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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[x] ANNUAL REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
[ ] 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.
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(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
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(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Class A Common Stock, $.01 Par Value
Class B Common Stock, $.01 Par Value
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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]
The Aggregate market value of the Registrant's Class A and Class B Common Stock
on February 23, 1998 held by nonaffiliates was approximately $272 Million.
(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 shares outstanding of the registrant as of February 23, 1998
was:
9,816,436 Shares of Class A Common Stock
19,277,473 Shares of Class B Common Stock
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, 1997, are incorporated by reference in Part III of this Form.
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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 February 1998.
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ITEM 1. BUSINESS
BACKGROUND AND CORPORATE ORGANIZATION
GENERAL
Herbalife International, Inc. (the "Company") is a network marketing company
that sells a wide range of weight management products, food and dietary
supplements and personal care products worldwide. As of December 31, 1997, the
Company conducted business in 36 countries located in Asia/Pacific Rim, Europe
and The Americas. Retail sales in those regions represented 43.2%, 30.4% and
26.4%, respectively, of the Company's total retail sales in 1997.
The Company has experienced substantial growth in retail sales and net income
in recent years. From 1992 to 1997, the Company's retail sales grew from $405.1
million to $1.49 billion, representing a compound annual growth rate of 29.8%.
From 1992 to 1997, the Company's net income grew from $20.1 million to $54.7
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 downline
organizations by sponsoring other distributors to do business in any market
where the Company operates, entitling the sponsors to receive royalty overrides
(cash incentives, including 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.
In December 1997, the Company's common stock, par value $.01 per share (the
"Old Common Stock") was reclassified into voting class A common stock ("Class A
Stock") and non-voting class B common stock ("Class B Stock"). The
reclassification of the Old Common Stock is referred to herein as the
"Recapitalization," and the Class A Stock and Class B Stock are together
referred to herein as the "Common Stock." See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Recent
Developments and Outlook" for a more detailed description of the
Recapitalization.
Herbalife International, Inc. operates through 43 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.
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GROWTH STRATEGY
The Company plans to continue capitalizing on its strong operating platform
and intends to pursue a growth strategy comprised of the following four
principal elements:
Expand Product Offerings and Develop New Product Lines. 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. The timely introduction of new, high quality products creates sales
opportunities for distributors, and also serves to generate enthusiasm among
distributors and provide them with additional promotional opportunities to sell
other Company products. During 1997, the Company introduced 17 new products
(exclusive of flavor and color variations) and during 1998 the Company intends
to introduce up to 40 new products (exclusive of flavor and color variations)
in selected markets, including several additions to the weight management
program, an important new line of personal care products and a new line of
water purification systems. The Company will also seek to introduce additional
new product lines in the future, including household products.
Revitalize Sales in Certain Existing Markets. Management continually seeks to
revitalize sales in markets, such as France, Germany, Italy and Spain, that
have experienced an initial period of growth followed by a leveling off or
decline in sales (see "Business-Geographic Areas of Operations") by, among
other things, providing extensive training and motivational program support to
distributors. In addition, the Company has created regional planning and
strategy groups that include senior members of the Company's distributor base,
increased focus on governmental relations and hired additional distributor
support representatives. The Company also seeks to introduce annually in each
targeted market additional products not previously offered. In certain markets,
the Company has enhanced its presence and visibility by opening new, more
attractive and conveniently located distributor sales centers. The Company
believes that these initiatives favorably impact operations and the Company
will continue to deploy these initiatives in an effort to provide a platform
for renewed growth in the targeted markets in the future.
Expand Into New Markets. The opening of new markets is an important component
of the Company's business strategy. From January 1, 1992 through December 31,
1997, the Company has commenced operations in 26 new countries, consisting of
six in Asia/Pacific Rim, 15 in Europe and five in The Americas. During 1997,
these countries contributed $1.05 billion of retail sales, representing
70.4% 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 opened new markets, Thailand and Chile, in
1997 and plans to open Turkey and Indonesia in 1998. Additional new markets
currently under consideration include China, India, Colombia and Ecuador. The
Company evaluates these and other new markets based, in part, on the Company's
ability efficiently to create a distributor base in potential markets. In
determining when and where to open new markets, the Company will continue to
seek to minimize the impact on distributor focus in existing markets and to
ensure that adequate distributor support services and other Company systems are
in place to support the growth.
Enhance Sales and Motivational Training. The Company will continue to seek to
increase sales through its network marketing system by utilizing extensive
training and motivational programs. The Company will also produce extravaganzas
and other large scale events and numerous training and motivational programs
worldwide. In addition, the Company will continue to offer extensive training
programs through various methods of telecommunication, including broadcast
faxes, pre-recorded telephone message services and live multi-lingual
teleconferences on a global basis, and will seek to expand the motivational and
training programming and audience of the HBN network. Approximately 20,000 HBN
home systems are currently in place. The Company believes distributors
frequently invite other distributors and customers into their homes to view the
2 to 3 hours of HBN network programming available each week.
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 94 products, exclusive of variations in product
flavors and colors, reformulations of products to satisfy regulatory
requirements within a particular country and 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 OTC drugs.
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The following chart summarizes the number of products offered by the Company
in its principal product categories as of December 31, 1997 and retail sales
information by product category during the indicated periods.
PRODUCT SALES BY CATEGORY
(Dollars in Thousands)
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Year Ended December 31,
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1997 1996 1995
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Percent of Percent of Percent of
Product Category Total Total Total
Product Category Retail Retail Retail Retail Retail Retail
(Number of Products in Category) Sales Sales Sales Sales Sales Sales
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Weight Management(14) $1,011,122 67.8% $ 854,410 71.2% $ 694,269 75.2%
Food and Dietary Supplements(22) 244,569 16.4% 168,371 14.0% 86,714 9.4%
Personal Care Products(58) 167,931 11.3% 116,938 9.7% 107,385 11.6%
Other 67,071 4.5% 60,425 5.1% 35,276 3.8%
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TOTAL $1,490,693 $1,200,144 $ 923,644
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NUMBER OF PRODUCTS OFFERED BY CATEGORY
(AS OF DECEMBER 31, 1997)
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF FOOD
WEIGHT AND DIETARY NUMBER OF TOTAL NUMBER
MANAGEMENT SUPPLEMENT PERSONAL CARE OF PRODUCTS
YEAR PRODUCTS PRODUCTS PRODUCTS (94 IN
COUNTRY ENTERED(1) (14 IN TOTAL) (22 IN TOTAL) (58 IN TOTAL) TOTAL)
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ASIA/PACIFIC RIM
Australia .............. 1982 8 7 43 58
New Zealand ............ 1988 8 6 42 56
Hong Kong .............. 1992 5 1 46 52
Japan .................. 1993 7 2 32 41
Philippines ............ 1994 7 0 0 7
Taiwan ................. 1995 4 0 36 40
South Korea ............ 1996 3 1 0 4
Thailand ............... 1997 5 0 27 32
EUROPE
United Kingdom ......... 1983 7 9 46 62
Israel ................. 1989 8 3 25 36
Spain .................. 1989 6 2 45 53
France ................. 1990 7 0 44 51
Germany ................ 1991 4 0 44 48
Italy .................. 1992 7 2 44 53
Portugal ............... 1992 5 1 45 51
Czech Republic ......... 1992 7 3 29 39
Netherlands ............ 1993 6 1 44 51
Belgium ................ 1994 7 4 44 55
Poland ................. 1994 5 1 20 26
Denmark ................ 1994 7 2 44 53
Sweden ................. 1994 7 1 44 52
Russia ................. 1995 12 14 31 57
Switzerland ............ 1995 3 0 44 47
Austria ................ 1995 2 1 44 47
Norway ................. 1995 5 1 32 38
Finland ................ 1995 8 3 32 43
South Africa ........... 1995 6 2 42 50
Greece ................. 1996 2 0 44 46
THE AMERICAS
United States .......... 1980 14 22 52 88
Canada ................. 1982 8 8 44 60
Mexico ................. 1989 12 12 24 48
Dominican Republic ..... 1994 6 0 0 6
Venezuela .............. 1994 5 0 36 41
Argentina .............. 1994 6 0 34 40
Brazil ................. 1995 6 0 0 6
Chile .................. 1997 5 0 19 24
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(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.
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(R) 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(R) weight
management tablets (original green, green, beige and yellow), (iii)
Thermojetics(R) Herbal Concentrate, an herbal beverage blended from five
natural botanicals, and (iv) a variety of other nutritional products,
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such as Cell-U-Loss(R), Activated Fiber, N.R.G. (Nature's Raw Guarana),
Thermo-bond(R) and Aminogen(R). In addition, the Company has recently
introduced four new products to the Thermojetics(R) system: Chew Slim(TM)
herbal diet gum, WaferFull(TM) chewable wafers, MentaBalance(TM) amino acid and
herbal supplement and CarboGuard(TM) micronutrient and herbal supplement.
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(R), Tang Kuei Plus,
Male Factor 1000(R), Schizandra Plus(R) 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(R). In 1996, the Company also introduced products designed
to meet the nutritional needs of children, consisting of Kindermins(R), a
liquid multivitamin/ herbal formula, and Dinomins(TM), a chewable vitamin
tablet.
Personal Care Products. The Company's entire personal care product line is
marketed under the name Dermajetics(R), which was initially launched in 1995.
Currently, the Dermajetics(R) 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 eaux de toilette, three for men and
three for women; Nature's Mirror(R), consisting of a cleanser, toner and
moisturizer for each of three different skin types and four specialty care
products; Good Hair Day, consisting of seven hair care products; Ocean
Currents(R), consisting of three bath products; Aroma Vie(R), consisting of
three aromatic soaps and oils; and other specialty personal care products,
including Herbal Aloe Gel and Lotion, Super APR (Arthritis Pain Relief), a
suncare line and Body Buffing and Toning Cream. In addition, during 1998 the
Company intends to introduce a new line of color cosmetics (lipstick, mascara
and related products) in selected markets.
Educational and Promotional Materials. The Company also sells distributor
kits, which an individual must purchase (at a worldwide average cost of
approximately $87 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).
Home Technology Products. During 1998, the Company plans to launch its new
AquaGenics(TM) line of home water purification systems. The AquaGenics(TM) line
includes a state-of-the art drinking water filtration system and a shower-head
water filter. In addition, the Company is in the developmental stage for other
home technology products.
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, staffs 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 products are manufactured by outside companies. Raven
Industries ("Raven") currently manufactures all of the Company's powder
products, and D&F Industries ("D&F") currently supplies all of the Company's
tablet and capsule products. For a number of years prior to 1998, the Company
was subject to requirements contracts with each of Raven, D&F and Dynamic
Products, Inc. ("Dynamic") pursuant to which the Company agreed to purchase all
of its requirements of powder products from Raven and all of its requirements
of tablet, capsule and certain other products from Dynamic or D&F, to the
extent each such manufacturer was capable of manufacturing such products. In
1996 and 1997, aggregate purchases by the Company from Raven and D&F
represented a majority of the Company's product purchases. In September 1997,
the Company entered into new three-year agreements with Raven, D&F and Dynamic,
pursuant to which revised pricing and other provisions became effective on
January 12, 1998. The new contracts provide, among other things, the ability
for the Company to source and develop products with other third party
manufacturers, subject to minimum percentage purchase and other requirements
for nutritional supplement, and a small number of non- nutritional supplement,
products falling into specified product categories. As a result, and because
the new contracts confirm the Company's ownership of product formulations for
substantially all of the Company's nutritional products, the Company has the
capacity, and in the future may seek, to "second source" particular nutritional
supplement products with multiple manufacturers. In addition, the Company's
WaferFull(TM) and Chew Slim(TM) weight management products are being
manufactured for the Company by new manufacturers. Further, the Company has
hired
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its own staffs of product research and development and product formulation
personnel, and will increasingly rely on its in-house staff for these
functions. However, the Company has historically relied on Raven and D&F for
these services, and will continue to do so, albeit to a lesser extent, in the
future.
The Company's ability to enter new markets and sustain satisfactory levels of
sales in each market has been in the past and is likely to continue to be
dependent in significant part upon its own ability and the ability of its
manufacturers, including Raven and D&F, to develop new products and reformulate
existing products for introduction into the Company's markets. Beginning in
1997, the Company has significantly expanded its in-house product research and
development and product formulation staffs, which now consist of 23
individuals. With the transition in the Company's relationship with Raven and
D&F from exclusive to non-exclusive contracts, there can be no assurance that
the Company will seek or continue to obtain the same amount or quality of
product research, development or formulation services from Raven and D&F that
it has received in the past. While the Company expects to obtain similar such
services from in-house personnel and alternative manufacturers in the future,
there can be no assurance that there will not be some disruption in the
Company's business from time to time as these support services begin to be
provided internally or by alternative manufacturers.
Pursuant to its new contracts with Raven, D&F and Dynamic, the Company owns
the proprietary rights to substantially all of its weight management products
and food and dietary supplements. However, there can be no assurance that
another company will not replicate one of the Company's products. In addition,
Raven and D&F continue to own certain product formulations and manufacturing
processes relating to certain of the Company's nutritional products. Two
individuals (not affiliates of the Company) are principal stockholders of each
of D&F, Raven and Dynamic. Mark Hughes owns a one-third ownership interest in
Raven and a one-fifth ownership interest in Dynamic.
Product Return and Buy-Back Policies. All of 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 as a Company distributor,
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(R) weight management tablets (original green, green, beige and
yellow) and other products in the Thermojetics(R) line have contributed
significantly to the Company's retail sales. One of the ingredients in the
Thermojetics(R) 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(R) 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 product).
On June 4, 1997, the FDA issued a proposed regulation for dietary supplements
containing ephedrine alkaloids. The proposed regulation would include
prohibitions against dietary supplements containing eight milligrams or more of
ephedrine alkaloids per serving, and would not permit such products to contain
any other stimulant, diuretic or laxative ingredients. In addition, labeling of
supplements would be prohibited from suggesting or recommending conditions of
use that would result in an intake of eight milligrams or more of ephedrine
alkaloids within a six-hour period, or a total daily intake of 24 milligrams or
more. The FDA proposal would also include prohibitions against certain claims
of suitability for weight loss and other uses or benefits. However, no final
regulation has been issued to date. There can be no assurance as to the final
form of any new FDA regulations or that the FDA will not seek to impose
additional regulations, possibly prohibiting, limiting potencies or placing
other restrictions on the sale of such products, or the impact, if any, of any
such regulations or actions on the Company. In addition, in September 1997 the
FDA issued regulations governing the labeling and marketing of dietary
supplement products. The Company will be required to revise a substantial
number of its product labels to reflect the new requirements prior to the 1999
effective date, although the Company does not expect the cost or impact of such
actions to be material.
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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(R) 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 selling the
Company's products to retail customers at retail prices. Second, distributors
may earn profits by selling products to distributors within their downline
organization who receive a lower discount percentage than the selling
distributor. Third, distributors who sponsor other distributors and establish
their own downline organizations may earn royalties of 1% to 5% on product
sales on each of up to three downline supervisor levels and production bonuses
of 2% to 6% on product sales within their downline organizations upon becoming
a qualifying "TAB Team" member. 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 royalty overrides
is approximately 72% 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, before reflecting a 6% handling fee
charged to distributors by the Company).
Distributors earn the right to receive royalties upon attaining the level of
supervisor and above, and production bonuses upon attaining the level of Global
Expansion Team 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 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
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.
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The following table sets forth the approximate number of the Company's
supervisors at the dates indicated:
<TABLE>
<CAPTION>
FEBRUARY 28,*
--------------------------------------------------------------------------------
1992 1993 1994 1995 1996 1997 1998
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Approximate Number of
Supervisors .............. 18,000 41,000 75,000 90,000 99,000 115,000 139,000
</TABLE>
- ----------
* Every February 28th, 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, 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 345 distributors (as of December 31, 1997) 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 in 1998 consist of a total available awards package of
one percent of the Company's 1997 total product retail sales, or approximately
$14.2 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. 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.
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.
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.
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<PAGE> 11
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.
RETAIL SALES BY COUNTRY
<TABLE>
<CAPTION>
Total
Retail Sales (in thousands)
Country Year --------------------------------------------------------------------------
(1) Entered 1997 1996 1995 1994 1993
- ----------------------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Australia 1982 $ 20,644 $ 24,059 $ 30,803 $ 29,155 $ 20,602
New Zealand 1988 1,802 1,799 2,535 3,206 2,497
Hong Kong 1992 21,808 11,698 10,783 5,323 3,853
Japan (5) 1993 525,738 311,117 81,730 18,759 686
Philippines 1994 1,264 1,935 13,219 80
Taiwan 1995 47,644 26,226 4,424
South Korea 1996 14,631 1,951
Thailand (6) 1997 9,907
---------- ---------- ---------- ---------- ----------
ASIA/PACIFIC RIM: $ 643,438 $ 378,785 $ 143,494 $ 56,523 $ 27,638
---------- ---------- ---------- ---------- ----------
United Kingdom 1983 $ 11,833 $ 12,487 $ 15,296 $ 30,769 $ 24,930
Israel 1989 8,132 8,419 30,133 73,278 30,359
Spain 1989 9,371 9,792 15,730 30,733 47,662
France 1990 12,913 12,379 13,129 46,968 97,306
Germany 1991 44,059 54,340 115,555 159,482 83,068
Italy 1992 65,026 54,449 56,687 72,009 77,842
Portugal 1992 3,545 3,097 8,934 11,073 13,328
Czech Republic 1992 14,758 13,733 15,112 24,423 10,005
Netherlands 1993 18,188 15,248 18,237 17,581 7,009
Belgium 1994 2,310 2,370 3,775 1,965
Poland 1994 13,883 16,218 6,238 792
Denmark 1994 4,699 3,747 11,263 2,377
Sweden 1994 21,061 16,488 17,845 1,799
Russia (3) 1995 157,819 142,078 29,593
Switzerland 1995 17,315 14,412 4,911
Austria 1995 10,076 7,385 3,134
Norway 1995 14,822 8,279 367
Finland 1995 9,073 14,702 300
South Africa (4) 1995 13,337 21,497 7,707
Greece 1996 898 227
---------- ---------- ---------- ---------- ----------
EUROPE: $ 453,118 $ 431,347 $ 373,946 $ 473,249 $ 391,509
---------- ---------- ---------- ---------- ----------
United States 1980 $ 298,661 $ 279,596 $ 333,595 $ 294,987 $ 246,984
Canada 1982 17,452 13,848 12,042 10,789 10,100
Mexico 1989 15,973 11,590 15,125 25,422 16,784
Dominican Republic (2) 1994 127 33 101 2,500
Venezuela 1994 3,667 5,568 11,152 1,527
Argentina 1994 4,784 3,185 10,006 19,061
Brazil 1995 50,094 76,192 24,183
Chile (6) 1997 3,379
---------- ---------- ---------- ---------- ----------
THE AMERICAS: $ 394,137 $ 390,012 $ 406,204 $ 354,286 $ 273,868
---------- ---------- ---------- ---------- ----------
TOTAL RETAIL SALES $1,490,693 $1,200,144 $ 923,644 $ 884,058 $ 693,015
========== ========== ========== ========== ==========
</TABLE>
11
<PAGE> 12
- ----------
(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 operates through various import/export companies located in
Russia to conduct transactions in the Company's products with Russian
distributors.
(4) South African sales are included in the European region due to their size.
(5) 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. Approximately ninety three percent 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.
(6) The Company initiated operations in Chile and Thailand in the first and
second quarters of 1997, respectively.
Geographic Sales Trends. The opening of new markets is an important component
of the Company's business strategy. From January 1, 1992 through December 31,
1997, the Company commenced operations in 26 new countries. In 1997, these
countries contributed $1.050 billion of retail sales, representing 70.4% of
the Company's total retail sales. Japan accounted for $525.7 million of such
sales, representing 35.3% of retail sales. Consistent with its growth strategy,
the Company opened markets in Thailand and Chile in 1997 and plans to open
Turkey and Indonesia in 1998. Additional new markets currently under
consideration include China, India, Colombia and Ecuador.
After entering a new country, the Company has in many instances 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. In determining when and where to
open new markets, the Company will continue to seek to minimize the impact on
distributor focus in existing markets and to ensure that adequate distributor
support services and other Company systems are in place to support the growth.
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(R) 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.
12
<PAGE> 13
Management continually seeks to revitalize sales in markets, such as France,
Germany, Italy and Spain, that have experienced an initial period of growth
followed by a leveling off or decline in sales, including by providing
extensive training and motivational program support to distributors. In
addition, the Company has created regional planning and strategy groups that
include senior members of the Company's distributor base, increased focus and
budgets for governmental relations and hired additional distributor support
representatives. The Company also seeks to introduce annually in each targeted
market additional products not previously offered. In certain markets, the
Company has enhanced its presence and visibility by opening new, more
attractive and conveniently located distributor sales centers. The Company
believes that these initiatives favorably impact operations and the Company
will continue to deploy these initiatives in an effort to provide a platform
for renewed growth.
Asia/Pacific Rim. Retail sales in Asia/Pacific Rim increased $264.6 million
or 69.9% during 1997 as compared to the prior year. The increase resulted from
strong retail sales in Japan and Taiwan. Retail sales in Japan increased
$214.6 million, or 69.0%. Given the rapid increase in retail sales in Japan to
current levels, retail sales in Japan are not expected to continue to increase
at historic rates. In Taiwan, retail sales for 1997 increased $21.4 million,
or 81.7%. Retail sales in other Asia/Pacific Rim countries for 1997 increased
$28.6 million, or 69.1% as compared to the corresponding period in 1996. The
increases in the other Asia/Pacific Rim countries resulted from the opening of
South Korea in November 1996 and Thailand in June 1997 coupled with increased
retail sales in Hong Kong.
Europe. Retail sales in Europe increased $21.8 million or 5.1% in 1997 as
compared to the prior year. Within the region, retail sales in Italy and
Russia increased $10.6 million, or 19.4%, and $15.7 million, or 11.1%,
respectively, in 1997 compared to 1996. Offsetting the retail sales increases
were declines in Germany, South Africa and Finland of $10.3 million, $8.2
million and $5.6 million, respectively in 1997 as compared to the prior year.
Although retail sales in Germany, South Africa and Finland declined in
comparison to the prior year periods, they have remained relatively stable over
the past four quarters.
The Americas. Retail sales in the Americas increased $4.1 million, or 1.1%
in 1997 as compared to the prior year. The increase in retail sales primarily
resulted from retail sales increases in the United States, Canada and Mexico of
$19.1 million, $3.6 million and $4.4 million, respectively, and retail sales of
$3.4 million resulted from the opening of Chile in March, 1997. Partially
offsetting these increases was a decline in Brazil of $26.1 million, or 34.3%.
The retail sales decrease in Brazil was primarily due to a difficult regulatory
environment which, among other factors, impeded the introduction of new
products within the country. The Company has recently received approval for
approximately 30 personal care products and will continue to pursue approval of
other new products within Brazil. During each of the 1997 third and fourth
quarters, retail sales in Brazil increased as compared to the preceeding
quarters. The 1997 fourth quarter retail sales in Brazil exceeded the same
period in 1996 by 9.7%.
The Company is exposed to risks associated with the current economic and
currency crises in Asia. Because of the significance of the Asian markets, and
Japan in particular, which has become the Company's largest single retail sales
market, a sustained economic slowdown and/or currency crisis in Asia could have
a material adverse impact on the Company's business. It is not possible for the
Company to predict the future economic climate in Asia.
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
13
<PAGE> 14
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 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 barriers
must be overcome 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 barriers,
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(R) personal care products
are predominantly manufactured in Europe and the United States. The products
manufactured in Europe are shipped to a centralized warehouse facility in
Strasbourg, from which delivery by ship or plane to other international markets
occurs. The Company's new line of color cosmetics products are being
manufactured in Italy and Germany, and the AquaGenics(TM) products are being
manufactured in the United States.
Beginning in 1996 and continuing in 1997, the Company undertook 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., France, Germany and Japan. The new European
system has resulted in improved inventory management. 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
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<PAGE> 15
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., France, Germany 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. During
1995, 1996 and 1997, the Company has invested in excess of $15 million to
enhance its computer and telecommunications systems. Additional significant
expenditures, including those to address computer system upgrades and Year 2000
compliance, are planned for the next several years. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources."
REGULATION
In both its United States and foreign markets, the Company is subject to and
affected by extensive laws, governmental regulations, administrative
determinations, court decisions and similar constraints (as applicable, at the
federal, state and local levels) 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. Regulation."
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") revised 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," which are statements describing certain types of product
performance characteristics, must have substantiation that the statement are
truthful and not misleading.
The majority of the products marketed by the Company are classified as
dietary supplements under the FFDCA. In addition, the adoption of new
regulations in the United States or in any of the Company's international
markets, or changes in the interpretation of existing regulations, could have a
material adverse effect on the Company. In September 1997 the FDA issued
regulations governing the labeling and marketing of dietary supplement
products. The regulations cover: 1) the identification of dietary supplements
and their nutrition and ingredient labeling; 2) the terminology to be used for
nutrient content claims, health content claims, and statements of nutritional
support; 3) labeling requirements for dietary supplements for which "high
potency" and "antioxidant" claims are made; 4) notification procedures for
statements on dietary supplements; and 5) premarket notification requirements
for new dietary ingredients in dietary supplements. The notification procedures
became effective in November, 1997, while the new labeling requirements will
not become effective until March 1999. The Company will be required to revise a
substantial number of its product labels to reflect the new requirements prior
to the 1999 effective date although the Company does not expect the cost or
impact of such actions to be material. In addition, the Company will be
required to continue its ongoing program of securing
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<PAGE> 16
substantiation of its product performance claims, and of notifying the FDA of
certain types of performance claims made for its products.
In addition, in certain markets, including the U.S., claims made with respect
to weight management, dietary supplement, personal care or other products of
the Company may change the regulatory status of the products. In the U.S., for
example, it is possible that the FDA could take the position that claims made
for certain of the Company's products place those products within the scope of
an FDA "over-the counter" (OTC) drug monograph. OTC monographs prescribe
permissible ingredients and appropriate labeling language, and require the
marketer or supplier of the products to register and file annual drug listing
information with the FDA. A limited number of the products sold by the Company
are labeled as OTC monograph drugs, and the Company believes that it is in
compliance with the applicable monographs. In the event that the FDA asserted
that product claims for other products caused them to fall within the scope of
OTC monographs, the Company would be required either to comply with the
applicable monographs or change the claims made in connection with the
products. There can be no assurance that the Company could do so effectively,
or that any such changes would not adversely affect sales and marketing of an
affected product. The Company's substantiation program involves compiling and
reviewing the scientific literature pertinent to the ingredients contained in
the Company's products.
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(R) 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(R) 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(R) 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 at that
time, the Company renewed sales of Thermojetics(R) 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(R) green tablets versus
sales of the Thermojetics(R) 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(R) green
tablets or other products within the Thermojetics(R) Weight Management System
(even though such products do not contain Ma Huang). The Thermojetics(R) green
tablets accounted for 2.4% and 2.2% of retail sales in 1996 and 1997,
respectively, although the marketing of the Thermojetics(R) weight management
tablets (original green, green, beige and yellow) and other products in the
Thermojetics(R) line have contributed significantly to the Company's retail
sales. The Company also previously offered the Thermojetics(R)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(R) 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.
The Company is a defendant in three legal actions by individuals claiming that
ingestion of Thermojetics(R) original green tablets caused them to suffer
serious medical problems. The Company believes that it has substantial defenses
to these actions and that the matters are not material. 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
does not market its Ma Huang product with any of these claims. On June 4, 1997,
the FDA issued a proposed regulation for dietary supplements containing
ephedrine alkaloids. The proposed regulation would prohibit dietary supplements
containing eight milligrams or more of ephedrine alkaloids per serving, and
would not permit such products to contain any other stimulant, diuretic, or
laxative ingredients. In addition, labeling of supplements would be prohibited
from suggesting or recommending conditions of use that would result in an
intake of eight milligrams or more of ephedrine alkaloids within a six-hour
period, or a total daily intake of 24 milligrams or more. The FDA proposal
would also require a warning not to take the product for more than seven days,
and would prohibit the supplements from being represented, either expressly or
implicitly, as being suitable for long-term uses, such as for weight loss or
body building. Similarly, claims for increased energy, increased mental
concentration, or
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<PAGE> 17
enhanced well-being that encourage the consumer to take more of the product to
achieve more of the purported effect would be required to be accompanied by a
warning stating that taking more than the recommended serving may cause a heart
attack, stroke, seizure, or death.
Although tests performed by an independent laboratory indicate that the
Company's original green Thermojetics(R) product contains less than the eight
milligrams of ephedrine alkaloids per serving permitted under the FDA proposal,
the Company is reviewing the possible impact of the FDA proposal, if it is
finalized in its current form, upon the Company's continued marketing of its
Thermojetics(R) original green tablet. In response to the proposal, or to a
final regulation which is substantially similar to the proposal, the Company
may be required to: (i) withdraw or reformulate its product with reduced
ephedrine levels, or with a substitute for Ma Huang, (ii) relabel its product
with different warnings or revised directions for use, (iii) not make certain
statements, possibly including weight loss, with respect to any product
containing Ma Huang and/or (iv) withdraw its product from the weight management
program and reposition it in a different category. Even in the absence of an
FDA final 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(R) Weight
Management Program, even though such products do not contain Ma Huang. During
1997 and 1996 the Company's weight management products contributed 67.8% and
71.2%, respectively, of total sales.
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.
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 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 as 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
17
<PAGE> 18
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 recordkeeping 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. 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.
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 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
operating an illegal "pyramid scheme" in violation of federal and state laws.
The Company believes that its network marketing system satisfies the standards
set forth in the Omnitrition case and other applicable statutes and caselaw
defining a legal marketing system, 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 substantial compliance with all
applicable regulations and restrictions, it is subject to the risk that foreign
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 or proposed audits which are at
18
<PAGE> 19
various levels of review, assessment or appeal 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 material amounts. In certain circumstances, additional taxes,
interest and penalties have been assessed, and the Company will be required to
litigate to reverse the assessments. In addition, Italian criminal tax
proceedings are pending against the managing director of the Company's Italian
subsidiary in his capacity as such with respect to certain tax issues affecting
the Company (and not affecting distributors or the taxation of distributors).
The Company has been advised by its Italian tax counsel that referral of tax
charges to criminal authorities in Italy is a relatively common procedure
(pursuant to statutory provisions requiring referral of specific types of claims
based upon the amounts thereof) and in any event believes that it has strong
defenses to the charges. None of the pending or proposed audits, assessments or
litigation is expected to have a material adverse effect on the Company.
However, ultimate resolution of these matters may take several years and the
outcome is uncertain.
In the event that such audits or assessments are concluded adversely to the
Company, the Company believes that it may be able to offset or mitigate the
consolidated effect of foreign tax assessments required to be paid through the
use of U.S. foreign tax credits. Currently, the foreign tax credits have been
fully utilized. 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 such foreign tax credits in the
future.
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.
19
<PAGE> 20
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 initially 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 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 10 employees, and in 1995 created the position of Chief
International Counsel. The Company has budgeted approximately $6.0 million to
government relations activities worldwide for 1998. The Company's Government
Relations Group and international legal personnel 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(R), Thermojetics(R),
Dermajetics(R) 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.
20
<PAGE> 21
EMPLOYEES
As of December 31, 1996 and 1997, the Company had 1,180 and 1,459 full-time
employees, respectively. These numbers do not include the Company's
distributors, who generally are 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.
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 86,000 square feet of general office
space under a lease that expires in January 2006. The Company leases an
aggregate of approximately 97,000 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 June 2001 and August 2006, respectively. The Company also leases
warehouse and office space in a majority of its other geographic areas of
operation. 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.
21
<PAGE> 22
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
The Company's Common Stock has been quoted on the NASDAQ National Market
System under the symbol "HERB" since April 21, 1992. As a result of the
Recapitalization (including a related Class B Stock dividend), as of December
12, 1997, the Common Stock ("Old Common Stock") was effectively split into
Class A Stock and the Class B Stock. The Class A Stock and the Class B Stock
have been quoted on the NASDAQ National Market System under the symbols "HERBA"
and "HERBB," respectively, since December 15, 1997. The table below sets forth,
for the periods indicated, the high and low sales prices of the Old Common
Stock, and, commencing December 15, 1997, the Class A Stock and the Class B
Stock, as reported on the NASDAQ National Market System. The sales 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.
<TABLE>
<CAPTION>
SALES PRICE
----------------------
HIGH LOW
-------- --------
<S> <C> <C>
1996
First Quarter ................................... 12 1/8 $ 8 5/8
Second Quarter .................................. 16 3/8 10 1/8
Third Quarter ................................... 15 7/8 12 1/2
Fourth Quarter .................................. 32 5/8 15 1/2
1997
First Quarter ................................... 37 3/4 $14 3/4
Second Quarter .................................. 21 1/8 15 3/4
Third Quarter ................................... 26 1/4 14 7/8
Fourth Quarter through December 12, 1997 ........ 27 7/8 $19 1/4
Fourth Quarter commencing December 15, 1997
Class A Stock .............................. $24 $20 1/2
Class B Stock .............................. 23 20
</TABLE>
- ----------
As of February 23, 1998, 9,816,436 and 19,277,473 shares of the Company's
Class A Stock and Class B Stock, respectively, were issued and outstanding and
were held by 1,010 and 1,011 stockholders of record, respectively.
22
<PAGE> 23
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, 1997 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,
------------------------------------------------------------------
(In thousands of dollars, except per share & other data amounts)
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
OPERATIONS:
Retail sales $1,490,693 $1,200,144 $ 923,644 $ 884,058 $ 693,015
Less-Distributor allowances on
product purchases 708,241 568,209 434,640 417,177 328,270
---------- ---------- ---------- ---------- ----------
Net Sales 782,452 631,935 489,004 466,881 364,745
Cost of sales 205,070 168,432 143,557 130,707 103,834
Royalty overrides 233,883 184,669 138,940 125,820 107,381
---------- ---------- ---------- ---------- ----------
Gross Profit 343,499 278,834 206,507 210,354 153,530
Marketing, distribution and
administrative expenses 257,514 210,087 176,046 139,629 88,918
Restructuring Expenses 2,300
Interest income-net 4,535 4,084 3,404 2,919 1,729
---------- ---------- ---------- ---------- ----------
Income before income taxes and
minority interest 90,520 72,831 31,565 73,644 66,341
Income taxes 34,850 28,040 11,837 27,616 25,160
---------- ---------- ---------- ---------- ----------
Income before minority interest 55,670 44,791 19,728 46,028 41,181
Minority Interest 1,003
---------- ---------- ---------- ---------- ----------
Net Income $ 54,667 $ 44,791 $ 19,728 $ 46,028 $ 41,181
========== ========== ========== ========== ==========
SHARE DATA:
Earnings per share:
Basic(1) $ 1.81 $ 1.50 $ 0.66 $ 1.54 $ 1.52
Diluted(1) $ 1.72 $ 1.43 $ 0.65 $ 1.50 $ 1.47
Cash dividends per common share $ 0.60 $ 0.60 $ 0.74 $ 0.80 $ 0.49
FINANCIAL CONDITION:
Working capital $ 125,986 $ 109,662 $ 85,126 $ 89,825 $ 72,723
Total assets 314,580 269,114 207,690 174,057 130,820
Long term obligations 2,666 2,306 1,779 1,014 994
Stockholders' equity 154,733 138,468 109,530 109,815 81,202
OTHER DATA:
Number of Countries 36 34 32 24 16
</TABLE>
(1) Basic earnings per share are computed by dividing net income by the weighted
average number of common shares outstanding. The weighted average number of
common shares outstanding for 1993, 1994, 1995, 1996 and 1997 were (in
thousands) 27,075; 29,864; 29,904; 29,803 and 30,193, respectively. Diluted
earnings per share assumes the maximum dilutive effective of stock options using
the Treasury Stock method. Common shares used in the calculation for 1993, 1994,
1995, 1996 and 1997 were (in thousands) 28,036; 30,768; 30,313; 31,379 and
31,803; respectively. The Recapitalization did not change the total number of
the Company's outstanding common shares. As a result, earnings per share was not
restated.
23
<PAGE> 24
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, 1997, the Company conducted business in 36 countries located
throughout Asia/Pacific Rim, Europe and The Americas.
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." Retail sales increased from $405.1 million
in 1992 to $1.49 billion in 1997, representing a compound annual growth rate of
29.8%. From 1992 to 1997 the Company's net income increased from $20.1 million
in 1992 to $54.7 million in 1997, representing a compound annual growth rate of
22.2%.
The Company markets its products globally. For the twelve months ended
December 31, 1997, 80.0% 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
1997 1996 1995 AS OF 12/31/97
---------- ---------- -------- --------------
(DOLLAR AMOUNTS IN MILLIONS)
<S> <C> <C> <C> <C>
Asia/Pacific Rim ...................... $ 643.4 $ 378.8 $ 143.5 8
Europe ................................ 453.1 431.3 373.9 20
The Americas .......................... 394.2 390.0 406.2 8
---------- ---------- -------- --
Total Retail Sales ................ $ 1,490.7 $ 1,200.1 $ 923.6 36
========== ========== ======== ==
</TABLE>
For the twelve months ended December 31, 1997, a relatively small number of
countries accounted for a large proportion of the $290.6 million increase in
retail sales. Of the 36 countries in which the Company operated during the
twelve months ended December 31, 1997, 24 countries experienced an aggregate
increase in retail sales of $350.5 million as compared with 1996 with Japan
alone accounting for 61.2% of the increase. The growth in these 24 countries
was partially offset by a $59.9 million aggregate decrease in retail sales in
the remaining 12 countries in which the Company operated during both periods.
As part of its growth strategy, management implements various initiatives to
revitalize sales in countries where the Company has experienced a loss of
retail sales. 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.
Subsequent to commencement of operations in 1980, the Company's network of
independent distributors has grown substantially to include 139,000 supervisors
as of February 28, 1998, an increase of 20.9% from the same date in the prior
year, and a much larger number of distributors. The number of supervisors in
the Asia/Pacific Rim markets increased from approximately 37,000 to 60,000 from
February 28, 1997 to February 28, 1998.
Consistent with the Company's growth strategy, the Company has continued its
efforts to expand its global presence by opening operations in new countries
where the Company believes there is or will be demand for its products and
participation in its network marketing system. From January 1, 1992 through
December 31, 1997, the Company commenced operations in 26 new countries.
During 1997, these countries contributed $1.05 billion of retail sales,
representing 70.4% of the Company's total retail sales. Japan accounted for
$525.7 million of such sales, representing 35.3% of the Company's retail sales.
During 1997, the Company commenced operations in Thailand and Chile and plans
to open new markets in Turkey and Indonesia in 1998. Additional new markets
currently under consideration include China, India, Colombia and Ecuador.
There can be no assurance that the opening of any new markets will occur as
planned or that any markets opened will generate significant retail sales.
24
<PAGE> 25
The Company is exposed to risks associated with foreign currency
fluctuations. For instance, the Company's purchases from suppliers are
generally made in U.S. dollars while its sales to distributors are generally
made in local currency. Accordingly, strengthening of the U.S. dollar versus a
foreign currency can have a negative impact on the Company. Although the
Company engages in currency hedging transactions to protect against certain
risks associated with foreign currency fluctuations, there can be no assurance
that such fluctuations will not have an adverse effect on the Company.
There are a number of factors that can adversely impact the success of the
Company's business in any of its existing or potential markets. These factors
include the regulatory environment, consumer acceptance of network marketing
companies, the presence of possible competitors, adverse publicity and
in-region cultural or demographic factors. In several of the Company's markets,
the Company has experienced one or several of these factors, resulting in a
decline in retail sales. 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. 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(R) 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. As
a result of this and other factors, retail sales in Germany declined from
$159.5 million in 1994 to $44.1 million for 1997.
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.
In order to increase sales in markets, such as France, Germany, Italy and
Spain, that have experienced a leveling off or decline in sales, management has
implemented several revitalization initiatives. These initiatives include
extensive training and motivational programs, appointment of regional planning
and strategy groups that include senior distributors, enhanced government
relations, introduction of new products, and establishment of distributor sales
centers. The Company believes that these initiatives favorably impact
operations and the Company will continue to deploy these initiatives in an
effort to provide a platform for renewed growth.
The Company's weight management products have historically contributed a
significant portion of the Company's total retail sales. During 1997, the
Company's 14 weight management products contributed 67.8% of total retail
sales, and one of these products contributed 19.8% of total retail sales.
During January 1998, the Company introduced two new weight management products
into this product line.
In recent years, the Company sought to diversify its product offerings by
substantially expanding its personal care product line to include skin care,
perfumes, hair care, body lotions, soaps and gel products, and by expanding
food and dietary supplement products. From 1994 to 1997, sales of the personal
care product line increased from $26.6 million to $167.9 million, representing
3.0% and 11.3% respectively, of total retail sales. From 1994 to 1997, sales of
food and dietary supplements increased from $86.8 million to $244.6 million,
representing 9.8% and 16.4% respectively, of total retail sales. During 1998,
the Company intends to introduce in certain markets up to thirty new personal
care products (exclusive of color variations), and up to eight new food and
dietary supplement products (exclusive of flavor variations), as well as a new
line of water purification systems. The Company will also seek to introduce
additional new lines in the future, including household products.
At a Special Meeting of the Company's shareholders held on December 11, 1997,
the Company's shareholders approved the Recapitalization, pursuant to which the
Company's Articles of Incorporation were amended and restated to: (i) effect a
one-for-three reverse split (the "Reverse Split") of the Old Common Stock, (ii)
reclassify each resulting whole share of Old Common Stock as a share of new
Class A Stock, (iii) create a new class of non-voting common stock, designated
as Class B Stock, and (iv) fix the relative rights, powers and limitations of
the Class A Stock and the Class B Stock. The Recapitalization did not change
the number of shares of the Company's authorized capital stock. On December 12,
1997, the Recapitalization became effective and the Company's Board of
Directors declared a dividend of two shares of Class B Stock on each whole
share of Class A Stock resulting from the Reverse Split. On December 15, 1997,
trading of both the Class A Stock and the Class B Stock commenced on the NASDAQ
National Market System.
25
<PAGE> 26
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 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 and bonuses, which total approximately
15% and 6%, respectively, on the suggested retail sales prices of products
earned by qualifying distributors on sales within their distributor
organizations, (b) the President's Team Bonus payable to certain of the
Company's most senior distributors in the aggregate amount of approximately an
additional 1% of product retail sales, and (c) other one-time incentive cash
bonuses to qualifying distributors. Royalty overrides, as reported in the
financial statements and selected financial data appearing elsewhere herein,
are net of a handling fee (6% of retail sales effective April 1, 1994,
previously 5%) charged by the Company to its distributors on purchases of
products from the Company.
The Company's use of "retail sales" in reporting financial and operating data
reflects the fundamental role of "retail sales" in the Company's accounting
systems, internal controls and operations, including the basis upon which
distributor bonuses are paid. The retail sales price of the Company's products
is reflected in distributor invoices as the price charged to distributors
together with, in most cases, a deduction for the corresponding distributor
allowance. The U.S. 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.
RESULTS OF OPERATIONS
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.
1997 COMPARED TO 1996
Retail sales for the twelve months ended December 31, 1997 increased 24.2% to
$1.49 billion, as compared to retail sales of $1.20 billion in the prior year.
Retail sales in Asia/Pacific Rim increased $264.6 million or 69.9% during
1997 as compared to the prior year. The increase resulted from strong retail
sales in Japan and Taiwan. Retail sales in Japan increased $214.6 million, or
69.0%. Given the rapid increase in retail sales in Japan to current levels,
retail sales in Japan are not expected to continue to increase at historic
rates. In Taiwan, retail sales for 1997 increased $21.4 million, or 81.7%.
Retail sales in other Asia/Pacific Rim countries for 1997 increased $28.6
million, or 69.1% as compared to 1996. The increases in the other Asia/Pacific
Rim countries resulted from the opening of South Korea in November 1996 and
Thailand in June 1997 coupled with increased retail sales in Hong Kong.
26
<PAGE> 27
Retail sales in Europe increased $21.8 million or 5.1% in 1997 as compared to
the prior year. Within the region, retail sales in Italy and Russia increased
$10.6 million, or 19.4%, and $15.7 million, or 11.1%, respectively, in 1997
compared to 1996. Offsetting the retail sales increases were declines in
Germany, South Africa and Finland of $10.3 million, $8.2 million and $5.6
million, respectively in 1997 as compared to the prior year. Although retail
sales in Germany, South Africa and Finland declined in comparison to the prior
year periods, they have remained relatively stable over the past four quarters.
Retail sales in the Americas increased $4.1 million, or 1.1% in 1997 as
compared to the prior year. The increase in retail sales primarily resulted
from retail sales increases in the United States, Canada and Mexico of $19.1
million, $3.6 million and $4.4 million, respectively, and retail sales of $3.4
million resulted from the opening of Chile in March, 1997. Partially
offsetting these increases was a decline in Brazil of $26.1 million, or 34.3%.
The retail sales decrease in Brazil was primarily due to a difficult regulatory
environment which, among other factors, impeded the introduction of new
products within the country. The Company has recently received approval for
approximately 30 personal care products and will continue to pursue approval of
other new products within Brazil. During each of the 1997 third and fourth
quarters, retail sales in Brazil increased as compared to the preceding
quarters. The 1997 fourth quarter retail sales in Brazil exceeded the same
period in 1996 by 9.7%.
In 1997, retail sales in all the product segments demonstrated strong growth
as compared to the prior year period. The increase in personal care retail
sales primarily resulted from a strong reception of the product line in Japan
and its introduction in Russia during July 1996. The increases in the remaining
categories were primarily due to the same factors identified in the
geographical segment discussion above.
Gross profit of $343.5 million for 1997, was $64.7 million, or 23.2% higher
than the gross profit of $278.8 million in the prior year. As a percentage of
retail sales, gross profit for 1997 as compared to the same period in the prior
year decreased modestly from 23.2% to 23.0%. The decrease in gross profit as a
percentage of retail sales primarily resulted from additional royalty override
expenses from a special 1997 distributor incentive program designed to motivate
distributors to achieve incremental sales growth.
Marketing, distribution and administrative expenses, as a percentage of
retail sales, were 17.3% for 1997 as compared to 17.5% for the same period in
1996. These expenses for the same periods increased 22.6% to $257.5 million
from $210.1 million in the prior year. The increase resulted from: (a) higher
in-country distribution expenses primarily due to facility and staff expansions
in Japan, new country openings in Chile and Thailand, and from a full year of
operations in South Korea, (b) higher administrative expenses due to staff
additions and other costs related primarily to supporting sales expansion in
foreign countries, and (c) higher marketing costs resulting from increased
sales event activity in 1997.
The weakening of the Japanese Yen against the U.S. Dollar during 1997
resulted in proportionately lower revenues, expenses, and ultimately income
when translated into the U.S. Dollar reporting currency. Comparing the weighted
average exchange rates in effect during 1996 and 1997, the adverse effect of
the weaker Japanese Yen on the Company's net income and earnings per diluted
share for the 1997 period was $7.9 million and approximately $0.25,
respectively. The effect of foreign currency changes of this nature in
countries other than Japan was not material to the operations of the Company.
Income taxes of $34.9 million for 1997 increased from $28.0 million in the
prior year. As a percentage of pre-tax income, income taxes remained unchanged
at 38.5% in 1997. To the extent the Company's operations in high tax
jurisdictions such as Japan continue to grow disproportionately relative to the
balance of the Company's operations, the Company may not be able to fully
utilize its foreign tax credits in the U.S., which could, accordingly, result
in the Company incurring a higher overall income tax rate on its worldwide
operations in the future.
On December 30, 1996, the Company sold an approximate 7% interest in its
Japanese subsidiary to certain officers (see Note 7 to the Consolidated
Financial Statements). In 1997, the earnings attributed to the minority interest
in the Japanese subsidiary were $1.0 million.
Net income for 1997 increased 22.1% to $54.7 million, from $44.8 million
reported in the corresponding prior year period.
1996 COMPARED TO 1995
Retail sales increased 29.9% to $1.2 billion 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):
27
<PAGE> 28
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 of operations 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(R) 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 be impacted as the expansion of operations into
international markets continues.
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.
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 1997, net cash provided by operating activities was $51.2 million,
compared to $65.4 million in 1996. The decrease primarily resulted from (i)
increased inventory levels required to support the Company's growth, and (ii)
higher credit card receivable balances primarily resulting from Japan, where
the collection period related to credit card receivables from banks is longer
than most countries. These reductions were partially offset by increased net
income and additional cash flow provided by increases in royalty overrides and
advanced sales balances.
Capital expenditures for 1997 were $13.1 million compared to $15.4 million
for the prior year. The majority of the 1997 expenditures resulted from
investments in management information systems and the expansion of new and
existing facilities, particularly in the U.S. and Japan. 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 $7 million will be required for
pre-opening expenses, capital expenditures and other operating cash flow needs
associated with its 1998 new market expansion activities.
28
<PAGE> 29
Stockholders' equity increased $16.3 million to $154.7 million during 1997.
During 1997, net income of $54.7 million and the issuance of capital stock upon
exercise of stock options, including related tax benefits, of $9.3 million were
partially offset by $18.1 million of dividends declared, stock repurchases of
$26.0 million and a translation loss of $3.9 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 and marketable securities totaled $122.7 million at
December 31, 1997 compared to $131.0 million at December 31, 1996.
In September, 1997, the Company entered into new agreements with its
suppliers of weight management and food and dietary supplement products. See
"Business -- Product Overview -- Product Manufacturing and Development." The
new contracts became effective January 12, 1998 and replace the contracts
previously in effect. The new contracts provide, among other things, the
ability for the Company to source and develop products from other third party
manufacturers, within certain contractual limitations. The new contracts
provide the opportunity for cost savings for certain products; however, the
realization of any product cost savings will be affected by the Company's
future product development.
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 operating margins and can
generate transaction losses on intercompany transactions. The Company from time
to time enters into forward exchange contracts and other hedging arrangements
to manage its foreign exchange risk on intercompany transactions. During 1997,
several European and Asian currencies weakened against the U.S. Dollar
resulting in a foreign exchange loss of $1.6 million as compared to a loss of
$3.0 million in 1996.
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. 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 February 1998 the Company had expended $46.6
million in the aggregate to repurchase 2.5 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 December 31,
1997, an aggregate of $21.2 million had been pledged against $26.4 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. There were no such hedges outstanding at
December 31, 1997.
At December 31, 1997, the Company had $5.5 million of credit facilities of
which $0.3 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.
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.
29
<PAGE> 30
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 33 through 52.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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 1997 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, 1997.
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 1997 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, 1997.
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 1997 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, 1997.
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 1997 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, 1997.
30
<PAGE> 31
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES 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 33
Consolidated Balance Sheets - December 31, 1997 and 1996 34
Consolidated Statements of Income for the years ended December 31, 1997, 1996 and 1995 36
Consolidated Statements of Changes in Stockholders' Equity for the Years Ended
December 31, 1997, 1996, and 1995 37
Consolidated Statements of Cash Flows for the Years Ended December 31, 1997, 1996, and 1995 38
Notes to Consolidated Financial Statements 39
- ---------------------------------------------------------------------------------------------------------
</TABLE>
2. FINANCIAL STATEMENT SCHEDULES
None.
3. EXHIBITS
<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 of Santa Cruz (1)
10.2 The Company's 1991 Stock Option Plan, as amended (7), (11)
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)
</TABLE>
31
<PAGE> 32
<TABLE>
<S> <C> <C>
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)
21 List of subsidiaries of the Company (8)
23.1 Independent Auditor's Consent (12)
27 Financial Data Schedule (12)
- ------------------------------------------------------------------------------------------------------------------------------
</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 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) Filed herewith.
(b) REPORTS ON FORM 8-K:
None.
(c) OTHER EXHIBITS:
See "Item 14(a)3. Exhibits."
(d) OTHER FINANCIAL STATEMENT SCHEDULES:
None.
32
<PAGE> 33
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, 1997
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, 1997. 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, 1997 and 1996, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1997 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Los Angeles, California
February 27, 1998
33
<PAGE> 34
HERBALIFE INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
ASSETS
<TABLE>
<CAPTION>
NOTES 1997 1996
-------- ------------ ------------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents 2,4 $78,913,000 $87,481,000
Marketable securities 2 43,794,000 43,558,000
Receivables, including related party receivables of $10,259,000 7 46,021,000 29,258,000
(1997) and $5,677,000 (1996)
Inventories 2, 3 71,583,000 46,204,000
Prepaid income taxes 695,000 1,821,000
Prepaid expenses and other current assets 7,466,000 5,243,000
Deferred income taxes 2, 12 19,502,000 15,882,000
------------ ------------
Total current assets 267,974,000 229,447,000
------------ ------------
PROPERTY - AT COST: 2, 5
Furniture and fixtures 14,521,000 10,870,000
Equipment 29,381,000 23,271,000
Leasehold improvements and building 20,061,000 18,236,000
------------ ------------
63,963,000 52,377,000
Less accumulated depreciation and amortization (34,225,000) (27,404,000)
------------ ------------
29,738,000 24,973,000
------------ ------------
OTHER ASSETS 6, 7 13,409,000 11,062,000
GOODWILL(NET OF ACCUMULATED AMORTIZATION OF $1,428,000 2
AND $1,255,000 IN 1997 AND 1996, RESPECTIVELY) 3,459,000 3,632,000
------------ ------------
TOTAL $314,580,000 $269,114,000
============ ============
</TABLE>
See the accompanying notes to consolidated
financial statements.
34
<PAGE> 35
HERBALIFE INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Notes 1997 1996
--------- ------------ ------------
<S> <C> <C> <C>
CURRENT LIABILITIES:
Accounts payable 2, 7 $12,654,000 $17,287,000
Royalty overrides 2 56,643,000 42,676,000
Accrued compensation 19,516,000 16,808,000
Accrued expenses 19,137,000 19,152,000
Dividends payable 4,634,000 4,453,000
Current portion of contracts payable and bank loans 4, 5 1,449,000 2,493,000
Advance sales deposits 2 18,375,000 9,045,000
Income taxes payable 2, 9, 12 9,580,000 7,871,000
------------ ------------
Total current liabilities 141,988,000 119,785,000
NON-CURRENT LIABILITIES
Contracts payable, net of current portion 4, 5 2,666,000 2,306,000
Deferred income taxes 2, 12 1,739,000 1,103,000
Other non-current liabilities 6, 7 11,586,000 6,780,000
------------ ------------
Total Liabilities 157,979,000 129,974,000
------------ ------------
MINORITY INTEREST 2, 7 1,868,000 672,000
------------ ------------
COMMITMENTS AND CONTINGENCIES 5, 6, 9
STOCKHOLDERS' EQUITY 10
Common Stock A, $0.01 par value; 33,333,333 shares authorized,
9,811,623 (1997) and 30,205,338 (1996) shares issued and outstanding 98,000 302,000
Common Stock B, $0.01 par value; 66,666,667 shares authorized,
19,818,248 shares issued and outstanding 198,000 --
Paid-in capital in excess of par value 50,319,000 43,258,000
Retained earnings, including cumulative translation adjustment of
($4,858,000) (1997) and $(981,000) (1996) 104,248,000 95,353,000
Unearned compensation (152,000) (412,000)
Unrealized gain(loss) on marketable securities 2 22,000 (33,000)
------------ ------------
Total stockholders' equity 154,733,000 138,468,000
------------ ------------
TOTAL $314,580,000 $269,114,000
============ ============
</TABLE>
See the accompanying notes to consolidated
financial statements.
35
<PAGE> 36
HERBALIFE INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
Notes 1997 1996 1995
-------------- -------------- ------------
<S> <C> <C> <C> <C>
Retail sales 2 $1,490,693,000 $1,200,144,000 $923,644,000
Less - Distributor allowances on product purchases 2 708,241,000 568,209,000 434,640,000
-------------- -------------- ------------
Net sales 2 782,452,000 631,935,000 489,004,000
Cost of sales, including purchases from related 7
parties of $66,771,000 (1997), $56,374,000 (1996) and
$29,340,000 (1995) 205,070,000 168,432,000 143,557,000
Royalty overrides 2 233,883,000 184,669,000 138,940,000
Marketing, distribution and administrative expenses 5, 6, 7 257,514,000 210,087,000 176,046,000
Restructuring expense 8 2,300,000
Interest income - net 4,535,000 4,084,000 3,404,000
-------------- -------------- ------------
Income before income taxes and minority interest 90,520,000 72,831,000 31,565,000
Income taxes 2, 9, 12 34,850,000 28,040,000 11,837,000
-------------- -------------- ------------
Income before minority interest 55,670,000 44,791,000 19,728,000
Minority Interest 2, 7 1,003,000
-------------- -------------- ------------
NET INCOME $54,667,000 $44,791,000 $19,728,000
============== ============== ============
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 30,193,000 29,803,000 29,904,000
============== ============== ============
Diluted 31,803,000 31,379,000 30,313,000
============== ============== ============
EARNINGS PER SHARE 2, 10
Basic $1.81 $1.50 $0.66
============== ============== ============
Diluted $1.72 $1.43 $0.65
============== ============== ============
CASH DIVIDENDS PER COMMON SHARE $0.60 $0.60 $0.74
============== ============== ============
</TABLE>
See the accompanying notes to consolidated
financial statements.
36
<PAGE> 37
HERBALIFE INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
<TABLE>
<CAPTION>
Paid in
Capital in
Common Common Excess of Retained
Stock A Stock B Par Value Earnings
-------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1994 $300,000 $41,117,000 $71,784,000
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 stock (1,000) (978,000)
Net income 19,728,000
Translation adjustments
Unrealized gain on Marketable Securities
Cash Dividends Declared (22,189,000)
--------- ---------- ------------- ------------
Balance at December 31, 1995 $300,000 $40,417,000 $69,323,000
Issuance of 839,000 shares of Common Stock under the 1991
Stock Option Plan 8,000 4,721,000
Issuance of Common Stock under the 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
Unrealized loss on Marketable Securities
Cash Dividends Declared (17,780,000)
--------- ---------- ------------- ------------
Balance at December 31, 1996 $302,000 $43,258,000 $96,334,000
Issuance of 669,826 shares of Common Stock under the 1991
Stock Option Plan 7,000 4,942,000
Issuance of Common Stock under 1994 Incentive Compensation
Plan 865,000
Additional capital from tax benefit of 1991 Stock Option Plan 3,448,000
One-for-Three Reverse Stock Split (206,000) 206,000
Stock split effected in the form of a stock dividend 206,000 (206,000)
Repurchase of 503,453 shares of Common Stock A and 788,540
shares of Common Stock B (5,000) (8,000) (2,194,000) (23,756,000)
Amortization of unearned compensation
Net income 54,667,000
Translation adjustments
Unrealized gain on marketable securities
Cash Dividends Declared (18,139,000)
----------------------------------------------------
Balance at December 31, 1997 $98,000 $198,000 $50,319,000 $109,106,000
====================================================
</TABLE>
<TABLE>
<CAPTION>
Gain
Cumulative (Loss) on Total
Translation Unearned Marketable Stockholders'
Adjustment Compensation Securities Equity
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1994 $250,000 ($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 stock 843,000 (136,000)
Net income 19,728,000
Translation adjustments 944,000 944,000
Unrealized gain on Marketable Securities 284,000 284,000
Cash Dividends Declared (22,189,000)
------------ -------------- ---------- ------------
Balance at December 31, 1995 $1,194,000 ($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 the 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) (2,175,000)
Unrealized loss on Marketable Securities (45,000) (45,000)
Cash Dividends Declared (17,780,000)
------------ --------------- ---------- -----------
Balance at December 31, 1996 ($981,000) ($412,000) ($33,000) $138,468,000
Issuance of 669,826 shares of Common Stock under the 1991
Stock Option Plan 4,949,000
Issuance of Common Stock under 1994 Incentive Compensation
Plan 865,000
Additional capital from tax benefit of 1991 Stock Option Plan 3,448,000
One-for-Three Reverse Stock Split --
Stock split effected in the form of a stock dividend --
Repurchase of 503,453 shares of Common Stock A and 788,540
shares of Common Stock B (25,963,000)
Amortization of unearned compensation 260,000 260,000
Net income 54,667,000
Translation adjustments (3,877,000) (3,877,000)
Unrealized gain on marketable securities 55,000 55,000
Cash Dividends Declared (18,139,000)
------------------------------------------------------------
Balance at December 31, 1997 $(4,858,000) $(152,000) $22,000 $154,733,000
============================================================
</TABLE>
See the accompanying notes to consolidated
financial statements.
37
<PAGE> 38
HERBALIFE INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 54,667,000 $ 44,791,000 $ 19,728,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 10,966,000 10,557,000 8,104,000
Deferred income taxes (2,984,000) (9,683,000) 5,775,000
Amortization of unearned compensation 260,000 1,304,000 805,000
Stock grant 865,000 2,497,000
Unrealized foreign exchange (gain) loss 1,735,000 (368,000) (1,112,000)
Minority interest in earnings 1,003,000
Other 299,000 256,000 149,000
Changes in operating assets and liabilities:
Receivables (18,896,000) (10,377,000) (4,968,000)
Inventories (31,355,000) (7,454,000) 10,903,000
Prepaid expenses and other current assets (2,002,000) (1,388,000) 4,881,000
Other assets 41,000 (658,000) (5,909,000)
Accounts payable (2,301,000) (466,000) 1,740,000
Royalty overrides 16,885,000 11,335,000 9,154,000
Accrued expenses and accrued compensation 4,437,000 20,065,000 7,495,000
Advance sales deposits 10,869,000 (6,790,000) 12,640,000
Income taxes payable 6,709,000 11,802,000 8,486,000
------------ ------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 51,198,000 65,423,000 77,871,000
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property (13,090,000) (15,401,000) (7,243,000)
Proceeds from sale of property 176,000 549,000 462,000
Changes in marketable securities (181,000) (8,553,000) (9,937,000)
------------ ------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (13,095,000) (23,405,000) (16,718,000)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Additions to bank loans and contracts payable 510,000 1,219,000
Principal payments on bank loans and contracts payable (3,337,000) (1,619,000) (1,433,000)
Exercise of stock options, net of stock repurchases 4,949,000 4,729,000 3,000
Repurchase of Common Stock (25,963,000) (7,477,000)
Dividends paid (18,150,000) (17,869,000) (24,240,000)
Other (6,000) 9,000
------------ ------------ ------------
NET CASH USED IN FINANCING ACTIVITIES (41,991,000) (21,023,000) (25,661,000)
------------ ------------ ------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (4,680,000) (2,690,000) (600,000)
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (8,568,000) 18,305,000 34,892,000
CASH AND CASH EQUIVALENTS AT JANUARY 1, 87,481,000 69,176,000 34,284,000
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT DECEMBER 31, $ 78,913,000 $ 87,481,000 $ 69,176,000
============ ============ ============
INTEREST PAID $ 506,000 $ 352,000 $ 715,000
============ ============ ============
INCOME TAXES PAID(REFUNDED) $ 27,110,000 $ 21,186,000 $ (4,012,000)
============ ============ ============
</TABLE>
See the accompanying notes to consolidated financial statements.
38
<PAGE> 39
HEBALIFE 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, 1997, the
Company conducted business in thirty-six countries located in the Asia/Pacific
Rim, Europe and Americas. 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 subsidiaries 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
$1,564,000, $3,013,000 and $2,573,000 in the years ending December 31, 1997,
1996 and 1995, 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 related to qualifying hedges are deferred and
recognized in operating income when the underlying hedged transaction occurs.
Premium payments on such contracts are amortized to expense 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 five years.
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 contracts payable
approximate fair value; and b) The fair value of investments is based on quoted
market prices.
39
<PAGE> 40
HERBALIFE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 periods ranging from twelve to twenty-four months.
Goodwill is being amortized over periods ranging from fifteen to forty years.
Long-lived assets are reviewed for impairment, based on undiscounted cash
flows, 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' approximate 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, related royalty overrides, and
allowances for product returns are
40
<PAGE> 41
HERBALIFE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
recorded when the merchandise is shipped. Advance sales deposits represent
prepaid orders for which the Company has not shipped the merchandise.
SOURCES OF SUPPLY AND PRODUCT DEVELOPMENT
All of the company's products are manufacturered by outside companies. The
weight loss and food and dietary supplements are manufactured by two companies;
Raven Industries ("Raven"), which manufacturers all of the Company's powder
products, and D&F Industries ("D&F"), which currently supplies all of the
Company's tablet and capsule products. The Company was subject to requirements
contracts with each of Raven, D&F, and their affiliate, pursuant to which, prior
to 1998, the Company agreed to purchase all of its requirements of powder
products from Raven and all of its requirements of tablet, capsule, and certain
other products from D&F or its affiliate, to the extent each such manufacturer
was capable of manufacturing such products. In September 1997, the company
entered into new three year agreements with Raven, D&F, and their affiliate,
pursuant to which revised pricing and other provisions became effective on
January 12, 1998. The new contracts provide, among other things, the ability for
the Company to source and develop products with other third party manufacturers,
subject to minimum percentage purchase and other requirements for nutritional
supplement, and a small number of non-nutritional supplement, products falling
into specified product categories. As a result, and because the new contracts
confirm the Company's ownership of product formulations for substantially all of
the Company's nutritional products, the Company has the capacity, and in the
future may seek, to "second source" particular nutritional supplement products
with multiple manufacturers. Further, the Company has hired its own staffs of
product research and development and product formulation personnel, and will
increasingly rely on its in-house staff for these functions. However, the
Company has historically relied on Raven and D&F for these services, and will
continue to do so, albeit to a lesser extent, in the future. See Note 7 for
discussion of the ownership of Raven and its affiliate.
EARNINGS PER SHARE
At December 31, 1997, the Company adopted Statement of Financial Accounting
Standard No. 128 ("SFAS 128"), "Earnings per Share". SFAS 128 replaces the
presentation of primary earnings per share with a presentation of basic earnings
per share based upon the weighted average number of common shares outstanding
for the period. It also requires dual presentation of basic and diluted earnings
per share for companies with complex capital structures. Earnings per share for
the current and prior periods have been presented in conformity with the
provisions of SFAS 128. A reconciliation of the basic and diluted weighted
average shares is as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Basic 30,193,000 29,803,000 29,904,000
Effect of Stock Options 1,610,000 1,576,000 409,000
---------- ---------- ----------
Diluted 31,803,000 31,379,000 30,313,000
========== ========== ==========
</TABLE>
Net income as presented in the consolidated income statement is used as the
numerator in the earnings per share calculation for both the basic and diluted
computations.
STOCK COMPENSATION
Effective January 1, 1996, the Company adopted the disclosure provisions of
SFAS 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.
41
<PAGE> 42
HERBALIFE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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:
<TABLE>
<CAPTION>
December 31,
--------------------------
1997 1996
----------- -----------
<S> <C> <C>
Product $61,048,000 $39,668,000
Literature 4,990,000 3,419,000
Promotional items 5,545,000 3,117,000
----------- -----------
Total $71,583,000 $46,204,000
=========== ===========
</TABLE>
4. BANK LOANS AND CONTRACTS PAYABLE
Bank loans and contracts payable consist of the following:
<TABLE>
<CAPTION>
December 31,
------------------------
1997 1996
---------- ----------
<S> <C> <C>
Capitalized leases, due in monthly installments
through 2002 (Note 5) $3,824,000 $3,536,000
Other 291,000 1,263,000
---------- ----------
Total 4,115,000 4,799,000
Less current portion 1,449,000 2,493,000
---------- ----------
Long-term portion $2,666,000 $2,306,000
========== ==========
</TABLE>
Annual scheduled payments of bank loans and contracts payable are: $1,449,000
(1998), $1,102,000 (1999), $844,000 (2000), $569,000 (2001), and $151,000
(2002).
The Company has revolving bank credit facilities in South Korea and Turkey in
the amount of $3,350,000 and $1,927,000, respectively. The credit facilities
will continue to be available until written notice is provided. The credit
facilities provide 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, 1997, there were no borrowings outstanding against the
South Korean credit facility. The credit facility in Turkey had $278,000
outstanding at December 31, 1997.
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 December 31, 1997,
an aggregate of $21.2 million had been pledged against $26.4 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 has other unsecured guarantees related mainly to short-term
currency hedge arrangements.
42
<PAGE> 43
HERBALIFE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 1997 were as follows:
<TABLE>
<CAPTION>
Operating Capital
----------- ----------
<S> <C> <C>
1998 $ 9,497,000 $1,360,000
1999 7,732,000 1,248,000
2000 6,997,000 917,000
2001 6,407,000 599,000
2002 5,506,000 155,000
Thereafter 17,293,000 --
----------- ----------
Total $53,432,000 4,279,000
-----------
Less: Amounts included above representing interest 455,000
----------
Present value of net minimum lease payments $3,824,000
==========
</TABLE>
Rental expense for the years ended December 31, 1997, 1996 and 1995 was
$14,299,000, $9,434,000, and $7,126,000 respectively.
Property under capital leases is included in property in the accompanying
balance sheets at December 31, 1997 and 1996 as follows:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Equipment $6,105,000 $5,575,000
Less: accumulated amortization 2,096,000 2,291,000
---------- ----------
Total $4,009,000 $3,284,000
========== ==========
</TABLE>
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 1996 was $320,000.
No bonuses were awarded under this plan for 1997 or 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 Committee of the Board of
Directors. The amounts awarded under the 1994 Plan for 1997 and 1996 totaled
$8,250,000 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 1997 and 1996 to the participants. As of
December 31, 1997, the remaining outstanding principal and accrued interest
obligations were $7,295,000. Each advance is a full recourse obligation of the
executive with a maturity date of two years following the date of
43
<PAGE> 44
HERBALIFE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 5.64% to 5.69%.
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 17% of their compensation, and the Company will match a portion
of the participant's contribution. Participants are partially vested in the
Company contributions after three years and fully vested after seven years. The
Company contributed $470,000, $399,000 and $284,000 for the years ended December
31, 1997, 1996 and 1995, respectively.
In 1996, the Company implemented two non-qualified, 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 gross
deferred compensation expense was $4,683,000 and $2,826,000 for 1997 and 1996
respectively. The deferred compensation expense net of participant contributions
was $1,078,000 and $616,000 for 1997 and 1996, respectively. The long-term
deferred compensation liability, included in other noncurrent liabilities in the
accompanying balance sheet, was $7,336,000 and $2,832,000 for December 31, 1997
and 1996, respectively.
In September, 1997 the Company implemented the non-qualified, unfunded,
non-contributory Supplemental Executive Retirement Plan ("SERP") for selected
key executives. Benefits under the SERP plan are based on years of service and
final average compensation, as defined. The actuarial present value of the
vested SERP obligation was $3.8 million as of December 31, 1997. The expense
under this plan was $431,000 for 1997.
7. TRANSACTIONS WITH RELATED PARTIES
The CEO and majority stockholder of the Company owns a one-third interest in
Raven, 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. Dynamic is affiliated through common
management with Raven and D&F (see Note 2). Total purchases from Raven
Industries were $63,424,000, $53,193,000 and $26,246,000 for the years ended
December 31, 1997, 1996 and 1995, respectively. Total purchases from Dynamic
Products, Inc. were $3,347,000, $3,181,000 and $3,094,000 for the years ended
December 31, 1997, 1996 and 1995, respectively. At December 31, 1997 and 1996,
the aggregate amounts payable to these suppliers were $103,000 and $1,339,000,
respectively.
In addition to advances described in Note 6, during 1996 and 1997, the Company
advanced $618,000 to certain officers and a Director. The outstanding principal
and accrued interest were $660,000 at December 31, 1997. Each outstanding
advance is a full recourse obligation of the officer with a maturity date of 9
months to two years. The advances bear interest ranging from 5.48% to 5.84%.
The Company engaged 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, 1996 and 1995, payments by the Company to this
consulting firm amounted to $230,000 and $1,003,000 respectively. No payments
were made to this firm in 1997.
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
44
<PAGE> 45
HERBALIFE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 approximate 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 cash and $3,234,000 in full recourse interest bearing notes. The
Notes are payable in 16 equal quarterly principal and interest installments,
beginning in March 1998, as amended. 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 restructuring was implemented in 1996.
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 each 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 substantial compliance with all applicable
regulations and restrictions, it is subject to the risk that foreign
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 or proposed audits which are at various levels of review,
assessment or appeal 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 material amounts.
In certain circumstances, additional taxes, interest and penalties have been
assessed, and the Company will be required to litigate to reverse the
assessments. In addition, Italian criminal tax proceedings are pending against
the managing director of the Company's Italian subsidiary in his capacity as
such with respect to certain tax issues affecting the Company (and not affecting
distributors or the taxation of distributors). The Company has been advised by
its Italian tax counsel that referral of tax charges to criminal authorities in
Italy is a relatively common procedure (pursuant to statutory provisions
requiring referral of specific types of claims based upon the amounts thereof)
and in any event believes that it has strong defenses to the charges. None of
the pending or proposed audits, assessments or litigation is expected to have a
material adverse effect on the Company. However, ultimate resolution of these
matters may take several years and the outcome is uncertain.
In the event that such audits or assessments are concluded adversely to the
Company, the Company believes that it may be able to offset or mitigate the
consolidated effect of foreign income tax assessments through the use of U.S.
foreign tax credits. Currently, the foreign tax credits have been fully
utilized. 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 such additional foreign tax credits in
the future.
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.
45
<PAGE> 46
HEBALIFE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. STOCKHOLDERS' EQUITY
At a Special Meeting of the Company's shareholders held on December 11, 1997,
the Company's shareholders approved a recapitalization plan, pursuant to which
the Company's Articles of Incorporation were amended and restated to: (i) effect
a one-for-three reverse split (the "Reverse Split") of the then outstanding
common stock ("Old Common Stock"), (ii) reclassify each resulting whole share of
Old Common Stock as a share of a new class A common stock ("Class A Stock") ,
(iii) create a new class of non-voting common stock, designated as class B
common stock ("Class B Stock"), and (iv) fix the relative rights, powers and
limitations of the Class A Stock and the Class B Stock. The recapitalization did
not change the aggregate number of shares of the Company's authorized and
outstanding capital stock. On December 12, 1997, the recapitalization became
effective and the Company's Board of Directors declared a dividend of two shares
of Class B Stock on each whole share of Class A Stock resulting from the Reverse
Split. On December 15, 1997, trading of both the Class A Stock and the Class B
Stock commenced on the NASDAQ National Market system. Common stock options and
SARs have been retroactively adjusted to reflect the Recapitalization.
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 6,800,000 shares of the Company's Common Stock A and/or Common Stock B
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, 1997 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%.
The Company's 1994 Plan allows for the granting 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 $1,332,000,
$4,798,000, and $892,000 for the years ended 1997, 1996, and 1995, respectively.
During July 1997, all outstanding SARs were converted to stock options with
the same strike price as the former SAR. As of December 31, 1997 there were no
SARs outstanding.
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" (SFAS
123), the Company's net earnings and earnings per share would have been reduced
to the pro forma amounts indicated in the following table:
<TABLE>
<CAPTION>
1997 1996 1995
-------------- -------------- --------------
<S> <C> <C> <C>
Net Income - as reported $54,667,000 $44,791,000 $19,728,000
Net Income - pro forma $46,881,000 $42,054,000 $18,164,000
Basic EPS - as reported $1.81 $1.50 $0.66
Basic EPS - pro forma $1.55 $1.41 $0.61
Diluted EPS - as reported $1.72 $1.43 $0.65
Diluted EPS - pro forma $1.49 $1.38 $0.61
</TABLE>
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
46
<PAGE> 47
HERBALIFE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
for the years presented 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 since January 1, 1995.
The fair value of the stock options granted during the years presented was
determined using the Black-Scholes option pricing model and the following
weighted average assumptions:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Risk free interest rate 6.49% 6.47% 5.79%
Expected option life 6.9 5.5 3.5
Volatility 75.18% 77.68% 70.52%
Dividend yield 3.5% 5.2% 5.2%
</TABLE>
Option groups outstanding at December 31, 1997 and related option information
follows:
<TABLE>
<CAPTION>
1997
----------------------------------------------------------------------------------------
Common Stock A Common Stock B
------------------------------------------- ------------------------------------------
Weighted Weighted
Options Average SARs Options Average SARs
-------------- -------- -------- ------------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at January 1, 1,312,000 $10.92 62,000 2,627,000 $10.92 124,000
Granted 933,000 17.29 -- 1,940,000 17.45 --
Exercised (222,000) 7.39 (10,000) (448,000) 7.39 (20,000)
SAR's converted to options 52,000 15.55 (52,000) 104,000 15.55 (104,000)
Canceled (34,000) 15.56 -- (67,000) 15.56 --
-------------- -------- -------- ------------- -------- --------
Outstanding at December 31, 2,041,000 $14.27 -- 4,156,000 $14.40 --
======== ======== ======== ========
Available for Grant at December 31, 226,000 377,000
-------------- -------------
Total reserved shares 2,267,000 4,533,000
============== =============
Exercisable at December 31, 389,000 778,000
============== =============
Option prices per share
Granted $15.69-$25.13 $15.69-$25.13
Exercised $ 0.88-$13.00 $ 0.88-$13.00
Weighted average fair value of
options granted during the year $9.46 $9.56
</TABLE>
<TABLE>
<CAPTION>
1996
----------------------------------------------------------------------------------------
Common Stock A Common Stock B
------------------------------------------- ------------------------------------------
Weighted Weighted
Options Average SARs Options Average SARs
-------------- -------- -------- ------------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at January 1, 972,000 $ 6.69 20,000 1,944,000 $ 6.69 40,000
Granted 638,000 14.96 58,000 1,277,000 14.96 117,000
Exercised (280,000) 5.64 (5,000) (559,000) 5.64 (11,000)
Canceled (18,000) 7.38 (11,000) (35,000) 7.38 (22,000)
-------------- -------- -------- ------------- -------- --------
Outstanding at December 31, 1,312,000 $10.92 62,000 2,627,000 $10.92 124,000
======== ======== ======== ========
Available for Grant at December 31, 221,000 441,000
-------------- -------------
Total reserved shares 1,533,000 3,068,000
============== =============
Exercisable at December 31, 256,000 513,000
============== =============
Option prices per share
Granted $ 10.13-$19.88 $10.13-$19.88
Exercised $ 0.88-$15.25 $ 0.88-$15.25
Weighted average fair value of
options granted during the year $7.23 $7.23
</TABLE>
47
<PAGE> 48
HERBALIFE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
1995
----------------------------------------------------------------------------------------
Common Stock A Common Stock B
------------------------------------------- ------------------------------------------
Weighted Weighted
Options Average SARs Options Average SARs
-------------- -------- -------- ------------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at January 1, 715,000 $12.95 13,000 1,429,000 $12.95 27,000
Granted 351,000 7.39 10,000 702,000 7.39 20,000
Repriced 487,000 7.38 -- 973,000 7.38 --
Exercised (14,000) 2.19 (3,000) (28,000) 2.19 (7,000)
Surrendered for reprice (487,000) 15.92 -- (973,000) 15.92 --
Canceled (80,000) 14.59 -- (159,000) 14.59 --
--------- ------ ------- --------- ------ -------
Outstanding at December 31, 972,000 $ 6.69 20,000 1,944,000 $ 6.69 40,000
====== ======= ====== =======
Available for Grant at December 31, 110,000 220,000
--------- ---------
Total reserved shares 1,082,000 2,164,000
========= =========
Exercisable at December 31, 259,000 517,000
========= =========
Option prices per share
Granted $ 7.38-$11.63 $7.38-$11.63
Exercised $ 0.88-$ 3.63 $0.88-$ 3.63
Weighted average fair value of
options granted during the year $3.01 $3.01
</TABLE>
The following table summarizes information regarding option groups outstanding
at December 31, 1997. This table has not been expanded to segregate between
Common Stock A options and Common Stock B options since the resultant
segregation would have produced similar results.
<TABLE>
<CAPTION>
Wtd Avg
Number Remaining Wtd Avg Options Wtd Avg
Outstanding Contractual Exercise Exercisable Exercise
Range of Exercise Prices: at 12/31/97 Life Price at 12/31/97 Price
----------- ----------- --------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.88 57,000 4 Years $ 0.88 57,000 $ 0.88
$7.38 to $10.13 1,459,000 7 Years $ 7.59 781,000 $ 7.44
$13.00 to $16.25 2,667,000 9 Years $14.77 218,000 $13.25
$16.38 to $19.88 1,272,000 9 Years $18.09 111,000 $19.88
$20.00 to $25.13 793,000 10 years $20.42 -- -
</TABLE>
48
<PAGE> 49
HERBALIFE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. OPERATIONS IN FOREIGN COUNTRIES
The following is a summary of the financial activity of the Company by
geographical area:
<TABLE>
<CAPTION>
ASIA/ ELIMINATIONS/ TOTAL
THE AMERICAS EUROPE PACIFIC RIM ADJUSTMENTS CONSOLIDATED
------------ ------------ ------------ ------------- ---------------
<S> <C> <C> <C> <C> <C>
1997
Retail sales to unaffiliated customers $394,137,000 $453,118,000 $643,438,000 $ -- $ 1,490,693,000
Transfers between geographic areas 447,020,000 3,517,000 -- (450,537,000) --
------------ ------------ ------------ ------------- ---------------
Total retail sales 841,157,000 456,635,000 643,438,000 (450,537,000) 1,490,693,000
Less distributor allowances 339,278,000 219,215,000 307,476,000 (157,728,000) 708,241,000
------------ ------------ ------------ ------------- ---------------
Net Sales $501,879,000 $237,420,000 $335,962,000 $(292,809,000) $ 782,452,000
============ ============ ============ ============= ===============
Income from operations $119,760,000 $ 7,581,000 $ 64,532,000 $ (75,637,000) $ 116,236,000
============ ============ ============ =============
General corporate expenses 30,251,000
Interest income 4,535,000
---------------
Income before income taxes and minority interest $ 90,520,000
===============
Identifiable assets $136,666,000 $ 39,266,000 $ 79,406,000 255,338,000
============ ============= ============
Corporate assets 59,242,000
---------------
Total assets $ 314,580,000
===============
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 $ 97,062,000 $ 4,719,000 $ 42,288,000 $ (50,930,000) $ 93,139,000
============ ============ ============ =============
General corporate expenses 24,392,000
Interest income 4,084,000
---------------
Income before income taxes and minority interest $ 72,831,000
===============
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 $ 61,961,000 $ 2,285,000 $ 9,647,000 $ (31,411,000) $ 42,482,000
============ ============ ============ =============
General corporate expenses 14,321,000
Interest income 3,404,000
---------------
Income before income taxes and minority interest $ 31,565,000
===============
Identifiable assets $ 84,840,000 $ 50,430,000 $ 22,859,000 $ 158,129,000
============ ============= ============
Corporate assets 49,561,000
---------------
Total assets $ 207,690,000
===============
</TABLE>
49
<PAGE> 50
HERBALIFE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. INCOME TAXES
The components of income before income taxes were:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Domestic $44,769,000 $23,298,000 $29,735,000
Foreign 45,751,000 49,533,000 1,830,000
----------- ----------- -----------
$90,520,000 $72,831,000 $31,565,000
=========== =========== ===========
</TABLE>
Income taxes are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
CURRENT:
Foreign $ 25,397,000 $ 26,349,000 $ 4,498,000
Federal 9,858,000 8,774,000 937,000
State 2,579,000 2,600,000 29,000
DEFERRED:
Foreign 1,156,000 (3,367,000) (511,000)
Federal (3,749,000) (5,589,000) 6,834,000
State (391,000) (727,000) 50,000
------------ ------------ ------------
$ 34,850,000 $ 28,040,000 $ 11,837,000
============ ============ ============
</TABLE>
The tax effects of temporary differences which gave rise to deferred income tax
assets and liabilities are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------
1997 1996
------------ ------------
<S> <C> <C>
DEFERRED INCOME TAX ASSETS:
Intercompany profit in inventory $ 1,693,000 $ 1,101,000
Accruals not currently deductible 11,798,000 10,909,000
Tax loss carryforwards of certain foreign subsidiaries 3,966,000 3,614,000
Less valuation allowance (1,601,000) (1,445,000)
Deferred compensation plan 2,960,000 1,056,000
Accrued state income taxes 640,000 652,000
Other 1,283,000 1,532,000
------------ ------------
20,739,000 17,419,000
============ ============
DEFERRED INCOME TAX LIABILITIES:
Depreciation/Amortization 975,000 1,166,000
Payments to former partners 931,000 962,000
Inventory deductibles 748,000 464,000
Other 322,000 48,000
------------ ------------
2,976,000 2,640,000
------------ ------------
NET $ 17,763,000 $ 14,779,000
============ ============
</TABLE>
50
<PAGE> 51
HERBALIFE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 1997, the Company's deferred income tax asset for tax loss
carryforwards of certain foreign subsidiaries totaling $3,966,000 was reduced by
a valuation allowance of $1,601,000. The tax loss carryforwards expire in
varying amounts between 1998 and 2007. 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 carry forward 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,
----------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Tax expense at United States statutory rate $ 31,682,000 $ 25,491,000 $ 11,048,000
Increase (decrease) in tax resulting from:
Foreign Sales Corporation (1,846,000) (332,000) (963,000)
U.S. Foreign tax credits (7,926,000) (4,497,000) --
Increase (decrease) in valuation allowances 156,000 (626,000) 1,725,000
Differences between U.S. and foreign tax rates on foreign income 10,541,000 6,556,000 846,000
State taxes, net of federal benefit 1,428,000 1,240,000 41,000
Other 815,000 208,000 (860,000)
------------ ------------ ------------
TOTAL $ 34,850,000 $ 28,040,000 $ 11,837,000
============ ============ ============
</TABLE>
Cumulative undistributed earnings of foreign subsidiaries for which no
deferred taxes have been provided approximated $14,679,000 at December 31, 1997.
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 objective 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, 1997, the Company had no forward exchange contracts outstanding.
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.
51
<PAGE> 52
HERBALIFE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. QUARTERLY INFORMATION (UNAUDITED)
Quarterly information presented here is unaudited.
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
FIRST QUARTER ENDED MARCH 31
Retail sales $323,944,000 $276,572,000
Net sales 169,977,000 146,223,000
Operating margin 73,351,000 62,539,000
Net income $ 11,916,000 $ 9,220,000
Net income per common share:
Basic $ 0.39 $ 0.31
Diluted $ 0.38 $ 0.30
Dividends per share paid $ 0.15 $ 0.15
SECOND QUARTER ENDED JUNE 30
Retail sales $350,020,000 $283,933,000
Net sales 184,891,000 150,255,000
Operating margin 81,636,000 65,312,000
Net income $ 13,700,000 $ 10,401,000
Net income per common share:
Basic $ 0.45 $ 0.35
Diluted $ 0.44 $ 0.33
Dividends per share paid $ 0.15 $ 0.15
THIRD QUARTER ENDED SEPTEMBER 30
Retail sales $393,894,000 $306,697,000
Net sales 207,227,000 160,741,000
Operating margin 92,113,000 71,363,000
Net income $ 14,253,000 $ 11,339,000
Net income per common share:
Basic $ 0.47 $ 0.38
Diluted $ 0.45 $ 0.36
Dividends per share paid $ 0.15 $ 0.15
FOURTH QUARTER ENDED DECEMBER 31
Retail sales $422,835,000 $332,941,000
Net sales 220,357,000 174,716,000
Operating margin 96,399,000 79,620,000
Net income $ 14,798,000 $ 13,831,000
Net income per common share:
Basic $ 0.49 $ 0.46
Diluted $ 0.47 $ 0.44
Dividends per share paid $ 0.15 $ 0.15
</TABLE>
52
<PAGE> 53
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 4, 1998
HERBALIFE INTERNATIONAL, INC.
By: TIM GERRITY
-----------------------------------
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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
MARK HUGHES Chairman of the Board and March 4, 1998
- --------------------------------------- President, Chief Executive Officer
Mark Hughes (Principal Executive Officer)
CHRISTOPHER PAIR Director and Executive Vice March 4, 1998
- --------------------------------------- President, Chief Operating Officer
Christopher Pair
MICHAEL E. ROSEN Director and Executive Vice March 4, 1998
- --------------------------------------- President, Chief Executive of
Michael E. Rosen Corporate Development/Marketing
EDWARD HALL
- --------------------------------------- Director March 4, 1998
Edward Hall
ALAN LIKER
- --------------------------------------- Director March 4, 1998
Alan Liker
CHRISTOPHER M. MINER
- --------------------------------------- Director March 4, 1998
Christopher M. Miner
</TABLE>
53
<PAGE> 54
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 of Santa Cruz (1)
10.2 The Company's 1991 Stock Option Plan, as amended (7), (11)
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)
21 List of subsidiaries of the Company (8)
23.1 Independent Auditors' Consent (12)
27 Financial Data Schedule (12)
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 55
(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) Filed herewith.
(b) REPORTS ON FORM 8-K:
None.
(c) OTHER EXHIBITS:
See "Item 14(a)3. Exhibits."
(d) OTHER FINANCIAL STATEMENT SCHEDULES:
None.
<PAGE> 1
EXHIBIT 4.1
SEAL SEAL
NUMBER SHARES
HA
HERBALIFE
INCORPORATED UNDER THE LAWS SEE REVERSE FOR CERTAIN
OF THE STATE OF NEVADA DEFINITIONS
CUSIP 426908 20 8
This Certifies that
SPECIMEN
is the record holder of
FULLY PAID AND NONASSESSABLE SHARES OF CLASS A COMMON STOCK, $.01 PAR VALUE, OF
HERBALIFE INTERNATIONAL, INC.
(hereinafter and on the back hereof called the "Corporation") transferable on
the books of the Corporation in person or by duly authorized attorney, upon
surrender of this Certificate properly endorsed. This Certificate is not valid
unless countersigned and registered by the Transfer Agent and Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures
of its duly authorized officers.
Dated:
HERBALIFE INTERNATIONAL, INC.
CORPORATE SEAL
1985
NEVADA
SECRETARY PRESIDENT
COUNTERSIGNED AND REGISTERED:
U.S. STOCK TRANSFER CORPORATION
TRANSFER AGENT AND REGISTRAR
BY
AUTHORIZED SIGNATURE
<PAGE> 2
The Corporation will furnish without charge to each stockholder who so
requests, the powers, designations, preferences and relative participating,
optional or other special rights of each class of stock or series thereof of
the Corporation and the qualifications, limitations or restrictions of such
preferences and/or rights. Such request may be made to the Corporation at its
principal offices.
KEEP THIS CERTIFICATE IN A SAFE PLACE. IF IT IS LOST, STOLEN OR DESTROYED
THE CORPORATION WILL REQUIRE A BOND OF INDEMNITY AS A CONDITION TO THE ISSUANCE
OF A REPLACEMENT CERTIFICATE.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM -- as tenants in common
TEN ENT -- as tenants by the entiraties
JT TEN -- as joint tenants with right
of survivorship and not as
tenants in common
COM PROP -- as community property
UNIF GIFT MIN ACT -- _____________ Custodian _____________
(Cust) (Minor)
under Uniform Gifts to Minors
Act__________________________________
(State)
UNIF TRF MIN ACT -- _________ Custodian (until age ______)
(Cust)
_____________ under Uniform Transfers
(Minor)
to Minors Act _______________________
(State)
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, ________________________ hereby sell, assign and
transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- --------------------------------------
- --------------------------------------
- --------------------------------------------------------------------------------
(PLEASE PRINT OR TYPE NAME AND ADDRESS, INCLUDING ZIP CODE OF ASSIGNEE)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- ------------------------------------------------------------------------- Shares
of the capital stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
- ----------------------------------------------------------------------- Attorney
to transfer the said stock on the books of the within named
Corporation with full power of substitution in the premises.
Dated________________________
X ___________________________________
X ___________________________________
NOTICE THE SIGNATURE(S) TO THIS ASSIGNMENT MUST
CORRESPOND WITH THE NAME(S) AS WRITTEN UPON
THE FACE OF THE CERTIFICATE IN EVERY
PARTICULAR, WITHOUT ALTERATION OR
ENLARGEMENT OR ANY CHANGE WHATEVER.
Signature(s) Guaranteed
By__________________________________
THE SIGNATURE(S) MUST BE GUARANTEED BY AN
ELIGIBLE GUARANTOR INSTITUTION (BANKS,
STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS
AND CREDIT UNIONS WITH MEMBERSHIP IN AN
APPROVED MEDALLION SIGNATURE GUARANTEE
PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15.
<PAGE> 3
SEAL SEAL
NUMBER SHARES
HB
HERBALIFE
INCORPORATED UNDER THE LAWS SEE REVERSE FOR CERTAIN
OF THE STATE OF NEVADA DEFINITIONS
CUSIP 426908 30 7
This Certifies that
SPECIMEN
is the record holder of
FULLY PAID AND NONASSESSABLE SHARES OF CLASS B COMMON STOCK, $.01 PAR VALUE, OF
HERBALIFE INTERNATIONAL, INC.
(hereinafter and on the back hereof called the "Corporation") transferable on
the books of the Corporation in person or by duly authorized attorney, upon
surrender of this Certificate properly endorsed. This Certificate is not valid
unless countersigned and registered by the Transfer Agent and Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures
of its duly authorized officers.
Dated:
HERBALIFE INTERNATIONAL, INC.
CORPORATE SEAL
1985
NEVADA
SECRETARY PRESIDENT
COUNTERSIGNED AND REGISTERED:
U.S. STOCK TRANSFER CORPORATION
TRANSFER AGENT AND REGISTRAR
BY
AUTHORIZED SIGNATURE
<PAGE> 4
The Class B Common Stock has no voting rights except as expressly provided
in the Amended and Restated Articles of Incorporation of the Corporation, or as
required by law.
The Corporation will furnish without charge to each stockholder who so
requests, the powers, designations, preferences and relative participating,
optional or other special rights of each class of stock or series thereof of
the Corporation and the qualifications, limitations or restrictions of such
preferences and/or rights. Such request may be made to the Corporation at its
principal offices.
KEEP THIS CERTIFICATE IN A SAFE PLACE. IF IT IS LOST, STOLEN OR DESTROYED
THE CORPORATION WILL REQUIRE A BOND OF INDEMNITY AS A CONDITION TO THE ISSUANCE
OF A REPLACEMENT CERTIFICATE.
The following abbreviations, when used in the Inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM -- as tenants in common
TEN ENT -- as tenants by the entiraties
JT TEN -- as joint tenants with right
of survivorship and not as
tenants in common
COM PROP -- as community property
UNIF GIFT MIN ACT -- _____________ Custodian _____________
(Cust) (Minor)
under Uniform Gifts to Minors
Act__________________________________
(State)
UNIF TRF MIN ACT -- _________ Custodian (until age ______)
(Cust)
_____________ under Uniform Transfers
(Minor)
to Minors Act _______________________
(State)
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, ________________________ hereby sell, assign and
transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- --------------------------------------
- --------------------------------------
- --------------------------------------------------------------------------------
(PLEASE PRINT OR TYPE NAME AND ADDRESS, INCLUDING ZIP CODE OF ASSIGNEE)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- ------------------------------------------------------------------------- Shares
of the capital stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
- ----------------------------------------------------------------------- Attorney
to transfer the said stock on the books of the within named
Corporation with full power of substitution in the premises.
Dated________________________
X ___________________________________
X ___________________________________
NOTICE THE SIGNATURE(S) TO THIS ASSIGNMENT MUST
CORRESPOND WITH THE NAME(S) AS WRITTEN UPON
THE FACE OF THE CERTIFICATE IN EVERY
PARTICULAR, WITHOUT ALTERATION OR
ENLARGEMENT OR ANY CHANGE WHATEVER.
Signature(s) Guaranteed
By__________________________________
THE SIGNATURE(S) MUST BE GUARANTEED BY AN
ELIGIBLE GUARANTOR INSTITUTION (BANKS,
STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS
AND CREDIT UNIONS WITH MEMBERSHIP IN AN
APPROVED MEDALLION SIGNATURE GUARANTEE
PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-1C.
<PAGE> 1
EXHIBIT 10.24
HERBALIFE INTERNATIONAL OF AMERICA, INC.
Supplemental Executive Retirement Plan
Master Plan Document
================================================================================
HERBALIFE INTERNATIONAL OF AMERICA, INC.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
EFFECTIVE SEPTEMBER 1, 1997
PURPOSE
The purpose of this Plan is to provide specified benefits to a select
group of management and highly compensated employees of Herbalife International
of America, Inc., a California corporation, and its subsidiaries, if any, that
sponsor this Plan. This Plan shall be unfunded for tax purposes and for purposes
of Title I of ERISA.
ARTICLE 1
DEFINITIONS
For purposes hereof, unless otherwise clearly apparent from the context,
the following phrases or terms shall have the following indicated meanings:
1.1 "Actuarial Equivalent" shall mean an actuarial equivalent value of
an amount payable in a different form or at a different date computed on the
basis of a discount rate equal to the long term "applicable federal rate," as
defined in Section 1274(d) of the Code, compounded quarterly. As the Plan
Administrator deems necessary, in its sole discretion, such actuarial
assumptions may be adjusted from time to time, and no Participant shall be
deemed to have any right, vested or nonvested, regarding the continued use of
any previously adopted actuarial assumption.
1.2 "Beneficiary" shall mean the individual designated, in accordance
with Article 9, that is entitled to receive benefits under this Plan upon the
death of a Participant.
1.3 "Beneficiary Designation Form" shall mean the form established from
time to time by the Plan Administrator that a Participant completes, signs and
returns to the Plan Administrator to designate a Beneficiary.
1.4 "Board" shall mean the board of directors of the Company.
<PAGE> 2
HERBALIFE INTERNATIONAL OF AMERICA, INC.
Supplemental Executive Retirement Plan
Master Plan Document
================================================================================
1.5 "Cause" shall mean the commission of an act of moral turpitude
against the business, reputation or interests of the employer, which act results
in the conviction of a felony pursuant to the laws of the State of California,
or a material failure to comply with a reasonable written direction of the Board
and failure to so comply (to the best of the Participant's ability) within a
reasonable time after receiving written notice to do so.
1.6 "Change in Control" shall mean the occurrence of any of the
following:
(A) Any "Person" or "Group" (as such terms are defined in
Section 13(d) of the Securities Exchange Act of 1934 (the
"Exchange Act") and the rules and regulations promulgated
thereunder) is or becomes the "Beneficial Owner" (within the
meaning of Rule 13d-3 under the Exchange Act), directly or
indirectly, of securities of the Company, or of any entity
resulting from a merger or consolidation involving the Company,
representing more than fifty percent (50%) of the combined voting
power of the then outstanding securities of the Company or such
entity.
(B) The individuals who, as of the date hereof, are members of
the Board (the "Existing Directors"), cease, for any reason, to
constitute more than fifty percent (50%) of the number of
authorized directors of the Company as determined in the manner
prescribed in the Company's Certificate of Incorporation and
Bylaws; provided, however, that if the election, or nomination
for election, by the Company's stockholders of any new director
was approved by a vote of at least fifty percent (50%) of the
Existing Directors, such new director shall be considered an
Existing Director; provided further, however, that no individual
shall be considered an Existing Director if such individual
initially assumed office as a result of either an actual or
threatened "Election Contest" (as described in Rule 14a-11
promulgated under the Exchange Act) or other actual or threatened
solicitation of proxies by or on behalf of anyone other than the
Board (a "Proxy Contest"), including by reason of any agreement
intended to avoid or settle any Election Contest or Proxy
Contest.
-2-
<PAGE> 3
HERBALIFE INTERNATIONAL OF AMERICA, INC.
Supplemental Executive Retirement Plan
Master Plan Document
================================================================================
(C) The consummation of (x) a merger, consolidation or
reorganization to which the Company is a party, whether or not
the Company is the Person surviving or resulting therefrom, or
(y) a sale, assignment, lease, conveyance or other disposition of
all or substantially all of the assets of the Company, in one
transaction or a series of related transactions, to any Person
other than the Company, where any such transaction or series of
related transactions as is referred to in clause (x) or clause
(y) above in this subparagraph (C) (a "Transaction") does not
otherwise result in a "Change in Control" pursuant to
subparagraph (A) of this definition of "Change in Control";
provided, however, that no such Transaction shall constitute a
"Change in Control" under this subparagraph (C) if the Persons
who were the stockholders of the Company immediately before the
consummation of such Transaction are the Beneficial Owners,
immediately following the consummation of such Transaction, of
fifty percent (50%) or more of the combined voting power of the
then outstanding voting securities of the Person surviving or
resulting from any merger, consolidation or reorganization
referred to in clause (x) above in this subparagraph (C) or the
Person to whom the assets of the Company are sold, assigned,
leased, conveyed or disposed of in any transaction or series of
related transactions referred in clause (y) above in this
subparagraph (C).
1.7 "Claimant" shall have the meaning set forth in Section 8.1.
1.8 "Code" shall mean the Internal Revenue Code of 1986, as amended from
time to time.
1.9 "Company" shall mean Herbalife International of America, Inc., a
California corporation.
1.10 "Disability" shall mean a period of disability during which a
Participant qualifies for benefits under the Participant's group long term
disability plan or, if a Participant does not participate in such a plan, a
period of disability during which the Participant would have qualified for
benefits under such a plan had the Participant been a participant in such a
plan, as determined in the sole discretion of the Plan Administrator. If the
Participant's Employer does
-3-
<PAGE> 4
HERBALIFE INTERNATIONAL OF AMERICA, INC.
Supplemental Executive Retirement Plan
Master Plan Document
================================================================================
not sponsor such a plan, Disability shall be determined by the Plan
Administrator in its sole discretion.
1.11 "Early Retirement" shall mean a Participant ceasing to be an
employee of all Employers on or after his or her attainment of both age
fifty-five (55) and ten (10) Years of Service for any reason other than a leave
of absence, Normal Retirement, death, Disability or Termination of Employment.
1.12 "Employer(s)" shall mean the Company and any subsidiaries of the
Company that have been selected by the Board to participate in the Plan.
1.13 "ERISA" shall mean the Employee Retirement Income Security Act of
1974, as amended from time to time.
1.14 "Final Average Compensation" shall mean the average of a
Participant's Compensation for his or her five (5) calendar years of employment,
whether or not consecutive, during his or her final ten (10) calendar years of
employment which would yield the highest average. The Participant's Compensation
for the calendar year in which the event that entitled the Participant to a
distribution of benefits under this Plan occurred shall be determined by
annualizing such Participant's monthly Compensation for such year on the basis
of a twelve (12) month year. If, when the event occurs that entitles the
Participant to a distribution of benefits under this Plan, (a) the Participant
has completed more than five (5) but less than ten (10) calendar years of
employment, all of such Participant's calendar years of employment shall be
counted in lieu of such Participant's final ten (10) calendar years of
employment, and (b) if the Participant has not completed five (5) calendar years
of employment, such Participant's entire period of employment shall be counted,
with the monthly Compensation for any calendar year in which the Participant
does not complete twelve (12) months of employment being annualized on the basis
of a twelve (12) month year. For purposes of the preceding definition,
"Compensation" shall mean the annual base salary, before reduction for
compensation deferred pursuant to all qualified, non-qualified and Code Section
125 or 401(k) plans of any Employer, but excluding bonuses, commissions,
overtime, relocation expenses, incentive payments, non-monetary awards,
directors fees and other fees, and automobile allowances paid to a Participant
for employment services rendered to any Employer, and other fringe benefits.
-4-
<PAGE> 5
HERBALIFE INTERNATIONAL OF AMERICA, INC.
Supplemental Executive Retirement Plan
Master Plan Document
================================================================================
1.16 "Normal Retirement" shall mean a Participant ceasing to be an
employee of all Employers on or after the attainment of age sixty-five (65) for
any reason other than a leave of absence, death, Disability or Termination of
Employment.
1.17 "Participant" shall mean any employee (i) who is selected to
participate in the Plan, (ii) who elects to participate in the Plan, (iii) who
signs a Plan Agreement and a Beneficiary Designation Form, (iv) whose signed
Plan Agreement Form and Beneficiary Designation Form are accepted by the Plan
Administrator, (v) who commences participation in the Plan, and (vi) whose Plan
Agreement has not terminated.
1.18 "Plan" shall mean the Company's Supplemental Executive Retirement
Plan, which shall be evidenced by this instrument and by each Plan Agreement, as
amended from time to time.
1.19 "Plan Administrator" shall mean the plan administrator described in
Article 7.
1.20 "Plan Agreement" shall mean a written agreement, as may be amended
from time to time, which is entered into by and between an Employer and a
Participant. Each Plan Agreement executed by a Participant shall provide for the
entire benefit to which such Participant is entitled under the Plan, and the
Plan Agreement bearing the latest date of acceptance by the Plan Administrator
shall govern such entitlement. Plan Agreements shall contain such terms and
conditions as the Plan Administrator may deem appropriate, and need not be
uniform among Participants.
1.21 "Plan Year" shall, for the first Plan Year, begin on September 1,
1997, and end on December 31, 1997. For each Plan Year thereafter, the Plan Year
shall begin on January 1 of each year and continue through December 31.
1.22 "Retirement" or "Retires" shall mean, in each instance, Early
Retirement or Normal Retirement, as the case may be.
1.23 "SERP Benefit" shall mean a sixty (60) equal quarterly
installments, commencing at age sixty-five (65), each of which shall equal
one-quarter (1/4th) of the product of (a) .0175, (b) the number of the
Participant's Years of Service up to a maximum of twenty (20) Years of Service,
and (c) the Participant's Final Average Compensation.
-5-
<PAGE> 6
HERBALIFE INTERNATIONAL OF AMERICA, INC.
Supplemental Executive Retirement Plan
Master Plan Document
================================================================================
1.24 "Termination of Employment" shall mean a Participant ceasing to be
an employee of all Employers, voluntarily or involuntarily, but shall exclude
cessation of employment with all Employers as a result of Normal Retirement,
Early Retirement, death or Disability.
1.25 "Trust" shall mean the trust established pursuant to that certain
Herbalife Master Trust Agreement For Deferred Compensation Plans, dated as of
January 1, 1996, between the Company and Imperial Trust Company, as amended from
time to
time.
1.26 "Vested" shall mean that portion of a Participant's benefits under
this Plan in which the Participant has a nonforfeitable right or vested interest
as determined in accordance with Article 3 below.
1.27 "Waiting Period Requirement" shall mean both (i) the attainment of
age twenty-one (21) and (ii) a Participant's continued employment for an
Employer for ninety (90) days after the Participant's date of hire.
1.28 "Years of Service" shall mean (a) with respect to Participants who
participate in this Plan as of September 1, 1997, the total number of full years
in which a Participant has been continuously employed by one or more Employers,
and (b) with respect to Participants whose participation commences after
September 1, 1997, the total number of full years in which a Participant has
been both continuously employed by one or more Employers and a Participant in
this Plan. For purposes of this definition, a year of employment shall be a 365
day period (or 366 day period in the case of a leap year) that, for the first
year of employment, commences on the employee's date of hire and that, for any
subsequent year, commences on an anniversary of that hiring date. The Plan
Administrator may, in its sole discretion, credit a Participant with any partial
year of employment. Periods during which an employee is on a paid leave of
absence or suffers from a Disability shall be deemed to be periods of continuous
employment. The Plan Administrator may, in its sole discretion, credit a
Participant with additional Years of Service as of his or her date of hire or
commencement of participation in this Plan.
-6-
<PAGE> 7
HERBALIFE INTERNATIONAL OF AMERICA, INC.
Supplemental Executive Retirement Plan
Master Plan Document
================================================================================
ARTICLE 2
ELIGIBILITY
2.1 SELECTION BY PLAN ADMINISTRATOR. Participation in the Plan shall be
limited to a select group of management and highly compensated employees of the
Employers who have met the Waiting Period Requirements. From that group, the
Plan Administrator shall select, in its sole discretion, employees to
participate in the Plan.
2.2 ENROLLMENT REQUIREMENTS. As a condition to participation, each
selected employee shall complete, execute and return to the Plan Administrator a
Plan Agreement and a Beneficiary Designation Form. In addition, the Plan
Administrator shall establish from time to time such other enrollment
requirements as it determines in its sole discretion are necessary.
2.3 COMMENCEMENT OF PARTICIPATION. Provided an employee selected to
participate in the Plan has met all enrollment requirements set forth in this
Plan and required by the Plan Administrator, that employee shall commence
participation in the Plan on the date specified by the Plan Administrator. If a
selected employee fails to meet all such requirements prior to that date, that
employee shall not be eligible to participate in the Plan until the completion
of those requirements.
ARTICLE 3
VESTING
3.1 IN GENERAL. Except as provided in Sections 3.2, 3.3, or 9.4 below,
each Participant shall have a nonforfeitable right or vested interest in his or
her SERP Benefit according to the following vesting schedule:
Years of Service Vested Percentage
---------------- -----------------
Less than 5 0%
5 20%
6 40%
7 60%
8 80%
9 100%
-7-
<PAGE> 8
HERBALIFE INTERNATIONAL OF AMERICA, INC.
Supplemental Executive Retirement Plan
Master Plan Document
================================================================================
3.2 FULL VESTING IN CERTAIN CASES. Notwithstanding Section 3.1 above,
but subject to Sections 3.3 and 9.4 below, a Participant, or his or her
Beneficiary in the case of a survivor benefit, shall have a nonforfeitable right
or vested interest in the Participant's SERP Benefit upon a Change in Control of
the Company or upon the Participant's Early Retirement, Normal Retirement, death
or Disability.
3.3 FORFEITURE IF CAUSE. Notwithstanding Sections 3.1 and 3.2 above, the
Plan Administrator may determine, in its sole discretion, that a Participant
shall have a vested interest of zero (0) in his or her SERP Benefit if his or
her Termination of Employment was for Cause, or if Cause existed during his or
her employment by the Company.
ARTICLE 4
BENEFITS
4.1 ELIGIBILITY FOR, AND PAYMENT OF, BENEFITS. Subject to the provisions
of Sections 4.2, 4.3, 4.4, 4.5, and 4.6:
(A) RETIREMENT OR DISABILITY BENEFIT. If a Participant Retires or
suffers a Disability, he or she shall receive the Actuarial Equivalent of his or
her Vested SERP Benefit paid in the form of sixty (60) equal quarterly
installments commencing within ninety (90) days after such Retirement or
Disability. If the Participant dies before receiving all of such installments,
the lump sum Actuarial Equivalent of the remaining installments shall be paid to
his or her Beneficiary as soon as administratively feasible after his or her
death. Notwithstanding the foregoing, if the lump sum Actuarial Equivalent of a
Participant's Vested SERP Benefit on the date of his or her Retirement or
Disability is less than twenty five thousand dollars ($25,000.00), the Plan
Administrator may, in its sole discretion, cause such Vested SERP Benefit to be
paid in the form of one lump sum within ninety (90) days after the date of such
Retirement or Disability.
(B) SURVIVOR'S BENEFIT. If a Participant dies prior to his or her
Termination of Employment, Disability or Retirement, or after such Termination
of Employment, Disability or Retirement but before receiving any benefit
payments, the Participant's Beneficiary shall receive the Actuarial Equivalent
of the Participant's Vested SERP Benefit paid in the form of one lump sum within
ninety (90) days after the date of death.
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(C) TERMINATION BENEFIT. If a Participant experiences a
Termination of Employment prior to his or her death, Disability or Retirement,
he or she shall receive the Actuarial Equivalent of his or her Vested SERP
Benefit paid in the form of one lump sum within ninety (90) days after such
Termination of Employment.
(D) CHANGE IN CONTROL BENEFIT. Within sixty (60) days after a
Change in Control of the Company, (a) each Participant and Beneficiary who has
not received any payments under Sections 4.1(a), (b), or (c) shall receive the
Actuarial Equivalent of his or her Vested SERP Benefit paid in the form of one
lump sum, and (b) each Participant or Beneficiary who has received some but not
all of the installments referred to in Section 4.1(a) shall receive the
Actuarial Equivalent of the remaining installments in one lump sum.
(E) WITHDRAWAL ELECTION. A Participant or his or her Beneficiary,
as the case may be, may elect, at any time, whether before or after he or she
commences to receive benefit payments under this Plan, to receive those payments
in a lump sum, based on the Actuarial Equivalent of his or her Vested SERP
Benefit remaining unpaid at the time of such election less a 10% penalty (as
described below) (the net amount shall be referred to as the "Benefit Amount").
No election partially to accelerate benefits shall be allowed. The Participant
shall make this election by giving the Plan Administrator advance written notice
of the election in a form determined from time to time by the Plan
Administrator. The penalty shall be equal to ten percent (10%) of the
Participant's remaining Vested SERP Benefit, determined on an Actuarial
Equivalent basis. The Participant or Beneficiary shall be paid the Benefit
Amount within sixty (60) days of his or her election. Once the Benefit Amount is
paid, the Participant's participation in the Plan shall terminate and the
Participant shall not be eligible to participate in the Plan in the future.
(F) PLAN ADMINISTRATOR DISCRETION. Upon the request of a
Participant or Beneficiary, the Plan Administrator, in its sole discretion and
consistent with its established procedures and rules, may consider other forms
of benefit payments, or the timing of benefit payments, as it deems necessary
and prudent under the circumstances.
4.2 BENEFITS CONDITIONED ON RELEASE. Payment of benefits
under Section 4.1 shall be conditioned on the prior execution by
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the Participant or Beneficiary of a release of claims against the Company or the
Employer (including, but not limited to, discrimination claims based on age,
gender, race, and similar factors), in form and substance satisfactory to the
Plan Administrator.
4.3 EFFECT OF CAUSE. Payment of benefits under Section 4.1 is
conditioned on the absence of Cause, and, if the Plan Administrator so
determines in its sole discretion, no benefits shall be payable under this Plan
if Cause exists. Without limiting the generality of the foregoing, if, after a
Participant's Termination of Employment, Retirement, death, or Disability, the
Employer discovers that Cause existed during such Participant's employment by
the Employer, the Company and the Employer shall be entitled to refrain from
making any payments under this Plan to such Participant or to his or her
Beneficiary, and to recover any payments theretofore made.
4.5 LIMITATION ON BENEFITS. Notwithstanding the foregoing provisions of
this Article 4, in no event shall a Participant or his or her Beneficiary
receive any benefit which would not be deductible to the Company or the Employer
under Section 162(m) of the Internal Revenue Code of 1986, as amended. Any
benefits which would exceed the limits on deductible compensation under such
Section 162(m) shall be deferred until the earliest time when they could be paid
without exceeding such limits.
4.6 EXCISE TAX LIMITATION. Notwithstanding anything contained in this
Plan to the contrary, in the event that any payment or benefit (within the
meaning of Section 280G(b)(2) of the Code) to a Participant or for a
Participant's benefit paid or payable or distributed or distributable pursuant
to the terms of this Plan or otherwise in connection with, or arising out of, a
Change of Control, or any other event which constitutes a "change in control"
within the meaning of Section 280G of the Code (a "Payment" or "Payments"),
would be subject to the excise tax imposed by Section 4999 of the Code (the
"Excise Tax"), then the benefits payable under this Plan shall be reduced (but
not below zero), but only to the extent necessary so that no portion of the
Payments shall be subject to the excise tax imposed by Section 4999 of the Code
(the "Section 4999 Limit"). Unless otherwise determined by the Plan
Administrator in its discretion, the Company shall reduce or eliminate the
benefits payable under this Plan by first reducing or eliminating those benefits
beginning with benefits which are to be paid the
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farthest in time from the Determination (as hereinafter
defined).
(a) All determinations required to be made under this Section 4.6 (each,
a "Determination") shall be made, at the Company's expense, by a nationally
recognized accounting firm designated by the Company and reasonably acceptable
to the Participant (the "Accounting Firm"). The Accounting Firm shall provide
its calculations, together with detailed supporting documentation, both to the
Company and to the Participant when requested by the Company or the Participant
(in either case provided that the Company or the Participant believe in good
faith that any of the Payments may be subject to the Excise Tax); provided,
however, that if the Accounting Firm determines that no Excise Tax is payable by
the Participant with respect to a Payment or Payments, it shall furnish the
Participant with an opinion reasonably acceptable to the Participant that no
Excise Tax will be imposed with respect to any such Payment or Payments. Within
ten (10) calendar days of the delivery of the Determination to the Participant,
the Participant shall have the right to dispute the Determination (the
"Dispute"). The existence of any Dispute shall not in any way affect the
Participant's right to receive the benefits under this Plan in accordance with
the Determination. If there is no Dispute, the Determination by the Accounting
Firm shall be final, binding and conclusive upon the Company and the
Participant, subject to the application of Section 4.6(b).
(b) As a result of the uncertainty in the application of Sections 4999
and 280G of the Code, it is possible that the Payments either will have been
made or will not have been made by the Company, in either case in a manner
inconsistent with the limitations provided in this Section 4.6 (an "Excess
Payment" or "Underpayment", respectively). If it is established pursuant to (i)
a final determination of a court for which all appeals have been taken and
finally resolved or the time for all appeals has expired, or (ii) an Internal
Revenue Service (the "IRS") proceeding which has been finally and conclusively
resolved, that an Excess Payment has been made, such Excess Payment shall be
deemed for all purposes to be a loan to the Participant made on the date the
Participant received the Excess Payment and the Participant shall repay the
Excess Payment to the Company on demand, together with interest on the Excess
Payment at one hundred twenty percent (120%) of the applicable federal rate (as
defined in Section 1274(d) of the Code) compounded semi-annually from the date
of the Participant's receipt of such Excess
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Payment until the date of such repayment. If it is determined (i) by the
Accounting Firm, the Company (which shall include the position taken by the
Company, together with its consolidated group, on its federal income tax return)
or the IRS, (ii) pursuant to a determination by a court, or (iii) upon the
resolution to the Participant's satisfaction of the Dispute, that an
Underpayment has occurred, the Company shall pay an amount equal to the
Underpayment to the Participant within ten (10) calendar days of such
determination or resolution, together with interest on such amount at one
hundred twenty percent (120%) of the applicable federal rate compounded
semi-annually from the date such amount should have been paid to the Participant
pursuant to the terms of this Plan or otherwise, but for the operation of this
Section 4.6, until the date of payment.
4.7 COMPETITION OR USE OF CONFIDENTIAL MATERIAL. Payment of benefits
under Section 4.1 is conditioned on the absence of Competition or Misuse of
Confidential Material (as such terms are defined below) by the Participant.
Without limiting the generality of the foregoing, if, during the time when a
Participant or his Beneficiary would otherwise be entitled to receive benefits
under this Section 4.1, the Participant Competes or Misuses Confidential
Material, the Company and the Employer shall be entitled to refrain from making
any payments under this Plan to such Participant or his or her Beneficiary, and
to recover any payments theretofore made. The provisions of this Section 4.7
shall not prejudice or limit any rights the Company or the Employer may have to
legal or equitable relief for such Competition or Misuse of Confidential
Material. If, at the time of enforcement of this Section 4.7, an arbitrator (or
court) should hold that the duration or scope of the restrictions stated herein
are unreasonable under the circumstances then existing, the maximum duration or
scope which is reasonable under such circumstances shall be substituted for the
stated duration or scope. Similarly, if, at the time of enforcement, an
arbitrator (or court) should hold that the area of the restriction stated herein
is unreasonable under the circumstances then existing, the maximum area which is
reasonable under such circumstances shall be substituted for the stated area.
(a) For purposes of this Plan, a Participant engages in "Competition,"
or "Competes" with the business of the Company or an Employer if he or she (i)
directly or indirectly engages in, or owns any interest in, any corporation,
partnership,
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proprietorship, firm or association which engages in any county in the business
in which the Company or such Employer engages in such county (all such entities
other than the Company and the Employers are hereinafter referred to as
"Competitors"), (ii) is employed by (as an employee, consultant, agent,
independent contractor, director, or otherwise), operates, joins, controls, or
otherwise participates in any Competitor, (iii) lends credit or money for the
purpose of assisting another to establish or operate any Competitor, (iv)
requests, advises, influences, or induces (or attempts to influence or induce)
any present or future customer, supplier, licensee, or other person or entity
with a business relationship with the Company or an Employer to withdraw,
curtail, or cancel its business with the Company or such Employer, or (v)
requests, advises, induces or influences (or attempts to induce or influence)
any person who is engaged (as an employee, consultant, agent, independent
contractor, director or otherwise) by the Company or any Employer to terminate
such person's employment or engagement. A Participant shall not be deemed to
Compete merely by being a passive owner of not more than two percent (2%) of the
outstanding shares of any class of stock of a corporation which is publicly
traded, so long as the Participant does not serve such company in any capacity
whether as a board member or otherwise, and the Participant has no active
participation in the business of such corporation or any of its subsidiaries or
affiliates.
(b) For purposes of this Plan, a Participant "Misuses" Confidential
Material if the Participant directly or indirectly, for any reason whatsoever
except in the performance of the Participant's duties to the Company or the
Employer, uses or discloses such Confidential Material, or refuses or fails
promptly to deliver to the Company or the Employer, upon request of the Company
or the Employer, any and all of the Confidential Material and copies thereof in
the Participant's possession or under the Participant's control. Notwithstanding
the foregoing, disclosure of Confidential Material shall not constitute "Misuse"
if the Confidential Material (i) has been publicly disclosed or was within the
Participant's possession prior to its being furnished to the Participant by the
Company or the Employer or becomes available to the Participant on a
nonconfidential basis from a third party (in any of such cases, not due to a
breach by the Participant of the Participant's obligations to the Company or the
Employer or by breach of any other person of a confidential or fiduciary
obligation), (ii) is required to be disclosed by the Participant pursuant to
applicable law, and the Participant provides notice to the
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Company and the Employer of such requirement as promptly as possible, or (iii)
was independently acquired or developed by the Participant without violating any
of the Participant's obligations to the Company or the Employer and without
relying on Confidential Material.
(c) For purposes of this Plan, "Confidential Material" means
confidential records and information, including, but not limited to,
development, marketing, purchasing, organizational, strategic, financial,
managerial, administrative, manufacturing, production, distribution and sales
information, data, specifications and processes presently owned or at any time
hereafter developed by the Company or an Employer or their agents or consultants
or used presently or at any time hereafter in the course of their business, that
are not otherwise part of the public domain.
4.8 WITHHOLDING AND PAYROLL TAXES. The Employers shall withhold from any
and all benefits paid under this Article 4, or, in the discretion of the
Employers, from any compensation or other amounts owing to a Participant or
Beneficiary, all federal, state and local income, employment and other taxes
required to be withheld by the Employer in connection with the benefits
hereunder, in amounts to be determined in the sole discretion of the Employers.
ARTICLE 5
TERMINATION, AMENDMENT OR MODIFICATION OF THE PLAN
5.1 TERMINATION. Each Employer reserves the right to terminate the Plan
at any time with respect to its participating employees by the actions of its
board of directors. The termination of the Plan shall not adversely affect any
Participant or his or her Beneficiary who has become entitled to the payment of
any benefits under the Plan as of the date of termination; provided, however,
that the Employer shall have the right to accelerate payments by paying the
Actuarial Equivalent value of such payments. For all other Participants, upon
the termination of the Plan, all Plan Agreements shall terminate and the
Actuarial Equivalent of a Participant's Vested SERP Benefit shall be paid out in
a lump sum.
5.2 AMENDMENT. Any Employer may, at any time, amend or modify the Plan
in whole or in part with respect to its participating employees by the actions
of its board of
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directors; provided, however, that no amendment or modification shall be
effective to decrease or restrict a Participant's then Vested SERP Benefit,
determined on an Actuarial Equivalent basis. The amendment or modification of
the Plan shall not affect any Participant or his or her Beneficiary who has
become entitled to the payment of benefits under the Plan as of the date of the
amendment or modification; provided, however, that the Employer shall have the
right to accelerate installment payments by paying the Actuarial Equivalent
value of such payments either in a lump sum or in some other accelerated form of
payment.
5.3 TERMINATION OF PLAN AGREEMENT. Absent the earlier termination,
modification or amendment of the Plan, the Plan Agreement of any Participant
shall terminate upon the full payment of the applicable Vested SERP Benefit as
provided under Article 4.
ARTICLE 6
OTHER BENEFITS AND AGREEMENTS
The benefits provided for a Participant under this Plan are in addition
to any other benefits available to such Participant under any other plan or
program for employees of the Employers. The Plan shall supplement and shall not
supersede, modify or amend any other such plan or program except as may
otherwise be expressly provided.
ARTICLE 7
ADMINISTRATION OF THE PLAN
7.1 PLAN ADMINISTRATOR DUTIES. This Plan shall be administered by a Plan
Administrator, which shall consist of the Compensation Committee of the Board,
or such other committee of at least three (3) members as the Board may appoint.
Members of the Plan Administrator may be Participants under this Plan. The Plan
Administrator shall have the full and sole discretion and authority to (i) make,
amend, interpret and enforce all appropriate rules and regulations for the
administration of this Plan, (ii) decide or resolve any and all questions
arising in connection with the interpretation, enforcement, administration, and
operation of this Plan, and (iii) determine the entitlement of Participants and
Beneficiaries to benefits hereunder, and compute the amount of such benefits.
The Plan Administrator is
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the "administrator" of this Plan within the meaning of Section 3(36) of ERISA
and the "named fiduciary" of this Plan within the meaning of Section 402 of
ERISA. Attached hereto as Exhibit "B" is a statement of the Participants' rights
under ERISA.
7.2 AGENTS. In the administration of this Plan, the Plan Administrator
may employ agents and delegate to them such administrative duties as it sees
fit, (including acting through a duly appointed representative), and may from
time to time consult with counsel who may be counsel to any Employer.
7.3 BINDING EFFECT OF DECISIONS. The decision or action of the Plan
Administrator with respect to any question arising out of or in connection with
the administration, interpretation and application of the Plan and the rules and
regulations promulgated hereunder shall be final and conclusive and binding upon
all persons having any interest in the Plan.
7.4 INDEMNITY OF PLAN ADMINISTRATOR. All Employers shall indemnify and
hold harmless the members of the Plan Administrator against any and all claims,
losses, damages, expenses or liabilities arising from any action or failure to
act with respect to this Plan, except in the case of willful misconduct by the
Plan Administrator or any of its members.
7.5 EMPLOYER INFORMATION. To enable the Plan Administrator to perform
its functions, each Employer shall supply full and timely information to the
Plan Administrator on all matters relating to the compensation of its
Participants, the date and circumstances of the retirement, Disability, death or
Termination of Employment of its Participants, and such other pertinent
information as the Plan Administrator may reasonably require.
ARTICLE 8
CLAIMS PROCEDURES
8.1 PRESENTATION OF CLAIM. Any Participant or Beneficiary of a deceased
Participant (such Participant or Beneficiary being referred to below as a
"Claimant") may deliver to the Plan Administrator a written claim for a
determination with respect to the amounts distributable to such Claimant from
the Plan. If such a claim relates to the contents of a notice received by the
Claimant, the claim must be made within 60 days after such notice was received
by the Claimant. The claim must state with
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particularity the determination desired by the Claimant. All other claims must
be made within 180 days of the date on which the event that caused the claim to
arise occurred. The claim must state with particularity the determination
desired by the Claimant.
8.2 NOTIFICATION OF DECISION. The Plan Administrator shall consider a
Claimant's claim within a reasonable time, and shall notify the Claimant in
writing:
(i) that the Claimant's requested determination has been made,
and that the claim has been allowed in full; or
(ii) that the Plan Administrator has reached a conclusion
contrary, in whole or in part, to the Claimant's requested determination, and
such notice must set forth in a manner calculated to be understood by the
Claimant:
(1) the specific reason(s) for the denial of the
claim, or any part of it;
(2) specific reference(s) to pertinent
provisions of the Plan upon which such denial was based;
(3) a description of any additional material or
information necessary for the Claimant to perfect the claim, and
an explanation of why such material or information is necessary;
and
(4) an explanation of the claim review procedure
set forth in Section 8.3 below.
8.3 REVIEW OF A DENIED CLAIM. Within 60 days after receiving a notice
from the Plan Administrator that a claim has been denied, in whole or in part, a
Claimant (or the Claimant's duly authorized representative) may file with the
Plan Administrator a written request for a review of the denial of the claim.
Thereafter, but not later than 30 days after the review procedure began, the
Claimant (or the Claimant's duly authorized representative):
(i) may review pertinent documents;
(ii) may submit written comments or other documents; and/or
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(iii) may request a hearing, which the Plan Administrator, in its
sole discretion, may grant.
8.4 DECISION ON REVIEW. The Plan Administrator shall render its decision
on review promptly, and not later than 60 days after the filing of a written
request for review of the denial, unless a hearing is held or other special
circumstances require additional time, in which case the Plan Administrator's
decision must be rendered within 120 days after such date. Such decision must be
written in a manner calculated to be understood by the Claimant, and it must
contain:
(i) specific reasons for the decision;
(ii) specific reference(s) to the pertinent Plan provisions upon
which the decision was based; and
(iii) such other matters as the Plan Administrator deems relevant.
8.5 ARBITRATION. A Claimant's compliance with the foregoing provisions
of this Article 8 is a mandatory prerequisite to a Claimant's right to commence
any arbitration proceeding with respect to any claim for benefits under this
Plan.
ARTICLE 9
BENEFICIARY DESIGNATION
9.1 BENEFICIARY. Each Participant shall have the right, at any time, to
designate his or her Beneficiary(ies) (both primary as well as contingent) to
receive any benefits payable under the Plan to a beneficiary upon the death of a
Participant. The Beneficiary designated under this Plan may be the same as or
different from the Beneficiary designation under any other plan of an Employer
in which the Participant participates.
9.2 BENEFICIARY DESIGNATION; CHANGE; SPOUSAL CONSENT. A Participant
shall designate his or her Beneficiary by completing and signing the Beneficiary
Designation Form, and returning it to the Plan Administrator or its designated
agent. A Participant shall have the right to change a Beneficiary by completing,
signing and otherwise complying with the terms of the Beneficiary Designation
Form and the Plan Administrator's rules and procedures, as in effect from time
to time. If the
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Participant names someone other than his or her spouse as a Beneficiary, a
spousal consent, in the form designated by the Plan Administrator, must be
signed by that Participant's spouse and returned to the Plan Administrator. Upon
the acceptance by the Plan Administrator of a new Beneficiary Designation Form,
all Beneficiary designations previously filed shall be cancelled. The Plan
Administrator shall be entitled to rely on the last Beneficiary Designation Form
filed by the Participant and accepted by the Plan Administrator prior to his or
her death.
9.3 ACKNOWLEDGMENT. No designation or change in designation of a
Beneficiary shall be effective until received, accepted and acknowledged in
writing by the Plan Administrator or its designated agent.
9.4 NO BENEFICIARY DESIGNATION. If a Participant fails to designate a
Beneficiary as provided in Sections 9.1, 9.2 and 9.3 above or, if all designated
Beneficiaries predecease the Participant or die prior to complete distribution
of the Participant's benefits, then the Participant's spouse shall be the
designated Beneficiary. If the Participant has no surviving spouse, the benefits
remaining under the Plan shall be forfeited.
9.5 DOUBT AS TO BENEFICIARY. If the Plan Administrator has any doubt as
to the proper Beneficiary to receive payments pursuant to this Plan, the Plan
Administrator shall have the right, exercisable in its discretion, to cause the
Participant's Employer to withhold such payments until this matter is resolved
to the Plan Administrator's satisfaction.
9.6 DISCHARGE OF OBLIGATIONS. The payment of benefits under the Plan to
a Beneficiary shall fully and completely discharge all Employers and the Plan
Administrator from all further obligations under this Plan with respect to the
Participant, and that Participant's Plan Agreement shall
terminate upon such full payment of benefits.
ARTICLE 10
TRUST
10.1 ESTABLISHMENT OF THE TRUST. The Company shall establish the Trust.
The Employers shall transfer over to the
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Trust such assets, if any, as the Employers determine, in their sole discretion.
10.2 INTERRELATIONSHIP OF THE PLAN AND THE TRUST. The provisions of the
Plan and the Plan Agreement shall govern the rights of a Participant to receive
distributions pursuant to the Plan. The provisions of the Trust shall govern the
rights of the Employers, Participants and the creditors of the Employers to the
assets transferred to the Trust. Each Employer shall at all times remain liable
to carry out its obligations under the Plan. Each Employer's obligations under
the Plan may be satisfied with Trust assets distributed pursuant to the terms of
the Trust, and any such distribution shall reduce the Employer's obligations
under this Agreement.
ARTICLE 11
ARBITRATION
Except as provided in Section 4.7, arbitration shall be the exclusive
remedy for resolving any dispute or controversy between any Employer and any
employee, Participant or Beneficiary, including, but not limited to, any dispute
regarding an employee's status as a Participant, a Participant's employment or
the termination of a Participant's employment or any dispute regarding the
application, interpretation or validity of this Plan not otherwise resolved
through the claims procedure set forth in Article 8. Such arbitration shall be
conducted in accordance with the then most applicable rules of the American
Arbitration Association. The arbitrator shall be empowered to grant only such
relief as would be available in a court of law. In the event of any conflict
between this Agreement and the rules of the American Arbitration Association,
the provisions of this Agreement shall be determinative. If the parties are
unable to agree upon an arbitrator, they shall select a single arbitrator from a
list designated by the office of the American Arbitration Association having
responsibility for the city in which the employee, Participant or Beneficiary
last resided while employed by the Employer of seven arbitrators, all of whom
shall be retired judges who are actively involved in hearing private cases or
members of the National Academy of Arbitrators. If the parties are unable to
agree upon an arbitrator from such list, they shall each strike names
alternatively from the list, with the first to strike being determined by lot.
After each party has used three strikes, the remaining name on the list shall be
the arbitrator. The fees and expenses of the arbitrator shall initially be borne
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equally by the parties; provided, however, that each party shall initially be
responsible for the fees and expenses of its own representatives and witnesses.
If the parties cannot agree upon a location for the arbitration, the arbitrator
shall determine the location. Judgment may be entered on the award of the
arbitrator in any court having jurisdiction. The prevailing party in the
arbitration proceeding, as determined by the arbitrator, and in any enforcement
or other court proceedings, shall be entitled to the extent provided by law to
reimbursement from the other party for all of the prevailing party's costs
(including but not limited to the arbitrator's compensation), expenses and
reasonable attorney's fees.
ARTICLE 12
MISCELLANEOUS
12.1 UNSECURED GENERAL CREDITOR. Participants and their Beneficiaries
successors and assigns shall have no legal or equitable rights, interests or
claims in any property or assets of an Employer. Any and all of an Employer's
assets shall be, and remain, the general, unpledged unrestricted assets of the
Employer. An Employer's obligation under the Plan shall be merely that of an
unfunded and unsecured promise to pay money in the future.
12.2 EMPLOYER'S LIABILITY. An Employer's liability for the payment of
benefits shall be defined only by the Plan and the Plan Agreement, as entered
into between the Employer and a Participant. An Employer shall have no
obligation to a Participant under the Plan except as expressly provided in the
Plan and his or her Plan Agreement.
12.3 NONASSIGNABILITY. Neither a Participant nor any other person shall
have any right to commute, sell, assign, transfer, pledge, anticipate, mortgage
or otherwise encumber, transfer, hypothecate or convey in advance of actual
receipt, the amounts, if any, payable hereunder, or any part thereof, which are,
and all rights to which are, expressly declared to be, unassignable and
non-transferable. No part of the amounts payable shall, prior to actual payment,
be subject to seizure or sequestration for the payment of any debts, judgments,
alimony or separate maintenance owed by a Participant or any other person, nor
be transferable by operation of law in the event of a Participant's or any other
person's bankruptcy or insolvency.
-21-
<PAGE> 22
HERBALIFE INTERNATIONAL OF AMERICA, INC.
Supplemental Executive Retirement Plan
Master Plan Document
================================================================================
12.4 NOT A CONTRACT OF EMPLOYMENT. The terms and conditions of this Plan
shall not be deemed to constitute a contract of employment between any Employer
and the Participant. Such employment is hereby acknowledged to be an "at will"
employment relationship that can be terminated at any time for any reason, with
or without cause, unless expressly provided in a written employment agreement.
Nothing in this Plan shall be deemed to give a Participant the right to be
retained in the service of any Employer or to interfere with the right of any
Employer to discipline or discharge the Participant at any time.
12.5 FURNISHING INFORMATION. A Participant or his or her Beneficiary
will cooperate with the Plan Administrator by furnishing any and all information
requested by the Plan Administrator and take such other actions as may be
requested in order to facilitate the administration of the Plan and the payments
of benefits hereunder, including but not limited to taking such physical
examinations as the Plan Administrator may deem necessary.
12.6 TERMS. Whenever any words are used herein in the masculine, they
shall be construed as though they were in the feminine in all cases where they
would so apply; and wherever any words are used herein in the singular or in the
plural, they shall be construed as though they were used in the plural or the
singular, as the case may be, in all cases where they would so apply.
12.7 CAPTIONS. The captions of the articles, sections and paragraphs of
this Plan are for convenience only and shall not control or affect the meaning
or construction of any of its provisions.
12.8 GOVERNING LAW. Subject to ERISA, the provisions of this Plan shall
be construed and interpreted according to the internal laws of the State of
California without regard to its conflict of laws principles.
12.9 VALIDITY. In case any provision of this Plan shall be illegal or
invalid for any reason, said illegality or invalidity shall not affect the
remaining parts hereof, but this Plan shall be construed and enforced as if such
illegal and invalid provision had never been inserted herein.
12.10 NOTICE. Any notice or filing required or permitted to be given to
the Plan Administrator under this Plan shall be
-22-
<PAGE> 23
HERBALIFE INTERNATIONAL OF AMERICA, INC.
Supplemental Executive Retirement Plan
Master Plan Document
================================================================================
sufficient if in writing and hand-delivered, or sent by
registered or certified mail, to the address below:
Herbalife International of
America, Inc.
1800 Century Park East
Los Angeles, California 90067
Attn: _________________________
Such notice shall be deemed given as of the date of delivery or, if delivery is
made by mail, as of the date shown on the postmark on the receipt for
registration or certification.
Any notice or filing required or permitted to be given to a Participant under
this Plan shall be sufficient if in writing and hand-delivered, or sent by mail,
to the last known address of the Participant.
12.11 SUCCESSORS. The provisions of this Plan shall bind and inure to
the benefit of the Participant's Employer and its successors and assigns and the
Participant and the Participant's Beneficiary.
12.12 SPOUSE'S INTEREST. The interest in the benefits hereunder of a
spouse of a Participant who has predeceased the Participant shall automatically
pass to the Participant and shall not be transferable by such spouse in any
manner, including but not limited to such spouse's will, nor shall such interest
pass under the laws of intestate succession.
12.13 INCOMPETENT. If the Plan Administrator determines in its
discretion that a benefit under this Plan is to be paid to a minor, a person
declared incompetent or to a person incapable of handling the disposition of
that person's property, the Plan Administrator may direct payment of such
benefit to the guardian, legal representative or person having the care and
custody of such minor, incompetent or incapable person. The Plan Administrator
may require proof of minority, incompetency, incapacity or guardianship, as it
may deem appropriate prior to distribution of the benefit. Any payment of a
benefit shall be a payment for the account of the Participant and the
Participant's Beneficiary, as the case may be, and shall be a complete discharge
of any liability under the Plan for such payment amount.
-23-
<PAGE> 24
HERBALIFE INTERNATIONAL OF AMERICA, INC.
Supplemental Executive Retirement Plan
Master Plan Document
================================================================================
12.14 COURT ORDER. The Plan Administrator is authorized to make any
payments directed by court order in any action in which the Plan or Plan
Administrator has been named as a party.
12.15 DISTRIBUTION IN THE EVENT OF TAXATION. If, for any reason, all or
any portion of a Participant's benefit under this Plan becomes taxable to the
Participant prior to receipt, a Participant may petition the Plan Administrator
for a distribution of that portion of his or her benefit that has become
taxable. Upon the grant of such a petition, which the Plan Administrator may
grant or refrain from granting in its sold discretion, a Participant's Employer
shall distribute to the Participant immediately available funds in an amount
equal to the taxable portion of his or her benefit (which amount shall not
exceed the lump sum Actuarial Equivalent of the Participant's unpaid Vested SERP
Benefit). If the petition is granted, the tax liability distribution shall be
made within ninety (90) days of the date when the Participant's petition is
granted. Such a distribution shall affect and reduce the benefits to be paid
under this Plan.
IN WITNESS WHEREOF, the Company has executed this Plan document on
______________, 1998, to be effective as of September 1, 1997.
"Company"
HERBALIFE INTERNATIONAL OF AMERICA,
INC., a California corporation
By:
----------------------------------
Title:
-------------------------------
-24-
<PAGE> 1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Post-Effective Amendment No. 1
to Registration Statement No. 333-42004 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 27, 1998 appearing in this Annual Report on Form 10-K of Herbalife
International, Inc. for the year ended December 31, 1997.
DELOITTE & TOUCHE LLP
Los Angeles, California
March 4, 1998
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 78,913,000
<SECURITIES> 43,794,000
<RECEIVABLES> 46,021,000
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<DEPRECIATION> 34,225,000
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<CURRENT-LIABILITIES> 141,988,000
<BONDS> 2,666,000
0
0
<COMMON> 296,000
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<TOTAL-LIABILITY-AND-EQUITY> 314,580,000
<SALES> 782,452,000
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