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NU SKIN ENTERPRISES INC - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

May 8, 2014

This quarterly report on Form 10-Q (this "Quarterly Report") contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended that represent the company's current expectations and beliefs. All statements other than statements of historical fact are "forward-looking statements" for purposes of federal and state securities laws and include, but are not limited to, statements of management's expectations regarding our performance, initiatives, strategies, new products, opportunities and risks; statements of projections regarding future operating results and other financial items; statements of belief; and statements of assumptions underlying any of the foregoing. In some cases, you can identify these statements by forward-looking words such as "believe," "expect," "project," "anticipate," "estimate," "intend," "plan," "targets," "likely," "will," "would," "could," "may," "might," the negative of these words and other similar words. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, except as required by law. We caution and advise readers that these statements are based on certain assumptions that may not be realized and involve risks and uncertainties that could cause actual results to differ materially from the expectations and beliefs contained herein. For a summary of these risks, see "Item 1A - Risk Factors" of this Quarterly Report, as well as the risk factors included in our Annual Report on Form 10-K for the year ended December 31, 2013 (our "Annual Report"). The following Management's Discussion and Analysis should be read in conjunction with our financial statements and related notes and Management's Discussion and Analysis included in our Annual Report, and our other filings, including Current Reports on Form 8-K, filed with the SEC through the date of this report.



Overview

Our revenue for the three-month period ended March 31, 2014 increased 24% to $671.1 million, when compared to the same period in 2013, with foreign currency fluctuations negatively impacting revenue 4%. This increase reflects year-over-year growth in each of our regions with significant growth in Greater China and South Korea. Earnings per share for the first quarter of 2014 were $1.05, compared to $0.90 in the prior year. Sales Leaders and Actives increased 24% and 12%, respectively, compared to the prior-year period. When compared to results for the fourth quarter of 2013, our revenue in the first quarter of 2014 decreased 36%, and Sales Leaders and Actives declined 34% and 16%, respectively. We typically experience a significant sequential decline in revenue and sales leader numbers in the quarter following a limited-time offer because of the higher than normal increase in revenue and sales leader activity during the quarter of the limited-time offer, which skews year-over-year and sequential comparisons. We also typically experience a seasonal decline from the fourth quarter to the first quarter. We believe our first quarter results, however, were adversely impacted by two additional factors. First, in January 2014, in response to media scrutiny in a prominent Chinese newspaper and subsequent government investigations of our operations and the activities of our sales force in Mainland China, we voluntarily took a number of steps in Mainland China to address regulatory concerns. These steps included suspending our business promotional meetings and suspending the acceptance of applications for new sales representatives. These steps caused a significant disruption in business growth in Mainland China, our fastest growing market. We resumed corporate-hosted business meetings and began accepting new sales representative applications as of May 1, 2014, and we anticipate that it may take some time to determine how the business will respond. Second, sales of ageLOC TR90 in the second half of 2013 were substantial. Our limited-time offer generated approximately $550 million of sales during this period. This product was sold in a kit containing a three-month supply. We believe the significant 2013 sales and the three-month supply kit configuration decreased consumer demand in subsequent regional limited-time offers of this product during the first quarter. In addition, TR90 was developed to decrease fat without sacrificing lean muscle. The result is a healthier body composition but not necessarily maximum weight loss. Our research shows that some consumers of TR90 were dissatisfied with the extent of their weight loss. We plan to address any consumer dissatisfaction with TR90 weight-loss results going forward by simplifying the eating plan and educating our sales force and consumers on the importance of maintaining lean muscle mass while focusing on weight loss from fat. In some markets, we have elected to make TR90 generally available shortly following a regional limited-time offer, rather than waiting a longer period as in previous limited-time offers. We believe these issues combined to result in regional limited-time offer sales, including in the North Asia region in the first quarter of 2014, which were significantly lower than global limited-time offer sales in the second half of 2013. -13-



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Revenue

Greater China. The following table sets forth revenue for the three-month periods ended March 31, 2014 and 2013 for the Greater China region and its principal markets (U.S. dollars in millions):

2014 2013 Change Mainland China $ 212.2$ 119.7 77% Taiwan 35.8 32.1 12% Hong Kong 30.9 19.0 63% Greater China total $ 278.9$ 170.8 63% Foreign currency exchange rate fluctuations positively impacted revenue in this region by 2% during the three-month period ended March 31, 2014. Year-over-year revenue and sales force growth in the Greater China region was driven by interest in our opportunity and strong product portfolio. The final phase of our initial limited-time offers of ageLOC TR90 in the Greater China region generated approximately $15 million in revenue in the first quarter of 2014. We currently plan to introduce our ageLOC Tru Face Essence Ultra anti-aging skin care serum through a limited-time offer in Mainland China in the second and third quarters of 2014. Regional limited-time offers of TR90 and ageLOC Tru Face Essence Ultra in Hong Kong and Taiwan are also currently planned for the second and third quarters. Sales Leaders and Actives in Mainland China increased 45% and 14%, respectively, compared to the prior-year period. Sales Leaders and Actives in Taiwan were up 10% compared to the prior year. Sales Leaders and Actives in Hong Kong were up 68% and 53%, respectively, compared to the prior year. Adverse media reports and government investigations, and our voluntary suspension of business promotional meetings and applications for new sales representatives in Mainland China had a significant negative impact on our revenue and number of Sales Leaders and Actives in this region during the first quarter, with Sales Leaders and Actives declining 49% and 38% sequentially. At the conclusion of the regulatory investigations by the Administrations of Industry and Commerce in Shanghai and Beijing in March 2014, Nu Skin China was penalized in the amount of US $524,000 (RMB 3.26 million) for the sale of certain products by individual direct sellers that, while permitted for sale in Nu Skin China's retail stores, were not registered for the direct selling channel. Nu Skin China was also fined US $16,000 (RMB 100,000) for product claims that were deemed to lack sufficient documentary support. We understand that six of our sales employees were also fined for unauthorized promotional activities in an aggregate amount of US $241,000 (RMB 1.50 million). In addition, Nu Skin China was asked to enhance the education and supervision of its sales representatives and is currently in the process of implementing these enhancements. We recently resumed corporate-hosted business meetings and acceptance of applications for new sales representatives. Any unanticipated delays, complications or other difficulties in resuming normal business operations could further impact our business negatively. As we have not previously undertaken such a lengthy suspension of business promotional meetings and applications for new sales representatives, there is some uncertainty regarding how our sales force will respond to the resumption of these activities and what impact adverse publicity and these voluntary actions will have on our business going forward. -14-

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North Asia. The following table sets forth revenue for the three-month periods ended March 31, 2014 and 2013 for the North Asia region and its principal markets (U.S. dollars in millions):

2014 2013 Change South Korea $ 114.0$ 81.1 41% Japan 81.5 104.8 (22%) North Asia total $ 195.5$ 185.9 5%



Revenue in the region for the three-month period ended March 31, 2014 was negatively impacted approximately 4% by foreign currency exchange rate fluctuations.

Local currency revenue growth of 38% in South Korea for the three-month period ended March 31, 2014, compared to the same prior-year period, reflects continued growth in Actives and Sales Leaders, interest generated by our ageLOC products and alignment with our product launch process. Our regional limited-time offer of TR90 in South Korea during the first quarter generated approximately $13 million in sales. Our Sales Leaders in South Korea increased 36% and the number of Actives increased 25%, compared to the prior year, driven by strong interest in our innovative anti-aging portfolio and opportunity. Local currency revenue in Japan during the first quarter of 2014 decreased 14%, compared to the same period in 2013. The revenue decline in Japan was augmented by the Japanese yen weakening significantly against the U.S. dollar, negatively impacting our revenue in this market by an additional 8% compared to the same period in 2013. Our limited-time offer of TR90 in Japan during the first quarter generated approximately $5 million in sales. Japan's revenue in the first quarter of 2013 included sales from the launch of our ageLOC Body Spa and related products. Over the course of the last year we changed our distributor sign-up process and have enhanced our distributor education, training and compliance efforts to address concerns expressed by a Japanese regulatory agency in 2013. These concerns also led us to be cautious in our promotional activities in Japan. We believe these steps negatively impacted our revenue in this market. In the first quarter of 2014, Sales Leaders and Actives in Japan decreased 16% and 5%, respectively, compared to the prior-year period, reflecting challenges related to the difficult direct selling environment in Japan.



Americas. The following table sets forth revenue for the three-month periods ended March 31, 2014 and 2013 for the Americas region (U.S. dollars in millions):

2014 2013 Change Americas $ 79.9$ 75.7 6% Revenue in the Americas increased 6% in the first quarter of 2014 compared to the same prior-year period. Revenue in the region for the three-month period ended March 31, 2014 was negatively impacted approximately 12% by foreign currency exchange rate fluctuations. Revenue in the region was positively impacted by strong growth in Canadian and Latin American markets. In the United States, revenue was down 4%, compared to the same prior-year period. We believe our inability to market our facial spa in the United States limited revenue growth in this market. We currently expect that the facial spa will become available for sale in the United States in the second half of 2014. Sales Leaders and Actives in the Americas region increased by 17% and 10%, respectively, when compared to the prior year. -15- -------------------------------------------------------------------------------- South Asia/Pacific. The following table sets forth revenue for the three-month periods ended March 31, 2014 and 2013 for the South Asia/Pacific region (U.S. dollars in millions): 2014 2013 Change South Asia/Pacific $ 71.2$ 67.0 6% Foreign currency exchange rate fluctuations in South Asia/Pacific negatively impacted revenue by 10% in the three-month period ended March 31, 2014, when compared to the same prior-year period. Revenue growth in this region reflects continued interest in our opportunity and strong product portfolio. Regional limited-time offers of ageLOC TR90 are currently planned for the second and third quarters. Sales Leaders in the region increased 27% and Actives increased 17%, compared to the prior year. EMEA. The following table sets forth revenue for the three-month periods ended March 31, 2014 and 2013 for the Europe, Middle East and Africa ("EMEA") region (U.S. dollars in millions): 2014 2013 Change EMEA $ 45.6$ 41.9 9% Foreign currency exchange rate fluctuations in the EMEA region negatively impacted revenue by 2% for the three-month period ended March 31, 2014. Local currency revenue growth of 10% in EMEA during the first quarter of 2014, compared to the same prior-year period, reflects continued interest in our product portfolio, including our ageLOC products. Sales Leaders and Actives in our EMEA region increased by 5% and 3%, respectively, when compared to the prior year. Gross profit Gross profit as a percentage of revenue was 84.1% for the first quarter of 2014, and 83.4% in the same prior-year period. This increase reflects strong gross margins on a consolidated basis for our ageLOC products. Similarly, revenue growth in Mainland China, where our gross margin on a consolidated basis benefits from our self-manufactured products, also positively impacted our gross profit as a percentage of revenue. Given heightened media and regulatory scrutiny in Mainland China and the voluntary measures we have taken in that market, we have adjusted our 2014 product launch plans. This change in plans increases the risk of inventory write-offs in Mainland China if we are unable to sell the inventory we produced based on our prior plans and forecasts. Any inventory write-off in Mainland China or any of our other markets would negatively impact our gross margins.



Selling expenses

Selling expenses as a percentage of revenue increased to 46.7% for the three-month period ended March 31, 2014 from 43.1% for the same period in 2013. This increase was largely due to growth in the number of Sales Leaders qualifying for increased sales compensation and promotional incentives. The salaries of our sales employees in Mainland China are fixed for a three-month period of time, until they are adjusted during a quarterly evaluation process. Consequently, the negative revenue impact of the voluntary measures we took in Mainland China caused our selling expenses as a percentage of revenue to be higher in the first quarter of 2014, compared to the prior-year period.



General and administrative expenses

As a percentage of revenue, general and administrative expenses decreased to 22.4% for the three-month period ended March 31, 2014 from 25.0% for the same period in 2013, due primarily to year-over-year revenue growth. -16- --------------------------------------------------------------------------------



Other income (expense), net

Other income (expense), net for the three-month period ended March 31, 2014 was $3.6 million of expense compared to $0.1 million of income for the same period in 2013. The increase in expense was due primarily to the impact of changes in foreign currency exchange rates, primarily the Japanese yen and Chinese yuan.



Provision for income taxes

Provision for income taxes for the three-month period ended March 31, 2014 was $33.3 million, compared to $28.5 million for the same period in 2013. The effective tax rate was 34.2% of pre-tax income during the three-month period ended March 31, 2014, compared to 34.4% in the same prior-year period.



Net income

As a result of the foregoing factors, net income for the first quarter of 2014 was $64.3 million, compared to $54.3 million for the same period in 2013.

Liquidity and Capital Resources

Historically, our principal uses of cash have included operating expenses, particularly selling expenses, and working capital (principally inventory purchases), as well as capital expenditures, stock repurchases, dividends, debt repayment and the development of operations in new markets. We have generally relied on cash flow from operations to fund operating activities, and we have at times incurred long-term debt in order to fund strategic transactions and stock repurchases. We typically generate positive cash flow from operations due to favorable margins. However, during the first quarter we used $160.6 million in cash for operations, compared to generating $70.4 million in cash from operations during the same period in 2013, due to three primary factors. First, we had a significant amount of accrued expenses at the end of December 2013, following a quarter of record sales and a record number of sales representatives who qualified for incentive trips. The selling expenses and incentive trip expenses, although accrued in 2013, were paid in 2014. Second, we built a large amount of inventory during the first quarter for planned product launches in 2014, increasing our inventory balance by a net $70 million from December 31, 2013 to March 31, 2014. Finally, the decrease in revenue due to the disruption in our Mainland China business lowered our net income for the first quarter of 2014. As of March 31, 2014, working capital was $331.4 million, compared to $341.5 million as of December 31, 2013. Cash and cash equivalents at March 31, 2014 and December 31, 2013 were $284.6 million and $525.2 million, respectively. The decrease in cash and cash equivalents reflects lower than anticipated revenue growth in Mainland China, and cash payments for inventory and accrued selling and other expenses. As of March 31, 2014, we were in violation of our restricted payments covenant under our amended and restated credit agreement, dated as of May 25, 2012, among us, various financial institutions, and JPMorgan Chase Bank, N.A. as administrative agent, as amended (the "JPMC Agreement") and our amended and restated note purchase and private shelf agreement (multi-currency), dated as of May 25, 2012, among us, Prudential Investment Management, Inc. and certain other purchasers, as amended (the "Prudential Agreement"), which restricts us from making dividend payments or stock repurchases to the extent the aggregate amount of such payments exceed $100 million plus the cumulative cash flow from operations less capital investments since June 30, 2012. Effective May 6, 2014, we entered into amendments of the JPMC Agreement and the Prudential Agreement that allow the aggregate amount of restricted payments to exceed the allowed threshold by no more than $50 million for the quarter ending March 31, 2014, $100 million for the quarter ending June 30, 2014 and $50 million for the quarter ending September 30, 2014, to avoid default or acceleration provisions of these agreements. While the JPMC Agreement is currently scheduled to expire on August 8, 2014, the Prudential Agreement is currently scheduled to remain in place beyond that date. If our cash flow from operations is not sufficient by the fourth quarter of 2014 to cover the necessary restricted payments, we may need to seek additional waivers or amendments under the Prudential Agreement, restructure this debt, or reduce our restricted payments to avoid a default under this agreement. -17- --------------------------------------------------------------------------------



Capital expenditures in the first three months of 2014 totaled approximately $30.5 million, and we anticipate additional capital expenditures of approximately $70 million for the remainder of 2014. Our 2014 capital expenditures are primarily related to:

· expansion of our corporate facilities in the United States, Greater China and

South Korea;



· the build-out and upgrade of leasehold improvements in our various markets,

including retail stores and service centers in Mainland China; and

· purchases of computer systems and software, including equipment and development

costs. We currently have debt pursuant to various credit facilities and other borrowings. Our book value for both the individual and consolidated debt included in the table below approximates fair value. The estimated fair value of our debt is based on interest rates available for debt with similar terms and remaining maturities. We have classified these instruments as Level 2 in the fair value hierarchy. The following table summarizes our long-term debt arrangements: Original Facility or Principal Balance as of Interest Arrangement Amount March 31, 2014(1) Rate Repayment terms Multi-currency uncommitted shelf facility(2): U.S. dollar $40.0$17.1 million 6.2% Notes due July denominated: million 2016 with annual principal payments that began in July 2010. $20.0$8.6 million 6.2% Notes due January million 2017 with annual principal payments that began in January 2011. Japanese yen 3.10.4 billion yen 1.7% Notes due April denominated: billion or $4.3 million 2014 with annual yen principal payments that began in April 2008.(3) 2.3 1.3 billion yen 2.6% Notes due billion or $12.6 million September 2017 yen with annual principal payments that began in September 2011. 2.2 0.9 billion yen 3.3% Notes due January billion or $9.0 million 2017 with annual yen principal payments that began in January 2011. 8.0 8.0 billion yen 1.7% Notes due May 2022 billion or $77.3 million with annual yen principal payments that begin in May 2016. Revolving credit facility(4)(5): 2010 $35.0 million Variable Revolving line of 30 day: credit. 0.66% 2013 $34.0 million Variable Revolving line of 30 day: credit. 0.5843% -18-

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(1) The current portion of our long-term debt (i.e. becoming due in the next 12

months) includes $10.4 million of the balance of our Japanese yen-denominated

debt under the multi-currency uncommitted shelf facility, $8.6 million of the

balance on our U.S. dollar denominated debt under the multi-currency

uncommitted shelf facility and $69.0 million of our revolving loans.

(2) On May 6, 2014, we entered into a third amendment of the amended and restated

note purchase and private shelf agreement (multi-currency), dated as of May

25, 2012, among us, Prudential Investment Management, Inc. and certain other

purchasers. The amendment modified the restricted payments covenant to allow

the aggregate amount of restricted payments to exceed the allowed threshold

by no more than $50 million for the quarter ending March 31, 2014, $100

million for the quarter ending June 30, 2014 and $50 million for the quarter

ending September 30, 2014, to avoid default or acceleration provisions of the

agreement.



(3) On April 30, 2014, we paid the notes in full.

(4) On April 9, 2014, we entered into an additional 364 day revolving line of

credit with Bank of America, N.A. with a commitment amount of $50.0 million.

The interest rate is equal to 1 month LIBOR plus 95.0 basis points.

(5) On May 6, 2014, we entered into a fifth amendment of the amended and restated

credit agreement, dated as of May 25, 2012, among us, various financial

institutions, and JPMorgan Chase Bank, N.A. as administrative agent. The

amendment modified the restricted payments covenant to allow the aggregate

amount of restricted payments to exceed the allowed threshold by no more than

$50 million for the quarter ending March 31, 2014, $100 million for the

quarter ending June 30, 2014 and $50 million for the quarter ending September

30, 2014, to avoid default or acceleration provisions of the agreement. The

amendment also fixed the applicable interest rate at LIBOR plus 0.75%,

increased the commitment fee to 0.25% and extended the term of the agreement

from May 9, 2014 to August 8, 2014, with $15 million reductions in the commitment amount on June 30, 2014 and July 31, 2014. Our board of directors has approved a stock repurchase program authorizing us to repurchase our outstanding shares of Class A common stock on the open market or in private transactions. The repurchases are used primarily to offset dilution from our equity incentive plans and for strategic initiatives. During the first three months of 2014, we repurchased 0.3 million shares of Class A common stock under this program for $25.0 million. At March 31, 2014, $369.5 million was available for repurchases under the stock repurchase program. -19- -------------------------------------------------------------------------------- In March 2014, our board of directors declared a quarterly cash dividend of $0.345 per share. This quarterly cash dividend totaling $20.1 million was paid on March 26, 2014, to stockholders of record on March 14, 2014. In May 2014, our board of directors declared a quarterly cash dividend of $0.345 per share to be paid June 11, 2014 to stockholders of record on May 23, 2014. Currently, we anticipate that our board of directors will continue to declare quarterly cash dividends and that the cash flows from operations will be sufficient to fund our future dividend payments. However, the continued declaration of dividends is subject to the discretion of our board of directors and will depend upon various factors, including our net earnings, financial condition, cash requirements, future prospects and other relevant factors. As of March 31, 2014 and December 31, 2013, we held $284.6 million and $525.2 million, respectively, in cash and cash equivalents, including $279.5 million and $493.9 million, respectively, held in our operations outside of the U.S. Substantially all of our non-U.S. cash and cash equivalents are readily convertible into U.S. dollars or other currencies, with the exception of approximately $24.3 million, which is subject to currency exchange restrictions by the government of Venezuela. Currency exchange restrictions in Venezuela require approval from the government's currency control organization for our subsidiary in Venezuela to obtain U.S. dollars at an official exchange rate to pay for imported products or to repatriate dividends to the United States. We typically fund the cash requirements of our operations in the U.S. through intercompany charges for products, license fees and corporate services. However, in some markets such as Mainland China, where we have lower intercompany charges, we may be unable to repatriate cash from current operations in the form of dividends until we file the necessary statutory financial statements for the relevant period. We currently have in place an intercompany loan arrangement, which allows us to access a portion of available cash in Mainland China pending our repatriation of dividends. As of March 31, 2014, we had approximately $160.0 million in cash denominated in Chinese yuan. We currently plan to repatriate undistributed earnings from our non-U.S. operations as necessary, considering the cash needs of our non-U.S. operations and the cash needs of our U.S. operations for dividends, stock repurchases, capital investments, debt repayment and strategic transactions. In all but two jurisdictions, we have not designated our investments as indefinitely reinvested, but rather have these funds available for our operations in the U.S. as needed. Any repatriation of non-U.S. earnings requires payment of U.S. taxes in accordance with the applicable U.S. tax rules and regulations. Accordingly, we have accrued the necessary U.S. taxes related to the funds that are not permanently reinvested. In May 2014, we amended the JPMC Agreement to extend the term of our credit facility to August 8, 2014. We are currently working to further extend or replace this line of credit and believe that existing cash balances, future cash flows from operations and existing lines of credit, with planned extensions or replacements, will be adequate to fund our cash needs on both a short- and long-term basis. The majority of our historical expenses have been variable in nature and as such, a potential reduction in the level of revenue would reduce our cash flow needs. In the event that our current cash balances, future cash flow from operations and current lines of credit are not sufficient to meet our obligations or strategic needs, or we are unsuccessful in extending or replacing expiring lines of credit, we would consider raising additional funds in the debt or equity markets or restructuring our current debt obligations. Additionally, we would consider realigning our strategic plans, including a reduction in capital spending, stock repurchases or dividend payments.



Contingent Liabilities

We are currently involved in a dispute with customs authorities in Japan related to additional customs assessments on several of our products made by Yokohama Customs for the period of October 2006 through September 2009 in connection with post-importation audits, as well as the disputed portion of our import duties from October 2009 to the present, which we have or will hold in bond or pay under protest. Additional assessments related to any prior period are barred by applicable statutes of limitations. The aggregate amount of these assessments and disputed duties was 4.2 billion Japanese yen as of March 31, 2014 (approximately $40.3 million), net of any recovery of consumption taxes. In addition, we are currently being required to post a bond or make a deposit equal to the difference between our declared duties and the amount the customs authorities have determined we should be paying on all current imports. We anticipate that additional disputed duties will be limited going forward as we have entered into an arrangement to purchase a majority of the affected products in Japan from a Japanese company that purchases and imports the products from the manufacturer. We are now pursuing this matter in Tokyo District Court. This dispute is separate and distinct from the dispute related to customs assessments on certain of the Company's products imported into Japan during the period of October 2002 through July 2005. -20- -------------------------------------------------------------------------------- We are currently being sued in several purported class action lawsuits and derivative claims relating to negative media and regulatory scrutiny regarding our business in Mainland China and the associated decline in our stock price. These lawsuits, or others filed alleging similar facts, could result in monetary or other penalties that may affect our operating results and financial condition.



Please refer to Item 1A. "Risk Factors" and Item 1. "Legal Proceedings" for more information regarding these matters.

Critical Accounting Policies

There were no significant changes in our critical accounting policies during the quarter ended March 31, 2014.

Seasonality and Cyclicality In addition to general economic factors, we are impacted by seasonal factors and trends such as major cultural events and vacation patterns. For example, most Asian markets celebrate their respective local New Year in the first quarter, which generally has a negative impact on that quarter. We believe that direct selling is also generally negatively impacted during the third quarter, when many individuals, including our sales force, traditionally take vacations. Although our product launch process may vary by market, we generally introduce new products to our sales force and consumers in all markets where the products are registered, through limited-time offers. The limited-time offers typically generate significant activity and a high level of purchasing, which may result in a higher than normal increase in revenue during the quarter of the limited-time offer and skew year-over-year and sequential comparisons.



Actives and Sales Leaders

The following table provides information concerning the number of Actives and Sales Leaders as of the dates indicated. "Actives" are persons who have purchased products directly from the company during the three months ended as of the date indicated. "Sales Leaders" include our independent distributors who have completed and who maintain specified sales requirements, and our sales employees and contractual sales promoters in Mainland China, who have completed certain qualification requirements. -21- --------------------------------------------------------------------------------

As of March 31, 2014 As of March 31, 2013 Region: Actives Sales Leaders Actives Sales Leaders Greater 305,000 31,118 261,000 22,011 China North Asia 400,000 17,794 361,000 16,682 Americas 180,000 7,339 163,000 6,273 South 115,000 6,787 98,000 5,337 Asia/Pacific EMEA 122,000 4,326 119,000 4,118 Total 1,122,000 67,364 1,002,000 54,421



Currency Risk and Exchange Rate Information

A majority of our revenue and many of our expenses are recognized outside of the United States, except for inventory purchases, which are primarily transacted in U.S. dollars from vendors in the United States. The local currency of each of our subsidiaries' primary markets is considered the functional currency. All revenue and expenses are translated at weighted-average exchange rates for the periods reported. Therefore, our reported revenue and earnings will be positively impacted by a weakening of the U.S. dollar and will be negatively impacted by a strengthening of the U.S. dollar. Given the large portion of our business derived from Mainland China, South Korea and Japan, any weakening of these currencies negatively impacts reported revenue and profits, whereas a strengthening of these currencies positively impacts our reported revenue and profits. Given the uncertainty of exchange rate fluctuations, it is difficult to predict the effect of these fluctuations on our future business, product pricing and results of operations or financial condition. Foreign exchange risk is managed in certain jurisdictions through the use of foreign currency debt. Portions of our Japanese yen borrowings have been designated, and are effective as, economic hedges of the net investment in a foreign operation. Accordingly, foreign currency transaction gains or losses due to spot rate fluctuations on these debt instruments are included in foreign currency translation adjustment within other comprehensive income. Included in the cumulative translation adjustment are $0.9 million and $5.1 million of pretax net gains for the periods ended March 31, 2014 and 2013, respectively from Japanese yen borrowings. Additionally, we may seek to reduce our exposure to fluctuations in foreign currency exchange rates through the use of foreign currency exchange contracts and through intercompany loans of foreign currency. We do not use derivative financial instruments for trading or speculative purposes. We regularly monitor our foreign currency risks and periodically take measures to reduce the impact of foreign exchange fluctuations on our operating results. At March 31, 2014 and 2013, we held forward contracts designated as foreign currency cash flow hedges with notional amounts totaling approximately 2.9 billion Japanese yen ($28.0 million as of March 31, 2014) and 11.0 million euros ($15.1 million as of March 31, 2014) to hedge forecasted foreign-currency-denominated intercompany transactions; and at March 31, 2013, we held 1.1 billion Japanese yen ($11.7 million as of March 31, 2013) and no euros. Because of our foreign exchange contracts at March 31, 2014, the impact of a 10% appreciation or 10% depreciation of the U.S. dollar against the Japanese yen would not represent a material potential loss in fair value, earnings or cash flows against these contracts. This potential loss does not consider the underlying foreign currency transaction or translation exposures to which we are subject.


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