended or materially limited by the
Commission or the New York Stock Exchange, or if trading generally on the
American Stock Exchange or the New York Stock Exchange or in the Nasdaq National
Market has been suspended or materially limited, or minimum or maximum prices
for trading have been fixed, or maximum ranges for prices have been required, by
any of said exchanges or by such system or by order of the Commission, the
National Association of Securities Dealers, Inc. or any other governmental
authority, or (iv) if a banking moratorium has been declared by either U.S.
Federal or New York State authorities.
(b) LIABILITIES. If this Agreement is terminated pursuant to this
Section, such termination shall be without liability of any party to any other
party except as provided in Section 4 hereof, and provided further that Sections
1, 6, 7 and 8 shall survive such termination and remain in full force and
effect.
SECTION 10. DEFAULT BY ONE OR MORE OF THE U.S. UNDERWRITERS. If one or
more of the U.S. Underwriters shall fail at Closing Time or a Date of Delivery
to purchase the Securities which it or they are obligated to purchase under this
Agreement (the "Defaulted Securities"), the U.S. Representatives shall have the
right, within 24 hours thereafter, to make arrangements for one or more of the
non-defaulting U.S. Underwriters, or any other underwriters, to purchase all,
but not less than all, of the Defaulted Securities in such amounts as may be
agreed upon and upon the terms herein set forth; if, however, the U.S.
Representatives shall not have completed such arrangements within such 24-hour
period, then:
a. if the number of Defaulted Securities does not exceed 10% of the
number of U.S. Securities to be purchased on such date, each of the non-
defaulting U.S. Underwriters shall be obligated, severally and not jointly,
to purchase the full amount thereof in the proportions that their
respective underwriting obligations hereunder bear to the underwriting
obligations of all non-defaulting U.S. Underwriters, or
31
b. if the number of Defaulted Securities exceeds 10% of the number
of U.S. Securities to be purchased on such date, this Agreement or, with
respect to any Date of Delivery which occurs after the Closing Time, the
obligation of the U.S. Underwriters to purchase and of the Company to sell
the Option Securities to be purchased and sold on such Date of Delivery
shall terminate without liability on the part of any non-defaulting U.S.
Underwriter.
No action taken pursuant to this Section shall relieve any defaulting U.S.
Underwriter from liability in respect of its default.
In the event of any such default which does not result in a termination of
this Agreement or, in the case of a Date of Delivery which is after the Closing
Time, which does not result in a termination of the obligation of the U.S.
Underwriters to purchase and the Company to sell the relevant U.S. Option
Securities, as the case may be, either the (i) U.S. Representatives or (ii) the
Company and any Selling Stockholder shall have the right to postpone the Closing
Time or the relevant Date of Delivery, as the case may be, for a period not
exceeding seven days in order to effect any required changes in the Registration
Statement or Prospectus or in any other documents or arrangements. As used
herein, the term "U.S. Underwriter" includes any person substituted for a U.S.
Underwriter under this Section 10.
SECTION 11. DEFAULT BY ONE OR MORE OF THE SELLING STOCKHOLDERS. If one or
more Selling Stockholders shall fail at Closing Time or at a Date of Delivery to
sell and deliver the number of Securities which such Selling Stockholder or
Selling Stockholders are obligated to sell hereunder, and the remaining Selling
Stockholders do not exercise the right hereby granted to increase, pro rata or
otherwise, the number of Securities to be sold by them hereunder to the total
number to be sold by all Selling Stockholders as set forth in Schedule B hereto,
then the U.S. Underwriters may, at the option of the U.S. Representatives, by
notice from the U.S. Representatives to the Company and the non-defaulting
Selling Stockholders, either (a) terminate this Agreement without any liability
on the fault of any non-defaulting party except that the provisions of Sections
1, 4, 6, 7 and 8 shall remain in full force and effect or (b) elect to purchase
the Securities which the non-defaulting Selling Stockholders have agreed to sell
hereunder. No action taken pursuant to this Section 11 shall relieve any
Selling Stockholder so defaulting from liability, if any, in respect of such
default.
In the event of a default by one or more Selling Stockholders as referred
to in this Section 11, each of the U.S. Representatives, the Company and the
non-defaulting Selling Stockholders shall have the right to postpone the Closing
Time or the relevant Date of Delivery for a period not exceeding seven days in
order to effect any required change in the Registration Statement or U.S.
Prospectus or in any other documents or arrangements.
SECTION 12. NOTICES. All notices and other communications hereunder shall
be in writing and shall be deemed to have been duly given if mailed or
transmitted by any standard form of telecommunication. Notices to the U.S.
Underwriters shall be directed to the U.S. Representatives at North Tower, World
Financial Center, New York, New York 10281-1201,
32
attention of Ms. Scott Haggard; notices to the Company shall be directed to it
at 75 West Center Street, Provo, Utah 84601, attention of Mr. M. Truman Hunt;
and notices to the Selling Stockholders shall be directed to 75 West Center
Street, Provo, Utah 84601, attention of Mr. Keith R. Halls.
SECTION 13. PARTIES. This Agreement shall inure to the benefit of and be
binding upon the U.S. Underwriters, the Company, and the Selling Stockholders
and their respective successors. Nothing expressed or mentioned in this
Agreement is intended or shall be construed to give any person, firm or
corporation, other than the U.S. Underwriters, the Company, and the Selling
Stockholders and their respective successors and the controlling persons and
officers and directors referred to in Sections 6 and 7 and their heirs and legal
representatives, any legal or equitable right, remedy or claim under or in
respect of this Agreement or any provision herein contained. This Agreement and
all conditions and provisions hereof are intended to be for the sole and
exclusive benefit of the U.S. Underwriters, the Company, and the Selling
Stockholders and their respective successors, and said controlling persons and
officers and directors and their heirs and legal representatives, and for the
benefit of no other person, firm or corporation. No purchaser of Securities
from any U.S. Underwriter shall be deemed to be a successor by reason merely of
such purchase.
SECTION 14. GOVERNING LAW AND TIME. THIS AGREEMENT SHALL BE GOVERNED BY
AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. -- EXCEPT AS
OTHERWISE SET FORTH HEREIN, SPECIFIED TIMES OF DAY REFER TO NEW YORK CITY TIME.
SECTION 15. EFFECT OF HEADINGS. The Article and Section headings herein
and the Table of Contents are for convenience only and shall not affect the
construction hereof.
33
If the foregoing is in accordance with your understanding of our agreement,
please sign and return to the Company and the Attorney-in-Fact for the Selling
Stockholders a counterpart hereof, whereupon this instrument, along with all
counterparts, will become a binding agreement among the U.S. Underwriters, the
Company and the Selling Stockholders in accordance with its terms.
Very truly yours,
NU SKIN ASIA PACIFIC, INC.
By
----------------------------------------
Title:
SELLING STOCKHOLDERS
By
----------------------------------------
As Attorney-in-Fact acting on behalf
of the Selling Stockholders named in
Schedule B hereto
CONFIRMED AND ACCEPTED,
as of the date first above written:
MERRILL LYNCH & CO.
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
MORGAN STANLEY DEAN WITTER
NOMURA SECURITIES INTERNATIONAL, INC.
PAINEWEBBER INCORPORATED
By: MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By
--------------------------------
Authorized Signatory
For themselves and as U.S. Representatives of the other U.S. Underwriters named
in Schedule A hereto.
TABLE OF CONTENTS
SECTION 1. Representations and Warranties. . . . . . . . . . . . . . . . . 3
(a) Representations and Warranties by the Company . . . . . . . . . . . . . . 3
(i) Compliance with Registration Requirements. . . . . . . . . . . . . . 3
(ii) Independent Accountants . . . . . . . . . . . . . . . . . . . . . . 4
(iii) Financial Statements . . . . . . . . . . . . . . . . . . . . . . . 4
(iv) No Material Adverse Change in Business. . . . . . . . . . . . . . . 5
(v) Good Standing of the Company . . . . . . . . . . . . . . . . . . . . 5
(vi) Good Standing of Subsidiaries . . . . . . . . . . . . . . . . . . . 6
(vii) Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . 6
(viii) Authorization of Agreement. . . . . . . . . . . . . . . . . . . . 6
(ix) Authorization and Description of Securities . . . . . . . . . . . . 6
(x) Absence of Defaults and Conflicts. . . . . . . . . . . . . . . . . . 7
(xi) Absence of Labor Dispute. . . . . . . . . . . . . . . . . . . . . . 7
(xii) Absence of Proceedings . . . . . . . . . . . . . . . . . . . . . . 7
(xiii) Accuracy of Exhibits. . . . . . . . . . . . . . . . . . . . . . . 8
(xiv) Possession of Intellectual Property. . . . . . . . . . . . . . . . 8
(xv) Absence of Further Requirements . . . . . . . . . . . . . . . . . . 8
(xvi) Possession of Licenses and Permits . . . . . . . . . . . . . . . . 8
(xvii) Title to Property . . . . . . . . . . . . . . . . . . . . . . . . 9
(xviii) Environmental Laws . . . . . . . . . . . . . . . . . . . . . . . 9
(xix) Registration Rights. . . . . . . . . . . . . . . . . . . . . . . .10
(xx) Certain Transactions. . . . . . . . . . . . . . . . . . . . . . . .10
(xxi) Operating Agreements . . . . . . . . . . . . . . . . . . . . . . .10
(b) Representations and Warranties by the Selling Stockholders. . . . . . . .10
(i) Accurate Disclosure. . . . . . . . . . . . . . . . . . . . . . . . .11
(ii) Authorization of Agreements . . . . . . . . . . . . . . . . . . . .11
(iii) Good and Marketable Title. . . . . . . . . . . . . . . . . . . . .11
(iv) Due Execution of Power of Attorney and Custody Agreement. . . . . .11
(v) Absence of Manipulation. . . . . . . . . . . . . . . . . . . . . . .12
(vi) Absence of Further Requirements . . . . . . . . . . . . . . . . . .12
(vii) Restriction on Sale of Securities. . . . . . . . . . . . . . . . .12
(viii) Certificates Suitable for Transfer. . . . . . . . . . . . . . . .13
(ix) No Association with NASD. . . . . . . . . . . . . . . . . . . . . .13
(c) Officer's Certificates. . . . . . . . . . . . . . . . . . . . . . . . . .13
SECTION 2 Sale and Delivery to the U.S. Underwriters; Closing. . . . . . . . .14
(a) Initial Securities . . . . . . . . . . . . . . . . . . . . . . . . .14
(b) U.S. Option Securities . . . . . . . . . . . . . . . . . . . . . . .17
i
(c) Payment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14
(d) Denominations; Registration. . . . . . . . . . . . . . . . . . . . .15
SECTION 3 Covenants of the Company . . . . . . . . . . . . . . . . . . . . . .15
(a) Compliance with Securities Regulations and Commission Requests . . .15
(b) Filing of Amendments.. . . . . . . . . . . . . . . . . . . . . . . .16
(c) Delivery of Registration Statements. . . . . . . . . . . . . . . . .16
(d) Delivery of Prospectuses . . . . . . . . . . . . . . . . . . . . . .16
(e) Continued Compliance with Securities Laws. . . . . . . . . . . . . .17
(f) Rule 158 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17
(g) Listing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17
(h) Restriction on Sale of Securities. . . . . . . . . . . . . . . . . .17
(i) Reporting Requirements . . . . . . . . . . . . . . . . . . . . . . .18
SECTION 4 Payment of Expenses. . . . . . . . . . . . . . . . . . . . . . . . .18
(a) Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18
(b) Termination of Agreement . . . . . . . . . . . . . . . . . . . . . .18
(c) Allocation of Expenses . . . . . . . . . . . . . . . . . . . . . . .19
SECTION 5 Conditions of U.S. Underwriters' Obligations . . . . . . . . . . . .19
(a) Effectiveness of Registration Statement. . . . . . . . . . . . . . .19
(b) Opinion of Counsel for Company . . . . . . . . . . . . . . . . . . .19
(c) Opinion of General Counsel to the Company. . . . . . . . . . . . . .19
(d) Opinion of Counsel for the Selling Stockholders. . . . . . . . . . .19
(e) Opinion of Japanese Counsel for the Company. . . . . . . . . . . . .20
(f) Opinion of Hong Kong Counsel for the Company . . . . . . . . . . . .20
(g) Opinion of Taiwanese Counsel for the Company . . . . . . . . . . . .20
(h) Opinion of South Korean Counsel for the Company. . . . . . . . . . .20
(i) Opinion of Thai Counsel for the Company . . . . . . . . . . . . . .20
(j) Opinion of Counsel for U.S. Underwriters . . . . . . . . . . . . . .21
(k) Officers' Certificate. . . . . . . . . . . . . . . . . . . . . . . .21
(l) Certificate of Selling Stockholders. . . . . . . . . . . . . . . . .21
(m) Accountant's Comfort Letter. . . . . . . . . . . . . . . . . . . . .21
(n) Bring-down Comfort Letter. . . . . . . . . . . . . . . . . . . . . .22
(o) Approval of Listing. . . . . . . . . . . . . . . . . . . . . . . . .22
(p) No Objection . . . . . . . . . . . . . . . . . . . . . . . . . . . .22
(q) Lock-up Agreements . . . . . . . . . . . . . . . . . . . . . . . . .22
(r) Purchase of Initial International Securities.. . . . . . . . . . . .22
ii
(s) Conditions to Purchase of the U.S. Option Securities . . . . . . . .22
(i) Officers' Certificate . . . . . . . . . . . . . . . . . . . .22
(ii) Certificate of Selling Stockholders . . . . . . . . . . . . .23
(iii) Opinion of Counsel for Company. . . . . . . . . . . . . . . .23
(iv) Opinion of General Counsel for the Company. . . . . . . . . .23
(v) Opinion of Counsel for the Selling Stockholders . . . . . . .23
(vi) Opinion of Japanese Counsel for Company . . . . . . . . . . .23
(vii) Opinion of Hong Kong Counsel for the Company. . . . . . . . .23
(viii) Opinion of Taiwanese Counsel for the Company. . . . . . . . .23
(ix) Opinion of South Korean Counsel for the Company . . . . . . .23
(x) Opinion of Thai Counsel for the Company. . . . . . . . . . . 24
(xi) Opinion of Counsel for the U.S. Underwriters. . . . . . . . .24
(xii) Bring-down Comfort Letter . . . . . . . . . . . . . . . . . .24
(t) Additional Documents . . . . . . . . . . . . . . . . . . . . . . . .24
(u) Termination of Agreement . . . . . . . . . . . . . . . . . . . . . .24
SECTION 6 Indemnification. . . . . . . . . . . . . . . . . . . . . . . . . . .25
(a) Indemnification of U.S. Underwriters . . . . . . . . . . . . . . . .25
(b) Indemnification of Company, Directors and Officers and Selling
Stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . . .27
(c) Actions against Parties; Notification. . . . . . . . . . . . . . . .28
(d) Settlement without Consent if Failure to Reimburse . . . . . . . . .28
(e) Other Agreements with Respect to Indemnification . . . . . . . . . .29
SECTION 7. Contribution . . . . . . . . . . . . . . . . . . . . . . . . . . .29
SECTION 8. Representations, Warranties and Agreements to Survive Delivery . .30
SECTION 9. Termination of Agreement . . . . . . . . . . . . . . . . . . . . .31
(a) Termination; General . . . . . . . . . . . . . . . . . . . . . . .31
(b) Liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . .31
SECTION 10. Default by One or More of the U.S. Underwriters. . . . . . . . . .31
SECTION 11. Default by one or more of the Selling Stockholders or the
Company. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .32
SECTION 12. Notices. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .32
SECTION 13. Parties. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .33
iii
SECTION 14. GOVERNING LAW AND TIME. . . . . . . . . . . . . . . . . . . . . .33
SECTION 15. Effect of Headings. . . . . . . . . . . . . . . . . . . . . . . .33
iv
LeBoeuf, Lamb, Greene & MacRae, L.L.P.
[Letterhead]
June 4, 1997
Nu Skin Asia Pacific, Inc.
75 West Center Street
Provo, Utah 84601
Re: Nu Skin Asia Pacific, Inc. -- Registration Statement
On Form S-1 (the "Registration Statement")
----------------------------------------------------
Ladies and Gentlemen:
We have acted as counsel to Nu Skin Asia Pacific, Inc., a Delaware
corporation (the "Company"), in connection with the registration and public
offering of up to 7,000,000 (1,050,000 including the over-allotment) presently
issued and outstanding shares of the Company's Class A Common Stock, par value
$0.001 per share (the "Class A Common Stock") by stockholders listed as selling
stockholders in the Registration Statement (the "Selling Stockholders").
Capitalized terms not otherwise defined herein have the meaning set forth in the
Registration Statement.
We have examined such corporate records, certificates and other documents
as we have considered necessary for the purposes hereof. In such examination,
we have assumed the genuineness of all signatures, the authenticity of all
documents submitted to us as originals, the conformity to the original documents
of all documents submitted to us as copies and the authenticity of the originals
of such copies. As to any facts material to our opinion, we have, when relevant
facts were not independently established, relied upon the aforesaid records,
certificates and documents.
Based on the foregoing, we are of the opinion that the shares of the Class
A Common Stock to be sold by the Selling Stockholders as described in the
Registration Statement are duly authorized by the Company, validly issued, fully
paid and nonassessable.
Nu Skin Asia Pacific, Inc.
June 4, 1997
Page 2
Our opinion set forth herein is limited in all cases to matters arising
under the Delaware General Corporation Law. We consent to the use of this
opinion as an Exhibit to the Registration Statement and to the reference to
our firm under the caption "Legal Matters" in the Prospectus that is part of
the Registration Statement. In giving such consent, we do not thereby
concede that we are within the category of persons whose consent is required
under the Securities Act of 1933, as amended, or the rules and regulations of
the Securities and Exchange Commission thereunder.
Very truly yours,
/s/ LeBoeuf, Lamb, Greene & MacRae, L.L.P.
NSI - NSK
LICENSING AND SALES AGREEMENT
TABLE OF CONTENTS
ARTICLE I
DEFINITIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2-6
1.1 Agreement. . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.2 Bonus Payments . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.3 Commission Expense . . . . . . . . . . . . . . . . . . . . . . . . 2
1.4 Copyrights . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.5 Distributor Lists. . . . . . . . . . . . . . . . . . . . . . . . . 3
1.6 Downline Organization. . . . . . . . . . . . . . . . . . . . . . 3
1.7 Independent Distribution Network . . . . . . . . . . . . . . . . . 3
1.8 Introductory Kits. . . . . . . . . . . . . . . . . . . . . . . . . 3
1.9 Know-How . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.10 Licensed Property. . . . . . . . . . . . . . . . . . . . . . . . . 4
1.11 NSI Independent Distributor. . . . . . . . . . . . . . . . . . . . 4
1.12 NON-RESIDENT INDEPENDENT DISTRIBUTOR . . . . . . . . . . . . . . 4
1.13 Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
1.14 Proprietary Information. . . . . . . . . . . . . . . . . . . . 4,5
1.15 Resident NSI Independent Distributor . . . . . . . . . . . . . . 5
1.16 Sales and Compensation Plan. . . . . . . . . . . . . . . . . . 5,6
1.17 Sales Aids . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
1.18 Territory. . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
ARTICLE II
GRANT OF EXCLUSIVE LICENSE . . . . . . . . . . . . . . . . . . . . . . . 6-10
2.1 Grant of EXCLUSIVE License . . . . . . . . . . . . . . . . . . . 6
2.2 Term of License Granted. . . . . . . . . . . . . . . . . . . . . 6
2.3 NSI's Interest in Licensed Property. . . . . . . . . . . . . . . . 7
2.4 Recitals of Value of Licensed Property . . . . . . . . . . . . 7,8
2.5 MAINTENANCE AND FURTHER DEVELOPMENT. . . . . . . . . . . . . . . . 8
2.6 LICENSE FEE. . . . . . . . . . . . . . . . . . . . . . . . . . . 8
2.7 COMPUTATION AND PAYMENT TERMS. . . . . . . . . . . . . . . . . . 8,9
2.8 Warranty of Title; DEFENSE OF CLAIMS . . . . . . . . . . . . . . .10
2.9 Modifications. . . . . . . . . . . . . . . . . . . . . . . . . . .10
2.10 RESERVATION OF RIGHTS TO TERMINATE LICENSE . . . . . . . . . . . .10
ARTICLE III
OBLIGATIONS OF THE PARTIES UNDER THE AGREEMENT . . . . . . . . . . . . . 11-15
3.1 OBLIGATIONS, RIGHTS, AND DUTIES. . . . . . . . . . . .11,12,13,14,15
ARTICLE IV
INTRODUCTORY KIT SALES. . . . . . . . . . . . . . . . . . . . . . . . . . 15-16
4.1 Agreement to Purchase Introductory Kits. . . . . . . . . . . . . .15
4.2 Pricing. . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,16
4.3 Payment Method . . . . . . . . . . . . . . . . . . . . . . . . . 16
4.4 Quantities . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
4.5 Quality of Introductory Kits . . . . . . . . . . . . . . . . . . .16
4.6 INSURANCE. . . . . . . . . . . . . . . . . . . . . . . . . . . 16,17
4.7 Merchantability. . . . . . . . . . . . . . . . . . . . . . . . . .17
ARTICLE V
GOVERNMENTAL APPROVALS, LAWS AND REGULATIONS . . . . . . . . . . . . . . 17-18
5.1 Obligations of NSK . . . . . . . . . . . . . . . . . . . . . . . 17
5.2 Compliance with Laws . . . . . . . . . . . . . . . . . . . . . . 17
5.3 Protection of NSI. . . . . . . . . . . . . . . . . . . . . . . . 18
5.4 COMPLIANCE OF NSK OPERATION. . . . . . . . . . . . . . . . . . . 18
ARTICLE VI
TERM AND TERMINATION . . . . . . . . . . . . . . . . . . . . . . . . . . 18-20
6.1 Term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
6.2 BREACH AND NOTICE. . . . . . . . . . . . . . . . . . . . . . . 18,19
6.3 EXAMPLES OF MATERIAL BREACH. . . . . . . . . . . . . . . . . . . 19
6.4 OBLIGATION OF NSK UPON TERMINATION . . . . . . . . . . . . . . . 20
6.5 DAMAGES NOT ALLOWABLE. . . . . . . . . . . . . . . . . . . . . . 20
6.6 Survival of Obligations. . . . . . . . . . . . . . . . . . . . . 20
6.7 WAIVER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
6.8 Reversion of Rights. . . . . . . . . . . . . . . . . . . . . . 20,21
ARTICLE VII
RELATIONSHIP OF NSI AND NSK. . . . . . . . . . . . . . . . . . . . . . . 21-22
7.1 NSI AND INDEPENDENT CONTRACTS. . . . . . . . . . . . . . . . . . .21
7.2 NSI CONDUCTS NO BUSINESS ACTIVITY IN TERRITORY . . . . . . . . . 21
7.3 CROSS DEFAULT. . . . . . . . . . . . . . . . . . . . . . . . . 21,22
7.4 ACCEPTANCE OF REGISTRATION AGREEMENT FROM NSI INDEPENDENT
DISTRIBUTORS . . . . . . . . . . . . . . . . . . . . . . . . . . .22
ARTICLE VIII
CONFIDENTIALITY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22-23
8.1 OBLIGATION TO KEEP CONFIDENTIAL. . . . . . . . . . . . . . . . . 22
8.2 SURVIVAL OF OBLIGATION . . . . . . . . . . . . . . . . . . . . 22,23
8.3 INFORMATION THE EXCLUSIVE PROPERTY OF NSI. . . . . . . . . . . . .23
ARTICLE IX
ASSIGNMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .24
TABLE OF CONTENTS
-CONTINUED-
ARTICLE X
FORCE MAJEURE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .24
ARTICLE XI
GOVERNMENTAL APPROVAL. . . . . . . . . . . . . . . . . . . . . . . . . . 24-25
ARTICLE XII
RECORDING. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25
ARTICLE XIII
GOVERNING LAW AND DISPUTE RESOLUTION . . . . . . . . . . . . . . . . . . 25-26
ARTICLE XIV
APPLICABILITY OF POST-EFFECTIVE LAW. . . . . . . . . . . . . . . . . . . . 26
ARTICLE XV
WAIVER AND DELAY . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26-27
ARTICLE XVI
NOTICES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
ARTICLE XVII
INTEGRATED CONTRACT. . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
ARTICLE XVIII
MODIFICATION AND AMENDMENTS. . . . . . . . . . . . . . . . . . . . . . . . 28
ARTICLE XIX
NONDISCLOSURE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
ARTICLE XX
SEVERABILITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28,29
ARTICLE XXI
COUNTERPARTS AND HEADINGS. . . . . . . . . . . . . . . . . . . . . . . . . 29
LICENSING AND SALES AGREEMENT
THIS LICENSING AND SALES AGREEMENT (hereinafter the "Agreement") is made
and entered into pursuant to the terms of Article VI , between Nu Skin
International, Inc. a corporation organized and existing under the laws of the
State of Utah, U.S.A., (hereinafter referred to as "NSI") and Nu Skin Korea, a
corporation duly organized and existing under the laws of the country of Korea,
(hereinafter "NSK"). Hereinafter, NSI and NSK shall collectively be referred to
as the "Parties".
W I T N E S S E T H
WHEREAS, NSI is engaged in the design, production and marketing of
products and related sales aids for distribution in the international markets of
the Asia-Pacific Region through a network of independent distributors; and,
WHEREAS, NSK desires to act as the exclusive wholesale distributor of NSI
products in Korea, having entered a separate written Wholesale Distribution
Agreement with Nu Skin Hong Kong, respecting such Products and Sales Aids in the
Asia-Pacific region; and,
WHEREAS, NSI and NSK mutually recognize that such Product and Sales Aid
sales will be maximized through NSK's use of NSI's Independent Distribution
Network; and,
WHEREAS, NSI desires to further develop and enlarge its Independent
Distribution Network in the country of South Korea with the assistance of NSK,
for their mutual benefit, in accordance with the terms and conditions
hereinafter provided;
1
NOW THEREFORE, in consideration of the premises, the mutual promises,
covenants, and warranties hereinafter set forth and for other valuable
consideration, the sufficiency of which is hereby acknowledged, the Parties
agree as follows:
ARTICLE I
DEFINITIONS
For the purposes of this Agreement, the following words and terms shall
have the meaning assigned to them in this Article I:
1.1 "AGREEMENT" shall mean this Licensing and Sales Agreement.
1.2 "BONUS PAYMENTS" shall mean all monetary obligations due to NSI
Independent Distributors accrued under the terms of the point accumulation
system of the Sales and Compensation Plan portion of their contract with NSI.
1.3 "COMMISSION EXPENSE" shall mean all direct expenses incurred by the
affiliated Nu Skin companies in operating, managing, and executing the Sales
Compensation Plan. These expenses include, but are not limited to amounts paid
to Distributors as Bonus Payments as well as operational costs associated with
the calculation and generation of monthly payments.
1.4 "COPYRIGHTS" shall mean any and all protectible software, programs,
databases, photographs, transparencies, literature and other written material,
source codes and applications owned by NSI or which NSI has a right to use,
license or sub-license, relating directly or indirectly to the scope of this
Agreement.
2
1.5 "DISTRIBUTOR LISTS" shall mean any and all individual and
accumulated name, address, identification number, sponsor name and/or similar
lists of all present or future NSI Independent Distributors expressed in any
medium.
1.6 "DOWNLINE ORGANIZATION" shall mean, with respect to any NSI
Independent Distributor, the sub-distributor or group of sub-distributors
directly or indirectly introduced to NSI by such NSI Independent Distributor(s)
who have likewise entered a contractual relationship to receive compensation
under the terms of the point accumulation system of the Sales and Compensation
Plan.
1.7 "INDEPENDENT DISTRIBUTION NETWORK" shall mean the network of all NSI
Independent Distributors having a contractual relationship with NSI to act as a
retail distributor.
1.8 "INTRODUCTORY KIT" shall mean those materials developed, maintained
and approved by NSI and intended for distribution and/or sale in conjunction
with the execution of the distribution contract to NSI Independent Distributors
in the Territory explaining the Nu Skin independent business opportunity, the
contractual relationship with NSI, and the marketing support programs for the
Territory.
1.9 "KNOW-HOW" shall mean any information, including, without
limitation, any commercial or business information, lists, marketing methods,
marketing surveys, processes, specifications, quality control reports, drawings,
photographs, or any other information owned by NSI, whether or not considered
proprietary, relating to the Independent Distribution Network, the Distributor
Lists, and the Sales and Compensation Plan.
3
1.10 "LICENSED PROPERTY" shall mean the Independent Distribution Network,
the Distributor Lists, the Sales and Compensation Plan, the Copyrights, the
Proprietary Information, and the associated Know-How.
1.11 "NSI INDEPENDENT DISTRIBUTOR" shall mean a person or business entity
authorized by contract with NSI to distribute, as an independent contractor, the
Products and Sales Aids purchased from an authorized Nu Skin distribution center
in accordance with the terms of such distribution contract.
1.12 "NON-RESIDENT INDEPENDENT DISTRIBUTOR" shall mean any NSI
Independent Distributor whose resident country as shown on the records of NSI is
outside the Territory, but whose Downline Organization is comprised of one or
more Resident Independent Distributors, having a right under contract to earn
Bonus Payments completed based at least partly on the sale of Products and Sales
Aids within the Territory.
1.13 "PRODUCTS" shall mean those goods which carry a point value within
the Sales Compensation Plan, including without limitation, cosmetics,
nutritional products, dietary supplements, vitamins, over-the-counter drugs,
quasi-drugs, drugs and pharmaceutical products designed and produced for the
Territory's market purchased at wholesale by NSI Independent Distributors.
1.14 "PROPRIETARY INFORMATION" shall mean, without limitation, all
information other than information in published form or expressly designated by
either party in writing as non-confidential, which is directly or indirectly
disclosed to the other party, regardless of the form in which it is disclosed,
relating in any way to the following property owned by the Parties or which the
Parties have been licensed to use or sub-license: (1) proprietary technical
4
information related to the Licensed Property and the Introductory Kit; (2)
information respecting actual or potential customers or customer contacts and
customer sales strategies, names, addresses, phone numbers, identification
numbers, database information and its organization, unique business methods; (3)
market studies, penetration data, customers, product formulas, contracts,
copyrights, computer programs, applications, technical data, licensed
technology, patents, inventions, procedures, methods, designs, strategies,
plans, liabilities, assets, cost revenues, sales costs, production costs, raw
material sources and other market information; (4) other sales and marketing
plans, programs and strategies; (5) trade secrets, Know-How, designs and
proprietary commercial and technical information, methods, practices,
procedures, processes, formulae with respect to manufacturing, assembly, design
or processing products subject to this Agreement and any component, part or
manufacture thereof; (7) profits, organization, employees, agents, distributors,
suppliers, trademarks, trade names and services; (8) other business and
commercial practices in general relating directly or indirectly to the
foregoing; and, (9) computer disks or other records or documents, originals or
copies, containing in whole or in part any of the foregoing.
1.15 "RESIDENT NSI INDEPENDENT DISTRIBUTOR" shall mean any NSI
Independent Distributor whose country of residence as shown on the records of
NSI is in the Territory and who may have a Downline Organization comprised of
Resident and Non-Resident NSI Independent Distributors.
1.16 "SALES AND COMPENSATION PLAN" shall mean the method and expression
designed and employed by NSI defining the relationship between NSI and a NSI
Independent Distributor, respecting the distribution of the Products and
compensation derived therefrom.
5
All such compensation paid in the AP Region, including the Territory, shall be
calculated in accordance with a common point accumulation system associated with
Product volumes purchased for sale by NSI Independent Distributors and taking
into account different currency rates of exchange in each of the countries in
the AP Region, including the Territory.
1.17 "SALES AIDS" shall mean the materials, in whatever form and/or
design produced for the Territory to assist in the marketing of the Products in
the Territory.
1.18 "TERRITORY" shall mean the entire area and jurisdiction comprising
the country of the Republic of Korea. The Territory defined in this Agreement
may be modified from time to time by written amendment, signed by the Parties.
ARTICLE II,
GRANT OF EXCLUSIVE LICENSE
2.1 GRANT OF EXCLUSIVE LICENSE. NSI hereby grants to NSK an exclusive
license and right to use in the Territory the Licensed Property and transfers to
NSK the financial and other obligations that are received by Resident NSI
Distributors under the Distributor Contract. NSI grants to NSK the right and
duty to prevent all third parties from using, reproducing, distributing, and
disclosing to the public the Licensed Property. NSK does not have the right to
grant sub-licenses, convey or otherwise share the Licensed Property.
2.2 TERM OF LICENSE GRANTED. The licenses granted in this Agreement
shall remain in full force until the termination of this Agreement in accordance
with its terms.
6
2.3 NSI'S INTEREST IN LICENSED PROPERTY. NSI hereby retains legal title
to the Licensed Property for all purposes, including but not limited to the
bringing or defending of any legal action in the Territory which it deems
reasonable to protect its rights therein. NSK agrees to assist NSI in any
manner to protect NSI's rights in the Licensed Property which NSI may reasonably
request.
2.3(a) NSK shall review regularly the Territory's market for
unauthorized users of the Licensed Property and unfair competition
affecting the status, channels of commerce or scope of the Licensed
Property, and agrees to inform NSI promptly of any possible infringement
of, or unfair competition affecting, the Licensed Property which comes to
the attention of NSK. In the event NSI decides to take affirmative action
against any such possible infringement or act of unfair competition, NSK
agrees to assist NSI, in whatever manner NSI may direct, and at the
expense of NSI. NSI claims, in its sole discretion, the exclusive right
to direct any such action. Recovery of damages resulting from any such
action shall be solely for the accounts of NSI. Should either party
hereto be involved as a defendant in any judicial action under the laws of
the Territory respecting the subject matter of this Agreement, the Parties
hereto agree to cooperate in such defense with each other to the greatest
possible extent. Any liability of NSK in such action shall be limited to
the amount of the license fees due to NSI from NSK under the terms of this
Agreement.
2.4 RECITALS OF VALUE OF LICENSED PROPERTY. NSK recognizes and agrees
that NSI has expended considerable time, effort and resources to develop and
maintain the Licensed Property. NSK further agrees it will derive a
considerable benefit from its use of the
7
Licensed Property in the Territory and from NSI's efforts and expenditures
respecting the Licensed Property.
2.5 MAINTENANCE OF LICENSED PROPERTY. NSI shall use its best efforts
and take all reasonable steps consistent with its existing internal policies and
procedures and with this Agreement to maintain and further develop the Licensed
Property in the Territory. In no event shall this clause be construed to
require NSI to establish or maintain a branch office, subsidiary corporation or
fixed place of business or similar permanent establishment in the Territory.
NSK shall, from its own accounts and at its own expense, likewise use its best
efforts to maintain the Licensed Property in the Territory as it deems
appropriate.
2.6 LICENSE FEE. Starting and beginning on the date when NSK commences
operations in the Territory and thereafter, and as compensation for the
exclusive licenses granted pursuant to the terms of this Agreement, NSK shall
pay to NSI a license fee equal to four percent (4%) of its sales, net of VAT, of
Products and Sales Aids and other items (exclusive of Introductory Kits and
goods sold on consignment) sold to NSI Independent Distributors during the
entire term of this Agreement.
2.7 COMPUTATION AND PAYMENT TERMS. The computation and payment terms
of amounts to be paid pursuant to this Agreement shall be as follows:
2.7(a) NSK shall give to NSI, at the end of each month, a written
statement of the sales volume achieved during such period in the
Territory. This statement shall be certified as to its correctness by
NSK's principal financial officer and dispatched to NSI within twenty (20)
days following the close of each such period.
8
2.7(b) The license fee shall be due and payable as of the last day of
each fiscal quarter based upon sales through the last day of said quarter.
2.7(c) For purposes of computing the license fee, Products and Sales
Aids shall be considered sold when recognized for accounting purposes as a
sale by NSK.
2.7(d) The Parties agree that the license fee shall remain competitive
within the market and shall be determined by negotiated arm's length
standards.
2.7(e) NSK shall keep complete and accurate records of its activities
under this Agreement which shall be open to inspection by authorized
representatives of NSI at any reasonable time. NSI may also appoint a CPA
or equivalent of NSI's choice in the Territory for the purpose of auditing
NSK's relevant records.
2.7(f) Payments made by NSK to NSI under this Agreement shall be payable
in Korean Won or the U.S. Dollar equivalent as of the date of the
settlement. Payments shall be made either directly to NSI in immediately
available funds by wire transfer to Zion's First National Bank, Provo
Branch, Provo, Utah, U.S.A. -- account number 32927931, or by such other
means of payment designated by NSI.
2.7(g) Without limiting any of NSI's other rights and remedies under to
this Agreement, amounts outstanding under the terms of this Agreement not
paid within 60 days from the date due and payable, and as set forth in the
payment provisions herein, shall bear interest at the U.S. prime interest
rate (as reported in the Wall Street Journal) plus two percent (2%) for
the full period outstanding. Whether or not interest charges are actually
levied is at the discretion of NSI.
9
2.8 WARRANTY OF TITLE; DEFENSE OF CLAIMS. NSI hereby warrants and
represents that it is the sole and exclusive owner of the Licensed Property;
that all NSI Proprietary Information related to the Licensed Property is
confidential, giving NSI a competitive advantage in its worldwide markets; that
to the best of its knowledge and information no claim exists or has been made
contesting the ownership and title of said Licensed Property; and that NSK's use
of the Licensed Property in the Territory will not constitute an infringement of
the right of any third party. NSI shall indemnify and hold harmless NSK for any
loss, damage or claim, including reasonable attorneys' fees, arising from or
relating to any breach of the warranties contained herein. NSI reserves the
right to control the defense of any litigation including, without limitation,
the right to choose counsel and to settle and dispose of any such litigation or
claim as it deems appropriate in its sole discretion.
2.9 MODIFICATIONS. NSI hereby retains legal title to the Licensed
Property and any modifications, enhancements and improvements to any of the
Licensed Property used or made by NSK pursuant to this Agreement; NSK will
promptly disclose to NSI all such modifications, enhancements and improvements.
2.10 RESERVATION OF RIGHTS TO TERMINATE LICENSE. NSI hereby retains the
right to terminate any of the licenses granted as part of the Licensed Property
or this Agreement for any of the reasons set forth in this Agreement.
10
ARTICLE III
OBLIGATIONS OF THE PARTIES UNDER THE AGREEMENT
3.1 OBLIGATIONS, RIGHTS, AND DUTIES. For the consideration received and
outlined within the Agreement, the Parties agree that the obligations of each of
them are as outlined below.
3.1(a) NSI agrees to maintain and provide support for the Sales and
Compensation Plan within the Territory. This includes the efforts made in
further developing and maintaining the Sales and Compensation Plan and
providing the necessary support to NSK to implement the details of the
Sales and Compensation Plan as directed by NSI. This includes, but is not
limited to, the following:
(1) to maintain an adequate computer system, including necessary
hardware, software, data links, computer peripherals, printers,
etc. to properly fulfill NSI's obligations under the Sales and
Compensation Plan;
(2) to provide the necessary training and support to NSK relating
to NSI's Independent Distributors, including information relating
to training methods, motivational strategies, convention and
event planning, technical policies and procedure knowledge, etc;
(3) to receive and use NSK's sales information to compute the
correct and appropriate payments to NSI's Independent
11
Distributors in the Territory, such that the Independent
Distributors within the Territory are fully compensated under and
in accordance with the Sales and Compensation Plan;
(4) to receive NSK's information relating to wrongful conduct and
behavior of NSI's Independent Distributors in the Territory and
to act in a responsible manner to help insure the reputation of
NSI;
(5) to maintain a record of the contracts entered into by NSI
Independent Distributors and provide such information to NSK, as
reasonably requested;
(6) to maintain appropriate insurance coverage such that the
assets and financial stability of NSI is insured; and
(7) to perform any other function or provide the necessary
support to comply with the intended provisions of this article
such that NSI uses its best efforts to maintain an Independent
Distribution Network within the Territory.
3.1(b) NSK agrees to timely perform the following functions and
responsibilities in fulfilling its duties and obligations under this
Agreement and recognizes that performance of such activities are in NSK's
best interests in furthering its development in the Territory:
(1) to maintain, at its sole cost and expense, such facilities
and other places of business within the Territory necessary to
effect
12
the purposes and intentions of this Agreement and to bear all
costs and expenses it incurs in the negotiation, memorialization,
execution and performance of all leases, rentals, equipment,
salaries, taxes, licenses, insurance, permits, telephone,
telegraph, promotional, advertising, travel, accounting, legal
and such similar expenses, relating to the business of NSK under
the terms and conditions of this Agreement, unless otherwise
agreed in writing by the Parties;
(2) to manage its business affairs in such a manner that the
reputation of the company is not damaged;
(3) to sell and/or distribute Introductory Kits to potential NSI
Independent Distributors in accordance with all applicable laws
and industry standards (See Article IV);
(4) to collect, but not accept, distribution contracts,
(Distributor Agreements*) from potential NSI Independent
Distributors and forward these contracts to NSI in a timely
fashion, such that the agreements are accepted or rejected by NSI
in the United States of America;
(5) to train and lend assistance to NSI Independent Distributors
in the Territory;
13
(6) to only accept Registration Agreements* from those
distributors previously or currently registered with NSI as
Independent Distributors.
(7) to transmit to NSI necessary information regarding sales to
NSI Independent Distributors, such that NSI can fulfill its
obligations to the Independent Distributors under the Sales
and Compensation Plan;
(8) to maintain appropriate insurance coverage such that the
assets and financial stability of NSK are insured; and
(9) to satisfy the local commission obligations owed to Resident
NSI Independent Distributors on a monthly basis, in accordance
with and pursuant to the Sales Compensation Plan. Pursuant to
Article 2.1 of this Agreement NSK agrees to pay all obligations
which it assumes hereunder and to which Resident NSI Independent
Distributors are entitled under the Distribution Contract in a
timely and efficient manner;
(10) to pay NSI a consulting fee based upon the efforts expended
by NSI in training, motivating, instructing and supervising
Resident NSI Independent Distributors during the initial start-up
*A person may become an Independent Distributor in Korea only if he/she signs a
Registration Agreement with NSK and is registered with the NSK as a Multilevel
Seller under the DDSA.
14
phase of NSK's operations in Korea. NSK agrees and understands
that such consulting is to its benefit in generating initial
revenue in Korea. NSI agrees to invoice NSK on a monthly basis
for this service. NSI further agrees that its method of computing
the consulting fee will be on a cost basis;
(11) to monitor and supervise the activities of NSI Independent
Distributors within the Territory, enforcing the Distributor
Contract and their own Registration Agreement (see * on page 13)
to ensure compliance with the Distributor Contract and Policies
and Procedures, suggesting and helping pursue any necessary
action against NSI Distributors who violate any of the terms and
conditions of the Distributor Contract, including the Policies
and Procedures, or any other rules and regulations of NSI or NSK;
(12) to perform any other function or provide support such that
NSI can fully perform its obligations to the Independent
Distributors under the Sales and Compensation Plan and
Distributor Contract.
15
ARTICLE IV
INTRODUCTORY KIT SALES
4.1 AGREEMENT TO PURCHASE INTRODUCTORY KITS. The Parties acknowledge
that pursuant to this Agreement NSK is being granted an exclusive license to use
the Licensed Property, including the Independent Distribution Network, in the
Territory. NSK agrees to use its best efforts in furthering the development of
the Independent Distribution Network in the Territory by purchasing from NSI and
selling or otherwise distributing Introductory Kits to potential NSI Independent
Distributors in the Territory. Alternatively, the Parties agree that NSK shall
have the right to locally produce Introductory Kits under the Nu Skin registered
trademarks. Such production of Introductory Kits will be governed by a separate
Trademark-Tradename Licensing Agreement entered into by NSK and NSI.
4.2 PRICING. In order to determine and set the prices to be paid by
NSK to NSI for Introductory Kits purchased or locally produced hereunder, the
Parties shall use those factors and circumstances relevant to prevailing market
conditions and shall negotiate in good faith. However, under no circumstance is
the sale price of the Introductory Kits to exceed 10% of NSI's manufacture
and/or purchase price.
4.3 PAYMENT METHOD. NSK shall pay the commercial invoices for
Introductory Kits sold or locally produced under this Agreement in immediately
available funds by wire transfer to a bank or banks designated by NSI, or by
such other means of payment agreed to by NSI. All purchases of Introductory
Kits will be payable in Korean Won with any exchange rate risks relating to
currency fluctuation being borne by NSI. Without limiting any of NSI's other
rights and remedies pursuant to provisions to this Agreement, amounts not paid
within the time set forth in the payment provisions herein shall be subject to
an interest charge equal to two percent (2%) over the prime rate (as reported in
the Wall Street Journal) for the entire
16
period such amounts remain unpaid. Whether or not interest charges are actually
levied is at the discretion of NSI.
4.4 QUANTITIES. NSK agrees to purchase or locally produce sufficient
quantities of the Introductory Kit to fill orders, in a timely fashion, received
from potential NSI Independent Distributors in the Territory.
4.5 QUALITY OF INTRODUCTORY KITS. NSI shall use its best efforts to
maintain and augment the quality, image and value of the Introductory Kits such
that Introductory Kits sold or locally produced in the Territory are consistent
with the quality of those sold in other Nu Skin markets.
4.6 INSURANCE. NSI covenants it will maintain a current insurance
policy covering product and business claims found in the Introductory Kit in an
amount consistent with normal and commercially reasonable standards in the
industry. NSI agrees to provide NSK with any certificate of insurance which NSK
may reasonably request.
4.7 MERCHANTABILITY. NSI warrants that Introductory Kits sold or
locally produced to NSK pursuant to this Agreement will be merchantable and of
sufficient quality for sales within Korea. If NSK determines that certain
Introductory Kits supplied under this Agreement are not merchantable, a claim
for a refund of the price paid can be made with 45 days from the day the
Introductory Kits are received in Korea. NSI agrees to refund, or credit the
account of NSK, for the purchase price of such non-merchantable Introductory
Kits.
17
ARTICLE V
GOVERNMENTAL APPROVALS, LAWS AND REGULATIONS
5.1 OBLIGATIONS OF NSK. NSK agrees it will obtain any governmental
approval required in the Territory to enable this Agreement to become effective
or to enable any payment pursuant to the provisions of this Agreement to be
made, or any other obligation hereunder to be observed or performed. NSK agrees
to keep NSI informed of its progress in obtaining all such governmental
approvals.
5.2 COMPLIANCE WITH LAWS. NSK shall comply with and make all necessary
filings and notifications under all applicable laws, regulations and ordinances
in the Territory, including without limitation, any requirement for the
registration or recording of this Agreement, if necessary, with any applicable
or responsible governmental entities and authorities.
5.3 PROTECTION OF NSI. NSK shall refrain from any action that will
cause NSI to be in violation of any applicable law, regulation, or ordinance of
the Territory, the United States, or elsewhere, or of any international
convention, bilateral, or multilateral treaty to which the Territory or the
United States is a signatory, including, without limitation, the U.S. Foreign
Corrupt Practices Act of 1977, the U.S. Export Control Laws, and the U.S. Anti-
Boycott Laws.
5.4 COMPLIANCE OF NSK OPERATION. NSK shall capitalize itself adequately
and maintain its operations on a financially sound basis and in compliance with
all applicable laws, regulations and ordinances covering the operation of such
business entities in the Territory.
18
ARTICLE VI
TERM AND TERMINATION
6.1 TERM. This Agreement shall be effective as of the date of NSK's
commencement of operations in the Territory. The initial term of the Agreement
shall expire in five (5) years from the date of said commencement, but shall
automatically be renewed for successive five (5) year terms unless either party
gives three (3) months written notice to the other of its intent to terminate
this Agreement prior to the expiration of the term then in effect.
6.2 BREACH AND NOTICE. In case either party breaches any provision of
this Agreement, the other party may immediately give notice of its intention to
terminate within ninety (90) days thereof and, unless the breaching party
notifies the other of the cure of such breach within said period, this Agreement
shall automatically terminate at the expiration of the ninety day period.
Should any such breach consist of the failure of NSK to pay any amount owing to
NSI hereunder, the period of notice of intention to terminate this Agreement
shall be thirty (30) days.
6.3 EXAMPLES OF MATERIAL BREACH. Either party may terminate this
Agreement upon the occurrence of any of the following:
6.3(a) the filing by or against the other party hereto of a
petition in bankruptcy or judicial or administrative declaration of
insolvency, the dissolution, liquidation, or re-organization of, and
the loss of clearinghouse privileges by, one party as circumstances
justifying termination of the Licensing and Sales Agreement by the
other party, by giving notice to the latter party of
19
its intention to so terminate. NSI may terminate this Agreement by giving
notice thereof to NSK in the event of government expropriation of any of
the assets of NSI or NSK which relate to the activities of NSK
contemplated by this Agreement;
6.3(b) if NSK causes or allows a judgment to be entered against it or
causes or allows a lien, security interest or other encumbrance to be
place upon its assets or the assets of NSI;
6.3(c) if NSK undergoes a substantial change in ownership or
control. Upon any of the foregoing events, such termination shall
be immediately effective.
6.3(d) if either party violates a term, condition, covenant, warranty or
promise under this Agreement.
6.4 OBLIGATION OF NSK UPON TERMINATION. Upon termination of this
Agreement by either Party, NSK agrees to the following;
6.4(a) to furnish NSI with a current list of all potential NSI
Independent Distributors from whom NSK has collected distribution
contracts or to whom NSK has sold Products or Sales Aids;
6.4(b) to dispose of any unused Introductory Kits or related materials
in accordance with the instructions of NSI;
6.5 DAMAGES NOT ALLOWABLE. Should this Agreement be terminated for any
reason, NSK shall not be able to claim from NSI any damages or compensation for
losses or expenses incurred, or for lost profits.
20
6.6 SURVIVAL OF OBLIGATIONS. Termination of this Agreement shall not
affect (1) any of the obligations, covenants and warranties made hereunder,
including the payment of any fees or other costs which have accrued as of the
date of termination; (2) any obligation which from the provision of this
Agreement is intended to survive the termination of said Agreement.
6.7 WAIVER. Any waiver by either party of a breach of any term or
condition of this Agreement shall not be considered as a waiver of a subsequent
breach of the Agreement or any other term or condition thereof.
6.8 REVERSION OF RIGHTS. Upon termination of this Agreement, all rights
and licenses herein granted to NSK shall immediately cease and shall revert to
NSI, and NSK shall not represent to any third party that it has any right to
use, assign, convey or otherwise transfer the Licensed Property.
ARTICLE VII
RELATIONSHIP OF NSI AND NSK
7.1 NSK AND INDEPENDENT CONTRACTS. The relationship of NSK and NSI
shall be and at all times remain, respectively, that of independent contractor
and contracting party. Nothing contained or implied in this Agreement shall be
construed to constitute NSK as the legal representative or agent of NSI or to
constitute or construe the parties as partners, joint venturers, co-owners or
otherwise as participants in a joint or common undertaking.
21
NSK shall not conclude any contract or agreement or make any commitment,
representation or warranty that binds NSI or otherwise act in the name of or on
behalf of NSI.
7.2 NSI CONDUCTS NO BUSINESS ACTIVITY IN TERRITORY. Nothing contained
in this Agreement shall be construed to require NSI to establish or maintain a
branch office, subsidiary corporation or fixed place of business or similar
permanent establishment in the Territory. In fact, the Parties understand and
agree that NSI will refrain from conducting business or engaging in any activity
in the Territory which could be construed, under the applicable laws and tax
regulations, as doing or conducting business in the Territory.
7.3 CROSS DEFAULT. The Parties agree that in the event NSI terminates,
or imposes disciplinary action on any NSI distributor due to the Distributor's
violation of the Distributor Agreement between NSI and the Distributor, that
such termination or disciplinary action shall provide sufficient grounds for NSK
to terminate or impose disciplinary action on the Distributor with respect to
the Registration Agreement with NSK. Likewise, the Parties agree that in the
event NSK terminates, or imposes disciplinary action on any NSK distributor due
to the Distributor's violation of the Registration Agreement between NSK and the
Distributor, that such termination or disciplinary action shall provide
sufficient grounds for NSI to terminate or impose disciplinary action on the
Distributor with respect to the Distributor Agreement with NSI.
7.4 ACCEPTANCE OF REGISTRATION AGREEMENT FROM NSI INDEPENDENT
DISTRIBUTORS. The Parties understand and agree that NSK will accept no
Registration Agreement with any person or entity unless that person or entity
has first signed a Distributor
22
Agreement with NSI and been accepted as a distributor of NSI under the sole
discretion and judgement of NSI.
ARTICLE VIII
CONFIDENTIALITY
8.1 OBLIGATION TO KEEP CONFIDENTIAL. NSI and NSK agree to hold
confidential any Proprietary Information disclosed by the other party or
otherwise obtained, directly or indirectly. NSK agrees that should it have
access to any Proprietary Information during the course of its relationship with
NSI, it will make no changes to or copies of such materials without the prior,
express written consent of NSI's authorized representative. Neither party will
use, divulge, or disclose any Proprietary Information, directly or indirectly,
for its own benefit or for the benefit of any third party.
8.2 SURVIVAL OF OBLIGATION. NSI and NSK agree to keep confidential the
terms of this Article until such time as: (a) either party releases the other
party, in writing, from its terms; or (b) the Proprietary Information becomes
known to the general public by means other than through a breach of this
Agreement; provided that the obligations of the Parties shall cease only with
respect to that portion of Proprietary Information identified in a written
release or generally known to the public. The confidentiality provisions of
this Article shall survive termination of this Agreement.
8.3 INFORMATION THE EXCLUSIVE PROPERTY OF NSI. NSK acknowledges that
all NSI Proprietary Information communicated to NSK by NSI, relating to the
Licensed
23
Property, shall be deemed to be secret and confidential in character and, as
between the Parties, will be considered the exclusive property of NSI licensed
to NSK for use in the Territory. Such information is provided to NSK solely for
the benefit of NSK and to enable NSK to perform its obligations and rights
pursuant to the provisions of this Agreement. Such information is not available
to third parties, except to the extent that it may be absolutely necessary to
achieve the purposes of this Agreement. NSK further agrees to take all
reasonable measures to prevent its employees or agents from divulging such
information in any manner that may be contrary to the interest of NSI or NSK.
24
ARTICLE IX
ASSIGNMENT
This Agreement shall be binding on and inure to the benefit of the heirs,
successors, assigns and beneficiaries of the Parties; provided that NSK may not
assign this Agreement or any rights or obligations hereunder, whether by
operation of law or otherwise, without the prior written consent of NSI through
its authorized representative (which consent may be granted or withheld by NSI
in its sole discretion). Any such attempted assignment shall be void and
unenforceable.
ARTICLE X
FORCE MAJEURE
Neither party shall be in default under the terms of this Agreement by
reason of its delay in the performance of or failure to perform any of its
obligations hereunder if such delay or failure is caused by strikes, acts of
God, the public enemy, riots, incendiaries, interference by military
authorities, compliance with governmental laws, rules and regulations, delays in
transit or delivery, inability to secure necessary governmental priorities for
materials or any fault beyond its control or without its fault or negligence.
ARTICLE XI
GOVERNMENTAL APPROVAL
Should government approval, filing or recording of this Agreement be
required or as provided in Article V herein, this Agreement shall not become
effective until the consent of
25
said proper governmental authorities in the Territory has been obtained. If
such approval or filing is required by law, NSK is responsible, pursuant to the
provisions of Article V, for filing and notification of this Agreement with
appropriate authorities in the Territory.
ARTICLE XII
RECORDING
NSI, in its sole discretion, shall have the right to record this Agreement
or proof thereof, or to enter NSK as a registered user in the Territory. NSK
agrees to cooperate, as reasonably requested by NSI, in arranging for such
recordings or entries, or in bearing or canceling such recordings or entries in
the event of amendments to or termination of this Agreement for any reason.
ARTICLE XIII
GOVERNING LAW AND DISPUTE RESOLUTION
This Agreement shall be governed by and construed in accordance with the
laws of the State of Utah, United States of America, applicable to contracts
executed and performed therein. The Parties agree that the forum for any
arbitration, action, suit or proceeding arising out of this Agreement shall be
in the State of Utah. Each Party hereby submits to the jurisdiction in the
State of Utah for resolution of any conflict or litigation arising under or
purporting to interpret this Agreement. Any dispute arising out of this
Agreement or any of the responsibilities and obligations therein shall be
resolved through arbitration administered
26
by the American Arbitration Association in accordance with its Commercial
Arbitration Rules as supplemented by the Procedures for International Commercial
Arbitration. The arbitration proceedings shall be conducted in Salt Lake City,
Utah, U.S.A. The findings and conclusions of said arbitration shall be binding
upon the Parties, their heirs, successors, assigns and beneficiaries.
ARTICLE XIV
APPLICABILITY OF POST-EFFECTIVE LAW
To the extent that the Vienna Convention on the International Sale of
Goods (the "Vienna Convention"), the United Nations Convention on contracts for
the International Sale of Goods (the "UN Convention") or some other such similar
law, treaty or act becomes effective during the term of this Agreement, the
Parties agree that neither the Vienna Convention, UN Convention nor any such
similar law, treaty or act shall be applicable to this Agreement or the
transactions contemplated hereunder.
ARTICLE XV
WAIVER AND DELAY
No waiver by either party of any breach or default in performance by the
other party, and no failure, refusal or neglect of either party to exercise any
right, power or option given to it hereunder or to insist upon strict compliance
with or performance of the other party's obligations under this Agreement, shall
constitute a waiver of the provisions of this Agreement
27
with respect to any subsequent breach thereof or a waiver by either party of its
right at any time thereafter to require exact and strict compliance with the
provisions thereof.
ARTICLE XVI
NOTICES
All notices, requests and other communications hereunder shall be in
writing and shall be deemed to have been duly given, if delivered by hand, or if
communicated by facsimile, cable or similar electronic means to the facsimile
number or cable identification number as previously provided by each party to
the other, at the time that receipt thereof has been confirmed by return
electronic communication or signal that the message has been received, or if
mailed, ten (10) days after dispatch by registered airmail or courier, postage
prepaid, from any post office addressed as follows:
If to NSK: Nu Skin Korea
Dabong Tower
890-12 Daechi-dong
Kangnam-ku, Seoul
Korea
Facsimile No.: 82-2-552-9728
If to NSI: Nu Skin International, Inc.
75 West Center Street,
Provo, Utah 84601, U.S.A.
Facsimile No.: (801) 345-3899
Attn.: Senior International Legal Counsel
Either party may change its facsimile number, cable identification number
or address by a notice given to the other party in the manner set forth above.
28
ARTICLE XVII
INTEGRATED CONTRACT
This Agreement constitutes the entire agreement between the Parties
relating to the subject matter hereof and supersedes all prior or
contemporaneous negotiations, representations, agreements and understandings
(both oral and written) of the Parties.
ARTICLE XVIII
MODIFICATION AND AMENDMENTS
No supplement, modification or amendment of this Agreement shall be
binding unless it is in writing and executed by the Parties.
ARTICLE XIX
NONDISCLOSURE
The Parties agree that, except to the extent required by law, neither
party will disclose the existence of any of the terms of this Agreement to any
person that is not an affiliate of such party or an employee or agent of such
party or affiliate without the prior written consent of the other party.
ARTICLE XX
SEVERABILITY
To the extent that any provision of this Agreement is (or in the opinion
of counsel mutually acceptable to both Parties would be) prohibited, judicially
invalidated or otherwise
29
rendered unenforceable in any jurisdiction, such provision shall be deemed
ineffective only to the extent of such prohibition, invalidation or
unenforceability in that jurisdiction, and only within that jurisdiction. Any
prohibited, judicially invalidated or unenforceable provision of this Agreement
will not invalidate or render unenforceable any other provision of this
Agreement, nor will such provision of this Agreement be invalidated or rendered
unenforceable in any other jurisdiction.
ARTICLE XXI
COUNTERPARTS AND HEADINGS
This Agreement may be executed in one or more counterparts, each of which
shall be deemed an original, but all of which together shall constitute one and
the same instrument. All headings and captions are inserted for convenience of
reference only and shall not affect the meaning or interpretation of any
provision hereof.
IN WITNESS WHEREOF, the Parties have caused this Agreement to be executed
in the United States of America by their respective duly authorized
representatives as of the day and year first-above written.
NU SKIN INTERNATIONAL, INC. NU SKIN KOREA, LTD.
BY: /s/ BLAKE M. RONEY BY: /s/ SUNG-TAE HAN
--------------------------- ------------------------------------
BLAKE M. RONEY SUNG-TAE HAN
PRESIDENT AND CEO REPRESENTATIVE DIRECTOR
30
NSHK - NSK
WHOLESALE DISTRIBUTION
AGREEMENT
TABLE OF CONTENTS
ARTICLE I
DEFINITIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2-5
1.1 AP Region . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.2 Agreement . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.3 Asia-Pacific Distribution Center. . . . . . . . . . . . . . 2
1.4 Exclusive Regional Distributor. . . . . . . . . . . . . . . 2
1.5 NSI Independent Distributor . . . . . . . . . . . . . . . . 3
1.6 NSHK Information. . . . . . . . . . . . . . . . . . . . . . 3
1.7 NSI . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.8 NSI Proprietary Information . . . . . . . . . . . . . . . . 4
1.9 Products. . . . . . . . . . . . . . . . . . . . . . . . . . 4
1.10 Sales Aids. . . . . . . . . . . . . . . . . . . . . . . . . 4
1.11 Territory . . . . . . . . . . . . . . . . . . . . . . . . . 4
1.12 Trademarks. . . . . . . . . . . . . . . . . . . . . . . . . 5
ARTICLE II
APPOINTMENT AS EXCLUSIVE WHOLESALE DISTRIBUTOR. . . . . . . . . . . . 5-7
2.1 Scope . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2.2 Sub-distributors. . . . . . . . . . . . . . . . . . . . . . 5,6
2.3 NSHK Sales in the Territory . . . . . . . . . . . . . . . . 6
2.4 Sales Outside the Territory . . . . . . . . . . . . . . . . 6,7
2.5 AP Region Orders and Inquiries. . . . . . . . . . . . . . . 7
ARTICLE III
GOVERNMENT APPROVALS AND REGISTRATIONS . . . . . . . . . . . . . . . . 7-8
ARTICLE IV
OBLIGATIONS OF NSK AS EXCLUSIVE WHOLESALE DISTRIBUTOR
IN THE TERRITORY . . . . . . . . . . . . . . . . . . . . . . . . . . . 8-13
4.1 Introduction. . . . . . . . . . . . . . . . . . . . . . . . 8
4.2 Marketing and Distribution. . . . . . . . . . . . . . . . . 8,9
4.3 Promotion . . . . . . . . . . . . . . . . . . . . . . . . . 9
4.4 NSK Operations. . . . . . . . . . . . . . . . . . . . . . . 9,10
4.5 NSHK Management Plan. . . . . . . . . . . . . . . . . . . . 10
4.6 NSK Actions . . . . . . . . . . . . . . . . . . . . . . . . 11
4.7 NSK Claims and Representations. . . . . . . . . . . . . . . 11,12
4.8 Government Approvals, Laws and Regulations. . . . . . . . . 12
4.9 Manufacture Or Distribution of Competitive Goods. . . . . . 12
4.10 Customer Support. . . . . . . . . . . . . . . . . . . . . . 13
ARTICLE V
PURCHASE, SALE AND DELIVERY OF PRODUCTS AND SALES AIDS . . . . . . . . 13-15
5.1 Agreement to Purchase . . . . . . . . . . . . . . . . . . . 13,14
5.2 Product Shipment. . . . . . . . . . . . . . . . . . . . . . 14
TABLE OF CONTENTS
-CONTINUED-
5.3 Payment Due Date. . . . . . . . . . . . . . . . . . . . . . 14
5.4 Passage of Title and Risk of Loss . . . . . . . . . . . . . 14
5.5 Inspection. . . . . . . . . . . . . . . . . . . . . . . . . 15
5.6 Inventory Obsolescence. . . . . . . . . . . . . . . . . . . 15
ARTICLE VI
PRODUCT AND SALES AIDS PURCHASE PRICE
AND TERMS OF PAYMENT . . . . . . . . . . . . . . . . . . . . . . . . . 16
6.1 Pricing . . . . . . . . . . . . . . . . . . . . . . . . . . 16
6.2 Payment method. . . . . . . . . . . . . . . . . . . . . . . 16
ARTICLE VII
OBLIGATIONS OF NSHK AS SUPPLIER OF PRODUCTS
AND SALES AIDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16-18
7.1 Product Quality . . . . . . . . . . . . . . . . . . . . . . 16,17
7.2 Warranty. . . . . . . . . . . . . . . . . . . . . . . . . . 17
7.3 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . 17
7.4 Delivery. . . . . . . . . . . . . . . . . . . . . . . . . . 18
7.5 U.S. and Hong Kong Export Regulations . . . . . . . . . . . 18
7.6 Export Expenses . . . . . . . . . . . . . . . . . . . . . . 18
ARTICLE VIII
MANAGEMENT AND SUPPORT . . . . . . . . . . . . . . . . . . . . . . . . 18
ARTICLE IX
PAYMENT DISPUTES AND RESOLUTION. . . . . . . . . . . . . . . . . . . . 19
ARTICLE X
COMPETING PRODUCTS . . . . . . . . . . . . . . . . . . . . . . . . . . 19-20
ARTICLE XI
NATURE OF RELATIONSHIP . . . . . . . . . . . . . . . . . . . . . . . . 20
ARTICLE XII
TERM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
ARTICLE XIII
TERMINATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21-22
ARTICLE XIV
EFFECT OF TERMINATION. . . . . . . . . . . . . . . . . . . . . . . . . 22-23
TABLE OF CONTENTS
-CONTINUED-
ARTICLE XV
CONFIDENTIALITY. . . . . . . . . . . . . . . . . . . . . . . . . . . . 23-24
ARTICLE XVI
ASSIGNMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
ARTICLE XVII
INDEMNIFICATION AND INSURANCE. . . . . . . . . . . . . . . . . . . . . 24-25
ARTICLE XVIII
NOTICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25-26
ARTICLE XIX
WAIVER AND DELAY . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
ARTICLE XX
FORCE MAJEURE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26-27
ARTICLE XXI
GOVERNING LAW AND DISPUTE RESOLUTION . . . . . . . . . . . . . . . . . 27
ARTICLE XXII
APPLICABILITY OF POST-EFFECTIVE LAW. . . . . . . . . . . . . . . . . . 28
ARTICLE XXIII
INTEGRATED CONTRACT. . . . . . . . . . . . . . . . . . . . . . . . . . 28
ARTICLE XXIV
MODIFICATIONS AND AMENDMENTS . . . . . . . . . . . . . . . . . . . . . 28
ARTICLE XXV
NONDISCLOSURE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
ARTICLE XXVI
SEVERABILITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
ARTICLE XXVII
COUNTERPARTS AND HEADINGS. . . . . . . . . . . . . . . . . . . . . . . 29-30
WHOLESALE DISTRIBUTION AGREEMENT
THIS WHOLESALE DISTRIBUTION AGREEMENT (hereinafter the "Agreement") is made
and entered into pursuant to the terms of Article XII, by and between Nu Skin
Hong Kong, Inc., a corporation duly organized and existing under the laws of the
State of Utah, U.S.A., (hereinafter "NSHK") and Nu Skin Korea, Ltd. a
corporation duly organized and existing under the laws of the country of Korea,
(hereinafter "NSK"). Hereinafter, NSHK and NSK collectively shall be referred
to as the "Parties".
W I T N E S S E T H
WHEREAS, NSHK is the Exclusive Regional Distributor of certain Products and
Sales Aids and desires to increase the sales of such Products and Sales Aids in
the Asia/Pacific region through the appointment of territorial distributors in
various jurisdictions comprising such Region; and,
WHEREAS, NSK has represented that it possesses the necessary expertise and
marketing organization and personnel for the promotion, sales, and customer
service relating to such Products and Sales Aids in the territory of Korea; and,
WHEREAS, NSHK is willing to appoint NSK and NSK is willing to accept such
appointment as exclusive wholesale distributor of NSHK's Products and Sales Aids
in the Territory, as hereinafter defined;
1
NOW THEREFORE, in consideration of the premises, the mutual promises and
covenants hereinafter set forth and for other good and valuable consideration,
the sufficiency of which is hereby acknowledged, the Parties agree as follows:
ARTICLE I
DEFINITIONS
For the purposes of this Agreement the following words, terms, and phrases
shall have the meaning assigned to them in this Article I, unless the context
otherwise requires or the parties otherwise agree within the terms of this
Agreement:
1.1 "AP REGION" shall mean the Asia-Pacific region, including, among
other countries and without limitation, the Territory.
1.2 "AGREEMENT" shall mean this Wholesale Distribution Agreement between
NSHK and NSK.
1.3 "ASIA-PACIFIC DISTRIBUTION CENTER" shall mean a place of business
independently maintained by a business entity carrying on a trade or business in
a country located in the AP Region and authorized by NSHK to act as an exclusive
wholesale distributor of Products and Sales Aids within that country. For the
purposes of this Agreement that business entity shall be NSK and the country
shall be the Territory.
1.4 "EXCLUSIVE REGIONAL DISTRIBUTOR" shall mean NSHK, as NSHK internally
and for itself, performs or designates others, under contract, to perform
functions and services in the AP Region to accomplish the distribution of
Products and Sales Aids to Asia-Pacific Distribution Centers and to perform
certain contractual functions in the AP Region.
2
1.5 "NSI INDEPENDENT DISTRIBUTOR" shall mean a person or business entity
authorized by contract with NSI to distribute, as an independent contractor, the
Products and Sales Aids purchased from an authorized Asia Pacific Distribution
Center in accordance with the terms of such distribution contract. For the
purposes of this Agreement, NSK shall be the only authorized Asia Pacific
Distribution Center in the Territory.
1.6 "NSHK INFORMATION" shall mean, without limitation, all information
other than information in published form or expressly designated by NSHK in
writing as non-confidential, which is directly or indirectly disclosed to NSK or
reflected for public notice on Products or Sales Aids provided pursuant to this
Agreement, regardless of the form in which it is disclosed, relating in any way
to the following property owned by NSHK or which NSHK has been licensed to use
or sub-license: NSHK's market, market studies, penetration data, customers,
Products, Sales Aids, contracts, copyrights, computer programs, applications,
technical data, licensed technology, patents, inventions, procedures, methods,
designs, strategies, plans, liabilities, assets, cost revenues, sales costs,
production costs, raw material sources or costs, profits, organization,
employees, agents, distributors, suppliers, know-how, Trademarks, trade names or
other business and commercial practices in general, relating directly or
indirectly to the foregoing.
1.7 "NSI" shall mean Nu Skin International, Inc., a U.S. corporation,
duly authorized and existing under the laws of the State of Utah, U.S.A. Nothing
contained in this Agreement shall be construed in a manner which may imply that
NSI has created a permanent business establishment in the Territory or in any
jurisdiction in the AP Region.
1.8 "NSI PROPRIETARY INFORMATION" shall mean, without limitation: (1)
proprietary technical information related to the NSI Distribution Network, the
Sales and Compensation
3
Plan, the copyrights, the Products and their formulations; (2) the identity of
or other pertinent information with respect to the actual or potential customers
or customer contacts and customer sales strategies; (3) market studies,
penetration data and other market information; (4) other sales and marketing
plans, programs and strategies; (5) sales costs, production costs and other
financial data; (6) Trademarks, trade secrets, know-how, designs and proprietary
commercial and technical information, methods, practices, procedures, processes,
manufacturing formulae, assembly, design or processing Products subject to this
agreement and any component, part or manufacturer thereof; and, (7) sources of
supplies and raw materials for Products, components and services.
1.9 "PRODUCTS" shall mean those goods, including without limitation,
cosmetics, nutritional products, dietary supplements, vitamins, over-the-counter
drugs, quasi-drugs, drugs and pharmaceutical products designed and produced for
the Territory's market purchased at wholesale by NSI Independent Distributors.
1.10 "SALES AIDS" shall mean the materials, in whatever form, designed,
approved and produced for the Territory to assist in the marketing of the
Products in the Territory.
1.11 "TERRITORY" shall mean the entire area and jurisdiction comprising
the country of the Republic of Korea. The Territory defined in this Agreement
may be modified from time to time by written amendment, signed by the Parties.
1.12 "TRADEMARKS" shall mean those words, symbols, devices, logos, trade
names and company names or a combination thereof used in relation to all
Products and Sales Aids covered by the existing or eventual registrations
thereof in the Territory.
ARTICLE II
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APPOINTMENT AS EXCLUSIVE WHOLESALE DISTRIBUTOR
2.1 SCOPE. NSHK hereby appoints and authorizes NSK as NSHK's exclusive
wholesale distributor in the Territory during the term of this Agreement, with
the right to sell and distribute, at wholesale, Products and Sales Aids in the
Territory, under the Products' names, logos, and Trademarks, subject to all
terms and conditions of this Agreement. NSK hereby accepts such appointment and
authorization and agrees to use its best lawful efforts to sell such Products
and Sales Aids throughout the Territory. In addition, the Parties undertake to
perform their respective obligations as set forth in this Agreement.
2.2 SUB-DISTRIBUTORS. NSK shall not, without the prior written approval
of NSHK, appoint sub-distributors or agents to promote or distribute Products or
Sales Aids in any portion of the Territory or outside the Territory. Further,
notwithstanding any such appointments or NSHK's approval thereof, NSK shall at
all times remain fully liable for the performance of its sub-distributors and/or
agents and NSK hereby agrees to indemnify and hold harmless NSHK from all
damages, losses, cost or expenses arising in any manner from any act or omission
on the part of its sub-distributors or agents.
2.2(a) NSK agrees that any wholesale distribution of Products OR Sales Aids
in the Territory shall be made only pursuant to the terms and conditions of
a separate written agreement entered with an NSI Independent Distributor
duly authorized by agreement with NSI to sell Products and Sales Aids at
retail within the Territory.
2.2(b) NSHK shall inform NSK, either for itself or through NSI, of the
identity of duly authorized NSI Independent Distributors.
2.2(c) NSK shall distribute to any NSI Independent Distributor only those
Products or Sales Aids specifically approved for distribution within the
Territory. NSK agrees to
5
assume all risk and liability for claims arising out of the use of Products
or Sales Aids it improperly distributes or represents in the Territory.
NSK agrees to maintain current an insurance policy in an amount sufficient
to cover claims arising from any such improper distribution or
representations.
2.2(d) NSK, as long as it retains title, shall be solely responsible for
the coordination, sale and delivery of any Products or Sales Aids taken
from its inventory in the Territory and distributed to any NSI Independent
Distributor in the Territory.
2.3 NSHK SALES IN THE TERRITORY. NSHK agrees not to sell Products or
Sales Aids to any party within the Territory or to any party outside the
Territory for delivery within the Territory, except to NSK pursuant to the terms
and conditions of this Agreement, unless NSHK has received the written consent
of NSK.
2.4 SALES OUTSIDE THE TERRITORY. NSK agrees that it will not sell
Products or Sales Aids outside the Territory. NSK shall not promote or solicit
customers for Product or Sales Aids sales outside the Territory. NSK shall not
establish any office outside the Territory
6
through which orders are solicited or any depot in which inventories of NSHK
Products or Sales Aids are stored without NSHK's written consent.
2.5 AP REGION ORDERS AND INQUIRIES. The Parties agree that from time to
time inquiries and orders concerning the Territory will arise. If NSHK receives
any order or inquiry concerning the sale of Products or Sales Aids in the
Territory, NSHK agrees to give notice of such inquiry or order to NSK, such
notice to include the name and address of the person making the order or inquiry
as well as any other relevant details regarding such order or inquiry that NSK
shall reasonably request. If NSK receives any order or inquiry concerning the
sale of Products or Sales Aids in the country or territory of any Asia-Pacific
Distribution Center in the AP Region, NSK agrees to give notice of such inquiry
or order to such Asia-Pacific Distribution Center, such notice to include the
name and address of the person making the order or inquiry, as well as any other
relevant details regarding such order or inquiry that such Asia-Pacific
Distribution Center shall reasonably request.
ARTICLE III
GOVERNMENT APPROVALS AND REGISTRATIONS
NSK agrees its will obtain any governmental approval required in the
Territory to enable this Agreement to become effective or to enable any payment
pursuant to the provisions of this Agreement to be made; it will further obtain,
at its sole expense, all governmental approvals and registrations required for
importation of the Products into the Territory; and, in addition it will obtain
any other governmental approvals or registrations to fulfill all other
7
obligations hereunder to be observed or performed. NSK agrees to keep NSHK
informed of the progress in obtaining all such governmental approvals.
ARTICLE IV
OBLIGATIONS OF NSK AS EXCLUSIVE WHOLESALE DISTRIBUTOR
IN THE TERRITORY
4.1 INTRODUCTION. NSK agrees it will fulfill all of its obligations set
forth below.
4.2 MARKETING AND DISTRIBUTION. NSK shall have the following
obligations with respect to marketing and distribution of the Products and Sales
Aids:
4.2(a) To use its best efforts to further the promotion, marketing, sales
and other distribution of the Products and Sales Aids in the Territory.
4.2(b) To maintain, or caused to be maintained, an adequate and balanced
inventory of Products, Sales Aids, supplies and necessary materials to
promote, market, sell and distribute the Products and Sales Aids in the
Territory.
4.2(c) To respond promptly to all inquiries by sub-distributors, NSI
Independent Distributors and customers, including complaints. To process
all orders and effect timely shipments of Products and Sales Aids within
the Territory.
4.2(d) To diligently investigate all leads with potential customers
referred to it by NSHK.
4.2(e) To permit NSHK to visit NSK and its sub-distributors or customers
and to visit NSK's place of business and inspect its inventories, service
records, financial records and other relevant documents.
8
4.2(f) To maintain, or contract to maintain, adequate personnel,
distribution and laboratory facilities dedicated on a full-time or part-
time basis to the quality control and sale of Products, in compliance with
all laws, ordinances and regulations of the Territory.
4.2(g) To provide, at the request of NSHK, a comprehensive three-year
business plan in the form and detail requested by NSHK and to update such
business plan at least each year or at more frequent intervals if required
by NSHK.
4.2(h) To provide, at the request of NSHK, reports of its activities and
sales respecting the Products and Sales Aids in the Territory in a form and
in such detail and time period as NSHK may reasonably require.
4.3 PROMOTION. NSK shall diligently undertake to promote the Products
and Sales Aids in the Territory in a manner consistent with the judgment,
policies and regional sales strategies of NSHK for the promotion of such
Products and Sales Aids. NSHK shall furnish NSK with copies of NSHK's
brochures, videos, Product literature, Sales Aids, etc. in the English language
for use by NSK in preparing its own promotional materials for distribution in
the Territory. All such materials prepared by NSK shall be in compliance with
applicable laws, regulations, and ordinances of the Territory, and, will be
reviewed and approved in the promotion of the Products by NSHK. All expenses
incurred by NSK with respect to creating such promotional materials and
promoting the Products and Sales Aids shall be borne by NSK.
4.4 NSK OPERATIONS. NSK agrees to maintain, at its sole cost and
expense, such facilities and other places of business within the Territory
necessary to effect the purposes and intentions of this Agreement. NSK further
agrees to bear all costs and expenses it incurs in the negotiation,
memorialization, execution and performance of all leases, rentals, equipment,
9
salaries, taxes, licenses, insurance, permits, telephone, telegraph,
promotional, advertising, travel, accounting and legal expenses, relating to the
business of NSK under the terms and conditions of this Agreement, unless
otherwise agreed in writing by the Parties.
4.4(a) In the event, NSK and NSHK obtain mutually beneficial professional
services including, without limitation, accounting or legal services, prior
to execution of or during the term of this Agreement, NSK and NSHK each
agree to pay the portion of any such expenses incurred in an amount
commensurate with the value each derived from such services. Any dispute
respecting expenses for such services shall be resolved in accordance with
the provisions of Article IX.
4.4(b) To the extent NSK is required to apply for or maintain import
licenses for the import of the Products or Sales Aids into the Territory,
NSK shall pay all costs and expenses related to obtaining such import
licenses.
4.4(c) NSK shall be liable to pay all customs duties, excise taxes, similar
governmental charges and levies, and any other charges or expenses related
to any Products or Sales Aids it imports into the Territory for subsequent
distribution.
4.5 NSHK MANAGEMENT PLAN. In order to allow NSHK to design and carry
out necessary and reasonable managerial planning for its legitimate business
purposes in the AP Region, NSK shall, in accordance with the schedule required
by NSHK, advise NSHK of the distribution prices at which NSK plans to sell
Products or Sales Aids to NSK and NSI Independent Distributors in the Territory
prior to effecting such sales.
4.6 NSK ACTIONS. NSK shall not in any manner represent itself as an
agent of NSHK or NSI in the Territory or in any jurisdiction within the AP
Region and neither NSHK nor NSI shall not be responsible for acts, omissions or
defaults of NSK or of NSK's
10
employees, officers, agents, independent contractors or representatives, and
neither NSK or its employees, officers, agents or representatives shall create
or assume any obligation on behalf of NSHK or NSI for any purpose whatsoever,
whether as agent or otherwise.
4.6(a) NSK agrees it has no authority, actual or apparent, to represent,
act for or in any way bind NSHK or NSI in any manner whatsoever, in any
jurisdiction.
4.6(b) NSK shall not in any manner represent its offices to be a branch
office or other fixed place of business of NSHK or NSI.
4.7 NSK CLAIMS AND REPRESENTATIONS. NSK shall not make any promises,
representations, warranties or guarantees respecting the Products, Sales Aids or
the Sales and Compensation Plan, except that NSK may represent that the Products
are safe for use when used as intended. NSK may make such other claims and
representations as are found in literature distributed or approved by NSHK at
the relevant time with statements intended for use in the Territory.
4.7(a) NSK shall not at any time make any explicit or implicit medical or
drug claim for or concerning any of the Products intended for distribution
in the Territory or AP Region as cosmetic products, nor may NSK
specifically recommend or prescribe any of such Products as suitable for
any specific ailment or condition. To do so would wrongly imply that any
Product so represented is a drug rather than a cosmetic. No cosmetic
Product is, or is represented to be a drug. NSK shall at all times comply
with all applicable laws, regulations and ordinances within the Territory.
4.8 GOVERNMENT APPROVALS, LAWS AND REGULATIONS. In addition to the
foregoing, NSK shall:
11
4.8(a) Comply with and make all necessary filings and notifications under
all applicable laws, regulations and ordinances in the Territory and
elsewhere, including, without limitation, any requirement for the
registration or recording of this Agreement with any responsible
governmental entities and authorities;
4.8(b) Refrain from any action that will cause NSHK to be in violation
of any applicable law, regulation, or ordinance of any jurisdiction in the
AP Region or the United States or elsewhere or any international convention
or bilateral or multilateral treaty to which any jurisdiction in the AP
Region or the United States is a signatory, including, without limitation,
the U.S. Foreign Corrupt Practices Act of 1977, the U.S. Export Control
Laws, and the U.S. Anti-Boycott laws; and,
4.8(c) Capitalize itself adequately and maintain its operations both on a
financially sound basis and in compliance with all applicable laws,
regulations or ordinances covering the operations of such a business entity
in the Territory.
4.9 MANUFACTURE OR DISTRIBUTION OF COMPETITIVE GOODS. NSK shall not
manufacture or distribute any products inside or outside the Territory which are
directly or indirectly competitive with the Products during the term of this
Agreement and for a period of three years after the termination of this
Agreement, without the written consent of NSHK.
4.10 CUSTOMER SUPPORT. NSK agrees to cooperate with NSHK in dealing with
any NSI Independent Distributor or customer complaints concerning the Products
and to take any action requested by NSHK to solve such complaints. NSK also
agrees to assist NSHK in arranging for any customer warranty service required by
law or required pursuant to the judgment of NSHK.
ARTICLE V
12
PURCHASE, SALE AND DELIVERY OF PRODUCTS AND SALES AIDS
5.1 AGREEMENT TO PURCHASE. NSK shall order such quantities of Products
and Sales Aids as it deems necessary to meet its sales requirements within the
Territory.
5.1(a) Each order shall be in the form of a written and signed Purchase
Order appearing on the official letterhead of NSK and shall be negotiated,
signed, accepted and become effective in the Territory. Acceptance by NSHK
shall be in writing, signed by a duly authorized representative of NSHK,
and effective upon execution.
5.1(b) Each Purchase Order shall identify the Products or Sales Aids to be
purchased, the country to which such Products or Sales Aids shall be
distributed to ensure shipment and receipt of Products or Sales Aids which
comply with such country's laws and regulation, the quantities thereof, and
the shipment dates therefor.
5.1(c) NSHK agrees to accept each Purchase Order for Products or Sales Aids
placed by NSK pursuant to this Article and subject to:
5.1(c)(i) The availability in NSHK's current inventory of the
Product(s) or Sales Aid(s) ordered by NSK; and,
5.1(c)(ii) The inability of NSHK to perform by reason of force
majeure as defined in Article XX of this Agreement.
5.2 PRODUCT SHIPMENT. NSHK shall ship all Product(s) and Sales Aids
sold by NSHK to NSK hereunder to the port of Pusan or such other place NSK may
designate in writing on the Purchase Order. NSHK shall transmit all commercial
invoices for the Products and Sales Aids directly to NSK by registered airmail,
postage prepaid, or any other method mutually acceptable to the Parties.
13
5.3 PAYMENT DUE DATE. NSK shall pay for each shipment of Products and
Sales Aids within one hundred twenty (120) days after the date of the issuance
of the commercial invoice or as the parties may decide, and NSK shall make
payment for the Products and Sales Aids as provided in Article IV of this
Agreement.
5.4 PASSAGE OF TITLE AND RISK OF LOSS. Title to and risk of loss for
any Products or Sales Aids ordered and shipped pursuant to the terms of this
Article shall remain with NSHK until their actual delivery to NSK or its
designated agent at the port of Pusan or at some point in transit as the parties
may agree to in writing. Shipment shall be made in a commercially reasonable
manner in accordance with standards applicable in the trade and industry, paid
by NSHK in accordance with the terms set forth in Article VI to a delivery point
outside the customs border ("Delivered at Frontier") at the port of Pusan or
such designated transhipment point. Upon delivery and thereafter, NSK is liable
for any risks related to theft, destruction, or other loss attributable to the
improper storage, care or negligence of NSK.
5.5 INSPECTION. Within forty-five (45) days following actual receipt of
a shipment of Products or Sales Aids by NSK, NSK (or its designated agent) shall
inspect the Products and Sales Aids and shall notify NSHK in writing, in
accordance with Article XVIII, of any defects in such shipment of Products or
Sales Aids. In the event of such notification, NSHK shall make appropriate
arrangements, acceptable to NSK, to replace any such defective Products or Sales
Aids at NSHK's sole cost and expense or, failing such replacement, shall, at the
option of NSHK, either credit the purchase price of the defective Products or
Sales Aids to NSK's account or promptly grant NSK a cash refund for such
purchase price. If NSHK is not notified of any defect in a shipment of Products
or Sales Aids within forty-five (45) days after
14
actual receipt thereof by NSK, then NSK shall be deemed to have waived its right
to claim any defect in the Products or Sales Aids contained in such shipment,
except for any latent or other defect not reasonably discernable upon inspection
of the Products or Sales Aids under the prevailing circumstances.
5.6 INVENTORY OBSOLESCENCE. In the event and to the extent that
Products or Sales Aids in the possession of NSK shall, due to the expiration of
shelf life, change in formulation, change in market conditions, or other reasons
not within the control of NSK, become non-saleable, NSHK agrees to credit the
original purchase price of such Products or Sales Aids to NSK. The ultimate
cost and method of disposal of any such Products and Sales Aids shall be the
responsibility by NSHK.
15
ARTICLE VI
PRODUCT AND SALES AIDS PURCHASE PRICE AND TERMS OF PAYMENT
6.1 PRICING. In order to determine and set the prices to be paid by NSK
to NSHK for Products and Sales Aids purchased hereunder, the Parties shall use
those factors and circumstances relevant to prevailing market conditions and
shall negotiate in good faith to set such prices.
6.2 PAYMENT METHOD. NSK shall pay the commercial invoices for Products
and Sales Aids shipped under this Agreement in immediately available funds by
wire transfer to a bank or banks designated by NSHK, or by such other means of
payment agreed to by NSHK. All purchases of Products and Sales Aids will be
payable in Korean Won. Without limiting any of NSHK's other rights and remedies
pursuant to this Agreement, amounts not paid within the time period set forth in
the payment provisions herein shall be subject to an interest charge equal to
two percent (2%) over the U.S. prime rate for the entire period such amounts
remain unpaid. Whether or not interest charges are actually levied is at the
discretion of NSI.
ARTICLE VII
OBLIGATIONS OF NSHK AS SUPPLIER OF PRODUCTS AND SALES AIDS
7.1 PRODUCT QUALITY. NSHK shall use its best efforts to maintain and
augment the quality, image and goodwill of the Products and Sales Aids and to
sell to NSK for resale in the Territory only Products and Sales Aids that are
consistent with the quality of Products and Sales Aids sold in the United States
of America and other jurisdictions in the AP Region.
16
NSHK does not however, warrant or represent that the formulae or ingredients
will be the same in all respects as those used in the United States or any other
region or territory.
7.2 WARRANTY. NSHK warrants that the Products and Sales Aids supplied
hereunder shall be merchantable under the laws and regulations of the
jurisdiction in which distribution of such Product or Sales Aid is intended;
that it will deliver good title thereto and that Products and Sales Aids will be
delivered free from any lawful security interest or other lien or encumbrance.
7.2(a) NSHK's liability for any breach of such warranties shall not exceed
in amount the price of the Products or Sales Aids in respect of which any
breach is claimed. NSHK'S WARRANTY STATED HEREIN IS EXPRESSLY IN LIEU OF
ANY OTHER WARRANTIES, EXPRESS OR IMPLIED, INCLUDING ANY IMPLIED WARRANTY OF
FITNESS FOR A PARTICULAR PURPOSE.
7.2(b) NSHK neither assumes nor authorizes any person or entity to assume
for it any other liability in connection with the Products or Sales Aids
supplied hereunder, and there are no oral contracts or warranties
collateral to or affecting this Agreement. NSHK shall not be liable to NSK
or any third parties for consequential, special or incidental damages.
7.3 INSURANCE. NSHK covenants it will maintain, or cause to be
maintained, a current insurance policy covering claims arising from the use of
its Products in an amount consistent with normal and commercially reasonable
standards in the trade. NSHK agrees to provide NSK with any certificate of
insurance which NSK may reasonably request.
17
7.4 DELIVERY. NSHK shall promptly, in accordance with normal and
commercially reasonable delivery schedules in the trade, deliver to NSK those
Products or Sales Aids for which NSK places orders in accordance with Article V
hereof.
7.5 U.S. AND HONG KONG EXPORT REGULATIONS. To the extent NSHK is
required to obtain any United States, Hong Kong, or other export licenses to
export the Products or Sales Aids to NSK in the Territory, NSHK shall pay all
costs and expenses related to obtaining such export licenses.
7.6 EXPORT EXPENSES. NSHK shall be liable for all customs duties,
excise taxes and similar governmental charges and levies related to the export
of the Products or Sales Aids from the United States of America, Hong Kong, or
any other jurisdiction. NSHK shall also be liable for reasonable freight and
insurance costs and expenses related to the export of the Products and Sales
Aids from the United States, Hong Kong, or any other jurisdiction and delivery
of the Products and Sales Aids to NSK or its authorized agent as set forth in
Article V.
ARTICLE VIII
MANAGEMENT AND SUPPORT
NSHK shall provide NSK with the management guidance and support, including
but not limited to, legal, financial and distributor support. NSHK will also
provide training with respect to implementation and enforcement of corporate
policy and strategic planning as well as budget review; budget approvals will be
made under the direction of the Board of Directors of NSK. NSK shall compensate
NSHK for any such management guidance and support so provided.
18
ARTICLE IX
PAYMENT DISPUTES AND RESOLUTION
In the event NSHK and NSK disagree with respect to any payment described in
any of the provisions of this Agreement, NSHK and NSK agree to attempt in good
faith to resolve such dispute or, failing such attempt, to select a mutually
acceptable, independent accountant to resolve such dispute. Such accountant's
decision shall be final and binding upon the Parties. NSHK and NSK further
agree that if they are unable to select a mutually acceptable, independent
accountant, each of NSHK and NSK shall select an independent accountant and such
independent accountants shall select a third accountant who shall resolve the
dispute. The decision of the accountant selected in this manner shall be final
and binding on the parties hereto. Upon resolution of the dispute, the party
owing payment shall pay the full amount of the resolved payment due within sixty
(60) days of such resolution. Expenses incurred in this dispute resolution
procedure shall be shared equally between the Parties.
ARTICLE X
COMPETING PRODUCTS
Nothing contained herein shall restrict or prohibit NSK from acting as a
distributor of non-competing products or materials besides the Products and
Sales Aids, provided that such other products do not infringe upon any patent,
name, Trademarks, emblems, trade name, design right, model or other commercial
or industrial property right of NSHK or NSI. NSK shall not during the term of
this Agreement or any time thereafter, manufacture, have manufactured, or sell
copies of the Products, Sales Aids, or other products that might
19
reasonably be deemed under U.S. or Foreign law to be confusingly similar to the
Products or Sales Aids.
ARTICLE XI
NATURE OF RELATIONSHIP
The relationship of NSK and NSHK shall be and at all times remain,
respectively, that of independent contractor and contracting party. Nothing
contained or implied in this Agreement shall be construed to constitute NSK as
the legal representative or agent of NSHK or to constitute or construe the
Parties as partners, joint venturers, co-owners or otherwise as participants in
a joint or common undertaking. NSK shall not conclude any contract or agreement
or make any commitment, representation or warranty that binds NSHK or otherwise
act in the name of or on behalf of NSHK. In fact, the Parties understand and
agree that NSHK will refrain from conducting business or engaging in any
activity in the Territory which could be construed, under the applicable laws
and tax regulations, as carrying on or conducting business in the Territory.
ARTICLE XII
TERM
This Agreement shall be effective as of the date of NSK's commencement of
operations in the Territory. The term of this Agreement shall continue unless
and until terminated pursuant to Article XIII hereof.
20
ARTICLE XIII
TERMINATION
13.1 This Agreement may be terminated in the following circumstances and
in the manner indicated:
13.1(a) upon written notice by one party to the other party at least
ninety (90) days prior to the desired cancellation date; or
13.1(b) immediately or at any time thereafter by NSHK, if (i) NSK shall
commence a voluntary case or any proceeding under any reorganization,
arrangement, adjustment of debt, relief of debtors, dissolution, insolvency
or liquidation, the loss of clearinghouse privileges by NSK as cause for
NSHK's termination of the agreement, or similar law of any jurisdiction
whether now or hereafter in effect relating to NSHK, or; (ii) there is
commenced against NSK any such proceeding that remains undismissed for a
period of thirty (30) days, or; (iii) NSK is adjudicated, voluntarily or
involuntarily, as bankrupt or insolvent; or
13.1(c) immediately or at any time thereafter by NSHK, if NSK becomes
insolvent or suffers any appointment of any custodian, trustee or the like
for it or any substantial part of its assets to continue undischarged or
unstayed for a period of thirty (30) days, or NSK makes a general
assignment for the benefit of creditors; or
13.1(d) by either party, upon sixty (60) days' written notice and demand
to cure, if the other party is in default in the performance of any
material obligation under this Agreement and the default remains uncured;
if the other party cures any such default within the sixty (60) day notice
period, then such default shall be of no force or effect.
21
13.1(e) If NSK causes or allows a judgment to be entered against it or
causes or allows a lien, security interest, or other encumbrance to be
placed upon its assets or the assets of NSHK.
13.1(f) If NSK undergoes a substantial change in ownership or control.
13.1(g) If either party violates a term, condition, covenant, warranty or
promise under this Agreement.
ARTICLE XIV
EFFECT OF TERMINATION
14.1 Upon termination of this Agreement, all rights and licenses herein
granted to NSK shall cease and shall revert to NSHK and NSK shall immediately
cease holding itself out to the public as exclusive wholesale distributor in the
Territory or otherwise represent that it is associated in any manner with NSHK
or NSI.
14.2 Upon termination of this Agreement, NSHK may either (a) deliver, and
NSK shall pay for, all Products and Sales Aids ordered by NSK prior to such
termination or (b) cancel, without cost or liability, the order of such Products
or Sales Aids.
14.3 Upon termination of this Agreement, neither party shall be released
from its obligations to pay monies due or to become due to the other party or to
complete any unfulfilled obligations under this Agreement, and each party shall
immediately pay, perform and discharge all debts, obligations and liabilities
hereunder. Upon termination of this Agreement for any reason, neither party
shall be liable or obligated to the other party with respect to any payments,
future profits, exemplary, special or consequential damages,
22
indemnifications or other compensation regarding such termination, irrespective
of whether such obligations or liabilities may be contemplated in the law of the
Territory or elsewhere, and, except as otherwise provided by applicable law,
each party hereby waives and relinquishes any rights, pursuant to law or
otherwise, to any such payments, indemnifications or compensation. All remedies
of a party, whether contained herein or provided by law or in equity, shall be
cumulative and not alternative.
14.4 The provisions of this Article XIV, as well as any other provisions
that by their terms so provide, shall survive termination of this Agreement and
continue in full force and effect thereafter.
ARTICLE XV
CONFIDENTIALITY
15.1 NSHK and NSK agree to hold confidential any proprietary information
disclosed by the other party or otherwise obtained directly or indirectly. NSK
agrees that should it have access to any proprietary information during the
course of its relationship with NSHK, it will make no changes to or copies of
such materials without the prior, express written consent of NSHK's authorized
representative. Neither party will use, divulge, or disclose any proprietary
information, directly or indirectly, for its own benefit or for the benefit of
any third party.
15.2 NSHK and NSK agree to keep confidential the terms of this Article
until such time as: (a) either party releases the other party, in writing, from
its terms; or (b) the proprietary information becomes known to the general
public by means other than through a breach of this Agreement; provided that the
obligations of the parties shall cease only with
23
respect to that portion of proprietary information identified in a written
release or generally known to the public. The confidentiality provisions of
this Article shall survive termination of this Agreement. NSK further agrees to
take all reasonable measures to prevent its employees or agents from divulging
such information in any manner that may be contrary to the interests of NSI,
NSHK or NSK.
ARTICLE XVI
ASSIGNMENT
This Agreement shall be binding on and inure to the benefit of the heirs,
successors, assigns and beneficiaries of the Parties; provided that NSK may not
assign this Agreement or any rights or obligations hereunder, whether by
operation of law or otherwise, without the prior written consent of NSHK's
authorized representative (which consent may be granted or withheld by NSHK in
its sole discretion). Any such attempted assignment shall be void and
unenforceable.
ARTICLE XVII
INDEMNIFICATION AND INSURANCE
17.1 NSHK agrees during and after the term of this Agreement to
indemnify and hold harmless NSK from liability, loss, cost or damage which
NSK may incur, including reasonable attorney's fees, as a result of claims,
demands or judgments, of any kind or nature, by anyone whomsoever, arising
out of an alleged or actual defect in the design, manufacture or content of
the Products or Sales Aids. NSK agrees to provide NSHK with prompt notice in
writing of any claim or demand arising out of any alleged or actual defect in
the design,
24
manufacture or content of the Products or Sales Aids of which NSHK has actual
knowledge. NSK shall cooperate with NSHK in the defense of any such action.
17.2 At all times during and following the term of this Agreement, NSK
shall maintain insurance with one or more reputable insurers reasonable in
coverage and amount in direct proportion and corresponding to the business to be
conducted by NSK pursuant to this Agreement.
ARTICLE XVIII
NOTICES
All notices, requests and other communications hereunder shall be in
writing and shall be deemed to have been duly given, if delivered by hand, or if
communicated by facsimile, cable or similar electronic means to the facsimile
number or cable identification number as previously provided by each party to
the other, at the time that receipt thereof has been confirmed by return
electronic communication or signal that the message has been received, or if
mailed, ten (10) days after dispatch by registered airmail, postage prepaid,
from any post office addressed as follows:
If to NSK: Nu Skin Korea
Dabong Tower
890-12 Daechi-dong
Kangnam-ku, Seoul
Korea
Facsimile No.: 82-2-552-9728
If to NSHK: Nu Skin Hong Kong, Inc.
75 West Center Street
Provo, Utah 84601
Facsimile No.: (801) 345-3899
25
Either party may change its facsimile number, cable identification number
or address by a notice given to the other party in the manner set forth above.
ARTICLE XIX
WAIVER AND DELAY
No waiver by either party of any breach or default in performance by the
other party, and no failure, refusal or neglect of either party to exercise any
right, power or option given to it hereunder or to insist upon strict compliance
with or performance of the other party's obligations under this Agreement, shall
constitute a waiver of the provisions of this Agreement with respect to any
subsequent breach thereof or a waiver by either party of its right at any time
thereafter to require exact and strict compliance with the provisions thereof.
ARTICLE XX
FORCE MAJEURE
The Parties shall not be responsible for failure to perform hereunder due
to force majeure, which shall include, but not be limited to: fires, floods,
riots, strikes, labor disputes, freight embargoes or transportation delays,
shortage of labor, inability to secure fuel, material, supplies, equipment or
power at reasonable prices or on account of shortage thereof, acts of God or of
the public enemy, war or civil disturbances, any existing or future laws, rules,
regulations or acts of any government (including any orders, rules or
regulations issued by any official or agency or such government) affecting a
party that would delay or prohibit performance hereunder, or any cause beyond
the reasonable control of a party. If an event of
26
force majeure should occur, the affected party shall promptly give notice
thereof to the other party and such affected party shall use its reasonable best
efforts to cure or correct any such event of force majeure.
ARTICLE XXI
GOVERNING LAW AND DISPUTE RESOLUTION
This Agreement shall be governed by and construed in accordance with the
laws of the State of Utah, applicable to contracts made and to be wholly
performed within such State. The Parties agree that the forum for any
arbitration, action, suit or proceeding arising out of this Agreement shall be
in the State of Utah, and each party to submits to the jurisdiction of the State
of Utah for resolution of any conflict or litigation arising under or purporting
to interpret this Agreement. Any dispute arising out of this Agreement or any
of the responsibilities and obligations therein shall be resolved through
arbitration administered by the American Arbitration Association in accordance
with its Commercial Arbitration Rules as supplemented by the Procedures for
International Commercial Arbitration. The arbitration proceedings shall be
conducted in Salt Lake City, Utah, U.S.A. The findings and conclusions of said
arbitration shall be binding upon the Parties, their heirs, successors, assigns
and beneficiaries.
27
ARTICLE XXII
APPLICABILITY OF POST-EFFECTIVE LAW
To the extent that the Vienna Convention on the International Sale of Goods
(the "Vienna Convention") the United Nations Convention on contracts for the
International Sale of Goods (the "UN Convention") or some other such similar
law, treaty or act becomes effective during the term of this Agreement, the
parties agree that neither the Vienna Convention, UN Convention nor any such
similar law, treaty or act shall be applicable to this Agreement or the
transactions contemplated hereunder.
ARTICLE XXIII
INTEGRATED CONTRACT
This Agreement constitutes the entire agreement between the Parties
relating to the subject matter hereof and supersedes all prior or
contemporaneous negotiations, representations, agreements and understandings
(both oral and written) of the Parties.
ARTICLE XXIV
MODIFICATIONS AND AMENDMENTS
No supplement, modification or amendment of this Agreement shall be binding
unless it is in writing and executed by the Parties.
28
ARTICLE XXV
NONDISCLOSURE
The Parties agree that, except to the extent required by law, neither party
will disclose the existence of any of the terms of this Agreement to any person
that is not an affiliate of such party or an employee or agent of such party or
affiliate without the prior written consent of the other party.
ARTICLE XXVI
SEVERABILITY
To the extent that any provision of this Agreement is (or, in the opinion
of counsel mutually acceptable to both parties, would be) prohibited, judicially
invalidated or otherwise rendered unenforceable in any jurisdiction, such
provision shall be deemed ineffective only to the extent of such prohibition,
invalidation or unenforceability in that jurisdiction, and only within that
jurisdiction. Any prohibited, judicially invalidated or unenforceable provision
of this Agreement will not invalidate or render unenforceable any other
provision of this Agreement, nor will such provision of this Agreement be
invalidated or rendered unenforceable in any other jurisdiction.
ARTICLE XXVII
COUNTERPARTS AND HEADINGS
This Agreement may be executed in one or more counterparts, each of which
shall be deemed an original, but all of which together shall constitute one and
the same instrument.
29
All headings and captions are inserted for convenience of reference only and
shall not affect the meaning or interpretation of any provision hereof.
IN WITNESS WHEREOF, the Parties have caused this Agreement to be executed
by their respective duly authorized representatives in the United States of
America as of the day and the year first above written.
NU SKIN HONG KONG, INC. NU SKIN KOREA, LTD.
BY: /s/ BLAKE M. RONEY BY: /s/ SUNG-TAE HAN
--------------------------------- ---------------------------------
BLAKE M. RONEY SUNG-TAE HAN
PRESIDENT AND CEO REPRESENTATIVE DIRECTOR
30
NSI - NSK
TRADEMARK - TRADENAME
LICENSING AGREEMENT
TABLE OF CONTENTS
ARTICLE I
DEFINITIONS............................................................... 2-5
1.1 Agreement......................................................... 2
1.2 Commercial Materials.............................................. 2
1.3 Independent Distribution Network.................................. 3
1.4 Introductory Kit.................................................. 3
1.5 Know-How.......................................................... 3
1.6 Licensed Marks and Names.......................................... 3
1.7 NSI Independent Distributor....................................... 3
1.8 NSI Trademark................................................... 3,4
1.9 NSI Tradename..................................................... 4
1.10 Product........................................................... 4
1.11 Proprietary Information......................................... 4,5
1.12 Sales Aid......................................................... 5
1.13 Territory......................................................... 5
ARTICLE II
GRANT OF EXCLUSIVE LICENSE............................................... 6-10
2.1 Grant of Exclusive License........................................ 6
2.2 Right to Prevent Infringement .................................... 6
2.3 Term of License Granted........................................... 7
2.4 NSI's Interest in Licensed Marks and Names........................ 7
2.5 Recitals of Value of Licensed Marks and Names..................... 8
2.6 Royalties....................................................... 8,9
2.7 Warranty of Title; Defense of Claims........................... 9,10
2.8 Modifications.................................................... 10
2.9 Reservation of Rights to Terminate License....................... 10
ARTICLE III
GOVERNMENTAL APPROVALS, LAWS AND REGULATIONS............................ 10-11
3.1 Obligations of NSK............................................... 10
3.2 Compliance with Laws............................................. 11
3.3 Protection of NSI................................................ 11
3.4 Compliance of NSK Operation...................................... 11
ARTICLE IV
TERM AND TERMINATION.................................................... 11-13
4.1 Term............................................................. 11
4.2 Breach and Notice................................................ 12
4.3 Examples of Material Breach................................... 12,13
4.4 Obligation of NSK Upon Termination............................... 13
TABLE OF CONTENTS
-CONTINUED-
4.5 Damages Not Allowable............................................ 13
4.6 Survival of Obligations.......................................... 13
4.7 Waiver........................................................... 13
4.8 Reservation of Rights............................................ 13
ARTICLE V
RELATIONSHIP OF NSI AND NSK................................................ 14
ARTICLE VI
CONFIDENTIALITY......................................................... 14-15
6.1 Obligation to Keep Confidential............................... 14,15
6.2 Survival of Obligation........................................... 15
6.3 Information the Exclusive Property of NSI ....................... 15
ARTICLE VII
ASSIGNMENT................................................................. 16
ARTICLE VIII
FORCE MAJEURE.............................................................. 16
ARTICLE IX
GOVERNMENTAL APPROVAL................................................... 16-17
ARTICLE X
RECORDING.................................................................. 17
ARTICLE XI
GOVERNING LAW AND DISPUTE RESOLUTION.....................................17-18
ARTICLE XII
APPLICABILITY OF POST-EFFECTIVE LAW........................................ 18
ARTICLE XIII
WAIVER AND DELAY........................................................ 18-19
ARTICLE XIV
NOTICES.................................................................... 19
ARTICLE XV
INTEGRATED CONTRACT........................................................ 20
TABLE OF CONTENTS
-CONTINUED-
ARTICLE XVI
MODIFICATION AND AMENDMENTS................................................ 20
ARTICLE XVII
NONDISCLOSURE.............................................................. 20
ARTICLE XVIII
SEVERABILITY............................................................ 20-21
ARTICLE XIX
COUNTERPARTS AND HEADINGS.................................................. 21
TRADEMARK \ TRADENAME LICENSING AGREEMENT
THIS TRADEMARK \ TRADENAME LICENSING AGREEMENT (hereinafter the
"Agreement") is made and entered into pursuant to the terms of Article IV,
between Nu Skin International, Inc. a corporation organized and existing under
the laws of the State of Utah, U.S.A., (hereinafter referred to as "NSI") and Nu
Skin Korea, Ltd. a corporation organized and existing under the laws of the
country of Korea (hereinafter "NSK"). Hereinafter, NSI and NSK shall
collectively be referred to as the "Parties".
W I T N E S S E T H
WHEREAS, NSI is engaged in the design, production and marketing of Products
and related Sales Aids for distribution in the international markets of the
Asia-Pacific Region through a network of independent distributors; and,
WHEREAS, NSK acts as the exclusive wholesale distributor of NSI products in
Korea, having entered a separate written Wholesale Distribution Agreement with
Nu Skin Hong Kong, Inc. ("NSHK"), the exclusive regional distributor of such
products and sales aids in the Asia-Pacific region; and,
WHEREAS, NSK has investigated the marketing potential for Products and
Commercial Materials, as defined in this Agreement, it intends to design,
manufacture, produce and distribute to enhance further its competitiveness in
the Territory; and,
WHEREAS, NSK has complied with the requirements of its distribution
arrangement with NSHK and received appropriate consent in accordance with the
provisions of the agreement
1
governing their relationship pertaining to distribution of NSI products and the
manufacture of non-competing Products in the Territory; and,
WHEREAS, NSK desires to affix NSI Trademarks, as defined herein, to the
Products and to affix NSI Tradenames, as defined herein, to Commercial Materials
it envisions for the Territory thereby deriving benefit from the goodwill, value
and reputation such marks and names shall lend when used to identify such
Products and Commercial Materials;
NOW THEREFORE, in consideration of the premises, the mutual promises,
covenants, and warranties hereinafter set forth and for other valuable
consideration, the sufficiency of which is hereby acknowledged, the Parties
agree as follows:
ARTICLE I
DEFINITIONS
For the purposes of this Agreement, the following words and terms shall
have the meaning assigned to them in this Article I:
1.1 "AGREEMENT" shall mean this Trademark - Tradename Licensing
Agreement.
1.2 "COMMERCIAL MATERIALS" shall mean, without limitation, any business
marquis, sign, letterhead, business card, pamphlet, brochure, magazine, flyer,
newsletter, Sales Aid, advertisement or other associated tangible materials NSK
uses in its activities with the Independent Distribution Network or the public
to enhance its image and competitiveness in the Territory that NSK has not
purchased from NSI or NSHK. Commercial Materials shall not, for the purposes of
this Agreement, include Introductory Kits, as defined herein.
2
1.3 "INDEPENDENT DISTRIBUTION NETWORK" shall mean the network of all
NSI Independent Distributors having a contractual relationship with NSI to act
as a retail distributor.
1.4 "INTRODUCTORY KIT" shall mean those materials developed, maintained
and approved by NSI and intended for sale or distribution in conjunction with
the execution of the distribution contract to NSI Independent Distributors in
the Territory explaining the Nu Skin independent business opportunity, the
contractual relationship with NSI and the marketing support programs for the
Territory.
1.5 "KNOW-HOW" shall mean any information, including, without
limitation, any commercial or business information, lists, marketing methods,
marketing surveys, processes, specifications, quality control reports, drawings,
photographs, or any other information owned by NSI, whether or not considered
proprietary, relating to the Independent Distribution Network, the Distributor
Lists, and the Sales Compensation Plan.
1.6 "LICENSED MARKS AND NAMES" shall mean any NSI Trademark affixed to
any Product for purposes of identifying, promoting or selling such Product in
the Territory to any NSI Independent Distributor and any NSI Tradename affixed
to or used in connection with any Commercial Material produced to further NSK's
commercial activities in the Territory.
1.7 "NSI INDEPENDENT DISTRIBUTOR" shall mean a person or business
entity authorized by contract with NSI to distribute, as an independent
contractor, the Products and Sales Aids purchased from an authorized Asia
Pacific Distribution Center in accordance with the terms of such distribution
contract.
1.8 "NSI TRADEMARK" shall mean any "mark" or "device" or combination
thereof defined under the laws of the Territory or the U.S., for which NSI has,
as the owner, existing
3
registrations, pending applications or a bona fide intent to use in the
Territory(1). An up-to-date list of NSI Trademarks, including examples of each,
is appended hereto as Schedule I, and NSI agrees to keep NSK currently informed
of additions and amendments thereto.
1.9 "NSI TRADENAME" shall mean any "mark," "name," or "device" or
combination thereof similar in appearance to any NSI Trademark of which NSI is
the owner, registered or otherwise, that is commercially valuable and has
increased in value through NSI's increased goodwill, reputation and
competitiveness.
1.10 "PRODUCT" shall mean any of the following bearing an NSI Trademark:
any product, including, without limitation, cosmetics, nutritional products,
dietary supplements, vitamins, over-the-counter drugs, quasi-drugs, drugs and
pharmaceutical products, and other products which NSK designs, manufactures,
produces and/or distributes in the Territory, that NSK has not purchased from
NSI or NSHK. Product shall not, for the purposes of this Agreement, include
Introductory Kits, as defined herein.
1.11 "PROPRIETARY INFORMATION" shall mean, without limitation, all
information other than information in published form or expressly designated by
either party in writing as non-confidential, which is directly or indirectly
disclosed to the other party, regardless of the form in which it is disclosed,
relating in any way to the following property owned by the Parties or which the
Parties have been licensed to use or sub-license: (1) proprietary technical
information related
_________________
(1) Thus, even if a particular mark may not be registered in respect of all
relevant goods in the Territory, use of the mark will be deemed to fall within
the scope of the license grant. This entitles the licensor to exercise quality
control with regard to the manufacture, use, and sale of the goods in relation
to which each mark is used, and also enables such use, as a matter of law to
enure to the benefit of the licensor.
4
to the Licensed Marks and Names and the Introductory Kit; (2) information
respecting actual or potential customers or customer contacts and customer sales
strategies, names, addresses, phone numbers, identification numbers, database
information and its organization, unique business methods; (3) market studies,
penetration data, customers, products, contracts, copyrights, computer programs,
applications, technical data, licensed technology, patents, inventions,
procedures, methods, designs, strategies, plans, liabilities, assets, cost
revenues, sales costs, production costs, raw material sources and other market
information; (4) other sales and marketing plans, programs and strategies; (5)
trade secrets, Know-How, designs and proprietary commercial and technical
information, methods, practices, procedures, processes, formulae with respect to
manufacturing, assembly, design or processing products subject to this Agreement
and any component, part or manufacture thereof; (7) profits, organization,
employees, agents, distributors, suppliers, Trademarks, Tradenames and services;
(8) other business and commercial practices in general relating directly or
indirectly to the foregoing; (9) computer disks or other records or documents,
originals or copies, containing in whole or in part any of the foregoing; and,
(10) tax information, returns and other financial information.
1.12 "SALES AID" shall mean the materials, in whatever form and/or
design produced for the Territory to assist in the marketing of products or the
Nu Skin independent business opportunity in the Territory.
1.13 "TERRITORY" shall mean the entire area and jurisdiction comprising
the country of the Republic of Korea. The Territory defined in this Agreement
may be modified from time to time by written amendment, signed by the Parties.
5
ARTICLE II
GRANT OF EXCLUSIVE LICENSE
2.1 GRANT OF EXCLUSIVE LICENSE. NSI hereby grants to NSK an exclusive
license and right to use in the Territory the Licensed Marks and Names, provided
that:
a) The quality and performance of all Products and Commercial Materials bearing
the Licensed Marks and Names shall always be in accordance with the standards,
specifications and instructions approved by NSI; and,
b) NSI shall have the right to inspect the premises of NSK and those of any of
NSK's subcontractors at which Product(s) are being manufactured, at reasonable
times, and also to receive samples of such Product(s), in accordance with a
reasonable schedule to be established promptly between NSI and NSK; and,
c) NSK agrees to correct, as promptly as possible, any faults in the Product(s)
and/or manufacturing thereof brought to NSK's attention by NSI or otherwise;
and,
d) NSK agrees to submit to NSI for prior approval, which approval
will not be unreasonably withheld, labels, packaging, advertising and
promotional materials, in relation to which any of the NSI Trademarks are
proposed to be used, including the marking legends intended to be used in
relation thereto.
2.2 NSI grants to NSK the right to prevent all third parties from
infringing NSI's and NSK's rights in the Licensed Marks and Names. NSK does not
have the right to grant sub-licenses for the Licensed Marks and Names in the
Territory.
6
2.3 TERM OF LICENSE GRANTED. The licenses granted in this Agreement
shall remain in full force until the termination of this Agreement in accordance
with its terms.
2.4 NSI'S INTEREST IN LICENSED MARKS AND NAMES. NSI hereby retains
legal title to the Licensed Marks and Names for all purposes, including but not
limited to, the bringing or defending of any legal action in the Territory which
it deems reasonable to protect its rights therein. NSK agrees to assist NSI in
any manner to protect NSI's rights in the Licensed Marks and Names which NSI may
reasonably request, including the delegation of its interests in any legal
proceeding to bring or defend such legal action in its own name.
2.4(a) NSK shall review regularly the Territory's market for unauthorized
users of the Licensed Marks and Names and unfair competition affecting the
status, channels of commerce or scope of the Licensed Marks and Names, and
agrees to inform NSI promptly of any possible infringement of, or unfair
competition affecting, the Licensed Marks and Names which comes to the
attention of NSK. In the event NSI decides to take affirmative action
against any such possible infringement or act of unfair competition, NSK
agrees to assist NSI, in whatever manner NSI may direct, and at the expense
of NSI. NSI claims, in its sole discretion, the exclusive right to direct
any such action. Recovery of damages resulting from any such action shall
be solely for the accounts of NSI. Should either party hereto be involved
as a defendant in any judicial action under the laws of the Territory
respecting the subject matter of this Agreement, the Parties hereto agree
to cooperate in such defense with each other to the greatest possible
extent. Any liability of NSK in such action shall be limited to the amount
of the license fees due to NSI from NSK under the terms of this Agreement.
7
2.5 RECITALS OF VALUE OF LICENSED MARKS AND NAMES. NSK recognizes and
agrees that NSI has expended considerable time, effort and resources to develop,
register, apply for registrations, maintain and enhance the value and reputation
of the Licensed Marks and Names. NSK further agrees it will derive a
considerable benefit from its use of the Licensed Marks and Names in the
Territory and from NSI's efforts and expenditures respecting the Licensed Marks
and Names.
2.6 ROYALTIES. As compensation for the exclusive licenses granted
pursuant to the terms of this Agreement, NSK shall pay to NSI a royalty equal to
five percent (5%) (or as otherwise mutually agreed upon by the Parties) of its
sales, net of value added tax (VAT), of all Products and Commercial Materials
sold in the Territory during the entire term of this Agreement. Where NSI owns
the formulae or has exclusive rights to the Product or Commercial Material in
the Territory, the applicable royalty shall be eight percent (8%) of sales, or
as otherwise mutually agreed upon by the Parties.
2.6(a) NSK shall give to NSI, at the end of each month, a written statement
of the sales volume of the Products and Commercial Materials achieved
during such period in the Territory. This statement shall be certified as
to its correctness by NSK's principal financial officer and dispatched to
NSI within thirty (30) days following the close of each such period.
2.6(b) For purposes of computing the royalty, Products and Commercial
Materials shall be considered sold when recognized for accounting purposes
as a sale by NSK to NSI Independent Distributors or others in the
Territory.
8
2.6(c) The Parties agree that the royalty shall remain competitive within
the market and shall be determined by negotiated arm's length standards and
may be amended from time to time as agreed by the Parties in writing.
2.6(d) NSK shall keep complete and accurate records of its activities under
this Agreement which shall be open to inspection by authorized
representatives of NSI at any reasonable time. NSI may also appoint a CPA
or equivalent of NSI's choice in the Territory for the purpose of auditing
NSK's relevant records.
2.6(e) Payments made by NSK to NSI under this Agreement shall be payable in
Korean Won with any exchange rate risks to U.S. dollars or other currency
being borne by NSI. Payments shall be made either directly to NSI in
immediately available funds by wire transfer to Zion's First National Bank,
Provo Branch, Provo, Utah, U.S.A. -- account number 32927931, or by such
other means of payment designated by NSI.
2.6(f) Without limiting any of NSI's other rights and remedies under this
Agreement, amounts outstanding under the terms of this Agreement not paid
within ninety (90) days from the date due and payable, and as set forth in
the payment provisions herein, shall bear interest at the prime interest
rate as reported in the WALL STREET JOURNAL plus two percent (2%) for the
full period outstanding. Whether or not interest charges are actually
levied is at the discretion of NSI.
2.7 WARRANTY OF TITLE; DEFENSE OF CLAIMS. NSI hereby warrants and
represents that it is the sole and exclusive owner of the Licensed Marks and
Names; that all NSI Proprietary Information related to the Licensed Marks and
Names is confidential, giving NSI a competitive advantage in its worldwide
markets; that to the best of its knowledge and information no claim
9
exists or has been made contesting the ownership and title of said Licensed
Marks and Names; and that NSK's use of the Licensed Marks and Names in the
Territory will not constitute an infringement of the right of any third party.
NSI shall indemnify and hold harmless NSK for any loss, damage or claim,
including reasonable attorneys' fees, arising from or relating to any breach of
the warranties contained herein. NSI reserves the right to control the defense
of any litigation including, without limitation, the right to choose counsel and
to settle and dispose of any such litigation or claim as it deems appropriate in
its sole discretion.
2.8 MODIFICATIONS. NSK shall make no modification to the Licensed Marks
and Names without the express, prior written consent of NSI.
2.9 RESERVATION OF RIGHTS TO TERMINATE LICENSE. NSI hereby retains the
right to terminate any of the licenses granted as part of the Licensed Marks and
Names or this Agreement for any of the reasons set forth in this Agreement.
ARTICLE III
GOVERNMENTAL APPROVALS, LAWS AND REGULATIONS
3.1 OBLIGATIONS OF NSK. NSK agrees it will obtain any governmental
approval required in the Territory to enable this Agreement to become effective
or to enable any payment pursuant to the provisions of this Agreement to be
made, or any other obligation hereunder to be observed or performed, including
the recordation of the licenses granted pursuant hereto as required by Korean
law. NSK agrees to keep NSI informed of its progress in obtaining all such
governmental approvals.
10
3.2 COMPLIANCE WITH LAWS. NSK shall comply with and make all necessary
filings and notifications under all applicable laws, regulations and ordinances
in the Territory, including without limitation, any requirement for the
registration or recording of this Agreement with any applicable or responsible
governmental entities and authorities.
3.3 PROTECTION OF NSI. NSK shall refrain from any action that will cause
NSI to be in violation of any applicable law, regulation, or ordinance of the
Territory, the United States, or elsewhere, or of any international convention,
bilateral, or
multilateral treaty to which the Territory or the United States is a signatory,
including, without limitation, the U.S. Foreign Corrupt Practices Act of 1977,
the U.S. Export Control Laws, and the U.S. Anti-Boycott Laws.
3.4 COMPLIANCE OF NSK OPERATION. NSK shall capitalize itself adequately
and maintain its operations on a financially sound basis and in compliance with
all applicable laws, regulations and ordinances covering the operation of such
business entities in the Territory.
ARTICLE IV
TERM AND TERMINATION
4.1 TERM. This Agreement shall be effective as of the first day of NSK
operations in the Territory. The initial term of the Agreement shall expire in
five (5) years from the date of its execution, but shall automatically be
renewed for successive five (5) year terms unless either party gives three (3)
months written notice to the other of its intent to terminate this Agreement
prior to the expiration of the term then in effect.
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4.2 BREACH AND NOTICE. In case either party breaches any provision of
this Agreement, the other party may immediately give notice of intention to
terminate within ninety (90) days thereof and, unless the breaching party
notifies the other of the cure of such breach within said period, this Agreement
shall automatically terminate at the expiration of the ninety day period.
Should any such breach consist of the failure of NSK to pay any amount owing to
NSI hereunder, the period of notice of intention to terminate this Agreement
shall be thirty (30) days.
4.3 EXAMPLES OF MATERIAL BREACH. Either party may terminate this
Agreement upon the occurrence of any of the following:
4.3(a) the filing by or against the other party hereto of a petition
in bankruptcy or judicial or administrative declaration of insolvency,
the dissolution, liquidation, or re-organization of, and the loss of
clearinghouse privileges by, one party as circumstances justifying
termination of the Trademark-Trade Name Licensing Agreement, by
giving notice to the latter party of its intention to so terminate.
NSI may terminate this Agreement by giving notice thereof to NSK in
the event of government expropriation of any of the assets of NSI or
NSK which relate to the activities of NSK contemplated by this
Agreement;
4.3(b) if NSK causes or allows a judgment to be entered against it or
causes or allows a lien, security interest or other encumbrance to be
placed upon its assets or the assets of NSI;
4.3(c) if NSK undergoes a substantial change in ownership or control.
Upon any of the foregoing events, such termination shall be
immediately effective.
12
4.3(d)if either party violates a term, condition, covenant, warranty or
promise under this Agreement.
4.4 OBLIGATION OF NSK UPON TERMINATION. Upon termination of this
Agreement by either Party, NSK agrees to sell, destroy or otherwise dispose of
all Products and Commercial Materials bearing the Licensed Marks and Names in
accordance with written instruction from NSI delivered pursuant to the Notice
provisions of this Agreement. Upon termination, NSK will cease to use the
Licensed Marks and Names.
4.5 DAMAGES NOT ALLOWABLE. Should this Agreement be terminated for any
reason, NSK shall not be able to claim from NSI any damages or compensation for
losses or expenses incurred, or for lost profits.
4.6 SURVIVAL OF OBLIGATIONS. Termination of this Agreement shall not
affect (1) any of the obligations, covenants and warranties made hereunder,
including the payment of any fees or other costs which have accrued as of the
date of termination; (2) any obligation which from the provision of this
Agreement is intended to survive the termination of said Agreement.
4.7 WAIVER. Any waiver by either party of a breach of any term or
condition of this Agreement shall not be considered as a waiver of a subsequent
breach of the Agreement or any other term or condition thereof.
4.8 REVERSION OF RIGHTS. Upon termination of this Agreement, all rights
and licenses herein granted to NSK shall immediately cease and shall revert to
NSI, and NSK shall cease representing to any third party that it has any right
to use, assign, convey or otherwise transfer the Licensed Marks and Names.
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ARTICLE V
RELATIONSHIP OF NSI AND NSK
The Parties agree that they are separate entities and have entered this
Agreement as individual contracting parties. Nothing contained or implied in
this Agreement shall be construed to constitute NSK as the legal representative
or agent of NSI or to constitute or construe the Parties as partners, joint
venturers, co-owners or otherwise as participants in a joint or common
undertaking. NSK shall not conclude any contract or agreement or make any
commitment, representation or warranty that binds NSI or otherwise act in the
name of or on behalf of NSI. Nothing contained in this Agreement shall be
construed to require NSI to establish or maintain a branch office, subsidiary
corporation or fixed place of business or similar permanent establishment in the
Territory. In fact, the Parties understand and agree that NSI will refrain from
conducting business or engaging in any activity in the Territory which could be
construed, under the applicable laws and tax regulations, as doing or conducting
business in the Territory.
ARTICLE VI
CONFIDENTIALITY
6.1 OBLIGATION TO KEEP CONFIDENTIAL. NSI and NSK agree to hold
confidential any Proprietary Information disclosed by the other party or
otherwise obtained, directly or indirectly. NSK agrees that should it have
access to any Proprietary Information during the course of its relationship with
NSI, it will make no changes to or copies of such materials without the prior,
express written consent of NSI's authorized representative. Neither party will
use, divulge, or
14
disclose any Proprietary Information, directly or indirectly, for its own
benefit or for the benefit of any third party.
6.2 SURVIVAL OF OBLIGATION. NSI and NSK agree to keep confidential the
terms of this Agreement until such time as: (a) either party releases the other
party, in writing, from its terms; or (b) the Proprietary Information becomes
known to the general public by means other than through a breach of this
Agreement; provided that the obligations of the Parties shall cease only with
respect to that portion of Proprietary Information identified in a written
release or generally known to the public. The confidentiality provisions of
this Article shall survive termination of this Agreement.
6.3 INFORMATION THE EXCLUSIVE PROPERTY OF NSI. NSK acknowledges that all
NSI Proprietary Information communicated to NSK by NSI, relating to the Licensed
Marks and Names, shall be deemed to be secret and confidential in character and,
as between the Parties, will be considered the exclusive property of NSI
licensed to NSK for the Territory. Such information is provided to NSK solely
for the benefit of NSK and to enable NSK to perform its obligations and rights
pursuant to the provisions of this Agreement. Such information is not available
to third parties, except to the extent that it may be absolutely necessary to
achieve the purposes of this Agreement. NSK further agrees to take all
reasonable measures to prevent its employees or agents from divulging such
information in any manner that may be contrary to the interest of NSI or NSK.
15
ARTICLE VII
ASSIGNMENT
This Agreement shall be binding on and inure to the benefit of the heirs,
successors, assigns and beneficiaries of the Parties; provided that NSK may not
assign this Agreement or any rights or obligations hereunder, whether by
operation of law or otherwise, without the prior written consent of NSI through
its authorized representative (which consent may be granted or withheld by NSI
in its sole discretion). Any such attempted assignment shall be void and
unenforceable.
ARTICLE VIII
FORCE MAJEURE
Neither party shall be in default under the terms of this Agreement by
reason of its delay in the performance of or failure to perform any of its
obligations hereunder if such delay or failure is caused by strikes, acts of
God, the public enemy, riots, incendiaries, interference by military
authorities, compliance with governmental laws, rules and regulations, delays in
transit or delivery, inability to secure necessary governmental priorities for
materials or any fault beyond its control or without its fault or negligence.
ARTICLE IX
GOVERNMENTAL APPROVAL
Should government approval, filing or recording of this Agreement be
required or as provided in Article III herein, this Agreement shall not become
effective until the consent of said
16
proper governmental authorities in the Territory has been obtained. If such
approval or filing is required by law, NSK is responsible, pursuant to the
provisions of Article III, for filing and notification of this Agreement with
appropriate authorities in the Territory.
ARTICLE X
RECORDING
NSI, in its sole discretion, shall have the right to record this Agreement
or proof thereof, or to enter NSK as a registered user in the Territory. NSK
agrees to cooperate, as reasonably requested by NSI, in arranging for such
recordings or entries, or in bearing or canceling such recordings or entries in
the event of amendments to or termination of this Agreement for any reason.
Pursuant to Article IV herein, NSK will record the licenses granted herein with
the Korean authorities as required by law.
ARTICLE XI
GOVERNING LAW AND DISPUTE RESOLUTION
This Agreement shall be governed by and construed in accordance with the
laws of the State of Utah, United States of America, applicable to contracts
executed and performed therein. The Parties agree that the forum for any
arbitration, action, suit or proceeding arising out of this Agreement shall be
in the State of Utah and each party submits to the jurisdiction in the State of
Utah for resolution of any conflict or litigation arising under or purporting to
interpret this Agreement. Any dispute arising out of this Agreement or any of
the responsibilities and
17
obligations therein shall be resolved through arbitration administered by the
American Arbitration Association in accordance with its Commercial Arbitration
Rules and supplemented by the Procedures for International Commercial
Arbitration. The arbitration proceedings shall be conducted in Salt Lake City,
Utah, U.S.A. The findings and conclusions of said arbitration shall be binding
upon the Parties, their heirs, successors, assigns and beneficiaries.
ARTICLE XII
APPLICABILITY OF POST-EFFECTIVE LAW
To the extent that the Vienna Convention on the International Sale of Goods
(the "Vienna Convention"), the United Nations Convention on Contracts for the
International Sale of Goods (the "UN Convention") or some other such similar
law, treaty or act becomes effective during the term of this Agreement, the
Parties agree that neither the Vienna Convention, the UN Convention, nor any
such similar law, treaty or act shall be applicable to this Agreement or the
transactions contemplated hereunder.
ARTICLE XIII
WAIVER AND DELAY
No waiver by either party of any breach or default in performance by the
other party, and no failure, refusal or neglect of either party to exercise any
right, power or option given to it hereunder or to insist upon strict compliance
with or performance of the other party's obligations under this Agreement, shall
constitute a waiver of the provisions of this Agreement with respect
18
to any subsequent breach thereof or a waiver by either party of its right at any
time thereafter to require exact and strict compliance with the provisions
thereof.
ARTICLE XIV
NOTICES
All notices, requests and other communications hereunder shall be in
writing and shall be deemed to have been duly given, if delivered by hand, or if
communicated by facsimile, cable or similar electronic means to the facsimile
number or cable identification number as previously provided by each party to
the other, at the time that receipt thereof has been confirmed by return
electronic communication or signal that the message has been received, or if
mailed, ten (10) days after dispatch by registered airmail, postage prepaid,
from any post office addressed as follows:
If to NSK: Nu Skin Korea, Ltd.
Dabong Tower
890-12 Daechi-dong
Kangnam-ku, Seoul
Korea
Facsimile No.: 82-2-552-9728
If to NSI: Nu Skin International, Inc.
75 West Center Street
Provo, Utah 84601, U.S.A.
Facsimile Number: (801) 345-5999
Attn.: Senior International Legal Counsel
Either party may change its facsimile number, cable identification number
or address by a notice given to the other party in the manner set forth above.
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ARTICLE XV
INTEGRATED CONTRACT
This Agreement constitutes the entire agreement between the Parties
relating to the subject matter hereof and supersedes all prior or
contemporaneous negotiations, representations, agreements and understandings
(both oral and written) of the Parties.
ARTICLE XVI
MODIFICATION AND AMENDMENTS
No supplement, modification or amendment of this Agreement shall be binding
unless it is in writing and executed by the Parties.
ARTICLE XVII
NONDISCLOSURE
The Parties agree that, except to the extent required by law, neither party
will disclose the existence of any of the terms of this Agreement to any person
that is not an affiliate of such party or an employee or agent of such party or
affiliate without the prior written consent of the other party.
ARTICLE XVIII
SEVERABILITY
To the extent that any provision of this Agreement is (or in the opinion of
counsel mutually acceptable to both Parties would be) prohibited, judicially
invalidated or otherwise
20
rendered unenforceable in any jurisdiction, such provision shall be deemed
ineffective only to the extent of such prohibition, invalidation or
unenforceability in that jurisdiction, and only within that jurisdiction. Any
prohibited, judicially invalidated or unenforceable provision of this Agreement
will not invalidate or render unenforceable any other provision of this
Agreement, nor will such provision of this Agreement be invalidated or rendered
unenforceable in any other jurisdiction.
ARTICLE XIX
COUNTERPARTS AND HEADINGS
This Agreement may be executed in one or more counterparts, each of which
shall be deemed an original, but all of which together shall constitute one and
the same instrument. All headings and captions are inserted for convenience of
reference only and shall not affect the meaning or interpretation of any
provision hereof.
IN WITNESS WHEREOF, the Parties have caused this Agreement to be executed
in the United States of America by their respective duly authorized
representatives as of the day and year first-above written.
NU SKIN INTERNATIONAL, INC. NU SKIN KOREA, LTD.
BY: /s/ BLAKE M. RONEY BY: /s/ SUNG-TAE HAN
--------------------------------- ---------------------------------
BLAKE M. RONEY SUNG-TAE HAN
PRESIDENT AND CEO REPRESENTATIVE DIRECTOR
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EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated February 19, 1997
relating to the consolidated financial statements of Nu Skin Asia Pacific, Inc.,
which appears in such Prospectus. We also consent to the references to us under
the headings "Experts" and "Selected Consolidated Financial and Other
Information" in such Prospectus. However, it should be noted that Price
Waterhouse LLP has not prepared or certified such "Selected Consolidated
Financial and Other Information."
/s/ PRICE WATERHOUSE LLP
Price Waterhouse LLP
Salt Lake City, Utah
June 2, 1997
