<PAGE> 1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
--------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to __________________
Commission file number 0-15712
-------
HERBALIFE INTERNATIONAL, INC.
-----------------------------
(Exact name of Registrant as specified in its charter)
Nevada 22-2695420
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1800 Century Park East, Los Angeles, California 90067
----------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
(310) 410-9600
--------------
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(Former Name, Former Address and Former Fiscal Year,
If Changed Since Last Report
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes No
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares outstanding of each of the registrant's classes of Common
Stock, as of April 30, 1998:
9,894,342 Shares of Class A Common Stock
19,482,014 Shares of Class B Common Stock
================================================================================
<PAGE> 2
HERBALIFE INTERNATIONAL, INC.
Index to Financial Statements and Exhibits
Filed with the Quarterly Report of the Company on Form 10-Q
For the Three Months Ended March 31, 1998
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page No.
<S> <C> <C>
Item 1. Financial Statements:
Consolidated Balance Sheets 2 - 3
Consolidated Statements of Income 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6 - 7
Item 2. Management's Discussion and Analysis of Financial 8 - 12
Condition and Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 2. Changes in Securities and Use of Proceeds 13
Item 3. Defaults Upon Senior Securities 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 14 - 15
Signature 16
</TABLE>
<PAGE> 3
HERBALIFE INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 68,934,000 $ 78,913,000
Marketable securities 37,676,000 43,794,000
Receivables 37,671,000 46,021,000
Inventories 79,588,000 71,583,000
Prepaid income taxes 1,734,000 695,000
Prepaid expenses and other current assets 9,571,000 7,466,000
Deferred income taxes 19,632,000 19,502,000
------------ ------------
Total current assets 254,806,000 267,974,000
Property, at cost, net of accumulated depreciation and
amortization of $36,526,000 (1998) and $34,255,000 (1997) 29,304,000 29,738,000
Other assets 21,525,000 13,409,000
Goodwill, net of accumulated amortization of
$1,469,000 (1998) and $1,428,000 (1997) 3,418,000 3,459,000
------------ ------------
TOTAL $309,053,000 $314,580,000
============ ============
</TABLE>
See the accompanying notes to consolidated financial statements
2
<PAGE> 4
HERBALIFE INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
------------- -------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 19,011,000 $ 12,654,000
Royalty overrides 57,527,000 56,643,000
Accrued compensation 14,445,000 19,516,000
Accrued expenses 19,278,000 19,137,000
Dividends payable 4,406,000 4,634,000
Current portion of contracts payable and bank loans 1,899,000 1,449,000
Advance sales deposits 10,822,000 18,375,000
Income taxes payable 11,301,000 9,580,000
------------- -------------
Total current liabilities 138,689,000 141,988,000
NON-CURRENT LIABILITIES:
Contracts payable, net of current portion 2,505,000 2,666,000
Deferred income taxes 1,146,000 1,739,000
Other non-current liabilities and deferred credits 15,502,000 11,586,000
------------- -------------
Total liabilities 157,842,000 157,979,000
------------- -------------
MINORITY INTEREST 2,202,000 1,868,000
------------- -------------
STOCKHOLDERS' EQUITY:
Common Stock A, $0.01 par value; 33,333,333 shares
authorized 9,893,408 (1998) and 9,811,623 (1997) shares 99,000 98,000
issued and outstanding
Common Stock B, $0.01 par value; 66,666,667 shares
authorized, 19,427,510 (1998) and 19,818,248
(1997) shares issued and outstanding 192,000 198,000
Paid-in-capital in excess of par value 52,497,000 50,319,000
Retained earnings includes cumulative translation
adjustment of $(5,289,000) (1998) and $(4,858,000) (1997) 96,195,000 104,248,000
Unearned compensation (87,000) (152,000)
Unrealized loss on marketable securities 113,000 22,000
------------- -------------
Total stockholders' equity 149,009,000 154,733,000
------------- -------------
TOTAL $ 309,053,000 $ 314,580,000
============= =============
</TABLE>
See the accompanying notes to consolidated financial statements
3
<PAGE> 5
HERBALIFE INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
March 31, 1998 March 31, 1997
-------------- --------------
<S> <C> <C>
Retail sales $398,447,000 $323,944,000
Less: Distributor allowances on product purchases 188,671,000 153,967,000
------------ ------------
Net sales 209,776,000 169,977,000
Cost of sales 54,511,000 45,731,000
Royalty overrides 62,591,000 50,895,000
Marketing, distribution & administrative expenses 68,963,000 54,836,000
Interest income - net 878,000 1,179,000
------------ ------------
Income before income taxes and minority interest 24,589,000 19,694,000
Income taxes 9,467,000 7,582,000
------------ ------------
Income before minority interest 15,122,000 12,112,000
Minority interest 334,000 196,000
------------ ------------
NET INCOME $ 14,788,000 $ 11,916,000
============ ============
EARNINGS PER SHARE
Basic $ 0.51 $ 0.39
Diluted 0.48 0.38
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 29,216,872 30,334,417
Diluted 30,709,026 31,725,194
CASH DIVIDENDS PER COMMON SHARE $ 0.15 $ 0.15
</TABLE>
See the accompanying notes to consolidated financial statements
4
<PAGE> 6
HERBALIFE INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
March 31, 1998 March 31, 1997
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $14,788,000 $ 11,916,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,982,000 2,225,000
Deferred income taxes (790,000) (225,000)
Amortization of unearned compensation 65,000 65,000
Stock Grant 582,000
Unrealized foreign exchange loss 15,000 (51,000)
Minority interest in earnings 334,000 196,000
Other (14,000) 16,000
Changes in operating assets and liabilities:
Receivables 7,617,000 (1,395,000)
Inventories (8,193,000) (1,208,000)
Prepaid expenses and other current assets (3,436,000) 1,067,000
Other assets (8,500,000) (5,166,000)
Accounts payable 6,405,000 (2,022,000)
Royalty overrides 1,250,000 (1,169,000)
Accrued expenses and accrued compensation 90,000 (3,165,000)
Advance sales deposits (7,562,000) (100,000)
Income taxes payable 3,315,000 1,338,000
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 8,366,000 2,904,000
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property (2,300,000) (3,336,000)
Proceeds from sale of property 29,000 9,000
Changes in marketable securities 6,209,000 (3,981,000)
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES 3,938,000 (7,308,000)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid (4,500,000) (4,534,000)
Additions to loans payable 858,000
Principal payments on loans payable (380,000) (834,000)
Exercise of stock options 2,084,000 1,980,000
Stock repurchases (19,572,000) (1,661,000)
Recapitalization costs (611,000)
Other (2,000)
------------ ------------
NET CASH USED BY FINANCING ACTIVITIES (22,121,000) (5,051,000)
------------ ------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (162,000) (1,473,000)
------------ ------------
NET CHANGE IN CASH AND CASH EQUIVALENTS (9,979,000) (10,928,000)
CASH AND CASH EQUIVALENTS AT JANUARY 1 78,913,000 87,481,000
------------ ------------
CASH AND CASH EQUIVALENTS AT MARCH 31 $ 68,934,000 $ 76,553,000
============ ============
</TABLE>
See the accompanying notes to consolidated financial statements
5
<PAGE> 7
HERBALIFE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. INTERIM FINANCIAL INFORMATION
The unaudited interim financial information of Herbalife International, Inc.
(the "Company") has been prepared in accordance with Article 10 of the
Securities and Exchange Commission's Regulation S-X. In the opinion of
management, the accompanying interim financial information contains all
adjustments, consisting of normal recurring adjustments, necessary to present
fairly the Company's financial statements as of March 31, 1998 and for the three
month periods ended March 31, 1997 and 1998.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information." These statements are effective for
financial statements issued for periods beginning after December 15, 1997. The
Company has not yet analyzed the impact of adopting these statements.
In February 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 132, Employers'
Disclosures about Pensions and Other Post Retirement Benefits. SFAS No. 132
requires an entity to disclose certain information about pensions and other post
retirement benefits. The effects of adopting these new accounting standards will
not be material to the Company's consolidated financial statements, when adopted
for this fiscal year, as required.
In the first quarter of 1998, the AICPA's Accounting Standards Executive
Committee issued Statement of Position (SOP) 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use. SOP 98-1 provides
guidance on the capitalization of software for internal use. The Company will
adopt SOP 98-1 on January 1, 1999, as required. Management is currently
assessing the impact of this SOP on the financial statements of the Company.
In April 1998, the AICPA's Accounting Standards Executive Committee issued
statement of position (SOP) 98-5, reporting on the cost of start-up activities.
SOP 98-5 requires that all the costs of start-up activities, including
organizational costs, be expensed as incurred. The Company will adopt SOP 98-5
on January 1, 1999, as required. The effects of adopting this SOP will not be
material to the Company's consolidated financial statements.
2. EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income by the weighted
average number of common shares outstanding. Diluted earnings per share includes
the dilutive effect of stock options. A reconciliation of the basic and diluted
weighted average shares is as follows:
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------
March 31, 1998 March 31, 1997
-------------- --------------
<S> <C> <C>
Basic 29,216,872 30,334,417
Effect of Stock Options 1,492,154 1,390,777
========== ==========
Diluted 30,709,026 31,725,194
========== ==========
</TABLE>
Net income as presented in consolidated statements of income is used as the
numerator in both the basic and diluted computation.
3. CONTINGENCIES
The Company's French and Italian subsidiaries have been subject to tax audits by
governmental authorities in those countries, each of whom are proposing that
material value added, withholding, and income taxes are due. The Company and its
tax advisors believe that the Company has substantial defenses and the Company
is vigorously contesting the additional proposed taxes and related charges.
However, the ultimate resolution of these matters is unknown and may take
several years.
6
<PAGE> 8
HERBALIFE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINGENCIES (CONTINUED)
A tentative settlement has been reached with the German tax authorities, the
amount for which has been provided for and was not material to the Company's
financial statements.
Furthermore, the Company is from time to time engaged in routine litigation
incidental 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.
4. COMPREHENSIVE INCOME
In June of 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 130 "Reporting Comprehensive Income." The
statement, which the Company adopted in the first quarter of 1998, establishes
standards for reporting and displaying comprehensive income and its components
in a full set of general-purpose financial statements. Comprehensive income is
summarized as follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31, 1998
----------------------------
1998 1997
----------- -----------
<S> <C> <C>
Net Income $14,788,000 $11,916,000
Foreign currency translation adjustment (431,000) (1,388,000)
Unrealized gain/(loss) on marketable securities 91,000 (123,000)
----------- -----------
Comprehensive income $14,448,000 $10,405,000
=========== ===========
</TABLE>
7
<PAGE> 9
HERBALIFE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Throughout this report "retail sales" are determined as the gross sales amounts
reflected on the Company's invoices to its distributors. The Company does not
receive the amount reported as "retail sales", and the Company does not monitor
the actual retail prices charged for the Company's products. "Net sales"
generally represents the actual purchase prices paid to the Company by its
distributors, after giving effect to distributor discounts (referred to as
"distributor allowances"), which total approximately 50% of suggested retail
sales prices. The Company receives its net sales price in cash or through credit
card payments upon receipt of orders from distributors. Importers are utilized
by the Company in some markets and, under certain circumstances, credit terms
are extended. The Company's "gross profit" consists of net sales less (i) "cost
of sales," consisting of the prices paid by the Company to its manufacturers for
products and costs related to product shipments, foreign duties and tariffs and
similar expenses, and (ii) "royalty overrides," currently consisting of (a)
royalties (5% to 15%) and bonuses (up to 6%) on the suggested retail sales
prices of products earned by qualifying distributors on the sales of other
distributors within their distributor organizations, and (b) the President's
Team Bonus payable to certain of the Company's most senior distributors in the
aggregate amount of up to an additional 1% of product retail sales and (c) other
one time incentive cash bonuses to qualifying distributors. Royalty overrides as
reported in the Consolidated Statements of Income are net of a handling fee (6%
of retail sales) charged by the Company to its distributors on purchases of
products from the Company.
The Company's use of "retail sales" in reporting financial and operating data
reflects the fundamental role of "retail sales" in the Company's accounting
systems, internal controls and operations, including the basis upon which
distributor bonuses are paid. The retail sales price of the Company's products
is reflected in distributor invoices as the price charged to distributors
together with, in most cases, a deduction for the corresponding distributor
allowance. The retail sales price is used by the Company to calculate, among
other things, royalty overrides and "volume points" earned by distributors.
Volume points are point values assigned to each of the Company's products that
are equal in all countries, and are used as a supervisor qualification criteria.
In addition, management relies upon "retail sales" data reflected in daily sales
reports to monitor results of operations in each of the Company's markets.
The significance of the Company's "net sales" is to reflect, generally, the
prices actually received by the Company after deducting the basic distributor
allowance, but before deducting royalty overrides and bonuses. The ratio of the
Company's "retail sales" to "net sales" is relatively constant because
distributor allowances historically total approximately 50% of suggested retail
sales prices. Accordingly, factors that affect "retail sales" generally have a
corresponding and proportionate effect on "net sales." To the extent the ratio
of "retail sales" to "net sales" varies from period to period, such variances
have resulted principally from sales of the Company's distributor kits and other
educational and promotional materials, for which there are no distributor
allowances. Sales of such items initially decreased and thereafter stabilized as
a percentage of total retail sales since 1991, but such decreases have not had a
material impact on the ratio of the Company's "retail sales" to "net sales" or
on the Company's operating margin.
The Company believes that, in certain of its markets, the opening of other new
markets within the same geographic region or with the same or similar language
or cultural bases has resulted in a corresponding tendency of some key
distributors to focus their attention on business opportunities provided by new
markets instead of developing their established downline organizations in
existing markets. Additionally, in certain instances, the Company has become
aware that certain sales in certain existing markets were attributable to
purchasers who distributed such product in countries which had not yet been
opened. When these countries were opened, such sales in existing markets shifted
to the newly opened markets, resulting in a decline in sales in the existing
market.
The Company's results of operations for the periods described below are not
necessarily indicative of results of operations for future periods, which depend
upon numerous factors including the Company's ability in the future to enter new
markets and introduce additional and new products into its markets.
8
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS (CONTINUED)
COMPARISON OF FIRST QUARTER 1998 TO 1997
Retail sales for the three months ended March 31, 1998 increased 23.0% to $398.4
million as compared to sales of $323.9 million in the prior year.
RETAIL SALES BY GEOGRAPHICAL SEGMENTS (DOLLARS IN MILLIONS):
<TABLE>
<CAPTION>
Three Months Ended March 31,
--------------------------------
%
1998 1997 Change
------ ------ ------
<S> <C> <C> <C>
Asia/Pacific Rim $151.4 $125.5 20.7
Europe 135.8 106.3 27.7
The Americas 111.2 92.1 20.7
------ ------ ----
Total Retail Sales $398.4 $323.9 23.0
====== ====== ====
</TABLE>
Retail sales within the Asia/Pacific Rim region increased 20.7% to $151.4
million in the first quarter of 1998 as compared to $125.5 million in the first
quarter of 1997. Japan continued to lead the region with first quarter retail
sales of $127.6 million representing a 26.6% increase from $100.8 million in the
prior year. The region also benefited from retail sales in Thailand, which
opened in June 1997, and increased sales in Hong Kong.
In Europe, retail sales increased 27.7% to $135.8 million for the first quarter
of 1998 as compared to $106.3 million in the first quarter of 1997. Within the
region, all but three countries reported increases in sales. Leading the region
in retail sales growth were Italy, Russia, Germany and Switzerland which posted
retail sales increases of $8.7 million, $4.7 million, $3.7 million, and $3.0
million, respectively. Turkey was opened in March 1998 and contributed
additional retail sales of $1.1 million during the first quarter.
Retail sales in The Americas increased 20.7% to $111.2 for the first quarter of
1998 as compared to $92.1 million in the first quarter of 1997. The United
States continued its recent growth trend with retail sales of $85.8 million in
the first quarter of 1998 as compared to $71.8 million in the first quarter of
the prior year, representing a 19.5% increase. Mexico and Canada also posted
strong retail sales increases of 78.6% and 21.5%, respectively.
RETAIL SALES BY PRODUCT SEGMENTS (DOLLARS IN MILLIONS):
<TABLE>
<CAPTION>
Three Months Ended March 31,
--------------------------------
%
1998 1997 Change
------ ------ ------
<S> <C> <C> <C>
Weight Management $270.2 $223.4 20.9
Food & Dietary Supplements 57.0 44.1 29.3
Personal Care 55.2 42.4 30.2
Literature/ Promotional/ Other 16.0 14.0 14.3
------ ------ ----
Total Retail Sales $398.4 $323.9 23.0
====== ====== ====
</TABLE>
For the three month period ended March 31, 1998, retail sales in all the product
segments demonstrated strong growth as compared to the same period in the prior
year. The increases in the product segments were primarily due to the same
factors identified in the geographical segments previously discussed. Prior year
numbers have been reclassified to conform with current year presentation.
9
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (CONTINUED)
COMPARISON OF FIRST QUARTER 1998 TO 1997 (CONTINUED)
OPERATING INFORMATION:
Gross profit of $92.7 million for the three months ended March 31, 1998 was
$19.3 million, or 26.3%, higher than gross profit of $73.4 million in the prior
year. As a percentage of retail sales, gross profit for the three months ended
March 31, 1998 as compared to the same period in the prior year increased from
22.6% to 23.3%. The increase in gross profit as a percentage of retail sales
primarily resulted from price increases effective January 1, 1998 in the
majority of our markets and lower freight costs.
Marketing, distribution and administrative expenses, as a percentage of retail
sales, were 17.3% for the three month period ended March 31, 1998 as compared to
16.9% for the same period in 1997. These expenses for the same periods increased
25.9% to $69.0 million from $54.8 million in the prior year to support the
Company in line with its defined growth strategies (expand product offerings
and develop new products, revitalize sales in certain existing markets, expand
into new markets and enhance sales and motivational training). The increase was
primarily salaries and related expenses from increased headcount in
administration and foreign distribution facilities.
The continued weakening of the Japanese Yen against the U.S. Dollar resulted in
proportionately lower revenues, expenses, and ultimately income when translated
into the U.S. Dollar reporting currency. The effect of the weaker Japanese Yen
on the Company's net income per diluted share for the three months ended March
31, 1998 was approximately $.04 as compared to the exchange rates in effect for
the same period of 1997. The effect of foreign currency changes of this nature
in countries other than Japan was not individually material to the operations of
the Company; however, the strengthening of the U.S. Dollar in relation to the
currencies of other countries in which the Company operates amounted to
approximately $.09 per diluted share as compared to the exchange rates in effect
for the same period in the prior year.
Income taxes of $9.5 million for the three months ended March 31, 1998 increased
from $7.6 million in the prior year. As a percentage of pre-tax income, income
taxes remained unchanged at 38.5% in 1998.
Net income for the three months ended March 31, 1998 increased 24.1% to $14.8
million as compared to the prior year.
LIQUIDITY AND CAPITAL RESOURCES:
The Company has historically met its working capital and capital expenditure
requirements, including funding for expansion of operations, through net cash
provided by operating activities. For the three months ended March 31, 1998, net
cash provided by operating activities was $8.4 million, compared to $2.9 million
for the same period in 1997. The increase primarily resulted from (i) reductions
in receivable balances primarily resulting from timing issues; (ii) increased
accounts payable balances also due to timing; and (iii) higher net income. These
reductions were partially offset by: (i) increased inventory levels primarily
resulting from new products and higher minimum stock levels; (ii) reductions in
advanced sales primarily relating to timing; and (iii) contributions to the
Company's defined benefit plans.
Capital expenditures for the three months ended March 31, 1998 were $2.3 million
compared to $3.3 million for the same period in the prior year. The majority of
the 1998 expenditures resulted from the expansion of office facilities and
equipment in the U.S. and to support growth in Japan. For 1998, the Company is
planning to invest approximately $16 million in the continued development of
management information systems and expansion of new and existing facilities. In
connection with its entry into each new market, the Company funds inventory
requirements and typically establishes either a full-service distribution
center, sales office, a fulfillment center or compliance office, or a
combination of the foregoing. While the capital requirements associated with
entry into new markets vary, the Company estimates that up to $8 million will be
required for pre-opening expenses, capital expenditures and other operating cash
flow needs associated with its 1998 new market expansion activities.
10
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (CONTINUED)
COMPARISON OF FIRST QUARTER 1998 TO 1997 (CONTINUED)
Stockholders' equity decreased $5.7 million to $149.0 million during the three
months ended March 31, 1998. For the first quarter of 1998, net income of $14.8
million and the issuance of capital stock, including related tax benefits, of
$4.4 million were offset by stock repurchases of $19.6 million and dividends
declared of $4.4 million. The payment of dividends is determined by the Board of
Directors at its discretion and the amounts of dividends declared and paid in
future quarters will depend, among other factors, on profitability, as well as
other planned uses of the Company's cash resources.
Cash and cash equivalents totaled $68.9 million at March 31, 1998 compared to
$78.9 million at December 31, 1997. At March 31, 1998, the Company's cash, cash
equivalents and marketable securities aggregate balance was $106.6 million,
which represents a $16.1 million decrease from the balance as of December 31,
1997.
The Company has not been subjected to material price increases by its suppliers
for several years. The Company believes that it has the ability to respond to a
portion or possibly all of any price increases by raising the price of its
products. Purchases by the Company from its suppliers are made in U.S. Dollars,
while sales to distributors are generally made in local currencies.
Consequently, strengthening of the U.S. Dollar versus a foreign currency can
have a negative impact on operating margins and can generate transaction losses
on intercompany transactions. The Company from time to time enters into forward
exchange contracts and other hedging arrangements to manage its foreign exchange
risk on intercompany transactions. As of March 31, 1998 the Company had $27
million in notional amounts of Yen put options with short-term maturities
through September 30, 1998. During the first quarter of 1998 and 1997 the
foreign exchange transaction loss was $.6 million and $1.4 million,
respectively.
The Company has conducted a review of its computer systems to consider upgrades,
address the implications of the adoption of a single European Union currency in
1999 and to identify those areas that require Year 2000 compliance. The Company
is currently developing an implementation plan to accomplish these objectives.
Year 2000 compliance refers to the inability of certain computer systems to
recognize dates commencing on January 1, 2000. Such inability has the potential
to materially adversely affect the operation of computer systems. The Company
currently believes that by modifying existing software and converting to new
software for certain tasks, Year 2000 compliance will not pose significant
operational problems and is not anticipated to be material to its financial
position or results of operations in any given year. However, there can be no
assurance that the systems of other companies on which the Company may rely will
be timely converted or that the failure to convert by another company would not
have an adverse effect on the Company. At the present time, the Company
estimates that the incremental cash requirements related to system upgrades,
European Union single currency issues and Year 2000 compliance will total
approximately $10 million to $15 million. Such expenditures will be expensed or
capitalized as appropriate.
In January 1996, the Company's Board of Directors approved a one million share
stock repurchase program, which was completed in April 1997, the Board of
Directors adopted an additional $30 million stock repurchase program which was
completed in February 1998. In February 1998, the Board adopted an additional
$20 million stock repurchase program. Pursuant to these stock repurchase
programs, through April 1998 the Company had expended $55.1 million in the
aggregate to repurchase 2.8 million shares of Old Common Stock, Common Stock A,
or Common Stock B.
The Company has pledged cash and cash equivalents to secure bank financing
primarily for the benefit of its foreign subsidiaries, including letters of
credit, lines of credit, leases, and other obligations. As of March 31, 1998, an
aggregate of $21.1 million had been pledged against $26.2 million of commitments
for debt obligations, contingent guarantees, and foreign exchange activity.
Generally, these debt arrangements expire in less than one year. The Company
also enters into other unsecured guarantees related mainly to short-term
currency hedge arrangements.
In March 31, 1998, the Company had $5.5 million of credit facilities of which
$0.9 million is outstanding. The majority of these facilities expire in 1998.
These facilities are subject to normal banking terms and conditions and do not
materially restrict the Company's activities.
11
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS
With the exception of the actual reported financial results and other historical
information, the statements made in the Management's Discussion and Analysis of
Financial Condition and Results of Operations and elsewhere in this report are
forward looking statements that involve risks and uncertainties that could
affect actual future results. Such risks and uncertainties include, but are not
limited to: the regulatory environment, consumer acceptance of network
marketing, economic conditions in the countries the Company operates, the
presence of possible competitors, adverse publicity and in-region cultural or
demographic factors and other risks indicated in the Company's filings with the
Securities and Exchange Commission, including the Company's filing of a
registration statement on Form S-3 in March 1998.
12
<PAGE> 14
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See discussion under "Legal Proceedings" in the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1997 and in footnote
three to the Financial Statements included in Item 1 of this document.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
13
<PAGE> 15
HERBALIFE INTERNATIONAL, INC.
EXHIBIT INDEX
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Exhibit Number Description Page No./(Footnote)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
3.1 Amended and Restated Articles of Incorporation (10)
3.2 Amended and Restated Bylaws (2)
4.1 Form of Class A Common Stock and Class B Common Stock Certificates (12)
10.1 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 (1)
of Santa Cruz
10.2 The Company's 1991 Stock Option Plan, as amended (7), (13)
10.3 The Company's 1992 Executive Incentive Compensation Plan, as amended (2), (7)
10.4 Form of Individual Participation Agreement relating to the Company's
Executive Compensation Plan (2)
10.5 Form of Letter Agreement between the Compensation Committee of the
Board of Directors of the Company and Mark Hughes (2)
10.6 Form of Indemnity Agreement between the Company and certain officers
and directors of the Company (2)
10.7 Trust Agreement among the Company, Citicorp Trust, N.A. and certain
officers and directors of the Company (2)
10.8 Form of Stock Appreciation Rights Agreement between the Company and
certain directors of the Company (2)
10.9 1994 Performance Based Annual Incentive Compensation Plan (4), (7), (11)
10.10 Form of Promissory Note for Advances under the Company's 1994
Performance Based Annual Incentive Compensation Plan (5)
10.11 Employment Agreement between the Company and Chris Pair dated April
3, 1994 (3)
10.12 Deferred Compensation Agreement between the Company and Michael Rosen (5)
10.13 Office lease agreement between the Company and State Teacher's
Retirement System, dated July 20, 1995 (6)
10.14 Form of stock appreciation rights agreements between the Company and
certain directors of the Company (6)
10.15 The Company's Senior Executive Deferred Compensation Plan, effective
January 1, 1996 (6)
10.16 The Company's Management Deferred Compensation Plan, effective
January 1, 1996 (6)
10.17 Master Trust Agreement between the company and Imperial Trust
Company, Inc., effective January 1, 1996 (6)
10.18 The Company's 401K Plan (6)
10.19 Agreement Concerning Share Allocation Plan for Specific Directors of
Herbalife of Japan K.K. dated December 30, 1996. (8)
10.20 Consulting Agreement between David Addis and Herbalife of America,
Inc. Dated January 27, 1997. (8)
10.21 Agreement between Herbalife International of America, Inc. and D&F
Industries, Inc. dated September 2, 1997 (9)
10.22 Agreement between Herbalife International of America, Inc. and
Dynamic Products, Inc. dated September 2, 1997 (9)
10.23 Agreement between Herbalife International of America, Inc. and Raven
Industries, Inc. d/b/a Omni-Pak Industries, dated September 2, 1997 (9)
10.24 The Company's Supplemental Executive Retirement Plan (12)
10.25 Form of Underwriting Agreement (14)
10.26 Form of Purchase Contract Between the Selling Stockholder and the (14)
Trust
21 List of subsidiaries of the Company (12)
27 Financial Data Schedule (15)
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
14
<PAGE> 16
(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 Registration Statement on Form
S-1 (No. 33-66576) declared effective by the Securities and Exchange
Commission on October 8, 1993.
(3) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the three months ended June 30, 1994.
(4) Incorporated by reference to the Company's Definitive Proxy Statement
relating to its 1994 Annual Meeting of Stockholders.
(5) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1994.
(6) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1995.
(7) Incorporated by reference to the Company's Definitive Proxy Statement
relating to its 1996 Annual Meeting of Stockholders.
(8) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1996.
(9) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the three months ended September 30, 1997.
(10) Incorporated by reference to the Company's Registration Statement on Form
8-K declared effective by the Security and Exchange Commission on December
12, 1997.
(11) Incorporated by reference to the Company's Definitive Proxy Statement
relating to the Special Shareholder Meeting held on December 11, 1997.
(12) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1997.
(13) Incorporated by reference to the Company's Definitive Proxy Statement
relating to its 1998 Annual Meeting of Stockholders.
(14) Incorporated by reference to the Company's Registration Statement on Form
S-3 (No 333-46201) declared effective by the Securities and Exchange
Commission on March 23, 1998.
(15) Filed herewith.
(b) REPORTS ON FORM 8-K:
None.
(c) OTHER EXHIBITS:
See "Item 14(a)3. Exhibits."
(d) OTHER FINANCIAL STATEMENT SCHEDULES:
None.
15
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: May 15, 1998
HERBALIFE INTERNATIONAL, INC.
(Registrant)
By: /s/ TIMOTHY GERRITY
Timothy Gerrity
Executive Vice President and
Chief Financial Officer
16
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 68,934,000
<SECURITIES> 37,676,000
<RECEIVABLES> 37,671,000
<ALLOWANCES> 0
<INVENTORY> 79,588,000
<CURRENT-ASSETS> 254,806,000
<PP&E> 65,830,000
<DEPRECIATION> 36,526,000
<TOTAL-ASSETS> 309,053,000
<CURRENT-LIABILITIES> 138,689,000
<BONDS> 2,505,000
0
0
<COMMON> 291,000
<OTHER-SE> 148,718,000
<TOTAL-LIABILITY-AND-EQUITY> 309,053,000
<SALES> 209,776,000
<TOTAL-REVENUES> 398,447,000
<CGS> 54,511,000
<TOTAL-COSTS> 117,102,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 24,589,000
<INCOME-TAX> 9,467,000
<INCOME-CONTINUING> 14,788,00
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,788,000
<EPS-PRIMARY> .51
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