SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
-----------------
FORM 10-Q
FOR QUARTERLY AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission file number 001-12421
Nu Skin Asia Pacific, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 87-0565309
------------- ------------
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
75 West Center Street, Provo, Utah 84601
---------------------------------- ------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (801) 345-6100
-----------------------------
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No _____
As of October 15, 1997, 11,723,011 shares of the Company's Class A Common
Stock, $.001 par value per share, 71,696,675 shares of the Company's Class B
Common Stock, $.001 par value per share, and no shares of the Company's
Preferred Stock, $.001 par value per share, were outstanding.
NU SKIN ASIA PACIFIC, INC.
1997 FORM 10-Q QUARTERLY REPORT - THIRD QUARTER
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS:
CONSOLIDATED BALANCE SHEETS..................................2
CONSOLIDATED STATEMENTS OF INCOME............................3
CONSOLIDATED STATEMENTS OF CASH FLOWS........................4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ..................5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS..........................7
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS...........................................11
ITEM 2. CHANGES IN SECURITIES.......................................11
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.............................11
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.........11
ITEM 5. OTHER INFORMATION...........................................11
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K............................12
SIGNATURES..........................................................13
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Nu Skin Asia Pacific, Inc.
Consolidated Balance Sheets (Unaudited)
(in thousands)
- --------------------------------------------------------------------------------
September 30, December 31,
1997 1996
------------- -------------
ASSETS
Current assets
Cash and cash equivalents $ 154,204 $ 207,106
Accounts receivable 13,633 8,937
Related parties receivable 5,304 7,974
Inventories, net 59,723 44,860
Prepaid expenses and other 39,166 11,281
------------- ------------
272,030 280,158
Property and equipment, net 10,313 8,884
Other assets, net 43,944 42,673
------------- ------------
Total assets $ 326,287 $ 331,715
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 6,707 $ 6,592
Accrued expenses 69,964 79,518
Related parties payable 53,485 46,326
Notes payable to stockholders -- 71,487
Note payable to NSI, current portion 10,000 10,000
----------- ------------
140,156 213,923
----------- ------------
Note payable to NSI, less current portion -- 10,000
----------- ------------
Commitments and contingencies
Stockholders' equity
Preferred stock - 25,000,000 shares
authorized, $.001 par value, no
shares issued and outstanding -- --
Class A common stock - 500,000,000
shares authorized, $.001 par value,
11,723,011 shares issued and
outstanding 12 12
Class B common stock - 100,000,000 shares
authorized, $.001 par value,
71,696,675 shares issued and
outstanding 72 72
Additional paid-in capital 137,876 137,876
Cumulative foreign currency translation
adjustment (10,276) (5,963)
Retained earnings 79,813 11,493
Deferred compensation (8,227) (22,559)
Note receivable from NSI (13,139) (13,139)
------------- ------------
186,131 107,792
------------- ------------
Total liabilities and stockholders'
equity $ 326,287 $ 331,715
============= ============
The accompanying notes are an integral part of these
consolidated financial statements.
<TABLE>
<CAPTION>
Three Three Nine Nine
Months Ended Months Ended Months Ended Months Ended
September 30, September 30, September 30, September 30,
1997 1996 1997 1996
-------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenue $ 226,428 $ 183,601 $ 667,438 $ 471,312
Cost of sales 61,493 52,629 187,692 133,592
-------------- ------------- ------------- -------------
Gross profit 164,935 130,972 479,746 337,720
-------------- ------------- ------------- -------------
Operating expenses
Distributor incentives 88,687 68,059 257,819 175,149
Selling, general and administrative 35,999 25,419 103,737 69,970
Distributor stock expense 4,477 -- 13,431 --
-------------- ------------- ------------- -------------
Total operating expenses 129,163 93,478 374,987 245,119
-------------- ------------- ------------- -------------
Operating income 35,772 37,494 104,759 92,601
Other income (expense), net 3,314 913 3,841 1,530
-------------- ------------- ------------- -------------
Income before provision for income taxes 39,086 38,407 108,600 94,131
Provision for income taxes (Note 3) 14,560 13,219 40,280 33,810
-------------- ------------- ------------- -------------
Net income $ 24,526 $ 25,188 $ 68,320 $ 60,321
============== ============= ============= =============
Net income per share (Note 4) $ .29 $ .31 $ .80 $ .75
============== ============= ============= =============
Weighted average common shares outstanding 85,426 80,518 85,423 80,518
============== ============= ============= =============
Pro forma data:
Income before pro forma provision for
income taxes $ 38,407 $ 94,131
Pro forma provision for income taxes
(Note 3) 13,450 32,965
------------- -------------
Income after pro forma provision for
income taxes $ 24,957 $ 61,166
============= =============
Pro forma net income per share (Note 4) $ .31 $ .76
============= =============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
Nine Nine
Months Ended Months Ended
September 30, September 30,
1997 1996
------------- -------------
Cash flows from operating activities:
Net income $ 68,320 $ 60,321
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 3,976 2,104
Amortization of deferred compensation 14,332 --
Changes in operating assets and liabilities:
Accounts receivable (4,696) (4,909)
Related parties receivable 2,670 (6,047)
Inventories, net (14,863) (13,717)
Prepaid expenses and other (27,885) (4,617)
Other assets (1,656) (1,542)
Accounts payable 115 624
Accrued expenses (9,554) 26,201
Related parties payable 7,159 7,366
---------- -------------
Net cash provided by operating activities 37,918 65,784
---------- -------------
Cash flows from investing activities:
Purchase of property and equipment (4,637) (3,967)
Payment to NSI for distribution rights (10,000) --
Payments for lease deposits (682) (218)
Receipt of refundable lease deposits 129 5
---------- -------------
Net cash used in investing activities (15,190) (4,180)
---------- -------------
Cash flows from financing activities:
Payments to stockholders for S
distribution notes (Note 2) (71,487) --
Dividends paid -- (43,059)
----------- --------------
Net cash used in financing activities (71,487) (43,059)
----------- --------------
Effect of exchange rate changes on cash (4,143) (679)
----------- --------------
Net increase (decrease) in cash and cash
equivalents (52,902) 17,866
Cash and cash equivalents, beginning of period 207,106 63,213
---------- -------------
Cash and cash equivalents, end of period $ 154,204 $ 81,079
========== =============
Supplemental cash flow information:
Interest paid $ -- $ 25
========== =============
The accompanying notes are an integral part of these
consolidated financial statements.
1. THE COMPANY
Nu Skin Asia Pacific, Inc. (the "Company") is a network marketing
company involved in the distribution and sale of premium quality,
innovative personal care and nutritional ("IDN") products. The Company
is the exclusive distribution vehicle for Nu Skin International, Inc.
("NSI") in the countries of Japan, Taiwan, Hong Kong (including Macau),
South Korea and Thailand, where the Company currently has operations
(collectively referred to as the "Subsidiaries"), and in Indonesia,
Malaysia, the Philippines, the People's Republic of China (the "PRC"),
Singapore and Vietnam, where operations have not yet commenced.
Additionally, the Company sells products to NSI affiliates in Australia
and New Zealand.
The Company was incorporated on September 4, 1996. It was formed as a
holding company and acquired the Subsidiaries through a reorganization
which occurred on November 20, 1996. Prior to the reorganization, each
of the Subsidiaries elected to be treated as an S corporation. In
connection with the reorganization, the Subsidiaries' S corporation
status was terminated on November 19, 1996, and the Company declared a
distribution to the stockholders that included all of the Subsidiaries'
previously earned and undistributed taxable S corporation earnings
totaling $86.5 million (the "S Distribution Notes").
On November 27, 1996 the Company completed its initial public offerings
of 4,750,000 shares of Class A common stock ("Class A Common Stock")
and received net proceeds of $98.8 million (the "Offerings").
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form
10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion
of management, the accompanying unaudited consolidated financial
statements contain all adjustments, consisting of normal recurring
adjustments, considered necessary for a fair statement of the Company's
financial information as of September 30, 1997 and 1996 and for the
three and nine-month periods ended September 30, 1997 and 1996. The
results of operations of any interim period are not necessarily
indicative of the results of operations to be expected for the fiscal
year. For further information, refer to the consolidated financial
statements and accompanying footnotes included in the Company's annual
report on Form 10-K for the year ended December 31, 1996.
2. RELATED PARTY TRANSACTION
On April 4, 1997, the Company paid the balance due on the S
Distribution Notes of $71.5 million with the related accrued interest
expense of $1.6 million. As described in Note 1, these notes originated
in connection with the reorganization in which the Subsidiaries' S
corporation status was terminated and the Company declared a
distribution to the stockholders that included all of the Subsidiaries'
previously earned and undistributed taxable S corporation earnings
totaling $86.5 million.
3. INCOME TAXES
As a result of the Company's reorganization described in Note 1, the
Company is no longer treated as an S corporation for U.S. Federal
income tax purposes. The provision for income taxes for the three and
nine-month periods ended September 30, 1996 primarily represents income
taxes in foreign countries as U.S. Federal income taxes were levied at
the stockholder level. The consolidated statements of income include a
pro forma presentation for income taxes which would have been recorded
if the Company had been taxed as a C corporation rather than as an S
corporation for the three and nine-month periods ended September 30,
1996.
4. NET INCOME PER SHARE
Net income per share is computed based on the weighted average number
of common shares and common share equivalents outstanding during the
periods presented assuming that the Company's reorganization and the
resultant issuance of 80.3 million shares of Class B common stock
occurred as of January 1, 1996.
5. FINANCIAL INSTRUMENTS
The Company's Subsidiaries enter into significant transactions with
each other, NSI and third parties which may not be denominated in the
respective Subsidiaries' functional currencies. The Company reduces its
exposure to fluctuations in foreign exchange rates by creating
offsetting positions through the use of foreign currency exchange
contracts. The Company currently does not use such financial
instruments for trading or speculative purposes. The Company regularly
monitors its foreign currency exposures to minimize the impact of
foreign exchange fluctuations on the Company's operating results.
At September 30, 1997 the Company held foreign currency forward
contracts with notional amounts totaling approximately $37 million to
hedge foreign currency items. The unrealized gains on these contracts
were $1.9 million and $0.3 million for the three and nine-month periods
ended September 30, 1997, respectively. These contracts have maturities
through May 1998.
6. NEW ACCOUNTING STANDARDS
The Company is required to adopt Statement of Financial Accounting
Standards No. 128 ("SFAS 128"), Earnings per Share, during the fourth
quarter of 1997. SFAS 128 specifies the computation, presentation and
disclosure requirements for earnings per share. The Company does not
believe that the adoption of SFAS 128 will have a material effect on
the Company's method of calculation or display of earnings per share
amounts.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
1997 Compared to 1996
Revenue increased 23% and 42% to $226.4 million and $667.4 million from
$183.6 million and $471.3 million for the three and nine-month periods ended
September 30, 1997, respectively, compared with the same periods in 1996. This
increase is primarily attributable to several factors. First, revenue in Japan
increased by $65.1 million and $160.0 million, or 66% and 60%, for the three and
nine-month periods ended September 30, 1997, respectively, compared with the
same periods in 1996. This increase in revenue was primarily a result of
continued growth of the personal care and IDN product lines, as well as
increased sales following a distributor convention held in the first quarter of
1997 and the sponsorship of the Japan Supergames featuring National Basketball
Association stars in the third quarter of 1997. Second, revenue in Taiwan
increased by $2.2 million and $26.0 million, or 6% and 24%, for the three and
nine-month periods ended September 30, 1997, respectively, compared with the
same periods in 1996, primarily as a result of growth in IDN sales following the
late 1996 introduction of LifePak, the Company's leading nutritional product.
Third, the opening of Thailand in the first quarter of 1997 resulted in an
additional $6.5 million and $19.9 million in revenue for the three and
nine-month periods ended September 30, 1997, respectively. Fourth, revenue in
Hong Kong increased by $2.0 million and $3.6 million for the three and
nine-month periods ended September 30, 1997, respectively, compared with the
same periods in 1996, primarily as a result of growth in IDN sales following the
first quarter introduction of LifePak. The increase in revenue for the three and
nine-month periods ended September 30, 1997 was partially offset by the
decreases in South Korea revenue of $32.8 million and $13.2 million,
respectively, which, to a degree, reflect the new market revenue cycle
experienced by the Company in other markets. However, the negative impact on
revenue of the revenue cycle in South Korea was compounded by slowing economic
growth and unfavorable media and consumer group attention toward foreign direct
selling companies.
Gross profit as a percentage of revenue was 72.8% and 71.3% for the three
months ended September 30, 1997 and 1996, respectively, and was 71.9% and 71.7%
for the nine months ended September 30, 1997 and 1996, respectively. This
increase is the result of the price increases which became effective in June of
this year, the reduction in revenue from South Korea, where import prices are
higher than the Company's other markets, and a three percent price reduction in
the cost of LifePak for the Company's Subsidiary in Japan, Nu Skin Japan
Company, Limited ("Nu Skin Japan"), which was instituted during the third
quarter of 1997.
Distributor incentives as a percentage of revenue increased to 39.2% and
38.6% for the three and nine-month periods ended September 30, 1997,
respectively, from 37.1% and 37.2% for the same periods in 1996. The primary
reason for this increase was the reduced revenue in South Korea during the third
quarter of 1997, where commissions are capped at 35% of product revenue versus
the standard 42% of product revenue in the Company's other markets.
Selling, general and administrative expenses as a percentage of revenue
increased to 15.9% and 15.5% for the three and nine-month periods ended
September 30, 1997, respectively, from 13.8% and 14.8% for the same periods in
1996. This increase was primarily due to increased promotion expenses of
approximately $2 million resulting from the net expense to Nu Skin Japan of
sponsoring the Japan Supergames and approximately $2 million resulting from
the first quarter distributor conventions. In addition, other general and
administrative expenses, including the expenses of operating as a public
company, were higher in the third quarter of 1997 as each market increased
spending to support current operations and future growth.
Distributor stock expense of $4.5 million and $13.4 million for the three
and nine-month periods ended September 30, 1997, respectively, reflects the
one-time grant of the distributor stock options at an exercise price of 25% of
the initial public offering price in connection with the Offerings completed on
November 27, 1996. This non-cash expense will be recorded each quarter in 1997.
Operating income decreased to $35.8 million from $37.5 million for the
three-month period ended September 30, 1997, compared with the same period in
1996. The decrease was caused by the increase in distributor incentives,
promotion expenses and distributor stock expense. Operating income for the
nine-month period ended September 30, 1997 increased 13% to $104.8 million from
$92.6 for the same period in 1996. The increase was caused primarily by an
increase in revenue. Operating margin decreased to 15.8% and 15.7% for the three
and nine-month periods ended September 30, 1997, respectively, compared to 20.4%
and 19.6% for the same periods in 1996. This margin decrease was caused by the
distributor stock expense, increased distributor incentives and increased
selling, general and administrative expenses.
Other income increased by $2.4 million and $2.3 million for the three and
nine-month periods ended September 30, 1997, respectively, compared with the
same periods in 1996. The increase was primarily caused by $1.9 million and $0.3
million for the three and nine-month periods ended September 30, 1997,
respectively, of unrealized exchange gains resulting from forward exchange
contracts and $2.5 million and $2.3 million for the three and nine-month periods
ended September 30, 1997, respectively, of unrealized exchange gains resulting
from an intercompany loan from Nu Skin Japan to the Company's Hong Kong
Subsidiary, Nu Skin Hong Kong, Inc. ("Nu Skin Hong Kong").
Provision for income taxes increased to $14.6 million and $40.3 million
from $13.2 million and $33.8 million for the three and nine-month periods ended
September 30, 1997, respectively, compared with the same periods in 1996, due to
increased income. The effective tax rate was 37.3% and 37.1% for the three and
nine-month periods ended September 30, 1997 and was 34.4% and 35.9% for the
three and nine-month periods ended September 30, 1996. This increase is due to
increased earnings in Japan, the highest tax jurisdiction in the region,
relative to earnings in other markets.
Net income decreased by $0.7 million to $24.5 million from $25.2 million
for the three-month period ended September 30, 1997, compared with the same
period in 1996, due to the decrease in operating margin. Net income increased by
$8.0 million to $68.3 million from $60.3 million for the nine-month period ended
September 30, 1997, compared with the same period in 1996, due to increased
revenue and other income. Net income as a percentage of revenue decreased to
10.8% and 10.2% for the three and nine-month periods ended September 30, 1997,
respectively, compared to 13.7% and 12.8% for the same periods in 1996, due
primarily to the distributor stock expense, increased distributor incentives and
increased selling, general and administrative expenses.
Liquidity and Capital Resources
The Company underwent a reorganization and the Offerings in November 1996.
During the Offerings, the Company raised $98.8 million in net proceeds. As of
the date of the reorganization, the aggregate undistributed taxable S
corporation earnings of the Subsidiaries were $86.5 million. The Subsidiaries'
earned and undistributed S corporation earnings through the date of termination
of the Subsidiaries' S corporation status were distributed in the form of the S
Distribution Notes, promissory notes bearing interest at 6.0% per annum. From
the proceeds of the Offerings, $15.0 million was used to pay a portion of the S
Distribution Notes and the remaining balance of $71.5 million was paid in April
1997.
In November 1996, the Company purchased from NSI the distribution rights to
seven new markets in the region. These markets include Thailand, where
operations commenced in March 1997, and Indonesia, Malaysia, the Philippines,
the PRC, Singapore and Vietnam, where operations have not yet commenced. These
rights were purchased for $25.0 million, of which $5.0 million was paid from the
proceeds of the Offerings and an additional $10.0 million was paid in January
1997. At September 30, 1997, the Company had a $10.0 million short-term
obligation, due January 15, 1998, related to the purchase of these rights.
Interest accrues at a rate of 6.0% per annum on amounts due under this
obligation.
The Company generates significant cash flow from operations due to its
significant growth, high margins and low capital requirements. Additionally, the
Company does not extend credit to distributors, but requires payment prior to
shipping products. This process eliminates the need for accounts receivable from
distributors. During the nine months ended September 30, 1997, the Company
generated $37.9 million from operations compared to $65.8 million during the
nine months ended September 30, 1996. This decrease in cash flows from
operations is primarily due to the build up of inventories to support future
market demands and the payment of income taxes during the first quarter of 1997.
As of September 30, 1997, working capital was $131.9 million compared to
$66.2 million as of December 31, 1996. Cash and cash equivalents at September
30, 1997 were $154.2 million compared to $207.1 million at December 31, 1996.
Historically, the Company's principal need for funds has been for
distributor incentives, working capital (principally inventory purchases),
capital expenditures and the development of new markets. The Company has
generally relied entirely on cash flow from operations to meet its business
objectives without incurring long-term debt to unrelated third parties.
Capital expenditures, primarily for equipment, computer systems and
software, office furniture and leasehold improvements, were $4.6 million and
$4.0 million for the nine months ended September 30, 1997 and 1996,
respectively. In addition, the Company anticipates capital expenditures through
1998 of an additional $20.0 million to further enhance its infrastructure,
including computer systems and software, warehousing facilities and walk-in
distributor centers in order to accommodate future growth.
As a part of the Company's and NSI's strategy to motivate distributors with
equity incentives, the Company sold to NSI an option to purchase 1.6 million
shares of the Company's Class A Common Stock. NSI purchased the option with a
$13.1 million 10-year note payable to the Company bearing interest at 6.0% per
annum. It is anticipated that the note will be repaid as distributors begin to
exercise their options beginning in 1998.
Under its operating and other agreements with NSI, the Company incurs
related party payables. The Company had related party payables of $53.5 million
and $46.3 million at September 30, 1997 and December 31, 1996, respectively. In
addition, the Company had related party receivables of $5.3 million and $8.0
million, respectively, at those dates. These receivables include NSI's
co-sponsorship of the Japan Supergames for $2.0 million. Related party balances
outstanding in excess of 60 days bear interest at a rate of 2% above the U.S.
prime rate. As of September 30, 1997, no material related party payables or
receivables had been outstanding for more than 60 days.
Management considers the Company to be liquid and able to meet its
obligations on both a short and long-term basis. Management believes existing
cash balances together with future cash flows from operations will be adequate
to fund cash needs relating to the implementation of the Company's strategic
plans.
Currency Fluctuation and Exchange Rate Information
The Company's revenues and most of its expenses are recognized primarily
outside of the United States. Each entity's local currency is considered the
functional currency. All revenue and expenses are translated at weighted average
exchange rates for the periods reported. Therefore, the Company's reported sales
and earnings will be positively impacted by a weakening of the U.S. dollar and
will be negatively impacted by a strengthening of the U.S. dollar.
The Company purchases inventory from NSI in U.S. dollars and assumes
currency exchange rate risk with respect to such purchases. Local currency in
Japan, Taiwan, Hong Kong, South Korea and Thailand is generally used to settle
non-inventory transactions with NSI. Given the uncertainty of exchange rate
fluctuations, the Company cannot estimate the effect of these fluctuations on
its future business, product pricing, results of operations or financial
condition. However, because nearly all of the Company's revenue is realized in
local currencies and the majority of its cost of sales is denominated in U.S.
dollars, the Company's gross profits will be positively affected by a weakening
in the U.S. dollar and will be negatively affected by a strengthening in the
U.S. dollar. The Company seeks to reduce its exposure to fluctuations in foreign
exchange rates by creating offsetting positions through the use of foreign
currency exchange contracts. The Company does not use such financial instruments
for trading or speculative purposes. The Company regularly monitors its foreign
currency risks and periodically takes measures to reduce the impact of foreign
exchange fluctuations on the Company's operating results. The Company has
entered into significant hedging positions, which, in the aggregate,
approximated $37 million of forward exchange contracts at September 30, 1997.
These forward exchange contracts, along with the intercompany loan from Nu Skin
Japan to Nu Skin Hong Kong of approximately $50 million, were valued at the
quarter end exchange rate of 120.43 Japanese yen to the U.S. dollar.
Following are the weighted average currency exchange rates of $1 into local
currency for each of the Company's markets for the quarters listed:
<TABLE>
<S> <C> <C> <C>
1995 1996 1997
-------------------------------------- --------------------------------------- ----------------------------
1st 2nd 3rd 4th 1st 2nd 3rd 4th 1st 2nd 3rd
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
Japan(1) 96.2 84.4 94.2 101.5 105.8 107.5 109.0 112.9 121.4 119.1 118.1
Taiwan 26.2 25.6 27.0 27.2 27.4 27.4 27.5 27.5 27.5 27.7 28.4
Hong Kong 7.7 7.7 7.7 7.7 7.7 7.7 7.7 7.7 7.7 7.7 7.7
South Korea 786.9 763.1 765.6 769.1 782.6 786.5 815.5 829.4 863.9 889.6 894.8
Thailand 24.9 24.6 24.9 25.1 25.2 25.3 25.3 25.5 26.0 25.4 31.5
</TABLE>
- -----------
(1) Between December 31, 1996 and October 15, 1997, the exchange rates of $1
into Japanese yen achieved a high of 127.13 yen. Since January 1, 1992, the
highest and lowest exchange rates for the Japanese yen have been 134.82 and
80.63, respectively.
Outlook
Management anticipates continued strong results overall, with particular
strength in Japan. Historically, the Company has experienced modest growth in
the fourth quarter, which reflects increased revenue due to the year-end gift
buying season. Product introductions for the fourth quarter include ALOE-MX, an
aloe vera drink developed specifically for the Japanese market and introduced in
Japan in October, and Overdrive, a leading IDN sports nutrition product, which
was introduced in Taiwan in October and is expected to be introduced in South
Korea before the end of 1997. The Company opened a new distributor walk-in
center in Thailand in October and plans to open walk-in centers in Japan and
Taiwan by the end of the year.
Economic concerns throughout Southeast Asia are anticipated to have an
impact on the Company's operations in Thailand, which represents less than three
percent of revenue, and in the Philippines, which is anticipated to be opened in
early 1998. In response to these concerns, management has commenced initiatives
to increase local manufacturing in Asia and seek cost reductions on goods
imported from outside of Asia. These initiatives are anticipated to increase
revenue through more competitive local pricing and to stabilize gross margins.
In particular, in the Philippines the Company plans to market a new line of skin
and hair care products, under the Scion trademark, which will be manufactured
locally. Other efforts to seek cost reductions may include a reevaluation of the
Company's vendor relationships, including with NSI. In addition, the Company
will offer a modified compensation plan in countries where the Company believes
that average per capita income is relatively low, such as the Philippines, which
will be designed to reward distributors at lower sales volumes. The Company
plans to continue to expand its operations into the new markets for which it has
purchased exclusive distribution rights from NSI, beginning with the Philippines
in early 1998, and may consider expansion into other new markets.
In Thailand, Taiwan and South Korea, the recently depreciated local
currencies are anticipated to suppress future revenue results in these markets.
In addition, during the fourth quarter, the Company expects a modest decline in
revenue in South Korea and Thailand as compared to revenue results for the third
quarter. This revenue decline reflects, in part, the market cycle experienced by
the Company in most new markets, where significant initial revenue is followed
by market softening and declining revenue until strategic initiatives and
product introductions generate renewed growth. However, this market cycle
pattern has been exacerbated in Thailand and South Korea by adverse economic
conditions and/or media and consumer group attention.
Gross margins and distributor incentives are anticipated to remain
consistent with third quarter results. Selling, general and administrative
expenses as a percentage of sales are anticipated to be slightly lower in the
fourth quarter than in the third quarter, when the Company incurred significant
expenses in connection with certain promotional activities, which included
sponsoring a large distributor event in Thailand and the Japan Supergames, which
featured National Basketball Association stars. Additionally, management
anticipates that the distributor stock expense of approximately $18 million in
1997 will not continue thereafter.
Other income will continue to vary based on the fluctuation in the Japanese
yen as the Company currently has significant hedging positions. The Company's
effective tax rate may continue to increase slightly as Japanese revenue, where
statutory rates are the highest in the Company's markets, becomes a larger
percentage of total revenue for the Company.
Note Regarding Forward Looking Statements: The statements made above in
this Outlook section are forward-looking statements as defined in the Private
Securities Litigation Reform Act of 1995. These forward-looking statements
involve risks and uncertainties and are based on certain assumptions that may
not be realized. Actual results and outcomes may differ materially from the
those discussed or anticipated. Factors that might cause such differences
include, but are not limited to, risks and uncertainties associated with
fluctuations in foreign currency values relative to the U.S. dollar, adverse
economic and business conditions in the Company's markets, especially South
Korea and Thailand, management of the Company's growth, the Company's dependence
on independent distributors and the effects on distributors of the NSI
distributor equity program, potential adverse effects of the Company's planned
price increases on sales and distributor growth, the Company's planned expansion
into new markets and the introduction and promotion of new products in the
Company's existing markets, including the introduction of ALOE-MX in Japan and
the Scion product line in the Philippines, market acceptance in South Korea of
LifePak, the Company's core IDN product, adverse publicity regarding the Company
and other direct selling companies in South Korea, the opening of new
distributor walk-in centers in Japan, Thailand and Taiwan, modifications to the
Company's sales compensation plan in the Philippines, the reevaluation of vendor
relationships, the increase in local manufacturing relationships, regulatory
action against the Company or its distributors in any of the Company's markets
and particularly in South Korea, and risks inherent in the importation,
regulation and sale of products in the Company's markets. For a more detailed
discussion of these and other risks and uncertainties, please refer to all of
the documents filed by the Company with the Securities and Exchange Commission.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None. See Item 5 for a discussion of certain regulatory matters.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
The Company's subsidiaries are periodically subject to reviews and audits
by various governmental agencies, particularly in new markets, where the Company
has experienced high rates of growth. As previously disclosed, the Company's
South Korea Subsidiary, Nu Skin Korea, Inc. ("Nu Skin Korea"), has been subject
to audits by various South Korean regulatory agencies. Management believes that
the audits were precipitated largely as a result of Nu Skin Korea's rapid growth
and its position as a large importer of cosmetics and personal care products in
South Korea, as well as by recent South Korean trade imbalances, slowing
economic growth and consumer, media and industry campaigns targeted at foreign-
owned enterprises. South Korean regulatory agencies have reviewed a broad range
of issues relating to the operations of Nu Skin Korea, with a focus on reviewing
customs valuation issues and intercompany payments. Although certain issues
under review have been resolved, other issues continue to be reviewed by various
regulatory agencies.
The Company continues to believe that its actions have been in compliance
in all material respects with relevant regulations. Potential sanctions related
to the regulatory reviews in South Korea include warnings, fines, foreign
exchange restrictions or potential criminal prosecution of managers. The
regulatory reviews and any related sanctions could result in negative publicity
that could have a material adverse impact on the Company and its operations. The
Company is not aware of any negative publicity to date in South Korea regarding
these developments. The Company intends to continue to vigorously contest these
matters.
The regulatory environment with respect to multi-level marketing changes
from time to time. Within certain of the Company's existing and potential
markets, the Company believes that regulators are reviewing and attempting to
refine multi-level marketing regulations with a view toward eliminating the
activity of unscrupulous operators. The status of these reviews differs from
country to country. The Company is not aware of potential significant regulatory
changes in the near future in existing markets. The Company welcomes regulatory
scrutiny as it serves to restrict the activity of illegitimate companies to the
benefit of legitimate operators.
The regulation of multi-level marketing is also significantly impacted by
subjective factors, including the attitude of individual regulators and policy
makers with respect to multi-level marketing, which results in variations on the
application of relevant regulations.
In the PRC, holders of multi-level selling licenses were recently required
to submit applications to re-license. Of the 41 companies holding multi-level
selling permits in 1996, the Company believes that 40 had their licenses renewed
during the quarter ended September 30, 1997. A PRC regulatory agency also
requested that provincial regulators not grant additional multi-level selling
licenses pending review of the efficacy of overall regulation of the industry.
The application of this request may impact the Company's strategy for
developing operations in that market.
On July 17, 1997 the Company filed a pre-effective amendment No. 1 to its
registration statement originally filed on June 4, 1997 on behalf of certain
stockholders. The Company converted its registration statement to a resale shelf
offering and deleted references to the underwriters. The registration statement
has not been declared effective and the shares subject to the registration
statement can only be resold by the selling stockholders once the registration
statement has been declared effective and only in accordance with the plan of
distribution outlined in the registration statement. The Company currently has
no intention to proceed with the offering which is the subject of the
registration statement.
IDN(R) and the product names LifePak(TM), ALOE-MX(TM), Overdrive(TM)
and Scion(TM) are trademarks of NSI which are licensed to the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) 27 Financial Data Schedule
(b) The Company filed no reports on Form 8-K during the three months
ended September 30, 1997.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on this 13th day
of November, 1997.
NU SKIN ASIA PACIFIC, INC.
By: /s/ Corey B. Lindley
----------------------------------------
Corey B. Lindley
Its: Chief Financial Officer
(Principal Financial and Accounting
Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 154,204
<SECURITIES> 0
<RECEIVABLES> 13,633
<ALLOWANCES> 0
<INVENTORY> 59,723
<CURRENT-ASSETS> 272,030
<PP&E> 19,262
<DEPRECIATION> 8,949
<TOTAL-ASSETS> 326,287
<CURRENT-LIABILITIES> 140,156
<BONDS> 0
0
0
<COMMON> 84
<OTHER-SE> 186,047
<TOTAL-LIABILITY-AND-EQUITY> 326,287
<SALES> 667,438
<TOTAL-REVENUES> 667,438
<CGS> 187,692
<TOTAL-COSTS> 562,679
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 108,600
<INCOME-TAX> 40,280
<INCOME-CONTINUING> 68,320
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 68,320
<EPS-PRIMARY> .80
<EPS-DILUTED> .80
</TABLE>
