(The following is excerpted from Amway Japan Ltd.'s SEC filing. The entire incredibly long and boring document can be found at http://www.sec.gov/Archives/edgar/data/922624/0000950123-95-003409.txt.)
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 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 direct 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. It has been reported that an amendment to the laws and regulations related to direct selling may be submitted for consideration by the Japanese legislature at its next scheduled session beginning in December 1995. Although no draft legislation has been made available, the reports suggest that the primary focus of any amendment will likely be upon establishing refund procedures for sales through telephonic solicitation as well as increasing criminal penalties for illegal sales practices. 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."