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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
For the fiscal year ended December 31, 1997
------------------------------
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 001-12421
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.
As of March 5, 1998, the aggregate market value of the voting stock (Class
A and Class B Common Stock) held by non-affiliates of the Company was
$648,847,604. For purposes of this calculation, voting stock held by officers,
directors, and corporate affiliates has been excluded.
As of March 5, 1998, 11,830,104 shares of the Company's Class A Common
Stock, $.001 par value per share, 70,280,759 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.
Portions of the Company's 1997 Annual Report (the "1997 Annual Report") to
security holders to be furnished to the Securities and Exchange Commission (the
"Commission") pursuant to Rule 14a-3(b) in connection with Registrant's 1998
Annual Meeting of Stockholders scheduled to be held on or about May 5, 1998 (the
"1998 Annual Meeting"), are attached hereto as Exhibit 13, and are incorporated
herein by reference into Parts II and IV of this Annual Report on Form 10-K
(this "Report").
Portions of the Company's Definitive Proxy Statement (the "Proxy
Statement") to be filed with the Commission pursuant to Regulation 14A in
connection with the 1998 Annual Meeting are incorporated herein by reference
into Part III of this Report.
Certain Exhibits filed with the Company's Registration Statement on Form
S-1 (Registration No. 333-12073), as amended on Post Effective Amendment No. 1
to the Company's Registration Statement filed on September 3, 1997 (Registration
No. 333-12073), and Company's Annual Report on Form 10-K for the year ended
December 31, 1996 are incorporated herein by reference into Part IV of this
Report.
NU SKIN ASIA PACIFIC, INC.
1997 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
Page
PART I........................................................................ 1
ITEM 1. BUSINESS.................................................... 1
ITEM 2. PROPERTIES..................................................41
ITEM 3. LEGAL PROCEEDINGS...........................................42
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.........43
PART II.......................................................................43
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS.................................43
ITEM 6. SELECTED FINANCIAL DATA.....................................43
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.........................43
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................43
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE........................43
PART III......................................................................44
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..........44
ITEM 11. EXECUTIVE COMPENSATION......................................44
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT..................................................44
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..............44
PART IV.......................................................................45
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K....................................................45
PART I
ITEM 1. BUSINESS
General
Nu Skin Asia Pacific, Inc. ("Nu Skin Asia Pacific" or the "Company"), is a
network marketing company involved in the distribution and sale of premium
quality, innovative personal care and nutritional products. The Company is the
exclusive distribution vehicle for Nu Skin International, Inc. ("NSI") in the
countries of Japan, Taiwan, Hong Kong (including Macau), South Korea, Thailand
and the Philippines, where the Company currently has operations, and in
Indonesia, Malaysia, the People's Republic of China ("PRC"), Indonesia,
Singapore and Vietnam, where Nu Skin operations have not 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, health solutions and botanical supplements.
The Company was incorporated in Delaware on September 4, 1996. On November
20, 1996, the stockholders (the "Original 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")
(together the "Original Subsidiaries") 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"). As a result of the
Reorganization, each of the Original Subsidiaries became a wholly-owned
subsidiary of the Company. 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, Nu Skin Thailand, and Nu Skin Philippines, Inc. ("Nu
Skin Philippines") 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.
In November 1996, the Company and certain Original 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"). In addition, in December 1996, the Company, NSI and certain of
NSI's affiliates offered to qualifying NSI independent distributors and
employees, in non-underwritten offerings (the "Rule 415 Offerings", and together
with the Underwritten Offerings, the "Offerings") certain options and shares of
Class A Common Stock pursuant to Rule 415 under the Securities Act of 1933, as
amended (the "1933 Act").
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
provides 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 who
are licensed to the Company pursuant to agreements between NSI and the Company's
Subsidiaries. On February 27, 1998, the Company entered into a Stock Acquisition
Agreement with the Stockholders of NSI and certain affiliates of NSI to acquire
all of the capital stock of NSI and certain affiliates of NSI. See "Recent
Developments."
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.
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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. References to "yen" and "(Y)" are to Japanese yen, and
references to "won" are to South Korean won. References to "baht" are to Thai
baht. References, if any, to the "NT$" are to New Taiwanese dollars and
references, if any, to the "HK$" are to Hong Kong dollars.
Note Regarding Forward-Looking Statements
Certain statements made herein under the captions "Business-Country
Profiles," and "Risk Factors," are "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995 (the "Reform
Act"). In addition, when used in this Report the words or phrases "will likely
result," "expects," "intends," "will continue," "is anticipated," "estimates,"
"projects," "Management believes," "the Company believes" and similar
expressions are intended to identify "forward-looking statements" within the
meaning of the Reform Act.
Forward-looking statements include plans and objectives of management for
future operations, including plans and objectives relating to the products and
the future economic performance of each country in which the Company operates
and financial results of the Company. These forward-looking statements involve
risks and uncertainties and are based on certain assumptions that may not be
realized. Actual results and outcomes may differ materially from those discussed
or anticipated. The forward-looking statements and associated risks set forth
herein relate to the: (i) proposed NSI Acquisition, (ii) expansion of the
Company's market share in its current markets; (iii) Company's entrance into new
markets (iv) development of new products and new product lines tailored to
appeal to the particular needs of consumers in specific markets; (v) stimulation
of product sales by introducing new products; (vi) opening of new offices,
walk-in distribution centers and distributor support centers in certain markets;
(vii) promotion of distributor growth, retention and leadership through local
initiatives; (viii) upgrading of the Company's technological resources to
support distributors; (ix) obtaining of regulatory approvals for certain
products, including LifePak; (x) stimulation of product purchases by inactive
distributors through direct mail campaigns; (xi) retention of the Company's
earnings for use in the operation and expansion of the Company's business; (xii)
development of brand awareness and loyalty; (xiii) enhancing of the Company's
Global Compensation Plan; (xiv) diversifying of the Company's revenue base and
markets, (xv) seeking of cost reductions from vendors; and (vxi) establishment
of local manufacturing.
All forward-looking statements are subject to known and unknown risks and
uncertainties, including those discussed under the caption "Risk Factors"
herein, that could cause actual results to differ materially from historical
results and those presently anticipated or projected. The Company wishes to
caution readers not to place undue reliance on any such forward-looking
statements, which speak only as of the date made. The Company wishes to further
advise readers that the important factors listed under the caption "Risk
Factors" could affect the Company's financial performance and could cause the
Company's actual results for future periods to differ materially from any views
or statements expressed with respect to future periods. Important factors and
risks that might cause such differences include, but are not limited to (a)
factors related to the Company's reliance upon independent distributors of NSI,
(b) fluctuations in foreign currency values relative to the U.S. dollar, (c)
adverse economic and business conditions in the Company's markets, especially
South Korea and Thailand, (d) the possibility the proposed NSI Acquisition may
not be consummated, (e) the potential effects of adverse publicity, including
adverse publicity regarding the Company and other direct selling companies in
South Korea and the Company's other markets, (f) the potential negative impact
of distributor actions, (g) seasonal and cyclical trends, (h) variations in
operating results, (i) government regulation of direct selling activities in the
PRC, Malaysia and other existing and future markets, (j) government regulation
of products and marketing, (k) import restrictions, (l) other regulatory issues,
including regulatory action against the Company or its distributors in any of
the Company's markets and particularly in South Korea, (m) the Company's
reliance on certain distributors, (n) the potential divergence of interests
between distributors and the Company, (o) management of the Company's growth,
(p) the effects on operations of the NSI distributor equity program, (q) the
introduction of the Scion product line in the Philippines and Aloe-mx in Japan,
(r) market acceptance in South Korea and other markets of LifePak and LifePak
Trim, the Company's core IDN nutritional supplements, (s) the acceptance of new
distributor walk-in centers in Japan, Thailand and Taiwan, (t) acceptance of
modifications to the Company's sales compensation plan in the Philippines, (u)
the Company's ability to renegotiate or adjust vendor relationships, (v) the
Company's ability to establish local manufacturing capability, (w) risks
inherent in the importation, regulation and sale of personal care and
nutritional products in the Company's markets, (x) the Company's ability to
successfully enter new markets such as Poland and Brazil and introduce new
products in addition to
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those already referenced above, (y) the Company's ability to manage growth and
deal with the possible adverse effect on the Company of the change in the status
of Hong Kong, (z) the potential conflicts of interest between the Company and
NSI, (aa) control of the Company by the Original Stockholders, (bb) the
anti-takeover effects of dual classes of common stock, (cc) the Company's
reliance on and the concentration of outside manufacturers, (dd) the Company's
reliance on the operations of and dividends and distributions from the
Subsidiaries, (ee) taxation and transfer pricing issues, (ff) the potential
increase in distributor compensation expense, (gg) product liability issues, and
(hh) competition in the Company's existing and future markets.
In light of the significant uncertainties inherent in forward-looking
statements, the inclusion of any such statement should not be regarded as a
representation by the Company or any other person that the objectives or plans
of the Company will be achieved. The Company disclaims any obligation or intent
to update any such factors or forward-looking statements to reflect future
events or developments. See "Risk Factors."
Recent Developments
On February 27, 1998, the Company entered into a Stock Acquisition
Agreement (the "Acquisition Agreement") with the stockholders of NSI and certain
affiliates of NSI (the "NSI Stockholders") to acquire (the "NSI Acquisition")
all of the capital stock of NSI and certain affiliates of NSI (the "Acquired
Entities"). The consideration to be paid by the Company to the NSI Stockholders
will consist of shares of Series A Preferred Stock, par value $.001 per share,
of the Company (the "Series A Preferred Stock") in an amount determined as set
forth below, the assumption of the Acquired Entities' S Distribution Notes (as
defined below) payable to the NSI Stockholders in the amount of approximately
$180 million (taking into account the Acquired Entities' S Distribution Notes as
of December 31, 1997 and as of the closing date of the NSI Acquisition) and,
contingent upon NSI and the Company meeting certain earnings growth targets, up
to $25 million in cash per year over the next four years. In addition, the
Acquisition Agreement provides that if the Acquired Entities' S Distribution
Notes do not equal or exceed $180 million, the Company will pay each NSI
Stockholder in cash or in the form of promissory notes the difference between
(i) $180 million and (ii) the aggregate principal amount of the Acquired
Entities' S Distribution Notes multiplied by each NSI Stockholder's proportional
ownership interest in the outstanding capital stock of NSI. The Acquisition
Agreement provides that the number of shares of Series A Preferred Stock to be
delivered to the NSI Stockholders shall be determined by dividing $70 million by
the average closing price of the Class A Common Stock for the 20 consecutive
trading days ending five trading days prior to the closing of the NSI
Acquisition.
Collectively, the NSI Stockholders and their affiliates own beneficially
all of the outstanding shares of the Class B Common Stock. In addition, several
of the NSI Stockholders are directors and/or executive officers of the Company.
Effective as of December 31, 1997, NSI contributed certain assets relating
to the right to distribute NSI products in the United States to Nu Skin USA,
Inc. ("Nu Skin USA"), a newly created corporation wholly owned by the NSI
Stockholders, in exchange for all of the common stock of Nu Skin USA. The Nu
Skin USA common stock was then distributed to the NSI Stockholders. In addition,
effective as of December 31, 1997, NSI and the other Acquired Entities declared
distributions to their then existing stockholders (consisting solely of the NSI
Stockholders) that included all of such Acquired Entities' previously earned and
undistributed S corporation earnings through such date (the "Acquired Entities'
S Corporation Distribution"). As of December 31, 1997, such Acquired Entities'
aggregate undistributed S corporation earnings were approximately $136.2
million. The Acquired Entities' S Corporation Distribution was distributed in
the form of promissory notes due December 31, 2004 and bearing interest at 8.0 %
per annum (the "Acquired Entities' S Distribution Notes"). The Acquired
Entities' S Corporation Distribution Notes are held entirely by the NSI
Stockholders. In addition, the Acquired Entities will declare distributions to
then existing stockholders that include all of such Acquired Entities'
previously earned and undistributed S corporation earnings through the date of
closing of the NSI Acquisition. As discussed above, the obligation to repay the
Acquired Entities' S Distribution Notes to the NSI Stockholders will be assumed
by the Company in connection with the NSI Acquisition.
The Acquired Entities consist of NSI, Nu Skin International Management
Group, Inc., ("NSIMG") and the NSI affiliates operating in Europe, Australia and
New Zealand, including Nu Skin Europe, Inc.; Nu Skin U.K., Ltd.(domesticated
-3-
in Delaware under the name Nu Skin U.K., Inc.); Nu Skin Germany, GmbH
(domesticated in Delaware under the name Nu Skin Germany, Inc.); Nu Skin France,
SARL (domesticated in Delaware under the name Nu Skin France, Inc.); Nu Skin
Netherlands, B.V. (domesticated in Delaware under the name Nu Skin Netherlands,
Inc.); Nu Skin Italy, (SRL) (domesticated in Delaware under the name Nu Skin
Italy, Inc.); Nu Skin Spain, S.L. (domesticated in Delaware under the name Nu
Skin Spain, Inc.); Nu Skin Belgium, N.V. (domesticated in Delaware under the
name Nu Skin Belgium, Inc.); Nu Skin Personal Care Australia, Inc.; Nu Skin New
Zealand, Inc.; Nu Skin Brazil, Ltda. (domesticated in Delaware under the name Nu
Skin Brazil, Inc.); Nu Skin Argentina, Inc.; Nu Skin Chile, S.A. (domesticated
in Delaware under the name Nu Skin Chile, Inc.); Nu Skin Poland Spa.
(domesticated in Delaware under the name Nu Skin Poland, Inc.); and Cedar
Meadows, L.C. The NSI Stockholders continue to own as private entities the NSI
affiliates operating in the United States, Canada, Mexico, Guatemala and Puerto
Rico, including Nu Skin USA, Inc.; Nu Skin Canada, Inc.; Nu Skin Mexico S.A. de
C.V. (domesticated in Delaware under the name Nu Skin Mexico, Inc.); Nu Skin
Guatemala, S.A. (domesticated in Delaware under the name Nu Skin Guatemala,
Inc.); and Nu Skin Puerto Rico, Inc. (collectively, the "Retained Entities").
The following chart illustrates the organizational structure of the
Company and the Retained Entities immediately after the NSI Acquisition.
[Organizational Chart]
-4-
Through its acquisition of NSI, the Company will obtain ownership and
control of the Nu Skin trademarks and tradenames, the Nu Skin Global
Compensation Plan, distributor lists and related intellectual property and
know-how (collectively, the "Intellectual Property"). The Company, through NSI,
intends to continue to license the Intellectual Property and, through NSIMG,
intends to continue to provide management support services to the Acquired
Entities on substantially the same terms as existed prior to the NSI
Acquisition. In connection with the NSI Acquisition, the Company anticipates,
through NSI and NSIMG, entering into new agreements with Nu Skin USA, Inc. and
revised agreements with the other Retained Entities on terms substantially
similar to its agreements with the Acquired Entities, pursuant to which NSI will
continue to license the Intellectual Property and the exclusive right to sell Nu
Skin personal care and nutritional products in the United States, Canada,
Mexico, Guatemala and Puerto Rico to the Retained Entities and NSIMG will
continue to provide management support services to the Retained Entities.
Upon completion of the NSI Acquisition, the Company and its subsidiaries
will own and distribute Nu Skin products in 18 markets worldwide. The Company
will also hold the rights to all future Nu Skin markets.
Country Profiles
The following table sets forth the Company's revenue and the total number
of active distributors for each of the countries in which the Company operated
for the years ended December 31, 1995, 1996 and 1997. This table should be
reviewed in connection with the information presented under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," incorporated herein by reference to the Company's 1997 Annual
Report, sections of which are filed herewith as Exhibit 13, which discusses the
costs associated with generating the aggregate revenue presented. The Company
did not commence operations in the Philippines until February 1998.
Year Ended December 31,
-----------------------------------------
COUNTRY 1995 1996 1997
- -------- --------- --------- ---------
(dollars in thousands)
Revenue:
Japan.................... $ 231,540 $ 380,044 $ 599,375
Taiwan................... 105,415 154,564 168,568
South Korea(1)........... -- -- 74,207
Thailand(2).............. -- -- 22,834
Hong Kong................ 17,046 17,037 21,267
Year Ended December 31,
-----------------------------------------
1995 1996 1997
--------- --------- ---------
Active Distributors(3)(4):
Japan.................... 147,000 215,000 297,000
Taiwan................... 75,000 91,000 86,000
South Korea(1)........... -- 57,000 21,000
Thailand(2).............. -- -- 11,000
Hong Kong................ 14,000 14,000 15,000
------- ------- -------
Total.............. 236,000 377,000 430,000
------- ------- -------
- ------------------
(1) The Company commenced operations in South Korea in February 1996.
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(2) The Company commenced operations in Thailand in March 1997. (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.
-6-
The following table sets forth certain estimated economic and demographic
data in each of the Company's markets for the years presented. 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. In addition, the following data does not
reflect the economic decline that commenced in certain of the Company's markets
in 1997. The listed data was not available from the referenced source as of
March 5, 1998.
1996 1996 GDP 1996 GDP Real GDP
Population (in billions per capita Growth
Country (in millions) of $) (in $) 1996/1995 (%)
- ------- ------------- ------------ ----------- -------------
Japan............... 125.5 $4,575.2 $36,456 3.6%
Taiwan.............. 21.5 270.5 12,583 5.6
South Korea......... 45.3 497.6 10,984 6.9
Hong Kong........... 6.3 158.7 25,108 4.6
Thailand............ 61.8 185.0 2,993 6.7
Philippines......... 72.0 83.2 1,156 5.5
- -----------
Source: World Information Services; Country Data Forecasts, March 1997.
Japan. The Company, through its subsidiary Nu Skin Japan, commenced
operations in Japan in April 1993. According to the World Federation of Direct
Selling Associations ("WFDSA"), the direct selling channel in Japan generated
sales of approximately $30 billion of goods and services in 1996, making Japan
the largest direct selling market in the world. Management believes that as many
as six million people are involved in direct selling businesses in Japan. Direct
selling is well-understood in Japan and is governed by detailed government
regulation. See "Risk Factors--Government Regulation of Direct Selling
Activities" and "--Government Regulation of Products and Marketing; Import
Restrictions."
A great deal of the Company's success to date can be directly attributed
to the growth of its Japanese business in recent years. Significant revenue was
recognized from the outset of the Company's operations in Japan due to the
immediate attention given to the market by leading NSI distributors from around
the world. Japan has continued to post strong financial results for the Company,
with revenue increasing by approximately 58% in U.S. dollars and 75% in local
currency for 1997 compared to 1996 and by approximately 64% in U.S. dollars and
90% in local currency for 1996 compared to 1995. Management believes that the
increase from 1996 to 1997 was primarily the result of the growth in executive
distributors in Japan during this period and the increasing demand for IDN
products, which accounted for 38% of revenue for the period. Furthermore, given
the size of the direct selling market, management believes that there is still
significant opportunity for revenue growth in this market. However, a variety of
factors including, without limitation, economic conditions in Asia generally and
Japan specifically may hinder revenue growth. As of December 31, 1997, Nu Skin
Japan offered 68 of the 90 Nu Skin personal care products and 15 of the 40 IDN
products, including LifePak and LifePak Trim, the core IDN nutritional
supplements. Nu Skin Japan also offered 4 popular skin lightening products, 7
additional face care products, and Aloe-mx, an Aloe vera-based nutritional drink
designed specifically for Japanese consumers.
In support of the Company's growth strategy, Nu Skin Japan intends to (i)
focus on internal country development by supporting the recently opened Fukuoka
walk-in center and considering opening offices in additional Japanese cities,
thereby increasing consumer awareness and enhancing the Company's image, (ii)
expand development capacity to develop more products that are particularly
suited to the Japanese market, (iii) continue to expand the current product
offerings in Japan to include additional Nu Skin personal care and IDN products,
(iv) enhance corporate support of distributors by upgrading information
technology resources, (v) expand warehousing and distribution support
facilities, and (vi) continue to build brand name recognition through
sponsorship from time to time of major events such as the NBA Supergames in 1997
and the Nippon Yacht Squadron in the America's Cup 2000 Regatta.
Taiwan. The Company, through its subsidiary Nu Skin Taiwan, commenced
operations in Taiwan in January 1992. According to the WFDSA, the direct selling
channel in Taiwan generated approximately $1.7 billion in sales of goods and
-7-
services in 1996, of which approximately 43% were nutritional products.
Approximately two million people (approximately 10% of the population) are
estimated to be involved in direct selling. Because a large percentage of its
population is involved in direct selling activities, the Taiwan government
regulates direct selling activities to a significant extent. For example, the
Taiwan government has enacted tax legislation aimed at ensuring proper tax
payments by distributors on their transactions with end consumers. See "Risk
Factors--Government Regulations of Direct Selling Activities" and "--Government
Regulation of Products and Marketing; Import Restrictions."
Revenue growth in Taiwan has averaged 41% per year since the commencement
of operations in 1992. The Company believes that the 1997 increase in sales was
primarily due to (i) the opening of walk-in centers in various Taiwanese cities,
(ii) increased distributor training and recognition, and (iii) increased product
offerings. The Company believes that Nu Skin Taiwan was the largest direct
selling company in Taiwan in 1997. As of December 31, 1997, Nu Skin Taiwan
offered 72 of the 90 Nu Skin personal care products and 11 of the 40 IDN
products.
In support of the Company's growth strategy, Nu Skin Taiwan intends to (i)
capitalize on the size of the nutritional supplements market by locally sourcing
LifePak to more competitively price this core IDN product and expanding the
current product offerings in Taiwan to include additional Nu Skin personal care
and IDN products, (ii) focus more resources on product development specifically
for the Taiwan market, and (iii) enhance corporate support of distributors by
upgrading information technology resources.
Hong Kong. The Company, through its subsidiary Nu Skin Hong Kong,
commenced operations in Hong Kong in September 1991. According to the WFDSA, the
direct selling channel in Hong King generated approximately $78 million in sales
of goods and services in 1995. Hong Kong represents an important market in the
structure of the Asian region because it serves as the location of the Company's
regional office and is an important base of operations for many of the Company's
most successful distributors, whose downline distributor networks extend into
other Asian markets. As of December 31, 1997, Nu Skin Hong Kong offered 86 of
the 90 Nu Skin personal care products and 18 of the 40 IDN products.
Hong Kong became a Special Administrative Region (SAR) of the PRC
effective July 1, 1997. Although the Company has not perceived any material
impact resulting from the integration, further integration of the Hong Kong
economy and political system with the economy and political system of the PRC
could have an impact on the Company's business in Hong Kong. See "Risk
Factors--Possible Adverse Effect on the Company of the Change in the Status of
Hong Kong."
In February 1995, Macau, a Portuguese colony scheduled to become an SAR of
the PRC in 1999, was opened as a new market. Revenue figures for Macau are
combined with those of Hong Kong. Macau represents the smallest of the Company's
markets in population with just under 500,000 residents. The Company's Macau
office operates under the direction of Nu Skin Hong Kong.
In support of the Company's growth strategy, Nu Skin Hong Kong intends to
(i) promote distributor growth, retention and leadership development through
local initiatives, (ii) capitalize on the size of the nutritional supplements
market by promoting the premium LifePak nutritional supplement, (iii) expanding
the current product offerings in Hong Kong to include additional Nu Skin
personal care and IDN products, and (iv) stimulate purchases from inactive
distributors through direct mail campaigns.
South Korea. The Company, through its subsidiary Nu Skin Korea, commenced
operations in South Korea in February 1996. According to the WFDSA, the direct
selling channel in South Korea generated approximately $1.8 billion in sales of
goods and services in 1996. South Korea's direct sales legislation, which went
into effect in July 1995, requires companies to comply with numerous provisions,
such as local registration, reporting of certain operating results and
dissemination to distributors of certain information regarding the laws. Nu Skin
Korea was among the first foreign-owned firms to register and begin operations
under the new direct selling legislation. See "Risk Factors--Government
Regulations of Direct Selling Activities" and "--Government Regulation of
Products and Marketing; Import Restrictions."
Management believes that Nu Skin Korea was one of the largest direct
sellers in the country during this time period. As of December 31, 1997, Nu Skin
Korea offered 52 of the 90 Nu Skin personal care products and 1 of the 40 IDN
-8-
products. Additionally, Nu Skin Korea offered various shades of Nu Colour
MoistureShade Liquid Finish designed specifically for Korean consumers.
The Company had sales in South Korea of approximately $122 million and $74
million for 1996 and 1997, respectively. The Company believes that the revenue
decline in South Korea during the second half of 1997, although partially
reflective of the business cycle experienced by the Company in other new
markets, was primarily the result of other factors specific to South Korea.
These other factors include a general collapse of the South Korean economy,
volatility in the South Korean won and activities by the South Korean government
and campaigns by a coalition of consumer protection and trade organizations
against producers of luxury and foreign goods, in general, and certain network
marketing companies, in particular, that resulted in negative media attention.
Management believes that the media attention has negatively impacted the
business environment generally. See "--Potential Effects of Adverse Publicity."
Additionally, the recent economic decline in South Korea has resulted in reduced
consumer spending on foreign goods. Further, the devaluation of the Korean won
has suppressed reported U.S. dollar revenues.
In support of the Company's growth strategy, Nu Skin Korea intends to (i)
engage in the local manufacturing of certain products to alleviate concerns
about the high level of goods being imported into South Korea by the Company,
(ii) engage in targeted promotional and public relations activities designed to
address concerns regarding the current business environment for direct selling
companies, (iii) promote the development of local distributor leadership,
including focused training efforts, compensation plan modifications and the
introduction of distributor productivity programs, and (iv) build the local
distributor support infrastructure.
Thailand. The Company, through its subsidiary, Nu Skin Thailand, commenced
operations in Thailand on March 13, 1997. According to the WFDSA, direct sales
in 1996 totaled $800 million in Thailand, making it the fourteenth largest
direct selling market worldwide. The Company's opening in Thailand was supported
by more than 200 of NSI's highest ranking distributors, many of whom are from
Taiwan and other Asian markets. As of December 31, 1997, Nu Skin Thailand
offered 31 of the 90 Nu Skin personal care products and none of the IDN
products. Initial revenue growth in the first half of 1997 slowed dramatically
in the second half of 1997 due primarily to economic turmoil in Thailand which
led to a significant devaluation of the Thai baht and a general slowdown in
consumer spending for foreign goods.
In Thailand, the Company intends to (i) systematically introduce
additional Nu Skin personal care products including locally sourced products at
a value price, (ii) promote the Company's brand image through public relations
efforts, including the endorsement of Nu Skin personal care products by the
1995-1996 Miss Thailand, and (iii) train new distributors in the most effective
methods of marketing the Company's products and in becoming effective leaders
within NSI's global distributor compensation plan (the "Global Compensation
Plan") framework.
Philippines. The Company, through its subsidiary Nu Skin Philippines,
commenced operations in the Philippines on February 4, 1998. The opening was
supported by over 150 of NSI's highest ranking distributors. Nu Skin Philippines
currently offers 26 of the 90 personal care products, none of the IDN products
and 11 personal care products that are manufactured in the Philippines under the
brand name Scion. The locally produced Scion personal care product line is
priced to appeal to a broader demographic segment of the population than Nu Skin
premium products. The Company intends to focus on establishing a stable
distributor base prior to implementing product line enhancements. In addition,
the Company also has implemented an enhancement to the Global Compensation Plan
to provide greater incentives for distributors at low executive levels in this
country with relatively low per capita income.
New Market Opportunities
The Company has developed a low cost, disciplined approach to opening new
markets. Each market opening is preceded by a thorough analysis of economic and
political conditions, regulatory standards and other business, tax and legal
issues. Prior to a market opening, the Company's management team, in conjunction
with NSI support personnel, local legal counsel and tax advisors, works to
obtain all necessary regulatory approvals and establish facilities capable of
meeting distributor needs. This approach, combined with the Global Compensation
Plan which motivates distributors to sponsor and train other distributors to
sell products in new markets, has enabled the Company to quickly and
successfully open new markets.
-9-
The Company has the right to be the exclusive distributor of NSI products
in Indonesia, Malaysia, the PRC, Singapore and Vietnam. The Company believes
that these countries collectively represent significant markets for future
expansion; however, no assurance can be given that Nu Skin operations will ever
be commenced in these counties. Generally, the Company, as a matter of policy,
does not announce the timing of its opening of new markets.
There are, however, significant risks and uncertainties associated with
the Company's expansion into these countries. The regulatory and political
climate in these potential markets is such that a replication of the Company's
current operating structure cannot be guaranteed. For example, Malaysia has
governmental guidelines that have the effect of limiting foreign ownership of
direct selling companies operating in Malaysia to no more than 30%. In addition,
because the Company's personal care and nutritional product lines are generally
positioned as premium product lines, the market potential for the Company's
product lines in relatively less developed countries, such as the PRC and
Vietnam, remains to be determined. Modifications to each product line may be
needed to accommodate the market conditions in each country, while maintaining
the integrity of the Company's products. No assurance can be given that the
Company will be able to obtain necessary regulatory approvals to commence
operations in these new markets, or that, once such approvals are obtained, the
Company and NSI, upon which the Company is largely dependent for product
development assistance, will be able to successfully reformulate Nu Skin
personal care and IDN product lines in any of the Company's new markets to
attract local consumers. Given existing regulatory environments and economic
conditions, the Company's entrance into Singapore and Vietnam is not anticipated
in the short to mid-term. See "Risk Factors--Entering New Markets" and
"--Government Regulation of Products and Marketing; Import Restrictions."
The following table sets forth certain estimated economic and demographic
data in each of the countries for which the Company has an exclusive license but
in which the Company has not commenced Nu Skin operations. Although the Company
believes that the following table provides a useful basis for evaluating the
relative size and growth of the economies and populations of the countries in
which the Company intends to operate, no assurance can be given that economic or
population data in a particular country will indicate what the Company's results
of operations, if any, will be in that country.
1996 1996 GDP 1996 GDP Real GDP
Population (in billions per capita Growth
Country (in millions) of $) (in $) 1996/1995 (%)
- ------- ------------- ------------ ----------- -------------
Indonesia.............. 197.4 $224.5 $1,137 7.8%
Malaysia............... 20.5 97.2 4,751 8.2
PRC.................... 1,236.0 808.2 654 9.7
Singapore.............. 3.0 93.2 30,771 7.0
Vietnam................ 76.3 26.1 342 9.3
- -------------------
Source: World Information Services; Country Data Forecasts, March 1997.
Indonesia. Although historically not open to foreign investment
opportunities, in the mid 1990's, Indonesia experienced an emphasis on
deregulation and private enterprise and an average annual growth in GDP of 6%
from 1985 to 1994. The Indonesian Direct Selling Association reports that there
are 750,000 participants in direct selling in the country. During the latter
part of 1997, Indonesia experienced a significant devaluation in its local
currency and significant economic turmoil. Due to these recent factors,
management believes that immediate expansion into this market is not in the
Company's best interest.
Malaysia. According to the WFDSA, more than $760 million in goods and
services were sold through the direct selling channel in Malaysia in 1996. There
are currently numerous direct selling companies operating in Malaysia. In
October 1995, the Company's business permit applications were denied by the
Malaysian government as the result of activities by certain NSI distributors
before required government approvals could be secured. See "Risk
Factors--Potential Negative Impact of Distributor Actions" and "--Potential
Effects of Adverse Publicity." Management is continuing to evaluate the time
frame in which it will reapproach the Malaysian market.
-10-
PRC. With the PRC's large population and the Company's success in the
neighboring and Chinese-speaking countries of Hong Kong and Taiwan, management
believes that the PRC may be an attractive market for the Company. However, the
PRC has proven to be a particularly difficult market for foreign corporations
due to its extensive government regulation and historical political tenets, and
no assurance can be given that the Company will be able to establish operations
in the PRC. The Company believes that entering the PRC may require the
successful establishment of a joint venture enterprise with a Chinese partner
and the establishment of a local manufacturing presence. These initiatives would
likely require a significant investment over time by the Company. The Company
believes that the PRC national regulatory agency responsible for direct selling
periodically reviews the regulation of multi-level marketing. Management is
aware of recent media reports in the PRC reporting an increasing desire on the
part of senior government officers to curtail or even abolish direct selling and
multi-level marketing activities. These views may lead to changes in applicable
regulations. The Company believes that PRC regulators are currently not issuing
direct selling or multi-level marketing licenses and may take action restricting
currently licensed direct selling businesses. The Company is actively working on
these and other issues including joint ventures and potential marketing
alternatives related to possible Nu Skin operations in the PRC. It is not known
when or whether the Company will be able to implement in the PRC business models
consistent with those used by the Company in other markets. The Company will
likely have to apply for licenses on a province by province basis, and the
repatriation of the Company's profits will be subject to restrictions on
currency conversion and the fluctuations of the government controlled exchange
rate. In addition, because distribution systems in the PRC are greatly
fragmented, the Company may be forced to use business models significantly
different from those used by the Company in more developed countries. The lack
of a comprehensive legal system, the uncertainties of enforcement of existing
legislation and laws, and potential revisions of existing laws could have an
adverse effect on the Company's proposed business in the PRC. See "Risk
Factors--Entering New Markets."
Singapore. In Singapore, relatively high levels of GDP per capita indicate
that the country enjoys strong consumer buying power and a dynamic market
structure similar to, yet smaller than, Hong Kong. Although direct selling
activities are permitted, currently network marketing is not allowed in
Singapore. Accordingly, the Company's entrance into Singapore is not anticipated
in the short to mid-term. See "--Government Regulation--Regulation of Products
and Marketing; Import Restrictions."
Vietnam. The Company believes that there is little or no direct selling
activity in Vietnam. However, the country is moving towards a market-based
economy and has recently adopted a freely convertible currency. The Company
anticipates that the increase in free enterprise will help to develop the direct
selling channel. However, given existing regulatory, environmental and economic
conditions, the Company's entrance into Vietnam is not anticipated in the short
to mid-term.
Southeast Asian and South Korean Economic Crisis
During 1997, economic and in some cases political conditions in Southeast
Asia and South Korea continued to decline. The region currently labors under
declining stock and currency markets, mounting bad bank debt, bankruptcies
involving some of its largest business enterprises, excess capacity, decreasing
demand for foreign goods and political unrest. These conditions are most
significantly reflected in the Company's operating results in South Korea and
Thailand. The Company has announced initiatives in each of its existing markets
to promote and sustain growth. These initiatives include increasing the local
production of products, supplementary product offerings with more moderately
priced goods, and enhancing the sales compensation plan to provide for greater
commission payouts at lower qualifying levels. No assurances can be given that
these initiatives will be successful. See " --Country Profiles" herein and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations-- Outlook" incorporated herein by reference to the Company's 1997
Annual Report, sections of which are filed herewith as Exhibit 13.
Distribution System
Overview of Distribution System. The foundation of the Company's sales
philosophy and distribution system is network marketing. Under most network
marketing systems, distributors purchase products for retail sale and personal
consumption. Pursuant to the Global Compensation Plan, products are sold
exclusively to or through independent distributors
-11-
who are not employees of the Company or NSI. Distributors contract directly with
NSI, and NSI makes such distributors available to the Company through Licensing
and Sales Agreements. See "--Relationship with NSI."
Network marketing is an effective vehicle to distribute the Company's
products because (i) a consumer can be educated about a product in person by a
distributor, which is more direct than the use of television and print
advertisements; (ii) direct sales allow for actual product testing by a
potential consumer; (iii) the impact of distributor and consumer testimonials is
enhanced; and (iv) as compared to other distribution methods, distributors can
give customers higher levels of service and attention, by, among other things,
delivering products directly to a consumer and following up on sales to ensure
proper product usage and customer satisfaction, and to encourage repeat
purchases. Under most network marketing systems, independent distributors
purchase products for resale and for personal consumption.
Direct selling as a distribution channel has been enhanced in the past
decade due to advancements in communications, including telecommunications, and
the proliferation of the use of videos and fax machines. Direct selling
companies can now produce high quality videos for use in product education,
demonstrations and sponsoring sessions that project a desired image for the
Company and the product line. Management believes that high quality sales aids
play an important role in the success of distributor efforts. For this reason,
NSI maintains an in-house staff of video production personnel and video and
audio cassette duplication equipment for timely and cost-effective production of
sales materials. These facilities and expertise are available for the Company's
use. Management is committed to fully utilizing current and future technological
advances to continue enhancing the effectiveness of direct selling.
NSI's network marketing program differs from many other network marketing
programs in several respects. First, the Global Compensation Plan allows NSI
distributors to develop a seamless global network of downline distributors.
Second, NSI's order and fulfillment systems eliminate the need for distributors
to carry significant levels of inventory. Third, the Global Compensation Plan is
among the most financially rewarding plans offered to distributors by network
marketing companies, and can result in commissions to distributors aggregating
up to 58% of a product's wholesale price. On a global basis, commissions have
averaged approximately 42% of revenue from commissionable sales over the last
eight years. Because the Company licenses the right to use the Global
Compensation Plan from NSI, the structure of the plan, including commission
rates, is largely under the control of NSI. See "Risk Factors--Increase in
Distributor Compensation Expense."
The Company's revenue is directly dependent upon the efforts of
distributors. Growth in sales volume requires an increase in the productivity of
distributors and/or growth in the total number of distributors. Because the
distributors have contracted directly with NSI, the Company primarily relies on
NSI to enforce distributor policies and procedures. There can be no assurance
that the productivity or number of distributors will be sustained at current
levels or increased in the future. See "Risk Factors--Reliance Upon Independent
Distributors of NSI." Furthermore, the Company estimates that, as of December
31, 1997, approximately 300 distributorships worldwide comprised NSI's Hawaiian
Blue Diamond and Blue Diamond executive distributor levels, which are NSI's two
highest executive distributor levels and, together with their extensive downline
networks, account for substantially all of the Company's revenue. Consequently,
the loss of such a high-level distributor or another key distributor, together
with a group of leading distributors in such distributor's downline network, or
the loss of a significant number of distributors for any reason, could adversely
affect the Company's results of operations. See "Risk Factors--Reliance on
Certain Distributors; Potential Divergence of Interests between Distributors and
the Company."
Sponsoring. The Company relies solely on NSI distributors to sponsor new
distributors. While the Company provides, at cost, product samples, brochures,
magazines and other sales materials, distributors are primarily responsible for
educating new distributors with respect to products, the Global Compensation
Plan, and how to build a successful distributorship.
The sponsoring of new distributors creates multiple levels in the network
marketing structure. Persons whom a distributor sponsors are referred to as
"downline" or "sponsored" distributors. If downline distributors also sponsor,
they create additional levels in the structure, but their downline distributors
remain part of the same downline network
-12-
as their original sponsoring distributor. See "Risk Factors--Reliance on Certain
Distributors; Potential Divergence of Interests between Distributors and the
Company."
Sponsoring activities are not required of distributors. However, because
of the financial incentives provided to those who succeed in building a
distributor network that consumes and resells products, 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, Hong Kong and the
Philippines, distributors are also required to purchase a starter kit, which
includes NSI's policies and procedures, for between $55 and $85, which
essentially represents the cost of producing the starter kit. In South Korea and
Thailand, distributors are not required to purchase a starter kit.
Global Compensation Plan. Management believes that one of the Company's
key competitive advantages is the Global Compensation Plan, which it licenses
from NSI. Distributors receive higher levels of commissions as they advance
under the Global Compensation Plan. The Global Compensation Plan is seamlessly
integrated across all markets in which Nu Skin personal care and IDN products
are sold, which allows distributors to receive commissions for global product
sales, rather than merely local product sales. This seamless integration means
that the Company's distributor base has global reach and that the knowledge and
experience resident in current distributors can be used to build distributor
leadership in new markets. Outside of the Company's markets, NSI currently has
affiliated operations in the U.S., the United Kingdom, Puerto Rico, Canada,
Australia, New Zealand, Ireland, Germany, France, the Netherlands, Belgium,
Italy, Spain, Austria, Portugal, Mexico and Guatemala. Allowing distributors to
receive commissions at the same rate for sales in foreign countries as for sales
in their home country is a significant benefit to distributors because they are
not required to establish new distributorships or requalify for higher levels of
commissions within each new country in which they begin to operate, which is
frequently the case under the compensation plans of the Company's major
competitors. Under the Global Compensation Plan, a distributor is paid
consolidated monthly commissions in the distributor's home country, in local
currency, for product sales in that distributor's global downline distributor
network. Current and future distributor lists have been licensed by NSI to the
Company pursuant to Licensing and Sales Agreements. See "--Relationship with
NSI."
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 approximately 42% of revenue from
commissionable sales over the last eight years. See "Risk Factors--Increase in
Distributor Compensation Expense."
Each product carries a specified number of sales volume points.
Commissions are based on total personal and group sales volume points per month.
Sales volume points are essentially based upon a product's wholesale cost, net
of any point of sale taxes. As a distributor's retail business expands and as he
or she successfully sponsors other distributors into the business who in turn
expand their own businesses, he or she receives a higher percentage of
commissions.
-13-
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 distributorship
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,
----------------------------------------------
Executive Distributors 1993 1994 1995 1996 1997
------ ------ ------ ------ ------
Japan............................ 2,459 3,613 4,017 10,169 15,756
Taiwan........................... 1,170 2,093 3,014 5,098 4,342
South Korea...................... -- -- -- 4,675 898
Thailand......................... -- -- -- -- 308
Hong Kong........................ 275 377 519 541 641
Total...................... 3,907 6,083 7,550 20,483 21,945
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 make appropriate
recommendations to NSI.
Distributor Support. The Company is committed to providing high level
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
-14-
and representations made in literature distributed by the Company. No medical
claims may be made regarding the products, nor may distributors prescribe any
particular product as suitable for any specific ailment. Even though sponsoring
activities can be conducted in many countries, distributors are prohibited from
conducting marketing activities outside of countries in which NSI and the
Company conduct business and are not allowed to export products from one country
to another. See "Risk Factors--Potential Negative Impact of Distributor
Actions."
Distributors must represent that the receipt of commissions is based on
substantial efforts. Exhibiting commission statements or checks is prohibited.
Sales aids such as videotapes, promotional clothing, pens, stationary and other
miscellaneous items must be produced or pre-approved by the Company or NSI.
Distributors may not use any form of media advertising to promote
products. Products may be promoted only by personal contact or by literature
produced or approved by the Company. Generic business opportunity advertisements
(without using either the Company or the NSI names) may be placed in accordance
with certain guidelines in some countries. NSI logos and names may not be
permanently displayed on physical premises. Distributors may not use NSI
trademarks or other intellectual property of NSI without NSI's consent.
Products may not be sold, and the business opportunity may not be
promoted, in traditional retail environments such as food markets, pharmacies
and drugstores. Nor may business be conducted at conventions, trade shows, flea
markets, swap meets, and similar events. Distributors who own or are employed by
a service-related business such as a doctor's office, hair salon, or health
club, may make products available to regular customers as long as products are
not displayed visibly to the general public in such a way as to attract the
general public into the establishment to purchase products.
Generally, distributors can receive commission bonuses only if, on a
monthly basis (i) the distributor achieves at least 100 points (approximately
U.S. $100) in personal sales volume, (ii) the distributor documents retail sales
to at least five retail customers, (iii) the distributor sells and/or consumes
at least 80% of personal sales volume, and (iv) the distributor is not in
default of any material policies or procedures.
NSI systematically reviews alleged reports of distributor misbehavior. If
NSI determines that a distributor has violated any of the distributor policies
or procedures, it may either terminate the distributor's rights completely or
impose sanctions such as warnings, probation, withdrawal or denial of an award,
suspension of privileges of a distributorship, fines or penalties, withholding
commissions until specified conditions are satisfied, or other appropriate
injunctive relief. Distributor terminations based on violations of NSI's
policies and procedures have aggregated less than 1% of the Company's
distributor force since inception. Distributors may voluntarily terminate their
distributorship at any time.
Payment. Distributors generally pay for products prior to shipment.
Accordingly, the Company carries no accounts receivable from distributors.
Distributors typically pay for products in cash, by wire transfer, and by credit
cards. 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.
Product Summary
The Company offers products in two distinct categories: personal care
products, marketed under the trademark "Nu Skin," and nutritional products,
marketed under the trademark "Interior Design Nutritionals" (IDN). The Company
is entitled to distribute NSI products in specified Asian countries pursuant to
a Regional Distribution Agreement. See "--Relationship with NSI" and "Risk
Factors--Relationship with and Reliance on NSI; Potential Conflicts of
Interest." NSI markets 90 different personal care and 40 different nutritional
products, of which 85 and 24, respectively, were available in at least one of
the Company's current markets as of December 31, 1997. Nearly all products sold
by the Company are purchased from NSI, with the exception of a line of 11
personal care products which are produced locally in Japan as well as a line of
11 personal care products which are produced locally in the Philippines. In
addition to products, the Company
-15-
offers a variety of sales aids, including items such as starter kits,
introductory kits, brochures, product catalogs, videotape and personal care
accessories. See "Risk Factors--Product Liability."
The following chart indicates how many of the Nu Skin personal care and
IDN products were available as of December 31, 1997, in each of the Company's
current markets.
Nu Skin Personal Care and IDN Product Offerings
Total Products Offered
Products ---------------------------------------------
Offered by Hong South
Product Categories/Product Lines NSI Japan Taiwan Kong Korea Thailand
--------------------------------------------------------
Nu Skin Personal Care:
Facial Care.............................. 20 14(1) 13 18 13 10
Body Care................................ 12 10 9 12 9 9
Hair Care................................ 14 13 13 14 12 10
Color Cosmetics.......................... 13 13 13 13 8(2) -
Specialty................................ 31 18 24 29 10 2
-- -- -- -- -- --
Total................................ 90 68 72 86 52 31
== == == == == ==
Nutritional Supplements.................. 17 7 4 4 1 -
Nutritious and Healthy Snacks............ 7 3 4 6 - -
Sports and Fitness Nutritional Products.. 1 - - - - -
Health Solutions......................... 3 - - - - -
Botanical Supplements.................... 8 4 3 8 - -
-- -- -- -- -- --
Total................................ 40 15 11 18 1 -
== == == == == ==
- ------------------
(1) In Japan, the Company also sells 11 locally sourced personal care products.
(2) In South Korea, the Company also sells one locally sourced color cosmetic
product.
Presented below are the dollar amount and percentage of revenue of each of
the two product categories and other sales aid revenue for the years ended
December 31, 1995, 1996 and 1997.
Revenue by Product Category
Year Ended Year Ended Year Ended
December 31, 1995 December 31, 1996 December 31, 1997
----------------- ----------------- -----------------
$ % $ % $ %
Product Category --------- ------ --------- ------ --------- ------
Nu Skin Personal care..$ 303,387 84.6% $ 493,609 72.8% $ 569,156 63.9%
IDN.................... 23,959 6.7 138,593 20.4 272,402 30.6
Sales aids............. 31,263 8.7 46,394 6.8 48,990 5.5
--------- ------ --------- ------ --------- ------
Total............$ 358,609 100.0% $ 678,596 100.0% $ 890,548 100.0%
========= ====== ========= ====== ========= ======
Nu Skin Personal Care Products
The Company's current Nu Skin personal care products category is divided
into the following lines: facial care, body care, hair care and color cosmetics,
as well as specialty products, such as sun protection, oral hygiene and
fragrances. Each of the Subsidiaries markets a variety of the 90 personal care
products currently offered by NSI. The Company also offers product sets that
include a variety of products in each product line as well as small, sample-size
packages to facilitate product sampling by potential consumers. The product sets
are especially popular during the opening phase of a new country, where
distributors and consumers are anxious to purchase a variety of products, and
during holiday and gift giving seasons in each market. The Company anticipates
the introduction of additional personal care products into each market, based on
the likelihood of the particular product's success in the market as well as
applicable regulatory approvals. See "Risk Factors--Government Regulation of
Products and Marketing; Import Restrictions."
-16-
The Nu Skin personal care products offered in Taiwan and Hong Kong are
substantially the same formulations of the products offered by NSI in the U.S.
In Japan and South Korea, however, most of the products have been reformulated
to satisfy certain regulatory requirements with respect to product ingredients
and preservatives and to meet the preferences of Japanese and South Korean
consumers.
The following is a brief description of each line within the personal care
product category offered by the Company as of December 31, 1997:
Facial Care. The goal of the facial care line is to allow users to cleanse
thoroughly without causing dryness and to moisturize with effective humectants
that allow the skin to attract and retain vital water. The Company's facial care
line currently consists of 20 different products: Cleansing Lotion, Facial
Scrub, Exfoliant Scrub, Facial Cleansing Bar, Clay Pack, pH Balance Facial
Toner, NaPCA Moisturizer, Rejuvenating Cream, Celltrex (called Hylatrex in Japan
and South Korea), Intensive Eye Complex, HPX Hydrating Gel, Face Lift and
Activator (two formulas for sensitive and normal skin), Jungamals Lip Balm,
Clarifex Cleansing Scrub, Clarifex Mud, Alpha Extra Face, Nu Colour Eye Makeup
Remover, MHA Revitalizing Lotion, MHA Revitalizing Lotion with SPF 15 and
Interim MHA Diminishing Gel. In addition, Nu Skin Japan also offers a line of
four popular skin lightening products and seven additional facial care products
designed particularly for Japanese consumers.
Body Care. The Company's line of body care products relies on premium
quality ingredients to cleanse and condition skin. The cleansers are uniquely
formulated without soap, and the moisturizers contain light but effective
humectants and emollients. The Company's body care line currently consists of 12
products: Antibacterial Body Cleansing Gel, Liquid Body Lufra, Body Smoother,
Hand Lotion, NaPCA Moisture Mist, Body Bar, Body Cleansing Gel, Enhancer,
Jungamals Crazy Crocodile Cleaner, Alpha Extra Body, MHA 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. Nu Colour
was introduced in South Korea during 1997. The Nu Colour line consists of 13
products with 105 SKU's including MoistureShade Liquid Finish (10),
MoistureShade Pressed Powder (8), Blush (9), Eye Shadow (10), Mascara (2),
Eyeliner (7), Lip Liner (10), Lipstick (32), DraMATTEics Lip Pencils (6), Lip
Gloss, Creme Concealer (5), Finishing Powder and Brow Pencil (4).
Specialty Products. Epoch is a unique line of ethnobotanical personal care
products created in cooperation with well known ethnobotanists. These products,
which unite natural compounds used by indigenous cultures with advanced
scientific ingredients, include Glacial Marine Mud, Deodorant with Citrisomes,
Polishing Bar, LeafClean Hand Wash, Everglide Foaming Shave Gel, Desert Breeze
Aftershave, Post Shave Lotion for Women, Infusions Herbal Bath, Emulsions and
Firewalker Foot Cream. Epoch was launched in August 1996 in Hong Kong, in
October 1996 in Taiwan, in February 1997 in Japan and in December 1997 in South
Korea and Thailand. Nu Skin Korea and Nu Skin Thailand currently offer only one
Epoch product, Glacial Marine Mud. 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.
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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, Japan, Taiwan, South Korea and
Thailand. At present, Sunright Lip Balm is not available in Japan. Currently,
Sunright Prime Pre & Part Sun Moisturizer and Sunright Lip Balm are not
available in Taiwan and South Korea. Nu Skin Thailand currently offers only one
Sunright product.
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, AP-24 Anti-Plaque Breath Spray and the recently introduced
AP-24 Whitening Flouride Toothpaste. These products are currently available in
Hong Kong and Taiwan. The AP-24 oral health care products for kids are designed
to make oral care fun for children and includes 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 40 products in the following
lines: nutritional supplements, nutritious and healthy snacks, sports and
fitness nutritional products, health solutions and botanical supplements. IDN is
designed to promote healthy, active lifestyles and general well-being through
proper diet, exercise and nutrition. Although less developed in the Asian market
than the Nu Skin personal care category, each of the Subsidiaries, except Nu
Skin Thailand, markets a variety of the IDN products offered by NSI. Nu Skin
Korea currently offers only one IDN product, LifePak. In the United States, the
IDN division is an official licensee of the U.S. Olympic Committee. In South
Korea, LifePak is the official nutritional supplement of the Korean Olympic
Committee
The Company believes that the nutritional supplement market is expanding
in Asia because of changing dietary patterns, a health-conscious population and
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 believes that individual attention and
testimonials by distributors will provide information and comfort to a potential
consumer.
IDN products generally require reformulation to satisfy the strict
regulatory requirements of each Asian market. While each product's concept and
positioning are generally the same, regulatory differences between U.S. and
Asian markets result in some product ingredient differences. See "Risk
Factors--Government Regulation of Products and Marketing." In addition, Asian
preferences and regulations favor tablets instead of gel caps, which are
typically used in the U.S.
The following is a brief description of each of the IDN product lines:
Nutritional Supplements. LifePak and LifePak Trim, the core IDN
nutritional supplements, are designed to provide an optimum mix of nutrients
including vitamins, minerals, antioxidants and phytonutrients (natural chemical
extracts from plants). The introduction of LifePak in Japan in October 1995
resulted in a significant increase in revenue and currently represents
approximately 24% of the Company's revenue in Japan. LifePak was launched in
Taiwan, Hong Kong and South Korea in October 1996, January 1997 and August 1997,
respectively.
-18-
Additional nutritional supplements include: Vitox, which incorporates beta
carotene and other important vitamins for overall health; Metabotrim, which
provides B vitamins and chromium chelate; Optimum Omega, a pure source of omega
3 fatty acids; Image HNS, an all-around vitamin and antioxidant supplement; and
Optigar Q, a blend of co-enzyme Q10 and deodorized garlic. The Company also
offers FibreNet, FibreNet Plus and Diene-O-Lean as a part of its nutritional
supplement offerings. The IDN Masters Wellness Supplement provides nutrition
specifically for an aging generation. Jungamals Children's Chewables combine
natural flavors and colors and contain a unique blend of antioxidants, chelated
minerals, and vitamins specifically tailored for children. NutriFi contains four
grams of soluble and insoluble fibers per serving in a powder that can be added
to liquids and foods to supplement the recommended daily amounts of fiber.
As an enhancement to the core IDN nutritional supplements, LifePak and
LifePak Trim, NSI introduced LifePak Women and LifePak Prime. These products
address the more specific nutritional needs of women and the aging generation.
Also launched by NSI were Life Essentials, a lower cost, more general
nutritional supplement, and Nightime Complex with Melatonin, a sleep aid. The
Company is currently evaluating the feasibility of introducing these nutritional
supplements into its markets.
Nutritious and Healthy Snacks. As part of the Company's mission to promote
a healthy lifestyle and long-term wellness, IDN includes Fiberry Fat-Free Snack
Bars and Appeal Lite, a nutritional drink containing chelated minerals and
vitamins. The Company also offers Breakbars and Pocket Fuel, nutritious snacks
which provide carbohydrates, protein and fiber. In addition, the Company offers
a number of other nutritional drinks. 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. Aloe-mx, a nutritional aloe vera beverage drink, was specifically
produced for the Japanese market and introduced in October of 1997.
Sports and Fitness Nutritional Products. To cater to health conscious
individuals with active lifestyles, the IDN Sports Nutrition System offers a
comprehensive, flexible program for individuals who desire to optimize
performance on an individual basis. The system includes LifePak, OverDrive, a
sports supplement licensed by the U.S. Olympic Committee that features
antioxidants, B vitamins and chromium chelate, GlycoBar energy bars, and
SportaLyte performance drink to help supply the necessary carbohydrates,
electrolytes and chelated minerals to optimize performance. Amino Build is a low
fat high protein drink mix that is designed to replace nutrients before and
after workouts. ProGRAM-16 protein bars are designed to provide nutritional
support for individuals seeking optimal performance during high-intensity
effort.
Health Solutions. IDN products include customized supplementation
addressing the specialized interests of health conscious individuals. These
supplements include Cartilage Formula which contains an advanced blend of
glucosamine to help maintain normal structure and function of healthy joints,
Eye Formula which contains significant levels of beta-carotene, vitamins C and E
to help maintain the normal structure and function of healthy eyes, and St.
John's Wart Complex which provides a balanced formula to support general health
and emotional well-being.
Botanical Supplements. Botanical supplements are designed for those who
seek the benefits of natural herb and plant extracts. These supplements include
Botanagar, Botanavox, Botanaflor, Botanazyme, BotanaEase, BotanaGuard,
Botanavive and Botaname. Each supplement addresses a range of issues, including:
alertness, digestive maintenance, dietary health support, regular sleep habits,
weight management and antioxidant support.
Sales Aids
The Company provides an assortment of sales aids to facilitate the sales
of its products. Sales aids include videotapes, promotional clothing, pens,
stationery, business cards, brushes, combs, cotton pads, tissues, and other
miscellaneous items to help create consumer awareness of the Company and its
products. Sales aids are priced at the Company's approximate cost and are not
commissionable items (i.e., distributors do not receive commissions on purchases
of sales aids).
-19-
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 has averaged less than 3.5% of annual revenue through
1997.
Product Development and Production
Product Development Philosophy. The Company is committed to building its
brand name and distributor and customer loyalty by selling premium quality,
innovative personal care and nutritional products that appeal to broad markets.
This commitment is illustrated by the Company's personal care products slogan
"All of the Good and None of the Bad" and its nutritional products slogan
"Adding Life to Years." The Company's product philosophy is to combine the best
of science and nature and to include in each of its products the highest quality
ingredients. For example, Nu Skin personal care products do not contain soaps
and other harsh cleansers that can dry and irritate skin, undesirable oils such
as lanolin, elements known to be irritating and pore clogging, volatile alcohols
such as ethyl alcohol, and conditioning agents that leave heavy residues. This
philosophy has led to the Company being one of the only personal care companies
in Japan to disclose every ingredient to consumers. This philosophy has also led
to the Company's commitment to avoid any ingredients in nutritional supplements
that are reported to have any long-term addictive or harmful effects, even if
short-term effects may be desirable. Independent distributors need to have
confidence that they are distributing the best products available in order to
have a sense of pride in their association with the Company and to have products
that are distinguishable from "off the shelf" products. NSI and the Company are
committed to developing and providing quality products that can be sold at an
attractive retail price and allow the Company to maintain reasonable profit
margins.
NSI is also committed to constantly improving its evolving product
formulations to incorporate innovative and proven ingredients into its product
line. Whereas many consumer product companies develop a formula and stay with
that formula for years, and sometimes decades, NSI believes that it must stay
current with product and ingredient evolution to maintain its reputation for
innovation to retain distributor and consumer attention and enthusiasm. For this
reason, NSI continuously evaluates its entire line of products for possible
enhancements and improvements.
In addition, the Company believes that timely and strategic product
introductions are critical to maintaining the growth of independent distribution
channels. Distributors become enthusiastic about new products and are generally
excited to share new products with their customer base. An expanding product
line helps to attract new distributors and generate additional revenues.
NSI maintains a laboratory and a staff of approximately 90 individuals
involved in product development. NSI also relies on an advisory board comprised
of recognized authorities in various disciplines. In addition, NSI and the
Company evaluate a significant number of product ideas that are presented by
distributors and other outside sources. NSI believes that strategic
relationships with certain vendors also provide important access to innovative
product concepts. The Company will continue to develop products tailored to
appeal to the particular needs of the Company's markets.
Historically, one of the reasons for the success of the Nu Skin personal
care product lines has been their gender neutral positioning. This product
positioning substantially expands the size of the traditional skin and hair care
market. NSI's IDN product lines have historically been positioned to be age
neutral. However, with a substantial distributor and user base established, the
Company believes that it can further increase its market share in both the
personal care and the nutritional products categories by introducing age and
gender specific products, additional vitamin products targeted to seniors, and
personal care products targeted to either men or women.
-20-
Production. Although the Company is investigating the possibility of
manufacturing certain products within specific markets, virtually all of the
Company's products are currently sourced through NSI and are produced by
manufacturers unaffiliated with NSI. The Company currently has little or no
direct contact with these manufacturers. The Company's profit margins and its
ability to deliver its existing products on a timely basis are dependent upon
the ability of NSI's outside manufacturers to continue to supply products in a
timely and cost-efficient manner. Furthermore, the Company's ability to enter
new markets and sustain satisfactory levels of sales in each market is dependent
in part upon the ability of suitable outside manufacturers to reformulate
existing products, if necessary to comply with local regulations or market
environments, for introduction into such markets. Finally, the development of
additional new products in the future will likewise be dependent in part on the
services of suitable outside manufacturers.
The Company currently acquires products or ingredients from sole suppliers
or suppliers that are considered by the Company to be the superior suppliers of
such ingredients. The Company believes that, in the event it is unable to source
any products or ingredients from its current suppliers, the Company could
produce such products or replace such products or substitute ingredients without
great difficulty or prohibitive increases in the cost of goods sold. However,
there can be no assurance that the loss of such a supplier would not have a
material adverse effect on the Company's business and results of operations.
With respect to products purchased by the Company from NSI, NSI currently
relies on two unaffiliated manufacturers to produce approximately 70% and 80% of
its personal care and nutritional products, respectively. NSI has a written
contract with the primary supplier of the Company's personal care products that
expires at the end of 2000. 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 NSI's relationship with any of its key manufacturers is terminated, NSI
will be able to find suitable replacement manufacturers. However, there can be
no assurance that the loss of either manufacturer would not have a material
adverse effect on the Company's business and results of operations. See "Risk
Factors--Reliance on and Concentration of Outside Manufacturers."
Relationship With NSI
As of March 5, 1997, approximately 98% of the combined voting power of the
outstanding shares of Common Stock was held by the shareholders of NSI and their
affiliates. As a result, when acting as stockholders of the Company, these
shareholders of NSI and their affiliates will consider the short-term and
long-term impact of all stockholder decisions on the consolidated financial
results of NSI and the Company. See "Risk Factors--Relationships with and
Reliance on NSI; Potential Conflicts of Interest." In addition, the Company has
entered into distribution, trademark/tradename license, licensing and sales, and
management services agreements (the "Operating Agreements") with NSI and NSIMG,
summary descriptions of which are set forth below. Such summaries are qualified
in their entirety by reference to the Operating Agreements in effect and as they
may be amended from time to time. In the future the Company may enter into
amendments to the Operating Agreements or additional agreements with NSI or
NSIMG. The Company is almost completely dependent on the Operating Agreements to
conduct its business, and in the event NSI is unable or unwilling to perform its
obligations under the Operating Agreements, or terminates the Operating
Agreements as provided therein, the Company's business and results of operations
will be adversely affected. See "Risk Factors--Relationship with and Reliance on
NSI; Potential Conflicts of Interest."
The South Korean Operating Agreements differ in various minor ways from
the Company's other Operating Agreements. With the exception of the minor
modification of certain terms, the Operating Agreements described below will
remain in effect following consummation of the NSI Acquisition.
Distribution Agreements. The Company has entered into a regional
distribution agreement (the "Regional Distribution Agreement") with NSI, through
Nu Skin Hong Kong, pursuant to which NSI has granted to the Company the
exclusive right to sell and distribute Nu Skin personal care and IDN products
and sales aids in the Company's markets. Nu Skin Japan, Nu Skin Taiwan, Nu Skin
Korea, Nu Skin Thailand and Nu Skin Philippines have each entered into wholesale
distribution agreements (the "Wholesale Distribution Agreements") with Nu Skin
Hong Kong, pursuant to which each such Subsidiary has been granted the right to
sell and distribute Nu Skin personal care and IDN products in its respective
country. The
-21-
following discussion summarizes the terms of the Regional Distribution Agreement
and the Wholesale Distribution Agreements for each of the Subsidiaries, other
than the Wholesale Distribution Agreement for Nu Skin Korea, which is discussed
below.
The Company has the right to purchase any Nu Skin personal care or IDN
products, subject to unavailability due to local regulatory requirements. See
"--Government Regulation." Purchases are made by submission of a purchase order
to NSI, which NSI must accept unless it has insufficient inventory to fill the
order. In determining whether it has sufficient inventory to fill a given order,
NSI is required to treat the Company on a parity basis with its other
affiliates.
The prices for products are governed by a price schedule which is subject
to change by NSI from time to time upon at least 30 days advance notice. NSI
pays ordinary freight and the Company pays handling, excise taxes and customs
duties on the products the Company orders. In order to assist NSI in planning
its inventory and pricing, the Company is required to provide NSI with certain
business plans and reports of its sales and prices to independent distributors.
The Company, through its subsidiary Nu Skin Hong Kong, purchases virtually
all of its products from NSI. Nu Skin Hong Kong pays for its purchases from NSI
under the Regional Distribution Agreement in U.S. dollars, while the other
Subsidiaries pay for their purchases from Nu Skin Hong Kong under the Wholesale
Distribution Agreements in their local currency. Nu Skin Hong Kong therefore
bears significant currency exchange risk as a result of purchases from NSI on
behalf of the other Subsidiaries. See "Risk Factors--Currency Risks."
The Company is responsible for paying for and obtaining government
approvals and registrations necessary for importation of Nu Skin personal care
and IDN products into its markets. In addition, the Company is responsible for
obtaining any government approvals, including any filings and notifications,
necessary for the effectiveness of the Regional Distribution Agreement and the
Wholesale Distribution Agreements or for the parties performance thereunder. See
"Risk Factors--Government Regulation of Products and Marketing; Import
Restrictions."
NSI is generally responsible for paying for the research, development and
testing of the products sold to the Company, including any product
reformulations needed to comply with local regulatory requirements. NSI warrants
as to the merchantability of, and its title to, such products. NSI has further
indemnified the Company from losses and liability relating to claims arising out
of alleged or actual defects in the design, manufacture or content of its
products. NSI is required to maintain insurance covering claims arising from the
use of its products and to cause each Subsidiary to be a named insured on such
insurance policy. See "Risk Factors--Product Liability."
The Company is prohibited from selling Nu Skin personal care and IDN
products outside of the countries for which it has an exclusive distribution
license, except that the Company may sell certain Nu Skin personal care and IDN
products to NSI affiliates in Australia and New Zealand. In addition, the
Company is prohibited from selling products which directly or indirectly compete
with Nu Skin personal care and IDN products in any country without NSI's prior
consent, which consent will not be unreasonably withheld or delayed. The Company
may sell non-competing products without restriction.
The Company may manufacture products which do not compete with Nu Skin
personal care and IDN products without restriction but may not manufacture
products which compete directly or indirectly with Nu Skin personal care and IDN
products without NSI's prior consent, which consent will not be unreasonably
withheld or delayed. Any products manufactured by the Company carrying an NSI
trademark will be subject to the Trademark/Tradename License Agreements with NSI
described below and will require the payment to NSI of certain royalties as set
forth therein. If NSI discontinues a product that the Company would like to
continue to sell, the Company may elect to manufacture the product itself or
through a third party manufacturer unless NSI has a competing product. In this
event, NSI has agreed to license the product formulation and any associated
trademarks and tradenames to the Company pursuant to the Trademark/Tradename
License Agreements described below.
When the Company determines to commence operations using its business
model in Indonesia, Malaysia, 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 substantially similar to
those described below.
-22-
Trademark/Tradename License Agreements. The following discussion
summarizes the terms of the Trademark/Tradename License Agreements for each of
the Subsidiaries. Pursuant to the Trademark/Tradename License Agreements, NSI
has granted to each Subsidiary an exclusive license to use in its market the Nu
Skin and IDN trademarks, the individual product trademarks used on Nu Skin
personal care and IDN products and any NSI tradenames. Each of the Subsidiaries
may thus use the licensed trademarks and tradenames on products and commercial
materials not purchased from NSI, including locally sourced products and
commercial materials and products and commercial materials manufactured by such
Subsidiary and may grant a sub-license, with the consent of NSI, for the
licensed trademarks and tradenames in its market. In addition, each Subsidiary
has the right to export such products and commercial materials into other
Company markets with NSI's consent, which consent shall not be unreasonably
withheld or delayed.
The Company pays a royalty to NSI for use of the licensed trademarks and
tradenames on products, starter and introductory kits and commercial materials
not purchased from NSI, including locally sourced products and commercial
materials and products and commercial materials manufactured by the Company. The
royalty is paid monthly and is equal to 5% of the Company's revenues from such
products and commercial materials for such month generally and a total of 8%
where NSI owns the formula or has exclusive rights in the subject market for
such products or commercial materials.
NSI is responsible for securing and maintaining trademark registrations in
the territory covered by each Trademark/Tradename Agreement. NSI has agreed to
take such actions as the Company may reasonably request to protect its and the
Company's rights to the licensed trademarks from infringement and related claims
and has indemnified the Company from losses and liability resulting from such
claims.
Licensing and Sales Agreements. Currently, all distributor agreements are
entered into between the distributor and NSI rather than with the Company.
Therefore, the Company does not own the distributor lists or the distribution
system, the Global Compensation Plan, copyrights and related intangibles.
Consequently, each of the Subsidiaries has entered into a Licensing and Sales
Agreement with NSI. The following discussion summarizes the terms of the
Licensing and Sales Agreement for each of the Subsidiaries, other than the
Licensing and Sales Agreement for Nu Skin Korea where the intercompany
agreements are modified to comply with local regulations.
The Licensing and Sales Agreements include a license to the Company to use
the distributor lists, the Global Compensation Plan, know how, distributor
system and related intellectual property exclusively in its markets. The Company
pays a license fee to NSI of 4% of the Company's revenue from product sales
(excluding starter and introductory kits) to NSI distributors for the use of
such licensed property. The Company may not grant a sublicense for the licensed
property.
The Company is required to use the Global Compensation Plan to distribute
any products, except as NSI may agree to modify the plan in accordance with
local requirements. The Company must comply with all policies implemented by NSI
under the Global Compensation Plan. This is necessary to ensure global
consistency in NSI's operations. The Company must also employ all NSI policies
relating to commissions payable to, and other relationships with, NSI
distributors.
The Company and the Subsidiaries are contractually obligated to pay a
distributor commission expense of 42% of commissionable product sales. The
Licensing and Sales Agreements provide that the Company is to satisfy this
obligation by paying commissions owed to local distributors. In the event that
these commissions exceed 42% of commissionable product sales, the Company is
entitled to receive the difference from NSI. In the event that the commissions
paid are lower than 42%, the Company must pay the difference to NSI. Under this
formulation, the Company's total commission expense is fixed at 42% of
commissionable product sales in each country. The 42% figure has been set on the
basis of NSI's experience over the past eight years which indicates that actual
commissions paid in a given year together with the cost of administering the
Global Compensation Plan average approximately 42% of commissionable product
sales for such year. In the event that actual commissions payable to
distributors from sales in the Company's markets vary from these historical
results, whether as a result of changes in distributor behavior or changes to
the Global Compensation Plan or in the event that NSI's cost of administering
the Global Compensation Plan increases or decreases, the Licensing and Sales
Agreements provide that the settlement of distributor commission expense between
the Company and NSI may be modified to more accurately reflect actual results.
See "Risk Factors--Potential Increase in Distributor Compensation Expense."
-23-
In addition to payments to local distributors, the Company is generally
responsible for distributor support and relations within Japan, Taiwan, Hong
Kong, South Korea, Thailand and the Philippines. The Company has agreed to use
its best efforts to support the development of NSI's distributor network in its
markets by purchasing starter or introductory kits from NSI and selling them to
potential NSI distributors.
NSI has agreed to take such actions as the Company may reasonably request
to protect its and the Company's rights to the property licensed under the
Licensing and Sales Agreements from infringement and related claims and has
indemnified the Company from losses and liability resulting from such claims.
Both NSI and the Company are required to maintain insurance coverage adequate to
insure their assets and financial stability. NSI is responsible for ensuring
that the property licensed under the Licensing and Sales Agreements complies
with local laws and regulations, including direct selling laws. See "Risk
Factors--Government Regulation of Direct Selling Activities."
Management Services Agreements. The following discussion summarizes the
terms of the Management Services Agreements which each of the Subsidiaries have
entered into with NSIMG. Pursuant to the Management Services Agreements, NSIMG
has agreed to provide a variety of management and support services to each
Subsidiary. These services include management, legal, financial, marketing and
distributor support/training, public relations, international expansion, human
resources, strategic planning, product development and operations administration
services. Most of NSI's senior management personnel and most employees who deal
with international issues are employees of NSIMG.
Generally, the management and support services are provided by employees
of NSI and NSIMG acting through NSIMG either (i) on a temporary basis in a
specific consulting role or (ii) on a full-time basis in a management position
in the country in which the services are required. The Management Services
Agreements do not cover the services of many of the Company's executive
officers. See "Management--Executive Compensation."
General Provisions. The Operating Agreements 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 and product
lines. The Company competes with other companies in the personal care and
nutritional products industry by emphasizing the value and premium quality of
the Company's products and the convenience of the Company's distribution system.
Many of the Company's competitors have much
-24-
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 existing markets is Amway Corporation and its
affiliates. The Company competes for new distributors on the basis of the Global
Compensation Plan and its premium quality products. Management envisions the
entry of many more direct selling organizations into the marketplace as this
channel of distribution expands over the next several years. The Company has
been advised that certain large, well-financed corporations are planning to
launch direct selling enterprises which will compete with the Company in certain
of its product lines. There can be no assurance that the Company will be able to
successfully meet the challenges posed by this increased competition. See "Risk
Factors--Competition."
Government Regulation
Direct Selling Activities. Direct selling activities are regulated by
various governmental agencies. These laws and regulations are generally intended
to prevent fraudulent or deceptive schemes, often referred to as "pyramid" or
"chain sales" schemes, that promise quick rewards for little or no effort,
require high entry costs, use high pressure recruiting methods and/or do not
involve legitimate products. In Japan, the Company's distribution system is
regulated under the "Door-to-Door" Sales Law, which requires the submission of
specific information concerning the Company's business and products and which
provides certain cancellation and cooling-off rights for consumers and new
distributors. In Taiwan, the Fair Trade Law (and the Enforcement Rules and
Supervisory Regulations of Multi-Level Sales) requires the Company to comply
with registration procedures and also provides distributors with certain rights
regarding cooling-off periods and product returns. The Company also complies
with South Korea's strict Door-to-Door Sales Act, which requires, among other
things, the regular reporting of revenue, the registration of distributors
together with the issuance of a registration card, and the maintaining of a
current distributor registry. This law also limits the amount of sponsoring
bonuses that a registered multi-level marketing company can pay to its
distributors to 35% of revenue in a given month. In Thailand and the
Philippines, currently there are no laws (other than general fair trade laws)
directly regulating direct selling or multi-level marketing activities. See
"Risk Factors--Potential Effects of Adverse Publicity" and "--Government
Regulation of Direct Selling Activities."
Based on research conducted in opening its existing markets (including
assistance from local counsel), the nature and scope of inquiries from
government regulatory authorities and the Company's history of operations in
such markets to date, the Company believes that its method of distribution is in
compliance in all material respects with the laws and regulations relating to
direct selling activities of the countries in which the Company currently
operates. Even though management believes that laws governing direct selling are
generally becoming more permissive in certain Asian countries, many countries,
including Singapore, one of the Company's potential markets, currently have laws
in place that would prohibit the Company and NSI from conducting business in
such markets. There can be no assurance that the Company will be allowed to
conduct business in each of the new markets or continue to conduct business in
each of its existing markets licensed from NSI. See "Risk Factors--Entering New
Markets."
Regulation of Products and Marketing. The Company and NSI are subject to
or affected by extensive governmental regulations not specifically addressed to
network marketing. Such regulations govern, among other things, (i) product
formulation, labeling, packaging and importation, (ii) product claims and
advertising, whether made by the Company, NSI or NSI distributors, (iii) fair
trade and distributor practices, (iv) taxes, transfer pricing and similar
regulations that affect foreign taxable income and customs duties, and (v)
regulations governing foreign companies generally.
-25-
The Japanese MOHW requires the Company to possess an import business
license and to register each personal care product imported into Japan.
Packaging and labeling requirements are also specified. The Company has had to
reformulate many products to satisfy MOHW regulations. In Japan, nutritional
foods, drugs and quasi-drugs are all strictly regulated. The chief concern
involves the types of claims and representations that can be made regarding the
efficacy of nutritional products. The Company's successful introduction of IDN
nutritional supplements 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 Nu Skin personal care products to be
introduced in Thailand have qualified for simplified registration procedures
under Thai law.
In the Philippines, personal care products are regulated by the Bureau of
Food and Drug, and all of the initial NSI personal care products to be
introduced in the Philippines have qualified for simplified registration
procedures under Philippine law.
Regulation of Potential Markets. Each of the proposed new markets will
present additional unique difficulties and challenges. The PRC, for example, has
proven to be a particularly difficult market for foreign corporations due to its
extensive government regulation and the historical political tenets, and no
assurance can be given that the Company will be able to establish operations in
the PRC. The Company believes that entering the PRC may require the successful
establishment of a joint venture enterprise with a Chinese partner and the
establishment of a local manufacturing presence. These initiatives would likely
require a significant investment over time by the Company. The Company believes
that the PRC national regulatory agency responsible for direct selling
periodically reviews the regulation of multi-level marketing. Management is
aware of recent media reports in the PRC reporting an increasing desire on the
part of senior government officers to curtail or even abolish direct selling and
multi-level marketing activities. These views may lead to changes in applicable
regulations. The Company believes that PRC regulators are currently not issuing
direct selling or multi-level marketing licenses and may take action restricting
currently licensed direct selling businesses. The Company is actively working on
these and other issues including joint ventures and potential marketing
alternatives related to possible Nu Skin operations in the PRC. It is not known
when or whether the Company will be able to implement in the PRC business models
consistent with those used by the Company in other markets. The Company will
likely have to apply for licenses on a province by province basis, and the
repatriation of the Company's profits will be subject to restrictions on
currency conversion and the fluctuations of the government controlled exchange
rate. In addition, because distribution systems in the PRC are greatly
fragmented, the Company may be forced to use business models significantly
different from those used by the Company in more developed countries. The lack
of a comprehensive legal system, the uncertainties of enforcement of existing
legislation and laws, and potential revisions of existing laws could have an
adverse effect on the Company's proposed business in the PRC. See "Risk
Factors--Entering New Markets."
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
-26-
Singapore. In addition, Malaysia has governmental guidelines that have the
effect of limiting foreign ownership of direct selling companies operating in
Malaysia to no more than 30%. There can be no assurance that the Company will be
able to properly structure Malaysian operations to comply with this policy. In
October of 1995, the Company's business permit applications were denied by the
Malaysian government as a result of activities by certain NSI distributors.
Therefore, the Company believes that although significant opportunities exist to
expand its operations into new markets, there can be no assurance that these or
other difficulties will not prevent the Company from realizing the benefits of
this opportunity.
Other Regulatory Issues. As a U.S. entity operating through subsidiaries
in foreign jurisdictions, the Company is subject to foreign exchange control and
transfer pricing laws that regulate the flow of funds between the Subsidiaries
and the Company as well as the flow of funds to NSI for product purchases,
management services, and contractual obligations such as the payment of
distributor commissions. In South Korea, in particular, the Company has come
under the scrutiny of regulators because of the manner in which the Company and
Nu Skin Korea implement the Global Compensation Plan. Pursuant to the Global
Compensation Plan, Nu Skin Korea currently pays commissions to distributors in
South Korea on both their local and foreign product sales. Similarly,
commissions on product sales in South Korea by other distributors are paid by
their local NSI affiliate. The Company believes that it operates in compliance
with all applicable foreign exchange control and transfer pricing laws. However,
there can be no assurance that the Company will continue to be found to be
operating in compliance with foreign exchange control and transfer pricing laws,
or that such laws will not be modified, which, as a result, may require changes
in the Company's operating procedures.
As is the case with most companies which operate in the Company's product
segment, NSI and the Company have from time to time received inquiries from
various government regulatory authorities regarding the nature of their
businesses and other issues such as compliance with local direct selling,
customs, taxation, foreign exchange control, securities and other laws. Although
to date none of these inquiries has resulted in a finding materially adverse to
the Company or NSI, adverse publicity resulting from inquiries into NSI's
operations by certain government agencies in the early 1990's, stemming in part
out of inappropriate product and earnings claims by distributors, materially
adversely affected NSI's business and results of operations. There can be no
assurance that the Company or NSI will not face similar inquiries in the future,
which, either as a result of findings adverse to the Company or NSI or as a
result of adverse publicity resulting from the instigation of such inquiries,
could have a material adverse effect on the Company's business and results of
operations. See "Risk Factors--Potential Effects of Adverse Publicity."
The Subsidiaries are periodically subject to reviews and audits by various
governmental agencies, particularly in new markets, where the Company has
experienced high rates of growth. In early 1997, the South Korean Ministry of
Trade, Industry and Energy commenced an examination of the largest foreign and
domestic owned network marketing companies in South Korea, including Nu Skin
Korea. The purposes of the examination were stated to be to monitor how
companies are operating and to audit current business practices. In addition, Nu
Skin Korea has been subject to an audit by the South Korean Customs Service.
Management believes that this audit was precipitated largely as a result of Nu
Skin Korea's rapid growth and its position as the largest importer of cosmetics
and personal care products in South Korea as well as by recent South Korean
trade imbalances. The Customs Service has reviewed a broad range of issues
relating to the operations of Nu Skin Korea, with a focus on reviewing customs
valuation issues and intercompany payments.
The Customs Service resolved certain issues related to its audit without
imposing sanctions. The intercompany payment issue was referred to various other
government agencies, which have also recently concluded their reviews and found
no wrong-doing and imposed no fines, sanctions or other restrictions. The import
valuation issues, which management considers to be routine in light of the
Company's extensive import and export activities, were referred to the valuation
division of the Customs Service. See "Risk Factors--Potential Negative Impact of
Distributor Actions." Management believes that other major importers of cosmetic
products and foreign-owned direct selling companies have also been the focus of
regulatory reviews by South Korean authorities.
Businesses which are more than 50% owned by non-citizens are not permitted
to operate in Thailand unless they have an Alien Business Permit, which is
frequently difficult to obtain. The Company is currently operating under the
Treaty of Amity and Economic Relations between Thailand and the United States
(the "Treaty of Amity"). Under the Treaty of Amity,
-27-
an Alien Business Permit is not required if a Thailand business is owned by an
entity organized in the United States, a majority of whose owners are U.S.
citizens or entities. From time to time, it has been reported that certain
Thailand government officials have considered supporting the termination of the
Treaty of Amity. The Company could face particular difficulties in continuing
operations in Thailand if the Treaty of Amity were terminated and the Company
were forced to obtain an Alien Business Permit.
Based on the Company's and NSI's experience and research (including
assistance from counsel) and the nature and scope of inquiries from government
regulatory authorities, the Company and NSI believe that they are in material
compliance with all regulations applicable to them. Despite this belief, either
the Company or NSI could be found not to be in material compliance with existing
regulations as a result of, among other things, the considerable interpretative
and enforcement discretion given to regulators or misconduct by independent
distributors. In 1994, NSI and three of its distributors entered into a consent
decree with the Federal Trade Commission (the "FTC") with respect to its
investigation of certain product claims and distributor practices, pursuant to
which NSI paid approximately $1 million to settle the FTC investigation. In
August 1997, NSI reached a settlement with the FTC with respect to certain
product claims and its compliance with the 1994 consent decree, pursuant to
which settlement NSI paid $1.5 million to the FTC. During 1997, NSI also
voluntarily agreed to recall and rewrite virtually all of its sales and
marketing materials to address FTC concerns. In February 1998, the State of
Pennsylvania filed a lawsuit against NSI and one of its affiliates Big Planet,
Inc., alleging violations of Pennsylvania law. In early March 1998, NSI and Big
Planet agreed to suspend for 30 days all sales and recruitment efforts related
to Big Planet's potential electricity marketing program. Big Planet also
volunteered certain other restrictions on its business. NSI's primary business
of distributing personal care and nutritional products was unaffected by the
lawsuit. These events were reported in certain media.
Any assertion or determination that either the Company, NSI or any NSI
distributors are not in compliance with existing laws or regulations could have
a material adverse effect on the Company's business and results of operations.
In addition, in any country or jurisdiction, the adoption of new laws or
regulations or changes in the interpretation of existing laws or regulations
could generate negative publicity and/or have a material adverse effect on the
Company's business and results of operations. The Company cannot determine the
effect, if any, that future governmental regulations or administrative orders
may have on the Company's business and results of operations. Moreover,
governmental regulations in countries where the Company plans to commence or
expand operations may prevent, delay or limit market entry of certain products
or require the reformulation of such products. Regulatory action, whether or not
it results in a final determination adverse to the Company or NSI, has the
potential to create negative publicity, with detrimental effects on the
motivation and recruitment of distributors and, consequently, on the Company's
sales and earnings. See "Risk Factors--Potential Effects of Adverse Publicity"
and "--Entering New Markets."
Employees
As of December 31, 1997, the Company had approximately 1,000 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.
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 risk factors relate to the
Company's business prior to the contemplated NSI Acquisition. Certain of these
factors may be impacted by the proposed NSI Acquisition; however, no assurance
can be given that the NSI Acquisition will be consummated. See "Recent
Developments."
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
-28-
not contract directly with distributors but licenses its distribution system and
distributor force from NSI. Distributor agreements with NSI are voluntarily
terminable by distributors at any time. The Company's revenue is directly
dependent upon the efforts of these independent distributors, and any growth in
future sales volume will require an increase in the productivity of these
distributors and/or growth in the total number of distributors. As is typical in
the direct selling industry, there is turnover in distributors from year to
year, which requires the sponsoring and training of new distributors by existing
distributors to maintain or increase the overall distributor force and motivate
new and existing distributors. The Company experiences seasonal decreases in
distributor sponsoring and product sales in some of the countries in which the
Company operates because of local holidays and customary vacation periods. The
size of the distribution force can also be particularly impacted by general
economic and business conditions and a number of intangible factors such as
adverse publicity regarding the Company or NSI, or the public's perception of
the Company's products, product ingredients, NSI's distributors or direct
selling businesses in general. Historically, the Company has experienced
periodic fluctuations in the level of distributor sponsorship (as measured by
distributor applications). However, because of the number of factors that impact
the sponsoring of new distributors, and the fact that the Company has little
control over the level of sponsorship of new distributors, the Company cannot
predict the timing or degree of those fluctuations. There can be no assurance
that the number or productivity of the Company's distributors will be sustained
at current levels or increased in the future. In addition, the number of
distributors as a percentage of the population in a given country or market
could theoretically reach levels that become difficult to exceed due to the
finite number of persons inclined to pursue a direct selling business
opportunity. This is of particular concern in Taiwan, where industry sources
have estimated that up to 10% of the population is already involved in some form
of direct selling.
Since distributor agreements are entered into between NSI and
distributors, all of the distributors who generate revenue for the Company are
distributors of NSI. See "--Relationship with and Reliance on NSI; Potential
Conflicts of Interest." Because distributors are independent contractors of NSI,
neither NSI nor the Company is in a position to provide the same level of
direction, motivation and oversight as either would with respect to its own
employees. The Company relies on NSI to enforce distributors policies and
procedures. Although NSI has a compliance department responsible for the
enforcement of the policies and procedures that govern distributor conduct, it
can be difficult to enforce these policies and procedures because of the large
number of distributors and their independent status, as well as the impact of
regulations in certain countries that limit the ability of NSI and the Company
to monitor and control the sales practices of distributors.
Currency Risks. The Company's foreign-derived sales and selling, general
and administrative expenses are converted to U.S. dollars for reporting
purposes. Consequently, the Company's reported earnings are significantly
impacted by changes in currency exchange rates, generally increasing with a
weakening dollar and decreasing with a strengthening dollar. In addition, the
Company purchases inventory from NSI in U.S. dollars and assumes currency
exchange rate risk with respect to such purchases. Local currency in Japan,
Taiwan, Hong Kong, South Korea, Thailand and the Philippines is generally used
to settle non-inventory transactions with NSI. Given the uncertainty of the
extent of exchange rate fluctuations, the Company cannot estimate the effect of
these fluctuations on its future business, product pricing, results of
operations or financial condition. However, because nearly all of the Company's
revenue is realized in local currencies and the majority of its cost of sales is
denominated in U.S. dollars, the Company's gross profits will be positively
affected by a weakening in the U.S. dollar and will be negatively affected by a
strengthening in the U.S. dollar.
The Company believes that a variety of complex factors impact the value of
local currencies relative to the U.S. dollar including, without limitation,
interest rates, monetary policies, political environments, and relative economic
strengths. The Company has been subject to exceptionally high volatility in
currency exchange rates in certain markets during 1997. In order to partially
offset the anticipated effect of these currency fluctuations, the Company
implemented a price increase on certain of its products of between 5% and 9% on
average in 1997. There can be no assurance that future currency fluctuations
will not result in similar concerns or adversely affect the performance of the
price of the Class A Common Stock. Although the Company tries to reduce its
exposure to fluctuations in foreign exchange rates by using hedging
transactions, such transactions may not entirely offset the impact of currency
fluctuations. Accordingly, in the face of a strengthening of the U.S. dollar,
the Company's earnings will be adversely affected. The Company does not use
hedging transactions for trading or speculative purposes. See "Management's
Discussion and Analysis of Financial
-29-
Condition and Results of Operations," incorporated herein by reference to the
Company's 1997 Annual Report, sections of which are filed herewith as Exhibit
13--Currency Fluctuation and Exchange Rate Information."
Risks Related to the Proposed NSI Acquisition. The Company believes that
the proposed NSI Acquisition will offer opportunities for long-term efficiencies
in operations that should positively affect future results of the combined
operations of the Company and the Acquired Entities. However, no assurances can
be given whether or when such efficiencies will be realized. In addition, the
combined companies will be more complex and diverse than the Company
individually, and the combination and continued operation of their distinct
business operations will present difficult challenges for the Company's
management due to the increased time and resources required in the management
effort. While management and the Board of Directors of the Company believe that
the combination can be effected in a manner which will increase the value of the
Company and the Acquired Entities, no assurance can given that such realization
of value will be achieved. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations," incorporated herein by reference
to the Company's 1997 Annual Report, sections of which are filed herewith as
Exhibit 13.
Although the parties to the NSI Acquisition have entered into definitive
agreements, the closing of the NSI Acquisition is subject to the timely
satisfaction of certain conditions contained in the Acquisition Agreement.
Although the Company currently expects that such closing conditions will be
satisfied or waived, there can be no assurance that the closing of the NSI
Acquisition will occur. Such conditions include, among others, the receipt of an
opinion from the Company's independent public accountants with respect to
certain tax matters of the NSI Acquisition, the receipt of all necessary
consents and approvals from governmental officials and other third parties and
the absence of any material adverse change in the business or operations of the
Acquired Entities.
Potential Effects of Adverse Publicity. The size of the distribution force
and the results of the Company's operations can be particularly impacted by
adverse publicity regarding the Company or NSI, or their competitors, including
publicity regarding the legality of network marketing, the quality of the
Company's products and product ingredients or those of its competitors,
regulatory investigations of the Company or the Company's competitors and their
products, distributor actions and the public's perception of NSI's distributors
and direct selling businesses generally.
In 1991 and 1992, NSI was the subject of investigations by various
regulatory agencies of eight states. All of the investigations were concluded
satisfactorily. However, the publicity associated with the investigations
resulted in a material adverse impact on NSI's results of operations. The denial
by the Malaysian government in 1995 of the Company's business permit
applications due to distributor actions resulted in adverse publicity for the
Company. See"--Potential Negative Impact of Distributor Actions." In South
Korea, publicity generated by a coalition of consumer groups targeted at a
competitor of the Company negatively impacted the Company's operations in 1997.
In addition, the South Korean government and certain consumer and trade
organizations have expressed concerns which have attracted media attention
regarding South Korean consumption of luxury and foreign products, in general.
The Company believes that the adverse publicity resulting from these claims and
media campaigns has adversely affected and may continue to adversely affect the
direct selling industry and the Company's South Korean operations. See
"--Seasonality and Cyclicality; Variations in Operating Results." The State of
Pennsylvania recently filed an action against NSI for alleged violations of
Pennsylvania law relating to activities of Nu Skin distributors promoting a
business called Big Planet. The filing of the action precipitated certain
negative media coverage just may have an impact on the operations of the Company
and its affiliates. There can be no assurance that the Company will not be
subject to adverse publicity in the future as a result of regulatory
investigations or actions, whether of the Company or its competitors,
distributor actions, actions of competitors or other factors, or that such
adverse publicity will not have a material adverse effect on the Company's
business or results of operations. See "--Government Regulation of Direct
Selling Activities," "--Government Regulation of Products and Marketing; Import
Restrictions," "--Other Regulatory Issues" and "--Entering New Markets."
Potential Negative Impact of Distributor Actions. Distributor actions can
negatively impact the Company and its products. From time to time, the Company
receives inquiries from regulatory agencies precipitated by distributor actions.
For example, in October 1995, the Company's business permit applications were
denied by the Malaysian government as the result of activities by certain NSI
distributors before required government approvals could be secured. NSI
subsequently
-30-
terminated the distributorship rights of some of the distributors involved and
elected to withdraw from the Malaysian market for a period of time. The denial
by the Malaysian government of the Company's business permit applications
resulted in adverse publicity for the Company. See "--Other Regulatory Issues."
Distributor activities in other countries in which the Company has not commenced
operations may similarly result in an inability to secure, or delay in securing
required regulatory and business permits. See "Business--New Market
Opportunities." In addition, the publicity which can result from a variety of
potential distributor activities such as inappropriate earnings claims, product
representations or improper importation of Nu Skin products from other markets,
can make the sponsoring and retaining of distributors more difficult, thereby
negatively impacting sales. See "--Potential Effects of Adverse Publicity."
Furthermore, the Company's business and results of operations could be adversely
affected if NSI terminates a significant number of distributors or certain
distributors who play a key role in the Company's distribution system. There can
be no assurance that these or other distributor actions will not have a material
adverse effect on the Company's business or results of operations. The recent
action filed by the State of Pennsylvania against the Company resulted from
improper distributor actions. See "--Potential Effects of Adverse Publicity."
Seasonality and Cyclicality; Variations in Operating Results. While
neither seasonal nor cyclical variations have materially affected the Company's
results of operations to date, the Company believes that its rapid growth may
have overshadowed these factors. Accordingly, there can be no assurance that
seasonal or cyclical variations will not materially adversely affect the
Company's results of operations in the future.
The direct selling industry in Asia is impacted by certain seasonal trends
such as major cultural events and vacation patterns. For example, sales are
generally affected by local New Year celebrations in Japan, Taiwan, Hong Kong,
South Korea and Thailand, which occur in the Company's first quarter. Management
believes that direct selling in Japan is also generally negatively impacted
during August, when many individuals traditionally take vacations.
Generally, the Company has experienced rapid revenue growth in each new
market from the commencement of operations. In Japan, Taiwan and Hong Kong, the
initial rapid revenue growth was followed by a short period of stable or
declining revenue followed by renewed growth fueled by new product
introductions, an increase in the number of active distributors and increased
distributor productivity. The Company's operations in South Korea experienced a
significant decline in 1997 which was due in part to a business cycle common to
new markets opened by the Company but which was due primarily to general
economic turmoil and adverse business conditions. See "--Potential Effects of
Adverse Publicity." An additional factor which the Company believes has
contributed to revenue decline in South Korea is the focus of key distributors
on other recently-opened markets, including Thailand.
In addition, the Company may experience variations in its results of
operations, on a quarterly basis 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.
Government Regulation of Direct Selling Activities. Direct selling
activities are regulated by various governmental agencies. These laws and
regulations are generally intended to prevent fraudulent or deceptive schemes,
often referred to as "pyramid" or "chain sales" schemes, that promise quick
rewards for little or no effort, require high entry costs, use high pressure
recruiting methods and/or do not involve legitimate products. In Japan, the
Company's distribution system is regulated under the "Door-to-Door" Sales Law,
which requires the submission of specific information concerning the Company's
business and products and which provides certain cancellation and cooling-off
rights for consumers and new distributors. Management has been advised by
counsel that in some respects Japanese laws are becoming more restrictive with
respect to direct selling in Japan. In Taiwan, the Fair Trade Law (and the
Enforcement Rules and Supervisory Regulations of Multi-Level Sales) requires the
Company to comply with registration procedures and also provides distributors
with certain rights regarding cooling-off periods and product returns. The
Company also complies with South Korea's strict Door-to-Door Sales Act, which
requires, among other things, the regular reporting of revenue, the registration
of distributors together with the issuance of a registration card, and the
maintaining of a current distributor registry. This law also limits the amount
of commissions that a registered multi-level marketing company can
-31-
pay to its distributors to 35% of revenue in a given month. In Thailand and the
Philippines, general fair trade laws impact direct selling and 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 all of the countries in which the Company currently
operates. Many countries, however, including Singapore, one of the Company's
potential markets, currently have laws in place that would prohibit the Company
and NSI from conducting business in such markets. There can be no assurance that
the Company will be allowed to conduct business in each of the new markets or
continue to conduct business in each of its existing markets licensed from NSI.
See "--Entering New Markets."
Government Regulation of Products and Marketing; Import Restrictions. The
Company and NSI are subject to or affected by extensive governmental regulations
not specifically addressed to network marketing. Such regulations govern, among
other things, (i) product formulation, labeling, packaging and importation, (ii)
product claims and advertising, whether made by the Company, NSI or NSI
distributors, (iii) fair trade and distributor practices, (iv) taxes, transfer
pricing and similar regulations that affect foreign taxable income and customs
duties, and (v) regulations governing foreign companies generally.
With the exception of a small percentage of revenues in Japan, virtually
all of the Company's sales historically have been derived from products
purchased from NSI. All of those products historically have been imported into
the countries in which they were ultimately sold. The countries in which the
Company currently conducts business impose various legal restrictions on
imports. In Japan, the Japanese Ministry of Health and Welfare ("MOHW") requires
the Company to possess an import business license and to register each personal
care product imported into the country. Packaging and labeling requirements are
also specified. The Company has had to reformulate many products to satisfy MOHW
regulations. In Japan, nutritional foods, drugs and quasi-drugs are all strictly
regulated. The chief concern involves the types of claims and representations
that can be made regarding the efficacy of nutritional products. In Taiwan, all
"medicated" cosmetic and pharmaceutical products require registration. In Hong
Kong and Macau, "pharmaceutical" products are strictly regulated. In South
Korea, the Company is subject to and has obtained the mandatory certificate of
confirmation as a qualified importer of cosmetics under the Pharmaceutical
Affairs Law as well as additional product approvals for each of the 45
categories of cosmetic products which it imports. Each new cosmetic product
undergoes a 60-day post-customs inspection during which, in addition to
compliance with ingredient requirements, each product is inspected for
compliance with South Korean labeling requirements. In Thailand, personal care
products are regulated by the Food and Drug Association and the Ministry of
Public Health and all of the Nu Skin personal care products introduced in this
market have qualified for simplified approval procedures under Thai law. In the
Philippines, Nu Skin products are regulated by the Bureau of Food and Drug and
all products introduced in this market have been registered. 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 Nu Skin and IDN products altogether.
Present or future health and safety or food and drug regulations could delay or
prevent the introduction of new products into a given country or marketplace or
suspend or prohibit the sale of existing products in such country or
marketplace.
-32-
Other Regulatory Issues. As a U.S. entity operating through subsidiaries
in foreign jurisdictions, the Company is subject to foreign exchange control and
transfer pricing laws that regulate the flow of funds between the Subsidiaries
and the Company, as well as the flow of funds to NSI for product purchases,
management services and contractual obligations such as payment of distributor
commissions. The Company believes that it operates in compliance with all
applicable customs, foreign exchange control and transfer pricing laws. However,
there can be no assurance that the Company will continue to be found to be
operating in compliance with foreign customs, exchange control and transfer
pricing laws, or that such laws will not be modified, which, as a result, may
require changes in the Company's operating procedures.
As is the case with most network marketing companies, NSI and the Company
have from time to time received inquiries from various government regulatory
authorities regarding the nature of their business and other issues such as
compliance with local business opportunity and securities laws. Although to date
none of these inquiries has resulted in a finding materially adverse to the
Company or NSI, adverse publicity resulting from inquiries into NSI operations
by certain government agencies in the early 1990's, stemming in part out of
inappropriate product and earnings claims by distributors, materially adversely
affected NSI's business and results of operations. There can be no assurance
that the Company or NSI will not face similar inquiries in the future which,
either as a result of findings adverse to the Company or NSI or as a result of
adverse publicity resulting from the instigation of such inquiries, could have a
material adverse effect on the Company's business and results of operations. See
"--Potential Effects of Adverse Publicity."
The Subsidiaries are periodically subject to reviews and audits by various
governmental agencies, particularly in new markets, where the Company has
experienced high rates of growth. Recently, the South Korean Ministry of Trade,
Industry and Energy commenced an examination of the largest foreign and domestic
owned network marketing companies in South Korea, including Nu Skin Korea. The
purposes of the examination were stated to be to monitor how companies are
operating and to audit current business practices. In addition, Nu Skin Korea
has been subject to an audit by the South Korean Customs Service. Management
believes that this audit was precipitated largely as a result of Nu Skin Korea's
rapid growth and its position as the largest importer of cosmetics and personal
care products in South Korea as well as by recent South Korean trade imbalances.
The Customs Service reviewed a broad range of issues relating to the operations
of Nu Skin Korea, with a focus on reviewing customs valuation issues and
intercompany payments. Recently, the Customs Service has resolved certain issues
related to its audit without imposing sanctions. The intercompany payment issue
was referred to various other government agencies which have also recently
concluded their reviews and found no wrong-doing and imposed no fines, sanctions
or other restrictions. The import valuation issues, which management considers
to be routine in light of the Company's extensive import and export activities,
were referred to the valuation division of the Customs Service. The Company
continues to believe that its actions have been in compliance in all material
respects with relevant regulations. See "--Potential Negative Impact of
Distributor Actions." Management believes that other major importers of cosmetic
products are also the focus of regulatory reviews by South Korean authorities.
Businesses which are more than 50% owned by non-citizens are not permitted
to operate in Thailand unless they have an Alien Business Permit, which is
frequently difficult to obtain. The Company is currently operating under the
Treaty of Amity and Economic Relations between Thailand and the United States
(the "Treaty of Amity"). Under the Treaty of Amity, an Alien Business Permit is
not required if a Thailand business is owned by an entity organized in the
United States, a majority of whose owners are U.S. citizens or entities. From
time to time, it has been reported that certain Thailand government officials
have considered supporting the termination of the Treaty of Amity. There can be
no assurance that, if the Treaty of Amity were terminated, the Company would be
able to obtain an Alien Business Permit and continue operations in Thailand.
Based on the Company's and NSI's experience and research (including
assistance from counsel) and the nature and scope of inquiries from government
regulatory authorities, the Company believes that it is in material compliance
with all regulations applicable to the Company. Despite this belief, either the
Company or NSI could be found not to be in material compliance with existing
regulations as a result of, among other things, the considerable interpretative
and enforcement discretion given to regulators or misconduct by independent
distributors. In 1994, NSI and three of its distributors entered into a consent
decree with the United States Federal Trade Commission (the "FTC") with respect
to its investigation of certain product claims and distributor practices,
pursuant to which NSI paid approximately $1 million to settle the FTC
-33-
investigation. In August 1997, NSI reached a settlement with the FTC with
respect to certain product claims and its compliance with the 1994 consent
decree pursuant to which settlement NSI paid $1.5 million to the FTC. In
connection with the August 1997 settlement, NSI also voluntarily agreed to
recall and rewrite virtually all of its sales and marketing materials to address
FTC concerns. In February 1998, the State of Pennsylvania filed a lawsuit
against NSI and one of its affiliates Big Planet, Inc., alleging violations of
Pennsylvania law. In early March 1998, NSI and Big Planet agreed to suspend for
30 days all sales and recruitment efforts related to Big Planet's potential
electricity marketing program. Big Planet also volunteered certain other
restrictions on its business. NSI's primary business of distributing personal
care and nutritional products was unaffected by the lawsuit. These events were
reported in certain media.
Even though neither the Company nor the Subsidiaries has encountered
similar regulatory concerns, there can be no assurances that the Company and the
Subsidiaries will not be subject to similar inquiries and regulatory
investigations or disputes and the effects of any adverse publicity resulting
therefrom. Any assertion or determination that either the Company, NSI or any
NSI distributors are not in compliance with existing laws or regulations could
potentially have a material adverse effect on the Company's business and results
of operations. In addition, in any country or jurisdiction, the adoption of new
laws or regulations or changes in the interpretation of existing laws or
regulations could generate negative publicity and/or have a material adverse
effect on the Company's business and results of operations. The Company cannot
determine the effect, if any, that future governmental regulations or
administrative orders may have on the Company's business and results of
operations. Moreover, governmental regulations in countries where the Company
plans to commence or expand operations may prevent, delay or limit market entry
of certain products or require the reformulation of such products. Regulatory
action, whether or not it results in a final determination adverse to the
Company or NSI, has the potential to create negative publicity, with detrimental
effects on the motivation and recruitment of distributors and, consequently, on
the Company's sales and earnings. See "--Potential Effects of Adverse
Publicity," "--Entering New Markets" and "Business--Government
Regulation--Regulation of Products and Marketing."
Reliance on Certain Distributors; Potential Divergence of Interests
between Distributors and the Company. The 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, 1997, approximately 300 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
-34-
currently contemplating opening operations in additional countries outside of
the Company's markets. To the extent distributors focus their energies on
establishing downline networks in these new countries, and decrease their focus
on building organizations within the Company's markets, the Company's business
and results of operations could be adversely affected. Furthermore, the Company
itself is currently contemplating opening new markets. In the event distributors
focus on these new markets, sales in existing markets might be adversely
affected. There can be no assurance that these new markets will develop or that
any increase in sales in new markets will not be more than offset by a decrease
in sales in the Company's existing markets.
Entering New Markets. As part of its growth strategy, the Company has
acquired from NSI the right to act as NSI's exclusive distribution vehicle in
Indonesia, Malaysia, the PRC, Singapore and Vietnam. The Company has undertaken
reviews of the laws and regulations to which its operations would be subject in
Indonesia, Malaysia, the PRC, Singapore and Vietnam. Given existing regulatory
environments and economic conditions, the Company's entrance into Singapore and
Vietnam is not anticipated in the short to mid-term. The regulatory and
political climate in the other countries for which the Company has the right to
act as NSI's exclusive distributor is such that a replication of the Company's
current operating structure cannot be guaranteed. Because the Company's personal
care and nutritional product lines are positioned as premium product lines, the
market potential for the Company's product lines in relatively less developed
countries, such as the PRC and Vietnam, remains to be determined. Modifications
to each product line may be needed to accommodate the market conditions in each
country, while maintaining the integrity of the Company's products. No assurance
can be given that the Company will be able to obtain necessary regulatory
approvals to commence operations in these new markets, or that, once such
approvals are obtained, the Company and NSI, upon which the Company is largely
dependent for product development assistance, will be able to successfully
reformulate Nu Skin personal care and IDN product lines in any of the Company's
new markets to attract local consumers.
Each of the proposed new markets will present additional unique
difficulties and challenges. The PRC, for example, has proven to be a
particularly difficult market for foreign corporations due to its extensive
government regulation and historical political tenets, and no assurance can be
given that the Company will be able to establish operations in the PRC. The
Company believes that entering the PRC may require the successful establishment
of a joint venture enterprise with a Chinese partner and the establishment of a
local manufacturing presence. These initiatives would likely require a
significant investment over time by the Company. The Company believes that the
PRC national regulatory agency responsible for direct selling periodically
reviews the regulation of multi-level marketing. Management is aware of recent
media reports in the PRC reporting an increasing desire on the part of senior
government officers to curtail or even abolish direct selling and multi-level
marketing activities. These views may lead to changes in applicable regulations.
The Company believes that PRC regulators are currently not issuing direct
selling or multi-level marketing licenses and may take action restricting
currently licensed direct selling businesses. The Company is actively working on
these and other issues including joint ventures and potential marketing
alternatives related to possible Nu Skin operations in the PRC. It is not known
when or whether the Company will be able to implement in the PRC business models
consistent with those used by the Company in other markets. The Company will
likely have to apply for licenses on a province by province basis, and the
repatriation of the Company's profits will be subject to restrictions on
currency conversion and the fluctuations of the government controlled exchange
rate. In addition, because distribution systems in the PRC are greatly
fragmented, the Company may be forced to use business models significantly
different from those used by the Company in more developed countries. The lack
of a comprehensive legal system, the uncertainties of enforcement of existing
legislation and laws, and potential revisions of existing laws could 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,
-35-
the Company believes that although significant opportunities exist to expand its
operations into new markets, there can be no assurance that these or other
difficulties will not prevent the Company from realizing the benefits of this
opportunity.
Managing Growth. The Company has experienced rapid growth since operations
in Hong Kong commenced in 1991. The management challenges imposed by this growth
include entry into new markets, growth in the number of employees and
distributors, expansion of facilities necessary to accommodate growth and
additions and modifications to the Company's product lines. To manage these
changes effectively, the Company may be required to hire additional management
and operations personnel and to improve its operational, financial and
management systems.
Possible Adverse Effect on the Company of the Change in the Status of Hong
Kong. The Company has offices and a portion of its operations in Hong Kong.
Effective July 1, 1997, the exercise of sovereignty over Hong Kong was
transferred from the Government of the United Kingdom of Great Britain and
Northern Ireland (the "United Kingdom"), to the government of the PRC pursuant
to the Sino-British Joint Declaration on the Question of Hong Kong (the "Joint
Declaration"), and Hong Kong became a Special Administrative Region (SAR) of the
PRC. The Joint Declaration provided for Hong Kong to be 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 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, 1997, Hong Kong serves as the location for the Company's regional offices
and an important base of operations for many of the Company's most successful
distributors whose downline distributor networks extend into other Asian
markets. Any adverse effect on the social, political or economic systems in Hong
Kong resulting from this transfer could have a material adverse effect on the
Company's business and results of operations. Although the Company does not
anticipate any material adverse change in the business environment in Hong Kong
resulting from the 1997 transfer of sovereignty, the Company has formulated
contingency plans to transfer the Company's regional office to another
jurisdiction in the event that the Hong Kong business environment is so
affected.
Relationship with and Reliance on NSI; Potential Conflicts of Interest.
NSI has ownership and control of the NSI trademarks, tradenames, the Global
Compensation Plan, distributor lists and related intellectual property and
know-how (collectively, the "Licensed Property"), and licenses to the Company
rights to use the Licensed Property in certain markets. NSI and its affiliates
currently operate in 17 countries, excluding the countries in which the Company
currently operates, and will continue to market and sell Nu Skin personal care
and IDN nutritional products in these countries, as well as in additional
countries outside of the Company's markets, through the network marketing
channel. Thus, the Company cannot use the NSI trademarks to expand into other
markets for which the Company does not currently have a license without first
obtaining additional licenses or other rights from NSI. There can be no
assurance that NSI will make any additional markets available to the Company or
that the terms of any new licenses from NSI will be acceptable to the Company.
See "--Recent Developments."
NSI has licensed to the Company, through the Subsidiaries, rights to
distribute Nu Skin and IDN products and to use the Licensed Property in the
Company's markets, and NSIMG, an affiliate of NSI, will provide management
support services to the Company and the Subsidiaries, pursuant to distribution,
trademark/tradename license, licensing and sales, and management services
agreements (the "Operating Agreements"). The Company relies on NSI for research,
development, testing, labeling and regulatory compliance for products sold to
the Company under the distribution agreements, and virtually all of the
Company's revenues are derived from products and sales aids purchased from NSI
pursuant to these agreements. NSIMG provides the Company with a variety of
management and consulting services, including, but not limited to, management,
legal, financial, marketing and distributor support/training, public relations,
international expansion, human resources, strategic planning, product
development and operations administration services. Each of the Operating
Agreements (other than the distribution, trademark/tradename license and
licensing and sales agreements for Nu Skin Korea, which have shorter terms), is
for a term ending December 31, 2016, and is subject to renegotiation after
December 31, 2001, in the event that the Original Stockholders and their
affiliates, on a combined basis, no longer beneficially own a majority of the
combined voting power of the outstanding shares of Common Stock of the Company
or of the common stock of NSI. The Company is almost completely dependent on the
Operating Agreements to conduct its business, and in the event NSI is unable
-36-
or unwilling to perform its obligations under the Operating Agreements, or
terminates the Operating Agreements as provided therein, the Company's business
and results of operations will be adversely affected. See
"Business--Relationship with NSI" and "Recent Developments."
After consummation of the Offerings and the NSI Acquisition, approximately
98% of the combined voting power of the outstanding shares of Common Stock will
be held by the Original Stockholders and certain of their affiliates.
Consequently, the Original Stockholders and certain of their affiliates will
have the ability, acting in concert, to elect all directors of the Company and
approve any action requiring approval by a majority of the stockholders of the
Company. Certain of the Original Stockholders also own 100% of the outstanding
shares of NSI. As a result of this ownership, and if the NSI Acquisition is not
consummated, the Original Stockholders who are also shareholders of NSI will
consider the short-term and the long-term impact of all stockholder decisions on
the consolidated financial results of NSI and the Company. See "--Control by
Existing Stockholders; Anti-Takeover Effects of Dual Classes of Common Stock."
The Operating Agreements were approved by the Board of Directors of the
Company, which was, except with respect to the approval of the Operating
Agreements with Nu Skin Thailand, composed entirely of individuals who were also
officers and shareholders of NSI at the time of approval. The Operating
Agreements with Nu Skin Thailand and Nu Skin Philippines were approved by a
majority of the disinterested directors of the Company. In addition, some of the
executive officers of the Company are also executive officers of NSI. It is
expected that a number of the Company's executive officers will continue to
spend a portion of their time on the affairs of NSI, for which they will
continue to receive compensation from NSI.
In view of the substantial relationships between the Company and NSI,
conflicts of interest may exist or arise with respect to existing and future
business dealings, including, without limitation, the relative commitment of
time and energy by the executive officers to the respective businesses of the
Company and NSI, potential acquisitions of businesses or properties, the
issuance of additional securities, the election of new or additional directors
and the payment of dividends by the Company. There can be no assurance that any
conflicts of interest will be resolved in favor of the Company. Under Delaware
and Utah law, a person who is a director of both the Company and NSI owes
fiduciary duties to both corporations and their respective shareholders. As a
result, persons who are directors of both the Company and NSI are required to
exercise their fiduciary duties in light of what they believe to be best for
each of the companies and its shareholders.
Control by Existing Stockholders; Anti-Takeover Effect of Dual Classes of
Common Stock. Because of the relationship between the Company and NSI,
management elected to structure the capitalization of the Company in such a
manner as to minimize the possibility of a change in control of the Company
without the consent of the 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. After
consummation of the Offerings, and the NSI Acquisition, the Original
Stockholders and certain of their affiliates will collectively own 100% of the
outstanding shares of the Class B Common Stock, representing approximately 98%
of the combined voting power of the outstanding shares of Common Stock.
Accordingly, the Original Stockholders and certain of their affiliates, acting
fully or partially in concert, will have the ability to control the election of
the Board of Directors of the Company and thus the direction and future
operations of the Company without the supporting vote of any other stockholder
of the Company, including decisions regarding acquisitions and other business
opportunities, the declaration of dividends and the issuance of additional
shares of Class A Common Stock and other securities. NSI is a privately-held
company, all of the shares of which are owned prior to consummation of the NSI
Acquisition by certain of the Original Stockholders. As long as the shareholders
of NSI prior to consummation of the NSI Acquisition 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 Underwritten 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 granted to NSI
options to purchase such shares of Class A Common Stock (the "Distributor
Options"), and NSI offered these options to qualifying distributors of NSI. The
Exercise Price
-37-
for each Distributor Option is $5.75, which is 25% of the initial price per
share to the public of the Class A Common Stock in the Underwritten Offerings.
The Distributor Options vested December 31,1997. The shares of Class A Common
Stock underlying the Distributor Options have been registered pursuant to Rule
415 under the 1933 Act.
The Company incurred a total pre-tax non-cash compensation expense of
$19.9 million in connection with the grant of the Distributor Options. This
non-cash compensation expense resulted in a corresponding impact on net income
and net income per share.
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 2000. An extension to such contract is currently being negotiated. NSI
does not currently have a written contract with the primary supplier of the
Company's nutritional products. The Company believes that in the event that
NSI's relationship with any of its key manufacturers is terminated, NSI will be
able to find suitable replacement manufacturers. However, there can be no
assurance that the loss of either manufacturer would not have a material adverse
effect on the Company's business and results of operations.
Reliance on Operations of and Dividends and Distributions from
Subsidiaries. The Company is a holding company without operations of its own or
significant assets other than ownership of 100% of the capital stock of each of
the Subsidiaries. Accordingly, an important source of the Company's income will
be dividends and other distributions from the Subsidiaries. Each of the
Subsidiaries has its operations in a country other than the United States, the
country in which the Company is organized. In addition, each of the Subsidiaries
receives its revenues in the local currency of the country or jurisdiction in
which it is situated. As a consequence, the Company's ability to obtain
dividends or other distributions is subject to, among other things, restrictions
on dividends under applicable local laws and regulations, and foreign currency
exchange regulations of the country or jurisdictions in which the Subsidiaries
operate. The Subsidiaries' ability to pay dividends or make other distributions
to the Company is also subject to their having sufficient funds from their
operations legally available for the payment of such dividends or distributions
that are not needed to fund their operations, obligations or other business
plans. Because the Company will be a stockholder of each of the Subsidiaries,
the Company's claims as such will generally rank junior to all other creditors
of and claims against the Subsidiaries. In the event of a Subsidiary's
liquidation, there may not be assets sufficient for the Company to recoup its
investment in such Subsidiary.
Taxation Risks and Transfer Pricing. The Company is subject to taxation in
the United States, where it is incorporated, at a statutory corporate federal
tax rate of 35.0% plus any applicable state income taxes. In addition, each
Subsidiary is subject to taxation in the country in which it operates, currently
ranging from a statutory tax rate of 57.9% in Japan to 16.5% in Hong Kong. The
Company is eligible to receive foreign tax credits in the U.S. for the amount of
foreign
-38-
taxes actually paid in a given period. In the event that the Company's
operations in high tax jurisdictions such as Japan grow disproportionately to
the rest of the Company's operations, the Company will be unable to fully
utilize its foreign tax credits in the U.S., which could, accordingly, result in
the Company paying a higher overall effective tax rate on its worldwide
operations.
Because the Subsidiaries operate outside of the United States, the Company
is subject to the jurisdiction of numerous foreign tax authorities. In addition
to closely monitoring the Subsidiaries' locally based income, these tax
authorities regulate and restrict various corporate transactions, including
intercompany transfers. The Company believes that the tax authorities in Japan
and South Korea are particularly active in challenging the tax structures of
foreign corporations and their intercompany transfers. The Company is currently
undergoing a customs audit in South Korea. See "--Government Regulation of
Products and Marketing; Import Restrictions" and "--Other Regulatory Issues."
Although the Company believes that its tax and transfer pricing structures are
in compliance in all material respects with the laws of every jurisdiction in
which it operates, no assurance can be given that these structures will not be
challenged by foreign tax authorities or that such challenges or any required
changes in such structures will not have a material adverse effect on the
Company's business or results of operations.
Increase in Distributor Compensation Expense. Under the Licensing and
Sales Agreements (the "Licensing and Sales Agreements") between each of the
Subsidiaries and NSI, the Company, through its Subsidiaries, is contractually
obligated to pay a distributor commission expense of 42% of commissionable
product sales (with the exception of South Korea where, due to government
regulations, the Company uses a formula based upon a maximum payout of 35% of
commissionable product sales). The Licensing and Sales Agreements provide that
the Company is to satisfy this obligation by paying commissions owed to local
distributors. In the event that these commissions exceed 42% of commissionable
product sales, the Company is entitled to receive the difference from NSI. In
the event that the commissions paid are lower than 42%, the Company must pay the
difference to NSI. Under this formulation, the Company's total commission
expense is fixed at 42% of commissionable product sales in each country (except
for South Korea). The 42% figure has been set on the basis of NSI's experience
over the past eight years during which period actual commissions paid in a given
year together with the cost of administering the Global Compensation Plan have
ranged between 41% and 43% of commissionable product sales for such year
(averaging approximately 42%). In the event that actual commissions payable to
distributors from sales in the Company's markets vary from these historical
results, whether as a result of changes in distributor behavior or changes to
the Global Compensation Plan or in the event that NSI's cost of administering
the Global Compensation Plan increases or decreases, the Licensing and Sales
Agreements provide that the intercompany settlement figure may be modified to
more accurately reflect actual results. This could result in the Company
becoming obligated to make greater settlement payments to NSI under the
Licensing and Sales Agreements. Such additional payments could adversely affect
the Company's results of operations. Because the Company licenses the right to
use the Global Compensation Plan from NSI, the structure of the plan, including
commission rates, is under the control of NSI.
Product Liability. The Company may be subject, under applicable laws and
regulations, to liability for loss or injury caused by its products. The
Company's Subsidiaries are currently covered for product liability claims to the
extent of and under insurance programs maintained by NSI for their benefit and
for the benefit of its affiliates purchasing NSI products. Accordingly, NSI
maintains a policy covering product liability claims for itself and its
affiliates with a $1 million per claim and $1 million annual aggregate limit and
an umbrella policy with a $40 million per claim and $40 million annual aggregate
limit. Although the Company has not been the subject of material product
liability claims and the laws and regulations providing for such liability in
the Company's markets appear to have been seldom utilized, no assurance can be
given that the Company may not be exposed to future product liability claims,
and, if any such claims are successful, there can be no assurance that the
Company will be adequately covered by insurance or have sufficient resources to
pay such claims. The Company does not currently maintain its own product
liability policy.
Competition. The markets for personal care and nutritional products are
large and intensely competitive. The Company competes directly with companies
that manufacture and market personal care and nutritional products in each of
the Company's product lines. The Company competes with other companies in the
personal care and nutritional products industry by emphasizing the value and
premium quality of the Company's products and the convenience of the Company's
distribution
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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
existing markets is Amway Corporation and its affiliates. The Company competes
for new distributors on the basis of the Global Compensation Plan and its
premium quality products. Management envisions the entry of many more direct
selling organizations into the marketplace as this channel of distribution
expands over the next several years. The Company has been advised that certain
large, well-financed corporations are planning to launch direct selling
enterprises which will compete with the Company in certain of its product lines.
There can be no assurance that the Company will be able to successfully meet the
challenges posed by this increased competition.
The Company competes for the time, attention and commitment of its
independent distributor force. Given that the pool of individuals interested in
the business opportunities presented by direct selling tends to be limited in
each market, the potential pool of distributors for the Company's products is
reduced to the extent other network marketing companies successfully recruit
these individuals into their businesses. Although management believes that the
Company offers an attractive business opportunity, there can be no assurance
that other network marketing companies will not be able to recruit the Company's
existing distributors or deplete the pool of potential distributors in a given
market.
Operations Outside the United States. The Company's revenues and most of
its expenses are recognized primarily outside of the United States. Therefore,
the Company is subject to transfer pricing regulations and foreign exchange
control, taxation, customs and other laws. The Company's operations may be
materially and adversely affected by economic, political and social conditions
in the countries in which it operates. A change in policies by any government in
the Company's markets could adversely affect the Company and its operations
through, among other things, changes in laws, rules or regulations, or the
interpretation thereof, confiscatory taxation, restrictions on currency
conversion, currency repatriation or imports, or the expropriation of private
enterprises. Although the general trend in these countries has been toward more
open markets and trade policies and the fostering of private business and
economic activity, no assurance can be given that the governments in these
countries will continue to pursue such policies or that such policies will not
be significantly altered in future periods. This could be especially true in the
event of a change in leadership, social or political disruption or upheaval, or
unforeseen circumstances affecting economic, political or social conditions or
policies. The Company is aware of news releases in South Korea, for example,
reporting comments by political figures proposing restrictions on foreign direct
sellers designed to protect the market share of local companies. There can be no
assurance that such activities, or other similar activities in the Company's
markets, will not result in passage of legislation or the enactment of policies
which could materially adversely affect the Company's operations in these
markets. In addition, the Company's ability to expand its operations into the
new markets for which it has received an exclusive license to distribute NSI
products will directly depend on its ability to secure the requisite government
approvals and comply with the local government regulations in each of those
countries. The Company has in the past experienced difficulties in obtaining
such approvals as a result of certain actions taken by its distributors, and no
assurance can be given that these or similar problems will not prevent the
Company from commencing operations in those countries. See "--Entering New
Markets."
Anti-Takeover Effects of Certain Charter, Contractual and Statutory
Provisions. The Board of Directors is authorized, subject to certain
limitations, to issue without further consent of the stockholders up to
25,000,000 shares of preferred stock with rights, preferences and privileges
designated by the Board of Directors. In addition, the Company's Certificate of
Incorporation requires the approval of 66 2/3% of the outstanding voting power
of the Class A
-40-
Common Stock and the Class B Common Stock to authorize or approve certain change
of control transactions. See "Description of Capital Stock--Common Stock--Voting
Rights" and "--Mergers and Other Business Combinations." The Company's
Certificate of Incorporation and Bylaws also contain certain provisions that
limit the ability to call special meetings of stockholders and the ability of
stockholders to bring business before or to nominate directors at a meeting of
stockholders. See "Description of Capital Stock--Other Charter and Bylaw
Provisions." Pursuant to the 1996 Stock Incentive Plan, in the event of certain
change of control transactions the Board of Directors has the right, under
certain circumstances, to accelerate the vesting of options and the expiration
of any restriction periods on stock awards. Finally, the Operating Agreements
with NSI and NSIMG are subject to renegotiation after December 31, 2001 upon a
change of control of the Company. Any of these actions, provisions or
requirements could have the effect of delaying, deferring or preventing a change
of control of the Company. See "Business--Relationship with NSI--General
Provisions" and "Recent Developments."
The Company is subject to the provisions of Section 203 of the General
Corporation Law of the State of Delaware (the "Anti-Takeover Law") regulating
corporate takeovers. The Anti-Takeover Law prevents certain Delaware
corporations, including those whose securities are listed on the New York Stock
Exchange, from engaging, under certain circumstances, in a "business
combination" (which includes a merger of more than 10% of the corporations'
assets) with an "interested stockholder" (a stockholder who, together with
affiliates and associates, within the prior three years owned 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.
Absence of Dividends. The Company does not anticipate that any dividends
will be declared on its Common Stock in the immediate future. The Company
intends from time to time to re-evaluate this policy based on its net income and
its alternative uses for retained earnings, if any. Any future declaration of
dividends will be subject to the discretion of the Board of Directors of the
Company and subject to certain limitations under the General Corporation Law of
the State of Delaware. The timing, amount and form of dividends, if any, will
depend, among other things, on the Company's results of operations, financial
condition, cash requirements and other factors deemed relevant by the Board of
Directors of the Company. There can be no assurance regarding the timing or
payment of any future dividends by the Company. It is anticipated that any
dividends, if declared, will be paid in U.S. dollars. The Company, as a holding
company, will be dependent on the earnings and cash flow of, and dividends and
distributions from, the Subsidiaries to pay any cash dividends or distributions
on the Class A Common Stock that may be authorized by the Board of Directors of
the Company. See "--Reliance on Operations of and Dividends and Distributions
from Subsidiaries."
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 5, 1998, the Company's leased office and
distribution facilities in each country where the Company currently has
operations.
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Approximate
Location Function Square Feet
- ---------- ---------- -----------
Tokyo, Japan.............. Central office/distribution center 44,000
Osaka, Japan.............. Distribution center/office 14,000
Fukuoka, Japan............ Warehouse/distribution center 12,000
Taipei, Taiwan............ Central office/distribution center 26,000
Kaohsiung, Taiwan......... Distribution center/office 10,000
Taichung, Taiwan.......... Distribution center/office 17,000
Nankan, Taiwan............ Warehouse/distribution center 37,000
Tainan, Taiwan............ Warehouse/distribution center 8,000
Causeway Bay, Hong Kong... Central office/distribution 19,000
center/distributor
business center/regional office
Tsing Yi, Hong Kong....... Warehouse 10,000
Macau..................... Distribution center/office 2,000
Seoul, South Korea........ Central office/distribution center 30,000
Seoul, South Korea........ Distribution center 7,000
Kyungki-Do, South Korea... Warehouse 16,000
Pusan, South Korea........ Distribution center 10,000
Bangkok, Thailand......... Central office/distribution center 13,000
Bangkok, Thailand......... Warehouse/distribution center 10,000
Chiang Mai, Thailand...... Distribution center 6,000
Manila, Philippines....... Central office/distribution center 10,000
Manila, Philippines....... Distribution center 5,000
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any litigation or other legal proceedings
which are expected to have a material adverse effect on its financial condition
or results of operations, nor are any such proceedings known to be contemplated.
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, 1997.
-42-
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The information required by Item 5 of Form 10-K is incorporated herein
by reference from the information contained in the section captioned "Common
Stock" in the Company's 1997 Annual Report to Stockholders, sections of which
are attached hereto as Exhibit 13.
ITEM 6. SELECTED FINANCIAL DATA
The information required by Item 6 of Form 10-K is incorporated herein
by reference from the information contained in the section captioned "Selected
Financial Data" in the Company's 1997 Annual Report to Stockholders, sections of
which are attached hereto as Exhibit 13.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information required by Item 7 of Form 10-K is incorporated herein
by reference from the information contained in the section captioned
"Management's Discussion and Analysis of Financial Condition and Results of
Operations " in the Company's 1997 Annual Report to Stockholders, sections of
which are attached hereto as Exhibit 13.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by Item 8 of Form 10-K is incorporated herein
by reference from the information contained in the section captioned "Financial
Statements and Supplementary Data" in the Company's 1997 Annual Report to
Stockholders, sections of which are attached hereto as Exhibit 13.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
-43-
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Identification of Directors. The information under the captions
"Directors and Executive Officers of the Company" and "Election of Directors"
appearing in the Proxy Statement to be filed on or about March 31, 1998 is
incorporated herein by reference.
(b) Identification of Executive Officers. The information under the
caption "Directors and Executive Officers of the Company" appearing in the Proxy
Statement to be filed on or about March 31, 1998 is incorporated herein by
reference.
(c) Compliance with Section 16(a) of the Exchange Act. The information
under the caption "Compliance With Section 16(a) of the Securities Exchange Act
of 1934", appearing in the Proxy Statement to be filed on or about March 31,
1998 is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information under the heading "Executive Compensation" appearing in
the Proxy Statement to be filed on or about March 31, 1998 is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information under the headings "Security Ownership of Certain
Beneficial Owners and Management" appearing in the Proxy Statement to be filed
on or about March 31, 1998 is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information under the headings "Directors and Executive Officers of
the Company", "Election of Directors" and "Certain Relationships and
Transactions", appearing in the Proxy Statement to be filed on or about March
31, 1998 is incorporated herein by reference.
-44-
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
Consolidated Balance Sheets at December 31, 1996 and 1997
Consolidated Statements of Income for the years ended
December 31, 1995, 1996 and 1997
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1995, 1996 and 1997
Consolidated Statements of Cash Flows for the years ended
December 31, 1995, 1996 and 1997
Notes to Consolidated Financial Statements
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(a) ExhibitThe following Exhibits are filed with this Form 10-K:
Exhibit
Number Exhibit Description
2.1 Stock Acquisition Agreement between Nu Skin Asia
Pacific, Inc. and each of the persons on the
signature pages thereof, dated February 27, 1998.
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.
-45-
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.
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.
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.
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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.
10.25 Form of Amended and Restated Stockholders Agreement
dated as of November 28, 1997.
10.26 Demand Promissory Note in the original principal
amount of $5,000,000 dated December 10, 1997 from
Nedra Roney payable to Nu Skin Asia Pacific, Inc.
10.27 Stock Pledge Agreement between Nu Skin Asia Pacific,
Inc. and Nedra Roney dated as of December 10, 1997.
10.28 Stock Purchase Agreement dated as of December 10,
1997 between Nu Skin Asia Pacific, Inc. and Kirk V.
Roney and Melanie R. Roney.
10.29 Stock Purchase Agreement dated as of December 10,
1997 between Nu Skin Asia Pacific, Inc. and Rick A.
Roney and certain affiliates.
10.30 Stock Purchase Agreement dated as of December 10,
1997 between Nu Skin Asia Pacific, Inc. and Burke F.
Roney.
10.31 Stock Purchase Agreement dated December 10, 1997
between Nu Skin Asia Pacific, Inc. and Park R. Roney.
10.32 Stock Purchase Agreement dated December 10, 1997
between Nu Skin Asia Pacific, Inc. and The MAR Trust.
13. 1997 Annual Report to Stockholders (Only items incorporated
by reference).
21.1 Subsidiaries of the Company.
27. Financial Data Schedule.
(b)The Company did not file a Current Report on Form 8-K during the
last quarter of the period covered by this report.
(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.
-47-
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 13th day of
March, 1998.
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 13, 1998
Blake M. Roney
/s/ Steven J. Lund President and Chief Executive Officer March 13, 1998
Steven J. Lund and Director (Principal Executive
Officer)
/s/ Corey B. Lindley Chief Financial Officer (Principal March 13, 1998
Corey B. Lindley Financial and Accounting Officer)
/s/ Sandra N. Tillotson Director March 13, 1998
Sandra N. Tillotson
/s/ Brooke B. Roney Director March 13, 1998
Brooke B. Roney
/s/ Keith R. Halls Director March 13, 1998
Keith R. Halls
/s/ E.J. "Jake" Garn Director March 13, 1998
E.J. "Jake" Garn
/s/ Paula Hawkins Director March 13, 1998
Paula Hawkins
/s/ Daniel W. Campbell Director March 13, 1998
Daniel W. Campbell
-48-
NU SKIN ASIA PACIFIC, INC.
EXHIBITS
TO
ANNUAL REPORT
ON
FORM 10-K
FOR THE YEAR ENDED
DECEMBER 31, 1997
Exhibit
Number Exhibit Description
2.1 Stock Acquisition Agreement between Nu Skin Asia Pacific, Inc. and each
of the persons listed on the signature pages thereof, dated February
27, 1998.
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.
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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.
10.25 Form of Amended and Restated Stockholders Agreement dated as of
November 28, 1997.
10.26 Demand Promissory Note in the original amount of $5,000,000 dated
December 10, 1997, from Nedra Roney payable to Nu Skin Asia Pacific,
Inc.
10.27 Stock Pledge Agreement between Nu Skin Asia Pacific, Inc. and Nedra
Roney dated as of December 10, 1997.
10.28 Stock Purchase Agreement dated as of December 10, 1997 between Nu Skin
Asia Pacific. Inc. and Kirk V. Roney and Melanie K. Roney.
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10.29 Stock Purchase Agreement dated as of December 10, 1997 between Nu Skin
Asia Pacific, Inc. and Rick A. Roney and certain affiliates.
10.30 Stock Purchase Agreement dated as of December 10, 1997 between Nu Skin
Asia Pacific, Inc. and Burke F. Roney.
10.31 Stock Purchase Agreement dated December 10, 1997 between Nu Skin Asia
Pacific, Inc. and Park R. Roney.
10.32 Stock Purchase Agreement dated December 10, 1997 between Nu Skin Asia
Pacific, Inc. and The MAR Trust.
13. 1997 Annual Report to Stockholders (Only items incorporated by
reference).
21.1 Subsidiaries of the Company.
27. Financial Data Schedule.
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