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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
ANNUAL REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
/X/ 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
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HERBALIFE INTERNATIONAL, INC.
-----------------------------
(Exact name of Registrant as specified in its charter)
NEVADA 22-2695420
---------------------- ------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
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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ITEM 1. BUSINESS
BACKGROUND AND CORPORATE ORGANIZATION
GENERAL
Herbalife International, Inc. (the "Company") markets weight management
products, food and dietary supplements and a line of personal care products
worldwide through a network marketing system. The Company emphasizes the herbs
and other natural ingredients in its 77 products in order to appeal to consumer
demand for products including such ingredients. As of February 28, 1997, the
Company conducts business in 34 countries located in The Americas, Europe and
Asia/Pacific Rim. Retail sales derived from The Americas, Europe and
Asia/Pacific Rim represented 32.5%, 35.9% and 31.6%, respectively, of the
Company's total retail sales for the year ended December 31, 1996.
The Company has experienced substantial growth in retail sales and net income in
recent years. From 1992 to 1996, the Company's retail sales grew from
$405.1 million to $1,200.1 million, representing a compound annual growth rate
of 31.2%, and the Company's net income grew from $20.1 million to $44.8 million,
representing a compound annual growth rate of 22.2%.
The Company's products are marketed exclusively through a network marketing
system. This system enables the Company's independent distributors to earn
profits by selling Herbalife products to retail consumers or other distributors.
Distributors may also develop their own distributor organizations by sponsoring
other distributors to do business in any market where the Company operates,
entitling the sponsors to receive royalties and bonuses on product sales within
their downline organizations.
Management believes that Herbalife's network marketing system is ideally suited
to its products, which emphasize a healthy lifestyle, because sales of such
products are strengthened by ongoing personal contact between retail consumers
and distributors, many of whom use the Company's products themselves. The
Company's network marketing system appeals to a broad cross-section of people
throughout the world, particularly those seeking to supplement family income,
start a home business or pursue employment opportunities other than
conventional, full-time employment.
HISTORY AND ORGANIZATION
The Company began operations in February 1980 as a California limited
partnership and operated in that form through December 1985, with the exception
of an interim period from October 1981 through August 1983 when the business was
operated through a California corporation. In January 1986, the Company's
business was transferred from the California limited partnership to its
corporate general partner, Herbalife International of America, Inc. ("Herbalife
of America"). In November 1986, Herbalife of America was acquired in a
stock-for-stock reorganization by Sage Court Ventures, Inc. ("Sage Court"). As
a result of the acquisition, Herbalife of America became a wholly-owned
subsidiary of Sage Court and the former stockholders of Herbalife of America
acquired a controlling interest in Sage Court. Sage Court's name was formally
changed to Herbalife International, Inc. in December 1986.
In October 1993, the Company and certain selling stockholders sold a total of
6,047,000 shares of Common Stock in a Public Offering (the "1993 Offering").
The Company issued and sold 2,647,000 shares as part of this transaction.
Herbalife International, Inc. operates through 39 wholly-owned domestic and
foreign subsidiaries. Except as the context otherwise requires, references to
"Herbalife" and the "Company" include Herbalife International, Inc. and its
operating subsidiaries.
EXECUTIVE OFFICES
The Company's executive offices are located at 1800 Century Park East, Los
Angeles, California 90067. The Company's telephone number is (310) 410-9600.
GROWTH STRATEGY
The Company's strategy for growth consists of the following three principal
elements:
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EXPAND INTO NEW MARKETS. The opening of new markets is an essential component
of the Company's business strategy. From January 1, 1992 through December 31,
1996, the Company has commenced operations in 24 new countries, consisting of
four in The Americas, 15 in Europe and five in Asia/Pacific Rim. During 1996,
these countries contributed $771.8 million of retail sales, representing 64.3%
of the Company's total retail sales. The Company believes there are numerous
additional markets in which its network marketing system and products should
prove successful. The Company plans to open several new markets in 1997 and in
1998.
EXPAND PRODUCT OFFERINGS. The Company is committed to expanding its product
line by developing and offering new products and introducing existing
products into markets where they are not currently offered. Expansion of
product offerings is designed to create enthusiasm among distributors and
serve as a promotional tool in selling other products. During 1997, the
Company intends to introduce several new products, including a new weight
management program and new personal care products. In addition, the Company
will continue its strategy of systematically introducing its most popular
existing products into markets where they are not currently offered (subject
to its ability to reformulate its products as necessary to obtain required
regulatory approvals).
ENHANCE SALES IN CERTAIN EXISTING MARKETS. Management will continue to seek to
enhance sales in the Company's existing markets. The Company intends to focus
initially on the United States and certain other markets, such as France,
Germany, Italy and Spain, where the Company has experienced a sales trend
characterized by an initial period of rapid sales growth followed by a decline
in sales. See "--Geographic Areas of Operations." Initiatives designed to
enhance sales in these markets will include the creation of new regional
strategy and planning groups, regular Company-sponsored and country-specific
training and motivational events and teleconferences, the hiring of additional
distributor support representatives, the introduction in each targeted
international market of up to five additional products not previously offered,
and the opening of new, more convenient distributor service centers in the
targeted international markets.
PRODUCT OVERVIEW
The Company's products include weight management products, food and dietary
supplements, personal care products and educational and promotional materials.
The Company currently markets 77 products, exclusive of variations in product
flavors, reformulations of products to satisfy regulatory requirements within a
particular country or similar variations of the Company's basic product line. A
limited number of the Company's personal care products are classified in the
U.S. as Over the Counter ("OTC") drugs.
The following chart summarizes the number of products offered by the Company in
its principal product categories as of December 31, 1996 and retail sales
information by product category during the indicated periods.
PRODUCT SALES BY CATEGORY
(Dollars in Thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
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1994 1995 1996
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Percent of Percent of Percent of
Product Category Total Retail Total Retail Total Retail
(Number of Products in Category) Retail Sales Sales Retail Sales Sales Retail Sales Sales
- -------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Weight Management(14) $721,450 81.6% $694,269 75.2% $889,513 74.1%
Food and Dietary Supplements(22) 86,779 9.8% 86,714 9.4% 134,829 11.2%
Personal Care Products(41)* 26,605 3.0% 107,385 11.6% 115,439 9.6%
Other** 49,224 5.6% 35,276 3.8% 60,363 5.1%
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TOTAL $884,058 $923,644 $1,200,144
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</TABLE>
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* Includes a limited number of products that are classified in the U.S. as
OTC drugs.
** Includes distributor kits and other educational and promotional materials.
Such materials are regularly developed and enhanced by the Company and, as a
result, the number of such materials is not presented.
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The following chart sets forth the number of the Company's products available as
of December 31, 1996 by category in each of the Company's markets as of that
date.
NUMBER OF PRODUCTS OFFERED BY CATEGORY
(AS OF DECEMBER 31, 1996)
<TABLE>
<CAPTION>
NUMBER OF
NUMBER OF FOOD AND
WEIGHT DIETARY NUMBER OF TOTAL
MANAGEMENT SUPPLEMENT PERSONAL CARE NUMBER OF
YEAR PRODUCTS PRODUCTS PRODUCTS PRODUCTS
COUNTRY ENTERED(1) (14 IN TOTAL) (22 IN TOTAL) (41 IN TOTAL) (77 IN TOTAL)
- ------------------------------ ------------- ---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
THE AMERICAS
United States . . . . . . 1980 14 22 36 72
Canada. . . . . . . . . . 1982 7 6 33 46
Mexico. . . . . . . . . . 1989 11 9 20 40
Dominican Republic. . . . 1994 6 0 0 6
Venezuela . . . . . . . . 1994 5 0 0 5
Argentina . . . . . . . . 1994 6 0 10 16
Brazil. . . . . . . . . . 1995 6 0 0 6
EUROPE
United Kingdom. . . . . . 1983 6 7 36 49
Israel. . . . . . . . . . 1989 6 2 10 18
Spain . . . . . . . . . . 1989 6 1 33 40
France. . . . . . . . . . 1990 6 0 34 40
Germany . . . . . . . . . 1991 4 0 34 38
Italy . . . . . . . . . . 1992 6 1 34 41
Portugal. . . . . . . . . 1992 5 1 34 40
Czech Republic. . . . . . 1992 6 0 10 16
Netherlands . . . . . . . 1993 6 0 38 44
Belgium . . . . . . . . . 1994 6 1 34 41
Poland. . . . . . . . . . 1994 5 0 6 11
Denmark . . . . . . . . . 1994 7 0 34 41
Sweden. . . . . . . . . . 1994 7 1 34 42
Russia. . . . . . . . . . 1995 8 4 10 22
Switzerland . . . . . . . 1995 2 0 26 28
Austria . . . . . . . . . 1995 2 1 34 37
Norway. . . . . . . . . . 1995 4 0 28 32
Finland . . . . . . . . . 1995 7 0 25 32
South Africa. . . . . . . 1995 6 0 32 38
Greece. . . . . . . . . . 1996 2 0 32 34
ASIA/PACIFIC RIM
Australia . . . . . . . . 1982 7 7 28 42
New Zealand . . . . . . . 1988 8 6 38 52
Hong Kong . . . . . . . . 1992 5 0 28 33
Japan . . . . . . . . . . 1993 6 1 21 28
Philippines . . . . . . . 1994 7 0 0 7
Taiwan. . . . . . . . . . 1995 4 0 10 14
South Korea . . . . . . . 1996 2 1 0 3
</TABLE>
___________
(1) Throughout the Report, "entering", "opening", "commencing operations" or
"doing business" in a market or country means that the Company has obtained
either regulatory approval of, or the favorable opinion of local legal
counsel with respect to, its network marketing system, has obtained all
requisite regulatory approvals of at least one product and has commenced
sales and shipment of that product within the market or country. With
respect to Japan, from 1989 through 1992, the Company operated under a
licensing arrangement in Japan and reported license fees with respect
thereto as revenue. Subsequently, in 1993, the Company formed a new
Japanese subsidiary whose revenues were then included in the Company's
results of operations. Accordingly, the Company considers Japan to have
been "opened" in 1993.
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WEIGHT MANAGEMENT PRODUCTS. A majority of the Company's sales are derived from
the 14 weight management products that the Company markets as the
Thermojetics-Registered Trademark- Weight-Management System. These weight
management products include the following: (i) Formula 1, a protein powder in
four different flavors designed as a meal replacement, (ii) the four
Thermojetics-Registered Trademark- weight management tablets (original green,
green, beige and yellow), (iii) Thermojetics-Registered Trademark- Herbal
Concentrate, an herbal beverage blended from five natural botanicals, and (iv) a
variety of other nutritional products, such as Cell-U-Loss-Registered
Trademark-, Activated Fiber, N.R.G. (Nature's Raw Guarana),
Thermo-bond-Registered Trademark- and Aminogen-Registered Trademark-.
FOOD AND DIETARY SUPPLEMENTS. The Company's food and dietary supplements
include a variety of products, each containing herbs, vitamins, minerals and
other natural ingredients. Such products are sold under various names, including
Herbal-Aloe, Florafiber, Xtra-Cal, Herbalifeline, Tang Kuei Plus, Male Factor
1000, Schizandra Plus and A.M. Replenishing and P.M. Cleansing formula. In
addition, in 1996, the Company launched its Health & Fitness Program and Bulk &
Muscle Program, together with a Longetics Program designed for the needs of
mature adults, which offer various products consisting of a protein drink mix, a
multivitamin, mineral and herbal tablet and Cell Activator. In 1996, the Company
supplemented its products to meet the nutritional needs of children. These
products now consist of Kindermins-Registered Trademark-, a liquid
multivitamin/herbal formula, and Dinomins-Registered Trademark-, a chewable
vitamin tablet.
PERSONAL CARE PRODUCTS. The Company's entire personal care product line is
marketed under the name Dermajetics-Registered Trademark-, which was initially
launched in 1995. Currently, the Dermajetics-Registered Trademark- product line
consists of the following products: The Skin Survival Kit, consisting of a day
and night moisturizer, a deep cleaning facial mask and a hydrating eye gel, all
packaged in a cosmetic bag; Parfums Vitessence-TM-, consisting of six eau de
toilettes, three for men and three for women; Nature's Mirror-TM-, consisting of
a cleanser, toner and moisturizer for each of three different skin types; Good
Hair Day, consisting of seven hair care products; Ocean Currents, consisting of
three bath products; Aroma Vie, consisting of nine aromatic soaps and oils; and
other specialty personal care products, including Herbal Aloe Gel, Super APR
(Arthritis Pain Relief) and Body Toning Cream.
EDUCATIONAL AND PROMOTIONAL MATERIALS. The Company also sells distributor kits,
which an individual must purchase (at a worldwide average cost of approximately
$89 per kit) in order to become a distributor of the Company, as well as other
educational and promotional materials. Such materials include sales aids,
informational videotapes and cassette recordings. Sales of distributor kits are
not subject to distributor allowances (i.e., the Company receives the entire
retail sales amount from the sale of distributor kits).
PRODUCT MANUFACTURING AND DEVELOPMENT. The Company expands its product line
through the development of new products. New product ideas are derived from a
number of sources, including trade publications, scientific and health journals,
the Company's executives and consultants and outside parties. In advance of
introducing products into its markets, local counsel and other representatives
retained by the Company investigate product formulation matters as they relate
to regulatory compliance and other issues. The Company's products are then
reformulated to suit both the regulatory and marketing requirements of the
particular market. See "--Regulation."
All of the Company's weight management products and food and dietary supplements
are manufactured by outside companies. Raven Industries, Inc. ("Raven")
manufactures the Company's powder products, and D&F Industries, Inc. ("D&F")
manufactures substantially all of the Company's tablet and capsule products,
including Activated Fiber-TM-, one of the Company's tablet products, pursuant to
a license agreement with Dynamic Products, Inc. ("Dynamic"). Except with respect
to certain research and development related to its personal care product line,
the Company does not currently maintain its own product research, development
and formulation staff and relies on Raven, D&F and other outside manufacturers
for the development of such products. When the Company, one of its consultants
or another party (including, in many instances, Raven or D&F) identifies a new
product concept or when an existing product must be reformulated for
introduction into a new or existing market, the new product concept or
reformulation project is generally submitted to D&F or Raven for technological
development and implementation.
D&F and Raven have granted the Company the exclusive right to market
any product which the Company purchases from these suppliers. In addition,
the Company has obtained or has applications pending for trademark
registration of certain of its tradenames in certain jurisdictions. See
"--Trademarks." However, there can be no assurance that another company will
not replicate one of the Company's products.
The Company's business relationship with Raven and D&F represents an important
source of income to these manufacturers, as sales to the Company comprise a
substantial portion of the total sales of Raven and D&F. In May 1993, the
Company entered into requirements contracts with Raven, D&F and Dynamic.
Pursuant to these contracts, each manufacturer has agreed, among other things,
not to sell the products sold to the Company to third parties, and the Company
has agreed to purchase all of its requirements for powder products from Raven
and all of its requirements for tablet, capsule, liquid, cream and lotion
products from D&F or Dynamic, to the extent each such manufacturer is capable or
becomes capable of manufacturing such products. The manufacturers have waived
that requirement as it relates to certain personal care products. The contracts
also provide Raven, D&F and Dynamic a right of first refusal to establish any
manufacturing facility outside of North America that the Company proposes to
develop or acquire and 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.
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The Company's contracts with Raven, D&F and Dynamic are due to expire in
January 1998, subject to automatic extension on the same terms for a period
of five years unless notice to the contrary is provided by either party no
later than six months prior to expiration. The Company is currently
negotiating new contracts with Raven, D&F and Dynamic. However, there can be
no assurance that Raven and D&F will continue to provide the product
manufacturing, research, development and formulation services that they have
in the past. Further, the Company currently anticipates that, even assuming
new contracts with Raven, D&F and Dynamic are entered into, such contracts
will not be exclusive requirements contracts as in the past. As a result, the
Company believes that, under any circumstances, it will be required to
arrange for alternative sources of supply for products within each of its
product categories. The Company interacts regularly with outside third party
suppliers (E.G., with respect to the personal care line) regarding product
manufacturing. As a result, and based upon progress to date, the Company
believes that it has or can obtain in a timely manner alternative sources of
supply for substantially all of its weight management products and food and
dietary supplements. The Company has commenced the process of identifying and
evaluating alternative sources of supply for weight management products and
food and dietary supplements in order to supplement or replace, as necessary,
the manufacturing and related services currently provided by Raven, D&F and
Dynamic.
Two individuals (not affiliates of the Company) are the principal stockholders
of each of Raven, D&F and Dynamic. Mark Hughes, the Company's principal
stockholder, Chairman of the Board, Chief Executive Officer and President, owns
a one-third ownership interest in Raven and a one-fifth ownership interest in
Dynamic.
The Company maintains a staff for the research and development of new personal
care products. Information and specifications with respect to products currently
in the personal care product line are made available to outside manufacturers on
a confidential basis and for the limited purpose of manufacturing these products
for the Company. Manufacturers of certain of the Company's personal care
products include the European companies BCM Cosmetiques S.A., formerly Croda
Cosmetique France S.A., and Abodino S.A. and the U.S. company Thibiant
International Inc. The European manufacturers are supplied components by
Herbalife at no charge, then procure the raw materials, compound the products
and fill the supplied components. The U.S. manufacturer procures the raw
materials and the components, compounds the product and fills the components.
The Company's arrangement with the manufacturers can be terminated by either
party upon the completion of any outstanding purchase orders.
PRODUCT RETURN AND BUY-BACK POLICIES. Generally, the Company's products include
a customer satisfaction guarantee. Within thirty days of purchase, any customer
who is not satisfied with an Herbalife product for any reason may return it or
any unused portion to the distributor from whom it was purchased for a full
refund from the distributor or credit toward purchase of another Herbalife
product. Distributors may obtain replacements from the Company for products
returned to them by consumers if they return such products to the Company on a
timely basis. In addition, in most jurisdictions, the Company maintains a
buy-back program pursuant to which it will repurchase products sold to a
distributor provided that the distributor resigns from the Company, returns the
product in marketable condition within twelve months of original purchase and
meets certain documentation and other requirements. The Company believes this
buy-back policy addresses a number of the regulatory compliance issues
pertaining to network marketing systems. See "Regulation--Network Marketing
System." Historically, product returns and buy-backs have not been significant,
averaging 0.7% of annual retail sales during the last five years.
RECENT REGULATORY DEVELOPMENTS. The development and marketing of the
Thermojetics-Registered Trademark- weight management tablets (original green,
green, beige and yellow) and other products in the Thermojetics-Registered
Trademark- line have contributed significantly to the Company's retail sales.
One of the ingredients in the Thermojetics-Registered Trademark- original green
herbal tablet is a Chinese herb, Ma Huang, which contains naturally-occurring
ephedrine in small quantities. Ephedrine products have been the subject of
adverse publicity in the United States and other countries relating to alleged
harmful effects, including the deaths of several individuals. Currently, the
Company offers the Thermojetics-Registered Trademark- original green herbal
tablet only in the United States (except in certain states in which regulations
may prohibit or restrict the sale of such product). On April 10, 1996, the FDA
issued a statement warning consumers not to purchase or ingest dietary
supplements containing natural sources of ephedrine that are claimed to produce
certain effects (none of which are claimed by the Company's products), and the
FDA stated that it intended to issue a proposed regulation regarding
ephedrine-containing products by December 31, 1996. However, no proposal has
been issued to date. There can be no assurance that the FDA will not seek to
impose additional regulations, possibly prohibiting, limiting
6
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potencies or placing other restrictions on the sale of such products. In
addition, during the third quarter of 1995, the Company received inquiries from
certain governmental agencies within Germany and Portugal relating to the
Company's product, Thermojetics-Registered Trademark- Instant Herbal Beverage,
which does not contain Ma Huang. The inquiries related to the caffeine content
of the product and the status of the product as an "instant tea," which was
disfavored by the regulators, versus a "beverage." The sale of this product in
these countries was subsequently suspended by the Company at the request of the
regulators. The Company may in the future attempt to reintroduce the product as
a "beverage" in one or both of these markets.
NETWORK MARKETING SYSTEM
The Company's products are distributed exclusively through a network marketing
system consisting of an extensive network of distributors. Distributors are
generally independent contractors who purchase products directly from the
Company or from other distributors for resale to retail consumers and other
distributors. Distributors may elect to work on a full-time or part-time basis.
The Company believes that its network marketing system appeals to a broad
cross-section of people worldwide, particularly those seeking to supplement
family income, start a home business or pursue employment opportunities other
than conventional, full-time employment, and that a majority of its distributors
therefore work on a part-time basis. The Company believes that its network
marketing system is ideally suited to marketing its products because sales of
such products are strengthened by ongoing personal contact between retail
consumers and distributors, many of whom use the Company's products themselves.
The Company encourages its distributors to use the Company's products and to
communicate the results of their use of such products to their retail customers.
Distributors' earnings are derived from several sources. First, distributors may
earn profits by purchasing the Company's products at wholesale prices (which are
discounted 25% to 50% from suggested retail prices depending on the
distributor's level within the Company's distributor network and whether the
distributor has registered for Herbalife Advantage Program purchases) and
selling the Company's products to retail customers at retail prices. Second,
distributors may earn profits by selling products to other distributors who do
not qualify for the same level of discount as the selling distributor. Third,
distributors who sponsor other distributors and establish their own distributor
organizations may earn royalties of 5% to 15% on product sales up to three
levels down within their distributor organization and production bonuses of 2%
to 6% on product sales within their downline organizations (except with respect
to sales generated by distributors who have reached the "Global Expansion Team"
level or higher). Combining these sources of earnings and including
participation in the President's Team bonus (as described below), the Company's
total "pay-out" on products subject to distributor royalties and overrides is
approximately 68% of the Company's suggested retail sale price (i.e. 50%
distributor allowance plus up to 22% of suggested retail sales prices in royalty
overrides and similar bonuses, less a handling fee charged to distributors by
the Company).
Distributors earn the right to receive royalties and production bonuses upon
attaining the level of supervisor and above. Once a distributor becomes a
supervisor, he or she has an incentive to qualify (by earning specified amounts
of royalties) as a member of the Global Expansion Team, the Millionaire Team or
the President's Team and thereby receive higher production bonuses (2%, 4% and
6%, respectively). The Company believes that the right of distributors to earn
royalties and production bonuses contributes significantly to the Company's
ability to retain its most productive distributors.
To become a distributor, a person must be sponsored by an existing distributor
and must purchase a distributor kit from the Company (except in South Korea,
where there is no charge for a distributor kit). To become a supervisor or
qualify for a higher level, distributors must purchase a certain amount of the
Company's products or earn certain amounts of royalties during specified time
periods and must re-qualify for such levels once each year. To attain supervisor
status, generally, a distributor must purchase, either from the Company or other
distributors, products representing at least 4,000 volume points in one month or
2,500 volume points in two consecutive months (volume points are point values
assigned to each of the Company's products that are equal in all countries and
are based on the suggested retail price of U.S. products). Supervisors may then
attain higher levels (I.E., the Global Expansion Team, the Millionaire Team or
the President's Team) by earning increasing amounts of royalties based on
purchases by distributors within their organizations. Supervisors contribute
significantly to the Company's sales and certain key supervisors who have
attained the highest levels within the Company's distributor network are
responsible for generating a substantial portion of the Company's sales and for
recruiting a substantial number of the Company's distributors. The following
table sets forth the approximate number of the Company's supervisors at the
dates indicated:
7
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<TABLE>
<CAPTION>
FEBRUARY 28,*
-------------
1991 1992 1993 1994 1995 1996 1997
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Approximate Number of Supervisors. . . . 12,000 18,000 41,000 75,000 90,000 99,000 115,000
</TABLE>
- ----------
* Every February 28th (which is the end of the first supervisor qualification
period of each year), the Company deletes from the rank of supervisor those
supervisors who did not satisfy the supervisor qualification requirements
during the preceding twelve months. Distributors who meet the supervisor
requirements at any time during the year are promoted to supervisor status
at such time (including any supervisors who were deleted on February 28th
but who subsequently requalified). The Company relies on distributors'
certifications as to the amount and source of their product purchases from
other distributors. Although the Company applies certain review procedures
with respect to such certifications, they are not directly verifiable by
the Company.
The Company also has two compensation and incentive programs designed to
motivate distributors at both the most senior and junior levels within the
Company's distributor network. The Company's most senior distributors consist of
approximately 260 distributors (as of December 31, 1996) who comprise the
President's Team and who work closely with Mark Hughes to develop and implement
new initiatives and strategies for increasing sales and distributor productivity
throughout the Company's entire distributor organization. Qualifying President
Team members have the opportunity to participate in the President's Bonus, which
for 1996 consisted of a total available awards package of one percent of the
Company's total product retail sales, or approximately $12 million. The
distribution of the President's Bonus is determined by Mark Hughes and is based
in part upon each President Team member's participation in corporate-sponsored
training and motivational events. In this manner, the Company attempts to
involve its most senior distributors in the development and growth of the
Company in order to support the sales, training, motivation and strategic
planning efforts of Mark Hughes.
For the Company's most junior distributors, those who have not yet attained
supervisor status, the Company instituted a "Success Builder" program. This
program permits a distributor who purchases products representing 1,000 volume
points in one month to obtain a 42% distributor allowance from suggested retail
prices on the Company's products, rather than the standard 25%. In addition, in
1996, the Company introduced the Herbalife Advantage Program ("HAP"), which uses
a product brochure that enables the Company's junior distributors to obtain an
extra 10% distributor allowance over the standard 25% and to order products by
individual unit (rather than by cases) to better suit their inventory and usage
needs. The Success Builder and HAP programs are designed to provide incentives
to distributors who are in the initial stages of building distributor
organizations and to encourage them to reach supervisor status. In addition to
these programs, the Company periodically offers a variety of special promotions
related to particular products or sales periods, involving special cash bonuses
and other awards, such as "Get-A-Way" vacations.
The Company seeks to expand its distributor base in each market by offering
distributors attractive compensation opportunities. The Company believes its
international sponsorship program provides a significant advantage to its
distributors as compared with distributors in certain other network marketing
organizations because the program permits distributors in any country to sponsor
distributors in other countries (where the Company is licensed to do business
and where the Company has obtained required product approvals) and to earn the
same level of royalties and bonuses on sales by those distributors as if both
distributors resided in the same country.
The Company maintains a computerized system for processing distributor orders
and calculating distributor royalties and bonus payments which enables it to
remit such payments promptly to distributors. The Company believes that prompt
remittance of royalties is vital to maintaining a motivated network of
distributors and that its distributors' loyalty to the Company has been enhanced
by the Company's history of consistently making royalty and bonus payments on a
scheduled basis.
8
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GEOGRAPHIC AREAS OF OPERATIONS
The following chart sets forth the countries in which the Company currently
operates, the year operations were commenced in each country and retail sales
information by country during the past five years.
<TABLE>
<CAPTION>
RETAIL SALES BY COUNTRY
Country Year Total Retail Sales ( in thousands )
----------------------------------------------------------------------
(1) Entered 1992 1993 1994 1995 1996
- ---------------------- --------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
United States 1980 $86,258 $246,984 $294,987 $333,595 $279,596
Canada 1982 4,815 10,100 10,789 12,042 13,848
Mexico 1989 11,088 16,784 25,422 15,125 11,590
Dominican Republic (2) 1994 2,500 101 33
Venezuela 1994 1,527 11,152 5,568
Argentina 1994 19,061 10,006 3,185
Brazil 1995 24,183 76,192
--------- ---------- ---------- ---------- ----------
THE AMERICAS: $102,161 $273,868 $354,286 $406,204 $390,012
--------- ---------- ---------- ---------- ----------
United Kingdom 1983 $9,770 $24,930 $30,769 $15,296 $12,487
Israel (3) 1989 3,831 30,359 73,278 30,133 8,419
Spain 1989 87,469 47,662 30,733 15,730 9,792
France 1990 96,773 97,306 46,968 13,129 12,379
Germany 1991 66,775 83,068 159,482 115,555 54,340
Italy 1992 903 77,842 72,009 56,687 54,449
Portugal 1992 4,075 13,328 11,073 8,934 3,097
Czech Republic 1992 9,938 10,005 24,423 15,112 13,733
Netherlands 1993 7,009 17,581 18,237 15,248
Belgium 1994 1,965 3,775 2,370
Poland 1994 792 6,238 16,218
Denmark 1994 2,377 11,263 3,747
Sweden 1994 1,799 17,845 16,488
Russia (4) 1995 29,593 142,078
Switzerland 1995 4,911 14,412
Austria 1995 3,134 7,385
Norway 1995 367 8,279
Finland 1995 300 14,702
South Africa (5) 1995 7,707 21,497
Greece 1996 227
--------- ---------- ---------- ---------- ----------
EUROPE: $279,534 $391,509 $473,249 $373,946 $431,347
----------- ----------- ----------- ------------ -----------
Australia 1982 $20,419 $20,602 $29,155 $30,803 $24,059
New Zealand 1988 2,695 2,497 3,206 2,535 1,799
Hong Kong 1992 283 3,853 5,323 10,783 11,698
Japan (6) 1993 686 18,759 81,730 311,117
Philippines 1994 80 13,219 1,935
Taiwan 1995 4,424 26,226
South Korea (7) 1996 1,951
--------- ---------- ---------- ---------- ----------
ASIA/PACIFIC RIM: $23,397 $27,638 $56,523 $143,494 $378,785
--------- ---------- ---------- ---------- ----------
TOTAL RETAIL SALES $405,092 $693,015 $884,058 $923,644 $1,200,144
--------- ---------- ---------- ---------- ----------
--------- ---------- ---------- ---------- ----------
</TABLE>
9
<PAGE>
___________
(1) The Company records sales data based on the country from which distributor
orders are shipped by the Company. Sales by distributors to other
distributors or retail consumers may occur in other countries, although
such sales generally violate geographic limitations imposed by the Company
on product sales.
(2) Sales in the Dominican Republic are shipped from the United States.
(3) The Company initiated operations in Israel in 1989 through a licensing
arrangement that was terminated in 1990. In 1991, the Company began
operating in Israel through a wholly-owned subsidiary. Accordingly, sales
data for Israel are reported only for 1991 and subsequent periods.
(4) The Company operates through various import/export companies located in
Russia to conduct transactions in the Company's products with Russian
distributors.
(5) Because sales in South Africa are not large enough to be treated as a
separate segment, they are included with sales from the European region.
(6) In 1989 through 1992 the Company operated under a licensing arrangement in
Japan and recorded license fees with respect thereto as revenue. A new
Japanese subsidiary was formed in November 1993 whose results from that
date are reported above. 93.0% of the outstanding capital stock of the
Japanese subsidiary is owned by the Company, with the remainder owned by
certain officers and directors of the Company. In addition, the Company has
begun steps to pursue an initial public offering of shares of the Japanese
subsidiary in Japan.
(7) The Company initiated operations in South Korea in the fourth quarter of
1996.
GEOGRAPHIC SALES TRENDS. The opening of new markets is an essential component
of the Company's business strategy. From January 1, 1992 through December 31,
1996, the Company commenced operations in 24 new countries. During 1996, these
countries contributed $771.8 million of retail sales, representing 64.3% of the
Company's total retail sales. Consistent with its growth strategy, the Company
currently plans to enter up to four new markets in 1997 and up to six new
markets in 1998. Potential new markets currently include Chile, China, India,
Indonesia, Malaysia, Thailand, Turkey and Ukraine.
After entering a new country, the Company has generally experienced an initial
period of rapid growth in sales as new distributors were recruited, followed by
a decline in sales. The Company believes that a significant factor affecting
these markets has been the opening of other new markets within the same
geographic region or with the same or similar language or cultural bases and the
corresponding tendency of some distributors to focus their attention on the
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 markets.
Another significant factor contributing to such sales declines is the adverse
publicity that sometimes arises when the Company experiences rapid growth within
a market, thus drawing the attention of the media and the Company's competitors.
The Company believes such unfavorable press reports are generally based upon a
lack of familiarity with the Company and its network marketing system and often
originate from competitive forces in the local market. For instance, in France
in late 1994 through 1995, certain reports erroneously alleged that the Company
was in some manner affiliated with a disfavored religious group. In other cases,
including a situation in France that resulted in the arrest of certain Herbalife
distributors, adverse publicity has arisen from allegations of tax
improprieties, which typically occur when a country applies its tax laws for the
first time to a sales and distribution system that is relatively new to that
country, as is often the case with the Company's network marketing system. See
"--Regulation--Transfer Pricing and Similar Regulations." The effect of
occasional adverse publicity has at times also led to increased regulatory
scrutiny in certain countries, which may also have an adverse effect on sales.
For example, during the third quarter of 1995, the Company received inquiries
from certain governmental agencies within Germany and Portugal related to the
Company's product, Thermojetics-Registered Trademark- Instant Herbal Beverage.
The inquiries related to the caffeine content of the product and the status of
the product as an "instant tea," which was disfavored by the regulators, versus
a "beverage." The sale of this product in these countries was subsequently
suspended by the Company at the request of the regulators. The Company may in
the future attempt to reintroduce the product as a "beverage" in one or both of
these markets.
In 1997, the Company intends to initiate new strategies designed to enhance
sales in the countries in which the sales trend described above has occurred,
initially focusing efforts on France, Germany, Italy and Spain, as well as in
the United States. These strategies include the creation of regional strategy
and planning groups, regular Company-sponsored and country-specific promotional
events and teleconferences in order to provide additional training and
motivational support, the hiring of additional distributor support
representatives to support marketing efforts, the addition in each targeted
international market of up to five products that were previously unavailable in
such markets, and the opening of new, more
10
<PAGE>
convenient distributor service centers in the targeted international markets in
connection with the reconfiguration of the Company's European distribution
infrastructure.
THE AMERICAS. Total retail sales in The Americas decreased $16.2 million or
4.0% in 1996 versus 1995. Brazil, which was opened in the fourth quarter of
1995, contributed $76.2 million of retail sales during 1996. Despite the
increase in retail sales in Brazil relative to 1995, the Company has experienced
declining quarter to quarter retail sales in Brazil during the course of 1996.
Retail sales in the United States decreased 16.2% to $279.6 million during 1996
from $333.6 million in the comparable 1995 period. The Company believes that a
portion of this decrease is attributable to the fact that, prior to the opening
of Brazil and Russia, certain retail sales in the U.S. were for products
purchased in the U.S. but re-directed to Brazil and Russia by distributors.
Following the opening of these markets, such sales shifted to Brazil and Russia.
The Company will seek to enhance U.S. sales during 1997 through the various
initiatives described above. See "--Geographic Sales Trends."
EUROPE. Total retail sales in Europe increased $57.4 million or 15.4% in 1996
versus 1995. Sales increases in Austria, Finland, Norway, Poland, Russia, South
Africa and Switzerland were offset in part by sales decreases in Germany and
Israel of $61.2 million and $21.7 million, respectively, together with sales
decreases in Belgium, Denmark, the Czech Republic, France, Italy, the
Netherlands, Portugal, Spain, Sweden and the United Kingdom. In addition to the
factors affecting sales in existing markets generally as discussed above, the
Company believes the sales decreases in these countries were attributable to
lengthy regulatory approval processes that have impeded the introduction of the
Company's most popular existing products, the reduction in activity levels of
certain key distributors in those markets and resistance to network marketing,
which resistance appears to be particularly strong in Germany and France. In
Russia, however, the Company has experienced significant retail sales increases,
despite a difficult business environment as a result of the political, economic
and social instability in that country. Thus far, the difficult business
environment has prevented the Company from establishing a physical presence in
Russia (through a sales or distribution center) and instead has required the
Company to rely on various import/export companies located in Russia to conduct
transactions in the Company's products with Russian distributors. As a result,
the Company has been required to extend credit to certain import/export
companies. The Company plans to closely monitor activities in Russia to
determine the best means of conducting business with its Russian distributors as
events unfold in that country.
ASIA/PACIFIC RIM. Total retail sales in Asia/Pacific Rim grew $235.3 million or
164.0% in 1996 versus 1995. This $235.3 million increase included retail sales
increases of $229.4 million in Japan. The growth in Japan resulted from new
products and marketing initiatives, and the Company believes that its success in
Japan is attributable to the personal nature of retail sales in the Japanese
market and the cultural acceptance of the Company's network marketing system in
such an environment.
NEW MARKET EXPANSION PROGRAM. The Company engages in a structured and thorough
analysis of potential new markets, including analysis of regulatory conditions,
product approval procedures, competitive forces, synergies between new and
existing countries and distributor presence or interest in new markets, before
selecting markets to enter. When the Company decides to enter a new market, it
first hires local legal counsel with expertise in the product approval process
to help ensure that the Company's network marketing system and products comply
with all applicable regulations and that the Company's profits may be
expatriated. In addition, local counsel helps to establish favorable public
relations in the new market by acting as an intermediary between the Company and
local regulatory authorities, public officials and business people. Local
counsel is also responsible for explaining the Company's products and product
ingredients to appropriate regulators and, when necessary, arranging for local
technicians to conduct required ingredient analysis tests of the Company's
products. In recent years, the Company has expanded its hiring of local firms
with experience in governmental relations and public relations prior to opening
a market in order to ensure a more favorable business environment upon entering
the market.
Where regulatory approval in a foreign market is required, the Company's local
counsel work with regulatory agencies to confirm that all of the ingredients of
the Company's products are permissible within the new market. During the
regulatory compliance process, the Company may alter the formulation, packaging
or labeling of its products to conform to applicable regulations as well as
local variations in customs and consumer habits, and the Company may modify
certain aspects of it network marketing system as necessary to comply with
applicable regulations. Where reformulations of the Company's principal weight
management products are required, the Company has historically found substitute
or replacement ingredients to be readily available, although there can be no
assurance in this regard in the future. Where regulatory approval in a foreign
market is not required, the Company obtains the favorable opinion of local
counsel as to compliance with all applicable regulations. See "--Regulation."
Following completion of the regulatory compliance phase, the Company undertakes
the steps necessary to meet the operational requirements of the new market. The
Company has recently developed a centralized distribution and telephone ordering
system. In the majority of its new markets, the Company establishes a storefront
sales center in one or more major
11
<PAGE>
cities and provides for product purchases by telephone. Product is shipped to
the purchaser from a warehouse located in the general geographic region. In
addition, the Company initiates plans to satisfy the inventory, personnel and
transportation requirements of the new market, and the Company modifies its
distributor manuals, cassette recordings, video cassettes and other training
materials as necessary to be suitable for the new market. In certain instances
where the Company has achieved rapid sales growth in a new market, such as in
Japan and Brazil, the Company has experienced inventory shortages as a result of
the large demand for the Company's products.
Although the Company intends to expand into new markets, there can be no
assurance that the Company can open markets on a timely basis or that such new
markets will prove to be profitable. Significant regulatory and legal
requirements must be satisfied before marketing can begin in any new market. In
addition, expansion of the Company's operations into new markets entails
substantial working capital and capital expenditure requirements associated with
both the regulatory compliance and operations phases of the process. The
lead-time and costs associated with opening anticipated new markets may
significantly exceed those of entering new markets in the past due to greater
regulatory requirements, the necessity of adapting to entirely new regulatory
systems and problems related to entering new markets with different cultural
bases and political systems from those encountered in the past. The lead-time
necessary to open a new market is generally up to two years but may be more.
PRODUCT DISTRIBUTION
The Company's weight management products, food and dietary supplements and some
personal care products are distributed to foreign markets either from the
facilities of the Company's manufacturers or from the Company's Los Angeles
distribution center. Products are distributed in the United States market from
the Los Angeles distribution center or from the Company's Memphis distribution
center. Products are generally transported by cargo ship or plane to the
Company's international markets and are warehoused in either one of the
Company's foreign distribution centers or a contracted third party warehouse and
distribution center. After arrival of the products in a foreign market,
distributors purchase the products from the local distribution center or the
associated sales center. The Company's Dermajetics-Registered Trademark-
personal care products are predominantly manufactured in France and the United
States. The products manufactured in France are shipped to a third-party
centralized warehouse facility in Strasbourg, from which delivery by ship or
plane to other international markets occurs.
Beginning in 1996 and continuing in 1997, the Company has undertaken the process
of reconfiguring its European product distribution system. As a part of this
process, the Company has reduced the number of European warehousing facilities
from nine to five and has opened new distribution sales centers. These sales
service centers are conveniently located and attractively designed in order to
encourage local distributors to meet and network with each other and learn more
about Herbalife's products, marketing system and upcoming events. In addition,
the Company has opened a central sales ordering facility in the United Kingdom
for answering and processing telephone orders from throughout Europe. Operators
at this center are capable of conversing in 17 different languages. As part of
this reconfiguration, the Company also implemented a new inventory management
system in the U.S., the U.K. and Japan. The new European system has resulted in
improved inventory management and a reduction in distribution costs in 1996 as
compared with 1995. Management anticipates that the reconfigured European
distribution system, featuring centralized distribution and telephone ordering
systems coupled with convenient storefront distributor service centers, will be
the model for developing distribution and distributor service systems in other
regions of the world.
MANAGEMENT INFORMATION AND TELECOMMUNICATIONS SYSTEMS
In order to facilitate its continued growth and support distributor activities,
the Company continually upgrades its management information and
telecommunications systems. These systems include, among other things: (i) a
centralized host computer located in the Company's Inglewood, California
Operations Center, which is linked to Herbalife's international markets through
a dedicated wide area network that provides on-line, real-time computer
connectivity and access; (ii) local area networks of personal computers within
Herbalife's markets, serving the Company's regional administrative staffs;
(iii) an international e-mail system through which Herbalife employees
communicate; (iv) a standardized Northern Telecom Meridian telecommunications
system connecting all of the Company's markets; and (v) a new inventory
management system that has recently been installed in the U.S., the U.K. and
Japan. These systems are designed to provide, among other things, financial and
operating data for management, timely and accurate product ordering, royalty
payment processing and inventory management and detailed distributor records.
Over the last three years, the Company has invested approximately $11.2 million
to enhance its computer and telecommunications systems.
12
<PAGE>
REGULATION
In both its United States and foreign markets, the Company is subject to and
affected by extensive laws, regulations, administrative determinations, court
decisions and similar constraints (as applicable, at the federal, state and
local levels) (hereinafter "regulations") including, among other things,
regulations pertaining to (i) the formulation, manufacturing, packaging,
labeling, distribution, importation, sale and storage of the Company's products,
(ii) product claims and advertising (including direct claims and advertising by
the Company as well as claims and advertising by distributors, for which the
Company may be held responsible), (iii) the Company's network marketing system,
(iv) transfer pricing and similar regulations that affect the level of foreign
taxable income and customs duties, and (v) taxation of distributors, which in
some instances may impose an obligation on the Company to collect the taxes and
maintain appropriate records.
PRODUCTS. The formulation, manufacturing, packaging, storing, labeling,
advertising, distribution and sale of the Company's products are subject to
regulation by one or more governmental agencies, including the Food and Drug
Administration ("FDA"), the Federal Trade Commission ("FTC"), the Consumer
Product Safety Commission ("CPSC"), the United States Department of Agriculture
("USDA"), the Environmental Protection Agency ("EPA") and the United States
Postal Service. The Company's activities are also regulated by various agencies
of the states, localities and foreign countries in which the Company's products
are manufactured, distributed and sold. The FDA, in particular, regulates the
formulation, manufacture and labeling of foods, dietary supplements and OTC
drugs, such as those distributed by the Company. FDA regulations require the
Company and its suppliers to meet relevant good manufacturing practice ("GMP")
regulations for the preparation, packing and storage of these products. GMP's
for dietary supplements have yet to be promulgated but are expected to be
proposed.
The 1994 Dietary Supplement Health and Education Act ("DSHEA") revises the
provisions of the Federal Food, Drug and Cosmetic Act ("FFDCA") concerning the
composition and labeling of dietary supplements and, the Company believes, is
generally favorable to the dietary supplement industry. The legislation creates
a new statutory class of "dietary supplements." This new class includes
vitamins, minerals, herbs, amino acids and other dietary substances for human
use to supplement the diet, and the legislation grandfathers, with certain
limitations, dietary ingredients that were on the market before October 15,
1994. A dietary supplement which contains a new dietary ingredient (i.e., one
not on the market before October 15, 1994) will require evidence of a history of
use or other evidence of safety establishing that it is reasonably expected to
be safe. Manufacturers of dietary supplements which make a "statement of
nutritional support" must have substantiation that the statement is truthful and
not misleading.
The majority of the products marketed by the Company are classified as dietary
supplements under the FFDCA. The labeling requirements for dietary supplements
have not been clearly established. In December 1995, the FDA issued proposed
regulations which govern the labeling of dietary supplements, including how to
declare nutritional information, how to make permissible "statements of
nutritional support" and when additional, defined terminology may be used on
dietary supplements. The proposed regulations were expected to become final at
the end of 1996; as of this date, however, no final regulations have been
issued. The proposed regulations would require the Company to revise a
substantial number of its labels at an undetermined, but likely immaterial,
expense to the Company. The FDA has informally stated that it will, subject to
public comment, withhold enforcement of these regulations until January 1, 1998.
Many states have also recently become active in the regulation of dietary
supplement products and may require the Company to modify the labeling or
formulation of certain products sold in those states.
All of the officers and directors of the Company are subject to a permanent
injunction entered in October 1986 pursuant to the settlement of an action
instituted by the California Attorney General, the State Health Director and the
Santa Cruz County District Attorney. The Company consented to the entry of this
injunction without in any way admitting the allegations of the complaint. The
injunction prevents the Company and such officers and directors from making
certain specified claims in future advertising of the Company's products and
requires the Company to implement certain documentation systems with respect to
payments to the Company's distributors. At the same time, the injunction does
not prevent the Company from continuing to make certain specified claims
concerning its products which have been and are being made, provided that it has
a reasonable basis for making such claims.
As a marketer of food and dietary supplements and other products that are
ingested by consumers, the Company is subject to the risk that one or more of
the ingredients in its products may become the subject of adverse regulatory
action. For example, one of the ingredients in the Thermojetics-Registered
Trademark- original green herbal tablet is a Chinese herb, Ma Huang, which
contains naturally-occurring ephedrine in small quantities. Ephedrine products
have been the subject of adverse publicity in the United States and other
countries relating to alleged harmful effects, including the deaths of several
individuals. Currently,
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<PAGE>
the Company offers the Thermojetics-Registered Trademark- original green herbal
tablet only in the United States (except in certain states in which regulations
may prohibit or restrict the sale of such product). In response to potential
federal regulatory proposals that may have affected the sale of the
Thermojetics-Registered Trademark- original green tablets in the United States,
the Company suspended sales of the product for approximately three months
commencing in July 1995 and introduced a reformulated herbal green tablet that
did not contain Ma Huang. When no such regulations were proposed or issued, the
Company renewed sales of Thermojetics-Registered Trademark- original green
herbal tablets in the United States in October 1995 (except in certain states in
which regulations may prohibit or restrict the sale of such product). During the
three-month suspension period, the Company did not experience a material change
in the level of sales of the reformulated Thermojetics-Registered Trademark-
green tablets versus sales of the Thermojetics-Registered Trademark- original
green tablets in the recently preceding months. However, it is possible that a
longer suspension period could have resulted in a decrease in sales of the
reformulated Thermojetics-Registered Trademark- green tablets or other products
within the Thermojetics-Registered Trademark- Weight Management System (even
though such products do not contain Ma Huang). The Thermojetics-Registered
Trademark- green tablets accounted for 2.1% and 2.5% of retail sales in 1995 and
1996, respectively, although the marketing of the Thermojetics-Registered
Trademark- weight management tablets (original green, green, beige and yellow)
and other products in the Thermojetics-Registered Trademark- line have
contributed significantly to the Company's retail sales. The Company also
previously offered the Thermojetics-Registered Trademark- original green herbal
tablet in Canada but, in response to Canadian marketing issues and regulatory
concerns, suspended sales of the product in February 1994.
The FDA has on record a small number of reports of adverse reactions allegedly
resulting from the ingestion of Ma Huang contained in the Company's
Thermojetics-Registered Trademark- original green tablet. The Company has not
received any communications from the FDA with respect to these reports. However,
many other companies manufacture products containing various amounts of Ma Huang
and the FDA has on record hundreds of reports of adverse reactions to these
products. On April 10, 1996, the FDA issued a statement warning consumers not to
purchase or ingest dietary supplements containing ephedrine that are claimed to
produce such effects as euphoria, heightened awareness, increased sexual
sensations or increased energy, because these products pose significant adverse
health risks, including dizziness, headache, gastrointestinal distress,
irregular heartbeat, heart palpitations, heart attack, strokes, seizures,
psychosis and death. The Company markets its Ma Huang product as an aid in
weight management, and not principally for any of their claims. The FDA stated
that it intended to issue a proposed regulation regarding ephedrine-containing
products by December 31, 1996; however, no proposal has been issued to date.
There can be no assurance that the FDA will not seek to impose additional
regulations, possibly prohibiting, limiting potencies or placing other
restrictions on the sale of such products. In addition, several states either
regulate or are considering regulating ephedrine-containing products as
controlled substances or are prohibiting the sale of such products by persons
other than licensed pharmacists.
There is a risk that the Company's product containing Ma Huang may become
subject to further federal, state, local or foreign laws or regulations, which
could require the Company to: (i) withdraw or reformulate its product with
reduced ephedrine levels or with a substitute for Ma Huang and/or (ii) relabel
its product with different warnings or revised directions for use and/or
(iii) not make certain statements, possibly including weight loss, with respect
to any product containing Ma Huang. Even in the absence of further laws or
regulation, the Company may elect to reformulate and/or relabel its product
containing Ma Huang. While the Company believes that its Ma Huang product could
be reformulated and relabeled, there can be no assurance in that regard or that
reformulation and/or relabeling would not have an adverse effect on sales of
such product or related products within the Thermojetics-Registered Trademark-
product line even though such products do not contain Ma Huang. It is a regular
part of the Company's business to monitor regulatory developments of this sort
in all of its markets and to determine the optimal strategy for the Company in
each instance in which such a development arises.
Some of the products marketed by the Company are considered conventional foods
and are currently labeled as such. Both this category of products and dietary
supplements are subject to the Nutrition, Labeling and Education Act ("NLEA"),
and regulations promulgated thereunder, which regulates health claims,
ingredient labeling and nutrient content claims characterizing the level of a
nutrient in the product.
A limited number of the products sold by the Company are labeled in the United
States as OTC drugs as opposed to dietary supplements, conventional foods or
personal care items. Many OTC drug products do not require pre-approval by the
FDA, but must comply with applicable OTC monographs, which prescribe permissible
ingredients and appropriate labeling language. In addition, either the Company
or its supplier must register and file annual drug listing information with the
FDA. Because the FDA could take the position that claims made with respect to
any product of the Company fall within an OTC monograph, the regulatory status
of some of the Company's products is or could become unclear. If any enforcement
were undertaken, the Company could be required to relabel or reformulate such
products, which the Company believes it could do without any material adverse
effect on the Company or the sale of such products.
In foreign markets, prior to commencing operations and prior to making or
permitting sales of its products in the market, the Company may be required to
obtain an approval, license or certification from the country's ministry of
health or comparable
14
<PAGE>
agency. Where a formal approval, license or certification is not required, the
Company nonetheless seeks a favorable opinion of counsel regarding the Company's
compliance with applicable laws. Prior to entering a new market in which a
formal approval, license or certificate is required, the Company works
extensively with local authorities in order to obtain the requisite approvals.
The approval process generally requires the Company to present each product and
product ingredient to appropriate regulators and, in some instances, arrange for
testing of products by local technicians for ingredient analysis. Such approvals
may be conditioned on reformulation of the Company's products or may be
unavailable with respect to certain products or certain ingredients. Product
reformulation or the inability to introduce certain products or ingredients into
a particular market may have an adverse effect on sales. The Company must also
comply with product labeling and packaging regulations that vary from country to
country. The Company's failure to comply with such regulations can result in,
among other things, a product being removed from sale in a particular market,
either temporarily or permanently.
The FTC, which exercises jurisdiction over the advertising of all the Company's
products, has in the past several years instituted enforcement actions against
several dietary supplement companies for false and misleading advertising of
certain products. These enforcement actions have resulted in consent decrees and
monetary payments by the companies involved. In addition, the FTC has increased
its scrutiny of the use of testimonials, which are utilized by the Company.
While the Company has not been the target of FTC enforcement action for the
advertising of its products, there can be no assurance that the FTC will not
question the Company's advertising or other operations in the future.
In certain countries, the Company may also be affected by regulations applicable
to the activities of its distributors because in some countries the Company is,
or regulators may assert that the Company is, responsible for its distributors'
conduct, or such regulators may request or require that the Company take steps
to ensure its distributors' compliance with regulations. The types of regulated
conduct include, among other things, representations concerning the Company's
products, income representations made by the Company and/or distributors, public
media advertisements (which in foreign markets may require prior approval by
regulators) and sales of products in markets in which such products have not
been approved, licensed or certified for sale. In certain markets, it is
possible that improper product claims by distributors could result in the
Company's products being reviewed or re-reviewed by regulatory authorities and,
as a result, being classified or placed into another category to which stricter
regulations are applicable. In addition, certain labeling changes might be
required.
Through its manuals, seminars and other training materials and programs, the
Company attempts to educate its distributors as to the scope of permissible and
impermissible activities in each market. The Company also investigates
allegations of distributor misconduct. However, the Company's distributors are
generally independent contractors, and the Company is not able to monitor
directly all distributor activities. As a consequence, there can be no assurance
that the Company's distributors comply with applicable regulations. Misconduct
by distributors has in the past and could again have a material adverse effect
on the Company in a particular market or in general.
The Company is unable to predict the nature of any future laws, regulations,
interpretations or applications, nor can it predict what effect additional
governmental regulations or administrative orders, when and if promulgated,
would have on its business in the future. They could, however, require the
reformulation of certain products not able to be reformulated, imposition of
additional record keeping requirements, expanded documentation of the properties
of certain products, expanded or different labeling and scientific
substantiation regarding product ingredients, safety or usefulness. Any or all
such requirements could have a material adverse effect on the Company's results
of operations and financial condition.
NETWORK MARKETING SYSTEM. The Company's network marketing system is subject to
a number of federal and state regulations administered by the FTC and various
state agencies as well as regulations in foreign markets administered by foreign
agencies. Regulations applicable to network marketing organizations are
generally directed at ensuring that product sales are ultimately made to
consumers (as opposed to other distributors) and that advancement within such
organizations be based on sales of the organizations' products rather than
investments in the organizations or other non-retail sales related criteria. For
instance, in certain markets there are limits on the extent to which
distributors may earn royalties on sales generated by distributors that were not
directly sponsored by the distributor. Where required by law, the Company
obtains regulatory approval of its network marketing system or, where such
approval is not required, the favorable opinion of local counsel as to
regulatory compliance. However, the Company remains subject to the risk that, in
one or more of its markets, its marketing system could be found not to be in
compliance with applicable regulations. Failure by the Company to comply with
these regulations could have a material adverse effect on the Company in a
particular market or in general. See "--Product Distribution."
The Company is also subject to the risk of challenges to the legality of its
network marketing system. For example, in WEBSTER V. OMNITRITION INTERNATIONAL,
INC., 79 F.3d 776 (9th Cir. 1996), the "multi-level marketing" program of
Omnitrition International, Inc. ("Omnitrition") was challenged in a class action
by certain Omnitrition distributors who alleged that Omnitrition was
15
<PAGE>
operating an illegal "pyramid scheme" in violation of federal and state laws.
The Company believes that its network marketing system would not be
classified as an illegal marketing system under the standards set forth in
the OMNITRITION case and other applicable statutes and caselaw, in part based
upon significant differences between the Company's marketing system and that
described in the OMNITRITION case. Further, it is an ongoing part of the
Company's business to monitor and respond to regulatory and legal
developments, including those that may affect its network marketing system.
However, the regulatory requirements concerning network marketing systems do not
include "bright line" rules and are inherently fact-based. An adverse
judicial determination with respect to the Company's network marketing system
could have a material adverse effect on the Company. Among other things, such
a determination could require the Company to make modifications to its
network marketing system, result in negative publicity or have a negative
impact on distributor morale. In addition, further adverse rulings by the
courts in the OMNITRITION litigation or other similar litigation could have a
material adverse effect on the Company, even if the Company's network
marketing system is not itself challenged.
TRANSFER PRICING AND SIMILAR REGULATIONS. In many foreign countries, the
Company is subject to transfer pricing regulations, restrictions on management
fees charged by the Company to its local subsidiary and similar regulations and
restrictions designed to ensure that appropriate levels of income are reported
as earned by the local subsidiary and taxed by the foreign governmental
authorities. In addition, the Company's operations in foreign countries are
subject to regulations designed to ensure that appropriate levels of customs
duties are assessed on the importation of the Company's products.
While the Company believes it is in compliance with all applicable regulations
and restrictions, it is subject to the risk that governmental authorities could
audit its transfer pricing and related practices and assert that additional
taxes are owed. For
16
<PAGE>
example, the Company is currently subject to pending audits or proposed
assessments in a number of foreign jurisdictions, including Italy, France and
Germany, involving transfer pricing issues, income taxes, value added taxes,
withholding taxes and related interest and penalties. In certain circumstances,
additional taxes, interest and penalties have been assessed, and the Company
will be required to litigate to reverse the assessments. In most instances, the
Company and its tax advisors believe that the Company has substantial defenses,
and the Company is vigorously contesting all material outstanding assessments.
In the event that such audits or assessments are concluded adversely to the
Company, the Company believes that it could generally offset or mitigate the
consolidated effect of foreign taxes required to be paid through the use of U.S.
foreign tax credits. However, depending upon the years at issue, the Company
might not be able to amend prior U.S. tax returns to obtain the benefit of such
credits. Furthermore, to the extent that the Company's operations in high tax
jurisdictions such as Japan grow disproportionately relative to the balance of
Company's operations, the Company may be unable to fully utilize its foreign tax
credits in the U.S., which could, accordingly, result in the Company paying a
higher overall effective tax rate on its worldwide operations. Because the laws
and regulations governing U.S. foreign tax credits are complex and depend, among
other things, on tax treaties with foreign nations in addition to U.S. tax laws,
there can be no assurance that the Company would in fact be able to take
advantage of any tax credits.
OTHER REGULATIONS. The Company is also subject to a variety of other
regulations in various foreign markets, including regulations pertaining to
social security assessments and value added taxes, employment and severance pay
requirements, import/export regulations and antitrust issues. As an example, in
many markets, the Company is substantially restricted in the amount and types of
rules and termination criteria that it can impose on distributors without
causing social security assessments to be payable by the Company on behalf of
such distributors and without incurring severance obligations to terminated
distributors. In some countries, the Company may be subject to such obligations
in any event.
Failure by the Company to comply with such regulations could have a material
adverse effect on the Company in a particular market or in general. Such
assertions or the effect of adverse regulations in one market could adversely
affect the Company in other markets as well by causing increased regulatory
scrutiny in those other markets or as a result of the negative publicity
generated in those other markets.
COMPLIANCE PROCEDURES. As indicated above, the Company, its products and its
network marketing system are subject, both directly and indirectly through
distributors' conduct, to numerous federal, state and local regulations both in
the United States and foreign markets. Beginning in 1985, the Company began to
institute formal regulatory compliance measures by developing a system to
identify specific complaints against distributors and to remedy any violations
by distributors through appropriate sanctions, including warnings, suspensions
and, when necessary, terminations. In its manuals, seminars and other training
programs and materials, the Company emphasizes that distributors are prohibited
from making therapeutic claims for the Company's products.
The Company's general policy regarding acceptance of distributor applications
from individuals who do not reside in one of the Company's markets is to refuse
to accept such individual's distributor application. From time to time,
exceptions to the policy are made on a country-by-country basis.
In order to comply with regulations that apply to both the Company and its
distributors, the Company conducts considerable research into the applicable
regulatory framework (typically, with the assistance of local legal counsel and
other representatives) prior to entering any new market to identify all
necessary licenses and approvals and applicable limitations on the Company's
operations in that market. The Company devotes substantial resources to
obtaining such licenses and approvals and bringing its operations into
compliance with such limitations. The Company also researches laws applicable to
distributor operations and revises or alters its distributor manuals and other
training materials and programs to provide distributors with guidelines for
operating a business, marketing and distributing the Company's products and
similar matters, as required by applicable regulations in each market. However,
the Company is not able to monitor its supervisors and distributors effectively
to ensure that they refrain from distributing the Company's products in
countries where the Company has not commenced operations, and the Company does
not devote significant resources to such monitoring.
In addition, regulations in existing and new markets are often ambiguous and
subject to considerable interpretive and enforcement discretion by the
responsible regulators. Moreover, even when the Company believes that it and its
distributors are in compliance with all applicable regulations, new regulations
are regularly being added and the interpretation of existing regulations is
subject to change. Further, the content and impact of regulations to which the
Company is subject may be influenced by public attention directed at the
Company, its products or its network marketing system, so that extensive
17
<PAGE>
adverse publicity about the Company, its products or its network marketing
system may result in increased regulatory scrutiny.
It is an ongoing part of the Company's business to anticipate and respond to
such new and changing regulations and make corresponding changes in the
Company's operations to the extent practicable. In furtherance of these efforts,
in 1994 the Company formed its Government Relations Group, currently consisting
of eight employees, and in 1995 created the position of Chief International
Counsel. These employees seek to establish relationships with regulators and
community leaders in both new and existing markets and strive to ensure that the
Company's products and network marketing system comply with regulatory
requirements. However, while the Company devotes considerable resources to
maintaining its compliance with regulatory constraints in each of its markets,
there can be no assurance that the Company would be found to be in full
compliance with applicable regulations in all of its markets at any given time
or that the regulatory authorities in one or more markets will not assert,
either retroactively or prospectively or both, that the Company's operations are
not in full compliance. Such assertions or the effect of adverse regulations in
one market could negatively affect the Company in other markets as well by
causing increased regulatory scrutiny in those other markets or as a result of
the negative publicity generated in those other markets. Such assertions could
have a material adverse effect on the Company in a particular market or in
general. Furthermore, depending upon the severity of regulatory changes in a
particular market and the changes in the Company's operations that would be
necessitated to maintain compliance, such changes could result in the Company
experiencing a material reduction in sales in such market or determining to exit
such market altogether. In such event, the Company would attempt to devote the
resources previously devoted to such market to a new market or markets or other
existing markets, but there can be no assurance that such transition would not
have an adverse effect on the Company's business and results of operations
either in the short or long term.
TRADEMARKS
The Company uses the umbrella trademarks Herbalife-Registered Trademark-,
Thermojetics-Registered Trademark-, Dermajetics-Registered Trademark- and
several other trademarks and tradenames in connection with its products and
operations. Trademark registrations are either issued or pending in the United
States Patent and Trademark Office and in comparable agencies in many other
countries. The Company considers its trademarks and tradenames to be an
important factor in its business. The Company's product formulations are not
protected by patents and are generally not patentable.
COMPETITION
The Company is subject to significant competition for the recruitment of
distributors from other network marketing organizations, including those that
market weight management products, food and dietary supplements and personal
care products, as well as other types of products. Some of the Company's
competitors are substantially larger and have available considerably greater
financial resources than the Company. The Company's ability to remain
competitive depends, in significant part, on the Company's success in recruiting
and retaining distributors through an attractive compensation plan and other
incentives. The Company believes that its production bonus program,
international sponsorship program and other compensation and incentive programs
provide its distributors with significant earning potential. However, there can
be no assurance that the Company's programs for recruitment and retention of
distributors will be successful.
In addition, the business of marketing weight management, food and dietary
supplement and personal care products is highly competitive. This market segment
includes numerous manufacturers, distributors, marketers, retailers and
physicians that actively compete for the business of consumers both in the
United States and abroad. The market is highly sensitive to the introduction of
new products or weight management plans (including various prescription drugs)
that may rapidly capture a significant share of the market. As a result, the
Company's ability to remain competitive depends in part upon the successful
introduction of new products.
EMPLOYEES
As of December 31, 1995 and 1996, the Company had 1,060 and 1,180 full-time
employees, respectively. These numbers do not include the Company's
distributors, who are generally independent contractors rather than employees of
the Company. The Company considers its employee relationships to be
satisfactory. Except for certain employees in Mexico, none of the Company's
employees is a member of any labor union, and the Company has never experienced
any business interruption as a result of any labor disputes.
18
<PAGE>
ITEM 2. PROPERTIES
The Company leases all of its physical properties located in the United States.
The Company's executive offices, re-located to Century City, California in
February 1996, include approximately 81,000 square feet of general office space
under a lease that expires in January 2006. The Company leases an aggregate of
approximately 78,000 square feet of office space, computer facilities and
conference rooms at the Operations Center in Inglewood, California, under a
lease that expires in October 2006, and approximately 146,000 square feet of
warehouse space in two separate facilities located in Los Angeles and Memphis.
The Los Angeles and Memphis agreements have terms through May 2001 and
August 2006, respectively. The Company also leases warehouse and office space in
a majority of its other geographic areas of operations. The Company believes
that its existing facilities are adequate to meet its current requirements and
that comparable space is readily available at each of these locations.
ITEM 3. LEGAL PROCEEDINGS
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. The Company believes that no litigation
currently pending against it will have a material adverse effect on its
consolidated financial position and results of operations. See
"Regulation--Transfer Pricing and Similar Regulations" for a discussion of
certain pending tax matters.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock has been quoted on the National Market System of the
National Association of Securities Dealers Automated Quotation System
("NASDAQ-NMS") under the symbol "HERB" since April 21, 1992. The table below
sets forth, for the periods indicated, the high and low closing bid prices of
the Common Stock, as reported on NASDAQ-NMS.
BID/CLOSING PRICES*
-------------------
HIGH LOW
---- ---
1995
First Quarter $17 3/4 $10 1/4
Second Quarter 13 1/4 10 1/8
Third Quarter 15 1/2 9 3/4
Fourth Quarter 9 7/8 6 3/4
1996
First Quarter $12 $9 3/8
Second Quarter 16 1/4 10 1/8
Third Quarter 15 7/8 12 5/8
Fourth Quarter 32 5/8 15 3/4
___________
*The bid/closing prices in the table were taken from a written summary provided
to the Company by NASDAQ. Prices reflect inter-dealer prices, without retail
mark-up, mark-down or commission and may not represent actual transactions.
At February 28, 1997, 30,230,738 shares of the Company's Common Stock were
issued and outstanding, and were held by 1,114 stockholders of record.
20
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data set forth below for each of the years
in the five-year period ended December 31, 1996 are derived from the audited
consolidated financial statements of the Company. The selected financial and
operating data should be read in conjunction with Management's Discussion and
Analysis of Results of Operations and Financial Condition and the consolidated
financial statements and related notes.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
(In thousands of dollars, except per share & other data amounts)
OPERATIONS:
<S> <C> <C> <C> <C> <C>
Retail sales $405,092 $693,015 $884,058 $923,644 $1,200,144
Less-Distributor allowances on
product purchases 190,669 328,270 417,177 434,640 568,209
---------- ---------- ---------- ---------- ----------
Net Sales 214,423 364,745 466,881 489,004 631,935
Cost of sales 63,138 103,834 130,707 143,557 168,432
Royalty overrides 60,851 107,381 125,820 138,940 184,669
Marketing, distribution and
administrative expenses 59,583 88,918 139,629 176,046 210,087
Restructuring Expenses 2,300
Interest income-net 689 1,729 2,919 3,404 4,084
---------- ---------- ---------- ---------- ----------
Income before income taxes 31,540 66,341 73,644 31,565 72,831
Income taxes 11,464 25,160 27,616 11,837 28,040
---------- ---------- ---------- ---------- ----------
Net income $20,076 $41,181 $46,028 $19,728 $44,791
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
SHARE DATA:
Earnings per share:
Primary $0.79 $1.47 $1.50 $0.65 $1.43
Fully-diluted $0.74 $1.47 $1.50 $0.65 $1.38
Cash dividends per common share $0.15 $0.49 $0.80 $0.74 $0.60
FINANCIAL CONDITION:
Working capital $18,732 $72,723 $89,825 $85,126 $109,662
Total assets 61,089 130,820 174,057 207,690 269,114
Long term obligations 1,045 994 1,014 1,779 2,306
Stockholders' equity 23,913 81,202 109,815 109,530 138,468
OTHER DATA:
Number of Countries 15 16 24 32 34
</TABLE>
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<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RECENT DEVELOPMENTS AND OUTLOOK
The Company utilizes a worldwide network marketing system to market weight
management products, food and dietary supplements and personal care products. As
of December 31, 1996, the Company conducted business in 34 countries located
throughout The Americas, Europe and Asia/Pacific Rim.
The Company has reported increased annual retail sales and net sales in each
year since 1988 and has reported profits for each year since 1990. See
"--Presentation of Retail Sales." In the last five years, retail sales
increased from $405.1 million in 1992 to $1,200.1 million in 1996, representing
a compound annual growth rate of 31.2%, and net income increased from $20.1
million in 1992 to $44.8 million in 1996, representing a compound annual growth
rate of 22.2%. In 1996, retail sales and net income increased by $276.5 million
or 29.9% and $25.1 million or 127.0%, respectively, compared to 1995. The
increase was primarily due to an expansion of operations into Japan, Russia and
Brazil.
The Company markets its products globally. For 1996, 76.7% of retail sales were
attributable to markets located outside of the United States. The following
summarizes the Company's retail sales by region for the time periods indicated.
<TABLE>
<CAPTION>
NUMBER OF
COUNTRIES
OPEN
AS OF
YEAR ENDED DECEMBER 31, 12/31/96
-------------------------------------- --------
1993 1994 1995 1996
-------- -------- -------- --------
(DOLLAR AMOUNTS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
The Americas . . . . . . . . . . . . . $273.9 $354.3 $406.2 $390.0 7
Europe . . . . . . . . . . . . . . . . 391.5 473.2 373.9 431.3 20
Asia/Pacific Rim . . . . . . . . . . . 27.6 56.5 143.5 378.8 7
-------- -------- -------- -------- --------
Total Retail Sales. . . . . . . . . $693.0 $884.0 $923.6 $1,200.1 34
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
</TABLE>
In 1996, a relatively small number of countries accounted for a large proportion
of the $276.5 million increase in retail sales. Of the 34 countries in which the
Company operated during 1996, 14 countries experienced an aggregate increase in
retail sales of $480.4 million as compared with 1995. Japan, Russia and Brazil
accounted for 82.0% of this increase. The growth in these 14 countries was
offset by a $203.9 million aggregate decrease in retail sales in the remaining
20 countries in which the Company operated. As part of its growth strategy,
management has recently implemented a plan to revitalize sales in countries
where the Company has experienced a loss of retail sales. See "Business--Growth
Strategy." The concentration of increased retail sales in a small number of
countries is expected to make the Company's earnings in future periods more
susceptible to various risks relating to dependency on foreign operations.
Subsequent to commencement of operations in 1980, the Company's network of
independent distributors has grown substantially to include 115,000 supervisors
as of February 28, 1997 and a much larger number of distributors. Although the
number of supervisors continued to grow during 1996, the Company has experienced
a decline in the addition of new supervisors during certain periods in 1996 in
several of its major markets. The addition of new supervisors declined in Japan
and Russia over the course of the three months ended December 31, 1996 and in
Brazil over the course of the nine months ended September 30, 1996 (with a
moderate increase in Brazil during the fourth quarter of 1996), and sales of
distributor kits declined in Russia over the course of the three months ended
December 31, 1996 and in Brazil over the course of 1996. Furthermore, despite
the substantial growth in Japan, Russia and Brazil in 1996, the rate of growth
of retail sales declined in Japan and Russia over the course of the three months
ended December 31, 1996, and retail sales generally declined in Brazil over the
course of the year ended December 31, 1996.
PRESENTATION OF RETAIL SALES
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 or through credit card
22
<PAGE>
payments upon receipt of orders from distributors. 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. Royalty overrides as reported in the
Consolidated Statements of Income 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 "income
from operations" consists of income before interest income and income taxes.
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'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.
1996 COMPARED TO 1995
Retail sales increased 29.9% to $1,200.1 million in 1996 from $923.6 million in
1995. The increase was primarily due to the year to year aggregate sales growth
of $480.4 million in 14 countries (including two countries which opened in
1996): 82.0% of this increase was derived from sales in three countries: Japan,
Russia and Brazil. This increase was partially offset by an aggregate $203.9
million sales decline in the remaining 20 countries in which the Company
operates.
Regionally, retail sales for 1996 as compared to 1995 increased 164.0% in
Asia/Pacific Rim, 15.4% in Europe and declined 4.0% in The Americas. In
Asia/Pacific Rim, combined retail sales of $378.8 million increased by $235.3
million compared with 1995. The increase was due to a significant growth in
sales in Japan which contributed retail sales of $311.1 million in 1996 as
compared to $81.7 million in 1995. The increase in sales in Japan is in part
attributable to the introduction of new products and expansion of existing
product lines and the growth in the distributor network in Japan. In Europe,
combined retail sales for 1996 of $431.3 million increased by $57.4 million
compared to 1995. This increase was due to a full year operation in Russia
which opened during 1995 and contributed retail sales of $142.1 million in 1996
as compared to $29.6 million in 1995. The most significant decline in Europe
was in Germany with 1996 retail sales of $54.3 million compared to $115.6
million in 1995. The decrease was due in part to the July 1995 suspension of
sales of Thermojetics-Registered Trademark- Instant Herbal Beverage in that
country and the adverse publicity stemming from the suspension.
In The Americas, combined retail sales in 1996 of $390.0 million decreased by
$16.2 million as compared to 1995. The decrease was due to a decline in sales
in the United States and several South American countries, partially offset by
Brazil which opened in the fourth quarter of 1995. The reduction in U.S. retail
sales is attributable in part to the Company's commencement of operations in
Brazil and the continuing effect of the commencement of operations in Russia in
July 1995. The Company is aware that, prior to the opening of Brazil and
Russia, some retail sales in the U.S. were for products purchased in the U.S.
but re-directed to Brazil or Russia by distributors. The Company expects that
U.S. retail sales may continue to be impacted as the expansion of operations
into international markets continues.
23
<PAGE>
The Company's gross profit increased to $278.8 million for 1996 from $206.5
million in 1995. As a percentage of retail sales, the gross profit was 23.2% in
1996 as compared with 22.4% in 1995. This is primarily attributable to higher
sales in Japan where the gross profit is higher due to higher retail selling
prices.
Marketing, distribution and administrative expenses for 1996 increased to $210.1
million from $176.0 million in 1995. As a percentage of retail sales, these
expenses were 17.5% in 1996 as compared to 19.1% in 1995. The increase in these
expenses is attributable to higher in-country distribution center costs directly
related to sales volume, particularly in Japan and Brazil. In addition,
administrative expenses increased as a result of a continued emphasis and
increased costs of strengthening government and media relations, increased
compensation related to staff additions and incentive compensation awards. Such
increases were partially offset by a decrease in sales promotion expenses in
1996 as compared to 1995. Foreign exchange losses were $3.0 million in 1996 as
compared to losses of $2.6 million in 1995.
Income taxes of $28.0 million in 1996 increased from $11.8 million in 1995. As a
percentage of income before income taxes, the income tax rate increased from
37.5% for 1995 to 38.5% for 1996. The increase is due in part to an increased
proportion of profits in countries which have a higher effective tax rate.
Net income for 1996 increased to $44.8 million from $19.7 million in 1995
because of the factors discussed above.
1995 COMPARED TO 1994
Retail sales increased 4.5% to $923.6 million in 1995 from $884.1 million in
1994. Contributing to 1995 consolidated retail sales was the introduction of the
first three phases of products in the Company's new line of personal care
products, the Skin Survival Kit in January 1995, the fragrances, Parfums
Vitessence-TM-, in April 1995 and the facial products, Nature's Mirror-TM-, in
October 1995. The new products accounted for $107.4 million of consolidated
retail sales in 1995. The products were introduced extensively in Europe and The
Americas where they accounted for $49.2 million and $50.7 million, or 13.2% and
12.5%, of those regions' retail sales in 1995, respectively.
Regionally, retail sales in 1995 compared to 1994 increased 153.9% and 14.7% in
Asia/Pacific Rim and The Americas, respectively, and decreased 21.0% in Europe.
In The Americas, retail sales increased from $354.3 million in 1994 to $406.2
million in 1995. In Asia/Pacific Rim, retail sales increased from $56.5 million
in 1994 to $143.5 million in 1995. In Europe, retail sales decreased from $473.2
million in 1994 to $373.9 million in 1995.
In The Americas, combined retail sales in 1995 increased $51.9 million, or
14.7%, when compared to 1994, which was due to (i) a sales increase in the U.S.
of $38.6 million or 13.1% when compared to 1994, and (ii) the October 1995
opening of Brazil, which reported retail sales of $24.2 million. The increases
were partly offset by a reduction in sales in Mexico resulting from devaluation
of the Mexican peso and a decrease in retail sales in Argentina in part
resulting from the opening of Brazil in 1995, as a result of which certain
Argentina product sales were redirected to Brazil. Within The Americas, U.S.
retail sales accounted for $333.6 million or 36.1% of total worldwide retail
sales in 1995, compared to $295.0 million or 33.4% of total worldwide retail
sales in 1994. The increase in U.S. retail sales as a percentage of worldwide
retail sales resulted from increased U.S. sales and approximately constant
foreign sales in 1995 as compared to 1994.
In the European region, the decrease in German sales of $43.9 million, together
with sales decreases in the Czech Republic, France, Israel, Italy, Portugal,
Spain and the U.K, were partially offset by sales in Belgium, Denmark, Poland
and Sweden, all of which opened in the second half of 1994, and sales in
Austria, Russia, South Africa and Switzerland, which opened in the second and
third quarters of 1995. The decrease in sales in Germany was due in part to the
suspension of sales of Thermojetics-Registered Trademark- Instant Herbal
Beverage in that country in July 1995. The suspension led to an increase in
product returns and distributor resignations, as well as a decline in sales of
other products. In 1995, sales in France continued to be negatively impacted by
an adverse business environment, including continued adverse publicity regarding
certain of the Company's French distributors. See "Business--Geographic Areas of
Operations." The Company believes that another significant factor affecting
these markets has been the opening of other new markets within the same
geographic region or with the same or similar language or cultural bases, and
the inclination of some distributors to focus their attention on business
opportunities provided by new markets, which can have a negative impact on
existing markets.
The Asia/Pacific Rim growth was due to (i) sales increases in Japan of $63.0
million, or 335.7%, when compared to 1994, and (ii) the opening of the
Philippines in December 1994 and Taiwan in July 1995, which reported combined
retail sales of $17.6 million for 1995.
24
<PAGE>
Gross profit decreased 1.8% to $206.5 million in 1995 from $210.4 million in
1994. As a percentage of retail sales, gross profit for 1995 decreased to 22.4%
from 23.8% in 1994. The decreased gross profit was due to higher cost of sales
and royalty overrides as a percentage of retail sales. The cost of sales
percentage increased to 15.5% in 1995 from 14.8% in 1994. Such increase includes
higher freight costs resulting from (i) redeployment of inventories to meet
demand patterns and (ii) provisions made against slow moving inventory. In
addition, royalty overrides as a percentage of retail sales increased to 15.0%
in 1995 from 14.2% in 1994. This was the result of a modification to the
marketing plan made in June 1995, which increased the royalties earned by
distributors and increased bonuses payable to certain of the Company's senior
distributors.
Marketing, distribution and administrative expenses increased 26.1% to $176.0
million in 1995 from $139.6 million in 1994. As a percentage of retail sales,
these expenses increased to 19.1% in 1995 from 15.8% in 1994. Selling expenses
increased $5.1 million, corporate expenses increased $18.6 million and
distribution expenses increased $12.7 million. The increased selling expenses
were instrumental in an effort to increase distributor kit sales, stimulate new
distributor sponsoring rates and expand distributor training. The increase was
also due to introductions of new technologies, such as International Satellite
Supervisor Training and The Herbalife Broadcast Network, a home based satellite
television program. The corporate expenses increased due to (i) initiatives
taken in new product introductions and marketing activities, (ii) intensified
government and media relations and other business related functions and
(iii) foreign exchange losses which increased $2.5 million in 1995, when
compared to 1994. The increase in distribution expense was due to new country
openings and facility and staff expansions in Japan and Germany.
During 1995, the Company made a detailed study of its European warehousing and
distribution systems to identify possible areas of cost savings. As a result,
the Company planned to make a number of changes in its European infrastructure
in order to enhance operating efficiencies. In connection with this change, the
Company recorded a restructuring charge of $2.3 million, primarily relating to
lease termination costs. The infrastructure modifications commenced in the
second half of 1996.
Income taxes decreased to $11.8 million in 1995 from $27.6 million in 1994. As a
percentage of pre-tax income, income taxes remained constant at 37.5%.
Net income decreased 57.1% to $19.7 million in 1995 from $46.0 million in 1994,
as a result of the factors described above.
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.
In 1996, net cash provided by operating activities was $65.4 million, compared
to $77.9 million in 1995. The decrease primarily resulted from (i) reductions
in advanced sales deposits primarily resulting from timing differences, (ii)
non-recurring 1995 inventory reductions as compared to an increase in 1996
inventory balances related to revenue growth, (iii) higher 1996 income taxes
from increased income and a non-recurring tax refund received in 1995, and (iv)
comparably higher receivable balances primarily resulting from new and existing
country expansion. These reductions were partially offset by increased net
income from expansion into new markets and additional liquidity provided by
higher accrued expense balances.
For the year ended December 31, 1995, net cash provided by operating activities
was $77.9 million, compared to $14.8 million for the year ended December 31,
1994. Although net income in 1995 decreased $26.3 million when compared to
1994, net cash provided by operating activities increased by $63.0 million. This
increase resulted primarily from reductions in inventories, prepaid expenses and
other current assets, increases in advanced sales deposits and royalty override
accruals and reduced taxable income and the timing of income tax payments.
Capital expenditures in 1996 were $15.4 million compared to $7.2 million for the
prior year. The majority of the 1996 expenditures resulted from the expansion of
office and distribution facilities and additional costs incurred in connection
with the implementation of management information systems. Capital expenditures
for the year ended December 31, 1995 were $7.2 million compared to $8.6 million
for the year ended December 31, 1994. The majority of the 1995 expenditures were
made to upgrade computer and office equipment and to expand facilities to
support growth. In connection with its entry into each new market, the Company
funds inventory requirements and, in certain markets, establishes a distributor
service center and/or a distribution facility. 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.
25
<PAGE>
Stockholders' equity increased $28.9 million to $138.5 million during 1996. In
1996, net income of $44.8 million and the issuance of capital stock,
including related tax benefits on non-qualified stock option exercises, of
$10.3 million were partially offset by $17.8 million of dividends declared and
stock repurchases of $7.5 million. Stockholders' equity decreased $0.3 million
to $109.5 million at December 31, 1995 from $109.8 million at December 31,
1994. In 1995, net income of $19.7 million was offset by $22.2 million of
dividends declared. The dividend in the third and fourth quarters of 1995 was
reduced to $0.15 per share from $0.22 per share in the prior four quarters.
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. See "Dividend Policy."
On January 12, 1996, the Company announced that its Board of Directors had
approved a share repurchase program pursuant to which up to $5 million could be
expended to repurchase shares of the Company's Common Stock. On September 13,
1996, the Company announced that the Board of Directors had approved the
extension of the share repurchase program, such that up to an aggregate of one
million shares of the Company's Common Stock could be repurchased. As of
February 28, 1997, the Company had expended $7.5 million to make repurchases of
574,500 shares in the public market.
In total, cash and cash equivalents increased to $87.5 million at December 31,
1996 compared to $69.2 million at December 31, 1995. At December 31, 1996, the
Company's cash, cash equivalents and marketable securities aggregate balance was
$131.0 million, which represents an $26.8 million increase from the balance as
of December 31, 1995.
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 generally 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 the Company. The Company is authorized to enter into
forward exchange contracts of up to $10 million to manage its foreign exchange
risk. Foreign exchange transaction losses were $0.1 million, $2.6 million and
$3.0 million in the years ended December 31, 1994, 1995 and 1996, respectively.
For a discussion of certain contingencies that may impact liquidity and capital
resources, see "Note 9, Contingencies," in the Company's consolidated financial
statements included herein.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company, together with the Report
thereon of Deloitte & Touche LLP, independent auditors, are included elsewhere
herein on pages 31 through 48.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
26
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information called for by Item 10 of Part III is incorporated by reference to
the Company's definitive Proxy Statement for the 1996 Annual Meeting of
Stockholders to be filed with the Securities and Exchange Commission within 120
days after the close of the year ended December 31, 1996.
ITEM 11. EXECUTIVE COMPENSATION
Information called for by Item 11 of Part III is incorporated by reference to
the Company's definitive Proxy Statement for the 1996 Annual Meeting of
Stockholders to be filed with the Securities and Exchange Commission within 120
days after the close of the year ended December 31, 1996.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information called for by Item 12 of Part III is incorporated by reference to
the Company's definitive Proxy Statement for the 1996 Annual Meeting of
Stockholders to be filed with the Securities and Exchange Commission within 120
days after the close of the year ended December 31, 1996.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information called for by Item 13 of Part III is incorporated by reference to
the Company's definitive Proxy Statement for the 1996 Annual Meeting of
Stockholders to be filed with the Securities and Exchange Commission within 120
days after the close of the year ended December 31, 1996.
27
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report:
1. FINANCIAL STATEMENTS
The following financial statements of the Company are filed with this
report and can be found on the pages indicated below:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Description Page No.
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Independent Auditors' Report
Consolidated Balance Sheets - December 31, 1995 and 1996
Consolidated Statements of Income for the years ended December 31, 1994, 1995 and 1996
Consolidated Statements of Changes in Stockholders' Equity for the Years Ended December 31, 1994, 1995, and 1996
Consolidated Statements of Cash Flows for the Years Ended December 31, 1994, 1995, and 1996
Notes to Consolidated Financial Statements
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
2. FINANCIAL STATEMENT SCHEDULES
None.
3. EXHIBITS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
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 (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 (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 (6), (12)
10.9 The Company's Executive Incentive Compensation Plan, as amended (7), (12)
10.10 Form of Individual Participation Agreement relating to the Company's Executive
Compensation Plan (7)
28
<PAGE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Exhibit Number Description Page No./(Footnote)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
10.11 Amendment to Employment Agreement between the Company and David
Addis dated June 29, 1993 (7)
10.12 Form of Letter Agreement between the Compensation Committee of the Board
of Directors of the Company and Mark Hughes (7)
10.13 Form of Indemnity Agreement between the Company and certain officers and
directors of the Company (7)
10.14 Trust Agreement among the Company, Citicorp Trust, N.A. and certain officers
and directors of the Company (7)
10.15 Form of Stock Appreciation Rights Agreement between the Company and
certain directors of the Company (7)
10.16 1994 Performance Based Annual Incentive Compensation Plan (9), (12)
10.17 Form of Promissory Note for Advances under the Company's 1994 Performance
Based Annual Incentive Compensation Plan (10)
10.18 Employment Agreement between the Company and Chris Pair dated April 3, 1994 (8)
10.19 Deferred Compensation Agreement between the Company and Michael Rosen (10)
10.20 Office lease agreement between the Company and State Teacher's Retirement
System, dated July 20, 1995 (11)
10.21 Form of stock appreciation rights agreements between the Company and certain
directors of the Company (11)
10.22 The Company's Senior Executive Deferred Compensation Plan, effective January
1, 1996 (11)
10.23 The Company's Management Deferred Compensation Plan, effective January 1,
1996 (11)
10.24 Master Trust Agreement between the company and Imperial Trust Company,
Inc., effective January 1, 1996 (11)
10.25 The Company's 401K Plan (11)
10.26 Agreement Concerning Share Allocation Plan for Specific Directors of Herbalife
of Japan K.K. dated December 30, 1996. (13)
10.27 Consulting Agreement between David Addis and Herbalife of America, Inc.
Dated January 27, 1997. (13)
21 List of subsidiaries of the Company (13)
23.1 Independent Auditors' Consent (13)
27 Financial Data Schedule (13)
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(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 Quarterly Report on
Form 10-Q for the three months ended June 30, 1994.
(9) Incorporated by reference to the Company's Definitive Proxy
Statement relating to its 1994 Annual Meeting of Stockholders.
(10) Incorporated by reference to the Company's Annual Report on Form
10-K for the year ended December 31, 1994.
(11) Incorporated by reference to the company's annual Report on Form
10-K for the year ended December 31, 1995.
(12) Incorporated by reference to the Company's definitive Proxy
Statement relating to its 1996 Annual Meeting of Stockholders.
(13) Filed herewith.
29
<PAGE>
(b) REPORTS ON FORM 8-K:
None.
(c) OTHER EXHIBITS:
See "Item 14(a)3. Exhibits."
(d) OTHER FINANCIAL STATEMENT SCHEDULES:
None.
30
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders of Herbalife International, Inc.:
We have audited the accompanying consolidated balance sheets of Herbalife
International, Inc. and subsidiaries (the "Company") as of December 31, 1995 and
1996, and the related consolidated statements of income, changes in
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Herbalife International, Inc. and
subsidiaries at December 31, 1995 and 1996, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1996 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Los Angeles, California
February 14, 1997
31
<PAGE>
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1996
ASSETS
<TABLE>
<CAPTION>
NOTES 1995 1996
----------- --------------- ---------------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents 2,4 $69,176,000 $87,481,000
Marketable securities 2 35,050,000 43,558,000
Receivables, including related parties 7 18,617,000 29,258,000
Inventories 2,3 40,904,000 46,204,000
Prepaid income taxes 1,457,000 1,821,000
Prepaid expenses and other current assets 2 5,763,000 5,243,000
Deferred income taxes 2,12 7,818,000 15,882,000
--------------- ---------------
Total current assets 178,785,000 229,447,000
--------------- ---------------
PROPERTY - AT COST: 2,5
Furniture and fixtures 9,402,000 10,870,000
Equipment 16,399,000 23,271,000
Leasehold improvements and building 13,836,000 18,236,000
--------------- ---------------
39,637,000 52,377,000
Less accumulated depreciation and amortization (23,036,000) (27,404,000)
--------------- ---------------
16,601,000 24,973,000
--------------- ---------------
OTHER ASSETS 8,500,000 11,062,000
GOODWILL(NET OF ACCUMULATED AMORTIZATION OF $1,083,000
AND $1,255,000 IN 1995 AND 1996,RESPECTIVELY) 2 3,804,000 3,632,000
--------------- ---------------
TOTAL $207,690,000 $269,114,000
--------------- ---------------
--------------- ---------------
</TABLE>
See the accompanying notes to consolidated financial statements
32
<PAGE>
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1996
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Notes 1995 1996
----------- --------------- ---------------
<S> <C> <C> <C>
CURRENT LIABILITIES:
Accounts payable 7 $18,667,000 $17,287,000
Royalty overrides 2 32,366,000 42,676,000
Accrued expenses 17,275,000 35,960,000
Dividends payable 9 4,542,000 4,453,000
Current portion of contracts payable and bank loans 4, 5 1,185,000 2,493,000
Advance sales deposits 2 16,572,000 9,045,000
Income taxes payable 12 3,052,000 7,871,000
--------------- ---------------
Total current liabilities 93,659,000 119,785,000
NON-CURRENT LIABILITIES
Contracts payable, net of current portion 4,5 1,779,000 2,306,000
Deferred Income Taxes 2,12 2,722,000 1,103,000
Other Non-Current Liabilities and Deferred Credits 7 6,780,000
--------------- ---------------
Total Liabilities 98,160,000 129,974,000
--------------- ---------------
MINORITY INTEREST 2,7 672,000
--------------- ---------------
COMMITMENTS AND CONTINGENCIES 5,9
STOCKHOLDERS EQUITY 10
Common Stock, $0.01 par value; authorized 100,000,000 shares,
issued 29,887,864 (1995) and 30,205,338 (1996) shares
300,000 302,000
Paid-in capital in excess of par value 40,417,000 43,258,000
Retained earnings, includes cumulative translation adjustment of
$1,194,000 (1995) and $(981,000) (1996) 70,517,000 95,353,000
Unearned compensation 10 (1,716,000) (412,000)
Unrealized gain(loss) on marketable securities 2 12,000 (33,000)
--------------- ---------------
Total stockholders' equity 109,530,000 138,468,000
--------------- ---------------
TOTAL $207,690,000 $269,114,000
--------------- ---------------
--------------- ---------------
</TABLE>
See the accompanying notes to consolidated financial statements
33
<PAGE>
HERBALIFE INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
Notes 1994 1995 1996
----- ------------ ------------ --------------
<S> <C> <C> <C> <C>
Retail sales 2 $884,058,000 $923,644,000 $1,200,144,000
Less - Distributor allowances on product purchases 2 417,177,000 434,640,000 568,209,000
------------- ------------- -------------
Net sales 2 466,881,000 489,004,000 631,935,000
Cost of sales, includes purchases from related
parties of $47,569,000 (1994), $29,340,000 (1995) and
$56,374,000 (1996) 7 130,707,000 143,557,000 168,432,000
Royalty overrides 2 125,820,000 138,940,000 184,669,000
Marketing, distribution and administrative expenses 5,6,7 139,629,000 176,046,000 210,087,000
Restructuring expense 8 2,300,000
Interest income - net 2,919,000 3,404,000 4,084,000
------------- ------------- -------------
Income before income taxes 73,644,000 31,565,000 72,831,000
Income taxes 2,9,12 27,616,000 11,837,000 28,040,000
------------- ------------- -------------
NET INCOME $46,028,000 $19,728,000 $44,791,000
------------- ------------- -------------
------------- ------------- -------------
WEIGHTED AVERAGE SHARES OUTSTANDING
Primary 30,768,000 30,313,000 31,379,000
------------- ------------- -------------
------------- ------------- -------------
Fully diluted 30,768,000 30,354,000 32,474,000
------------- ------------- -------------
------------- ------------- -------------
EARNINGS PER SHARE 2,10
Primary $1.50 $0.65 $1.43
------------- ------------- -------------
------------- ------------- -------------
Fully diluted $1.50 $0.65 $1.38
------------- ------------- -------------
------------- ------------- -------------
CASH DIVIDENDS PER COMMON SHARE $0.80 $0.74 $0.60
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
See the accompanying notes to consolidated financial statements
34
<PAGE>
HERBALIFE INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995, AND 1996
<TABLE>
<CAPTION>
Common Paid in Capital Retained Cumulative
Stock in Excess of Par Earnings Translation
Value Adjustment
-------- ----------------- ----------- -----------
<S> <C> <C> <C> <C>
Balance at December 31, 1993 $295,000 $37,387,000 $49,751,000 ($749,000)
Treasury Stock Retired (1,000) (986,000)
Issuance of Stock to Outside Firm 1,000 1,313,000
Issuance of 518,000 shares of Common Stock under
the 1991 Stock Option Plan 5,000 35,000
Additional capital from tax benefit of 1991 Stock Option Plan
and vesting of employee restricted stock 3,368,000
Amortization of unearned compensation
Net income 46,028,000
Translation adjustments 999,000
Unrealized loss on Marketable Securities
Cash Dividends Declared (23,995,000)
-------- ----------------- ----------- -----------
Balance at December 31, 1994 $300,000 $41,117,000 $71,784,000 $250,000
Issuance of 42,000 shares of Common Stock under the
1991 Stock Option Plan 1,000 92,000
Retire 7,090 Shares of Common Stock (89,000)
Additional capital from tax benefit of 1991 Stock Option Plan and
vesting of employee restricted stock 275,000
Amortization of unearned compensation
Cancellation of 135,000 shares of restricted stocks (1,000) (978,000)
Net income 19,728,000
Translation adjustments 944,000
Unrealized gain on Marketable Securities
Cash Dividends Declared (22,189,000)
-------- ----------------- ----------- -----------
Balance at December 31, 1995 $300,000 $40,417,000 $69,323,000 $1,194,000
Issuance of 839,000 shares of Common Stock under the
1991 Stock Option Plan 8,000 4,721,000
Issuance of Common Stock under 1994 Incentive
Compensation Plan 1,307,000
Additional capital from tax benefit of 1991 Stock Option Plan 4,284,000
Repurchase of 574,500 Shares of Common Stock (6,000) (7,471,000)
Amortization of unearned compensation
Net income 44,791,000
Translation adjustments (2,175,000)
Unrealized loss on Marketable Securities
Cash Dividends Declared (17,780,000)
-------- ----------------- ----------- -----------
Balance at December 31, 1996 $302,000 $43,258,000 $96,334,000 ($981,000)
-------- ----------------- ----------- -----------
-------- ----------------- ----------- -----------
<CAPTION>
Treasury Stock Unearned Unrealized Total
Compensation Loss on Stockholders'
Marketable Equity
Securities
-------------- ------------ ----------- -------------
<S> <C> <C> <C> <C>
Balance at December 31, 1993 ($987,000) ($4,495,000) $81,202,000
Treasury Stock Retired 987,000
Issuance of Stock to Outside Firm 1,314,000
Issuance of 518,000 shares of Common Stock under
the 1991 Stock Option Plan 40,000
Additional capital from tax benefit of 1991 Stock
Option Plan and vesting of employee restricted stock 3,368,000
Amortization of unearned compensation 1,131,000 1,131,000
Net income 46,028,000
Translation adjustments 999,000
Unrealized loss on Marketable Securities (272,000) (272,000)
Cash Dividends Declared (23,995,000)
-------------- ------------ ----------- -------------
Balance at December 31, 1994 ($3,364,000) ($272,000) $109,815,000
--------------
--------------
Issuance of 42,000 shares of Common Stock under
the 1991 Stock Option Plan 93,000
Retire 7,090 Shares of Common Stock (89,000)
Additional capital from tax benefit of 1991 Stock
Option Plan and vesting of employee restricted stock 275,000
Amortization of unearned compensation 805,000 805,000
Cancellation of 135,000 shares of restricted stocks 843,000 (136,000)
Net income 19,728,000
Translation adjustments 944,000
Unrealized gain on Marketable Securities 284,000 284,000
Cash Dividends Declared (22,189,000)
------------ ----------- -------------
Balance at December 31, 1995 ($1,716,000) $12,000 $109,530,000
Issuance of 839,000 shares of Common Stock under
the 1991 Stock Option Plan 4,729,000
Issuance of Common Stock under 1994 Incentive
Compensation Plan 1,307,000
Additional capital from tax benefit of 1991 Stock Option Plan 4,284,000
Repurchase of 574,500 Shares of Common Stock (7,477,000)
Amortization of unearned compensation 1,304,000 1,304,000
Net income 44,791,000
Translation adjustments (2,175,000)
Unrealized loss on Marketable Securities (45,000) (45,000)
Cash Dividends Declared (17,780,000)
------------ ----------- -------------
Balance at December 31, 1996 ($412,000) ($33,000) $138,468,000
------------ ----------- -------------
------------ ----------- -------------
</TABLE>
See the accompanying notes to consolidated financial statements
35
<PAGE>
HERBALIFE INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $46,028,000 $19,728,000 $44,791,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 3,458,000 8,104,000 10,557,000
Deferred income taxes (5,125,000) 5,775,000 (9,683,000)
Amortization of unearned compensation 1,131,000 805,000 1,304,000
Stock Grant 2,497,000
Foreign exchange gain (1,105,000) (1,112,000) (368,000)
Other 12,000 149,000 256,000
Changes in operating assets and liabilities:
Receivables (6,726,000) (4,968,000) (10,377,000)
Inventories (26,186,000) 10,903,000 (7,454,000)
Prepaid expenses and other current assets (4,577,000) 4,881,000 (1,388,000)
Other assets (5,436,000) (5,909,000) (658,000)
Accounts payable 6,106,000 1,740,000 (466,000)
Royalty overrides (581,000) 9,154,000 11,335,000
Accrued expenses 6,821,000 7,495,000 20,065,000
Advance sales deposits 1,357,000 12,640,000 (6,790,000)
Income taxes payable (332,000) 8,486,000 11,802,000
----------- ----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 14,845,000 77,871,000 65,423,000
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property (8,648,000) (7,243,000) (15,401,000)
Proceeds from sale of property 143,000 462,000 549,000
Changes in marketable securities (1,475,000) (9,937,000) (8,553,000)
Notes receivable from related parties (3,815,000)
----------- ----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (13,795,000) (16,718,000) (23,405,000)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Additions to bank loans and contracts payable 1,219,000
Principal payments on bank loans and contracts payable (457,000) (1,433,000) (1,619,000)
Exercise of stock options, net of stock repurchases 236,000 3,000 4,729,000
Treasury Stock acquired (7,477,000)
Dividends paid (22,646,000) (24,240,000) (17,869,000)
Other (215,000) 9,000 (6,000)
----------- ----------- -----------
NET CASH USED IN FINANCING ACTIVITIES (23,082,000) (25,661,000) (21,023,000)
----------- ----------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS 589,000 (600,000) (2,690,000)
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (21,443,000) 34,892,000 18,305,000
CASH AND CASH EQUIVALENTS AT JANUARY 1, 55,727,000 34,284,000 69,176,000
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT DECEMBER 31, 34,284,000 69,176,000 87,481,000
----------- ----------- -----------
----------- ----------- -----------
INTEREST PAID 202,000 715,000 352,000
----------- ----------- -----------
----------- ----------- -----------
INCOME TAXES PAID(REFUNDED) $33,683,000 ($4,012,000) $21,186,000
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See the accompanying notes to consolidated financial statements
36
<PAGE>
HERBALIFE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
Herbalife International, Inc. and its subsidiaries (the Company) markets weight
management products, other food and dietary supplements and personal care
products worldwide. The Company's products, which consist of herbs and other
natural ingredients, are marketed through a network marketing system in which
"distributors" who are generally independent contractors purchase products for
resale to retail consumers and other distributors. As of December 31, 1996, the
Company conducted business in thirty-four countries located in the Americas,
Europe and Asia/Pacific Rim. In the Company's foreign markets, distributors
market the same, or essentially the same products, as those sold in the United
States and in fundamentally the same manner.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION POLICY
The consolidated financial statements include the accounts of the Company and
its subsidiaries; all significant intercompany transactions and accounts have
been eliminated.
TRANSLATION OF FOREIGN CURRENCIES
Foreign subsidiary's asset and liability accounts are translated for
consolidated financial reporting purposes into U.S. dollar amounts at year-end
exchange rates. Revenue and expense accounts are translated at the average
rates during the year. Foreign exchange translation adjustments are accumulated
in a separate component of stockholders' equity. Transaction losses, which were
$111,000, $2,573,000 and $3,013,000 in the years ending December 31, 1994, 1995
and 1996, respectively, are included in marketing, distribution and
administrative expenses in the accompanying Consolidated Statements of Income.
FORWARD EXCHANGE CONTRACTS
The Company enters into forward exchange contracts in managing its foreign
exchange risk on intercompany transactions and does not use the contracts for
trading purposes. Gains and losses on forward exchange contracts are recorded
when incurred. Premiums on such contracts are amortized into income over the
life of the contracts.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with a maturity of
three months or less to be cash equivalents. Cash and cash equivalents are
comprised primarily of money market accounts, foreign and domestic bank
accounts, and tax-exempt municipal bonds with short-term maturities. To reduce
its credit risk, the Company monitors the credit standing of the financial
institutions that hold the Company's cash and cash equivalents.
MARKETABLE SECURITIES
The Company's marketable securities are classified as "available for sale".
Fluctuations in fair value are included in a separate component of stockholders'
equity. Marketable securities are comprised primarily of tax-exempt municipal
bonds with contractual maturities of up to three years.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Pursuant to SFAS No. 107, "Disclosure About Fair Value of Financial
Instruments," the Company has estimated the fair value of its financial
instruments using the following methods and assumptions: a) The carrying amounts
of cash and cash equivalents, accounts receivable, accounts payable and bank
debt approximate fair value because of their short-term nature; and b) The fair
values of short-term investments are based on quoted market prices.
37
<PAGE>
INVENTORIES
Inventories are stated at lower of cost (on the first-in, first-out basis) or
market.
ADVERTISING COSTS
The Company expenses advertising costs in the period incurred. Literature and
promotional items are sold to distributors and are included in inventories and
are charged to cost of sales as they are sold.
LONG-LIVED ASSETS
Depreciation of furniture, fixtures and other equipment is computed on a
straight-line basis over the estimated useful lives of the related assets, which
range from three to six years. Leasehold improvements are amortized on a
straight-line basis over the life of the related asset or the term of the lease
whichever is shorter.
Costs incurred in advance of commencing operations in a new country are
capitalized. These costs are predominantly legal, accounting and other
professional costs relating to the approval and registration of the Company's
products in the new markets as well as professional expenses incurred in
connection with the structuring, organization and formation of the entities
through which the Company's business is conducted in a new Company. These costs
are amortized over a period not exceeding twenty-four months.
Goodwill is being amortized over periods ranging from fifteen to forty years.
Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of such assets may not be
recoverable. Impairment losses would be recognized if the carrying amount of
the asset exceeds the fair value of the asset.
INCOME TAXES
Income tax expense includes income taxes payable for the current year and the
change in deferred income tax assets and liabilities for the future tax
consequences of events that have been recognized in the Company's financial
statements or income tax returns. A valuation allowance is recognized to reduce
the carrying value of deferred tax assets if it is more likely than not that a
component of the deferred tax assets will not be realized.
ROYALTY OVERRIDES
An independent distributor may earn commissions called royalty overrides or
production bonuses based on retail volume. Such commissions are based on the
retail sales volume of certain other members of the independent sales force who
are sponsored by the distributor.
MINORITY INTEREST
On December 30, 1996, the Company sold shares of Herbalife Japan to certain
Company Directors, Executive Officers and Resident Managers of Herbalife Japan.
The minority interest represents the minority stockholders 7% interest in the
equity of Herbalife Japan.
REVENUE RECOGNITION
The Company records its retail sales based upon suggested retail prices as
reflected on the Company's sales invoices to its distributors. The Company does
not receive the amount reported as retail sales, but generally receives the net
sales price in cash or through credit card payments upon receipt of orders from
distributors. The net sales price is the suggested retail price less a
distributor allowance approximating 50%. Sales and related royalty overrides
are recorded when the merchandise is shipped. Advance sales deposits represent
prepaid orders for which the Company has not shipped the merchandise.
38
<PAGE>
SOURCES OF SUPPLY AND PRODUCT DEVELOPMENT
Substantially all the Company's weight management products, food and dietary
supplement products are produced by two manufacturers, who also perform
substantially all of the Company's research and development functions and own
certain product formulations and manufacturing processes relating to the
Company's products. The Company has requirement contracts with these companies
that extend to January 1998, whereby the Company has agreed to purchase all of
its requirements for these products from the manufacturers, and the
manufacturers have agreed to sell these products only to the Company.
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.
STOCK COMPENSATION
Effective January 1, 1996, the Company adopted FAS No. 123, "Accounting for
Stock-Based Compensation". This statement establishes financial accounting and
reporting standards for stock-based employee compensation plans, such as stock
purchase plans, stock options, restricted stock and stock appreciation rights as
well as non-employee equity transactions. The Company has not changed the
method of accounting for its employee stock compensation plans, but as permitted
by this statement, has provided the fair value disclosure requirements in
Footnote 10.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions.
Such estimates and assumptions affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
3. INVENTORIES
Inventories consist primarily of finished goods available for resale and can be
categorized as follows:
December 31,
---------------------------
1995 1996
----------- -----------
Product $35,099,000 $39,668,000
Literature 3,375,000 3,419,000
Promotional items 2,430,000 3,117,000
----------- -----------
Total $40,904,000 $46,204,000
----------- -----------
----------- -----------
4. BANK LOANS AND CONTRACTS PAYABLE
Bank loans and contracts payable consist of the following:
December 31,
---------------------------
1995 1996
----------- -----------
Capitalized leases, due in monthly
installments through 2000 (Note 5) 2,398,000 3,536,000
Other 566,000 1,263,000
----------- -----------
Total 2,964,000 4,799,000
Less current portion 1,185,000 2,493,000
----------- -----------
Long-term portion $1,779,000 $2,306,000
----------- -----------
----------- -----------
39
<PAGE>
Annual scheduled payments of bank loans and contracts payable are: $2,493,000
(1997), $886,000 (1998), $732,000 (1999), $477,000 (2000), and thereafter
$211,000 (2001).
During 1996, the Company entered into a revolving bank credit facility in South
Korea in the amount of $2,000,000. The credit facility will continue to be
available until written notice from the borrower is provided. The credit
facility provides for borrowings at local interest rates, set when borrowings
are made. The borrowings are collateralized by cash investments on account with
the bank. At December 31, 1996, there was $1,198,000 borrowed against this line
of credit.
5. LEASE OBLIGATIONS
The Company has warehouse and office facilities, furniture and fixtures and
equipment under leases which expire at various dates through 2009. Under the
lease agreements, the Company is also obligated to pay property taxes,
insurance, and maintenance costs. Certain of the leases contain renewal
options. Future minimum rental commitments for non-cancelable operating leases
and capital leases at December 31, 1996 were as follows:
Operating Capital
----------- -----------
1997 8,360,000 1,437,000
1998 7,605,000 1,025,000
1999 5,415,000 826,000
2000 3,759,000 510,000
2001 3,528,000 220,000
Thereafter 11,541,000
----------- -----------
Total $40,208,000 4,018,000
-----------
-----------
Less: Amounts included above representing interest 482,000
-----------
Present value of net minimum lease payments $3,536,000
-----------
Rental expense for the years ended December 31, 1994, 1995 and 1996 was
$5,120,000, $7,126,000, and $9,434,000 respectively.
Property under capital leases is included in property in the accompanying
balance sheets at December 31, 1995 and 1996 as follows:
1995 1996
---------- ----------
Equipment $3,756,000 $5,575,000
Less: accumulated amortization 1,443,000 2,291,000
---------- ----------
Total $2,313,000 $3,284,000
---------- ----------
---------- ----------
6. EMPLOYEE COMPENSATION PLANS
The Company has two incentive compensation plans: the 1992 Executive Incentive
Compensation Plan (the "1992 Plan") and the 1994 Performance-Based Annual
Incentive Compensation Plan (the "1994 Plan"). Under the 1992 plan, a target
percentage of earnings before bonuses and income taxes may be awarded to
Officers, Directors and Key Employees, as determined by the Chief Executive
Officer and Compensation Committee, based on the attainment of certain corporate
and business objectives. The expense under the 1992 Plan for 1994 and 1996
totaled $830,000 and $320,000, respectively. No bonuses were awarded under
this plan for 1995.
The 1994 Plan provides additional compensation as an incentive to key executives
and consultants to attain certain specified performance objectives of the
Company. The amount of the available awards to individual participants and the
aggregate amount to all participants is determined based upon objective
performance goals as determined by the Compensation
40
<PAGE>
Committee of the Board of Directors. The amounts awarded under the 1994 Plan
for 1994 and 1996 totaled $3,160,000 and $5,850,000, respectively. No amounts
were awarded under this plan for 1995.
In accordance with the 1994 Plan, the Company made advances of targeted
performance bonus amounts during 1994 and 1996 to the participants. As of
December 31, 1996, the remaining outstanding principal and accrued interest
obligations were $3,968,000 (of which $607,000 is being forgiven pursuant to the
consulting agreement as discussed in Note 7). Each 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%. The remaining balance
for Directors and Officers will be repaid prior to the end of the first quarter
of 1997.
The Company also maintains a savings plan pursuant to Sections 401 (k) and (m)
of the Internal Revenue Code. The plan is available to substantially all
employees who meet length and service requirements. Employees may elect to
contribute 2% to 15% of their compensation, and the Company will match a portion
of the participant's contribution. Participants are partially vested in
contributions, made on their behalf by the Company, after three years, and fully
vested after seven years. Employer contributions were $203,000, $284,000 and
$399,000 for the years ended December 31, 1994, 1995 and 1996, respectively.
In 1996, the Company implemented two non-qualified, unfunded, deferred
compensation plans for select groups of management: the "Management Plan" and
the "Senior Executive Plan". The Deferred Compensation Plans allow eligible
employees to elect annually to defer up to fifty percent (50%) of their base
annual salary and up to one hundred percent (100%) of their annual bonus for
each calendar year (the "Annual Deferral Amount"). The Company makes matching
contributions on behalf of each participant in the Senior Executive Plan of one
hundred percent (100%) of the amount deferred by each participant up to ten
percent (10%) of the participant's base annual salary. Each participant in
either of the Deferred Compensation Plans has at all times a fully vested and
non-forfeitable interest in each year's contribution, including interest
credited thereto, and in any Company matching contributions, if applicable. In
connection with a participant's election to defer an Annual Deferral Amount, the
participant may also elect to receive a short-term payout, equal to the Annual
Deferral Amount plus interest. Such amount is payable in five or more years
from the first day of the year in which the Annual Deferral Amount is actually
deferred. The deferred compensation expense was $2,826,000 for 1996.
7. TRANSACTIONS WITH RELATED PARTIES
The CEO and majority stockholder of the Company owns a one-third interest in
Raven Industries, a major supplier of the Company's products, and a one-fifth
interest in Dynamic Products, Inc., a supplier of one of the Company's products.
An employee (former Director and Executive Officer) of the Company owns a five
percent interest in Dynamic Products, Inc. Total purchases from Raven
Industries were $41,801,000, $26,246,000 and $53,193,000 for the years ended
December 31, 1994, 1995 and 1996, respectively. Total purchases from Dynamic
Products, Inc. were $5,768,000, $3,094,000 and $3,181,000 for the years ended
December 31, 1994, 1995 and 1996, respectively. At December 31, 1995 and 1996,
the aggregate amounts payable to these suppliers were $971,000 and $1,339,000,
respectively.
The Company engages Nutrient Research Consultants, Ltd., which is wholly owned
by an employee (former Director and Executive Officer), to perform consulting
services related to the formulation and testing of nutritional products. For
the years ended December 31, 1994, 1995 and 1996, payments by the Company to
this consulting firm amounted to $1,294,000, $1,003,000 and $230,000,
respectively.
In January 1997, the Company entered into a consulting agreement with the former
Chief Counsel of the Company (the "Consultant"). The agreement provides for the
Consultant 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, the Consultant 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; and
(iii) forgiveness of $607,000 of the advances previously made to the Consultant.
In addition, vesting of the Consultant's restricted shares and stock options,
originally granted pursuant to his preexisting employment agreement, will
continue to vest through the consulting period.
In December 1996, the Company sold an aggregate 7% interest in its Japanese
subsidiary to certain Company Directors, Executive Officers and Resident
managers of Herbalife Japan K.K.. The aggregate sales price was $4,620,000,
$1,386,000 in
41
<PAGE>
cash and $3,234,000 in full recourse interest bearing notes. The notes are
receivable in five equal annual principal and interest installments, beginning
in December 1997. The sales price of the shares was determined based upon a
valuation performed by an independent investment banking firm. The profit
recognized from the sale has been deferred until the interest ultimately is sold
to a third party.
8. RESTRUCTURING EXPENSES
In connection with the Company's plan to modify its European infrastructure to
enhance operating efficiencies, the Company recorded a restructuring charge of
$2,300,000 in the year ended December 31, 1995. The restructuring charge
included expected termination costs for certain leases and reductions in certain
asset carrying values. The plan to modify the infrastructure was implemented in
the second half of 1996. At December 31, 1996, the remaining liability of
approximately $700,000 consists of lease obligations at closed facilities.
9. CONTINGENCIES
The Company is subject to transfer pricing regulations, restrictions on the
management fees it charges to its worldwide subsidiaries and similar regulations
and restrictions designed to ensure that appropriate levels of income are
reported as earned by the local subsidiary and taxed by the appropriate
governmental authorities. In addition, the Company's operations in foreign
countries are subject to regulations designed to ensure that appropriate levels
of customs duties are assessed on the importation of the Company's products.
While the Company believes it is in compliance with all applicable regulations
and restrictions, it is subject to the risk that governmental authorities could
audit its transfer pricing and related practices and assert that additional
taxes are owed. For example, the Company is currently subject to pending audits
or proposed assessments in a number of foreign jurisdictions, including Italy,
France and Germany, involving transfer pricing issues, income taxes, value added
taxes, withholding taxes, and related interest and penalties. In certain
circumstances, significant additional taxes, interest and penalties have been
assessed, and the Company will be required to litigate to reverse the
assessments. In most instances, the Company and its tax advisors believe that
the Company has substantial defenses, and the Company is vigorously contesting
all material outstanding assessments. However, the ultimate resolution of these
matters may take several years.
In the event that such audits or assessments are concluded adversely to the
Company, the Company believes that it could generally offset or mitigate the
consolidated effect of foreign income taxes required to be paid through the use
of U.S. foreign tax credits. However, depending upon the years at issue, the
Company might not be able to amend prior U.S. tax returns to obtain the benefit
of such credits. Furthermore, to the extent that the Company's operations in
high tax jurisdictions such as Japan grow disproportionately relative to the
balance of the Company's operations, the Company may be unable to fully utilize
its foreign tax credits in the U.S., which could, accordingly, result in the
Company paying a higher overall effective tax rate on its worldwide operations.
Because the laws and regulations governing U.S. foreign tax credits are complex
and depend, among other things, on tax treaties with foreign nations in addition
to U.S. tax laws, there can be no assurance that the Company would in fact be
able to take advantage of such additional tax credits.
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.
10. STOCKHOLDERS' EQUITY
The Company's 1991 Stock Option Plan ("1991 Plan"), as amended, permits the
granting of non-qualified stock options to key employees and consultants to
purchase 5,400,000 shares of the Company's Common Stock at prices not less than
85% of the fair market value of such shares on the date the option is granted.
All options outstanding at December 31, 1996 were granted at the fair market
value of such shares on the grant date. The contractual life of the options are
generally 10 years and vest ratably over a maximum of 5 years in minimum annual
installments of 20%.
42
<PAGE>
The Company's 1994 Plan allows for the granting of stock appreciation rights
("SAR's") and other forms of stock based performance awards authorized by the
Compensation Committee of the board of Directors. Compensation costs for these
awards are recorded based on the quoted market price of the Company's common
stock at the end of the period in accordance with Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
Interpretations. In 1992 and 1993, three key management employees were issued a
total of 525,000 restricted shares of Common Stock in connection with their
respective employment agreements. The employees are entitled to receive
dividends, but assumption of full beneficial ownership vests ratably over five
years and is contingent upon remaining in continuous employment for the vesting
period. Paid-in Capital in Excess of Par Value and Unearned Compensation were
recorded for the market value of the shares issued. Unearned Compensation is
being amortized to compensation expense over the vesting period and is shown as
a reduction of stockholders' equity. Stock based compensation costs included in
the determination of income were $1.1 million, $.9 million and $4.8 million for
the years ended 1994, 1995, and 1996, respectively.
The Company accounts for stock option grants in accordance with Accounting
Principles Board Opinion No. 25. Had compensation cost for stock option grants
been calculated using the fair value provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (FAS
123), the Company's net earnings and earnings per share would have been reduced
to the pro forma amounts indicated in the following table:
1995 1996
----------- -----------
Net Income - as reported $19,728,000 $44,791,000
Net Income - pro forma $18,164,000 $42,054,000
Primary EPS - as reported $0.65 $1.43
Primary EPS - pro forma $0.60 $1.35
Fully Diluted EPS - as reported $0.65 $1.38
Fully Diluted EPS - pro forma $0.60 $1.30
During November, 1995, 1,460,000 options were repriced by the Company to reflect
the then current stock price of $7.375. In accordance with the provisions of
FAS 123, the fair value compensation cost of the vested portion of the repriced
options was included in the determination of pro forma earnings for 1995. The
pro forma effect on net income for 1995 and 1996 is not necessarily
representative of the pro forma effect on net income for future years since the
pro forma compensation costs relate only to stock options granted or repriced
during 1995 and 1996.
The fair value of the stock options granted during 1995 and 1996 was determined
using the Black-Scholes option pricing model and the following weighted average
assumptions for 1995 and 1996, respectively: risk-free interest rates of 5.79%
and 6.47%; expected option life of 3.5 years and 5.5 years; volatility of 70.52%
and 77.68%; and dividend yields of 5.2%.
43
<PAGE>
Summarized information related to the 1991 and 1994 Plan is as follows:
<TABLE>
<CAPTION>
Year Ended December 31, 1994 1995 1996
------------------------- -------------------------- -------------------------
<S> <C> <C> <C> <C> <C> <C>
Options SAR's Options SAR's Options SAR's
---------- ------- ----------- ------- ---------- --------
Outstanding at January 1, 2,367,000 50,000 2,144,000 40,000 2,916,000 60,000
Granted 400,000 1,053,000 30,000 1,915,000 175,000
Repriced 1,460,000
Exercised (518,000) (10,000) (42,000) (10,000) (839,000) (16,000)
Surrendered for repricing (1,460,000)
Canceled (105,000) (239,000) (53,000) (33,000)
---------- ------- ----------- ------- ---------- --------
Outstanding at December 31, 2,144,000 40,000 2,916,000 60,000 3,939,000 186,000
------- ------ --------
------- ------ --------
Available for Grant at December 31, 944,000 330,000 662,000
---------- ----------- ---------
Total reserved shares 3,088,000 3,246,000 4,601,000
---------- ----------- ---------
Exercisable at December 31, 333,000 776,000 769,000
---------- ----------- ---------
Option prices per share
Granted $15.38-$21.88 $7.38-$11.63 $10.13-$19.88
Exercised $0.88-$9.00 $0.88-$3.63 $0.88-$15.25
Weighted average fair value of
options granted during the year $3.01 $7.23
</TABLE>
The following table summarizes information about fixed-price stock options at
December 31, 1995 and 1996:
1995 1996
------ ------
Outstanding at January 1, $12.95 $6.69
Granted $7.39 $14.96
Repriced $7.38
Exercised $2.19 $5.64
Surrendered for reprice $15.92
Canceled $14.59 $7.38
Outstanding at December 31, $6.69 $10.92
Option groups outstanding at December 31, 1996 and related option information
follows:
<TABLE>
<CAPTION>
Wtd Avg
Number Remaining Wtd Avg Options Wtd Avg
Outstanding Contractual Exercise Exercisable Exercise
Range of Exercise Prices: at 12/31/96 Life Price at 12/31/96 Price
----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.88 61,000 5 Years $0.88 61,000 $0.88
$3.63 46,000 5 Years $3.63 14,000 $3.63
$7.38 to $10.13 2,034,000 8 Years $7.54 685,000 $7.39
$13.00 to $15.75 1,798,000 10 Years $15.28 9,000 $13.00
</TABLE>
11. OPERATIONS IN FOREIGN COUNTRIES
The following is a summary of the financial activity of the Company by
geographical area:
44
<PAGE>
<TABLE>
<CAPTION>
Asia/ Eliminations/ Total
The Americas Europe Pacific Rim Adjustments Consolidated
------------ ------------ ------------ -------------- -------------
<S> <C> <C> <C> <C> <C>
1996
Retail sales to unaffiliated customers $390,012,000 $431,347,000 $378,785,000 $1,200,144,000
Transfers between geographic areas 377,152,000 3,744,000 (380,896,000)
------------ ------------ ------------ -------------- -------------
Total retail sales 767,164,000 435,091,000 378,785,000 (380,896,000) 1,200,144,000
Less distributor allowances 321,771,000 203,731,000 180,514,000 (137,807,000) 568,209,000
------------ ------------ ------------ -------------- -------------
Net Sales $445,393,000 $231,360,000 $198,271,000 ($243,089,000) $631,935,000
------------ ------------ ------------ -------------- -------------
------------ ------------ ------------ -------------- -------------
Income from operations $63,858,000 $9,411,000 $46,408,000 ($50,930,000) $68,747,000
------------ ------------ ------------ -------------- -------------
------------ ------------ ------------ -------------- -------------
Identifiable assets $123,735,000 $37,421,000 $50,914,000 $212,070,000
------------ ------------ ------------
------------ ------------ ------------
Corporate assets 57,044,000
-------------
Total assets $269,114,000
-------------
-------------
1995
Retail sales to unaffiliated customers $406,204,000 $373,946,000 $143,494,000 $923,644,000
Transfers between geographic areas 79,346,000 15,584,000 (94,930,000)
------------ ------------ ------------ -------------- -------------
Total retail sales 485,550,000 389,530,000 143,494,000 (94,930,000) 923,644,000
Less distributor allowances 206,952,000 174,545,000 67,041,000 (13,898,000) 434,640,000
------------ ------------ ------------ -------------- -------------
Net Sales $278,598,000 $214,985,000 $76,453,000 ($81,032,000) $489,004,000
------------ ------------ ------------ -------------- -------------
Income from operations $41,314,000 $6,856,000 $11,402,000 ($31,411,000) $28,161,000
------------ ------------ ------------ -------------- -------------
------------ ------------ ------------ -------------- -------------
Identifiable assets $84,840,000 $50,430,000 $22,859,000 $158,129,000
------------ ------------ ------------
------------ ------------ ------------
Corporate assets 49,561,000
-------------
Total assets $207,690,000
-------------
-------------
1994
Retail sales to unaffiliated customers $354,286,000 $473,249,000 $56,523,000 $884,058,000
Transfers between geographic areas 165,853,000 (165,853,000)
------------ ------------ ------------ -------------- -------------
Total retail sales 520,139,000 473,249,000 56,523,000 (165,853,000) 884,058,000
Less distributor allowances 168,442,000 222,196,000 26,539,000 417,177,000
------------ ------------ ------------ -------------- -------------
Net Sales $351,697,000 $251,053,000 $29,984,000 ($165,853,000) $466,881,000
------------ ------------ ------------ -------------- -------------
------------ ------------ ------------ -------------- -------------
Income from operations $111,908,000 $39,365,000 $2,378,000 ($82,926,000) $70,725,000
------------ ------------ ------------ -------------- -------------
------------ ------------ ------------ -------------- -------------
Identifiable assets $54,015,000 $63,970,000 $8,937,000 $126,922,000
------------ ------------ ------------
------------ ------------ ------------
Corporate assets 40,421,000
-------------
Total assets $167,343,000
-------------
-------------
</TABLE>
The Company's "income from operations" consists of income before interest income
and income taxes. Corporate assets consist principally of marketable
securities.
45
<PAGE>
12. INCOME TAXES
The components of income before income taxes were:
Year Ended December 31,
--------------------------------------------------
1994 1995 1996
---------- ---------- -----------
Domestic $62,369,000 $29,735,000 $23,298,000
Foreign 11,275,000 1,830,000 49,533,000
---------- ---------- -----------
$73,644,000 $31,565,000 $72,831,000
---------- ---------- -----------
---------- ---------- -----------
Income taxes are as follows:
Year Ended December 31,
--------------------------------------------------
1994 1995 1996
---------- ---------- -----------
CURRENT:
Foreign $4,950,000 $4,498,000 $26,349,000
Federal 25,951,000 937,000 8,774,000
State 2,167,000 29,000 2,600,000
DEFERRED:
Foreign 350,000 (511,000) (3,367,000)
Federal (6,007,000) 6,834,000 (5,589,000)
State 205,000 50,000 (727,000)
---------- ---------- -----------
$27,616,000 $11,837,000 $28,040,000
---------- ---------- -----------
---------- ---------- -----------
The tax effects of temporary differences which gave rise to deferred income tax
assets and liabilities are as follows:
Year Ended December 31,
------------------------------
1995 1996
---------- -----------
DEFERRED INCOME TAX ASSETS:
Intercompany profit in inventory $4,373,000 $1,101,000
Accruals not currently deductible 3,662,000 10,909,000
Tax loss carryforwards of certain
foreign subsidiaries 2,635,000 3,614,000
Deferred compensation plan 1,056,000
Less valuation allowance (2,232,000) (1,445,000)
Accrued state income taxes 67,000 652,000
Other 831,000 1,532,000
---------- -----------
$9,336,000 $17,419,000
---------- -----------
DEFERRED INCOME TAX LIABILITIES:
Depreciation/Amortization $2,031,000 $1,166,000
Payments to former partners 1,009,000 $962,000
Inventory deductibles 533,000 464,000
Deductible deferred costs 452,000 5,000
Other 215,000 43,000
---------- -----------
$4,240,000 $2,640,000
---------- -----------
NET $5,096,000 $14,779,000
---------- -----------
---------- -----------
46
<PAGE>
At December 31, 1996, the Company's deferred income tax asset for tax loss
carryforwards of certain foreign subsidiaries totaling $3,614,000 was reduced by
a valuation allowance of $1,445,000. The tax loss carryforwards expire in
varying amounts between 1997 and 2005. Realization of the tax loss
carryforwards is dependent on generating sufficient taxable income prior to
expiration of the loss carryforwards. Although realization is not assured,
management believes it is more likely than not that the net carrying value of
the tax loss carryforwards will be realized. The amount of the tax loss
carryforwards that is considered realizable, however, could be reduced in the
near term if estimates of future taxable income during the carryforward period
are reduced.
The tax expense differs from the "expected" income tax expense by applying the
United States statutory rate of 35% as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Tax expense at United States statutory rate $25,775,000 $11,048,000 $25,491,000
Increase (decrease) in tax resulting from:
Foreign Sales Corporation (542,000) (963,000) (332,000)
Foreign tax credits utilized in U.S. (4,497,000)
Reduction of valuation allowances (1,276,000)
Net losses for which no tax benefit was recorded 214,000 1,725,000 650,000
Differences between U.S. and foreign tax rates on
foreign income 648,000 846,000 6,556,000
State and other taxes, net of federal benefit 1,467,000 41,000 1,240,000
Other 54,000 (860,000) 208,000
----------- ----------- -----------
TOTAL $27,616,000 $11,837,000 $28,040,000
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
Cumulative undistributed earnings of foreign subsidiaries for which no deferred
taxes have been provided approximated $16,934,000 at December 31, 1996. The
additional taxes payable on the earnings of foreign subsidiaries, if remitted,
would be substantially offset by U.S. tax credits for foreign taxes paid.
13. FINANCIAL INSTRUMENTS
The Company enters into forward exchange contracts in managing its foreign
exchange risk on intercompany transactions and does not use the contracts for
trading purposes. The Company's goal is to protect the Company from the risk
that the eventual dollar net cash inflows from the intercompany transactions
will be adversely affected by changes in exchange rates. At December 31, 1996,
the Company had $4,000,000 in notional amounts of forward exchange contracts
with short-term maturities through February 25, 1997. Gains and losses on the
forward exchange contracts are recognized currently into income and, along with
contract premiums, are included in marketing, distribution and administrative
expenses. A summary of the forward exchange contracts as of December 31, 1996
is as follows:
<TABLE>
<CAPTION>
$U.S. Recognized Unrealized
Type Equivalent Maturity Gain (Loss) Gain (Loss)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Forward exchange contracts
as of December 31, 1996:
French Francs Sell $4,000,000 2/25/97 $0 $63,000
</TABLE>
The Company is exposed to credit losses in the event of nonperformance by
counterparties to its foreign exchange contracts but has no off-balance-sheet
credit risk of accounting loss. The Company anticipates, however, that the
counterparties will be able to fully satisfy their obligations under the
contracts. The Company does not obtain collateral or other security to support
the foreign exchange contracts subject to credit risk but monitors the credit
standing of the counterparties. The Company is required by the counterparty to
provide $1,500,000 of collateral for the Company's obligations in the contracts.
47
<PAGE>
14. QUARTERLY INFORMATION (UNAUDITED)
Quarterly information presented here is unaudited.
1995 1996
------------ ------------
FIRST QUARTER ENDED MARCH 31
Retail sales $229,166,000 276,572,000
Net sales 121,613,000 146,223,000
Operating margin 52,449,000 62,539,000
Net income 6,301,000 9,220,000
Net income per common share 0.21 0.30
Dividends per share paid 0.22 0.15
SECOND QUARTER ENDED JUNE 30
Retail sales $235,396,000 $283,933,000
Net sales 124,827,000 150,255,000
Operating margin 53,499,000 65,312,000
Net income 8,055,000 10,401,000
Net income per common share 0.27 0.33
Dividends per share paid 0.22 0.15
THIRD QUARTER ENDED SEPTEMBER 30
Retail sales $201,661,000 $306,697,000
Net sales 107,257,000 160,741,000
Operating margin 45,774,000 71,363,000
Net income 335,000 11,339,000
Net income per common share 0.01 0.36
Dividends per share paid 0.15 0.15
FOURTH QUARTER ENDED DECEMBER 31
Retail sales $257,421,000 $332,941,000
Net sales 135,307,000 174,716,000
Operating margin 54,785,000 79,620,000
Net income 5,037,000 13,830,000
Net income per common share 0.17 0.42
Dividends per share paid 0.15 0.15
48
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereto duly authorized.
Dated: March 26, 1997 HERBALIFE INTERNATIONAL, INC.
TIM GERRITY
By:_______________________________________
Tim Gerrity
Executive Vice President,
Chief Financial Officer
(Principal Financial and Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the date indicated.
TITLE DATE
MARK HUGHES
__________________________ Chairman of the Board and March 26, 1997
Mark Hughes President, Chief Executive
Officer (Principal
Executive Officer)
CHRISTOPHER PAIR
___________________________ Director and Executive Vice March 26, 1997
Christopher Pair President, Chief Operating
Officer
MICHAEL E. ROSEN Director and Executive Vice March 26, 1997
___________________________ President, Chief Executive,
Michael E. Rosen Corporate Development/Marketing
EDWARD HALL
___________________________ Director March 26, 1997
Edward Hall
ALAN LIKER
___________________________ Director March 26, 1997
Alan Liker
CHRISTOPHER M. MINER
____________________________ Director March 26, 1997
Christopher M. Miner
49
<PAGE>
HERBALIFE INTERNATIONAL, INC.
EXHIBITS
TO
ANNUAL REPORT
ON
FORM 10-K
FOR THE YEAR ENDED
DECEMBER 31, 1996
<PAGE>
HERBALIFE INTERNATIONAL, INC.
EXHIBIT INDEX
- --------------------------------------------------------------------------------
Exhibit Description Page
Number No./(Footnote)
- --------------------------------------------------------------------------------
10.11 Amendment to Employment Agreement between the
Company and David Addis dated June 29, 1993 (7)
10.12 Form of Letter Agreement between the Compensation
Committee of the Board of Directors of the Company (7)
and Mark Hughes
10.13 Form of Indemnity Agreement between the Company
and certain officers and directors of the Company (7)
10.14 Trust Agreement among the Company, Citicorp Trust,
N.A. and certain officers and directors of the (7)
Company
10.15 Form of Stock Appreciation Rights Agreement
between the Company and certain directors of the (7)
Company
10.16 1994 Performance Based Annual Incentive (9), (12)
Compensation Plan
10.17 Form of Promissory Note for Advances under the
Company's 1994 Performance Based Annual Incentive (10)
Compensation Plan
10.18 Employment Agreement between the Company and Chris
Pair dated April 3, 1994 (8)
10.19 Deferred Compensation Agreement between the (10)
Company and Michael Rosen
10.20 Office lease agreement between the Company and
State Teacher's Retirement System, dated July 20, (11)
1995
10.21 Form of stock appreciation rights agreements
between the Company and certain directors of the (11)
Company
10.22 The Company's Senior Executive Deferred
Compensation Plan, effective January 1, 1996 (11)
10.23 The Company's Management Deferred Compensation
Plan, effective January 1, 1996 (11)
10.24 Master Trust Agreement between the company and
Imperial Trust Company, Inc., effective January 1, (11)
1996
10.25 The Company's 401K Plan (11)
10.26 Agreement Concerning Share Allocation Plan for (13)
Specific Directors of Herbalife of Japan K.K.
dated December 30, 1996.
10.27 Consulting Agreement between David Addis and (13)
Herbalife of America, Inc. Dated January 27, 1997.
21 List of subsidiaries of the Company (13)
23.1 Independent Auditors' Consent (13)
27 Financial Data Schedule (13)
- --------------------------------------------------------------------------------
(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) ncorporated 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 Quarterly Report on Form
10-Q for the three months ended June 30, 1994.
(9) Incorporated by reference to the Company's Definitive Proxy Statement
relating to its 1994 Annual Meeting of Stockholders.
(10) Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 1994.
<PAGE>
(11) Incorporated by reference to the company's annual Report on Form 10-K
for the year ended December 31, 1995.
(12) Incorporated by reference to the Company's definitive Proxy Statement
relating to its 1996 Annual Meeting of Stockholders.
(13) Filed herewith.
<PAGE>
AGREEMENT CONCERNING SHARE ALLOCATION PLAN
FOR
SPECIFIC DIRECTORS
OF
HERBALIFE OF JAPAN K.K.
THIS AGREEMENT made and entered into, as of the 30th day of December, 1996,
by and among those persons, named on Exhibit A attached hereto and made an
integral part hereof, and currently serving as directors of Herbalife of Japan
K.K. (hereinafter the "Participating HJKK Directors"),
WITNESSETH:
WHEREAS, Herbalife of Japan K.K. (hereinafter "HJKK") was established, as
of November 25, 1992, and has since continued to exist, as a wholly-owned
Japanese subsidiary of Herbalife International, Inc. (hereinafter "HII"); and
WHEREAS, HII currently holds two hundred (200) shares of the stock of HJKK;
and
WHEREAS, HII has decided that a certain number of the HJKK shares currently
held by HII be allocated to each person who currently is serving as a director
of HJKK and that ten (10) shares of HJKK be allocated to Mr. Mark Hughes, the
founder of the Herbalife business and a director of HJKK, and that four (4)
shares of HJKK be allocated to the Participating HJKK Directors, in such manner
as specified in Exhibit A attached hereto and made an integral part hereof
(hereinafter "Exhibit A"); and
WHEREAS, inasmuch as Japanese law does not permit any person to hold any
fractional share (less than one (1) share) of any Japanese corporation, such as
HJKK, it has been agreed among the Participating HJKK Directors that an
appropriate entity be established for purposes of holding the four (4) shares
allocated by HII for and on behalf of the Participating HJKK Directors,
NOW THEREFORE, for and in consideration of the above premises and the
mutual covenants and agreements contained herein, it is agreed as follows:
<PAGE>
- 2 -
ARTICLE 1. (Establishment of Entity)
1.1 Promptly upon the execution of this Agreement, an entity shall be
established, as an unincorporated association, with such initial and additional
cash contributions by each Participating HJKK Director as specified in Article
2, below, for the purposes of acquiring from HII and holding, for and on behalf
of all Participating HJKK Directors, four (4) shares of HJKK. For purposes of
this Agreement, the Entity shall be deemed to be established as of the date
first above written.
1.2 The entity established pursuant to Paragraph 1.1, above (hereinafter
the "Entity") shall be called "Herbalife of Japan K.K. Directors Share
Allocation Plan," in English, and "HERBALIFE OF JAPAN KABUSHIKI KAISHA YAKUIN
MOCHIKABUKAI," in Japanese, and shall be located at the registered head office
of HJKK.
1.3 Mr. John Purdy, who is a Participating HJKK Director and is currently
serving as a Representative Director of HJKK, shall be the representative of the
Entity and, as such, shall be authorized and empowered to conduct and manage all
affairs pertaining to the operation of the Entity, in accordance with the
provisions of this Agreement. In the event that Mr. Purdy is not able to act as
the representative of the Entity for any reasons whatsoever, such other
Participating HJKK Director as may be designated, by agreement among Messrs.
Michael E. Rosen, Timothy Gerrity and Christopher Pair, shall act as such in Mr.
Purdy's place.
ARTICLE 2. (Cash Contributions)
2.1 Immediately upon establishment of the Entity, pursuant to Paragraph
1.1, above, Mr. John Purdy, as the representative of the Entity, shall take all
steps necessary to open a bank account in the name of the Entity, and shall
notify all other Participating HJKK Directors of the details of such bank
account, in writing.
2.2 Within seven (7) days after receipt of the details of the Entity's
bank account, pursuant to Paragraph 2.1, above, each Participating HJKK Director
shall pay his or her initial cash
<PAGE>
- 3 -
contribution to the Entity, in the amount specified opposite to his or her name
in Exhibit A, by wire transfer to the Entity's bank account.
2.3 Within seven (7) days from each anniversary of the establishment of
the Entity, as specified in Exhibit B attached hereto and made an integral part
hereof (hereinafter "Exhibit B"), each Participating HJKK Director shall pay his
or her additional cash contributions to the Entity, in the respective amounts as
specified opposite to his or her name in Exhibit B, by wire transfer to the
Entity's bank account.
2.4 Any amount specified either in Exhibit A or in Exhibit B shall be a
net amount. All expenses and bank charges that may be incurred in connection
with remittances of the cash contributions shall be borne by the respective
Participating HJKK Directors.
ARTICLE 3. (Share Acquisition)
3.1 Promptly after the initial cash contributions have been made to the
Entity by all Participating HJKK Directors, Mr. John Purdy, as the
representative of the Entity, shall take all steps to purchase and acquire, in
the name of the Entity and for the benefit of all Participating HJKK Directors,
perfect and complete title to and ownership of four (4) shares of stock of HJKK
from HII, at a price equal to the aggregate of all initial and additional cash
contributions made or to be made by the Participating HJKK Directors; provided,
however, that the price for the four (4) shares shall be paid to HII by the
Entity, in the manner specified immediately below:.
3.1.1 At the time of the acquisition of the four (4) shares, the
sum equal to the initial cash contributions; and
3.1.2 Within fourteen (14) days of each anniversary of the
establishment of the Entity, as specified in Exhibit B, the
sum equal to all additional cash contributions made by each
Participating HJKK Director, at such anniversary, pursuant
to Paragraph 2.3, above.
<PAGE>
- 4 -
3.2 The four (4) shares of stock of HJKK (hereinafter the "Subject HJKK
Shares") acquired in the name of the Entity, pursuant to Paragraph 3.1, above,
shall be held in the name of the Entity, but for the benefit of all
Participating HJKK Directors, in accordance with the provisions of this
Agreement. Each Participating HJKK Director shall have a joint and several,
but undivided, interest in the Subject HJKK Shares with other Participating HJKK
Directors, according to the percentage that his or her cash contribution bears
to the aggregate of all cash contributions made by the Participating HJKK
Directors, as is specified in Exhibit A (hereinafter the "Interest Percentage").
ARTICLE 4. (Entitlement on Subject HJKK Shares)
4.1 Mr. John Purdy, as the representative of the Entity, shall act as
proxy for the Entity, in order that the Entity may exercise voting and other
rights, as a shareholder of HJKK, at or in connection with any general meetings
of shareholders of HJKK.
4.2 In the event that any shares to be newly issued by HJKK for any
purposes are allotted to the Entity, as a shareholder of HJKK, on the account of
the Subject HJKK Shares, the Entity shall subscribe to such new shares so
allotted. In the event that the Entity is required to make cash payment to HJKK
for subscription to and acquisition of such new shares, each Participating HJKK
Director shall make an additional cash contribution to the Entity, in the amount
equal to his or her Interest Percentage of the total amount of cash payment to
be made to HJKK by the Entity for such new shares so subscribed. Any such new
shares allotted to and acquired by the Entity, with or without cash payment
therefor, shall be deemed to constitute a part of the Subject HJKK Shares, for
purposes of this Agreement, and shall be held in the name of the Entity, but for
the benefit of all Participating HJKK Directors, in accordance with the
provisions of this Agreement.
4.3 In the event that the Entity receives any cash distribution on the
Subject HJKK Shares, the Entity shall immediately distribute the same to all
Participating HJKK
<PAGE>
- 5 -
Directors, according to their respective Interest Percentages.
ARTICLE 5. (Dissolution of Entity)
5.1 In the event that the number of the Subject HJKK Shares is increased,
through the acquisition of additional HJKK shares by the Entity or by reason of
a splitting, by HJKK, of the issued and outstanding HJKK shares into a greater
number or otherwise, so that the Subject HJKK Shares may be distributed to all
Participating HJKK Directors, without necessitating the distribution of any
fractional share (less than one (1) share), according to their respective
Interest Percentages, then and in such event the Subject HJKK Shares shall be
distributed to the Participating HJKK Directors according to their respective
Interest Percentages and, upon such distribution, the Entity shall be dissolved.
5.2 In the event that the Entity is dissolved, prior to the completion of
all additional cash contributions by the Participating HJKK Directors, pursuant
to Paragraph 2.3, above, then and in such event, notwithstanding the provisions
of Paragraphs 2.3 and 3.1, above, each Participating HJKK Director shall be
obligated to pay his or her remaining additional cash contributions to HII,
directly, not later than the respective dates specified in Subparagraph 3.1.2,
above, for the respective payments to HII by the Entity.
ARTICLE 6. (Governing Law)
This Agreement shall be governed by and interpreted in accordance with the
laws of Japan.
ARTICLE 7. (Jurisdiction)
Any disputes or controversies shall be submitted to the exclusive
jurisdiction of the Tokyo District Court.
ARTICLE 8. (Language)
This Agreement is executed in the English language only. No translation of
this Agreement into any other language, including the Japanese language, shall
have any effect whatsoev-
<PAGE>
- 6 -
er.
IN WITNESS WHEREOF, this Agreement has been executed by all Participating
HJKK Directors, in a single original, which shall be kept at the registered head
office of HJKK, where the Entity is to be located.
Michael E. Rosen
11158 Sunset Boulevard
Los Angeles, CA 90049
U. S. A.
---------------------------
Timothy Gerrity
505 Paseo Miramar
Pacific Palisades, CA 90272
U. S. A.
/s/ Timothy Gerrity
---------------------------
Christopher Pair
14132 Beresford Road
Beverly Hills, CA 90210
U. S. A.
---------------------------
Alan Liker
10560 Wyton Drive
Los Angeles, CA 90024
U. S. A.
---------------------------
John Purdy
4-1-12-2082, Minami-Azabu
Minato-ku Tokyo 106
Japan
/s/ John Purdy 12/30/96
---------------------------
<PAGE>
- 7 -
Margaret Snowdon
13082 Mindanao Way, Unit 23
Marina del Rey, CA 90292
U. S. A.
/s/ Margaret Snowdon 12/30/96
-----------------------------
Tomomi Kosugi
2-36-7, Unoki
Ohta-ku, Tokyo 146
Japan
/s/ Tomomi Kosugi 12/30/96
-----------------------------
Hirofumi Naka
1-3-20-202, Kugenuma-Kaigan
Fujisawa-shi, Kanagawa 251
Japan
/s/ Hirofumi Naka 12/30/96
-----------------------------
Masahiro Igata
1124-3, Kashiwa
Kashiwa-shi, Chiba 277
Japan
/s/ Masahiro Igata 12/30/96
-----------------------------
<PAGE>
EXHIBIT A
Interest Percentage
HJKK Directors Initial Contribution (Initial Allocation)
- -------------- -------------------- --------------------
Michael E. Rosen Y12,765,000 28.75% (1.15 shrs)
Timothy Gerrity Y12,765,000 28.75% (1.15 shrs)
Christopher Pair Y12,765,000 28.75% (1.15 shrs)
Allan Liker Y4,440,000 10.00% (0.40 shr)
John Purdy Y666,000 1.50% (0.06 shr)
Margaret Snowdon Y333,000 0.75% (0.03 shr)
Tomomi Kosugi Y222,000 0.50% (0.02 shr)
Hirofumi Naka Y222,000 0.50% (0.02 shr)
Masahiro Igata Y222,000 0.50% (0.02 shr)
----------- ------------------
Total Y44,400,000 100.00% (4.00 shrs)
<PAGE>
ADDITIONAL CONTRIBUTIONS
<TABLE>
<CAPTION>
1st. 2nd 3rd. 4th. 5th.
HJKK Directors Anniv. Anniv. Anniv. Anniv. Anniv. Total
- -------------- ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Michael Rosen Y6,072,000 Y6,072,000 Y6,072,000 Y6,072,000 Y6,072,000 Y30,360,000
Timothy Gerrity 6,072,000 6,072,000 6,072,000 6,072,000 6,072,000 30,360,000
Christopher Pair 6,072,000 6,072,000 6,072,000 6,072,000 6,072,000 30,360,000
Alan Liker 2,112,000 2,112,000 2,112,000 2,112,000 2,112,000 10,560,000
John Purdy 316,800 316,800 316,800 316,800 316,800 1,584,000
Margaret Snowdon 158,400 158,400 158,400 158,400 158,400 792,000
Tomomi Kosugi 105,600 105,600 105,600 105,600 105,600 528,000
Hirofumi Naka 105,600 105,600 105,600 105,600 105,600 528,000
Macahiro Igata 105,600 105,600 105,600 105,600 105,600 528,000
---------- ---------- --------- ---------- --------- ----------
Total Y21,120,000 Y21,120,000 Y21,120,000 Y21,12O,000 Y21,120,000 Y105,600,000
------------
------------
</TABLE>
Each sum payable for each anniversary, specified above, shall bear interest
at the rate of two point one hundred and twenty-five percent (2.125%) per
annum from the date of the establishment of the Entity until full payment of
the said sum.
<PAGE>
CONSULTING AGREEMENT
THIS CONSULTING AGREEMENT (the "Agreement") is made effective as of
January 27, 1997 between DAVID R. ADDIS ("Consultant") and HERBALIFE
INTERNATIONAL OF AMERICA, INC., a California corporation (the "Company").
R E C I T A L S
A. Consultant has served as Chief Counsel of the Company (including its
subsidiary and affiliated companies) since 1993 and has substantial experience
and expertise in the legal and other aspects of the Company's business,
involving principally multi-level marketing of weight control products, food and
dietary supplements, personal care and similar products worldwide. The Company
wishes to engage Consultant to provide certain services in those areas and
otherwise in connection with its business during the term of this Agreement.
B. The parties wish to enter into this Agreement, among other things, to
provide for the rendition of the foregoing consulting services and the
compensation payable by the Company to Consultant in consideration thereof.
NOW, THEREFORE, in consideration of the foregoing premises and the mutual
covenants and agreements contained in this Agreement, the parties agree as
follows:
1. CONSULTING PERIOD AND SERVICES; TERMINATION OF PRIOR AGREEMENTS;
COMPENSATION.
1.1 TERM; PRIOR AGREEMENTS. This Agreement is effective as of the
first date written above (the "Effective Date") and will continue through
January 1, 1998. The term of this Agreement may be renewed by mutual agreement
of the parties in writing. In the event that the Company elects to renew the
Agreement for an additional term beyond January 1, 1998, it will notify
Consultant in writing of that fact no later than October 1, 1997. If the
Company provides such notice, then the parties will negotiate in good faith in
an attempt to reach agreement on the terms and conditions governing an extension
of the Agreement for an additional term beyond January 1, 1998. As of the
Effective Date, all instruments, agreements and understandings previously or
currently in place (excluding only the express provisions of this Agreement)
relating to Consultant's services to and employment and compensation by the
Company (including, without limitation, the letter of employment dated November
30, 1992) (collectively, the "Prior Arrangements") are terminated and of no
further force or effect. In the event that the Company acts to terminate this
Agreement prior to January 1, 1998 other than on account of Consultant's breach
hereunder, then, notwithstanding any other provision of this Agreement,
Consultant shall be entitled to receive all of the compensation provided for
herein for the remainder of the term.
1.2 SERVICES. Consultant agrees to provide his best, diligent
efforts and services as requested by the Company (a) in connection with the
proposed public DECS offering or an equivalent transaction and (b) otherwise in
relation to the business of the Company and its subsidiary and affiliated
companies from time to time during the term (including, without limitation,
assistance with respect to litigation matters currently pending
<PAGE>
or that may arise in the future). The foregoing services will include, without
limitation, assistance in facilitating the transition of Consultant's previous
responsibilities as Chief Counsel of the Company to a successor Chief Counsel.
Consultant's title and role will be solely that of a consultant performing
services as an independent contractor, and Consultant agrees not to hold himself
out as having any other title or authority on behalf of or with respect to the
Company or any of its subsidiary or affiliated companies.
1.3 COMPENSATION. In consideration of Consultant's services
hereunder, Consultant shall be entitled to the Base Compensation. "Base
Compensation" includes the following: (i) periodic compensation at the rate of
$700,000 per annum for the balance of 1997 (taking into account compensation
previously paid or earned with respect to services in 1997 under the Prior
Arrangements), payable monthly in cash in arrears; (ii) $3,500 per month,
payable monthly in cash in advance on the first day of each month for the
balance of 1997 (representing the monthly cost to Consultant of insurance
coverage elected by Consultant under COBRA); (iii) 40,000 shares of Common Stock
of the Company, such shares to be deemed earned and fully vested as of
January 1, 1998; (iv) provided that Consultant continues to provide consulting
services hereunder as of November 1, 1997, vesting of a previously granted stock
option (covering 17,500 shares of Common Stock with a strike price of $7-3/8 per
share) (the "November Option") on that date; and (v) $1,000,000, such amount to
be paid in cash on January 1, 1998. Further, in the event that the Company
requests that Consultant perform services pursuant to clause (b) of Section 1.2
above that require Consultant to expend, On Average, in excess of 40 hours per
month, then Consultant shall be entitled to receive Hourly Compensation for time
expended in excess of 40 hours per month On Average, PROVIDED that
(x) Consultant advises the Company that, in his reasonable judgment, the
assignment of tasks by the Company is expected to result in the expenditure of
time in excess of 40 hours per month On Average and (y) the Company confirms in
writing that Hourly Compensation will be available in respect thereof. If the
Company does not provide that confirmation, then the parties will confer in good
faith to reduce the tasks assigned to Consultant such that Consultant's services
hereunder will not require the expenditure of more than 40 hours per month On
Average. "On Average" refers to any four consecutive calendar months during the
term of this Agreement (with partial months during the term prorated on a daily
basis). "Hourly Compensation" means $350 per hour. As applicable, Hourly
Compensation shall be payable following appropriate submission to the Company by
Consultant of an invoice with supporting time documentation.
1.4 EXPENSES. In addition to the foregoing compensation, Consultant
shall be entitled to be reimbursed by the Company for all out-of-pocket expenses
incurred by Consultant in the performance of his services under this Agreement.
The terms and conditions of expense reimbursement (including, without
limitation, the requirement to submit reasonably itemized statements and
supporting documentation) shall be as prescribed by the Company from time to
time. Further, so long as this Agreement remains in effect, the Company shall
provide for (i) appropriate office space for Consultant in Washington D.C. and
(ii) the employment of a secretary for Consultant in that office.
1.5 INDEPENDENT CONTRACTOR. Consultant acknowledges that he is being
engaged on an independent contractor basis under this Agreement, and shall not
be eligible for benefits generally available to the employees or executives of
the Company or otherwise
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<PAGE>
and that his sole compensation for services hereunder are those stated in this
Agreement. Compensation to Consultant hereunder shall not be subject to any
withholding or deductions provided by local, state or federal law, except to the
extent any such law requires withholding on payments to independent contractors.
In lieu of such withholding, Consultant shall be solely responsible for the
payment of all applicable taxes on compensation earned or paid hereunder.
2. INDEMNIFICATION. In addition to the compensation for services
provided in Section 1 above, to the maximum extent permitted by law, Consultant
shall be entitled to be indemnified by the Company in connection with the
provision of services under this Agreement, in accordance with and subject to
the same conditions forming a part of the indemnification provisions applicable
to the executive officers and directors of the Company, as such indemnification
provisions exist as of the date hereof. In the event that any aspect of such
indemnification provisions is not permitted by applicable law to be made
available to Consultant, then the Company shall provide Consultant with the
maximum indemnification benefits permissible under applicable law.
3. CONFIDENTIALITY. In view of the fact that Consultant's work as an
executive of the Company previously and hereafter as a consultant to the Company
has and will bring Consultant into close contact with many confidential affairs
of the Company, including matters of both a legal and a business nature, such as
information about the Company's distributors, marketing plan, pending legal
matters and disputes, costs, profits, markets, sales, strategic plans for future
development and other information not readily available to the public
(collectively, "Confidential Information"), Consultant hereby agrees:
(i) To keep secret all Confidential Information of the Company
learned prior to the date of this Agreement and in the course of Consultant's
engagement hereunder, and not to disclose any such Confidential Information to
anyone outside of the Company, either during or after Consultant's engagement
with the Company, except in connection with the diligent and responsible
rendering of services in connection with the proposed public DECS transaction
and unless and until such time as the Company consents to such disclosure;
(ii) To deliver promptly to the Company on termination of this
Agreement or at any other time that the Company may so request, all memoranda,
notes, records, reports and other documents and writings and memorializations
whatsoever (and all copies thereof) relating to or reflecting Confidential
Information which Consultant may then possess or have under Consultant's
control;
(iii) That as a means reasonably designed to protect the Confidential
Information of the Company which would otherwise inherently be utilized in the
following proscribed activities, he will not, during the term of this Agreement
and for a period of 36 months thereafter, provide any services to or otherwise
participate in any capacity (including, without limitation, as owner, partner,
officer, director, member, counsel, advisor, consultant or agent or
representative) in any person or entity engaged, directly or indirectly, in a
direct sales or in a multi-level marketing business or enterprise or other
business or enterprise engaged, directly or indirectly, in the sale,
merchandising or distribution of diet products, food supplements, healthcare
products, personal care products
-3-
<PAGE>
or any other categories of products that the Company currently markets or may in
the future market, in each instance without the prior written consent of the
Company. Notwithstanding the preceding sentence, the parties agree that
Consultant may provide services to or otherwise participate as described above
in the sale, merchandising and distribution of pharmaceutical products, medical
devices and personal care products that have a pharmaceutical use or purpose.
Further, during the term of this Agreement, Consultant agrees not to provide any
services to other persons or entities or otherwise participate in activities
that would prevent him from diligently and effectively performing his consulting
services hereunder; and
(iv) That violation of this Section 3 would cause the Company
irreparable damage for which the Company could not be reasonably compensated in
damages in an action at law, and, therefore, that in the event of any breach or
threatened breach by Consultant of this Section 3, the Company shall be entitled
to make application to a court of competent jurisdiction for equitable relief by
way of injunction or otherwise (without being required to post a bond). This
provision shall not, however, be construed as a waiver of any of the rights
which the Company may have for damages under this Agreement or otherwise, and
all of the Company's rights and remedies shall be unrestricted and cumulative.
4. OTHER AGREEMENTS.
4.1 LOAN TRANSACTIONS; ARTWORK. In consideration of the parties'
entering into this Agreement, the Company agrees to forgive the advances
previously made to Consultant in respect of anticipated bonuses under the
Company's 1994 Performance-Based Incentive Compensation Plan (the "1994 Plan")
in the approximate outstanding principal amount of $600,000 as of the date
hereof. Consultant, however, agrees to repay promptly (and, in any event,
within 45 days of the date hereof) a separate loan in the original principal
amount of $350,000 made by the Company to Consultant, with accrued interest
thereon as reflected in the documentation governing such loan; PROVIDED,
HOWEVER, that Consultant shall be required to repay only $195,000 of the
principal amount of such loan and the Company hereby forgives the balance
thereof. As further consideration for the parties' entering into this
Agreement, the Company agrees that all artwork on the walls and other
decorations in the offices previously supplied for Consultant's use by the
Company and that were purchased with Consultant's personal funds (which were not
reimbursed by the Company) shall remain the sole property of Consultant that may
be removed by Consultant from such offices at his will.
5. WAIVER OF OTHER CLAIMS. Except (i) as set forth in this Agreement and
(ii) for any and all rights that Consultant may have under the Company's 401(k)
plan and deferred compensation plan as of the date hereof (as to which
Consultant shall continue to have the rights specified therein with respect to
the entire period through the Effective Date), each of the Company and
Consultant agrees that it and he has no other claims on account of loans,
advances, salary, bonuses or expectation of bonuses, or any other monetary
amounts whatsoever relating directly or indirectly to the previous employment
relationship between the Company (including its subsidiary and affiliated
companies) and Consultant. In particular, but without limitation of the
generality of the foregoing, Consultant acknowledges that he shall not be
entitled to receive any bonus or other
-4-
<PAGE>
compensation under the 1994 Plan in respect of the 1996 performance period.
Notwithstanding the foregoing, this will confirm that, (i) for a period of 30
days following the Effective Date, Consultant shall have the right to exercise a
previously granted stock option (covering 17,500 shares with a strike price of
$7-3/8 per share) in the manner specified in the original agreement governing
such stock option, and (ii) provided that Consultant continues to provide
consulting services hereunder as of November 1, 1997, Consultant shall have the
right to exercise the November Option on or prior to November 30, 1997, in the
manner specified in the original agreement governing such stock option.
6. GENERAL PROVISIONS.
6.1 NOTICES. All notices under this Agreement will be in writing and
will be delivered by personal service or telegram, telecopy or certified mail
(if such service is not available, then by first class mail), postage prepaid,
to such address as may be designated from time to time by the relevant party,
and which will initially be as set forth below. Any notice sent by certified
mail will be deemed to have been given three (3) days after the date on which it
is mailed. All other notices will be deemed given when received. No objection
may be made to the manner of delivery of any notice actually received in writing
by an authorized agent of a party. Notices will be addressed as follows or to
such other address as the party to whom the same is directed will have specified
in conformity with the foregoing:
(i) If to Company:
Herbalife International of America, Inc.
1800 Century Park East
Los Angeles, CA 90067
Telecopy No.: (310) 557-3915
Attn: Christopher Pair
(i) If to Consultant:
David R. Addis
9716 Arnon Chapel Road
Great Falls, VA 22066
Telecopy No.: (703) 759-4779
6.2 ENTIRE AGREEMENT; AMENDMENTS. This Agreement sets forth the
entire understanding of the parties relating to the engagement of Consultant by
the Company effective with respect to the period from and after the date hereof.
Without limiting the generality of the foregoing, all Prior Arrangements are
hereby terminated as of the Effective Date (except as otherwise provided
herein). None of the terms or provisions hereof shall be modified or waived,
and this Agreement may not be amended or terminated, except by a written
instrument signed by the party against which modifications or waiver or
amendment or termination is sought to be enforced. No waiver of any one
provision shall be considered a waiver of any other provision, and the fact that
an obligation is waived for a period of time shall not be considered to be a
continuing waiver.
-5-
<PAGE>
6.3 SEVERABILITY. Each of the rights and remedies enumerated in this
Agreement shall be independent of the others and shall be severally enforceable
and all of such rights and remedies shall be in addition to and not in lieu of
any other rights and remedies available to the Company or Consultant under
applicable law or in equity. If any of the provisions contained, or if any of
the rights or remedies enumerated, in this Agreement is hereafter construed to
be invalid or unenforceable, the same shall not affect the remainder of the
covenant or covenants, or rights or remedies, which shall be given full effect
without regard to the invalid portions. If any of the provisions contained in
this Agreement is held to be unenforceable because of the duration or scope of
such provision, the parties agree that the court making such determination shall
have the power to reduce the duration and/or scope of such provision so that the
reduced form of said provision shall be enforceable.
6.4 GOVERNING LAW. This Agreement shall be construed under and
governed by the laws of the State of California, without giving effect to
principles of conflicts of laws.
6.5 HEADINGS. The Section headings in this Agreement are inserted
only as a matter of convenience, and in no way define, limit, or extend or
interpret the scope of this Agreement or of any particular Section.
6.6 COUNTERPARTS. This Agreement may be executed in counterparts,
each of which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the
first date written above.
HERBALIFE INTERNATIONAL OF AMERICA, INC.
By:
Its:
-------------------------------------
-----------------------------------------
David R. Addis
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<PAGE>
EXHIBIT 21
HERBALIFE INTERNATIONAL, INC.
SUBSIDIARIES OF REGISTRANT
Registrant has thirty-nine active wholly-owned subsidiaries which are:
1. Herbalife International of America, Inc., a California corporation.
2. Herbalife of Canada, Ltd., a Canadian corporation formed in July,
1982.
3. Herbalife Australasia Pty., Ltd., an Australian corporation formed in
November, 1982.
4. Herbalife (U.K.) Limited, a United Kingdom corporation formed in
March, 1983.
5. Herbalife International of Hong Kong Limited, a Hong Kong Corporation
formed in September, 1983.
6. Herbalife International de Espana, S.A., a Spanish Corporation formed
in June, 1988.
7. Herbalife (N.Z.) Limited, A New Zealand corporation formed in
November, 1988.
8. Herbalife Internacional de Mexico, S.A. de C.V., a Mexican corporation
formed in May, 1989.
9. Herbalife International France, S.A., a French corporation formed in
May, 1990.
10. Herbalife International Deutschland GmbH, a German corporation formed
in November, 1990.
11. Herbalife International of Israel (1990) Ltd., an Israeli corporation
formed in January, 1991.
12. Herbalife Products de Mexico, S.A. de C.V., a Mexican corporation
formed in June, 1992.
13. Herbalife Italia S.p.A., an Italian corporation formed in July, 1992.
14. Herbalife International, S.A., a Portuguese corporation formed in
August, 1992.
15. Herbalife International of Japan, K.K., a Japanese corporation formed
in December, 1992.
16. Herbalife International FSC, Inc., a U.S. Virgin Islands corporation
formed in December, 1992.
17. Herbalife International Netherlands, B.V., a Netherlands corporation
formed in March, 1993.
18. Herbalife International Belgium, S.A./N.V., a Belgian corporation
formed in September, 1993.
19. Herbalife Dominicana, S.A., a Dominican Republic corporation formed in
September, 1993.
20. Vida Herbal Suplementos Alimenticios, C.A., a Venezuelan corporation
formed in September, 1993.
21. Herbalife Polska Sp.zo.o, a Polish corporation formed in October,
1993.
22. Herbalife International Argentina, S.A., an Argentinean corporation
formed in December, 1993.
23. Herbalife Denmark ApS, a Danish corporation formed in December, 1993.
24. Promotions One, Inc., a California corporation formed in December,
1993.
25. Herbalife International of Europe, Inc., a California corporation
formed in January, 1994.
26. Herbalife International of South America, a California corporation
formed in February, 1994.
27. Herbalife International Distribution, Inc., a California corporation
formed in March, 1994.
<PAGE>
28. Herbalife International Holdings, Inc., a Filipino corporation formed
in July, 1994.
29. Herbalife International Philippines, Inc., a Filipino corporation
formed in July, 1994.
30. Herbalife Sweden Aktiebolag, a Swedish corporation formed in October,
1994.
31. Herbalife International Do Brasil Ltda. , a Brazilian corporation
formed in October, 1994.
32. Herbalife International Communications, Inc., formed in November 1994.
33. Herbalife International Finland OY c/o Hanes, a Finnish corporation
formed in June, 1995.
34. Herbalife International Russia 1995 Ltd., a Israeli corporation formed
in June, 1995.
35. Herbalife South Africa, Ltd., a South African corporation formed in
June, 1995.
36. Herbalife Taiwan, Inc., a Taiwanese corporation formed in June, 1995.
37. Herbalife Norway Products A/S, a Norwegian corporation formed in
August, 1995.
38. Herbalife International Greece S.A., a Greek corporation formed in
May, 1995.
39. Herbalife Korea Co., Ltd., a South Korean corporation formed in
February, 1994.
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Post-Effective Amendment No. 1
to Registration Statement No. 33-42004 and Post-Effective Amendment No. 1 to
Registration Statement No. 33-67102 of Herbalife International, Inc. on Form S-8
and in Post-Effective Amendment No. 2 to Registration Statement No. 33-48580 of
Herbalife International, Inc. on Form S-3 of our report dated February 14, 1997
appearing in this Annual Report on Form 10-K of Herbalife International, Inc.
for the year ended December 31, 1996.
DELOITTE & TOUCHE LLP
Los Angeles, California
March 24, 1997
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