<PAGE> 1
===============================================================================
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 June 30, 1997
-------------
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
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)
1800 Century Park East, Los Angeles, California 90067
----------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
(310) 410-9600
--------------
(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 31, 1997: 30,136,245 .
===============================================================================
<PAGE> 2
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, 1997
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements: Page No.
--------
<S> <C> <C>
Consolidated Balance Sheets 2 - 3
Consolidated Statements of Income 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6 - 7
Item 2. Management's Discussion and Analysis of Financial Condition and 8 - 11
Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 12
Item 2. Changes in Securities 12
Item 3. Defaults Upon Senior Securities 12
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 13-14
Signature 15
</TABLE>
<PAGE> 3
HERBALIFE INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
December 31, June 30,
1996 1997
------------- -------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 87,481,000 $ 75,415,000
Marketable securities 43,558,000 46,349,000
Receivables 29,258,000 35,981,000
Inventories 46,204,000 52,211,000
Prepaid income taxes 1,821,000 1,321,000
Prepaid expenses and other current assets 5,243,000 7,092,000
Deferred income taxes 15,882,000 15,970,000
------------- -------------
Total current assets 229,447,000 234,339,000
------------- -------------
Property - at cost 52,377,000 59,427,000
Less accumulated depreciation and amortization (27,404,000) (30,504,000)
------------- -------------
Property-net 24,973,000 28,923,000
Other assets 11,062,000 15,928,000
Goodwill, net of accumulated amortization of
$1,225,000 (1996) and $1,312,000 (1997) 3,632,000 3,545,000
------------- -------------
TOTAL $ 269,114,000 $ 282,735,000
============= =============
</TABLE>
See the accompanying notes to consolidated financial statements
2
<PAGE> 4
HERBALIFE INTERNATIONAL, INC.
LIABILITIES AND STOCKHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31, June 30,
1996 1997
------------- -------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 17,287,000 $ 11,176,000
Royalty overrides 42,676,000 43,340,000
Accrued expenses 35,960,000 38,203,000
Dividends payable 4,453,000 4,520,000
Current portion of contracts payable and bank loans 2,493,000 1,736,000
Advance sales deposits 9,045,000 11,278,000
Income taxes payable 7,871,000 8,736,000
------------- -------------
Total current liabilities 119,785,000 118,989,000
NON-CURRENT LIABILITIES:
Contracts payable, net of current portion 2,306,000 2,633,000
Deferred income taxes 1,103,000 1,100,000
Other non-current liabilities and deferred credits 6,780,000 8,529,000
------------- -------------
Total liabilities 129,974,000 131,251,000
------------- -------------
MINORITY INTEREST 672,000 1,102,000
------------- -------------
</TABLE>
STOCKHOLDERS' EQUITY:
<TABLE>
<CAPTION>
<S> <C> <C>
Common stock, $.01 par value; authorized 100,000,000
shares, issued 30,205,338 (1996) and 30,626,555 (1997)
shares 302,000 306,000
Paid-in-capital in excess of par value 43,258,000 47,925,000
Retained earnings includes cumulative translation
adjustment of $(981,000) (1996) and $(1,816,000)
(1997) 95,353,000 110,953,000
Treasury stock (8,367,000)
Unearned compensation (412,000) (282,000)
Unrealized loss on marketable securities (33,000) (153,000)
------------- -------------
Total stockholders' equity 138,468,000 150,382,000
------------- -------------
TOTAL $ 269,114,000 $ 282,735,000
============= =============
</TABLE>
See the accompanying notes to consolidated financial statements
3
<PAGE> 5
HERBALIFE INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
--------------------------- ---------------------------
June 30, 1996 June 30, 1997 June 30, 1996 June 30, 1997
------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
Retail sales $283,933,000 $350,020,000 $560,506,000 $673,964,000
Less: Distributor allowances on product purchases 133,678,000 165,129,000 264,028,000 319,097,000
------------ ------------ ------------ -----------
Net sales 150,255,000 184,891,000 296,478,000 354,867,000
Cost of sales 41,013,000 48,121,000 81,480,000 93,851,000
Royalty overrides 43,930,000 55,134,000 87,148,000 106,029,000
Marketing, distribution & administrative expenses 49,602,000 60,262,000 98,306,000 115,098,000
Interest income - net 932,000 969,000 1,850,000 2,148,000
------------ ------------ ------------ -----------
Income before income taxes and minority interest 16,642,000 22,343,000 31,394,000 42,037,000
Income taxes 6,241,000 8,602,000 11,772,000 16,184,000
------------ ------------ ------------ -----------
Income before minority interest 10,401,000 13,741,000 19,622,000 25,853,000
Minority interest 41,000 237,000
------------ ------------ ------------ -----------
NET INCOME $ 10,401,000 $ 13,700,000 $ 19,622,000 $ 25,616,000
============ ============ ============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING 31,295,282 31,099,717 31,373,229 31,554,047
============ ============ ============ ============
EARNINGS PER SHARE $0.33 $0.44 $0.63 $0.81
============ ============ ============ ============
CASH DIVIDENDS PER COMMON SHARE $0.15 $0.15 $0.30 $0.30
============ ============ ============ ============
</TABLE>
See the accompanying notes to consolidated financial statements
4
<PAGE> 6
HERBALIFE INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30, 1996 June 30, 1997
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 19,622,000 $ 25,616,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 4,386,000 4,684,000
Deferred income taxes 2,900,000 282,000
Amortization of unearned compensation 402,000 130,000
Stock Grant 582,000
Unrealized Foreign exchange (gain) loss 180,000 (256,000)
Minority interest in earnings 237,000
Other 9,000 104,000
Changes in operating assets and liabilities:
Receivables (3,807,000) (6,151,000)
Inventories (2,228,000) (6,677,000)
Prepaid expenses and other current assets (6,116,000) (1,660,000)
Other assets 406,000 (5,996,000)
Accounts payable (1,350,000) (5,488,000)
Royalty overrides 2,626,000 1,210,000
Accrued expenses 11,784,000 1,722,000
Advance sales deposits (10,029,000) 2,277,000
Income taxes payable 1,340,000 2,392,000
Other liabilities 1,942,000
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 20,125,000 14,950,000
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property (5,922,000) (7,042,000)
Proceeds from sale of property 90,000
Changes in marketable securities (4,663,000) (2,911,000)
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (10,585,000) (9,863,000)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid (8,953,000) (9,114,000)
Additions to loans payable 511,000
Principal payments on loans payable (868,000) (1,836,000)
Exercise of stock options 293,000 2,713,000
Stock repurchases (3,265,000) (8,367,000)
Other 151,000
------------ ------------
NET CASH USED BY FINANCING ACTIVITIES (12,642,000) (16,093,000)
------------ ------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (1,119,000) (1,060,000)
------------ ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (4,221,000) (12,066,000)
CASH AND CASH EQUIVALENTS AT JANUARY 1 69,176,000 87,481,000
------------ ------------
CASH AND CASH EQUIVALENTS AT JUNE 30 $ 64,955,000 $ 75,415,000
============ ============
</TABLE>
See the accompanying notes to consolidated financial statements
5
<PAGE> 7
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, 1997 and for the three
and six month periods ended June 30, 1996 and 1997.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No., 130, "Reporting for Comprehensive Income"
and No. 131, "Disclosures about Segments of an Enterprise and Related
Information." These statements are effective for financial statements issued for
periods beginning after December 15, 1997. The Company has not yet analyzed the
impact of adopting these statements.
2. EARNINGS PER SHARE
Primary earnings per share are computed by dividing net income by the weighted
average number of common and equivalent shares. Fully diluted earnings per share
assumes the maximum dilutive effect of stock options.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------------- ------------------------------
June 30, June 30, June 30, June 30,
1996 1997 1996 1997
--------------- --------------- -------------- -------------
<S> <C> <C> <C> <C>
Weighted average shares outstanding
Primary 31,216,012 31,098,990 31,115,870 31,554,044
Fully diluted 31,295,282 31,099,717 31,373,229 31,554,047
</TABLE>
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 ("SFAS 128") "Earnings per Share." SFAS
128 replaces the presentation of primary earnings per share with a presentation
of basic earnings per share based upon the weighted average number of common
shares for the period. It also requires dual presentation of basic and diluted
earnings per share for companies with complex capital structures. SFAS 128 will
be adopted by the Company in 1997 and earnings per share will be restated upon
adoption. Had earnings per share been determined consistent with SFAS 128, basic
and diluted earnings per share would have been:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------------- ------------------------------
June 30, June 30, June 30, June 30,
1996 1997 1996 1997
--------------- --------------- ------------- ---------------
<S> <C> <C> <C> <C>
Basic earnings per share $0.35 $0.45 $0.66 $0.85
Diluted earning per share $0.33 $0.44 $0.63 $0.81
Weighted average shares outstanding
Basic 29,735,589 30,125,542 29,804,584 30,223,503
Diluted 31,216,012 31,098,990 31,115,870 31,554,044
</TABLE>
3. CONTINGENCIES
The Company's French, German and Italian subsidiaries have been subject to tax
audits by tax authorities in those countries, who are proposing that material
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 the additional proposed taxes and related charges.
However, the ultimate resolution of these matters is unknown and may take
several years.
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, estimating the impact of
such litigation matters, establishes reserves considered appropriate by
management. The Company's estimates of the impact of these matters may change as
the matters progress and are ultimately resolved.
6
<PAGE> 8
HERBALIFE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. CONTINGENCIES (cont)
In June, 1997, the Company informed its exclusive suppliers of weight management
and food and dietary supplement products that it would not exercise it's right
to automatically renew its existing supply agreements for a five-year period
beginning in January, 1998. The Company continues to negotiate with its
suppliers for replacement contracts and is also developing contingency plans
with several alternative manufacturers if agreements with its current suppliers
are not executed. If new contracts are entered with alternative manufacturers,
the Company expects to incur additional costs during the transition; however,
these costs are not expected to have a material impact to the financial position
of the Company.
7
<PAGE> 9
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"
generally represents 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 or through credit
card payments upon receipt of orders from distributors. Importers are utilized
by the Company in some markets and, under certain circumstances, credit terms
are extended. The Company's "gross profit" 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 and (c) other
one time incentive cash bonuses to qualifying distributors. Royalty overrides as
reported in the Consolidated Statements of Income are net of a handling fee (6%
of retail sales) 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. The retail sales price is used by the Company to calculate, among
other things, royalty overrides and "volume points" earned by distributors.
Volume points are point values assigned to each of the Company's products that
are equal in all countries, and are used as a 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 initially decreased and thereafter stabilized 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 believes that, in certain of its markets, the opening of other new
markets within the same geographic region or with the same or similar language
or cultural bases has resulted in a corresponding tendency of some key
distributors to focus their attention on business opportunities provided by new
markets instead of developing their established downline organizations in
existing markets. Additionally, in certain instances, the Company has become
aware that certain sales in certain existing markets were attributable to
purchasers who distributed such product in countries which had not yet been
opened. When these countries were opened, such sales in existing markets shifted
to the newly opened markets, resulting in a decline in sales in the existing
market.
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.
8
<PAGE> 10
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations (Continued)
Comparison of Second Quarter and Year-to-Date 1997 to 1996
Retail sales for the three and six months ended June 30, 1997 increased 23.3%
and 20.2% to $350.0 million and $674.0 million, respectively, as compared to
sales of $283.9 million and $560.5 million for the corresponding periods of the
prior year.
Retail Sales by Geographical Segments (dollars in millions):
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- --------------------------
% %
1997 1996 Change 1997 1996 Change
------ ------ ----- ------ ----- -----
<S> <C> <C> <C> <C> <C> <C>
Asia/Pacific Rim $140.6 $ 72.4 94.2 $266.1 $125.8 111.5
Europe 113.3 111.5 1.6 219.6 217.6 0.9
Americas 96.1 100.0 (3.9) 188.3 217.1 (13.3)
------ ------ ----- ------ ----- -----
Total Retail Sales $350.0 $283.9 23.3 $674.0 $560.5 20.2
====== ====== ==== ====== ====== =====
</TABLE>
Retail sales increases in Asia/Pacific Rim primarily resulted from strong retail
sales in Japan and Taiwan. For the three and six months ended June 30, 1997,
retail sales in Japan increased $55.4 million, or 93.5%, and $114.0 million, or
112.4%, respectively; however, retail sales in Japan are not expected to
continue to increase at this rate. In Taiwan, retail sales for the three and six
months ended June 30, 1997 increased $8.4 million, or 187.6%, and $17.4 million,
or 256.8%, respectively. Retail sales in other Asia/Pacific Rim countries for
the three and six months ended June 30, 1997 increased $4.5 million, or 51.2%,
and $8.9 million, or 50.8%, respectively, as compared to the corresponding
periods in 1996. The increases in the other Asia/Pacific Rim countries resulted
from the introduction of South Korea in November, 1996 coupled with increased
retail sales in Hong Kong.
Retail sales in Europe were relatively consistent for the three and six months
ended June 30, 1997 as compared to the prior year. Within the region, retail
sales for the same periods in Russia increased $2.3 million, or 6.3%, and $18.4
million, or 29.8%, respectively. Italy, Norway, Sweden and the Netherlands also
posted strong retail sales increases for the three and six month periods ended
June 30, 1997 as compared to the prior year. Offsetting the retail sales
increases were declines in Germany, South Africa and Finland. Retail sales in
Germany for the three and six months ended June 30, 1997 decreased $3.1 million,
or 22.1%, and $10.5 million, or 33.6%, respectively, as compared to 1996.
Although retail sales in Germany declined in comparison to the prior year
periods, they have remained relatively stable over the past three quarters.
In The Americas, the decline in retail sales primarily resulted from sales
declines in Brazil. These declines were partially offset by retail sales
increases in the U.S., Mexico and Canada and additional retail sales resulting
from the opening of Chile in March, 1997. The decrease in retail sales in Brazil
is primarily due to a difficult regulatory environment which, among other
factors, has impeded the introduction of new products within the country . The
Company continues to pursue approval of new products within Brazil. Within The
Americas, U.S. retail sales for the three months ended June 30, 1997 increased
$6.6 million, or 9.4%, to $76.1 million as compared to $69.5 million in the
prior year. For the six months ended June 30, 1997, U.S. retail sales decreased
$3.5 million, or 2.3%, as compared to $151.4 million in 1996. The U.S., as a
percentage of worldwide sales for the three and six month periods ended June 30,
1997, was 21.7% and 22.0%, respectively, as compared to 24.5% and 27.0% for the
same periods last year.
9
<PAGE> 11
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations (Continued)
Comparison of Second Quarter and Year-to-Date 1997 to 1996 (Continued)
Retail Sales by Product Segments (dollars in millions):
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
% %
1996 1997 Change 1996 1997 Change
------ ----- ----- ------ ----- ----
<S> <C> <C> <C> <C> <C> <C>
Weight Management $210.1 $247.2 17.7 $406.8 $470.4 15.6
Food & Dietary Supplements 39.3 48.7 23.9 79.9 93.0 16.4
Personal Care 19.5 37.0 89.7 44.2 79.4 79.6
Literature/ Promotional/ Other 15.0 17.1 14.0 29.6 31.2 5.4
------ ----- ----- ------ ----- ----
Total Retail Sales $283.9 $350.0 23.3 $560.5 $674.0 20.2
====== ===== ==== ====== ====== ====
</TABLE>
For the three and six month periods ended June 30, 1997, retail sales in all the
product segments demonstrated strong growth as compared to the prior year
periods. The increase in Personal Care retail sales primarily resulted from a
strong reception of the product line in Japan and the introduction in Russia
during July 1996. The increases in the remaining categories were primarily due
to the same factors identified in the geographical segment discussion above.
Operating Information:
Gross profit of $81.6 million and $155.0 million for the three and six months
ended June 30, 1997, respectively, was $16.3 million, or 25.0%, and $27.1
million, or 21.2%, higher than gross profit of $65.3 million and $127.9 million
in the prior year, respectively. As a percentage of retail sales, gross profit
for the three and six months ended June 30, 1997 as compared to the same periods
in the prior year increased from 23.0% to 23.3% and 22.8% to 23.0%,
respectively. The increase in gross profit as a percentage of retail sales
primarily resulted from the proportional increase in retail sales in Japan,
which has a higher gross profit margin due to favorable product pricing.
Partially offsetting the gross profit increase were additional royalty override
expenses resulting from a special 1997 distributor incentive program designed to
motivate distributors to achieve incremental growth.
Marketing, distribution and administrative expenses, as a percentage of retail
sales, declined to 17.2% and 17.1% for the three and six month periods ended
June 30, 1997 as compared to 17.5% for the same periods in 1996, respectively.
These expenses for the same periods increased 21.6% and 17.1% to $60.3 million
and $115.1 million from $49.6 million and $98.3 million in the prior year,
respectively. The increase resulted from: (a) higher in-country distribution
expenses primarily due to facility and staff expansions in Japan and new country
openings in South Korea, Chile, and Thailand, (b) higher administrative expenses
due to staff additions and other costs related primarily to supporting sales
expansion in foreign countries, and (c) higher marketing costs resulting from
increased sales event activity in 1997.
The recent devaluation of the Japanese Yen against the U.S. dollar resulted in
proportionately lower revenues, expenses, and ultimately income when translated
into the U.S. dollar reporting currency. The effect of the devalued Japanese Yen
on the Company's net income per fully diluted share for the three and six month
periods ended June 30, 1997 was approximately $.06 and $.14, respectively, as
compared to the exchange rates in effect for the same periods in the prior year.
The effect of foreign currency changes in countries other than Japan was not
material to the operations of the Company.
Income taxes of $8.6 million and $16.2 million for the three and six months
ended June 30, 1997 increased from $6.2 million and $11.8 million in the prior
year, respectively. As a percentage of pre-tax income, income taxes increased
from 37.5% in 1996 to 38.5% in 1997. The increase is due in part to an increased
proportion of profits in countries which have a higher effective tax rate.
Net income for the three and six months ended June 30, 1997 increased 31.7% and
30.5% to $13.7 million and $25.6 million, respectively, from $10.4 million and
$19.6 million reported in the corresponding periods a year earlier.
10
<PAGE> 12
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations (Continued)
Comparison of Second Quarter and Year-to-Date 1997 to 1996 (Continued)
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, 1997, net
cash provided by operating activities was $15.0 million, compared to $20.1
million for the same period in 1996. The decrease primarily resulted from (i)
liquidity needed to fund the payment of additional expenses accrued at December
31, 1996, including the president's team bonus, and to fund certain employee
benefit plans; (ii) higher credit card receivable balances primarily resulting
from new and existing country expansion; (iii) reductions in accounts payable
primarily resulting from timing issues; and (iv) increased inventory levels
required to support the Company's growth. These reductions were partially offset
by increased net income and additional liquidity provided by increases in the
advanced sales balances as compared to significant reductions in the prior year.
Capital expenditures for the six months ended June 30, 1997 were $7.0 million
compared to $5.9 million for the prior year. The majority of the 1997
expenditures resulted from the expansion of office facilities and equipment in
the U.S. and to support growth in Japan. For 1997, the Company is planning to
invest approximately $11 million in management information systems and expansion
of new and existing facilities. 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, a 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 $7 million will be required for pre-opening expenses and
capital expenditures associated with its 1997 new market expansion activities.
Stockholders' equity increased $11.9 million to $150.4 million during the six
months ended June 30, 1997. In 1997, net income of $25.6 million and the
issuance of capital stock, including related tax benefits, of $4.7 million were
partially offset by $9.2 million of dividends declared and stock repurchases of
$8.4 million. The payment of dividends is determined by the Board of Directors
at its discretion and the amounts of dividends declared and paid in future
quarters will depend, among other factors, on profitability, as well as other
planned uses of the Company's cash resources.
Cash and cash equivalents totaled $75.4 million at June 30, 1997 compared to
$87.5 million at December 31, 1996. At June 30, 1997, the Company's cash, cash
equivalents and marketable securities aggregate balance was $121.8 million,
which represents a $9.3 million decrease from the balance as of December 31,
1996.
In June, 1997, the Company informed its exclusive suppliers of weight management
and food and dietary supplement products that it would not exercise it's right
to automatically renew its existing supply agreements for a five-year period
beginning in January, 1998. The Company continues to negotiate with its
suppliers for replacement contracts and is also developing contingency plans
with several alternative manufacturers if agreements with its current suppliers
are not executed. If new contracts are entered with alternative manufacturers,
the Company expects to incur additional costs during the transition; however,
these costs are not expected to have a material impact to the financial position
of the Company.
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 operating margins and can generate transaction losses
on intercompany transactions. The Company from time to time enters into forward
exchange contracts and other hedging arrangements to manage its foreign exchange
risk on intercompany transactions. During the second quarter of 1997, the
Japanese Yen and the British Pound strengthened against the U.S. dollar while
the Brazilian Real depreciated against the U.S. Dollar. As a result, foreign
exchange gains of $2.6 million were recorded for the six months ended June 30,
1997 as compared to a loss of $2.2 million for the same period in 1996.
11
<PAGE> 13
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, 1996 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 May 29,
1997 in Beverly Hills, California, 29,219,607 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 on the following matters:
To elect six directors to serve on the Company's Board of Directors;
<TABLE>
<CAPTION>
Number Number
of Shares of Shares
For Withheld
---------- ---------
<S> <C> <C>
Mark Hughes 28,830,006 389,601
Christopher Pair 28,912,892 306,715
Michael Rosen 28,907,825 311,782
Edward J. Hall 28,937,004 282,603
Alan Liker 28,937,004 282,603
Christopher M. Miner 28,937,389 282,218
</TABLE>
To amend and restate the company's Amended and Restated 1991 Stock
Option Plan (the "Option Plan'), among other things, to increase the
aggregate number of shares which may be issued upon exercise of all
options granted under the Option Plan (excluding shares previously
issued upon option exercise but including shares subject to existing
outstanding options) from 5,400,000 to 6,800,000 and to increase the
aggregate number of stock options a participant under the Option Plan
may be awarded during any single calendar year from 500,000 to
1,500,000.
<TABLE>
<CAPTION>
Percent of
Shares Shares Voting
--------- ------------
<S> <C> <C>
Votes For 20,485,953 76%
Votes Against 6,436,976 24%
Votes Abstaining 60,362 -
Broker Non-Votes 2,236,316 n/a
</TABLE>
Item 5. OTHER INFORMATION
None.
12
<PAGE> 14
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
HERBALIFE INTERNATIONAL, INC.
EXHIBIT INDEX
- -----------------------------------------------------------------------------------------------------------------------------------
Exhibit Number Description Page No./(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 (6)
3.5 Certificate of Amendment to Articles of Incorporation dated May 14, 1993 (6)
3.6 Amended and Restated Bylaws (6)
4.1 Form of Common Stock Certificate (6)
10.1 Agreement between Herbalife International of America, Inc. and D&F
Industries, Inc. dated May 12, 1993 (6)
10.2 Agreement between Herbalife International of America, Inc. and Raven Industries, Inc.
dated May 12, 1993 (6)
10.3 Agreement between Herbalife International of America, Inc. and Dynamic Products, Inc.
dated May 12, 1993 (6)
10.4 Master Lease between the Company and Trizec Properties, Inc. dated July 17, 1991 (4)
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 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 The Company's 1988 Incentive Plan (1)
10.8 The Company's 1991 Stock Option Plan, as amended (11)
10.9 The Company's Executive Incentive Compensation Plan, as amended (6),(11)
10.10 Form of Individual Participation Agreement relating to the Company's Executive
Compensation Plan (6)
10.11 Amendment to Employment Agreement between the Company and David Addis dated June 29,
1993 (6)
10.12 Form of Letter Agreement between the Compensation Committee of the Board of Directors
of the Company and Mark Hughes (6)
10.13 Form of Indemnity Agreement between the Company and certain officers and directors of
the Company (6)
10.14 Trust Agreement among the Company, Citicorp Trust, N.A. and certain officers and
directors of the Company (6)
10.15 Form of Stock Appreciation Rights Agreement between the Company and certain directors
of the Company (6)
10.16 1994 Performance Based Annual Incentive Compensation Plan (8), (11)
10.17 Form of Promissory Note for Advances under the Company's 1994 Performance Based
Annual Incentive Compensation Plan (9)
10.18 Employment Agreement between the Company and Chris Pair dated April 3, 1994 (7)
10.19 Deferred Compensation Agreement between the Company and Michael Rosen (9)
10.20 Office lease agreement between the Company and State Teacher's Retirement System,
dated July 20, 1995 (10)
10.21 Form of stock appreciation rights agreements between the Company and certain
directors of the Company (10)
</TABLE>
13
<PAGE> 15
Item 6. EXHIBITS AND REPORTS ON FORM 8-K (Continued)
(a) Exhibits (Continued)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Exhibit Number Description Page No./(Footnote)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
10.22 The Company's Senior Executive Deferred Compensation Plan, effective January 1, 1996 (10)
10.23 The Company's Management Deferred Compensation Plan, effective January 1, 1996 (10)
10.24 Master Trust Agreement between the company and Imperial Trust Company, Inc.,
effective January 1, 1996 (10)
10.25 The Company's 401K Plan (10)
10.26 Agreement Concerning Share Allocation Plan for Specific Directors of Herbalife of
Japan K.K. dated December 30, 1996. (12)
10.27 Consulting Agreement between David Addis and Herbalife of America, Inc. Dated January
27, 1997. (12)
21 List of subsidiaries of the Company (12)
27 Financial Data Schedule (13)
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
(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 Registration Statement on Form S-1 (No. 33-66576) declared effective
by the Securities and Exchange Commission on October 8, 1993.
(7) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the three months ended June 30, 1994.
(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 Annual Report on Form 10-K for the year ended December 31, 1995.
(11) Incorporated by reference to the Company's definitive Proxy Statement relating to its 1996 Annual Meeting of
Stockholders.
(12) Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1996.
(13) Filed herewith.
</TABLE>
(b) REPORTS ON FORM 8-K
None.
14
<PAGE> 16
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: August 14, 1997
HERBALIFE INTERNATIONAL, INC.
(Registrant)
By: /s/TIMOTHY GERRITY
Timothy Gerrity
Executive Vice President and
Chief Financial Officer
15
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 75,415,000
<SECURITIES> 46,349,000
<RECEIVABLES> 35,981,000
<ALLOWANCES> 0
<INVENTORY> 52,211,000
<CURRENT-ASSETS> 234,339,000
<PP&E> 59,427,000
<DEPRECIATION> 30,504,000
<TOTAL-ASSETS> 282,735,000
<CURRENT-LIABILITIES> 118,989,000
<BONDS> 2,633,000
0
0
<COMMON> 306,000
<OTHER-SE> 150,076,000
<TOTAL-LIABILITY-AND-EQUITY> 282,735,000
<SALES> 354,867,000
<TOTAL-REVENUES> 673,964,000
<CGS> 93,851,000
<TOTAL-COSTS> 199,880,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 42,037,000
<INCOME-TAX> 16,184,000
<INCOME-CONTINUING> 25,616,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 25,616,000
<EPS-PRIMARY> 0.81
<EPS-DILUTED> 0.81
</TABLE>
