Malaysia-Thailand Region In the Malaysia-Thailand region, net sales were $51.5 million for the second quarter, a decrease of 30.7 percent from the same period last year, which primarily reflected the devaluation of the Malaysian ringgitt and the Thai baht in relation to the U.S. dollar. In local currency, sales increased 37.1 percent in Malaysia and 5.9 percent in Thailand in relation to the comparable period last year, as distributors in both markets responded to pre-price increase buying opportunities in February. Sales in Malaysia were also assisted by the introduction of new Nutrition and Wellness products and a successful promotion of the 5-Ply Wok. For the six months, sales in the Malaysia-Thailand region were $107.5 million, a decrease of 34.6 percent from the same period last year, primarily reflecting the devaluation of this region's currencies in relation to the U.S. dollar. Sales in local currency increased 12.4 percent over last year in Malaysia due to the pre-price increase buying in February and the continued strength of Nutrition and Wellness products. Local currency sales declined 9.0 percent in Thailand for the six month period in relation to last year due to continued pressures in its local economy. Australia-New Zealand Region For the second quarter, sales in the Australia-New Zealand region were $34.4 million, a 7.5 percent increase over the comparable period last year. For the six months, sales were $77.7 million, an 8.1 percent increase over the comparable period last year. Australia recorded a 12.7 percent sales increase for the second quarter, and, in local currency, sales increased 32.6 percent in relation to last year. For the six months, Australia recorded a 13.2 percent increase and, in local currency, sales increased 29.1 percent in relation to last year. In New Zealand, sales for the second quarter were $5.4 million, a 13.7 percent decline and, in local currency, sales increased 3.1 percent in relation to the comparable period last year. For the six months, New Zealand recorded a 12.9 percent decrease and, in local currency, sales were level with the prior year. These positive results reflect, in part, the region's higher sponsoring rate in the past six months and the efforts of its larger core distributor force, which grew 24 percent in Australia in fiscal 1997, plus the strength of the catalog business and new Nutrition & Wellness products in Australia. Core Distributor Force The total size of the core distributor force, defined as independent distributors who have renewed their distributorships within the past twelve months, increased both during the second quarter and the six months in relation to the same periods last year for all markets. New distributor sponsoring decreased significantly, in relation to last year, in the Greater China region and Thailand for both the second quarter and the first half of the fiscal year, while Malaysia recorded a small decline. The Australia-New Zealand region had an increase for the six months and a slight decline for the second quarter compared to the comparable periods last year. Gross Profit For the second quarter, gross profit as a percentage of sales decreased to 58.4 percent from 62.9 percent last year. For the six month period, the gross profit percentage was 59.8 percent compared to 63.3 percent last year. The decrease in both periods is due primarily to the higher cost of purchases in Thailand resulting from the negative impact of foreign currency on U.S. dollar purchases from Amway Corporation; this also had a negative impact, to a lesser degree, in Malaysia and Taiwan. The negative impact of foreign currency is more deeply reflected in gross margin beginning in the second quarter of fiscal 1998 because the Company uses the FIFO method of inventory costing and the markets hold approximately three months of inventory on hand. Operating Expenses and Operating Income Total operating expenses, including distributor incentives, increased as a percent of sales during the second quarter to 50.2 percent from 45.9 percent last year and, for the six months, increased to 50.7 percent from 44.8 percent in the first six months of last year. The increase for both periods primarily reflected the lack of absorption of higher operating expenses in China at that market's lower sales level. Distribution expenses declined in the second quarter compared to the same quarter last year. The decline in the translated U.S. dollar value of distribution expenses in all markets, except China, more than offset the net increase in distribution expenses in China due to its geographic expansion in the fourth quarter of last year. For the six months, distribution expenses increased slightly due to these increased costs in China and also due to increased freight costs from the direct fulfillment program in Australia. Selling and administrative expenses decreased for both the second quarter and the six months compared to the same periods last year due primarily to the recovery of certain taxes in China resulting from negotiations with the government and adjustment of prior year expenses. The decline in the translated U.S. dollar value of selling and administrative expenses in all other markets also contributed to the decrease. For the second quarter, the Malaysia-Thailand region no longer contributed over half of the Company's operating income, as it had historically. This was primarily due to the difficult economic conditions in Thailand and the downward pressure on that market's gross margin which, combined with lower translated operating results due to adverse foreign currency translation rates, resulted in a significantly lower operating margin for that market. During the second quarter, in relation to the first quarter of fiscal 1998, Thailand experienced an additional 7.7 percent decline in value of its currency and Malaysia experienced an additional 4.5 percent decline, both relative to the U.S. dollar. Since the beginning of the Asian currency crisis in June of 1997, the Thai baht has declined approximately 40 percent and the Malaysian ringgitt has declined over 30 percent, relative to the U.S. dollar. For the six months, the Malaysia-Thailand region continued to contribute over half of the Company's operating income, however this was primarily due to the overall lower level of operating income which included a net loss in China. Other Income-Net For the second quarter and first six months, other income-net decreased $5.3 million and $8.9 million respectively in relation to the comparable periods last year. Interest income declined around 50 percent during these periods due to the lower cash balances principally related to the share repurchase in fiscal 1997 and the reduction in net operating cash flow in the current fiscal year. Realized and unrealized foreign currency exchange transaction losses of $2.0 million for the second quarter and $3.5 million for the first six months were also included in other income-net. Taxes The effective tax rate in the second quarter increased to 44.8 percent from 32.6 percent last year. For the six months, the effective tax rate increased to 42.2 percent from 32.8 percent last year. For both periods, the increase primarily is a result of losses in China, for which the Company receives no tax benefit, compared to non-taxed income for the same periods last year. Income taxes for the first six months of the current fiscal year benefited 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 also declined during this period due to lower dividend withholding taxes from the reduced earnings in certain markets. Second Half and Fiscal 1998 Outlook The difficult environment of the first half is continuing to impact the Company's operations. As a result, declines in net sales and net income are expected to continue for the balance of the fiscal year. Structurally, the Company expects net sales and net income to decline at a slower pace in the fourth quarter due to a more favorable comparison with the fourth quarter of last year when the impact of the Asian currency crisis and certain China issues, such as the revised return policy and the rapid geographic expansion, were reported. In China, the government has increased its pressure on the direct selling industry, creating a hostile environment towards all direct selling operations. There has been a significant amount of negative publicity about direct selling and the social unrest alleged to be caused by it; in addition, there are reports about government proposals that could require a shift away from direct selling operations to retail store sales. This has created a mood of uncertainty for distributors and continues to negatively impact sales and sponsoring. Until this situation is clarified, the Company expects results to continue to be weak in China. In Taiwan, the Company is hopeful that an aggressive new product introduction schedule and specific growth plans tailored to incentivizing mid- level distributors will result in local currency sales growth for the second half of the fiscal year. However, translated sales and net income are expected to be negatively impacted by the lower value of the New Taiwan dollar and the cost of these growth programs. ....ENDS PART TWO.. MORE....