AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 30, 1996
REGISTRATION NO. 333-12073
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- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------
NU SKIN ASIA PACIFIC, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
--------------
DELAWARE 5122 87-(APPLIED FOR)
(STATE OF JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
ORGANIZATION)
75 WEST CENTER STREET
PROVO, UTAH 84601
(801) 345-6100
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
STEVEN J. LUND, PRESIDENT
NU SKIN ASIA PACIFIC, INC.
75 WEST CENTER STREET
PROVO, UTAH 84601
(801) 345-6100
(NAME, AND ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA
CODE, OF AGENT FOR SERVICE)
--------------
COPIES TO:
NOLAN S. TAYLOR, ESQ. WILLIAM H. HINMAN, JR., ESQ.
LEBOEUF, LAMB, GREENE & MACRAE, SHEARMAN & STERLING
L.L.P. 555 CALIFORNIA STREET, SUITE 2000
1000 KEARNS BUILDING SAN FRANCISCO, CA 94104
136 SOUTH MAIN STREET TELEPHONE: (415) 616-1100
SALT LAKE CITY, UTAH 84101-1685
TELEPHONE: (801) 320-6700
--------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
--------------
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the
following box. [_]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
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CALCULATION OF REGISTRATION FEE
==================================================================================================
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PER SHARE OFFERING PRICE(1) REGISTRATION FEE
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Class A Common Stock,
par value(2)(3)..... 8,489,500 $22.00 $186,769,000 previously paid
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Class A Common
Stock(3)(4)............ 1,609,500 $22.00 $ 35,409,000 $12,210.00
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Options to purchase
Class A Common Stock... 2,000,000 -- -- --
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Class A Common Stock
underlying Options(5).. 2,000,000 $5.50 $11,000,000 $ 3,793.10
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Total................... -- $16,003.10
==================================================================================================
(1) Estimated pursuant to Rule 457(a) under the Securities Act of 1933 solely
for the purposes of calculating the amount of registration fee.
(2) Includes 2,850,000 shares being offered by certain stockholders of the
Company. Also includes 690,000 shares and 199,500 shares which the U.S.
Underwriters and the International Underwriters, respectively, have the
option to purchase from certain stockholders of the Company to cover
overallotments, if any. A filing fee of $64,403.10 has previously been
paid in connection with the 8,489,500 shares included in this Registration
Statement as filed on September 16, 1996.
(3) The amount of shares registered also includes any shares initially offered
or sold outside the United States that are thereafter sold or resold in
the United States. Offers and sales of shares outside the United States
are being made pursuant to the exemption afforded by Rule 901 of
Regulation S and this Registration Statement shall not be deemed effective
with respect to such offers and sales.
(4) Includes 194,317 shares and 56,183 shares which the U.S. Underwriters and
the International Underwriters, respectively, have the option to purchase
from certain stockholders of the Company, and 1,250,000 shares being
offered by certain stockholders of the Company.
(5) Pursuant to Rule 416, includes such indeterminate number of additional
securities as may be required for issuance on exercise of the options as a
result of any adjustment in the number of securities issuable upon such
exercise by reason of the anti-dilution provisions of the options.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
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++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED SEPTEMBER 30, 1996
PROSPECTUS
7,600,000 SHARES
NU SKIN ASIA PACIFIC, INC.
CLASS A COMMON STOCK
-----------
Of the 7,600,000 shares of Class A Common Stock, par value $ per share (the
"Class A Common Stock"), of Nu Skin Asia Pacific, Inc., a Delaware corporation
(the "Company"), offered hereby, 4,750,000 shares are being offered by the
Company and 2,850,000 shares are being offered by certain stockholders of the
Company (the "Selling Stockholders"). See "Principal and Selling Stockholders."
The Company will not receive any of the proceeds from the sale of shares by the
Selling Stockholders.
Of the 7,600,000 shares of Class A Common Stock being offered hereby,
4,600,000 shares are being offered initially in the United States and Canada by
the U.S. Underwriters (the "U.S. Offering"), 1,670,000 shares are being offered
initially in a concurrent offering in Japan by the Japanese Underwriters (the
"Japanese Offering"), and 1,330,000 shares are being offered initially in a
concurrent offering outside the United States, Canada and Japan by the
International Underwriters (the "International Offering," together with the
U.S. Offering and the Japanese Offering, the "Offerings"). The initial public
offering price and the underwriting discount per share are identical for each
of the Offerings. See "Underwriting."
Each share of Class A Common Stock entitles its holder to one vote, and each
share of Class B Common Stock (the "Class B Common Stock") of the Company
entitles its holder to ten votes. The Class A Common Stock and Class B Common
Stock are sometimes collectively referred to in this Prospectus as the "Common
Stock." All of the shares of Class B Common Stock are held by the Selling
Stockholders. After consummation of the Offerings, the Selling Stockholders
will beneficially own shares of Common Stock having approximately % of the
combined voting power of the outstanding shares of Common Stock (approximately
% if the Underwriters' over-allotment options are exercised in full). Each
share of Class B Common Stock is convertible into one share of Class A Common
Stock at the option of the holder of Class B Common Stock and in certain other
instances. See "Description of Capital Stock--Common Stock--Conversion."
Prior to the Offerings, there has been no public market for the Class A
Common Stock. It is currently estimated that the initial public offering price
will be between $ and $ per share. See "Underwriting" for information
relating to the factors to be considered in determining the initial public
offering price. The U.S. Underwriters and the International Underwriters have
reserved up to shares for sale (at the initial public offering price) to
certain of the Company's distributors and employees.
Application has been made to list the Class A Common Stock on the New York
Stock Exchange.
SEE "RISK FACTORS," BEGINNING ON PAGE 10, FOR A DISCUSSION OF CERTAIN FACTORS
WHICH SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE SECURITIES OFFERED
HEREBY.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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PRICE TO UNDERWRITING PROCEEDS TO PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2) SELLING STOCKHOLDERS
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Per Share................ $ $ $ $
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Total(3)................. $ $ $ $
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(1) The Company and the Selling Stockholders have agreed to indemnify the U.S.
Underwriters, the Japanese Underwriters and the International Underwriters
against certain liabilities, including liabilities under the Securities Act
of 1933, as amended. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated to be
$2,250,000.
(3) The Selling Stockholders have granted the U.S. Underwriters and the
International Underwriters options, exercisable within 30 days after the
date hereof, to purchase up to 884,317 and 255,683 additional shares of
Class A Common Stock, respectively, solely to cover over-allotments, if
any. If such options are exercised in full, the total Price to Public,
Underwriting Discount, Proceeds to Company and Proceeds to Selling
Stockholders will be $ , $ , $ and $ , respectively. See
"Underwriting."
-----------
The shares of Class A Common Stock offered hereby are offered by the
Underwriters, subject to prior sale, when, as and if issued to and accepted by
them, subject to approval of certain legal matters by counsel for the
Underwriters and certain other conditions. The Underwriters reserve the right
to withdraw, cancel or modify such offer and to reject orders in whole or in
part. It is expected that delivery of certificates for the shares of Class A
Common Stock will be made in New York, New York on or about , 1996.
-----------
MERRILL LYNCH & CO. MORGAN STANLEY & CO.
INCORPORATED
DEAN WITTER REYNOLDS INC. NOMURA SECURITIES INTERNATIONAL, INC.
-----------
The date of this Prospectus is , 1996.
[GATEFOLD: PHOTOGRAPHS SHOWING PRODUCTS.]
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 Nu
Skin International, Inc. ("NSI") which are licensed to the Company. The
italicized product names used in this Prospectus are product names and also,
in certain cases, trademarks and are the property of NSI. All other tradenames
and trademarks appearing in this Prospectus are the property of their
respective holders. See "Business--Relationship with NSI--Trademark/Tradename
License Agreements" and "--Licensing and Sales Agreements." The principal
executive offices of the Company are located at 75 West Center Street, Provo,
Utah 84601, and the Company's telephone number is (801) 345-6100.
IN CONNECTION WITH THE OFFERINGS BY THE UNDERWRITERS, THE UNDERWRITERS MAY
OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE
OF THE CLASS A COMMON STOCK AT LEVELS ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL
IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK
EXCHANGE OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT
ANY TIME.
In this Prospectus, references to "dollars" and "$" are to United States
dollars, and the terms "United States" and "U.S." mean the United States of
America, its states, territories, possessions and all areas subject to its
jurisdiction, and references to "(Yen)" are to Japanese yen.
2
[GATEFOLD: PHOTOGRAPHS DEPICTING LIFESTYLE.]
[GATEFOLD: PHOTOGRAPHS DEPICTING LIFESTYLE.]
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information and the financial statements
and notes thereto appearing elsewhere in this Prospectus. Unless otherwise
noted, all information in this Prospectus assumes no exercise of the
Underwriters' over-allotment options and gives effect to the Reorganization (as
defined herein). As used herein, "Nu Skin Asia Pacific" or the "Company" means
Nu Skin Asia Pacific, Inc., including the Subsidiaries, giving effect to the
Reorganization. The "Subsidiaries" means Nu Skin Hong Kong, Inc. ("Nu Skin Hong
Kong"), Nu Skin Japan Company, Limited ("Nu Skin Japan"), Nu Skin Korea, Inc.
("Nu Skin Korea"), and Nu Skin Taiwan, Inc. ("Nu Skin Taiwan"), collectively,
and excludes Nu Skin Personal Care (Thailand) Limited ("Nu Skin Thailand"),
which has been formed, but has not commenced operations.
See "The Reorganization and S Corporation Distribution." Until September 30,
1994, the Company's fiscal year ended on September 30 of each year. As of
October 1, 1994, the Company changed its fiscal year end to December 31 of each
year, beginning with the fiscal year ended December 31, 1995.
THE COMPANY
Nu Skin Asia Pacific is a rapidly growing network marketing company involved
in the distribution and sale of premium quality, innovative personal care and
nutritional products. The Company is the exclusive distribution vehicle for Nu
Skin International, Inc. ("NSI") in the countries of Japan, Taiwan, Hong Kong
(including Macau) and South Korea, where the Company currently has operations,
and in Thailand, Indonesia, Malaysia, the Philippines, the People's Republic of
China ("PRC"), Singapore and Vietnam, where operations have not commenced.
The Company is one of the fastest growing network marketing companies in
Asia. Revenue increased 82.0% to $287.7 million for the six months ended
June 30, 1996 from $158.1 million for the same period in 1995. Net income
increased 78.2% to $35.1 million for the six months ended June 30, 1996 from
$19.7 million for the same period in 1995. Revenue increased 35.6% to $358.6
million for the year ended December 31, 1995 from $264.4 million in 1994. Net
income increased 86.1% to $40.2 million for the year ended December 31, 1995
from $21.6 million in 1994. The Company's network of independent distributors
has grown since the Company's inception in 1991 to more than 375,000 active
distributors as of June 30, 1996.
The Company's product philosophy is to combine the best of science and nature
in developing premium quality, innovative personal care and nutritional
products which are specifically designed for the network marketing distribution
channel. The Company offers products in two distinct categories: personal care
products, marketed under the trademark "Nu Skin," and nutritional products,
marketed under the trademark "Interior Design Nutritionals" ("IDN"). The Nu
Skin personal care product lines include facial care, body care, hair care and
color cosmetics, as well as specialty products such as sun protection, oral
hygiene and fragrances. The IDN product lines include nutritional supplements,
weight management products and nutritious snacks, and sports nutrition
products.
In Japan, Taiwan and Hong Kong, the Company currently offers most of NSI's
personal care products and approximately one-third of NSI's nutritional
products. In South Korea, the Company currently offers one-third of NSI's
personal care products and none of the nutritional products. The Company
believes that it can significantly grow its business and attract new customers
by expanding its product offerings in each of its markets to include more of
NSI's existing personal care and nutritional products. In addition to expanding
its product offerings with existing NSI products, the Company intends to
introduce new products tailored to specific markets.
The distribution of products through the network marketing and other direct
selling channels has grown significantly in recent years. The World Federation
of Direct Selling Associations ("WFDSA") reports that, since 1990, worldwide
direct distribution of goods and services to consumers has increased 60%,
resulting in the sale of over $72 billion of goods and services in 1995.
According to the WFDSA, $34 billion of goods and services were sold by its
members in 1995 through direct selling channels in the markets in which the
Company currently operates, which represents 47% of the global volume of direct
sales.
3
OPERATING STRENGTHS
The Company believes that its success is due to its commitment to provide a
wide range of premium quality, innovative personal care and nutritional
products and an appealing global business opportunity for persons interested in
establishing a direct sales business. The Company has been able to achieve
rapid, sustained and profitable growth by capitalizing on the following
operating strengths:
PREMIUM PRODUCT OFFERINGS. The Company is committed to building its brand
name and distributor and customer loyalty by selling premium quality,
innovative personal care and nutritional products that appeal to broad
markets. This commitment is illustrated by the Company's personal care
products slogan "All of the Good and None of the Bad" and its nutritional
products slogan "Adding Life to Years." The Company offers products
designed for the direct selling channel by focusing on innovative
consumable products which build loyalty and lead to repeat purchases.
Management believes that the Company's focus on innovative products
supports its distributors' demonstrative and educational sales techniques.
GLOBAL DISTRIBUTOR COMPENSATION PLAN. The strength of the Company's
global distributor compensation plan (the "Global Compensation Plan") is
its seamless integration across all markets in which NSI products are sold.
By entering into international sponsoring agreements with NSI, distributors
are authorized to sponsor new distributors in each country where NSI or the
Company has operations. This allows distributors to receive commissions at
the same rate for sales in foreign countries as for sales in their home
country. This is a significant benefit to distributors because they are not
required to establish new distributorships or requalify for higher levels
of commissions within each new country in which they begin to operate. The
seamless integration of the Global Compensation Plan means that distributor
knowledge and experience can be used to rapidly build distributor
leadership in new markets.
HIGH LEVEL OF DISTRIBUTOR INCENTIVES. The Company believes that the
Global Compensation Plan is among the most financially rewarding plans
offered to distributors by network marketing companies. There are two
fundamental ways in which distributors can earn money: (i) through retail
markups, for which the Company recommends a range from 43% to 60%, and (ii)
through a series of commissions on each product sale which can result in
commissions to distributors aggregating up to 58% of such product's
wholesale price. On a global basis, however, commissions have averaged from
40% to 42% of revenue from commissionable sales over the last seven years.
NEW MARKET DEVELOPMENT PROGRAM. The Company has developed a low cost,
disciplined approach to opening new markets. Each market opening is
preceded by a thorough analysis of economic and political conditions,
regulatory standards and other business, tax and legal issues. Prior to a
market opening, the Company's management team, in conjunction with NSI
support personnel, local legal counsel and tax advisors, works to obtain
all necessary regulatory approvals and establish facilities capable of
meeting distributor needs. This market development approach, combined with
the Global Compensation Plan, which motivates distributors to train and
sponsor other distributors to sell products in new markets, has enabled the
Company to quickly and successfully open new markets. See "Risk Factors--
Entering New Markets."
DISTRIBUTOR SUPPORT PROGRAMS. The Company is committed to providing a
high level of support services tailored to the needs of its distributors in
each market. The Company meets the needs and builds the loyalty of its
distributors with personalized distributor service, a support staff that
assists distributors as they build networks of downline distributors, and a
liberal product return policy. The Company provides walk-in, telephonic and
computerized product fulfillment and tracking services that result in user-
friendly, timely product distribution. Each walk-in center maintains
meeting rooms which distributors may utilize in training and sponsoring
activities.
4
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.
EXPERIENCED MANAGEMENT TEAM. The Company's senior management team,
members of which founded NSI, has been instrumental in successfully
managing the growth in revenue and net income experienced by the Company to
date. The Company has also attracted experienced local general managers to
oversee operations in Japan, Taiwan, Hong Kong and South Korea.
GROWTH STRATEGY
The Company's primary objective is to capitalize on its operating strengths
to become a leading distributor of consumer products in each of its markets.
Specifically, the Company's strategy to increase revenue and net income is as
follows:
INTRODUCE NEW PRODUCTS. Because new products tend to increase sales by
existing distributors and attract new distributors, the Company intends to
continue introducing existing and new NSI products. For example, LifePak,
the Company's most successful nutritional product, is currently available
only in Japan, where, after being introduced in 1995, it has grown to
represent approximately 20% of revenue. The Company intends, subject to
regulatory approval, to introduce LifePak in Taiwan in late 1996 and in
Hong Kong in 1997. In addition, the Company expects to launch Epoch, a new
line of ethnobotanical personal care products, in all markets by mid-1997.
The Company also intends to introduce products tailored to specific
demographic and geographic market segments and will consider introducing
entirely new product categories in the future.
OPEN NEW MARKETS. The Company will continue to pursue attractive new
market opportunities. Thailand is the next country in which the Company
intends to commence operations, subject to receipt of necessary government
approvals. The Company's preparatory work for Thailand is currently
ongoing. In addition, the Company has conducted preliminary investigations
on the feasibility of commencing operations in Indonesia, Malaysia, the
Philippines, the PRC, Singapore and Vietnam. The Company believes that
these countries may represent significant markets for the future expansion
of its operations. See "Risk Factors--Entering New Markets."
ATTRACT, RETAIN AND ENHANCE PRODUCTIVITY OF DISTRIBUTORS. To date, the
Company has enjoyed significant growth in the number of its active
distributors (defined as those distributors which have purchased products
from the Company during the previous three months). By leveraging its
operating strengths, the Company intends to continue to create and maintain
a business climate to promote the growth in the number of active
distributors and to increase distributor retention, motivation and
productivity. In addition, the Company will pursue growth in the number of
active distributors by continuing to work with NSI to enhance the Global
Compensation Plan, initiating an innovative distributor equity incentive
program, selectively opening new distributor walk-in centers to provide a
local presence in additional key cities, enhancing distributor recognition
programs, and targeting inactive distributors who may still have an
interest in the Company's business opportunity or products.
INCREASE PRODUCT CONSUMPTION. The Company intends to increase sales to
new and existing consumers through (i) increasing product promotions in
marketing literature, (ii) increasing the availability of sample packages,
(iii) emphasizing product "systems," such as the HairFitness system of
various shampoos and conditioners, which leads to the purchase of multiple
products rather than a single product, and (iv) implementing an automatic
reordering system which is designed to result in convenient repeat
purchases.
5
THE OFFERINGS
Of the 7,600,000 shares of Class A Common Stock, par value $ per share,
being offered hereby, 4,600,000 shares are being offered initially in the
United States and Canada by the U.S. Underwriters, 1,670,000 shares are being
offered initially in a concurrent offering in Japan by the Japanese
Underwriters, and 1,330,000 shares are being offered initially in a concurrent
offering outside the United States, Canada and Japan by the International
Underwriters. The initial public offering price and the underwriting discount
per share are identical for each of the Offerings. See "Underwriting."
Class A Common Stock offered
by(1):
The Company..................... 4,750,000 shares
The Selling Stockholders........ 2,850,000 shares
Total Class A Common Stock.... 7,600,000 shares
Common Stock to be outstanding
after the Offerings:
Class A Common Stock(2)......... shares
Class B Common Stock(3)(4)...... shares
Total Common Stock............ shares
Use of proceeds................... The Company expects to apply the net pro-
ceeds of the Offerings (i) to finance the
Company's entry into selected new countries
(including the payment of a one-time li-
censing fee to NSI); (ii) to repay a por-
tion of the S Distribution Notes (as de-
fined herein); (iii) to introduce new prod-
ucts into countries in which the Company
currently operates; (iv) to enhance the
Company's technological infrastructure; (v)
to establish additional offices and distri-
bution centers in countries in which the
Company currently operates; and (vi) for
general corporate purposes.
Proposed New York Stock Exchange
symbol........................... "NUS"
Voting rights..................... The Class A Common Stock and Class B Common
Stock vote as a single class on all mat-
ters, except as otherwise required by law,
with each share of Class A Common Stock en-
titling its holder to one vote and each
share of Class B Common Stock entitling its
holder to ten votes. In all other respects
the holders of Class A Common Stock and the
holders of Class B Common Stock have equal
rights. All of the shares of Class B Common
Stock are owned by the Selling Stockhold-
ers. After consummation of the Offerings,
the Selling Stockholders will beneficially
own shares of Common Stock having approxi-
mately % of the combined voting power of
the outstanding shares of Common Stock (ap-
proximately % if the Underwriters' over-
allotment options are exercised in full).
6
- --------
(1) Assumes no exercise of the Underwriters' over-allotment options, which have
been granted by the Selling Stockholders.
(2) Includes: (i) 7,600,000 shares of Class A Common Stock being offered in the
Offerings; (ii) shares of Class A Common Stock that are reserved for
issuance upon the exercise of options that will be granted to NSI prior to
the Offerings and assigned to qualifying NSI distributors in connection
with the Offerings (the "Distributor Options"); (iii) shares of Class A
Common Stock that have been issued to the Selling Stockholders and will,
prior to the Offerings, be contributed to NSI and its affiliates (other
than the Company) for issuance to employees of NSI and its affiliates
(other than the Company) as employee stock bonus awards; (iv) shares of
Class A Common Stock to be issued by the Company to its employees as
employee stock bonus awards; and (v) shares of Class A Common Stock
subject to a stock option which has been granted to an executive officer of
the Company at an exercise price of $ per share. Does not include
shares of Class A Common Stock reserved for issuance pursuant to the 1996
Stock Incentive Plan, including shares of Class A Common Stock to be
issued as stock bonus awards to certain executive officers of the Company
immediately prior to the Offerings. See "Management--1996 Stock Incentive
Plan" and "Certain Relationships and Related Transactions."
(3) All shares of Class B Common Stock are currently held by the Selling
Stockholders and each such share is convertible at any time into one share
of Class A Common Stock and converts automatically into one share of Class
A Common Stock (i) upon a transfer to a person other than a Selling
Stockholder and (ii) if the number of shares of Class B Common Stock
becomes less than 10% of the aggregate number of shares of Common Stock
outstanding. See "Description of Capital Stock--Common Stock--Conversion."
7
SUMMARY COMBINED FINANCIAL AND OTHER INFORMATION
The following tables set forth summary combined, pro forma and other
financial information of the Company.
SIX MONTHS
YEAR ENDED ENDED
YEAR ENDED SEPTEMBER 30, DECEMBER 31, JUNE 30,
---------------------------------- ------------------- -----------------
1991 1992 1993 1994 1994(/1/) 1995 1995 1996
------- ------- -------- -------- --------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
INCOME STATEMENT DATA:
Revenue................. $ 677 $42,919 $110,624 $254,637 $264,440 $358,609 $158,125 $287,711
Cost of sales........... 462 14,080 38,842 86,872 82,241 96,615 41,901 80,963
------- ------- -------- -------- -------- -------- -------- --------
Gross profit............ 215 28,839 71,782 167,765 182,199 261,994 116,224 206,748
Operating expenses:
Distributor incen-
tives................. 130 14,659 40,267 95,737 101,372 135,722 60,224 107,090
Selling, general and
administrative........ 1,249 10,065 27,150 44,566 48,753 67,475 27,511 44,551
------- ------- -------- -------- -------- -------- -------- --------
Operating income........ (1,164) 4,115 4,365 27,462 32,074 58,797 28,489 55,107
Other income (expense),
net.................... 3 160 133 443 (394) 511 549 617
------- ------- -------- -------- -------- -------- -------- --------
Income before provision
for income taxes....... (1,161) 4,275 4,498 27,905 31,680 59,308 29,038 55,724
Provision for income
taxes.................. -- 1,503 417 10,226 10,071 19,097 9,350 20,591
------- ------- -------- -------- -------- -------- -------- --------
Net income (loss)....... $(1,161) $ 2,772 $ 4,081 $ 17,679 $ 21,609 $ 40,211 $ 19,688 $ 35,133
======= ======= ======== ======== ======== ======== ======== ========
PRO FORMA INCOME STATEMENT DATA(/2/)(/3/):
Revenue........................................... $358,609 $158,125 $287,711
Cost of sales..................................... 96,615 41,901 80,963
-------- -------- --------
Gross profit...................................... 261,994 116,224 206,748
Operating expenses:
Distributor incentives........................... 135,722 60,224 107,090
Selling, general and administrative.............. 74,318 30,933 47,973
-------- -------- --------
Operating income.................................. 51,954 25,067 51,685
Other income (expense), net(/4/) ................. (1,405) (1,367) 884
-------- -------- --------
Income before provision for income taxes.......... 50,549 23,700 52,569
Provision for income taxes........................ 19,391 9,092 19,285
-------- -------- --------
Net income (loss)................................. $ 31,158 $ 14,608 $ 33,284
======== ======== ========
Net income per share(/5/)......................... $ $ $
======== ======== ========
Weighted average common shares outstanding(/5/)...
AS OF JUNE 30, 1996
-------------------------
ACTUAL AS ADJUSTED(/6/)
-------- ----------------
BALANCE SHEET DATA: (IN THOUSANDS)
Cash and cash equivalents............................. $ 51,464 $123,464
Working capital....................................... 39,334 59,469
Total assets.......................................... 124,691 226,695
Short term notes payable to stockholders.............. -- 44,565
Short term note payable to NSI........................ -- 10,000
Long term note payable to NSI......................... -- 10,000
Stockholders' equity.................................. 55,885 93,324
AS OF SEPTEMBER 30, AS OF DECEMBER 31, AS OF JUNE 30,
------------------------------ -------------------- ----------------
1991 1992 1993 1994 1994 1995 1995 1996
----- ------ ------- ------- --------- --------- ------- -------
OTHER INFORMATION(/7/):
Number of active
distributors........... -- 33,000 106,000 152,000 170,000 236,000 200,000 384,000
Number of Executive
distributors........... -- 649 2,788 5,835 6,083 7,550 7,302 12,446
8
- --------
(1) The information for the year ended December 31, 1994 is not included in the
Company's Combined Financial Statements included elsewhere in this
Prospectus. Such information has been presented for comparative purposes.
(2) The unaudited pro forma income statement data reflects the Reorganization,
the Offerings and the following adjustments as if such events had occurred
on January 1, 1995: (i) the amortization over a 20-year period of a $25.0
million payment to NSI for the exclusive rights to distribute NSI products
in Thailand, Indonesia, Malaysia, the Philippines, the PRC, Singapore and
Vietnam (the "License Fee"); (ii) the recognition by the Company of
additional management charges of $4.4 million per year relating to certain
support services provided to the Company by NSI and an NSI affiliate, which
costs were borne by NSI prior to the Reorganization; (iii) additional
administrative and overhead costs of $1.2 million per year as if the
Company had operated as a public company; (iv) adjustments for U.S. Federal
and state income taxes as if the Company had been taxed as a C corporation
rather than as an S corporation since inception; and (v) interest expense
of $1.8 million relating to the issuance of $59.6 million of interest
bearing S distribution notes (the "S Distribution Notes") due and payable
within six months (8% interest per annum) to the Selling Stockholders in
respect of the earned and undistributed taxable S corporation earnings at
June 30, 1996, that would have been distributed had the Company's S
corporation status been terminated on June 30, 1996.
(3) The pro forma balance sheet does not reflect deferred compensation expense
and additional paid-in capital, nor do the pro forma income statements
reflect the estimated non-cash compensation expense, of $21.4 million in
connection with the one-time grant of the Distributor Options at an
exercise price of 25% of the initial public offering price in connection
with the Offerings. The Distributor Options will include conditions related
to distributor performance and will vest on December 31, 1997. The Company
will record distributor stock incentive expense for these non-employee
stock options. See "Certain Relationships and Related Transactions."
(4) Other income and expense includes: (i) increased interest expense of $1.8
million for the year ended December 31, 1995 and for the six months ended
June 30, 1995, relating to the issuance of $59.6 million of S Distribution
Notes; (ii) increased interest expense of $0.9 million, $0.5 million and
$0.1 million for the year ended December 31, 1995 and for the six months
ended June 30, 1995 and 1996, respectively, relating to the issuance of
$20.0 million in notes payable to NSI; and (iii) increased interest income
of $0.8 million, $0.4 million and $0.4 million for the year ended December
31, 1995 and for the six months ended June 30, 1995 and 1996, respectively,
relating to the issuance of an estimated $10.0 million note receivable from
NSI.
(5) Computed based upon the number of shares of Common Stock outstanding after
giving effect to the Reorganization and the Offerings.
(6) The unaudited pro forma balance sheet data as of June 30, 1996, reflects:
(i) the sale of 4,750,000 shares of Class A Common Stock pursuant to the
Offerings; (ii) the issuance of $59.6 million of S Distribution Notes to
the Selling Stockholders; (iii) $20.0 million in notes payable to NSI
related to the payment of the $25.0 million License Fee to NSI; (iv) a
$15.0 million partial payment of the S Distribution Notes from the proceeds
of the Offerings; (v) an estimated $10.0 million note receivable from NSI
related to the sale of an option to purchase shares of Class A Common
Stock to NSI; (vi) estimated deferred compensation and additional paid-in
capital of $4.8 million, which represents the estimated compensation
expense related to the equity incentives granted to employees of NSI and
its affiliates (other than the Company) which vest over a period of four
years; and (vii) the recognition of a deferred tax asset of $5.0 million
relating to adjustments for U.S. Federal and state income taxes as if the
Company had been taxed as a C corporation rather than as an S corporation
since inception. No adjustment has been made to give effect to the
Company's earned and undistributed taxable S corporation earnings for the
period from July 1, 1996 through the S Termination Date (as defined
herein). The Company anticipates the increase in the S Distribution Notes
to be between approximately $20.0 million and $30.0 million. See "The
Reorganization and S Corporation Distribution." The Company estimates that,
at the Offerings, it will reserve between approximately $40.0 million and
$50.0 million of cash on hand for repayment of the S Distribution Notes.
The balance of the S Distribution Notes will be repaid from cash generated
by operations.
(7) Active distributors are those distributors who are resident in the
countries in which the Company operates and who have purchased products
during the three months ended as of the date indicated, rounded to the
nearest thousand. An Executive distributor is a distributor who has
submitted a qualifying letter of intent and achieved a specified personal
and group sales volume for a four month period.
9
RISK FACTORS
An investment in the Class A Common Stock involves special considerations
and significant risks, including, but not limited to, those discussed or
referred to below. Prospective investors should carefully consider the
following risks and information in conjunction with the other information
contained in this Prospectus before purchasing shares of Class A Common Stock.
RELIANCE UPON INDEPENDENT DISTRIBUTORS OF NSI; EFFECT OF ADVERSE PUBLICITY
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. The Company's
revenue is directly dependent upon the efforts of these independent
distributors, and any growth in future sales volume will require an increase
in the productivity of these distributors and/or growth in the total number of
distributors. As is typical in the direct selling industry, there is turnover
in distributors from year to year, which requires the sponsoring and training
of new distributors by existing distributors to maintain or increase the
overall distributor force and motivate new and existing distributors. The
Company experiences seasonal decreases in distributor sponsoring and product
sales in some of the countries in which the Company operates because of local
holidays and customary vacation periods. The size of the distribution force
can also be particularly impacted by general economic and business conditions
and a number of intangible factors such as adverse publicity regarding the
Company or NSI, or the public's perception of the Company's products, product
ingredients, NSI's distributors or direct selling businesses in general.
Historically, the Company has experienced periodic fluctuations in the level
of distributor sponsorship (as measured by distributor applications). However,
because of the number of factors that impact the sponsoring of new
distributors, and the fact that the Company has little or no control over the
level of sponsorship of new distributors, the Company cannot predict the
timing or degree of those fluctuations. There can be no assurance that the
number or productivity of the Company's distributors will be sustained at
current levels or increased in the future. In addition, the number of
distributors as a percent of the population in a given country or market could
theoretically reach levels that become difficult to exceed due to the finite
number of persons inclined to pursue a direct selling business opportunity.
This is of particular concern in Taiwan, where industry sources have estimated
that up to 10% of the population is already involved in some form of direct
selling.
Because distributors are independent contractors of NSI, neither NSI nor the
Company is in a position to provide the same level of direction, motivation
and oversight as either would with respect to its own employees. Although NSI
has a compliance department responsible for the enforcement of the policies
and procedures that govern distributor conduct, it can be difficult to enforce
these policies and procedures because of the large number of distributors and
their independent status, as well as the impact of certain resale price
maintenance and other regulations that limit the ability of NSI and the
Company to monitor and control the sales practices of distributors.
Distributor actions can negatively impact the Company and its products. For
example, in October 1995, the Company's business permit applications were
denied by the Malaysian government as the result of activities by certain NSI
distributors before required government approvals could be secured. NSI
subsequently terminated the distributorship rights of some of the distributors
involved and elected to withdraw from the Malaysian market for a period of
time. Distributor activities in other countries in which the Company has not
commenced operations may similarly result in an inability to, or delay in,
securing required regulatory and business permits. See "Business--New Market
Opportunities." In addition, the publicity resulting from inappropriate
earnings claims and product representations by distributors can make the
sponsoring and retaining of distributors more difficult, thereby negatively
impacting sales. 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.
10
GOVERNMENT REGULATION
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. As is the case with most network marketing companies, NSI and the
Company have from time to time received inquiries from various government
regulatory authorities regarding the nature of their business and other issues
such as compliance with local business opportunity and securities laws.
Although to date none of these inquiries has resulted in a finding materially
adverse to the Company or NSI, adverse publicity resulting from inquiries into
NSI's operations by certain government agencies in the early 1990's 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 merely
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. The Company believes that its method of distribution is
in compliance in all material respects with the laws and regulations relating
to direct selling activities of the countries in which the Company currently
operates. Even though management believes that laws governing direct selling
are generally becoming more permissive, 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 licensed from NSI, particularly in those (such as
Singapore) which currently prohibit network marketing.
The Company is also 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
or its distributors, (iii) fair trade laws that prohibit fixing retail prices
of products, and (iv) taxes, transfer pricing and similar regulations that
affect foreign taxable income and customs duties. Although the Company
believes that it is in material compliance with all regulations applicable to
it, it 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. Any assertion or determination that either the
Company or any of its distributors is 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 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, 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.
CONCENTRATION OF DISTRIBUTORS; RELIANCE ON DISTRIBUTOR NETWORKS
The loss of a key distributor together with a group of leading distributors
in such key 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. This is the result of the nature of the
Company's network marketing distribution system, under which distributors
develop relationships with other distributors, both within their own countries
and internationally, and under which the Company's sales are concentrated
within, and consequently dependent upon, a relatively small number of
distributor networks.
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
11
in which such participants are located. The Company, on the other hand,
receives revenues based almost exclusively on the volume of products sold
within the Company's markets. So, for example, if a distributor located in
Japan sponsors a distributor in Europe, the Japanese distributor could receive
commissions based on the sales made by the European distributor, but the
Company would not receive any revenue since the products would have been sold
outside of the Company's markets. The interests of the Company and
distributors therefore diverge somewhat in that the Company's primary
objective is to maximize the amount of products sold within the Company's
markets, while the distributors' objective is to maximize the amount of
products sold by the participants in the distributors' worldwide downline
networks. The Company and NSI have observed that the commencement of
operations in a new country tends to distract the attention of distributors
from the established markets for a period of time while key distributors begin
to build their downline networks within the new country. NSI is currently
contemplating opening operations in additional countries outside of the
Company's markets. To the extent distributors focus their energies on
establishing downline networks in these new countries, and decrease their
focus on building organizations within the Company's markets, the Company's
business and results of operations could be adversely affected. Furthermore,
the Company itself is currently contemplating opening new markets. In the
event distributors focus on these new markets, sales in existing markets might
be adversely affected. There can be no assurance that these new markets will
develop or that any increase in sales in new markets will not be more than
offset by a decrease in sales in the existing markets.
ENTERING NEW MARKETS
As part of its growth strategy, the Company has acquired from NSI the right
to act as NSI's exclusive distribution vehicle in Thailand, Indonesia,
Malaysia, the Philippines, the PRC, Singapore and Vietnam. The Company
currently intends, subject to receipt of government approvals, to commence
operations in Thailand in the near future and has conducted preliminary
investigations into the feasibility of opening the other markets in the
countries for which the Company has the right to act as NSI's exclusive
distributor. The regulatory and political climate in these other markets is
such that a replication of the Company's current operating structure cannot be
guaranteed. Because the Company's personal care and nutritional product lines
are positioned as premium product lines, the market potential for the
Company's product lines in relatively less developed countries, such as the
PRC and Vietnam, remains to be determined. Modifications to each product line
may be needed to accommodate the market conditions in each country, while
maintaining the integrity of the Company's products. No assurance can be given
that the Company will be able to successfully reformulate its product lines in
any of its new markets to attract local consumers.
Each of the proposed new markets will present additional unique difficulties
and challenges. In Thailand, for example, businesses which are more than 50%
owned by non-citizens are not permitted to operate unless they have an Alien
Business Permit, which is frequently difficult to obtain. Under the treaty of
Amity and Economic Relations between Thailand and the United States (the
"Treaty of Amity") an Alien Business Permit is not required if a Thailand
business is owned by an entity organized in the United States, a majority of
whose owners are U.S. citizens or entities. From time to time, it has been
reported that certain Thailand government officials have considered supporting
the termination of the Treaty of Amity. There can be no assurance that the
Company will ever be able to obtain all of the necessary permits and approvals
to commence operations in Thailand. The Company could face particular
difficulties in commencing operations in Thailand if the Treaty of Amity were
terminated and the Company were forced to obtain an Alien Business Permit.
The PRC has also proven to be a particularly difficult market for foreign
corporations due to its extensive government regulation and the historical
political tenants of the PRC government. In order to enter the market in the
PRC, the Company may be required to create a joint venture enterprise with a
Chinese entity and to establish a local manufacturing presence, which will
entail a significant investment on the Company's part. The Company will likely
have to apply for licenses on a province by province basis and the
repatriation of the Company's profits will be subject to restrictions on
currency conversion and the fluctuations of the government controlled exchange
rate. In addition, because distribution systems are greatly fragmented, the
Company may be forced to use business models significantly different from
those used by the Company in more developed countries. The
12
lack of a comprehensive legal system and the uncertain and sporadic
enforcement of existing legislation and laws could also have an adverse effect
on the Company's proposed business in the PRC.
The other potential new markets also present significant regulatory,
political and economic obstacles to the Company. In Singapore, for example,
network marketing is currently illegal and is not permitted under any
circumstances. Although the Company believes that this restriction will
eventually be relaxed or repealed, no assurance can be given that such
regulation will not remain in place and that the Company will not be
permanently prevented from initiating sales in Singapore. In addition,
Malaysia has governmental guidelines that have the effect of limiting foreign
ownership of companies operating in Malaysia. There can be no assurance that
the Company will be able to properly structure Malaysian operations to comply
with this policy. Therefore, although the Company believes that significant
opportunities exist to expand its operations into new markets, there can be no
assurance that these or other difficulties will not prevent the Company from
realizing the benefits of this opportunity.
MANAGING GROWTH
The Company has experienced rapid growth since it commenced operations in
1991. The management challenges imposed by this growth include entry into new
markets, growth in the number of employees and distributors, expansion of
facilities necessary to accommodate growth and additions and modifications to
the Company's product lines. To manage these changes effectively, the Company
may be required to hire additional management and operations personnel and to
improve its operational, financial and management systems. If the Company is
unable to manage growth effectively or hire or retain qualified personnel, the
Company's business and results of operations could be adversely affected.
POSSIBLE ADVERSE EFFECT ON THE COMPANY OF A CHANGE IN THE STATUS OF HONG KONG
The Company has offices and a portion of its operations in the British Crown
Colony of Hong Kong. Effective July 1, 1997, the exercise of sovereignty over
Hong Kong will be transferred from the Government of the United Kingdom of
Great Britain and Northern Ireland (the "United Kingdom") to the government of
the PRC pursuant to the Sino-British Joint Declaration on the Question of Hong
Kong (the "Joint Declaration") and Hong Kong will become a Special
Administrative Region (SAR) of the PRC. The Joint Declaration provides that
Hong Kong will be directly under the authority of the government of the PRC
but Hong Kong will enjoy a high degree of autonomy except in foreign and
defense affairs, and that Hong Kong will be vested with executive, legislative
and independent judicial power. The Joint Declaration also provides that the
current social and economic systems in Hong Kong will remain unchanged for 50
years after June 30, 1997 and that Hong Kong will retain the status of an
international financial center. Although sales in Hong Kong accounted for less
than 5% of the Company's revenues for the year ended December 31, 1995, Hong
Kong serves as the location for the Company's regional offices and an
important base of operations for many of the Company's most successful
distributors whose downline distributor networks extend into other Asian
markets. Any adverse effect on the social, political or economic systems in
Hong Kong resulting from this transfer could have a material adverse effect on
the Company's business and results of operations. Although the Company does
not anticipate any material adverse change in the business environment in Hong
Kong resulting from the 1997 transfer of sovereignty, the Company is
formulating contingency plans to transfer the Company's regional office to
another jurisdiction in the event that the Hong Kong business environment is
so affected.
RELATIONSHIP WITH AND RELIANCE ON NSI; POTENTIAL CONFLICTS OF INTEREST
Following the Reorganization, NSI will retain ownership and control of the
NSI trademarks, tradenames, the Global Compensation Plan, distributor lists
and related intellectual property and know-how (collectively, the "Licensed
Property"), and will license to the Company rights to use the Licensed
Property in certain markets. Thus the Company will not be able to use the Nu
Skin name to expand into other markets for which the Company does not
currently have a license without first obtaining additional licenses or other
rights from NSI. There can be no assurance that NSI will make any additional
markets available to the Company or that the terms of any new licenses from
NSI will be acceptable to the Company.
13
NSI has licensed to the Company, through the Subsidiaries, rights to
distribute NSI products and to use the Licensed Property in the Company's
markets, and an NSI affiliate, Nu Skin Management Group, Inc. ("NSIMG") will
provide management support services to the Company and the Subsidiaries,
pursuant to distribution, trademark/tradename license, licensing and sales,
and management services agreements (collectively, the "Operating Agreements").
The Company will rely on NSI for research, development, testing, labeling and
regulatory compliance for products sold to the Company under the distribution
agreements, and virtually all of the Company's revenues will be derived from
products and sales aids purchased from NSI pursuant to these agreements. NSIMG
will provide the Company with a variety of management and consulting services,
including, but not limited to, management, legal, financial, marketing and
distributor support/training, public relations, international expansion, human
resources, strategic planning, product development and operations
administration services. Each of the Operating Agreements is for a term ending
December 31, 2016, and is subject to renegotiation after December 31, 2001, in
the event that the Selling Stockholders, on a combined basis, no longer
beneficially own a majority of the combined voting power of the outstanding
shares of Common Stock. The Company will be almost completely dependent on the
Operating Agreements to conduct its business, and in the event NSI is unable
or unwilling to perform its obligations under the Operating Agreements, or
terminates the Operating Agreements as provided therein, the Company's
business and results of operations will be adversely affected.
Upon the consummation of the Offerings, approximately % of the combined
voting power of the outstanding shares of Common Stock will be held by the
Selling Stockholders (approximately % if the Underwriters' overallotment
options are exercised in full). Consequently, the Selling Stockholders will
have the ability, acting in concert, to elect all directors of the Company and
approve any action requiring approval by a majority of the stockholders of the
Company. The Selling Stockholders also own, and following the Offerings will
continue to own, 100% of the outstanding shares of NSI. As a result of this
ownership, the Selling Stockholders will consider the short-term and the long-
term impact of all stockholder decisions on the consolidated financial results
of NSI and the Company. See "--Control by Selling Stockholders; Anti-Takeover
Effect of Dual Classes of Common Stock."
The Operating Agreements were approved by the present Board of Directors of
the Company, which is composed entirely of officers and shareholders of NSI.
It is expected that, subsequent to the closing of the Offerings, the
composition of the Board of Directors of the Company will be changed so that
at least two of its members will be persons unaffiliated with NSI. In
addition, most of the executive officers of the Company are also executive
officers of NSI. It is expected that a number of the Company's executive
officers will continue to spend a portion of their time on the affairs of NSI,
for which they will continue to receive compensation from NSI.
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."
RELIANCE ON AND CONCENTRATION OF OUTSIDE MANUFACTURERS
All the Company's products are produced by unaffiliated manufacturers
primarily through 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
14
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 60% of its
personal care and nutritional products, respectively. The Company believes
that in the event that NSI's relationship with either of these 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.
HOLDING COMPANY STRUCTURE
The Company will conduct all of its operations through the Subsidiaries.
Accordingly, an important source of the Company's income will be dividends and
other distributions from the Subsidiaries. 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
After the Reorganization, the Company will be subject to taxation in the
United States, where it is incorporated, at a statutory corporate federal tax
rate of 35.0% plus any applicable state income taxes. In addition, each
Subsidiary will be subject to taxation in the country in which it operates,
currently ranging from a statutory tax rate of 57.9% in Japan to 16.5% in Hong
Kong. The Company will be eligible for foreign tax credits in the U.S. for the
amount of foreign taxes actually paid in a given period. In the event that the
Company's operations in high tax jurisdictions such as Japan grow
disproportionately to the rest of the Company's operations, the Company will
be unable to fully utilize its foreign tax credits in the U.S., which could,
accordingly, result in the Company paying a higher overall effective tax rate
on its worldwide operations.
Because the Subsidiaries operate outside of the United States, the Company
is subject to the jurisdiction of numerous foreign tax authorities. In
addition to closely monitoring the Subsidiaries locally based income, these
tax authorities regulate and restrict various corporate transactions,
including intercompany transfers. The Company believes that the tax
authorities in Japan and South Korea are particularly active in challenging
the tax structures of foreign corporations and their intercompany transfers.
Although the Company believes that its tax and transfer pricing structures are
in compliance in all material respects with the laws of every jurisdiction in
which it operates, no assurance can be given that these structures will not be
challenged by foreign tax authorities or that such challenges will not have a
material adverse effect on the Company's business or results of operations.
15
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 is
obligated to pay NSI a fixed commission expense of 42% of commissionable
product sales to distributors in each of the Company's markets (with the
exception of South Korea where, due to government regulations, the Company
utilizes a different formula to satisfy this obligation). The Licensing and
Sales Agreements provide that the Company is to satisfy this obligation by
paying commissions owed to local distributors. In the event that these
commissions exceed 42% of commissionable product sales, the Company is
entitled to receive the difference from NSI. In the event that the commissions
paid are lower than 42%, the Company must pay the difference to NSI. Under
this formulation, the Company's total commission expense is fixed at 42% of
commissionable product sales in each country (except for South Korea). The 42%
figure has been set on the basis of NSI's experience over the past seven years
which indicates that actual commissions paid in a given year together with the
cost of administering the Global Compensation Plan average approximately 42%
of commissionable product sales for such year. In the event that actual
commissions payable to distributors from sales in the Company's markets vary
from these historical results, whether as a result of changes in distributor
behavior or changes to the Global Compensation Plan or in the event that NSI's
cost of administering the Global Compensation Plan increases or decreases, the
Licensing and Sales Agreements provide that the intercompany settlement figure
may be modified to more accurately reflect actual results. This could result
in the Company becoming obligated to make greater settlement payments to NSI
under the Licensing and Sales Agreements. Such additional payments could
adversely affect the Company's results of operations. Because the Company
licenses the right to use the Global Compensation Plan from NSI, the structure
of the plan, including commission rates, is under the control of NSI.
SEASONALITY AND CYCLICALITY
The Company's business is impacted by general seasonal trends common to the
direct selling channel in Asia. Seasonal fluctuations experienced by the
Company have generally been related to the occurrence of major cultural events
and vacation patterns in each of the Company's markets. For example, the
Company has historically experienced a decline in revenue in Japan, Taiwan and
Hong Kong during the local New Year celebrations, which fall in the Company's
first quarter. Management also anticipates a decline in revenue for the first
quarter in South Korea, when a similar New Year celebration occurs. In Japan,
the Company has also historically experienced a decline in revenue during
August, when many of the local distributors traditionally take vacations.
The Company's results of operations have been subject to cyclical
variations. 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. In addition, the Company has also experienced
variations on a quarterly basis in its results of operations, as new products
are introduced and new markets are opened. No assurances can be given that the
Company's revenue growth rate in South Korea, which commenced operations in
February 1996, or in new markets where operations have not commenced, will
follow this pattern.
PRODUCT LIABILITY
The Company may be subject, under applicable laws and regulations, to
liability for loss or injury caused by its products. The Company is currently
covered for product liability claims to the extent of and under insurance
programs maintained by NSI for its benefit and for the benefit of its
affiliates purchasing NSI products and will continue to be so covered after
the Offerings. 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.
16
COMPETITION
The markets for personal care and nutritional products are large and
intensively competitive. The Company competes directly with companies that
manufacture and market personal care and nutritional products in each of the
Company's product lines. 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 greater name recognition and
financial resources. 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; CURRENCY RISKS
Virtually all of the Company's assets and operations are located, and all of
its revenues are derived from, operations outside the United States. The
Company's operations may be materially and adversely affected by economic,
political and social conditions in the countries in which it operates. A
change in policies by any government in the Company's markets could adversely
affect the Company and its operations through, among other things, changes in
laws, rules or regulations, or the interpretation thereof, confiscatory
taxation, restrictions on currency conversion, currency repatriation or
imports, or the expropriation of private enterprises. Although the general
trend in these countries has been toward more open markets and trade policies
and the fostering of private business and economic activity, no assurance can
be given that the governments in these countries will continue to pursue such
policies or that such policies will not be significantly altered in future
periods. This could be especially true in the event of a change in leadership,
social or political disruption or upheaval, or unforeseen circumstances
affecting economic, political or social conditions or policies. Moreover, 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 "Management's Discussion and
Analysis of Financial Conditions and Results of Operations--Currency
Fluctuation and Exchange Rate Information."
The Company purchases virtually all of its products from NSI through Nu Skin
Hong Kong. Nu Skin Hong Kong pays for its purchases from NSI under a regional
distribution agreement in U.S. dollars, while the other Subsidiaries pay for
their purchases from Nu Skin Hong Kong under wholesale distribution agreements
in
17
their local currency. Nu Skin Hong Kong therefore bears significant currency
exchange risk as a result of purchases from NSI on behalf of the Subsidiaries.
Fluctuations in currency exchange rates, particularly those caused by an
increase in the value of the U.S. dollar, could have a material adverse effect
on the Company's financial position, results of operations and cash flows. The
Company is not a party to material foreign currency hedging transactions and
does not anticipate that it will engage in significant currency hedging
transactions in the future. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
IMPORT RESTRICTIONS, DUTIES AND REGULATION OF CONSUMER GOODS
With the exception of a small percentage of revenues in Japan, virtually all
of the Company's sales historically have been derived from products purchased
from NSI. All of those products historically have been imported into the
countries in which they were ultimately sold. The countries in which the
Company currently conducts business impose various legal restrictions on
imports. In most cases, permits or licenses are required to import particular
types of goods, including nutritional supplements and personal care products.
Duties of varying amounts are imposed based on the values or quantities of the
goods imported. In certain countries and jurisdictions, cosmetic and
nutritional products are subject to significant import duties. Other products
that the Company imports, notably products in the personal care line, may be
subject to health and safety regulations. Certain products in the nutritional
line are also subject to governmental regulation regarding food and drugs,
which regulations have had the effect of limiting the Company's ability to
sell some of its products in some of its countries and jurisdictions. Certain
of the Company's products which may be deemed in certain countries to be
"pharmaceutical" in nature may not be sold through network marketing channels
in those countries. The Company has not experienced any difficulty maintaining
its import licenses but has experienced complications regarding health and
safety and food and drug regulations for nutritional products. Many products
require reformulation to comply with local requirements. In addition, new
regulations could be adopted or any of the existing regulations could be
changed at any time in a manner that could have a material adverse effect on
the Company's business and results of operations. Duties on imports are a
component of national trade and economic policy and could be changed in a
manner that would be materially adverse to the Company's sales and its
competitive position compared to locally-produced goods, in particular in
countries such as Taiwan, where the Company's products are already subject to
high customs duties. In addition, import restrictions in certain countries and
jurisdictions limit the Company's ability to import products from NSI. In some
jurisdictions, such as the PRC, regulators may prevent the importation of NSI
products altogether. Present or future health and safety or food and drug
regulations could delay or prevent the introduction of new products into a
given country or marketplace or suspend or prohibit the sale of existing
products in such country or marketplace.
CONTROL BY SELLING 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 current NSI shareholders. Consequently, the shares of Class B Common Stock
enjoy ten to one voting privileges over the shares of Class A Common Stock
until the outstanding shares of Class B Common Stock constitute less than 10%
of the total outstanding shares of Common Stock. Immediately following the
Offerings, the shareholders of NSI will collectively own 100% of the
outstanding shares of the Class B Common Stock representing approximately %
of the combined voting power of the outstanding shares of Common Stock
(approximately % if the Underwriters' over-allotment options are exercised in
full). Accordingly, following completion of the Offerings, the shareholders of
NSI, acting fully or partially in concert, will be able to control the
election of the Board of Directors of the Company and thus the direction and
future operations of the Company without the supporting vote of any other
stockholder of the Company, including decisions regarding acquisitions and
other business opportunities, the declaration of dividends and the issuance of
additional shares of Class A Common Stock and other securities. NSI is a
privately-held company, the shareholders of which are named herein under the
caption "Principal and Selling Stockholders." As long as the shareholders of
NSI are majority stockholders of the Company, assuming they act in concert,
third parties will not be able to obtain control of the Company through
purchases of shares of Class A Common Stock.
18
In addition, the Operating Agreements between the Company and NSI include
provisions that significantly reduce the likelihood of an involuntary change
of control. These anti-takeover mechanisms could have a negative impact on the
Company's valuation and be a limiting factor on the potential appreciation in
value of the shares offered hereby.
ABSENCE OF PUBLIC MARKET FOR CLASS A COMMON STOCK; DETERMINATION OF OFFERING
PRICE; PRICE FLUCTUATIONS
Prior to the Offerings, there has been no public market for the Class A
Common Stock and there can be no assurance that an active trading market for
the Class A Common Stock will develop or continue after the closing of the
Offerings. Accordingly, no assurance can be given as to the liquidity of the
market for the Class A Common Stock or the price at which any sales of shares
of Class A Common Stock may occur in the future, which price will depend upon
the number of holders thereof and other factors beyond the control of the
Company, including the liquidity of the market for the Common Stock, investor
perceptions of the Company, changes in conditions or trends in the Company's
industry or publicly traded comparable companies, adverse publicity which the
Company may suffer and general economic and other conditions. The initial
public offering price per share of the Class A Common Stock will be determined
by negotiation among the Company, the Selling Stockholders and representatives
of the Underwriters, and may not be indicative of the market price for the
shares of Class A Common Stock after the closing of the Offerings.
SHARES ELIGIBLE FOR FUTURE SALE
The Board of Directors of the Company is entitled to issue additional
shares of Class A Common Stock, generally without any stockholder vote. The
Company, its directors and officers and the shareholders of NSI have agreed or
will agree prior to the Offerings not to sell or otherwise dispose of any
shares of common stock or securities convertible into or exchangeable or
exercisable for Common Stock, without the prior consent of Merrill Lynch & Co.
for a period of 180 days after the date of this Prospectus, except that the
Company may, without such consent, grant options or issue shares of Common
Stock pursuant to certain equity incentive programs including, without
limitation, the Distributor Options and the employee stock bonus awards, which
vest at specified times following the Offerings. See "Certain Relationships
and Related Transactions" and "Underwriting." The shares of Class A Common
Stock and Class B Common Stock issued in the Reorganization will be
"restricted" shares within the meaning of Rule 144 of the 1933 Act (the "1933
Act") and, absent registration or an exemption from registration under the
1933 Act, cannot, as Rule 144 is currently in effect, be traded for a period
of at least two years after the Reorganization. Accordingly, approximately
shares of Class A Common Stock will be eligible for resale under Rule 144 on
, 1998, which is the expiration of the two-year holding period pursuant to
Rule 144. The sale or issuance or the potential for sale or issuance of such
shares of Class A Common Stock could have an adverse impact on the market
price of the Class A Common Stock or on any trading market for the Class A
Common Stock that may develop. See "Shares Eligible for Future Sale."
DILUTION
The initial public offering price is expected to be substantially higher
than the book value per share of Common Stock. Investors purchasing shares of
Common Stock in the Offerings will therefore incur immediate and substantial
dilution. See "Dilution."
19
THE REORGANIZATION AND S CORPORATION DISTRIBUTION
THE REORGANIZATION
Prior to the Offerings, the shareholders of Nu Skin Japan, Nu Skin Korea, Nu
Skin Taiwan, Nu Skin Hong Kong and Nu Skin Thailand will contribute their
shares of capital stock to the capital of the Company in a transaction
intended to qualify under Section 351 of the Code in exchange for shares of
the Company's Class B Common Stock (the "Reorganization"). Prior to the
Reorganization, all of the outstanding shares of capital stock of the
Subsidiaries and Nu Skin Thailand were held by the Selling Stockholders. The
Reorganization will result in each of the Subsidiaries and Nu Skin Thailand
becoming a wholly-owned subsidiary of the Company.
Nu Skin Hong Kong and Nu Skin Taiwan are Utah corporations, each operating
through branches in Hong Kong and Taiwan, respectively. Nu Skin Japan and Nu
Skin Korea are Japanese and South Korean corporations, respectively, and both
are domesticated corporations in Delaware. Nu Skin Thailand, which currently
has no operations, is a Thailand corporation and also a Delaware domesticated
corporation. Nu Skin Japan, Nu Skin Korea and Nu Skin Thailand each has dual
residence in the U.S. and its respective foreign jurisdiction, and each is
treated as a U.S. corporation for U.S. tax purposes and a Japan, South Korea
or Thailand corporation, respectively, for tax purposes in each such
jurisdiction. After the Reorganization, Nu Skin Hong Kong and Nu Skin Taiwan
will continue to be viewed as branches in Hong Kong and Taiwan, respectively,
and Nu Skin Japan, Nu Skin Korea and Nu Skin Thailand will continue to be
viewed as domestic corporations in Japan, South Korea and Thailand,
respectively.
The following chart illustrates the organizational structure of the Company
immediately after the Reorganization and the Offerings.
POST-REORGANIZATION AND THE OFFERINGS
Existing Public
Stockholders Stockholders
Class B Common Stock Class A Common Stock
representing % of the representing % of the
Total Common Stock Total Common Stock
Nu Skin Asia
(US Corporation)
100% 100%
Nu Skin Nu Skin Nu Skin Nu Skin
International, Inc. Hong Kong Japan Taiwan
US Corporation (US Corporation) (US Corporation (US Corporation)
and
Japan Corporation)
Nu Skin Nu Skin
Korea Thailand
(US Corporation (US Corporation
and South Korea and
Corporation) Thailand
Corporation)
S CORPORATION DISTRIBUTION
Prior to the Reorganization, each Subsidiary elected to be treated as an "S"
corporation under subchapter S of the Code and comparable state tax laws. As a
result of the Subsidiaries' S corporation status, the earnings of the
Subsidiaries since incorporation have been included in the taxable income of
the Selling Stockholders for Federal and certain state income tax purposes,
and the Subsidiaries have generally not been subject to U.S. Federal or state
income tax on such earnings. Prior to the consummation of the Offerings, the
Subsidiaries' S
20
corporation status will be terminated (the "S Termination Date"). Prior to the
S Termination Date, the Company will declare a distribution to the Selling
Stockholders that will include all of the Subsidiaries' previously earned and
undistributed S corporation earnings through the S Termination Date (the "S
Corporation Distribution"). As of June 30, 1996, the Subsidiaries' aggregate
undistributed taxable S corporation earnings were $59.6 million. The Company
estimates that the Subsidiaries' aggregate undistributed taxable S corporation
earnings will be between $80.0 million and $90.0 million as of the S
Termination Date (which includes approximately $20.0 million to $30.0 million
of the Company's earned and undistributed taxable S corporation earnings for
the period from July 1, 1996 through the S Termination Date). The S
Corporation Distribution will be distributed in the form of promissory notes
due within six months of the S Termination Date bearing interest at 8% per
annum (S Distribution Notes). Upon the consummation of the Offerings,
approximately $15.0 million of the proceeds from the Offerings will be used to
pay a portion of the S Distribution Notes. The Company estimates that, at the
Offerings, it will reserve between approximately $40.0 million and $50.0
million of cash on hand for repayment of the S Distribution Notes. The balance
of the S Distribution Notes will be repaid from cash generated by operations.
On and after the S Termination Date, the Company will no longer be treated as
an S corporation and, accordingly, will be fully subject to Federal and state
income taxes.
21
USE OF PROCEEDS
The net proceeds from the sale of shares of Class A Common Stock by the
Company are estimated to be approximately $92 million, based on an assumed
initial public offering price of $ per share and after deducting estimated
underwriting discounts and offering expenses payable by the Company. The
Company will not receive any of the proceeds from the sale of shares of Class
A Common Stock by the Selling Stockholders, including from the exercise of the
Underwriters' over-allotment option. The Company has agreed to pay certain
expenses on behalf of the Selling Stockholders.
The Company anticipates applying the net proceeds of the Offerings as
follows: (i) approximately $40 million of such proceeds will be used, together
with operating income, to finance the entry of the Company into Thailand, the
Philippines, the PRC (where it is anticipated that the Company will be
required to invest in a manufacturing facility), Malaysia, Indonesia, Vietnam
and Singapore, which includes a $15 million payment to NSI for the exclusive
rights to distribute NSI products in these countries and which may include
organizational costs, the initial build-up of inventory and other start-up
expenses; (ii) approximately $15 million will be used to repay a portion of
the S Distribution Notes; (iii) approximately $12 million of such proceeds
will be used for the introduction of new products in the Company's markets;
(iv) approximately $12 million of such proceeds will be used to enhance the
Company's technological infrastructure, including the expansion of information
systems hardware and support capabilities allowing the Company the ability to
better support distributors; (v) approximately $10 million of such proceeds
will be used to expand the Company's presence and operations in South Korea,
Japan and Taiwan, which will include the establishment of several additional
walk-in distributor centers in major cities; and (vi) the remainder of such
proceeds, approximately $3 million, will be used for general corporate
purposes, which may include additional capital expansion projects. Pending
such uses, the Company intends to invest the proceeds from the Offerings in
short-term, interest bearing, investment grade instruments.
DIVIDEND POLICY
The Company does not anticipate that, after the Offerings, any dividends
will be declared on the Class A 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, however, 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 "Description of Capital Stock--Common
Stock--Dividends" and "--Preferred Stock."
22
CAPITALIZATION
The following table sets forth the cash and cash equivalents, the short-term
debt and capitalization of the Company on a combined basis as of June 30,
1996, and as adjusted as of that date to give effect to the Reorganization,
including (i) the S Corporation Distribution as if the Company's S corporation
status had terminated on such date; and (ii) $5.0 million of net deferred tax
assets that would have been recorded had the Company's S corporation status
been terminated on June 30, 1996, and as further adjusted to reflect the sale
by the Company of shares of Class A Common Stock in the Offerings, and the
application of the net proceeds therefrom. The information below should be
read in conjunction with the Combined Financial Statements and the related
notes thereto and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and pro forma financial statements included
elsewhere in this Prospectus.
AS OF JUNE 30, 1996
---------------------------------------------------
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
AS AS FURTHER
ACTUAL ADJUSTED ADJUSTED /(1)(2)(3)/
------- -------- ------------------------
Cash and cash
equivalents............ $51,464 $51,464 $123,464
======= ======= ========
Short-term notes
payable(/4/)........... $ -- $59,565 $ 54,565
======= ======= ========
Long-term notes
payable................ $ -- $ -- $ 10,000
Stockholders' equity:
Capital Stock of the
Subsidiaries prior to
the Reorganization.... 4,550/(5)/ -- --
Preferred Stock, par
value $0.001 per
share, 25,000,000
shares authorized,
no shares issued and
outstanding .......... -- -- --
Class A Common Stock,
par value $ per
share, 500,000,000
shares
authorized, ,
and shares
issued and outstanding
actual, as adjusted
and as further
adjusted,
respectively.......... -- -- 14
Class B Common Stock,
par value $ per
share, shares
authorized, ,
and shares
issued and outstanding
actual, as adjusted
and as further
adjusted,
respectively.......... -- 100/(5)/ 90
Additional paid in
capital............... -- -- 106,805
Cumulative foreign
currency translation
adjustment............ (3,780) (3,780) (3,780)
Retained earnings...... 55,115 5,004/(6)/ 5,004
Deferred compensation.. -- -- (4,809)
Note receivable from
NSI................... -- -- (10,000)
------- ------- --------
Total stockholders'
equity.............. 55,885 1,324 93,324
------- ------- --------
Total
capitalization...... $55,885 $ 1,324 $103,324
======= ======= ========
- --------
(1) Reflects the sale by the Company of 4,750,000 shares of Class A Common
Stock at an estimated offering price of $ per share, less estimated
offering expenses of $8.0 million, including Underwriters' discounts. The
Company will use a portion of the net proceeds from the Offerings to pay
the $25.0 million License Fee to NSI, which payment will consist of $20.0
million in notes payable to NSI and a $5.0 million payment to NSI.
Approximately $15.0 million of the net proceeds of the Offerings will be
used to repay a portion of the S Distribution Notes. The Company estimates
that, at the Offerings, it will reserve between approximately $40.0
million and $50.0 million of cash on hand for repayment of the S
Distribution Notes. The balance of the S Distribution Notes will be repaid
from cash generated by operations.
(2) Reflects the conversion by the Selling Stockholders of shares of
Class B Common Stock into Class A Common Stock. These shares will be
contributed by the Selling Stockholders, prior to the Offerings, to the
Company and NSI and its affiliates (other than the Company) for issuance
in connection with the Distributor Options and employee stock bonus
awards. Also reflects estimated deferred compensation and additional paid-
in capital of $4.8 million, which represents the estimated compensation
expense related to the equity incentives granted to employees of NSI and
its affiliates (other than the Company) which vest over a period of four
years.
(3) No adjustment has been made to give effect to the Company's earned and
undistributed taxable S corporation earnings for the period from July 1,
1996, through the S Termination Date. The Company anticipates the increase
in the S Distribution Notes to be between approximately $20.0 million and
$30.0 million. See "The Reorganization and S Corporation Distribution."
The pro forma balance sheet does not reflect deferred compensation expense
and additional paid-in capital of $21.4 million in connection with the
one-time grant of stock options at 25% of the initial public offering
price to independent distributors (non-employees) of the Company
immediately prior to the Offerings.
(4) Reflects the issuance of $59.6 million of S Distribution Notes to the
Selling Stockholders in respect of the earned and undistributed taxable S
corporation earnings at June 30, 1996, that would have been distributed
had the Subsidiaries' S corporation status been terminated on June 30,
1996. Approximately $15.0 million of the net proceeds of the Offerings
will be used to repay a portion of the S Distribution Notes.
(5) Reflects the contribution by the Selling Stockholders of their interests
in the Subsidiaries in exchange for shares of Class B Common Stock.
(6) Reflects the recognition of a deferred tax asset of $5.0 million. In
connection with the Reorganization, the Company will make certain
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.
23
DILUTION
The net tangible book value of the Company at June 30, 1996 was
approximately $55.9 million, or $ per share of Common Stock. After giving
effect to the Reorganization and the S Corporation Distribution as if they had
occurred as of June 30, 1996 and the Company's S corporation status had
terminated at such date, the pro forma net tangible book value of the Company
at June 30, 1996 would have been approximately $1.3 million, or $ per share
of Common Stock. After giving effect to the sale of the 4,750,000 shares of
Class A Common Stock offered by the Company hereby, and the application of the
estimated net proceeds therefrom as set forth under "Use of Proceeds" (after
deducting estimated offering expenses and the underwriting discount), the pro
forma net tangible book value of the Company as adjusted at June 30, 1996
would have been approximately $68.3 million, or $ per share. See "The
Reorganization and S Corporation Distribution" and "Use of Proceeds." This
represents an immediate dilution of $ per share to purchasers of shares at
the initial public offering price. The following table illustrates the per
share dilution:
Assumed initial public offering price per share(/1/)................ $
Net tangible book value per share at June 30, 1996............ $
Increase in net tangible book value per share attributable to
the establishment of deferred tax assets.....................
Decrease in net tangible book value per share attributable to
S Corporation Distribution and Reorganization................
Adjusted net tangible book value per share before the
Offerings....................................................
Increase in net tangible book value per share attributable to
the Offerings................................................
Decrease in tangible book value per share attributable to the
payment of the
License Fee..................................................
Net tangible book value, as further adjusted, per share after the
Offerings..........................................................
Dilution per share to purchasers of shares in the Offerings.........
--------
(1) Before deducting estimated underwriting discounts and commissions
and estimated expenses of the Offerings payable by the Company.
The following table summarizes on a pro forma basis as of June 30, 1996 the
difference between the number of shares of Common Stock purchased from the
Company, the total consideration paid and the average price per share paid by
the Selling Stockholders and by the purchasers of Common Stock in the
Offerings at an assumed initial public offering price of $ per share.
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
---------------------- ------------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ------------ ------- ---------
Selling Stockholders.... (/1/) % $ --(/2/) --% $--
New investors........... 7,600,000(/3/) 159,600,000 100
--------- --- ------------ ---
Total................. 100% $159,600,000 100%
========= === ============ ===
--------
(1) Excludes the 2,850,000 shares assumed to be sold by the Selling
Stockholders to new investors in connection with the Offerings.
Includes shares which the Selling Stockholders have committed
to transfer to NSI and certain NSI affiliates for subsequent
issuance upon exercise of the Distributor Options and in connection
with employee stock bonus awards.
(2) The cash consideration paid by the Selling Stockholders has been
reduced by distributions previously made to the Selling
Stockholders and certain distributions to be received by the
Selling Stockholders out of the net proceeds of the Offerings. See
"The Reorganization and S Corporation Distribution" and "Use of
Proceeds."
(3) Includes 2,850,000 shares sold by the Selling Stockholders and
4,750,000 new shares sold by the Company in connection with the
Offerings.
24
SELECTED COMBINED FINANCIAL AND OTHER INFORMATION
The following selected combined financial and other data as of December 31,
1994 and 1995 and for the fiscal years ended September 30, 1993 and 1994 and
for the three month period ended December 31, 1994 and for the year ended
December 31, 1995 have been derived from the Company's Combined Financial
Statements, which have been audited by Price Waterhouse LLP, independent
accountants, included elsewhere in this Prospectus. The combined financial
data as of September 30, 1993 and 1994 are derived from the combined financial
statements of the Company, which have been audited but are not contained
herein. The financial data as of September 30, 1991 and 1992 and for the
fiscal years ended September 30, 1991 and 1992 and for the year ended December
31, 1994 and as of June 30, 1996 and for the six months ended June 30, 1995
and 1996 are unaudited. Interim results, in the opinion of management, include
all adjustments (consisting solely of normal recurring adjustments) necessary
to present fairly the financial information for such periods; however, such
results are not necessarily indicative of the results which may be expected
for any other interim period or for a full year. This information should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Combined Financial Statements and
the related notes thereto included elsewhere in this Prospectus.
SIX MONTHS
THREE MONTHS YEAR ENDED ENDED
YEAR ENDED SEPTEMBER 30, ENDED DECEMBER 31, JUNE 30,
---------------------------------- DECEMBER 31, ------------------- -----------------
1991 1992 1993 1994 1994 1994(/1/) 1995 1995 1996
------- ------- -------- -------- ------------ --------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
INCOME STATEMENT DATA:
Revenue................. $ 677 $42,919 $110,624 $254,637 $73,562 $264,440 $358,609 $158,125 $287,711
Cost of sales........... 462 14,080 38,842 86,872 19,607 82,241 96,615 41,901 80,963
------- ------- -------- -------- ------- -------- -------- -------- --------
Gross profit............ 215 28,839 71,782 167,765 53,955 182,199 261,994 116,224 206,748
Operating expenses:
Distributor incen-
tives................. 130 14,659 40,267 95,737 27,950 101,372 135,722 60,224 107,090
Selling, general and
administrative........ 1,249 10,065 27,150 44,566 13,545 48,753 67,475 27,511 44,551
------- ------- -------- -------- ------- -------- -------- -------- --------
Operating income........ (1,164) 4,115 4,365 27,462 12,460 32,074 58,797 28,489 55,107
Other income (expense),
net.................... 3 160 133 443 (813) (394) 511 549 617
------- ------- -------- -------- ------- -------- -------- -------- --------
Income before provision
for income taxes....... (1,161) 4,275 4,498 27,905 11,647 31,680 59,308 29,038 55,724
Provision for income
taxes.................. -- 1,503 417 10,226 2,730 10,071 19,097 9,350 20,591
------- ------- -------- -------- ------- -------- -------- -------- --------
Net income (loss)....... $(1,161) $ 2,772 $ 4,081 $ 17,679 $ 8,917 $ 21,609 $ 40,211 $ 19,688 $ 35,133
======= ======= ======== ======== ======= ======== ======== ======== ========
PRO FORMA INCOME STATEMENT DATA(/2/)(/3/):
Revenue........................................... $358,609 $158,125 $287,711
Cost of sales..................................... 96,615 41,901 80,963
-------- -------- --------
Gross profit...................................... 261,994 116,224 206,748
Operating expenses:
Distributor incentives........................... 135,722 60,224 107,090
Selling, general and administrative.............. 74,318 30,933 47,973
-------- -------- --------
Operating income.................................. 51,954 25,067 51,685
Other income (expense), net(/4/).................. (1,405) (1,367) 884
-------- -------- --------
Income before provision for income taxes.......... 50,549 23,700 52,569
Provision for income taxes........................ 19,391 9,092 19,285
-------- -------- --------
Net income (loss)................................. $ 31,158 $ 14,608 $ 33,284
======== ======== ========
Net income per share(/5/)......................... $ $ $
======== ======== ========
Weighted average common shares outstanding(/5/)...
25
AS OF
AS OF SEPTEMBER 30, AS OF DECEMBER 31, JUNE 30,
------------------------------- -------------------- --------
1991 1992 1993 1994 1994 1995 1996
------ ------ ------- ------- --------- --------- --------
BALANCE SHEET DATA: (IN THOUSANDS)
Cash and cash equiva-
lents.................. $1,132 $1,553 $14,591 $18,077 $ 16,288 $ 63,213 $ 51,464
Working capital......... (921) 1,026 (504) 15,941 26,680 47,863 39,334
Total assets............ 2,733 10,236 41,394 71,565 61,424 118,228 124,691
Stockholders' equity.... (656) 2,749 6,926 24,934 33,861 61,771 55,885
AS OF JUNE 30, 1996
-------------------------
ACTUAL AS ADJUSTED(/6/)
-------- ----------------
BALANCE SHEET DATA: (IN THOUSANDS)
Cash and cash equivalents............................. $ 51,464 $123,464
Working capital....................................... 39,334 59,469
Total assets.......................................... 124,691 226,695
Short term notes payable to stockholders.............. -- 44,565
Short term note payable to NSI........................ -- 10,000
Long term note payable to NSI......................... -- 10,000
Stockholders' equity.................................. 55,885 93,324
AS OF SEPTEMBER 30, AS OF DECEMBER 31, AS OF JUNE 30,
----------------------------- ------------------ ---------------
1991 1992 1993 1994 1994 1995 1995 1996
------ ------ ------- ------- --------- --------- ------- -------
OTHER INFORMATION(/7/):
Number of active
distributors........... -- 33,000 106,000 152,000 170,000 236,000 200,000 384,000
Number of Executive
distributors........... -- 649 2,788 5,835 6,083 7,550 7,302 12,446
- --------
(1) The information for the year ended December 31, 1994 is not included in
the Company's Combined Financial Statements included elsewhere in this
Prospectus. Such information has been presented for comparative purposes.
(2) The unaudited pro forma income statement data reflects the Reorganization,
the Offerings and the following adjustments as if such events had occurred
on January 1, 1995: (i) the amortization over a 20-year period of a $25.0
million purchase from NSI of the exclusive rights to distribute NSI
products in Thailand, Indonesia, Malaysia, the Philippines, the PRC,
Singapore and Vietnam (the "License Fee"); (ii) the recognition by the
Company of additional management charges of $4.4 million per year relating
to certain support services provided to the Company by NSI and an NSI
affiliate, which costs were borne by NSI prior to the Reorganization;
(iii) additional administrative and overhead costs of $1.2 million per
year as if the Company had operated as a public company; (iv) adjustments
for U.S. Federal and state income taxes as if the Company had been taxed
as a C corporation rather than an S corporation; and (v) interest expense
of $1.8 million relating to the issuance of $59.6 million of interest
bearing S distribution notes (the "S Distribution Notes") due and payable
within six months (8% interest per annum) to the Selling Stockholders in
respect of the earned and undistributed taxable S corporation earnings at
June 30, 1996, that would have been distributed had the Company's S
corporation status been terminated on June 30, 1996.
(3) The pro forma balance sheet does not reflect deferred compensation expense
and additional paid-in capital, nor do the pro forma income statements
reflect the estimated non-cash compensation expense, of $21.4 million in
connection with the one-time grant of the Distributor Options at an
exercise price of 25% of the initial public offering price in connection
with the Offerings. The Distributor Options will include conditions
related to the achievement of performance goals and will vest on December
31, 1997. The Company will record distributor stock incentive expense for
these non-employee stock options. See "Certain Relationships and Related
Transactions."
(4) Other income and expense includes: (i) increased interest expense of $1.8
million for the year ended December 31, 1995 and for the six months ended
June 30, 1995, relating to the issuance of $59.6 million of S Distribution
Notes; (ii) increased interest expense of $0.9 million, $0.5 million and
$0.1 million for the year ended December 31, 1995 and for the six months
ended June 30, 1995 and 1996, respectively, relating to the issuance of
$20.0 million in notes payable to NSI; and (iii) increased interest income
of $0.8 million, $0.4 million and $0.4 million for the year ended December
31, 1995 and for the six months ended June 30, 1995 and 1996,
respectively, relating to the issuance of an estimated $10.0 million note
receivable from NSI.
(5) Computed based upon the number of shares of Common Stock outstanding after
giving effect to the Reorganization and the Offerings.
(6) The unaudited pro forma balance sheet data as of June 30, 1996, reflects:
(i) the sale of 4,750,000 shares of Class A Common Stock pursuant to the
Offerings; (ii) the issuance of $59.6 million of S Distribution Notes to
the Selling Stockholders; (iii) $20.0 million in notes payable to NSI
related to the payment of the $25.0 million License Fee to NSI; (iv) a
$15.0 million partial payment of the S Distribution Notes from the
proceeds of the Offerings; (v) an estimated $10.0 million note receivable
from NSI related to the sale of an option to purchase shares of Class
A Common Stock to NSI; (vi) estimated deferred compensation and additional
paid-in capital of $4.8 million, which represents the estimated
compensation expense related to the equity incentives granted to employees
of NSI and its affiliates (other than the Company) which vest over a
period of four years; and (vii) the recognition of a deferred tax asset of
$5.0 million relating to adjustments for U.S. Federal and state income
taxes as if the Company had been taxed as a C corporation rather than as
an S corporation since inception. No adjustment has been made to give
effect to the Company's earned and undistributed taxable S corporation
earnings for the period from July 1, 1996 through the S Termination Date
(as defined herein). The Company anticipates the increase in the S
Distribution Notes to be between approximately $20.0 million and $30.0
million. See "The Reorganization and S Corporation Distribution." The
Company estimates that, at the Offerings, it will reserve between
approximately $40.0 million and $50.0 million of cash on hand for
repayment of the S Distribution Notes. The balance of the Notes will be
repaid from cash generated by operations.
(7) Active distributors are those distributors who are resident in the
countries in which the Company operates and who have purchased products
during the three months ended as of the date indicated, rounded to the
nearest thousand. An Executive distributor is a distributor who has
submitted a qualifying letter of intent and achieved a specified personal
and group sales volume for a four month period.
26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion of the Company's financial condition and results of
operations should be read in conjunction with the Combined Financial
Statements and the related notes thereto included elsewhere in this
Prospectus. See also "The Reorganization and S Corporation Distribution."
OVERVIEW
Nu Skin Asia Pacific is a rapidly growing network marketing company involved
in the distribution and sale of premium quality, innovative personal care and
nutritional products. The Company is the exclusive distribution vehicle for Nu
Skin International, Inc. ("NSI") in the countries of Japan, Taiwan, Hong Kong
(including Macau) and South Korea, where the Company currently has operations,
and in Thailand, Indonesia, Malaysia, the Philippines, the PRC, Singapore and
Vietnam, where operations have not commenced. Additionally, the Company
supplies certain products to NSI affiliates in Australia and New Zealand. The
Company's network of independent distributors has grown since inception to
more than 375,000 active distributors as of June 30, 1996.
The Company has generated increased revenue each year since it commenced
operations in September 1991 and has operated profitably each year since 1992.
The Company's growth is primarily due to an increase in revenue from sales of
personal care products, the introduction of nutritional products, an increase
in the number of active distributors and the expansion of operations into new
geographic markets.
The Company's revenue is primarily dependent upon the efforts of a network
of independent distributors who purchase products and sales materials from the
Company. The Company recognizes virtually all of its revenue when the Company
ships products and sales materials to its distributors, which occurs after
payment is received by the Company. Revenue is net of returns, which have
historically been approximately 1.5% of gross sales. The following table sets
forth revenue information for the time periods indicated.
SIX MONTHS ENDED
DATE YEAR ENDED DECEMBER 31, JUNE 30,
OPERATIONS ----------------------- -----------------
COUNTRY COMMENCED 1993 1994 1995 1995 1996
------- -------------- ------- ------- ------- -------- --------
(IN MILLIONS)
Japan................... April 1993 $ 101.2 $ 172.9 $ 231.5 $ 100.7 $ 166.5
Taiwan.................. January 1992 38.6 79.2 105.4 48.3 67.6
South Korea............. February 1996 -- -- -- -- 43.4
Hong Kong............... September 1991 14.3 10.9 17.1 7.5 8.1
Sales to NSI
affiliates(/1/)........ January 1993 8.5 1.4 4.6 1.6 2.1
------- ------- ------- -------- --------
Total revenue......... $ 162.6 $ 264.4 $ 358.6 $ 158.1 $ 287.7
======= ======= ======= ======== ========
--------
(1) Includes revenue from the sale of certain products to NSI
affiliates in Australia and New Zealand.
Revenue generated in Japan and Taiwan represented 57.9% and 23.5%,
respectively, of total revenue generated during the six months ended June 30,
1996. Since the commencement of operations in February 1996, the Company's
South Korean operations generated $43.4 million of revenue, or 15.1% of total
revenue for the six months ended June 30, 1996. Revenue generated in Hong Kong
during the six months ended June 30, 1996 represented 2.8% of total Company
revenue.
27
Cost of sales primarily consists of the cost of products purchased from NSI
as well as customs duties related to the importation of such products. As the
sales mix changes between product categories and from country to country, cost
of sales and, accordingly, gross profit, will fluctuate.
Distributor incentives are the Company's most significant expense. Pursuant
to the Operating Agreements with NSI, the Company is obligated to pay a fixed
commission expense of 42% on product sales (except in South Korea, where, due
to government regulations, the Company utilizes a different formula to satisfy
this obligation). The Company satisfies this commission obligation by paying
commissions owed to local distributors and settling the difference with NSI.
Because the Company's revenue includes sales of both commissionable and non-
commissionable items, distributor incentives as a percentage of total revenue
have ranged from approximately 36.4% to 38.1% since September 30, 1993. Non-
commissionable items consist of sales materials and starter kits as well as
sales to NSI affiliates in Australia and New Zealand.
Selling, general and administrative expenses include wages and benefits,
rents and utilities, travel and entertainment, promotion and advertising and
professional fees, as well as license and management fees paid to NSI and Nu
Skin International Management Group, Inc. ("NSIMG"). Pursuant to the Operating
Agreements, the Company contracts for management support services from NSIMG,
for which the Company pays a fee equal to an allocation of expenses plus 3%.
In addition, the Company pays to NSI a license fee of 4% of the Company's
revenues from sales to distributors (excluding sales of starter kits) for the
use of NSI's distributor lists, distribution system and certain related
intangibles.
Provision for income taxes is dependent on the statutory tax rates in each
of the countries in which the Company operates. Historically, each of the
Subsidiaries was only taxed in its local jurisdiction in accordance with
relevant tax laws. Statutory tax rates in the countries in which the Company
has operations are 16.5% in Hong Kong, 25.0% in Taiwan, 30.1% in South Korea
and 57.9% in Japan. The Company operates a regional business center in Hong
Kong, which bears inventory obsolescence and currency exchange risks. Any
income or loss incurred by the regional business center is not subject to
taxation in Hong Kong.
Upon the consummation of the Reorganization, the Company will be subject to
taxation in the United States, where it is incorporated, at a statutory
corporate federal tax rate of 35%. In addition, each Subsidiary will be
subject to taxation in the country in which it operates. The Company will
receive foreign tax credits for the amount of foreign taxes actually paid in a
given period, which may be utilized to reduce taxes paid in the United States.
In the event that the Company's operations in high tax jurisdictions such as
Japan grow disproportionately to the rest of the Company's operations, the
Company may be unable to fully utilize its foreign tax credits in the U.S.
which could, accordingly, result in the Company paying a higher overall
effective tax rate on its worldwide operations.
28
RESULTS OF OPERATIONS
The following tables set forth (i) the results of operations and
supplemental data, and (ii) operating results and supplemental data as a
percentage of revenue, respectively, for the periods indicated.
YEAR ENDED YEAR ENDED SIX MONTHS ENDED
SEPTEMBER 30, DECEMBER 31, JUNE 30,
------------- -------------- -----------------
1993 1994 1994 1995 1995 1996
------ ------ ------ ------ -------- --------
(IN MILLIONS)
Revenue........................ $110.6 $254.6 $264.4 $358.6 $ 158.1 $ 287.7
Cost of sales.................. 38.8 86.8 82.2 96.6 41.9 81.0
------ ------ ------ ------ -------- --------
Gross profit................... 71.8 167.8 182.2 262.0 116.2 206.7
Operating expenses:
Distributor incentives....... 40.3 95.7 101.4 135.7 60.2 107.0
Selling, general and adminis-
trative..................... 27.1 44.6 48.8 67.5 27.5 44.6
------ ------ ------ ------ -------- --------
Operating income............... 4.4 27.5 32.0 58.8 28.5 55.1
Other income (expense), net.... .1 .4 (.4) .5 .5 .6
------ ------ ------ ------ -------- --------
Income before provision for
income taxes.................. 4.5 27.9 31.6 59.3 29.0 55.7
Provision for income taxes..... .4 10.2 10.0 19.1 9.3 20.6
------ ------ ------ ------ -------- --------
Net income..................... $ 4.1 $ 17.7 $ 21.6 $ 40.2 $ 19.7 $ 35.1
====== ====== ====== ====== ======== ========
Unaudited supplemental da-
ta(/1/):
Net income before pro forma
provision for income taxes.... $ 4.5 $ 27.9 $ 31.6 $ 59.3 $ 29.0 $ 55.7
Pro forma provision for income
taxes......................... 1.5 10.4 11.5 22.8 11.1 20.4
------ ------ ------ ------ -------- --------
Net income after pro forma
provision for income taxes.... $ 3.0 $ 17.5 $ 20.1 $ 36.5 $ 17.9 $ 35.3
====== ====== ====== ====== ======== ========
YEAR ENDED YEAR ENDED SIX MONTHS ENDED
SEPTEMBER 30, DECEMBER 31, JUNE 30,
-------------- -------------- ------------------
1993 1994 1994 1995 1995 1996
------ ------ ------ ------ -------- --------
Revenue................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales............. 35.1 34.1 31.1 26.9 26.5 28.1
------ ------ ------ ------ -------- --------
Gross profit.............. 64.9 65.9 68.9 73.1 73.5 71.9
------ ------ ------ ------ -------- --------
Operating expenses:
Distributor incentives... 36.4 37.6 38.4 37.8 38.1 37.2
Selling, general and ad-
ministrative............ 24.5 17.5 18.4 18.8 17.4 15.5
------ ------ ------ ------ -------- --------
Operating income.......... 4.0 10.8 12.1 16.5 18.0 19.2
Other income (expense),
net...................... .1 .2 (.1) .1 .3 .2
------ ------ ------ ------ -------- --------
Income before provision
for income taxes......... 4.1 11.0 12.0 16.6 18.3 19.4
Provision for income
taxes.................... .4 4.0 3.8 5.3 5.9 7.2
------ ------ ------ ------ -------- --------
Net income................ 3.7% 7.0% 8.2% 11.3% 12.4% 12.2%
====== ====== ====== ====== ======== ========
Unaudited supplemental da-
ta(/1/):
Net income before pro
forma
provision for income tax-
es....................... 4.1% 11.0% 12.0% 16.6% 18.3% 19.4%
Pro forma provision for
income taxes............. 1.4 4.1 4.3 6.4 7.0 7.1
------ ------ ------ ------ -------- --------
Net income after pro forma
provision for income tax-
es....................... 2.7% 6.9% 7.7% 10.2% 11.3% 12.3%
====== ====== ====== ====== ======== ========
- --------
(1) Reflects adjustment for Federal and state income taxes as if the Company
had been taxed as a C corporation rather than an S corporation.
29
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1995
REVENUE was $287.7 million during the six months ended June 30, 1996, an
increase of 82.0% from the revenue of $158.1 million recorded during the same
period in 1995. This increase is attributable to the following factors. First,
revenue in Japan increased by $65.8 million, or 65.3%, primarily as a result
of the continued success of nutritional, color cosmetics and HairFitness
products, which were introduced in October 1995. Second, revenue in Taiwan
increased by $19.3 million, or 40.0%, primarily as a result of the
introduction of color cosmetics and other products, along with the opening of
a new distribution center in Taichung, Taiwan. Third, in February 1996, Nu
Skin Korea commenced operations and, through June 30, 1996, has generated
revenue of $43.4 million. Additionally, revenue in Hong Kong increased by $0.6
million during the six months ended June 30, 1996 as compared to the same
period in 1995.
GROSS PROFIT as a percentage of revenue was 71.9% and 73.5% during the six
months ended June 30, 1996 and 1995, respectively. This decline is a result of
the introduction of three nutritional products in Japan in October 1995 and
the commencement of operations in South Korea in 1996. IDN products are
generally subject to higher duties than other products marketed by the
Company, which yields lower gross profit as a percentage of revenue. The
commencement of operations in South Korea also impacted gross profit as a
percentage of revenue due to South Korean regulations which result in higher
prices on imported products than in other markets.
DISTRIBUTOR INCENTIVES as a percentage of total revenue declined from 38.1%
for the six months ended June 30, 1995 to 37.2% for the same period in 1996.
The primary reason for this decline was increased revenue from South Korea
where local regulations limit the incentives which can be paid to South Korean
distributors.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES as a percentage of revenue
declined from 17.4% during the six months ended June 30, 1995 to 15.5% during
the same period in 1996. This fluctuation was primarily due to economies of
scale gained as the Company's revenue increased.
OPERATING INCOME during the six months ended June 30, 1996 increased to
$55.1 million, an increase of 93.3% from the $28.5 million of operating income
recorded during the same period in 1995. Operating income as a percentage of
revenue increased from 18.0% to 19.2%. This increase was caused primarily by
lower selling, general and administrative expenses as a percentage of revenue.
OTHER INCOME increased by $0.1 million during the six months ended June 30,
1996 as compared to the same period in 1995.
PRO FORMA PROVISION FOR INCOME TAXES increased to $20.4 million during the
six months ended June 30, 1996 compared to $11.1 million during the same
period in 1995. The effective tax rate decreased to 36.6% in 1996 as compared
to 38.3% for the same period in 1995. The Company generated excess foreign tax
credits in 1995 which did not continue in 1996.
NET INCOME AFTER PRO FORMA PROVISION FOR INCOME TAXES increased by $17.4
million to $35.3 million during the six months ended June 30, 1996 compared to
the $17.9 million during the same period in 1995. Pro forma net income as a
percentage of revenue increased to 12.3% for the six months ended June 30,
1996 as compared to 11.3% for the same period in 1995.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO THE YEAR ENDED DECEMBER 31, 1994
REVENUE was $358.6 million during the year ended December 31, 1995, an
increase of 35.6% from the $264.4 million of revenue recorded during 1994.
This increase was due primarily to an increased number of active distributors
in each market, which was the primary factor contributing to a $58.6 million
increase in revenue in Japan, a $26.2 million increase in revenue in Taiwan
and a $6.2 million increase in revenue in Hong Kong. Nutritional products,
color cosmetics products and a new line of HairFitness products were
introduced in
30
Japan in the fourth quarter of 1995, accounting for $25.0 million of the $58.6
million increase. Revenue in Taiwan and Hong Kong increased as a result of a
higher volume of sales of color cosmetics, which were introduced in late 1994,
and other personal care products. Additionally, certain new product
introductions by NSI affiliates in Australia and New Zealand led to a $3.2
million increase in revenue.
GROSS PROFIT as a percentage of revenue increased from 68.9% in 1994 to
73.1% in 1995. The increase in gross profit resulted from a reduction in
product costs on purchases from NSI and from other cost savings related to
inventory shipping and handling.
DISTRIBUTOR INCENTIVES as a percentage of revenue decreased from 38.4% in
1994 to 37.8% in 1995. This decline was primarily attributable to an increase
in revenue in 1995 from non-commissionable sales materials and sales to NSI
affiliates.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES as a percentage of revenue
increased to 18.8% during the year ended December 31, 1995, from 18.4% during
1994. This increase was primarily due to a one-time cost incurred in February
1995 in connection with moving the Company's Japanese facilities into a
larger, more accessible office and distributor center in Tokyo, Japan.
OPERATING INCOME increased to $58.8 million in 1995 from $32.0 million in
1994, an increase of 83.7%. Operating income as a percentage of revenue
increased to 16.5% from 12.1%. The increase was primarily the result of the
product cost reductions discussed above.
OTHER INCOME increased by approximately $0.9 million during 1995 as compared
to 1994. This increase was primarily caused by the disposal of property and
equipment related to a move to new facilities during 1994, and an increase in
interest income generated through the short term investment of cash.
PRO FORMA PROVISION FOR INCOME TAXES increased to $22.8 million during the
year ended December 31, 1995 as compared to $11.5 million for the same period
in 1994. The effective tax rate was 38.4% in 1995 as compared to 36.4% in
1994.
NET INCOME AFTER PRO FORMA PROVISION FOR INCOME TAXES increased by $16.4
million to $36.5 million during the year ended December 31, 1995 as compared
to $20.1 million for the same period in 1994. Pro forma net income as a
percentage of revenue increased to 10.2% during the year ended December 31,
1995 as compared to 7.7% for the same period in 1994.
YEAR ENDED SEPTEMBER 30, 1994, COMPARED TO THE YEAR ENDED SEPTEMBER 30, 1993
REVENUE for the year ended September 30, 1994, was $254.6 million, an
increase of 130.2% when compared to the $110.6 million of revenue reported in
1993. This increase was largely due to the following three factors: (i) a
$113.6 million increase in revenue reflecting a full year of operations in
Japan in fiscal year 1994 as compared to only six months of operations in
fiscal year 1993; (ii) a $33.2 million increase in revenue in Taiwan due to a
growing number of active distributors purchasing the Company's products; and
(iii) a $2.3 million increase in revenue in Hong Kong. These increases were
partially offset by a $5.1 million decrease in revenues from sales to NSI
affiliates in Australia and New Zealand.
GROSS PROFIT as a percentage of revenue increased slightly to 65.9% in
fiscal year 1994 from 64.9% in fiscal year 1993. The increase in gross profit
as a percentage of revenue was primarily due to changes in the sales mix.
DISTRIBUTOR INCENTIVES as a percentage of revenue increased to 37.6% during
the year ended September 30, 1994, from 36.4% during the year ended September
30, 1993. This increase was primarily due to a decrease in non-commissionable
sales to NSI affiliates in Australia and New Zealand which represented 6.7% of
total revenue in fiscal year 1993 compared to less than 1.0% of total revenue
in fiscal year 1994.
31
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES as a percentage of revenue
decreased to 17.5% during the year ended September 30, 1994, from 24.5% during
the year ended September 30, 1993. This decrease in selling, general and
administrative expenses as a percentage of revenue was the result of economies
of scale obtained as revenue increased in Japan and Taiwan.
OPERATING INCOME during the year ended September 30, 1994, increased to
$27.5 million from $4.4 million recorded during the year ended September 30,
1993. This increase was the combination of an increase in revenue and a
decrease in selling, general, and administrative expenses.
OTHER INCOME increased by $0.3 million during the year ended September 30,
1994 as compared to the same period in 1993.
PRO FORMA PROVISION FOR INCOME TAXES increased to $10.4 million during the
year ended December 31, 1994, as compared to $1.5 million for the same period
in 1993. The effective tax rate was 37.3% in 1994 compared to 33.3% in 1993.
NET INCOME AFTER PRO FORMA PROVISION FOR INCOME TAXES increased by $14.5
million to $17.5 million during the year ended December 31, 1994 as compared
to $3.0 million for the same period in 1993. Pro forma net income as a
percentage of revenue increased to 6.9% for the year ended December 31, 1994
as compared to 2.7% for the same period in 1993.
UNAUDITED PRO FORMA COMBINED RESULTS OF OPERATIONS
As part of the Reorganization and Offerings, several actions will occur
which will impact the comparability of the historical financial results for
the Company with the future results of the Company. The following adjustments
are reflected in the unaudited pro forma combined financial information set
forth below and included elsewhere in this Prospectus: (i) the amortization
over a 20-year period of a $25.0 million payment to NSI for the exclusive
rights to distribute NSI products in Thailand, Indonesia, Malaysia, the
Philippines, the PRC, Singapore and Vietnam, (ii) the recognition by the
Company of additional management charges of $4.4 million per year relating to
certain support services provided to the Company by NSIMG and NSI, which costs
were borne by NSI prior to the Reorganization, (iii) additional administrative
and overhead costs of $1.2 million per year as if the Company had operated as
a public company, (iv) increased interest expense of $1.8 million relating to
the issuance of $59.6 million of S Distribution Notes due and payable within
six months (8% interest per annum) to the Selling Stockholders in respect of
the earned and undistributed taxable S corporation earnings at June 30, 1996
that would have been distributed had the Company's S corporation status been
terminated on June 30, 1996, and (v) 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. The pro forma balance sheet does not
reflect deferred compensation expense and additional paid-in capital, nor do
the pro forma statements of income reflect the estimated non-cash compensation
expense, of $21.4 million in connection with the one-time grant of the
Distributor Options at an exercise price of 25% of the initial public offering
price in connection with the Offerings. The Distributor Options will include
conditions related to the achievement of performance goals and will vest on
December 31, 1997. The Company will record distributor incentive stock expense
for these non-employee stock options. See "Certain Relationships and Related
Transactions."
32
The following table sets forth the percentage of revenue represented by the
specific components of income and expense on a pro forma basis for the periods
presented. See "Unaudited Pro Forma Combined Financial Statements" and the
related notes thereto included elsewhere in this Prospectus.
FOR THE SIX MONTHS
ENDED JUNE 30,
FOR THE YEAR ENDED --------------------
DECEMBER 31, 1995 1995 1996
------------------ --------- ---------
Revenue........................... 100.0% 100.0% 100.0%
Cost of sales..................... 26.9 26.5 28.1
----- --------- ---------
Gross profit...................... 73.1 73.5 71.9
Operating expenses:
Distributor Incentives........... 37.8 38.1 37.2
Selling, general and
administrative.................. 20.7 19.6 16.7
----- --------- ---------
Operating income.................. 14.6 15.8 18.0
Other income (expense), net....... (0.4) (0.9) 0.3
----- --------- ---------
Income before provision for income
taxes............................ 14.2 14.9 18.3
Provision for income taxes........ 5.4 5.7 6.7
----- --------- ---------
Net income........................ 8.8% 9.2% 11.6%
===== ========= =========
Upon the consummation of the Reorganization, the Company will be subject to
taxation in the United States, where it is incorporated, at a statutory
corporate federal tax rate of 35%. In addition, each Subsidiary will be
subject to taxation in the country in which it operates. The Company will
receive foreign tax credits for the amount of foreign taxes actually paid in a
given period, which may be utilized to reduce taxes paid in the United States.
In the event that the Company's operations in high tax jurisdictions such as
Japan grow disproportionately to the rest of the Company's operations, the
Company will be unable to fully utilize its foreign tax credits in the U.S.
which could, accordingly, result in the Company paying a higher overall
effective tax rate on its worldwide operations.
LIQUIDITY AND CAPITAL RESOURCES
The Company generates significant cash flow from operations. During the year
ended December 31, 1995, cash provided by operations totaled $65.0 million. As
of June 30, 1996, the Company had cash and cash equivalents of $51.5 million.
As of June 30, 1996, the Subsidiaries' aggregate undistributed taxable S
corporation earnings were $59.6 million. The Company estimates that the
Subsidiaries' aggregate undistributed taxable S corporation earnings will be
between $80.0 million and $90.0 million as of the S Termination Date (which
includes approximately $20.0 million to $30.0 million of the Company's earned
and undistributed taxable S corporation earnings for the period from July 1,
1996 through the S Termination Date). The S Corporation Distribution will be
distributed in the form of promissory notes due within six months of the S
Termination Date bearing interest at 8% per annum ("S Distribution Notes").
Upon the consummation of the Offerings, approximately $15.0 million of the
proceeds from the Offerings will be used to pay a portion of the S
Distribution Notes. The Company estimates that at the Offerings it will
reserve between approximately $40.0 million and $50.0 million of cash on hand
for repayment of the S Distribution Notes. The balance of the S Distribution
Notes will be repaid from cash generated by operations. On and after the
S Termination Date, the Company will no longer be treated as an S corporation
and, accordingly, will be fully subject to Federal and state income taxes. See
"The Reorganization and S Corporation Distribution."
The Company is able to generate significant cash balances due to its rapid
growth, high margins and minimal capital requirements. As of June 30, 1996,
working capital was $39.3 million compared to $47.9 million
33
and $26.7 million at December 31, 1995 and 1994, respectively. Cash and cash
equivalents at June 30, 1996 were $51.5 million compared to $63.2 million and
$16.3 million at December 31, 1995 and 1994, respectively.
Historically, the Company's principal need for funds has been for
distributor incentives, working capital (principally inventory purchases),
capital expenditures and the development of new markets. The Company has
generally relied entirely on cash flow from operations to meet its business
objectives without incurring long term debt to unrelated third parties. The
Company did, however, rely upon borrowings from NSI in initially establishing
operations in Japan, Taiwan and Hong Kong. Regulations in South Korea preclude
borrowings from related entities, which led to the Company establishing an
$8.0 million line of credit to facilitate the opening of the South Korean
market. As of June 30, 1996, all borrowings under the line of credit had been
repaid, and no further borrowings under the line of credit are anticipated.
Capital expenditures, primarily for equipment, computer systems and
software, office furniture and leasehold improvements, were $2.9 million, $5.4
million and $1.7 million for the six months ended June 30, 1996, and the years
ended December 31, 1995 and 1994, respectively. The Company anticipates
additional capital expenditures of $3.5 million to support growth through the
end of 1996. In addition, the Company anticipates capital expenditures over
the next two years of approximately $22.0 million to further enhance its
infrastructure, including computer systems and software, warehousing
facilities and distributor centers in order to accommodate future growth.
Under the Operating Agreements with NSI, the Company incurs related party
payables. The Company had related party payables of $21.0 million, $28.7
million and $10.6 million at June 30, 1996, and December 31, 1995 and 1994,
respectively. In addition, the Company had related party receivables of $9.9
million, $1.8 million and $17.9 million, respectively, at those dates. NSI has
the right to charge interest on balances outstanding in excess of 60 days at a
rate of 2% above the U.S. prime rate. As of June 30, 1996, none of the related
party payables or receivables had been outstanding for more than 60 days.
Management believes that the proceeds from the Offerings together with
future cash flows from operations will be adequate to fund cash needs relating
to the implementation of the Company's strategic plans, including opening new
markets and funding the S Distribution Notes.
SEASONALITY AND CYCLICALITY
The Company's business is impacted by general seasonal trends common to the
direct selling channel in Asia. Seasonal fluctuations experienced by the
Company have generally been related to the occurrence of major cultural events
and vacation patterns in each of the Company's markets. For example, the
Company has historically experienced a decline in revenue in Japan, Taiwan and
Hong Kong during the local New Year celebrations, which fall in the Company's
first quarter. Management also anticipates a decline in revenue for the first
quarter in South Korea, when a similar New Year celebration occurs. In Japan,
the Company has also historically experienced a decline in revenue during
August, when many of the local distributors traditionally take vacations.
The Company's results of operations have been subject to cyclical
variations. 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. In addition, the Company has also experienced
variations on a quarterly basis in its results of operations, as new products
are introduced and new markets are opened. No assurances can be given that the
Company's revenue growth rate in South Korea, which commenced operations in
February 1996, or in new markets where operations have not commenced, will
follow this pattern.
34
QUARTERLY RESULTS
The following table sets forth certain unaudited quarterly data for the
periods shown.
YEAR ENDED DECEMBER
YEAR ENDED DECEMBER 31, 1995 31, 1996
------------------------------------ --------------------
1ST 2ND 3RD 4TH 1ST 2ND
QUARTER QUARTER QUARTER QUARTER(/1/) QUARTER(/2/) QUARTER
------- ------- ------- ------------ ------------ -------
(IN MILLIONS)
Revenue................... $77.7 $80.5 $83.3 $117.2 $124.2 $163.5
Gross profit.............. 57.3 59.7 61.0 83.9 89.4 117.4
Operating income.......... 13.5 15.0 12.7 17.6 23.2 31.9
--------
(1) LifePak, Nu Colour and HairFitness products were introduced in Japan
during October of 1995.
(2) The Company commenced operations in South Korea in February of 1996.
CURRENCY FLUCTUATION AND EXCHANGE RATE INFORMATION
The Company purchases inventory from NSI in U.S. dollars and assumes
currency exchange rate risk with respect to such purchases. Local currency in
Japan, Taiwan, Hong Kong and South Korea is generally used to settle non-
inventory transactions with NSI. It is anticipated that the Company will
transact its business in new markets with NSI in a similar manner, as
permitted by local regulations. Given the uncertainty of exchange rate
fluctuations, the Company cannot estimate the effect of these fluctuations on
its future business, product pricing, results of operations or financial
condition. The Company is not a party to material foreign currency hedging
transactions and does not anticipate engaging in significant currency hedging
transactions in the future.
INFLATION
In general, costs are affected by inflation and the effects of inflation may
be experienced by the Company in future periods. Management believes, however,
that such effects have not been material to the Company during the periods
presented. Certain of the countries in which the Company operates have
experienced significant inflation in the past. Although to date this inflation
has not had a material effect on the Company's results of operations, there
can be no assurance that inflation will not in the future so affect results of
operations.
35
BUSINESS
GENERAL
Nu Skin Asia Pacific is a rapidly growing network marketing company involved
in the distribution and sale of premium quality, innovative personal care and
nutritional products. The Company is the exclusive distribution vehicle for Nu
Skin International, Inc. in the countries of Japan, Taiwan, Hong Kong
(including Macau) and South Korea, where the Company currently has operations,
and in Thailand, Indonesia, Malaysia, the Philippines, the PRC, Indonesia,
Singapore and Vietnam, where operations have not commenced.
The Company is one of the fastest growing network marketing companies in
Asia. Revenue increased 82.0% to $287.7 million for the six months ended
June 30, 1996 from $158.1 million for the same period in 1995. Net income
increased 78.2% to $35.1 million for the six months ended June 30, 1996 from
$19.7 million for the same period in 1995. Revenue increased 35.6% to $358.6
million for the year ended December 31, 1995 from $264.4 million in 1994. Net
income increased 86.1% to $40.2 million for the year ended December 31, 1995
from $21.6 million in 1994. The Company's network of independent distributors
has grown since inception in 1991 to more than 375,000 active distributors as
of June 30, 1996.
The Company's product philosophy is to combine the best of science and
nature in developing premium quality, innovative personal care and nutritional
products which are specifically designed for the network marketing
distribution channel. The Company offers products in two distinct categories:
personal care products, marketed under the trademark "Nu Skin," and
nutritional products, marketed under the trademark "Interior Design
Nutritionals" (IDN). The Nu Skin personal care product lines include facial
care, body care, hair care and color cosmetics, as well as specialty products
such as sun protection, oral hygiene and fragrances. The IDN product lines
include nutritional supplements, weight management products and nutritious
snacks, and sports nutrition products.
In Japan, Taiwan and Hong Kong, the Company currently offers most of NSI's
personal care products and approximately one-third of NSI's nutritional
products. In South Korea, the Company currently offers one-third of NSI's
personal care products and none of the nutritional products. The Company
believes that it can significantly grow its business and attract new customers
by expanding its product offerings in each of its markets to include more of
NSI's existing personal care and nutritional products. In addition to
expanding its product offerings with existing NSI products, the Company
intends to introduce new products tailored to specific markets.
The distribution of products through the network marketing and other direct
selling channels has grown significantly in recent years. The WFDSA reports
that, since 1990, worldwide direct distribution of goods and services to
consumers has increased 60%, resulting in the sale of over $72 billion of
goods and services in 1995. According to the WFDSA, $34 billion of goods and
services were sold by its members in 1995 through direct selling channels in
the markets in which the Company operates, which represents 47% of the global
volume of direct sales.
OPERATING STRENGTHS
The Company believes that its success is due to its commitment to provide a
wide range of premium quality, innovative personal care and nutritional
products and an appealing global business opportunity for persons interested
in establishing a direct sales business. The Company has been able to achieve
rapid, sustained and profitable growth by capitalizing on the following
operating strengths:
PREMIUM PRODUCT OFFERINGS. The Company is committed to building its brand
name and distributor and customer loyalty by selling premium quality,
innovative personal care and nutritional products that appeal to broad
markets. This commitment is illustrated by the Company's personal care
products slogan "All of the Good and None of the Bad" and its nutritional
products slogan "Adding Life to Years." The Company offers products designed
for the direct selling channel by focusing on innovative consumable products
which build loyalty and
36
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 strength of the Global
Compensation Plan is its seamless integration across all markets in which NSI
products are sold. By entering into international sponsoring agreements with
NSI, distributors are authorized to sponsor new distributors in each country
where NSI or the Company has operations. This allows distributors to receive
commissions for sales at the same rate for sales in foreign countries as for
sales in their home country. This is a significant benefit to distributors
because they are not required to establish new distributorships or requalify
for higher levels of commissions within each new country in which they begin
to operate. The seamless integration of the Global Compensation Plan means
that distributor knowledge and experience can be used to rapidly build
distributor leadership in new markets.
HIGH LEVEL OF DISTRIBUTOR INCENTIVES. The Company believes that the Global
Compensation Plan is among the most financially rewarding plans offered to
distributors by network marketing companies. There are two fundamental ways in
which distributors can earn money: (i) through retail markups, for which the
Company recommends a range from 43% to 60%; and (ii) through a series of
commissions on each product sale which can result in commissions to
distributors aggregating up to 58% of such product's wholesale price. On a
global basis, however, commissions have averaged from 40% to 42% of revenue
from commissionable sales over the last seven years.
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
marked development approach, combined with the Global Compensation Plan, which
motivates distributors to train and sponsor other distributors to sell
products in new markets, has enabled the Company to quickly and successfully
open new markets. See "Risk Factors--Entering New Markets."
DISTRIBUTOR SUPPORT PROGRAMS. The Company is committed to providing a high
level of support services tailored to the needs of its distributors in each
market. The Company meets the needs and builds the loyalty of its distributors
with personalized distributor service, a support staff that assists
distributors as they build networks of downline distributors, and a liberal
product return policy. The Company provides walk-in, telephonic and
computerized product fulfillment and tracking services that result in user-
friendly, timely product distribution. Each walk-in center maintains meeting
rooms which distributors may utilize in training and sponsoring activities.
RELATIONSHIP WITH NSI. NSI, founded in 1984 and based in Provo, Utah, is
engaged in selling personal care and nutritional products and, together with
its affiliates, comprises one of the largest network marketing organizations
in the world. NSI has provided, and will continue to provide, a high level of
support services to the Company, including product development, marketing and
other managerial support services. Management believes that the Company's
relationship with NSI has allowed the Company to increase revenue and net
income at rates that otherwise may not have been possible. See "Risk Factors--
Relationship with and Reliance on NSI; Potential Conflict 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 to oversee
operations in Japan, Taiwan, Hong Kong and South Korea.
GROWTH STRATEGY
The Company's primary objective is to capitalize on its operating strengths
to become a leading distributor of consumer products in each of its markets.
Specifically, the Company's strategy to increase revenue and net income is as
follows:
37
INTRODUCE NEW PRODUCTS. Because new products tend to increase sales by
existing distributors and attract new distributors, the Company intends to
continue introducing existing and new NSI products. For example, LifePak, the
Company's most successful nutritional product, is currently available only in
Japan, where, after being introduced in 1995, it has grown to represent
approximately 20% of revenue. The Company intends, subject to regulatory
approval, to introduce LifePak in Taiwan in late 1996 and in Hong Kong in
1997. In addition, the Company expects to launch Epoch, a new line of
ethnobotanical personal care products, in all markets by mid-1997. The Company
also intends to introduce products tailored to specific demographic and
geographic market segments and will consider introducing entirely new product
categories in the future.
OPEN NEW MARKETS. The Company will continue to pursue attractive new market
opportunities. Thailand is the next country in which the Company intends to
commence operations, subject to receipt of necessary government approvals. The
Company's preparatory work for Thailand is currently ongoing. In addition, the
Company has conducted preliminary investigations on the feasibility of
commencing operations in Indonesia, Malaysia, the Philippines, the PRC,
Singapore and Vietnam. The Company believes that these countries may represent
significant markets for the future expansion of its operations. See "Risk
Factors--Entering New Markets."
ATTRACT, RETAIN AND ENHANCE PRODUCTIVITY OF DISTRIBUTORS. To date, the
Company has enjoyed significant growth in the number of its active
distributors (defined as those distributors which have purchased products from
the Company during the previous three months). By leveraging its operating
strengths, the Company intends to continue to create and maintain a business
climate to promote the growth in the number of active distributors and to
increase distributor retention, motivation and productivity. In addition, the
Company will pursue growth in the number of active distributors by continuing
to work with NSI to enhance the Global Compensation Plan, initiating an
innovative distributor equity incentive program, selectively opening new
distributor walk-in centers to provide a local presence in additional key
cities, enhancing distributor recognition programs, and targeting inactive
distributors who may still have an interest in the Company's business
opportunity or products.
INCREASE PRODUCT CONSUMPTION. The Company intends to increase sales to new
and existing consumers through (i) increasing product promotions in marketing
literature, (ii) increasing the availability of sample packages, (iii)
emphasizing product "systems," such as the HairFitness system of various
shampoos and conditioners, which leads to the purchase of multiple products
rather than a single product, and (iv) implementing an automatic reordering
system which is designed to result in convenient repeat purchases.
INDUSTRY OVERVIEW
The distribution of products through the network marketing and other direct
selling channels has grown dramatically in recent years. The WFDSA reports
that, since 1990, worldwide direct distribution of goods and services to
consumers has increased 60%, resulting in the sale of over $72 billion of
goods and services in 1995. According to the WFDSA, $34 billion of goods and
services were sold by its members in 1995 through direct selling channels in
the markets in which the Company currently operates, which represents 47% of
the global volume of direct sales. The Company believes that extended family
relationships, the family culture and the extended social networks common in
Asian countries are particularly well suited to the Company's network
marketing methods. The Company also believes that a variety of recent social
and economic changes which have occurred throughout Asia have had a positive
impact on the Company's revenues and net income. Trends that have benefited
the Company include the emergence of a greater interest on the part of some
Asians in pursuing more independent entrepreneurial activities outside
traditional business settings, an increase in the number of Asian women
joining the work force and an increase in the number of Asians seeking
supplemental income from alternative sources.
The Asian retail market is generally characterized by fragmented
distribution and numerous small retailers who may have only limited knowledge
of the products they sell and may not be able to effectively demonstrate their
products to customers. In Japan, these problems are further exacerbated by the
multi-tiered, traditional Japanese distribution system which has proven
difficult for many foreign manufacturers to penetrate. Outside of
38
Japan, the general lack of a developed distribution infrastructure throughout
Asia has fostered and encouraged the growth of direct selling as a significant
distribution channel. Given this environment, the Company believes that the
high level of personal service provided by direct selling companies, including
convenient in-home demonstrations, easy-access product ordering, timely
delivery and product return policies, provides additional value to consumers.
In addition, rapidly growing Asian economies and a growing demand in Asia for
Western brand name products has fueled the growth and demand for high quality
consumer products.
COUNTRY PROFILES
The following table sets forth the Company's revenue and the total number of
active distributors for each of the countries in which the Company currently
operates for the years ended December 31, 1994 and 1995 and for the six months
ended June 30, 1996.
SIX
MONTHS
YEAR ENDED DECEMBER 31, ENDED
----------------------- JUNE 30,
COUNTRY 1994 1995 1996
------- ----------- ----------- --------
(DOLLARS IN THOUSANDS)
Revenue:
Japan.................................... $ 172,960 $ 231,540 $166,513
Taiwan................................... 79,219 105,415 67,561
Hong Kong................................ 10,880 17,046 8,093
South Korea(/1/)......................... -- -- 43,407
----------- ----------- --------
Total(/2/)............................. $ 263,059 $ 354,001 $285,574
=========== =========== ========
Active Distributors(/3/)(/4/):
Japan.................................... 106,000 147,000 195,000
Taiwan................................... 53,000 75,000 93,000
Hong Kong................................ 11,000 14,000 14,000
South Korea(/1/)......................... -- -- 82,000
----------- ----------- --------
Total.................................. 170,000 236,000 384,000
=========== =========== ========
--------
(1) The Company commenced operations in South Korea in February 1996.
(2) Does not include sales of certain products to NSI affiliates in
Australia and New Zealand of $1.4 million, $4.6 million and $2.1
million in 1994, 1995 and the first six months of 1996,
respectively.
(3) "Active Distributors" include only those distributors who
purchased products from the Company during the three months ended
as of the date indicated.
(4) Numbers are rounded to the nearest thousand.
The following table sets forth certain estimated economic and demographic
data regarding the Company's markets:
REAL GDP
1995 POPULATION 1995 GDP 1995 GDP GROWTH
COUNTRY (IN MILLIONS) (IN BILLIONS OF $) PER CAPITA (IN $) 1995/1994(%)
------- --------------- ------------------ ----------------- ------------
Japan................... 125.3 $4,645.5 $37,672 0.9%
Taiwan.................. 21.2 259.9 13,403 6.1
Hong Kong............... 6.2 144.3 26,442 5.0
South Korea............. 44.9 446.4 11,422 8.1
- --------
Source: World Information Sources; Country Data Forecasts March, 1996.
JAPAN. The Company, through its subsidiary Nu Skin Japan, commenced
operations in Japan in April 1993. According to the WFDSA, the direct selling
channel in Japan generated sales of approximately $30 billion of goods and
services in 1995, making Japan the largest direct selling market in the world.
Management believes that as many as six million people are involved in direct
selling businesses in Japan.
39
To date, the Company has experienced significant growth in Japan, where
revenue increased 34% in 1995 compared to 1994 and has continued to grow at
44% on an annualized basis for the six months ended June 30, 1996. Significant
revenue was recognized from the outset of the Company's operations in Japan
due to the immediate attention given to the market by leading NSI distributors
from around the world. A great deal of the Company's success to date can be
directly attributed to the growth of its Japanese business in recent years.
Furthermore, given the size of the Japanese market, management believes that
there is significant opportunity for expansion of its market share. Nu Skin
Japan currently offers 50 of the 80 NSI personal care products and 9 of the 30
IDN products, including LifePak, the core IDN product. Additionally, Nu Skin
Japan offers 11 personal care products that are manufactured in Japan and are
specifically targeted to the Japanese market.
In support of the Company's growth strategy, Nu Skin Japan intends to (i)
focus on internal country development by opening offices in additional
Japanese cities, thereby increasing consumer awareness and enhancing the
Company's image; (ii) expand development capacity to develop more products
that are particularly suited to the Japanese market; and (iii) enhance
corporate support of distributors by upgrading information technology
resources.
TAIWAN. The Company, through its subsidiary Nu Skin Taiwan, commenced
operations in Taiwan in January 1992. According to the WFDSA, the direct
selling channel in Taiwan generated approximately $2 billion in sales of goods
and services in 1995, of which 43% were nutritional products. Currently, two
million people (approximately 10% of the population) are estimated to be
involved in direct selling.
Revenue growth in Taiwan has averaged 52% on an annualized basis since 1992.
The Company believes that the recent increase in sales is primarily due to (i)
the opening of walk-in centers in Kaohsiung and Taichung; (ii) increased
distributor training and recognition; and (iii) increased product offerings.
Based on information provided by the Taiwan Direct Selling Association, Nu
Skin Taiwan is the third largest direct selling business in Taiwan. Management
believes that Nu Skin Taiwan has captured approximately 31% and 1% of the
market for personal care products and nutritional supplements, respectively,
sold through the direct selling channel. Nu Skin Taiwan currently offers 55 of
the 80 NSI personal care products and 7 of the 30 IDN products.
In support of the Company's growth strategy, Nu Skin Taiwan intends to (i)
capitalize on the size of the nutritional supplements market by expanding the
current product offerings in Taiwan to include additional NSI products, in
particular LifePak, which, subject to regulatory approval, is scheduled for
introduction in Taiwan by the end of 1996, (ii) focus more resources on
product development specifically for the Taiwanese market, (iii) add
additional walk-in distribution and distributor support centers in additional
major cities, and (iv) enhance corporate support of distributors by upgrading
information technology resources.
HONG KONG. The Company, through its subsidiary Nu Skin Hong Kong, commenced
operations in Hong Kong in September 1991. According to the WFDSA, the direct
selling channel in Hong Kong generated approximately $78 million in sales of
goods and services in 1995. Hong Kong represents an important market in the
structure of the Asian region because it serves as the location of the
Company's regional office and is an important base of operations for many of
the Company's most successful distributors, whose downline distributor
networks extend into other Asian markets. Nu Skin Hong Kong currently offers
69 of the 80 NSI personal care products and 13 of the 30 IDN products.
Hong Kong is currently a British Crown Colony and is scheduled to become a
Special Administrative Region (SAR) of the PRC effective July 1, 1997. The
further integration of the Hong Kong economy and political system with the
economy and political system of the PRC could have an impact on the Company's
business in Hong Kong. See "Risk Factors--Possible Adverse Effect on the
Company of a Change in the Status of Hong Kong."
In February 1995, Macau, a Portuguese colony scheduled to become an SAR of
the PRC in 1999, was opened as a new market. Revenue figures for Macau are
combined with those of Hong Kong. Macau represents the smallest of the
Company's markets in population, with just under 500,000 residents. The
Company's Macau office works under the direction of Nu Skin Hong Kong.
40
In support of the Company's growth strategy, Nu Skin Hong Kong intends to
(i) promote distributor growth, retention and leadership development through
local initiatives such as a recently opened "distributor business center,"
which provides offices for distributors to rent, at cost, from which they can
conduct business; (ii) seek regulatory approvals for the introduction of
LifePak; which is not yet available in Hong Kong, and (iii) stimulate
purchases from inactive distributors through direct mail campaigns.
SOUTH KOREA. The Company, through its subsidiary Nu Skin Korea, commenced
operations in South Korea in February 1996. According to the WFDSA, the direct
selling channel in South Korea generated approximately $1.7 billion in sales
of goods and services in 1995.
The Company's sales in South Korea exceeded $43 million through June 30,
1996, making the Company the second largest direct seller in the country. Nu
Skin Korea currently offers 26 of the 80 NSI personal care products and none
of the IDN products. Nu Skin Korea was among the first foreign-owned firms to
register and begin operations under the new direct selling legislation
implemented in 1995. Management believes that significant competition will
soon enter the South Korean market. See "Risk Factors--Competition" and "--
Competition."
In support of the Company's growth strategy, Nu Skin Korea intends to (i)
continue to add products from NSI's personal care product line to stimulate
new sales; (ii) seek regulatory approvals for the introduction of IDN
products; (iii) continue to develop an infrastructure to support a rapidly
growing distributor base, including, but not limited to, adding additional
walk-in centers in major South Korean cities; and (iv) promote the development
of local distributor leadership.
NEW MARKET OPPORTUNITIES
The Company has developed a low cost, disciplined approach to opening new
markets. Each market opening is preceded by a thorough analysis of economic
and political conditions, regulatory standards and other business, tax and
legal issues. Prior to a market opening, the Company's management team, in
conjunction with NSI support personnel, local legal counsel and tax advisors,
works to obtain all necessary regulatory approvals and establish facilities
capable of meeting distributor needs. This approach, combined with the Global
Compensation Plan, which motivates distributors to sponsor and train other
distributors to sell products in new markets, has enabled the Company to
quickly and successfully open new markets.
The Company, as a matter of policy, does not announce the timing of its
opening of new markets. However, the Company has announced that its next new
market expansion efforts will be in Thailand and anticipates opening this
market upon receipt of all final government approvals. In addition to
Thailand, the Company is the exclusive distributor of NSI products in
Indonesia, Malaysia, the Philippines, the PRC, Singapore and Vietnam. The
Company believes that these countries collectively represent significant
markets for future expansion. There are, however, significant risks and
uncertainties associated with this expansion. See "Risk Factors--Entering New
Markets."
The following table sets forth certain economic and demographic data
regarding the countries for which the Company has an exclusive license but in
which the Company has not commenced operations.
1995 POPULATION 1995 GDP 1995 GDP REAL GDP GROWTH
COUNTRY (IN MILLIONS) (IN BILLIONS OF $) PER CAPITA (IN $) 1995/1994
------- --------------- ------------------ ----------------- ---------------
Thailand................ 60.7 $ 162.7 $ 3,033 8.6%
Indonesia............... 203.1 196.4 1,066 8.0%
Malaysia................ 20.0 86.5 4,826 9.6%
Philippines............. 68.9 74.6 1,186 4.8%
PRC..................... 1,227.0 673.5 680 10.2%
Singapore............... 3.0 79.2 29,573 8.9%
Vietnam................. 74.7 22.8 379 9.5%
--------
Source: World Information Services; Country Data Forecasts March, 1996
41
THAILAND. According to the WFDSA, direct sales in 1995 totaled $562 million
in Thailand. This makes Thailand the sixteenth largest direct selling market
worldwide. In opening the Thailand market, the Company does not anticipate a
material departure from its traditional business model.
INDONESIA. Indonesia has experienced a recent emphasis on deregulation and
private enterprise and an average annual growth in GDP of 6% from 1985 to
1994. The Indonesian Direct Selling Association reports that there are 600,000
participants in direct selling in the country. Management believes that the
combination of the above factors creates an attractive opportunity for
expansion.
MALAYSIA. According to the WFDSA, more than $640 million in goods and
services were sold through the direct selling channel in Malaysia in 1995.
There are currently several direct selling companies operating in Malaysia. In
October 1995, the Company's business permit applications were denied by the
Malaysian government as the result of activities by certain NSI distributors
before required government approvals could be secured. See "Risk Factors--
Reliance Upon Independent Distributors of NSI; Effect of Adverse Publicity."
Management is reevaluating the time frame in which it will reapproach the
Malaysian market.
PHILIPPINES. Even though the per capita GDP in the Philippines is low, the
Company believes that there is demand for premium personal care and nutrition
products, especially near Manila, the capital city, which, in 1995, had a
population of 11 million. Management believes that nearly $500 million of
goods and services are sold annually through the direct selling channel and
that more than 20 international direct selling companies currently operating
in the Philippines.
PRC. With the PRC's large population and the Company's success in the
neighboring and Chinese-speaking countries of Hong Kong and Taiwan, management
believes that the PRC will be an attractive market for the Company. The PRC
government and local jurisdictions have recently initiated rules and
regulations for network marketing companies. The Company believes that it will
be able to comply with these regulations in operating a network marketing
business in the PRC. See "Risk Factors--Reliance Upon Independent Distributors
of NSI; Effect of Adverse Publicity."
SINGAPORE. In Singapore, relatively high levels of GDP per capita indicate
that the country enjoys strong consumer buying power and a dynamic market
structure similar to Hong Kong. Although direct selling activities are
permitted, currently network marketing is not allowed in Singapore. See "Risk
Factors--Entering New Markets."
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.
DISTRIBUTION SYSTEM
OVERVIEW OF DISTRIBUTION SYSTEM. The foundation of the Company's sales
philosophy and distribution system is network marketing. Under most network
marketing systems, distributors purchase products for retail sale or personal
consumption. Pursuant to the Global Compensation Plan, products are sold
exclusively to or through independent distributors who are not employees of
the Company or NSI. Distributors contract directly with NSI, and NSI makes
such distributors available to the Company through Licensing and Sales
Agreements. See "--Relationship with NSI" and "Certain Relationships and
Related Transactions."
Network marketing is an effective vehicle to distribute the Company's
products because (i) a consumer can be educated about a product in person by a
distributor, which is more direct than the use of television and print
advertisements; (ii) direct sales allow for actual product testing by a
potential consumer; (iii) the impact of distributor and consumer testimonials
is enhanced; and (iv) as compared to other distribution methods, distributors
can give customers higher levels of service and attention, by, among other
things, delivering products to a consumer's home and following up on sales to
ensure proper product usage, customer satisfaction, and to encourage repeat
purchases. Under most network marketing systems, independent distributors
purchase products either for resale or for personal consumption.
42
Direct selling as a distribution channel has been enhanced in the past
decade due to advancements in communications, including telecommunications,
and the proliferation of the use of videos and fax machines. Direct selling
companies can now produce high quality videos for use in product education,
demonstrations and sponsoring sessions that project a desired image for the
Company and the product line. Management believes that high quality sales aids
play an important role in the success of distributor efforts. For this reason,
NSI maintains an in-house staff of video production personnel and video and
audio cassette duplication equipment for timely and cost-effective production
of sales materials. These facilities and expertise are available for the
Company's use. Management is committed to fully utilizing current and future
technological advances to continue enhancing the effectiveness of direct
selling.
NSI's network marketing program differs from many other network marketing
programs in several respects. First, the Global Compensation Plan allows NSI
distributors to develop a seamless global network of downline distributors.
Second, NSI's order and fulfillment systems eliminate the need for
distributors to carry significant levels of inventory. Third, the Global
Compensation Plan is among the most financially rewarding plans offered to
distributors by network marketing companies, and can result in commissions to
distributors aggregating up to 58% of a product's wholesale price. On a global
basis, commissions have averaged 40% to 42% of revenue from commissionable
sales over the last seven years.
SPONSORING. The Company relies solely on its distributor force to sponsor
new distributors. While the Company provides, at cost, product samples,
brochures, magazines and other sales materials, distributors are primarily
responsible for educating new distributors with respect to products, the
Global Compensation Plan, and how to build a successful distributorship.
The sponsoring of new distributors creates multiple levels in the network
marketing structure. Persons whom a distributor sponsors are referred to as
"downline" or "sponsored" distributors. If downline distributors also sponsor,
they create additional levels in the structure, but their downline
distributors remain part of the same distribution line as their original
sponsors. See "Risk Factors--Concentration of Distributors; Reliance on
Distributor Networks."
Sponsoring activities are not required of distributors. However, because of
the financial incentives provided to those who succeed in building a
distributor network, the Company believes that most of its distributors
attempt, with varying degrees of effort and success, to sponsor additional
distributors. Generally, distributors invite friends, family members and
acquaintances to sales meetings where Company products are presented and where
the Global Compensation Plan is explained. People are often attracted to
become distributors after using Company products and becoming regular retail
customers. Once a person becomes a distributor, he or she is able to purchase
products directly from the Company at wholesale prices for resale to consumers
or for personal consumption. The distributor is also entitled to sponsor other
distributors in order to build a network of distributors and product users.
A potential distributor must enter into a standard distributor agreement
with NSI which obligates the distributor to abide by NSI's policies and
procedures. Additionally, in all countries except Japan, a new distributor is
required to enter into a product purchase agreement with the Company's local
Subsidiary, which governs product purchases. In Japan, Taiwan and Hong Kong,
distributors are also required to purchase a starter kit, which includes NSI's
policies and procedures, for between $55 and $85, which essentially represents
the cost of producing the starter kit, and active distributors are required to
pay the Company an Annual Materials Fee ("AMF") of up to $35 to cover the cost
of newsletters, magazines and updates that are mailed regularly to them. In
South Korea, due to local regulations, distributors are not required to
purchase a starter kit, and active distributors are not required to pay an
AMF.
GLOBAL COMPENSATION PLAN. One of the Company's key competitive advantages is
the Global Compensation Plan, which it licenses from NSI. The Global
Compensation Plan is seamlessly integrated across all markets in which NSI
products are sold. This seamless integration means that the Company's
distributor base has global reach and that the knowledge and experience
resident in current distributors can be used to build
43
distributor leadership in new markets. By entering into international
sponsoring agreements with NSI, distributors are authorized to sponsor new
distributors in each country where NSI or the Company has operations. These
countries currently include the U.S., the United Kingdom, Puerto Rico, Canada,
Taiwan, Hong Kong (including Macau), Japan, South Korea, Australia, New
Zealand, Ireland, Germany, France, the Netherlands, Belgium, Italy, Spain,
Mexico and Guatemala. This allows distributors to receive commissions at the
same rate for sales in foreign countries as for sales in their home country.
This is a significant benefit to distributors because they are not required to
establish new distributorships or requalify for higher levels of commissions
within each new country in which they begin to operate. Under the Global
Compensation Plan, a distributor is paid consolidated monthly commissions in
the distributor's home country, in local currency, for product sales in that
distributor's global downline distributor network. Current and future
distributor lists have been licensed by NSI to the Company, pursuant to
Licensing and Sales Agreements. See "--Relationship with NSI" and "Certain
Relationships and Related Transactions."
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. The Company believes that the Global
Compensation Plan is among the most financially rewarding plans offered to
distributors by network marketing companies. There are two fundamental ways in
which distributors can earn money: (i) through retail markups, for which the
Company recommends a range from 43% to 60%; and (ii) through a series of
commissions on product sales, which can result in commissions to distributors
aggregating up to 58% of such product's wholesale price. On a global basis,
however, commissions have averaged from 40% to 42% of revenue from
commissionable sales for each of the last seven years.
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 ("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,
EXECUTIVE DISTRIBUTORS 1992 1993 1994 1995 1996
---------------------- ----- ----- ----- ----- --------
Japan................................... -- 2,459 3,613 4,017 7,422
Taiwan.................................. 551 1,170 2,093 3,014 3,685
Hong Kong............................... 164 275 377 519 507
South Korea............................. -- -- -- -- 832
----- ----- ----- ----- ------
Total................................. 715 3,904 6,083 7,550 12,446
===== ===== ===== ===== ======
44
On a monthly basis, the Company and NSI evaluate requests for exemptions to
the Global Compensation Plan to determine whether technical exemptions should
be granted. While the general policy is to discourage exceptions, management
believes that the flexibility to grant such exceptions is critical in
retaining distributor loyalty and dedication. In each market, distributor
services personnel evaluate each such instance and appropriate recommendations
are made to NSI.
DISTRIBUTOR SUPPORT. The Company is committed to providing a high level of
support services tailored to the needs of its distributors in each market. The
Company meets the needs and builds the loyalty of its distributors with
personalized distributor service, a support staff that assists distributors as
they build networks of downline distributors, and a liberal product return
policy. Because many distributors have only a limited number of hours each
week to concentrate on their Nu Skin business, management believes that
maximizing a distributor's efforts through effective support of each
distributor has been and will continue to be important to the success of the
Company.
Through training meetings, annual conventions, distributor focus groups,
regular telephone conference calls and personal contacts with distributors,
the Company seeks to understand and satisfy the needs of each distributor. The
Company provides walk-in, telephonic and computerized product fulfillment and
tracking services that result in user-friendly, timely product distribution.
In addition, the Company is committed to evaluating new ideas in technology
and services, such as automatic product reordering, that the Company can
provide to distributors. The Company currently utilizes voicemail,
teleconferencing and fax services. Global Internet access (including Company
and product information, ordering abilities and group and personal sales
volume inquiries) is anticipated to be provided to distributors in the future.
Each walk-in center maintains meeting rooms which distributors may utilize in
training and sponsoring activities.
RULES AFFECTING DISTRIBUTORS. NSI's standard distributor agreement, policies
and procedures, and compensation plan contained in every starter and/or
introductory kit outline the scope of permissible distributor marketing
activities. The Company's distributor rules and guidelines are designed to
provide distributors with maximum flexibility and opportunity within the
bounds of governmental regulations regarding network marketing. Distributors
are independent contractors and are thus prohibited from representing
themselves as agents or employees of NSI or the Company. Distributors are
obligated to present the Company's products and business opportunity ethically
and professionally. Distributors agree that the presentation of the Company's
business opportunity must be consistent with, and limited to, the product
claims and representations made in literature distributed by the Company. No
medical claims may be made regarding the products, nor may distributors
prescribe any particular product as suitable for any specific ailment. Even
though sponsoring activities can be conducted in many countries, distributors
are prohibited from conducting marketing activities outside of countries in
which NSI and the Company conduct business and are not allowed to export
products from one country to another. Prior to the commencement of Company
operations in a new country, distributor activity is restricted to discussions
of the product line and business opportunity with personal acquaintances.
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,
45
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.
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. Distributors may voluntarily terminate
their distributorship at any time.
PAYMENT. Distributors pay for products prior to or shortly after shipment.
Accordingly, the Company carries minimal accounts receivable. Distributors pay
for products in one of several ways. Cash, which represents a large portion of
all payments, is received by order takers in the distribution center when
orders are personally picked up by a distributor. In addition, in Japan cash
is sent through the mail using a postal cash envelope. The Company also
accepts payment through the use of credit cards. This method of payment is
very popular in Hong Kong and Taiwan and is expected to increase in popularity
in South Korea. Another form of payment utilized in Japan is a Tososhin card,
which is essentially a distributor credit card utilized to place orders. Bank
wire transfers are also popular throughout Asia, particularly in Japan.
46
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." NSI
markets 80 different personal care and 30 different nutritional products, of
which 69 and 13, respectively, are available in the Company's current markets.
Nearly all products sold by the Company are purchased from NSI, with the
exception of a line of 11 personal care products which are produced locally in
Japan. In addition to products, the Company offers a variety of sales aids,
including items such as starter kits, introductory kits, brochures, product
catalogs, videotape and personal care accessories.
The following chart indicates how many of the NSI personal care and IDN
products available as of June 30, 1996, in each of the Company's current
markets.
PERSONAL CARE AND IDN PRODUCT OFFERINGS
PRODUCT CATEGORIES /PRODUCT
LINES TOTAL PRODUCTS OFFERED IN THE CURRENT COUNTRIES
- --------------------------- PRODUCTS ----------------------------------------------------
OFFERED BY HONG SOUTH
NSI JAPAN TAIWAN KONG KOREA
---------- ----- ---------- ---------- ----------
Personal Care:
Facial Care.............. 17 10(/1/) 13 15 9
Body Care................ 12 9 9 12 7
Hair Care................ 14 13 13 13 10
Color Cosmetics.......... 11 10 10 10 -
Specialty................ 26 8 10 19 -
--- ---------- ---------- ---------- ----------
Total.................. 80 50 55 69 26
=== ========== ---------- ========== ==========
IDN:
Nutritional Supplements.. 18 7 5 10 -
Weight Management
Products and Nutritious
Snacks.................. 8 1 2 3 -
Sports Nutrition......... 4 1 - - -
--- ---------- ---------- ---------- ----------
Total.................. 30 9 7 13 -
=== ========== ========== ========== ==========
--------
(1) In Japan, the Company also sells 11 locally sourced facial care
products.
Presented below are the dollar amount and percentage of revenue of each of
the two product categories and other sales aid revenue for the years ended
December 31, 1994 and 1995, and for the six months ended June 30, 1996.
REVENUE BY PRODUCT CATEGORY
YEAR ENDED YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1994 DECEMBER 31, 1995 JUNE 30, 1996
------------------- ------------------- ------------------
PRODUCT CATEGORY $ % $ % $ %
---------------- ---------- -------- ---------- -------- --------- --------
(DOLLARS IN THOUSANDS)
Personal care..... $ 241,188 91.2% $ 308,145 85.9% $ 213,707 74.3%
Nutritional....... 5,464 2.1 16,298 4.5 51,065 17.7
Sales aids........ 17,788 6.7 34,166 9.6 22,939 8.0
---------- ------- ---------- ------- --------- ------
Total........... $ 264,440 100.0% $ 358,609 100.0% $ 287,711 100.0%
========== ======= ========== ======= ========= ======
47
PERSONAL CARE PRODUCTS
The Company's current personal care products category is divided into the
following lines: facial care, body care, hair care and color cosmetics, as
well as specialty products, such as sun protection, oral hygiene and
fragrances. Each of the Subsidiaries markets a variety of the 80 personal care
products currently offered by NSI. The Company also offers product sets that
include a variety of products in each product line as well as small, sample-
size packages to facilitate product sampling by potential consumers. The
product sets are especially popular during the opening phase of a new country,
where distributors and consumers are anxious to purchase a variety of
products, and during holiday and gift giving seasons in each market. The
Company anticipates the introduction of additional personal care products into
each market, based on the likelihood of the particular product's success in
the market as well as applicable regulatory approvals.
The personal care products offered in Taiwan and Hong Kong are substantially
the same formulations of the products offered by NSI in the U.S. In Japan and
South Korea, however, most of the products have been reformulated to satisfy
certain regulatory requirements with respect to product ingredients and
preservatives and to meet the preferences of Japanese and South Korean
consumers.
The following is a brief description of each line within the personal care
product category offered by the Company as of June 30, 1996:
FACIAL CARE. The goal of the facial care line is to allow users to cleanse
thoroughly without causing dryness and to moisturize with effective humectants
that allow the skin to attract and retain vital water. The Company's facial
care line currently consists of 17 different products: Cleansing Lotion,
Facial Scrub, Exfoliant Scrub, Facial Cleansing Bar, Clay Pack, pH Balance
Facial Toner, NaPCA Moisturizer, Rejuvenating Cream, Celltrex (called Hylatrex
in Japan and South Korea), Intensive Eye Complex, HPX Hydrating Gel, Face Lift
and Activator (two formulas for sensitive and normal skin), Jungamals Lip
Balm, Clarifex Cleansing Scrub, Clarifex Mud, Alpha Extra Face and Nu Colour
Eye Makeup Remover.
BODY CARE. The Company's line of body care products relies on premium
quality ingredients to cleanse and condition skin. The cleansers are uniquely
formulated without soap, and the moisturizers contain light but effective
humectants and emollients. The Company's body care line currently consists of
12 products: Antibacterial Body Cleansing Gel, Liquid Body Lufra, Body
Smoother, Hand Lotion, NaPCA Moisture Mist, Body Bar, Body Cleansing Gel,
Enhancer, Glacial Marine Mud (Original), Jungamals Crazy Crocodile Cleaner,
Jungamals Rhino Ray Resister and Alpha Extra Body. Glacial Marine Mud
(Original) is exclusively licensed to NSI for sale in the direct selling
channel.
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
Color line consists of 11 products with 72 sku's including MoistureShade
Liquid Finish (10), MoistureShade Pressed Powder (4), Blush Duo (5), Eye
Shadow Trio (6), Mascara (2), Eyeliner (3), Lip Liner (5), Lipstick (20),
DraMATTEics Lip Pencils (6), Nu Colour Moisture Finish (10), and Lip Gloss.
SPECIALTY PRODUCTS. The Company recently introduced a product line labeled
Epoch, a unique line of ethnobotanical personal care products created in
cooperation with well known ethnobotanists. These products,
48
which unite natural compounds used by indigenous cultures with advanced
scientific ingredients, include Glacial Marine Mud, Deodorant with Citrisomes,
Polishing Bar, LeafClean Hand Wash, Everglide Foaming Shave Gel, Desert Breeze
Aftershave and Post Shave Lotion for Women. Epoch will be launched in the fall
of 1996 in Hong Kong and Taiwan and is currently expected to be launched,
subject to regulatory approval, in the spring of 1997 in Japan and South
Korea. Glacial Marine Mud is exclusively licensed to NSI for sale in the
direct selling channel.
Nutriol, a line of products exclusively licensed to NSI for sale in the
direct selling channel and manufactured in Europe, consists of five products:
Nutriol Hair Fitness Preparation, Nutriol Shampoo, Nutriol Mascara, Nutriol
Nail and Nutriol Eyelash. Nutriol represents a product designed to replenish
the hair's vital minerals and elements. Each Nutriol product uses
mucopolysaccharide, a patented ingredient.
The Company's line of Sunright products is designed to provide a variety of
sun screen protection with non-irritating and non-greasy products. The sun
protection line includes a sun preparation product that prepares the skin for
the drying impact of the sun, five sun screen alternatives with various levels
of SPF, and a sun screen lip balm. In the Asian market, the Company's sun care
line is currently available in Hong Kong and Japan. At present, Sunright Prime
Pre & Post Sun Moisturizer and Sunright Lip Balm are not available in Japan.
AP-24, a line of oral health care products which incorporates anti-plaque
technology designed to help prevent plaque build-up 24 hours a day, is
exclusively licensed to the Company, together with the associated trademark,
for sale in the direct selling channel under the trademark AP-24. This product
line includes AP-24 Anti-Plaque Toothpaste, AP-24 Anti-Plaque Mouthwash, AP-24
Triple Action Dental Floss and AP-24 Anti-Plaque Breath Spray. These products
are currently available in Hong Kong and Taiwan. The Company currently intends
to launch this product line, subject to regulatory approval, in South Korea
and Japan in 1997. The AP-24 oral health care products for kids offers
products designed to make oral care fun for children, including Jungamal's
Tough Tusk Toothpaste and Jungamal's Fluffy Flamingo Floss.
The Company offers a men's and a women's fragrance under the Nu Skin
trademark Safiro.
PRODUCT SETS. The Company currently offers product sets that include a
sampling of products from a given product line. These package configurations
are intended to encourage increased product trials.
INTERIOR DESIGN NUTRITIONALS
The IDN product category is comprised of 30 products in the following lines:
nutritional supplements, weight management products and nutritious snacks, and
sports nutrition. IDN is designed to promote healthy, active lifestyles and
general well-being through proper diet, exercise and nutrition. Although less
developed in the Asian market than the personal care category, each of the
Subsidiaries, except Nu Skin Korea, markets a variety of the IDN products
offered by NSI. In the United States, the IDN division is an official licensee
of the U.S. Olympic Committee.
The Company believes that the nutritional supplement market is expanding in
Asia because of changing dietary patterns, a health-conscious population and
recent reports supporting the benefits of using vitamin and mineral
nutritional supplements. This product line is particularly well suited to
network marketing because the average consumer is often uneducated regarding
nutritional products. The Company believes that network marketing is a more
efficient method than traditional retailing channels in educating consumers
regarding the benefits of nutritional products. Because of the numerous over-
the-counter vitamin and mineral supplements in Asia, the Company is confident
that individual attention and testimonials by distributors will provide
information and comfort to a potential consumer.
IDN products generally require reformulation to satisfy the strict
regulatory requirements of each Asian market. While each product's concept and
positioning are generally the same, regulatory differences between U.S. and
Asian markets result in some product ingredient differences. In addition,
Asian preferences and regulations favor tablets instead of gel caps, which are
typically used in the U.S.
49
The following is a brief description of each of the IDN product lines:
NUTRITIONAL SUPPLEMENTS. LifePak, the core IDN nutritional supplement, is
designed to provide an optimum mix of nutrients including vitamins, minerals,
antioxidants and phytonutrients (natural chemical extracts from plants). The
introduction of LifePak in Japan in October 1995 resulted in a significant
increase in revenue and currently represents 20% of the Company's sales in
Japan. LifePak is scheduled for launch in Taiwan in the fall of 1996.
Additional nutritional supplements include: Vitox, which incorporates beta
carotene and other important vitamins for overall health; Metabotrim, which
provides B vitamins necessary to convert food to energy and chromium chelate
which has been shown to help in the body's normal metabolic process; Optimum
Omega, a pure source of omega 3 fatty acids aimed to assist cardiovascular
health; Image HNS, an all-around vitamin and antioxidant supplement; and
Optigar Q, a blend of co-enzyme Q10 and deodorized garlic. The IDN Masters
Wellness Supplement provides nutrition specifically for an aging generation.
Jungamals Children's Chewables combine natural flavors and colors and contain
a unique blend of antioxidants, chelated minerals, and vitamins specifically
tailored for children. NutriFi contains four grams of soluble and insoluble
fibers per serving in a powder that can be added to liquids and foods to
supplement the recommended daily amounts of fiber.
The Company also offers a number of nutritional drinks. Hot & Healthy,
unlike traditional hot drinks, is 100% caffeine-free and contains beneficial
ingredients such as Korean Panax Ginseng and grape seed extract. Splash C with
juice crystals is a healthy beverage providing significant doses of vitamins C
and E as well as calcium in each serving. Real fruit juice crystals are added
to create orange or lemon flavor.
IDN's botanical line contains phytonutrients for those who seek natural
ingredients in dietary supplements and is designed to address specific areas
of need. The botanicals, offered in eight different dietary supplements,
provide natural ingredients without sugar, salt, wheat, dairy products,
artificial colors, chemicals or preservatives.
WEIGHT MANAGEMENT PRODUCTS AND NUTRITIOUS SNACKS. As part of the Company's
mission to promote a healthy lifestyle and long-term wellness, IDN includes a
HealthTrim Lifestyle System (which includes LifePak Trim, Fiberry Fat-Free
Snack Bars and Appeal Lite, a nutritional drink containing chelated minerals
and vitamins), and instructional assessment materials with a counseling
program. The Company also offers Breakbars, a nutritious snack which provides
carbohydrates, protein and fiber.
SPORTS NUTRITION. To cater to health conscious individuals with active
lifestyles, the IDN Sports Nutrition System offers a comprehensive, flexible
program for individuals who desire to optimize performance on an individual
basis. The system includes LifePak, OverDrive, a sports supplement licensed by
the U.S. Olympic Committee that features antioxidants, B vitamins and chromium
chelate, GlycoBar energy bars, and SportaLyte performance drink to help supply
the necessary carbohydrates, electrolytes and chelated minerals to optimize
performance. AminoBuild is a low fat high protein drink mix that is designed
to replace nutrients before and after workouts.
SALES AIDS
The Company provides an assortment of sales aids to facilitate the sales of
its products. Sales aids include videotapes, promotional clothing, pens,
stationary, business cards, brushes, combs, cotton pads, tissues, and other
miscellaneous items to help create consumer awareness of the Company and its
products. Sales aids are priced at the Company's approximate cost and are not
commissionable items (i.e., distributors do not receive commissions on
purchases of sales aids).
PRODUCT GUARANTEES
The Company believes that it is among the most consumer protective companies
in the direct selling industry. For 30 days from the date of purchase, the
Company's product return policy allows a retail purchaser to return any
product to the distributor through whom the product was purchased for a full
refund. After 30 days
50
from the date of purchase, the return privilege is in the discretion of the
distributor. Because distributors may return unused and resalable products to
the Company for a refund of 90% of the purchase price for one year, they are
encouraged to provide consumer refunds beyond 30 days. In addition, the
product return policy is a material aspect of the success of distributors in
developing a retail customer base. The Company's experience with actual
product returns to date has averaged approximately 1.5% of annual revenue
through 1995.
PRODUCT DEVELOPMENT AND PRODUCTION
PRODUCT DEVELOPMENT PHILOSOPHY. The Company is committed to building its
brand name and distributor and customer loyalty by selling premium quality,
innovative personal care and nutritional products that appeal to broad
markets. This commitment is illustrated by the Company's personal care
products slogan "All of the Good and None of the Bad" and its nutritional
products slogan "Adding Life to Years." The Company's product philosophy is to
combine the best of science and nature and to include in each of its products
the highest quality ingredients. For example, NSI avoids soaps and other harsh
cleansers that can dry and irritate skin, undesirable oils such as lanolin,
elements known to be irritating and pore clogging, volatile alcohols such as
ethyl alcohol, and conditioning agents that leave heavy residues. This
philosophy has led to the Company being one of the only personal care
companies in Japan to disclose every ingredient to consumers. This philosophy
has also led to the Company's commitment to avoid any ingredients in
nutritional supplements that are reported to have any long-term addictive or
harmful effects, even if short-term effects may be desirable. Independent
distributors need to have confidence that they are distributing the best
products available in order to have a sense of pride in their association with
the Company and to have products that are distinguishable from "off the shelf"
products. NSI and the Company are committed to developing and providing
quality products that can be sold at an attractive retail price and allow the
Company to maintain reasonable profit margins.
NSI is also committed to constantly improving its evolving product
formulations to incorporate innovative and proven ingredients into its product
line. Whereas many consumer product companies develop a formula and stay with
that formula for years, and sometimes decades, NSI believes that it must stay
current with product and ingredient evolution to maintain its reputation for
innovation to retain distributor and consumer attention and enthusiasm. For
this reason, NSI continuously evaluates its entire line of products for
possible enhancements and improvements.
In addition, the Company believes that timely and strategic product
introductions are critical to maintaining the growth of independent
distribution channels. Distributors become enthusiastic about new products and
are generally excited to share new products with their customer base. An
expanding product line helps to attract new distributors and generate
additional revenues.
NSI maintains a laboratory and a staff of approximately 90 individuals
involved in product development. NSI also relies on an advisory board
comprised of recognized authorities in various disciplines. In addition, NSI
and the Company evaluate a significant number of product ideas that are
presented by distributors and other outside sources. NSI believes that
strategic relationships with certain vendors also provide important access to
innovative product concepts. The Company will continue to develop products
tailored to appeal to the particular needs of the Company's markets.
Historically, one of the reasons for the success of the Company's personal
care product line has been its gender neutral positioning. This product
positioning substantially expands the size of the traditional skin and hair
care market. NSI's IDN line of products has historically been positioned to be
age neutral. However, with a substantial distributor and user base
established, the Company believes that it can further increase its market
share in both the personal care and the nutritional products categories by
introducing age and gender specific products, including LifePak for Women,
additional vitamin products targeted to seniors, and personal care products
targeted to either men or women.
PRODUCTION. All the Company's products are produced by unaffiliated
manufacturers primarily through NSI. The Company currently has little or no
direct contact with these manufacturers. The Company's profit
51
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 60% of its
personal care and nutritional products, respectively. The Company believes
that in the event that NSI's relationship with either of these manufacturers
is terminated, NSI will be able to find suitable replacement manufacturers.
However, there can be no assurance that the loss of either manufacturer would
not have a material adverse effect on the Company's business and results of
operations. See "Risk Factors--Reliance on and Concentration of Outside
Manufacturers."
RELATIONSHIP WITH NSI
Upon the consummation of the Offerings, approximately % of the combined
voting power of the outstanding shares of Common Stock will be held by the
Shareholders of NSI. In addition, the Company has entered into, or, upon
consummation of the Offerings will enter into, the Operating Agreements with
NSI and with NSIMG, a Delaware corporation also controlled by the shareholders
of NSI, summary descriptions of which are set forth below. Such summaries are
qualified in their entirety by reference to the Operating Agreements, which
are filed as exhibits to the Registration Statement of which this Prospectus
forms a part. In the future the Company may enter into amendments to the
Operating Agreements or additional agreements with NSI or NSIMG. The Company
intends to seek the approval of a majority of its independent directors for
any amendment to the Operating Agreements and any new agreement which the
Company believes to be of material importance to the Company and as to which
the Company and NSI or NSIMG have conflicting interests. See "Risk Factors--
Relationship With and Reliance on NSI; Potential Conflicts of Interest."
DISTRIBUTION AGREEMENTS. The Company has entered into a regional
distribution agreement (the "Regional Distribution Agreement") with NSI,
through Nu Skin Hong Kong, pursuant to which NSI has granted to the Company
the exclusive right to sell and distribute NSI products and sales aids in the
Company's markets. Nu Skin Japan, Nu Skin Taiwan and Nu Skin Korea have each
entered into wholesale distribution agreements (the "Wholesale Distribution
Agreements") with Nu Skin Hong Kong, pursuant to which each such Subsidiary
has been granted the right to sell and distribute NSI products in its
respective country.
The Company has the right to purchase any of NSI's products, subject to
unavailability due to local regulatory requirements. See "--Government
Regulation." Purchases are made by submission of a purchase order to NSI,
which NSI must accept unless it has insufficient inventory to fill the order.
In determining whether it has sufficient inventory to fill a given order, NSI
is required to treat the Company on a parity basis with its other affiliates.
The prices for products are governed by a price schedule which is subject to
change by NSI from time to time upon at least 30 days advance notice. NSI pays
ordinary freight and the Company pays handling, excise taxes and customs
duties on the products the Company orders. In order to assist NSI in planning
its inventory and pricing, the Company is required to provide NSI with certain
business plans and reports of its sales and prices to independent
distributors.
52
The Company purchases virtually all of its products from NSI through Nu Skin
Hong Kong. Nu Skin Hong Kong pays for its purchases from NSI under the
Regional Distribution Agreement in U.S. dollars, while the other Subsidiaries
pay for their purchases from Nu Skin Hong Kong under the Wholesale
Distribution Agreements in their local currency. Nu Skin Hong Kong therefore
bears significant currency exchange risk as a result of purchases from NSI on
behalf of the other Subsidiaries. See "Risk Factors--Operations Outside the
United States; Currency Risks."
The Company is responsible for paying for and obtaining government approvals
and registrations necessary for importation of NSI's products into its
markets. In addition, the Company is responsible for obtaining any government
approvals, including any filings and notifications, necessary for the
effectiveness of the Regional Distribution Agreement and the Wholesale
Distribution Agreements or for the parties performance thereunder.
NSI is generally responsible for paying for the research, development and
testing of the products sold to the Company, including any product
reformulations needed to comply with local regulatory requirements. NSI
warrants as to the merchantability of, and its title to, such products. NSI
has further indemnified the Company from losses and liability relating to
claims arising out of alleged or actual defects in the design, manufacture or
content of its products. NSI is required to maintain insurance covering claims
arising from the use of its products and to cause each Subsidiary to be a
named insured on such insurance policy. The Subsidiaries are also required to
maintain insurance policies covering the business to be conducted by them
pursuant to the Regional Distribution Agreement and the Wholesale Distribution
Agreements.
The Company is prohibited from selling NSI products outside of the countries
for which it has an exclusive distribution license, except that the Company
may sell certain NSI products to NSI affiliates in Australia and New Zealand.
In addition, the Company is prohibited from selling products which directly or
indirectly compete with NSI products in any country without NSI's prior
consent, which consent will not be unreasonably withheld or delayed. The
Company may sell non-competing products without restriction.
The Company may manufacture products which do not compete with NSI products
without restriction but may not manufacture products which compete directly or
indirectly with NSI products without NSI's prior consent, which consent will
not be unreasonably withheld or delayed. Any products manufactured by the
Company carrying an NSI trademark will be subject to the Trademark/Tradename
License Agreements with NSI described below and will require the payment to
NSI of certain royalties as set forth therein. If NSI discontinues a product
that the Company would like to continue to sell, the Company may elect to
manufacture the product itself or through a third party manufacturer unless
NSI has a competing product. In this event, NSI has agreed to license the
product formulation and any associated trademarks and tradenames to the
Company pursuant to the Trademark/Tradename License Agreements described
below.
When the Company determines to commence operations in Thailand, Indonesia,
Malaysia, the Philippines, the PRC, Singapore or Vietnam, NSI has agreed under
the Regional Distribution Agreement to enter into new Trademark/Tradename
License Agreements and Licensing and Sales Agreements and to cause NSIMG to
enter into new Management Services Agreements, in each case substantially
similar to those described below, with the Company or subsidiaries operating
in such countries.
TRADEMARK/TRADENAME LICENSE AGREEMENTS. Pursuant to the Trademark/Tradename
License Agreements, NSI has granted to each Subsidiary an exclusive license to
use in its market the NSI and IDN trademarks, the individual product
trademarks used on NSI products and any NSI tradenames. Each of the
Subsidiaries may thus use the licensed trademarks and tradenames on products
and commercial materials not purchased from NSI, including locally sourced
products and commercial materials and products and commercial materials
manufactured by such subsidiary and may grant a sub-license, with the consent
of NSI, for the licensed
53
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 and commercial materials not purchased from NSI,
including locally sourced products and commercial materials and products and
commercial materials manufactured by the Company. The royalty is paid monthly
and is equal to 5% of the Company's revenues from such products and commercial
materials for such month generally and a total of 8% where NSI owns the
formula or has exclusive rights in the subject market for such products or
commercial materials.
NSI has the right to inspect the premises where products using its
trademarks are manufactured in order to ensure that the products meet its
quality standards. The Company's labels, packaging, advertising and
promotional materials using NSI's trademarks must conform with NSI's published
standards and NSI has the right of prior approval. The Company is responsible
for correcting any manufacturing defects in locally sourced products or
products it manufactures that are brought to the Company's attention by NSI or
otherwise.
NSI is responsible for securing and maintaining trademark registrations in
the territory covered by each Trademark/Tradename Agreement. NSI has agreed to
take such actions as the Company may reasonably request to protect its and the
Company's rights to the licensed trademarks from infringement and related
claims and has indemnified the Company from losses and liability resulting
from such claims.
LICENSING AND SALES AGREEMENTS. Currently, all distributor agreements are
entered into between the distributor and NSI rather than with the Company.
Therefore, the Company does not own the distributor lists or the distribution
system, the Global Compensation Plan, copyrights and related intangibles.
Consequently, each of the Subsidiaries has entered into a Licensing and Sales
Agreement with NSI which includes a license to the Company to use the
distributor lists, the Global Compensation Plan, know how, distributor system
and related intellectual property exclusively in its markets. The Company pays
a license fee to NSI of 4% of the Company's revenue from product sales
(excluding starter and introductory kits) to NSI distributors for the use of
such licensed property. The Company may not grant a sublicense for the
licensed property.
The Company is required to use the Global Compensation Plan to distribute
any products, except as NSI may agree to modify the plan in accordance with
local requirements. The Company must comply with all policies implemented by
NSI under the Global Compensation Plan. This is necessary to ensure global
consistency in NSI's operations. The Company must also employ all NSI policies
relating to commissions payable to, and other relationships with, NSI
distributors.
The Company is obligated to pay NSI a fixed commission expense of 42% of
commissionable product sales to distributors in each of the Company's markets
(with the exception of South Korea where, due to government regulations, the
Company utilizes a different formula to satisfy this obligation). The
Licensing and Sales Agreements provide that the Company is to satisfy this
obligation by paying commissions owed to local distributors. In the event that
these commissions exceed 42% of commissionable product sales, the Company is
entitled to receive the difference from NSI. In the event that the commissions
paid are lower than 42%, the Company must pay the difference to NSI. Under
this formulation, the Company's total commission expense is fixed at 42% of
commissionable product sales in each country (except for South Korea). The 42%
figure has been set on the basis of NSI's experience over the past seven years
which indicates that actual commissions paid in a given year together with the
cost of administering the Global Compensation Plan average approximately 42%
of commissionable product sales for such year. In the event that actual
commissions payable to distributors from sales in the Company's markets vary
from these historical results, whether as a result of changes in distributor
behavior or changes to the Global Compensation Plan or in the event that NSI's
cost of administering the Global Compensation Plan increases or decreases, the
Licensing and Sales Agreements provide that the intercompany settlement figure
may be modified to more accurately reflect actual results.
54
In addition to payments to local distributors, the Company is generally
responsible for distributor support and relations within Japan, Taiwan, Hong
Kong and South Korea. The Company has agreed to use its best efforts to
support the development of NSI's distributor network in its markets by
purchasing starter or introductory kits from NSI and selling them to potential
NSI distributors.
NSI has agreed to take such actions as the Company may reasonably request to
protect its and the Company's rights to the property licensed under the
Licensing and Sales Agreements from infringement and related claims and has
indemnified the Company from losses and liability resulting from such claims.
Both NSI and the Company are required to maintain insurance coverage adequate
to insure their assets and financial stability. NSI is responsible for
ensuring that the property licensed under the Licensing and Sales Agreements
complies with local laws and regulations, including direct selling laws.
MANAGEMENT SERVICES AGREEMENTS. Upon consummation of the Offerings, the
Subsidiaries will enter into Management Services Agreements with NSIMG,
pursuant to which NSIMG has agreed to provide a variety of management and
support services to each Subsidiary. These services will likely include
management, legal, financial, marketing and distributor support/training,
public relations, international expansion, human resources, strategic
planning, product development and operations administration services. Most of
NSI's senior management personnel and most employees who deal with
international issues are employees of NSIMG.
Generally, the management and support services will be provided by employees
of NSI and NSIMG acting through NSIMG either (i) on a temporary basis in a
specific consulting role or (ii) on a full-time basis in a management position
in the country in which the services are required. The Management Services
Agreements do not cover the services of many of the Company's executive
officers. See "Management--Executive Compensation."
GENERAL PROVISIONS. The Operating Agreements are each for a term ending on
December 31, 2016, and, after December 31, 2001, will be subject to
renegotiation in the event that members of the families of, or trusts or
foundations established by or for the benefit of the Selling Stockholders of
NSI on a combined basis no longer beneficially own a majority of the combined
voting power of the outstanding shares of Common Stock of the Company. Such
renegotiation provision is to protect the NSI trademarks and product quality,
as well as to ensure the confidentiality of NSI trade secrets. 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; (iii) entry of a judgment by a court of competent jurisdiction against
the other party in excess of $25,000,000; or (iv) the placement of a lien or
encumbrances securing an amount in excess of $25,000,000 on the assets of the
other party. Each Operating Agreement is further subject to termination by NSI
upon 30 days notice in the event of a change of control of the subsidiary
party thereto. Each Operating Agreement provides that neither party may assign
its rights thereunder without the consent of the other party. Each Operating
Agreement is governed by Utah law. Any dispute arising under an Operating
Agreement is to be settled by arbitration conducted in Utah in accordance with
the applicable rules of the American Arbitration Association, as supplemented
by the commercial arbitration procedures for international commercial
arbitration.
MUTUAL INDEMNIFICATION AGREEMENT. Prior to or concurrently with the
Offerings, the Company and NSI will enter into a mutual indemnification
agreement pursuant to which NSI will indemnify the Company for certain claims,
losses and liabilities relating to the operations of the Subsidiaries prior to
the Reorganization and the Company will indemnify NSI for certain claims,
losses and liabilities relating to the operations of the Subsidiaries after
the Reorganization.
COMPETITION
PERSONAL CARE AND NUTRITIONAL PRODUCTS. The markets for personal care and
nutritional products are large and intensively competitive. The Company
competes directly with companies that manufacture and market personal care and
nutritional products in each of the Company's product categories. Many of the
Company's
55
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 will be able to
successfully meet the challenges posed by this increased competition.
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. 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.
GOVERNMENT REGULATION
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. See "Risk Factors--Government Regulation." 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 the aggregate
wholesale value of products sold in a given month.
The Japanese Ministry of Health and Welfare ("MOHW") requires the Company to
possess an import business license and to register each personal care product
imported into the country. Packaging and labeling requirements are also
specified. The Company has had to reformulate many products to satisfy MOHW
regulations. In Japan, nutritional foods, drugs and quasi-drugs are all
strictly regulated. The chief concern involves the types of claims and
representations that can be made regarding the efficacy of nutritional
products. The Company's successful introduction of IDN products in Japan was
done utilizing the combined efforts of NSI's technical staff as well as inside
and outside consultants.
All "medicated" cosmetic and pharmaceutical products, including PharmAssist,
require registration in Taiwan. 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 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
56
inspection where, in addition to compliance with ingredient requirements, each
product is inspected for compliance with South Korean labeling requirements.
The Company believes it is operating in compliance in all material respects
with all applicable regulations relating to both its products and distribution
system.
EMPLOYEES
As of June 30, 1996, the Company had approximately 800 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. In Japan, Taiwan, Hong Kong and South Korea, the
Company's employee staff consists of well trained, highly efficient personnel
that support distributors in a professional manner.
PROPERTIES
In each of its current markets, the Company has established a central office
for the local administrative staff who is directed by a general manager. These
offices also have a training room for distributor and employee use and an
adjoining distribution center where distributors can place, pay for, and pick
up orders. In Japan, Taiwan, and South Korea additional pick up centers have
been added to provide better service to distributors and meet the increasing
demand for product. In Hong Kong, the Company maintains a distributor business
center where established distributors can use office space for training and
sponsoring activities at cost.
In addition to the Company's corporate headquarters in Provo, Utah, the
following table summarizes, as of June 30, 1996, the Company's leased office
and distribution facilities in each country where the Company currently has
operations.
PROPERTIES LEASED
LOCATION FUNCTION LEASE TOTAL
-------- -------- ------------------
Tokyo, Japan............ Central office/ distribution center 35,000 square feet
Osaka, Japan............ Distribution center/office 7,700 square feet
Taipei, Taiwan.......... Central office/distribution center 22,000 square feet
Kaohsiung, Taiwan....... Distribution center/office 9,500 square feet
Taichung, Taiwan........ Distribution center/office 17,000 square feet
Taoyuan, Taiwan......... Warehouse/distribution center 36,000 square feet
Causeway Bay, Hong
Kong................... Central office/distribution
center/distributor business
center/regional office 19,000 square feet
Tsing Yi, Hong Kong..... Warehouse 10,000 square feet
Macau................... Distribution center/office 2,000 square feet
Seoul, Korea............ Central office/distribution center 20,000 square feet
Seoul, Korea............ Distribution center 7,000 square feet
Kyungki-Do, Korea....... Warehouse 16,000 square feet
LEGAL PROCEEDINGS
The Company is not a party to any litigation or other legal proceedings or
investigations which is expected to have a material adverse effect on its
financial condition or results of operations, nor are any such proceedings
known to be contemplated.
57
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information regarding the Company's
directors and executive officers.
NAME AGE POSITION
---- --- --------
Blake M. Roney.......... 38 Chairman of the Board
Steven J. Lund.......... 42 President, Chief Executive Officer and Director
Renn M. Patch........... 46 Chief Operating Officer
Corey B. Lindley........ 32 Vice President of Finance
Michael D. Smith........ 50 Vice President of Operations
M. Truman Hunt.......... 37 Vice President of Legal Affairs and Investor Relations
Keith R. Halls.......... 38 Secretary and Director
Takashi Bamba........... 61 President, Nu Skin Japan
John Chou............... 50 President, Nu Skin Taiwan
S.T. Han................ 54 President, Nu Skin Korea
George Mak.............. 42 President, Nu Skin Hong Kong
Mark L. Adams........... 44 Controller
Sandie N. Tillotson..... 39 Director
Brooke B. Roney......... 34 Director
Kirk V. Roney........... 42 Director
Max L. Pinegar.......... 65 Director
Max E. Esplin........... 53 Director
Blake M. Roney has served as the Chairman of the Board since the Company's
inception and is a founder of NSI. He has also served as President, Chief
Executive Officer and Chairman of the Board of NSI and its affiliated entities
since their respective inceptions. He received a B.S. degree from Brigham
Young University. He is the brother of Kirk V. Roney and Brooke B. Roney.
Steven J. Lund has been the President, Chief Executive Officer and a
Director of the Company since its inception. Mr. Lund has also served as
Executive Vice President and a Director of NSI since its inception and as Vice
President and Secretary of certain NSI affiliated entities since their
respective inceptions. Mr. Lund previously worked as an attorney in private
practice. He received a B.A. degree from Brigham Young University and a J.D.
degree from Brigham Young University's J. Reuben Clark Law School.
Renn M. Patch has been the Chief Operating Officer of the Company since its
inception. Since 1992 he has been Vice President of Global Operations and
Assistant General Manager of NSI. From 1991 to 1992, he served as Director of
Government Affairs of NSI. Prior to joining NSI in 1991, Mr. Patch was
associated with the Washington, D.C. consulting firm of Parry and Romani
Associates. Mr. Patch earned a B.A. degree from the University of Minnesota, a
J.D. degree from Hamline University School of Law and an L.L.M. degree from
Georgetown University.
Corey B. Lindley has been the Vice President of Finance of the Company since
its inception. From 1993 to 1996, he served as Managing Director,
International of NSI. Mr. Lindley worked as the International Controller of
NSI from 1991 to 1994 and lived in Hong Kong and Japan during that time. From
1990 to 1991, he served as Assistant Director of Finance of NSI. Mr. Lindley
is a Certified Public Accountant. Prior to joining NSI in 1990, he worked for
the accounting firm of Deloitte and Touche. He earned a B.S. degree from
Brigham Young University and an M.B.A. degree from Utah State University.
Michael D. Smith has been the Vice President of Operations for the Company
since its inception. He has also served as Vice President of Asian Operations
of NSI since February 1996. Prior to that time, he served as General Counsel
of NSI from 1992 to 1996 and as Director of Legal Affairs of NSI from 1989 to
1992. He earned B.S. and M.A. degrees from Brigham Young University and a J.D.
degree from the University of Utah.
58
M. Truman Hunt has served as the Vice President of Legal Affairs and
Investor Relations since the Company's inception. He has also served as
Counsel to the President of NSI since 1994. From 1991 to 1994, Mr. Hunt served
as President and Chief Executive Officer of Better Living Products, Inc., an
NSI affiliate involved in the manufacture and distribution of houseware
products sold through traditional retail channels. Prior to that time, he was
a securities and business attorney in private practice. He received a B.S.
degree from Brigham Young University and a J.D. degree from the University of
Utah.
Keith R. Halls has served as the Secretary and a Director of the Company
since its inception. He has also served as General Vice President and a
Director of NSI since 1992. He served as Director of Finance of NSI from 1986
to 1992. Mr. Halls is a Certified Public Accountant. Mr. Halls received a B.A.
degree from Stephen F. Austin State University and a B.S. degree from Brigham
Young University.
Takashi Bamba has served as the President of Nu Skin Japan since 1993. Prior
to joining Nu Skin Japan in 1993, Mr. Bamba served five years as President and
CEO of Avon Products Co., Ltd., the publicly traded Japanese subsidiary of
Avon Products, Inc. Prior to working at Avon Products Co., Ltd., he spent 17
years at Avon Products, Inc. He received a B.A. degree from Yokohama National
University.
John Chou has served as the President of Nu Skin Taiwan since 1991. Prior to
joining Nu Skin Taiwan in 1991, he spent twenty-one years in international
marketing and management with 3M Taiwan Ltd., Amway Taiwan and Universal PR
Co. Mr. Chou is a standing director of the Taiwan ROC Direct Selling
Association. He is also a member of the Kiwanis International, and the Taiwan
American Chamber of Commerce. He received a B.A. degree from Tan Kang
University in Taipei, Taiwan.
S.T. Han has served as the President of Nu Skin Korea since 1995. Prior to
joining Nu Skin Korea in 1995, Mr. Han spent four years as the Executive
Managing Director of Woosung Film Co., the exclusive distributor of Konica
film in South Korea. He also worked for Amway Korea, Ltd. during that
company's start-up phase of operations in 1991. Mr. Han graduated with a B.A.
degree from ChungAng University.
George Mak has served as the President of Nu Skin Hong Kong since 1991.
Prior to joining Nu Skin Hong Kong in 1991, Mr. Mak worked for Johnson &
Johnson as a personnel and administration manager for Hong Kong and Shanghai
from 1989 to 1991. Prior to joining Johnson & Johnson he worked for 10 years
in the human resources and accounting fields. He earned an M.B.A. degree from
the University of East Asia, Macau.
Mark L. Adams has served as the Controller since the Company's inception. He
has also served as International Controller of NSI since 1994. Prior to
joining NSI in 1994, he was an audit manager with Arthur Andersen & Co. and
served as Chief Financial Officer and a Director of Sanyo Icon, a subsidiary
of Sanyo Electric Co. Ltd. He received an M.A. degree from Brigham Young
University and has been a Certified Public Accountant since 1978.
Sandie N. Tillotson has served as a Director of the Company since its
inception. She was a founder of NSI and has also served as General Vice
President since 1992 and a Director of NSI since its inception. She served as
Vice President of Corporate Services of NSI from 1984 to 1992. She earned a
B.S. degree from Brigham Young University.
Brooke B. Roney has served as a Director of the Company since its inception.
He was a founder of NSI and has also served as General Vice President and a
Director of NSI since 1992. He served as Vice President of Distribution of NSI
from 1984 to 1992. He is the brother of Blake M. Roney and Kirk V. Roney.
Kirk V. Roney has served as a Director of the Company since its inception.
He has also served as General Vice President of NSI since 1992 and a Director
of NSI since 1984. He served as Vice President of Planning and Development of
NSI from 1984 to 1992. He earned an M.I.M. degree from the American Graduate
School
59
of International Management. He earned an M.A. degree from Central Michigan
University and a B.A. from Brigham Young University. He is the brother of
Blake M. Roney and Brooke B. Roney.
Max L. Pinegar has served as a Director of the Company since September 1996.
He has also served as General Manager of NSI since 1989 and as Vice President
of NSI since 1992. He received a B.A. degree from Brigham Young University and
an M.B.A. degree from the University of Utah.
Max E. Esplin has served as a Director of the Company since September 1996.
He has also served as Vice President of Finance of NSI since 1993. He served
as Controller of NSI from 1989 until 1993. Mr. Esplin is a Certified Public
Accountant. He received a B.S. degree from Brigham Young University.
Following completion of the Offerings, the Company's Board of Directors
intends to appoint at least two additional directors who will not be officers
or employees of NSI or the Company. It is expected that these outside
directors will receive annual retainer and per meeting fees in connection with
these directorships. See "--Compensation of Directors."
COMMITTEES OF THE BOARD OF DIRECTORS
Within 90 days after the closing of the Offerings, the Company's Board of
Directors will establish an Audit Committee consisting of at least two
directors, none of whom will be an officer or employee of the Company or NSI.
The duties of the Audit Committee will be to recommend to the Company's Board
of Directors the selection of independent certified public accountants to
audit annually the books and records of the Company, to review the activities
and the reports of the independent certified public accountants and to report
the results of such review to the Company's Board of Directors. The Audit
Committee will also consider the adequacy of the Company's internal controls
and internal auditing methods and procedures. Within 90 days after the closing
of the Offerings, the Company's Board of Directors will establish a
Compensation Committee consisting of at least two directors, none of whom will
be an officer or employee of the Company, the duties of which are to make
recommendations to the Company's Board of Directors with respect to the
salaries, bonuses and other compensation to be paid to the Company's officers.
The Company's Board of Directors also intends to establish an Executive
Committee consisting of Messrs. Blake M. Roney, Steven J. Lund and Keith R.
Halls. The duties of the Executive Committee are, to the extent authorized by
the Company's Board of Directors, to exercise all the powers and authority of
the Company's Board of Directors with respect to the management of the
business and affairs of the Company.
COMPENSATION OF DIRECTORS
Following the Offerings, directors who do not receive compensation as
officers or employees of the Company, NSI or its affiliates will be paid an
annual fee of $25,000 and a fee of $1,000 for each meeting of the Company's
Board of Directors or any committee meeting thereof that they attend.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company's Board of Directors does not currently have a compensation
committee but anticipates establishing one within 90 days following the
closing of the Offerings. Several members of the Company's Board of Directors
are also directors of NSI and have set or will set compensation for certain
executive officers of the Company who have been or will be following the
Offerings, executive officers of NSI.
EXECUTIVE COMPENSATION
The Company was formed in September 1996, and consequently paid no
compensation to the executive officers named in the table below during the
year ended December 31, 1995. However, salary, bonus and other compensation is
presented in the table below for the year ended December 31, 1995 based on
payments by NSI and the Subsidiaries to the named executive officers as if the
Company had been in existence during that period. During fiscal year 1995,
Messrs. Bamba, Chou, and Mak were employed full time as the Presidents of Nu
Skin
60
Japan, Nu Skin Taiwan and Nu Skin Korea, respectively. During fiscal year
1995, Messrs. Lund and Patch were, and after the Offerings will 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 Subsidiaries during fiscal year 1995. During 1996, the Company
will pay Messrs. Lund and Patch annual salaries commensurate with their fiscal
1995 salaries in return for their services to the Company. These salaries and
bonuses will be in addition to any amounts received by these officers from NSI
in return for their services to NSI. During 1996, the Company, through the
Subsidiaries, will pay Messrs. Bamba, Chou and Mak salaries of approximately
$361,000, $211,000 and $111,000, respectively. In addition, Messrs. Bamba,
Chou and Mak will be eligible to participate in the Company's contemplated
bonus incentive plan which is intended to be modeled after NSI's cash bonus
long term incentive plan which was in effect for these individuals in fiscal
year 1995. See "--Bonus Incentive Plan." It is anticipated that Messrs. Bamba,
Chou and Mak will continue to receive all of their compensation from the
Company through the Subsidiaries.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
------------------------------------------------
OTHER
ANNUAL ALL
SALARY BONUS COMPENSATION OTHER
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($) COMPENSATION
--------------------------- ---- ------- ------- ------------ ------------
Steven J. Lund........... 1995 236,364 85,529(/1/) -- --
President and Chief
Executive Officer
Takashi Bamba............ 1995 361,028 105,563(/2/) 98,063(/3/) 3,297(/4/)
President, Nu Skin Japan
John Chou................ 1995 185,370 75,786(/2/) 63,730(/5/) --
President, Nu Skin
Taiwan
Renn M. Patch............ 1995 97,175 104,765(/6/) 18,750(/7/) --
Chief Operating Officer
George Mak............... 1995 102,564 17,535(/2/) 9,645(/8/) --
President, Nu Skin Hong
Kong
--------
(1) Cash bonus paid to Mr. Lund not pursuant to a formal bonus plan.
(2) Cash bonus paid during fiscal year 1995 pursuant to NSI's cash bonus
long term incentive plan for the Presidents of the Subsidiaries.
(3) Includes deferred portion of a bonus accrued during fiscal year 1995
pursuant to NSI's cash bonus long term incentive plan for the
Presidents of the Subsidiaries and annual lease payments for a Company-
provided automobile.
(4) Annual premium for disability and accidental death insurance policy.
(5) Includes deferred portion of a bonus accrued during fiscal year 1995
pursuant to NSI's cash bonus long term incentive plan for the
Presidents of the Subsidiaries and annual payments for a Company-
provided automobile and club dues.
(6) Noncash bonus paid to Mr. Patch, not pursuant to a formal bonus plan.
(7) Includes $16,500 of accrued deferred compensation and $2,250 of vested
deferred compensation awarded to Mr. Patch under NSI's deferred
compensation plan.
(8) Deferred portion of a bonus accrued during fiscal year 1995 pursuant to
NSI's cash bonus long term incentive plan for the Presidents of the
Subsidiaries.
EMPLOYMENT AGREEMENTS
Messrs. Bamba, Chou and Han have entered into employment agreements with Nu
Skin Japan, Nu Skin Taiwan and Nu Skin Korea, respectively. Under these
agreements, these individuals are paid an annual salary and receive various
other benefits. These individuals, together with Mr. Mak, are also entitled to
participate in the Bonus Incentive Plan to be adopted by the Company prior to
or concurrently with the Offerings. See "--Bonus Incentive Plan."
Mr. Bamba is employed as the President of Nu Skin Japan at an annual salary
of approximately $361,000. This salary is subject to annual review by Nu Skin
Japan. Under the terms of his employment agreement, Mr. Bamba is entitled to
reimbursement of business-related expenses, the use of an automobile provided
by Nu
61
Skin Japan, a country club membership and dues, and participation in any
retirement plan offered by Nu Skin Japan. Mr. Bamba has the right under his
employment agreement to have Nu Skin Japan purchase a country club membership
and pay related dues, although he has not exercised this right. Mr. Bamba is
also provided with a private insurance plan paid for by Nu Skin Japan provided
the premium for such private insurance plan does not exceed (Yen)300,000 per
year. Mr. Bamba has agreed to certain confidentiality obligations. The term of
Mr. Bamba's employment is indefinite, subject to termination by Mr. Bamba or Nu
Skin Japan upon three months' notice.
Mr. Chou is employed as the President of Nu Skin Taiwan at an annual salary
of approximately $211,000. Under the terms of his employment agreement, Mr.
Chou is entitled to health insurance paid for in part by Nu Skin Taiwan. Nu
Skin Taiwan also provides Mr. Chou with a monthly car allowance. The term of
Mr. Chou's employment agreement currently extends until June 1997. Under his
employment agreement, Mr. Chou has agreed to certain confidentiality
obligations.
Mr. Han is employed as the President of Nu Skin Korea at an annual salary of
approximately $110,000. Under the terms of his employment agreement, Mr. Han is
entitled to the use of an automobile and driver provided by Nu Skin Korea, as
well as medical insurance and pension benefits. Mr. Han's employment is for a
three year term ending January 1, 1999, subject to the right of Nu Skin Korea
or Mr. Han to terminate the agreement on 60 days' advance notice. Once Mr. Han
has been employed by Nu Skin Korea for 12 months, he will become entitled to
receive, upon termination, severance pay equal to two months' salary for each
consecutive year of service. Mr. Han has agreed to certain confidentiality and
noncompetition obligations.
1996 STOCK INCENTIVE PLAN
The Board of Directors of the Company has adopted the Nu Skin Asia Pacific,
Inc. 1996 Stock Incentive Plan (the "Plan"). The purpose of the Plan is to
attract and retain executives, other employees and independent consultants who
are important to the success and growth of the Company and to ensure that their
interests are aligned with the interests of the stockholders of the Company.
The Company expects that the stockholders of the Company will approve the Plan
prior to consummation of the Offerings.
ADMINISTRATION. The Plan is administered by the 1996 Stock Incentive Plan
Committee (the "Plan Committee"). Initially, the Plan Committee will consist of
the members of the Company's Board of Directors, and later of the members of
the Compensation Committee of the Board of Directors, once the Compensation
Committee has been established. The Plan Committee will determine, from time to
time, the individuals to whom awards shall be made, the type of awards, and the
amount, size and terms of each award. The Plan Committee will make all other
determinations necessary or advisable for the administration of the Plan.
AWARDS. Awards under the Plan may be in the form of options (both
nonqualified stock options ("NQSOs") and incentive stock options ("ISOs")),
contingent stock, restricted stock, and stock appreciation rights ("SARs"), or
such other forms as the Plan Committee in its discretion may deem appropriate.
The maximum number of awards that may be issued to any one person during the
life of the Plan shall be limited to 10% of the shares reserved for issuance
under the Plan. The maximum number of awards that may be awarded during a
calendar year to any one person is limited to 10% of the shares reserved for
issuance under the Plan. The number of shares which may be issued under the
Plan as well as the terms of any outstanding awards may be equitably adjusted
by the Plan Committee in the event of a stock split, stock dividend,
recapitalization, merger, consolidation, combination or similar events. In
general, any shares subject to an option or right which for any reason expires
or is terminated unexercised shall again be available under the Plan. No awards
may be granted more than ten years after the effective date of the Plan.
NUMBER OF SHARES. A total of shares of the Company's Class A Common Stock
has been authorized to be issued pursuant to the Plan. The Company anticipates
issuing stock bonus awards for % of these shares to executive officers of the
Company prior to the Offerings. Messrs. Renn M. Patch, Corey B. Lindley,
Michael D. Smith, Takashi Bamba, John Chou, S.T. Han, George Mak, and Mark
Adams, will receive stock bonus awards of , , , , , , and
shares of Class A Common Stock, respectively. These awards vest ratably
over four years following the date of grant, provided the executive officer
remains in the employment of the Company.
62
PLAN AMENDMENT. The Board of Directors may amend the Plan, without
stockholder approval, anytime in any respect unless stockholder approval of
the amendment in question is required under Delaware law, the Code, certain
exemptions from Section 16 of the Securities Exchange Act of 1934, as amended
(the "1934 Act"), any national securities exchange system on which the shares
are then listed or reported, by any regulatory body having jurisdiction with
respect to the Plan, or other applicable laws, rules or regulations. No
amendment to the Plan may alter or impair any award granted under the Plan
without the consent of the holders thereof. The Plan may be terminated at any
time by the Board of Directors.
OPTIONS. The Plan provides for the grant of ISOs to employees and NQSOs to
employees and independent consultants. In the case of ISOs, the exercise price
of an option may not be less than 100% of the fair market value of a share of
Class A Common Stock at the time of grant (or 110% of such fair market value
if the optionee owns more than 10% of the total voting power of all classes of
Company stock outstanding at the time of grant). In the case of NQSOs, the
exercise price of an option may not be less than 85% of the fair market value
of a share of Class A Common Stock at the time of grant. The Plan Committee
may provide for a reduction in the exercise price of a NQSO by dividends paid
on a share of Class A Common Stock while the NQSO is outstanding. Options will
be exercisable for a term determined by the Plan Committee provided such
exercise shall occur not earlier than six months and not later than ten years
(five years if the optionee owns more than ten percent of the total voting
power of all classes of Company Stock outstanding at the time of grant) after
the grant of the option. The aggregate fair market value of ISO's (determined
at the time of grant) granted to an employee which may become first
exercisable in any one calendar year shall not exceed $100,000. If any option
is not granted, exercised, or held pursuant to the provisions applicable to an
ISO, it will be considered to be an NQSO to the extent that any or all of the
grant is in conflict with such provisions. The Plan Committee has the power to
permit acceleration of previously determined exercise terms under certain
circumstances and upon such terms and conditions as the Plan Committee deems
appropriate.
CONTINGENT STOCK. The Plan Committee will determine the amount of contingent
stock to be granted to a participant based on the past or expected impact the
participant has had or can have on the financial well being of the Company and
other factors determined by the Plan Committee to be appropriate. A
participant receiving an award of contingent stock will receive the stock upon
the satisfaction of certain objectives. Contingent stock awards made pursuant
to the Plan will be subject to such terms, conditions and restrictions,
including obtainment of performance objectives, for such period or periods as
may be determined by the Plan Committee at the time of grant. The Plan
Committee in its discretion may permit acceleration of the expiration of the
applicable restriction period with respect to part or all of the award to any
participant.
RESTRICTED STOCK. The Plan Committee will determine the amount of restricted
stock to be granted to a participant based on the past or expected impact the
participant has had or can have on the financial well being of the Company and
other factors deemed by the Plan Committee to be appropriate. Restricted stock
is issued to the participant subject to forfeiture if certain objectives are
not met. Restricted stock awards made pursuant to the Plan shall be subject to
the terms, conditions and restrictions, including the payment of performance
objectives, and for such period or periods as will be determined by the Plan
Committee at the time of grant. The Plan Committee in its discretion may
permit acceleration of the expiration of the applicable restriction period
with respect to part or all of the award to any participant. 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).
63
FEDERAL INCOME TAX CONSEQUENCES. The participant recognizes no taxable gain
or loss when an incentive stock option is granted or exercised. If the shares
acquired upon the exercise of an incentive stock option are held for at least
one year after exercise and two years after grant (the "Holding Period"), the
participant recognizes any gain or loss recognized upon such sale as long-term
capital gain or loss and the Company is not entitled to a deduction. If the
shares are not held for the Holding Period, the gain is ordinary income to the
participant to the extent of the difference between the exercise price and the
fair market value of the Class A Common Stock on the date the option is
exercised and any excess is capital gain. Also, in such circumstances, the
Company is entitled to a deduction equal to the amount of any ordinary income
recognized by the participant.
The participant recognizes no taxable income and the Company receives no
deduction when a nonqualified stock option is granted. Upon exercise of a
nonqualified stock option, the participant recognizes ordinary income and the
Company is entitled to a deduction equal to the difference between the
exercise price and the fair market value of the shares on the date of
exercise. The participant recognizes as a capital gain or loss any subsequent
profit or loss realized on the sale or exchange of any shares disposed of or
sold.
A participant granted restricted stock or contingent stock is not required
to include the value of such shares in income until the first time such
participant's rights in the shares are transferable or are not subject to
substantial risk of forfeiture, whichever occurs earlier, unless such
participant timely files an election under Code Section 83(b) to be taxed on
the receipt of the shares. In either case, the amount of such ordinary income
will be equal to the excess of the fair market value of the shares at the time
the income is recognized over the amount (if any) paid for the shares. The
Company is entitled to a deduction, in the amount of the ordinary income
recognized by the participant, for the Company's taxable year in which the
participant recognizes such income.
Upon the grant of an SAR, the participant recognizes no taxable income and
the Company receives no deduction. The participant recognizes ordinary income
and the Company is entitled to a deduction at the time of exercise equal to
the cash and the fair market value of shares payable upon such exercise.
Under certain circumstances, an accelerated vesting or cash out of stock
options, or accelerated lapse of restrictions on other awards, in connection
with a change in control of the Company might be deemed an "excess parachute
payment" for purposes of the golden parachute tax provisions of Code Section
280G. To the extent it is so considered, the participant may be subject to a
20% excise tax and the Company may be denied a tax deduction.
Code Section 162(m) limits to $1,000,000 per year the federal income tax
deduction available to a public company for compensation paid to any of its
chief executive officer and four other highest paid executive officers.
However, Section 162(m) provides an exception from its limitation for certain
"performance based" compensation if various requirements are satisfied. The
Plan contains provisions which are intended to satisfy these requirements for
awards made at the time the Company is considered a public company and which
otherwise are "performance based" compensation.
BONUS INCENTIVE PLAN
Concurrent with the Offerings, the Company intends to adopt a bonus
incentive plan for the Presidents of the Subsidiaries. This bonus incentive
plan will be patterned after a similar plan under which Messrs. Bamba, Chou,
Han and Mak were compensated by NSI prior to the Reorganization and the
Offerings. Under the contemplated bonus incentive plan, Messrs. Bamba, Chou,
Han and Mak will be entitled to receive an annual cash bonus based upon the
prior year's operating results of the Subsidiary for which they are
responsible. Under this bonus incentive plan, participants would be able to
receive a bonus equal to 100% of their respective salaries, conditioned on
meeting certain performance criteria and subject to cash availability and
approval of the Board of Directors of the Company. One half of this bonus
would be payable by February 15 of the year following the year in which the
bonus is earned and the remaining one half would be deferred and would vest
ratably over 10 years or at age 65, whichever occurs first.
64
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Following the Offerings, the Selling Stockholders will own all of the
outstanding shares of Class B Common Stock, which will represent
approximately % of the combined voting power of all outstanding Common
Stock. Prior to or concurrently with the Offerings, the Selling Stockholders
who are also the stockholders of Nu Skin Japan, Nu Skin Taiwan, Nu Skin Korea
and Nu Skin Hong Kong will contribute their shares of capital stock in such
entities to the Company in exchange for shares of Class B Common Stock. See
"The Reorganization and S Corporation Distribution."
Upon the consummation of the Offerings, approximately % of the combined
voting power of the outstanding shares of Common Stock will be held by the
Selling Stockholders, who are also the shareholders of NSI (approximately %
if the Underwriters' over-allotment option is exercised in full).
Consequently, the Selling Stockholders will have the ability, acting in
concert, to elect all directors of the Company and approve any action
requiring approval by a majority of the stockholders of the Company. The
Selling Stockholders also own, and following the Offerings will continue to
own, 100% of the outstanding shares of NSI. As a result of this ownership, the
Selling Stockholders will consider the short-term and the long-term impact of
all stockholder decisions on the consolidated financial results of NSI and the
Company. The interests of NSI, on the one hand, and of the Company, on the
other hand, may differ from time to time. See "Risk Factors--Control by
Selling Stockholders; Anti-Takeover Effect of Dual Classes of Common Stock"
and "Relationship with and Reliance on NSI; Conflict of Interest."
The Operating Agreements were approved by the present Board of Directors of
the Company, which is composed entirely of officers and shareholders of NSI.
It is expected that, subsequent to the closing of the Offerings, the
composition of the Board of Directors of the Company will be changed so that
at least two of its members will be persons unaffiliated with NSI. In
addition, most of the executive officers of the Company are also executive
officers of NSI. It is expected that a number of the Company's executive
officers will continue to spend a portion of their time on the affairs of NSI,
for which they will continue to receive compensation from NSI. See "Risk
Factors--Relationship with and Reliance on NSI; Conflict of Interest" and
"Business--Relationship with NSI."
Virtually all of the products sold by the Company are purchased from NSI
pursuant to distribution agreements with NSI. The Company also manufactures
itself, or through third-party manufacturers, certain products and commercial
materials which it then sells using NSI trademarks or tradenames licensed
under trademark/tradename license agreements with NSI. In addition, the
Company does not have its own sales or distribution network but licenses the
right to use NSI's distribution network and the Global Compensation Plan
pursuant to licensing and sales agreements with NSI. During 1995, the Company
paid NSI approximately $99.2 million for goods and services provided to the
Company under the Operating Agreements. NSIMG also provides a broad range of
management, administrative and technical support to the Company pursuant to
management services agreements with the Company. During 1995, the Company paid
NSIMG approximately $2.1 million for services provided to the Company under a
management service agreement. For a summary of the terms of these agreements,
see "Business--Relationship with NSI." See also Combined Financial Statements
and footnotes thereto.
During 1995, Nu Skin Japan paid NSI a royalty of 8% of the revenue from
sales of products manufactured by a third party manufacturer under a license
agreement between Nu Skin Japan and NSI. In fiscal 1995, Nu Skin Japan paid
NSI $2.3 million in royalties pursuant to this license agreement.
Pursuant to wholesale distribution agreements, Nu Skin Hong Kong distributes
certain NSI products to Nu Skin Personal Care Australia, Inc. and Nu Skin New
Zealand, Inc. Pursuant to these agreements, Nu Skin Hong Kong was paid
approximately $4.6 million in fiscal 1995 by Nu Skin Personal Care Australia,
Inc. and Nu Skin New Zealand, Inc.
Prior to or concurrently with the Offerings, the Company will purchase from
NSI for $15.0 million, the exclusive rights to distribute NSI products in
Thailand, Indonesia, Malaysia, the Philippines, the PRC, Singapore
65
and Vietnam. This amount will be paid out of proceeds of the Offerings. See
"Use of Proceeds." In addition the Company and NSI will enter into a mutual
indemnification agreement pursuant to which NSI will indemnify the Company for
certain claims, losses and liabilities relating to the operations of the
Subsidiaries prior to the Reorganization and the Company will indemnify NSI
for certain claims, losses and liabilities relating to the operations of the
Subsidiaries after the Reorganization. See "Business--Relationship with NSI."
Craig Bryson and Craig S. Tillotson are major stockholders of the Company
and have been NSI distributors since 1984. Messrs. Bryson and Tillotson are
partners in an entity (the "Partnership") which receives substantial
commissions from NSI, including commissions on sales generated within the
Company's markets. For the fiscal year ended December 31, 1995, total
commissions paid to the Partnership on sales originating in the Company's then
open markets (Japan, Taiwan and Hong Kong) was approximately $1.1 million. By
agreement, NSI pays commissions to the Partnership at the highest level of
commissions available to distributors. Management believes that this
arrangement allows Messrs. Bryson and Tillotson the flexibility of using their
expertise and reputations in network marketing circles to sponsor, motivate
and train distributors to benefit NSI's distributor force generally, without
having to focus solely on their own organizations.
The Selling Stockholders will enter into a stockholders' agreement with the
Company (the "Stockholders' Agreement"). The Selling Stockholders will in the
aggregate own shares having % of the voting power of the Company immediately
after the Offerings. Pursuant to the Stockholders' Agreement, the Selling
Stockholders have agreed not to transfer any shares of Common Stock they own
except in accordance with such Agreement. In order to ensure the qualification
of the Reorganization under Section 351 of the Code, the Selling Stockholders
have agreed not to transfer any shares they own for 365 days after the
Offerings without the consent of the Company except for certain transfers
relating to a distributor stock incentive program and an employee stock
incentive program. After the expiration of this 365-day period, no Selling
Stockholder may transfer in any one-year period a number of shares greater
than 10% of the number of shares beneficially owned by such Selling
Stockholder at the time of the Offerings. Such transfer may be made without
additional limitation to Selling Stockholders, spouses of Selling Stockholders
and certain trusts controlled by, and descendants of, Selling Stockholders
("Permitted Transferees"). If a Selling Stockholder (the "Offering
Stockholder") intends to transfer shares to a party who is not a Permitted
Transferee, the other Selling Stockholders (the "Offerees") have a right of
first offer to purchase such shares except in certain limited circumstances.
Each Offeree will have the opportunity to purchase the Offeree's pro rata
portion of the shares to be offered by the Offering Stockholder as well as
additional shares not purchased by other Offerees. Any shares not purchased
pursuant to the right of first offer may be sold at or above 95% of the price
offered to the Offerees. The Stockholders' Agreement will terminate upon the
occurrence of certain specified events, including the transfer of shares of
Common Stock by a Selling Stockholder that causes all Selling Stockholders
immediately after such transaction to own beneficially in the aggregate shares
having less than 10% of the total voting power of the Company.
Prior to the Offerings, the Company will enter into indemnification
agreements with its officers and directors indemnifying them against liability
incurred by them in the course of their service to the Company. The Company
has granted certain of its executive officers options to purchase shares of
Class A Common Stock. In January 1994, NSI stockholders agreed to grant M.
Truman Hunt an option to purchase shares of capital stock of the Company
at an exercise price of $ per share. This option is immediately exercisable,
upon consummation of the Reorganization.
Prior to the Offerings, the Selling Stockholders intend to contribute to the
Company an aggregate of up to % of the outstanding shares of the Company's
Common Stock on the date of such contribution. The Company intends to grant to
NSI the Distributor Options to purchase such shares of Common Stock and NSI
intends to assign the Distributor Options to qualifying distributors of NSI in
connection with the Offerings. The Distributor Options will be subject to
certain conditions related to distributor performance and will vest on
December 31, 1997. The Company will record distributor incentive expense for
the Distributor Options.
The Company has employment agreements with certain of its executive
officers. See "Management--Employment Agreements."
66
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth, as of June 30, 1996, certain information
regarding the beneficial ownership of the Class A Common Stock and Class B
Common Stock assuming the Company was in existence on that date and after
giving effect to the Reorganization and as adjusted to give effect to the
sales of shares of Class A Common Stock in the Offerings (assuming no exercise
of the Underwriters' over-allotment options) by (i) 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; (ii) each of the Company's
directors; (iii) each of the executive officers whose names appear in the
summary compensation table; and (iv) all directors and executive officers as a
group. The business address of the 5% stockholders is 75 West Center Street,
Provo, Utah 84601.
CLASS A CLASS B TOTAL
COMMON STOCK(/1/) COMMON STOCK COMMON STOCK
-------------------------------- ---------------------- ------------
TO BE
OWNED AND OWNED OWNED PRIOR TO AND VOTING
DIRECTORS, EXECUTIVE OFFICERS TO BE SOLD AFTER THE AFTER POWER AFTER
AND 5% STOCKHOLDERS IN THE OFFERINGS(/2/) OFFERINGS THE OFFERINGS(/3/) OFFERINGS
- ----------------------------- --------------------- ---------- ---------------------- ------------
NUMBER NUMBER % NUMBER % %
--------------------- ------ --- ----------- --------- ------------
Blake M. Roney..........
Nedra D. Roney..........
Sandie N. Tillotson.....
Craig S. Tillotson......
Craig Bryson............
Steven J. Lund..........
Brooke B. Roney.........
Kirk V. Roney...........
Keith R. Halls..........
Renn M. Patch(/4/)......
Takashi Bamba(/5/)......
John Chou(/6/)..........
George Mak(/7/).........
All directors and
executive officers as a
group (17
persons)(/8/)..........
--------
(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 is automatically converted into a share of Class A Common
Stock upon transfer to any person who is not a permitted
Transferee as defined in the Stockholders' Agreement entered into
by the existing stockholders prior to the Offerings. See "Certain
Relationships and Related Transactions."
(2) Prior to the Offerings, the Selling Stockholders will convert
shares of Class B Common Stock to Class A Common Stock to be sold
in the Offerings.
(3) Reflects the conversion prior to the Offerings by the Selling
Stockholders of approximately shares of Class B Common Stock
into shares of Class A Common Stock which were contributed by
the Selling Stockholders pro rata to NSI, its affiliates and the
Company for distribution to distributors of NSI and employees of
NSI and its affiliates pursuant to the Distributor Options and
employee stock bonus awards. See "Shares Eligible For Future
Sale."
(4) Excludes stock options to purchase a total of shares of Class A
Common Stock granted to Mr. Patch and which will not be
exercisable within 60 days of the Offerings.
(5) Excludes stock options to purchase a total of shares of Class A
Common Stock granted to Mr. Bamba and which will not be
exercisable within 60 days of the Offerings.
(6) Excludes stock options to purchase a total of shares of Class
A Common Stock granted to Mr. Han and which will not be
exercisable within 60 days of the Offerings.
(7) Excludes stock options to purchase a total of shares of Class
A Common Stock granted to Mr. Mak and which will not be
exercisable within 60 days of the Offerings.
(8) Includes shares of Class A Common Stock to be issued as stock
bonus awards to certain executive officers of the Company prior to
the Offerings.
67
SHARES ELIGIBLE FOR FUTURE SALE
Prior to the Offerings, there has been no public market for the Common Stock
and no prediction can be made that an active trading market will develop or as
to the effect, if any, that market sales of shares or the availability of such
shares for sale will have on the market price of the Common Stock prevailing
from time to time. Future sales of substantial amounts of Common Stock in the
public market could adversely affect prevailing market prices.
Upon completion of the Offerings, the Company will have shares of Class
A Common Stock issued and outstanding (assuming the exercise of all
Distributor Options, the issuance of all shares of Class A Common Stock
underlying the employee stock bonus awards and the exercise of an option
granted to an executive officer of the Company to purchase shares of Class A
Common Stock). Of these shares, the shares of Class A Common Stock sold in
the Offerings will be freely tradeable without restriction or further
registration under the 1933 Act, unless held by "affiliates" of the Company,
as that term is defined in Rule 144 of the 1933 Act. Any such affiliate will
be subject to the resale limitations of Rule 144. The remaining shares of
Class A Common Stock are "restricted" shares within the meaning of Rule 144.
Restricted shares may not be resold in the public market except in compliance
with the registration requirements of the 1933 Act or pursuant to an exemption
therefrom, including the exemption provided by Rule 144.
Prior to the Offerings, the Company anticipates issuing stock bonus awards
under the 1996 Stock Incentive Plan to certain of its executive officers to
acquire shares of Class A Common Stock. These awards will vest ratably over
four years following the date of grant. After such grants, an aggregate of
approximately shares will remain available for future option grants and
other equity awards under the Plan. See "Management--1996 Stock Incentive
Plan." Shares granted or issuable upon exercise of options granted pursuant to
the Plan are "restricted" shares within the meaning of Rule 144. The Company
intends to file a registration statement under the 1933 Act to register all of
the shares of Class A Common Stock reserved for issuance under the Plan. Such
registration statement is expected to be filed as soon as practicable after
the date of the Offerings and will become automatically effective upon filing.
Shares issued under the Plan after such registration statement is filed may
thereafter be sold in the open market, subject to the Rule 144 volume
limitations applicable to affiliates and any transfer restrictions imposed on
the date of the grant.
The Company has granted an option to an executive officer to purchase
shares of Class A Common Stock of the Company, which is immediately
exercisable upon consummation of the Reorganization. The shares issuable upon
exercise of such option are "restricted" shares within the meaning of Rule
144.
Prior to the Offerings, the Selling Stockholders intend to contribute to the
Company an aggregate of up to % of the outstanding shares of the Company's
Common Stock on the date of such contribution. The Company intends to grant to
NSI the Distributor Options to purchase such shares of Common Stock and NSI
intends to assign these Distributor Options to qualifying distributors of NSI
in connection with the Offerings. The Distributor Options will be subject to
certain conditions related to distributor performance and will vest on
December 31, 1997. The Company will record distributor incentive expense for
the Distributor Options.
The Selling Stockholders of the Company have also previously contributed an
additional % of the Company's outstanding Class A Common Stock to NSI and its
affiliates for use by NSI and its affiliates in connection with the grant of
employee stock bonus awards to be made by NSI and its affiliates using such
shares of Class A Common Stock.
The Company intends to issue shares of Class A Common Stock to its
employees in connection with employee stock bonus awards. The Company intends
to file a registration statement pursuant to Rule 415 of the 1933 Act to
register such shares of Class A Common Stock.
Upon completion of the Offerings, the Selling Stockholders will hold
shares of the Class A Common Stock and shares of the Class B Common Stock
(which Class B shares are convertible into Class A shares). The Selling
Stockholders have entered into a stockholders' agreement which restricts the
extent to which any Selling Stockholder can dispose of its shares of Common
Stock following the Offerings. Among other things, in order to ensure the
qualification of the Reorganization under Section 351 of the Code, such
stockholders have
68
agreed not to transfer any shares they own for 365 days after the Offerings
without the consent of the Company except for certain transfers pursuant to a
distributor incentive program. After the expiration of the 365-day period, no
such stockholder is permitted to transfer in any one-year period a number of
shares greater than 10% of the number of shares beneficially owned by such
stockholder at the time of the Offerings.
Generally, as currently in effect, Rule 144 provides that beginning 90 days
after the date of this Prospectus, a person (or persons whose shares are
aggregated) who has beneficially owned "restricted" shares of the Common Stock
for at least two years will be entitled to sell on the open market in broker's
transactions within any three-month period a number of shares that does not
exceed the greater of (i) 1% of the then outstanding shares of the Common
Stock (1% is expected to be equal to approximately shares immediately
following the Offerings) or (ii) the average weekly trading volume in the
Common Stock on the open market during the four calendar weeks preceding such
sale. Sales under Rule 144, as currently in effect, are also subject to
certain notice requirements and the availability of current public information
about the Company. Under the provisions of Rule 144, the Selling Stockholders
will be 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. The Commission has recently proposed to reduce
the Rule 144 holding periods. If enacted, such modification will have a
material effect on the timing of when shares of the Common Stock become
eligible for resale.
The shares of Class A Common Stock sold in the Offerings will not be listed
on any stock exchange in Japan and will not be registered with the Japan
Securities Dealers Association as shares to be traded in the Japanese over-
the-counter market. Therefore, there will be no public market in Japan for the
trading of such shares. Under the Securities and Exchange Law of Japan, if the
offer of shares of Class A Common Stock is made to 50 or more persons in Japan
on uniform terms and conditions and the aggregate offering price is (Yen)500
million or more, such offer will be subject to regulations applicable to
secondary public offerings, the primary requirements of which are the filing
of a notification with the Minister of Finance of Japan (the "MOF") and the
distribution of a prospectus.
The Company, its directors and officers, and the existing shareholders of
NSI have agreed or will agree prior to the Offerings not to sell or otherwise
dispose of any shares of Common Stock or securities convertible into or
exchangeable or exercisable for Common Stock, without the prior consent of
Merrill Lynch & Co., for a period of 180 days after the date of this
Prospectus, except that the Company may, without such consent, grant options
or issue shares of Common Stock pursuant to certain equity incentives,
including, without limitation, the Distributor Options and the Employee Stock
Bonus Awards. See "Underwriting."
69
DESCRIPTION OF CAPITAL STOCK
GENERAL
As of the date of this Prospectus (and after consummation of the
Reorganization), the authorized capital stock of the Company consists of
500,000,000 shares of Class A Common Stock, par value $ per share and
100,000,000 shares of Class B Common Stock, par value $ per share, and
25,000,000 shares of Preferred Stock, par value $0.001 per share ("Preferred
Stock"). As of the date of this Prospectus (and after consummation of the
Reorganization and giving effect to the implementation of the Distributor
Equity Incentive Plan) there are shares of Class A Common
Stock and shares of Class B Common Stock outstanding, all of
which are held of record by the Selling Stockholders. See "The Reorganization
and S Corporation Distribution" and "Principal and Selling Stockholders." Of
the authorized shares of Preferred Stock, no shares of Preferred Stock are
outstanding. The following description is a summary and is subject to and
qualified in its entirety by reference to the provisions of the Company's
Amended and Restated Certificate of Incorporation (the "Certificate of
Incorporation") filed as an exhibit in the Registration Statement of which
this Prospectus forms a part.
COMMON STOCK
The shares of Class A Common Stock and Class B Common Stock are identical in
all respects, except for voting rights and certain conversion rights and
transfer restrictions regarding the shares of the Class B Common Stock, as
described below.
VOTING RIGHTS. Each share of Class A Common Stock entitles the holder to one
vote on each matter submitted to a vote of the Company's stockholders and each
share of Class B Common Stock entitles the holder to ten votes on each such
matter, including the election of directors. There is no cumulative voting.
Except as required by applicable law, holders of Class A Common Stock and
holders of Class B Common Stock will vote together on all matters submitted to
a vote of the stockholders. With respect to certain corporate changes, such as
liquidations, reorganizations, recapitalizations, mergers, consolidations and
sales of substantially all of the Company's assets, holders of Class A Common
Stock and holders of Class B Common Stock will vote together as a single class
and the approval of 66 2/3% of the outstanding voting power is required to
authorize or approve such transactions. See "Risk Factors--Control by Selling
Stockholders; Anti-Takeover Effect of Dual Classes of Common Stock."
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.
70
RESTRICTIONS ON TRANSFER. If a holder of Class B Common Stock transfers such
shares, whether by sale, assignment, gift, bequest, appointment or otherwise,
to a person other than a Permitted Transferee (as defined in the Company's
Certificate of Incorporation) such shares will be converted automatically into
shares of Class A Common Stock. In the case of a pledge of shares of Class B
Common stock to a financial institution, such shares will not be deemed to be
transferred unless and until a foreclosure occurs.
CONVERSION. The Class A Common Stock has no conversion rights. The Class B
Common Stock is convertible into shares of Class A Common Stock, in whole or
in part, at any time and from time to time at the option of the holder, on the
basis of one share of Class A Common Stock for each share of Class B Common
Stock converted. In the event of a transfer of shares of Class B Common Stock
to any person other than a Permitted Transferee each share of Class B Common
Stock so transferred automatically will be converted into one share of Class A
Common Stock. Each share of Class B Common Stock will also automatically
convert into one share of Class A Common Stock if, on the record date for any
meeting of the stockholders, the number of shares of Class B Common Stock then
outstanding is less than 10% of the aggregate number of shares of Class A
Common Stock and Class B Common Stock then outstanding.
LIQUIDATION. In the event of liquidation, after payment of the debts and
other liabilities of the Company and after making provision for the holders of
Preferred Stock, if any, the remaining assets of the Company will be
distributable ratably among holders of Class A Common Stock and holders of
Class B Common Stock treated as a single class.
MERGERS AND OTHER BUSINESS COMBINATIONS. Upon the merger or consolidation of
the Company, holders of each class of Common Stock are entitled to receive
equal per share payments or distributions, except that in any transaction in
which shares of capital stock are distributed, such shares may differ as to
voting rights to the extent and only to the extent that the voting rights of
the Class A Common Stock and the Class B Common Stock differ at that time. The
Company may not dispose of all or any substantial part of the assets of the
Company to, or merge or consolidate with, any person, entity or "group" (as
defined in Rule 13-d-5 of the 1934 Act), which beneficially owns in the
aggregate 10% or more of the outstanding Common Stock of the Company (a
"Related Person") without the affirmative vote of the holders, other than such
Related Person, of not less that 66 2/3% of the voting power of outstanding
Class A Common Stock and Class B Common Stock voting as a single class. For
the sole purpose of determining the 66 2/3% vote, a Related Person will also
include the seller or sellers from whom the Related Person acquired, during
the preceding six months, at least 5% of the outstanding shares of Class A
Common Stock in a single transaction or series of related transactions
pursuant to one or more agreements or other arrangements (and not through a
brokers' transaction), but only if such seller or sellers have beneficial
ownership of shares of Common Stock having a fair market value in excess of
$10 million in the aggregate following such disposition to such Related
Person. This 66 2/3% voting requirement is not applicable, however, if (i) the
proposed transaction is approved by a vote of not less than a majority of the
directors of the Company who are neither affiliated nor associated with the
Related Person (or the seller of shares to the Related Person as described
above) or (ii) in the case of a transaction pursuant to which the holders of
Common Stock are entitled to receive cash, property, securities or other
consideration, the cash or fair market value of the property, securities or
other consideration to be received per share in such transaction is not less
than the higher of (A) the highest price per share paid by the Related Person
for any of its holdings of Common Stock within the two-year period immediately
prior to the announcement of the proposed transaction or (B) the highest
closing sale price during the 30-day period immediately preceding such date or
during the 30-day period immediately preceding the date on which the Related
Person became a Related Person, whichever is higher.
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.
71
LISTING. The Company has made application to list the Class A Common Stock
on the New York Stock Exchange under the trading symbol "NUS."
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. 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.
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW
Upon consummation of the Offerings, the Company will be subject to the
provisions of Section 203 of the DGCL (the "Anti-Takeover Law") regulating
corporate takeovers. The Anti-Takeover Law prevents certain Delaware
corporations, including those whose securities are listed on the New York
Stock Exchange, from engaging, under certain circumstances, in a "business
combination" (which includes a merger of not more than 10% of the
corporations' assets) with an "interested stockholder" (a stockholder who,
together with affiliates and associates, within the prior three years did own,
15% or more of the corporation's outstanding voting stock) for three years
following the date that such stockholder became an "interested stockholder,"
unless the "business combination" or "interested stockholder" is approved in a
prescribed manner.
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. Prior to the consummation of the
Offerings, the Company intends to enter into separate indemnification
agreements with each of its directors and executive officers in order to
effectuate such provisions. See "Certain Relationships and Related
Transactions." The Company's Certificate of Incorporation also provides for,
to the fullest extent permitted by the DGCL, elimination or limitation of
liability of directors for breach of their fiduciary duty to the Company or
its stockholders.
72
CERTAIN UNITED STATES TAX CONSEQUENCES TO NON-UNITED STATES HOLDERS
The following is a general discussion of certain United States federal
income and estate tax consequences of the ownership and disposition of Class A
Common Stock by a Non-U.S. Holder. For this purpose, a "Non-U.S. Holder" is
any person who is, for United States federal income tax purposes, a foreign
corporation, a non-resident alien individual, a foreign partnership or a
foreign estate or trust. This discussion does not address all aspects of
United States federal income and estate taxes and does not deal with foreign,
state and local consequences that may be relevant to such Non-U.S. Holders in
light of their personal circumstances. Furthermore, this discussion is based
on provisions of the Code, existing and proposed regulations promulgated
thereunder and administrative and judicial interpretations thereof, as of the
date hereof, all of which are subject to change (possibly with retroactive
effect). Each prospective purchaser of Class A Common Stock is advised to
consult a tax advisor with respect to current and possible future tax
consequences of acquiring, holding and disposing of Class A Common Stock as
well as any tax consequences that may arise under the laws of any U.S. state,
municipality or other taxing jurisdiction.
An individual may, subject to certain exceptions, be deemed to be a resident
alien (as opposed to a non-resident alien) by virtue of being present in the
United States on at least 31 days in the calendar year and for an aggregate of
at least 183 days during a three-year period ending in the current calendar
year (counting for such purposes all of the days present in the current year,
one-third of the days present in the immediately preceding year, and one-sixth
of the days present in the second preceding year). Resident aliens are subject
to U.S. federal tax as if they were U.S. citizens.
DIVIDENDS
Dividends paid to a Non-U.S. Holder of Class A Common Stock generally will
be subject to withholding of United States federal income tax either at a rate
of 30% of the gross amount of the dividends or at such lower rate as may be
specified by an applicable income tax treaty. However, dividends that are
effectively connected with the conduct of a trade or business by the Non-U.S.
Holder within the United States and, where a tax treaty applies, are
attributable to a United States permanent establishment of the Non-U.S.
Holder, are not subject to the withholding tax (provided the Non-U.S. Holder
files appropriate documentation, including, under current law, IRS Form 4224,
with the payor of the dividend), but instead are subject to United States
federal income tax on a net income basis at applicable graduated individual or
corporate rates. Any such effectively connected dividends received by a
foreign corporation may, under certain circumstances, be subject to an
additional "branch profits tax" at a 30% rate or such lower rate as may be
specified by an applicable income tax treaty.
Under current law, dividends paid to an address outside the United States
are presumed to be paid to a resident of such country (unless the payer has
knowledge to the contrary) for purposes of the withholding discussed above and
for purposes of determining the applicability of a tax treaty rate. However,
under proposed Treasury regulations not currently in effect, in the case of
dividends paid after December 31, 1997 (December 31, 1999 in the case of
dividends paid to accounts in existence on or before the date that is 60 days
after the proposed regulations are published as final regulations), a Non-U.S.
Holder of Class A Common Stock who wishes to claim the benefit of an
applicable treaty rate would be required to satisfy applicable certification
and other requirements either directly or through an intermediary. In
addition, backup withholding, as discussed below, may apply in certain
circumstances if applicable certification and other requirements are not met.
A Non-U.S. Holder of Class A Common Stock eligible for a reduced rate of
United States withholding tax pursuant to an income tax treaty may obtain a
refund of any excess amounts withheld by filing an appropriate claim for
refund with the Internal Revenue Service (the "IRS").
GAIN ON DISPOSITION OF COMMON STOCK
A Non-U.S. Holder will generally not be subject to United States federal
income tax with respect to gain recognized on a sale or other disposition of
Class A Common Stock unless (i) the gain is effectively connected with a trade
or business of the Non-U.S. Holder in the United States, and, where a tax
treaty applies, is attributable to a United States permanent establishment of
the Non-U.S. Holder, (ii) in the case of a Non-U.S.
73
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.
74
UNDERWRITING
The U.S. Underwriters named below (the "U.S. Underwriters"), acting through
their U.S. representatives, Merrill Lynch, Pierce, Fenner & Smith Incorporated
("Merrill Lynch"), Morgan Stanley & Co. Incorporated, Dean Witter Reynolds
Inc. and Nomura Securities International, Inc. (collectively, the "U.S.
Representatives"), have severally agreed, subject to the terms and conditions
of a U.S. Purchase Agreement with the Company and the Selling Stockholders
(the "U.S. Purchase Agreement"), to purchase from the Company and the Selling
Stockholders the number of shares of Class A Common Stock set forth opposite
their respective names below.
NUMBER OF
U.S. UNDERWRITERS SHARES
----------------- ---------
Merrill Lynch, Pierce, Fenner & Smith
Incorporated.............................................
Morgan Stanley & Co. Incorporated.................................
Dean Witter Reynolds Inc. ........................................
Nomura Securities International, Inc..............................
---------
Total........................................................... 4,600,000
=========
The Company and the Selling Stockholders have also entered into an
International Purchase Agreement (the "International Purchase Agreement") with
certain underwriters outside the United States, Canada and Japan (the
"International Underwriters"), for whom Merrill Lynch International Limited,
Morgan Stanley & Co. International Limited, Dean Witter International Ltd. and
Nomura International Plc are acting as representatives (the "Lead
International Underwriters"). Subject to the terms and conditions set forth in
the International Purchase Agreement, the Company and the Selling Stockholders
have agreed to sell to the International Underwriters, and the International
Underwriters have severally agreed to purchase, an aggregate of 1,330,000
shares of Class A Common Stock pursuant to Regulation S under the Securities
Act.
The Company and the Selling Stockholders have also entered into a Japanese
Underwriting Agreement (the "Japanese Underwriting Agreement" and, together
with the U.S. Purchase Agreement and the International Purchase Agreement, the
"Purchase Agreements") with certain underwriters in Japan (the "Japanese
Underwriters" and, together with the U.S. Underwriters and the "International
Underwriters", the "Underwriters"), for whom The Nomura Securities Co., Ltd.,
Merrill Lynch Japan Incorporated and Morgan Stanley Japan Limited are acting
as representatives (the "Lead Japanese Underwriters"). Subject to the terms
and conditions set forth in the Japanese Underwriting Agreement, the Company
and the Selling Stockholders have agreed to sell to the Japanese Underwriters,
and the Japanese Underwriters have jointly and severally agreed to purchase,
an aggregate of 1,670,000 shares of Class A Common Stock pursuant to
Regulation S under the Securities Act.
In each Purchase Agreement, the Underwriters named therein have agreed,
subject to the terms and conditions set forth in such Purchase Agreement, to
purchase all of the shares of Class A Common Stock being sold pursuant to such
Purchase Agreement if any of the shares of Class A Common Stock being sold
pursuant to such Purchase Agreement are purchased. Under certain
circumstances, under the U.S. or International Purchase Agreements, the
commitments of non-defaulting Underwriters may be increased. Each Purchase
Agreement provides that the Company and the Selling Stockholders are not
obligated to sell, and the U.S. Underwriters, International Underwriters and
Japanese Underwriters are not obligated to purchase, the shares of Class A
Common Stock under the terms of each Purchase Agreement unless the shares of
Class A Common Stock to be sold pursuant to the Purchase Agreements are
contemporaneously sold.
75
The initial public offering price per share and the total underwriting
discount per share are identical under the U.S. Purchase Agreement, the
International Purchase Agreement and the Japanese Underwriting Agreement.
All of the shares to be offered in connection with the Offerings have been
under the Securities Act. With regards to the Japanese Offering, a filing of a
securities registration statement and amendments thereto under the Securities
and Exchange Laws of Japan has also been made with the Minister of Finance of
Japan. The Japanese Underwriters have agreed that the Japanese Offering will
be a public offering without listing in Japan and will be governed by the
Japanese laws and regulations.
The Company has been informed that the U.S. Underwriters, the International
Underwriters and the Japanese Underwriters have entered into an Intersyndicate
Agreement dated the date hereof (the "Intersyndicate Agreement") which
provides for the coordination of their activities. Under the terms of the
Intersyndicate Agreement, the U.S. Underwriters, the International
Underwriters and the Japanese Underwriters are permitted to sell shares of
Class A Common Stock to each other.
The Company has been informed that, under the terms of the Intersyndicate
Agreement (i) the U.S. Underwriters and any dealer to whom they sell shares of
Class A Common Stock will not offer to sell or resell shares of Class A Common
Stock to persons who are non-U.S. or non-Canadian persons or to persons they
believe intend to resell to persons who are non-U.S. or non-Canadian persons,
(ii) the International Underwriters and any dealer to whom they sell shares of
Class A Common Stock will not offer to sell or resell shares of Class A Common
Stock to U.S., Canadian or Japanese persons, or to persons they believe intend
to resell to persons who are U.S., Canadian or Japanese persons, and (iii) the
Japanese Underwriters and any sub-underwriter to whom they sell shares of
Class A Common Stock will not offer to sell or resell shares of Class A Common
Stock to non-Japanese persons, or to persons they believe intend to resell to
persons who are non-Japanese persons, except in each case for transactions
pursuant to the Intersyndicate Agreement, which, among other things, permits
the Underwriters to purchase from each other and offer for resale such number
of shares of Class A Common Stock as the selling Underwriter or Underwriters
and the purchasing Underwriter or Underwriters may agree. As used in this
section, "United States Person" or "Canadian Person" shall mean, respectively,
any individual who is resident in the United States or Canada or any
corporation, pension, profit-sharing or other trust or entity organized under
or governed by the laws of the United States or Canada or any political
subdivision thereof (other than a foreign branch or subsidiary of any United
States or Canadian Corporation), and shall include, respectively, any United
States or Canadian branch of a person other than a United States or Canadian
Person. "United States" shall mean the United States of America, its
territories, its possessions and all areas subject to its jurisdiction.
"Canada" shall mean the provinces of Canada, its territories, its possessions
and all areas subject to its jurisdiction. "Japanese Person" shall mean (i)
any individual who is resident in Japan, or (ii) any corporation, mutual fund,
trust or other similar entity organized under the laws of Japan (other than a
branch of such a corporate entity located outside Japan or mutual funds,
trusts or other similar entities the assets of which are managed in a
discretionary manner by an individual or entity not located in Japan) and
shall include any branch established in Japan of a foreign corporate entity
and any mutual fund, trust or other similar entity, regardless of the country
under whose laws it is organized, the assets of which are managed in a
discretionary manner by an individual or entity located in Japan. "Japan"
shall mean Japan and all areas subject to its jurisdiction.
The Selling Stockholders have granted the U.S. Underwriters and the
International Underwriters options exercisable for 30 days after the date of
this Prospectus to purchase up to 884,317 and 255,683 additional shares of
Class A Common Stock, respectively, to cover over-allotments, if any, at the
initial public offering price, less the underwriting discount. To the extent
that the U.S. and International Underwriters exercise such options, each of
the U.S. and International Underwriters will have a firm commitment, subject
to certain conditions, to purchase approximately the same percentage of the
option shares that the number of shares to be purchased initially by that
Underwriter is of the number of shares of Common Stock initially purchased by
the U.S. and International Underwriters. No over-allotment option has been
granted under the Japanese Underwriting Agreement.
76
The U.S. Representatives have advised the Company that the U.S. Underwriters
propose to offer the shares of Class A Common Stock to the public initially at
the public offering price set forth on the cover page of this Prospectus, and
to certain dealers at such price less a concession not in excess of $ per
share. The U.S. Underwriters may allow, and such dealers may reallow, a
discount not in excess of $ per share on sales to certain other dealers.
After the initial public offering of the Class A Common Stock, the public
offering price, concession and discount may be changed.
The Company and the Selling Stockholders have agreed to indemnify the U.S.
Underwriters, the Japanese Underwriters and the International Underwriters
against certain liabilities which may be incurred in connection with the
offering of the Class A Common Stock and the exercise of the over-allotment
options, including liabilities under the Securities Act and other applicable
securities laws. In addition, the Company has agreed to reimburse the Japanese
Underwriters for certain out-of-pocket expenses incurred in connection with
the Japanese Offering.
Without the consent of Merrill Lynch, the Company, its executive officers
and the Selling Stockholders have agreed that they will not, for a period of
180 days following the date of this Prospectus, directly or indirectly, offer
to sell, grant any option for the sale of, or otherwise dispose of, any shares
of Class A Common Stock or any securities convertible into or exchangeable or
exercisable for any such shares. The foregoing agreements with respect to the
issuance of stock by the Company are subject to certain exceptions, including
the contribution of shares of Class A Common Stock to the Company and NSI for
issuance of such shares in the Distributor and Employee Incentive programs.
See "Shares Eligible for Future Sale."
Application has been made to list the Class A Common Stock on the New York
Stock Exchange under the symbol "NUS." In order to meet the requirements for
listing of the Class A Common Stock on the NYSE, the U.S. Underwriters have
undertaken to sell lots of 100 or more shares to a minimum of 2,000 beneficial
owners.
At the request of the Company, the U.S. Underwriters and the International
Underwriters have reserved up to shares of Class A Common Stock for sale
at the public offering price to certain employees of NSI and the Company and
to certain distributors of NSI and the Company, who have expressed an interest
in purchasing such shares. The number of shares available to the general
public will be reduced to the extent these persons purchase the reserved
shares. Any reserved shares that are not so purchased by such employees or
distributors at the closing of the Offerings will be offered by the U.S.
Underwriters and the International Underwriters to the general public on the
same terms as the other shares offered hereby.
In order to comply with local securities laws in certain jurisdictions
outside the United States, sales to certain employees and distributors will be
made directly by the Company rather than through the Underwriters, and the
total underwriting discount set forth on the cover page of this Prospectus
will be reduced accordingly. In addition, all shares sold to employees and
distributors outside the United States will be shares offered by the Company,
rather than by the Selling Stockholders.
Prior to the Offerings, there has been no established trading market for the
shares of Class A Common Stock. The initial public offering price for the
Class A Common Stock offered hereby has been determined by negotiation among
the Company and the Underwriters. Among the factors considered in making such
determination were the history of and the prospects for the industry in which
the Company competes, an assessment of the Company's management, the past and
present operations of the Company, the historical results of operations of the
Company and the trend of its revenues and earnings, the prospects for future
earnings of the Company, the general condition of the securities markets at
the time of the Offerings, the prices of similar securities of generally
comparable companies and other relevant factors. There can be no assurance
that an active trading market will develop for the Class A Common Stock or
that the Class A Common Stock will trade in the public market subsequent to
the Offerings at or above the initial public offering price.
The U.S. Representatives have informed the Company that the U.S.
Underwriters do not intend to confirm sales of Class A Common Stock offered
hereby to any accounts over which they exercise discretionary authority.
77
LEGAL MATTERS
The validity of the issuance of the shares of Class A Common Stock offered
hereby will be passed upon for the Company and the Selling Stockholders by
LeBoeuf, Lamb, Greene & MacRae, L.L.P., a limited liability partnership
including professional corporations, Salt Lake City, Utah. Certain other legal
matters governed by Japanese law will be passed upon for the Company and the
Selling Stockholders by Nagashima & Ohno, Tokyo, Japan. Certain legal matters
will be passed upon for the U.S. and International Underwriters by Shearman &
Sterling, San Francisco, California and for the Japanese Underwriters by
Tomotsune Kimura & Mitomi, Tokyo, Japan.
EXPERTS
The combined financial statements of Nu Skin Asia Pacific, Inc. as of
December 31, 1994 and 1995 and for the fiscal years ended September 30, 1993
and 1994, for the three month period ended December 31, 1994 and for the year
ended December 31, 1995 and balance sheet of Nu Skin Asia Pacific, Inc. as of
September 6, 1996 included in this Prospectus have been so included in
reliance on the reports of Price Waterhouse LLP, independent accountants,
given on the authority of said firm as experts in auditing and accounting.
ADDITIONAL INFORMATION
The Company has filed a Registration Statement on Form S-1, of which this
Prospectus is a part, with the Securities and Exchange Commission (the
"Commission") under the 1933 Act with respect to the shares of Common Stock
offered hereby. This Prospectus does not contain all the information set forth
in the Registration Statement and the exhibits and schedules thereto. For
further information with respect to the Company and the Common Stock offered
hereby, reference is made to the Registration Statement, including the
financial schedules and exhibits filed therewith. Statements made in this
Prospectus as to the contents of any contract, agreement or other documents
are not necessarily complete, and, in each instance, reference is made to the
copy of such document filed as an exhibit to the Registration Statement or
otherwise with the Commission. Each such statement shall be deemed qualified
in its entirety by such reference. Copies of the Registration Statement,
including all exhibits and schedules thereto, may be obtained from the
Commission's principal office at 450 Fifth Street, N.W., Washington, D.C.
20549 upon the payment of the fees prescribed by the Commission, or may be
examined without charge at the public reference facilities maintained at the
principal office of the Commission. The Commission maintains a Web site on the
Internet at http://www.sec.gov that contains reports, proxy and information
statements and other information regarding registrants that file with the
Commission.
The Company intends to furnish holders of the Class A Common Stock with
annual reports containing audited consolidated financial statements and a
report thereon by its independent auditors, and quarterly reports containing
unaudited consolidated financial information. Such audited financial
statements and unaudited quarterly financial information will be prepared in
accordance with United States generally accepted accounting principles.
78
NU SKIN ASIA PACIFIC, INC.
INDEX TO FINANCIAL STATEMENTS
PAGE
----
COMBINED FINANCIAL STATEMENTS:
Report of Independent Accountants..................................... F-2
Combined Balance Sheets at December 31, 1994 and 1995, and at June 30,
1996 (unaudited)..................................................... F-3
Combined Statements of Income for the years ended September 30, 1993
and 1994, the three months ended December 31, 1993 (unaudited) and
1994, the year ended December 31, 1995, and the six months ended June
30, 1995 (unaudited) and 1996 (unaudited)............................ F-4
Combined Statements of Stockholders' Equity for the years ended Sep-
tember 30, 1993 and 1994, the three months ended December 31, 1994,
the year ended December 31, 1995, and the six months ended June 30,
1996 (unaudited)..................................................... F-5
Combined Statements of Cash Flows for the years ended September 30,
1993 and 1994, the three months ended December 31, 1993 (unaudited)
and 1994, the year ended December 31, 1995, and the six months ended
June 30, 1995 (unaudited) and 1996 (unaudited)....................... F-6
Notes to Combined Financial Statements................................ F-7
NU SKIN ASIA PACIFIC, INC.:
Report of Independent Accountants..................................... F-15
Balance Sheet As of September 6, 1996................................. F-16
Notes to Balance Sheet As of September 6, 1996........................ F-17
UNAUDITED PRO FORMA DATA:
Unaudited Pro Forma Consolidated Balance Sheet As of June 30, 1996.... F-20
Unaudited Pro Forma Consolidated Statements of Income For the Year
Ended
December 31, 1995.................................................... F-21
Unaudited Pro Forma Consolidated Statements of Income For the Six
Months Ended
June 30, 1996........................................................ F-22
Notes to Unaudited Pro Forma Consolidated Balance Sheet and Statements
of Income............................................................ F-23
All schedules are omitted because they are not applicable or the required
information is shown in the combined financial statements or notes thereto.
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Nu Skin Asia Pacific, Inc.
In our opinion, the accompanying combined balance sheets and the related
combined statements of income, of stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of Nu Skin
Asia Pacific, Inc. at December 31, 1994 and 1995, and the results of its
operations and its cash flows for the years ended September 30, 1993 and 1994,
the three months ended December 31, 1994, and the year ended December 31,
1995, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We did not audit the financial statements of Nu Skin Hong Kong,
Inc. --Hong Kong Branch for the year ended September 30, 1993, which
statements reflect 17% of revenue for the year then ended. Those statements
were audited by other independent accountants whose report dated April 14,
1994 (except for Notes 2 and 8, as to which the date is August 30, 1996)
expressed an unqualified opinion on those statements. Our opinion, as it
relates to data of Nu Skin Hong Kong, Inc. for the year ended September 30,
1993, is based solely on the report of other independent accountants. We
conducted our audits of these statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Salt Lake City, Utah
September 10, 1996
F-2
NU SKIN ASIA PACIFIC, INC.
COMBINED BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 31,
---------------- JUNE 30,
1994 1995 1996
------- -------- -----------
(UNAUDITED)
ASSETS
Current assets
Cash and cash equivalents...................... $16,288 $ 63,213 $ 51,464
Accounts receivable............................ 1,068 3,242 4,899
Related parties receivable..................... 17,870 1,793 9,945
Inventories, net............................... 15,556 32,662 38,383
Prepaid expenses and other..................... 3,461 3,410 3,449
------- -------- --------
54,243 104,320 108,140
Property and equipment, net...................... 3,850 6,904 8,120
Other assets..................................... 3,331 7,004 8,431
------- -------- --------
Total assets................................. $61,424 $118,228 $124,691
======= ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable............................... $ 3,630 $ 4,395 $ 8,101
Accrued expenses............................... 13,377 23,313 39,672
Related parties payable........................ 10,556 28,749 21,033
------- -------- --------
27,563 56,457 68,806
------- -------- --------
Commitments and contingencies (Notes 7 and 10)
Stockholders' equity
Capital stock.................................. 1,300 4,550 4,550
Cumulative foreign currency translation adjust-
ment.......................................... 441 (2,940) (3,780)
Retained earnings.............................. 32,120 60,161 55,115
------- -------- --------
33,861 61,771 55,885
------- -------- --------
Total liabilities and stockholders' equity... $61,424 $118,228 $124,691
======= ======== ========
The accompanying notes are an integral part of these combined financial
statements.
F-3
NU SKIN ASIA PACIFIC, INC.
COMBINED STATEMENTS OF INCOME
(IN THOUSANDS)
THREE
YEAR ENDED MONTHS ENDED YEAR ENDED SIX MONTHS ENDED
SEPTEMBER 30, DECEMBER 31, DECEMBER 31, JUNE 30,
----------------- ------------------- ------------ -----------------------
1993 1994 1993 1994 1995 1995 1996
-------- -------- ----------- ------- ------------ ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
Revenue................. $110,624 $254,637 $63,759 $73,562 $358,609 $158,125 $287,711
Cost of sales........... 38,842 86,872 24,238 19,607 96,615 41,901 80,963
-------- -------- ------- ------- -------- -------- --------
Gross profit............ 71,782 167,765 39,521 53,955 261,994 116,224 206,748
-------- -------- ------- ------- -------- -------- --------
Operating expenses
Distributor
incentives............ 40,267 95,737 22,315 27,950 135,722 60,224 107,090
Selling, general and
administrative........ 27,150 44,566 9,358 13,545 67,475 27,511 44,551
-------- -------- ------- ------- -------- -------- --------
Total operating
expenses............... 67,417 140,303 31,673 41,495 203,197 87,735 151,641
-------- -------- ------- ------- -------- -------- --------
Operating income........ 4,365 27,462 7,848 12,460 58,797 28,489 55,107
Other income (expense),
net.................... 133 443 24 (813) 511 549 617
-------- -------- ------- ------- -------- -------- --------
Income before provision
for income taxes....... 4,498 27,905 7,872 11,647 59,308 29,038 55,724
Provision for income
taxes (Note 8)......... 417 10,226 2,885 2,730 19,097 9,350 20,591
-------- -------- ------- ------- -------- -------- --------
Net income.............. $ 4,081 $ 17,679 $ 4,987 $ 8,917 $ 40,211 $ 19,688 $ 35,133
======== ======== ======= ======= ======== ======== ========
Unaudited pro forma
data:
Income before pro forma
provision for income
taxes.................. 4,498 27,905 7,872 11,647 59,308 29,038 55,724
Pro forma provision for
income taxes (Note 8).. 1,511 10,391 2,931 4,041 22,751 11,139 20,443
-------- -------- ------- ------- -------- -------- --------
Income after pro forma
provision for income
taxes.................. $ 2,987 $ 17,514 $ 4,941 $ 7,606 $ 36,557 $ 17,899 $ 35,281
======== ======== ======= ======= ======== ======== ========
The accompanying notes are an integral part of these combined financial
statements.
F-4
NU SKIN ASIA PACIFIC, INC.
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
CUMULATIVE
FOREIGN
CURRENCY TOTAL
CAPITAL TRANSLATION RETAINED STOCKHOLDERS'
STOCK ADJUSTMENT EARNINGS EQUITY
------- ----------- -------- -------------
Balance at October 1, 1992........ $1,300 $ 6 $ 1,443 $ 2,749
Net change in cumulative foreign
currency translation adjustment.. -- 96 -- 96
Net income........................ -- -- 4,081 4,081
------ ------- ------- -------
Balance at September 30, 1993..... 1,300 102 5,524 6,926
Net change in cumulative foreign
currency translation adjustment.. -- 329 -- 329
Net income........................ -- -- 17,679 17,679
------ ------- ------- -------
Balance at September 30, 1994..... 1,300 431 23,203 24,934
Net change in cumulative foreign
currency translation adjustment.. -- 10 -- 10
Net income........................ -- -- 8,917 8,917
------ ------- ------- -------
Balance at December 31, 1994...... 1,300 441 32,120 33,861
Contributed capital............... 3,250 -- -- 3,250
Dividends......................... -- -- (12,170) (12,170)
Net change in cumulative foreign
currency translation adjustment.. -- (3,381) -- (3,381)
Net income........................ -- -- 40,211 40,211
------ ------- ------- -------
Balance at December 31, 1995...... 4,550 (2,940) 60,161 61,771
Dividends (unaudited)............. -- -- (40,179) (40,179)
Net change in cumulative foreign
currency translation
adjustment (unaudited)........... -- (840) -- (840)
Net income (unaudited)............ -- -- 35,133 35,133
------ ------- ------- -------
Balance at June 30, 1996
(unaudited)...................... $4,550 $(3,780) $55,115 $55,885
====== ======= ======= =======
The accompanying notes are an integral part of these combined financial
statements.
F-5
NU SKIN ASIA PACIFIC, INC.
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
THREE
YEAR ENDED MONTHS ENDED YEAR ENDED SIX MONTHS ENDED
SEPTEMBER 30, DECEMBER 31, DECEMBER 31, JUNE 30,
----------------- ------------------- ------------ -----------------------
1993 1994 1993 1994 1995 1995 1996
------- -------- ----------- ------- ------------ ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
Cash flows from
operating activities:
Net income............. $ 4,081 $ 17,679 $ 4,987 $ 8,917 $ 40,211 $19,688 $ 35,133
Adjustments to reconcile
net income to net cash
provided by (used in)
operating activities:
Depreciation........... 813 1,401 466 358 2,012 996 1,285
Loss on disposal of
property and
equipment............. 1 90 -- 1,093 12 4 --
Changes in operating
assets and
liabilities:
Accounts receivable.... 36 (1,006) (4,141) 165 (2,174) (2,364) (1,657)
Related parties
receivable............ (3,615) (25,288) 100 11,108 16,077 15,316 (8,152)
Inventories, net....... (9,301) 158 947 (939) (17,106) (3,298) (5,721)
Prepaid expenses and
other................. (587) (890) (3,530) (836) 51 1,663 (39)
Other assets........... (542) 277 195 (20) (2,994) (572) (1,432)
Accounts payable....... 1,544 884 1,928 279 765 188 3,706
Accrued expenses....... 2,216 13,106 3,457 (4,384) 9,936 2,937 16,359
Related parties
payable............... 19,398 3,475 (1,152) (16,442) 18,193 9,888 (7,716)
------- -------- ------- ------- -------- ------- --------
Net cash provided by
(used in) operating
activities............ 14,044 9,886 3,257 (701) 64,983 44,446 31,766
------- -------- ------- ------- -------- ------- --------
Cash flows from
investing activities:
Purchase of property
and equipment......... (4,061) (1,766) (500) (417) (5,422) (3,237) (2,859)
Proceeds from disposal
of property and equip-
ment.................. 20 25 -- 14 48 3 --
Payments for lease de-
posits................ (1,726) (614) (73) (677) (701) (295) --
Receipt of refundable
lease deposits........ 337 153 153 -- 22 3 5
------- -------- ------- ------- -------- ------- --------
Net cash used in
investing activities.. (5,430) (2,202) (420) (1,080) (6,053) (3,526) (2,854)
------- -------- ------- ------- -------- ------- --------
Cash flows from
financing activities:
Proceeds from related
party loans........... 4,350 -- -- -- -- -- --
Payments on related
party loans........... -- (4,350) -- -- -- -- --
Proceeds from capital
contributions......... -- -- -- -- 3,250 -- --
Dividends paid......... -- -- -- -- (12,170) (2,456) (40,179)
------- -------- ------- ------- -------- ------- --------
Net cash provided by
(used in) financing
activities............ 4,350 (4,350) -- -- (8,920) (2,456) (40,179)
------- -------- ------- ------- -------- ------- --------
Effect of exchange rate
changes on cash....... 74 152 (702) (8) (3,085) 1,584 (482)
------- -------- ------- ------- -------- ------- --------
Net increase (decrease)
in cash and cash
equivalents............ 13,038 3,486 2,135 (1,789) 46,925 40,048 (11,749)
Cash and cash
equivalents, beginning
of period.............. 1,553 14,591 14,591 18,077 16,288 16,288 63,213
------- -------- ------- ------- -------- ------- --------
Cash and cash
equivalents, end of
period................. $14,591 $ 18,077 $16,726 $16,288 $ 63,213 $56,336 $ 51,464
======= ======== ======= ======= ======== ======= ========
Supplemental cash flow
information:
Interest paid.......... $ 207 $ 81 $ 42 $ 6 $ 119 $ 25 $ 24
======= ======== ======= ======= ======== ======= ========
The accompanying notes are an integral part of these combined financial
statements.
F-6
NU SKIN ASIA PACIFIC, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
1. THE COMPANY
Nu Skin Asia Pacific, Inc. (the "Company") is a network marketing company
involved in the distribution of premium quality, innovative personal care and
nutritional products in Asia. The Company is the exclusive distribution
vehicle for Nu Skin International, Inc. ("NSI") through the Company's
subsidiaries in the countries of Japan, Taiwan, Hong Kong (including Macau)
and South Korea (collectively referred to as the "Subsidiaries").
Additionally, the Company sells products to NSI affiliates in Australia and
New Zealand. NSI was founded in 1984 and is one of the largest network
marketing companies in the world. NSI owns the Nu Skin trademark and provides
the products and marketing materials to each of its affiliates. Nu Skin
Management Group, Inc. ("NSIMG"), an NSI affiliate, has provided, and will
continue to provide, a high level of support services to the Company,
including product development, marketing, legal, accounting and other
managerial services. The operations of the Company, of NSI, of NSIMG and of
other NSI affiliates are conducted by a variety of individual entities that
are under the control of a group of common stockholders.
Inasmuch as the Subsidiaries are under common control, and in accordance
with the planned reorganization discussed in Note 11, the Subsidiaries'
historical balance sheets and related statements of income, of stockholders'
equity and of cash flows are combined and presented as a single entity after
elimination of intercompany transactions.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CHANGE IN FISCAL YEAR
In October 1994, the Company's Board of Directors approved a change in the
Company's fiscal year end from September 30 to December 31. The change became
effective as of September 30, 1994.
USE OF ESTIMATES
The preparation of these financial statements in conformity with generally
accepted accounting principles required management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Significant estimates include reserves for product returns,
obsolete inventory and taxes. Actual results could differ from these
estimates.
CASH AND CASH EQUIVALENTS
Cash equivalents are short-term, highly liquid instruments with original
maturities of 90 days or less.
INVENTORIES
Inventories consist of merchandise purchased for resale and are stated at
the lower of cost using the first-in, first-out method or market.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and depreciated using the
straight-line method over the following estimated useful lives:
Furniture and fixtures........ 5 - 7 years
Computers and equipment....... 3 - 5 years
Leasehold improvements........ Shorter of estimated useful life or lease term
Vehicles...................... 3 - 5 years
Expenditures for maintenance and repairs are charged to expense as incurred.
F-7
NU SKIN ASIA PACIFIC, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
OTHER ASSETS
Other assets consist primarily of deposits for noncancelable operating
leases.
REVENUE RECOGNITION
Revenue is recognized when products are shipped and title passes to
independent distributors who are the Company's customers. A reserve for
product returns is accrued based on historical experience. The Company
generally requires cash payment at the point of sale. The Company has
determined that no allowance for doubtful accounts is necessary. Amounts
received prior to shipment to distributors are recorded as deferred revenue.
INCOME TAXES
Effective October 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income Taxes".
Under SFAS 109, the liability method is used in accounting for income taxes.
Under this method, deferred tax assets and liabilities are determined based on
the differences between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse.
The Company elected to be taxed as an S corporation whereby the U.S. Federal
and state income tax effects of the Company's activities accrue directly to
its stockholders. The cumulative affect of adopting SFAS No. 109 as of
October 1, 1993 was not material to the Company's operations.
FOREIGN CURRENCY TRANSLATION
All business operations of the Company occur outside of the United States.
Each Subsidiary's local currency is considered the functional currency. Since
a substantial portion of the Company's inventories are purchased with U.S.
dollars from the United States and since the Company is incorporated in the
United States, 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 average exchange rates and stockholders' equity is recorded at
historical exchange rates. The resulting foreign currency translation
adjustments are recorded as a separate component of stockholders' equity in
the combined balance sheets, and transaction gains and losses are included in
other income in the combined statements of income.
INDUSTRY SEGMENT AND GEOGRAPHIC AREA
The Company operates in a single industry, which is the direct selling of
personal care and nutritional products, and in a single geographic area, which
is the Asia Pacific Region.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of financial instruments including cash and cash equivalents,
accounts receivable, related parties receivable, accounts payable, accrued
expenses and related parties payable approximate their recorded values.
INTERIM RESULTS (UNAUDITED)
The accompanying balance sheet as of June 30, 1996, the statement of
stockholders' equity for the six months ended June 30, 1996 and the statements
of income and of cash flows for the three months ended December 31, 1993 and
the six months ended June 30, 1995 and 1996 are unaudited. In the opinion of
management, these statements have been prepared on the same basis as the
audited financial statements and include all adjustments necessary for the
fair statement of the results of interim periods. The data disclosed in these
notes to the combined financial statements at such dates or for such periods
are also unaudited.
F-8
NU SKIN ASIA PACIFIC, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
3. RELATED PARTY TRANSACTIONS
SCOPE OF RELATED PARTY ACTIVITY
The Company has extensive and pervasive transactions with affiliated
entities that are under the control of a group of common stockholders. These
transactions are as follows: (1) The Company purchases virtually all of its
products from NSI through Nu Skin Hong Kong under the terms of the Regional
Distribution Agreement. The Company's purchase prices for NSI products and
commercial materials are governed by a price schedule which is subject to
negotiation between the Company and NSI. (2) The Company sells NSI products to
each of its Subsidiaries and to NSI affiliates in Australia and New Zealand
through Nu Skin Hong Kong under the terms of the Regional Distribution
Agreement. (3) The Company pays a royalty to NSI for use of licensed
trademarks and trade names on products and commercial materials not purchased
from NSI, including products and commercial materials manufactured or locally
sourced by each of the Subsidiaries under the terms of the Trademark/Tradename
License Agreements. (4) Distributor agreements are entered into between the
distributor and NSI rather than the Company. The Company pays license fees to
NSI for the right to use NSI's distributor lists, the distribution system and
other intangibles in the countries in which the Company maintains exclusive
distribution rights under the terms of the Licensing and Sales Agreements. (5)
The Company is obligated to pay NSI a commission fee of 42% on all sales to
distributors by the Company to fulfill NSI's obligation under the Global
Compensation Plan as outlined in the Licensing and Sales Agreements. Such
payment is compensation to NSI for the commissions which become payable by NSI
to the independent distributors upon the Company's sales of product and covers
the costs of such commissions and the administration of the Global
Compensation Plan. The Company offsets this liability by paying directly the
commissions and rebates due to the distributors in the countries in which the
Company operates. (6) The Company pays fees to NSIMG for management and
support services under the terms of the Management Services Agreement. The
Company's management believes that the fees charged by NSI and NSIMG are
reasonable. In the event that NSI and NSIMG are unable or unwilling to perform
their obligations under the above agreements, or terminate the agreements as
provided therein, the Company's business and results of operations will be
adversely affected.
Total commission fees (including those paid directly to distributors within
the Company's geographic territory) are recorded as distributor incentives in
the combined statements of income. Trademark royalty fees, license fees and
management fees are included in selling, general and administrative expenses
in the combined statements of income.
SUMMARY OF TRANSACTIONS
The following summarizes the Company's transactions with related parties (in
thousands):
Product purchases
YEAR ENDED THREE SIX
SEPTEMBER 30, MONTHS ENDED YEAR ENDED MONTHS ENDED
----------------- DECEMBER 31, DECEMBER 31, JUNE 30,
1993 1994 1994 1995 1996
------- -------- ------------ ------------ ------------
(UNAUDITED)
Beginning inventories... $ 5,474 $ 14,775 $14,617 $ 15,556 $ 32,662
Inventory purchases from
affiliates............. 29,877 61,409 11,608 69,821 65,821
Other inventory
purchases, import
duties and value added
locally................ 18,266 25,305 8,938 43,900 20,863
------- -------- ------- -------- --------
Total products available
for sale............... 53,617 101,489 35,163 129,277 119,346
Less: Cost of sales..... (38,842) (86,872) (19,607) (96,615) (80,963)
------- -------- ------- -------- --------
Ending inventories...... $14,775 $ 14,617 $15,556 $ 32,662 $ 38,383
======= ======== ======= ======== ========
F-9
NU SKIN ASIA PACIFIC, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Related parties payable transactions
YEAR ENDED THREE SIX
SEPTEMBER 30, MONTHS ENDED YEAR ENDED MONTHS ENDED
------------------ DECEMBER 31, DECEMBER 31, JUNE 30,
1993 1994 1994 1995 1996
-------- -------- ------------ ------------ ------------
(UNAUDITED)
Beginning related
parties payable........ $ 4,125 $ 27,873 $ 26,998 $ 10,556 $ 28,749
Inventory purchases from
affiliates............. 47,076 61,409 11,608 69,821 65,821
Distributor incentives.. 40,267 95,737 27,950 135,722 107,090
Less: Distributor
incentives paid
directly to
distributors........... (13,256) (68,880) (19,837) (105,642) (83,148)
License fees............ 3,574 9,252 2,750 13,158 10,741
Trademark royalty fees.. -- -- 19 2,694 1,383
Management fees......... 794 1,449 499 2,066 1,333
Proceeds from (payments
for) related party
loans.................. 4,350 (4,350) -- -- --
Less: Payments to
related parties........ (59,057) (95,492) (39,431) (99,626) (110,936)
-------- -------- -------- --------- ---------
Ending related parties
payable................ $ 27,873 $ 26,998 $ 10,556 $ 28,749 $ 21,033
======== ======== ======== ========= =========
RELATED PARTIES RECEIVABLE AND PAYABLE BALANCES
The Company has receivable and payable balances with affiliates in Australia
and New Zealand, and with NSI and NSIMG. Related parties balances outstanding
greater than 60 days bear interest at prime plus 2%. Since no significant
balances have been outstanding greater than 60 days, no related parties
interest income or interest expense has been recorded in the combined
financial statements. Sales to related parties were $7,426,000 and $2,288,000
for the years ended September 30, 1993 and 1994, respectively, $855,000 for
the three months ended December 31, 1994, $4,608,000 for the year ended
December 31, 1995 and $2,137,000 (unaudited) for the six months ended June 30,
1996.
Related parties receivable includes $15,746,000 due from NSI at December 31,
1994 for excess payments made during 1994 resulting from a refund of
overpayments on inventory purchased from NSI during 1994. The Company has
determined that no allowance is necessary for amounts due from related
parties.
CERTAIN RELATIONSHIPS WITH STOCKHOLDER DISTRIBUTORS
Two major stockholders of the Company have been NSI distributors since 1984.
These stockholders receive substantial commissions from NSI, including
commissions relating to sales within the countries in which the Company
operates. By agreement, NSI pays commissions to these stockholders 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.
F-10
NU SKIN ASIA PACIFIC, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
4. PROPERTY AND EQUIPMENT
Property and equipment are comprised of the following (in thousands):
DECEMBER 31,
---------------- JUNE 30,
1994 1995 1996
------- ------- -----------
(UNAUDITED)
Furniture and fixtures............................ $ 982 $ 3,593 $ 4,589
Computers and equipment........................... 3,772 5,060 6,006
Leasehold improvements............................ 1,240 2,221 2,531
Vehicles.......................................... 156 152 241
------- ------- -------
6,150 11,026 13,367
Less: accumulated depreciation.................... (2,300) (4,122) (5,247)
------- ------- -------
$ 3,850 $ 6,904 $ 8,120
======= ======= =======
Depreciation of property and equipment totaled $813,000 and $1,401,000 for
the years ended September 30, 1993 and 1994, respectively, $358,000 for the
three months ended December 31, 1994, $2,012,000 for the year ended December
31, 1995 and $1,285,000 (unaudited) for the six months ended June 30, 1996.
5. ACCRUED EXPENSES
Accrued expenses consist of the following (in thousands):
DECEMBER 31,
---------------- JUNE 30,
1994 1995 1996
------- ------- -----------
(UNAUDITED)
Income taxes payable.............................. $ 7,577 $17,463 $27,797
Other taxes payable............................... 606 798 5,167
Other accruals.................................... 5,194 5,052 6,708
------- ------- -------
$13,377 $23,313 $39,672
======= ======= =======
6. LINE OF CREDIT
During 1995, the Company entered into an $8,000,000 revolving credit
agreement with a financial institution in South Korea. Advances were available
under the agreement through July 1, 1996. The credit facility bears interest
at an annual rate of 12%. There were no outstanding balances under the credit
facility at December 31, 1995 and June 30, 1996 (unaudited).
7. LEASE OBLIGATIONS
The Company leases office space and computer hardware under noncancelable
long-term operating leases. Most leases include renewal options of up to three
years. Minimum future operating lease obligations at December 31, 1995 are as
follows (in thousands):
Year ending December 31,
1996............................................................... $6,626
1997............................................................... 2,141
1998............................................................... 209
------
Total minimum lease payments......................................... $8,976
======
F-11
NU SKIN ASIA PACIFIC, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Rental expense for operating leases totaled $3,941,000 and $5,848,000 for
the years ended September 30, 1993 and 1994, respectively, $1,639,000 for the
three months ended December 31, 1994, $9,470,000 for the year ended December
31, 1995 and $4,154,000 (unaudited) for the six months ended June 30, 1996.
8. INCOME TAXES
Combined income before provision for income taxes consists of income earned
solely from international operations. The provision for income taxes for the
years ended September 30, 1993 and 1994, for the three months ended December
31, 1994, for the year ended December 31, 1995 and for the six months ended
June 30, 1996 (unaudited) primarily represents income taxes paid in foreign
countries.
PRO FORMA PROVISION FOR INCOME TAXES
The combined statements of income include a pro forma presentation for
income taxes which would have been recorded if the Company had not been an S
corporation based upon the U.S. Federal and state tax laws. The unaudited pro
forma provision for income taxes consists of the following (in thousands):
YEAR ENDED THREE SIX
SEPTEMBER 30, MONTHS ENDED YEAR ENDED MONTHS ENDED
--------------- DECEMBER 31, DECEMBER 31, JUNE 30,
1993 1994 1994 1995 1996
------ ------- ------------ ------------ ------------
(UNAUDITED)
Current:
Federal........... $1,176 $ 870 $1,505 $ 5,113 $1,192
State............. -- -- -- -- --
Foreign........... 944 11,176 2,779 19,500 22,967
Deferred:
Federal........... (82) (705) (194) (1,459) (1,340)
State............. -- -- -- -- --
Foreign........... (527) (950) (49) (403) (2,376)
------ ------- ------ ------- -------
$1,511 $10,391 $4,041 $22,751 $20,443
====== ======= ====== ======= =======
The principal components of pro forma deferred tax assets are as follows:
DECEMBER 31,
------------- JUNE 30,
1994 1995 1996
------ ------ -----------
(UNAUDITED)
Deferred tax assets:
Product return reserve.......................... $ 54 $ 115 $ 866
Inventory reserve............................... 14 414 1,114
Depreciation.................................... 979 866 1,078
Exchange gains and losses....................... -- 389 --
Accrued expenses not deductible until paid...... 179 123 141
Uniform capitalization.......................... 897 1,696 1,726
Minimum tax credit.............................. -- -- 1,193
Valuation allowance............................. -- -- (1,193)
Other........................................... 82 61 79
------ ------ ------
$2,205 $3,664 $5,004
====== ====== ======
F-12
NU SKIN ASIA PACIFIC, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
A reconciliation of the Company's pro forma effective tax rate compared to
the statutory U.S. Federal tax rate is as follows:
YEAR ENDED THREE SIX
SEPTEMBER 30, MONTHS ENDED YEAR ENDED MONTHS ENDED
-------------- DECEMBER 31, DECEMBER 31, JUNE 30,
1993 1994 1994 1995 1996
------ ------ ------------ ------------ ------------
(UNAUDITED)
Income taxes at statu-
tory rate.............. 34.00% 35.00% 35.00% 35.00% 35.00%
Foreign tax credit limi-
tation (benefit)....... (0.60) 1.97 (0.42) 2.69 (0.52)
Alternative minimum
tax.................... -- -- -- -- 2.14
Non-deductible ex-
penses................. 0.26 0.27 0.11 0.67 0.07
Other................... (0.05) -- -- -- --
------ ------ ----- ----- -----
33.61% 37.24% 34.69% 38.36% 36.69%
====== ====== ===== ===== =====
9. FINANCIAL INSTRUMENTS
The Subsidiaries enter into significant transactions with each other, NSI
and third parties which may not be denominated in the respective entity's
functional currency. The Company reduces its exposure to fluctuations in
foreign exchange rates by creating offsetting positions through the use of
foreign currency exchange contracts. The Company currently does not use such
financial instruments for trading or speculative purposes. The Company
regularly monitors its foreign currency risks and periodically takes measures
to minimize the impact of foreign exchange fluctuations on the Company's
operating results.
At December 31, 1994 and 1995, and June 30, 1996, the Company held foreign
currency forward contracts with notional amounts totaling $-0-, $1,000,000 and
$1,000,000, respectively, to hedge foreign currency risks. These contracts all
have maturities prior to December 31, 1996. At December 31, 1995 and June 30,
1996 and for the periods then ended, there were no significant unrealized
losses on these contracts.
10. COMMITMENTS AND CONTINGENCIES
The Company is subject to governmental regulations pertaining to product
formulation, labeling and packaging, product claims and advertising and to the
Company's direct selling system. The Company is also subject to the
jurisdiction of numerous foreign tax authorities. These tax authorities
regulate and restrict various corporate transactions, including intercompany
transfers. The Company believes that the tax authorities in Japan and South
Korea are particularly active in challenging the tax structures and
intercompany transfers of foreign corporations. Any assertions or
determination that either the Company or any of its distributors is not in
compliance with existing statutes, laws, rules or regulations could 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.
F-13
NU SKIN ASIA PACIFIC, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
11. SUBSEQUENT EVENTS
PLANNED REORGANIZATION
Prior to or concurrently with the initial public offerings, the stockholders
of the Subsidiaries will effectuate a tax-free reorganization whereby the
stockholders will contribute their shares of capital stock to the Company in
exchange for shares of the Company's Class B Common Stock intended to qualify
as a tax free transfer under Section 351 of the Internal Revenue Code of 1986
(the "Reorganization"). The Reorganization will result in each of the
Subsidiaries becoming a wholly-owned subsidiary of the Company. Prior to the
Reorganization, each Subsidiary elected to be treated as an S corporation. As
part of the Reorganization, each Subsidiary will terminate its S corporation
status.
Inasmuch as the separate entities that will be reorganized to constitute the
Company are under common control, the Reorganization will be accounted for in
a manner similar to a pooling of interests. Accordingly, the individual
Subsidiaries' historical balance sheets and related statements of income, of
stockholders' equity and of cashflows are combined and presented as a single
entity after elimination of intercompany transactions. The unaudited pro forma
statements included elsewhere in this registration statement reflect the
Reorganization and related accounting treatment.
F-14
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Nu Skin Asia Pacific, Inc.
In our opinion, the accompanying balance sheet presents fairly, in all
material respects, the financial position of Nu Skin Asia Pacific, Inc. at
September 6, 1996, in conformity with generally accepted accounting
principles. This financial statement is the responsibility of the Company's
management; our responsibility is to express an opinion on this financial
statement based on our audit. We conducted our audit of this statement in
accordance with generally accepted auditing standards which require that we
plan and perform the audit to obtain reasonable assurance about whether the
balance sheet is free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
balance sheet, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall balance sheet
presentation. We believe that our audit provides a reasonable basis for the
opinion expressed above.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Salt Lake City, Utah
September 10, 1996
F-15
NU SKIN ASIA PACIFIC, INC.
BALANCE SHEET
AS OF SEPTEMBER 6, 1996
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ASSETS
Deferred offering costs................................................. $1,676
------
Total assets........................................................ $1,676
======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accrued expenses...................................................... $1,676
------
Total liabilities................................................... 1,676
------
Stockholders' equity
Preferred Stock--25,000,000 shares authorized, $.001 par value........ --
Class A Common Stock.................................................. --
Class B Common Stock.................................................. --
------
Total stockholders' equity.......................................... --
------
Total liabilities and stockholders' equity.......................... $1,676
======
The accompanying notes are an integral part of this balance sheet.
F-16
NU SKIN ASIA PACIFIC, INC.
NOTES TO BALANCE SHEET
AS OF SEPTEMBER 6, 1996
NOTE 1--DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Nu Skin Asia Pacific, Inc. (the "Company") is a network marketing company
involved in the marketing, distribution and sale of premium quality,
innovative personal care and nutritional products. The Company is the
exclusive distribution vehicle of products produced by Nu Skin International,
Inc. ("NSI") in Japan, Taiwan, Hong Kong, and South Korea, where the Company
currently has operations, and in Thailand, Indonesia, Malaysia, the
Philippines, the People's Republic of China, Singapore and Vietnam, where
operations have not commenced. The Company belongs to a group of affiliated
entities that are under the control of a group of common stockholders (the "Nu
Skin Group"). The Nu Skin Group's affiliates include various entities that
have exclusive Nu Skin marketing rights, distribution rights and trademark
licenses in each of the markets in which the Company operates.
The Company was organized in September 1996 as a holding company in
anticipation of a tax-free reorganization of the distribution and marketing
entities operating in Japan, Taiwan, Hong Kong, and South Korea (collectively
referred to as the "Subsidiaries"). The Reorganization will be undertaken in
anticipation of the initial public offerings (the "Offerings").
The balance sheet should be read in conjunction with the historical Combined
Financial Statements of Nu Skin Asia Pacific, Inc. included elsewhere in this
registration statement.
USE OF ESTIMATES
The preparation of the balance sheet in conformity with generally accepted
accounting principles required management to make estimates and assumptions
that affect the reported amounts of certain assets and liabilities and
disclosures of contingent assets and liabilities at the date of the balance
sheet. Actual results could differ from those estimates. Management believes
that the estimates are reasonable.
INCOME TAXES
Income taxes are computed using the asset and liability method. Under the
asset and liability method, deferred income tax assets and liabilities are
determined based on the difference between the financial and tax bases of
assets and liabilities and are measured using the currently enacted tax rates
and laws in accordance with Statement of Financial Accounting Standards No.
109, Accounting for Income Taxes.
STOCK-BASED COMPENSATION
The Company will adopt Statement of Financial Accounting Standards No. 123
(SFAS 123), Accounting for Stock-Based Compensation. SFAS 123 becomes
effective during 1996. The Company will measure compensation expense for its
stock-based employee compensation plans using the intrinsic value method
prescribed by Accounting Principles Board Opinion No. 25 ("APB 25"),
Accounting for Stock Issued to Employees, and will provide pro forma
disclosures of net income and net income per share as if the fair value-based
method prescribed by SFAS 123 had been applied in measuring compensation
expense.
NOTE 2--DEFERRED OFFERING COSTS
The Company has incurred costs totaling $1,676,000 in connection with the
Offerings. These costs have been reflected as deferred offerings costs in the
accompanying balance sheet as of September 6, 1996. If the Offerings are
successful, the costs will be deducted from the proceeds received from the
Offerings. If the Offerings are not successful, the costs will be charged to
expense in the period in which a decision is made to terminate the Offerings.
In such event, the costs would be paid by NSI.
F-17
NU SKIN ASIA PACIFIC, INC.
NOTES TO BALANCE SHEET--(CONTINUED)
AS OF SEPTEMBER 6, 1996
NOTE 3--CAPITAL STOCK
The Company's capital stock consists of Preferred Stock, Class A Common
Stock, and Class B Common Stock. The shares of Class A Common Stock and Class
B Common Stock are identical in all respects, except for voting rights and
certain conversion rights and transfer restrictions, as follows: (1) each
share of Class A Common Stock entitles the holder to one vote on matters
submitted to a vote of the Company's stockholders and each share of Class B
Common Stock entitles the holder to ten votes on each such matter; (2) stock
dividends of Class A Common Stock may be paid only to holders of Class A
Common Stock and stock dividends of Class B Common Stock may be paid only to
holders of Class B Common Stock; (3) if a holder of Class B Common Stock
transfers such shares to a person other than a permitted transferee, as
defined in the Company's' Certificate of Incorporation, such shares will be
converted automatically into shares of Class A Common Stock; and (4) Class A
Common Stock has no conversion rights; however, each share of Class B Common
Stock is convertible into one share of Class A Common Stock, in whole or in
part, at any time at the option of the holder.
STOCKHOLDER CONTROL
Subsequent to the Offerings, a group of common stockholders (the "Existing
Stockholders") will own all of the outstanding shares of Class A Common Stock
and Class B Common Stock, which will represent approximately 99% of the
combined voting rights of all outstanding Common Stock. Accordingly, the
Existing Stockholders, acting as a group, will control the election of the
entire Board of Directors and decisions with respect to the Company's dividend
policy, the Company's access to capital, mergers or other business
combinations involving the Company, the acquisition or disposition of assets
by the Company and any change in control of the Company.
CERTAIN RELATIONSHIPS WITH STOCKHOLDERS
Prior to or concurrent with the Offerings of the Company's shares, all of
the Company's current stockholders will enter into a Stockholders' Agreement
with the Company which will contain certain limitations on the transfer of
shares of Class A Common Stock and Class B Common Stock. Additionally, each
Existing Stockholder who is a party to the Stockholders' Agreement will grant
the other parties (subject to certain exceptions) a right of first offer to
purchase a pro rata (based on ownership percentages) portion of shares to be
offered as well as any shares not purchased by the other parties.
DIVIDEND REPATRIATION
The Company will conduct all of its operations through the Subsidiaries.
Accordingly, an important source of the Company's income will be dividends and
other distributions from the Subsidiaries. The Company's ability to obtain
dividends or other distributions is subject to, among other things,
restrictions on dividends under applicable local statutes, laws, rules and
regulations, and foreign currency exchange regulations of the countries in
which the Subsidiaries operate. The Subsidiaries' ability to pay dividends or
make other distributions to the Company is also subject to the Subsidiaries
having sufficient funds from their operations which are legally available for
the payment of such dividends or distributions and which are not required to
fund future operations. Because the Company will be a stockholder of each of
the Subsidiaries, the Company's claims will generally rank junior to all other
creditors. Therefore, in the event of an entity's liquidation, there may not
be assets sufficient for the Company to recoup its investment in such entity.
NOTE 4--EQUITY INCENTIVE PLANS (UNAUDITED)
The Company has reserved 5% of the outstanding shares of the Company's
common stock just prior to the Offerings for issuance as equity incentives to
employees and other eligible participants under the Company's 1996 Stock
Incentive Plan. The Company will account for employee equity incentives in
accordance with SFAS 123.
F-18
NU SKIN ASIA PACIFIC, INC.
NOTES TO BALANCE SHEET--(CONTINUED)
AS OF SEPTEMBER 6, 1996
Prior to the Offerings, certain existing stockholders of the Company (the
"Selling Stockholders") intend to contribute to the Company an aggregate of up
to 4% of the outstanding shares of the Company's Common Stock on the date of
such contribution. The Company intends to grant to NSI options to purchase
such shares of Common Stock, and NSI intends to assign these options (the
"Distributor Options") to qualifying distributors of NSI in connection with
the Offerings. The Distributor Options will be subject to certain conditions
related to distributor performance and will vest on December 31, 1997. The
Company will record distributor incentive expense for the Distributor Options.
In addition, prior to the Offerings, the Selling Stockholders will
contribute to NSI and other members of the Nu Skin Group, shares equal to an
aggregate of up to 1.25% of the outstanding shares of the Company's common
stock on the date of such contribution for issuance to employees of NSI and
employees of other members of the Nu Skin Group as part of an employee equity
incentive plan. Equity incentives granted or awarded under this plan will vest
over the four year period following the grant or award date. Compensation
expense related to equity incentives granted to employees of NSI and other
members of the Nu Skin Group will be recorded by the entity that benefits from
the employee's services.
In addition, in January 1994, NSI agreed to grant one of the Company's
executives an option to purchase 1/3 of one percent of the Company's common
stock, to become exercisable upon the Reorganization. The exercise price of
this option was set at the estimated fair market value of this equity interest
in January 1994.
F-19
NU SKIN ASIA PACIFIC, INC.
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF JUNE 30, 1996
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
NU SKIN PRO FORMA
ASIA PACIFIC, PRO FORMA PRO FORMA FOR THE
INC., AS OF ADJUSTMENTS ADJUSTMENTS REORGANIZATION
SEPTEMBER 6, COMBINED FOR THE PRO FORMA FOR FOR THE AND THE
1996 SUBSIDIARIES REORGANIZATION REORGANIZATION OFFERINGS OFFERINGS
------------- ------------ -------------- -------------- ----------- --------------
ASSETS
Current assets
Cash and cash
equivalents.......... $ -- $ 51,464 $ -- $ 51,464 $72,000 (g) $123,464
Accounts receivable... -- 4,899 -- 4,899 -- 4,899
Related parties
receivable........... -- 9,945 -- 9,945 -- 9,945
Inventories, net...... -- 38,383 -- 38,383 -- 38,383
Prepaid expenses and
other................ -- 3,449 2,700 (b) 6,149 -- 6,149
------ -------- ------- -------- ------- --------
-- 108,140 2,700 110,840 72,000 182,840
Property and equipment,
net.................... -- 8,120 -- 8,120 -- 8,120
Deferred offering
costs.................. 1,676 -- -- 1,676 (1,676)(g) --
Deferred tax assets..... -- -- 2,304 (b) 2,304 -- 2,304
Other assets............ -- 8,431 -- 8,431 25,000 (g) 33,431
------ -------- ------- -------- ------- --------
Total assets........ $1,676 $124,691 $ 5,004 $131,371 $95,324 $226,695
====== ======== ======= ======== ======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable...... $ -- $ 8,101 $ -- $ 8,101 $ -- $ 8,101
Accrued expenses...... 1,676 39,672 -- 41,348 (1,676)(g) 39,672
Related parties
payable.............. -- 21,033 -- 21,033 -- 21,033
Notes payable to
stockholders......... -- -- 59,565 (d) 59,565 (15,000)(g) 44,565
Note payable to NSI... -- -- -- -- 10,000 (g) 10,000
------ -------- ------- -------- ------- --------
1,676 68,806 59,565 130,047 (6,676) 123,371
------ -------- ------- -------- ------- --------
Note payable to NSI..... -- -- -- -- 10,000 (g) 10,000
------ -------- ------- -------- ------- --------
Stockholders' equity
Capital Stock of
Combined
Subsidiaries.......... -- 4,550 (4,550)(a) -- -- --
Preferred Stock--
25,000,000 shares
authorized, $.001 par
value................ -- -- -- -- -- --
Class A Common Stock--
500,000,000 shares
authorized........... -- -- -- -- 14 (g) 14
Class B Common Stock.. -- -- 100 (a) 100 (10)(g) 90
Additional paid-in
capital.............. -- -- -- -- 106,805 (g) 106,805
Cumulative foreign
currency translation
adjustment........... -- (3,780) -- (3,780) -- (3,780)
Retained earnings..... -- 55,115 (55,115)(d) 5,004 -- 5,004
5,004(b)
Deferred
compensation......... -- -- -- -- (4,809)(h) (4,809)
Note receivable from
NSI.................. -- -- -- -- (10,000)(f) (10,000)
------ -------- ------- -------- ------- --------
-- 55,885 (54,561) 1,324 92,000 93,324
------ -------- ------- -------- ------- --------
Total liabilities
and stockholders'
equity............. $1,676 $124,691 $ 5,004(b) $131,371 $95,324 $226,695
====== ======== ======= ======== ======= ========
The accompanying notes are an integral part of these unaudited pro forma
consolidated financial statements.
F-20
NU SKIN ASIA PACIFIC, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
PRO FORMA
PRO FORMA PRO FORMA FOR THE
NU SKIN ADJUSTMENTS PRO FORMA ADJUSTMENTS REORGANIZATION
ASIA COMBINED FOR THE FOR FOR THE AND THE
PACIFIC, INC. SUBSIDIARIES REORGANIZATION REORGANIZATION OFFERINGS OFFERINGS
------------- ------------ -------------- -------------- ----------- --------------
Revenue................. $ -- $358,609 $ -- $358,609 $ -- $358,609
Cost of sales........... -- 96,615 -- 96,615 -- 96,615
---- -------- ------- -------- ------- --------
Gross profit............ -- 261,994 261,994 261,994
---- -------- ------- -------- ------- --------
Operating expenses
Distributor
incentives(f)......... -- 135,722 -- 135,722 -- 135,722
Selling, general and
administrative........ -- 67,475 4,391(c) 71,866 2,452(h) 74,318
---- -------- ------- -------- ------- --------
Total operating
expenses............... -- 203,197 4,391 207,588 2,452 210,040
---- -------- ------- -------- ------- --------
Operating income........ -- 58,797 (4,391) 54,406 (2,452) 51,954
Other income (expense).. -- 511 (1,783)(e) (1,272) (133)(i) (1,405)
---- -------- ------- -------- ------- --------
Income before provision
for income taxes....... -- 59,308 (6,174) 53,134 (2,585) 50,549
Provision for income
taxes.................. -- 19,097 1,286(b) 20,383 (992)(j) 19,391
---- -------- ------- -------- ------- --------
Net income.............. $ -- $ 40,211 $(7,460) $ 32,751 $(1,593) $ 31,158
==== ======== ======= ======== ======= ========
Net income per share.... $ $
======== ========
Weighted average shares
outstanding............
======== ========
The accompanying notes are an integral part of these unaudited pro forma
consolidated financial statements.
F-21
NU SKIN ASIA PACIFIC, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
PRO FORMA
PRO FORMA PRO FORMA FOR THE
NU SKIN ADJUSTMENTS PRO FORMA ADJUSTMENTS REORGANIZATION
ASIA PACIFIC, COMBINED FOR THE FOR FOR THE AND THE
INC. SUBSIDIARIES REORGANIZATION REORGANIZATION OFFERINGS OFFERINGS
------------- ------------ -------------- -------------- ----------- --------------
Revenue................. $ -- $287,711 $ -- $287,711 $ -- $287,711
Cost of sales........... -- 80,963 -- 80,963 -- 80,963
---- -------- ------- -------- ------ --------
Gross profit............ -- 206,748 -- 206,748 -- 206,748
---- -------- ------- -------- ------ --------
Operating expenses
Distributor
incentives (f)........ -- 107,090 -- 107,090 -- 107,090
Selling, general and
administrative........ -- 44,551 2,196(c) 46,747 1,226(h) 47,973
---- -------- ------- -------- ------ --------
Total operating
expenses............... -- 151,641 2,196 153,837 1,226 155,063
---- -------- ------- -------- ------ --------
Operating income........ -- 55,107 (2,196) 52,911 (1,226) 51,685
Other income (expense).. -- 617 -- 617 267(i) 884
---- -------- ------- -------- ------ --------
Income before provision
for income taxes....... -- 55,724 (2,196) 53,528 (959) 52,569
Provision for income
taxes.................. -- 20,591 (954)(b) 19,637 (352)(j) 19,285
---- -------- ------- -------- ------ --------
Net income.............. $ -- $ 35,133 $(1,242) $ 33,891 $ (607) $ 33,284
==== ======== ======= ======== ====== ========
Net income per share.... $ $
======== ========
Weighted average shares
outstanding............
======== ========
The accompanying notes are an integral part of these unaudited pro forma
consolidated financial statements.
F-22
NU SKIN ASIA PACIFIC, INC.
NOTES TO UNAUDITED PRO FORMA
CONSOLIDATED BALANCE SHEET AND STATEMENTS OF INCOME
NOTE 1--BASIS OF PRESENTATION
Prior to or concurrently with the initial public offerings (the "Offerings")
the stockholders of Nu Skin Japan Company, Limited, Nu Skin Taiwan, Inc., Nu
Skin Hong Kong, Inc. and Nu Skin Korea, Inc. (the "Subsidiaries") will
contribute their shares of capital stock to the capital of Nu Skin Asia
Pacific, Inc. (the "Company") in a reorganization which is a transaction
intended to qualify under Section 351 of the Internal Revenue Code of 1986 as
a tax free transfer in exchange for shares of the Company's Class B Common
Stock (the "Reorganization"). The Reorganization will result in each of the
Subsidiaries becoming a wholly-owned subsidiary of the Company. Prior to the
Reorganization, each of the Subsidiaries elected to be taxed as an S
corporation whereby the income tax effects of the Company's activities accrued
directly to the stockholders.
Inasmuch as the Subsidiaries that will be reorganized are under common
control, the Reorganization will be accounted for in a manner similar to a
pooling of interests. Accordingly, the historical balance sheets and related
statements of income, of stockholders' equity and of cash flows are combined
and presented as a single entity after elimination of intercompany
transactions.
The unaudited pro forma financial data reflect the Reorganization and the
Offerings as if all conditions to these transactions had been completed as of
June 30, 1996 for pro forma combined balance sheet data purposes and as of
January 1, 1995 for pro forma combined statement of income data purposes.
These data do not necessarily reflect the results of operations or financial
position of the Company that would have resulted had such transactions
actually been consummated as of such dates. Also, these data are not
necessarily indicative of the future results of operations of future financial
position of the Company.
NOTE 2--PRO FORMA ADJUSTMENTS
The pro forma adjustments reflect the following:
REORGANIZATION
a) Reflects the contribution by the existing stockholders of their
interest in the Subsidiaries in exchange for all shares of the Class B
Common Stock. As a result, the Company will become the parent company and
the Subsidiaries will become wholly-owned subsidiaries of the Company.
b) Reflects the recognition of a deferred tax asset of $5.0 million. In
connection with the Reorganization, the Company will make certain
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. Additionally, reflects the tax effect of pro forma adjustments
on earnings.
c) Reflects additional management charges of $4.4 million per year
relating to certain support services provided to the Company by NSI and an
NSI affiliate, which costs were borne by NSI prior to the Reorganization.
d) Reflects the distribution of $59.6 million of notes (the "S
Distribution Notes") to the existing stockholders of the Company in respect
of the earned and undistributed taxable S corporation earnings at June 30,
1996 that would have been distributed had the Subsidiaries' S corporation
status been terminated on June 30, 1996.
The adjustments reflect the distribution and the related issuance of
promissory notes. The Company estimates that, at the Offerings, it will
reserve between $40.0 million and $50.0 million of cash on hand for
repayment of the S Distribution Notes. The balance of the S Distribution
Notes will be repaid from cash generated by operations.
F-23
NU SKIN ASIA PACIFIC, INC.
NOTES TO UNAUDITED PRO FORMA
CONSOLIDATED BALANCE SHEET AND STATEMENTS OF INCOME--(CONTINUED)
e) Reflects the increase in interest expense for the promissory notes
issued in connection with the distribution to the stockholders of the
undistributed S corporation earnings. The promissory notes will bear
interest at 8% per annum and are due and payable within six months from the
date of issuance.
OFFERING
f) Reflects an estimated $10.0 million note receivable in connection with
the sale of an option to purchase shares of Class A Common Stock to
NSI. The pro forma balance sheet does not reflect deferred compensation
expense and additional paid-in capital, nor do the pro forma statements of
income reflect the estimated compensation expense, of $21.4 million in
connection with the one-time grant of stock options at 25% of the initial
public offering price to independent distributors (non-employees) of the
Company immediately prior to the Offerings. These options will include
conditions related to the achievement of performance goals and will vest on
December 31, 1997. The Company will record distributor stock incentive
expense for these non-employee stock options.
g) Reflects the estimated net proceeds to the Company from the Offerings
of $94 million less a $2 million payment for the offering costs, a $15.0
million payment of short term notes to the stockholders, the $25.0 million
purchase from NSI of the exclusive rights to distribute products in
Thailand, Indonesia, Malaysia, the Philippines, the People's Republic of
China, Singapore and Vietnam, which purchase consists of $20.0 million in
notes payable to NSI and a $5.0 million payment to NSI, and the related
adjustments to stockholders' equity. Also, reflects the conversion of
shares of Class B Common Stock into Class A Common Stock and the sale by
the Company of an estimated 4,750,000 shares of Class A Common Stock.
h) The pro forma statements of income reflect the annual amortization of
$1.3 million for the acquired distribution rights from NSI. Amortization
will be recorded on a straight-line basis over the estimated useful life of
twenty years. Also reflects estimated compensation expense of $1.2 million
related to the equity incentives granted to employees of NSI and employees
of other members of the Nu Skin Group. The pro forma balance sheet reflects
estimated deferred compensation and additional paid-in capital of $4.8
million, which represents the estimated compensation expense related to the
equity incentives granted to employees of NSI and employees of other
members of the Nu Skin Group which vest over a period of four years.
i) Reflects interest expense for the $20.0 million in notes payable to
NSI issued in connection with the purchase of exclusive distribution rights
in certain Asian countries. The notes will bear interest at 8% per annum
and are due and payable within 14 months from the date of issuance. Also
reflects interest income for the estimated $10.0 million note receivable
from NSI issued in connection with the sale of an option to purchase
shares of Class A Common Stock. The note will bear interest at 8% per annum
and is due and payable in ten years from the date of issuance.
j) Reflects tax effect of pro forma adjustments on earnings.
NOTE 3--DEFERRED OFFERING COSTS
The Company has incurred costs totaling $1,676,000 as of September 6, 1996
in connection with the Offerings of the Class A Common Stock. These costs have
been reflected as deferred offering costs in the accompanying pro forma
balance sheet as of June 30, 1996. If the Offerings are successful, the costs
will be deducted from the proceeds received from the Offerings. If the
Offerings are not successful, the costs will be charged to expense in the
period in which a decision is made to terminate the Offerings. In such event,
the costs would be paid by NSI.
F-24
NU SKIN ASIA PACIFIC, INC.
NOTES TO UNAUDITED PRO FORMA
CONSOLIDATED BALANCE SHEET AND STATEMENTS OF INCOME--(CONTINUED)
NOTE 4--PRO FORMA NET INCOME PER SHARE
Pro forma net income per share presented in the Unaudited Pro Forma
Consolidated Statements of Income gives effect to the issuance of shares
of the Company's common stock ( shares of Class B Common Stock issued in
connection with the Reorganization, shares of Class A Common Stock to be
issued in the Offerings, giving effect to the conversion by certain existing
stockholders of the Company of shares of Class B Common Stock into
shares of Class A Common Stock, and shares of Class A Common Stock to be
issued in connection with stock options granted to an officer of the Company
in July 1994) and gives effect to the pro forma adjustments to expenses
described in Note 2 above.
F-25
[GATEFOLD: PHOTOGRAPHS SHOWING PRODUCTS.]
[GATEFOLD: PHOTOGRAPHS DEPICTING LIFESTYLE.]
[GATEFOLD: PHOTOGRAPHS DEPICTING LIFESTYLE.]
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO OTHER DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN
THE PROSPECTUS, IN CONNECTION WITH THE OFFERING DESCRIBED HEREIN, AND, IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY,
THE CLASS A COMMON STOCK IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM,
IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE AN IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET
FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE
HEREOF.
---------------
TABLE OF CONTENTS
PAGE
----
Prospectus Summary....................................................... 3
Risk Factors............................................................. 10
The Reorganization and S Corporation Distribution........................ 20
Use of Proceeds.......................................................... 22
Dividend Policy.......................................................... 22
Capitalization........................................................... 23
Dilution................................................................. 24
Selected Combined Financial and Other Information........................ 25
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 27
Business................................................................. 36
Management............................................................... 58
Certain Relationships and Related Transactions........................... 65
Principal and Selling Stockholders....................................... 67
Shares Eligible for Future Sale.......................................... 68
Description of Capital Stock............................................. 70
Certain United States Tax Consequences to Non-United States Holders...... 73
Underwriting............................................................. 75
Legal Matters............................................................ 78
Experts.................................................................. 78
Additional Information................................................... 78
Index to Financial Statements............................................ F-1
UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN
THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
7,600,000 SHARES
[LOGO]
NU SKIN ASIA PACIFIC, INC.
CLASS A COMMON STOCK
---------------
PROSPECTUS
---------------
MERRILL LYNCH & CO.
MORGAN STANLEY & CO.
INCORPORATED
DEAN WITTER REYNOLDS INC.
NOMURA SECURITIES INTERNATIONAL, INC.
, 1996
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION
[ALTERNATE PAGE FOR RULE 415]
PRELIMINARY PROSPECTUS DATED SEPTEMBER , 1996
PROSPECTUS
OPTIONS TO PURCHASE SHARES OF CLASS A COMMON STOCK
SHARES OF CLASS A COMMON STOCK
NU SKIN ASIA PACIFIC, INC.
-----------
This Prospectus relates to the offering by Nu Skin Asia Pacific, Inc., a
Delaware corporation (the "Company"), of shares of the Company's Class A
Common Stock, par value $ per share (the "Class A Common Stock"), the
offering by a Company option holder of options (the "Distributor Options") to
purchase shares of Class A Common Stock, the offering by the Company of
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 shares
of Class A Common Stock in connection with the awarding of employee stock bonus
awards, and the offering by certain stockholders of the Company (the "Rule 415
Selling Stockholders") of shares of Class A Common Stock to their employees
as employee stock bonus awards. The offering of the Distributor Options, the
underlying shares of Class A Common Stock underlying the Distributor Options
and the employee stock bonus awards are collectively referred to as the "Rule
415 Offerings." See "Rule 415 Selling Stockholders" and "Plan of Distribution".
The Company will not receive any of the proceeds from the sale of shares by the
Rule 415 Selling Stockholders in connection with the employee stock bonus
awards. The Company will receive the proceeds from the issuance of shares in
connection with the exercise of the Distributor Options.
Each share of Class A Common Stock entitles its holder to one vote, and each
share of Class B Common Stock (the "Class B Common Stock") of the Company
entitles its holder to ten votes. The Class A and Class B Common Stock are
sometimes collectively referred to in this Prospectus as the "Common Stock."
All of the shares of Class B Common Stock are held by the existing stockholders
of the Company prior to the Offerings. After consummation of the Offerings, the
Selling Stockholders (as defined below) will beneficially own shares of Common
Stock having approximately % of the combined voting power of the outstanding
shares of Common Stock. Each share of Class B Common Stock is convertible into
one share of Class A Common Stock at the option of the holder of Class B Common
Stock and in certain other instances. See "Description of Capital Stock--Common
Stock--Conversion."
In addition to the shares underlying the Distributor Options and the employee
stock bonus awards, the Company has registered 8,740,000 shares of Class A
Common Stock, including 4,750,000 shares being offered by the Company and
2,850,000 shares being offered by certain selling stockholders (the "Selling
Stockholders"), for issuance and sale in connection with an underwritten
offering (the "Underwritten Offerings," and together with the Rule 415
Offerings, the "Offerings") of such shares of Class A Common Stock and 884,317
shares and 255,683 shares of Class A Common Stock which the U.S. Underwriters
and the International Underwriters, respectively, have the option to purchase
from the Selling Stockholders to cover overallotments, if any.
Prior to the Offerings, there has been no public market for the Class A
Common Stock.
Application has been made to list the Class A Common Stock on the New York
Stock Exchange.
SEE "RISK FACTORS," BEGINNING ON PAGE 10, FOR A DISCUSSION OF CERTAIN FACTORS
WHICH SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE SECURITIES OFFERED
HEREBY.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PRICE TO UNDERWRITING PROCEEDS TO PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)(3) SELLING STOCKHOLDERS
- -------------------------------------------------------------------------------
Per Option(4).........
- -------------------------------------------------------------------------------
Per Share............. $ $ $ $
- -------------------------------------------------------------------------------
Total................. $ $ $ $
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) The Rule 415 Offerings are being made by certain Rule 415 Selling
Stockholders and by the Company from time to time pursuant to Rule 415
under the Securities Act of 1933 and are not being made in connection with
an underwritten distribution. Therefore, no underwriting commissions or
discounts will be paid in connection with the Rule 415 Offerings. See "Rule
415 Selling Stockholders" and "Plan of Distribution."
(2) Before deducting expenses payable by the Company, which, together with the
expenses of the Underwritten Offerings, are estimated to be $2,250,000.
(3) Includes proceeds from the exercise of the Distributor Options to purchase
shares of Class A Common Stock. See "Rule 415 Selling Stockholders" and
"Plan of Distribution."
(4) No consideration is being paid upon the issuance and grant of the
Distributor Options and the awarding of employee stock bonus awards by the
Rule 415 Selling Stockholders. See "Rule 415 Selling Stockholders" and
"Plan of Distribution."
-----------
The date of this Prospectus is , 1996.
[ALTERNATE PAGE FOR RULE 415]
THE OFFERINGS
DISTRIBUTOR OPTIONS. Prior to the date of this Prospectus, the Company's
existing stockholders will contribute to the Company shares of the Company's
Class A Common Stock for use in implementing a distributor equity incentive
program. Also prior to the date of this Prospectus, the Company will grant to
NSI options to purchase such shares (the "Distributor Options"). Each
Distributor Option entitles the holder to purchase one share of Class A Common
Stock.
NSI intends to initially allocate the Distributor Options to distributors who
have achieved gold or higher executive distributor levels under the Global
Compensation Plan on the date of this Prospectus in a manner similar to the
methodology described below. From the date of this Prospectus until June 30,
1997 (the "Qualification Period"), existing and new distributors will have the
opportunity to qualify for a reallocation of the Distributor Options from NSI
by achieving gold or higher executive distributor levels under the Global
Compensation Plan as of June 30, 1997 (such qualifying distributors are
hereinafter referred to as "Eligible Distributors"). At the end of the
Qualification Period, each Eligible Distributor will receive Distributor
Options based upon a reallocation of the Distributor Options determined by
multiplying the total number of Distributor Options by the quotient obtained by
dividing (x) the Eligible Distributor's weighted total compensation during the
Qualification Period (the "Weighted Individual Compensation") by (y) the sum of
the Weighted Individual Compensation earned by all Eligible Distributors during
the Qualification Period (the "Weighted Total Compensation"). For purposes of
calculating such quotient, the following weighting factors (the "Weighting
Factors") will be applied to an Eligible Distributor's compensation to
calculate "Weighted Individual Compensation" according to executive distributor
levels:
EXECUTIVE DISTRIBUTOR LEVEL WEIGHTING FACTOR
--------------------------- ----------------
Hawaiian Blue Diamond..................................... 100%
Blue Diamond.............................................. 94%
Diamond................................................... 86%
Emerald................................................... 82%
Ruby...................................................... 78%
Lapis..................................................... 74%
Gold...................................................... 72%
For purposes of illustration, for the seven month period ended on August 30,
1996 (the "Illustrative Qualification Period"), the Weighted Total Compensation
was $ . An Emerald level distributor who earned commissions of $40,000 during
the Illustrative Qualification Period would apply a weighting factor of 82% to
such commissions, resulting in Weighted Individual Compensation of $32,800.
Such distributor's allotment of the Distributor Options would be equal to the
quotient of his or her Weighted Individual Compensation ($32,800) divided by
the Weighted Total Compensation ($ ), multiplied by the total number of
Distributor Options ( ). Such distributor would therefore be allocated
of the Distributor Options.
The foregoing example is presented for illustrative purposes only. There can
be no assurance that the number of Eligible Distributors will remain constant
during the Qualification Period. Given the fixed number of Distributor Options
available, the number of Distributor Options allocable to an Eligible
Distributor will decrease as the total number of Eligible Distributors
increases and conversely will increase as the total number of Eligible
Distributors decreases. NSI has historically experienced periods of significant
fluctuations in its total number of executive distributors and may experience
such fluctuations in the future. An increase in the total number of Eligible
Distributors during the Qualification Period could result in a material
reduction in the number of Distributor Options allocable to an individual
Eligible Distributor. The number of Distributor Options allocable to an
Eligible Distributor will also decrease as the number of Eligible Distributors
at higher executive distributor levels increases as a proportion of all
Eligible Distributors and conversely will increase as the number of Eligible
6
[ALTERNATE PAGE FOR RULE 415]
Distributors at higher executive distributor levels decreases as a proportion
of all Eligible Distributors. There can be no assurance that the proportion of
Eligible Distributors at each executive distributor level will remain constant
during the Qualification Period. In addition, the number of Distributor Options
allocable to an Eligible Distributor will decrease as such Eligible
Distributor's compensation decreases as a proportion of total compensation paid
to all Eligible Distributors and conversely will increase as such Eligible
Distributor's compensation increases as a proportion of total compensation paid
to all Eligible Distributors. There can be no assurance that an Eligible
Distributor's compensation will remain constant as a percentage of total
Eligible Distributor compensation during the Qualification Period. Further,
there can be no assurance that an Eligible Distributor will be able to earn
particular compensation amounts during the Qualification Period.
For Distributor Options to vest, an Eligible Distributor will generally be
required to maintain, during the period from July 1, 1997, through December 31,
1997 (the "Vesting Period"), the executive level he or she achieved by the end
of the Qualification Period (the "Qualifying Executive Level"). If an Eligible
Distributor fails to maintain the Qualifying Executive Level for any month
during the Vesting Period, the number of Distributor Options vested in such
Eligible Distributor will be recalculated at the end of the Vesting Period to
be that number of Distributor Options such Eligible Distributor would have been
allocated had he or she achieved the lowest executive distributor level held by
him or her during the Vesting Period as of June 30, 1997 (the "Recalculated
Distributor Options"). For example, if an Eligible Distributor receives an
allocation as a Diamond executive distributor, which distributor level has a
Weighting Factor of 86%, but during the Vesting Period the distributor falls to
a lower distributor level during any given month and the lowest level to which
the distributor falls is Ruby level, the Ruby level Weighting Factor of 78%
would be used to recalculate the number of Distributor Options vested in such
distributor. Therefore, the difference between the number of Distributor
Options allocated to an Eligible Distributor at the end of the Qualification
Period and the Recalculated Distributor Options, if the amount of Recalculated
Distributor Options is lower, will be forfeited by such Eligible Distributor.
If an Eligible Distributor ceases to be an executive distributor at any time
during the Vesting Period, all Distributor Options held such Eligible
Distributor will be immediately forfeited. Forfeited options will not vest but
will revert to NSI.
Distributor Options vested in an Eligible Distributor will become exercisable
on December 31, 1997, and will remain exercisable for a four-year period
following such date provided the Eligible Distributor is still an executive
distributor on 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 Distributor Options will
agree to not resell in any given six month period more than % of the shares of
Class A Common Stock issuable upon exercise of the Distributor Options
originally granted to such Eligible Distributor. Upon vesting, Distributor
Options will be exercisable at 25% of the initial price per share to the public
in the Underwritten Offerings (the "Exercise Price").
By receiving an allocation of Distributor Options at the end of the
Qualification Period, each Eligible Distributor confirms his or her agreement
to continue to resell or personally consume at least 80% of all products
purchased by such distributor per month. If, within one year after the Vesting
Date, the dollar volume of product returns from an Eligible Distributor and his
or her downline distributors exceeds 2% of the total dollar volume of products
purchased by such Eligible Distributor and his or her downline distributors
during the Qualification Period and Vesting Period, NSI shall have the right
(i) to withhold from future commission payments the aggregate economic value of
the Distributor Options received by the Eligible Distributor as of the Vesting
Date (as determined by multiplying (x) the number of Distributor Options vested
in such Eligible Distributor by (y) the remainder of the fair market value [the
closing price of the Company's Class A Common Stock on the Vesting Date as
reported in the Wall Street Journal] of the shares underlying the Distributor
Options less the Exercise Price) and (ii) to impose any penalties or remedies
otherwise available to NSI, including termination of a distributorship.
The Distributor Option program is not intended to be an executive
distributor's primary source of income. Even though the exact number of
Distributor Options initially allocated may fluctuate materially during the
Qualification Period due to increases and decreases in overall executive
distributor activity, an executive distributor's primary income source, i.e.,
product sales and commissions, will continue to be based on the efforts of the
executive distributor and his or her downline organization.
7
[ALTERNATE PAGE FOR RULE 415]
EMPLOYEE STOCK BONUS AWARDS. Prior to the date of this Prospectus, the
existing stockholders will also contribute an aggregate of shares of the
Company's Class A Common Stock (the "Employee Shares") to NSI and its
affiliates (other than the Company) for use in connection with the employee
stock bonus awards to be made by NSI and its affiliates (other than the
Company) to their respective employees in connection with the 415 Offerings.
The shares of Class A Common Stock underlying each such employee stock bonus
award will be issued to the employee recipient at a rate of 25% per year
commencing one year following the date of the award, provided the employee
recipient is still employed by NSI or one of its affiliates (other than the
Company). The Company also intends to issue shares of Class A Common Stock
to its employees in connection with employee stock bonus awards to be made to
the Company's employees on the same terms as described above pursuant to the Nu
Skin Asia Pacific, Inc. 1996 Stock Incentive Plan.
The Distributor Options, the shares of Class A Common Stock underlying the
Distributor Options and the employee stock bonus awards are included in this
Prospectus pursuant to Rule 415 under the Securities Act of 1933, as amended
(the "1933 Act"). The Distributor Options will be issued pursuant to this
Prospectus upon the grant of the Distributor Options. The shares of Class A
Common Stock will be issued by the Company or sold by the Rule 415 Selling
Stockholders, as applicable, upon the exercise of the Distributor Options and
upon the grant of the employee stock bonus awards. See "Rule 415 Selling
Stockholders."
Distributor Options offered by a
Rule 415 Selling Stockholder(1).. Distributor Options
Class A Common Stock underlying
the Distributor Options (2) ..... shares
Employee Stock Bonus Awards
offered by the Rule 415 Selling
Stockholders (3)................. shares
Employee stock bonus awards
offered by the Company........... shares
Common Stock to be outstanding
after the Offerings:
Class A Common Stock(4)......... shares
Class B Common Stock(5)......... shares
Total Common Stock............ shares
Proposed New York Stock Exchange " NUS"
symbol...........................
Voting rights..................... The Class A Common Stock and Class B Common
Stock vote as a single class on all mat-
ters, except as otherwise required by law,
with each share of Class A Common Stock en-
titling its holder to one vote and each
share of Class B Common Stock entitling its
holder to ten votes. In all other respects
the holders of Class A Common Stock and the
holders of Class B Common Stock have equal
rights. All of the shares of Class B Common
Stock are owned by the Selling
[ALTERNATE PAGE FOR RULE 415]
Stockholders. After consummation of the Un-
derwritten Offerings, the Selling Stock-
holders will beneficially own shares of
Common Stock having approximately % of the
combined voting power of the outstanding
shares of Common Stock (approximately % if
the Underwriters' over-allotment options
are exercised in full).
- --------
(1) Includes options granted by the Company to a Rule 415 Selling Stockholder
to purchase shares of Class A Common Stock contributed to the Company by
the existing stockholders of the Company prior to the Rule 415 Offerings.
(2) Consists of shares of Class A Common Stock issuable upon the exercise of
the Distributor Options at an exercise price equal to 25% of the initial
public offering price in the 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 of the Company.
(4) Includes (a) shares of Class A Common Stock to be offered in the Rule
415 Offerings; (b) shares of Class A Common Stock being offered in the
Underwritten Offerings by the Company and the Selling Stockholders; and (c)
shares of Class A Common Stock issuable upon the exercise of the stock
options granted to one of the Company's executives and which become
exercisable upon consummation of the Reorganization.
(5) Gives effect to the conversion by the existing stockholders of the Company
prior to the Rule 415 Offerings of (a) shares of Class B Common Stock
into shares of Class A Common Stock for issuance upon the exercise of the
Distributor Options; and (b) shares of Class B Common Stock into shares
of Class A Common Stock for issuance pursuant to employee stock bonus
awards.
[ALTERNATE PAGE FOR RULE 415]
RULE 415 SELLING STOCKHOLDERS
DISTRIBUTOR OPTIONS. Prior to the date of this Prospectus, the Company's
existing stockholders will contribute to the Company shares of the
Company's Class A Common Stock for use in implementing a distributor equity
incentive program. Also prior to the date of this Prospectus, the Company will
grant to NSI options to purchase such shares (the "Distributor Options").
Each Distributor Option entitles the holder to purchase one share of Class A
Common Stock.
NSI intends to initially allocate the Distributor Options to distributors
who have achieved gold or higher executive distributor levels under the Global
Compensation Plan on the date of this Prospectus in a manner similar to the
methodology described below. From the date of this Prospectus until June 30,
1997 (the "Qualification Period"), existing and new distributors will have the
opportunity to qualify for a reallocation of the Distributor Options from NSI
by achieving gold or higher executive distributor levels under the Global
Compensation Plan as of June 30, 1997 (such qualifying distributors are
hereinafter referred to as "Eligible Distributors"). At the end of the
Qualification Period, each Eligible Distributor will receive Distributor
Options based upon a reallocation of the Distributor Options determined by
multiplying the total number of Distributor Options by the quotient obtained
by dividing (x) the Eligible Distributor's weighted total compensation during
the Qualification Period (the "Weighted Individual Compensation") by (y) the
sum of the Weighted Individual Compensation earned by all Eligible
Distributors during the Qualification Period (the "Weighted Total
Compensation"). For purposes of calculating such quotient, the following
weighting factors (the "Weighting Factors") will be applied to an Eligible
Distributor's compensation to calculate "Weighted Individual Compensation"
according to executive distributor levels:
EXECUTIVE DISTRIBUTOR LEVEL WEIGHTING FACTOR
--------------------------- ----------------
Hawaiian Blue Diamond..................................... 100%
Blue Diamond.............................................. 94%
Diamond................................................... 86%
Emerald................................................... 82%
Ruby...................................................... 78%
Lapis..................................................... 74%
Gold...................................................... 72%
For purposes of illustration, for the seven month period ended on August 30,
1996 (the "Illustrative Qualification Period"), the Weighted Total
Compensation was $ . An Emerald level distributor who earned commissions of
$40,000 during the Illustrative Qualification Period would apply a weighting
factor of 82% to such commissions, resulting in Weighted Individual
Compensation of $32,800. Such distributor's allotment of the Distributor
Options would be equal to the quotient of his or her Weighted Individual
Compensation ($32,800) divided by the Weighted Total Compensation ($ ),
multiplied by the total number of Distributor Options ( ). Such distributor
would therefore be allocated of the Distributor Options.
The foregoing example is presented for illustrative purposes only. There can
be no assurance that the number of Eligible Distributors will remain constant
during the Qualification Period. Given the fixed number of Distributor Options
available, the number of Distributor Options allocable to an Eligible
Distributor will decrease as the total number of Eligible Distributors
increases and conversely will increase as the total number of Eligible
Distributors decreases. NSI has historically experienced periods of
significant fluctuations in its total number of executive distributors and may
experience such fluctuations in the future. An increase in the total number of
Eligible Distributors during the Qualification Period could result in a
material reduction in the number of Distributor Options allocable to an
individual Eligible Distributor. The number of Distributor Options allocable
to an Eligible Distributor will also decrease as the number of Eligible
Distributors at higher executive distributor levels increases as a proportion
of all Eligible Distributors and conversely will increase as the number of
Eligible
66
[ALTERNATE PAGE FOR RULE 415]
Distributors at higher executive distributor levels decreases as a proportion
of all Eligible Distributors. There can be no assurance that the proportion of
Eligible Distributors at each executive distributor level will remain constant
during the Qualification Period. In addition, the number of Distributor
Options allocable to an Eligible Distributor will decrease as such Eligible
Distributor's compensation decreases as a proportion of total compensation
paid to all Eligible Distributors and conversely will increase as such
Eligible Distributor's compensation increases as a proportion of total
compensation paid to all Eligible Distributors. There can be no assurance that
an Eligible Distributor's compensation will remain constant as a percentage of
total Eligible Distributor compensation during the Qualification Period.
Further, there can be no assurance that an Eligible Distributor will be able
to earn particular compensation amounts during the Qualification Period.
For Distributor Options to vest, an Eligible Distributor will generally be
required to maintain, during the period from July 1, 1997, through December
31, 1997 (the "Vesting Period"), the executive level he or she achieved by the
end of the Qualification Period (the "Qualifying Executive Level"). If an
Eligible Distributor fails to maintain the Qualifying Executive Level for any
month during the Vesting Period, the number of Distributor Options vested in
such Eligible Distributor will be recalculated at the end of the Vesting
Period to be that number of Distributor Options such Eligible Distributor
would have been allocated had he or she achieved the lowest executive
distributor level held by him or her during the Vesting Period as of June 30,
1997 (the "Recalculated Distributor Options"). For example, if an Eligible
Distributor receives an allocation as a Diamond executive distributor, which
distributor level has a Weighting Factor of 86%, but during the Vesting Period
the distributor falls to a lower distributor level during any given month and
the lowest level to which the distributor falls is Ruby level, the Ruby level
Weighting Factor of 78% would be used to recalculate the number of Distributor
Options vested in such distributor. Therefore, the difference between the
number of Distributor Options allocated to an Eligible Distributor at the end
of the Qualification Period and the Recalculated Distributor Options, if the
amount of Recalculated Distributor Options is lower, will be forfeited by such
Eligible Distributor. If an Eligible Distributor ceases to be an executive
distributor at any time during the Vesting Period, all Distributor Options
held such Eligible Distributor will be immediately forfeited. Forfeited
options will not vest but will revert to NSI.
Distributor Options vested in an Eligible Distributor will become
exercisable on December 31, 1997, and will remain exercisable for a four-year
period following such date provided the Eligible Distributor is still an
executive distributor on 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
Distributor Options will agree to not resell in any given six month period
more than % of the shares of Class A Common Stock issuable upon exercise of
the Distributor Options originally granted to such Eligible Distributor. Upon
vesting, Distributor Options will be exercisable at 25% of the initial price
per share to the public in the Underwritten Offerings (the "Exercise Price").
By receiving an allocation of Distributor Options at the end of the
Qualification Period, each Eligible Distributor confirms his or her agreement
to continue to resell or personally consume at least 80% of all products
purchased by such distributor per month. If, within one year after the Vesting
Date, the dollar volume of product returns from an Eligible Distributor and
his or her downline distributors exceeds 2% of the total dollar volume of
products purchased by such Eligible Distributor and his or her downline
distributors during the Qualification Period and Vesting Period, NSI shall
have the right (i) to withhold from future commission payments the aggregate
economic value of the Distributor Options received by the Eligible Distributor
as of the Vesting Date (as determined by multiplying (x) the number of
Distributor Options vested in such Eligible Distributor by (y) the remainder
of the fair market value [the closing price of the Company's Class A Common
Stock on the Vesting Date as reported in the Wall Street Journal] of the
shares underlying the Distributor Options less the Exercise Price) and (ii) to
impose any penalties or remedies otherwise available to NSI, including
termination of a distributorship.
The Distributor Option program is not intended to be an executive
distributor's primary source of income. Even though the exact number of
Distributor Options initially allocated may fluctuate materially during the
Qualification Period due to increases and decreases in overall executive
distributor activity, an executive distributor's primary income source, i.e.,
product sales and commissions, will continue to be based on the efforts of the
executive distributor and his or her downline organization.
[ALTERNATE PAGE FOR RULE 415]
EMPLOYEE STOCK BONUS AWARDS. Prior to the date of this Prospectus, the
existing stockholders will also contribute an aggregate of shares of the
Company's Class A Common Stock (the "Employee Shares") to NSI and its
affiliates (other than the Company) for use in connection with the employee
stock bonus awards to be made by NSI and its affiliates (other than the
Company) to their respective employees in connection with the 415 Offerings.
The shares of Class A Common Stock underlying each such employee stock bonus
award will be issued to the employee recipient at a rate of 25% per year
commencing one year following the date of the award, provided the employee
recipient is still employed by NSI or one of its affiliates (other than the
Company). The Company also intends to issue shares of Class A Common Stock
to its employees in connection with employee stock bonus awards to be made to
the Company's employees on the same terms as described above pursuant to the
Nu Skin Asia Pacific, Inc. 1996 Stock Incentive Plan.
The following table sets forth the names of the Rule 415 Selling
Stockholders for whom Distributor Options and shares of Class A Common Stock
are being registered pursuant to Rule 415 under the 1933 Act, the number of
shares of Class A Common Stock owned and to be sold in the Rule 415 Offerings
and the total voting power of such Rule 415 Selling Stockholders after the
Offerings.
CLASS A
COMMON STOCK
-------------------------
TO BE
OWNED AND OWNED
DISTRIBUTOR DISTRIBUTOR TO BE SOLD IN AFTER THE
OPTIONS OPTIONS TO THE RULE 415 RULE 415
PRIOR TO BE OFFERED OFFERINGS(/3/) OFFERINGS
THE RULE 415 IN THE RULE 415 -------------- ----------
RULE 415 SELLING STOCKHOLDERS(/1/) OFFERINGS(/2/) OFFERINGS(/2/) NUMBER NUMBER %
- ---------------------------------- -------------- --------------- -------------- ------ ---
Nu Skin International,
Inc....................
Nu Skin Personal Care
Australia, Inc. .......
Nu Skin New Zealand,
Inc. ..................
Nu Skin Mexico, Inc. ...
Nu Skin Guatemala, Inc.
.......................
Nu Skin Europe, Inc. ...
Nu Skin Netherlands,
B.V. ..................
Nu Skin U.K., Inc. .....
Nu Skin Germany, Inc. ..
Nu Skin Belgium, Inc. ..
Nu Skin France, Inc. ...
Nu Skin Italy, Inc. ....
Nu Skin Spain, Inc. ....
- --------
(1) Each of the Rule 415 Selling Stockholders is an affiliate of the Company
in that each Rule 415 Selling Stockholder is owned by the same individuals
who will own 100% of the Common Stock of the Company following
consummation of the Reorganization and prior to the concurrent
underwritten offerings.
(2) Consists of options that have been granted by the Company to Nu Skin
International, Inc. to purchase shares of the Company's Class
A Common Stock.
(3) Includes the number of shares of Class A Common Stock to be issued by the
Rule 415 Selling Stockholders as employee stock bonus awards.
CERTAIN U.S. TAX CONSEQUENCES TO RECIPIENTS OF DISTRIBUTOR OPTIONS AND
EMPLOYEE STOCK BONUS AWARDS. For purposes of the Internal Revenue Code of
1986, as amended, (the "Code"), the Distributor Options will be considered
non-qualified stock options. A recipient (an "Option Recipient") of a non-
qualified stock option recognizes no taxable income and NSI and its
affiliates, other than the Company (the "Option Grantors"), receive no
deduction when a non-qualified stock option is granted. Upon exercise of a
non-qualified stock option, the Option Recipient recognizes ordinary income
and the Option Grantors are 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. An Option Recipient of restricted stock or contingent
stock is not required to include the value of such shares in income until the
first time such Option Recipient's rights in the
[ALTERNATE PAGE FOR RULE 415]
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 Option Grantors are entitled to a
deduction, in the amount of the ordinary income recognized by the Option
Recipient, for the tax year of the employee in which the Option Recipient
recognizes such income. Option 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. Option 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.
[ALTERNATE PAGE FOR RULE 415]
PLAN OF DISTRIBUTION
DISTRIBUTOR OPTIONS. Prior to the date of this Prospectus, the Company's
existing stockholders will contribute to the Company shares of the
Company's Class A Common Stock for use in implementing a distributor equity
incentive program. Also prior to the date of this Prospectus, the Company will
grant to NSI options to purchase such shares (the "Distributor Options").
Each Distributor Option entitles the holder to purchase one share of Class A
Common Stock.
NSI intends to initially allocate the Distributor Options to distributors
who have achieved gold or higher executive distributor levels under the Global
Compensation Plan on the date of this Prospectus in a manner similar to the
methodology described below. From the date of this Prospectus until June 30,
1997 (the "Qualification Period"), existing and new distributors will have the
opportunity to qualify for a reallocation of the Distributor Options from NSI
by achieving gold or higher executive distributor levels under the Global
Compensation Plan as of June 30, 1997 (such qualifying distributors are
hereinafter referred to as "Eligible Distributors"). At the end of the
Qualification Period, each Eligible Distributor will receive Distributor
Options based upon a reallocation of the Distributor Options determined by
multiplying the total number of Distributor Options by the quotient obtained
by dividing (x) the Eligible Distributor's weighted total compensation during
the Qualification Period (the "Weighted Individual Compensation") by (y) the
sum of the Weighted Individual Compensation earned by all Eligible
Distributors during the Qualification Period (the "Weighted Total
Compensation"). For purposes of calculating such quotient, the following
weighting factors (the "Weighting Factors") will be applied to an Eligible
Distributor's compensation to calculate "Weighted Individual Compensation"
according to executive distributor levels:
EXECUTIVE DISTRIBUTOR LEVEL WEIGHTING FACTOR
--------------------------- ----------------
Hawaiian Blue Diamond..................................... 100%
Blue Diamond.............................................. 94%
Diamond................................................... 86%
Emerald................................................... 82%
Ruby...................................................... 78%
Lapis..................................................... 74%
Gold...................................................... 72%
For purposes of illustration, for the seven month period ended on August 30,
1996 (the "Illustrative Qualification Period"), the Weighted Total
Compensation was $ . An Emerald level distributor who earned commissions of
$40,000 during the Illustrative Qualification Period would apply a weighting
factor of 82% to such commissions, resulting in Weighted Individual
Compensation of $32,800. Such distributor's allotment of the Distributor
Options would be equal to the quotient of his or her Weighted Individual
Compensation ($32,800) divided by the Weighted Total Compensation ($ ),
multiplied by the total number of Distributor Options ( ). Such
distributor would therefore be allocated of the Distributor Options.
The foregoing example is presented for illustrative purposes only. There can
be no assurance that the number of Eligible Distributors will remain constant
during the Qualification Period. Given the fixed number of Distributor Options
available, the number of Distributor Options allocable to an Eligible
Distributor will decrease as the total number of Eligible Distributors
increases and conversely will increase as the total number of Eligible
Distributors decreases. NSI has historically experienced periods of
significant fluctuations in its total number of executive distributors and may
experience such fluctuations in the future. An increase in the total number of
Eligible Distributors during the Qualification Period could result in a
material reduction in the number of Distributor Options allocable to an
individual Eligible Distributor. The number of Distributor Options allocable
to an Eligible Distributor will also decrease as the number of Eligible
Distributors at higher executive distributor levels increases as a proportion
of all Eligible Distributors and conversely will increase as the number of
Eligible
70
[ALTERNATE PAGE FOR RULE 415]
Distributors at higher executive distributor levels decreases as a proportion
of all Eligible Distributors. There can be no assurance that the proportion of
Eligible Distributors at each executive distributor level will remain constant
during the Qualification Period. In addition, the number of Distributor
Options allocable to an Eligible Distributor will decrease as such Eligible
Distributor's compensation decreases as a proportion of total compensation
paid to all Eligible Distributors and conversely will increase as such
Eligible Distributor's compensation increases as a proportion of total
compensation paid to all Eligible Distributors. There can be no assurance that
an Eligible Distributor's compensation will remain constant as a percentage of
total Eligible Distributor compensation during the Qualification Period.
Further, there can be no assurance that an Eligible Distributor will be able
to earn particular compensation amounts during the Qualification Period.
For Distributor Options to vest, an Eligible Distributor will generally be
required to maintain, during the period from July 1, 1997, through December
31, 1997 (the "Vesting Period"), the executive level he or she achieved by the
end of the Qualification Period (the "Qualifying Executive Level"). If an
Eligible Distributor fails to maintain the Qualifying Executive Level for any
month during the Vesting Period, the number of Distributor Options vested in
such Eligible Distributor will be recalculated at the end of the Vesting
Period to be that number of Distributor Options such Eligible Distributor
would have been allocated had he or she achieved the lowest executive
distributor level held by him or her during the Vesting Period as of June 30,
1997 (the "Recalculated Distributor Options"). For example, if an Eligible
Distributor receives an allocation as a Diamond executive distributor, which
distributor level has a Weighting Factor of 86%, but during the Vesting Period
the distributor falls to a lower distributor level during any given growth and
the lowest level to which the distributor falls is Ruby level, the Ruby level
Weighting Factor of 78% would be used to recalculate the number of Distributor
Options vested in such distributor. Therefore, the difference between the
number of Distributor Options allocated to an Eligible Distributor at the end
of the Qualification Period and the Recalculated Distributor Options, if the
amount of Recalculated Distributor Options is lower, will be forfeited by such
Eligible Distributor. If an Eligible Distributor ceases to be an executive
distributor at any time during the Vesting Period, all Distributor Options
held such Eligible Distributor will be immediately forfeited. Forfeited
options will not vest but will revert to NSI.
Distributor Options vested in an Eligible Distributor will become
exercisable on December 31, 1997, and will remain exercisable for a four-year
period following such date provided the Eligible Distributor is still an
executive distributor on 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
Distributor Options will agree to not resell in any given six month period
more than % of the shares of Class A Common Stock issuable upon exercise of
the Distributor Options originally granted to such Eligible Distributor. Upon
vesting, Distributor Options will be exercisable at 25% of the initial price
per share to the public in the Underwritten Offerings (the "Exercise Price").
By receiving an allocation of Distributor Options at the end of the
Qualification Period, each Eligible Distributor confirms his or her agreement
to continue to resell or personally consume at least 80% of all products
purchased by such distributor per month. If, within one year after the Vesting
Date, the dollar volume of product returns from an Eligible Distributor and
his or her downline distributors exceeds 2% of the total dollar volume of
products purchased by such Eligible Distributor and his or her downline
distributors during the Qualification Period and Vesting Period, NSI shall
have the right (i) to withhold from future commission payments the aggregate
economic value of the Distributor Options received by the Eligible Distributor
as of the Vesting Date (as determined by multiplying (x) the number of
Distributor Options vested in such Eligible Distributor by (y) the remainder
of the fair market value [the closing price of the Company's Class A Common
Stock on the Vesting Date as reported in the Wall Street Journal] of the
shares underlying the Distributor Options less the Exercise Price) and (ii) to
impose any penalties or remedies otherwise available to NSI, including
termination of a distributorship.
The Distributor Option program is not intended to be an executive
distributor's primary source of income. Even though the exact number of
Distributor Options initially allocated may fluctuate materially during the
Qualification Period due to increases and decreases in overall executive
distributor activity, an executive distributor's primary income source, i.e.,
product sales and commissions, will continue to be based on the efforts of the
executive distributor and his or her downline organization.
[ALTERNATE PAGE FOR RULE 415]
EMPLOYEE STOCK BONUS AWARDS. Prior to the date of this Prospectus, the
existing stockholders will also contribute an aggregate of shares of the
Company's Class A Common Stock (the "Employee Shares") to NSI and its
affiliates (other than the Company) for use in connection with the employee
stock bonus awards to be made by NSI and its affiliates (other than the
Company) to their respective employees in connection with the 415 Offerings.
The shares of Class A Common Stock underlying each such employee stock bonus
award will be issued to the employee recipient at a rate of 25% per year
commencing one year following the date of the award, provided the employee
recipient is still employed by NSI or one of its affiliates (other than the
Company). The Company also intends to issue shares of Class A Common Stock
to its employees in connection with employee stock bonus awards to be made to
the Company's employees on the same terms as described above pursuant to the
Nu Skin Asia Pacific, Inc. 1996 Stock Incentive Plan.
The Distributor Options, the shares of Class A Common Stock underlying the
Distributor Options and the employee stock bonus awards are included in this
Prospectus pursuant to Rule 415 under the 1933 Act. The Distributor Options
will be issued pursuant to this Prospectus upon the grant of the Distributor
Options. The shares of Class A Common Stock will be distributed upon exercise
of the Distributor Options and upon grant of the employee stock bonus awards.
See "Rule 415 Selling Stockholders."
This Prospectus may be used from time to time by the holders who offer the
securities registered hereby pursuant to Rule 415 under the 1933 Act for sale
in connection with the Distributor Options and underlying Class A Common
Stock, the employee stock bonus awards or in transactions in which they are or
may be deemed to be underwriters within the meaning of the 1933 Act. The Class
A Common Stock may be sold from time to time directly by the holders or
pledgees, donees, transferees or other successors in interest. Alternatively,
the Class A Common Stock may be offered from time to time by the holders to or
through brokers or dealers who may act solely as agents, or may acquire shares
as principals. The distribution of the Class A Common Stock may be effected in
one or more transactions that may take place on the New York Stock Exchange,
including block trades, ordinary broker's transactions, privately negotiated
transactions or through sales to one or more broker/dealers for resale of such
securities as principals, at market prices prevailing at the time of sale, at
prices related to such prevailing market prices or at negotiated prices. Usual
and customary or specifically negotiated brokerage fees or commissions may be
paid by these holders in connection with such sales. In connection with such
sales, the holders and any participating brokers or dealers may be deemed
"underwriters" as such term is defined in the 1933 Act. The Company has agreed
to bear, except as hereinafter set forth, all expenses (other than
underwriting discounts and selling commissions, state and local transfer
taxes, and fees and expenses of counsel or other advisors to the Selling
Stockholders) in connection with the registration of the offered securities.
The Registration Statement of which this Prospectus forms a part must be
current at any time during which a Selling Stockholder sells Class A Common
Stock.
[ALTERNATE PAGE FOR RULE 415]
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO OTHER DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN
THE PROSPECTUS, IN CONNECTION WITH THE OFFERING DESCRIBED HEREIN, AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE CLASS A
COMMON STOCK IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
AN IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN
THIS PROSPECTUS OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
---------------
TABLE OF CONTENTS
PAGE
----
Prospectus Summary.......................................................
Risk Factors.............................................................
The Reorganization and S Corporation Distribution........................
Use of Proceeds..........................................................
Dividend Policy..........................................................
Capitalization...........................................................
Dilution.................................................................
Selected Combined Financial and other Information........................
Management's Discussion and Analysis of Financial Condition and Results
of Operations...........................................................
Business.................................................................
Management...............................................................
Certain Relationships and Related Transactions...........................
Rule 415 Selling Stockholders............................................
Shares Eligible for Future Sale..........................................
Plan of Distribution.....................................................
Description of Capital Stock.............................................
Certain United States Tax Consequences to Non-United States Holders......
Underwriting.............................................................
Legal Matters............................................................
Experts..................................................................
Additional Information...................................................
Index to Financial Statements............................................
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
OPTIONS
SHARES
[LOGO]
NU SKIN ASIA PACIFIC, INC.
OPTIONS TO PURCHASE
CLASS A COMMON STOCK
CLASS A COMMON STOCK
---------------
PROSPECTUS
---------------
, 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The estimated expenses of the issuance and distribution, all of which are
payable by the Registrant, are as follows.
SEC Registration Fee............................................. $64,403.10
NASD Fee......................................................... 19,176.90
Stock Exchange Listing........................................... *
Printing and Engraving........................................... *
Accounting Fees and Expenses..................................... *
Legal Fees and Expenses.......................................... *
Blue Sky Fees and Expenses....................................... *
Transfer Agent's Fees and Expenses............................... *
Miscellaneous Expenses........................................... *
----------
Total........................................................ $2,250,000
==========
- --------
*To be supplied by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article 10 of the Company's Certificate of Incorporation and Article 5 of
the Company's Bylaws require indemnification to the fullest extent permitted
by Section 145 of DGCL. Section 145 of the DGCL provides that a corporation
may indemnify directors and officers as well as other employees and
individuals against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred in connection with
specified actions, suits or proceedings, whether civil, criminal,
administrative, or investigative (other than action by or in the right of the
corporation a "derivative action"), if they acted in good faith and in a
manner they reasonably believed to be in or not opposed to the best interests
of the corporation and, with respect to any criminal action or proceeding, had
no reasonable cause to believe their conduct was unlawful. A similar standard
is applicable in the case of derivative actions, except that indemnification
only extends to expenses (including attorneys' fees) incurred in connection
with the defense or settlement of such actions, and the statute requires court
approval before there can be any indemnification where the person seeking
indemnification has been found liable to the corporation. Indemnification
provided by or granted pursuant to Section 145 of the DGCL is not exclusive of
other indemnification that may be granted by a corporation's bylaws, any
agreement, any vote of stockholders or disinterested directors or otherwise.
Article 5 of the Company's Bylaws provides for indemnification consistent with
the requirements of Section 145 of the DGCL. Reference is made to Exhibits 3.1
and 3.2 to this Registration Statement for the complete text of, respectively,
Article 10 of the Company's Certificate of Incorporation and Article 5 of the
Company's Bylaws.
Section 145 of the DGCL also permits a corporation to purchase and maintain
insurance on behalf of directors and officers. Article 10 of the Certificate
of Incorporation and Article 5 of the Company's Bylaws permits it to purchase
such insurance on behalf of its directors and officers.
Article 7 of the Company's Certificate of Incorporation provides for, to the
fullest extent permitted by the DGCL, elimination or limitation of liability
of directors to the Company or its stockholders for breach of fiduciary duty
as a director. Section 102(b)(7) of the DGCL permits a corporation to provide
in its certificate of incorporation that a director of the corporation shall
not be personally liable to the corporation or its stockholders for monetary
damages for breach of fiduciary duties as a director, except for liability (i)
for any breach of a
II-1
director's duty of loyalty to the corporation or its stockholders; (ii) for
acts or omissions not in good faith or which involve international misconduct
or a knowing violation of law; (iii) for improper payment of dividends or
redemptions of shares; or (iv) for any transaction from which the director
derives an improper personal benefit. Reference is made to Exhibit 3.1 to this
Registration Statement for the complete text of Article 7 of the Company's
Certificate of Incorporation.
Reference is made to the form of Underwriting Agreement filed as Exhibit 1.1
to this Registration Statement which provides for the indemnification of the
directors and officers of the Company signing this Registration Statement and
certain controlling persons of the Company against certain liabilities,
including those arising under the 1933 Act, in certain instances by the
Underwriters.
Prior to the consummation of the Offerings, the Company intends to enter
into separate indemnification agreements with each of its directors and
executive officers in order to effectuate the provisions of Article 10 of the
Company's Certificate of Incorporation and Article 5 of the Company's Bylaws.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Pursuant to the Reorganization, prior to the Offerings, the shareholders of
Nu Skin Japan, Nu Skin Korea, Nu Skin Taiwan, Nu Skin Hong Kong and Nu Skin
Thailand will contribute their shares of capital stock to the capital of the
Company in a transaction intended to qualify under Section 351 of the Code in
exchange for shares of the Company's Class B Common Stock. This sale is exempt
from registration under Section 4(2) of the 1933 Act. Prior to the
Reorganization, all of the outstanding shares of capital stock of the
Subsidiaries were held by the Selling Stockholders. The Reorganization will
result in each of the Subsidiaries becoming a wholly-owned subsidiary of the
Company.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES.
(a) Exhibits
**1.1 Form of U.S. Underwriting Agreement
**1.2 Form of Japanese Underwriting Agreement
**1.3 Form of International Underwriting Agreement
2.1 Form of Contribution Agreement
*3.1 Amended and Restated Certificate of Incorporation of the Company
*3.2 Amended and Restated Bylaws of the Company
*4.1 Specimen Form of Stock Certificate for Class A Common Stock
*4.2 Specimen Form of Stock Certificate for Class B Common Stock
**5.1 Opinion of LeBoeuf, Lamb, Greene & MacRae, L.L.P. regarding legality
of the securities covered by this Registration Statement
*10.1 Form of Indemnification Agreement to be entered into by and among the
Company and certain of its officers and directors
*10.2 Form of Stockholders' Agreement by and among the initial stockholders
of the Company
*10.3 Employment Contract, dated December 12, 1991, by and between Nu Skin
Taiwan and John Chou
*10.4 Employment Agreement, dated May 1, 1993, by and between Nu Skin Japan
and Takashi Bamba
*10.5 Service Agreement, dated January 1, 1996, by and between Nu Skin Korea
and Sung-Tae Han
*10.6 Form of Purchase and Sale Agreement between Nu Skin Hong Kong and NSI
+*10.7 Form of Licensing and Sales Agreement between NSI and each Subsidiary
(other than Nu Skin Korea)
*10.8 Form of Regional Distribution Agreement between NSI and Nu Skin Hong
Kong
*10.9 Form of Wholesale Distribution Agreement between NSI and each
Subsidiary (other than Nu Skin Hong Kong)
*10.10 Form of Trademark/Tradename License Agreement between NSI and each
Subsidiary
*10.11 Form of Management Services Agreement between NSIMG and each
Subsidiary
+*10.12 Form of Licensing and Sales Agreement between NSI and Nu Skin Korea
II-2
*10.13 Form of Independent Distributor Agreement by and between NSI and
Independent Distributors in Hong Kong/Macau
*10.14 Form of Independent Distributor Agreement by and between NSI and
Independent Distributors in Japan
*10.15 Form of Independent Distributor Agreement by and between NSI and
Independent Distributors in South Korea
*10.16 Form of Independent Distributor Agreement by and between NSI and
Independent Distributors in Taiwan
*10.17 Nu Skin Asia Pacific, Inc. 1996 Stock Incentive Plan
**10.18 Form of Bonus Incentive Plan for Subsidiary Presidents
**10.19 Option Agreement by and between the Company and M. Truman Hunt
*10.20 Form of Mutual Indemnification Agreement by and between the Company
and NSI
**10.21 Manufacturing Sublicense Agreement, dated July 27, 1995, by and
between NSI and Nu Skin Japan
**10.22 Option Agreement by and between the Company and NSI.
**11.1 Statement Regarding Computation of Shares by Price Waterhouse LLP
21.1 Subsidiaries of the Company
23.1 Consent of Price Waterhouse LLP, independent certified public
accountants
23.2 Consent of Price Waterhouse LLP, independent certified public
accountants
*23.3 Report of Grant Thornton, independent certified public accountants
23.4 Consent of Grant Thornton, independent certified public accountants
**23.5 Consent of LeBoeuf, Lamb, Greene & MacRae, L.L.P. (contained in their
Opinion filed as exhibit 5.1)
*24 Power of Attorney (included with the signatures in Part II of this
Registration Statement)
- --------
*Previously filed.
**To be filed by amendment.
+ Confidential treatment has been requested. The copy filed as an exhibit
omits the information subject to the confidentiality request.
ITEM 17. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement;
(i) To include any prospectus required by Section 10(a)(3) of the
1933 Act;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high and of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in
the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement;
(2) That, for the purpose of determining any liability under the 1933
Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
II-3
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreements, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
(b) Insofar as indemnification for liabilities arising under the 1933 Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the 1933 Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the
Registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with
the securities being registered, the Registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction on the question whether such indemnification
by it is against public policy as expressed in the 1933 Act and will be
governed by the final adjudication of such issue.
(c) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the 1933 Act, the
information omitted from the form of prospectus filed as a part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rules 424(b)(1) or (4) or
497(h) under the 1933 Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the 1933 Act, each
post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
II-4
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 1 to the Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in
the City of Provo, State of Utah on September 30, 1996.
NU SKIN ASIA PACIFIC, INC.
By: /s/ Steven J. Lund
___________________________
Steven J. Lund
President and Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 1 to the Registration Statement has been signed below on
September 30, 1996 by the following persons in the capacities indicated.
SIGNATURE TITLE DATE
Chairman of the
* Board of Directors September 30,
- ------------------------------------ 1996
Blake M. Roney
President and Chief
/s/ Steven J. Lund Executive Officer September 30,
- ------------------------------------ and Director 1996
Steven J. Lund (Principal Executive
Officer)
Vice President
* Finance (Principal September 30,
- ------------------------------------ Financial and 1996
Corey B. Lindley Accounting Officer)
* Director September 30,
- ------------------------------------ 1996
Sandie N. Tillotson
* Director September 30,
- ------------------------------------ 1996
Keith R. Halls
* Director September 30,
- ------------------------------------ 1996
Brooke B. Roney
* Director September 30,
- ------------------------------------ 1996
Kirk V. Roney
II-5
SIGNATURE TITLE DATE
* Director September 30,
- ------------------------------------- 1996
Max E. Esplin
* Director September 30,
- ------------------------------------- 1996
Max L. Pinegar
*By: /s/ Steven J. Lund
___________________________
Steven J. Lund asattorney-in-fact
for each of the persons indicated
II-6
INDEX TO EXHIBITS
PAGINATION
BY
SEQUENTIAL
EXHIBIT NUMBERING
NUMBER EXHIBIT DESCRIPTION SYSTEM
------- ------------------- ----------
**1.1 Form of U.S. Underwriting Agreement
**1.2 Form of Japanese Underwriting Agreement
**1.3 Form of International Underwriting Agreement
2.1 Form of Contribution Agreement
*3.1 Amended and Restated Certificate of Incorporation of the
Company
*3.2 Amended and Restated Bylaws of the Company
*4.1 Specimen Form of Stock Certificate for Class A Common
Stock
*4.2 Specimen Form of Stock Certificate for Class B Common
Stock
**5.1 Opinion of LeBoeuf, Lamb, Greene & MacRae, L.L.P.
regarding legality of the securities covered by this
Registration Statement
*10.1 Form of Indemnification Agreement to be entered into by
and among the Company and certain of its officers and
directors
*10.2 Form of Stockholders' Agreement by and among the initial
stockholders of the Company
*10.3 Employment Contract, dated December 12, 1991, by and
between Nu Skin Taiwan and John Chou
*10.4 Employment Agreement, dated May 1, 1993, by and between
Nu Skin Japan and Takashi Bamba
*10.5 Service Agreement, dated January 1, 1996, by and between
Nu Skin Korea and Sung-Tae Han
*10.6 Form of Purchase and Sale Agreement between Nu Skin Hong
Kong and NSI
+*10.7 Form of Licensing and Sales Agreement between NSI and
each Subsidiary (other than Nu Skin Korea)
*10.8 Form of Regional Distribution Agreement between NSI and
Nu Skin Hong Kong
*10.9 Form of Wholesale Distribution Agreement between NSI and
each Subsidiary (other than Nu Skin Hong Kong)
*10.10 Form of Trademark/Tradename License Agreement between NSI
and each Subsidiary
*10.11 Form of Management Services Agreement between NSIMG and
each Subsidiary
+*10.12 Form of Licensing and Sales Agreement between NSI and Nu
Skin Korea
*10.13 Form of Independent Distributor Agreement by and between
NSI and Independent Distributors in Hong Kong/Macau
*10.14 Form of Independent Distributor Agreement by and between
NSI and Independent Distributors in Japan
*10.15 Form of Independent Distributor Agreement by and between
NSI and Independent Distributors in South Korea
*10.16 Form of Independent Distributor Agreement by and between
NSI and Independent Distributors in Taiwan
*10.17 Nu Skin Asia Pacific, Inc. 1996 Stock Incentive Plan
**10.18 Form of Bonus Incentive Plan for Subsidiary Presidents
**10.19 Option Agreement, by and between the Company and M.
Truman Hunt
*10.20 Form of Mutual Indemnification Agreement by and between
the Company and NSI
**10.21 Manufacturing Sublicense Agreement, dated July 27, 1995,
by and between NSI and Nu Skin Japan
**10.22 Option Agreement by and between the Company and NSI
PAGINATION
BY
SEQUENTIAL
EXHIBIT NUMBERING
NUMBER EXHIBIT DESCRIPTION SYSTEM
------- ------------------- ----------
**11.1 Statement Regarding Computation of Shares by Price
Waterhouse LLP
21.1 Subsidiaries of the Company
23.1 Consent of Price Waterhouse LLP, independent certified
public accountants
23.2 Consent of Price Waterhouse LLP, independent certified
public accountants
*23.3 Report of Grant Thornton, independent certified public
accountants
23.4 Consent of Grant Thornton, independent certified public
accountants
**23.5 Consent of LeBoeuf, Lamb, Greene & MacRae, L.L.P.
(contained in their Opinion filed as exhibit 5.1)
*24 Power of Attorney (included with the signatures in Part
II of this Registration Statement)
- --------
*Previously Filed.
**To be filed by amendment.
+ Confidential treatment has been requested. The copy filed as an exhibit omits
the information subject to the confidentiality request.
EXHIBIT 2.1
FORM OF CONTRIBUTION AGREEMENT
================================================================================
CONTRIBUTION AGREEMENT
by and among
NU SKIN ASIA PACIFIC, INC.
and
EACH OF THE PERSONS LISTED ON THE SIGNATURE PAGES HEREOF
Dated ___________, 1996
================================================================================
TABLE OF CONTENTS
Page
----
ARTICLE I DEFINITIONS................................................. 2
ARTICLE II CONTRIBUTION OF THE ASIAN ENTITY SHARES AND SUBSCRIPTION AND
PURCHASE OF THE HOLDING COMPANY SHARES...................... 3
2.1 Contribution of the Asian Entity Shares and Subscription and Purchase
of the Holding Company Shares...................................... 3
2.2 Closing.............................................................. 3
2.3 Delivery of Holding Company Shares................................... 4
2.4 Delivery of Asian Entity Shares...................................... 4
ARTICLE III TAX TREATMENT OF THE CONTRIBUTION........................... 4
3.1 Federal Income Tax Treatment of Contributing Stockholders and IPO
Public Stockholders................................................ 4
3.2 Federal Income Tax Treatment of the Holding Company and Asian
Entities........................................................... 5
3.3 Obligations of the Holding Company, Contributing Stockholders and
IPO Public Stockholders............................................ 5
3.4 Termination of "S" Corporation Status................................ 5
ARTICLE IV REPRESENTATIONS AND WARRANTIES.............................. 5
4.1 Representations and Warranties of Contributing Stockholders.......... 5
4.1.1 Title to Shares............................................. 5
4.1.2 Conflicts, Consents, etc.................................... 6
4.1.3 Intent to Transfer.......................................... 6
4.1.4 Not an Investment Company................................... 6
4.2 Representations and Warranties of the Holding Company................ 6
ARTICLE V CONDITIONS PRECEDENT........................................ 7
5.1 Conditions to Obligations of Contributing Stockholders and the
Holding Company.................................................... 7
5.1.1 Representations and Performance by the Contributing
Stockholders................................................ 7
5.1.2 No Injunction, etc.......................................... 7
5.1.3 IPO......................................................... 7
ARTICLE VI MISCELLANEOUS............................................... 7
6.1 Stock Transfer Taxes................................................. 7
6.2 Modification; Waiver................................................. 7
6.3 Further Actions...................................................... 8
6.4 Notices.............................................................. 8
6.5 Assignment........................................................... 8
6.6 Counterparts......................................................... 8
6.7 Governing Law........................................................ 8
CONTRIBUTION AGREEMENT, dated ____________, 1996 (this "Agreement"),
by and among Nu Skin Asia Pacific, Inc., a Delaware corporation (the "Holding
Company"), and each of the persons listed on the signature pages hereof
(collectively, the "Contributing Stockholders").
W I T N E S S E T H:
-------------------
WHEREAS, the Contributing Stockholders are, as of the date of this
Agreement, the record and beneficial owners of all of the issued and outstanding
shares of capital stock of each of Nu Skin Hong Kong, Inc., a corporation
organized under the laws of the State of Utah, Nu Skin Japan, Inc., a
corporation organized under the laws of Japan and the State of Delaware, Nu Skin
Korea, Inc. a corporation organized under the laws of South Korea and the State
of Delaware, Nu Skin Taiwan, Inc., a corporation organized under the laws of the
State of Utah and Nu Skin Thailand, Inc., a corporation organized under the laws
of the State of Utah (each, an "Asian Entity" and collectively, the "Asian
Entities") as listed in Schedule A hereto for each Contribution Stockholder;
WHEREAS, the aggregate number of shares of common stock issued and
outstanding of each Asian Entity (collectively, the "Asian Entity Shares") are
as listed in Schedule A hereto;
WHEREAS, the Holding Company was incorporated to become the holding
company for the Asian Entities;
WHEREAS, the Contributing Stockholders wish to contribute the Asian
Entity Shares to the Holding Company solely in exchange for shares of Class B
common stock, par value $.001 per share, of the Holding Company ("Class B Common
Stock"), to effect such holding company structure (the "Contribution");
WHEREAS, immediately after the Contribution, the Contributing
Stockholders will own all of the issued and outstanding shares of Class B Common
Stock of the Holding Company;
WHEREAS, substantially simultaneously with the Contribution, the
Holding Company plans to offer and sell shares of Class A common stock, par
value $.001 per share of the Holding Company ("Class A Common Stock") to the
public through an initial public offering pursuant to an effective registration
statement on Form S-1 (the "IPO") subsequent to the Contribution, which will
constitute a qualified underwriting transaction within the meaning of Treas.
Reg. Section 1.351-1(a)(3); and
WHEREAS, immediately after the Contribution and the IPO, the
Contributing Stockholders and the Persons purchasing Class A common stock
pursuant to the IPO (the "IPO Public Stockholders") will be treated as a group
being in control of the Holding Company for purposes of Section 351 of the Code;
NOW, THEREFORE, in consideration of the premises and the
representations, warranties and agreements herein contained, the parties hereto
agree as follows:
ARTICLE I
DEFINITIONS
As used herein and in the Schedules hereto, the terms set forth in
this Article I have the respective meanings indicated. Terms defined in the
singular or plural, as the case may be, shall have the same respective meaning
when used in the plural or singular, as the case may be.
Asian Entities: the meaning specified in the first WHEREAS clause of
--------------
this Agreement.
Asian Entity Shares: the meaning specified in the second WHEREAS
-------------------
clause of this Agreement.
Class A Common Stock: the meaning specified in the sixth WHEREAS
--------------------
clause of this Agreement.
Class B Common Stock: the meaning specified in the fourth WHEREAS
--------------------
clause of this Agreement.
Closing: the meaning specified in Section 2.2.
-------
Closing Date: the meaning specified in Section 2.2.
------------
Code: the Internal Revenue Code of 1986, as amended.
----
Commission: the U.S. Securities and Exchange Commission.
----------
Consents: the meaning specified in Section 4.1.2(b).
--------
Contributing Stockholder: the meaning specified in the introductory
------------------------
paragraph of this Agreement.
Contribution: the meaning specified in the fourth WHEREAS clause of
------------
this Agreement.
Control: the ownership of stock possessing at least 80 percent of the
-------
total combined voting power of all classes of stock entitled to vote and at
least 80 percent of the total number of shares of all other classes of the
corporation.
-2-
Holding Company Shares: the Class B Common Stock issued and delivered
----------------------
to the Contributing Stockholders pursuant to this Agreement.
IPO: the meaning specified in the sixth WHEREAS clause of this
---
Agreement.
IPO Public Stockholders: the meaning specified in the seventh WHEREAS
-----------------------
clause of this Agreement.
Lien: the meaning specified in Section 4.1.7.
----
Person: any individual, corporation, partnership, firm, joint
------
venture, unincorporated organization, governmental or regulatory authority or
other entity.
Securities Act: the Securities Act of 1933, as amended.
--------------
ARTICLE II
CONTRIBUTION OF THE ASIAN ENTITY SHARES
AND SUBSCRIPTION AND PURCHASE
OF THE HOLDING COMPANY SHARES
Section 2.1 Contribution of the Asian Entity Shares and Subscription
--------------------------------------------------------
and Purchase of the Holding Company Shares. Subject to all of the terms and
- ------------------------------------------
conditions of this Agreement and in reliance upon the representations and
warranties contained herein, at the Closing provided for in Section 2.2, (i)
each Contributing Stockholder agrees to contribute and transfer, and the Holding
Company agrees to acquire, the number of Asian Entity Shares as set forth
opposite such Contributing Stockholder's name on Schedule A hereto under the
heading "Asian Entity Shares to be Contributed" and (ii) each Contributing
Stockholder agrees to subscribe for and purchase, and the Holding Company agrees
to issue, the number of Holding Company Shares set forth opposite such
Contributing Stockholder's name on Schedule A hereto under the heading "Holding
Company Shares to be Received." The Holding Company shall deliver to each
Contributing Stockholder the certificates for Holding Company Shares as provided
in Section 2.3 and each Contributing Stockholder shall deliver to the Holding
Company certificates for its Asian Entity Shares as provided in Section 2.4.
Section 2.2 Closing. (a) The Closing of the purchase and sale of the
-------
Holding Company Shares contemplated hereby (the "Closing") shall be held at a
time and location to be designated by the Holding Company on the Closing Date.
The "Closing Date" shall be, if the conditions set forth in Article VI have been
satisfied or waived, (i) the date on which the IPO closes or (ii) such other
date prior to the closing of the IPO as the Contributing Stockholders and the
Holding Company shall mutually agree. The Closing shall be deemed to have
occurred at 12:01 a.m., New York time, on the Closing Date.
-3-
(b) Anything contained in this Agreement to the contrary
notwithstanding, this Agreement may be terminated at any time prior to the
Closing Date:
(i) by the mutual written consent of the Holding Company and each
of the Contributing Stockholders; or
(ii) by the Holding Company if the Closing has not occurred on or
before February 15, 1997.
In the event this Agreement shall be terminated pursuant to this
Section 2.2(b), all further obligations of the parties under this Agreement
(other than Section 6.7) shall terminate without further liability of any party
to this Agreement; provided, however, that nothing herein shall relieve any
-------- -------
party from liability for its willful breach of this Agreement.
Section 2.3 Delivery of Holding Company Shares. At the Closing, the
----------------------------------
Holding Company shall deliver to each Contributing Stockholder, against delivery
of certificates for the Asian Entity Shares to be delivered to the Holding
Company by such Contributing Stockholder hereunder, stock certificates
registered in the name of such Contributing Stockholder and representing the
Holding Company Shares to be issued to such Contributing Stockholder, which
certificates shall bear such legends as are determined to be appropriate by
counsel to the Holding Company.
Section 2.4 Delivery of Asian Entity Shares. At the Closing, each
-------------------------------
Contributing Stockholder shall deliver to the Holding Company, against delivery
of certificates for the Holding Company Shares to be delivered to such
Contributing Stockholder by the Holding Company hereunder, stock certificates
representing the number of Asian Entity Shares as set forth opposite such
Contributing Stockholder's name on Schedule A hereto under the heading "Asian
Entity Shares to be Contributed," duly endorsed in proper form for transfer and
with such other instruments as shall reasonably be required by the Holding
Company to vest fully in the Holding Company all right, title and interest in
and to such Asian Entity Shares free and clear of any Liens.
ARTICLE III
TAX TREATMENT OF THE CONTRIBUTION
Section 3.1 Federal Income Tax Treatment of Contributing Stockholders
---------------------------------------------------------
and IPO Public Stockholders. For Federal income tax purposes, the Contribution
- ---------------------------
and the IPO shall be treated as part of a single integrated transaction
qualifying under Section 351 of the Code, pursuant to which neither the
Contributing Stockholders nor the IPO Public Stockholders acquiring their shares
of Class A Common Stock through the IPO will recognize any gain or loss. Under
Section 358 of the Code, the basis in the Class B Common Stock received by the
Contributing Stockholders will be equal to their basis in the stock of the Asian
Entities contributed to the Holding Company, and the basis of the Class A
-4-
Common Stock in the hands of the IPO Public Stockholders will be the same as the
price paid pursuant to the IPO.
Section 3.2 Federal Income Tax Treatment of the Holding Company and
-------------------------------------------------------
Asian Entities. Neither the Holding Company nor the Asian Entities shall
- --------------
recognize any gain or loss as a result of the Contribution and IPO. No
liabilities will be assumed by the Holding Company under Section 357 of the
Code. The basis of the property transferred to the Holding Company shall be
equal to the basis of such property in the hands of the Contributing
Stockholders and the IPO Public Stockholders immediately prior to the transfer
to the Holding Company.
Section 3.3 Obligations of the Holding Company, Contributing
------------------------------------------------
Stockholders and IPO Public Stockholders. The Contributing Stockholders and the
- ----------------------------------------
IPO Public Stockholders agree to file the information required by Treas. Reg.
Section 1.351-3 for his Federal income tax return for the taxable year in which
the Contribution and IPO occur, and the Holding Company agrees to furnish to
each Contributing Stockholder and each IPO Public Stockholder information
necessary to enable such stockholder to comply with the information reporting
requirements of Treas. Reg. Section 1.351-3.
Section 3.4 Termination of "S" Corporation Status. As a result of
-------------------------------------
the Contribution, the Asian Entities will cease to qualify as "S" corporations
within the meaning of Section 1361(a) of the Code and will become "C"
corporations within the meaning of Section 1361(a)(2) of the Code, which will
join in filing consolidated Federal income tax returns with the Holding Company
as the common parent.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
Section 4.1 Representations and Warranties of Contributing
----------------------------------------------
Stockholders. Each Contributing Stockholder, severally and not jointly,
- ------------
represents and warrants to, and acknowledges and agrees with, the Holding
Company as follows:
Section 4.1.1 Title to Shares. As of the date hereof, such
---------------
Contributing Stockholder is, and as of the Closing Date such Contributing
Stockholder shall be, the record and beneficial owner of and have good and valid
title to the Asian Entity Shares identified on Schedule A hereto as being owned
by such Contributing Stockholder, free and clear of any lien, pledge, charge,
security interest, encumbrance, option or other right or claim with respect
thereto (collectively, "Liens"), except for Liens created by virtue of entering
into this Agreement. Upon the exchange of the Asian Entity Shares for the
Holding Company Shares, such Contributing Stockholder shall transfer to the
Holding Company good and valid title to such Asian Entity Shares, free and clear
of any Lien.
-5-
Section 4.1.2 Conflicts, Consents, etc. (a) Conflicts. The
------------------------- ---------
execution and delivery of this Agreement by such Contributing Stockholder, and
the consummation by such Contributing Stockholder of the transactions
contemplated hereby in the manner contemplated hereby, will not conflict with,
require any consent or other action by any Person under or result in any
violation of, or default under (or any event that, with notice or lapse of time
or both, would constitute a default under) or give rise to any right of
termination, cancellation or acceleration under any provision of (i) any
mortgage, indenture, loan agreement, note, bond, deed of trust, other agreement,
commitment or obligation for the borrowing of money or the obtaining of credit,
lease or other agreement, contract, license, franchise, permit or instrument to
which such Contributing Stockholder is a party or by which it is bound or (ii)
any judgment, order, decree, law, statute, rule or regulation applicable to such
Contributing Stockholder.
(b) Consents. No consent, waiver, approval, authorization, permit,
--------
order, filing, registration or qualification of or with any court, governmental
authority or third party (collectively, "Consents") is required to be obtained
or made by such Contributing Stockholder in connection with the execution and
delivery of this Agreement by such Contributing Stockholder or the consummation
by such Contributing Stockholder of the transactions contemplated hereby in the
manner contemplated hereby.
Section 4.1.3 Intent to Transfer. No Contributing Stockholder has
------------------
any intention or plan, formally or informally, on the date hereof, to transfer
any shares of the Holding Company received in exchange for the Contribution,
except for the establishment of the stock option plans pursuant to which
approximately 4 million shares of Class A Common Stock will be transferred by
the Contributing Stockholders to the Holding Company and Nu Skin International,
Inc.
Section 4.1.4 Not an Investment Company. None of the Asian Entities
-------------------------
is an investment company within the meaning of Section 351(e) of the Code and
the Treasury regulations promulgated thereunder.
Section 4.2 Representations and Warranties of the Holding Company.
-----------------------------------------------------
The Holding Company represents and warrants that it is not an investment company
within the meaning of Section 351(e) of the Code and Treasury regulations
promulgated thereunder and that it has no current plan or intention to dispose
of any of the assets contributed to it by the Contributing Stockholders and the
IPO Public Stockholders and intends to cause the Asian Entities to carry on
their active trade or businesses. No liabilities will be assumed by the Holding
Company as part of the Contribution or IPO.
-6-
ARTICLE V
CONDITIONS PRECEDENT
Section 5.1 Conditions to Obligations of Contributing Stockholders
------------------------------------------------------
and the Holding Company. The obligations of each Contributing Stockholder and
- -----------------------
of the Holding Company, as the case may be, under this Agreement to consummate
the transactions contemplated hereby is subject to the fulfillment, at or prior
to the Closing, of the following conditions, any one or more of which may be
waived by such Contributing Stockholder or the Holding Company, as the case may
be, at its sole discretion:
Section 5.1.1 Representations and Performance by the Contributing
---------------------------------------------------
Stockholders. The representations and warranties of each Contributing
- -------------
Stockholder contained in Section 4.1 shall be true and correct as of the date
made and as of the Closing Date as though made at and as of the Closing Date or
as of the date specified therein as though made at and as of such date.
Contributing Stockholders shall have duly performed and complied in all material
respects with all agreements, covenants and conditions required by this
Agreement to be performed or complied with by Contributing Stockholders prior to
or at the Closing.
Section 5.1.2 No Injunction, etc. No injunction, judgment or
-------------------
provision of applicable law or regulation or other order restraining or
prohibiting the consummation of the transactions contemplated by this Agreement
or seeking to prohibit, alter, prevent or materially delay the Closing, shall be
threatened or pending or in effect.
Section 5.1.3 IPO. A registration statement on Form S-1 for the IPO
---
shall have been declared effective by the Commission and the Holding Company and
the underwriters of the IPO shall have agreed on the terms of pricing.
ARTICLE VI
MISCELLANEOUS
Section 6.1 Stock Transfer Taxes. All stock, stamp, transfer
--------------------
registration or similar taxes or duties, if any, resulting from (i) the transfer
of the Holding Company Shares shall be paid by the Holding Company and (ii)
resulting from the transfer of the Asian Entity Shares shall be paid by the
Contributing Stockholders.
Section 6.2 Modification; Waiver. This Agreement may be modified
--------------------
only by a written instrument executed by the parties to this Agreement. Any of
the terms and conditions of this Agreement may be waived in writing at any time
on or prior to the Closing Date by the party entitled to the benefits of such
terms and conditions.
-7-
Section 6.3 Further Actions. Each party shall execute and deliver
---------------
such certificates and other documents and take such other actions as may
reasonably be requested by the other parties in order to consummate or implement
the transactions contemplated by this Agreement.
Section 6.4 Notices. All notices, requests, demands and other
-------
communications under this Agreement shall be in writing and shall be deemed to
have been duly given if delivered, telecopied or mailed, certified or registered
mail, first-class postage paid, return receipt requested, or any other delivery
service with proof of delivery:
if to the Holding Company:
Nu Skin Asia Pacific, Inc.
75 West Center Street
Provo, UT 84601
Attention: Steven J. Lund, President
with a copy to:
LeBoeuf, Lamb, Greene & MacRae, L.L.P.
136 South Main Street
Salt Lake City, UT 84101-1685
Attention: Nolan S. Taylor, Esq.
If to Contributing Stockholders, at their respective addresses set
forth on Schedule A.
or to such other address or to such other person as any party shall have last
designated by notice to the other parties.
Section 6.5 Assignment. This Agreement shall be binding upon and
----------
inure to the benefit of the parties and their respective successors and
permitted assigns, but shall not be assignable, by operation of law or
otherwise, by any party without the prior written consent of the other parties.
Section 6.6 Counterparts. This Agreement may be executed in
------------
counterparts, all of which shall constitute one and the same instrument.
Section 6.7 Governing Law. This Agreement shall be governed by and
-------------
construed in accordance with the internal laws of the State of Utah applicable
to agreements made and to be performed entirely within such State, without
regard to the conflicts of law principles of such State except that, to the
extent applicable, all matters relating specifically to the Holding Company
Shares shall be governed by the laws of Delaware.
-8-
IN WITNESS WHEREOF, this Agreement has been signed by each of the
parties hereto as of the date first above written.
NU SKIN ASIA PACIFIC, INC.
CONTRIBUTING STOCKHOLDERS
By:___________________________ ______________________________
Name: Blake M. Roney
Title:
______________________________
Nedra D. Roney
______________________________
Sandie N. Tillotson
______________________________
Craig S. Tillotson
______________________________
Craig Bryson
______________________________
Steven J. Lund
______________________________
Brooke B. Roney
______________________________
Kirk V. Roney
______________________________
Keith R. Halls
-9-
EXHIBIT 21.1
List of Subsidiaries
NU SKIN JAPAN COMPANY, LIMITED - a domesticated Delaware corporation with dual
residence in the United States and Japan.
NU SKIN TAIWAN, INC. - a Utah corporation operating in Taiwan through a
branch.
NU SKIN KOREA, INC. - a domesticated Delaware corporation with dual residence in
the United States and Japan.
NU SKIN HONG KONG, INC. - a Utah corporation operating in Hong Kong through a
branch.
NU SKIN PERSONAL CARE (THAILAND) LIMITED - a domesticated Delaware corporation
with dual residence in the United States and Thailand.
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement (Amendment No.1) on Form S-1 of our report dated
September 10, 1996 relating to the combined financial statements of Nu Skin Asia
Pacific, Inc., which appears in such Prospectus. We also consent to the
references to us under the headings "Experts" and "Selected Combined Financial
Information" in such Prospectus. However, it should be noted that Price
Waterhouse LLP has not prepared or certified such "Selected Combined Financial
Information".
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Salt Lake City, Utah
September 25, 1996
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement (Amendment No.1) on Form S-1 of our report dated
September 10, 1996 relating to the balance sheet of Nu Skin Asia Pacific, Inc.,
which appears in such Prospectus.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Salt Lake City, Utah
September 25, 1996
Exhibit 23.4
[LETTERHEAD OF GRANT THORNTON HONG KONG]
September 27, 1996
Board of Directors
Nu Skin Hong Kong, Inc.
Room 2503 Windsor House
311 Gloucester Road
Causeway Bay
Hong Kong
Gentlemen
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We refer to our audit report, dated April 14, 1994 on the financial statements
of Nu Skin Hong Kong, Inc. - Hong Kong Branch as of September 30, 1993 and for
the year then ended, except for notes 2 and 8 to these financial statements as
to which the date is August 30, 1996.
We consent to the use of the aforementioned report in the Registration Statement
(Amendment No.1) on Form S-1 (333-120730 and Prospectus of Nu-Skin Asia Pacific,
Inc.
Very truly yours
/s/ Grant Thornton
GRANT THORNTON
