<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
/ / QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT
OF 1934 (FEE REQUIRED)
For the quarterly period ended June 30, 1995
-------------
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from ______________________ to ______________________
Commission file number 0-15712
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HERBALIFE INTERNATIONAL, INC.
-----------------------------
(Exact name of Registrant as specified in its charter)
Nevada 22-2695420
------------------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
9800 La Cienega Boulevard, Inglewood, California 90301
------------------------------------------------ ----------------
(Address of principal executive offices) (Zip Code)
(310) 410-9600
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(Registrant's telephone number, including area code)
- -------------------------------------------------------------------------------
(Former Name, Former Address and Former Fiscal Year, If Changed Since Last
Report
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
----- -----
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes No
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares outstanding of each of the registrant's classes of Common
Stock, as of July 27, 1995: 29,852,954.
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- -------------------------------------------------------------------------------
<PAGE>
HERBALIFE INTERNATIONAL, INC.
Index to Financial Statements and Exhibits
Filed with the Quarterly Report of the Company on Form 10-Q
For the Six Months Ended June 30, 1995
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements: Page No.
--------
Consolidated Balance Sheets. . . . . . . . . . . . . . . . 2
Consolidated Income Statements.. . . . . . . . . . . . . . 3
Consolidated Statements of Cash Flows. . . . . . . . . . . 4
Notes to Consolidated Financial Statements . . . . . . . . 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . . . 6-8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . 9
Item 2. Changes in Securities. . . . . . . . . . . . . . . . . . . 9
Item 3. Defaults Upon Senior Securities. . . . . . . . . . . . . . 9
Item 4. Submission of Matters to a Vote of Security Holders. . . . 9
Item 5. Other Information. . . . . . . . . . . . . . . . . . . . . 10
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . 10 - 11
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
1
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HERBALIFE INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
ASSETS December 31, 1994 June 30, 1995
------------------ -------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . $ 34,284,000 $ 70,576,000
Marketable securities . . . . . . . . . . . . . . . . . . . . . . . . . 24,829,000 10,125,000
Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,648,000 13,048,000
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,096,000 43,833,000
Prepaid income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . 6,714,000
Prepaid expense and other current assets. . . . . . . . . . . . . . . . 9,221,000 8,838,000
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . 12,595,000 10,942,000
------------ ------------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . 151,387,000 157,362,000
------------ ------------
PROPERTY - at cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31,625,000 35,307,000
Less accumulated depreciation and amortization. . . . . . . . . . . . . (19,287,000) (20,693,000)
------------ ------------
12,338,000 14,614,000
------------ ------------
OTHER ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,355,000 6,484,000
GOODWILL (Net of accumulated amortization of $910,000
and $997,000 in 1994 and 1995, respectively.). . . . . . . . . . . . . . 3,977,000 3,891,000
------------ ------------
TOTAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $174,057,000 $182,351,000
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 17,163,000 $ 16,134,000
Royalty overrides . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,351,000 24,812,000
Accrued expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,748,000 8,006,000
Dividends payable . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,593,000 6,597,000
Current portion of bank loans and contracts payable . . . . . . . . . . 476,000 956,000
Advance sales deposits. . . . . . . . . . . . . . . . . . . . . . . . . 4,231,000 6,153,000
Income taxes payable . . . . . .. . . . . . . . . . . . . . . . . . . . 3,359,000
------------ ------------
Total current liabilities. . . . . . . . . . . . . . . . . . . . . . . . . 61,562,000 66,017,000
------------ ------------
BANK LOANS & CONTRACTS PAYABLE
Net of current portion. . . . . . . . . . . . . . . . . . . . . . . . . 1,014,000 1,173,000
------------ ------------
DEFERRED INCOME TAXES. . . . . . . . . . . . . . . . . . . . . . . . . . . 1,666,000 1,894,000
------------ ------------
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value; authorized 100,000,000 shares, issued
29,967,954 and 29,987,954 shares in 1994 and 1995, respectively. . . 300,000 300,000
Paid-in-capital in excess of par value. . . . . . . . . . . . . . . . . 41,117,000 41,314,000
Retained earnings (includes cumulative translation adjustment
of $250,000 and $1,580,000 in 1994 and 1995, respectively) . . . . . 72,034,000 74,522,000
Unearned compensation . . . . . . . . . . . . . . . . . . . . . . . . . (3,364,000) (2,798,000)
Unrealized loss on marketable securities. . . . . . . . . . . . . . . . (272,000) (71,000)
------------ ------------
Total stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . 109,815,000 113,267,000
------------ ------------
TOTAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $174,057,000 $182,351,000
------------ ------------
------------ ------------
</TABLE>
See the accompanying notes to consolidated financial statements.
2
<PAGE>
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
HERBALIFE INTERNATIONAL, INC.
CONSOLIDATED INCOME STATEMENTS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, 1994 June 30, 1995 June 30, 1994 June 30, 1995
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Retail sales . . . . . . . . . . . . . . . . . . . . . $ 227,198,000 $ 235,396,000 $ 418,919,000 $ 464,562,000
Less: Distributor allowances on product purchases. . . (106,677,000) (110,569,000) (197,089,000) (218,123,000)
------------- ------------- ------------- -------------
Net sales. . . . . . . . . . . . . . . . . . . . . . . 120,521,000 124,827,000 221,830,000 246,439,000
Cost of sales. . . . . . . . . . . . . . . . . . . . . 34,026,000 37,522,000 61,880,000 71,982,000
Royalty overrides. . . . . . . . . . . . . . . . . . . 32,362,000 33,806,000 61,446,000 68,510,000
------------- ------------- ------------- -------------
Operating margin . . . . . . . . . . . . . . . . . . . 54,133,000 53,499,000 98,504,000 105,947,000
Marketing, distribution and administrative expenses. . 30,532,000 41,163,000 56,298,000 84,113,000
Interest income - net. . . . . . . . . . . . . . . . . 589,000 552,000 1,318,000 1,135,000
------------- ------------- ------------- -------------
Income before income taxes . . . . . . . . . . . . . . 24,190,000 12,888,000 43,524,000 22,969,000
Income taxes . . . . . . . . . . . . . . . . . . . . . 8,839,000 4,833,000 15,886,000 8,613,000
------------- ------------- ------------- -------------
NET INCOME . . . . . . . . . . . . . . . . . . . . . . $ 15,351,000 $ 8,055,000 $ 27,638,000 $ 14,356,000
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
EARNINGS PER SHARE . . . . . . . . . . . . . . . . . . $ 0.50 $ 0.27 $ 0.90 $ 0.47
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
CASH DIVIDENDS PER COMMON SHARE. . . . . . . . . . . . $ 0.18 $ 0.22 $ 0.36 $ 0.44
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
See the accompanying notes to consolidated financial statements.
3
<PAGE>
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
HERBALIFE INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30, 1994 June 30, 1995
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income. . . . . . . . . . . . . . . . . . . . . . $ 27,638,000 $ 14,356,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization. . . . . . . . . 948,000 3,895,000
Deferred income taxes. . . . . . . . . . . . . (463,000) 1,947,000
Amortization of unearned compensation. . . . . 566,000 691,000
Foreign exchange gain. . . . . . . . . . . . . (188,000) ( 1,349,000)
Other. . . . . . . . . . . . . . . . . . . . . 126,000
Changes in operating assets and liabilities:
Receivables. . . . . . . . . . . . . . . . . . (6,330,000) 1,559,000
Inventories. . . . . . . . . . . . . . . . . . (6,856,000) 9,662,000
Prepaid expenses and other current assets. . . (3,847,000) 2,281,000
Other assets . . . . . . . . . . . . . . . . . (709,000) (2,854,000)
Accounts payable . . . . . . . . . . . . . . . 1,791,000 (997,000)
Royalty overrides. . . . . . . . . . . . . . . (595,000) 1,089,000
Accrued expenses . . . . . . . . . . . . . . . 5,176,000 (2,924,000)
Advance sales deposits . . . . . . . . . . . . 2,480,000 1,759,000
Income taxes payable . . . . . . . . . . . . . 7,296,000 9,832,000
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES. . . . . . . . 26,907,000 39,073,000
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property. . . . . . . . . . . . . (3,098,000) (3,553,000)
Proceeds from sale of property . . . . . . . . 130,000 272,000
Sale of Marketable Securities. . . . . . . . . 5,644,000 14,905,000
------------ ------------
NET CASH PROVIDED BY INVESTING ACTIVITIES. . . . . . . . 2,676,000 11,624,000
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid . . . . . . . . . . . . . . . . (10,807,000) (13,195,000)
Additions to loans payable . . . . . . . . . . 127,000 596,000
Principal payments on loans payable. . . . . . (236,000) (549,000)
Exercise of stock options. . . . . . . . . . . 629,000 73,000
Other. . . . . . . . . . . . . . . . . . . . . (196,000)
------------ ------------
NET CASH USED BY FINANCING ACTIVITIES. . . . . . . . . . (10,483,000) (13,075,000)
------------ ------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH. . . . . . . . . 294,000 (1,330,000)
------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS. . . . . . . . 19,394,000 36,292,000
CASH AND CASH EQUIVALENTS AT JANUARY 1 . . . . . . . . . 55,727,000 34,284,000
------------ ------------
CASH AND CASH EQUIVALENTS AT JUNE 30 . . . . . . . . . . $ 75,121,000 $ 70,576,000
------------ ------------
------------ ------------
</TABLE>
See the accompanying notes to consolidated financial statements.
4
<PAGE>
HERBALIFE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. INTERIM FINANCIAL INFORMATION
The unaudited interim financial information of Herbalife International, Inc.
(the "Company") has been prepared in accordance with Article 10 of the
Securities and Exchange Commission's Regulation S-X. In the opinion of
management, the accompanying interim financial information contains all
adjustments, consisting of normal recurring adjustments, necessary to present
fairly the Company's financial statements as of June 30, 1995 and for the three
and six-month periods ended June 30, 1994 and 1995.
2. EARNINGS PER SHARE
Earnings per share are computed by dividing net income by the weighted average
number of common and equivalent shares outstanding. Shares used in the
computation of earnings per share are as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ ----------------
June 30, 1994 June 30,1995 June 30, 1994 June 30,1995
------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
Weighted average number of Shares 30,883,527 30,376,693 30,863,385 30,383,084
</TABLE>
3. CONTINGENCIES
In January 1995, the Company and certain of its officers and directors were
served with three complaints alleging violation of federal securities laws. See
discussion under "Legal Proceedings" in the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1994 for a general description of the
litigation. In March 1995, the Court consolidated the three complaints and on
April 5, 1995, the plaintiffs served a Consolidated First Amended Complaint. On
June 19, 1995, the Court granted the defendants' Motion to Dismiss the
Consolidated First Amended Complaint with leave for the plaintiffs to file a
Consolidated Second Amended Complaint. The plaintiffs filed and served a
Consolidated Second Amended Complaint on July 20, 1995. A hearing on the
defendants' Motion to Dismiss the Consolidated Second Amended Complaint is
scheduled for August 28, 1995. The Company has certain indemnity obligations to
the named officers and directors. The Company has directors and officers
liability insurance which, subject to certain customary exceptions and
exclusions, is expected to cover a portion or all of such obligations less the
Company's self-retention amount. However, based upon an initial review of the
allegations of the complaints and preliminary analysis by litigation counsel,
the Company believes that the Company has substantial and meritorious defenses
to the asserted claims and the Company is vigorously contesting these claims.
The Company's French subsidiary has been subject to a tax audit by French tax
authorities, who are proposing that significant value added, withholding, and
income taxes are due. The Company and its tax advisors believe that the
Company has substantial defenses and the Company is vigorously contesting these
claims and potential assessments.
Furthermore, the Company is from time to time engaged in routine litigation
incident to the conduct of its business. The Company regularly reviews all
pending litigation matters in which it is involved and establishes reserves
deemed appropriate by management for such litigation matters.
5
<PAGE>
HERBALIFE INTERNATIONAL, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Throughout this report "retail sales" are determined as the gross sales amounts
reflected on the Company's invoices to its distributors. The Company does not
receive the amount reported as "retail sales", and the Company does not monitor
the actual retail prices charged for the Company's products. "Net sales"
represent the actual purchase prices paid to the Company by its distributors,
after giving effect to distributor discounts (referred to as "distributor
allowances"), which total approximately 50% of suggested retail sales prices.
The Company receives its net sales price in cash upon receipt of orders from
distributors. The Company's "operating margin" consists of net sales less (i)
"cost of sales," consisting of the prices paid by the Company to its
manufacturers for products and costs related to product shipments, foreign
duties and tariffs and similar expenses, and (ii) "royalty overrides," currently
consisting of (a) royalties (5% to 15%) and bonuses (up to 6%) on the suggested
retail sales prices of products earned by qualifying distributors on the sales
of other distributors within their distributor organizations, and (b) the
President's Team Bonus payable to certain of the Company's most senior
distributors in the aggregate amount of up to an additional 1% of product retail
sales. Royalty overrides as shown on the financial statements are net of a
handling fee (6% of retail sales effective April 1, 1994, previously 5%)
charged by the Company to its distributors on purchases of products from
the Company.
The Company's use of "retail sales" in reporting financial and operating data
reflects the fundamental role of "retail sales" in the Company's accounting
systems, internal controls and operations, including the basis upon which
distributor bonuses are paid. The retail sales price of the Company's products
is reflected in distributor invoices as the price charged to distributors
(together with, in most cases, a deduction for the corresponding distributor
allowance), and the retail sales price is used by the Company to calculate,
among other things, royalty overrides and "volume points" earned by distributors
and supervisor qualification criteria. In addition, management relies upon
"retail sales" data reflected in daily sales reports to monitor results of
operations in each of the Company's markets.
The significance of the Company's "net sales" is to reflect, generally, the
prices actually received by the Company after deducting the basic distributor
allowance, but before deducting royalty overrides and bonuses. The ratio of the
Company's "retail sales" to "net sales" is relatively constant because
distributor allowances historically total approximately 50% of suggested retail
sales prices. Accordingly, factors that affect "retail sales" generally have a
corresponding and proportionate effect on "net sales." To the extent the ratio
of "retail sales" to "net sales" varies from period to period, such variances
have resulted principally from sales of the Company's distributor kits and other
educational and promotional materials, for which there are no distributor
allowances. Sales of such items have decreased as a percentage of total retail
sales since 1991, but such decreases have not had a material impact on the ratio
of the Company's "retail sales" to "net sales" or on the Company's operating
margin.
The Company's results of operations for the periods described below are not
necessarily indicative of results of operations for future periods, which depend
upon numerous factors including the Company's ability in the future to enter new
markets and introduce additional and new products into its markets.
COMPARISON OF SECOND QUARTER AND YEAR-TO-DATE 1995 TO 1994
Retail sales for the three and six months ended June 30, 1995 increased 3.6% and
10.9% to $235.4 million and $464.6 million from $227.2 million and $418.9
million, respectively, compared to the corresponding periods a year earlier.
Regionally, retail sales in the three and six months ended June 30, 1995
compared to the corresponding periods of 1994 increased 191.0% and 149.6%,
respectively, in Asia/Pacific Rim; 13.8% and 17.6%, respectively, in The
Americas; and decreased 20.1% and 8.4%, respectively, in Europe. In
Asia/Pacific Rim, retail sales in the three and six months ended June 30, 1995
increased from $11.6 million and $23.5 million to $33.6 million and $58.6
million, respectively, compared to the corresponding periods of 1994. In
Europe, retail sales in the three and six months ended June 30, 1995
decreased from $128.9 million and $227.5 million to $103.0 million and $208.5
million respectively, compared to the corresponding periods of 1994. In The
Americas, retail sales in the same periods grew from $86.7 million and $167.9
million to $98.7 million and $197.4 million, respectively. Contributing to the
growth
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATION (CONTINUED)
COMPARISON OF SECOND QUARTER AND YEAR-TO-DATE 1995 TO 1994 (CONTINUED)
in consolidated retail sales in the three and six months ended June 30, 1995
compared to the corresponding periods of a year ago was the introduction of the
first two phases of products in the company's new line of personal care
products, the Skin Survival Kit in January 1995 and the fragrances, "Parfums
Vitessences", in April 1995. These products accounted for $30.5 million and
$56.7 million of consolidated retail sales in the three and six months ended
June 30, 1995, respectively. The products were introduced extensively in Europe
and The Americas where they accounted for $16.2 million and $12.7 million, or
15.7% and 12.9%, of those regions' retail sales in the quarter ended June 30,
1995, and $27.4 million and $27.2 million, or 13.1% and 13.8%, of those regions'
retail sales in the six months ended June 30, 1995.
The Asia/Pacific Rim growth was due to (i) the opening of the Philippines in
December 1994, which reported retail sales of $5.5 million and $11.3 million in
the three and six months ended June 30, 1995, and (ii) sales increases of
$12.1 million and $19.1 million, or 333.6% and 354.9%, in Japan for the same
periods, when compared to the corresponding periods in 1994. In The Americas,
combined retail sales of $3.6 million and $10.4 million in the three and
six month periods ended June 30, 1995 in Argentina, which opened in July 1994,
and Venezuela, which opened in May 1994, more than offset the reduction in
sales in Mexico in the same periods resulting from the December 1994
devaluation of the Mexican Peso. In Europe, the combined retail sales
contribution of $11.0 million and $19.8 million in the three and six months
ended June 30, 1995 from Belgium, Denmark, Poland and Sweden, all of which
opened in the second half of 1994, together with increases of $4.0 million
and $27.0 million in Germany in the same periods, were more than offset by
sales decreases in France, Italy, Israel, Spain and the UK.
Within The Americas, U.S. retail sales accounted for $88.2 million and $172.9
million or 37.5% and 37.2% of worldwide retail sales during the three and six
months ended June 30, 1995, up from the level of $77.0 million and $149.1
million, or 33.9% and 35.6%, reported for the comparable periods a year
earlier. International sales, as a percentage of total retail sales, declined
to 62.5% and 62.8% in the three and six months ended June 30, 1995 from 66.1%
and 64.4% in the corresponding periods of 1994.
Operating margin for the three months ended June 30, 1995 decreased 1.2% to
$53.5 million from $54.1 million, and for the six months ended, June 30, 1995
increased 7.6% to $105.9 million from $98.5 million when compared to the
corresponding periods a year earlier. As a percentage of retail sales,
operating margin for the three and six months ended June 30, 1995 decreased to
22.7% and 22.8% from 23.8% and 23.5%, respectively. The decreased operating
margins are principally due to higher cost of sales as a percentage of retail
sales. Cost of sales as a percentage of retail sales for the three and six
months ended June 30, 1995 increased to 15.9% and 15.5% from 15.0% and 14.8% for
the corresponding periods in 1994. These increases include higher freight costs
resulting from (i) the increase in Asia/Pacific Rim retail sales as a percentage
of total international retail sales, and (ii) regional redeployment of
inventories to meet demand patterns.
Marketing, distribution and administrative expenses for the three and six months
ended June 30, 1995 increased 34.8% and 49.4% to $41.2 million and $84.1
million from $30.5 million and $56.3 million in the corresponding periods a year
earlier. Such expenses as a percentage of retail sales for the three and six
months ended June 30, 1995 increased to 17.5% and 18.1% from 13.4% reported in
the corresponding periods a year earlier. In the three and six months ended
June 30, 1995 compared to the same periods of 1994 selling expenses increased
$4.1 million and $9.6 million, and corporate expenses increased $6.3 million and
$13.4 million. Distribution center operating costs were flat in the second
quarter when compared to the second quarter of 1994, and they increased $4.9
million in the six months ended June 30, 1995 when compared to the corresponding
period in 1994. The increased selling expenses were incurred to recover from
lower International Business Package (distributor kit) sales, as well as to
stimulate new distributor sponsoring rates. The corporate expense increases
are due to additional corporate marketing, distribution and administrative
expenses
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATION (CONTINUED)
COMPARISON OF SECOND QUARTER AND YEAR-TO-DATE 1995 TO 1994
reflective of initiatives taken in new product introductions and technologies to
enhance sales, marketing activities and other business related functions. The
additional distribution center expenses resulted from geographic expansion.
Income taxes for the three and six months ended June 30, 1995 decreased 45.3%
and 45.8% to $4.8 million and $8.6 million from $8.8 million and $15.9 million
in the corresponding periods a year earlier. As a percentage of pre-tax income,
income taxes in the three and six months ended June 30, 1995 increased to 37.5%
from 36.5%, a year earlier. This rate increase in 1995 reflects the change in
geographical mix of taxable income and modified tax planning strategies by the
Company.
Net income for the three and six months ended June 30, 1995 decreased 47.5% and
48.1% to $8.1 million and $14.4 million from $15.4 million and $27.6 million
reported in the same periods a year earlier.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically met its working capital and capital expenditure
requirements, including funding for expansion of operations, through net cash
provided by operating activities. For the six months ended June 30, 1995 net
cash provided by operating activities was $39.1 million compared to $26.9
million for the corresponding period a year earlier. Although net income
decreased $13.3 million in the six months ended June 30, 1995 when compared to
the corresponding period of 1994, this shortfall was offset by reductions in
inventories in the six months ended June 30, 1995. In 1994 inventories
increased by $6.9 million in the first half, reducing the cash provided by
operating activities.
Stockholders' equity increased $3.5 million to $113.3 million during the six
months ended June 30, 1995. The increase was primarily a result of net income
of $14.4 million, less dividends paid of $13.2 million during the period. The
payment of dividends is determined by the Board of Directors in its discretion
and the amount of dividends declared and paid in future quarters will depend,
among other factors, on the anticipated return to historical levels of
profitability, as well as other planned uses of the Company's cash resources.
Capital expenditures for the first six months of 1995 were $3.6 million compared
to $3.1 million for the corresponding period a year earlier. The majority of
the 1995 expenditures were made to upgrade computer and office equipment and to
expand facilities to support management growth. In connection with its entry
into each new market, the Company funds inventory requirements and typically
establishes either a full-service distribution center, sales office, fulfillment
center or compliance office, or a combination of the foregoing. While the
capital requirements associated with entry into new markets vary, the Company
estimates that approximately $3.0 million to $6.0 million will be required for
working capital and capital expenditures associated with its remaining planned
1995 new market expansions.
In total, net cash and cash equivalents increased $36.3 million in the
six months ended June 30, 1995 as a result of an income tax refund in the
period, changes in marketable securities, and the reduction in inventories.
At June 30, 1995, the Company's cash, cash equivalent and marketable
securities aggregate balance was $80.7 million which represents a $21.6 million
increase from the balance as of December 31, 1994.
The Company has not been subjected to material price increases by its suppliers
for several years. The Company believes that it has the ability to respond to a
portion or possibly all of any price increases by raising the price of its
products. Purchases by the Company from its suppliers are made in U.S. dollars,
while sales to distributors are generally made in local currencies.
Consequently, strengthening of the U.S. dollar versus a foreign currency can
have a negative impact on revenues and operating margins, and weakening of the
U.S. dollar versus a foreign currency has a positive impact on revenues and
operating margins. In both the first half of 1995 and 1994 the U.S. dollar
weakened against the currencies of the major countries whose the Company
operates, resulting in increased revenue and reported exchange gains net of
tax of $0.03 and $0.01, respectively.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
In January 1995, the Company and certain of its officers and directors were
served with three complaints alleging violation of federal securities laws. See
discussion under "Legal Proceedings" in the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1994 for a general description of the
litigation. In March 1995, the Court consolidated the three complaints and on
April 5, 1995, the plaintiffs served a Consolidated First Amended Complaint. On
June 19, 1995, the Court granted the defendants' Motion to Dismiss the
Consolidated First Amended Complaint with leave for the plaintiffs to file a
Consolidated Second Amended Complaint. The plaintiffs filed and served a
Consolidated Second Amended Complaint on July 20, 1995. A hearing on the
defendants' Motion to Dismiss the Consolidated Second Amended Complaint is
scheduled for August 28, 1995. The Company has certain indemnity obligations to
the named officers and directors. The Company has directors and officers
liability insurance which, subject to certain customary exceptions and
exclusions, is expected to cover a portion or all of such obligations less the
Company's self-retention amount. However, based upon an initial review of the
allegations of the complaints and preliminary analysis by litigation counsel,
the Company believes that it has substantial and meritorious defenses to the
asserted claims and is vigorously contesting these claims.
The Company's French subsidiary has been subject to a tax audit by French tax
authorities, who are proposing that significant value added, withholding, and
income taxes are due. The Company and its tax advisors believe that the
Company has substantial defenses and the Company is vigorously contesting
these claims and potential assessments.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See discussion under "Legal Proceedings" in the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1994 and in footnote three to
the Financial Statements included in Item 1 of this document.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Stockholders of the Company held on Thursday, May
11, 1995 in Los Angeles, California, 25,734,478 shares of the Company's common
stock were present either in person or by proxies solicited by management
pursuant to Regulation 14A under the Securities Exchange Act of 1934.
The Stockholders voted to re-elect the Company's six Directors:
Number of Shares
----------------
For Withheld Total
--- -------- -----
Mark Hughes 25,528,237 206,241 25,734,478
Dr. David Katzin 25,528,137 206,341 25,734,478
Christopher Pair 25,524,223 210,255 25,734,478
Paul Buxbaum 25,524,237 219,241 25,734,478
Edward Hall 25,492,787 241,691 25,734,478
Alan Liker 25,492,773 241,705 25,734,478
9
<PAGE>
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT PAGE NO./
NUMBER DESCRIPTION (FOOTNOTE)
<C> <S> <C>
3.1 Articles of Incorporation . . . . . . . . . . . . . . . . . . . . . . . (2)
3.2 Articles of Amendment to the Articles of Incorporation
dated December 10, 1986 . . . . . . . . . . . . . . . . . . . . . (2)
3.3 Articles of Amendment to the Articles of Incorporation
dated November 22, 1989 . . . . . . . . . . . . . . . . . . . . . (2)
3.4 Certificate of Determination relating to the Company's Senior
Convertable Preferred Stock dated February 11, 1993 . . . . . . . (7)
3.5 Certificate of Amendment to Articles of Incorporation dated May 14, 1993 (7)
3.6 Amended and Restated Bylaws . . . . . . . . . . . . . . . . . . . . . (7)
4.1 Form of Common Stock Certificate . . . . . . . . . . . . . . . . . . . (7)
10.1 Agreement between Herbalife International of America , Inc.
and D&F Industries, Inc. dated May 12, 1993 . . . . . . . . . . . (7)
10.2 Agreement between Herbalife International of America, Inc.
and Raven Industries, Inc. dated May 12, 1993 . . . . . . . . . . (7)
10.3 Agreement between Herbalife International of America, Inc.
and Dynamic Products, Inc. dated May 12, 1993 . . . . . . . . . . (7)
10.4 Master Lease between the Company and Trizec Properties, Inc.
dated July 17, 1991 . . . . . . . . . . . . . . . . . . . . . . (7)
10.5 Equipment Lease Agreement between the Company and Hewlett Packard
dated May 21, 1992 . . . . . . . . . . . . . . . . . . . . . . (5)
10.6 Final Judgment and Permanent Injunction, entered into on October,
1986 by the parties to that certain action entitled PEOPLE
OF THE STATE OF CALIFORNIA, ET AL., V HERBALIFE INTERNATIONAL,
INC. ET AL., Case No. 92767 in the Superior Court of
the State of California for the County of Santa Cruz . . . . . . (1)
10.7 Permitting Agreement between the Company and
Nippon Herbalife K.K. effective July 27, 1988 . . . . . . . . . . (3)
10.8 Exclusive License Agreement between the Company
and Nippon Herbalife K.K. dated August 25, 1988 . . . . . . . . . (3)
10.9 First Addendum to Exclusive License Agreement between the Company
and Nippon Herbalife K.K. dated April 10, 1991 . . . . . . . . . (7)
10.10 Second Addendum to Exclusive License Agreement dated between
the Company and Nippon Herbalife K.K. dated May 22, 1992 . . . . (5)
10.11 The Company's 1988 Incentive Plan . . . . . . . . . . . . . . . (1)
10.12 The Company's 1991 Stock Option Plan, as amended . . . . . . . . (6)
10.13 The Company's Executive Incentive Compensation Plan , as amended . (7)
10.14 Form of Individual Participation Agreement relating
to the Company's Executive Compensation Plan . . . . . . . . . . (7)
10.15 Employment Agreement between the Company and
Norman Friedmann dated August 1, 1992. . . . . . . . . . . . . . . (5)
10.16 Employment Agreement between the Company and
David Addis dated December 1, 1992 . . . . . . . . . . . . . . . . (5)
10.17 Amendment to Employment Agreement between the Company
and Norman Friedmann dated July 27, 1993 . . . . . . . . . . . . . (7)
</TABLE>
10
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (CONTINUED)
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT PAGE NO./
NUMBER DESCRIPTION (FOOTNOTE)
<C> <S> <C>
10.18 Amendment to Employment Agreement between the Company
and David Addis dated June 29, 1993 . . . . . . . . . . . (7)
10.19 Form of Letter Agreement between the Compensation Committee of
the Board of Directors of the Company and Mark Hughes . . . (7)
10.20 Form of Indemnity Agreement between the Company and certain
officers and directors of the Company . . . . . . . . . . (7)
10.21 Trust Agreement among the Company, Citicorp Trust, N.A.
and certain officers and directors of the Company . . . . . (7)
10.22 Form of Stock Appreciation Rights Agreement between
the Company and certain directors of the Company . . . . . (7)
10.23 1994 Performance Based Annual Incentive Compensation Plan . . . (8)
10.24 Form of Promissory Note for Advances under the Company's
1994 Performance Based Annual Incentive Compensation Plan . (9)
10.25 Employment Agreement between the Company and Chris Pair
dated April 3, 1994 . . . . . . . . . . . . . . . . . . . . (10)
10.26 Deferred Compensation Agreement between the
Company and Michael Rosen . . . . . . . . . . . . . . . . . (9)
11 Statement regarding the computation of Earnings Per Share . . . (9)
21 List of subsidiaries of the Company . . . . . . . . . . . . . . (9)
23.1 Independent Auditors' Consent . . . . . . . . . . . . . . . . . (9)
27 Financial Data Schedule (filed via Edgar) . . . . . . . . . . . (-)
FOOTNOTES
________________________________
<FN>
(1) Incorporated by reference to the Company's Annual Report on Form
10-K for the year ended December 31, 1987.
(2) Incorporated by reference to the Company's Annual Report on Form
10-K for the year ended December 31, 1989.
(3) Incorporated by reference to the Company's Annual Report on Form
10-K for the year ended December 31, 1990.
(4) Incorporated by reference to the Company's Annual Report on Form
10-K for the year ended December 31, 1991.
(5) Incorporated by reference to the Company's Annual Report on Form
10-K for the year ended December 31, 1992.
(6) Incorporated by reference to the Company's definitive Proxy
Statement relating to its annual meeting of shareholders held May
20, 1993.
(7) Incorporated by reference to the Company's Registration Statement
on Form S-1 (No. 33-66576) declared effective by the Securities
and Exchange Commission on October 8, 1993.
(8) Incorporated by reference to the Company's Definitive Proxy
Statement relating to its 1994 Annual Meeting of Stockholders.
(9) Incorporated by reference to the Company's Annual Report on Form
10-K for the year ended December 31, 1994.
(10) Incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the three months ended June 30, 1994.
</TABLE>
(b) REPORTS ON FORM 8-K
None.
11
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: July , 1995
---
HERBALIFE INTERNATIONAL, INC.
(Registrant)
By: J. MARK HATTENDORF
J. Mark Hattendorf
Senior Vice President and
Chief Financial Officer
12
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<PAGE>
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<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> JUN-30-1995
<CASH> 70,576,000
<SECURITIES> 10,125,000
<RECEIVABLES> 13,048,000
<ALLOWANCES> 0
<INVENTORY> 43,833,000
<CURRENT-ASSETS> 157,362,000
<PP&E> 35,307,000
<DEPRECIATION> 20,693,000
<TOTAL-ASSETS> 182,351,000
<CURRENT-LIABILITIES> 66,017,000
<BONDS> 1,173,000
<COMMON> 300,000
0
0
<OTHER-SE> 112,967,000
<TOTAL-LIABILITY-AND-EQUITY> 182,351,000
<SALES> 246,439,000
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