Filed pursuant to Rule 424(b)(3)
File No. 333-12073
PROSPECTUS
Options to purchase 1,605,000 Shares of Class A Common Stock
3,018,546 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, par value $.001 per share (the "Class A Common Stock"), of the Company,
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 163,546 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 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 Company and 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, par value $.001 per share (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 the
consummation of the Company's reorganization (the "Existing Stockholders"). 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." After
consummation of the Rule 415 Offerings, the Existing Stockholders and certain of
their affiliates will beneficially own shares of Common Stock having
approximately 98.2% of the combined voting power of the outstanding shares of
Common Stock.
The Class A Common Stock is traded on the New York Stock Exchange under the
symbol "NUS." On August 28, 1997, the last reported sale price of the Class A
Common Stock was $23 3/4 per share. See "Plan of Distribution" for information
relating to the factors considered in determining the exercise price of the
Distributor Options offered hereby.
See "Risk Factors," beginning on page 16, 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 Rule 415
Public Discount(1) Company(2) Selling Stockholders
Per Option(3). . . . . . . . . . . . . -- -- -- --
Per Share(3) . . . . . . . . . . . . . $5.75 -- $9,228,750 --
Total. . . . . . . . . . . . . . . . . $9,228,750 -- $9,228,750 --
====================================== ============= =============== ============== ======================
(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) 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." The Rule 415 Selling Stockholders
will pay all expenses in connection with the Rule 415 Offerings.
(3) 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 September 3, 1997.
[THIS PAGE INTENTIONALLY LEFT BLANK]
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. As used herein, "Nu
Skin Asia Pacific" or the "Company" means Nu Skin Asia Pacific, Inc. and the
Subsidiaries. The "Subsidiaries" means Nu Skin Hong Kong, Inc. ("Nu Skin Hong
Kong"), Nu Skin Japan Company, Limited ("Nu Skin Japan"), Nu Skin Korea, Inc.
("Nu Skin Korea"), Nu Skin Taiwan, Inc. ("Nu Skin Taiwan") and Nu Skin Personal
Care (Thailand) Limited ("Nu Skin Thailand"), collectively. Until September 30,
1994, the Company's fiscal year ended on September 30 of each year. As of
October 1, 1994, the Company changed its fiscal year end to December 31 of each
year, beginning with the fiscal year ended December 31, 1995.
The Company
Nu Skin Asia Pacific is a rapidly growing network marketing company
involved in the distribution and sale of premium quality, innovative personal
care and nutritional products. The Company is the exclusive distribution vehicle
for Nu Skin International, Inc. ("Nu Skin International" or "NSI") in the
countries of Japan, Taiwan, Hong Kong (including Macau), South Korea and
Thailand, where the Company currently has operations, and in Indonesia,
Malaysia, the People's Republic of China ("PRC"), the Philippines, Singapore and
Vietnam, where operations have not commenced.
The Company believes it is one of the fastest growing network marketing
companies in Asia. Revenue increased 53.3% to $441.0 million for the six months
ended June 30, 1997 from $287.7 million for the same period in 1996. Net income
increased 24.7% to $43.8 million for the six months ended June 30, 1997 from
$35.1 million for the same period in 1996. Revenue increased 89.2% to $678.6
million for the year ended December 31, 1996 from $358.6 million in 1995.
Operating expenses have increased with the growth of the Company's revenue. Net
income increased 103.2% to $81.7 million for the year ended December 31, 1996
from $40.2 million in 1995. The Company's network of independent distributors
has grown since the Company's inception in 1991 to more than 400,000 active
distributors as of June 30, 1997. See "Risk Factors--Managing Growth."
A great deal of the Company's success to date is the result of the growth
of its Japanese business, which can be attributed to an increasing awareness of
the Nu Skin and IDN brands. Significant revenue was recognized from the outset
of the Company's operations in Japan in 1993 due to the immediate attention
given to the market by leading NSI distributors from around the world. Japan has
continued to post strong financial results for the Company, with revenue
increasing by approximately 64% in U.S. dollars and 90% in local currency for
1996 compared to 1995 and by approximately 57% in U.S. dollars and 77% in local
currency for the six months ended June 30, 1997 compared to the same period in
1996. Given the size of the direct selling market in Japan and the growing
Japanese demand for the Company's premium quality and innovative products,
management believes that there is still significant opportunity for revenue
growth in this market.
The Company's product philosophy is to combine the best of science and
nature in developing premium quality, innovative personal care and nutritional
products which are specifically designed for the network marketing distribution
channel. The Company offers products in two distinct categories: personal care
products, marketed under the trademark "Nu Skin," and nutritional products,
marketed under the trademark "Interior Design Nutritionals" ("IDN"). The Nu Skin
personal care product lines include facial care, body care, hair care and color
cosmetics, as well as specialty products such as sun protection, oral hygiene
and fragrances. The IDN product lines include nutritional supplements,
nutritious and healthy snacks, sports and fitness nutritional products and
botanical supplements.
In Japan, Taiwan and Hong Kong, the Company currently offers most of the Nu
Skin personal care products and approximately one-third of the Interior Design
Nutritionals products, including LifePak, the core IDN nutritional supplement.
In South Korea, the Company currently offers approximately one-half of the Nu
Skin personal care products, including most of the Nu Skin core facial and hair
care products, and LifePak. In Thailand, the Company currently offers one-third
of the Nu Skin personal care products, including most of the core facial and
hair care products, and none of the nutritional products. The Company believes
that it can significantly grow its business and attract new customers by
expanding its product offerings in each of its markets to include more of the
existing Nu Skin personal care and IDN products. In addition to expanding its
product offerings with existing Nu Skin personal care and IDN products, the
Company intends to introduce new products tailored to specific markets.
The distribution of products through the network marketing and other direct
selling channels has grown significantly in recent years. The World Federation
of Direct Selling Associations ("WFDSA") reports that, since 1990, worldwide
direct distribution of goods and services to consumers has increased 76%,
resulting in the sale of nearly $80 billion of goods and services in 1996.
According to the WFDSA, $35 billion of goods and services were sold by its
members in 1996 through direct selling channels in the markets in which the
Company currently operates, which represents 44% of the global volume of direct
sales by its members.
Operating Strengths and Growth Strategy
The Company believes that its success to date is due to its reputation and
commitment to provide a wide range of premium quality, innovative personal care
and nutritional products and an appealing global business opportunity for
persons interested in establishing a direct sales business. Specifically, the
Company's operating strengths include (i) its premium product offerings, (ii) a
unique global distributor compensation plan (the "Global Compensation Plan"),
which compensates distributors for product sales in downline distribution
networks in any country in which NSI and its affiliates operate, (iii) a
comparatively high level of distributor incentives paid to independent
distributors under the Global Compensation Plan, (iv) a systematic market
development program, (v) individual distributor attention and other distributor
support programs and (vi) an experienced management team at both the Company and
the Subsidiaries. See "Business--Operating Strengths." Consideration of the
Company's operating strengths must be tempered by consideration of various risks
which impact or may impact the Company and its operations. See "Risk Factors."
The Company's primary objective is to capitalize on its operating strengths
to become a leading distributor of consumer products in each of its markets. The
Company intends to pursue this strategy by (i) introducing new products, (ii)
opening new markets, (iii) attracting new distributors and enhancing distributor
productivity and (iv) increasing brand awareness and loyalty. See
"Business--Growth Strategy." Consideration of the Company's growth strategy
should be made in connection with a consideration of the risks associated with
such growth strategy. See "Risk Factors."
Relationship with Nu Skin International
NSI, founded in 1984 and based in Provo, Utah, is engaged in selling
personal care and nutritional products and, together with its affiliates,
comprises one of the largest network marketing organizations in the world. NSI
has provided, and will continue to provide, a high level of support services to
the Company, including product development, distributor support services,
marketing and other managerial support services. Management believes that the
Company's relationship with NSI has allowed the Company to increase revenue and
net income at rates that otherwise may not have been possible. Since distributor
agreements are entered into between NSI and distributors, all of the
distributors who generate revenue for the Company are distributors of NSI. The
Company primarily relies on NSI to enforce distributor policies and procedures.
NSI's distributor network is licensed by NSI to the Subsidiaries. See "Risk
Factors--Reliance Upon Independent Distributors of NSI" and "--Relationship with
and Reliance on NSI; Potential Conflicts of Interest."
Recent Events
The Reorganization. The Company was incorporated on September 4, 1996. On
November 20, 1996, the stockholders of Nu Skin Japan, Nu Skin Taiwan, Nu Skin
Hong Kong, Nu Skin Korea and Nu Skin Thailand contributed their shares of
capital stock to the capital of the Company in a transaction (the
"Reorganization") intended to qualify under Section 351 of the Internal Revenue
Code of 1986, as amended (the "Code"), in exchange for shares of Class B Common
Stock. Prior to the Reorganization, all of the outstanding shares of the
Subsidiaries were held by these stockholders. As a result of the Reorganization,
each of the Subsidiaries became a wholly-owned subsidiary of the Company.
The Initial Public Offerings. In November 1996, the Company and certain
selling stockholders (the "Selling Stockholders") sold a total of 10,465,000
shares of Class A Common Stock in underwritten public offerings (the
"Underwritten Offerings"). Of the 10,465,000 shares of Class A Common Stock sold
in the Underwritten Offerings, 4,750,000 shares were offered and sold by the
Company and 5,715,000 shares were offered and sold by the Selling Stockholders.
Registration Statement for Secondary Public Offering. On June 4, 1997, the
Company filed with the Securities and Exchange Commission a registration
statement on Form S-1 (File No. 333-28513) related to the public offering by the
Existing Stockholders and certain of their affiliates (the "Secondary Offering
Selling Stockholders") of 7,000,000 shares of Class A Common Stock. On July 17,
1997, the Company filed a pre-effective amendment No. 1 to this registration
statement. The Company converted the registration statement to a resale shelf
offering and deleted references to the underwriters. The registration statement
has not been declared effective and the shares subject to the registration
statement can only be resold by the Secondary Offering Selling Stockholders once
the registration statement has been declared effective and only in accordance
with the plan of distribution outlined in the registration statement. The
Company currently has no intention to proceed with the offering which is the
subject of the registration statement.
The Rule 415 Offerings
Distributor Options
Prior to the date of this Prospectus, the Existing Stockholders contributed
to the Company 1,605,000 shares of the Company's Class A Common Stock for use in
implementing an NSI distributor equity incentive program. Also prior to the date
of this Prospectus, the Company granted to NSI an option to acquire such
1,605,000 shares of Class A Common Stock (the "Distributor Options"). Each
Distributor Option entitles the holder to purchase one share of Class A Common
Stock. Upon vesting, Distributor Options will be exercisable at $5.75, which is
25% of the initial price per share to the public in the Underwritten Offerings
(the "Exercise Price").
Distributor Option Allocation. From January 1, 1997 until August 31, 1997
(the "Qualification Period"), existing and new distributors in each country
where NSI conducts business and where local laws may permit the issuance of
options hereunder had the opportunity to qualify for an allocation of the
Distributor Options from NSI by achieving executive distributor levels
("Executive Pin Levels") of Gold or higher under the Global Compensation Plan as
of August 31, 1997 and by submitting a representation letter to NSI as provided
in the NSI 1996 Distributor Stock Option Plan, as amended (the "NSI Stock Option
Plan") (qualifying distributors are hereinafter referred to as "Eligible
Distributors"). Pursuant to NSI's policies and procedures, that portion of sales
volume for September 1997 which would be attributed to sales volume for August
1997 will be included for purposes of determining commissions paid during the
Qualification Period, as well as whether a distributor qualifies as an Eligible
Distributor. Each allocation of Distributor Options made to an Eligible
Distributor that is an entity (such as a partnership or corporation) shall be
made by NSI solely to the entity, not to the owners of the entity individually.
NSI will notify Eligible Distributors of the results of the allocation of the
Distributor Options by October 31, 1997. Each Eligible Distributor shall have
the right to decline his or her Distributor Options by notice to NSI no later
than November 15, 1997. Each Eligible Distributor who has not declined his or
her Distributor Options on or before November 15, 1997 will be granted a number
of Distributor Options determined in accordance with the formula set forth
below. Because there is a fixed number of Distributor Options available for this
program, the allocation formula and explanations are rather complex.
S x (X/Y) = number of Distributor Options to be
allocated to an Eligible Distributor;
where
S = fixed number of Distributor Options
available = 1,605,000
X = C x (P+G) = Weighted Individual Compensation
C = net commissions paid to the Eligible Distributor on
sales volume during the Qualification Period
P = Executive Pin Level Weighting Factor
G = Business Growth Weighting Factor
Y = Sum of Weighted Individual Compensation paid to all
Eligible Distributors during the Qualification
Period = Weighted Total Compensation
Thus, the number of Distributor Options to be allocated to an Eligible
Distributor will be determined by multiplying the total number of Distributor
Options available ("S" in the formula above) by the quotient obtained by
dividing the Eligible Distributor's Weighted Individual Compensation ("X" in the
formula above, and as defined below) under the Global Compensation Plan during
the Qualification Period by the sum of the Weighted Individual Compensation paid
to all Eligible Distributors under the Global Compensation Plan on sales volume
during the Qualification Period (the "Weighted Total Compensation," and "Y" in
the formula above). An Eligible Distributor's Weighted Individual Compensation
is equal to total commissions, net of any withholdings, fines, penalties, or the
like, paid to such Eligible Distributor on sales volume during the Qualification
Period ("C" in the formula above) multiplied by the sum of his or her Executive
Pin Level Weighting Factor ("P" in the formula above, and as defined below) and
his or her Business Growth Weighting Factor ("G" in the formula above, and as
defined below).
Executive Pin Level Weighting Factor. An Eligible Distributor's Executive
Pin Level Weighting Factor is the percentage set forth in the table below
opposite the actual Executive Pin Level achieved by such Eligible Distributor as
of August 31, 1997. Allocations of Distributor Options shall generally be based
on the Executive Pin Level at which Eligible Distributors receive commissions,
giving consideration to any temporary exceptions which may be granted by NSI
from time to time.
Executive
Executive Pin Level Pin Level
as of August 31, 1997 Weighting Factor
- --------------------- ----------------
Hawaiian Blue Diamond................................ 100%
Blue Diamond......................................... 94%
Diamond.............................................. 86%
Emerald.............................................. 82%
Ruby................................................. 78%
Lapis................................................ 74%
Gold................................................. 72%
Business Growth Weighting Factor. An Eligible Distributor's Business Growth
Weighting Factor is based on the increase in his or her average monthly net
commissions paid on sales volume during the Qualification Period. An Eligible
Distributor's Business Growth Weighting Factor is equal to one-third (1/3) of
1%, up to a maximum of 100%, for each 1% increase in average monthly net
commissions paid during the Qualification Period that is greater than actual net
commission paid during September 1996 (the "Base Month"). The Base Month for a
distributor qualifying as an Eligible Distributor after September 1996 is deemed
to be his or her first month as an Eligible Distributor.
Illustrations. For purposes of illustration, for the eight-month period
ended on August 31, 1996 (the "Illustrative Qualification Period"), the Weighted
Total Compensation (Y) will be assumed to have been $200,000,000. An Emerald
level distributor who was paid net commissions (C) of $40,000 (or average
monthly net commissions of $5,000) during the Illustrative Qualification Period
and who had previously been paid net commissions of $1,000 during such
distributor's Base Month would apply a weighting factor of 182% to such net
commissions (computed using the 82% Executive Pin Level Weighting Factor (P) for
an Emerald level distributor plus a 100% Business Growth Weighting Factor (G)
based on the 400% increase in average net commissions paid during the
Illustrative Qualification Period over net commissions paid during such
distributor's Base Month), resulting in Weighted Individual Compensation (X) of
$72,800. Such distributor's allocation of Distributor Options at the end of the
Illustrative Qualification Period would be equal to the quotient of his or her
Weighted Individual Compensation (X = $72,800) divided by the Weighted Total
Compensation (X = $200,000,000), multiplied by the total number of Distributor
Options (S = 1,605,000). Such distributor would therefore be allocated 584
Distributor Options.
To illustrate another example, the Weighted Total Compensation (Y) for the
Illustrative Qualification Period will be assumed to have been $300,000,000. A
Blue Diamond level distributor who was paid net commissions (C) of $520,000 (or
average monthly net commissions of $65,000) during the Illustrative
Qualification Period and who had previously been paid net commissions of $50,000
during such distributor's Base Month would apply a weighting factor of 104% to
such net commissions (computed using the 94% Executive Pin Level Weighting
Factor (P) for a Blue Diamond level distributor plus a 10% Business Growth
Weighting Factor (G) based on the 30% increase in average net commissions paid
during the Illustrative Qualification Period over net commissions paid during
such distributor's Base Month) resulting in Weighted Individual Compensation (X)
of $540,800. Such distributor's allocation of Distributor Options at the end of
the Illustrative Qualification Period would be equal to the quotient of his or
her Weighted Individual Compensation (X = $540,800) divided by the Weighted
Total Compensation (Y = $300,000,000), multiplied by the total number of
Distributor Options (S = 1,605,000). Such distributor would therefore be
allocated 2,893 Distributor Options.
Vesting. 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 Pin Level he or
she achieved by the end of the Qualification Period (the "Qualifying Executive
Pin Level"). If an Eligible Distributor fails to maintain the Qualifying
Executive Pin 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, at the
end of the Qualification Period, the lowest Executive Pin Level held by him or
her during the Vesting Period (the "Recalculated Distributor Options"). For
example, if an Eligible Distributor ends the Qualification Period as a Diamond
level distributor with an Executive Pin Level Weighting Factor of 86% and a
Business Growth Weighting Factor of 15%, resulting in a combined weighting
factor for Weighted Individual Compensation of 101%, but during the Vesting
Period the lowest actual Executive Pin Level to which the distributor falls is
Ruby level, which carries an Executive Pin Level Weighting Factor of 78% (the
Business Growth Weighting Factor would remain unchanged), the combined weighting
factor for Weighted Individual Compensation would be reduced to 93%. 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 falls
below the Gold Executive Pin Level at any time during the Vesting Period, all
Distributor Options held by such Eligible Distributor will be immediately
forfeited. Forfeited or declined options will not vest but will revert to NSI.
Exercisability. Distributor Options vested in an Eligible Distributor will
become exercisable upon receipt of written notice from NSI of the number of
Distributor Options vested in such Eligible Distributor which is currently
estimated to be by January 31, 1998, and will remain exercisable for a four-year
period following December 31, 1997, provided the Eligible Distributor maintains
an Executive Pin Level of Gold or higher 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 agrees 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 the
Exercise Price of $5.75, which is 25% of the initial price per share to the
public in the Underwritten Offerings.
Certain Factors Impacting Program. The allocation examples presented above
are 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 Pin Levels increases as a proportion of all
Eligible Distributors and conversely will increase as the number of Eligible
Distributors at higher Executive Pin Levels decreases as a proportion of all
Eligible Distributors. There can be no assurance that the proportion of Eligible
Distributors at each Executive Pin 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. In certain
countries, including Japan, the formula used in determining allocations among
distributors may be modified to comply with local regulations, which will impact
the number of Distributor Options allocated to all Eligible Distributors. The
Distributor Option program is not intended to be an Eligible Distributor's
primary source of income. An Eligible Distributor's primary income source, i.e.,
product sales and commissions, will continue to be based on the efforts of the
Eligible Distributor and his or her downline organization.
Regulatory Requirements. 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. The necessary regulatory
approvals or qualifications have not been secured in each country, and it is
anticipated that in certain countries where regulatory approvals or
qualifications have been obtained the exercisability of the Distributor Options
may be suspended until further regulatory approvals are secured. In addition, it
is possible that NSI may not be able to secure the necessary regulatory
approvals or qualifications in certain countries. As of the date of this
Prospectus, NSI has been unable to secure the necessary legal approvals to
implement the NSI Stock Option Plan in Italy, South Korea and the United
Kingdom. In Japan, as required by law, the terms "commission" or "compensation"
for purposes of calculating Weighted Individual Compensation and Weighted Total
Compensation in the formula used to determine allocations of distributor
options, shall not include rebates paid on personal sales efforts or commissions
paid on personal sales volume as part of the executive fountain bonus. Due to
local legal and other requirements, the NSI Stock Option Plan as implemented in
the Netherlands and Hong Kong has been changed to provide that vested
distributor options will be exercisable for 90 days following December 31, 1997,
provided a Netherlands or Hong Kong distributor holding such options maintains
an Executive Pin Level of Gold or higher until the date of exercise. In certain
countries, including Belgium, France, Spain and possibly others, only existing
distributors and/or existing executive distributors will be allowed to
participate in the NSI Stock Option Plan. In Canada, information regarding the
NSI Stock Option Plan is permitted to be provided only to distributors with an
Executive Pin Level of Gold or higher. In the event the NSI Stock Option Plan
was not implemented until after commencement of the Qualification Period, or is
suspended after commencement of such period in a given country (a "Deferred
Qualification Country"), the formulas referenced above will be modified as
follows. For purposes of calculating Weighted Individual Compensation and
Weighted Total Compensation, a distributor resident in a Deferred Qualification
Country shall be deemed to have been paid during each month during the
Qualification Period for which the NSI Stock Option Plan was not implemented or
was suspended, net commissions equal to the average monthly net commissions
actually paid to such distributor during the portion of the Qualification Period
during which the NSI Stock Option Plan was implemented in such Deferred
Qualification Country.
Product Returns. 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 Eligible Distributor per month. In addition, product
returns during the Qualification or Vesting Periods will reduce commission
levels and may affect distributor pin levels, consequently impacting the number
of Distributor Options received by an Eligible Distributor. In the event of
product returns occurring after the Qualification or Vesting Periods which would
have affected distributor pin 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 Eligible
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.
Employee Stock Bonus Awards
Prior to the date of this Prospectus, the Existing Stockholders also
contributed an aggregate of 1,250,000 shares of Class A Common Stock 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 Rule 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, unless otherwise specified, provided
the employee recipient is still employed by NSI or one of its affiliates (other
than the Company). As of August 21, 1997, NSI and its affiliates (other than
the Company) had made stock bonus awards for 480,960 shares of Class A Common
Stock, of which awards for 19,096 shares had lapsed in connection with the
termination of the employee recipients. The Company will also issue 163,546
shares of Class A Common Stock in connection with stock bonus awards to be made
to the Company's employees pursuant to the 1996 Stock Incentive Plan on terms
substantially similar to those described above in relation to the employee stock
bonus awards to be made by NSI and its affiliates (other than the Company).
The Company has made stock bonus awards for 150,959 shares of Class A Common
Stock, of which awards for 12,413 shares have lapsed in connection with the
termination of the employee recipients.
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, qualifications or exemptions in each such country. There can be no
assurance that such qualifications will be secured or, once secured, will not be
suspended. 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--Regulatory and Tax
Issues" and "Certain United States Tax Consequences to Non-United States
Holders."
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 proceeds from the distribution of shares by the Company and 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. See "Rule 415 Selling Stockholders."
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....................................... 163,546 shares of Class A Common Stock
Common Stock to be outstanding after the Rule 415
Offerings:(4)(5)
Class A Common Stock(6)(7).................... 13,491,557 shares
Class B Common Stock.......................... 71,696,675 shares
Total Common Stock..................... 85,188,232 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 matters,
except as otherwise required by law, with each
share of Class A Common Stock entitling its
holder to one vote and each share of Class B
Common Stock entitling its holder to ten votes.
In all other respects the holders of Class A
Common Stock and the holders of Class B Common
Stock have equal rights. All of the shares of
Class B Common Stock are owned by the Existing
Stockholders and certain of their affiliates.
After consummation of the Rule 415 Offerings,
the Existing Stockholders and certain of their
affiliates will beneficially own shares of
Common Stock having approximately 98.2% of the
combined voting power of the outstanding shares
of Common Stock.
(1) Consists of a divisible and assignable option granted by the Company
to NSI to purchase shares of Class A Common Stock contributed to the
Company by the Existing Stockholders prior to the Rule 415 Offerings, which
option will be divided among and assigned to distributors by NSI pursuant
to the NSI Stock Option Plan.
(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
price per share to the public in the Underwritten 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.
(4) Reflects the conversion by the Existing Stockholders 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.
(5) All shares of Class B Common Stock are currently held by the Existing
Stockholders and certain of their affiliates 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 or certain of the affiliates of
the Existing Stockholders, 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."
(6) Includes: (a) 3,018,546 shares of Class A Common Stock issued and sold
in the Rule 415 Offerings (assuming the exercise of all 1,605,000
Distributor Options and the vesting of all 163,546 stock bonus awards
offered hereby by the Company to certain of its employees); (b) 10,465,000
shares of Class A Common Stock sold in the Underwritten Offerings by the
Company and the Selling Stockholders; and (c) 8,011 shares of Class A
Common Stock issued and sold by the Company pursuant to Regulation S under
the 1933 Act.
(7) Does not include: (i) 3,836,454 shares of Class A Common Stock
reserved for issuance pursuant to the 1996 Stock Incentive Plan; and (ii)
250,825 shares of Class A Common Stock subject to a stock option which was
granted to an executive officer of the Company. See "Management--1996 Stock
Incentive Plan," "Certain Relationships and Related
Transactions--Agreements and Arrangements with Management."
Forward-Looking Statements
Statements made herein under the captions "--Operating Strengths and Growth
Strategy," "Risk Factors--Seasonality and Cyclicality; Variations in Operating
Results," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "--Seasonality and Cyclicality," "--Outlook,"
"Business--Operating Strengths," "--Growth Strategy," and "--Country Profiles"
are "forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995 (the "Reform Act"). In addition, when used in this
Prospectus the words or phrases "will likely result," "expects," "intends,"
"will continue," "is anticipated," "estimates," "projects," "management
believes," "the Company believes" and similar expressions are intended to
identify "forward-looking statements" within the meaning of the Reform Act.
Forward-looking statements include plans and objectives of management for future
operations, including plans and objectives relating to the products and the
future economic performance and financial results of the Company. The
forward-looking statements and associated risks set forth herein relate to the:
(i) expansion of the Company's market share in its current markets; (ii)
Company's entrance into new markets; (iii) development of new products and new
product lines tailored to appeal to the particular needs of consumers in
specific markets; (iv) stimulation of product sales by introducing new products;
(v) opening of new offices, walk-in distribution centers and distributor support
centers in certain markets; (vi) promotion of distributor growth, retention and
leadership through local initiatives; (vii) upgrading of the Company's
technological resources to support distributors; (viii) obtaining of regulatory
approvals for certain products, including LifePak; (ix) stimulation of product
purchases by inactive distributors through direct mail campaigns; (x) retention
of the Company's earnings for use in the operation and expansion of the
Company's business; and (xi) development of brand awareness and loyalty. All
forward-looking statements are subject to certain risks and uncertainties,
including those discussed under the caption "Risk Factors" herein, that could
cause actual results to differ materially from historical results and those
presently anticipated or projected. The Company wishes to caution readers not to
place undue reliance on any such forward-looking statements, which speak only as
of the date made. The Company wishes to advise readers that the important
factors listed under the caption "Risk Factors" could affect the Company's
financial performance and could cause the Company's actual results for future
periods to differ materially from any views or statements expressed with respect
to future periods. Important factors and risks that might cause such differences
include, but are not limited to, factors related to the allocation and vesting
of the Distributor Options, the decrease in the number of Distributor Options
available, the effect of product returns, restrictions on the resale of the
shares underlying the Distributor Options, regulatory and taxation risks, the
Company's reliance upon independent distributors of NSI, the potential effects
of adverse publicity, including adverse publicity regarding the Company and
other direct selling companies in South Korea, the potential negative impact of
distributor actions, currency risks, seasonal and cyclical trends, variations in
operating results, government regulation of direct selling activities,
government regulation of products and marketing, import restrictions, other
regulatory issues, including regulatory action against the Company or its
distributors in any of the Company's markets and particularly in South Korea,
the Company's reliance on certain distributors, the potential divergence of
interests between distributors and the Company, the Company's entering new
markets, and the introduction of new products in the Company's existing markets,
managing the Company's growth, the possible adverse effect on the Company of the
change in the status of Hong Kong, the Company's relationship with and reliance
on NSI, potential conflicts of interest between the Company and NSI, control of
the Company by the Existing Stockholders, the anti-takeover effects of dual
classes of common stock, the adverse impact of the Distributor Option program on
the Company's income, the Company's reliance on and the concentration of outside
manufacturers, the Company's reliance on the operations of and dividends and
distributions from the Subsidiaries, taxation and transfer pricing, the
potential increase in distributor compensation expense, product liability
issues, market conditions, especially in South Korea, and competition, the
Company's operations outside the U.S., the anti-takeover effects of certain
charter, contractual and statutory provisions, 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, the vesting of the employee stock bonus
awards and otherwise, dilution, the absence of dividends, potential adverse
effects of the Company's price increases on sales and distributor growth, the
introduction and acceptance in South Korea of LifePak, the Company's core IDN
product, and other risks inherent in the importation, regulation and sale of
products in the Company's markets. In light of the significant uncertainties
inherent in forward-looking statements, the inclusion of any such statement
should not be regarded as a representation by the Company or any other person
that the objectives or plans of the Company will be achieved. See "Risk
Factors."
-----------
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,"
"--Licensing and Sales Agreements" and "--Korean Operating Agreements." The
principal executive offices of the Company are located at 75 West Center Street,
Provo, Utah 84601, and the Company's telephone number is (801) 345-6100.
In this Prospectus, references to "dollars" and "$" are to United States
dollars, and the terms "United States" and "U.S." mean the United States of
America, its states, territories, possessions and all areas subject to its
jurisdiction, references to "yen" and "(Y)" are to Japanese yen, and references
to "won" are to South Korean won.
SUMMARY CONSOLIDATED FINANCIAL AND OTHER INFORMATION
The following tables set forth summary consolidated, pro forma and other
financial information of the Company.
Six Months
Year Ended September 30, Year Ended December 31, Ended June 30,
1992 1993 1994 1994(1) 1995 1996 1996 1997
(in thousands, except per share data)
Income Statement Data:
Revenue........................ $42,919 $110,624 $254,637 $264,440 $358,609 $678,596 $287,711 $441,010
Cost of sales.................. 14,080 38,842 86,872 82,241 96,615 193,158 80,963 126,199
------- -------- -------- -------- -------- -------- -------- --------
Gross profit................... 28,839 71,782 167,765 182,199 261,994 485,438 206,748 314,811
Operating expenses:
Distributor incentives....... 14,659 40,267 95,737 101,372 135,722 249,613 107,090 169,132
Selling, general and
administrative............. 10,065 27,150 44,566 48,753 67,475 105,477 44,551 67,738
Distributor stock expense.... -- -- -- -- -- 1,990 -- 8,954
------- -------- -------- -------- -------- -------- -------- --------
Operating income......... 4,115 4,365 27,462 32,074 58,797 128,358 55,107 68,987
Other income (expense), net.... 160 133 443 (394) 511 2,833 617 527
------- -------- -------- -------- -------- -------- -------- --------
Income before provision for
income taxes................. 4,275 4,498 27,905 31,680 59,308 131,191 55,724 69,514
Provision for income taxes..... 1,503 417 10,226 10,071 19,097 49,494 20,591 25,720
------- -------- ------- -------- -------- -------- -------- --------
Net income............... $ 2,772 $ 4,081 $ 17,679 $ 21,609 $ 40,211 $ 81,697 $ 35,133 $ 43,794
======= ======== ======== ======== ======== ======== ======== ========
Pro forma net income per share(2)........................................ $.50 $1.01 $.44 $.51
Pro forma weighted average common shares outstanding..................... 80,518 81,060 80,518 85,421
Year Ended Six Months
December 31, Ended June 30,
1995 1996 1996 1997
(in thousands, except per share data)
Pro Forma Income Statement Data:(3)(4)
Revenue................................................. $358,609 $678,596 $287,711 $441,010
Cost of sales........................................... 96,615 193,158 80,963 126,199
-------- -------- -------- --------
Gross profit............................................ 261,994 485,438 206,748 314,811
Operating expenses:
Distributor incentives............................... 135,722 249,613 107,090 169,132
Selling, general and administrative.................. 74,433 111,802 47,973 67,738
-------- -------- -------- --------
Operating income........................................ 51,839 124,023 51,685 77,941
Other income (expense), net(5).......................... (2,298) 3,602 884 527
-------- -------- -------- --------
Income before provision for income taxes................ 49,541 127,625 52,569 78,468
Provision for income taxes.............................. 19,005 44,700 18,410 29,033
-------- -------- -------- --------
Net income.............................................. $ 30,536 $ 82,925 $ 34,159 $ 49,435
======== ======== ======== ========
Net income per share(6)................................. $.36 $.97 $.40 $.58
Weighted average common shares outstanding.............. 85,377 85,377 85,377 85,377
As of
June 30, 1997
(in thousands)
Balance Sheet Data:
Cash and cash equivalents....................................... $ 151,375
Working capital................................................. 107,975
Total assets.................................................... 306,807
Short term note payable to NSI.................................. 10,000
Stockholders' equity............................................ 161,246
As of September 30, As of December 31, As of June 30,
1992 1993 1994 1994 1995 1996 1996 1997
Other Information:(7)
Number of active distributors...... 33,000 106,000 152,000 170,000 236,000 377,000 384,000 416,000
Number of executive distributors... 649 2,788 5,835 6,083 7,550 20,483 12,446 22,520
- -----------
(1) The information for the year ended December 31, 1994 is not included
in the Company's Consolidated Financial Statements included elsewhere in
this Prospectus. Such information has been presented for comparative
purposes only.
(2) Reflects the weighted average number of common shares and common share
equivalents outstanding during the periods presented assuming that the
Company's Reorganization and the resultant issuance of 80,250,000 shares of
Class B Common Stock occurred as of January 1, 1995. The weighted average
number of common shares and common share equivalents include: (i) an option
granted to an executive officer of the Company prior to the Reorganization
to purchase 267,500 shares of Class A Common Stock; (ii) the sale of
4,750,000 shares of Class A Common Stock by the Company in connection with
the Underwritten Offerings; (iii) the grant of awards for 109,000 shares of
Class A Common Stock to certain employees of the Company during November
and December 1996; and (iv) the grant of awards for 41,959 additional
shares of Class A Common Stock to certain employees of the Company during
January 1997.
(3) As part of the Reorganization, several actions occurred which impacted
the comparability of the historical financial results of the Company with
the future results of the Company. Therefore, a pro forma presentation has
been prepared to provide comparative data. The unaudited pro forma income
statement data reflect the Reorganization as if such event had occurred as
of January 1, 1995, and the following adjustments: (i) the amortization
over a 20-year period of a $25.0 million payment, consisting of $5.0
million in cash and $20.0 million in notes, to NSI for the exclusive rights
to distribute NSI products in Thailand, Indonesia, Malaysia, the PRC, the
Philippines, Singapore and Vietnam (the "License Fee"); (ii) the
recognition by the Company of additional charges of $4.4 million for the
year ended December 31, 1995, $4.0 million for the year ended December 31,
1996 and $2.2 million for the six months ended June 30, 1996, relating to
certain support services provided to the Company by NSI and an NSI
affiliate and certain other charges related to operating as a public
company; (iii) estimated annual compensation expense of $1.2 million
related to the employee stock bonus awards granted to employees of the
Company, NSI and its affiliates; and (iv) adjustments for U.S. Federal and
state income taxes as if the Company had been taxed as a C corporation
rather than as an S corporation since inception.
(4) The unaudited pro forma income statement data do not reflect the
estimated non-cash compensation expense totaling $19.9 million in
connection with the one-time grant of the Distributor Options at an
exercise price of $5.75 per share. $2.0 million of such expense was
recorded as actual distributor stock expense for the year ended December
31, 1996. An additional $9.0 million of such expense was recorded for the
six months ended June 30, 1997. Neither of these expenses has been included
in the pro forma presentation. The granting and vesting of the Distributor
Options are conditioned upon distributor performance under the Global
Compensation Plan and the NSI 1996 Distributor Stock Option Plan. The
vesting of the Distributor Options is scheduled to occur on December 31,
1997. See "Certain Relationships and Related Transactions--Distributor
Options," "Shares Eligible for Future Sale" and "Plan of Distribution."
(5) Pro forma other income and expense includes: (i) increased interest
expense of $2.7 million for the year ended December 31, 1995 relating to
the issuance of promissory notes (the "S Distribution Notes") of $86.5
million from the Subsidiaries' earned and undistributed S corporation
earnings through the date of the termination of the Subsidiaries' S
corporation status; (ii) increased interest expense of $0.9 million for the
year ended December 31, 1995 and $0.1 million each for the year ended
December 31, 1996 and the six months ended June 30, 1996 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 each
for the years ended December 31, 1995 and December 31, 1996 and $0.4
million for the six months ended June 30, 1996 relating to a note
receivable from NSI with an estimated principal balance of $13.1 million as
consideration for the Distributor Options.
(6) Reflects, as if all shares had been issued as of January 1, 1995, the
following: (i) 80,250,000 common shares outstanding and common share
equivalents after giving effect to the Reorganization; (ii) the sale by the
Company of 4,750,000 shares of Class A Common Stock in the Underwritten
Offerings; (iii) the grant of awards for 109,000 shares of Class A Common
Stock to certain employees of the Company; and (iv) an option granted to an
executive officer of the Company to purchase 267,500 shares of Class A
Common Stock. Supplemental income per share, calculated as if $25.0 million
of the proceeds from the Underwritten Offerings were used to repay notes
payable, had a dilutive effect of less than 2% and, therefore, is not
presented.
(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.
RISK FACTORS
An investment in the Distributor Options or the Class A Common Stock
involves special considerations and significant risks, including, but not
limited to, those discussed or referred to below. Prospective investors should
carefully consider the following risks and information in conjunction with the
other information contained in this Prospectus before acquiring Distributor
Options or shares of Class A Common Stock. The statements in this section and in
this Prospectus that are not historical facts are forward-looking statements.
These forward-looking statements involve certain risks and uncertainties. Actual
results and outcomes may differ materially from those discussed in this section.
Factors that might cause such differences include, but are not limited to, the
risks and important factors discussed below.
Risks Related to Allocation and Vesting of Distributor Options; Decrease in
Number of Distributor Options Available; Effect of Product Returns
Each allocation of Distributor Options made to an Eligible Distributor that
is an entity (such as a partnership or corporation) shall be made by NSI solely
to the entity, not to the owners of the entity individually. For an Eligible
Distributor's Options to vest, such Eligible Distributor will generally be
required to maintain his or her Qualifying Executive Pin Level during the
Vesting Period. If an Eligible Distributor fails to maintain his or her
Qualifying Executive Pin 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 falls
below the Gold Executive Pin Level at any time during the Vesting Period, all
Distributor Options held by such Eligible Distributor will be immediately
forfeited. Forfeited or declined options will not vest but will revert to NSI.
Distributor Options vested in an Eligible Distributor will become exercisable
upon receipt of written notice from NSI of the number of Distributor Options
vested in such Eligible Distributor which is currently estimated to be by
January 31, 1998, and will remain exercisable for a four-year period following
December 31, 1997, provided the Eligible Distributor maintains an Executive Pin
Level of Gold or higher until the date of exercise. No Distributor Options will
be exercisable after December 31, 2001. In certain jurisdictions, the exercise
period may be shortened to comply with local regulations. See "Plan of
Distribution--Distributor Options--Vesting" and "--Exercisability."
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 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, qualifications or exemptions in each such country. There can be no
assurance that such approvals or qualifications will be secured or, once
secured, will not be suspended. It is possible that NSI may not be able to
secure the necessary regulatory approvals or qualifications in certain
countries. 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
countries, including Belgium, France, Spain and possibly others, only existing
distributors and/or 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. The NSI
Stock Option Plan, as it is implemented or administered in any given country
where distributors of NSI reside or act as independent distributors of NSI, may
be amended or modified by NSI's board of directors from time to time to comply
with the legal requirements and restrictions of such country. 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."
Reliance Upon Independent Distributors of NSI
The Company distributes its products exclusively through independent
distributors who have contracted directly with NSI to become distributors.
Consequently, the Company does not contract directly with distributors but
licenses its distribution system and distributor force from NSI. Distributor
agreements with NSI are voluntarily terminable by distributors at any time. The
Company's revenue is directly dependent upon the efforts of these independent
distributors, and any growth in future sales volume will require an increase in
the productivity of these distributors and/or growth in the total number of
distributors. As is typical in the direct selling industry, there is turnover in
distributors from year to year, which requires the sponsoring and training of
new distributors by existing distributors to maintain or increase the overall
distributor force and motivate new and existing distributors. The Company
experiences seasonal decreases in distributor sponsoring and product sales in
some of the countries in which the Company operates because of local holidays
and customary vacation periods. The size of the distribution force can also be
particularly impacted by general economic and business conditions and a number
of intangible factors such as adverse publicity regarding the Company or NSI, or
the public's perception of the Company's products, product ingredients, NSI's
distributors or direct selling businesses in general. Historically, the Company
has experienced periodic fluctuations in the level of distributor sponsorship
(as measured by distributor applications). However, because of the number of
factors that impact the sponsoring of new distributors, and the fact that the
Company has little control over the level of sponsorship of new distributors,
the Company cannot predict the timing or degree of those fluctuations. There can
be no assurance that the number or productivity of the Company's distributors
will be sustained at current levels or increased in the future. In addition, the
number of distributors as a percent of the population in a given country or
market could theoretically reach levels that become difficult to exceed due to
the finite number of persons inclined to pursue a direct selling business
opportunity. This is of particular concern in Taiwan, where industry sources
have estimated that up to 10% of the population is already involved in some form
of direct selling.
Since distributor agreements are entered into between NSI and distributors,
all of the distributors who generate revenue for the Company are distributors of
NSI. See "--Relationship with and Reliance on NSI; Potential Conflicts of
Interest." Because distributors are independent contractors of NSI, neither NSI
nor the Company is in a position to provide the same level of direction,
motivation and oversight as either would with respect to its own employees. The
Company relies on NSI to enforce distributors policies and procedures. Although
NSI has a compliance department responsible for the enforcement of the policies
and procedures that govern distributor conduct, it can be difficult to enforce
these policies and procedures because of the large number of distributors and
their independent status, as well as the impact of regulations in certain
countries that limit the ability of NSI and the Company to monitor and control
the sales practices of distributors.
Potential Effects of Adverse Publicity
The size of the distribution force and the results of the Company's
operations can be particularly impacted by adverse publicity regarding the
Company or NSI, or their competitors, including publicity regarding the legality
of network marketing, the quality of the Company's products and product
ingredients or those of its competitors, regulatory investigations of the
Company or the Company's competitors and their products, distributor actions and
the public's perception of NSI's distributors and direct selling businesses
generally.
In 1991 and 1992, NSI was the subject of investigations by various
regulatory agencies of eight states. All of the investigations were concluded
satisfactorily. However, the publicity associated with the investigations
resulted in a material adverse impact on NSI's results of operations. The denial
by the Malaysian government in 1995 of the Company's business permit
applications due to distributor actions resulted in adverse publicity for the
Company. In South Korea, a coalition of consumer groups recently announced a
public boycott against the Company's largest international competitor in this
market. These groups have claimed that this competitor has violated South Korean
laws barring comparisons between products and has made unjustified environmental
claims about its products. Various trade groups have also attacked this
competitor's direct marketing methods. In addition, the South Korean government
and certain consumer and trade organizations have expressed concerns which have
attracted media attention regarding South Korean consumption of luxury and
foreign products, in general. Although the Company has not been subject to
similar attacks, the Company believes that the adverse publicity resulting from
these claims and media campaigns has and may continue to adversely affect the
direct selling industry and the Company's South Korean operations. See
"--Seasonality and Cyclicality; Variations in Operating Results." There can be
no assurance that the Company will not be subject to adverse publicity in the
future as a result of regulatory investigations or actions, whether of the
Company or its competitors, distributor actions, actions of competitors or other
factors or that such adverse publicity will not have a material adverse effect
on the Company's business or results of operations. See "--Government Regulation
of Direct Selling Activities," "--Government Regulation of Products and
Marketing," "--Other Regulatory Issues" and "--Entering New Markets."
Potential Negative Impact of Distributor Actions
Distributor actions can negatively impact the Company and its products.
From time to time, the Company receives inquiries from regulatory agencies
precipitated by distributor actions. For example, in October 1995, the Company's
business permit applications were denied by the Malaysian government as the
result of activities by certain NSI distributors before required government
approvals could be secured. NSI subsequently terminated the distributorship
rights of some of the distributors involved and elected to withdraw from the
Malaysian market for a period of time. The denial by the Malaysian government of
the Company's business permit applications resulted in adverse publicity for the
Company. See "--Other Regulatory Issues." Distributor activities in other
countries in which the Company has not commenced operations may similarly result
in an inability to secure, or delay in securing required regulatory and business
permits. See "Business--New Market Opportunities." In addition, the publicity
which can result from a variety of potential distributor activities such as
inappropriate earnings claims, product representations or improper importation
of Nu Skin products from other markets, can make the sponsoring and retaining of
distributors more difficult, thereby negatively impacting sales. See
"--Potential Effects of Adverse Publicity." Furthermore, the Company's business
and results of operations could be adversely affected if NSI terminates a
significant number of distributors or certain distributors who play a key role
in the Company's distribution system. There can be no assurance that these or
other distributor actions will not have a material adverse effect on the
Company's business or results of operations.
Currency Risks
The Company's foreign-derived sales and selling, general and administrative
expenses are converted to U.S. dollars for reporting purposes. Consequently, the
Company's reported earnings are significantly impacted by changes in currency
exchange rates, generally increasing with a weakening dollar and decreasing with
a strengthening dollar. In addition, the Company purchases inventory from NSI in
U.S. dollars and assumes currency exchange rate risk with respect to such
purchases. Local currency in Japan, Taiwan, Hong Kong, South Korea and Thailand
is generally used to settle non-inventory transactions with NSI. Given the
uncertainty of the extent of exchange rate fluctuations, the Company cannot
estimate the effect of these fluctuations on its future business, product
pricing, results of operations or financial condition. However, because nearly
all of the Company's revenue is realized in local currencies and the majority of
its cost of sales is denominated in U.S. dollars, the Company's gross profits
will be positively affected by a weakening in the U.S. dollar and will be
negatively affected by a strengthening in the U.S. dollar.
The Company believes that a variety of complex factors impact the value of
local currencies relative to the U.S. dollar including, without limitation,
interest rates, monetary policies, political environments, and relative economic
strengths. The Company believes that an increase in the short-term interest rate
by the U.S. Federal Reserve Board in early 1997 contributed to the strengthening
of the U.S. dollar against the yen in the first four months of 1997. In order to
partially offset the anticipated effect of these currency fluctuations, the
Company implemented a price increase on certain of its products of between 5%
and 9% on average. There can be no assurance that these price increases will not
adversely affect the Company's results of operations by decreasing consumer
demand for the Company's products or that the Company will be able to effect
additional price increases in the future to offset the impact of future currency
fluctuations. There can be no assurance that future currency fluctuations will
not result in similar concerns or adversely affect the performance of the price
of the Class A Common Stock. Although the Company tries to reduce its exposure
to fluctuations in foreign exchange rates by using hedging transactions, such
transactions may not entirely offset the impact of currency fluctuations.
Accordingly, in the face of a strengthening of the U.S. dollar, the Company's
earnings will be adversely affected. The Company does not use hedging
transactions for trading or speculative purposes. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Currency
Fluctuation and Exchange Rate Information."
Seasonality and Cyclicality; Variations in Operating Results
While neither seasonal nor cyclical variations have materially affected the
Company's results of operations to date, the Company believes that its rapid
growth may have overshadowed these factors. Accordingly, there can be no
assurance that seasonal or cyclical variations will not materially adversely
affect the Company's results of operations in the future.
The direct selling industry in Asia is impacted by certain seasonal trends
such as major cultural events and vacation patterns. For example, sales are
generally affected by local New Year celebrations in Japan, Taiwan, Hong Kong,
South Korea and Thailand, which occur in the Company's first quarter. Management
believes that direct selling in Japan is also generally negatively impacted
during August, when many individuals traditionally take vacations.
Generally, the Company has experienced rapid revenue growth in each new
market from the commencement of operations. In Japan, Taiwan and Hong Kong, the
initial rapid revenue growth was followed by a short period of stable or
declining revenue followed by renewed growth fueled by new product
introductions, an increase in the number of active distributors and increased
distributor productivity. The Company believes that a similar pattern is
currently occurring in its operations in South Korea, where the Company
experienced a significant decline in its second quarter revenue from revenue in
the first quarter of 1997 and anticipates an additional significant decline in
the third quarter of 1997. The Company believes that the anticipated revenue
decline is partially reflective of the typical business cycle experienced in new
markets and partially the result of other factors specific to South Korea. These
other factors include recent activities by the South Korean government and
campaigns by a coalition of consumer protection and trade organizations against
producers of luxury and foreign goods, in general, and certain network marketing
companies, in particular, that have drawn negative media attention. Although the
Company has not been the focus of these campaigns, management believes that they
have negatively impacted the business environment generally. See "--Potential
Effects of Adverse Publicity." An additional factor which the Company believes
has contributed to revenue decline in South Korea is the focus of key
distributors on other recently-opened markets, including Thailand.
In addition, the Company may experience variations on a quarterly basis in
its results of operations, as new products are introduced and new markets are
opened. There can be no assurance that current revenue and productivity trends
will be maintained in any of these markets or that future results of operations
will follow historical performance. Furthermore, no assurances can be given that
the Company's revenue growth rate in Thailand, which commenced operations in
March 1997, or in new markets where operations have not commenced, will follow
this pattern.
Government Regulation of Direct Selling Activities
Direct selling activities are regulated by various governmental agencies.
These laws and regulations are generally intended to prevent fraudulent or
deceptive schemes, often referred to as "pyramid" or "chain sales" schemes, that
promise quick rewards for little or no effort, require high entry costs, use
high pressure recruiting methods and/or do not involve legitimate products. In
Japan, the Company's distribution system is regulated under the "Door-to-Door"
Sales Law, which requires the submission of specific information concerning the
Company's business and products and which provides certain cancellation and
cooling-off rights for consumers and new distributors. Management has been
advised by counsel that in some respects Japanese laws are becoming more
restrictive with respect to direct selling in Japan. In Taiwan, the Fair Trade
Law (and the Enforcement Rules and Supervisory Regulations of Multi-Level Sales)
requires the Company to comply with registration procedures and also provides
distributors with certain rights regarding cooling-off periods and product
returns. The Company also complies with South Korea's strict Door-to-Door Sales
Act, which requires, among other things, the regular reporting of revenue, the
registration of distributors together with the issuance of a registration card,
and the maintaining of a current distributor registry. This law also limits the
amount of commissions that a registered multi-level marketing company can pay to
its distributors to 35% of revenue in a given month. In Thailand, general fair
trade laws impact direct selling and multi-level marketing activities.
In April 1997, the South Korean Ministry of Trade, Industry and Energy
("MOTIE") commenced a review of the largest foreign and domestic-owned network
marketing companies in South Korea, including Nu Skin Korea. The purposes of the
review were stated to be to monitor how companies are operating and to audit
current business practices. Although the MOTIE has not issued a report in
connection with the industry or Nu Skin Korea, the Company does not believe that
this review will adversely affect its ability to conduct business in South
Korea.
Based on research conducted in opening its existing markets (including
assistance from local counsel), the nature and scope of inquiries from
government regulatory authorities and the Company's history of operations in
such markets to date, the Company believes that its method of distribution is in
compliance in all material respects with the laws and regulations relating to
direct selling activities of all of the countries in which the Company currently
operates. Many countries, however, including Singapore, one of the Company's
potential markets, currently have laws in place that would prohibit the Company
and NSI from conducting business in such markets. There can be no assurance that
the Company will be allowed to conduct business in each of the new markets or
continue to conduct business in each of its existing markets licensed from NSI.
See "--Entering New Markets."
Government Regulation of Products and Marketing; Import Restrictions
The Company and NSI are subject to or affected by extensive governmental
regulations not specifically addressed to network marketing. Such regulations
govern, among other things, (i) product formulation, labeling, packaging and
importation, (ii) product claims and advertising, whether made by the Company,
NSI or NSI distributors, (iii) fair trade and distributor practices, (iv) taxes,
transfer pricing and similar regulations that affect foreign taxable income and
customs duties, and (v) regulations governing foreign companies generally.
With the exception of a small percentage of revenues in Japan, virtually
all of the Company's sales historically have been derived from products
purchased from NSI. All of those products historically have been imported into
the countries in which they were ultimately sold. The countries in which the
Company currently conducts business impose various legal restrictions on
imports. In Japan, the Japanese Ministry of Health and Welfare ("MOHW") requires
the Company to possess an import business license and to register each personal
care product imported into the country. Packaging and labeling requirements are
also specified. The Company has had to reformulate many products to satisfy MOHW
regulations. In Japan, nutritional foods, drugs and quasi-drugs are all strictly
regulated. The chief concern involves the types of claims and representations
that can be made regarding the efficacy of nutritional products. In Taiwan, all
"medicated" cosmetic and pharmaceutical products require registration. In Hong
Kong and Macau, "pharmaceutical" products are strictly regulated. In South
Korea, the Company is subject to and has obtained the mandatory certificate of
confirmation as a qualified importer of cosmetics under the Pharmaceutical
Affairs Law as well as additional product approvals for each of the 45
categories of cosmetic products which it imports. Each new cosmetic product
undergoes a 60-day post-customs inspection during which, in addition to
compliance with ingredient requirements, each product is inspected for
compliance with South Korean labeling requirements. There can be no assurance
that these or other applicable regulations will not prevent the Company from
introducing new products into its markets or require the reformulation of
existing products.
In Thailand, personal care products are regulated by the Food and Drug
Association and the Ministry of Public Health and all of the Nu Skin personal
care products introduced in this market have qualified for simplified approval
procedures under Thai law.
The Company has not experienced any difficulty maintaining its import
licenses but has experienced complications regarding health and safety and food
and drug regulations for nutritional products. Many products require
reformulation to comply with local requirements. In addition, new regulations
could be adopted or any of the existing regulations could be changed at any time
in a manner that could have a material adverse effect on the Company's business
and results of operations. Duties on imports are a component of national trade
and economic policy and could be changed in a manner that would be materially
adverse to the Company's sales and its competitive position compared to
locally-produced goods, in particular in countries such as Taiwan, where the
Company's products are already subject to high customs duties. In addition,
import restrictions in certain countries and jurisdictions limit the Company's
ability to import products from NSI. In some jurisdictions, such as the PRC,
regulators may prevent the importation of Nu Skin and IDN products altogether.
Present or future health and safety or food and drug regulations could delay or
prevent the introduction of new products into a given country or marketplace or
suspend or prohibit the sale of existing products in such country or
marketplace.
Other Regulatory Issues
As a U.S. entity operating through subsidiaries in foreign jurisdictions,
the Company is subject to foreign exchange control and transfer pricing laws
that regulate the flow of funds between the Subsidiaries and the Company, as
well as the flow of funds to NSI for product purchases, management services and
contractual obligations such as payment of distributor commissions. The Company
believes that it operates in compliance with all applicable customs, foreign
exchange control and transfer pricing laws. However, there can be no assurance
that the Company will continue to be found to be operating in compliance with
foreign customs, exchange control and transfer pricing laws, or that such laws
will not be modified, which, as a result, may require changes in the Company's
operating procedures.
As is the case with most network marketing companies, NSI and the Company
have from time to time received inquiries from various government regulatory
authorities regarding the nature of their business and other issues such as
compliance with local business opportunity and securities laws. Although to date
none of these inquiries has resulted in a finding materially adverse to the
Company or NSI, adverse publicity resulting from inquiries into NSI operations
by certain government agencies in the early 1990's, stemming in part out of
inappropriate product and earnings claims by distributors, materially adversely
affected NSI's business and results of operations. There can be no assurance
that the Company or NSI will not face similar inquiries in the future which,
either as a result of findings adverse to the Company or NSI or as a result of
adverse publicity resulting from the instigation of such inquiries, could have a
material adverse effect on the Company's business and results of operations. See
"--Potential Effects of Adverse Publicity."
The Subsidiaries are periodically subject to reviews and audits by various
governmental agencies, particularly in new markets, where the Company has
experienced high rates of growth. Recently, the South Korean Ministry of Trade,
Industry and Energy commenced an examination of the largest foreign and domestic
owned network marketing companies in South Korea, including Nu Skin Korea. The
purposes of the examination were stated to be to monitor how companies are
operating and to audit current business practices. In addition, Nu Skin Korea
has been subject to an audit by the South Korean Customs Service. Management
believes that this audit was precipitated largely as a result of Nu Skin Korea's
rapid growth and its position as the largest importer of cosmetics and personal
care products in South Korea as well as by recent South Korean trade imbalances.
The Customs Service has reviewed a broad range of issues relating to the
operations of Nu Skin Korea, with a focus on reviewing customs valuation issues
and intercompany payments. Recently, the Customs Service has resolved certain
issues related to its audit without imposing sanctions. The intercompany payment
issue was referred to various other government agencies, which are currently
reviewing this issue. The import valuation issues, which management considers to
be routine in light of the Company's extensive import and export activities,
were referred to the valuation division of the Customs Service. The Company
continues to believe that its actions have been in compliance in all material
respects with relevant regulations. Although the potential sanctions related to
the investigations include warnings, fines, foreign exchange restrictions or
potential criminal prosecution of managers, the Company believes that none of
the sanctions would have a material adverse impact on operations. However, the
investigations and any related sanctions could result in negative publicity that
could have a material adverse impact on the Company and its operations. The
Company is not aware of any negative publicity to date in South Korea regarding
these developments. The Company intends to continue to vigorously contest these
matters. See "--Potential Negative Impact of Distributor Actions." Management
believes that other major importers of cosmetic products are also the focus of
regulatory reviews by South Korean authorities.
Businesses which are more than 50% owned by non-citizens are not permitted
to operate in Thailand unless they have an Alien Business Permit, which is
frequently difficult to obtain. The Company is currently operating under the
Treaty of Amity and Economic Relations between Thailand and the United States
(the "Treaty of Amity"). Under the Treaty of Amity, an Alien Business Permit is
not required if a Thailand business is owned by an entity organized in the
United States, a majority of whose owners are U.S. citizens or entities. From
time to time, it has been reported that certain Thailand government officials
have considered supporting the termination of the Treaty of Amity. There can be
no assurance that, if the Treaty of Amity were terminated, the Company would be
able to obtain an Alien Business Permit and continue operations in Thailand.
Based on the Company's and NSI's experience and research (including
assistance from counsel) and the nature and scope of inquiries from government
regulatory authorities, the Company believes that it is in material compliance
with all regulations applicable to the Company. Despite this belief, either the
Company or NSI could be found not to be in material compliance with existing
regulations as a result of, among other things, the considerable interpretative
and enforcement discretion given to regulators or misconduct by independent
distributors. In 1994, NSI and three of its distributors entered into a consent
decree with the United States Federal Trade Commission (the "FTC") with respect
to its investigation of certain product claims and distributor practices,
pursuant to which NSI paid approximately $1 million to settle the FTC
investigation. In August 1997, NSI reached a settlement with the FTC with
respect to certain product claims and its compliance with the 1994 consent
decree pursuant to which settlement NSI paid $1.5 million to FTC. NSI also
recently voluntarily agreed to recall and rewrite virtually all of its sales and
marketing materials to address FTC concerns. Even though neither the Company nor
the Subsidiaries has encountered similar regulatory concerns, there can be no
assurances that the Company and the Subsidiaries will not be subject to similar
inquiries and regulatory investigations or disputes and the effects of any
adverse publicity resulting therefrom. Any assertion or determination that
either the Company, NSI or any NSI distributors are not in compliance with
existing laws or regulations could potentially have a material adverse effect on
the Company's business and results of operations. In addition, in any country or
jurisdiction, the adoption of new laws or regulations or changes in the
interpretation of existing laws or regulations could generate negative publicity
and/or have a material adverse effect on the Company's business and results of
operations. The Company cannot determine the effect, if any, that future
governmental regulations or administrative orders may have on the Company's
business and results of operations. Moreover, governmental regulations in
countries where the Company plans to commence or expand operations may prevent,
delay or limit market entry of certain products or require the reformulation of
such products. Regulatory action, whether or not it results in a final
determination adverse to the Company or NSI, has the potential to create
negative publicity, with detrimental effects on the motivation and recruitment
of distributors and, consequently, on the Company's sales and earnings. See
"--Potential Effects of Adverse Publicity," "--Entering New Markets" and
"Business--Government Regulation--Regulation of Products and Marketing."
Reliance on Certain Distributors; Potential Divergence of Interests between
Distributors and the Company
The Company's Global Compensation Plan allows distributors to sponsor new
distributors. The sponsoring of new distributors creates multiple distributor
levels in the network marketing structure. Sponsored distributors are referred
to as "downline" distributors within the sponsoring distributor's "downline
network." If downline distributors also sponsor new distributors, additional
levels of downline distributors are created, with the new downline distributors
also becoming part of the original sponsor's "downline network." As a result of
this network marketing distribution system, distributors develop relationships
with other distributors, both within their own countries and internationally.
The Company believes that its revenue is generated from thousands of distributor
networks. However, the Company estimates that, as of June 30, 1997,
approximately 340 distributorships worldwide comprised NSI's two highest
executive distributor levels (Hawaiian Blue Diamond and Blue Diamond
distributors). These distributorships have developed extensive downline networks
which consist of thousands of sub-networks. Together with such networks, these
distributorships account for substantially all of the Company's revenue.
Consequently, the loss of such a high-level distributor or another key
distributor together with a group of leading distributors in such distributor's
downline network, or the loss of a significant number of distributors for any
reason, could adversely affect sales of the Company's products, impair the
Company's ability to attract new distributors and adversely impact earnings.
Under the Global Compensation Plan, a distributor receives commissions
based on products sold by the distributor and by participants in the
distributor's worldwide downline network, regardless of the country in which
such participants are located. The Company, on the other hand, receives revenues
based almost exclusively on sales of products to distributors within the
Company's markets. So, for example, if a distributor located in Japan sponsors a
distributor in Europe, the Japanese distributor could receive commissions based
on the sales made by the European distributor, but the Company would not receive
any revenue since the products would have been sold outside of the Company's
markets. The interests of the Company and distributors therefore diverge
somewhat in that the Company's primary objective is to maximize the amount of
products sold within the Company's markets, while the distributors' objective is
to maximize the amount of products sold by the participants in the distributors'
worldwide downline networks. The Company and NSI have observed that the
commencement of operations in a new country tends to distract the attention of
distributors from the established markets for a period of time while key
distributors begin to build their downline networks within the new country. NSI
is currently contemplating opening operations in additional countries outside of
the Company's markets. To the extent distributors focus their energies on
establishing downline networks in these new countries, and decrease their focus
on building organizations within the Company's markets, the Company's business
and results of operations could be adversely affected. Furthermore, the Company
itself is currently contemplating opening new markets. In the event distributors
focus on these new markets, sales in existing markets might be adversely
affected. There can be no assurance that these new markets will develop or that
any increase in sales in new markets will not be more than offset by a decrease
in sales in the Company's existing markets.
Entering New Markets
As part of its growth strategy, the Company has acquired from NSI the right
to act as NSI's exclusive distribution vehicle in Indonesia, Malaysia, the PRC,
the Philippines, Singapore and Vietnam. The Company has undertaken a preliminary
review of the laws and regulations to which its operations would be subject in
Indonesia, Malaysia, the PRC, the Philippines, Singapore and Vietnam. The
Company has announced its intention to commence operations in the Philippines in
1998. Given existing regulatory environments and economic conditions, the
Company's entrance into Singapore and Vietnam is not anticipated in the short to
mid-term. The regulatory and political climate in the other countries for which
the Company has the right to act as NSI's exclusive distributor is such that a
replication of the Company's current operating structure cannot be guaranteed.
Because the Company's personal care and nutritional product lines are positioned
as premium product lines, the market potential for the Company's product lines
in relatively less developed countries, such as the PRC and Vietnam, remains to
be determined. Modifications to each product line may be needed to accommodate
the market conditions in each country, while maintaining the integrity of the
Company's products. No assurance can be given that the Company will be able to
obtain necessary regulatory approvals to commence operations in these new
markets, or that, once such approvals are obtained, the Company and NSI, upon
which the Company is largely dependent for product development assistance, will
be able to successfully reformulate Nu Skin personal care and IDN product lines
in any of the Company's new markets to attract local consumers.
Each of the proposed new markets will present additional unique
difficulties and challenges. The PRC, for example, has proven to be a
particularly difficult market for foreign corporations due to its extensive
government regulation and the historical political tenets of the PRC government.
In order to enter the market in the PRC, the Company may be required to enter
into 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 believes that the PRC national regulatory agency
responsible for direct selling periodically reviews the regulation of
multi-level marketing. These reviews may lead to changes in applicable
regulations. Therefore, it is not known when or whether the Company will be able
to implement business models consistent with those used by the Company in other
markets. 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. The extensive fragmentation of distribution systems in
the PRC may also force the Company to significantly change its business models.
The lack of a comprehensive legal system and the uncertainties of enforcement of
existing legislation and laws could also have an adverse effect on the Company's
proposed business in the PRC.
The other potential new markets also present significant regulatory,
political and economic obstacles to the Company. In Singapore, for example,
network marketing is currently illegal and is not permitted under any
circumstances. Although the Company believes that this restriction will
eventually be relaxed or repealed, no assurance can be given that such
regulation will not remain in place and that the Company will not be permanently
prevented from initiating sales in Singapore. In addition, Malaysia has
governmental guidelines that have the effect of limiting foreign ownership of
direct selling companies operating in Malaysia to no more than 30%. There can be
no assurance that the Company will be able to properly structure Malaysian
operations to comply with this policy. In October of 1995, the Company's
business permit applications were denied by the Malaysian government as a result
of activities by certain NSI distributors. Therefore, the Company believes that
although significant opportunities exist to expand its operations into new
markets, there can be no assurance that these or other difficulties will not
prevent the Company from realizing the benefits of this opportunity.
Managing Growth
The Company has experienced rapid growth since operations in Hong Kong
commenced in 1991. The management challenges imposed by this growth include
entry into new markets, growth in the number of employees and distributors,
expansion of facilities necessary to accommodate growth and additions and
modifications to the Company's product lines. To manage these changes
effectively, the Company may be required to hire additional management and
operations personnel and to improve its operational, financial and management
systems. For example, the dramatic growth in South Korea has led to operational
strains. While the Company is currently implementing numerous programs to
address these issues, there can be no assurance that the rapid growth in South
Korea will not result in further operational strains or that the Company's other
markets will not experience similar problems in the future that could adversely
affect the Company's business and results of operations.
Possible Adverse Effect on the Company of the Change in the Status of Hong Kong
The Company has offices and a portion of its operations in Hong Kong.
Effective July 1, 1997, the exercise of sovereignty over Hong Kong was
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 became a Special Administrative Region (SAR) of the
PRC. The Joint Declaration provides that Hong Kong will be directly under the
authority of the government of the PRC but Hong Kong will enjoy a high degree of
autonomy except in foreign and defense affairs, and that Hong Kong will be
vested with executive, legislative and independent judicial power. The Joint
Declaration also provides that the current social and economic systems in Hong
Kong will remain unchanged for 50 years after June 30, 1997 and that Hong Kong
will retain the status of an international financial center. Although sales in
Hong Kong accounted for less than 5% of the Company's revenues for the year
ended December 31, 1996, Hong Kong serves as the location for the Company's
regional offices and an important base of operations for many of the Company's
most successful distributors whose downline distributor networks extend into
other Asian markets. Any adverse effect on the social, political or economic
systems in Hong Kong resulting from this transfer could have a material adverse
effect on the Company's business and results of operations. Although the Company
does not anticipate any material adverse change in the business environment in
Hong Kong resulting from the 1997 transfer of sovereignty, the Company has
formulated contingency plans to transfer the Company's regional office to
another jurisdiction in the event that the Hong Kong business environment is so
affected.
Relationship with and Reliance on NSI; Potential Conflicts of Interest
NSI has ownership and control of the NSI trademarks, tradenames, the Global
Compensation Plan, distributor lists and related intellectual property and
know-how (collectively, the "Licensed Property"), and licenses to the Company
rights to use the Licensed Property in certain markets. NSI and its affiliates
currently operate in 15 countries, excluding the countries in which the Company
currently operates, and will continue to market and sell Nu Skin personal care
and IDN nutritional products in these countries, as well as in additional
countries outside of the Company's markets, through the network marketing
channel. Thus the Company cannot use the NSI trademarks to expand into other
markets for which the Company does not currently have a license without first
obtaining additional licenses or other rights from NSI. There can be no
assurance that NSI will make any additional markets available to the Company or
that the terms of any new licenses from NSI will be acceptable to the Company.
NSI has licensed to the Company, through the Subsidiaries, rights to
distribute Nu Skin and IDN products and to use the Licensed Property in the
Company's markets, and Nu Skin International Management Group, Inc. ("NSIMG"),
an affiliate of NSI, will provide management support services to the Company and
the Subsidiaries, pursuant to distribution, trademark/tradename license,
licensing and sales, and management services agreements (the "Operating
Agreements"). The Company relies on NSI for research, development, testing,
labeling and regulatory compliance for products sold to the Company under the
distribution agreements, and virtually all of the Company's revenues are derived
from products and sales aids purchased from NSI pursuant to these agreements.
NSIMG provides the Company with a variety of management and consulting services,
including, but not limited to, management, legal, financial, marketing and
distributor support/training, public relations, international expansion, human
resources, strategic planning, product development and operations administration
services. Each of the Operating Agreements (other than the distribution,
trademark/tradename license and licensing and sales agreements for Nu Skin
Korea, which have shorter terms), is for a term ending December 31, 2016, and is
subject to renegotiation after December 31, 2001, in the event that the Selling
Stockholders and their affiliates, on a combined basis, no longer beneficially
own a majority of the combined voting power of the outstanding shares of Common
Stock of the Company or of the common stock of NSI. The Company is almost
completely dependent on the Operating Agreements to conduct its business, and in
the event NSI is unable or unwilling to perform its obligations under the
Operating Agreements, or terminates the Operating Agreements as provided
therein, the Company's business and results of operations will be adversely
affected. See "Business--Relationship with NSI."
After consummation of the Rule 415 Offerings, approximately 98.2% of the
combined voting power of the outstanding shares of Common Stock will be held by
the Existing Stockholders and certain of their affiliates. Consequently, the
Existing Stockholders and certain of their affiliates will have the ability,
acting in concert, to elect all directors of the Company and approve any action
requiring approval by a majority of the stockholders of the Company. Certain of
the Existing Stockholders also own 100% of the outstanding shares of NSI. As a
result of this ownership, the Existing Stockholders who are also shareholders of
NSI will consider the short-term and the long-term impact of all stockholder
decisions on the consolidated financial results of NSI and the Company. See
"--Control by Existing Stockholders; Anti-Takeover Effects of Dual Classes of
Common Stock."
The Operating Agreements were approved by the Board of Directors of the
Company, which was, except with respect to the approval of the Operating
Agreements with Nu Skin Thailand, composed entirely of individuals who were also
officers and shareholders of NSI at the time of approval. The Operating
Agreements with Nu Skin Thailand were approved by a majority of the
disinterested directors of the Company. In addition, some of the executive
officers of the Company are also executive officers of NSI. It is expected that
a number of the Company's executive officers will continue to spend a portion of
their time on the affairs of NSI, for which they will continue to receive
compensation from NSI.
Concurrently with the Underwritten Offerings, the Company purchased from
NSI for $25.0 million the exclusive rights to distribute Nu Skin personal care
and IDN products in Thailand, Indonesia, Malaysia, the PRC, the Philippines,
Singapore and Vietnam. The Company has paid $15.0 million of this amount, and
the remaining $10.0 million of this amount is due in January 1998.
In view of the substantial relationships between the Company and NSI,
conflicts of interest may exist or arise with respect to existing and future
business dealings, including, without limitation, the relative commitment of
time and energy by the executive officers to the respective businesses of the
Company and NSI, potential acquisitions of businesses or properties, the
issuance of additional securities, the election of new or additional directors
and the payment of dividends by the Company. There can be no assurance that any
conflicts of interest will be resolved in favor of the Company. Under Delaware
and Utah law, a person who is a director of both the Company and NSI owes
fiduciary duties to both corporations and their respective shareholders. As a
result, persons who are directors of both the Company and NSI are required to
exercise their fiduciary duties in light of what they believe to be best for
each of the companies and its shareholders. See "Certain Relationships and
Related Transactions."
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. After consummation of the Rule 415
Offerings, the Existing Stockholders and certain of their affiliates will
collectively own 100% of the outstanding shares of the Class B Common Stock,
representing approximately 98.2% of the combined voting power of the outstanding
shares of Common Stock. Accordingly, the Existing Stockholders and certain of
their affiliates, acting fully or partially in concert, will have the ability to
control the election of the Board of Directors of the Company and thus the
direction and future operations of the Company without the supporting vote of
any other stockholder of the Company, including decisions regarding acquisitions
and other business opportunities, the declaration of dividends and the issuance
of additional shares of Class A Common Stock and other securities. NSI is a
privately-held company, all of the shares of which are owned by certain of the
Existing Stockholders. As long as the shareholders of NSI are majority
stockholders of the Company, assuming they act in concert, third parties will
not be able to obtain control of the Company through purchases of shares of
Class A Common Stock. See "Description of Capital Stock."
Adverse Impact on Company Income Due to Distributor Option Program
Prior to the Underwritten Offerings, the Existing Stockholders converted
1,605,000 shares of Class B Common Stock to Class A Common Stock and contributed
such shares of Class A Common Stock to the Company. The Company granted to NSI
options to purchase such shares of Class A Common Stock (the "Distributor
Options"), and NSI offered these options to qualifying distributors of NSI. The
Exercise Price for each Distributor Option is $5.75, which is 25% of the initial
price per share to the public of the Class A Common Stock in the Underwritten
Offerings. The vesting of the Distributor Options is subject to certain
conditions, and the Distributor Options have been registered along with the
shares of Class A Common Stock underlying such Distributor Options pursuant to
Rule 415 under the 1933 Act. See "Business--Distributor Option Program" and
"Plan of Distribution".
The Company estimates a total pre-tax non-cash compensation expense of
$19.9 million in connection with the grant of the Distributor Options. This
non-cash compensation expense will result in a corresponding impact on net
income and net income per share, which may also result in a corresponding impact
on the market price of the Class A Common Stock. See "Shares Eligible for Future
Sale."
Reliance on and Concentration of Outside Manufacturers
Virtually all the Company's products are sourced through NSI and are
produced by manufacturers unaffiliated with NSI. The Company currently has
little or no direct contact with these manufacturers. The Company's profit
margins and its ability to deliver its existing products on a timely basis are
dependent upon the ability of NSI's outside manufacturers to continue to supply
products in a timely and cost-efficient manner. Furthermore, the Company's
ability to enter new markets and sustain satisfactory levels of sales in each
market is dependent in part upon the ability of suitable outside manufacturers
to reformulate existing products, if necessary to comply with local regulations
or market environments, for introduction into such markets. Finally, the
development of additional new products in the future will likewise be dependent
in part on the services of suitable outside manufacturers.
The Company currently acquires products or ingredients from sole suppliers
or suppliers that are considered by the Company to be the superior suppliers of
such ingredients. The Company believes that, in the event it is unable to source
any products or ingredients from its current suppliers, the Company could
produce such products or replace such products or substitute ingredients without
great difficulty or prohibitive increases in the cost of goods sold. However,
there can be no assurance that the loss of such a supplier would not have a
material adverse effect on the Company's business and results of operations.
With respect to sales to the Company, NSI currently relies on two
unaffiliated manufacturers to produce approximately 70% and 80% of its personal
care and nutritional products, respectively. NSI has a written agreement with
the primary supplier of the Company's personal care products that expires at the
end of 1997. An extension to such contract is currently being negotiated. NSI
does not currently have a written contract with the primary supplier of the
Company's nutritional products. The Company believes that in the event that
NSI's relationship with any of its key manufacturers is terminated, NSI will be
able to find suitable replacement manufacturers. However, there can be no
assurance that the loss of either manufacturer would not have a material adverse
effect on the Company's business and results of operations.
Reliance on Operations of and Dividends and Distributions from Subsidiaries
The Company is a holding company without operations of its own or
significant assets other than ownership of 100% of the capital stock of each of
the Subsidiaries. Accordingly, an important source of the Company's income will
be dividends and other distributions from the Subsidiaries. Each of the
Subsidiaries has its operations in a country other than the United States, the
country in which the Company is organized. In addition, each of the Subsidiaries
receives its revenues in the local currency of the country or jurisdiction in
which it is situated. As a consequence, the Company's ability to obtain
dividends or other distributions is subject to, among other things, restrictions
on dividends under applicable local laws and regulations, and foreign currency
exchange regulations of the country or jurisdictions in which the Subsidiaries
operate. The Subsidiaries' ability to pay dividends or make other distributions
to the Company is also subject to their having sufficient funds from their
operations legally available for the payment of such dividends or distributions
that are not needed to fund their operations, obligations or other business
plans. Because the Company will be a stockholder of each of the Subsidiaries,
the Company's claims as such will generally rank junior to all other creditors
of and claims against the Subsidiaries. In the event of a Subsidiary's
liquidation, there may not be assets sufficient for the Company to recoup its
investment in such Subsidiary.
Taxation Risks and Transfer Pricing
The Company is subject to taxation in the United States, where it is
incorporated, at a statutory corporate federal tax rate of 35.0% plus any
applicable state income taxes. In addition, each Subsidiary is subject to
taxation in the country in which it operates, currently ranging from a statutory
tax rate of 57.9% in Japan to 16.5% in Hong Kong. The Company is eligible to
receive foreign tax credits in the U.S. for the amount of foreign taxes actually
paid in a given period. In the event that the Company's operations in high tax
jurisdictions such as Japan grow disproportionately to the rest of the Company's
operations, the Company will be unable to fully utilize its foreign tax credits
in the U.S., which could, accordingly, result in the Company paying a higher
overall effective tax rate on its worldwide operations.
Because the Subsidiaries operate outside of the United States, the Company
is subject to the jurisdiction of numerous foreign tax authorities. In addition
to closely monitoring the Subsidiaries' locally based income, these tax
authorities regulate and restrict various corporate transactions, including
intercompany transfers. The Company believes that the tax authorities in Japan
and South Korea are particularly active in challenging the tax structures of
foreign corporations and their intercompany transfers. The Company is currently
undergoing audits in South Korea. See "--Government Regulation of Products and
Marketing; Import Restrictions" and "--Other Regulatory Issues." Although the
Company believes that its tax and transfer pricing structures are in compliance
in all material respects with the laws of every jurisdiction in which it
operates, no assurance can be given that these structures will not be challenged
by foreign tax authorities or that such challenges or any required changes in
such structures will not have a material adverse effect on the Company's
business or results of operations.
Increase in Distributor Compensation Expense
Under the Licensing and Sales Agreements (the "Licensing and Sales
Agreements") between each of the Subsidiaries and NSI, the Company, through its
Subsidiaries, is contractually obligated to pay a distributor commission expense
of 42% of commissionable product sales (with the exception of South Korea where,
due to government regulations, the Company uses a formula based upon a maximum
payout of 35% of commissionable product sales). The Licensing and Sales
Agreements provide that the Company is to satisfy this obligation by paying
commissions owed to local distributors. In the event that these commissions
exceed 42% of commissionable product sales, the Company is entitled to receive
the difference from NSI. In the event that the commissions paid are lower than
42%, the Company must pay the difference to NSI. Under this formulation, the
Company's total commission expense is fixed at 42% of commissionable product
sales in each country (except for South Korea). The 42% figure has been set on
the basis of NSI's experience over the past eight years during which period
actual commissions paid in a given year together with the cost of administering
the Global Compensation Plan have ranged between 41% and 43% of commissionable
product sales for such year (averaging approximately 42%). In the event that
actual commissions payable to distributors from sales in the Company's markets
vary from these historical results, whether as a result of changes in
distributor behavior or changes to the Global Compensation Plan or in the event
that NSI's cost of administering the Global Compensation Plan increases or
decreases, the Licensing and Sales Agreements provide that the intercompany
settlement figure may be modified to more accurately reflect actual results.
This could result in the Company becoming obligated to make greater settlement
payments to NSI under the Licensing and Sales Agreements. Such additional
payments could adversely affect the Company's results of operations. Because the
Company licenses the right to use the Global Compensation Plan from NSI, the
structure of the plan, including commission rates, is under the control of NSI.
Product Liability
The Company may be subject, under applicable laws and regulations, to
liability for loss or injury caused by its products. The Company's Subsidiaries
are currently covered for product liability claims to the extent of and under
insurance programs maintained by NSI for their benefit and for the benefit of
its affiliates purchasing NSI products. Accordingly, NSI maintains a policy
covering product liability claims for itself and its affiliates with a $1
million per claim and $1 million annual aggregate limit and an umbrella policy
with a $40 million per claim and $40 million annual aggregate limit. Although
the Company has not been the subject of material product liability claims and
the laws and regulations providing for such liability in the Company's markets
appear to have been seldom utilized, no assurance can be given that the Company
may not be exposed to future product liability claims, and, if any such claims
are successful, there can be no assurance that the Company will be adequately
covered by insurance or have sufficient resources to pay such claims. The
Company does not currently maintain its own product liability policy.
Competition
The markets for personal care and nutritional products are large and
intensely competitive. The Company competes directly with companies that
manufacture and market personal care and nutritional products in each of the
Company's product lines. The Company competes with other companies in the
personal care and nutritional products industry by emphasizing the value and
premium quality of the Company's products and the convenience of the Company's
distribution system. Many of the Company's competitors have much greater name
recognition and financial resources than the Company. In addition, personal care
and nutritional products can be purchased in a wide variety of channels of
distribution. While the Company believes that consumers appreciate the
convenience of ordering products from home through a sales person or through a
catalog, the buying habits of many consumers accustomed to purchasing products
through traditional retail channels are difficult to change. The Company's
product offerings in each product category are also relatively small compared to
the wide variety of products offered by many other personal care and nutritional
product companies. There can be no assurance that the Company's business and
results of operations will not be affected materially by market conditions and
competition in the future.
The Company also competes with other direct selling organizations, some of
which have longer operating histories and higher visibility, name recognition
and financial resources. The leading network marketing company in the Company's
markets is Amway Corporation and its affiliates. The Company competes for new
distributors on the basis of the Global Compensation Plan and its premium
quality products. Management envisions the entry of many more direct selling
organizations into the marketplace as this channel of distribution expands over
the next several years. The Company has been advised that certain large,
well-financed corporations are planning to launch direct selling enterprises
which will compete with the Company in certain of its product lines. There can
be no assurance that the Company will be able to successfully meet the
challenges posed by this increased competition.
The Company competes for the time, attention and commitment of its
independent distributor force. Given that the pool of individuals interested in
the business opportunities presented by direct selling tends to be limited in
each market, the potential pool of distributors for the Company's products is
reduced to the extent other network marketing companies successfully recruit
these individuals into their businesses. Although management believes that the
Company offers an attractive business opportunity, there can be no assurance
that other network marketing companies will not be able to recruit the Company's
existing distributors or deplete the pool of potential distributors in a given
market.
Operations Outside the United States
The Company's revenues and most of its expenses are recognized primarily
outside of the United States. Therefore, the Company is subject to transfer
pricing regulations and foreign exchange control, taxation, customs and other
laws. The Company's operations may be materially and adversely affected by
economic, political and social conditions in the countries in which it operates.
A change in policies by any government in the Company's markets could adversely
affect the Company and its operations through, among other things, changes in
laws, rules or regulations, or the interpretation thereof, confiscatory
taxation, restrictions on currency conversion, currency repatriation or imports,
or the expropriation of private enterprises. Although the general trend in these
countries has been toward more open markets and trade policies and the fostering
of private business and economic activity, no assurance can be given that the
governments in these countries will continue to pursue such policies or that
such policies will not be significantly altered in future periods. This could be
especially true in the event of a change in leadership, social or political
disruption or upheaval, or unforeseen circumstances affecting economic,
political or social conditions or policies. The Company is aware of news
releases in South Korea in 1996, for example, reporting comments by political
figures proposing restrictions on foreign direct sellers designed to protect the
market share of local companies. There can be no assurance that such activities,
or other similar activities in the Company's markets, will not result in passage
of legislation or the enactment of policies which could materially adversely
affect the Company's operations in these markets. In addition, the Company's
ability to expand its operations into the new markets for which it has received
an exclusive license to distribute NSI products will directly depend on its
ability to secure the requisite government approvals and comply with the local
government regulations in each of those countries. The Company has in the past
experienced difficulties in obtaining such approvals as a result of certain
actions taken by its distributors, and no assurance can be given that these or
similar problems will not prevent the Company from commencing operations in
those countries. See "--Entering New Markets."
Anti-Takeover Effects of Certain Charter, Contractual and Statutory Provisions
The Board of Directors is authorized, subject to certain limitations, to
issue without further consent of the stockholders up to 25,000,000 shares of
preferred stock with rights, preferences and privileges designated by the Board
of Directors. See "Description of Capital Stock--Preferred Stock." In addition,
the Company's Certificate of Incorporation requires the approval of 66 2/3% of
the outstanding voting power of the Class A Common Stock and the Class B Common
Stock to authorize or approve certain change of control transactions. See
"Description of Capital Stock--Common Stock--Voting Rights" and "--Mergers and
Other Business Combinations." The Company's Certificate of Incorporation and
Bylaws also contain certain provisions that limit the ability to call special
meetings of stockholders and the ability of stockholders to bring business
before or to nominate directors at a meeting of stockholders. See "Description
of Capital Stock--Other Charter and Bylaw Provisions." Pursuant to the 1996
Stock Incentive Plan, in the event of certain change of control transactions the
Board of Directors has the right, under certain circumstances, to accelerate the
vesting of options and the expiration of any restriction periods on stock
awards. See "Management--1996 Stock Incentive Plan." Finally, the Operating
Agreements with NSI and NSIMG are subject to renegotiation after December 31,
2001 upon a change of control of the Company. Any of these actions, provisions
or requirements could have the effect of delaying, deferring or preventing a
change of control of the Company. See "Business--Relationship with NSI--General
Provisions."
The Company is subject to the provisions of Section 203 of the General
Corporation Law of the State of Delaware (the "Anti-Takeover Law") regulating
corporate takeovers. The Anti-Takeover Law prevents certain Delaware
corporations, including those whose securities are listed on the New York Stock
Exchange, from engaging, under certain circumstances, in a "business
combination" (which includes a merger of more than 10% of the corporations'
assets) with an "interested stockholder" (a stockholder who, together with
affiliates and associates, within the prior three years did own 15% or more of
the corporation's outstanding voting stock) for three years following the date
that such stockholder became an "interested stockholder," unless the "business
combination" or "interested stockholder" is approved in a prescribed manner. A
Delaware corporation may "opt out" of the Anti-Takeover Law with an express
provision in its original certificate of incorporation or an express provision
in its certificate of incorporation or bylaws resulting from a stockholders'
amendment approved by at least a majority of the outstanding voting shares. The
Company has not "opted out" of the provisions of the Anti-Takeover Law.
Shares Eligible for Future Sale
Sales of a substantial number of shares of Class A Common Stock in the
public market following the Rule 415 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 Exercise Price of the Distributor Options is $5.75. At this price,
investors exercising Distributor Options to purchase shares of Class A Common
Stock in the Rule 415 Offerings will incur immediate dilution of $4.03 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. The Company, as a holding company, will be
dependent on the earnings and cash flow of, and dividends and distributions
from, the Subsidiaries to pay any cash dividends or distributions on the Class A
Common Stock that may be authorized by the Board of Directors of the Company.
See "--Reliance on Operations of and Dividends and Distributions from
Subsidiaries" and "Dividend Policy."
USE OF PROCEEDS
The net proceeds from the issuance of shares of Class A Common Stock by the
Company in connection with the exercise of the Distributor Options are estimated
to be approximately $9.2 million (assuming the exercise of all 1,605,000
Distributor Options). The Company will not receive any proceeds from the
distribution of shares of Class A Common Stock by the Company and the Rule 415
Selling Stockholders in connection with the employee stock bonus awards. The
Rule 415 Selling Stockholders will pay all expenses in connection with the Rule
415 Offerings.
The Company anticipates that the net proceeds of the Rule 415 Offerings
will be used for general corporate purposes, which may include additional
capital expansion projects. Pending such use, the Company intends to invest the
proceeds from the Rule 415 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" and "--Reliance on Operations of and Dividends and Distributions
from Subsidiaries" and "Description of Capital Stock--Common Stock--Dividends"
and "--Preferred Stock."
PRICE RANGE OF CLASS A COMMON STOCK
The Company's Class A Common Stock trades on the NYSE under the symbol
"NUS" and was listed for the first time on November 21, 1996. Prior to that
date, there was no public market for the Company's Class A Common Stock. The
following table is based upon information available to the Company and sets
forth the range of the high and low closing sales prices for the Company's Class
A Common Stock.
Sales Price
High Low
1996
Fourth Quarter (from November 21, 1996)..................... $30.88 $26.50
1997
First Quarter............................................... $30.88 $24.13
Second Quarter.............................................. $28.13 $24.00
Third Quarter (through July 15, 1997)....................... $27.06 $23.81
The approximate number of holders of record of the Company's Class A Common
Stock as of July 15, 1997 was 486. This number does not represent the actual
number of beneficial owners of shares of the Company's Class A Common Stock
because shares are frequently held in "street name" by securities dealers and
others for the benefit of individual owners who have the right to vote their
shares. The last reported sale price of the Class A Common Stock on the New York
Stock Exchange on August 28, 1997, was $23.75.
CAPITALIZATION
The following table sets forth the cash and cash equivalents, the
short-term debt and capitalization of the Company as of June 30, 1997, and as
adjusted to reflect the issuance and sale by the Company of shares of Class A
Common Stock in the Rule 415 Offerings and the application of the net proceeds
therefrom. The information below should be read in conjunction with the
Consolidated Financial Statements and the related notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the pro forma financial statements included elsewhere in this
Prospectus.
As of June 30, 1997
As
Actual(1) Adjusted(2)
(in thousands, except
share amounts)
Cash and cash equivalents(3).................................... $151,375 $160,604
============ ============
Short-term notes payable to related parties(3).................. $ 10,000 $ 10,000
============ ============
Stockholders' equity:
Preferred Stock, par value $.001 per share,
25,000,000 shares authorized, no shares
issued and outstanding................................... $ -- $ --
Class A Common Stock, par value $.001 per share,
500,000,000 shares authorized, 11,723,011 and
13,491,557 shares issued and outstanding actual
and as adjusted, respectively............................ 12 13
Class B Common Stock, par value $.001 per share,
100,000,000 shares authorized, 71,696,675 shares
issued and outstanding actual and as adjusted............ 72 72
Additional paid-in capital.................................. 137,876 147,103
Cumulative foreign currency translation adjustment.......... (5,857) (5,857)
Retained earnings........................................... 55,287 55,287
Deferred compensation....................................... (13,005) (13,005)
Note receivable from NSI.................................... (13,139) (13,139)
------------ ------------
Total stockholders' equity............................... 161,246 170,474
------------ ------------
Total capitalization..................................... $161,246 $170,474
============ ============
- -----------
(1) Does not include 3,836,454 shares of Class A Common Stock reserved for
issuance pursuant to the 1996 Stock Incentive Plan and 250,825 shares of
Class A Common Stock subject to a stock option which was granted to an
executive officer of the Company. See "Management--1996 Stock Incentive
Plan" and "Certain Relationships and Related Transactions--Agreements and
Arrangements with Management."
(2) Assumes the exercise of all 1,605,000 Distributor Options at the Exercise
Price of $5.75 and the vesting of all 163,546 stock bonus awards offered
hereby by the Company to certain of its employees. The Rule 415 Selling
Stockholders will pay all expenses in connection with the Rule 415
Offerings. However, does not reflect the repayment to the Company by NSI of
the $13.1 million 10-year note for the purchase of an option to purchase
1.6 million shares of Class A Common Stock. It is anticipated that the note
will be repaid as distributors begin to exercise their options beginning in
1998. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources."
(3) The $10.0 million note payable to NSI related to the License Fee is due
January 15, 1998.
DILUTION
The net tangible book value of the Company at June 30, 1997 was
approximately $137.0 million, or $1.64 per share of Common Stock. After giving
effect to the issuance of the 1,768,546 shares of Class A Common Stock offered
hereby by the Company (assuming the exercise of all 1,605,000 Distributor
Options and the vesting of all 163,546 stock bonus awards offered by the Company
to certain of its employees), and the application of the estimated net proceeds
therefrom as set forth under "Use of Proceeds," the pro forma net tangible book
value of the Company as adjusted at June 30, 1997 would have been approximately
$146.3 million, or $1.72 per share. See "Use of Proceeds." This represents an
immediate dilution of $4.03 per share to individuals exercising the Distributor
Options at the Exercise Price of $5.75. See "Risk Factors--Dilution." The
following table illustrates the per share dilution:
Exercise Price of the Distributor Options........................ $5.75
Net tangible book value per share at June 30, 1997............. $1.64
Increase in net tangible book value per share attributable to
the Rule 415 Offerings....................................... .08
-----
Net tangible book value, as adjusted, per share after the
Rule 415 Offerings............................................. 1.72
----
Dilution per share to individuals exercising Distributor Options
in the Rule 415 Offerings...................................... $4.03
====
The following table summarizes on a pro forma basis as of June 30, 1997 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 recipients of the employee stock bonus
awards in the Rule 415 Offerings and individuals exercising Distributor Options
in the Rule 415 Offerings.
Shares Purchased Total Consideration Average
Price
Number Percent Amount Percent Per Share
Existing Stockholders(1)...... 71,696,675(2) 96% $ --(3) --% $ --
Recipients of the employee
stock bonus awards(4)....... 1,413,546 2 $ -- -- --
Individuals exercising the
Distributor Options(5)...... 1,605,000 2 9,228,750 100 5.75
---------- --- ---------- ---
Total................ 74,715,221 100% $9,228,750 100%
========== === ========== ===
- ---------------------------
(1) The term Existing Stockholders does not include an executive officer of the
Company who exercised a portion of an option and acquired 16,675 shares
pursuant to such exercise following the Reorganization and who sold such
shares in the Underwritten Offerings.
(2) Excludes 5,698,325 shares sold by the Existing Stockholders, 16,675 shares
sold by an executive officer of the Company after partial exercise of an
option, and 4,750,000 shares sold by the Company in connection with the
Underwritten Offerings.
(3) 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
aggregate net proceeds of the Underwritten Offerings and the Rule 415
Offerings. See "Use of Proceeds."
(4) Includes 1,250,000 shares which the Existing Stockholders contributed to
NSI and its affiliates (other than the Company) for subsequent issuance in
connection with employee stock bonus awards and 163,546 shares to be issued
by the Company to employees as stock bonus awards.
(5) Includes 1,605,000 shares which the Existing Stockholders contributed to
the Company for issuance upon exercise of the Distributor Options.
SELECTED CONSOLIDATED FINANCIAL AND OTHER INFORMATION
The following selected consolidated financial data and other information as
of December 31, 1995 and 1996 and for the fiscal year ended September 30, 1994,
for the three months ended December 31, 1994 and for the years ended December
31, 1995 and 1996 have been derived from the Company's Consolidated Financial
Statements, which have been audited by Price Waterhouse LLP, independent
accountants, included elsewhere in this Prospectus. The pro forma income
statement data for the fiscal years ended December 31, 1995 and 1996 and for the
six months ended June 30, 1996 have been derived from the Company's Unaudited
Pro Forma Consolidated Statements of Income, included elsewhere in this
Prospectus. The consolidated financial data as of September 30, 1993, and for
the fiscal year then ended, and as of September 30, 1994 and as of December 31,
1994 are derived from the consolidated financial statements of the Company,
which have been audited but are not contained herein. The financial data as of
September 30, 1992 and for the fiscal year ended September 30, 1992 and for the
year ended December 31, 1994 and as of June 30, 1997 and for the six months
ended June 30, 1996 and 1997 are unaudited. Interim results, in the opinion of
management, include all adjustments (consisting solely of normal recurring
adjustments) necessary to present fairly the financial information for such
periods; however, such results are not necessarily indicative of the results
which may be expected for any other interim period or for a full year. This
information should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Consolidated
Financial Statements and the related notes thereto included elsewhere in this
Prospectus.
Three Six Months
Months Ended
Year Ended September 30, Ended Year Ended December 31, June 30,
-------------------------- December --------------------------- ---------------
1992 1993 1994 31, 1994 1994(1) 1995 1996 1996 1997
---- ---- ---- -------- ---- ---- ---- ---- ----
(in thousands, except per share data)
Income Statement Data:
Revenue................... $42,919 $110,624 $254,637 $73,562 $264,440 $358,609 $678,596 $287,711 $441,010
Cost of sales............. 14,080 38,843 86,872 19,607 82,241 96,615 193,158 80,963 126,199
------- -------- -------- ------- -------- -------- -------- -------- --------
Gross profit.............. 28,839 71,782 167,765 53,955 182,199 261,994 485,438 206,748 314,811
Operating expenses:
Distributor
incentives.......... 14,659 40,267 95,737 27,950 101,372 135,722 249,613 107,090 169,132
Selling, general and
administrative...... 10,065 27,150 44,566 13,545 48,753 67,475 105,477 44,551 67,738
Distributor stock
expense............. -- -- -- -- -- -- 1,990 -- 8,954
------- -------- -------- ------- -------- -------- -------- -------- --------
Operating income.......... 4,115 4,365 27,462 12,460 32,074 58,797 128,358 55,107 68,987
Other income (expense),
net.................... 160 133 443 (813) (394) 511 2,833 617 527
------- -------- -------- ------- -------- -------- -------- -------- --------
Income before provision
for income taxes....... 4,275 4,498 27,905 11,647 31,680 59,308 131,191 55,724 69,514
Provision for income
taxes.................. 1,503 417 10,226 2,730 10,071 19,097 49,494 20,591 25,720
------- -------- -------- ------- -------- -------- -------- -------- --------
Net income................ $2,772 $4,081 $17,679 $8,917 $21,609 $40,211 $81,697 $35,133 $43,794
------- -------- -------- ------- -------- -------- -------- -------- --------
Pro forma net income per share(2).................................................. $.50 $1.01 $.44 $.51
Pro forma weighted average common shares outstanding............................... 80,518 81,060 80,518 85,421
Year Ended Six Months
December 31, Ended June 30,
--------------------- ---------------------
1995 1996 1996 1997
---- ---- ---- ----
(in thousands, except per share data)
Pro Forma Income Statement Data:(3)(4)
Revenue....................................... $ 358,609 $ 678,596 $ 287,711 $ 441,010
Cost of sales................................. 96,615 193,158 80,963 126,199
--------- --------- --------- ---------
Gross profit.................................. 261,994 485,438 206,748 314,811
Operating expenses:
Distributor incentives...................... 135,722 249,613 107,090 169,132
Selling, general and administrative......... 74,433 111,802 47,973 67,738
--------- --------- --------- ---------
Operating income.............................. 51,839 124,023 51,685 77,941
Other income(expense), net(5)................. (2,298) 3,602 884 527
--------- --------- --------- ---------
Income before provision for income taxes...... 49,541 127,625 52,569 78,468
Provision for income taxes.................... 19,005 44,700 18,410 29,033
--------- --------- --------- ---------
Pro forma net income.......................... $ 30,536 $ 82,925 $ 34,159 $ 49,435
========= ========= ========= =========
Pro forma net income per share(6)............. $.36 $.97 $.40 $.58
Weighted average common shares outstanding.... 85,377 85,377 85,377 85,377
As of September 30, As of December 31, As of
------------------------------ ------------------------------- June 30,
1992 1993 1994 1994 1995 1996 1997
---- ---- ---- ---- ---- ---- ----
(in thousands)
Balance Sheet Data:
Cash and cash equivalents.................. $ 1,553 $14,591 $18,077 $16,288 $63,213 $207,106 $151,375
Working capital............................ 1,026 (504) 15,941 26,680 47,863 66,235 107,975
Total assets............................... 10,236 41,394 71,565 61,424 118,228 331,715 306,807
Short term notes payable to stockholders .. -- -- -- -- -- 71,487 --
Short term note payable to NSI............. -- -- -- -- -- 10,000 10,000
Long term note payable to NSI.............. -- -- -- -- -- 10,000 --
Stockholders' equity....................... 2,749 6,926 24,934 33,861 61,771 107,792 161,246
As of September 30, As of December 31, As of June 30,
----------------------------- ------------------------------- --------------------
1992 1993 1994 1994 1995 1996 1996 1997
---- ---- ---- ---- ---- ---- ---- ----
Other Information:(7)
Number of active distributors..... 33,000 106,000 152,000 170,000 236,000 377,000 384,000 416,000
Number of executive distributors.. 649 2,788 5,835 6,083 7,550 20,483 12,446 22,520
- -----------
(1) The information for the year ended December 31, 1994 is not included in the
Company's Consolidated Financial Statements included elsewhere in this
Prospectus. Such information has been presented for comparative purposes
only.
(2) Reflects the weighted average number of common shares and common share
equivalents outstanding during the periods presented assuming that the
Company's Reorganization and the resultant issuance of 80,250,000 shares of
Class B Common Stock occurred as of January 1, 1995. The weighted average
number of common shares and common share equivalents include: (i) an option
granted to an executive officer of the Company prior to the Reorganization
to purchase 267,500 shares of Class A Common Stock; (ii) the sale of
4,750,000 shares of Class A Common Stock by the Company in connection with
the Underwritten Offerings; (iii) the grant of awards for 109,000 shares of
Class A Common Stock to certain employees of the Company during November
and December 1996; and (iv) the grant of awards for 41,959 additional
shares of Class A Common Stock to certain employees of the Company during
January 1997.
(3) As part of the Reorganization, several actions occurred which impacted the
comparability of the historical financial results of the Company with the
future results of the Company. Therefore, a pro forma presentation has been
prepared to provide comparative data. The unaudited pro forma income
statement data reflect the Reorganization as if such event had occurred as
of January 1, 1995, and the following adjustments: (i) the amortization
over a 20-year period of a $25.0 million payment, consisting of $5.0
million in cash and $20.0 million in notes, to NSI for the exclusive rights
to distribute NSI products in Thailand, Indonesia, Malaysia, the PRC, the
Philippines, Singapore and Vietnam; (ii) the recognition by the Company of
additional charges of $4.4 million for the year ended December 31, 1995,
$4.0 million for the year ended December 31, 1996 and $2.2 million for the
six months ended June 30, 1996, relating to certain support services
provided to the Company by NSI and an NSI affiliate and certain other
charges related to operating as a public company; (iii) estimated annual
compensation expense of $1.2 million related to the employee stock bonus
awards granted to employees of the Company, NSI and its affiliates; and
(iv) adjustments for U.S. Federal and state income taxes as if the Company
had been taxed as a C corporation rather than as an S corporation since
inception.
(4) The unaudited pro forma income statement data do not reflect the estimated
non-cash compensation expense totaling $19.9 million in connection with the
one-time grant of the Distributor Options at an exercise price of $5.75 per
share. $2.0 million of such expense was recorded as actual distributor
stock expense for the year ended December 31, 1996. An additional $9.0
million of such expense was recorded for the six months ended June 30,
1997. Neither of these expenses has been included in the pro forma
presentation. The granting and vesting of the Distributor Options are
conditioned upon distributor performance under the Global Compensation Plan
and the NSI 1996 Distributor Stock Option Plan. The vesting of the
Distributor Options is scheduled to occur on December 31, 1997. See
"Certain Relationships and Related Transactions--Distributor Options,"
"Shares Eligible for Future Sale" and "Plan of Distribution."
(5) Pro forma other income and expense includes: (i) increased interest expense
of $2.7 million for the year ended December 31, 1995 relating to the
issuance of the S Distribution Notes of $86.5 million from the
Subsidiaries' earned and undistributed S corporation earnings through the
date of the termination of the Subsidiaries' S corporation status; (ii)
increased interest expense of $0.9 million for the year ended December 31,
1995 and $0.1 million each for the year ended December 31, 1996 and the six
months ended June 30, 1996 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 each for the years ended December
31, 1995 and December 31, 1996 and $0.4 million for the six months ended
June 30, 1996 relating to a note receivable from NSI with an estimated
principal balance of $13.1 million as consideration for the Distributor
Options.
(6) Reflects, as if all shares had been issued as of January 1, 1995, the
following: (i) 80,250,000 common shares outstanding and common share
equivalents after giving effect to the Reorganization; (ii) the sale by the
Company of 4,750,000 shares of Class A Common Stock in the Underwritten
Offerings; (iii) the grant of awards for 109,000 shares of Class A Common
Stock to certain employees of the Company; and (iv) an option granted to an
executive officer of the Company to purchase 267,500 shares of Class A
Common Stock. Supplemental income per share, calculated as if $25.0 million
of the proceeds from the Underwritten Offerings were used to repay notes
payable, had a dilutive effect of less than 2% and, therefore, is not
presented.
(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.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the Company's financial condition and results
of operations should be read in conjunction with the Consolidated Financial
Statements and the related notes thereto included elsewhere in this Prospectus.
General
Nu Skin Asia Pacific is a network marketing company involved in the
distribution and sale of premium quality, innovative personal care and
nutritional products. The Company is the exclusive distribution vehicle for Nu
Skin International in the countries of Japan, Taiwan, Hong Kong (including
Macau), South Korea and Thailand, where the Company currently has operations,
and in Indonesia, Malaysia, the PRC, the Philippines, Singapore and Vietnam,
where operations have not commenced. Until September 30, 1994, the Company's
fiscal year ended on September 30 of each year. As of October 1, 1994, the
Company changed its fiscal year end to December 31 of each year, beginning with
the fiscal year ended December 31, 1995.
The Company's revenue is primarily dependent upon the efforts of a network
of independent distributors who purchase products and sales materials from the
Company in their local currency and who constitute the Company's customers. The
Company recognizes revenue when products are shipped and title passes to these
independent distributors. Revenue is net of returns, which have historically
been less than 3.0% of gross sales. Distributor incentives are paid to several
levels of distributors on each product sale. The amount and recipient of the
incentive varies depending on the purchaser's position within the Global
Compensation Plan. These incentives are classified as operating expenses. The
following table sets forth revenue information for the time periods indicated.
This table should be reviewed in connection with the tables presented under
"Results of Operations" which disclose distributor incentives and other costs
associated with generating the aggregate revenue presented.
Six Months
Date Year Ended December 31, Ended June 30,
Operations -------------------------- ----------------
Country Commenced 1994 1995 1996 1996 1997
- ------- ---------- ---- ---- ---- ---- ----
(in millions)
Japan............................ April 1993 $172.9 $231.5 $380.0 $166.5 $261.4
Taiwan........................... January 1992 79.2 105.4 154.6 67.6 91.3
South Korea...................... February 1996 -- -- 122.4 43.4 63.1
Hong Kong........................ September 1991 10.9 17.1 17.0 8.1 9.7
Thailand......................... March 1997 -- -- -- -- 13.4
Sales to NSI affiliates(1)....... January 1993 1.4 4.6 4.6 2.1 2.1
------ ------ ------ ------ ------
Total revenue................. $264.4 $358.6 $678.6 $287.7 $441.0
====== ====== ====== ====== ======
- -----------
(1) Includes revenue from the sale of certain products to NSI affiliates in
Australia and New Zealand.
Revenue generated in Japan and Taiwan represented 59.3% and 20.7%,
respectively, of total revenue generated during the six months ended June 30,
1997. The Company's South Korean operations, which commenced in February 1996,
generated 14.3% of total revenue for the six months ended June 30, 1997. Revenue
generated in Hong Kong during the six months ended June 30, 1997 represented
2.2% of total Company revenue. Revenue from the first four months of operations
in Thailand represented 3.0% of total Company revenue for the six months ended
June 30, 1997. Operating expenses have increased in each country with the growth
of the Company's revenue.
Cost of sales primarily consists of the cost of products purchased from NSI
(in U.S. dollars) as well as duties related to the importation of such products.
Additionally, cost of sales includes the cost of sales materials sold to
distributors at or near cost. Sales materials are generally purchased in local
currencies. As the sales mix changes between product categories and sales
materials, cost of sales and gross profit may fluctuate to some degree due
primarily to varying import duty rates levied on imported product lines. In each
of the Company's current markets, duties are generally higher on nutritional
products than on personal care products. Also, as currency exchange rates
fluctuate, the Company's gross margin will fluctuate. In general, however, costs
of sales move proportionately with revenue.
Distributor incentives are the Company's most significant expense. Pursuant
to the Operating Agreements with NSI, the Company and the Subsidiaries are
contractually obligated to pay a distributor commission expense of 42.0% of
commissionable product sales (with the exception of South Korea, where, due to
government regulations, the Company uses a formula based upon a maximum payout
of 35.0% of commissionable product sales). The Licensing and Sales Agreements
provide that the Company is to satisfy this obligation by paying commissions
owed to local distributors. In the event that these commissions exceed 42.0% of
commissionable product sales, the Company is entitled to receive the difference
from NSI. In the event that the commissions paid are lower than 42.0%, the
Company must pay the difference to NSI. Under this formulation, the Company's
total commission expense is fixed at 42.0% of commissionable product sales in
each country (except for South Korea). The 42.0% figure has been set on the
basis of NSI's experience over the past eight years which indicates that actual
commissions paid in a given year and the costs of administering the Global
Compensation Plan (which have historically not exceeded 2% of revenue) together
have averaged approximately 42.0% of commissionable product sales per year
during such period. Because the Company's revenue includes sales of both
commissionable and non-commissionable items, distributor incentives as a
percentage of total revenue have ranged from approximately 36.8% to 38.4% since
December 31, 1994. Non-commissionable items consist of sales materials and
starter kits as well as sales to NSI affiliates in Australia and New Zealand.
In the fourth quarter of 1996, NSI and the Company implemented a one-time
distributor equity incentive program. This global program provides for the
granting of options to distributors to purchase 1.6 million shares of the
Company's currently outstanding Class A Common Stock. The number of options each
distributor receives will be based on their performance and productivity through
August 31, 1997. The options are exercisable at a price of $5.75 per share and
will vest on December 31, 1997. As anticipated, the Company recorded a $2.0
million charge for the year ended December 31, 1996 and a $9.0 million charge
for the six months ended June 30, 1997 and expects additional charges in 1997 of
approximately $8.9 million for the non-cash and non-recurring expenses
associated with this program.
Selling, general and administrative expenses include wages and benefits,
rents and utilities, travel and entertainment, promotion and advertising and
professional fees, as well as license and management fees paid to NSI and NSIMG.
Pursuant to the Operating Agreements, the Company contracts for management
support services from NSIMG, for which the Company pays a fee equal to an
allocation of expenses plus 3.0% of such expenses. In addition, the Company pays
to NSI a license fee of 4.0% of the Company's revenue from sales to distributors
(excluding sales of starter kits) for the use of NSI's distributor lists,
distribution system and certain related intangibles.
Provision for income taxes is dependent on the statutory tax rates in each
of the countries in which the Company operates. Statutory tax rates in the
countries in which the Company has operations are 16.5% in Hong Kong, 25.0% in
Taiwan, 30.0% in Thailand, 30.1% in South Korea and 57.9% in Japan. The Company
operates a regional business center in Hong Kong, which bears inventory
obsolescence and currency exchange risks. Any income or loss incurred by the
regional business center is not subject to taxation in Hong Kong. In addition,
since the Reorganization, the Company is subject to taxation in the United
States, where it is incorporated, at a statutory corporate federal tax rate of
35.0%. However, the Company receives foreign tax credits in the U.S. for the
amount of foreign taxes actually paid in a given period, which are utilized to
reduce taxes payable in the United States. See "Risk Factors--Taxation Risks and
Transfer Pricing."
Results of Operations
The following tables set forth (i) operating results, and (ii) operating
results as a percentage of revenue, respectively, for the periods indicated.
Six Months Ended
Year Ended December 31, June 30,
-------------------------- ----------------
1994 1995 1996 1996 1997
---- ---- ---- ---- ----
(in millions)
Revenue..................................................... $264.4 $358.6 $678.6 $287.7 $441.0
Cost of sales............................................... 82.2 96.6 193.2 81.0 126.2
------ ------ ------ ------ ------
Gross profit................................................ 182.2 262.0 485.4 206.7 314.8
Operating expenses:
Distributor incentives................................... 101.4 135.7 249.6 107.1 169.1
Selling, general and administrative...................... 48.8 67.5 105.4 44.5 67.7
Distributor stock expense................................ -- -- 2.0 -- 9.0
------ ------ ------ ------ ------
Operating income............................................ 32.0 58.8 128.4 55.1 69.0
Other income (expense), net................................. (.4) .5 2.8 .6 .5
------ ------ ------ ------ ------
Income before provision for income taxes.................... 31.6 59.3 131.2 55.7 69.5
Provision for income taxes(1)............................... 10.0 19.1 49.5 20.6 25.7
------ ------ ------ ------ ------
Net income.................................................. $21.6 $40.2 $81.7 $35.1 $43.8
====== ====== ====== ====== ======
Unaudited supplemental data:(1)
Net income before pro forma provision for income taxes... $31.6 $59.3 $131.2 $55.7
Pro forma provision for income taxes..................... 11.5 22.8 46.0 19.5
------ ------ ------ ------
Net income after pro forma provision for income taxes.... $20.1 $36.5 $85.2 $36.2
====== ====== ====== ======
Six Months Ended
Year Ended December 31, June 30,
-------------------------- ----------------
1994 1995 1996 1996 1997
---- ---- ---- ---- ----
(in millions)
Revenue..................................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales............................................... 31.1 26.9 28.5 28.1 28.6
------ ------ ------ ------ ------
Gross profit................................................ 68.9 73.1 71.5 71.9 71.4
Operating expenses:
Distributor incentives................................... 38.4 37.8 36.8 37.2 38.4
Selling, general and administrative...................... 18.4 18.8 15.5 15.5 15.4
Distributor stock expense................................ -- -- .3 -- 2.0
------ ------ ------ ------ ------
Operating income............................................ 12.1 16.5 18.9 19.2 15.6
Other income (expense), net................................. (.1) .1 .4 .2 .1
------ ------ ------ ------ ------
Income before provision for income taxes.................... 12.0 16.6 19.3 19.4 15.7
Provision for income taxes(1)............................... 3.8 5.3 7.3 7.2 5.8
------ ------ ------ ------ ------
Net income.................................................. 8.2% 11.3% 12.0% 12.2% 9.9%
====== ====== ====== ====== ======
Unaudited supplemental data:(1)
Net income before pro forma provision for income taxes... 12.0% 16.6% 19.3% 19.4%
Pro forma provision for income taxes..................... 4.3 6.4 6.8 6.8
------ ------ ------ ------
Net income after pro forma provision for income taxes.... 7.7% 10.2% 12.5% 12.6%
====== ====== ====== ======
- -----------
(1) Reflects adjustments for U.S. Federal and state income taxes as if the
Company had been taxed as a C corporation rather than as an S corporation
since inception. No adjustment is required for 1997 because the Company has
been taxed as a C corporation for this period.
Six Months Ended June 30, 1997 compared to the six months ended June 30, 1996.
Revenue increased 53% to $441.0 million for the six-month period ended June
30, 1997 from $287.7 million for the same period in 1996. This increase is
primarily attributable to several factors. First, revenue in Japan increased by
$94.9 million, or 57%, for the six-month period ended June 30, 1997, compared
with the same period in 1996. This increase in revenue was primarily a result of
continued growth of the IDN product line as well as increased sales following a
distributor convention held in the first quarter of 1997. Second, revenue in
Taiwan increased by $23.8 million, or 35%, for the six-month period ended June
30, 1997, compared with the same period in 1996, primarily as a result of growth
in IDN sales following the late 1996 introduction of LifePak. Third, for the six
months ended June 30, 1997, South Korea revenue increased $19.6 million, or 45%,
due to the Company's February 1996 introduction into South Korea resulting in a
shorter comparative period. Fourth, the opening of Thailand in the first quarter
of 1997 resulted in an additional $13.4 million in revenue for the six-month
period ended June 30, 1997. Fifth, revenue in Hong Kong increased by $1.6
million for the six-month period ended June 30, 1997, compared with the same
period in 1996.
Gross profit as a percentage of revenue was 71.4% and 71.9% for the six
months ended June 30, 1997 and 1996, respectively. This decrease reflected the
strengthening of the U.S. dollar and the commencement of operations in South
Korea in 1996. The Company purchases goods in U.S. dollars and recognizes
revenue in local currency and is consequently subjected to exchange rate risks
in its gross margins. The full quarter of operations in South Korea in 1997 also
impacted gross profit as a percentage of revenue due to South Korean regulations
which result in higher prices on imported products as compared to other markets.
Distributor incentives as a percentage of revenue increased to 38.4% for
the six-month period ended June 30, 1997 from 37.2% for the same period in 1996.
The primary reasons for this increase were a more developed distributor network
in South Korea in 1997, where commissions are capped at 35% of revenue, along
with the sales of a smaller percentage of non-commissionable items throughout
the Company in 1997.
Selling, general and administrative expenses as a percentage of revenue
decreased to 15.4% for the six-month period ended June 30, 1997 from 15.5% for
the same period in 1996. This decrease was primarily due to economies of scale
gained as the Company's revenue increased and was offset somewhat by increased
promotion expenses of approximately $2 million resulting from the first quarter
distributor conventions.
Distributor stock expense of $9.0 million for the six-month period ended
June 30, 1997, reflects the one-time grant of the distributor stock options at
an exercise price of 25% of the initial public offering price in connection with
the Underwritten Offerings completed on November 27, 1996. This non-cash expense
is non-recurring and will be recorded each quarter in 1997.
Operating income increased 25% to $69.0 million from $55.1 million for the
six-month period ended June 30, 1997, compared with the same period in 1996.
This increase was caused primarily by an increase in revenue. Operating margin
decreased to 15.6% for the six-month period ended June 30, 1997 from 19.2% for
the same period in 1996. This margin decrease was caused primarily by the
distributor stock expense and increased distributor incentives.
Other income decreased by $0.1 million for the six-month period ended June
30, 1997, compared with the same period in 1996. The decrease was primarily
caused by $0.9 million for the six-month period ended June 30, 1997, of
unrealized exchange losses resulting from forward exchange contracts and $0.2
million for the six-month period ended June 30, 1997, of unrealized exchange
losses resulting from an intercompany loan from Nu Skin Japan to Nu Skin Hong
Kong.
Provision for income taxes increased to $25.7 million from $20.6 million
for the six-month period ended June 30, 1997, compared with the same period in
1996 due to increased income. The effective tax rate was 37.0% for the six-month
periods ended June 30, 1997 and 1996.
Net income increased by $8.7 million to $43.8 million from $35.1 million
for the six-month period ended June 30, 1997, compared with the same period in
1996 due primarily to increased revenue. Net income as a percentage of revenue
decreased to 9.9% for the six-month period ended June 30, 1997, compared to
12.2% for the same period in 1996 due primarily to the distributor stock expense
and increased distributor incentives.
Year ended December 31, 1996 compared to the year ended December 31, 1995
Revenue was $678.6 million during 1996, an increase of 89.2% from revenue
of $358.6 million recorded during 1995. This increase is primarily attributable
to several factors. First, revenue in Japan increased by $148.5 million, or
64.1%. This increase in revenue was primarily a result of the continued success
of nutritional, color cosmetics and HairFitness products, which were introduced
in October 1995. Revenue growth in Japan was partially offset by the
strengthening of the U.S. dollar relative to the Japanese yen during 1996.
Second, revenue in Taiwan increased by $49.2 million, or 46.7%, primarily as a
result of the introduction of color cosmetics and other products, including
LifePak in October 1996, along with the opening of a new distribution and
walk-in center in Nankan, Taiwan. Third, in February 1996, Nu Skin Korea
commenced operations and generated revenue of $122.4 million for 1996. Finally,
revenue in Hong Kong decreased by $0.1 million during 1996 as compared to 1995,
due to several leading Hong Kong distributors continuing to focus on other Asian
markets.
Gross profit as a percentage of revenue was 71.5% and 73.1% during 1996 and
1995, respectively. This decline reflected the strengthening of the U.S. dollar,
the introduction of nutritional products in Japan and the commencement of
operations in South Korea in 1996. Nutritional products are generally subject to
higher duties than other products marketed by the Company, which yields lower
gross profit as a percentage of revenue. The commencement of operations in South
Korea also impacted gross profit as a percentage of revenue due to South Korean
regulations which result in higher prices on imported products than in other
markets.
Distributor incentives as a percentage of revenue declined from 37.8% for
1995 to 36.8% for 1996. The primary reason for this decline was increased
revenue from South Korea where local regulations limit the incentives which can
be paid to South Korean distributors.
Selling, general and administrative expenses as a percentage of revenue
declined from 18.8% during 1995 to 15.5% during 1996. This decrease was
primarily due to economies of scale gained as the Company's revenue increased.
Distributor stock expense of $2.0 million reflects the one-time grant of
the distributor stock options at an exercise price of $5.75 per share. This
non-cash expense is non-recurring and an estimated $4.5 million will be recorded
each quarter in 1997.
Operating income during 1996 increased to $128.4 million, an increase of
118.4% from the $58.8 million of operating income recorded during 1995.
Operating income as a percentage of revenue increased from 16.5% to 18.9%. This
increase was caused primarily by lower selling, general and administrative
expenses as a percentage of revenue.
Other income increased by $2.3 million during 1996 as compared to 1995. The
increase was primarily caused by an increase in interest income generated
through the short-term investment of cash.
Pro forma provision for income taxes increased to $46.0 million during 1996
compared to $22.8 million during 1995. The effective tax rate decreased to 35.0%
in 1996 as compared to 38.4% for 1995. The Company generated excess foreign tax
credits in 1995 which did not continue in 1996.
Net income after pro forma provision for income taxes increased by $48.7
million to $85.2 million during 1996 compared to $36.5 million during 1995. Pro
forma net income as a percentage of revenue increased to 12.5% for 1996 as
compared to 10.2% for 1995.
Year ended December 31, 1995 compared to the year ended December 31, 1994
Revenue was $358.6 million during 1995, an increase of 35.6% from the
$264.4 million of revenue recorded during 1994. This increase was due primarily
to an increased number of active and executive level distributors in each
market, which was the primary factor contributing to a $58.6 million increase in
revenue in Japan, a $26.2 million increase in revenue in Taiwan and a $6.2
million increase in revenue in Hong Kong. Nutritional products, color cosmetics
products and a new line of HairFitness products were introduced in Japan in the
fourth quarter of 1995, accounting for $25.0 million of the $58.6 million
increase. Additionally, the Company benefitted by the strengthening of the
Japanese yen during 1995. Revenue in Taiwan and Hong Kong increased as a result
of a higher volume of sales of color cosmetics, which were introduced in late
1994, and other personal care products. Additionally, certain new product
introductions by NSI affiliates in Australia and New Zealand led to a $3.2
million increase in revenue from sales to affiliated entities.
Gross profit as a percentage of revenue increased from 68.9% in 1994 to
73.1% in 1995. The increase in gross profit resulted from a reduction in product
costs on purchases from NSI, the weakening of the U.S. dollar relative to the
Japanese yen and other cost savings related to inventory shipping and handling.
Distributor incentives as a percentage of revenue decreased from 38.4% in
1994 to 37.8% in 1995. This decline was primarily attributable to an increase in
revenue in 1995 from non-commissionable sales materials and sales to NSI
affiliates.
Selling, general and administrative expenses as a percentage of revenue
increased to 18.8% during 1995 from 18.4% during 1994. This increase was
primarily due to a one-time cost incurred in February 1995 in connection with
moving the Company's Japanese facilities into a larger, more accessible office
and distributor center in Tokyo, Japan.
Operating income increased to $58.8 million in 1995 from $32.0 million in
1994, an increase of 83.8%. Operating income as a percentage of revenue
increased to 16.5% from 12.1%. The increase was primarily the result of the
product cost reductions discussed above.
Other income increased by approximately $0.9 million during 1995 as
compared to 1994. This increase was primarily caused by the disposal of property
and equipment related to a move to new facilities during 1994, and an increase
in interest income generated through the short term investment of cash.
Pro forma provision for income taxes increased to $22.8 million during 1995
as compared to $11.5 million for 1994. The effective tax rate was 38.4% in 1995
as compared to 36.4% in 1994.
Net income after pro forma provision for income taxes increased by $16.4
million to $36.5 million during 1995 as compared to $20.1 million for 1994. Net
income as a percentage of revenue increased to 10.2% during 1995 as compared to
7.7% for 1994.
Unaudited Pro Forma Consolidated Results of Operations
As part of the Reorganization, several actions occurred which impacted the
comparability of the historical financial results of the Company with the future
results of the Company. Therefore, a pro forma presentation has been prepared to
provide comparative data. The following adjustments reflect the Reorganization
as if such event had occurred as of January 1, 1995, and are reflected in the
unaudited pro forma consolidated financial information set forth below: (i) the
amortization over a 20-year period of a $25.0 million payment, consisting of
$5.0 million in cash and $20.0 million in notes, to NSI for the exclusive rights
to distribute Nu Skin personal care and IDN products in Thailand, Indonesia,
Malaysia, the PRC, the Philippines, Singapore and Vietnam; (ii) the recognition
by the Company of additional charges of $4.0 million relating to certain support
services provided to the Company by NSI and an NSI affiliate and certain other
charges related to operating as a public company; (iii) estimated annual
compensation expense of $1.2 million related to the employee stock bonus awards
granted to employees of the Company; and (iv) adjustment for U.S. Federal and
state income taxes as if the Company had been taxed as a C corporation rather
than as an S corporation since inception. The unaudited pro forma combined
financial information set forth below does not reflect the estimated non-cash
compensation expense of $19.9 million in connection with the one-time grant of
the Distributor Options at an exercise price of $5.75 per share. The Distributor
Options include conditions related to the achievement of performance goals and
will vest on December 31, 1997.
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.
Six Months
Year Ended Ended
December 31, 1996 June 30, 1996
----------------- -------------
Revenue.................................... 100.0% 100.0%
Cost of sales.............................. 28.5 28.1
----- -----
Gross profit............................... 71.5 71.9
Operating expenses:
Distributor incentives.................. 36.8 37.2
Selling, general and administrative..... 16.5 16.7
----- -----
Operating income........................... 18.2 18.0
Other income (expense), net................ .5 .3
----- -----
Income before provision for income taxes... 18.7 18.3
Provision for income taxes................. 6.6 6.4
----- -----
Net income................................. 12.1% 11.9%
===== =====
The Company is subject to taxation in the United States, where it is
incorporated, at a statutory corporate federal tax rate of 35%. In addition,
each Subsidiary is subject to taxation in the country in which it operates. The
Company receives foreign tax credits for the amount of foreign taxes actually
paid in a given period, which may be utilized to reduce taxes paid in the United
States. In the event that the Company's operations in high tax jurisdictions
such as Japan grow disproportionately to the rest of the Company's operations,
the Company will be unable to fully utilize its foreign tax credits in the U.S.
which could, accordingly, result in the Company paying a higher overall
effective tax rate on its worldwide operations.
Liquidity and Capital Resources
The Company underwent the Reorganization and the Underwritten Offerings in
November 1996. During the Underwritten Offerings, the Company raised $98.8
million in net proceeds. As of the date of the Reorganization, the aggregate
undistributed taxable S corporation earnings of the Subsidiaries were $86.5
million. The Subsidiaries' earned and undistributed S corporation earnings
through the date of termination of the Subsidiaries' S corporation status were
distributed in the form of the S Distribution Notes, promissory notes bearing
interest at 6.0% per annum. From the proceeds of the Underwritten Offerings,
$15.0 million was used to pay a portion of the S Distribution Notes and the
remaining balance of $71.5 million was paid in April 1997.
In November 1996, the Company purchased from NSI the distribution rights to
seven new markets in the region. These markets include Thailand, where
operations commenced in March 1997, and Indonesia, Malaysia, the Philippines,
the PRC, Singapore and Vietnam, where operations have not yet commenced. These
rights were purchased for $25.0 million, of which $5.0 million was paid from the
proceeds of the Underwritten Offerings and an additional $10.0 million was paid
in January 1997. At June 30, 1997, the Company had a $10.0 million short term
obligation, due January 15, 1998, related to the purchase of these rights.
Interest accrues at a rate of 6.0% per annum on amounts due under this
obligation.
The remaining $78.8 million in net proceeds from the Underwritten Offerings
are to be used for new market development, introducing new products, enhancing
the Company's technological infrastructure, establishing additional office and
distribution centers and for other general corporate purposes. Management
anticipates using the remaining proceeds of the Underwritten Offerings within
the next three years.
The Company generates significant cash flow from operations due to its
significant growth, high margins and minimal capital requirements. Additionally,
the Company does not extend credit to distributors, but requires payment prior
to shipping products. This process eliminates the need for accounts receivable
from distributors. During the six months ended June 30, 1997, the Company
generated $28.2 million from operations compared to $31.8 million during the six
months ended June 30, 1996. This decrease in cash flows from operations is
primarily due to the buildup of inventories to support future market demands and
the payment of income taxes during the first quarter of 1997.
As of June 30, 1997, working capital was $108.0 million compared to $66.2
million as of December 31, 1996. Cash and cash equivalents at June 30, 1997 were
$151.4 million compared to $207.1 million at December 31, 1996.
Historically, the Company's principal need for funds has been for
distributor incentives, working capital (principally inventory purchases),
capital expenditures and the development of new markets. The Company has
generally relied entirely on cash flow from operations to meet its business
objectives without incurring long term debt to unrelated third parties.
Capital expenditures, primarily for equipment, computer systems and
software, office furniture and leasehold improvements, were $2.5 million and
$2.9 million for the six months ended June 30, 1997 and 1996, respectively. In
addition, the Company anticipates capital expenditures through 1998 of an
additional $22.5 million to further enhance its infrastructure, including
computer systems and software, warehousing facilities and walk-in distributor
centers in order to accommodate future growth.
As a part of the Company's and NSI's strategy to motivate distributors with
equity incentives, the Company sold to NSI an option to purchase 1.6 million
shares of the Company's Class A Common Stock. NSI purchased the option with a
$13.1 million 10-year note payable to the Company bearing interest at 6.0% per
annum. It is anticipated that the note will be repaid as distributors begin to
exercise their options beginning in 1998.
Under its operating agreements with NSI, the Company incurs related party
payables. The Company had related party payables of $61.4 million and $46.3
million at June 30, 1997 and December 31, 1996, respectively. In addition, the
Company had related party receivables of $5.8 million and $8.0 million,
respectively, at those dates. Related party balances outstanding in excess of 60
days bear interest at a rate of 2% above the U.S. prime rate. As of June 30,
1997, no material related party payables or receivables had been outstanding for
more than 60 days.
Management considers the Company to be liquid and able to meet its
obligations on both a short and long-term basis. Management believes existing
cash balances together with future cash flows from operations will be adequate
to fund cash needs relating to the implementation of the Company's strategic
plans.
Seasonality and Cyclicality
While neither seasonal nor cyclical variations have materially affected the
Company's results of operations to date, the Company believes that its rapid
growth may have overshadowed these factors. Accordingly, there can be no
assurance that seasonal or cyclical variations will not materially adversely
affect the Company's results of operations in the future.
The direct selling industry is impacted by certain seasonal trends such as
major cultural events and vacation patterns. For example, Japan, Taiwan, Hong
Kong, South Korea and Thailand celebrate their respective local New Year in the
Company's first quarter. Management believes that direct selling in Japan is
also generally negatively impacted during August, when many individuals
traditionally take vacations.
Generally, the Company has experienced rapid revenue growth in each new
market from the commencement of operations. In Japan, Taiwan and Hong Kong, the
initial rapid growth was followed by a short period of stable or declining
revenue followed by renewed growth fueled by new product introductions, an
increase in the number of active distributors and increased distributor
productivity. The Company believes that a similar pattern is currently occurring
in its operations in South Korea, where the Company experienced a significant
decline in its second quarter revenue from revenue in the first quarter of 1997
and anticipates an additional significant decline in the third quarter of 1997.
See "--Outlook." In addition, the Company may experience variations on a
quarterly basis in its results of operations, as new products are introduced and
new markets are opened. No assurance can be given that the Company's revenue
growth rate in Thailand, which commenced operations in March 1997, or in new
markets where operations have not commenced, will follow this pattern.
Quarterly Results
The following table sets forth certain unaudited quarterly data for the
periods shown.
1995 1996 1997
------------------------------------- --------------------------------------- ------------------
1st 2nd 3rd 4th 1st 2nd 3rd 4th 1st 2nd
Quarter Quarter Quarter Quarter(1) Quarter(2) Quarter Quarter Quarter Quarter(3) Quarter
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
(in millions, except per share amounts)
Revenue ............ $77.7 $80.5 $83.2 $117.2 $124.2 $163.5 $183.6 $207.3 $211.0 $230.0
Gross profit......... 57.3 59.7 60.3 84.7 89.4 117.4 130.9 147.7 150.3 164.5
Operating income..... 13.5 15.0 12.8 17.5 23.2 31.9 37.5 35.8 30.8 38.2
Net income........... 9.3 10.3 8.1 12.5 14.8 20.3 25.2 21.4 20.5 23.3
Net income per share(4) 0.11 0.13 0.10 0.16 0.18 0.25 0.32 0.26 0.24 0.27
- -----------
(1) LifePak, Nu Colour and HairFitness products were introduced in Japan during
October 1995.
(2) The Company commenced operations in South Korea in February 1996.
(3) The Company commenced operations in Thailand in March 1997.
(4) Net income per share is computed based on 80,517,500 shares of Common Stock
and Common Stock equivalents outstanding prior to the Reorganization and
the Underwritten Offerings and 82,689,000 weighted average shares of Common
Stock outstanding for the fourth quarter of 1996, 85,415,600 for the first
quarter of 1997 and 85,426,470 for the second quarter of 1997.
Currency Fluctuation and Exchange Rate Information
The Company's revenues and most of its expenses are recognized primarily
outside of the United States. Each entity's local currency is considered the
functional currency. All revenue and expenses are translated at weighted average
exchange rates for the periods reported. Therefore, the Company's reported sales
and earnings will be positively impacted by a weakening of the U.S. dollar and
will be negatively impacted by a strengthening of the U.S.
dollar.
The Company purchases inventory from NSI in U.S. dollars and assumes
currency exchange rate risk with respect to such purchases. Local currency in
Japan, Taiwan, Hong Kong, South Korea and Thailand is generally used to settle
non-inventory transactions with NSI. Given the uncertainty of exchange rate
fluctuations, the Company cannot estimate the effect of these fluctuations on
its future business, product pricing, results of operations or financial
condition. However, because nearly all of the Company's revenue is realized in
local currencies and the majority of its cost of sales is denominated in U.S.
dollars, the Company's gross profits will be positively affected by a weakening
in the U.S. dollar and will be negatively affected by a strengthening in the
U.S. dollar. The Company seeks to reduce its exposure to fluctuations in foreign
exchange rates by creating offsetting positions through the use of foreign
currency exchange contracts. The Company does not use such financial instruments
for trading or speculative purposes. The Company regularly monitors its foreign
currency risks and periodically takes measures to reduce the impact of foreign
exchange fluctuations on the Company's operating results. The Company entered
into significant hedging positions during the second quarter, which approximated
$51.0 million of forward exchange contracts at June 30, 1997. These forward
exchange contracts, along with the intercompany loan from Nu Skin Japan to Nu
Skin Hong Kong of approximately $40.0 million, were valued at the quarter end
exchange rate of 114.6 yen to the dollar.
Following are the weighted average currency exchange rates of $1 into local
currency for each of the Company's markets for the quarters listed:
1995 1996 1997
--------------------------------------- --------------------------------------- -----------------
1st 2nd 3rd 4th 1st 2nd 3rd 4th 1st 2nd
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Japan(1)......... 96.2 84.4 94.2 101.5 105.8 107.5 109.0 112.9 121.4 119.1
Taiwan........... 26.2 25.6 27.0 27.2 27.4 27.4 27.5 27.5 27.5 27.7
Hong Kong........ 7.7 7.7 7.7 7.7 7.7 7.7 7.7 7.7 7.7 7.7
South Korea(1)... 786.9 763.1 765.6 769.1 782.6 786.5 815.5 829.4 863.9 889.6
Thailand......... 24.9 24.6 24.9 25.1 25.2 25.3 25.3 25.5 26.0 25.4
- ------------
(1) Between December 31, 1996 and July 15, 1997, the exchange rates of $1 into
Japanese yen and South Korean won achieved highs of 127.13 yen and 899.0
won, respectively. Since January 1, 1992, the highest and lowest exchange
rates for the Japanese yen have been 134.82 and 80.63, respectively, and
for the South Korean won have been 899.0 and 755.8, respectively.
Outlook
Management anticipates continued strong results overall, with particular
strength in Japan. Historically, the Company has experienced modest growth in
the third quarter due primarily to the vacation season. Planned product
introductions later this year include an aloe vera drink, developed specifically
for the Japanese market, and Overdrive, a leading Interior Design Sports
Nutrition product, in Taiwan.
During the third quarter, the Company expects continued sequential
softening in the South Korean market reflecting, in part, the market cycle
experienced by the Company in other new markets where significant initial
revenue is followed by market softening and declining revenue until strategic
initiatives and product introductions generate renewed growth. However, this
market cycle pattern has been exacerbated in South Korea by slowing economic
growth and media and consumer campaigns against certain direct selling
companies. Management currently anticipates that the market will resume
sequential growth in the fourth quarter of 1997, depending largely on the
success of the recent introduction of the Company's core nutritional product,
LifePak.
Gross margins are anticipated to improve following the price increases on
sales to distributors ranging from 5% to 9% implemented during the second
quarter. Additionally, lower revenue in South Korea, where the import values on
the Company's products are higher than import values in other markets, will lead
to gross margin improvement for the Company. Distributor incentives as a
percentage of sales are expected to increase as South Korean revenue, where
distributor incentives are capped at 35% of revenue, decreases. Selling, general
and administrative expenses are anticipated to be slightly higher in the third
quarter due to a large distributor event planned in Thailand as well as an
additional significant expense planned for spending on the sponsorship of two
promotional basketball games in Japan featuring National Basketball Association
stars. Additionally, management currently anticipates that the distributor
equity program may heighten distributor enthusiasm throughout 1997 and that the
distributor stock expense of $18.0 million in 1997 will not continue thereafter.
Other income will continue to vary based on the fluctuation in the Japanese
yen as the Company currently has significant hedging positions. The Company's
effective tax rate may continue to slightly increase as Japanese revenue, where
statutory rates are the highest in the Company's markets, becomes a larger
percentage of total revenue for the Company.
Note Regarding Forward-Looking Statements. The statements made above in
this section under the caption "Outlook" that are not historical facts are
"forward-looking statements" as defined in the Reform Act. These forward-looking
statements involve risks and uncertainties and are based on certain assumptions
that may not be realized. Actual results and outcomes may differ materially from
those discussed or anticipated. Factors that might cause such differences
include, but are not limited to, risks and uncertainties associated with
management of the Company's growth, the Company's dependence on independent
distributors and the effects on distributors of the NSI distributor equity
program, potential adverse effects of the Company's price increases on sales and
distributor growth, economic conditions in the Company's markets, especially
South Korea, the introduction and market acceptance in South Korea of LifePak,
the Company's core IDN product, adverse publicity regarding the Company and
other direct selling companies in South Korea, the Company's planned expansion
into new markets and the introduction of new products in the Company's existing
markets, regulatory action against the Company or its distributors in any of the
Company's markets and particularly in South Korea, fluctuations in foreign
currency values relative to the U.S. dollar, and risks inherent in the
importation, regulation and sale of products in the Company's markets. See "Risk
Factors."
BUSINESS
General
Nu Skin Asia Pacific is a rapidly growing network marketing company
involved in the distribution and sale of premium quality, innovative personal
care and nutritional products. The Company is the exclusive distribution vehicle
for NSI in the countries of Japan, Taiwan, Hong Kong (including Macau), South
Korea and Thailand, where the Company currently has operations, and in
Indonesia, Malaysia, the PRC, the Philippines, Singapore and Vietnam, where
operations have not commenced.
The Company believes it is one of the fastest growing network marketing
companies in Asia. Revenue increased 53.3% to $441.0 million for the six months
ended June 30, 1997 from $287.7 million for the same period in 1996. Net income
increased 24.7% to $43.8 million for the six months ended June 30, 1997 from
$35.1 million for the same period in 1996. Revenue increased 89.2% to $678.6
million for the year ended December 31, 1996 from $358.6 million in 1995.
Operating expenses have increased with the growth of the Company's revenue. Net
income increased 103.2% to $81.7 million for the year ended December 31, 1996
from $40.2 million in 1995. The Company's network of independent distributors
has grown since the Company's inception in 1991 to more than 400,000 active
distributors as of June 30, 1997. See "Risk Factors--Managing Growth."
A great deal of the Company's success to date can be directly attributed to
the growth of its Japanese business in recent years. Significant revenue was
recognized from the outset of the Company's operations in Japan in 1993 due to
the immediate attention given to the market by leading NSI distributors from
around the world. Japan has continued to post strong financial results for the
Company, with revenue increasing by approximately 64% in U.S. dollars and 90% in
local currency for 1996 compared to 1995 and by approximately 57% in U.S.
dollars and 77% in local currency for the six months ended June 30, 1997
compared to the same period in 1996. Given the size of the direct selling market
in Japan and the growing Japanese demand for the Company's products, management
believes that there is still significant opportunity for expansion of its share
of this market.
The Company's product philosophy is to combine the best of science and
nature in developing premium quality, innovative personal care and nutritional
products which are specifically designed for the network marketing distribution
channel. The Company offers products in two distinct categories: personal care
products, marketed under the trademark "Nu Skin," and nutritional products,
marketed under the trademark "Interior Design Nutritionals" ("IDN"). The Nu Skin
personal care product lines include facial care, body care, hair care and color
cosmetics, as well as specialty products such as sun protection, oral hygiene
and fragrances. The IDN product lines include nutritional supplements,
nutritious and healthy snacks, sports and fitness nutritional products, and
botanical supplements.
In Japan, Taiwan and Hong Kong, the Company currently offers most of the Nu
Skin personal care products and approximately one-third of the IDN products
including LifePak, the core IDN nutritional supplement. In South Korea, the
Company currently offers approximately one-half of the Nu Skin personal care
products, including most of the Nu Skin core facial and hair care products, and
LifePak. In Thailand, the Company currently offers one-third of the Nu Skin
personal care products, including most of the core facial and hair care
products, and none of the nutritional products. The Company believes that it can
significantly grow its business and attract new customers by expanding its
product offerings in each of its markets to include more of the existing Nu Skin
personal care and IDN products. In addition to expanding its product offerings
with existing Nu Skin personal care and IDN products, the Company intends to
introduce new products tailored to specific markets.
Operating Strengths
The Company believes that its success is due to its reputation and its
commitment to provide a wide range of premium quality, innovative personal care
and nutritional products and an appealing global business opportunity for
persons interested in establishing a direct sales business. The Company has been
able to achieve rapid, sustained and profitable growth by capitalizing on the
following operating strengths:
Premium Product Offerings. The Company is committed to continue building
its brand name and distributor and customer loyalty by selling premium quality,
innovative personal care and nutritional products that appeal to broad markets
and the universal desire for health and beauty. This commitment is illustrated
by the Company's personal care products slogan "All of the Good and None of the
Bad" and its nutritional products slogan "Adding Life to Years." The Company
offers products designed for the direct selling channel by focusing on
innovative consumable products which build loyalty and lead to repeat purchases.
Management believes that the Company's focus on innovative products supports its
distributors' demonstrative and educational sales techniques.
Global Distributor Compensation Plan. The Company believes that one of the
strengths of the Global Compensation Plan is its seamless integration across all
markets in which Nu Skin and IDN products are sold. By entering into
international sponsoring agreements with NSI, distributors are authorized to
sponsor new distributors in each country where NSI or the Company has
operations. This allows distributors to receive commissions for sales in foreign
countries at the same rate as for sales in their home country. This is a
significant benefit to distributors because they are not required to establish
new distributorships or requalify for higher levels of commissions within each
new country in which they begin to operate. The seamless integration of the
Global Compensation Plan means that distributor knowledge and experience can be
used to rapidly build distributor leadership in new markets. See "Risk
Factors--Reliance Upon Independent Distributors of NSI."
High Level of Distributor Incentives. The Company believes that the Global
Compensation Plan is among the most financially rewarding plans offered to
distributors by network marketing companies and consequently tends to attract a
high caliber of distributors. There are two fundamental ways in which
distributors can earn money: (i) through retail markups, for which the Company
recommends a range from 43% to 60%; and (ii) through a series of commissions on
each product sale which can result in commissions to distributors aggregating up
to 58% of such product's wholesale price. On a global basis, however,
commissions have averaged 42% of revenue from commissionable sales over the last
eight years. See "Risk Factors--Increase in Distributor Compensation Expense."
New Market Development Program. The Company has developed a low cost,
disciplined approach to opening new markets. Each market opening is preceded by
a thorough analysis of economic and political conditions, regulatory standards
and other business, tax and legal issues. Prior to a market opening, the
Company's management team, in conjunction with NSI support personnel, local
legal counsel and tax advisors, works to obtain all necessary regulatory
approvals and establish facilities capable of meeting distributor needs. This
market development approach, combined with the Global Compensation Plan, which
motivates distributors to train and sponsor other distributors to sell products
in new markets, has enabled the Company to quickly and successfully open new
markets. See "Risk Factors--Entering New Markets."
Distributor Support Programs. The Company is committed to providing a high
level of support services tailored to the needs of its distributors in each
market. The Company meets the needs and builds the loyalty of its distributors
with personalized distributor service and a support staff that assists
distributors as they build networks of downline distributors. The Company
provides walk-in, telephonic and computerized product fulfillment and tracking
services that result in user-friendly, timely product distribution. Distributors
purchase directly from the Company, are not required to maintain inventories to
supply down line distributors and are supported by a liberal product return
policy. In addition, each walk-in center maintains meeting rooms which
distributors may utilize in training and sponsoring activities.
Relationship with NSI. NSI, founded in 1984 and based in Provo, Utah, is
engaged in selling personal care and nutritional products and, together with its
affiliates, comprises one of the largest network marketing organizations in the
world. NSI has provided, and will continue to provide, a high level of support
services to the Company, including product development, marketing and other
managerial support services. Management believes that the Company's relationship
with NSI has allowed the Company to increase revenue and net income at rates
that otherwise may not have been possible. Since distributor agreements are
entered into between NSI and distributors, all of the distributors who generate
revenue for the Company are distributors of NSI. The Company primarily relies on
NSI to enforce distributor policies and procedures. NSI's distributor network is
licensed by NSI to the Subsidiaries. See "Risk Factors--Relationship with and
Reliance on NSI; Potential Conflicts of Interest."
Experienced Management Team. The Company's senior management team, members
of which founded NSI, has been instrumental in successfully managing the growth
in revenue and net income experienced by the Company to date. The Company has
also attracted experienced local general managers or presidents to oversee local
operations. The local general managers are frequently recognized as industry
leaders and are experienced in dealing with governmental and regulatory
agencies.
Consideration of the Company's operating strengths should be made in
connection with various risks, including risks associated with the Company's
reliance on its independent distributors and the effect on the Company's
operations of adverse publicity regarding the Company and actions of
distributors, risks associated with product liability and government regulation
of the Company's products, marketing plan and direct selling generally, the
Company's reliance on NSI and on outside manufacturers, competition and the
adverse impact on net income of an increase in distributor compensation expense.
See "Risk Factors."
Growth Strategy
The Company's primary objective is to capitalize on its operating strengths
to become a leading distributor of premium quality consumer products in each of
its markets. Specifically, the Company's strategy to increase revenue and net
income is as follows:
Introduce New Products. Because new products tend to increase sales by
existing distributors and attract new distributors, the Company intends to
continue introducing existing and new Nu Skin personal care and IDN products.
The Company first introduced nutritional products, for example, in Japan in 1995
where they have grown to represent approximately 37% of revenue. In addition the
Company introduced LifePak in Taiwan, Hong Kong and South Korea in October 1996,
January 1997 and August 1997, respectively. The Company expects to launch a
number of other IDN products in South Korea by the end of 1997, subject to
regulatory approval. The Company also intends to introduce products tailored to
specific demographic and geographic market segments and will consider
introducing entirely new product categories in the future. See "Risk
Factors--Government Regulation of Products and Marketing."
Open New Markets. The Company will continue to pursue attractive new market
opportunities. In March 1997, the Company commenced operations in Thailand. The
Company has announced its intention to commence operations in the Philippines in
1998. The Company has conducted preliminary investigations on the feasibility of
commencing operations in Indonesia, Malaysia, the PRC, Singapore and Vietnam.
The Company believes that these countries may represent significant markets for
the future expansion of its operations, provided that the Company can secure the
required regulatory and business permits. See "--New Market Opportunities,"
"Risk Factors--Entering New Markets," "--Potential Negative Impact of
Distributor Actions," "--Government Regulation of Direct Selling Activities" and
"--Government Regulation of Products and Marketing."
Attract New Distributors and Enhance Distributor Productivity. To date, the
Company has enjoyed significant growth in the number of its executive
distributors (defined as those active distributors whose group of downline
distributors meet certain monthly qualification requirements). By leveraging its
operating strengths, the Company intends to continue to create and maintain a
business climate to promote the growth in the number of executive distributors
and to increase distributor retention, motivation and productivity. In addition,
the Company will pursue growth in the number of executive distributors by
continuing to work with NSI to enhance the Global Compensation Plan,
implementing an innovative distributor equity incentive program, opening two or
more new distributor walk-in centers by the end of 1997 to provide a local
presence in additional key cities, enhancing distributor training and
recognition programs, and targeting inactive distributors via direct marketing
who may still have an interest in the Company's business opportunity or
products. See "Business--Distribution System."
Increase Brand Awareness and Loyalty. The Company intends to increase brand
awareness and loyalty, and sales to new and existing consumers, through (i)
increasing marketing and promotional efforts focused on the Nu Skin and IDN
brands, including the use of celebrity spokespersons such as Christie Brinkley,
the 1995-1996 Miss Thailand and high profile Olympic and world class athletes,
(ii) increased use of respected professional product advisers to promote
existing products and develop new product offerings, (iii) increasing the
availability of sample packages, (iv) emphasizing product "systems," such as the
HairFitness system of various shampoos and conditioners, which leads to the
purchase of multiple products rather than a single product, and (v) implementing
systems designed to promote repeat product purchases.
Consideration of the Company's growth strategy should be made in connection
with certain risks associated with such growth strategy including risks related
to opening new markets and managing growth, conducting operations outside of the
United States, managing currency risks and complying with import restrictions
and government regulations regarding the Company's products, marketing plan, and
direct selling generally. See "Risk Factors."
Forward-Looking Statements
The statements in this section under the captions "Business--General,"
"--Operating Strengths" and "--Growth Strategy" that are not historical facts
are "forward-looking statements" as defined in the Reform Act. These
forward-looking statements involve risks and uncertainties and are based on
certain assumptions that may not be realized. Actual results and outcomes may
differ materially from those discussed or anticipated. Factors that might cause
such differences include, but are not limited to, risks and uncertainties
associated with management of the Company's growth, the Company's dependence on
independent distributors and the effects on distributors of the NSI distributor
equity program, potential adverse effects of the Company's price increases on
sales and distributor growth, economic conditions in the Company's markets,
especially South Korea, the introduction and market acceptance in South Korea of
LifePak, the Company's core IDN product, adverse publicity regarding the Company
and other direct selling companies in South Korea, the Company's planned
expansion into new markets and the introduction of new products in the Company's
existing markets, regulatory action against the Company or its distributors in
any of the Company's markets and particularly in South Korea, fluctuations in
foreign currency values relative to the U.S. dollar, and risks inherent in the
importation, regulation and sale of products in the Company's markets. See
"Risk Factors."
Industry Overview
The distribution of products through the network marketing and other direct
selling channels has grown significantly in recent years. The WFDSA reports
that, since 1990, worldwide direct distribution of goods and services to
consumers has increased 76%, resulting in the sale of nearly $80 billion of
goods and services in 1996. According to the WFDSA, $35 billion of goods and
services were sold by its members in 1996 through direct selling channels in the
markets in which the Company currently operates, which represents 44% of the
global volume of direct sales by its members. The Company believes that extended
family relationships, the family culture and the extended social networks common
in Asian countries are particularly well suited to the Company's network
marketing methods. The Company also believes that a variety of recent social and
economic changes which have occurred throughout Asia have had a positive impact
on the Company's revenues and net income. Trends that have benefited the Company
include the emergence of a greater interest on the part of some Asians in
pursuing more independent entrepreneurial activities outside traditional
business settings, an increase in the number of Asian women joining the work
force and an increase in the number of Asians seeking supplemental income from
alternative sources.
The Asian retail market is generally characterized by fragmented
distribution and numerous small retailers. In Japan, these problems are further
exacerbated by the multi-tiered, traditional Japanese distribution system which
has proven difficult for many foreign manufacturers to penetrate. Outside of
Japan, the general lack of a developed distribution infrastructure throughout
Asia has fostered and encouraged the growth of direct selling as a significant
distribution channel. Given this environment, the Company believes that the high
level of personal service provided by direct selling companies, including
convenient in-home demonstrations, easy-access product ordering, timely delivery
and generous product return policies, provides additional value to consumers. In
addition, rapidly growing Asian economies and a growing demand in Asia for
Western brand name products has fueled the growth and demand for high quality
consumer products.
Country Profiles
The following table sets forth the Company's revenue and the total number
of active distributors for each of the countries in which the Company operated
for the years ended December 31, 1995 and 1996 and for the three months ended
June 30, 1996 and 1997. This table should be reviewed in connection with the
information presented under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operations," which discusses the costs
associated with generating the aggregate revenue presented.
Year Ended Six Months
Country December 31, Ended June 30,
- ------- -------------------- --------------------
1995 1996 1996 1997
---- ---- ---- ----
(dollars in thousands)
Revenue:
Japan................... $231,540 $380,044 $166,513 $261,381
Taiwan.................. 105,415 154,564 67,561 91,327
South Korea(1).......... -- 122,337 43,407 63,053
Hong Kong............... 17,046 17,037 8,093 9,733
Thailand(2)............. -- -- -- 13,374
-------- -------- -------- --------
Total(3) $354,001 $673,982 $285,574 $438,868
======== ======== ======== ========
Active Distributors:(4)(5)
Japan................... 147,000 215,000 195,000 247,000
Taiwan.................. 75,000 91,000 93,000 85,000
South Korea(1).......... -- 57,000 82,000 39,000
Hong Kong............... 14,000 14,000 14,000 14,000
Thailand(2)............. -- -- -- 31,000
-------- -------- -------- --------
Total............... 236,000 377,000 384,000 416,000
======== ======== ======== ========
- -----------
(1) The Company commenced operations in South Korea in February 1996.
(2) The Company commenced operations in Thailand in March 1997.
(3) Total revenue does not include sales of certain products to NSI affiliates
in Australia and New Zealand of $4.6 million in 1995 and in 1996 and $2.1
million for the first six months of 1996 and for the same period in 1997.
Operating expenses have increased with the growth of the Company's revenue.
(4) The term "Active Distributors" includes only those distributors who
purchased products from the Company during the three months ended as of the
date indicated.
(5) Numbers are rounded to the nearest thousand.
The following table sets forth certain estimated economic and demographic
data in each of the Company's markets. Although the Company believes that the
following table provides a useful basis for evaluating the relative size and
growth of the economies and populations of the countries in which the Company
operates, no assurance can be given that economic or population data in a
particular country will indicate what the Company's results of operations will
be in that country.
1996 GDP 1996 GDP Real GDP
1996 Population (in billions per capita Growth
Country (in millions) of $) (in $) 1996/1995(%)
- ------- --------------- ------------ ---------- ------------
Japan.......... 125.5 $4,575.2 $36,456 3.6%
Taiwan......... 21.5 270.5 12,583 5.6
South Korea.... 45.3 497.6 10,984 6.9
Hong Kong...... 6.3 158.7 25,108 4.6
Thailand........ 61.8 185.0 2,993 6.7
- -----------
Source: World Information Services; Country Data Forecasts, March 1997.
Japan. The Company, through its subsidiary Nu Skin Japan, commenced
operations in Japan in April 1993. According to the WFDSA, the direct selling
channel in Japan generated sales of approximately $30 billion of goods and
services in 1996, making Japan the largest direct selling market in the world.
Management believes that as many as six million people are involved in direct
selling businesses in Japan. Direct selling is well-understood in Japan and is
governed by detailed government regulation. See "Risk Factors--Government
Regulation of Direct Selling Activities" and "--Government Regulation of
Products and Marketing."
A great deal of the Company's success to date can be directly attributed to
the growth of its Japanese business in recent years. Significant revenue was
recognized from the outset of the Company's operations in Japan due to the
immediate attention given to the market by leading NSI distributors from around
the world. Japan has continued to post strong financial results for the Company,
with revenue increasing by approximately 64% in U.S. dollars and 90% in local
currency for 1996 compared to 1995 and by approximately 57% in U.S. dollars and
77% in local currency for the six months ended June 30, 1997 compared to the
same period in 1996. Management believes that the increase for the six months
ended June 30, 1997 was primarily the result of a doubling of executive
distributors in Japan during this period and the increasing demand for IDN
products, which accounted for 37% of revenue for the period. Furthermore, given
the size of the direct selling market in Japan and the growing Japanese demand
for the Company's products, management believes that there is still significant
opportunity for revenue growth in this market. As of June 30, 1997, Nu Skin
Japan offered 67 of the 89 Nu Skin personal care products and 14 of the 36 IDN
products, including LifePak, the core IDN product. Nu Skin Japan also offered 4
popular skin lightening products and 7 additional face care products designed
specifically for Japanese consumers.
In support of the Company's growth strategy, Nu Skin Japan intends to (i)
focus on internal country development by opening offices in additional Japanese
cities, thereby increasing consumer awareness and enhancing the Company's image,
(ii) expand development capacity to develop more products that are particularly
suited to the Japanese market, (iii) continue to expand the current product
offerings in Japan to include additional Nu Skin personal care and IDN products,
and (iv) enhance corporate support of distributors by upgrading information
technology resources.
Taiwan. The Company, through its subsidiary Nu Skin Taiwan, commenced
operations in Taiwan in January 1992. According to the WFDSA, the direct selling
channel in Taiwan generated approximately $2 billion in sales of goods and
services in 1995, of which 43% were nutritional products. Currently, two million
people (approximately 10% of the population) are estimated to be involved in
direct selling. Because a large percentage of its population is involved in
direct selling activities, the Taiwanese government regulates direct selling
activities to a significant extent. For example, the Taiwan government has
enacted tax legislation aimed at ensuring proper tax payments by distributors on
their transactions with end consumers. See "Risk Factors--Government Regulations
of Direct Selling Activities" and "--Government Regulation of Products and
Marketing."
Revenue growth in Taiwan has averaged 47% per year since the commencement
of operations in 1992. The Company believes that the recent increase in sales is
primarily due to (i) the opening of walk-in centers in Kaohsiung and Taichung,
(ii) increased distributor training and recognition, and (iii) increased product
offerings. Based on information provided by the Taiwan Direct Selling
Association, as of 1995, Nu Skin Taiwan had captured approximately 31% and 1% of
the market for personal care products and nutritional supplements, respectively,
sold through the direct selling channel. The Company believes that Nu Skin
Taiwan is now the largest direct selling company in Taiwan. As of June 30, 1997,
Nu Skin Taiwan offered 62 of the 89 Nu Skin personal care products and 11 of the
36 IDN products.
In support of the Company's growth strategy, Nu Skin Taiwan intends to (i)
capitalize on the size of the nutritional supplements market by promoting the
recently introduced LifePak and FibreNet products and expanding the current
product offerings in Taiwan to include additional Nu Skin personal care and IDN
products, (ii) focus more resources on product development specifically for the
Taiwan market, and (iii) enhance corporate support of distributors by upgrading
information technology resources.
Hong Kong. The Company, through its subsidiary Nu Skin Hong Kong, commenced
operations in Hong Kong in September 1991. According to the WFDSA, the direct
selling channel in Hong King generated approximately $78 million in sales of
goods and services in 1995. Hong Kong represents an important market in the
structure of the Asian region because it serves as the location of the Company's
regional office and is an important base of operations for many of the Company's
most successful distributors, whose downline distributor networks extend into
other Asian markets. As of June 30, 1997, Nu Skin Hong Kong offered 84 of the 89
Nu Skin personal care products and 16 of the 36 IDN products.
Hong Kong became 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 the Change in the Status of Hong Kong."
In February 1995, Macau, a Portuguese colony scheduled to become an SAR of
the PRC in 1999, was opened as a new market. Revenue figures for Macau are
combined with those of Hong Kong. Macau represents the smallest of the Company's
markets in population with just under 500,000 residents. The Company's Macau
office operates under the direction of Nu Skin Hong Kong.
In support of the Company's growth strategy, Nu Skin Hong Kong intends to
(i) promote distributor growth, retention and leadership development through
local initiatives, (ii) capitalize on the size of the nutritional supplements
market by promoting the recently introduced LifePak product and expanding the
current product offerings in Hong Kong to include additional Nu Skin personal
care and IDN products, and (iii) stimulate purchases from inactive distributors
through direct mail campaigns.
South Korea. The Company, through its subsidiary Nu Skin Korea, commenced
operations in South Korea in February 1996. According to the WFDSA, the direct
selling channel in South Korea generated approximately $1.8 billion in sales of
goods and services in 1996. South Korea's direct sales legislation, which went
into effect in July 1995, requires companies to comply with numerous provisions,
such as local registration, reporting of certain operating results and
dissemination to distributors of certain information regarding the laws. See
"Risk Factors--Government Regulations of Direct Selling Activities" and
"--Government Regulation of Products and Marketing."
The Company had sales in South Korea of approximately $122 million and $63
million for 1996 and the first six months of 1997, respectively, making the
Company the second largest direct seller in the country. As of June 30, 1997, Nu
Skin Korea offered 51 of the 89 Nu Skin personal care products and none of the
IDN products. Additionally, Nu Skin Korea offered 3 shades of Nu Colour
MoistureShade Liquid Finish designed specifically for Korean consumers. In
August 1997, Nu Skin Korea introduced LifePak in South Korea. Nu Skin Korea was
among the first foreign-owned firms to register and begin operations under the
new direct selling legislation. Management believes that significant competition
may soon enter the South Korean market. See "Risk Factors--Competition."
The Company believes that revenue from its South Korean operations is
following a pattern similar to that experienced by the Company in certain of its
other markets, where initial rapid revenue growth has been followed by a short
period of stable or declining revenue. The Company experienced a significant
decline in its second quarter revenue in South Korea from revenue in the first
quarter of 1997 and anticipates an additional significant decline in the third
quarter of 1997.
The Company believes that the anticipated revenue decline in South Korea is
partially reflective of the typical business cycle experienced in new markets
and partially the result of other factors specific to South Korea. These other
factors include recent activities by the South Korean government and campaigns
by a coalition of consumer protection and trade organizations against producers
of luxury and foreign goods, in general, and certain network marketing
companies, in particular, that have drawn negative media attention. Although the
Company has not been the focus of these campaigns, management believes that the
media attention has negatively impacted the business environment generally. See
"--Potential Effects of Adverse Publicity." An additional factor which the
Company believes has contributed to the revenue decline in South Korea is the
focus of key distributors on other recently-opened markets, including Thailand.
In support of the Company's growth strategy, Nu Skin Korea intends to (i)
continue the strategic introduction of Nu Skin personal care and IDN products
(ii) engage in targeted promotional and public relations activities designed to
address concerns regarding the current business environment for direct selling
companies, (iii) promote the development of local distributor leadership,
including focused training efforts, compensation plan modifications and the
introduction of distributor productivity programs, (iv) engage in the local
manufacturing of certain products to partially alleviate concerns about the high
level of goods being imported into South Korea by the Company, and (v) build the
local distributor support infrastructure.
Thailand. The Company, through its subsidiary, Nu Skin Thailand, commenced
operations in Thailand on March 13, 1997. According to the WFDSA, direct sales
in 1996 totaled $800 million in Thailand, making it the fourteenth largest
direct selling market worldwide. The Company's opening in Thailand was supported
by more than 200 of NSI's highest ranking distributors, many of whom are from
Taiwan and other Asian markets. As of June 30, 1997, Nu Skin Thailand offered 26
of the 89 Nu Skin personal care products and none of the IDN products.
In Thailand, the Company intends to (i) systematically introduce additional
Nu Skin personal care products throughout the remainder of 1997, (ii) promote
the Company's brand image through public relations efforts, including the
endorsement of Nu Skin personal care products by the 1995-1996 Miss Thailand,
(iii) train new distributors in the most effective methods of marketing the
Company's products and in becoming effective leaders within the Global
Compensation Plan framework, and (iv) build the Company's infrastructure to
support growth in the market by adding an additional walk-in center in a major
city.
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 NSI's global distributor
compensation plan (the "Global Compensation Plan"), which motivates distributors
to sponsor and train other distributors to sell products in new markets, has
enabled the Company to quickly and successfully open new markets.
The Company has the right to be the exclusive distributor of NSI products
in Indonesia, Malaysia, the PRC, the Philippines, Singapore and Vietnam. The
Company believes that these countries collectively represent significant markets
for future expansion. Generally, the Company, as a matter of policy, does not
announce the timing of its opening of new markets. However, the Company has
announced its intention to commence operations in the Philippines in 1998.
There are, however, significant risks and uncertainties associated with the
Company's expansion into these countries. The regulatory and political climate
in these potential markets is such that a replication of the Company's current
operating structure cannot be guaranteed. For example, Malaysia has governmental
guidelines that have the effect of limiting foreign ownership of direct selling
companies operating in Malaysia to no more than 30%. In addition, because the
Company's personal care and nutritional product lines are positioned as premium
product lines, the market potential for the Company's product lines in
relatively less developed countries, such as the PRC and Vietnam, remains to be
determined. Modifications to each product line may be needed to accommodate the
market conditions in each country, while maintaining the integrity of the
Company's products. No assurance can be given that the Company will be able to
obtain necessary regulatory approvals to commence operations in these new
markets, or that, once such approvals are obtained, the Company and NSI, upon
which the Company is largely dependent for product development assistance, will
be able to successfully reformulate Nu Skin personal care and IDN product lines
in any of the Company's new markets to attract local consumers. Given existing
regulatory environments and economic conditions, the Company's entrance into
Singapore and Vietnam is not anticipated in the short to mid-term. See "Risk
Factors--Entering New Markets" and "--Government Regulation of Products and
Marketing; Import Restrictions."
Furthermore, the PRC has proven to be a particularly difficult market for
foreign corporations due to its extensive government regulation and the
historical political tenets of the PRC government. In order to enter the market
in the PRC, the Company may be required to enter into 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 believes
that the PRC national regulatory agency responsible for direct selling
periodically reviews the regulation of multi-level marketing. These reviews may
lead to changes in applicable regulations. Therefore, it is not known when or
whether the Company will be able to implement its business model in a manner
consistent with the implementation of its business model in other markets. The
Company will likely have to apply for licenses on a province by province basis,
and the repatriation of the Company's profits will be subject to restrictions on
currency conversion and the fluctuations of the government controlled exchange
rate. In addition, because distribution systems in the PRC are greatly
fragmented, the Company may be forced to use business models significantly
different from those used by the Company in more developed countries. The lack
of a comprehensive legal system and the uncertainties of enforcement of existing
legislation and laws could also have an adverse effect on the Company's proposed
business in the PRC. See "Risk Factors--Entering New Markets."
The following table sets forth certain estimated economic and demographic
data in each of the countries for which the Company has an exclusive license but
in which the Company has not commenced operations. Although the Company believes
that the following table provides a useful basis for evaluating the relative
size and growth of the economies and populations of the countries in which the
Company intends to operate, no assurance can be given that economic or
population data in a particular country will indicate what the Company's results
of operations will be in that country.
1996 GDP 1996 GDP Real GDP
1996 Population (in billions per capita Growth
Country (in millions) of $) (in $) 1996/1995(%)
- ------- --------------- ------------ ---------- ------------
Indonesia........ 197.4 $224.5 $1,137 7.8%
Malaysia......... 20.5 97.2 4,751 8.2
PRC.............. 1,236.0 808.2 654 9.7
Philippines...... 72.0 83.2 1,156 5.5
Singapore........ 3.0 93.2 30,771 7.0
Vietnam.......... 76.3 26.1 342 9.3
- -----------------
Source: World Information Services; Country Data Forecasts, March 1997.
Indonesia. Although historically not open to foreign investment
opportunities, Indonesia has experienced a recent update emphasis on
deregulation and private enterprise and an average annual growth in GDP of 6%
from 1985 to 1994. The Indonesian Direct Selling Association reports that there
are 750,000 participants in direct selling in the country. Management believes
that the combination of the above factors creates an attractive opportunity for
expansion.
Malaysia. According to the WFDSA, more than $760 million in goods and
services were sold through the direct selling channel in Malaysia in 1996. There
are currently numerous direct selling companies operating in Malaysia. In
October 1995, the Company's business permit applications were denied by the
Malaysian government as the result of activities by certain NSI distributors
before required government approvals could be secured. See "Risk
Factors--Potential Negative Impact of Distributor Actions" and "--Potential
Effects of Adverse Publicity." Management is reevaluating the time frame in
which it will reapproach the Malaysian market.
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 Company
believes that the PRC national regulatory agency responsible for direct selling
periodically reviews the regulation of multi-level marketing. These reviews may
lead to changes in applicable regulations. The Company is actively researching
this and other issues including potential manufacturing alternatives related to
the commencement of operations in the PRC. It is not known when or whether the
Company will be able to implement its business model in a manner consistent with
the implementation of its business model in other markets. See "--Government
Regulation--Regulation of Products and Marketing; Import Restrictions" and
"--New Market Opportunities."
Philippines. Even though the per capita GDP in the Philippines is low, the
Company believes that there is demand for premium personal care and nutrition
products, especially near Manila, the capital city, which, in 1996, had a
population of 10 million. Management believes that nearly $500 million of goods
and services are sold annually through the direct selling channel and that more
than 20 international direct selling companies currently operating in the
Philippines. The Company has announced its intention to commence operations in
the Philippines in 1998.
Singapore. In Singapore, relatively high levels of GDP per capita indicate
that the country enjoys strong consumer buying power and a dynamic market
structure similar to, yet smaller than, Hong Kong. Although direct selling
activities are permitted, currently network marketing is not allowed in
Singapore. Accordingly, the Company's entrance into Singapore is not anticipated
in the short to mid-term. See "--Government Regulation--Regulation of Products
and Marketing; Import Restrictions."
Vietnam. The Company believes that there is little or no direct selling
activity in Vietnam. However, the country is moving towards a market-based
economy and has recently adopted a freely convertible currency. The Company
anticipates that the increase in free enterprise will help to develop the direct
selling channel. However, given existing regulatory, environmental and economic
conditions, the Company's entrance into Vietnam is not anticipated in the short
to mid-term.
Distribution System
Overview of Distribution System. The foundation of the Company's sales
philosophy and distribution system is network marketing. Under most network
marketing systems, distributors purchase products for retail sale and personal
consumption. Pursuant to the Global Compensation Plan, products are sold
exclusively to or through independent distributors who are not employees of the
Company or NSI. Distributors contract directly with NSI, and NSI makes such
distributors available to the Company through Licensing and Sales Agreements.
See "--Relationship with NSI" and "Certain Relationships and Related
Transactions."
Network marketing is an effective vehicle to distribute the Company's
products because (i) a consumer can be educated about a product in person by a
distributor, which is more direct than the use of television and print
advertisements; (ii) direct sales allow for actual product testing by a
potential consumer; (iii) the impact of distributor and consumer testimonials is
enhanced; and (iv) as compared to other distribution methods, distributors can
give customers higher levels of service and attention, by, among other things,
delivering products directly to a consumer and following up on sales to ensure
proper product usage and customer satisfaction, and to encourage repeat
purchases. Under most network marketing systems, independent distributors
purchase products for resale and for personal consumption.
Direct selling as a distribution channel has been enhanced in the past
decade due to advancements in communications, including telecommunications, and
the proliferation of the use of videos and fax machines. Direct selling
companies can now produce high quality videos for use in product education,
demonstrations and sponsoring sessions that project a desired image for the
Company and the product line. Management believes that high quality sales aids
play an important role in the success of distributor efforts. For this reason,
NSI maintains an in-house staff of video production personnel and video and
audio cassette duplication equipment for timely and cost-effective production of
sales materials. These facilities and expertise are available for the Company's
use. Management is committed to fully utilizing current and future technological
advances to continue enhancing the effectiveness of direct selling.
NSI's network marketing program differs from many other network marketing
programs in several respects. First, the Global Compensation Plan allows NSI
distributors to develop a seamless global network of downline distributors.
Second, NSI's order and fulfillment systems eliminate the need for distributors
to carry significant levels of inventory. Third, the Global Compensation Plan is
among the most financially rewarding plans offered to distributors by network
marketing companies, and can result in commissions to distributors aggregating
up to 58% of a product's wholesale price. On a global basis, commissions have
averaged 42% of revenue from commissionable sales over the last eight years.
Because the Company licenses the right to use the Global Compensation Plan from
NSI, the structure of the plan, including commission rates, is largely under the
control of NSI. See "Risk Factors--Increase in Distributor Compensation
Expense."
The Company's revenue is directly dependent upon the efforts of
distributors. Growth in sales volume requires an increase in the productivity of
distributors and/or growth in the total number of distributors. Because the
distributors have contracted directly with NSI, the Company primarily relies on
NSI to enforce distributor policies and procedures. There can be no assurance
that the productivity or number of distributors will be sustained at current
levels or increased in the future. See "Risk Factors--Reliance Upon Independent
Distributors of NSI." Furthermore, the Company estimates that, as of June 30,
1997, approximately 340 distributorships worldwide comprised NSI's Hawaiian Blue
Diamond and Blue Diamond executive distributor levels, which are NSI's two
highest executive distributor levels and, together with their extensive downline
networks, account for substantially all of the Company's revenue. Consequently,
the loss of such a high-level distributor or another key distributor, together
with a group of leading distributors in such distributor's downline network, or
the loss of a significant number of distributors for any reason, could adversely
affect the Company's results of operations. See "Risk Factors--Reliance on
Certain Distributors; Potential Divergence of Interests between Distributors and
the Company."
Sponsoring. The Company relies solely on NSI distributors to sponsor new
distributors. While the Company provides, at cost, product samples, brochures,
magazines and other sales materials, distributors are primarily responsible for
educating new distributors with respect to products, the Global Compensation
Plan, and how to build a successful distributorship.
The sponsoring of new distributors creates multiple levels in the network
marketing structure. Persons whom a distributor sponsors are referred to as
"downline" or "sponsored" distributors. If downline distributors also sponsor,
they create additional levels in the structure, but their downline distributors
remain part of the same downline network as their original sponsoring
distributor. See "Risk Factors--Reliance on Certain Distributors; Potential
Divergence of Interests between Distributors and the Company."
Sponsoring activities are not required of distributors. However, because of
the financial incentives provided to those who succeed in building a distributor
network, the Company believes that most of its distributors attempt, with
varying degrees of effort and success, to sponsor additional distributors.
Generally, distributors invite friends, family members and acquaintances to
sales meetings where Company products are presented and where the Global
Compensation Plan is explained. People are often attracted to become
distributors after using Company products and becoming regular retail customers.
Once a person becomes a distributor, he or she is able to purchase products
directly from the Company at wholesale prices for resale to consumers or for
personal consumption. The distributor is also entitled to sponsor other
distributors in order to build a network of distributors and product users.
A potential distributor must enter into a standard distributor agreement
with NSI which obligates the distributor to abide by NSI's policies and
procedures. Additionally, in all countries except Japan, a new distributor is
required to enter into a product purchase agreement with the Company's local
subsidiary, which governs product purchases. In Japan, Taiwan and Hong Kong,
distributors are also required to purchase a starter kit, which includes NSI's
policies and procedures, for between $55 and $85, which essentially represents
the cost of producing the starter kit. In South Korea and Thailand, distributors
are not required to purchase a starter kit.
Global Compensation Plan. Management believes that one of the Company's key
competitive advantages is the Global Compensation Plan, which it licenses from
NSI. Distributors receive higher levels of commissions as they advance under the
Global Compensation Plan. The Global Compensation Plan is seamlessly integrated
across all markets in which Nu Skin personal care and IDN products are sold,
which allows distributors to receive commissions for global product sales,
rather than merely local product sales. This seamless integration means that the
Company's distributor base has global reach and that the knowledge and
experience resident in current distributors can be used to build distributor
leadership in new markets. Outside of the Company's markets, NSI currently has
affiliated operations in the U.S., the United Kingdom, Puerto Rico, Canada,
Australia, New Zealand, Ireland, Germany, France, the Netherlands, Belgium,
Italy, Spain, Mexico and Guatemala. Allowing distributors to receive commissions
at the same rate for sales in foreign countries as for sales in their home
country is a significant benefit to distributors because they are not required
to establish new distributorships or requalify for higher levels of commissions
within each new country in which they begin to operate, which is frequently the
case under the compensation plans of the Company's major competitors. Under the
Global Compensation Plan, a distributor is paid consolidated monthly commissions
in the distributor's home country, in local currency, for product sales in that
distributor's global downline distributor network. Current and future
distributor lists have been licensed by NSI to the Company pursuant to Licensing
and Sales Agreements. See "--Relationship with NSI" and "Certain Relationships
and Related Transactions."
The Global Compensation Plan allows an individual the opportunity to
develop a business, the success of which is based upon that individual's level
of commitment, time, enthusiasm, personal skills, contacts, and motivation. For
many, a distributorship is a very small business, in which products may be
purchased primarily for personal consumption and for resale to relatively few
customers. For others, a distributorship becomes a full-time occupation.
High Level of Distributor Incentives. Based upon its knowledge of network
marketing distributor compensation plans, the Company believes that the Global
Compensation Plan is among the most financially rewarding plans offered to
distributors by network marketing companies. There are two fundamental ways in
which distributors can earn money: (i) through retail markups, for which the
Company recommends a range from 43% to 60%; and (ii) through a series of
commissions on product sales, which can result in commissions to distributors
aggregating up to 58% of such product's wholesale price. On a global basis,
however, commissions have averaged 42% of revenue from commissionable sales over
the last eight years. See "Risk Factors--Increase in Distributor Compensation
Expense."
Each product carries a specified number of sales volume points. Commissions
are based on total personal and group sales volume points per month. Sales
volume points are essentially based upon a product's wholesale cost, net of any
point of sale taxes. As a distributor's retail business expands and as he or she
successfully sponsors other distributors into the business who in turn expand
their own businesses, he or she receives a higher percentage of commissions.
Once a distributor becomes an executive, the distributor can begin to take
full advantage of the benefits of commission payments on personal and group
sales volume. To achieve executive status, a distributor must submit a
qualifying letter of intent and achieve specified personal and group sales
volumes for a four-month period of time. To maintain executive status, a
distributor must generally also maintain specified personal and group sales
volumes each month. An executive's commissions increase substantially as
multiple downline distributors achieve executive status. In determining
commissions, the number of levels of downline distributors that can be included
in an executive's group increases as the number of executive distributorships
directly below the executive increases.
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 June 30,
----------------------------------------- ----------------
Country 1992 1993 1994 1995 1996 1996 1997
- ------- ---- ---- ---- ---- ---- ---- ----
Japan........... -- 2,459 3,613 4,017 10,169 7,422 13,678
Taiwan.......... 551 1,170 2,093 3,014 5,098 3,685 5,008
South Korea..... -- -- -- -- 4,675 832 3,244
Thailand........ -- -- -- -- -- -- --
Hong Kong....... 164 275 377 519 541 507 590
--- ----- ----- ----- ------ ------ ------
Total...... 715 3,904 6,083 7,550 20,483 12,446 22,520
=== ===== ===== ===== ====== ====== ======
On a monthly basis, the Company and NSI evaluate requests for exceptions to
the Global Compensation Plan. While the general policy is to discourage
exceptions, management believes that the flexibility to grant such exceptions is
critical in retaining distributor loyalty and dedication. In each market,
distributor services personnel evaluate each such instance and appropriate
recommendations are made to NSI.
Distributor Support. The Company is committed to providing a high level of
support services tailored to the needs of its distributors in each market. The
Company meets the needs and builds the loyalty of its distributors with
personalized distributor service, a support staff that assists distributors as
they build networks of downline distributors, and a liberal product return
policy. Because many distributors have only a limited number of hours each week
to concentrate on their Nu Skin business, management believes that maximizing a
distributor's efforts through effective support of each distributor has been and
will continue to be important to the success of the Company.
Through training meetings, annual conventions, distributor focus groups,
regular telephone conference calls and personal contacts with distributors, the
Company seeks to understand and satisfy the needs of each distributor. The
Company provides walk-in, telephonic and computerized product fulfillment and
tracking services that result in user-friendly, timely product distribution. In
addition, the Company is committed to evaluating new ideas in technology and
services, such as automatic product reordering, that the Company can provide to
distributors. The Company currently utilizes voicemail, teleconferencing and fax
services. Global Internet access (including Company and product information,
ordering abilities and group and personal sales volume inquiries) is anticipated
to be provided to distributors in the future. Each walk-in center maintains
meeting rooms which distributors may utilize in training and sponsoring
activities.
Rules Affecting Distributors. NSI's standard distributor agreement,
policies and procedures, and compensation plan contained in every starter and/or
introductory kit outline the scope of permissible distributor marketing
activities. The Company's distributor rules and guidelines are designed to
provide distributors with maximum flexibility and opportunity within the bounds
of governmental regulations regarding network marketing. Distributors are
independent contractors and are thus prohibited from representing themselves as
agents or employees of NSI or the Company. Distributors are obligated to present
the Company's products and business opportunity ethically and professionally.
Distributors agree that the presentation of the Company's business opportunity
must be consistent with, and limited to, the product claims and representations
made in literature distributed by the Company. No medical claims may be made
regarding the products, nor may distributors prescribe any particular product as
suitable for any specific ailment. Even though sponsoring activities can be
conducted in many countries, distributors are prohibited from conducting
marketing activities outside of countries in which NSI and the Company conduct
business and are not allowed to export products from one country to another. See
"Risk Factors--Potential Negative Impact of Distributor Actions."
Distributors must represent that the receipt of commissions is based on
substantial efforts. Exhibiting commission statements or checks is prohibited.
Sales aids such as videotapes, promotional clothing, pens, stationary and other
miscellaneous items must be produced or pre-approved by the Company or NSI.
Distributors may not use any form of media advertising to promote products.
Products may be promoted only by personal contact or by literature produced or
approved by the Company. Generic business opportunity advertisements (without
using either the Company or the NSI names) may be placed in accordance with
certain guidelines in some countries. NSI logos and names may not be permanently
displayed on physical premises. Distributors may not use NSI trademarks or other
intellectual property of NSI without NSI's consent.
Products may not be sold, and the business opportunity may not be promoted,
in traditional retail environments such as food markets, pharmacies and
drugstores. Nor may business be conducted at conventions, trade shows, flea
markets, swap meets, and similar events. Distributors who own or are employed by
a service-related business such as a doctor's office, hair salon, or health
club, may make products available to regular customers as long as products are
not displayed visibly to the general public in such a way as to attract the
general public into the establishment to purchase products.
Generally, distributors can receive commission bonuses only if, on a
monthly basis (i) the distributor achieves at least 100 points (approximately
U.S. $100) in personal sales volume, (ii) the distributor documents retail sales
to at least five retail customers, (iii) the distributor sells and/or consumes
at least 80% of personal sales volume, and (iv) the distributor is not in
default of any material policies or procedures.
NSI systematically reviews alleged reports of distributor misbehavior. If
NSI determines that a distributor has violated any of the distributor policies
or procedures, it may either terminate the distributor's rights completely or
impose sanctions such as warnings, probation, withdrawal or denial of an award,
suspension of privileges of a distributorship, fines or penalties, withholding
commissions until specified conditions are satisfied, or other appropriate
injunctive relief. Distributor terminations based on violations of NSI's
policies and procedures have aggregated less than 1% of the Company's
distributor force since inception. Distributors may voluntarily terminate their
distributorship at any time.
Payment. Distributors generally pay for products prior to shipment.
Accordingly, the Company carries no accounts receivable from distributors.
Distributors pay for products in one of several ways. Cash, which represents a
large portion of all payments, is received by order takers in the distribution
center when orders are personally picked up by a distributor. In addition, in
Japan cash is sent through the mail using a postal cash envelope. The Company
also accepts payment through the use of credit cards. This method of payment is
very popular in Hong Kong and Taiwan and is expected to increase in popularity
in South Korea. Another form of payment utilized in Japan is a Tososhin card,
which is essentially a distributor credit card utilized to place orders. Bank
wire transfers are also popular throughout Asia, particularly in Japan.
Product Summary
The Company offers products in two distinct categories: personal care
products, marketed under the trademark "Nu Skin," and nutritional products,
marketed under the trademark "Interior Design Nutritionals" (IDN). The Company
is entitled to distribute NSI products in specified Asian countries pursuant to
a Regional Distribution Agreement. See "--Relationship with NSI" and "Risk
Factors--Relationship with and Reliance on NSI; Potential Conflicts of
Interest." NSI markets 89 different personal care and 36 different nutritional
products, of which 84 and 19, respectively, were available in at least one of
the Company's markets as of June 30, 1997. Nearly all products sold by the
Company are purchased from NSI, with the exception of a line of 11 personal care
products which are produced locally in Japan. In addition to products, the
Company offers a variety of sales aids, including items such as starter kits,
introductory kits, brochures, product catalogs, videotape and personal care
accessories. See "Risk Factors--Product Liability."
The following chart indicates how many of the Nu Skin personal care and IDN
products were available as of June 30, 1997 in each of the Company's current
markets.
Nu Skin Personal Care and IDN Product Offerings
Products Offered By the Company
Total ----------------------------------------------------
Products Hong South
Product Categories/Product Lines Offered Japan Taiwan Kong Korea Thailand
- -------------------------------- -------- ------ ------ ------ ------ --------
Nu Skin Personal Care:
Facial Care............................... 20 14(1) 13 18 13 9
Body Care................................. 12 10 9 12 9 7
Hair Care................................. 14 13 13 13 12 10
Color Cosmetics........................... 13 13 10 13 8(2) 0
Speciality................................ 30 17 17 28 9 0
------ ------ ------ ------ ------ ------
89 67 62 84 51 26
Total............................... ====== ====== ====== ====== ====== ======
IDN:
Nutritional Supplements................... 16 6 4 3 -- --
Nutritious and Healthy Snacks............. 8 3 4 5 -- --
Sports and Fitness Nutritional Products... 4 1 -- -- -- --
Botanical Supplements..................... 8 4 3 8 -- --
------ ------ ------ ------ ------ ------
Total............................... 36 14 11 16 -- --
====== ====== ====== ====== ====== ======
- -----------
(1) In Japan, the Company also sells 11 locally sourced personal care products.
(2) In South Korea, the Company also sells one locally sourced color cosmetic
product.
Presented below are the dollar amount and percentage of revenue of each of
the two product categories and other sales aid revenue for the years ended
December 31, 1995 and 1996 and the six months ended June 30, 1997.
Revenue by Product Category
Year Ended Year Ended Six Months Ended
December 31, 1995 December 31, 1996 June 30, 1997
------------------- ------------------- --------------------
Product Category $ % $ % $ %
- ---------------- -------- ------ -------- ------ -------- ------
(dollars in thousands)
Nu Skin personal care.... $303,387 84.6% $493,609 72.8% $282,645 64.1%
IDN...................... 23,959 6.7 138,593 20.4 132,399 30.0
Sales aids............... 31,263 8.7 46,394 6.8 25,966 5.9
-------- ------ -------- ------ -------- ------
Total............ $358,609 100.0% $678,596 100.0% $441,010 100.0%
======== ====== ======== ====== ======== ======
Nu Skin Personal Care Products
The Company's current Nu Skin personal care products category is divided
into the following lines: facial care, body care, hair care and color cosmetics,
as well as specialty products, such as sun protection, oral hygiene and
fragrances. Each of the Subsidiaries markets a variety of the 89 personal care
products currently offered by NSI. The Company also offers product sets that
include a variety of products in each product line as well as small, sample-size
packages to facilitate product sampling by potential consumers. The product sets
are especially popular during the opening phase of a new country, where
distributors and consumers are anxious to purchase a variety of products, and
during holiday and gift giving seasons in each market. The Company anticipates
the introduction of additional personal care products into each market, based on
the likelihood of the particular product's success in the market as well as
applicable regulatory approvals. See "Risk Factors--Government Regulation of
Products and Marketing."
The Nu Skin personal care products offered in Taiwan and Hong Kong are
substantially the same formulations of the products offered by NSI in the U.S.
In Japan and South Korea, however, most of the products have been reformulated
to satisfy certain regulatory requirements with respect to product ingredients
and preservatives and to meet the preferences of Japanese and South Korean
consumers.
The following is a brief description of each line within the Nu Skin
personal care product category offered by the Company as of June 30, 1997:
Facial Care. The goal of the facial care line is to allow users to cleanse
thoroughly without causing dryness and to moisturize with effective humectants
that allow the skin to attract and retain vital water. The Company's facial care
line currently consists of 20 different products: Cleansing Lotion, Facial
Scrub, Exfoliant Scrub, Facial Cleansing Bar, Clay Pack, pH Balance Facial
Toner, NaPCA Moisturizer, Rejuvenating Cream, Celltrex (called Hylatrex in Japan
and South Korea), Intensive Eye Complex, HPX Hydrating Gel, Face Lift and
Activator (two formulas for sensitive and normal skin), Jungamals Lip Balm,
Clarifex Cleansing Scrub, Clarifex Mud, Alpha Extra Face, Nu Colour Eye Makeup
Remover, MHA Revitalizing Lotion, MHA Revitalizing Lotion with SPF 15 and
Interim MHA Diminishing Gel. In addition, Nu Skin Japan also offers a line of
four popular skin lightening products and seven additional facial care products
designed particularly for Japanese consumers.
Body Care. The Company's line of body care products relies on premium
quality ingredients to cleanse and condition skin. The cleansers are uniquely
formulated without soap, and the moisturizers contain light but effective
humectants and emollients. The Company's body care line currently consists of 12
products: Antibacterial Body Cleansing Gel, Liquid Body Lufra, Body Smoother,
Hand Lotion, NaPCA Moisture Mist, Body Bar, Body Cleansing Gel, Enhancer,
Jungamals Crazy Crocodile Cleaner, Alpha Extra Body, MHA Revitalizing Body
Lotion and Dermatic Effects Body Contouring Lotion.
Hair Care. The Company's hair care line, HairFitness, is designed to meet
the needs of people with all types of hair and hair problems. Focusing on the
condition of the scalp and its impact on hair quality, the Company's hair care
products use water-soluble conditioners like panthenol to reduce build-up on the
scalp and to promote healthy hair. HairFitness includes 12 products featuring
ceregen, a revolutionary wheat hydrocolloid complex of conditioning molecules
that have been shown to have dramatic hair repair and moisture control aspects:
3 in 1 Shampoo, Moisturizing Shampoo, Balancing Shampoo, Vital Shampoo, Deep
Clarifying Shampoo, Glacial Therapy, Weightless Conditioner, Luxurious
Conditioner, Conditioning Detangler Spray, Styling Gel, Holding Spray and Mousse
(Styling Foam). The Company also carries Dermanator Shampoo and Jungamals Tiger
Tangle Tamer Shampoo.
Color Cosmetics. In the latter part of 1995, the Company introduced Nu
Colour, a new line of color cosmetics, in Hong Kong, Taiwan and Japan. The Nu
Colour line consists of 13 products with 106 SKU's including MoistureShade
Liquid Finish (10), MoistureShade Pressed Powder (8), Blush (9), Eye Shadow
(10), Mascara (2), Eyeliner (7), Lip Liner (11), Lipstick (32), DraMATTEics Lip
Pencils (6), Lip Gloss, Creme Concealer (5), Finishing Powder and Brow Pencil
(4).
Specialty Products. The Company recently introduced a product line labeled
Epoch, a unique line of ethnobotanical personal care products created in
cooperation with well known ethnobotanists. These products, which unite natural
compounds used by indigenous cultures with advanced scientific ingredients,
include Glacial Marine Mud, Deodorant with Citrisomes, Polishing Bar, LeafClean
Hand Wash, Everglide Foaming Shave Gel, Desert Breeze Aftershave, Post Shave
Lotion for Women, Infusions Herbal Bath, Emulsions and Firewalker Moisturizing
Foot Cream. Epoch was launched in August 1996 in Hong Kong, in October 1996 in
Taiwan and in February 1997 in Japan. Glacial Marine Mud is exclusively licensed
to NSI for sale in the direct selling channel.
Nutriol, a line of products exclusively licensed to NSI for sale in the
direct selling channel and manufactured in Europe, consists of five products:
Nutriol Hair Fitness Preparation, Nutriol Shampoo, Nutriol Mascara, Nutriol Nail
and Nutriol Eyelash. Nutriol represents a product designed to replenish the
hair's vital minerals and elements. Each Nutriol product uses
mucopolysaccharide, a patented ingredient.
The Company's line of Sunright products is designed to provide a variety of
sun screen protection with non-irritating and non-greasy products. The sun
protection line includes a sun preparation product that prepares the skin for
the drying impact of the sun, five sun screen alternatives with various levels
of SPF, and a sun screen lip balm. In the Asian market, the Company's sun care
line is currently available in Hong Kong and Japan. At present, Sunright Prime
Pre & Post Sun Moisturizer and Sunright Lip Balm are not available in Japan.
AP-24, a line of oral health care products which incorporates anti-plaque
technology designed to help prevent plaque build-up 24 hours a day, is
exclusively licensed to the Company, together with the associated trademark, for
sale in the direct selling channel under the trademark AP-24. This product line
includes AP-24 Anti-Plaque Toothpaste, AP-24 Anti-Plaque Mouthwash, AP-24 Triple
Action Dental Floss and AP-24 Anti-Plaque Breath Spray. These products are
currently available in Hong Kong and Taiwan. The AP-24 oral health care products
for kids offers products designed to make oral care fun for children, including
Jungamal's Tough Tusk Toothpaste and Jungamal's Fluffy Flamingo Floss.
The Company offers a men's and a women's fragrance under the Nu Skin
trademark Safiro. The Company also offers a Nail Care Kit.
Product Sets. The Company currently offers product sets that include a
sampling of products from a given product line. These package configurations are
intended to encourage increased product trials.
Interior Design Nutritionals
The IDN product category is comprised of 36 products in the following
lines: nutritional supplements, nutritious and healthy snacks, sports and
fitness nutritional products and botanical supplements. IDN is designed to
promote healthy, active lifestyles and general well-being through proper diet,
exercise and nutrition. Although less developed in the Asian market than the Nu
Skin personal care category, each of the Subsidiaries, except Nu Skin Thailand,
markets a variety of the IDN products offered by NSI. Nu Skin Korea currently
offers only one IDN product, LifePak. 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, and
the related LifePak products are designed to provide an optimum mix of nutrients
including vitamins, minerals, antioxidants and phytonutrients (natural chemical
extracts from plants). The introduction of LifePak in Japan in October 1995
resulted in a significant increase in revenue and currently represents
approximately 20% of the Company's revenue in Japan. LifePak was launched in
Taiwan, Hong Kong and South Korea in October 1996, January 1997 and August 1997,
respectively.
Additional nutritional supplements include: Vitox, which incorporates beta
carotene and other important vitamins for overall health; Metabotrim, which
provides B vitamins and chromium chelate; Optimum Omega, a pure source of omega
3 fatty acids; Image HNS, an all-around vitamin and antioxidant supplement; and
Optigar Q, a blend of co-enzyme Q10 and deodorized garlic. The Company also
offers FibreNet, FibreNet Plus and Diene-O-Lean as a part of its nutritional
supplements offerings. The IDN Masters Wellness Supplement provides nutrition
specifically for an aging generation. Jungamals Children's Chewables combine
natural flavors and colors and contain a unique blend of antioxidants, chelated
minerals, and vitamins specifically tailored for children. NutriFi contains four
grams of soluble and insoluble fibers per serving in a powder that can be added
to liquids and foods to supplement the recommended daily amounts of fiber.
As an enhancement to the core IDN nutritional supplement, LifePak, NSI also
offers LifePak Trim, LifePak Women and LifePak Prime. These products address
specific nutritional needs, including the nutritional needs of women and the
aging generation. Also recently launched by NSI were Life Essentials, a lower
cost, more general nutritional supplement, and Nightime Complex with Melatonin,
a sleep aid. The Company is currently evaluating the feasibility of introducing
these products into its markets.
Nutritious and Healthy Snacks. As part of the Company's mission to promote
a healthy lifestyle and long-term wellness, IDN includes Fiberry Fat-Free Snack
Bars and Appeal Lite, a nutritional drink containing chelated minerals and
vitamins. The Company also offers Breakbars and Pocket Fuel, nutritious snacks
which provide carbohydrates, protein and fiber. In addition, the Company offers
a number of other nutritional drinks. Hot & Healthy, unlike traditional hot
drinks, is 100% caffeine-free and contains beneficial ingredients such as Korean
Panax Ginseng and grape seed extract. Splash C with juice crystals is a healthy
beverage providing significant doses of vitamins C and E as well as calcium in
each serving. Real fruit juice crystals are added to create orange or lemon
flavor.
Sports and Fitness Nutritional Products. To cater to health conscious
individuals with active lifestyles, the IDN Sports Nutrition System offers a
comprehensive, flexible program for individuals who desire to optimize
performance on an individual basis. The system includes LifePak, OverDrive, a
sports supplement licensed by the U.S. Olympic Committee that features
antioxidants, B vitamins and chromium chelate, GlycoBar energy bars, and
SportaLyte performance drink to help supply the necessary carbohydrates,
electrolytes and chelated minerals to optimize performance. AminoBuild is a low
fat high protein drink mix that is designed to replace nutrients before and
after workouts.
Botanical Supplements. Botanical supplements are designed for those who
seek the benefits of natural herb and plant extracts. These supplements include
Botanagar, Botanavox, Botanaflor, Botanazyme, BotanaEase, BotanaGuard,
Botanavive and Botaname. Each supplement addresses a range of issues, including:
alertness, digestive maintenance, dietary health support, regular sleep habits,
weight management and antioxidant support.
Sales Aids
The Company provides an assortment of sales aids to facilitate the sales of
its products. Sales aids include videotapes, promotional clothing, pens,
stationery, business cards, brushes, combs, cotton pads, tissues, and other
miscellaneous items to help create consumer awareness of the Company and its
products. Sales aids are priced at the Company's approximate cost and are not
commissionable items (i.e., distributors do not receive commissions on purchases
of sales aids).
Product Guarantees
The Company believes that it is among the most consumer protective
companies in the direct selling industry. For 30 days from the date of purchase,
the Company's product return policy allows a retail purchaser to return any
product to the distributor through whom the product was purchased for a full
refund. After 30 days from the date of purchase, the return privilege is at the
discretion of the distributor. Because distributors may return unused and
resalable products to the Company for a refund of 90% of the purchase price for
one year, they are encouraged to provide consumer refunds beyond 30 days. In
addition, the product return policy is a material aspect of the success of
distributors in developing a retail customer base. The Company's experience with
actual product returns has averaged less than 3% of revenue through June 30,
1997.
Product Development and Production
Product Development Philosophy. The Company is committed to building its
brand name and distributor and customer loyalty by selling premium quality,
innovative personal care and nutritional products that appeal to broad markets.
This commitment is illustrated by the Company's personal care products slogan
"All of the Good and None of the Bad" and its nutritional products slogan
"Adding Life to Years." The Company's product philosophy is to combine the best
of science and nature and to include in each of its products the highest quality
ingredients. For example, Nu Skin personal care products do not contain soaps
and other harsh cleansers that can dry and irritate skin, undesirable oils such
as lanolin, elements known to be irritating and pore clogging, volatile alcohols
such as ethyl alcohol, and conditioning agents that leave heavy residues. This
philosophy has led to the Company being one of the only personal care companies
in Japan to disclose every ingredient to consumers. This philosophy has also led
to the Company's commitment to avoid any ingredients in nutritional supplements
that are reported to have any long-term addictive or harmful effects, even if
short-term effects may be desirable. Independent distributors need to have
confidence that they are distributing the best products available in order to
have a sense of pride in their association with the Company and to have products
that are distinguishable from "off the shelf" products. NSI and the Company are
committed to developing and providing quality products that can be sold at an
attractive retail price and allow the Company to maintain reasonable profit
margins.
NSI is also committed to constantly improving its evolving product
formulations to incorporate innovative and proven ingredients into its product
line. Whereas many consumer product companies develop a formula and stay with
that formula for years, and sometimes decades, NSI believes that it must stay
current with product and ingredient evolution to maintain its reputation for
innovation to retain distributor and consumer attention and enthusiasm. For this
reason, NSI continuously evaluates its entire line of products for possible
enhancements and improvements.
In addition, the Company believes that timely and strategic product
introductions are critical to maintaining the growth of independent distribution
channels. Distributors become enthusiastic about new products and are generally
excited to share new products with their customer base. An expanding product
line helps to attract new distributors and generate additional revenues.
NSI maintains a laboratory and a staff of approximately 90 individuals
involved in product development. NSI also relies on an advisory board comprised
of recognized authorities in various disciplines. In addition, NSI and the
Company evaluate a significant number of product ideas that are presented by
distributors and other outside sources. NSI believes that strategic
relationships with certain vendors also provide important access to innovative
product concepts. The Company will continue to develop products tailored to
appeal to the particular needs of the Company's markets.
Historically, one of the reasons for the success of the Nu Skin personal
care product lines has been their gender neutral positioning. This product
positioning substantially expands the size of the traditional skin and hair care
market. NSI's IDN product lines have historically been positioned to be age
neutral. However, with a substantial distributor and user base established, the
Company believes that it can further increase its market share in both the
personal care and the nutritional products categories by introducing age and
gender specific products, additional vitamin products targeted to seniors, and
personal care products targeted to either men or women.
Production. Although the Company is investigating the possibility of
manufacturing certain products within specific markets, virtually all the
Company's products are currently sourced through NSI and are produced by
manufacturers unaffiliated with NSI. The Company currently has little or no
direct contact with these manufacturers. The Company's profit margins and its
ability to deliver its existing products on a timely basis are dependent upon
the ability of NSI's outside manufacturers to continue to supply products in a
timely and cost-efficient manner. Furthermore, the Company's ability to enter
new markets and sustain satisfactory levels of sales in each market is dependent
in part upon the ability of suitable outside manufacturers to reformulate
existing products, if necessary to comply with local regulations or market
environments, for introduction into such markets. Finally, the development of
additional new products in the future will likewise be dependent in part on the
services of suitable outside manufacturers.
The Company currently acquires products or ingredients from sole suppliers
or suppliers that are considered by the Company to be the superior suppliers of
such ingredients. The Company believes that, in the event it is unable to source
any products or ingredients from its current suppliers, the Company could
produce such products or replace such products or substitute ingredients without
great difficulty or prohibitive increases in the cost of goods sold. However,
there can be no assurance that the loss of such a supplier would not have a
material adverse effect on the Company's business and results of operations.
With respect to products purchased by the Company from NSI, NSI currently
relies on two unaffiliated manufacturers to produce approximately 70% and 80% of
its personal care and nutritional products, respectively. NSI has a written
contract with the primary supplier of the Company's personal care products that
expires at the end of 1997. An extension to such contract is currently being
negotiated. NSI does not currently have a written contract with the primary
supplier of the Company's nutritional products. The Company believes that in the
event that NSI's relationship with any of its key manufacturers is terminated,
NSI will be able to find suitable replacement manufacturers. However, there can
be no assurance that the loss of either manufacturer would not have a material
adverse effect on the Company's business and results of operations. See "Risk
Factors--Reliance on and Concentration of Outside Manufacturers."
Relationship With NSI
Upon consummation of the Rule 415 Offerings, approximately 98.2% of the
combined voting power of the outstanding shares of Common Stock will be held by
the shareholders of NSI and their affiliates. As a result, when acting as
stockholders of the Company, these shareholders of NSI and their affiliates will
consider the short-term and long-term impact of all stockholder decisions on the
consolidated financial results of NSI and the Company. See "Risk
Factors--Relationship with and Reliance on NSI; Potential Conflicts of
Interest." In addition, the Company has entered into distribution,
trademark/tradename license, licensing and sales, and management services
agreements (the "Operating Agreements") with NSI and with Nu Skin International
Management Group, Inc. ("NSIMG"), a Delaware corporation also controlled by the
shareholders of NSI, summary descriptions of which are set forth below. Such
summaries are qualified in their entirety by reference to the Operating
Agreements in effect and as they may be amended from time to time. In the future
the Company may enter into amendments to the Operating Agreements or additional
agreements with NSI or NSIMG. The Company intends to seek the approval of a
majority of its independent directors for any amendment to the Operating
Agreements and any new agreement which the Company believes to be of material
importance to the Company and as to which the Company and NSI or NSIMG have
conflicting interests. The Company is almost completely dependent on the
Operating Agreements to conduct its business, and in the event NSI is unable or
unwilling to perform its obligations under the Operating Agreements, or
terminates the Operating Agreements as provided therein, the Company's business
and results of operations will be adversely affected. See "Risk
Factors--Relationship with and Reliance on NSI; Potential Conflicts of
Interest."
Distribution Agreements. The Company has entered into a regional
distribution agreement (the "Regional Distribution Agreement") with NSI, through
Nu Skin Hong Kong, pursuant to which NSI has granted to the Company the
exclusive right to sell and distribute Nu Skin personal care and IDN products
and sales aids in the Company's markets. Nu Skin Japan, Nu Skin Taiwan, Nu Skin
Korea and Nu Skin Thailand have each entered into wholesale distribution
agreements (the "Wholesale Distribution Agreements") with Nu Skin Hong Kong,
pursuant to which each such Subsidiary has been granted the right to sell and
distribute Nu Skin personal care and IDN products in its respective country. The
following discussion summarizes the terms of the Regional Distribution Agreement
and the Wholesale Distribution Agreements for each of the Subsidiaries, other
than the Wholesale Distribution Agreement for Nu Skin Korea, which is discussed
below.
The Company has the right to purchase any Nu Skin personal care or IDN
products, subject to unavailability due to local regulatory requirements. See
"--Government Regulation." Purchases are made by submission of a purchase order
to NSI, which NSI must accept unless it has insufficient inventory to fill the
order. In determining whether it has sufficient inventory to fill a given order,
NSI is required to treat the Company on a parity basis with its other
affiliates.
The prices for products are governed by a price schedule which is subject
to change by NSI from time to time upon at least 30 days advance notice. NSI
pays ordinary freight and the Company pays handling, excise taxes and customs
duties on the products the Company orders. In order to assist NSI in planning
its inventory and pricing, the Company is required to provide NSI with certain
business plans and reports of its sales and prices to independent distributors.
The Company, through its subsidiary Nu Skin Hong Kong, purchases virtually
all of its products from NSI. Nu Skin Hong Kong pays for its purchases from NSI
under the Regional Distribution Agreement in U.S. dollars, while the other
Subsidiaries pay for their purchases from Nu Skin Hong Kong under the Wholesale
Distribution Agreements in their local currency. Nu Skin Hong Kong therefore
bears significant currency exchange risk as a result of purchases from NSI on
behalf of the other Subsidiaries. See "Risk Factors--Currency Risks."
The Company is responsible for paying for and obtaining government
approvals and registrations necessary for importation of Nu Skin personal care
and IDN products into its markets. In addition, the Company is responsible for
obtaining any government approvals, including any filings and notifications,
necessary for the effectiveness of the Regional Distribution Agreement and the
Wholesale Distribution Agreements or for the parties performance thereunder. See
"Risk Factors--Government Regulation of Products and Marketing; Import
Restrictions."
NSI is generally responsible for paying for the research, development and
testing of the products sold to the Company, including any product
reformulations needed to comply with local regulatory requirements. NSI warrants
as to the merchantability of, and its title to, such products. NSI has further
indemnified the Company from losses and liability relating to claims arising out
of alleged or actual defects in the design, manufacture or content of its
products. NSI is required to maintain insurance covering claims arising from the
use of its products and to cause each Subsidiary to be a named insured on such
insurance policy. See "Risk Factors--Product Liability."
The Company is prohibited from selling Nu Skin personal care and IDN
products outside of the countries for which it has an exclusive distribution
license, except that the Company may sell certain Nu Skin personal care and IDN
products to NSI affiliates in Australia and New Zealand. In addition, the
Company is prohibited from selling products which directly or indirectly compete
with Nu Skin personal care and IDN products in any country without NSI's prior
consent, which consent will not be unreasonably withheld or delayed. The Company
may sell non-competing products without restriction.
The Company may manufacture products which do not compete with Nu Skin
personal care and IDN products without restriction but may not manufacture
products which compete directly or indirectly with Nu Skin personal care and IDN
products without NSI's prior consent, which consent will not be unreasonably
withheld or delayed. Any products manufactured by the Company carrying an NSI
trademark will be subject to the Trademark/Tradename License Agreements with NSI
described below and will require the payment to NSI of certain royalties as set
forth therein. If NSI discontinues a product that the Company would like to
continue to sell, the Company may elect to manufacture the product itself or
through a third party manufacturer unless NSI has a competing product. In this
event, NSI has agreed to license the product formulation and any associated
trademarks and tradenames to the Company pursuant to the Trademark/Tradename
License Agreements described below.
When the Company determines to commence operations in Indonesia, Malaysia,
the Philippines, the PRC, Singapore or Vietnam, NSI has agreed under the
Regional Distribution Agreement to enter into new Trademark/Tradename License
Agreements and Licensing and Sales Agreements and to cause NSIMG to enter into
new Management Services Agreements, in each case substantially similar to those
described below, with the Company or subsidiaries operating in such countries.
See "Risk Factors--Entering New Markets."
Trademark/Tradename License Agreements. The following discussion summarizes
the terms of the Trademark/Tradename License Agreements for each of the
Subsidiaries, other than the Trademark/Tradename License Agreement for Nu Skin
Korea, which is discussed below. Pursuant to the Trademark/Tradename License
Agreements, NSI has granted to each Subsidiary an exclusive license to use in
its market the Nu Skin and IDN trademarks, the individual product trademarks
used on Nu Skin personal care and IDN products and any NSI tradenames. Each of
the Subsidiaries may thus use the licensed trademarks and tradenames on products
and commercial materials not purchased from NSI, including locally sourced
products and commercial materials and products and commercial materials
manufactured by such Subsidiary and may grant a sub-license, with the consent of
NSI, for the licensed trademarks and tradenames in its market. In addition, each
Subsidiary has the right to export such products and commercial materials into
other Company markets with NSI's consent, which consent shall not be
unreasonably withheld or delayed.
The Company pays a royalty to NSI for use of the licensed trademarks and
tradenames on products, starter and introductory kits and commercial materials
not purchased from NSI, including locally sourced products and commercial
materials and products and commercial materials manufactured by the Company. The
royalty is paid monthly and is equal to 5% of the Company's revenues from such
products and commercial materials for such month generally and a total of 8%
where NSI owns the formula or has exclusive rights in the subject market for
such products or commercial materials.
NSI is responsible for securing and maintaining trademark registrations in
the territory covered by each Trademark/Tradename Agreement. NSI has agreed to
take such actions as the Company may reasonably request to protect its and the
Company's rights to the licensed trademarks from infringement and related claims
and has indemnified the Company from losses and liability resulting from such
claims.
Licensing and Sales Agreements. Currently, all distributor agreements are
entered into between the distributor and NSI rather than with the Company.
Therefore, the Company does not own the distributor lists or the distribution
system, the Global Compensation Plan, copyrights and related intangibles.
Consequently, each of the Subsidiaries has entered into a Licensing and Sales
Agreement with NSI. The following discussion summarizes the terms of the
Licensing and Sales Agreement for each of the Subsidiaries, other than the
Licensing and Sales Agreement for Nu Skin Korea, which is discussed below.
The Licensing and Sales Agreements include a license to the Company to use
the distributor lists, the Global Compensation Plan, know how, distributor
system and related intellectual property exclusively in its markets. The Company
pays a license fee to NSI of 4% of the Company's revenue from product sales
(excluding starter and introductory kits) to NSI distributors for the use of
such licensed property. The Company may not grant a sublicense for the licensed
property.
The Company is required to use the Global Compensation Plan to distribute
any products, except as NSI may agree to modify the plan in accordance with
local requirements. The Company must comply with all policies implemented by NSI
under the Global Compensation Plan. This is necessary to ensure global
consistency in NSI's operations. The Company must also employ all NSI policies
relating to commissions payable to, and other relationships with, NSI
distributors.
The Company and the Subsidiaries are contractually obligated to pay a
distributor commission expense of 42% of commissionable product sales. The
Licensing and Sales Agreements provide that the Company is to satisfy this
obligation by paying commissions owed to local distributors. In the event that
these commissions exceed 42% of commissionable product sales, the Company is
entitled to receive the difference from NSI. In the event that the commissions
paid are lower than 42%, the Company must pay the difference to NSI. Under this
formulation, the Company's total commission expense is fixed at 42% of
commissionable product sales in each country. The 42% figure has been set on the
basis of NSI's experience over the past eight years which indicates that actual
commissions paid in a given year together with the cost of administering the
Global Compensation Plan average approximately 42% of commissionable product
sales for such year. In the event that actual commissions payable to
distributors from sales in the Company's markets vary from these historical
results, whether as a result of changes in distributor behavior or changes to
the Global Compensation Plan or in the event that NSI's cost of administering
the Global Compensation Plan increases or decreases, the Licensing and Sales
Agreements provide that the settlement of distributor commission expense between
the Company and NSI may be modified to more accurately reflect actual results.
See "Risk Factors--Potential Increase in Distributor Compensation Expense."
In addition to payments to local distributors, the Company is generally
responsible for distributor support and relations within Japan, Taiwan, Hong
Kong and Thailand. The Company has agreed to use its best efforts to support the
development of NSI's distributor network in its markets by purchasing starter or
introductory kits from NSI and selling them to potential NSI distributors.
NSI has agreed to take such actions as the Company may reasonably request
to protect its and the Company's rights to the property licensed under the
Licensing and Sales Agreements from infringement and related claims and has
indemnified the Company from losses and liability resulting from such claims.
Both NSI and the Company are required to maintain insurance coverage adequate to
insure their assets and financial stability. NSI is responsible for ensuring
that the property licensed under the Licensing and Sales Agreements complies
with local laws and regulations, including direct selling laws. See "Risk
Factors--Government Regulation of Direct Selling Activities."
Management Services Agreements. The following discussion summarizes the
terms of the Management Services Agreements which each of the Subsidiaries have
entered into with NSIMG. Pursuant to the Management Services Agreements, NSIMG
has agreed to provide a variety of management and support services to each
Subsidiary. These services include management, legal, financial, marketing and
distributor support/training, public relations, international expansion, human
resources, strategic planning, product development and operations administration
services. Most of NSI's senior management personnel and most employees who deal
with international issues are employees of NSIMG.
Generally, the management and support services are provided by employees of
NSI and NSIMG acting through NSIMG either (i) on a temporary basis in a specific
consulting role or (ii) on a full-time basis in a management position in the
country in which the services are required. The Management Services Agreements
do not cover the services of many of the Company's executive officers. See
"Management--Executive Compensation."
General Provisions. The Operating Agreements (other than the Korean
Operating Agreements discussed below) are each for a term ending on December 31,
2016, and, after December 31, 2001, will be subject to renegotiation in the
event that members of the families of, or trusts or foundations established by
or for the benefit of the 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. Each Operating Agreement is
subject to termination by either party in the event of: (i) a material breach by
the other party which remains uncured for a period of 60 days after notice
thereof; (ii) the bankruptcy or insolvency of the other party; or (iii) entry of
a judgment by a court of competent jurisdiction against the other party in
excess of $25,000,000. Each Operating Agreement to which NSI is a party and each
Operating Agreement to which NSIMG is a party is further subject to termination
by NSI or NSIMG, respectively, upon 30 days notice in the event of a change of
control of the Subsidiary party thereto and by such Subsidiary upon 30 days
notice in the event of a change of control of NSI or NSIMG, respectively. Each
Operating Agreement provides that neither party may assign its rights thereunder
without the consent of the other party. Each Operating Agreement is governed by
Utah law. Any dispute arising under an Operating Agreement is to be settled by
arbitration conducted in Utah in accordance with the applicable rules of the
American Arbitration Association, as supplemented by the commercial arbitration
procedures for international commercial arbitration.
Korean Operating Agreements. In addition to the Management Services
Agreement with NSIMG described above, Nu Skin Korea has entered into a Wholesale
Distribution Agreement with Nu Skin Hong Kong and a Trademark/Tradename License
Agreement and a Licensing and Sales Agreement with NSI (the "Korean Operating
Agreements").
Wholesale Distribution Agreement. Pursuant to its Wholesale Distribution
Agreement with Nu Skin Hong Kong, Nu Skin Korea has been granted the right to
sell and distribute Nu Skin personal care and IDN products in South Korea. Under
the Wholesale Distribution Agreement, Nu Skin Korea has the right to purchase
any Nu Skin personal care or IDN products that have been made available for the
South Korean market. Purchases are made by submission of purchase orders to NSI
through Nu Skin Hong Kong, which purchase orders must be accepted if there is
sufficient inventory to fill such order. Nu Skin Korea pays handling, excise
taxes and customs duties on the products it orders.
Nu Skin Korea is responsible for paying for and obtaining government
approvals and registrations necessary for importation of Nu Skin personal care
and IDN products into South Korea and the effectiveness of the Wholesale
Distribution Agreement. See "Risk Factors--Government Regulation of Products and
Marketing; Import Restrictions."
Nu Skin Korea's Wholesale Distribution Agreement prohibits it from selling
Nu Skin personal care and IDN products outside of South Korea. In addition, Nu
Skin Korea is prohibited from selling or manufacturing products which directly
or indirectly compete with Nu Skin personal care or IDN products without NSI's
prior consent.
The term of Nu Skin Korea's Wholesale Distribution Agreement is continuous
unless terminated by either party. The Wholesale Distribution Agreement is
subject to termination by either party: (i) upon 90 days written notice without
cause; (ii) in the event of the default in the performance of a material
obligation under the agreement by the other party which remains uncured for a
period of 60 days after notice thereof; (iii) upon the entry of a judgment
against Nu Skin Korea or placement of a lien, security interest or encumbrance
on the assets of Nu Skin Korea or NSI; (iv) in the event of a substantial change
in ownership or control of Nu Skin Korea; or (v) in the event of a violation by
either party of any provision of the Wholesale Distribution Agreement. The
Wholesale Distribution Agreement is subject to termination by Nu Skin Hong Kong
upon the bankruptcy or insolvency of Nu Skin Korea. Nu Skin Korea may not assign
its rights under the Wholesale Distribution Agreement without the consent of Nu
Skin Hong Kong. The Wholesale Distribution Agreement is governed by Utah law,
and any dispute arising thereunder is to be settled by arbitration conducted in
Utah in accordance with the applicable rules of the American Arbitration
Association, as supplemented by the commercial arbitration procedures for
international commercial arbitration.
Trademark/Tradename License Agreement. Pursuant to its Trademark/Tradename
License Agreement with NSI, NSI has granted to Nu Skin Korea an exclusive
license to use in its market the Nu Skin personal care and IDN trademarks, the
individual product trademarks used on Nu Skin personal care and IDN products and
any NSI tradenames. Nu Skin Korea may not grant a sub-license for the licensed
trademarks and tradenames in its market.
Nu Skin Korea pays a royalty to NSI for use of the licensed trademarks and
tradenames on products, starter and introductory kits and commercial materials
not purchased from NSI, including locally sourced products and commercial
materials and products and commercial materials manufactured by Nu Skin Korea.
The royalty is paid monthly and is equal to 5% of Nu Skin Korea's revenues from
such products and commercial materials for such month generally and 8% of such
revenues where NSI owns the formula or has exclusive rights in the subject
market for such products or commercial materials.
Nu Skin Korea is responsible for obtaining any government approvals,
including any filings and notifications, necessary for the effectiveness of the
Trademark/Tradename License Agreement or for the parties performance thereunder.
Nu Skin Korea has agreed to cooperate with NSI as reasonably requested to
protect NSI's rights in the licensed trademarks and tradenames. Nu Skin Korea's
liability in any infringement and related actions is limited to the amount of
license fees due to NSI under its Trademark/Tradename License Agreement.
Nu Skin Korea's Trademark/Tradename License Agreement is for an initial
term ending in February 2001, subject to automatic renewal for additional 5-year
terms unless terminated by either party. The Trademark/Tradename License
Agreement is subject to termination by either party in the event of a material
breach by the other party which remains uncured for a period of 90 days after
notice thereof, including: (i) the bankruptcy or insolvency of the other party;
(ii) entry of a judgment against Nu Skin Korea or placement of a lien, security
interest or encumbrance on the assets of Nu Skin Korea or NSI; (iii) a
substantial change in ownership or control of Nu Skin Korea; or (iv) a violation
by either party of any provision of the Trademark/Tradename License Agreement.
The Trademark/Tradename License Agreement is further subject to termination by
NSI upon the government expropriation of any assets of Nu Skin Korea or NSI
relating to Nu Skin Korea's activities under the agreement. Nu Skin Korea may
not assign its rights under the Trademark/Tradename License Agreement without
the consent of NSI. The Trademark/Tradename License Agreement is governed by
Utah law, and any dispute arising under the Trademark/Tradename License
Agreement is to be settled by arbitration conducted in Utah in accordance with
the applicable rules of the American Arbitration Association, as supplemented by
the commercial arbitration procedures for international commercial arbitration.
Licensing and Sales Agreement. Nu Skin Korea has entered into a Licensing
and Sales Agreement with NSI which includes a license to Nu Skin Korea to use
the distributor lists, the Global Compensation Plan, know how, distributor
system and related intellectual property exclusively in its markets. Nu Skin
Korea pays a license fee to NSI of 4% of its revenue from product sales
(excluding introductory kits) to NSI distributors for the use of such licensed
property. Nu Skin Korea may not grant a sublicense for the licensed property.
Pursuant to its Licensing and Sales Agreement with NSI, Nu Skin Korea is
obligated to pay commissions to local distributors, using a formula based upon a
maximum payout of 35% of commissionable product sales. In addition to payments
of local commissions, Nu Skin Korea is generally responsible for distributor
support and relations within South Korea. Nu Skin Korea has agreed to use its
best efforts to support the development of NSI's distributor network in South
Korea by purchasing starter or introductory kits from NSI and selling them to
potential NSI distributors.
NSI has warranted to its title to the property licensed under the Licensing
and Sales Agreements and that Nu Skin Korea's use of such property will not
constitute an infringement of the right of any third party, and has indemnified
the Company from losses and liability relating to any breach of such warranties.
The provisions of Nu Skin Korea's Licensing and Sales Agreement with
respect to term, termination, assignment, governing law and arbitration are
substantially the same as for its Trademark/Tradename License Agreement.
Mutual Indemnification Agreement. The Company and NSI have entered into a
mutual indemnification agreement pursuant to which NSI has agreed to indemnify
the Company for certain claims, losses and liabilities relating to the
operations of the Subsidiaries prior to the Reorganization and the Company has
agreed to indemnify NSI for certain claims, losses and liabilities relating to
the operations of the Subsidiaries after the Reorganization.
Competition
Personal Care and Nutritional Products. The markets for personal care and
nutritional products are large and intensely competitive. The Company competes
directly with companies that manufacture and market personal care and
nutritional products in each of the Company's product categories and 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.
Network Marketing Companies. The Company also competes with other direct
selling organizations, some of which have a longer operating history and higher
visibility, name recognition and financial resources. The leading network
marketing company in the Company's markets is Amway Corporation and its
affiliates. The Company competes for new distributors on the basis of the Global
Compensation Plan and its premium quality products. Management envisions the
entry of many more direct selling organizations into the marketplace as this
channel of distribution expands over the next several years. The Company has
been advised that certain large, well-financed corporations are planning to
launch direct selling enterprises which will compete with the Company in certain
of its product lines. There can be no assurance that the Company will be able to
successfully meet the challenges posed by this increased competition. See "Risk
Factors--Competition."
Government Regulation
Direct Selling Activities. Direct selling activities are regulated by
various governmental agencies. These laws and regulations are generally intended
to prevent fraudulent or deceptive schemes, often referred to as "pyramid" or
"chain sales" schemes, that promise quick rewards for little or no effort,
require high entry costs, use high pressure recruiting methods and/or do not
involve legitimate products. In Japan, the Company's distribution system is
regulated under the "Door-to-Door" Sales Law, which requires the submission of
specific information concerning the Company's business and products and which
provides certain cancellation and cooling-off rights for consumers and new
distributors. In Taiwan, the Fair Trade Law (and the Enforcement Rules and
Supervisory Regulations of Multi-Level Sales) requires the Company to comply
with registration procedures and also provides distributors with certain rights
regarding cooling-off periods and product returns. The Company also complies
with South Korea's strict Door-to-Door Sales Act, which requires, among other
things, the regular reporting of revenue, the registration of distributors
together with the issuance of a registration card, and the maintaining of a
current distributor registry. This law also limits the amount of sponsoring
bonuses that a registered multi-level marketing company can pay to its
distributors to 35% of revenue in a given month. In Thailand, currently there
are no laws (other than general fair trade laws) directly regulating direct
selling or multi-level marketing activities. 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 in certain Asian
countries, many countries, including Singapore, one of the Company's potential
markets, currently have laws in place that would prohibit the Company and NSI
from conducting business in such markets. There can be no assurance that the
Company will be allowed to conduct business in each of the new markets or
continue to conduct business in each of its existing markets licensed from NSI.
See "Risk Factors--Entering New Markets."
Regulation of Products and Marketing. The Company and NSI are subject to or
affected by extensive governmental regulations not specifically addressed to
network marketing. Such regulations govern, among other things, (i) product
formulation, labeling, packaging and importation, (ii) product claims and
advertising, whether made by the Company, NSI or NSI distributors, (iii) fair
trade and distributor practices, (iv) taxes, transfer pricing and similar
regulations that affect foreign taxable income and customs duties, and (v)
regulations governing foreign companies generally.
The Japanese MOHW requires the Company to possess an import business
license and to register each personal care product imported into Japan.
Packaging and labeling requirements are also specified. The Company has had to
reformulate many products to satisfy MOHW regulations. In Japan, nutritional
foods, drugs and quasi-drugs are all strictly regulated. The chief concern
involves the types of claims and representations that can be made regarding the
efficacy of nutritional products. The Company's successful introduction of IDN
products in Japan was achieved by utilizing the combined efforts of NSI's
technical staff as well as external consultants.
In Taiwan, all "medicated" cosmetic and pharmaceutical products require
registration. Non-medicated cosmetic products, such as shampoo and hair
conditioner, require no registration.
In Hong Kong, cosmetic products not classified as "drugs" nor as
"pharmaceutical products" are not subject to statutory registrations, packaging
and labeling requirements apart from the Trade Descriptions Ordinance. In Macau,
"pharmaceutical" products are strictly regulated; general products are not
subject to registration requirements.
In South Korea, the Company is subject to and has obtained the mandatory
certificate of confirmation as a qualified importer of cosmetics under the
Pharmaceutical Affairs Law as well as additional product approvals for each of
the 45 categories of cosmetic products which it imports. Each new cosmetic
product undergoes a 60-day post-customs inspection where, in addition to
compliance with ingredient requirements, each product is inspected for
compliance with South Korean labeling requirements.
In Thailand, personal care products are regulated by the Food and Drug
Association, and all of the initial NSI personal care products to be introduced
in Thailand have qualified for simplified registration procedures under Thai
law.
Regulation of Potential Markets. Each of the proposed new markets will
present additional unique difficulties and challenges. The PRC, for example, has
proven to be a particularly difficult market for foreign corporations due to its
extensive government regulation and the historical political tenets of the PRC
government. In order to enter the market in the PRC, the Company may be required
to enter into 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 believes that the PRC national regulatory agency
responsible for direct selling periodically reviews the regulation of
multi-level marketing. These reviews may lead to changes in applicable
regulations. Therefore, it is not known when or whether the Company will be able
to implement business models consistent with those used by the Company in other
markets. 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. The extensive fragmentation of distribution systems in
the PRC may also force the Company to significantly change its business models.
The lack of a comprehensive legal system and the uncertain and sporadic
enforcement of existing legislation and laws could also have an adverse effect
on the Company's proposed business in the PRC.
The other potential new markets also present significant regulatory,
political and economic obstacles to the Company. In Singapore, for example,
network marketing is currently illegal and is not permitted under any
circumstances. Although the Company believes that this restriction will
eventually be relaxed or repealed, no assurance can be given that such
regulation will not remain in place and that the Company will not be permanently
prevented from initiating sales in Singapore. In addition, Malaysia has
governmental guidelines that have the effect of limiting foreign ownership of
direct selling companies operating in Malaysia to no more than 30%. There can be
no assurance that the Company will be able to properly structure Malaysian
operations to comply with this policy. In October of 1995, the Company's
business permit applications were denied by the Malaysian government as a result
of activities by certain NSI distributors. Therefore, the Company believes that
although significant opportunities exist to expand its operations into new
markets, there can be no assurance that these or other difficulties will not
prevent the Company from realizing the benefits of this opportunity.
Other Regulatory Issues. As a U.S. entity operating through subsidiaries in
foreign jurisdictions, the Company is subject to foreign exchange control and
transfer pricing laws that regulate the flow of funds between the Subsidiaries
and the Company as well as the flow of funds to NSI for product purchases,
management services, and contractual obligations such as the payment of
distributor commissions. In South Korea, in particular, the Company has come
under the scrutiny of regulators because of the manner in which the Company and
Nu Skin Korea implement the Global Compensation Plan. Pursuant to the Global
Compensation Plan, Nu Skin Korea currently pays commissions to distributors in
South Korea on both their local and foreign product sales. Similarly,
commissions on product sales in South Korea by other distributors are paid by
their local NSI affiliate. The Company believes that it operates in compliance
with all applicable foreign exchange control and transfer pricing laws. However,
there can be no assurance that the Company will continue to be found to be
operating in compliance with foreign exchange control and transfer pricing laws,
or that such laws will not be modified, which, as a result, may require changes
in the Company's operating procedures.
As is the case with most companies which operate in the Company's product
segment, NSI and the Company have from time to time received inquiries from
various government regulatory authorities regarding the nature of their
businesses and other issues such as compliance with local direct selling,
customs, taxation, foreign exchange control, securities and other laws. Although
to date none of these inquiries has resulted in a finding materially adverse to
the Company or NSI, adverse publicity resulting from inquiries into NSI's
operations by certain government agencies in the early 1990's, stemming in part
out of inappropriate product and earnings claims by distributors, materially
adversely affected NSI's business and results of operations. There can be no
assurance that the Company or NSI will not face similar inquiries in the future,
which, either as a result of findings adverse to the Company or NSI or as a
result of adverse publicity resulting from the instigation of such inquiries,
could have a material adverse effect on the Company's business and results of
operations. See "Risk Factors--Potential Effects of Adverse Publicity."
The Subsidiaries are periodically subject to reviews and audits by various
governmental agencies, particularly in new markets, where the Company has
experienced high rates of growth. Recently, the South Korean Ministry of Trade,
Industry and Energy commenced an examination of the largest foreign and domestic
owned network marketing companies in South Korea, including Nu Skin Korea. The
purposes of the examination were stated to be to monitor how companies are
operating and to audit current business practices. In addition, Nu Skin Korea
has been subject to an audit by the South Korean Customs Service. Management
believes that this audit was precipitated largely as a result of Nu Skin Korea's
rapid growth and its position as the largest importer of cosmetics and personal
care products in South Korea as well as by recent South Korean trade imbalances.
The Customs Service has reviewed a broad range of issues relating to the
operations of Nu Skin Korea, with a focus on reviewing customs valuation issues
and intercompany payments. Recently, the Customs Service has resolved certain
issues related to its audit without imposing sanctions. The intercompany payment
issue was referred to various other government agencies, which are currently
reviewing this issue. The import valuation issues, which management considers to
be routine in light of the Company's extensive import and export activities,
were referred to the valuation division of the Customs Service. The Company
continues to believe that its actions have been in compliance in all material
respects with relevant regulations. Although the potential sanctions related to
the investigations include warnings, fines, foreign exchange restrictions or
potential criminal prosecution of managers, the Company believes that none of
the sanctions would have a material adverse impact on operations. However, the
investigations and any related sanctions could result in negative publicity that
could have a material adverse impact on the Company and its operations. The
Company is not aware of any negative publicity to date in South Korea regarding
these developments. The Company intends to continue to vigorously contest these
matters. See "Risk Factors--Potential Negative Impact of Distributor Actions."
Management believes that other major importers of cosmetic products are also the
focus of regulatory reviews by South Korean authorities.
Businesses which are more than 50% owned by non-citizens are not permitted
to operate in Thailand unless they have an Alien Business Permit, which is
frequently difficult to obtain. The Company is currently operating under the
Treaty of Amity and Economic Relations between Thailand and the United States
(the "Treaty of Amity"). Under the Treaty of Amity, an Alien Business Permit is
not required if a Thailand business is owned by an entity organized in the
United States, a majority of whose owners are U.S. citizens or entities. From
time to time, it has been reported that certain Thailand government officials
have considered supporting the termination of the Treaty of Amity. The Company
could face particular difficulties in continuing operations in Thailand if the
Treaty of Amity were terminated and the Company were forced to obtain an Alien
Business Permit.
Based on the Company's and NSI's experience and research (including
assistance from counsel) and the nature and scope of inquiries from government
regulatory authorities, the Company and NSI believe that they are in material
compliance with all regulations applicable to them. Despite this belief, either
the Company or NSI could be found not to be in material compliance with existing
regulations as a result of, among other things, the considerable interpretative
and enforcement discretion given to regulators or misconduct by independent
distributors. In 1994, NSI and three of its distributors entered into a consent
decree with the Federal Trade Commission (the "FTC") with respect to its
investigation of certain product claims and distributor practices, pursuant to
which NSI paid approximately $1 million to settle the FTC investigation. In
August 1997, NSI reached a settlement with the FTC with respect to certain
product claims and its compliance with the 1994 consent decree, pursuant to
which settlement NSI paid $1.5 million to the FTC. NSI also recently voluntarily
agreed to recall and rewrite virtually all of its sales and marketing materials
to address FTC concerns. Even though neither the Company nor the Subsidiaries
have encountered similar regulatory concerns, there can be no assurances that
the Company and the Subsidiaries will not be subject to similar inquiries and
regulatory investigations or disputes and the effects of any adverse publicity
resulting therefrom. Any assertion or determination that either the Company, NSI
or any NSI distributors are not in compliance with existing laws or regulations
could have a material adverse effect on the Company's business and results of
operations. In addition, in any country or jurisdiction, the adoption of new
laws or regulations or changes in the interpretation of existing laws or
regulations could generate negative publicity and/or have a material adverse
effect on the Company's business and results of operations. The Company cannot
determine the effect, if any, that future governmental regulations or
administrative orders may have on the Company's business and results of
operations. Moreover, governmental regulations in countries where the Company
plans to commence or expand operations may prevent, delay or limit market entry
of certain products or require the reformulation of such products. Regulatory
action, whether or not it results in a final determination adverse to the
Company or NSI, has the potential to create negative publicity, with detrimental
effects on the motivation and recruitment of distributors and, consequently, on
the Company's sales and earnings. See "Risk Factors--Potential Effects of
Adverse Publicity" and "--Entering New Markets."
Employees
As of July 15, 1997, the Company had approximately 950 full-time and
part-time employees. None of the employees is represented by a union or other
collective bargaining group. The Company believes its relationship with its
employees is good, and does not currently foresee a shortage in qualified
personnel needed to operate the business. Each Subsidiary is directed by an
experienced manager.
Properties
In each of its current markets, the Company has established a central
office for the local administrative staff directed by a general manager. These
offices also have a training room for distributor and employee use and an
adjoining distribution center where distributors can place, pay for and pick up
orders. In Japan, Taiwan, and South Korea, additional pick up centers have been
added to provide better service to distributors and meet the increasing demand
for product. In Hong Kong, the Company maintains a distributor business center
where established distributors can use office space for training and sponsoring
activities at cost.
In addition to the Company's corporate headquarters in Provo, Utah, the
following table summarizes, as of May 31, 1997, the Company's leased office and
distribution facilities in each country where the Company currently has
operations.
Location Function Approximate Square Feet
Tokyo, Japan................ Central office/distribution center 35,000
Osaka, Japan................ Distribution center/office 13,400
Taipei, Taiwan.............. Central office/distribution center 22,000
Kaohsiung, Taiwan........... Distribution center/office 9,500
Taichung, Taiwan............ Distribution center/office 17,000
Nankan, Taiwan.............. Warehouse/distribution center 36,000
Causeway Bay, Hong Kong..... Central office/distribution center/distributor
business center/regional office 19,000
Tsing Yi, Hong Kong......... Warehouse 10,000
Macau....................... Distribution center/office 2,000
Seoul, South Korea.......... Central office/distribution center 30,000
Seoul, South Korea.......... Distribution center 7,000
Kyungki-Do, South Korea..... Warehouse 16,000
Pusan, South Korea.......... Distribution center 10,000
Bangkok, Thailand........... Central office/distribution center 8,200
Bangkok, Thailand........... Distribution center 1,700
Legal Proceedings
The Company is not a party to any litigation or other legal proceedings
which are expected to have a material adverse effect on its financial condition
or results of operations, nor are any such proceedings known to be contemplated.
See "--Government Regulation--Other Regulatory Issues" and "Risk Factors--Other
Regulatory Issues," for a discussion of certain regulatory matters.
MANAGEMENT
Directors and Executive Officers
As of July 15, 1997, the directors and executive officers of the Company
and key managers of the Subsidiaries were as follows:
Name Age Position
- ---- --- --------
Blake M. Roney 39 Chairman of the Board
Steven J. Lund 43 President, Chief Executive Officer and Director
Renn M. Patch 46 Chief Operating Officer
Corey B. Lindley 32 Chief Financial Officer
Michael D. Smith 51 Vice President of Operations
M. Truman Hunt 38 Vice President of Legal Affairs and Investor Relations
Keith R. Halls 39 Secretary and Director
Takashi Bamba 61 President, Nu Skin Japan Company, Limited
John Chou 51 President, Nu Skin Taiwan, Inc.
S.T. Han 54 President, Nu Skin Korea, Inc.
Sandra N. Tillotson 40 Director
Brooke B. Roney 35 Director
Max L. Pinegar 65 Director
E.J. "Jake" Garn 64 Director
Paula Hawkins 70 Director
Daniel W. Campbell 42 Director
A brief biographical summary of each of the Company's directors and
executive officers and the key managers of the Subsidiaries follows:
Blake M. Roney has served as the Chairman of the Board since the Company's
inception and is a founder of Nu Skin International Inc., an affiliate of the
Company ("NSI"). He has also served as President, Chief Executive Officer and
Chairman of the Board of NSI and certain of its affiliated entities since their
respective inceptions. He received a B.S. degree from Brigham Young University.
He is the brother of Brooke B. Roney.
Steven J. Lund has been the President, Chief Executive Officer and a
Director of the Company since its inception. Mr. Lund has also served as
Executive Vice President and a Director of NSI since 1985 and as Vice President
and Secretary of certain NSI affiliated entities since their respective
inceptions. Mr. Lund previously worked as an attorney in private practice. He
received a B.A. degree from Brigham Young University and a J.D. degree from
Brigham Young University's J. Reuben Clark Law School.
Renn M. Patch has been the Chief Operating Officer of the Company since its
inception. Since 1992 he has been Vice President of Global Operations and
Assistant General Manager of NSI. From 1991 to 1992, he served as Director of
Government Affairs of NSI. Prior to joining NSI in 1991, Mr. Patch was
associated with the Washington, D.C. consulting firm of Parry and Romani
Associates. Mr. Patch earned a B.A. degree from the University of Minnesota, a
J.D. degree from Hamline University School of Law and an L.L.M. degree from
Georgetown University.
Corey B. Lindley has been the Chief Financial Officer of the Company since
its inception. From 1993 to 1996, he served as Managing Director, International
of NSI. Mr. Lindley worked as the International Controller of NSI from 1991 to
1994 and lived in Hong Kong and Japan during that time. From 1990 to 1991, he
served as Assistant Director of Finance of NSI. Mr. Lindley is a Certified
Public Accountant. Prior to joining NSI in 1990, he worked for the accounting
firm of Deloitte and Touche. He earned a B.S. degree from Brigham Young
University and an M.B.A. degree from Utah State University.
Michael D. Smith has been the Vice President of Operations for the Company
since its inception. He has also served as Vice President of Asian Operations of
NSI since February 1996. Prior to that time, he served as General Counsel of NSI
from 1992 to 1996 and as Director of Legal Affairs of NSI from 1989 to 1992. He
earned B.S. and M.A. degrees from Brigham Young University and a J.D. degree
from the University of Utah.
M. Truman Hunt has served as the Vice President of Legal Affairs and
Investor Relations since the Company's inception. He has also served as Counsel
to the President of NSI since 1994. From 1991 to 1994, Mr. Hunt served as
President and Chief Executive Officer of Better Living Products, Inc., an NSI
affiliate involved in the manufacture and distribution of houseware products
sold through traditional retail channels. Prior to that time, he was a
securities and business attorney in private practice. He received a B.S. degree
from Brigham Young University and a J.D. degree from the University of Utah.
Keith R. Halls has served as the Secretary and a Director of the Company
since its inception. He has also served as General Vice President and a Director
of NSI since 1992. He served as Director of Finance of NSI from 1986 to 1992.
Mr. Halls is a Certified Public Accountant. Mr. Halls received a B.A. degree
from Stephen F. Austin State University and a B.S. degree from Brigham Young
University.
Takashi Bamba has served as the President and/or General Manager of Nu Skin
Japan since 1993. Prior to joining Nu Skin Japan in 1993, Mr. Bamba served five
years as President and CEO of Avon Products Co., Ltd., the publicly traded
Japanese subsidiary of Avon Products, Inc. Prior to working at Avon Products
Co., Ltd., he spent 17 years at Avon Products, Inc. He received a B.A. degree
from Yokohama National University.
John Chou has served as the President and/or General Manager of Nu Skin
Taiwan since 1991. Prior to joining Nu Skin Taiwan in 1991, he spent twenty-one
years in international marketing and management with 3M Taiwan Ltd., Amway
Taiwan and Universal PR Co. Mr. Chou is a standing director of the Taiwan ROC
Direct Selling Association. He is also a member of the Kiwanis International,
and the Taiwan American Chamber of Commerce. He received a B.A. degree from Tan
Kang University in Taipei, Taiwan.
S.T. Han has served as the President and/or General Manager of Nu Skin
Korea since 1995. Prior to joining Nu Skin Korea in 1995, Mr. Han spent four
years as the Executive Managing Director of Woosung Film Co., the exclusive
distributor of Konica film in South Korea. He also worked for Amway Korea, Ltd.
during that Company's start-up phase of operations in 1991. Mr. Han graduated
with a B.A. degree from ChungAng University.
Sandra N. Tillotson has served as a Director of the Company since its
inception. She was a founder of NSI and has also served as General Vice
President of NSI since 1992 and a Director of NSI since its inception and as a
Director and an executive officer of certain of NSI's affiliated entities since
their respective inceptions. She served as Vice President of Corporate Services
of NSI from 1984 to 1992. She earned a B.S. degree from Brigham Young
University.
Brooke B. Roney has served as a Director of the Company since its
inception. He was a founder of NSI and has also served as General Vice President
and a Director of NSI since 1992 and as a Director and an executive officer of
certain of NSI's affiliated entities since their respective inceptions. He
served as Vice President of Distribution of NSI from 1984 to 1992. He is the
brother of Blake M. Roney.
Max L. Pinegar has served as a Director of the Company since September
1996. He has also served as General Manager of NSI since 1989 and as Vice
President of NSI since 1992. He received a B.A. degree from Brigham Young
University and an M.B.A. degree from the University of Utah.
E.J. "Jake" Garn has served as a Director of the Company since March 1997.
Senator Garn has been Vice Chairman of Huntsman Corporation, one of the largest
privately-held companies in the U.S., since 1993. He currently serves as a
director for Dean Witter Funds, John Alden Life Insurance Company and Franklin
Quest & Co., Inc. From 1974 to 1993, Senator Garn was a member of the United
States Senate and served on numerous senate committees. He received a B.A.
degree from the University of Utah.
Paula Hawkins has served as a Director of the Company since March 1997.
Senator Hawkins has been a principal of Paula Hawkins & Associates, Inc., a
management consulting company, since its inception. From 1980 to 1986, Senator
Hawkins was a member of the United States Senate and served on numerous senate
committees.
Daniel W. Campbell has served as a Director of the Company since March
1997. Mr. Campbell has been a Managing General Partner of EsNet, Ltd. since
1994. From 1992 to 1994, Mr. Campbell was the Senior Vice President and Chief
Financial Officer of WordPerfect Corporation and prior to that was a Partner of
Price Waterhouse LLP. He received a B.S. degree from Brigham Young University.
Compensation of Directors
Directors who do not receive compensation as officers or employees of the
Company, NSI or its affiliates are paid an annual fee of $25,000 and a fee of
$1,000 for each meeting of the Board of Directors or any committee meeting
thereof that they attend. The Company is considering implementing various equity
incentive programs for Directors.
Compensation Committee Interlocks and Insider Participation
The Compensation committee members are Keith R. Halls, Max L. Pinegar,
Paula Hawkins and Daniel W. Campbell. Mr. Halls is the Chairman of the
Compensation Committee. Mr. Halls is currently the Secretary of the Company. Mr.
Halls has entered into a Stockholders' Agreement with the Company and certain
other of its stockholders. See "Certain Relationships and Related
Transactions--Stockholders Agreement." Mr. Halls is also a stockholder of NSI
and Mr. Pinegar is an executive officer of NSI, which provides the Company with
substantially all of its products, its distributor network and other support
services. See "Certain Relationships and Related Transactions--Operating
Agreements; Relationship with NSI." Several members of the Company's Board of
Directors are also directors of NSI and have set or will set compensation for
certain executive officers of the Company who have been or may in the future be
executive officers of NSI.
Executive Compensation
The following table sets forth a summary of all compensation awarded or
paid to or earned by the chief executive officer and the four other most highly
compensated executive officers of the Company in the last fiscal year for
services rendered in all capacities to the Company for the fiscal years ended
December 31, 1995 and 1996. Except for the employee stock bonus awards
referenced elsewhere herein, no options or long-term incentive plan awards were
granted or made to the referenced executive officers during the referenced
periods, except as provided below.
The Company was formed in September 1996, and consequently paid no
compensation to the executive officers named in the table below during the
fiscal year ended December 31, 1995 and during the first eight months of the
fiscal year ended December 31, 1996. However, salary, bonus and other
compensation is presented in the table below for 1995 and 1996 based on payments
by NSI and the Subsidiaries and, for the last quarter of 1996, by the Company to
the named executive officers as if the Company had been in existence during all
of 1995 and 1996. During 1995 and 1996, Messrs. Bamba and Chou were, and
continue to be, employed full time as the General Managers and/or Presidents of
Nu Skin Japan and Nu Skin Taiwan, respectively, and received all of their
compensation from the Company through these Subsidiaries. During 1995 and 1996,
Messrs. Lund, Smith and Patch were, and Messrs. Lund and Patch continue to be,
executive officers of NSI. The compensation presented in the table below
reflects an allocation of the time spent by Messrs. Lund and Patch providing
services to the Company and the Subsidiaries during 1995 and 1996 and by Mr.
Smith providing such services during 1996. These salaries and bonuses are in
addition to any amounts received by these officers from NSI in return for their
services to NSI.
Summary Compensation Table
Long-Term
Annual Compensation Compensation
--------------------------------------------- ------------
Other Annual Restricted All Other
Name and Principal Position Year Salary Bonus Compensation Stock Awards Compensation
--------------------------- ---- ------ ----- ------------ ------------ ------------
Steven J. Lund.................... 1996 $259,973 $89,345(1) $ -- $ -- $ --
President and Chief 1995 236,364 82,529(1) -- -- --
Executive Officer
Takashi Bamba..................... 1996 364,138 174,557(2) 195,401(3) 401,375(4) 3,297(5)
President, Nu Skin Japan 1995 361,028 105,563(2) 98,063(3) -- 3,297(5)
John Chou......................... 1996 211,000 56,232(2) 77,897(6) 401,375(4) --
President, Nu Skin Taiwan 1995 185,370 75,786(2) 63,730(6) -- --
Michael D. Smith.................. 1996 157,812 13,090(1) 25,676(7) 401,375(4) 24,390(8)
Vice President of 1995 -- -- -- -- --
Operations
Renn M. Patch..................... 1996 98,638 20,437(1) 13,800(7) 401,375(4) 5,542(8)
Chief Operating Officer 1995 97,175 104,765(9) 18,750(10) -- --
- -----------
(1) Cash bonus paid to the recipient not pursuant to a formal bonus plan.
(2) Cash bonus paid during the year reported pursuant to a cash bonus long
term incentive plan for the Presidents of the Subsidiaries.
(3) Includes deferred portion of a bonus accrued during the year reported
pursuant to a cash bonus long term incentive plan for the Presidents of
the Subsidiaries and annual lease payments for an automobile.
(4) Employee stock bonus awards for 13,000 shares of Class A Common Stock each
were granted in 1996 to Messrs. Bamba, Chou and Smith by the Company
pursuant to the 1996 Stock Incentive Plan and to Mr. Patch by NSI pursuant
to its own stock incentive plan. The awards vest 25% per year beginning in
November 1997. Dividends will be paid only on shares actually issued
pursuant to employee stock bonus awards and only as, when and if declared
by the Company's Board of Directors. Employee stock bonus awards have been
valued for purposes of this Summary Compensation Table using the closing
market price of the Company's Class A Common Stock on December 31, 1996
($307/8) multiplied by the number of shares underlying the awards.
(5) Annual premium for pension insurance policy.
(6) Includes deferred portion of a bonus accrued during the year reported
pursuant to a cash bonus long term incentive plan for the Presidents of
the Subsidiaries and annual payments for an automobile and club dues.
(7) Includes deferred portion of a bonus accrued during the year reported not
pursuant to a formal bonus plan.
(8) Includes compensation in the form of the cash value of the use of certain
NSI-owned property and other perquisites.
(9) Noncash bonus paid to Mr. Patch, not pursuant to a formal bonus plan.
(10)Includes $16,500 of accrued deferred compensation and $2,250 of vested
deferred compensation awarded to Mr. Patch under NSI's deferred
compensation plan.
Employment Agreements
Messrs. Bamba, Chou and Han have entered into employment agreements with Nu
Skin Japan, Nu Skin Taiwan and Nu Skin Korea, respectively. Under these
agreements, these individuals are paid an annual salary and receive various
other benefits. These individuals are also entitled to participate in a cash
bonus long-term incentive plan.
Mr. Bamba is employed as the President of Nu Skin Japan at a 1997 annual
salary of approximately $394,000. This salary is subject to annual review. Under
the terms of his employment agreement, Mr. Bamba is entitled to reimbursement of
business-related expenses, the use of an automobile provided by Nu Skin Japan,
and participation in any retirement plan offered by Nu Skin Japan. Mr. Bamba
also has the right under his employment agreement to have Nu Skin Japan purchase
a country club membership and pay related dues, although he has not exercised
this right. Mr. Bamba is also provided with a private insurance plan paid for by
Nu Skin Japan provided the premium for such private insurance plan does not
exceed (Y)300,000 per year. Under his employment agreement, Mr. Bamba has agreed
to certain confidentiality obligations. The term of Mr. Bamba's employment is
indefinite, subject to termination by Mr. Bamba or Nu Skin Japan upon three
months' notice.
Mr. Chou is employed as the President of Nu Skin Taiwan at a 1997 annual
salary of approximately $230,000. Under the terms of his employment agreement,
Mr. Chou is entitled to health insurance paid for in part by Nu Skin Taiwan. Nu
Skin Taiwan also provides Mr. Chou with a monthly car allowance. The term of Mr.
Chou's employment agreement currently extends until June 1997. Under his
employment agreement, Mr. Chou has agreed to certain confidentiality
obligations.
Mr. Han is employed as the President of Nu Skin Korea at a 1997 annual
salary of approximately $140,000. Under the terms of his employment agreement,
Mr. Han is entitled to the use of an automobile and driver provided by Nu Skin
Korea, as well as medical insurance and pension benefits. Mr. Han's employment
is for a three year term ending January 1, 1999, subject to the right of Nu Skin
Korea or Mr. Han to terminate the agreement on 60 days' advance notice. Once Mr.
Han had been employed by Nu Skin Korea for 12 months, he became entitled to
receive, upon termination, severance pay equal to two months' salary for each
consecutive year of service. Under his employment agreement, Mr. Han has agreed
to certain confidentiality and noncompetition obligations.
1996 Stock Incentive Plan
Prior to the Underwritten Offerings, the Board of Directors of the Company
adopted the Nu Skin Asia Pacific, Inc. 1996 Stock Incentive Plan, as amended
(the "1996 Stock Incentive Plan"). The stockholders approved the 1996 Stock
Incentive Plan in the Company's May 15, 1997 Annual Meeting. The purpose of the
1996 Stock Incentive Plan is to attract and retain executives, other employees,
independent consultants and directors who are important to the success and
growth of the Company and to ensure that their interests are aligned with the
interests of the stockholders of the Company.
Administration. The 1996 Stock Incentive Plan is administered by the 1996
Stock Incentive Plan Committee (the "Plan Committee"). The Plan Committee
consists of the members of the Compensation Committee of the Board of Directors.
The Plan Committee will determine, from time to time, the individuals to whom
awards shall be made, the type of awards, and the amount, size and terms of each
award. The Plan Committee will make all other determinations necessary or
advisable for the administration of the 1996 Stock Incentive Plan.
Awards. Awards under the 1996 Stock Incentive Plan may be in the form of
options (both nonqualified stock options ("NQSOs") and incentive stock options
("ISOs")), contingent stock, restricted stock, and stock appreciation rights
("SARs"), or such other forms as the Plan Committee in its discretion may deem
appropriate. The maximum number of awards that may be issued to any one person
during the life of the 1996 Stock Incentive Plan shall be limited to 10% of the
shares reserved for issuance under the 1996 Stock Incentive Plan. The number of
shares which may be issued under the 1996 Stock Incentive Plan as well as the
terms of any outstanding awards may be equitably adjusted by the Plan Committee
in the event of a stock split, stock dividend, recapitalization, merger,
consolidation, combination or similar events. In general, any shares subject to
an option or right which for any reason expires or is terminated unexercised
shall again be available under the 1996 Stock Incentive Plan. No awards may be
granted more than ten years after the effective date of the 1996 Stock Incentive
Plan.
Number of Shares. A total of 4,000,000 shares of the Class A Common Stock
have been authorized to be issued pursuant to the 1996 Stock Incentive Plan. The
Company issued stock bonus awards from these shares to executive officers of the
Company following the Underwritten Offerings. Messrs. Corey B. Lindley, Michael
D. Smith, Takashi Bamba and John Chou received stock bonus awards of 13,000
shares of Class A Common Stock each, and Mr. S.T. Han received a stock bonus
award of 1,800 shares of Class A Common Stock. These awards vest ratably over
four years beginning in November 1997, provided the executive officer remains in
the employment of the Company. In addition, Renn M. Patch received a stock bonus
award from NSI of 13,000 shares of Class A Common Stock, which award vests on
terms substantially similar to those described above in relation to the stock
bonus awards made by the Company.
Plan Amendment. The Board of Directors may amend the 1996 Stock Incentive
Plan, without stockholder approval, anytime in any respect unless stockholder
approval of the amendment in question is required under Delaware law, the Code,
certain exemptions from Section 16 of the Securities Exchange Act of 1934, as
amended (the "1934 Act"), any national securities exchange system on which the
shares are then listed or reported, by any regulatory body having jurisdiction
with respect to the 1996 Stock Incentive Plan, or other applicable laws, rules
or regulations. No amendment to the 1996 Stock Incentive Plan may alter or
impair any award granted under the 1996 Stock Incentive Plan without the consent
of the holders thereof. The 1996 Stock Incentive Plan may be terminated at any
time by the Board of Directors.
Options. The 1996 Stock Incentive Plan provides for the grant of ISOs to
employees and NQSOs to employees and independent consultants. In the case of
ISOs, the exercise price of an option may not be less than 100% of the fair
market value of a share of Class A Common Stock at the time of grant (or 110% of
such fair market value if the optionee owns more than 10% of the total voting
power of all classes of Company stock outstanding at the time of grant). In the
case of NQSOs, the exercise price of an option may not be less than 85% of the
fair market value of a share of Class A Common Stock at the time of grant. The
Plan Committee may provide for a reduction in the exercise price of a NQSO by
dividends paid on a share of Class A Common Stock while the NQSO is outstanding.
Options will be exercisable for a term determined by the Plan Committee provided
such exercise shall occur not earlier than six months and not later than ten
years (five years if the optionee owns more than ten percent of the total voting
power of all classes of Company Stock outstanding at the time of grant) after
the grant of the option. The aggregate fair market value of ISO's (determined at
the time of grant) granted to an employee which may become first exercisable in
any one calendar year shall not exceed $100,000. If any option is not granted,
exercised, or held pursuant to the provisions applicable to an ISO, it will be
considered to be an NQSO to the extent that any or all of the grant is in
conflict with such provisions. The Plan Committee has the power to permit
acceleration of previously determined exercise terms under certain circumstances
and upon such terms and conditions as the Plan Committee deems appropriate. See
"Risk Factors--Anti-Takeover Effects of Certain Charter, Contractual and
Statutory Provisions."
Contingent Stock. The Plan Committee will determine the amount of
contingent stock to be granted to a participant based on the past or expected
impact the participant has had or can have on the financial well being of the
Company and other factors determined by the Plan Committee to be appropriate. A
participant receiving an award of contingent stock will receive the stock upon
the satisfaction of certain objectives. Contingent stock awards made pursuant to
the 1996 Stock Incentive Plan will be subject to such terms, conditions and
restrictions, including obtainment of performance objectives, for such period or
periods as may be determined by the Plan Committee at the time of grant. The
Plan Committee in its discretion may permit acceleration of the expiration of
the applicable restriction period with respect to part or all of the award to
any participant. See "Risk Factors--Anti-Takeover Effects of Certain Charter,
Contractual and Statutory Provisions."
Restricted Stock. The Plan Committee will determine the amount of
restricted stock to be granted to a participant based on the past or expected
impact the participant has had or can have on the financial well being of the
Company and other factors deemed by the Plan Committee to be appropriate.
Restricted stock is issued to the participant subject to forfeiture if certain
objectives are not met. Restricted stock awards made pursuant to the 1996 Stock
Incentive Plan shall be subject to the terms, conditions and restrictions,
including the payment of performance objectives, and for such period or periods
as will be determined by the Plan Committee at the time of grant. The Plan
Committee in its discretion may permit acceleration of the expiration of the
applicable restriction period with respect to part or all of the award to any
participant. See "Risk Factors--Anti-Takeover Effects of Certain Charter,
Contractual and Statutory Provisions." Shares of restricted stock may not be
sold, assigned, transferred, pledged, hypothecated or otherwise disposed of,
except by will or the laws of descent and distribution, for such period provided
in the participant's award agreement.
SARs. SARs are rights to receive cash or shares of Company stock, or a
combination thereof, as the Plan Committee may determine in an amount equal to
the excess of (i) the fair market value of the stock with respect to which the
SAR is exercised, or (ii) 100% of the fair market value of such stock at the
time the SAR was granted, less any dividends paid on such shares while the SAR
was outstanding. No cash consideration will be received by the Company for the
grant of any SAR. No SAR may be granted for a period of less than one year or
greater than ten years. SARs may be exercised at such time and subject to such
terms and conditions as are prescribed by the Plan Committee at the time of
grant, subject to certain limitations (including that no SAR shall be
exercisable within one year after the date of grant).
Federal Income Tax Consequences. The participant recognizes no taxable gain
or loss when an incentive stock option is granted or exercised. If the shares
acquired upon the exercise of an incentive stock option are held for at least
one year after exercise and two years after grant (the "Holding Period"), the
participant recognizes any gain or loss recognized upon such sale as long-term
capital gain or loss and the Company is not entitled to a deduction. If the
shares are not held for the Holding Period, the gain is ordinary income to the
participant to the extent of the difference between the exercise price and the
fair market value of the Class A Common Stock on the date the option is
exercised and any excess is capital gain. Also, in such circumstances, the
Company is entitled to a deduction equal to the amount of any ordinary income
recognized by the participant.
The participant recognizes no taxable income and the Company receives no
deduction when a nonqualified stock option is granted. Upon exercise of a
nonqualified stock option, the participant recognizes ordinary income and the
Company is entitled to a deduction equal to the difference between the exercise
price and the fair market value of the shares on the date of exercise. The
participant recognizes as a capital gain or loss any subsequent profit or loss
realized on the sale or exchange of any shares disposed of or sold.
A participant granted restricted stock or contingent stock is not required
to include the value of such shares in income until the first time such
participant's rights in the shares are transferable or are not subject to
substantial risk of forfeiture, whichever occurs earlier, unless such
participant timely files an election under Code Section 83(b) to be taxed on the
receipt of the shares. In either case, the amount of such ordinary income will
be equal to the excess of the fair market value of the shares at the time the
income is recognized over the amount (if any) paid for the shares. The Company
is entitled to a deduction, in the amount of the ordinary income recognized by
the participant, for the Company's taxable year in which the participant
recognizes such income.
Upon the grant of an SAR, the participant recognizes no taxable income and
the Company receives no deduction. The participant recognizes ordinary income
and the Company is entitled to a deduction at the time of exercise equal to the
cash and the fair market value of shares payable upon such exercise.
Under certain circumstances, an accelerated vesting or cash out of stock
options, or accelerated lapse of restrictions on other awards, in connection
with a change in control of the Company might be deemed an "excess parachute
payment" for purposes of the golden parachute tax provisions of Code Section
280G. To the extent it is so considered, the participant may be subject to a 20%
excise tax and the Company may be denied a tax deduction.
Code Section 162(m) limits to $1,000,000 per year the federal income tax
deduction available to a public company for compensation paid to any of its
chief executive officer and four other highest paid executive officers. However,
Section 162(m) provides an exception from its limitation for certain
"performance based" compensation if various requirements are satisfied. The 1996
Stock Incentive Plan contains provisions which are intended to satisfy these
requirements for awards made at the time the Company is considered a public
company and which otherwise are "performance based" compensation.
Bonus Incentive Plan
The Company has adopted a bonus incentive plan for the Presidents of the
Subsidiaries. This bonus incentive plan is patterned after a similar plan under
which Messrs. Bamba, Chou and Han were compensated prior to the Underwritten
Offerings. Under the new bonus incentive plan, Messrs. Bamba, Chou and Han are
entitled to receive an annual cash bonus based upon the prior year's operating
results of the Subsidiary for which they are responsible. Participants in this
bonus incentive plan are able to receive a bonus equal to 100% of their
respective salaries, conditioned on meeting certain performance criteria and
subject to cash availability and approval of the Executive Committee of the
Board of Directors of the Company. One half of this bonus is payable by February
15 of the year following the year in which the bonus is earned and the remaining
one half is deferred and vests ratably over 10 years or at age 65, whichever
occurs first.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
S Corporation Distribution
Prior to the Reorganization, each Subsidiary elected to be treated as an
"S" corporation under Subchapter S of the Code and comparable state tax laws. On
November 19, 1996, the Subsidiaries' S corporation status was terminated (the "S
Termination Date"). Prior to the S Termination Date, the Company declared a
distribution to the Existing Stockholders that included all of the Subsidiaries'
previously earned and undistributed S corporation earnings through the S
Termination Date (the "S Corporation Distribution"). As of the date of the
Reorganization, the Subsidiaries' aggregate undistributed taxable S corporation
earnings were $86.5 million. The S Corporation Distribution was distributed in
the form of promissory notes bearing interest at 6% per annum. On April 4, 1997,
the Company paid the outstanding S Distribution Note balance of $71.5 million
together with the related interest expense due. The Existing Stockholders, which
include Messrs. Blake M. Roney, Steven J. Lund and Keith R. Halls, who serve as
officers of the Company, were the holders of the S Distribution Notes.
Control By Existing Stockholders
After consummation of the Rule 415 Offerings, approximately 98.2% of the
combined voting power of the outstanding shares of Common Stock will be held by
the Existing Stockholders and certain of their affiliates. Consequently, the
Existing Stockholders and certain of their affiliates will have the ability,
acting in concert, to elect all directors of the Company and approve any action
requiring approval by a majority of the stockholders of the Company. Certain of
the Existing Stockholders, including Messrs. Blake M. Roney, Steven J. Lund and
Keith R. Halls, also own 100% of the outstanding shares of NSI. As a result of
this ownership, these stockholders will consider the short-term and the
long-term impact of all stockholder decisions on the consolidated financial
results of NSI and the Company. The interests of NSI, on the one hand, and of
the Company, on the other hand, may differ from time to time. See "Risk
Factors--Relationship with and Reliance on NSI; Potential Conflicts of Interest"
and "--Control by Existing Stockholders; Anti-Takeover Effect of Dual Classes of
Common Stock."
Operating Agreements; Relationship with NSI
NSI has licensed to the Company, through the Subsidiaries, rights to
distribute NSI products and to use certain NSI property in the Company's
markets, and NSIMG, an NSI affiliate, provides management support services to
the Company and the Subsidiaries, pursuant to the Operating Agreements with the
Subsidiaries, which include distribution, trademark/tradename license, licensing
and sales, and management services agreements. Virtually all of the products
sold by the Company are purchased from NSI pursuant to distribution agreements.
The Company also manufactures itself, or through third-party manufacturers,
certain products and commercial materials which it then sells using NSI
trademarks or tradenames licensed under trademark/tradename license agreements.
In addition, the Company does not have its own sales or distribution network but
licenses the right to use NSI's distribution network and the Global Compensation
Plan pursuant to licensing and sales agreements. NSIMG also provides a broad
range of management, administrative and technical support to the Company
pursuant to management services agreements. See "Business--Relationship with
NSI."
During the year ended December 31, 1996, NSI and NSIMG charged the Company
approximately $185.5 million and $4.2 million, respectively, for goods and
services provided to the Company under the Operating Agreements. During the six
months ended June 30, 1997, NSI and NSIMG charged the Company approximately
$125.7 million and $3.2 million, respectively, for goods and services provided
to the Company under the Operating Agreements. See Consolidated Financial
Statements and the related notes thereto.
The Operating Agreements were approved by the Board of Directors of the
Company, which was, except with respect to the approval of the Operating
Agreements for Nu Skin Thailand, composed entirely of officers and shareholders
of NSI at the time of each such approval. In addition, two of the executive
officers of the Company, including the Chief Executive Officer, are also
executive officers of NSI. It is expected that they will continue to spend a
portion of their time on the affairs of NSI, for which they will continue to
receive compensation from NSI in addition to amounts received from the Company
for services to the Company. See "Risk Factors--Relationship with and Reliance
on NSI; Potential Conflicts of Interest" and "Business--Relationship with NSI."
During 1996, Nu Skin Japan paid NSI a royalty of 8% of the revenue from
sales of products manufactured by a third party manufacturer under a license
agreement between Nu Skin Japan and NSI. In the six months ended June 30, 1997,
Nu Skin Japan paid NSI $1.6 million in royalties under this agreement.
Pursuant to wholesale distribution agreements, Nu Skin Hong Kong
distributes certain NSI products to Nu Skin Personal Care Australia, Inc. and Nu
Skin New Zealand, Inc., affiliates of NSI. Pursuant to these agreements, Nu Skin
Hong Kong was paid approximately $2.1 million during the six months ended June
30, 1997 by Nu Skin Personal Care Australia, Inc. and Nu Skin New Zealand, Inc.
Concurrently with the Underwritten Offerings, the Company purchased from
NSI for $25.0 million the exclusive rights to distribute NSI products in
Thailand, Indonesia, Malaysia, the PRC, the Philippines, Singapore and Vietnam.
As of June 30, 1997, the Company had paid $15.0 million of this amount. In
addition, the Company and NSI have entered into a mutual indemnification
agreement pursuant to which NSI has agreed to indemnify the Company for certain
claims, losses and liabilities relating to the operations of the Subsidiaries
prior to the Reorganization, and the Company has agreed to indemnify NSI for
certain claims, losses and liabilities relating to the operations of the
Subsidiaries after the Reorganization. Messrs. Blake M. Roney, Steven J. Lund
and Keith R. Halls, who serve as officers of the Company, are stockholders of
NSI. See "Business--Relationship with NSI."
Stockholders' Partnership
Craig Bryson and Craig S. Tillotson are major stockholders of the Company
and have been NSI distributors since 1984. Messrs. Bryson and Tillotson are
partners in an entity (the "Partnership") which receives substantial commissions
from NSI, including commissions on sales generated within the Company's markets.
For the year ended December 31, 1996, total commissions paid to the Partnership
on sales originating in the Company's then open markets (Japan, Taiwan, Hong
Kong and South Korea) were approximately $1.2 million. By agreement, NSI pays
commissions to the Partnership at the highest level of commissions available to
distributors. Management believes that this arrangement allows Messrs. Bryson
and Tillotson the flexibility of using their expertise and reputations in
network marketing circles to sponsor, motivate and train distributors to benefit
NSI's distributor force generally, without having to focus solely on their own
organizations.
Stockholders' Agreement
The Existing Stockholders and certain of their affiliates have entered into
a stockholders' agreement with the Company (the "Stockholders' Agreement"). The
Existing Stockholders and certain of their affiliates beneficially own shares
having approximately 98.2% of the combined voting power of the outstanding
shares of Common Stock. In order to ensure the qualification of the
Reorganization under Section 351 of the Code, the Existing Stockholders and
certain of their affiliates have agreed not to transfer any shares they own
through November 28, 1997 without the consent of the Company except for certain
transfers relating to the funding of the Distributor Options and the grant of
the employee stock bonus awards. See "Shares Eligible for Future Sale." The
Company has consented to the Rule 415 Offerings. After November 28, 1997, and
subject to any volume limitations imposed by Rule 144, no such stockholder is
permitted to transfer in any one-year period a number of shares equal to the
greater of (i) 10% of the total number of shares of Common Stock originally
issued to such stockholder in connection with the Reorganization, or (ii) 1.25%
of the total Common Stock issued and outstanding at the time of such proposed
transfer. The Existing Stockholders and certain of their affiliates have been
granted registration rights by the Company permitting each such stockholder to
register his or her shares of Class A Common Stock, subject to certain
restrictions, on any registration statement filed by the Company until such
stockholder has sold a specified value of shares of Class A Common Stock. See
"Description of Capital Stock--Registration Rights."
Agreements and Arrangements with Management
Prior to the Underwritten Offerings, the Company entered into
indemnification agreements with its officers and directors indemnifying them
against liability incurred by them in the course of their service to the
Company. Pursuant to the 1996 Stock Incentive Plan, as of the date of this
Prospectus, the Company had granted stock bonus awards to certain executive
officers of the Company for an aggregate of 150,959 shares of Class A Common
Stock, of which awards for 12,413 shares have lapsed in connection with the
termination of the employee recipients. The shares of Class A Common Stock
underlying each of these stock bonus awards will be issued to the recipient of
the award at a rate of 25% per year commencing in November 1997, subject to
certain restrictions. See "Management--1996 Stock Incentive Plan--Number of
Shares." Prior to the Reorganization, NSI stockholders agreed to grant M. Truman
Hunt an option, which became immediately exercisable upon consummation of the
Reorganization, to purchase 267,500 shares of Class A Common Stock. As of the
date of this Prospectus, Mr. Hunt had exercised a portion of this option and
purchased 16,675 shares of Class A Common Stock, which he then sold in the
Underwritten Offerings. The Company has employment agreements with certain of
its executive officers. See "Management--Employment Agreements."
Distributor Options
Prior to the Rule 415 Offerings, the Existing Stockholders converted
1,605,000 shares of Class B Common Stock into Class A Common Stock and
contributed such shares to the Company for use in implementing an NSI
distributor equity incentive program, and the Company granted to NSI the
Distributor Options to acquire such 1,605,000 shares of Class A Common Stock.
NSI is offering the Distributor Options to qualifying distributors of NSI in
connection with the Rule 415 Offerings. The Distributor Options are subject to
certain conditions related to distributor performance and will vest on December
31, 1997. The Company will record distributor stock expense for the Distributor
Options. See "Shares Eligible for Future Sale."
PRINCIPAL STOCKHOLDERS
The following table sets forth, as of June 30, 1997, certain information
regarding the beneficial ownership of the Class A Common Stock and Class B
Common Stock prior to and after the Rule 415 Offerings (assuming the exercise of
all 1,605,000 Distributor Options and the vesting of all 163,546 stock bonus
awards offered hereby by the Company to certain of its employees) 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.
Total
Class B Common
Class A Common Stock(1) Common Stock(1) Stock
----------------------------------------- -------------------- ---------
Owned To Be Voting
Prior Sold in Power
to the the To Be Owned Owned Prior to and After the
Rule 415 Rule 415 After the Rule After the Rule Rule 415
Offerings Offerings 415 Offerings 415 Offerings Offerings
Directors, Executive Officers, --------- --------- --------------- ------------------ ---------
5% Stockholders Number Number Number % Number % %
- ------------------------------ --------- --------- -------- ----- ----------- ------ ---------
Blake M. Roney(2)...................... -- -- -- -- 20,629,049 28.8 28.2
Nedra D. Roney(3)...................... -- -- -- -- 14,213,895 19.8 19.5
Sandra N. Tillotson(4)................. -- -- -- -- 8,559,510 11.9 11.7
Craig S. Tillotson(5).................. -- -- -- -- 4,411,058 6.2 6.0
R. Craig Bryson(6)..................... -- -- -- -- 4,925,736 6.9 6.7
Steven J. Lund(7)...................... -- -- -- -- 4,244,652 5.9 5.8
Brooke B. Roney(8)..................... -- -- -- -- 3,496,751 4.9 4.8
Keith R. Halls(9)...................... -- -- -- -- 1,208,891 1.7 1.7
Max L. Pinegar(10)..................... 14,000 -- 14,000 * -- -- *
Daniel W. Campbell..................... -- -- -- -- -- -- --
E.J. "Jake" Garn....................... -- -- -- -- -- -- --
Paula Hawkins.......................... -- -- -- -- -- -- --
Renn M. Patch(11)...................... 14,000 -- 14,000 * -- -- *
Michael D. Smith(12)................... 14,000 -- 14,000 * -- -- *
Takashi Bamba(13)...................... 13,000 -- 13,000 * -- -- *
John Chou(14).......................... 13,215 -- 13,215 * -- -- *
BNASIA, Ltd.(15)....................... -- -- -- -- 20,052,884 28.0 27.5
RCKASIA, Ltd.(16)...................... -- -- -- -- 4,775,736 6.7 6.5
All directors and officers as a group
(16 persons)(17)................... 334,840 -- 334,840 * 38,138,854 53.2 52.2
- ----------------
* 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. See
"Certain Relationships and Related Transactions."
(2) Includes shares beneficially owned or deemed to be owned beneficially by
Blake M. Roney prior to the Rule 415 Offerings as follows: 20,052,884
shares of Class B Common Stock as general partner of BNASIA, Ltd., a
limited partnership, and with respect to which he shares voting and
investment power with his wife Nancy L. Roney as set forth in footnote (15)
below; 400,000 shares of Class B Common Stock as co-trustee and with
respect to which he shares voting and investment power with Nancy L. Roney;
and 176,165 shares of Class B Common Stock as trustee and with respect to
which he has sole voting and investment power. 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.
(3) Includes shares beneficially owned or deemed to be owned beneficially by
Nedra D. Roney prior to the Rule 415 Offerings as follows: 13,913,895
shares of Class B Common Stock directly and with respect to which she has
sole voting and investment power; and 300,000 shares of Class B Common
Stock as co-trustee and with respect to which she shares voting and
investment power. Nedra D. Roney is a Director and shareholder of NSI.
(4) Includes shares beneficially owned or deemed to be owned beneficially by
Sandra N. Tillotson prior to the Rule 415 Offerings as follows: 7,584,743
shares of Class B Common Stock directly and with respect to which she has
sole voting and investment power; 424,767 shares of Class B Common Stock as
trustee and with respect to which she has sole voting and investment power;
50,000 shares of Class B Common Stock as co-trustee and with respect to
which she shares voting and investment power; and 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. Sandra N. Tillotson is a
Director of the Company, and a Director, executive officer and shareholder
of NSI.
(5) Includes shares beneficially owned or deemed to be owned beneficially by
Craig S. Tillotson prior to the Rule 415 Offerings as follows: 2,962,912
shares of Class B Common Stock directly and with respect to which he has
sole voting and investment power; 112,500 shares of Class B Common Stock as
trustee and with respect to which he has sole voting and investment power;
335,646 shares of Class B Common Stock as co-trustee and with respect to
which he shares voting and investment power; and 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. Craig S. Tillotson is a
shareholder of NSI.
(6) Includes shares beneficially owned or deemed to be owned beneficially by R.
Craig Bryson prior to the Rule 415 Offerings as follows: 4,775,736 shares
of Class B Common Stock as general partner of RCKASIA, Ltd., a limited
partnership, and with respect to which he shares voting and investment
power with his wife Kathleen D. Bryson as reported in footnote (16) below;
and 150,000 shares of Class B Common Stock as co-trustee and with respect
to which he shares voting and investment power with Kathleen D. Bryson. R.
Craig Bryson is a shareholder of NSI.
(7) Includes shares beneficially owned or deemed to be owned beneficially
by Steven J. Lund prior to the Rule 415 Offerings as follows: 3,144,751
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; 897,901 shares of Class B Common Stock as trustee and
with respect to which he has sole voting and investment power; and 202,000
shares of Class B Common Stock as co-trustee and with respect to which he
shares voting and investment power with Kalleen Lund. Steven J. Lund is a
Director, President and Chief Executive Officer of the Company, and a
Director, executive officer and shareholder of NSI.
(8) Includes shares beneficially owned or deemed to be owned beneficially by
Brooke B. Roney prior to the Rule 415 Offerings as follows: 3,426,951
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 Denice R. Roney; and 69,800 shares of Class B Common Stock as
co-trustee and with respect to which he shares voting and investment power
with Denice R. Roney. Brooke B. Roney is a Director of the Company, and a
Director, executive officer and shareholder of NSI.
(9) Includes shares beneficially owned or deemed to be owned beneficially by
Keith R. Halls prior to the Rule 415 Offerings as follows: 563,258 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; 552,633 shares of Class B Common Stock as
trustee and with respect to which he has sole voting and investment power;
and 43,000 shares of Class B Common Stock as co-trustee and with respect to
which he shares voting and investment power with Anna Lisa Massaro Halls.
Keith R. Halls is a Director and Secretary of the Company, and a Director,
executive officer and shareholder of NSI.
(10) Includes shares beneficially owned or deemed to be owned beneficially by
Max L. Pinegar prior to the Rule 415 Offerings as follows: 1,000 shares of
Class A Common stock directly and with respect to which he has sole voting
and investment power; and 13,000 shares of Class A Common Stock issuable to
Mr. Pinegar as an employee stock bonus award which will vest ratably,
according to its terms, over four years following the date of the award.
Max L. Pinegar is a Director of the Company, and an executive officer of
NSI.
(11) Includes shares beneficially owned or deemed to be owned beneficially by
Renn M. Patch prior to the Rule 415 Offerings as follows: 1,000 shares of
Class A Common Stock directly and with respect to which he has sole voting
and investment power; and 13,000 shares of Class A Common Stock issuable to
Mr. Patch as an employee stock bonus award which will vest ratably,
according to its terms, over four years following the date of the award.
Renn M. Patch is Chief Operating Officer of the Company, and an executive
officer of NSI.
(12) Includes shares beneficially owned or deemed to be owned beneficially by
Michael D. Smith prior to the Rule 415 Offerings as follows: 1,000 shares
of Class A Common Stock directly and with respect to which he has sole
voting and investment power; and 13,000 shares of Class A Common Stock
issuable to Mr. Smith as an employee stock bonus award which will vest
ratably, according to its terms, over four years following the date of the
award. Michael D. Smith is Vice President of Operations of the Company.
(13) Includes shares beneficially owned or deemed to be owned beneficially by
Takashi Bamba prior to the Rule 415 Offerings as follows: 13,000 shares of
Class A Common Stock issuable to Mr. Bamba as an employee stock bonus award
which will vest ratably, according to its terms, over four years following
the date of the award. Takashi Bamba is President of Nu Skin Japan.
(14) Includes shares beneficially owned or deemed to be owned beneficially by
John Chou prior to the Rule 415 Offerings as follows: 215 shares of Class A
Common Stock directly and with respect to which he has sole voting and
investment power; and 13,000 shares of Class A Common Stock issuable to Mr.
Chou as an employee stock bonus award which will vest ratably, according to
its terms, over four years following the date of the award. John Chou is
President of Nu Skin Taiwan.
(15) Includes 20,052,884 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.
(16) Includes 4,775,736 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.
(17) Class A Common Stock owned prior to the Rule 415 Offerings includes 250,825
shares of Class A Common Stock subject to a stock option which has been
granted to an executive officer of the Company and which is exercisable
within 60 days of the Rule 415 Offerings.
RULE 415 SELLING STOCKHOLDERS
Distributor Options
Prior to the date of this Prospectus, the Existing Stockholders contributed
to the Company 1,605,000 shares of the Company's Class A Common Stock for use in
implementing an NSI distributor equity incentive program. Also prior to the date
of this Prospectus, the Company granted to NSI an option to acquire such
1,605,000 shares of Class A Common Stock (the "Distributor Options"). Each
Distributor Option entitles the holder to purchase one share of Class A Common
Stock. Upon vesting, Distributor Options will be exercisable at $5.75, which is
25% of the initial price per share to the public in the Underwritten Offerings
(the "Exercise Price").
Distributor Option Allocation. From January 1, 1997 until August 31, 1997
(the "Qualification Period"), existing and new distributors in each country
where NSI conducts business and where local laws may permit the issuance of
options hereunder had the opportunity to qualify for an allocation of the
Distributor Options from NSI by achieving executive distributor levels
("Executive Pin Levels") of Gold or higher under the Global Compensation Plan as
of August 31, 1997 and by submitting a representation letter to NSI as provided
in the NSI 1996 Distributor Stock Option Plan, as amended (the "NSI Stock Option
Plan") (qualifying distributors are hereinafter referred to as "Eligible
Distributors"). Pursuant to NSI's policies and procedures, that portion of sales
volume for September 1997 which would be attributed to sales volume for August
1997 will be included for purposes of determining commissions paid during the
Qualification Period, as well as whether a distributor qualifies as an Eligible
Distributor. Each allocation of Distributor Options made to an Eligible
Distributor that is an entity (such as a partnership or corporation) shall be
made by NSI solely to the entity, not to the owners of the entity individually.
NSI will notify Eligible Distributors of the results of the allocation of the
Distributor Options by October 31, 1997. Each Eligible Distributor shall have
the right to decline his or her Distributor Options by notice to NSI no later
than November 15, 1997. Each Eligible Distributor who has not declined his or
her Distributor Options on or before November 15, 1997 will be granted a number
of Distributor Options determined in accordance with the formula set forth
below. Because there is a fixed number of Distributor Options available for this
program, the allocation formula and explanations are rather complex.
S x (X/Y) = number of Distributor Options to be
allocated to an Eligible Distributor;
where
S = fixed number of Distributor Options
available = 1,605,000
X = C x (P+G) = Weighted Individual Compensation
C = net commissions paid to the Eligible Distributor on
sales volume during the Qualification Period
P = Executive Pin Level Weighting Factor
G = Business Growth Weighting Factor
Y = Sum of Weighted Individual Compensation paid to
all Eligible Distributors during the Qualification
Period = Weighted Total Compensation
Thus, the number of Distributor Options to be allocated to an Eligible
Distributor will be determined by multiplying the total number of Distributor
Options available ("S" in the formula above) by the quotient obtained by
dividing the Eligible Distributor's Weighted Individual Compensation ("X" in the
formula above, and as defined below) under the Global Compensation Plan during
the Qualification Period by the sum of the Weighted Individual Compensation paid
to all Eligible Distributors under the Global Compensation Plan on sales volume
during the Qualification Period (the "Weighted Total Compensation," and "Y" in
the formula above). An Eligible Distributor's Weighted Individual Compensation
is equal to total commissions, net of any withholdings, fines, penalties, or the
like, paid to such Eligible Distributor on sales volume during the Qualification
Period ("C" in the formula above) multiplied by the sum of his or her Executive
Pin Level Weighting Factor ("P" in the formula above, and as defined below) and
his or her Business Growth Weighting Factor ("G" in the formula above, and as
defined below).
Executive Pin Level Weighting Factor. An Eligible Distributor's Executive
Pin Level Weighting Factor is the percentage set forth in the table below
opposite the actual Executive Pin Level achieved by such Eligible Distributor as
of August 31, 1997. Allocations of Distributor Options shall generally be based
on the Executive Pin Level at which Eligible Distributors receive commissions,
giving consideration to any temporary exceptions which may be granted by NSI
from time to time.
Executive
Executive Pin Level Pin Level
as of August 31, 1997 Weighting Factor
--------------------- ----------------
Hawaiian Blue Diamond................................ 100%
Blue Diamond......................................... 94%
Diamond.............................................. 86%
Emerald.............................................. 82%
Ruby................................................. 78%
Lapis................................................ 74%
Gold................................................. 72%
Business Growth Weighting Factor. An Eligible Distributor's Business Growth
Weighting Factor is based on the increase in his or her average monthly net
commissions paid on sales volume during the Qualification Period. An Eligible
Distributor's Business Growth Weighting Factor is equal to one-third (1/3) of
1%, up to a maximum of 100%, for each 1% increase in average monthly net
commissions paid during the Qualification Period that is greater than actual net
commission paid during September 1996 (the "Base Month"). The Base Month for a
distributor qualifying as an Eligible Distributor after September 1996 is deemed
to be his or her first month as an Eligible Distributor.
Illustrations. For purposes of illustration, for the eight-month period
ended on August 31, 1996 (the "Illustrative Qualification Period"), the Weighted
Total Compensation (Y) will be assumed to have been $200,000,000. An Emerald
level distributor who was paid net commissions (C) of $40,000 (or average
monthly net commissions of $5,000) during the Illustrative Qualification Period
and who had previously been paid net commissions of $1,000 during such
distributor's Base Month would apply a weighting factor of 182% to such net
commissions (computed using the 82% Executive Pin Level Weighting Factor (P) for
an Emerald level distributor plus a 100% Business Growth Weighting Factor (G)
based on the 400% increase in average net commissions paid during the
Illustrative Qualification Period over net commissions paid during such
distributor's Base Month), resulting in Weighted Individual Compensation (X) of
$72,800. Such distributor's allocation of Distributor Options at the end of the
Illustrative Qualification Period would be equal to the quotient of his or her
Weighted Individual Compensation (X = $72,800) divided by the Weighted Total
Compensation (Y = $200,000,000), multiplied by the total number of Distributor
Options (S = 1,605,000). Such distributor would therefore be allocated 584
Distributor Options.
To illustrate another example, the Weighted Total Compensation (Y) for the
Illustrative Qualification Period will be assumed to have been $300,000,000. A
Blue Diamond level distributor who was paid net commissions (C) of $520,000 (or
average monthly net commissions of $65,000) during the Illustrative
Qualification Period and who had previously been paid net commissions of $50,000
during such distributor's Base Month would apply a weighting factor of 104% to
such net commissions (computed using the 94% Executive Pin Level Weighting
Factor (P) for a Blue Diamond level distributor plus a 10% Business Growth
Weighting Factor (G) based on the 30% increase in average net commissions paid
during the Illustrative Qualification Period over net commissions paid during
such distributor's Base Month) resulting in Weighted Individual Compensation (X)
of $540,800. Such distributor's allocation of Distributor Options at the end of
the Illustrative Qualification Period would be equal to the quotient of his or
her Weighted Individual Compensation (X = $540,800) divided by the Weighted
Total Compensation (Y = $300,000,000), multiplied by the total number of
Distributor Options (S = 1,605,000). Such distributor would therefore be
allocated 2,893 Distributor Options.
Vesting. 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 Pin Level he or
she achieved by the end of the Qualification Period (the "Qualifying Executive
Pin Level"). If an Eligible Distributor fails to maintain the Qualifying
Executive Pin 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, at the
end of the Qualification Period, the lowest Executive Pin Level held by him or
her during the Vesting Period (the "Recalculated Distributor Options"). For
example, if an Eligible Distributor ends the Qualification Period as a Diamond
level distributor with an Executive Pin Level Weighting Factor of 86% and a
Business Growth Weighting Factor of 15%, resulting in a combined weighting
factor for Weighted Individual Compensation of 101%, but during the Vesting
Period the lowest actual Executive Pin Level to which the distributor falls is
Ruby level, which carries an Executive Pin Level Weighting Factor of 78% (the
Business Growth Weighting Factor would remain unchanged), the combined weighting
factor for Weighted Individual Compensation would be reduced to 93%. 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 falls
below the Gold Executive Pin Level at any time during the Vesting Period, all
Distributor Options held by such Eligible Distributor will be immediately
forfeited. Forfeited or declined options will not vest but will revert to NSI.
Exercisability. Distributor Options vested in an Eligible Distributor will
become exercisable upon receipt of written notice from NSI of the number of
Distributor Options vested in such Eligible Distributor which is currently
estimated to be by January 31, 1998, and will remain exercisable for a four-year
period following December 31, 1997, provided the Eligible Distributor maintains
an Executive Pin Level of Gold or higher 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 agrees 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 the
Exercise Price of $5.75, which is 25% of the initial price per share to the
public in the Underwritten Offerings.
Certain Factors Impacting Program. The allocation examples presented above
are 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 Pin Levels increases as a proportion of all
Eligible Distributors and conversely will increase as the number of Eligible
Distributors at higher Executive Pin Levels decreases as a proportion of all
Eligible Distributors. There can be no assurance that the proportion of Eligible
Distributors at each Executive Pin 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. In certain
countries, including Japan, the formula used in determining allocations among
distributors may be modified to comply with local regulations, which will impact
the number of Distributor Options allocated to all Eligible Distributors. The
Distributor Option program is not intended to be an Eligible Distributor's
primary source of income. An Eligible Distributor's primary income source, i.e.,
product sales and commissions, will continue to be based on the efforts of the
Eligible Distributor and his or her downline organization.
Regulatory Requirements. 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. The necessary regulatory
approvals or qualifications have not been secured in each country, and it is
anticipated that in certain countries where regulatory approvals or
qualifications have been obtained the exercisability of the Distributor Options
may be suspended until further regulatory approvals are secured. In addition, it
is possible that NSI may not be able to secure the necessary regulatory
approvals or qualifications in certain countries. As of the date of this
Prospectus, NSI has been unable to secure the necessary legal approvals to
implement the NSI Stock Option Plan in Italy, South Korea and the United
Kingdom. In Japan, as required by law, the terms "commission" or "compensation"
for purposes of calculating Weighted Individual Compensation and Weighted Total
Compensation in the formula used to determine allocations of distributor
options, shall not include rebates paid on personal sales efforts or commissions
paid on personal sales volume as part of the executive fountain bonus. Due to
local legal and other requirements, the NSI Stock Option Plan as implemented in
the Netherlands and Hong Kong has been changed to provide that vested
distributor options will be exercisable for 90 days following December 31, 1997,
provided a Netherlands or Hong Kong distributor holding such options maintains
an Executive Pin Level of Gold or higher until the date of exercise. In certain
countries, including Belgium, France, Spain and possibly others, only existing
distributors and/or existing executive distributors will be allowed to
participate in the NSI Stock Option Plan. In Canada, information regarding the
NSI Stock Option Plan is permitted to be provided only to distributors with an
Executive Pin Level of Gold or higher. In the event the NSI Stock Option Plan
was not implemented until after commencement of the Qualification Period, or is
suspended after commencement of such period in a given country (a "Deferred
Qualification Country"), the formulas referenced above will be modified as
follows. For purposes of calculating Weighted Individual Compensation and
Weighted Total Compensation, a distributor resident in a Deferred Qualification
Country shall be deemed to have been paid during each month during the
Qualification Period for which the NSI Stock Option Plan was not implemented or
was suspended, net commissions equal to the average monthly net commissions
actually paid to such distributor during the portion of the Qualification Period
during which the NSI Stock Option Plan was implemented in such Deferred
Qualification Country.
Product Returns. 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 Eligible Distributor per month. In addition, product
returns during the Qualification or Vesting Periods will reduce commission
levels and may affect distributor pin levels, consequently impacting the number
of Distributor Options received by an Eligible Distributor. In the event of
product returns occurring after the Qualification or Vesting Periods which would
have affected distributor pin 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 Eligible
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.
Employee Stock Bonus Awards
Prior to the date of this Prospectus, the Existing Stockholders also
contributed an aggregate of 1,250,000 shares of Class A Common Stock 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 Rule 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, unless otherwise specified, provided
the employee recipient is still employed by NSI or one of its affiliates (other
than the Company). As of August 21, 1997, NSI and its affiliates (other than
the Company) had made stock bonus awards for 480,960 shares of Class A Common
Stock, of which awards for 19,096 shares had lapsed in connection with the
termination of the employee recipients. The Company will also issue 163,546
shares of Class A Common Stock in connection with stock bonus awards to be made
to its employees pursuant to the 1996 Stock Incentive Plan on terms
substantially similar to those described above in relation to the employee stock
bonus awards to be made by NSI and its affiliates (other than the Company). The
Company has made stock bonus awards for 150,959 shares of Class A Common Stock,
of which awards for 12,413 shares have lapsed in connection with the termination
of the employee recipients.
Rule 415 Selling Stockholders
The following table sets forth the names of the Rule 415 Selling
Stockholders for whom Distributor Options and shares of Class A Common Stock
have been 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 to be offered in Rule 415
Offering and the total voting power of such Rule 415 Selling Stockholders after
the Rule 415 Offerings.
Class A
Common Stock
----------------------------
Owned and
To Be To Be Owned
Distributor Distributor Sold in After the
Options Options to the Rule 415 Rule 415
Owned Prior to be Offered Offerings(3) Offerings
the Rule 415 in the Rule 415 ------------ ------------
Rule 415 Selling Stockholders(1) Offering(2) Offerings(2) Number Number %
-------------------------------- -------------- --------------- --------- ------ ---
Nu Skin International, Inc............... 1,605,000 1,605,000 1,136,524 -- --
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. ................. -- -- 1,500 -- --
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
owned at least 99% of the Common Stock following consummation of the
Reorganization and prior to the Underwritten Offerings.
(2) Consists of options that have been granted by the Company to NSI to
purchase 1,605,000 shares of 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.
Regulatory and Tax Issues
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 shares in income until the first time such
Employee Stock Bonus Award Recipient's 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 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.
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 suspend such
qualifications or require material modifications to the terms of the programs as
they are currently contemplated to be implemented. In certain countries,
including Belgium, France, Spain and possibly others, only existing distributors
and/or existing executive distributors will be allowed to participate in the NSI
Stock Option Plan. 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 Distributor Options, 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.
SHARES ELIGIBLE FOR FUTURE SALE
General. Upon completion of the Rule 415 Offerings, assuming the exercise
by distributors of all the 1,605,000 Distributor Options and vesting of all
163,546 stock bonus awards offered by the Company, the Company will have
13,491,557 shares of Class A Common Stock issued and outstanding. This number
includes (i) 10,465,000 shares of Class A Common Stock issued and sold in the
Underwritten Offerings, (ii) 3,018,546 shares of Class A Common Stock issued and
sold in the Rule 415 Offerings and (iii) 8,011 shares of Class A Common Stock
issued and sold by the Company pursuant to Regulation S under the 1933 Act, and
excludes (a) 3,836,454 shares of Class A Common Stock reserved for issuance
pursuant to the 1996 Stock Incentive Plan and (b) 250,825 shares of Class A
Common Stock subject to a stock option which was granted to an executive officer
of the Company. In addition, upon completion of the Rule 415 Offerings, the
Company will have 71,696,675 shares of Class B Common Stock issued and
outstanding, each share of which is convertible at any time into one share of
Class A Common Stock. The 71,696,675 shaes of Class B Common Stock and the
250,825 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
10,465,000 shares of Class A Common Stock sold in the Underwritten Offerings,
the 1,605,000 shares underlying the Distributor Options and offered hereby, and
the 1,250,000 and 163,546 shares of Class A Common Stock to be issued as
employee stock bonus awards and offered hereby have been registered under the
1933 Act. The 8,011 shares of Class A Common Stock issued and sold pursuant to
Regulation S under the 1933 Act were exempt from registration under the 1933
Act. Accordingly, these 13,491,557 shares of Class A Common Stock are freely
tradable 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.
The Company will issue 163,546 shares of Class A Common Stock in connection
with stock bonus awards made to the Company's employees pursuant to the 1996
Stock Incentive Plan. The Company has granted stock bonus awards under the 1996
Stock Incentive Plan to certain of its executive officers and employees for a
total of 150,959 shares of Class A Common Stock, of which awards for 12,413
shares have lapsed in connection with the termination of the employee
recipients. An aggregate of approximately 3,836,454 shares 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 1996 Stock Incentive 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 1996 Stock
Incentive Plan. Such registration statement is expected to be filed as soon as
practicable and will become automatically effective upon filing. Shares issued
under the 1996 Stock Incentive Plan after such registration statement is filed
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 a person (or
persons whose shares are aggregated) who has beneficially owned "restricted"
shares of the Common Stock for at least one year will be entitled to sell on
the open market in broker's transactions within any three-month period a number
of shares that does not exceed the greater of (i) 1% of the then outstanding
shares of the Class A Common Stock (1% is expected to be equal to approximately
134,916 shares immediately following the Rule 415 Offerings) or (ii) the average
weekly trading volume in the Class A Common Stock on the open market during the
four calendar weeks preceding such sale. Sales under Rule 144, as currently in
effect, are also subject to certain notice requirements and the availability
of current public information about the Company. Under the provisions of Rule
144, the Existing Stockholders were deemed to have acquired beneficial ownership
of the shares of Common Stock currently held by them on the date of the
issuance of such shares by the Company in the Reorganization.
Upon completion of the Rule 415 Offerings, the Existing Stockholders and
certain of their affiliates will hold 71,696,675 shares of 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 Underwritten
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 366 days after the Underwritten 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. 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
total number of shares of Common Stock originally issued to such stockholder in
connection with the Reorganization, or (ii) 1.25% of the total Common Stock
issued and outstanding at the time of such proposed transfer. The 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."
Distributor Options and Employee Stock Bonus Awards. Prior to the Rule 415
Offerings, the Existing Stockholders converted 1,605,000 shares of Class B
Common Stock to Class A Common Stock and the contributed such shares of Class A
Common Stock to the Company. The Company has granted to NSI the Distributor
Options to purchase such shares of Class A Common Stock, and NSI will assign
these Distributor Options to qualifying distributors of NSI in connection with
the Rule 415 Offerings. The vesting of and the right to exercise the Distributor
Options are subject to certain conditions, and the Distributor Options have been
registered along with the shares of Class A Common Stock underlying such
Distributor Options concurrently with the Rule 415 Offerings pursuant to Rule
415 under the 1933 Act.
Prior to the date of this Prospectus, the Existing Stockholders have also
converted 1,250,000 shares of Class B Common Stock to Class A Common Stock and
have contributed 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 in
connection with the Rule 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, unless otherwise specified, provided the employee recipient is still
employed by NSI or one of its affiliates (other than the Company). As of August
21, 1997, NSI and its affiliates (other than the Company) had made stock bonus
awards for 480,960 shares of Class A Common Stock, of which awards for 19,096
shares had lapsed in connection with the termination of the employee recipients.
The Company will also issue 163,546 shares of Class A Common Stock in connection
with stock bonus awards to be made to its employees, pursuant to the 1996 Stock
Incentive Plan, on terms substantially similar to those described above in
relation to the employee stock bonus awards to be made by NSI and its affiliates
(other than the Company). The Company has granted stock bonus awards to certain
of its executive officers and employees for 150,959 shares of Class A Common
Stock, of which awards for 12,413 shares have lapsed in connection with the
termination of the employee recipients.
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 will not receive any proceeds from the distribution of shares by the
Company and 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. The
Distributor Options will be issued at the Exercise Price of $5.75, which is 25%
of the initial price per share to the public in the Underwritten 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
or that, if qualified, the governmental authorities in such jurisdictions will
not suspend such qualifications or require material modifications to the terms
of the programs as they are currently contemplated to be implemented. In certain
countries, including Belgium, France, Spain and possibly others, only existing
distributors and/or existing executive distributors will be allowed to
participate in the NSI Stock Option Plan. 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
"Plan of Distribution."
PLAN OF DISTRIBUTION
Distributor Options
Prior to the date of this Prospectus, the Existing Stockholders contributed
to the Company 1,605,000 shares of the Company's Class A Common Stock for use in
implementing an NSI distributor equity incentive program. Also prior to the date
of this Prospectus, the Company granted to NSI an option to acquire such
1,605,000 shares of Class A Common Stock (the "Distributor Options"). Each
Distributor Option entitles the holder to purchase one share of Class A Common
Stock. Upon vesting, Distributor Options will be exercisable at $5.75, which is
25% of the initial price per share to the public in the Underwritten Offerings
(the "Exercise Price").
Distributor Option Allocation. From January 1, 1997 until August 31, 1997
(the "Qualification Period"), existing and new distributors in each country
where NSI conducts business and where local laws may permit the issuance of
options hereunder had the opportunity to qualify for an allocation of the
Distributor Options from NSI by achieving executive distributor levels
("Executive Pin Levels") of Gold or higher under the Global Compensation Plan as
of August 31, 1997 and by submitting a representation letter to NSI as provided
in the NSI 1996 Distributor Stock Option Plan, as amended (the "NSI Stock Option
Plan") (qualifying distributors are hereinafter referred to as "Eligible
Distributors"). Pursuant to NSI's policies and procedures, that portion of sales
volume for September 1997 which would be attributed to sales volume for August
1997 will be included for purposes of determining commissions paid during the
Qualification Period, as well as whether a distributor qualifies as an Eligible
Distributor. Each allocation of Distributor Options made to an Eligible
Distributor that is an entity (such as a partnership or corporation) shall be
made by NSI solely to the entity, not to the owners of the entity individually.
NSI will notify Eligible Distributors of the results of the allocation of the
Distributor Options by October 31, 1997. Each Eligible Distributor shall have
the right to decline his or her Distributor Options by notice to NSI no later
than November 15, 1997. Each Eligible Distributor who has not declined his or
her Distributor Options on or before November 15, 1997 will be granted a number
of Distributor Options determined in accordance with the formula set forth
below. Because there is a fixed number of Distributor Options available for this
program, the allocation formula and explanations are rather complex.
S x (X/Y) = number of Distributor Options to be
allocated to an Eligible Distributor;
where
S = fixed number of Distributor Options
available = 1,605,000
X = C x (P+G) = Weighted Individual Compensation
C = net commissions paid to the Eligible Distributor on
sales volume during the Qualification Period
P = Executive Pin Level Weighting Factor
G = Business Growth Weighting Factor
Y = Sum of Weighted Individual Compensation paid to
all Eligible Distributors during the Qualification
Period = Weighted Total Compensation
Thus, the number of Distributor Options to be allocated to an Eligible
Distributor will be determined by multiplying the total number of Distributor
Options available ("S" in the formula above) by the quotient obtained by
dividing the Eligible Distributor's Weighted Individual Compensation ("X" in the
formula above, and as defined below) under the Global Compensation Plan during
the Qualification Period by the sum of the Weighted Individual Compensation paid
to all Eligible Distributors under the Global Compensation Plan on sales volume
during the Qualification Period (the "Weighted Total Compensation," and "Y" in
the formula above). An Eligible Distributor's Weighted Individual Compensation
is equal to total commissions, net of any withholdings, fines, penalties, or the
like, paid to such Eligible Distributor on sales volume during the Qualification
Period ("C" in the formula above) multiplied by the sum of his or her Executive
Pin Level Weighting Factor ("P" in the formula above, and as defined below) and
his or her Business Growth Weighting Factor ("G" in the formula above, and as
defined below).
Executive Pin Level Weighting Factor. An Eligible Distributor's Executive
Pin Level Weighting Factor is the percentage set forth in the table below
opposite the actual Executive Pin Level achieved by such Eligible Distributor as
of August 31, 1997. Allocations of Distributor Options shall generally be based
on the Executive Pin Level at which Eligible Distributors receive commissions,
giving consideration to any temporary exceptions which may be granted by NSI
from time to time.
Executive
Executive Pin Level Pin Level
as of August 31, 1997 Weighting Factor
--------------------- ----------------
Hawaiian Blue Diamond....................... 100%
Blue Diamond................................ 94%
Diamond..................................... 86%
Emerald..................................... 82%
Ruby........................................ 78%
Lapis....................................... 74%
Gold........................................ 72%
Business Growth Weighting Factor. An Eligible Distributor's Business Growth
Weighting Factor is based on the increase in his or her average monthly net
commissions paid on sales volume during the Qualification Period. An Eligible
Distributor's Business Growth Weighting Factor is equal to one-third (1/3) of
1%, up to a maximum of 100%, for each 1% increase in average monthly net
commissions paid during the Qualification Period that is greater than actual net
commission paid during September 1996 (the "Base Month"). The Base Month for a
distributor qualifying as an Eligible Distributor after September 1996 is deemed
to be his or her first month as an Eligible Distributor.
Illustrations. For purposes of illustration, for the eight-month period
ended on August 31, 1996 (the "Illustrative Qualification Period"), the Weighted
Total Compensation (Y) will be assumed to have been $200,000,000. An Emerald
level distributor who was paid net commissions (C) of $40,000 (or average
monthly net commissions of $5,000) during the Illustrative Qualification Period
and who had previously been paid net commissions of $1,000 during such
distributor's Base Month would apply a weighting factor of 182% to such net
commissions (computed using the 82% Executive Pin Level Weighting Factor (P) for
an Emerald level distributor plus a 100% Business Growth Weighting Factor (G)
based on the 400% increase in average net commissions paid during the
Illustrative Qualification Period over net commissions paid during such
distributor's Base Month), resulting in Weighted Individual Compensation (X) of
$72,800. Such distributor's allocation of Distributor Options at the end of the
Illustrative Qualification Period would be equal to the quotient of his or her
Weighted Individual Compensation (X = $72,800) divided by the Weighted Total
Compensation (Y = $200,000,000), multiplied by the total number of Distributor
Options (S = 1,605,000). Such distributor would therefore be allocated 584
Distributor Options.
To illustrate another example, the Weighted Total Compensation (Y) for the
Illustrative Qualification Period will be assumed to have been $300,000,000. A
Blue Diamond level distributor who was paid net commissions (C) of $520,000 (or
average monthly net commissions of $65,000) during the Illustrative
Qualification Period and who had previously been paid net commissions of $50,000
during such distributor's Base Month would apply a weighting factor of 104% to
such net commissions (computed using the 94% Executive Pin Level Weighting
Factor (P) for a Blue Diamond level distributor plus a 10% Business Growth
Weighting Factor (G) based on the 30% increase in average net commissions paid
during the Illustrative Qualification Period over net commissions paid during
such distributor's Base Month) resulting in Weighted Individual Compensation (X)
of $540,800. Such distributor's allocation of Distributor Options at the end of
the Illustrative Qualification Period would be equal to the quotient of his or
her Weighted Individual Compensation (X = $540,800) divided by the Weighted
Total Compensation (Y = $300,000,000), multiplied by the total number of
Distributor Options (S = 1,605,000). Such distributor would therefore be
allocated 2,893 Distributor Options.
Vesting. 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 Pin Level he or
she achieved by the end of the Qualification Period (the "Qualifying Executive
Pin Level"). If an Eligible Distributor fails to maintain the Qualifying
Executive Pin 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, at the
end of the Qualification Period, the lowest Executive Pin Level held by him or
her during the Vesting Period (the "Recalculated Distributor Options"). For
example, if an Eligible Distributor ends the Qualification Period as a Diamond
level distributor with an Executive Pin Level Weighting Factor of 86% and a
Business Growth Weighting Factor of 15%, resulting in a combined weighting
factor for Weighted Individual Compensation of 101%, but during the Vesting
Period the lowest actual Executive Pin Level to which the distributor falls is
Ruby level, which carries an Executive Pin Level Weighting Factor of 78% (the
Business Growth Weighting Factor would remain unchanged), the combined weighting
factor for Weighted Individual Compensation would be reduced to 93%. 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 falls
below the Gold Executive Pin Level at any time during the Vesting Period, all
Distributor Options held by such Eligible Distributor will be immediately
forfeited. Forfeited or declined options will not vest but will revert to NSI.
Exercisability. Distributor Options vested in an Eligible Distributor will
become exercisable upon receipt of written notice from NSI of the number of
Distributor Options vested in such Eligible Distributor which is currently
estimated to be by January 31, 1998, and will remain exercisable for a four-year
period following December 31, 1997, provided the Eligible Distributor maintains
an Executive Pin Level of Gold or higher 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 agrees 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 the
Exercise Price of $5.75, which is 25% of the initial price per share to the
public in the Underwritten Offerings.
Certain Factors Impacting Program. The allocation examples presented above
are 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 Pin Levels increases as a proportion of all
Eligible Distributors and conversely will increase as the number of Eligible
Distributors at higher Executive Pin Levels decreases as a proportion of all
Eligible Distributors. There can be no assurance that the proportion of Eligible
Distributors at each Executive Pin 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. In certain
countries, including Japan, the formula used in determining allocations among
distributors may be modified to comply with local regulations, which will impact
the number of Distributor Options allocated to all Eligible Distributors. The
Distributor Option program is not intended to be an Eligible Distributor's
primary source of income. An Eligible Distributor's primary income source, i.e.,
product sales and commissions, will continue to be based on the efforts of the
Eligible Distributor and his or her downline organization.
Regulatory Requirements. 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. The necessary regulatory
approvals or qualifications have not been secured in each country, and it is
anticipated that in certain countries where regulatory approvals or
qualifications have been obtained the exercisability of the Distributor Options
may be suspended until further regulatory approvals are secured. In addition, it
is possible that NSI may not be able to secure the necessary regulatory
approvals or qualifications in certain countries. As of the date of this
Prospectus, NSI has been unable to secure the necessary legal approvals to
implement the NSI Stock Option Plan in Italy, South Korea and the United
Kingdom. In Japan, as required by law, the terms "commission" or "compensation"
for purposes of calculating Weighted Individual Compensation and Weighted Total
Compensation in the formula used to determine allocations of distributor
options, shall not include rebates paid on personal sales efforts or commissions
paid on personal sales volume as part of the executive fountain bonus. Due to
local legal and other requirements, the NSI Stock Option Plan as implemented in
the Netherlands and Hong Kong has been changed to provide that vested
distributor options will be exercisable for 90 days following December 31, 1997,
provided a Netherlands or Hong Kong distributor holding such options maintains
an Executive Pin Level of Gold or higher until the date of exercise. In certain
countries, including Belgium, France, Spain and possibly others, only existing
distributors and/or existing executive distributors will be allowed to
participate in the NSI Stock Option Plan. In Canada, information regarding the
NSI Stock Option Plan is permitted to be provided only to distributors with an
Executive Pin Level of Gold or higher. In the event the NSI Stock Option Plan
was not implemented until after commencement of the Qualification Period, or is
suspended after commencement of such period in a given country (a "Deferred
Qualification Country"), the formulas referenced above will be modified as
follows. For purposes of calculating Weighted Individual Compensation and
Weighted Total Compensation, a distributor resident in a Deferred Qualification
Country shall be deemed to have been paid during each month during the
Qualification Period for which the NSI Stock Option Plan was not implemented or
was suspended, net commissions equal to the average monthly net commissions
actually paid to such distributor during the portion of the Qualification Period
during which the NSI Stock Option Plan was implemented in such Deferred
Qualification Country.
Product Returns. 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 Eligible Distributor per month. In addition, product
returns during the Qualification or Vesting Periods will reduce commission
levels and may affect distributor pin levels, consequently impacting the number
of Distributor Options received by an Eligible Distributor. In the event of
product returns occurring after the Qualification or Vesting Periods which would
have affected distributor pin 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 Eligible
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.
Employee Stock Bonus Awards
Prior to the date of this Prospectus, the Existing Stockholders also
contributed an aggregate of 1,250,000 shares of Class A Common Stock 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 Rule 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, unless otherwise specified, provided
the employee recipient is still employed by NSI or one of its affiliates (other
than the Company). As of August 21, 1997, NSI and its affiliates (other than
the Company) had made stock bonus awards for 480,960 shares of Class A Common
Stock, of which awards for 19,096 shares had lapsed in connection with the
termination of the employee recipients. The Company will also issue 163,546
shares of Class A Common Stock in connection with stock bonus awards to be made
to its employees pursuant to the 1996 Stock Incentive Plan on terms
substantially similar to those described above in relation to the employee stock
bonus awards to be made by NSI and its affiliates (other than the Company). The
Company has made stock bonus awards for 150,959 shares of Class A Common Stock,
of which awards for 12,413 shares have lapsed in connection with the termination
of the employee recipients.
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
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 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 effected in one or more transactions that may take place on the New
York Stock Exchange, including block trades, ordinary brokers' 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 Rule
415 Selling Stockholders will bear all expenses (including underwriting
discounts and selling commissions, state and local transfer taxes, and fees and
expenses of counsel or other advisors to the Rule 415 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 Rule 415 Selling Stockholder sells Class A Common Stock. Any
material changes which the Company, in its sole discretion, determines should be
disclosed prior to the sale of the securities offered hereby will be set forth
in an accompanying supplement to this Prospectus (the "Prospectus Supplement").
The names of any participating brokers or dealers, any applicable commissions or
discounts and the net proceeds to the Rule 415 Selling Stockholders from such
sale will be set forth in the applicable Prospectus Supplement.
DESCRIPTION OF CAPITAL STOCK
General
As of the date of this Prospectus, the authorized capital stock of the
Company consists of 500,000,000 shares of Class A Common Stock, par value $.001
per share, and 100,000,000 shares of Class B Common Stock, par value $.001 per
share, and 25,000,000 shares of Preferred Stock, par value $.001 per share
("Preferred Stock"). Upon completion of the Rule 415 Offerings (assuming the
exercise of all 1,605,000 Distributor Options and the vesting of all 163,546
stock bonus awards offered hereby by the Company to certain of its employees,
the Company will have 13,491,557 shares of Class A Common Stock issued and
outstanding. This number includes 3,018,546 shares of Class A Common Stock to be
issued and sold in the Rule 415 Offerings, and excludes (i) 3,836,454 shares of
Class A Common Stock reserved for issuance pursuant to the 1996 Stock Incentive
Plan and (ii) 250,825 shares of Class A Common Stock subject to a stock option
which was granted to an executive officer of the Company. In addition, upon
completion of the Rule 415 Offerings, the Company will have 71,696,675 shares of
Class B Common Stock issued and outstanding, all of which are held of record by
the Existing Stockholders and certain of their affiliates. Of the authorized
shares of Preferred Stock, no shares of Preferred Stock are outstanding. The
following description is a summary and is subject to and qualified in its
entirety by reference to the provisions of the Company's Amended and Restated
Certificate of Incorporation (the "Certificate of Incorporation") filed as an
exhibit to the Registration Statement of which this Prospectus forms a part.
Common Stock
The approximate number of holders of record of the Company's Class A Common
Stock and Class B Common Stock as of July 15, 1997 was 486 and 58, respectively.
Those numbers may not represent the actual number of beneficial owners of shares
of the Company's Class A Common Stock and Class B Common Stock because shares
are frequently held in "street name" by securities dealers and others for the
benefit of individual owners who have the right to vote their shares. The shares
of Class A Common Stock and Class B Common Stock are identical in all respects,
except for voting rights and certain conversion rights and transfer restrictions
regarding the shares of the Class B Common Stock, as described below.
Voting Rights. Each share of Class A Common Stock entitles the holder to
one vote on each matter submitted to a vote of the Company's stockholders and
each share of Class B Common Stock entitles the holder to ten votes on each such
matter, including the election of directors. There is no cumulative voting.
Except as required by applicable law, holders of Class A Common Stock and
holders of Class B Common Stock will vote together on all matters submitted to a
vote of the stockholders. With respect to certain corporate changes, such as
liquidations, reorganizations, recapitalizations, mergers, consolidations and
sales of substantially all of the Company's assets, holders of Class A Common
Stock and holders of Class B Common Stock will vote together as a single class
and the approval of 66 2/3% of the outstanding voting power is required to
authorize or approve such transactions. See "Risk Factors--Control by 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
Common Stock is made on the Class B Common Stock, the Company must also make a
pro rata and simultaneous dividend or distribution on the Class A Common Stock
payable in shares of Class A Common Stock. See "Risk Factors--Absence of
Dividends" and "Dividend Policy."
Restrictions on Transfer. If a holder of Class B Common Stock transfers
such shares, whether by sale, assignment, gift, bequest, appointment or
otherwise, to a person other than a permitted transferee (as defined in the
Company's Certificate of Incorporation) such shares will be converted
automatically into shares of Class A Common Stock. In the case of a pledge of
shares of Class B Common stock to a financial institution, such shares will not
be deemed to be transferred unless and until a foreclosure occurs.
Conversion. The Class A Common Stock has no conversion rights. The Class B
Common Stock is convertible into shares of Class A Common Stock, in whole or in
part, at any time and from time to time at the option of the holder, on the
basis of one share of Class A Common Stock for each share of Class B Common
Stock converted. In the event of a transfer of shares of Class B Common Stock to
any person other than a Permitted Transferee, each share of Class B Common Stock
so transferred automatically will be converted into one share of Class A Common
Stock. Each share of Class B Common Stock will also automatically convert into
one share of Class A Common Stock if, on the record date for any meeting of the
stockholders, the number of shares of Class B Common Stock then outstanding is
less than 10% of the aggregate number of shares of Class A Common Stock and
Class B Common Stock then outstanding.
Liquidation. In the event of liquidation, after payment of the debts and
other liabilities of the Company and after making provision for the holders of
Preferred Stock, if any, the remaining assets of the Company will be
distributable ratably among holders of Class A Common Stock and holders of Class
B Common Stock treated as a single class.
Mergers and Other Business Combinations. Upon the merger or consolidation
of the Company, holders of each class of Common Stock are entitled to receive
equal per share payments or distributions, except that in any transaction in
which shares of capital stock are distributed, such shares may differ as to
voting rights to the extent and only to the extent that the voting rights of the
Class A Common Stock and the Class B Common Stock differ at that time. The
Company may not dispose of all or any substantial part of the assets of the
Company to, or merge or consolidate with, any person, entity or "group" (as
defined in Rule 13d-5 of the 1934 Act), which beneficially owns in the aggregate
10% or more of the outstanding Common Stock of the Company (a "Related Person")
without the affirmative vote of the holders, other than such Related Person, of
not less that 66 2/3% of the voting power of outstanding Class A Common Stock
and Class B Common Stock voting as a single class. For the sole purpose of
determining the 66 2/3% vote, a Related Person will also include the seller or
sellers from whom the Related Person acquired, during the preceding six months,
at least 5% of the outstanding shares of Class A Common Stock in a single
transaction or series of related transactions pursuant to one or more agreements
or other arrangements (and not through a brokers' transaction), but only if such
seller or sellers have beneficial ownership of shares of Common Stock having a
fair market value in excess of $10 million in the aggregate following such
disposition to such Related Person. This 66 2/3% voting requirement is not
applicable, however, if (i) the proposed transaction is approved by a vote of
not less than a majority of the directors of the Company who are neither
affiliated nor associated with the Related Person (or the seller of shares to
the Related Person as described above) or (ii) in the case of a transaction
pursuant to which the holders of Common Stock are entitled to receive cash,
property, securities or other consideration, the cash or fair market value of
the property, securities or other consideration to be received per share in such
transaction is not less than the higher of (A) the highest price per share paid
by the Related Person for any of its holdings of Common Stock within the
two-year period immediately prior to the announcement of the proposed
transaction or (B) the highest closing sale price during the 30-day period
immediately preceding such date or during the 30-day period immediately
preceding the date on which the Related Person became a Related Person,
whichever is higher. See "Risk Factors--Anti-Takeover Effects of Certain
Charter, Contractual and Statutory Provisions."
Other Provisions. Holders of the Class A Common Stock and holders of Class
B Common Stock are not entitled to preemptive rights. Neither the Class A Common
Stock nor the Class B Common Stock may be subdivided or combined in any manner
unless the other class is subdivided or combined in the same proportion.
Transfer Agent and Registrar. The Transfer Agent and Registrar for the
Class A Common Stock is American Stock Transfer and Trust Company.
Listing. The Class A Common Stock is traded on the New York Stock Exchange
under the trading symbol "NUS." There is currently no public market for the
Company's Class B Common Stock.
Preferred Stock
The Board of Directors is authorized, subject to any limitations prescribed
by the DGCL or the rules of the New York Stock Exchange or other organizations
on whose systems stock of the Company may be quoted or listed, to provide for
the issuance of additional shares of Preferred Stock in one or more series, to
establish from time to time the number of shares to be included in each such
series, to fix the rights, powers, preferences and privileges of the shares of
each wholly unissued series and any qualifications, limitations or restrictions
thereon, and to increase or decrease the number of shares of such series,
without any further vote or action by the stockholders. The approval of the
holders of at least 66 2/3% of the combined voting power of the outstanding
shares of Common Stock, however, is required for the issuance of shares of
Preferred Stock that have the right to vote for the election of directors under
ordinary circumstances or to elect 50% or more of the directors under any
circumstances. Depending upon the terms of the Preferred Stock established by
the Company's Board of Directors, any or all series of Preferred Stock could
have preference over the Common Stock with respect to dividends and other
distributions and upon liquidation of the Company or could have voting or
conversion rights that could adversely affect the holders of the outstanding
Common Stock. In addition, the Preferred Stock could delay, defer or prevent a
change of control of the Company. See "Risk Factors--Anti-Takeover Effects of
Certain Charter, Contractual and Statutory Provisions." The Company has no
present plans to issue any shares of Preferred Stock.
Other Charter and Bylaw Provisions
Special meetings of stockholders may be called only by the majority
stockholders, the Company's Board of Directors, the President or the Secretary.
Except as otherwise required by law, stockholders, in their capacity as such,
are not entitled to request or call a special meeting of the stockholders.
Stockholders of the Company are required to provide advance notice of
nominations of directors to be made at, and of business proposed to be brought
before, a meeting of the stockholders. The failure to deliver proper notice
within the periods specified in the Company's Amended and Restated Bylaws (the
"Bylaws") will result in the denial of the stockholder of the right to make such
nominations or propose such action at the meeting. See "Risk
Factors--Anti-Takeover Effects of Certain Charter, Contractual and Statutory
Provisions."
Section 203 of the Delaware General Corporation Law
The Company is a Delaware corporation and is subject to the provisions of
Section 203 of the DGCL (the "Anti-Takeover Law") regulating corporate
takeovers. The Anti-Takeover Law prevents certain Delaware corporations,
including those whose securities are listed on the New York Stock Exchange, from
engaging, under certain circumstances, in a "business combination" with an
"interested stockholder" (a stockholder who, together with affiliates and
associates, within the prior three years did own 15% or more of the
corporation's outstanding voting stock) for three years following the date that
such stockholder became an "interested stockholder," unless the "business
combination" or "interested stockholder" is approved in a prescribed manner. A
Delaware corporation may "opt out" of the Anti-Takeover Law with an express
provision in its original certificate of incorporation or an express provision
in its certificate of incorporation or bylaws resulting from a stockholders'
amendment approved by at least a majority of the outstanding voting shares. The
Company has not "opted out" of the provisions of the Anti-Takeover Law. See
"Risk Factors--Anti-Takeover Effects of Certain Charter, Contractual and
Statutory Provisions."
Indemnification and Limitation of Liability of Directors and Officers
To the fullest extent permitted by the DGCL, the Company's Certificate of
Incorporation and Bylaws provide that the Company shall indemnify and advance
expenses to each of its directors, officers, employees and agents. The Company
believes the foregoing provisions are necessary to attract and retain qualified
persons as directors and officers. The Company has entered into separate
indemnification agreements with each of its directors and executive officers in
order to effectuate such provisions. See "Certain Relationships and Related
Transactions." The Company's Certificate of Incorporation also provides for, to
the fullest extent permitted by the DGCL, elimination or limitation of liability
of directors for breach of their fiduciary duty to the Company or its
stockholders.
Registration Rights
Under the Stockholders' Agreement, the 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."
CERTAIN UNITED STATES TAX CONSEQUENCES
TO NON-UNITED STATES HOLDERS
The following is a general discussion of certain United States federal
income and estate tax consequences of the ownership and disposition of Class A
Common Stock by a Non-U.S. Holder. For this purpose, a "Non-U.S. Holder" is any
person who is, for United States federal income tax purposes, a foreign
corporation, a non-resident alien individual, a foreign partnership or a foreign
estate or trust. This discussion does not address all aspects of United States
federal income and estate taxes and does not deal with foreign, state and local
consequences that may be relevant to such Non-U.S. Holders in light of their
personal circumstances. Furthermore, this discussion is based on provisions of
the Code, existing and proposed regulations promulgated thereunder and
administrative and judicial interpretations thereof, as of the date hereof, all
of which are subject to change (possibly with retroactive effect). Each
prospective purchaser of Class A Common Stock is advised to consult a tax
advisor with respect to current and possible future tax consequences of
acquiring, holding and disposing of Class A Common Stock as well as any tax
consequences that may arise under the laws of any U.S. state, municipality or
other taxing jurisdiction.
An individual may, subject to certain exceptions, be deemed to be a
resident alien (as opposed to a non-resident alien) by virtue of being present
in the United States for 183 days or more during the calendar year or on at
least 31 days in the calendar year and for an aggregate of at least 183 days
during a three-year period ending in the current calendar year (counting for
such purposes all of the days present in the current year, one-third of the days
present in the immediately preceding year, and one-sixth of the days present in
the second preceding year). Resident aliens are subject to U.S. federal tax as
if they were U.S. citizens.
Dividends
Dividends paid to a Non-U.S. Holder of Class A Common Stock generally will
be subject to withholding of United States federal income tax either at a rate
of 30% of the gross amount of the dividends or at such lower rate as may be
specified by an applicable income tax treaty. However, dividends that are
effectively connected with the conduct of a trade or business by the Non-U.S.
Holder within the United States and, where a tax treaty applies, are
attributable to a United States permanent establishment of the Non-U.S. Holder,
are not subject to the withholding tax (provided the Non-U.S. Holder files
appropriate documentation, including, under current law, IRS Form 4224, with the
payor of the dividend), but instead are subject to United States federal income
tax on a net income basis at applicable graduated individual or corporate rates.
Any such effectively connected dividends received by a foreign corporation may,
under certain circumstances, be subject to an additional "branch profits tax" at
a 30% rate or such lower rate as may be specified by an applicable income tax
treaty.
Under current law, dividends paid to an address outside the United States
are presumed to be paid to a resident of such country (unless the payer has
knowledge to the contrary) for purposes of the withholding discussed above and
for purposes of determining the applicability of a tax treaty rate. However,
under proposed Treasury regulations not currently in effect, in the case of
dividends paid after December 31, 1997 (December 31, 1999 in the case of
dividends paid to accounts in existence on or before the date that is 60 days
after the proposed regulations are published as final regulations), a Non-U.S.
Holder of Class A Common Stock who wishes to claim the benefit of an applicable
treaty rate would be required to satisfy applicable certification and other
requirements either directly or through an intermediary. In addition, backup
withholding, as discussed below, may apply in certain circumstances if
applicable certification and other requirements are not met.
A Non-U.S. Holder of Class A Common Stock eligible for a reduced rate of
United States withholding tax pursuant to an income tax treaty may obtain a
refund of any excess amounts withheld by filing an appropriate claim for refund
with the Internal Revenue Service (the "IRS").
Gain on Disposition of Common Stock
A Non-U.S. Holder will generally not be subject to United States federal
income tax with respect to gain recognized on a sale or other disposition of
Class A Common Stock unless (i) the gain is effectively connected with a trade
or business of the Non-U.S. Holder in the United States, and, where a tax treaty
applies, is attributable to a United States permanent establishment of the
Non-U.S. Holder, (ii) in the case of a Non-U.S. Holder who is an individual and
holds the Class A Common Stock as a capital asset, such holder is present in the
United States for 183 or more days in the taxable year of the sale or other
disposition and certain other conditions are met, or (iii) the Company is or has
been a "U.S. real property holding corporation" for United States federal income
tax purposes. The Company believes it is not and does not anticipate becoming a
"U.S. real property holding corporation" for United States federal income tax
purposes.
If an individual Non-U.S. Holder falls under clause (i) above, he will,
unless an applicable treaty provides otherwise, be taxed on his net gain derived
from the sale under regular graduated United States federal income tax rates. If
an individual Non-U.S. Holder falls under clause (ii) above, he will be subject
to a flat 30% tax on the gain derived from the sale, which may be offset by
certain United States capital losses.
If a Non-U.S. Holder that is a foreign corporation falls under clause (i)
above, it will be taxed on its gain under regular graduated United States
federal income tax rates and may be subject to an additional branch profits tax
at a 30% rate, unless it qualifies for a lower rate under an applicable income
tax treaty.
Federal Estate Tax
Class A Common Stock held by an individual Non-U.S. Holder at the time of
death will be included in such holder's gross estate for United States federal
estate tax purposes, unless an applicable estate tax treaty provides otherwise.
Information Reporting and Backup Withholding Tax
The Company must report annually to the IRS and to each Non-U.S. Holder the
amount of dividends paid to such holder and the tax withheld with respect to
such dividends, regardless of whether withholding was required. Copies of the
information returns reporting such dividends and withholding may also be made
available to the tax authorities in the country in which the Non-U.S. Holder
resides under the provisions of an applicable income tax treaty.
A backup withholding tax is imposed at the rate of 31% on certain payments
to persons that fail to furnish certain identifying information to the payor.
Under current law, backup withholding generally will not apply to dividends paid
to a Non-U.S. Holder at an address outside the United States (unless the payer
has knowledge that the payee is a U.S. person), but generally will apply to
dividends paid on Class A Common Stock at addresses inside the United States to
Non-U.S. Holders that fail to provide certain identifying information in the
manner required. However, under proposed Treasury regulations not currently in
effect, in the case of dividends paid after December 31, 1997 (December 31, 1999
in the case of dividends paid to accounts in existence on or before the date
that is 60 days after the proposed regulations are published as final
regulations), a Non-U.S. Holder generally would be subject to backup withholding
at a 31% rate, unless certain certification procedures (or, in the case of
payments made outside the United States with respect to an offshore account,
certain documentary evidence procedures) are complied with, directly or through
an intermediary or a Non-U.S. Holder otherwise establishes an exemption from
backup withholding.
Payment of the proceeds of a sale of Class A Common Stock by or through a
United States office of a broker is subject to both backup withholding and
information reporting unless the beneficial owner provides the payor with its
name and address and certifies under penalties of perjury that it is a Non-U.S.
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.
LEGAL MATTERS
The validity of the issuance of the shares of Class A Common Stock offered
hereby will be passed upon for the Company and the Rule 415 Selling Stockholders
by LeBoeuf, Lamb, Greene & MacRae, L.L.P., a limited liability partnership
including professional corporations, Salt Lake City, Utah.
EXPERTS
The consolidated financial statements of Nu Skin Asia Pacific, Inc. at
December 31, 1995 and 1996 and for the year ended September 30, 1994, the three
months ended December 31, 1994 and the years ended December 31, 1995 and 1996
included in this Prospectus have been so included in reliance on the report of
Price Waterhouse LLP, independent accountants, given on the authority of said
firm as experts in auditing and accounting.
ADDITIONAL INFORMATION
The Company has filed a Registration Statement on Form S-1, of which this
Prospectus is a part, with the Securities and Exchange Commission (the
"Commission") under the 1933 Act with respect to the securities offered hereby.
This Prospectus does not contain all the information set forth in the
Registration Statement and the exhibits and schedules thereto. For further
information with respect to the Company and the securities offered hereby,
reference is made to the Registration Statement, including the financial
schedules and exhibits filed therewith. Statements made in this Prospectus as to
the contents of any contract, agreement or other documents are not necessarily
complete, and, in each instance, reference is made to the copy of such document
filed as an exhibit to the Registration Statement or otherwise with the
Commission. Each such statement shall be deemed qualified in its entirety by
such reference.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports and other information with the Commission. The
Registration Statement and the exhibits thereto, as well as any such reports and
other information to be filed by the Company with the Commission, may be
inspected and copied at the public reference facilities of the Commission, 450
Fifth Street, N.W., Washington D.C. 20549, and at the Commission's offices at 7
World Trade Center, Suite 1300, New York, New York 10048 and 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661-2311. Copies of such material can be
obtained from the public reference section of the Commission at 450 Fifth
Street, N.W., Washington D.C. 20549 at prescribed rates. The Commission also
maintains a site on the World Wide Web, the address of which is
http:\\www.sec.gov, that contains reports, proxy and information statements and
other information regarding issuers, such as the Company, that file
electronically with the Commission. Such reports and other information may also
be inspected at the offices of the New York Stock Exchange, 20 Broad Street, New
York, New York 10005.
NU SKIN ASIA PACIFIC, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Consolidated Financial Statements:
Report of Independent Accountants.................................... F-2
Consolidated Balance Sheets at December 31, 1995 and 1996, and at
June 30, 1997 (unaudited).......................................... F-3
Consolidated Statements of Income for the year ended September 30,
1994, the three months ended December 31, 1994, the years ended
December 31, 1995 and 1996, and the six months ended June 30,
1996 (unaudited) and 1997 (unaudited).............................. F-4
Consolidated Statements of Stockholders' Equity for the year ended
September 30, 1994, the three months ended December 31, 1994,
the years ended December 31, 1995 and 1996, and the six months
ended June 30, 1997 (unaudited).................................... F-5
Consolidated Statements of Cash Flows for the year ended
September 30, 1994, the three months ended December 31, 1994,
the years ended December 31, 1995 and 1996, and the six months
ended June 30, 1996 (unaudited) and 1997 (unaudited)............... F-6
Notes to Consolidated Financial Statements........................... F-7
Unaudited Pro Forma Data:
Unaudited Pro Forma Consolidated Statement of Income for the year
ended December 31, 1995............................................ F-20
Unaudited Pro Forma Consolidated Statement of Income for the year
ended December 31, 1996............................................ F-21
Unaudited Pro Forma Consolidated Statement of Income for the
six months ended June 30, 1996..................................... F-22
Notes to Unaudited Pro Forma Consolidated Statements of Income....... F-23
All schedules are omitted because they are not applicable or the required
information is shown in the consolidated financial statements or notes thereto.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Nu Skin Asia Pacific, Inc.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income, of stockholders' equity and of cash
flows present fairly, in all material respects, the financial position of Nu
Skin Asia Pacific, Inc. and its subsidiaries at December 31, 1995 and 1996, and
the results of their operations and their cash flows for the year ended
September 30, 1994, the three months ended December 31, 1994, and the years
ended December 31, 1995 and 1996, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Salt Lake City, Utah
February 19, 1997
NU SKIN ASIA PACIFIC, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
December 31,
---------------------- June 30,
1995 1996 1997
-------- -------- --------
(unaudited)
ASSETS
Current assets
Cash and cash equivalents............................... $ 63,213 $207,106 $151,375
Accounts receivable..................................... 3,242 8,937 9,407
Related parties receivable.............................. 1,793 7,974 5,785
Inventories, net........................................ 32,662 44,860 58,077
Prepaid expenses and other.............................. 3,410 11,281 28,892
-------- -------- --------
104,320 280,158 253,536
Property and equipment, net................................ 6,904 8,884 9,679
Other assets, net.......................................... 7,004 42,673 43,592
-------- -------- --------
Total assets....................................... $118,228 $331,715 $306,807
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable........................................ $ 4,395 $ 6,592 $ 6,705
Accrued expenses........................................ 23,313 79,518 67,451
Related parties payable................................. 28,749 46,326 61,405
Notes payable to stockholders........................... -- 71,487 --
Note payable to NSI, current portion.................... -- 10,000 10,000
-------- -------- --------
56,457 213,923 145,561
-------- -------- --------
Note payable to NSI, less current portion.................. -- 10,000 --
-------- -------- --------
Commitments and contingencies (Notes 8 and 12)
Stockholders' equity
Capital stock........................................... 4,550 -- --
Preferred stock--25,000,000 shares authorized,
$.001 par value, no shares issued and outstanding..... -- -- --
Class A common stock--500,000,000 shares authorized,
$.001 par value, 11,723,011 shares issued and
outstanding........................................... -- 12 12
Class B common stock--100,000,000 shares authorized,
$.001 par value, 71,696,675 shares issued and
outstanding........................................... -- 72 72
Additional paid-in capital.............................. -- 137,876 137,876
Cumulative foreign currency translation adjustment...... (2,940) (5,963) (5,857)
Retained earnings....................................... 60,161 11,493 55,287
Deferred compensation................................... -- (22,559) (13,005)
Note receivable from NSI................................ -- (13,139) (13,139)
-------- -------- --------
61,771 107,792 161,246
-------- -------- --------
Total liabilities and stockholders' equity......... $118,228 $331,715 $306,807
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
NU SKIN ASIA PACIFIC, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
Three Months
Ended Year Ended Six Months
December 31, December 31, Ended June 30,
Year Ended ---------------------- ----------------------
September 30, 1994 1994 1995 1996 1996 1997
------------------ ------------ -------- -------- -------- --------
(unaudited)
Revenue...................... $254,637 $73,562 $358,609 $678,596 $287,711 $441,010
Cost of sales................ 86,872 19,607 96,615 193,158 80,963 126,199
-------- ------- -------- -------- -------- --------
Gross profit................. 167,765 53,955 261,994 485,438 206,748 314,811
-------- ------- -------- -------- -------- --------
Operating expenses
Distributor incentives.... 95,737 27,950 135,722 249,613 107,090 169,132
Selling, general and
administrative......... 44,566 13,545 67,475 105,477 44,551 67,738
Distributor stock expense. -- -- -- 1,990 -- 8,954
-------- ------- -------- -------- -------- --------
Total operating expenses..... 140,303 41,495 203,197 357,080 151,641 245,824
-------- ------- -------- -------- -------- --------
Operating income............. 27,462 12,460 58,797 128,358 55,107 68,987
Other income (expense), net.. 443 (813) 511 2,833 617 527
-------- ------- -------- -------- -------- --------
Income before provision for
income taxes.............. 27,905 11,647 59,308 131,191 55,724 69,514
Provision for income taxes
(Note 10)................. 10,226 2,730 19,097 49,494 20,591 25,720
-------- ------- -------- -------- -------- --------
Net income................... $ 17,679 $ 8,917 $ 40,211 $ 81,697 $ 35,133 $ 43,794
======== ======= ======== ======== ======== ========
Pro forma net income per share
(Note 2).................. $.50 $1.01 $.44 $.51
======== ======== ======== ========
Pro forma weighted average
common shares outstanding. 80,518 81,060 80,518 85,421
======== ======== ======== ========
Unaudited pro forma data:
Income before pro forma
provision for income
taxes.................. $ 27,905 $11,647 $ 59,308 $131,191 $ 55,724
Pro forma provision for
income taxes (Note 10). 10,391 4,041 22,751 45,945 19,514
-------- ------- -------- -------- -------- --------
Income after pro forma
provision for income
taxes.................. $ 17,514 $ 7,606 $ 36,557 $ 85,246 $ 36,210
======== ======= ======== ======== ========
Pro forma net income per
share (Note 2)......... $.45 $1.05 $.45
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
NU SKIN ASIA PACIFIC, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
Cumulative
Foreign
Class A Class B Additional Currency Note Total
Capital Common Common Paid-In Translation Retained Deferred Receivable Stockholders'
Stock Stock Stock Capital Adjustment Earnings Compensation From NSI Equity
------- ------- ------- ---------- ----------- -------- ------------ ---------- -------------
Balance at October 1, 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
Reorganization and
termination of S
corporation status
(Note 1)............... (4,550) $80 $1,209 -- 3,261 --
Net proceeds from the
Initial Underwritten
Offerings and
conversion of shares by
stockholders (Note 1)... -- $12 (8) 98,829 -- -- 98,833
Dividends................. -- -- -- -- -- (47,139) (47,139)
Issuance of notes payable
to stockholders (Note 3) -- -- -- -- -- (86,487) (86,487)
Net change in cumulative
foreign currency
translation adjustment.. -- -- -- -- (3,023) -- (3,023)
Issuance of distributor
stock options (Note 9).. -- -- -- 33,039 -- -- $(17,910) $(13,139) 1,990
Issuance of employee stock
awards (Note 9)........ -- -- -- 4,799 -- -- (4,649) -- 150
Net income................ -- -- -- -- -- 81,697 -- -- 81,697
------- ------- ------- -------- -------- ------- --------- --------- --------
Balance at December 31,
1996................... -- 12 72 137,876 (5,963) 11,493 (22,559) (13,139) 107,792
Net change in cumulative
foreign currency
translation adjustment
(unaudited)............. -- -- -- 106 -- -- -- 106
Amortization of deferred
compensation
(unaudited)............. -- -- -- -- -- -- 9,554 -- 9,554
Net income (unaudited).... -- -- -- -- -- 43,794 -- -- 43,794
------- ------- ------- -------- -------- ------- --------- --------- --------
Balance at June 30, 1997
(unaudited)............. $ -- $12 $72 $137,876 $(5,857) $55,287 $(13,005) $(13,139) $161,246
======= ======= ======= ======== ======== ======= ========= ========= ========
The accompanying notes are an integral part of these consolidated financial statements.
NU SKIN ASIA PACIFIC, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Three Months Year Ended Six Months Ended
Year Ended Ended December 31, June 30,
September 30, December 31, ------------------ ------------------
1994 1994 1995 1996 1996 1997
------------- ------------ ------- ------- ------- -------
(unaudited)
Cash flows from operating activities:
Net income........................................ $17,679 $8,917 $40,211 $81,697 $35,133 $43,794
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization.................. 1,401 358 2,012 3,274 1,285 2,300
Loss on disposal of property and equipment..... 90 1,093 12 381 -- --
Amortization of deferred compensation.......... -- -- -- 2,140 -- 9,554
Changes in operating assets and liabilities:
Accounts receivable......................... (1,006) 165 (2,174) (5,695) (1,657) (470)
Related parties receivable.................. (25,288) 11,108 16,077 (6,181) (8,152) 2,189
Inventories, net............................ 158 (939) (17,106) (12,198) (5,721) (13,217)
Prepaid expenses and other.................. (890) (836) 51 (7,871) (39) (17,611)
Other assets................................ 277 (20) (2,994) (10,361) (1,432) (1,506)
Accounts payable............................ 884 279 765 2,197 3,706 113
Accrued expenses............................ 13,106 (4,384) 9,936 56,205 16,359 (12,067)
Related parties payable..................... 3,475 (16,442) 18,193 17,577 (7,716) 15,079
------- ------- ------- -------- ------- --------
Net cash provided by (used in) operating
activities.................................. 9,886 (701) 64,983 121,165 31,766 28,158
------- ------- ------- -------- ------- --------
Cash flows from investing activities:
Purchase of property and equipment................ (1,766) (417) (5,422) (5,672) (2,859) (2,477)
Proceeds from disposal of property and equipment.. 25 14 48 41 -- --
Payment to NSI for distribution rights............ -- -- -- (5,000) -- (10,000)
Payments for lease deposits....................... (614) (677) (701) (562) -- (167)
Receipt of refundable lease deposits.............. 153 -- 22 98 5 129
------- ------- ------- -------- ------- --------
Net cash used in investing activities.......... (2,202) (1,080) (6,053) (11,095) (2,854) (12,515)
Cash flows from financing activities:
Payments on related party loans................... (4,350) -- -- -- -- --
Proceeds from capital contributions............... -- -- 3,250 -- -- --
Net proceeds from the Initial Underwritten
Offerings...................................... -- -- -- 98,833 -- --
Dividends paid.................................... -- -- (12,170) (47,139) (40,179) --
Payment to stockholders for S distribution
notes (Note 3)................................. -- -- -- (15,000) -- (71,487)
------- ------- ------- -------- ------- --------
Net cash provided by (used in) financing
activities.................................. (4,350) -- (8,920) 36,694 (40,179) (71,487)
------- ------- ------- -------- ------- --------
Effect of exchange rate changes on cash........... 152 (8) (3,085) (2,871) (482) 113
------- ------- ------- -------- ------- --------
Net increase (decrease) in cash and cash
equivalents.................................... 3,486 (1,789) 46,925 143,893 (11,749) (55,731)
Cash and cash equivalents, beginning of period. 14,591 18,077 16,288 63,213 63,213 207,106
------- ------- ------- -------- ------- --------
Cash and cash equivalents, end of period.......... $18,077 $16,288 $63,213 $207,106 $51,464 $151,375
======= ======= ======= ======== ======= ========
Supplemental cash flow information:
Interest paid..................................... $81 $6 $119 $84 $24 $--
======= ======= ======= ======== ======= ========
- -----------
Supplemental schedule of non-cash investing and financing activities in 1996:
$20.0 million note payable to NSI issued as partial consideration for the
$25.0 million purchase of distribution rights from NSI.
$86.5 million of interest bearing S distribution notes issued in 1996, of
which $71.5 million remains unpaid at December 31, 1996 (Note 3).
$1.2 million of additional paid-in capital contributed by the existing
stockholders of their interest in the Subsidiaries in exchange for all
shares of the Class B common stock in connection with the Company's
termination of its S corporation status (Note 1).
The accompanying notes are an integral part of
these consolidated financial statements.
NU SKIN ASIA PACIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY
Nu Skin Asia Pacific, Inc. (the "Company") is a network marketing company
involved in the distribution and sale of premium quality, innovative personal
care and nutritional products. The Company is the exclusive distribution vehicle
for Nu Skin International, Inc. ("NSI") in the countries of Japan, Taiwan, Hong
Kong (including Macau), South Korea and Thailand, where the Company currently
has operations (collectively referred to as the "Subsidiaries"), and in
Indonesia, Malaysia, the PRC, the Philippines, Singapore and Vietnam, where
operations have not yet commenced. Additionally, the Company sells products to
NSI affiliates in Australia and New Zealand. NSI was founded in 1984 and is one
of the largest network marketing companies in the world. NSI owns the Nu Skin
trademark and provides the products and marketing materials to each of its
affiliates. Nu Skin International Management Group, Inc. ("NSIMG"), an NSI
affiliate, has provided, and will continue to provide, a high level of support
services to the Company, including product development, marketing, legal,
accounting and other managerial services.
The Company was incorporated on September 4, 1996. It was formed as a
holding company and acquired the Subsidiaries through a reorganization which
occurred on November 20, 1996. Prior to the reorganization, each of the
Subsidiaries elected to be treated as an S corporation. In connection with the
reorganization, the Subsidiaries' S corporation status was terminated on
November 19, 1996, and the Company declared a distribution to the stockholders
that included all of the Subsidiaries' previously earned and undistributed
taxable S corporation earnings totaling $86.5 million.
Prior to the reorganization, the Company, NSI, NSIMG and other NSI
affiliates operated under the control of a group of common stockholders.
Inasmuch as the Subsidiaries that were acquired were under common control, the
Company's consolidated financial statements include the Subsidiaries' historical
balance sheets and related statements of income, of stockholders' equity and of
cash flows for all periods presented.
On November 27, 1996 the Company completed its initial public offerings of
4,750,000 shares of Class A common stock and received net proceeds of $98.8
million (the "Initial Underwritten Offerings").
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation
The consolidated financial statements include the accounts of the Company
and the Subsidiaries. All significant intercompany accounts and transactions are
eliminated in consolidation.
Change in fiscal year
In October 1994, the Company's Board of Directors approved a change in the
Company's fiscal year end from September 30 to December 31. The change became
effective as of October 1, 1994.
Use of estimates
The preparation of these financial statements in conformity with generally
accepted accounting principles required management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Significant estimates include reserves for product returns,
obsolete inventory and taxes. Actual results could differ from these estimates.
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.
Other assets
Other assets consist primarily of deposits for noncancelable operating
leases and distribution rights purchased from NSI. Distribution rights are
amortized on the straight-line basis over the estimated useful life of the
asset. The Company assesses the recoverability of long-lived assets by
determining whether the unamortized balance can be recovered through
undiscounted future operating cash flows attributable to the assets.
Revenue recognition
Revenue is recognized when products are shipped and title passes to
independent distributors who are the Company's customers. A reserve for product
returns is accrued based on historical experience. The Company generally
requires cash payment at the point of sale. The Company has determined that no
allowance for doubtful accounts is necessary. Amounts received prior to shipment
and title passage to distributors are recorded as deferred revenue.
Income taxes
Effective October 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109 ("SFAS 109"), Accounting for Income Taxes. Under
SFAS 109, the liability method is used in accounting for income taxes. Under
this method, deferred tax assets and liabilities are determined based on the
differences between financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse.
Prior to the Company's reorganization described in Note 1, the Subsidiaries
elected to be taxed as S corporations whereby, for U.S. federal tax purposes,
the income tax effects of the Subsidiaries' activities accrued directly to their
stockholders. Therefore, adoption of SFAS 109 required no establishment of
deferred income taxes since no material differences existed between financial
reporting and tax bases of assets and liabilities for foreign tax purposes.
Concurrent with the Company's reorganization, the Company terminated the S
corporation elections of its Subsidiaries. As a result, U.S. deferred income
taxes under the provisions of SFAS 109 were established.
Pro forma net income per share
Pro forma net income per share is computed based on the weighted average
number of common shares and common share equivalents outstanding during the
periods presented assuming that the Company's reorganization and the resultant
issuance of 80.3 million shares of Class B common stock occurred as of January
1, 1995.
Foreign currency translation
All business operations of the Company occur outside of the United States.
Each entity's local currency is considered its functional currency. Since a
substantial portion of the Company's inventories are purchased with U.S. dollars
from the United States and since the Company is incorporated in the United
States, all assets and liabilities are translated into U.S. dollars at exchange
rates existing at the balance sheet dates, revenues and expenses are translated
at weighted average exchange rates, and stockholders' equity is recorded at
historical exchange rates. The resulting foreign currency translation
adjustments are recorded as a separate component of stockholders' equity in the
consolidated balance sheets, and transaction gains and losses are included in
other income in the consolidated financial statements.
Industry segment and geographic area
The Company operates in a single industry, which is the direct selling of
skin care, hair care and nutritional products, and in a single geographic area,
which is the Asia Pacific Region.
Fair value of financial instruments
The fair value of financial instruments including cash and cash
equivalents, accounts receivable, related parties receivable, accounts payable,
accrued expenses, related parties payable and notes payable approximate book
values.
Stock-based compensation
The Company has adopted Statement of Financial Accounting Standards No. 123
("SFAS 123"), Accounting for Stock-Based Compensation. The Company measures
compensation expense for its stock-based employee compensation plans using the
intrinsic value method prescribed by Accounting Principles Board Opinion No. 25
("APB 25"), Accounting for Stock Issued to Employees, and will, when material,
provide pro forma disclosures of net income and net income per share as if the
fair value-based method prescribed by SFAS 123 had been applied in measuring
compensation expense.
New accounting standards
The Company is required to adopt Statement of Financial Accounting
Standards No. 128 ("SFAS 128"), Earnings per Share, during the fourth quarter of
1997. SFAS 128 specifies the computation, presentation and disclosure
requirements for earnings per share. The Company does not believe that the
adoption of SFAS 128 will have a material effect on the Company's method of
calculation or display of earnings per share amounts.
Interim results (unaudited)
The accompanying consolidated balance sheet at June 30, 1997, the related
consolidated statements of income and of cash flows for the six months ended
June 30, 1996 and 1997, and the related statement of stockholders' equity for
the six months ended June 30, 1997 are unaudited. In the opinion of management,
these statements have been prepared on the same basis as the audited financial
statements and include all normal recurring adjustments necessary for the fair
statement of the results of interim periods. The data disclosed in these notes
to the consolidated financial statements at such date or for such periods are
also unaudited.
3. RELATED PARTY TRANSACTIONS
Scope of related party activity
The Company has extensive and pervasive transactions with affiliated
entities that are under common control. These transactions are as follows: (1)
Through its Hong Kong entity, the Company purchases a substantial portion of its
inventories from affiliated entities (primarily NSI). (2) In addition to selling
products to consumers in its geographic territories, the Company, through its
Hong Kong entity, sells products and marketing materials to affiliated entities
in geographic areas outside those held by the Company (primarily Australia and
New Zealand). (3) The Company pays trademark royalty fees to NSI on products
bearing NSI trademarks and marketed in the Company's geographic areas that are
not purchased from NSI. (4) NSI enters into a distribution agreement with each
independent distributor. The Company pays license fees to NSI for the right to
use the lists of distributors within its geographical regions, and for the right
to use the NSI distribution system and other related intangibles. (5) The
Company participates in a global compensation plan established by the NSI
distribution agreement whereby distributors' commissions are determined by
aggregate worldwide purchases made by down-line distributors. Thus, commissions
on purchases from the Company earned by distributors located in geographic areas
outside those held by the Company are remitted to NSI, which then forwards these
commissions to the distributors. (6) The Company pays fees for management and
support services provided by NSIMG.
The purchase prices paid by Nu Skin Hong Kong for the purchase of product
and marketing materials from NSI are determined pursuant to the Regional
Distribution Agreement. The selling prices to the Subsidiaries of products and
marketing materials are determined pursuant to the Wholesale Distribution
Agreements between Nu Skin Hong Kong and the other Subsidiaries. Trademark
royalty fees and license fees are payable pursuant to the Trademark/Tradename
License Agreement between the Subsidiaries and NSI and the Licensing and Sales
Agreement between the Subsidiaries and NSI, respectively. The independent
distributor commission program is managed by NSI. Charges to the Company are
based on a worldwide commission fee of 42% which covers commissions paid to
distributors on a worldwide basis and the direct costs of administering the
global compensation plan. Management and support services fees are billed to the
Company by NSIMG pursuant to the Management Services Agreement between the
Company, the Subsidiaries and NSIMG and consist of all direct expenses incurred
by NSIMG on behalf of the Company and indirect expenses of NSIMG allocated to
the Company based on its net sales.
Total commission fees (including those paid directly to distributors within
the Company's geographic territories) are recorded as distributor incentives in
the consolidated statements of income. Trademark royalty fees, license fees and
management fees are included in selling, general and administrative expenses in
the consolidated statements of income.
In November 1996, the Company purchased from NSI the distribution rights to
seven new markets in the region. These markets include Thailand, where
operations commenced in March 1997, and in Indonesia, Malaysia, the PRC, the
Philippines, Singapore and Vietnam, where operations have not yet commenced.
These rights were purchased for $25.0 million of which $5.0 million was paid
from proceeds from the Initial Underwritten Offerings. At December 31, 1996, the
Company had a $10.0 million short term obligation, due January 15, 1997, and a
$10.0 million long term obligation, due January 15, 1998, related to the
purchase of these rights. At June 30, 1997, the Company had a $10.0 million
(unaudited) short term obligation related to the purchase of these rights.
Interest accrues at a rate of 6.0% per annum on amounts due under this
obligation.
Notes payable to stockholders
In connection with the reorganization described in Note 1, the aggregate
undistributed taxable S corporation earnings of the Subsidiaries were $86.5
million. These earnings were distributed in the form of promissory notes which
are expected to be paid during 1997 and which bear interest at 6.0% per annum.
From proceeds of the Initial Underwritten Offerings, $15.0 million was used to
pay a portion of the notes, leaving an unpaid notes payable to stockholders
balance of $71.5 million at December 31, 1996. Interest expense of $536,000 was
recorded for the year ended December 31, 1996, and is included in accrued
expenses. On April 4, 1997, the Company paid the entire balance on the notes
payable to stockholders of $71.5 million together with the related accrued
interest of $1.6 million (unaudited). As described in Note 1, these notes
originated in connection with the reorganization in which the Subsidiaries' S
corporation status was terminated and the Company declared a distribution to the
stockholders that included all of the Subsidiaries' previously earned and
undistributed taxable S corporation earnings totaling $86.5 million.
Related party transactions
The following summarizes the Company's transactions with related parties
(in thousands):
Three Months
Ended Year Ended December 31, Six Months
Year Ended December 31, ---------------------------- Ended June 30,
Product purchases September 30, 1994 1994 1995 1996 1997
- ----------------- ------------------ ------------ -------- -------- --------------
(unaudited)
Beginning inventories................. $ 14,775 $ 14,617 $ 15,556 $ 32,662 $ 44,860
Inventory purchases from affiliates... 61,409 11,608 69,821 157,413 106,312
Other inventory purchases and
value added locally................ 25,305 8,938 43,900 47,943 33,104
-------- -------- -------- -------- --------
Total products available for sale..... 101,489 35,163 129,277 238,018 184,276
Less: Cost of sales................... (86,872) (19,607) (96,615) (193,158) (126,199)
-------- -------- -------- -------- --------
Ending inventories.................... $ 14,617 $ 15,556 $ 32,662 $ 44,860 $ 58,077
======== ======== ======== ======== ========
Three Months
Ended Year Ended December 31, Six Months
Year Ended December 31, ---------------------------- Ended June 30,
Related parties payable transactions September 30, 1994 1994 1995 1996 1997
- ------------------------------------ ------------------ ------------ -------- -------- --------------
(unaudited)
Beginning related parties payable..... $ 27,873 $ 26,998 $ 10,556 $ 28,749 $ 46,326
Inventory purchases from affiliates... 61,409 11,608 69,821 157,413 106,312
Distributor incentives................ 95,737 27,950 135,722 249,613 169,132
Less: Distributor incentives paid to
distributors within the
Company's markets.................. (68,880) (19,837) (105,642) (197,614) (136,997)
License fees.......................... 9,252 2,750 13,158 25,221 17,080
Trademark royalty fees................ -- 19 2,694 2,882 2,296
Management fees....................... 1,449 499 2,066 4,189 3,156
Proceeds from (payments for)
related party loans................ (4,350) -- -- -- --
Less: Payments to related parties..... (95,492) (39,431) (99,626) (224,127) (145,901)
-------- -------- -------- -------- --------
Ending related parties payable........ $ 26,998 $ 10,556 $ 28,749 $ 46,326 $ 61,405
======== ======== ======== ======== ========
Related parties receivable and payable balances
The Company has receivable and payable balances with related parties in
Australia and New Zealand, and with NSI and NSIMG. Related parties balances
outstanding greater than 60 days bear interest at the prime rate plus 2%. Since
no significant balances have been outstanding greater than 60 days, no related
parties interest income or interest expense has been recorded in the
consolidated financial statements. Sales to related parties were $2,288,000 for
the year ended September 30, 1994, $855,000 for the three months ended December
31, 1994, $4,608,000 and $4,614,000 for the years ended December 31, 1995 and
1996, respectively, and $2,100,000 (unaudited) for the six months ended June 30,
1997.
Certain relationships with stockholder distributors
Two major stockholders of the Company have been NSI distributors since
1984. These stockholders are partners in an entity which receives substantial
commissions from NSI, including commissions relating to sales within the
countries in which the Company operates. By agreement, NSI pays commissions to
this partnership at the highest level of distributor compensation to allow the
stockholders to use their expertise and reputations in network marketing to
further develop NSI's distributor force, rather than focusing solely on their
own distributor organizations. The commissions paid to this partnership relating
to sales within the countries in which the Company operates were $1,100,000 for
the year ended September 30, 1994, $270,000 for the three months ended December
31, 1994, $1,100,000 and $1,200,000 for the years ended December 31, 1995 and
1996, respectively, and $612,000 (unaudited) for the six months ended June 30,
1997.
4. PROPERTY AND EQUIPMENT
Property and equipment are comprised of the following (in thousands):
December 31,
--------------------
1995 1996 June 30, 1997
------ ------ -------------
(unaudited)
Furniture and fixtures............ $ 3,593 $ 3,175 $ 5,767
Computers and equipment........... 5,060 7,480 8,479
Leasehold improvements............ 2,221 4,737 3,692
Vehicles.......................... 152 200 146
------- ------- -------
11,026 15,592 18,084
Less: accumulated depreciation.... (4,122) (6,708) (8,405)
------- ------- -------
$ 6,904 $ 8,884 $ 9,679
======= ======= =======
Depreciation of property and equipment totaled $1,401,000 for the year
ended September 30, 1994, $358,000 for the three months ended December 31, 1994,
$2,012,000 and $3,118,000 for the years ended December 31, 1995 and 1996,
respectively, and $1,675,000 (unaudited) for the six months ended June 30, 1997.
5. OTHER ASSETS
Other assets consist of the following (in thousands):
December 31,
--------------------
1995 1996 June 30, 1997
------ ------ -------------
(unaudited)
Deposits for noncancelable
operating leases................ $ 5,738 $ 9,962 $11,352
Distribution rights, net of
accumulated amortization........ -- 24,844 24,388
Other............................. 1,266 7,867 7,852
------- ------- -------
$ 7,004 $42,673 $43,592
======= ======= =======
The $25.0 million distribution rights asset is being amortized on a
straight-line basis over its estimated useful life of twenty years. Amortization
expense totaled $156,000 for the year ended December 31, 1996 and $625,000
(unaudited) for the six months ended June 30, 1997.
6. ACCRUED EXPENSES
Accrued expenses consist of the following (in thousands):
December 31,
--------------------
1995 1996 June 30, 1997
------ ------ -------------
(unaudited)
Income taxes payable.............. $17,463 $54,233 $43,550
Other taxes payable............... 798 9,194 9,868
Other accruals.................... 5,052 16,091 14,033
------- ------- -------
$23,313 $79,518 $67,451
======= ======= =======
7. LINE OF CREDIT
During 1995, the Company entered into an $8,000,000 revolving credit
agreement (bearing interest at an annual rate of 12%) with a financial
institution in South Korea. Advances were available under the agreement through
July 1, 1996. There were no outstanding balances under the credit facility at
December 31, 1995.
8. LEASE OBLIGATIONS
The Company leases office space and computer hardware under noncancelable
long-term operating leases. Most leases include renewal options of up to three
years. Minimum future operating lease obligations at December 31, 1996 are as
follows (in thousands):
Year ending December 31,
- ------------------------
1997............................................... $ 4,131
1998............................................... 2,745
1999............................................... 1,965
2000............................................... 1,321
2001............................................... --
-------
Total minimum lease payments............................... $10,162
=======
Rental expense for operating leases totaled $5,848,000 for the year ended
September 30, 1994, $1,639,000 for the three months ended December 31, 1994,
$9,470,000 and $8,260,000 for the years ended December 31, 1995 and 1996,
respectively, and $4,478,000 (unaudited) for the six months ended June 30, 1997.
9. STOCKHOLDERS' EQUITY
The Company's capital stock consists of preferred stock, Class A common
stock, and Class B common stock. The shares of Class A common stock and Class B
common stock are identical in all respects, except for voting rights and certain
conversion rights and transfer restrictions, as follows: (1) each share of Class
A common stock entitles the holder to one vote on matters submitted to a vote of
the Company's stockholders and each share of Class B common stock entitles the
holder to ten votes on each such matter; (2) stock dividends of Class A common
stock may be paid only to holders of Class A common stock and stock dividends of
Class B common stock may be paid only to holders of Class B common stock; (3) if
a holder of Class B common stock transfers such shares to a person other than a
permitted transferee, as defined in the Company's' Certificate of Incorporation,
such shares will be converted automatically into shares of Class A common stock;
and (4) Class A common stock has no conversion rights; however, each share of
Class B common stock is convertible into one share of Class A common stock, in
whole or in part, at any time at the option of the holder.
Stockholder control
As of December 31, 1996, a group of common stockholders owned all of the
outstanding shares of Class B common stock, which represented 98.4% of the
combined voting rights of all outstanding common stock. Accordingly, these
stockholders, acting as a group, control the election of the entire Board of
Directors and decisions with respect to the Company's dividend policy, the
Company's access to capital, mergers or other business combinations involving
the Company, the acquisition or disposition of assets by the Company and any
change in control of the Company.
Equity incentive plans
Effective November 21, 1996, NSI and the Company implemented a one-time
distributor equity incentive program. This program provided for grants of
options to selected distributors for the purchase of 1,605,000 shares of the
Company's previously issued Class A common stock. The number of options each
distributor will ultimately receive will be based on their performance and
productivity through August 31, 1997. The options are exercisable at a price of
$5.75 per share and will vest on December 31, 1997. The related compensation
expense has been deferred in the Company's financial statements and is being
expensed to the statement of income as distributor stock expense ratably through
December 31, 1997.
The Company has recorded compensation expense based upon the best available
estimate of the number of shares that are expected to be issued to each
distributor at the measurement date, and will revise such expense, as necessary,
if subsequent information indicates that actual forfeitures are likely to differ
from initial estimates. The compensation expense will be adjusted quarterly over
the vesting period for subsequent changes in the expected or actual outcome. Any
options forfeited may be reallocated and result in an additional compensation
charge.
As a part of this program, the Company sold an option to NSI to purchase
shares underlying distributor options for consideration of a 10-year note,
bearing interest at 6.0% per annum, with an estimated principal balance of $13.1
million. It is anticipated that NSI will repay this note as distributors begin
to exercise their options in 1998.
Prior to the Initial Underwritten Offerings, the Company's stockholders
contributed to NSI and other Nu Skin entities (excluding the Company) 1,250,000
shares of the Company's Class A common stock held by them for issuance to
employees of NSI and other Nu Skin entities as a part of an employee equity
incentive plan. Equity incentives granted or awarded under this plan will vest
over four years. Compensation expense related to equity incentives granted to
employees of NSI and other Nu Skin entities who perform services on behalf of
the Company will be recognized by the Company ratably over the vesting period.
In November and December 1996, the Company made stock bonus awards to
certain of its employees for an aggregate of 109,000 shares of Class A common
stock and in January 1997 the Company made additional stock bonus awards to
certain of its employees for an aggregate of 41,959 shares (unaudited) of Class
A common stock. Subsequent to the granting of these stock bonus awards for an
aggregate of 150,959 (unaudited) shares of Class A common stock, awards for
12,413 (unaudited) shares lapsed. The Company has recorded deferred compensation
expense related to these stock awards and is recognizing such expense ratably
over the vesting period.
Prior to the reorganization, NSI agreed to grant one of the Company's
executives an option to purchase 267,500 shares of the Company's Class A common
stock which became exercisable at the date of the reorganization. The exercise
price of this option was set at the estimated fair market value of this equity
interest on the date the option was granted. This executive exercised the
portion of this option underlying 16,675 shares during November 1996.
10. INCOME TAXES
Consolidated income before provision for income taxes consists of income
earned solely from international operations. The provision for current and
deferred taxes for the year ended December 31, 1996 consists of the following
(in thousands):
Current
Federal.......................................... $ 331
State............................................ --
Foreign.......................................... 56,929
Deferred
Federal.......................................... (1,929)
State............................................ --
Foreign.......................................... (2,398)
Change in U.S. tax status........................ (3,439)
-------
Provision for income taxes.................... $49,494
=======
As a result of the Company's reorganization described in Note 1, the
Company will no longer be treated as an S corporation for U.S. Federal income
tax purposes. Accordingly, the provision for income taxes recorded in the
statement of income for the year ended December 31, 1996 consists of the
following: (1) the cumulative income tax effect from recognition of the deferred
tax assets at the date of S corporation termination; (2) the provision for
income taxes for the period November 20, 1996 through December 31, 1996 as a
U.S. C corporation; and (3) income taxes in foreign countries for the
Subsidiaries during the year.
The provision for income taxes for the year ended September 30, 1994, for
the three months ended December 31, 1994 and for the year ended December 31,
1995 primarily represent income taxes in foreign countries as U.S. Federal
income taxes were levied at the stockholder level.
The principal components of deferred tax assets were as follows (in
thousands):
December 31, 1995 November 20, 1996 December 31, 1996
----------------- ----------------- -----------------
(pro forma)
Deferred tax assets:
Inventory reserve............................... $414 $1,455 $1,971
Product return reserve.......................... 115 1,183 1,562
Depreciation.................................... 866 1,535 1,592
Foreign tax credit.............................. -- -- 1,234
Exchange gains and losses....................... 389 -- --
Uniform capitalization.......................... 1,696 713 763
Distributor stock options and employee stock
awards........................................ -- -- 749
Accrued expenses not deductible until paid...... 123 5,037 6,739
Minimum tax credit.............................. -- -- 330
Other........................................... 61 -- --
------ ------ -------
Total deferred tax assets....................... $3,664 $9,923 $14,940
Deferred tax liabilities:
Withholding tax................................. $ -- $3,944 $ 4,148
Net foreign deferred tax asset.................. -- 1,021 2,572
Exchange gains and losses....................... -- 443 399
Other........................................... -- 55 55
------ ------ -------
Total deferred tax liabilities.................. -- 5,463 7,174
------ ------ -------
Net deferred tax assets......................... $3,664 $4,460 $ 7,766
====== ====== =======
Pro forma provision for income taxes
The consolidated statements of income include a pro forma presentation for
income taxes which would have been recorded if the Company had been taxed as a C
corporation for all periods presented.
A reconciliation of the Company's pro forma effective tax rate compared to
the statutory U.S. Federal tax rate is as follows:
Three Months
Year Ended Ended Year Ended
September 30, December 31, December 31,
-------------- ------------ -----------------------------
1994 1994 1995 1996
----- ---- ---- ----
Income taxes at statutory rate........... 35.00% 35.00% 35.00% 35.00%
Foreign tax credit limitation (benefit).. 1.97 (.42) 2.69 --
Non-deductible expenses.................. .27 .11 .67 .06
Other.................................... -- -- -- (.04)
------ ------ ------ ------
37.24% 34.69% 38.36% 35.02%
====== ====== ====== ======
11. FINANCIAL INSTRUMENTS
The Company's Subsidiaries enter into significant transactions with each
other, NSI and third parties which may not be denominated in the respective
Subsidiaries' functional currencies. The Company reduces its exposure to
fluctuations in foreign exchange rates by creating offsetting positions through
the use of foreign currency exchange contracts. The Company currently does not
use such financial instruments for trading or speculative purposes. The Company
regularly monitors its foreign currency exposures to minimize the impact of
foreign exchange fluctuations on the Company's operating results.
At December 31, 1995, the Company held foreign currency forward contracts
with notional amounts totaling $1,000,000 to hedge foreign currency items. There
were no significant unrealized gains or losses on these contracts. These
contracts all had maturities prior to December 31, 1996. The Company did not
hold any foreign currency forward contracts at December 31, 1996. At June 30,
1997, the Company held foreign currency forward contracts with notional amounts
totaling approximately $51 million (unaudited) to hedge foreign currency items.
The unrealized losses on these contracts were $0.9 million (unaudited) for the
six-month period ended June 30, 1997. These contracts have maturities through
May 1998.
12. COMMITMENTS AND CONTINGENCIES
The Company is subject to governmental regulations pertaining to product
formulation, labeling and packaging, product claims and advertising and to the
Company's direct selling system. The Company is also subject to the jurisdiction
of numerous foreign tax authorities. These tax authorities regulate and restrict
various corporate transactions, including intercompany transfers. The Company
believes that the tax authorities in Japan and South Korea are particularly
active in challenging the tax structures and intercompany transfers of foreign
corporations. Any assertions or determination that either the Company, NSI or
any of NSI's distributors is not in compliance with existing statutes, laws,
rules or regulations could potentially have a material adverse effect on the
Company's operations. In addition, in any country or jurisdiction, the adoption
of new statutes, laws, rules or regulations or changes in the interpretation of
existing statutes, laws, rules or regulations could have a material adverse
effect on the Company and its operations. Although management believes that the
Company is in compliance, in all material respects, with the statutes, laws,
rules and regulations of every jurisdiction in which it operates, no assurance
can be given that the Company's compliance with applicable statutes, laws, rules
and regulations will not be challenged by foreign authorities or that such
challenges will not have a material adverse effect on the Company's financial
position or results of operations or cash flows.
NU SKIN ASIA PACIFIC, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
For the Year Ended December 31, 1995
(in thousands, except per share amounts)
Pro Forma
for the
Reorganization
and the Initial
Pro Forma Underwritten
Actual Adjustments Offerings
Revenue........................................ $358,609 $ -- $358,609
Cost of sales.................................. 96,615 -- 96,615
-------- ------- --------
Gross profit................................... 261,994 -- 261,994
-------- ------- --------
Operating expenses(d)
Distributor incentives...................... 135,722 -- 135,722
Selling, general and administrative......... 67,475 6,958(a) 74,433
-------- ------- --------
Total operating expenses....................... 203,197 6,958 210,155
-------- ------- --------
Operating income............................... 58,797 (6,958) 51,839
Other income (expense), net.................... 511 (2,809)(b) (2,298)
-------- ------- --------
Income before provision for income taxes....... 59,308 (9,767) 49,541
Provision for income taxes..................... 19,907 (92)(c) 19,005
-------- ------- --------
Net income..................................... $ 40,211 $(9,675) $ 30,536
======== ======= ========
Net income per share........................... $.50 $.36
======== ======= ========
Weighted average common shares outstanding..... 80,518 85,377
======== ======= ========
The accompanying notes are an integral part of these unaudited pro forma
consolidated financial statements.
NU SKIN ASIA PACIFIC, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
For the Year Ended December 31, 1996
(in thousands, except per share amounts)
Pro Forma
for the
Reorganization
and the Initial
Pro Forma Underwritten
Actual Adjustments Offerings
Revenue........................................ $678,596 $ -- $678,596
Cost of sales.................................. 193,158 -- 193,158
-------- ------- --------
Gross profit................................... 485,438 -- 485,438
-------- ------- --------
Operating expenses
Distributor incentives...................... 249,613 -- 249,613
Selling, general and administrative......... 105,477 6,325(a) 111,802
Distributor stock expense................... 1,990 (1,990)(d) --
-------- ------- --------
Total operating expense........................ 357,080 4,335 361,415
-------- ------- --------
Operating income............................... 128,358 (4,335) 124,023
Other income (expense), net.................... 2,833 769(b) 3,602
-------- ------- --------
Income before provision for income taxes....... 131,191 (3,566) 127,625
Provision for income taxes..................... 49,494 (4,794)(c) 44,700
-------- ------- --------
Net income..................................... $ 81,697 $ 1,228 $ 82,925
======== ======= ========
Net income per share........................... $1.01 $.97
======== ======= ========
Weighted average common shares outstanding..... 81,060 85,377
======== ======= ========
The accompanying notes are an integral part of these unaudited pro forma
consolidated financial statements.
NU SKIN ASIA PACIFIC, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
For the Six Months Ended June 30, 1996
(in thousands, except per share amounts)
Pro Forma
for the
Reorganization
and the Initial
Pro Forma Underwritten
Actual Adjustments Offerings
Revenue........................................ $287,711 $ -- $287,711
Cost of sales.................................. 80,963 -- 80,963
-------- ------- --------
Gross profit................................... 206,748 -- 206,748
-------- ------- --------
Operating expenses(d)
Distributor incentives...................... 107,090 -- 107,090
Selling, general and administrative......... 44,551 3,422 47,973
-------- ------- --------
Total operating expenses....................... 151,641 3,422 155,063
-------- ------- --------
Operating income............................... 55,107 (3,422) 51,685
Other income (expense), net.................... 617 267(b) 884
-------- ------- --------
Income before provision for income taxes....... 55,724 (3,155) 52,569
Provision for income taxes..................... 20,591 (2,181)(c) 18,410
-------- ------- --------
Net income..................................... $ 35,133 $ (974) $ 34,159
======== ======= ========
Net income per share........................... $.44 $.40
======== ======= ========
Weighted average common shares outstanding..... 80,518 85,377
======== ======= ========
The accompanying notes are an integral part of these unaudited pro forma
consolidated financial statements.
NU SKIN ASIA PACIFIC, INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
Note 1--Basis of Presentation
As part of the reorganization and the Initial Underwritten Offerings
discussed in Note 1 to the Consolidated Financial Statements, several actions
occurred which impacted the comparability of the historical financial results of
the Company with the future results of the Company. Therefore, a pro forma
presentation has been prepared to provide comparative data. The unaudited pro
forma consolidated statements of income data reflect the reorganization and the
Initial Underwritten Offerings as if all conditions to these transactions had
occurred as of January 1, 1995. These data do not necessarily reflect the
results of operations of the Company that would have resulted had such
transactions actually been consummated as of such date. Also, these data are not
necessarily indicative of the future results of operations of the Company.
Note 2--Pro Forma Adjustments
The pro forma adjustments reflect the following:
(a) Reflects the amortization of the distribution rights acquired from
NSI. Amortization is being recorded on a straight-line basis over the
estimated useful life of twenty years. Also reflects estimated annual
compensation expense of $1.2 million related to the employee stock bonus
awards granted to employees of the Company, NSI and its affiliates. Also
reflects additional costs of $4.4 million for the year ended December 31,
1995, $4.0 million for the year ended December 31, 1996 and $2.2 million
for the six months ended June 30, 1996, relating to certain support
services provided to the Company by NSI and NSIMG and certain other charges
related to operating as a public company. These costs include additional
infrastructure, operating and accounting systems, and business processes as
well as the additional outside services inherent in supporting a public
entity.
(b) Reflects interest expense for the $20.0 million note payable to
NSI issued in connection with the purchase of distribution rights. The note
bears interest at 6.0% per annum and is due and payable within 14 months
from the date of issuance. Also reflects interest expense of $2.7 million
for the year ended December 31, 1995 relating to the $86.5 million notes
payable to stockholders. The notes bear interest at 6.0% per annum. Also
reflects interest income for the note receivable from NSI with an estimated
principal balance of $13.1 million issued in connection with the sale of an
option to NSI to purchase shares underlying distributor options. The note
bears interest at 6.0% per annum and is due and payable ten years from the
date of issuance.
(c) Reflects adjustments for U.S. Federal and state income taxes as if
the Company had been taxed as a C corporation rather than as an S
corporation since inception. Also reflects the tax effect of pro forma
adjustments on earnings.
(d) The unaudited pro forma consolidated statements of income data
does not reflect the estimated non-cash compensation expense of $19.9
million in connection with the one-time grant of distributor options at an
exercise price of $5.75 per share. $1,990,000 of such expense was recorded
as actual distributor stock expense for the year ended December 31, 1996.
Note 3--Pro Forma Net Income Per Share
Pro forma net income per share data reflects 80,250,000 shares of common
stock outstanding and common stock equivalents after giving effect to the
reorganization and an option granted to an executive officer of the Company to
purchase 267,500 shares of Class A Common Stock. Also reflects the sale of
4,750,000 shares of Class A common stock by the Company and the grant of awards
for 109,000 shares of Class A common stock to employees of the Company.
Supplemental income per share, calculated as if $25.0 million of the proceeds
from the Initial Underwritten Offerings were used to pay down notes payable, had
a dilutive effect of less than 2% and, therefore, is not presented.
================================================================================
[THIS PAGE INTENTIONALLY LEFT BLANK]
================================================================================
No NSI distributor, dealer, salesperson or other individual has been
authorized to give any information or to make any representations in connection
with the Rule 415 Offerings as 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......................................................... 4
Risk Factors............................................................... 16
Use of Proceeds............................................................ 32
Dividend Policy............................................................ 32
Price Range of Class A Common Stock........................................ 32
Capitalization............................................................. 33
Dilution................................................................... 34
Selected Consolidated Financial and
Other Information .................................................... 35
Management's Discussion and Analysis
of Financial Condition and Results of
Operations............................................................. 38
Business................................................................... 49
Management................................................................. 78
Certain Relationships and Related Transactions............................. 86
Principal Stockholders..................................................... 89
Rule 415 Selling Stockholders.............................................. 92
Shares Eligible for Future Sale............................................ 98
Plan of Distribution....................................................... 99
Description of Capital Stock............................................... 104
Certain United States Tax Consequences
to Non-United States Holders........................................... 108
Legal Matters.............................................................. 111
Experts.................................................................... 111
Additional Information..................................................... 111
Index to Consolidated Financial Statements................................. F-1
================================================================================
================================================================================
1,605,000 Options
3,018,546 Shares
[LOGO]
Options to Purchase
Class A Common Stock
Class A Common Stock
---------
PROSPECTUS
---------
September 3, 1997