<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
/x/ QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (FEE REQUIRED)
For the quarterly period ended September 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
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
9800 La Cienega Boulevard, Inglewood, California 90301
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(Address of principal executive offices) (Zip Code)
(310) 410-9600
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(Registrant's telephone number, including area code)
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(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
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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
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APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares outstanding of each of the registrant's classes of Common
Stock, as of October 18, 1995: 29,854,954.
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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 Nine Months Ended September 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. . . . . . . . . . . . 6-9
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. . . . . . . . . . . . . . . . . . . . . 9
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . 10 - 11
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HERBALIFE INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
ASSETS December 31,1994 September 30, 1995
---------------- ------------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents. . . . . . . . . . . . . . . . . . $ 34,284,000 $ 58,999,000
Marketable securities. . . . . . . . . . . . . . . . . . . . 24,829,000 21,618,000
Receivables. . . . . . . . . . . . . . . . . . . . . . . . . 13,648,000 11,156,000
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . 50,096,000 39,996,000
Prepaid income taxes . . . . . . . . . . . . . . . . . . . . 6,714,000
Prepaid expenses and other current assets. . . . . . . . . . 9,221,000 8,644,000
Deferred income taxes. . . . . . . . . . . . . . . . . . . . 12,595,000 9,011,000
------------- ------------
Total current assets . . . . . . . . . . . . . . . . . . . . . $ 151,387,000 $149,424,000
------------- ------------
PROPERTY - at cost . . . . . . . . . . . . . . . . . . . . . . 31,625,000 37,184,000
Less accumulated depreciation and amortization . . . . . . . (19,287,000) (21,810,000)
------------- ------------
12,338,000 15,374,000
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OTHER ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . 6,355,000 7,288,000
GOODWILL (Net of accumulated amortization of $910,000
and $1,040,000 in 1994 and 1995, respectively.). . . . . . . 3,977,000 3,848,000
------------- ------------
TOTAL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 174,057,000 $175,934,000
------------- ------------
------------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . $ 17,163,000 $ 19,959,000
Royalty overrides. . . . . . . . . . . . . . . . . . . . . . 23,351,000 22,784,000
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . 9,748,000 10,544,000
Dividends payable. . . . . . . . . . . . . . . . . . . . . . 6,593,000 4,478,000
Current portion of bank loans and contracts payable. . . . . 476,000 1,467,000
Advance sales deposits . . . . . . . . . . . . . . . . . . . 4,231,000 4,670,000
Income taxes payable . . . . . . . . . . . . . . . . . . . . 297,000
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Total current liabilities. . . . . . . . . . . . . . . . . . . 61,562,000 64,199,000
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BANK LOANS AND CONTRACTS PAYABLE
Net of current portion . . . . . . . . . . . . . . . . . . . 1,014,000 1,347,000
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DEFERRED INCOME TAXES. . . . . . . . . . . . . . . . . . . . . 1,666,000 1,884,000
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STOCKHOLDERS' EQUITY:
Common stock, $.01 par value; authorized 100,000,000 shares,
issued 29,967,954 and 29,854,954 shares in 1994 and 1995,
respectively. . . . . . . . . . . . . . . . . . . . . . . 300,000 300,000
Paid-in-capital in excess of par value . . . . . . . . . . . 41,117,000 40,351,000
Retained earnings (includes cumulative translation
adjustment of $250,000 and $952,000 in 1994
and 1995, respectively). . . . . . . . . . . . . . . . . . 72,034,000 69,779,000
Unearned compensation. . . . . . . . . . . . . . . . . . . . (3,364,000) (1,918,000)
Unrealized loss on marketable securities . . . . . . . . . . (272,000) (8,000)
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Total stockholders' equity . . . . . . . . . . . . . . . . . . 109,815,000 108,504,000
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TOTAL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 174,057,000 $175,934,000
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</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 Nine Months Ended
September 30,1994 September 30,1995 September 30, 1994 September 30,1995
<S> <C> <C> <C> <C>
Retail sales . . . . . . . . . . . . . . . . . . . . . . $234,852,000 $201,661,000 $653,771,000 $666,223,000
Less: Distributor allowances on product purchases . . . (109,621,000) (94,404,000) (306,710,000) (312,526,000)
------------ ------------ ------------ ------------
Net sales. . . . . . . . . . . . . . . . . . . . . . . . 125,231,000 107,257,000 347,061,000 353,697,000
Cost of sales. . . . . . . . . . . . . . . . . . . . . . 35,794,000 31,560,000 97,674,000 103,542,000
Royalty overrides. . . . . . . . . . . . . . . . . . . . 32,606,000 29,923,000 94,052,000 98,434,000
------------ ------------ ------------ ------------
Operating margin . . . . . . . . . . . . . . . . . . . . 56,831,000 45,774,000 155,335,000 151,721,000
Marketing, distribution and administrative expenses. . . 34,754,000 46,169,000 91,052,000 130,282,000
Interest income - net. . . . . . . . . . . . . . . . . . 837,000 932,000 2,154,000 2,067,000
------------ ------------ ------------ ------------
Income before income taxes . . . . . . . . . . . . . . . 22,914,000 537,000 66,437,000 23,506,000
Income taxes . . . . . . . . . . . . . . . . . . . . . . 9,028,000 201,000 24,914,000 8,815,000
------------ ------------ ------------ ------------
NET INCOME . . . . . . . . . . . . . . . . . . . . . . . $ 13,886,000 $ 336,000 $ 41,523,000 $ 14,691,000
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
EARNINGS PER SHARE . . . . . . . . . . . . . . . . . . . $ 0.45 $ 0.01 $ 1.35 $ 0.48
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
CASH DIVIDENDS PER COMMON SHARE. . . . . . . . . . . . . $ 0.22 $ 0.15 $ 0.58 $ 0.59
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</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>
Nine Months Ended
September 30, 1994 September 30, 1995
------------------ ------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 41,523,000 $ 14,691,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization. . . . . . . . . . . . . . . . . 1,737,000 5,888,000
Deferred income taxes. . . . . . . . . . . . . . . . . . . . . (3,826,000) 3,872,000
Amortization of unearned compensation. . . . . . . . . . . . . 848,000 756,000
Foreign exchange (gain) loss . . . . . . . . . . . . . . . . . (2,200,000) 933,000
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . (31,000)
Changes in operating assets and liabilities:
Receivables. . . . . . . . . . . . . . . . . . . . . . . . . . (6,819,000) 2,834,000
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . (19,169,000) 12,574,000
Prepaid expenses and other current assets. . . . . . . . . . . (6,026,000) 2,095,000
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . (2,870,000) (3,746,000)
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . 6,873,000 343,000
Royalty overrides. . . . . . . . . . . . . . . . . . . . . . . 1,159,000 (686,000)
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . 8,314,000 37,000
Advance sales deposits . . . . . . . . . . . . . . . . . . . . 2,442,000 408,000
Income taxes payable . . . . . . . . . . . . . . . . . . . . . 9,423,000 7,102,000
Other current liabilities. . . . . . . . . . . . . . . . . . . 188,000 473,000
------------- -------------
NET CASH PROVIDED BY OPERATING ACTIVITIES. . . . . . . . . . . . . . 31,597,000 47,543,000
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CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property. . . . . . . . . . . . . . . . . . . . . (5,002,000) (5,377,000)
Proceeds from sale of property . . . . . . . . . . . . . . . . 134,000 437,000
Sale of marketable securities. . . . . . . . . . . . . . . . . 1,745,000 3,483,000
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NET CASH USED IN INVESTING ACTIVITIES. . . . . . . . . . . . . . . . (3,123,000) (1,457,000)
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CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . (16,187,000) (19,762,000)
Additions to loans payable . . . . . . . . . . . . . . . . . . 127,000
Principal payments on loans payable. . . . . . . . . . . . . . (367,000) (884,000)
Exercise of stock options. . . . . . . . . . . . . . . . . . . 805,000 74,000
Stock repurchases. . . . . . . . . . . . . . . . . . . . . . . (630,000)
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . (196,000) (98,000)
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NET CASH USED BY FINANCING ACTIVITIES. . . . . . . . . . . . . . . . (16,448,000) (20,670,000)
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EFFECT OF EXCHANGE RATE CHANGES ON CASH. . . . . . . . . . . . . . . 412,000 (701,000)
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NET INCREASE IN CASH AND CASH EQUIVALENTS. . . . . . . . . . . . . . 12,438,000 24,715,000
CASH AND CASH EQUIVALENTS AT JANUARY 1 . . . . . . . . . . . . . . . 55,727,000 34,284,000
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CASH AND CASH EQUIVALENTS AT SEPTEMBER 30. . . . . . . . . . . . . . $ 68,165,000 $ 58,999,000
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------------- -------------
</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 September 30, 1995 and for the
three and nine month periods ended September 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 NINE MONTHS ENDED
------------------ -----------------
SEPTEMBER 30, 1994 SEPTEMBER 30,1995 SEPTEMBER 30, 1994 SEPTEMBER 30, 1995
------------------ ----------------- ------------------ ------------------
<S> <C> <C> <C> <C>
Weighted average number of shares 30,754,253 30,282,596 30,830,973 30,324,670
</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.
On August 28, 1995, the court granted the defendants' Motion to Dismiss the
Consolidated Second Amended Complaint with leave for the plaintiffs to file a
Consolidated Third Amended Complaint. The plaintiffs filed and served a
Consolidated Third Amended Complaint on September 29, 1995. A hearing on the
defendants' Motion to Dismiss the Consolidated Third Amended Complaint was
held on November 6, 1995. The matter is under submission pending a decision
by the Court and the Company is currently awaiting that decision. 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.
During the third quarter the Company received inquiries from certain
governmental agencies within Germany and Portugal relating to the Company's
product Thermojetics-TM- Instant Herbal Beverage. Pending resolution of these
inquiries, sale of this product in these countries was suspended. The Company
is engaged in ongoing consultation with the appropriate authorities, and the
resumption of sales of this product is dependent upon the satisfactory
outcome of these consultations.
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
GENERAL
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 THIRD QUARTER AND YEAR-TO-DATE 1995 TO 1994
Retail sales for the three months ended September 30, 1995 decreased 14.1% to
$201.7 million from $234.9 million, and for the nine months ended September
30, 1995 increased 1.9% to $666.2 million from $653.8 million, compared to
the corresponding periods a year earlier. Regionally, retail sales in the
three and nine months ended September 30, 1995 compared to the corresponding
periods of 1994 increased 135.9% and 144.3%, respectively, in Asia/Pacific
Rim; 2.1% and 12.2%, respectively, in The Americas; and decreased 42.8% and
20.8%, respectively, in Europe. In The Americas, retail sales in these
periods grew from $90.4 million and $258.3 million to $92.2 million and
$289.7 million, respectively. In Asia/Pacific Rim retail sales grew from
$15.0 million and $38.5 million to $35.3 million and $94.0 million in the
three and nine months ended September 30, 1995 compared to the corresponding
periods in 1994. In Europe, retail sales in the three and nine months ended
September 30, 1995 decreased from $129.5 million and $357.0 million to $74.1
million and $282.6 million respectively, compared to the corresponding
periods of 1994. Contributing to the 1995 consolidated retail
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (CONTINUED)
COMPARISON OF THIRD QUARTER AND YEAR-TO-DATE 1995 TO 1994 (CONTINUED)
sales in the three and nine months ended September 30, 1995 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
Vitessence-TM-," in April 1995. These products accounted for $18.8 million and
$75.5 million of consolidated retail sales in the three and nine months ended
September 30, 1995, respectively. The products were introduced extensively in
Europe and The Americas where they accounted for $8.8 million and $8.9 million,
or 11.9% and 9.7%, of those regions' retail sales in the quarter ended September
30, 1995, and $36.2 million and $36.1 million, or 12.8% and 12.5%, of those
regions' retail sales in the nine months ended September 30, 1995. During the
third quarter the Company has re-evaluated the sale of the original
Thermojetics-TM- Green tablets which contain, among other ingredients, the
Chinese herb known as Ma Huang which contains small quantities of naturally
occuring ephedrine. A decision was reached that it would be appropriate to
reintroduce this product in the U.S. in the near future.
The Asia/Pacific Rim growth was due to (i) sales increases of $15.9 million
and $35.0 million, or 262.3% and 306.0%, in Japan in the three and nine
months ended September 30, 1995, when compared to the corresponding periods
in 1994, and (ii) the opening of the Philippines in December 1994 and Taiwan
in July 1995, which reported combined retail sales of $2.9 million and $14.2
million for the same periods. In The Americas, combined retail sales
increases of 14.9% and 16.7% in the three and nine month periods ended
September 30, 1995 in the U.S., 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
decrease in Germany sales of $33.9 million and $7.0 million in the three and
nine months ended September 30, 1995, together with decreases in Czech,
France, Italy, Israel, Spain and the UK, were partially offset in the same
periods by sales in Belgium, Denmark, Poland and Sweden, all of which opened
in the second half of 1994, and Austria and Switzerland which opened in the
third quarter of 1995. The decrease in reported sales in Germany was in part
due to the suspension of sales of Thermojetics-TM- Instant Herbal Beverage
in that country in July 1995. This situation has led to an increase in
product returns and distributor resignations, as well as a decline in sales
of other products.
Within The Americas, U.S. retail sales accounted for $81.4 million and $254.3
million or 40.4% and 38.2% of worldwide retail sales during the three and
nine months ended September 30, 1995 respectively, up from the level of $73.4
million and $222.5 million, or 31.2% and 34.0%, reported for the comparable
periods a year earlier. International sales, as a percentage of total retail
sales, declined to 59.6% and 61.8% in the three and nine months ended
September 30, 1995 from 68.8% and 66.0% in the corresponding periods of 1994.
Operating margin for the three and nine months ended September 30, 1995
decreased 19.5% and 2.3% to $45.8 million and $151.7 million from $56.8
million and $155.3 million when compared to the corresponding periods a year
earlier. As a percentage of retail sales, operating margin for the three and
nine months ended September 30, 1995 decreased to 22.7% and 22.8% from 24.2%
and 23.8%, respectively in the corresponding periods of the prior year. The
decreased operating margins are due to higher cost of sales and royalty
overrides as a percentage of retail sales. Cost of sales as a percentage of
retail sales for the three and nine months ended September 30, 1995 increased
to 15.7% and 15.5% from 15.2% and 14.9% 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. Royalty overrides as a percentage of retail sales for
the three and nine months ended September 30, 1995 increased to 14.8% from
13.9% and 14.4% for the corresponding periods of 1994. This increase
includes primarily the effect of a modification to the marketing plan made in
June 1995 which increases the royalties earned by distributors.
Marketing, distribution and administrative expenses for the three and nine
months ended September 30, 1995 increased 32.9% and 43.1% to $46.2 million
and $130.3 million from $34.8 million and $91.1 million in the corresponding
periods a year earlier. Such expenses as a percentage of retail sales for
the three and nine months ended September 30, 1995 increased to 22.9% and
19.6% from 14.8% and 13.9% reported in the corresponding periods a year
earlier. In the three and nine months ended September 30, 1995 compared to
the corresponding periods of 1994, selling expenses increased $4.9 million and
$14.5 million, and corporate expenses increased $5.8 million and $19.1
million. Distribution center operating costs increased $0.7 million and $5.7
million in the three and nine months ended September 30, 1995, respectively,
when compared to the corresponding periods in 1994 resulting from geographic
expansion. The increased selling expenses were incurred to recover from
lower International Business Package (distributor kit) sales, stimulate new
distributor sponsoring rates and expand distributor training. The corporate
expense increases were due to (i)
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (CONTINUED)
COMPARISON OF THIRD QUARTER AND YEAR-TO-DATE 1995 TO 1994 (CONTINUED)
initiatives taken in new product introductions and technologies to enhance
sales, marketing activities and other business related functions and (ii)
increased foreign exchange losses of $3.4 million and $2.7 million in the
three and nine months ended September 30, 1995, respectively when compared to
the corresponding periods a year earlier.
Income taxes for the three and nine months ended September 30, 1995 decreased
97.8% and 64.6% to $0.2 million and $8.8 million from $9.0 million and $24.9
million in the corresponding periods a year earlier. As a percentage of pre-tax
income, income taxes in the three months ended September 30, 1995 decreased to
37.5% from 39.4% a year earlier. In the nine months periods ended September 30,
1995 and 1994 the rate remained constant at 37.5%.
Net income for the three and nine months ended September 30, 1995 decreased
97.6% and 64.6% to $0.3 million and $14.7 million from $13.9 million and $41.5
million reported in the corresponding 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 nine months ended September 30, 1995
net cash provided by operating activities was $47.5 million compared to $31.6
million for the corresponding period a year earlier. Although net income
decreased $26.8 million in the nine months ended September 30, 1995 when
compared to the corresponding period of 1994, this shortfall was offset by
reductions in inventories in the nine months ended September 30, 1995. In 1994
inventories increased by $19.2 million in the first nine months, reducing the
cash provided by operating activities.
Stockholders' equity decreased $1.3 million to $108.5 million during the nine
months ended September 30, 1995. The decrease was primarily a result of net
income of $14.7 million, less dividends declared of $17.6 million during the
period. The dividend in the third quarter was reduced to $0.15 per share
from $0.22 per share in the same period in 1994. 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 increased levels of profitability, as well as other planned uses
of the Company's cash resources.
Capital expenditures for the first nine months of 1995 were $5.4 million
compared to $5.0 million for the corresponding period a year earlier. The
majority of the 1995 expenditures were made to upgrade computer and office
equipment. 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
$1.5 million to $3.0 million will be required for working capital and capital
expenditures associated with its remaining planned 1995 new market expansions.
In total, cash and cash equivalents increased $24.7 million in the nine
months ended September 30, 1995. This increase resulted from net income, an
income tax refund in the period, changes in marketable securities, and the
reduction in inventories, offset by dividends paid and capital expenditures.
At September 30, 1995, the Company's cash, cash equivalent and marketable
securities aggregate balance was $80.6 million which represents a $21.5
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
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
revenues and operating margins. In both the first nine months of 1995 and
1994 the U.S. dollar weakened against the currencies of the major countries
where the Company operates, resulting in increased revenue. The timing of
the intercompany payments resulted in a reported exchange loss net of tax of
$0.02 per share and a reported exchange gain net of tax of $0.04 per share in
the first nine months of 1995 and 1994, respectively.
For a discussion of certain contingencies that may impact liquidity and
capital resources, see "Note 3, Contingencies," above.
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
None.
ITEM 5. OTHER INFORMATION
None.
9
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT PAGE NO./
NUMBER DESCRIPTION (FOOTNOTE)
<S> <C> <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
Convertible 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)
10
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (CONTINUED)
(A) EXHIBITS
EXHIBIT PAGE NO./
NUMBER DESCRIPTION (FOOTNOTE)
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)
21 List of subsidiaries of the Company. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (9)
27 Financial Data Schedule (filed via Edgar). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (-)
</TABLE>
FOOTNOTES
(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.
(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: November 10, 1995
HERBALIFE INTERNATIONAL, INC.
(Registrant)
By: Timothy Gerrity
-----------------------------
Timothy Gerrity
Senior Vice President and
Chief Financial Officer
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> SEP-30-1995
<CASH> 58,999,000
<SECURITIES> 21,618,000
<RECEIVABLES> 11,156,000
<ALLOWANCES> 0
<INVENTORY> 39,996,000
<CURRENT-ASSETS> 149,424,000
<PP&E> 37,184,000
<DEPRECIATION> 21,810,000
<TOTAL-ASSETS> 175,934,000
<CURRENT-LIABILITIES> 64,199,000
<BONDS> 1,347,000
<COMMON> 300,000
0
0
<OTHER-SE> 108,204,000
<TOTAL-LIABILITY-AND-EQUITY> 175,934,000
<SALES> 353,697,000
<TOTAL-REVENUES> 666,223,000
<CGS> 103,542,000
<TOTAL-COSTS> 201,976,000
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<INCOME-TAX> 8,815,000
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