AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 8, 1996
REGISTRATION NO. 333-12073
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
NU SKIN ASIA PACIFIC, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
---------------
DELAWARE 5122 87-0565309
(STATE OF JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF INCORPORATION OR CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
ORGANIZATION)
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)
---------------
COPIES TO:
NOLAN S. TAYLOR, ESQ. WILLIAM H. HINMAN, JR., ESQ.
LEBOEUF, LAMB, GREENE & MACRAE, SHEARMAN & STERLING
L.L.P. 555 CALIFORNIA STREET, SUITE 2000
1000 KEARNS BUILDING SAN FRANCISCO, CA 94104
136 SOUTH MAIN STREET TELEPHONE: (415) 616-1100
SALT LAKE CITY, UTAH 84101-1685
TELEPHONE: (801) 320-6700
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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.
---------------
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. [X]
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. [_]
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 NOVEMBER 8, 1996
PROSPECTUS
7,600,000 SHARES
LOGO
CLASS A COMMON STOCK
-------------
Of the 7,600,000 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, 4,750,000 shares are being offered
by the Company and 2,850,000 shares are being offered by certain stockholders
of the Company (the "Selling Stockholders"). See "Principal and Selling
Stockholders." Of the 7,600,000 shares of Class A Common Stock being offered
hereby, 4,600,000 shares are being offered initially in the United States and
Canada by the U.S. Underwriters (the "U.S. Offering"), 1,670,000 shares are
being offered initially in a concurrent offering in Japan by the Japanese
Underwriters (the "Japanese Offering"), and 1,330,000 shares are being offered
initially in a concurrent offering outside the United States, Canada and Japan
by the International Managers (the "International Offering," together with the
U.S. Offering and the Japanese 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
stockholders of the Company prior to consummation of the Offerings (the
"Existing Stockholders"). After consummation of the Offerings, the Existing
Stockholders will beneficially own shares of Common Stock having approximately
98.8% of the combined voting power of the outstanding shares of Common Stock
(approximately 98.7% if the Underwriters' over-allotment options are exercised
in full).
Prior to the Offerings, there has been no public market for the Class A
Common Stock. It is currently estimated that the initial public offering price
will be between $20 and $22 per share. See "Underwriting" for information
relating to the factors to be considered in determining the initial public
offering price. Approximately $15,000,000 of the net proceeds to the Company
from the Offerings will be used to repay a portion of the S Distribution Notes
(as defined herein) issued to the Existing Stockholders in connection with the
Reorganization (as defined herein). See "Use of Proceeds" and "The
Reorganization and S Corporation Distribution."
The Class A Common Stock has been approved for listing on the New York Stock
Exchange under the symbol "NUS," subject to official notice of issuance.
SEE "RISK FACTORS," BEGINNING ON PAGE 10, FOR A DISCUSSION OF CERTAIN FACTORS
WHICH SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE SECURITIES OFFERED
HEREBY.
-------------
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.
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PRICE TO UNDERWRITING PROCEEDS TO PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2) SELLING STOCKHOLDERS
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Per Share................ $ $ $ $
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Total(3)................. $ $ $ $
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(1) The Company and the Selling Stockholders have agreed to indemnify the U.S.
Underwriters, the Japanese Underwriters and the International Managers
against certain liabilities, including liabilities under the Securities Act
1933, as amended. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated to be
$3,000,000.
(3) 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 884,317 and 255,683 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, Proceeds to Company and Proceeds to Selling Stockholders will be
$ , $ , $ and $ , respectively. See "Underwriting."
-------------
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 , 1996.
-------------
MERRILL LYNCH & CO. MORGAN STANLEY & CO.
INCORPORATED
DEAN WITTER REYNOLDS INC.
NOMURA SECURITIES INTERNATIONAL, INC.
-------------
The date of this Prospectus is , 1996.
[COMPANY LOGO AND THE WORDS "SCIENCE," "NATURE" AND "BEST OF SCIENCE &
NATURE."]
IN CONNECTION WITH THE OFFERINGS BY THE UNDERWRITERS, THE UNDERWRITERS MAY
OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE
OF THE CLASS A COMMON STOCK AT LEVELS ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL
IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK
EXCHANGE OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT
ANY TIME.
[PICTURE OF NU SKIN PERSONAL CARE AND NUTRITIONAL PRODUCTS.]
[PICTURE OF NU SKIN PERSONAL CARE AND NUTRITIONAL PRODUCTS CONTINUED FROM
PREVIOUS PAGE.]
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 and gives effect to the Reorganization (as
defined herein). As used herein, "Nu Skin Asia Pacific" or the "Company" means
Nu Skin Asia Pacific, Inc., including the Subsidiaries, giving effect to the
Reorganization. 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"), and Nu Skin Taiwan, Inc. ("Nu Skin Taiwan"), collectively,
and excludes Nu Skin Personal Care (Thailand) Limited ("Nu Skin Thailand"),
which has been formed, but has not commenced operations.
See "The Reorganization and S Corporation Distribution." 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) and South Korea, where the Company
currently has operations, and in Thailand, Indonesia, Malaysia, the
Philippines, the People's Republic of China ("PRC"), 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 95.2% to $471.3 million for the nine
months ended September 30, 1996 from $241.4 million for the same period in
1995. Net income increased 117.7% to $60.3 million for the nine months ended
September 30, 1996 from $27.7 million for the same period in 1995. Revenue
increased 35.6% to $358.6 million for the year ended December 31, 1995 from
$264.4 million in 1994. Although operating expenses have increased with the
growth of the Company's revenue, such expenses have declined as a percentage of
revenue due to improved operating leverage. Net income increased 86.1% to $40.2
million for the year ended December 31, 1995 from $21.6 million in 1994. The
Company's network of independent distributors has grown since the Company's
inception in 1991 to more than 330,000 active distributors as of September 30,
1996. See "Risk Factors--Managing Growth."
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,
weight management products and nutritious snacks, and sports nutrition
products.
In Japan, Taiwan and Hong Kong, the Company currently offers most of NSI's
personal care products and approximately one-third of NSI's nutritional
products. In South Korea, the Company currently offers one-third of NSI's
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
NSI's existing personal care and nutritional products. In addition to expanding
its product offerings with existing NSI products, the Company intends to
introduce new products tailored to specific markets.
3
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 65%,
resulting in the sale of over $75 billion of goods and services in 1995.
According to the WFDSA, $34 billion of goods and services were sold by its
members in 1995 through direct selling channels in the markets in which the
Company currently operates, which represents 45% of the global volume of direct
sales by its members.
OPERATING STRENGTHS AND GROWTH STRATEGY
The Company believes that its success to date is based upon 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. Specifically, the Company's
operating strengths include (i) its premium product offerings, (ii) a 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, (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." Any
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 consumption of its products. See
"Business--Growth Strategy." Any 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 NSI
NSI, founded in 1984 and based in Provo, Utah, is engaged in selling personal
care and nutritional products and, together with its affiliates, compromises
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 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. See "Risk Factors--Relationship with and
Reliance on NSI; Potential Conflicts of Interest." Because of this fact, the
Company cannot control who becomes a distributor.
4
THE OFFERINGS
Of the 7,600,000 shares of Class A Common Stock, par value $.001 per share,
being offered hereby, 4,600,000 shares are being offered initially in the
United States and Canada by the U.S. Underwriters, 1,670,000 shares are being
offered initially in a concurrent offering in Japan by the Japanese
Underwriters, and 1,330,000 shares are being offered initially in a concurrent
offering outside the United States, Canada and Japan by the International
Managers. The initial public offering price and the underwriting discount per
share are identical for each of the Offerings. See "Underwriting."
Class A Common Stock offered by(1):
The Company...................................... 4,750,000 shares
The Selling Stockholders......................... 2,850,000 shares
Total Class A Common Stock..................... 7,600,000 shares
Common Stock to be outstanding after the Offerings:
Class A Common Stock(1)(2)(3)(4)................. 8,850,000 shares
Class B Common Stock(3).......................... 74,545,000 shares
Total Common Stock............................. 83,395,000 shares
Concurrent Non-Underwritten Offering............... Immediately prior to the Offerings (i) the
Existing Stockholders will contribute
1,250,000 shares of Class A Common Stock to
NSI and it affiliates (other than the
Company) for issuance to employees of NSI
and its affiliates (other than the Company)
as employee stock bonus awards
(approximately 600,000 of which will be
awarded prior to the Offerings), (ii) the
Company will grant stock bonus awards to
its employees covering 109,000 shares of
Class A Common Stock, and (iii) NSI will
grant options ("Distributor Options") to
certain of its distributors covering
1,605,000 shares of Class A Common Stock
and (iv) the Existing Stockholders will
contribute to the Company the 1,605,000
shares of Class A Common Stock underlying
the Distributor Options.
Use of proceeds.................................... The Company expects to apply the net
proceeds of the Offerings as follows: (i)
approximately $40 million to finance the
Company's entry into selected new countries
(including the payment of a licensing fee
to NSI); (ii) approximately $15 million to
repay a portion of the S Distribution Notes
(as defined herein); (iii) approximately
$12 million to introduce new products into
countries in which the Company currently
operates; (iv) approximately $12 million to
enhance the Company's technological
infrastructure; (v) approximately $10
million to establish additional offices and
distribution centers in countries in which
the Company currently operates; and (vi)
approximately $2 million for general
corporate purposes.
5
New York Stock Exchange symbol..... "NUS"
Voting rights...................... The Class A Common Stock and Class B Common
Stock vote as a single class on all mat-
ters, except as otherwise required by law,
with each share of Class A Common Stock en-
titling 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 Existing Stockhold-
ers. After consummation of the Offerings,
the Existing Stockholders will beneficially
own shares of Common Stock having approxi-
mately 98.8% of the combined voting power
of the outstanding shares of Common Stock
(approximately 98.7% if the underwriters'
over-allotment options are exercised in
full).
Risk Factors....................... Prospective investors should consider cer-
tain risk factors and uncertainties rela-
tive to the Company, its business and the
Class A Common Stock offered hereby includ-
ing, without limitation, the Company's re-
liance on the independent distributors of
NSI, the potential effects of adverse pub-
licity, the potential negative impact of
distributor actions, government regulation
of direct selling activities, government
regulation of products and marketing, reli-
ance on certain distributors and the poten-
tial divergence of interests between dis-
tributors and the Company, the Company's
entry into new markets, the management of
the Company's growth, the possible adverse
effect on the Company of a change in the
status of Hong Kong, the Company's rela-
tionship with and reliance upon NSI and po-
tential conflicts of interest related
thereto, control by the Existing Stockhold-
ers and the anti-takeover effect of dual
classes of Common Stock, the impact on in-
come due to the Distributor Options, the
Company's reliance on and concentration of
outside manufacturers, the Company's reli-
ance on operations of and dividends and
distributions from its subsidiaries, issues
related to transfer pricing and taxation,
potential increases in distributor compen-
sation expense, seasonality and
cyclicality, product liability, competi-
tion, operations outside the United States,
currency risks, import restrictions, duties
and regulation of consumer goods, the anti-
takeover effects of certain charter, con-
tractual and statutory provisions, the ab-
sence of a public market for the Class A
Common Stock, factors related to the deter-
mination of the offering price, fluctua-
tions in the price of the Class A Common
Stock, the existence of shares eligible for
future sale into the Company's market for
the Class A Common Stock upon exercise of
the Distributor Options, employee stock bo-
nus awards and otherwise, dilution and the
absence of dividends.
6
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(1) Assumes no exercise of the underwriters' over-allotment options aggregating
1,140,000 shares of Class A Common Stock, which have been granted by the
Selling Stockholders.
(2) Includes: (i) 7,600,000 shares of Class A Common Stock being offered in the
Offerings and (ii) 1,250,000 shares of Class A Common Stock that have been
issued to the Existing Stockholders and will, prior to the Offerings, be
contributed to NSI and its affiliates (other than the Company) for issuance
to employees of NSI and its affiliates (other than the Company) as employee
stock bonus awards (approximately 600,000 of which will be awarded prior to
the Offerings).
(3) All shares of Class B Common Stock are currently held by the Existing
Stockholders and each such share is convertible at any time into one share
of Class A Common Stock and converts automatically into one share of Class
A Common Stock (i) upon a transfer to a person other than an Existing
Stockholder 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."
(4) Does not include: (i) 4,000,000 shares of Class A Common Stock reserved
for issuance pursuant to the 1996 Stock Incentive Plan, 109,000 shares of
which are reserved for issuance by the Company to its employees in
connection with employee stock bonus awards which are to be awarded
immediately prior to the Offerings; (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 options that will be granted to NSI
immediately prior to the Offerings and assigned to qualifying NSI
distributors in connection with the Offerings (the "Distributor Options");
and (iii) 267,500 shares of Class A Common Stock subject to a stock option
which has been 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."
----------------
Nu Skin (R), Interior Design Nutritionals(TM), IDN (R), 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" and "--Licensing
and Sales 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, and references to "yen" and "(Yen)" are to Japanese yen.
7
SUMMARY COMBINED FINANCIAL AND OTHER INFORMATION
The following tables set forth summary combined, pro forma and other
financial information of the Company.
NINE MONTHS
YEAR ENDED ENDED
YEAR ENDED SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
------------------------------------- ------------------- ------------------
1991 1992 1993 1994 1994(/1/) 1995 1995 1996
--------- -------- -------- -------- --------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
INCOME STATEMENT DATA:
Revenue................. $ 677 $ 42,919 $110,624 $254,637 $264,440 $358,609 $241,412 $471,312
Cost of sales........... 462 14,080 38,842 86,872 82,241 96,615 64,110 133,592
--------- -------- -------- -------- -------- -------- -------- --------
Gross profit............ 215 28,839 71,782 167,765 182,199 261,994 177,302 337,720
Operating expenses:
Distributor incen-
tives................. 130 14,659 40,267 95,737 101,372 135,722 91,893 175,149
Selling, general and
administrative........ 1,249 10,065 27,150 44,566 48,753 67,475 44,099 69,970
--------- -------- -------- -------- -------- -------- -------- --------
Operating income........ (1,164) 4,115 4,365 27,462 32,074 58,797 41,310 92,601
Other income (expense),
net.................... 3 160 133 443 (394) 511 (408) 1,530
--------- -------- -------- -------- -------- -------- -------- --------
Income before provision
for income taxes....... (1,161) 4,275 4,498 27,905 31,680 59,308 40,902 94,131
Provision for income
taxes.................. -- 1,503 417 10,226 10,071 19,097 13,170 33,810
--------- -------- -------- -------- -------- -------- -------- --------
Net income (loss)....... $ (1,161) $ 2,772 $ 4,081 $ 17,679 $ 21,609 $ 40,211 $ 27,732 $ 60,321
========= ======== ======== ======== ======== ======== ======== ========
PRO FORMA INCOME STATEMENT DATA(/2/)(/3/):
Revenue........................................... $358,609 $241,412 $471,312
Cost of sales..................................... 96,615 64,110 133,592
-------- -------- --------
Gross profit...................................... 261,994 177,302 337,720
Operating expenses:
Distributor incentives........................... 135,722 91,893 175,149
Selling, general and administrative.............. 74,318 49,231 75,102
-------- -------- --------
Operating income.................................. 51,954 36,178 87,469
Other income (expense), net(/4/) ................. (2,298) (3,217) 1,997
-------- -------- --------
Income before provision for income taxes.......... 49,656 32,961 89,466
Provision for income taxes........................ 19,049 12,644 32,502
-------- -------- --------
Net income (loss)................................. $ 30,607 $ 20,317 $ 56,964
======== ======== ========
Net income per share.............................. $ .36 $ .24 $ .67
Weighted average common shares outstanding(/5/)... 85,377 85,377 85,377
AS OF SEPTEMBER 30, 1996
-------------------------
ACTUAL AS ADJUSTED(/6/)
-------- ----------------
BALANCE SHEET DATA: (IN THOUSANDS)
Cash and cash equivalents............................. $ 81,079 $151,844
Working capital....................................... 60,828 57,309
Total assets.......................................... 168,907 270,441
Short term notes payable to stockholders.............. -- 66,893
Short term note payable to NSI........................ -- 10,000
Long term note payable to NSI......................... -- 10,000
Stockholders' equity.................................. 78,259 92,900
AS AS
AS OF SEPTEMBER 30, OF DECEMBER 31, OF SEPTEMBER 30,
------------------------------ ---------------- ------------------
1991 1992 1993 1994 1994 1995 1995 1996
----- ------ ------- ------- ------- ------- -------- --------
OTHER INFORMATION(/7/):
Number of active
distributors........... -- 33,000 106,000 152,000 170,000 236,000 224,000 331,000
Number of executive
distributors........... -- 649 2,788 5,835 6,083 7,550 7,519 17,809
8
- --------
(1) The information for the year ended December 31, 1994 is not included in the
Company's Combined Financial Statements included elsewhere in this
Prospectus. Such information has been presented for comparative purposes
only.
(2) The unaudited pro forma income statement data reflects the Reorganization,
the Offerings and the following adjustments as if such events had occurred
on January 1, 1995: (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 Philippines, the PRC, Singapore and
Vietnam (the "License Fee"); (ii) the recognition by the Company of
additional management charges of $4.4 million per year relating to certain
support services provided to the Company by NSI and an NSI affiliate; (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; (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; and (v) increased interest expense of $2.7
million relating to the issuance of $81.9 million of interest bearing S
distribution notes (the "S Distribution Notes"), approximately $15.0
million of which will be repaid from the proceeds of the Offerings, due and
payable within six months (8% interest per annum) to the Existing
Stockholders in respect of the earned and undistributed taxable S
corporation earnings and capital at September 30, 1996, that would have
been distributed had the Company's S corporation status been terminated on
September 30, 1996.
(3) The unaudited pro forma income statement data does not reflect the
estimated non-cash compensation expense of $21.1 million in connection with
the one-time grant of the Distributor Options at an exercise price of 25%
of the initial public offering price. The granting and vesting of the
Distributor Options will be 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. The Company will record distributor stock incentive
expense for these non-employee stock options. See "Certain Relationships
and Related Transactions" and "Shares Eligible for Future Sale."
(4) Other pro forma income and expense includes: (i) increased interest expense
of $2.7 million for the year ended December 31, 1995 and for the nine
months ended September 30, 1995, relating to the issuance of $81.9 million
of S Distribution Notes (approximately $15.0 million of which will be
repaid from the proceeds of the Offerings); (ii) increased interest expense
of $0.9 million, $0.7 million and $0.1 million for the year ended December
31, 1995 and for the nine months ended September 30, 1995 and 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, $0.6 million and $0.6 million for the year ended
December 31, 1995 and for the nine months ended September 30, 1995 and
1996, respectively, relating to an estimated $10.0 million note receivable
from NSI as consideration for the Distributor Options.
(5) Reflects 80,250,000 shares of Common Stock and Common Stock equivalents
outstanding after giving effect to the Reorganization, increased by the
sale of 4,750,000 shares of Class A Common Stock, the award of 109,000
shares of Common Stock to employees of the Company and 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 Offerings were used to repay notes payable, had a
dilutive effect of less than 2%, and therefore is not presented.
(6) The as adjusted balance sheet data as of September 30, 1996 reflects
estimated deferred compensation expense and additional paid-in capital of
$21.1 million in connection with the one-time grant of the Distributor
Options. The as adjusted balance sheet data also reflects: (i) the sale of
4,750,000 shares of Class A Common Stock pursuant to the Offerings; (ii)
the issuance of $81.9 million of S Distribution Notes to the Selling
Stockholders; (iii) a $15.0 million partial payment of the S Distribution
Notes from the proceeds of the Offerings; (iv) $20.0 million in notes
payable to NSI, consisting of a $10 million short-term note due on January
15, 1997 and a $10 million long-term note due on January 15, 1998, which
will be issued as partial payment of the $25.0 million License Fee to NSI;
(v) an estimated $10.0 million note receivable from NSI, issued by NSI as
partial consideration for the Distributor Options; (vi) estimated deferred
compensation and additional paid-in capital of $4.8 million, which
represents the estimated compensation expense related to the employee stock
bonus awards granted to employees of the Company, NSI and its affiliates
which vest over a period of four years; and (vii) the recognition of a
deferred tax asset of $5.8 million relating to 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 has been
made to give effect to the Company's earned and undistributed taxable S
corporation earnings for the period from October 1, 1996 through the S
Termination Date (as defined herein). The Company anticipates the increase
in the S Distribution Notes to be between approximately $10.0 million and
$15.0 million. See "The Reorganization and S Corporation Distribution." The
Company estimates that, at the Offerings, it will reserve between $60.0
million and $70.0 million of cash on hand for repayment of the S
Distribution Notes. The balance of the S Distribution Notes will be repaid
from cash generated by operations.
(7) 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.
9
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 purchasing shares of Class A Common Stock.
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 or no 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 of this fact, the Company cannot control who becomes a
distributor. In addition, 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. 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
certain resale price maintenance and other regulations 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, including publicity regarding the legality of the Company's
distribution system, the quality of the Company's products and product
ingredients, regulatory investigations of the Company and its 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
10
resulted in a material adverse impact to NSI's results of operations. The
Company has not been subject to investigations in Asia, however, the denial by
the Malaysian government in 1995 of the Company's business permits due to
distributor action resulted in adverse publicity for the Company. There can be
no assurance that the Company will not be subject to adverse publicity in the
future as a result of similar regulatory investigations, similar distributor
actions 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" and "--Entering New Markets."
POTENTIAL NEGATIVE IMPACT OF DISTRIBUTOR ACTIONS
Distributor actions can negatively impact the Company and its products. 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
application resulted in adverse publicity for the Company. 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 resulting from such distributor
activities and other distributor activities such as inappropriate earnings
claims and product representations by distributors 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.
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 sponsoring bonuses that a registered multi-level marketing company can pay
to its distributors to 35% of revenue in a given month.
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's
operations by certain government agencies in the early 1990's, stemming in
part out of alleged 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."
11
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 the countries in which the Company currently
operates. 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 "--Entering New Markets."
GOVERNMENT 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, and (iv)
taxes, transfer pricing and similar regulations that affect foreign taxable
income and customs duties.
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,
including PharmAssist, 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 and is
required to obtain 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. 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.
Based on the Company'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 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. There can be no assurances that the Company 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
12
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
approximately 520 distributorships worldwide comprise NSI's two highest
executive distributor levels. 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 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
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 Thailand, Indonesia,
Malaysia, the Philippines, the PRC, Singapore and Vietnam. The Company has
undertaken a preliminary review of the laws and regulations to which its
operations would be subject in Thailand, the Philippines, Indonesia, Malaysia,
the PRC, Vietnam and Singapore. 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 Company currently intends, subject
to receipt of government approvals,
13
to commence operations in Thailand in the near future and has conducted
preliminary investigations into the feasibility of opening the other markets
in the countries for which the Company has the right to act as NSI's exclusive
distributor. The regulatory and political climate in these other markets 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 will be able to successfully reformulate its product lines in
any of its new markets to attract local consumers.
Each of the proposed new markets will present additional unique difficulties
and challenges. In Thailand, for example, 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. Under the Treaty of
Amity and Economic Relations between Thailand and the United States (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 the
Company will ever be able to obtain all of the necessary permits and approvals
to commence operations in Thailand. The Company could face particular
difficulties in commencing operations in Thailand if the Treaty of Amity were
terminated and the Company were forced to obtain an Alien Business Permit.
The PRC has also proven to be a particularly difficult market for foreign
corporations due to its extensive government regulation and the historical
political tenants 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 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 companies operating in Malaysia. 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.
MANAGING GROWTH
The Company has experienced rapid growth since it commenced operations 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. If the Company is
unable to manage growth effectively or hire or retain qualified personnel, the
Company's business and results of operations could be adversely affected.
14
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, 1995, 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 is
formulating 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
Following the Reorganization, NSI will retain 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 will license 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 following the Offerings will continue to market and sell personal care and
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 will not be able to use the Nu Skin name 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 NSI products and to use the Licensed Property in the Company's
markets, and an NSI affiliate, Nu Skin Management Group, Inc. ("NSIMG") will
provide management support services to the Company and the Subsidiaries,
pursuant to distribution, trademark/tradename license, licensing and sales,
and management services agreements with the Subsidiaries (collectively, the
"Operating Agreements"). The Company will rely on NSI for 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 will be derived from products and sales aids purchased from
NSI pursuant to these agreements. NSIMG will provide 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 is for a term ending December 31, 2016, and is
subject to renegotiation after December 31, 2001, in the event that the
Existing Stockholders, 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 NSI. The Company will be 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 the consummation of the Offerings, approximately 98.8% of the combined
voting power of the outstanding shares of Common Stock will be held by the
Existing Stockholders (approximately 98.7% if the
15
underwriters' overallotment options are exercised in full). Consequently, the
Existing Stockholders 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. The Existing Stockholders also
own, and following the Offerings will continue to own, 100% of the outstanding
shares of NSI. As a result of this ownership, the Existing 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. See "--Control
by Existing Stockholders; Anti-Takeover Effect of Dual Classes of Common
Stock."
The Operating Agreements were approved by the present Board of Directors of
the Company, which is composed entirely of officers and shareholders of NSI.
It is expected that, subsequent to the closing of the Offerings, the
composition of the Board of Directors of the Company will be changed so that
at least two of its members will be persons unaffiliated with NSI. In
addition, most 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.
Prior to or concurrently with the Offerings, the Company will purchase from
NSI for $25 million the exclusive rights to distribute NSI products in
Thailand, Indonesia, Malaysia, the Philippines, the PRC, Singapore and
Vietnam. The Company will pay $15 million of this amount out of the proceeds
of the Offerings.
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, the payment of dividends by the Company, including the use of $15
million of the proceeds of the Offerings to repay a portion of the S
Distribution Notes. See "The Reorganization and S Corporation Distribution."
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."
CONTROL BY EXISTING STOCKHOLDERS; 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 Existing Stockholders. 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. Immediately following the
Offerings, the Existing Stockholders will collectively own 100% of the
outstanding shares of the Class B Common Stock representing approximately
98.8% of the combined voting power of the outstanding shares of Common Stock
(approximately 98.7% if the underwriters' over-allotment options are exercised
in full). Accordingly, following completion of the Offerings, the Existing
Stockholders, acting fully or partially in concert, will be able 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
Existing Stockholders of the Company. 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 Offerings, the Existing Stockholders intend to convert
1,605,000 shares of Class B Common Stock to Class A Common Stock and
contribute such shares of Class A Common Stock to the Company. The
16
Company intends to grant to NSI options to purchase such shares of Class A
Common Stock, and NSI intends to assign these options to qualifying
distributors of NSI in connection with the Offerings (the "Distributor
Options"). The exercise price for the Distributor Options will be 25% of the
price to the public in connection with the Offerings. The vesting of the
Distributor Options is subject to certain conditions, and the Distributor
Options are being registered along with the shares of Class A Common Stock
underlying such Distributor Options concurrently with the Offerings pursuant
to Rule 415 under the 1933 Act.
The Company estimates a pre-tax non-cash compensation expense of $21.1
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 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
17
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
After the Reorganization, the Company will be 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 will be 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 will be eligible for 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.
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 will not have a
material adverse effect on the Company's business or results of operations.
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 has agreed
to incur 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 seven 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.
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.
18
The direct selling industry in Asia is impacted by certain seasonal trends
such as major cultural events and vacation patterns. For example, Japan,
Taiwan, Hong Kong and South Korea celebrate the 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.
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
revenue followed by renewed growth fueled by new product introductions, an
increase in the number of active distributors and increased distributor
productivity. 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 assurances can be given that the Company's
revenue growth rate in South Korea, which commenced operations in February
1996, or in new markets where operations have not commenced, will follow this
pattern.
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 and will continue to be
so covered after the Offerings. 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 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.
19
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; CURRENCY RISKS
Virtually all of the Company's assets and operations are located, and all of
its revenues are derived from, operations outside the United States. 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, 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 "Risk Factors--
Entering New Markets."
The Company purchases virtually all of its products from NSI through Nu Skin
Hong Kong. Nu Skin Hong Kong pays for its purchases from NSI under a regional
distribution agreement in U.S. dollars, while the other Subsidiaries pay for
their purchases from Nu Skin Hong Kong under 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
Subsidiaries. Fluctuations in currency exchange rates, particularly those
caused by an increase in the value of the U.S. dollar, could have a material
adverse effect on the Company's financial position, results of operations and
cash flows. 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 risks and periodically takes measures to reduce
the impact of foreign exchange rate fluctuations on the Company's operating
results. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Currency Fluctuation and Exchange Rate Information."
IMPORT RESTRICTIONS, DUTIES AND REGULATION OF CONSUMER GOODS
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
20
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, including PharmAssist, 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 and is required to obtain 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. 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.
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 NSI 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.
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
transactions. See "Description of Capital 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 Company's 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."
Upon consummation of the Offerings, the Company will be 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
not 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
21
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.
ABSENCE OF PUBLIC MARKET FOR CLASS A COMMON STOCK; DETERMINATION OF OFFERING
PRICE; PRICE FLUCTUATIONS
Prior to the Offerings, there has been no public market for the Class A
Common Stock and there can be no assurance that an active trading market for
the Class A Common Stock will develop or continue after the closing of the
Offerings. Accordingly, no assurance can be given as to the liquidity of the
market for the Class A Common Stock or the price at which any sales of shares
of Class A Common Stock may occur in the future, which price will depend upon
the number of holders thereof and other factors beyond the control of the
Company, including the liquidity of the market for the Common Stock, investor
perceptions of the Company, changes in conditions or trends in the Company's
industry or publicly traded comparable companies, adverse publicity which the
Company or NSI may suffer and general economic and other conditions. The
initial public offering price per share of the Class A Common Stock will be
determined by negotiation among the Company, the Selling Stockholders and
representatives of the Underwriters, and may not be indicative of the market
price for the shares of Class A Common Stock after the closing of the
Offerings.
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."
DILUTION
The initial public offering price is expected to be approximately $21 per
share of Class A Common Stock. At this assumed offering price, investors
purchasing shares of Class A Common Stock in the Offerings will incur
immediate dilution of $20.19 per share. See "Dilution."
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. See "Dividend Policy."
22
THE REORGANIZATION AND S CORPORATION DISTRIBUTION
THE REORGANIZATION
Prior to the Offerings, the shareholders of Nu Skin Japan, Nu Skin Korea, Nu
Skin Taiwan, Nu Skin Hong Kong and Nu Skin Thailand will contribute their
shares of capital stock to the capital of the Company in a transaction
intended to qualify under Section 351 of 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 and Nu Skin Thailand were held by the Existing Stockholders. The
Reorganization will result in each of the Subsidiaries and Nu Skin Thailand
becoming a wholly-owned subsidiary of the Company.
Nu Skin Hong Kong and Nu Skin Taiwan are Utah corporations, each operating
through branches in Hong Kong and Taiwan, respectively. Nu Skin Japan and Nu
Skin Korea are Japanese and South Korean corporations, respectively, and both
are domesticated corporations in Delaware. Nu Skin Thailand, which currently
has no operations, is a Thailand corporation and also a Delaware domesticated
corporation. Nu Skin Japan, Nu Skin Korea and Nu Skin Thailand each has dual
residence in the U.S. and its respective foreign jurisdiction, and each is
treated as a U.S. corporation for U.S. tax purposes and a Japan, South Korea
or Thailand corporation, respectively, for tax purposes in each such
jurisdiction. After the Reorganization, Nu Skin Hong Kong and Nu Skin Taiwan
will continue to be viewed as branches in Hong Kong and Taiwan, respectively,
and Nu Skin Japan, Nu Skin Korea and Nu Skin Thailand will continue to be
viewed as domestic corporations in Japan, South Korea and Thailand,
respectively.
The following chart illustrates the organizational structure of the Company
immediately after the Reorganization and the Offerings.
POST-REORGANIZATION AND THE OFFERINGS
[CHART]
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. As a
result of the Subsidiaries' S corporation status, the earnings of the
Subsidiaries since incorporation have been included in the taxable income of
the Existing Stockholders for Federal and certain state income tax purposes,
and the Subsidiaries have generally not been subject to U.S. Federal or state
income tax on such earnings. Prior to the consummation of the Offerings, the
Subsidiaries' S corporation status will be terminated (the "S Termination
Date"). Prior to the S Termination Date, the Company will declare a
distribution to the Existing Stockholders that will include all of the
Subsidiaries' previously earned and undistributed S corporation earnings
through the S Termination Date (the "S Corporation Distribution").
23
As of September 30, 1996, the Subsidiaries' aggregate undistributed taxable S
corporation earnings were $81.9 million. The Company estimates that the
Subsidiaries' aggregate undistributed taxable S corporation earnings will be
between $92.0 million and $97.0 million as of the S Termination Date (which
includes approximately $10 million to $15 million of the Company's earned and
undistributed taxable S corporation earnings for the period from October 1,
1996 through the S Termination Date). The S Corporation Distribution will be
distributed in the form of promissory notes due within six months of the S
Termination Date bearing interest at 8% per annum (S Distribution Notes). Upon
the consummation of the Offerings, approximately $15.0 million of the proceeds
from the Offerings will be used to pay a portion of the S Distribution Notes.
The Company estimates that, at the Offerings, it will reserve between $60.0
million and $70.0 million of cash on hand for repayment of the S Distribution
Notes. The balance of the S Distribution Notes will be repaid from cash
generated by operations. On and after the S Termination Date, the Company will
no longer be treated as an S corporation and, accordingly, will be fully
subject to Federal and state income taxes.
24
USE OF PROCEEDS
The net proceeds from the sale of shares of Class A Common Stock by the
Company are estimated to be approximately $91 million, based on an assumed
initial public offering price of $21 per share and after deducting estimated
underwriting discounts and offering expenses payable by the Company. The
Company will not receive any of the proceeds from the sale of shares of Class
A Common Stock by the Selling Stockholders, including from the exercise of the
Underwriters' over-allotment options. The Company has agreed to pay certain
expenses on behalf of the Selling Stockholders.
The Company anticipates applying the net proceeds of the Offerings as
follows: (i) approximately $40 million of such proceeds will be used, together
with operating income, to finance the planned entry of the Company into
Thailand, the Philippines, the PRC (where it is anticipated that the Company
will be required to invest in a manufacturing facility), Malaysia, Indonesia,
Vietnam and Singapore, which includes a $15 million payment to NSI (consisting
of a $5 million payment upon the consummation of the Offerings and a $10
million payment scheduled for January 15, 1997) as partial payment for the
exclusive rights to distribute NSI products in these countries, and which may
include organizational costs, the initial build-up of inventory and other
start-up expenses; (ii) approximately $15 million will be used to repay a
portion of the S Distribution Notes; (iii) approximately $12 million of such
proceeds will be used for the introduction of new products in the Company's
markets; (iv) approximately $12 million of such proceeds will be used to
enhance the Company's technological infrastructure, including the expansion of
information systems hardware and support capabilities allowing the Company the
ability to better support distributors; (v) approximately $10 million of such
proceeds will be used to expand the Company's presence and operations in South
Korea, Japan and Taiwan, which will include the establishment of several
additional walk-in distributor centers in major cities; and (vi) the remainder
of such proceeds, approximately $2 million, will be used for general corporate
purposes, which may include additional capital expansion projects. Pending
such uses, the Company intends to invest the proceeds from the Offerings in
short-term, interest bearing, investment grade instruments.
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," "--Reliance on Operations of and
Dividends and Distributions from Subsidiaries" and "Description of Capital
Stock--Common Stock--Dividends" and "--Preferred Stock."
25
CAPITALIZATION
The following table sets forth the cash and cash equivalents, the short-term
debt and capitalization of the Company on a combined basis as of September 30,
1996, and as adjusted as of that date to give effect to the Reorganization,
including (i) the S Corporation Distribution as if the Company's S corporation
status had terminated on such date; and (ii) $5.8 million of net deferred tax
assets that would have been recorded had the Company's S corporation status
been terminated on September 30, 1996, and as further adjusted to reflect the
sale by the Company of shares of Class A Common Stock in the Offerings, and
the application of the net proceeds therefrom. The information below should be
read in conjunction with the Combined Financial Statements and the related
notes thereto and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and pro forma financial statements included
elsewhere in this Prospectus.
AS OF SEPTEMBER 30, 1996
-----------------------------------------------------------
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
AS AS FURTHER
ACTUAL ADJUSTED ADJUSTED (/1/)(/2/)(/3/)
------- -------- ------------------------
Cash and cash
equivalents............ $81,079 $81,079 $151,844
======= ======= ========
Short-term notes
payable(/1/)(/4/)...... $ -- $81,893 $ 76,893
======= ======= ========
Long-term notes
payable(/1/)........... $ -- $ -- $ 10,000
Stockholders' equity:
Capital Stock of the
Subsidiaries prior to
the Reorganization.... 4,550(/5/) -- --
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, no, no and
8,850,000 shares
issued and outstanding
actual, as adjusted
and as further
adjusted,
respectively(/7/)..... -- -- 9
Class B Common Stock,
par value $.001 per
share, 100,000,000
shares authorized, no,
80,250,000 and
74,545,000 shares
issued and outstanding
actual, as adjusted
and as further
adjusted,
respectively.......... -- 80(/5/) 75
Additional paid in
capital............... -- -- 126,692
Cumulative foreign
currency translation
adjustment............ (3,714) (3,714) (3,714)
Retained earnings...... 77,423 5,769(/6/) 5,769
Deferred compensation.. -- -- (25,931)
Note receivable from
NSI................... -- -- (10,000)
------- ------- --------
Total stockholders'
equity.............. 78,259 2,135 92,900
------- ------- --------
Total
capitalization...... $78,259 $ 2,135 $102,900
======= ======= ========
- --------
(1) Reflects the sale by the Company of 4,750,000 shares of Class A Common
Stock at an estimated offering price of $21 per share, less estimated
offering expenses of $9.0 million, including Underwriters' discounts. In
connection with the Offerings, the Company will pay the $25.0 million
License Fee to NSI, which consists of a $5 million cash payment upon the
consummation of the Offerings, a $10 million short-term note due on
January 15, 1997 and a $10 million long-term note due on January 15, 1998.
The $5 million cash payment and the $10 million short-term note will be
paid from the proceeds of the Offerings. Approximately $15.0 million of
the net proceeds of the Offerings will also be used to repay a portion of
the S Distribution Notes. The Company estimates that, at the Offerings, it
will reserve between $60.0 million and $70.0 million of cash on hand for
repayment of the S Distribution Notes. The balance of the S Distribution
Notes are expected to be repaid from cash generated by operations.
(2) Reflects the conversion by the Existing Stockholders of 5,705,000 shares
of Class B Common Stock into Class A Common Stock. Of these shares,
2,855,000 shares will be contributed by the Existing Stockholders, prior
to the Offerings, to the Company and NSI and its affiliates (other than
the Company) for issuance in connection with the Distributor Options and
employee stock bonus awards and 2,850,000 shares will be sold in the
Offerings. Also reflects estimated deferred compensation and additional
paid-in capital of $25.9 million, $4.8 million of which represents the
estimated compensation expense related to the employee stock bonus awards
granted to employees of the Company, NSI and its affiliates which vest
over a period of four years and $21.1 million of which represents the
estimated compensation expense related to the one-time grant of the
Distributor Options with an exercise price at 25% of the initial public
offering price to independent distributors (non-employees) of the Company
immediately prior to the Offerings. See "Shares Eligible for Future Sale."
(3) No adjustment has been made to give effect to the Company's earned and
undistributed taxable S corporation earnings for the period from October
1, 1996, through the S Termination Date. The Company anticipates the
increase in the S Distribution Notes will be approximately $10 million and
$15 million. See "The Reorganization and S Corporation Distribution."
(4) Reflects the issuance of $81.9 million of S Distribution Notes to the
Selling Stockholders in respect of the earned and undistributed taxable S
corporation earnings and capital at September 30, 1996, that would have
been distributed had the Subsidiaries' S corporation status been
terminated on September 30, 1996. Approximately $15.0 million of the net
proceeds of the Offerings will be used to repay a portion of the S
Distribution Notes.
(5) Reflects the contribution by the Existing Stockholders of their interests
in the Subsidiaries in exchange for shares of Class B Common Stock.
(6) Reflects the recognition of a deferred tax asset of $5.8 million. In
connection with the Reorganization, the Company will record deferred tax
assets 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.
(7) Excludes 1,605,000 shares held by the Company and reserved for issuance
upon exercise of the Distributor Options.
26
DILUTION
The net tangible book value of the Company at September 30, 1996 was
approximately $78.3 million, or $.98 per share of Common Stock. After giving
effect to the Reorganization and the S Corporation Distribution as if they had
occurred as of September 30, 1996 and the Company's S corporation status had
terminated at such date, the pro forma net tangible book value of the Company
at September 30, 1996 would have been approximately $2.1 million, or $.03 per
share of Common Stock. After giving effect to the sale of the 4,750,000 shares
of Class A Common Stock offered by the Company hereby, and the application of
the estimated net proceeds therefrom as set forth under "Use of Proceeds"
(after deducting estimated offering expenses and the underwriting discount),
after the purchase of the License Fee from NSI, the pro forma net tangible
book value of the Company as adjusted at September 30, 1996 would have been
approximately $67.9 million, or $.81 per share. See "The Reorganization and S
Corporation Distribution" and "Use of Proceeds." This represents an immediate
dilution of $20.19 per share to purchasers of shares at the initial public
offering price. See "Risk Factors--Dilution." The following table illustrates
the per share dilution:
Assumed initial public offering price per share(/1/).......... $21.00
Net tangible book value per share at September 30, 1996..... $ .98
Increase in net tangible book value per share attributable
to the establishment of deferred tax assets................ .07
Decrease in net tangible book value per share attributable
to S Corporation Distribution and Reorganization........... (1.02)
-----
Adjusted net tangible book value per share before the
Offerings.................................................. .03
Increase in net tangible book value per share attributable
to the Offerings........................................... 1.08
Decrease in tangible book value per share attributable to
the purchase of the exclusive license fee from NSI......... (.30)
-----
Net tangible book value, as further adjusted, per share after
the Offerings................................................ .81
------
Dilution per share to purchasers of shares in the Offerings... $20.19
======
--------
(1) Before deducting estimated underwriting discounts and commissions
and estimated expenses of the Offerings payable by the Company.
The following table summarizes on a pro forma basis as of September 30, 1996
the difference between the number of shares of Common Stock purchased from the
Company, the total consideration paid and the average price per share paid by
the Existing Stockholders and by the purchasers of Common Stock in the
Offerings at an assumed initial public offering price of $21 per share.
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
----------------------- ------------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ------------ ------- ---------
Existing Stockholders... 77,400,000(/1/) 91% $ --(/2/) --% $ --
New investors........... 7,600,000(/3/) 9 159,600,000 100 21.00
---------- --- ------------ ---
Total................. 85,000,000 100% $159,600,000 100%
========== === ============ ===
--------
(1) Excludes the 2,850,000 shares to be sold by the Selling
Stockholders to new investors in connection with the Offerings.
Includes 1,250,000 shares which the Existing Stockholders have
committed to transfer to NSI and its affiliates (other than the
Company) for subsequent issuance in connection with employee stock
bonus awards and 1,605,000 shares which the Existing Stockholders
intend to contribute to the Company for subsequent issuance upon
exercise of the Distributor Options.
(2) The cash consideration paid by the Existing Stockholders has been
reduced by distributions previously made to the Existing
Stockholders and certain distributions to be received by the
Existing Stockholders out of the net proceeds of the Offerings. See
"The Reorganization and S Corporation Distribution" and "Use of
Proceeds."
(3) Includes 2,850,000 shares to be sold by the Selling Stockholders
and 4,750,000 shares to be sold by the Company in connection with
the Offerings.
27
SELECTED COMBINED FINANCIAL AND OTHER INFORMATION
The following selected combined financial and other data as of December 31,
1994 and 1995 and for the fiscal years ended September 30, 1993 and 1994 and
for the three month period ended December 31, 1994 and for the year ended
December 31, 1995 have been derived from the Company's Combined Financial
Statements, which have been audited by Price Waterhouse LLP, independent
accountants, included elsewhere in this Prospectus. The combined financial
data as of September 30, 1993 and 1994 are derived from the combined financial
statements of the Company, which have been audited but are not contained
herein. The financial data as of September 30, 1991 and 1992 and for the
fiscal years ended September 30, 1991 and 1992 and for the year ended December
31, 1994 and as of September 30, 1996 and for the nine months ended September
30, 1995 and 1996 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 Combined
Financial Statements and the related notes thereto included elsewhere in this
Prospectus.
THREE
MONTHS NINE MONTHS
ENDED YEAR ENDED ENDED
YEAR ENDED SEPTEMBER 30, DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
------------------------------------ ------------ ------------------- ------------------
1991 1992 1993 1994 1994 1994(/1/) 1995 1995 1996
-------- -------- -------- -------- ------------ --------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
INCOME STATEMENT DATA:
Revenue................. $ 677 $ 42,919 $110,624 $254,637 $ 73,562 $264,440 $358,609 $241,412 $471,312
Cost of sales........... 462 14,080 38,842 86,872 19,607 82,241 96,615 64,110 133,592
-------- -------- -------- -------- -------- -------- -------- -------- --------
Gross profit............ 215 28,839 71,782 167,765 53,955 182,199 261,994 177,302 337,720
Operating expenses:
Distributor incen-
tives................. 130 14,659 40,267 95,737 27,950 101,372 135,722 91,893 175,149
Selling, general and
administrative........ 1,249 10,065 27,150 44,566 13,545 48,753 67,475 44,099 69,970
-------- -------- -------- -------- -------- -------- -------- -------- --------
Operating income........ (1,164) 4,115 4,365 27,462 12,460 32,074 58,797 41,310 92,601
Other income (expense),
net.................... 3 160 133 443 (813) (394) 511 (408) 1,530
-------- -------- -------- -------- -------- -------- -------- -------- --------
Income before provision
for income taxes....... (1,161) 4,275 4,498 27,905 11,647 31,680 59,308 40,902 94,131
Provision for income
taxes.................. -- 1,503 417 10,226 2,730 10,071 19,097 13,170 33,810
-------- -------- -------- -------- -------- -------- -------- -------- --------
Net income (loss)....... $ (1,161) $ 2,772 $ 4,081 $ 17,679 $ 8,917 $ 21,609 $ 40,211 $ 27,732 $ 60,321
======== ======== ======== ======== ======== ======== ======== ======== ========
PRO FORMA INCOME STATEMENT DATA(/2/)(/3/):
Revenue........................................... $358,609 $241,412 $471,312
Cost of sales..................................... 96,615 64,110 133,592
-------- -------- --------
Gross profit...................................... 261,994 177,302 337,720
Operating expenses:
Distributor incentives........................... 135,722 91,893 175,149
Selling, general and administrative.............. 74,318 49,231 75,102
-------- -------- --------
Operating income.................................. 51,954 36,178 87,469
Other income (expense), net(/4/).................. (2,298) (3,217) 1,997
-------- -------- --------
Income before provision for income taxes.......... 49,656 32,961 89,466
Provision for income taxes........................ 19,049 12,644 32,502
-------- -------- --------
Net income (loss)................................. $ 30,607 $ 20,317 $ 56,964
======== ======== ========
Net income per share.............................. $ .36 $ .24 $ .67
Weighted average common shares outstanding(/5/)... 85,377 85,377 85,377
28
AS
AS OF SEPTEMBER 30, OF DECEMBER 31,
------------------------------- ----------------
1991 1992 1993 1994 1994 1995
------ ------ ------- ------- ------- -------
BALANCE SHEET DATA: (IN THOUSANDS)
Cash and cash equiva-
lents.................. $1,132 $1,553 $14,591 $18,077 $16,288 $63,213
Working capital......... (921) 1,026 (504) 15,941 26,680 47,863
Total assets............ 2,733 10,236 41,394 71,565 61,424 118,228
Stockholders' equity.... (656) 2,749 6,926 24,934 33,861 61,771
AS OF SEPTEMBER 30, 1996
-------------------------
ACTUAL AS ADJUSTED(/6/)
-------- ----------------
BALANCE SHEET DATA: (IN THOUSANDS)
Cash and cash equivalents............................. $ 81,079 $151,844
Working capital....................................... 60,828 57,309
Total assets.......................................... 168,907 270,441
Short term notes payable to stockholders.............. -- 66,893
Short term note payable to NSI........................ -- 10,000
Long term note payable to NSI......................... -- 10,000
Stockholders' equity.................................. 78,259 92,900
AS AS
AS OF SEPTEMBER 30, OF DECEMBER 31, OF SEPTEMBER 30,
--------------------------- --------------- -----------------
1991 1992 1993 1994 1994 1995 1995 1996
---- ------ ------- ------- ------- ------- -------- --------
OTHER INFORMATION(/7/):
Number of active
distributors........... -- 33,000 106,000 152,000 170,000 236,000 224,000 331,000
Number of executive
distributors........... -- 649 2,788 5,835 6,083 7,550 7,519 17,809
- --------
(1) The information for the year ended December 31, 1994 is not included in
the Company's Combined Financial Statements included elsewhere in this
Prospectus. Such information has been presented for comparative purposes
only.
(2) The unaudited pro forma income statement data reflects the Reorganization,
the Offerings and the following adjustments as if such events had occurred
on January 1, 1995: (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 Philippines, the PRC, Singapore and
Vietnam (the "License Fee"); (ii) the recognition by the Company of
additional management charges of $4.4 million per year relating to certain
support services provided to the Company by NSI and an NSI affiliate;
(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; (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; and (v) increased interest expense of $2.7
million relating to the issuance of $81.9 million of interest bearing S
distribution notes (the "S Distribution Notes"), approximately $15.0
million of which will be repaid from the proceeds of the Offerings, due
and payable within six months (8% interest per annum) to the Existing
Stockholders in respect of the earned and undistributed taxable S
corporation earnings and capital at September 30, 1996, that would have
been distributed had the Company's S corporation status been terminated on
September 30, 1996.
(3) The unaudited pro forma income statement data does not reflect the
estimated non-cash compensation expense of $21.1 million in connection
with the one-time grant of the Distributor Options at an exercise price of
25% of the initial public offering price. The granting and vesting of the
Distributor Options will be conditioned upon distributor performance under
the Global Compensation Plan and the NSI 1996 Distribution Stock Option
Plan. The vesting of the Distributor Options is scheduled to occur on
December 31, 1997. The Company will record distributor stock incentive
expense for these non-employee stock options. See "Certain Relationships
and Related Transactions" and "Shares Eligible for Future Sale."
(4) Other pro forma income and expense includes: (i) increased interest
expense of $2.7 million for the year ended December 31, 1995 and for the
nine months ended September 30, 1995, relating to the issuance of $81.9
million of S Distribution Notes (approximately $15.0 million of which will
be repaid from the proceeds of the Offerings); (ii) increased interest
expense of $0.9 million, $0.7 million and $0.1 million for the year ended
December 31, 1995 and for the nine months ended September 30, 1995 and
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, $0.6 million and $0.6 million for the
year ended December 31, 1995 and for the nine months ended September 30,
1995 and 1996, respectively, relating to an estimated $10.0 million note
receivable from NSI as consideration for the Distributor Options.
(5) Reflects 80,250,000 shares of Common Stock and Common Stock equivalents
outstanding after giving effect to the Reorganization, increased by the
sale of 4,750,000 shares of Class A Common Stock, the award of 109,000
shares of Common Stock to employees of the Company and 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 Offerings were used to repay notes
payable, had a dilutive effect of less than 2%, and therefore, is not
presented.
(6) The as adjusted balance sheet data as of September 30, 1996 reflects
estimated deferred compensation expense and additional paid-in capital of
$21.1 million in connection with the one-time grant of the Distributor
Options. The as adjusted balance sheet data also reflects: (i) the sale of
4,750,000 shares of Class A Common Stock pursuant to the Offerings; (ii)
the issuance of $81.9 million of S Distribution Notes to the Selling
Stockholders; (iii) a $15.0 million partial payment of the S Distribution
Notes from the proceeds of the Offerings; (iv) $20.0 million in notes
payable to NSI, consisting of a $10 million short-term note due on January
15, 1997 and a $10 million long-term note due on January 15, 1998, which
will be issued as partial payment of the $25.0 million License Fee to NSI;
(v) an estimated $10.0 million note receivable from NSI, issued by NSI as
partial consideration for the Distributor Options; (vi) estimated deferred
compensation and additional paid-in capital of $4.8 million, which
represents the estimated compensation expense related to the employee
stock bonus awards granted to employees of the Company, NSI and its
affiliates which vest over a period of four years; and (vii) the
recognition of a deferred tax asset of $5.8 million relating to
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 has been made to give effect to the Company's
earned and undistributed taxable S corporation earnings for the period
from October 1, 1996 through the S Termination Date (as defined herein).
The Company anticipates the increase in the S Distribution Notes to be
between $10.0 million and $15.0 million. See "The Reorganization and S
Corporation Distribution." The Company estimates that, at the Offerings,
it will reserve between $60.0 million and $70.0 million of cash on hand
for repayment of the S Distribution Notes. The balance of the S
Distribution Notes will be repaid from cash generated by operations.
(7) 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.
29
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 Combined Financial
Statements and the related notes thereto included elsewhere in this
Prospectus. See also "The Reorganization and S Corporation Distribution."
OVERVIEW
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) and South Korea, where the
Company currently has operations, and in Thailand, Indonesia, Malaysia, the
Philippines, the PRC, Singapore and Vietnam, where operations have not
commenced. Additionally, the Company supplies certain products to NSI
affiliates in Australia and New Zealand. The Company's network of independent
distributors has grown since inception to more than 330,000 active
distributors as of September 30, 1996.
The Company has generated increased revenue each year since it commenced
operations in September 1991 and has operated profitably each year since 1992.
The Company's growth is primarily due to an increase in revenue from sales of
personal care products, the introduction of nutritional products, an increase
in the number of active distributors and the expansion of operations into new
geographic markets.
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 virtually all of its revenue when products are shipped
and title passes to these independent distributors after payment is received
by the Company. Revenue is net of returns, which have historically been
approximately 1.5% of gross sales. Distributor incentives are paid to various
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.
NINE MONTHS ENDED
DATE YEAR ENDED DECEMBER 31, SEPTEMBER 30,
OPERATIONS ----------------------- -----------------
COUNTRY COMMENCED 1993 1994 1995 1995 1996
------- -------------- ------- ------- ------- -------- --------
(IN MILLIONS)
Japan................... April 1993 $ 101.2 $ 172.9 $ 231.5 $ 153.6 $ 265.1
Taiwan.................. January 1992 38.6 79.2 105.4 74.1 107.0
South Korea............. February 1996 -- -- -- -- 83.7
Hong Kong............... September 1991 14.3 10.9 17.1 10.7 12.1
Sales to NSI
affiliates(/1/)........ January 1993 8.5 1.4 4.6 3.0 3.4
------- ------- ------- -------- --------
Total revenue......... $ 162.6 $ 264.4 $ 358.6 $ 241.4 $ 471.3
======= ======= ======= ======== ========
--------
(1) Includes revenue from the sale of certain products to NSI
affiliates in Australia and New Zealand.
Revenue generated in Japan and Taiwan represented 56.2% and 22.7%,
respectively, of total revenue generated during the nine months ended
September 30, 1996. Since the commencement of operations in February 1996, the
Company's South Korean operations generated $83.7 million of revenue, or 17.8%
of total revenue for the nine months ended September 30, 1996. Although
operating costs have increased in each country with the growth of the
Company's revenue, such costs have declined as a percentage of revenue due to
improved operating leverage. Revenue generated in Hong Kong during the nine
months ended September 30, 1996 represented 2.6% of total Company revenue.
30
Cost of sales primarily consists of the cost of products purchased from NSI
(in U.S. dollars) as well as customs duties related to the importation of such
products. As the sales mix changes between product categories, cost of sales
and, accordingly, gross profit, may fluctuate to some degree. In general,
however, costs of sales move proportionate to revenue. Also, as currency
exchange rates fluctuate, the Company's gross margin will fluctuate.
Distributor incentives are the Company's most significant expense. Pursuant
to the Operating Agreements with NSI, the Company has agreed to incur 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). 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 36.4% to 38.1%
since September 30, 1993. Non-commissionable items consist of sales materials
and starter kits as well as sales to NSI affiliates in Australia and New
Zealand.
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 Nu
Skin International Management Group, Inc. ("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%.
In addition, the Company pays to NSI a license fee of 4% of the Company's
revenues 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. Historically, each of the
Subsidiaries was only taxed in its local jurisdiction in accordance with
relevant tax laws. Statutory tax rates in the countries in which the Company
has operations are 16.5% in Hong Kong, 25.0% in Taiwan, 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.
Upon the consummation of the Reorganization, the Company will be subject to
taxation in the United States, where it is incorporated, at a statutory
corporate federal tax rate of 35%. In addition, each Subsidiary will be
subject to taxation in the country in which it operates. The Company will
receive 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 may 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.
31
RESULTS OF OPERATIONS
The following tables set forth (i) the results of operations and
supplemental data, and (ii) operating results and supplemental data as a
percentage of revenue, respectively, for the periods indicated.
YEAR ENDED YEAR ENDED NINE MONTHS ENDED
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
------------- -------------- ------------------
1993 1994 1994 1995 1995 1996
------ ------ ------ ------ -------- --------
(IN MILLIONS)
Revenue....................... $110.6 $254.6 $264.4 $358.6 $ 241.4 $ 471.3
Cost of sales................. 38.8 86.8 82.2 96.6 64.1 133.6
------ ------ ------ ------ -------- --------
Gross profit.................. 71.8 167.8 182.2 262.0 177.3 337.7
Operating expenses:
Distributor incentives...... 40.3 95.7 101.4 135.7 91.9 175.1
Selling, general and admin-
istrative.................. 27.1 44.6 48.8 67.5 44.1 70.0
------ ------ ------ ------ -------- --------
Operating income.............. 4.4 27.5 32.0 58.8 41.3 92.6
Other income (expense), net... .1 .4 (.4) .5 (.4) 1.5
------ ------ ------ ------ -------- --------
Income before provision for
income taxes................. 4.5 27.9 31.6 59.3 40.9 94.1
Provision for income taxes.... .4 10.2 10.0 19.1 13.2 33.8
------ ------ ------ ------ -------- --------
Net income.................... $ 4.1 $ 17.7 $ 21.6 $ 40.2 $ 27.7 $ 60.3
====== ====== ====== ====== ======== ========
Unaudited supplemental da-
ta(/1/):
Net income before pro forma
provision for income taxes... $ 4.5 $ 27.9 $ 31.6 $ 59.3 $ 40.9 $ 94.1
Pro forma provision for income
taxes........................ 1.5 10.4 11.5 22.8 15.7 34.2
------ ------ ------ ------ -------- --------
Net income after pro forma
provision for income taxes... $ 3.0 $ 17.5 $ 20.1 $ 36.5 $ 25.2 $ 59.9
====== ====== ====== ====== ======== ========
YEAR ENDED YEAR ENDED NINE MONTHS ENDED
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
-------------- -------------- ------------------
1993 1994 1994 1995 1995 1996
------ ------ ------ ------ -------- --------
Revenue................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales............. 35.1 34.1 31.1 26.9 26.6 28.3
------ ------ ------ ------ -------- --------
Gross profit.............. 64.9 65.9 68.9 73.1 73.4 71.7
------ ------ ------ ------ -------- --------
Operating expenses:
Distributor incentives... 36.4 37.6 38.4 37.8 38.1 37.2
Selling, general and ad-
ministrative............ 24.5 17.5 18.4 18.8 18.3 14.9
------ ------ ------ ------ -------- --------
Operating income.......... 4.0 10.8 12.1 16.5 17.0 19.6
Other income (expense),
net...................... .1 .2 (.1) .1 (.2) .3
------ ------ ------ ------ -------- --------
Income before provision
for income taxes......... 4.1 11.0 12.0 16.6 16.8 19.9
Provision for income
taxes.................... .4 4.0 3.8 5.3 5.5 7.2
------ ------ ------ ------ -------- --------
Net income................ 3.7% 7.0% 8.2% 11.3% 11.3% 12.7%
====== ====== ====== ====== ======== ========
Unaudited supplemental da-
ta(/1/):
Net income before pro
forma
provision for income tax-
es....................... 4.1% 11.0% 12.0% 16.6% 16.8% 19.9%
Pro forma provision for
income taxes............. 1.4 4.1 4.3 6.4 6.5 7.3
------ ------ ------ ------ -------- --------
Net income after pro forma
provision for income tax-
es....................... 2.7% 6.9% 7.7% 10.2% 10.3% 12.6%
====== ====== ====== ====== ======== ========
- --------
(1) Reflects adjustment for Federal and state income taxes as if the Company
had been taxed as a C corporation rather than as an S corporation since
inception.
32
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1995
REVENUE was $471.3 million during the nine months ended September 30, 1996,
an increase of 95.2% from the revenue of $241.4 million recorded during the
same period in 1995. This increase is attributable to the following factors.
First, revenue in Japan increased by $111.5 million, or 72.6%. This increase
in revenue was primarily as a result of the continued success of nutritional,
color cosmetics and HairFitness products, which were introduced in October
1995 and was partially offset by the strengthening of the U.S. dollar relative
to the Japanese yen during the same period. Second, revenue in Taiwan
increased by $32.9 million, or 44.4%, primarily as a result of the
introduction of color cosmetics and other products, along with the opening of
a new distribution center in Taichung, Taiwan. Third, in February 1996, Nu
Skin Korea commenced operations and, through September 30, 1996, has generated
revenue of $83.7 million. Additionally, revenue in Hong Kong increased by $1.4
million during the nine months ended September 30, 1996 as compared to the
same period in 1995.
GROSS PROFIT as a percentage of revenue was 71.7% and 73.4% during the nine
months ended September 30, 1996 and 1995, respectively. This decline reflected
the strengthening of the U.S. dollar, the introduction of three nutritional
products in Japan in October 1995 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 total revenue declined from 38.1%
for the nine months ended September 30, 1995 to 37.2% for the same period in
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 18.3% during the nine months ended September 30, 1995 to 14.9%
during the same period in 1996. This fluctuation was primarily due to
economies of scale gained as the Company's revenue increased.
OPERATING INCOME during the nine months ended September 30, 1996 increased
to $92.6 million, an increase of 124.2% from the $41.3 million of operating
income recorded during the same period in 1995. Operating income as a
percentage of revenue increased from 17.0% to 19.6%. This increase was caused
primarily by lower selling, general and administrative expenses as a
percentage of revenue.
OTHER INCOME increased by $1.9 million during the nine months ended
September 30, 1996 as compared to the same period in 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 $34.2 million during the
nine months ended September 30, 1996 compared to $15.7 million during the same
period in 1995. The pro forma effective tax rate decreased to 36.3% in 1996 as
compared to 38.4% for the same period in 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 $34.7
million to $59.9 million during the nine months ended September 30, 1996
compared to the $25.2 million during the same period in 1995. Pro forma net
income as a percentage of revenue increased to 12.6% for the nine months ended
September 30, 1996 as compared to 10.3% for the same period in 1995.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO THE YEAR ENDED DECEMBER 31, 1994
REVENUE was $358.6 million during the year ended December 31, 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 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 Hong Kong. Nutritional products,
color cosmetics products and a new line of HairFitness products were
introduced in
33
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.
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 the year ended December 31, 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 the
year ended December 31, 1995 as compared to $11.5 million for the same period
in 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 the year ended December 31, 1995 as compared
to $20.1 million for the same period in 1994. Pro forma net income as a
percentage of revenue increased to 10.2% during the year ended December 31,
1995 as compared to 7.7% for the same period in 1994.
YEAR ENDED SEPTEMBER 30, 1994, COMPARED TO THE YEAR ENDED SEPTEMBER 30, 1993
REVENUE for the year ended September 30, 1994, was $254.6 million, an
increase of 130.2% when compared to the $110.6 million of revenue reported in
1993. This increase was largely due to the following three factors: (i) a
$113.6 million increase in revenue reflecting a full year of operations in
Japan in fiscal year 1994 as compared to only six months of operations in
fiscal year 1993; (ii) a $33.2 million increase in revenue in Taiwan due to a
growing number of active distributors purchasing the Company's products; and
(iii) a $2.3 million increase in revenue in Hong Kong. These increases were
partially offset by a $5.1 million decrease in revenues from sales to NSI
affiliates in Australia and New Zealand.
GROSS PROFIT as a percentage of revenue increased slightly to 65.9% in
fiscal year 1994 from 64.9% in fiscal year 1993. The increase in gross profit
as a percentage of revenue was primarily due to changes in the sales mix.
DISTRIBUTOR INCENTIVES as a percentage of revenue increased to 37.6% during
the year ended September 30, 1994, from 36.4% during the year ended September
30, 1993. This increase was primarily due to a decrease in non-commissionable
sales to NSI affiliates in Australia and New Zealand which represented 6.7% of
total revenue in fiscal year 1993 compared to less than 1.0% of total revenue
in fiscal year 1994.
34
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES as a percentage of revenue
decreased to 17.5% during the year ended September 30, 1994, from 24.5% during
the year ended September 30, 1993. This decrease in selling, general and
administrative expenses as a percentage of revenue was the result of economies
of scale obtained as revenue increased in Japan and Taiwan.
OPERATING INCOME during the year ended September 30, 1994, increased to
$27.5 million from $4.4 million recorded during the year ended September 30,
1993. This increase was the combination of an increase in revenue and a
decrease in selling, general, and administrative expenses.
OTHER INCOME increased by $0.3 million during the year ended September 30,
1994 as compared to the same period in 1993.
PRO FORMA PROVISION FOR INCOME TAXES increased to $10.4 million during the
year ended December 31, 1994, as compared to $1.5 million for the same period
in 1993. The effective tax rate was 37.3% in 1994 compared to 33.3% in 1993.
NET INCOME AFTER PRO FORMA PROVISION FOR INCOME TAXES increased by $14.5
million to $17.5 million during the year ended December 31, 1994 as compared
to $3.0 million for the same period in 1993. Pro forma net income as a
percentage of revenue increased to 6.9% for the year ended December 31, 1994
as compared to 2.7% for the same period in 1993.
UNAUDITED PRO FORMA COMBINED RESULTS OF OPERATIONS
As part of the Reorganization and Offerings, several actions will occur
which will impact the comparability of the historical financial results for
the Company with the future results of the Company. The following adjustments
are reflected in the unaudited pro forma combined financial information set
forth below and included elsewhere in this Prospectus: (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 Philippines, the
PRC, Singapore and Vietnam, (ii) the recognition by the Company of additional
management charges of $4.4 million per year relating to certain support
services provided to the Company by NSI and an NSI affiliate, (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, (iv)
recording of 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, and
(v) increased interest expense of $2.7 million relating to the issuance of
$81.9 million of S Distribution Notes due and payable within six months (8%
interest per annum) to the Selling Stockholders in respect of the earned and
undistributed taxable S corporation earnings at September 30, 1996 that would
have been distributed had the Company's S corporation status been terminated
on September 30, 1996. The unaudited pro forma combined financial information
set forth below does not reflect the estimated non-cash compensation expense
of $21.1 million in connection with the one-time grant of the Distributor
Options at an exercise price of 25% of the initial public offering price in
connection with the Offerings. The Distributor Options will include conditions
related to the achievement of performance goals and will vest on December 31,
1997. The Company will record distributor incentive stock expense for these
non-employee stock options.
35
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. See "Unaudited Pro Forma Combined Financial Statements" and the
related notes thereto included elsewhere in this Prospectus.
FOR THE
NINE MONTHS
ENDED
SEPTEMBER 30,
FOR THE YEAR ENDED --------------
DECEMBER 31, 1995 1995 1996
------------------ ------ ------
Revenue................................. 100.0% 100.0% 100.0%
Cost of sales........................... 26.9 26.6 28.3
----- ------ ------
Gross profit............................ 73.1 73.4 71.7
Operating expenses:
Distributor Incentives................. 37.8 38.1 37.2
Selling, general and administrative.... 20.7 20.4 15.9
----- ------ ------
Operating income........................ 14.6 14.9 18.6
Other income (expense), net............. (0.6) (1.3) 0.4
----- ------ ------
Income before provision for income
taxes.................................. 14.0 13.6 19.0
Provision for income taxes.............. 5.4 5.2 6.9
----- ------ ------
Net income.............................. 8.6% 8.4% 12.1%
===== ====== ======
Upon the consummation of the Reorganization, the Company will be subject to
taxation in the United States, where it is incorporated, at a statutory
corporate federal tax rate of 35%. In addition, each Subsidiary will be
subject to taxation in the country in which it operates. The Company will
receive 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 generates significant cash flow from operations. During the year
ended December 31, 1995, cash provided by operations totaled $65.0 million. As
of September 30, 1996, the Company had cash and cash equivalents of $81.1
million. As of September 30, 1996, the Subsidiaries' aggregate undistributed
taxable S corporation earnings were $81.9 million. The Company estimates that
the Subsidiaries' aggregate undistributed taxable S corporation earnings will
be between $92.0 million and $97.0 million as of the S Termination Date (which
includes approximately $10 million to $15 million of the Company's earned and
undistributed taxable S corporation earnings for the period from October 1,
1996 through the S Termination Date). The S Corporation Distribution will be
distributed in the form of promissory notes due within six months of the S
Termination Date bearing interest at 8% per annum ("S Distribution Notes").
Upon the consummation of the Offerings, $15.0 million of the proceeds from the
Offerings will be used to pay a portion of the S Distribution Notes. The
Company estimates that at the Offerings it will reserve between $60.0 million
and $70.0 million of cash on hand for repayment of the S Distribution Notes.
The balance of the S Distribution Notes will be repaid from cash generated by
operations. On and after the S Termination Date, the Company will no longer be
treated as an S corporation and, accordingly, will be fully subject to Federal
and state income taxes. See "The Reorganization and S Corporation
Distribution."
The Company is able to generate significant cash balances due to its rapid
growth, high margins and minimal capital requirements. As of September 30,
1996, working capital was $60.8 million compared to $47.9 million and $26.7
million at December 31, 1995 and 1994, respectively. Cash and cash equivalents
at September 30, 1996 were $81.1 million compared to $63.2 million and $16.3
million at December 31, 1995 and 1994, respectively.
36
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. The
Company did, however, rely upon borrowings from NSI in initially establishing
operations in Japan, Taiwan and Hong Kong. Regulations in South Korea preclude
borrowings from related entities, which led to the Company establishing an
$8.0 million line of credit to facilitate the opening of the South Korean
market. There were no outstanding borrowings under this credit facility as of
December 31, 1995, and it expired on July 1, 1996.
Capital expenditures, primarily for equipment, computer systems and
software, office furniture and leasehold improvements, were $4.0 million, $5.4
million and $1.7 million for the nine months ended September 30, 1996, and the
years ended December 31, 1995 and 1994, respectively. The Company anticipates
additional capital expenditures of $2.4 million to support growth through the
end of 1996. In addition, the Company anticipates capital expenditures over
the next two years of approximately $22.0 million to further enhance its
infrastructure, including computer systems and software, warehousing
facilities and distributor centers in order to accommodate future growth.
Under the Operating Agreements with NSI, the Company incurs related party
payables. The Company had related party payables of $36.1 million, $28.7
million and $10.6 million at September 30, 1996, and December 31, 1995 and
1994, respectively. In addition, the Company had related party receivables of
$7.8 million, $1.8 million and $17.9 million, respectively, at those dates.
NSI has the right to charge interest on balances outstanding in excess of 60
days at a rate of 2% above the U.S. prime rate. As of September 30, 1996, 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 anticipates using
the proceeds of the Offerings as outlined in the Use of Proceeds section
within the next three years. Further, management believes that the proceeds
from the Offerings 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 S Distribution
Notes.
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 and South Korea celebrate the 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.
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
revenue followed by renewed growth fueled by new product introductions, an
increase in the number of active distributors and increased distributor
productivity. 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 assurances can be given that the Company's
revenue growth rate in South Korea, which commenced operations in February
1996, or in new markets where operations have not commenced, will follow this
pattern.
37
QUARTERLY RESULTS
The following table sets forth certain unaudited quarterly data for the
periods shown.
1995 1996
------------------------------------ ----------------------------
1ST 2ND 3RD 4TH 1ST 2ND 3RD
QUARTER QUARTER QUARTER QUARTER(/1/) QUARTER(/2/) QUARTER QUARTER
------- ------- ------- ------------ ------------ ------- -------
(IN MILLIONS)
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
--------
(1) LifePak, Nu Colour and HairFitness products were introduced in Japan
during October of 1995.
(2) The Company commenced operations in South Korea in February of 1996.
CURRENCY FLUCTUATION AND EXCHANGE RATE INFORMATION
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 and South Korea is generally used to settle non-
inventory transactions with NSI. It is anticipated that the Company will
transact its business in new markets with NSI in a similar manner, as
permitted by local regulations. 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 will continue
to be realized in local currencies and the majority of its cost of sales will
continue to be 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 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 risks and
periodically takes measures to minimize the impact of foreign exchange
fluctuations on the Company's operating results.
INFLATION
In general, costs are affected by inflation and the effects of inflation may
be experienced by the Company in future periods. Management believes, however,
that such effects have not been material to the Company during the periods
presented. Certain of the countries in which the Company operates have
experienced significant inflation in the past. Although to date this inflation
has not had a material effect on the Company's results of operations, there
can be no assurance that inflation will not in the future so affect results of
operations.
38
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 Nu
Skin International, Inc. in the countries of Japan, Taiwan, Hong Kong
(including Macau) and South Korea, where the Company currently has operations,
and in Thailand, Indonesia, Malaysia, the Philippines, the PRC, Indonesia,
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 95.2% to $471.3 million for the nine
months ended September 30, 1996 from $241.4 million for the same period in
1995. Net income increased 117.7% to $60.3 million for the nine months ended
September 30, 1996 from $27.7 million for the same period in 1995. Revenue
increased 35.6% to $358.6 million for the year ended December 31, 1995 from
$264.4 million in 1994. Although operating expenses have increased with the
growth of the Company's revenue, such expenses have declined as a percentage
of revenue due to improved operating leverage. Net income increased 86.1% to
$40.2 million for the year ended December 31, 1995 from $21.6 million in 1994.
The Company's network of independent distributors has grown since inception in
1991 to more than 330,000 active distributors as of September 30, 1996. See
"Risk Factors--Managing Growth."
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, weight management products and nutritious
snacks, and sports nutrition products.
In Japan, Taiwan and Hong Kong, the Company currently offers most of NSI's
personal care products and approximately one-third of NSI's nutritional
products. In South Korea, the Company currently offers one-third of NSI's
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
NSI's existing personal care and nutritional products. In addition to
expanding its product offerings with existing NSI 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 WFDSA reports
that, since 1990, worldwide direct distribution of goods and services to
consumers has increased 65%, resulting in the sale of over $75 billion of
goods and services in 1995. According to the WFDSA, $34 billion of goods and
services were sold by its members in 1995 through direct selling channels in
the markets in which the Company operates, which represents 45% of the global
volume of direct sales by its members.
OPERATING STRENGTHS
The Company believes that its success is due to 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:
39
PREMIUM PRODUCT OFFERINGS. 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 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 NSI 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 at the same rate for
sales in foreign countries 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 NSI Independent Distributors."
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. 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 from 40% to 42% of revenue
from commissionable sales over the last seven 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, a support staff that assists
distributors as they build networks of downline distributors, and a liberal
product return policy. The Company provides walk-in, telephonic and
computerized product fulfillment and tracking services that result in user-
friendly, timely product distribution. 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 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. See
"Risk Factors--Relationship with and Reliance on NSI; Potential Conflicts of
Interest." Because of this fact, the Company cannot control who becomes a
distributor.
40
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 to oversee
operations in Japan, Taiwan, Hong Kong and South Korea.
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 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 NSI products. For example, LifePak, the
Company's most successful nutritional product was introduced in Japan in 1995,
where it has grown to represent approximately 17% of revenue. In October 1996,
the Company introduced LifePak in Taiwan and intends, subject to regulatory
approval, to introduce LifePak in Hong Kong in 1997. In addition, the Company
expects to launch Epoch, a new line of ethnobotanical personal care products,
in all markets by mid-1997. 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. Thailand is the next country in which the Company intends to
commence operations, subject to receipt of necessary government approvals. The
Company's preparatory work for Thailand is currently ongoing. In addition, the
Company has conducted preliminary investigations on the feasibility of
commencing operations in Indonesia, Malaysia, the Philippines, 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 active
distributors (defined as those distributors which have purchased products from
the Company during the previous three months). 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 active distributors and to
increase distributor retention, motivation and productivity. In addition, the
Company will pursue growth in the number of active distributors by continuing
to work with NSI to enhance the Global Compensation Plan, initiating an
innovative distributor equity incentive program, selectively opening new
distributor walk-in centers to provide a local presence in additional key
cities, enhancing distributor recognition programs, and targeting inactive
distributors who may still have an interest in the Company's business
opportunity or products. See "Shares Eligible for Future Sale."
INCREASE PRODUCT CONSUMPTION. The Company intends to increase sales to new
and existing consumers through (i) increasing product promotions in marketing
literature, (ii) increasing the availability of sample packages, (iii)
emphasizing product "systems," such as the HairFitness system of various
shampoos and
41
conditioners, which leads to the purchase of multiple products rather than a
single product, and (iv) implementing an automatic reordering system which is
designed to result in convenient repeat 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."
INDUSTRY OVERVIEW
The distribution of products through the network marketing and other direct
selling channels has grown dramatically in recent years. The WFDSA reports
that, since 1990, worldwide direct distribution of goods and services to
consumers has increased 65%, resulting in the sale of over $75 billion of
goods and services in 1995. According to the WFDSA, $34 billion of goods and
services were sold by its members in 1995 through direct selling channels in
the markets in which the Company currently operates, which represents 45% of
the global volume of direct sales. 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 who may have only limited knowledge
of the products they sell and may not be able to effectively demonstrate their
products to customers. In Japan, these problems are further exacerbated by the
multi-tiered, traditional Japanese 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 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 currently
operates for the years ended December 31, 1994 and 1995 and for the nine
months ended September 30, 1996. This table should be reviewed in connection
with "Management's Discussion and Analysis of Financial Condition and Results
of Operations" which discusses the costs associated with generating the
aggregate revenue presented.
42
NINE
MONTHS
YEAR ENDED DECEMBER 31, ENDED
----------------------- SEPTEMBER 30,
COUNTRY 1994 1995 1996
------- ----------- ----------- -------------
(DOLLARS IN THOUSANDS)
Revenue:
Japan................................ $ 172,960 $ 231,540 $265,072
Taiwan............................... 79,219 105,415 107,023
Hong Kong............................ 10,880 17,046 12,133
South Korea(/1/)..................... -- -- 83,697
----------- ----------- --------
Total(/2/)......................... $ 263,059 $ 354,001 $467,925
=========== =========== ========
Active Distributors(/3/)(/4/):
Japan................................ 106,000 147,000 182,000
Taiwan............................... 53,000 75,000 81,000
Hong Kong............................ 11,000 14,000 12,000
South Korea(/1/)..................... -- -- 56,000
----------- ----------- --------
Total.............................. 170,000 236,000 331,000
=========== =========== ========
--------
(1) The Company commenced operations in South Korea in February 1996.
(2) Operating expenses have increased with the growth of the Company's
revenue. However, as a percentage of revenue such expenses have
declined due to improved operating leverage. In addition, total
revenue does not include sales of certain products to NSI
affiliates in Australia and New Zealand of $1.4 million, $4.6
million and $3.4 million in 1994, 1995 and the first nine months
of 1996, respectively.
(3) "Active Distributors" include only those distributors who
purchased products from the Company during the three months ended
as of the date indicated.
(4) Numbers are rounded to the nearest thousand.
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.
REAL GDP
1995 POPULATION 1995 GDP 1995 GDP GROWTH
COUNTRY (IN MILLIONS) (IN BILLIONS OF $) PER CAPITA (IN $) 1995/1994(%)
------- --------------- ------------------ ----------------- ------------
Japan................... 125.3 $4,645.5 $37,672 0.9%
Taiwan.................. 21.2 259.9 13,403 6.1
Hong Kong............... 6.2 144.3 26,442 5.0
South Korea............. 44.9 446.4 11,422 8.1
- --------
Source: World Information Services; Country Data Forecasts March, 1996.
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 1995, 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. Network marketing activities and the sale of the
Company's products are subject to significant government regulation in Japan.
See "Risk Factors--Government Regulation of Direct Selling Activities" and "--
Government Regulation of Products and Marketing."
To date, the Company has experienced significant growth in Japan, where
revenue increased 34% in 1995 compared to 1994 and has continued to grow at
53% on an annualized basis for the nine months ended September 30, 1996.
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. A great
43
deal of the Company's success to date can be directly attributed to the growth
of its Japanese business in recent years. Furthermore, given the size of the
Japanese market, management believes that there is significant opportunity for
expansion of its market share. Nu Skin Japan currently offers 52 of the 80 NSI
personal care products and 10 of the 30 IDN products, including LifePak, the
core IDN product. Additionally, Nu Skin Japan offers 11 personal care products
that are manufactured in Japan and are specifically targeted to the Japanese
market.
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; and (iii) 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 recently enacted 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 52% on an annualized basis since 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, Nu
Skin Taiwan is the third largest direct selling business in Taiwan. Management
believes that Nu Skin Taiwan has 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 60 of
the 80 NSI personal care products and 7 of the 30 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 expanding the
current product offerings in Taiwan to include additional NSI products, in
particular LifePak, which, subject to regulatory approval, is scheduled for
introduction in Taiwan by the end of 1996, (ii) focus more resources on
product development specifically for the Taiwanese market, (iii) add
additional walk-in distribution and distributor support centers in additional
major cities, and (iv) 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 Kong 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
74 of the 80 NSI personal care products and 13 of the 30 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
44
the smallest of the Company's markets in population, with just under 500,000
residents. The Company's Macau office works 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 such as a recently opened "distributor business center,"
which provides offices for distributors to rent, at cost, from which they can
conduct business; (ii) seek regulatory approvals for the introduction of
LifePak; which is not yet available in Hong Kong, 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 new 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 of certain information regarding the laws
to distributors. See "Risk Factors--Government Regulations of Direct Selling
Activities" and "--Government Regulation of Products and Marketing."
The Company's sales in South Korea exceeded $83 million through September
30, 1996, making the Company the second largest direct seller in the country.
Nu Skin Korea currently offers 27 of the 80 NSI personal care products and
none of the IDN 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 will soon enter
the South Korean market. See "Risk Factors--Competition" and "--Competition."
In support of the Company's growth strategy, Nu Skin Korea intends to (i)
continue to add products from NSI's personal care product line to stimulate
new sales; (ii) seek regulatory approvals for the introduction of IDN
products; (iii) continue to develop an infrastructure to support a rapidly
growing distributor base, including, but not limited to, adding additional
walk-in centers in major South Korean cities; and (iv) promote the development
of local distributor leadership.
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 regulatory approvals and establish facilities
capable of meeting distributor needs. This approach, combined with 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. However, the Company has announced that its next new
market expansion efforts will be in Thailand and anticipates opening this
market upon receipt of all final government approvals. In addition to
Thailand, the Company is the exclusive distributor of NSI products in
Indonesia, Malaysia, the Philippines, the PRC, 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. 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."
45
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 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.
1995 POPULATION 1995 GDP 1995 GDP REAL GDP GROWTH
COUNTRY (IN MILLIONS) (IN BILLIONS OF $) PER CAPITA (IN $) 1995/1994(%)
------- --------------- ------------------ ----------------- ---------------
Thailand................ 60.7 $ 162.7 $ 3,033 8.6%
Indonesia............... 203.1 196.4 1,066 8.0
Malaysia................ 20.0 86.5 4,826 9.6
Philippines............. 68.9 74.6 1,186 4.8
PRC..................... 1,227.0 673.5 680 10.2
Singapore............... 3.0 79.2 29,573 8.9
Vietnam................. 74.7 22.8 379 9.5
--------
Source: World Information Services; Country Data Forecasts March, 1996.
THAILAND. According to the WFDSA, direct sales in 1995 totaled $562 million
in Thailand. This makes Thailand the sixteenth largest direct selling market
worldwide. In opening the Thailand market, the Company does not anticipate a
material departure from its traditional business model. See "--Government
Regulation of Products and Marketing."
INDONESIA. Although historically not open to foreign investment
opportunities, Indonesia has experienced a recent 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 600,000
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 several 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.
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 1995, had a
population of 11 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.
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 believes that it will
be able to comply with these regulations in operating a network marketing
business in the PRC. See "--Government Regulation of Products and Marketing."
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 Hong Kong. Although direct selling activities are
permitted, currently network marketing is not allowed in Singapore.
Accordingly, the Company's entrance
46
into Singapore is not anticipated in the short to mid-term. See "--Government
Regulation of Products and Marketing."
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 or 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 to a consumer's home and following up on sales to
ensure proper product usage, customer satisfaction, and to encourage repeat
purchases. Under most network marketing systems, independent distributors
purchase products either for resale or 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 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 40% to 42% of revenue from commissionable
sales over the last seven years. 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. 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 has no control
over who becomes a distributor and little or no control over the level of
sponsorship of new distributors. 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 approximately
520 distributorships worldwide comprise NSI's two highest executive
distributor levels and, together with their extensive downline networks,
account for substantially all of the Company's revenue.
47
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 its distributor force 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 essentially represents
the cost of producing the starter kit, and active distributors are required to
pay the Company an Annual Materials Fee ("AMF") of up to $35 to cover the cost
of newsletters, magazines and updates that are mailed regularly to them. In
South Korea, due to local regulations, distributors are not required to
purchase a starter kit, and active distributors are not required to pay an
AMF.
GLOBAL COMPENSATION PLAN. Management believes that one of the Company's key
competitive advantages is the Global Compensation Plan, which it licenses from
NSI. The Global Compensation Plan is seamlessly integrated across all markets
in which NSI products are sold. 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. 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. These countries
currently include the U.S., the United Kingdom, Puerto Rico, Canada, Taiwan,
Hong Kong (including Macau), Japan, South Korea, Australia, New Zealand,
Ireland, Germany, France, the Netherlands, Belgium, Italy, Spain, Mexico and
Guatemala. This allows distributors to receive commissions at the same rate
for sales in foreign countries 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. 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."
48
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 from 40% to 42% of revenue from
commissionable sales for each of the last seven 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.
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
--------------------------- SEPTEMBER 30,
EXECUTIVE DISTRIBUTORS 1992 1993 1994 1995 1996
---------------------- ----- ----- ----- ----- -------------
Japan.............................. -- 2,459 3,613 4,017 8,937
Taiwan............................. 551 1,170 2,093 3,014 4,346
Hong Kong.......................... 164 275 377 519 520
South Korea........................ -- -- -- -- 4,006
----- ----- ----- ----- ------
Total............................ 715 3,904 6,083 7,550 17,809
===== ===== ===== ===== ======
On a monthly basis, the Company and NSI evaluate requests for exemptions to
the Global Compensation Plan to determine whether technical exemptions should
be granted. 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
49
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. Prior to the commencement of Company
operations in a new country, distributor activity is restricted to discussions
of the product line and business opportunity with personal acquaintances. See
"Risk Factors--Potential Negative Impact of Distributor Actions."
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.
50
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 pay for products prior to or shortly after shipment.
Accordingly, the Company carries minimal accounts receivable. 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 80 different personal care and 30 different nutritional
products, of which 69 and 13, respectively, are available in the Company's
current markets. 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."
The following chart indicates how many of the NSI personal care and IDN
products available as of September 30, 1996, in each of the Company's current
markets.
PERSONAL CARE AND IDN PRODUCT OFFERINGS
PRODUCT CATEGORIES /PRODUCT LINES TOTAL PRODUCTS OFFERED
- --------------------------------- PRODUCTS ---------------------------
OFFERED BY HONG SOUTH
NSI JAPAN TAIWAN KONG KOREA
---------- ----- ------ ---- -----
Personal Care:
Facial Care............................... 17 10(/1/) 13 15 10
Body Care................................. 12 9 9 12 7
Hair Care................................. 14 13 13 13 10
Color Cosmetics........................... 11 11 10 10 -
Specialty................................. 26 9 15 24 -
--- --- --- --- ---
Total................................... 80 52 60 74 27
=== === === === ===
IDN:
Nutritional Supplements................... 18 8 5 10 -
Weight Management Products and Nutritious
Snacks................................... 8 1 2 3 -
Sports Nutrition.......................... 4 1 - - -
--- --- --- --- ---
Total................................... 30 10 7 13 -
=== === === === ===
--------
(1) In Japan, the Company also sells 11 locally sourced facial care
products.
51
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, 1994 and 1995, and for the nine months ended September 30, 1996.
REVENUE BY PRODUCT CATEGORY
YEAR ENDED YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1994 DECEMBER 31, 1995 SEPTEMBER 30, 1996
------------------- ------------------- --------------------
PRODUCT CATEGORY $ % $ % $ %
---------------- ---------- -------- ---------- -------- ---------- ---------
(DOLLARS IN THOUSANDS)
Personal care... $ 241,188 91.2% $ 308,145 85.9% $ 345,069 73.2%
Nutritional..... 5,464 2.1 16,298 4.5 92,241 19.6
Sales aids...... 17,788 6.7 34,166 9.6 34,002 7.2
---------- ------- ---------- ------- ---------- -------
Total......... $ 264,440 100.0% $ 358,609 100.0% $ 471,312 100.0%
========== ======= ========== ======= ========== =======
PERSONAL CARE PRODUCTS
The Company's current 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 80 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."
The 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 personal care
product category offered by the Company as of September 30, 1996:
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 17 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 and Nu Colour
Eye Makeup Remover.
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, Glacial Marine Mud (Original), Jungamals Crazy Crocodile Cleaner,
Jungamals Rhino Ray Resister and Alpha Extra Body. Glacial Marine Mud
(Original) is exclusively licensed to NSI for sale in the direct selling
channel.
52
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 11 products with 72 sku's including MoistureShade
Liquid Finish (10), MoistureShade Pressed Powder (4), Blush Duo (5), Eye
Shadow Trio (6), Mascara (2), Eyeliner (3), Lip Liner (5), Lipstick (20),
DraMATTEics Lip Pencils (6), Nu Colour Moisture Finish (10), and Lip Gloss.
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 and Post Shave Lotion for Women. Epoch was launched in October of
1996 in Hong Kong and Taiwan and is currently expected to be launched, subject
to regulatory approval, in the spring of 1997 in Japan and South Korea.
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, 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 Company currently intends
to launch this product line, subject to regulatory approval, in South Korea
and Japan in 1997. 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 30 products in the following lines:
nutritional supplements, weight management products and nutritious snacks, and
sports nutrition. IDN is designed to promote healthy,
53
active lifestyles and general well-being through proper diet, exercise and
nutrition. Although less developed in the Asian market than the personal care
category, each of the Subsidiaries, except Nu Skin Korea, 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, the core IDN nutritional supplement, is
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 17% of the
Company's revenue in Japan. LifePak was launched in Taiwan in October of 1996.
Additional nutritional supplements include: Vitox, which incorporates beta
carotene and other important vitamins for overall health; Metabotrim, which
provides B vitamins necessary to convert food to energy and chromium chelate
which has been shown to help in the body's normal metabolic process; Optimum
Omega, a pure source of omega 3 fatty acids aimed to assist cardiovascular
health; Image HNS, an all-around vitamin and antioxidant supplement; and
Optigar Q, a blend of co-enzyme Q10 and deodorized garlic. 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.
The Company also offers a number of 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.
IDN's botanical line contains phytonutrients for those who seek natural
ingredients in dietary supplements and is designed to address specific areas
of need. The botanicals, offered in eight different dietary supplements,
provide natural ingredients without sugar, salt, wheat, dairy products,
artificial colors, chemicals or preservatives.
WEIGHT MANAGEMENT PRODUCTS AND NUTRITIOUS SNACKS. As part of the Company's
mission to promote a healthy lifestyle and long-term wellness, IDN includes a
HealthTrim Lifestyle System (which includes LifePak Trim, Fiberry Fat-Free
Snack Bars and Appeal Lite, a nutritional drink containing chelated minerals
and vitamins), and instructional assessment materials with a counseling
program. The Company also offers Breakbars, a nutritious snack which provides
carbohydrates, protein and fiber.
54
SPORTS NUTRITION. 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.
SALES AIDS
The Company provides an assortment of sales aids to facilitate the sales of
its products. Sales aids include videotapes, promotional clothing, pens,
stationary, 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).
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 in
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 to date has averaged approximately 1.5% of annual
revenue through 1995.
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, NSI avoids 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
55
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 the Company's 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, including LifePak for Women,
additional vitamin products targeted to seniors, and personal care products
targeted to either men or women.
PRODUCTION. 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 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
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 the consummation of the Offerings, approximately 98.8% of the combined
voting power of the outstanding shares of Common Stock (approximately 98.7% if
the Underwriters' over-allotment options are exercised in full) will be held
by the shareholders of NSI. As a result, when acting as stockholders of the
Company, these shareholders of NSI 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,
or, upon
56
consummation of the Offerings will enter into, the Operating Agreements with
NSI and with 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, which
are filed as exhibits to the Registration Statement of which this Prospectus
forms a part. 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 will be
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 granted to the Company
the exclusive right to sell and distribute NSI products and sales aids in the
Company's markets. Nu Skin Japan, Nu Skin Taiwan and Nu Skin Korea 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 NSI products in its
respective country.
The Company has the right to purchase any of NSI's 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 purchases virtually all of its products from NSI through Nu Skin
Hong Kong. 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--Operations Outside the
United States; Currency Risks."
The Company is responsible for paying for and obtaining government approvals
and registrations necessary for importation of NSI's 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."
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. The Subsidiaries are also required to
maintain insurance policies covering the business to be conducted by them
pursuant to the Regional Distribution Agreement and the Wholesale Distribution
Agreements. See "Risk Factors--Product Liability."
57
The Company is prohibited from selling NSI products outside of the countries
for which it has an exclusive distribution license, except that the Company
may sell certain NSI products to NSI affiliates in Australia and New Zealand.
In addition, the Company is prohibited from selling products which directly or
indirectly compete with NSI 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 NSI products
without restriction but may not manufacture products which compete directly or
indirectly with NSI products without NSI's prior consent, which consent will
not be 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 Thailand, 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. Pursuant to the Trademark/Tradename
License Agreements, NSI has granted to each Subsidiary an exclusive license to
use in its market the NSI and IDN trademarks, the individual product
trademarks used on NSI 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 has the right to inspect the premises where products using its
trademarks are manufactured in order to ensure that the products meet its
quality standards. The Company's labels, packaging, advertising and
promotional materials using NSI's trademarks must conform with NSI's published
standards and NSI has the right of prior approval. The Company is responsible
for correcting any manufacturing defects in locally sourced products or
products it manufactures that are brought to the Company's attention by NSI or
otherwise.
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
58
of the Subsidiaries has entered into a Licensing and Sales Agreement with NSI
which includes 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.
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 has agreed to incur a distributor commission expense of 42% of
commissionable product sales (with the exception of South Korea where, due to
government regulations, the Company satisfies this obligation by using 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 seven 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 intercompany settlement figure
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 South Korea. 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. Upon consummation of the Offerings, the
Subsidiaries will enter into Management Services Agreements with NSIMG,
pursuant to which NSIMG has agreed to provide a variety of management and
support services to each Subsidiary. These services will likely 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 will be 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."
59
GENERAL PROVISIONS. The Operating Agreements 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 Existing Stockholders of
NSI 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
NSI. See "Risk Factors--Anti-Takeover Effects of Certain Charter, Contractual
and Statutory Provisions." 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 is further subject to termination by NSI
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. 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.
MUTUAL INDEMNIFICATION AGREEMENT. Prior to or concurrently with the
Offerings, the Company and NSI will enter into a mutual indemnification
agreement pursuant to which NSI will indemnify the Company for certain claims,
losses and liabilities relating to the operations of the Subsidiaries prior to
the Reorganization and the Company will 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
60
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. 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'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" and "--Government
Regulation of Direct Selling Activities."
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,
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, and (iv) taxes, transfer pricing and similar
regulations that affect foreign taxable income and customs duties.
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. 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, including
PharmAssist, 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.
61
In South Korea, the Company 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.
Based on the Company 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. There can be no assurances that the Company 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."
REGULATION OF POTENTIAL MARKETS. Each of the proposed new markets will
present additional unique difficulties and challenges. In Thailand, for
example, 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. Under the Treaty of Amity and Economic
Relations between Thailand and the United States (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 the Company will ever be
able to obtain all of the necessary permits and approvals to commence
operations in Thailand. The Company could face particular difficulties in
commencing operations in Thailand if the Treaty of Amity were terminated and
the Company were forced to obtain an Alien Business Permit.
The PRC has also proven to be a particularly difficult market for foreign
corporations due to its extensive government regulation and the historical
political tenants 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 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.
62
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 companies operating in Malaysia. 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.
EMPLOYEES
As of September 30, 1996, the Company had approximately 825 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.
PROPERTIES
In each of its current markets, the Company has established a central office
for the local administrative staff who is 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 September 30, 1996, the Company's leased
office and distribution facilities in each country where the Company currently
has operations.
PROPERTIES LEASED
LOCATION FUNCTION LEASE TOTAL
-------- -------- ------------------
Tokyo, Japan............ Central office/ distribution center 35,000 square feet
Osaka, Japan............ Distribution center/office 13,400 square feet
Taipei, Taiwan.......... Central office/distribution center 22,000 square feet
Kaohsiung, Taiwan....... Distribution center/office 9,500 square feet
Taichung, Taiwan........ Distribution center/office 17,000 square feet
Taoyuan, Taiwan......... Warehouse/distribution center 36,000 square feet
Causeway Bay, Hong Central office/distribution 19,000 square feet
Kong................... center/distributor business
center/regional office
Tsing Yi, Hong Kong..... Warehouse 10,000 square feet
Macau................... Distribution center/office 2,000 square feet
Seoul, South Korea...... Central office/distribution center 20,000 square feet
Seoul, South Korea...... Distribution center 7,000 square feet
Kyungki-Do, South Warehouse 16,000 square feet
Korea..................
Pusan, South Korea...... Distribution Center 10,000 square feet
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.
63
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information regarding the Company's
directors and executive officers.
NAME AGE POSITION
---- --- --------
Blake M. Roney.......... 38 Chairman of the Board
Steven J. Lund.......... 42 President, Chief Executive Officer and Director
Renn M. Patch........... 46 Chief Operating Officer
Corey B. Lindley........ 32 Vice President of Finance
Michael D. Smith........ 50 Vice President of Operations
M. Truman Hunt.......... 37 Vice President of Legal Affairs and Investor Relations
Keith R. Halls.......... 38 Secretary and Director
Takashi Bamba........... 61 President, Nu Skin Japan
John Chou............... 50 President, Nu Skin Taiwan
S.T. Han................ 54 President, Nu Skin Korea
George Mak.............. 42 President, Nu Skin Hong Kong
Mark L. Adams........... 45 Controller
Sandie N. Tillotson..... 39 Director
Brooke B. Roney......... 34 Director
Kirk V. Roney........... 42 Director
Max L. Pinegar.......... 65 Director
Max E. Esplin........... 53 Director
Blake M. Roney has served as the Chairman of the Board since the Company's
inception and is a founder of NSI. He has also served as President, Chief
Executive Officer and Chairman of the Board of NSI and 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 its inception 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 Vice President of Finance 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. 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.
64
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 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 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 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 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.
Mark L. Adams has served as the Controller since the Company's inception. He
has also served as International Controller of NSI since 1994. Prior to
joining NSI in 1994, he was an audit manager with Arthur Andersen & Co. and
served as Chief Financial Officer and a Director of Sanyo Icon, a subsidiary
of Sanyo Electric Co. Ltd. He received an M.A. degree from Brigham Young
University and has been a Certified Public Accountant since 1978.
Sandie 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 since 1992 and a Director of NSI since its inception. 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. 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.
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. 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
65
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.
Max E. Esplin has served as a Director of the Company since September 1996.
He has also served as Vice President of Finance of NSI since 1993. He served
as Controller of NSI from 1989 until 1993. Mr. Esplin is a Certified Public
Accountant. He received a B.S. degree from Brigham Young University.
Following completion of the Offerings, the Company's Board of Directors
intends to appoint at least two additional directors who will not be officers
or employees of NSI or the Company. It is expected that these outside
directors will receive annual retainer and per meeting fees in connection with
these directorships. See "--Compensation of Directors."
COMMITTEES OF THE BOARD OF DIRECTORS
Within 90 days after the closing of the Offerings, the Company's Board of
Directors will establish an Audit Committee consisting of at least two
directors, none of whom will be an officer or employee of the Company or NSI.
The duties of the Audit Committee will be to recommend to the Company's Board
of Directors the selection of independent certified public accountants to
audit annually the books and records of the Company, to review the activities
and the reports of the independent certified public accountants and to report
the results of such review to the Company's Board of Directors. The Audit
Committee will also consider the adequacy of the Company's internal controls
and internal auditing methods and procedures. Within 90 days after the closing
of the Offerings, the Company's Board of Directors will establish a
Compensation Committee consisting of at least two directors, none of whom will
be an officer or employee of the Company, the duties of which are to make
recommendations to the Company's Board of Directors with respect to the
salaries, bonuses and other compensation to be paid to the Company's officers.
The Company's Board of Directors also intends to establish an Executive
Committee consisting of Messrs. Blake M. Roney, Steven J. Lund and Keith R.
Halls. The duties of the Executive Committee are, to the extent authorized by
the Company's Board of Directors, to exercise all the powers and authority of
the Company's Board of Directors with respect to the management of the
business and affairs of the Company.
COMPENSATION OF DIRECTORS
Following the Offerings, directors who do not receive compensation as
officers or employees of the Company, NSI or its affiliates will be paid an
annual fee of $25,000 and a fee of $1,000 for each meeting of the Company's
Board of Directors or any committee meeting thereof that they attend.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company's Board of Directors does not currently have a compensation
committee but anticipates establishing one within 90 days following the
closing of the Offerings. 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 will be following the
Offerings, executive officers of NSI.
EXECUTIVE COMPENSATION
The Company was formed in September 1996, and consequently paid no
compensation to the executive officers named in the table below during the
year ended December 31, 1995. However, salary, bonus and other compensation is
presented in the table below for the year ended December 31, 1995 based on
payments by NSI and the Subsidiaries to the named executive officers as if the
Company had been in existence during that period. During 1995, Messrs. Bamba,
Chou, and Mak were employed full time as the Presidents of Nu Skin Japan,
Nu Skin Taiwan and Nu Skin Korea, respectively. During 1995, Messrs. Lund and
Patch were, and after the
66
Offerings will continue to be, executive officers of NSI and the Company. The
compensation presented in the table below reflects an allocation of the time
spent by Messrs. Lund and Patch providing services to the Subsidiaries during
1995. During 1996, the Company will pay Messrs. Lund and Patch annual salaries
commensurate with their 1995 salaries in return for their services to the
Company. These salaries and bonuses will be in addition to any amounts
received by these officers from NSI in return for their services to NSI.
During 1996, the Company, through the Subsidiaries, will pay Messrs. Bamba,
Chou and Mak salaries of approximately $361,000, $211,000 and $111,000,
respectively. In addition, Messrs. Bamba, Chou and Mak will be eligible to
participate in the Bonus Incentive Plan which is intended to be modeled after
NSI's cash bonus long term incentive plan which was in effect for these
individuals in 1995. See "--Bonus Incentive Plan." It is anticipated that
Messrs. Bamba, Chou and Mak will continue to receive all of their compensation
from the Company through the Subsidiaries.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
----------------------------------
OTHER ALL
ANNUAL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION COMPENSATION
--------------------------- ---- -------- ------- ------------ ------------
Steven J. Lund........... 1995 $236,364 $85,529(/1/) $ -- $ --
President and Chief
Executive Officer
Takashi Bamba............ 1995 361,028 105,563(/2/) 98,063(/3/) 3,297(/4/)
President, Nu Skin Japan
John Chou................ 1995 185,370 75,786(/2/) 63,730(/5/) --
President, Nu Skin
Taiwan
Renn M. Patch............ 1995 97,175 104,765(/6/) 18,750(/7/) --
Chief Operating Officer
George Mak............... 1995 102,564 17,535(/2/) 9,645(/8/) --
President, Nu Skin Hong
Kong
--------
(1)Cash bonus paid to Mr. Lund not pursuant to a formal bonus plan.
(2) Cash bonus paid during 1995 pursuant to NSI's cash bonus long term
incentive plan for the Presidents of the Subsidiaries.
(3) Includes deferred portion of a bonus accrued during 1995 pursuant to
NSI's cash bonus long term incentive plan for the Presidents of the
Subsidiaries and annual lease payments for a Company-provided
automobile.
(4) Annual premium for disability and accidental death insurance policy.
(5) Includes deferred portion of a bonus accrued during 1995 pursuant to
NSI's cash bonus long term incentive plan for the Presidents of the
Subsidiaries and annual payments for a Company-provided automobile and
club dues.
(6)Noncash bonus paid to Mr. Patch, not pursuant to a formal bonus plan.
(7) Includes $16,500 of accrued deferred compensation and $2,250 of vested
deferred compensation awarded to Mr. Patch under NSI's deferred
compensation plan.
(8) Deferred portion of a bonus accrued during 1995 pursuant to NSI's cash
bonus long term incentive plan for the Presidents of the Subsidiaries.
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 the Bonus Incentive Plan to be adopted by the Company prior to
or concurrently with the Offerings. See "--Bonus Incentive Plan."
Mr. Bamba is employed as the President of Nu Skin Japan at an annual salary
of approximately $361,000. This salary is subject to annual review by Nu Skin
Japan. 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
67
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 (Yen)300,000 per year. 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 an annual salary
of approximately $211,000. 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 an annual salary of
approximately $110,000. 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 has been employed by Nu Skin Korea for 12 months, he will become
entitled to receive, upon termination, severance pay equal to two months'
salary for each consecutive year of service. Mr. Han has agreed to certain
confidentiality and noncompetition obligations.
1996 STOCK INCENTIVE PLAN
The Board of Directors of the Company has adopted the Nu Skin Asia Pacific,
Inc. 1996 Stock Incentive Plan (the "Plan"). The purpose of the 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. The Company expects that the Existing Stockholders will
approve the Plan prior to consummation of the Offerings.
ADMINISTRATION. The Plan is administered by the 1996 Stock Incentive Plan
Committee (the "Plan Committee"). Initially, the Plan Committee will consist
of the members of the Company's Board of Directors, and later of the members
of the Compensation Committee of the Board of Directors, once the Compensation
Committee has been established. 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 award. The Plan Committee will make all
other determinations necessary or advisable for the administration of the
Plan.
AWARDS. Awards under the 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 Plan shall be limited to 10% of the shares reserved for issuance
under the Plan. The number of shares which may be issued under the 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 Plan. No
awards may be granted more than ten years after the effective date of the
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 Plan. The Company
anticipates issuing stock bonus awards for 1.8% of these shares to executive
officers of the Company prior to the Offerings. Messrs. Renn M. Patch, Corey
B. Lindley, Michael D. Smith, Takashi Bamba, John Chou, S.T. Han, George Mak,
and Mark Adams, will receive stock bonus awards of 13,000, 9,000, 13,000,
10,400, 13,000, 1,800, 9,000 and 3,500 shares of Class A Common Stock,
respectively. These awards vest ratably over four years following the date of
grant, provided the executive officer remains in the employment of the
Company.
68
PLAN AMENDMENT. The Board of Directors may amend the 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 Plan, or other applicable laws, rules or regulations. No
amendment to the Plan may alter or impair any award granted under the Plan
without the consent of the holders thereof. The Plan may be terminated at any
time by the Board of Directors.
OPTIONS. The 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."
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 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 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
69
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 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
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
Concurrent with the Offerings, the Company intends to adopt a bonus
incentive plan for the Presidents of the Subsidiaries. This bonus incentive
plan will be patterned after a similar plan under which Messrs. Bamba, Chou,
Han and Mak were compensated by NSI prior to the Reorganization and the
Offerings. Under the contemplated bonus incentive plan, Messrs. Bamba, Chou,
Han and Mak will be entitled to receive an annual cash bonus based upon the
prior year's operating results of the Subsidiary for which they are
responsible. Under this bonus incentive plan, participants would be 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 Board of Directors of the Company. One half of this bonus
would be payable by February 15 of the year following the year in which the
bonus is earned and the remaining one half would be deferred and would vest
ratably over 10 years or at age 65, whichever occurs first.
70
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Prior to or concurrently with the Offerings, the Existing Stockholders, who
are also the stockholders of Nu Skin Japan, Nu Skin Taiwan, Nu Skin Korea and
Nu Skin Hong Kong, will contribute their shares of capital stock in such
entities to the Company in exchange for shares of Class B Common Stock. See
"The Reorganization and S Corporation Distribution."
Upon the consummation of the Offerings, approximately 98.8% of the combined
voting power of the outstanding shares of Common Stock will be held by the
Selling Stockholders (approximately 98.7% if the Underwriters' over-allotment
options are exercised in full). Consequently, the Selling Stockholders 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. The Selling Stockholders also own, and following the Offerings will
continue to own, 100% of the outstanding shares of NSI. As a result of this
ownership, the Selling 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 Existing Stockholders; Anti-Takeover Effect of Dual Classes of
Common Stock."
The Operating Agreements were approved by the present Board of Directors of
the Company, which is composed entirely of officers and shareholders of NSI.
It is expected that, subsequent to the closing of the Offerings, the
composition of the Board of Directors of the Company will be changed so that
at least two of its members will be persons unaffiliated with NSI. In
addition, most 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. See "Risk
Factors--Relationship with and Reliance on NSI; Potential Conflicts of
Interest" and "Business--Relationship with NSI."
Virtually all of the products sold by the Company are purchased from NSI
pursuant to distribution agreements with NSI. 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 with NSI. 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 with NSI. During 1995, the Company
paid NSI approximately $99.2 million for goods and services provided to the
Company under the Operating Agreements. NSIMG also provides a broad range of
management, administrative and technical support to the Company pursuant to
management services agreements with the Company. During 1995, the Company paid
NSIMG approximately $2.1 million for services provided to the Company under a
management service agreement. For a summary of the terms of these agreements,
see "Business--Relationship with NSI." See also Combined Financial Statements
and footnotes thereto.
During 1995, 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 fiscal 1995, Nu Skin Japan paid
NSI $2.3 million in royalties pursuant to this license 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. Pursuant to these agreements, Nu Skin Hong Kong was paid
approximately $4.6 million in fiscal 1995 by Nu Skin Personal Care Australia,
Inc. and Nu Skin New Zealand, Inc.
Prior to or concurrently with the Offerings, the Company will purchase from
NSI for $25.0 million, the exclusive rights to distribute NSI products in
Thailand, Indonesia, Malaysia, the Philippines, the PRC, Singapore and
Vietnam. See "Risk Factors--Entering New Markets." The Company will pay $15
million of this amount out of proceeds of the Offerings. See "Use of
Proceeds." In addition the Company and NSI will enter into a mutual
indemnification agreement pursuant to which NSI will indemnify the Company for
certain claims, losses
71
and liabilities relating to the operations of the Subsidiaries prior to the
Reorganization and the Company will indemnify NSI for certain claims, losses
and liabilities relating to the operations of the Subsidiaries after the
Reorganization. See "Business--Relationship with NSI."
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 fiscal year ended December 31, 1995, total
commissions paid to the Partnership on sales originating in the Company's then
open markets (Japan, Taiwan and Hong Kong) was approximately $1.1 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.
The Existing Stockholders will enter into a stockholders agreement with the
Company (the "Stockholders' Agreement"). The Existing Stockholders will in the
aggregate own shares having 98.8% of the voting power of the Company
immediately after the Offerings (approximately 98.7% of 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 Existing Stockholders
have agreed not to transfer any shares they own for 366 days after the
Offerings 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. See "Shares Eligible for Future Sale." After the
expiration of this 366 day period 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 original
number of shares of Common Stock owned by the Existing Shareholder as of the
date of the Stockholders Agreement, or (ii) 1.25% of the total Common Stock
owned by all Existing Stockholders as of the date of the Stockholders
Agreement. The Existing Stockholders have been granted registration rights by
the Company permitting each of such Existing 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 Existing Stockholder
has sold a specified value of shares of Class A Common Stock. See "Description
of Capital Stock--Registration Rights."
Prior to the Offerings, the Company will enter into indemnification
agreements with its officers and directors indemnifying them against liability
incurred by them in the course of their service to the Company. The Company
has granted certain of its executive officers options to purchase shares of
Class A Common Stock. In January 1994, NSI stockholders agreed to grant M.
Truman Hunt an option 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. This option is
immediately exercisable upon consummation of the Reorganization.
Prior to the Offerings, the Existing Stockholders intend to convert
1,605,000 shares of Class B Common Stock into Class A Common Stock and
contribute such shares to the Company. The Company intends to grant to NSI the
Distributor Options to purchase such shares of Common Stock and NSI intends to
assign the Distributor Options to qualifying distributors of NSI in connection
with the Offerings. The Distributor Options will be subject to certain
conditions related to distributor performance and will vest on December 31,
1997. The Company will record distributor incentive expense for the
Distributor Options. See "Shares Eligible for Future Sale."
The Company has employment agreements with certain of its executive
officers. See "Management--Employment Agreements."
72
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth, as of September 30, 1996, certain
information regarding the beneficial ownership of the Class A Common Stock and
Class B Common Stock after giving effect to the Reorganization and as adjusted
to give effect to (i) the contribution to the Company by the Existing
Stockholders of 1,605,000 shares of Class A Common Stock which the Company has
reserved for issuance upon exercise of the Distributor Options; (ii) the
contribution of 1,250,000 shares of Class A Common Stock by the Existing
Stockholders to NSI and its affiliates (other than the Company) for issuance
in connection with certain employee stock bonus awards; and (iii) the sales of
shares of Class A Common Stock in 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; and (d) 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 CLASS B TOTAL
COMMON STOCK(/1/)(/2/) COMMON STOCK(/1/)(/2/) COMMON STOCK
------------------------------- ----------------------- ------------
OWNED TO
PRIOR BE SOLD TO BE OWNED OWNED PRIOR TO AND VOTING POWER
TO THE IN THE AFTER THE AFTER AFTER THE
DIRECTORS, EXECUTIVE OFFICERS, OFFERINGS OFFERINGS OFFERINGS THE OFFERINGS(/3/) OFFERINGS
5% STOCKHOLDERS --------- --------- ----------- ----------------------- ------------
AND SELLING STOCKHOLDERS NUMBER NUMBER NUMBER % NUMBER % %
- ------------------------------ --------- --------- ------- --- -------------- -------- ------------
Blake M. Roney(/4/)....... 215,369 215,369 -- -- 21,493,043 28.8 28.5
Nedra D. Roney(/5/)....... 453,949 453,949 -- -- 14,793,417 19.8 19.6
Sandie N. Tillotson(/6/).. 403,751 403,751 -- -- 8,963,024 12.0 11.9
Craig S. Tillotson(/7/)... 201,874 201,874 -- -- 4,612,813 6.2 6.1
R. Craig Bryson(/8/)...... 201,874 201,874 -- -- 5,127,492 6.9 6.8
Steven J. Lund(/9/)....... 142,500 142,500 -- -- 4,267,229 5.7 5.7
The WFA Trust and The All
R's Trust(/1//0/)........ 649,133 649,133 -- -- 119,840 * *
Brooke B. Roney(/1//1/)... 142,500 142,500 -- -- 3,639,168 4.9 4.8
Kirk V. Roney(/1//2/)..... 142,500 142,500 -- -- 3,389,168 4.6 4.5
Keith R. Halls(/1//3/).... 28,500 28,500 -- -- 934,741 1.3 1.2
The MAR Trust and The
Nedra Roney Fixed
Charitable
Trust(/1//4/)............ 251,583 251,583 -- -- 312,996 * *
Renn M. Patch(/1//5/)..... -- -- -- -- -- -- --
Takashi Bamba(/1//6/)..... -- -- -- -- -- -- --
John Chou(/1//7/)......... -- -- -- -- -- -- --
George Mak(/1//8/)........ -- -- -- -- -- -- --
Rick A. Roney(/1//9/)..... 6,333 6,333 -- -- 868,199 1.2 1.2
Burke F. Roney(/2//0/).... 5,067 5,067 -- -- 624,093 * *
Park R. Roney(/2//1/)..... 5,067 5,067 -- -- 624,093 * *
BNASIA, Ltd.(/2//2/)...... -- -- -- -- 21,316,878 28.6 28.3
RCKASIA, Ltd.(/2//3/)..... -- -- -- -- 5,052,492 6.8 6.7
All directors and officers
as a group (17
persons)(/2//4/)......... 1,991,753 1,724,253 267,500 * 43,119,209 57.8 57.3
- -------
* 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 entered into by the Existing Stockholders and the
Company prior to the Offerings. 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) Reflects the conversion prior to the Offerings by the Existing
Stockholders of 2,855,000 shares of Class B Common Stock into 2,855,000
shares of Class A Common Stock which were contributed by the Existing
Stockholders pro rata to NSI and its affiliates (other than the Company)
for distribution to distributors of NSI and employees of NSI and its
affiliates (other than the Company) pursuant to the Distributor Options
and employee stock bonus awards. See "Shares Eligible For Future Sale."
Does not reflect the exercise of the options granted by the Selling
Stockholders to the U.S. Underwriters and the International Managers (on a
pro rata basis, based on the number of shares sold by such Selling
Stockholders in the Offerings) exercisable for 30 days after the date of
this Prospectus to purchase up to 884,317 and 255,683 additional shares of
Class A Common Stock, respectively, to cover over-allotments, if any, at
the initial public offering price, less the underwriting discount. Upon
the exercise in full of the underwriters' over-allotment options, the
Selling Stockholders will convert 1,140,000 shares of Class B Common Stock
into 1,140,000 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: 65,369 shares of Class A
Common Stock directly and with respect to which he has sole voting and
investment power; 21,316,878 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
73
wife Nancy L. Roney as set forth in footnote 22 below; 176,165 shares of
Class B Common Stock as trustee and with respect to which he has sole voting
and investment power; 150,000 shares of Class A Common Stock as co-trustee
and with respect to which he shares voting and investment power with Nancy
L. Roney. 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, pursuant to
the Offerings, an additional 345,801 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 21,147,242
shares and 28.8% and the Voting Power After the Offerings would be 28.5%.
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: 328,949 shares of Class
A Common Stock and 14,793,417 shares of Class B Common Stock directly and
with respect to which she has sole voting and investment power; 125,000
shares of Class A Common Stock as co-trustee and with respect to which she
shares voting and investment power with Evan Schmutz. If the underwriters'
over-allotment options are exercised in full, Nedra D. Roney will sell,
pursuant to the Offerings, an additional 259,159 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 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 14,534,258 shares and 28.8% and the Voting Power After the
Offerings would be 28.5%. Nedra D. Roney is a Director and shareholder of
NSI.
(6) Includes shares beneficially owned or deemed to be owned beneficially by
Sandie N. Tillotson prior to the Offerings as follows: 49,583 shares of
Class A Common Stock and 8,038,257 shares of Class B Common Stock directly
and with respect to which she has sole voting and investment power;
354,168 shares of Class A Common Stock and 424,767 shares of Class B
Common Stock as trustee and with respect to which she has sole voting and
investment power; 500,000 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, Sandie N. Tillotson will sell, pursuant to the
Offerings, an additional 161,500 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 Sandie
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 8,801,524
shares and 12.0% and the Voting Power After the Offerings would be 11.9%.
Sandie 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: 24,792 shares of
Class A Common Stock and 3,234,668 shares of Class B Common Stock directly
and with respect to which he has sole voting and investment power; 177,082
shares of Class A Common Stock and 112,500 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; 1,000,000 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, Craig S.
Tillotson will sell, pursuant to the Offerings, an additional 80,750
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 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 4,532,063 shares and 6.2% and the Voting
Power After the Offerings would be 6.1%. 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: 26,874 shares of Class
A Common Stock directly and with respect to which he has sole voting and
investment power; 5,052,492 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
set forth in footnote 23 below; 175,000 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, RCKASIA,
Ltd., a limited partnership of which R. Craig Bryson and Kathleen D.
Bryson are the general partners and who share voting and investment power,
will sell, pursuant to the Offerings, an additional 80,750 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 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 5,046,742 shares and 6.9% and the Voting Power After the
Offerings would be 6.8%. 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: 67,500 shares of Class A
Common Stock directly and with respect to which he has sole voting and
investment power; 3,414,168 shares of Class B Common Stock as general
partner of a limited partnership and with respect to which he shares
voting and investment power with his wife Kalleen Lund; 778,061 shares of
Class B Common Stock as trustee and with respect to which he has sole
voting and investment power; 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 Kalleen Lund. Excludes
649,133 shares of Class A Common Stock and 119,840 shares of Class B
Common Stock held as trustee of The WFA Trust and The All R's Trust and
with respect to which he has sole voting and investment power as set forth
in footnote 10 below. If the underwriters' over-allotment options are
exercised in full, SKASIA, Ltd., a limited partnership of which Steven J.
Lund and Kalleen Lund are the general partners and who share voting and
investment power, will sell, pursuant to the Offerings, an additional
57,000 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 4,210,229 shares and 5.7% and the
Voting Power After the Offerings would be 5.7%. Steven J. Lund is a
Director and President of the Company and a Director, executive officer
and shareholder of NSI.
(10) Includes shares of Class A Common Stock and Class B Common Stock owned
beneficially by Steven J. Lund as trustee and with respect to which he
has sole voting and investment power.
(11) Includes shares beneficially owned or deemed to be owned beneficially by
Brooke B. Roney prior to the Offerings as follows: 127,500 shares of
Class A Common Stock directly and with respect to which he has sole
voting and investment power; 3,639,168 shares of Class B Common Stock as
general partner of a limited partnership and with respect to which he
shares voting and investment power with his wife Denise R. Roney; 15,000
shares of Class A Common Stock as co-trustee and with respect to which he
shares voting and investment power with Denise B. Roney. If the
underwriters' over-allotment options are exercised in full, BDASIA, Ltd.,
a limited partnership of which Brooke B. Roney and Denise B. Roney are
the general partners and who share voting and investment power, will
sell, pursuant to the Offerings, an additional 57,000 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 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 3,582,168 shares and 4.9% and the Voting Power After the
Offerings would be 4.8%. Brooke B. 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
Kirk V. Roney prior to the Offerings as follows: 17,500 shares of Class A
Common Stock directly and with respect to which he has sole voting and
investment power; 3,314,168 shares of Class B Common Stock as general
partner of a limited partnership and with respect to which he shares
voting and investment power with his wife Melanie R. Roney; 125,000
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 Melanie K. Roney and Lee S. McCullough. If the underwriters'
over-allotment options are exercised in full, KMASIA, Ltd., a limited
partnership of which Kirk V. Roney and Melanie K. Roney are the general
partners and who share voting and investment power, will sell, pursuant
to the Offerings, an additional 57,000 shares of Class A Common Stock,
converted from Class B
74
Common Stock, in which event 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 3,332,168 shares and 4.5% and the Voting
Power After the Offerings would be 4.5%. Kirk V. Roney is a Director of the
Company and a Director, executive officer and shareholder of NSI.
(13) Includes shares beneficially owned or deemed to be owned beneficially by
Keith R. Halls prior to the Offerings as follows: 12,250 shares of Class
A Common Stock directly and with respect to which he has sole voting and
investment power; 622,241 shares of Class B Common Stock as general
partner of 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; 250,000 shares of Class B Common Stock as trustee and with respect
to which he has sole voting and investment power; 16,250 shares of Class
A Common Stock and 12,500 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. Excludes 251,583 shares of Class A Common Stock and
312,996 shares of Class B Common Stock held as trustee of The MAR Trust
and The Nedra Roney Fixed Charitable Trust and with respect to which he
has sole voting and investment power as set forth in footnote 14 below.
If the underwriters' over-allotment options are exercised in full,
KAASIA, Ltd., a limited partnership of which Keith R. Halls and Anna Lisa
Massaro Halls are the general partners and who share voting and
investment power, will sell, pursuant to the Offerings, an additional
11,400 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 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 903,244 shares and 1.2% and the
Voting Power After the Offerings would be 1.2%. Keith R. Halls is a
Director and Secretary of the Company and a Director, executive officer
and shareholder of NSI.
(14) Includes shares of Class A Common Stock and Class B Common Stock owned
beneficially by Keith R. Halls as trustee and with respect to which he
has sole voting and investment power.
(15) Excludes employee stock bonus awards of 13,000 shares of Class A Common
Stock awarded to Mr. Patch and which will not vest within 60 days of the
Offerings.
(16) Excludes employee stock bonus awards of 10,400 shares of Class A Common
Stock awarded to Mr. Bamba and which will not vest within 60 days of the
Offerings.
(17) Excludes employee stock bonus awards of 13,000 shares of Class A Common
Stock awarded to Mr. Chou and which will not vest within 60 days of the
Offerings.
(18) Excludes employee stock bonus awards of 9,000 shares of Class A Common
Stock awarded to Mr. Mak and which will not vest within 60 days of the
Offerings.
(19) Includes shares beneficially owned or deemed to be owned beneficially by
Rick A. Roney prior to the Offerings as follows: 6,333 shares of Class A
Common Stock and 780,117 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, Rick A. Roney will sell, pursuant to the
Offerings, an additional 11,400 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 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 842,899 shares
and 1.2% 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.
(20) Includes shares beneficially owned or deemed to be owned beneficially by
Burke F. Roney prior to the Offerings as follows: 5,067 shares of Class A
Common Stock and 624,093 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, Burke F.
Roney will sell, pursuant to the Offerings, an additional 9,120 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 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 614,973 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.
(21) Includes shares beneficially owned or deemed beneficially owned by Park
R. Roney prior to the Offerings as follows: 5,067 shares of Class A
Common Stock and 624,093 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, Park R. Roney
will sell, pursuant to the Offerings, an additional 9,120 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 Park R. Roney would be 0 shares and 0%, the number and
percentage of shares of Class B Common Stock owned after the Offerings
would be 614,973 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.
(22) Includes 21,316,878 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 345,801 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 20,971,077 shares and 28.6% and the Voting Power After
the Offerings would be 28.2%.
(23) Includes 5,052,492 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,
RCKASIA, Ltd. will sell, pursuant to the Offerings, an additional 80,750
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 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 4,971,742 shares and 6.8% and the Voting
Power After the Offerings would be 6.7%.
(24) Class A Common Stock owned prior to the Offerings includes 267,500 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, all directors and officers as a group will sell,
pursuant to the Offerings, an additional 689,701 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 all directors and officers as a group would be 0 shares and
0%, the number and percentage of shares of Class B Common Stock owned
after the Offerings would be 42,429,508 shares and 57.8% and the Voting
Power After the Offerings would be 57.1%.
75
SHARES ELIGIBLE FOR FUTURE SALE
GENERAL. Prior to the Offerings, there has been no public market for the
Common Stock and no prediction can be made that an active trading market will
develop or as to the effect, if any, that market sales of shares or the
availability of such shares for sale will have on the market price of the
Common Stock prevailing from time to time. Future sales of substantial amounts
of Common Stock in the public market could adversely affect prevailing market
prices.
Upon completion of the Offerings, the Company will have 8,850,000 shares of
Class A Common Stock issued and outstanding. This number includes (i)
7,600,000 shares of Class A Common Stock to be sold in the Offerings and (ii)
1,250,000 shares of Class B Common Stock converted into Class A Common Stock
prior to the Offerings and contributed by the Existing Stockholders to NSI and
its affiliates (other than the Company) for issuance to employees of NSI and
its affiliates (other than the Company) as employee stock bonus awards
(approximately 600,000 of which will be awarded prior to the Offerings) and
excludes (a) 1,605,000 shares of Class B Common Stock converted into Class A
Common Stock prior to the Offerings and contributed by the Existing
Stockholders to the Company and held by the Company in reserve as treasury
shares for issuance upon the exercise of the Distributor Options, (b) 267,500
shares of Class A Common Stock subject to a stock option which has been
granted to an executive officer of the Company, and (c) 109,000 shares
reserved for issuance by the Company to its employees as employee stock bonus
awards. In addition, upon completion of the Offerings and the aforementioned
conversions, the Company will have 74,545,000 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 74,545,000 shares of Class B Common
Stock and the 267,500 shares of Class A Common Stock subject to the
aforementioned executive option are "restricted" shares within the meaning of
Rule 144 under the 1933 Act ("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. The 7,600,000 shares of Class A Common Stock to be sold
in the Offerings, the 1,605,000 shares underlying the Distributor Options and
the 1,250,000 and 109,000 shares of Class A Common Stock reserved for issuance
as employee stock bonus awards have been registered under the 1933 Act and
are, accordingly, 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. The shares underlying the Distributor Options and the
employee stock bonus awards are, however, subject to certain vesting and
resale limitations, as described below.
Prior to the Offerings, the Company anticipates granting stock bonus awards
under the 1996 Stock Incentive Plan to certain of its executive officers and
employees for 109,000 shares of Class A Common Stock. These awards will vest
ratably over four years following the date of grant. See "Certain
Relationships and Related Transactions." After such grants, an aggregate of
approximately 3,891,000 shares will remain available for future option grants
and other equity awards under the 1996 Stock Incentive Plan. See "Management--
1996 Stock Incentive Plan." Shares granted or issuable upon exercise of
options granted pursuant to the Plan are "restricted" shares within the
meaning of Rule 144. 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 Plan. Such registration statement is
expected to be filed as soon as practicable after the date of the Offerings
and will become automatically effective upon filing. Shares issued under the
Plan after such registration statement is filed 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.
Generally, as currently in effect, Rule 144 provides that beginning 90 days
after the date of this Prospectus, a person (or persons whose shares are
aggregated) who has beneficially owned "restricted" shares of the Common Stock
for at least two years 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 then outstanding shares of the Common
Stock (1% is expected to be equal to approximately 885,000 shares immediately
following the Offerings) or (ii) the average weekly trading volume in the
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 the provisions of Rule 144, the Existing Stockholders
will be deemed to have acquired beneficial ownership of the shares of
76
Common Stock currently held by them on the date of the issuance of such shares
by the Company in the Reorganization. The Commission has recently proposed to
reduce the Rule 144 holding periods. If enacted, such modification will have a
material effect on the timing of when shares of the Common Stock become
eligible for resale.
Upon completion of the Offerings, the Existing Stockholders will hold
74,545,000 shares of the Class B Common Stock (which Class B shares are
convertible into Class A shares). See "Risk Factors--Control by Existing
Stockholders; Anti-Takeover Effect of Dual Classes of Common Stock." The
Existing Stockholders have entered into a stockholders agreement (the
"Stockholders Agreement") which restricts the extent to which any Existing
Stockholder can dispose of its shares of Common Stock following the Offerings.
Among other things, in order to ensure the qualification of the Reorganization
under Section 351 of the Code, such stockholders have agreed not to transfer
any shares they own for 365 days after the Offerings without the consent of
the Company except for the funding of the Distributor Options and the grant of
the employee stock bonus awards. After the expiration of the 365-day period,
no such stockholder is permitted to transfer in any one-year period a number
of shares greater than the lesser of (i) the amount that could be sold under
Rule 144 during that period, or (ii) 1.25% of the total Common Stock owned by
Existing Stockholders as of the date of the Stockholders Agreement. The
Existing Stockholders have been granted registration rights by the Company
permitting each of such Existing 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 Existing Stockholder has sold a
specified value of shares of Class A Common Stock. See "Certain Relationships
and Related Transactions."
The Company, its directors and officers, and the Existing Stockholders of
NSI have agreed or will agree prior to the Offerings not to sell or otherwise
dispose of any shares of Common Stock or securities convertible into or
exchangeable or exercisable for Common Stock, without the prior consent of
Merrill Lynch & Co., for a period of 180 days after the date of this
Prospectus, except that the Company and the Existing Stockholders may, without
such consent, grant options or issue shares of Common Stock pursuant to
certain equity incentives, including, without limitation, the Distributor
Options and the employee stock bonus awards. See "Risk Factors--Shares
Eligible for Future Sale" and "Underwriting."
DISTRIBUTOR OPTIONS AND EMPLOYEE STOCK BONUS AWARDS. Prior to the Offerings,
the Existing Stockholders intend to convert 1,605,000 shares of Class B Common
Stock to Class A Common Stock and contribute such shares of Class A Common
Stock to the Company. The Company intends to grant to NSI the Distributor
Options to purchase such shares of Class A Common Stock, and NSI intends to
assign these Distributor Options to qualifying distributors of NSI in
connection with the Offerings. The vesting of and the right to exercise the
Distributor Options are subject to certain conditions, and the Distributor
Options are being registered along with the shares of Class A Common Stock
underlying such Distributor Options concurrently with the Offerings pursuant
to Rule 415 under the 1933 Act.
Prior to the date of this Prospectus, the Existing Stockholders will also
convert 1,250,000 shares of Class B Common Stock to Class A Common Stock and
contribute such shares to NSI and its affiliates (other than the Company) for
issuance in connection with the employee stock bonus awards to be made by NSI
and its affiliates (other than the Company) to their respective employees
(approximately 600,000 of which will be awarded in connection with the
Offerings). The shares of Class A Common Stock underlying each such employee
stock bonus award will be issued to the employee recipient at a rate of 25%
per year commencing one year following the date of the award, provided the
employee recipient is still employed by NSI or one of its affiliates (other
than the Company). The Company also intends to issue 109,000 shares of Class A
Common Stock to its employees in connection with employee stock bonus awards
to be made to the Company's employees on the same terms as described above
pursuant to the 1996 Stock Incentive Plan.
The Distributor Options, the shares of Class A Common Stock underlying the
Distributor Options and the employee stock bonus awards have been registered
pursuant to Rule 415 under the 1933 Act. The shares of Class A Common Stock
will be issued by the Company upon the exercise of the Distributor Options.
The Company
77
will not receive any of the proceeds from the distribution of shares in
connection with the employee stock bonus awards. The Company will receive the
proceeds from the issuance of shares in connection with the exercise of the
Distributor Options. The Distributor Options will be issued with an exercise
price of 25% of the initial price per share in the Offerings.
The Company and its affiliates anticipate that the Distributor Options, the
shares of Class A Common Stock underlying the Distributor Options and the
employee stock bonus awards will be qualified in some form pursuant to the
securities laws of each jurisdiction in which the Company and its affiliates
operate. There can be no assurance, however, that NSI will be able to qualify
the Distributor Options and the employee stock bonus awards in each
jurisdiction, the timing of such qualification, or that, if qualified, the
governmental authorities in such jurisdictions will not require material
modifications to the terms of the programs as they are currently contemplated
to be implemented. In certain European countries, including France and Spain,
only existing executive distributors will be allowed to participate in the
Distributor Option program. No assurances can be given as to the timing of any
governmental approvals received in connection with the Distributor Options. In
addition, there can be no assurance that the laws and relevant regulations and
judicial and administrative interpretations in such jurisdictions will not
change in a manner that has a material impact on the ability of NSI to adopt
or maintain such programs in such jurisdictions.
78
DESCRIPTION OF CAPITAL STOCK
GENERAL
As of the date of this Prospectus (and after consummation of the
Reorganization), 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"). Upon completion of the Offerings, the Company will have 8,850,000
shares of Class A Common Stock issued and outstanding. This number includes
(i) 7,600,000 shares of Class A Common Stock to be sold in the Offerings and
(ii) 1,250,000 shares of Class B Common Stock converted into Class A Common
Stock prior to the Offerings and contributed by the Existing Stockholders to
NSI and its affiliates (other than the Company) for issuance to employees of
NSI and its affiliates (other than the Company) as employee stock bonus awards
and excludes (a) 1,605,000 shares of Class B Common Stock converted into Class
A Common Stock prior to the Offerings and contributed by the Existing
Stockholders to the Company and held by the Company in reserve as treasury
shares for issuance upon the exercise of the Distributor Options, (b) 267,500
shares of Class A Common Stock subject to a stock option which has been
granted to an executive officer of the Company and (c) 109,000 shares reserved
for issuance by the Company to its employees as employee stock bonus awards.
In addition, upon completion of the Offerings, the Company will have
74,545,000 shares of Class B Common Stock issued and outstanding, all of which
are held of record by the Existing Stockholders. 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 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 Existing
Stockholders; 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 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
79
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 13-d-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 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.
80
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 has been approved for listing on the New
York Stock Exchange under the trading symbol "NUS," subject to official notice
of issuance.
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 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
Upon consummation of the Offerings, the Company will be 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" (which includes a merger of not 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. 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
81
agents. The Company believes the foregoing provisions are necessary to attract
and retain qualified persons as directors and officers. Prior to the
consummation of the Offerings, the Company intends to enter 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
The Existing Stockholders have been granted registration rights by the
Company permitting each of such Existing 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 Existing Stockholder
has sold a specified value of shares of Class A Common Stock. See "Certain
Relationships and Related Transactions."
82
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 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").
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.
83
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. 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.
84
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, Dean Witter Reynolds
Inc. and Nomura Securities International, Inc. (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,
the Selling Stockholders and Nu Skin Japan, as guarantor (the "Guarantor"), to
purchase from the Company and 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.................................
Dean Witter Reynolds Inc. ........................................
Nomura Securities International, Inc..............................
---------
Total........................................................... 4,600,000
=========
The Company, the Selling Stockholders and the Guarantor have also entered
into an International Purchase Agreement (the "International Purchase
Agreement") with certain underwriters outside the United States, Canada and
Japan (the "International Managers"), for whom Merrill Lynch International,
Morgan Stanley & Co. International Limited, Dean Witter International Ltd. and
Nomura International plc are acting as representatives (the "Lead
International Managers"). Subject to the terms and conditions set forth in the
International Purchase Agreement, the Company and the Selling Stockholders
have agreed to sell to the International Underwriters, and the International
Underwriters have severally agreed to purchase, an aggregate of 1,330,000
shares of Class A Common Stock pursuant to Regulation S under the 1933 Act.
The Company, the Selling Stockholders and the Guarantor have also entered
into a Japanese Underwriting Agreement (the "Japanese Underwriting Agreement"
and, together with the U.S. Purchase Agreement and the International Purchase
Agreement, the "Purchase Agreements") with The Nomura Securities Co., Ltd.,
Merrill Lynch Japan Incorporated and Morgan Stanley Japan Limited (the
"Japanese Underwriters" and, together with the U.S. Underwriters and the
International Managers, the "Underwriters"). Subject to the terms and
conditions set forth in the Japanese Underwriting Agreement, the Selling
Stockholders have agreed to sell to the Japanese Underwriters, and the
Japanese Underwriters have jointly and severally agreed to purchase, an
aggregate of 1,670,000 shares of Class A Common Stock pursuant to 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 Company and the Selling Stockholders are not
obligated to sell, and the U.S. Underwriters, International Managers and
Japanese Underwriters 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.
85
NU SKIN ASIA PACIFIC, INC.
INDEX TO FINANCIAL STATEMENTS
PAGE
----
COMBINED FINANCIAL STATEMENTS:
Report of Independent Accountants..................................... F-2
Report of Independent Certified Public Accountants.................... F-3
Combined Balance Sheets at December 31, 1994 and 1995, and at
September 30, 1996 (unaudited)....................................... F-4
Combined Statements of Income for the years ended September 30, 1993
and 1994, the three months ended December 31, 1993 (unaudited) and
1994, the year ended December 31, 1995, and the nine months ended
September 30, 1995 (unaudited) and 1996 (unaudited).................. F-5
Combined Statements of Stockholders' Equity for the years ended Sep-
tember 30, 1993 and 1994, the three months ended December 31, 1994,
the year ended December 31, 1995, and the nine months ended September
30, 1996 (unaudited)................................................. F-6
Combined Statements of Cash Flows for the years ended September 30,
1993 and 1994, the three months ended December 31, 1993 (unaudited)
and 1994, the year ended December 31, 1995, and the nine months ended
September 30, 1995 (unaudited) and 1996 (unaudited).................. F-7
Notes to Combined Financial Statements................................ F-8
NU SKIN ASIA PACIFIC, INC.:
Report of Independent Accountants..................................... F-16
Balance Sheet As of September 6, 1996................................. F-17
Notes to Balance Sheet As of September 6, 1996........................ F-18
UNAUDITED PRO FORMA DATA:
Unaudited Pro Forma Consolidated Balance Sheet As of September 30,
1996................................................................. F-21
Unaudited Pro Forma Consolidated Statement of Income For the Year
Ended
December 31, 1995.................................................... F-22
Unaudited Pro Forma Consolidated Statement of Income For the Nine
Months Ended
September 30, 1996................................................... F-23
Notes to Unaudited Pro Forma Consolidated Balance Sheet and Statements
of Income............................................................ F-24
All schedules are omitted because they are not applicable or the required
information is shown in the combined 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 combined balance sheets and the related
combined 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. at December 31, 1994 and 1995, and the results of its
operations and its cash flows for the years ended September 30, 1993 and 1994,
the three months ended December 31, 1994, and the year ended December 31,
1995, 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 did not audit the financial statements of Nu Skin Hong Kong,
Inc. --Hong Kong Branch for the year ended September 30, 1993, which
statements reflect 17% of revenue for the year then ended. Those statements
were audited by other independent accountants whose report dated April 14,
1994 (except for Notes 2 and 8, as to which the date is August 30, 1996)
expressed an unqualified opinion on those statements. Our opinion, as it
relates to data of Nu Skin Hong Kong, Inc. for the year ended September 30,
1993, is based solely on the report of other independent accountants. 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
September 10, 1996
F-2
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Nu Skin Hong Kong, Inc.
We have audited the accompanying balance sheet of Nu Skin Hong Kong, Inc. -
Hong Kong Branch as of September 30, 1993, and the related statements of
earnings, retained earnings, and cash flows for the year then ended. These
financial statements are the responsibility of the management of the branch.
Our responsibility is to express an opinion on these financial statements
based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Nu Skin Hong Kong, Inc. -
Hong Kong Branch as of September 30, 1993, and the results of its operations
and its cash flows for the year then ended, in conformity with United States
generally accepted accounting principles.
/s/ Grant Thornton
Hong Kong
April 14, 1994 (except for Notes 2 and 8, as to which the date is August 30,
1996)
F-3
NU SKIN ASIA PACIFIC, INC.
COMBINED BALANCE SHEETS
(IN THOUSANDS)
PRO FORMA
AMOUNTS
DECEMBER 31, (NOTE 2)
---------------- SEPTEMBER 30, SEPTEMBER 30,
1994 1995 1996 1996
------- -------- ------------- -------------
(UNAUDITED) (UNAUDITED)
ASSETS
Current assets
Cash and cash equivalents...... $16,288 $ 63,213 $ 81,079
Accounts receivable............ 1,068 3,242 8,151
Related parties receivable..... 17,870 1,793 7,840
Inventories, net............... 15,556 32,662 46,379
Prepaid expenses and other..... 3,461 3,410 8,027 $10,636
------- -------- --------
54,243 104,320 151,476
Property and equipment, net...... 3,850 6,904 8,672
Other assets..................... 3,331 7,004 8,759 11,919
------- -------- --------
Total assets................. $61,424 $118,228 $168,907
======= ======== ========
LIABILITIES AND STOCKHOLDERS' EQ-
UITY
Current liabilities
Accounts payable............... $ 3,630 $ 4,395 $ 5,019
Accrued expenses............... 13,377 23,313 49,514
Related parties payable........ 10,556 28,749 36,115
Notes payable to stockholders.. -- -- -- 81,893
------- -------- --------
27,563 56,457 90,648
------- -------- --------
Commitments and contingencies
(Notes 7 and 10)
Stockholders' equity
Capital stock.................. 1,300 4,550 4,550 80
Cumulative foreign currency
translation adjustment........ 441 (2,940) (3,714) (3,714)
Retained earnings.............. 32,120 60,161 77,423 5,769
------- -------- -------- -------
33,861 61,771 78,259 $ 2,135
------- -------- --------
Total liabilities and stock-
holders' equity............. $61,424 $118,228 $168,907
======= ======== ========
The accompanying notes are an integral part of these combined financial
statements.
F-4
NU SKIN ASIA PACIFIC, INC.
COMBINED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE
YEAR ENDED MONTHS ENDED YEAR ENDED NINE MONTHS ENDED
SEPTEMBER 30, DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
----------------- ------------------- ------------ -----------------------
1993 1994 1993 1994 1995 1995 1996
-------- -------- ----------- ------- ------------ ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
Revenue................. $110,624 $254,637 $63,759 $73,562 $358,609 $241,412 $471,312
Cost of sales........... 38,842 86,872 24,238 19,607 96,615 64,110 133,592
-------- -------- ------- ------- -------- -------- --------
Gross profit............ 71,782 167,765 39,521 53,955 261,994 177,302 337,720
-------- -------- ------- ------- -------- -------- --------
Operating expenses
Distributor
incentives............ 40,267 95,737 22,315 27,950 135,722 91,893 175,149
Selling, general and
administrative........ 27,150 44,566 9,358 13,545 67,475 44,099 69,970
-------- -------- ------- ------- -------- -------- --------
Total operating
expenses............... 67,417 140,303 31,673 41,495 203,197 135,992 245,119
-------- -------- ------- ------- -------- -------- --------
Operating income........ 4,365 27,462 7,848 12,460 58,797 41,310 92,601
Other income (expense),
net.................... 133 443 24 (813) 511 (408) 1,530
-------- -------- ------- ------- -------- -------- --------
Income before provision
for income taxes....... 4,498 27,905 7,872 11,647 59,308 40,902 94,131
Provision for income
taxes (Note 8)......... 417 10,226 2,885 2,730 19,097 13,170 33,810
-------- -------- ------- ------- -------- -------- --------
Net income.............. $ 4,081 $ 17,679 $ 4,987 $ 8,917 $ 40,211 $ 27,732 $ 60,321
======== ======== ======= ======= ======== ======== ========
Pro forma historical net
income per share (Note
2)..................... $ .47 $ .71
======== ========
Pro forma weighted
average common shares
outstanding (Note 2)... 84,802 84,802
======== ========
Unaudited pro forma
data:
Income before pro forma
provision for income
taxes.................. 4,498 27,905 7,872 11,647 59,308 40,902 94,131
Pro forma provision for
income taxes (Note 8).. 1,511 10,391 2,931 4,041 22,751 15,690 34,196
-------- -------- ------- ------- -------- -------- --------
Income after pro forma
provision for income
taxes.................. $ 2,987 $ 17,514 $ 4,941 $ 7,606 $ 36,557 $ 25,212 $ 59,935
======== ======== ======= ======= ======== ======== ========
Pro forma net income per
share (Note 2)......... $ .43 $ .71
======== ========
The accompanying notes are an integral part of these combined financial
statements.
F-5
NU SKIN ASIA PACIFIC, INC.
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
CUMULATIVE
FOREIGN
CURRENCY TOTAL
CAPITAL TRANSLATION RETAINED STOCKHOLDERS'
STOCK ADJUSTMENT EARNINGS EQUITY
------- ----------- -------- -------------
Balance at October 1, 1992........ $1,300 $ 6 $ 1,443 $ 2,749
Net change in cumulative foreign
currency translation adjustment.. -- 96 -- 96
Net income........................ -- -- 4,081 4,081
------ ------- ------- -------
Balance at September 30, 1993..... 1,300 102 5,524 6,926
Net change in cumulative foreign
currency translation adjustment.. -- 329 -- 329
Net income........................ -- -- 17,679 17,679
------ ------- ------- -------
Balance at September 30, 1994..... 1,300 431 23,203 24,934
Net change in cumulative foreign
currency translation adjustment.. -- 10 -- 10
Net income........................ -- -- 8,917 8,917
------ ------- ------- -------
Balance at December 31, 1994...... 1,300 441 32,120 33,861
Contributed capital............... 3,250 -- -- 3,250
Dividends......................... -- -- (12,170) (12,170)
Net change in cumulative foreign
currency translation adjustment.. -- (3,381) -- (3,381)
Net income........................ -- -- 40,211 40,211
------ ------- ------- -------
Balance at December 31, 1995...... 4,550 (2,940) 60,161 61,771
Dividends (unaudited)............. -- -- (43,059) (43,059)
Net change in cumulative foreign
currency translation
adjustment (unaudited)........... -- (774) -- (774)
Net income (unaudited)............ -- -- 60,321 60,321
------ ------- ------- -------
Balance at September 30, 1996
(unaudited)...................... $4,550 $(3,714) $77,423 $78,259
====== ======= ======= =======
The accompanying notes are an integral part of these combined financial
statements.
F-6
NU SKIN ASIA PACIFIC, INC.
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
THREE
YEAR ENDED MONTHS ENDED YEAR ENDED NINE MONTHS ENDED
SEPTEMBER 30, DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
----------------- ------------------- ------------ -----------------------
1993 1994 1993 1994 1995 1995 1996
------- -------- ----------- ------- ------------ ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
Cash flows from
operating activities:
Net income............. $ 4,081 $ 17,679 $ 4,987 $ 8,917 $ 40,211 $27,732 $ 60,321
Adjustments to reconcile
net income to net cash
provided by (used in)
operating activities:
Depreciation........... 813 1,401 466 358 2,012 1,504 2,104
Loss on disposal of
property and
equipment............. 1 90 -- 1,093 12 4 --
Changes in operating
assets and
liabilities:
Accounts receivable.... 36 (1,006) (4,141) 165 (2,174) (2,595) (4,909)
Related parties
receivable............ (3,615) (25,288) 100 11,108 16,077 15,185 (6,047)
Inventories, net....... (9,301) 158 947 (939) (17,106) (6,502) (13,717)
Prepaid expenses and
other................. (587) (890) (3,530) (836) 51 758 (4,617)
Other assets........... (542) 277 195 (20) (2,994) 76 (1,542)
Accounts payable....... 1,544 884 1,928 279 765 3,004 624
Accrued expenses....... 2,216 13,106 3,457 (4,384) 9,936 3,976 26,201
Related parties
payable............... 19,398 3,475 (1,152) (16,442) 18,193 10,201 7,366
------- -------- ------- ------- -------- ------- --------
Net cash provided by
(used in) operating
activities............ 14,044 9,886 3,257 (701) 64,983 53,343 65,784
------- -------- ------- ------- -------- ------- --------
Cash flows from
investing activities:
Purchase of property
and equipment......... (4,061) (1,766) (500) (417) (5,422) (3,405) (3,967)
Proceeds from disposal
of property and equip-
ment.................. 20 25 -- 14 48 3 --
Payments for lease de-
posits................ (1,726) (614) (73) (677) (701) (295) (218)
Receipt of refundable
lease deposits........ 337 153 153 -- 22 3 5
------- -------- ------- ------- -------- ------- --------
Net cash used in
investing activities.. (5,430) (2,202) (420) (1,080) (6,053) (3,694) (4,180)
------- -------- ------- ------- -------- ------- --------
Cash flows from
financing activities:
Proceeds from related
party loans........... 4,350 -- -- -- -- -- --
Payments on related
party loans........... -- (4,350) -- -- -- -- --
Proceeds from capital
contributions......... -- -- -- -- 3,250 -- --
Dividends paid......... -- -- -- -- (12,170) (4,197) (43,059)
------- -------- ------- ------- -------- ------- --------
Net cash provided by
(used in) financing
activities............ 4,350 (4,350) -- -- (8,920) (4,197) (43,059)
------- -------- ------- ------- -------- ------- --------
Effect of exchange rate
changes on cash....... 74 152 (702) (8) (3,085) 963 (679)
------- -------- ------- ------- -------- ------- --------
Net increase (decrease)
in cash and cash
equivalents............ 13,038 3,486 2,135 (1,789) 46,925 46,415 17,866
Cash and cash
equivalents, beginning
of period.............. 1,553 14,591 14,591 18,077 16,288 16,288 63,213
------- -------- ------- ------- -------- ------- --------
Cash and cash
equivalents, end of
period................. $14,591 $ 18,077 $16,726 $16,288 $ 63,213 $62,703 $ 81,079
======= ======== ======= ======= ======== ======= ========
Supplemental cash flow
information:
Interest paid.......... $ 207 $ 81 $ 42 $ 6 $ 119 $ 79 $ 25
======= ======== ======= ======= ======== ======= ========
The accompanying notes are an integral part of these combined financial
statements.
F-7
NU SKIN ASIA PACIFIC, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
1. THE COMPANY
Nu Skin Asia Pacific, Inc. (the "Company") is a network marketing company
involved in the distribution of premium quality, innovative personal care and
nutritional products in Asia. The Company is the exclusive distribution
vehicle for Nu Skin International, Inc. ("NSI") through the Company's
subsidiaries in the countries of Japan, Taiwan, Hong Kong (including Macau)
and South Korea (collectively referred to as the "Subsidiaries").
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
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 operations of the Company, of NSI, of NSIMG and of
other NSI affiliates are conducted by a variety of individual entities that
are under the control of a group of common stockholders.
Inasmuch as the Subsidiaries are under common control, and in accordance
with the planned reorganization discussed in Note 11, the Subsidiaries'
historical balance sheets and related statements of income, of stockholders'
equity and of cash flows are combined and presented as a single entity after
elimination of intercompany transactions.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 September 30, 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.
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
Leasehold improvements........ Shorter of estimated useful life or lease term
Vehicles...................... 3 - 5 years
Expenditures for maintenance and repairs are charged to expense as incurred.
F-8
NU SKIN ASIA PACIFIC, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
OTHER ASSETS
Other assets consist primarily of deposits for noncancelable operating
leases.
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 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 on
the differences between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse.
The Company elected to be taxed as an S corporation whereby the U.S. Federal
and state income tax effects of the Company's activities accrue directly to
its stockholders. The cumulative affect of adopting SFAS No. 109 as of
October 1, 1993 was not material to the Company's operations.
FOREIGN CURRENCY TRANSLATION
All business operations of the Company occur outside of the United States.
Each Subsidiary's local currency is considered the 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, its reporting currency is the U.S. dollar, and assets and
liabilities are translated into U.S. dollars at exchange rates existing at the
balance sheet dates. Revenues and expenses are translated at 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 combined balance sheets, and
transaction gains and losses are included in other income in the combined
statements of income.
INDUSTRY SEGMENT AND GEOGRAPHIC AREA
The Company operates in a single industry, which is the direct selling of
personal 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 and related parties payable approximate their recorded values.
PRO FORMA AMOUNTS
The pro forma amounts reflect the Company's planned reorganization of the
capital structure, the declaration of S Distribution Notes of $81.9 million in
connection with the Company's conversion from an S corporation to a C
corporation prior to the Company's planned public offerings and the
recognition of a deferred tax asset of $5.8 million relating to adjustments
for U.S. Federal and state income taxes as if the Company had been taxed as a
C corporation rather than an S corporation since inception.
F-9
NU SKIN ASIA PACIFIC, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
PRO FORMA NET INCOME PER SHARE
Pro forma net income per share is computed based on the weighted average
number of common and common equivalent shares outstanding after the
Reorganization and is adjusted for the number of shares (4,284,000) to be
issued as if $81.9 million of the proceeds from the Company's planned public
offerings were used to pay S Distribution Notes (assuming net proceeds of
$19.11 per share). Supplemental pro forma income per share, calculated as if
$25.0 million of the proceeds from the Company's planned public offerings were
used to repay notes payable, have not been presented as they do not differ
materially from pro forma net income per share.
INTERIM RESULTS (UNAUDITED)
The accompanying balance sheet as of September 30, 1996, the statement of
stockholders' equity for the nine months ended September 30, 1996 and the
statements of income and of cash flows for the three months ended December 31,
1993 and the nine months ended September 30, 1995 and 1996 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 combined financial
statements at such dates 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 the control of a group of common stockholders. These
transactions are as follows: (1) The Company purchases virtually all of its
products from NSI through Nu Skin Hong Kong under the terms of the Regional
Distribution Agreement. The Company's purchase prices for NSI products and
commercial materials are governed by a price schedule which is subject to
negotiation between the Company and NSI. (2) The Company sells NSI products to
each of its Subsidiaries and to NSI affiliates in Australia and New Zealand
through Nu Skin Hong Kong under the terms of the Wholesale Distribution
Agreements. (3) The Company pays a royalty to NSI for use of licensed
trademarks and trade names on products and commercial materials not purchased
from NSI, including products and commercial materials manufactured or locally
sourced by each of the Subsidiaries under the terms of the Trademark/Tradename
License Agreements. (4) Distributor agreements are entered into between the
distributor and NSI rather than the Company. The Company pays license fees to
NSI for the right to use NSI's distributor lists, the distribution system and
other intangibles in the countries in which the Company maintains exclusive
distribution rights under the terms of the Licensing and Sales Agreements. (5)
The Company has agreed to incur a commission fee of 42% of commissionable
product sales (with the exception of South Korea, where, due to government
regulations, the Company satisfies this obligation by using a formula based
upon a maximum payout of 35% of commissionable product sales) to fulfill NSI's
obligation under the Global Compensation Plan as outlined in the Licensing and
Sales Agreements. Such payment is compensation to NSI for the commissions
which become payable by NSI to the independent distributors upon the Company's
sales of product and covers the costs of such commissions and the
administration of the Global Compensation Plan. The Company satisfies this
liability by paying directly the commissions owed to distributors resident in
the countries in which it operates and settling the difference with NSI. (6)
The Company pays fees to NSIMG for management and support services under the
terms of the Management Services Agreement. The Company's management believes
that the fees charged by NSI and NSIMG are reasonable and would not have been
materially different had the Company operated as a stand-alone entity during
the periods presented. In the event NSI and NSIMG are unable or unwilling to
perform their obligations under certain of the above agreements, or terminate
these agreements as provided therein, the Company's business and results of
operations will be adversely affected.
F-10
NU SKIN ASIA PACIFIC, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Total commission fees (including those paid directly to distributors within
the Company's geographic territory) are recorded as distributor incentives in
the combined statements of income. Trademark royalty fees, license fees and
management fees are included in selling, general and administrative expenses
in the combined statements of income.
SUMMARY OF TRANSACTIONS
The following summarizes the Company's transactions with related parties (in
thousands):
Product purchases
YEAR ENDED THREE NINE
SEPTEMBER 30, MONTHS ENDED YEAR ENDED MONTHS ENDED
----------------- DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1993 1994 1994 1995 1996
------- -------- ------------ ------------ -------------
(UNAUDITED)
Beginning inventories... $ 5,474 $ 14,775 $14,617 $ 15,556 $ 32,662
Inventory purchases from
affiliates............. 29,877 61,409 11,608 69,821 112,324
Other inventory
purchases, import
duties and value added
locally................ 18,266 25,305 8,938 43,900 34,985
------- -------- ------- -------- --------
Total products available
for sale............... 53,617 101,489 35,163 129,277 179,971
Less: Cost of sales..... (38,842) (86,872) (19,607) (96,615) (133,592)
------- -------- ------- -------- --------
Ending inventories...... $14,775 $ 14,617 $15,556 $ 32,662 $ 46,379
======= ======== ======= ======== ========
Related parties payable transactions
YEAR ENDED THREE NINE
SEPTEMBER 30, MONTHS ENDED YEAR ENDED MONTHS ENDED
------------------ DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1993 1994 1994 1995 1996
-------- -------- ------------ ------------ -------------
(UNAUDITED)
Beginning related
parties payable........ $ 4,125 $ 27,873 $ 26,998 $ 10,556 $ 28,749
Inventory purchases from
affiliates............. 29,877 61,409 11,608 69,821 112,324
Distributor incentives.. 40,267 95,737 27,950 135,722 175,149
Less: Distributor
incentives paid
directly to
distributors........... (13,256) (68,880) (19,837) (105,642) (134,865)
License fees............ 3,574 9,252 2,750 13,158 17,699
Trademark royalty fees.. -- -- 19 2,694 2,089
Management fees......... 794 1,449 499 2,066 2,225
Proceeds from (payments
for) related party
loans.................. 4,350 (4,350) -- -- --
Less: Payments to
related parties........ (41,858) (95,492) (39,431) (99,626) (167,255)
-------- -------- -------- --------- ---------
Ending related parties
payable................ $ 27,873 $ 26,998 $ 10,556 $ 28,749 $ 36,115
======== ======== ======== ========= =========
F-11
NU SKIN ASIA PACIFIC, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
RELATED PARTIES RECEIVABLE AND PAYABLE BALANCES
The Company has receivable and payable balances with affiliates in Australia
and New Zealand, and with NSI and NSIMG. Related parties balances outstanding
greater than 60 days bear interest at prime 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 combined
financial statements. Sales to related parties were $7,426,000 and $2,288,000
for the years ended September 30, 1993 and 1994, respectively, $855,000 for
the three months ended December 31, 1994, $4,608,000 for the year ended
December 31, 1995 and $3,404,000 (unaudited) for the nine months ended
September 30, 1996.
Related parties receivable includes $15,746,000 due from NSI at December 31,
1994 for excess payments made during 1994 relating to overpayments on
inventory purchased from NSI during 1994. This balance was settled by amounts
due for shipments of inventory from NSI during 1995. The Company has
determined that no allowance is necessary for amounts due from related
parties.
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 and $1,100,000 for the years ended September 30, 1993 and 1994,
respectively, $270,000 for the three months ended December 31, 1994,
$1,100,000 for the year ended December 31, 1995 and $1,200,000 (unaudited) for
the nine months ended September 30, 1996.
4. PROPERTY AND EQUIPMENT
Property and equipment are comprised of the following (in thousands):
DECEMBER 31,
-------------- SEPTEMBER 30,
1994 1995 1996
------ ------ -------------
(UNAUDITED)
Furniture and fixtures............................ $ 982 $3,593 $4,734
Computers and equipment........................... 3,772 5,060 7,117
Leasehold improvements............................ 1,240 2,221 2,588
Vehicles.......................................... 156 152 223
------ ------ ------
6,150 11,026 14,662
Less: accumulated depreciation.................... (2,300) (4,122) (5,990)
------ ------ ------
$3,850 $6,904 $8,672
====== ====== ======
Depreciation of property and equipment totaled $813,000 and $1,401,000 for
the years ended September 30, 1993 and 1994, respectively, $358,000 for the
three months ended December 31, 1994, $2,012,000 for the year ended December
31, 1995 and $2,104,000 (unaudited) for the nine months ended September 30,
1996.
F-12
NU SKIN ASIA PACIFIC, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
5. ACCRUED EXPENSES
Accrued expenses consist of the following (in thousands):
DECEMBER 31,
--------------- SEPTEMBER 30,
1994 1995 1996
------- ------- -------------
(UNAUDITED)
Income taxes payable.............................. $ 7,577 $17,463 $37,118
Other taxes payable............................... 606 798 3,644
Other accruals.................................... 5,194 5,052 8,752
------- ------- -------
$13,377 $23,313 $49,514
======= ======= =======
6. LINE OF CREDIT
During 1995, the Company entered into an $8,000,000 revolving credit
agreement with a financial institution in South Korea. Advances were available
under the agreement through July 1, 1996. The credit facility bears interest
at an annual rate of 12%. There were no outstanding balances under the credit
facility at December 31, 1995.
7. 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, 1995 are as
follows (in thousands):
Year ending December 31,
1996.............................................................. $ 7,189
1997.............................................................. 2,766
1998.............................................................. 1,088
-------
Total minimum lease payments........................................ $11,043
=======
Rental expense for operating leases totaled $3,941,000 and $5,848,000 for
the years ended September 30, 1993 and 1994, respectively, $1,639,000 for the
three months ended December 31, 1994, $9,470,000 for the year ended December
31, 1995 and $6,165,000 (unaudited) for the nine months ended September 30,
1996.
8. INCOME TAXES
Combined income before provision for income taxes consists of income earned
solely from international operations. The provision for income taxes for the
years ended September 30, 1993 and 1994, for the three months ended December
31, 1994, for the year ended December 31, 1995 and for the nine months ended
September 30, 1996 (unaudited) primarily represents income taxes paid in or
payable to foreign countries.
F-13
NU SKIN ASIA PACIFIC, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
PRO FORMA PROVISION FOR INCOME TAXES
The combined statements of income include a pro forma presentation for
income taxes which would have been recorded if the Company had not been an S
corporation based upon the U.S. Federal and state tax laws. The unaudited pro
forma provision for income taxes consists of the following (in thousands):
YEAR ENDED THREE NINE
SEPTEMBER 30, MONTHS ENDED YEAR ENDED MONTHS ENDED
--------------- DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1993 1994 1994 1995 1996
------ ------- ------------ ------------ -------------
(UNAUDITED)
Current:
Federal.......... $1,176 $ 870 $1,505 $ 5,113 $ 2,491
State............ -- -- -- -- --
Foreign.......... 944 11,176 2,779 19,500 37,061
Deferred:
Federal.......... (82) (705) (194) (1,459) (2,105)
State............ -- -- -- -- --
Foreign.......... (527) (950) (49) (403) (3,251)
------ ------- ------ ------- -------
$1,511 $10,391 $4,041 $22,751 $34,196
====== ======= ====== ======= =======
The principal components of U.S. pro forma deferred tax assets are as
follows:
DECEMBER 31,
------------- SEPTEMBER 30,
1994 1995 1996
------ ------ -------------
(UNAUDITED)
Deferred tax assets:
Product return reserve........................ $ 54 $ 115 $ 933
Inventory reserve............................. 14 414 1,464
Depreciation.................................. 979 866 1,128
Exchange gains and losses..................... -- 389 --
Accrued expenses not deductible until paid.... 179 123 212
Uniform capitalization........................ 897 1,696 1,945
Minimum tax credit............................ -- -- 2,005
Valuation allowance........................... -- -- (2,005)
Other......................................... 82 61 87
------ ------ ------
$2,205 $3,664 $5,769
====== ====== ======
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 THREE NINE
SEPTEMBER 30, MONTHS ENDED YEAR ENDED MONTHS ENDED
-------------- DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1993 1994 1994 1995 1996
------ ------ ------------ ------------ -------------
(UNAUDITED)
Income taxes at statu-
tory rate.............. 34.00% 35.00% 35.00% 35.00% 35.00%
Foreign tax credit limi-
tation (benefit)....... (0.60) 1.97 (0.42) 2.69 (0.84)
Alternative minimum
tax.................... -- -- -- -- 2.13
Non-deductible ex-
penses................. 0.26 0.27 0.11 0.67 0.04
Other................... (0.05) -- -- -- --
------ ------ ----- ----- -----
33.61% 37.24% 34.69% 38.36% 36.33%
====== ====== ===== ===== =====
F-14
NU SKIN ASIA PACIFIC, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
9. FINANCIAL INSTRUMENTS
The Subsidiaries enter into significant transactions with each other, NSI
and third parties which may not be denominated in the respective entity's
functional currency. 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 risks and periodically takes measures
to reduce the impact of foreign exchange fluctuations on the Company's
operating results.
At December 31, 1994 and 1995, and September 30, 1996, the Company held
foreign currency forward contracts with amounts totaling $-0-, $1,000,000 and
$13,150,000 (unaudited), respectively, to hedge certain foreign currency
risks. These contracts all have maturities prior to December 31, 1996. At
December 31, 1995 and September 30, 1996 and for the periods then ended, there
were no significant unrealized gains or losses on these contracts.
10. 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.
11. SUBSEQUENT EVENTS
PLANNED REORGANIZATION
Prior to or concurrently with the initial public offerings, the stockholders
of the Subsidiaries will effectuate a tax-free reorganization whereby the
stockholders will contribute their shares of capital stock to the Company in
exchange for shares of the Company's Class B Common Stock intended to qualify
as a tax free transfer under Section 351 of the Internal Revenue Code of 1986
(the "Reorganization"). The Reorganization will result in each of the
Subsidiaries becoming a wholly-owned subsidiary of the Company. Prior to the
Reorganization, each Subsidiary elected to be treated as an S corporation. As
part of the Reorganization, each Subsidiary will terminate its S corporation
status.
Inasmuch as the separate entities that will be reorganized to constitute the
Company are under common control, the Reorganization will be accounted for in
a manner similar to a pooling of interests. Accordingly, the individual
Subsidiaries' historical balance sheets and related statements of income, of
stockholders' equity and of cashflows are combined and presented as a single
entity after elimination of intercompany transactions. The unaudited pro forma
statements included elsewhere in this registration statement reflect the
Reorganization and related accounting treatment.
F-15
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Nu Skin Asia Pacific, Inc.
In our opinion, the accompanying balance sheet presents fairly, in all
material respects, the financial position of Nu Skin Asia Pacific, Inc. at
September 6, 1996, in conformity with generally accepted accounting
principles. This financial statement is the responsibility of the Company's
management; our responsibility is to express an opinion on this financial
statement based on our audit. We conducted our audit of this statement in
accordance with generally accepted auditing standards which require that we
plan and perform the audit to obtain reasonable assurance about whether the
balance sheet is free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
balance sheet, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall balance sheet
presentation. We believe that our audit provides a reasonable basis for the
opinion expressed above.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Salt Lake City, Utah
September 10, 1996
F-16
NU SKIN ASIA PACIFIC, INC.
BALANCE SHEET
AS OF SEPTEMBER 6, 1996
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ASSETS
Deferred offering costs.................................................. $1,676
------
Total assets......................................................... $1,676
======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accrued expenses....................................................... $1,676
------
Total liabilities.................................................... 1,676
------
Stockholders' equity
Preferred Stock--25,000,000 shares authorized, $.001 par value......... --
Class A Common Stock--500,000,000 shares authorized, $.001 par value... --
Class B Common Stock--100,000,000 shares authorized, $.001 par value... --
------
Total stockholders' equity........................................... --
------
Total liabilities and stockholders' equity........................... $1,676
======
The accompanying notes are an integral part of this balance sheet.
F-17
NU SKIN ASIA PACIFIC, INC.
NOTES TO BALANCE SHEET
AS OF SEPTEMBER 6, 1996
NOTE 1--DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Nu Skin Asia Pacific, Inc. (the "Company") is a network marketing company
involved in the marketing, distribution and sale of premium quality,
innovative personal care and nutritional products. The Company is the
exclusive distribution vehicle of products produced by Nu Skin International,
Inc. ("NSI") in Japan, Taiwan, Hong Kong, and South Korea, where the Company
currently has operations, and in Thailand, Indonesia, Malaysia, the
Philippines, the People's Republic of China, Singapore and Vietnam, where
operations have not commenced. The Company belongs to a group of affiliated
entities that are under the control of a group of common stockholders (the "Nu
Skin Group"). The Nu Skin Group's affiliates include various entities that
have exclusive Nu Skin marketing rights, distribution rights and trademark
licenses in each of the markets in which the Company operates.
The Company was organized in September 1996 as a holding company in
anticipation of a tax-free reorganization of the distribution and marketing
entities operating in Japan, Taiwan, Hong Kong, and South Korea (collectively
referred to as the "Subsidiaries"). The Reorganization will be undertaken in
anticipation of the initial public offerings (the "Offerings").
The balance sheet should be read in conjunction with the historical Combined
Financial Statements of Nu Skin Asia Pacific, Inc. included elsewhere in this
registration statement.
USE OF ESTIMATES
The preparation of the balance sheet in conformity with generally accepted
accounting principles required management to make estimates and assumptions
that affect the reported amounts of certain assets and liabilities and
disclosures of contingent assets and liabilities at the date of the balance
sheet. Actual results could differ from those estimates. Management believes
that the estimates are reasonable.
INCOME TAXES
Income taxes are computed using the asset and liability method. Under the
asset and liability method, deferred income tax assets and liabilities are
determined based on the difference between the financial and tax bases of
assets and liabilities and are measured using the currently enacted tax rates
and laws in accordance with Statement of Financial Accounting Standards No.
109, Accounting for Income Taxes.
STOCK-BASED COMPENSATION
The Company will adopt Statement of Financial Accounting Standards No. 123
(SFAS 123), Accounting for Stock-Based Compensation. SFAS 123 becomes
effective during 1996. The Company will measure 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 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.
NOTE 2--DEFERRED OFFERING COSTS
The Company has incurred costs totaling $1,676,000, as of September 6, 1996,
in connection with the Offerings. These costs have been reflected as deferred
offering costs in the accompanying balance sheet as of September 6, 1996. If
the Offerings are successful, the costs will be deducted from the proceeds
received from the Offerings. If the Offerings are not successful, the costs
will be charged to expense in the period in which a decision is made to
terminate the Offerings. In such event, the costs would be paid by NSI.
F-18
NU SKIN ASIA PACIFIC, INC.
NOTES TO BALANCE SHEET--(CONTINUED)
AS OF SEPTEMBER 6, 1996
NOTE 3--CAPITAL STOCK
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 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
Subsequent to the Offerings, a group of common stockholders (the "Existing
Stockholders") will own all of the outstanding shares of Class B Common Stock,
which will represent approximately 99% of the combined voting rights of all
outstanding Common Stock. Accordingly, the Existing Stockholders, acting as a
group, will 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.
CERTAIN RELATIONSHIPS WITH STOCKHOLDERS
Prior to or concurrent with the Offerings of the Company's shares, all of
the Company's current stockholders will enter into a Stockholders' Agreement
with the Company which will contain certain limitations on the transfer of
shares of Class A Common Stock and Class B Common Stock. Additionally, each
Existing Stockholder who is a party to the Stockholders' Agreement will grant
the other parties (subject to certain exceptions) a right of first offer to
purchase a pro rata (based on ownership percentages) portion of shares to be
offered as well as any shares not purchased by the other parties.
DIVIDEND REPATRIATION
The Company will conduct all of its operations through the Subsidiaries.
Accordingly, an important source of the Company's income will be dividends and
other distributions from the Subsidiaries. The Company's ability to obtain
dividends or other distributions is subject to, among other things,
restrictions on dividends under applicable local statutes, laws, rules and
regulations, and foreign currency exchange regulations of the countries in
which the Subsidiaries operate. The Subsidiaries' ability to pay dividends or
make other distributions to the Company is also subject to the Subsidiaries
having sufficient funds from their operations which are legally available for
the payment of such dividends or distributions and which are not required to
fund future operations. Because the Company will be a stockholder of each of
the Subsidiaries, the Company's claims will generally rank junior to all other
creditors. Therefore, in the event of an entity's liquidation, there may not
be assets sufficient for the Company to recoup its investment in such entity.
NOTE 4--EQUITY INCENTIVE PLANS (UNAUDITED)
The Company has reserved 4,000,000 of the outstanding shares of the
Company's Class A Common Stock just prior to the Offerings for issuance as
equity incentives to employees and other eligible participants under the
Company's 1996 Stock Incentive Plan. The Company will account for employee
equity incentives in accordance with APB 25.
F-19
NU SKIN ASIA PACIFIC, INC.
NOTES TO BALANCE SHEET--(CONTINUED)
AS OF SEPTEMBER 6, 1996
Prior to the Offerings, certain existing stockholders of the Company (the
"Selling Stockholders") intend to contribute to the Company an aggregate of up
to 1,605,000 of the outstanding shares of the Company's Class A Common Stock
on the date of such contribution. The Company intends to grant to NSI options
to purchase such shares of Common Stock, and NSI intends to assign these
options (the "Distributor Options") to qualifying distributors of NSI in
connection with the Offerings. The Distributor Options will vest subject to
certain conditions related to distributor performance on December 31, 1997.
The Company will record distributor incentive expense for the Distributor
Options, calculated in accordance with SFAS 123.
In addition, prior to the Offerings, the Selling Stockholders will
contribute to NSI and other members of the Nu Skin Group, shares equal to an
aggregate of up to 1,250,000 of the outstanding shares of the Company's Class
A Common Stock on the date of such contribution for issuance to employees of
NSI and employees of other members of the Nu Skin Group as part of an employee
equity incentive plan. Equity incentives granted or awarded under this plan
will vest over the four year period following the grant or award date.
Compensation expense related to equity incentives granted to employees of NSI
and other members of the Nu Skin Group will be recorded by the entity that
benefits from the employee's services.
In addition, in January 1994, NSI agreed to grant one of the Company's
executives an option to purchase 267,500 of the Company's Class A Common
Stock, to become exercisable upon the Reorganization. The exercise price of
this option was set at the estimated fair market value of this equity interest
in January 1994.
F-20
NU SKIN ASIA PACIFIC, INC.
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 1996
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
PRO FORMA
PRO FORMA PRO FORMA FOR THE
NU SKIN ADJUSTMENTS PRO FORMA ADJUSTMENTS REORGANIZATION
ASIA PACIFIC, COMBINED FOR THE FOR THE FOR THE AND THE
INC. SUBSIDIARIES REORGANIZATION REORGANIZATION OFFERINGS OFFERINGS
------------- ------------ -------------- -------------- ----------- --------------
ASSETS
Current assets
Cash and cash
equivalents.......... $ -- $ 81,079 $ -- $ 81,079 $70,765 (g) $151,844
Accounts receivable... -- 8,151 -- 8,151 -- 8,151
Related parties
receivable........... -- 7,840 -- 7,840 -- 7,840
Inventories, net...... -- 46,379 -- 46,379 -- 46,379
Prepaid expenses and
other................ -- 8,027 2,609 (b) 10,636 -- 10,636
------ -------- ------- -------- ------- --------
-- 151,476 2,609 154,085 70,765 224,850
Property and equipment,
net.................... -- 8,672 -- 8,672 -- 8,672
Deferred offering
costs.................. 1,676 -- -- 1,676 (1,676)(g) --
Deferred tax assets..... -- -- 3,160 (b) 3,160 -- 3,160
Other assets............ -- 8,759 -- 8,759 25,000 (g) 33,759
------ -------- ------- -------- ------- --------
Total assets........ $1,676 $168,907 $ 5,769 $176,352 $94,089 $270,441
====== ======== ======= ======== ======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable...... $ -- $ 5,019 $ -- $ 5,019 $ -- $ 5,019
Accrued expenses...... 1,676 49,514 -- 51,190 (1,676)(g) 49,514
Related parties
payable.............. -- 36,115 -- 36,115 -- 36,115
Notes payable to
stockholders......... -- -- 81,893 (d) 81,893 (15,000)(g) 66,893
Note payable to NSI... -- -- -- -- 10,000 (g) 10,000
------ -------- ------- -------- ------- --------
1,676 90,648 81,893 174,217 (6,676) 167,541
------ -------- ------- -------- ------- --------
Note payable to NSI..... -- -- -- -- 10,000 (g) 10,000
------ -------- ------- -------- ------- --------
Stockholders' equity
Capital Stock of
Combined
Subsidiaries.......... -- 4,550 (4,550)(a) -- -- --
Preferred Stock--
25,000,000 shares
authorized, $.001 par
value................ -- -- -- -- -- --
Class A Common Stock--
500,000,000 shares
authorized, $.001 par
value, 8,850,000
shares issued and
outstanding.......... -- -- -- -- 9 (g) 9
Class B Common Stock--
100,000,000 shares
authorized, $.001 par
value, 74,545,000
shares issued and
outstanding.......... -- -- 80 (a) 80 (5)(g) 75
Additional paid-in
capital.............. -- -- -- -- 126,692(g)(h) 126,692
Cumulative foreign
currency translation
adjustment........... -- (3,714) -- (3,714) -- (3,714)
Retained earnings..... -- 77,423 (77,423)(a)(d) 5,769 -- 5,769
5,769(b)
Deferred
compensation......... -- -- -- -- (25,931)(h) (25,931)
Note receivable from
NSI.................. -- -- -- -- (10,000)(f) (10,000)
------ -------- ------- -------- ------- --------
-- 78,259 (76,124) 2,135 90,765 92,900
------ -------- ------- -------- ------- --------
Total liabilities
and stockholders'
equity............. $1,676 $168,907 $ 5,769(b) $176,352 $94,089 $270,441
====== ======== ======= ======== ======= ========
The accompanying notes are an integral part of these unaudited pro forma
consolidated financial statements.
F-21
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
PRO FORMA PRO FORMA FOR THE
NU SKIN ADJUSTMENTS PRO FORMA ADJUSTMENTS REORGANIZATION
ASIA COMBINED FOR THE FOR THE FOR THE AND THE
PACIFIC, INC. SUBSIDIARIES REORGANIZATION REORGANIZATION OFFERINGS OFFERINGS
------------- ------------ -------------- -------------- ----------- --------------
Revenue................. $ -- $358,609 $ -- $358,609 $ -- $358,609
Cost of sales........... -- 96,615 -- 96,615 -- 96,615
---- -------- ------- -------- ------- --------
Gross profit............ -- 261,994 261,994 261,994
---- -------- ------- -------- ------- --------
Operating expenses
Distributor
incentives(f)......... -- 135,722 -- 135,722 -- 135,722
Selling, general and
administrative........ -- 67,475 4,391(c) 71,866 2,452(h) 74,318
---- -------- ------- -------- ------- --------
Total operating
expenses............... -- 203,197 4,391 207,588 2,452 210,040
---- -------- ------- -------- ------- --------
Operating income........ -- 58,797 (4,391) 54,406 (2,452) 51,954
Other income (expense).. -- 511 (2,676)(e) (2,165) (133)(i) (2,298)
---- -------- ------- -------- ------- --------
Income before provision
for income taxes....... -- 59,308 (7,067) 52,241 (2,585) 49,656
Provision for income
taxes.................. -- 19,097 944(b) 20,041 (992)(j) 19,049
---- -------- ------- -------- ------- --------
Net income.............. $ -- $ 40,211 $(8,011) $ 32,200 $(1,593) $ 30,607
==== ======== ======= ======== ======= ========
Net income per share.... $ .40 $ .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-22
NU SKIN ASIA PACIFIC, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
PRO FORMA
PRO FORMA PRO FORMA FOR THE
NU SKIN ADJUSTMENTS PRO FORMA ADJUSTMENTS REORGANIZATION
ASIA PACIFIC, COMBINED FOR THE FOR THE FOR THE AND THE
INC. SUBSIDIARIES REORGANIZATION REORGANIZATION OFFERINGS OFFERINGS
------------- ------------ -------------- -------------- ----------- --------------
Revenue................. $ -- $471,312 $ -- $471,312 $ -- $471,312
Cost of sales........... -- 133,592 -- 133,592 -- 133,592
---- -------- ------- -------- ------ --------
Gross profit............ -- 337,720 -- 337,720 -- 337,720
---- -------- ------- -------- ------ --------
Operating expenses
Distributor
incentives (f)........ -- 175,149 -- 175,149 -- 175,149
Selling, general and
administrative........ -- 69,970 3,293(c) 73,263 1,839(h) 75,102
---- -------- ------- -------- ------ --------
Total operating
expenses............... -- 245,119 3,293 248,412 1,839 250,251
---- -------- ------- -------- ------ --------
Operating income........ -- 92,601 (3,293) 89,308 (1,839) 87,469
Other income (expense).. -- 1,530 -- 1,530 467(i) 1,997
---- -------- ------- -------- ------ --------
Income before provision
for income taxes....... -- 94,131 (3,293) 90,838 (1,372) 89,466
Provision for income
taxes.................. -- 33,810 (810)(b) 33,000 (498)(j) 32,502
---- -------- ------- -------- ------ --------
Net income.............. $ -- $ 60,321 $(2,483) $ 57,838 $ (874) $ 56,964
==== ======== ======= ======== ====== ========
Net income per share.... $ .72 $ .67
======== ========
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-23
NU SKIN ASIA PACIFIC, INC.
NOTES TO UNAUDITED PRO FORMA
CONSOLIDATED BALANCE SHEET AND STATEMENTS OF INCOME
NOTE 1--BASIS OF PRESENTATION
Prior to or concurrently with the initial public offerings (the
"Offerings"), the stockholders of Nu Skin Japan Company, Limited, Nu Skin
Taiwan, Inc., Nu Skin Hong Kong, Inc. and Nu Skin Korea, Inc. (the
"Subsidiaries") will contribute their shares of capital stock to the capital
of Nu Skin Asia Pacific, Inc. (the "Company") in a reorganization which is a
transaction intended to qualify under Section 351 of the Internal Revenue Code
of 1986 as a tax free transfer in exchange for shares of the Company's Class B
Common Stock (the "Reorganization"). The Reorganization will result in each of
the Subsidiaries becoming a wholly-owned subsidiary of the Company. Prior to
the Reorganization, each of the Subsidiaries elected to be taxed as an S
corporation whereby the income tax effects of the Company's activities accrued
directly to the stockholders.
Inasmuch as the Subsidiaries that will be reorganized are under common
control, the Reorganization will be accounted for in a manner similar to a
pooling of interests. Accordingly, the historical balance sheets and related
statements of income, of stockholders' equity and of cash flows are combined
and presented as a single entity after elimination of intercompany
transactions.
The unaudited pro forma financial data reflect the Reorganization and the
Offerings as if all conditions to these transactions had been completed as of
September 30, 1996 for pro forma combined balance sheet data purposes and as
of January 1, 1995 for pro forma combined statement of income data purposes.
These data do not necessarily reflect the results of operations or financial
position of the Company that would have resulted had such transactions
actually been consummated as of such dates. Also, these data are not
necessarily indicative of the future results of operations of future financial
position of the Company.
NOTE 2--PRO FORMA ADJUSTMENTS
The pro forma adjustments reflect the following:
REORGANIZATION
a) Reflects the contribution by the existing stockholders of their
interest in the Subsidiaries in exchange for all shares of the Class B
Common Stock. As a result, the Company will become the parent company and
the Subsidiaries will become wholly-owned subsidiaries of the Company.
b) Reflects the recognition of a deferred tax asset of 5.8 million
relating to adjustments for U.S. Federal and state income taxes as if the
Company had been taxed as a C Corporation rather than an S Corporation
since inception.
c) Reflects incremental costs of $4.4 million per year related to
operating 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.
d) Reflects the distribution of $81.9 million of notes (the "S
Distribution Notes") to the existing stockholders of the Company in respect
of the earned and undistributed taxable S corporation earnings at September
30, 1996 that would have been distributed had the Subsidiaries' S
corporation status been terminated on September 30, 1996.
The adjustments reflect the distribution and the related issuance of
promissory notes. The Company estimates that, at the Offerings, it will
reserve between $60.0 million and $70.0 million of cash on hand for
repayment of the S Distribution Notes. The balance of the S Distribution
Notes will be repaid from cash generated by operations.
F-24
[COMPANY LOGO WITH THE WORDS "BEAUTY, HEALTH & OPPORTUNITY" AND "BEAUTY,"
"HEALTH" AND "OPPORTUNITY."]
[PICTURE OF A WOMAN USING A NU SKIN NAIL CARE KIT.]
[PICTURE OF A COUPLE WALKING IN A FIELD.]
[PICTURE OF A MAN AND WOMAN BRUSHING A CHILD'S HAIR.]
[PICTURE OF CHRISTIE BRINKLEY, A SPOKESPERSON FOR NU SKIN PRODUCTS, WITH A
HORSE.]
[PICTURE OF A NU SKIN DISTRIBUTOR ON THE TELEPHONE AND CONSUMING A NU SKIN
BEVERAGE PRODUCT.]
[PICTURE OF A MAN AND A WOMAN WHO IS APPLYING NU SKIN COSMETICS.]
[PICTURE OF A NU SKIN DISTRIBUTOR DEMONSTRATING PRODUCTS TO A CUSTOMER.]
[PICTURE OF CHRISTIE BRINKLEY, A SPOKESPERSON FOR NU SKIN PRODUCTS, WITH A
HORSE,
CONTINUED FROM PREVIOUS PAGE.]
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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............................................................. 10
The Reorganization and S Corporation Distribution........................ 23
Use of Proceeds.......................................................... 25
Dividend Policy.......................................................... 25
Capitalization........................................................... 26
Dilution................................................................. 27
Selected Combined Financial and Other Information........................ 28
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 30
Business................................................................. 39
Management............................................................... 64
Certain Relationships and Related Transactions........................... 71
Principal and Selling Stockholders....................................... 73
Shares Eligible for Future Sale.......................................... 76
Description of Capital Stock............................................. 79
Certain United States Tax Consequences to Non-United States Holders...... 83
Underwriting............................................................. 85
Legal Matters............................................................ 89
Experts.................................................................. 89
Additional Information................................................... 89
Index to Financial Statements............................................ F-1
UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE CLASS A COMMON STOCK, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
7,600,000 SHARES
[LOGO]
CLASS A COMMON STOCK
----------------
PROSPECTUS
----------------
MERRILL LYNCH & CO.
MORGAN STANLEY & CO.
INCORPORATED
DEAN WITTER REYNOLDS INC.
NOMURA SECURITIES INTERNATIONAL, INC.
, 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+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 [ALTERNATE PAGE FOR RULE 415]
PRELIMINARY PROSPECTUS DATED NOVEMBER 8, 1996
PROSPECTUS
OPTIONS TO PURCHASE 1,605,000 SHARES OF CLASS A COMMON STOCK
2,964,000 SHARES OF CLASS A COMMON STOCK
[Logo]
--------------
This Prospectus relates to the offering by Nu Skin International, Inc.
("NSI"), an affiliate of Nu Skin Asia Pacific, Inc. (the "Company"), of options
(the "Distributor Options") to purchase 1,605,000 shares of Class A Common
Stock, the offering by the Company of 1,605,000 shares of Class A Common Stock
to be issued upon the exercise of the Distributor Options, the offering by the
Company to its employees of 109,000 shares of Class A Common Stock in
connection with the awarding of employee stock bonus awards, and the offering
by NSI and its affiliates (other than the Company) (the "Rule 415 Selling
Stockholders") of 1,250,000 shares of Class A Common Stock to their employees
as employee stock bonus awards. The offering of the Distributor Options, the
underlying shares of Class A Common Stock underlying the Distributor Options
and the employee stock bonus awards are collectively referred to as the "Rule
415 Offerings." See "Rule 415 Selling Stockholders" and "Plan of Distribution".
The Company will not receive any of the proceeds from the distribution of
shares by the Rule 415 Selling Stockholders in connection with the employee
stock bonus awards. The Company will receive the proceeds from the issuance of
shares in connection with the exercise of the Distributor Options.
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 existing
stockholders (the "Existing Stockholders") of the Company prior to the
consummation of the Offerings (the "Rule 415 Offerings"). 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."
In addition to the shares underlying the Distributor Options and the employee
stock bonus awards, the Company has registered 7,600,000 shares of Class A
Common Stock, including 4,750,000 shares being offered by the Company and
2,850,000 shares being offered by certain selling stockholders (the "Selling
Stockholders"), for issuance and sale in connection with underwritten offerings
(the "Offerings") of such shares of Class A Common Stock and 884,317 shares and
255,683 shares of Class A Common Stock which the U.S. Underwriters and the
International Managers, respectively, have the option to purchase from the
Selling Stockholders to cover over-allotments, if any. After consummation of
the Offerings, the Existing Stockholders will beneficially own shares of Common
Stock having approximately 98.8% of the combined voting power of the
outstanding shares of Common Stock.
Prior to the Offerings, there has been no public market for the Class A
Common Stock.
The Class A Common Stock has been approved for listing on the New York Stock
Exchange under the symbol "NUS," subject to official notice of issuance.
SEE "RISK FACTORS," BEGINNING ON PAGE 10, FOR A DISCUSSION OF CERTAIN FACTORS
WHICH SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE SECURITIES OFFERED
HEREBY.
--------------
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 PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)(3) SELLING STOCKHOLDERS
- -------------------------------------------------------------------------------
Per Option(4)......... -- -- -- --
- -------------------------------------------------------------------------------
Per Share(4).......... $ -- $ $
- -------------------------------------------------------------------------------
Total................. $ -- $ $
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) The Rule 415 Offerings are being made by the Rule 415 Selling Stockholders
and by the Company from time to time pursuant to Rule 415 under the
Securities Act of 1933 and are not being made in connection with an
underwritten distribution. Therefore, no underwriting commissions or
discounts will be paid in connection with the Rule 415 Offerings. See "Rule
415 Selling Stockholders" and "Plan of Distribution."
(2) Before deducting expenses payable by the Company, which, together with the
expenses of the Offerings, are estimated to be $3,000,000.
(3) Includes proceeds from the exercise of the Distributor Options to purchase
shares of Class A Common Stock. See "Rule 415 Selling Stockholders" and
"Plan of Distribution."
(4) No consideration is being paid upon the issuance and grant of the
Distributor Options and the awarding of employee stock bonus awards by the
Rule 415 Selling Stockholders. See "Rule 415 Selling Stockholders" and
"Plan of Distribution."
--------------
The date of this Prospectus is , 1996.
[ALTERNATE PAGE FOR RULE 415]
THE RULE 415 OFFERINGS
DISTRIBUTOR OPTIONS. Prior to the date of this Prospectus, the Existing
Stockholders will contribute to the Company 1,605,000 shares of the Company's
Class A Common Stock for use in implementing a distributor equity incentive
program. Also prior to the date of this Prospectus, the Company will grant to
NSI 1,605,000 options to purchase such shares (the "Distributor Options"). Each
Distributor Option entitles the holder to purchase one share of Class A Common
Stock.
NSI intends to initially allocate the Distributor Options to executive
distributors who have achieved gold or higher executive distributor levels
under the Global Compensation Plan on the date of this Prospectus in each
country where NSI conducts business and where local laws permit the issuance of
options hereunder and in a manner similar to that described below. From
December 1, 1996 until August 31, 1997 (the "Qualification Period"), existing
and new distributors will have the opportunity to qualify for a reallocation of
the Distributor Options from NSI by achieving gold or higher executive
distributor levels under the Global Compensation Plan as of August 31, 1997
(such qualifying distributors are hereinafter referred to as "Eligible
Distributors"). At the end of the Qualification Period, each Eligible
Distributor will receive Distributor Options based upon a reallocation of the
Distributor Options determined by multiplying the total number of Distributor
Options by the quotient obtained by dividing (x) the Eligible Distributor's
weighted total compensation (determined in the manner set forth below) under
the Global Compensation Plan during the Qualification Period (the "Weighted
Individual Compensation") by (y) the sum of the Weighted Individual
Compensation earned by all Eligible Distributors under the Global Compensation
Plan during the Qualification Period (the "Weighted Total Compensation"). For
purposes of calculating such quotient, the following weighting factors will be
applied to an Eligible Distributor's compensation to calculate "Weighted
Individual Compensation" according to executive distributor levels:
EXECUTIVE
DISTRIBUTOR
LEVEL
EXECUTIVE DISTRIBUTOR LEVEL WEIGHTING FACTOR
--------------------------- ----------------
Hawaiian Blue Diamond..................................... 100%
Blue Diamond.............................................. 94%
Diamond................................................... 86%
Emerald................................................... 82%
Ruby...................................................... 78%
Lapis..................................................... 74%
Gold...................................................... 72%
In addition, for each 1% increase in average monthly
commissions earned during the Qualification Period that is
greater than actual commission earnings during September 1996
for a gold or higher executive distributor as of September
1996, or for a distributor qualifying as a gold or higher
executive distributor after September 1996, actual
commissions earned during such distributor's first month as a
gold or higher executive distributor (the "Base Month"), the
Executive Distributor Level Weighting Factors will increase
by one third ( 1/3) of 1% up to a maximum increase of 100%
(such increase is referred to as the "Growth Weighting
Factor").
For purposes of illustration, for the nine-month period ended on August 31,
1996 (the "Illustrative Qualification Period"), the Weighted Total Compensation
will be assumed to have been $200,000,000. An Emerald level distributor who
earned total commissions of $40,000 (or average monthly commissions of $4,444)
during the Illustrative Qualification Period and who had previously earned
commissions of $1,000 during the Base Month would apply a weighting factor of
182% to such commissions (computed using the 82% Executive Distributor Level
Weighting Factor for an Emerald level distributor plus a 100% Growth Weighting
Factor based on the 344% increase in average commissions during the
Illustrative Qualification Period over commissions earned during the Base
Month), resulting in Weighted Individual Compensation of $72,800. Such
distributor's allotment of the Distributor Options would be equal to the
quotient of his or her Weighted Individual Compensation ($72,800) divided by
the Weighted Total Compensation ($200,000,000), multiplied by the total number
of Distributor Options (1,605,000). Such distributor would therefore be
allocated 584 of the Distributor Options.
5
[ALTERNATE PAGE FOR RULE 415]
The foregoing example is presented for illustrative purposes only. There can
be no assurance that the number of Eligible Distributors will remain constant
during the Qualification Period. Given the fixed number of Distributor Options
available, the number of Distributor Options allocable to an Eligible
Distributor will decrease as the total number of Eligible Distributors
increases and conversely will increase as the total number of Eligible
Distributors decreases. NSI has historically experienced periods of significant
fluctuations in its total number of executive distributors and may experience
such fluctuations in the future. An increase in the total number of Eligible
Distributors during the Qualification Period could result in a material
reduction in the number of Distributor Options allocable to an individual
Eligible Distributor. The number of Distributor Options allocable to an
Eligible Distributor will also decrease as the number of Eligible Distributors
at higher executive distributor levels increases as a proportion of all
Eligible Distributors and conversely will increase as the number of Eligible
Distributors at higher executive distributor levels decreases as a proportion
of all Eligible Distributors. There can be no assurance that the proportion of
Eligible Distributors at each executive distributor level will remain constant
during the Qualification Period. In addition, the number of Distributor Options
allocable to an Eligible Distributor will decrease as such Eligible
Distributor's compensation decreases as a proportion of total compensation paid
to all Eligible Distributors and conversely will increase as such Eligible
Distributor's compensation increases as a proportion of total compensation paid
to all Eligible Distributors. There can be no assurance that an Eligible
Distributor's compensation will remain constant as a percentage of total
Eligible Distributor compensation during the Qualification Period. Further,
there can be no assurance that an Eligible Distributor will be able to earn
particular compensation amounts during the Qualification Period.
The availability of the Distributor Options in each country in which NSI
distributors reside is entirely dependent upon and subject to NSI's ability to
secure any necessary regulatory approvals, qualifications or exemptions in each
such country. It is anticipated that necessary regulatory approvals or
qualifications will not be secured in certain countries until sometime after
December 1, 1996, the commencement of the Qualification Period. In the event
the Distributor Options are not made available to distributors in a given
country ("Deferred Qualification Countries") until after commencement of the
Qualification Period, the formulas referenced above will be modified as
follows. For purposes of calculating Weighted Individual Compensation and
Weighted Total Compensation, distributors resident in Deferred Qualification
Countries shall be deemed to have earned during each month during the
Qualification Period for which Distributor Options were not available,
commissions equal to the average monthly commissions actually earned by such
distributors during the portion of the Qualification Period for which
Distributor Options were available in such Deferred Qualification Country.
For Distributor Options to vest, an Eligible Distributor will generally be
required to maintain, during the period from September 1, 1997, through
December 31, 1997 (the "Vesting Period"), the executive level he or she
achieved by the end of the Qualification Period (the "Qualifying Executive
Level"). If an Eligible Distributor fails to maintain the Qualifying Executive
Level for any month during the Vesting Period, the number of Distributor
Options vested in such Eligible Distributor will be recalculated at the end of
the Vesting Period to be that number of Distributor Options such Eligible
Distributor would have been allocated had he or she achieved the lowest
executive distributor level held by him or her during the Vesting Period as of
August 31, 1997 (the "Recalculated Distributor Options"). For example, if an
Eligible Distributor ends the Qualification Period as a Diamond executive
distributor with an Executive Distributor Level Weighting Factor of 86% and a
Growth Weighting Factor of 15%, resulting in a combined weighting factor of
101%, but during the Vesting Period the lowest level to which the distributor
falls is Ruby level, which carries an Executive Distributor Level Weighting
Factor of 78% (the Growth Weighting Factor would remain unchanged) the combined
weighting factor would be reduced to 93%. Therefore, the difference between the
number of Distributor Options allocated to an Eligible Distributor at the end
of the Qualification Period and the Recalculated Distributor Options, if the
amount of Recalculated Distributor Options is lower, will be forfeited by such
Eligible Distributor. If an Eligible Distributor ceases to be an executive
distributor at any time during the Vesting Period, all Distributor Options held
by such Eligible Distributor will be immediately forfeited. Forfeited options
will not vest but will revert to NSI.
6
[ALTERNATE PAGE FOR RULE 415]
Distributor Options vested in an Eligible Distributor will become exercisable
on December 31, 1997, and will remain exercisable for a four-year period
following such date provided the Eligible Distributor remains an executive
distributor until the date of exercise. No distributor options will be
exercisable after December 31, 2001. By exercising any portion of the
Distributor Options, each Eligible Distributor who is granted more than 3,000
Distributor Options will agree not to resell in any given six-month period more
than 33% of the shares of Class A Common Stock issuable upon exercise of the
Distributor Options originally granted to such Eligible Distributor. Upon
vesting, Distributor Options will be exercisable at 25% of the initial price
per share to the public in the Offerings (the "Exercise Price").
By receiving an allocation of Distributor Options at the end of the
Qualification Period, each Eligible Distributor confirms his or her agreement
to continue to resell or personally consume at least 80% of all products
purchased by such distributor per month. In addition, product returns during
the Qualification or Vesting Periods will reduce commission levels and may
affect distributor level, consequently impacting the number of Distributor
Options received by an individual distributor. In the event of product returns
occurring after the Qualification or Vesting Periods which would have affected
distributor levels or qualification for or vesting of Distributor Options had
such product returns been made during the Qualification or Vesting Periods, NSI
reserves the right to use any mechanism available to it under the NSI
distributor policies and procedures, as may be amended from time to time, to
recoup the value of the Distributor Options received by an individual
distributor on the Vesting Date in excess of the value of Distributor Options
which would have vested had such returns been made prior to the Vesting Date.
The Distributor Option program is not intended to be an executive
distributor's primary source of income. Even though the exact number of
Distributor Options initially allocated to an individual distributor may
fluctuate materially during the Qualification Period due to increases and
decreases in overall executive distributor activity, an executive distributor's
primary income source, i.e., product sales and commissions, will continue to be
based on the efforts of the executive distributor and leadership of his or her
downline organization.
EMPLOYEE STOCK BONUS AWARDS. Prior to the date of this Prospectus, the
Existing Stockholders will also contribute an aggregate of 1,250,000 shares of
the Company's Class A Common Stock (the "Employee Shares") to NSI and its
affiliates (other than the Company) for use in connection with the employee
stock bonus awards to be made by NSI and its affiliates (other than the
Company) to their respective employees in connection with the 415 Offerings.
The shares of Class A Common Stock underlying each such employee stock bonus
award will be issued to the employee recipient at a rate of 25% per year
commencing one year following the date of the award, provided the employee
recipient is still employed by NSI or one of its affiliates (other than the
Company). The Company also intends to issue 109,000 shares of Class A Common
Stock to its employees in connection with employee stock bonus awards to be
made to the Company's employees on the same terms as described above pursuant
to the Nu Skin Asia Pacific, Inc. 1996 Stock Incentive Plan.
REGULATORY AND TAX ISSUES. The availability of Distributor Options and
employee stock bonus awards in each country in which NSI distributors and/or
employees reside is entirely dependent upon and subject to NSI's ability to
secure any necessary regulatory approvals or qualifications in each such
country. There can be no assurance that such qualifications will be secured.
The receipt of Distributor Options and employee stock bonus awards will also
subject the recipient to potentially material income tax and capital gains tax
implications. See "Rule 415 Selling Stockholders--Certain U.S. Tax Consequences
to Recipients of Distributor Options and Employee Stock Bonus Awards" and "--
Non-U.S. Regulatory and Tax Consequences."
The Distributor Options, the shares of Class A Common Stock underlying the
Distributor Options and the employee stock bonus awards are included in this
Prospectus pursuant to Rule 415 under the Securities Act of 1933, as amended
(the "1933 Act"). The distribution of the Distributor Options will occur for
purposes of Rule 415 upon the assignment of the Distributor Options by NSI to
the distributors. The shares of Class A Common Stock will be issued by the
Company upon the exercise of the Distributor Options. The Company will not
receive any of the proceeds from the distribution of shares in connection with
the employee stock bonus awards. The Company will receive the proceeds from the
issuance of shares in connection with the exercise of the Distributor Options.
See "Rule 415 Selling Stockholders."
7
[ALTERNATE PAGE FOR RULE 415]
Distributor Options offered by
NSI(1)........................... 1,605,000 Distributor Options
Common Stock underlying the
Distributor
Options(2) ...................... 1,605,000 shares of Class A Common Stock
Employee stock bonus awards
offered by the Rule 415 Selling
Stockholders(3).................. 1,250,000 shares of Class A Common Stock
Employee stock bonus awards
offered by the Company........... 109,000 shares of Class A Common Stock
Common Stock to be outstanding
after the Rule 415 Offerings:
Class A Common
Stock(4)(6)(7)(8).............. 10,564,000 shares
Class B Common Stock(5)(8)...... 74,545,000 shares
Total Common Stock............ 85,109,000 shares
New York Stock Exchange symbol.... "NUS"
Voting rights..................... The Class A Common Stock and Class B Common
Stock vote as a single class on all mat-
ters, except as otherwise required by law,
with each share of Class A Common Stock en-
titling 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 Existing Stockhold-
ers. After consummation of the Offerings,
the Existing Stockholders will beneficially
own shares of Common Stock having approxi-
mately 98.8% of the combined voting power
of the outstanding shares of Common Stock
(approximately 98.7% if the Underwriters'
over-allotment options are exercised in
full).
Risk Factors...................... Prospective investors should consider cer-
tain risk factors and uncertainties rela-
tive to the Company, its business and the
Class A Common Stock offered hereby includ-
ing, without limitation, the Company's re-
liance on the independent distributors of
NSI, the potential effects of adverse pub-
licity, the potential negative impact of
distributor actions, government regulation
of direct selling activities, government
regulation of products and marketing, reli-
ance on certain distributors and the poten-
tial divergence of interests between dis-
tributors and the Company, the Company's
entry into new markets, the management of
the Company's growth, the possible adverse
effect on the Company of a change in the
status of Hong Kong, the Company's rela-
tionship with and reliance upon NSI and po-
tential conflicts of interest related
thereto, control by the Existing Stockhold-
ers and the anti-takeover effect of dual
classes of Common Stock,
7--1
[ALTERNATE PAGE FOR RULE 415]
the impact on income due to the Distributor
Options, the Company's reliance on and con-
centration of outside manufacturers, the
Company's reliance on operations of and
dividends and distributions from its sub-
sidiaries, issues related to transfer pric-
ing and taxation, potential increases in
distributor compensation expense,
seasonality and cyclicality, product
liability,competition, operations outside
the United States, currency risks, import
restrictions, duties and regulation of con-
sumer goods, the anti-takeover effects of
certain charter, contractual and statutory
provisions, the absence of a public market
for the Class A Common Stock, factors re-
lated to the determination of the offering
price, fluctuations in the price of the
Class A Common Stock, the existence of
shares eligible for future sale into the
Company's market for the Class A Common
Stock upon exercise of the Distributor Op-
tions, employee stock bonus awards and oth-
erwise, dilution and the absence of divi-
dends.
- --------
(1) Includes options granted by the Company to NSI to purchase shares of Class
A Common Stock contributed to the Company by the existing stockholders of
the Company prior to the Rule 415 Offerings.
(2) Consists of shares of Class A Common Stock issuable upon the exercise of
the Distributor Options at an exercise price equal to 25% of the initial
public offering price in the Offerings.
(3) Includes shares of Class A Common Stock contributed to the Rule 415 Selling
Stockholders prior to the Rule 415 Offerings by certain existing
stockholders of the Company.
(4) Includes (a) 2,964,000 shares of Class A Common Stock to be offered in the
Rule 415 Offerings (assuming exercise of all 1,605,000 Distributor
Options); and (b) 7,600,000 shares of Class A Common Stock being offered in
the Offerings by the Company and the Selling Stockholders.
(5) Gives effect to the conversion by the existing stockholders of the Company
prior to the Rule 415 Offerings of (a) 1,605,000 shares of Class B Common
Stock into shares of Class A Common Stock for issuance upon the exercise of
the Distributor Options; and (b) 1,250,000 shares of Class B Common Stock
into shares of Class A Common Stock for issuance pursuant to employee stock
bonus awards.
(6) Does not include: (i) 3,891,000 shares of Class A Common Stock reserved for
issuance pursuant to the 1996 Stock Incentive Plan; and (ii) 267,500 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 Sales."
(7) Assumes no exercise of the Underwriters' over-allotment options aggregating
1,140,000 shares of Class A Common Stock, which have been granted by the
Selling Stockholders in connection with the Offerings.
(8) All shares of Class B Common Stock are currently held by the Existing
Stockholders and each such share is convertible at any time into one share
of Class A Common Stock and converts automatically into one share of Class
A Common Stock (i) upon a transfer to a person other than an Existing
Stockholder, 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."
7--2
[ALTERNATE PAGE FOR RULE 415]
RISKS RELATED TO REALLOCATION AND VESTING OF DISTRIBUTOR OPTIONS; DECREASE IN
NUMBER OF DISTRIBUTOR OPTIONS AVAILABLE; EFFECT OF PRODUCT RETURNS
For Distributors Options to vest, an Eligible Distributor will generally be
required to maintain, during the Vesting Period, the Qualifying Executive
Level. If an Eligible Distributor fails to maintain the Qualifying Executive
Level for any month during the Vesting Period, the number of Distributor
Options vested in such Eligible Distributor will be recalculated at the end of
the Vesting Period. If an Eligible Distributor ceases to be an executive
distributor at any time during the Vesting Period, all Distributor Options
held by such Eligible Distributor will be immediately forfeited. Forfeited
options will not vest but will revert to NSI. Distributor Options vested in an
Eligible Distributor will become exercisable on December 31, 1997, and remain
exercisable for a four year period following such date provided the Eligible
Distributor remains an executive distributor until the date of exercise.
There can be no assurance that the number of Eligible Distributors will
remain constant during the Qualification Period. Given the fixed number of
Distributor Options available, the number of Distributor Options allocable to
an Eligible Distributor will decrease as the total number of Eligible
Distributors increases and conversely will increase as the total number of
Eligible Distributors decreases. NSI has historically experienced periods of
significant fluctuations in its total number of executive distributors and may
experience such fluctuations in the future. An increase in the total number of
Eligible Distributors during the Qualification Period could result in a
material reduction in the number of Distributor Options allocable to an
individual Eligible Distributor. The number of Distributor Options allocable
to an Eligible Distributor will also decrease as the number of Eligible
Distributors at higher executive distributor levels increases as a proportion
of all Eligible Distributors and conversely will increase as the number of
Eligible Distributors at higher executive distributor levels decreases as a
proportion of all Eligible Distributors. There can be no assurance that the
proportion of Eligible Distributors at each executive distributor level will
remain constant during the Qualification Period. In addition, the number of
Distributor Options allocable to an Eligible Distributor will decrease as such
Eligible Distributor's compensation or rate of compensation growth decreases
as a proportion of total compensation or total compensation growth paid to all
Eligible Distributors and conversely will increase as such Eligible
Distributor's compensation increases as a proportion of total compensation or
total compensation growth paid to all Eligible Distributors. There can be no
assurance that an Eligible Distributor's compensation will remain constant as
a percentage of total Eligible Distributor compensation during the
Qualification Period. Further, there can be no assurance that an Eligible
Distributor will be able to earn particular compensation amounts during the
Qualification Period.
Product returns during the Qualification or Vesting Periods will reduce
commission levels and may affect distributor levels, consequently impacting
the number of Distributor Options received by an individual distributor. In
the event of product returns occurring after the Qualification or Vesting
Periods which would have affected distributor levels or qualification for or
vesting of Distributor Options had such product returns been made during the
Qualification or Vesting Periods, NSI may recoup the value of the Distributor
Options received by an individual distributor on the Vesting Date in excess of
the value of Distributor Options which would have vested had such returns been
made prior to the Vesting Date. There can be no assurance that product returns
will not affect the number of Distribution Options or the value of
Distribution Options received by a distributor. See "Plan of Distribution--
Distributor Options."
NSI has granted in the past, and may continue to grant in the future,
exceptions under its Global Compensation Plan permitting various distributors
to receive compensation at higher levels than they would have been entitled to
receive based exclusively on their personal and group sales volumes. Although
exceptions are discouraged, management believes that this arrangement is
important in retaining the loyalty and dedication of distributors in certain
situations. In keeping with this strategy, NSI intends to utilize a weighting
factor in granting Distributor Options to these individuals based on the
distributor level at which they receive commissions rather than on the level
dictated by their technical status under the Global Compensation Plan. Such a
policy
22
[ALTERNATE PAGE FOR RULE 415
may result in other distributors who have not received a similar preference
receiving fewer options than they would have received were such exceptions not
being made under the Global Compensation Plan. See "Plan of Distribution."
RESTRICTIONS ON RESALE OF SHARES UNDERLYING DISTRIBUTOR OPTIONS
By exercising any portion of their Distributor Options, each Eligible
Distributor who is granted more than 3,000 Distributor Options will agree not
to resell in any given six-month period more than 33% of the shares of Class A
Common Stock issuable upon exercise of the Distributor Options vested in each
Eligible Distributor. See "Plan of Distribution--Distributor Options."
REGULATORY AND TAXATION RISKS
The availability of Distributor Options and employee stock bonus awards in
each country in which NSI distributors and/or employees reside is entirely
dependent upon and subject to NSI's ability to secure any necessary regulatory
approvals or qualifications in each such country. There can be no assurance
that such qualifications will be secured. The receipt of Distributor Options
and employee stock bonus awards will also subject the recipient to potentially
material income tax and capital gains tax implications. The Company and its
affiliates anticipate that the Distributor Options, the shares of Class A
Common Stock underlying the Distributor Options and the employee stock bonus
awards will be qualified in some form pursuant to the securities laws of each
jurisdiction in which the Company and its affiliates operate. There can be no
assurance, however, that NSI will be able to qualify the Distributor Options
and the employee stock bonus awards in each jurisdiction or that, if
qualified, the governmental authorities in such jurisdictions will not require
material modifications to the terms of the programs as they are currently
contemplated to be implemented. In certain European countries, including
France and Spain, only executive distributors as of the date of this
Prospectus will be allowed to participate in the Distributor Option program.
No assurances can be given as to the timing of any governmental approvals
received in connection with the Distributor Options. In addition, there can be
no assurance that the laws and relevant regulations and judicial and
administrative interpretations in such jurisdictions will not change in a
manner that has a material impact on the ability of NSI to adopt or maintain
such programs in such jurisdictions. See "Rule 415 Selling Stockholders--
Certain U.S. Tax Consequences to Recipients of Distributor Options and
Employee Stock Bonus Awards" and "--Non U.S. Regulatory and Tax Consequences."
22--1
[ALTERNATE PAGE FOR RULE 415]
RULE 415 SELLING STOCKHOLDERS
DISTRIBUTOR OPTIONS. Prior to the date of this Prospectus, the Existing
Stockholders will contribute to the Company 1,605,000 shares of the Company's
Class A Common Stock for use in implementing a distributor equity incentive
program. Also prior to the date of this Prospectus, the Company will grant to
NSI 1,605,000 options to purchase such shares (the "Distributor Options").
Each Distributor Option entitles the holder to purchase one share of Class A
Common Stock.
NSI intends to initially allocate the Distributor Options to executive
distributors who have achieved gold or higher executive distributor levels
under the Global Compensation Plan on the date of this Prospectus in each
country where NSI conducts business and where local laws permit the issuance
of options hereunder and in a manner similar to that described below. From
December 1, 1996 until August 31, 1997 (the "Qualification Period"), existing
and new distributors will have the opportunity to qualify for a reallocation
of the Distributor Options from NSI by achieving gold or higher executive
distributor levels under the Global Compensation Plan as of August 31, 1997
(such qualifying distributors are hereinafter referred to as "Eligible
Distributors"). At the end of the Qualification Period, each Eligible
Distributor will receive Distributor Options based upon a reallocation of the
Distributor Options determined by multiplying the total number of Distributor
Options by the quotient obtained by dividing (x) the Eligible Distributor's
weighted total compensation (determined in the manner set forth below) under
the Global Compensation Plan during the Qualification Period (the "Weighted
Individual Compensation") by (y) the sum of the Weighted Individual
Compensation earned by all Eligible Distributors under the Global Compensation
Plan during the Qualification Period (the "Weighted Total Compensation"). For
purposes of calculating such quotient, the following weighting factors will be
applied to an Eligible Distributor's compensation to calculate "Weighted
Individual Compensation" according to executive distributor levels:
EXECUTIVE LEVEL
DISTRIBUTOR
EXECUTIVE DISTRIBUTOR LEVEL WEIGHTING FACTOR
--------------------------- ----------------
Hawaiian Blue Diamond..................................... 100%
Blue Diamond.............................................. 94%
Diamond................................................... 86%
Emerald................................................... 82%
Ruby...................................................... 78%
Lapis..................................................... 74%
Gold...................................................... 72%
In addition, for each 1% increase in average monthly
commissions earned during the Qualification Period that is
greater than actual commission earnings during September 1996
for a gold or higher executive distributor as of September 1996,
or for a distributor qualifying as a gold or higher executive
distributor after September 1996, actual commissions earned
during such distributor's first month as a gold or higher
executive distributor (the "Base Month"), the above referenced
Weighting Factors will increase by one third ( 1/3) of 1% up to
a maximum increase of 100% (such increase is referred to as the
"Growth Weighting Factor").
For purposes of illustration, for the nine-month period ended on August 31,
1996 (the "Illustrative Qualification Period"), the Weighted Total
Compensation will be assumed to have been $200,000,000. An Emerald level
distributor who earned total commissions of $40,000 (or average monthly
commission of $4,444) during the Illustrative Qualification Period and who had
previously earned commissions of $1,000 during the Base Month, would apply a
weighting factor of 182% to such commissions (computed using the 82% Executive
Distributor Level Weighting Factor for an Emerald level distributor plus a
100% Growth Weighting Factor based on the 344% increase in average commissions
during the Illustrative Qualification Period over commissions earned during
the Base Month), resulting in Weighted Individual Compensation of $72,800.
Such distributor's allotment of the Distributor Options would be equal to the
quotient of his or her Weighted Individual Compensation ($72,800) divided by
the Weighted Total Compensation ($200,000,000), multiplied by the total number
of Distributor Options (1,605,000). Such distributor would therefore be
allocated 584 of the Distributor Options.
68
[ALTERNATE PAGE FOR RULE 415]
The foregoing example is presented for illustrative purposes only. There can
be no assurance that the number of Eligible Distributors will remain constant
during the Qualification Period. Given the fixed number of Distributor Options
available, the number of Distributor Options allocable to an Eligible
Distributor will decrease as the total number of Eligible Distributors
increases and conversely will increase as the total number of Eligible
Distributors decreases. NSI has historically experienced periods of
significant fluctuations in its total number of executive distributors and may
experience such fluctuations in the future. An increase in the total number of
Eligible Distributors during the Qualification Period could result in a
material reduction in the number of Distributor Options allocable to an
individual Eligible Distributor. The number of Distributor Options allocable
to an Eligible Distributor will also decrease as the number of Eligible
Distributors at higher executive distributor levels increases as a proportion
of all Eligible Distributors and conversely will increase as the number of
Eligible Distributors at higher executive distributor levels decreases as a
proportion of all Eligible Distributors. There can be no assurance that the
proportion of Eligible Distributors at each executive distributor level will
remain constant during the Qualification Period. In addition, the number of
Distributor Options allocable to an Eligible Distributor will decrease as such
Eligible Distributor's compensation decreases as a proportion of total
compensation paid to all Eligible Distributors and conversely will increase as
such Eligible Distributor's compensation increases as a proportion of total
compensation paid to all Eligible Distributors. There can be no assurance that
an Eligible Distributor's compensation will remain constant as a percentage of
total Eligible Distributor compensation during the Qualification Period.
Further, there can be no assurance that an Eligible Distributor will be able
to earn particular compensation amounts during the Qualification Period.
The availability of the Distributor Options in each country in which NSI
distributors reside is entirely dependent upon and subject to NSI's ability to
secure any necessary regulatory approvals, qualifications or exemptions in
each such country. It is anticipated that necessary regulatory approvals or
qualifications will not be secured in certain countries until sometime after
December 1, 1996, the commencement of the Qualification Period. In the event
the Distributor Options are not made available to distributors in a given
country ("Deferred Qualification Countries") until after commencement of the
Qualification Period, the formulas referenced above will be modified as
follows. For purposes of calculating Weighted Individual Compensation and
Weighted Total Compensation, distributors resident in Deferred Qualification
Countries shall be deemed to have earned during each month during the
Qualification Period for which Distributor Options were not available,
commissions equal to the average monthly commissions actually earned by such
distributors during the portion of the Qualification Period for which
Distributor Options were available in such Deferred Qualification Country.
For Distributor Options to vest, an Eligible Distributor will generally be
required to maintain, during the period from September 1, 1997, through
December 31, 1997 (the "Vesting Period"), the executive level he or she
achieved by the end of the Qualification Period (the "Qualifying Executive
Level"). If an Eligible Distributor fails to maintain the Qualifying Executive
Level for any month during the Vesting Period, the number of Distributor
Options vested in such Eligible Distributor will be recalculated at the end of
the Vesting Period to be that number of Distributor Options such Eligible
Distributor would have been allocated had he or she achieved the lowest
executive distributor level held by him or her during the Vesting Period as of
August 31, 1997 (the "Recalculated Distributor Options"). For example, if an
Eligible Distributor ends the Qualification Period as a Diamond executive
distributor with an Executive Distributor Level Weighting Factor of 86% and a
Growth Weighting Factor of 15%, resulting in a combined weighting factor of
101%, but during the Vesting Period the lowest level to which the distributor
falls is Ruby level, which carries an Executive Distributor Level Weighting
Factor of 78% (the Growth Weighting Factor would remain unchanged) the
combined weighting factor would be reduced to 93%. Therefore, the difference
between the number of Distributor Options allocated to an Eligible Distributor
at the end of the Qualification Period and the Recalculated Distributor
Options, if the amount of Recalculated Distributor Options is lower, will be
forfeited by such Eligible Distributor. If an Eligible Distributor ceases to
be an executive distributor at any time during the Vesting Period, all
Distributor Options held by such Eligible Distributor will be immediately
forfeited. Forfeited options will not vest but will revert to NSI.
Distributor Options vested in an Eligible Distributor will become
exercisable on December 31, 1997, and will remain exercisable for a four-year
period following such date provided the Eligible Distributor remains an
executive distributor until the date of exercise. No distributor options will
be exercisable after December 31,
69
[ALTERNATE PAGE FOR RULE 415]
2001. By exercising any portion of the Distributor Options, each Eligible
Distributor who is granted more than 3,000 Distributor Options will agree not
to resell in any given six month period more than 33% of the shares of Class A
Common Stock issuable upon exercise of the Distributor Options originally
granted to such Eligible Distributor. Upon vesting, Distributor Options will
be exercisable at 25% of the initial price per share to the public in the
Underwritten Offerings (the "Exercise Price").
By receiving an allocation of Distributor Options at the end of the
Qualification Period, each Eligible Distributor confirms his or her agreement
to continue to resell or personally consume at least 80% of all products
purchased by such distributor per month. In addition, product returns during
the Qualification or Vesting Periods will reduce commission levels and may
affect distributor levels, consequently impacting the number of Distributor
Options received by an individual distributor. In the event of product returns
occurring after the Qualification or Vesting Periods which would have affected
distributor levels or qualification for or vesting of Distributor Options had
such product returns been made during the Qualification or Vesting Periods,
NSI reserves the right to use any mechanism available to it under the NSI
distributor policies and procedures, as may be amended from time to time, to
recoup the value of the Distributor Options received by an individual
distributor on the Vesting Date in excess of the value of Distributor Options
which would have vested had such returns been made prior to the Vesting Date.
The Distributor Option program is not intended to be an executive
distributor's primary source of income. Even though the exact number of
Distributor Options initially allocated to an individual distributor may
fluctuate materially during the Qualification Period due to increases and
decreases in overall executive distributor activity, an executive
distributor's primary income source, i.e., product sales and commissions, will
continue to be based on the efforts of the executive distributor and
leadership of his or her downline organization.
EMPLOYEE STOCK BONUS AWARDS. Prior to the date of this Prospectus, the
Existing Stockholders will also contribute an aggregate of 1,250,000 shares of
the Company's Class A Common Stock (the "Employee Shares") to NSI and its
affiliates (other than the Company) for use in connection with the employee
stock bonus awards to be made by NSI and its affiliates (other than the
Company) to their respective employees in connection with the 415 Offerings.
The shares of Class A Common Stock underlying each such employee stock bonus
award will be issued to the employee recipient at a rate of 25% per year
commencing one year following the date of the award, provided the employee
recipient is still employed by NSI or one of its affiliates (other than the
Company). The Company also intends to issue 109,000 shares of Class A Common
Stock to its employees in connection with employee stock bonus awards to be
made to the Company's employees on the same terms as described above pursuant
to the Nu Skin Asia Pacific, Inc. 1996 Stock Incentive Plan.
69--1
[ALTERNATE PAGE FOR RULE 415]
The following table sets forth the names of the Rule 415 Selling
Stockholders for whom Distributor Options and shares of Class A Common Stock
are being registered pursuant to Rule 415 under the 1933 Act, the number of
Distributor Options owned prior to and to be offered in the Rule 415
Offerings, the number of shares of Class A Common Stock owned and to be sold
in the Rule 415 Offerings and the total voting power of such Rule 415 Selling
Stockholders after the Rule 415 Offerings.
CLASS A
COMMON STOCK
-------------------------
TO BE
OWNED AND OWNED
DISTRIBUTOR DISTRIBUTOR TO BE SOLD IN AFTER THE
OPTIONS OPTIONS TO THE RULE 415 RULE 415
PRIOR TO BE OFFERED OFFERINGS(/3/) OFFERINGS
THE RULE 415 IN THE RULE 415 -------------- ----------
RULE 415 SELLING STOCKHOLDERS(/1/) OFFERINGS(/2/) OFFERINGS(/2/) NUMBER NUMBER %
- ---------------------------------- -------------- --------------- -------------- ------ ---
Nu Skin International,
Inc.................... 1,605,000 1,605,000 1,137,515 -- --
Nu Skin Personal Care
Australia, Inc. ....... -- -- 25,148 -- --
Nu Skin New Zealand,
Inc. .................. -- -- 5,110 -- --
Nu Skin Mexico, Inc. ... -- -- 13,483 -- --
Nu Skin Guatemala, Inc.
....................... -- -- 500 -- --
Nu Skin Canada, Inc. ... -- -- 33,775 -- --
Nu Skin Netherlands,
B.V. .................. -- -- 3,398 -- --
Nu Skin U.K., Inc. ..... -- -- 5,755 -- --
Nu Skin Germany, Inc. .. -- -- 4,236 -- --
Nu Skin Belgium, Inc. .. -- -- 3,400 -- --
Nu Skin France, Inc. ... -- -- 6,193 -- --
Nu Skin Italy, Inc. .... -- -- 4,157 -- --
Nu Skin Spain, Inc. .... -- -- 4,894 -- --
Nu Skin Puerto Rico,
Inc.................... -- -- 2,427 -- --
- --------
(1) Each of the Rule 415 Selling Stockholders is an affiliate of the Company
in that each Rule 415 Selling Stockholder is owned by the same individuals
who will own 100% of the Common Stock of the Company following
consummation of the Reorganization and prior to the Offerings and the Rule
415 Offerings.
(2) Consists of options that have been granted by the Company to NSI to
purchase 1,605,000 shares of the Company's Class A Common Stock.
(3) Includes 1,250,000 shares of Class A Common Stock to be awarded by the
Rule 415 Selling Stockholders in connection with employee stock bonus
awards.
CERTAIN U.S. TAX CONSEQUENCES TO RECIPIENTS OF DISTRIBUTOR OPTIONS AND
EMPLOYEE STOCK BONUS AWARDS. For purposes of the Internal Revenue Code of
1986, as amended, (the "Code"), the Distributor Options will be considered
non-qualified stock options. A recipient (an "Option Recipient") of a non-
qualified stock option recognizes no taxable income and NSI and its
affiliates, other than the Company (the "Option Grantors"), receive no
deduction when a non-qualified stock option is granted. Upon exercise of a
non-qualified stock option, the Option Recipient recognizes ordinary income
and the Option Grantor 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 Option Recipient recognizes as capital gain or loss any
subsequent profit or loss recognized on the sale or exchange of any shares
disposed of or sold. A recipient (an "Employee Stock Bonus Award Recipient")
of restricted stock or contingent stock is not required to include the value
of such shares in income until the first time such Employee Stock Bonus Award
Recipient's rights in the shares are transferable or not subject to
substantial risk of forfeiture, whichever occurs earlier. In the case of
restricted stock or contingent stock, 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
and NSI and its affiliates, other than the Company (the "Employee Stock Bonus
Award Grantors") are entitled to a deduction, in the amount of the ordinary
income recognized by the Employee Stock Bonus Award Recipient, for the tax
year of the employee in which the Employee Stock Bonus Award Recipient
recognizes such income. Recipients of Distributor Options and employee stock
bonus awards should consult their own tax advisers regarding the U.S. tax
consequences of being awarded a Distributor Option or an employee stock bonus
award. Non-U.S. recipients of Distributor Options and employee stock bonus
awards should consult with their tax advisers regarding the application of the
tax laws of their respective countries to the Distributor Options and employee
stock bonus awards.
69--2
NON-U.S. REGULATORY AND TAX CONSIDERATIONS. The Company and its affiliates
anticipate that the Distributor Options, the shares of Class A Common Stock
underlying the Distributor Options and the employee stock bonus awards will be
qualified in some form pursuant to the securities laws of each jurisdiction in
which the Company and its affiliates operate. There can be no assurance,
however, that NSI will be able to qualify the Distributor Options and the
employee stock bonus awards in each jurisdiction or that, if qualified, the
governmental authorities in such jurisdictions will not require material
modifications to the terms of the programs as they are currently contemplated
to be implemented. In certain European countries, including France and Spain,
only executive distributors as of the date of this Prospectus will be allowed
to participate in the Distributor Option program. No assurances can be given
as to the timing of any governmental approvals received in connection with the
Distributor Options. In addition, there can be no assurance that the laws and
relevant regulations and judicial and administrative interpretations in such
jurisdictions will not change in a manner that has a material impact on the
ability of NSI to adopt or maintain such programs in such jurisdictions.
Receipt of the Distributor Options, exercise of such options and sale of the
shares of Class A Common Stock underlying such shares of Class A Common Stock
by NSI or its distributors, and receipt of employee stock bonus awards and the
sale of the shares of Class A Common Stock underlying such stock bonus awards,
will have certain material income tax and capital gains tax implications for
the distributors of NSI and the employees of the Company and NSI. Although
this prospectus and related documentation contains certain tax information
relevant to distributors of NSI and employees of the Company and NSI and its
affiliates (other than the Company), such information is only intended to be a
summary of certain relevant provisions and does not address all aspects of tax
law that may be relevant to each distributor and employee based on the
individual circumstances of such distributor and employee in each jurisdiction
in which they operate. Distributors and employees are urged to consult their
own tax advisors with respect to the particular tax consequences to them of
the exercise of the Distributor Options and the purchase, ownership and
disposition of the Class A Common Stock, including the applicability of any
federal, state, provincial or foreign tax laws to which they may be subject as
well as with respect to the possible effects of changes in tax laws in each
jurisdiction, including changes which may be applied retroactively in a manner
that could adversely affect holders of the Class A Common Stock.
69--3
[ALTERNATE PAGE FOR RULE 415]
PLAN OF DISTRIBUTION
DISTRIBUTOR OPTIONS. Prior to the date of this Prospectus, the Company's
Existing Stockholders will contribute to the Company 1,605,000 shares of the
Company's Class A Common Stock for use in implementing a distributor equity
incentive program. Also prior to the date of this Prospectus, the Company will
grant to NSI 1,605,000 options to purchase such shares (the "Distributor
Options"). Each Distributor Option entitles the holder to purchase one share
of Class A Common Stock.
NSI intends to initially allocate the Distributor Options to executive
distributors who have achieved gold or higher executive distributor levels
under the Global Compensation Plan on the date of this Prospectus in each
country where NSI conducts business and where local laws permit the issuance
of options hereunder and in a manner similar to that described below. From
December 1, 1996 until August 31, 1997 (the "Qualification Period"), existing
and new distributors will have the opportunity to qualify for a reallocation
of the Distributor Options from NSI by achieving gold or higher executive
distributor levels under the Global Compensation Plan as of August 31, 1997
(such qualifying distributors are hereinafter referred to as "Eligible
Distributors"). At the end of the Qualification Period, each Eligible
Distributor will receive Distributor Options based upon a reallocation of the
Distributor Options determined by multiplying the total number of Distributor
Options by the quotient obtained by dividing (x) the Eligible Distributor's
weighted total compensation (determined in the manner set forth below) under
the Global Compensation Plan during the Qualification Period (the "Weighted
Individual Compensation") by (y) the sum of the Weighted Individual
Compensation earned by all Eligible Distributors under the Global Compensation
Plan during the Qualification Period (the "Weighted Total Compensation"). For
purposes of calculating such quotient, the following weighting factors (the
"Weighting Factors") will be applied to an Eligible Distributor's compensation
to calculate "Weighted Individual Compensation" according to executive
distributor levels:
EXECUTIVE
DISTRIBUTOR
LEVEL
EXECUTIVE DISTRIBUTOR LEVEL WEIGHTING FACTOR
--------------------------- ----------------
Hawaiian Blue Diamond..................................... 100%
Blue Diamond.............................................. 94%
Diamond................................................... 86%
Emerald................................................... 82%
Ruby...................................................... 78%
Lapis..................................................... 74%
Gold...................................................... 72%
In addition, for each 1% increase in average monthly
commissions earned during the Qualification Period that is
greater than actual commission earnings during September 1996 for
a gold or higher executive distributor as of September 1996, or
for a distributor qualifying as a gold or higher executive
distributor after September 1996, actual commissions earned
during such distributor's first month as a gold or higher
executive distributor (the "Base Month"), the above referenced
Executive Distributor Level Weighting Factors will increase by
one third ( 1/3) of 1% up to a maximum increase of 100% (such
increase is referred to as the "Growth Weighting Factor").
For purposes of illustration, for the nine-month period ended on August 31,
1996 (the "Illustrative Qualification Period"), the Weighted Total
Compensation will be assumed to have been $200,000,000. An Emerald level
distributor who earned total commissions of $40,000 (on average monthly
commissions of $4,444) during the Illustrative Qualification Period and who
had previously earned commissions of $1,000 during the Base Month would apply
a weighting factor of 182% to such commissions (computed using the 82%
Executive Distributor Level weighting factor for an Emerald level distributor
plus a 100% Growth Weighting Factor based on the 344% increase in average
commissions during the Illustrative Qualification Period over commissions
earned during the Base Month), resulting in Weighted Individual Compensation
of $72,800. Such distributor's allotment of the Distributor Options would be
equal to the quotient of his or her Weighted Individual Compensation ($72,800)
divided by the Weighted Total Compensation ($200,000,000), multiplied by the
total number of Distributor Options (1,605,000). Such distributor would
therefore be allocated 584 of the Distributor Options.
70
[ALTERNATE PAGE FOR RULE 415]
The foregoing example is presented for illustrative purposes only. There can
be no assurance that the number of Eligible Distributors will remain constant
during the Qualification Period. Given the fixed number of Distributor Options
available, the number of Distributor Options allocable to an Eligible
Distributor will decrease as the total number of Eligible Distributors
increases and conversely will increase as the total number of Eligible
Distributors decreases. NSI has historically experienced periods of
significant fluctuations in its total number of executive distributors and may
experience such fluctuations in the future. An increase in the total number of
Eligible Distributors during the Qualification Period could result in a
material reduction in the number of Distributor Options allocable to an
individual Eligible Distributor. The number of Distributor Options allocable
to an Eligible Distributor will also decrease as the number of Eligible
Distributors at higher executive distributor levels increases as a proportion
of all Eligible Distributors and conversely will increase as the number of
Eligible Distributors at higher executive distributor levels decreases as a
proportion of all Eligible Distributors. There can be no assurance that the
proportion of Eligible Distributors at each executive distributor level will
remain constant during the Qualification Period. In addition, the number of
Distributor Options allocable to an Eligible Distributor will decrease as such
Eligible Distributor's compensation decreases as a proportion of total
compensation paid to all Eligible Distributors and conversely will increase as
such Eligible Distributor's compensation increases as a proportion of total
compensation paid to all Eligible Distributors. There can be no assurance that
an Eligible Distributor's compensation will remain constant as a percentage of
total Eligible Distributor compensation during the Qualification Period.
Further, there can be no assurance that an Eligible Distributor will be able
to earn particular compensation amounts during the Qualification Period.
The availability of the Distributor Options in each country in which NSI
distributors reside is entirely dependent upon and subject to NSI's ability to
secure any necessary regulatory approvals, qualifications or exemptions in
each such country. It is anticipated that necessary regulatory approvals or
qualifications will not be secured in certain countries until sometime after
December 1, 1996, the commencement of the Qualification Period. In the event
the Distributor Options are not made available to distributors in a given
country ("Deferred Qualification Countries") until after commencement of the
Qualification Period, the formulas referenced above will be modified as
follows. For purposes of calculating Weighted Individual Compensation and
Weighted Total Compensation, distributors resident in Deferred Qualification
Countries shall be deemed to have earned during each month during the
Qualification Period for which Distributor Options were not available,
commissions equal to the average monthly commissions actually earned by such
distributors during the portion of the Qualification Period for which
Distributor Options were available in such Deferred Qualification Country.
For Distributor Options to vest, an Eligible Distributor will generally be
required to maintain, during the period from September 1, 1997, through
December 31, 1997 (the "Vesting Period"), the executive level he or she
achieved by the end of the Qualification Period (the "Qualifying Executive
Level"). If an Eligible Distributor fails to maintain the Qualifying Executive
Level for any month during the Vesting Period, the number of Distributor
Options vested in such Eligible Distributor will be recalculated at the end of
the Vesting Period to be that number of Distributor Options such Eligible
Distributor would have been allocated had he or she achieved the lowest
executive distributor level held by him or her during the Vesting Period as of
August 31, 1997 (the "Recalculated Distributor Options"). For example, if an
Eligible Distributor ends the Qualification Period as a Diamond executive
distributor with an Executive Distributor Level Weighting Factor of 86% and a
Growth Weighting Factor of 15%, resulting in a combined weighting factor of
101%, but during the Vesting Period the lowest level to which the distributor
falls is Ruby level, which carries an Executive Distributor Level Weighting
Factor of 78% (the Growth Weighting Factor would remain unchanged) the
combined weighting factor would be reduced to 93%. Therefore, the difference
between the number of Distributor Options allocated to an Eligible Distributor
at the end of the Qualification Period and the Recalculated Distributor
Options, if the amount of Recalculated Distributor Options is lower, will be
forfeited by such Eligible Distributor. If an Eligible Distributor ceases to
be an executive distributor at any time during the Vesting Period, all
Distributor Options held by such Eligible Distributor will be immediately
forfeited. Forfeited options will not vest but will revert to NSI.
Distributor Options vested in an Eligible Distributor will become
exercisable on December 31, 1997, and will remain exercisable for a four-year
period following such date provided the Eligible Distributor remains an
executive distributor until the date of exercise. No distributor options will
be exercisable after December 31,
70--1
[ALTERNATE PAGE FOR RULE 415]
2001. By exercising any portion of the Distributor Options, each Eligible
Distributor who is granted more than 3,000 Distributor Options will agree not
to resell in any given six-month period more than 33% of the shares of Class A
Common Stock issuable upon exercise of the Distributor Options originally
granted to such Eligible Distributor. Upon vesting, Distributor Options will
be exercisable at 25% of the initial price per share to the public in the
Underwritten Offerings (the "Exercise Price").
By receiving an allocation of Distributor Options at the end of the
Qualification Period, each Eligible Distributor confirms his or her agreement
to continue to resell or personally consume at least 80% of all products
purchased by such distributor per month. In addition, product returns during
the Qualification or Vesting Periods will reduce commission levels and may
affect distributor levels, consequently impacting the number of Distributor
Options received by an individual distributor. In the event of product returns
occurring after the Qualification or Vesting Periods which would have affected
distributor levels or qualification for or vesting of Distributor Options had
such product returns been made during the Qualification or Vesting Periods,
NSI reserves the right to use any mechanism available to it under the NSI
distributor policies and procedures, as may be amended from time to time, to
recoup the value of the Distributor Options received by an individual
distributor on the Vesting Date in excess of the value of Distributor Options
which would have vested had such returns been made prior to the Vesting Date.
The Distributor Option program is not intended to be an executive
distributor's primary source of income. Even though the exact number of
Distributor Options initially allocated to an individual distributor may
fluctuate materially during the Qualification Period due to increases and
decreases in overall executive distributor activity, an executive
distributor's primary income source, i.e., product sales and commissions, will
continue to be based on the efforts of the executive distributor and
leadership of his or her downline organization.
EMPLOYEE STOCK BONUS AWARDS. Prior to the date of this Prospectus, the
Existing Stockholders will also contribute an aggregate of 1,250,000 shares of
the Company's Class A Common Stock (the "Employee Shares") to NSI and its
affiliates (other than the Company) for use in connection with the employee
stock bonus awards to be made by NSI and its affiliates (other than the
Company) to their respective employees in connection with the 415 Offerings.
The shares of Class A Common Stock underlying each such employee stock bonus
award will be issued to the employee recipient at a rate of 25% per year
commencing one year following the date of the award, provided the employee
recipient is still employed by NSI or one of its affiliates (other than the
Company). The Company also intends to issue 109,000 shares of Class A Common
Stock to its employees in connection with employee stock bonus awards to be
made to the Company's employees on the same terms as described above pursuant
to the Nu Skin Asia Pacific, Inc. 1996 Stock Incentive Plan.
The Distributor Options, the shares of Class A Common Stock underlying the
Distributor Options and the employee stock bonus awards are included in this
Prospectus pursuant to Rule 415 under the 1933 Act. The distribution of the
Distribution Options will occur for purposes of Rule 415 upon the assignment
of the distributor options by NSI to the distributors. The shares of Class A
Common Stock will be issued by the Company upon exercise of the Distributor
Options. The Company will not receive any of the proceeds from the
distribution of shares in connection with the employee stock bonus awards. The
Company will receive the proceeds from the issuance of shares in connection
with the exercise of the Distributor Options. See "Rule 415 Selling
Stockholders."
This Prospectus may be used from time to time by the holders who offer the
securities registered hereby pursuant to Rule 415 under the 1933 Act for sale
in connection with the Distributor Options and underlying Class A Common
Stock, the employee stock bonus awards or in transactions in which they are or
may be deemed to be underwriters within the meaning of the 1933 Act. The Class
A Common Stock may be sold from time to time directly by the holders or
pledgees, donees, transferees or other successors in interest. Alternatively,
the Class A Common Stock may be offered from time to time by the holders to or
through brokers or dealers who may act solely as agents, or may acquire shares
as principals. The distribution of the Class A Common Stock may be
70--2
effected in one or more transactions that may take place on the New York Stock
Exchange, including block trades, ordinary broker's transactions, privately
negotiated transactions or through sales to one or more broker/dealers for
resale of such securities as principals, at market prices prevailing at the
time of sale, at prices related to such prevailing market prices or at
negotiated prices. Usual and customary or specifically negotiated brokerage
fees or commissions may be paid by these holders in connection with such sales.
In connection with such sales, the holders and any participating brokers or
dealers may be deemed "underwriters" as such term is defined in the 1933 Act.
The Company has agreed to bear, except as hereinafter set forth, all expenses
(other than underwriting discounts and selling commissions, state and local
transfer taxes, and fees and expenses of counsel or other advisors to the
Selling Stockholders) in connection with the registration of the offered
securities. The Registration Statement of which this Prospectus forms a part
must be current at any time during which a Selling Stockholder sells Class A
Common Stock.
70--3
[ALTERNATE PAGE FOR RULE 415]
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO NSI DISTRIBUTOR, DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN
AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN
THOSE CONTAINED IN THE PROSPECTUS, IN CONNECTION WITH THE OFFERING DESCRIBED
HEREIN, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE RULE 415 SELLING
STOCKHOLDERS. 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............................................................. 10
The Reorganization and S Corporation Distribution........................ 24
Use of Proceeds.......................................................... 25
Dividend Policy.......................................................... 25
Capitalization........................................................... 26
Dilution................................................................. 27
Selected Combined Financial and other Information........................ 28
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 31
Business................................................................. 39
Management............................................................... 64
Certain Relationships and Related Transactions........................... 71
Rule 415 Selling Stockholders............................................ 68
Shares Eligible for Future Sale.......................................... 76
Plan of Distribution..................................................... 70
Description of Capital Stock............................................. 79
Certain United States Tax Consequences to Non-United States Holders...... 83
Underwriting............................................................. 85
Legal Matters............................................................ 89
Experts.................................................................. 89
Additional Information................................................... 89
Index to Financial Statements............................................ F-1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
1,605,000 OPTIONS
2,964,000 SHARES
[LOGO]
OPTIONS TO PURCHASE
CLASS A COMMON STOCK
CLASS A COMMON STOCK
---------------
PROSPECTUS
---------------
, 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The estimated expenses of the issuance and distribution, to be paid by the
Registrant, are as follows.
SEC Registration Fee........................................... $ 80,406
NASD Fee....................................................... 27,117
Stock Exchange Listing......................................... 109,000
Printing and Engraving......................................... 700,000
Accounting Fees and Expenses................................... 1,200,000(1)
Legal Fees and Expenses........................................ 1,600,000
Blue Sky Fees and Expenses..................................... 15,000
Transfer Agent's Fees and Expenses............................. 10,000
Custodian's Fees and Expenses.................................. 25,000
Miscellaneous Expenses......................................... 39,976
----------
Total...................................................... $3,800,000
==========
- --------
(1) Approximately $500,000 of the Legal Fees and Expenses and $300,000 of the
Accounting Fees and Expenses will be borne by NSI as expenses to be
incurred in connection with certain stock and option grants to NSI
distributors and employees.
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 10 of the Certificate
of Incorporation and 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 for liability (i)
for any breach of a
II-1
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 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.
Prior to the consummation of the Offerings, the Company intends to enter
into separate indemnification agreements with each of its directors and
executive officers in order to effectuate the provisions of Article 10 of the
Company's Certificate of Incorporation and Article 5 of the Company's Bylaws.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Pursuant to the Reorganization, prior to the Offerings, the shareholders of
Nu Skin Japan, Nu Skin Korea, Nu Skin Taiwan, Nu Skin Hong Kong and Nu Skin
Thailand will contribute their shares of capital stock to the capital of the
Company in a transaction intended to qualify under Section 351 of the Code in
exchange for shares of the Company's Class B Common Stock. This sale is exempt
from registration under Section 4(2) of the 1933 Act. Prior to the
Reorganization, all of the outstanding shares of capital stock of the
Subsidiaries were held by the Selling Stockholders. The Reorganization will
result in each of the Subsidiaries becoming a wholly-owned subsidiary of the
Company.
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 to be entered into by and among the
Company and certain of its officers and directors
*10.2 Form of Stockholders' Agreement by and among the initial stockholders
of the Company
*10.3 Employment Contract, dated December 12, 1991, by and between Nu Skin
Taiwan and John Chou
*10.4 Employment Agreement, dated May 1, 1993, by and between Nu Skin Japan
and Takashi Bamba
*10.5 Service Agreement, dated January 1, 1996, by and between Nu Skin Korea
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 NSI and each
Subsidiary (other than Nu Skin Hong Kong)
*10.10 Form of Trademark/Tradename License Agreement between NSI and each
Subsidiary
*10.11 Form of Management Services Agreement between NSIMG and each
Subsidiary
+*10.12 Form of 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
II-2
*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
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 by and between the Company and M. Truman Hunt
*10.20 Form of Mutual Indemnification Agreement by and between the Company
and NSI
*10.21 Manufacturing Sublicense Agreement, dated July 27, 1995, by and
between NSI and Nu Skin Japan
10.22 1996 Option Agreement by and between the Company and NSI.
10.23 Form of Addendum to Amended and Restated Licensing and Sales Agreement
10.24 Form of Administrative Services Agreement
*21.1 Subsidiaries of the Company
23.1 Consent of Price Waterhouse LLP, independent accountants
23.2 Consent of Price Waterhouse LLP, independent accountants
23.4 Consent of Grant Thornton, independent certified public accountants
*23.5 Consent of LeBoeuf, Lamb, Greene & MacRae, L.L.P. (contained in their
Opinion filed as exhibit 5.1)
*24 Power of Attorney (included with the signatures in Part II of this
Registration Statement)
- --------
*Previously filed.
+ Confidential treatment has been requested. The copy filed as an exhibit
omits the information subject to the confidentiality request.
(b) FINANCIAL STATEMENT SCHEDULES
Schedules have been omitted because the information required to be set forth
therein is not applicable or is shown in the financial statements or notes
thereto.
ITEM 17. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement;
(i) To include any prospectus required by Section 10(a)(3) of the
1933 Act;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high and of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in
the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement;
(2) That, for the purpose of determining any liability under the 1933
Act, each such post-effective amendment 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.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
II-3
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreements, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
(b) 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.
(c) 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 Amendment No. 3 to the Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in
the City of Provo, State of Utah on November 7, 1996.
NU SKIN ASIA PACIFIC, INC.
/s/ Steven J. Lund
By: ___________________________
Steven J. Lund
President and Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 3 to the Registration Statement has been signed below on November
7, 1996 by the following persons in the capacities indicated.
SIGNATURE TITLE DATE
* Chairman of the
- ------------------------------------ Board of Directors November 7,
Blake M. Roney 1996
/s/ Steven J. Lund President and Chief
- ------------------------------------ Executive Officer November 7,
Steven J. Lund and Director 1996
(Principal
Executive Officer)
* Vice President
- ------------------------------------ Finance (Principal November 7,
Corey B. Lindley Financial and 1996
Accounting Officer)
* Director
- ------------------------------------ November 7,
Sandie N. Tillotson 1996
* Director
- ------------------------------------ November 7,
Keith R. Halls 1996
* Director
- ------------------------------------ November 7,
Brooke B. Roney 1996
* Director
- ------------------------------------ November 7,
Kirk V. Roney 1996
II-5
SIGNATURE TITLE DATE
* Director
- ------------------------------------- November 7,
Max E. Esplin 1996
* Director
- ------------------------------------- November 7,
Max L. Pinegar 1996
/s/ Steven J. Lund
*By: ________________________________
Steven J. Lund asattorney-in-fact
for each of the persons indicated
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 to be entered into by
and among the Company and certain of its officers and
directors
*10.2 Form of Stockholders' Agreement by and among the initial
stockholders of the Company
*10.3 Employment Contract, dated December 12, 1991, by and
between Nu Skin Taiwan and John Chou
*10.4 Employment Agreement, dated May 1, 1993, by and between
Nu Skin Japan and Takashi Bamba
*10.5 Service Agreement, dated January 1, 1996, by and between
Nu Skin Korea 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 NSI and
each Subsidiary (other than Nu Skin Hong Kong)
*10.10 Form of Trademark/Tradename License Agreement between NSI
and each Subsidiary
*10.11 Form of Management Services Agreement between NSIMG and
each Subsidiary
+*10.12 Form of 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
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, by and between the Company and M.
Truman Hunt
*10.20 Form of Mutual Indemnification Agreement by and between
the Company and NSI
*10.21 Manufacturing Sublicense Agreement, dated July 27, 1995,
by and between NSI and Nu Skin Japan
10.22 1996 Option Agreement by and between the Company and NSI
10.23 Form of Addendum to Amended and Restated Licensing and
Sales Agreement
10.24 Form of Administrative Services Agreement
*21.1 Subsidiaries of the Company
PAGINATION
BY
SEQUENTIAL
EXHIBIT NUMBERING
NUMBER EXHIBIT DESCRIPTION SYSTEM
------- ------------------- ----------
23.1 Consent of Price Waterhouse LLP, independent accountants
23.2 Consent of Price Waterhouse LLP, independent accountants
23.4 Consent of Grant Thornton, independent certified public
accountants
*23.5 Consent of LeBoeuf, Lamb, Greene & MacRae, L.L.P.
(contained in their Opinion filed as exhibit 5.1)
*24 Power of Attorney (included with the signatures in Part
II of this Registration Statement)
- --------
*Previously Filed.
**To be filed by amendment.
+ Confidential treatment has been requested. The copy filed as an exhibit omits
the information subject to the confidentiality request.
EXHIBIT 1.1
______________________________________________________________________________
______________________________________________________________________________
Nu Skin Asia Pacific, Inc.
A Delaware Corporation
4,600,000 Shares of Class A Common Stock
U.S. PURCHASE AGREEMENT
Dated: ., 1996
______________________________________________________________________________
______________________________________________________________________________
Table of Contents
SECTION 1.Representations and Warranties................. 5
(a) Representations and Warranties by the Company....... 5
(i) Compliance with Registration Requirements...... 5
(ii) Independent Accountants....................... 6
(iii) Financial Statements......................... 6
(iv) No Material Adverse Change in Business........ 7
(v) Good Standing of the Company................... 7
(vi) Good Standing of Subsidiaries................. 7
(vii) Capitalization............................... 8
(viii) Authorization of Agreement.................. 8
(ix) Authorization and Description of Securities... 8
(x) Absence of Defaults and Conflicts.............. 9
(xi) Absence of Labor Dispute...................... 9
(xii) Absence of Proceedings....................... 10
(xiii) Accuracy of Exhibits........................ 10
(xiv) Possession of Intellectual Property.......... 10
(xv) Absence of Further Requirements............... 10
(xvi) Possession of Licenses and Permits........... 11
(xvii) Title to Property........................... 11
(xviii) Compliance with Cuba Act................... 12
(xix) Environmental Laws........................... 12
(xx) Registration Rights........................... 12
(xxi) Contribution Agreement....................... 12
(xxii) Certain Transactions........................ 13
(xxiii) The Reorganization......................... 13
(xxiv) Operating Agreements........................ 13
(b) Representations and Warranties by the Selling
Stockholders...................................... 13
(i) Accurate Disclosure............................ 13
(ii) Authorization of Agreements................... 14
(iii) Good and Marketable Title.................... 14
(iv) Due Execution of Power of Attorney and
Custody Agreement............................ 15
(v) Absence of Manipulation........................ 15
(vi) Absence of Further Requirements............... 15
(vii) Restriction on Sale of Securities............ 16
(viii) Certificates Suitable for Transfer.......... 16
(ix) No Association with NASD...................... 16
(c) Officer's Certificates.............................. 16
SECTION 2 Sale and Delivery to the U.S. Underwriters; Closing. 17
i
(a) Initial Securities.................................. 17
(b) U.S. Option Securities.............................. 17
(c) Payment............................................. 17
(d) Denominations; Registration......................... 18
SECTION 3 Covenants of the Company............................ 18
(a) Compliance with Securities Regulations and
Commission Requests................................ 18
(b) Filing of Amendments................................ 19
(c) Delivery of Registration Statements................. 19
(d) Delivery of Prospectuses............................ 19
(e) Continued Compliance with Securities Laws........... 20
(f) Blue Sky Qualifications............................. 20
(g) Rule 158............................................ 20
(h) Use of Proceeds..................................... 21
(i) Listing............................................. 21
(j) Restriction on Sale of Securities................... 21
(k) Reporting Requirements.............................. 21
(l) Compliance with NASD Rules.......................... 21
(m) Compliance with Rule 463............................ 22
SECTION 4 Payment of Expenses................................. 22
(a) Expenses............................................ 22
(b) Expenses of the Selling Stockholders................ 22
(c) Termination of Agreement............................ 23
(d) Allocation of Expenses.............................. 23
SECTION 5 Conditions of U.S. Underwriters' Obligations........ 23
(a) Effectiveness of Registration Statement............. 23
(b) Opinion of Counsel for Company...................... 23
(c) Opinion of General Counsel to the Company........... 24
(d) Opinion of Counsel for the Selling Stockholders..... 24
(e) Opinion of Japanese Counsel for the Company......... 24
(f) Opinion of Special Japanese Counsel for the Company. 24
(g) Opinion of Hong Kong Counsel for the Company........ 24
(h) Opinion of Special Hong Kong Counsel for the Company 24
(i) Opinion of Taiwanese Counsel for the Company........ 25
(j) Opinion of South Korean Counsel for the Company..... 25
(k) Opinion of Canadian Counsel for the Company......... 25
(l) Opinion of Japanese Counsel for the Underwriters.... 25
(m) Opinion of Counsel for U.S. Underwriters............ 25
(n) Officers' Certificate............................... 26
(o) Certificate of Selling Stockholders................. 26
(p) Accountant's Comfort Letter......................... 26
ii
(q) Bring-down Comfort Letter........................... 26
(r) Approval of Listing................................. 27
(t) Lock-up Agreements.................................. 27
(u) Purchase of Initial International Securities........ 27
(v) Purchase of Japanese Securities..................... 27
(w) Reorganization...................................... 27
(x) Conditions to Purchase of the U.S. Option Securities 27
(i) Officers' Certificate.......................... 27
(ii) Certificate of Selling Stockholders............ 28
(iii)Opinion of Counsel for Company................. 28
(iv) Opinion of General Counsel to the Company...... 28
(v) Opinion of Counsel for the Selling Stockholders 28
(vi) Opinion of Japanese Counsel for Company........ 28
(vii)Opinion of Special Japanese Counsel for Company 28
(viii)Opinion of Hong Kong Counsel for the Company.. 28
(ix) Opinion of Special Hong Kong Counsel for the
Company....................................... 28
(x) Opinion of Taiwanese Counsel for the Company... 29
(xi) Opinion of South Korean Counsel for the Company 29
(xii)Opinion of Canadian Counsel for the Company.... 29
(xiii)Opinion of Japanese Counsel for the
Underwriters................................. 29
(xiv)Opinion of Counsel for the U.S. Underwriters... 29
(xv) Bring-down Comfort Letter...................... 29
(y) Additional Documents................................ 29
(z) Termination of Agreement............................ 30
SECTION 6 Indemnification..................................... 30
(a) Indemnification of U.S. Underwriters................ 30
(b) Indemnification of Company, Directors and Officers
and Selling Stockholders........................... 33
(c) Actions against Parties; Notification............... 34
(d) Settlement without Consent if Failure to Reimburse.. 34
(e) Indemnification for Reserved Securities............. 34
(f) Other Agreements with Respect to Indemnification.... 35
SECTION 7.Contribution........................................ 35
SECTION 8.Representations, Warranties and
Agreements to Survive Delivery..................... 36
SECTION 9.Termination of Agreement............................ 37
(a) Termination; General................................ 37
(b) Liabilities......................................... 37
SECTION 10. Default by One or More of the U.S. Underwriters... 37
iii
SECTION 11. Default by one or more of the Selling
Stockholders or the Company..................... 38
SECTION 12. Notices........................................... 39
SECTION 13. Parties.......................................... 39
SECTION 14. GOVERNING LAW AND TIME........................... 40
SECTION 15. Effect of Headings............................... 40
iv
Draft of 9/15/96
Nu Skin Asia Pacific, Inc.
A Delaware Corporation
4,600,000 Shares of Class A Common Stock
(Par Value $.001 Per Share)
U.S. PURCHASE AGREEMENT
-----------------------
., 1996
MERRILL LYNCH & CO.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
Morgan Stanley & Co. Incorporated
Dean Witter Reynolds Inc.
Nomura Securities International, Inc.
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:
Nu Skin Asia Pacific, Inc., a Delaware corporation (the "Company"), Nu Skin
Japan Company, Limited, as guarantor (the "Guarantor"), and the persons listed
in Schedule B hereto (the "Selling Stockholders"), confirm their respective
agreements with Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch") and each of the other 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 and Morgan Stanley & Co. Incorporated, Dean
Witter Reynolds Inc. and Nomura Securities International, Inc. are acting as
representatives (in such capacity, the "U.S. Representatives"), with respect to
(i) the sale by the Company and the Selling Stockholders, acting severally and
not jointly, and the purchase by the U.S. Underwriters, acting severally and not
jointly, of the respective numbers of shares of Class A Common Stock, par value
$.001 per share, of the Company (the "Common Stock") set forth
1
in Schedules A and B hereto and (ii) the grant by the Selling Stockholders to
the U.S. Underwriters, acting severally and not jointly, of the option described
in Section 2(b) hereof to purchase all or any part of 884,317 additional shares
of Common Stock to cover over-allotments, if any. The aforesaid 4,600,000
shares of Common Stock (the "Initial U.S. Securities") to be purchased by the
U.S. Underwriters and all or any part of the 884,317 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 (the "Japanese Underwriting Agreement")
providing for the offering by the Selling Stockholders of an aggregate of
1,670,000 shares of Common Stock (the "Japanese Securities") through
arrangements with certain underwriters in Japan (the "Japanese Underwriters")
for whom The Nomura Securities Co., Ltd., Merrill Lynch Japan Incorporated and
Morgan Stanley Japan Limited are acting as managers (the "Lead Japanese
Underwriters").
With regards to the offering of the Japanese Securities in Japan, the
Company has filed with the Minister of Finance of Japan (the "MOF") a securities
registration statement and amendment(s) to such securities registration
statement pursuant to the Securities and Exchange Law of Japan (Law No. 25 of
1948, as amended) (the "Securities and Exchange Law of Japan"). A further
amendment to such securities registration statement will be filed by the Company
with the MOF immediately after the execution of the Japanese Underwriting
Agreement (such securities registration statement and all such amendments being
hereinafter collectively referred to as the "Japanese Registration Statement").
In addition, the Company has prepared a summary preliminary registration
prospectus and a preliminary registration prospectus with respect to the
offering of the Japanese Securities in Japan (together the "Japanese preliminary
prospectus") and intends to prepare a supplement or supplements to such
preliminary registration prospectus (such summary preliminary registration
prospectus and preliminary registration prospectus and all such supplements
being hereinafter collectively referred to as the "Japanese Prospectus"). The
Japanese Underwriters have agreed that the sale of the Japanese Securities will
be a public offering without listing in Japan and will be governed by Japanese
laws and regulations.
It is also 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 offering by the Company
and the Selling Stockholders of an aggregate of 1,330,000 shares of Common Stock
(the "Initial International Securities") through arrangements with certain
managers outside the United States, Canada, and Japan (the "International
Managers") for which Merrill Lynch International, Morgan Stanley & Co.
International Limited, Dean Witter International Ltd. and Nomura International
Plc 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 255,683 additional shares of Common
2
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 Company and 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 and the Japanese
Securities are contemporaneously purchased by the International Managers and the
Japanese Underwriters or purchasers procured by them, respectively.
The U.S. Underwriters, the Japanese Underwriters and the International
Managers are hereinafter collectively called the "Underwriters," the Initial
U.S. Securities, the Japanese Securities and the Initial International
Securities are hereinafter collectively called the "Initial Securities," and the
U.S. Securities, the Japanese 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 price per share for the International Securities to be
purchased by the International Managers pursuant to the International Purchase
Agreement and the price per share for the Japanese Securities to be purchased by
the Japanese Underwriters pursuant to the Japanese Underwriting Agreement, shall
be identical to the price per share for the U.S. Securities to be purchased by
the U.S. Underwriters hereunder.
The Company, the Selling Stockholders and the U.S. Underwriters agree that
up to . shares of the Initial U.S. Securities to be purchased by the U.S.
Underwriters, and that up to . shares of the Initial International Securities to
be purchased by the International Managers (collectively, the "Reserved
Securities") shall be reserved for sale by the U.S. Underwriters and the
International Managers to certain eligible employees and persons having business
relationships with the Company and its affiliates, as part of the distribution
of the Securities by the U.S. Underwriters and the International Managers,
subject to the terms of this Agreement, the applicable rules, regulations and
interpretations of the National Association of Securities Dealers, Inc. and all
other applicable laws, rules and regulations. To the extent that such Reserved
Securities are not orally confirmed for purchase by such eligible employees and
persons having business relationships with the Company or its affiliates by the
end of the first business day after the date of this Agreement, such Reserved
Securities may be offered to the public as part of the public offering
contemplated hereby.
3
The Company has advised the Underwriters that prior to or concurrently with
the sale of the Securities, the stockholders (the "Existing Stockholders") of Nu
Skin Japan Company, Limited, Nu Skin Korea, Inc., Nu Skin Taiwan, Inc., Nu Skin
Hong Kong, Inc. and Nu Skin Personal Care (Thailand) Limited (collectively the
"Subsidiaries") will contribute 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, $.001 par value (the "Reorganization").
Prior to the Reorganization, all of the outstanding shares of capital stock of
the Subsidiaries were held by the Existing Stockholders. The Reorganization
will result in each of the Subsidiaries becoming a wholly-owned subsidiary of
the Company.
The Company has also advised the Underwriters that prior to the
Reorganization each U.S. Subsidiary other than Nu Skin Personal Care (Thailand)
Limited had elected to be treated as an "S" corporation under subchapter S of
the Code and comparable state tax laws. As a result of the Subsidiaries' S
corporation status, the earnings of the Subsidiaries since incorporation had
been included in the taxable income of the Existing Stockholders for U.S.
Federal and certain state income tax purposes, and the Subsidiaries had
generally not been subject to U.S. Federal or state income tax on such earnings.
Prior to the sale of the Securities, the Subsidiaries' S corporation status will
be terminated (the "S Termination Date"). Prior to the S Termination Date, the
Company will declare a distribution to the Existing Stockholders that will
include all of the Subsidiaries' previously earned and undistributed S
corporation earnings through the S Termination Date (the "S Corporation
Distribution"). The S Corporation Distribution will be distributed in the form
of promissory notes due within six months of the S Termination Date bearing
interest at 8% per annum ("S Distribution Notes").
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-1 (No. 333-12073) 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 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).
Three 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"), one relating to the U.S. Securities (the "Form of
U.S. Prospectus") and the Japanese 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"
4
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, together with any International Prospectus of even date relating to
the International Securities, respectively, 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, together with the Japanese Prospectus are herein
collectively called the "Prospectuses." If Rule 434 is relied on, the term
"U.S. Prospectus" shall refer to the U.S. preliminary prospectus dated _____,
1996 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 and the
---------------------------------------------
Guarantor represent and warrant 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 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)
5
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, and the U.S. and the International
Prospectuses, any U.S. or any International preliminary prospectuses and
any supplement thereto or prospectus wrapper prepared in connection
therewith, at their respective times of issuance and at the Closing Time,
complied and will comply as of the times specified above in all material
respects with any applicable laws or regulations of Hong Kong, Taiwan,
South Korea, Canada and the United Kingdom, being those foreign
jurisdictions in which the Prospectuses and such preliminary prospectuses,
as amended or supplemented, if applicable, are distributed in connection
with the offer and sale of Reserved Securities. Neither the Prospectuses
nor any amendments or supplements thereto (including any prospectus
wrapper), 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.
6
(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
--------------------
Registration Statement and the Prospectuses, together with the related
schedules and notes, present fairly the financial position of the Company
and its combined Subsidiaries at the dates indicated and the statement of
operations, stockholders' equity and cash flows of the Company and its
combined 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
Prospectus and to enter into and perform its obligations under this
Agreement, the International Purchase Agreement and the Japanese
Underwriting Agreement; and the Company is duly
7
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.
(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 upon consummation of the Reorganization will be
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. Upon consummation of the Reorganization, the Subsidiaries will
be 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, the International Purchase
Agreement or the Japanese Underwriting 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). The shares of issued and outstanding capital stock,
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.
(viii) Authorization of Agreement. This Agreement, the International
--------------------------
Purchase
8
Agreement and the Japanese Underwriting Agreement have been duly
authorized, executed and delivered by the Company and the Guarantor.
(ix) Authorization and Description of Securities. The Securities to be
-------------------------------------------
purchased by the Underwriters from the Company have been duly authorized
for issuance and sale to the Underwriters pursuant to this Agreement, the
International Purchase Agreement and the Japanese Underwriting Agreement
and, when issued and delivered by the Company pursuant to this Agreement,
the International Purchase Agreement and the Japanese Underwriting
Agreement against payment of the consideration set forth herein and
therein, will be validly issued, fully paid, and non-assessable; 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; and the issuance of
the Securities is not subject to the preemptive or other similar rights of
any securityholder of the Company.
(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, the International
Purchase Agreement and the Japanese Underwriting Agreement and the
consummation of the transactions contemplated in this Agreement, the
International Purchase Agreement, the Japanese Underwriting Agreement and
in the Registration Statement (including the consummation of the
transactions contemplated in the U.S. and International Prospectuses under
the captions "The Reorganization and S Corporation Distribution" and
"Shares Eligible for Future Sale - Distributor Options and Employee Stock
Bonus Awards", the issuance and sale of the Securities and the use of the
proceeds from the sale of the Securities as described in the U.S. and the
International Prospectuses under the caption "Use of Proceeds" and in the
Japanese Prospectus in Part Two - V under the caption "2. Installation,
Material Expansion or Repair of Facilities or Plan Thereof") and compliance
by the Company with its obligations under this Agreement, the International
Purchase Agreement and the Japanese Underwriting 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,
9
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 affect
the properties or assets thereof or the consummation of the transactions
contemplated in the Prospectuses under the caption "The Reorganization and
S Corporation Distribution" or in this Agreement, the International
Purchase Agreement, the Japanese Underwriting 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
10
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 offering, issuance or sale of the Securities under this
Agreement, the International Purchase Agreement and the Japanese
Underwriting Agreement, or the consummation of the transactions
contemplated in the Prospectuses under the captions "The Reorganization and
S Corporation Distribution," this Agreement, the International Purchase
Agreement and the Japanese Underwriting Agreement, except (i) 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, (ii) the registration relating to the offering of
the Japanese Securities under the Securities and Exchange Laws of Japan,
and (iii) such as have been obtained under the laws and regulations of
jurisdictions outside the United States in which the Reserved Securities
are offered.
(vi) 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 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
-----------------
11
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) Compliance with Cuba Act. The Company and its Subsidiaries have
------------------------
complied with, and are and will be in compliance with, the provisions of
that certain Florida act relating to disclosure of doing business with
Cuba, codified as Section 517.075 of the Florida statutes, and the rules
and regulations thereunder (collectively, the "Cuba Act") or are exempt
therefrom.
(xix) 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 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
12
governmental body or agency, against or affecting the Company or any of its
Subsidiaries relating to Hazardous Materials or any Environmental Laws.
(xxx) Registration Rights. 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.
(xxi) Contribution Agreement. The Contribution Agreement, dated
----------------------
., 1996, among the Company, the Subsidiaries and the Existing Stockholders,
a copy of which has been filed with the Registration Statement as Exhibit
2.1, including the exhibits thereto as to which the Company is or is to be
a party (the "Contribution Agreement"), and all the other agreements
pursuant to which the Company is to acquire stock as part of the
Reorganization, (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 the Company and its
Subsidiaries and constitute or will constitute legal, valid and binding
obligations of the Company and its Subsidiaries, enforceable against them
in accordance with their terms.
(xxii) 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.
(xxiii) The Reorganization. Prior to or concurrently with the
------------------
Closing Time, the transactions contemplated in the Registration Statement
under the caption "The Reorganization and S Corporation Distribution" will
have been effected as described therein, and thereafter the Company and its
Subsidiaries will possess all the assets necessary to conduct their
business as described in the Registration Statement.
(xxiv) 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 ., 1996 (collectively, the "Operating Agreements"),
to which one or more of the Subsidiaries is a party (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
13
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:
(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 the Contribution
Agreement (together with all other documents necessary to effect the
Reorganization), this Agreement, the International Purchase Agreement,
the Japanese Underwriters 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 and
the Japanese Underwriting Agreement. The execution and delivery of the
Contribution Agreement (together with all other documents necessary to
effect the Reorganization), this Agreement, the International Purchase
Agreement, the Japanese Underwriting 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
14
of any tax, lien, charge or encumbrance upon the shares of stock to be
acquired by the Company in connection with the Reorganization or 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 and the Japanese Underwriting 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, the International Purchase Agreement and the Japanese
Underwriting 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 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, Blake M. Roney and Koichi
Takeuchi, or any of them, as attorneys-in-fact (the "Attorneys-in-Fact")
and ., 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, the International Purchase
Agreement and the Japanese Underwriting Agreement and the certificate
referred to in Section 5(o) or that may be required pursuant to Sections
5(x) and 5(y) 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, the
International Purchase
15
Agreement and the Japanese Underwriting 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, the International Purchase
Agreement or the Japanese Underwriting 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, the International Purchase Agreement or
the Japanese Underwriting Agreement, except (i) 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 (ii) the
registration relating to the offering of the Japanese Securities under
the Securities and Exchange Laws of Japan, and (ii) such as have been
obtained under the laws and regulations of jurisdictions outside the
United States in which the Reserved Securities are offered.
(vii) Restriction on Sale of Securities. During a period of 180
---------------------------------
days from the date of the U.S. Prospectus, such Selling Stockholder will
not, without the prior written consent of Merrill Lynch (i) 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, 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 (A) the Securities to be sold
hereunder or under the International Purchase Agreement or the Japanese
Underwriting Agreement, (B) any transaction outlined in the Prospectuses
under the caption "The Reorganization and S Corporation Distribution",
or (C) any transaction outlined in the Prospectuses under the caption
"Shares Eligible for Future Sale - Distributor Options and Employee
Stock Bonus Awards."
(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
16
Purchase Agreement or the Japanese Underwriting 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 or the Japanese Underwriting Agreement.
(xi) 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.
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, the Company and each Selling Stockholder, severally and not jointly,
agree to sell to each U.S. Underwriter, severally and not jointly, and each U.S.
Underwriter, severally and not jointly, agrees to purchase from the Company and
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 the Company or 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, acting severally and not
jointly, hereby grant an option to the U.S. Underwriters, severally and not
jointly, to purchase up to an additional 884,317 shares of
17
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 and 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
Section 10), or such other time not later than ten business days after such date
as shall be agreed upon by Merrill Lynch and 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 and 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 Company and the Selling Stockholders by wire
transfer of immediately available funds to bank accounts designated by the
Company and the Custodian pursuant to each Selling Stockholder's Power of
Attorney and Custody Agreement, as the case may be, 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
18
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 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
19
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 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, the International Purchase Agreement or the Japanese Underwriting
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 the U.S. or the International
Prospectuses 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 U.S. or any International
Prospectus in order to comply with
20
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) Blue Sky Qualifications. The Company will use its best efforts,
-----------------------
in cooperation with the U.S. Underwriters, to qualify the Securities for
offering and sale under the applicable securities laws of such states and other
jurisdictions (domestic or foreign) as Merrill Lynch may designate and to
maintain such qualifications in effect for a period of not less than one year
from the later of the effective date of the Registration Statement and any Rule
462(b) Registration Statement; provided, however, that the Company shall not be
obligated to file any general consent to service of process or to qualify as a
foreign corporation or as a dealer in securities in any jurisdiction in which it
is not so qualified or to subject itself to taxation in respect of doing
business in any jurisdiction in which it is not otherwise so subject. In each
jurisdiction in which the Securities have been so qualified, the Company will
file such statements and reports as may be required by the laws of such
jurisdiction to continue such qualification in effect for a period of not less
than one year from the effective date of the Registration Statement and any Rule
462(b) Registration Statement.
(g) 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.
(h) Use of Proceeds. The Company will use the net proceeds received
---------------
by it from the sale of the Securities in the manner specified in the U.S. and
the International Prospectuses under "Use of Proceeds" and in the Japanese
Prospectus in Part Two - V under the caption "2. Installation, Material
Expansion or Repair of Facilities or Plan Thereof."
(i) Listing. The Company will use its best efforts to effect the
-------
listing of the Common Stock (including the Securities) on the New York Stock
Exchange.
(j) Restriction on Sale of Securities. During a period of 180 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
21
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 (A) the Securities to be
sold hereunder or under the International Purchase Agreement or the Japanese
Underwriting Agreement, (B) 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, (C) any transactions outlined in the
Prospectuses under the caption "The Reorganization and S Corporation
Distribution", or (D) any transactions outlined in the Prospectuses under the
caption "Shares Eligible for Future Sale - Distributor Options and Employee
Stock Bonus Awards."
(k) 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.
(l) Compliance with NASD Rules. The Company hereby agrees that it
--------------------------
will ensure that the Reserved Securities will be restricted if and to the extent
required by the National Association of Securities Dealers, Inc. (the "NASD") or
the NASD rules from sale, transfer, assignment, pledge or hypothecation for a
period of three months following the date of this Agreement. The U.S.
Underwriters will notify the Company as to which persons will need to be so
restricted. At the request of the U.S. Underwriters, the Company will direct
the transfer agent to place a stop transfer restriction upon such securities for
such period of time. Should the Company release, or seek to release, from such
restrictions any of the Reserved Securities, the Company agrees to reimburse the
U.S. Underwriters for any reasonable expenses (including, without limitation,
legal expenses) they incur in connection with such release.
(m) Compliance with Rule 463. The Company will file with the
Commission such reports on Form SR as may be required pursuant to Rule 463 of
the 1933 Act Regulations.
SECTION 4 Payment of Expenses. (a) Expenses. The Company and the Guarantor
------------------- --------
will pay or cause to be paid all expenses incident to the performance of their
obligations 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, any Agreement
22
among Underwriters and such other documents as may be required in connection
with the offering, purchase, sale, issuance 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, issuance or delivery of the Securities to
the Underwriters and the transfer of the Securities between the U.S.
Underwriters, the International Managers and the Japanese Underwriters (iv) the
fees and disbursements of the Company's 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, (x) the fees and expenses incurred in
connection with the listing of the Securities on the New York Stock Exchange and
(xi) all costs and expenses of the Underwriters, including the fees and
disbursements of Fried, Frank, Harris, Shriver & Jacobson, special counsel for
the U.S. Underwriters, in connection with matters related to the Reserved
Securities which are designated by the Company for sale to employees,
distributors and others having a business relationship with the Company and its
affiliates.
(b) Expenses of the Selling Stockholders. The Selling Stockholders,
------------------------------------
jointly and severally, will pay all expenses incident to the performance of
their respective obligations under, and the consummation of the transactions
contemplated by this Agreement, including (i) any stamp duties, capital duties
and stock transfer taxes, if any, payable upon the sale of the Securities to the
U.S. Underwriters, and their transfer between the Underwriters pursuant to an
agreement between such Underwriters, and (ii) the fees and disbursements of
their respective counsel and accountants.
(c) 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 Company and the Guarantor 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, special
counsel for the U.S. Underwriters and counsel for the Japanese Underwriters.
Except as provided in this Section 4 and in Section 6 and Section 7 hereof,
neither the Company nor the Guarantor shall be responsible for paying the out-
of-pocket expenses of the U.S. Underwriters.
(d) Allocation of Expenses. The provisions of this Section shall not
----------------------
affect any agreement that the Company, the Guarantor and the Selling
Stockholders may make for the
23
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 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 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 to 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 to
the Underwriters may reasonably request.
(d) Opinion of Counsel for the Selling Stockholders. 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
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.
24
Underwriters to the effect set forth in Exhibit C hereto and to such further
effect as counsel to 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 to the U.S. Underwriters may reasonably request.
(f) Opinion of Special Japanese Counsel for the Company. At Closing
---------------------------------------------------
Time, the U.S. Representatives shall have received the favorable opinion, dated
as of Closing Time, of Nagashima & Ohno, Special 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 E hereto and
to such further effect as counsel to the U.S. Underwriters may reasonably
request.
(g) 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 Allen & Overy, 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 F hereto and to such further
effect as counsel to the U.S. Underwriters may reasonably request.
(h) Opinion of Special 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, Special 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 G hereto and
to such further effect as counsel to the U.S. Underwriters may reasonably
request.
(i) 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 H hereto and to such further
effect as counsel to the U.S. Underwriters may reasonably request.
25
(j) 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 I hereto and to such further
effect as counsel to the U.S. Underwriters may reasonably request.
(k) Opinion of Canadian Counsel for the Company. At Closing Time,
-------------------------------------------
the U.S. Representatives shall have received the favorable opinion, dated as of
Closing Time, of Miller & Thomson, Canadian 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 J hereto and to such further
effect as counsel to the U.S. Underwriters may reasonably request.
(l) Opinion of Japanese Counsel for the Underwriters. At Closing
------------------------------------------------
Time, the U.S. Representatives shall have received the favorable opinion, dated
as of Closing Time, of Tomotsune Kimura & Mitomi, Japanese counsel for the
Underwriters, 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 such effect as counsel to the U.S.
Underwriters may reasonably request.
(m) 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), (ii), (v),
(vi) (solely as to preemptive or other similar rights arising by operation of
law or under the charter or by-laws of the Company), (vii) through (ix),
inclusive, (xi), (xii) (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.
(n) 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
26
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.
(o) 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,
the International Purchase Agreement and the Japanese Underwriting Agreement at
or prior to Closing Time.
(p) Accountant's Comfort Letter. At the time of the execution of
---------------------------
this 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.
(q) 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 (o) of this Section, except that the
specified date referred to shall be a date not more than three business days
prior to Closing Time.
(r) 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.
(s) 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
27
arrangements.
(t) Lock-up Agreements. At the date of this Agreement, the U.S.
------------------
Representatives shall have received an agreement substantially in the form of
Exhibit J hereto signed by the persons listed on Schedule D hereto.
(u) 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.
(v) Purchase of Japanese Securities. Contemporaneously with or the
-------------------------------
purchase by the U.S. Underwriters of the Initial U.S. Securities under this
Agreement, the Japanese Underwriters shall have purchased the Japanese
Securities under the Japanese Underwriting Agreement.
(w) Reorganization. Prior to or simultaneously with the Closing
---------------
Time, the transactions contemplated in the Registration Statement under the
caption "The Reorganization and S Corporation Distribution" will have been
effected as described therein, and thereafter the Company and its Subsidiaries
will possess all the assets necessary to conduct their business as described in
the Registration Statement.
(x) 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(n) hereof
remains true and correct as of such Date of Delivery.
(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(o) remains true and correct as of such Date of Delivery.
28
(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 to 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 to the U.S. Underwriters, dated such Date of Delivery, to the same
effect as the opinion required by Section 5(e) hereof, except that no opinion
regarding the issuance or sale of the Securities in Japan need be contained in
such opinion.
(vii) Opinion of Special Japanese Counsel for Company. The favorable
-----------------------------------------------
opinion of Japanese counsel for the Company, in form and substance satisfactory
to counsel to the U.S. Underwriters, dated such Date of Delivery, to the same
effect as the opinion required by Section 5(f) hereof, except that no opinion
regarding the issuance or sale of the Securities in Japan need be contained in
such opinion.
(viii) 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 to 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 Special Hong Kong Counsel for the Company. The
----------------------------------------------------
favorable opinion of Hong Kong counsel for the Company, in form and substance
satisfactory to counsel to 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 Taiwanese Counsel for the Company. The favorable
--------------------------------------------
opinion
29
of Taiwanese counsel for the Company, in form and substance satisfactory to
counsel to 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 South Korean Counsel for the Company. The favorable
-----------------------------------------------
opinion of South Korean counsel for the Company, in form and substance
satisfactory to counsel to 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) Opinion of Canadian Counsel for the Company. The favorable
-------------------------------------------
opinion of Canadian counsel for the Company, in form and substance satisfactory
to counsel to 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(k) hereof.
(xiii) Opinion of Japanese Counsel for the Underwriters. The favorable
------------------------------------------------
opinion of Japanese counsel for the Underwriters, in form and substance
satisfactory to counsel to the U.S. Underwriters, dated such Date of Delivery,
to the same effect as the opinion required by Section 5(l) hereof, except that
no opinion regarding the issuance or sale of the Securities in Japan need be
contained in such opinion.
(xiv) 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(m) hereof.
(xv) 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(q) 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.
(y) 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 issuance and 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.
30
(z) 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.
SECTION 6 Indemnification.
---------------
(a) Indemnification of U.S. Underwriters. The Company, the Guarantor and
------------------------------------
the Selling Stockholders, jointly (except as provided in clause (3) 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, arising out of (A) the violation of any applicable laws
or regulations of foreign jurisdictions where Reserved Securities have been
offered and (B) any untrue statement or alleged untrue statement of a material
fact included in the supplement or prospectus wrapper material distributed in
Hong Kong, Taiwan, South Korea, Canada and the United Kingdom in connection with
the reservation and sale of the Reserved Securities to eligible employees and
distributors of the Company and its affiliates or the omission or alleged
omission therefrom of a material fact necessary to make the statements therein,
when considered in conjunction with the U.S. or the International Prospectus or
U.S. or International preliminary prospectus, not misleading;
(3) against any and all loss, liability, claim, damage and expense
31
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 or in connection with any violation of the nature referred
to in Section 6(a)(2)(A) hereof; 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)(3) is sought from the Company or the Guarantor,
and (B) each Selling Stockholder, to the extent indemnification pursuant to this
Section 6(a)(3) is sought from such Selling Stockholder; and
(4) 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 or in connection with
any violation of the nature referred to in Section 6(a)(2)(A) hereof, to the
extent that any such expense is not paid under clauses (1), (2) or (3) 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 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 and under Article 9 of the Japanese
Underwriting 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, the International Purchase Agreement and
the Japanese Underwriting Agreement and (z) each Selling Stockholder other than
Blake M. Roney, Steven J. Lund and Keith R. Halls (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, the
------------------
Guarantor 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
32
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 ( 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, the Guarantor or the Selling Stockholders, the
indemnified parties may proceed against either (1) the Company, the Guarantor
and the Selling Stockholders jointly, (2) the Selling Stockholders only or (3)
both the Company and the Guarantor only, but may not proceed solely against
Blake M. Roney, Steven J. Lund and Keith R. Halls (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, the Guarantor 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 or the Guarantor by making
a written demand upon the Company or the Guarantor 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 or the Guarantor 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 or the Guarantor 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 or the Guarantor and thereafter obtain payment
from the Back-Stopped Selling Stockholders without regard to the pursuit by any
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 or the Guarantor, to seek to obtain payment from
the Company or the Guarantor with respect to such Final Judgment or, having
sought such payment, to wait such 45 days after failure by the Company or the
Guarantor to immediately satisfy any such Final Judgment if (A) the Company or
the Guarantor files a petition for relief under the United States Bankruptcy
Code (the "Bankruptcy Code") or the Japanese equivalent thereof, (B) an order
for relief is entered against the Company or the Guarantor in an involuntary
case under the Bankruptcy Code or its Japanese equivalent, (C) the Company or
the Guarantor makes an assignment for the benefit of their respective creditors,
(D) any court orders or approves the appointment of a receiver or custodian for
the Company or the Guarantor 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
33
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,
the Guarantor or the Selling Stockholders before obtaining reimbursement of
expenses pursuant to clause (a)(4) of this Section 6. However, the indemnified
parties shall first seek to obtain such reimbursement in full from the Company
or the Guarantor by making a written demand upon the Company or the Guarantor
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 or the Guarantor 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 or the Guarantor 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 the Guarantor or, having made written demand therefor, to wait such 45 days
after failure by the Company or the Guarantor to immediately reimburse such
expenses if (I) the Company or the Guarantor files a petition for relief under
the Bankruptcy Code or its Japanese equivalent, (II) an order for relief is
entered against the Company or the Guarantor in an involuntary case under
the Bankruptcy Code, (III) the Company or the Guarantor 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 the Guarantor 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)(3) of this
Section 6 if the indemnified parties are entitled to seek indemnity under such
clause (a)(3) from any Selling Stockholder with respect to a settlement that has
not been effected with the written consent of the Company or the Guarantor.
(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 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
34
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 to the indemnified parties shall be selected by Merrill Lynch, and, in
the case of parties indemnified pursuant to Section 6(b) above, counsel to 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 to the
indemnifying party shall not (except with the consent of the indemnified party)
also be counsel to 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)(3) or Section 6(a)(4) 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.
(e) Indemnification for Reserved Securities. In connection with the
---------------------------------------
offer and sale of the Reserved Securities, the Company and the Guarantor agree,
promptly upon a request in writing, to indemnify and hold harmless the U.S.
Underwriters from and against any and all losses, liabilities, claims, damages
and expenses incurred by them as a result of the failure of
35
eligible employees and distributors of the Company or its affiliates to pay for
and accept delivery of Reserved Securities which, by the end of the first
business day following the date of this Agreement, were subject to a properly
confirmed agreement to purchase.
The Company and the Guarantor also agree, promptly upon a request in
writing, to indemnify and hold harmless the U.S. Underwriters from and against
any and all losses, liabilities, claims, damages and expenses incurred by them
as a result of, in connection with or arising out of the offer and sale of the
Reserved Securities, including the allocation of shares within distributor
groups and among distributors generally, provided that the Company shall not be
obligated to indemnify the U.S. Underwriters insofar as the claim is caused by
the failure of any U.S. Underwriter to allocate shares as instructed in writing
by the Company.
(f) Other Agreements with Respect to Indemnification. The provisions of
------------------------------------------------
this Section shall not affect any agreement among 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, the
Guarantor 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, the Guarantor 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, or in connection with any violation of the nature referred to in
Section 6(a)(2)(A) hereof, 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, the Guarantor 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 Company and 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, the Guarantor and the Selling
Stockholders on the one hand and the U.S. Underwriters on the other hand shall
be determined by reference to,
36
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 or
any violation of the nature referred to in Section 6(a)(2)(A) or hereof.
The Company, the Guarantor, 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, 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 among 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
37
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.
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, Japan 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, New York State or Japanese 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:
38
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
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 or the
---------------------------------------------------------
Company. (a) If a Selling Stockholder 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 and the Company 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 any Selling Stockholder as referred to in this
Section 11, each of the U.S. Representatives, the Company and the non-defaulting
Selling Stockholders
39
shall have the right to postpone the Closing Time or 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.
(b) If the Company shall fail at Closing Time or at the Date of Delivery to
sell the number of Securities that it is obligated to sell hereunder, then this
Agreement shall terminate without any liability on the part of any nondefaulting
party; provided, however, that the provisions of Sections 1, 4, 6, 7 and 8 shall
remain in full force and effect. No action taken pursuant to this Section shall
relieve the Company from liability, if any, in respect of such default.
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, 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, the Guarantor 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, the Guarantor 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, the Guarantor
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.
40
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.
41
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:
NU SKIN JAPAN COMPANY,
LIMITED, AS GUARANTOR
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 & CO. INCORPORATED
DEAN WITTER REYNOLDS INC.
NOMURA SECURITIES INTERNATIONAL, INC.
By: MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By ______________________________________
Authorized Signatory
42
For themselves and as U.S. Representatives of the other U.S. Underwriters named
in Schedule A hereto.
43
EXHIBIT 10.17
NU SKIN ASIA PACIFIC, INC.
1996 STOCK INCENTIVE PLAN
TABLE OF CONTENTS
PAGE
----
1. PURPOSE................................................ 1
2. DEFINITIONS............................................ 1
3. ADMINISTRATION......................................... 4
4. SHARES SUBJECT TO THE PLAN............................. 4
5. PARTICIPANTS........................................... 5
6. AWARDS UNDER THE PLAN.................................. 5
7. STOCK OPTIONS.......................................... 5
8. STOCK APPRECIATION RIGHTS.............................. 7
9. CONTINGENT STOCK AWARDS................................ 8
10. RESTRICTED STOCK AWARDS................................ 9
11. GENERAL RESTRICTIONS................................... 10
12. RIGHTS OF A SHAREHOLDER................................ 11
13. RIGHTS TO TERMINATE EMPLOYMENT......................... 11
14. WITHHOLDING OF TAXES................................... 11
15. NONASSIGNABILITY....................................... 11
16. NON-UNIFORM DETERMINATIONS............................. 11
17. ADJUSTMENTS............................................ 11
18. AMENDMENT.............................................. 12
19. EFFECT ON OTHER PLAN................................... 12
20. DURATION OF PLAN....................................... 12
21. FUNDING OF THE PLAN.................................... 12
22. PLAN STATUS............................................ 12
23. GOVERNING LAW.......................................... 13
NU SKIN ASIA PACIFIC, INC.
1996 STOCK INCENTIVE PLAN
1. PURPOSE
1.1 The purpose of the Nu Skin Asia Pacific, Inc. 1996 Stock Incentive
Plan (the "Plan") is to provide incentives to specified individuals whose
performance, contributions and skills add to the value of Nu Skin Asia Pacific,
Inc. (the "Company") and its affiliated companies. The Company also believes
that the Plan will facilitate attracting, retaining and motivating employees,
directors and consultants of high caliber and potential.
1.2 Plan participants shall include those officers, directors, employees
and consultants of the Company and subsidiaries who, in the opinion of the
Committee, are making or are in a position to make substantial contributions to
the Company by their ability and efforts.
2. DEFINITIONS
2.1 For purposes of the Plan, the following terms shall have the following
meanings, unless the context clearly indicates to the contrary.
(a) "Award" means a grant of Restricted Stock, Contingent Stock, an
Option, or an SAR.
(b) "Award Agreement" means the agreement approved by the Committee
evidencing an Award to a Grantee.
(c) "Board" means the Company's Board of Directors.
(d) "Code" means the Internal Revenue Code of 1986, as amended.
(e) "Committee" means the members of the Board until the Compensation
Committee of the Board is appointed, and after the Compensation Committee is
appointed means the members of the Compensation Committee of the Board, who are
"outside directors" (within the meaning of Section 162(m) of the Code and any
regulations or rulings promulgated thereunder) to the extent required for
purposes of compliance with such Code Section, and "disinterested persons"
(within the meaning of Rule 16b-3 of the Exchange Act), to the extent required
for compliance with such Rule.
(f) "Company" means Nu Skin Asia Pacific, Inc.
(g) "Consultant" means any individual who provides services to the
Company as an independent contractor and not as an Employee or Director.
(h) "Contingent Stock" means stock which will be issued to a Grantee
upon the attainment of certain conditions pursuant to Section 9 hereof.
(i) "Director(s)" means a member or the members of the Board.
(j) "Effective Date" means September 5, 1996.
(k) "Employee" means
any individual who is an employee of the Company, a Parent or Subsidiary.
(l) "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
(m) "Fair Market Value" of a Share means on, or with respect to, any
given date:
(i) If the Shares are listed on a national stock exchange, the closing
market price of such Shares as reported on the composite tape for issues listed
on such exchange on such date or, if no trade shall have been reported for such
date, on the next preceding date on which there were trades reported; provided,
that if no such quotation shall have been made within the ten business days
preceding such date, Fair Market Value shall be determined under (iii) below.
(ii) If the Shares are not listed on a national stock exchange but are
traded on the over-the-counter market, the mean between the closing dealer bid
and asked price of such Shares as reported by the National Association of
Securities Dealers through their Automated Quotation System for such date, or if
no quotations shall have been made on such date, on the next preceding date on
which there were quotations; provided, that, if such quotations shall have been
made within the ten business days preceding such date, Fair Market Value shall
be determined under (iii) below.
(iii) If (i) and (ii) do not apply, the Fair Market Value of a Share
shall be determined without regard to any control premium or discount for lack
of control (except as otherwise required by Section 422 of the Code) by the
Committee in good faith consistent with the valuation of the Company as provided
by a third party appraiser for other corporate purposes before adjustments or
any discounts applied due to lack of marketability. The Committee may rely upon
the most recent valuation (if it is based on a date within 3 months of the
valuation date) and there shall be no requirement to cause a more recent
valuation to be made (except as may be required for
2
purposes of Section 422 of the Code). If no such valuation exists, the Committee
may engage a third party appraiser to prepare the valuation.
(n) "Grantee" means an Employee, Director or Consultant who has
received an Award.
(o) "Incentive Stock Option" shall have the same meaning as given to
the term by Section 422 of the Code and any regulations or rulings promulgated
thereunder.
(p) "Nonqualified Stock Option" means any Option granted pursuant to
Section 7 which when awarded by the Committee was not intended to be, or does
not qualify as, an Incentive Stock Option.
(q) "Option" means the right to purchase from the Company a stated
number of Shares at a specified Option Price. The Option may be granted to an
Employee, Director or Consultant subject to the terms of this Plan, and such
other conditions and restrictions as the Committee deems appropriate. Each
Option shall be designated by the Committee to be either an Incentive Stock
Option or a Nonqualified Stock Option. Only Employees may be granted Incentive
Stock Options.
(r) "Option Agreement" means the Award Agreement pursuant to which an
Option is granted under Section 7.
(s) "Option Price" means the purchase price per Share under an Option,
as described in Section 7.
(t) "Parent" means any corporation (other than the Company) in an
unbroken chain of corporations ending with the Company if, at the time of the
granting of an Option, each of the corporations (other than the Company) owns
stock possessing 50% or more of the total combined voting power of all classes
of stock in one of the other corporations in such chain within the meaning of
Section 424(e) of the Code and any regulations or rulings promulgated
thereunder.
(u) "Plan" means Nu Skin Asia Pacific, Inc. 1996 Stock Incentive Plan,
as evidenced herein and as amended from time to time.
(v) "Restricted Stock" means Shares issued, subject to restrictions,
to a Grantee pursuant to Section 10.
(w) "SAR" means a stock appreciation right which provides a Grantee a
potential right to a payment based on the appreciation in the fair market value
of a Share granted pursuant to Section 8.
3
(x) "SEC" means the U.S. Securities and Exchange Commission.
(y) "Section 16 Person" means a person who is an "insider" within the
meaning of Section 16(b) of the Exchange Act with respect to transactions
involving equity securities of the Company, including the Shares.
(z) "Share" means one share of the Company's Class A common stock,
$.001 par value.
(aa) "Subsidiary" means any corporation in an unbroken chain of
corporations beginning with the Company if, at the time of the granting of the
Option, each of the corporations (other than the last corporation) in the
unbroken chain owns stock possessing 50% or more of the total combined voting
power of all classes of stock in one of the other corporations in such chain,
within the meaning of Section 424(f) of the Code and any regulations or rulings
promulgated thereunder.
3. ADMINISTRATION
3.1 The Plan shall be administered by the Committee. The Committee shall
have full and final authority in its discretion to:
(a) conclusively interpret the provisions of the Plan and to decide
all questions of fact arising in its application;
(b) determine the individuals to whom Awards shall be made under the
Plan;
(c) determine the type of Award to be made to such individuals and the
amount, size and terms of each Award;
(d) determine the time when Awards will be granted to such
individuals; and
(e) make all other determinations necessary or advisable for the
administration of the Plan.
4. SHARES SUBJECT TO THE PLAN
4.1 The Shares subject to Awards under the Plan shall not exceed in the
aggregate 4,000,000 Shares.
4.2 Shares may be authorized and unissued Shares or treasury Shares.
4.3 Except as provided herein, any Shares subject to an Award, which Award
for any reason expires or is terminated unexercised as to such Shares shall
again be available under the Plan.
4
5. PARTICIPANTS
5.1 Awards permitted pursuant to this Plan which are Incentive Stock
Options may only be made to Employees (including Directors who are also
Employees). All other Awards permitted pursuant to the Plan may only be made to
Employees, Directors or Consultants.
6. AWARDS UNDER THE PLAN
6.1 Awards under the Plan may be in the form of Options (both Nonqualified
Stock Options and Incentive Stock Options), Contingent Stock, Restricted Stock,
and SARs and any combination of the above.
6.2 The maximum number of Awards that may be awarded to any one Employee,
Director or Consultant during the life of the Plan shall be 10% of the total
Shares reserved for issuance under the Plan.
7. STOCK OPTIONS
7.1 The Committee in its sole discretion shall designate whether an Option
is to be an Incentive Stock Option or a Nonqualified Stock Option. The
Committee may grant both Incentive Stock Options and Nonqualified Stock Options
to the same individual. However, where both an Incentive Stock Option and a
Nonqualified Stock Option are awarded at one time, such Options shall be deemed
to have been awarded in separate grants, shall be clearly identified, and in no
event will the exercise of one such Option affect the right to exercise the
other such Option except to the extent so provided in the Award Agreement as
determined by the Committee.
7.2 Options granted pursuant to the Plan shall be authorized by the
Committee under terms and conditions approved by the Committee, not inconsistent
with this Plan or Exchange Act Rule 16b-3(c), and shall be evidenced by Option
Agreements in such form as the Committee shall from time to time approve, which
Option Agreements shall contain or shall be subject to the following terms and
conditions, whether or not such terms and conditions are specifically included
therein:
(a) The Option Price of an Incentive Stock Option shall not be less
than 100% of the Fair Market Value of a Share on the day the Option is granted,
as determined by the Committee. The Option Price of a Nonqualified Stock Option
shall not be less than 85% of the Fair Market Value of a Share on the day the
Option is granted, as determined by the Committee. Notwithstanding the
immediately preceding sentence, the Award Agreement for a Nonqualified Stock
Option at the Committee's sole discretion, may, but need not, provide for a
reduction of the Option Price by dividends paid on a Share during the period the
Option is outstanding and unexercised, but in no event shall the Option Price be
less than the par value of such Share.
(b) Each Option Agreement shall state the period or periods of time,
as determined by the Committee, within which the Option may be exercised
5
by the Grantee, in whole or in part, provided such period shall not commence
earlier than six months after the date of the grant of the Option and not later
than ten years after the date of the grant of the Option. The Committee shall
have the power to permit in its discretion an acceleration of previously
determined exercise terms, subject to the terms of this Plan, to the extent
permitted by Exchange Act Rule 16b-3(c), and under such circumstances and upon
such terms and conditions as deemed appropriate and which are not inconsistent
with Exchange Act Rule 16b-3(c)(1).
(c) Shares purchased pursuant to an Option Agreement shall be paid for
in full at the time of purchase, either in the form of cash, common stock of the
Company at Fair Market Value, or a combination thereof, as the Committee shall
determine.
(d) Notwithstanding anything herein to the contrary, the aggregate
Fair Market Value (determined as of the time the Option is granted) of Incentive
Stock Options for any Employee which may become first exercisable in any
calendar year shall not exceed $100,000.
(e) Notwithstanding anything herein to the contrary, no Incentive
Stock Option shall be granted to any individual if, at the time the Option is to
be granted, the individual owns stock possessing more than 10% of the total
combined voting power of all classes of stock of the Company unless at the time
such Option is granted the Option Price is at least 110% of the Fair Market
Value of the stock subject to the Option and such Option by its terms is not
exercisable after the expiration of five years from the date such Option is
granted.
(f) Each Option Agreement for an Incentive Stock Option shall contain
such other terms, conditions and provisions as the Committee may determine to be
necessary or desirable in order to qualify such Option as an incentive stock
option within the meaning of Section 422 of the Code, or any amendment thereof,
substitute therefor, or regulation thereunder. Subject to the limitations of
Section 18, and without limiting any provisions hereof, the Committee shall have
the power without further approval to amend the terms of any Option for
Grantees.
7.3 If any Option is not granted, exercised, or held pursuant to the
provisions of the Plan or Section 422 of the Code applicable to an Incentive
Stock Option, it will be considered to be a Nonqualified Stock Option to the
extent that any or all of the grant is in conflict with such provisions.
7.4 An Option may be terminated (subject to any shorter periods set forth
in an individual Option Agreement by the Committee, in its sole discretion) as
follows:
6
(a) During the period of continuous employment or service as a Consultant
with the Company or Subsidiary, an Option will be terminated only if it has been
fully exercised or it has expired by its terms.
(b) In the event of termination of employment as an Employee or service as
a Director or Consultant for any reason, the Option will terminate upon the
earlier of (i) the full exercise of the Option, (ii) the expiration of the
Option by its terms, or (iii) except as provided in Section 7.4(c), no more than
one year (three months for Incentive Stock Options) following the date of
employment termination (or termination of service as a Director or Consultant)
for Nonqualified Stock Options. For purposes of the Plan, a leave of absence
approved by the Company shall not be deemed to be termination of employment
except with respect to an Incentive Stock Option as required to comply with
Section 422 of the Code and the regulations issued thereunder.
(c) If a Grantee's employment as an Employee, or service as a Director or
Consultant, terminates by reason of death or disability prior to the termination
of an Option, such Option may be exercised to the extent that the Grantee shall
have been entitled to exercise it at the time of death or disability, as the
case may be, by the Grantee, the estate of the Grantee or the person or persons
to whom the Option may have been transferred by will or by the laws of descent
and distribution for the period set forth in the Option Agreement, but no more
than three years following the date of such death or disability, provided,
however, with respect to an Incentive Stock Option, such right must be
exercised, if at all, within one year after the date of such death or
disability.
8. STOCK APPRECIATION RIGHTS
8.1 SARs shall be evidenced by Award Agreements for SARs in such form, and
not inconsistent with this Plan or Exchange Act Rule 16b-3(c)(1), as the
Committee shall approve from time to time, which Award Agreements shall contain
in substance the following terms and conditions as discussed in Sections 8.2
through 8.4.
8.2 An SAR may be, but is not required to be, granted in connection with
an Option. An SAR shall entitle the Grantee, subject to such terms and
conditions determined by the Committee, to receive, upon surrender of the SAR,
all or a portion of the excess of (i) the Fair Market Value of a specified
number of Shares at the time of the surrender, as determined by the
Committee, over (ii) 100% of the Fair Market Value of such Shares at the time
the SAR was granted less any dividends paid on such Shares while the SAR was
outstanding but unexercised.
8.3 SARs shall be granted for a period of not less than one year nor more
than ten years, and shall be exercisable in whole or in part, at such time or
times and subject to such other terms and conditions as shall be prescribed by
the Committee at the time of grant, subject to the following:
7
(a) No SAR shall be exercisable, in whole or in part, during the one
year period starting with the date of grant; and
(b) SARs will be exercisable only during a Grantee's employment by, or
service as a Consultant for, the Company or a Subsidiary, except that in the
discretion of the Committee an SAR may be made exercisable for up to three
months after the Grantee's employment, or service as a Director or Consultant,
is terminated for any reason other than death, retirement or disability. In the
event that a Grantee's employment as an Employee, or service as a Director or
Consultant, is terminated as a result of death, retirement or disability without
having fully exercised such Grantee's SARs, the Grantee or such Grantee's
beneficiary may have the right to exercise the SARs during their term within a
period of 6 months after the date of such termination to the extent that the
right was exercisable at the date of such termination, or during such other
period and subject to such terms as may be determined by the Committee. Subject
to the limitations of Section 18, the Committee in its sole discretion may
reserve the right to accelerate previously determined exercised terms, within
the terms of the Plan, under such circumstances and upon such terms and
conditions as it deems appropriate.
(c) The Committee shall establish such additional terms and
conditions, without limiting the foregoing, as it determines to be necessary or
desirable to avoid "short-swing" trading liability in connection with an SAR
within the meaning of Section 16(b) of the Exchange Act.
(d) The Committee, in its sole discretion, may establish different
time periods than specified above for any individual or group of individual
Awards.
8.4 Upon exercise of an SAR, payment shall be made within ninety days in
the form of common stock of the Company (at Fair Market Value on the date of
exercise), cash, or a combination thereof, as the Committee may determine.
9. CONTINGENT STOCK AWARDS
9.1 Contingent Stock Awards under the Plan shall be evidenced by Award
Agreements for Contingent Stock in such form and not inconsistent with this Plan
as the Committee shall approve from time to time, which Award Agreements shall
contain in substance the terms and conditions described in Sections 9.2 through
9.5.
9.2 The Committee shall determine the number of Shares subject to a
Contingent Stock Award to be granted to an Employee, Director or Consultant
based on the past or expected impact the Employee, Director or Consultant has
had or can have on the financial well-being of the Company and other factors
deemed by the Committee to be appropriate.
8
9.3 Contingent Stock Awards made pursuant to this Plan shall be subject to
such terms, conditions, and restrictions, including without limitation,
substantial risks of forfeiture and/or attainment of performance objectives,
and for such period or periods as shall be set forth in the Award Agreement as
determined by the Committee at the time of grant. The Committee shall have the
power to permit, in its discretion, an acceleration of the expiration of the
applicable restriction period with respect to any part or all of the Award to
any Grantee. The Committee shall have the power to make a Contingent Stock
Award that is not subject to vesting or any other contingencies in recognition
of an Employee's, Director's or Consultant's prior service and financial impact
on the Company. During the restriction period, the Grantee shall not have the
rights of a shareholder.
9.4 The Award Agreement for the Contingent Stock Award shall specify the
terms and conditions upon which any restrictions on the right to receive Shares
representing Contingent Stock Awards under the Plan shall lapse, as determined
by the Committee. Upon the lapse of such restrictions, Shares shall be issued
to the Grantee or such Grantee's legal representative.
9.5 In the event of a Grantee's termination of employment as an Employee,
or service as a Director or Consultant, whichever is applicable, for any reason
prior to the lapse of restrictions applicable to a Contingent Stock Award made
to such Grantee and unless otherwise provided for herein by this Plan or as
provided for in the Award Agreement for Contingent Stock, all rights to Shares
as to which there still remain unlapsed restrictions shall be forfeited by such
Grantee to the Company without payment or any consideration by the Company, and
neither the Grantee nor any successors, heirs, assigns or personal
representatives of such Grantees shall thereafter have any further rights or
interest in such Shares.
10. RESTRICTED STOCK AWARDS
10.1 Restricted Stock Awards under the Plan shall be evidenced by Award
Agreements for Restricted Stock in such form, and not inconsistent with this
Plan, as the Committee shall approve from time to time, which Award Agreements
shall contain in substance the terms and conditions described in Sections 10.2
through 10.6.
10.2 The Committee shall determine the number of Shares subject to a
Restricted Stock Award to be granted to an Employee, Director or Consultant
based on the past or expected impact the Employee, Director or Consultant has
had or can have on the financial well-being of the Company and other factors
deemed by the Committee to be appropriate.
10.3 Restricted Stock Awards made pursuant to this Plan shall be subject
to such terms, conditions, and restrictions, including without limitation,
substantial risks of forfeiture and/or attainment of performance objectives, and
for such period or periods as set forth in the Award Agreement as determined by
the Committee at the time of grant. The Committee shall have the power to
permit, in its discretion, an acceleration of the expiration of the applicable
restriction period with respect to any part or all of the Award to any Grantee.
Upon issuance of a Restricted Stock Award, Shares will be issued in the name of
the Grantee. During the restriction period, Grantee shall have the rights of a
shareholder for all such Shares of Restricted Stock, including the right to vote
and the right to receive dividends thereon as paid.
9
10.4 Each certificate evidencing stock subject to Restricted Stock Awards
shall bear an appropriate legend referring to the terms, conditions and
restrictions applicable to such Shares. Any attempt to dispose of Shares of
Restricted Stock in contravention of such terms, conditions and restrictions
shall be ineffective. The Committee may adopt rules which provide that the
certificates evidencing such Shares may be held in custody by a bank or other
institution, or that the Company may itself hold such Shares in custody, until
the restrictions thereon shall have lapsed and may require as a condition of any
Award that the Grantee shall have delivered a stock power endorsed in blank
relating to the Shares of Restricted Stock covered by such Award.
10.5 The Award Agreement for Restricted Stock shall specify the terms and
conditions upon which any restrictions on the right to receive shares
representing Restricted Stock awarded under the Plan shall lapse as determined
by the Committee. Upon the lapse of such restrictions, Shares which have not
been delivered to the Grantee or such Grantee's legal representative shall be
delivered to such Grantee or such Grantee's legal representative.
10.6 In the event of a Grantee's termination of employment as an Employee,
or service as a Director or Consultant, whichever is applicable, for any reason
prior to the lapse of restrictions applicable to a Restricted Stock Award made
to such Grantee and unless otherwise provided for herein by this Plan or as
provided for in the Award Agreement for Restricted Stock, all rights to Shares
as to which there remain unlapsed restrictions shall be forfeited by such
Grantee to the Company without payment or any consideration by the Company, and
neither the Grantee nor any successors, heirs, assigns or personal
representatives of such Grantee shall thereafter have any further rights or
interest in such Shares.
11. GENERAL RESTRICTIONS
11.1 The Plan and each Award under the Plan shall be subject to the
requirement that, if at any time the Committee shall determine that (i) the
listing, registration or qualification of the Shares subject or related thereto
upon any securities exchange or under any state or federal law, (ii) the consent
or approval of any government regulatory body, or (iii) an agreement by the
Grantee of an Award with respect to the disposition of Shares, is necessary or
desirable as a condition of, or in connection with the Plan or the granting of
such Award or the issue or purchase of Shares thereunder, the Plan will not be
effective and/or the Award may not be consummated in whole or in part unless
such listing, registration, qualification, consent, approval or agreement shall
have been effected or obtained free of any conditions not acceptable to the
Committee.
12. RIGHTS OF A SHAREHOLDER
12.1 The Grantee of any Award under the Plan shall have no rights as a
shareholder with respect thereto unless and until certificates for Shares of
common stock are issued to such Grantee, except for the rights provided in
Section 10 as it pertains to Restricted Stock Awards.
13. RIGHTS TO TERMINATE EMPLOYMENT
13.1 Nothing in the Plan or in any agreement entered into pursuant to the
Plan shall confer upon any Grantee the right to continue in the employment as an
Employee, or service as
10
a Director or Consultant, of the Company or a Subsidiary or affect any right
which the Company or its Subsidiary may have to terminate the employment, or
service as a Director or Consultant, of such Grantee.
14. WITHHOLDING OF TAXES
14.1 Whenever the Company proposes, or is required, to issue or transfer
Shares under the Plan, the Company shall have the right to require the Grantee
to remit to the Company an amount, or a number of shares, sufficient to satisfy
any federal, state and/or local withholding tax requirements prior to the
delivery of any certificate or certificates for such Shares. Whenever under the
Plan payments are to be made in cash, such payments shall be net of an amount
sufficient to satisfy any federal, state and/or local withholding tax
requirements.
15. NONASSIGNABILITY
15.1 No Award or benefit under the Plan shall be assignable or
transferable by the Grantee thereof except by will or by the laws of descent and
distribution. During the life of the Grantee, such Award shall be exercisable
only by such person or by such person's guardian or legal representative.
16. NON-UNIFORM DETERMINATIONS
16.1 The Committee's determination under the Plan (including, without
limitation, determinations of the persons to receive Awards, the form, amount
and timing of such Awards, the terms and conditions of such Awards and the Award
Agreements evidencing same, and the establishment of values and performance
targets) need not be uniform and may be made by the Committee selectively among
persons who receive, or are eligible to receive, Awards under the Plan, whether
or not such persons are similarly situated.
17. ADJUSTMENTS
17.1 In the event of any change in the outstanding common stock of the
Company by reason of a reorganization, a stock dividend, recapitalization,
merger, consolidation, split-up, combination, exchange of Shares or the like,
the Committee shall adjust the number of Shares of common stock which may be
issued under the Plan and shall provide for an equitable adjustment of any
outstanding Award or Shares issuable pursuant to an outstanding Award under this
Plan.
18. AMENDMENT
18.1 The Plan may be amended by the Board, without Shareholder approval,
at any time in any respect, unless Shareholder approval of the amendment in
question is required under Delaware law, the Code, any exemption from Section 16
of the Exchange Act (including without limitation SEC Rule 16b-3) for which the
Company intends Section 16 Persons to qualify, any national securities exchange
system on which the Shares are then listed or reported, by any
11
regulatory body having jurisdiction with respect to the Plan, or any other
applicable laws, rules or regulations.
18.2 The termination or modification or amendment of the Plan shall not,
without the consent of a Grantee, affect a Grantee's rights under an Award
previously granted. Notwithstanding the foregoing, however, the Company reserves
the right to terminate the Plan in whole or in part, at any time and for any
reason, provided that appropriate compensation, as determined in the sole and
absolute discretion of the Committee, is made to Grantees with respect to Awards
previously granted.
19. EFFECT ON OTHER PLAN
19.1 Participation in this Plan shall not affect a Grantee's eligibility
to participate in any other benefit or incentive plan of the Company, and any
Awards made pursuant to this Plan shall not be used in determining the benefits
provided under any other plan of the Company unless specifically provided.
20. DURATION OF PLAN
20.1 The Plan shall remain in effect until all Awards under the Plan have
been satisfied by the issuance of Shares or the payment of cash, but no Awards
shall be granted more than ten years after the date the Plan is adopted by the
Company.
21. FUNDING OF THE PLAN
21.1 This Plan shall be unfunded. The Company shall not be required to
establish any special or separate fund or to make any other segregation of
assets to assure the payment of any Award under this Plan, and payment of Awards
shall be on the same basis as the claims of the Company's general creditors. In
no event shall interest be paid or accrued on any Award including unpaid
installments of Awards.
22. PLAN STATUS
22.1 This Plan is intended to satisfy the requirements of a 16b-3 plan
under the Exchange Act.
22.2 This Plan is intended to qualify as a plan under Rule 701 issued
pursuant to The Securities Act of 1933, as amended.
23. GOVERNING LAW
23.1 The laws of the State of Delaware shall govern, control and determine
all questions arising with respect to the Plan and the interpretation and
validity of its respective provisions.
12
NU SKIN ASIA PACIFIC, INC.
By___________________________________
Its President
ATTEST:
___________________________
Its Secretary
13
EXHIBIT 10.18
LONG-TERM INCENTIVE (LTI) PLAN
Effective January 1, 1995
OBJECTIVE: The objective of the LTI plan is to help insure the long-term
- --------- growth, profitability and stability of Nu Skin Asia Pacific's
(the "Company") operations. In addition, through delegation of
authority and responsibility, key members of local management in
each market (i.e. Country General Managers) will be held
accountable for operations and will be retained and rewarded
accordingly.
BONUS PLAN: An annual bonus will be paid and accrued by February 15th of
- ---------- each year based upon the prior year's results of operations in
the country overseen by each General Manager. All bonus
payments, including those accruing in the Company's accounts,
are at the discretion of the Company's Board of Directors and
are subject to available cash flow of each Nu Skin entity and
the overall financial position of the Company and each of its
subsidiaries. However, under normal operations and cash
positioning, 100% of a General Manager's annual base salary is
the maximum potential bonus. Fifty percent (50%) of the bonus
will be paid by February 15 of each year and fifty percent (50%)
of the bonus will accrue and vest ratably over 10 years of
continued subsequent employment or upon reaching the age of 65,
whichever is sooner. (NOTE: The amount accrued each year will
earn interest at a rate equivalent to the interest rate earned
on the Company's cash deposits. Also, the amount accrued each
year will begin a new vesting period of 10 years.) To the extent
possible, the following general parameters will be followed in
establishing yearly performance objectives:
Sales Growth 25%
Distributor Activity:
Active Distributors 10%
Sponsorship 15%
Profitability (net income
before taxes) 40%
Discretionary 10%
(Operations, Employee Morale, Efficiency,
Timeliness, Policy & Procedure Adherence,
Pin Level Promotions)
GOALS Based upon the Strategic Plan and Budget for each entity,
- ----- annual ratings in the area of Sales Growth, Distributor Activity
and Profitability will be determined by the Company's Board of
Directors.
Four different goals will be established as follows:
Goal "A" = Superior performance
Goal "B" = Excellent performance
Goal "C" = Good performance
Goal "D" = Average performance
Each goal will be assigned the following percentages for
use in determining total bonus to be earned:
Goal "A" = 100%
Goal "B" = 67%
Goal "C" = 33%
Goal "D" = 0%
EXAMPLE: The following is an example of the Bonus calculation:
- --------
Annual
Annual Active Profitability
Sales Goal Distributors Sponsorship Contribution Discretionary
---------- ------------ ----------- ------------- -------------
Goal A 1,000,000 50,000 90,000 15%
Goal B 800,000 40,000 70,000 12%
Goal C 600,000 30,000 50,000 9%
Goal D 500,000 20,000 30,000 6%
Actual
Results 750,000 25,000 83,000 16% Superior
If the General Manager has a salary of $100,000 the total
bonus would be calculated as follows:
Sales Bonus
$100,000 X 25% X 33% = $8,250
Active Distributor Bonus
-------------------------
$100,000 X 10% X 0% = $0
Sponsorship Bonus
-----------------
$100,000 X 15% X 67% = $10,050
Profitability Bonus
-------------------
$100,000 X 40% X 100% = $40,000
Discretionary Bonus
-------------------
$100,000 X 10% X 100% = $10,000
The total bonus would be $68,300 of which $34,150 would be paid in cash
on February 15 and the remaining $34,150 would be defined in an account on the
Company's books for future distribution.
DRAFT
1996
OPTION AGREEMENT
BETWEEN
NU SKIN ASIA PACIFIC, INC.
AND
NU SKIN INTERNATIONAL, INC.
TABLE OF CONTENTS
Page
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ARTICLE I
GRANT AND EXERCISE OF OPTION
1.01. Grant of Option................................................ 2
1.02. Exercise Price................................................. 2
1.03. Assignment of Options.......................................... 2
1.04. Exercise Period................................................ 3
1.05. Exercise of Options............................................ 3
1.06. Plan........................................................... 4
1.07. Restrictions on Option Shares.................................. 4
1.08. Term........................................................... 4
ARTICLE II
REPRESENTATIONS AND AGREEMENTS OF THE COMPANY
2.01. Due Authorization and Execution, Binding Effect, Etc........... 4
2.02. Shares to be Fully Paid; Reservation of Shares................. 5
2.03. Regulatory Matters............................................. 5
2.04. Transfer, Stamp or Issue Tax................................... 6
ARTICLE III
TRANSFERS OF OPTION AND SHARES
3.01. Restrictions on Transfer....................................... 6
ARTICLE IV
MISCELLANEOUS PROVISIONS
4.01. Notices........................................................ 6
4.02. Arbitration; Consent to Jurisdiction........................... 7
4.03. Entire Agreement; Amendments and Waivers....................... 7
4.04. Successors and Assigns......................................... 8
4.05. Governing Law.................................................. 8
4.06. Counterparts................................................... 8
4.07. Headings....................................................... 8
4.08. Severability................................................... 8
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1996 OPTION AGREEMENT
---------------------
1996 OPTION AGREEMENT, dated __________, 1996 ("Agreement"), between
NU SKIN ASIA PACIFIC, INC., a corporation incorporated under the laws of the
state of Delaware (the "Company"), and NU SKIN INTERNATIONAL, INC., a
corporation incorporated under the laws of the State of Utah (the
"Optionholder").
RECITALS
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The Optionholder has paid to the Company for this Option Agreement a
total of $_________ in the form of a promissory note (the "Note"). The Company
and the Optionholder have entered into an Administrative Services Agreement
pursuant to which the Optionholder provides to the Company certain
administrative, computer and other services. The Company's wholly owned
subsidiaries (the "Subsidiaries") and the Optionholder have entered into various
service and licensing agreements. The Optionholder is an independent contractor
for the Company, providing services to the Company directly and through the
Optionholder's distributors (the "Distributors"). The Subsidiaries' income and
value and thus, as a result of its ownership of the Subsidiaries, the Company's
net worth, will increase to the extent the Distributors increase product sales.
To provide an incentive for the Distributors to increase sales, the Optionholder
has agreed that it will establish a stock option plan (the "Plan") pursuant to
which Distributors will be offered by Optionholder the option to purchase shares
of Class A Common Stock of the Company ("Company Stock"). The parties desire to
enter into this Agreement in order to provide for certain options and rights
with respect to certain shares of the Company Stock on the terms set forth
herein. This Agreement and the rights and obligations of the parties hereto are
intended to
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be incentives to increase sales and to the purchase of products by the
distributors and services from the Subsidiaries after the occurrence of a
reorganization (the "Reorganization") as contemplated by the Contribution
Agreement to be entered into prior to, or concurrently with, the Company's
proposed initial public offering (the "IPO").
NOW, THEREFORE, in order to induce the Optionholder to offer to
Distributors options to purchase Company Stock and in consideration of the Note
and the premises and the mutual covenants and agreements of the parties set
forth below and other good and valuable consideration the receipt and
sufficiency of which hereby are acknowledged by the Company and the
Optionholder, the Company and the Optionholder hereby agree as follows:
ARTICLE I
GRANT AND EXERCISE OF OPTION
1.01. Grant of Option. Effective on the date of the Reorganization
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and subject to the closing of the IPO (the "Effective Date"), the Company hereby
grants to the Optionholder an option (the "Option") to purchase 1,605,000 shares
of Company Stock on the terms and conditions contained herein. (A share of
Company Stock purchasable upon exercise of the Option is sometimes hereinafter
referred to as an "Option Share".)
1.02. Exercise Price. The purchase price per Option Share shall be
--------------
equal to 25% of the purchase price per share to the public in the IPO (the
"Exercise Price").
1.03. Assignment of Options. The Option is divisible into units of
---------------------
whole shares by the Optionholder. The Option, and any portion thereof, may be
assigned by the Optionholder to, and only to, Distributors ("Assignee") pursuant
to, and only pursuant to, the Plan. Except for the assignment by the
Optionholder permitted by this Section 1.03, the Option and any portion
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thereof, shall not be assignable or transferrable (other than upon the death of
any Assignee under the laws of descent and distribution) and may not be
alienated nor subject to creditors claims.
1.04. Exercise Period. The Option, and any part thereof, may be
---------------
exercised only during the period which begins on January 1, 1998 and ends on
December 31, 2001; provided, however, that the Optionholder, and only the
Optionholder, may exercise until June 30, 2002, any portion of the Option which
was assigned to an Assignee but either was forfeited under the terms of the Plan
or otherwise unexercised on December 31, 2001 (the "Exercise Period").
1.05. Exercise of Options. The Option may be exercised by, and only
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by, (i) the Optionholder, or (ii) an Assignee (or upon the Assignee's death, the
Assignee's beneficiary) only to the extent of the portion assigned to such
Assignee pursuant to Section 1.03 hereof and pursuant to the terms of the Plan
and the award agreement issued to the Assignee under the Plan. The Assignee may
exercise the Assignee's portion of the Option by written notice (on a form to be
prepared by the Optionholder) to the Optionholder at 75 West Center Street,
Provo, Utah 84601, Attn: Corporate Secretary, or such other address as the
Optionholder by written notice to the Assignee may designate. Such notice shall
specify how many Option Shares are to be purchased and the exercise date, which
date shall not be earlier than the tenth business day (as indicated by postmark)
after the date of such notice and not later than the last day of the Exercise
Period. The payment of the Exercise Price for each Option Share to be purchased
shall accompany such notice. The Optionholder shall forward the notice and
payment of the Exercise Price to the Company at the address specified for
notices pursuant to Section 4.01 hereof. The Optionholder may exercise a portion
of the Option only to the extent such portion was assigned to, but subsequently
forfeited by, a Distributor under the Plan.
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1.06. Plan. The Plan shall have such terms as Optionholder's Board
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of Directors may determine from time to time; provided, however, the Plan must
provide incentives for an Assignees to maintain and increase the Assignee's PIN
level and aggregate compensation during the period which begins on the Effective
Date and ends on December 31, 1997.
1.07. Restrictions on Option Shares. If a Distributor is assigned
-----------------------------
3,000 or more Option Shares (the "Total Grant"), the Option Shares received by
such Distributor, upon exercise of the portion of the Option assigned to such
Distributor, will be restricted preventing the Distributor from selling more
than 33% of the Total Grant in any given six month period.
1.08. Term. The Option shall terminate on December 31, 2001, except
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as to the Optionholder as provided pursuant to Section 1.04 hereof.
ARTICLE II
REPRESENTATIONS AND AGREEMENTS OF THE COMPANY
2.01. Due Authorization and Execution, Binding Effect, Etc. The
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Company represents and warrants to the Optionholder as follows:
(a) The Company is a corporation duly organized, validly existing and
in good standing under the laws of Delaware, and has full power and lawful
authority to carry on the business which it is now conducting.
(b) The Company has the full corporate power to execute and deliver
this Agreement and to carry out its obligations hereunder.
(c) The execution and delivery of this Agreement have been duly and
validly authorized by the Board of Directors of the Company or an appropriate
committee thereof.
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(d) No other corporate acts or proceedings on the part of the Company
are necessary to authorize this Agreement.
(e) This Agreement constitutes a valid and legally binding obligation
of the Company, enforceable against the Company in accordance with its terms;
(f) No consent or approval by, or filing with, any governmental
authority is required in connection with the execution and delivery of this
Agreement other than such as have been obtained or made on or prior to the date
hereof; and
(g) The execution and delivery of this Agreement and the performance
by the Company of its obligations hereunder will not result in the violation of
any term or provision of the charter or bylaws of the Company or the
Subsidiaries or any loan agreement, indenture, note or other instrument, or
decree, order, statute, rule or regulation applicable to the Company or
Subsidiaries.
2.02. Shares to be Fully Paid; Reservation of Shares. The Company
----------------------------------------------
covenants and agrees that all Option Shares issued or sold to the Optionholder
or any Assignee upon the exercise of the Option and payment of the Exercise
Price will, upon such issuance or sale, be fully paid and non-assessable and
free from all taxes, liens, claims, charges and encumbrances. The Company
further covenants and agrees that during the Exercise Period, the Company will
have authorized, and reserved for the purpose of issue upon exercise of the
Option, a sufficient number of shares of Company Stock to provide for the
exercise of the Option.
2.03. Regulatory Matters. The issuance or sale of any Option Shares
------------------
upon exercise of the Option shall be subject to and contingent upon the
Company's and the Optionholders' and any Assignee's ability to satisfy all laws
and regulations applicable to the Options and the issuance of the Option Shares.
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2.04. Transfer, Stamp or Issue Tax. Any transfer, stamp, issue or
----------------------------
similar tax payable in connection with the exercise or sale of the Option shall
be paid or caused to be paid by the Optionholder and Assignee.
ARTICLE III
TRANSFERS OF OPTIONS AND SHARES
3.01. Restrictions on Transfer. The Optionholder may not sell,
------------------------
assign, transfer, pledge, hypothecate, make a gift of or contribute, or
otherwise dispose of the Option except pursuant to Section 1.03 hereof. An
Assignee may not sell, assign, transfer, pledge, hypothecate, make a gift of or
contribute, or otherwise dispose of the portion of the Option assigned to that
Assignee, except upon the death of the Assignee pursuant to the laws of descent
and distribution to the extent so provided in the Plan The document evidencing
an assignment hereunder shall contain this restriction.
ARTICLE IV
MISCELLANEOUS PROVISIONS
4.01. Notices. All communications, notices, requests, consents or
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demands given under this instrument shall be in writing and shall be deemed to
have been duly given when delivered to, or mailed by prepaid, registered or
certified mail,
if to the Company,
75 West Center Street
Provo, Utah 84601
Attention: Corporate Secretary
6
if to the Optionholder,
75 West Center Street
Provo, Utah 84601
Attention: Corporate Secretary
or, if to any party, to such other address as may be furnished by such party in
the manner provided herein.
4.02. Arbitration; Consent to Jurisdiction. Any dispute among the
------------------------------------
parties hereto arising out of or in connection with this Agreement shall be
settled and finally determined by arbitration conducted in Provo, Utah in
accordance with the then existing Commercial Arbitration Rules of the American
Arbitration Association, and judgment upon any award rendered by any arbitrator
or arbitrators may be entered in any court having jurisdiction thereof. The
parties hereto consent to the jurisdiction of the courts of the State of Utah or
the United States District Court for the District of Utah in any action, suit or
proceeding for purposes relating to any arbitration proceedings (including
enforcement of the agreement to arbitrate and enforcement of and entry of
judgment on any arbitration award), and further consent that any process or
notice of motion or other application may be served outside the State of Utah by
registered mail or by personal service, provided that a reasonable time for
appearance is allowed. Twenty (20) days shall be deemed such a reasonable time.
4.03. Entire Agreement; Amendments and Waivers. This Agreement sets
----------------------------------------
forth the entire understanding of the parties hereto with respect to its subject
matter and merges and supersedes all prior and contemporaneous understandings
with respect to its subject matter. This Agreement may not be amended, waived
or modified, in whole or in part, except in writing signed on behalf of the
Company and the Optionholder. No waiver of any provision of this Agreement in
any
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instance shall be deemed to be a waiver of the same or any other provision
in any other instance. Failure of any party to enforce any provision of this
Agreement shall not be construed as a waiver of its rights under such provision.
4.04. Successors and Assigns. This Agreement shall be binding upon,
----------------------
enforceable against and inure to the benefit of, the parties hereto and their
respective successors and permitted assigns, and nothing herein is intended to
confer any right, remedy or benefit upon any other person.
4.05. Governing Law. This Agreement shall in all respects be
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governed by and construed in accordance with the laws of the State of Utah
applicable to agreements made and to be performed fully in such State.
4.06. Counterparts. This Agreement may be executed in multiple
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
4.07. Headings. The headings contained in this Agreement are for
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convenience only and shall not be used in the interpretation of this Agreement.
4.08. Severability. If any provision of this Agreement is held to be
------------
invalid or unenforceable by a court of competent jurisdiction, this Agreement
shall be interpreted and enforced as if such provision were severed or limited,
but only to the extent necessary to render such provision and this Agreement
enforceable.
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IN WITNESS WHEREOF, the parties hereto have
duly executed this Agreement as of the day and year first above written.
NU SKIN ASIA PACIFIC, INC.
By: _______________________________________
Its: _______________________________________
NU SKIN INTERNATIONAL, INC.
By: _______________________________________
Its _______________________________________
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EXHIBIT 10.23
ADDENDUM TO AMENDED AND RESTATED
LICENSING AND SALES AGREEMENT
-----------------------------
THIS ADDENDUM (the "Addendum") TO THE AMENDED AND RESTATED LICENSING
AND SALES AGREEMENT (the "Agreement") is made and entered into this _____ day of
November, 1996, 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 Japan Company, Limited, a corporation duly incorporated,
organized and existing under the laws of Japan (hereinafter "NSJ"). Capitalized
terms used herein without definition shall have the same meanings herein as in
the Agreement.
NOW THEREFORE, in consideration of the premises, the mutual promises,
covenants, and warranties hereinafter set forth or set forth in the Agreement
and for other valuable consideration, the sufficiency of which is hereby
acknowledged, the Parties agree as follows:
1. Payment. In recognition of the services NSI has provided and in
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the future will continue to provide NSJ and as an incentive for NSI to continue
providing quality services to NSJ and allowing NSJ to have access to NSI's
network of distributors, NSJ shall pay NSI U.S. Dollars (U.S. $ ).
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2. Time of Payment. NSJ's payment to NSI shall be made over time as
---------------
provided in paragraph 3 below.
3. Manner of Payment. NSI shall notify NSJ within ___ days of the
-----------------
exercise of options for Class A Common Stock of Nu Skin Asia Pacific, Inc. by a
distributor performing services benefiting Nu Skin Asia Pacific, Inc. If such
options are exercised in part, from time to time, then NSJ's payment shall be at
the rate of U.S. Dollars (U.S. $ ) per share exercised under such
----- -----
options. NSJ shall transmit payment to NSI by wire transfer within thirty (30)
days following the end of each calendar quarter based on the number of options
expired within that quarter. NSI's notice shall contain wire transfer
instructions.
4. Independent Contractor. The parties are acting hereunder as
----------------------
independent contractors and no partnership or joint venture is intended to be
created hereby. NSI is retained only for the purposes and to the extent set
forth in the Agreement and this
Addendum. As such, NSJ shall not be responsible for the payment of any taxes,
benefits, workers' compensation or unemployment compensation to NSI or NSI's
employees. NSJ is interested only in the results to be obtained under this
Agreement. The manner and means of conducting NSI's services are under the sole
control and in the sole discretion of NSI.
IN WITNESS WHEREOF, the Parties have caused this Addendum to the
Agreement to be executed in the United States of America by their duly
authorized representatives as of the day and year first above written.
NU SKIN INTERNATIONAL, INC. NU SKIN JAPAN COMPANY, LIMITED
By: By:
------------------------ ---------------------------
Blake M. Roney Takashi Bamba
President President
EXHIBIT 10.24
ADMINISTRATIVE SERVICES AGREEMENT
---------------------------------
THIS ADMINISTRATIVE SERVICES AGREEMENT is entered into as of the ____ day
of ___________, 1996, between NU SKIN ASIA PACIFIC, INC., a Delaware corporation
(the "Company" or "NSA"), and NU SKIN INTERNATIONAL, INC., a Utah corporation
("NSI").
WITNESSETH:
WHEREAS, the Company wishes NSI to perform certain administrative services
("Administrative Services"), all of which to be performed in accordance with the
terms hereof; and
WHEREAS, NSI wishes to perform the Administrative Services, subject to the
terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, the receipt and sufficiency of which hereby is
acknowledged, the parties hereby agree as follows:
ARTICLE 1
Administrative Services
1.1 Duties. NSI agrees to perform various Administrative Services which
shall include: (i) entering into Licensing and Sales Agreements with the
Company's Subsidiaries; (ii) administering certain distributor stock option
plan(s); and (iii) providing management and technical support services. NSI
agrees to perform the Administrative Services in a commercially reasonable
manner and in accordance with industry practices and geographical customs.
ARTICLE 2
Terms of Payment
2.1 Contract Price. In consideration for NSI's performance of the
Administrative Services and the delivery of a promissory
note in the amount of ($________) pursuant to the 1996 Option Agreement between
NSA and NSI dated __________ __, 1996 (the "Option Agreement"), the Company
shall issue to NSI an option to purchase 1,605,000 shares of NSA stock (the "NSA
Stock"). Such option shall have the terms and conditions that are described in
the Option Agreement.
ARTICLE 3
Term of Agreement
3.1 Term. This Agreement shall be effective from the date hereof and
shall automatically terminate on _____________, 19__, unless it is renewed,
extended, or modified by a written agreement signed by both parties hereto, or
is earlier terminated as provided for herein.
3.2 Early Termination. NSA shall have the sole power to determine whether
NSI is performing the Administrative Services in accordance with and pursuant to
this Agreement. If NSA determines, in its sole discretion, that NSI is
materially failing to perform the Administrative Services, NSA shall provide NSI
written notice of such failure to perform. If NSA determines that NSI has
failed to correct such deficient performance within ninety (90) days after
receipt of such notice, NSA may declare this Agreement to be terminated.
3.3 Survival of Certain Articles. The parties agree that notwithstanding
any termination of this Agreement pursuant to Sections 3.1 and 3.2 hereof,
Article 5 shall survive any such termination and shall remain in full force and
effect.
ARTICLE 4
Excuse for Non-Performance
4.1 Force Majeure. Any failure by NSI to perform, or delay in timely
performance of, the Administrative Services hereunder shall be excused, if and
to the extent prevented or delayed by strike, act of God, governmental action,
accident or any other
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condition beyond NSI's reasonable control NSI agrees to resume performance of
the Administrative Services as soon as practicable following cessation of such
force majeure condition.
ARTICLE 5
Records
5.1 Records. NSI will maintain appropriate records as to the
Administrative Services rendered hereunder. NSI will keep such records
throughout the term of this Agreement, which records shall be available for
inspection by the Company at the Company's request upon reasonable prior notice
during normal business hours. At the termination of this Agreement, copies of
all such records shall be given to the Company at its request.
ARTICLE 6
Miscellaneous
6.1 Assignment. This Agreement may not be assigned by either party
without the prior written consent of the other party.
6.2 Governing Law. This Agreement will be governed by, and construed in
accordance with, the laws of the State of Utah.
6.3 Entirety; Amendment. This Agreement, including the Schedules hereto,
represents the entire agreement between the parties and may only be amended by
an instrument in writing executed by the parties or their permitted assignees.
6.4 Section Headings. Section and Article headings are for reference
purposes only and shall not affect the interpretation or meaning of this
Agreement.
6.5 Notices. All notices pursuant to this Agreement shall be in writing,
except as provided herein. Notices in writing shall be sufficient if hand
delivered or mailed by first class mail, postage prepaid, or sent by
telecommunication to the attention of the person listed below and to the party
intended as the recipient
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thereof at the address of such party set forth below, or at such other address
or to the attention of such other person as such party shall have designated for
such purpose in a written notice complying as to delivery with the terms of this
Section.
NSI: Nu Skin International, Inc.
75 West Center Street
Provo, Utah 84601
The Company: Nu Skin Asia Pacific, Inc.
75 West Center Street
Provo, Utah 84601
6.6 No waiver of performance. Failure by either party at any time to
require performance by the other party or to claim breach of any provision of
this Agreement will not be construed as a waiver of any right accruing under
this Agreement, nor affect any subsequent breach, nor affect the effectiveness
of this Agreement or any part hereof, nor prejudice either party as regards any
subsequent action.
6.7 Counterparts. 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.
6.8 No Partnership. The parties are acting hereunder as independent
contractors and no partnership or joint venture is intended to be created
hereby. NSI is retained only for the purposes and to the extent set forth in
this Agreement. As such, NSA shall not be responsible for the payment of any
taxes, benefits, workers' compensation or unemployment compensation to NSI or
NSI's employees. NSA is interested only in the results to be obtained under
this Agreement. The manner and means of conducting the services are under the
sole control and in the sole discretion of NSI.
6.9 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
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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.
IN WITNESS WHEREOF, the parties hereto have respectively caused this
Agreement to be executed by their duly authorized officers as of the day and
year first above written.
NU SKIN INTERNATIONAL, INC.
By:
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Title:
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NU SKIN ASIA PACIFIC, INC.
By:
---------------------------------------
Title:
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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 (Amendment No. 3) on Form S-1 of our report dated
September 10, 1996 relating to the combined 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 Combined Financial
Information" in such Prospectus. However, it should be noted that Price
Waterhouse LLP has not prepared or certified such "Selected Combined Financial
Information".
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Salt Lake City, Utah
November 7, 1996
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement (Amendment No. 3) on Form S-1 of our report dated
September 10, 1996 relating to the balance sheet of Nu Skin Asia Pacific, Inc.,
which appears in such Prospectus.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Salt Lake City, Utah
November 7, 1996
Exhibit 23.4
[LETTERHEAD OF GRANT THORNTON HONG KONG]
November 6, 1996
Board of Directors
Nu Skin Hong Kong, Inc.
Room 2503 Windsor House
311 Gloucester Road
Causeway Bay
Hong Kong
Gentlemen
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We refer to our audit report, dated April 14, 1994 on the financial statements
of Nu Skin Hong Kong, Inc. - Hong Kong Branch as of September 30, 1993 and for
the year then ended, except for notes 2 and 8 to these financial statements as
to which the date is August 30, 1996.
We consent to the use of the aforementioned report in the Registration Statement
(Amendment No. 3) on Form S-1 (333-12073) and Prospectus of Nu Skin Asia
Pacific, Inc.
Very truly yours
/s/ Grant Thornton
GRANT THORNTON
