SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
-----------------
FORM 10-Q
(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, 1998
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 Enterprises, 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)
(801) 345-6100
(Registrant's telephone number, including area code)
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 16, 1998, 18,094,278 shares of the Company's Class A Common
Stock, $.001 par value per share, and 70,280,759 shares of the Company's Class B
Common Stock, $.001 par value per share, were outstanding.
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
NU SKIN ENTERPRISES, INC.
1998 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.......................10
Part II. Other Information
Item 1. Legal Proceedings.....................................................16
Item 2. Changes in Securities.................................................16
Item 3. Defaults upon Senior Securities.......................................16
Item 4. Submission of Matters to a Vote of Security Holders...................16
Item 5. Other Information.....................................................16
Item 6. Exhibits and Reports on Form 8-K......................................16
Signatures ...............................................................17
1
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Nu Skin Enterprises, Inc.
Consolidated Balance Sheets (Unaudited)
(in thousands, except share amounts)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
ASSETS
Current assets
<S> <C> <C>
Cash and cash equivalents $ 174,276 $ 174,300
Accounts receivable 12,376 11,074
Related parties receivable 19,843 23,008
Inventories, net 65,388 69,491
Prepaid expenses and other 57,139 38,716
----------- -----------
329,022 316,589
Property and equipment, net 35,467 27,146
Other assets, net 114,086 61,269
----------- -----------
Total assets $ 478,575 $ 405,004
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 10,574 $ 23,259
Accrued expenses 124,583 140,615
Related parties payable 13,621 10,038
Current portion of long-term debt 11,211 --
Notes payable to stockholders, current portion -- 19,457
----------- -----------
159,989 193,369
----------- -----------
Long-term debt, less current portion 129,600 --
Notes payable to stockholders, less current portion -- 116,743
Minority interest -- (15,753)
----------- -----------
Commitments and contingencies
Stockholders' equity
Preferred stock - 25,000,000 shares authorized, $.001 par value,
none and 1,941,331 shares issued and outstanding -- 2
Class A common stock - 500,000,000 shares authorized, $.001
par value, 14,986,790 and 11,758,011 shares issued and
outstanding 15 12
Class B common stock - 100,000,000 shares authorized, $.001
par value, 70,280,759 shares issued and outstanding 70 70
Additional paid-in capital 102,244 115,053
Retained earnings 137,138 33,541
Deferred compensation (6,725) (9,455)
Accumulated other comprehensive income (43,756) (28,578)
----------- -----------
188,986 110,645
----------- -----------
Total liabilities and stockholders' equity $ 478,575 $ 405,004
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
2
<PAGE>
Nu Skin Enterprises, Inc.
Consolidated Statements of Income (Unaudited)
(in thousands, except per share amounts)
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<TABLE>
<CAPTION>
Three Three Nine Nine
Months Ended Months Ended Months Ended Months Ended
September 30, September 30, September 30, September 30,
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenue $ 217,852 $ 243,147 $ 654,766 $ 713,266
Cost of sales 44,290 48,710 134,581 144,574
Cost of sales - amortization of inventory
step-up (Note 2) 8,640 -- 21,600 --
----------- ----------- ----------- -----------
Gross profit 164,922 194,437 498,585 568,692
----------- ----------- ----------- -----------
Operating expenses
Distributor incentives 79,961 93,370 238,359 269,050
Selling, general and administrative 47,600 50,889 142,301 155,577
Distributor stock expense -- 4,477 -- 13,431
----------- ----------- ----------- -----------
Total operating expenses 127,561 148,736 380,660 438,058
----------- ----------- ----------- -----------
Operating income 37,361 45,701 117,925 130,634
Other income (expense), net 3,101 3,224 10,595 8,182
----------- ----------- ----------- -----------
Income before provision for income taxes
and minority interest 40,462 48,925 128,520 138,816
Provision for income taxes 14,971 14,559 44,288 40,277
Minority interest -- 3,656 3,081 12,093
----------- ----------- ----------- -----------
Net income $ 25,491 $ 30,710 $ 81,151 $ 86,446
=========== =========== =========== ===========
Net income per share (Note 4):
Basic $ .30 $ .37 $ .97 $ 1.04
Diluted $ .30 $ .35 $ .94 $ .99
Weighted average common shares outstanding:
Basic 85,318 83,420 83,983 83,420
Diluted 86,242 87,368 86,319 87,364
Pro forma data:
Income before pro forma provision for
income taxes and minority interest $ 48,925 $ 128,520 $ 138,816
Pro forma provision for income taxes (Note 3) 18,592 47,424 52,750
Pro forma minority interest 2,267 1,944 7,498
----------- ----------- -----------
Pro forma net income $ 28,066 $ 79,152 $ 78,568
=========== =========== ===========
Pro forma net income per share (Note 4):
Basic $ .34 $ .94 $ .94
Diluted $ .32 $ .92 $ .90
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
Nu Skin Enterprises, Inc.
Consolidated Statements of Cash Flows (Unaudited)
(in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine Nine
Months Ended Months Ended
September 30, September 30,
1998 1997
------------ ------------
Cash flows from operating activities:
<S> <C> <C>
Net income $ 81,151 $ 86,446
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 9,232 5,768
Amortization of deferred compensation 2,730 17,243
Amortization of inventory step-up 21,600 --
Income applicable to minority interest 3,081 12,093
Changes in operating assets and liabilities:
Accounts receivable (1,302) (4,351)
Related parties receivable 3,165 (9,513)
Inventories, net 4,103 (7,217)
Prepaid expenses and other (18,423) (26,014)
Other assets (14,108) (3,880)
Accounts payable (12,685) (733)
Accrued expenses (19,032) (9,909)
Related parties payable 13,399 (28,196)
--------- ---------
Net cash provided by operating activities 72,911 31,737
--------- ---------
Cash flows from investing activities:
Purchase of property and equipment (14,414) (8,050)
Payments for lease deposits (1,660) (682)
Receipt of refundable lease deposits 1,066 129
--------- ---------
Net cash used in investing activities (15,008) (8,603)
--------- ---------
Cash flows from financing activities:
Payments on long-term debt (41,634) --
Proceeds from long-term debt 181,538 --
Payment to stockholders for notes payable (180,000) (71,487)
Repurchase of shares of common stock (1,521) --
Proceeds from capital contributions -- 29,845
Dividends paid -- (29,341)
--------- ---------
Net cash used in financing activities (41,617) (70,983)
--------- ---------
Effect of exchange rate changes on cash (16,310) (753)
--------- ---------
Net decrease in cash and cash equivalents (24) (48,602)
Cash and cash equivalents, beginning of period 174,300 214,823
--------- ---------
Cash and cash equivalents, end of period $ 174,276 $ 166,221
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
Nu Skin Enterprises, Inc.
Notes to Consolidated Financial Statements
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1. THE COMPANY
Nu Skin Enterprises, Inc. (the "Company"), is a network marketing
company involved in the distribution and sale of premium quality,
innovative personal care and nutritional products. The Company
distributes Nu Skin brand products in markets throughout the world
excluding North America. The Company's operations throughout the world
are divided into three regions: North Asia, which consists of Japan and
South Korea; Southeast Asia, which consists of Taiwan, Thailand, Hong
Kong (including Macau), the Philippines, Australia, and New Zealand; and
Other Markets, which consists of the United Kingdom, Austria, Belgium,
Denmark, France, Germany, Italy, Ireland, Poland, Portugal, Spain,
Sweden, the Netherlands (the Company's subsidiaries operating in these
countries are collectively referred to as the "Subsidiaries") and sales
to and license fees from the Company's North American private
affiliates.
The Company was incorporated on September 4, 1996 as a holding company
and acquired certain of the Subsidiaries (the "Initial Subsidiaries")
through a reorganization (the "Reorganization") which occurred November
20, 1996. Prior to the Reorganization, each of the Initial Subsidiaries
elected to be treated as an S corporation. In connection with the
Reorganization, the Initial Subsidiaries' S corporation status was
terminated on November 19, 1996, and the Company declared a distribution
to the stockholders that included all of the Initial 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 and received net proceeds of
$98.8 million (the "Underwritten 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, 1998 and December 31, 1997 and for the
three and nine-month periods ended September 30, 1998 and 1997. 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, 1997.
2. ACQUISITION OF NU SKIN INTERNATIONAL, INC. ("NSI") AND CERTAIN AFFILIATES
On March 27, 1998, the Company completed the acquisition (the "NSI
Acquisition") of the capital stock of NSI, NSI affiliates in Europe,
South America, Australia and New Zealand and certain other NSI
affiliates (the "Acquired Entities") for $70 million in preferred stock
and long-term notes payable to the stockholders of the Acquired Entities
(the "NSI Stockholders") totaling approximately $10.1 million. In
addition, contingent upon NSI and the Company meeting specific earnings
growth targets, the Company will pay up to $25 million in cash per year
over the next four years to the NSI Stockholders. Also, as part of the
NSI Acquisition, the Company assumed approximately $169.9 million in S
Distribution Notes. During the second quarter of 1998, the S
Distribution Notes and long-term notes payable to the NSI Stockholders
were paid in full. The contingent consideration paid, if any, will be
accounted for as an adjustment to the purchase price and allocated to
the Acquired Entities' assets and liabilities.
The NSI Acquisition was accounted for by the purchase method of
accounting, except for that portion of the Acquired Entities under
common control of a group of stockholders, which portion was accounted
for in a manner similar to a pooling of interests. The common control
group is comprised of the NSI Stockholders who are immediate family
members. The minority interest, which is
5
<PAGE>
Nu Skin Enterprises, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
comprised of the NSI Stockholders who are not immediate family members,
was acquired during the NSI Acquisition.
In connection with the NSI Acquisition, the Company recorded inventory
step-up of $21.6 million and intangible assets of $32.4 million. The
Company recorded amortization of inventory step-up totaling $8.6 million
and $21.6 million, and amortization of intangible assets totaling $0.5
million and $1.0 million, for the three and nine-month periods ended
September 30, 1998, respectively.
On May 5, 1998, the stockholders of the Company approved the automatic
conversion of the preferred stock issued in the NSI Acquisition into
2,986,663 shares of Class A Common Stock.
3. INCOME TAXES
As a result of the NSI Acquisition described in Note 2, the Acquired
Entities are no longer treated as S corporations for U.S. Federal income
tax purposes. The combined statements of income include a pro forma
presentation for income taxes, including the effect on minority
interest, which would have been recorded if the Acquired Entities had
been taxed as C corporations rather than as S corporations for the
nine-month period ended September 30, 1998 and for the three and
nine-month periods ended September 30, 1997.
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. Additionally, diluted earnings per share data gives
effect to all dilutive potential common shares that were outstanding
during the periods presented, including the convertible preferred stock
issued in the NSI Acquisition as if such shares had been converted to
Class A Common Stock.
5. FINANCIAL INSTRUMENTS
The Company's Subsidiaries enter into significant transactions with each
other and third parties which may not be denominated in the respective
Subsidiaries' functional currencies. 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 and through certain intercompany loans of foreign currency.
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. Gains
and losses on foreign currency forward contracts and certain
intercompany loans of foreign currency are recorded as other income and
expense in the consolidated statements of income.
At September 30, 1998 and December 31, 1997, the Company held foreign
currency forward contracts with notional amounts totaling approximately
$29.3 million and $51.0 million, respectively, to hedge foreign currency
items. The realized and unrealized net losses on these contracts were
$0.5 million and the realized and unrealized net gains on these
contracts were $2.9 million for the three and nine-month periods ended
September 30, 1998, respectively. These contracts have maturities
through February 1999.
At September 30, 1998, the intercompany loan from Nu Skin Japan to Nu
Skin Hong Kong totaled approximately $47.5 million. The Company recorded
unrealized exchange gains totaling $2.4 million and $5.2 million,
resulting from this intercompany loan for the three and nine-month
periods ended September 30, 1998, respectively.
6
<PAGE>
Nu Skin Enterprises, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
At September 30, 1998, the intercompany loan from Nu Skin Japan to the
Company totaled approximately $68.0 million. The Company recorded
unrealized exchange gains totaling $0.8 million and $2.8 million,
resulting from this intercompany loan for the three and nine-month
periods ended September 30, 1998, respectively. There was no loan at
September 30, 1997 from Nu Skin Japan to the Company.
During the third quarter of 1998, the Company designated as long-term
investments the intercompany loan from Nu Skin Japan to the Company and
the intercompany loan balance at the designation date from Nu Skin Japan
to Nu Skin Hong Kong. The net consolidated transaction losses on these
long-term investments subsequent to the designation date totaled
approximately $3.7 million, and are recorded in other comprehensive
income for the three and nine-month periods ended September 30, 1998.
6. NEW ACCOUNTING STANDARDS
Reporting Comprehensive Income
During the first quarter of 1998 the Company adopted Statement of
Financial Accounting Standards No. 130 ("SFAS 130"), Reporting
Comprehensive Income. Comprehensive income is defined as the change in
equity of a business enterprise during a period from transactions and
other events and circumstances from nonowner sources, and it includes
all changes in equity during a period except those resulting from
investments by owners and distributions to owners.
The components of comprehensive income, net of related tax, for the
three and nine-month periods ended September 30, 1998 and 1997, were as
follows (in thousands):
<TABLE>
<CAPTION>
Three Three Nine Nine
Months Ended Months Ended Months Ended Months Ended
September 30, September 30, September 30, September 30,
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net income $ 25,491 $ 30,710 $ 81,151 $ 86,446
Other comprehensive income, net of tax:
Foreign currency translation adjustments (1,015) (2,784) (9,562) (2,660)
------------- ------------- ------------- -------------
Comprehensive income $ 24,476 $ 27,926 $ 71,589 $ 83,786
============= ============= ============= =============
</TABLE>
Accumulated other comprehensive income is comprised of foreign currency
translation adjustments and consolidated transaction gains and losses on
certain intercompany loans designated as long-term investments.
Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use In March 1998, the American Institute of Certified Public
Accountants issued Statement of Position 98-1 ("SOP 98-1"), Accounting
for the Costs of Computer Software Developed or Obtained for Internal
Use. The statement is effective for fiscal years beginning after
December 15, 1998. Earlier application is encouraged in fiscal years for
which annual financial statements have not been issued. The statement
defines which costs of computer software developed or obtained for
internal use are capital and which costs are expensed. The Company
adopted SOP 98-1 effective January 1998. The adoption of SOP 98-1 does
not materially affect the Company's consolidated financial statements.
Reporting on the Costs of Start-Up Activities
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5 ("SOP 98-5"), Reporting on the Costs
of Start-Up Activities. The statement is effective for fiscal years
beginning after December 15, 1998. The statement requires costs of
start-up activities and organization costs to be expensed as incurred.
The Company will adopt SOP 98-5 for calendar year
7
<PAGE>
Nu Skin Enterprises, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
1999. The adoption of SOP 98-5 will not materially affect the Company's
consolidated financial statements.
Accounting for Derivative Instruments and Hedging Activities
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133 ("SFAS 133"), Accounting for
Derivative Instruments and Hedging Activities. The statement requires
companies to recognize all derivatives as either assets or liabilities,
with the instruments measured at fair value. The accounting for changes
in fair value, gains or losses, depends on the intended use of the
derivative and its resulting designation. The statement is effective for
all fiscal quarters of fiscal years beginning after June 15, 1999. The
Company will adopt SFAS 133 by January 1, 2000. The Company is currently
evaluating the impact the adoption of SFAS 133 will have on the
Company's consolidated financial statements.
7. LONG-TERM DEBT
On May 8, 1998, the Company and its Japanese subsidiary Nu Skin Japan
Co., Ltd. entered into a $180 million credit facility with a syndicate
of financial institutions for which ABN-AMRO, N.V. acted as agent. This
credit facility was used to satisfy Company liabilities which were
assumed as part of the NSI Acquisition. The Company borrowed $110
million and Nu Skin Japan Co., Ltd. borrowed the Japanese Yen equivalent
of $70 million denominated in local currency. The outstanding balance on
the credit facility was $140.8 million at September 30, 1998.
The U.S. portion of the credit facility bears interest at either a base
rate as specified in the credit facility or the London Inter-Bank Offer
rate plus an applicable margin, in the borrower's discretion. The
Japanese portion of the credit facility bears interest at either a base
rate as specified in the credit facility or the Tokyo Inter-Bank Offer
rate plus an applicable margin, in the borrower's discretion. The
maturity date for the credit facility is three years from the borrowing
date, with a possible extension of the maturity date upon approval of
the then outstanding lenders. Interest expense on the credit facility
totaled $1.5 million and $2.7 million for the three and nine-month
periods ended September 30,1998, respectively.
8. CONVERSION OF COMMON STOCK
On July 20, 1998, the Board of Directors authorized the Company to
request the holders of the Class B Common Stock to convert up to 15
million shares of Class B Common Stock to Class A Common Stock. The
Company continues to pursue agreement from such stockholders and
anticipates that following the agreement of such stockholders this
conversion will occur during the fourth quarter of 1998.
9. COMMON STOCK REPURCHASE PROGRAM
On July 21, 1998, the Board of Directors authorized the Company to
repurchase up to $10 million of the Company's outstanding shares of
Class A Common Stock. As of September 30, 1998, the Company had
repurchased 97,900 shares for an aggregate price of approximately $1.5
million.
10. SUBSEQUENT EVENTS
On October 16, 1998, the Company completed the acquisition of
privately-held Generation Health Holdings, Inc., the parent company of
Pharmanex, Inc. (the "Pharmanex Acquisition"), for approximately 4.1
million shares of the Company's Class A Common Stock, including
approximately 260,000 shares issuable upon exercise of options assumed
by the Company. The Company also assumed approximately $30 million in
liabilities. In addition, the final purchase price may include up
8
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Nu Skin Enterprises, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
to approximately $33 million in additional consideration depending upon
the performance of the capital markets and the Company's stock during
the year following closing.
In connection with the closing of the Pharmanex Acquisition, the Company
paid approximately $29 million relating to the assumed liabilities.
The Pharmanex Acquisition will be accounted for by the purchase method
of accounting. The Company is in the process of making allocations of
its acquisition costs to the acquired assets and liabilities of
Generation Health Holdings, Inc.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
1998 compared to 1997
Revenue decreased 10.4% and 8.2% to $217.9 million and $654.8 million
from $243.1 million and $713.3 million for the three and nine-month periods
ended September 30, 1998, respectively, compared with the same periods in 1997.
The decrease in revenue resulted primarily from significant weakening of the
Japanese yen and other Asian currencies relative to the U.S. dollar, an
increasing competitive environment in Taiwan and the economic downturn in South
Korea and Thailand.
Revenue in North Asia, which consists of Japan and South Korea,
decreased to $161.6 million and $466.7 million from $171.1 million and $495.6
million for the three and nine-month periods ended September 30, 1998,
respectively, compared with the same periods in 1997. Economic challenges and a
weakened currency in South Korea resulted in a significant decline in South
Korean revenue for the three and nine-month periods ended September 30, 1998
compared to the same periods in 1997. Revenue in Japan decreased 1.2% and
increased 7.9% for the three and nine-month periods ended September 30, 1998,
respectively. The decrease in revenue in U.S. dollars for the three-month period
ended September 30, 1998 was due primarily to a 18.1% weakening of the yen from
the third quarter of 1997 to the third quarter of 1998. In local currency,
revenue in Japan increased by 14.4% and 21.8% for the three and nine-month
periods ended September 30, 1998, respectively, compared to the same periods in
1997.
Revenue in Southeast Asia, which consists of Taiwan, Thailand, Hong
Kong, the Philippines, Australia and New Zealand, totaled $38.1 million and
$123.7 million for the three and nine-month periods ended September 30, 1998, a
decrease of 34.2% and 30.5%, respectively, from revenue of $57.9 million and
$178.1 million during the three and nine-month periods ended September 30, 1997.
The Company's operations in Taiwan have continued to suffer the impact of
increased competition. In addition, the Company's operations in Thailand have
been impacted negatively by Thailand's economic challenges and currency
devaluation.
The declines in North and Southeast Asia were partially offset by
aggregate revenue increases in the Company's other markets, which include the
United Kingdom, Germany, Italy, the Netherlands, France, Belgium, Spain,
Portugal, Ireland, Austria, Poland, Denmark, Sweden and sales to and license
fees from the Company's North American private affiliates. Aggregate revenue in
these markets increased to $18.1 million and $64.4 million from $14.2 million
and $39.6 million, an increase of 27.5% and 62.6%, for the three and nine-month
periods ended September 30, 1998, respectively, compared to the same periods in
1997. These increases were primarily due to increased revenue from the Company's
North American private affiliates following a successful convention held in the
first quarter of 1998 in the United States, as well as increased sales in Europe
following the opening of Poland, Denmark and Sweden in 1998 and the introduction
of nutritional products in several markets in 1998.
Gross profit as a percentage of revenue was 75.7% and 80.0% for the
three months ended September 30, 1998 and 1997, respectively, and was 76.1% and
79.7% for the nine months ended September 30, 1998 and 1997, respectively. The
amortization of the step-up of inventory from the NSI Acquisition increased cost
of sales by $8.6 million and $21.6 million for the three and nine-month periods
ended September 30, 1998, respectively. Without this non-recurring charge, gross
profit as a percentage of revenue would have been 79.7% and 79.4% for the three
and nine-month periods ended September 30, 1998, respectively, a slight decrease
from 1997 gross profit. The Company purchases goods in U.S. dollars and
recognizes revenue in local currency and is consequently subjected to exchange
rate risks in its gross margins. The negative pressure on gross margins, due
primarily to weakened currencies throughout the Company's Asian markets, was
offset by gross margin improvement as a result of price increases throughout
Asia which occurred during the second quarter of 1997. In addition, increased
local manufacturing efforts are designed to improve and stabilize gross margins,
including the local manufacturing in Taiwan of LifePak, the Company's leading
nutritional product.
10
<PAGE>
Distributor incentives as a percentage of revenue decreased to 36.7% and
36.4% for the three and nine-month periods ended September 30, 1998 from 38.4%
and 37.7% for the three and nine-month periods ended September 30, 1997,
respectively. The primary reason for this decrease was increased revenue from
sales to and license fees from the Company's North American private affiliates
which is not subject to incentives being paid by the Company.
Selling, general and administrative expenses as a percentage of revenue
increased to 21.8% from 20.9% for the three-months ended September 30, 1998,
compared with the same period in 1997. This increase was due to an increase in
U.S. dollar-based selling, general and administrative expenses, resulting from
the NSI Acquisition. Selling, general and administrative expenses remained
nearly constant as a percentage of revenue at 21.7% for the nine-month period
ended September 30, 1998, compared to 21.8% for the same period in 1997. In
dollar terms, selling, general and administrative expenses decreased from $50.9
million and $155.6 million to $47.6 million and $142.3 million for the three and
nine-month periods ended September 30, 1998, respectively, compared with the
same periods in 1997. These decreases were primarily due to the weakened local
currencies in which the majority of these expenses are denominated.
Distributor stock expense of $4.5 million and $13.4 million for the
three and nine-month periods ended September 30, 1997, respectively, reflects a
one-time grant of distributor stock options at an exercise price of $5.75 per
share, 25% of the per share offering price in the Company's initial public
offering completed in November 1996. This non-cash expense is non-recurring and
was only recorded in the fourth quarter of 1996 and in each of the four quarters
of 1997.
Operating income decreased 18.2% and 9.7% to $37.4 million and $117.9
million from $45.7 million and $130.6 million for the three and nine-month
periods ended September 30, 1998, respectively, compared with the same periods
in 1997. Operating margin decreased to 17.1% and 18.0% from 18.8% and 18.3% for
the three and nine-month periods ended September 30, 1998 compared with the same
periods in 1997, respectively. The operating income and margin decreases were
caused primarily by the decrease in U.S. dollar revenue and by the non-recurring
amortization of inventory step-up recorded in the second and third quarters of
1998.
Other income remained nearly constant at approximately $3.0 million for
the three months ended September 30, 1998 and increased by $2.4 million for the
nine-month period ended September 30, 1998, compared with the same periods in
1997. The increase for the nine-month periods was primarily caused by the
hedging gains from forward contracts and intercompany loans recorded in the
second quarter of 1998.
Provision for income taxes increased to $15.0 million from $14.6 million
for the three months ended September 30, 1998 compared with the same period in
1997 due to decreased income that was offset by the increase in the effective
tax rate from 29.8% to 37.0% for the same periods. The increase in the effective
tax rate is due to the NSI Acquisition. Provision for income taxes increased to
$44.3 million from $40.3 million for the nine months ended September 30, 1998
compared with the same period in 1997 due to a slight decrease in income that
was offset by the increase in the effective tax rate to 34.5% from 29.0%. The
pro forma provision for income taxes presents income taxes as if the Acquired
Entities had been taxed as C corporations rather than as S corporations for the
three months ended September 30, 1997 and for the nine-month periods ended
September 30, 1998 and 1997. On a pro forma basis, the effective tax rate for
the three and nine-month periods ended September 30, 1997 was 38.0% and was
36.9% for the nine-months ended September 30, 1998.
Minority interest relates to the earnings of the Acquired Entities which
are not under common control. The minority interest owed at March 26, 1998 was
purchased as part of the NSI Acquisition. Accordingly, minority interest does
not continue after the NSI Acquisition.
Net income decreased by $5.2 million to $25.5 million and $81.2 million
from $30.7 million and $86.4 million for the three and nine-month periods ended
September 30, 1998, respectively, compared with the same periods in 1997 due
primarily to the amortization of inventory step-up recorded in 1998 offset by
distributor stock expense recorded in 1997. Net income as a percentage of
revenue decreased to 11.7% for the three months ended September 30, 1998 as
compared to 12.6% for the same period in 1997 and increased from 12.1% to 12.4%
for the nine months ended September 30, 1998 compared to the same period in
1997.
11
<PAGE>
Liquidity and Capital Resources
Historically, the Company's principal needs for funds have 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 to fund
operating activities.
The Company generates significant cash flow from operations due to
favorable gross margins and minimal capital requirements. Additionally, the
Company does not extend credit to distributors, but requires payment prior to
shipping products. This process eliminates the need for accounts receivable from
distributors. During the first quarter of each year, the Company pays
significant accrued income taxes in many foreign jurisdictions including Japan.
These large cash payments generally more than offset significant cash generated
in the first quarter. During the nine months ended September 30, 1998, the
Company generated $72.9 million from operations compared to $31.7 million
generated during the nine months ended September 30, 1997. This increase in cash
generated from operations is primarily due to reduced inventory levels and the
repayment of significant related party payables to the Company's North American
private affiliates in 1997 by NSI in connection with the spin-off of its U.S.
operations.
As of September 30, 1998, working capital was $169.0 million compared to
$123.2 million as of December 31, 1997. This increase is largely due to
increases in prepaid expenses and a reduction of accrued liabilities both
resulting from the payment of foreign taxes in excess of the U.S. corporate tax
rate of 35%. Cash and cash equivalents at September 30, 1998 and 1997 remained
constant at $174.3 million.
Capital expenditures, primarily for equipment, computer systems and
software, office furniture and leasehold improvements, were $14.4 million and
$8.1 million for the nine months ended September 30, 1998 and 1997,
respectively. In addition, the Company anticipates additional capital
expenditures in 1998 and 1999 of $25 million to further enhance its
infrastructure, including enhancements to computer systems and software,
warehousing facilities and walk-in distributor centers in order to accommodate
anticipated future growth.
In March 1998, the Company completed its acquisition of the Acquired
Entities for $70 million in preferred stock and long-term notes payable to the
NSI Stockholders totaling approximately $10.1 million. In addition, contingent
upon NSI and the Company meeting certain earnings growth targets, the Company
may pay up to $25 million in cash per year over the next four years. Also, as
part of the NSI Acquisition, the Company assumed approximately $169.9 million in
S Distribution Notes due in equal monthly installments over the next seven
years. During the second quarter of 1998, the S Distribution Notes and long-term
notes payable to the NSI Stockholders were paid in full with proceeds from the
credit facility described below. The contingent consideration paid, if any, will
be accounted for as an adjustment to the purchase price and allocated to the
Acquired Entities' assets and liabilities.
In May 1998, the Company and its Japanese subsidiary Nu Skin Japan Co.,
Ltd. entered into a $180 million credit facility with a syndicate of financial
institutions for which ABN-AMRO, N.V. acted as agent. This credit facility was
used to satisfy Company liabilities which were assumed as part of the NSI
Acquisition. The Company borrowed $110 million and Nu Skin Japan Co., Ltd.
borrowed the Japanese Yen equivalent of $70 million denominated in local
currency. No payments were made during the third quarter of 1998 relating to the
$180.0 million credit facility. The U.S. portion of the credit facility bears
interest at either a base rate as specified in the credit facility or the London
Inter-Bank Offer rate plus an applicable margin, in the borrower's discretion.
The Japanese portion of the credit facility bears interest at either a base rate
as specified in the credit facility or the Tokyo Inter-Bank Offer rate plus an
applicable margin, in the borrower's discretion. The maturity date for the
credit facility is three years from the borrowing date, with a possible
extension of the maturity date upon approval of the then outstanding lenders.
The credit facility provides that the amounts borrowed are to be used for
general corporate purposes. The credit facility also contains other terms and
conditions and affirmative and negative financial covenants customary for credit
facilities of this type.
In July 1998, the Board of Directors authorized the Company to
repurchase up to $10 million of the Company's outstanding shares of Class A
Common Stock. As of September 30, 1998, the Company had repurchased 97,900
shares for an aggregate price of approximately $1.5 million.
12
<PAGE>
In October 1998, the Company completed the acquisition of privately-held
Generation Health Holdings, Inc., the parent company of Pharmanex, Inc. (the
"Pharmanex Acquisition"), for approximately 4.1 million shares of the Company's
Class A Common Stock. The Company also assumed approximately $30 million in
liabilities. In addition, the final purchase price may include up to
approximately $33 million in additional consideration depending upon the
performance of the capital markets and the Company's stock during the year
following closing. In connection with the closing of the Pharmanex Acquisition,
the Company paid approximately $29 million relating to the assumed liabilities.
Under its operating agreements with other Nu Skin affiliated companies,
the Company incurs related party payables and receivables. The Company had
related party payables of $13.6 million and $10.0 million at September 30, 1998
and December 31, 1997, respectively. In addition, the Company had related party
receivables of $19.8 million and $23.0 million, respectively, at those dates.
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, 1998, 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 currently 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.
Year 2000
The Company has developed a comprehensive plan to address Year 2000
issues. In connection with this plan, the Company has established a committee
that is responsible for assessing and testing the Company's systems to identify
Year 2000 issues, and overseeing the upgrade or remediation of non-compliant
Year 2000 systems. This committee reports on a regular basis to the executive
management team of the Company and the Audit Committee of the Board of Directors
on the progress and status of the plan and the Year 2000 issues affecting the
Company.
To date, the Company has completed a broad scope assessment and audit of
its information technology systems and non-information technology systems to
identify and prioritize potential Year 2000 issues and is in the middle of
performing a micro-based assessment designed to identify specific Year 2000
issues at the hardware, software, and processing levels. Through this process
the Company has identified potential Year 2000 issues in its information systems
and is in the process of addressing these issues through upgrades and other
remediation. The Company currently estimates that the cost of all upgrades
related to Year 2000 issues, including scheduled upgrades intended primarily to
increase efficiencies within the Company and also address Year 2000 issues, are
anticipated to be approximately $10 million through 1999, which the Company
anticipates will be funded by cash from operations. The Company currently
anticipates that it will complete the micro-based analysis and remediation on
all of its significant in-house systems by the first quarter of 1999. In 1999,
the Company will continue to run broad scope tests of its in-house systems to
confirm that it has adequately addressed all Year 2000 issues and continue its
work on the systems of its foreign offices.
As part of the Year 2000 plan, the Company is also assessing and
monitoring the Company's vendors and suppliers and other third parties for Year
2000 readiness. To date the committee has sent questionnaires to these third
parties seeking their assessment and evaluation of their own Year 2000 readiness
and has received responses back from a substantial majority of these third
parties. Members of the committee have already begun follow-up calls to the top
50 vendors of the Company and plan to visit the Company's significant suppliers
and vendors in person for purposes of evaluating their Year 2000 readiness and
sharing Year 2000 information. The Company will continue the follow-up with
third party vendors throughout 1999.
Based on the Company's evaluation of the Year 2000 issues affecting the
Company, the Company believes that Year 2000 readiness of its vendors and
suppliers, which is beyond the control of the Company, is currently the most
significant area of risk, particularly in its foreign markets. The Company does
not believe it is possible at this time to quantify or estimate the most
reasonable worst case year 2000 scenario. However, the Company is beginning to
formulate contingency plans to limit, to the extent possible, interruption of
the Company's operations arising from the failure of third parties to be Year
2000 compliant as it moves forward in the implementation of its Year 2000 plan.
The Company will continue to work with
13
<PAGE>
third parties as indicated above to further evaluate and quantify this risk and
will continue the development of contingency plans over the next twelve months
as this process moves forward. There can be no assurance, however, that the
Company will be able to successfully identify and develop contingency plans for
all Year 2000 issues that could, directly or indirectly, adversely affect the
Company's operations, some of which are beyond the control of the Company. In
particular, the Company cannot predict or evaluate domestic and foreign
governments' preparation for the Year 2000 or the readiness of other third
parties (domestic and foreign) that do not have relationships with the Company,
and the resulting impact that the failure of such parties to be Year 2000
compliant may have on the economy in general and on the Company's business.
The foregoing discussion of the Year 2000 issues contain forward-looking
statements that represents the Company's current expectations or beliefs. These
forward looking statements are subject to various risks and uncertainties that
could cause outcomes to be different from those currently anticipated including
those risks identified under the heading "Note Regarding Forward Looking
Statements."
Seasonality and Cyclicality
The direct selling industry is impacted by certain seasonal trends such
as major cultural events and vacation patterns. For example, Japan, Taiwan, Hong
Kong, South Korea and Thailand celebrate their respective local New Year in the
Company's first quarter. Management believes that direct selling in Japan and
Europe is also generally negatively impacted during August, when many
individuals traditionally take vacations.
Generally, the Company has experienced rapid revenue growth in each new
market from the commencement of operations. In Japan, Taiwan and Hong Kong, the
initial rapid growth was followed by a short period of stable or declining
revenue followed by renewed growth fueled by new product introductions, an
increase in the number of active distributors and increased distributor
productivity. In South Korea, the Company experienced a significant decline in
its 1997 revenue from revenue in 1996 and experienced additional sequential
declines in the first and second quarters of 1998. Revenue in Thailand also
decreased significantly after the commencement of operations in March 1997.
Management believes that the revenue declines in South Korea and Thailand were
partly due to normal business cycles in new markets but were primarily due to
volatile economic conditions in those markets. In addition, the Company may
experience variations on a quarterly basis in its results of operations, as new
products are introduced and new markets are opened. No assurance can be given
that the Company's revenue growth rate in new markets where Nu Skin operations
have not commenced will follow this pattern.
Currency Fluctuation and Exchange Rate Information
The Company's revenue and most of its expenses are recognized primarily
outside of the United States except for inventory purchases which are primarily
transacted in U.S. dollars from vendors in 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.
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 and
through certain intercompany loans of foreign currency. 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. During the third quarter of 1998, the Company designated as long-term
investments the intercompany loan from Nu Skin Japan to the Company and the
intercompany loan balance at the designation date from Nu Skin Japan to Nu Skin
Hong Kong.
14
<PAGE>
Outlook
Management currently anticipates earnings growth in 1998 and annual
revenue and earnings growth in 1999. This growth is expected to result in part
from continued growth in Japan in local currency terms, improved margins
resulting from the recent NSI Acquisition and the strengthening of local
currencies against the U.S. dollar. Further, expansion into new markets,
specifically Brazil, is expected to contribute to growth in revenue and
earnings. Additionally, the Company intends to continue pursuing strategic
initiatives to minimize the impact of fluctuating currencies and economies in
Asia by diversifying its markets, moving more of its manufacturing to local
markets, implementing enhancements to its sales compensation plan and seeking
cost reductions from vendors. Revenue in the fourth quarter of 1998 is
anticipated to be up sequentially and from the fourth quarter of 1997. These
revenue gains are expected to be led by Japan where current plans include a
major convention during the fourth quarter of 1998, the introduction of a new
water purification product line as well as other nutritional and personal care
products and the recent strengthening of the Japanese yen against the U.S.
dollar. Additionally, the Company has announced plans for operations in Brazil
to commence in the fourth quarter. The Company's anticipated revenue and
earnings growth, however, could be adversely affected by fluctuations in Asian
currencies, particularly the yen, and the continued weakening of Asian
economies.
Operating margins in the fourth quarter of 1998 are expected to improve
in relation to the anticipated revenue growth in the fourth quarter of 1998 in
spite of an additional $2 to $3 million of operating expenses (including
research and development costs) resulting from the Pharmanex Acquisition.
Note Regarding Forward-Looking Statements
Certain statements made above in the Liquidity and Capital Resources
section, the Year 2000 section and the Outlook section are "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995 (the "Reform Act"). These forward-looking statements involve risks and
uncertainties and are based on certain assumptions that may not be realized.
Actual results and outcomes may differ materially from those discussed or
anticipated. The forward-looking statements and associated risks described in
this filing relate to, among other things, (i) the anticipation of significant
cash flow from operations, (ii) the Company's expectation that it will be able
to rely entirely on cash flow from operations to fund its business objectives
without incurring long-term debt to unrelated third parties, (iii) the Company's
expectation that it will be able to successfully address any Year 2000 related
issues, including with third parties, as more fully described under the Year
2000 section above, (iv) the Company's expectation concerning its ability to
develop viable contingency or back up plans in the event any of its systems or
the systems of its vendors or suppliers are not Year 2000 compliant, (v) the
Company's expectation that it will be able to fund its Year 2000 program from
cash from operations, (vi) management's belief that the Company is liquid and
able to meet its obligations both on a short and long-term basis, (vii) the
anticipation of earnings growth in 1998 and annual revenue and earnings growth
in 1999, (viii) management's belief that revenue in the fourth quarter will be
up sequentially and from the fourth quarter of 1997, (ix) the planned expansion
into Brazil, (x) the Company's intentions to pursue strategic initiatives to
minimize the impact of fluctuating foreign currencies and economies in Asia by
diversifying its markets, moving more of its manufacturing to local markets,
implementing enhancements to its sales compensation plan and seeking cost
reductions from vendors, (xi) the Company's plan to implement forward contracts
and other hedging strategies to manage foreign currency risks, and (xii) the
expected improvement in operating margins in the fourth quarter in relation to
the anticipated revenue growth.
Important factors and risks that might cause actual results to differ
from those anticipated include, but are not limited to: (a) lower than expected
revenue, revenue growth and cash flow from operations because of adverse
economic, business or political conditions, increased competition, adverse
publicity in the Company's markets, particularly Japan and Taiwan, or the
Company's inability, for any reason, to open new markets, introduce new
products, implement its marketing and local sourcing initiatives and other
strategic plans as well as the potential negative effect of distributor actions
such as decreased selling efforts or increased turnover; (b) variations in
operating results including revenue, gross profit and earnings caused by
continued fluctuations in foreign currency values; (c) the Company's inability
to favorably implement forward contracts and other hedging strategies to manage
foreign currency risk; (d) difficulties in integrating the NSI operations and
the Pharmanex operations with the Company's operations; (e) the inability of the
Company to successfully establish manufacturing facilities in foreign markets at
lower costs while maintaining the quality and marketing position of its
products; (f) unanticipated problems or circumstances,
15
<PAGE>
including any regulatory and other legal issues, that may prevent or delay
the Company from expanding into new markets, or distributing its products; (g)
the inability of the Company to gain market acceptance of new products,
including the Company's proposed home water filtration product in Japan, which
represents a new market segment, and the locally manufactured LifePak in Taiwan;
(h) increased expenditures required to address the Year 2000 issue if the
Company's technology requirements change or unforseen problems are discovered;
(i) risks that the Company's and its vendors' plans to remedy Year 2000 issues
may be inadequate which could result in disruptions of the Company's business;
(j) increased government regulation of direct selling activities and products in
existing and future markets such as the PRC's recent restrictions on direct
selling; (k) management's inability to effectively manage the Company's growth;
(l) the Company's inability to renegotiate or adjust vendor relationships
favorable to the Company; (m) risks inherent in the importation, regulation and
sale of personal care and nutritional products in the Company's markets
including product liability issues; (n) the Company's reliance on and the
concentration of outside manufacturers; (o) taxation and transfer pricing
issues, including the Company's inability to fully use its foreign tax credits;
(p) seasonal and cyclical trends; and (q) difficulties in integrating the
Pharmanex products from the mass market into the Company's distribution channel
without incurring undue expenses. For a more detailed discussion of risks and
uncertainties related to the Company's business, please refer to the Company's
Form 10-K for the year ended December 31, 1997, and any amendments thereto, and
other documents filed by the Company with the Securities and Exchange
Commission.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Reference is made to Part II of Item I of the Company's Quarterly
Report on Form 10-Q for the quarterly period ended June 30, 1998.
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
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Regulation S-K
Number Description
-------------- -----------
27.1 Financial Data Schedule - Nine Months Ended
September 30, 1998
(b) Reports on Form 8-K. The Company did not file a Current Report on
Form 8-K during the quarterly period ended September 30, 1998.
16
<PAGE>
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, 1998.
NU SKIN ENTERPRISES, INC.
By: /s/ Corey B. Lindley
Corey B. Lindley
Its: Chief Financial Officer
(Principal Financial and Accounting
Officer)
17
<PAGE>
EXHIBIT INDEX
27.1 Financial Data Schedule - Nine Months Ended
September 30, 1998
18
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<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 174,276
<SECURITIES> 0
<RECEIVABLES> 12,376
<ALLOWANCES> 0
<INVENTORY> 65,388
<CURRENT-ASSETS> 329,022
<PP&E> 86,955
<DEPRECIATION> 51,488
<TOTAL-ASSETS> 478,575
<CURRENT-LIABILITIES> 159,989
<BONDS> 129,600
0
0
<COMMON> 85
<OTHER-SE> 188,901
<TOTAL-LIABILITY-AND-EQUITY> 478,575
<SALES> 654,766
<TOTAL-REVENUES> 654,766
<CGS> 156,181
<TOTAL-COSTS> 536,841
<OTHER-EXPENSES> 0
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<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 128,520
<INCOME-TAX> 44,288
<INCOME-CONTINUING> 81,151
<DISCONTINUED> 0
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<NET-INCOME> 81,151
<EPS-PRIMARY> .97
<EPS-DILUTED> .94
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