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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 (FEE REQUIRED)
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
[ ] 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
HERBALIFE INTERNATIONAL, INC.
(Exact name of Registrant as specified in its charter)
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Nevada 22-2695420
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1800 Century Park East, Los Angeles, California 90067
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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)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common
Stock, $.01 Par Value
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the Registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes
[X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of the Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K. [X]
Based upon the closing price of its Common Stock at February 28, 1997
of $21 per share, the aggregate market value of Registrant's outstanding
Common Stock held by non-affiliates was approximately $264,670,000.
(Determination of stock ownership by non-affiliates was made solely for
the purpose of responding to the requirements of this Form and the
Registrant is not bound by this determination for any other purpose.)
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 [ ]
The number of outstanding shares of the registrant's Common Stock, as
of February 28, 1997 was 30,230,738.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement to be filed with the Securities and
Exchange Commission within 120 days after the close of the Registrant's
fiscal year ended December 31, 1996, are incorporated by reference in
Part III of this Form.
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EXPLANATORY NOTE: This Form 10-K/A of Herbalife International, Inc. amends the
Annual Report on Form 10-K of the registrant for the registrant's fiscal year
ended December 31, 1996. Specifically, this Form 10-K/A amends and restates Item
13, "Certain Relationships and Related Transactions," as incorporated into the
Form 10-K from the registrant's proxy statement relating to the 1997 annual
meeting of stockholders.
ITEM 13 RESTATED CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company purchases its powder products from Raven, one-third of whose
stock is owned by Mark Hughes. In addition, one of the Company's tablet
products, Activated Fiber, is manufactured by D&F pursuant to a licensing
agreement with Dynamic, twenty percent and five percent of whose stock is owned
by Mark Hughes and Dr. David B. Katzin, respectively. Dr. Katzin was a director
of the Company until March 22, 1996 and an executive officer until December 31,
1996, and he is currently the Company's Executive Director of the Medical
Advisory Board. Two individuals (not affiliates of the Company) are principal
stockholders of each of D&F, Raven and Dynamic.
In May 1993, the Company entered into requirements contracts with each
of D&F, Raven and Dynamic that extend to January 1998 (subject to extension
unless either party elects to terminate). Pursuant to these requirements
contracts, the Company has agreed to purchase all of its requirements of powder
products from Raven and all of its requirements of tablet, capsule, liquid,
cream and lotion products from Dynamic or D&F to the extent each such
manufacturer is capable or becomes capable of manufacturing such products.
However, the Company has obtained waivers to permit the purchase of certain
personal care products from other manufacturers. The requirements contracts also
provide Raven, D&F and Dynamic with: (i) a right of first refusal to establish
any manufacturing facility outside of North America that the Company proposes to
develop or acquire; and (ii) the right to receive certain royalty payments in
the event that such a manufacturing facility were constructed or acquired and
the right of first refusal were not exercised.
During 1996, the Company's purchases from Raven and Dynamic amounted to
$53.2 million and $3.2 million, respectively. Mr. Hughes' share of the 1996
earnings of Raven and Dynamic and Dr. Katzin's share of the 1996 earnings of
Dynamic totaled $5.6 million, $0.2 million and $56,000, respectively. In 1995,
Mr. Hughes' share of the earnings of Raven and Dynamic totalled $2.6 million and
$0.3 million, respectively, and Dr. Katzin's share of the earnings of Dynamic
totalled $66,000. Management believes that the price paid under these
requirements contracts is appropriate, taking into account the product research,
development and formulation services provided by the companies.
During 1996, the Company engaged Nutrient Research Consultants, Ltd., a
California corporation ("Consultant"), which is wholly owned by Dr. Katzin, to
perform consulting services. Such services consisted of assistance in
distributor and supervisor education, identification of new product concepts,
product reformulation and governmental and public relations. Consultant was
engaged on a month-to-month basis pursuant to an oral agreement which had been
in effect since the expiration of a written six-month contract entered into
between Consultant and the Company in 1985. During the first three months of
1996, Consultant received $230,000 from the Company in consulting fees,
whereafter he became an employee of the Company. Management believes that the
terms of its agreement with Consultant fairly reflected the value of the
services provided by Consultant.
In January 1997, the Company entered into a Consulting Agreement with
David R. Addis, the former Chief Counsel of the Company. The agreement provides
for Mr. Addis to provide consulting services, as requested by the Company,
through the end of 1997 in connection with the business and operations of the
Company. Pursuant to the agreement, Mr. Addis is entitled to receive, among
other things, the following: (i) base monthly compensation at the rate of
$700,000 per annum through the end of 1997; (ii) $1,000,000 payable on January
1, 1998; (iii) vesting of 40,000 restricted shares of the Company's
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Common Stock (originally granted pursuant to a preexisting employment agreement
with Mr. Addis) on January 1, 1998; (iv) vesting of an option (originally
granted pursuant to the preexisting employment agreement) to purchase 17,500
shares of Common Stock of the Company in November 1997, provided that services
continue to be provided through that time; (v) forgiveness of $607,000 of the
advances previously made to Mr. Addis; and (vi) certain other benefits described
in the agreement.
In accordance with the 1994 Plan, the Company made advances of targeted
performance bonus amounts during 1994 to Mssrs. Hughes, Pair, Katzin, Addis and
Rosen and during 1995 to Mr. Addis and during 1996 to Messrs. Hughes, Pair,
Addis and Rosen. As of December 31, 1996, the remaining outstanding principal
and accrued interest obligations of such individuals were $2,046,000 in the case
of Mr. Hughes; $496,000 in the case of Mr. Pair; $168,000 in the case of Dr.
Katzin; $1,098,000 in the case of Mr. Addis (of which $607,000 is being forgiven
pursuant to Mr. Addis' consulting agreement as discussed above); and $160,000 in
the case of Mr. Rosen. Each outstanding advance is a full recourse obligation of
the executive with a maturity date of two years following the date of the
advance. In addition, the advances bear interest at the applicable federal rate
(AFR) for two-year notes at the time of the advances. The rates for existing
outstanding advances range from 5.31% to 7.93%. In addition, during 1996, the
Company advanced Mr. Pair $53,000 (all of which was outstanding at year end) for
the funding of insurance premiums, which advance likewise has a two-year
maturity and bears interest at 5.75% per annum. As in the case of advances under
the 1994 Plan, the Company intends to apply future earned bonuses to effect
repayment of such advance.
The Company has begun steps to pursue an initial public offering of
shares of Herbalife Japan KK ("Herbalife Japan") in Japan. Herbalife Japan was
formed in November 1992 as a wholly-owned subsidiary of the Company, and the
Company commenced operations through that subsidiary in November 1993. The
Company has conducted business in Japan, directly or through a license, since
1989. The Company's advisors have informed the Company that the public offering
process in Japan is lengthy (offerings can take one to three years or longer to
complete) and involves a detailed review, among other things, of the systems and
procedures of the subject company by Japanese regulators. Consequently, there
can be no assurance of a successful completion of the offering. Similarly, the
Company has not yet determined whether to complete the offering, assuming
regulatory approval is obtained. However, in preparation for the possible
offering, in December 1996 the Company sold shares of Herbalife Japan to certain
of the Company's directors and executive officers, as well as to resident
managers of Herbalife Japan, as an incentive for increased efforts to facilitate
the operation of the Herbalife Japan business and the success of the offering.
The following table lists the purchasers of such shares, the number of shares
purchased and the percentage of Herbalife Japan's outstanding shares represented
thereby, and the purchase price paid to the Company by each individual:
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF SHARES HERBALIFE JAPAN AGGREGATE
NAME PURCHASED SHARES PRICE (1)
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<S> <C> <C> <C>
Mark Hughes......... 10.00 5.000% $3,300,000
Christopher Pair.... 1.15 0.575 379,500
Michael Rosen....... 1.15 0.575 379,500
Timothy Gerrity..... 1.15 0.575 379,500
Alan Liker.......... 0.40 0.200 132,000
Other .............. 0.15 0.075 49,500
Total 14.00 7.000% $4,620,000
</TABLE>
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(1) Purchase price for shares was denominated in Japanese yen; dollar amounts
reflect conversion at the yen-to-dollar exchange rate in effect on the date of
purchase.
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The purchase price for the shares was determined, in part, based upon a
formula (the "Formula") prescribed by a Japanese regulatory authority
responsible for certain aspects of public offerings of securities in that
country, as applied to Herbalife Japan's 1995 results of operations. The Board
of Directors of the Company separately sought and obtained a valuation of the
shares from an independent investment banking firm, Houlihan, Lokey, Howard &
Zukin, (Inc. ("Houlihan Lokey"), which rendered an opinion to the Board to the
effect that the fair market value of the shares was greater than that determined
under the Formula. Consequently, the purchase price per share was increased to
the fair value of the shares as indicated in the Houlihan Lokey opinion. The
Company's Board of Directors, based in part on the Houlihan Lokey opinion and
the determination of price derived under the Formula (which is utilized
generally in Japan in connection with public offerings) and taking into account
the uncertainty of completion of the offering in Japan and other pertinent
factors, has determined that the purchase price reflects the fair market value
of the shares.
For each of the foregoing individuals, the purchase price for the shares
was paid to the Company approximately 30% in cash and approximately 70% in the
form of a full recourse promissory note bearing interest at 6.31% per annum in
the case of Mr. Hughes (loan denominated in U.S. dollars) and 2.125% per annum
in the case of each individual other than Mr. Hughes (loans denominated in
Japanese yen), with principal payable in five equal annual installments on the
first five anniversaries of the date of the purchase of shares and accrued
interest payable at the same time as principal.
In the event that the offering is completed in Japan, regulations in
that country will preclude any of the foregoing individuals from selling shares
in the public market for one year following the offering. Neither the Company
nor Herbalife Japan has entered into any agreement or arrangement with the above
individuals to repurchase the shares of Herbalife Japan purchased by them in the
event that the offering is not completed.
In February 1997, the Company engaged Mr. Liker, a director of the
Company, to provide consulting services through the end of 1997 in connection
with the offering in Japan. Under the terms of the Company's oral agreement with
Mr. Liker, Mr. Liker is to receive $80,000 in 1997 from the Company for such
services.
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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: October 1, 1997
HERBALIFE INTERNATIONAL, INC.
(Registrant)
By: /s/ TIMOTHY GERRITY
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Timothy Gerrity
Executive Vice President and
Chief Financial Officer
