<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 18, 1995
SECURITIES ACT FILE NOS. (N-2) NO. 33-61915
(F-3) NO. 33-
INVESTMENT COMPANY ACT FILE NO. 811-07341
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM N-2
(CHECK APPROPRIATE BOX OR BOXES)
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REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /X/
PRE-EFFECTIVE AMENDMENT NO. 2 /X/
POST-EFFECTIVE AMENDMENT NO. / /
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 /X/
AMENDMENT NO. 2 /X/
AJL PEPS TRUST
(Exact Name of Registrant as Specified in Charter)
c/o The Bank of New York
101 Barclay Street
New York, New York 10286
(212) 815-3199
(Address and Telephone Number of Principal Executive Offices)
Steven R. Umlauf
Morgan Stanley & Co. Incorporated
1251 Avenue of the Americas
New York, New York 10020
(212) 703-4198
(Name, Address and Telephone Number of Agent for Service)
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FORM F-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
NIHON AMWAY KABUSHIKI KAISHA
(Exact Name of Registrant as Specified in Charter)
AMWAY JAPAN LIMITED
(Translation of Registrant's Name in English)
JAPAN
(State or Other Jurisdiction of Incorporation or Organization)
NONE
(I.R.S. Employer Identification No.)
ARCO TOWER
8/1, Shimomeguro 1-chome
Meguro-ku, Tokyo 153
(813) 5434-8484
(Address and Telephone Number of Principal Executive Offices)
CT CORPORATION SYSTEM
1633 Broadway
New York, New York 10019
(212) 664-1666
(Name, Address and Telephone Number of Agent for Service)
Copies to:
Robert A. Yolles, Esq.
Jones, Day, Reavis & Pogue
77 West Wacker
Chicago, Illinois 60601-1692
Craig N. Meurlin, Esq.
Senior Vice President &
General Counsel
Amway Corporation
7575 Fulton Street East
Ada, Michigan 49355
John J. McCarthy, Jr., Esq.
Linda A. Simpson, Esq.
Davis Polk & Wardwell
450 Lexington Avenue
New York, New York 10017
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
If the only securities being registered on these Forms are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. / /
If any of the securities being registered on these Forms are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, check the following box. / /
If these Forms are filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If these Forms are post-effective amendments filed pursuant to Rule 462(c),
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
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MAXIMUM AMOUNT OF
TITLE OF SECURITIES AGGREGATE OFFERING REGISTRATION
BEING REGISTERED PRICE FEE
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Premium Exchangeable Participating Shares (PEPS).............................. $345,000,000 $118,965.52(1)
Common Stock, no par value(2)................................................. None None
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<FN>
(1) $3,448.28 previously paid.
(2) A separate registration statement on Form F-6 (Registration No. 33-78994)
has been filed with respect to the American Depositary Shares evidenced by
American Depositary Receipts issuable upon deposit of the shares of Common
Stock. The Registrant is registering a presently indeterminate number of
shares of Common Stock as shall be deliverable in the form of American
Depositary Shares upon exchange of the PEPS. The maximum number of shares of
Common Stock that may be deliverable upon such exchange is subject to
adjustment. Since the shares of Common Stock are deliverable only upon the
exchange of the PEPS and a registration fee of $118,965.52 is being paid
with File No. 33-61915 with respect to the PEPS, no further registration fee
with respect to the Common Stock is required pursuant to the provisions of
Rule 457(i).
</TABLE>
The Registrants hereby amend these Registration Statements on such date or
dates as may be necessary to delay their effective date until the Registrants
shall file a further amendment which specifically states that these Registration
Statements shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until these Registration Statements shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE> 2
EXPLANATORY NOTE
The N-2 Registration Statement relates to the offering of Premium
Exchangeable Participating Shares ("PEPS") (without giving effect to the U.S.
Underwriters' over-allotment option), of which PEPS will be offered in
the United States and Canada and PEPS will be offered internationally
outside the United States and Canada, except Japan. The N-2 Registration
Statement includes the U.S. Prospectus followed by an alternate front cover page
for the International Prospectus.
<PAGE> 3
FORM N-2
CROSS-REFERENCE SHEET
PARTS A AND B OF PROSPECTUS*
<TABLE>
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ITEMS IN PARTS A AND B OF FORM N-2 LOCATION IN PROSPECTUS
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1. Outside Front Cover......................... Front Cover Page
2. Inside Front and Outside Back Cover Page.... Front Cover Page; Inside Front Cover Page
3. Fee Table and Synopsis...................... Prospectus Summary
4. Financial Highlights........................ Not Applicable
5. Plan of Distribution........................ Front Cover Page; Prospectus Summary; Under-
writing
6. Selling Shareholders........................ Not Applicable
7. Use of Proceeds............................. Use of Proceeds; Investment Objectives and
Policies
8. General Description of the Registrant....... Front Cover Page; Prospectus Summary; The
Trust; Investment Restrictions; Investment
Objectives and Policies; Risk Factors and
Special Considerations
9. Management.................................. Management and Administration of the Trust
10. Capital Stock, Long-Term Debt and Other
Securities.................................. Description of PEPS
11. Defaults and Arrears on Senior Securities... Not Applicable
12. Legal Proceedings........................... Not Applicable
13. Table of Contents of the Statement of
Additional Information...................... Not Applicable
14. Cover Page.................................. Not Applicable
15. Table of Contents........................... Not Applicable
16. General Information and History............. The Trust
17. Investment Objectives and Policies.......... Investment Objectives and Policies;
Investment Restrictions
18. Management.................................. Management and Administration of the Trust
19. Control Person and Principal Holders of
Securities.................................. Management and Administration of the Trust
20. Investment Advisory and Other Services...... Management and Administration of the Trust
21. Brokerage Allocation and Other Practices.... Investment Objectives and Policies
22. Tax Status.................................. Federal Income Tax Considerations
23. Financial Statement......................... AJL PEPS Trust -- Statement of Assets and
Liabilities
<FN>
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* Pursuant to the General Instructions to Form N-2, all information required to
be set forth in Part B: Statement of Additional Information has been included
in Part A: The Prospectus. Information required to be included in Part C is
set forth under the appropriate item, so numbered in Part C of the N-2
Registration Statement.
</TABLE>
<PAGE> 4
PROSPECTUS (Subject to Completion)
Issued October 18, 1995
$300,000,000
PEPS sm
AJL PEPS Trust
$ . PREMIUM EXCHANGEABLE PARTICIPATING SHARES - PEPS sm
(Subject to Exchange for American Depositary Shares Representing
Shares of Common Stock of Amway Japan Limited, No Par Value, or Shares of Such
Common Stock)
------------------------
EACH OF THE SHARES ($ . PREMIUM EXCHANGEABLE PARTICIPATING SHARES, OR "PEPS")
OF THE AJL PEPS TRUST (THE "TRUST") REPRESENTS THE RIGHT TO RECEIVE AN ANNUAL
DISTRIBUTION OF $ , AND WILL BE EXCHANGED ON , 1999 (THE
"EXCHANGE DATE") FOR BETWEEN 0.XX AND 1.XX AMERICAN DEPOSITARY SHARES ("ADSS,"
AND EACH, AN "ADS") REPRESENTING SHARES OF COMMON STOCK, NO PAR VALUE (THE
"COMMON STOCK") OF AMWAY JAPAN LIMITED (THE "COMPANY"), OR, AT THE OPTION OF
A HOLDER, THE EQUIVALENT IN SHARES OF COMMON STOCK. EACH ADS REPRESENTS ONE-
HALF OF ONE SHARE OF COMMON STOCK. THE ANNUAL DISTRIBUTION OF $ PER PEPS
IS PAYABLE QUARTERLY ON EACH FEBRUARY 15, MAY 15, AUGUST 15 AND NOVEMBER
15, COMMENCING FEBRUARY 15, 1996. THE PEPS ARE NOT SUBJECT TO REDEMPTION.
THE TRUST IS A NEWLY ORGANIZED, 3 1/4-YEAR TRUST ESTABLISHED TO PURCHASE AND
HOLD A PORTFOLIO OF STRIPPED U.S. TREASURY SECURITIES MATURING ON A QUARTERLY
BASIS THROUGH THE EXCHANGE DATE, AND FORWARD CONTRACTS (THE "CONTRACTS") WITH
TWO EXISTING SHAREHOLDERS (THE "SELLERS") OF THE COMPANY RELATING TO THE ADSS.
OF THE PEPS OFFERED HEREBY, PEPS ARE BEING OFFERED INITIALLY IN THE UNITED
STATES AND CANADA BY THE U.S. UNDERWRITERS AND PEPS ARE BEING OFFERED
INITIALLY INTERNATIONALLY OUTSIDE THE UNITED STATES AND CANADA BY THE
INTERNATIONAL UNDERWRITERS. SEE "UNDERWRITING."
THE TRUST'S INVESTMENT OBJECTIVES ARE TO PROVIDE EACH HOLDER WITH A QUARTERLY
DISTRIBUTION OF $ . PER PEPS, AND TO PROVIDE THE HOLDER OF EACH PEPS, ON THE
EXCHANGE DATE, ADSS (OR, AT THE OPTION OF A HOLDER, THE EQUIVALENT IN SHARES
OF COMMON STOCK) EQUAL TO (I) IF THE EXCHANGE PRICE PER ADS IS LESS THAN $
(THE "THRESHOLD APPRECIATION PRICE") BUT EQUAL TO OR GREATER THAN $ (THE
"DOWNSIDE PROTECTION THRESHOLD PRICE"), A NUMBER (OR FRACTIONAL NUMBER) OF
ADSS PER PEPS SO THAT THE VALUE THEREOF AT THE EXCHANGE PRICE EQUALS $
(THE "INITIAL VALUE"), (II) IF THE EXCHANGE PRICE PER ADSS IS EQUAL TO OR
GREATER THAN THE THRESHOLD APPRECIATION PRICE, 0.XX ADSS PER PEPS AND
(III) IF THE EXCHANGE PRICE PER ADS IS LESS THAN THE DOWNSIDE PROTECTION
THRESHOLD PRICE, 1.XX ADSS PER PEPS. HOLDERS OTHERWISE ENTITLED TO
RECEIVE FRACTIONAL ADSS OR FRACTIONAL SHARES OF COMMON STOCK IN RESPECT
OF THEIR AGGREGATE HOLDINGS OF PEPS WILL RECEIVE CASH IN LIEU THEREOF.
THE EXCHANGE PRICE PER ADS MEANS GENERALLY THE AVERAGE ADS EQUIVALENT
PRICE (AS DEFINED HEREIN) FOR THE 20 TRADING DAYS (AS DEFINED HEREIN)
IMMEDIATELY PRIOR TO (BUT NOT INCLUDING) THE EXCHANGE DATE.
THE YIELD ON PEPS IS HIGHER THAN THE ACTUAL DIVIDEND YIELD ON THE ADSS. HOWEVER,
THERE IS NO ASSURANCE THAT THE YIELD ON THE PEPS WILL BE HIGHER THAN THE
DIVIDEND YIELD ON THE ADSS OVER THE LIFE OF THE TRUST. IN ADDITION, THE
OPPORTUNITY FOR EQUITY APPRECIATION AFFORDED BY AN INVESTMENT IN THE PEPS IS
LESS THAN THAT AFFORDED BY AN INVESTMENT IN THE ADSS BECAUSE THE VALUE OF THE
ADSS RECEIVABLE BY HOLDERS OF THE PEPS UPON EXCHANGE AT THE EXCHANGE DATE
WILL ONLY EXCEED THE INITIAL VALUE IF THE EXCHANGE PRICE EXCEEDS THE
THRESHOLD APPRECIATION PRICE, WHICH REPRESENTS AN APPRECIATION OF % OF
THE INITIAL VALUE. MOREOVER, BECAUSE A HOLDER OF EACH PEPS WILL ONLY
RECEIVE 0.XX ADSS IF THE EXCHANGE PRICE EXCEEDS THE THRESHOLD APPRECIATION
PRICE, HOLDERS OF THE PEPS WILL ONLY BE ENTITLED TO RECEIVE UPON EXCHANGE
% OF ANY APPRECIATION OF THE VALUE OF THE ADSS IN EXCESS OF THE
THRESHOLD APPRECIATION PRICE. ALTHOUGH THE VALUE OF THE ADSS RECEIVABLE
BY A HOLDER OF PEPS UPON EXCHANGE AT THE EXCHANGE DATE MAY BE LESS THAN
THE AMOUNT PAID BY THE HOLDER, UNLIKE THE ADSS, AN INVESTMENT IN PEPS
AFFORDS PROTECTION FROM DEPRECIATION OF THE ADSS TO THE EXTENT THAT
THE EXCHANGE PRICE DOES NOT FALL BELOW THE DOWNSIDE PROTECTION
THRESHOLD PRICE. IN THE EVENT THE EXCHANGE PRICE IS LESS THAN THE
DOWNSIDE PROTECTION THRESHOLD PRICE, HOLDERS WILL RECEIVE 1.XX ADSS
PER PEPS AND ACCORDINGLY WILL HAVE ONLY LIMITED PROTECTION FROM
DEPRECIATION BELOW % OF THE INITIAL VALUE.
(continued on following page)
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
PRICE $ A PEPS
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PRICE TO SALES PROCEEDS TO
PUBLIC LOAD(1) THE TRUST(2)
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Per PEPS................. $ $ $
Total (3)................ $ $ $
<FN>
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(1) The Company and an affiliate of the Sellers have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933.
(2) Before deducting estimated offering expenses of $ payable by the Trust.
(3) The Trust has granted to the U.S. Underwriters an option for 30 days to
purchase up to an additional PEPS at the price to the public less
underwriting discount, solely to cover over-allotments. If the option is
exercised in full, the total Price to Public, Sales Load and Proceeds to the
Trust will be $ , $ and $ , respectively. See "Underwriting."
</TABLE>
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The PEPS are offered, subject to prior sale, when, as and if accepted by the
Underwriters and subject to approval of certain legal matters by Davis Polk &
Wardwell, counsel for the Underwriters. It is expected that delivery of the PEPS
will be made on or about , 1995 at the office of Morgan Stanley &
Co. Incorporated, New York, New York, against payment therefor in New York
funds.
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MORGAN STANLEY & CO. MERRILL LYNCH & CO.
Incorporated
, 1995
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
<PAGE> 5
The Trust's portfolio will not be managed in the traditional sense. The
Trust's management powers will be limited to the disposition of the Contracts in
certain limited circumstances. The Trust may continue to hold the Contracts
despite a significant decline in the market price of the ADSs or the Common
Stock or adverse changes in the financial condition of the Company. The address
of the Trust is 101 Barclay Street, New York, New York 10286 (telephone no.
(212) 815-3199). Investors are advised to read this Prospectus and to retain it
for future reference.
PEPS may be a suitable investment for those investors who are able to
understand the unique nature of the Trust and the economic characteristics of
the Contracts and the U.S. Treasury securities held by the Trust.
The Trust will be a grantor trust for federal income tax purposes and each
holder will be treated as the owner of its pro rata portion of the U.S. Treasury
securities and the Contracts. The U.S. Treasury securities will be treated as
having "original issue discount" which holders must recognize currently as
income as it accrues. Holders will not recognize income, gain or loss upon the
Trust's entry into the Contracts nor will the delivery of ADSs pursuant to the
Contracts be taxable to holders. Although the matter is not free from doubt,
holders should not recognize income, gain or loss with respect to the Contracts
over their term. See "Federal Income Tax Considerations."
The Company is not affiliated with the Trust.
THE PEPS HAVE BEEN APPROVED FOR LISTING ON THE NEW YORK STOCK EXCHANGE UPON
NOTICE OF ISSUANCE UNDER THE SYMBOL "AJP". PRIOR TO THIS OFFERING THERE HAS BEEN
NO PUBLIC MARKET FOR THE PEPS.
TYPICAL CLOSED-END FUND SHARES FREQUENTLY TRADE AT A PREMIUM TO OR DISCOUNT
FROM NET ASSET VALUE. BASED ON ITS ASSETS AND THE MARKET IN WHICH THE PEPS ARE
EXPECTED TO TRADE, THE TRUST BELIEVES THE PEPS ARE UNLIKELY TO TRADE AT A
PREMIUM TO OR DISCOUNT FROM NET ASSET VALUE. THE TRUST BELIEVES, HOWEVER, THAT
BECAUSE OF THE YIELD ON THE PEPS AND THE FORMULA FOR DETERMINING THE NUMBER OF
ADSS TO BE DELIVERED ON THE EXCHANGE DATE, THE PEPS WILL TEND TO TRADE AT A
PREMIUM TO THE MARKET VALUE OF THE ADSS TO THE EXTENT THE ADS PRICE FALLS AND AT
A DISCOUNT TO THE MARKET VALUE OF THE ADSS TO THE EXTENT THE ADS PRICE RISES.
"PEPS" and "Premium Exchangeable Participating Shares" are service marks of
Morgan Stanley & Co. Incorporated.
The closing sale price of the ADSs on the New York Stock Exchange on October
17, 1995 was $20 7/8 per ADS. The closing sale price of the Common Stock on the
Japanese over-the-counter market on October 17, 1995 was Y4,290 or $42.77 per
share (based on the noon buying rate in New York City on October 17, 1995 for
cable transfers in yen, as announced for customs purposes by the Federal Reserve
Bank of New York of $1 = Y100.3).
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, AND IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE TRUST OR ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFERING TO SELL OR A SOLICITATION OF AN OFFER
TO BUY BY ANY PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL FOR SUCH PERSON
TO MAKE SUCH AN OFFERING OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCE IMPLY THAT
THE INFORMATION HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
------------------------
UNTIL , 1995 (25 DAYS AFTER THE COMMENCEMENT OF THE OFFERING),
ALL DEALERS EFFECTING TRANSACTIONS IN THE PEPS, WHETHER OR NOT PARTICIPATING IN
THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY
REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
------------------------
TABLE OF CONTENTS
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PAGE
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Prospectus Summary.................................................................................. 3
The Trust........................................................................................... 8
Use of Proceeds..................................................................................... 8
Investment Objectives and Policies.................................................................. 8
Investment Restrictions............................................................................. 15
Risk Factors and Special Considerations............................................................. 16
Description of the PEPS............................................................................. 18
Management and Administration of the Trust.......................................................... 19
Federal Income Tax Considerations................................................................... 22
Underwriting........................................................................................ 25
Legal Matters....................................................................................... 27
Experts............................................................................................. 28
Additional Information.............................................................................. 28
Independent Auditors' Report........................................................................ 29
Statement of Assets and Liabilities................................................................. 30
Appendix A: Prospectus of Amway Japan Limited
</TABLE>
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICES OF THE PEPS OR THE
ADSS AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET.
SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE OR OTHERWISE.
SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<PAGE> 6
PROSPECTUS SUMMARY
This summary of the provisions relating to the PEPS does not purport to be
complete and is qualified in its entirety by the detailed information appearing
elsewhere in this Prospectus. Certain terms used in this summary are defined
elsewhere in this Prospectus. Unless otherwise indicated, all information in
this Prospectus assumes that the U.S. Underwriters' over-allotment option with
respect to the PEPS is not exercised.
THE TRUST
The Trust is a newly organized, 3 1/4-year trust. The Trust will be
registered as a non-diversified closed-end management investment company under
the Investment Company Act of 1940 (the "Investment Company Act"). Under
provisions of the Internal Revenue Code of 1986, as amended (the "Code")
applicable to grantor trusts, the Trustees will not have the power to vary the
investments held by the Trust. Accordingly, the Trust's portfolio will not be
managed in the traditional sense. The Trust's management powers will be
restricted to the disposition of the Contracts in certain limited circumstances.
See "Management and Administration of the Trust -- Trustees." Any proceeds
resulting from the disposition of a Contract will not be reinvested but will be
distributed to holders of the PEPS ("Holders").
THE OFFERING
The Trust is offering PEPS to the public at a purchase price of $
per PEPS (which is equal to the ADS Equivalent Price (as defined under
"Investment Objectives and Policies - Trust Assets") on the date of this
offering) through a group of underwriters (the "Underwriters") lead managed in
the U.S. and Canada by Morgan Stanley & Co. Incorporated and Merrill Lynch,
Pierce, Fenner & Smith Incorporated and lead managed internationally by Morgan
Stanley & Co. International Limited and Merrill Lynch International Limited. In
addition, the U.S. Underwriters have been granted options to purchase up to
additional PEPS solely for the purpose of covering over-allotments. See
"Underwriting."
GENERAL
The PEPS are designed to provide investors with a higher distribution per
PEPS than the regular dividends currently paid per ADS. The annual calendar year
distribution on the PEPS is $ per share. The regular annual fiscal year
dividend currently paid per ADS is Y45 ($0.46 based on the noon buying rate in
New York City on August 31, 1995 for cable transfers in yen, as announced for
customs purposes by the Federal Reserve Bank of New York of $1 = Y97.75). The
Company is proposing to increase its regular annual dividend and to pay certain
special dividends. See "Dividends and Dividend Policy" in the prospectus of the
Company. Future declarations of dividends on the ADSs by the Company and the
amount of such dividends are discretionary with its Board of Directors and
subject to legal and other factors. Such further declarations will necessarily
depend on the Company's future earnings, financial condition, capital
requirements and other factors. The Trust will not be entitled to any dividends
that may be declared on the ADSs.
The yield on PEPS is higher than the actual dividend yield on the ADSs.
However, there is no assurance that the yield on the PEPS will be higher than
the dividend yield on the ADSs over the life of the Trust. In addition, the
opportunity for equity appreciation afforded by an investment in the PEPS is
less than that afforded by an investment in the ADSs because the value of the
ADSs (or shares of Common Stock) receivable by a Holder upon exchange at the
Exchange Date will only exceed the Initial Value if the Exchange Price exceeds
the Threshold Appreciation Price, which represents an appreciation of % of the
Initial Value. Moreover, because a holder of each PEPS will only receive 0.xx
ADSs if the Exchange Price exceeds the Threshold Appreciation Price, holders of
the PEPS will only be entitled to receive upon exchange % of any appreciation
of the value of the ADSs in excess of the Threshold Appreciation Price. Although
the value of the ADSs (or shares of Common Stock) receivable by a Holder upon
exchange at the Exchange Date may be less than the amount paid by the Holder,
unlike the ADSs, an investment in PEPS affords protection from depreciation of
the ADSs to the extent that the Exchange Price does not fall below the Downside
Protection Threshold Price. In the event the Exchange Price is less than the
Downside Protection Threshold Price,
3
<PAGE> 7
Holders will receive 1.xx ADSs per PEPS and accordingly will have only limited
protection from depreciation below % of the Initial Value. See "Investment
Objectives and Policies -- Trust Assets."
DISTRIBUTIONS
The Holders are entitled to receive distributions at the rate per PEPS of
$ per annum or $ per quarter, payable quarterly on each February 15, May
15, August 15 and November 15 or, if any such date is not a business day, on the
next succeeding business day, to Holders of record as of each February 1, May 1,
August 1 and November 1, respectively. The first distribution will be payable on
February 15, 1996 to Holders of record as of February 1, 1996. See "Investment
Objectives and Policies -- Trust Assets."
MANDATORY EXCHANGE
On the Exchange Date, each outstanding PEPS will be exchanged automatically
for between 0.xx and 1.xx ADSs, subject to adjustment in the event of certain
dividends or distributions, subdivisions, splits, combinations, issuances of
certain rights or warrants, distributions of certain assets with respect to the
Common Stock or certain purchases by the Company of Common Stock or ADSs. In the
event of a merger of the Company into another entity, or the liquidation of the
Company, or in certain related events, Holders of the PEPS would receive
consideration in the form of cash, Marketable Common Stock or a combination
thereof, rather than ADSs. Additionally, the occurrence of certain defaults by
the Sellers under the Contracts or the related collateral arrangements would
cause the acceleration of the Contracts and the exchange of each PEPS for an
amount of ADSs, cash or a combination thereof, in respect of the ADSs. See
"Investment Objectives and Policies -- The Contracts." In lieu of receiving ADSs
on the Exchange Date, each Holder will have the option to receive the equivalent
in shares of Common Stock, subject to certain restrictions. See "Investment
Objectives and Policies -- Delivery of ADSs; No Fractional ADSs; Option to Elect
Shares of Common Stock."
VOTING RIGHTS
The Holders will have the right to vote on matters affecting the Trust, as
described under "Description of the PEPS," but will not have voting rights with
respect to the Common Stock or the ADSs prior to receipt of the ADSs or shares
of Common Stock by Holders as a result of the exchange of the PEPS for ADSs or
shares of Common Stock on the Exchange Date. See "Investment Objectives and
Policies -- The Company" and "Description of the PEPS." See also "Description of
Capital Stock -- Japanese Unit Share System" and "-- Voting Rights" and
"Description of American Depositary Receipts -- Voting of Deposited Securities"
in the accompanying prospectus of the Company.
THE COMPANY
Amway Japan Limited is the exclusive distribution vehicle for Amway
Corporation in Japan. The Company, which has a 16 year operating history,
believes that it is one of the largest direct selling businesses in Japan as
measured by its fiscal 1995 net sales of Y 178.0 billion (U.S. $1.8 billion) and
net income of Y 23.1 billion (U.S. $235.3 million) and approximately 980,000
independent distributors who renewed their distributorships from the prior
fiscal year. Reference is made to the accompanying prospectus of the Company
which describes the Company (including financial matters) and the ADSs and the
Common Stock, deliverable to Holders upon mandatory exchange of the PEPS on the
Exchange Date. The Company is not affiliated with the Trust and will not receive
any of the proceeds from the sale of the PEPS.
ASSETS OF THE TRUST; INVESTMENT OBJECTIVES AND POLICIES
The Trust will purchase and hold a portfolio of stripped U.S. Treasury
securities maturing on a quarterly basis through the Exchange Date and Contracts
with the Sellers relating to the ADSs of the Company. It is the Trust's
investment objective to provide to each Holder, on the Exchange Date, ADSs (or,
at the option of a Holder, the equivalent in shares of Common Stock) equal to
(i) if the Exchange Price (as defined herein) per ADS is less than the Threshold
Appreciation Price but equal to or greater than the Downside Protection
Threshold Price, a number (or fractional number) of ADSs per PEPS so that the
value thereof at the
4
<PAGE> 8
Exchange Price equals the Initial Value, (ii) if the Exchange Price per ADS is
equal to or greater than the Threshold Appreciation Price, 0.xx ADSs per PEPS
and (iii) if the Exchange Price per ADS is less than the Downside Protection
Threshold Price, 1.xx ADS per PEPS. Holders otherwise entitled to receive
fractional ADSs (or fractional shares of Common Stock) in respect of their
aggregate holdings of PEPS will receive cash in lieu thereof. See "Investment
Objectives and Policies -- Delivery of ADSs; No Fractional ADSs; Option to Elect
Shares of Common Stock." It is also the Trust's investment objective to provide
each Holder with a quarterly distribution of $ per PEPS, equal to the pro
rata portion of the quarterly cash distributions from the proceeds of the U.S.
Treasury securities.
The Trust will enter into forward contracts (the "Contracts") with two
shareholders of the Company (the "Sellers") obligating the Sellers, severally
and not jointly, on the Exchange Date, to deliver to the Trust ADSs in
the aggregate, except that (i) if the Exchange Price per ADS is less than the
Threshold Appreciation Price but equal to or greater than the Downside
Protection Threshold Price, each Seller will be obligated to deliver under its
Contract ADSs with an aggregate value equal to the product of the Initial Value
times the initial number of ADSs subject to such Contract, (ii) if the Exchange
Price per ADS is equal to or greater than the Threshold Appreciation Price, each
Seller will be obligated to deliver under its Contract ADSs equal to the product
of 0.xx times the initial number of ADSs subject to such Contract and (iii) if
the Exchange Price per share of Common Stock is less than the Downside Threshold
Protection Price, each Seller will be obligated to deliver under its contract
ADSs representing a number of shares of Common Stock equal to the product of
1.xx times the initial number of ADSs subject to such Contract. This provides
the Trust with the potential for a portion of any capital appreciation above the
Threshold Appreciation Price on the ADSs, and limited protection from
depreciation of the ADSs. The purchase price under the Contracts is equal to
$ per ADS and $ in the aggregate and is payable to the Sellers
by the Trust on the closing of this offering.
The obligations of each Seller under its Contract will be secured by a
pledge of ADSs or, at the election of the Sellers, by substitute collateral
consisting of U.S. Government obligations. See "Investment Objectives and
Policies -- The Contracts."
FEDERAL INCOME TAX CONSIDERATIONS
The Trust will be taxable as a grantor trust for federal income tax
purposes. Accordingly, each Holder will be treated for federal income tax
purposes as the owner of its pro rata portion of the U.S. Treasury securities
and the Contracts, and income received (including original issue discount
treated as received) by the Trust will generally be treated as income of the
Holders.
The U.S. Treasury securities held by the Trust will be treated for federal
income tax purposes as having "original issue discount" which will accrue over
the term of the U.S. Treasury securities. It is currently anticipated that a
substantial portion of each quarterly cash distribution to the Holders will be
treated as a tax-free return of the Holders' costs of the U.S. Treasury
securities and therefore will not be considered current income for federal
income tax purposes. However, a Holder (whether on the cash or accrual method of
tax accounting) must recognize currently as income original issue discount on
the U.S. Treasury securities as it accrues. It is also expected that the
tax-free portion of each quarterly cash distribution will increase as a
percentage of the total distribution during the life of the Trust.
Under existing law, a Holder will not recognize income, gain or loss upon
the Trust's entry into the Contracts and should not recognize income, gain or
loss with respect to the Contracts over their term. Holders should be aware that
no published authorities directly address the characterization of the Contracts
and that it is possible that the Internal Revenue Service ("IRS") will assert
that a Holder should include in income over the term of the Contracts additional
amounts which together with the original issue discount on such Holder's pro
rata portion of the U.S. Treasury securities should not exceed the aggregate
amount of the quarterly cash distributions to such Holder. The delivery of ADSs
to the Trust pursuant to the Contracts will not be taxable to the Holders. The
distribution of ADSs or Common Stock upon the termination of the Trust will not
be taxable to the Holders. A Holder will have taxable gain or loss upon receipt
of cash in lieu of fractional ADSs or shares of Common Stock distributed upon
termination of the Trust. Each Holder's aggregate basis in its ADSs or shares of
Common Stock (or combination thereof) will be equal to its basis in its pro rata
portion of
5
<PAGE> 9
the Contracts less the portion of such basis allocable to any fractional ADSs or
shares of Common Stock for which cash is received. See "Federal Income Tax
Considerations."
MANAGEMENT AND ADMINISTRATION OF THE TRUST
The administration of the Trust will be overseen by three Trustees. The
day-to-day administration of the Trust will be carried out by The Bank of New
York (or its successor) as trust administrator (the "Administrator"). The Bank
of New York (or its successor) will also act as custodian for the Trust's assets
(the "Custodian") and as paying agent, registrar and transfer agent (the "Paying
Agent") with respect to the PEPS. Except as aforesaid, and except for its role
as Collateral Agent under the Trust's Collateral Agreements (see "Investment
Objectives and Policies -- The Contracts -- Collateral Arrangements;
Acceleration"), The Bank of New York has no other affiliation with, and is not
engaged in any other transaction with, the Trust. See "Management and
Administration of the Trust."
LIFE OF THE TRUST
The Trust will terminate automatically on or shortly after the Exchange
Date. Promptly after the Exchange Date, the ADSs (or shares of Common Stock) to
be exchanged for the PEPS and other remaining Trust assets, if any, will be
distributed pro rata to Holders. See "Investment Objectives and Policies --
Trust Termination."
RISK FACTORS AND SPECIAL CONSIDERATIONS
The Trust will not be managed in the traditional sense. The Trust may
continue to hold the Contracts despite a significant decline in the market price
of the ADSs or the Common Stock or adverse changes in the financial condition of
the Company. However, the Trustees will have the power, but not the obligation,
to sell Contracts only in the limited circumstances of (a) a decline in the ADS
Equivalent Price, on an as-adjusted basis, of the ADSs to less than 50% of the
Initial Value or (b) the bankruptcy or insolvency of the Company. Proceeds from
any sale of a Contract will not be reinvested but will be distributed pro rata
to Holders. In the event of such a sale of the Contracts and distribution of
proceeds, the U.S. Treasury securities remaining in the Trust will be
liquidated, the proceeds distributed pro rata to Holders and the Trust
terminated. See "Risk Factors and Special Considerations -- Limited Management"
and "Management and Administration of the Trust -- Trustees."
The yield on the PEPS is higher than the actual dividend yield on the ADSs.
However, there is no assurance that the yield on the PEPS will be higher than
the dividend yield on the ADSs over the life of the Trust. In addition, the
opportunity for equity appreciation afforded by an investment in the PEPS is
less than that afforded by an investment in the ADSs because the value of the
ADSs (or shares of Common Stock) receivable by holders of the PEPS upon exchange
at the Exchange Date will only exceed the Initial Value if the Exchange Price
exceeds the Threshold Appreciation Price, which represents an appreciation of
% of the Initial Value. Moreover, because a holder of each PEPS will only
receive 0.xx ADSs if the Exchange Price exceeds the Threshold Appreciation
Price, holders of the PEPS will only be entitled to receive upon exchange % of
any appreciation of the value of the ADSs in excess of the Threshold
Appreciation Price. Although the value of the ADSs (or shares of Common Stock)
receivable by a Holder upon exchange at the Exchange Date may be less than the
amount paid by the Holder, unlike the ADSs, an investment in PEPS affords
protection from depreciation of the ADSs to the extent that the Exchange Price
does not fall below the Downside Protection Threshold Price. In the event the
Exchange Price is less than the Downside Protection Threshold Price, Holders
will receive 1.xx ADSs per PEPS and accordingly will not be protected from
depreciation below % of the Initial Value. See "Investment Objectives and
Policies -- Enhanced Yield; Limited Depreciation Protection; Less Equity
Appreciation than Common Stock."
The Trust is classified as a "non-diversified" investment company under the
Investment Company Act. Consequently, the Trust is not limited by the Investment
Company Act in the proportion of its assets that may be invested in the
securities of a single issuer. Since the only securities held by the Trust will
be the U.S. Treasury securities and the Contracts, the Trust may be subject to
greater risk than would be the case for an
6
<PAGE> 10
investment company with more diversified investments. See "Investment Objectives
and Policies" and "Risk Factors and Special Considerations -- Non-Diversified
Status."
Fluctuations in the rate of exchange between the yen and the U.S. dollar
will affect the ADS Equivalent Price and are likely to affect the market price
of ADSs in the United States. See "Risk Factors and Special
Considerations -- Exchange Rates."
No published authorities directly address the characterization of the
Contracts for U.S. federal income tax purposes. As a result, there can be no
assurance that Holders will not be required to recognize income with respect to
the Contracts over their term. See "Federal Income Tax Considerations."
LISTING
The PEPS have been approved for listing on the New York Stock Exchange upon
notice of issuance under the symbol "AJP."
FEES AND EXPENSES
The public offering price of the PEPS includes an underwriting discount
payable by the Trust to the Underwriters of %. Estimated organization costs of
the Trust in the amount of $ and estimated costs of the Trust in
connection with the initial registration and public offering of the PEPS in the
amount of $ will be paid from the proceeds of the offering of the PEPS.
Each of the Administrator, the Custodian and the Paying Agent, and each Trustee
will be paid by Morgan Stanley & Co. Incorporated ("Morgan Stanley") at the
closing of this offering a one-time, up-front amount in respect of its ongoing
fees and, in the case of the Administrator, anticipated expenses of the Trust
(estimated to be $ in the aggregate), over the term of the Trust.
Morgan Stanley has also agreed to pay any on-going expenses of the Trust in
excess of these estimated amounts and to reimburse the Trust for any amounts it
may be required to pay as indemnification to any Trustee, the Administrator, the
Custodian or the Paying Agent. Morgan Stanley will be reimbursed by the Sellers
for all fees and expenses of the Trust and all reimbursements of
indemnifications paid by it. See "Management and Administration of the Trust --
Estimated Expenses."
Regulations of the Securities and Exchange Commission ("SEC") applicable to
closed-end investment companies designed to assist investors in understanding
the costs and expenses that an investor will bear directly or indirectly require
the presentation of Trust expenses in the following format. Because the Trust
will not bear any ongoing fees or expenses, investors will not bear any direct
expenses and the only expense which investors might be considered to be bearing
indirectly is the proportion of the Sales Load applicable to their PEPS which is
payable by the Trust to the Underwriters from the proceeds of the offering.
<TABLE>
<S> <C>
Investor transaction expenses
Sales load (as a percentage of offering price).............................. %
====
Annual Expenses
Management Fees............................................................. 0%
Other Expenses.............................................................. 0%
----
Total Annual Expenses............................................... 0%
====
</TABLE>
SEC regulations also require that closed-end investment companies present an
illustration of cumulative expenses (both direct and indirect) that an investor
would bear. The example is required to factor in the applicable Sales Load and
to assume, in addition to a 5% annual return, the reinvestment of all
distributions at net asset value. INVESTORS SHOULD NOTE THAT THE ASSUMPTION OF A
5% ANNUAL RETURN DOES NOT ACCURATELY REFLECT THE FINANCIAL TERMS OF THE TRUST.
SEE "INVESTMENT OBJECTIVES AND POLICIES -- TRUST ASSETS." ADDITIONALLY, THE
TRUST DOES NOT PERMIT THE REINVESTMENT OF DISTRIBUTIONS.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS
------- -------
<S> <C> <C>
You would pay the following expenses (i.e., the applicable sales load) on
a $1,000 investment, assuming a 5% annual return........................ $ $
</TABLE>
7
<PAGE> 11
THE TRUST
AJL PEPS Trust (the "Trust") is a New York trust formed on August 17, 1995
pursuant to a trust agreement dated as of August 17, 1995, as amended on
, 1995 (the "Trust Agreement"). The Trust's portfolio will not be
managed in the traditional sense.
USE OF PROCEEDS
The net proceeds of this offering will be used to purchase a fixed
portfolio comprised of U.S. Treasury securities and to pay the purchase price
under the Contracts to the Sellers.
INVESTMENT OBJECTIVES AND POLICIES
TRUST ASSETS
The Trust's investment objectives are to provide each Holder with a
quarterly distribution of $ per PEPS, and to provide the Holder of each
PEPS, on or shortly after the Exchange Date, ADSs representing shares of Common
Stock per PEPS equal to (i) if the Exchange Price per ADS is less than $
(the "Threshold Appreciation Price") but equal to or greater than $ (the
"Downside Protection Threshold Price"), a number (or fractional number) of ADSs
per PEPS so that the value thereof at the Exchange Price equals $ (the
"Initial Value"), (ii) if the Exchange Price per ADS is equal to or greater than
the Threshold Appreciation Price, 0.xx ADSs per PEPS and (iii) if the Exchange
Price per ADS is less than the Downside Protection Threshold Price, 1.xx ADSs
per PEPS. Holders otherwise entitled to receive fractional ADSs (or fractional
shares of Common Stock) in respect of their aggregate holdings of PEPS will
receive cash in lieu thereof. See " -- Delivery of ADSs; No Fractional ADSs;
Option to Elect Shares of Common Stock." The Exchange Price per ADS means the
average ADS Equivalent Price (as defined below) for a Calculation Period (as
defined below) of 20 Trading Days (as defined below) immediately prior to (but
not including) the Exchange Date, provided that if no ADS Equivalent Price may
be determined for one or more (but not all) of such Trading Days, such Trading
Days shall be disregarded in the calculation of the Exchange Price (but no
additional Trading Days shall be added to the Calculation Period). If no ADS
Equivalent Price may be determined for all such 20 Trading Days, the most
recently available ADS Equivalent Price prior to such 20 Trading Days shall be
the Exchange Price. In lieu of ADSs, Holders may elect to receive the equivalent
in shares of Common Stock. See " -- Delivery of ADSs; No Fractional ADSs; Option
to Elect Shares of Common Stock." A policy of the Trust is to invest at least
65% of its portfolio in, and to be concentrated in, the Contracts. The foregoing
investment objectives and policy are fundamental policies of the Trust which may
not be changed without the approval of a majority of the Fund's outstanding
PEPS. A "majority of the Fund's outstanding PEPS" means the lesser of (i) 67% of
the PEPS represented at a meeting at which more than 50% of the outstanding PEPS
are represented, and (ii) more than 50% of the outstanding PEPS.
The ADS Equivalent Price on any date of determination means the Closing
Price (as defined below) of the Common Stock on such date, times one-half,
divided by the Calculation Exchange Rate (as defined below) on such date. The
Closing Price of any security on any Trading Day within a period for which an
average price must be determined (a "Calculation Period") means (i) the last
reported executed trade price (regular way) of such security on the principal
trading market for such security on such date; (ii) if no regular way executed
trade price for such security is reported on the principal trading market for
such security on such date, the average of the closing bid and offered prices
for such security as reported by the principal trading market for such security;
(iii) if no regular way executed trade price or closing bid and offered prices
for such security are reported on the principal trading market for such security
on such date, the Closing Price (as determined in accordance with clauses (i) or
(ii)) for the next succeeding day (if any) within the relevant Calculation
Period on which the Closing Price may be so determined; or (iv) if such security
is no longer listed or admitted to trading on any exchange or in any
over-the-counter market, the average of the closing bid and offered prices for
such day as furnished by a member firm of the most recent principal trading
market for such security; provided that if any event that results in an
adjustment under the Contracts as described under
8
<PAGE> 12
" -- The Contracts -- Dilution Adjustments" occurs during any Calculation
Period, the Closing Price as determined pursuant to the foregoing will be
appropriately adjusted for each Trading Day in the Calculation Period occurring
prior to the day on which such adjustment was effected to reflect the occurrence
of such event. The Calculation Exchange Rate on any date of determination means
the noon buying rate in New York City on such date for cable transfers in yen as
announced for custom purposes by the Federal Reserve Bank of New York. A
"Trading Day" means, with respect to any security, a day on which the principal
trading market for such security is open for trading or quotation. The principal
trading market for the Common Stock is currently the Japanese over-the-counter
market.
The value of the ADSs (or shares of Common Stock) that will be received by
Holders upon exchange of PEPS for ADSs (or shares of Common Stock) on the
Exchange Date may be less than the amount paid for the PEPS offered hereby.
For illustrative purposes only, the following chart shows the number of
ADSs (or shares of Common Stock) that a Holder would receive for each PEPS at
various Exchange Prices. The chart assumes that there would be no adjustments
under the Contracts by reason of the occurrence of any of the events described
under " -- The Contracts -- Dilution Adjustments." There can be no assurance
that the Exchange Price will be within the range set forth below. Given the
Initial Value of $ per PEPS, the Threshold Appreciation Price of $
and the Downside Protection Threshold Price of $ , a Holder would receive
in connection with the exchange of PEPS on the Exchange Date the following
number of ADSs or shares of Common Stock:
<TABLE>
<CAPTION>
EXCHANGE PRICE NUMBER OF SHARES
OF ADSS NUMBER OF ADSS OF COMMON STOCK
- -------------- --------------- -----------------
<S> <C> <C>
</TABLE>
The following table sets forth information regarding the distributions to
be received on the U.S. Treasuries, the portion of each year's distributions
that will constitute a return of capital for federal income tax purposes and the
amount of original issue discount accruing on the U.S. Treasuries with respect
to a Holder who acquires its PEPS at the issue price from an Underwriter
pursuant to the original offering. See "Federal Income Tax Considerations."
<TABLE>
<CAPTION>
ANNUAL
ANNUAL GROSS INCLUSION OF
ANNUAL GROSS DISTRIBUTIONS ORIGINAL ISSUE
DISTRIBUTIONS FROM ANNUAL RETURN DISCOUNT
FROM U.S. TREASURIES OF CAPITAL IN INCOME
YEAR U.S. TREASURIES PER PEPS PER PEPS PER PEPS
- ----- --------------- --------------- ------------- --------------
<S> <C> <C> <C> <C>
1995 $ $ $ $
1996
1997
1998
</TABLE>
The annual distribution of $ per PEPS is payable quarterly on each
February 15, May 15, August 15 and November 15, commencing February 15, 1996.
Quarterly distributions on the PEPS will consist solely of the cash received
from the U.S. Treasury securities. The Trust will not be entitled to any
dividends that may be declared on the Common Stock. See "Management and
Administration of the Trust -- Distributions."
9
<PAGE> 13
ENHANCED YIELD; LIMITED DEPRECIATION PROTECTION; LESS EQUITY APPRECIATION THAN
COMMON STOCK
Distributions will be paid on the PEPS at a higher rate than the rate at
which dividends are currently paid on the ADSs. However, there is no assurance
that the yield on the PEPS will be higher than the dividend yield on the ADSs
over the life of the Trust. In addition, the opportunity for equity appreciation
afforded by an investment in the PEPS is less than that afforded by an
investment in the ADSs because the value of the ADSs (or shares of Common Stock)
receivable by holders upon exchange at the Exchange Date will only exceed the
Initial Value if the Exchange Price exceeds the Threshold Appreciation Price,
which represents an appreciation of % of the Initial Value. Moreover, because
a Holder will only receive 0.xx ADSs if the Exchange Price exceeds the Threshold
Appreciation Price, Holders will only be entitled to receive upon exchange %
(the percentage equal to the Initial Value divided by the Threshold Appreciation
Price) of any appreciation of the value of the ADSs in excess of the Threshold
Appreciation Price. Although the value of the ADSs (or shares of Common Stock)
receivable by a Holder upon exchange at the Exchange Date may be less than the
amount paid by the Holder, unlike the ADSs, an investment in PEPS affords
protection from depreciation of the ADSs to the extent that the Exchange Price
does not fall below the Downside Protection Threshold Price. In the event the
Exchange Price is less than the Downside Protection Threshold Price, Holders
will receive 1.xx ADSs per PEPS and accordingly will have only limited
protection from depreciation below % of the Initial Value.
THE COMPANY
Amway Japan Limited is the exclusive distribution vehicle for Amway
Corporation in Japan. The Company, which has a 16 year operating history,
believes that it is one of the largest direct selling businesses in Japan as
measured by its fiscal 1995 net sales of Y178.0 billion (U.S. $1.8 billion) and
net income of Y23.1 billion (U.S. $235.3 million) and approximately 980,000
independent distributors who renewed their distributorships from the prior
fiscal year. The principal executive offices of the Company are currently
located at ARCO Tower, 8-1, Shimomeguro 1-chome, Meguro-Ku, Tokyo 153, telephone
number (813) 5434-8484.
Reference is made to the accompanying prospectus of the Company which
describes the Company (including financial matters) and the ADSs and the Common
Stock, deliverable to Holders upon mandatory exchange of the PEPS on the
Exchange Date. The Company is not affiliated with the Trust and will not receive
any of the proceeds from the sale of the PEPS.
Holders will not be entitled to rights with respect to the ADSs or the
Common Stock (including, without limitation, voting rights and rights to receive
dividends or other distributions in respect thereof) until receipt of ADSs or
shares of Common Stock by Holders of PEPS as a result of the exchange of the
PEPS for ADSs or Common Stock on the Exchange Date. See "Description of Capital
Stock" and "Description of American Depositary Receipts" in the accompanying
Company prospectus.
The shares of Common Stock are traded on the Japanese over-the-counter
market. The ADSs are listed on the New York Stock Exchange. Information
regarding market prices of the Common Stock and the ADSs and trading volume of
the ADSs appears under the caption "Market Information" in the accompanying
Company prospectus.
THE CONTRACTS
General. The Trust will enter into one or more Contracts with the Sellers
obligating each Seller, severally and not jointly, to deliver to the Trust on
the Exchange Date a number of ADSs equal to the initial number of ADSs subject
to such Seller's Contract times a ratio (the "Exchange Ratio"). The aggregate
initial number of ADSs under the Contracts will equal the aggregate number of
PEPS offered hereunder. The Exchange Ratio under each Contract will equal, at
the Exchange Date (i) if the Exchange Price per ADS is less than the Threshold
Appreciation Price but equal to or greater than the Downside Protection
Threshold Price, the Initial Value divided by the Exchange Price, (ii) if the
Exchange Price per ADS is equal to or greater than the Threshold Appreciation
Price, 0.xx and (iii) if the Exchange Price per ADS is less than the Downside
Protection Threshold Price, 1.xx. The purchase price of the Contracts was
arrived at by arms' length negotiation between the Trust and the Sellers taking
into consideration factors including the price, expected
10
<PAGE> 14
dividend level and volatility of the Common Stock, current interest rates, the
term of the Contracts, current market volatility generally, the collateral
security pledged by the Sellers, the value of other similar instruments and the
costs and anticipated proceeds of the offering of the PEPS. All matters relating
to the administration of the Contracts will be the responsibility of either the
Trust's Administrator or Custodian.
Dilution Adjustments. The Exchange Ratio is subject to adjustment if the
Company shall (i) pay a stock dividend or make a distribution with respect to
the Common Stock in shares of such stock, (ii) subdivide or split its
outstanding shares of Common Stock, (iii) combine its outstanding shares of
Common Stock into a smaller number of shares or (iv) issue by reclassification
of its shares of Common Stock any shares of common stock of the Company. In any
such event, the Exchange Ratio shall be multiplied by the number of shares of
common stock that a holder who held one share of Common Stock immediately prior
to such event would be entitled solely by reason of such event to hold
immediately after such event.
In addition, if the Company shall issue rights or warrants to all holders
of Common Stock entitling them to subscribe for or purchase shares of Common
Stock at a price per share less than the Then-Current Market Price per share of
the Common Stock (as defined below) (other than rights to purchase Common Stock
pursuant to a plan for the reinvestment of dividends or interest) then the
Exchange Ratio shall be multiplied by a fraction, of which the numerator shall
be the number of shares of Common Stock outstanding immediately prior to the
issuance of such rights or warrants plus the number of additional shares offered
for subscription or purchase pursuant to such rights or warrants, and of which
the denominator shall be the number of shares of Common Stock which the
aggregate offering price of the shares so offered for subscription or purchase
would purchase at the Then-Current Market Price. To the extent that, after
expiration of such rights or warrants, the shares offered thereby shall not have
been delivered, the Exchange Ratio shall be readjusted to the Exchange Ratio
that would then be in effect had the foregoing adjustment been made upon the
basis of delivery of only the number of shares of Common Stock actually
delivered. The "Then-Current Market Price" per share of the Common Stock means
the average Closing Price per share of Common Stock for a Calculation Period of
5 Trading Days immediately prior to the time such adjustment is effected;
provided that if no Closing Price for the Common Stock may be determined for one
or more (but not all) of such Trading Days, such Trading Day shall be
disregarded in the calculation of the Then-Current Market Price (but no
additional Trading Days shall be added to the Calculation Period). If no Closing
Price for the Common Stock may be determined for all such Trading Days, the most
recently available Closing Price for the Common Stock prior to such 5 Trading
Days shall be the Then-Current Market Price.
Further, if the Company shall pay a dividend or make a distribution to all
holders of Common Stock of evidences of its indebtedness or other non-cash
assets (excluding any stock dividends or distributions in shares of Common
Stock) or issue to all holders of Common Stock rights or warrants to subscribe
for or purchase any of its securities (other than rights or warrants referred to
in the previous paragraph), then the Exchange Ratio shall be multiplied by a
fraction, of which the numerator shall be the Then-Current Market Price per
share of Common Stock, and the denominator shall be such price less the fair
market value (as determined by a nationally recognized investment banking firm
retained for this purpose by the Administrator) of the portion of such evidences
of indebtedness, non-cash assets or rights or warrants payable in respect of one
share of Common Stock.
If the Company distributes cash (other than any Permitted Dividend (as
defined below), special dividends of Y50 and Y25 per share of Common Stock to be
distributed to holders of record on August 31, 1995 and February 28, 1996,
respectively, any cash distributed in consideration of fractional shares of
Common Stock and any cash distributed in a Reorganization Event (as defined
below) ("Excluded Distributions")), by dividend or otherwise, to all holders of
Common Stock or makes an Excess Purchase Payment (as defined below), then the
Exchange Ratio shall be multiplied by a fraction, of which the numerator shall
be the Then-Current Market Price per share of Common Stock and of which the
denominator shall be such price less the amount of such distribution applicable
to one share of Common Stock which would not be a Permitted Dividend (or in the
case of an Excess Purchase Payment, less the aggregate amount of Excess Purchase
Payments for which adjustment is being made at such time divided by the number
of then-outstanding shares of Common Stock). For purposes of these adjustments,
(a) "Permitted Dividend" means any cash dividends in respect of the Common Stock
to the extent that the per share amount of such dividends
11
<PAGE> 15
does not, in any fiscal semiannual period, exceed Y 50, and (b) "Excess Purchase
Payment" means the excess, if any, of (i) the cash and the value (as determined
by a nationally recognized independent investment banking firm retained for this
purpose by the Administrator) of all other consideration paid by the Company
with respect to one share of Common Stock acquired in any share repurchase,
whether made by the Company in the open market or by tender offer or exchange
offer, over (ii) the Then-Current Market Price per share of Common Stock.
Notwithstanding the foregoing, the Company may pay up to Y15 billion in respect
of share repurchases without any dilution adjustment under the Contracts being
required, provided no such purchase involves an Excess Purchase Payment of more
than 5% of the Then-Current Market Price per share of the Common Stock. For a
discussion of proposed dividends and share repurchases by the Company see
"Prospectus Summary -- Recent Developments" in the accompanying Company
prospectus.
If any adjustment in the Exchange Ratio is made as described herein (other
than in a Reorganization Event as described below), the Threshold Appreciation
Price, the Initial Value and the Downside Protection Threshold Price shall also
be adjusted, by multiplying each by a fraction, of which the numerator shall be
one and the denominator shall be the fraction or number by which the Exchange
Ratio shall have been multiplied pursuant to such Exchange Ratio adjustment. In
addition, if at any time the number of shares of Common Stock represented by
each ADS shall change, the Exchange Ratio shall be multiplied by a fraction, of
which the numerator shall be one half and the denominator shall be the number of
shares of Common Stock then represented by each ADS.
Dilution adjustments shall be effected: (i) in the case of any dividend,
distribution or issuance described above, at the opening of business on the
business day following the record date for determination of holders of Common
Stock entitled to receive such dividend, distribution or issuance or, if later,
at the time such dividend, distribution or issuance shall be announced by the
Company; (ii) in the case of any subdivision, split, combination or
reclassification described above, on the effective date of such transaction;
(iii) in the case of any Excess Purchase Payment for which the Company shall
announce, at or prior to the time it commences the relevant share repurchase,
the repurchase price for shares to be repurchased, on the date of such
announcement; and (iv) in the case of any other Excess Purchase Payment, on the
payment date with respect hereto. There will be no adjustment under the
Contracts in respect of any dividends, distributions or issuances that may be
declared or announced after the Exchange Date. If any announcement or
declaration of a record date in respect of a dividend, distribution or issuance
shall subsequently be cancelled by the Company, or such dividend, distribution
or issuance shall fail to receive requisite approvals or shall fail to occur for
any other reason, or any open market repurchase, tender offer or exchange offer
shall fail to occur, then the Exchange Ratio shall be readjusted to the Exchange
Ratio that would then be in effect had adjustment for such dividend,
distribution or issuance not been made.
In the event of (A) any consolidation or merger of the Company, or any
surviving entity or subsequent surviving entity of the Company (a "Company
Successor"), with or into another entity (other than a merger or consolidation
in which the Company is the continuing corporation and in which the Common Stock
outstanding immediately prior to the merger or consolidation is not exchanged
for cash, securities or other property of the Company or another corporation),
(B) any sale, transfer, lease or conveyance to another corporation of the
property of the Company or any Company Successor as an entirety or substantially
as an entirety, (C) any statutory exchange of securities of the Company or any
Company Successor with another corporation (other than in connection with a
merger or acquisition) or (D) any liquidation, dissolution or winding up of the
Company or any Company Successor (any such event described in clause (A), (B),
(C) or (D), a "Reorganization Event"), the Exchange Ratio will be adjusted to
equal an aggregate amount such that, on the Exchange Date, each Holder will
receive for each PEPS cash in an amount equal to (i) if the Transaction Value
(as defined below) is less than the Threshold Appreciation Price but equal to or
greater than the Downside Protection Threshold Price, the Initial Value, (ii) if
the Transaction Value is greater than or equal to the Threshold Appreciation
Price, 0.xx multiplied by the Transaction Value and (iii) if the Transaction
Value is less than the Downside Protection Threshold Price, 1.xx multiplied by
the Transaction Value.
Notwithstanding the foregoing, to the extent that any Marketable Common
Stock (as defined below) is received in such Reorganization Event, then in lieu
of delivering cash as provided above, the Sellers may at
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their option deliver a proportional amount of such Marketable Common Stock. If a
Seller elects to deliver Marketable Common Stock, Holders will be responsible
for the payment of any and all brokerage and other transaction costs upon the
sale of such securities.
"Transaction Value" means one-half times (i) for any cash received in any
such Reorganization Event, the amount of cash received per share of Common
Stock, (ii) for any property other than cash or Marketable Common Stock received
in any such Reorganization Event, an amount equal to the market value on the
date the Reorganization Event is consummated of such property received per share
of Common Stock and (iii) for any Marketable Common Stock received in any such
Reorganization Event, an amount equal to the average Closing Price per share of
such securities for a Calculation Period of 20 Trading Days immediately prior to
the Exchange Date multiplied by the number of shares of Marketable Common Stock
received for each share of Common Stock; provided that if no Closing Price for
such Marketable Common Stock may be determined for one or more (but not all) of
such Trading Days, such Trading Days shall be disregarded in the calculation of
such average Closing Price (but no additional Trading Days shall be added to the
Calculation Period). If no Closing Price for the Marketable Common Stock may be
determined for all such Trading Days, the calculation in the preceding clause
(iii) shall be based on the most recently available Closing Price for the
Marketable Common Stock prior to such 20 Trading Days. The number of shares of
Marketable Common Stock included in the calculation of Transaction Value for
purposes of the preceding clause (iii) shall be subject to adjustment if a
dilution event of the type described above shall occur with respect to the
issuer of the Marketable Common Stock between the time of the Reorganization
Event and the Exchange Date. "Marketable Common Stock" means any common equity
securities listed on a U.S. national securities exchange or any foreign
securities exchange or in the Japanese over-the-counter market or reported by
The Nasdaq National Market.
Collateral Arrangements; Acceleration. Each Seller's obligations under its
Contract will be secured by a security interest in the maximum number of ADSs
subject to such Contract (i.e., 1.xx times the initial number of ADSs subject to
such Seller's Contract, subject to adjustment in accordance with the dilution
adjustment provisions of such Contract), pursuant to a Collateral Agreement
between such Seller and The Bank of New York, as collateral agent (the
"Collateral Agent"). Unless a Seller is in default in its obligations under the
Collateral Agreement, the Seller will be permitted to substitute for the pledged
ADSs collateral consisting of short-term, direct obligations of the U.S.
Government. Any U.S. Government obligations pledged as substitute collateral for
ADSs will be required to have an aggregate market value at the time of
substitution and at daily mark-to-market valuations thereafter of not less than
150% (or, from and after any Insufficiency Determination, as described below,
200%) of the product of the ADS Equivalent Price at the time of each valuation
times the number of ADSs for which such obligations are being substituted. Each
Collateral Agreement will provide that, in the event of a Reorganization Event,
the relevant Seller will pledge as alternative collateral any Marketable Common
Stock, plus cash in an amount at least equal to the Transaction Value of any
consideration other than Marketable Common Stock, received by it in respect of
the maximum number of ADSs subject to such Seller's Contract at the time of the
Reorganization Event. The number of shares of Marketable Common Stock required
to be pledged shall be subject to adjustment if any event requiring a dilution
adjustment under the Contracts shall occur. Each Seller will be permitted to
substitute U.S. Government obligations for Marketable Common Stock or cash
pledged after any Reorganization Event. Any U.S. Government obligations so
substituted will be required to have an aggregate market value at the time of
substitution and at daily mark-to-market valuations thereafter of: (A) in the
case of obligations substituted for pledged shares of Marketable Common Stock,
not less than 150% (or, from and after any Insufficiency Determination, 200%) of
the product of the market price per share of Marketable Common Stock at the time
of each valuation times the number of shares of Marketable Common Stock for
which such obligations are being substituted; and (B) in the case of obligations
substituted for pledged cash, not less than 105% of the amount of cash for which
such obligations are being substituted.
If the Collateral Agent shall determine (an "Insufficiency Determination")
that the U.S. Government obligations pledged as substitute collateral shall fail
to meet the foregoing requirements at any valuation, or that any Seller has
failed to pledge additional collateral required as a result of a dilution
adjustment increasing the maximum number of ADSs or shares of Marketable Common
Stock subject to such Seller's Contract, and
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<PAGE> 17
such failure shall not be cured by the close of business on the following
business day, then, unless a Collateral Event of Default (as defined below)
under such Seller's Collateral Agreement shall have occurred and be continuing,
the Collateral Agent shall commence (i) sales of such Seller's collateral
consisting of U.S. Government obligations and (ii) purchases, using the proceeds
of such sales, of ADSs or shares of Marketable Common Stock, in an amount
sufficient to cause the collateral to meet the requirements under such
Collateral Agreement. The Collateral Agent shall discontinue such sales and
purchases if at any time a Collateral Event of Default under such Collateral
Agreement shall have occurred and be continuing. A "Collateral Event of Default"
under any Collateral Agreement shall mean, at any time, (A) if no U.S.
Government obligations shall be pledged as substitute collateral at such time,
failure of the collateral to consist of at least the maximum number of ADSs
subject to the relevant Seller's Contract at such time (or, if a Reorganization
Event shall have occurred at or prior to such time, failure of the collateral to
include the amount of cash and the maximum number of shares of any Marketable
Common Stock required to be pledged as described above); (B) if any U.S.
Government obligations shall be pledged as substitute collateral for ADSs (or
shares of Marketable Common Stock) at such time, failure of such U.S. Government
obligations to have a market value at such time not less than 105% of the ADS
Equivalent Price (or the then-current market price per share of Marketable
Common Stock, as the case may be) times the difference between (x) the maximum
number of ADSs (or shares of Marketable Common Stock) subject to the relevant
Seller's Contract at such time and (y) the number of ADSs (or shares of
Marketable Common Stock) pledged as collateral at such time; and (C) if any U.S.
Government obligations shall be pledged as substitute collateral for any cash at
such time, failure of such U.S. Government obligations to have a market value at
such time not less than 105% of such cash, if such failure shall not be cured
within one business day after notice thereof is delivered to the relevant
Seller.
The occurrence of a Collateral Event of Default under any Collateral
Agreement, or the bankruptcy or insolvency of any Seller, will cause an
automatic acceleration of each Seller's obligations under each Contract. In any
such event, each Seller will become obligated to deliver ADSs (or, after a
Reorganization Event, Marketable Common Stock or cash or a combination thereof)
having an aggregate value equal to the "Aggregate Acceleration Value" under its
Contract. The Aggregate Acceleration Value for each Contract will be based on an
"Acceleration Value" determined by the Administrator on the basis of quotations
from independent dealers. Each quotation will be for the amount that would be
paid to the relevant dealer in consideration of an agreement between the Trust
and such dealer that would have the effect of preserving the Trust's rights to
receive ADSs (or, after a Reorganization Event, the alternative consideration
provided under the Contract) under a portion of such Contract that corresponds
to an initial number of ADSs equal to 1,000. The Administrator will request
quotations for each Contract from four nationally recognized independent dealers
on or as soon as reasonably practicable following the date of acceleration. If
four quotations are provided for any Contract, the Acceleration Value will be
the arithmetic mean of the two quotations remaining after disregarding the
highest and lowest quotations. If two or three quotations are provided, the
Acceleration Value will be the arithmetic mean of such quotations. If one
quotation is provided, the Acceleration Value will be equal to such quotation.
The Aggregate Acceleration Value for each Contract will be computed by dividing
the Acceleration Value by 1,000 and multiplying the quotient by the initial
number of ADSs subject to such Contract, except that, if no quotations are
provided, the Aggregate Acceleration Value will be (A) the ADS Equivalent Price
on the acceleration date times the number of ADSs that would be required to be
delivered on such date under the Contract if the Exchange Date were redefined to
be the acceleration date or (B) after a Reorganization Event, the value of the
alternative consideration that would be required to be delivered on such date
under the Contract if the Exchange Date were redefined to be the acceleration
date.
Upon any acceleration, the Collateral Agent will distribute to the Trust
for distribution pro rata to the Holders, with respect to each Seller's
Contract, the Aggregate Acceleration Value under such Contract, in the form of
ADSs then pledged by that Seller, or cash generated from the liquidation of U.S.
Government obligations then pledged by that Seller, or a combination thereof
(or, after a Reorganization Event, in the form of Marketable Common Stock then
pledged, cash then pledged, cash generated from the liquidation of U.S.
Government obligations then pledged, or a combination thereof). In addition, in
the event that by the Exchange Date any substitute collateral has not been
replaced by ADSs (or, after a Reorganization Event,
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<PAGE> 18
cash or Marketable Common Stock) sufficient to meet the obligations under any
Contract, the Collateral Agent will distribute to the Trust for distribution pro
rata to the Holders, with respect to such Contract, the market value of the ADSs
required to be delivered thereunder, in the form of any ADSs then pledged by the
relevant Seller plus cash generated from the liquidation of U.S. Government
obligations then pledged by such Seller (or, after a Reorganization Event, the
market value of the alternative consideration required to be delivered
thereunder, in the form of any Marketable Common Stock then pledged, plus any
cash then pledged, plus cash generated from the liquidation of U.S. Government
obligations then pledged).
Description of Sellers. The Sellers are the Jay Van Andel Trust and HDV
GRIT Holdings, Inc., principal shareholders of the Company. Reference is made to
the caption "Principal and Selling Shareholders" in the accompanying Company
prospectus for information about the Sellers.
TEMPORARY INVESTMENTS
For cash management purposes, the Trust may invest the proceeds of the U.S.
Treasury securities and any other cash held by the Trust in short-term
obligations of the U.S. Government maturing no later than the business day
preceding the next following distribution date.
TRUST TERMINATION
The Trust will terminate automatically on or shortly after the Exchange
Date.
In the event that the Contracts are accelerated, or that both Contracts
shall be disposed of as described under "Management and Administration of the
Trust -- Trustees," then any U.S. Treasury securities then held in the Trust
shall be liquidated by the Administrator and distributed pro rata to the
Holders, together with the amounts distributed upon acceleration (see "-- The
Contracts; Collateral Arrangements; Acceleration") or any consideration received
by the Trust upon disposition of the Contracts, and the Trust shall be
terminated.
DELIVERY OF ADSS; NO FRACTIONAL ADSS; OPTION TO ELECT SHARES OF COMMON STOCK
American Depositary Receipts ("ADRs") evidencing the ADSs for which the
PEPS will be exchanged on the Exchange Date are expected to be delivered shortly
after the Exchange Date. Each Holder will receive ADRs representing the greatest
number of whole ADSs allocable to its PEPS, plus the cash value, based on the
Exchange Price, of any fractional ADSs (or, as described below, shares of Common
Stock) so allocable. In lieu of ADSs, any Holder may elect to receive the shares
of Common Stock represented by such ADSs, subject to the restrictions, terms and
conditions of the Company's Share Handling Regulations and Articles of
Association and of the Deposit Agreement relating to the ADSs. Because the
Deposit Agreement relating to the ADSs only permits withdrawal of shares of
Common Stock underlying ADSs where such shares constitute whole 100-share units
of Common Stock, Holders electing to receive shares of Common Stock may be
required to receive ADSs to the extent the number of underlying shares is not an
integral multiple of 100 (or such other number of shares as may constitute a
unit at the Exchange Date). See "Description of Capital Stock," "Description of
American Depositary Receipts" and "Exchange Controls and Other Limitations
Affecting Securityholders" in the accompanying Company prospectus. Such shares
of Common Stock may be delivered to the Holder at a designated Tokyo office of
the share custodian for the depositary for the ADSs (the "Share Custodian"),
currently The Mitsubishi Bank, Limited, or at another location specified by the
Holder, provided that delivery of shares of Common Stock at a place other than
the designated Tokyo office of the Share Custodian shall be at the request, risk
and expense of the Holder.
INVESTMENT RESTRICTIONS
As a matter of fundamental policy (as described under "Investment
Objectives and Policies"), the Trust may not purchase any securities or
instruments other than the U.S. Treasury securities, the Contracts and the ADSs
or other assets received pursuant to the Contracts and, for cash management
purposes, short-term obligations of the U.S. Government; issue any securities or
instruments except for the PEPS; make short sales
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or purchase securities on margin; write put or call options; borrow money;
underwrite securities; purchase or sell real estate, commodities or commodities
contracts; or make loans.
RISK FACTORS AND SPECIAL CONSIDERATIONS
INTERNAL MANAGEMENT; LIMITED MANAGEMENT
The Trust will be internally managed by its Trustees and will not have any
separate investment adviser. The Trust will not be managed in the traditional
sense. The Trust intends that its portfolio will remain fixed except for in the
events described under "Investment Objectives and Policies -- The Contracts,"
subject to the Trustees' power, but not obligation, to dispose of the Contracts
only in certain circumstances. As a result, the Contracts may continue to be
held by the Trust despite significant declines in the market price of the ADSs
or of the Common Stock or adverse changes in the financial condition of the
Company (or, after a Reorganization Event, comparable developments affecting any
Marketable Common Stock or the issuer thereof). Proceeds from any disposition of
the Contracts will not be reinvested but will be distributed to Holders, at
which time any U.S. Treasury securities held by the Trust would also be
liquidated and distributed and the Trust terminated. See "Management and
Administration of the Trust -- Trustees."
LIMITED APPRECIATION POTENTIAL; ADS DEPRECIATION RISK
It is anticipated that on the Exchange Date the Trust will receive the ADSs
deliverable pursuant to the Contracts, which will then be distributed to
Holders. The yield on the PEPS is higher than the actual dividend yield on the
ADSs. However, because the terms of the Contracts call for the Sellers to
deliver less than the full number of ADSs subject to the Contracts where the
Exchange Price exceeds the Initial Value (and therefore less than one full ADS
for each outstanding PEPS), the PEPS have more limited appreciation potential
than the ADSs. Therefore, the PEPS may trade below the value of the ADSs if the
ADSs appreciate in value. An investment in PEPS does afford protection from the
depreciation of the ADSs to the extent that the Exchange Price does not fall
below the Downside Protection Threshold Price ( % of the Initial Value).
DILUTION ADJUSTMENTS; SHAREHOLDER RIGHTS
The number of ADSs or shares of Common Stock that Holders are entitled to
receive at the termination of the Trust is subject to adjustment in the event of
certain dividends or distributions, subdivisions, splits, combinations,
issuances of certain rights or warrants, distributions of certain assets with
respect to the Common Stock or certain purchases by the Company of Common Stock
or ADSs. See "Investment Objectives and Policies -- The Contracts -- Dilution
Adjustments." The number of ADSs or shares of Common Stock to be received by
Holders may not be adjusted for other events, such as offerings of Common Stock
for cash or in connection with acquisitions, that may adversely affect the price
of the ADSs or the Common Stock and, because of the relationship of the amount
to be received pursuant to the Contracts to the price of the ADSs, such other
events may adversely affect the trading price of the PEPS. There can be no
assurance that the Company will not take any of the foregoing actions, or that
it will not make offerings of, or that major shareholders will not sell any,
ADSs or shares of Common Stock in the future, or as to the amount of any such
offerings or sales. In addition, until the receipt by Holders of the ADSs (or
shares of Common Stock if so elected) as a result of the exchange of the PEPS
for the ADSs, Holders will not be entitled to any rights with respect to the
ADSs (or the Common Stock) (including without limitation voting rights and the
rights to receive any dividends or other distributions in respect thereof).
TRADING VALUE; LISTING
The PEPS are innovative securities, and it is not possible to predict how
they will trade in the secondary market. The trading price of the PEPS may vary
considerably prior to the Exchange Date due to, among other things, fluctuations
in the price of the ADSs or the Common Stock (which may occur due to changes in
the Company's financial condition, results of operations or prospects, or
because of complex and interrelated political, economic, financial and other
factors that can affect the capital markets generally, the stock
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exchanges or quotation systems on which the ADSs and the Common Stock are traded
and the market segment of which the Company is a part) and fluctuations in
interest rates and other factors that are difficult to predict and beyond the
Trust's control.
The Underwriters currently intend, but are not obligated, to make a market
in the PEPS. There can be no assurance that a secondary market will develop or,
if a secondary market does develop, that it will provide the holders of the PEPS
with liquidity of investment or that it will continue for the life of the PEPS.
Application will be made to list the PEPS on the NYSE. Assuming the
acceptance of such application, there can be no assurance that the PEPS will not
later be delisted or that trading in the PEPS on the NYSE will not be suspended.
In the event of a delisting or suspension of trading on such exchange, the Trust
will apply for listing of the PEPS on another national securities exchange or
for quotation on another trading market. If the PEPS are not listed or traded on
any securities exchange or trading market, or if trading of the PEPS is
suspended, pricing information for the PEPS may be more difficult to obtain, and
the price and liquidity of the PEPS may be adversely affected.
NET ASSET VALUE
The Trust is a newly organized closed-end investment company with no
previous operating history. Typical closed-end fund shares frequently trade at a
premium to or discount from net asset value. Based on its assets and the market
in which the PEPS are expected to trade, the Trust believes the PEPS are
unlikely to trade at a premium to or discount from net asset value. The Trust
believes, however, that because of the yield on the PEPS and the formula for
determining the number of ADSs to be delivered on the Exchange Date, the PEPS
will tend to trade at a premium to the market value of the ADSs to the extent
the ADS price falls and at a discount to the market value of the ADSs to the
extent the ADS price rises. The PEPS are not subject to redemption.
The net asset value of the portfolio will be calculated by the
Administrator no less frequently than quarterly by dividing the value of the net
assets of the Trust (the value of its assets less its liabilities) by the total
number of PEPS outstanding. The Trust's net asset value will be published
semi-annually as part of the Trust's semi-annual report to Holders and at such
other times as the Trustees may determine. The U.S. Treasury securities will be
valued at the mean between the last current bid and asked prices or, if
quotations are not available, as determined in good faith by the Trustees.
Short-term investments having a maturity of 60 days or less are valued at cost
with accrued interest or discount earned included in interest receivable. The
Contracts will be valued at the mean of the bid prices received by the Trust
from at least three independent broker-dealer firms unaffiliated with the Trust
who are in the business of making bids on financial instruments similar to the
Contracts and with terms comparable thereto.
NON-DIVERSIFIED STATUS
The Trust is considered non-diversified under the Investment Company Act,
which means that the Trust is not limited in the proportion of its assets that
may be invested in the obligations of a single issuer. Because the only
securities held or received by the Trust will be U.S. Treasury securities and
the Contracts or other assets consistent with the terms of the Contracts, the
Trust may be subject to greater risk than would be the case for an investment
company with more diversified investments.
EXCHANGE RATES
The rate of exchange between the yen and the U.S. dollar is determined by
the forces of supply and demand in the foreign exchange markets, which in turn
are affected by changes in the balance of payments and other economic and
financial conditions, government intervention, speculation and other factors.
Fluctuations in exchange rates affect the foreign currency equivalents of the
yen price of the shares of Common Stock and therefore are likely to affect the
market price of the ADSs in the United States.
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TAX TREATMENT OF THE CONTRACTS
No published authorities directly address the characterization of the
Contracts for U.S. federal income tax purposes. As a result, there can be no
assurance that Holders will not be required to recognize income with respect to
the Contracts over their term. See "Federal Income Tax Considerations."
DESCRIPTION OF THE PEPS
Each PEPS represents an equal proportional interest in the Trust. Upon
liquidation of the Trust, Holders are entitled to share pro rata in the net
assets of the Trust available for distribution. PEPS have no preemptive,
redemption or conversion rights. PEPS are fully paid and nonassessable by the
Trust.
Holders are entitled to a full vote for each PEPS held on all matters to be
voted on by Holders and are not able to cumulate their votes in the election of
Trustees. The Trustees of the Trust have been selected initially by Morgan
Stanley & Co. Incorporated and Merrill Lynch, Pierce, Fenner & Smith
Incorporated as the initial Holders of the Trust. The Trust intends to hold
annual meetings as required by the rules of the New York Stock Exchange. The
Trustees may call special meetings of Holders for action by Holder vote as may
be required by either the Investment Company Act or the Trust Agreement. The
Holders have the right, upon the declaration in writing or vote of more than
two-thirds of the outstanding PEPS, to remove a Trustee. The Trustees will call
a meeting of Holders to vote on the removal of a Trustee upon the written
request of the record holders of 10% of the PEPS or to vote on other matters
upon the written request of the record holders of 51% of the PEPS (unless
substantially the same matter was voted on during the preceding 12 months).
BOOK-ENTRY SYSTEM
The PEPS will be issued in the form of one or more global securities (the
"Global Securities") deposited with The Depository Trust Company (the
"Depositary") and registered in the name of a nominee of the Depositary.
The Depositary has advised the Trust and the Underwriters as follows: The
Depositary is a limited-purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York Uniform Commercial Code and a
"clearing agency" registered pursuant to Section 17A of the Exchange Act. The
Depositary was created to hold securities of persons who have accounts with the
Depositary ("participants") and to facilitate the clearance and settlement of
securities transactions among its participants in such securities through
electronic book-entry changes in accounts of the participants, thereby
eliminating the need for physical movement of certificates. Such participants
include securities brokers and dealers, banks, trust companies and clearing
corporations. Indirect access to the Depositary's book-entry system is also
available to others, such as banks, brokers, dealers and trust companies that
clear through or maintain a custodial relationship with a participant, either
directly or indirectly.
Upon the issuance of a Global Security, the Depositary or its nominee will
credit the respective PEPS represented by such Global Security to the accounts
of participants. The accounts to be credited shall be designated by the
Underwriters. Ownership of beneficial interests in such Global Securities will
be limited to participants or persons that may hold interests through
participants. Ownership of beneficial interests by participants in such Global
Securities will be shown on, and the transfer of those ownership interests will
be effected only through, records maintained by the Depositary or its nominee
for such Global Securities. Ownership of beneficial interests in such Global
Securities by persons that hold through participants will be shown on, and the
transfer of that ownership interest within such participant will be effected
only through, records maintained by such participant. The laws of some
jurisdictions require that certain purchasers of securities take physical
delivery of such securities in definitive form. Such limits and such laws may
impair the ability to transfer beneficial interests in a Global Security.
So long as the Depositary for a Global Security, or its nominee, is the
registered owner of such Global Security, such Depositary or such nominee, as
the case may be, will be considered the sole owner or holder of the PEPS. Except
as set forth below, owners of beneficial interests in such Global Securities
will not be
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entitled to have the PEPS registered in their names and will not receive or be
entitled to receive physical delivery of the PEPS in definitive form and will
not be considered the owners or holders thereof.
ADSs, shares of Common Stock or other consideration deliverable on exchange
of, and any quarterly distributions on, PEPS registered in the name of or held
by the Depositary or its nominee will be made to the Depositary or its nominee,
as the case may be, as the registered owner or the holder of the Global
Security. None of the Trust, any Trustee, the Paying Agent, the Administrator or
the Custodian for the PEPS will have any responsibility or liability for any
aspect of the records relating to, or payments made on account of, beneficial
ownership interests in a Global Security or for maintaining, supervising or
reviewing any records relating to such beneficial ownership interests.
The Trust expects that the Depositary, upon receipt of any payment in
respect of a Global Security, will credit immediately participants' accounts
with payments in amounts proportionate to their respective beneficial interests
in the principal amount of such Global Security as shown on the records of the
Depositary. The Trust also expects that payments by participants to owners of
beneficial interests in such Global Security held through such participants will
be governed by standing instructions and customary practices, as is now the case
with securities held for the accounts of customers in bearer form or registered
in "street name," and will be the responsibility of such participants.
A Global Security may not be transferred except as a whole by the
Depositary to a nominee or a successor of the Depositary. If the Depositary is
at any time unwilling or unable to continue as depositary and a successor
depositary is not appointed by the Trust within ninety days, the Trust will
issue PEPS in definitive registered form in exchange for the Global Security
representing such PEPS. In addition, the Trust may at any time and in its sole
discretion determine not to have any PEPS represented by one or more Global
Securities and, in such event, will issue PEPS in definitive form in exchange
for all of the Global Securities representing the PEPS. Further, if the Trust so
specifies with respect to the PEPS, an owner of a beneficial interest in a
Global Security representing PEPS may, on terms acceptable to the Trust and the
Depositary for such Global Security, receive PEPS in definitive form. In any
such instance, an owner of a beneficial interest in a Global Security will be
entitled to physical delivery in definitive form of PEPS represented by such
Global Security equal in number to that represented by such beneficial interest
and to have such PEPS registered in its name.
MANAGEMENT AND ADMINISTRATION OF THE TRUST
TRUSTEES
The Trust will be internally managed by three Trustees. Under the
provisions of the Code applicable to grantor trusts, the Trustees will not have
the power to vary the investments held by the Trust. Nevertheless, the Trustees
may consider disposing of the Contracts, although they are not obligated to do
so, in the event of (a) a decline in the ADS Equivalent Price (or, after a
Reorganization Event, the value of the alternative consideration required to be
delivered under the Contracts) that, on an as-adjusted basis, as determined by
the Trustees, reflects a 50% or greater decline below the Initial Value (as
adjusted from time to time under the Contracts) or (b) the bankruptcy or
insolvency of the Company (or of the issuer of any Marketable Common Stock
delivered in a Reorganization Event). See "Investment Objectives and Policies --
The Contracts -- Dilution Adjustments."
The names of the persons who have been elected by Morgan Stanley & Co.
Incorporated and Merrill Lynch, Pierce, Fenner & Smith Incorporated, the initial
Holders of the Trust, and who will serve as the Trustees are set forth below.
The positions and the principal occupations of the individual Trustees during
the past five years are also set forth below.
19
<PAGE> 23
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
NAME, AGE AND ADDRESS TITLE DURING PAST FIVE YEARS
- --------------------------------- ------------------ -----------------------
<S> <C> <C>
Donald J. Puglisi, 50 Managing Trustee Professor of Finance
Department of Finance University of Delaware
University of Delaware
Newark, DE 19716
William R. Latham III, 51 Trustee Professor of Economics
Department of Economics University of Delaware
University of Delaware
Newark, DE 19716
James B. O'Neill, 56 Trustee Professor of Economics
Center for Economic Education & University of Delaware
Entrepreneurship
University of Delaware
Newark, DE 19716
</TABLE>
Each Trustee who is not a director, officer or employee of any Underwriter
or the Administrator, or of any affiliate thereof, will be paid by Morgan
Stanley, on behalf of the Trust, in respect of its annual fee and anticipated
out-of-pocket expenses, a one-time, up-front fee of $10,800. The Trust's
Managing Trustee will also receive an additional up-front fee of $3,600 for
serving in that capacity. The Trustees will not receive, either directly or
indirectly, any compensation, including any pension or retirement benefits, from
the Trust. None of the Trustees receives any compensation for serving as a
trustee or director of any other affiliated investment company.
ADMINISTRATOR
The day-to-day affairs of the Trust will be managed by The Bank of New
York, as Trust Administrator pursuant to an Administration Agreement. Under the
Administration Agreement, the Trustees have delegated most of their operational
duties to the Administrator, including without limitation, the duties to: (i)
receive invoices for and pay, or cause to be paid, all expenses incurred by the
Trust; (ii) with the approval of the Trustees, engage legal and other
professional advisors (other than the independent public accountants for the
Trust); (iii) instruct the Paying Agent to pay distributions on PEPS as
described herein; (iv) prepare and mail, file or publish all notices, proxies,
reports, tax returns and other communications and documents, and keep all books
and records, for the Trust; (v) at the direction of the Trustees, institute and
prosecute legal and other appropriate proceedings to enforce the rights and
remedies of the Trust; and (vi) make all necessary arrangements with respect to
meetings of Trustees and any meetings of holders of PEPS. The Administrator will
not, however, select the independent public accountants for the Trust or sell or
otherwise dispose of the Trust assets (except in connection with an acceleration
of the Contracts, or the settlement of the Contracts at the Exchange Date, or a
disposition of the Contracts as described under "Management and Administration
of the Trust -- Trustees," and upon termination of the Trust).
The Administration Agreement may be terminated by either the Trust or the
Administrator upon 60 days' prior written notice, except that no termination
shall become effective until a successor Administrator has been chosen and has
accepted the duties of the Administrator.
Except for its roles as Administrator, custodian, paying agent, registrar
and transfer agent for the Trust, and except for its role as Collateral Agent
under the Collateral Agreements, The Bank of New York has no other affiliation
with, and is not engaged in any other transactions with, the Trust.
The address of the Administrator is 101 Barclay Street, New York, New York
10286.
CUSTODIAN
The Trust's custodian (the "Custodian") is The Bank of New York pursuant to
a custodian agreement (the "Custodian Agreement"). In the event of any
termination of the Custodian Agreement by the Trust or
20
<PAGE> 24
the resignation of the Custodian, the Trust must engage a new Custodian to carry
out the duties of the Custodian as set forth in the Custodian Agreement.
Pursuant to the Custodian Agreement, all net cash received by the Trust will be
invested by the Custodian in short-term U.S. Treasury securities maturing on or
shortly before the next quarterly distribution date. The Custodian will also act
as collateral agent under the Collateral Agreement and will hold a perfected
security interest in the ADSs and U.S. Government obligations or other assets
consistent with the terms of the Contracts.
PAYING AGENT
The transfer agent, registrar and paying agent (the "Paying Agent") for the
PEPS is The Bank of New York pursuant to a paying agent agreement (the "Paying
Agent Agreement"). In the event of any termination of the Paying Agent Agreement
by the Trust or the resignation of the Paying Agent, the Trust will use its best
efforts to engage a new Paying Agent to carry out the duties of the Paying
Agent.
INDEMNIFICATION
The Trust will indemnify each Trustee, the Paying Agent, the Administrator
and the Custodian with respect to any claim, liability, loss or expense
(including the costs and expenses of the defense against any claim or liability)
which it may incur in acting as Trustee, Paying Agent, Administrator or
Custodian, as the case may be, except in the case of willful misfeasance, bad
faith, gross negligence or reckless disregard of their respective duties. Morgan
Stanley has agreed to reimburse the Trust for any amounts it may be required to
pay as indemnification to any Trustee, the Paying Agent, the Administrator or
the Custodian. Morgan Stanley will in turn be reimbursed by the Sellers for all
such reimbursements paid by it.
DISTRIBUTIONS
The Trust intends to distribute to Holders on a quarterly basis the
proceeds of the U.S. Treasury securities held by the Trust. The first
distribution, reflecting the Trust's operations from the date of this offering,
will be made on February 15, 1996 to holders of record as of February 1, 1996.
Thereafter, distributions will be made on February 15, May 15, August 15 and
November 15 of each year to Holders of record as of each February 1, May 1,
August 1 and November 1, respectively. Upon termination of the Trust as
described in "Investment Objectives and Policies -- Trust Termination," each
Holder will receive any remaining net assets of the Trust.
ESTIMATED EXPENSES
Morgan Stanley will pay at the Trust's inception to each of the
Administrator, the Custodian and the Paying Agent, and to each Trustee, a
one-time, up-front amount in respect of its fee and, in the case of the
Administrator, anticipated expenses of the Trust over the term of the Trust. The
anticipated Trust expenses to be borne by the Administrator include, among other
things, expenses for legal and independent accountants' services, costs of
printing proxies, PEPS certificates and Holder reports, expenses of the
Trustees, fidelity bond coverage, stock exchange listing fees and expenses of
qualifying the PEPS for sale in the various states. Estimated organization costs
of the Trust in the amount of $ and estimated costs of the Trust in
connection with the initial registration and public offering of the PEPS in the
amount of $ will be paid from the proceeds of the offering of the PEPS.
The amount payable to the Administrator in respect of ongoing expenses of
the Trust was determined based on estimates made in good faith on the basis of
information currently available to the Trust, including estimates furnished by
the Trust's agents. There cannot, however, be any assurance that actual
operating expenses of the Trust will not be substantially more than this amount.
Any excess expenses will be paid by Morgan Stanley or, in the event of their
failure to pay such amounts, the Trust. Morgan Stanley will be reimbursed by the
Sellers for all fees and expenses of the Trust paid by it.
21
<PAGE> 25
FEDERAL INCOME TAX CONSIDERATIONS
In the opinion of Davis Polk & Wardwell, tax counsel to the Trust
("Counsel"), the following is a general summary of the material federal income
tax consequences of the ownership of the PEPS with respect to a Holder who
acquires its PEPS at the issue price from an Underwriter pursuant to the
original offering and holds its PEPS as a capital asset. It does not discuss all
of the tax consequences that may be relevant to a Holder in light of its
particular circumstances or to Holders subject to special treatment under
federal income tax laws (e.g., certain financial institutions, insurance
companies, dealers in stock or securities, tax-exempt organizations or persons
who hold the PEPS as a part of a hedging transaction or straddle). It also does
not discuss the tax consequences of the ownership of the ADSs, Common Stock or
Marketable Common Stock. PROSPECTIVE PURCHASERS OF PEPS ARE URGED TO REVIEW THE
DISCUSSION UNDER "TAXATION" IN THE ACCOMPANYING PROSPECTUS OF THE COMPANY
CONCERNING THE FEDERAL TAX CONSEQUENCES OF AN INVESTMENT IN THE ADSs OR COMMON
STOCK, WHICH IS BASED UPON THE OPINION OF WHITE & CASE, SPECIAL TAX COUNSEL TO
THE COMPANY. The summary herein is based on the Code, administrative
pronouncements, judicial decisions and existing and proposed Treasury
Regulations, changes to any of which subsequent to the date of this Prospectus
may affect the tax consequences described herein. PROSPECTIVE PURCHASERS OF PEPS
SHOULD CONSULT THEIR TAX ADVISORS AS TO THE FEDERAL, STATE AND LOCAL INCOME TAX
CONSEQUENCES OF ACQUIRING, HOLDING AND DISPOSING OF PEPS.
As used herein, the term "United States Holder" means a Holder that is, for
United States federal income tax purposes, (i) a citizen or resident of the
United States, (ii) a corporation, partnership or other entity created or
organized in or under the laws of the United States or of any political
subdivision thereof, or (iii) an estate or trust the income of which is subject
to United States federal income taxation regardless of its source. The term
"Non-U.S. Holder" means a Holder that is not a United States Holder.
The term "Holder" as used below in the discussion of "Tax Consequences to
United States Holders" and "Tax Consequences to Non-U.S. Holders" means a
"United States Holder" and a "Non-U.S. Holder," respectively.
TAX STATUS OF THE TRUST
The Trust will be taxable as a grantor trust for federal income tax
purposes, and income received by the Trust will be treated as income of the
Holders in the manner set forth below.
TAX CONSEQUENCES TO UNITED STATES HOLDERS
Tax Basis of the U.S. Treasury Securities and the Contracts. Each Holder
will be considered the owner of its pro rata portion of the stripped U.S.
Treasury securities and the Contracts in the Trust under the grantor trust rules
of Sections 671-679 of the Code. The cost to the Holder of its PEPS will be
allocated among the Holder's pro rata portion of the U.S. Treasury securities
and the Contracts (in proportion to the fair market values thereof on the date
on which the Holder acquires its PEPS) in order to determine the Holder's tax
bases. It is currently anticipated that % and % of the net proceeds of the
offering will be used by the Trust to purchase the U.S. Treasury securities and
as payments under the Contracts, respectively.
Recognition of Original Issue Discount on the U.S. Treasury
Securities. The U.S. Treasury securities in the Trust will consist of stripped
U.S. Treasury securities. A Holder will be required to treat its pro rata
portion of each U.S. Treasury security in the Trust as a bond that was
originally issued on the date the Holder purchased its PEPS and at an original
issue discount equal to the excess of the Holder's pro rata portion of the
amounts payable on such U.S. Treasury security over the Holder's tax basis
therefor as discussed above. The Holder (whether on the cash or accrual method
of tax accounting) is required to include original issue discount (other than
original issue discount on short-term U.S. Treasury securities as defined below)
in income for federal income tax purposes as it accrues, in accordance with a
constant yield method. Because it is expected that more than 20% of the Holders
will be accrual basis taxpayers, original issue discount on any short-term U.S.
Treasury security (i.e., any U.S. Treasury security with a maturity of one year
or less from the
22
<PAGE> 26
date it is purchased) held by the Trust will also be required to be included in
income by the Holders as it is accrued. Unless a Holder elects to accrue the
original issue discount on a short-term U.S. Treasury security according to a
constant yield method based on daily compounding, such original issue discount
will be accrued on a straight-line basis. The Holder's tax basis in a U.S.
Treasury security will be increased by the amount of any original issue discount
included in income by the Holder with respect to such U.S. Treasury security.
Treatment of the Contracts. Each Holder will be treated as having entered
into a pro rata portion of the Contracts and, at the Exchange Date, as having
received a pro rata portion of the ADSs (or cash, Marketable Common Stock or a
combination thereof) delivered to the Trust. Under existing law, a Holder will
not recognize income, gain or loss upon entry into the Contracts. Holders should
be aware that no published authorities directly address the characterization of
the Contracts and that it is possible that the IRS will recharacterize the
Contracts and assert that a Holder should include in income over the term of the
Contracts additional amounts which together with the original issue discount on
such Holder's pro rata portion of the U.S. Treasury securities should not exceed
the aggregate amount of the quarterly cash distributions to such Holder. Counsel
is of the opinion that a Holder should not be required under existing law to
include any such additional amounts in income over the term of the Contracts.
Prospective investors in the PEPS should be aware, however, that the IRS is not
bound by the opinion of Counsel and are urged to consult their tax advisors as
to the proper tax treatment of the Contracts.
Sale of the PEPS. Upon a sale of all or some of a Holder's PEPS, a Holder
will be treated as having sold its pro rata portion of the U.S. Treasury
securities and the Contracts underlying the PEPS. The selling Holder will
recognize gain or loss equal to the difference between the amount realized and
the Holder's aggregate tax bases in its pro rata portion of the U.S. Treasury
securities and the Contracts. Any gain or loss will be long-term capital gain or
loss if the Holder has held the PEPS for more than one year. The excess of net
long-term capital gains over net short-term capital losses is taxed at a lower
rate than ordinary income for certain non-corporate taxpayers. The distinction
between capital gain or loss and ordinary income or loss is also relevant for
purposes of, among other things, limitations on the deductibility of capital
losses.
Distribution of the ADSs or Common Stock. The delivery of ADSs to the
Trust pursuant to the Contracts will not be taxable to the Holders. The
distribution of ADSs or Common Stock upon the termination of the Trust will not
be taxable to the Holders. A Holder will have taxable gain or loss upon receipt
of cash in lieu of fractional ADSs or shares of Common Stock distributed upon
termination of the Trust. Each Holder's aggregate basis in its ADSs or shares of
Common Stock (or combination thereof) will be equal to its basis in its pro rata
portion of the Contracts less the portion of such basis allocable to any
fractional ADSs or shares of Common Stock for which cash is received.
Distribution of Cash or Marketable Common Stock. If as a result of a
Reorganization Event, cash, Marketable Common Stock, or a combination of cash
and Marketable Common Stock is delivered pursuant to the Contracts, a Holder
will have taxable gain or loss upon receipt equal to the difference between the
amount of cash received, including cash received in lieu of fractional shares of
Marketable Common Stock, and its basis in its pro rata portion of the Contracts
allocable to any shares of Common Stock for which such cash or fractional shares
of Marketable Common Stock were received. Although it is not entirely clear,
such gain or loss should be capital gain or loss. If such gain or loss is
treated as capital gain or loss and the Holder has held the PEPS for more than
one year, such gain or loss will be long-term capital gain or loss. A Holder's
basis in any Marketable Common Stock received will be equal to its basis in its
pro rata portion of the Contracts less the portion of such basis allocable to
any shares of Common Stock for which cash or fractional shares of Marketable
Common Stock were received. See "Investment Objectives and Policies -- The
Contracts."
Fees and Expenses of the Trust. Counsel believes that a Holder's pro rata
portion of the expenses in connection with the organization of the Trust,
underwriting discounts and commissions and other offering expenses should be
includible in the cost to the Holder of the PEPS. However, there can be no
assurance that the IRS will not take a contrary view. If the IRS were to prevail
in treating such expenses as excludible from the Holder's cost of the PEPS, such
expenses would not be includible in the basis of the assets of the Trust
23
<PAGE> 27
and should instead be amortizable and deductible over the term of the Trust. If
such expenses were treated as amortizable and deductible, an individual Holder
who itemizes deductions would be entitled to amortize and deduct (subject to any
other applicable limitations on itemized deductions) such expenses over the term
of the Trust only to the extent that such amortized annual expenses together
with such Holder's other miscellaneous deductions exceeds 2% of such Holder's
adjusted gross income.
TAX CONSEQUENCES TO NON-U.S. HOLDERS
Subject to the discussion below concerning backup withholding and income
that is effectively connected with a trade or business of a Non-U.S. Holder in
the United States, under present United States federal income tax law:
(a) payments of principal and interest (including any original issue
discount) on a Non-U.S. Holder's pro rata portion of any U.S. Treasury security
will not be subject to United States federal withholding tax provided that, in
the case of interest, the statement requirement set forth in Section 871(h) or
Section 881(c) of the Code has been fulfilled with respect to the beneficial
owner, as discussed below; and
(b) any gain realized by a Non-U.S. Holder on the sale of its PEPS will not
be subject to U.S. federal income tax provided that in the case of a Non-U.S.
Holder who is a non-resident alien individual, such Holder is not present in the
United States for 183 days or more during the taxable year of the sale.
Sections 871(h) and 881(c) of the Code require that, in order to obtain the
portfolio interest exemption from withholding tax described in paragraph (a)
above, either the beneficial owner of the PEPS, or a securities clearing
organization, bank or other financial institution that holds customers'
securities in the ordinary course of its trade or business (a "Financial
Institution") and that is holding the PEPS on behalf of such beneficial owner,
file a statement with the Trust to the effect that the beneficial owner of the
PEPS is not a United States Holder. Under temporary United States Treasury
Regulations, such requirement will be fulfilled if the beneficial owner of a
PEPS certifies on Internal Revenue Service Form W-8 (or a substitute form
thereof), under penalties of perjury, that it is not a United States Holder and
provides its name and address, and any Financial Institution holding the PEPS on
behalf of the beneficial owner files a statement with the Trust to the effect
that it has received such a statement from the Holder (and furnishes the Trust
with a copy thereof).
If any interest (including any original issue discount) or gain realized by
a Non-U.S. Holder is effectively connected with the Holder's trade or business
in the United States, such interest or gain will be subject to regular U.S.
federal income tax in the same manner as if the Non-U.S. Holder were a U.S.
Holder. See "Tax Consequences to United States Holders" above. In lieu of the
certificate described in the preceding paragraph, such a Non-U.S. Holder will be
required to provide to the Trust a properly executed Internal Revenue Service
Form 4224 in order to claim an exemption from withholding tax. In addition, if
such Non-U.S. Holder is a foreign corporation, such interest or gain may be
included in the earnings and profits of such Holder in determining such Holder's
U.S. branch profits tax liability.
BACKUP WITHHOLDING AND INFORMATION REPORTING
The payments of principal and interest (including original issue discount)
on, and the proceeds received from the sale of, a PEPS may be subject to U.S.
backup withholding tax at the rate of 31% if the Holder thereof fails to supply
an accurate taxpayer identification number or otherwise to comply with
applicable U.S. information reporting or certification requirements. Any amounts
so withheld will be allowed as a credit against such Holder's U.S. federal
income tax liability and may entitle such Holder to a refund, provided that the
required information is furnished to the IRS.
After the end of each calendar year, the Trust will furnish to each record
holder of the PEPS an annual statement containing information relating to the
payments on the U.S. Treasury securities received by the Trust. The Trust will
also furnish annual information returns to each record holder of the PEPS and to
the IRS.
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<PAGE> 28
NEW YORK STATE AND CITY INCOME TAX CONSIDERATIONS
Under the income tax laws of the State and City of New York, the Trust will
not be treated as an association taxable as a corporation.
The foregoing discussion relates only to federal and certain New York State
and City income taxes. Holders may also be subject to state and local taxation
in other jurisdictions and should consult their tax advisers in this regard.
UNDERWRITING
Under the terms and subject to the conditions contained in an Underwriting
Agreement dated the date hereof (the "Underwriting Agreement"), the U.S.
Underwriters named below, for whom Morgan Stanley & Co. Incorporated and Merrill
Lynch, Pierce, Fenner & Smith Incorporated are acting as representatives (the
"U.S. Representatives"), and the International Underwriters named below, for
whom Morgan Stanley & Co. International Limited and Merrill Lynch International
Limited are acting as representatives (the "International Representatives"),
have severally agreed to purchase, and the Trust has agreed to sell them,
severally, the respective number of PEPS set forth opposite their respective
names below:
<TABLE>
<CAPTION>
U.S. UNDERWRITER NUMBER OF PEPS
- ------------------------------------------------------------------------- ------------------
<S> <C>
Morgan Stanley & Co. Incorporated........................................
Merrill Lynch, Pierce, Fenner & Smith Incorporated.......................
Subtotal............................................................
------------------
</TABLE>
<TABLE>
<CAPTION>
INTERNATIONAL UNDERWRITER
- -------------------------------------------------------------------------
<S> <C>
Morgan Stanley & Co. International Limited...............................
Merrill Lynch International Limited......................................
Subtotal............................................................
------------------
Total..........................................................
==================
</TABLE>
The U.S. Underwriters and the International Underwriters are collectively
referred to as the "Underwriters," and the U.S. Representatives and the
International Representatives are collectively referred to as the
"Representatives."
Under the terms and conditions of the Underwriting Agreement, the
Underwriters are committed to take and pay for all the PEPS offered hereby
(other than the PEPS subject to the U.S. Underwriters' over-allotment option),
if any are taken.
The Underwriters propose to offer the PEPS in part directly to the public
at the initial public offering price set forth on the cover page of this
Prospectus, and in part to certain securities dealers at such price less a
concession of $ per PEPS. The Underwriters may allow, and such dealers may
reallow, a concession not in excess of $ per PEPS to certain brokers and
dealers. After the initial public offering the public offering price and
concession and discount to dealers may be changed by the Representatives.
The Underwriters have entered into an intersyndicate agreement (the
"Intersyndicate Agreement") that provides for the coordination of their
activities. Under the terms of the Intersyndicate Agreement, the Underwriters in
each geographic area have agreed not to offer or sell any PEPS in any other
geographic area until the completion of the distribution of the PEPS in each
offering. Pursuant to the Intersyndicate Agreement, each of the U.S.
Underwriters has agreed or will agree that, as part of the distribution of the
25
<PAGE> 29
PEPS, subject to certain exceptions, (i) it is not purchasing any PEPS for the
account of anyone other than a U.S. Person (as defined below) or Canadian Person
(as defined below) and (ii) it has not offered or sold, and will not offer or
sell, directly or indirectly, any PEPS or distribute any prospectus relating to
the PEPS to any person outside the United States or Canada or to anyone other
than a U.S. Person or Canadian Person, or to any dealer who does not so agree.
Each of the International Underwriters has agreed or will agree that, as part of
the distribution of the PEPS, subject to certain exceptions, (i) it is not
purchasing any PEPS for the account of any U.S. Person or Canadian Person and
(ii) it has not offered or sold, and will not offer or sell, directly or
indirectly, any PEPS or distribute any prospectus relating to the PEPS in the
United States or Canada or to any U.S. Person or Canadian Person or to any
dealer who does not so agree. The foregoing limitations do not apply to
stabilization transactions or to transactions between the U.S. Underwriters and
the International Underwriters pursuant to the Intersyndicate Agreement. As used
in this section, "United States" means the United States of America, its
territories, possessions and other areas subject to its jurisdiction; "Canada"
means Canada, its provinces, territories, possessions and other areas subject to
its jurisdiction; and U.S. Person" and "Canadian Person" mean (i) a citizen or
resident of the United States or Canada, respectively, (ii) a corporation,
partnership, trust or other entity created or organized in or under the laws of
the United States or Canada, respectively (other than a foreign branch of such
an entity), or (iii) an estate or trust, the income of which is subject to
United States federal income taxation or Canadian federal income taxation,
respectively, regardless of its source of income, and includes any United States
or Canadian branch of a person not included in any of clauses (i), (ii) and
(iii) of this sentence.
PEPS have been subscribed for jointly by Morgan Stanley & Co.
Incorporated and Merrill Lynch, Pierce, Fenner & Smith Incorporated at an
aggregate purchase price of $100,000. No PEPS will be sold to the public until
the PEPS subscribed for have been purchased and the purchase price thereof paid
in full to the Trust.
The Company and an affiliate of the Sellers have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the 1933
Act.
The Trust has granted the U.S. Underwriters an option exercisable for 30
calendar days after the date of this Prospectus to purchase up to an aggregate
of additional PEPS to cover over-allotments, if any. The U.S.
Underwriters may exercise such option only to cover overallotments in connection
with the sale of the PEPS offered hereby.
The Company, its directors and executive officers, and the Principal and
Selling Shareholders listed under the caption "Principal and Selling
Shareholders" in the Company prospectus, including the Sellers, have agreed not
to offer, sell or otherwise dispose of ADSs or shares of Common Stock or any
securities convertible into or exchangeable or exercisable for ADSs or shares of
Common Stock, other than (i) in certain permitted private sale transactions,
(ii) pursuant to existing or prospective employee stock option plans previously
disclosed to the Underwriters and (iii) certain gifts to donees who have agreed
not to offer, sell or otherwise dispose of ADSs or shares of Common Stock as set
forth herein, until 90 days from the date of this Prospectus without the prior
written consent of Morgan Stanley & Co. Incorporated on behalf of the
Underwriters.
The PEPS have been approved for listing on the New York Stock Exchange Inc.
upon notice of issuance.
SELLING RESTRICTIONS
General
No action has been or will be taken in any jurisdiction (except in the
United States) that would permit a public offering of the PEPS or the
possession, circulation or distribution of this Prospectus or any other material
relating to the Trust or the PEPS in any jurisdiction where action for such
purpose is required. Accordingly, no PEPS may be offered or sold, directly or
indirectly, and neither this Prospectus nor any other offering material or
advertisements in connection with the PEPS may be distributed or published, in
or from any country or jurisdiction, except in compliance with any applicable
rules and regulations or any such country or jurisdiction.
The Investment Company Act limits all investment companies (including
foreign investment companies) in their acquisition of voting stock of an
investment company such as the Trust. Accordingly, an investment
26
<PAGE> 30
company may acquire no more than 3% of the outstanding PEPS, and any group of
affiliated investment companies may acquire no more than 10% of the outstanding
PEPS.
United Kingdom
Each International Underwriter represents and agrees that (i) it has not
offered or sold and prior to the date six months after the date of issue of the
PEPS will not offer or sell any PEPS to persons in the United Kingdom except to
persons whose ordinary activities involve them in acquiring, holding, managing
or disposing of investments (as principal or agent) for the purposes of their
businesses or otherwise in circumstances which have not resulted and will not
result in an offer to the public in the United Kingdom within the meaning of the
Public Offers of Securities Regulations 1995; (ii) it has complied with and will
comply with all applicable provisions of the Financial Services Act 1986 with
respect to anything done by it in relation to the PEPS in, from or otherwise
involving the United Kingdom; and (iii) it has only issued or passed on and will
only issue or pass on in the United Kingdom any document received by it in
connection with the issue of the PEPS to a person who is of a kind described in
Article 11(3) of the Financial Services Act 1986 (Investment Advertisements)
(Exemptions) Order 1995 or is a person to whom such document may otherwise
lawfully be issued or passed on.
Hong Kong
Each International Underwriter has agreed that (i) it has not offered or
sold and will not offer or sell in Hong Kong, by means of any documents, any
other than to persons whose ordinary business it is to buy or sell shares or
debentures, whether as a principal or agent, or in circumstances which do not
constitute an offer to the public within the meaning of the Companies Ordinance
(Cap. 32) of Hong Kong and (ii) it has not issued and will not issue any
invitation or advertisement relating to the PEPS in Hong Kong (except if
permitted to do so under the securities laws of Hong Kong) other than with
respect to PEPS intended to be disposed of to persons outside Hong Kong or to be
disposed of in Hong Kong only to persons whose business involves the
acquisition, disposal, or holding of securities, whether as principal or agent.
Singapore
Each International Underwriter has agreed that the PEPS may not be offered
or sold, nor may any document or other material in connection with the PEPS be
distributed, either directly or indirectly, (i) to persons in Singapore other
than in circumstances in which such offer or sale does not constitute an offer
or sale of the PEPS to the public in Singapore or (ii) to the public or any
member of the public in Singapore other than pursuant to, and in accordance with
the conditions of, an explanation invoked under Division 5A of Part IV of the
Companies Act, Chapter 50 of Singapore and to persons to whom the PEPS may be
offered or sold under such exemption.
Japan
Each International Underwriter has agreed that it has not offered or sold,
and it will not offer or sell, directly or indirectly, any of the PEPS in Japan
or to residents of Japan or to any persons for reoffering or resale, directly or
indirectly, in Japan or to any resident of Japan except pursuant to an exemption
from the registration requirements of the Securities and Exchange Law available
thereunder and in compliance with the other relevant laws of Japan.
LEGAL MATTERS
Certain legal matters will be passed upon for the Trust and the
Underwriters by Davis Polk & Wardwell, New York, New York. Certain legal matters
will be passed upon for the Company and the Sellers by Jones, Day, Reavis &
Pogue, Cleveland, Ohio, who will rely as to matters of Japanese law upon the
opinion of Nishimura & Sanada, Tokyo. Certain legal matters with respect to the
Contracts will be passed upon for the Sellers by their respective counsel,
Cravath, Swaine & Moore and Hogan & Hartson. The validity of the shares of
Common Stock and certain other legal matters governed by Japanese law will be
passed upon for the Company and the Sellers by Nishimura & Sanada, Tokyo.
Certain U.S. federal income tax matters will be passed upon for the Company by
White & Case, Washington, D.C.
27
<PAGE> 31
EXPERTS
The statement of assets and liabilities included in this Prospectus has
been audited by Deloitte & Touche LLP, independent auditors, as stated in their
report appearing herein, and is included in reliance upon the report of such
firm given upon their authority as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Trust has filed with the Securities and Exchange Commission,
Washington, D.C. 20549, a Registration Statement under the Securities Act of
1933, as amended, with respect to the PEPS offered hereby. Further information
concerning the PEPS and the Trust may be found in the Registration Statement, of
which this Prospectus constitutes a part. The Registration Statement may be
inspected without charge at the Commission's office in Washington, D.C., and
copies of all or any part thereof may be obtained from such office after payment
of the fees prescribed by the Commission.
28
<PAGE> 32
AJL PEPS TRUST
INDEPENDENT AUDITORS' REPORT
To the Board of Trustees and Shareholders of AJL PEPS Trust:
We have audited the accompanying statement of assets and liabilities of AJL
PEPS Trust (the "Trust") as of , 1995. This financial statement
is the responsibility of the Trust's management. Our responsibility is to
express an opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the statement of assets and liabilities is
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the statement of assets and
liabilities. An audit also includes assessing the accounting principles used and
significant estimates made by the Trust's management, as well as evaluating the
overall statement of assets and liabilities presentation. We believe that our
audit of the statement of assets and liabilities provides a reasonable basis for
our opinion.
In our opinion, such statements of assets and liabilities referred to above
presents fairly, in all material respects, the financial position of AJL PEPS
Trust, as of , 1995 in conformity with generally accepted
accounting principles.
Chicago, Illinois
, 1995
29
<PAGE> 33
AJL PEPS TRUST
STATEMENT OF ASSETS AND LIABILITIES
, 1995
<TABLE>
<S> <C>
ASSETS
Cash..................................................................... $100,000
Deferred organizational expenses (Note 1)................................
--------
Total assets................................................... $
========
LIABILITIES
Organizational expenses payable (Note 1)............................... $
SHAREHOLDERS' EQUITY
Premium Exchangeable Participating Shares, no par value, shares
authorized, shares issued and outstanding................. $100,000
--------
Total liabilities and shareholders' equity..................... $
========
NET ASSETS............................................................... $
========
Net asset value per share................................................ $
========
</TABLE>
- ---------------
NOTE 1. ORGANIZATION
The Trust was established on August 17, 1995 and is registered as a
non-diversified, closed-end management investment company under the Investment
Company Act. Costs incurred by the Trust in connection with its organization,
estimated at $ , will be amortized on a straight-line basis over the
life of the Trust beginning at the commencement of operations of the Trust.
Offering costs will be paid from the proceeds of the offering and will be
charged to capital upon the receipt of such proceeds by the Trust.
NOTE 2. PREMIUM EXCHANGEABLE PARTICIPATING SHARES OFFERING
The Trust proposes to sell Premium Exchangeable Participating Shares to the
public pursuant to a Registration Statement on Form N-2 under the Securities Act
of 1933, as amended, as filed on August 18, 1995 and subsequently amended. The
Trust intends to use the proceeds to purchase a portfolio comprised of stripped
U.S. Treasury securities and to pay the purchase price of forward contracts for
American Depositary Shares representing shares of common stock of Amway Japan
Limited with two existing shareholders of Amway Japan Limited. The proceeds of
the offering, net of all offering expenses, will be recorded as capital upon
receipt of such proceeds by the Trust.
30
<PAGE> 34
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
APPENDIX A
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED OCTOBER 18, 1995
PROSPECTUS
AMWAY JAPAN LIMITED
INCORPORATED UNDER THE LAWS OF JAPAN
AMERICAN DEPOSITARY SHARES
EACH REPRESENTING ONE-HALF OF ONE SHARE OF COMMON STOCK
This Prospectus relates to up to American Depositary Shares
("ADSs") of Amway Japan Limited (the "Company"), a Japanese corporation, which
may be delivered by the AJL PEPS TRUST (the "Trust"), a non-diversified
closed-end management investment company, to holders of Premium Exchangeable
Participating Shares of the Trust (the "PEPS") upon mandatory exchange of the
PEPS (the "Exchange") on (the "Exchange Date"). On the
Exchange Date, at the option of holders of PEPS, shares of Common Stock, no par
value (the "Common Stock"), of the Company may be delivered in lieu of ADSs in
exchange for PEPS. The PEPS are being offered (the "Offering") through a group
of Underwriters pursuant to a separate prospectus of the Trust (the "Trust
Prospectus"). In connection with the Offering, each Selling Shareholder
identified herein under "Principal and Selling Shareholders" and the Trust will
enter into a contract (each, a "Purchase Contract" and collectively the
"Purchase Contracts") which, among other things, will require each Selling
Shareholder to deliver to the Trust on the Exchange Date a specified number of
ADSs or, alternatively, shares of Common Stock, for each PEPS depending upon the
price of the Common Stock on the principal trading market of the Company for the
20 trading days immediately preceding the Exchange Date. Each ADS represents
one-half of one share of Common Stock of the Company. The ADSs are evidenced by
American Depositary Receipts. See "Description of American Depositary Receipts."
The Trust has granted the Underwriters of the PEPS an option for 30 days
from the date hereof to purchase up to an additional PEPS, solely to
cover over-allotments, which additional PEPS will also be mandatorily exchanged
by delivery of up to ADSs or, at the option of holders of PEPS,
shares of Common Stock to which this Prospectus relates.
All of the ADSs and underlying Common Stock covered by this Prospectus are
beneficially owned by the Selling Shareholders who are also Principal
Shareholders. Prior to the Offering, the Principal Shareholders collectively
owned beneficially 83.3% of the outstanding Common Stock. Assuming no other
disposition or acquisition of Common Stock or ADSs by the Principal Shareholders
prior to the Exchange Date, and assuming that the Exchange results in the
delivery of two ADSs or one share of Common Stock in exchange for each PEPS, the
Principal Shareholders will collectively own beneficially 78.6% of the
outstanding Common Stock (77.9% if the Underwriters' over-allotment option is
exercised in full). The Company will not receive any of the proceeds from the
sale of the PEPS or the delivery of the ADSs or shares of Common Stock pursuant
to the Purchase Contracts.
This Prospectus relates only to the ADSs covered hereby and does not relate
to the PEPS. NEITHER THE COMPANY NOR THE SELLING SHAREHOLDERS TAKE ANY
RESPONSIBILITY FOR ANY INFORMATION INCLUDED IN OR OMITTED FROM THE TRUST
PROSPECTUS. THE TRUST PROSPECTUS DOES NOT CONSTITUTE A PART OF THIS PROSPECTUS,
AND IS NOT INCORPORATED BY REFERENCE HEREIN.
The Common Stock is traded in Japan in the over-the-counter market. The
Company maintains a sponsored deposit facility for its ADSs, which are traded in
the United States on the New York Stock Exchange (the "NYSE") under the symbol
"AJL." On October 17, 1995, the closing sale price per share of Common Stock in
the Japanese over-the-counter market as reported by the Japan Securities Dealers
Association was Y4,290 per share. The closing sale price per ADS on the NYSE on
October 17, 1995 was U.S.$20.88. See "Market Information."
SEE "RISK FACTORS" BEGINNING ON PAGE 10 OF THIS PROSPECTUS FOR A DISCUSSION
OF CERTAIN FACTORS RELEVANT TO AN INVESTMENT IN THE ADSS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
, 1995.
<PAGE> 35
ENFORCEABILITY OF CIVIL LIABILITIES
The Company is a Japanese corporation, and substantially all of its assets
and operations are located, and substantially all of its revenues are derived,
outside the United States. The Company has appointed CT Corporation System, New
York, New York, as its agent to receive service of process with respect to any
action brought against it in any federal or state court in the State of New York
arising from the Offering or the Exchange. However, it may not be possible for
investors to enforce outside the United States judgments against the Company
obtained in the United States in any such actions, including actions predicated
upon the civil liability provisions of the United States federal and state
securities laws. In addition, certain directors and certain officers of the
Company and the independent auditors named under "Experts" are residents of
Japan, and all or a substantial portion of the assets of such persons are or may
be located outside the United States. As a result, it may not be possible for
investors to effect service of process within the United States upon such
persons, or to enforce against them judgments obtained in United States courts,
including judgments predicated upon the civil liability provisions of the United
States federal and state securities laws. The Company has been advised by its
Japanese counsel, Nishimura & Sanada, that there is uncertainty as to whether
the courts of Japan would (i) recognize judgments of United States courts
obtained against the Company or such persons predicated upon the civil liability
provisions of the United States federal and state securities laws or (ii)
enforce in original actions brought in Japan liabilities against the Company or
such persons predicated upon the United States federal and state securities
laws.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Enforceability of Civil Liabilities............. 2
Available Information........................... 2
Incorporation of Certain Documents by
Reference..................................... 3
Prospectus Summary.............................. 4
Risk Factors.................................... 10
Market Information.............................. 17
Dividends and Dividend Policy................... 19
Exchange Rates.................................. 21
Selected Financial Information.................. 22
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 24
Business........................................ 35
Management...................................... 49
Principal and Selling Shareholders.............. 52
Certain Transactions............................ 55
Description of Capital Stock.................... 56
Description of American Depositary Receipts..... 62
Exchange Controls and Other Limitations
Affecting Securityholders..................... 71
Taxation........................................ 73
Plan of Distribution............................ 79
Legal Matters................................... 79
Experts......................................... 79
Index to Financial Statements................... F-1
</TABLE>
------------------
IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS OF THE PEPS HAVE ADVISED
THE COMPANY THAT THEY MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR
MAINTAIN THE MARKET PRICES OF THE PEPS OR THE ADSS AT LEVELS ABOVE THOSE WHICH
MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON
THE NEW YORK STOCK EXCHANGE OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports and other information with the Securities and Exchange
Commission (the "Commission"). Reports and other information filed by the
Company can be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the following Regional Offices of the Commission: Midwest
Regional Office, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511
2
<PAGE> 36
and Northeast Regional Office, Seven World Trade Center, New York, New York
10048. Copies of such material can be obtained from the Public Reference Section
of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at
prescribed rates. Reports and other information concerning the Company may also
be inspected at the offices of the New York Stock Exchange.
The Company furnishes the Depositary referred to in "Description of
American Depositary Receipts" with annual reports in English, which include a
review of the Company's operations, and annual audited financial statements of
the Company prepared in conformity with Japanese generally accepted accounting
principles ("Japanese GAAP"), together with a reconciliation of net income and
shareholders' equity to generally accepted accounting principles in the United
States ("U.S. GAAP"). The Company also furnishes the Depositary with an English
translation of unaudited quarterly financial information prepared in accordance
with Japanese GAAP, together with a reconciliation of net income and
shareholders' equity to U.S. GAAP. Upon receipt thereof, the Depositary mails
such reports to all holders of record of American Depositary Receipts ("ADRs")
evidencing ADSs. The Deposit Agreement for the ADRs referred to in "Description
of American Depositary Receipts" also requires that the Company furnish to the
Depositary in English all notices of shareholders' meetings and other reports
and communications that are made generally available to holders of shares of
Common Stock, and the Depositary is required to mail such notices, reports and
communications to the holders of record of ADRs.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company's Annual Report on Form 20-F, filed on October 18, 1995, for
the fiscal year ended August 31, 1995, was filed pursuant to Section 13 of the
Exchange Act and the Registration Statement on Form 8-A filed on June 14, 1994,
are hereby incorporated by reference into this Prospectus.
To the extent designated therein certain Reports on Form 6-K and all other
documents filed by the Company pursuant to Section 13(a), 13(c) or 15(d) of the
Exchange Act subsequent to the date of this Prospectus and prior to the
termination of the Offering shall be deemed to be incorporated by reference into
this Prospectus and to be a part hereof from the date of filing of such
documents. Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
or in any other subsequently filed document which also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any such
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Prospectus.
The Company will provide without charge to each person to whom this
Prospectus is delivered, on the written or oral request of such person, a copy
(without exhibits other than exhibits specifically incorporated by reference) of
any or all documents incorporated by reference into this Prospectus. Requests
for such copies should be directed to Ms. Holly Clemente, Director of Investor
Relations at (212) 836-4850 or Mr. Milton Isa, Investor Relations Officer, at
011-81-3-5434-8484.
In this Prospectus, amounts are expressed in Japanese yen ("yen" or "Y") or
in United States dollars ("dollars," "U.S. dollars," "U.S.$" or "$"). Except as
otherwise indicated, for the convenience of the reader the translations of yen
into dollars have been made at the rate of 98 yen to the dollar, the approximate
rate of exchange on August 31, 1995, the date of the most recent balance sheet
contained herein. This rate is not materially different from the noon buying
rate in New York City for cable transfers in foreign currencies as announced for
customs purposes by the Federal Reserve Bank of New York (the "Noon Buying
Rate") on such date (Y97.75 = U.S.$1.00). See "Exchange Rates" for information
regarding rates of exchange between the yen and the dollar from fiscal 1991
through fiscal 1995, and as of a recent date. No representation is made that the
yen amounts have been, could have been or could be converted into dollars at
those or any other rates.
3
<PAGE> 37
PROSPECTUS SUMMARY
The following summary should be read in conjunction with, and is qualified
in its entirety by, the more detailed information and the consolidated financial
statements appearing elsewhere in this Prospectus. Unless otherwise indicated:
(i) all information in this Prospectus assumes that (A) the Underwriters'
over-allotment option with respect to the PEPS is not exercised and (B) the
Exchange results in the delivery by the Trust of two ADSs or one share of Common
Stock in exchange for each PEPS, (ii) references in this Prospectus to the
"Company" refer to Amway Japan Limited and its subsidiary, (iii) all historical
financial information reflects a three-for-two Common Stock split effected
during each of fiscal 1991 and 1992, (iv) information relating to the ownership
interest of the Principal Shareholders and the Selling Shareholders is
calculated based on an aggregate offering price of $300 million ($345 million if
the Underwriters' over-allotment option is exercised in full), a price per share
of Common Stock based on the closing price per share on October 17, 1995 of
Y4,290 and a noon buying rate on such date of Y100.3 = U.S. $1.00, and (v)
references in this Prospectus to "Amway" refer to Amway Corporation and its
subsidiaries. The Company's fiscal year ends August 31 of each year.
THE COMPANY
General. Amway Japan Limited is the exclusive distribution vehicle for
Amway in Japan. The Company, which has a 16 year operating history, believes
that it is one of the largest direct selling businesses in Japan as measured by
its fiscal 1995 net sales of Y178.0 billion (U.S.$1.8 billion) and net income of
Y23.1 billion (U.S.$235.3 million) and approximately 980,000 independent
distributors who renewed their distributorships from the prior fiscal year. The
Company believes that Japan, with a population of approximately 124.8 million,
is the largest direct selling market in the world in terms of sales, estimated
to be approximately twice the size of the direct selling market in the U.S.
The Company believes that the Amway Sales and Marketing Plan (the "Sales
Plan") is fundamental to the Company's operations. Under the Sales Plan, the
Company sells products exclusively to its distributors, who are independent
contractors and not employees of the Company or Amway. The Sales Plan offers
individuals the opportunity to establish their own business as independent
distributors selling directly to consumers. This direct selling method involves
a high level of personal service, including the demonstration and convenient
delivery of a broad range of consumer products, generally to a distributor's
personal contacts and relatives. Distributors can develop a larger business by
sponsoring new distributors into their organization and/or by establishing
separate distributorships in other Amway markets internationally. Although no
compensation is paid by the Company for sponsoring activities, the sponsoring of
new distributors creates layers of "downline" distributors in the distribution
structure and permits distributors to earn performance bonuses based in part on
product purchases by their downline distributors. No distributor is obligated to
purchase any products or to sponsor new distributors.
The Company distributes approximately 130 different consumer products, in
four core product lines: Housewares, Personal Care, Nutrition and Home Care.
These products consist primarily of products purchased from Amway. In addition,
in order to heighten distributor interest by broadening the range of products
available, the Company distributes certain other products which bear the Amway
name or trademark but which are manufactured for the Company by third parties.
Many products the Company distributes are specially formulated for the Japanese
market. For example, cosmetics and skin care products are formulated for skin
tones and fragrance preferences of Japanese consumers, the Amway water treatment
system unit was designed to accommodate the characteristics of the water in
Japan and various products in the Housewares and Home Care Lines reflect the
characteristics of Japanese homes. The Company promotes products that are
environmentally friendly, which is consistent with the concerns of many Japanese
consumers and the Company's (and Amway's) long-standing philosophy. All products
distributed by the Company are covered by Amway's Satisfaction Guarantee, which
gives consumers the right to return products to the Company within a reasonable
time for a full refund, replacement or credit toward a future purchase.
Electronic and other durable products manufactured for Amway or the Company by
third parties are also covered by Amway's or their respective manufacturer's
warranties.
The Company believes that the extended family relationships and lifelong
close personal relationships common in Japan are particularly well-suited to the
direct selling methods of the Sales Plan. In addition, the low cost of entry,
wide range of available products and ability to start a distributorship business
part-time make a distributorship with the Company an attractive business
opportunity. The Company also believes that
4
<PAGE> 38
a variety of social and economic changes which have occurred in Japan in the
last few years have had a positive impact on the Company's sales. Trends that
benefit the Company include the emergence of a greater interest on the part of
some Japanese in pursuing more independent, entrepreneurial activities outside
traditional business settings, an increase in the number of Japanese women
deciding to join the workforce and an increase in the number of Japanese seeking
supplemental income from alternative sources to mitigate the financial impact of
slowing wages and salary growth, the reduction or elimination of bonuses and
overtime work, and the increased concern over future employment prospects.
The Company also believes that there has been a major shift in Japanese
consumers' attitudes toward consumer products. In evaluating products, Japanese
consumers are placing an increasing emphasis on value based upon proven product
performance, rather than equating high price with high quality. The Company
generally offers high value products that are easily demonstrated by
distributors and can be meaningfully differentiated from competing products. The
Japanese retail market is generally characterized by numerous small retailers
who frequently have only limited knowledge of the products they sell and may not
be able to demonstrate their products to customers. The Company provides
additional value to the consumer through a high level of personal service,
including convenient in-home demonstrations, ordering and delivery, and the
Amway Satisfaction Guarantee.
Strategy. The Company's principal growth strategies are (i) to promote
distributor productivity, retention and sponsoring by continuing to enhance
distributor relations, (ii) to develop and implement new methods to better
understand, communicate with and motivate distributors in order to increase
substantially distributor productivity and sponsoring, while maintaining high
rates of distributor retention and (iii) to systematically introduce new
products and services, while continuing to improve existing products, that are
targeted to the Japanese market and that are meaningfully differentiated from
competitive products.
The Company will continue to dedicate significant financial and human
resources to enhancing distributor relations. As an example of its commitment,
in fiscal 1995 over 65% of the Company's total operating expenses were
attributable to distributor incentives and activities designed to motivate,
reward and support distributors. In fiscal 1995, the Company sponsored
approximately 672 motivational sales meetings, product demonstration seminars
and product fairs, training sessions, leadership seminars and business promotion
meetings. In addition, the Company will continue to engage in the sponsorship of
civic events and corporate image advertising in order to enhance distributor
retention and sponsoring and the public perception of the Company. In fiscal
1995, 71.8% of the total number of distributors renewed their distributorships
from the prior fiscal year.
The Company is also developing and implementing new methods designed to
increase distributor productivity and sponsoring, while maintaining high rates
of retention. These new methods involve an identification and understanding of
distinct distributor types. Historically, the Company has categorized its
distributors into two general groups -- business-building distributors and
distributors who buy for their own consumption and sell only to a few
customers -- and has focused most of its resources on the former group. The
Company believes that, within each group, there are a number of distinct types
of distributors whose performance can be differentiated based upon sales
volumes, sponsoring activities, demographics, product purchase patterns and
renewal history. An identification and understanding of the distinct distributor
types will enable the Company to tailor its motivational and communication
efforts to targeted groups of distributors. In particular, the Company believes
that, by expanding the awareness of other Company products by existing
distributors, it will be able to expand the range of products purchased by those
distributors whose purchases have traditionally been limited to only a few
products or to products within a single product line.
Another principal growth strategy is to systematically introduce
meaningfully differentiated new products and services appropriate for the
Japanese market, while continuing to improve existing products. New and improved
products introduced during the 24-month period ended August 31, 1995, including
Amway water treatment system units and replacement parts, a specially formulated
line of Satinique(R) hair care products, a reformulated Dish Drops dishwashing
detergent, Triple X food supplement and World Plaza hosiery, accounted for
approximately 40% of net sales for fiscal 1995.
5
<PAGE> 39
The effort to introduce products specifically designed for the Japanese
market is fostered by the Company's cooperative efforts with Amway, which has
substantial research and development resources. Amway maintains an extensive
research and development center with 43 research and quality assurance
laboratories, currently staffed by approximately 425 people who focus on
developing new products and improving existing products. The Company, through
its product marketing and research and development personnel working in
conjunction with Amway, has introduced a variety of products specially
formulated or manufactured for the Japanese market, including the Artistry(R)
line of cosmetic and skin care products, SA8(R) powdered laundry detergent, the
Satinique(R) line of hair care products, Nutrilite food supplements and water
treatment system units and replacement parts.
Amway, working with the Company, is seeking strategic arrangements with
third parties that would provide the Company with additional products, product
lines or services targeted specifically for the Japanese markets. These
products, product lines or services would be distinct from, and non-competitive
with, the Company's existing product lines, but would have the common
characteristic of being meaningfully differentiated from competing products or
services. The Company believes that its customer base and distribution network,
as well as its financial strength, make it attractive to potential strategic
partners. As a financial objective, the Company's goal is to obtain such
products, product lines or services without reducing the Company's gross or
operating margins.
------------------------
The Company was organized as a joint stock corporation (kabushiki kaisha)
under the laws of Japan in 1977 and commenced sales activities in 1979. The
principal executive offices of the Company are currently located at ARCO Tower,
8-1, Shimomeguro 1-chome, Meguro-ku, Tokyo 153, telephone number (813)
5434-8484.
The Company's Principal Shareholders are certain corporations, trusts,
foundations and other entities established by or for the benefit of the founders
of Amway, Richard M. DeVos and Jay Van Andel, and their respective families as
identified under the caption "Principal and Selling Shareholders" (the
"Principal Shareholders"). Members of the DeVos and Van Andel families also
beneficially own all of the outstanding shares of capital stock of Amway. Prior
to the Offering, the Principal Shareholders collectively owned beneficially
83.3% of the outstanding Common Stock. After the Exchange (assuming no other
disposition or acquisition of Common Stock or ADSs by the Principal Shareholders
prior to the Exchange Date), the Principal Shareholders will collectively own
beneficially 78.6% of the outstanding Common Stock (77.9% if the Underwriters'
over-allotment option is exercised in full). The Selling Shareholders identified
under the caption "Principal and Selling Shareholders" (the "Selling
Shareholders") are Principal Shareholders. See "Risk Factors -- Controlling
Shareholders" and "Principal and Selling Shareholders."
Amway was founded in 1959 in Ada, Michigan, by Richard M. DeVos and Jay Van
Andel and is one of the world's largest direct selling businesses, operating in
the United States and, through affiliates, in over 70 countries and territories
throughout the world. The Company's relationship with Amway provides the Company
with significant competitive advantages, including Amway's 36 years of
experience in the research, development, testing and support of consumer
products and its proven ability to distribute products successfully.
Since its founding, Amway has stressed the environmental safety of its
products. Surfactants used in all of Amway's cleaning products are
biodegradable. Amway's aerosols do not use CFC (chlorofluorocarbon) propellants,
which have been linked to damage in the earth's ozone layer. Most Amway
household products are concentrated, allowing for less packaging materials, and
all of Amway's SA8(R) laundry products available in Japan are phosphate-free. In
keeping with Amway's commitment to the environment, animal testing is not used
in the development or testing of products.
The Company has entered into a series of agreements with Amway covering the
use of Amway trademarks, the selection and purchase of products from Amway and
the provision of support services by Amway to the Company. See
"Business -- Relationship with Amway" and "Certain Transactions."
------------------------
6
<PAGE> 40
RECENT DEVELOPMENTS
In order to demonstrate its long-term commitment in Japan, to enhance the
Company's image, to strengthen its corporate identity and to take advantage of
current Japanese real estate market conditions, the Company acquired in March
1995 a 3,561 square meter parcel of land in Tokyo for the construction of a new
headquarters facility. Certain additional events must occur prior to July 1,
1996 before the site is available for construction. Accordingly, construction of
the headquarters facility is not planned to commence before fiscal 1997. It is
anticipated that this facility will be available for occupancy in fiscal 1999.
The purchase price for the land, which was paid in cash, aggregated Y19.4
billion (U.S.$198.0 million). The total capital cost of this entire project,
including the purchase price for the land, is currently estimated to be between
Y27.5 billion (U.S.$280.6 million) and Y32.5 billion (U.S.$331.6 million). See
"Business -- Properties."
In addition, the Company purchased a 22,296 square meter parcel of land in
Tokyo in July 1995 for the construction of a new Tokyo Regional Distribution
Center. The purchase price for this land, which was paid in cash, was Y4.7
billion (U.S.$48.0 million). It is anticipated that construction of this
Regional Distribution Center will begin in December 1995 and that this facility
will be operational beginning in February 1997. The total cost of this project,
including the purchase price for the land, is currently estimated to be between
Y13.8 billion (U.S.$140.8 million) and Y14.4 billion (U.S.$146.9 million). See
"Business -- Properties."
In October 1995, the Company announced its intention to increase the
regular annual dividend rate with respect to fiscal 1996 to Y100 (U.S.$1.02) per
share of Common Stock from Y90 (U.S.$0.92) per share of Common Stock, to pay a
special year-end dividend with respect to fiscal 1995 of Y50 (U.S.$0.51) per
share of Common Stock in December 1995 and to pay a special interim dividend in
May 1996 of Y25 (U.S.$0.26) per share of Common Stock, in each case subject to
legal and other factors. There can be no assurance as to whether the Company
will be able to pay dividends as currently proposed or any other dividends. See
"Dividends and Dividend Policy."
In addition, in October 1995, the Company announced its intention to
present to the shareholders for their approval at the Company's Ordinary General
Meeting of Shareholders to be held on November 29, 1995 a proposal to repurchase
up to Y15 billion (U.S. $153.0 million) of Common Stock by means of open market
purchases or a tender offer to the shareholders of the Company in accordance
with the Securities and Exchange Law of Japan and the Exchange Act. The Company
has been informed by the Principal Shareholders that they intend to participate
fully in the share repurchase. The share repurchase will also include those
shares of Common Stock represented by ADSs. The shareholders' approval will be
conditioned upon amendment of applicable laws, regulations and ordinances of
Japan such that taxation on deemed dividends under the Income Tax Law or the
Corporate Tax Law of Japan will not apply either to (i) shareholders (whether
individual or corporate) who do not sell their shares in the repurchase, except
that corporate shareholders (other than nonresident corporate shareholders
without a permanent establishment in Japan) may elect to be subject to deemed
dividend taxation, or (ii) individual shareholders who sell their shares in a
tender offer. See "Dividends and Dividends Policy," "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources," "Description of Capital Stock -- Repurchase by the Company
of its Common Stock" and "Taxation -- Japanese Taxation."
7
<PAGE> 41
SUMMARY FINANCIAL INFORMATION
The following summary income statement and balance sheet information has
been derived from the consolidated financial statements of the Company. Such
information at August 31, 1995 and for each of the years in the five year period
ended August 31, 1995 has been derived from the Company's audited consolidated
financial statements (the last three years of which, together with the related
report of Deloitte Touche Tohmatsu, independent auditors, are contained in this
Prospectus). All such financial information is qualified in its entirety by
reference to, and should be read in conjunction with, "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the
Consolidated Financial Statements (including Notes thereto).
The Company prepares its consolidated financial statements in accordance
with Japanese GAAP, which differ in certain material respects from U.S. GAAP.
See Notes 10 and 11 of Notes to Consolidated Financial Statements, which present
a reconciliation of U.S. GAAP and Japanese GAAP.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED AUGUST 31,
---------------------------------------------------------------------------
1991 1992 1993 1994 1995 1995
-------- -------- -------- -------- -------- ----------
(U.S.$)(1)
<S> <C> <C> <C> <C> <C> <C>
(IN MILLIONS OF YEN AND THOUSANDS OF DOLLARS EXCEPT PER SHARE AND ADS AMOUNTS AND SHARES OUTSTANDING)
INCOME STATEMENT INFORMATION:
In accordance with Japanese GAAP:
Net sales........................ Y123,038 Y123,253 Y130,028 Y157,556 Y177,991 $1,816,235
Cost of sales.................... 34,832 36,087 37,319 43,576 47,515 484,847
-------- -------- -------- -------- -------- ----------
Gross profit..................... 88,206 87,166 92,709 113,980 130,476 1,331,388
-------- -------- -------- -------- -------- ----------
Distributor incentives........... 30,417 31,908 34,001 42,652 47,885 488,622
Distribution expenses............ 6,805 7,653 7,773 8,324 8,853 90,337
Selling and administrative
expenses(2).................... 11,260 15,188 16,810 19,616 24,022 245,123
-------- -------- -------- -------- -------- ----------
Total operating expenses......... 48,482 54,749 58,584 70,592 80,760 824,082
-------- -------- -------- -------- -------- ----------
Operating income................. 39,724 32,417 34,125 43,388 49,716 507,306
Other income -- net.............. 2,464 3,487 2,485 2,557 1,733 17,684
-------- -------- -------- -------- -------- ----------
Income before income taxes....... 42,188 35,904 36,610 45,945 51,449 524,990
Income taxes..................... 23,307 19,373 20,759 25,341 28,387 289,663
-------- -------- -------- -------- -------- ----------
Net income....................... Y 18,881 Y 16,531 Y 15,851 Y 20,604 Y 23,062 $ 235,327
========= ========= ========= ========= ========= ==========
Net income per share(3).......... Y 129.28 Y 110.49 Y 105.94 Y 137.70 Y 154.13 $ 1.57
Net income per ADS(4)............ Y 64.64 Y 55.24 Y 52.97 Y 68.85 Y 77.07 $ 0.79
Shares outstanding (in
thousands)..................... 146,050 149,625 149,625 149,625 149,625 149,625
In accordance with U.S. GAAP:(5)
Net income....................... Y 19,932 Y 16,335 Y 16,576 Y 20,452 Y 24,447 $ 249,459
Net income per share(3).......... 136.47 109.17 110.78 136.69 163.39 1.67
Net income per ADS(4)............ 68.24 54.59 55.39 68.34 81.70 0.83
BALANCE SHEET INFORMATION:
In accordance with Japanese GAAP:
Working capital.................. Y 50,976 Y 57,030 Y 62,305 Y 68,852 Y 43,566 $ 444,551
Total assets..................... 87,091 93,008 101,976 116,535 121,810 1,242,959
Total shareholders' equity....... 56,904 64,687 72,297 79,171 77,882 794,714
In accordance with U.S. GAAP:(5)
Working capital.................. Y 55,465 Y 61,284 Y 70,435 Y 73,397 Y 51,317 $ 523,443
Total assets..................... 90,727 96,472 106,239 120,991 129,503 1,321,459
Total shareholders' equity....... 60,539 68,147 76,494 83,231 83,661 853,684
OTHER INFORMATION:
Number of distributors(6)(7)..... 597,000 752,000 816,000 896,000 980,000
Number of direct
distributors(7)(8)............. 4,500 4,600 4,800 5,900 7,100
Renewal rate(9).................. 68.2% 67.6% 71.7% 72.8% 71.8%
</TABLE>
8
<PAGE> 42
- ---------
(1) Translated at the rate of Y98 = U.S.$1.00, the approximate rate of exchange
based on the Noon Buying Rate on August 31, 1995.
(2) In preparing this summary financial information, enterprise taxes have been
reclassified from selling and administrative expenses to income taxes in
order to present this summary financial information in a format which is
more consistent with U.S. disclosure practices. See Notes 1 and 10 of Notes
to Consolidated Financial Statements.
(3) The computation of net income per share is based on the weighted average
number of shares of Common Stock outstanding during the period retroactively
adjusted for stock splits.
(4) Each ADS represents one-half of one share of Common Stock.
(5) The Company prepares its consolidated financial statements in accordance
with Japanese GAAP which differ in certain respects from U.S. GAAP. A
discussion of the significant differences between Japanese GAAP and U.S.
GAAP and reconciliations of net income and shareholders' equity on a
Japanese GAAP basis to a U.S. GAAP basis is set forth in Note 10 of the
Notes to Consolidated Financial Statements.
(6) Includes total number of distributorships (including direct
distributorships) in force from the prior fiscal year which were renewed for
the fiscal year shown. Numbers of distributors are rounded to the nearest
thousand. The number for each fiscal year does not reflect the total number
of distributors for each fiscal year because it does not include new
distributors who enrolled during such fiscal year.
(7) Multiple persons in the same household (such as a married couple) who are
distributors are considered a single distributorship.
(8) "Direct distributors" are distributors who have achieved a significant level
of performance for a specified period. See
"Business -- Distribution -- Direct Distributors." Numbers of direct
distributors are rounded to the nearest hundred.
(9) Percentage of all distributorships in force from the prior fiscal year which
were renewed for the fiscal year shown.
9
<PAGE> 43
RISK FACTORS
Investing in the ADSs involves certain considerations not typically
associated with equity securities of United States companies, as well as other
considerations, which are discussed or referred to below. Prospective investors
should carefully consider the following information in conjunction with the
other information contained in this Prospectus.
RELIANCE UPON INDEPENDENT DISTRIBUTORS;
POSSIBLE NEGATIVE EFFECTS OF ADVERSE PUBLICITY
The Company distributes products exclusively through its distributors. The
level of the Company's net sales is directly dependent upon the efforts of its
distributors and any growth in net sales will require increased productivity by
the distributors and/or growth in the number of distributors. As is typical of
direct selling, there is turnover in distributors from year to year which
requires the sponsoring of new distributors by existing distributors in order to
maintain or increase the overall distributor force. Sponsoring activities and
distributor retention levels are particularly impacted by changes in the level
of distributor motivation, which in turn can be positively or negatively
affected by general economic conditions and a number of intangible factors.
Adverse publicity concerning the Company, Amway and direct selling generally can
have a significant negative impact on sponsoring activities and retention
levels. Historically, the Company has experienced periodic increases and
decreases in the level of sponsoring (as measured by distributor applications).
Because of the number of factors that impact sponsoring, the Company cannot
predict when or to what extent such increases and decreases in the level of
sponsoring will occur. There can be no assurance that the number or productivity
of distributors will be sustained at current levels or increased. In addition,
the number of distributors as a percent of the population may reach levels that
become difficult to exceed due to the finite number of persons inclined to
pursue an independent direct selling business opportunity. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Overview" and "Business -- Distribution."
Because the Company's distributors are independent contractors, the Company
is not in a position to provide them with the same level of direction and
oversight as it provides with respect to its own employees. Although the Company
has a Code of Ethics and Rules of Conduct (the "Code of Ethics and Rules of
Conduct"), patterned on Amway's Code of Ethics and Rules of Conduct, governing
distributor conduct, because of the large number of distributors and their
independent status, as well as the impact of certain resale price maintenance
and certain other regulations that limit the ability of the Company to monitor
and control the sales practices of its distributors, it can be difficult to
enforce those rules. At times distributor actions have given rise and may in the
future give rise to negative publicity for the Company and Amway. Also,
distributor leaders and downline distributors, without prior review or approval
by the Company or Amway, might prepare and sell their own audio and video tapes
and written materials. Sales of these tapes and materials could be inconsistent
with the Sales Plan or the Code of Ethics and Rules of Conduct, which, among
other things, prohibits unfounded claims and actions which improperly influence
the purchase of such materials. Actions by the Company terminating distributors
for violations of the Sales Plan or the Code of Ethics and Rules of Conduct
could negatively impact the Company's business.
CONCENTRATION OF DISTRIBUTORS
Because the Sales Plan provides incentives for distributors to develop
larger businesses by sponsoring new distributors into their organizations, the
Company's sales are concentrated within, and dependent upon, a relatively small
number of distributor lines of sponsorship. In addition, certain distributor
leaders have created distributor organizations independent of the Company and
Amway. These distributor organizations are designed to assist in motivating and
training distributors and can include Amway distributors from all over the
world.
Although there can be no assurances, the Company believes that the loss of
a leader of a distributor line would not necessarily result in the loss of a
significant number of that leader's downline distributors because of the
Company's close relationship with the significant downline distributors.
However, the loss of a distributor
10
<PAGE> 44
leader and a significant number of that leader's downline distributors could
have a material adverse effect on the Company. See "Business -- Distribution."
REGULATION OF CERTAIN DIRECT SELLING ACTIVITIES
Various governmental agencies in Japan regulate certain direct selling
activities. Applicable laws and regulations are generally intended to prevent
fraudulent or deceptive schemes often referred to as "pyramid" schemes which
promise quick rewards for little or no effort, require high entry costs, use
high pressure recruiting methods and/or do not involve legitimate products. The
Company is an active member of the Japan Direct Selling Association, a trade
association for the promotion of legitimate and ethical direct selling
practices. The Sales Plan under which the Company distributes products has a low
cost of entry, is based upon the sale of a broad range of products, does not
require product purchases and does not provide for the payment of any
compensation by the Company for recruiting. See "Business -- Distribution." The
Company believes that its method of distribution is in compliance in all
material respects with Japanese laws and regulations relating to direct selling
activities. The Company's activities can also be impacted by other regulations
not specifically addressed to direct selling. For example, the Act Concerning
Prohibition of Private Monopoly and Maintenance of Fair Trade (the
"Anti-Monopoly Law"), among other things, regulates resale price maintenance
(fixing retail prices of products). The Company only provides suggested retail
prices for the products it distributes. There can be no assurance that new
legislation or regulations or new interpretations of existing laws and
regulations would not have a material adverse effect on the Company's
operations. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business -- Government Regulation."
RELATIONSHIP AND POTENTIAL CONFLICTS OF INTEREST WITH AMWAY
There could be conflicts of interest with respect to transactions between
the Company and Amway or other affiliates of Amway. Conflicts could arise in a
variety of circumstances including in the interpretation, extension or
renegotiation of the various agreements between the Company and Amway or in
other arrangements, in the allocation of products by Amway to its various
affiliates worldwide and in the establishment by Amway of product prices and
exchange rates. The agreements between the Company and Amway include a trademark
license agreement relating to the use of Amway trademarks and product formulas
and designs (the "Trademark License Agreement"), a product purchase agreement
relating to the purchase of products from Amway (the "Product Purchase
Agreement") and a support services agreement relating to the utilization of
Amway support services (the "Support Services Agreement"). Each agreement is for
a term ending August 31, 2011, and is subject to renegotiation after December
31, 1999 in the event that members of the families of, or corporations, trusts,
foundations or other entities established by or for the benefit of, Richard M.
DeVos or Jay Van Andel on a combined basis no longer beneficially own a majority
of the Company's voting stock. See "Business -- Relationship with Amway" and
"Certain Transactions."
Under the Trademark License Agreement, Amway licenses the Amway trademark
and individual product trademarks to the Company for use only in Japan. Thus,
the Company will not be able to use the Amway name to expand outside Japan.
Approximately 80% of the Company's fiscal 1995 net sales was derived from
the distribution of products it purchased from Amway. Purchases of these
products represented approximately 65% of fiscal 1995 cost of sales. The prices
for these products are governed by a price schedule which Amway establishes
periodically based upon a U.S. dollar "cost plus" base price calculation. Amway
has the right to modify the "cost plus" base price; however, Amway has agreed
that any such modification will be consistently applied to all Amway affiliates.
No assurances can be given that Amway will not modify such U.S. dollar "cost
plus" base price, or as to the effect of any such modification on the Company.
In connection with the reorganization of certain Amway affiliates in
December 1993 as part of the capitalization of Amway Asia Pacific Ltd. ("AAP"),
the Company, based upon an independent evaluation, transferred to AAP the stock
of Amway Pacific Limited, a former subsidiary of the Company, through which the
Company held a 95% interest in the joint venture company formed as the exclusive
distribution vehicle for
11
<PAGE> 45
Amway products in the People's Republic of China. This resulted in the
acquisition by the Company of 972,222 shares of common stock of AAP,
representing an acquisition price of approximately U.S.$17.5 million (Y1.9
billion) (based on the Noon Buying Rate of Y110.70 = U.S.$1.00 prevailing on
December 21, 1993). As a result of this transaction, the Company owns
approximately 2% of AAP's common stock. The Principal Shareholders own
approximately 83% of AAP's common stock, with the remainder publicly held. See
"Certain Transactions" and Note 4 of Notes to Consolidated Financial Statements.
OPERATIONS OUTSIDE THE UNITED STATES; CURRENCY FLUCTUATIONS
Substantially all of the Company's assets and operations are located, and
substantially all of its revenues are derived, outside the United States. The
Company's operations may be materially and adversely affected by economic,
political and social conditions in Japan where the Company is incorporated. A
change in trade and other policies by the Japanese government could adversely
affect the Company through, among other things, changes in laws, regulations, or
the interpretation thereof, taxation or restrictions on imports. Fluctuations in
currency exchange rates between the yen and the dollar could have a material
adverse effect on the Company's financial position, results of operations and
cash flows.
The prices for products purchased from Amway, which the Company pays for in
yen, are governed by a price schedule that Amway establishes based upon a U.S.
dollar "cost plus" base price calculation. In addition to the U.S. dollar "cost
plus" base price component of Amway's schedule, the current prices for these
products include an implicit dollar/yen exchange rate which the Company has
calculated to be approximately Y91 = U.S.$1.00 compared to an exchange rate that
applied to product purchases throughout fiscal 1995 of Y104 = U.S.$1.00. Amway
has the right to modify, on 30 days' prior written notice, the prices of
products to be purchased by the Company from Amway; provided that any change in
the U.S. dollar "cost plus" base price component must be made on a consistent
basis for all Amway affiliates. The Company believes that the dollar/yen
exchange rate is determined by Amway based on Amway's assessment of current and
future economic and business conditions, both in the United States and Japan,
market conditions with respect to the Company's products and other factors,
including the impact, if any, of hedging activities by Amway. Using the
Company's assumptions regarding product and sales mix and assuming the
application of the price schedule established for fiscal 1996 throughout fiscal
1996 and that the products purchased from Amway continue to represent 65% of the
Company's cost of sales, the use of an implicit exchange rate of Y91 = U.S.
$1.00 throughout fiscal 1996 would result in a 5.2% reduction in the Company's
cost of sales for fiscal 1996 as compared to fiscal 1995. As a result of the
Company's payment for its purchases of products from Amway in yen, and because
the Company does not currently hedge its currency transaction exposure relating
to the purchase of products from Amway, appreciation of the dollar against the
yen could have a material adverse effect on the Company's operating results to
the extent Amway modifies the implicit exchange rate component of the prices it
charges the Company for products. In addition, the strengthening of the yen
against the dollar has allowed the Company to maintain relatively stable pricing
historically, notwithstanding periodic changes by Amway in the U.S. dollar "cost
plus" base prices to the Company. The Company cannot predict whether such
strengthening of the yen against the dollar will continue. Further, the Company
cannot predict what portion of any price changes may be passed through to
distributors or the effect of any such price changes on net sales or distributor
retention or sponsoring. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Foreign Exchange Transaction Information"
and "Business -- Relationship with Amway -- Product Purchase Agreement."
All payments to Amway for investor relations services and for support
services performed by third parties (the internal labor charges were
substantially eliminated in September 1993, except for those expenses incurred
in connection with investor relations services) are paid for in dollars and the
Company bears the risk of currency exchange rate fluctuations in connection
therewith. See "Business -- Relationship with Amway -- Support Services
Agreement."
12
<PAGE> 46
IMPORT RESTRICTIONS AND REGULATION OF CONSUMER GOODS;
DUTIES AND U.S. TRADE RELATIONS
Approximately 80% of the Company's fiscal 1995 net sales was derived from
the distribution of products it purchased from Amway. Japan imposes various
legal restrictions on imports. In some cases, licenses are required to import
particular types of goods. In general, duties of varying amounts are imposed
based on the classification of the goods imported. Certain products the Company
imports, notably products in the Personal Care Line, are subject to health and
safety regulations. Certain products in the Nutrition Line are also subject to
governmental regulation regarding foods and drugs which has had the effect of
limiting the Company's ability to sell certain products. The Company has not
experienced any difficulty maintaining its import licenses nor has it
experienced difficulties regarding health and safety or food and drug
regulations for products sold by distributors; however, such regulations could
be changed in a manner that could have a material adverse effect on the Company.
Present or future health and safety or food and drug regulations could delay or
prevent the introduction of new products or suspend or prohibit the sale of
existing products. See "Business -- Government Regulation."
Duties on imports are a component of Japan's national trade and economic
policy and could be changed in a manner that would materially impact the
Company's sales and its competitive position compared to locally produced goods.
In particular, as has been widely reported, certain U.S. government and industry
leaders have been critical of Japanese trade policies, duties and import
restrictions. In the last twelve months, the U.S. took steps to impose trade
sanctions on Japan and certain Japanese products; however, such sanctions did
not become effective as a result of subsequent agreements between the U.S. and
Japan. If trade relations between the U.S. and Japan deteriorate or U.S. trade
sanctions are imposed, Japan could choose to retaliate by increasing duties or
imposing additional restrictions on imports of the type the Company purchases
from Amway. Depending on the nature or severity of the sanctions, this could
have a material adverse effect on the Company.
PRODUCT LIABILITY
Manufacturers and sellers of products in Japan may be subject under
applicable laws or legal precedents to liability for loss or injury caused by
such products. The Company is currently covered for product liability claims to
the extent of and under insurance programs maintained by Amway for the benefit
of its affiliates purchasing Amway products, including the Company. See
"Business -- Relationship with Amway -- Product Purchase Agreement" and "Certain
Transactions." Although the Company has not had material product liability
claims brought against it and the laws and legal precedents providing for such
liability in Japan have been utilized less than comparable laws and legal
precedents in the United States, no assurance can be given that the Company may
not be exposed to future product liability claims and, if any such claims were
successful, there can be no assurance that the Company will be adequately
covered by insurance or have sufficient resources to pay such claims. On July 1,
1995, a new product liability law went into effect in Japan. This law permits
consumers to establish product liability claims against manufacturers and
importers of goods upon a showing of a defective condition in such goods rather
than negligence as was previously required. As a result of this new law, Amway
as the manufacturer and the Company as the importer of consumer products may be
subject to increased potential liability for loss or injury caused by such
products. See "Business -- Government Regulation -- Product Liability."
CONTROLLING SHAREHOLDERS
Following the Exchange (assuming no other disposition or acquisition of
Common Stock or ADSs by the Principal Shareholders prior to the Exchange Date),
the Principal Shareholders will collectively own beneficially 78.6% of the
outstanding shares of Common Stock (77.9% if the Underwriters' over-allotment
option is exercised in full). After taking into account the delivery of ADSs or
Common Stock by the Selling Shareholders on the Exchange Date and the Principal
Shareholders' participation in the proposed share repurchase described under the
caption "Prospectus Summary -- Recent Developments," the Principal Shareholders,
if they act in concert, will continue to be able to control the election of the
Board of Directors of the Company (the "Board of Directors") and, thus, the
direction and future operations of the Company
13
<PAGE> 47
without the supporting vote of any other holder of Common Stock or ADSs,
including decisions regarding acquisitions, dispositions and other business
opportunities, the declaration of dividends and the repurchase or the issuance
of shares of Common Stock and other securities. In general, as long as the
Principal Shareholders are majority shareholders of the Company and act in
concert, third parties will not be able to obtain control of the Company through
purchases of ADSs or shares of Common Stock not held by the Principal
Shareholders.
LESSER RELATIVE LIQUIDITY OF JAPANESE OVER-THE-COUNTER MARKET
The principal market for the Common Stock is the Japanese over-the-counter
("OTC") market. The Japanese OTC market is not as large or as active as the
Tokyo Stock Exchange (the "TSE") or the New York Stock Exchange (the "NYSE"). As
a result, the Japanese OTC market is less liquid and may be more volatile than
the TSE or the NYSE. At August 31, 1995, the Japanese OTC market had an
aggregate market capitalization of approximately Y13.0 trillion (U.S.$132.7
billion) compared to the Y339.7 trillion (U.S.$3.5 trillion) market
capitalization of the companies listed for trading on the TSE and U.S.$5.5
trillion for the NYSE. The aggregate annual equity trading value of the Japanese
OTC market in 1994 was Y5.4 trillion (U.S.$55.1 billion) compared to the
aggregate annual equity trading value for the same period of Y87.4 trillion
(U.S.$891.9 billion) for the TSE and U.S.$2.5 trillion for the NYSE. At August
31, 1995, the aggregate market capitalization of the Company in the Japanese OTC
market represented 4.1% of the aggregate market capitalization of the entire
Japanese OTC market. The Company does not currently meet the published listing
criteria and other requirements for the TSE and no assurance can be given that
the Common Stock will ever be listed on the TSE.
SIGNIFICANT RESTRICTIONS ON COMMON STOCK UNDER JAPANESE UNIT SHARE SYSTEM
Pursuant to the Commercial Code of Japan relating to joint stock
corporations (kabushiki kaisha) and certain related legislation (the "Commercial
Code"), the Company's Articles of Association, as amended (the "Articles of
Association"), provide that 100 shares of Common Stock constitute one "unit."
Thus, a holder who owns ADRs representing less than 200 ADSs will indirectly own
less than a whole unit, because each ADS represents one-half of one share of
Common Stock. The Commercial Code imposes significant restrictions and
limitations on holdings of Common Stock that do not constitute whole units. In
general, under the unit share system, holders of less than a unit do not have
the right to vote, to transfer shares other than to the issuer or to bring
derivative actions on behalf of the issuer. Under the unit share system, holders
of less than a unit of shares of Common Stock have the right to require the
Company to purchase their shares. Holders of ADRs representing other than
integral multiples of whole units of Common Stock are unable to withdraw the
underlying shares of Common Stock representing less than one unit and,
therefore, they are unable, as a practical matter, to exercise the right to
require the Company to purchase such underlying shares. The unit share system
does not affect the transferability of ADSs, which may be transferred in lots of
any size.
The voting rights of ADR holders are exercised through the Depositary, an
agent of which is the record owner of the underlying shares of Common Stock.
Upon receipt of instructions of a record holder of ADRs, the Depositary shall
endeavor, insofar as practicable and permitted, to vote or cause to be voted the
securities represented by such holder's ADRs in accordance with such
instructions. If such instructions are not received by the Depositary on or
before the date established by the Depositary for such purpose, the Depositary
shall deem such holder to have instructed the Depositary to give a discretionary
proxy to the persons designated by the Company to vote the securities
represented by such holder's ADRs subject to certain exceptions. See
"Description of American Depositary Receipts -- Voting of Deposited Securities."
To the extent the shares voted for or against a proposal do not constitute
integral multiples of a unit, any remainders in excess of the highest integral
multiple of a unit will be disregarded. However, the elimination of such
remainders from the aggregate votes of all the underlying shares represented by
ADRs would not currently exceed a total of 99 shares of Common Stock or 199
ADSs.
The unit share system generally will not affect the rights of ADR holders
(i) to receive dividends (including interim dividends), (ii) to receive shares
and/or cash by way of stock split or upon consolidation or subdivision of shares
or upon a capital decrease or merger, (iii) to be allotted subscription rights
with respect to new shares, convertible bonds and bonds with warrants to
subscribe for shares when such rights are granted
14
<PAGE> 48
to shareholders and (iv) to participate in the distribution of surplus assets in
the event of the liquidation of the Company. For a more complete description of
the unit share system and its effect on the rights of holders of the Common
Stock and holders of ADRs, see "Description of Capital Stock -- Japanese Unit
Share System" and "Description of American Depositary Receipts."
RIGHTS OF SHAREHOLDERS UNDER JAPANESE LAW
MAY BE LESS THAN UNDER U.S. JURISDICTIONS
The Company's corporate affairs are governed by its Articles of Association
and the Commercial Code. Principles of law relating to such matters as the
validity of corporate procedures, the fiduciary duties of directors and officers
and the rights of the Company's shareholders may differ from those that would
apply if the Company were incorporated in a jurisdiction within the United
States. For example, under the Commercial Code, only holders of 3% or more of
the Common Stock are entitled to examine the Company's accounting books and
records. The rights of shareholders under Japanese law may not be as extensive
as the rights of shareholders under legislation or judicial precedent in many
United States jurisdictions. Thus, holders of the Common Stock or ADSs may have
more difficulty in protecting their interests in the face of actions by the
Board of Directors or the Principal Shareholders than they might have as
shareholders of a corporation incorporated in many United States jurisdictions.
In addition, there is uncertainty whether the courts of Japan would enforce
liabilities of the Company in actions brought in Japan which are predicated upon
the securities laws of the United States or any state thereof. See
"Enforceability of Civil Liabilities," "Description of Capital Stock" and
"Description of American Depositary Receipts."
RECORD OWNERSHIP AND SHAREHOLDER RIGHTS
In general, the rights of shareholders under Japanese law to, among other
things, vote their shares, receive dividends and distributions, bring derivative
actions, examine the accounting books and records of the issuing corporation
(subject to the 3% holdings limitation discussed above under the caption
" -- Rights of Shareholders Under Japanese Law May Be Less Than Under U.S.
Jurisdictions") and exercise appraisal rights are available only to holders of
record. Because the Depositary (through its agent) is the record holder of the
shares of Common Stock underlying the ADSs, only the Depositary is entitled to
exercise such rights with respect to such shares.
Pursuant to the contractual obligations of the Depositary under the Deposit
Agreement, the voting rights of ADR holders and rights of ADR holders to receive
dividends and other distributions are not materially affected by the absence of
record ownership because the Depositary will endeavor insofar as practicable and
permitted under the provisions of or governing the Deposited Securities (as
defined in "Description of American Depositary Receipts"), to vote the
underlying shares of Common Stock as instructed by ADR holders and will pay to
holders of ADRs the dividends and distributions collected from the Company.
However, an ADR holder in its capacity as such will not be able to bring a
derivative action, examine the accounting books and records of the Company or
exercise appraisal rights through the Depositary. An ADR holder whose holdings
represent at least one unit (200 ADSs) would be able to withdraw the underlying
shares in integral multiples of one unit and become a record holder entitled to
the full rights of a shareholder under Japanese law with respect to such units.
However, as described above under " -- Significant Restrictions on Common Stock
Under Japanese Unit Share System," withdrawal of the underlying shares is not
available to ADR holders of less than one unit. ADR holders of both whole and
fractional units are permitted to withdraw only the underlying shares of the
whole units. As a result, with respect to the fractions of a unit, an ADR holder
will not have certain rights which are dependent upon record ownership of the
underlying shares of Common Stock and will not be able to withdraw the
underlying shares in order to become the record owner.
TERMINATION OF DEPOSIT AGREEMENT
The Deposit Agreement may be terminated at any time by the Company on 30
days' written notice. In addition, the Deposit Agreement terminates if a
successor Depositary has not been appointed within 60 days after the Depositary
notifies the Company of its election to resign. If the Deposit Agreement is
terminated, the
15
<PAGE> 49
Depositary will cease to perform any further acts under the Deposit Agreement,
including the transfer of ADRs, the distribution of dividends and the giving of
further notices, except that the Depositary will continue to deliver underlying
securities and related dividends or other distributions in exchange for
surrendered ADRs and perform certain other limited functions. As soon as
practicable after the expiration of six months following the termination of the
Deposit Agreement, the Depositary, subject to the provisions of the Commercial
Code and the Share Handling Regulations of the Company, shall sell the shares of
Common Stock remaining on deposit which constitute integral multiples of one
whole unit and hold the net proceeds for the ratable benefit of the holders of
unsurrendered ADRs. The Company does not intend to terminate the Deposit
Agreement or to permit the resignation of the Depositary without appointing a
successor Depositary.
16
<PAGE> 50
MARKET INFORMATION
JAPANESE OTC MARKET
The principal securities market for the Common Stock is the Japanese OTC
market. Trading in the Common Stock in the Japanese OTC market began in April
1991. The following table sets forth certain price information and average daily
trading volume for the fiscal quarters shown for the Common Stock in the
Japanese OTC market. High and low sales prices are shown in yen as reported by
the Japan Securities Dealers Association (the "JSDA") and, solely for the
convenience of the reader, in U.S. dollars per share of Common Stock at the Noon
Buying Rate on the last trading date of each fiscal quarter, except as noted.
<TABLE>
<CAPTION>
AVERAGE
DAILY
YEN PRICE PER TRADING DOLLAR PRICE
SHARE VOLUME PER SHARE(1)
--------------- (IN THOUSANDS ---------------
HIGH LOW OF SHARES) HIGH LOW
----- ----- -------------- ----- -----
<S> <C> <C> <C> <C> <C>
FY 1994 First Quarter.................. 4,200 2,700 44.3 38.50 25.75
Second Quarter................ 4,950 3,400 26.9 47.50 32.62
Third Quarter................. 4,850 3,910 19.0 46.31 37.33
Fourth Quarter................ 4,300 3,300 46.8 42.95 32.96
FY 1995 First Quarter.................. 3,470 2,920 48.2 38.08 29.52
Second Quarter................ 3,450 2,650 34.5 35.71 27.43
Third Quarter................. 3,240 2,550 57.7 38.28 30.12
Fourth Quarter................ 3,590 2,700 78.3 36.63 27.55
FY 1996 First Quarter (through
October 17, 1995)............. 4,480 3,200 226.9 44.67 31.90
</TABLE>
- ---------
(1) Each ADS represents one-half of one share of Common Stock.
On August 31, 1995, the closing sale price per share of Common Stock in the
Japanese over-the-counter market as reported by the Japan Securities Dealers
Association was Y3,540 per share. See the cover page of this Prospectus for
recent price information for the Common Stock in the Japanese OTC market.
U.S. MARKET
In February 1993, the Company sponsored a deposit facility for its American
Depositary Shares, which, at that time, traded in the unlisted OTC market in the
United States (the "Level I ADSs"). Beginning on June 29, 1994, the ADSs began
to trade on the New York Stock Exchange ("NYSE"). Prior to June 29, 1994,
quotations for the Level I ADSs from certain market makers in the U.S. OTC
market were provided in the so-called "pink sheets" published daily by the
National Quotations Bureau, Inc. listing the bid and ask prices, if any, for the
previous trading day. Quotations for the Level I ADSs began appearing in the
"pink sheets" in September 1993 (the first quarter of fiscal 1994). U.S. OTC
quotations published in the "pink sheets" reflected interdealer prices without
retail mark-up, mark-down or commission and did not necessarily represent actual
transactions at those or any other prices.
The following table sets forth (i) beginning with the first quarter of
fiscal 1994 (when quotations for the Level I ADSs first appeared in the "pink
sheets"), for the fiscal quarters shown, high and low bid prices in U.S.
dollars, as published in the National Quotations Bureau, Inc.'s "pink sheets"
for the Level I ADSs in the U.S. OTC market until the time the ADSs began
trading on the NYSE (during such periods, there were no published ask prices);
and (ii) the high and low composite closing sales prices in U.S. dollars for the
ADSs, listed on the NYSE, beginning on June 29, 1994. The bid prices in the
following table have been adjusted to
17
<PAGE> 51
reflect the change, effective June 14, 1994, of the number of shares represented
by each Level I ADS from one share of Common Stock to one-half of one share of
Common Stock.
<TABLE>
<CAPTION>
LEVEL I ADSS
-------------------
BID
-------------------
OTC MARKET HIGH LOW
---------------------------------------------------------------- ------ ------
<S> <C> <C> <C>
FY 1994 First Quarter................................................... $19.80 $14.28
Second Quarter.................................................. 22.11 15.13
Third Quarter................................................... 23.11 19.02
Fourth Quarter (through June 28, 1994).......................... 20.80 18.14
</TABLE>
<TABLE>
<CAPTION>
ADSS
-------------------
NYSE HIGH LOW
---------------------------------------------------------------- ------ ------
<S> <C> <C> <C>
FY 1994 Fourth Quarter (beginning June 29, 1994)........................ $19.00 $16.50
FY 1995 First Quarter................................................... 17.00 14.50
Second Quarter.................................................. 16.75 14.75
Third Quarter................................................... 19.38 14.38
Fourth Quarter.................................................. 19.25 17.38
FY 1996 First Quarter (through October 17, 1995)........................ 21.38 16.38
</TABLE>
18
<PAGE> 52
DIVIDENDS AND DIVIDEND POLICY
The Articles of Association provide that the Company's financial accounts
shall be closed on August 31 each year (the end of the Company's fiscal year),
and that such date shall be the record date for the payment of year-end
dividends, if any. The payment of year-end dividends is subject to shareholder
approval. In addition, the Company may, by resolution of the Board of Directors,
pay interim cash dividends once each fiscal year to shareholders of record as of
the close of business on the last day of February of such fiscal year, without
shareholder approval. Pursuant to the current provisions of the Commercial Code,
after the end of each fiscal year, the Board of Directors prepares, among other
things, a proposal for appropriation of profits and retained earnings to
year-end dividends and other purposes. This proposal is then submitted to
shareholders for approval at the Ordinary General Meeting of Shareholders which,
pursuant to the Articles of Association, must be convened within three months
after the close of the fiscal year. Historically, year-end dividends have been
paid promptly following approval thereof at the shareholders meeting to holders
of record as of the preceding August 31. Although the interim dividend is
ordinarily declared and the year-end dividend is approved subsequent to the last
day of February or the August 31 record date, as the case may be, the Common
Stock generally trades in the Japanese OTC market "ex-dividend" three business
days in advance of each record date (unless the record date is not a business
day, in which case the ex-dividend date is four business days prior to the
record date). For additional information regarding procedures and pending
procedures for the declaration of dividends, see "Description of Capital
Stock -- Dividends."
The following table sets forth the dividends paid with respect to each
fiscal year indicated to holders of the Common Stock.
<TABLE>
<CAPTION>
DIVIDEND PAID PER
FISCAL COMMON SHARE
YEAR ENDED ------------------
AUGUST 31, Y U.S.$(1)
---------------------------------------- --- --------
<S> <C> <C>
1993 60 0.54
1994(2) 140 1.39
</TABLE>
- ---------
(1) Yen dividend amounts per share of Common Stock appearing in this table and
the footnotes are translated solely for the convenience of the reader into
U.S. dollars at the Noon Buying Rate on the dividend payment date. Each ADS
represents one-half of one share of Common Stock.
(2) Includes (i) a special, commemorative interim dividend in recognition of the
Company's 15 years of operations, of Y30 (U.S.$0.29) per share of Common
Stock and a regular interim dividend of Y30 (U.S.$0.29) per share of Common
Stock paid on May 10, 1994 to holders of record on February 28, 1994 and
(ii) a regular year-end dividend of Y30 (U.S.$0.31) per share of Common
Stock and a special year-end dividend of Y50 (U.S.$0.50) per share of Common
Stock paid on December 9, 1994 to holders of record on August 31, 1994.
In fiscal 1995, the Company paid a regular interim dividend of Y45
(U.S.$0.54) per share of Common Stock and a special interim dividend of Y50
(U.S.$0.60) per share of Common Stock on May 20, 1995 to holders of record on
February 28, 1995. The Company has announced its intention to pay, subject to
legal and other factors, a regular year-end dividend for fiscal 1995 of Y45
(U.S.$0.46) per share of Common Stock and a special year-end dividend of Y50
(U.S.$0.51) per share of Common Stock. Such year-end dividends would be payable
in December 1995 to holders of record on August 31, 1995. If such regular and
special year-end dividends are paid as proposed, dividends paid with respect to
fiscal 1995 would total Y190 (U.S.$1.94) per share of Common Stock.
In October 1995, the Company announced its intention to increase the rate
of its regular annual dividend with respect to fiscal 1996 to Y100 (U.S.$1.02)
per share of Common Stock from Y90 (U.S.$0.92) per share of Common Stock with
respect to fiscal 1995. Such increased annual dividend rate would be paid with
respect to fiscal 1996 as a Y50 (U.S.$0.51) per share interim dividend payable
in May 1996 to holders of record on February 28, 1996 and as a Y50 (U.S.$0.51)
per share year-end dividend promptly following shareholder approval at the
November 1996 Ordinary General Meeting of Shareholders to holders of record on
August 31, 1996.
19
<PAGE> 53
In October 1995, the Company also announced its intention to pay a special
interim dividend with respect to fiscal 1996 of Y25 (U.S.$0.26) per share of
Common Stock in May 1996 in addition to the proposed interim dividend of Y50
(U.S.$0.51) per share of Common Stock described above for a total fiscal 1996
interim dividend of Y75 (U.S.$0.77) per share of Common Stock. The 1996 interim
dividend and the 1996 special interim dividend are proposed to be paid on the
same date in May 1996 to holders of record on February 28, 1996. Interim
dividends are not subject to shareholder approval. See "Description of Capital
Stock -- Dividends."
Future dividend policy depends upon a variety of factors, many of which are
beyond the control of the Company. The dividends described above and any other
future dividends will depend on the Company's earnings, capital requirements,
financial condition, the sufficiency of funds legally available for the payment
of dividends and other factors considered relevant by the Board of Directors and
upon receiving shareholder approval for year-end dividends or when otherwise
required. The funds legally available, at August 31, 1995, for the payment of
such dividends in fiscal 1996 and the proposed share repurchase described under
the caption "Prospectus Summary -- Recent Developments" totalled Y45.2 billion
(U.S.$461.2 million), which amount is sufficient for the payment of such
dividends and such share repurchase. There can be no assurance that the Company
will be able to pay the foregoing dividends or any other dividends in the future
or that the Company will repurchase any of its shares.
Under Japanese foreign exchange controls currently in effect, dividends
paid on, and the proceeds of sales in Japan of, shares of Common Stock held by
non-residents of Japan may be converted into any foreign currency and
repatriated abroad. See "Exchange Controls and Other Limitations Affecting
Securityholders." For a description of additional dividend matters relevant to
holders of ADSs, see "Description of American Depositary
Receipts -- Distributions on Deposited Securities."
Dividends paid to U.S. holders of ADSs will be generally subject to a
Japanese withholding tax at the rate of 15%. For United States federal income
tax purposes, U.S. holders of ADRs evidencing ADSs will be treated as the owners
of the underlying Common Stock. Cash dividends (including the amount of any
Japanese taxes withheld therefrom) paid with respect to the underlying Common
Stock are includible in the gross income of a U.S. holder as ordinary income
when the dividends are received by the Depositary and are not eligible for the
dividends received deduction allowed to corporations. Japanese withholding tax
paid by or for the account of any U.S. holder will generally be eligible for
credit against the holder's U.S. federal income tax liability. See "Taxation."
20
<PAGE> 54
EXCHANGE RATES
The rate of exchange between the yen and the dollar is determined by the
forces of supply and demand in the foreign exchange markets, which in turn are
affected by changes in the balance of payments and other economic and financial
conditions, government intervention, speculation and other factors. The
following table sets forth for the periods indicated certain information
concerning the exchange rate for yen and dollars, based on the Noon Buying Rates
during each such fiscal period.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED AUGUST 31, HIGH LOW AVERAGE(1) PERIOD-END
- -------------------------------------------- ------- ------- ---------- -----------
(AMOUNTS IN YEN PER DOLLAR)
<S> <C> <C> <C> <C>
1991........................................ Y143.55 Y125.05 Y 135.76 Y136.85
1992........................................ 136.15 122.95 128.65 122.95
1993........................................ 126.10 101.10 115.46 104.73
1994........................................ 113.10 96.81 104.69 100.11
1995........................................ 99.60 84.04 93.08 97.75
</TABLE>
- ---------
(1) The average of month-end rates during the period.
On October 17, 1995, the Noon Buying Rate was Y100.3 = U.S.$1.00. As stated
previously, for the convenience of the reader translations of financial
information from yen into dollars have been made, except as otherwise indicated,
at the rate of 98 yen to the dollar, the approximate rate of exchange on August
31, 1995 (which does not differ materially from the Noon Buying Rate of Y97.75
on such date).
Fluctuations in exchange rates will affect the foreign currency amounts
received when dividends are remitted outside Japan to holders of ADSs. Such
fluctuations also affect the foreign currency equivalents of the yen price of
the Common Stock in the Japanese OTC market, and therefore are likely to affect
the market price of the ADSs in the United States.
21
<PAGE> 55
SELECTED FINANCIAL INFORMATION
The following selected income statement and balance sheet information has
been derived from the consolidated financial statements of the Company. Such
information at August 31, 1995 and for each of the years in the five year period
ended August 31, 1995 has been derived from the Company's audited consolidated
financial statements (the last three years of which, together with the related
report of Deloitte Touche Tohmatsu, independent auditors, are contained in this
Prospectus). All such financial information is qualified in its entirety by
reference to, and should be read in conjunction with, "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the
Consolidated Financial Statements (including Notes thereto).
The Company prepares its consolidated financial statements in accordance
with Japanese GAAP, which differ in certain material respects from U.S. GAAP.
See Notes 10 and 11 of Notes to Consolidated Financial Statements, which present
a reconciliation of U.S. GAAP and Japanese GAAP.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED AUGUST 31,
---------------------------------------------------------------------------
1991 1992 1993 1994 1995 1995
-------- -------- -------- -------- -------- ----------
(U.S.$)(1)
<S> <C> <C> <C> <C> <C> <C>
(IN MILLIONS OF YEN AND THOUSANDS OF DOLLARS EXCEPT PER SHARE AND ADS AMOUNTS AND SHARES OUTSTANDING)
INCOME STATEMENT INFORMATION:
In accordance with Japanese GAAP:
Net sales........................ Y123,038 Y123,253 Y130,028 Y157,556 Y177,991 $1,816,235
Cost of sales.................... 34,832 36,087 37,319 43,576 47,515 484,847
-------- -------- -------- -------- -------- ----------
Gross profit..................... 88,206 87,166 92,709 113,980 130,476 1,331,388
-------- -------- -------- -------- -------- ----------
Distributor incentives........... 30,417 31,908 34,001 42,652 47,885 488,622
Distribution expenses............ 6,805 7,653 7,773 8,324 8,853 90,337
Selling and administrative
expenses(2).................... 11,260 15,188 16,810 19,616 24,022 245,123
-------- -------- -------- -------- -------- ----------
Total operating expenses......... 48,482 54,749 58,584 70,592 80,760 824,082
-------- -------- -------- -------- -------- ----------
Operating income................. 39,724 32,417 34,125 43,388 49,716 507,306
Other income -- net.............. 2,464 3,487 2,485 2,557 1,733 17,684
-------- -------- -------- -------- -------- ----------
Income before income taxes....... 42,188 35,904 36,610 45,945 51,449 524,990
Income taxes..................... 23,307 19,373 20,759 25,341 28,387 289,663
-------- -------- -------- -------- -------- ----------
Net income....................... Y 18,881 Y 16,531 Y 15,851 Y 20,604 Y 23,062 $ 235,327
========= ========= ========= ========= ========= ==========
Net income per share(3).......... Y 129.28 Y 110.49 Y 105.94 Y 137.70 Y 154.13 $ 1.57
Net income per ADS(4)............ Y 64.64 Y 55.24 Y 52.97 Y 68.85 Y 77.07 $ 0.79
Shares outstanding (in
thousands)..................... 146,050 149,625 149,625 149,625 149,625 149,625
In accordance with U.S. GAAP:(5)
Net income....................... Y 19,932 Y 16,335 Y 16,576 Y 20,452 Y 24,447 $ 249,459
Net income per share(3).......... 136.47 109.17 110.78 136.69 163.39 1.67
Net income per ADS(4)............ 68.24 54.59 55.39 68.34 81.70 0.83
BALANCE SHEET INFORMATION:
In accordance with Japanese GAAP:
Working capital.................. Y 50,976 Y 57,030 Y 62,305 Y 68,852 Y 43,566 $ 444,551
Total assets..................... 87,091 93,008 101,976 116,535 121,810 1,242,959
Total shareholders' equity....... 56,904 64,687 72,297 79,171 77,882 794,714
In accordance with U.S. GAAP:(5)
Working capital.................. Y 55,465 Y 61,284 Y 70,435 Y 73,397 Y 51,317 $ 523,643
Total assets..................... 90,727 96,472 106,239 120,991 129,503 1,321,459
Total shareholders' equity....... 60,539 68,147 76,494 83,231 83,661 853,684
OTHER INFORMATION:
Number of distributors(6)(7)..... 597,000 752,000 816,000 896,000 980,000
Number of direct
distributors(7)(8)............. 4,500 4,600 4,800 5,900 7,100
Renewal rate(9).................. 68.2% 67.6% 71.7% 72.8% 71.8%
</TABLE>
22
<PAGE> 56
- ---------
(1) Translated at the rate of Y98 = U.S.$1.00, the approximate rate of exchange
based on the Noon Buying Rate on August 31, 1995.
(2) In preparing this selected financial information, enterprise taxes have been
reclassified from selling and administrative expenses to income taxes in
order to present this selected financial information in a format which is
more consistent with U.S. disclosure practices. See Notes 1 and 10 of Notes
to Consolidated Financial Statements.
(3) The computation of net income per share is based on the weighted average
number of shares of Common Stock outstanding during the period retroactively
adjusted for stock splits.
(4) Each ADS represents one-half of one share of Common Stock.
(5) The Company prepares its consolidated financial statements in accordance
with Japanese GAAP which differ in certain respects from U.S. GAAP. A
discussion of the significant differences between Japanese GAAP and U.S.
GAAP and reconciliations of net income and shareholders' equity on a
Japanese GAAP basis to a U.S. GAAP basis is set forth in Note 10 of the
Notes to Consolidated Financial Statements.
(6) Includes total number of distributorships (including direct
distributorships) in force from the prior fiscal year which were renewed for
the fiscal year shown. Numbers of distributors are rounded to the nearest
thousand. The number for each fiscal year does not reflect the total number
of distributors for each fiscal year because it does not include new
distributors who enrolled during such fiscal year.
(7) Multiple persons in the same household (such as a married couple) who are
distributors are considered a single distributorship.
(8) "Direct distributors" are distributors who have achieved a significant level
of performance for a specified period. See
"Business -- Distribution -- Direct Distributors." Numbers of direct
distributors are rounded to the nearest hundred.
(9) Percentage of all distributorships in force from the prior fiscal year which
were renewed for the fiscal year shown.
23
<PAGE> 57
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the Company's financial condition
and results of operations should be read in conjunction with the Selected
Financial Information, the Consolidated Financial Statements (including Notes
thereto) and the other information included elsewhere in this Prospectus. The
Company's fiscal year ends August 31 of each year.
OVERVIEW
The Company distributes approximately 130 different consumer products
through independent distributors. At August 31, 1995, the Company had
approximately 980,000 independent distributors who had renewed their
distributorships from the prior fiscal year. Substantially all of the Company's
revenues are derived from the sale by the Company to distributors of these
consumer products. The Company also receives revenues from other products, which
include starter and sponsor kits for new distributors and other business support
materials to existing distributors, and from distributor renewal fees. See
"Business -- Products." The Company recognizes sales when products are shipped
to distributors.
The level of the Company's net sales is directly dependent upon the efforts
of the distributors. For fiscal 1995, the Company's distributor renewal rate was
71.8% compared to 72.8% for fiscal 1994 and 71.7% for fiscal 1993. Because of
the number of factors that impact sponsoring, the Company cannot predict when or
to what extent increases and decreases in the level of sponsoring (as measured
by distributor applications) will occur in future periods. Net sales in any
particular period are also affected by a variety of other factors, such as
shifts in product mix, pricing, product improvements and the introduction of
major new products which tend to stimulate distributor interest and thus sales.
In addition, net sales are affected by certain external factors, such as current
economic conditions. See "Risk Factors -- Reliance Upon Independent
Distributors; Possible Negative Effects of Adverse Publicity" and
"Business -- Distribution -- Sponsoring."
A significant expense for the Company is cost of sales. Approximately 65%
of the Company's cost of sales for fiscal 1995 represented purchases of products
from Amway, which the Company pays for in yen. The prices for these products are
governed by a price schedule which Amway establishes periodically based upon a
U.S. dollar "cost plus" base price calculation. In addition to the U.S. dollar
"cost plus" base price component of Amway's schedule, the current prices for
these products include an implicit dollar/yen exchange rate which the Company
has calculated to be approximately Y91 = U.S.$1.00 compared to an implicit
exchange rate that applied to product purchases throughout fiscal 1995 of Y104 =
U.S.$1.00. Amway has the right to modify, on 30 days' prior written notice, the
prices of products to be purchased by the Company from Amway; provided that any
change in the U.S. dollar "cost plus" base price component must be made on a
consistent basis for all Amway affiliates. The Company believes that the
dollar/yen exchange rate is determined by Amway based on Amway's assessment of
current and future economic and business conditions, both in the United States
and Japan, market conditions with respect to the Company's products and other
factors, including the impact, if any, of hedging activities by Amway. Using the
Company's assumptions regarding product and sales mix and assuming the
application of the price schedule established for fiscal 1996 throughout fiscal
1996 and that the products purchased from Amway continue to represent 65% of the
Company's cost of sales, the use of an implicit exchange rate of Y91 = U.S.$1.00
throughout fiscal 1996 would result in a 5.2% reduction in the Company's cost of
sales for fiscal 1996 as compared to fiscal 1995. No assurances can be given
that Amway will not modify such U.S. dollar "cost plus" base price, or as to the
effect of any such modification on the Company. See "Risk Factors -- Operations
Outside the United States; Currency Fluctuations," " -- Foreign Exchange
Transaction Information" and "Business -- Relationship with Amway -- Product
Purchase Agreement."
The Company pays, as a cost of sales, all freight, handling, duties and
taxes associated with the importation of the goods, as well as the cost of the
initial transportation of the goods from the point of entry to a local
warehouse. Cost of sales also includes a provision for loss on inventory
disposal.
Because the most significant component of the Company's operating expenses
is distributor incentives, which are principally in the form of bonus payments
to distributors based on performance, a significant portion
24
<PAGE> 58
of the Company's operating expenses fluctuates with the volume of sales. See
"Business -- Distribution." Distributors earn incentives based on the purchase
of products by them and their downline distributors. Bonuses are not typically
paid on business support materials, as such items are intended for use by the
distributors rather than for resale to consumers. Distributor incentives are
paid by the Company based on a schedule set under the Sales Plan and tied to the
volume and cost of products purchased by the distributors.
Other operating expenses consist of distribution expenses and selling and
administrative expenses. Distribution expenses include the costs associated with
having products available for, or delivering products to, distributors including
the costs of warehouse and distribution facilities.
Selling and administrative expenses include, in addition to corporate staff
overhead, the costs of motivational sales meetings, product demonstration
seminars and product fairs, training sessions, distributor leadership seminars
and business promotion meetings. Corporate image advertising, civic events and
other promotional activities are also selling and administrative expenses.
Included in selling and administrative expenses are charges relating to
various administrative support services provided to the Company by Amway
pursuant to the Support Services Agreement. These services include legal,
accounting, tax, treasury, marketing, insurance, inventory control, investor
relations and human resources. These charges include direct costs incurred by
Amway for investor relations services and direct costs payable by Amway to third
parties for services. Prior to September 1, 1993, these charges also included
certain internal labor costs relating to those services provided by Amway to the
Company. These internal labor costs, which aggregated Y352.3 million for fiscal
1993, were eliminated on September 1, 1993 (except for those expenses incurred
in connection with investor relations services). See "Business -- Relationship
with Amway -- Support Services Agreement."
Other income-net is principally a combination of interest income and gains
and losses on a portion of the investment portfolios held by Amway Japan
Enterprises Inc., a Delaware corporation and a wholly-owned subsidiary of the
Company ("AJEI"). See " -- Liquidity and Capital Resources" and Note 12 of Notes
to Consolidated Financial Statements.
Under Japanese law, the Company is subject to a number of taxes based on
earnings, such as corporate tax, inhabitants tax and enterprise tax. As
described below, the Company's effective tax rates differ from the statutory tax
rates due to the effect of expenditures which are permanently non-deductible for
tax purposes and timing differences in the recognition of certain items of
income and expense.
The Company's financial condition and results of operations will also be
affected by certain actions that may be taken by the Company to avoid "passive
foreign investment company" status for U.S. federal income tax purposes because
such actions would reduce the Company's cash position. The Company does not
expect these actions to have a material impact on its results of operations. See
"Taxation -- United States Federal Income Taxation -- Passive Foreign Investment
Companies."
For a discussion of certain governmental matters which apply to the Company
and its business see "Risk Factors -- Regulation of Certain Direct Selling
Activities," " -- Operations Outside the United States; Currency Fluctuations,"
" -- Product Liability" and "Business -- Government Regulation."
25
<PAGE> 59
RESULTS OF OPERATIONS
The following table sets forth the percentage of net sales represented by
the specific components of income and expense for the fiscal years ended August
31, 1993, 1994 and 1995.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED AUGUST 31,
----------------------------
1993 1994 1995
------ ------ ------
<S> <C> <C> <C>
Net sales........................................................ 100.0% 100.0% 100.0%
Cost of sales.................................................... 28.7 27.7 26.7
------ ------ ------
Gross profit..................................................... 71.3 72.3 73.3
------ ------ ------
Distributor incentives........................................... 26.1 27.1 26.9
Distribution expenses............................................ 6.0 5.3 5.0
Selling and administrative expenses.............................. 12.9 12.5 13.5
------ ------ ------
Total operating expenses......................................... 45.1 44.8 45.4
------ ------ ------
Operating income................................................. 26.2 27.5 27.9
Other income -- net.............................................. 1.9 1.6 1.0
------ ------ ------
Income before income taxes....................................... 28.2 29.2 28.9
Income taxes..................................................... 16.0 16.1 15.9
------ ------ ------
Net income....................................................... 12.2% 13.1% 13.0%
====== ====== ======
</TABLE>
- ---------
Figures may not add to 100% due to rounding.
The Company operates in a single business segment, consumer products, and
in a single geographic market, Japan. The following table sets forth the net
sales by product line for the fiscal years ended August 31, 1993, 1994 and 1995.
NET SALES BY PRODUCT LINE
(IN MILLIONS OF YEN)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED AUGUST 31,
----------------------------------
1993 1994 1995
-------- -------- --------
<S> <C> <C> <C>
Personal Care.............................................. Y 41,888 Y 46,000 Y 55,491
Housewares................................................. 26,629 46,522 50,754
Nutrition.................................................. 33,691 37,031 42,360
Home Care.................................................. 21,754 21,549 22,371
Other Products............................................. 6,066 6,454 7,015
-------- -------- --------
Y130,028 Y157,556 Y177,991
======== ======== ========
</TABLE>
FISCAL 1995 COMPARED TO FISCAL 1994
Net Sales. Net sales for fiscal 1995 of Y178.0 billion increased Y20.4
billion, or 13%, over net sales during fiscal 1994. All product categories
contributed to this increase, with the largest growth occurring in the Personal
Care and Nutrition Lines. Personal Care Line sales increased 20.6% and Nutrition
Line sales increased 14.4%. The Housewares Line and Other Products increased
9.1% and 8.7%, respectively. Competitive pricing pressures on household products
limited growth within the Home Care Line, which showed a more modest increase of
3.8%. Of the Y178.0 billion of fiscal 1995 net sales, Y71.9 million, or 40.4%,
is attributable to new products introduced during the 24-month period ended
August 31, 1995.
The largest contributor to growth within the Personal Care Line during
fiscal 1995 was the Amway World Plaza collection of apparel and accessories
which includes 58 new items that were added during fiscal 1995. Artistry(R) Self
Acting skin cream, which was launched in May 1995, and other skin care products,
particularly the Skin Care Trial Kit, also had a significant impact on fiscal
1995 growth. The Body Shampoo and Body Care Towel, launched in October 1994,
contributed to a lesser extent.
26
<PAGE> 60
Growth within the Nutrition Line was almost entirely attributable to sales
of the Company's Triple X food supplement, which was launched during the second
quarter of fiscal 1995. Sales of other food supplement products decreased in
fiscal 1995. Because Triple X was designed to be a complete, all-inclusive
nutritional supplement, the Company believes that the decrease in sales of other
food supplement products is directly related to the introduction of Triple X.
Within the Housewares Line, sales of Amway Queen(R) Cookware increased Y2.5
billion, or 17.2% over fiscal 1994. In addition, the Amway Queen(R) 7-ply
Utility Pan, which was reintroduced in October 1994, showed strong sales in
fiscal 1995. The combined fiscal 1995 sales of Amway Queen(R) Cookware, the
Amway Queen(R) 7-Ply Utility Pan and the Amway Queen(R) Wok were Y21.7 billion
and accounted for 12.2% of net sales. Sales of water treatment system units,
together with replacement parts, showed a slight increase over those of the
prior year and accounted for Y22.8 billion or 12.8% of net sales in fiscal 1995
compared to 13.7% of net sales for fiscal 1994.
The modest increase in sales in the Home Care Line was primarily
attributable to the introduction in April 1995 of the Super Concentrated
Cleaning system, a product that includes highly concentrated cleaning agents and
a mechanism that allows the user to adjust the strength of such agents. The
increase in Other Product sales was largely attributable to renewal fee income,
which increased 20.2% over fiscal 1994 due to increases in both the Company's
renewal fee and the number of distributor renewals.
Gross Profit. Gross profit during fiscal 1995 increased Y16.5 billion, or
14.5%, over that of fiscal 1994. The improvement in gross profit was caused by
the improvement in the implicit dollar/yen exchange rate between Amway and the
Company partially offset by an increase in prices for products purchased by the
Company from Amway. The introduction of the higher-margin Artistry(R) Self
Acting skin cream also contributed to this improvement. These improvements were
partially offset by an increase in the cost of producing and distributing the
Company's distributor magazine. Overall, these factors resulted in a gross
margin of 73.3%, as compared to a gross margin of 72.3% during fiscal 1994.
Expenses. Total operating expenses increased Y10.1 billion, or 14.4%, over
fiscal 1994. As a percentage of sales, however, this represented an increase of
only 0.6%, from 44.8% during fiscal 1994 to 45.4% during fiscal 1995.
Distributor incentives and distribution expenses decreased slightly as a
percentage of sales. This decrease in distributor incentives was primarily
attributable to the fact that, in fiscal 1994, the Company paid a special 15th
year anniversary bonus to distributors. These decreases in distributor
incentives and distribution expenses were more than offset by an increase in
selling and administrative costs of Y4.4 billion, or 22.1%, compared to fiscal
1994. The increase in selling and administrative costs resulted largely from
increased headcount and general expansion of the Company, as well as increased
advertising, promotional and public relations expenditures. Also, the Company
increased its expenditures for its annual distributor convention and similar
distributor events. Finally, administrative expenses in fiscal 1995 include Y0.4
billion of nonrecurring charges relating to land acquisitions. See Note 5 of
Notes to Consolidated Financial Statements.
Operating Income. The increase in gross profit and smaller increase in
operating expenses combined to produce an increase in operating income of Y6.4
billion, or 14.6%, over fiscal 1994.
Other Income-net. Other income during fiscal 1995 decreased Y0.8 billion
as compared to fiscal 1994, or 32.2%. This was primarily the result of one-time
charges in fiscal 1995 relating to the write-off of certain capitalized software
costs (Y465.0 million) and relating to costs incurred in connection with the
Kobe earthquake (Y195.0 million). In addition, other income-net in fiscal 1994
included a gain (Y507.0 million) on the transfer of the Company's interest in
Amway Pacific, Ltd. for shares of Amway Asia Pacific Ltd. See Notes 4 and 5 of
Notes to Consolidated Financial Statements. While investment income at AJEI
increased significantly over that of fiscal 1994, this increase was offset by
reduced interest income attributable to lower cash balances available for
investment, which resulted primarily from the use of cash to purchase land for
the new headquarters building and the new Tokyo Regional Distribution Center.
Income Taxes. The Company's effective tax rate for each of fiscal 1995 and
fiscal 1994 was 55.2%.
Net Income. The factors discussed above resulted in net income for fiscal
1995 of Y23.1 billion, which represents an increase of Y2.5 billion, or 11.9%,
over that of fiscal 1994.
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<PAGE> 61
FISCAL 1994 COMPARED TO FISCAL 1993
Net Sales. Net sales for fiscal 1994 of Y157.6 billion increased by Y27.5
billion (21.2%) from Y130.0 billion for fiscal 1993. Sales in fiscal 1994
increased in all business categories, except in the Home Care Line, which
declined 0.9%. Sales in the Housewares Line, the Company's largest line in
fiscal 1994, were Y46.5 billion. This was a 74.7% increase over Housewares Line
sales of Y26.6 billion in fiscal 1993. Sales in the Personal Care Line, the
Company's largest line in both fiscal 1992 and 1993, increased by Y4.1 billion
(9.8%) from fiscal 1993 sales of Y41.9 billion. Sales in the Nutrition and Other
Lines increased 9.9% and 6.4%, respectively. This growth was the result of an
increase in the distributor base in 1994 compared to fiscal 1993, as well as the
sales of new products, particularly water treatment system units. The number of
renewed distributors increased 9.8% to 896,000 from 816,000 at the end of fiscal
1993. The water treatment system unit, which was introduced on a test marketing
basis in fiscal 1993 and available in September 1993 on a limited basis through
direct distributors until becoming generally available to all distributors in
January 1994, accounted for Y21.6 billion or 13.7% of total sales in fiscal
1994. In fiscal 1993, the sales of water treatment system units accounted for
approximately 2.0% of total sales. New products introduced since September 1,
1992 accounted for approximately Y55.6 billion or 35.3% of fiscal 1994 net
sales.
Gross Profit. Gross profit for fiscal 1994 of Y114.0 billion increased by
Y21.3 billion (22.9%) from a gross profit of Y92.7 billion in fiscal 1993. The
increase was primarily a result of the increase in net sales. As a percentage of
net sales, gross margin increased to 72.3% in fiscal 1994 from 71.3% in fiscal
1993. The primary reason for this improvement was the appreciation of the yen
over the U.S. dollar and the impact of the implicit dollar/yen exchange rate for
purchases of products from Amway during fiscal 1994. The exchange rate which was
applicable during fiscal 1994 was approximately Y113 = U.S.$1.00 compared to
approximately Y131 = U.S.$1.00 for fiscal 1993. This improvement in the exchange
rate was partially offset by a shift in product mix from the Home Care, Personal
Care and Nutrition Lines to the Housewares Line, which generally has a lower
gross margin than the other three lines.
Expenses. Total operating expenses for fiscal 1994 were Y70.6 billion, an
increase of Y12.0 billion (20.5%) over Y58.6 billion for fiscal 1993, primarily
due to an increase of Y8.7 billion (25.4%) in distributor incentives.
Distributor incentives increased, as a percent of net sales, to 27.1% in fiscal
1994 from 26.1% in fiscal 1993 primarily as a result of an increase, as a
percent of total sales, in the sales of products on which distributor bonuses
are calculated and a special 15th anniversary bonus paid in fiscal 1994. Total
operating expenses, as a percent of net sales, decreased to 44.8% in fiscal 1994
from 45.1% in fiscal 1993 primarily due to a 0.7% reduction, as a percent of
total sales, in distribution expenses and a 0.5% reduction, as a percent of
total sales, in selling and administrative expenses in fiscal 1994 partially
offset by the increase in distributor incentives mentioned above.
Operating Income. Operating income for fiscal 1994 of Y43.4 billion
increased by Y9.3 billion (27.1%) from Y34.1 billion for fiscal 1993. The
Company's operating margin was 27.5% in fiscal 1994, as compared to 26.2% in
fiscal 1993. This improvement in operating income is the result of the
improvement in gross profit, distribution expense and selling and administrative
expense as a percent of net sales partially offset by increased distributor
incentives as a percent of net sales.
Other Income-net. Other income-net for fiscal 1994 of Y2.6 billion
increased slightly from Y2.5 billion in fiscal 1993.
Income Taxes. Income taxes of Y25.3 billion increased Y4.6 billion (22.1%)
from fiscal 1993 primarily due to the fact that pre-tax income increased 25.5%
to Y45.9 billion from Y36.6 billion in fiscal 1993. The effective tax rate in
fiscal 1994 was 55.2% compared to 56.7% in fiscal 1993. The decline in the
effective tax rate was primarily due to a reduction in the statutory rate to
51.4% in fiscal 1994 from 52.1% in fiscal 1993.
Net Income. Net income for fiscal 1994 of Y20.6 billion increased by Y4.8
billion (30.0%) from Y15.9 billion in fiscal 1993. The increase is attributable
to the increase in net sales, the reduction in distribution and selling and
administrative expenses as a percent of net sales, and the improvement in the
effective income tax rate.
28
<PAGE> 62
FISCAL 1993 COMPARED TO FISCAL 1992
Net Sales. Net sales for fiscal 1993 of Y130.0 billion increased by Y6.8
billion (5.5%) from Y123.3 billion for fiscal 1992. Sales in fiscal 1993
increased in all business categories, except in the Home Care Line, which
declined 2.4%. Sales in the Personal Care Line, the Company's largest line in
fiscal years 1993 and 1992 in terms of net sales, increased 10.3% to Y41.9
billion while Other, the Housewares Line and the Nutrition Line increased 14.4%,
5.0% and 4.2%, respectively. This growth was a result of an increase in the
distributor base when compared to fiscal 1992. Sales per distributor remained
constant between fiscal 1993 and fiscal 1992. New products introduced in fiscal
1993 that significantly contributed to 1993 sales growth included water
treatment system units (Y2.5 billion), which were available on a limited test
marketing basis beginning in March 1993, a 3.8 liter, three piece Amway Queen(R)
cookware "add-on" set, which was introduced in October 1992 for a limited time
only, and the calcium fiber drink, which was introduced in December 1992. New
and improved products introduced since the beginning of fiscal 1992, including
the water treatment system units, accounted for approximately 23% of fiscal 1993
net sales.
Gross Profit. Gross profit for fiscal 1993 of Y92.7 billion increased by
Y5.5 billion (6.4%) from a gross profit of Y87.2 billion in fiscal 1992. The
increase was primarily a result of increased net sales. As a percentage of net
sales, gross margin for fiscal 1993 increased to 71.3% from 70.7% in fiscal 1992
due to several factors, including a slight increase in the Company's selling
price to distributors primarily relating to certain selected Amway Queen(R)
cookware products. In addition, gross margin was favorably impacted, as a
percentage of net sales, as a result of a slight appreciation of the dollar/yen
exchange rate of Y130.5 = U.S.$1.00 which was applicable during fiscal 1993
compared to the average dollar/yen exchange rate of Y131.4 = U.S.$1.00 for
purchases of products from Amway in fiscal 1992. These factors were partially
offset by a slight shift in product mix from the Home Care Line to the Personal
Care Line, which generally has a lower gross margin than the Home Care Line.
Expenses. Total operating expenses in fiscal 1993 were Y58.6 billion, an
increase of Y3.8 billion (7.0%) over Y54.7 billion for fiscal 1992, primarily
due to an increase of Y2.1 billion (6.6%) in distributor incentives. Operating
expenses as a percent of net sales increased to 45.1% in fiscal 1993 from 44.4%
in fiscal 1992. Increased distributor seminar costs and an increase in rental
costs as a result of additional office space to accommodate staff increases in
fiscal 1991 and 1992 also contributed to the increase in total operating
expenses in fiscal 1993. Distributor incentives increased as a percent of net
sales to 26.1% in fiscal 1993 from 25.9% in fiscal 1992 due to an increase in
certain bonuses paid to distributors.
Operating Income. Operating income for fiscal 1993 of Y34.1 billion
increased by Y1.7 billion (5.3%) from Y32.4 billion for fiscal 1992. The
Company's operating margin was 26.2% in fiscal 1993 compared to 26.3% in fiscal
1992.
Other Income-Net. Other income-net for fiscal 1993 of Y2.5 billion
decreased by Y1.0 billion (28.7%) from Y3.5 billion for fiscal 1992. This was
caused primarily by lower interest income of Y2.8 billion in fiscal 1993
compared to Y3.3 billion in fiscal 1992, a reduction of 14.5%, as a result of
lower interest rates and a valuation loss on long-term investments of Y0.4
billion. In addition, net miscellaneous expenses increased slightly.
Income Taxes. Income taxes increased to Y20.8 billion in fiscal 1993, an
increase of Y1.4 billion (7.2%) from Y19.4 billion in fiscal 1992. Income taxes
as a percent of income before income taxes increased to 56.7% in fiscal 1993
from 54.0% in fiscal 1992. This increase was attributable to an increase for
fiscal 1993 in expenses that are not tax deductible or not currently deductible,
such as distributor meals and entertainment and a valuation loss on long-term
investments.
Net Income. Net income of Y15.9 billion in fiscal 1993 represented a Y0.7
billion (4.1%) decline from net income of Y16.5 billion in fiscal 1992. The
decline in net income was attributable to lower other income-net and the
increased effective income tax rate described above.
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<PAGE> 63
LIQUIDITY AND CAPITAL RESOURCES
The Company generates significant cash flows from operations. In fiscal
1995, cash provided by operations totaled Y31.2 billion, including net income of
Y23.1 billion. The Company had cash, cash equivalents and short-term investments
of Y73.6 billion, including marketable equity securities and related derivative
instruments totaling Y32.0 billion, as of August 31, 1995.
Historically, the Company has maintained working capital levels that
significantly exceeded its working capital requirements. At August 31, 1995, the
Company's working capital of Y43.6 billion had decreased Y25.3 billion from
working capital of Y68.9 billion at August 31, 1994. This decrease was primarily
the result of the purchases of the land for the new headquarters facility and
the new Tokyo Regional Distribution Center discussed below.
On March 30, 1995, the Company acquired a 3,561 square meter parcel of land
in Tokyo for the construction of a new headquarters facility. The purchase
price, which was paid in cash, aggregated Y19.4 billion. Certain additional
costs related to this purchase are, in accordance with Japanese GAAP, being
expensed as incurred. Certain additional events must occur prior to July 1, 1996
before the site is available for construction. Accordingly, construction of the
headquarters facility is not planned to commence before fiscal 1997. The total
cost for the headquarters project, including the purchase price for the land, is
currently estimated to be between Y27.5 billion and Y32.5 billion. In addition,
the Company purchased a 22,296 square meter parcel of land in Tokyo in July 1995
for the development of a new Tokyo Regional Distribution Center. The purchase
price for this land, which was paid in cash, was Y4.7 billion. It is anticipated
that construction of this Regional Distribution Center will begin in December
1995 and that this facility will be operational beginning in February 1997. The
total cost of this project, including the purchase price for the land, is
currently estimated to be between Y13.8 billion and Y14.4 billion. The
construction of both facilities is expected to be financed out of operating cash
flows.
Capital expenditures in fiscal 1995 totaled Y25.2 billion primarily for the
purchases of the land for the new headquarters facility and the new Tokyo
Regional Distribution Center. The Company's committed capital expenditures for
fiscal 1996 will consist primarily of expenses incurred in connection with the
planning of the new headquarters facility and the planning and construction of
the new Tokyo Regional Distribution Center.
During the first quarter of fiscal 1995, the Company paid fiscal 1994
year-end regular and special dividends aggregating Y12.0 billion (Y80 per share,
Y40 per ADS). During the third quarter of fiscal 1995, the Company paid fiscal
1995 interim regular and special dividends aggregating Y14.2 billion (Y95 per
share, Y47.50 per ADS). The Company has announced its intention to pay, subject
to legal and other factors, a 1995 year-end regular dividend of Y45 per share
during fiscal 1996. If paid as currently intended, based on the number of shares
of Common Stock currently outstanding, such dividends would aggregate Y6.7
billion.
In October 1995, the Company announced its intention to increase the rate
of its regular annual dividend with respect to fiscal 1996 to Y100 per share of
Common Stock from Y90 per share of Common Stock with respect to fiscal 1995.
Such increased annual dividend rate would be paid with respect to fiscal 1996 as
a Y50 per share interim dividend payable in May 1996 to holders of record on
February 28, 1996 and as a Y50 year-end dividend promptly following shareholder
approval at the November 1996 Ordinary General Meeting of Shareholders to
holders of record on August 31, 1996.
In October 1995, the Company also announced its intention to pay a special
year-end dividend with respect to fiscal 1995 of Y50 per share of Common Stock
in December 1995 and to pay a special interim dividend with respect to fiscal
1996 of Y25 per share of Common Stock in May 1996 in addition to the proposed
interim dividend of Y50 per share of Common Stock described above for a total
fiscal 1996 interim dividend of Y75 per share of Common Stock. The 1996 interim
dividend and the 1996 special interim dividend are proposed to be paid on the
same date in May 1996 to holders of record on February 28, 1996. Interim
dividends are not subject to shareholder approval. See "Description of Capital
Stock -- Dividends."
On October 18, 1995, the Company announced its intention to present to the
shareholders for their approval at the Company's Ordinary General Meeting of
Shareholders to be held on November 29, 1995 a proposal to repurchase up to
Y15.0 billion (U.S.$153.0 million) of Common Stock by means of open market
30
<PAGE> 64
purchases or a tender offer to the shareholders of the Company in accordance
with the Securities and Exchange Law of Japan and the Exchange Act. The Company
has been informed by the Principal Shareholders that they intend to participate
fully in the share repurchase. The share repurchase will also include those
shares of Common Stock represented by ADSs. The shareholders' approval will be
conditioned upon amendment of applicable laws, regulations and ordinances of
Japan such that taxation on deemed dividends under the Income Tax Law or the
Corporate Tax Law of Japan will not apply either to (i) shareholders (whether
individual or corporate) who do not sell their shares in the repurchase, except
that corporate shareholders (other than nonresident corporate shareholders
without a permanent establishment in Japan) may elect to be subject to deemed
dividend taxation, or (ii) individual shareholders who sell their shares in a
tender offer. See, "Description of Capital Stock -- Repurchase by the Company of
its Common Stock" and "Taxation -- Japanese Taxation."
If, as proposed, the annual dividend rate is increased, the special
dividends described above are paid and the Company repurchases shares with an
aggregate value of approximately Y15.0 billion, dividend payments, based on the
number of shares currently outstanding, and payments for share repurchases in
fiscal 1996 would aggregate approximately Y40.4 billion. No assurances can be
given that any of these payments or repurchases or any future dividends will be
paid or made as currently intended.
The Company pays to Amway, for the use of Amway trademarks, formulas and
designs in connection with products manufactured by others under contract with
the Company, a royalty of up to 8% of net sales of such products. As of July 31,
1995, the Company executed, in prepayment of royalties for fiscal years 1996,
1997 and 1998, promissory notes in the aggregate amount of Y1.9 billion. In
consideration for the execution of these notes, the revised royalties for these
years will approximate 3.6% for those Company-sourced products bearing an Amway
trademark and approximately 7.3% for those Company-sourced products bearing an
Amway trademark and using an Amway formula or design. The actual royalty payable
with respect to these products will depend on actual aggregate sales of such
products for the three-year period. The notes are payable in six semiannual
installments commencing February 28, 1996, with the final payment due and
payable on August 31, 1998. Because these notes are not treated as notes under
Japanese commercial practices and regulations, they will not be recorded on the
balance sheet of the Company. See Note 9 of Notes to Consolidated Financial
Statements.
In March 1994, the Company capitalized AJEI with approximately Y31.6
billion (U.S.$300.0 million) (based on the Noon Buying Rate of Y105.38 =
U.S.$1.00 prevailing on March 18, 1994) of the Company's available cash. AJEI
initially invested approximately U.S.$287 million with two independent
investment managers, each of which is to manage approximately half of that
amount for a two year period. Both investment managers designed an equity
portfolio to produce results similar to the S&P 500. To protect against a loss
due to declines in the dollar value of the portfolios, the Company purchased two
put options exercisable in two years for a total premium of approximately
U.S.$13 million. The first put allowed AJEI to require the repurchase of
approximately U.S.$93.5 million of one equity portfolio at its original cost.
The second put provided for protection of approximately U.S.$93.5 million in the
other portfolio against downward market movements in the S&P 500. In September
1995, AJEI sold its positions in those portions of each of the equity portfolios
that were the subject of the puts and sold the puts for an aggregate net amount
of approximately U.S.$226.4 million. The Company previously recognized a portion
of this amount; the remaining U.S.$18.9 million will be included in other
income-net for the period ending November 30, 1995. The proceeds of such sale
were invested by AJEI in U.S. treasury securities and money market preferred
stock.
The performance of the balance of AJEI's equity investments of
approximately Y10.4 billion is hedged by swap transactions pursuant to which
AJEI, in effect, exchanged the S&P 500 total return (including dividends) on the
portfolio for a fixed return thereon of approximately 5% per year for two years.
At the end of two years any decrease in the price of the S&P 500 will be paid to
AJEI by the swap counterparties and any increase in the price of the S&P 500
will be paid to the swap counterparties by AJEI. As owner of the underlying
portfolio, AJEI receives the benefit of outperformance of, and bears the risks
of underperformance of, the investment managers' portfolios relative to the S&P
500.
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<PAGE> 65
In order to hedge, in part, AJEI's exposure with respect to its portfolio
of investments (which are U.S. dollar denominated) against exchange rate
fluctuations between the yen and the dollar, the Company has entered into a
series of forward currency transactions with Amway, as of October 12, 1995, in a
notional amount of U.S.$190 million that provide for the delivery of yen to AJEI
on January 9, 1996, at an average exchange rate of Y98.21 = U.S. $1.00. Except
for such forward currency transactions, no arrangements have been made by the
Company or AJEI to hedge its investments against exchange rate changes between
the yen and the dollar. As a result, the remaining investments held by AJEI are
subject to the beneficial or adverse effect of any such exchange rate
fluctuations.
In translating financial statements of AJEI into yen, the exchange rate
prevailing as of the respective balance sheet date was used for all asset and
liability items and for items other than capital stock and additional paid-in
capital in the shareholders' equity section. Translation adjustments resulting
from the depreciation of the U.S. dollar in relation to the yen were recorded as
a Translation adjustment on the balance sheet. AJEI is subject to U.S. federal
income tax rules and regulations. Any dividends or other distributions by AJEI
to the Company may be subject to withholding tax. See Note 2 of Notes to
Consolidated Financial Statements.
Under Japanese GAAP, it is permissible to reflect accounts of a
non-Japanese subsidiary in the consolidated financial statements of a Japanese
corporation without converting the accounting principles of such a subsidiary to
Japanese GAAP. Accordingly, the Company has followed Statement of Financial
Accounting Standards ("SFAS") No. 115 "Accounting for Certain Investments in
Debt and Equity Securities." SFAS No. 115 requires the Company to carry AJEI's
investments, options and swaps at market; changes in market value are either
reflected in an adjustment to shareholders' equity (with respect to one
investment manager's portfolio and any corresponding put) or constitute other
income/expense in the income statement (with respect to the other investment
manager's portfolio, any corresponding put and each of the swaps).
The Company does not currently have any plans, arrangements or
understandings with respect to incurring indebtedness in fiscal 1996. The
Company believes that internally generated funds, together with available cash,
will be sufficient over at least the next 12 months to meet its presently
anticipated day-to-day operating expenses, working capital and capital
expenditure requirements, to pay proposed regular and special dividends, and to
make proposed share repurchases.
PROJECTIONS
Because the Common Stock trades in the Japanese OTC market, the Company is
required to disclose publicly in Japan certain financial projections in
accordance with the requirements of the JSDA. Such projections are based on the
Company's Japanese accounts as prepared in accordance with the Commercial Code.
Each year, the first set of projections, covering both the first six months of a
fiscal year and the full fiscal year, are made at the time of the announcement
of the results of the preceding fiscal year. The second set of projections
covering the full fiscal year (reflecting six month interim results), is made at
the time of the announcement of the results of the first six month period. In
accordance with the JSDA requirements, the Company has disclosed projections of
its net sales, net income and "ordinary income." Under Japanese GAAP, "ordinary
income" includes all items of income and expense except for net special profit
or loss (largely comprised of items, defined in the Japanese accounting
regulations, that include "extraordinary items" under U.S. GAAP) and income
taxes, other than the Japanese enterprise tax. Japanese enterprise taxes are
included in selling and administrative expenses and are deductible when paid for
the purposes of calculating taxable income. However, in the statements of income
included in this Prospectus, enterprise taxes have been reclassified to "Income
taxes."
In accordance with JSDA requirements, on October 18, 1995, the Company
announced its net sales, "ordinary income" and net income projections for the
six months ending February 28, 1996 and for the fiscal year ending August 31,
1996. The Company projected for the six months ending February 28, 1996 net
sales of Y98.9 billion (U.S.$1.0 billion), ordinary income of Y25.2 billion
(U.S.$257.1 million) and net income of Y12.8 billion (U.S.$130.6 million). For
fiscal 1996, the Company projected net sales of Y201.7 billion
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(U.S.$2.1 billion), ordinary income of Y52.2 billion (U.S.$532.7 million) and
net income of Y26.7 billion (U.S.$272.4 million).
In accordance with the requirements established by the JSDA, the
projections must generally be amended if the most recent projection or the
actual results vary from the prior projection by 10% or more in the case of
projected net sales, 30% or more in the case of projected ordinary income or 30%
or more in the case of projected net income. Accordingly, the Company may, as
interim or full fiscal year results become clear, announce its revised
"projection" even though such applicable period may already have been completed.
In arriving at its projections, the Company has assumed that the first half
of fiscal 1996 would be stronger than the second half of fiscal 1995 and that
fiscal 1996 as a whole would be stronger than fiscal 1995, primarily as a result
of new product introductions late in fiscal 1995 and throughout fiscal 1996. In
the Housewares Line, new product introductions in fiscal 1996 will include a
performance-enhanced induction range that will feature fully programmable
cooking. In the Personal Care Line, early in fiscal 1996 the Company will unveil
a comprehensive revision of product formulations and packaging for a significant
portion of the Artistry(R) line of cosmetics and skin care products. In addition
to these new product introductions, throughout fiscal 1996 the Company intends
to implement specific programs designed to increase distributor interest and
productivity, especially within the Home Care Line.
The foregoing financial projections should be read in conjunction with all
of the information, including the Consolidated Financial Statements, set forth
in this Prospectus. Except as required by the JSDA or otherwise, the Company
does not, as a matter of course, make public projections or forecasts of its
anticipated financial position or results of operations. To the extent the
Company releases, publishes or updates projections in Japan because of JSDA or
other requirements, it will include such information in documents filed with the
Commission or otherwise make such information public. Except as so required, the
Company does not anticipate that it will, and disclaims any obligation to,
publish or furnish projections or updates of projections previously published or
furnished.
The foregoing financial projections were not prepared with a view towards
public disclosure or compliance with published guidelines established by the
American Institute of Certified Public Accountants regarding projections and are
included in this Prospectus only because such information was made available in
Japan pursuant to the requirements of the JSDA and consequently in the United
States pursuant to the Company's obligations under Rule 12g3-2(b) promulgated by
the Commission under the Exchange Act. Neither the Company nor its directors or
officers assumes any responsibility for the accuracy of such projections. The
Company's independent auditors have not examined or compiled the projections
and, accordingly, assume no responsibility for them. The foregoing financial
projections reflect numerous assumptions, including various assumptions with
respect to the anticipated future performance of the Company, general business
and economic conditions and other matters, most of which are beyond the control
of the Company. In addition, unanticipated events and circumstances may affect
the actual financial results of the Company. Therefore, while the foregoing
financial projections are necessarily presented with numerical specificity as
required by the JSDA, the actual results achieved in fiscal 1996 will vary from
the projected results. These variations may be material. Accordingly, no
representation can be or is made with respect to the accuracy of the foregoing
financial projections or the ability of the Company to achieve the projected
results. See "Risk Factors" for a discussion of certain considerations that may
affect the future financial performance of the Company.
FOREIGN EXCHANGE TRANSACTION INFORMATION
The prices for products purchased from Amway, which the Company pays for in
yen, are governed by a price schedule that Amway establishes based upon a U.S.
dollar "cost plus" base price calculation. In addition to the U.S. dollar "cost
plus" base price component of Amway's schedule, the current prices for these
products include an implicit dollar/yen exchange rate which the Company has
calculated to be approximately Y91 = U.S.$1.00 compared to an exchange rate that
applied to product purchases throughout fiscal 1995 of Y104 = U.S.$1.00. Amway
has the right to modify, on 30 days' prior written notice, the prices of
products to be purchased by the Company from Amway; provided that any change in
the U.S. dollar "cost plus" base price component must be made on a consistent
basis for all Amway affiliates. The Company believes that the dollar/yen
exchange rate is determined by Amway based on Amway's assessment of current and
future
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<PAGE> 67
economic and business conditions, both in the United States and Japan, market
conditions with respect to the Company's products and other factors, including
the impact, if any, of hedging activities by Amway. Using the Company's
assumptions regarding product and sales mix and assuming the application of the
price schedule established for fiscal 1996 throughout fiscal 1996 and that the
products purchased from Amway continue to represent 65% of the Company's cost of
sales, the use of an implicit exchange rate of Y91 = U.S.$1.00 throughout fiscal
1996 would result in a 5.2% reduction in the Company's cost of sales for fiscal
1996 as compared to fiscal 1995. As a result of the Company's payment for its
purchases of products from Amway in yen, and because the Company does not
currently hedge its currency transaction exposure relating to the purchase of
products from Amway, appreciation of the dollar against the yen could have a
material adverse effect on the Company's operating results to the extent Amway
modifies the implicit exchange rate component of the prices it charges the
Company for products. In addition, the strengthening of the yen against the
dollar has allowed the Company to maintain relatively stable pricing
historically notwithstanding periodic changes by Amway in the U.S. dollar "cost
plus" base prices to the Company. The Company can not predict whether such
strengthening of the yen against the dollar will continue. Further, the Company
cannot predict what portion of any price changes may be passed through to
distributors or the effect of any such price changes on net sales or distributor
retention or sponsoring. See "Risk Factors -- Operations Outside the United
States; Currency Fluctuations," " -- Overview," and "Business -- Relationship
with Amway -- Product Purchase Agreement."
All payments to Amway for investor relations services and for support
services performed by third parties (internal labor charges were substantially
eliminated in September 1993, except for those expenses incurred in connection
with investor relations services) are made in dollars and the Company bears the
risk of currency exchange rate fluctuations in connection therewith. The Company
does not currently hedge against currency exchange rate fluctuations.
INFLATION
Inflation has not had a significant effect upon the Company's business.
ACCOUNTING CHANGE
Through the year ended August 31, 1992, both internally developed and
purchased software costs were charged to income when incurred or paid. However,
effective September 1, 1992, the Company changed the accounting for software
costs to defer and amortize them over five years. The Company believes that, due
to the significant investments being made in information systems, the method of
deferring software costs and amortizing them is more appropriate for measuring
the results of operations for each year. The effect of this change was to
increase net income by Y1.1 billion for the year ended August 31, 1993.
RECONCILIATION OF JAPANESE AND UNITED STATES GAAP
The consolidated financial statements of the Company are prepared in
accordance with Japanese GAAP, which differ in certain material respects from
U.S. GAAP. In the case of the Company, the applicable major differences relate
to income taxes, pension costs, software development costs, stock issue
expenses, non-monetary transactions and certain expenses incurred in connection
with capital projects.
Shareholders' equity would have been Y4.1 billion and Y5.8 billion higher
at August 31, 1994 and 1995, respectively, if U.S. GAAP had been followed. The
significant differences between Japanese GAAP and U.S. GAAP as applicable to the
Company are set out in more detail in Notes 10 and 11 of Notes to Consolidated
Financial Statements.
The Company had two outstanding negotiable promissory notes dated August
31, 1993 payable to Amway pursuant to the Trademark License Agreement totalling
Y314 million at August 31, 1994, which are not recorded on the balance sheet at
such date due to the commercial practices and regulations in Japan. The final
installment of these notes was paid on or prior to August 31, 1995. The Company
also has promissory notes dated July 31, 1995 totalling Y1.9 billion payable to
Amway pursuant to the Trademark License Agreement in prepayment of royalties for
fiscal years 1996 through 1998. These promissory notes are not recorded on the
balance sheet due to commercial practices and regulations in Japan. For U.S.
GAAP, these promissory notes would have been recorded as a long-term liability
with the offset being recorded to a prepaid expense account. See
"Business -- Relationship with Amway -- Trademark License Agreement."
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BUSINESS
GENERAL
Amway Japan Limited is the exclusive distribution vehicle for Amway in
Japan. The Company, which has a 16 year operating history, believes that it is
one of the largest direct selling businesses in Japan as measured by its fiscal
1995 net sales of Y178.0 billion (U.S.$1.8 billion) and net income of Y23.1
billion (U.S.$235.3 million) and the approximately 980,000 independent
distributors who renewed their distributorships in fiscal 1994 from the prior
fiscal year. The Company believes that Japan, with a population of approximately
124.8 million, is the largest direct selling market in the world in terms of
sales, estimated to be approximately twice the size of the direct selling market
in the U.S.
The Company believes that the Sales Plan is fundamental to the Company's
operations. Under the Sales Plan, the Company sells products exclusively to its
distributors, who are independent contractors and not employees of the Company
or Amway. The Sales Plan offers individuals the opportunity to establish their
own business as independent distributors selling directly to consumers. This
direct selling method involves a high level of personal service, including the
demonstration and convenient delivery of a broad range of consumer products,
generally to a distributor's personal contacts and relatives. Distributors can
develop a larger business by sponsoring new distributors into their organization
and/or by establishing separate distributorships in other Amway markets
internationally. Although no compensation is paid by the Company for sponsoring
activities, the sponsoring of new distributors creates layers of "downline"
distributors in the distribution structure and permits distributors to earn
performance bonuses based in part on product purchases by their downline
distributors. No distributor is obligated to purchase any products or to sponsor
new distributors.
The Company distributes approximately 130 different consumer products, in
four core product lines: Housewares, Personal Care, Nutrition and Home Care.
These products consist primarily of products purchased from Amway. In addition,
in order to heighten distributor interest by broadening the range of products
available, the Company distributes certain other products which bear the Amway
name or trademark but which are manufactured for the Company by third parties.
Many products the Company distributes are specially formulated for the Japanese
market. For example, cosmetics and skin care products are formulated for skin
tones and fragrance preferences of Japanese consumers, the Amway water treatment
system unit was designed to accommodate the characteristics of the water in
Japan and various products in the Housewares and Home Care Lines reflect the
characteristics of Japanese homes. The Company promotes products that are
environmentally friendly, which is consistent with the concerns of many Japanese
consumers and the Company's (and Amway's) long-standing philosophy. All products
distributed by the Company are covered by the Amway Satisfaction Guarantee,
which gives consumers the right to return products to the Company within a
reasonable time for a full refund, replacement or credit toward a future
purchase. Electronic and other durable products manufactured for Amway or the
Company by third parties are also covered by Amway's or their respective
manufacturer's warranties.
The Company believes that the extended family relationships and lifelong
close personal relationships common in Japan are particularly well-suited to the
direct selling methods of the Sales Plan. In addition, the low cost of entry,
wide range of available products and ability to start a distributorship business
part-time make a distributorship with the Company an attractive business
opportunity. The Company also believes that a variety of social and economic
changes which have occurred in Japan in the last few years have had a positive
impact on the Company's sales. Trends that benefit the Company include the
emergence of a greater interest on the part of some Japanese in pursuing more
independent, entrepreneurial activities outside traditional business settings,
an increase in the number of Japanese women deciding to join the workforce and
an increase in the number of Japanese seeking supplemental income from
alternative sources to mitigate the financial impact of slowing wages and salary
growth, the reduction or elimination of bonuses and overtime work, and the
increased concern over future employment prospects.
The Company also believes that there has been a major shift in Japanese
consumers' attitudes towards consumer products. In evaluating products, Japanese
consumers are placing an increasing emphasis on value based upon proven product
performance and service, rather than equating high price with high quality. The
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Company generally offers high value products that are easily demonstrated by
distributors and can be meaningfully differentiated from competing products. The
Japanese retail market is generally characterized by numerous small retailers
who frequently have only limited knowledge of the products they sell and may not
be able to demonstrate their products to customers. A high level of personal
service, including convenient in-home demonstrations, ordering and delivery, and
the Amway Satisfaction Guarantee provide additional value to the consumer.
PRODUCTS
The Company distributes approximately 130 different products in four core
product lines: Housewares, Personal Care, Nutrition and Home Care. Many products
are formulated exclusively for the Company for the Japanese market. In computing
the number of products, differences in size, color, fragrance and flavor are not
considered; as a consequence, the number of stock keeping units ("SKUs")
associated with the products the Company distributes is considerably larger than
the number of products. Approximately 80% of the Company's fiscal 1995 net sales
was derived from the distribution of products it purchased from Amway. Amway has
contracts with third party manufacturers for certain private label products in
its Housewares Line, predominantly metal kitchenware products such as Amway
Queen(R) cookware. The remaining approximately 20% of the Company's fiscal 1995
sales was derived from a variety of other products including starter kits,
sponsor kits, business support materials and other products purchased directly
by the Company from sources other than Amway and targeted specifically for the
Japanese market.
Housewares. The Housewares Line includes water treatment system units and
replacement parts, Amway Queen(R) cookware (including the Amway Queen(R) wok),
an electromagnetic induction range and gourmet kitchen knives. The water
treatment system unit, manufactured exclusively for Amway pursuant to
specifications jointly developed by the Company and Amway, utilizes carbon block
filter and ultraviolet technology to eliminate odors and bad taste in drinking
water and removes over 115 organic contaminants. An integral ultraviolet light
kills over 99.9% of bacteria, fungi and viruses. In addition, sales of the water
treatment system unit are generating ongoing sales of replacement carbon filters
and ultraviolet light bulbs, which must be replaced, at least annually,
depending on use and water conditions. The water treatment system unit has an
integrated self-monitoring system that alerts users when the filter or
ultraviolet light needs to be replaced. Amway Queen(R) cookware uses an
integrated waterless cooking system designed to preserve flavor, color and
nutrients, which the Company believes appeals to health conscious Japanese
consumers. Amway Queen(R) cookware, manufactured in the U.S. exclusively for
Amway, is significantly heavier than typical stainless steel cookware and is
guaranteed by the manufacturer to last a lifetime with proper use and care.
Amway Queen(R) cookware is sold in a 20-piece set and is designed to save space
and reduce energy costs by allowing pots to be stacked on top of each other so
that an entire meal can be prepared on a single burner. The cookware line also
includes the Amway Queen(R) wok (not included in the Amway Queen(R) cookware
set) which is designed for stir-fry and tempura-style cooking, common methods of
food preparation in many Japanese households. The electromagnetic induction
range, produced for the Company by a third party, provides a cool-to-the-touch,
smooth, easy to clean cooking surface that heats through electromagnetic
induction rather than traditional gas or electric heat. Fifteen Housewares Line
products are currently available in Japan.
Personal Care. The Personal Care Line includes the Artistry(R) line of
cosmetic and skin care products, Satinique(R) hair care products, hand and body
lotions, bath and shower soaps, oral care products and bath salts, as well as
products in the Amway World Plaza Collection. Many of these products were
specifically formulated for the Japanese market based upon market research and
analysis by the Company working in conjunction with Amway. For example, the
Artistry(R) line was completely reformulated as to color, shading and scent for
the Japanese market and reintroduced with new packaging in 1991. Satinique(R)
hair care products sold in Japan are also specially formulated for the special
needs and preferences of the Japanese market. The Company's bath salts are
locally manufactured to the Company's specifications and are not available in
other Amway markets. Approximately 52 Personal Care Line products are currently
available in Japan.
Nutrition. The Nutrition Line includes vitamins and dietary supplements
produced by Nutrilite Products Inc., a division of Amway ("Nutrilite"). For 60
years, Nutrilite has manufactured naturally-based nutritional
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supplements. Many of the raw materials used to make Nutrilite supplements are
grown and harvested on Nutrilite owned and operated farms including 600 acres in
California's San Jacinto Valley and acerola cherry plantations in Puerto Rico
and Mexico. No herbicides, pesticides or chemical fertilizers are used to grow
the raw materials for Nutrilite products, and no artificial preservatives,
colorings or flavorings are used in Nutrilite products. Leading Nutrition Line
products available in and specially formulated for the Japanese market include
vitamin supplements such as Triple X, a food supplement, Acerola C, Yeast B and
Wheat Germ E; nutrient rich products such as Hon E Lechi, Beta Carotene A,
Nutri-Protein and Quench(R) 8 drink mixes; and calcium fiber drink. Amway and
Nutrilite are official sponsors of the National Basketball Association, a
relationship which is highlighted on the packaging for Amway's vitamin and food
supplement products worldwide, including those distributed by the Company. Many
products in the Nutrition Line are regulated. See " -- Government Regulation."
Twenty-six Nutrition Line products are currently available in Japan.
Home Care. The Home Care Line consists of a broad range of concentrated
laundry care products (such as Amway's SA8(R) brand products), household
cleaners (such as Amway's L.O.C.(R) brand products), a Super Concentrated
Cleaning System, glass, metal and car care products and air fresheners. Amway
has demonstrated commitment to environmental matters that began with Amway's
first product in 1959, L.O.C.(R) (liquid organic cleaner), which since its
introduction has contained only biodegradable cleaning agents without the use of
phosphates, solvents or caustic materials. All SA8(R) brand products sold in
Japan are phosphate-free and have been reformulated specifically for the
Japanese market. Surfactants used in all of Amway's cleaning products are
biodegradable. Many of the products in Amway's Home Care Line are offered in
concentrated form, reducing the amount of packaging which must be created and
discarded. High concentration levels also reduce the Company's shipping costs
and reduce the amount of space that the products occupy in the Company's
warehouses and in consumers' homes. Amway aerosols do not use CFC
(chlorofluorocarbon) propellants which have been linked to damage in the earth's
ozone layer. Approximately 37 Home Care Line products are currently available in
Japan.
Other. Other products include sponsor kits, starter kits and business
support materials such as motivational audio and videotapes and written
materials as well as certain business accessories. Distributors interested in
sponsoring new distributors provide such potential new distributors with sponsor
kits. The purpose of the sponsor kit is to acquaint new distributors with the
Sales Plan, Rules of Conduct and Code of Ethics and performance bonus programs
and to provide product descriptions. The sponsor kits also contain
distributorship applications. The purchase price of a sponsor kit is currently
Y300 (U.S.$3.06). In order to become a distributor, an individual must complete
the distributorship application and purchase a starter kit from the Company. The
starter kit contains product order forms and literature as well as more detailed
information regarding the Sales Plan and the Rules of Conduct and Code of
Ethics. The purchase price of a starter kit is currently Y8,240 (U.S.$84). The
Company also derives revenues from the annual renewal fees paid by distributors
electing to renew their distributorships. Starter kits and sponsor kits are
covered by the Amway Satisfaction Guarantee. Other than the starter kit and
annual renewal fees, distributors are not required to make any payments to, or
purchases from, the Company as a condition to obtaining or maintaining their
distributorships. For a discussion of the fees charged by the Company to
distributors for annual renewals, see " -- Distribution."
DISTRIBUTION
The Sales Plan is fundamental to the Company's operations. Under the Sales
Plan, the Company sells products exclusively to its distributors, who are
independent contractors and not employees of the Company or Amway. The Sales
Plan is established and controlled by Amway and is required to be used by the
Company. The Sales Plan creates a direct selling structure under which
individuals have the opportunity to establish their own businesses with a
minimal cost of entry. See " -- Products -- Other." In order to become a
distributor, a person must be sponsored by an existing distributor and submit a
standard distributorship application (the "Distributorship Application"), which
is subject to Company approval. See " -- Sponsoring." The Company's net sales
are directly dependent upon the efforts of its distributors. See "Risk
Factors -- Reliance Upon Independent Distributors; Possible Negative Effects of
Adverse Publicity."
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The following table sets forth the approximate number of the Company's
distributors, direct distributors and the renewal rate for the fiscal years
shown.
<TABLE>
<CAPTION>
1991 1992 1993 1994 1995
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Number of distributors(1)(2)..... 597,000 752,000 816,000 896,000 980,000
Renewal rate(3).................. 68.2% 67.6% 71.7% 72.8% 71.8%
Number of direct
distributors(2)(4)............. 4,500 4,600 4,800 5,900 7,100
</TABLE>
- ---------
(1) Includes total numbers of distributorships (including direct
distributorships) in force from the prior fiscal year which were renewed for
the fiscal year shown. Numbers of distributors are rounded to the nearest
thousand. The number for each fiscal year does not reflect the total number
of distributors for such fiscal year because it does not include new
distributors who enrolled during such fiscal year.
(2) Multiple persons in the same household (such as a married couple) who are
distributors are considered a single distributorship.
(3) Percentage of all distributorships in force from the prior fiscal year which
were renewed for the fiscal year shown.
(4) "Direct distributors" are distributors who have achieved a specified,
significant level of performance for a specified period. See
" -- Distribution -- Direct Distributors." Numbers of direct distributors
are rounded to the nearest hundred.
Distributorships expire August 31 of each year regardless of when a person
commenced or last renewed the distributorship. A distributorship must be renewed
each fiscal year. The renewal fee is currently Y3,400 (U.S.$35). Distributors
are, however, given a grace period to pay their renewal fee before their
distributorship is treated as lapsing for nonrenewal. Persons can also lose
distributor status by violating the Sales Plan, the terms of their
distributorship, the Code of Ethics and Rules of Conduct or applicable law,
rules or regulations. See " -- Rules Affecting Distributors."
Amway's direct selling method is intended to involve a high level of
personal service, including convenient in-home demonstrations, ordering and
direct delivery of a broad range of consumer products, generally to a
distributor's personal contacts and relatives. Door-to-door sales and "cold
calling" are discouraged. The Company does not (and its rules do not permit
distributors to) sell products to or through retail stores or through direct
mail solicitation or other direct marketing mass media.
Sponsoring. The Company relies on its existing distributors to sponsor and
to assist in the training and motivation of new distributors. Existing
distributors identify persons who they believe might be interested in
participating in the Sales Plan and invite them to a presentation regarding the
Sales Plan. A person interested in becoming a distributor must be formally
sponsored by an existing distributor and, like all distributors, must sign a
Distributorship Application which is subject to Company approval. Although the
Company does not pay for sponsoring activities, the Company believes that such
activities are vital to the Company's net sales.
The sponsoring of new distributors creates layers in the direct selling
structure. Persons whom a distributor sponsors are referred to as "downline" or
"sponsored" distributors. If downline distributors also sponsor, they create
additional layers in the structure, but their downline distributors remain part
of the same distribution line as their original sponsors. Because of the
structure of the Company's distribution system under which distributors can
develop larger businesses sponsoring new distributors into their organization,
the Company's sales are concentrated within, and consequently dependent upon, a
relatively small number of distributor lines of sponsorship. Although there can
be no assurances, the Company believes that the loss of a leader of a
distributor line would not necessarily result in the loss of a significant
number of that leader's downline distributors. See "Risk
Factors -- Concentration of Distributors."
Historically, the Company has experienced periodic increases and decreases
in the level of sponsoring (as measured by distributor applications). The
Company believes these increases and decreases in part reflect the tendency of
distributors to focus on sponsoring efforts for limited periods and then to
focus on other activities.
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Rapid decreases in sponsoring activities can also be precipitated by adverse
publicity regarding direct sales generally or the Company or Amway in
particular. Because of the number of factors that impact sponsoring, the Company
cannot predict the timing or degree of these increases and decreases. There can
be no assurance that the number or productivity of distributors will be
sustained at current levels or increased. In addition, the number of
distributors as a percent of the population may reach levels that become
difficult to exceed due to the finite number of persons inclined to pursue an
independent direct selling business opportunity. Net sales are impacted by a
variety of other factors such as distributor productivity, distributor
retention, product improvements and new products.
Sponsoring is not required and distributors are not paid by the Company for
sponsoring activities. However, distributors have an incentive to engage in
sponsoring and an economic interest in their downline distributors' success
because, as described below, performance bonuses are available based in part on
purchases by downline distributors. See " -- Distributors' Sales Incentives."
Distributors are not limited to a particular sales territory within Japan
in their selling or sponsoring activities; however, additional requirements
apply if a distributor proposes to sponsor individuals outside Japan.
Principally for legal reasons (such as import, labeling and registration laws),
the Company does not allow distributors to export products. However, the Sales
Plan permits international sponsoring, under which Amway distributors in any
country (not only in Japan) can sponsor distributors in any other country in
which Amway operates (including Japan). This means that the Company's
distributors can sponsor distributors outside Japan and that Amway distributors
outside Japan can sponsor distributors in Japan. The international sponsors can
earn bonuses based in part upon the performance of the distributors they have
internationally sponsored. The Company believes that the level of international
sponsoring in or from Japan has not been significant.
Under the Sales Plan and the Code of Ethics and Rules of Conduct,
distributors are prohibited from providing distributor produced sales, business,
motivational and similar materials to other distributors prior to review and
approval by the Company. The Company does, however, permit distributors to
circulate certain newsletters without such review and approval. The Company has
not historically encountered significant unauthorized dissemination of such
materials. However, some distributor leaders and downline distributors, without
prior review or approval by the Company or Amway, have prepared and sold their
own audio and video tapes and written materials. Sales of these tapes and
materials could be inconsistent with the Sales Plan and the Code of Ethics and
Rules of Conduct, which, among other things, prohibit unfounded claims and
actions which improperly influence the purchase of such materials. Because
distributors are not employees of the Company, the Company cannot control
distributor leaders or their downline distributors other than through
communications with such leaders or downline distributors, and, if necessary,
efforts to enforce the Sales Plan and the Code of Ethics and Rules of Conduct.
Improper content in such materials and/or improper sales of such materials by
distributor leaders or downline distributors could have a material adverse
effect on the Company. See "Risk Factors -- Reliance Upon Independent
Distributors; Possible Negative Effects of Adverse Publicity."
Distributors' Sales Incentives. Under the Sales Plan, distributors receive
compensation in the form of their own direct retail profit and through various
available bonuses and awards based on their own purchases of products and the
purchases of their downline distributors.
A distributor's retail profit is the difference between the price the
distributor pays for the products and the price at which the distributor resells
the products. Distributors, not the Company, select the actual resale price of
products; the Company only provides suggested retail prices. Products that a
distributor buys for personal use or for sales demonstrations do not provide the
opportunity for a retail profit but do count towards bonuses and awards. The
Company's rules do not permit direct distributors and their downline
distributors to mark up the price of products sold to their downline
distributors.
Distributors can earn bonuses based upon their performance and the
performance of their downline distributors. Performance bonuses and awards are
paid according to a schedule established by Amway based on the cost and volume
of the products the Company sells to distributors. Under the Sales Plan, the
cost and volume variables assigned to products for purposes of calculating
bonuses may be changed from time to time.
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Cost is a currency based figure which reflects inflation and other economic
considerations and is generally the cost of a product to a distributor. In
Japan, the cost component is assigned with reference to the suggested retail
price of products and averages approximately 70% of such suggested prices.
Volume is an effort indicator that places the emphasis on the number of units
sold rather than their prices, which can increase from year to year. On average,
the Company's ratio of cost to volume for performance bonuses is approximately 3
to 2. Performance bonuses currently range from 3% to a maximum of 21% of the
combined cost of products purchased by distributors and their downline
distributors, depending on their combined volume. The higher the volume, the
higher the percentage of the performance bonus.
Pursuant to the Sales Plan, a portion of a distributor's performance bonus
must be shared, under the same bonus schedule, with the downline distributors
whose individual performance contributed to such distributor's bonus. Once a
distributor reaches the maximum performance bonus level, higher levels of
achievement are attainable, including additional bonuses, one-time incentive
awards and additional recognition. In addition to cash and public recognition,
trips and other prizes are also awarded. Many of these higher levels of
achievement are based on the number of lines of distributors that a distributor
has established which achieve the maximum performance bonuses for a specified
number of months. In this manner, the Sales Plan seeks to foster entrepreneurial
spirit, to provide monetary and nonmonetary recognition for achievement and to
reward persons building organizations producing high levels of sales.
Distributors must re-qualify each year for each of these bonuses (except for
one-time incentive awards). The requirement of six months of qualified
performance for direct distributor status (and consequently the higher levels of
achievement) is meant to promote sales activities throughout the entire year.
See " -- Direct Distributors." The requirement for annual requalification can,
however, lead to increased sales activity early in a fiscal year as distributors
try to get a quick start on requalifying, and late in a fiscal year as
distributors seek to requalify before the annual deadline. Another sales
incentive under the Sales Plan is the Sales Incentive Program under which the
Company has additional funds available each year to award to distributors at its
discretion.
Direct Distributors. Once a distributor achieves a specified significant
level of performance, the distributor becomes a "direct distributor" and is
eligible to earn higher bonuses and awards and to receive various forms of
official recognition from the Company.
In order to earn direct distributor status, a distributor must achieve
specified, significant qualifying criteria for three consecutive months plus
three additional months (which need not be consecutive) within the applicable 12
month period. In general, the qualifying criteria involve achieving and/or
sponsoring one or more groups of other distributors which earn the maximum
performance bonus under the Sales Plan. See
" -- Distributors' Sales Incentives" for a description of the performance bonus
program. Persons earning direct distributor status must requalify each year to
remain direct distributors.
A large proportion of persons who become distributors may not actively
promote the sale of products, seek sponsoring opportunities or renew their
distributorships. Many of the distributors operate their distributorships on a
part-time basis to supplement their existing incomes. In contrast, direct
distributors generally have developed an active business evidenced by meeting
significant qualifying criteria and tend more frequently to actively promote
sales and sponsoring activities.
Rules Affecting Distributors. Under the Code of Ethics and Rules of
Conduct, distributors are not permitted to make unwarranted claims about Amway
products, to sell Amway products in retail locations, to supply Amway products
to others for purposes of resale (except to their downline distributors), or to
make exaggerated claims regarding the benefits of being a distributor.
Distributors are also prohibited from selling Amway or Company products to other
than their personally sponsored distributors or customers, and from using their
downline distributors (other than their personally sponsored distributors) for
the sale of products not manufactured, licensed or distributed by Amway or the
Company. The Company discourages door-to-door sales or other "cold calling"
techniques.
The Sales Plan has rules which are intended to promote ethical business
practices. For example, one of the conditions for eligibility for performance
bonuses is the "70% rule," which requires 70% or more of the products a
distributor buys to be resold at wholesale (to downline distributors) or retail
(to consumers). This
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rule is intended to limit purchases of inventory merely to achieve bonuses,
while allowing a level of inventory necessary to conduct business.
The Company, in conjunction with Amway, has a number of programs and
procedures to reinforce the Company's rules that apply to distributors. The
Company publishes Amagram(R), a monthly magazine circulated primarily to
distributors. Approximately half of the magazine contains articles of general
interest to the public at large and approximately half contains Amway product
advertisements, distributor recognition and regular features covering provisions
of the Sales Plan and the Code of Ethics and Rules of Conduct specifically for
distributors. The Company sponsors leadership seminars, business promotion
meetings and training sessions at which, among other things, the importance of
the Sales Plan and the Code of Ethics and Rules of Conduct are stressed.
Despite these efforts and because of the large number of distributors and
their independent status, as well as the impact of certain resale price
maintenance and other regulations that limit the ability of the Company to
monitor and control the sales practices of its distributors, the Sales Plan and
the Code of Ethics and Rules of Conduct can be difficult to enforce. At times,
distributor actions have given rise and may in the future give rise to negative
publicity with respect to Amway or the Company. Such negative publicity can have
a material adverse effect on retail sales, distributor morale and motivation,
public perception of Amway or the Company and the number of persons applying to
become distributors. Negative publicity regarding direct sales in general or
illegal pyramid or other schemes promoted by unethical organizations can also
have a material adverse effect on legitimate direct sales organizations,
including the Company.
Returns. Under the Amway Satisfaction Guarantee, consumers are able to
return durable or non-durable products distributed by the Company, whether new
or used, within a reasonable time for a full refund, replacement or credit
toward a future purchase. Prior to October 1994, this policy only applied to
non-durable products. Electronic and other durable items manufactured for the
Company by third parties, including the induction range, are also covered by
their respective manufacturer's warranties. The Company generally bears the
expense of fulfilling the Amway Satisfaction Guarantee, except with respect to
defective products, as to which the Company may seek reimbursement from Amway.
See " -- Relationship with Amway -- Product Purchase Agreement." The foregoing
are in addition to an eight-day "cooling off" period provided for door-to-door
sales under Japanese law which permits consumers to return products during such
period. See " -- Government Regulation -- Direct Selling Law." All bonuses and
other payments to distributors are adjusted to account for products returned
under the Amway Satisfaction Guarantee. The Code of Ethics contains a separate
"buy-back" policy under which downline distributors may return products to
their sponsors or the Company for a refund. Such repurchases are made at the
downline distributor's original cost, less any performance bonuses already
received, and less, in the case of Company repurchases, a handling charge not
to exceed 10% of the cost of the returned products. Returns under both the
Amway Satisfaction Guarantee and the distributor buy-back policy are subject to
various written rules and conditions. The Company's net expenses under these
arrangements have not been material and it believes these arrangements foster
consumer and distributor confidence and are material to sales and sponsoring.
Product Shipment; Payment. The Company distributes products to
distributors principally through the use of private package delivery services,
although distributors are also permitted to pick up their own orders. The
Company maintains warehouse facilities for products prior to shipping or
pick-up. All of the Company's five warehouse operations at its Regional
Distribution Centers are operated for the Company by third parties under
contracts. See " -- Properties." All distributors are authorized to order and
pick up products directly from the Company if the order is prepaid. Distributors
may also order products through their sponsors. The Company currently ships
products directly to the ordering distributor without a separate shipping and
handling charge if the order is greater than Y20,000 (U.S.$205). If the order is
less than Y20,000, a Y1,000 (U.S.$10) shipping and handling charge is assessed.
Regardless of the method or sequence of delivery, distributor performance bonus
calculations include the cost component of sales to or through their downline
distributors. Generally, distributors pay in full for their purchases by postal
money order or direct bank transfer (debit) at the time of their order.
Qualified distributors are permitted to use an electronic payment system and
telephone and telecopy ordering systems. Distributors generally collect payment
from their sponsored downline distributors at the time an order is placed and
from consumers at the time of delivery of the products. The
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Company historically has not extended credit to its distributors. However, in
November 1993, the Company arranged a financing program with two unaffiliated
Japanese finance companies whereby qualifying distributors and their customers
may finance, for periods of up to 48 months, purchases of the Company's most
expensive products: the Amway Queen(R) cookware set, the induction range and the
Amway Queen(R) wok (only when they are purchased with Amway Queen(R) cookware)
and water treatment system units. Distributors may not obtain financing for
multiple purchases of a product. Loans are extended solely at the discretion of
the respective finance company. While the Company does not guarantee any of
these loans, it is responsible for any disputes arising between the purchasers
and the Company or the distributor. The Company is required, upon request, to
provide collateral to the finance companies. See Note 3 of Notes to Consolidated
Financial Statements.
Distributors' Inventory. The amount of inventory which a distributor
ultimately purchases or maintains is not within the direct control of the
Company. The Sales Plan expressly discourages inventory loading by distributors.
The Company's distribution system is designed to provide prompt availability of
products to distributors and thereby obviate the need for distributor
stockpiling. The Sales Plan discourages distributors from purchasing in any one
month more products than they can reasonably expect to sell in the following
month. The previously mentioned "buy-back" rule permitting downline distributors
to return products to the Company or sponsors for a refund is also intended to
discourage excess distributor inventories. See
" -- Distribution -- Returns." These rules and policies are difficult to
enforce, and the Company is aware that certain distributors may have purchased
and may continue to purchase products in excess of their current needs to avoid
announced or anticipated price increases or to achieve performance targets. The
result of such purchases is to increase the Company's sales in the short-term
and decrease sales thereafter until the distributor's excess inventory has been
depleted.
STRATEGY
The Company's principal growth strategies are (i) to promote distributor
productivity, retention and sponsoring by continuing to enhance distributor
relations, (ii) to develop and implement new methods to better understand,
communicate with and motivate distributors in order to increase substantially
distributor productivity and sponsoring, while maintaining high rates of
distributor retention and (iii) to systematically introduce new products and
services, while continuing to improve existing products, that are targeted to
the Japanese market and that are meaningfully differentiated from competitive
products.
The Company will continue to dedicate significant financial and human
resources to enhancing distributor relations. As an example of its commitment,
in fiscal 1995, over 65% of the Company's total operating expenses were
attributable to distributor incentives and activities designed to motivate,
reward and support distributors. In fiscal 1995, the Company sponsored
approximately 672 motivational sales meetings, product demonstration seminars
and product fairs, training sessions, leadership seminars and business promotion
meetings. In addition, the Company will continue to engage in the sponsorship of
civic events and corporate image advertising in order to enhance distributor
retention and sponsoring and the public perception of the Company. In fiscal
1995, 71.8% of the total number of distributors renewed their distributorships
from the prior fiscal year.
The Company is also developing and implementing new methods designed to
increase distributor productivity and sponsoring, while maintaining high rates
of retention. These new methods involve an identification and understanding of
distinct distributor types. Historically, the Company has categorized its
distributors into two general groups -- business-building distributors and
distributors who buy for their own consumption and sell only to a few
customers -- and has focused most of its resources on the former group. The
Company believes that, within each group, there are a number of distinct types
of distributors whose performance can be differentiated based upon sales
volumes, sponsoring activities, demographics, product purchase patterns and
renewal history. An identification and understanding of the distinct distributor
types will enable the Company to tailor its motivational and communication
efforts to targeted groups of distributors. In particular, the Company believes
that, by expanding the awareness of other Company products by existing
distributors, it will be able to expand the range of products purchased by those
distributors whose purchases have traditionally been limited to only a few
products or to products within a single product line.
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Another principal growth strategy is to systematically introduce
meaningfully differentiated new products and services appropriate for the
Japanese market, while continuing to improve existing products. New and improved
products introduced during the 24-month period ended August 31, 1995, including
the Amway water treatment system units and replacement parts, a specially
formulated line of Satinique(R) hair care products, reformulated Dish Drops
dishwashing detergent, Triple X food supplement and World Plaza hosiery,
accounted for approximately 40% of net sales for fiscal 1995.
The effort to introduce products specifically designed for the Japanese
market is fostered by the Company's cooperative efforts with Amway, which has
substantial research and development resources. Amway maintains an extensive
research and development center with 43 research and quality assurance
laboratories, currently staffed by approximately 425 people who focus on
developing new products and improving existing products. The Company, through
its product marketing and research and development personnel working in
conjunction with Amway, has introduced a variety of products specially
formulated or manufactured for the Japanese market, including the Artistry(R)
line of cosmetic and skin care products, SA8(R) powdered laundry detergent, the
Satinique(R) line of hair care products, Nutrilite food supplements and water
treatment system units and replacement parts.
Amway, working with the Company, is seeking strategic arrangements with
third parties that would provide the Company with additional products, product
lines or services targeted specifically for the Japanese markets. These
products, product lines or services would be distinct from, and non-competitive
with, the Company's existing product lines, but would have the common
characteristic of being meaningfully differentiated from competing products or
services. The Company believes that its customer base and distribution network,
as well as its financial strength, make it attractive to potential strategic
partners. As a financial objective, the Company's goal is to obtain such
products, product lines or services without reducing the Company's gross or
operating margins.
COMPETITION
The Company faces significant competition in Japan both in the products
sold and in the sponsoring and retaining of independent distributors. Competing
consumer products in home care, housewares, personal care and nutrition are
available from a wide variety of sources including retail, specialty, department
and discount stores and mail order companies, some of which have greater
financial resources and offer a greater variety of brands than the Company.
Competing consumer products in various product lines are also available from
other direct sales companies. Such products are also manufactured and marketed
by numerous well known multinational and Japanese enterprises.
The Company believes that the principal bases of product competition it
faces are quality, price, product knowledge, convenience and variety. Although
consumers of the types of products that the Company distributes have
alternatives that are lower in cost, the Company believes that its products are
competitive on the bases of value, availability of product knowledge through the
direct sales method and convenience of purchase. In addition, the Company
believes that there has been a major shift in Japanese consumers' attitudes
towards consumer products. In evaluating products, Japanese customers are
placing an increasing emphasis on value based upon proven products' performance
and service, rather than equating high price with high quality. The Company
generally offers high value products that are easily demonstrated by
distributors and can be meaningfully differentiated from competing products. A
high level of personal service, including convenient in-home demonstrations,
ordering and delivery and the Amway Satisfaction Guarantee provide additional
value to the consumer.
The Company also competes with other direct selling organizations to
recruit independent distributors. Other direct selling organizations may or may
not have product lines that compete with the products which the Company
distributes. The Company believes that the principal bases of competition in
recruiting independent distributors are reputation, perceived opportunity for
financial success and quality and range of products offered for sale.
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COMMUNITY SUPPORT ACTIVITIES
The Company engages in a variety of activities in support of the
environment, human achievement, education, the arts and civic causes. The
Company continues to sponsor the tour of the major art exhibition "Masters of
the Arctic -- Art in the Service of the Earth" in Japan featuring a collection
of Inuit art. The exhibition celebrates the art of the indigenous peoples of the
northern hemisphere's circumpolar region and focuses on their tradition of
respect for and preservation of their environment. The Company has also
sponsored performances and tours of the New York Philharmonic Orchestra, the
Cleveland Orchestra, the American Symphony Orchestra, the San Francisco Symphony
and the Philadelphia Philharmonic Orchestra. In addition, the Company has
sponsored the Maurice Bejart Ballet and exhibitions of American contemporary art
in Japan. Recent major independent sponsorships and co-sponsorships have
included four Interlink Festivals in conjunction with the U.S. Embassy, the
"Kabuki Class for Everyone" programs and the special exhibition "John Cage Sound
Installation: on his essay 'Civil Disobedience'."
In its effort to preserve the environment, the Company founded the Amway
Nature Center which raises funds for environmental protection activities. Since
its inception in 1989, the Amway Nature Center has funded numerous projects both
in Japan and elsewhere. Recent campaigns have funded projects for the
preservation of the Kurosawa wetlands, the restoration of the Yaeyama coral
reef, nature conservation in Yakushima and the preservation and restoration of
underwater forests in the seas off the Izu Peninsula.
The objective of these activities is to enhance the Company's image,
strengthen its corporate identity and foster a positive relationship with the
local community. Sponsorships also allow the Company to demonstrate its
commitment to the environment. The Company believes that leading corporations
have an obligation to contribute to the welfare of their communities. Another
goal of the Company's contribution to society is to offer valuable and helpful
support to the local customers who have given their patronage to, and have
accepted, the Company, its products and business. Through sponsorships, the
Company seeks to earn and maintain a positive image and name recognition among
its distributors and their customers as well as potential distributors and
customers.
SOURCES OF SUPPLY
The Company has no manufacturing facilities. Amway products are principally
produced by Amway at its worldwide manufacturing plant in Ada, Michigan and by
Nutrilite at its plant in Buena Park, California. Certain products, such as
Amway Queen(R) cookware and water treatment system units and replacement parts,
are produced to Amway specifications by third-party manufacturers. Certain other
products, such as the induction range and the fully-automated coffee maker, are
produced to Company specifications by third-party manufacturers.
RELATIONSHIP WITH AMWAY
The Company, as the exclusive distribution vehicle for Amway in Japan, has
and will continue to have a number of contractual relationships with Amway. The
Company and Amway have entered into the Trademark License Agreement relating to
the use of Amway trademarks and product formulas, the Product Purchase Agreement
relating to the purchase of products from Amway and the Support Services
Agreement relating to the utilization of Amway support services. The following
descriptions of the contracts and amendments thereto, are only summaries and are
qualified in their entirety by reference to such agreements, copies of which are
on file with the Commission, and amendments to the agreements described below,
may be entered into by the Company and Amway after consummation of the Offering.
The continuation of these contractual relationships with Amway is essential to
the conduct of the Company's business.
Trademark License Agreement. Pursuant to the Trademark License Agreement
with the Company, Amway has granted the Company an exclusive right to use in
Japan the Amway trademark and the individual product trademarks used on Amway
products. In addition to the exclusive use of the trademarks on Amway sourced
products in Japan, the Company has the right, with Amway's consent, to use the
Amway trademark in connection with products manufactured by the Company or by
others under contract with the Company. In addition, the Company has the right
to use Amway formulas and designs for certain products sold by the
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<PAGE> 78
Company. With respect to locally manufactured products based upon an Amway
formula, Amway is responsible only for defects in the formula.
Use of the trademarks is royalty free (the value of the trademarks is
included in the prices of products purchased from Amway), except in connection
with products manufactured by the Company or by others under contract with the
Company, in which case Amway may charge a royalty of up to 8% of the net sales
of such products. Exclusively for fiscal years 1994 and 1995, however, the
royalty rate for certain Company-sourced products bearing an Amway trademark was
established at 2%, except that for Amway products bearing an Amway trademark and
using an Amway formula or design (certain Satinique(R) and Artistry(R)
products), the royalty rate was established at 4%, in each case calculated based
on the net sales forecasts of the Company for such periods and not net sales as
otherwise required by the Trademark License Agreement. Based upon these rates
and estimates of sales for fiscal years 1994 and 1995, the Company delivered to
Amway promissory notes in the aggregate amount of approximately Y628.0 million
(U.S.$6.4 million) in prepayment of royalties for these products for fiscal
years 1994 and 1995. The final installment of these notes was paid on or prior
to August 31, 1995.
As of July 31, 1995, the Company executed, in prepayment of royalties for
fiscal years 1996, 1997 and 1998, promissory notes in the aggregate amount of
Y1.9 billion (U.S.$19.4 million). In consideration for the execution of these
notes, the revised royalties for these years will approximate 3.6% for those
Company-sourced products bearing an Amway trademark and approximately 7.3% for
those Company-sourced products bearing an Amway trademark and using an Amway
formula or design. The actual royalty payable with respect to these products
will depend on actual aggregate sales of such products for the three-year
period. The notes are payable in six semiannual installments commencing February
28, 1996, with the final payment due and payable on August 31, 1998.
Product Purchase Agreement. Pursuant to the Product Purchase Agreement
between Amway and the Company, the Company has the right to select the Amway
products it desires to purchase from the menu of products Amway makes available
to its international affiliates, subject to unavailability due to local
regulatory requirements. See " -- Government Regulation -- Product
Restrictions." Purchases are evidenced by purchase orders and Amway must use
reasonable commercial efforts to fill such orders. In determining whether it has
the production capacity to meet an order, Amway is required to treat the Company
on a parity with other comparable Amway affiliates based on net sales.
Prior to September 1, 1992, the Company paid for all of its purchases from
Amway in dollars; since that date, purchases have been paid for in yen. The
prices for products purchased from Amway are governed by a price schedule which
Amway establishes based upon a U.S. dollar "cost plus" base price calculation.
In addition to the U.S. dollar "cost plus" base price component of Amway's
schedule, the current prices for these products include an implicit dollar/yen
exchange rate which the Company has calculated to be approximately Y91 =
U.S.$1.00 compared to an implicit exchange rate that applied to product
purchases throughout fiscal 1995 of Y104 = U.S.$1.00. Amway has the right to
modify, on 30 days' prior written notice, the prices of products to be purchased
by the Company from Amway; provided that any change in the U.S. dollar "cost
plus" base price component must be made on a consistent basis for all Amway
affiliates. See "Risk Factors -- Operations Outside the United States; Currency
Fluctuations" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Foreign Exchange Transaction Information."
Amway indemnifies the Company with respect to any defect in, or any harm
caused by, any product purchased from Amway under the Product Purchase Agreement
or failure of any such products to comply with local regulatory requirements in
Japan. Under the Product Purchase Agreement, Amway is required to maintain
product liability insurance with respect to products that the Company purchases
from Amway. The Product Purchase Agreement also provides that the Company may be
a named insured on such product liability policies with its own independent
rights under such policies.
Support Services Agreement. Amway provides various administrative support
services for the Company. Support services provided include legal, accounting,
tax, treasury, marketing, insurance, inventory control, investor relations and
human resources. Charges for these services include direct costs incurred by
Amway for investor relations services and direct costs payable by Amway to third
parties for such services. Prior to
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September 1, 1993, these charges also included certain internal labor costs
relating to those services provided by Amway to the Company. These internal
labor costs were eliminated effective September 1, 1993 (except for those
expenses incurred in connection with investor relations services). See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Foreign Exchange Transaction Information" and "Certain
Transactions."
In addition, the Support Services Agreement provides that the Company will,
upon the request of Amway, provide assistance to Amway with respect to Amway
products specifically formulated for the special needs and preferences of the
Japanese market. Under the Support Services Agreement, Amway reimburses the
Company for certain costs and expenses relating to such assistance provided by
the Company to Amway.
The Company has the right to discontinue receiving any of such services or
to terminate the Support Services Agreement at any time upon six months' notice
to Amway. Amway has agreed not to discontinue any services that Amway continues
to provide to its other international affiliates. If Amway determines to
discontinue any service to all of its international affiliates, it may do so
upon six months' notice to the Company. There can be no assurance that the
Company would be able to obtain such services from alternative suppliers or, if
obtained, at a cost comparable to that charged by Amway.
General Provisions. Each of the Trademark License Agreement, Product
Purchase Agreement and Support Services Agreement is for a term ending on August
31, 2011, and is subject to renegotiation after December 31, 1999 in the event
that members of the families of, or trusts or foundations established by or for
the benefit of, Richard M. DeVos or Jay Van Andel on a combined basis no longer
beneficially own a majority of the voting stock of the Company. Such
renegotiation is to promote the protection of the Amway trademarks and product
quality, as well as to ensure the confidentiality of Amway trade secrets.
GOVERNMENT REGULATION
The Company operates in Japan pursuant to various regulatory frameworks.
These regulatory frameworks, as summarized below, affect the Company's direct
selling, general trade, securities, import/export and distribution activities in
addition to many other areas of the Company's business.
Direct Selling Law. The Company is subject to certain provisions of the
Japanese Door-to-Door Sales Law (the "Sales Law"). The Sales Law is broadly
drafted to cover sales other than those made in stores and therefore covers the
direct selling method of the Sales Plan. The Sales Law is intended to ensure
fair transactions involving door-to-door sales, mail order sales as well as
chain sales transactions through various requirements, including certain
disclosure to purchasers of products, refund procedures and, with respect to
door-to-door sales, an eight-day "cooling-off period."
The Company believes that its method of distribution is in compliance in
all material respects with the Sales Law. However, since this statute could be
interpreted by regulators in a manner which could impact the Company's
operations, there can be no assurance that new legislation or regulations or new
interpretations of the existing laws and regulations would not have a material
adverse effect on the Company's operations. See "Risk Factors -- Regulation of
Certain Direct Selling Activities."
Fair Trade Laws. The Company's operations and the activities of
distributors are regulated by the Anti-Monopoly Law and the guidelines
concerning distribution systems and business practice (the "Guidelines") issued
thereunder by the Fair Trade Commission of Japan in 1991. The Guidelines are
intended to assure fair and free competition as well as broadly regulate, among
other areas, resale price maintenance, sole distributorship contracts, rebates
and assignment of exclusive sales territories. The Company believes that it is
in compliance in all material respects with the Guidelines. There can be no
assurance, however, that new guidelines or amendments to the Anti-Monopoly Law
would not have a material adverse effect on the Company's operations.
Securities Laws. The Common Stock is currently registered with the JSDA as
Japanese OTC traded shares and the Company is subject to the Securities and
Exchange Law of Japan, as amended (the "Securities and Exchange Law"), and
ordinances and regulations thereunder, as well as requirements of the JSDA.
Under the Securities and Exchange Law and the JSDA's requirements, the Company
is subject to periodic
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and other reporting requirements, including filings of annual and semiannual
securities reports, business reports and financial reports with the Ministry of
Finance ("MOF") and the JSDA.
Foreign Ownership and Import. The Company operates in accordance with
company, trade, tax and the foreign investment laws of Japan. The Company was
formed as a joint stock corporation (kabushiki kaisha) in accordance with the
Commercial Code. Foreign investment is regulated by the Foreign Exchange and
Foreign Trade Control Law of Japan, as amended (the "Foreign Exchange Law").
There are no limitations on the repatriation of capital, earnings or the sales
proceeds for goods imported, provided that the underlying transactions are
proper and legal. Imports are controlled by the Foreign Exchange Law, and as a
signatory to the General Agreement on Tariffs and Trade, as amended ("GATT"),
Japan adheres to GATT requirements relative to customs duties. Additionally,
customs duties are covered by the Customs Duty Law, the Customs Tariff Law and
the Customs Duty Temporary Measures Law.
Intellectual Property Protection. The Company considers the Amway
trademarks important to its business. Pursuant to the Trademark License
Agreement with Amway, the Company has the exclusive license to use the Amway
trademark and the individual product trademarks used on Amway products in the
Company's market. Pursuant to this Agreement, Amway is responsible for filing,
maintaining and defending the trademarks and other intellectual property
licensed to the Company. See " -- Relationship with Amway -- Trademark License
Agreement". Amway policy is to secure trademark registration for the Amway
trademark in all core product lines and any other relevant product and service
classifications, as well as to register a basic portfolio of product trademarks.
Where applicable, Amway registers the foreign language equivalents of the Amway
trademark. Where possible, Amway's policy is also to perfect patent filing for
products or components, particularly in the Housewares Line. For example, Amway
has filed for and obtained patent protection on components of the water
treatment system in Japan.
Japan is a participant in the major international conventions for the
protection of intellectual property. In addition, the Company believes that
Japan's Patent Law, Trademark Law, Copyright Law and Unfair Competition
Prevention Law, among other laws, provide adequate protection for the
intellectual property Amway licenses to the Company.
Product Restrictions. Some of the Company's products, particularly
vitamins, certain nutritional supplements and cosmetics, are subject to the
Pharmaceutical Business Law, the Food Sanitation Law and other health,
sanitation and labeling laws and regulations. Under the Pharmaceutical Business
Law, in the event that a distributor promotes the sale of vitamin products or
nutritional supplements by claiming that such vitamin products or nutritional
supplements would have a pharmaceutical effect, the distribution of vitamin
products or nutritional supplements by such distributor may constitute a
violation of the Pharmaceutical Business Law. Certain of the Company's products
require licenses for importation.
Product Liability. On July 1, 1995, a new product liability law went into
effect in Japan. This law permits consumers to establish product liability
claims against manufacturers and importers of goods upon a showing of a
defective condition in such goods rather than negligence as was previously
required. As a result of this new law, Amway as the manufacturer and the Company
as the importer of consumer products may be subject to increased potential
liability for loss or injury caused by such products.
LEGAL PROCEEDINGS
The Company is a party to certain routine litigation incidental to its
business, none of which is currently expected to have a material adverse effect
on the Company's financial condition or results of operations.
EMPLOYEES
At August 31, 1995, the Company had approximately 635 permanent full-time
employees, approximately 75 other contract temporary employees and approximately
250 temporary employees. The Company has no union employees and no collective
bargaining agreements. The Company considers its employee relations to be
excellent. The distributors are independent contractors and are not employees of
the Company. See " -- Distribution."
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PROPERTIES
The Company has no manufacturing facilities. The Company has office
facilities and Regional Distribution Centers (including warehouses) located
throughout Japan all of which currently are leased by the Company. The following
table summarizes the number of facilities in which the Company currently has
operations in addition to its registered head office and main office in Tokyo:
<TABLE>
<CAPTION>
REGIONAL CUSTOMER
DISTRIBUTION SERVICE
CENTERS(1) OFFICES
------------ ------------
<S> <C> <C>
Fukuoka....................................................... 1 1
Hiroshima..................................................... -- 1
Ishikawa...................................................... -- 1
Kobe.......................................................... 1(2) --
Nagoya........................................................ -- 1
Okinawa....................................................... 1(3) --
Osaka......................................................... -- 1
Sapporo....................................................... 1 1
Sendai........................................................ -- 1
Tokyo......................................................... 1 1
-- --
Total.................................................... 5 8
========= =========
</TABLE>
- ---------
(1) The Company's warehouse operations at its Regional Distribution Centers in
Fukuoka, Kobe, Okinawa, Sapporo and Tokyo are operated for the Company by
third parties under contracts expiring at various dates from 1996 through
1997.
(2) In January 1995, the Kobe area sustained a major earthquake. The Company's
Regional Distribution Center in Kobe was relatively undamaged, although it
was inaccessible through April 3, 1995.
(3) Leased by the warehouse operator.
In order to demonstrate its long-term commitment in Japan, to enhance the
Company's image, to strengthen its corporate identity and to take advantage of
current Japanese real estate market conditions, the Company acquired in March
1995 a 3,561 square meter parcel of land in Tokyo for the construction of a new
headquarters facility. Certain additional events must occur prior to July 1,
1996 before the site is available for construction. Accordingly, construction of
the facility is not planned to commence before fiscal 1997. It is anticipated
that this facility will be available for occupancy in fiscal 1999. The purchase
price for the land aggregated Y19.4 billion (U.S.$198.0 million). The total
capital cost of this headquarters project is currently estimated to be between
Y27.5 billion (U.S.$280.6 million) and Y32.5 billion (U.S.$331.6 million).
In addition, the Company purchased a 22,296 square meter parcel of land in
Tokyo in July 1995 for the construction of a new Tokyo Regional Distribution
Center. The purchase price for this land, which was paid in cash, was Y4.7
billion (U.S.$48.0 million). It is anticipated that construction of this
Regional Distribution Center will begin in December 1995 and that this facility
will be operational beginning in February 1997. The total cost of this project
is currently estimated to be between Y13.8 billion (U.S.$140.8 million) and
Y14.4 billion (U.S.$146.9 million). See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
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<PAGE> 82
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information regarding the Company's
directors and executive officers:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------- ---------------------------------------------
<S> <C> <C>
Richard M. DeVos, Jr. 39 Chairman; Director
Stephen A. Van Andel 40 Vice-Chairman; Director
Richard S. Johnson 53 President; Representative Director
Takashi Kure 44 Vice President and Chief Planning Officer;
Director
Yoshizo Matsushita 60 Vice President and Chief Financial Officer;
Director
Hisao Hattori 70 Director Executive Director of the
President's Office/Public Relations and
External Affairs; Director
Hitoshi Tsurumoto 55 Director of Human Resources; Director
Noboru Makino 74 Director
Nobuyuki Nakahara 60 Director
Yoshikazu Takaishi 65 Director
Bert Crandell 42 Marketing Division Director
Patric J. Sullivan 52 Distributor Relations Division Director
Shigeo Kobayashi 48 National Distribution Manager
</TABLE>
Richard M. DeVos, Jr. has been Chairman of the Company since January 1995
and a director of the Company since November 1994. Since January 1995, Mr. DeVos
has been President of Amway Asia Pacific Ltd. Mr. DeVos has been President of
Amway since 1993. Mr. DeVos was President and Chief Executive Officer of the
Orlando Magic Ltd. from 1991 to 1993. Mr. DeVos is Chairman of the Windquest
Group, a multi-company management group which he founded in 1989. Prior to that,
Mr. DeVos was Vice President- International of Amway since 1984. Previously, Mr.
DeVos held various research and development, manufacturing, distribution,
marketing, finance, public relations and government affairs positions with
Amway. Mr. DeVos holds a Bachelor of Business Administration degree from
Northwood University and has attended the Executive Study Program at the Wharton
School of the University of Pennsylvania. Mr. DeVos is also a director of Amway
Asia Pacific Ltd.
Stephen A. Van Andel has been Vice-Chairman of the Company since January
1995 and a director of the Company since November 1994. Since January 1995, Mr.
Van Andel has been Chairman of Amway Asia Pacific Ltd. Mr. Van Andel has been
Chairman of Amway since September 1, 1995 and Chairman of the Executive
Committee of Amway since 1993 as well as a member of the Policy Board of Amway
since 1992. Since 1993, Mr. Van Andel also has been Vice President-Corporate
Affairs of Amway. Mr. Van Andel was appointed Vice President-Marketing of Amway
in 1988 and in 1991, he became Vice President-Americas. Prior to 1988, Mr. Van
Andel held various administrative and management positions with Amway. Mr. Van
Andel holds a Bachelor's degree from Hillsdale College and a Masters of Business
Administration from Miami University. Mr. Van Andel is also a director of Amway
Asia Pacific Ltd.
Richard S. Johnson has been President and Representative Director of the
Company since 1991. Mr. Johnson joined Amway in 1990 as General Manager of Amway
Germany. Prior to joining Amway, Mr. Johnson was President of Tupperware
Pacific. Mr. Johnson holds a Bachelor's Degree from the University of
Pennsylvania and a Masters of Business Administration Degree from Harvard
Business School.
Takashi Kure has been Vice President and Chief Planning Officer of the
Company since January 1995 and a director of the Company since 1987. Prior to
becoming Chief Planning Officer, Mr. Kure served as Vice
49
<PAGE> 83
President and Chief Operating Officer since 1990. Between 1989 and 1990, Mr.
Kure served as Director of Sales and Marketing. Previously, Mr. Kure served as
Director of Operations and Manager of Information Systems Control Department of
the Company. Mr. Kure joined the Company in 1985 as Manager of the EDP
Department. Mr. Kure holds a Bachelor's Degree from Cornell University.
Yoshizo Matsushita has been Vice President and Chief Financial Officer of
the Company since April 1, 1994 and a director of the Company since 1990. Mr.
Matsushita joined the Company in 1989 as Division Manager of Finance and served
as Director of Finance from 1990 to 1994. Prior to joining the Company, Mr.
Matsushita held various manufacturing and finance positions with Nihon Tetra Pak
K.K. Mr. Matsushita holds a Bachelor's of Business Administration Degree from
Meiji University.
Hisao Hattori has been Executive Director of the President's Office/Public
Relations and External Affairs since February 1994 and a director of the Company
since 1992. Mr. Hattori joined the Company in 1987 as Statutory Auditor and in
1988 became Director of the President's Office and from 1992 to 1994 served as
Executive Director of the President's Office. Prior to joining the Company, Mr.
Hattori held various administrative positions with IBM Japan Limited.
Hitoshi Tsurumoto has been Director of Human Resources and a director of
the Company since 1990. Mr. Tsurumoto joined the Company in 1989 as Manager of
Human Resources and Administration. Prior to joining the Company, Mr. Tsurumoto
held various personnel and administrative positions with Wyeth Japan Limited.
Mr. Tsurumoto holds a Bachelor's Degree from Hokkaido University of Education.
Noboru Makino has been a director of the Company since November 1994. Since
1990, Mr. Makino has served as an Advisory Director to Mitsubishi Research
Institute, Ltd. Prior to that Mr. Makino was Director and Chairman of Mitsubishi
Research Institute, Ltd. since June 1984. Mr. Makino holds a Master's Degree
from Tokyo University.
Nobuyuki Nakahara has been a director of the Company since November 1994.
In March 1994, Mr. Nakahara became a Honorary Chairman of Tonen Corporation
("Tonen"). Since March 1986, he was Representative Director and President of
Tonen. Mr. Nakahara holds a Bachelor's of Economics Degree from Tokyo
University.
Yoshikazu Takaishi has been a director of the Company since November 1994.
Between November 1993 and November 1994, he was statutory auditor of the
Company. In April 1993, Mr. Takaishi established Takaishi Law Office. Prior to
that, Mr. Takaishi was Managing Director (Legal Affairs and Intellectual
Property) for IBM Japan Limited. Mr. Takaishi holds a Bachelor's of Law Degree
from Nihon University and has been an attorney-at-law since 1957.
Bert Crandell has been Marketing Division Director of the Company since
September 1992. Mr. Crandell has been employed by Amway since 1978 in a variety
of research and development and marketing positions. Mr. Crandell holds a
Bachelor's Degree from Michigan State University.
Patric J. Sullivan has been Distributor Relations Division Director of the
Company since January 1994. Mr. Sullivan has been employed by Amway since 1971
in a variety of distributor relations positions. Mr. Sullivan holds a Bachelor's
Degree from Aquinas College.
Shigeo Kobayashi has been National Distribution Manager of the Company
since he joined the Company in November 1988. Mr. Kobayashi holds a Bachelor's
Degree of Mathematics from Science University of Tokyo.
Effective as of the Ordinary General Meeting of Shareholders on November
29, 1995, Mr. Hattori will be retiring from his positions as a director of the
Company and as Executive Director of the President's Office/ Public Relations
and External Affairs after eight years of distinguished service. The Company has
nominated Tomiaki Nagase for election by the shareholders at the Ordinary
General Meeting of Shareholders on November 29, 1995 as a director of the
Company to succeed Mr. Hattori. In addition, Mr. Nagase will be appointed as an
executive officer of the Company.
50
<PAGE> 84
Tomiaki Nagase, age 60, has been an employee of the Company since July 1,
1995. Mr. Nagase was previously Senior Managing Director of Kao Corporation, a
multi-national corporation involved in the manufacture and sale of consumer
products ("Kao"), from March 1992 until June 1995. Previously, Mr. Nagase held
various operational and marketing managerial positions with Kao as well as
serving as a member of its board of directors. In addition, Mr. Nagase has
previously held managerial positions with The Fuji Bank, Limited and Asian
Development Bank. Mr. Nagase holds a Bachelor's Degree in Economics from
Gakushuin University.
The Company's Statutory Auditors are Akira Toriumi (a former employee of
the Company), Kouichi Kura (full-time external Statutory Auditor of the
Company), Lawrence M. Call (Chief Financial Officer of Amway and an officer of
various of its affiliates) and Craig N. Meurlin (General Counsel of Amway and an
officer of various affiliates).
51
<PAGE> 85
PRINCIPAL AND SELLING SHAREHOLDERS
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information as to the ownership of
Common Stock as of August 1, 1995 by (i) the Principal Shareholders and as
adjusted to reflect the deposit of Common Stock, as represented by ADSs, with
the collateral agent in connection with the delivery by the Selling
Shareholders, on the Exchange Date, of ADSs or shares of Common Stock, which
will be exchanged for the PEPS, (ii) each person owning of record or known to
the Company to be the beneficial owner of more than 10% of the Common Stock and
(iii) the Company's officers and directors as a group. All information with
respect to beneficial ownership has been furnished by the respective Principal
Shareholder, more than 10% shareholder, executive officer or director, as the
case may be. Unless otherwise indicated, the persons named below have sole
voting and investment power with respect to the number of shares of Common Stock
set forth opposite their names.
<TABLE>
<CAPTION>
NUMBER OF SHARES TO BE
SHARES BENEFICIALLY OWNED SHARES BENEFICIALLY OWNED
PRIOR TO THE OFFERING REPRESENTED AFTER THE EXCHANGE
NAMES AND ADDRESSES -------------------------- BY ADSS -------------------------
OF BENEFICIAL OWNERS NUMBER PERCENTAGE DEPOSITED(1) NUMBER PERCENTAGE
- -------------------------------------------- ---------- ------------ ---------- ----------
<S> <C> <C> <C> <C> <C>
Jay and Betty J. Van Andel
7186 Windy Hill Drive, S.E.
Grand Rapids, Michigan 49546 63,455,500(2) 42.4% 3,507,131(3) 59,948,369 40.1%
David Van Andel
6962 Ada Drive
Grand Rapids, Michigan 49546 29,695,000(4) 19.8% -- 29,695,000 19.8%
Richard M. and Helen DeVos
1840 South Ocean Blvd.
Manapalan, Florida 33462 50,173,500(5) 33.5% -- 50,173,500 33.5%
Richard M. DeVos, Jr.
2003 Hillsboro, S.E.
Grand Rapids, Michigan 49546 11,020,500(6) 7.4% 3,507,131(7) 7,513,369 5.0%
All officers and directors
as a group (16) 11,042,500 7.4% 3,507,131(7) 7,535,369 5.0%
<FN>
- ---------
(1) Assuming no exercise of the Underwriters' over-allotment option. Each ADS
represents one-half of one share of Common Stock.
(2) Includes 33,760,500 shares (22.6%) of Common Stock held by the Jay Van Andel
Trust, 26,956,000 shares (18.0%) of Common Stock held by Japan HC I, Inc.
and 2,739,000 shares (1.8%) of Common Stock held by the Jay and Betty J.
Van Andel Foundation (the "Van Andel Foundation"). Under the terms of the
Jay Van Andel Trust, Jay Van Andel has sole voting and dispositive power
with respect to the shares of Common Stock held by such Trust. Jay Van
Andel is a director of Japan HC I, Inc. with shared voting and dispositive
power with respect to the shares of Common Stock held by Japan HC I, Inc.,
and a co-trustee of the Van Andel Foundation with shared voting and
dispositive power with respect to the shares of Common Stock held by such
Foundation. As the sole beneficiary of the Betty J. Van Andel Trust, which
is the sole shareholder of Japan HC I, Inc., Betty J. Van Andel has shared
voting and dispositive power with respect to the shares of Common Stock
held by Japan HC I, Inc. due to her right to revoke such Trust. Jay Van
Andel and Betty J. Van Andel are married; as a consequence, each may be
deemed to be the beneficial owner of all of the shares listed.
(3) The Jay Van Andel Trust will deposit with the collateral agent, as security
for its obligations under its Purchase Contract, up to shares of
Common Stock, as represented by up to ADSs, in
52
<PAGE> 86
connection with its delivery to the Trust, on the Exchange Date, of ADSs or
Common Stock in exchange for the PEPS.
(4) Includes 26,956,000 shares (18.0%) of Common Stock held by Japan HC I, Inc.
and 2,739,000 shares (1.8%) of Common Stock held by the Van Andel
Foundation. David Van Andel is a director of Japan HC I, Inc. with shared
voting and dispositive power with respect to the shares of Common Stock
held by Japan HC I, Inc., and a co-trustee of the Van Andel Foundation with
shared voting and dispositive power with respect to the shares of Common
Stock held by such Foundation.
(5) Includes 25,995,000 shares (17.4%) of Common Stock held by RDV(AJL)
Holdings, Inc., 21,439,500 shares (14.3%) of Common Stock held by HDV(AJL)
Holdings, Inc., 2,739,000 shares (1.8%) of Common Stock held by the Richard
and Helen DeVos Foundation (the "DeVos Foundation"). The Richard DeVos
Trust is the sole shareholder of RDV(AJL) Holdings, Inc. The Helen DeVos
Trust is the sole shareholder of HDV(AJL) Holdings, Inc. Richard M. DeVos
is a co-trustee of the Richard DeVos Trust and a co-trustee of the Helen
DeVos Trust in each case with shared and dispositive power of the shares of
Common Stock indirectly held by such trusts. Helen DeVos is a co-trustee of
the Helen DeVos Trust and a co-trustee of the Richard DeVos Trust in each
case with shared voting and dispositive power of the shares of Common Stock
indirectly held by such trusts. Richard M. DeVos, Helen DeVos and Jerry L.
Tubergen are each a co-trustee of the DeVos Foundation and each has shared
voting and dispositive power of the shares of Common Stock held by the
DeVos Foundation.
(6) Includes 2,505,500 shares (1.7%) of Common Stock held by RDV GRIT Holdings,
Inc., 6,515,000 shares (4.4%) of Common Stock held by HDV GRIT Holdings,
Inc. and 2,000,000 shares (1.3%) of Common Stock held by RDV Capital
Management L.P. II. Richard M. DeVos, Jr. and Jerry L. Tubergen are
directors of each of RDV GRIT Holdings, Inc. and HDV GRIT Holdings, Inc.
with shared voting and dispositive power of the shares of Common Stock held
by such corporations. RDV Corporation is the general partner of RDV Capital
Management L.P. II. As a director of RDV Corporation, Richard M. DeVos, Jr.
shares voting and dispositive power of the shares of Common Stock held by
RDV Capital Management L.P. II. Richard M. DeVos, who holds an indirect
interest in RDV GRIT Holdings, Inc., but has no voting or dispositive power
with respect to the shares of Common Stock held by such corporation,
disclaims beneficial ownership of such shares. Helen DeVos, who holds an
indirect interest in HDV GRIT Holdings, Inc., but has no voting or
dispositive power with respect to the shares of Common Stock held by such
corporation, disclaims beneficial ownership of such shares.
(7) HDV GRIT Holdings, Inc. will deposit with the collateral agent, as security
for its obligations under its Purchase Contract, up to shares of
Common Stock, as represented by up to ADSs, in connection with
its delivery to the Trust, on the Exchange Date, of ADSs or Common Stock in
exchange for the PEPS.
</TABLE>
53
<PAGE> 87
SELLING SHAREHOLDERS
The following table sets forth certain information as to the ownership of
Common Stock as of August 1, 1995 by the Selling Shareholders listed below. The
Selling Shareholders are Principal Shareholders. In addition, the table below
sets forth information as to the ownership of Common Stock, as adjusted to
reflect the deposit of Common Stock, as represented by ADSs, with the collateral
agent in connection with the delivery by the Selling Shareholders, on the
Exchange Date, of ADSs or shares of Common Stock, which will be exchanged for
the PEPS. See "Risk Factors -- Relationship and Potential Conflicts of Interest
with Amway," " -- Controlling Shareholders," "Business -- Relationship with
Amway" and "Certain Transactions."
<TABLE>
<CAPTION>
SHARES BENEFICIALLY NUMBER OF SHARES TO BE
OWNED SHARES BENEFICIALLY OWNED
PRIOR TO THE OFFERING REPRESENTED AFTER THE EXCHANGE
NAMES AND ADDRESSES ------------------------ BY ADSS ------------------------
OF BENEFICIAL OWNERS NUMBER PERCENTAGE DEPOSITED(1) NUMBER PERCENTAGE
- ----------------------------------- ---------- ---------- ------------ ---------- ----------
<S> <C> <C> <C> <C> <C>
Jay Van Andel Trust(2) 33,760,500 22.6% 3,507,131 30,253,369 20.2%
HDV GRIT Holdings, Inc.(3) 6,515,000 4.4% 3,507,131 3,007,869 2.0%
</TABLE>
- ---------
(1) The table set forth above assumes that the Underwriters' over-allotment
option is not exercised. In connection with the Offering, the Trust has
granted the Underwriters a 30-day option to purchase up to an additional
PEPS which may require the Selling Shareholders to deposit the
following number of additional shares of Common Stock, as represented by
ADSs, with the collateral agent as security for delivery by the Selling
Shareholders, on the Exchange Date, of ADSs or Common Stock in exchange for
the PEPS: Jay Van Andel Trust ; and HDV GRIT Holdings, Inc.
. Each ADS represents one-half of one share of Common Stock.
(2) Under the terms of the Jay Van Andel Trust, Jay Van Andel has sole voting
and dispositive power with respect to the shares of Common Stock held by
the Jay Van Andel Trust and as a result is the beneficial owner of the
shares of Common Stock held by such Trust. Jay Van Andel and Betty J. Van
Andel are married; as a consequence, Betty J. Van Andel may be deemed to be
the beneficial owner of such shares.
(3) Richard M. DeVos, Jr. and Jerry L. Tubergen are directors of HDV GRIT
Holdings, Inc. with shared voting and dispositive power of the shares of
Common Stock held by HDV GRIT Holdings, Inc. and as a result are the
beneficial owners of such shares. Helen DeVos, who holds an indirect
interest in HDV GRIT Holdings, Inc., but has no voting or dispositive power
with respect to the shares of Common Stock held by such corporation,
disclaims beneficial ownership of such shares.
54
<PAGE> 88
CERTAIN TRANSACTIONS
Members of the DeVos and Van Andel families own all of the outstanding
shares of Amway. Following the Exchange (assuming no other disposition or
acquisition of Common Stock or ADSs by the Principal Shareholders prior to the
Exchange Date), the Principal Shareholders will collectively own beneficially
78.6% of the outstanding shares of Common Stock (77.9% if the Underwriters'
over-allotment option is exercised in full). See "Principal and Selling
Shareholders."
Approximately 80% of the Company's fiscal 1995 net sales was derived from
the distribution of products in the four core Amway product lines at prices and
on other terms provided in the Product Purchase Agreement between Amway and the
Company. In addition, Amway has granted the Company the exclusive right in Japan
to use the Amway trademark and individual product trademarks. Amway also
provides a broad range of administrative and technical assistance to the Company
pursuant to various assistance agreements with the Company. For a summary of the
terms of the agreements between Amway and the Company, see
"Business -- Relationship with Amway." During fiscal 1993, fiscal 1994 and
fiscal 1995, pursuant to the agreements between Amway and the Company, the
Company paid Amway a total of Y23.8 billion (U.S.$242.9 million), Y28.2 billion
(U.S.$287.8 million) and Y28.6 billion (U.S.$291.8 million), respectively, for
the purchase of products; and Y633.0 million (U.S.$6.5 million), Y290.0 million
(U.S.$3.0 million) and Y385.0 million (U.S.$3.9 million), respectively, for
services provided to the Company. In addition, the Company has paid Amway in
advance through the issuance of promissory notes for royalties under the
Trademark License Agreement, in the aggregate amount of Y1.9 billion (U.S.$19.4
million) for fiscal 1996 through 1998. See "Business -- Relationship with
Amway -- Trademark License Agreement."
In connection with the reorganization of certain Amway affiliates in
December 1993 as part of the capitalization of AAP, the Company transferred to
AAP the stock of Amway Pacific Limited, a former subsidiary of the Company,
through which the Company held a 95% interest in the joint venture company
formed as the exclusive distribution vehicle for Amway products in the People's
Republic of China. This resulted in the acquisition by the Company of 972,222
shares of common stock of AAP, representing an acquisition price of
approximately Y1.9 billion (U.S.$17.5 million) (based on the Noon Buying Rate of
Y110.70 = U.S.$1.00 prevailing on December 21, 1993). This price was established
principally based upon an independent valuation. As a result of this
transaction, the Company owns approximately 2% of AAP's common stock. The
Principal Shareholders own approximately 83% of AAP's common stock, with the
remainder publicly held.
Takaishi Law Office, of which Mr. Takaishi, a director of the Company, is
the founder, provided legal services to the Company in fiscal 1993, 1994 and
1995 and it is anticipated that it will provide legal services to the Company in
fiscal 1996.
The Company has agreed to pay approximately Y50.0 million (U.S.$0.5
million) of the costs and expenses of the Offering. The Company will indemnify
the Selling Shareholders and the Underwriters of the PEPS against certain
liabilities, including liabilities under the Securities Act.
55
<PAGE> 89
DESCRIPTION OF CAPITAL STOCK
Set forth below is a discussion of the material provisions of the Common
Stock, including brief summaries of certain provisions of the Articles of
Association and the Company's Share Handling Regulations (the "Share Handling
Regulations"), as currently in effect, and of the Commercial Code. These
summaries do not purport to be complete and are qualified in their entirety by
reference to the full Articles of Association and the full Share Handling
Regulations which have been filed as exhibits to the Registration Statement of
which this Prospectus is a part.
GENERAL
Under the Articles of Association, the presently authorized capital stock
of the Company consists of 256,000,000 shares of Common Stock, which may be
issued as no par value shares or with a par value of Y50 per share. As of August
31, 1995, 149,624,951 no par value shares were issued and outstanding. No Y50
par value shares are outstanding. Under the Commercial Code, the Company may, by
resolution of the Board of Directors, convert par value shares into no par value
shares and vice versa, provided that in the latter case, the total par value may
not be more than the Company's stated capital. The Commercial Code requires that
shares be in registered form. Under the Commercial Code, shares are transferable
by delivery of share certificates, but in order to assert shareholders' rights
against the Company, the transferee must have its name registered on the
Company's register of shareholders. The Share Handling Regulations require
shareholders to file their names, addresses and seal impressions with The Yasuda
Trust and Banking Company, Limited, the transfer agent for the Company, and
foreign shareholders customarily using a signature may file a specimen signature
in lieu of a seal impression. Shareholders not resident in Japan are required to
file a mailing address in Japan or appoint a resident proxy in Japan. These
requirements do not apply to the holders of ADSs or ADRs.
The central clearing system of share certificates under the Law Concerning
Central Clearing of Share Certificates and Other Securities of Japan started to
operate in October 1991. Under this system, a holder of shares of Common Stock
may choose, at its discretion, to participate in this system and all
certificates of shares of Common Stock elected to be put into this system will
be deposited with the central clearing system (through a participating
institution, such as a securities company or bank, having a clearing account
with the clearing house, if the holder is not such a securities company or bank)
and all such shares will be registered in the name of the clearing house on the
Company's register of shareholders. Each participating shareholder will in turn
be registered in the Company's register of beneficial shareholders and be
treated the same way as shareholders registered on the Company's register of
shareholders. This system is intended to reduce paperwork required in connection
with the transfer of title to share certificates.
DIVIDENDS
The Articles of Association provide that the Company's financial accounts
shall be closed on August 31 of each year and that dividends, if any, shall be
paid to the shareholders of record at the close of business as of such date.
Pursuant to the Commercial Code, after the close of the fiscal year, the Board
of Directors prepares, among other things, a proposal for appropriation of
profits and retained earnings for year-end dividends, legal reserve and other
reserves, and such appropriation customarily includes a bonus to Directors and
Statutory Auditors. This proposal is then submitted to the Board of Statutory
Auditors of the Company and the independent certified public accountants for
their review and comments. Then the proposal accompanied by the Board of
Statutory Auditors' and independent accountant's reports are submitted for
shareholder approval at the Ordinary General Meeting of Shareholders, which,
pursuant to the Articles of Association, must be convened within three months
after the close of the fiscal year and is customarily held in November of each
year.
In addition to year-end dividends, the Board of Directors may by resolution
declare an interim cash dividend (which may include special or commemorative
dividends) to shareholders of record as of the close of the last day of February
of each year, without prior shareholder approval, but subject to the
restrictions described below. The requisite appropriation of profits and
retained earnings and related transfer of the
56
<PAGE> 90
applicable amount to legal reserve occurs at the time of the payment of the
interim dividend from funds available for such purpose as described below.
Payment of interim dividends reduces the funds legally available for the payment
of year-end dividends for the fiscal year in which such interim dividends are
resolved and paid.
As a result of amendments to the Commercial Code, effective October 1993,
the Company is required to have three Statutory Auditors (previously two), of
which at least one (previously none) is required to be an "external" auditor,
which is an auditor who has not been a director, manager or employee of the
Company or its subsidiaries during the last five years. As required by the
amendments to the Commercial Code, the Statutory Auditors formed a Board of
Statutory Auditors consisting of Lawrence M. Call, Akira Toriumi, Kouichi Kura
(who serves as external statutory auditor) and Craig N. Meurlin.
As a result of amendments to the Commercial Code, beginning in September
1995, the Board of Directors is required to submit its proposal for the
appropriation of profits and retained earnings for year-end dividends, legal
reserve and other reserves and bonus to the Company's Board of Statutory
Auditors, in lieu of its Statutory Auditors. Then, the proposal is required to
be submitted for shareholder approval at the Ordinary General Meeting of
Shareholders accompanied by a report of the Board of Statutory Auditors of the
Company, in lieu of the Statutory Auditors' report.
The amendments to the Commercial Code which took effect on April 1, 1991
eliminated certain provisions relating to stock dividends. Under the Commercial
Code, the shareholders may, by resolution at a Ordinary General Meeting of
Shareholders, transfer to the Company's stated capital account any amount which
could otherwise be distributed as year-end dividends and the Board of Directors
may, by its resolution, pay a dividend in the form of additional shares of
Common Stock, by way of a stock split without affecting the par value thereof,
up to the amount so transferred to the Company's stated capital account.
Under the Commercial Code, the Company may not make any distribution of
profits by way of year-end dividends or interim dividends for any fiscal year
unless it has set aside in its legal reserve an amount equal to at least
one-tenth of the amount paid by way of appropriation of profits and retained
earnings for such fiscal year or equal to one-tenth of any interim dividend, as
the case may be, until the legal reserve equals one-quarter of its stated
capital. Under the Commercial Code, the Company may distribute profits by way of
year-end or interim dividends out of the excess of its net assets over the
aggregate of (i) its stated capital, (ii) its additional paid-in capital, (iii)
its accumulated legal reserve, (iv) the legal reserve to be set aside in respect
of the dividend concerned and any other proposed payment by way of appropriation
of profits and retained earnings; (v) the excess, if any, of unamortized
expenses incurred in preparation for commencement of business and in connection
with research and development expense over the aggregate of amounts referred to
in (ii), (iii) and (iv) above; and (vi) the book value, as stated on its balance
sheet as at the last day of the fiscal year concerned, of the shares of Common
Stock, if any, which have been purchased and held by the Company for the purpose
of transfer to its employees (see " -- Repurchase by the Company of its Common
Stock" below). In the case of interim dividends, the net assets are calculated
by reference to the balance sheet as at the last closing of the Company's
accounts, but adjusted to reflect (A) any subsequent payment by way of
appropriation of profits and retained earnings and the related transfer to the
legal reserve; (B) any subsequent transfer of profits and retained earnings to
stated capital; and (C) if the Company has been authorized pursuant to a
resolution of the Ordinary General Meeting of Shareholders relating to the
immediately preceding fiscal year to purchase shares of Common Stock for the
purpose of transfer to its employees or for the purpose of cancellation (see
" -- Repurchase by the Company of its Common Stock" below), the total amount of
the purchase price for the shares authorized by such resolution to be paid by
the Company for such purpose. Interim dividends may not be paid where there is a
risk that at the end of the fiscal year there might not be any excess of net
assets over the aggregate of the amounts referred to in clauses (i) through (vi)
above. As of August 31, 1995, the net assets of the Company determined in
accordance with the Commercial Code were Y75.7 billion (U.S.$772.4 million), its
stated capital was Y12.5 billion (U.S.$127.6 million), its additional paid-in
capital was Y14.9 billion (U.S.$152.0 million) and its legal reserve was Y3.1
billion (U.S.$31.6 million).
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In Japan the "ex-dividend" date and the record date for dividends precede
the date of determination of the amount of the dividend to be paid. See
" -- Record Date." For information as to taxation of dividends, see
"Taxation -- Japanese Taxation."
TRANSFER OF ADDITIONAL PAID-IN CAPITAL AND LEGAL RESERVE TO STATED CAPITAL AND
STOCK SPLITS
When the Company issues new shares of Common Stock, the entire amount of
the issue price of such new shares is required to be accounted for as stated
capital, although the Company may account for an amount not exceeding one-half
of such issue price as additional paid-in capital (subject to the remainder
being not less than the total par value, if any, of the new shares being
issued). The Company may, by resolution of the Board of Directors, transfer the
whole or any part of additional paid-in capital and legal reserve to stated
capital and grant to shareholders additional shares of Common Stock free of
charge by way of a stock split without affecting the par value thereof, with
reference to the whole or any part of the amount of additional paid-in capital
and legal reserve so transferred to stated capital. Such additional shares may
also be granted by reference to the amount representing the portion of the issue
price of shares of Common Stock in excess of the par value thereof which has
been accounted for as stated capital. In either case, following the issuance of
additional shares by way of a stock split, the total par value of all
outstanding shares may not exceed the Company's stated capital, and the
Company's net assets (as of its latest balance sheet date) divided by the total
number of shares outstanding must be at least Y50.
The Commercial Code permits the Company to make a distribution to
shareholders by way of a rights issue at a subscription price per share which is
less than the par value thereof if (i) the difference between the subscription
price and the par value does not exceed the amount of the stated capital minus
the aggregate par value of all outstanding shares, divided by the number of new
shares to be issued pursuant to such rights issue, (ii) the sum of the net
assets of the Company (as appearing on its latest balance sheet) and the total
subscription price, divided by the number of the shares outstanding immediately
after the issuance of the new shares, is at least Y50 and (iii) the subscription
rights are made transferable. In order to satisfy the requirement mentioned in
(i) above, the Board of Directors may transfer the whole or any part of
additional paid-in capital or legal reserve to stated capital.
JAPANESE UNIT SHARE SYSTEM
At the Ordinary General Meeting of Shareholders in November 1994, the
shareholders approved an amendment to the Articles of Association to reduce the
number of shares of Common Stock constituting one unit under the Japanese unit
share system from 1,000 shares to 100 shares. As a result, effective February 1,
1995, the number of shares constituting one unit is 100 shares.
Transferability of Shares Representing Less Than One Unit. Certificates
for shares representing less than one unit may only be issued in certain limited
circumstances. Because the transfer of shares normally requires delivery of the
certificates therefor, fractions of a unit for which no share certificates are
issued are not normally transferable. Shares representing less than one unit for
which share certificates have been issued continue to be transferable, but the
transfer may be registered on the Company's register of shareholders only if the
transferee is already a registered shareholder (whether in respect of units or
of shares representing less than one unit). Because transfer of ADRs does not
require changes in the ownership of the underlying Common Stock, holders of ADRs
representing less than one unit of Common Stock are not affected by such
restrictions in their ability to transfer such ADRs. However, because transfers
of less than a unit of the underlying shares of Common Stock are normally
prohibited under the unit share system, under the Deposit Agreement, the right
of ADR holders to surrender their ADRs and withdraw the underlying shares of
Common Stock for sale in Japan may only be exercised as to whole units of Common
Stock. As a result, access to the Japanese markets through the withdrawal
mechanism will not be available for dispositions of shares in lots of less than
one unit.
Right of a Holder of Shares Representing Less Than One Unit to Require the
Company to Purchase Such Shares. A holder of shares representing less than one
unit may at any time require the Company to purchase such shares at their last
reported sale price in the Japanese OTC market on the day when such request is
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served on the transfer agent of the Company or, if no such sale takes place on
such day, the price at which the first sale of the shares is effected in the
Japanese OTC market thereafter, less applicable brokerage commission. The usual
securities transfer tax is applicable to such transactions. Because holders of
ADRs representing less than one unit are not able to withdraw the underlying
shares of Common Stock from deposit, such holders are unable as a practical
matter to exercise this right to require the Company to purchase the underlying
shares of Common Stock. See " -- Transferability of Shares Representing Less
Than One Unit."
Other Rights of a Holder of Shares Representing Less Than One Unit. A
holder of shares representing less than one unit continues to enjoy in respect
of such shares only (i) the right to receive dividends (including interim
dividends), (ii) the right to receive shares and/or cash by way of stock split
or upon consolidation or subdivision of shares or upon a capital decrease or
merger, (iii) the right to be allotted subscription rights with respect to new
shares, convertible bonds and bonds with warrants to subscribe for shares when
such rights are granted to shareholders, (iv) the right to participate in the
distribution of surplus assets in the event of the liquidation of the Company
and (v) the right to require the Company to issue replacement share certificates
for lost, stolen or destroyed share certificates. All other rights, including
voting rights, the right to institute derivative actions and the right to
examine the Company's accounting books and records (subject to the further
limitation that only holders of 3% or more of a company's shares may have access
to such company's accounting books and records), cannot be exercised with
respect to shares representing less than one unit.
Voting Rights of a Holder of Shares Representing Less Than One Unit. A
holder of shares representing less than one unit cannot exercise any voting
rights with respect to such shares. In calculating the quorum for various voting
purposes, the aggregate number of shares representing less than one unit will be
excluded from the number of outstanding shares. A holder of shares representing
one or more whole units will have one vote for each such share, except as stated
in " -- Voting Rights" below.
Consolidation by Operation of Law of Shares Constituting One Unit into One
Share. The unit share system is intended to be an interim measure with a view
ultimately to achieve shares of much higher denomination than at present. The
Commercial Code contains provisions to the effect that on a date to be specified
by separate legislation the shares comprising one unit will be deemed to be
consolidated into one share. When the bill specifying such date will be
submitted to the Japanese Diet is unknown at present. If the consolidation takes
place, the holder of any fractional share constituting one-hundredth of one
share or any integral multiple thereof, which may result from such
consolidation, will be registered as the holder thereof, in the register of
fractional shares, and the holder of any fraction representing less than a whole
hundredth of one share will be entitled only limited rights, such as the right
to receive a cash payment and/or a distribution of shares by way of stock split.
The registered holders of fractional shares may request that the Company issue
share certificates, but such fractional shares will not carry voting rights and,
unless the Articles of Association are amended to provide otherwise, the
entitlement thereof will be limited and will not include the right to receive
dividends thereon.
See "Risk Factors -- Significant Restrictions on Common Stock Under
Japanese Unit Share System" and "Description of American Depositary Receipts"
for a discussion of the effect of the unit share system on the rights of holders
of ADRs.
ORDINARY GENERAL MEETING OF SHAREHOLDERS
The Ordinary General Meeting of Shareholders to settle accounts of the
Company for each fiscal year is normally held in November each year in Tokyo,
Japan. In addition, the Company may hold an extraordinary general meeting of
shareholders whenever necessary by giving at least two weeks' advance notice to
shareholders.
Under the Commercial Code, notice of any shareholders' meeting, setting
forth the place, time and purpose thereof, must be mailed to each shareholder
having voting rights (or, in the case of a non-resident shareholder, to his
resident proxy or mailing address in Japan appointed or determined pursuant to
the Share Handling Regulations) at least two weeks prior to the date set for the
meeting.
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VOTING RIGHTS
A shareholder is entitled to one vote per share subject to the limitations
on voting rights set forth in the following paragraph and under " -- Japanese
Unit Share System" above. Under the Commercial Code, except as otherwise
provided by law or by the Articles of Association, a resolution can be adopted
at a General Meeting of Shareholders by a majority of the shares having voting
rights represented at the meeting. The Commercial Code and the Articles of
Association provide, however, that the quorum for the election of Directors and
Statutory Auditors shall not be less than one-third of the total number of
outstanding shares having voting rights. The Company's shareholders are not
entitled to cumulative voting in the election of Directors. A corporate
shareholder, more than one-quarter of whose outstanding shares are directly or
indirectly owned by the Company, may not exercise its voting rights in respect
of the shares of the Company. Shareholders may exercise their voting rights
through proxies provided that the proxies are also shareholders holding voting
rights.
The Commercial Code provides that in order to amend the Articles of
Association and in certain other instances, including a reduction of the stated
capital, the removal of a Director or Statutory Auditor, dissolution, merger or
consolidation, the transfer of the whole or an important part of the business,
the taking over of the whole of the business of any other corporation or any
offering of new shares at a "specially favorable" price (or any offering of
convertible bonds or debentures with "specially favorable" conversion conditions
or of bonds or debentures with warrants or rights to subscribe for new shares
with "specially favorable" conditions) to persons other than shareholders, the
quorum shall be a majority of the total number of shares having voting rights
outstanding and the approval of the holders of at least two-thirds of the shares
having voting rights represented at the meeting is required.
Voting rights of holders of ADRs are exercised through the Depositary, an
agent of which is the record holder of the underlying shares of Common Stock,
based upon instructions from the holders of ADRs to the Depositary. See "Risk
Factors -- Significant Restrictions on Common Stock Under Japanese Unit Share
System" and "Description of American Depositary Receipts -- Voting of Deposited
Securities."
SUBSCRIPTION RIGHTS
Holders of the Common Stock have no preemptive rights under the Articles of
Association. Authorized but unissued shares may be issued at such times and upon
such terms as the Board of Directors determines, subject to the limitations as
to the offering of new shares at a "specially favorable" price discussed in
" -- Voting Rights" above. Under the Commercial Code, the Board of Directors
may, however, determine that shareholders shall be given subscription rights
regarding a particular issue of new shares, in which case such rights must be
given on uniform terms to all shareholders as of a record date of which not less
than two weeks' public notice must be given. Each of the shareholders to whom
such rights are given must also be given notice of the expiry thereof at least
two weeks prior to the date on which such rights are to expire.
Rights to subscribe for new shares may be made transferable or
nontransferable by the Board of Directors and may be made at par or at or
substantially below the market price of shares of Common Stock. Accordingly,
rights offerings can result in substantial dilution or can result in rights
holders not being able to realize the economic value of such rights.
LIQUIDATION RIGHTS
In the event of a liquidation of the Company, the assets remaining after
payment of all debts, liquidation expenses and taxes will be distributed among
the shareholders in proportion to the respective numbers of shares which they
hold.
LIABILITY TO FURTHER CALLS OR ASSESSMENTS
All the Company's presently outstanding shares of Common Stock are fully
paid and nonassessable.
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TRANSFER AGENT
The Yasuda Trust and Banking Company, Limited is the transfer agent for the
Common Stock. As such transfer agent, its office at 2-1, Yaesu 1-chome, Chuo-ku,
Tokyo 103, Japan keeps the Company's register of shareholders and makes transfer
of record ownership upon presentation of the certificates representing the
transferred shares.
RECORD DATE
The close of business on August 31 is the record date for the Company's
year-end dividends, if paid. The shareholders who are registered as the holders
of at least one unit on the Company's register of shareholders at the close of
business as of August 31 are also entitled to exercise shareholders' voting
rights at the Ordinary General Meeting of Shareholders with respect to the
fiscal year ending on such August 31. The close of business on the last day of
February of each year is the record date for interim dividends, if paid. In
addition, the Company may set a record date for determining the shareholders
entitled to other rights and for other purposes by giving at least two weeks'
public notice.
The shares of Common Stock generally trade ex-dividend or ex-rights in the
Japanese OTC market on the third business day prior to a record date (or if the
record date is not a business day, the fourth business day prior thereto), for
the purpose of dividends or rights offerings.
REPURCHASE BY THE COMPANY OF ITS COMMON STOCK
With certain exceptions, neither the Company nor any subsidiary can acquire
shares of the Company's Common Stock. One exception is by means of a reduction
of capital in the manner provided in the Commercial Code. Under another
exception, the Company may acquire its Common Stock in response to a
shareholder's request for purchase of shares representing less than one unit.
See " -- Japanese Unit Share System." Shares so purchased, once they aggregate a
whole unit, must be sold or otherwise transferred to a third party within a
reasonable period thereafter. On October 1, 1994, an amendment to the Commercial
Code (the "Amendment") became effective that permits the Company (and other
Japanese corporations) to repurchase and cancel its (and their) own capital
stock with funds legally available for dividends pursuant to a resolution of the
Ordinary General Meeting of Shareholders. Such stock repurchase may be made by
the Company through purchases of Common Stock in the Japanese OTC market or by
offering to purchase Common Stock from existing shareholders by means of a
tender offer in accordance with the Securities and Exchange Law of Japan. In
September 1995, a bill was proposed in the Japanese legislature to provide
special treatment regarding deemed dividend taxation in connection with
repurchases and cancellations of shares by corporations the shares of which are
listed on any Japanese stock exchange or registered with the JSDA as shares to
be traded on the Japanese OTC market. The bill is being considered for adoption
by the Japanese legislature. See "Taxation -- Japanese Taxation." In addition,
the Amendment also permits the Company, pursuant to a resolution of the Ordinary
General Meeting of Shareholders, to acquire shares of Common Stock for the
purpose of transferring shares of Common Stock to the Company's employees for
due cause, such as providing compensation for specified long-term service to the
Company, provided that the Company may not purchase more than three percent of
the total number of outstanding shares of the Company for transfer to its
employees.
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DESCRIPTION OF AMERICAN DEPOSITARY RECEIPTS
The following is a summary of the material provisions of the Deposit
Agreement relating to the ADSs (including all exhibits thereto, the "Deposit
Agreement") among the Company, Morgan Guaranty Trust Company of New York, as
depositary (the "Depositary"), and the registered holders from time to time of
the ADRs issued thereunder. This summary does not purport to be complete and is
qualified in its entirety by reference to the Deposit Agreement. Copies of the
Deposit Agreement are available for inspection at the principal office of the
Depositary in New York (the "Principal New York Office"), which is presently
located at 60 Wall Street, New York, New York 10260. Terms used herein and not
otherwise defined shall have the respective meanings set forth in the Deposit
Agreement.
AMERICAN DEPOSITARY RECEIPTS
ADRs evidencing ADSs are issuable by the Depositary pursuant to the terms
of the Deposit Agreement. Each ADS represents the right to receive one-half of
one share of Common Stock deposited under the Deposit Agreement (together with
any additional shares of Common Stock deposited thereunder and all other
securities, property and cash received and held thereunder at any time in
respect of or in lieu of such deposited shares of Common Stock, the "Deposited
Securities") with the Custodian, currently The Mitsubishi Bank, Limited
(together with any successor or successors thereto, the "Custodian"). The
Custodian's offices are currently located at 7-1, Marunouchi 2-chome,
Chiyoda-ku, Tokyo 100, Japan. An ADR may evidence any number of ADSs. Only
persons in whose names ADRs are registered on the books of the Depositary will
be treated by the Depositary and the Company as holders of ADRs.
DEPOSIT, TRANSFER AND WITHDRAWAL
In connection with the deposit of shares of Common Stock under the Deposit
Agreement, the Depositary or the Custodian may require the following in form
satisfactory to it: (i) a written order directing the Depositary to execute and
deliver to, or upon the written order of, the person or persons designated in
such order an ADR or ADRs evidencing the number of ADSs representing such
deposited shares of Common Stock (a "Delivery Order"); (ii) proper endorsements
or duly executed instruments of transfer in respect of such deposited shares of
Common Stock; (iii) instruments assigning to the Custodian or its nominee any
distribution on or in respect of such deposited shares of Common Stock or
indemnity therefor; and (iv) proxies entitling the Custodian to vote such
deposited shares of Common Stock. As soon as practicable after the Custodian
receives Deposited Securities pursuant to any such deposit or pursuant to the
form of ADR, the Custodian shall present such Deposited Securities for
registration of transfer into the name of the Depositary or its nominee or the
Custodian or its nominee, to the extent such registration is practicable, at the
cost and expense of the person making such deposit (or for whose benefit such
deposit is made) and shall obtain evidence satisfactory to it of such
registration. Deposited Securities shall be held by the Custodian for the
account and to the order of the Depositary at such place or places and in such
manner as the Depositary shall determine. Deposited Securities may be delivered
by the Custodian to any person only under the circumstances expressly
contemplated in the Deposit Agreement.
After any such deposit of shares of Common Stock, the Custodian shall
notify the Depositary of such deposit and of the information contained in any
related Delivery Order by letter, first class airmail postage prepaid, or, at
the request, risk and expense of the person making the deposit, by cable, telex
or facsimile transmission. After receiving such notice from the Custodian, the
Depositary, subject to the terms and conditions of the Deposit Agreement, shall
execute and deliver at the Transfer Office which is presently located at the
Principal New York Office, to or upon the order of any person named in such
notice, an ADR or ADRs registered as requested and evidencing the aggregate ADSs
to which such person is entitled.
Subject to the terms and conditions of the Deposit Agreement, the
Depositary may so issue ADRs for delivery at the Transfer Office only against
deposit with the Custodian of: (i) shares of Common Stock in form satisfactory
to the Custodian; (ii) rights to receive shares of Common Stock from the Company
or any registrar, transfer agent, clearing agent or other entity recording share
ownership or transactions; or (iii) other rights to receive shares of Common
Stock (until such shares of Common Stock are actually deposited
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pursuant to (i) or (ii) above, "Pre-released ADRs") only if (a) Pre-released
ADRs are fully collateralized (marked to market daily) with cash or U.S.
government securities held by the Depositary for the benefit of holders of ADRs
(but such collateral shall not constitute "Deposited Securities"), (b) each
recipient of Pre-released ADRs agrees in writing with the Depositary that such
recipient (1) owns such shares of Common Stock, (2) assigns all beneficial
right, title and interest therein to the Depositary, (3) holds such shares of
Common Stock for the account of the Depositary and (4) will deliver such shares
of Common Stock to the Custodian as soon as practicable and promptly upon demand
therefor and (c) all Pre-released ADRs evidence not more than 20% of all ADSs
(excluding those evidenced by Pre-released ADRs), except to the extent that the
Depositary (in its sole discretion) determines that unusual market conditions
require the issuance of Pre-released ADRs in addition to 20% of all such ADSs.
The Depositary may retain for its own account any earnings on collateral for
Pre-released ADRs and its charges for issuance thereof. At the request, risk and
expense of the person depositing shares of Common Stock, the Depositary may
accept deposits together with the other instruments herein specified for
forwarding to the Custodian and may deliver ADRs at a place other than its
Transfer Office. Every person depositing shares of Common Stock under the
Deposit Agreement represents and warrants that such shares of Common Stock are
validly issued and outstanding, fully paid, non-assessable and free of
preemptive rights, that the person making such deposit is duly authorized so to
do and that such shares of Common Stock are not "restricted securities" as such
term is defined in Rule 144 under the Securities Act. Such representations and
warranties shall survive the deposit of shares of Common Stock and issuance of
ADRs.
Subject to the terms and conditions of the Deposit Agreement and the
Articles of Association and Share Handling Regulations, upon surrender of an ADR
in form satisfactory to the Depositary at the Transfer Office, the holder
thereof is entitled to delivery at the Custodian's Tokyo office of the Deposited
Securities at the time represented by the ADSs evidenced by such ADR. At the
request, risk and expense of the holder thereof, the Depositary may deliver such
Deposited Securities at such other place as may have been requested by the
holder of the ADR. Notwithstanding any other provision of the Deposit Agreement
or the ADR, the withdrawal of Deposited Securities may be restricted only for
the reasons set forth in General Instruction I.A.(1) of Form F-6 under the
Securities Act.
Notwithstanding anything to the contrary contained in the Deposit Agreement
or the form of ADRs, upon surrender of an ADR or ADRs by a holder of the ADR to
the Depositary, as a result of, and to the extent required by the operation of
applicable provisions of the Commercial Code or any other Japanese law, the
Depositary will effect the delivery to such holder of only such Deposited
Securities comprising a unit or an integral multiple thereof (the "deliverable
portion" of such ADR or ADRs). For the purpose of the foregoing sentence, the
deliverable portion shall be determined on the basis of the aggregate number of
Deposited Securities represented by the entire amount of the ADSs evidenced by
the ADR or ADRs surrendered by the same holder of the ADRs at that time. The
Depositary will promptly advise such holder as to the number of Deposited
Securities represented by the non-deliverable portion of such ADR or ADRs and
shall deliver to such holder a new ADR evidencing such non-deliverable portion.
In addition, the Depositary shall notify such holder of the additional amount of
ADSs which such holder would be required to surrender in order for the
Depositary to effect delivery of all the Deposited Securities represented by the
ADSs of such holder.
DISTRIBUTIONS ON DEPOSITED SECURITIES
Subject to the terms and conditions of the Deposit Agreement, to the extent
practicable, the Depositary will distribute by mail to each holder of ADRs
entitled thereto on the record date set by the Depositary therefor at such
holder's address shown on the ADR Register, in proportion to the number of
Deposited Securities (on which the following distributions on Deposited
Securities are received by the Custodian) represented by ADSs evidenced by such
holder's ADRs:
(i) Cash: Any U.S. dollars available to the Depositary resulting from
a cash dividend or other cash distribution or the net proceeds of sales of
any other distribution or portion thereof authorized in the Deposit
Agreement ("Cash"), on an averaged or other practicable basis, subject to
appropriate adjustments for (a) taxes withheld, (b) such distribution being
impermissible or impracticable with respect to certain holders and (c)
deduction of the Depositary's expenses in (1) converting any foreign
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currency into U.S. dollars by sale or in such other manner as the
Depositary may determine to the extent that it determines that such
conversion may be made on a reasonable basis, (2) transferring foreign
currency or U.S. dollars to the United States by such means as the
Depositary may determine to the extent that it determines that such
transfer may be made on a reasonable basis, (3) obtaining any approval or
license of any governmental authority required for such conversion or
transfer, which is obtainable at a reasonable cost and within a reasonable
time and (4) making any sale by public or private means in any commercially
reasonable manner. If the Depositary determines that in its judgment any
foreign currency received by it cannot be converted on a reasonable basis
and transferred to the United States, the Depositary may distribute the
foreign currency received by it or, at its discretion, hold such foreign
currency, uninvested and without liability for interest thereon, for the
respective accounts of the holders of ADRs entitled to receive the same.
(ii) Shares of Common Stock: (a) Additional ADRs evidencing whole
ADSs representing any shares of Common Stock available to the Depositary
resulting from a stock split or a dividend on Deposited Securities
consisting of shares of Common Stock (a "Share Distribution") and (b) U.S.
dollars available to it resulting from the net proceeds of sales of shares
of Common Stock received in a Share Distribution, which shares of Common
Stock would give rise to fractional ADSs if additional ADRs were issued
therefor, as in the case of Cash.
(iii) Rights: (a) Warrants or other instruments in the discretion of
the Depositary representing rights to acquire additional ADRs in respect of
any rights to subscribe for additional shares of Common Stock or rights of
any nature available to the Depositary as a result of a distribution on
Deposited Securities ("Rights"), to the extent that the Company timely
furnishes to the Depositary evidence satisfactory to the Depositary that
the Depositary may lawfully distribute same (the Company has no obligation
to so furnish such evidence), (b) to the extent the Company does not so
furnish such evidence and sales of Rights are practicable, any U.S. dollars
available to the Depositary from the net proceeds of sales of Rights as in
the case of Cash or (c) to the extent the Company does not so furnish such
evidence and such sales cannot practicably be accomplished by reason of the
nontransferability of the Rights, limited markets therefor, their short
duration or otherwise, nothing (and any Rights may lapse). The Depositary
will not make available to holders of ADRs any Rights unless a registration
statement with respect to such Rights under the Securities Act is in effect
or unless the offering and sale of such Rights to such holders is exempt
from registration thereunder. Should any distribution of Rights not be
possible or if the Depositary deems such distribution not feasible, the
Depositary intends to endeavor to dispose of the Rights for the benefit of
the holders, as stated above.
(iv) Other Distributions: (a) Securities or property available to the
Depositary resulting from any distribution on Deposited Securities other
than Cash, Share Distributions and Rights ("Other Distributions"), by any
means that the Depositary may deem equitable and practicable or (b) to the
extent the Depositary deems distribution of such securities or property not
to be equitable and practicable, any U.S. dollars available to the
Depositary from the net proceeds of sales of Other Distributions as in the
case of Cash. Such U.S. dollars available will be distributed by checks
drawn on a bank in the United States for whole dollars and cents (any
fractional cents being withheld without liability for interest and added to
future Cash distributions).
To the extent that the Depositary determines in its discretion that any
distribution is not practicable with respect to any holder of ADRs, the
Depositary may make such distribution as it so determines is practicable,
including the distribution of foreign currency, securities or property (or
appropriate documents evidencing the right to receive foreign currency,
securities or property) or the retention thereof as Deposited Securities with
respect to such holder's ADRs (without liability for interest thereon or the
investment thereof).
There can be no assurance that the Depositary will be able to effect any
currency conversion or to sell or otherwise dispose of any distributed or
offered property, subscription or other rights, shares of Common Stock or other
securities in a timely manner or at a specified rate or price, as the case may
be.
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DISCLOSURE OF BENEFICIAL OWNERSHIP
Any Beneficial Owner (as defined below) of ADSs who becomes, or ceases to
be, directly or indirectly the Beneficial Owner of more than 5% of all
outstanding shares of Common Stock (whether such interest is held in whole or
only in part through ADRs) shall, within five days (excluding Saturdays, Sundays
and legal holidays in any part of Japan) following such event, send written
notice to the Depositary at its Transfer Office and to the Company at its
principal office in Japan containing the following information:
(i) the name, address and nationality of such Beneficial Owner and all
other persons by whom or on whose behalf such shares of Common Stock of the
Company (including any Deposited Securities) have been acquired or are
held; the number of ADSs, and total shares of Common Stock (including ADSs)
beneficially owned directly or indirectly by such Beneficial Owner
immediately before and immediately after the event requiring notification;
the names and addresses of any persons other than the Depositary, the
Custodian or either of their nominees, through whom such beneficially owned
shares of Common Stock are held, or in whose name the same are registered
in the Company's share register, and the respective numbers of shares of
Common Stock beneficially held through each such person; the date or dates
of acquisition of the beneficial interest in such shares of Common Stock;
and the number of any shares of Common Stock in which such Beneficial Owner
has the right to acquire directly or indirectly beneficial ownership and
material information as to such right(s) of acquisition; and
(ii) the names, addresses and nationalities of any persons with whom
such Beneficial Owner is acting as a partnership, limited partnership,
syndicate or other group for the purpose of acquiring, holding, voting or
disposing of a beneficial interest in shares of Common Stock; and the
number of such shares of Common Stock being acquired, held, voted or
disposed of as a result of such association (being the total number held by
such group).
Any Beneficial Owner of more than 5% of all outstanding shares of Common
Stock shall promptly notify the Depositary and the Company as provided above of
any material change in the information previously notified, including, without
limitation, a change of more than 1% in the percentage of total shares of Common
Stock to which the beneficial ownership relates.
As used in this description, the "Beneficial Owner" means a person who,
directly or indirectly, through any contract, trust, arrangement, understanding,
relationship or otherwise, has an interest in any shares of Common Stock,
including shares of Common Stock which underlie any ADS (including having the
right to exercise or control the exercise of any right conferred by the holding
of such shares of Common Stock or the power to vote or to direct voting or the
power to dispose or to direct disposition), and includes any holder of an ADS.
Any Beneficial Owner of shares of Common Stock shall, if so requested in
writing by the Company, provide such information with respect to the beneficial
ownership of such shares of Common Stock (including not only shares of Common
Stock underlying ADSs, but also any shares of Common Stock (including any
securities convertible into, exchangeable for or exercisable for shares of
Common Stock) in which such Beneficial Owner has an interest) by such Beneficial
Owner as is requested by the Company. Such Beneficial Owner shall provide such
information to the Company in writing within the time specified by the Company.
Copies of any such request and responses shall be contemporaneously sent to the
Depositary at its Transfer Office.
If the Company notifies the Depositary in writing that a particular
Beneficial Owner has not complied with the above described provisions, the
Depositary has agreed to use reasonable efforts not to vote or cause to be voted
any shares of Common Stock held by it or any Custodian as to which such
Beneficial Owner of such shares of Common Stock shall have failed to comply with
the provisions of the paragraphs above but only to the extent that such
Beneficial Owner is the holder of an ADR or ADRs. See "Exchange Controls and
Other Limitations Affecting Securityholders -- Reporting of Substantial
Shareholdings."
The disclosure obligations set forth above shall also apply to any class of
equity securities of the Company other than the shares of Common Stock that the
Company may issue from time to time (including any securities convertible into,
exchangeable for or exercisable for such equity securities).
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RECORD DATES
The Depositary may, after consultation with the Company, if practicable,
fix a record date (which shall be as near as practicable to any corresponding
record date set by the Company) for the determination of the holders of ADRs who
shall be entitled to receive any cash dividend or other distribution on or in
respect of Deposited Securities, to give instructions for the exercise of any
voting rights, to receive any notice or to act in respect of other matters and
only such holders of ADRs shall be so entitled.
VOTING OF DEPOSITED SECURITIES
As soon as practicable after receipt from the Company of notice of any
meeting or solicitation of consents or proxies of holders of shares of Common
Stock or other Deposited Securities, the Depositary shall mail to holders of
ADRs a notice stating (i) such information as is contained in such notice and
any solicitation materials, (ii) that each holder of ADRs on the record date set
by the Depositary therefor will be entitled, subject to any applicable provision
of Japanese law and of the Articles of Association, to instruct the Depositary
as to the exercise of the voting rights, if any, pertaining to the Deposited
Securities represented by the ADSs evidenced by such holder's ADRs and (iii) the
manner in which such instructions may be given, including instructions (or
deemed instructions in accordance with the last sentence of this paragraph) to
give a discretionary proxy to the persons designated by the Company. Because of
the Japanese unit share system, the Depositary shall in no event vote or
exercise the right to vote Deposited Securities other than in a unit or integral
multiples thereof and may therefore not be permitted to vote all Deposited
Securities in respect of which it has received voting instructions from the
holder of ADRs. In voting or exercising the right to vote Deposited Securities
the Depositary shall, to the extent possible, aggregate Deposited Securities
represented by ADSs evidenced by ADRs as to which the holders thereof have given
the same or similar instructions. Subject to the provisions of the Deposit
Agreement as described above under "Disclosure of Beneficial Ownership," upon
receipt of instructions of a record holder of ADRs on or before the date
established by the Depositary for such purpose, the Depositary shall endeavor
insofar as practicable and permitted under the provisions of or governing
Deposited Securities to vote or cause to be voted (or to grant a discretionary
proxy to the persons designated by the Company to vote) the Deposited Securities
represented by the ADSs evidenced by such holder's ADRs in accordance with such
instructions. The Depositary will not itself exercise any voting discretion in
respect of any Deposited Securities. To the extent such instructions are not so
received by the Depositary from any holder of ADRs, the Depositary shall deem
such holder to have so instructed the Depositary to give a discretionary proxy
to the persons designated by the Company and the Depositary shall endeavor
insofar as practicable and permitted under the provisions of or governing
Deposited Securities to give a discretionary proxy to the persons designated by
the Company to vote the Deposited Securities represented by the ADSs evidenced
by such holder's ADRs as to which such instructions are so given; provided that
no such discretionary proxy shall be given with respect to any matter as to
which the Company informs the Depositary in writing that (i) the Company does
not wish such proxy given, (ii) substantial opposition exists or (iii) the
rights of holders of shares of Common Stock will be materially and adversely
affected.
INSPECTION OF TRANSFER BOOKS
The Deposit Agreement provides that the Depositary will keep books at its
Transfer Office for the registration, registration of transfer, combination and
split-up of ADRs, which at all reasonable times will be open for inspection by
the holders of ADRs and the Company for the purpose of communicating with
holders of ADRs the interest of the business of the Company or a matter related
to the Deposit Agreement or the ADRs.
REPORTS AND OTHER COMMUNICATIONS
The Depositary shall make available for inspection by holders of ADRs at
the Transfer Office any reports and communications received from the Company
which are both (i) received by the Depositary as the holder of the Deposited
Securities and (ii) made generally available to the holders of shares of Common
Stock or other Deposited Securities by the Company. The Depositary shall also
send to the holders of ADRs copies of
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such reports when furnished by the Company. Any such reports and communications
furnished to the Depositary by the Company shall be furnished in English.
On or before the first date on which the Company gives notice, by
publication or otherwise, of any meeting of holders of shares of Common Stock or
other Deposited Securities, or of any adjourned meeting of such holders, or the
taking of any action by such holders other than at a meeting, the Company shall
transmit to the Depositary and the Custodian a copy of the notice thereof (in
English) in the form given or to be given to holders of shares of Common Stock
or other Deposited Securities. The Depositary will, at the Company's expense,
arrange for the prompt mailing of copies thereof to all holders of ADRs. In
connection with any registration statement under the Securities Act relating to
the ADRs or with any undertaking contained therein, the Company and the
Depositary shall each furnish to the other and to the Commission or any
successor governmental agency such information as shall be required to make such
filings or comply with such undertakings. The Company has delivered to the
Depositary, the Custodian and any Transfer Office, a copy of all provisions of
or governing the shares of Common Stock and any other Deposited Securities
issued by the Company or any affiliate of the Company and, promptly upon any
change thereto, the Company shall deliver to the Depositary, the Custodian and
any Transfer Office, a copy (in English or with an English translation) of such
provisions as so changed. The Depositary and its agents may rely upon the
Company's delivery thereof for all purposes of the Deposit Agreement.
CHANGES AFFECTING DEPOSITED SHARES OF COMMON STOCK
Subject to the terms and conditions of the Deposit Agreement, the
Depositary may, in its discretion, amend the form of ADR or distribute
additional or amended ADRs (with or without calling the ADRs for exchange) or
cash, securities or property on the record date set by the Depositary therefor
to reflect any change in par value, split-up, consolidation, cancellation or
other reclassification of Deposited Securities, any Share Distribution or Other
Distribution not distributed to holders of ADRs or any cash, securities or
property available to the Depositary in respect of Deposited Securities from
(and the Depositary is authorized to surrender any Deposited Securities to any
person and to sell by public or private sale any property received in connection
with) any recapitalization, reorganization, merger, consolidation, liquidation,
receivership, bankruptcy or sale of all or substantially all the assets of the
Company, and to the extent the Depositary does not so amend the form of ADR or
make a distribution to holders of ADRs to reflect any of the foregoing, or the
net proceeds thereof, whatever cash, securities or property results from any of
the foregoing shall constitute Deposited Securities and each ADS evidenced by
the ADR shall automatically represent its pro rata interest in the Deposited
Securities as then constituted.
AMENDMENT AND TERMINATION OF DEPOSIT AGREEMENT
The ADRs and the Deposit Agreement may be amended by the Company and the
Depositary, provided that any amendment that imposes or increases any fees or
charges (other than stock transfer or other taxes and other governmental
charges, transfer or registration fees, cable, telex or facsimile transmission
costs, delivery costs or other such expenses), or that shall otherwise prejudice
any substantial existing right of holder of ADRs, shall become effective 30 days
after notice of such amendment shall have been given to the holder of ADRs.
Every holder of an ADR at the time any amendment to the Deposit Agreement
becomes effective shall be deemed, by continuing to hold such ADR, to consent
and agree to such amendment and to be bound by the Deposit Agreement, as amended
thereby. In no event shall any amendment impair the right of the holder of any
ADR to surrender such ADR and receive the Deposited Securities represented
thereby, except in order to comply with mandatory provisions of applicable law.
The Depositary may, and shall at the written direction of the Company,
terminate the Deposit Agreement and the related ADRs by mailing notice of such
termination to the holders of ADRs at least 30 days prior to the date fixed in
such notice for such termination. The Depositary may terminate the Deposit
Agreement, upon such notice, at any time after 60 days after the Depositary
shall have delivered to the Company its written resignation, provided that no
successor depositary shall have been appointed and accepted its appointment as
provided in the Deposit Agreement before the end of such 60 days. After the date
so fixed for termination, the Depositary and its agents will perform no further
acts under the Deposit Agreement, except to
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advise holders of ADRs of such termination, receive and hold (or sell)
distributions on Deposited Securities and deliver Deposited Securities being
withdrawn. As soon as practicable after the expiration of six months from the
date so fixed for termination, the Depositary, subject to the provisions of the
Commercial Code and the Share Handling Regulations, shall sell the Deposited
Securities and shall thereafter (as long as it may lawfully do so) hold in a
segregated account the net proceeds of such sales, together with any other cash
then held by it under the Deposit Agreement, without liability for interest, in
trust for the pro rata benefit of the holders of ADRs not theretofore
surrendered. After making such sale, the Depositary shall be discharged from all
obligations in respect of the Deposit Agreement, except to account for such net
proceeds and other cash. After the date so fixed for termination, the Company
shall be discharged from all obligations under the Deposit Agreement except for
its obligations to the Depositary and its agents.
CHARGES OF DEPOSITARY
The Depositary may charge each person to whom ADRs are issued against
deposits of shares of Common Stock, including deposits in respect of Share
Distributions, Rights and Other Distributions, and each person surrendering ADRs
for withdrawal of Deposited Securities, U.S.$5.00 for each 100 ADSs (or portion
thereof) evidenced by the ADRs issued or surrendered. An issuance fee will not
be charged in connection with the initial issuance of ADSs covered by this
Prospectus. The Company will pay all other charges and expenses of the
Depositary and any agent of the Depositary (except the Custodian) pursuant to
agreements from time to time between the Company and the Depositary, except (i)
stock transfer or other taxes and other governmental charges (which are payable
by holders of ADRs or persons depositing shares of Common Stock), (ii) cable,
telex and facsimile transmission and delivery charges incurred at the request of
persons depositing, or holders of ADRs delivering shares of Common Stock, ADRs
or Deposited Securities (which are payable by such persons or holders of ADRs),
(iii) transfer or registration fees for the registration of transfer of
Deposited Securities on any applicable register in connection with the deposit
or withdrawal of Deposited Securities (which are payable by persons depositing
shares of Common Stock or holders of ADRs withdrawing Deposited Securities;
there are no such fees in respect of the shares of Common Stock as of the date
of the Deposit Agreement) and (iv) expenses of the Depositary in connection with
the conversion of foreign currency into U.S. dollars (which are paid out of such
foreign currency).
LIABILITY OF HOLDER FOR TAXES
If any tax or other governmental charge shall become payable by or on
behalf of the Custodian or the Depositary with respect to the ADRs, any
Deposited Securities represented by the ADSs evidenced thereby or any
distribution thereon, such tax or other governmental charge shall be paid by the
holder thereof to the Depositary. The Depositary may refuse to effect any
registration, registration of transfer, split-up or combination thereof or,
subject to the terms and conditions of the Deposit Agreement, any withdrawal of
such Deposited Securities until such payment is made. The Depositary may also
deduct from any distributions on or in respect of Deposited Securities, or may
sell by public or private sale for the account of the holder thereof any part or
all of such Deposited Securities (after attempting by reasonable means to notify
the holder thereof prior to such sale), and may apply such deduction or the
proceeds of any such sale in payment of such tax or other governmental charge,
the holder thereof remaining liable for any deficiency, and shall reduce the
number of ADSs evidenced thereby to reflect any such sales of Deposited
Securities. In connection with any distribution to holders of ADRs, the Company
will remit to the appropriate governmental authority or agency all amounts (if
any) required to be withheld and owing to such authority or agency by the
Company; and the Depositary and the Custodian will remit to the appropriate
governmental authority or agency all amounts (if any) required to be withheld
and owing to such authority or agency by the Depositary or the Custodian. If the
Depositary determines that any distribution in property other than cash
(including shares of Common Stock or Rights) on Deposited Securities is subject
to any tax that the Depositary or the Custodian is obligated to withhold, the
Depositary may dispose of all or a portion of such property in such amounts and
in such manner as the Depositary deems necessary and practicable to pay such
taxes, by public or private sale, and the Depositary shall distribute the net
proceeds of any such sale or the balance of any such property after deduction of
such taxes to the holders of ADRs entitled thereto.
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GENERAL LIMITATIONS
The Depositary, the Company, their agents and each of them shall: (i) incur
no liability (a) if any present or future law, regulation of any country or of
any governmental or regulatory authority or stock exchange, the provisions of or
governing any Deposited Security (including the Articles of Association or the
Share Handling Regulations of the Company), act of God, war or other
circumstance beyond its control shall prevent, delay or subject to any civil or
criminal penalty any act which the Deposit Agreement or the ADRs provides shall
be done or performed by it or (b) by reason of any exercise or failure to
exercise any discretion given it in the Deposit Agreement or the ADRs; (ii)
assume no liability except to perform its obligations to the extent they are
specifically set forth in the ADRs and the Deposit Agreement without gross
negligence or bad faith; (iii) be under no obligation to appear in, prosecute or
defend any action, suit or other proceeding in respect of any Deposited
Securities or the ADRs; and (iv) not be liable for any action or inaction by it
in reliance upon the advice of or information from legal counsel, accountants,
any person presenting shares of Common Stock for deposit, any holder of ADRs or
any other person believed by it to be competent to give such advice or
information. The Depositary, its agents and the Company may rely and shall be
protected in acting upon any written notice, request, direction or other
document believed by them to be genuine and to have been signed or presented by
the proper party or parties. The Depositary and its agents will not be
responsible for any failure to carry out any instructions to vote any of the
Deposited Securities, for the manner in which any such vote is cast (provided
that any such action or inaction is undertaken in good faith) or for the effect
of any such vote. The Depositary and its agents may own and deal in any class of
securities of the Company and its affiliates and in ADRs. The Company has agreed
to indemnify the Depositary, its directors, employees and agents under certain
circumstances and the Depositary has agreed to indemnify the Company, its
directors, employees and agents against losses incurred by the Company to the
extent such losses are due to the negligence or bad faith of the Depositary or
its agents.
Prior to the issuance, registration, registration of transfer, split-up or
combination of any ADR, the delivery of any distribution in respect thereof or,
subject to the terms and conditions of the Deposit Agreement, the withdrawal of
any Deposited Securities, the Company, the Depositary or the Custodian may
require from the depositor of shares of Common Stock, the presenter of the ADR
or the holder of an ADR: (i) payment with respect thereto of (a) any stock
transfer or other tax or other governmental charge, (b) any stock transfer or
registration fees in effect for the registration of transference of shares of
Common Stock or other Deposited Securities upon any applicable register and (c)
any applicable charges as provided in the Deposit Agreement; (ii) the production
of proof satisfactory to it of (a) the identity and genuineness of any signature
and (b) such other information, including, without limitation, information as to
citizenship, residence, exchange control approval, beneficial ownership of any
securities, compliance with applicable law, regulations, provisions of or
governing Deposited Securities (including the registration of Deposited
Securities on the books of the Company or the Foreign Registrar) and terms of
the Deposit Agreement and the ADRs, as it may deem necessary or proper; and
(iii) compliance with such regulations as the Depositary may establish
consistent with the Deposit Agreement. The issuance of ADRs, the acceptance of
deposits of shares of Common Stock, the registration, registration of transfer,
split-up or combination of ADRs or, subject to the terms and conditions of the
Deposit Agreement, the withdrawal of Deposited Securities may be suspended,
generally or in particular instances, when the ADR Register or any register for
Deposited Securities is closed or when any such action is deemed necessary or
advisable by the Depositary or the Company.
GOVERNING LAW
The Deposit Agreement is governed by and shall be construed in accordance
with the laws of the State of New York without regard to the principles of
conflicts thereof.
MORGAN GUARANTY TRUST COMPANY OF NEW YORK
The Depositary is Morgan Guaranty Trust Company of New York, a New York
banking corporation, which has its principal office located in New York, New
York. Morgan Guaranty Trust Company of New York is a commercial bank offering a
wide range of banking and trust services to its customers in the New York
metropolitan area, throughout the United States and around the world.
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The Consolidated Balance Sheets of J.P. Morgan & Co. Incorporated ("J.P.
Morgan"), the parent corporation of Morgan Guaranty Trust Company of New York,
are set forth in its most recent Annual Report and Form 10-Q. The Annual Report,
Form 10-K and Form 10-Q of J.P. Morgan are on file with the Commission.
The Articles of Association and By-Laws of Morgan Guaranty Trust Company of
New York together with the Annual Report, Form 10-K and Form 10-Q of J.P. Morgan
will be available for inspection at the Principal New York Office of the
Depositary.
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EXCHANGE CONTROLS AND OTHER LIMITATIONS
AFFECTING SECURITYHOLDERS
GENERAL
The Foreign Exchange Law and the Foreign Trade Control Law and the cabinet
orders and ministerial ordinances issued thereunder (collectively, the "Foreign
Exchange Regulations") govern certain matters relating to the acquisition and
holding of shares of equity securities of Japanese corporations by
"non-residents of Japan" and "foreign investors" (as defined below).
"Non-residents of Japan" are defined as individuals who are not resident in
Japan and corporations whose principal offices are located outside Japan.
Generally, branches and other offices of Japanese corporations located outside
Japan are regarded as non-residents of Japan, but branches and other offices of
non-resident corporations located within Japan are regarded as residents of
Japan. "Foreign investors" are defined to be (i) non-resident individuals of
Japan, (ii) corporations which are established under the laws of foreign
countries or whose principal offices are located outside of Japan and (iii)
corporations (a) not less than 50% of the shares of which are held by persons
described in clause (i) and/or (ii) immediately above or (b) a majority of the
directors (or similar persons having the power of representation) of which are
non-resident individuals of Japan.
ACQUISITION OF SHARES
Acquisition by a non-resident of Japan of shares of stock of a Japanese
corporation from a resident of Japan generally requires prior notification by
the acquiring person to the MOF. The notification must be filed not more than 10
days prior to the proposed acquisition. If, however, a party to the transaction
is one of the securities firms (or licensed branches of foreign securities
firms) which are designated by the MOF or if such a securities firm acts as an
intermediary (broker or agent) in such transaction, no prior notification is
required. Such designated securities firms are subject to reporting requirements
to the MOF through The Bank of Japan.
Notwithstanding the foregoing, if the proposed transaction falls within the
category of "inward direct investment," the transaction is subject to different
regulations. The term "inward direct investment" in relation to transactions in
shares means in relevant part acquisition of shares of a Japanese corporation
whose shares are listed on any stock exchange in Japan (or registered with the
JSDA as shares to be traded in the Japanese OTC market) by a foreign investor
(whether from a resident, a nonresident or any other foreign investor) the
result of which would be such investor's holding directly or indirectly 10% or
more of the total outstanding shares of such corporation or (if such foreign
investor already holds 10% or more of the total outstanding shares of such
corporation) acquisition of additional shares in such corporation.
Except in limited cases which are prescribed by the law as requiring prior
notification, whenever an inward direct investment is made, the foreign investor
who makes such investment must make a post facto report to the MOF and other
Ministers having jurisdiction over the business of the issuer of the shares
within 15 days from the acquisition.
DIVIDENDS AND PROCEEDS OF SALE
Under the Foreign Exchange Regulations, dividends paid on, and the proceeds
of sales in Japan of, shares of Common Stock held by non-residents of Japan may
in general be converted into any foreign currency and repatriated abroad. The
acquisition of shares of Common Stock by non-resident shareholders by way of
stock split is not subject to any notification requirements.
AMERICAN DEPOSITARY SHARES
Neither the deposit of shares of Common Stock by a non-resident of Japan,
the issuance of ADRs evidencing the ADSs created by such deposit in exchange
therefor nor the withdrawal of the underlying shares
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of Common Stock upon surrender of ADRs is subject to any formalities or
restrictions referred to under
" -- Acquisition of Shares" above.
REPORTING OF SUBSTANTIAL SHAREHOLDINGS
The Securities and Exchange Law requires any person who has become,
beneficially and solely or jointly, a holder of more than 5% of the total issued
shares of a company listed on any Japanese stock exchange or whose shares are
traded in the Japanese OTC market to file with the MOF within five business days
a report concerning such shareholdings. A similar report must also be made in
respect of any subsequent change of one percent or more in any such holding. For
this purpose, shares issuable to such person upon conversion of convertible
securities or exercise of share subscription warrants are taken into account in
determining both the number of shares held by such holder and the issuer's total
issued shares capital. Copies of each such report must also be furnished to the
issuer of such shares and all Japanese stock exchanges on which the shares are
listed or, in the case of shares traded in the Japanese OTC market, the JSDA.
The Securities and Exchange Law also requires a principal shareholder (a
beneficial owner of 10% or more of the total issued shares of a company listed
on any Japanese stock exchange or whose shares are traded in the Japanese OTC
market) who sold (or purchased) its shares of that company to file with the MOF
a Principal Shareholder Sale (or Purchase) Report by the 15th day of the month
immediately following the month of the sale (or purchase).
Any person who has become, beneficially and solely or jointly, a holder of
more than 5% of the total issued shares of the Company and who fails to file the
report with respect to such holding as required by the Securities and Exchange
Law, or who files such a report containing an untrue statement with respect to
important matters, is subject to incarceration for a period not longer than one
year and/or a fine of not more than Y1.0 million. Any person who fails to file a
Principal Shareholder Sale (or Purchase) Report as required by the Securities
and Exchange Law, or who files such a Report containing an untrue statement, is
subject to a fine of not more than Y300,000 (U.S.$3,529). If the Company
notifies the Depositary that a holder of ADRs has failed to file any such report
or has filed such a report containing an untrue statement, the Depositary has
agreed to use reasonable efforts to not vote or cause to be voted the shares of
Common Stock underlying the ADSs evidenced by such ADRs. See "Description of
American Depositary Receipts -- Disclosure of Beneficial Ownership."
OTHER
There are no limitations on the right of non-residents or foreign owners in
their capacity as such to hold or vote shares of Common Stock or ADSs imposed by
Japanese law or by the Articles of Association.
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TAXATION
The following discussion is a summary of the material anticipated tax
consequences of the operations of the Company and of an investment in the Common
Stock or the ADSs under United States federal income tax laws and Japanese tax
laws. The discussion does not deal with all possible tax consequences relating
to the Company's operations or to an investment in the Common Stock or the ADSs.
In particular, the discussion does not address the tax consequences under state,
local and other (e.g., non-United States federal, non-Japanese) tax laws.
Accordingly, each prospective investor should consult its tax advisor regarding
the tax consequences of an investment in the Common Stock or the ADSs. The
discussion is based upon laws and relevant interpretations thereof in effect as
of the date of this Prospectus, all of which are subject to change.
JAPANESE TAXATION
Generally, a non-resident of Japan (whether an individual or a corporation)
is subject to Japanese withholding tax on dividends paid by Japanese
corporations. Stock splits are not subject to Japanese income tax. However, a
transfer of retained earnings or legal reserve (but, in general, not additional
paid-in capital) to stated capital (whether made in connection with a stock
split or otherwise) is treated as a dividend payment to shareholders for
Japanese tax purposes and is, in general, subject to Japanese income tax. No
such transfer would be necessary in connection with a stock split if the total
par value of the shares in issue after the stock split does not exceed the
stated capital.
In addition, the repurchase and cancellation of shares pursuant to a
resolution of the Ordinary General Meeting of Shareholders using distributable
profits, as described herein under "Description of Capital Stock -- Repurchase
by the Company of its Common Stock" above, may be treated as a dividend payment
to shareholders in certain circumstances. Shareholders who sell their shares in
a repurchase by the Company executed by means of a tender offer may be deemed to
have received a taxable dividend payment from the Company in connection with
such repurchase. In the case of a non-resident shareholder (whether individual
or corporate) without a permanent establishment in Japan, any such dividend will
be subject to Japanese withholding taxation on the amount by which cash received
by such shareholder from the Company in respect of such repurchase exceeds the
sum of the stated capital and the additional paid-in capital attributable to the
shares sold by such shareholder. Gains realized by shareholders in connection
with such a tender offer repurchase may also be subject to Japanese capital
gains taxation, to the extent not subject to taxation as a deemed dividend. In
the case of shareholders who sell their shares in an open market repurchase by
the Company, such shareholders will not be deemed to have received any dividend
payment from the Company in connection with such repurchase, although they may
be subject to Japanese capital gains taxation. For either type of repurchase,
non-resident shareholders (whether individual or corporate) without permanent
establishments in Japan will not in general be subject to Japanese capital gains
taxation, as further discussed below. In addition, a dividend will be deemed to
have been received by any shareholder who elects not to participate in a
repurchase by the Company (whether through an open market repurchase or by way
of a tender offer); however, non-resident shareholders (whether individual or
corporate) without permanent establishments in Japan who elect not to
participate in such a repurchase by the Company will be exempt from all Japanese
taxation in respect of such deemed dividend.
In September 1995, a bill was proposed in the Japanese legislature to
provide special treatment regarding deemed dividend taxation in connection with
repurchases and cancellations of shares by corporations the shares of which are
listed on any Japanese stock exchange or registered with the JSDA as shares to
be traded on the Japanese OTC market. Such special treatment is proposed to
apply to non-resident shareholders as well as resident shareholders. Under the
proposed bill which is stated to be effective through March 31, 1999 (i)
individual shareholders who sell their shares in a tender offer will not be
subject to deemed dividend income taxation, but rather will be subject to
capital gains taxation (with the exception of non-resident individuals without
permanent establishments in Japan, who are generally not subject to Japanese
capital gains taxation, as further discussed below), and (ii) dividends deemed
to have been received by shareholders (whether individual or corporate) who
elect not to participate in any repurchase will not be taxable, although
corporate shareholders (other than non-resident corporate shareholders without
permanent establishments in Japan) may elect to be subject to deemed dividend
taxation. However, due to uncertainty as to the enactment of the
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legislation, the form in which any legislation may be enacted and the variations
in treatment depending upon the circumstances of particular shareholders,
prospective investors are urged to consult their own tax advisors as to the tax
consequences to them of any repurchase and cancellation by the Company of its
shares.
Under the Convention between the United States of America and Japan for the
Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect
to Tax on Income dated March 8, 1971 (the "Convention"), as currently in force,
the maximum rate of Japanese withholding tax which may be imposed on dividends
(including deemed dividends) paid to a United States resident or corporation not
having a "permanent establishment" (as defined therein) in Japan is limited to:
(i) 15% of the gross amount actually distributed; or
(ii) if the recipient is a corporation, 10% of the gross amount
actually distributed, if:
(a) during the part of the paying corporation's taxable year which
precedes the date of payment of the dividend and during the whole of its
prior taxable year (if any), at least 10% of the voting shares of the
paying corporation were owned by the recipient corporation, and
(b) not more than 25% of the gross income of the paying corporation
for such prior taxable year (if any) consists of interest or dividends
(as defined therein).
For purposes of the Convention and the U.S. Internal Revenue Code of 1986,
as amended (the "Code"), U.S. holders of ADRs will be treated as the owners of
the Common Stock underlying the ADSs represented by the ADRs. In order for the
lower Convention rate to apply to dividends paid with respect to ADRs held by
U.S. holders, the Depositary will make the appropriate notification to the
Japanese taxation authorities regarding the residency status of such ADR
holders.
In the absence of any applicable tax treaty, convention or agreement
reducing the maximum rate of withholding tax, the rate of Japanese withholding
tax applicable to dividends paid by Japanese corporations to non-residents of
Japan or non-Japanese corporations is 20%.
Gains derived from the sale outside Japan of shares of Common Stock or ADRs
by a non-resident of Japan, or from the sale of shares of Common Stock within
Japan by a non-resident of Japan not having a permanent establishment in Japan,
are in general not subject to Japanese income tax.
Japanese inheritance and gift taxes at progressive rates may be payable by
an individual who has acquired shares of Common Stock or ADRs as legatee, heir
or donee, even though neither the individual nor the decedent nor the donor is a
Japanese resident.
Generally, a transfer by a non-resident of Japan of shares of Common Stock
in the Japanese OTC market is subject to a Japanese securities transaction tax
which is levied on the transferor at the rate of 0.3% of the aggregate transfer
prices. A transfer by a non-resident of Japan of ADSs on the NYSE is not subject
to the Japanese securities transaction tax provided the transferor is outside
Japan at the time of the transfer. Non-residents of Japan interested in trading
Common Stock or ADSs through facilities other than the NYSE should seek the
advice of their own tax advisors as to Japanese securities transaction tax or
other tax consequences.
UNITED STATES FEDERAL INCOME TAXATION
The following summary of U.S. federal income taxation is based upon the
opinion of White & Case, special U.S. tax counsel to the Company.
TAXATION OF SHAREHOLDERS
For purposes of United States federal income taxation, U.S. holders of ADRs
evidencing ADSs will be treated as the owners of the Common Stock underlying
such ADSs. Except as indicated below, for purposes of the discussion below
relating to United States federal income taxation considerations, the term
"Common Stock" includes ADSs representing shares of the Common Stock and ADRs
evidencing such ADSs.
74
<PAGE> 108
The following discussion addresses the United States federal income
taxation of a United States person (i.e., a United States citizen or resident, a
United States corporation, a United States partnership or an estate or trust
subject to United States tax on all of its income regardless of source (a "U.S.
Investor")) making an investment in the Common Stock. The following discussion
does not address the tax consequences to a person who holds (or will hold),
directly or indirectly, 10% or more of the Common Stock (a "10% Shareholder").
Non-United States persons and 10% Shareholders are urged to consult their own
tax advisors regarding the tax considerations incident to an investment in the
Common Stock. In addition, this summary does not address the United States tax
treatment of certain types of U.S. Investors (e.g., individual retirement and
other tax-deferred accounts, life insurance companies and tax-exempt
organizations) or of persons other than U.S. Investors, all of whom may be
subject to tax rules that differ significantly from those summarized below. The
discussion below, as it relates to U.S. tax consequences, is based upon the
provisions of the Code and regulations, rulings and judicial decisions
thereunder as of the date hereof, and such authorities may be repealed, revoked
or modified so as to result in U.S. federal income tax consequences different
from those discussed below. Prospective investors are advised to consult their
own tax advisors with respect to their particular circumstances and with respect
to the effect of state, local or foreign tax laws to which they may be subject.
A U.S. Investor receiving a distribution on the Common Stock will be
required to include such distribution (including amounts withheld) in gross
income as a taxable dividend to the extent such distribution is paid from
earnings and profits of the Company as determined under United States federal
income tax law. Distributions in excess of the earnings and profits of the
Company will first be treated, for United States federal income tax purposes, as
a nontaxable return of capital to the extent of (and in reduction of) the U.S.
Investor's basis in the Common Stock and then as gain from the sale or exchange
of a capital asset, provided that the Common Stock constitutes a capital asset
in the hands of the U.S. Investor. Dividends received on the Common Stock will
not be eligible for the corporate dividends received deduction. Dividends paid
in yen will be includible in income in a U.S. dollar amount based on the
exchange rate at the time of their receipt (which, in the case of ADSs, will be
the date of receipt by the Depositary) regardless of whether the payment is in
fact converted into U.S. dollars at that time. Gain or loss, if any, realized on
the sale or disposition of such yen will be U.S. source ordinary income or loss.
Subject to the limitations of the Code, U.S. Investors may credit against
their U.S. income tax liability Japanese taxes withheld at the applicable
Convention rate from dividends paid on Common Stock owned by them. Distributions
with respect to the Common Stock that are taxable as dividends in the U.S. will
generally constitute income from sources outside the United States for purposes
of determining the limitation on the allowable foreign tax credit. The overall
limitation on foreign taxes eligible for credit is calculated separately with
respect to specific classes of income. For this purpose, dividends distributed
by the Company to U.S. Investors (who are not 10% Shareholders) will generally
constitute "passive income" or, in the case of certain U.S. Investors,
"financial services income."
With certain exceptions, gain or loss on the sale or exchange of the Common
Stock will be treated as capital gain or loss (if the Common Stock is held as a
capital asset). Such capital gain or loss will be long-term capital gain or loss
if the U.S. Investor has held the Common Stock for more than one year at the
time of the sale or exchange. Gain, if any, will generally be U.S. source gain.
The Code contains special tax provisions applicable to non-United States
corporations and their shareholders in certain circumstances. The following is a
summary of these provisions which could have an adverse impact on the Company
and its U.S. Investors.
PERSONAL HOLDING COMPANIES
Sections 541 through 547 of the Code relate to the classification of
certain companies (including foreign corporations) as personal holding companies
("PHCs") and the consequent taxation of such corporations on their undistributed
personal holding company income. A PHC is a corporation (i) more than 50% of the
stock of which is owned, directly or indirectly, by five or fewer individuals
(without regard to their citizenship or residence) and (ii) which receives 60%
or more of gross income, as specifically adjusted, from certain passive
75
<PAGE> 109
sources. For purposes of this gross income test, income of a foreign corporation
means generally only income derived from U.S. sources or income that is
effectively connected with a U.S. trade or business.
More than 50% of the shares of Common Stock will be owned, directly or
indirectly, by five or fewer individuals both after the Offering and the
Exchange (assuming no other disposition of Common Stock or ADSs by the Principal
Shareholders prior to the Exchange Date). Because the Company derives most of
its U.S. source income from non-passive sources, the Company does not satisfy
the foregoing income test and therefore is not a PHC. Even if the character of
the Company's U.S. source income should change in the future, the Company should
not be subject to the taxation as a PHC because it intends to make dividend
distributions in an amount sufficient to eliminate any undistributed personal
holding company income.
FOREIGN PERSONAL HOLDING COMPANIES
Sections 551 through 558 of the Code relate to foreign personal holding
companies ("FPHCs") and impute undistributed income of certain foreign
corporations to United States persons who are shareholders of such corporations.
A foreign corporation will be classified as a FPHC if (i) five or fewer
individuals, who are United States citizens or residents, directly or indirectly
own more than 50% of the corporation's stock (measured either by voting power or
value) (the "shareholder test") and (ii) the corporation receives at least 60%
of its gross income (regardless of source), as specifically adjusted, from
certain passive sources (the "income test"). After a corporation becomes a FPHC,
the income test percentage for each subsequent taxable year is reduced to 50%.
If the Company were to be classified as a FPHC, a portion of its
undistributed income would be imputed to each of its U.S. Investors who hold the
Common Stock on the last day of the calendar year. Such income would be taxable
to such persons as a dividend, even if no cash dividend is actually paid. U.S.
Investors who dispose of their Common Stock prior to such date would not be
subject to tax under these rules. If the Company were to become a FPHC, U.S.
Investors who acquire Common Stock from decedents would be denied the step-up of
the income tax basis for such Common Stock to fair market value at the date of
death which would otherwise have been available and instead would have a tax
basis equal to the lower of the fair market value or the decedent's basis.
Immediately after both the Offering and the Exchange (assuming no other
disposition of Common Stock or ADSs by the Principal Shareholders prior to the
Exchange Date), Richard DeVos and Jay Van Andel, who are United States citizens,
will directly or indirectly own a beneficial interest in more than 50% of the
Common Stock for purposes of the FPHC rules. Accordingly, the shareholder test
will be met immediately after both the Offering and the Exchange (assuming no
other disposition of Common Stock or ADSs by the Principal Shareholders prior to
the Exchange Date). Because the Company derives most of its gross income from
the distribution of Amway products in Japan and such income is not passive
income, the Company does not satisfy the foregoing income test and therefore is
not a FPHC.
PASSIVE FOREIGN INVESTMENT COMPANIES
If 75% or more of the gross income of the Company (including the pro rata
gross income of any company of which the Company is considered to own 25% or
more of the stock by value) in a taxable year is passive income, or if the
average percentage of assets (generally determined based upon adjusted tax
basis) of the Company (including the pro rata value of the assets of any company
of which the Company is considered to own 25% or more of the stock by value) in
a taxable year which produce or are held for the production of passive income is
at least 50%, the Company would be classified as a "passive foreign investment
company" ("PFIC") for that taxable year. Non-tax exempt U.S. Investors are taxed
on gain from the sale of PFIC stock and certain distributions from PFICs
(generally distributions in excess of average distributions to such shareholders
by the PFIC in the prior three years) by being treated as if such amounts were
received ratably during the period the U.S. Investor held the shares and
treating such amounts as ordinary income. The amount allocated to each year
(other than the current year) is subject to tax at the maximum marginal tax rate
in effect for that year plus an interest charge calculated as though the U.S.
Investor actually owed and failed to pay tax on the amount of income allocated
to each prior year. The application of this system may
76
<PAGE> 110
result in significantly higher U.S. taxes on a U.S. Investor's distributions and
gain from the sale of PFIC stock. If the Company were to become a PFIC, U.S.
Investors who acquire Common Stock from decedents could be denied the step-up of
the income tax basis for such Common Stock to fair market value at the date of
death which would otherwise have been available and instead could have a tax
basis equal to the lower of the fair market value or the decedent's basis.
The Company does not expect to be a PFIC because it believes that it can
manage its business so as to avoid PFIC status. The Company may take certain
actions that would reduce the Company's cash position. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations." The
Company does not expect these actions to have a material impact on its results
of operations or to have a material adverse effect on its liquidity.
The Company will notify U.S. Investors in the event that the Company is
treated as a PFIC for any taxable year to enable U.S. Investors to consider
whether to elect to treat the Company as a qualified electing fund ("QEF") for
United States federal income tax purposes. The result of the QEF election is
that an electing U.S. Investor avoids the tax treatment generally applicable to
PFICs discussed above. Instead, a shareholder of a QEF is required, for each
taxable year, to include in income a pro rata share of the ordinary earnings of
the QEF as ordinary income and a pro rata share of the net capital gain of the
QEF as long-term capital gain. The Company intends to comply with the reporting
requirements necessary for a U.S. Investor to make a QEF election, and will
report such information to U.S. Investors as may be required to make such a QEF
election effective. If a shareholder makes a QEF election and such election
applies for all years that such shareholder has held the stock, gain on the sale
of such stock would be characterized as capital gain (provided the stock is held
as a capital asset) and the denial of basis step-up at death described above
would not apply.
CONTROLLED FOREIGN CORPORATIONS
Sections 951 through 964 and section 1248 of the Code are applicable to
controlled foreign corporations ("CFCs") and impute a portion of undistributed
income to 10% Shareholders and convert into dividend income a portion of the
gain on dispositions of shares which would otherwise qualify for capital gain
treatment. The CFC provisions only apply if 10% Shareholders, who are also
United States persons, own, in the aggregate, more than 50% (measured by voting
power or value) of the shares of a foreign corporation. Certain trusts and
foundations established by or for the benefit of Richard DeVos and Jay Van Andel
and their families, who are 10% Shareholders, are deemed to own more than 50% of
the shares of Common Stock and therefore the Company is a CFC. However, the
income imputation rules referred to for CFCs above apply only with respect to
such 10% Shareholders.
UNITED STATES BACKUP WITHHOLDING AND INFORMATION REPORTING
The receipt of dividends on the Common Stock by a holder of the Common
Stock (i) made by mail or wire transfer to an address in the United States, (ii)
made by a paying agent, broker or other intermediary in the United States or
(iii) made by a United States broker or a "United States-related" broker to such
holder outside the United States may be subject to United States information
reporting requirements. Holders of Common Stock who are not United States
persons ("non-U.S. holders") generally would be exempt from these reporting
requirements, but may be required to comply with certification and
identification procedures in order to prove their exemption. Treasury
regulations currently in effect do not require backup withholding with respect
to dividends paid by a foreign corporation such as the Company.
The payment of the proceeds of the disposition of Common Stock by a holder
to or through the United States office of a broker generally will be subject to
information reporting and backup withholding at a rate of 31% unless the holder
either certifies its status as a non-U.S. holder under penalties of perjury or
otherwise establishes an exemption. The payment of the proceeds of the
disposition by a holder of Common Stock to or through a non-U.S. office of a
broker will generally not be subject to backup withholding and information
reporting. Information reporting (but not backup withholding) may apply,
however, to such a holder who sells a beneficial interest in Common Stock
through a non-United States branch of a United States broker, or through a
non-United States office of a "United States-related" broker, in either case
unless the holder
77
<PAGE> 111
establishes an exemption or the broker has documentary evidence in its files of
the holder's status as a non-U.S. holder (and the broker has no actual knowledge
to the contrary). For purposes of these rules, a "United States-related" broker
is a broker or other intermediary that is a controlled foreign corporation for
United States federal income tax purposes or that is a person 50% or more of the
gross income from all sources of which, over a specified three-year period, is
effectively connected with a United States trade or business.
Any amounts withheld under the backup withholding rules from a payment to a
holder will be refunded (or credited against the holder's United States federal
income tax liability, if any) provided that the required information is
furnished to the United States Internal Revenue Service.
78
<PAGE> 112
PLAN OF DISTRIBUTION
The PEPS will be distributed as described in the Trust Prospectus under the
caption "Underwriting."
LEGAL MATTERS
Certain legal matters will be passed upon for the Company and the Selling
Shareholders by Jones, Day, Reavis & Pogue, Cleveland, Ohio, who will rely as to
matters of Japanese law upon the opinion of Nishimura & Sanada. The validity of
the underlying shares of Common Stock and certain other legal matters governed
by Japanese law will be passed upon for the Company and the Selling Shareholders
by Nishimura & Sanada, Tokyo. Certain U.S. federal income tax matters will be
passed upon for the Company by White & Case, Washington, D.C.
EXPERTS
The consolidated financial statements as of August 31, 1994 and 1995 and
for each of the years in the three year period ended August 31, 1995 have been
included herein in reliance upon the report of Deloitte Touche Tohmatsu,
independent auditors, appearing elsewhere herein given upon the authority of
said firm as experts in accounting and auditing.
79
<PAGE> 113
THIS PAGE INTENTIONALLY LEFT BLANK
80
<PAGE> 114
AMWAY JAPAN LIMITED
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report.......................................................... F-2
Consolidated Balance Sheets at August 31, 1994 and 1995............................... F-3
Consolidated Statements of Income for the three years ended August 31, 1995........... F-4
Consolidated Statements of Shareholders' Equity for the three years ended August 31,
1995................................................................................ F-5
Consolidated Statements of Cash Flows for the three years ended August 31, 1995....... F-6
Notes to Consolidated Financial Statements............................................ F-7
</TABLE>
F-1
<PAGE> 115
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of Amway Japan Limited
We have audited the accompanying consolidated balance sheets of Amway Japan
Limited and subsidiary as of August 31, 1994 and 1995, and the related
consolidated statements of income, shareholders' equity and cash flows for each
of the three years in the period ended August 31, 1995, all expressed in
Japanese yen. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in Japan (and the United States of America). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Amway Japan Limited and
subsidiary as of August 31, 1994 and 1995, and the results of their operations
and their cash flows for each of the three years in the period ended August 31,
1995, in conformity with accounting principles generally accepted in Japan. As
described in Notes 10 and 11, accounting principles generally accepted in Japan
differ, in certain material respects, from those generally accepted in the
United States.
Our audits also comprehended the translation of Japanese yen amounts into
U.S. dollar amounts and, in our opinion, such translation has been made in
conformity with the basis stated in Note 1. Such U.S. dollar amounts are
presented solely for the convenience of readers outside Japan.
DELOITTE TOUCHE TOHMATSU
Tokyo, Japan
October 18, 1995
F-2
<PAGE> 116
AMWAY JAPAN LIMITED AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
AUGUST 31, 1994 AND 1995
(IN MILLIONS OF YEN AND THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
1995
1994 1995 ----------
-------- -------- (NOTE 1)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents (Note 3)........................ Y 61,548 Y 41,640 $ 424,898
Short-term investments (Note 2)........................... 29,690 31,997 326,500
Accounts receivable....................................... 2,274 806 8,224
Finished good inventories................................. 10,936 11,397 116,296
Prepaid expenses.......................................... 841 1,032 10,531
Other current assets...................................... 927 622 6,347
-------- -------- ----------
Total current assets................................. 106,216 87,494 892,796
Property and equipment, net (Note 5)........................ 2,519 26,791 273,378
Investments in affiliates (Note 4).......................... 1,937 2,037 20,786
Leasehold deposits.......................................... 2,214 2,453 25,031
Capitalized software costs (Note 10)........................ 1,614 880 8,979
Other....................................................... 301 286 2,918
Translation adjustments..................................... 1,734 1,869 19,071
-------- -------- ----------
Total................................................ Y116,535 Y121,810 $1,242,959
======== ======== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... Y 11,762 Y 13,532 $ 138,082
Income taxes payable...................................... 14,961 15,952 162,775
Accounts payable to Amway Corporation (Note 9)............ 2,592 3,496 35,673
Allowance for sales returns............................... 3,868 4,281 43,684
Accrued distributor seminar expenses...................... 2,523 2,684 27,388
Distributor deposits...................................... 952 1,655 16,888
Consumption taxes payable................................. 547 717 7,316
Accrued expenses and other current liabilities............ 159 1,611 16,439
-------- -------- ----------
Total current liabilities............................ 37,364 43,928 448,245
-------- -------- ----------
Shareholders' equity (Notes 7 and 14):
Common stock, no par value -- authorized 256,000 thousand
shares; issued and outstanding 149,625 thousand shares
(equivalent to 299,250 thousand ADSs, see Note 1)...... 12,462 12,462 127,163
Additional paid-in capital................................ 14,850 14,850 151,531
Legal reserve............................................. 3,116 3,116 31,796
Net unrealized gain (loss) on short-term investments...... (242) 1,632 16,653
Retained earnings......................................... 48,985 45,822 467,571
-------- -------- ----------
Total shareholders' equity........................... 79,171 77,882 794,714
-------- -------- ----------
Total................................................ Y116,535 Y121,810 $1,242,959
======== ======== =========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 117
AMWAY JAPAN LIMITED AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED AUGUST 31, 1993, 1994 AND 1995
(IN MILLIONS OF YEN AND THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE (ADS)
AMOUNTS)
<TABLE>
<CAPTION>
1995
1993 1994 1995 ----------
-------- -------- -------- (NOTE 1)
<S> <C> <C> <C> <C>
Net sales.................................. Y130,028 Y157,556 Y177,991 $1,816,235
Cost of sales.............................. 37,319 43,576 47,515 484,847
-------- -------- -------- ----------
Gross profit.......................... 92,709 113,980 130,476 1,331,388
-------- -------- -------- ----------
Operating expenses:
Distributor incentives................... 34,001 42,652 47,885 488,622
Distribution expenses.................... 7,773 8,324 8,853 90,337
Selling and administrative expenses...... 16,810 19,616 24,022 245,123
-------- -------- -------- ----------
Total operating expenses............ 58,584 70,592 80,760 824,082
-------- -------- -------- ----------
Operating income.................... 34,125 43,388 49,716 507,306
Other income -- net (Note 12).............. 2,485 2,557 1,733 17,684
-------- -------- -------- ----------
Income before income taxes.......... 36,610 45,945 51,449 524,990
Income taxes (Note 8)...................... 20,759 25,341 28,387 289,663
-------- -------- -------- ----------
Net income.......................... Y 15,851 Y 20,604 Y 23,062 $ 235,327
======== ======== ======== =========
Net income per common share................ Y 105.94 Y 137.70 Y 154.13 $ 1.57
Net income per ADS......................... 52.97 68.85 77.07 .79
Dividends per share........................ 60.00 140.00 190.00 1.94
Dividends per ADS.......................... 30.00 70.00 95.00 .97
Shares outstanding (thousands)............. 149,625 149,625 149,625
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 118
AMWAY JAPAN LIMITED AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED AUGUST 31, 1993, 1994 AND 1995
(IN MILLIONS OF YEN AND THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE (ADS)
AMOUNTS)
<TABLE>
<CAPTION>
NET
SHARES UNREALIZED
ISSUED AND ADDITIONAL GAIN (LOSS) ON TOTAL
OUTSTANDING COMMON PAID-IN LEGAL SHORT-TERM RETAINED SHAREHOLDERS'
(THOUSANDS) STOCK CAPITAL RESERVE INVESTMENTS EARNINGS EQUITY
----------- -------- ---------- ------- --------------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, August 31, 1992.... 149,625 Y 12,462 Y 14,850 Y 1,675 -- Y 35,700 Y 64,687
Net income................... -- -- -- -- -- 15,851 15,851
Dividends paid:
1992 year-end, Y25 per
share (Y12.50 per ADS)... -- -- -- -- -- (3,740) (3,740)
1993 interim, Y30 per share
(Y15 per ADS)............ -- -- -- -- -- (4,489) (4,489)
Bonuses to directors and
statutory auditors......... -- -- -- -- -- (12) (12)
Transfer to legal reserve.... -- -- -- 824 -- (824) --
----------- -------- ---------- ------- --------------- --------- -------------
Balances, August 31, 1993.... 149,625 12,462 14,850 2,499 -- 42,486 72,297
Net income................... -- -- -- -- -- 20,604 20,604
Dividends paid:
1993 year-end, Y30 per
share
(Y15 per ADS)............ -- -- -- -- -- (4,489) (4,489)
1994 interim, Y60 per share
(Y30 per ADS)............ -- -- -- -- -- (8,977) (8,977)
Bonuses to directors and
statutory auditors......... -- -- -- -- -- (22) (22)
Transfer to legal reserve.... -- -- -- 617 -- (617) --
Change in fair value of
short-term investments..... -- -- -- -- (242) -- (242)
----------- -------- ---------- ------- --------------- --------- -------------
Balances, August 31, 1994.... 149,625 12,462 14,850 3,116 (242) 48,985 79,171
Net income................... -- -- -- -- -- 23,062 23,062
Dividends paid:
1994 year-end, Y80 per
share
(Y40 per ADS)............ -- -- -- -- -- (11,969) (11,969)
1995 interim, Y95 per share
(Y47.50 per ADS)......... -- -- -- -- -- (14,214) (14,214)
Bonuses to directors and
statutory auditors......... -- -- -- -- -- (42) (42)
Change in fair value of
short-term investments..... -- -- -- -- 1,874 -- 1,874
----------- -------- ---------- ------- --------------- --------- -------------
Balances, August 31, 1995.... 149,625 Y 12,462 Y 14,850 Y 3,116 Y 1,632 Y 45,822 Y 77,882
========= ========= ======= ============= ========== ===========
In U.S. Dollars (Note 1):
Balances, August 31, 1994.... $127,163 $151,531 $31,796 $(2,469) $ 499,847 $ 807,868
Net income................... -- -- -- -- 235,327 235,327
Dividends paid:
1994 year-end, $0.82 per
share ($0.41 per ADS).... -- -- -- -- (122,133) (122,133)
1995 interim, $0.97 per
share ($0.48 per ADS).... -- -- -- -- (145,041) (145,041)
Bonuses to directors and
statutory auditors......... -- -- -- -- (429) (429)
Change in fair value of
short-term investments..... -- -- -- 19,122 -- 19,122
-------- ---------- ------- --------------- --------- -------------
Balances, August 31, 1995.... $127,163 $151,531 $31,796 $16,653 $ 467,571 $ 794,714
========= ========= ======= ============= ========== ===========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 119
AMWAY JAPAN LIMITED AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED AUGUST 31, 1993, 1994 AND 1995
(IN MILLIONS OF YEN AND THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
1995
1993 1994 1995 ---------
------- -------- -------- (NOTE 1)
<S> <C> <C> <C> <C>
Operating activities:
Net income..................................... Y15,851 Y 20,604 Y 23,062 $ 235,327
Adjustments to reconcile net income to net cash
provided by operating activities:
Loss on inventory disposal................... 1,625 1,487 1,739 17,745
Depreciation and amortization................ 742 1,177 1,435 14,643
Loss on disposals of property and
equipment -- net.......................... 109 69 138 1,408
Gain on exchange of stock of subsidiary...... -- (507) -- --
Loss (gain) on marketable securities and
investments -- net........................ -- 118 (645) (6,582)
Write-off of capitalized software............ -- -- 465 4,745
Write-down of investments.................... 383 -- -- --
Changes in assets and liabilities:
Accounts receivable....................... 448 529 1,468 14,980
Finished good inventories................. (1,194) (2,526) (2,200) (22,449)
Prepaid expenses.......................... (9) (202) (191) (1,949)
Other current assets...................... (128) 355 136 1,387
Accounts payable.......................... (234) 1,792 2,674 27,286
Income taxes payable...................... 779 3,961 987 10,071
Accrued expenses and other current
liabilities............................. 813 1,932 2,192 22,367
Other........................................ (12) 35 (55) (561)
------- -------- -------- ---------
Net cash provided by operating
activities.............................. 19,173 28,824 31,205 318,418
------- -------- -------- ---------
Investing activities:
Purchase of property and equipment............. (858) (961) (25,174) (256,878)
Investments in affiliates...................... (1,121) -- (100) (1,020)
Purchases of short-term investments............ -- (33,386) (3,954) (40,347)
Proceeds from sale of short-term investments... 3,119 12,308 4,646 47,408
Proceeds from redemption of long-term
investments.................................. -- 2,702 -- --
Capitalized software costs..................... (1,187) (797) (110) (1,122)
Net change in leasehold deposits............... (378) 57 (239) (2,439)
Other.......................................... (25) (14) 1 11
------- -------- -------- ---------
Net cash used in investing activities..... (450) (20,091) (24,930) (254,387)
------- -------- -------- ---------
Financing activities:
Cash dividends paid............................ (8,229) (13,466) (26,183) (267,174)
------- -------- -------- ---------
Net increase (decrease) in cash and cash
equivalents.................................... 10,494 (4,733) (19,908) (203,143)
Cash and cash equivalents, beginning of year..... 55,787 66,281 61,548 628,041
------- -------- -------- ---------
Cash and cash equivalents, end of year........... Y66,281 Y 61,548 Y 41,640 $ 424,898
======== ========= ========= ==========
Additional cash flow information:
Income taxes paid.............................. Y19,980 Y 21,471 Y 27,478 $ 280,388
Non-cash investing activities:
Net unrealized gain (loss) on short-term
investments............................. -- (242) 1,874 19,122
Fair value of stock acquired in non-cash
exchange (Note 4)....................... -- 1,937 -- --
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 120
AMWAY JAPAN LIMITED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED AUGUST 31, 1993, 1994 AND 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Amway Japan Limited (the "Company"), is a direct selling company that
distributes approximately 130 consumer products through approximately 980,000
independent distributors in Japan. Established in 1977, the Company serves as
the exclusive distribution vehicle in Japan for Amway Corporation ("Amway"), a
U.S. direct selling company incorporated in Michigan. The Company operates in a
single business segment, consumer products, and in a single geographic area,
Japan. The Company's common stock is traded on the Japanese over-the-counter
market, and on the New York Stock Exchange in the form of American Depositary
Shares (ADSs), which represent one half of one share of common stock.
Basis of Presentation -- The accompanying consolidated financial statements
include the accounts of the Company and its wholly-owned U.S. subsidiary, Amway
Japan Enterprises, Inc. ("AJEI"), which was established in March of 1994. The
consolidated financial statements are presented in accordance with accounting
principles generally accepted in Japan ("Japanese GAAP"), which differ in
certain material respects from those in the United States ("U.S. GAAP"). See
Notes 10 and 11. In preparing these financial statements, certain amounts have
been reclassified to present these financial statements in a format which is
more familiar to readers outside of Japan. Additionally, the 1993 annual report
and the 1994 consolidated financial statements have been reclassified to conform
to current year presentation.
The consolidated statements of cash flows have been prepared for the
convenience of readers outside of Japan, although such statements are not
required as part of the basic financial statements in Japan. For purposes of the
consolidated statement of cash flows, the Company considers all time deposits
and negotiable certificates of deposit with a maturity of one year or less to be
cash equivalents.
The U.S. dollar amounts included herein are, solely for convenience,
calculated at the approximate rate of exchange prevailing on August 31, 1995 of
Y98 to U.S. $1. The U.S. dollar amounts should not be construed as
representations that the Japanese yen have been, or could in the future be,
converted into United States dollars at this or any other rate of exchange.
Consolidation -- The accompanying consolidated financial statements include
the accounts of the Company and AJEI. All significant intercompany accounts and
transactions are eliminated in consolidation. It is common practice in Japan for
the accounts of foreign subsidiaries to be included in the consolidated
financial statements without converting the accounting principles of the foreign
entities to Japanese GAAP. Accordingly, the accounts of AJEI included in the
consolidated financial statements are based upon U.S. GAAP.
Foreign Currency Translation -- In translating financial statements of AJEI
into yen, the exchange rates prevailing at the respective balance sheet dates
were used for all asset and liability items and for items other than capital
stock and additional paid-in capital in the shareholders' equity section, for
which historical rates were used. Translation adjustments resulting from such
translation were recorded as assets.
Average exchange rates during the respective periods were used for all AJEI
items of income and expense, except for net income which was translated at the
rates prevailing at the respective balance sheet dates. The resulting exchange
difference has been included in Other income -- net.
Marketable Equity Securities and Related Financial Derivatives --
Substantially all marketable equity securities which are included in Short-term
investments are owned by AJEI. Under Statement of Financial Accounting
Standards ("SFAS") No. 115, trading securities are carried at fair value, and
gains and losses, whether realized or unrealized, are included in income or
expense, whereas available-for-sale securities are carried at fair value, and
unrealized holding gains and losses are included in a separate component of
shareholders' equity net of tax effects.
F-7
<PAGE> 121
AMWAY JAPAN LIMITED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
YEARS ENDED AUGUST 31, 1993, 1994 AND 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED
The Company has only limited involvement with derivative financial
instruments and does not use them for trading purposes. They are used to manage
well-defined investment risks. Options which do not qualify for hedge accounting
are valued at market, and changes in market value are recognized as gains or
losses in the period of the change. Options which qualify as hedges are split
between time values and intrinsic values. The changes in intrinsic value are
included in the same separate component of shareholders' equity as the changes
in the fair value of the item being hedged. The time value is amortized into
expense over the life of the option. Swaps are valued at market value, and
changes in market value are recognized as gains or losses in the period of the
change.
Investments in Affiliates -- The Company's 50% interest in Provatene
Partners Limited is accounted for pursuant to the equity method of accounting.
The Company's 2% interest in Amway Asia Pacific Ltd. ("AAP") is carried at cost
(see Note 4).
Revenue Recognition -- The Company recognizes sales revenue upon shipment
of products to distributors. An allowance for sales returns is accrued based on
historical experience.
Inventories -- Inventories consist primarily of finished good merchandise
purchased for resale and are stated at the lower of cost, determined in
accordance with the first-in, first-out method, or market.
Property and Equipment -- Property and equipment are stated at cost.
Depreciation is computed in accordance with the declining-balance method over
the estimated useful lives of the assets.
Software Costs -- The Company capitalizes the cost of both internally
developed and purchased computer software. Such capitalized costs are amortized
on a straight-line basis over a five-year period or the estimated useful life,
whichever is shorter.
Income Taxes -- Income taxes are provided only for amounts currently
payable for each year. Deferred income taxes related to temporary differences
between the tax basis of an asset or liability and the reported amounts in the
consolidated financial statements are not recorded except for those related to
the accounts of AJEI.
The Japanese enterprise tax, which is based on earnings and included in
selling and administrative expenses under Japanese GAAP, has been reclassified
to Income taxes in these financial statements in order to provide a presentation
more familiar to readers outside of Japan.
Defined Benefit Pension Plan -- The Company's contributions to its defined
benefit non-contributory pension plan (see Note 11) are charged to expense when
paid, as are retirement benefits paid to directors and statutory auditors. Prior
service costs of the pension plan are amortized to expense at the rate of 30%
per annum.
Stock Issue Costs -- Stock issue costs are charged to expense when paid.
Amounts per Share; Amounts per American Depositary Share (ADS) -- The
computation of net income per share is based on the weighted average number of
shares of common stock outstanding during the period. Each ADS is equivalent to
one half of one share of common stock, consequently amounts per ADS are
calculated as one half of the per share amount.
Appropriation of Retained Earnings -- Payments of bonuses to directors and
statutory auditors are made as an appropriation of retained earnings. Retained
earnings at each year-end are appropriated and reflected in the books of account
in the year during which approval at the shareholders meeting has been obtained.
This accounting is required by the Commercial Code of Japan (the "Code").
F-8
<PAGE> 122
AMWAY JAPAN LIMITED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
YEARS ENDED AUGUST 31, 1993, 1994 AND 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED
Foreign Currency Transactions -- Current receivables and payables
denominated in foreign currencies are translated into yen at the current rates
of exchange. Long-term receivables and payables are translated into yen at the
exchange rates prevailing on the transaction dates. Transaction gains and losses
are included in Other income -- net.
2. INVESTMENTS
Short-term investments, at approximate market value, at August 31, 1994 and
1995, were comprised of the following (in millions of yen and thousands of U.S.
dollars):
<TABLE>
<CAPTION>
1994 1995 1995
------- ------- --------
<S> <C> <C> <C>
Marketable securities:
Trading securities............................... Y14,837 Y15,789 $161,112
Available-for-sale securities.................... 14,353 16,208 165,388
Other.............................................. 500 -- --
------- ------- --------
Y29,690 Y31,997 $326,500
======= ======= ========
</TABLE>
Substantially all short-term investments are held by AJEI. In March of 1994
AJEI invested approximately $287 million with two independent investment
managers. Each investment manager placed approximately half of that amount in
equity portfolios designed to produce results similar to the Standard & Poor's
500 Stock Index (the "S&P 500"). To protect against a loss due to price declines
in the dollar value of a portion of each of the portfolios, AJEI purchased two
put options exercisable in two years for a total premium of approximately $13
million. The first put allows AJEI to require the repurchase of $93.5 million of
one equity portfolio at its original cost. The second put provides for
protection in the other portfolio of $93.5 million against downward market
movements in the S&P 500.
In September of 1995, AJEI sold those portions of the equity portfolios
that were protected by these puts, realizing a net gain of $18.9 million. The
proceeds of the sale were reinvested in U.S. treasury securities and money
market preferred stocks.
The balance of the equity investments ($100 million) is hedged by swaps
that allow AJEI to receive a quarterly fixed interest payment of approximately
5% per annum, less the dividend yield on the S&P 500. In March of 1996, any
decrease in the price of the S&P 500 will be paid to AJEI by the swap
counterparties, and any increase in the price of the S&P 500 will be paid to the
swap counterparties by AJEI. As owner of the underlying managed portfolios, AJEI
receives the benefit of outperformance of, and bears the risk of
underperformance of, the investment managers' portfolios relative to the S&P
500.
U.S. earnings of AJEI, which have been included in the determination of net
income but have not been remitted to the Company, aggregated $6.4 million for
the year ended August 31, 1995.
In translating the financial statements of AJEI into yen, the exchange rate
prevailing as of the respective balance sheet dates was used for all asset and
liability items and for items other than capital stock and additional paid-in
capital in the shareholders' equity section. Translation adjustments resulting
from the depreciation of the U.S. dollar in relation to the yen were recorded as
Translation adjustments on the consolidated balance sheets.
Subsequent to year-end, the Company entered into a series of hedging
contracts with Amway in order to protect against exchange rate fluctuations
between the yen and the U.S. dollar. These contracts, which protect $190 million
of AJEI's investments, provide for the delivery of Y18.6 billion to the Company
on January 9,
F-9
<PAGE> 123
AMWAY JAPAN LIMITED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
YEARS ENDED AUGUST 31, 1993, 1994 AND 1995
2. INVESTMENTS -- CONTINUED
1996 at an average exchange rate of approximately Y98 to U.S. $1.00. Through
September of 1995, no arrangements have been made to hedge the remaining balance
of AJEI's investments against exchange rate fluctuations.
3. CASH AND CASH EQUIVALENTS
Cash and cash equivalents at August 31, 1994 and 1995 consisted of the
following (in million of yen and thousands of U.S. dollars):
<TABLE>
<CAPTION>
1994 1995 1995
------- ------- --------
<S> <C> <C> <C>
Cash on hand and in banks.......................... Y 4,148 Y 4,840 $ 49,388
Time deposits...................................... 35,400 36,800 375,510
Negotiable certificates of deposit................. 22,000 -- --
------- ------- --------
Total......................................... Y61,548 Y41,640 $424,898
======= ======= ========
</TABLE>
The Company has arrangements with two finance companies for the extension
of credit to the Company's distributors. The Company is responsible for the
losses incurred by these finance companies as the result of improper acts of
distributors, and in certain other cases. Time deposits of Y300 million ($3.1
million) at August 31, 1994 and 1995 collateralized these arrangements.
Management believes that the risk of loss is not significant. At August 31, 1994
and 1995, the outstanding receivables of the finance companies relating to these
arrangements aggregated approximately Y2.6 billion and Y6.8 billion ($69.4
million), respectively.
Time deposits of Y200 million and Y50 million ($510 thousand) were pledged
as collateral for deferred payment of postal charges at August 31, 1994 and
1995, respectively.
4. INVESTMENTS IN AFFILIATES
On December 21, 1993, the Company transferred to Amway Asia Pacific Ltd.
("AAP"), a Bermuda corporation majority-owned by shareholders of the Company,
the stock of Amway Pacific Limited ("APL"), a former subsidiary of the Company.
Through APL, the Company held a 95% interest in the joint venture company formed
to be the exclusive distribution vehicle for Amway products in the People's
Republic of China. In exchange for the stock of APL the Company acquired 972,222
shares of the common stock of AAP, representing an acquisition price of
approximately Y1.9 billion. This price was established principally based upon an
independent valuation. The exchange was accounted for as a sale of APL stock and
a purchase of AAP stock and, in accordance with Japanese accounting practices
and tax treatment, a gain on the exchange of Y507 million was included in income
for the year ended August 31, 1994.
As a result of this transaction, the Company owns approximately 2% of AAP's
common stock. The shareholders of Amway own approximately 83% of AAP's common
stock, with the remainder publicly held. The market value of the AAP stock held
by the Company as of August 31, 1995 was Y3.8 billion ($38.8 million).
In December of 1994 the Company, at a cost of Y100 million, formed a
partnership joint venture, Provatene Partners Limited, with Nutrilite Products,
("Nutrilite"), a division of Amway. The joint venture engages in the processing
of raw materials used by Nutrilite in the manufacture of certain vitamins.
F-10
<PAGE> 124
AMWAY JAPAN LIMITED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
YEARS ENDED AUGUST 31, 1993, 1994 AND 1995
5. PROPERTY AND EQUIPMENT
Property and equipment at August 31, 1994 and 1995 consisted of the
following (in millions of yen and thousands of U.S. dollars):
<TABLE>
<CAPTION>
1994 1995 1995
------- ------- --------
<S> <C> <C> <C>
Land....................................................... Y -- Y24,055 $245,459
Leasehold improvements..................................... 1,057 1,258 12,837
Vehicles................................................... 219 249 2,541
Furniture and fixtures..................................... 4,121 4,490 45,816
------- ------- --------
Total................................................. 5,397 30,052 306,653
Less accumulated depreciation and amortization............. (2,878) (3,261) (33,275)
------- ------- --------
Net property and equipment................................. Y 2,519 Y26,791 $273,378
======= ======= ========
</TABLE>
On March 30, 1995 the Company acquired a 3561 square meter parcel of land
in Tokyo for the construction of a new headquarters facility. Construction of
the facility is not planned to commence before fiscal 1997. The purchase price,
which was paid in cash, aggregated Y19.4 billion ($198 million). Management
estimates that the total cost of the headquarters project, including the
purchase price of the land, will range between Y27.5 billion ($280.6 million)
and Y32.5 billion ($331.6 million). Additionally, on July 27, 1995 the Company
purchased a 22,296 square meter parcel of land in Tokyo for the development of a
sixth Regional Distribution Center (RDC). The purchase price, which was paid in
cash, aggregated Y4.7 billion ($48.0 million). The total cost of the RDC
project, including the purchase price of the land, is expected to range between
Y13.8 billion ($140.8 million) and Y14.4 billion ($146.9 million). In accordance
with Japanese accounting practices, certain additional direct costs of these
land acquisitions are being expensed as incurred. As of August 31, 1995, such
costs have aggregated Y399 million ($4.1 million). Except for these capital
projects, the Company has no material commitments for capital expenditures as of
August 31, 1995.
The Company maintains five Regional Distribution Centers (RDCs) in Tokyo,
Fukuoka, Sapporo, Okinawa and Kobe. In January of 1995, the Kobe area sustained
a major earthquake. The Company's RDC in Kobe was relatively undamaged. The
Company did incur, however, costs directly related to the earthquake
(principally air freight and administrative charges) aggregating approximately
Y408 million during the fiscal year ended August 31, 1995. In August of 1995,
the Company recovered Y211 million of this amount through its insurance. These
costs and the related insurance recovery are both unusual in nature and
infrequent in occurrence, however they are not considered to be sufficiently
material to warrant separate classification as an extraordinary item in the
income statement. Accordingly, they have been charged against Other income --
net.
6. LEASES
The Company has no leases which are accounted for as capital leases. Total
rent expense under operating leases, primarily for real estate and equipment,
aggregated Y2.6 billion, Y3.0 billion and Y3.1 billion ($31.5 million), during
the fiscal years ended August 31, 1993, 1994, and 1995, respectively. Certain of
the
F-11
<PAGE> 125
AMWAY JAPAN LIMITED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
YEARS ENDED AUGUST 31, 1993, 1994 AND 1995
6. LEASES -- CONTINUED
equipment leases are non-cancelable. Future minimum annual rentals under
operating leases as of August 31, 1995 are as follows (in millions of yen and
thousands of U.S. dollars):
<TABLE>
<CAPTION>
REAL ESTATE EQUIPMENT TOTAL TOTAL
----------- --------- ------ -------
<S> <C> <C> <C> <C>
Year ended August 31,
1996.......................................... Y 2,629 Y 399 Y3,028 $30,898
1997.......................................... 1,500 262 1,762 17,980
1998.......................................... 3 180 183 1,867
1999.......................................... -- 72 72 735
2000.......................................... -- 1 1 10
----------- --------- ------ -------
Total minimum lease payments....................... Y 4,132 Y 914 Y5,046 $51,490
========== ========== ====== =======
</TABLE>
7. SHAREHOLDERS' EQUITY
As of August 31, 1994 and 1995, 84.8% and 83.3%, respectively, of the
Company's outstanding common stock was held by certain trusts, foundations and
entities created by or for the benefit of the founders of Amway, Jay Van Andel
and Richard M. DeVos, and their families. The remaining balance of the Company's
common stock was publicly held. The Company's common stock is traded on the
Japanese over-the-counter market. The Company's common stock is also traded on
the New York Stock Exchange in the form of American Depositary Shares (ADSs),
which represent one-half of one common share.
Under the Code, at least 50% of the issue price of new shares is to be
designated as stated capital as determined by resolution of the Board of
Directors. Proceeds in excess of the amounts designated as stated capital are to
be credited to additional paid-in capital. The Company may transfer portions of
additional paid-in capital to stated capital by resolution of the Board of
Directors.
Under the Code, the Company is required to appropriate as a legal reserve
portions of retained earnings in an amount equal to at least 10% of specified
cash payments, such as cash dividends and bonuses to directors and statutory
auditors, appropriated in each financial period until the reserve equals 25% of
the stated capital. As of August 31, 1994 and 1995 such reserve, at Y3.1
billion, was equal to 25% of stated capital. This reserve is not available for
dividends but may be used to reduce a deficit by resolution of the shareholders
or transferred to the stated capital by resolution of the Board of Directors.
The Company may also transfer portions of retained earnings which are available
for dividends to stated capital by resolution of the shareholders.
Annual dividends are approved at the shareholders' meeting held subsequent
to the fiscal year to which the dividends are applicable. In addition,
semiannual dividends may be paid upon resolution of the Board of Directors,
subject to limitations imposed by the Code, without shareholder approval.
Effective October 1, 1994, an amendment to the Code permits the Company to
repurchase its outstanding common shares for the purpose of (1) assignment of
the shares to its employees or (2) cancellation of the shares subject to an
approval at the ordinary general shareholders' meeting and certain requirements
of the Code. In a repurchase for the purpose of (1) above, (a) the aggregate
purchase price may not exceed the Company's distributable retained earnings and
(b) the aggregate number of shares repurchased must not exceed three percent of
the total issued shares. In a repurchase for the purpose of (2) above, the
requirements include requirement (a) above, but not requirement (b) above.
F-12
<PAGE> 126
AMWAY JAPAN LIMITED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
YEARS ENDED AUGUST 31, 1993, 1994 AND 1995
8. INCOME TAXES
The Company is subject to a number of taxes based on earnings: the
corporate tax, inhabitants tax and enterprise tax. The enterprise tax is
deductible when paid for purposes of calculating earnings-based taxes, which
results in an effective statutory tax rate that is somewhat lower than the
combined statutory tax rate would otherwise be. In the aggregate, these taxes
produced effective statutory tax rates of approximately 52.1%, 51.4%, and 51.4%
for 1993, 1994 and 1995, respectively. The Company's effective tax rates
reflected in the accompanying consolidated statements of income differ from the
effective statutory tax rates primarily due to the effect of permanently
non-deductible expenses and temporary differences in the recognition of certain
income and expenses for tax and for financial reporting purposes.
9. RELATED PARTY TRANSACTIONS
The Company is the exclusive distribution vehicle for Amway (a Michigan
corporation) in Japan. The Company has entered into agreements with Amway (1)
for receiving a long-term secure and stable supply of merchandise (the Product
Purchase Agreement), (2) for the exclusive use of Amway's trademarks in Japan
(the Trademark License Agreement) and (3) for receiving management support
services (the Support Services Agreement). See also Note 2.
Balances with Amway at August 31, 1994 and 1995 were as follows (in
millions of yen and thousands of U.S. dollars):
<TABLE>
<CAPTION>
1994 1995 1995
------ ------ -------
<S> <C> <C> <C>
Receivables included in other current assets.................. Y 131 Y 196 $ 2,000
Accounts payable and accrued expenses......................... 2,592 3,496 35,673
</TABLE>
Purchases from and other transactions with Amway for the years ended August
31, 1993, 1994 and 1995 were as follows (in millions of yen and thousands of
U.S. dollars):
<TABLE>
<CAPTION>
1993 1994 1995 1995
------- ------- ------- --------
<S> <C> <C> <C> <C>
Purchases....................................... Y23,826 Y28,175 Y28,622 $292,061
Management charges.............................. 633 290 385 3,929
Royalties....................................... 304 493 697 7,112
</TABLE>
All charges for support services made pursuant to the Support Services
Agreement are denominated in U.S. dollars. Accordingly, the Company bears the
risk of currency exchange rate fluctuations in connection therewith. Because the
Company does not believe this risk to be significant, no arrangements have been
made to hedge this exposure against exchange rate fluctuations.
The Company pays to Amway, for the use of Amway trademarks and formulas in
connection with products manufactured by others under contract with the Company,
a royalty of 4% of sales of products bearing an Amway trademark, and 8% of sales
of products bearing an Amway trademark and also using an Amway formula or
design. Based upon estimated sales of certain products for fiscal years 1994 and
1995, the Company delivered to Amway promissory notes in payment of royalties
for these years. In consideration for the execution of these notes, the actual
payments during fiscal years 1994 and 1995 approximated 2% for certain products
bearing an Amway trademark and 4% for certain products bearing an Amway
trademark and using an Amway formula or design.
Based upon estimated sales of products for fiscal years 1996 through 1998,
the Company also delivered promissory notes in payment of royalties for these
years. In consideration for the execution of these notes, the actual payments
for these years are expected to approximate 3.6% for products bearing an Amway
trademark
F-13
<PAGE> 127
AMWAY JAPAN LIMITED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
YEARS ENDED AUGUST 31, 1993, 1994 AND 1995
9. RELATED PARTY TRANSACTIONS -- CONTINUED
and 7.3% for products bearing an Amway trademark and using an Amway formula or
design. Balances on these promissory notes were as follows (in millions of yen
and thousands of U.S. dollars):
<TABLE>
<CAPTION>
1994 1995 1995
----- ------ -------
<S> <C> <C> <C>
Royalties payable........................................... Y 314 Y1,867 $19,051
Less current maturities..................................... (314) (622) (6,347)
----- ------ -------
-- 1,245 12,704
===== ====== =======
</TABLE>
The outstanding balance at August 31, 1995 is payable in six semi-annual
installments commencing February 28, 1996, with the final payment due and
payable on August 31, 1998. Because these promissory notes are not treated as
notes under Japanese commercial practices and regulations, they have not been
recorded on the accompanying consolidated balance sheets of the Company.
10. RECONCILIATION OF JAPANESE AND U.S. ACCOUNTING PRINCIPLES
The Company prepares its accounts in accordance with Japanese GAAP, which
differ in certain material respects from U.S. GAAP. The significant differences
relate to the following items:
Income Taxes -- In accordance with Japanese GAAP, income taxes are provided
only for amounts currently payable for each year. U.S. GAAP requires that
deferred income taxes be recognized for temporary differences between the tax
basis of assets and liabilities and the reported amounts in the consolidated
financial statements.
Pension Costs -- Under Japanese GAAP, the amounts contributed to the
Company's funnded defined benefit pension plan, including amortization of prior
service costs, are charged to expense when paid. Under U.S. GAAP, net periodic
pension costs, as defined by SFAS No. 87, are charged to expense.
Software Costs -- The Company capitalizes the costs of both internally
developed and purchased software under Japanese GAAP, whereas only purchased
software costs are capitalized under U.S. GAAP. Under Japanese GAAP,
amortization of capitalized software costs aggregated Y44 million, Y326 million
and Y379 million ($3.9 million), during the fiscal years ended August 31, 1993,
1994, and 1995, respectively. Accumulated amortization, under Japanese GAAP,
aggregated Y370 million and Y460 million ($4.7 million) as of August 31, 1994
and 1995, respectively.
Stock Issue Costs -- Stock issue costs are charged to expense when paid
under Japanese GAAP, whereas such costs are charged to additional paid-in
capital under U.S. GAAP.
Investments in Affiliates and Non-Monetary Transaction -- In December 1993,
the Company exchanged its ownership of, and advances to, APL for 972,222 shares
(approximately 2%) of the common stock of AAP. A gain was recorded on the
exchange of stock under Japanese GAAP, whereas U.S. GAAP does not allow
recognition of such a gain (see Note 3). Additionally, under U.S. GAAP the
investment in AAP would be valued at market value with the unrealized gain or
loss, net of tax, being reflected in shareholders equity. Under Japanese GAAP,
this investment is carried at cost.
Cash Dividend -- Under Japanese GAAP, dividends are charged to retained
earnings when paid. Under U.S. GAAP, dividends are charged to retained earnings
when declared by the Board of Directors.
Translation Adjustments -- Under Japanese GAAP, translation adjustments
resulting from translating financial statements of foreign subsidiaries are
reported as assets or liabilities, whereas such adjustments are reported in a
separate component of shareholders' equity under U.S. GAAP.
F-14
<PAGE> 128
AMWAY JAPAN LIMITED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
YEARS ENDED AUGUST 31, 1993, 1994 AND 1995
10. RECONCILIATION OF JAPANESE AND U.S. ACCOUNTING PRINCIPLES -- CONTINUED
Notes Payable -- The Company has outstanding negotiable promissory notes
payable to Amway aggregating Y0.3 billion and Y1.9 billion as of August 31, 1994
and 1995, respectively (see Note 9). Because these notes are not treated as
notes under the commercial practices and regulations in Japan, they have not
been recorded on the accompanying consolidated balance sheets. Under U.S. GAAP,
these notes would have been recorded as a liability with the offset being
recorded as a prepaid expense.
Land Acquisition Costs -- On March 30, 1995 the Company acquired a 3561
square meter parcel of land in Tokyo for the construction of a new headquarters
facility, and on July 27, 1995 the Company acquired a 22,296 square meter parcel
of land in Tokyo for the development of a sixth RDC (see Note 5). Taxes and
certain other direct costs of these acquisitions are being expensed as incurred
in accordance with Japanese GAAP, whereas under U.S. GAAP these costs would be
capitalized.
The following table summarizes the effects on net income of the differences
between Japanese GAAP and U.S. GAAP for the years ended August 31, 1993, 1994
and 1995 (in millions of yen and thousands of U.S. dollars):
<TABLE>
<CAPTION>
1993 1994 1995 1995
------- ------- ------- --------
<S> <C> <C> <C> <C>
Amounts as shown in the Japanese GAAP consolidated
financial statements............................. Y15,851 Y20,604 Y23,062 $235,327
Adjustments of:
Income taxes..................................... 1,303 778 540 5,510
Defined benefit pension plan..................... 103 136 28 286
Software costs................................... (586) (521) 493 5,030
Land acquisition costs........................... -- -- 399 4,071
Gain on exchange of stock of subsidiary.......... -- (507) -- --
Other............................................ (95) (38) (75) (765)
------- ------- ------- --------
Amounts according to U.S. GAAP..................... Y16,576 Y20,452 Y24,447 $249,459
======= ======= ======= ========
Net income per share under U.S. GAAP............... Y110.78 Y136.69 Y163.39 $ 1.67
Net income per ADS................................. Y 55.39 Y 68.34 Y 81.70 $ .83
</TABLE>
F-15
<PAGE> 129
AMWAY JAPAN LIMITED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
YEARS ENDED AUGUST 31, 1993, 1994 AND 1995
10. RECONCILIATION OF JAPANESE AND U.S. ACCOUNTING PRINCIPLES -- CONTINUED
The following table summarizes the effect on shareholders' equity of the
differences between Japanese GAAP and U.S. GAAP as of August 31, 1994 and 1995
(in millions of yen and thousands of U.S. dollars):
<TABLE>
<CAPTION>
1994 1995 1995
------- ------- --------
<S> <C> <C> <C>
Amounts as shown in the Japanese GAAP consolidated
financial statements................................... Y79,171 Y77,882 $794,714
Adjustments of:
Income taxes........................................... 5,321 5,861 59,806
Defined benefit pension plan........................... 463 491 5,010
Software costs......................................... (1,108) (615) (6,276)
Land acquisition costs................................. -- 399 4,071
Gain on exchange of stock of subsidiary................ (507) (507) (5,173)
Unrealized gain on investment in affiliate, net of
related income taxes................................ 846 1,154 11,776
Translation adjustments, net of related income taxes... (847) (908) (9,265)
Other.................................................. (108) (96) (979)
------- ------- --------
Amounts according to U.S. GAAP........................... Y83,231 Y83,661 $853,684
======= ======= ========
</TABLE>
Income Tax -- The effective income tax rates of the Company on a U.S. GAAP
basis differ from the effective Japanese statutory rates as follows:
<TABLE>
<CAPTION>
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Effective Japanese statutory rates............................ 52.1% 51.4% 51.4%
Non-deductible expenses....................................... 1.9 2.0 2.5
Other......................................................... -- 1.2 (0.7)
---- ---- ----
Effective tax rates........................................... 54.0% 54.6% 53.2%
==== ==== ====
</TABLE>
The approximate effect of temporary differences that would give rise to
deferred tax balances under U.S. GAAP is as follows (in millions of yen and
thousands of U.S. dollars):
<TABLE>
<CAPTION>
1994 1995
DEFERRED TAX DEFERRED TAX
--------------------- ----------------------
ASSETS LIABILITIES ASSETS LIABILITIES
------ ----------- ------- -----------
<S> <C> <C> <C> <C>
Accruals, currently not deductible for tax:
Sales returns.................................. Y1,988 Y -- Y 2,200 Y --
Enterprise tax................................. 1,653 -- 1,726 --
Accrued distributor seminars................... 1,309 -- 1,447 --
Deferred software costs.......................... 650 -- 354 --
Translation adjustments.......................... 882 -- 961 --
Unrealized gain on investment in affiliate....... -- 895 -- 1,221
Other............................................ 767 1,046 1,059 925
------ ----------- ------- -----------
Total............................................ Y7,249 Y 1,941 Y 7,747 Y 2,146
====== ========= ======= =========
Total (U.S. dollars, Note 1)..................... $79,051 $ 21,898
======= =========
</TABLE>
F-16
<PAGE> 130
AMWAY JAPAN LIMITED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
YEARS ENDED AUGUST 31, 1993, 1994 AND 1995
10. RECONCILIATION OF JAPANESE AND U.S. ACCOUNTING PRINCIPLES -- CONTINUED
Cash Flows -- U.S. GAAP requires that for cash flow reporting, cash and
cash equivalents include only those time deposits with maturities of less than
three months. Under U.S. GAAP, cash and cash equivalents were Y45.1 billion and
Y32.4 billion ($331 million) at August 31, 1994 and 1995, respectively.
11. PENSION PLAN
The Company maintains a defined-benefit non-contributory pension plan (the
"Plan") for the benefit of its full-time employees. Substantially all such
employees are covered by the Plan. Under the Plan, employees terminating their
employment or retiring are, in most circumstances, entitled to benefits based on
years of service, compensation at the time of termination and certain other
factors. At August 31, 1995 the Plan was fully funded. The amounts contributed
to the fund for the years ended August 31, 1993, 1994 and 1995 were Y262
million, Y299 million and Y308 million ($3.1 million), respectively.
The net periodic pension costs, the status of projected benefit obligations
of the Plan and major assumptions used to determine these amounts under the
requirements of U.S. GAAP are as follows:
<TABLE>
<CAPTION>
1993 1994 1995 1995
----- ---- ---- ------
<S> <C> <C> <C> <C>
Components of net periodic pension costs:
Service cost.......................................... Y 149 Y173 Y249 $2,541
Interest cost......................................... 33 45 74 755
Actual return on plan assets.......................... (104) (29) (11) (112)
Net amortization and deferral......................... 81 (26) (32) (327)
----- ---- ---- ------
Net periodic pension costs.............................. Y 159 Y163 Y280 $2,857
===== ==== ==== ======
</TABLE>
<TABLE>
<CAPTION>
1994 1995 1995
------- ------- --------
<S> <C> <C> <C>
Status of obligations:
Actuarial present value of benefit obligations:
Vested benefit obligation........................... Y (714) Y (940) $ (9,592)
Non-vested benefit obligation....................... (20) (24) (245)
------- ------- --------
Accumulated benefit obligation......................... Y (734) Y (964) $ (9,837)
======= ======= ========
Projected benefit obligation for service rendered to
date................................................... Y(1,363) Y(1,479) $(15,092)
Plan assets at fair value................................ 1,205 1,497 15,276
------- ------- --------
Plan assets in excess of projected benefit obligations... (158) 18 184
Unrecognized net loss.................................... 629 440 4,489
Unrecognized prior service costs......................... -- 40 408
Unrecognized net assets at date of initial application... (8) (7) (71)
------- ------- --------
Prepaid pension costs to be recognized on the
consolidated balance sheets............................ Y 463 Y 491 $ 5,010
======= ======= ========
Assumptions used:
Discount rate.......................................... 5.5% 5.5%
Rate of increase in compensation level................. 5.5% 4.0%
Expected long-term rate of return on assets............ 6.0% 6.0%
</TABLE>
At August 31, 1995, Plan assets consisted primarily of marketable debt and
equity securities.
F-17
<PAGE> 131
AMWAY JAPAN LIMITED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
YEARS ENDED AUGUST 31, 1993, 1994 AND 1995
12. OTHER INCOME -- NET
Other Income -- net for the years ended August 31, 1993, 1994 and 1995
consists of the following (in millions of yen and thousands of U.S. dollars):
<TABLE>
<CAPTION>
1993 1994 1995 1995
------ ------ ------ -------
<S> <C> <C> <C> <C>
Interest income............................................ Y2,838 Y1,949 Y1,131 $11,541
Gain on exchange of stock of subsidiary.................... -- 507 -- --
Gains on sales of investments.............................. -- 108 508 5,184
Dividend income............................................ -- 311 658 6,714
Write-off of capitalized software (Note 13)................ -- -- (465) (4,745)
Earthquake-related costs, net (Note 5)..................... -- -- (197) (2,010)
Other, net................................................. (353) (318) 98 1,000
------ ------ ------ -------
Other income -- net........................................ Y2,485 Y2,557 Y1,733 $17,684
====== ====== ====== =======
</TABLE>
13. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
(in millions of yen and thousands of QUARTER ENDED
U.S. dollars, -----------------------------------------------------------------
except per share (ADS) data) NOVEMBER 30 FEBRUARY 28 MAY 31 AUGUST 31 YEAR
----------- ----------- -------- --------- ----------
<S> <C> <C> <C> <C> <C>
Fiscal 1994
Net Sales............................. Y 37,466 Y 40,655 Y 39,772 Y 39,663 Y 157,556
Gross Profit.......................... 26,696 29,602 29,125 28,557 113,980
Net Income............................ 5,269 5,609 5,087 4,639 20,604
Net Income per Common Share........... 35.21 37.49 34.00 31.00 137.70
Net Income per ADS.................... 17.60 18.75 17.00 15.50 68.85
Fiscal 1995
Net Sales............................. Y 42,665 Y 41,683 Y 48,768 Y 44,875 Y 177,991
Gross Profit.......................... 30,970 30,097 36,168 33,241 130,476
Net Income............................ 5,630 5,760 6,708 4,964 23,062
Net Income per Common Share........... 37.63 38.50 44.83 33.18 154.13
Net Income per ADS.................... 18.81 19.25 22.42 16.59 77.07
Fiscal 1995 (in U.S. Dollars, Note 1)
Net Sales............................. $ 435,358 $ 425,336 $497,633 $ 457,908 $1,816,235
Gross Profit.......................... 316,020 307,113 369,061 339,194 1,331,388
Net Income............................ 57,449 58,776 68,449 50,653 235,327
Net Income per Common Share........... .38 .40 .46 .33 1.57
Net Income per ADS.................... .19 .20 .23 .17 .79
</TABLE>
A charge of Y465 million ($4.7 million) relating to a write-off of
capitalized software costs was charged against Other income -- net during the
quarter ended August 31, 1995. Due to the replacement and upgrade of order
management and certain general ledger systems, this software was determined to
be without future benefit to the Company. Under U.S. GAAP, this charge would
have been classified as a Selling and administrative expenses.
F-18
<PAGE> 132
AMWAY JAPAN LIMITED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
YEARS ENDED AUGUST 31, 1993, 1994 AND 1995
14. SUBSEQUENT EVENTS
In October 1995, the Company announced its intention to increase the
regular annual dividend rate with respect to fiscal 1996 to Y100 ($1.02) per
share of common stock from Y90 ($.92) per share of common stock, to pay a
special year-end dividend with respect to fiscal 1995 of Y50 ($.51) per share of
common stock in December 1995 and to pay a special interim dividend in May 1996
of Y25 ($.26) per share of common stock, in each case subject to legal and other
factors.
In October 1995, the Company announced its intention to present to the
shareholders for their approval a proposal to repurchase up to Y15.0 billion
($153.0 million) of common stock by means of open market purchases or a tender
offer to the shareholders of the Company in accordance with the Securities and
Exchange Law of Japan and the Securities Exchange Act of 1934. The Company has
been informed by its controlling shareholders that they intend to participate
fully in the share repurchase. The share repurchase will also include those
shares of common stock represented by ADSs. The shareholders' approval will be
conditioned upon amendment of applicable laws, regulations and ordinances of
Japan such that taxation on deemed dividends under the Income Tax Law or the
Corporate Tax Law of Japan will apply to neither individual shareholders who
sell their shares in a tender offer nor to individual or corporate shareholders
who do not sell their shares in the repurchase, except that corporate
shareholders (other than nonresident corporate shareholders without a permanent
establishment in Japan) may elect to be subject to deemed dividend taxation.
Assuming a repurchase of the full Y15.0 billion of common stock, this
transaction will have the effect of reducing both cash and cash equivalents and
shareholders' equity by Y15.0 billion.
See also Note 2 regarding certain investment transactions relating to AJEI
that occurred subsequent to August 31, 1995.
F-19
<PAGE> 133
ALTERNATE FRONT COVER PAGE FOR INTERNATIONAL PROSPECTUS
PROSPECTUS (Subject to Completion)
Issued October 18, 1995
$300,000,000
PEPS sm
AJL PEPS Trust
$ . PREMIUM EXCHANGEABLE PARTICIPATING SHARES - PEPS sm
(Subject to Exchange for American Depositary Shares Representing
Shares of Common Stock of Amway Japan Limited, No Par Value, or Shares of Such
Common Stock)
------------------------
EACH OF THE SHARES ($ . PREMIUM EXCHANGEABLE PARTICIPATING SHARES, OR "PEPS")
OF THE AJL PEPS TRUST (THE "TRUST") REPRESENTS THE RIGHT TO RECEIVE AN ANNUAL
DISTRIBUTION OF $ , AND WILL BE EXCHANGED ON , 1999 (THE
"EXCHANGE DATE") FOR BETWEEN 0.XX AND 1.XX AMERICAN DEPOSITARY SHARES ("ADSS,"
AND EACH, AN "ADS") REPRESENTING SHARES OF COMMON STOCK, NO PAR VALUE (THE
"COMMON STOCK") OF AMWAY JAPAN LIMITED (THE "COMPANY"), OR, AT THE OPTION OF
A HOLDER, THE EQUIVALENT IN SHARES OF COMMON STOCK. EACH ADS REPRESENTS ONE-
HALF OF ONE SHARE OF COMMON STOCK. THE ANNUAL DISTRIBUTION OF $ PER PEPS
IS PAYABLE QUARTERLY ON EACH FEBRUARY 15, MAY 15, AUGUST 15 AND NOVEMBER
15, COMMENCING FEBRUARY 15, 1996. THE PEPS ARE NOT SUBJECT TO REDEMPTION.
THE TRUST IS A NEWLY ORGANIZED, 3 1/4-YEAR TRUST ESTABLISHED TO PURCHASE AND
HOLD A PORTFOLIO OF STRIPPED U.S. TREASURY SECURITIES MATURING ON A QUARTERLY
BASIS THROUGH THE EXCHANGE DATE, AND ONE OR MORE FORWARD CONTRACTS (THE
"CONTRACTS") WITH TWO EXISTING SHAREHOLDERS (THE "SELLERS") OF THE COMPANY
RELATING TO THE ADSS. OF THE PEPS OFFERED HEREBY, PEPS ARE BEING OFFERED
INITIALLY IN THE UNITED STATES AND CANADA BY THE U.S. UNDERWRITERS AND PEPS
ARE BEING OFFERED INITIALLY INTERNATIONALLY OUTSIDE THE UNITED STATES AND
CANADA BY THE INTERNATIONAL UNDERWRITERS. SEE "UNDERWRITING."
THE TRUST'S INVESTMENT OBJECTIVES ARE TO PROVIDE EACH HOLDER WITH A QUARTERLY
DISTRIBUTION OF $ . PER PEPS, AND TO PROVIDE THE HOLDER OF EACH PEPS, ON THE
EXCHANGE DATE, ADSS (OR, AT THE OPTION OF A HOLDER, THE EQUIVALENT IN SHARES
OF COMMON STOCK) EQUAL TO (I) IF THE EXCHANGE PRICE PER ADS IS LESS THAN $
(THE "THRESHOLD APPRECIATION PRICE") BUT EQUAL TO OR GREATER THAN $ (THE
"DOWNSIDE PROTECTION THRESHOLD PRICE"), A NUMBER (OR FRACTIONAL NUMBER) OF
ADSS PER PEPS SO THAT THE VALUE THEREOF AT THE EXCHANGE PRICE EQUALS $
(THE "INITIAL VALUE"), (II) IF THE EXCHANGE PRICE PER ADS IS EQUAL TO OR
GREATER THAN THE THRESHOLD APPRECIATION PRICE, 0.XX ADSS PER PEPS AND
(III) IF THE EXCHANGE PRICE PER ADS IS LESS THAN THE DOWNSIDE PROTECTION
THRESHOLD PRICE, 1.XX ADSS PER PEPS. HOLDERS OTHERWISE ENTITLED TO
RECEIVE FRACTIONAL ADSS OR FRACTIONAL SHARES OF COMMON STOCK IN RESPECT
OF THEIR AGGREGATE HOLDINGS OF PEPS WILL RECEIVE CASH IN LIEU THEREOF.
THE EXCHANGE PRICE PER ADS MEANS GENERALLY THE AVERAGE ADS EQUIVALENT
PRICE (AS DEFINED HEREIN) FOR THE 20 TRADING DAYS (AS DEFINED HEREIN)
IMMEDIATELY PRIOR TO (BUT NOT INCLUDING) THE EXCHANGE DATE.
THE YIELD ON PEPS IS HIGHER THAN THE ACTUAL DIVIDEND YIELD ON THE ADSS. HOWEVER,
THERE IS NO ASSURANCE THAT THE YIELD ON THE PEPS WILL BE HIGHER THAN THE
DIVIDEND YIELD ON THE ADSS OVER THE LIFE OF THE TRUST. IN ADDITION, THE
OPPORTUNITY FOR EQUITY APPRECIATION AFFORDED BY AN INVESTMENT IN THE PEPS IS
LESS THAN THAT AFFORDED BY AN INVESTMENT IN THE ADSS BECAUSE THE VALUE OF THE
ADSS RECEIVABLE BY HOLDERS OF THE PEPS UPON EXCHANGE AT THE EXCHANGE DATE
WILL ONLY EXCEED THE INITIAL VALUE IF THE EXCHANGE PRICE EXCEEDS THE
THRESHOLD APPRECIATION PRICE, WHICH REPRESENTS AN APPRECIATION OF % OF
THE INITIAL VALUE. MOREOVER, BECAUSE A HOLDER OF EACH PEPS WILL ONLY
RECEIVE 0.XX ADSS IF THE EXCHANGE PRICE EXCEEDS THE THRESHOLD APPRECIATION
PRICE, HOLDERS OF THE PEPS WILL ONLY BE ENTITLED TO RECEIVE UPON EXCHANGE
% OF ANY APPRECIATION OF THE VALUE OF THE ADSS IN EXCESS OF THE
THRESHOLD APPRECIATION PRICE. ALTHOUGH THE VALUE OF THE ADSS RECEIVABLE
BY A HOLDER OF PEPS UPON EXCHANGE AT THE EXCHANGE DATE MAY BE LESS THAN
THE AMOUNT PAID BY THE HOLDER, UNLIKE THE ADSS, AN INVESTMENT IN PEPS
AFFORDS PROTECTION FROM DEPRECIATION OF THE ADSS TO THE EXTENT THAT
THE EXCHANGE PRICE DOES NOT FALL BELOW THE DOWNSIDE PROTECTION
THRESHOLD PRICE. IN THE EVENT THE EXCHANGE PRICE IS LESS THAN THE
DOWNSIDE PROTECTION THRESHOLD PRICE, HOLDERS WILL RECEIVE 1.XX ADSS
PER PEPS AND ACCORDINGLY WILL HAVE ONLY LIMITED PROTECTION FROM
DEPRECIATION BELOW % OF THE INITIAL VALUE.
(continued on following page)
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
PRICE $ A PEPS
<TABLE>
<CAPTION>
PRICE TO SALES PROCEEDS TO
PUBLIC LOAD(1) THE TRUST(2)
--------------------- ------------------ ------------------------------
<S> <C> <C> <C>
Per PEPS................. $ $ $
Total (3)................ $ $ $
<FN>
- ---------------
(1) The Company and an affiliate of the Sellers have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933.
(2) Before deducting estimated offering expenses of $ payable by the Trust.
(3) The Trust has granted to the U.S. Underwriters an option for 30 days to
purchase up to an additional PEPS at the price to the public less
underwriting discount, solely to cover over-allotments. If the option is
exercised in full, the total Price to Public, Sales Load and Proceeds to the
Trust will be $ , $ and $ , respectively. See "Underwriting."
</TABLE>
------------------------
The PEPS are offered, subject to prior sale, when, as and if accepted by the
Underwriters and subject to approval of certain legal matters by Davis Polk &
Wardwell, counsel for the Underwriters. It is expected that delivery of the PEPS
will be made on or about , 1995 at the office of Morgan Stanley &
Co. Incorporated, New York, New York, against payment therefor in New York
funds.
------------------------
MORGAN STANLEY & CO. MERRILL LYNCH INTERNATIONAL LIMITED
International
, 1995
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH JURISDICTION.
<PAGE> 134
The Trust's portfolio will not be managed in the traditional sense. The
Trust's management powers will be limited to the disposition of the Contracts in
certain limited circumstances. The Trust may continue to hold the Contracts
despite a significant decline in the market price of the ADSs or the Common
Stock or adverse changes in the financial condition of the Company. The address
of the Trust is 101 Barclay Street, New York, New York 10286 (telephone no.
(212) 815-3199). Investors are advised to read this Prospectus and to retain it
for future reference.
PEPS may be a suitable investment for those investors who are able to
understand the unique nature of the Trust and the economic characteristics of
the Contracts and the U.S. Treasury securities held by the Trust.
The Trust will be a grantor trust for federal income tax purposes and each
holder will be treated as the owner of its pro rata portion of the U.S. Treasury
securities and the Contracts. The U.S. Treasury securities will be treated as
having "original issue discount" which holders must recognize currently as
income as it accrues. Holders will not recognize income, gain or loss upon the
Trust's entry into the Contracts nor will the delivery of ADSs pursuant to the
Contracts be taxable to holders. Although the matter is not free from doubt,
holders should not recognize income, gain or loss with respect to the Contracts
over their term. See "Federal Income Tax Considerations."
The Company is not affiliated with the Trust.
THE PEPS HAVE BEEN APPROVED FOR LISTING ON THE NEW YORK STOCK EXCHANGE UPON
NOTICE OF ISSUANCE UNDER THE SYMBOL "AJP". PRIOR TO THIS OFFERING THERE HAS BEEN
NO PUBLIC MARKET FOR THE PEPS.
TYPICAL CLOSED-END FUND SHARES FREQUENTLY TRADE AT A PREMIUM TO OR DISCOUNT
FROM NET ASSET VALUE. BASED ON ITS ASSETS AND THE MARKET IN WHICH THE PEPS ARE
EXPECTED TO TRADE, THE TRUST BELIEVES THE PEPS ARE UNLIKELY TO TRADE AT A
PREMIUM TO OR DISCOUNT FROM NET ASSET VALUE. THE TRUST BELIEVES, HOWEVER, THAT
BECAUSE OF THE YIELD ON THE PEPS AND THE FORMULA FOR DETERMINING THE NUMBER OF
ADSS TO BE DELIVERED ON THE EXCHANGE DATE, THE PEPS WILL TEND TO TRADE AT A
PREMIUM TO THE MARKET VALUE OF THE ADSS TO THE EXTENT THE ADS PRICE FALLS AND AT
A DISCOUNT TO THE MARKET VALUE OF THE ADSS TO THE EXTENT THE ADS PRICE RISES.
"PEPS" and "Premium Exchangeable Participating Shares" are service marks of
Morgan Stanley & Co. Incorporated.
The closing sale price of the ADSs on the New York Stock Exchange on October
17, 1995 was $20 7/8 per ADS. The closing sale price of the Common Stock on the
Japanese over-the-counter market on October 17, 1995 was Y4,290 or $42.77 per
share (based on the noon buying rate in New York City on October 17, 1995 for
cable transfers in yen, as announced for customs purposes by the Federal Reserve
Bank of New York of $1 = Y100.3).
<PAGE> 135
FORM N-2
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(A) FINANCIAL STATEMENTS
PART A-- INDEPENDENT AUDITORS' REPORT. STATEMENT OF ASSETS AND LIABILITIES.
PART B-- NONE.
(B) EXHIBITS
<TABLE>
<S> <C>
**2.d.(i) Trust Agreement dated as of August 17, 1995
* 2.d.(ii) Form of Specimen Certificate of PEPS
* 2.h.(i) Form of Underwriting Agreement
* 2.h.(ii) Form of Intersyndicate Agreement
* 2.h.(iii) Form of Master Selected Dealer Agreement
* 2.h.(iv) Form of International Dealer Agreement
* 2.j Form of Custodian Agreement
* 2.k.(i) Form of Administration Agreement
* 2.k.(ii) Form of Paying Agent Agreement
* 2.k.(iii) Form of Purchase Contract
* 2.1 Opinion and Consent of Counsel to the Trust
* 2.n.(i) Tax Opinion of Counsel to the Trust (Consent contained in Exhibit 2.1)
* 2.n.(ii) Consent of Special Tax Counsel to the Company
* 2.n.(iii) Consent of Independent Public Accountants
2.n.(iv) Consents to Being Named as Trustee
* 2.p Form of Subscription Agreement
<FN>
- ---------------
* To be filed by amendment.
** Previously filed.
</TABLE>
ITEM 25. MARKETING ARRANGEMENTS
See the Form of Underwriting Agreement filed as Exhibit 2.h.(i) to this
Registration Statement.
ITEM 26. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated expenses to be incurred in
connection with the offering described in this Registration Statement:
<TABLE>
<S> <C>
Registration fees....................................................... $118,966
New York Stock Exchange listing fee..................................... *
Printing (other than certificates)...................................... *
Engraving and printing certificates..................................... *
Fees and expenses of qualification under state securities laws
(excluding fees of counsel)........................................... 25,000
Accounting fees and expenses............................................ *
Legal fees and expenses................................................. *
NASD fees............................................................... 30,500
Miscellaneous........................................................... *
--------
Total.............................................................. $ *
========
<FN>
- ---------------
* To be furnished by amendment.
</TABLE>
C-1
<PAGE> 136
ITEM 27. PERSON CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Prior to August 17, 1995 the Trust had no existence. As of the effective
date the Trust will have entered a subscription agreement for PEPS with
Morgan Stanley & Co. Incorporated and Merrill Lynch, Pierce, Fenner & Smith
Incorporated and an Underwriting Agreement with respect to PEPS with a
group of U.S. underwriters lead represented by Morgan Stanley & Co. Incorporated
and Merrill Lynch, Pierce, Fenner & Smith Incorporated and a group of
international underwriters lead represented by Morgan Stanley & Co.
International Limited and Merrill Lynch International Limited.
ITEM 28. NUMBER OF HOLDERS OF SECURITIES
<TABLE>
<CAPTION>
NUMBER OF
RECORD
TITLE OF CLASS HOLDERS
--------------------------------------------------------------------------------
<S> <C>
Shares of beneficial interest....................................... 0
</TABLE>
ITEM 29. INDEMNIFICATION
Article of the Trust Agreement and Article of the Underwriting
Agreement provide for indemnification.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "Act"), may be permitted to directors, officers and
controlling persons of the Registrant, pursuant to the foregoing provisions or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
ITEM 30. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
Not Applicable
ITEM 31. LOCATION OF ACCOUNTS AND RECORDS
The Bank of New York
101 Barclay Street
New York, New York 10286
(Trust Agreement)
The Bank of New York
101 Barclay Street
New York, New York 10286
(with respect to its services as Administrator)
The Bank of New York
101 Barclay Street
New York, New York 10286
(with respect to its services as Custodian)
C-2
<PAGE> 137
The Bank of New York
101 Barclay Street
New York, New York 10286
(with respect to its services as Registrar, Transfer Agent and Paying
Agent)
ITEM 32. MANAGEMENT SERVICES
Not applicable.
ITEM 33. UNDERTAKINGS
(a) The registrant hereby undertakes to suspend offering of its units until
it amends its prospectus if (1) subsequent to the effective date of its
registration statement, the net asset value declines more than 10 percent from
its net asset value as of the effective date of the Registration Statement or
(2) the net asset value increases to an amount greater than its net proceeds as
stated in the prospectus.
(b) The registrant hereby undertakes that (i) for purpose of determining
any liability under the 1933 Act, the information omitted from the form of
prospectus filed as part of this registration statement in reliance upon Rule
430A and contained in a form of prospectus filed by the registrant under Rule
497(h) under the 1933 Act shall be deemed to be part of this registration
statement as of the time it was declared effective; (ii) for the purpose of
determining any liability under the 1933 Act, each post-effective amendment that
contains a form of prospectus shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of the securities
at that time shall be deemed to be the initial bona fide offering thereof.
C-3
<PAGE> 138
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated (except for the Securities and
Exchange Commission registration fee) expenses, other than the underwriting
discounts, expected to be incurred by the Company in connection with the
issuance and distribution of the securities registered under this Registration
Statement.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee................. $ 1,585
New York Stock Exchange listing fee................................. 61,800
Printing............................................................ 85,000
Fees and expenses of qualification under state securities laws...... 15,000
Accounting fees and expenses........................................ 125,000
Legal fees and expenses............................................. 220,000
Miscellaneous....................................................... 1,615
----------
Total.......................................................... $ 510,000
=========
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Articles 254 and 280 of the Commercial Code make the provisions of Section
10, Chapter 2, Book III of the Civil Code applicable to the relationship between
the Company and its directors and statutory auditors, respectively. Section 10,
among other things provides in effect that:
(1) Any director or statutory auditor of a company may demand advance
payment of expenses which are considered necessary for the management of
the affairs of such company entrusted to him;
(2) If a director or a statutory auditor of a company has defrayed any
expenses which are considered necessary for the management of the affairs
of such company entrusted to him, he may demand reimbursement therefor from
the company;
(3) If a director or a statutory auditor has assumed an obligation
necessary for the management of the affairs entrusted to him, he may
require the company to perform it in his place or, if it is not due, to
furnish adequate security;
(4) If a director or a statutory auditor, without any fault on his
part, sustains damage through the management of the affairs entrusted to
him, he may demand compensation therefor from the company; and
Notwithstanding the above subparagraphs (1) through (4), these statutory
provisions are generally interpreted to provide that the company shall not make
any advance payment or reimbursement of expenses nor any indemnification for
liability of a director or statutory auditor of the company in any threatened,
pending or completed action or suit, including all appeals, except that the
company may purchase and maintain insurance on behalf of the director or
statutory auditor of the company against any liability asserted against him
provided that the company shall not purchase and maintain insurance for any
liability, costs and expenses incurred by him when he shall have been finally
adjudged to be liable for negligence or misconduct in the performance of his
duty to the company in shareholder derivative actions.
Amway Corporation intends to enter into indemnity agreements (the
"Indemnity Agreements") with the directors of the Company. Pursuant to the
Indemnity Agreements, Amway Corporation will indemnify a director (the
"Indemnitee") if the Indemnitee is a party to or otherwise involved in any legal
proceeding by reason of the fact that the Indemnitee is or was a director of the
Company, or is or was serving at the request of the Company in certain
capacities with another entity, against all expenses, judgments, settlements,
fines and penalties, actually and reasonably incurred by the Indemnitee in
connection with the defense or settlement of such proceeding. Indemnity will
only be available if the Indemnitee acted in good faith and in a manner which he
believes would not result in any personal profit or advantage to him. The
Indemnity
II-1
<PAGE> 139
Agreements will mandate advancement of expenses to the Indemnitee if the
Indemnitee provides the Company with a written promise to repay the advanced
amounts in the event that it is determined that the conduct of the Indemnitee
has not met the applicable standard of conduct.
ITEM 16. EXHIBITS
Unless otherwise indicated, the following Exhibits are filed with the
Registration Statement:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------- --------------------------------------------------------------------------------
<S> <C> <C>
3.1 -- Articles of Association of the Registrant, as amended (English translation)
4.1 -- Share Handling Regulations (unofficial English translation followed by the
original Japanese version) (incorporated by reference to Exhibit 4.1 of the
Registration Statement on Form F-1, as amended (Registration No. 33-78400))
4.2 -- Deposit Agreement dated as of February 18, 1993, as amended and restated as of
June 28, 1994 among the Registrant, Morgan Guaranty Trust Company of New York,
as Depositary, and all holders of ADRs issued thereunder (incorporated by
reference to exhibit (a)(2) of the Registration Statement on Form F-6, as
amended (Registration No. 33-78994))
5.1 -- Opinion of Nishimura & Sanada, counsel to the Registrant, as to the legality of
the securities being registered
10.1* -- First Amendment to Amended and Restated Trademark License Agreement, dated as of
July 31, 1995, between Amway Corporation and the Registrant
23.1 -- Independent Auditors' Consent
23.2 -- Consent of Nishimura & Sanada (included in Exhibit 5.1)
23.3 -- Consent of White & Case
23.4* -- Consent of Jones, Day, Reavis & Pogue
99.1 -- Consent of person to be nominated as director
</TABLE>
- ---------
* Previously filed on September 21, 1995 with the Registrant's initial
Registration Statement on Form F-3.
ITEM 17. UNDERTAKINGS
The undersigned undertakes to provide, for purposes of determining any
liability under the Securities Act of 1933, each filing of the registrant's
annual report pursuant to Section 13(a) or Section 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the Registration Statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than payment by the registrant
of expenses incurred or paid by a director, officer or controlling person of the
registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with the
securities being registered, the registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
II-2
<PAGE> 140
The undersigned hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as a
part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be
part of this registration statement as of the time it was declared
effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-3
<PAGE> 141
FORM N-2
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Amendment to
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of New York, State of New York, on the 17th day of
October, 1995.
AJL PEPS Trust
By: /s/ STEVEN R. UMLAUF
------------------------------
Steven R. Umlauf
Trustee
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to Registration Statement has been signed below by the following persons, in the
capacities and on the date indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
- ------------------------------------- -------------------------------------------------------
<S> <C> <C>
/s/ STEVEN R. UMLAUF Principal Executive Officer, October 17, 1995
Steven R. Umlauf Principal Financial Officer,
Principal Accounting Officer
and Trustee
</TABLE>
S-1
<PAGE> 142
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL OF THE
REQUIREMENTS FOR FILING ON FORM F-3 AND HAS DULY CAUSED THIS AMENDMENT TO THE
REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO
DULY AUTHORIZED, IN THE CITY OF TOKYO, JAPAN ON OCTOBER 17, 1995.
AMWAY JAPAN LIMITED
/s/ RICHARD S. JOHNSON
By:
Name: Richard S. Johnson
Title: Representative Director and
President
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED:
<TABLE>
<CAPTION>
NAME TITLE DATE
- ----------------------------------- ----------------------------------- -----------------
<S> <C> <C>
/s/ RICHARD S. JOHNSON Representative Director and October 17, 1995
- ----------------------------------- President
Richard S. Johnson (Principal Executive Officer)
/s/ YOSHIZO MATSUSHITA Director, Vice President and Chief October 17, 1995
- ----------------------------------- Financial Officer (Principal
Yoshizo Matsushita Financial Officer and Principal
Accounting Officer)
Director October , 1995
- -----------------------------------
Richard M. DeVos, Jr.
/s/ STEPHEN A. VAN ANDEL Director October 17, 1995
- -----------------------------------
Stephen A. Van Andel
/s/ TAKASHI KURE Director October 17, 1995
- -----------------------------------
Takashi Kure
/s/ HISAO HATTORI Director October 17, 1995
- -----------------------------------
Hisao Hattori
/s/ HITOSHI TSURUMOTO Director October 17, 1995
- -----------------------------------
Hitoshi Tsurumoto
Director October , 1995
- -----------------------------------
Noboru Makino
Director October , 1995
- -----------------------------------
Nobuyuki Nakahara
/s/ YOSHIKAZU TAKAISHI Director October 17, 1995
- -----------------------------------
Yoshikazu Takaishi
/s/ CRAIG N. MEURLIN Authorized Representative in the October 17, 1995
- ----------------------------------- United States
Craig N. Meurlin
</TABLE>
S-2
<PAGE> 143
EXHIBIT INDEX
<TABLE>
<CAPTION>
PAGINATION
BY
SEQUENTIAL
EXHIBIT EXHIBIT NUMBERING
NUMBER DESCRIPTION SYSTEM
- ------------ --------------------------------------------------------------------------------
<S> <C> <C>
**2.d.(i) Trust Agreement dated as of August 17, 1995
* 2.d.(ii) Form of Specimen Certificate of PEPS
* 2.h.(i) Form of Underwriting Agreement
* 2.h.(ii) Form of Intersyndicate Agreement
* 2.h.(iii) Form of Master Selected Dealer Agreement
* 2.h.(iv) Form of International Dealer Agreement
* 2.j Form of Custodian Agreement
* 2.k.(i) Form of Administration Agreement
* 2.k.(ii) Form of Paying Agent Agreement
* 2.k.(iii) Form of Purchase Contract
* 2.1 Opinion and Consent of Counsel to the Trust
* 2.n.(i) Tax Opinion of Counsel to the Trust (Consent contained in Exhibit 2.1)
* 2.n.(ii) Consent of Special Tax Counsel to the Company
* 2.n.(iii) Consent of Independent Public Accountants
2.n.(iv) Consents to Being Named as Trustee
* 2.p Form of Subscription Agreement
<FN>
- ---------------
* To be filed by amendment.
** Previously filed.
</TABLE>
E-1
<PAGE> 144
CONSENT TO BEING NAMED AS TRUSTEE
The undersigned hereby consents to being named in the Registration
Statement on Form N-2 of AJL PEPS TRUST (the "Trust") and any amendments
thereto, as a person about to become a Trustee of the Trust.
Dated: October 17, 1995
/s/ DONALD J. PUGLISI
----------------------------
Donald J. Puglisi
E-2
<PAGE> 145
CONSENT TO BEING NAMED AS TRUSTEE
The undersigned hereby consents to being named in the Registration
Statement on Form N-2 of AJL PEPS TRUST (the "Trust") and any amendments
thereto, as a person to become a Trustee of the Trust.
Dated: October 13, 1995
/s/ WILLIAM R. LATHAM III
-------------------------------
William R. Latham III
E-3
<PAGE> 146
CONSENT TO BEING NAMED AS TRUSTEE
The undersigned hereby consents to being named in the Registration
Statement on Form N-2 of AJL PEPS TRUST (the "Trust") and any amendments
thereto, as a person about to become a Trustee of the Trust.
Dated: October 17, 1995
/s/ JAMES B. O'NEILL
-----------------------------
James B. O'Neill
E-4
<PAGE> 147
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------- --------------------------------------------------------------------------------
<S> <C> <C>
3.1 -- Articles of Association of the Registrant, as amended (English translation)
4.1 -- Share Handling Regulations (unofficial English translation followed by the
original Japanese version) (incorporated by reference to Exhibit 4.1 of the
Registration Statement on Form F-1, as amended (Registration No. 33-78400))
4.2 -- Deposit Agreement dated as of February 18, 1993, as amended and restated as of
June 28, 1994 among the Registrant, Morgan Guaranty Trust Company of New York,
as Depositary, and all holders of ADRs issued thereunder (incorporated by
reference to exhibit (a)(2) of the Registration Statement on Form F-6, as
amended (Registration No. 33-78994))
5.1 -- Opinion of Nishimura & Sanada, counsel to the Registrant, as to the legality of
the securities being registered
10.1* -- First Amendment to Amended and Restated Trademark License Agreement, dated as of
July 31, 1995, between Amway Corporation and the Registrant
23.1 -- Independent Auditors' Consent
23.2 -- Consent of Nishimura & Sanada (included in Exhibit 5.1)
23.3 -- Consent of White & Case
23.4* -- Consent of Jones, Day, Reavis & Pogue
99.1 -- Consent of person to be nominated as director
</TABLE>
- ---------
* Previously filed on September 21, 1995 with the Registrant's initial
Registration Statement on Form F-3.
E-5
<PAGE> 1
Exhibit 3.1
<Translation>
ARTICLES OF ASSOCIATION
OF
AMWAY JAPAN LIMITED
Established: April 26, 1977
Authenticated by
a notary public: April 26, 1977
Incorporated: June 1, 1977
Amended: September 1, 1978
Amended: January 4, 1979
Amended: August 17, 1981
Amended: May 12, 1982
Amended: November 30, 1983
Amended: April 28, 1984
Amended: March 10, 1987
Amended: August 20, 1987
Amended: August 27, 1987
Amended: September 18, 1987
Amended: October 9, 1987
Amended: October 16, 1987
Amended: October 20, 1987
Amended: December 15, 1987
Amended: November 30, 1989
Amended: August 23, 1990
Amended: November 30, 1990
Amended: November 28, 1991
Amended: November 27, 1992
Amended: November 26, 1993
Amended: November 29, 1994
<PAGE> 2
ARTICLES OF ASSOCIATION
-----------------------
TABLES OF CONTENTS
------------------
<TABLE>
<CAPTION>
Article Page
------- ----
<S> <C> <C>
1 . Corporate Name 1
2 . Purposes 1
3 . Location of Head Office 2
4 . Method of Public Notice 2
5 . Total Number of Shares Authorized to be Issued 2
6 . Par Value of Each Par Value Share 2
7 . Number of Shares Constituting One Unit 2
8 . Share Handling Regulations 3
9 . Transfer Agent 3
10. Record Date 3
11. Convocation 4
12. Persons Entitled to Convene General Meetings of 4
Shareholders and Chairman thereof
13. Resolutions 4
14. Exercise of Voting Rights by Proxy 5
15. Number 5
16. Election 5
17. Term of Office 5
18. Representative Directors and Executive Directors 6
19. Persons Entitled to Convene Meetings of the 6
Board of Directors and Chairman thereof
20. Notice of Convocation 6
21. Resolutions 6
22. Regulations of the Board of Directors 6
23. Remuneration and Retirement Allowances 7
24. Number 7
25. Election 7
26. Term of Office 7
27. Full-Time Statutory Auditor 8
28. Notice of Convocation 8
29. Resolutions 8
</TABLE>
<PAGE> 3
<TABLE>
<S> <C>
30. Regulations of the Board of Statutory Auditors 8
31. Remuneration and Retirement Allowances 8
32. Fiscal Period and the Date for Settlement 8
of Accounts
33. Cash Dividends 9
34. Interim Dividends 9
35. Prescription Period for Payment of Dividends, etc. 9
36. Conversion of Convertible Bonds and Dividends 9
Supplementary Provisions 10
</TABLE>
<PAGE> 4
ARTICLES OF ASSOCIATION
-----------------------
OF
--
AMWAY JAPAN LIMITED
-------------------
CHAPTER I
---------
GENERAL PROVISIONS
------------------
ARTICLE 1. CORPORATE NAME
- ---------- --------------
The Company shall be called "NIHON AMWAY KABUSHIKI KAISHA" and
indicated as "AMWAY JAPAN LIMITED" in English.
ARTICLE 2. PURPOSES
- ---------- --------
The purposes of the Company shall be to engage in the following
business activities:
1. the import, export, manufacture, sale and sale for consignment of the
following goods:
(1) soaps, cleansers, detergents, quasi-pharmaceuticals, cosmetics
and cosmetic accessories;
(2) nutritionally-enriched food supplements (containing nutritive
elements such as vitamins, calcium, proteins and fats, and
natural fibers), macaroni, spaghetti and other noodles, food
additives, seasonings, jam, confectioneries and soft drinks;
(3) coffee, tea, cocoa and the like;
(4) pet food;
(5) clothing, textile and accessories;
(6) writing materials, stationery, office supplies;
(7) cooking utensils, tableware and household goods;
(8) electrical appliances; and
(9) chemical products;
2. the import, export, sale and sale for consignment of leather, leather
products, cloth products such as
- 1 -
<PAGE> 5
bags, toys, playing materials, flowers and other plants;
3. the publishing and sale of magazines and other periodicals and books;
4. the import, export, production, and sale of compact discs, cassette
tapes, video tapes, phonographic records and other types of visual and
audio software;
5. the import, export and sale of cameras, photographic film, and
photographic equipment;
6. the liability insurance agency business;
7. the business of introduction of prospective life insurance policy
holders and the business relating to life insurance solicitation; and
8. any and all other business incidental to the foregoing.
ARTICLE 3. LOCATION OF HEAD OFFICE
- ---------- -----------------------
The head office of the Company shall be situated in Minato-ku, Tokyo.
ARTICLE 4. METHOD OF PUBLIC NOTICE
- ---------- -----------------------
Public notices of the Company shall be given by publishing the notice
in the Nippon Keizai Shimbun.
CHAPTER II
----------
SHARES
------
ARTICLE 5. TOTAL NUMBER OF SHARES AUTHORIZED TO BE ISSUED
- ---------- ----------------------------------------------
The total number of shares authorized to be issued by the Company
shall be 256,000,000.
ARTICLE 6. PAR VALUE OF EACH PAR VALUE SHARE
- ---------- ---------------------------------
The par value of each par value share shall be fifty yen (Y.50).
- 2 -
<PAGE> 6
ARTICLE 7. NUMBER OF SHARES CONSTITUTING ONE UNIT
- ---------- --------------------------------------
The number of shares constituting one unit of shares of the Company
shall be one hundred (100).
ARTICLE 8. SHARE HANDLING REGULATIONS
- ---------- --------------------------
The denomination of share certificates, registration of transfer of
shares, registration of pledges on shares and cancellation thereof, indication
of trust property on shares and cancellation thereof, re-issuance of share
certificates, purchase of shares not constituting a full unit and other
procedures relating to handling of shares and the fees there for shall be
provided for in the Share Handling Regulations to be established by the Board
of Directors.
ARTICLE 9. TRANSFER AGENT
- ---------- --------------
(1) The Company shall appoint a transfer agent with respect to its
shares.
(2) The transfer agent of the Company and its share handling
office shall be determined by a resolution of the Board of Directors.
(3) The Register of Shareholders and the Beneficial Owners List of
the Company shall be maintained at the share handling office of the
transfer agent, and the registration of transfer of shares,
registration of pledges on shares and cancellation thereof, indication
of trust property on shares and cancellation thereof, re-issuance of
share certificates, purchase of shares not constituting a full unit,
receipt of various notifications and other business relating to shares
shall be handled by the transfer agent and not by the Company.
ARTICLE 10. RECORD DATE
- ----------- -----------
(1) Shareholders (hereinafter the term "Shareholders" shall
include Beneficial Owners) whose
- 3 -
<PAGE> 7
names are entered in the Register of Shareholders and the Beneficial Owners
List by the end of August 31 each year shall be entitled to exercise their
rights as shareholders at an Ordinary General Meeting of Shareholders of the
year.
(2) In addition to the preceding paragraph and other provisions of
these Articles of Association or whenever necessary, the Company, by a
resolution of the Board of Directors, regard shareholders or pledgees who are
registered in the Register of Shareholders and in the Beneficial Owners List at
a fixed date as those who shall be entitled to exercise their rights as
shareholders, by giving prior public notice.
CHAPTER III
-----------
GENERAL MEETINGS OF SHAREHOLDERS
--------------------------------
ARTICLE 11. CONVOCATION
- ----------- -----------
An Ordinary General Meeting of Shareholders of the Company shall be
convened within three (3) months from the day following the date for settlement
of accounts in respect of each fiscal period, and an Extraordinary General
Meeting of Shareholders shall be convened whenever necessary.
ARTICLE 12. PERSONS ENTITLED TO CONVENE GENERAL
- ----------- -----------------------------------
MEETINGS OF SHAREHOLDERS AND CHAIRMAN THEREOF
---------------------------------------------
(1) The President and Director shall convene a General Meeting of
Shareholders pursuant to a resolution of the Board of Directors and act as
chairman thereat unless otherwise provided by law or regulation.
(2) Concerning the above-mentioned convocation and chairing of a
General Meeting of Shareholders in the preceding paragraph, should the
President and Director be unable to so act, or by a resolution at a meeting of
the Board of Directors, one of the other Directors, in an
- 4 -
<PAGE> 8
order predetermined by the Board of Directors, shall act in his place.
ARTICLE 13. RESOLUTIONS
- ----------- -----------
Resolutions at a General Meeting of Shareholders of the Company shall
be adopted by a majority of the voting rights of the shareholders present
thereat unless otherwise provided by law or regulation or by these Articles of
Association.
ARTICLE 14. EXERCISE OF VOTING RIGHTS BY PROXY
- ----------- ----------------------------------
(1) A shareholder of the Company or his statutory agent may
exercise his voting rights by a proxy, who shall be another shareholder having
voting rights of the Company.
(2) The proxy mentioned in the preceding paragraph shall submit to
the Company a document evidencing his power of representation at each General
Meeting of Shareholders.
CHAPTER IV
----------
DIRECTORS AND BOARD OF DIRECTORS
--------------------------------
ARTICLE 15. NUMBER
- ----------- ------
The number of Directors of the Company shall be not more than twelve
(12).
ARTICLE 16. ELECTION
- ----------- --------
(1) The Directors of the Company shall be elected, at a General
Meeting of Shareholders, by a majority of the voting rights of the shareholders
present who shall hold one-third (1/3) or more of the total number of issued
shares with voting rights.
(2) No cumulative voting shall be conducted in the election of
Directors of the Company.
ARTICLE 17. TERM OF OFFICE
- ----------- --------------
(1) The term of office of Directors of the Company shall expire
upon the conclusion of the Ordinary General Meeting of Shareholders in respect
of the last settlement
- 5 -
<PAGE> 9
of accounts which takes place within two (2) years after their assumptions of
office.
(2) The term of office of a Director elected to fill a vacancy or
to increase the number of Directors shall expire when the term of office of the
present Directors in office expires.
ARTICLE 18. REPRESENTATIVE DIRECTORS AND EXECUTIVE DIRECTORS
- ----------- ------------------------------------------------
(1) The Directors who shall represent the Company shall be elected
by a resolution of the Board of Directors.
(2) The Company may, by resolutions of the Board of Directors,
appoint one (1) Chairman and Director, one (1) President and Director, and one
(1) or more Vice President and Directors, Senior Managing Directors and
Managing Directors.
ARTICLE 19. PERSONS ENTITLED TO CONVENE MEETINGS OF THE
- ----------- -------------------------------------------
BOARD OF DIRECTORS AND CHAIRMAN THEREOF
---------------------------------------
(1) The President and Director shall convene meetings of the Board
of Directors and act as chairman thereat unless otherwise provided by law or
regulation.
(2) Should the President and Director be unable to so act, one of
the other Directors, in an order predetermined by the Board of Directors, shall
act in his place.
ARTICLE 20. NOTICE OF CONVOCATION
- ----------- ---------------------
Notice of convocation of meetings of the Board of Directors of the
Company shall be dispatched to each Director and Statutory Auditor at least
three (3) days prior to the date fixed for such meetings; provided, however,
that in case of emergency, such period may be shortened.
- 6 -
<PAGE> 10
ARTICLE 21. RESOLUTIONS
- ----------- -----------
Resolutions at meetings of the Board of Directors of the Company shall
be adopted by a majority of the Directors present, the quorum being a majority
of the Directors in office.
ARTICLE 22. REGULATIONS OF THE BOARD OF DIRECTORS
- ----------- -------------------------------------
Matters relating to the Board of Directors of the Company shall be
governed by the Regulations of the Board of Directors to be established by its
Board of Directors unless otherwise provided by law or regulation or by these
Articles of Association.
ARTICLE 23. REMUNERATION AND RETIREMENT ALLOWANCES
- ----------- --------------------------------------
The amounts of remuneration and retirement allowances for Directors of
the Company shall be determined by resolutions of the General Meeting of
Shareholders.
CHAPTER V
---------
STATUTORY AUDITORS AND BOARD OF
-------------------------------
STATUTORY AUDITORS
------------------
ARTICLE 24. NUMBER
- ----------- ------
The number of Statutory Auditors of the Company shall be not more than
four (4).
ARTICLE 25. ELECTION
- ----------- --------
The Statutory Auditors of the Company shall be elected, at a General
Meeting of Shareholders, by a majority of the voting rights of the shareholders
present who shall hold one-third (1/3) or more of the total number of issued
shares with voting rights.
- 7 -
<PAGE> 11
ARTICLE 26. TERM OF OFFICE
- ----------- --------------
(1) The term of office of Statutory Auditors of the Company shall
expire upon the conclusion of the Ordinary General Meeting of Shareholders in
respect of the last settlement of accounts which takes place within three (3)
years after their assumptions of office.
(2) The term of office of a Statutory Auditor elected to fill a
vacancy created by the resignation of a Statutory Auditor before expiration of
his term of office shall expire when the term of office of the present
Statutory Auditor who has retired would otherwise expire.
ARTICLE 27. FULL-TIME STATUTORY AUDITOR
- ----------- ---------------------------
One (1) or more Statutory Auditor(s) to serve full-time shall be
elected by the mutual decision of the Statutory Auditors of the Company.
ARTICLE 28. NOTICE OF CONVOCATION
- ----------- ---------------------
Notice of convocation of meetings of the Board of Statutory Auditors
of the Company shall be dispatched to each Statutory Auditor at least three (3)
days prior to the date fixed for such meetings, provided, however, that in case
of emergency, such period may be shortened.
ARTICLE 29. RESOLUTIONS
- ----------- -----------
Resolutions at meetings of the Board of Statutory Auditors of the
Company shall be adopted by a majority of the Statutory Auditors in office
unless otherwise provided by law or regulation.
ARTICLE 30. REGULATIONS OF THE BOARD OF STATUTORY AUDITORS
- ----------- ----------------------------------------------
Matters relating to the Board of Statutory Auditors of the Company
shall be governed by the Regulations of the Board of Statutory Auditors to be
established by its Board of Statutory Auditors unless otherwise provided by law
or regulation or by these Articles of Association.
- 8 -
<PAGE> 12
ARTICLE 31. REMUNERATION AND RETIREMENT ALLOWANCES
- ----------- --------------------------------------
The amounts of remuneration and retirement allowances for Statutory
Auditors of the Company shall be determined by resolutions of the General
Meeting of Shareholders.
CHAPTER VI
----------
ACCOUNTS
--------
ARTICLE 32. FISCAL PERIOD AND-THE DATE FOR SETTLEMENT OF ACCOUNTS
- ----------- -----------------------------------------------------
The fiscal period of the Company shall commence on September 1 of each
year and end on August 31 of the following year, and the last day of the fiscal
period shall be the date for settlement of accounts.
ARTICLE 33. CASH DIVIDENDS
- ----------- --------------
Cash dividends of the Company shall be paid to the shareholders or
pledgees who are registered in the Register of Shareholders and in the
Beneficial Owners List at the close of the last day for each settlement of
accounts.
ARTICLE 34. INTERIM DIVIDENDS
- ----------- -----------------
The Company may, by a resolution of the Board of Directors, pay cash
distributions pursuant to Article 293-5 of the Commercial Code ("interim
dividends") to the shareholders or pledgees who are registered in the Register
of Shareholders and in the Beneficial Owners List at the close of the last day
of February of each year.
ARTICLE 35. PRESCRIPTION PERIOD FOR PAYMENT OF DIVIDENDS, ETC.
- ----------- --------------------------------------------------
If cash dividends, interim dividends or other various distributions
are not collected within three (3) years from the date when the payment thereof
becomes due,
- 9 -
<PAGE> 13
the Company shall be released from its obligation to make such payment.
ARTICLE 36. CONVERSION OF CONVERTIBLE BONDS AND DIVIDENDS
- ----------- ---------------------------------------------
The initial cash dividends or interim dividends on shares issued upon
conversion of convertible bonds of the Company shall be paid as though, and it
shall be deemed that, conversion was effected on March 1, if a request for
conversion is made during the period from March 1 to August 31, and on
September 1, if a request for conversion is made during the period from
September 1 of a year to the last day of February of the following year.
[SUPPLEMENTARY PROVISIONS]
The amendment of Article 7 shall be effective on February 1, 1995.
This supplementary provision shall be eliminated from these Articles
of Association upon the taking effect of Article 7.
- 10 -
<PAGE> 1
Exhibit 5.1
October 18, 1995
Amway Japan Limited
ARCO Tower
8-1, Shimomeguro 1-chome
Meguro-ku, Tokyo 153
Japan
Dear Sirs:
1. We have acted as Japanese special counsel to Amway Japan Limited (the
"Company") and have been requested by the Company to give this opinion in
connection with the Registration Statement on Form F-3 filed with the United
States Securities and Exchange Commission (the "Commission") on September 21,
1995 as will be amended by Amendment No. 1 thereto (the "Amendment No. 1") to
be filed on or about October 18, 1995 (collectively, the "Registration
Statement") for the purposes of registering under the United States Securities
Act of 1933, as amended (the "Securities Act"), the number of shares (the
"Shares") of the Company's common stock, no par value (the "Common Stock") set
forth on the cover page of the Prospectus constituting a part of the
Registration Statement, which Shares may be represented by American Depositary
Shares, each representing one-half of one share of Common Stock.
2. This opinion is limited to Japanese law and is given on the basis that
it will be governed by and construed in accordance with Japanese law. We have
made no investigation of the laws of any jurisdiction other than Japan and
neither express nor imply any opinion as to any other laws.
3. For the purposes of this opinion we have examined the following
documents and such other documents and made such further examinations and
inquiries as we have deemed necessary or appropriate for the purposes of this
opinion:
(i) a copy of the Articles of Association, the Regulations of the
Board of Directors and the Share Handling Regulations of the
Company certified by the President and the Representative
Director of the Company as being true and complete as of
October 18, 1995;
<PAGE> 2
Amway Japan Limited
October 18, 1995
Page 2
(ii) a certified copy of the Commercial Registration Record of the
Company; and
(iii) a draft dated October 6, 1995 of the Amendment No. 1.
In our examination of the above-mentioned documents, we have assumed the
genuineness of all documents submitted to us as originals, the conformity to
the originals thereof of all documents submitted to us as copied documents and
the genuineness of all signatures thereon or on the originals thereof. In
addition, we have assumed that the Amendment No. 1 will be filed in
substantially the form of the draft dated October 6, 1995, which we have
reviewed.
4. Based on the foregoing, we are of the opinion that the Shares being
registered under the Registration Statement have been validly issued, and are
fully paid and non-assessable.
5. We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the references to us under the heading "Legal
Matters" in the Registration Statement. In giving this consent, we do not
hereby admit that we are within the category of persons whose consent is
required within Section 7 of the Securities Act or the rules and regulations of
the Commission thereunder.
This opinion is given to you for use in connection with the
Registration Statement.
Yours faithfully,
NISHIMURA & SANADA
/s/ Masahiro Shimojo
-----------------------------------
Masahiro Shimojo
<PAGE> 1
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
-----------------------------
We consent to the use in this Registration Statement of Amway Japan Limited on
Form F-3, as amended, of our report dated October 18, 1995, appearing in the
Prospectus, which is part of this Registration Statement, as amended.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
DELOITTE TOUCHE TOHMATSU
Tokyo, Japan
October 18, 1995
<PAGE> 1
Exhibit 99.1
------------
AMWAY JAPAN LIMITED
Consent of Prospective Director
-------------------------------
Pursuant to Rule 438 (Consent of Persons About to Become Directors) of
the Securities Act of 1933, as amended, the undersigned hereby consents to be
named as a person about to become a director of Amway Japan Limited (the
"Registrant") in Amendment No. 1 to the Registration Statement on Form F-3
(Registration No. 33-97204) of the Registrant as filed with the Securities and
Exchange Commission.
/s/ Tomiaki Nagase
------------------------------
Tomiaki Nagase
October 17, 1995
Date
