Tender-Offer Statement — Going-Private Transaction — Schedule 13E-3
Filing Table of Contents
Document/Exhibit Description Pages Size
1: SC 13E3 Amway Asia Pacific Ltd/New Aap Ltd SC 13E3 4 30K
2: EX-99.A.1 Exhibit (A)(1) 60 328K
3: EX-99.A.3 Exhibit (A)(3) 2 9K
4: EX-99.A.4 Exhibit (A)(4) 1 8K
5: EX-99.C.4 Exhibit (C)(4) 66 190K
6: EX-99.I Exhibit (I) 73 381K
7: EX-99.J Exhibit (J) 1 6K
Exhibit (i)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
F O R M 2 0 - F
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
----------------
FOR THE FISCAL YEAR ENDED AUGUST 31, 1999
COMMISSION FILE NUMBER 1-12548
AMWAY ASIA PACIFIC LTD.
(Exact name of Registrant as specified in its charter)
BERMUDA
(Jurisdiction of incorporation or organization)
38/F THE LEE GARDENS
33 HYSAN AVENUE
CAUSEWAY BAY, HONG KONG
(Address of principal executive offices)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT.
Name of each exchange
Title of each class on which registered
Common Stock, par value New York Stock Exchange
U.S.$0.01 per share
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT.
None
SECURITIES FOR WHICH THERE IS A REPORTING OBLIGATION
PURSUANT TO SECTION 15(d) OF THE ACT.
Common Stock, par value U.S.$0.01 per share.
This Annual Report consists of 73 pages.
Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of the close of the period covered by the annual
report.
Outstanding as of
Title of class August 31, 1999
-------------- -----------------
Common Stock, U.S. $0.01 par 56,441,960 shares
value per share
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ___
-----
Indicate by check mark which financial statement item the registrant has elected
to follow.
Item 17 Item 18 X
----- ---
In addition to historical information, this Annual Report on Form 20-F
contains forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934
(the "Exchange Act"). All statements other than statements of historical
information provided herein are forward-looking statements and may contain
information about financial results, economic conditions, trends and known
uncertainties. The forward-looking statements contained herein are subject to
certain risks and uncertainties that could cause actual results to differ
materially from those reflected in the forward-looking statements. Factors that
might cause such a difference include, but are not limited to, those discussed
in the sections entitled "Description of Business-Government Regulation,"
"Description of Business--Risks and Uncertainties" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Outlook and -
Forward Looking Statements." Readers are cautioned not to place undue reliance
on these forward-looking statements, which reflect management's analysis only as
of the date hereof. The Company undertakes no obligation to publicly revise
these forward-looking statements to reflect events or circumstances that arise
after the date hereof. In addition to the disclosure contained herein, readers
should carefully review any disclosure of risks and uncertainties contained in
other documents the Company has filed or will file from time to time with the
Securities and Exchange Commission.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Amway Asia Pacific Ltd., a Bermuda corporation (the "Company"), was
incorporated in 1993. The Company, directly or through controlled affiliates, is
the exclusive distribution vehicle for Amway Corporation ("Amway") in Australia,
Brunei, China (the mainland, the Hong Kong Special Administrative Region, Macau
and Taiwan), Malaysia, New Zealand, and Thailand. References to the Company
include the Company's controlled affiliates where the context so requires.
References herein to "China" refer exclusively to the mainland of China. The
Company offers products principally in four core Amway product lines: Personal
Care, Nutrition & Wellness, Home Care and Home Tech. It also offers catalog
products in certain markets and Other Products and Services.
The Company believes the Amway Sales and Marketing Plan (the "Sales
Plan") is fundamental to the Company's operations. In China, the Sales Plan and
the Company's overall mode of operations are different than in its other
markets. These differences are described below in "-- China Operations". The
discussion of the Sales Plan and the Company's business below and as set forth
in " - Distribution" does not include China's operations unless specifically
referenced.
Under the Sales Plan, the Company sells products exclusively to or
through its distributors, who are independent contractors or agents and are not
employees of the Company or Amway. The Sales Plan offers individuals the
opportunity to establish their own business as independent Amway distributors
selling directly to customers. Amway's direct selling method involves a high
level of personal service, including the demonstration and convenient delivery
of a broad range of consumer products, generally to a distributor's personal
contacts and relatives. Distributors develop a larger business by sponsoring new
distributors into their organization and/or by establishing separate
distributorships in other Amway or Company markets internationally. The
sponsoring of new distributors creates multiple levels of "downline"
distributors in the direct selling structure which the Company believes is vital
to its sales prospects and continued success. See "--Distribution."
In connection with the initial public offering of the Company's Common
Stock, par value $.01 per share (the "Common Stock"), in December 1993 (the
"Offering"), Amway and the Company effected a reorganization in which (i) the
Amway affiliates, through which operations were conducted in five of the nine
countries that constitute the Company's current markets, became subsidiaries of
the Company, (ii) Amway's Hong Kong operations became a branch of the Company
and (iii) a partnership in which the Company is a partner with a 99% economic
interest acquired the Thailand operations. In addition, the Company acquired
from Amway Japan Limited ("AJL") AJL's interest in Amway (China) Co. Ltd.
("Amway China"), the joint venture company which has the exclusive rights to
manufacture and distribute Amway-trademarked products in China (subject to local
governmental requirements). After the Company consummated these transactions,
Amway distributed the stock of the Company to Amway's stockholders, which
consist of certain trusts and foundations established by or for the benefit of
the founders of Amway, Richard M.
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DeVos and Jay Van Andel, and their families (which actions, together with
related actions, are referred to herein collectively as the "Reorganization").
After the Company consummated the Reorganization, it completed an initial public
offering of 9,085,000 shares of Common Stock (a 16.8% interest).
As a result of governmental policies in Malaysia that set forth certain
local ownership requirements for foreign companies, the Company's Malaysia
affiliate ("Amway Malaysia") was required to reduce its foreign equity ownership
to 51.0% with the remaining 49.0% being divested to Malaysian investors and the
Malaysian public (of which 35% must be held by Bumiputras, the indigenous
population of Malaysia. Common shares of Amway Malaysia are listed on the Kuala
Lumpur Stock Exchange.
TENDER OFFER AND AMALGAMATION
On November 18, 1999, New AAP Limited, a corporation organized under
the laws of Bermuda ("New AAP"), commenced a tender offer to purchase all of the
outstanding shares of the Company's common stock, $.01 par value per share (the
"Common Stock"), for $18.00 per share, in cash (the "Offer"). The Offer expired
on December 17, 1999. New AAP is wholly owned by Apple Hold Co., L.P. ("Apple"),
a Bermuda partnership and an entity controlled and beneficially owned by the
DeVos and Van Andel families and certain corporations, trusts and other entities
established by or for the benefit of such families (the "Principal
Shareholders"). Other than an aggregate of 1,128,580 shares tendered by certain
charitable foundations established by the Principal Shareholders, the Principal
Shareholders did not tender any shares in response to the Offer. In connection
with the consummation of the Tender Offer, the Principal Shareholders
contributed their remaining shares of Common Stock to Apple.
The Offer was made pursuant to a Tender Offer and Amalgamation
Agreement, dated November 15, 1999, among New AAP, Apple and the Company (the
"Amalgamation Agreement"). The Amalgamation Agreement provided for, among other
things, New AAP first to conduct the Offer and then for the Company and New AAP
to amalgamate (the "Amalgamation") with the Company continuing as the surviving
company. In addition, in connection with the Offer, the Principal Shareholders
entered into a Shareholder and Voting Agreement, dated November 15, 1999 (the
"Shareholder Agreement"). Pursuant to the Shareholder Agreement, the Principal
Shareholders have agreed, and Apple agreed, after the transfer of the shares of
Common Stock of the Company by the Principal Shareholders to Apple, not to
dispose of or otherwise transfer their shares, and New AAP has agreed not to
dispose of or otherwise transfer any shares transferred to it by the Principal
Shareholders or shares purchased by it in the Offer, in either case, prior to
the consummation of the Amalgamation. Pursuant to the Offer, New AAP purchased
approximately 14.5% of the Company's outstanding shares, and as a result of the
Offer, the Principal Shareholders beneficially own 97.4% of the Company's Common
Stock, directly or indirectly.
The Amalgamation is the second and final step in the transaction
between New AAP and the Company. The Company's Board of Directors has called an
extraordinary meeting of shareholders to be held on April 27, 2000, to consider
the Amalgamation. Because the Principal Shareholders, directly or indirectly
through Apple, beneficially own 97.4% of the outstanding shares of the Company
and because Apple holds all of the outstanding shares of New AAP, approval of
the Amalgamation by the shareholders is assured. At the effective time of the
Amalgamation, which will be April 27, 2000, upon surrender of their shares,
shareholders (other than Apple) will receive $18 per share in cash. Dissenting
shareholders will have appraisal rights under the Bermuda Companies Act of 1981,
as amended, pursuant to which they may apply to the Supreme Court of Bermuda to
appraise the fair value of their shares.
PRODUCTS
The Company, directly or through its controlled affiliates, distributes
more than 280 different products in four core product lines: Personal Care,
Nutrition & Wellness, Home Care and Home Tech. Not all of the products in each
line are available in all of the Company's nine markets. In China, the Company,
as of August 31, 1999, marketed more than 40 products from the Nutrition and
Wellness, Personal Care and Home Care lines. In China, all of the products
distributed are manufactured in China by the Company's China affiliate. The four
core product lines are supplemented in Australia, New Zealand and certain other
markets by catalog sales and the distribution of certain other products and
services. In computing the number of products, differences in size, color,
fragrance and flavor are not considered; as a consequence, the number of stock
keeping units associated with the products the Company distributes is much
larger
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than the number of products. Approximately 73% of the Company's fiscal 1999 net
sales were derived from the distribution of products purchased from Amway.
Almost all products offered through catalogs are not Amway manufactured
products. In addition, each of the affiliates also markets a limited number of
locally sourced products including starter kits (except in China), business
support materials and products targeted for individual markets. Except in China,
all of the Company's products are sold only through the Company's distributors;
customers may not order products directly from the Company and direct response
mass media are not used to solicit orders. In China, products are sold directly
by the Company through sales representatives and in retail shops available to
the general public; in addition, individuals may sign up to be privileged
customers, which allow them to purchase products at a discount.
Sales
The Company principally sells consumer products, in three Asia Pacific
geographic regions - Australia/New Zealand, Malaysia/Thailand and Greater China.
Set forth below is the dollar amount of net sales by product line for each of
the periods indicated.
NET SALES BY PRODUCT LINE
(U.S. DOLLARS IN THOUSANDS)
[Download Table]
YEARS ENDED AUGUST 31,
1997 1998 1999
-----------------------------------------------
Personal Care $241,121 $149,384 $139,768
Nutrition & 146,518 112,681 $113,585
Wellness
Home Care 130,617 89,727 $72,599
Home Tech 127,601 99,130 $72,330
Catalog Products 68,920 64,353 $59,486
Other Products and Services 130,389 72,304 $43,707
-------- -------- --------
Total $845,166 $587,579 $501,475
======== ======== ========
Core Product Lines
Personal Care Line. Amway's Personal Care line includes the Artistry(R)
line of cosmetic and skin care products, hair care products, hand and body
lotions, bath and shower soaps, deodorants, oral care products, sun care
products and fragrances.
Nutrition & Wellness Line. Amway's Nutrition & Wellness line consists
of nutrient rich food supplements, including vitamins and minerals, produced by
the Nutrilite division of Amway ("Nutrilite"). Many of the raw materials used to
make Nutrilite supplements are grown and harvested on Nutrilite owned and
operated farms including 600 acres in the San Jacinto Valley in California,
1,600 acres in Washington State and acerola cherry plantations in Brazil and
Mexico. Many products in the Nutrition & Wellness line are strictly regulated in
certain of the Company's markets; as a result, the Company's affiliates in New
Zealand, Australia and Thailand have only a limited range of Nutrition &
Wellness products available. The planned expansion of the Company's
manufacturing plant in Guangzhou, China will produce certain Nutrition &
Wellness products for sale in China. See "--Government Regulation - China Direct
Selling Regulations".
Home Care Line. The Amway Home Care line consists of a broad range of
concentrated laundry care products (such as Amway's SA8(R) brand products),
household cleaners (such as Amway's L.O.C (R) brand products), glass, metal,
floor and car care products and air fresheners. Many of the products in Amway's
Home Care line are offered in concentrated form, reducing the amount of
packaging which must be created and discarded. High concentration levels also
reduce the Company's shipping costs and reduce the amount of space that the
products use in the Company's warehouses and in consumer's homes.
Home Tech Line. The Amway Home Tech line includes Amway Queen(R)
cookware, home environmental products (such as water and air treatment systems),
food preparation and storage systems, vacuum cleaners, gourmet kitchen knives,
cleavers and shears, and home and motor vehicle alarm systems.
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Catalog and Other Products and Services
Catalog Products. Catalogs are used principally in the Company's more
established markets to offer additional products to existing customers. Catalogs
featuring a smaller number of products are also used in newer markets to
generate distributor interest without detracting from the four core Amway
product lines. Almost all items available through catalogs are not Amway
manufactured products and typically have lower profit margins than core product
lines. Because of the method for calculating performance bonuses, bonuses to
distributors on catalog products are lower than bonuses on core line products.
Catalog merchandise includes clothing, gourmet food and jewelry. The catalogs
used in different jurisdictions are tailored to the local market and offer
varying assortments of products. Currently, catalogs with a greater number of
products are used widely in Australia and New Zealand; smaller catalogs are used
in Malaysia, Taiwan and Thailand. Like all of the Company's products, catalog
products are sold only through the Company's distributors; customers may not
order catalog products directly from the Company and direct response mass media
are not used to solicit catalog orders.
Other Products and Services. The other products and services category
include starter kits (which include certain Amway products in Australia and New
Zealand) and business support materials such as motivational audio and
videotapes and written materials. Individuals are required to purchase starter
kits in order to become distributors. The purpose of the starter kit is to
acquaint new distributors with the Sales Plan, the Rules of Conduct and Code of
Ethics, which regulate distributors' conduct and performance bonus programs, and
to provide product descriptions. Net sales of other products include the net
sales of all products included in starter kits in Australia, and New Zealand
and, prior to July 21, 1998, included net sales of the products included in
starter kits in China. Since the Company began operating in China under its new
mode of operations in July, 1998, it no longer sells starter kits in that
market. See "--China Operations". The Company also derives revenues from the
annual renewal fees paid by distributors electing to renew their status as
distributors. Other than purchasing the starter kit and paying the annual
renewal fees, distributors are not required to make any payments to or purchases
from the Company as a condition to obtaining or maintaining distributor status.
Product Strategy and Development
Each Company affiliate manages its product mix by selecting those
products available in Amway's global portfolio of products that the affiliate
believes will positively impact performance in its market. The products
available in each particular market depend on a variety of factors including the
length of time the Company has been in the market, local preferences and local
regulatory requirements. Generally, newer markets offer fewer products than
established markets. In newer markets, the Company typically offers products
that allow for regular contact between distributor and consumer, that are easy
to demonstrate and that are relatively inexpensive. As distributors in a market
become more established and experienced, it has been the Company's strategy to
gradually introduce a broader range of products, including more complex and more
expensive products. The local affiliates' merchandising personnel, working with
the marketing staff of Amway, actively participate in the product development
process and in managing their local portfolio of products. Local regulatory
structures can also affect the rate and type of new product introductions. For
example, many of the Company's Nutrition & Wellness line products are regulated
under food and drug laws in the Company's countries of operation. As part of its
product marketing strategy, the Company also uses brochures, limited time
special pricing offers, multipack and multiproduct special pricing, gift packs
and other promotional techniques.
The introduction of new products and product improvements are an
integral part of the product marketing strategy and the Company believes it
enhances distributor sponsoring activity. The Company plans to systematically
introduce additional Amway products which address the particular needs and
preferences of each market. Amway (including Nutrilite) maintains an extensive
research and development center with research and quality assurance laboratories
currently staffed by approximately 600 people at Amway, including those at
Amway's Nutrilite locations, focused on the development and improvement of
meaningfully differentiated, quality products. Although Amway is generally
responsible for research, development, testing, labeling and regulatory
compliance for new products and product improvements, the Company's affiliates
and distributors are encouraged to suggest ideas for new products and product
improvements. The Company also develops and introduces specialized products
designed to meet the needs or preferences of particular markets such as home and
motor vehicle security systems sold in Australia and mooncakes and fruitcakes
sold in Malaysia.
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DISTRIBUTION
Distributors. The Sales Plan is fundamental to the Company's
operations. Under the Sales Plan, the Company sells products exclusively to or
through its distributors, who are independent contractors (and, in the case of
Australia, independent agents) and not employees of the Company or Amway. The
Sales Plan creates a multi-level direct selling structure under which
individuals have the opportunity to establish their own businesses with a
minimal cost of entry. In order to become a distributor, a person must be
sponsored by an existing distributor, and sign a standard Distributorship
Agreement, which is subject to Company approval. See " - China Operations" for
the different mode of operations in that market. As is typical of direct
selling, there is a high rate of turnover among distributors. The Company's net
sales are directly dependent upon the efforts of its distributors and any growth
in future sales volume will require increased productivity by the distributors
and/or growth in the number of distributors.
The following table sets forth the approximate number of the Company's
core distributor force for the fiscal years shown. The Company defines its core
distributor force as those distributors who have renewed their distributorships
within the past fiscal year.
CORE DISTRIBUTOR FORCE
[Enlarge/Download Table]
YEARS ENDED AUGUST 31,
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
China(1) -- 24,000 80,000 50,000 43,000
Hong Kong/Macau 58,000 52,000 45,000 42,000 38,000
Taiwan 181,000 179,000 178,000 166,000 141,000
------------------------------------------------------------------------------------------
GREATER CHINA REGION TOTAL 239,000 255,000 303,000 258,000 222,000
Malaysia(2) 80,000 95,000 115,000 123,000 137,000
Thailand 94,000 117,000 143,000 147,000 124,000
------------------------------------------------------------------------------------------
MALAYSIA-THAILAND REGION TOTAL 174,000 212,000 258,000 270,000 261,000
Australia 80,000 71,000 88,000 95,000 100,000
New Zealand 17,000 17,000 18,000 23,000 18,000
------------------------------------------------------------------------------------------
97,000 88,000 106,000 118,000 118,000
AUSTRALIA-NEW ZEALAND REGION
TOTAL
==========================================================================================
COMPANY TOTAL 510,000 555,000 667,000 646,000 601,000
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(1) Fiscal year 1996 reflects a limited number of renewals due to the April
1995 startup date which resulted in a renewal base of only five months;
fiscal years 1998 and 1999 reflects a change in the classification of
distributors, which resulted in lower renewals. See " - China Operations."
(2) Includes Brunei's core distributor force for fiscal 1996 through fiscal
1999.
Except in Australia, distributors purchase products at wholesale from
the Company or from the distributor who sponsored them and sell the products
directly to consumers at either Company established prices or based on suggested
retail prices. In Australia, distributors are independent agents who do not take
title to products for resale to consumers. Instead, the distributors in
Australia, in their capacities as independent agents, arrange for sales of
products
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directly by the Company to the consumer and/or arrange for delivery of products
to distributors they have sponsored. For their services, the independent agents
in Australia receive a commission on products they retail comparable to the
retail profit on the same product sold to distributors for resale in other
countries. Except where prohibited by law from imposing resale price
restrictions, the Company's rules do not permit distributors and their downline
distributors to mark up the price of products sold to their downline
distributors. Distributors in all of the Company's markets also buy products for
their personal use.
Amway's direct selling method involves a high level of personal
service, including the demonstration and convenient delivery of a broad range of
consumer products, generally to a distributor's personal contacts and relatives.
Under the Amway Code of Ethics and Rules of Conduct, distributors are not
permitted to make any unwarranted claims about Amway products. The Company does
not, and its rules do not permit distributors to, sell products to or through
retail stores (except in China) or through direct mail solicitation or other
direct marketing mass media, to supply Amway products to others for purposes of
resale (except to their downline distributors), or to make exaggerated claims
regarding the benefits of being a distributor. See " - China Operations."
Distributors are also prohibited from selling Amway or Company products to other
than their personally-sponsored distributors or customers, and from using their
downline distributors (other than their personally sponsored distributors) for
the sale of products other than Amway or Company manufactured, licensed or
distributed products. The Company discourages door-to-door sales or other
"cold-calling" techniques.
The overall core distributor force decreased in fiscal 1999 primarily
because of declines in the core distributor force in Thailand and Taiwan. In
addition, in China the number of sales representatives declined as a result of
the change in mode of operations in that market at the beginning of fiscal 1999,
which included a reclassifiction of certain distributors as privileged
customers. See "--China Operations."
Sponsoring. The Company relies on its existing distributors to sponsor
and to assist in the training and motivation of new distributors. Existing
distributors identify persons who they believe might be interested in
participating in the Sales Plan and invite them to a presentation regarding the
Sales Plan. A person interested in becoming a distributor must be formally
sponsored by an existing distributor and, like all distributors, must sign a
standard Distributorship Agreement, which is subject to Company approval.
The sponsoring of new distributors creates levels in the direct selling
structure. Persons whom a distributor sponsors are referred to as "downline" or
"sponsored" distributors. If downline distributors also sponsor, they create
additional levels in the structure, but their downline distributors remain part
of the same distribution line as their original sponsors. Because of the
structure of the Company's distribution system under which distributors can
develop larger businesses by sponsoring new distributors into their
organization, the Company's sales are concentrated within, and consequently
dependent upon, a relatively small number of distributor lines of sponsorship.
See "--Risks and Uncertainties--Our results are impacted by the actions of a
relatively small number of distributors."
The Company has generally experienced increases and decreases in the
sponsoring of new distributors in its markets (as measured by distributor
applications) over various time periods. The Company believes these increases
and decreases in part reflect the tendency of distributors to focus on
sponsoring efforts for limited periods and then to focus on other activities.
Rapid decreases in sponsoring activities can also be precipitated by adverse
publicity regarding direct sales generally or the Company or Amway in
particular. See "--Risks and Uncertainties--Our sales are affected by sponsoring
levels; many factors, adverse publicity in particular, impact sponsoring." For
the 1999 fiscal year, as compared to the prior fiscal year, sponsoring decreased
significantly in all of the Company's markets, except for Malaysia and Hong
Kong, where sponsoring increased, and China, which experienced only a slight
decline.
In addition, sponsoring may be impacted by local government regulatory
activity. As part of the Chinese government's oversight of direct selling in
China and its concerns with illegal and unethical pyramid companies and the
social unrest that erupted in the wake of such misconduct, in April 1998, the
Chinese government issued a new directive that required an immediate cessation
of direct selling activities by all direct selling companies. All direct selling
activities in China, including sponsoring, were halted until the Company resumed
operations in China under its new mode of operation on July 21, 1998. See
"--Government Regulation - China Direct Selling Regulations."
Sponsoring is not required and distributors are not paid by the Company
for sponsoring activities as such; however, products contained in starter kits
may contribute to performance bonuses earned by the sponsoring
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distributor. However, distributors have an incentive to engage in sponsoring and
an economic interest in their downline distributors' success because, as
described below, performance bonuses are available based in part on purchases of
downline distributors.
Distributors are not limited to a particular sales territory in their
sales or sponsoring activities; however, additional requirements apply if a
distributor proposes to sponsor individuals outside a distributor's country of
operation. Principally for legal reasons, such as import, labeling and
registration laws, the Company does not allow distributors to export products.
However, Amway encourages international sponsoring of new distributors and
allows distributors to establish "second distributorships," which are new,
separate distributorships in one or more additional Amway or Company markets.
Distributors that are internationally sponsored purchase products from the Amway
affiliate in the country or territory in which such distributors reside. Sales
resulting from such international sponsoring outside the Company's markets,
however, are not included in the Company's net sales. The Company believes that
international sponsoring has been integral to the successful opening and growth
of several of its markets in the past and that international sponsoring was
integral to the successful opening of the China market. International sponsoring
can, however, have temporary or permanent adverse effects on sponsoring levels
in distributors' home markets. For example, the Company believes that the
sponsoring decline in fiscal years 1995 through 1997 in Taiwan and Hong Kong was
due to the distributor leaders' focus on building their businesses in China. In
addition, certain of Amway's distributor leaders have created international
distributor organizations, or networks, that are independent of Amway and the
Company. These networks are designed to assist in motivating and training
distributors and frequently include Amway distributors from all over the world.
The international sponsor can earn bonuses based in part upon the performance of
the distributors they have internationally sponsored.
Distributors' Sales Incentives. Under the Sales Plan, distributors
receive compensation in the form of their own direct retail profit and through
various available bonuses and awards based on their own purchases of products
and the purchases of their downline distributors. See " - China Operations" for
the different mode of operations in that market.
A distributor's retail profit is the difference between the price the
distributor pays for the products and the price at which the distributor resells
the products which in the Company's markets averages approximately 30%. In the
case of Australia, retail "profit" is in the form of a commission since the
Australian distributors are independent agents. In addition to retail profit or
commission, distributors and others in their line of distribution are eligible
to receive bonuses based upon the sales to their downline distributors (or in
the case of Australia, sales arranged by their downline distributors).
Performance bonuses and awards are paid according to a schedule
established by Amway based on the volume and costs of the products the Company
sells to (or, in the case of Australia, through) distributors. These performance
bonuses currently range from 3% to a maximum of 21% of the combined cost of
products purchased by (or in the case of Australia, through) distributors and
their downline distributors, depending on their combined volume. The higher the
volume, the higher the percentage of the performance bonus. The level of volume
needed to achieve the different percentages of performance bonuses varies by
country due to different product mixes being available and other economic
factors, including inflation rates. Pursuant to the multi-level structure of the
Sales Plan, a portion of a distributor's performance bonus must be shared, under
the same bonus schedule, with the downline distributors whose performance
contributed to such distributor's bonus.
Once a distributor reaches the maximum performance bonus level, higher
levels of achievement are attainable, including additional bonuses, one-time
incentive awards and additional recognition. In addition to cash and public
recognition, trips and other prizes are also awarded. Many of these higher
levels of achievement are based on the number of lines of distributors that a
distributor has established which achieve the maximum performance bonuses. In
this manner, the Sales Plan seeks to foster entrepreneurial spirit, to provide
monetary and non-monetary recognition for achievement and to reward persons
building organizations producing high levels of sales. Distributors must
requalify each year for each of these bonuses (except for one-time incentive
awards). The requirement for annual requalifications can lead to increased sales
activity early in a fiscal year as distributors are motivated to get a quick
start on requalification and late in a fiscal year as distributors are motivated
to achieve requalification.
Distribution Facilities; Payment. The Company distributes products to
distributors through the use of public and private package delivery services,
its own fleet of delivery vehicles and in certain areas through merchandising or
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"pick-up" centers open only to distributors. The Company maintains warehouse
facilities for products prior to shipping, pick up or delivery. In China, the
Company's product distribution centers were converted to shops when the Company
resumed its business in July 1998 under its new mode of operation. These shops
are open to the general public for retail sales of the Company's products. See
"-- China Operations." Generally, distributors pay in full for their purchases
by cash or check at the time of their order but no later than receipt of
products. The Company from time to time does offer payment plans for the
purchase of big-ticket items. Qualified distributors are permitted to use an
electronic payment system in Taiwan, which permits payments to be made within
five days. In Malaysia, qualified distributors may make payment five days after
the date of order for out-of-town deliveries. In China, payments by check are
accepted for customer delivery orders, but delivery is made only upon
confirmation of payment.
Returns. Although each of the Company's affiliates has a slightly
different guarantee policy, generally all products distributed by the Company,
including starter kits, (other than certain third party manufactured and locally
sourced products distributed by the Company's Malaysia, Taiwan and Thailand
affiliates) are covered by the Amway Satisfaction Guarantee. Under the Amway
Satisfaction Guarantee, consumers have a reasonable period of time (generally at
least 90 days) to determine whether such products are satisfactory. If not, the
unused portion can be returned to the Company for a refund, replacement or
credit on future purchases. In addition, the Sales Plan contains a "buy-back"
policy under which sponsoring distributors are required to purchase currently
marketable Amway products from their downline distributors who voluntarily
resign their distributor status and leave the business. Normally, such
repurchases are made at the withdrawing downline distributor's original cost,
less any performance bonuses already received, less a handling charge not to
exceed 10% of the cost of the returned products. Returns under both the Amway
Satisfaction Guarantee and the distributor buy-back policy are subject to
various written rules and conditions. The Company's net expenses under these
arrangements have generally not been material. A high rate of starter kit
returns did, however, contribute to the decline in China net sales during the
fourth quarter of fiscal 1997. Under the original money-back guarantee,
distributors could return their kits for a full refund for one year after the
date of purchase, even after use of all of the products in the kits. Effective
June 1, 1997 through September 30, 1998, in order to address abuses occurring in
China, the Company refined its return policy in China for products and starter
kits purchased after that date to eliminate the refund for empty containers,
reduce the refund for the return of used products, including products in the
starter kits, and add a significant handling charge for all returns. On October
1, 1998, the China affiliate adopted a further revision to its return policy and
implemented a stricter return policy which provides for a full cash refund for
products returned within 10 days of purchase and a partial refund or credit for
those products returned within 30 days of purchase.
CHINA OPERATIONS
In response to illegal and unethical pyramid schemes of other companies
and ensuing social unrest in China, the difficult regulatory environment in that
market during fiscal 1998 escalated to the point that the Chinese government
banned all direct selling activities on April 18, 1998. To comply with this
directive, the Company proposed a new mode of operations in China which was
approved by the Chinese government in July 1998. This new mode of operations
differs from how the Company operates in its other markets. The Company resumed
operations in China under its new mode of operations on July 21, 1998. See " -
Government Regulation--China Direct Selling Regulations."
Under this new mode of operations, the Company's product distribution
centers located in 14 provinces and four direct municipalities were converted to
retail shops where customers can buy the Company's products at retail prices.
For a nominal fee, customers can become privileged customers who are eligible to
buy products at a discount. Many of the Company's former distributors who
purchased products principally for their own use have become privileged
customers. Similar to distributors in the Company's other markets, a team of
non-employee sales representatives promotes the Company's products and provides
services to customers. These services include introducing, demonstrating and
delivering the products to their customers. A significant number of the
Company's formerly active distributors have accepted the Company's invitation to
become sales representatives.
Sales representatives may sponsor individuals to become privileged
customers. Only sales representatives are paid bonuses by the Company; these
bonuses, however, are based on their personal purchases. In addition, those
sales representatives who perform services to train and help privileged
customers and other sales representatives are also compensated for their
services. Generally, sales representatives in China do not earn income from the
resale of the
10
Company's products, as title to the products passes directly from the Company to
the customer. In some instances, however, sales representatives may obtain a
business license whereby they will be permitted to buy products from the Company
and resell to customers at the retail price established by the Company, thereby
enabling them to earn income from the markup on those products.
The Company's core distributor force in China for the fiscal year ended
August 31, 1999 is comprised of sales representatives and does not include
privileged customers. In fiscal 1998, the Company's core distributor force was
those former distributors who could have renewed their distributorships during
such fiscal year and who accepted the Company's invitation to become a sales
representative under the Company's new mode of operations. This reclassification
of the Company's core distributor force in China, and the turmoil in that market
during fiscal 1998, resulted in a decline in the number of the core distributor
force in China as compared to fiscal 1997. See "--Distribution--Distributors"
and " - Government Regulation - China Direct Selling Regulations."
The Company experienced a slow start under its new mode of operations
effective in July 1998, until April, 1999, when it implemented the China
Business Revitalization Program, which was designed to make the Amway business
opportunity more attractive and tailored to the environment in China. The China
Business Revitalization Program was focused on (i) simplifying the business,
lowering the cost of entry and increasing compensation opportunities; (ii)
accelerating new product launches; (iii) reducing prices significantly on a
large portion of Home Care and toiletry products; and (iv) strengthening Amway
China's image through advertising and various public relations projects. The
Company believes this program has been a key driver of resumed sales growth in
China in the second half of fiscal 1999. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
COMPETITION
The Company faces significant competition in all of its markets both in
the products sold and in the recruiting of independent sales persons. Competing
consumer products in personal care, nutrition and wellness, home care and home
tech are available from a wide variety of sources including retail, specialty,
department and discount stores and mail order companies, some of which have
greater financial resources and virtually all of which offer a greater variety
of brands than the Company. Competing consumer products in various product lines
are also available from other direct sales companies. Such products are also
manufactured and marketed by numerous well known multinational firms and
national enterprises in the countries in which the Company operates.
The Company believes that the principal bases of competition with
respect to its products are quality, price, convenience and selection. Although
the Company believes that the consumers of the types of products that the
Company distributes have lower cost and wider selection alternatives, the
Company also believes that the products which the Company distributes are
competitive on the bases of quality and convenience of purchase. The Company
does not seek to be a low cost or discount supplier of products. Instead, it
seeks to provide meaningfully differentiated products with quality, value,
service and the Amway Satisfaction Guarantee that support the comparatively
higher prices the Company suggests (and where permitted by law sets) for the
retail prices of its products. The Company believes that its person-to-person
direct selling structure also creates the opportunity for competitive customer
service.
The Company also competes with other direct selling organizations to
recruit independent sales persons. Other direct selling organizations may or may
not have product lines that compete with the products which the Company
distributes. The Company believes that the principal bases of competition in
recruiting independent sales persons are reputation, perceived opportunity for
financial success, quality and range of products for sale.
SOURCES OF SUPPLY
Amway products are principally produced by Amway at its worldwide
manufacturing plant in Ada, Michigan and by Amway's Nutrilite division at its
plants in Buena Park and Lakeview, California. All products currently sold in
China are produced at the Company's manufacturing facility in Guangzhou, China.
The Company is in the final stages of expanding its manufacturing capabilities
in China, which it expects to be complete in April 2000. See "--Government
Regulation - China Direct Selling Regulations" and "Description of Property."
Certain products such as Amway Queen(R) cookware, and vacuum cleaners are
produced to Amway specifications by third-party manufacturers
11
and purchased by Amway for resale to the Company. Catalog and branded
merchandise is generally purchased directly from the manufacturer.
RELATIONSHIP WITH AMWAY
The Company, as the distribution vehicle for Amway in the Asia Pacific
markets in which the Company operates, has and will continue to have a number of
contractual relationships with Amway. The continuation of these contractual
relationships with Amway is essential to the conduct of the Company's business.
Trademark License Agreements. Pursuant to Trademark License Agreements
with the Company and each of the Company's affiliates (other than Amway China,
which is covered by a different agreement), Amway has granted to each affiliate
an exclusive right to use in its market the Amway trademark and the individual
product trademarks used on Amway products. In addition to the exclusive use of
the trademark on Amway sourced products in their countries of operation, the
Company's affiliates also have the right to use, after obtaining Amway's prior
approval, the Amway trademark in connection with locally sourced products or
Amway formulated products manufactured by the affiliate or by others under
contract with the affiliate.
Use of the trademarks is royalty free (the value of the trademarks is
included in the export price of products purchased from Amway), except in
connection with locally sourced products or Amway formulated products
manufactured by the affiliate or by others under contract with the affiliate, in
which case Amway may charge a royalty of up to 8% of the net sales of such
products; such net sales are reduced by twenty-five percent of the selling price
to cover bonuses paid by the Company or the affiliate. Amway is responsible for
defects in the products it manufactures. Each affiliate may, at its own expense,
provide additional guarantees on Amway sourced products and bears the risk of
all guarantees on any locally sourced or manufactured products. With respect to
locally manufactured products based upon an Amway formula, Amway is responsible
only for defects in the formula or related Amway technical advice; the affiliate
is responsible for manufacturing defects.
Product Purchase Agreements. Pursuant to Product Purchase Agreements
between Amway and each of the Company's affiliates (other than Amway China,
which is covered by a different agreement), each affiliate has the right to
select the Amway products it desires to purchase from the menu of products Amway
makes available to its international affiliates subject to unavailability due to
local regulatory requirements. Purchases are evidenced by purchase orders which
are subject to rejection by Amway only if it does not have available production
capacity sufficient to fill the order. In determining whether it has the
production capacity to meet an affiliate's order, Amway is required to treat
each of the Company's affiliates on a parity with other comparable Amway
affiliates based on net sales.
Prices for the products are governed by a price schedule which Amway
establishes from time to time based upon a policy that is required to be
consistently applied to the Company's affiliates on a parity with Amway
affiliates (provided that the prices for those affiliates paying in local
currency are impacted by market specific exchange rates). That policy uses a
U.S. dollar cost plus base price subject to local market variances if
determined, based upon independent studies, to be necessary to comply with U.S.
and foreign tax laws. Amway has the right to modify this policy; however, any
such modification will be consistently applied to the Company's affiliates on a
parity with Amway affiliates. Amway is required to give the Company's affiliates
at least 30 days advance notice of any change in pricing. Each affiliate also
pays freight, handling and customs duties. Amway can determine whether it will
be paid in U.S. dollars or the local currency of the affiliate. Currently, Amway
is paid in local currency by the Company's Australian and New Zealand
affiliates; the other affiliates pay in U.S. dollars. Effective January 1, 2000,
Amway increased export prices to the Company by a weighted average of
approximately 1.3% (excluding the implicit local currency to U.S. dollar
exchange rate increase on products sold to the Australian and New Zealand
affiliates). The Company expects the impact of this cost increase to be
immaterial to the Company's fiscal 2000 financial statements.
Amway indemnifies the Company and its affiliates in respect of any
defect in, or any harm caused by, any product purchased from Amway under the
Product Purchase Agreements provided that this indemnification does not apply to
any failure to comply with local regulatory requirements in countries other than
the one to which Amway shipped the product. Under the Product Purchase
Agreements, Amway is required to maintain product liability insurance with
respect to products that each of the Company's affiliates purchase from Amway.
Each Product Purchase
12
Agreement also provides that each Company affiliate contracting with Amway
thereunder is to be a named insured on such product liability policies, having
its own independent rights under such policies.
Support Services Agreements. Amway provides various administrative
support services for the Company and its affiliates. Support services provided
include executive management, legal, accounting, tax, treasury, investor
relations, marketing, insurance, inventory control and human resources. Through
fiscal 1993, these services were provided at Amway's fully allocated cost.
Effective September 1, 1993 through August 31, 1997, Amway eliminated certain
charges for services provided to the Company's affiliates. Pursuant to Amended
and Restated Support Services Agreements between each of the Company's
affiliates and Amway, effective September 1, 1997, Amway instituted direct and
indirect charges for these support services, including information and
telecommunication systems, as part of the effort to manage the overall growth in
costs of these services.
In addition, the Company reimbursed Amway for the services of certain
of its officers pursuant to the Support Services Agreements and such
reimbursement will continue under the Amended and Restated Support Services
Agreements.
The Company has the right to discontinue receiving any of such services
or to terminate the Amended and Restated Support Services Agreements at any time
upon six months notice to Amway. Amway agrees to make available to the Company
and its affiliates all services that Amway provides to its other international
affiliates. If Amway determines to discontinue any service to all of its
international affiliates, it will provide six months notice to the Company.
General Provisions. Each of the Trademark License Agreements and
Product Purchase Agreements is for a term ending on August 31, 2010, and is
subject to renegotiation after December 31, 1998, in the event that members of
the families of, or trusts or foundations established by or for the benefit of,
Richard M. DeVos or Jay Van Andel on a combined basis no longer beneficially own
a majority of the voting stock of the Company. Such renegotiation is to promote
the protection of the Amway trademarks and product quality, as well as to ensure
the confidentiality of Amway trade secrets. Each of the Amended and Restated
Support Services Agreements terminates on August 31, 2010.
Distributor List License Agreements. In connection with the transfer of
assets of Amway's Hong Kong affiliate to a branch of the Company and the assets
of Amway's Taiwan affiliate to a subsidiary of the Company in the
Reorganization, Amway did not transfer the then current distributor lists in
Hong Kong or Taiwan but instead licensed them to the Company. In each case, the
royalty arrangements were set based upon an independent valuation at 3.75% and
5%, respectively, of net sales. These licenses are for 10-year and 6-year terms,
respectively, subject to renewal at the option of the Company at a price to be
determined based on an independent valuation done at that time of the remaining
value of the distributor lists. Each of the distributor list license agreements
was amended effective August 31, 1994, to reflect the Company's agreement to
execute promissory notes with respect to royalty payments for fiscal 1995 and
1996; such agreements were amended a second time effective July 31, 1995 to
reflect the Company's execution of promissory notes with respect to royalty
payments for fiscal 1997, 1998 and 1999. See Note 10 to the Consolidated
Financial Statements. The Company prepaid these promissory notes in full on
February 27, 1997.
Amway has granted the Company an extension of the license with respect
to the Taiwan distributor list. This license expired in November 1999. Pursuant
to the extension, the Company is not obligated to pay royalties for such license
until a valuation of the list is completed. At such time, the Company may elect
to purchase the distributor list or continue the royalty arrangement based on
the remaining fair market value of the list for an additional five-year term. If
the Company elects the second alternative, royalties will be payable from the
termination date of the prior agreement.
China Technical Agreement. Amway is providing technical assistance to
Amway China pursuant to a Technology Inducement and Trademark License Contract
(the "China Technical Agreement") in connection with the operation of its
manufacturing facility in Guangzhou. The China Technical Agreement also grants
Amway China the exclusive right to manufacture and sell Amway licensed products
in accordance with the Sales Plan in China. Amway China has the exclusive right
to use certain Amway trademarks in China.
Under the China Technical Agreement, Amway furnished to Amway China
technical information, including formulations, specifications and operating and
instruction manuals necessary to establish manufacturing processes for
13
Amway products in China. Amway China's technical personnel also have the right
to study the manufacturing and sale of Amway products at other Amway plants and
places of business and Amway technical personnel assisted in Amway China's
initial setup of manufacturing operations. Amway China may request ongoing
technical assistance and service from Amway in connection with the manufacture
of Amway products in China on a per diem fee basis, plus reasonable
transportation and living expenses.
Under the China Technical Agreement, Amway China is obligated to pay a
royalty of 5% of the net sales price (less distributor incentives) from the sale
of Amway products manufactured in China. The China Technical Agreement has a
term of 10 years from the date of initial production of Amway products at Amway
China's manufacturing plant.
Amway has agreed to indemnify Amway China for any liability it may
incur in consequence of direct and ordinary damages to third parties which are
proven to have been proximately caused by the willful misconduct or negligence
of Amway or its employees. Except for liability for patent infringement, Amway
China has agreed to indemnify Amway for any other liabilities incurred in
connection with the sale of Amway licensed products, including liabilities for
indirect, special or consequential damages resulting from the Amway licensed
products sold by Amway China.
During fiscal 2000, the Company's China affiliate and Amway expect to
terminate the China Technical Agreement and execute a Technology Import and
Inducement Agreement (the "TIIA") and a Trademark License Agreement (the "TLA").
These agreements would be applicable to all products manufactured by or for
Amway China, including those to be manufactured in the planned expansion of
manufacturing operations in Guangzhou. See "Government Regulation - China Direct
Selling Regulations." It is anticipated that under the TIIA Amway will continue
to furnish Amway China with all of the technical information necessary to
establish and maintain manufacturing processes for Amway products in China, as
well as the broader scope and level of technical information required for
production of Artistry(R) skin care and Nutrition & Wellness products at the
expanded manufacturing operations in Guangzhou. Under the TIIA, Amway China will
be obligated to pay a royalty based on the gross revenues from the sale of
products to distributors less bonuses, freight and returns.
Under the TLA, Amway China will continue to hold the exclusive right to
use in China the Amway trademark and the individual product trademarks for all
current and future Amway products. Amway China will be obligated to pay a
royalty based on the gross revenues from the sale of products to distributors
less bonuses, freight and returns.
It is expected that Amway will provide a broader range of technical and
other rights and services to the Company under the proposed TIIA and TLA in
contrast to the China Technical Agreement currently in effect, which the Company
will require for operation of the planned expansion of its Guangzhou operations.
The royalty rates to be charged pursuant to the TIIA and TLA will therefore
likely increase from the rate charged under the China Technical Agreement.
Both of these agreements will require the approval of the appropriate
Chinese governmental authorities prior to implementation.
INTELLECTUAL PROPERTY
The continuation of the Trademark License Agreements with Amway is
essential to the conduct of the Company's business. Amway is responsible for
filing, maintaining and defending the trademarks and other intellectual property
licensed to the Company and its affiliates. Amway is entitled to retain any
damages awarded in any such defense.
Amway's policy is to secure trademark registrations for the Amway
trademark in all core product lines and any other relevant product and service
classifications, as well as to register a basic portfolio of product trademarks.
Where applicable, Amway also chooses and registers foreign language equivalents
of the Amway trademark; it has either filed or perfected such registrations in
the PRC, Taiwan and Thailand. Where possible, Amway's policy is to perfect
patent filings in each relevant country for products or components, particularly
in the Amway Home Tech product line.
14
Australia, New Zealand, Hong Kong, Macau, Malaysia, Brunei, Taiwan and
Thailand are all participants in the major international conventions for the
protection of intellectual property or have laws that provide for the protection
of intellectual property according to generally recognized international
business standards. The Company considers these laws and conventions to be
adequate for the protection of the intellectual property it licenses. China has
laws that provide for the protection of intellectual property and is a signatory
to many of the major international conventions applicable to intellectual
property. Although the Company considers these laws and conventions to be
adequate for the protection of intellectual property it licenses, there is no
assurance that it will be able to obtain timely and equitable enforcement of
such laws and conventions.
GOVERNMENT REGULATION
The Company operates in each jurisdiction pursuant to various
regulatory frameworks. In certain jurisdictions the Company is subject to
specific statutes regulating, and in some instances requiring licensing of,
direct selling companies. These laws and regulations are generally intended to
prevent fraudulent or deceptive schemes often referred to as "pyramid" or "chain
sales" schemes which promise quick rewards for little or no effort, require high
entry costs, use high pressure recruiting methods and/or do not involve
legitimate products. See "--Risks and Uncertainties."
In addition, the Company's operations and the activities of
distributors are also regulated in several markets by fair trade laws which
broadly cover such areas as resale price maintenance, price discrimination and
misleading and deceptive conduct. Some of the Company's products, particularly
vitamins, dietary supplements and cosmetics, are subject to drug, cosmetic,
health, sanitation, labeling and other regulations in the Company's markets.
Finally, although the Company's distributors are not employees of the Company,
some jurisdictions have attempted either to make the Company responsible for
certain payments of, or to withhold from distributors payments for, social
service or tax obligations.
Import/Export and Foreign Ownership. In addition to these regulatory
schemes, the Company operates in accordance with company (and in the case of
China, the Sino-foreign co-operative joint venture law), trade, tax and foreign
investment laws of each jurisdiction. Requirements regarding the balancing of
foreign exchange receipts and expenditures, inward and outward remittance of
foreign currency, opening of bank accounts at home and abroad and currency to be
used for settlement of payment are imposed on the Company's China operations
through various regulations. China currently imposes significant restrictions
and tariffs on imports and such restrictions may affect the Company's ability to
introduce additional products in China. Regulations issued by the State
Administration for Industry and Commerce ("SAIC") permit direct selling
companies to sell only those products manufactured by them in the China. See
"--China Direct Selling Regulations." Thailand also places a high customs tax on
the importation of luxury goods, and the Company must maintain a customs license
with the Thailand Customs Department. The Treaty of Amity between Thailand and
the United States allows an exemption for U.S. owned entities from the Alien
Business Law, which would otherwise allow the Thailand Ministry of Commerce to
only approve foreign ownership of a business if (i) such business is majority
Thai owned, (ii) the entity in question does not compete with a Thailand company
and (iii) foreign currency is not transferred to Thailand. The Company has
structured its Thailand affiliate to meet the tests for U.S. ownership under the
Treaty of Amity. The Malaysia Foreign Investment Committee regulates through
administrative guidelines all acquisitions of Malaysian businesses, properties
and assets by foreign interests. In particular, levels of foreign and Bumiputra
investment are highly regulated. See "--General." Australia and New Zealand both
impose various customs duties on imported goods. The Company currently has, and
is required to maintain, the consent of the Overseas Investment Commission to
carry on business in New Zealand. Australian law also imposes restrictions on
direct or indirect foreign ownership of Australian entities.
China Direct Selling Regulations. On April 21, 1998, the Chinese
government issued a new directive that required an immediate cessation of direct
selling activities by all direct selling companies because of the Chinese
government's concerns with illegal and unethical pyramid schemes of other
companies and the social unrest that erupted in the wake of such misconduct.
This directive did not apply to direct selling in the Special Administrative
Region of Hong Kong or any other markets in which the Company operates. Although
the directive was not targeted at the Company's operations in China, it applied
to all direct selling companies. In compliance with the directive, the Company
promptly ceased accepting distributor applications and limited sales to
distributors for self-consumption only.
15
On June 18, 1998, the Ministry of Foreign Trade and Economic
Cooperation (MOFTEC), SAIC and the State Bureau for Internal Trade (BIT) jointly
issued Guidelines which provided the basis for major foreign direct selling
companies to change their mode of operations while retaining the right to use a
non-employee sales force to promote products and to service customers. The
Company, along with other direct selling companies in China, engaged in
extensive discussions with the Chinese government after this directive was
issued in order to determine future acceptable methods of operation in that
market. The Company received approval for a revised plan of operation from the
Chinese national government and resumed operations on July 21, 1998. See " -
China Operations."
On January 10, 1997, the SAIC issued regulations governing direct
selling activities. These regulations, which are still applicable to companies
with an approved new mode of operations, provide that direct selling companies
may sell only products manufactured by them in the China. Amway China had been
permitted to import certain Personal Care and Home Care products from Amway in
1996 and 1997 for test marketing and perhaps for eventual manufacture in China.
In order to continue to offer its current product selection and eventually a
wider range of Amway products, the Company is in the final stages of expanding
its manufacturing facility in Guangzhou, China. The Company manufactures
Artistry(R) skin care and Nutrition & Wellness products at this expanded
facility. The Company has decided not to pursue the construction of a
manufacturing facility in Shanghai because products can be made available in the
market more quickly through the expansion of the Guangzhou facility than from
the construction of an entire new facility.
Chinese Environmental Protection. Amway China's manufacturing
operations are subject both to Chinese national and local environmental
protection laws and regulations which currently impose a graduated schedule of
fees for the discharge of waste substances, require the payment of fines for
pollution and provide for the closure by the Chinese government of any facility
which fails to comply with orders requiring it to cease or cure certain
behaviors causing environmental damage. In particular, the Environmental
Protection Law imposes certain requirements on Amway China to ensure that proper
evaluation has been conducted and standards are set in respect of atmospheric
conditions, surface water, industrial waste, gas discharge, effluent discharge
and industrial noise at Amway China's manufacturing plant. Amway China has
established environmental protection systems to treat certain of its waste
materials and to safeguard against accidents. Amway China believes its
environmental protection facilities and systems are adequate for it to comply
with the existing national and local environmental protection regulations.
However, there can be no assurance that the Chinese national or local
authorities will not impose additional regulations which would require
additional expenditure on environmental matters.
Sales of Locally Made Products in Malaysia. The Malaysian government
has previously indicated certain minimum sales requirements with regard to
products made in Malaysia. The Company's Malaysian affiliate, however, in fiscal
1999 was the first multilevel direct selling company to receive a three year
direct selling license renewal from the government and such license renewal did
not include any local manufacturing requirements. The Company continues to work
to increase its local manufacturing and packaging in Malaysia in accordance with
the desires of the Malaysian government. The Company is aware that the
government may impose additional conditions or regulations as the government
deems appropriate and is committed to continually work with the government to
reach a satisfactory resolution with regard to any such additional conditions or
regulations that may be imposed.
EMPLOYEES
At August 31, 1999, the Company had approximately 2,100 employees. The
Company's Australia and China affiliates have union employees; the Company has
no other union employees and no collective bargaining agreements. The Company
does not expect the labor unions pursuant to which Australian and Chinese
employees are organized to have any material impact on the Company's operations.
The Company considers its employee relations to be excellent. The distributors
are independent contractors (and, in the case of Australia, independent agents)
and are not employees of the Company.
RISKS AND UNCERTAINTIES
Doing business as a direct sales company in China continues to have
regulatory risks associated with it. The regulatory environment in China
continues to pose a risk to our operations. The Chinese government (at the
16
national, provincial and local levels) continues to monitor activities of direct
sales companies, particularly those which are deemed to involve what the
government considers to be illegal or unethical pyramid schemes. If abuses are
found, even if they do not involve the Company, the government may choose to
impose restrictions on all direct sales companies, even those not involved in
illegal or unethical schemes. Any restrictions could materially, adversely
affect our operations and financial results. In addition, our sales
representatives in China are independent contractors. We do not exercise control
over their activities to the same extent that we would employees. If the Chinese
government alleges that our sales representatives have acted inappropriately, it
could impose restrictions on our operations, including, for example, meetings of
the sales representatives. There is also a new Chinese governmental requirement
for salesmen examinations which will go into effect at the end of 2000. We do
not yet know how this requirement will affect us, but it may limit sales
representatives' activities until they pass the examination.
The regulatory environment in China is also affected by the state of
Sino-United States relations. For example, any escalation of the issues
surrounding Taiwan and its return to Chinese rule could, depending on the U.S.
response, result in adverse action against us because we are considered an
American company in China. Failure of the United States to enact permanent
normal trade relations status with China could also result in adverse actions
against us.
Our business is subject to the uncertain economy in the Asia Pacific
region. Our sales have declined in large part because of lower consumer demand
caused by the economic downturn in most of Asia. In contrast to fiscal 1998,
however, in fiscal 1999 Amway Asia Pacific's overall net sales were not
significantly impacted by currency devaluations in Asia. Amway Asia Pacific's
margins declined, however, because of currency devaluations in Malaysia and
Taiwan, as a result, their purchases of products from Amway were more expensive.
The lower consumer demand in our markets means that it is unlikely that we can
raise prices to our distributors to cover the higher product costs.
The decline in the average value of the local currencies in some of our
markets, relative to the U.S. dollar, in fiscal 1999 was not nearly as
significant as the declines experienced in fiscal 1998. The Thai baht, however,
strengthened relative to the U.S. dollar and more than offset these declines so
that we did not experience an adverse exchange impact on our results. We believe
the economies in the region are still under pressure, however, as governments
implement policies designed to restore growth. While some economic growth has
resumed in most markets, the local economies are still not at the levels
experienced prior to July 1997. We remain concerned that the Chinese government
will devalue the yuan to support that country's exports. Such a devaluation
could, we believe, trigger a new wave of devaluations in the region and further
economic turmoil, resulting in lower local currency sales as consumer demand
would falter even more. Further devaluations against the U.S. dollar would also
negatively impact translated sales results.
Our results are impacted by the actions of a relatively small number of
distributors. Under the Sales Plan, our distributor leaders grow their
businesses by developing lines of sponsorship through bringing others into their
organizations. While these distributor organizations are large and complex,
there are relatively few lines of sponsorship and distributor leaders. The
distributor leaders often form organizations independent of Amway Asia Pacific
that motivate and train the members of their lines of sponsorship. These
distributor leaders significantly influence their organizations through
motivational rallies and seminars; these activities positively impact our sales.
Although, one of Amway Asia Pacific's primary business goals is to maintain
strong and effective relationships with the distributor leadership, there can be
no assurance that such relationships will be maintained. Amway Asia Pacific's
sales could also decline if we lose a significant distributor leader and would
decline if a large number of other distributors in an organization left as well.
Distributor leaders can also impact a subsidiary's results of
operations by moving from one market to another or expanding operations within a
market. This occurred in Taiwan and Hong Kong after the China market opened in
April 1995. As Taiwan and Hong Kong distributor leaders worked on opening and
growing their businesses in China, sales in their home markets dropped. As we
opened in ten new provinces within China in the fourth quarter of fiscal 1997,
our distributors expanded their operations as well. Our distributors' ability to
focus on business-building was hampered by our large geographic area of
operations and limited resources, which caused a decline in Amway Asia Pacific's
results in the fourth quarter of fiscal 1997. We do not currently plan any
further geographic expansion, either in China or other parts of Asia, although
our distributors may participate in new
17
markets opened by Amway which could adversely affect our results. We believe our
Taiwan and Hong Kong distributor leaders have resumed intensive business
building activities in China as growth in that market and this could adversely
affect results in their home markets.
Our sales are affected by sponsoring levels; many factors, adverse
publicity in particular, impact sponsoring. We distribute products exclusively
through our distributors and, in China, through our sales representatives. Our
net sales, therefore, are directly dependent on maintaining and building our
core distributor force. Like other direct selling companies, a large number of
our distributors do not renew their distributorships each year. To increase our
sales, sponsoring must increase and/or distributors must increase their
productivity. Distributor motivation and leadership are the two primary factors
which impact sponsoring, our ability to retain distributors and in turn, our
sales. Geographic expansion, economic conditions, government regulations,
adverse publicity and the perception of Amway, Amway Asia Pacific and direct
selling generally all impact distributor motivation and leadership. Over time,
we have experienced increases and decreases in sponsoring but we cannot predict
the timing or extent of these changes because of the many factors at work. We
cannot be assured that we will be able to increase our distributors or their
productivity. In addition, we may be unable to increase distributors beyond a
certain point as there is a finite number of persons interested in having a
direct selling business.
Adverse publicity may result from certain distributor activities. In
particular, some distributor leaders, through their own independent
organizations, distribute motivational audio and video tapes and written
material without our prior review and approval. Negative publicity may arise
from the sales of such materials. While our prior review and approval is
required in certain instances under the Sales Plan, we cannot closely monitor
our distributors as we would our employees. We do communicate with distributor
leaders and attempt to enforce the Sales Plan and the Amway Code of Ethics and
Rules of Conduct to avoid circumstances leading to negative publicity. If
necessary, we terminate distributors who violate our rules. It is possible that
negative publicity will adversely affect our results.
ITEM 2. DESCRIPTION OF PROPERTY
The Company has one manufacturing facility in the PRC, located in
Guangzhou, Guangdong province, which was opened on January 18, 1995. The Company
is in the final stages of expanding this manufacturing plant; as a result of
this expansion, production of Artistry(R) skin care and Nutrition & Wellness
products began in fiscal 1999. See "Description of Business - Government
Regulation - China Direct Selling Regulations." In addition, the Company has
office facilities for its officers and employees and distribution centers and
warehouses for the storage and distribution of its products located throughout
its markets. The following table summarizes, as of August 31, 1999, the number
of owned and leased offices and distribution center/warehouses in each country
in which the Company currently has sales activities:
[Download Table]
Owned Leased
Pickup or Pickup or
Distribution Distribution
Offices Center/Warehouse Offices Center/Warehouse
Australia (1)........... 1 1 1 2
PRC (2)................. 2 1 7 45
Malaysia (1)(3)......... - 3 - 7
New Zealand (1)......... 1 1 - -
Taiwan (1).............. - - 1 5
Thailand (1)............ - - - 20
--------------------------------
(1) Certain distribution centers/warehouses in these countries include office
space.
(2) Reflects Amway China's land use rights (for a 50-year term) with respect to
its manufacturing facility; includes facilities in Hong Kong and Macau.
18
(3) Includes facilities in Brunei.
The Company believes that its facilities are in good condition and that
it has sufficient capacity to meet its current operational requirements.
ITEM 3. LEGAL PROCEEDINGS
On December 8, 1999, Robert Fisher commenced a purported class action
lawsuit in the Superior Court of the State of California, County of San Mateo,
captioned FISHER, ET AL. V. AMWAY ASIA PACIFIC, LTD., ET AL., No. 411303. The
complaint, which names as defendants the Company, its officers and directors and
New AAP, alleges that the purchase price offered to the Company's public
shareholders in connection with New AAP's cash tender offer was unfair and that
in pursuing the cash tender offer, defendants engaged in various manipulative
and deceptive acts and practices in breach of their fiduciary duties to the
Company's public shareholders. The complaint seeks an injunction prohibiting
defendants from proceeding with the cash tender offer or, alternatively,
rescission of the cash tender offer to the extent already completed, unspecified
damages, costs and attorneys' fees and other relief. This action has been
removed to the United States District Court, Northern District of California and
was assigned No. C 00-00199 MEJ.
On December 16, 1999, Robert F. Wardrop, II, commenced a purported
class action lawsuit in the United States District Court for the Southern
District of New York captioned WARDROP, ET AL. V. AMWAY ASIA PACIFIC LTD., ET
AL, No. 99 Civ. 12093. The complaint, which names as defendants the Company, its
officers and directors and New AAP, alleges that defendants violated Section
14(e) of the Exchange Act, and Rules 14D-1 and 14D-9 promulgated pursuant
thereto, by misrepresenting in the Offer to Purchase that the purchase price
offered to the Company's public shareholders was fair. According to plaintiffs,
the statement that the purchase price was fair was false or misleading because
defendants allegedly failed to consider the impact on the Company's future of
the agreement between China and the United States, under which the United States
agreed to support China's entry into the World Trade Organization. The complaint
seeks an injunction prohibiting the defendants from proceeding with the cash
tender offer or, alternatively, rescission of the cash tender offer to the
extent already completed or rescissory damages, costs and attorneys' fees and
other relief.
The Company is a party to certain other routine litigation incidental
to its business, none of which is currently expected to have a material adverse
effect on the Company's financial condition or results of operations.
19
ITEM 4. CONTROL OF REGISTRANT
The following table sets forth certain information, as of December 31,
1999, as to the security ownership of those persons owning of record or known to
the Company to be the beneficial owner of more than 10% of the Common Stock and
the Common Stock ownership of the Company's officers and directors as a group.
All information with respect to beneficial ownership has been furnished by the
respective 10% beneficial owner, officer or director, as the case may be. Unless
otherwise indicated, the persons named below have sole voting and investment
power with respect to the number of shares of Common Stock set forth opposite
their names.
Names and Addresses Number of Shares of Percentage of Shares
of Beneficial Owners Common Stock of Common Stock
Beneficially Owned Beneficially Owned
-------------------- ------------------- --------------------
New AAP Limited 8,181,756(1) 14.5%
7575 Fulton Street, East
Ada, MI 49355
Apple Hold Co., L.P. 54,996,706(2) 97.4%
7575 Fulton Street, East
Ada, MI 49355
All officers and directors as a group 220,661(3) *
(14 persons)
*Less than one percent (1%).
(1) Acquired pursuant to the Offer, see "Description of Business - Tender
Offer." New AAP is wholly owned by Apple Hold Co., L.P.
(2) Includes 8,181,756 shares (14.5%) of Common Stock held by its wholly-owned
subsidiary, New AAP Limited. The limited partners of Apple Hold Co., L.P.
are corporations and trusts formed by or for the benefit of the DeVos and
Van Andel families; the general partner is AP New Co., LLC, a Nevada
limited liability company, the sole manager of which is Amway Corporation.
(3) Includes issued and outstanding options to purchase Common Stock. Pursuant
to the Amalgamation Agreement, all issued and outstanding options to
purchase Common Stock shall be converted into rights to receive cash in
accordance with the Black-Scholes Option Pricing Model and will require
surrender of all such options by the holders thereof as of the effective
date of the Amalgamation. See "Description of Business - Tender Offer." In
addition, Richard M. DeVos, Jr., Stephen A. Van Andel and Douglas L. DeVos
are executive officers of Amway, the sole manager of AP New Co., the
general manager of Apple, and therefore beneficially own 54,966,706 (97.4%)
shares of Common Stock.
ITEM 5. NATURE OF TRADING MARKET
The principal market for the shares of Common Stock is the New York
Stock Exchange (the "NYSE"), such shares having traded on the NYSE since
December 14, 1993. The Common Stock is also listed on the Australian Stock
Exchange Limited (the "ASX"), such shares having been listed on the ASX since
December 23, 1993.
On February 1, 2000, there were 56,441,960 shares of Common Stock
outstanding, of which 56,213,286 shares were held by 971 U.S. record holders.
The high and low sales prices of the Company's shares of Common Stock
on the NYSE and the ASX at the end of each fiscal quarterly period during the
last two fiscal years is set forth below in the following table.
20
[Download Table]
NYSE
-------------------------
HIGH LOW
---------- ------
FY 1998 First Quarter $34 $19 1/2
Second Quarter 22 15/16 15 3/4
Third Quarter 21 1/16 12 15/16
Fourth Quarter 16 1/2 9 3/16
FY 1999 First Quarter 13 3/16 8 1/4
Second Quarter 13 1/2 7
Third Quarter 14 1/2 6 7/8
Fourth Quarter 14 15/16 9 15/16
ASX
HIGH LOW
---- ---
FY 1998 First Quarter AU$46.50 AU$36.50
Second Quarter
36.00 26.00
Third Quarter
32.51 23.00
Fourth Quarter
28.50 19.50
FY 1999 First Quarter AU$21.00 AU$14.50
Second Quarter
21.00 12.00
Third Quarter
20.80 11.80
Fourth Quarter
24.00 15.90
ITEM 6. EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERS
The Company has been designated as a non-resident for exchange control
purposes by the Bermuda Monetary Authority. The transfer of shares between
persons regarded as resident outside Bermuda for exchange control purposes and
the issuance of shares to or by such persons may be effected without specific
consent under the Bermuda Exchange Control Act of 1972 and regulations
thereunder. Issuance and transfers of shares involving any person regarded as
resident in Bermuda for exchange control purposes require specific prior
approval under the Bermuda Exchange Control Act of 1972.
Owners of shares of Common Stock that are ordinarily resident outside
Bermuda are not subject to any restrictions on the exercise of rights to hold or
vote their shares. Because the Company has been designated as a non-resident for
Bermuda exchange control purposes, there are no restrictions on its ability to
transfer funds in and out of Bermuda or to pay dividends to United States
residents who are holders of the Common Stock, other than in respect of local
Bermuda currency.
21
In accordance with Bermuda law, share certificates may be issued in the
names of corporations, partnerships or individuals. In the case of an applicant
acting in a special capacity (for example, as trustee), certificates may, at the
request of the applicant, record the capacity in which the applicant is acting.
Notwithstanding the recording of any such special capacity, the Company is not
bound to investigate or incur any responsibility in respect of the proper
administration of any such trust. The Company will take no notice of any trust
applicable to any of its shares whether or not it had notice of such trust.
As an "exempted company," the Company is exempt from Bermuda laws which
restrict the percentage of share capital that may be held by non-Bermudans, but
as an exempted company the Company may not participate in certain business
transactions, including (i) the acquisition or holding of land in Bermuda
(except that required for its business and held by way of lease or tenancy for
terms of not more than 21 years) without the express authorization of the
Bermuda legislature, (ii) the taking of mortgages on land in Bermuda to secure
an amount in excess of $50,000 without the consent of the Minister of Finance of
Bermuda, (iii) the acquisition of securities created or issued by, or any
interest in, any local company or business, other than certain types of Bermuda
government securities or securities of another "exempted" company, partnership
or other corporation resident in Bermuda but incorporated abroad or (iv) the
carrying on of business of any kind in Bermuda, except in furtherance of the
business of the Company carried on outside Bermuda or under a license granted by
the Minister of Finance of Bermuda.
In addition to having no restrictions on the degree of foreign
ownership, the Company is subject neither to taxes on its income or dividends
nor to any foreign exchange controls in Bermuda. In addition, there is no
capital gains tax in Bermuda, and profits can be accumulated by the Company, as
required, without limitation.
As a result of the Company's ownership of its Australian affiliate, the
Foreign Acquisitions and Takeovers Act of 1975 (Australia) purports to apply to
sales of shares of Common Stock of the Company. As a result of the application
of this statute, changes in interests in the Company by non-Australian persons
may be subject to review and approval by the Australian Treasurer. The statute
provides for prior voluntary notification of any acquisition which would result
in one non-Australian person or group of associated non-Australian persons
controlling 15% or more of the outstanding shares of Common Stock. In addition,
the statute provides for prior notification of any acquisition by associated
non-Australian persons resulting in foreign persons controlling, in the
aggregate, 40% or more of total voting power or ownership.
ITEM 7. TAXATION
BERMUDA TAXATION
At the date hereof, there is no Bermuda income, corporation or profits
tax, withholding tax, capital gains tax, capital transfer tax, estate duty or
inheritance tax payable by the Company or its stockholders other than
stockholders ordinarily resident in Bermuda. The Company is not subject to stamp
or other similar duty on the issue, transfer or redemption of its shares of
Common Stock.
The Company has obtained an assurance from the Minister of Finance of
Bermuda under the Exempted Undertaking Tax Protection Act of 1966 that, in the
event there is enacted in Bermuda any legislation imposing tax computed on
profits or income or computed on any capital assets, gain or appreciation or any
tax in the nature of estate duty or inheritance tax, such tax shall not be
applicable to the Company or to its operations, or to the shares, debentures or
other obligations of the Company until March 28, 2016, except insofar as such
tax applies to persons ordinarily resident in Bermuda and holding such shares,
debentures or other obligations of the Company or any real property or leasehold
interests in Bermuda owned by the Company. No reciprocal tax treaty affecting
the Company exists between Bermuda and the United States.
As an exempted company, the Company is liable to pay in Bermuda a
registration fee based upon its authorized share capital and the premium on its
issued shares of Common Stock at a rate not exceeding U.S.$26,500 per annum.
22
UNITED STATES TAXATION
Taxation of Stockholders
The general discussion below relates to the United States federal
income taxation of a United States person (i.e., a United States citizen or
resident, a United States corporation, a United States partnership, or an estate
or trust subject to United States tax on all of its income regardless of source
(a "U.S. Investor")) holding shares of Common Stock. The following discussion
does not address the tax consequences to a person who holds (or will hold),
directly or indirectly, 10% or more of the Common Stock (a "10% Stockholder").
In addition, this summary does not address the United States tax treatment of
certain types of U.S. Investors (e.g., individual retirement and other
tax-deferred accounts, life insurance companies and tax-exempt organizations) or
of persons other than U.S. Investors, all of whom may be subject to tax rules
that differ significantly from those summarized below. The discussion below, as
it relates to U.S. tax consequences, is based upon the provisions of the Code
and regulations, rulings and judicial decisions thereunder as of the date
hereof, and such authorities may be repealed, revoked or modified so as to
result in U.S. federal income tax consequences different from those discussed
below.
A U.S. Investor receiving a distribution on the Common Stock will be
required to include such distribution in gross income as a taxable dividend to
the extent such distribution is paid from earnings and profits of the Company as
determined under United States federal income tax law. Distributions in excess
of the earnings and profits of the Company will first be treated, for United
States federal income tax purposes, as a nontaxable return on capital to the
extent of (and reduction of) the U.S. Investor's basis in the Common Stock and
then as gain from the sale or exchange of a capital asset, provided that the
Common Stock constitutes a capital asset in the hands of the U.S. Investor.
Dividends received on the Common Stock will not be eligible for the corporate
dividends received deduction.
Distributions with respect to the Common Stock that are taxable as
dividends in the United States will generally constitute income from sources
outside the United States for purposes of determining the limitation on the
allowable foreign tax credit. The overall limitation on foreign taxes eligible
for credit is calculated separately with respect to specific classes of income.
For this purpose, dividends distributed by the Company to U.S. Investors (who
are not 10% Stockholders) will generally constitute "passive income" or, in the
case of certain U.S. Investors, "financial services income."
With certain exceptions, gain or loss on the sale or exchange of the
Common Stock will be treated as capital gain or loss (if the Common Stock is
held as a capital asset). Such capital gain or loss will be long-term capital
gain or loss if the U.S. Investor has held the Common Stock for more than one
year at the time of the sale or exchange. Gain, if any, will generally be U.S.
source gain.
Various provisions contained in the Code impose special taxes in
certain circumstances on non-United States corporations and their stockholders.
The following is a summary of certain provisions which could have an adverse
impact on the Company and the U.S. Investors. There is currently no reciprocal
tax treaty between Bermuda and the United States affecting the Company or its
stockholders.
Personal Holding Companies
Sections 541 through 547 of the Code relate to the classification of
certain companies (including foreign corporations) as personal holding companies
("PHCs") and the consequent taxation of such corporations on their undistributed
personal holding company income. A PHC is a corporation (i) more than 50% of the
stock of which is owned, directly or indirectly, by five or fewer individuals at
least one of which is a U.S. resident or citizen and (ii) which receives 60% or
more of gross income, as specifically adjusted, from certain passive sources.
For purposes of this gross income test, income of a foreign corporation means
generally only income derived from U.S. sources or income that is effectively
connected with a U.S. trade or business.
More than 50% of the shares of Common Stock are owned, directly or
indirectly, by five or fewer individuals, at least one of whom is a U.S.
resident or citizen. However, since the Company will derive most or all of its
income from foreign sources that will not be effectively connected with a U.S.
trade or business, the Company believes that it does not satisfy the foregoing
income test and therefore will not be classified as a PHC.
23
Foreign Personal Holding Companies
Sections 551 through 558 of the Code relate to foreign personal holding
companies ("FPHCs") and impute undistributed income of certain foreign
corporations to United States persons who are stockholders of such corporations.
A foreign corporation will be classified as a FPHC if (i) five or fewer
individuals, who are United States citizens or residents, directly or indirectly
own more than 50% of the corporation's stock (measured either by voting power or
value) (the "stockholder test") and (ii) the corporation receives at least 60%
of its gross income (regardless of source), as specifically adjusted, from
certain passive sources (the "income test"). After a corporation becomes a FPHC,
the income test percentage for each subsequent taxable year is reduced to 50%.
If the Company were to be classified as a FPHC, a portion of its
undistributed income would be imputed to each of its U.S. Investors who held the
Company's stock on the last day of the calendar year. Such income would be
taxable to such persons as a dividend, even if no cash dividend is actually
paid. U.S. Investors who dispose of their Common Stock prior to such date would
not be subject to tax under these rules. If the Company were to become a FPHC,
U.S. Investors who acquire Common Stock from decedents would be denied the
step-up of the income tax basis for such Common Stock to fair market value at
the date of death which would otherwise have been available and instead would
have a tax basis equal to the lower of the fair market value or the decedent's
basis.
Richard M. DeVos and Jay Van Andel, who are United States citizens,
directly or indirectly own a beneficial interest of more than 50% of the Common
Stock for purposes of the FPHC rules. Accordingly, the stockholder test will be
met. Because the Company derives most of its gross income from the distribution
of Amway products in Australia and Hong Kong and such income is not considered
passive income, the Company does not satisfy the foregoing income test and
therefore is not an FPHC.
Passive Foreign Investment Companies
Through December 31, 1997, if 75% or more of the gross income of the
Company (including the pro rata gross income of any company of which the Company
is considered to own 25% or more of the stock by value) in a taxable year is
passive income, or if the average percentage of assets (generally determined
based upon adjusted tax basis) of the Company (including the pro rata value of
the assets of any company of which the Company is considered to own 25% or more
of the stock by value) in a taxable year which produce or are held for the
production of passive income is at least 50%, the Company would be classified as
a "passive foreign investment company" ("PFIC") for that taxable year. Non-tax
exempt U.S. Investors are taxed on gain from the sale of PFIC stock and certain
distributions from PFICs (generally distributions in excess of average
distributions to such shareholders by the PFIC in the prior three years) by
being treated as if such amounts were received ratably during the period the
U.S. Investor held the shares and treating such amounts as ordinary income. The
amount allocated to each year (other than the current year) is subject to tax at
the maximum marginal tax rate in effect for that year plus an interest charge
calculated as though the U.S. Investor actually owed and failed to pay tax on
the amount of income allocated to each prior year. The application of this
system may result in significantly higher U.S. taxes on a U.S. Investor's
distributions and gain from the sale of PFIC stock. If the Company were to
become a PFIC, U.S. Investors who acquire Common Stock from decedents could be
denied the step-up of the income tax basis for such Common Stock to fair market
value at the date of death which would otherwise have been available and instead
could have a tax basis equal to the lower of the fair market value or the
decedent's basis. The Company does not expect to be a PFIC because it believes
that it can manage its business so as to avoid PFIC status.
The Company will notify U.S. Investors in the event that the Company is
treated as a PFIC for any taxable year to enable U.S. Investors to consider
whether to elect to treat the Company as a qualified electing fund ("QEF") for
United States federal income tax purposes. The result of the QEF election is
that an electing U.S. Investor avoids the tax treatment generally applicable to
PFICs discussed above. Instead, a shareholder of a QEF is required, for each
taxable year, to include in income a pro rata share of the ordinary earnings of
the QEF as ordinary income and a pro rata share of the next capital gain of the
QEF as long-term capital gain. The Company intends to comply with the reporting
requirements necessary for a U.S. Investor to make a QEF election, and will
report such information to U.S. Investors as may be required to make such a QEF
election effective. If a shareholder makes a QEF election and such election
applies for all years that such shareholder has held the stock, gain on the sale
of such stock would be characterized as capital gain (provided the stock is held
a capital asset) and the denial of bases step-up at death described above would
not apply.
24
Effective January 1, 1998, if 75% or more of the gross income of the
Company (including the pro rata gross income of any company of which the Company
is considered to own 25% or more of the stock by value) in a taxable year is
passive income, or if the average percentage of assets (generally determined
based upon fair market value) of the Company (including the pro rata value of
the assets of any company of which the Company is considered to own 25% or more
of the stock by value) in a taxable year which produce or are held for the
production of passive income is at least 50%, the Company would be classified as
a PFIC for that taxable year.
Because the fair market value of the Company's active assets is
expected to remain greater than 50% of the fair market value of the Company's
total assets and the active income of the Company is expected to continue to
exceed 25% of the Company's gross income, the Company believes it will not
satisfy the foregoing asset and income tests, and therefore will not be
classified as PFIC after January 1, 1998.
Controlled Foreign Corporations
Sections 951 through 964 and Section 1248 of the Code relate to
controlled foreign corporations ("CFC") and impute some portion of undistributed
income to 10% Stockholders and convert into dividend income some portion of
gains on dispositions of shares which would otherwise qualify for capital gain
treatment. The CFC provisions only apply if 10% Stockholders, who are also
United States persons, own, in the aggregate, more than 50% (measured by voting
power or value) of the shares of a foreign corporation. Certain trusts and
foundations established by or for the benefit of Richard DeVos and Jay Van Andel
and their families who are considered 10% Stockholders are deemed to own more
than 50% of the Common Stock and the Company is a CFC. However, the income
imputation rules referred to for CFCs above would only apply with respect to 10%
Stockholders.
UNITED STATES BACKUP WITHHOLDING AND INFORMATION REPORTING
The receipt of dividends on the Common Stock by a holder of the Common
Stock (i) made by mail or wire transfer to an address in the United States, (ii)
made by a paying agent, broker or other intermediary in the United States or
(iii) made by a United States broker or a "United States-related" broker to such
holder outside the United States may be subject to United States information
reporting requirements. Holders of Common Stock who are not United States
persons ("non-U.S. holders") generally would be exempt from these reporting
requirements, but may be required to comply with certification and
identification procedures in order to prove their exemption. Treasury
regulations currently in effect do not require backup withholding with respect
to dividends paid by a foreign corporation such as the Company.
The payment of the proceeds of the disposition of Common Stock by a
holder to or through the United States office of a broker generally will be
subject to information reporting and backup withholding at a rate of 31% unless
the holder either certifies its status as a non-U.S. holder under penalties of
perjury or otherwise establishes an exemption. The payment of the proceeds of
the disposition by a holder of Common Stock to or through a non-U.S. office of a
broker will generally not be subject to backup withholding and information
reporting. Information reporting (but not backup withholding) may apply,
however, to such a holder who sells a beneficial interest in Common Stock
through a non-United States branch of a United States broker, or through a
non-United States office of a "United States-related" broker, in either case
unless the holder establishes an exemption or the broker has documentary
evidence in its files of the holder's status such as a non-U.S. holder (and the
broker has no actual knowledge to the contrary). For purposes of these rules, a
"United States-related" broker is a broker or other intermediary that is a
controlled foreign corporation for United States federal income tax purposes or
that is a person 50% or more of the gross income from all sources of which, over
a specified three-year period, is effectively connected with a United States
trade or business.
Any amounts withheld under the backup withholding rules from a payment
to a holder will be refunded (or credited against the holder's United States
federal income tax liability, if any) provided that the required information is
furnished to the United States Internal Revenue Service.
25
ITEM 8. SELECTED CONSOLIDATED FINANCIAL DATA
[Enlarge/Download Table]
(U.S. DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED AUGUST 31,
INCOME STATEMENT DATA: 1999 1998 1997 1996 1995
---------- -------------- -------------- -------------- ----------
Historical
Net sales . . . . . . . . . . . . . $ 501,475 $ 587,579 $ 845,166 $ 716,757 $ 718,279
Cost of sales . . . . . . . . . . 216,455 257,220 313,287 269,377 273,970
------------ -------------- -------------- -------------- -------------
285,020 330,359 531,879 447,380 444,309
------------ -------------- -------------- -------------- -------------
Distributor incentives . . . . . . 128,815 157,018 219,111 186,092 187,863
Distribution expenses . . . . . . . 37,774 45,199 49,662 40,777 37,842
Selling and administrative
expenses . . . . . . . . . . . . 92,104 102,849 114,523 93,367 90,849
------------ -------------- -------------- -------------- -------------
Total operating expenses . . . . . . 258,693 305,066 383,296 320,236 316,554
------------ -------------- -------------- -------------- -------------
Operating income . . . . . . . . . 26,327 25,293 148,583 127,144 127,755
------------ -------------- -------------- -------------- -------------
Other income - net . . . . . . . . 6,504 9,683 24,707 19,781 12,512
------------ -------------- -------------- -------------- -------------
Income before income taxes and
minority interest . . . . . . . . 32,831 34,976 173,290 146,925 140,267
Income taxes . . . . . . . . . . . 13,294 23,508 54,909 55,709 44,963
------------ -------------- -------------- -------------- -------------
Income before minority interest . . 19,537 11,468 118,381 91,216 95,304
Minority interest in net income
of consolidated subsidiaries . . . 7,062 10,015 14,350 8,983 5,422
------------ -------------- -------------- -------------- -------------
Net income . . . . . . . . . . . . $ 12,475 $ 1,453 $ 104,031 $ 82,233 $ 89,882
============ ============== =============== ============== =============
Basic and diluted earnings
per share . . . . . . . . . . . $ 0.22 $ 0.03 $ 1.76 $ 1.37 1.50
============ ============== =============== ============== =============
Dividends per share (4) . . . . . . $ - $ 0.88 $ .84 $ 1.02 0.64
============ ============== =============== ============== =============
Weighted average number of
shares outstanding (000's) . . . 56,442 56,442 59,124 60,039 60,013
============ ============== =============== ============== =============
Weighted average number of
shares outstanding including
the effect of dilutive
securities (000's) . . . . . . . 56,442 56,446 59,176 60,097 60,103
============ ============== =============== ============== =============
26
[Enlarge/Download Table]
(U.S. DOLLARS IN THOUSANDS)
BALANCE SHEET DATA: AUGUST 31,
------------------------------------------------------------------------
1999 1998 1997 1996 1995
------ ------ ------ ------ ----
Working Capital . . . . . . . . . . $ 113,203 $ 102,128 $ 186,477 $ 315,970 $ 260,951
. .
Total assets . . . . . . . . . . . 366,079 387,073 520,143 617,391 529,338
Long-term debt (less current
maturities) . . . . . . . . . . - - - 16,308 23,987
Total shareholders' equity . . . . 194,388 176,098 252,484 364,216 329,616
OTHER DATA: AUGUST 31,
------------------------------------------------------------------------
1999 1998 1997 1996 1995
------ ------ ------ ------ ----
Number of core distributors
(1) (2) . . . . . . . . . . . . . 601,000 646,000 667,000 555,000 510,000
Number of direct distributors
(2) (3) . . . . . . . . . . . . . 6,165 6,725 7,437 7,096 7,052
YEARS ENDED AUGUST 31,
------------------------------------------------------------------------
1999 1998 1997 1996 1995
------ ------ ------ ------ ----
Gross margin . . . . . . . . . . . 56.8% 56.2% 62.9% 62.4% 61.9%
Operating margin . . . . . . . . . 5.2% 4.3% 17.6% 17.7% 17.8%
Net income margin . . . . . . . . . 2.5% 0.2% 12.3% 11.5% 12.5%
(1) Includes total number of distributorships (including direct
distributorships) or sales representatives in the case of China (see
Description of Business--China Operations), in force from the prior fiscal
year which were renewed for the fiscal year shown. Number of distributors
are rounded to the nearest thousand. The number for each fiscal year does
not reflect the total number of distributors for such fiscal year because
it does not include new distributors who enrolled during such fiscal year.
(2) Multiple persons in the same household (such as a married couple) who are
distributors are considered a single distributorship.
(3) "Direct distributors" are distributors who have achieved a significant
level of performance for a specified period.
(4) In fiscal 1996, the Company paid total regular dividends of $0.70 per share
and a special dividend of $0.32 per share. No dividends have been paid
since the fourth quarter of fiscal 1998.
27
ITEM 9. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of the Company's financial
condition and results of operations should be read in conjunction with the
Consolidated Financial Statements (including Notes thereto), "Description of
Business--Government Regulation and -Risks and Uncertainties" and other
information included elsewhere in this Annual Report.
BACKGROUND
The Company, organized in 1993, completed its initial public offering
of 9,085,000 shares of Common Stock on December 21, 1993. The Company is a
Bermuda corporation which, directly or indirectly through controlled affiliates,
is the exclusive distribution vehicle for Amway in Australia, Brunei, China (the
mainland, the Hong Kong Special Administrative Region, Taiwan and Macau),
Malaysia, New Zealand and Thailand. References herein to "China" refer
exclusively to the mainland of China. Each affiliate is wholly owned, except
Malaysia, in which the Company has a 51.7% ownership equity position (see Note
15 in the Consolidated Financial Statements), and Thailand, a partnership in
which the Company is a general partner with a 99.0% economic interest.
In the fourth quarter of fiscal 1998, the Company changed its mode of
operation in China in response to a China government directive. As part of the
change in operations, the Company's China affiliate sells product primarily to
sales representatives and privileged customers. See "Description of
Business--China Operations." In Australia, distributors are independent agents
who arrange for sales of products directly by the Company to the consumer and/or
arrange for delivery of products to distributors they have sponsored. See
"Description of Business--Distribution." Unless otherwise noted, any references
to the Company's distributors within this Management's Discussion and Analysis
of Financial Condition and Results of Operations includes sales representatives
in China and sales agents in Australia.
OVERVIEW
Substantially all of the Company's revenues are derived from the sale
of a broad range of consumer products to or through distributors. The Company
also receives revenues from the sale of starter kits to new distributors and
other business support materials to existing distributors and from distributor
renewal fees, except in China where such fees are not charged. See "Description
of Business--China Operations." The Company recognizes sales when products are
shipped to or through distributors as well as privileged customers in China.
The Company's affiliates record net sales in currencies other than the
U.S. dollar. The Company's financial statements are expressed in U.S. dollars.
Revenues and expenses are translated from local currencies into U.S. dollars at
average currency exchange rates. Accordingly, fluctuations in currency exchange
rates can have a material beneficial or adverse effect on net sales when
calculated on a U.S. dollar basis. See "--Foreign Currency Exchange Rate
Information and Market Risk" and "Description of Business--Risks and
Uncertainties-- Our business is subject to the economic and political turmoil
occurring in the Asia Pacific Region."
The Company's net sales are directly dependent upon the efforts of its
distributors. Any growth in future sales volume will require growth in the
number of distributors and/or increased productivity by the distributors.
Historically, the Company has experienced periodic increases and decreases in
the level of sponsoring in its markets (as measured by distributor
applications); however, because of the number of factors that impact sponsoring,
the Company cannot predict the timing or degree of these occurrences in the
future. As is typical of direct selling, there is a high turnover in
distributors from year to year which requires the sponsoring and training of new
distributors by existing distributors in order to maintain or increase the
overall distributor force. Sales levels, sponsoring activities and distributor
retention levels are impacted by changes in the level of distributor motivation
and the development of distributor leadership, which in turn can be affected by
a number of tangible factors including governmental policies or regulations
regarding the direct selling industry, general economic conditions, and a number
of intangible factors such as adverse publicity and the perception of Amway, the
Company and direct selling generally. Reported net sales are also impacted by a
variety of other factors, such as pricing, exchange rate fluctuations, product
28
improvements, product promotions and the introduction of major new products
which tend to stimulate distributor interest and thus sales.
The Company's most significant expense is cost of sales. Approximately
70% of the Company's cost of sales for fiscal 1999 was represented by the cost
of products purchased from Amway and the related costs for freight, handling,
duties and taxes as well as the cost of transporting these products from the
point of entry to a local warehouse. For fiscal 1998, Amway sourced products and
related costs accounted for approximately 65% of its cost of sales. The increase
for fiscal 1999 primarily reflects increases in the cost of products purchased
from Amway and changes in product mix. Amway periodically establishes a price
schedule for the products purchased from Amway based upon a U.S. dollar "cost
plus" base price calculation and an implicit local currency to U.S. dollar
exchange rate for those markets billed in local currency (currently Australia
and New Zealand only). Amway has the right to modify its prices at any time on
at least 30 days advance notice, provided that any change in the U.S. dollar
"cost plus" base price component must be made on a consistent basis for all
Amway affiliates. In fiscal 1999, Amway raised its "cost plus" base prices for
products purchased by the Company's affiliates by approximately 3.7% effective
September 1, 1998. Given the currency volatility in the Asia Pacific region, the
Company and Amway have been reviewing on a quarterly basis the implicit exchange
rate in the pricing of products purchased from Amway by the Australian and New
Zealand affiliates based on an assessment of current and future economic and
business conditions in the United States as well as in Australia and New
Zealand, forward foreign exchange expectations, market conditions with respect
to the Company's products and other factors. Effective September 1, 1998, in
addition to the increase in the cost-plus base prices, Amway increased the
implicit local currency to U.S. dollar exchange rates for Australia and New
Zealand by approximately 5.4% and 5.3%, respectively; effective December 1,
1998, Amway increased the implicit local currency to U.S. dollar exchange rates
for Australia and New Zealand an additional 3.0% and 1.7%, respectively; and on
March 1, 1999, the implicit exchange rates were increased by an additional 3.2%
for Australia and 3.6% for New Zealand due to additional devaluation. Beginning
in fiscal 2000, the Company and Amway will review the exchange rate in the
pricing of products purchased from Amway by the Australian and New Zealand
affiliates three times per year, with any resulting price changes becoming
effective on the first day of September, January and May. Resulting from such
review, effective September 1, 1999, prices on products purchased from Amway
were decreased 3.1% for Australia and increased 3.7% for New Zealand. See
"Description of Business--Relationship with Amway". Also included in cost of
sales is a royalty (5% of net sales less distributor incentives) paid by the
Company's China affiliate to Amway for the right to manufacture Amway products
in China.
The most significant component of the Company's operating expenses is
distributor incentives, which are principally in the form of bonus payments to
distributors based on performance. Distributors earn incentives based on the
purchases of consumer products by them and their downline distributors. Bonuses
are not paid on business support materials, as such items are intended for use
by the distributors rather than for resale to consumers. Distributor incentives
are paid by the Company based on a schedule set by Amway under the Sales Plan
and are tied to the volume and value of products purchased by the distributors.
In China, sales representatives' compensation is also based on the services
provided by them to the Company. See "Description of Business--China
Operations."
Other operating expenses consist of distribution expenses and selling
and administrative expenses. Distribution expenses include the costs associated
with having products available for, and delivering products to, distributors and
privileged customers. These include the costs of warehouse and distribution
facilities. Selling and administrative expenses include, in addition to
corporate staff overhead and royalty expense on distributor lists, the costs of
motivational sales meetings, product demonstration seminars and product fairs,
training sessions, distributor leadership seminars and business promotions
meetings. Corporate image advertising, civic events and promotional activities
are also classified as selling and administrative expenses. In addition,
pursuant to the Amended and Restated Support Services Agreements between Amway,
the Company and its affiliates, Amway provides information systems, executive
management, investor relations services and certain administrative support
services including legal, accounting, tax, treasury, marketing, insurance,
inventory control and human resources services to the Company. The Company pays
Amway for such services based on the internal labor and other direct and
indirect costs incurred by Amway in providing such services. The Company also
pays Amway software license fees and maintenance charges with respect to
information systems provided by Amway. See Note 10 to the Consolidated Financial
Statements and "Description of Business--Relationship with Amway--Support
Services Agreement."
29
The Company is not taxed in Bermuda where it is incorporated or in Hong
Kong (except with respect to the operations of the Hong Kong affiliate) where
its headquarters are located. Each Company affiliate is subject to taxation in
the country in which it operates. Currently, the statutory tax rates in the
Company's markets range from a high of 36% in Australia to a low of 7.5% in
China. The Malaysian government suspended the income tax on business-related
income in that country for the 1999 tax year which, for the Company's Malaysia
affiliate, is the Company's 1999 fiscal year. Income taxes in Malaysia resumed
effective for fiscal 2000 at the expected statutory tax rate of 28%. See
"--Results of Operations--Income Taxes." In China, the current tax laws, which
apply to calendar years, allow the Company's China affiliate to pay no tax on
profits for the two calendar years beginning in the year that an accumulated
profit was realized; thereafter, the China affiliate is subject to special
reduced rates of 7.5% for three years, 10.0% for the subsequent three years and
15% thereafter. Such an accumulated profit was realized by the Company's China
affiliate during the 1997 calendar year; therefore, the Company's China
affiliate was not subject to tax on profits in 1997 and 1998. The Company's
China affiliate operated at a loss for the 1998 calendar year and therefore the
Company did not receive any benefit from this tax holiday for calendar 1998. The
China tax laws allow for losses to be carried forward for up to five years. A
7.5% statutory tax rate applied for the 1999 calendar year and the Company
recorded a tax benefit at August 31, 1999, in line with its expectation that a
portion of the China affiliate's fiscal 1999 loss will be used to offset future
taxable earnings at that affiliate. See "Description of Business--Government
Regulation--China Direct Selling Regulations" and "--Results of
Operations--Income Taxes." Dividends from the Company's subsidiaries in Taiwan
and Thailand are subject to withholding taxes at the rates of 20% and 10%,
respectively.
FISCAL 1999
Summary. The Asian economic crisis continued to have a significant
negative impact on the Company's business during fiscal 1999, particularly in
the first half of the fiscal year, as the significant decline in purchasing
power in many of the Company's markets contributed to the decline in the
Company's overall sales volume. Local currencies in several of the Company's
markets, which significantly weakened in comparison to the U.S. dollar during
fiscal 1997 and 1998, recovered to some degree in the first quarter of fiscal
1999 and remained relatively steady throughout the remainder of the fiscal year,
leading to a slightly positive impact on reported U.S. dollar sales for fiscal
1999 as compared to fiscal 1998. Sales momentum in China was slow to recover
after the Company was permitted to resume operations in July 1998 following the
government's directive in April 1998 to cease all direct selling activities. The
negative effects of the ban, and the adverse publicity which accompanied the
ban, were severe and pervasive, making the Company's efforts to recruit sales
representatives and privileged customers extremely difficult in that market,
particularly in the first half of fiscal 1999. Midway through the third quarter
of fiscal 1999, the China Business Revitalization Program, designed to make the
Amway business opportunity more attractive and tailored to the environment in
China, was launched. This program proved successful in attracting sales
representatives and helped to generate a higher level of sales in that market in
the second half of fiscal 1999 as compared to the same period in fiscal 1998.
The Company generated an increase in operating profit in fiscal 1999 as compared
to fiscal 1998 due primarily to the impact of the China Business Revitalization
Program and efforts to control costs in China and other markets.
Core Distributor Force; Sponsoring. At August 31, 1999, the Company had
a core distributor force of approximately 601,000 independent distributors
(those distributors who had renewed their distributorships from the prior fiscal
year), a decrease compared to the August 31, 1998 level of 646,000. This
decrease was primarily due to the decline in core distributor force in Thailand
and Taiwan. The core distributor force in Malaysia and Australia increased for
fiscal 1999 due to the distributor benefit program in Malaysia (see "--Results
of Operations") and due to the larger base of distributors carrying over from
the previous year in both markets. In China, the number of sales representatives
declined as a result of the change in the mode of operations in China at the
beginning of fiscal 1999, which included a reclassification of certain
distributors as privileged customers.
For fiscal 1999, as compared to fiscal 1998, overall sponsoring
declined as a result of a decrease in all of the Company's markets except
Malaysia and Hong Kong, which recorded strong increases in sponsoring. The
decreases were largely due to the economic conditions in Asia. In Australia,
there was a difficult comparison to the prior year when distributor enthusiasm
in that market was high following the implementation of direct fulfillment in
fiscal 1998. The increase in Malaysia reflected distributor enthusiasm for the
new Distributor Benefit Program and successful promotions on big ticket items
used to attract new distributors together with the stabilization of the
30
Malaysia economy. In China, the enthusiasm generated by the China Business
Revitalization Program and the easing of the criteria to become a sales
representative in that market led to an increase in sponsoring in the second
half of fiscal 1999 as compared to the same period of fiscal 1998.
RESULTS OF OPERATIONS
NET SALES BY COUNTRY
The table below sets forth net sales information in U.S. dollars for
each of the countries in which the Company has operations for the periods shown.
[Enlarge/Download Table]
NET SALES BY COUNTRY
(U.S. DOLLARS IN THOUSANDS)
% CHANGE % CHANGE % CHANGE
FISCAL FROM FISCAL FROM FISCAL FROM
COUNTRY 1999 FISCAL 1998 1998 FISCAL 1997 1997 FISCAL 1996
------------- ------- ---------- ------- ----------- ------ ------------
China............................. $ 55,452 (18.8)% $ 68,304 (61.6)% $178,008 182.9%
Hong Kong (1)..................... 25,468 (18.9) 31,412 (8.8) 34,435 (10.4)
Taiwan............................ 122,594 (13.6) 141,920 (13.9) 164,783 (15.3)
------- ------- -------
GREATER CHINA REGION.............. 203,514 (15.8) 241,636 (35.9) 377,226 27.5
Malaysia / Brunei (2)............. 83,459 (11.9) 94,706 (30.0) 135,244 21.3
Thailand.......................... 89,171 (14.5) 104,326 (42.5) 181,574 8.3
------- ------- -------
MALAYSIA-THAILAND REGION.......... 172,630 (13.3) 199,032 (37.2) 316,818 13.5
Australia......................... 107,386 (13.6) 124,232 2.0 121,796 4.9
New Zealand....................... 17,945 (20.9) 22,679 (22.7) 29,326 14.2
------- ------- -------
AUSTRALIA-NEW ZEALAND REGION...... 125,331 (14.7) 146,911 (2.8) 151,122 6.6
------- ------- -------
Total Net Sales................... $501,475 (14.7) $587,579 (30.5) $845,166 17.9%
======== ======== ========
<FN>
(1) Includes Macau.
(2) Brunei, included in the results of Malaysia since its acquisition by
Malaysia on April 30, 1996, is immaterial to the comparisons.
The table below sets forth the change in local currency net sales for
each of the countries in which the Company has operations for fiscal 1999 and
1998 as compared to the previous fiscal year.
CHANGE IN LOCAL CURRENCY NET SALES BY COUNTRY
---------------------------------------------
% INCREASE (DECREASE)
FROM THE PRIOR FISCAL YEAR
FISCAL FISCAL
1999 1998
---- ----
COUNTRY
-----------------
China...................................... (18.8) (61.7)
Hong Kong (1).............................. (18.8) (8.7)
Taiwan..................................... (12.9) 0.9
Malaysia/Brunei (2)........................ (9.8) 2.8
Thailand................................... (22.7) (10.3)
Australia.................................. (10.4) 19.8
New Zealand................................ (15.0) (6.7)
31
(1) Includes Macau.
(2) Sales are denominated in more than one local currency. Any fluctuation in
the exchange rates between the currencies in this market were immaterial to
the calculation of percentage change in local currency sales.
Specific Components of Income and Expense Represented as a Percentage of Net
Sales.
The following table sets forth the percentage of net sales represented
by the specific components of income and expense for the periods shown.
[Enlarge/Download Table]
YEARS ENDED AUGUST 31,
1999 1998 1997
---------- --------- --------
Net sales (1)....................................... 100.0% 100.0% 100.0%
Cost of sales....................................... 43.2 43.8 37.1
----- ----- -----
.................................................... 56.8 56.2 62.9
----- ----- -----
Distributor incentives.............................. 25.7 26.7 25.9
Distribution expenses............................... 7.5 7.7 5.9
Selling and administrative expenses................. 18.4 17.5 13.6
----- ----- -----
Total operating expenses
.................................................... 51.6 51.9 45.4
----- ----- -----
Operating income.................................... 5.2 4.3 17.6
Other income - net.................................. 1.3 1.6 2.9
----- ----- -----
Income before income taxes and minority interest.... 6.5 6.0 20.5
Income taxes........................................ 2.7 4.0 6.5
----- ----- -----
Income before minority interest..................... 3.9 2.0 14.0
Minority interest in net income of consolidated
subsidiaries...................................... 1.4 1.7 1.7
----- ----- -----
Net income.......................................... 2.5% 0.2% 12.3%
===== ===== =====
<FN>
(1) Figures in this table may not add due to rounding.
Fiscal 1999 Compared to Fiscal 1998
Net Sales. Net sales of $501.5 million for fiscal 1999 decreased $86.1
million (14.7%) from net sales of $587.6 million for fiscal 1998, reflecting
double-digit declines in all the Company's markets. Although net sales declined
for the year, net sales increased 9.2% for the fourth quarter of fiscal 1999 as
compared to the fourth quarter of fiscal 1998 reflecting increases in China and,
to a lesser extent, Malaysia. This increase in the Company's net sales for the
fourth quarter reflects a favorable comparison with the prior year, when the
government ban on direct selling in China (see "Description of Business--China
Operations") and the Asian economic crisis severely impacted the Company's
results.
Net sales in the Greater China region for fiscal 1999 were $203.5
million, a decrease of 15.8% from fiscal 1998. Net sales in China declined 18.8%
for fiscal 1999 reflecting the slow restart in that market, particularly in the
first half of fiscal 1999, under the new mode of operations. Under this mode of
operations, distributors worked with a revised sales plan and shifted the
emphasis of their work from business opportunity and network development to
product sales and customer service. In addition, during that period of
transition, sales representatives approached the rebuilding of their businesses
with a cautious attitude due to public uncertainty regarding direct selling
companies in China. The sales trend in China significantly improved in the
fourth quarter of fiscal 1999 when net sales in that market were approximately
double that of each of the previous three quarters of fiscal 1999. This fourth
quarter increase in China sales reflected the positive impact of the China
Business Revitalization Program. This program, which was launched midway through
the third quarter of fiscal 1999, has attracted an increased number of sales
representatives and has generated increased sales as compared to sales levels
prior to implementation of the program. These increased sales are primarily the
result of new product introductions and increased unit volume of certain Home
Care and Toiletry products on which prices were reduced by 30% to 40% as part of
the Revitalization Program. The increase in unit volume of these Home Care and
Toiletry products, together with recent decreases in
32
import duties on raw materials and consumption taxes related to these products,
has been sufficient to cause an increase in gross profit on these products since
the inception of the Program, notwithstanding the decrease in prices for such
products. The transition to local manufacturing in China required by Chinese
regulations and the high level of promotional activity in the first half of
fiscal 1999 resulted in some of the Company's more popular products becoming
temporarily sold out near the end of the second quarter of fiscal 1999. The
products were again made available during the second half of fiscal 1999 and
contributed to the improved sales trend in China in the fourth quarter. The
year-to-year net sales comparison in China was negatively impacted by the
reduction in the sales return reserve of $4.3 million in the fourth quarter of
fiscal 1998 compared to a reduction in the sales return reserve of $1.5 million
in the first quarter of fiscal 1999. Fiscal 1999 net sales in Taiwan declined
13.6% compared to fiscal 1998 primarily due to the much weakened purchasing
power in Taiwan, particularly for high ticket items, such as the Air Treatment
System which was introduced in fiscal 1998, and increased competitive pressure
in the market. The effect of translating local currency sales into U.S. dollars
at weaker exchange rates compared to those in effect during the prior year also
had a negative impact on the U.S. dollar sales comparison in Taiwan.
Net sales in the Malaysia-Thailand region were $172.6 million for
fiscal 1999, a decrease of 13.3% compared to fiscal 1998. This decrease
primarily reflects the more difficult economic environment and decline in
purchasing power in both Malaysia and Thailand, particularly in the first half
of fiscal 1999. The region's sales comparison for the year was positively
impacted by the strengthening of the Thai baht, in relation to the U.S. dollar,
partially offset by the negative impact of the devaluation of the Malaysian
ringgit. In Malaysia, the full year sales decline was moderated by increased net
sales in the fourth quarter of fiscal 1999 as compared to the fourth quarter of
fiscal 1998. This increase for the fourth quarter in Malaysia was primarily due
to successful promotional activity for higher priced items and the launch of the
Air Treatment System in July 1999, increased applications as a result of the
introduction of the distributor benefit program in January 1999 and a
stabilization in local economic conditions.
Net sales in the Australia-New Zealand region were $125.3 million for
fiscal 1999, a decrease of 14.7% compared to fiscal 1998 reflecting a difficult
comparison with the strong results in fiscal 1998 when direct fulfillment, a
direct ordering program was launched in Australia and a special incentive trip
was offered to distributors. The adverse economy in New Zealand and the
departure of a major distributor leader in that market also had a negative
impact on fiscal 1999 sales for the region. The region's sales comparison for
the year was also negatively impacted by the effect of translating both
Australia's and New Zealand's local currency sales into U.S. dollars at weaker
exchange rates compared to those in effect during the prior year.
Price increases had a positive impact on fiscal 1999 net sales in each
of the Company's markets except China, which had an overall price decrease in
association with the China Business Revitalization Program. The Company's fiscal
1999 net sales would have declined approximately 18% as compared to fiscal 1998
without these price changes.
Gross Profit. Gross profit, as a percentage of sales, increased in
fiscal 1999 to 56.8% from 56.2% in fiscal 1998. The fiscal 1998 gross margin
reflects a charge of $12.3 million for excess and obsolete inventory in China,
due to the ban on direct selling which began in April 1998. In fiscal 1999,
gross margin includes a $2.0 million write back made in the fourth quarter of
that 1998 reserve reflecting the positive results of the China Revitalization
Program. Excluding the impact of the $12.3 million reserve in fiscal 1998 and
the subsequent $2.0 million partial write back of that reserve in fiscal 1999,
gross profit as a percent of sales decreased from 58.3% in fiscal 1998 to 56.4%
in fiscal 1999 due principally to the higher cost of U.S. dollar purchases from
Amway, primarily in Malaysia and Taiwan, resulting from these countries' weaker
currencies relative to the U.S. dollar.
Expenses. Operating expenses decreased $46.4 million (15.2%) to $258.7
million for fiscal 1999 primarily due to the decrease in distributor incentives
resulting from the Company's lower sales level. The decline in selling and
administrative expenses and distribution expenses also contributed to the
overall decline in operating expenses for the year. Distribution expenses
declined primarily reflecting lower costs in China due to a reduction in
distribution employees and lower infrastructure costs and a favorable comparison
with the prior year with respect to Australia, when the launch of that market's
direct fulfillment initiative resulted in higher costs. Selling and
administrative expenses declined primarily due to management restructuring and a
significant reduction in employee and other variable costs in China. Lower
distributor incentive trip costs, particularly in Australia and Malaysia, and
the benefit of promotional funds provided to Malaysia and Thailand by Amway also
contributed to the decline in operating expenses.
33
As a percentage of sales, operating expenses declined in fiscal 1999 to
51.6% from 51.9% in fiscal 1998. This decrease primarily reflects a change in
the special sales bonus program in Australia and Taiwan and the restructure of
the distribution system in China.
Operating Income. Operating income of $26.3 million for fiscal 1999
increased $1.0 million (4.1%) from operating income of $25.3 million for fiscal
1998 primarily due to the decline in operating expenses substantially offset by
the decline in gross profit caused by the decline in sales. As a percentage of
sales, operating margin increased to 5.2% in fiscal 1999 from 4.3% in fiscal
1998 reflecting the increase in gross margin and the decline in operating
expenses as a percentage of sales.
Other Income - Net. Other income - net for fiscal 1999 decreased $3.2
million (32.8%) to $6.5 million. This decrease was primarily due to lower net
interest income as a result of lower average cash balances and the $3.1 million
VAT refund in China in fiscal 1999 compared to the $5.2 million VAT refund in
the prior year. These unfavorable factors were partially offset by the
comparative impact of the fiscal 1998 write-off of certain expenditures related
to the previously planned Shanghai manufacturing facility. Other income includes
realized and unrealized foreign currency exchange losses of $3.3 million for
fiscal 1999 and $3.9 million in fiscal 1998.
Income Taxes. Income taxes for fiscal 1999 decreased $10.2 million
(43.4%) compared to fiscal 1998 primarily due to a tax holiday applicable to
fiscal 1999 business income in Malaysia. The effective tax rate decreased to
40.5% for fiscal 1999 from 67.2% for fiscal 1998 primarily due to the tax
holiday in Malaysia and the $0.8 million tax credit recorded in China in fiscal
1999 compared to fiscal 1998 when China recorded a net loss for which no
corresponding tax benefit was recorded.
Net Income. Net income for fiscal 1999 of $12.5 million ($0.22 per
share) increased $11.0 million from $1.5 million ($0.03 per share) for fiscal
1998 primarily due to operating income remaining steady despite the lower sales
level and the lower income tax expense in fiscal 1999. As a percentage of sales,
net income for fiscal 1999 increased to 2.5% from 0.2% primarily due to the
lower effective tax rate, the increase in gross margin and the decline in
operating expenses as a percentage of sales.
Fiscal 1998 Compared to Fiscal 1997
Net Sales. Net sales of $587.6 million for fiscal 1998 decreased $257.6
million (30.5%) from net sales of $845.2 million for fiscal 1997. This decrease
was primarily due to the effect of translating sales into U.S. dollars from
local currencies that have devalued relative to the U.S. dollar since July 1997
(see "--Foreign Currency Exchange Rate Information and Market Risk"), and due to
the difficult operating environment in China. See "Description of
Business--China Operations." The negative impact of currency devaluations came
primarily from the Malaysia-Thailand region but also from the Australia-New
Zealand region and Taiwan. Approximately 60% of the Company's sales decline was
due to this effect of translating sales into U.S. dollars at weaker local
currency exchange rates. Excluding China, an average of 30 new or improved
products were introduced in each region. For the total Company, new or improved
products introduced within the past 24 months represented over 20 percent of
total sales in fiscal 1998.
Net sales in the Greater China region for fiscal 1998 were $241.6
million, a decrease of 35.9% from fiscal 1997. This decline was primarily driven
by the 61.6% decrease in net sales in China primarily due to the three-month ban
on direct selling activities in China, effective April 21, 1998 and the negative
impact of the stringent regulatory environment in China prior to the ban. Net
sales in China were positively impacted by the lower rate of product and starter
kit returns experienced in fiscal 1998 as compared to fiscal 1997 as a result of
the revised return policy. See "Description of Business--China Operations." In
the fourth quarter of fiscal 1998, a significant portion of China's sales was
the result of promotions to reduce excess inventory that had built up in advance
of the sales ban and a $4 million reduction of the sales return reserve to
reflect the lower rate of returns. Fiscal 1998 net sales in Taiwan declined
13.9% compared to fiscal 1997 due to the effect of translating local currency
sales into U.S. dollars at weaker exchange rates compared to those in effect
during the prior year; sales increased 0.9% in local currency terms. See
"Description of Business--Risks and Uncertainties--Our business is subject to
the economic and political turmoil occurring in the Asia Pacific Region."
34
Net sales in the Malaysia-Thailand region were $199.0 million for
fiscal 1998, a decrease of 37.2% compared to fiscal 1997. This decrease reflects
the significant devaluation of the Malaysian ringgit and the Thai baht in
relation to the U.S. dollar as compared to the same period of fiscal 1997. Local
currency net sales for fiscal 1998 increased 2.8% in Malaysia compared to fiscal
1997 primarily due to the introduction of new Nutrition & Wellness products and
the increase in that market's core distributor force. In Thailand, the 10.3%
decline in local currency net sales was primarily due to lower demand resulting
from the adverse economic environment in that country. See "Description of
Business--Risks and Uncertainties--Our business is subject to the economic and
political turmoil occurring in the Asia Pacific Region."
Net sales in the Australia-New Zealand region were $146.9 million for
fiscal 1998, a decrease of 2.8% compared to fiscal 1997 primarily due to the
devaluation of the local currencies in that region in relation to the U.S.
dollar as compared to fiscal 1997. In Australia, local currency sales for fiscal
1998 increased 19.8% compared to fiscal 1997. This local currency sales increase
reflects, in part, the efforts of Australia's larger core distributor force,
which grew 24% in fiscal 1997 and 8% in fiscal 1998. Growth in sales of Catalog
products in Australia also had a significant impact on that market's net sales
for fiscal 1998, while continued strong sales of new Nutrition & Wellness
products introduced in the second quarter of fiscal 1998 and the impact of the
new Home Shopping Delivery program further improved Australia's net sales. In
New Zealand, the 6.7% decline in local currency net sales reflects the decline
in distributor sponsoring and low consumer confidence in the economy in that
market. New Zealand's fiscal 1998 net sales comparison to the prior year was
also negatively impacted by the launch of the Water Treatment System in the
first quarter of fiscal 1997.
Price increases did not have a material effect on the Company's net
sales for fiscal 1998.
Gross Profit. Gross profit, as a percentage of sales, decreased in
fiscal 1998 to 56.2% from 62.9% in fiscal 1997. This decrease primarily reflects
the higher cost of U.S. dollar purchases from Amway in Thailand, Malaysia and
Taiwan resulting from the negative impact of weaker local currencies against the
U.S. dollar. The lower gross profit percentage also reflects the third quarter
charge to cost of sales of $12.3 million for excess and obsolete inventory in
China as a result of the impact of the government's ban on direct selling
activities in that market. See "Description of Business--China Operations."
Expenses. Operating expenses decreased $78.2 million (20.4%) to $305.1
million for fiscal 1998. This decrease was primarily due to the effect of
translating local currency expenses into U.S. dollars at exchange rates that
reflect weaker local currencies than a year ago in all markets except China and
Hong Kong, as well as the decrease in distributor incentives in China resulting
from the lower sales levels. Eliminating the effects of translation to U.S.
dollars, operating expenses increased at rates ranging from 7% to 29% (as
expressed in the respective local currencies) in all the Company's markets
except China and Thailand; the largest percentage increase was in Australia due
to increased distributor incentives in support of the higher sales level in that
market. As a percentage of sales, operating expenses increased in fiscal 1998 to
51.9% from 45.4% in fiscal 1997, primarily as a result of the lack of absorption
of operating expenses in China at that market's lower sales level.
Operating Income. Operating income of $25.3 million for fiscal 1998
decreased $123.3 million (83.0%) from operating income of $148.6 million for
fiscal 1997 primarily due to the significant decline in sales volume in China
and the significant negative impact of foreign exchange rate fluctuations on
sales and gross margin, primarily in Malaysia and Thailand. As a percentage of
sales, operating margin decreased to 4.3% in fiscal 1998 from 17.6% in fiscal
1997 primarily due to the lack of absorption of operating expenses in China at
that market's lower sales level. The decline in gross margin percentage,
primarily in Thailand, and the $12.3 million charge for excess and obsolete
inventory in China also contributed to the operating margin decline.
Other Income - Net. Other income - net for fiscal 1998 decreased $15.0
million (60.8%) to $9.7 million. This decrease was primarily due to the decline
in interest income due to the lower cash balances principally related to the
share repurchase in fiscal 1997 and the reduction in net operating cash flow in
fiscal 1998. Realized and unrealized foreign currency exchange transaction
losses in fiscal 1998 of $3.9 million, compared to $2.6 million in fiscal 1997,
also contributed to the decline in other income - net. During the fourth
quarter, the Company recorded a write-off of certain expenditures related to the
previously planned Shanghai manufacturing facility (see "--Liquidity and Capital
Resources") in the amount of $2.6 million. In addition, the Company received a
nontaxable
35
VAT refund in China of $5.2 million in fiscal 1998 compared to $6.5 million in
fiscal 1997. Fiscal 1999 will be the final year that the Company will be
eligible to receive this VAT refund in China.
Income Taxes. Income taxes for fiscal 1998 decreased $31.4 million
(57.2%) compared to fiscal 1997 primarily due to the Company's 79.8% decline in
pre-tax income. The effective tax rate increased from 31.7% for fiscal 1997 to
67.2% for fiscal 1998 primarily due to the loss in China in fiscal 1998 with no
corresponding tax benefit, compared to non-taxable income in China in fiscal
1997. See "Description of Business--Government Regulation--China Tax Issues."
Income taxes benefited in fiscal 1998 from the liquidation of Amway Asia Pacific
Enterprises Inc. in November 1997 which resulted in the reversal of personal
holding company taxes accrued for that entity for the 1997 calendar year. Income
taxes were also decreased by lower dividend withholding taxes from the reduced
earnings in certain markets.
Net Income. Net income for fiscal 1998 of $1.5 million ($0.03 per
share) decreased $102.6 million (98.6%) from $104.0 million ($1.76 per share)
for fiscal 1997 as a result of the factors described above. As a percentage of
sales, net income for fiscal 1998 decreased from 12.3% to 0.2% primarily due to
the lower gross margin percentage and the lack of absorption of operating
expenses in China at that market's lower sales level.
LIQUIDITY AND CAPITAL RESOURCES
At August 31, 1999, the Company had cash and cash equivalents of $151.6
million, a decrease of $5.5 million since August 31, 1998. Uses of cash and cash
equivalents were $13.0 million in capital expenditures (discussed below), the
net $12.4 million purchase of investments, $11.3 million in dividends paid by
the Malaysia affiliate to minority shareholders and $8.3 million net payments on
short-term borrowings. These uses of cash were partially offset by the $33.1
million provided by operating activities which primarily reflected the $12.5
million of net income and the non-cash nature of depreciation and amortization
expenses of $12.8 million, the $2.2 million invested by the other partner in a
joint venture in Australia (discussed below) and the $3.8 million positive
impact of the translation of local currency cash and cash equivalents held at
the Company's foreign affiliates into U.S. dollars at more favorable foreign
currency exchange rates as compared to the exchange rates at the beginning of
fiscal 1999. See "--Foreign Currency Exchange Rate Information and Market Risk."
In the third quarter of fiscal 1999, the Company's Australia affiliate
entered a joint venture for the purpose of selling insurance and other financial
products to and through distributors. The other party to the joint venture
contributed $2.2 million to the newly formed company, Amway Financial Services
Holdings Pty Ltd ("AFS"). Based on the joint venture agreement, in accordance
with Generally Accepted Accounting Principles in the United States, the joint
venture partner's interest in AFS is reflected in the Company's consolidated
financial statements as a minority interest in a subsidiary.
Historically, the Company has maintained significant working capital
levels. At August 31, 1999, the Company's working capital of $113.2 million had
increased from working capital of $102.1 million at August 31, 1998, primarily
because working capital generated from operations was more than sufficient to
cover the cash used for capital expenditures and dividends paid by a subsidiary
to minority shareholders and because working capital was positively impacted by
the effect of exchange rate fluctuations on the translation of working capital
items.
Of the $13.0 million in capital expenditures for fiscal 1999, $9.6
million was for the expansion of the Company's operations in China. Capital
expenditures for fiscal 2000 are expected to be approximately $32.1 million,
including $24.3 million for expansion in China. The expansion in China includes
the expansion of the Guangzhou manufacturing facility where new Artistry and
Nutrition & Wellness products for that market are being produced. The Company is
in the final stages of this manufacturing expansion, which is expected to be
completed in the third quarter of fiscal 2000, in coordination with the China
market's new product launch plan. In addition to the $32.1 million of fiscal
2000 estimated capital expenditures, the Company's Malaysia affiliate has
authorized $9.1 million for new regional distribution centers and construction
of a new distribution center and headquarters building in Malaysia. The Company
does not currently expect to begin significant spending on these capital
projects in Malaysia until after fiscal 2000, except for approximately $0.6
million to be used in fiscal 2000 for the purchase of a regional distribution
center. The capital expenditures in Malaysia will be funded using the proceeds
of its public offering completed in August 1996. The Company's other capital
expenditures, including the capital
36
expenditures for China expansion, are expected to be funded from the Company's
cash on hand and, if necessary, bank borrowing.
The China affiliate is expected to continue its short-term borrowing
position through fiscal 2000. The China affiliate maintained a credit facility
of $18.1 million and had outstanding borrowings of $10.3 million against this
credit facility as of August 31, 1999. The parent Company is expected to
continue to help fund the manufacturing facility expansion in China during
fiscal 2000. The parent Company, which receives most of its cash from dividends
received from its affiliates, maintained short-term bank borrowings during most
of the first six months of fiscal 1999 but paid the balance of such borrowings
in February 1999. Although the parent Company plans to maintain its $25.0
million credit facility, it does not expect to borrow against this credit
facility in fiscal 2000 and has no other plans for incurring indebtedness prior
to the amalgamation with New AAP Limited that is planned in connection with the
recent tender offer. See "Description of Business--General."
The Company did not pay a dividend during fiscal 1999 because of
continued uncertainties with respect to business conditions in the region and
the need for the Company to retain its cash for planned capital needs and to
cover the operating losses experienced in China through the third quarter of
fiscal 1999.
Approximately 40% of the Company's cash and short-term investments at
August 31, 1999 were held by the Company's Malaysia affiliate. Minority
shareholders own 48.3% of this affiliate. Of the total cash and investments held
by the Malaysia affiliate, approximately $11.7 million represents the remaining
proceeds from the Malaysia affiliate's public offering and is primarily
dedicated to future capital requirements of the Malaysia affiliate. The Malaysia
affiliate obtained regulatory approval to amend that affiliate's Memorandum and
Articles of Association to authorize the affiliate to repurchase up to 10% of
its outstanding common stock or 9,997,000 shares, for a maximum aggregate price
of Malaysian ringgit 100 million, subject to certain regulatory limitations.
This action was approved by the Malaysia affiliate's shareholders at its January
12, 1998 annual shareholders' meeting. As of August 31, 1999, the Malaysia
affiliate had repurchased and cancelled 1,365,000 of its shares in fiscal 1998
on the open market at an aggregate price of Malaysian ringgit 8.6 million. These
repurchases were funded by the Malaysia affiliate's available cash on hand, not
including the proceeds from the public offering, and internally generated funds
and any future repurchases would be funded by cash on hand and, depending on
future operations, internally generated funds.
Pursuant to the Amalgamation Agreement, all issued and outstanding
options to purchase Common Stock shall be converted into rights to receive cash
in accordance with the Black-Scholes Option Pricing Model and will require
surrender of all such options by the holders thereof as of the effective date of
the Amalgamation. The Company will pay an aggregate amount of $1.1 million in
connection with the surrender of such options.
OUTLOOK
The Company believes sales growth will resume in fiscal 2000 due to
significantly improved results in China. The Company's new mode of operation is
gaining wider acceptance in China and expanded product offerings in that market
are being well received. The number of sales representatives also is increasing
and this is a key indicator of future growth. See "Description of
Business--Risks and Uncertainties".
FORWARD LOOKING STATEMENTS
The statements contained in this report that are not historical facts
are forward looking statements. These forward looking statements involve risks
and uncertainties with respect to the Company's markets. With respect to
operations in China, these risks and uncertainties include the ability of the
Company to manage effectively issues associated with the modification and
refinement of its marketing plan and its distribution system. The Company is
still in the process of obtaining the necessary approvals from certain provinces
and cities for all aspects of its new mode of operations, including the use of
independent sales agents. In addition, the Company is also trying to obtain
licenses for new cities and branches. Obtaining these approvals and licenses
involves regular discussions with national, provincial and city government
officials; the Company believes that it has good relations with governmental
officials, but there can be no assurance that the approvals and licenses will be
obtained. In addition, operations can always be adversely affected by new or
existing government regulations, or interpretations thereof, or by other
governmental action. In addition, risks and uncertainties in China include: (i)
the possibility of increased government scrutiny of and regulations regarding
the direct selling industry; (ii) the Company's ability to source
37
materials necessary to achieve portions of its fiscal 2000 product launch
schedule; and (iii) the possibility that because of the Company's relationship
with Amway Corporation, a U.S. company, the Company can be affected by changes
in the US - China relationship.
In addition, the forward looking statements contained herein are
subject to other risks and uncertainties with respect to the Company's markets,
which could cause results to differ materially such as, without limitation, a
worsening of economic turmoil in the Company's markets, such as the occurrence
of further adverse currency volatility in the markets in which the Company
operates, the creation of adverse government regulations or the occurrence of
adverse government action in the Company's markets related to either the
Company's Sales and Marketing Plan or its products, import or price restrictions
in any of the Company's markets, the possibility of adverse publicity directed
at the Company in its markets, the difficulty in passing on the full impact of
the cost increases to distributors, given the economic situation in the
Company's markets and a deterioration of the Company's positive relationship
with its distributor leadership. The most significant uncertainty, with respect
to currencies that impact the Company, is whether the Chinese yuan will be
devalued against the dollar; in addition to its impact on operations in China,
that could in turn lead to further weakening of other Asian currencies. See
"Description of Business--Risks and Uncertainties."
INFLATION
Inflation has not had a significant effect upon the Company's business.
FOREIGN CURRENCY EXCHANGE RATE INFORMATION AND MARKET RISK
The consolidated financial statements of the Company are prepared in
U.S. dollars in accordance with U.S. generally accepted accounting principles
("U.S. GAAP"). Transactions at the Company are predominantly accounted for in
U.S. dollars. However, all affiliates of the Company operate outside of the
United States and each affiliate accounts for transactions in its local currency
and holds cash and short-term investments in its local currency, except as noted
below.
From the fourth quarter of fiscal 1997, the effect of translating local
currency amounts into U.S. dollars had a negative impact on the reported
financial results of the Company until the second quarter of fiscal 1999. For
the second, third and fourth quarters of fiscal 1999, comparative translated
results received a benefit from the strengthening of certain local currencies in
relation to the U.S. dollar as compared to the same periods of fiscal 1998. The
following table shows the approximate effective weighted average exchange rates
used, in accordance with U.S. GAAP, to translate the seven primary foreign
currencies in which the Company operates into U.S. dollars for the Company's
consolidated statements of income for fiscal years 1999 and 1998.
[Enlarge/Download Table]
Weighted Average Exchange Rate
(Local Currency per U.S. dollar)
-------------------------------- Percentage Change *
Year ended August 31, ----------------------------
--------------------------------
From 1998 From 1997
1999 1998 1997 to 1999 to 1998
---- ---- ---- ------- -------
Chinese yuan ............................. 8.28 8.28 8.30 -- --
Hong Kong dollar ......................... 7.75 7.74 7.74 -- --
New Taiwan dollar ........................ 32.65 32.39 27.65 (1%) (15%)
Malaysia ringgit ......................... 3.80 3.71 2.53 (2%) (32%)
Thai baht ............................... 37.36 41.32 26.46 11% (36%)
Australian dollar ........................ 1.58 1.52 1.29 (4%) (15%)
New Zealand dollar ....................... 1.88 1.75 1.45 (7%) (17%)
* Percentage change is calculated on the rates expressed as U.S. dollar per
local currency.
Since the beginning of the fourth quarter of fiscal 1997, when the
significant devaluation began, through the end of fiscal 1998, five of the seven
primary foreign currencies devalued against the U.S. dollar to various degrees
between 25% and 38%. During this time, the devaluations of the Thai baht and the
Malaysian ringgit had
38
the largest negative impact on the Company in regard to this market risk while
the New Taiwan dollar and Australian dollar also had a negative impact. During
the first quarter of fiscal 1999, the Thai baht, Australian dollar, New Zealand
dollar and New Taiwan dollar all strengthened to varying degrees between 7% and
16% against the U.S. dollar while the Chinese yuan, Hong Kong dollar and
Malaysia ringgit remained relatively unchanged. All seven of the currencies have
remained relatively steady since the first quarter of fiscal 1999. Despite this
recent relative stability, the volatility of these currencies relative to the
U.S. dollar continues to represent a risk of loss to the Company in the near
term.
Foreign Currency Exchange Rate Risk on Cash and Short-term Investments.
The Company's cash is primarily generated and held in seven different foreign
currencies by the Company's various affiliates. Of the Company's $162.0 million
of cash and short-term investments at August 31, 1999, approximately $45.2
million was held in U.S. dollars primarily at the Malaysia, China and Taiwan
affiliates and the parent company, while the remaining balance was held in local
currencies. Because the Company's consolidated financial statements are reported
in U.S. dollars, this local currency cash and investments balance is exposed to
the fluctuations of foreign currency exchange rates. The effect of this market
risk can impact the U.S. dollar fair value of these assets as well as the
Company's consolidated cash flows. In estimating the extent of market risk to
the Company's cash and investments the Company analyzed recent data with respect
to historical and potential fluctuations in the seven primary foreign currencies
in which such instruments are held compared to the U.S. dollar. Certain
currencies have experienced little or no devaluation against the U.S. dollar,
while the other currencies, as discussed above, have fluctuated significantly
over the past two and a half years. These exchange rate fluctuations were then
weighted by the amount of cash and investments held in the respective currency
and a hypothetical 10% adverse change in the overall foreign currency exchange
rate was determined to reasonably reflect an overall possible near-term change
in such rates. The potential loss in fair value of the Company's cash and
investments held at August 31, 1999 which would result if such a hypothetical
10% adverse change in foreign currency rates occurred would be approximately
$11.7 million. If such an adverse change in foreign currency exchange rates
occurs, a significant portion of the impact would be reflected in other
comprehensive income and as a translation adjustment to stockholders' equity on
the Company's balance sheet; in addition, it would also impact the Company's
consolidated statement of cash flows.
Other Foreign Currency Exchange Rate Risk. In accordance with U.S.
GAAP, transaction related currency exchange gains or losses are reflected in net
income; while the translation adjustments, resulting from the translation of
assets and liabilities at current exchange rates as of the balance sheet date,
are reflected in other comprehensive income and recorded as a separate component
of stockholders' equity. The Company's transaction related currency exchange
gains or losses are primarily the result of exchange rate fluctuations on U.S.
dollar transactions with Amway, including any gains or losses on foreign
currency forward contracts used, in certain cases, to hedge these transactions
as discussed below. All of the Company's subsidiaries, except Australia and New
Zealand, pay for their purchases of products from Amway in U.S. dollars and bear
the risk of foreign currency exchange fluctuations. Australia and New Zealand
pay for their purchases of products from Amway in local currencies, thereby
transferring the immediate risk of foreign currency exchange rate fluctuations
to Amway. Transaction related currency exchange gains/(losses), in U.S. dollars
in thousands, during each of the last three fiscal years are as follows:
YEARS ENDED AUGUST 31: GAIN/(LOSS)
---------------------- ------------
1999 ......................................... $ (3,315)
1998 ......................................... (3,914)
1997 ......................................... (2,554)
The Company does not currently hedge currency exchange rate
fluctuations that affect the translation of the Company's financial statements
into U.S. dollars. However, certain of the Company's affiliates have taken
actions to minimize the Company's foreign currency transaction exposure on U.S.
dollar liabilities and future U.S. dollar transactions. These actions include
entering forward contracts or holding U.S. dollars where it is economically
viable and where local regulations allow. To the extent that these U.S. dollar
deposits and forward contracts relate to existing liabilities, the Company's
foreign currency exchange rate risk on income and cash flow with respect to
these liabilities is effectively hedged. To the extent that these U.S. dollar
deposits and forward contracts relate to future U.S. dollar transactions, the
Company's cash flow on these transactions is effectively hedged; but until the
future transaction occurs, the Company's earnings are exposed to foreign
currency exchange rate risk because a fluctuation in the exchange rate will
create a gain or loss on the hedge instrument with no offsetting effect on
earnings from an underlying transaction. For example, in fiscal 1999, the
Company recorded a foreign currency
39
exchange loss of $3.3 million, primarily due to losses on forward contracts in
Thailand and on U.S. dollar deposits in Taiwan as those markets' local
currencies strengthened against the U.S. dollar since the beginning of the
fiscal year.
At August 31, 1999, the Company held U.S. dollar deposits or forward
contracts as hedges on future transactions totaling $19.2 million at all of the
Company's affiliates except Australia and New Zealand. In estimating the extent
of foreign currency exchange rate risk on the Company's earnings related to
these hedges, the Company analyzed recent data with respect to historical and
potential fluctuations in the foreign currencies in which these U.S. dollar
purchases are made. These exchange rate fluctuations were then weighted by the
amount of U.S. dollar deposits and forward contracts held to hedge future
transactions in the respective currency and a hypothetical 10% adverse change in
the overall foreign currency exchange rate was determined to reasonably reflect
an overall possible near-term change in such rates. An adverse change as it
applies in this case would be a strengthening of the local currency against the
U.S. dollar. The potential negative impact on the Company's after-tax earnings
related to these hedges which would result if such a hypothetical 10%
strengthening in foreign currency rates occurred would be approximately $1.3
million.
The above calculations reflect the immediate impact of hypothetical
point-in-time adjustments to exchange rates and is provided pursuant to the
requirements of the rules and regulations of the Securities and Exchange
Commission. It does not reflect the on-going operational effects on the Company
of such changes in exchange rates. Due to the number of currencies involved, the
constantly changing exposure in these currencies and the fact that all foreign
currencies do not react in the same manner against the U.S. dollar, the
Company's actual exposure to this market risk is difficult to quantify and there
can be no assurance that these quantifications of the risk would reflect actual
results.
NEW ACCOUNTING PRONOUNCEMENTS
The Company adopted three new accounting pronouncements during fiscal
1999, which have impacted the presentation of the Company's consolidated
financial statements. The Company also plans to adopt Statement of Financial
Accounting Standards No. 133 (as amended by Statement No. 137), "Accounting for
Derivative Instruments and Hedging Activities" which will impact on the
Company's consolidated financial statements in future fiscal years. See Note 3
of Notes to the Consolidated Financial Statements.
YEAR 2000
The Company's information technology ("IT") systems and certain non-IT
systems did not experience any significant difficulties with the onset of Year
2000. Based on operations since January 1, 2000, the Company does not expect any
significant impact to its ongoing business as a result of the Year 2000 issue.
In addition, the Company is not aware of any significant Year 2000 or similar
problems that have arisen for its suppliers or customers. The total cost of the
Company's remediation efforts was approximately $3.3 million, including internal
costs. This total cost consisted of approximately $1.1 of expenses, of which
approximately $1.0 is reflected in fiscal 1999 results with the remainder to be
recorded in fiscal 2000, and $2.2 of capital additions related to the
remediation effort.
40
ITEM 10. DIRECTORS AND OFFICERS OF REGISTRANT
(a) The following table sets forth certain information regarding the
Company's directors and executive officers as of February 1, 1999:
[Download Table]
DIRECTOR/EXECUTIVE
NAME AGE POSITION OFFICER SINCE
---- --- -------- -------------
Stephen A. Van Andel 44 Chairman, Director 1994
Richard M. DeVos, Jr. 44 Vice Chairman, Director 1994
Douglas L. DeVos 35 President, Director 1999
Eoghan M. McMillan 64 Director 1994
Jack C.K. So 54 Director 1994
John C.C. Chan 56 Director 1996
L.H. Choong 52 Director 1993
Eva Cheng 47 Executive Vice President; 1993
Director
Lynn Lyall 46 Chief Financial Officer, Vice 1999
President and Treasurer
Lawrence M. Call 57 Vice President 1993
Craig N. Meurlin 47 Vice President, General 1993
Counsel and Assistant
Secretary
John C. Brockman 56 Vice President, Distributor 1997
Relations
Percy Chin 44 Vice President, General 1996
Manager - East China
Patrick Hau 48 Vice President, General 1996
Manager - National Operations
Audie Wong 47 Vice President, General 1995
Manager - North China
Martin Liou 42 General Manager - Taiwan 1997
Low Han Kee 40 Regional Manager - Malaysia 1997
Preecha Prakobkit 51 General Manager - Thailand 1997
Peter Williams 46 General Manager - Australia 1997
Betty Yeung 51 General Manager - South China 1997
John C.R. Collis 41 Secretary 1993
41
Stephen A. Van Andel, age 44, has been Chairman of the Company since
January 1995 and a Director since 1994. Since January 1995, Mr. Van Andel has
been Vice Chairman of Amway Japan Limited. Mr. Van Andel has been Chairman of
Amway since 1995 and was a member of the Policy Board of Amway from 1992 through
August 31, 1999. He has been on the Board of Directors of Amway since September
1, 19999. He has been on the Board of Directors of Amway since September 1,
1999. Mr. Van Andel was Chairman of the Executive Committee of Amway and Vice
President - Corporate Affairs of Amway from 1993 to 1995. He was appointed Vice
President - Marketing of Amway in 1988 and in 1991, became Vice President -
Americas. Prior to 1988, Mr. Van Andel held various administrative and
management positions with Amway. He holds a Bachelor's Degree from Hillsdale
College and a Master's of Business Administration from Miami University. Mr. Van
Andel is also a director of Michigan National Bank Corp.
Richard M. DeVos, Jr., age 44, has been a Director of AAP since 1994
and Vice Chairman since October 15, 1999. He served as president from January
1995 through October 15, 1999. Since January 1995, Mr. DeVos has been Chairman
of Amway Japan Limited. He has been President of Amway since 1993 and was a
member of the Policy Board of Amway from 1992 through August 31, 1999. He has
been on the Board of Directors of Amway since September 1, 1999. Mr. DeVos was
president and Chief Executive Officer of the Orlando Magic Ltd. from 1991 to
1993. He is Chairman of the Windquest Group, a multi-company management group
which he founded in 1989. Prior to that, Mr. DeVos was Vice president -
International of Amway since 1984. Previously,. He held various research and
development, manufacturing, distribution, marketing, finance, public relations
and government affairs positions with Amway. Mr. DeVos holds a Bachelor of
Business Administration Degree from Northwood University and has attended the
Executive Study Program at the Wharton School of the University of Pennsylvania.
He is also a director of Old Kent Financial Corporation.
Douglas L. DeVos, age 35, has been a director of AAP since April 14,
1999 and President since October 15, 1999. Since June 1998, Mr. DeVos has been
Senior Vice President - Asia Pacific Region, Global Distributor Relations of
Amway and was a member of the Policy Board of Amway from 1989 to August 31,
1999. Mr. DeVos has been on the Board of Directors of Amway since September 1,
1999. He was appointed Vice President, North American Sales, of Amway in 1993
and became Senior Vice President, Managing Director - Americas of Amway from
1996 to 1998. Prior to 1993, Mr. DeVos held various administrative and
management positions with Amway. He holds a bachelor of Science Degree from
Purdue University Krannert School of Management. Mr. DeVos is also a director of
Amway Japan Limited.
Eoghan M. McMillan, age 64, has been a director of the Company and the
Chairman of the Compensation Committee and a member of the Audit Committee since
1994. Mr. McMillan has also been chairman of the Company's Special Committee
since October 1999. Mr. McMillan is a director of Rodamco N.V. and Chairman of
Rodamco B.V., both incorporated in the Netherlands, and Chairman of Rodamco
Pacific Management Ltd. Prior thereto, he practiced with Arthur Andersen & Co.
since 1959 and served as Country Managing Partner for its practices in Hong Kong
and China from 1979 until September 1993 and as Regional Managing partner for
Southeast Asia for most of this period. From 1989 to 1992, Mr. McMillan was
Chairman of the Hong Kong Futures Exchange and a director of its wholly-owned
subsidiary, Hong Kong Futures Exchange Clearing Corporation. He is a Certified
Public Accountant, a Fellow of the Chartered Association of Certified
Accountants in the United Kingdom and a Fellow of the Hong Kong Society of
Accountants. Mr. McMillan was appointed by the Hong Kong government as a
Director of the Board of Hong Kong Securities Clearing Company Limited. He is
also a director of Vitasoy International Holdings Ltd., Sun Hung Kai Development
(China) Ltd., Shangri-la Asia Ltd., Land Development Corporation, Pengursan
Danaharta Nasional Berhad, Huan He Pacific Limited and several other entities in
which Rodamco holds investments, principally in countries in the Asia Pacific
region.
Jack C. K. So, age 54, has been a director of the Company and the
Chairman of the Audit Committee and a member of the Compensation Committee since
1994. He has also been a member of the Company's Special Committee since October
1999. Mr. So is Chairman of the Hong Kong Mass Transit Railway Corporation and
has held such position since 1995. From 1992 to 1995, he served as Managing
Director of Sun Hung Kai Development (China) Ltd. Previously, Mr. So served as
Executive Director of the Hong Kong Trade Development Council since 1985. Prior
to that, he spent seven years in the private sector and held various senior
posts in stock brokering, trade and banking. Before joining the private sector,
Mr. So served as Administrative Officer and held significant positions in
various departments of the Hong Kong government. Mr. So holds a Bachelor's
Degree from the University of Hong Kong.
42
John C.C. Chan, age 56, has been a director of the Company and a member
of the Compensation and Audit Committees since 1996. Mr. Chan has also been a
member of the Company's Special Committee since October 1999. Since 1993, Mr.
Chan has been Managing Director of The Kowloon Motor Bus Company, one of the
largest privately owned and operated bus companies in the world. He served in
many governmental positions in Hong Kong from 1967 to 1993. Mr. Chan is a
director of Hang Seng Bank Limited, a member of the Council of the Stock
Exchange of Hong Kong, Chairman of the Hong Kong Securities Clearing Company
Limited. He holds degrees in English literature and management studies from the
University of Hong Kong.
L.H. Choong, age 52, has been a Director of AAP since its formation in
1993. He was an Executive Vice President of the Company from 1993 to 1998 and
held the positions of Managing Director of Amway (Malaysia) Sdn. Bhd. From 1981
to 1998 and Amway (Thailand) Limited from 1987 through August 31, 1997. He
joined Amway(Malaysia) Sdn. Bhd. In 1978. He joined Amway (Malaysia) Sdn. Bhd.
in 1978. Before joining Amway (Malaysia) Sdn. Bhd., Mr. Choong held various
marketing, sales and product management positions with ESSO Malaysia Berhad,
Diethelm (Malaysia) Sdn. Bhd. and Colgate-Palmolive (Malaysia) Sdn. Bhd. He
holds a Bachelor's Degree from the University of Malaya.
Eva Cheng, age 47, has been Executive Vice President and a Director of
the Company since its formation in 1993. Ms. Cheng serves as Managing Director
of the Greater China Region. She joined Amway International, Inc. in 1977 and
was named General Manager of the Hong Kong operation in 1980, serving as
Managing Director of its Hong Kong and Taiwan operations from 1987 to 1993.
Prior to joining Amway, Ms. Cheng worked in various executive officer positions
in the Hong Kong government. She has a Bachelor's Degree and a Master's of
Business Administration from the University of Hong Kong.
Lynn Lyall, age 46, has been Chief Financial Officer, Vice President
and Treasurer of AAP since July 1, 1999. Mr. Lyall has also served as Vice
President of Finance of Amway since July 1, 1999. Prior to joining Amway, he had
been Executive Vice President and Chief Financial Officer of Blockbuster
Entertainment, Inc. since 1997. Before becoming Chief Financial Officer of
Blockbuster, Mr. Lyall held various financial positions with Cadbury Schweppes,
PLC from 1990 until 1997. He also held financial positions with Bordo Citrus
Products, Inc., Kraft, Inc. and Coca-Cola Company. Prior to that, Mr. Lyall
spent six years in public accounting with Arthur Anderson & Co. He is a
Certified Public Accountant and holds a Bachelor's Degree and a Master's of
Management Degree from Northwestern University.
Lawrence M. Call, age 57, Vice President, served as Chief Financial
Officer, Vice President and Treasurer of the Company from its formation in 1993
to October of 1999. Mr. Call has also served as Chief Financial Officer of Amway
since 1991. Prior to joining Amway, Mr. Call had been Treasurer of PPG
Industries, a manufacturer of flat glass, fiberglass, coatings, resins
industrial and special chemicals, since 1984. Before becoming Treasurer of PPG
Industries, Mr. Call had held various other financial control positions with PPG
Industries. Prior to that, Mr. Call spent 15 years in public accounting with
Deloitte, Haskins and Sells (the predecessor to Deloitte and Touche). Mr. Call
is a Certified Public Accountant and holds a Bachelor's Degree from Loyola
University.
Craig N. Meurlin, age 47, has been Vice President, General Counsel and
Assistant Secretary of the Company since 1993. Mr. Meurlin is Senior Vice
President, General Counsel and Secretary of Amway and has held such positions
since 1993. Prior to that, he was a partner in the law firm of Jones, Day,
Reavis & Pogue. Mr. Meurlin holds a Bachelor's of Arts Degree from the
University of Vermont and a Juris Doctor from the University of Virginia.
John C. Brockman, age 56, is Vice President - Distributor Relations of
the Company and has held such position since October 29, 1997. Mr. Brockman is
also Director of Worldwide Sale Plan Administration for Amway Corporation. He
joined Amway in 1973 as a coordinator in the Meeting and Travel Department and
was promoted to Manager of that department in 1975. Mr. Brockman was named
Regional Manager for Amway's Western Sales Region in 1977, and in November of
1981 was promoted to the position of Director - International Sales, holding
such position until his promotion to his current position. He holds a Bachelor's
Degree in Business Administration from the University of Southern California.
Percy Chin, age 44, is Vice President and General Manager of Amway
(China) Co. Ltd. - East China and has held such position since January 1996. Mr.
Chin joined Amway China in 1992 as financial controller and was
43
promoted to Regional Director of Finance and Administration in 1995. Prior to
joining Amway, he held the position as Director of Finance at Heinz China, China
Dyeing Holding Ltd., and with the Canadian Government - Department of Education.
Mr. Chin is a member of Canadian Certified Management Accountants and holds
Bachelor's Degrees in Science and Communication from the University of
Saskatchewan, Canada.
Patrick Hau, age 48, is Vice President and General Manager -- National
Operations of Amway (China) Co. Ltd. Mr. Hau joined Amway Hong Kong in 1987 as
Financial Controller, serving as General Manager from 1991 to 1996. Prior to
joining the Company, he was employed as financial controller at Pearl & Dean
Ltd. in Hong Kong and Australia and was a tax consultant with Price Waterhouse
and a tax officer of the Inland Revenue Department. Mr. Hau holds a diploma in
Business Studies from Hong Kong Polytechnic, a post-graduate diploma in
Accounting & Finance from the New South Wales Institute of Technology, and a
Master's of Business Administration Degree from Oklahoma City University. He is
a member of the Hong Kong Society of Accountants, the Chartered Association of
Certified Accountants, the Australia Society of Accountants and the Chartered
Institute of Secretaries & Administrators.
Audie Wong, age 47, is Vice President and General Manager of Amway
(China) Co. Ltd. - North China and has held such position since May 1997. Mr.
Wong joined Amway Hong Kong in 1981 as Marketing Coordinator and was promoted to
Marketing Manager in 1986. From 1991 to 1994, Mr. Wong was General Manager of
Amway Taiwan and served as General Manager of South China from 1994 until April
1997. He holds a Bachelor of Arts Degree from State University of New York at
Buffalo, a Master's Degree from the University of Oregon and a Master's of
Business Administration from the University of Oklahoma City.
Martin Liou, age 42, is General Manager of Amway Taiwan Company,
Limited and has held such position since May 1997. Mr. Liou joined Amway Taiwan
in 1985 as Distribution Manager, becoming Distribution Director of the Greater
China Region in 1994. In 1995, he assumed dual roles, Operations Director for
Amway Taiwan and Director of Planning and Development for Greater China, which
he held until March 1997 when he assumed the responsibilities as Deputy General
Manager of Amway Taiwan. Prior to joining Amway Taiwan, he was Production
Supervisor for ISI Company. Mr. Liou is a member of the Taiwan Direct Selling
Association and holds a Bachelor's Degree in Chemical Engineering from National
Taiwan University.
Low Han Kee, age 40, is General Manager of Amway (Malaysia) Sdn. Bhd.
and has held such position since 1993. Mr. Low joined Amway Malaysia in 1990 as
Divisional Manager, Finance & Administration. Prior to joining Amway Malaysia,
he worked for fifteen years in various financial positions for companies listed
on the Kuala Lumpur Stock Exchange. From 1984 to 1985, Mr. Low worked for First
Allied Corporation Berhad and as Group Chief Accountant for Mulpha International
Trading Corporation Berhad from 1985 to 1990. Mr. Low is a Certified Public
Accountant and a member of The Malaysian Association of Certified Public
Accountants.
Preecha Prakobkit, age 51, is General Manager of Amway (Thailand) Ltd.
and has held such position since 1990. Mr. Prakobkit joined Amway Thailand in
1988 as Sales and Marketing Manager and was promoted to Sales Manager in 1990.
Prior to joining Amway Thailand, he worked as Marketing Manager for the Mall
Department Store and Product Manager for Philips Electrical Company. Mr.
Prakobkit is the Secretary General of the Thai Direct Selling Association and
holds a Bachelor's Degree in Marketing from Walter E. Heller School of Business.
Peter Williams, age 46, is General Manager of Amway of Australia and
has held such position since June 1997. Mr. Williams joined Amway of New Zealand
in March 1988 as the Northern Region Sales Manager and was promoted to National
Sales Manager in November 1988. He became General Manager in 1996, serving until
his promotion to his current assignment at Amway of Australia. Prior to joining
Amway of New Zealand, Mr. Williams worked for Enzed Fluid Connectors as Export
Sales Manager in the Middle East and as London Branch Manager for Extraman/OPS.
He has been an Executive Member of the New Zealand Direct Selling Association.
Mr. Williams attended Northcote College and holds a Diploma in Business
(Marketing) from the University of Auckland.
Betty Yeung, age 51, is General Manager of Amway (China) Co. Ltd. -
South China and has held such position since May 1997. Mrs. Yeung joined Amway
Hong Kong as Marketing Coordinator in 1979, and was promoted to Sales/Marketing
Manager in 1980 and Sales/Public Relations Manager in 1985. She joined Amway
Canada as Distributor Relation Manager in 1991. Mrs. Yeung rejoined Amway China
in 1994 as Director of External Affairs and was appointed Director of Sales,
South China in 1996 and National Sales Director in 1997.
44
Prior to joining Amway Hong Kong, Mrs. Yeung worked at Rediffusion Co. in
customer service related positions. She holds a Bachelor's Degree from the
Chinese University of Hong Kong and a Diploma in Management Studies from Hong
Kong Polytechnic.
John C.R. Collis, age 41, is an attorney at Conyers, Dill & Pearman,
Hamilton, Bermuda.
There exists no arrangement or understanding between any director and
any other person pursuant to which such director was elected. Each director and
executive officer serves until their successors are elected and qualified.
There exists no family relationship between any director or executive
officer of the Company and any other director or executive officer of the
Company.
ITEM 11. COMPENSATION OF DIRECTORS AND OFFICERS
The aggregate amount of cash compensation (including bonuses) paid by
the Company during the fiscal year ended August 31, 1999, to all directors and
officers of the Company as a group totaled approximately $4.5 million.
The Company has not made any material payments or accruals for
pension, retirement and other such benefits for directors and officers of the
Company as a group during the fiscal year ended August 31, 1999.
ITEM 12. OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR SUBSIDIARIES
As of December 1, 1999, the Company's directors and officers as a group
have been granted options to purchase Common Stock under the Company's Long-Term
Incentive Plan, as described in the following table:
DATE OF GRANT OPTIONS GRANTED EXERCISE PRICE OPTIONS EXERCISED
------------- --------------- -------------- -----------------
December 15, 1993 160,000 $18.00 100,000
January 18, 1995 59,000(1) 33.00 18,718
July 1, 1996 4,000(2) 30.13 5,499
October 23, 1996 55,000(3) 34.38 - 0 -
July 9, 1997 44,500(4) 46.44 - 0 -
======== ========
TOTAL 322,500 124,217
(1) An additional 17,000 options were granted to certain key employees of the
Company or its affiliates on such date at the same exercise price.
(2) An additional 20,000 options were granted to certain key employees of the
Company or its affiliates on such date at the same exercise price.
(3) An additional 2,000 options were granted to a key employee of an affiliate
of the Company on such date at the same exercise price.
(4) An additional 48,000 options were granted to certain key employees of the
Company or its affiliates on such date at the same exercise price.
Such options become exercisable over a period of three years commencing
on the first anniversary of the date of grant and will expire no later than 10
years after the date of grant.
In addition, as of December 1, 1999, the Company has granted, pursuant
to the Company's Long-Term Incentive Plan, 9,000 shares of restricted stock at a
purchase price equal to the par value of the Common Stock, all of which have
vested as of December 1, 1999.
As of November 1, 1998, the Company's outside directors as a group have
been granted awards with respect to the Common Stock under the Company's Outside
Director Long-Term Award Plan, as described in the following table:
45
DATE OF GRANT AWARDS GRANTED EXERCISE PRICE AWARDS EXERCISED
------------- -------------- -------------- ----------------
January 8, 1995 15,000 (1) $33.00 - 0 -
January 10, 1996 6,000 35.38 - 0 -
April 10, 1996 5,000 31.62 - 0 -
January 15, 1997 9,000 42.25 - 0 -
TOTAL 35,000 - 0 -
(1)Awards with respect to 5,000 shares of Common Stock expired in
September 1996.
Such awards become exercisable over a period of three years commencing
on the first anniversary of the date of grant and will expire no later than 10
years after the date of the grant.
Pursuant to the Tender Offer Agreement, all issued and outstanding
options to purchase Common Stock shall be converted into rights to receive cash
in accordance with the Black-Scholes Option Pricing Model and will require
surrender of all such options by the holders thereof as of the effective date of
the Amalgamation.
ITEM 13. INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS
Pursuant to the Offer, the Principal Shareholders, which include
Richard M. DeVos, Jr., Stephen A. Van Andel and Douglas L. DeVos, who are all
executive officers of the Company, own 97.4% of the Company's Common Stock. See
"Description of Business - Tender Offer."
The principal shareholders of Amway and related family members own
97.4% of the outstanding shares of Common Stock. Approximately 73% of the
Company's fiscal 1999 net sales were derived from the distribution of products
purchased from Amway. In addition, Amway has granted each of the Company's
affiliates the exclusive right to use and market the Amway trademark and
individual product trademarks pursuant to various contracts between Amway and
the Company's affiliates. Amway also provides a broad range of management,
administrative and technical assistance to the Company and its affiliates
pursuant to various support services agreements with the Company and each of the
Company's affiliates. Finally, Amway licensed to the Company the right to use
the previously existing distributor lists in Hong Kong and Taiwan. During fiscal
1999, pursuant to agreements between Amway and the Company and its affiliates,
the Company and its affiliates paid Amway a total of $113.6 million for the
purchase of products. See "Description of Business - Relationship with Amway"
and Note 10 to Consolidated Financial Statements.
In connection with the Reorganization, Amway, the Company and each of
its affiliates entered into agreements pursuant to which Amway, on the one hand,
and the Company and/or its affiliates (other than the Company's Hong Kong branch
and Taiwan affiliate), on the other hand, each agreed to provide certain
indemnification rights to the other. Each agreed to be responsible for those
liabilities, known or unknown, that were incurred by it or originated with it.
For example, any tax liabilities properly attributable to Amway or any of its
subsidiaries (other than the Company and its affiliates) are the responsibility
of Amway. In addition, in the event the Company disposes of stock of its
subsidiaries, the Company has agreed to pay Amway an indemnity, on an after-tax
basis, with respect to any U.S. federal income tax liability incurred by Amway
resulting from gain recognition agreements between Amway and the U.S. Internal
Revenue Service that were entered into in connection with the Reorganization.
Amway retained liabilities associated with the Company's Hong Kong branch.
46
PART II
ITEM 14. DESCRIPTION OF SECURITIES TO BE REGISTERED
Not applicable
PART III
ITEM 15. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 16. CHANGES IN SECURITIES, CHANGES IN SECURITY FOR REGISTERED SECURITIES
AND USE OF PROCEEDS
Not applicable
PART IV
ITEM 17. FINANCIAL STATEMENTS
Not applicable (See Item 18).
ITEM 18. FINANCIAL STATEMENTS
See Consolidated Financial Statements (including Notes thereto)
attached hereto.
ITEM 19. FINANCIAL STATEMENTS AND EXHIBITS
The following financial statements and exhibits are filed as a part of
this Report.
(a) Financial Statements
See accompanying Index to Consolidated Financial Statements.
(b) Exhibits
47
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, the Registrant certifies that it meets all of the requirements for filing
on Form 20-F and has duly caused this annual report to be signed on its behalf
by the undersigned, thereunto duly authorized.
AMWAY ASIA PACIFIC LTD.
(Registrant)
Date: February 29, 2000 By: /s/ Craig N. Meurlin
--------------------
Name: Craig N. Meurlin
Title: Vice President, General Counsel
and Assistant Secretary
48
AMWAY ASIA PACIFIC LTD.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE IN
FORM 20-F
---------
Consolidated financial statements and independent auditors' report:
Independent auditors' report . . . . . . . . . . . . . . . . F-1
Consolidated balance sheets at August 31, 1999 and 1998 . . . F-2
Consolidated statements of income for the years ended
August 31, 1999, 1998 and 1997 . . . .. . . . . . . . . . . F-3
Consolidated statements of shareholders' equity and comprehensive
income for the years ended August 31, 1999, 1998 and 1997 . F-4
Consolidated statements of cash flows for the years ended
August 31, 1999, 1998 and 1997 . . . . . . . . . . . . . . F-5
Notes to consolidated financial statements . . . . . . . . . F-7
Financial statement schedules for the years ended
August 31, 1999, 1998 and 1997:
II - Valuation and qualifying accounts . . . . . . . . . S-1
All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or the notes
thereto.
49
INDEPENDENT AUDITORS' REPORT
----------------------------
The Board of Directors and Shareholders
Amway Asia Pacific Ltd.:
We have audited the consolidated financial statements of Amway Asia Pacific Ltd.
and subsidiaries as listed in the accompanying index. In connection with our
audits of the consolidated financial statements, we also have audited the
financial statement schedule as listed in the accompanying index. These
consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Amway Asia Pacific
Ltd. and subsidiaries as of August 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the years in the three-year period
ended August 31, 1999, in conformity with generally accepted accounting
principles. Also in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
/s/ KPMG LLP
Detroit, Michigan
October 1, 1999, except as to Note 20, which is as of December 17, 1999.
F-1
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AMWAY ASIA PACIFIC LTD.
CONSOLIDATED BALANCE SHEETS
August 31, 1999 and 1998
(U.S. dollars in thousands, except per share amounts)
1999 1998
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents ....................................................... $ 151,630 $ 157,157
Short-term investments (note 4) ................................................ 10,414 143
Accounts receivable, net of allowance for doubtful accounts
of $2,475 and $2,144, respectively ............................................ 13,963 21,264
Inventories (note 5) ........................................................... 62,128 75,104
Prepaid expenses and other current assets (notes 10 and 12) .................... 12,402 23,234
--------- ---------
Total current assets ................................................ 250,537 276,902
Property, plant and equipment, net (note 6) ........................................ 104,505 104,346
Long-term investments ............................................................... 3,516 750
Other assets (note 12) .............................................................. 7,521 5,075
--------- ---------
Total assets ........................................................ $ 366,079 $ 387,073
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable (note 10) ..................................................... $ 41,421 $ 59,799
Short-term borrowings (note 7) .................................................. 10,269 18,573
Accrued expenses and income taxes (notes 8 and 12) ............................. 80,655 92,150
Distributor deposits ............................................................ 4,989 4,252
--------- ---------
Total current liabilities ........................................... 137,334 174,774
Deferred income taxes (note 12) .................................................... 454 184
--------- ---------
Total liabilities ................................................... 137,788 174,958
--------- ---------
Minority interests (note 15) ........................................................ 33,903 36,017
--------- ---------
Shareholders' equity (note 16):
Preferred stock, $0.01 par value - authorized 20,000,000 shares, none
issued ........................................................................ -- --
Common stock, $0.01 par value - authorized 110,000,000 shares;
issued and outstanding: 56,441,960 shares ..................................... 564 564
Additional paid-in capital ...................................................... 79,246 79,246
Accumulated other comprehensive income - cumulative foreign currency
translation adjustments ....................................................... (38,414) (44,182)
Retained earnings ............................................................... 152,992 140,470
--------- ---------
Total shareholders' equity .......................................... 194,388 176,098
--------- ---------
Commitments and contingencies (notes 9 and 14)
Total liabilities and shareholders' equity .......................... $ 366,079 $ 387,073
========= =========
See accompanying notes to the consolidated financial statements.
F-2
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AMWAY ASIA PACIFIC LTD.
CONSOLIDATED STATEMENTS OF INCOME
Years ended August 31, 1999, 1998 and 1997
(U.S. dollars in thousands, except per share amounts)
1999 1998 1997
-------- -------- --------
Net sales .................................................................... $501,475 $587,579 $845,166
Cost of sales (note 10) ..................................................... 216,455 257,220 313,287
-------- -------- --------
285,020 330,359 531,879
-------- -------- --------
Operating expenses (note 10):
Distributor incentives ................................................... 128,815 157,018 219,111
Distribution expenses .................................................... 37,774 45,199 49,662
Selling and administrative expenses ...................................... 92,104 102,849 114,523
-------- -------- --------
Total operating expenses ..................................... 258,693 305,066 383,296
-------- -------- --------
Operating income ............................................. 26,327 25,293 148,583
Other income - net (note 11) ................................................ 6,504 9,683 24,707
-------- -------- --------
Income before income taxes and minority
interest
32,831 34,976 173,290
Income taxes (note 12) ...................................................... 13,294 23,508 54,909
-------- -------- --------
Income before minority interest .............................. 19,537 11,468 118,381
Minority interest in income of consolidated subsidiaries
(note 15) .................................................................. 7,062 10,015 14,350
-------- -------- --------
Net income ................................................... $ 12,475 $ 1,453 $104,031
======== ======== ========
Basic and diluted earnings per share (note 17)
$ 0.22 $ 0.03 $ 1.76
======== ======== ========
Dividends per share paid to Company shareholders ............................. $ -- $ 0.88 $ 0.84
======== ======== ========
Weighted average number of shares outstanding (000s) ........................ 56,442 56,442 59,124
======== ======== ========
Weighted average number of shares outstanding including
the effect of dilutive securities (000s) (note 17) ......................... 56,442 56,446 59,176
======== ======== ========
See accompanying notes to the consolidated financial statements.
F-3
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CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
Years ended August 31, 1999, 1998 and 1997
(U.S. dollars in thousands, except per share amounts)
ACCUMULATED
ADDITIONAL OTHER TOTAL
COMPREHENSIVE COMMON PAID-IN COMPREHENSIVE RETAINED SHAREHOLDERS'
INCOME STOCK CAPITAL INCOME EARNINGS EQUITY
------ --------- ------------ ------ ---------- ------
BALANCES AT AUGUST 31, 1996 ..................... $ 600 $ 228,335 $ 959 $ 134,322 $ 364,216
Comprehensive income:
Net income ................................... $ 104,031 -- -- -- 104,031 104,031
Other comprehensive income:
Net change in cumulative foreign
currency translation adjustments ......... (17,780) -- -- (17,780) -- (17,780)
Unrealized gains on marketable equity
Securities ............................... 448 -- -- 448 -- 448
---------
Other comprehensive income ................. (17,332)
---------
Comprehensive income ............................ $ 86,699
=========
Stock options exercised for 84,217
common shares ............................... 1 1,863 -- -- 1,864
Purchase of common stock for retirement ......... (37) (150,736) -- -- (150,773)
Dividends of $0.84 per share .................... -- -- -- (49,665) (49,665)
Amortization of unearned portion of
restricted common stock ....................... -- 143 -- -- 143
--------- ----------- ----------- ---------- ----------
BALANCES AT AUGUST 31, 1997 ..................... 564 79,605 (16,373) 188,688 252,484
Comprehensive income:
Net income ................................... $ 1,453 -- -- -- 1,453 1,453
Other comprehensive income:
Realization of gain upon sale of
securities .............................. (582) -- -- (582) -- (582)
Net change in cumulative foreign
currency translation adjustments ......... (27,227) -- -- (27,227) -- (27,227)
---------
Other comprehensive income ................. (27,809)
---------
Comprehensive income (loss) ..................... $ (26,356)
=========
AMHB repurchase of common stock held
by minority shareholders (note 15) ............. -- (397) -- -- (397)
Dividends of $0.88 per share .................... -- -- -- (49,671) (49,671)
Amortization of unearned portion of
restricted common stock ....................... -- 38 -- -- 38
--------- ---------- ---------- --------- ---------
BALANCES AT AUGUST 31, 1998 ..................... 564 79,246 (44,182) 140,470 176,098
Comprehensive income:
Net income ................................... $ 12,475 -- -- -- 12,475 12,475
Other comprehensive income:
Net change in cumulative foreign
currency translation adjustments ......... 5,768 -- -- 5,768 -- 5,768
---------
Comprehensive income ............................ $ 18,243
=========
Effect of change in minority interest in
AMHB on beginning retained earnings ............ -- -- -- 47 47
--------- --------- --------- --------- ---------
BALANCES AT AUGUST 31, 1999 ..................... $ 564 $ 79,246 $ (38,414) $ 152,992 $ 194,388
========= ========= ========= ========= =========
See accompanying notes to the consolidated financial statements.
F-4
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AMWAY ASIA PACIFIC LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED AUGUST 31, 1999, 1998 AND 1997
(U.S. DOLLARS IN THOUSANDS)
1999 1998 1997
--------- --------- ---------
Cash flows from operating activities:
Net income ............................................................ $ 12,475 $ 1,453 $ 104,031
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization ..................................... 12,776 13,516 13,009
Deferred income taxes ............................................. (1,470) (2,662) (4,934)
Loss (gain) on sale or disposal of property and
equipment ...................................................... 1,331 1,582 (44)
Loss (gain) on sale of investments ................................ (578) (637) 5
Changes in assets and liabilities:
Accounts receivable ........................................... 8,353 (7,932) (7,522)
Inventories ................................................... 17,259 18,162 (31,984)
Prepaid expenses and other current assets ..................... 12,110 2,964 (5,658)
Accounts payable .............................................. (20,369) (18,894) 46,838
Accrued expenses and income taxes ............................. (15,298) (15,106) 10,611
Distributor deposits .......................................... 322 (4,033) (1,617)
Other ......................................................... 6,187 21,361 23,248
--------- --------- ---------
Net cash provided by operating activities ....................... 33,098 9,774 145,983
--------- --------- ---------
Cash flows from investing activities:
Capital expenditures .................................................. (12,968) (33,155) (28,546)
Proceeds from sale of equipment ....................................... 446 375 701
Purchases of held to maturity investments ............................. (26,837) (80,851) (98,612)
Proceeds from maturity of investments ................................. 18,713 115,904 78,284
Purchases of available for sale investments ........................... (9,344) -- --
Proceeds from sale of available for sale investments .................. 5,057 1,644 --
Payments received on (issuance of) notes receivable ................... (125) 273 (1,126)
--------- --------- ---------
Net cash provided by (used in) investing activities ............. (25,058) 4,190 (49,299)
--------- --------- ---------
See accompanying notes to the consolidated financial statements.
F-5
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AMWAY ASIA PACIFIC LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
YEARS ENDED AUGUST 31, 1999, 1998 AND 1997
(U.S. DOLLARS IN THOUSANDS)
1999 1998 1997
--------- --------- ---------
Cash flows from financing activities:
Net short-term borrowings (payments) .................................. (8,330) 18,529 --
Principal payments on notes payable and capital lease
obligations ......................................................... -- -- (27,564)
Dividends paid to shareholders ........................................ -- (49,671) (49,665)
Dividends paid by subsidiaries to minority shareholders ............... (11,334) (5,976) (3,112)
Proceeds from issuance of common stock ................................ -- -- 1,864
Purchase of common stock for retirement ............................... -- -- (150,773)
Amway (Malaysia) purchase for retirement of common stock
held by minority shareholders ....................................... -- (2,129) --
Investment in subsidiary by minority shareholder ...................... 2,219 -- --
--------- --------- ---------
Net cash used in financing activities ........................... (17,445) (39,247) (229,250)
--------- --------- ---------
Effect of exchange rate changes on cash ................................... 3,878 (25,475) (20,201)
--------- --------- ---------
Net decrease in cash and cash equivalents ................................. (5,527) (50,758) (152,767)
Cash and cash equivalents at beginning of year ............................ 157,157 207,915 360,682
--------- --------- ---------
Cash and cash equivalents at end of year .................................. $ 151,630 $ 157,157 $ 207,915
========= ========= =========
Supplemental disclosures of cash flow information:
Interest paid ......................................................... $ 971 $ 118 $ 51
========= ========= =========
Income taxes paid ..................................................... $ 27,952 $ 35,768 $ 60,772
========= ========= =========
See accompanying notes to the consolidated financial statements.
F-6
AMWAY ASIA PACIFIC LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 1999, 1998 and 1997
(U.S. DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(1) BASIS OF PRESENTATION
Amway Asia Pacific Ltd. (the "Company"), a Bermuda corporation, was
incorporated on September 7, 1993. On December 21, 1993, the Company completed
its initial public offering of common stock. The Company has subsidiaries in
Australia, Brunei, China (the mainland, the Hong Kong Special Administrative
Region, Macau and Taiwan), Malaysia, New Zealand and Thailand. Each subsidiary
is wholly owned, except Malaysia, in which the Company has a 51.7% ownership
equity position (see note 15), and Thailand, a partnership in which the Company
is a general partner with a 99.0% economic interest.
The consolidated financial statements include the Company and its
subsidiaries. The Company's subsidiary in Australia ("Amway Australia") owns 50%
of the voting shares of AFS Pty. Ltd. Because Amway Australia is given control
over management decisions by means of a casting vote on the board of directors,
Amway Australia is deemed to have control over AFS Pty. Ltd. Therefore, the
financial statements of AFS Pty. Ltd. are consolidated with those of Amway
Australia and the Company.
All significant intercompany transactions and balances have been
eliminated. Certain prior year amounts have been reclassified to conform to the
current year presentation.
(2) DESCRIPTION OF BUSINESS
The Company is the exclusive distribution vehicle for Amway Corporation
("Amway") in Australia, Brunei, China (the mainland, the Hong Kong Special
Administrative Region, Macau and Taiwan), Malaysia, New Zealand and Thailand.
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Cash Equivalents
For purposes of the consolidated balance sheets and statements of cash
flows, the Company considers all highly liquid debt instruments with maturities
of three months or less at the time of purchase to be cash equivalents.
(b) Short-term Investments
Management determines the proper classifications of investments in
obligations with fixed maturities and marketable equity securities at the time
of purchase and reevaluates such designations as of each balance sheet date. All
securities covered by Statement of Financial Accounting Standards ("SFAS") No.
115, "Accounting for Certain Investments in Debt and Equity Securities," are
designated as either held to maturity or available for sale. Securities
designated as held to maturity are stated at amortized cost, and securities
designated as available for sale are stated at fair value, with unrealized gains
and losses reported as a component of other comprehensive income included in
shareholders' equity. Time deposits with original maturity dates of three months
to one year are also classified as short-term investments. These investments,
which are not subject to the provisions of SFAS No. 115, are carried at cost,
which approximates market value. Realized gains and losses on sales of
investments, as determined on a specific identification basis, are included in
the consolidated statements of income.
F-7
AMWAY ASIA PACIFIC LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
(c) Inventories
Inventories are stated at the lower of cost or market. Cost is
determined using the first-in, first-out (FIFO) method.
(d) Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation is
calculated primarily on the straight-line method over the estimated useful lives
of the assets. Leasehold improvements are amortized straight-line over the
shorter of the lease term or estimated useful life of the asset.
(e) Long-Lived Assets
In accordance with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", the Company
reviews long-lived assets and certain identifiable intangibles for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Recoverability of an asset to be held and used
is measured by a comparison of its carrying amount to future net cashflows
expected to be generated by the asset. If the asset is considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the asset exceeds its fair value. Assets to be disposed of
are reported at the lower of the carrying amount or fair value less costs to
sell.
(f) Other Assets
Other assets at August 31, 1999 and 1998 are stated at cost, net of
amortization, if any, and primarily consist of deposits, land use rights, and
employee loans.
(g) Minority Interests
Minority interest represents the minority shareholders' or partners'
share of equity and net income in consolidated subsidiaries.
(h) Accounting for Sales or Repurchase of Stock by a Subsidiary
Gains or losses arising from the issuance or repurchase of stock by a
subsidiary is accounted for as a capital transaction in the consolidated
financial statements.
F-8
AMWAY ASIA PACIFIC LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
(i) Stock Based Compensation
Prior to September 1, 1996, the Company accounted for its stock option
awards in accordance with the provisions of Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. As such, compensation expense would be recorded on the date of
grant only if the current market price of the underlying stock exceeded the
exercise price. On September 1, 1996, the Company adopted SFAS No. 123,
"Accounting for Stock-Based Compensation," which permits entities to recognize
as expense over the vesting period the fair value of all stock-based awards on
the date of grant. Alternatively, SFAS No. 123 also allows entities to continue
to apply the provisions of APB Opinion No. 25 and provide pro forma net income
and pro forma earnings per share disclosures for employee stock option grants
made in fiscal years beginning after December 15, 1994 as if the
fair-value-based method defined in SFAS No. 123 had been applied. The Company
has elected to continue to apply the provisions of APB Opinion No. 25 and
provide the pro forma disclosure provisions of SFAS No. 123.
(j) Revenue Recognition
The Company recognizes sales when products are shipped to or through
distributors. A reserve for sales returns is accrued based on historical
experience.
(k) Earnings Per Share
Earnings per share are computed in accordance with the provisions of
SFAS No. 128 "Earnings per Share." Basic earnings per share are computed by
dividing income available to common shareholders by the weighted average number
of common shares outstanding during the year. The calculation of diluted
earnings per share is similar to that of basic earnings per share except that
for diluted earnings per share, the denominator is increased to include the
effect of additional common shares that would have been outstanding if all
dilutive potential common shares had been issued.
(l) Foreign Currency Translation
All operations of the Company occur outside of the United States. Each
operation's local currency is considered its functional currency. No currency is
dominant within the group and transactions in Bermuda are minimal. Therefore,
the U.S. dollar is used for translation purposes since most merchandise purchase
transactions, as discussed below, are conducted in U.S. dollars. All assets and
liabilities are translated into U.S. dollars at the current exchange rate as of
the balance sheet date. Revenues and expenses are translated at average currency
exchange rates. Shareholders' equity is recorded at historical exchange rates.
The resulting translation adjustment is recorded as a component of other
comprehensive income included in shareholders' equity. Transaction gains and
losses are included in other income-net.
All of the Company's subsidiaries, except Australia and New Zealand,
pay for their purchases of products from Amway in U. S. dollars and bear the
risk of foreign currency exchange fluctuations. Australia and New Zealand pay
for their purchases of products from Amway in local currencies, thereby
transferring the immediate risk of foreign currency exchange rate fluctuations
to Amway. Amway has the right to modify its prices at any time on at least 30
days advance notice to its affiliates.
F-9
AMWAY ASIA PACIFIC LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
(m) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make reasonable estimates
and assumptions in certain circumstances that affect the amounts reported in the
accompanying consolidated financial statements and notes. Ultimate resolution of
uncertainties could cause actual results to differ from those estimates.
(n) New Accounting Pronouncements
In fiscal 1999, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes standards for reporting and
presentation of comprehensive income and its components. Comprehensive income
includes all changes in equity during a period except those resulting from
investments by and distributions to the Company's shareholders. For the Company,
this primarily represents net income plus or minus the change in cumulative
foreign currency translation adjustments. The Statement requires only additional
or modified disclosures in the consolidated financial statements; it does not
affect the Company's financial position or results of operations. Comprehensive
income for the years ended August 31, 1999, 1998 and 1997 is displayed in the
Consolidated Statements of Shareholders' Equity and Comprehensive Income.
Accumulated other comprehensive income as of August 31, 1999 and 1998 is
displayed in the Consolidated Balance Sheets.
In fiscal 1999, the Company adopted SFAS No. 132, "Employers'
Disclosures about Pension and Other Postretirement Benefits." As it applies to
the Company, SFAS No. 132 revises the required disclosures about the Company's
defined benefit pension plans as displayed in note 13; it does not change the
method of accounting for such plans.
In fiscal 1999, the Company also adopted SFAS No. 131 "Disclosures
about Segments of an Enterprise and Related Information." This statement
requires only additional disclosures in the notes to the consolidated financial
statements; it does not affect the Company's financial position or results of
operations. The related disclosures for the Company are displayed in note 19.
In June, 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This Statement establishes comprehensive
accounting and reporting standards for derivative instruments and hedging
activities and, as amended by SFAS No. 137, is effective for fiscal years
beginning after June 15, 2000 with earlier adoption allowed. The Company
currently plans to adopt this statement effective September 1, 2000.
F-10
AMWAY ASIA PACIFIC LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(4) INVESTMENTS
SECURITIES SUBJECT TO THE PROVISIONS OF SFAS NO. 115 AT AUGUST 31, 1999
AND 1998 ARE SUMMARIZED AS FOLLOWS:
MARKET
COST VALUE
---- -----
August 31, 1999:
----------------
Available for sale:
Debt security mutual funds ... $ 4,353 $ 4,353
======= =======
Held to maturity:
Banker's acceptances ......... $ 1,979 $ 1,979
Commercial paper ............. 2,781 2,781
Treasury bills ............... 1,301 1,301
Government bonds ............. 2,766 2,766
------- -------
Total held to maturity ....... $ 8,827 $ 8,827
======= =======
August 31, 1998:
----------------
Held to maturity:
Banker's acceptances ......... $15,154 $15,154
Commercial paper ............. 255 255
------- -------
Total held to maturity ....... $15,409 $15,409
======= =======
There were no gross unrealized holding gains or losses on these
securities in fiscal 1999 or 1998. The government bonds within the held to
maturity category at August 31, 1999 mature in 2005 and are included in
long-term investments on the consolidated balance sheet. The remaining
securities within the held to maturity category at August 31, 1999 have original
maturities between 3 months and 1 year and, along with the available for sale
securities shown above, are included in short-term investments on the August 31,
1999 consolidated balance sheet. The held to maturity securities at August 31,
1998 have original maturities of less than 3 months and are therefore included
in cash and cash equivalents on the August 31, 1998 consolidated balance sheet.
Short-term investments included on the August 31, 1998 consolidated balance
sheet of $143 represent time deposits, which are not subject to the reporting
requirements of SFAS 115, and are stated at cost, which approximates market
value.
(5) INVENTORIES
INVENTORIES CONSIST OF THE FOLLOWING AT AUGUST 31:
[Download Table]
1999 1998
------- -------
Raw materials .......................................... $ 6,009 $ 6,996
Manufactured finished goods and finished goods purchased
for resale ........................................... 56,119 68,108
------- -------
Total .............................................. $62,128 $75,104
======= =======
F-11
AMWAY ASIA PACIFIC LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(6) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following at August 31:
[Enlarge/Download Table]
1999 1998
--------- ---------
Land and improvements .......................................... $ 7,720 $ 7,633
Buildings and improvements ..................................... 61,542 46,151
Machinery and equipment ........................................ 78,235 70,111
Leasehold improvements ......................................... 12,975 15,760
Construction in progress ....................................... 4,181 14,144
--------- ---------
164,653 153,799
Less accumulated depreciation and amortization ................. (60,148) (49,453)
--------- ---------
Net property, plant and equipment .......................... $ 104,505 $ 104,346
========= =========
(7) SHORT-TERM BORROWINGS
The Company's subsidiary in China had short-term borrowings of $10,269
and $11,473 at August 31, 1999 and 1998, respectively, under unsecured revolving
line of credit agreements with three local banks. The agreements are guaranteed
by Standard Chartered Bank in the form of standby letters of credit which in
turn are guaranteed by the Company. The interest rates on loans under these
agreements are based on the published rates determined by the Central Bank in
China for short-term loans. The weighted-average interest rate on these
borrowings was approximately 5.9% and 6.8% at August 31, 1999 and 1998,
respectively. There are no commitment fees on these credit facilities. Unused
credit available under these agreements was $11,478 and $6,643 at August 31,
1999 and 1998, respectively.
At August 31, 1998, the Company also had borrowings of $7,100 under an
unsecured revolving line of credit agreement in the United States with Standard
Chartered Bank. The interest rates on loans under this credit facility are based
on LIBOR plus 0.25% at the time of loan. The weighted-average interest rate on
these borrowings was approximately 5.9% at August 31, 1998. There are no
commitment fees on these credit facilities. Unused credit available under these
agreements was $25,000 and $17,900 at August 31, 1999 and 1998, respectively.
(8) ACCRUED EXPENSES AND INCOME TAXES
Accrued expenses and income taxes consist of the following at August
31:
[Download Table]
1999 1998
---------- --------
Distributor incentives ....................................... $27,705 $29,837
Distributor seminars ......................................... 11,710 13,581
Income taxes ................................................. 9,122 16,329
Deferred taxes ............................................... 2,465 3,029
Other taxes
1,679 2,362
Employee compensation and retirement
8,062 7,565
Sales returns
5,386 6,491
Other ........................................................ 14,526 12,956
------- -------
Total .................................................... $80,655 $92,150
======= =======
F-12
AMWAY ASIA PACIFIC LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(9) LEASES
The Company leases real estate under noncancelable operating leases
which expire at various dates through 2004. Future minimum annual rentals under
these noncancelable operating leases as of August 31, 1999, are as follows:
Year ending August 31:
2000 ................................................ $ 6,663
2001 ................................................ 3,811
2002 ................................................ 2,603
2003 ................................................ 1,212
2004 ................................................ 253
-------
Total minimum lease payments ......................... $14,542
=======
Rental expense charged to operations for the years ended August 31,
1999, 1998 and 1997, approximated $9,765, $11,801 and $10,953, respectively,
including amounts paid under short-term cancelable leases.
(10) RELATED PARTY TRANSACTIONS
The Company, as the distribution vehicle for Amway in the Asia Pacific
markets in which the Company operates, has a number of contractual relationships
with Amway (1) for the right to purchase Amway products which Amway makes
available to its international affiliates (the "Product Purchase Agreements"),
(2) for the right to manufacture and sell Amway licensed products in China (the
"China Technical Agreement"), (3) for the right to use Amway's trade name and
trademark along with certain other intellectual property rights (the "Trademark
License Agreements"), (4) for receiving various executive management,
administrative support and information services (the "Amended and Restated
Support Service Agreements") and (5) for the right to use the Hong Kong and
Taiwan distributor lists (the "Distributor List and Certain Other Intangibles
License Agreements").
Purchases from and other transactions with Amway for the years ended
August 31 are as follows:
Prices for products are governed by a price schedule which Amway
establishes periodically based upon a U.S. dollar "cost plus" base price
calculation. At August 31, 1999 and 1998, the Company owed Amway $14,445 and
$31,337, respectively, primarily for the purchase of inventory. These amounts
are included in accounts payable.
[Download Table]
1999 1998 1997
---- ---- ----
Product purchases ................................. $113,599 $151,560 $190,031
China Technical royalty
41 885 3,725
Trademark license royalty ......................... 395 275 390
Support service and license fees .................. 5,308 5,294 650
Distributor list royalty .......................... 9,165 9,165 9,111
F-13
AMWAY ASIA PACIFIC LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(10) RELATED PARTY TRANSACTIONS - CONTINUED
On July 31, 1995, the Company entered into seven non-interest bearing
negotiable promissory notes aggregating $27,946 payable to Amway over three
years beginning in fiscal 1997 for the prepayment of fiscal 1997, 1998 and 1999
royalties on the Hong Kong and Taiwan distributor lists. The Company prepaid
these notes in full on February 27, 1997. Prepaid royalties totaling $9,165 are
included as a component of prepaid expenses at August 31, 1998. These prepaid
amounts were fully amortized as of August 31, 1999.
Under Amended and Restated Support Services Agreements between Amway,
the Company and its affiliates, Amway provides information systems, executive
management, investor relations services and certain administrative support
services including legal, accounting, tax, treasury, marketing, insurance,
inventory control and human resources services to the Company. The Company pays
Amway software license fees and maintenance charges with respect to information
systems provided by Amway; the Company pays Amway for other services based on
the internal labor and other direct and indirect costs incurred by Amway in
providing such services.
(11) OTHER INCOME - NET
Other income - net consists of the following for the years ended August
31:
[Download Table]
1999 1998 1997
-------- -------- --------
Interest income ............................. $ 8,216 $ 12,203 $ 22,461
Loss on foreign exchange .................... (3,315) (3,914) (2,554)
Interest expense ............................ (954) (1,329) (155)
Other, net .................................. 2,557 2,723 4,955
-------- -------- --------
Other income - net ........................ $ 6,504 $ 9,683 $ 24,707
======== ======== ========
(12) INCOME TAXES
Income is subject to taxation in each country where the Company
operates and it files separate income tax returns in each country. Income taxes
consist of the following for the years ended August 31:
[Download Table]
1999 1998 1997
-------- -------- --------
Current ............................ $ 15,018 $ 25,403 $ 59,532
Deferred ........................... (1,724) (1,895) (4,623)
-------- -------- --------
Total .......................... $ 13,294 $ 23,508 $ 54,909
======== ======== ========
The significant components of deferred income tax expense attributable
to income before income taxes for the years ended August 31 are as follows:
[Download Table]
1999 1998 1997
------- ------- -------
Deferred taxes on undistributed earnings ........... $ (500) $(1,937) $(4,798)
Net operating loss carryforwards ................... (2,015) -- --
Inventory reserves ................................. (522) (95) (208)
Valuation allowance on deferred tax assets ......... 2,284 -- --
Other .............................................. (971) 137 383
------- ------- -------
Total .......................................... $(1,724) $(1,895) $(4,623)
======= ======= =======
F-14
AMWAY ASIA PACIFIC LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(12) INCOME TAXES - CONTINUED
The statutory tax rates by country are as follows:
[Enlarge/Download Table]
1999 1998 1997
-------------- -------------- -----------
Australia ............................................. 36.0% 36.0% 36.0%
Brunei ................................................ 30.0% 30.0% 30.0%
Mainland China (1) .................................... 7.5% 0.0% 0.0%
Hong Kong ............................................. 16.0% 16.0% 16.5%
Macau ................................................. 16.5% 16.5% 16.5%
Malaysia (2) .......................................... 28.0% 28.0% 30.0%
New Zealand ........................................... 33.0% 33.0% 33.0%
Taiwan ................................................ 25.0% 25.0% 25.0%
Thailand .............................................. 30.0% 30.0% 30.0%
<FN>
(1) In Mainland China, the current tax laws, which apply
to calendar years, allow the Company's subsidiary to
pay no tax on profits for the two calendar years
beginning in the year that an accumulated profit was
realized. Thereafter, it is subject to special
reduced rates of 7.5% for three years, 10% for the
subsequent three years and 15% thereafter. During the
1997 tax year, the Company's Chinese subsidiary
attained such an accumulated profit for the first
time; therefore, the Company's Mainland China
subsidiary was not subject to tax on profits in 1997
and 1998. The Mainland China tax laws allow for
losses to be carried forward for up to five years.
(2) The Malaysian government suspended the corporate
income tax on business-related income in that country
for the 1999 tax year. The statutory rate of 28%,
which will become effective again for the 2000 tax
year, was applied in the calculation of deferred
taxes at August 31, 1999.
A reconciliation of the weighted-average statutory tax rate to the
weighted-average effective tax rate is shown in the table below. In 1998, the
Company's weighted-average statutory tax rate was particularly high because its
Mainland China subsidiary recorded a net operating loss while it was not subject
to income tax in that year.
[Enlarge/Download Table]
1999 1998 1997
------- ------- -------
Weighted average statutory tax rate ...................... 38.5% 51.9% 25.3%
Add tax effect of non-deductible meals
and entertainment ...................................... 1.7% 4.0% 1.0%
Add dividend withholding tax ............................. 9.8% 11.8% 5.1%
Subtract impact of Malaysia tax holiday .................. (9.9)% -- --
All other................................................. 0.4% (0.5)% 0.3%
------- ------- -------
Weighted average effective tax rate ...................... 40.5% 67.2% 31.7%
======= ======= =======
F-15
AMWAY ASIA PACIFIC LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(12) INCOME TAXES - CONTINUED
Taiwan and Thailand require a withholding tax of 20% and 10%,
respectively, on dividends paid to the Bermuda parent. The Company's Taiwan
subsidiary is subject to a statutory reserve on its retained earnings from which
it may not remit dividends. This statutory reserve was $8.0 million using the
exchange rate effective August 31, 1999.
The tax effects of temporary differences which give rise to significant
portions of the deferred tax assets and deferred tax liabilities at August 31,
1999 and 1998, are presented below.
[Enlarge/Download Table]
1999 1998
------- -------
Deferred tax assets:
Inventories ........................................................ $ 1,942 $ 1,420
Accrued sales returns .............................................. 1,331 1,212
Accrued expenses ................................................... 1,690 1,675
Net operating loss carryforwards ................................... 2,015 --
Other .............................................................. 917 (126)
------- -------
7,895 4,181
Valuation allowance ............................................. (2,284) --
------- -------
Total deferred tax assets, net of valuation allowance ........... 5,611 4,181
------- -------
Deferred tax liabilities:
Withholding taxes .................................................. (2,465) (2,965)
Other .............................................................. (454) (248)
------- -------
Total deferred tax liabilit ..................................... (2,919) (3,213)
------- -------
Net deferred tax asset .......................................... $ 2,692 $ 968
======= =======
The net deferred tax asset is included in the consolidated
balance sheet as follows:
Prepaid expenses and other current assets ........................ $ 4,624 $ 3,960
Other assets ..................................................... 987 221
Accrued expenses and income taxes ................................ (2,465) (3,029)
Deferred income taxes ............................................ (454) (184)
------- -------
Net deferred tax asset ........................................ $ 2,692 $ 968
======= =======
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of the
deferred tax assets will not be realized. Based upon the level of historical
taxable income and projections of future taxable income, management believes it
is more likely than not that the Company will realize the benefit of the net
deferred tax assets at August 31, 1999.
F-16
AMWAY ASIA PACIFIC LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(13) EMPLOYEE BENEFIT PENSION PLANS
For all periods presented, the Company's China (Mainland, Macau, Taiwan
and Hong Kong Special Administrative Region) subsidiaries each sponsored a
pension plan that covers substantially all employees, primarily under defined
benefit pension plans. The following information, shown in accordance with SFAS
No. 132, relates to these defined benefit pension plans:
[Enlarge/Download Table]
1999 1998 1997
------- ------- -------
Components of net periodic pension costs:
Service cost ..................................... $ 830 $ 751 $ 702
Interest cost .................................... 428 461 342
Expected return on plan assets ................... (363) (481) (461)
Net amortization and deferral .................... 73 44 13
----- ----- -----
Net periodic pension cost ............................ $ 968 $ 775 $ 596
===== ===== =====
1999 1998
------- -------
Change in projected benefit obligation:
Projected benefit obligation, beginning of year .................. $ 5,960 $ 5,255
Service cost ..................................................... 830 751
Interest cost .................................................... 428 461
Plan amendments .................................................. 29 94
Net actuarial loss (gain) ........................................ 490 (199)
Benefits paid .................................................... (926) (456)
Effect of exchange rate changes on translation ................... 226 54
------- -------
Projected benefit obligation, end of year ........................ 7,037 5,960
------- -------
Change in fair value of plan assets:
Fair value of plan assets, beginning of year ..................... 4,836 5,630
Actual return on plan assets ..................................... 1,015 (513)
Employer contributions ........................................... 589 512
Benefits paid .................................................... (926) (456)
Effect of exchange rate changes on translation ................... (156) (337)
------- -------
Fair value of plan assets, end of year ........................... 5,670 4,836
------- -------
Funded status of the plan ............................................ (1,367) (1,124)
Unrecognized net actuarial loss ...................................... 758 886
Unrecognized prior service costs ..................................... 537 574
Unrecognized transition asset ........................................ (53) (68)
Additional minimum liability ......................................... (385) (605)
------- -------
Net pension liability recognized on the balance sheets ............... $ (510) $ (337)
======= =======
The weighted average discount rate used in determining the actuarial
present value of projected benefit obligation for defined benefit pension plans
ranged from 7% to 8% for the fiscal years ended August 31, 1999 and 1998. The
rate of increase in compensation levels ranged from 5% to 7% and the expected
long-term rate of return on assets ranged from 7% to 8% for the fiscal years
ended August 31, 1999 and 1998, respectively.
F-17
AMWAY ASIA PACIFIC LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(14) CONTINGENCIES
In addition to the matters discussed in Note 20, the Company is a party
to certain routine litigation incidental to its business, none of which is
currently expected to have a material adverse effect on the Company's financial
condition and results of operations.
(15) REPURCHASE OF COMMON STOCK BY A SUBSIDIARY
In fiscal 1998, Amway (Malaysia) Holdings Berhad ("AMHB"), the parent
company for the Malaysia affiliate, obtained regulatory and shareholder approval
to repurchase up to 10% of the outstanding shares of its own common stock,
subject to certain regulatory limitations. During fiscal 1998, AMHB repurchased
and cancelled 1,365,000 of its shares on the open market at an aggregate price
of Malaysian ringgit 8.6 million, decreasing the local ownership level (minority
interest) to 48.3%. There were no such repurchases in fiscal 1999.
(16) STOCK OPTION/INCENTIVE AWARD PLANS
During fiscal 1994, the Company adopted the Long-term Incentive Plan
which authorizes the granting of stock-based awards of up to an aggregate of
500,000 shares of the Company's common stock to officers and key employees of or
consultants to the Company who demonstrate superior performance or achieve
management objectives. The plan is administered by the Compensation Committee of
the Board of Directors who determine the terms and conditions of each award
within the guidelines established by the plan.
During fiscal 1997, non-qualified stock options for 149,500 shares were
granted at a price equal to the market value on the date the options were
granted. The weighted average fair value of these options at the date of grant
was $17 per share. These options become exercisable over a period of three years
and expire no later than 10 years after the date of grant. No such options were
granted during fiscal years 1998 or 1999.
During fiscal 1995, the Company adopted an Outside Director Long-term
Award Plan which authorizes the granting of stock-based awards of up to an
aggregate of 50,000 shares of the Company's common stock. During fiscal 1997,
the Company granted non-qualified stock options for 9,000 shares at a price
equal to the market value on the date the options were granted. The weighted
average fair value of these options at the date of grant was $16 per share. No
such options were granted during fiscal years 1998 or 1999.
F-18
AMWAY ASIA PACIFIC LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(16) STOCK OPTION/INCENTIVE AWARD PLANS - CONTINUED
Activity related to the options issued under the Long-term Incentive
Plan and the Outside Director Long-term Award Plan are summarized in the table
below.
[Enlarge/Download Table]
Options Options Options
outstanding outstanding exercisable
at beginning Forfeited or at end at end
of year Granted Exercised expired of year of year
-------- ------- --------- -------- --------- ----------
FISCAL 1997
Number of options 241,000 158,500 84,217 3,278 312,005 101,672
Weighted average
exercise price $ 25 $ 42 $ 22 $ 20 $ 35 $ 22
FISCAL 1998
Number of options 312,005 -- -- -- 312,005 194,672
Weighted average
exercise price $ 35 $ -- $ -- $ -- $ 35 $ 31
FISCAL 1999
Number of options 312,005 -- -- 13,500 298,505 245,672
Weighted average
exercise price $ 35 $ -- $ -- $ 36 $ 35 $ 33
The exercise prices for options outstanding at August 31, 1999 range
from $18 to $46 per share. The weighted average remaining contractual life for
options outstanding at August 31, 1999 is six years.
During fiscal 1995 and 1996, pursuant to the Long-term Incentive Plan,
the Company granted 3,000 and 6,000 shares, respectively, of restricted common
stock to an officer at a cost of $0.01 per share. Of this restricted common
stock, 2,000, 3,000 and 4,000 shares vested and became nonforfeitable on June 1,
1997, June 30, 1997 and June 1, 1998, respectively. The fair value of the
restricted stock awards at the date of grant, based on the stock's market value
at the grant date, was $36 and $34 per share, respectively. The cost of these
restricted stock awards, based on the stock's fair market value at the award
date, was charged to shareholders' equity and amortized against earnings over
the vesting period.
As permitted by SFAS No. 123, "Accounting for Stock-Based
Compensation," the Company has elected not to adopt the fair value based method
to measure compensation cost related to stock-based awards in determining net
income in the basic financial statements. If the Company had elected to adopt
the fair value based method, the Company's net income for the years ended August
31, 1999, 1998 and 1997 would have been $11,470, $403 and $103,697,
respectively, and earnings per share would have been $0.20, $0.01 and $1.75 per
share, respectively.
The options pricing model used to estimate the fair value of the
stock-based awards for purposes of this disclosure included the following
assumptions: Expected life of 7.5 years; 8.5% risk-free interest rate; 2% annual
rate of dividends; and expected volatility of 7% in fiscal 1994 and fiscal 1995,
17% in fiscal 1996 and 24% to 31% in fiscal 1997.
F-19
AMWAY ASIA PACIFIC LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(17) EARNINGS PER SHARE
The Company's stock options represent potential dilutive common shares
for the purposes of computing diluted earnings per share in accordance with SFAS
No. 128. These stock options had an immaterial effect on the weighted-average
number of shares outstanding, and there were no dilutive securities that
affected net income, for fiscal years 1999, 1998 and 1997.
For fiscal 1999, options to purchase 299,000 shares of common stock at
a weighted-average exercise price of $35 per share were outstanding but not
included in the computation of fiscal 1999 diluted earnings per share because
the options' exercise price was greater than that year's average market price of
the common shares. Such options expire at various dates during fiscal 2003,
2005, 2006 and 2007. For fiscal 1998, options to purchase 255,000 shares of
common stock at a weighted-average exercise price of $38 per share were
outstanding but not included in the computation of diluted earnings per share
because the options' exercise price was greater than that year's average market
price of the common shares. Such options expire at various dates during fiscal
2005, 2006 and 2007.
(18) UNAUDITED QUARTERLY FINANCIAL DATA
[Enlarge/Download Table]
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
------- ------- ------- ------- -----
1999
----
Net sales ............................. $ 117,710 $ 116,571 $ 131,648 $ 135,546 $ 501,475
Gross profit .......................... 66,686 65,607 74,094 78,633 285,020
Operating income ...................... 2,322 1,955 6,463 15,587 26,327
Income before income taxes
and minority interest ................ 1,070 3,530 7,829 20,402 32,831
Net income (loss) ..................... $ (3,380) $ (578) $ 2,111 $ 14,322 $ 12,475
========= ========= ========= ========= =========
Basic and diluted earnings
(loss) per share .................... $ (0.06) $ (0.01) $ 0.04 $ 0.25 $ 0.22
========= ========= ========= ========= =========
Weighted average number of
shares outstanding (000s):
For basic EPS ..................... 56,442 56,442 56,442 56,442 56,442
========= ========= ========= ========= =========
For diluted EPS ................... 56,442 56,442 56,442 56,442 56,442
========= ========= ========= ========= =========
1998
----
Net sales ............................. $ 169,124 $ 160,678 $ 133,601 $ 124,176 $ 587,579
Gross profit .......................... 103,227 93,907 64,469 68,756 330,359
Operating income ...................... 16,590 13,185 (9,525) 5,043 25,293
Income (loss) before income
taxes and minority interest ......... 19,684 13,866 (7,449) 8,875 34,976
Net income (loss) ..................... $ 8,525 $ 5,539 $ (15,295) $ 2,684 $ 1,453
========= ========= ========= ========= =========
Basic and diluted earnings
(loss) per share .................... $ 0.15 $ 0.10 $ (0.27) $ 0.05 $ 0.03
========= ========= ========= ========= =========
Weighted average number of
shares outstanding (000s):
For basic EPS ..................... 56,442 56,442 56,442 56,442 56,442
========= ========= ========= ========= =========
For diluted EPS ................... 56,461 56,449 56,442 56,442 56,446
========= ========= ========= ========= =========
F-20
AMWAY ASIA PACIFIC LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(19) SEGMENT INFORMATION
The FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," in June 1997. This Statement requires that
public companies report certain information about operating segments. It also
requires the reporting of certain information about the company's products and
services, the geographic areas in which the company operates and the company's
major customers. The Company adopted this statement in fiscal 1999.
The Company has identified three reportable segments based on
geographic regions including Greater China, Malaysia/Thailand and Australia/New
Zealand. The segments have similar business characteristics and each offers
similar products to its independent distributors and customers. The Company
assesses each segment's performance based on operating income or loss.
Transactions between the Parent company and the segments are reflected in the
segments' operating income or loss. There are no material transactions between
segments. Information related to the Company's segments for each of the years in
the three-year period ended August 31, 1999 is presented below.
[Enlarge/Download Table]
YEARS ENDED AUGUST 31,
------------------------------------------
1999 1998 1997
--------- --------- ---------
Net sales:
Greater China region ........................................ $ 203,514 $ 241,636 $ 377,226
Malaysia/Thailand region .................................... 172,630 199,032 316,818
Australia/New Zealand region ................................ 125,331 146,911 151,122
--------- --------- ---------
Total consolidated net sales ................................ $ 501,475 $ 587,579 $ 845,166
========= ========= =========
Operating income (loss):
Greater China region ........................................ $ (3,402) $ (16,152) $ 50,538
Malaysia/Thailand region .................................... 21,971 31,947 83,683
Australia/New Zealand region ................................ 10,285 11,381 16,706
Corporate expenses and eliminations, net .................... (2,527) (1,883) (2,344)
--------- --------- ---------
Total consolidated operating income ......................... $ 26,327 $ 25,293 $ 148,583
========= ========= =========
Depreciation and amortization:
Greater China region ....................................... $ 9,549 $ 10,266 $ 8,339
Malaysia/Thailand region ................................... 1,148 1,129 2,001
Australia/New Zealand region ............................... 2,079 2,121 2,669
--------- --------- ---------
Total consolidated depreciation and amortization ........... $ 12,776 $ 13,516 $ 13,009
========= ========= =========
Capital expenditures:
Greater China region ........................................ $ 10,329 $ 29,581 $ 17,626
.........
Malaysia/Thailand region .................................... 1,396 935 8,536
Australia/New Zealand region ................................ 1,243 2,639 2,384
--------- --------- ---------
Total consolidated capital expenditures ..................... $ 12,968 $ 33,155 $ 28,546
========= ========= =========
F-21
AMWAY ASIA PACIFIC LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(19) SEGMENT INFORMATION - CONTINUED
Total assets for each of the Company's segments as of August 31, 1999
and 1998 is presented in the following table.
[Enlarge/Download Table]
AUGUST 31,
---------------------------------
1999 1998
--------- ---------
Total assets:
Greater China region ........................................... $ 172,090 $ 192,411
Malaysia/Thailand region ....................................... 118,774 137,360
Australia/New Zealand region ................................... 54,389 48,808
Corporate (1) .................................................. 25,631 22,250
Eliminations ................................................... (4,805) (13,756)
--------- ---------
Total consolidated assets .............................. $ 366,079 $ 387,073
========= =========
(1) Corporate assets are principally receivables from the Company's
subsidiaries (which are deducted from total assets through eliminations)
and cash and cash equivalents.
Each of the Company's three segments derives its revenue primarily from
the sale of consumer products to or through its independent distributors.
Although the Company's performance does not rely on sales to any single
distributor, the Company's sales could decline if it were to lose a significant
distributor leader. The Company groups its products into four core product
lines: Personal Care, Nutrition & Wellness, Home Care and Home Tech. Not all of
the products in each line are available in all of the Company's three regions.
The three geographic regions also offer catalog products which are tailored to
the local market and offer varying assortments of products including clothing,
gourmet food and jewelry. Other products and services include starter kits and
business support materials such as motivational audio and videotapes and written
materials. The Company's net sales by product line are presented in the
following table:
[Download Table]
YEARS ENDED AUGUST 31,
----------------------------------------
1999 1998 1997
-------- -------- --------
Personal Care ......................... $139,768 $149,384 $241,121
Nutrition & Wellness .................. 113,585 112,681 146,518
Home Care ............................. 72,599 89,727 130,617
Home Tech ............................. 72,330 99,130 127,601
Catalog products ...................... 59,486 64,353 68,920
Other products and services ........... 43,707 72,304 130,389
-------- -------- --------
$501,475 $587,579 $845,166
======== ======== ========
F-22
AMWAY ASIA PACIFIC LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(20) SUBSEQUENT EVENTS
Tender Offer and Amalgamation - On November 18, 1999, New AAP Limited,
a corporation organized under the laws of Bermuda ("New AAP"), commenced a
tender offer to purchase all of the outstanding shares of the Company's common
stock, $.01 par value per share (the "Common Stock"), for $18.00 per share, in
cash (the "Offer"). The Offer expired on December 17, 1999. New AAP is wholly
owned by Apple Hold Co., L.P. ("Apple"), a Bermuda partnership and an entity
controlled and beneficially owned by the DeVos and Van Andel families and
certain corporations, trusts and other entities established by or for the
benefit of such families (the "Principal Shareholders"). Other than an aggregate
of 1,128,580 shares tendered by certain charitable foundations established by
the Principal Shareholders, the Principal Shareholders did not tender any shares
in response to the Offer. In connection with the consummation of the Tender
Offer, the Principal Shareholders contributed their remaining shares of Common
Stock to Apple.
The Offer was made pursuant to a Tender Offer and Amalgamation
Agreement, dated November 15, 1999, among New AAP, Apple and the Company (the
"Amalgamation Agreement"). The Amalgamation Agreement provided for, among other
things, New AAP first to conduct the Offer and then for the Company and New AAP
to amalgamate (the "Amalgamation") with the Company continuing as the surviving
company. Apple and New AAP have agreed not to dispose of or otherwise transfer
any shares of the Company prior to the consummation of the Amalgamation.
Pursuant to the Offer, New AAP purchased approximately 18% of the Company's
outstanding shares, and as a result of the Offer, the Principal Shareholders own
97.4% of the Company's Common Stock.
Legal Proceedings - On December 8, 1999, a class action lawsuit was
commenced in the Superior Court of the State of California, County of San Mateo,
captioned FISHER, ET AL. V. AMWAY ASIA PACIFIC, LTD., ET AL., No. 411303. The
complaint, which names as defendants the Company, its officers and directors and
New AAP, alleges that the purchase price offered to the Company's public
shareholders in connection with New AAP's cash tender offer was unfair and that
in pursuing the cash tender offer, defendants engaged in various manipulative
and deceptive acts and practices in breach of their fiduciary duties to the
Company's public shareholders. The complaint seeks an injunction prohibiting
defendants from proceeding with the cash tender offer or, alternatively,
rescission of the cash tender offer to the extent already completed, unspecified
damages, costs and attorneys' fees and other relief. This action has been
removed to the United States District Court, Northern District of California and
was assigned No. C 00-00199 MEJ.
On December 16, 1999, a class action lawsuit was commenced in the
United States District Court for the Southern District of New York captioned
WARDROP, ET AL. V. AMWAY ASIA PACIFIC LTD., ET AL, No. 99 Civ. 12093. The
complaint, which names as defendants the Company, its officers and directors and
New AAP, alleges that defendants violated Section 14(e) of the Exchange Act, and
Rules 14D-1 and 14D-9 promulgated pursuant thereto, by misrepresenting in the
Offer to Purchase that the purchase price offered to the Company's public
shareholders was fair. According to plaintiffs, the statement that the purchase
price was fair was false or misleading because defendants allegedly failed to
consider the impact on the Company's future of the agreement between China and
the United States, under which the United States agreed to support China's entry
into the World Trade Organization. The complaint seeks an injunction prohibiting
the defendants from proceeding with the cash tender offer or, alternatively,
rescission of the cash tender offer to the extent already completed or
rescissory damages, costs and attorneys' fees and other relief.
F-23
[Enlarge/Download Table]
SCHEDULE II
AMWAY ASIA PACIFIC LTD.
VALUATION AND QUALIFYING ACCOUNTS
(U.S. DOLLARS IN THOUSANDS)
ADDITIONS
---------------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING OF COSTS AND OTHER END OF
DESCRIPTION PERIOD EXPENSES ACCOUNTS DEDUCTIONS (A) PERIOD
----------------------------------------------- ------------ ------------- ---------- -------------- -----------
Year ended August 31, 1997
Allowance for doubtful
accounts and reserve
for excess and obsolete
inventory ............................... $ 12,270 $ 14,062 $ -- $(15,105) $ 11,227
Year ended August 31, 1998
Allowance for doubtful
accounts and reserve
for excess and obsolete
inventory ............................... $ 11,227 $ 17,742 $ -- $ (8,432) $ 20,537
Year ended August 31, 1999
Allowance for doubtful
accounts and reserve
for excess and obsolete
inventory ............................... $ 20,537 $ 1,563 $ -- $ (4,855) $ 17,245
(A) Disposals of inventory and write-off of bad debts.
S-1
Dates Referenced Herein and Documents Incorporated by Reference
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