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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
-----------------
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1996
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ______________ to ______________
Commission file number 333-12073
Nu Skin Asia Pacific, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 87-0565309
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
75 West Center Street, Provo, Utah 84601
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (801) 345-6100
-------------------------
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
Class A Common Stock New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
(Title of Class)
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No _____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. o
As of March 3, 1997, the aggregate market value of the voting stock held by
non-affiliates of the Company was $339,777,427.
As of March 3, 1997, 11,723,011 shares of the Company's Class A Common
Stock, $.001 par value per share, 71,696,675 shares of the Company's Class B
Common Stock, $.001 par value per share, and no shares of the Company's
Preferred Stock, $.001 par value per share, were outstanding.
NU SKIN ASIA PACIFIC, INC.
1996 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
Page
PART I ......................................................................1
ITEM 1. BUSINESS..................................................1
ITEM 2. PROPERTIES...............................................34
ITEM 3. LEGAL PROCEEDINGS........................................35
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......35
PART II .....................................................................36
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS......................................36
ITEM 6. SELECTED FINANCIAL DATA..................................37
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS......................39
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA..............47
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE......................47
PART III .....................................................................48
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.......48
ITEM 11. EXECUTIVE COMPENSATION...................................51
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT...............................................56
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...........59
PART IV .....................................................................62
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K.................................................62
PART I
ITEM 1. BUSINESS
General
Nu Skin Asia Pacific, Inc., a Delaware corporation founded in September
1996 (the "Company"), is a network marketing company involved in the
distribution and sale of personal care and nutritional products. The Company is
the exclusive distribution vehicle for Nu Skin International, Inc. ("NSI") in
the countries of Japan, Taiwan, Hong Kong (including Macau), South Korea and
Thailand, where the Company currently has operations, and in Indonesia,
Malaysia, the Philippines, the People's Republic of China ("PRC"), Indonesia,
Singapore and Vietnam, where operations have not yet commenced. The Company's
products are specifically designed for the network marketing distribution
channel. The Company markets its personal care products under the trademark "Nu
Skin" and its nutritional products 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, sports nutrition products and botanicals.
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 and Thailand, the Company currently offers one-third of
NSI's personal care products and none of the nutritional products. The Company
intends to expand its product offerings with existing NSI products and to
introduce new products tailored to specific markets.
The Company was incorporated on September 4, 1996. On November 20, 1996,
the stockholders of Nu Skin Japan Company, Limited ("Nu Skin Japan"), Nu Skin
Taiwan, Inc. ("Nu Skin Taiwan"), Nu Skin Hong Kong, Inc. ("Nu Skin Hong Kong"),
Nu Skin Korea, Inc. ("Nu Skin Korea") and Nu Skin Personal Care (Thailand), Inc.
("Nu Skin Thailand") contributed their shares of capital stock to the capital of
the Company in a transaction (the "Reorganization ") intended to qualify under
Section 351 of the Internal Revenue Code of 1986, as amended (the "Code"), in
exchange for shares of the Company's Class B Common Stock, par value $.001 per
share (the "Class B Common Stock"). Prior to the Reorganization, all of the
outstanding shares of such companies were held by these stockholders (the
"Original Stockholders"). As a result of the Reorganization, each of the
above-listed companies became a wholly-owned subsidiary of the Company.
In November 1996, the Company and certain selling stockholders sold a total
of 10,465,000 shares of the Company's Class A Common Stock, par value $.001 per
share (the "Class A Common Stock," and, together with the Class B Common Stock,
the "Common Stock "), in underwritten public offerings (the "Underwritten
Offerings"). The Company issued and sold 4,750,000 shares of Class A Common
Stock as part of this transaction. In December 1996, in non-underwritten
offerings (the "Rule 415 Offerings," and, together with the Underwritten
Offerings, the "Offerings") pursuant to Rule 415 of the Securities Act of 1933,
as amended (the "1933 Act"): (i) NSI offered to qualifying NSI distributors
options (the "Distributor Options") to purchase 1,605,000 shares of Class A
Common Stock; (ii) the Company offered 1,605,000 shares of Class A Common Stock
to be issued upon the exercise of the Distributor Options; (iii) the Company
offered to its employees 109,000 shares of Class A Common Stock in connection
with the awarding of employee stock bonus awards; and (iv) NSI and certain of
its affiliates offered 1,250,000 shares of Class A Common Stock to their
employees as stock bonus awards. The 1,605,000 shares of Class A Common Stock
underlying the Distributor Options are held by the Company for issuance upon the
exercise of the Distributor Options. The Distributor Options are expected to
become exercisable in January 1998 and will remain exercisable until December
31, 2001. In November and December 1996, the Company made stock bonus awards to
certain of its employees for an aggregate of 109,000 shares of Class A Common
Stock and in January 1997 the Company made additional stock bonus awards to
certain of its employees for an aggregate of 41,959 shares of Class A Common
Stock. The shares of Class A Common Stock underlying each of these stock bonus
awards will be issued to the recipient of the award at a rate of 25% per year
commencing in November, 1997, subject to certain restrictions. In January 1997,
the Company also issued and sold 8,011 shares of Class A Common Stock to three
foreign individuals pursuant to Regulation S under the 1933 Act. As of March 3,
1997, the Original Stockholders and certain of their affiliates beneficially
owned shares of Common Stock having approximately 98.4% of the combined voting
power of the outstanding shares of Common Stock.
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 continues to provide, a high level of support services to the
Company, including product development, marketing and other managerial support
services. Since distributor agreements are entered into between NSI and
distributors, all of the distributors who generate revenue for the Company are
distributors of NSI. Because of this fact, the Company cannot control who
becomes a distributor.
When used in this Annual Report on Form 10-K and in future filings by the
Company with the Securities and Exchange Commission (the "Commission"), in the
Company's press releases and in oral statements made with the approval of an
authorized executive officer, the words or phrases "will likely result,"
"expects," "intends," "will continue," "is anticipated," "estimates," "projects"
and similar expressions are intended to identify "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements include plans and objectives of management for future
operations, including plans and objectives relating to the products and the
future economic performance and financial results of the Company. The
forward-looking statements and associated risks set forth herein relate to: (i)
the expansion of the Company's market share in its current markets; (ii)
Company's entrance into new markets; (iii) development of new products and new
product lines tailored to appeal to the particular needs of consumers in
specific markets; (iv) stimulation of product sales by introducing new products;
(v) opening of new offices, walk-in distribution centers and distributor support
centers in certain markets; (vi) promotion of distributor growth, retention and
leadership through local initiatives; (vii) upgrading of the Company's
technological resources to support distributors; (viii) obtaining of regulatory
approvals for certain products, including LifePak; (ix) stimulation of product
purchases by inactive distributors through direct mail campaigns; and (x)
retention of the Company's earnings for use in the operation and expansion of
the Company's business. All forward-looking statements are subject to certain
risks and uncertainties, including those discussed under the caption "Certain
Business Considerations and Risk Factors" herein, that could cause actual
results to differ materially from historical earnings and those presently
anticipated or projected. The Company wishes to caution readers not to place
undue reliance on any such forward- looking statements, which speak only as of
the date made. The Company wishes to advise readers that the factors listed
under the caption "Certain Business Considerations and Risk Factors" could
affect the Company's financial performance and could cause the Company's actual
results for future periods to differ materially from any opinions or statements
expressed with respect to future periods in any current statements. Factors and
risks that might cause such differences include, but are not limited to,
factors related to the Company's reliance upon independent distributors of NSI,
the potential effects of adverse publicity, the potential negative impact of
distributor actions, government regulation of direct selling activities,
government regulation of products and marketing, other regulatory issues, the
Company's reliance on certain distributors, the potential divergence of
interests between distributors and the Company, the Company's entering new
markets, managing the Company's growth, the possible adverse effects on the
Company of a change in the status of Hong Kong, the Company's relationship with
and reliance on NSI, potential conflicts of interest between the Company and
NSI, control of the Company by the Original Stockholders, the anti-takeover
effects of dual classes of common stock, the adverse impact on the Company's
income of the Distributor Option program, the allocation and vesting of the
Distributor Options, the potential decrease in the number of Distributor
Options available, product returns, restrictions on the resale of the shares of
Class A Common Stock underlying the Distributor Options, regulatory and
taxation risks, the Company's reliance on and the concentration of outside
manufacturers, the Company's reliance on the operations of and dividends and
distributions from the Subsidiaries, taxation and transfer pricing, the
potential increase in distributor compensation expense, seasonal and cyclical
trends, variations in operating results, product liability issues, market
conditions and competition, the Company's operations outside the U.S., currency
risks, import restrictions, duties and regulation of consumer goods, the
anti-takeover effects of certain charter, contractual and statutory provisions,
dilution and the absence of Company dividends. In light of the significant
uncertainties inherent in forward-looking statements, the inclusion of any such
statement should not be regarded as a representation by the Company or any
other person that the objectives or plans of the Company will be achieved.
Unless otherwise noted, references to "Nu Skin Asia Pacific" or the
"Company" mean Nu Skin Asia Pacific, Inc., including the Subsidiaries. The
"Subsidiaries" means Nu Skin Japan, Nu Skin Taiwan, Nu Skin Hong Kong , Nu Skin
Korea and Nu Skin Thailand, collectively. Until September 30, 1994, the
Company's fiscal year ended on September 30 of each year. As of October 1, 1994,
the Company changed its fiscal year end to December 31 of each year, beginning
with the fiscal year ended December 31, 1995.
Nu Skin(R), Interior Design Nutritionals(TM), IDN(R), a logo consisting of
an image of a gold fountain with the words "Nu Skin" below it, and a logo
consisting of the stylized letters "IDN" in black and red are trademarks of NSI
which are licensed to the Company. The italicized product names used in this
Annual Report on Form 10-K are product names and also, in certain cases,
trademarks and are the property of NSI. All other tradenames and trademarks
appearing in this Annual Report on Form 10-K are the property of their
respective holders.
In this Annual Report on Form 10-K, references to "dollars" and "$" are to
United States dollars, and the terms "United States" and "U.S." mean the United
States of America, its states, territories, possessions and all areas subject to
its jurisdiction, and references to "yen" and the yen sign are to Japanese yen,
and references to "won" are to South Korean won.
Country Profiles
The following table sets forth the Company's revenue and the total number
of active distributors for each of the countries in which the Company operated
for the years ended December 31, 1994, 1995 and 1996. This table should be
reviewed in connection with the information presented under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," which discusses the costs associated with generating the aggregate
revenue presented.
Country Year Ended December 31,
1994 1995 1996
(dollars in thousands)
Revenue:
Japan................... $172,960 $231,540 $380,044
Taiwan.................. 79,219 105,415 154,564
South Korea(1).......... -- -- 122,337
Hong Kong............... 10,880 17,046 17,037
-------- -------- --------
Total(2).......... $263,059 $354,001 $673,982
======== ======== ========
Active Distributors(3)(4):
Japan................... 106,000 147,000 215,000
Taiwan.................. 53,000 75,000 91,000
South Korea(1).......... -- -- 57,000
Hong Kong............... 11,000 14,000 14,000
-------- -------- --------
Total............. 170,000 236,000 377,000
======== ======== ========
- ---------------------------
(1) The Company commenced operations in South Korea in February 1996.
(2) Operating expenses have increased with the growth of the Company's
revenue. However, as a percentage of revenue such expenses have
declined due to improved operating leverage. In addition, total revenue
does not include sales of certain products to NSI affiliates in
Australia and New Zealand of $1.4 million, $4.6 million and $4.6
million in 1994, 1995 and 1996, respectively.
(3) The term "Active Distributors" includes only those distributors who
purchased products from the Company during the three months ended as of
the date indicated.
(4) Numbers are rounded to the nearest thousand.
The following table sets forth certain estimated economic and demographic
data in each of the Company's markets. Although the Company believes that the
following table provides a useful basis for evaluating the relative size and
growth of the economies and populations of the countries in which the Company
operates, no assurance can be given that economic or population data in a
particular country will indicate what the Company's results of operations will
be in that country.
1995 Real GDP
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
Thailand...... 60.7 162.7 3,033 8.6
- ---------------------------
Source: World Information Services; Country Data Forecasts, March 1996.
Japan. The Company, through its subsidiary Nu Skin Japan, commenced
operations in Japan in April 1993. Network marketing activities and the sale of
the Company's products are subject to significant government regulation in
Japan. To date, the Company has experienced significant growth in Japan, where
revenue increased 34% in 1995 compared to 1994 and 64% in 1996 as compared to
1995. Nu Skin Japan currently offers 52 of the 89 NSI personal care products and
10 of the 36 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, (iii) continue to expand the current product
offerings in Japan to include additional NSI products, such as FibreNet and the
MHA Product System, which were recently introduced in Japan, and (iv) enhance
corporate support of distributors by upgrading information technology resources.
Taiwan. The Company, through its subsidiary Nu Skin Taiwan, commenced
operations in Taiwan in January 1992. The Taiwanese government regulates direct
selling activities to a significant extent. For example, the Taiwan government
recently enacted tax legislation aimed at ensuring proper tax payments by
distributors on their transactions with end consumers. Revenue growth in Taiwan
has averaged 59% on an annualized basis since 1993.
In support of the Company's growth strategy, Nu Skin Taiwan intends to (i)
capitalize on the size of the nutritional supplements market by promoting the
recently introduced LifePak product and expanding the current product offerings
in Taiwan to include additional NSI products, in particular FibreNet, which,
subject to regulatory approval, is scheduled for introduction in Taiwan by the
end of 1997, (ii) focus more resources on product development specifically for
the Taiwan market, and (iii) enhance corporate support of distributors by
upgrading information technology resources.
Hong Kong. The Company, through its subsidiary Nu Skin Hong Kong, commenced
operations in Hong Kong in September 1991. Nu Skin Hong Kong currently offers 81
of the 89 NSI personal care products and 13 of the 36 IDN products.
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. The Company's Macau office operates under the
direction of Nu Skin Hong Kong.
In support of the Company's growth strategy, Nu Skin Hong Kong intends to
(i) promote distributor growth, retention and leadership development through
local initiatives 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. Nu Skin Korea currently offers 34 of
the 89 NSI personal care products and none of the IDN products.
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.
Thailand. The Company, through its subsidiary Nu Skin Thailand, commenced
operations in Thailand on March 13, 1997. Nu Skin Thailand currently offers 26
of the 89 personal care products and none of the IDN products.
In Thailand, the Company intends to focus on establishing a stable
distributor base prior to implementing growth strategies through product line
enhancement.
New Market Opportunities
The Company has developed a low cost, disciplined approach to opening new
markets. Each market opening is preceded by a thorough analysis of economic and
political conditions, regulatory standards and other business, tax and legal
issues. Prior to a market opening, the Company's management team, in conjunction
with NSI support personnel, local legal counsel and tax advisors, works to
obtain all necessary regulatory approvals and establish facilities capable of
meeting distributor needs. This approach, combined with NSI's global distributor
compensation plan (the "Global Compensation Plan"), which motivates distributors
to sponsor and train other distributors to sell products in new markets, has
enabled the Company to quickly and successfully open new markets.
The Company, as a matter of policy, does not announce the timing of its
opening of new markets. The Company is the exclusive distributor of NSI products
in Indonesia, Malaysia, the Philippines, the PRC, Singapore and Vietnam. The
Company believes that these countries collectively represent significant markets
for future expansion. There are, however, significant risks and uncertainties
associated with this expansion. The regulatory and political climate in these
potential markets is such that a replication of the Company's current operating
structure cannot be guaranteed. For example, Malaysia has governmental
guidelines that have the effect of limiting foreign ownership of direct selling
companies operating in Malaysia to no more than 30%. In addition, because the
Company's personal care and nutritional product lines are positioned as premium
product lines, the market potential for the Company's product lines in
relatively less developed countries, such as the PRC and Vietnam, remains to be
determined. Modifications to each product line may be needed to accommodate the
market conditions in each country, while maintaining the integrity of the
Company's products. No assurances can be given that the Company will be able to
make such modifications. Given existing regulatory environments and economic
conditions, the Company's entrance into Singapore and Vietnam is not anticipated
in the short to mid-term.
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.
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 and customer satisfaction, and to encourage repeat
purchases. Under most network marketing systems, independent distributors
purchase products either for resale or for personal consumption.
Direct selling as a distribution channel has been enhanced in the past
decade due to advancements in communications, including telecommunications, and
the proliferation of the use of videos and fax machines. Direct selling
companies can now produce high quality videos for use in product education,
demonstrations and sponsoring sessions that project a desired image for the
Company and the product line. Management believes that high quality sales aids
play an important role in the success of distributor efforts. For this reason,
NSI maintains an in-house staff of video production personnel and video and
audio cassette duplication equipment for timely and cost-effective production of
sales materials. These facilities and expertise are available for the Company's
use. Management is committed to fully utilizing current and future technological
advances to continue enhancing the effectiveness of direct selling.
NSI's network marketing program differs from many other network marketing
programs in several respects. First, the Global Compensation Plan allows NSI
distributors to develop a seamless global network of downline distributors.
Second, NSI's order and fulfillment systems eliminate the need for distributors
to carry significant levels of inventory. Third, the Global Compensation Plan is
among the most financially rewarding plans offered to distributors by network
marketing companies, and can result in commissions to distributors aggregating
up to 58% of a product's wholesale price. On a global basis, commissions have
averaged 42% of revenue from commissionable sales over the last seven years.
Because the Company licenses the right to use the Global Compensation Plan from
NSI, the structure of the plan, including commission rates, is under the control
of NSI.
The Company's revenue is directly dependent upon the efforts of
distributors. Growth in sales volume requires an increase in the productivity of
distributors and/or growth in the total number of distributors. Because the
distributors have contracted directly with NSI, the Company has no control over
who becomes a distributor and little or no control over the level of sponsorship
of new distributors. There can be no assurance that the productivity or number
of distributors will be sustained at current levels or increased in the future.
Furthermore, the Company estimates that, as of December 31, 1996, approximately
325 distributorships worldwide comprised NSI's Hawaiian Blue Diamond and Blue
Diamond executive distributor levels ("Executive Pin Levels"), which are NSI's
two highest Executive Pin Levels and, together with their extensive downline
networks, account for substantially all of the Company's revenue. Consequently,
the loss of such a high-level distributor or another key distributor, together
with a group of leading distributors in such distributor's downline network, or
the loss of a significant number of distributors for any reason, could adversely
affect the Company's results of operations.
Sponsoring. The Company relies solely on NSI distributors to sponsor new
distributors. While the Company provides, at cost, product samples, brochures,
magazines and other sales materials, distributors are primarily responsible for
educating new distributors with respect to products, the Global Compensation
Plan, and how to build a successful distributorship.
The sponsoring of new distributors creates multiple levels in the network
marketing structure. Persons whom a distributor sponsors are referred to as
"downline" or "sponsored" distributors. If downline distributors also sponsor,
they create additional levels in the structure, but their downline distributors
remain part of the same downline network as their original sponsoring
distributor.
Sponsoring activities are not required of distributors. However, because of
the financial incentives provided to those who succeed in building a distributor
network, the Company believes that most of its distributors attempt, with
varying degrees of effort and success, to sponsor additional distributors.
Generally, distributors invite friends, family members and acquaintances to
sales meetings where Company products are presented and where the Global
Compensation Plan is explained. People are often attracted to become
distributors after using Company products and becoming regular retail customers.
Once a person becomes a distributor, he or she is able to purchase products
directly from the Company at wholesale prices for resale to consumers or for
personal consumption. The distributor is also entitled to sponsor other
distributors in order to build a network of distributors and product users.
A potential distributor must enter into a standard distributor agreement
with NSI which obligates the distributor to abide by NSI's policies and
procedures. Additionally, in all countries except Japan, a new distributor is
required to enter into a product purchase agreement with the Company's local
subsidiary, which governs product purchases. In Japan, Taiwan and Hong Kong,
distributors are also required to purchase a starter kit, which includes NSI's
policies and procedures, for between $55 and $85, which essentially represents
the cost of producing the starter kit, and active distributors are required to
pay the Company an Annual Materials Fee ("AMF") of up to $35 to cover the cost
of newsletters, magazines and updates that are mailed regularly to them. In
South Korea, due to local regulations, distributors are not required to purchase
a starter kit, and active distributors are not required to pay an AMF.
Global Compensation Plan. Management believes that one of the Company's key
competitive advantages is the Global Compensation Plan, which it licenses from
NSI. The Global Compensation Plan is seamlessly integrated across all markets in
which NSI products are sold. This seamless integration means that the Company's
distributor base has global reach and that the knowledge and experience resident
in current distributors can be used to build distributor leadership in new
markets. By entering into international sponsoring agreements with NSI,
distributors are authorized to sponsor new distributors in each country where
NSI or the Company has operations. These countries currently include the U.S.,
the United Kingdom, Puerto Rico, Canada, Taiwan, Hong Kong (including Macau),
Japan, South Korea, Thailand, 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.
The Global Compensation Plan allows an individual the opportunity to
develop a business, the success of which is based upon that individual's level
of commitment, time, enthusiasm, personal skills, contacts, and motivation. For
many, a distributorship is a very small business, in which products may be
purchased primarily for personal consumption and for resale to relatively few
customers. For others, a distributorship becomes a full-time occupation.
High Level of Distributor Incentives. Based upon its knowledge of network
marketing distributor compensation plans, the Company believes that the Global
Compensation Plan is among the most financially rewarding plans offered to
distributors by network marketing companies. There are two fundamental ways in
which distributors can earn money: (i) through retail markups, for which the
Company recommends a range from 43% to 60%; and (ii) through a series of
commissions on product sales, which can result in commissions to distributors
aggregating up to 58% of such product's wholesale price. On a global basis,
however, commissions have averaged 42% of revenue from commissionable sales over
the last 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, 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,
----------------------------------------
1992 1993 1994 1995 1996
Executive Distributors ----------------------------------------
Japan..................... -- 2,459 3,613 4,017 10,169
Taiwan.................... 551 1,170 2,093 3,014 5,098
South Korea............... -- -- -- -- 4,675
Hong Kong................. 164 275 377 519 541
----- ----- ----- ----- ------
Total.............. 715 3,904 6,083 7,550 20,483
===== ===== ===== ===== ======
On a monthly basis, the Company and NSI evaluate requests for exceptions to
the Global Compensation Plan. While the general policy is to discourage
exceptions, management believes that the flexibility to grant such exceptions is
critical in retaining distributor loyalty and dedication. In each market,
distributor services personnel evaluate each such instance and appropriate
recommendations are made to NSI.
Distributor Support. The Company is committed to providing a high level of
support services tailored to the needs of its distributors in each market. The
Company meets the needs and builds the loyalty of its distributors with
personalized distributor service, a support staff that assists distributors as
they build networks of downline distributors, and a liberal product return
policy. Because many distributors have only a limited number of hours each week
to concentrate on their Nu Skin business, management believes that maximizing a
distributor's efforts through effective support of each distributor has been and
will continue to be important to the success of the Company.
Through training meetings, annual conventions, distributor focus groups,
regular telephone conference calls and personal contacts with distributors, the
Company seeks to understand and satisfy the needs of each distributor. The
Company provides walk-in, telephonic and computerized product fulfillment and
tracking services that result in user-friendly, timely product distribution. In
addition, the Company is committed to evaluating new ideas in technology and
services, such as automatic product reordering, that the Company can provide to
distributors. The Company currently utilizes voicemail, teleconferencing and fax
services. Global Internet access (including Company and product information,
ordering abilities and group and personal sales volume inquiries) is anticipated
to be provided to distributors in the future. Each walk-in center maintains
meeting rooms which distributors may utilize in training and sponsoring
activities.
Rules Affecting Distributors. NSI's standard distributor agreement,
policies and procedures, and compensation plan contained in every starter and/or
introductory kit outline the scope of permissible distributor marketing
activities. The Company's distributor rules and guidelines are designed to
provide distributors with maximum flexibility and opportunity within the bounds
of governmental regulations regarding network marketing. Distributors are
independent contractors and are thus prohibited from representing themselves as
agents or employees of NSI or the Company. Distributors are obligated to present
the Company's products and business opportunity ethically and professionally.
Distributors agree that the presentation of the Company's business opportunity
must be consistent with, and limited to, the product claims and representations
made in literature distributed by the Company. No medical claims may be made
regarding the products, nor may distributors prescribe any particular product as
suitable for any specific ailment. Even though sponsoring activities can be
conducted in many countries, distributors are prohibited from conducting
marketing activities outside of countries in which NSI and the Company conduct
business and are not allowed to export products from one country to another.
Distributors must represent that the receipt of commissions is based on
substantial efforts. Exhibiting commission statements or checks is prohibited.
Sales aids such as videotapes, promotional clothing, pens, stationary and other
miscellaneous items must be produced or pre-approved by the Company or NSI.
Distributors may not use any form of media advertising to promote products.
Products may be promoted only by personal contact or by literature produced or
approved by the Company. Generic business opportunity advertisements (without
using either the Company or the NSI names) may be placed in accordance with
certain guidelines in some countries. NSI logos and names may not be permanently
displayed on physical premises. Distributors may not use NSI trademarks or other
intellectual property of NSI without NSI's consent.
Products may not be sold, and the business opportunity may not be promoted,
in traditional retail environments such as food markets, pharmacies and
drugstores. Nor may business be conducted at conventions, trade shows, flea
markets, swap meets, and similar events. Distributors who own or are employed by
a service-related business such as a doctor's office, hair salon, or health
club, may make products available to regular customers as long as products are
not displayed visibly to the general public in such a way as to attract the
general public into the establishment to purchase products.
Generally, distributors can receive commission bonuses only if, on a
monthly basis (i) the distributor achieves at least 100 points (approximately
U.S. $100) in personal sales volume, (ii) the distributor documents retail sales
to at least five retail customers, (iii) the distributor sells and/or consumes
at least 80% of personal sales volume, and (iv) the distributor is not in
default of any material policies or procedures.
NSI systematically reviews alleged reports of distributor misbehavior. If
NSI determines that a distributor has violated any of the distributor policies
or procedures, it may either terminate the distributor's rights completely or
impose sanctions such as warnings, probation, withdrawal or denial of an award,
suspension of privileges of a distributorship, fines or penalties, withholding
commissions until specified conditions are satisfied, or other appropriate
injunctive relief. Distributor terminations based on violations of NSI's
policies and procedures have aggregated less than 1% of the Company's
distributor force since inception. Distributors may voluntarily terminate their
distributorship at any time.
Payment. Distributors generally pay for products prior to shipment.
Accordingly, the Company carries no accounts receivable from distributors.
Distributors pay for products in one of several ways. Cash, which represents a
large portion of all payments, is received by order takers in the distribution
center when orders are personally picked up by a distributor. In addition, in
Japan cash is sent through the mail using a postal cash envelope. The Company
also accepts payment through the use of credit cards. This method of payment is
very popular in Hong Kong and Taiwan and is expected to increase in popularity
in South Korea. Another form of payment utilized in Japan is a Tososhin card,
which is essentially a distributor credit card utilized to place orders. Bank
wire transfers are also popular throughout Asia, particularly in Japan.
Product Summary
The Company offers products in two distinct categories: personal care
products, marketed under the trademark "Nu Skin," and nutritional products,
marketed under the trademark "Interior Design Nutritionals" (IDN). The Company
is entitled to distribute NSI products in specified Asian countries pursuant to
a Regional Distribution Agreement. NSI markets 89 different personal care and 36
different nutritional products, of which 81 and 17, respectively, were available
in the Company's current markets as of December 31, 1996. 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 December 31, 1996, in each of the Company's current
markets.
Personal Care and IDN Product Offerings
Total Products Offered
Products
Offered Hong South
Product Categories/Product Lines by NSI Japan Taiwan Kong Korea
Personal Care:
Facial Care............................................ 20 10(1) 13 18 10
Body Care.............................................. 12 9 8 12 7
Hair Care.............................................. 14 13 13 13 12
Color Cosmetics........................................ 13 10 10 13 -
Specialty.............................................. 30 10 16 25 5
-- -- -- -- ---
Total........................................... 89 52 60 81 34
== == == == ==
IDN:
Nutritional Supplements................................ 14 4 2 1 -
Weight Management Products and Nutritious Snacks....... 10 1 3 4 -
Sports Nutrition....................................... 4 1 - - -
Botanicals............................................. 8 4 3 8 -
--- --- --- --- ---
Total........................................... 36 10 8 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, 1995 and 1996.
Revenue by Product Category
Year Ended Year Ended Year Ended
December 31, 1994 December 31, 1995 December 31, 1996
$ % $ % $ %
Product Category
Personal care................ $ 241,188 91.2% $ 303,387 84.6% $ 493,609 72.8%
Nutritional.................. 5,464 2.1 23,959 6.7 138,593 20.4
Sales aids................... 17,788 6.7 31,263 8.7 46,394 6.8
Total................ $ 264,440 100.0% $ 358,609 100.0% $ 678,596 100.0%
Personal Care Products
The Company's current personal care products category is divided into the
following lines: facial care, body care, hair care and color cosmetics, as well
as specialty products, such as sun protection, oral hygiene and fragrances. Each
of the Subsidiaries markets a variety of the 89 personal care products currently
offered by NSI. The Company also offers product sets that include a variety of
products in each product line as well as small, sample-size packages to
facilitate product sampling by potential consumers. The product sets are
especially popular during the opening phase of a new country, where distributors
and consumers are anxious to purchase a variety of products, and during holiday
and gift giving seasons in each market. The Company anticipates the introduction
of additional personal care products into each market, based on the likelihood
of the particular product's success in the market as well as applicable
regulatory approvals.
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 December 31, 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 20 different products: Cleansing Lotion, Facial
Scrub, Exfoliant Scrub, Facial Cleansing Bar, Clay Pack, pH Balance Facial
Toner, NaPCA Moisturizer, Rejuvenating Cream, Celltrex (called Hylatrex in Japan
and South Korea), Intensive Eye Complex, HPX Hydrating Gel, Face Lift and
Activator (two formulas for sensitive and normal skin), Jungamals Lip Balm,
Clarifex Cleansing Scrub, Clarifex Mud, Alpha Extra Face, Nu Colour Eye Makeup
Remover, MHA Revitalizing Lotion, MHA Revitalizing Lotion with SPF 15 and
Interim MHA Diminishing Gel.
Body Care. The Company's line of body care products relies on premium
quality ingredients to cleanse and condition skin. The cleansers are uniquely
formulated without soap, and the moisturizers contain light but effective
humectants and emollients. The Company's body care line currently consists of 12
products: Antibacterial Body Cleansing Gel, Liquid Body Lufra, Body Smoother,
Hand Lotion, NaPCA Moisture Mist, Body Bar, Body Cleansing Gel, Enhancer,
Jungamals Crazy Crocodile Cleaner, Alpha Extra Body, MHA Revitalzing Body Lotion
and Dermatic Effects Body Contouring Lotion.
Hair Care. The Company's hair care line, HairFitness, is designed to meet
the needs of people with all types of hair and hair problems. Focusing on the
condition of the scalp and its impact on hair quality, the Company's hair care
products use water-soluble conditioners like panthenol to reduce build-up on the
scalp and to promote healthy hair. HairFitness includes 12 products featuring
ceregen, a revolutionary wheat hydrocolloid complex of conditioning molecules
that have been shown to have dramatic hair repair and moisture control aspects:
3 in 1 Shampoo, Moisturizing Shampoo, Balancing Shampoo, Vital Shampoo, Deep
Clarifying Shampoo, Glacial Therapy, Weightless Conditioner, Luxurious
Conditioner, Conditioning Detangler Spray, Styling Gel, Holding Spray and Mousse
(Styling Foam). The Company also carries Dermanator Shampoo and Jungamals Tiger
Tangle Tamer Shampoo.
Color Cosmetics. In the latter part of 1995, the Company introduced Nu
Colour, a new line of color cosmetics, in Hong Kong, Taiwan and Japan. The Nu
Colour line consists of 13 products with 106 SKU's including MoistureShade
Liquid Finish (10), MoistureShade Pressed Powder (8), Blush (9), Eye Shadow
(10), Mascara (2), Eyeliner (7), Lip Liner (11), Lipstick (32), DraMATTEics Lip
Pencils (6), Lip Gloss, Creme Concealer (5), Finishing Powder and Brow Pencil
(4).
Specialty Products. The Company recently introduced a product line labeled
Epoch, a unique line of ethnobotanical personal care products created in
cooperation with well known ethnobotanists. These products, which unite natural
compounds used by indigenous cultures with advanced scientific ingredients,
include Glacial Marine Mud, Deodorant with Citrisomes, Polishing Bar, LeafClean
Hand Wash, Everglide Foaming Shave Gel, Desert Breeze Aftershave, Post Shave
Lotion for Women, Infusions, Emulsions and Firewalker Foot Cream. Epoch was
launched in October of 1996 in Hong Kong and Taiwan and is currently expected to
be launched, subject to regulatory approval, in the spring of 1997 in Japan and
South Korea. Glacial Marine Mud is exclusively licensed to NSI for sale in the
direct selling channel.
Nutriol, a line of products exclusively licensed to NSI for sale in the
direct selling channel and manufactured in Europe, consists of five products:
Nutriol Hair Fitness Preparation, Nutriol Shampoo, Nutriol Mascara, Nutriol Nail
and Nutriol Eyelash. Nutriol represents a product designed to replenish the
hair's vital minerals and elements. Each Nutriol product uses
mucopolysaccharide, a patented ingredient.
The Company's line of Sunright products is designed to provide a variety of
sun screen protection with non-irritating and non-greasy products. The sun
protection line includes a sun preparation product that prepares the skin for
the drying impact of the sun, five sun screen alternatives with various levels
of SPF, and a sun screen lip balm. In the Asian market, the Company's sun care
line is currently available in Hong Kong and Japan. At present, Sunright Prime
Pre & Post Sun Moisturizer and Sunright Lip Balm are not available in Japan.
AP-24, a line of oral health care products which incorporates anti-plaque
technology designed to help prevent plaque build-up 24 hours a day, is
exclusively licensed to the Company, together with the associated trademark, for
sale in the direct selling channel under the trademark AP-24. This product line
includes AP-24 Anti-Plaque Toothpaste, AP-24 Anti-Plaque Mouthwash, AP-24 Triple
Action Dental Floss and AP-24 Anti-Plaque Breath Spray. These products are
currently available in Hong Kong and Taiwan. The Company currently intends to
launch this product line, subject to regulatory approval, in South Korea and
Japan in 1997. The AP-24 oral health care products for kids offers products
designed to make oral care fun for children, including Jungamal's Tough Tusk
Toothpaste and Jungamal's Fluffy Flamingo Floss.
The Company offers a men's and a women's fragrance under the Nu Skin
trademark Safiro. The Company also offers a Nail Care Kit.
Product Sets. The Company currently offers product sets that include a
sampling of products from a given product line. These package configurations are
intended to encourage increased product trials.
Interior Design Nutritionals
The IDN product category is comprised of 36 products in the following
lines: nutritional supplements, weight management products and nutritious
snacks, sports nutrition and botanicals. 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.
The following is a brief description of each of the IDN product lines:
Nutritional Supplements. LifePak, the core IDN nutritional supplement, is
designed to provide an optimum mix of nutrients including vitamins, minerals,
antioxidants and phytonutrients (natural chemical extracts from plants). The
introduction of LifePak in Japan in October 1995 resulted in a significant
increase in revenue and currently represents approximately 22% of the Company's
revenue in Japan. LifePak was launched in Taiwan in October of 1996.
Additional nutritional supplements include: Vitox, which incorporates beta
carotene and other important vitamins for overall health; Metabotrim, which
provides B vitamins necessary to convert food to energy and chromium chelate
which has been shown to help in the body's normal metabolic process; Optimum
Omega, a pure source of omega 3 fatty acids aimed to assist cardiovascular
health; Image HNS, an all-around vitamin and antioxidant supplement; and Optigar
Q, a blend of co-enzyme Q10 and deodorized garlic. The IDN Masters Wellness
Supplement provides nutrition specifically for an aging generation. Jungamals
Children's Chewables combine natural flavors and colors and contain a unique
blend of antioxidants, chelated minerals, and vitamins specifically tailored for
children. NutriFi contains four grams of soluble and insoluble fibers per
serving in a powder that can be added to liquids and foods to supplement the
recommended daily amounts of fiber.
As an enhancement to the core IDN nutritional supplement, LifePak, NSI
recently introduced LifePak Women and LifePak Prime. These products address the
more specific nutritional needs of women and the aging generation. Also recently
launched by NSI was Life Essentials, a lower cost more general nutritional
supplement, and Nightime Complex with Melatonin, a sleep aid.
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.
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 and Pocket Fuel, nutritious snacks which provide
carbohydrates, protein and fiber. FibreNet and Diene-O-Lean are two recent
additions to IDN's weight management system.
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.
Botanicals. Botanical supplements are designed for those who seek the
benefits of natural herb and plant extracts. These supplements include
Botanagar, Botanavox, Botanaflor, Botanazyme, BotanaEase, BotanaGuard,
Botanavive and Botaname. Each supplement addresses a range of issues, including:
alertness, digestive maintenance, dietary health support, regular sleep habits,
weight management and antioxidant support.
Sales Aids
The Company provides an assortment of sales aids to facilitate the sales of
its products. Sales aids include videotapes, promotional clothing, pens,
stationery, business cards, brushes, combs, cotton pads, tissues, and other
miscellaneous items to help create consumer awareness of the Company and its
products. Sales aids are priced at the Company's approximate cost and are not
commissionable items (i.e., distributors do not receive commissions on purchases
of sales aids).
Product Guarantees
The Company believes that it is among the most consumer protective
companies in the direct selling industry. For 30 days from the date of purchase,
the Company's product return policy allows a retail purchaser to return any
product to the distributor through whom the product was purchased for a full
refund. After 30 days from the date of purchase, the return privilege is 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 2.0% of annual revenue
through 1996.
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, additional vitamin products targeted to seniors, and
personal care products targeted to either men or women.
Production. Virtually all the Company's products are sourced through NSI
and are produced by manufacturers unaffiliated with NSI. The Company currently
has little or no direct contact with these manufacturers. The Company's profit
margins and its ability to deliver its existing products on a timely basis are
dependent upon the ability of NSI's outside manufacturers to continue to supply
products in a timely and cost-efficient manner. Furthermore, the Company's
ability to enter new markets and sustain satisfactory levels of sales in each
market is dependent in part upon the ability of suitable outside manufacturers
to reformulate existing products, if necessary to comply with local regulations
or market environments, for introduction into such markets. Finally, the
development of additional new products in the future will likewise be dependent
in part on the services of suitable outside manufacturers.
The Company currently acquires products or ingredients from sole suppliers
or suppliers that are considered by the Company to be the superior suppliers of
such ingredients. The Company believes that, in the event it is unable to source
any products or ingredients from its current suppliers, the Company could
produce such products or replace such products or substitute ingredients without
great difficulty or prohibitive increases in the cost of goods sold. However,
there can be no assurance that the loss of such a supplier would not have a
material adverse effect on the Company's business and results of operations.
With respect to products purchased by the Company from NSI, NSI currently
relies on two unaffiliated manufacturers to produce approximately 70% and 80% of
its personal care and nutritional products, respectively. NSI has a written
contract with the primary supplier of the Company's personal care products that
expires at the end of 1997. An extension to such contract is currently being
negotiated. NSI does not currently have a written contract with the primary
supplier of the Company's nutritional products. The Company believes that in the
event that NSI's relationship with any of its key manufacturers is terminated,
NSI will be able to find suitable replacement manufacturers. However, there can
be no assurance that the loss of either manufacturer would not have a material
adverse effect on the Company's business and results of operations.
Relationship With NSI
As of March 3, 1997, approximately 98.4% of the combined voting power of
the outstanding shares of Common Stock was held by the shareholders of NSI. As a
result, when acting as stockholders of the Company, these shareholders of NSI
will consider the short-term and long-term impact of all stockholder decisions
on the consolidated financial results of NSI and the Company. In addition, the
Company has entered into distribution, trademark/tradename license, licensing
and sales, and management services agreements (the "Operating Agreements") with
NSI and with Nu Skin International Management Group, Inc. ("NSIMG"), a Delaware
corporation also controlled by the shareholders of NSI, summary descriptions of
which are set forth below. Such summaries are qualified in their entirety by
reference to the Operating Agreements, forms of which were filed as exhibits to
the Company's Registration Statement on Form S-1 (File No. 333-12073). In the
future the Company may enter into amendments to the Operating Agreements or
additional agreements with NSI or NSIMG. The Company intends to seek the
approval of a majority of its independent directors for any amendment to the
Operating Agreements and any new agreement which the Company believes to be of
material importance to the Company and as to which the Company and NSI or NSIMG
have conflicting interests. The Company is almost completely dependent on the
Operating Agreements to conduct its business, and in the event NSI is unable or
unwilling to perform its obligations under the Operating Agreements, or
terminates the Operating Agreements as provided therein, the Company's business
and results of operations will be adversely affected.
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, Nu Skin Korea and Nu Skin
Thailand have each entered into wholesale distribution agreements (the
"Wholesale Distribution Agreements") with Nu Skin Hong Kong, pursuant to which
each such Subsidiary has been granted the right to sell and distribute 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. Purchases are made by
submission of a purchase order to NSI, which NSI must accept unless it has
insufficient inventory to fill the order. In determining whether it has
sufficient inventory to fill a given order, NSI is required to treat the Company
on a parity basis with its other affiliates.
The prices for products are governed by a price schedule which is subject
to change by NSI from time to time upon at least 30 days advance notice. NSI
pays ordinary freight and the Company pays handling, excise taxes and customs
duties on the products the Company orders. In order to assist NSI in planning
its inventory and pricing, the Company is required to provide NSI with certain
business plans and reports of its sales and prices to independent distributors.
The Company purchases virtually all of its products from NSI through Nu
Skin Hong Kong. Nu Skin Hong Kong pays for its purchases from NSI under the
Regional Distribution Agreement in U.S. dollars, while the other Subsidiaries
pay for their purchases from Nu Skin Hong Kong under the Wholesale Distribution
Agreements in their local currency. Nu Skin Hong Kong therefore bears
significant currency exchange risk as a result of purchases from NSI on behalf
of the other Subsidiaries.
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 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
trademarks and tradenames in its market. In addition, each Subsidiary has the
right to export such products and commercial materials into other Company
markets with NSI's consent, which consent shall not be unreasonably withheld or
delayed.
The Company pays a royalty to NSI for use of the licensed trademarks and
tradenames on products, starter and introductory kits and commercial materials
not purchased from NSI, including locally sourced products and commercial
materials and products and commercial materials manufactured by the Company. The
royalty is paid monthly and is equal to 5% of the Company's revenues from such
products and commercial materials for such month generally and a total of 8%
where NSI owns the formula or has exclusive rights in the subject market for
such products or commercial materials.
NSI has the right to inspect the premises where products using its
trademarks are manufactured in order to ensure that the products meet its
quality standards. The Company's labels, packaging, advertising and promotional
materials using NSI's trademarks must conform with NSI's published standards and
NSI has the right of prior approval. The Company is responsible for correcting
any manufacturing defects in locally sourced products or products it
manufactures that are brought to the Company's attention by NSI or otherwise.
NSI is responsible for securing and maintaining trademark registrations in
the territory covered by each Trademark/Tradename Agreement. NSI has agreed to
take such actions as the Company may reasonably request to protect its and the
Company's rights to the licensed trademarks from infringement and related claims
and has indemnified the Company from losses and liability resulting from such
claims.
Licensing and Sales Agreements. Currently, all distributor agreements are
entered into between the distributor and NSI rather than with the Company.
Therefore, the Company does not own the distributor lists or the distribution
system, the Global Compensation Plan, copyrights and related intangibles.
Consequently, each 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 and the Subsidiaries are contractually obligated to pay a
distributor commission expense of 42% of commissionable product sales (with the
exception of South Korea where, due to government regulations, the Company
satisfies this obligation by using a formula based upon a maximum payout of 35%
of commissionable product sales). The Licensing and Sales Agreements provide
that the Company is to satisfy this obligation by paying commissions owed to
local distributors. In the event that these commissions exceed 42% of
commissionable product sales, the Company is entitled to receive the difference
from NSI. In the event that the commissions paid are lower than 42%, the Company
must pay the difference to NSI. Under this formulation, the Company's total
commission expense is fixed at 42% of commissionable product sales in each
country (except for South Korea). The 42% figure has been set on the basis of
NSI's experience over the past seven years which indicates that actual
commissions paid in a given year together with the cost of administering the
Global Compensation Plan average approximately 42% of commissionable product
sales for such year. In the event that actual commissions payable to
distributors from sales in the Company's markets vary from these historical
results, whether as a result of changes in distributor behavior or changes to
the Global Compensation Plan or in the event that NSI's cost of administering
the Global Compensation Plan increases or decreases, the Licensing and Sales
Agreements provide that the settlement of distributor commission expense between
the Company and NSI may be modified to more accurately reflect actual results.
In addition to payments to local distributors, the Company is generally
responsible for distributor support and relations within Japan, Taiwan, Hong
Kong, South Korea and Thailand. The Company has agreed to use its best efforts
to support the development of NSI's distributor network in its markets by
purchasing starter or introductory kits from NSI and selling them to potential
NSI distributors.
NSI has agreed to take such actions as the Company may reasonably request
to protect its and the Company's rights to the property licensed under the
Licensing and Sales Agreements from infringement and related claims and has
indemnified the Company from losses and liability resulting from such claims.
Both NSI and the Company are required to maintain insurance coverage adequate to
insure their assets and financial stability. NSI is responsible for ensuring
that the property licensed under the Licensing and Sales Agreements complies
with local laws and regulations, including direct selling laws.
Management Services Agreements. The Subsidiaries have entered 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 include management, legal, financial, marketing and distributor
support/training, public relations, international expansion, human resources,
strategic planning, product development and operations administration services.
Most of NSI's senior management personnel and most employees who deal with
international issues are employees of NSIMG.
Generally, the management and support services are provided by employees of
NSI and NSIMG acting through NSIMG either (i) on a temporary basis in a specific
consulting role or (ii) on a full-time basis in a management position in the
country in which the services are required. The Management Services Agreements
do not cover the services of many of the Company's executive officers.
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 Original Stockholders on a
combined basis no longer beneficially own a majority of the combined voting
power of the outstanding shares of common stock of the Company or of NSI. Each
Operating Agreement is subject to termination by either party in the event of:
(i) a material breach by the other party which remains uncured for a period of
60 days after notice thereof; (ii) the bankruptcy or insolvency of the other
party; or (iii) entry of a judgment by a court of competent jurisdiction against
the other party in excess of $25,000,000. Each Operating Agreement to which NSI
is a party and each Operating Agreement to which NSIMG is a party is further
subject to termination by NSI or NSIMG, respectively, upon 30 days notice in the
event of a change of control of the Subsidiary party thereto and by such
Subsidiary upon 30 days notice in the event of a change of control of NSI or
NSIMG, respectively. Each Operating Agreement provides that neither party may
assign its rights thereunder without the consent of the other party. Each
Operating Agreement is governed by Utah law. Any dispute arising under an
Operating Agreement is to be settled by arbitration conducted in Utah in
accordance with the applicable rules of the American Arbitration Association, as
supplemented by the commercial arbitration procedures for international
commercial arbitration.
Mutual Indemnification Agreement. The Company and NSI have entered into a
mutual indemnification agreement pursuant to which NSI has agreed to indemnify
the Company for certain claims, losses and liabilities relating to the
operations of the Subsidiaries prior to the Reorganization and the Company has
agreed to indemnify NSI for certain claims, losses and liabilities relating to
the operations of the Subsidiaries after the Reorganization.
Competition
Personal Care and Nutritional Products. The markets for personal care and
nutritional products are large and intensely competitive. The Company competes
directly with companies that manufacture and market personal care and
nutritional products in each of the Company's product categories. The Company
competes with other companies in the personal care and nutritional products
industry by emphasizing the value and premium quality of the Company's products
and the convenience of the Company's distribution system. Many of the Company's
competitors have much greater name recognition and financial resources than the
Company. In addition, personal care and nutritional products can be purchased in
a wide variety of channels of distribution. While the Company believes that
consumers appreciate the convenience of ordering products from home through a
sales person or through a catalog, the buying habits of many consumers
accustomed to purchasing products through traditional retail channels are
difficult to change. The Company's product offerings in each product category
are also relatively small compared to the wide variety of products offered by
many other personal care and nutritional product companies. There can be no
assurance that the Company's business and results of operations will not be
affected materially by market conditions and competition in the future.
Network Marketing Companies. The Company also competes with other direct
selling organizations, some of which have a longer operating history and higher
visibility, name recognition and financial resources. The leading network
marketing company in the Company's markets is Amway Corporation and its
affiliates. The Company competes for new distributors on the basis of the Global
Compensation Plan and its premium quality products. Management envisions the
entry of many more direct selling organizations into the marketplace as this
channel of distribution expands over the next several years. The Company has
been advised that certain large, well-financed corporations are planning to
launch direct selling enterprises which will compete with the Company in certain
of its product lines. There can be no assurance that the Company will be able to
successfully meet the challenges posed by this increased competition.
Government Regulation
Direct Selling Activities. Direct selling activities are regulated by
various governmental agencies. These laws and regulations are generally intended
to prevent fraudulent or deceptive schemes, often referred to as "pyramid" or
"chain sales" schemes, that promise quick rewards for little or no effort,
require high entry costs, use high pressure recruiting methods and/or do not
involve legitimate products. In Japan, the Company's distribution system is
regulated under the "Door-to-Door" Sales Law, which requires the submission of
specific information concerning the Company's business and products and which
provides certain cancellation and cooling-off rights for consumers and new
distributors. In Taiwan, the Fair Trade Law (and the Enforcement Rules and
Supervisory Regulations of Multi-Level Sales) requires the Company to comply
with registration procedures and also provides distributors with certain rights
regarding cooling-off periods and product returns. The Company also complies
with South Korea's strict Door-to-Door Sales Act, which requires, among other
things, the regular reporting of revenue, the registration of distributors
together with the issuance of a registration card, and the maintaining of a
current distributor registry. This law also limits the amount of sponsoring
bonuses that a registered multi-level marketing company can pay to its
distributors to 35% of revenue in a given month. In Thailand, currently there
are no laws (other than general fair trade laws) directly regulating direct
selling or multi-level marketing activities.
Based on research conducted in opening its existing markets (including
assistance from local counsel), the nature and scope of inquiries from
government regulatory authorities and the Company and NSI's history of
operations in such markets to date, the Company and NSI believe that their
method of distribution is in compliance in all material respects with the laws
and regulations relating to direct selling activities of the countries in which
the Company and NSI currently operate. Even though management believes that laws
governing direct selling are generally becoming more permissive in certain Asian
countries, many countries, including Singapore, one of the Company's potential
markets, currently have laws in place that would prohibit the Company and NSI
from conducting business in such markets. There can be no assurance that the
Company will be allowed to conduct business in each of the new markets or
continue to conduct business in each of its existing markets licensed from NSI.
Regulation of Products and Marketing. The Company and NSI are subject to or
affected by extensive governmental regulations not specifically addressed to
network marketing. Such regulations govern, among other things, (i) product
formulation, labeling, packaging and importation, (ii) product claims and
advertising, whether made by the Company, NSI or NSI distributors, (iii) fair
trade and distributor practices, (iv) taxes, transfer pricing and similar
regulations that affect foreign taxable income and customs duties, and (v)
regulations governing foreign companies generally.
The Japanese Ministry of Health and Welfare ("MOHW") requires the Company
to possess an import business license and to register each personal care product
imported into the country. Packaging and labeling requirements are also
specified. The Company has had to reformulate many products to satisfy MOHW
regulations. In Japan, nutritional foods, drugs and quasi-drugs are all strictly
regulated. The chief concern involves the types of claims and representations
that can be made regarding the efficacy of nutritional products. The Company's
successful introduction of IDN products in Japan was achieved by utilizing the
combined efforts of NSI's technical staff as well as external consultants.
In Taiwan, all "medicated" cosmetic and pharmaceutical products require
registration. Non-medicated cosmetic products, such as shampoo and hair
conditioner, require no registration.
In Hong Kong, cosmetic products not classified as "drugs" nor as
"pharmaceutical products" are not subject to statutory registrations, packaging
and labeling requirements apart from the Trade Descriptions Ordinance. In Macau,
"pharmaceutical" products are strictly regulated; general products are not
subject to registration requirements.
In South Korea, the Company is subject to and has obtained the mandatory
certificate of confirmation as a qualified importer of cosmetics under the
Pharmaceutical Affairs Law as well as additional product approvals for each of
the 45 categories of cosmetic products which it imports. Each new cosmetic
product undergoes a 60-day post-customs inspection where, in addition to
compliance with ingredient requirements, each product is inspected for
compliance with South Korean labeling requirements.
In Thailand, personal care products are regulated by the Food and Drug
Association, and all of the initial NSI personal care products to be introduced
in Thailand have qualified for simplified registration procedures under Thai
law. Businesses which are more than 50% owned by non-citizens are not permitted
to operate unless they have an Alien Business Permit, which is frequently
difficult to obtain. The Company is currently operating under the Treaty of
Amity and Economic Relations between Thailand and the United States (the "Treaty
of Amity"). Under the Treaty of Amity, an Alien Business Permit is not required
if a Thailand business is owned by an entity organized in the United States, a
majority of whose owners are U.S. citizens or entities. From time to time, it
has been reported that certain Thailand government officials have considered
supporting the termination of the Treaty of Amity. The Company could face
particular difficulties in continuing operations in Thailand if the Treaty of
Amity were terminated and the Company were forced to obtain an Alien Business
Permit.
Regulation of Potential Markets. Each of the proposed new markets will
present additional unique difficulties and challenges. The PRC, for example, has
proven to be a particularly difficult market for foreign corporations due to its
extensive government regulation and the historical political tenants of the PRC
government. In order to enter the market in the PRC, the Company may be required
to create a joint venture enterprise with a Chinese entity and to establish a
local manufacturing presence, which will entail a significant investment on the
Company's part. The Company will likely have to apply for licenses on a province
by province basis and the repatriation of the Company's profits will be subject
to restrictions on currency conversion and the fluctuations of the government
controlled exchange rate. In addition, because distribution systems are greatly
fragmented, the Company may be forced to use business models significantly
different from those used by the Company in more developed countries. The lack
of a comprehensive legal system and the uncertain and sporadic enforcement of
existing legislation and laws could also have an adverse effect on the Company's
proposed business in the PRC.
The other potential new markets also present significant regulatory,
political and economic obstacles to the Company. In Singapore, for example,
network marketing is currently illegal and is not permitted under any
circumstances. Although the Company believes that this restriction will
eventually be relaxed or repealed, no assurance can be given that such
regulation will not remain in place and that the Company will not be permanently
prevented from initiating sales in Singapore. In addition, Malaysia has
governmental guidelines that have the effect of limiting foreign ownership of
direct selling companies operating in Malaysia to no more than 30%. There can be
no assurance that the Company will be able to properly structure Malaysian
operations to comply with this policy. In October of 1995, the Company's
business permit applications were denied by the Malaysian government as a result
of activities by certain NSI distributors. Therefore, the Company believes that
although significant opportunities exist to expand its operations into new
markets, there can be no assurance that these or other difficulties will not
prevent the Company from realizing the benefits of this opportunity.
Other Regulatory Issues. As a U.S. entity operating through subsidiaries in
foreign jurisdictions, the Company is subject to foreign exchange control and
transfer pricing laws that regulate the flow of funds between the Subsidiaries
and the Company as well as the flow of funds to NSI for product purchases,
management services, and contractual obligations such as the payment of
distributor commissions. In South Korea, in particular, the Company has come
under the scrutiny of regulators because of the manner in which the Company and
Nu Skin Korea implement the Global Compensation Plan. Pursuant to the Global
Compensation Plan, Nu Skin Korea currently pays commissions to distributors in
South Korea on both their local and foreign product sales. Similarly,
commissions on product sales in South Korea by other distributors are paid by
their local NSI affiliate. The Company believes that it operates in compliance
with all applicable foreign exchange control and transfer pricing laws. However,
there can be no assurance that the Company will continue to be found to be
operating in compliance with foreign exchange control and transfer pricing laws,
or that such laws will not be modified, which, as a result, may require changes
in the Company's operating procedures.
As is the case with most companies which operate in the Company's product
segment, NSI and the Company have from time to time received inquiries from
various government regulatory authorities regarding the nature of their
businesses and other issues such as compliance with local direct selling,
customs, taxation, foreign exchange control, securities and other laws. Although
to date none of these inquiries has resulted in a finding materially adverse to
the Company or NSI, adverse publicity resulting from inquiries into NSI's
operations by certain government agencies in the early 1990's, stemming in part
out of inappropriate product and earnings claims by distributors, materially
adversely affected NSI's business and results of operations. There can be no
assurance that the Company or NSI will not face similar inquiries in the future,
which, either as a result of findings adverse to the Company or NSI or as a
result of adverse publicity resulting from the instigation of such inquiries,
could have a material adverse effect on the Company's business and results of
operations.
The Subsidiaries are periodically subject to reviews and audits by various
governmental agencies, particularly in new markets, where the Company has
experienced high rates of growth. Currently, Nu Skin Korea is subject to an
audit by South Korean customs authorities, which may or may not lead to other
regulatory review. Management believes that this inquiry is the result of Nu
Skin Korea's rapid growth and the fact that it is now reportedly the largest
importer of cosmetics and personal care products in South Korea. Management
believes that other major importers of cosmetic products are also the focus of
regulatory reviews by South Korean authorities.
Based on the Company's and NSI's experience and research (including
assistance from counsel) and the nature and scope of inquiries from government
regulatory authorities, the Company and NSI believe that they are in material
compliance with all regulations applicable to them. Despite this belief, either
the Company or NSI could be found not to be in material compliance with existing
regulations as a result of, among other things, the considerable interpretative
and enforcement discretion given to regulators or misconduct by independent
distributors. In 1994, NSI and three of its distributors entered into a consent
decree with the Federal Trade Commission (the "FTC") with respect to its
investigation of certain product claims and distributor practices, pursuant to
which NSI paid approximately $1 million to settle the FTC investigation. NSI is
currently in discussions with the FTC regarding its compliance with such consent
decree and other product issues raised by the FTC. NSI recently voluntarily
agreed to recall and rewrite virtually all of its sales and marketing materials
to address FTC concerns. NSI has also offered a monetary settlement, which
proposal is currently under review by the FTC. Even though neither the Company
nor the Subsidiaries have encountered similar regulatory concerns, there can be
no assurances that the Company and the Subsidiary will not be subject to similar
inquiries and regulatory investigations or disputes and the effects of any
adverse publicity resulting therefrom. Any assertion or determination that
either the Company, NSI or any NSI distributors are not in compliance with
existing laws or regulations could have a material adverse effect on the
Company's business and results of operations. In addition, in any country or
jurisdiction, the adoption of new laws or regulations or changes in the
interpretation of existing laws or regulations could generate negative publicity
and/or have a material adverse effect on the Company's business and results of
operations. The Company cannot determine the effect, if any, that future
governmental regulations or administrative orders may have on the Company's
business and results of operations. Moreover, governmental regulations in
countries where the Company plans to commence or expand operations may prevent,
delay or limit market entry of certain products or require the reformulation of
such products. Regulatory action, whether or not it results in a final
determination adverse to the Company or NSI, has the potential to create
negative publicity, with detrimental effects on the motivation and recruitment
of distributors and, consequently, on the Company's sales and earnings.
Employees
As of December 31, 1996, the Company had approximately 900 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.
Certain Business Considerations and Risk Factors
There are certain significant risks facing the Company, many of which are
substantial in nature. Stockholders and prospective stockholders in the Company
should consider carefully the following risks and information in conjunction
with the other information contained herein.
The statements in this section that are not historical facts are
forward-looking statements. These forward-looking statements involve certain
risks and uncertainties. Actual results and outcomes may differ materially from
those discussed in this section. Factors that might cause such differences
include, but are not limited to, the risks and factors discussed below.
Reliance Upon Independent Distributors of NSI. The Company distributes its
products exclusively through independent distributors who have contracted
directly with NSI to become distributors. Consequently, the Company does not
contract directly with distributors but licenses its distribution system and
distributor force from NSI. Distributor agreements with NSI are voluntarily
terminable by distributors at any time. The Company's revenue is directly
dependent upon the efforts of these independent distributors, and any growth in
future sales volume will require an increase in the productivity of these
distributors and/or growth in the total number of distributors. As is typical in
the direct selling industry, there is turnover in distributors from year to
year, which requires the sponsoring and training of new distributors by existing
distributors to maintain or increase the overall distributor force and motivate
new and existing distributors. The Company experiences seasonal decreases in
distributor sponsoring and product sales in some of the countries in which the
Company operates because of local holidays and customary vacation periods. The
size of the distribution force can also be particularly impacted by general
economic and business conditions and a number of intangible factors such as
adverse publicity regarding the Company or NSI, or the public's perception of
the Company's products, product ingredients, NSI's distributors or direct
selling businesses in general. Historically, the Company has experienced
periodic fluctuations in the level of distributor sponsorship (as measured by
distributor applications). However, because of the number of factors that impact
the sponsoring of new distributors, and the fact that the Company has little or
no control over the level of sponsorship of new distributors, the Company cannot
predict the timing or degree of those fluctuations. There can be no assurance
that the number or productivity of the Company's distributors will be sustained
at current levels or increased in the future. In addition, the number of
distributors as a percent of the population in a given country or market could
theoretically reach levels that become difficult to exceed due to the finite
number of persons inclined to pursue a direct selling business opportunity. This
is of particular concern in Taiwan, where industry sources have estimated that
up to 10% of the population is already involved in some form of direct selling.
Since distributor agreements are entered into between NSI and distributors,
all of the distributors who generate revenue for the Company are distributors of
NSI. Because of this fact, the Company cannot control who becomes a distributor.
In addition, because distributors are independent contractors of NSI, neither
NSI nor the Company is in a position to provide the same level of direction,
motivation and oversight as either would with respect to its own employees.
Although NSI has a compliance department responsible for the enforcement of the
policies and procedures that govern distributor conduct, it can be difficult to
enforce these policies and procedures because of the large number of
distributors and their independent status, as well as the impact of certain
resale price maintenance and other regulations that limit the ability of NSI and
the Company to monitor and control the sales practices of distributors.
Potential Effects of Adverse Publicity. The size of the distribution force
and the results of the Company's operations can be particularly impacted by
adverse publicity regarding the Company or NSI, including publicity regarding
the legality of the Company's distribution system, the quality of the Company's
products and product ingredients, regulatory investigations of the Company and
its products, distributor actions and the public's perception of NSI's
distributors and direct selling businesses generally.
In 1991 and 1992, NSI was the subject of investigations by various
regulatory agencies of eight states. All of the investigations were concluded
satisfactorily. However, the publicity associated with the investigations
resulted in a material adverse impact on NSI's results of operations. The
Company has not been subject to investigations in Asia, however, the denial by
the Malaysian government in 1995 of the Company's business permits due to
distributor action resulted in adverse publicity for the Company. There can be
no assurance that the Company will not be subject to adverse publicity in the
future as a result of similar regulatory investigations, similar distributor
actions or other factors or that such adverse publicity will not have a material
adverse effect on the Company's business or results of operations.
Potential Negative Impact of Distributor Actions. Distributor actions can
negatively impact the Company and its products. For example, in October 1995,
the Company's business permit applications were denied by the Malaysian
government as the result of activities by certain NSI distributors before
required government approvals could be secured. NSI subsequently terminated the
distributorship rights of some of the distributors involved and elected to
withdraw from the Malaysian market for a period of time. The denial by the
Malaysian government of the Company's business permit application resulted in
adverse publicity for the Company. In South Korea, the Company is currently
undergoing a customs audit which was precipitated by the alleged illegal
importation by certain NSI distributors of NSI products not yet available for
sale in South Korea. Distributor activities in other countries in which the
Company has not commenced operations may similarly result in an inability to
secure, or delay in securing required regulatory and business permits. In
addition, the publicity resulting from such distributor activities and other
distributor activities such as inappropriate earnings claims and product
representations by distributors can make the sponsoring and retaining of
distributors more difficult, thereby negatively impacting sales. Furthermore,
the Company's business and results of operations could be adversely affected if
NSI terminates a significant number of distributors or certain distributors who
play a key role in the Company's distribution system. There can be no assurance
that these or other distributor actions will not have a material adverse effect
on the Company's business or results of operations.
Government Regulation of Direct Selling Activities. Direct selling
activities are regulated by various governmental agencies. These laws and
regulations are generally intended to prevent fraudulent or deceptive schemes,
often referred to as "pyramid" or "chain sales" schemes, that promise quick
rewards for little or no effort, require high entry costs, use high pressure
recruiting methods and/or do not involve legitimate products. In Japan, the
Company's distribution system is regulated under the "Door-to-Door" Sales Law,
which requires the submission of specific information concerning the Company's
business and products and which provides certain cancellation and cooling-off
rights for consumers and new distributors. Management has been advised by
counsel that in some respects Japanese laws are becoming more restrictive with
respect to direct selling in Japan. In Taiwan, the Fair Trade Law (and the
Enforcement Rules and Supervisory Regulations of Multi-Level Sales) requires the
Company to comply with registration procedures and also provides distributors
with certain rights regarding cooling-off periods and product returns. The
Company also complies with South Korea's strict Door-to-Door Sales Act, which
requires, among other things, the regular reporting of revenue, the registration
of distributors together with the issuance of a registration card, and the
maintaining of a current distributor registry. This law also limits the amount
of sponsoring bonuses that a registered multi-level marketing company can pay to
its distributors to 35% of revenue in a given month. In Thailand, currently
there are no laws (other than general fair trade laws) directly regulating
direct selling or multi-level marketing activities.
Based on research conducted in opening its existing markets (including
assistance from local counsel), the nature and scope of inquiries from
government regulatory authorities and the Company's history of operations in
such markets to date, the Company believes that its method of distribution is in
compliance in all material respects with the laws and regulations relating to
direct selling activities of the countries in which the Company and NSI
currently operates. Even though management believes that laws governing direct
selling are generally becoming more permissive in certain Asian countries, many
countries, including Singapore, one of the Company's potential markets,
currently have laws in place that would prohibit the Company and NSI from
conducting business in such markets. There can be no assurance that the Company
will be allowed to conduct business in each of the new markets or continue to
conduct business in each of its existing markets licensed from NSI.
Government Regulation of Products and Marketing. The Company and NSI are
subject to or affected by extensive governmental regulations not specifically
addressed to network marketing. Such regulations govern, among other things, (i)
product formulation, labeling, packaging and importation, (ii) product claims
and advertising, whether made by the Company, NSI or NSI distributors, (iii)
fair trade and distributor practices, (iv) taxes, transfer pricing and similar
regulations that affect foreign taxable income and customs duties, and (v)
regulations governing foreign companies generally.
The Japanese Ministry of Health and Welfare requires the Company to possess
an import business license and to register each personal care product imported
into the country. Packaging and labeling requirements are also specified. The
Company has had to reformulate many products to satisfy MOHW regulations. In
Japan, nutritional foods, drugs and quasi- drugs are all strictly regulated. The
chief concern involves the types of claims and representations that can be made
regarding the efficacy of nutritional products. In Taiwan, all "medicated"
cosmetic and pharmaceutical products require registration. In Hong Kong and
Macau, "pharmaceutical" products are strictly regulated. In South Korea, the
Company is subject to and has obtained the mandatory certificate of confirmation
as a qualified importer of cosmetics under the Pharmaceutical Affairs Law as
well as additional product approvals for each of the 45 categories of cosmetic
products which it imports. Each new cosmetic product undergoes a 60-day
post-customs inspection where, in addition to compliance with ingredient
requirements, each product is inspected for compliance with South Korean
labeling requirements. There can be no assurance that these or other applicable
regulations will not prevent the Company from introducing new products into its
markets or require the reformulation of existing products.
In Thailand, personal care products are regulated by the Food and Drug
Association, and all of the initial NSI personal care products to be introduced
in Thailand have qualified for simplified registration procedures under Thai
law. Businesses which are more than 50% owned by non-citizens are not permitted
to operate unless they have an Alien Business Permit, which is frequently
difficult to obtain. The Company is currently operating under the Treaty of
Amity and Economic Relations between Thailand and the United States. Under the
Treaty of Amity, an Alien Business Permit is not required if a Thailand business
is owned by an entity organized in the United States, a majority of whose owners
are U.S. citizens or entities. From time to time, it has been reported that
certain Thailand government officials have considered supporting the termination
of the Treaty of Amity. There can be no assurance that, if the Treaty of Amity
were terminated, the Company would be able to obtain an Alien Business Permit
and continue operations in Thailand.
Other Regulatory Issues. As a U.S. entity operating through subsidiaries in
foreign jurisdictions, the Company is subject to foreign exchange control and
transfer pricing laws that regulate the flow of funds between the Subsidiaries
and the Company, as well as the flow of funds to NSI for product purchases,
management services and contractual obligations such as payment of distributor
commissions. In South Korea, in particular, the Company has come under the
scrutiny of regulators because of the manner in which the Company and Nu Skin
Korea implement the Global Compensation Plan. Pursuant to the Global
Compensation Plan, Nu Skin Korea currently pays commissions to distributors in
South Korea on both their local and foreign product sales. Similarly,
commissions on product sales in South Korea by other distributors are paid by
their local NSI affiliate. The Company believes that it operates in compliance
with all applicable foreign exchange control and transfer pricing laws. However,
there can be no assurance that the Company will continue to be found to be
operating in compliance with foreign exchange control and transfer pricing laws,
or that such laws will not be modified, which, as a result, may require changes
in the Company's operating procedures.
As is the case with most network marketing companies, NSI and the Company
have from time to time received inquiries from various government regulatory
authorities regarding the nature of their business and other issues such as
compliance with local business opportunity and securities laws. Although to date
none of these inquiries has resulted in a finding materially adverse to the
Company or NSI, adverse publicity resulting from inquiries into NSI's operations
by certain government agencies in the early 1990's, stemming in part out of
inappropriate product and earnings claims by distributors, materially adversely
affected NSI's business and results of operations. There can be no assurance
that the Company or NSI will not face similar inquiries in the future which,
either as a result of findings adverse to the Company or NSI or as a result of
adverse publicity resulting from the instigation of such inquiries, could have a
material adverse effect on the Company's business and results of operations.
The Subsidiaries are periodically subject to reviews and audits by various
governmental agencies, particularly in new markets, where the Company has
experienced high rates of growth. Currently, Nu Skin Korea is subject to an
audit by South Korean customs authorities, which may or may not lead to other
regulatory review. Management believes that this inquiry is the result of Nu
Skin Korea's rapid growth and the fact that it is now reportedly the largest
importer of cosmetics and personal care products in South Korea. Management
believes that other major importers of cosmetic products are the focus of
regulatory reviews by South Korean authorities.
Based on the Company's and NSI's experience and research (including
assistance from counsel) and the nature and scope of inquiries from government
regulatory authorities, the Company believes that it is in material compliance
with all regulations applicable to the Company. Despite this belief, either the
Company or NSI could be found not to be in material compliance with existing
regulations as a result of, among other things, the considerable interpretative
and enforcement discretion given to regulators or misconduct by independent
distributors. In 1994, NSI and three of its distributors entered into a consent
decree with the Federal Trade Commission with respect to its investigation of
certain product claims and distributor practices, pursuant to which NSI paid
approximately $1 million to settle the FTC investigation. NSI is currently in
discussions with the FTC regarding its compliance with such consent decree and
other product issues raised by the FTC. NSI recently voluntarily agreed to
recall and rewrite virtually all of its sales and marketing materials to address
FTC concerns. NSI has also offered a monetary settlement, which proposal is
currently under review by the FTC. Even though neither the Company nor the
Subsidiaries has encountered similar regulatory concerns, there can be no
assurances that the Company and the Subsidiaries will not be subject to similar
inquiries and regulatory investigations or disputes and the effects of any
adverse publicity resulting therefrom. Any assertion or determination that
either the Company, NSI or any NSI distributors are not in compliance with
existing laws or regulations could potentially have a material adverse effect on
the Company's business and results of operations. In addition, in any country or
jurisdiction, the adoption of new laws or regulations or changes in the
interpretation of existing laws or regulations could generate negative publicity
and/or have a material adverse effect on the Company's business and results of
operations. The Company cannot determine the effect, if any, that future
governmental regulations or administrative orders may have on the Company's
business and results of operations. Moreover, governmental regulations in
countries where the Company plans to commence or expand operations may prevent,
delay or limit market entry of certain products or require the reformulation of
such products. Regulatory action, whether or not it results in a final
determination adverse to the Company or NSI, has the potential to create
negative publicity, with detrimental effects on the motivation and recruitment
of distributors and, consequently, on the Company's sales and earnings.
Reliance on Certain Distributors; Potential Divergence of Interests between
Distributors and the Company. The Company's Global Compensation Plan allows
distributors to sponsor new distributors. The sponsoring of new distributors
creates multiple distributor levels in the network marketing structure.
Sponsored distributors are referred to as " downline" distributors within the
sponsoring distributor's "downline network." If downline distributors also
sponsor new distributors, additional levels of downline distributors are
created, with the new downline distributors also becoming part of the original
sponsor's "downline network." As a result of this network marketing distribution
system, distributors develop relationships with other distributors, both within
their own countries and internationally. The Company believes that its revenue
is generated from thousands of distributor networks. However, the Company
estimates that, as of December 31, 1996, approximately 325 distributorships
worldwide comprised NSI's two highest executive distributor levels (Hawaiian
Blue Diamond and Blue Diamond distributors). These distributorships have
developed extensive downline networks which consist of thousands of sub-
networks. Together with such networks, these distributorships account for
substantially all of the Company's revenue. Consequently, the loss of such a
high-level distributor or another key distributor together with a group of
leading distributors in such distributor's downline network, or the loss of a
significant number of distributors for any reason, could adversely affect sales
of the Company's products, impair the Company's ability to attract new
distributors and adversely impact earnings.
Under the Global Compensation Plan, a distributor receives commissions
based on products sold by the distributor and by participants in the
distributor's worldwide downline network, regardless of the country in which
such participants are located. The Company, on the other hand, receives revenues
based almost exclusively on sales of products to distributors within the
Company's markets. So, for example, if a distributor located in Japan sponsors a
distributor in Europe, the Japanese distributor could receive commissions based
on the sales made by the European distributor, but the Company would not receive
any revenue since the products would have been sold outside of the Company's
markets. The interests of the Company and distributors therefore diverge
somewhat in that the Company's primary objective is to maximize the amount of
products sold within the Company's markets, while the distributors' objective is
to maximize the amount of products sold by the participants in the distributors'
worldwide downline networks. The Company and NSI have observed that the
commencement of operations in a new country tends to distract the attention of
distributors from the established markets for a period of time while key
distributors begin to build their downline networks within the new country. NSI
is currently contemplating opening operations in additional countries outside of
the Company's markets. To the extent distributors focus their energies on
establishing downline networks in these new countries, and decrease their focus
on building organizations within the Company's markets, the Company's business
and results of operations could be adversely affected. Furthermore, the Company
itself is currently contemplating opening new markets. In the event distributors
focus on these new markets, sales in existing markets might be adversely
affected. There can be no assurance that these new markets will develop or that
any increase in sales in new markets will not be more than offset by a decrease
in sales in the existing markets.
Entering New Markets. As part of its growth strategy, the Company has
acquired from NSI the right to act as NSI's exclusive distribution vehicle in
Indonesia, Malaysia, the Philippines, the PRC, Singapore and Vietnam. The
Company has undertaken a preliminary review of the laws and regulations to which
its operations would be subject in the Philippines, Indonesia, Malaysia, the
PRC, Vietnam and Singapore. Given existing regulatory environments and economic
conditions, the Company's entrance into Singapore and Vietnam is not anticipated
in the short to mid-term. The regulatory and political climate in the other
countries for which the Company has the right to act as NSI's exclusive
distributor is such that a replication of the Company's current operating
structure cannot be guaranteed. Because the Company's personal care and
nutritional product lines are positioned as premium product lines, the market
potential for the Company's product lines in relatively less developed
countries, such as the PRC and Vietnam, remains to be determined. Modifications
to each product line may be needed to accommodate the market conditions in each
country, while maintaining the integrity of the Company's products. No assurance
can be given that the Company will be able to 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. The PRC, for example, has proven to be a
particularly difficult market for foreign corporations due to its extensive
government regulation and the historical political tenants of the PRC
government. In order to enter the market in the PRC, the Company may be required
to create a joint venture enterprise with a Chinese entity and to establish a
local manufacturing presence, which will entail a significant investment on the
Company's part. The Company will likely have to apply for licenses on a province
by province basis and the repatriation of the Company's profits will be subject
to restrictions on currency conversion and the fluctuations of the government
controlled exchange rate. In addition, because distribution systems are greatly
fragmented, the Company may be forced to use business models significantly
different from those used by the Company in more developed countries. The lack
of a comprehensive legal system and the uncertain and sporadic enforcement of
existing legislation and laws could also have an adverse effect on the Company's
proposed business in the PRC.
The other potential new markets also present significant regulatory,
political and economic obstacles to the Company. In Singapore, for example,
network marketing is currently illegal and is not permitted under any
circumstances. Although the Company believes that this restriction will
eventually be relaxed or repealed, no assurance can be given that such
regulation will not remain in place and that the Company will not be permanently
prevented from initiating sales in Singapore. In addition, Malaysia has
governmental guidelines that have the effect of limiting foreign ownership of
direct selling companies operating in Malaysia to no more than 30%. There can be
no assurance that the Company will be able to properly structure Malaysian
operations to comply with this policy. In October of 1995, the Company's
business permit applications were denied by the Malaysian government as a result
of activities by certain NSI distributors. Therefore, the Company believes that
although significant opportunities exist to expand its operations into new
markets, there can be no assurance that these or other difficulties will not
prevent the Company from realizing the benefits of this opportunity.
Managing Growth. The Company's Asian Operations have experienced rapid
growth since operations in Hong Kong commenced in 1991. The management
challenges imposed by this growth include entry into new markets, growth in the
number of employees and distributors, expansion of facilities necessary to
accommodate growth and additions and modifications to the Company's product
lines. To manage these changes effectively, the Company may be required to hire
additional management and operations personnel and to improve its operational,
financial and management systems. 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, 1996, Hong Kong serves as the location
for the Company's regional offices and an important base of operations for many
of the Company's most successful distributors whose downline distributor
networks extend into other Asian markets. Any adverse effect on the social,
political or economic systems in Hong Kong resulting from this transfer could
have a material adverse effect on the Company's business and results of
operations. Although the Company does not anticipate any material adverse change
in the business environment in Hong Kong resulting from the 1997 transfer of
sovereignty, the Company 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. NSI
retains and will continue to 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
licenses and will continue to license to the Company rights to use the Licensed
Property in certain markets. NSI and its affiliates currently operate in 15
countries, excluding the countries in which the Company currently operates, and
will continue to market and sell personal care and nutritional products in these
countries, as well as in additional countries outside of the Company's markets,
through the network marketing channel. Thus the Company will not be able to use
the Nu Skin name to expand into other markets for which the Company does not
currently have a license without first obtaining additional licenses or other
rights from NSI. There can be no assurance that NSI will make any additional
markets available to the Company or that the terms of any new licenses from NSI
will be acceptable to the Company.
NSI has licensed to the Company, through the Subsidiaries, rights to
distribute NSI products and to use the Licensed Property in the Company's
markets, and NSIMG, will provide management support services to the Company and
the Subsidiaries, pursuant to the Operating Agreements. The Company relies on
NSI for research, development, testing, labeling and regulatory compliance for
products sold to the Company under the distribution agreements, and virtually
all of the Company's revenues are derived from products and sales aids purchased
from NSI pursuant to these agreements. NSIMG 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 Original
Stockholders, on a combined basis, no longer beneficially own a majority of the
combined voting power of the outstanding shares of common stock of the Company
or of NSI. The Company will be almost completely dependent on the Operating
Agreements to conduct its business, and in the event NSI is unable or unwilling
to perform its obligations under the Operating Agreements, or terminates the
Operating Agreements as provided therein, the Company's business and results of
operations will be adversely affected.
As of March 3, 1997, approximately 98.4% of the combined voting power of
the outstanding shares of Common Stock was held by the Original Stockholders and
certain of their affiliates. Consequently, as of such date, the Original
Stockholders and certain of their affiliates had the ability, acting in concert,
to elect all directors of the Company and approve any action requiring approval
by a majority of the stockholders of the Company. Certain of the Original
Stockholders also owned 100% of the outstanding shares of NSI, as of March 3,
1997. As a result of this ownership, these Original 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 Operating Agreements were approved by the Board of Directors of the
Company, which, at the time of such approval, was composed entirely of officers
and shareholders of 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.
Concurrently with the Underwritten Offerings, the Company purchased from
NSI for $25 million the exclusive rights to distribute NSI products in Thailand,
Indonesia, Malaysia, the Philippines, the PRC, Singapore and Vietnam. The
Company has paid $15 million of this amount, and will pay the remaining $10
million of this amount in January 1998.
In view of the substantial relationships between the Company and NSI,
conflicts of interest may exist or arise with respect to existing and future
business dealings, including, without limitation, the relative commitment of
time and energy by the executive officers to the respective businesses of the
Company and NSI, potential acquisitions of businesses or properties, the
issuance of additional securities, the election of new or additional directors,
the payment of dividends by the Company, including the use of $15 million of the
proceeds of the Underwritten Offerings to repay a portion of the S Distribution
Notes. 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.
Control by Original 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 Original Stockholders. Consequently, the shares of
Class B Common Stock enjoy ten to one voting privileges over the shares of Class
A Common Stock until the outstanding shares of Class B Common Stock constitute
less than 10% of the total outstanding shares of Common Stock. As of March 3,
1997, the Original Stockholders and certain of their affiliates collectively
owned 100% of the outstanding shares of the Class B Common Stock, representing
approximately 98.4% of the combined voting power of the outstanding shares of
Common Stock. Accordingly, as of such date, the Original Stockholders and
certain of their affiliates, acting fully or partially in concert, were able to
control the election of the Board of Directors of the Company and thus the
direction and future operations of the Company without the supporting vote of
any other stockholder of the Company, including decisions regarding acquisitions
and other business opportunities, the declaration of dividends and the issuance
of additional shares of Class A Common Stock and other securities. NSI is a
privately-held company, all of the shares of which were owned as of March 3,
1997 by certain of the Original 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.
Adverse Impact on Company Income Due to Distributor Option Program. Prior
to the Offerings, the Original Stockholders converted 1,605,000 shares of Class
B Common Stock to Class A Common Stock and contributed such shares of Class A
Common Stock to the Company. The Company has granted to NSI the Distributor
Options to purchase such shares of Class A Common Stock, and NSI will assign the
Distributor Options to qualifying distributors of NSI in connection with the
Rule 415 Offerings. The Exercise Price for the Distributor Options is $5.75,
which is 25% of the initial price per share to the public in the Underwritten
Offerings. The vesting of the Distributor Options is subject to certain
conditions, and the Distributor Options have been registered along with the
shares of Class A Common Stock underlying such Distributor Options pursuant to
Rule 415 under the 1933 Act.
The Company estimates a pre-tax non-cash compensation expense of
approximately $20.0 million in connection with the grant of the Distributor
Options. This non-cash compensation expense will result in a corresponding
impact on net income and net income per share, which may also result in a
corresponding impact on the market price of the Class A Common Stock.
Risks Related to Allocation and Vesting of Distributor Options; Decrease in
Number of Distributor Options Available; Effect of Product Returns. Each
allocation of Distributor Options made to a qualifying distributor (an "
Eligible Distributor") that is an entity (such as a partnership or corporation)
shall be made by NSI solely to the entity, not to the owners of the entity
individually. In order for his or her Distributor Options to vest, an Eligible
Distributor will generally be required to maintain, during the period from
September 1, 1997 through December 31, 1997 (the "Vesting Period"), the
Executive Pin Level he or she achieved by August 31, 1997 (the "Qualifying
Executive Pin Level") . If an Eligible Distributor fails to maintain his or her
Qualifying Executive Pin Level for any month during the Vesting Period, the
number of Distributor Options vested in such Eligible Distributor will be
recalculated at the end of the Vesting Period. If an Eligible Distributor falls
below an Executive Pin Level of Gold at any time during the Vesting Period, all
Distributor Options held by such Eligible Distributor will be immediately
forfeited. Forfeited or declined options will not vest but will revert to NSI.
Distributor Options vested in an Eligible Distributor will become exercisable
upon receipt of written notice from NSI of the number of Distributor Options
vested in such Eligible Distributor which is currently estimated to be by
January 31, 1998, and will remain exercisable for a four-year period following
December 31, 1997, provided the Eligible Distributor maintains an Executive Pin
Level of Gold or higher until the date of exercise. No Distributor Options will
be exercisable after December 31, 2001. In certain jurisdictions, the exercise
period may be shortened to comply with local regulations.
There can be no assurance that the number of Eligible Distributors will
remain constant during the qualification period from January 1, 1997 until
August 31, 1997 (the "Qualification Period"). Given the fixed number of
Distributor Options available, the number of Distributor Options allocable to an
Eligible Distributor will decrease as the total number of Eligible Distributors
increases and conversely will increase as the total number of Eligible
Distributors decreases. NSI has historically experienced periods of significant
fluctuations in its total number of executive distributors and may experience
such fluctuations in the future. An increase in the total number of Eligible
Distributors during the Qualification Period could result in a material
reduction in the number of Distributor Options allocable to an individual
Eligible Distributor. The number of Distributor Options allocable to an Eligible
Distributor will also decrease as the number of Eligible Distributors at higher
executive distributor levels increases as a proportion of all Eligible
Distributors and conversely will increase as the number of Eligible Distributors
at higher executive distributor levels decreases as a proportion of all Eligible
Distributors. There can be no assurance that the proportion of Eligible
Distributors at each Executive Pin Level will remain constant during the
Qualification Period. In addition, the number of Distributor Options allocable
to an Eligible Distributor will decrease as such Eligible Distributor's
compensation decreases as a proportion of total compensation paid to all
Eligible Distributors and conversely will increase as such Eligible
Distributor's compensation increases as a proportion of total compensation paid
to all Eligible Distributors. There can be no assurance that an Eligible
Distributor's compensation will remain constant as a percentage of total
Eligible Distributor compensation during the Qualification Period. Further,
there can be no assurance that an Eligible Distributor will be able to earn
particular compensation amounts during the Qualification Period. In certain
countries, including Japan, the formula used in determining allocations among
distributors may be modified to comply with local regulations, which will impact
the number of Distributor Options allocated to all Eligible Distributors.
Product returns during the Qualification or Vesting Periods will reduce
commission levels and may affect distributor pin levels, consequently impacting
the number of Distributor Options received by an Eligible Distributor. In the
event of product returns occurring after the Qualification or Vesting Periods
which would have affected distributor pin levels or qualification for or vesting
of Distributor Options had such product returns been made during the
Qualification or Vesting Periods, NSI reserves the right to use any mechanism
available to it under the NSI distributor policies and procedures, as may be
amended from time to time, to recoup the value of the Distributor Options
received by an Eligible Distributor at the end of the Vesting Period in excess
of the value of Distributor Options which would have vested had such returns
been made prior to the end of the Vesting Period. There can be no assurance that
product returns will not affect the number of Distribution Options or the value
of Distribution Options received by an Eligible Distributor.
NSI has granted in the past, and may continue to grant in the future,
exceptions under its Global Compensation Plan permitting various distributors to
receive compensation at higher levels than they would have been entitled to
receive based exclusively on their personal and group sales volumes. Although
exceptions are discouraged, management believes that this arrangement is
important in retaining the loyalty and dedication of distributors in certain
situations. However, allocations of Distributor Options shall generally be based
on the Executive Pin Level at which Eligible Distributors receive commissions,
giving consideration to any temporary exceptions which may be granted by NSI
from time to time.
Restrictions on Resale of Shares Underlying Distributor Options. By
exercising any portion of his or her Distributor Options, each Eligible
Distributor who is granted more than 3,000 Distributor Options agrees not to
resell in any given six-month period more than 33% of the shares of Class A
Common Stock issuable upon exercise of the Distributor Options originally
granted to such Eligible Distributor.
Regulatory and Taxation Risks. The availability of Distributor Options and
employee stock bonus awards in each country in which NSI distributors and/or
employees reside is entirely dependent upon and subject to NSI's ability to
secure any necessary regulatory approvals, qualifications or exemptions in each
such country. There can be no assurance that such qualifications will be secured
or, once secured, will not be suspended. It is possible that NSI may not be able
to secure the necessary regulatory approvals or qualifications in certain
countries. The receipt of Distributor Options and employee stock bonus awards
will also subject the recipient to potentially material income tax and capital
gains tax implications. The Company and its affiliates anticipate that the
Distributor Options, the shares of Class A Common Stock underlying the
Distributor Options and the employee stock bonus awards will be qualified in
some form pursuant to the securities laws of each jurisdiction in which the
Company and its affiliates operate. There can be no assurance, however, that NSI
will be able to qualify the Distributor Options and the employee stock bonus
awards in each jurisdiction or that, if qualified, the governmental authorities
in such jurisdictions will not suspend qualifications or require material
modifications to the terms of the programs as they are currently contemplated to
be implemented. In South Korea, prior to awarding Distributor Options to
distributors, NSI is awaiting confirmation from regulatory authorities that
distributors will be permitted to exercise any Distributor Options received by
them. There can be no assurance, however, that distributors in South Korea will
be allocated or be allowed to exercise any of the Distributor Options they may
receive. In certain European countries, including France, the United Kingdom,
Spain, Belgium and possibly others, only existing distributors and/or executive
distributors will be allowed to participate in the Nu Skin International, Inc.
1996 Stock Option Plan. No assurances can be given as to the timing of any
governmental approvals received in connection with the Distributor Options. In
addition, there can be no assurance that the laws and relevant regulations and
judicial and administrative interpretations in such jurisdictions will not
change in a manner that has a material impact on the ability of NSI to adopt or
maintain such programs in such jurisdictions. The Nu Skin International, Inc.
1996 Stock Option Plan, as it is implemented or administered in any given
country where distributors of NSI reside or act as independent distributors of
NSI, may be amended or modified by NSI's board of directors from time to time to
comply with the legal requirements and restrictions of such country.
Reliance on and Concentration of Outside Manufacturers. Virtually all the
Company's products are sourced through NSI and are produced by manufacturers
unaffiliated with NSI. The Company currently has little or no direct contact
with these manufacturers. The Company's profit margins and its ability to
deliver its existing products on a timely basis are dependent upon the ability
of NSI's outside manufacturers to continue to supply products in a timely and
cost-efficient manner. Furthermore, the Company's ability to enter new markets
and sustain satisfactory levels of sales in each market is dependent in part
upon the ability of suitable outside manufacturers to reformulate existing
products, if necessary to comply with local regulations or market environments,
for introduction into such markets. Finally, the development of additional new
products in the future will likewise be dependent in part on the services of
suitable outside manufacturers.
The Company currently acquires products or ingredients from sole suppliers
or suppliers that are considered by the Company to be the superior suppliers of
such ingredients. The Company believes that, in the event it is unable to source
any products or ingredients from its current suppliers, the Company could
produce such products or replace such products or substitute ingredients without
great difficulty or prohibitive increases in the cost of goods sold. However,
there can be no assurance that the loss of such a supplier would not have a
material adverse effect on the Company's business and results of operations.
With respect to sales to the Company, NSI currently relies on two
unaffiliated manufacturers to produce approximately 70% and 80% of its personal
care and nutritional products, respectively. NSI has a written agreement with
the primary supplier of the Company's personal care products that expires at the
end of 1997. An extension to such contract is currently being negotiated. NSI
does not currently have a written contract with the primary supplier of the
Company's nutritional products. The Company believes that in the event that
NSI's relationship with any of its key manufacturers is terminated, NSI will be
able to find suitable replacement manufacturers. However, there can be no
assurance that the loss of either manufacturer would not have a material adverse
effect on the Company's business and results of operations.
Reliance on Operations of and Dividends and Distributions from
Subsidiaries. The Company is a holding company without operations of its own or
significant assets other than ownership of 100% of the capital stock of each of
the Subsidiaries. Accordingly, an important source of the Company's income will
be dividends and other distributions from the Subsidiaries. Each of the
Subsidiaries has its operations in a country other than the United States, the
country in which the Company is organized. In addition, each of the Subsidiaries
receives its revenues in the local currency of the country or jurisdiction in
which it is situated. As a consequence, the Company's ability to obtain
dividends or other distributions is subject to, among other things, restrictions
on dividends under applicable local laws and regulations, and foreign currency
exchange regulations of the country or jurisdictions in which the Subsidiaries
operate. The Subsidiaries' ability to pay dividends or make other distributions
to the Company is also subject to their having sufficient funds from their
operations legally available for the payment of such dividends or distributions
that are not needed to fund their operations, obligations or other business
plans. Because the Company will be a stockholder of each of the Subsidiaries,
the Company's claims as such will generally rank junior to all other creditors
of and claims against the Subsidiaries. In the event of a Subsidiary's
liquidation, there may not be assets sufficient for the Company to recoup its
investment in such Subsidiary.
Taxation Risks and Transfer Pricing. The Company is subject to taxation in
the United States, where it is incorporated, at a statutory corporate federal
tax rate of 35.0% plus any applicable state income taxes. In addition, each
Subsidiary is subject to taxation in the country in which it operates, currently
ranging from a statutory tax rate of 57.9% in Japan to 16.5% in Hong Kong. The
Company will be eligible for foreign tax credits in the U.S. for the amount of
foreign taxes actually paid in a given period. In the event that the Company's
operations in high tax jurisdictions such as Japan grow disproportionately to
the rest of the Company's operations, the Company will be unable to fully
utilize its foreign tax credits in the U.S., which could, accordingly, result in
the Company paying a higher overall effective tax rate on its worldwide
operations.
Because the Subsidiaries operate outside of the United States, the Company
is subject to the jurisdiction of numerous foreign tax authorities. In addition
to closely monitoring the Subsidiaries locally based income, these tax
authorities regulate and restrict various corporate transactions, including
intercompany transfers. The Company believes that the tax authorities in Japan
and South Korea are particularly active in challenging the tax structures of
foreign corporations and their intercompany transfers. Although the Company
believes that its tax and transfer pricing structures are in compliance in all
material respects with the laws of every jurisdiction in which it operates, no
assurance can be given that these structures will not be challenged by foreign
tax authorities or that such challenges will not have a material adverse effect
on the Company's business or results of operations.
Increase in Distributor Compensation Expense. Under the Licensing and Sales
Agreements (the "Licensing and Sales Agreements") between each of the
Subsidiaries and NSI, the Company and each Subsidiary are contractually
obligated to pay a distributor commission expense of 42% of commissionable
product sales (with the exception of South Korea where, due to government
regulations, the Company uses a formula based upon a maximum payout of 35% of
commissionable product sales). The Licensing and Sales Agreements provide that
the Company is to satisfy this obligation by paying commissions owed to local
distributors. In the event that these commissions exceed 42% of commissionable
product sales, the Company is entitled to receive the difference from NSI. In
the event that the commissions paid are lower than 42%, the Company must pay the
difference to NSI. Under this formulation, the Company's total commission
expense is fixed at 42% of commissionable product sales in each country (except
for South Korea). The 42% figure has been set on the basis of NSI's experience
over the past seven years during which period actual commissions paid in a given
year together with the cost of administering the Global Compensation Plan have
ranged between 41% and 43% of commissionable product sales for such year
(averaging approximately 42%). In the event that actual commissions payable to
distributors from sales in the Company's markets vary from these historical
results, whether as a result of changes in distributor behavior or changes to
the Global Compensation Plan or in the event that NSI's cost of administering
the Global Compensation Plan increases or decreases, the Licensing and Sales
Agreements provide that the intercompany settlement figure may be modified to
more accurately reflect actual results. This could result in the Company
becoming obligated to make greater settlement payments to NSI under the
Licensing and Sales Agreements. Such additional payments could adversely affect
the Company's results of operations. Because the Company licenses the right to
use the Global Compensation Plan from NSI, the structure of the plan, including
commission rates, is under the control of NSI.
Seasonality and Cyclicality; Variations in Operating Results. While neither
seasonal nor cyclical variations have materially affected the Company's results
of operations to date, the Company believes that its rapid growth may have
overshadowed these factors. Accordingly, there can be no assurance that seasonal
or cyclical variations will not materially adversely affect the Company's
results of operations in the future.
The direct selling industry in Asia is impacted by certain seasonal trends
such as major cultural events and vacation patterns. For example, sales are
generally affected by local New Year celebrations in Japan, Taiwan, Hong Kong
and South Korea, which occur in the Company's first quarter. Management believes
that direct selling in Japan is also generally negatively impacted during
August, when many individuals traditionally take vacations.
Generally, the Company has experienced rapid revenue growth in each new
market from the commencement of operations. In Japan, Taiwan and Hong Kong, the
initial rapid revenue growth was followed by a short period of stable revenue
followed by renewed growth fueled by new product introductions, an increase in
the number of active distributors and increased distributor productivity. In
addition, the Company may experience variations on a quarterly basis in its
results of operations, as new products are introduced and new markets are
opened. There can be no assurance that current revenue and productivity trends
will be maintained in any of these markets or that future results of operations
will follow historical performance. Furthermore, no assurances can be given that
the Company's revenue growth rate in either South Korea or Thailand, which
commenced operations in February 1996 and March 1997, respectively, or in new
markets where operations have not commenced, will follow this pattern.
Product Liability. The Company may be subject, under applicable laws and
regulations, to liability for loss or injury caused by its products. The
Company's Subsidiaries are currently covered for product liability claims to the
extent of and under insurance programs maintained by NSI for their benefit and
for the benefit of its affiliates purchasing NSI products. Accordingly, NSI
maintains a policy covering product liability claims for itself and its
affiliates with a $1 million per claim and $1 million annual aggregate limit and
an umbrella policy with a $40 million per claim and $40 million annual aggregate
limit. Although the Company has not been the subject of material product
liability claims and the laws and regulations providing for such liability in
the Company's markets appear to have been seldom utilized, no assurance can be
given that the Company may not be exposed to future product liability claims,
and, if any such claims are successful, there can be no assurance that the
Company will be adequately covered by insurance or have sufficient resources to
pay such claims. The Company does not currently maintain its own product
liability policy.
Competition. The markets for personal care and nutritional products are
large and intensely competitive. The Company competes directly with companies
that manufacture and market personal care and nutritional products in each of
the Company's product lines. The Company competes with other companies in the
personal care and nutritional products industry by emphasizing the value and
premium quality of the Company's products and the convenience of the Company's
distribution system. Many of the Company's competitors have much greater name
recognition and financial resources than the Company. In addition, personal care
and nutritional products can be purchased in a wide variety of channels of
distribution. While the Company believes that consumers appreciate the
convenience of ordering products from home through a sales person or through a
catalog, the buying habits of many consumers accustomed to purchasing products
through traditional retail channels are difficult to change. The Company's
product offerings in each product category are also relatively small compared to
the wide variety of products offered by many other personal care and nutritional
product companies. There can be no assurance that the Company's business and
results of operations will not be affected materially by market conditions and
competition in the future.
The Company also competes with other direct selling organizations, some of
which have longer operating histories and higher visibility name recognition and
financial resources. The leading network marketing company in the Company's
markets is Amway Corporation and its affiliates. The Company competes for new
distributors on the basis of the Global Compensation Plan and its premium
quality products. Management envisions the entry of many more direct selling
organizations into the marketplace as this channel of distribution expands over
the next several years. The Company has been advised that certain large,
well-financed corporations are planning to launch direct selling enterprises
which will compete with the Company in certain of its product lines. There can
be no assurance that the Company will be able to successfully meet the
challenges posed by this increased competition.
The Company competes for the time, attention and commitment of its
independent distributor force. Given that the pool of individuals interested in
the business opportunities presented by direct selling tends to be limited in
each market, the potential pool of distributors for the Company's products is
reduced to the extent other network marketing companies successfully recruit
these individuals into their businesses. Although management believes that the
Company offers an attractive business opportunity, there can be no assurance
that other network marketing companies will not be able to recruit the Company's
existing distributors or deplete the pool of potential distributors in a given
market.
Operations Outside the United States; Currency Risks. The Company's
revenues and most of its expenses are recognized primarily outside of the United
States. Therefore, the Company is subject to transfer pricing regulations and
foreign exchange control, taxation, customs and other laws. The Company's
operations may be materially and adversely affected by economic, political and
social conditions in the countries in which it operates. A change in policies by
any government in the Company's markets could adversely affect the Company and
its operations through, among other things, changes in laws, rules or
regulations, or the interpretation thereof, confiscatory taxation, restrictions
on currency conversion, currency repatriation or imports, or the expropriation
of private enterprises. Although the general trend in these countries has been
toward more open markets and trade policies and the fostering of private
business and economic activity, no assurance can be given that the governments
in these countries will continue to pursue such policies or that such policies
will not be significantly altered in future periods. This could be especially
true in the event of a change in leadership, social or political disruption or
upheaval, or unforeseen circumstances affecting economic, political or social
conditions or policies. The Company is aware of news releases in South Korea,
for example, reporting comments by political figures proposing restrictions on
foreign direct sellers designed to protect the market share of local companies.
There can be no assurance that such activities, or other similar activities in
the Company's markets, will not result in passage of legislation or the
enactment of policies which could materially adversely affect the Company's
operations in these markets. In addition, the Company's ability to expand its
operations into the new markets for which it has received an exclusive license
to distribute NSI products will directly depend on its ability to secure the
requisite government approvals and comply with the local government regulations
in each of those countries. The Company has in the past experienced difficulties
in obtaining such approvals as a result of certain actions taken by its
distributors, and no assurance can be given that these or similar problems will
not prevent the Company from commencing operations in those countries.
The Company purchases inventory from NSI in U.S. dollars and assumes
currency exchange rate risk with respect to such purchases. Local currency in
Japan, Taiwan, Hong Kong, South Korea and Thailand is generally used to settle
non-inventory transactions with NSI. Given the uncertainty of exchange rate
fluctuations, the Company cannot estimate the effect of these fluctuations on
its future business, product pricing, results of operations or financial
condition. However, because nearly all of the Company's revenue is realized in
local currencies and the majority of its cost of sales is denominated in U.S.
dollars, the Company's gross profits will be positively affected by a weakening
in the U.S. dollar and will be negatively affected by a strengthening in the
U.S. dollar. The Company reduces its exposure to fluctuations in foreign
exchange rates by creating offsetting positions through the use of foreign
currency exchange contracts. The Company does not use such financial instruments
for trading or speculative purposes. The Company regularly monitors its foreign
currency risks and periodically takes measures to reduce the impact of foreign
exchange fluctuations on the Company's operating results.
Import Restrictions, Duties and Regulation of Consumer Goods. With the
exception of a small percentage of revenues in Japan, virtually all of the
Company's sales historically have been derived from products purchased from NSI.
All of those products historically have been imported into the countries in
which they were ultimately sold. The countries in which the Company currently
conducts business impose various legal restrictions on imports. In Japan, the
Japanese Ministry of Health and Welfare ("MOHW") requires the Company to possess
an import business license and to register each personal care product imported
into the country. Packaging and labeling requirements are also specified. The
Company has had to reformulate many products to satisfy MOHW regulations. In
Japan, nutritional foods, drugs and quasi-drugs are all strictly regulated. The
chief concern involves the types of claims and representations that can be made
regarding the efficacy of nutritional products. In Taiwan, all "medicated"
cosmetic and pharmaceutical products require registration. In Hong Kong and
Macau,"pharmaceutical" products are strictly regulated. In South Korea, the
Company has obtained the mandatory certificate of confirmation as a qualified
importer of cosmetics under the Pharmaceutical Affairs Law and is required to
obtain additional product approvals for each of the 45 categories of cosmetic
products which it imports. Each new cosmetic product undergoes a 60 day
post-customs inspection where, in addition to compliance with ingredient
requirements, each product is inspected for compliance with South Korean
labeling requirements. There can be no assurance that these or other applicable
regulations will not prevent the Company from introducing new products into its
markets or require the reformulation of existing products.
The Company has not experienced any difficulty maintaining its import
licenses but has experienced complications regarding health and safety and food
and drug regulations for nutritional products. Many products require
reformulation to comply with local requirements. In addition, new regulations
could be adopted or any of the existing regulations could be changed at any time
in a manner that could have a material adverse effect on the Company's business
and results of operations. Duties on imports are a component of national trade
and economic policy and could be changed in a manner that would be materially
adverse to the Company's sales and its competitive position compared to
locally-produced goods, in particular in countries such as Taiwan, where the
Company's products are already subject to high customs duties. In addition,
import restrictions in certain countries and jurisdictions limit the Company's
ability to import products from NSI. In some jurisdictions, such as the PRC,
regulators may prevent the importation of NSI products altogether. Present or
future health and safety or food and drug regulations could delay or prevent the
introduction of new products into a given country or marketplace or suspend or
prohibit the sale of existing products in such country or marketplace.
Anti-Takeover Effects of Certain Charter, Contractual and Statutory
Provisions. The Board of Directors is authorized, subject to certain
limitations, to issue without further consent of the stockholders up to
25,000,000 shares of preferred stock with rights, preferences and privileges
designated by the Board of Directors. In addition, the Company's Certificate of
Incorporation requires the approval of 66 2/3% of the outstanding voting power
of the Class A Common Stock and the Class B Common Stock to authorize or approve
certain change of control transactions. The Company's Certificate of
Incorporation and Bylaws also contain certain provisions that limit the ability
to call special meetings of stockholders and the ability of stockholders to
bring business before or to nominate directors at a meeting of stockholders.
Pursuant to the Company's 1996 Stock Incentive Plan, in the event of certain
change of control transactions the Board of Directors has the right, under
certain circumstances, to accelerate the vesting of options and the expiration
of any restriction periods on stock awards. Finally, the Operating Agreements
with NSI and NSIMG are subject to renegotiation after December 31, 2001 upon a
change of control of the Company. Any of these actions, provisions or
requirements could have the effect of delaying, deferring or preventing a change
of control of the Company.
The Company is subject to the provisions of Section 203 of the General
Corporation Law of the State of Delaware (the "Anti-Takeover Law") regulating
corporate takeovers. The Anti-Takeover Law prevents certain Delaware
corporations, including those whose securities are listed on the New York Stock
Exchange, from engaging, under certain circumstances, in a "business
combination" (which includes a merger of not more than 10% of the corporations'
assets) with an "interested stockholder" (a stockholder who, together with
affiliates and associates, within the prior three years did own, 15% or more of
the corporation's outstanding voting stock) for three years following the date
that such stockholder became an "interested stockholder," unless the "business
combination" or "interested stockholder" is approved in a prescribed manner. A
Delaware corporation may "opt out" of the Anti-Takeover Law with an express
provision in its original certificate of incorporation or an express provision
in its certificate of incorporation or bylaws resulting from a stockholders'
amendment approved by at least a majority of the outstanding voting shares. The
Company has not "opted out" of the provisions of the Anti-Takeover Law.
Shares Eligible for Future Sale. Sales of a substantial number of shares of
Class A Common Stock in the public market could adversely affect the market
price for the Class A Common Stock.
Dilution. The Exercise Price of the Distributor Options is $5.75. At this
price, as of December 31, 1996, investors exercising Distributor Options to
purchase shares of Class A Common Stock in the Rule 415 Offerings will incur
immediate dilution of $4.67 per share, assuming the exercise of all the
Distributor Options (excluding any potential increase in the Company's net
tangible book value related to tax benefits that may arise upon the exercise of
the Distributor Options) and the issuance of the shares of Class A Common Stock
underlying the 109,000 stock bonus awards granted by the Company to certain of
its employees in the Rule 415 Offerings.
Absence of Dividends. The Company does not anticipate that any dividends
will be declared on its Common Stock in the immediate future. The Company
intends from time to time to re-evaluate this policy based on its net income and
its alternative uses for retained earnings, if any. Any future declaration of
dividends will be subject to the discretion of the Board of Directors of the
Company and subject to certain limitations under the General Corporation Law of
the State of Delaware. The timing, amount and form of dividends, if any, will
depend, among other things, on the Company's results of operations, financial
condition, cash requirements and other factors deemed relevant by the Board of
Directors of the Company. There can be no assurance regarding the timing or
payment of any future dividends by the Company. It is anticipated that any
dividends, if declared, will be paid in U.S. dollars.
ITEM 2. PROPERTIES
In each of its current markets, the Company has established a central
office for the local administrative staff directed by a general manager. These
offices also have a training room for distributor and employee use and an
adjoining distribution center where distributors can place, pay for, and pick up
orders. In Japan, Taiwan, and South Korea additional pick up centers have been
added to provide better service to distributors and meet the increasing demand
for product. In Hong Kong, the Company maintains a distributor business center
where established distributors can use office space for training and sponsoring
activities at cost.
In addition to the Company's corporate headquarters in Provo, Utah, the
following table summarizes, as of March 3, 1997, the Company's leased office and
distribution facilities in each country where the Company currently has
operations.
Approximate
Location Function Square Feet
- -------- -------- ------------
Tokyo, Japan............. Central office/ distribution center 35,000
Osaka, Japan............. Distribution center/office 13,400
Taipei, Taiwan........... Central office/distribution center 22,000
Kaohsiung, Taiwan........ Distribution center/office 9,500
Taichung, Taiwan......... Distribution center/office 17,000
Nankan, Taiwan........... Warehouse/distribution center 36,000
Causeway Bay, Hong Kong.. Central office/distribution 19,000
center/distributor
business center/regional office
Tsing Yi, Hong Kong...... Warehouse 10,000
Macau.................... Distribution center/office 2,000
Seoul, South Korea....... Central office/distribution center 20,000
Seoul, South Korea....... Distribution center 7,000
Kyungki-Do, South Korea.. Warehouse 16,000
Pusan, South Korea....... Distribution center 10,000
Bangkok, Thailand........ Central office/distribution center 8,200
Bangkok, Thailand........ Distribution center 1,700
ITEM 3. 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the security holders during
the fourth quarter of the fiscal year ended December 31, 1996.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
COMMON STOCK
The Company's Class A Common Stock is listed on the New York Stock Exchange
("NYSE"). The Company's Class A Common Stock trades under the symbol "NUS" and
was listed on the NYSE on November 21, 1996. Prior to that date, there was no
public market for the Company's Class A Common Stock. The following table is
based upon information available to the Company and sets forth the range of the
high and low sales prices for the Company's Class A Common Stock for the
quarterly period from November 21, 1996, the day the Class A Common Stock was
priced in the Company's initial public offering based upon quotations on the
NYSE:
Sales Price
------------------
Security Quarter Ended High Low
Class A Common Stock, par December 31, 1996 (since $30.78 $23.00(1)
value $0.001 per share November 21, 1996)
- --------------
(1) Denotes the price per share in the Underwritten Offerings. The lowest sales
price quoted on the NYSE was $26.50.
The market price of the Company's Class A Common Stock is subject to
significant fluctuations in response to variations in the Company's quarterly
operating results, general trends in the market for the Company's products and
product candidates, and other factors, many of which the Company has little or
no control over. In addition, broad market fluctuations, as well as general
economic, business and political conditions, may adversely effect the market for
the Company's Class A Common Stock, regardless of the Company's actual or
projected performance.
The approximate number of holders of record of the Company's Class A Common
Stock as of March 3, 1997 was 8,600. This number does not represent the actual
number of beneficial owners of shares of the Company's Class A Common Stock
because shares are frequently held in "street name" by securities dealers and
others for the benefit of individual owners who have the right to vote their
shares. The Company has not paid or declared any cash dividends on its Class A
Common Stock since its incorporation and does not anticipate paying any cash
dividends on its Class A Common Stock in the foreseeable future. The Company
currently anticipates that all of its earnings, if any, will be retained for use
in the operation and expansion of its business. Any future determination as to
cash dividends will depend upon the earnings and financial position of the
Company and such other factors as the Company's Board of Directors may deem
appropriate.
ITEM 6. SELECTED FINANCIAL DATA
Three
Months
Ended
Year Ended September 30, December 31, Year Ended December 31,
1992 1993 1994 1994 1994 1995 1996
------ ------ ------ ------ ------ ------ ------
(in thousands, except per share data)
Income Statement Data:
Revenue............................ $42,919 $110,624 $254,637 $73,562 $264,440 $358,609 $678,596
Cost of sales...................... 14,080 38,842 86,872 19,607 82,241 96,615 193,158
------- -------- -------- ------- -------- -------- --------
Gross profit....................... 28,839 71,782 167,765 53,955 182,199 261,994 485,438
Operating expenses:
Distributor incentives........ 14,659 40,267 95,737 27,950 101,372 135,722 249,613
Selling, general and administrative 10,065 27,150 44,566 13,545 48,753 67,475 105,477
Distributor stock expense..... -- -- -- -- -- -- 1,990
------- -------- -------- ------- -------- -------- --------
Operating income................... 4,115 4,365 27,462 12,460 32,074 58,797 128,358
Other income (expense), net........ 160 133 443 (813) (394) 511 2,833
------- -------- -------- ------- -------- -------- --------
Income before provision for income
taxes......................... 4,275 4,498 27,905 11,647 31,680 59,308 131,191
Provision for income taxes......... 1,503 417 10,226 2,730 10,071 19,097 49,494
------- -------- -------- ------- -------- -------- --------
Net income......................... $ 2,772 $ 4,081 $ 17,679 $ 8,917 $ 21,609 $ 40,211 $ 81,697
======= ======== ======== ======= ======== ======== ========
Pro forma net income per share..... $ .50 $ 1.01
Pro forma weighted average common
shares outstanding(5)......... 80,518 81,060
Pro Forma Income Statement
Data(1)(2):
Revenue....................................................................................... $358,609 $678,596
Cost of sales................................................................................. 96,615 193,158
Gross profit.................................................................................. 261,994 485,438
Operating expenses:
Distributor incentives................................................................... 135,722 249,613
Selling, general and administrative...................................................... 74,433 111,802
Operating income.............................................................................. 51,839 124,023
Other income (expense), net(3)................................................................ (2,298) 3,602
Income before provision for income taxes...................................................... 49,541 127,625
Provision for income taxes.................................................................... 19,005 44,700
Net income ................................................................................... $ 30,536 $ 82,925
Net income per share.......................................................................... $ .36 $ .97
Weighted average common shares outstanding(4)................................................. 85,377 85,377
As of September 30, As of December 31,
-------------------------------------- ------------------------------------
1992 1993 1994 1994 1995 1996(5)
------ ------ ------ ------ ------ -------
(in thousands)
Balance Sheet Data:
Cash and cash equivalents............ $ 1,553 $ 14,591 $ 18,077 $ 16,288 $ 63,213 $ 207,106
Working capital...................... 1,026 (504) 15,941 26,680 47,863 66,235
Total assets......................... 10,236 41,394 71,565 61,424 118,228 331,715
Short term notes payable to stockholders -- -- -- -- -- 71,487
Short term note payable to NSI....... -- -- -- -- -- 10,000
Long term note payable to NSI........ -- -- -- -- -- 10,000
Stockholders' equity................. 2,749 6,926 24,934 33,861 61,771 107,792
As of September 30, As of December 31,
-------------------------------------- ------------------------------------
1992 1993 1994 1994 1995 1996
------ ------ ------ ------ ------ -----
Other Information(6):
Number of active distributors........ 33,000 106,000 152,000 170,000 236,000 377,000
Number of executive distributors..... 649 2,788 5,835 6,083 7,550 20,483
- ------
(1) The unaudited pro forma income statement data reflects the Reorganization,
the Offerings and the following adjustments as if such events had occurred
on January 1, 1995: (i) the amortization over a 20-year period of a $25.0
million payment, consisting of $5.0 million in cash and $20.0 million in
notes, to NSI for the exclusive rights to distribute NSI products in
Thailand, Indonesia, Malaysia, the Philippines, the PRC, Singapore and
Vietnam (the "License Fee"); (ii) the recognition by the Company of
additional charges of $4.4 million for the year ended December 31, 1995,
and an additional $4.0 million for the year ended December 31, 1996,
relating to certain support services provided to the Company by NSI and an
NSI affiliate, and charges related to operating as a public company; (iii)
estimated compensation expense of $1.2 million related to the employee
stock bonus awards granted to employees of the Company, NSI and its
affiliates; and (iv) adjustments for U.S. Federal and state income taxes as
if the Company had been taxed as a C corporation rather than as an S
corporation since inception.
(2) The unaudited pro forma income statement data does not reflect the non-cash
compensation expense totaling $19.9 million in connection with the one-time
grant of the Distributor Options at an exercise price of $5.75 per share.
The granting and vesting of the Distributor Options are conditioned upon
distributor performance under the Global Compensation Plan and the NSI 1996
Distributor Stock Option Plan. The vesting of the Distributor Options is
scheduled to occur on December 31, 1997.
(3) Other pro forma income and expense includes: (i) increased interest expense
of $2.7 million for the year ended December 31, 1995 relating to the
distribution to the Original Stockholders through the issuance of
promissory notes (the "S Distribution Notes") of the Subsidiaries' earned
and undistributed S corporation earnings through the date of the
termination of the Subsidiaries S corporation status; (ii) increased
interest expense of $0.9 million for the year ended December 31, 1995 and
$0.1 million for the year ended December 31, 1996 relating to the issuance
of $20.0 million in notes as partial payment of the License Fee payable to
NSI; and (iii) increased interest income of $0.8 million for the year ended
December 31, 1995 and $0.8 million for the year ended December 31, 1996
relating to an estimated $13.1 million note receivable from NSI as
consideration for the Distributor Options.
(4) Pro forma weighted average common shares outstanding reflects 80,250,000
shares of Common Stock outstanding after giving effect to the
Reorganization, increased by the sale of 4,750,000 shares of Class A Common
Stock, the award of 109,000 shares of Class A Common Stock to employees of
the Company, and an option granted to an executive officer of the Company
to purchase 267,500 shares of Class A Common Stock. Supplemental income per
share, calculated as if $25.0 million of the proceeds from the Offerings
were used to repay notes payable, had a dilutive effect of less than 2% and
therefore, is not presented.
(5) On November 27, 1996, the Company completed an initial public offering of
4,750,000 shares and recognized offering proceeds on the transaction of
$98.8 million. From these proceeds, $5.0 million was paid to NSI as partial
payment of the License Fee and $15.0 million was paid to certain
stockholders as partial payment of the S Distribution Notes payable. As of
December 31, 1996, the balance of short-term and long-term notes payable to
NSI relating to the License Fee were $10.0 million and $10.0 million,
respectively, and the balance of S Distribution Notes payable was $71.5
million.
(6) Active distributors are those distributors who are resident in the
countries in which the Company operates and who have purchased products
during the three months ended as of the date indicated, rounded to the
nearest thousand. An executive distributor is an active distributor who has
submitted a qualifying letter of intent to become an executive distributor,
achieved specified personal and group sales volumes for a four month period
and maintained such specified personal and group sales volumes thereafter.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of the Company's financial condition and results
of operations should be read in conjunction with the Consolidated Financial
Statements and the related notes thereto which are included in this report.
General
Nu Skin Asia Pacific is a network marketing company involved in the
distribution and sale of premium quality, innovative personal care and
nutritional products. The Company is the exclusive distribution vehicle for Nu
Skin International, Inc. ("Nu Skin International" or "NSI") in the countries of
Japan, Taiwan, Hong Kong (including Macau), South Korea and Thailand, where the
Company currently has operations, and in Indonesia, Malaysia, the Philippines,
the PRC, Singapore and Vietnam, where operations have not commenced. Until
September 30, 1994, the Company's fiscal year ended on September 30 of each
year. As of October 1, 1994, the Company changed its fiscal year end to December
31 of each year, beginning with the fiscal year ended December 31, 1995.
The Company's revenue, which is net of returns, is primarily dependent upon
the efforts of a network of independent distributors who purchase products and
sales materials from the Company in their local currency and who constitute the
Company's customers. The Company recognizes revenue when products are shipped
and title passes to these independent distributors. Distributor incentives are
paid to several levels of distributors on each product sale. The amount and
recipient of the incentive varies depending on the purchaser's position within
the Global Compensation Plan. These incentives are classified as operating
expenses. The following table sets forth revenue information for the time
periods indicated. This table should be reviewed in connection with the tables
presented under "Results of Operations" which disclose distributor incentives
and other costs associated with generating the aggregate revenue presented.
Date
Operations Year Ended
Commenced December 31,
Country(1) 1994 1995 1996
(in millions)
Japan April 1993 $ 172.9 $ 231.5 $ 380.0
Taiwan January 1992 79.2 105.4 154.6
South Korea February 1996 -- -- 122.4
Hong Kong September 1991 10.9 17.1 17.0
Sales to NSI affiliates(2) January 1993 1.4 4.6 4.6
------ -------- ---------
$ 264.4 $ 358.6 $ 678.6
======== ======== =========
- ---------------
(1) Operations in Thailand commenced in 1997.
(2) Includes revenue from the sale of certain products to NSI affiliates in
Australia and New Zealand.
Revenue generated in Japan and Taiwan represented 56.0% and 22.8%,
respectively, of total revenue generated during 1996. The Company's South Korean
operations, which commenced in February 1996, generated 18.0% of total revenue
for 1996. Although operating costs have increased in each country with the
growth of the Company's revenue, such costs have declined as a percentage of
revenue due to improved operating leverage. Revenue generated in Hong Kong
during 1996 represented 2.5% of total Company revenue.
Cost of sales primarily consists of the cost of products purchased from NSI
(in U.S. dollars) as well as duties related to the importation of such products.
Additionally, cost of sales includes the cost of sales materials sold to
distributors at or near cost. Sales materials are generally purchased in local
currencies. As the sales mix changes between product categories and sales
materials, cost of sales and gross profit may fluctuate to some degree due
primarily to varying import duty rates levied on imported product lines. In each
of the Company's current markets, duties are generally higher on nutritional
products than on personal care products. Also, as currency exchange rates
fluctuate, the Company's gross margin will fluctuate. In general, however, costs
of sales move proportionate to revenue.
Distributor incentives are the Company's most significant expense. Pursuant
to the Operating Agreements with NSI, the Company and the Subsidiaries are
contractually obligated to pay a distributor commission expense of 42.0% of
commissionable product sales (with the exception of South Korea, where, due to
government regulations, the Company uses a formula based upon a maximum payout
of 35.0% of commissionable product sales). The Licensing and Sales Agreements
provide that the Company is to satisfy this obligation by paying commissions
owed to local distributors. In the event that these commissions exceed 42.0% of
commissionable product sales, the Company is entitled to receive the difference
from NSI. In the event that the commissions paid are lower than 42.0%, the
Company must pay the difference to NSI. Under this formulation, the Company's
total commission expense is fixed at 42.0% of commissionable product sales in
each country (except for South Korea). The 42.0% figure has been set on the
basis of NSI's experience over the past seven years which indicates that actual
commissions paid in a given year together with the cost of administering the
Global Compensation Plan average approximately 42.0% of commissionable product
sales for such year. Because the Company's revenue includes sales of both
commissionable and non-commissionable items, distributor incentives as a
percentage of total revenue have ranged from approximately 36.8% to 38.4% since
December 31, 1994. Non-commissionable items consist of sales materials and
starter kits as well as sales to NSI affiliates in Australia and New Zealand.
In the fourth quarter of 1996, NSI and the Company implemented a one-time
distributor equity incentive program. This global program provides for the
granting of options to distributors to purchase 1.6 million shares of the
Company's currently outstanding Class A Common Stock. The number of options each
distributor receives will be based on their performance and productivity through
August 31, 1997. The options are exercisable at a price of $5.75 per share and
will vest on December 31, 1997. As anticipated, the Company recorded a $2.0
million charge in 1996 and expects additional charges in 1997 of approximately
$18.0 million for the non-cash and non-recurring expenses associated with this
program.
Selling, general and administrative expenses include wages and benefits,
rents and utilities, travel and entertainment, promotion and advertising and
professional fees, as well as license and management fees paid to NSI and 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. Statutory tax rates in the
countries in which the Company has operations are 16.5% in Hong Kong, 25.0% in
Taiwan, 30.0% in Thailand, 30.1% in South Korea and 57.9% in Japan. The Company
operates a regional business center in Hong Kong, which bears inventory
obsolescence and currency exchange risks. Any income or loss incurred by the
regional business center is not subject to taxation in Hong Kong. In addition,
since the Reorganization, the Company is subject to taxation in the United
States, where it is incorporated, at a statutory corporate federal tax rate of
35.0%. However, the Company receives foreign tax credits in the U.S. for the
amount of foreign taxes actually paid in a given period, which are utilized to
reduce taxes payable in the United States.
Results of Operations
The following tables set forth (i) operating results, and (ii)
operating results as a percentage of revenue, respectively, for the periods
indicated.
Year Ended December 31,
(in millions)
1994 1995 1996
------ ------ -----
Revenue.............................................................. $ 264.4 $ 358.6 $ 678.6
Cost of sales........................................................ 82.2 96.6 193.2
-------- -------- --------
Gross profit......................................................... 182.2 262.0 485.4
Operating expenses:
Distributor incentives.......................................... 101.4 135.7 249.6
Selling, general and administrative............................. 48.8 67.5 105.4
Distributor stock expense....................................... -- -- 2.0
-------- -------- --------
Operating income..................................................... 32.0 58.8 128.4
Other income (expense), net.......................................... (.4) .5 2.8
-------- -------- --------
Income before provision for income taxes............................. 31.6 59.3 131.2
Provision for income taxes(1)........................................ 10.0 19.1 49.5
-------- -------- --------
Net income........................................................... $ 21.6 $ 40.2 $ 81.7
======== ======== ========
Unaudited supplemental data(1):
Income before pro forma provision for income taxes.............. $ 31.6 $ 59.3 $ 131.2
Pro forma provision for income taxes............................ 11.5 22.8 46.0
-------- -------- --------
Net income after pro forma provision for income taxes........... $ 20.1 $ 36.5 $ 85.2
======== ======== ========
Year Ended December 31,
1994 1995 1996
------ ------ -----
Revenue............................................................. 100.0% 100.0% 100.0%
Cost of sales....................................................... 31.1 26.9 28.5
-------- -------- -------
Gross profit........................................................ 68.9 73.1 71.5
Operating expenses:
Distributor incentives......................................... 38.4 37.8 36.8
Selling, general and administrative............................ 18.4 18.8 15.5
Distributor stock expense...................................... -- -- 0.3
-------- -------- -------
Operating income.................................................... 12.1 16.5 18.9
Other income (expense), net......................................... (.1) .1 .4
-------- -------- -------
Income before provision for income taxes............................ 12.0 16.6 19.3
Provision for income taxes(1)....................................... 3.8 5.3 7.3
-------- -------- -------
Net income.......................................................... 8.2% 11.3% 12.0%
======== ======== =======
Year Ended December 31,
1994 1995 1996
------ ------ -----
Unaudited supplemental data(1):
Income before pro forma provision for income taxes............. 12.0% 16.6% 19.3%
Pro forma provision for income taxes............................ 4.3 6.4 6.8
-------- -------- --------
Net income after pro forma provision for income taxes........... 7.7% 10.2% 12.5%
======== ======== ========
- ----------
(1) Reflects adjustment for Federal and state income taxes as if the Company
had been taxed as a C corporation rather than as an S corporation since
inception.
1996 compared to 1995
Revenue was $678.6 million during 1996, an increase of 89.2% from revenue
of $358.6 million recorded during 1995. This increase is primarily attributable
to several factors. First, revenue in Japan increased by $148.5 million, or
64.1%. This increase in revenue was primarily a result of the continued success
of nutritional, color cosmetics and HairFitness products, which were introduced
in October 1995. Revenue growth in Japan was partially offset by the
strengthening of the U.S. dollar relative to the Japanese yen during 1996.
Second, revenue in Taiwan increased by $49.2 million, or 46.7%, primarily as a
result of the introduction of color cosmetics and other products, including
LifePak in October 1996, along with the opening of a new distribution and
walk-in center in Nankan, Taiwan. Third, in February 1996, Nu Skin Korea
commenced operations and has generated revenue of $122.4 million for 1996.
Additionally, revenue in Hong Kong decreased by $0.1 million during 1996 as
compared to 1995, due to several leading Hong Kong distributors continuing to
focus on other Asian markets.
Gross profit as a percentage of revenue was 71.5% and 73.1% during 1996 and
1995, respectively. This decline reflected the strengthening of the U.S. dollar,
the introduction of nutritional products in Japan and the commencement of
operations in South Korea in 1996. Nutritional products are generally subject to
higher duties than other products marketed by the Company, which yields lower
gross profit as a percentage of revenue. The commencement of operations in South
Korea also impacted gross profit as a percentage of revenue due to South Korean
regulations which result in higher prices on imported products than in other
markets.
Distributor incentives as a percentage of revenue declined from 37.8% for
1995 to 36.8% for 1996. The primary reason for this decline was increased
revenue from South Korea where local regulations limit the incentives which can
be paid to South Korean distributors.
Selling, general and administrative expenses as a percentage of revenue
declined from 18.8% during 1995 to 15.5% during 1996. This decrease was
primarily due to economies of scale gained as the Company's revenue increased.
Operating income during 1996 increased to $128.4 million, an increase of
118.4% from the $58.8 million of operating income recorded during 1995.
Operating income as a percentage of revenue increased from 16.5% to 18.9%. This
increase was caused primarily by lower selling, general and administrative
expenses as a percentage of revenue.
Other income increased by $2.3 million during 1996 as compared to 1995. The
increase was primarily caused by an increase in interest income generated
through the short-term investment of cash.
Pro forma provision for income taxes increased to $46.0 million during 1996
compared to $22.8 million during 1995. The effective tax rate decreased to 35.0%
in 1996 as compared to 38.4% for 1995. The Company generated excess foreign tax
credits in 1995 which did not continue in 1996.
Net income after pro forma provision for income taxes increased by $48.7
million to $85.2 million during 1996 compared to $36.5 million during 1995. Pro
forma net income as a percentage of revenue increased to 12.5% for 1996 as
compared to 10.2% for 1995.
1995 compared to 1994
Revenue was $358.6 million during 1995, an increase of 35.6% from the
$264.4 million of revenue recorded during 1994. This increase was due primarily
to an increased number of active and executive level distributors in each
market, which was the primary factor contributing to a $58.6 million increase in
revenue in Japan, a $26.2 million increase in revenue in Taiwan and a $6.2
million increase in revenue in Hong Kong. Nutritional products, color cosmetics
products and a new line of HairFitness products were introduced in Japan in the
fourth quarter of 1995, accounting for $25.0 million of the $58.6 million
increase. Additionally, the Company benefitted by the strengthening of the
Japanese yen during 1995. Revenue in Taiwan and Hong Kong increased as a result
of a higher volume of sales of color cosmetics, which were introduced in late
1994, and other personal care products. Additionally, certain new product
introductions by NSI affiliates in Australia and New Zealand led to a $3.2
million increase in revenue from sales to affiliated entities.
Gross profit as a percentage of revenue increased from 68.9% in 1994 to
73.1% in 1995. The increase in gross profit resulted from a reduction in product
costs on purchases from NSI, the weakening of the U.S. dollar relative to the
Japanese yen and other cost savings related to inventory shipping and handling.
Distributor incentives as a percentage of revenue decreased from 38.4% in
1994 to 37.8% in 1995. This decline was primarily attributable to an increase in
revenue in 1995 from non-commissionable sales materials and sales to NSI
affiliates.
Selling, general and administrative expenses as a percentage of revenue
increased to 18.8% during 1995 from 18.4% during 1994. This increase was
primarily due to a one-time cost incurred in February 1995 in connection with
moving the Company's Japanese facilities into a larger, more accessible office
and distributor center in Tokyo, Japan.
Operating income increased to $58.8 million in 1995 from $32.0 million in
1994, an increase of 83.8%. Operating income as a percentage of revenue
increased to 16.5% from 12.1%. The increase was primarily the result of the
product cost reductions discussed above.
Other income increased by approximately $0.9 million during 1995 as
compared to 1994. This increase was primarily caused by the disposal of property
and equipment related to a move to new facilities during 1994, and an increase
in interest income generated through the short term investment of cash.
Pro forma provision for income taxes increased to $22.8 million during 1995
as compared to $11.5 million for 1994. The effective tax rate was 38.4% in 1995
as compared to 36.4% in 1994.
Net income after pro forma provision for income taxes increased by $16.4
million to $36.5 million during 1995 as compared to $20.1 million for 1994. Net
income as a percentage of revenue increased to 10.2% during 1995 as compared to
7.7% for 1994.
Unaudited Pro Forma Combined Results of Operations
As part of the Reorganization and Offerings, several actions occurred which
impacted 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: (i)
the amortization over a 20-year period of a $25.0 million payment, consisting of
$5.0 million in cash and $20.0 million in notes, to NSI for the exclusive rights
to distribute NSI products in Thailand, Indonesia, Malaysia, the Philippines,
the PRC, Singapore and Vietnam; (ii) the recognition by the Company of
additional management charges of $4.4 million per year relating to certain
support services provided to the Company by NSI and an NSI affiliate; (iii)
estimated annual compensation expense of $1.3 million related to the employee
stock bonus awards granted to employees of the Company; (iv) the recording of
U.S. Federal and state income taxes as if the Company had been taxed as a C
corporation rather than as an S corporation since inception; and (v) increased
interest expense of $2.7 million relating to the issuance of $86.5 million of S
Distribution Notes (6.0% interest per annum), which are expected to be paid
during 1997, to the Original Stockholders in respect of the earned and
undistributed taxable S corporation earnings at November 19, 1996. The unaudited
pro forma combined financial information set forth below does not reflect the
estimated non-cash compensation expense of approximately $20.0 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 include conditions related to the achievement
of performance goals and will vest on December 31, 1997. The Company records
distributor incentive stock expense for these non-employee stock options.
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.
For the Year Ended December 31,
-------------------------------
1995 1996
---- ----
Revenue......................................... 100.0% 100.0%
Cost of sales................................... 26.9 28.5
------ ------
Gross profit.................................... 73.1 71.5
Operating expenses:
Distributor incentives................ 37.8 36.8
Selling, general and administrative... 20.8 16.5
------ ------
Operating income................................ 14.5 18.2
Other income (expense), net..................... (0.7) 0.5
------ ------
Income before provision for income taxes........ 13.8 18.7
Provision for income taxes...................... 5.3 6.6
------ ------
Net income...................................... 8.5% 12.1%
====== ======
The Company is subject to taxation in the United States, where it is
incorporated, at a statutory corporate federal tax rate of 35%. In addition,
each Subsidiary is subject to taxation in the country in which it operates. The
Company receives foreign tax credits for the amount of foreign taxes actually
paid in a given period, which may be utilized to reduce taxes paid in the United
States. In the event that the Company's operations in high tax jurisdictions
such as Japan grow disproportionately to the rest of the Company's operations,
the Company will be unable to fully utilize its foreign tax credits in the U.S.
which could, accordingly, result in the Company paying a higher overall
effective tax rate on its worldwide operations.
Liquidity and Capital Resources
The Company underwent a reorganization and an initial public offering in
November 1996. During the Underwritten Offerings, the Company raised $98.8
million in net proceeds. As of the date of the Reorganization, the aggregate
undistributed taxable S corporation earnings of the Subsidiaries were $86.5
million. The Subsidiaries' earned and undistributed S corporation earnings
through the date of termination of the Subsidiaries' S corporation status were
distributed in the form of the S Distribution Notes, promissory notes bearing
interest at 6.0% per annum. From the proceeds of the Underwritten Offerings,
$15.0 million was used to pay a portion of the S Distribution Notes, leaving an
unpaid S Distribution Note balance of $71.5 million at December 31, 1996.
In November 1996, the Company purchased from NSI the distribution rights to
seven new markets in the region. These markets include, Thailand where
operations commenced in March 1997, and, Indonesia, Malaysia, the Philippines,
the PRC, Singapore and Vietnam, where operations have not yet commenced. These
rights were purchased for $25.0 million of which $5.0 million was paid from the
proceeds of the Underwritten Offerings. At December, 31, 1996, the Company had a
$10.0 million short term obligation, due January 15, 1997, and a $10.0 million
long term obligation, due January 15, 1998, related to the purchase of these
rights. Interest accrues at a rate of 6.0% per annum on amounts due under these
obligations.
The remaining proceeds of the Underwritten Offerings of $78.8 million are
to be used for new market development, introducing new products, enhancing the
Company's technological infrastructure, establishing additional office and
distribution centers and for other general corporate purposes. Management
anticipates using the remaining proceeds of the Underwritten Offerings within
the next three years.
The Company generates significant cash flow from operations due to its
significant growth, high margins and minimal capital requirements. Additionally,
the Company does not extend credit to distributors, but requires payment prior
to shipping products. This process eliminates the need for accounts receivable
from distributors. During the year ended December 31, 1996, the Company
generated $121.2 million from operations compared to $65.0 million and $6.0
million during 1995 and 1994, respectively.
As of December 31, 1996, working capital was $66.2 million compared to
$47.9 million and $26.7 million as of December 31, 1995 and 1994, respectively.
Cash and cash equivalents at December 31, 1996 were $207.1 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.
There were no outstanding borrowings under this credit facility as of December
31, 1995, and it expired on July 1, 1996.
Capital expenditures, primarily for equipment, computer systems and
software, office furniture and leasehold improvements, were $5.7 million, $5.4
million and $1.7 million for 1996, 1995 and 1994, respectively. In addition, the
Company anticipates capital expenditures over the next two years of
approximately $25.0 million to further enhance its infrastructure, including
computer systems and software, warehousing facilities and walk-in distributor
centers in order to accommodate future growth.
As a part of the Company's and NSI's strategy to motivate distributors with
equity incentives, the Company sold to NSI an option to purchase 1.6 million
shares of the Company's currently outstanding Class A Common Stock. NSI
purchased the option with a $13.1 million 10-year note payable to the Company
bearing interest at 6.0% per annum. It is anticipated that the note will be
repaid as distributors begin to exercise their options beginning in 1998.
Under the Operating Agreements with NSI, the Company incurs related party
payables. The Company had related party payables of $46.3 million, $28.7 million
and $10.6 million at December 31, 1996, 1995 and 1994, respectively. In
addition, the Company had related party receivables of $8.0 million, $1.8
million and $17.9 million, respectively, at those dates. NSI and the Company
have 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 December 31, 1996, no material
related party payables or receivables had been outstanding for more than 60
days.
Management considers the Company to be liquid and able to meet its
obligations on both a short and long-term basis. Management believes existing
cash balances together with future cash flows from operations will be adequate
to fund cash needs relating to the implementation of the Company's strategic
plans, including opening new markets and funding the payment of the S
Distribution Notes, and the notes payable to NSI related to the payment of the
License Fee.
Quarterly Results
The following table sets forth certain unaudited quarterly data for the
periods shown.
1995 1996
--------------------------------------------------- ---------------------------------------------
1st 2nd 3rd 4th 1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter(1) Quarter(2) Quarter Quarter Quarter
(in millions)
Revenue.................... $ 77.7 $ 80.5 $ 83.2 $ 117.2 $ 124.2 $ 163.5 $ 183.6 $ 207.3
Gross profit............... 57.3 59.7 60.3 84.7 89.4 117.4 130.9 147.7
Operating income........... 13.5 15.0 12.8 17.5 23.2 31.9 37.5 35.8
Net income................. 9.3 10.3 8.1 12.5 14.7 20.4 25.2 21.4
Net income per share(3).... 0.12 0.13 0.10 0.16 0.18 0.25 0.31 0.26
- ---------------
(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.
(3) Net income per share is computed based on 80,517,500 shares of Common Stock
and Common Stock equivalents outstanding prior to the Reorganization and
the Offerings and 82,689,000 weighted average shares of Common Stock
outstanding for the fourth quarter of 1996.
Currency Fluctuation and Exchange Rate Information
The Company's revenues and most of its expenses are recognized primarily
outside of the United States. Each entity's local currency is considered the
functional currency. All revenue and expenses are translated at weighted average
exchange rates for the periods reported. Therefore, the Company's reported sales
and earnings will be positively impacted by a weakening of the U.S. dollar and
will be negatively impacted by a strengthening of the U.S. dollar.
The Company purchases inventory from NSI in U.S. dollars and assumes
currency exchange rate risk with respect to such purchases. Local currency in
Japan, Taiwan, Hong Kong, South Korea and Thailand is generally used to settle
non-inventory transactions with NSI. Given the uncertainty of exchange rate
fluctuations, the Company cannot estimate the effect of these fluctuations on
its future business, product pricing, results of operations or financial
condition. However, because nearly all of the Company's revenue is realized in
local currencies and the majority of its cost of sales is denominated in U.S.
dollars, the Company's gross profits will be positively affected by a weakening
in the U.S. dollar and will be negatively affected by a strengthening in the
U.S. dollar. The Company reduces its exposure to fluctuations in foreign
exchange rates by creating offsetting positions through the use of foreign
currency exchange contracts. The Company does not use such financial instruments
for trading or speculative purposes. The Company regularly monitors its foreign
currency risks and periodically takes measures to reduce the impact of foreign
exchange fluctuations on the Company's operating results.
Following are the average currency exchange rates of $1 into local currency
for each of the Company's markets for the quarters listed:
1994 1995 1996
------------------------------------ ---------------------------------- ----------------------------------
1st 2nd 3rd 4th 1st 2nd 3rd 4th 1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
------ ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Japan(1) 107.6 103.2 99.1 98.8 96.2 84.4 94.2 101.5 105.8 107.5 109.0 112.9
Taiwan 26.4 26.7 26.4 26.2 26.2 25.6 27.0 27.2 27.4 27.4 27.5 27.5
Hong Kong 7.7 7.7 7.7 7.7 7.7 7.7 7.7 7.7 7.7 7.7 7.7 7.7
South Korea(1) 807.6 806.6 801.7 795.8 786.9 763.1 765.6 769.1 782.6 786.5 815.5 829.4
- ------------
(1) Between December 31, 1996 and March 1, 1997, the exchange rates of $1 into
Japanese yen and South Korean won achieved highs of 124.52 yen and 875.3
won, respectively. Since January 1, 1992, the highest and lowest exchange
rates for the Japanese yen have been 134.82 and 80.63, respectively, and
for the South Korean won have been 875.3 and 755.8, respectively.
Outlook
Management believes that implementation of its business strategies will
lead to continued growth in local currency revenue in each of the Company's
markets in 1997. However, revenue in South Korea is expected to stabilize during
the first half of 1997 while the local distributor leadership develops and the
global distributor leadership focuses attention on the Thailand market opening,
as well as their own local markets. Revenue in Hong Kong is expected to see
modest growth in 1997 due to the introduction of LifePak and other products. The
productivity of Thailand is difficult to assess because operations commenced in
March 1997.
Concern over the strengthening of the U.S. dollar in South Korea and Japan
are important issues for management in 1997 and will most likely have a negative
impact on the Company's gross margins and reported U.S. dollar revenue and
operating results. Announced pricing increases will partially offset these
negative effects, but the Company anticipates a modest decrease in gross margins
during 1997 as well as reduced revenue and income growth rates due to
anticipated weaker currencies in these markets. In addition, operating as a
public company for a full year in 1997, the Company will incur additional
selling, general and administrative expenses that it has not incurred
previously. Management anticipates that the distributor equity program will
heighten distributor enthusiasm in 1997 and that the distributor stock expense
of $18.0 million in 1997 will not continue in 1998 and beyond.
The statements above that are not historical facts are forward-looking
statements. These forward-looking statements involve risks and uncertainties.
Actual results and outcomes may differ materially from the those discussed.
Factors that might cause such differences include, but are not limited to,
management of growth, expansion of new markets, fluctuations in currencies,
risks associated with new product introductions, the effect of negative
publicity and potential governmental regulations impacting the Company
throughout the region, but in particularly in South Korea, China and Malaysia,
where direct sales or network marketing licenses are required.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item appears beginning on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
As of March 3, 1997, the directors and executive officers of the Company
and key managers of the Subsidiaries were as follows:
Name Age Position
Blake M. Roney 38 Chairman of the Board
Steven J. Lund 43 President, Chief Executive Officer
and Director
Renn M. Patch 46 Chief Operating Officer
Corey B. Lindley 32 Vice President of Finance
Michael D. Smith 51 Vice President of Operations
M. Truman Hunt 37 Vice President of Legal Affairs
and Investor Relations
Keith R. Halls 39 Secretary and Director
Takashi Bamba 61 President, Nu Skin Japan Company, Limited
John Chou 50 President, Nu Skin Taiwan, Inc.
S.T. Han 54 President, Nu Skin Korea, Inc.
George Mak 43 President, Nu Skin Hong Kong, Inc.
Sandie N. Tillotson 40 Director
Brooke B. Roney 34 Director
Kirk V. Roney 42 Director
Max L. Pinegar 65 Director
Max E. Esplin 53 Director
E.J. "Jake" Garn 64 Director
Paula Hawkins 70 Director
Daniel W. Campbell 42 Director
- ---------------
A brief biographical summary of each of the Company's directors and
executive officers and the key managers of the Subsidiaries follows:
Blake M. Roney has served as the Chairman of the Board since the Company's
inception and is a founder of Nu Skin International Inc., an affiliate of the
Company ("NSI"). He has also served as President, Chief Executive Officer and
Chairman of the Board of NSI and certain of its affiliated entities since their
respective inceptions. He received a B.S. degree from Brigham Young University.
He is the brother of Kirk V. Roney and Brooke B. Roney.
Steven J. Lund has been the President, Chief Executive Officer and a
Director of the Company since its inception. Mr. Lund has also served as
Executive Vice President and a Director of NSI since 1985 and as Vice President
and Secretary of certain NSI affiliated entities since their respective
inceptions. Mr. Lund previously worked as an attorney in private practice. He
received a B.A. degree from Brigham Young University and a J.D. degree from
Brigham Young University's J. Reuben Clark Law School.
Renn M. Patch has been the Chief Operating Officer of the Company since its
inception. Since 1992 he has been Vice President of Global Operations and
Assistant General Manager of NSI. From 1991 to 1992, he served as Director of
Government Affairs of NSI. Prior to joining NSI in 1991, Mr. Patch was
associated with the Washington, D.C. consulting firm of Parry and Romani
Associates. Mr. Patch earned a B.A. degree from the University of Minnesota, a
J.D. degree from Hamline University School of Law and an L.L.M. degree from
Georgetown University.
Corey B. Lindley has been the 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.
M. Truman Hunt has served as the Vice President of Legal Affairs and
Investor Relations since the Company's inception. He has also served as Counsel
to the President of NSI since 1994. From 1991 to 1994, Mr. Hunt served as
President and Chief Executive Officer of Better Living Products, Inc., an NSI
affiliate involved in the manufacture and distribution of houseware products
sold through traditional retail channels. Prior to that time, he was a
securities and business attorney in private practice. He received a B.S. degree
from Brigham Young University and a J.D. degree from the University of Utah.
Keith R. Halls has served as the Secretary and a Director of the Company
since its inception. He has also served as General Vice President and a Director
of NSI since 1992. He served as Director of Finance of NSI from 1986 to 1992.
Mr. Halls is a Certified Public Accountant. Mr. Halls received a B.A. degree
from Stephen F. Austin State University and a B.S. degree from Brigham Young
University.
Takashi Bamba has served as the President and/or General Manager of Nu Skin
Japan since 1993. Prior to joining Nu Skin Japan in 1993, Mr. Bamba served five
years as President and CEO of Avon Products Co., Ltd., the publicly traded
Japanese subsidiary of Avon Products, Inc. Prior to working at Avon Products
Co., Ltd., he spent 17 years at Avon Products, Inc. He received a B.A. degree
from Yokohama National University.
John Chou has served as the President and/or General Manager of Nu Skin
Taiwan since 1991. Prior to joining Nu Skin Taiwan in 1991, he spent twenty-one
years in international marketing and management with 3M Taiwan Ltd., Amway
Taiwan and Universal PR Co. Mr. Chou is a standing director of the Taiwan ROC
Direct Selling Association. He is also a member of the Kiwanis International,
and the Taiwan American Chamber of Commerce. He received a B.A. degree from Tan
Kang University in Taipei, Taiwan.
S.T. Han has served as the President and/or General Manager of Nu Skin
Korea since 1995. Prior to joining Nu Skin Korea in 1995, Mr. Han spent four
years as the Executive Managing Director of Woosung Film Co., the exclusive
distributor of Konica film in South Korea. He also worked for Amway Korea, Ltd.
during that Company's start-up phase of operations in 1991. Mr. Han graduated
with a B.A. degree from ChungAng University.
George Mak has served as the President and/or General Manager of Nu Skin
Hong Kong since 1991. Prior to joining Nu Skin Hong Kong in 1991, Mr. Mak worked
for Johnson & Johnson as a personnel and administration manager for Hong Kong
and Shanghai from 1989 to 1991. Prior to joining Johnson & Johnson he worked for
10 years in the human resources and accounting fields. He earned an M.B.A.
degree from the University of East Asia, Macau.
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 of NSI since 1992 and a Director of NSI since its inception and as a
Director and an executive officer of certain of NSI's affiliated entities since
their respective inceptions. She served as Vice President of Corporate Services
of NSI from 1984 to 1992. She earned a B.S. degree from Brigham Young
University.
Brooke B. Roney has served as a Director of the Company since its
inception. He was a founder of NSI and has also served as General Vice President
and a Director of NSI since 1992 and as a Director and an executive officer of
certain of NSI's affiliated entities since their respective inceptions. He
served as Vice President of Distribution of NSI from 1984 to 1992. He is the
brother of Blake M. Roney and Kirk V. Roney.
Kirk V. Roney has served as a Director of the Company since its inception.
He has also served as General Vice President of NSI since 1992 and a Director of
NSI since 1984, and as a Director and an executive officer of certain of NSI's
affiliated entities since their respective inceptions. He served as Vice
President of Planning and Development of NSI from 1984 to 1992. He earned an
M.I.M. degree from the American Graduate School of International Management. He
earned an M.A. degree from Central Michigan University and a B.A. from Brigham
Young University. He is the brother of Blake M. Roney and Brooke B. Roney.
Max L. Pinegar has served as a Director of the Company since September
1996. He has also served as General Manager of NSI since 1989 and as Vice
President of NSI since 1992. He received a B.A. degree from Brigham Young
University and an M.B.A. degree from the University of Utah.
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.
E.J. "Jake" Garn has served as a Director of the Company since March 1997.
Senator Garn has been Vice Chairman of Huntsman Corporation, one of the largest
privately-held companies in the U.S., since 1993. He currently serves as a
director for Dean Witter Funds, John Alden Life Insurance Company and Franklin
Quest & Co., Inc. From 1974 to 1993, Senator Garn was a member of the United
States Senate and served on numerous senate committees. He received a B.A.
degree from the University of Utah.
Paula Hawkins is the principal of Paula Hawkins & Associates, Inc., a
management consulting company. From 1980 to 1986, Senator Hawkins was a member
of the United States Senate and served on numerous senate committees.
Daniel W. Campbell has been a Managing General Partner of EsNet, Ltd. since
1994. From 1992 to 1994, Mr. Campbell was the Senior Vice President and Chief
Financial Officer of WordPerfect Corporation and prior to that was a Partner of
Price Waterhouse LLP. He received a B.S. degree from Brigham Young University.
Committees of the Board of Directors
In January and March 1997, the Board of Directors established three
committees: the Audit Committee, the Compensation Committee and the Executive
Committee.
The Audit Committee members are Daniel W. Campbell and E.J. "Jake" Garn.
Mr. Campbell is the Chairman of the Audit Committee. The Audit Committee, among
other things, makes recommendations to the Board of Directors regarding the
selection of certified public accountants to audit annually the books and
records of the Company, reviews the activities and the reports of the certified
public accountants, reports the results of such review to the Board of Directors
and considers the adequacy of the Company's internal controls and internal
auditing methods and procedures.
The Compensation Committee members are Keith R. Halls, Max L. Pinegar,
Paula Hawkins and Daniel W. Campbell. Mr. Halls is the Chairman of the
Compensation Committee. The Compensation Committee, among other things, makes
recommendations to the Board of Directors regarding the salaries, bonuses and
other compensation to be paid to the Company's officers.
The Executive Committee members are Blake M. Roney, Steven J. Lund and
Keith R. Halls. Mr. Roney is the Chairman of the Executive Committee. The duties
of the Executive Committee are, to the extent authorized by the Board of
Directors, to exercise all the powers and authority of the Board of Directors
with respect to the management of the business and affairs of the Company.
Meetings
In the fiscal year ended December 31, 1996, the Board of Directors held
four meetings, three of which were held by written consent. All of the
then-current members of the Board of Directors attended the meetings. The
Compensation Committee, the Audit Committee and the Executive Committee were
each formed in 1997 and therefore held no meetings in the fiscal year ended
December 31, 1996.
Compensation of Directors
Directors who do not receive compensation as officers or employees of the
Company, NSI or its affiliates are paid an annual fee of $25,000 and a fee of
$1,000 for each meeting of the Board of Directors or any committee meeting
thereof that they attend.
ITEM 11. EXECUTIVE COMPENSATION
The Company believes that stockholders should be provided information about
director and executive officer compensation consistent with the rules of the
Securities and Exchange Commission. As a result, this Annual Report on Form 10-K
contains the following sections of information regarding executive compensation:
Summary Compensation Table; Employment Agreements; 1996 Stock Incentive Plan;
Bonus Incentive Plan; Compensation Committee Interlocks and Insider
Participation; Executive Compensation Report of the Board of Directors; and
Stock Performance Graph.
Summary Compensation Table
The following table sets forth a summary of all compensation awarded or
paid to or earned by the chief executive officer and the four other most highly
compensated executive officers of the Company in the last fiscal year for
services rendered in all capacities to the Company for the fiscal years ended
December 31, 1995 and 1996. Except for the employee stock bonus awards
referenced elsewhere herein, no options or long-term incentive plan awards were
granted or made to the referenced executive officers during the referenced
periods, except as provided below.
The Company was formed in September 1996, and consequently paid no
compensation to the executive officers named in the table below during the
fiscal year ended December 31, 1995 and during the first eight months of the
fiscal year ended December 31, 1996. However, salary, bonus and other
compensation is presented in the table below for 1995 and 1996 based on payments
by NSI and the Subsidiaries and, for the last quarter of 1996, by the Company to
the named executive officers as if the Company had been in existence during all
of 1995 and 1996. During 1995 and 1996, Messrs. Bamba and Chou were, and
continue to be, employed full time as the General Managers and/or Presidents of
Nu Skin Japan and Nu Skin Taiwan, respectively, and received all of their
compensation from the Company through these Subsidiaries. During 1995 and 1996,
Messrs. Lund, Smith and Patch were, and Messrs. Lund and Patch continue to be,
executive officers of NSI. The compensation presented in the table below
reflects an allocation of the time spent by Messrs. Lund, Smith and Patch
providing services to the Company and the Subsidiaries during 1995 and 1996.
These salaries and bonuses are in addition to any amounts received by these
officers from NSI in return for their services to NSI.
Annual Compensation
---------------------------------------------------------------
Other
Annual All Other
Name and Principal Position Year Salary Bonus Compensation Compensation
- --------------------------- ---- ------ ----- ------------ ------------
Steven J. Lund............................... 1996 $259,973 $89,345(1) $ -- $ --
President and Chief Executive Officer 1995 236,364 82,529(1) -- --
Takashi Bamba................................ 1996 364,138 174,557(2) 195,401(3) 3,297(4)
President, Nu Skin Japan 1995 361,028 105,563(2) 98,063(3) 3,297(4)
John Chou.................................... 1996 211,000 56,232(2) 77,897(5) --
President, Nu Skin Taiwan 1995 185,370 75,786(2) 63,730(5) --
Michael D. Smith............................. 1996 157,812 13,090(1) 25,676(6) 24,390(7)
Vice President of Operations 1995 -- -- -- --
Renn M. Patch................................ 1996 98,638 20,437(1) 13,800 5,542(7)
Chief Operating Officer 1995 97,175 104,765(8) 18,750(9) --
- ---------------------------
(1) Cash bonus paid to the recipient not pursuant to a formal bonus plan.
(2) Cash bonus paid during the year reported pursuant to a cash bonus long term
incentive plan for the Presidents of the Subsidiaries.
(3) Includes deferred portion of a bonus accrued during the year reported
pursuant to a cash bonus long term incentive plan for the Presidents of the
Subsidiaries and annual lease payments for an automobile.
(4) Annual premium for pension insurance policy.
(5) Includes deferred portion of a bonus accrued during the year reported
pursuant to a cash bonus long term incentive plan for the Presidents of the
Subsidiaries and annual payments for an automobile and club dues.
(6) Includes deferred portion of a bonus accrued during the year reported not
pursuant to a formal bonus plan.
(7) Includes compensation in the form of the cash value of the use of certain
NSI-owned property and other perquisites.
(8) Noncash bonus paid to Mr. Patch, not pursuant to a formal bonus plan.
(9) Includes $16,500 of accrued deferred compensation and $2,250 of vested
deferred compensation awarded to Mr. Patch under NSI's deferred
compensation plan.
Employment Agreements
Messrs. Bamba, Chou and Han have entered into employment agreements with Nu
Skin Japan, Nu Skin Taiwan and Nu Skin Korea, respectively. Under these
agreements, these individuals are paid an annual salary and receive various
other benefits. These individuals, together with Mr. Mak, are also entitled to
participate in a cash bonus long-term incentive plan.
Mr. Bamba is employed as the President of Nu Skin Japan at a 1997 annual
salary of approximately $394,000. This salary is subject to annual review. Under
the terms of his employment agreement, Mr. Bamba is entitled to reimbursement of
business-related expenses, the use of an automobile provided by Nu Skin Japan,
and participation in any retirement plan offered by Nu Skin Japan. Mr. Bamba
also has the right under his employment agreement to have Nu Skin Japan purchase
a country club membership and pay related dues, although he has not exercised
this right. Mr. Bamba is also provided with a private insurance plan paid for by
Nu Skin Japan provided the premium for such private insurance plan does not
exceed (Y)300,000 per year. Under his employment agreement, Mr. Bamba has agreed
to certain confidentiality obligations. The term of Mr. Bamba's employment is
indefinite, subject to termination by Mr. Bamba or Nu Skin Japan upon three
months' notice.
Mr. Chou is employed as the President of Nu Skin Taiwan at a 1997 annual
salary of approximately $230,000. Under the terms of his employment agreement,
Mr. Chou is entitled to health insurance paid for in part by Nu Skin Taiwan. Nu
Skin Taiwan also provides Mr. Chou with a monthly car allowance. The term of Mr.
Chou's employment agreement currently extends until June 1997. Under his
employment agreement, Mr. Chou has agreed to certain confidentiality
obligations.
Mr. Han is employed as the President of Nu Skin Korea at a 1997 annual
salary of approximately $140,000. Under the terms of his employment agreement,
Mr. Han is entitled to the use of an automobile and driver provided by Nu Skin
Korea, as well as medical insurance and pension benefits. Mr. Han's employment
is for a three year term ending January 1, 1999, subject to the right of Nu Skin
Korea or Mr. Han to terminate the agreement on 60 days' advance notice. Once Mr.
Han had been employed by Nu Skin Korea for 12 months, he became entitled to
receive, upon termination, severance pay equal to two months' salary for each
consecutive year of service. Under his employment agreement, Mr. Han has agreed
to certain confidentiality and noncompetition obligations.
1996 Stock Incentive Plan
The Board of Directors has adopted the Nu Skin Asia Pacific, Inc. 1996
Stock Incentive Plan. The purpose of the Plan is to attract and retain
executives, other employees, independent consultants and directors who are
important to the success and growth of the Company.
Bonus Incentive Plan
The Company has adopted a bonus incentive plan for the Presidents of the
Subsidiaries. This bonus incentive plan is patterned after a similar plan under
which Messrs. Bamba, Chou, Han and Mak were compensated prior to the Offerings.
Under the new bonus incentive plan, Messrs. Bamba, Chou, Han and Mak are
entitled to receive an annual cash bonus based upon the prior year's operating
results of the Subsidiary for which they are responsible. Participants in this
bonus incentive plan are able to receive a bonus equal to 100% of their
respective salaries, conditioned on meeting certain performance criteria and
subject to cash availability and approval of the Board of Directors of the
Company. One half of this bonus is payable by February 15 of the year following
the year in which the bonus is earned and the remaining one half is deferred and
vests ratably over 10 years or at age 65, whichever occurs first.
Compensation Committee Interlocks and Insider Participation
Several members of the Company's Board of Directors are also directors of
NSI and have set or will set compensation for certain executive officers of the
Company who have been or may in the future be executive officers of NSI.
Executive Compensation Report of the Board of Directors
The Compensation Committee was not formed until March 1997. Accordingly,
the Board of Directors performed the functions of the Compensation Committee for
the fiscal year ended December 31, 1996.
Notwithstanding anything to the contrary set forth in any of the previous
filings made by the Company under the Securities Act of 1933, as amended, or the
Securities Act of 1934, as amended, that might incorporate future filings,
including, but not limited to, this Annual Report on Form 10-K, in whole or in
part, the following Executive Compensation Report and the performance graph
appearing herein shall not be deemed to be incorporated by reference into any
such future filings.
This Executive Compensation Report discusses the Company's executive
compensation policies and the basis for the compensation paid to the Company's
executive officers, including its Chief Executive Officer, Steven J. Lund,
during the fiscal year ended December 31, 1996.
Compensation Policy. The Company's policy with respect to executive
compensation has been designed to:
o Adequately and fairly compensate executive officers in relation to their
responsibilities, capabilities and contributions to the Company and in a
manner that is commensurate with compensation paid by companies of
comparable size or within the Company's industry;
o Reward executive officers for the achievement of short-term operating goals
and for the enhancement of the long-term value of the Company; and
o Align the interests of the executive officers with those of the Company's
stockholders with respect to short-term operating goals and long-term
increases in the price of the Company's Common Stock.
The components of compensation paid to certain executive officers consist
of: (a) base salary, (b) incentive compensation in the form of annual bonus
payments and other awards made by the Company under the Company's bonus
incentive plans for the Presidents of the Subsidiaries and the Nu Skin Asia
Pacific, Inc. 1996 Stock Incentive Plan, respectively, and (c) certain other
benefits provided to the Company's executive officers. In the absence of a
Compensation Committee, the Board of Directors has been responsible for
reviewing and approving cash compensation paid by the Company to its executive
officers and members of the Company's senior management team, including annual
bonuses and awards made under the aforementioned incentive plans, selecting the
individuals who will receive such bonuses and awards and determining the timing,
pricing and amount of all such bonuses and awards granted.
As described above, the Company has adopted a bonus incentive plan for the
Presidents of the Subsidiaries. The Company has not yet adopted a formal bonus
incentive plan for other executive officers. During 1996, bonuses made to
executive officers other than the Presidents of the Subsidiaries were
discretionary and based on achievement of business targets and objectives. The
Company believes its incentive compensation plan for Presidents of the
Subsidiaries rewards those officers when the Company and its stockholders have
benefited from achieving the Company's goals and targeted objectives, all of
which the Board of Directors feels will dictate, in large part, the Company's
future operating results. The Board of Directors believes that its policy of
compensating certain of its executive officers with incentive-based compensation
fairly and adequately compensates those individuals in relation to their
responsibilities, capabilities and contribution to the Company, and in a manner
that is commensurate with compensation paid by companies of comparable size or
within the Company's industry.
Components of Compensation. The primary components of compensation paid by
the Company to its executive officers and senior management personnel, and the
relationship of such components of compensation to the Company's performance,
are discussed below:
Base Salary. For the fiscal year ended December 31, 1996, the Board of
Directors reviewed and approved the base salary paid by the Company to its
executive officers and the Presidents of the Subsidiaries. Annual adjustments to
base salaries are determined based upon a number of factors, including the
Company's performance (to the extent such performance can fairly be attributed
or related to each executive's officer's performance), as well as the nature of
each executive officer's responsibilities, capabilities and contributions. In
addition, for the fiscal year ended December 31, 1996, the Board of Directors
reviewed the base salaries of its executive officers in an attempt to ascertain
whether those salaries fairly reflect job responsibilities and prevailing market
conditions and rates of pay. The Board of Directors believes that base salaries
for the Company's executive officers have been reasonable in relation to the
Company's size and performance in comparison with the compensation paid by
similarly sized companies or companies within the Company's industry.
Incentive Compensation. As discussed above, a substantial portion of the
compensation paid to the Presidents of the Subsidiaries is in the form of
incentive compensation designed to reward the achievement of operating goals and
long-term increases in shareholder value. Under the terms of the bonus incentive
plan for the Presidents of the Subsidiaries and the Nu Skin Asia Pacific, Inc.
1996 Stock Incentive Plan, the Board of Directors and the Compensation Committee
have authority, within the terms of such plans, to select the executive officers
and employees who will be granted bonuses and other awards and to determine the
timing, pricing and amount of any such bonuses or awards.
Other Benefits. The Company maintains certain other plans and arrangements
for the benefit of its executive officers. The Company believes these benefits
are reasonable in relation to the executive compensation practices of other
similarly sized companies or companies within the Company's industry.
Compensation of the Chief Executive Officer. Steven J. Lund, the Company's
President and Chief Executive Officer, is also Executive Vice President of NSI
and an officer of certain other NSI affiliates. During 1995 and 1996, even after
the Company's formation in September 1996, Mr. Lund continued to receive all of
his cash compensation from NSI. This practice will likely continue during 1997.
The amounts set forth in the table above reflect that portion of Mr. Lund's
salary and bonus which is allocated to the Company based on the relative amount
of time spent on the Company's affairs.
Conclusion. The Board of Directors believes that the concepts discussed
above further the stockholders' interests and that officer compensation
encourages responsible management of the Company. The Board of Directors
regularly considers the effect of management compensation on stockholder
interests. In the past, the Board of Directors based its review on the
experience of its own members and on information requested from management
personnel. In the future, these factors, reports of the Compensation Committee
and discussions with and information compiled by various independent consultants
retained by the Company will be used in determining officer compensation.
Board of Directors(1)
Blake M. Roney
Steven J. Lund
Sandie N. Tillotson
Brooke B. Roney
Kirk V. Roney
Keith R. Halls
Max E. Esplin
Max L. Pinegar
_______________
(1) For the fiscal year ended December 31, 1996, the entire Board of Directors
then serving acted as the Compensation Committee. A Compensation Committee
consisting of Keith R. Halls, Max L. Pinegar, Paula Hawkins and Daniel W.
Campbell was established on March 3, 1997. In addition, on that date E.J.
"Jake" Garn, Paula Hawkins and Daniel W. Campbell were appointed to the
Board of Directors.
Stock Performance Graph
The following graph compares the cumulative total stockholder return (stock
price appreciation plus dividends) on the Company's Class A Common Stock with
the cumulative total return of the S&P 500 Index and a market weighted index of
publicly traded peers for the period from November 21, 1996 (the date the Class
A Common Stock was priced in connection with the Underwritten Offerings) though
December 31, 1996. The returns are calculated by assuming an investment in the
Class A Common Stock and each index of $100 on November 21, 1996. The publicly
traded companies in the peer group are: Amway Asia Pacific, Ltd., Amway Japan,
Ltd., The Estee Lauder Companies, Inc., Tupperware Corporation, Revlon, Inc. and
Avon Products.
Measurement Period Company S&P 500 Index Peer Group Index
------------------ ------- ------------- ----------------
November 21, 1996 $100.00 $100.00 $100.00
December 31, 1996 102.49 99.90 97.11
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of the Company's Class A Common Stock and Class B Common Stock as of
December 31, 1996 by (i) each person (or group of affiliated persons) who is
known by the Company to own beneficially more than 5% of the outstanding shares
of either the Class A Common Stock or the Class B Common Stock, (ii) each of the
Company's directors, (iii) each of the Company's executive officers whose names
appear in the summary compensation table under the caption "Compensation of
Directors and Executive Officers," and (iv) all executive officers and directors
and director nominees of the Company as a group. The information in this table
assumes (a) the exercise of all the Distributor Options, (b) the issuance of
the 109,000 stock bonus awards offered by the Company in the Rule 415 Offerings
and the shares of Class A Common Stock underlying such stock bonus awards,
(c) the issuance of the 1,250,000 stock bonus awards offered by NSI in the
Rule 415 Offering and the shares of Class A Common Stock underlying such stock
bonus awards, and (d) the exercise by an executive officer of the Company of an
option to purchase 250,825 shares of Class A Common Stock. The business address
of the 5% stockholders is 75 West Center Street, Provo, Utah, 84601.
Class A Class B Voting
Common Stock(1) Common Stock(1) Power
Directors, Executive
Officers, 5% Stockholders Number % Number % %
------------------------- ------ - ------ - -
Blake M. Roney(2) -- -- 20,629,048 28.8 28.2
Nedra D. Roney(3) -- -- 14,213,895 19.8 19.5
Sandie N. Tillotson(4) -- -- 8,559,510 11.9 11.7
Craig S. Tillotson(5) -- -- 4,411,057 6.2 6.0
R. Craig Bryson(6) -- -- 4,925,736 6.9 6.7
Steven J. Lund(7) -- -- 4,244,653 5.9 5.8
Brooke B. Roney(8) -- -- 3,496,752 4.9 4.8
Kirk V. Roney(9) -- -- 3,246,752 4.5 4.5
Keith R. Halls(10) -- -- 1,361,022 1.9 1.9
Max L. Pinegar(11) 14,000 * -- -- *
Max E. Esplin(12) 14,000 * -- -- *
Daniel W. Campbell -- -- -- -- --
E.J. "Jake" Garn -- -- -- -- --
Paula Hawkins -- -- -- -- --
Renn M. Patch(13) 14,000 * -- -- *
Michael D. Smith(14) 14,000 * -- -- *
Takashi Bamba(15) 13,000 * -- -- *
John Chou(16) 13,215 * -- -- *
BNASIA, Ltd(17) -- -- 20,452,884 28.5 28.1
RCKASIA, Ltd(18) -- -- 4,850,736 6.8 6.7
All directors and officers as a 358,373 2.7 41,537,737 57.9 56.9
group (19 persons)(19)
- ---------------------------
* Less than 1%.
(1) Each share of Class B Common Stock is convertible at any time at the option
of the holder into one share of Class A Common Stock and each share of
Class B Common Stock is automatically converted into one share of Class A
Common Stock upon the transfer of such share of Class B Common Stock to any
person who is not a Permitted Transferee as defined in the Stockholders
Agreement entered into by the Company and certain of its stockholders prior
to the Company's initial public offering.
(2) Includes shares beneficially owned or deemed to be owned beneficially by
Blake M. Roney as follows: 20,452,884 shares of Class B Common Stock as
general partner of BNASIA, Ltd., a limited partnership, and with respect to
which he shares voting and investment power with his wife Nancy L. Roney as
set forth in footnote 17 below; and 176,165 shares of Class B Common Stock
as trustee and with respect to which he has sole voting and investment
power. Blake M. Roney is the Chairman of the Board of Directors of the
Company, and Chairman of the Board of Directors, an executive officer and a
shareholder of NSI.
(3) Includes shares beneficially owned or deemed to be owned beneficially by
Nedra D. Roney as follows: 14,213,895 shares of Class B Common Stock
directly and with respect to which she has sole voting and investment
power. Nedra D. Roney is a Director and shareholder of NSI.
(4) Includes shares beneficially owned or deemed to be owned beneficially by
Sandie N. Tillotson as follows: 7,634,743 shares of Class B Common Stock
directly and with respect to which she has sole voting and investment
power; 424,767 shares of Class B Common Stock as trustee and with respect
to which she has sole voting and investment power; and 500,000 shares of
Class B Common Stock as manager of a limited liability company and with
respect to which she has sole voting and investment power. Sandie N.
Tillotson is a Director of the Company and a Director, executive officer
and shareholder of NSI.
(5) Includes shares beneficially owned or deemed to be owned beneficially by
Craig S. Tillotson as follows: 3,032,912 shares of Class B Common Stock
directly and with respect to which he has sole voting and investment power;
112,500 shares of Class B Common Stock as trustee and with respect to which
he has sole voting and investment power; 265,645 shares of Class B Common
Stock as co-trustee and with respect to which he shares voting and
investment power; and 1,000,000 shares of Class B Common Stock as manager
of a limited liability company and with respect to which he has sole voting
and investment power. Craig S. Tillotson is a shareholder of NSI.
(6) Includes shares beneficially owned or deemed to be owned beneficially by R.
Craig Bryson as follows: 4,850,736 shares of Class B Common Stock as
general partner of RCKASIA, Ltd., a limited partnership, and with respect
to which he shares voting and investment power with his wife Kathleen D.
Bryson as set forth in footnote 18 below; and 75,000 shares of Class B
Common Stock as co-trustee and with respect to which he shares voting and
investment power with Kathleen D. Bryson. R. Craig Bryson is a shareholder
of NSI.
(7) Includes shares beneficially owned or deemed to be owned beneficially by
Steven J. Lund as follows: 3,271,752 shares of Class B Common Stock as
general partner of a limited partnership and with respect to which he
shares voting and investment power with his wife Kalleen Lund; 897,901
shares of Class B Common Stock as trustee and with respect to which he has
sole voting and investment power; and 75,000 shares of Class B Common Stock
as co-trustee and with respect to which he shares voting and investment
power with Kalleen Lund. Steven J. Lund is a Director and President of the
Company and a Director, executive officer and shareholder of NSI.
(8) Includes shares beneficially owned or deemed to be owned beneficially by
Brooke B. Roney as follows: 3,496,752 shares of Class B Common Stock as
general partner of a limited partnership and with respect to which he
shares voting and investment power with his wife Denice R. Roney. Brooke B.
Roney is a Director of the Company and a Director, executive officer and
shareholder of NSI.
(9) Includes shares beneficially owned or deemed to be owned beneficially by
Kirk V. Roney as follows: 3,171,752 shares of Class B Common Stock as
general partner of a limited partnership and with respect to which he
shares voting and investment power with his wife Melanie K. Roney; and
75,000 shares of Class B Common Stock as co-trustee and with respect to
which he shares voting and investment power with Melanie K. Roney and Lee
S. McCullough. Kirk V. Roney is a Director of the Company and a Director,
executive officer and shareholder of NSI.
(10) Includes shares beneficially owned or deemed to be owned beneficially by
Keith R. Halls as follows: 593,758 shares of Class B Common Stock as
general partner of a limited partnership and with respect to which he
shares voting and investment power with his wife Anna Lisa Massaro Halls;
50,000 shares of Class B Common Stock as the manager of a limited liability
company and with respect to which he has sole voting and investment power;
704,764 shares of Class B Common Stock as trustee and with respect to which
he has sole voting and investment power; and 12,500 shares of Class B
Common Stock as co-trustee and with respect to which he shares voting and
investment power with Anna Lisa Massaro Halls. Keith R. Halls is a Director
and Secretary of the Company and a Director, executive officer and
shareholder of NSI.
(11) Includes shares beneficially owned or deemed to be owned beneficially by
Max L. Pinegar as follows: 1,000 shares of Class A Common Stock directly
and with respect to which he has sole voting and investment power; and
13,000 shares of Class A Common Stock issued to Mr. Pinegar as an employee
stock bonus award which will vest ratably, according to its terms, over
four years following the date of the award. Max L. Pinegar is a Director of
the Company and an executive officer of NSI.
(12) Includes shares beneficially owned or deemed to be owned beneficially by
Max E. Esplin as follows: 1,000 shares of Class A Common Stock directly and
with respect to which he has sole voting and investment power; and 13,000
shares of Class A Common Stock issued to Mr. Esplin as an employee stock
bonus award which will vest ratably, according to its terms, over four
years following the date of the award. Max E. Esplin is a Director of the
Company and an executive officer of NSI.
(13) Includes shares beneficially owned or deemed to be owned beneficially by
Renn M. Patch as follows: 1,000 shares of Class A Common Stock directly and
with respect to which he has sole voting and investment power; and 14,000
shares of Class A Common Stock issued to Mr. Patch as an employee stock
bonus award which will vest ratably, according to its terms, over four
years following the date of the award. Renn M. Patch is Chief Operating
Officer of the Company and an executive officer of NSI.
(14) Includes shares beneficially owned or deemed to be owned beneficially by
Michael D. Smith as follows: 1,000 shares of Class A Common Stock directly
and with respect to which he has sole voting and investment power; and
13,000 shares of Class A Common Stock issued to Mr. Smith as an employee
stock bonus award which will vest ratably, according to its terms, over
four years following the date of the award. Michael D. Smith is Vice
President of Operations of the Company.
(15) Includes shares beneficially owned or deemed to be owned beneficially by
Takashi Bamba as follows: 13,000 shares of Class A Common Stock issued to
Mr. Bamba as an employee stock bonus award which will vest ratably,
according to its terms, over four years following the date of the award.
Takashi Bamba is President of Nu Skin Japan.
(16) Includes shares beneficially owned or deemed to be owned beneficially by
John Chou as follows: 215 shares of Class A Common Stock directly and with
respect to which he has sole voting and investment power; and 13,000 shares
of Class A Common Stock issued to Mr. Chou as an employee stock bonus award
which will vest ratably, according to its terms, over four years following
the date of the award. John Chou is President of Nu Skin Taiwan.
(17) Includes 20,452,884 shares of Class B Common Stock owned by BNASIA, Ltd., a
limited partnership of which Blake M. Roney and his wife Nancy L. Roney are
the general partners and who share voting and investment power.
(18) Includes 4,850,736 shares of Class B Common Stock owned by RCKASIA, Ltd., a
limited partnership of which R. Craig Bryson and his wife Kathleen D.
Bryson are the general partners and who share voting and investment power.
(19) Class A Common Stock includes: 250,825 shares subject to a stock option
which has been granted to an executive officer of the Company and which is
exercisable until January 1, 2004; 5,748 shares owned directly by certain
directors and executive officers; and 101,800 shares issued to certain
directors and executive officers as employee stock bonus awards which will
vest ratably, according to their terms, over four years following the date
of the awards.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Reorganization
In the Reorganization prior to the Offerings, the Original Stockholders
contributed to the capital of the Company their shares of capital stock of Nu
Skin Japan, Nu Skin Taiwan, Nu Skin Korea, Nu Skin Hong Kong and Nu Skin
Thailand in a transaction intended to qualify under Section 351 of the Internal
Revenue Code of 1986, as amended, in exchange for shares of the Company's Class
B Common Stock. As a result of the Reorganization, each of the Subsidiaries
became a wholly-owned subsidiary of the Company, and the Original Stockholders
and certain of their affiliates held all of the outstanding shares of Class B
Common Stock.
S Corporation Distribution
Prior to the Reorganization, each Subsidiary elected to be treated as an
"S" corporation under Subchapter S of the Code and comparable state tax laws. On
November 19, 1996, the Subsidiaries' S corporation status was terminated (the "S
Termination Date"). Prior to the S Termination Date, the Company declared a
distribution to the Original Stockholders that included all of the Subsidiaries'
previously earned and undistributed S corporation earnings through the S
Termination Date (the "S Corporation Distribution"). As of the date of the
Reorganization, the Subsidiaries' aggregate undistributed taxable S corporation
earnings were $86.5 million. The S Corporation Distribution was distributed in
the form of promissory notes, which are expected to be paid during 1997, bearing
interest at 6% per annum. From the proceeds of the Underwritten Offerings, $15.0
million was used to pay a portion of the S Distribution Notes, leaving an unpaid
S Distribution Note balance of $71.5 million at December 31, 1996.
Control By Existing Stockholders
As of March 3, 1997, approximately 98.4% of the combined voting power of
the outstanding shares of Common Stock was held by the Original Stockholders and
certain of their affiliates. Consequently, as of such date, the Original
Stockholders and certain of their affiliates had 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. As of March 3, 1997, certain
of the Original Stockholders also owned 100% of the outstanding shares of NSI.
As a result of this ownership, these Original 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.
Operating Agreements; Relationship with NSI
NSI has licensed to the Company, through the Subsidiaries, rights to
distribute NSI products and to use certain NSI property in the Company's
markets, and NSIMG, an NSI affiliate, provides management support services to
the Company and the Subsidiaries, pursuant to the Operating Agreement with the
Subsidiaries, which include distribution, trademark/tradename license, licensing
and sales, and management services agreements with the Subsidiaries (the
Operating Agreements). Virtually all of the products sold by the Company are
purchased from NSI pursuant to distribution agreements. The Company also
manufactures itself, or through third-party manufacturers, certain products and
commercial materials which it then sells using NSI trademarks or tradenames
licensed under trademark/tradename license agreements. In addition, the Company
does not have its own sales or distribution network but licenses the right to
use NSI's distribution network and global distributor compensation plan pursuant
to licensing and sales agreements. NSIMG also provides a broad range of
management, administrative and technical support to the Company pursuant to
management services agreements.
During the fiscal year ended December 31, 1996, NSI and NSIMG charged the
Company approximately $219.9 million and $4.2 million, respectively, for goods
and services provided to the Company under the Operating Agreements.
The Operating Agreements were approved by the original Board of Directors
of the Company, which was composed entirely of officers and shareholders of NSI.
In addition, two of the executive officers of the Company, including the Chief
Executive Officer, are also executive officers of NSI. It is expected that they
will continue to spend a portion of their time on the affairs of NSI, for which
they will continue to receive compensation from NSI in addition to amounts
received from the Company for services to the Company..
During 1996, Nu Skin Japan paid NSI a royalty of 8% of the revenue from
sales of products manufactured by a third party manufacturer under a license
agreement between Nu Skin Japan and NSI. In the fiscal year ended December 31,
1996, Nu Skin Japan paid NSI $2.9 million in royalties under this agreement.
Pursuant to wholesale distribution agreements, Nu Skin Hong Kong
distributes certain NSI products to Nu Skin Personal Care Australia, Inc. and Nu
Skin New Zealand, Inc., affiliates of NSI. Pursuant to these agreements, Nu Skin
Hong Kong was paid approximately $4.6 million in fiscal year 1996 by Nu Skin
Personal Care Australia, Inc. and Nu Skin New Zealand, Inc.
Concurrently with the Underwritten Offerings, the Company purchased from
NSI for $25 million, the exclusive rights to distribute NSI products in
Thailand, Indonesia, Malaysia, the Philippines, the People's Republic of China,
Singapore and Vietnam. As of March 3, 1997, the Company had paid $15 million of
this amount. In addition, the Company and NSI have entered into a mutual
indemnification agreement pursuant to which NSI has agreed to indemnify the
Company for certain claims, losses and liabilities relating to the operations of
the Subsidiaries prior to the Reorganization, and the Company has agreed to
indemnify NSI for certain claims, losses and liabilities relating to the
operations of the Subsidiaries after the Reorganization.
Stockholders' Partnership
Craig Bryson and Craig S. Tillotson are major stockholders of the Company
and have been NSI distributors since 1984. Messrs. Bryson and Tillotson are
partners in an entity (the "Partnership") which receives substantial commissions
from NSI, including commissions on sales generated within the Company's markets.
For the fiscal year ended December 31, 1996, total commissions paid to the
Partnership on sales originating in the Company's then open markets (Japan,
Taiwan, Hong Kong and South Korea) were approximately $1.2 million. By
agreement, NSI pays commissions to the Partnership at the highest level of
commissions available to distributors. Management believes that this arrangement
allows Messrs. Bryson and Tillotson the flexibility of using their expertise and
reputations in network marketing circles to sponsor, motivate and train
distributors to benefit NSI's distributor force generally, without having to
focus solely on their own organizations.
Stockholders' Agreement
The Original Stockholders have entered into a stockholders' agreement with
the Company (the "Stockholders' Agreement"). As of March 3, 1997, the Original
Stockholders and certain of their affiliates beneficially owned shares having
approximately 98.4% of the combined voting power of the outstanding shares of
Common Stock. In order to ensure the qualification of the Reorganization under
Section 351 of the Code, the Original Stockholders have agreed not to transfer
any shares they own through November 28, 1997 without the consent of the Company
except for certain transfers relating to the funding of the Distributor Options
and the grant of the employee stock bonus awards. After such date and subject to
any volume limitations imposed by Rule 144, no such stockholder is permitted to
transfer in any one-year period a number of shares equal to the greater of (i)
10% of the total number of shares of Common Stock originally issued to such
stockholder in connection with the Reorganization, or (ii) 1.25% of the total
Common Stock issued and outstanding at the time of such proposed transfer. The
Original Stockholders have been granted registration rights by the Company
permitting each such Original Stockholder to register his or her shares of Class
A Common Stock, subject to certain restrictions, on any registration statement
filed by the Company until such Original Stockholder has sold a specified value
of shares of Class A Common Stock.
Agreements and Arrangements with Management
Prior to the Offerings, the Company entered into indemnification agreements
with its officers and directors indemnifying them against liability incurred by
them in the course of their service to the Company. Pursuant to the Nu Skin Asia
Pacific, Inc. 1996 Stock Incentive Plan, as of March 3, 1997, the Company had
granted stock bonus awards to certain executive officers of the Company for an
aggregate of 150,959 shares of Class A Common Stock. The shares of Class A
Common Stock underlying each of these stock bonus awards will be issued to the
recipient of the award at a rate of 25% per year commencing in November 1997,
subject to certain restrictions. In January 1994, NSI stockholders agreed to
grant to an individual who is now executive officer of the Company an option,
which became immediately exercisable upon consummation of the Reorganization, to
purchase 267,500 shares of Class A Common Stock at an aggregate exercise price
of $500,000, which reflects the agreed upon fair market value of this equity
interest in January 1994. As of March 3, 1997, the executive officer had
exercised a portion of this option and purchased 16,675 shares of Class A Common
Stock, which he then sold in the Underwritten Offerings. The Company has
employment agreements with certain of its executive officers.
Distributor Options
Prior to the Offerings, the Original Stockholders converted 1,605,000
shares of Class B Common Stock into Class A Common Stock and contributed such
shares to the Company for use in implementing an NSI distributor equity
incentive program, and the Company granted to NSI the Distributor Options to
acquire such 1,605,000 shares of Class A Common Stock. NSI will assign the
Distributor Options to qualifying distributors of NSI in connection with the
Rule 415 Offerings. The Distributor Options are subject to certain conditions
related to distributor performance and will vest on December 31, 1997. The
Company will record distributor incentive expense for the Distributor Options.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as part of this Form 10-K:
1. Financial Statements (pursuant to Part II, Item 8)
Report of Independent Accountants....................................F-2
Consolidated Balance Sheets at December 31, 1995 and 1996............F-3
Consolidated Statements of Income for the year ended September 30,
1994, the three months ended December 31, 1994 and the years
ended December 31, 1995 and 1996.................................F-4
Consolidated Statements of Stockholders' Equity for the year ended
September 30, 1994, the three months ended December 31, 1994
and the years ended December 31, 1995 and 1996...................F-5
Consolidated Statements of Cash Flows for the year ended
September 30, 1994, the three months ended December 31, 1994
and the years ended December 31, 1995 and 1996...................F-6
Notes to Consolidated Financial Statements...........................F-7
2. Financial Statement Schedules: Financial statement schedules have been
omitted because they are not required or are not applicable, or because the
required information is shown in the financial statements or notes thereto.
3. Exhibits: The following Exhibits are filed with this Form 10-K:
Exhibit
Number Exhibit Description
3.1 Amended and Restated Certificate of
Incorporation of the Company incorporated by
reference to Exhibit 3.1 to the Company's
Registration Statement on Form S-1 (File No.
333-12073) (the "Form S-1").
3.2 Amended and Restated Bylaws of the Company incorporated by
reference to Exhibit 3.2 to the Company's Form S-1.
4.1 Specimen Form of Stock Certificate for Class
A Common Stock incorporated by reference to
Exhibit 4.1 to the Company's Form S-1.
4.2 Specimen Form of Stock Certificate for Class B common Stock
incorporated by reference to Exhibit 4.2 to the Company's
Form S-1.
10.1 Form of Indemnification Agreement to be
entered into by and among the Company and
certain of its officers and directors
incorporated by reference to Exhibit 10.1 to
the Company's Form S-1.
10.2 Form of Stockholders' Agreement by and among
the initial stockholders of the Company
incorporated by reference to Exhibit 10.2 to
the Company's Form S-1.
10.3 Employment Contract, dated December 12,
1991, by and between Nu Skin Taiwan and John
Chou incorporated by reference to Exhibit
10.3 to the Company's Form S-1.
10.4 Employment Agreement, dated May 1, 1993, by
and between Nu Skin Japan and Takashi Bamba
incorporated by reference to Exhibit 10.4 to
the Company's Form S-1.
10.5 Service Agreement, dated January 1, 1996, by
and between Nu Skin Korea and Sung-Tae Han
incorporated by reference to Exhibit 10.5 to
the Company's Form S-1.
10.6 Form of Purchase and Sale Agreement between
Nu Skin Hong Kong and NSI incorporated by
reference to Exhibit 10.6 to the Company's
Form S-1.
10.7 Form of Licensing and Sales Agreement
between NSI and each Subsidiary (other than
Nu Skin Korea) incorporated by reference to
Exhibit 10.7 to the Company's Form S-1.
10.8 Form of Regional Distribution Agreement
between NSI and Nu Skin Hong Kong
incorporated by reference to Exhibit 10.8 to
the Company's Form S-1.
10.9 Form of Wholesale Distribution Agreement
between NSI and each Subsidiary (other than
Nu Skin Hong Kong incorporated by reference
to Exhibit 10.9 to the Company's Form S-1.
10.10 Form of Trademark/Tradename License
Agreement between NSI and each Subsidiary
incorporated by reference to Exhibit 10.10
to the Company's Form S-1.
10.11 Form of Management Services Agreement
between NSIMG and each subsidiary
incorporated by reference to Exhibit 10.11
to the Company's Form S-1.
10.12 Form of Licensing and Sales Agreement
between NSI and Nu Skin Korea incorporated
by reference to Exhibit 10.12 to the
Company's Form S-1.
10.13 Form of Independent Distributor Agreement by
and between NSI and Independent Distributors
in Hong Kong/Macau incorporated by reference
to Exhibit 10.13 to the Company's Form S-1.
10.14 Form of Independent Distributor Agreement by and between NSI
and 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 incorporated by reference to
Exhibit 10.15 to the Company's Form S-1.
10.16 Form of Independent Distributor Agreement by
and between NSI and Independent Distributors
in Taiwan incorporated by reference to
Exhibit 10.16 to the Company's Form S-1.
10.17 Nu Skin Asia Pacific, Inc. 1996 Stock Incentive Plan
incorporated by reference to Exhibit 10.17 to the
Company's Form S-1.
10.18 Form of bonus Incentive Plan for Subsidiary
Presidents incorporated by reference to
Exhibit 10.18 to the Company's Form S-1.
10.19 Option Agreement, by and between the Company and
M. Truman Hunt incorporated by reference to
Exhibit 10.19 to the Company's Form S-1.
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 incorporated by reference to
Exhibit 10.21 to the Company's Form S-1.
10.22 1996 Option Agreement by and between the Company
and NSI incorporated by reference to Exhibit 10.22
to the Company's Form S-1.
10.23 Form of Addendum to Amended and Restated
Licensing and Sales Agreement incorporated
by reference to Exhibit 10.23 to the
Company's Form S-1.
10.24 Form of Administrative Services Agreement incorporated
by reference to Exhibit 10.24 to the Company's Form S-1.
21.1 Subsidiaries of the Company
23.1 Consent of Price Waterhouse LLP
(b) On December 10, 1996, the Company filed a Current Report on Form 8-K to
report the sale of equity securities pursuant to Regulation S promulgated
under the Securities Act of 1933, as amended.
(c) The exhibits required by Item 601 of Regulation S-K are set forth in (a)3
above.
(d) The financial statement schedules required by Regulation S-K are set forth
in (a)2 above.
Nu Skin Asia Pacific, Inc.
Index to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Page
Consolidated Financial Statements:
Report of Independent Accountants..........................................F-2
Consolidated Balance Sheets at December 31, 1995 and 1996..................F-3
Consolidated Statements of Income for the year ended September 30, 1994,
the three months ended December 31, 1994 and the years ended
December 31, 1995 and 1996...............................................F-4
Consolidated Statements of Stockholders' Equity for the year ended
September 30,1994, the three months ended December 31, 1994 and
the years ended December 31, 1995 and 1996...............................F-5
Consolidated Statements of Cash Flows for the year ended
September 30, 1994, the three months ended December 31, 1994
and the years ended December 31, 1995 and 1996...........................F-6
Notes to Consolidated Financial Statements.................................F-7
All schedules are omitted because they are not applicable or the required
information is shown in the consolidated financial statements or notes thereto.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Nu Skin Asia Pacific, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, of stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of Nu Skin Asia
Pacific, Inc. and its subsidiaries at December 31, 1995 and 1996, and the
results of their operations and their cash flows for the year ended September
30, 1994, the three months ended December 31, 1994, and the years ended December
31, 1995 and 1996, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Salt Lake City, Utah
February 19, 1997
Nu Skin Asia Pacific, Inc.
Consolidated Balance Sheets
(in thousands)
December 31,
1995 1996
------ ------
ASSETS
Current assets
Cash and cash equivalents $ 63,213 $ 207,106
Accounts receivable 3,242 8,937
Related parties receivable 1,793 7,974
Inventories, net 32,662 44,860
Prepaid expenses and other 3,410 11,281
---------- ----------
104,320 280,158
Property and equipment, net 6,904 8,884
Other assets, net 7,004 42,673
---------- ----------
Total assets $ 118,228 $ 331,715
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 4,395 $ 6,592
Accrued expenses 23,313 79,518
Related parties payable 28,749 46,326
Notes payable to stockholders -- 71,487
Note payable to NSI, current portion -- 10,000
---------- ----------
56,457 213,923
---------- ----------
Note payable to NSI, less current portion -- 10,000
---------- ----------
Commitments and contingencies (Notes 8 and 12)
Stockholders' equity
Capital stock 4,550 --
Preferred stock - 25,000,000 shares authorized, $.001 par value, no
shares issued and outstanding -- --
Class A common stock - 500,000,000 shares authorized, $.001 par
value, 11,715,000 shares issued and outstanding -- 12
Class B common stock - 100,000,000 shares authorized, $.001 par
value, 71,696,675 shares issued and outstanding -- 72
Additional paid-in capital -- 137,876
Cumulative foreign currency translation adjustment (2,940) (5,963)
Retained earnings 60,161 11,493
Deferred compensation -- (22,559)
Note receivable from NSI -- (13,139)
---------- ----------
61,771 107,792
---------- ----------
Total liabilities and stockholders' equity $ 118,228 $ 331,715
========== ==========
The accompanying notes are an integral part of these consolidated financial statements.
Nu Skin Asia Pacific, Inc.
Consolidated Statements of Income
(in thousands, except per share amounts)
Three
Year Ended Months Ended Year Ended
September 30, December 31, December 31,
--------------- -------------- --------------------------------
1994 1994 1995 1996
------ ------ ------ -----
Revenue $ 254,637 $ 73,562 $ 358,609 $ 678,596
Cost of sales 86,872 19,607 96,615 193,158
--------------- ------------- ------------ -------------
Gross profit 167,765 53,955 261,994 485,438
--------------- ------------- ------------ -------------
Operating expenses
Distributor incentives 95,737 27,950 135,722 249,613
Selling, general and
administrative 44,566 13,545 67,475 105,477
Distributor stock expense -- -- -- 1,990
--------------- ------------- ------------ -------------
Total operating expenses 140,303 41,495 203,197 357,080
--------------- ------------- ------------ -------------
Operating income 27,462 12,460 58,797 128,358
Other income (expense), net 443 (813) 511 2,833
--------------- ------------- ------------ -------------
Income before provision for income
taxes 27,905 11,647 59,308 131,191
--------------- ------------- ------------ -------------
Provision for income taxes (Note 10) 10,226 2,730 19,097 49,494
--------------- ------------- ------------ -------------
Net income $ 17,679 $ 8,917 $ 40,211 $ 81,697
=============== ============= ============ =============
Pro forma net income per share
(Note 2) $ .50 $ 1.01
============ =============
Pro forma weighted average common
shares outstanding 80,518 81,060
============ =============
Unaudited pro forma data:
Income before pro forma
provision for income taxes 27,905 11,647 59,308 131,191
Pro forma provision for income
taxes (Note 10) 10,391 4,041 22,751 45,945
--------------- ------------- ------------ -------------
Income after pro forma provision
for income taxes $ 17,514 $ 7,606 $ 36,557 $ 85,246
=============== ============= ============ =============
Pro forma net income per share $ .45 $ 1.05
============ =============
(Note 2)
The accompanying notes are an integral part of these consolidated financial statements.
Nu Skin Asia Pacific, Inc.
Consolidated Statements of Stockholders' Equity
(in thousands)
Cumulative
Foreign
Class A Class B Additional Currency Note Total
Capital Common Common Paid-In Translation Retained Deferred Receivable Stockholders'
Stock Stock Stock Capital Adjustment Earnings Compensation From NSI Equity
Balance at October 1, 1993 $ 1,300 $ 102 $ 5,524 $ 6,926
Net change in cumulative
foreign currency
translation adjustment -- 329 -- 329
Net income -- -- 17,679 17,679
------- ---------- -------- ------------
Balance at September 30, 1994 1,300 431 23,203 24,934
Net change in cumulative
foreign currency
translation adjustment -- 10 -- 10
Net income -- -- 8,917 8,917
------- ---------- -------- ------------
Balance at December 31, 1994 1,300 441 32,120 33,861
Contributed capital 3,250 -- -- 3,250
Dividends -- -- (12,170) (12,170)
Net change in cumulative
foreign currency
translation adjustment -- (3,381) -- (3,381)
Net income -- -- 40,211 40,211
-------- ---------- -------- ------------
Balance at December 31, 1995 4,550 (2,940) 60,161 61,771
Reorganization and termination
of S corporation status
(Note 1) (4,550) $ 80 $ 1,209 -- 3,261 --
Net proceeds from the Offerings
and conversion of shares
by stockholders (Note 1) -- $ 12 (8) 98,829 -- -- 98,833
Dividends -- -- -- -- -- (47,139) (47,139)
Issuance of notes payable to
stockholders (Note 3) -- -- -- -- -- (86,487) (86,487)
Net change in cumulative
foreign currency
translation adjustment -- -- -- -- (3,023) -- (3,023)
Issuance of distributor stock
options (Note 9) -- -- -- 33,039 -- -- $ (17,910) $ (13,139) 1,990
Issuance of employee stock
awards (Note 9) -- -- -- 4,799 -- -- (4,649) -- 150
Net income -- -- -- -- -- 81,697 -- -- 81,697
--------------------------------------------------------------------------------------------------------
Balance at December 31, 199$ -- $ 12 $ 72 $ 137,876 $ (5,963) $ 11,493 $ (22,559) $ (13,139) $ 107,792
======== ======== ======= ========== ========== ======== =========== ========= ============
The accompanying notes are an integral part of these consolidated financial statements.
Nu Skin Asia Pacific, Inc.
Consolidated Statements of Cash Flows
(in thousands)
Three
Year Ended Months Ended Year Ended
September 30, December 31, December 31,
-------------- ------------- ---------------------------
1994 1994 1995 1996
------ ------ ------ -----
Cash flows from operating activities:
Net income $ 17,679 $ 8,917 $ 40,211 $ 81,697
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization 1,401 358 2,012 3,274
Loss on disposal of property and equipment 90 1,093 12 381
Amortization of deferred compensation -- -- -- 2,140
Changes in operating assets and liabilities:
Accounts receivable (1,006) 165 (2,174) (5,695)
Related parties receivable (25,288) 11,108 16,077 (6,181)
Inventories, net 158 (939) (17,106) (12,198)
Prepaid expenses and other (890) (836) 51 (7,871)
Other assets 277 (20) (2,994) (10,361)
Accounts payable 884 279 765 2,197
Accrued expenses 13,106 (4,384) 9,936 56,205
Related parties payable 3,475 (16,442) 18,193 17,577
-------------- ------------- -------------- ------------
Net cash provided by (used in) operating activities 9,886 (701) 64,983 121,165
-------------- ------------- -------------- ------------
Cash flows from investing activities:
Purchase of property and equipment (1,766) (417) (5,422) (5,672)
Proceeds from disposal of property and equipment 25 14 48 41
Payment to NSI for distribution rights -- -- -- (5,000)
Payments for lease deposits (614) (677) (701) (562)
Receipt of refundable lease deposits 153 -- 22 98
-------------- ------------- -------------- ------------
Net cash used in investing activities (2,202) (1,080) (6,053) (11,095)
-------------- ------------- -------------- ------------
Cash flows from financing activities:
Payments on related party loans (4,350) -- -- --
Proceeds from capital contributions -- -- 3,250 --
Net proceeds from the Offerings (Note 1) -- -- -- 98,833
Dividends paid -- -- (12,170) (47,139)
Payment to stockholders for notes payable (Note 3) -- -- -- (15,000)
-------------- ------------- -------------- ------------
Net cash provided by (used in) financing activities (4,350) -- (8,920) 36,694
-------------- ------------- -------------- ------------
Effect of exchange rate changes on cash 152 (8) (3,085) (2,871)
-------------- ------------- -------------- ------------
Net increase (decrease) in cash and cash equivalents 3,486 (1,789) 46,925 143,893
Cash and cash equivalents, beginning of period 14,591 18,077 16,288 63,213
-------------- ------------- -------------- ------------
Cash and cash equivalents, end of period $ 18,077 $ 16,288 $ 63,213 $ 207,106
============== ============= ============== ============
Supplemental cash flow information:
Interest paid $ 81 $ 6 $ 119 $ 84
============== ============= ============== ============
Supplemental schedule of non-cash investing and financing activities in 1996:
o $20.0 million note payable to NSI issued as partial consideration for the
$25.0 million purchase of distribution rights from NSI.
o $86.5 million of interest bearing S distribution notes issued in 1996, of
which $71.5 million remains unpaid at December 31, 1996 (Note 3).
o $1.2 million of additional paid-in capital contributed by the existing
stockholders of their interest in the Subsidiaries in exchange for all
shares of the Class B common stock in connection with the Company's
termination of its S corporation status (Note 1).
The accompanying notes are an integral part of these consolidated financial
statements.
Nu Skin Asia Pacific, Inc.
Notes to Consolidated Financial Statements
1. THE COMPANY
Nu Skin Asia Pacific, Inc. (the "Company") is a network marketing company
involved in the distribution and sale of premium quality, innovative
personal care and nutritional products. The Company is the exclusive
distribution vehicle for Nu Skin International, Inc. ("NSI") in the
countries of Japan, Taiwan, Hong Kong (including Macau), and South Korea,
where the Company currently has operations, and in Thailand, where
operations have not yet commenced (collectively referred to as the
"Subsidiaries"), and in Indonesia, Malaysia, the Philippines, the
PRC, Singapore and Vietnam, where operations also have not yet commenced.
Additionally, the Company sells products to NSI affiliates in Australia and
New Zealand. NSI was founded in 1984 and is one of the largest network
marketing companies in the world. NSI owns the Nu Skin trademark and
provides the products and marketing materials to each of its affiliates. Nu
Skin International Management Group, Inc. ("NSIMG"), an NSI affiliate, has
provided, and will continue to provide, a high level of support services to
the Company, including product development, marketing, legal, accounting
and other managerial services.
The Company was incorporated on September 4, 1996. It was formed as a
holding company and acquired the Subsidiaries through a reorganization
which occurred on November 20, 1996. Prior to the reorganization, each of
the Subsidiaries elected to be treated as an S corporation. In connection
with the reorganization, the Subsidiaries' S corporation status was
terminated on November 19, 1996, and the Company declared a distribution to
the stockholders that included all of the Subsidiaries' previously earned
and undistributed taxable S corporation earnings totaling $86.5 million.
Prior to the reorganization, the Company, NSI, NSIMG and other NSI
affiliates operated under the control of a group of common stockholders.
Inasmuch as the Subsidiaries that were acquired were under common control,
the Company's consolidated financial statements include the Subsidiaries'
historical balance sheets and related statements of income, of
stockholders' equity and of cash flows for all periods presented.
On November 27, 1996 the Company completed its initial public offerings of
4,750,000 shares of Class A common stock and received net proceeds of $98.8
million (the "Offerings").
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation
The consolidated financial statements include the accounts of the Company
and the Subsidiaries. All significant intercompany accounts and
transactions are eliminated in consolidation.
Change in fiscal year
In October 1994, the Company's Board of Directors approved a change in the
Company's fiscal year end from September 30 to December 31. The change
became effective as of October 1, 1994.
Use of estimates
The preparation of these financial statements in conformity with generally
accepted accounting principles required management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Significant estimates include reserves for
product returns, obsolete inventory and taxes. Actual results could differ
from these estimates.
Cash and cash equivalents
Cash equivalents are short-term, highly liquid instruments with original
maturities of 90 days or less.
Inventories
Inventories consist of merchandise purchased for resale and are stated at
the lower of cost using the first-in, first-out method or market.
Property and equipment
Property and equipment are recorded at cost and depreciated using the
straight-line method over the following estimated useful lives:
Furniture and fixtures 5 - 7 years
Computers and equipment 3 - 5 years
Leasehold improvements Shorter of estimated useful life or lease term
Vehicles 3 - 5 years
Expenditures for maintenance and repairs are charged to expense as
incurred.
Other assets
Other assets consist primarily of deposits for noncancelable operating
leases and distribution rights purchased from NSI. Distribution rights are
amortized on the straight-line basis over the estimated useful life of the
asset. The Company assesses the recoverability of long-lived assets by
determining whether the amortization of the balance over its remaining life
can be recovered through undiscounted future operating cash flows
attributable to the assets.
Revenue recognition
Revenue is recognized when products are shipped and title passes to
independent distributors who are the Company's customers. A reserve for
product returns is accrued based on historical experience. The Company
generally requires cash payment at the point of sale. The Company has
determined that no allowance for doubtful accounts is necessary. Amounts
received prior to shipment and title passage to distributors are recorded
as deferred revenue.
Income taxes
Effective October 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109 ("SFAS 109"), Accounting for Income Taxes.
Under SFAS 109, the liability method is used in accounting for income
taxes. Under this method, deferred tax assets and liabilities are
determined based on the differences between financial reporting and tax
bases of assets and liabilities and are measured using the enacted tax
rates and laws that will be in effect when the differences are expected to
reverse.
Prior to the Company's reorganization described in Note 1, the Subsidiaries
elected to be taxed as S corporations whereby the income tax effects of the
Subsidiaries' activities accrued directly to their stockholders; therefore,
adoption of SFAS 109 required no establishment of deferred income taxes
since no material differences between financial reporting and tax bases of
assets and liabilities existed. Concurrent with the Company's
reorganization, the Company terminated the S corporation elections of its
Subsidiaries. As a result, deferred income taxes under the provisions of
SFAS 109 were established.
Pro forma net income per share
Pro forma net income per share is computed based on the weighted average
number of common shares and common share equivalents outstanding during the
periods presented assuming that the Company's reorganization and the
resultant issuance of 80.3 million shares of Class B common stock occurred
as of January 1, 1995.
Foreign currency translation
All business operations of the Company occur outside of the United States.
Each entity's local currency is considered 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 weighted average exchange rates, and
stockholders' equity is recorded at historical exchange rates. The
resulting foreign currency translation adjustments are recorded as a
separate component of stockholders' equity in the consolidated balance
sheets, and transaction gains and losses are included in other income in
the consolidated financial statements.
Industry segment and geographic area
The Company operates in a single industry, which is the direct selling of
skin care, hair care and nutritional products, and in a single geographic
area, which is the Asia Pacific Region.
Fair value of financial instruments
The fair value of financial instruments including cash and cash
equivalents, accounts receivable, related parties receivable, accounts
payable, accrued expenses, related parties payable and notes payable
approximate book values.
Stock-based compensation
The Company has adopted Statement of Financial Accounting Standards No. 123
("SFAS 123"), Accounting for Stock- Based Compensation. The Company
measures compensation expense for its stock-based employee compensation
plans using the intrinsic value method prescribed by Accounting Principles
Board Opinion No. 25 ("APB 25"), Accounting for Stock Issued to Employees,
and will, when applicable, 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.
3. RELATED PARTY TRANSACTIONS
Scope of related party activity
The Company has extensive and pervasive transactions with affiliated
entities that are under common control. These transactions are as follows:
(1) Through its Hong Kong entity, the Company purchases a substantial
portion of its inventories from affiliated entities (primarily NSI). (2) In
addition to selling products to consumers in its geographic territories,
the Company through its Hong Kong entity, sells products and marketing
materials to affiliated entities in geographic areas outside those held by
the Company (primarily Australia and New Zealand). (3) The Company pays
trademark royalty fees to NSI on products bearing NSI trademarks and
marketed in the Company's geographic areas that are not purchased from NSI.
(4) NSI enters into a distribution agreement with each independent
distributor. The Company pays license fees to NSI for the right to use the
lists of distributors within its geographical regions, and for the right to
use the NSI distribution system and other related intangibles. (5) The
Company participates in a global commission plan established by the NSI
distribution agreement whereby distributors' commissions are determined by
aggregate worldwide purchases made by down-line distributors. Thus,
commissions on purchases from the Company earned by distributors located in
geographic areas outside those held by the Company are remitted to NSI,
which then forwards these commissions to the distributors. (6) The Company
pays fees for management and support services provided by NSIMG.
The purchase prices paid to the Subsidiaries for the purchase of product
and marketing materials are determined pursuant to the Regional
Distribution Agreement between the Company, through a Subsidiary, and NSI.
The selling prices to the Subsidiaries of products and marketing materials
are determined pursuant to the Wholesale Distribution Agreements between a
Subsidiary and certain of the other Subsidiaries. Trademark royalty fees
and license fees are payable pursuant to the Trademark/Tradename License
Agreement between the Subsidiaries and NSI and the Licensing and Sales
Agreement between the Subsidiaries and NSI, respectively. The independent
distributor commission program is managed by NSI. Charges to the Company
are based on a worldwide commission fee of 42% which covers commissions
paid to distributors on a worldwide basis and the direct costs of
administering the global compensation plan. Management and support
services fees are billed to the Company by NSIMG pursuant to the
Management Services Agreement between the Company, the Subsidiaries and
NSIMG and consist of all direct expenses incurred by NSIMG on behalf of the
Company and indirect expenses of NSIMG allocated to the Company based on
its net sales.
Total commission fees (including those paid directly to distributors within
the Company's geographic territories) are recorded as distributor
incentives in the consolidated statements of income. Trademark royalty
fees, license fees and management fees are included in selling, general and
administrative expenses in the consolidated statements of income.
In November 1996, the Company purchased from NSI the distribution rights to
seven new markets in the region. These markets include Thailand, Indonesia,
Malaysia, the Philippines, the PRC, Singapore and Vietnam, where operations
have not yet commenced. These rights were purchased for $25.0 million of
which $5.0 million was paid from proceeds from the Offerings. At December
31, 1996, the Company had a $10.0 million short term obligation, due
January 15, 1997, and a $10.0 million long term obligation, due January 15,
1998, related to the purchase of these rights. Interest accrues at a rate
of 6.0% per annum on amounts due under these obligations.
Notes payable to stockholders
In connection with the reorganization described in Note 1, the aggregate
undistributed taxable S corporation earnings of the Subsidiaries were $86.5
million. These earnings were distributed in the form of promissory notes
which are expected to be paid during 1997 and which bear interest at 6.0%
per annum. From proceeds of the Offerings, $15.0 million was used to pay a
portion of the notes, leaving an unpaid notes payable to stockholders
balance of $71.5 million at December 31, 1996. Interest expense of $536,000
was recorded for the year ended December 31, 1996 and is included in
accrued expenses.
Related party transactions
The following summarizes the Company's transactions with related
parties (in thousands):
Product purchases
Three
Year Ended Months Ended Year Ended
September 30, December 31, December 31,
-------------- -------------- ------------------------------
1994 1994 1995 1996
------ ------ ------ -----
Beginning inventories $ 14,775 $ 14,617 $ 15,556 $ 32,662
Inventory purchases from affiliates 61,409 11,608 69,821 157,413
Other inventory purchases and value
added locally 25,305 8,938 43,900 47,943
-------------- -------------- -------------- -------------
Total products available for sale 101,489 35,163 129,277 238,018
Less: Cost of sales (86,872) (19,607) (96,615) (193,158)
-------------- -------------- -------------- --------------
Ending inventories $ 14,617 $ 15,556 $ 32,662 $ 44,860
============== ============== ============== ==============
Related parties payable transactions
Three
Year Ended Months Ended Year Ended
September 30, December 31, December 31,
-------------- ------------ -------------------------------
1994 1994 1995 1996
------ ------ ------ -----
Beginning related parties payable $ 27,873 $ 26,998 $ 10,556 $ 28,749
Inventory purchases from affiliates 61,409 11,608 69,821 157,413
Distributor incentives 95,737 27,950 135,722 249,613
Less: Distributor incentives paid
directly to distributors 68,880) (19,837) (105,642) (197,614)
License fees 9,252 2,750 13,158 25,221
Trademark royalty fees -- 19 2,694 2,882
Management fees 1,449 499 2,066 4,189
Proceeds from (payments for)
related party loans (4,350) -- -- --
Less: Payments to related parties 95,492) (39,431) (99,626) (224,127)
-------------- -------------- -------------- --------------
Ending related parties payable $ 26,998 $ 10,556 $ 28,749 $ 46,326
============== ============== ============== ==============
Nu Skin Asia Pacific, Inc.
Notes to Consolidated Financial Statements
Related parties receivable and payable balances
The Company has receivable and payable balances with related parties in
Australia and New Zealand, and with NSI and NSIMG. Related parties balances
outstanding greater than 60 days bear interest at 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
consolidated financial statements. Sales to related parties were $2,288,000
for the year ended September 30, 1994, $855,000 for the three months ended
December 31, 1994 and $4,608,000 and $4,614,000 for the years ended
December 31, 1995 and 1996, respectively.
Certain relationships with stockholder distributors
Two major stockholders of the Company have been NSI distributors since
1984. These stockholders are partners in an entity which receives
substantial commissions from NSI, including commissions relating to sales
within the countries in which the Company operates. By agreement, NSI pays
commissions to this partnership at the highest level of distributor
compensation to allow the stockholders to use their expertise and
reputations in network marketing to further develop NSI's distributor
force, rather than focusing solely on their own distributor organizations.
The commissions paid to this partnership relating to sales within the
countries in which the Company operates were $1,100,000 for the year ended
September 30, 1994, $270,000 for the three months ended December 31, 1994
and $1,100,000 and $1,200,000 for the years ended December 31, 1995 and
1996, respectively.
4. PROPERTY AND EQUIPMENT
Property and equipment are comprised of the following:
December 31,
1995 1996
(in thousands)
Furniture and fixtures $ 3,593 $ 3,175
Computers and equipment 5,060 7,480
Leasehold improvements 2,221 4,737
Vehicles 152 200
--------- ----------
11,026 15,592
Less: accumulated depreciation (4,122) (6,708)
--------- ----------
$ 6,904 $ 8,884
========= ==========
Depreciation of property and equipment totaled $1,401,000 for the year
ended September 30, 1994, $358,000 for the three months ended December 31,
1994, and $2,012,000 and $3,118,000 for the years ended December 31, 1995
and 1996, respectively.
5. OTHER ASSETS
Other assets consist of the following:
December 31,
1995 1996
(in thousands)
Deposits for noncancelable operating leases $ 5,738 $ 9,962
Distribution rights, net of accumulated amortization -- 24,844
Other 1,266 7,867
------- --------
$ 7,004 $ 42,673
======= ========
The $25.0 million distribution rights asset is being amortized on a
straight-line basis over its estimated useful life of twenty years.
Amortization expense totaled $156,000 for the year ended December 31, 1996.
6. ACCRUED EXPENSES
Accrued expenses consist of the following:
December 31,
1995 1996
(in thousands)
Income taxes payable $ 17,463 $ 54,233
Other taxes payable 798 9,194
Other accruals 5,052 16,091
------------ ------------
$ 23,313 $ 79,518
============ ============
7. LINE OF CREDIT
During 1995, the Company entered into an $8,000,000 revolving credit
agreement (bearing interest at an annual rate of 12%) with a financial
institution in South Korea. Advances were available under the agreement
through July 1, 1996. There were no outstanding balances under the credit
facility at December 31, 1995 and 1996.
8. LEASE OBLIGATIONS
The Company leases office space and computer hardware under noncancelable
long-term operating leases. Most leases include renewal options of up to
three years. Minimum future operating lease obligations at December 31,
1996 are as follows (in thousands):
Year ending December 31,
1997 $ 4,131
1998 2,745
1999 1,965
2000 1,321
2001 --
--------------
Total minimum lease payments $ 10,162
==============
Rental expense for operating leases totaled $5,848,000 for the year ended
September 30, 1994, $1,639,000 for the three months ended December 31,
1994, and $9,470,000 and $8,260,000 for the years ended December 31, 1995
and 1996, respectively.
9. STOCKHOLDERS' EQUITY
The Company's capital stock consists of preferred stock, Class A common
stock, and Class B common stock. The shares of Class A common stock and
Class B common stock are identical in all respects, except for voting
rights and certain conversion rights and transfer restrictions, as follows:
(1) each share of Class A common stock entitles the holder to one vote on
matters submitted to a vote of the Company's stockholders and each share of
Class B common stock entitles the holder to ten votes on each such matter;
(2) stock dividends of Class A common stock may be paid only to holders of
Class A common stock and stock dividends of Class B common stock may be
paid only to holders of Class B common stock; (3) if a holder of Class B
common stock transfers such shares to a person other than a permitted
transferee, as defined in the Company's' Certificate of Incorporation, such
shares will be converted automatically into shares of Class A common stock;
and (4) Class A common stock has no conversion rights; however, each share
of Class B common stock is convertible into one share of Class A common
stock, in whole or in part, at any time at the option of the holder.
Stockholder control
As of December 31, 1996, a group of common stockholders owned all of the
outstanding shares of Class B common stock, which represented
98.4% of the combined voting rights of all outstanding common stock.
Accordingly, these stockholders, acting as a group, control the election of
the entire Board of Directors and decisions with respect to the Company's
dividend policy, the Company's access to capital, mergers or other business
combinations involving the Company, the acquisition or disposition of
assets by the Company and any change in control of the Company.
Equity incentive plans
Effective November 21, 1996, NSI and the Company implemented a one-time
distributor equity incentive program. This program provided for grants of
options to selected distributors for the purchase of 1.6 million shares of
the Company's previously issued Class A common stock. The number of options
each distributor will ultimately receive will be based on their performance
and productivity through August 31, 1997. The options are exercisable at a
price of $5.75 per share and will vest on December 31, 1997. The related
compensation expense has been deferred in the Company's financial
statements and is being expensed to the statement of income as distributor
stock expense ratably through December 31, 1997.
The Company will record compensation expense based upon the best available
estimate of the number of shares that are expected to be issued to each
distributor at the measurement date, revised as necessary if subsequent
information indicates that actual forfeitures are likely to differ from
initial estimates. The compensation expense will be adjusted quarterly over
the vesting period for subsequent changes in the expected or actual
outcome. Any options forfeited may be reallocated and result in an
additional compensation charge.
As a part of this program, the Company sold an option to NSI to purchase
shares underlying distributor options for consideration of a $13.1 million
10-year note, bearing interest at 6.0% per annum. It is anticipated that
NSI will repay this note as distributors begin to exercise their options in
1998.
Prior to the Offerings, the Company's stockholders contributed to NSI and
other Nu Skin entities (excluding the Company) 1.3 million of the shares of
the Company's Class A common stock held by them for issuance to employees
of NSI and other Nu Skin entities as a part of an employee equity incentive
plan. Equity incentives granted or awarded under this plan will vest over
four years. Compensation expense related to equity incentives granted to
employees of NSI and other Nu Skin entities who perform services on behalf
of the Company will be recognized by the Company ratably over the vesting
period.
In November 1996, the Company made stock bonus awards to certain employees
of the Company for an aggregate of 109,000 shares of Class A common stock.
The Company has recorded deferred compensation expense related to these
stock awards and is recognizing such expense ratably over the vesting
period.
In January 1994, NSI agreed to grant one of the Company's executives an
option to purchase 267,500 shares of the Company's Class A common stock
which became exercisable at the date of the reorganization. The exercise
price of this option was set at the estimated fair market value of this
equity interest in January 1994. This executive exercised the portion of
this option underlying 16,675 shares during November 1996.
10. INCOME TAXES
Consolidated income before provision for income taxes consists of income
earned solely from international operations. The provision for current and
deferred taxes for the year ended December 31, 1996 consists of the
following (in thousands):
Current
Federal $ 331
State --
Foreign 56,929
-----------
57,260
Deferred
Federal (1,929)
State --
Foreign (2,398)
Change in tax status (3,439)
-----------
Provision for income taxes $ 49,494
===========
As a result of the Company's reorganization described in Note 1, the
Company will no longer be treated as an S corporation for U.S. Federal
income tax purposes. Accordingly, the provision for income taxes for
the year ended December 31, 1996 consists of the following: (1) the
cumulative income tax effect from recognition of the deferred tax
assets at the date of S corporation termination; (2) the provision for
income taxes for the period November 20, 1996 through December 31, 1996
as a U.S. C corporation; and (3) income taxes in foreign countries for
the Subsidiaries during the year.
The provision for income taxes for the year ended September 30, 1994,
for the three months ended December 31, 1994 and for the year ended
December 31, 1995 primarily represent income taxes in foreign countries
as U.S. Federal income taxes were levied at the stockholder level.
The principal components of deferred tax assets were as follows (in
thousands):
November 20, December 31,
1996 1996
Deferred tax assets:
Inventory reserve $ 1,455 $ 1,971
Product return reserve 1,183 1,562
Depreciation 1,535 1,592
Foreign tax credit -- 1,234
Uniform capitalization 713 763
Distributor stock options and employee stock awards -- 749
Accrued expenses not deductible until paid 5,037 6,739
Minimum tax credit -- 330
---------- ----------
Total deferred tax assets $ 9,923 $ 14,940
---------- ----------
Deferred tax liabilities:
Withholding tax $ 3,944 $ 4,148
Net foreign deferred tax asset 1,021 2,572
Exchange gains and losses 443 399
Other 55 55
---------- ----------
Total deferred tax liabilities 5,463 7,174
---------- ----------
Net deferred tax assets $ 4,460 $ 7,766
========== ==========
Pro forma provision for income taxes
The consolidated statements of income include a pro forma presentation for
income taxes which would have been recorded if the Company had been taxed
as a C corporation for all periods presented.
A reconciliation of the Company's pro forma effective tax rate compared to
the statutory U.S. Federal tax rate is as follows:
Three
Year Ended Months Ended Year Ended
September 30, December 31, December 31,
1994 1994 1995 1996
------ ------ ------ -----
Income taxes at statutory rate 35.00% 35.00% 35.00% 35.00%
Foreign tax credit
limitation (benefit) 1.97 (0.42) 2.69 --
Non-deductible expenses .27 .11 .67 .06
Other -- -- -- (.04)
--------- --------- -------- ---------
37.24% 34.69% 38.36% 35.02%
========= ========= ======== =========
11. FINANCIAL INSTRUMENTS
The Company's Subsidiaries enter into significant transactions with each
other, NSI and third parties which may not be denominated in the respective
Subsidiaries' functional currencies. The Company reduces its exposure to
fluctuations in foreign exchange rates by creating offsetting positions
through the use of foreign currency exchange contracts. The Company
currently does not use such financial instruments for trading or
speculative purposes. The Company regularly monitors its foreign currency
exposures to minimize the impact of foreign exchange fluctuations on the
Company's operating results.
At December 31, 1995, the Company held foreign currency forward contracts
with notional amounts totaling $1,000,000 to hedge foreign currency items.
There were no significant estimated unrealized losses on these contracts.
These contracts all had maturities prior to December 31, 1996. The Company
did not hold any foreign currency forward contracts at December 31, 1996.
12. COMMITMENTS AND CONTINGENCIES
The Company is subject to governmental regulations pertaining to product
formulation, labeling and packaging, product claims and advertising and to
the Company's direct selling system. The Company is also subject to the
jurisdiction of numerous foreign tax authorities. These tax authorities
regulate and restrict various corporate transactions, including
intercompany transfers. The Company believes that the tax authorities in
Japan and South Korea are particularly active in challenging the tax
structures and intercompany transfers of foreign corporations. Any
assertions or determination that either the Company, NSI or any of NSI's
distributors is not in compliance with existing statutes, laws, rules or
regulations could potentially have a material adverse effect on the
Company's operations. In addition, in any country or jurisdiction, the
adoption of new statutes, laws, rules or regulations or changes in the
interpretation of existing statutes, laws, rules or regulations could have
a material adverse effect on the Company and its operations. Although
management believes that the Company is in compliance, in all material
respects, with the statutes, laws, rules and regulations of every
jurisdiction in which it operates, no assurance can be given that the
Company's compliance with applicable statutes, laws, rules and regulations
will not be challenged by foreign authorities or that such challenges will
not have a material adverse effect on the Company's financial position or
results of operations or cash flows.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on this 14th day of
March, 1997.
NU SKIN ASIA PACIFIC, INC.
By: /s/ Steven J. Lund
Steven J. Lund
Its: Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ Blake M. Roney Chairman of the Board of Directors March 14, 1997
Blake M. Roney
/s/ Steven J. Lund President and Chief Executive Officer and March 14, 1997
Steven J. Lund Director (Principal Executive Officer)
/s/ Corey B. Lindley Vice President of Finance (Principal March 14, 1997
Corey B. Lindley Financial and Accounting Officer)
/s/ Sandie N. Tillotson Director March 14, 1997
Sandie N. Tillotson
/s/ Brooke B. Roney Director March 14, 1997
Brooke B. Roney
Director
Kirk V. Roney
/s/ Keith R. Halls Director March 14, 1997
Keith R. Halls
/s/ Max E. Esplin Director March 14, 1997
Max E. Esplin
/s/ Max L. Pinegar Director March 14, 1997
Max L. Pinegar
/s/ E.J. "Jake" Garn Director March 14, 1997
E.J. "Jake" Garn
/s/ Paula Hawkins Director March 14, 1997
Paula Hawkins
/s/ Daniel W. Campbell Director March 14, 1997
Daniel W. Campbell
NU SKIN ASIA PACIFIC, INC.
EXHIBITS
TO
ANNUAL REPORT
ON
FORM 10-K
FOR THE YEAR ENDED
DECEMBER 31, 1996
Exhibit
Number Exhibit Description
3.1 Amended and Restated Certificate of
Incorporation of the Company incorporated by
reference to Exhibit 3.1 to the Company's
Registration Statement on Form S-1 (File No.
333-12073) (the "Form S-1").
3.2 Amended and Restated Bylaws of the Company incorporated by
reference to Exhibit 3.2 to the Company's Form S-1.
4.1 Specimen Form of Stock Certificate for Class
A Common Stock incorporated by reference to
Exhibit 4.1 to the Company's Form S-1.
4.2 Specimen Form of Stock Certificate for Class B common Stock
incorporated by reference to Exhibit 4.2 to the Company's
Form S-1.
10.1 Form of Indemnification Agreement to be
entered into by and among the Company and
certain of its officers and directors
incorporated by reference to Exhibit 10.1 to
the Company's Form S-1.
10.2 Form of Stockholders' Agreement by and among
the initial stockholders of the Company
incorporated by reference to Exhibit 10.2 to
the Company's Form S-1.
10.3 Employment Contract, dated December 12,
1991, by and between Nu Skin Taiwan and John
Chou incorporated by reference to Exhibit
10.3 to the Company's Form S-1.
10.4 Employment Agreement, dated May 1, 1993, by
and between Nu Skin Japan and Takashi Bamba
incorporated by reference to Exhibit 10.4 to
the Company's Form S-1.
10.5 Service Agreement, dated January 1, 1996, by
and between Nu Skin Korea and Sung-Tae Han
incorporated by reference to Exhibit 10.5 to
the Company's Form S-1.
10.6 Form of Purchase and Sale Agreement between
Nu Skin Hong Kong and NSI incorporated by
reference to Exhibit 10.6 to the Company's
Form S-1.
10.7 Form of Licensing and Sales Agreement
between NSI and each Subsidiary (other than
Nu Skin Korea) incorporated by reference to
Exhibit 10.7 to the Company's Form S-1.
10.8 Form of Regional Distribution Agreement
between NSI and Nu Skin Hong Kong
incorporated by reference to Exhibit 10.8 to
the Company's Form S-1.
10.9 Form of Wholesale Distribution Agreement
between NSI and each Subsidiary (other than
Nu Skin Hong Kong incorporated by reference
to Exhibit 10.9 to the Company's Form S-1.
10.10 Form of Trademark/Tradename License
Agreement between NSI and each Subsidiary
incorporated by reference to Exhibit 10.10
to the Company's Form S-1.
10.11 Form of Management Services Agreement
between NSIMG and each subsidiary
incorporated by reference to Exhibit 10.11
to the Company's Form S-1.
10.12 Form of Licensing and Sales Agreement
between NSI and Nu Skin Korea incorporated
by reference to Exhibit 10.12 to the
Company's Form S-1.
10.13 Form of Independent Distributor Agreement by
and between NSI and Independent Distributors
in Hong Kong/Macau incorporated by reference
to Exhibit 10.13 to the Company's Form S-1.
10.14 Form of Independent Distributor Agreement by and between NSI
and 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 incorporated by reference to
Exhibit 10.15 to the Company's Form S-1.
10.16 Form of Independent Distributor Agreement by
and between NSI and Independent Distributors
in Taiwan incorporated by reference to
Exhibit 10.16 to the Company's Form S-1.
10.17 Nu Skin Asia Pacific, Inc. 1996 Stock Incentive Plan
incorporated by reference to Exhibit 10.17 to the
Company's Form S-1.
10.18 Form of bonus Incentive Plan for Subsidiary
Presidents incorporated by reference to
Exhibit 10.18 to the Company's Form S-1.
10.19 Option Agreement, by and between the Company and
M. Truman Hunt incorporated by reference to
Exhibit 10.19 to the Company's Form S-1.
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 incorporated by reference to
Exhibit 10.21 to the Company's Form S-1.
10.22 1996 Option Agreement by and between the Company
and NSI incorporated by reference to Exhibit 10.22
to the Company's Form S-1.
10.23 Form of Addendum to Amended and Restated
Licensing and Sales Agreement incorporated
by reference to Exhibit 10.23 to the
Company's Form S-1.
10.24 Form of Administrative Services Agreement incorporated
by reference to Exhibit 10.24 to the Company's Form S-1.
21.1 Subsidiaries of the Company
23.1 Consent of Price Waterhouse LLP
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 South Korea.
NU SKIN PERSONAL CARE (THAILAND) LIMITED - a domesticated Delaware corporation
with dual residence in the United States and Thailand.
NU SKIN PHILIPPINES, INC. - a Delaware corporation operating in the
Philippines through a branch.
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the inclusion in the Rule 415 Prospectus, dated
December 12, 1996, constituting part of the Registration Statement of Nu Skin
Asia Pacific, Inc., declared effective on November 21, 1996, of our report
dated February 19, 1997 appearing on page F-2 of this Form 10-K.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Salt Lake City, Utah
March 17, 1997