<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the quarterly period ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from ______________________ to _______________________
Commission file number 0-15712
HERBALIFE INTERNATIONAL, INC.
(Exact name of Registrant as specified in its charter)
Nevada 22-2695420
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1800 Century Park East, Los Angeles, California 90067
(Address of principal executive offices) (Zip Code)
(310) 410-9600
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(Former Name, Former Address and Former Fiscal Year,
If Changed Since Last Report
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares outstanding of each of the registrant's classes of Common
Stock, as of July 31, 1998:
9,968,545 Shares of Class A Common Stock
18,850,477 Shares of Class B Common Stock
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<PAGE> 2
HERBALIFE INTERNATIONAL, INC.
Index to Financial Statements and Exhibits
Filed with the Quarterly Report of the Company on Form 10-Q
For the Quarter Ended June 30, 1998
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Item 1. Financial Statements: Page No.
<S> <C>
Consolidated Balance Sheets 2 - 3
Consolidated Statements of Income 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6 - 7
Item 2. Management's Discussion and Analysis of Financial Condition and 8 - 12
Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 2. Changes in Securities and Use of Proceeds 13
Item 3. Defaults Upon Senior Securities 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 14 - 15
Signature 16
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HERBALIFE INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 62,295,000 $ 78,913,000
Marketable securities 27,505,000 43,794,000
Receivables 38,693,000 46,021,000
Inventories 91,842,000 71,583,000
Prepaid income taxes 1,491,000 695,000
Prepaid expenses and other current assets 13,387,000 7,466,000
Deferred income taxes 18,176,000 19,502,000
------------ ------------
Total current assets 253,389,000 267,974,000
Property, at cost, net of accumulated depreciation and
amortization of $38,740,000 (1998) and $34,255,000 (1997) 29,473,000 29,738,000
Deferred compensation plan 15,865,000 6,464,000
Other assets 7,134,000 6,945,000
Goodwill, net of accumulated amortization of
$1,514,000 (1998) and $1,428,000 (1997) 3,378,000 3,459,000
------------ ------------
TOTAL $309,239,000 $314,580,000
============ ============
</TABLE>
See the accompanying notes to consolidated financial statements
2
<PAGE> 4
HERBALIFE INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
------------- -------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 19,801,000 $ 12,654,000
Royalty overrides 47,564,000 56,643,000
Accrued compensation 15,348,000 19,516,000
Accrued expenses 21,284,000 19,137,000
Dividends payable 4,381,000 4,634,000
Current portion of contracts payable and bank loans 1,574,000 1,449,000
Advance sales deposits 14,546,000 18,375,000
Income taxes payable 9,908,000 9,580,000
------------- -------------
Total current liabilities 134,406,000 141,988,000
NON-CURRENT LIABILITIES:
Contracts payable, net of current portion 2,292,000 2,666,000
Deferred income taxes 1,140,000 1,739,000
Deferred compensation liability 12,423,000 7,767,000
Other non-current liabilities and deferred credits 4,472,000 3,819,000
------------- -------------
Total liabilities 154,733,000 157,979,000
------------- -------------
MINORITY INTEREST 1,953,000 1,868,000
------------- -------------
STOCKHOLDERS' EQUITY:
Common Stock A, $0.01 par value; 33,333,333 shares
authorized 9,967,748 (1998) and 9,811,623 (1997) shares
issued and outstanding 100,000 98,000
Common Stock B, $0.01 par value; 66,666,667 shares
authorized, 18,904,371 (1998) and 19,818,248 (1997) shares
issued and outstanding 189,000 198,000
Paid-in-capital in excess of par value 54,917,000 50,319,000
Retained earnings 104,264,000 109,106,000
Cumulative translation adjustment (6,992,000) (4,858,000)
Unearned compensation (22,000) (152,000)
Unrealized gain on marketable securities 97,000 22,000
------------- -------------
Total stockholders' equity 152,553,000 154,733,000
------------- -------------
TOTAL $ 309,239,000 $ 314,580,000
============= =============
</TABLE>
See the accompanying notes to consolidated financial statements
3
<PAGE> 5
HERBALIFE INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
June 30, 1998 June 30, 1997 June 30, 1998 June 30, 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Retail sales $398,142,000 $350,020,000 $796,589,000 $673,964,000
Less: Distributor allowances on product purchases 188,198,000 165,129,000 376,869,000 319,097,000
------------ ------------ ------------ ------------
Net sales 209,944,000 184,891,000 419,720,000 354,867,000
Cost of sales 53,635,000 48,121,000 108,146,000 93,851,000
Royalty overrides 60,086,000 55,134,000 122,676,000 106,029,000
Marketing, distribution & administrative expenses 71,682,000 60,262,000 140,645,000 115,098,000
Interest income - net 798,000 969,000 1,675,000 2,148,000
------------ ------------ ------------ ------------
Income before income taxes and minority interest 25,339,000 22,343,000 49,928,000 42,037,000
Income taxes 9,756,000 8,602,000 19,222,000 16,184,000
------------ ------------ ------------ ------------
Income before minority interest 15,583,000 13,741,000 30,706,000 25,853,000
Minority interest 255,000 41,000 590,000 237,000
------------ ------------ ------------ ------------
NET INCOME $ 15,328,000 $ 13,700,000 $ 30,116,000 $ 25,616,000
============ ============ ============ ============
EARNINGS PER SHARE
Basic $ 0.53 $ 0.45 $ 1.03 $ 0.85
Diluted 0.50 0.44 0.99 0.81
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 28,998,000 30,126,000 29,110,000 30,224,000
Diluted 30,441,000 31,099,000 30,565,000 31,554,000
CASH DIVIDENDS PER COMMON SHARE $ 0.15 $ 0.15 $ 0.30 $ 0.30
</TABLE>
See the accompanying notes to consolidated financial statements
4
<PAGE> 6
HERBALIFE INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
June 30, 1998 June 30, 1997
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 30,116,000 $ 25,616,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 5,992,000 4,684,000
Deferred income taxes 601,000 282,000
Amortization of unearned compensation 130,000 130,000
Stock Grant -- 582,000
Unrealized foreign exchange (gain) loss 1,723,000 (256,000)
Minority interest in earnings 590,000 237,000
Other (19,000) 104,000
Changes in operating assets and liabilities:
Receivables 5,931,000 (6,151,000)
Inventories (22,136,000) (6,677,000)
Prepaid expenses and other current assets (7,395,000) (1,660,000)
Other assets (999,000) (1,987,000)
Accounts payable 7,382,000 (5,488,000)
Royalty overrides (8,412,000) 1,210,000
Accrued expenses and accrued compensation 518,000 1,883,000
Advance sales deposits (3,281,000) 2,277,000
Income taxes payable 2,835,000 2,392,000
Deferred compensation liability 4,656,000 1,879,000
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 18,232,000 19,057,000
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property (4,980,000) (7,042,000)
Proceeds from sale of property 68,000 90,000
Changes in marketable securities 16,364,000 (2,911,000)
Deferred compensation plan investments (9,401,000) (4,009,000)
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES 2,051,000 (13,872,000)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid (8,853,000) (9,114,000)
Distribution to minority interest (505,000) (98,000)
Additions to loans payable 858,000 511,000
Principal payments on loans payable (946,000) (1,836,000)
Exercise of stock options 4,589,000 2,713,000
Stock repurchases (28,558,000) (8,367,000)
Recapitalization costs (616,000) --
------------ ------------
NET CASH USED BY FINANCING ACTIVITIES (34,031,000) (16,191,000)
------------ ------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (2,870,000) (1,060,000)
------------ ------------
NET CHANGE IN CASH AND CASH EQUIVALENTS (16,618,000) (12,066,000)
CASH AND CASH EQUIVALENTS AT JANUARY 1 78,913,000 87,481,000
------------ ------------
CASH AND CASH EQUIVALENTS AT JUNE 30 $ 62,295,000 $ 75,415,000
============ ============
</TABLE>
See the accompanying notes to consolidated financial statements
5
<PAGE> 7
HERBALIFE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. INTERIM FINANCIAL INFORMATION
The unaudited interim financial information of Herbalife International, Inc.
(the "Company") has been prepared in accordance with Article 10 of the
Securities and Exchange Commission's Regulation S-X. In the opinion of
management, the accompanying interim financial information contains all
adjustments, consisting of normal recurring adjustments, necessary to present
fairly the Company's financial statements as of June 30, 1998 and for the three
and six month periods ended June 30, 1997 and 1998.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information." This statement is effective for financial
statements issued for periods beginning after December 15, 1997. The Company has
not yet analyzed the impact of adopting these statements.
In February 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 132, Employers'
Disclosures about Pensions and Other Post Retirement Benefits. SFAS No. 132
requires an entity to disclose certain information about pensions and other post
retirement benefits. The effect of adopting this accounting standard will not be
material to the Company's consolidated financial statements.
In the first quarter of 1998, the AICPA's Accounting Standards Executive
Committee issued Statement of Position (SOP) 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use. SOP 98-1 provides
guidance on the capitalization of software for internal use. The Company will
adopt SOP 98-1 on January 1, 1999, as required. Management is currently
assessing the impact of this SOP on the financial statements of the Company.
In April 1998, the AICPA's Accounting Standards Executive Committee issued
statement of position (SOP) 98-5, reporting on the cost of start-up activities.
SOP 98-5 requires that all the costs of start-up activities, including
organizational costs, be expensed as incurred. The Company will adopt SOP 98-5
on January 1, 1999, as required. The effects of adopting this SOP will not be
material to the Company's consolidated financial statements.
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative
Instruments and Hedging Activities. This statement shall be effective January 1,
2000. The Company has not yet analyzed the impact of adopting the statement.
2. EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income by the weighted
average number of common shares outstanding. Diluted earnings per share includes
the dilutive effect of stock options. A reconciliation of the basic and diluted
weighted average shares is as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
---------------------------- ----------------------------
June 30, June 30, June 30, June 30,
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Basic 28,998,000 30,126,000 29,110,000 30,224,000
Effect of Stock Options 1,443,000 973,000 1,455,000 1,330,000
---------- ---------- ---------- ----------
Diluted 30,441,000 31,099,000 30,565,000 31,554,000
========== ========== ========== ==========
</TABLE>
Net income as presented in the consolidated statements of income is used as the
numerator in both the basic and diluted computation.
6
<PAGE> 8
HERBALIFE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. CONTINGENCIES
The Company's French and Italian subsidiaries have been subject to tax audits by
governmental authorities in those countries, each of whom are proposing that
material value added, withholding, and income taxes are due. The Company and its
tax advisors believe that the Company has substantial defenses and the Company
is vigorously contesting the additional proposed taxes and related charges.
However, the ultimate resolution of these matters is unknown and may take
several years.
As previously disclosed, the Company's German subsidiary has been subject to a
tax audit. A final settlement has been reached with the German tax authorities,
the amount for which has been provided for and was not material to the Company's
financial statements.
Furthermore, the Company is from time to time engaged in routine litigation
incidental to the conduct of its business. The Company regularly reviews all
pending litigation matters in which it is involved and, estimating the impact of
such litigation matters, establishes reserves considered appropriate by
management. The Company's estimates of the impact of these matters may change as
the matters progress and are ultimately resolved.
4. COMPREHENSIVE INCOME
In June of 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 "Reporting Comprehensive Income." The
statement, which the Company adopted in 1998, establishes standards for
reporting and displaying comprehensive income and its components in a full set
of general-purpose financial statements. Comprehensive income is summarized as
follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, 1998 June 30, 1997 June 30, 1998 June 30, 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net Income $ 15,328,000 $ 13,700,000 $ 30,116,000 $ 25,616,000
Foreign currency translation
adjustment (1,703,000) 554,000 (2,134,000) (834,000)
Unrealized gain/(loss) on marketable
securities (16,000) 3,000 75,000 (120,000)
------------- ------------- ------------- -------------
Comprehensive income $ 13,609,000 $ 14,257,000 $ 28,057,000 $ 24,662,000
============= ============= ============= =============
</TABLE>
5. TRANSACTIONS WITH RELATED PARTIES.
On April 23, 1998, Raven Industries ("Raven") and D&F Industries ("D&F"), two of
the significant suppliers of the Company's products, and Dynamic Products, Inc.
("Dynamic") another supplier to the Company, concluded a bond offering. Part of
the proceeds from the offering was used to repurchase certain ownership
interests in such entities, including the entire ownership interest of Mr.
Hughes, CEO and President of the Company in Raven and Dynamic (representing 1/3
and 1/5 of the formerly outstanding ownership, respectively), as well as the
entire ownership interest of an employee (formerly a Director and Executive
Officer) of the Company in Dynamic (representing 5% of the formerly outstanding
ownership).
7
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Throughout this report "retail sales" are determined as the gross sales amounts
reflected on the Company's invoices to its distributors. The Company does not
receive the amount reported as "retail sales", and the Company does not monitor
the actual retail prices charged for the Company's products. "Net sales"
generally represents the actual purchase prices paid to the Company by its
distributors, after giving effect to distributor discounts (referred to as
"distributor allowances"), which total approximately 50% of suggested retail
sales prices. The Company receives its net sales price in cash or through credit
card payments upon receipt of orders from distributors. Importers are utilized
by the Company in some markets and, under certain circumstances, credit terms
are extended. The Company's "gross profit" consists of net sales less (i) "cost
of sales," consisting of the prices paid by the Company to its manufacturers for
products and costs related to product shipments, foreign duties and tariffs and
similar expenses, and (ii) "royalty overrides," currently consisting of (a)
royalties and bonuses, which total approximately 15% and 6%, respectively, on
the suggested retail sales prices of products earned by qualifying distributors
on the sales of other distributors within their distributor organizations, and
(b) the President's Team Bonus payable to certain of the Company's most senior
distributors in the aggregate amount of up to an additional 1% of product retail
sales and (c) other one time incentive cash bonuses to qualifying distributors.
Royalty overrides as reported in the Consolidated Statements of Income are net
of a handling fee (6% of retail sales) charged by the Company to its
distributors on purchases of products from the Company.
The Company's use of "retail sales" in reporting financial and operating data
reflects the fundamental role of "retail sales" in the Company's accounting
systems, internal controls and operations, including the basis upon which
distributor bonuses are paid. The retail sales price of the Company's products
is reflected in distributor invoices as the price charged to distributors
together with, in most cases, a deduction for the corresponding distributor
allowance. The retail sales price is used by the Company to calculate, among
other things, royalty overrides and "volume points" earned by distributors.
Volume points are point values assigned to each of the Company's products that
are equal in all countries, and are used as a supervisor qualification criteria.
In addition, management relies upon "retail sales" data reflected in daily sales
reports to monitor results of operations in each of the Company's markets.
The significance of the Company's "net sales" is to reflect, generally, the
prices actually received by the Company after deducting the basic distributor
allowance, but before deducting royalty overrides and bonuses. The ratio of the
Company's "retail sales" to "net sales" is relatively constant because
distributor allowances historically total approximately 50% of suggested retail
sales prices. Accordingly, factors that affect "retail sales" generally have a
corresponding and proportionate effect on "net sales." To the extent the ratio
of "retail sales" to "net sales" varies from period to period, such variances
have resulted principally from sales of the Company's distributor kits and other
educational and promotional materials, for which there are no distributor
allowances. Sales of such items initially decreased and thereafter stabilized as
a percentage of total retail sales since 1991, but such decreases have not had a
material impact on the ratio of the Company's "retail sales" to "net sales" or
on the Company's operating margin.
The Company'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.
COMPARISON OF OPERATING RESULTS FOR 1998 TO 1997
Retail sales for the three and six months ended June 30, 1998 increased 13.7%
and 18.2% to $398.1 million and $796.6 million as compared to sales of $350.0
million and $674.0 million for the corresponding periods of the prior year.
RETAIL SALES BY GEOGRAPHICAL SEGMENTS (DOLLARS IN MILLIONS):
<TABLE>
<CAPTION>
Three Months Ended June 30 Six Months Ended June 30
---------------------------------- ----------------------------------
% %
1998 1997 Change 1998 1997 Change
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Asia/Pacific Rim $154.8 $140.7 10.1 $306.3 $266.1 15.1
Europe 125.5 113.3 10.8 261.3 219.6 19.0
The Americas 117.8 96.0 22.7 229.0 188.3 21.6
------ ------ ------ ------ ------ ------
Total Retail Sales $398.1 $350.0 13.7 $796.6 $674.0 18.2
====== ====== ====== ====== ====== ======
</TABLE>
8
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS (CONTINUED)
COMPARISON OF OPERATING RESULTS FOR 1998 TO 1997 (CONTINUED)
Retail sales increases in the Asia/Pacific Rim region primarily resulted from
enhanced sales in Japan. For the three months and six months ended June 30,
1998, retail sales in Japan increased $8.8 million, or 7.7%, and $35.6 million,
or 16.6% respectively. In local currency, retail sales in Japan increased 23%
and 28% for the three months and six months ended June 30, 1998. The region also
benefited from retail sales in Thailand, which opened in June 1997, and
increased sales in Hong Kong and Korea, partly offset by a decrease in Taiwan.
The decline in Taiwan was primarily due to the weakening of the Taiwanese
currency relative to the U.S. Dollar.
In Europe, retail sales in Italy, Germany, South Africa and Switzerland posted
strong increases for the three and six month periods ended June 30, 1998 as
compared to the prior year. The increases were partially offset by the retail
sales decreases in Russia as economic uncertainty in the country contributed to
a sluggish consumer spending environment. Excluding Russia, retail sales in
Europe increased 27.4% and 32.4%, respectively, for the three months and six
months ended June 30, 1998. Turkey was opened in March 1998 and contributed
additional retail sales of $2.8 million and $3.9 million for the three and six
months ended June 30, 1998 respectively.
In the Americas, retail sales increases resulted primarily from the continued
growth in the United States. For the three months and six months ended June 30,
1998, retail sales in the U.S. increased $16.9 million, or 22.2%, and $30.9
million, or 20.9% respectively.
RETAIL SALES BY PRODUCT SEGMENTS (DOLLARS IN MILLIONS):
<TABLE>
<CAPTION>
Three Months Ended June 30 Six Months Ended June 30
---------------------------------- ----------------------------------
% %
1998 1997 Change 1998 1997 Change
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Food & Dietary Supplements $207.5 $192.1 8.0 $412.4 $366.5 12.5
Weight Management 128.0 103.8 23.3 250.3 196.9 27.1
Personal Care 45.9 37.0 24.1 101.1 79.4 27.3
Literature/ Promotional/ Other 16.7 17.1 (2.3) 32.7 31.2 4.8
------ ------ ------ ------ ------ ------
Total Retail Sales $398.1 $350.0 13.7 $796.5 $674.0 18.2
====== ====== ====== ====== ====== ======
Historical Presentation:
Food & Dietary Supplements $ 56.6 $ 48.7 16.2% $113.6 $ 93.0 22.2%
Weight Management 278.9 247.2 12.8% 549.2 470.4 16.8%
</TABLE>
Certain products that were originally classified as Weight Management, have now
been reclassified as Food & Dietary Supplements, such as multi-vitamin herbal
and mineral products. The purpose of this change in the presentation of Sales by
Product Segments is to reflect a growing trend in the nutritional and healthy
lifestyle sector of the Company's business.
For the three and six month period ended June 30, 1998, retail sales in the
Weight Management, Food & Dietary Supplements and Personal Care segments
demonstrated strong growth as compared to the same periods in the prior year.
The increases in these product segments were primarily due to the same factors
identified in the geographical segments discussed above.
OPERATING INFORMATION:
Gross profit of $96.2 and $188.9 million for the three and six months ended June
30, 1998 was $14.6 million, or 17.9% and $33.9 million, or 21.9% higher than
gross profit of $81.6 million and $155.0 million in the prior year respectively.
Gross margin (defined as gross profit as a percentage of retail sales) for the
three and six months ended June 30, 1998 as compared to the same periods in the
prior year increased from 23.3% to 24.2% and 23.0% to 23.7%, respectively. The
increase in gross margin primarily resulted from price increases effective
January 1, 1998 in the majority of the Company's markets, and cost savings from
previously negotiated agreements with the Company's largest contract
manufacturers of nutritional and weight management products. The price increase
and the lower costs were partly offset by continued negative pressure on the
gross margin from weakened currencies mainly in the Company's Asia/Pac Rim
markets.
9
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS (CONTINUED)
COMPARISON OF OPERATING RESULTS FOR 1998 TO 1997 (CONTINUED)
Marketing, distribution and administrative expenses, as a percentage of retail
sales, were 18.0% and 17.7% for the three and six months ended June 30, 1998
respectively as compared to 17.2% and 17.1% for the same periods in 1997. These
expenses for the same periods increased 19.0% and 22.2% to $71.7 million and
$140.6 million from $60.3 million and $115.1 million in the prior year to
support the Company defined growth strategies (expand product offerings and
develop new products, revitalize sales in certain existing markets, expand into
new markets and enhance sales and motivational training). The increase in
expenses was primarily due to additional salaries and related expenses from
increased headcount in administration and foreign distribution facilities and a
foreign exchange loss of $1.1 million and $1.7 million for the three and six
months ended June 30, 1998 compared to gains of $4.0 million and $2.6 million
for the same periods of 1997.
The continued weakening of the Japanese Yen against the U.S. Dollar resulted in
proportionately lower revenues, expenses, and ultimately income when translated
into the U.S. Dollar reporting currency. The effect of the weaker Japanese Yen
on the Company's net income per diluted share for the three and six months ended
June 30, 1998 was approximately $0.09 and $0.12, respectively, as compared to
the exchange rates in effect for the same periods of 1997. The effect of foreign
currency changes in any country other than Japan was not individually material
to the operations of the Company. However, the strengthening of the U.S. Dollar
in relation to the currencies of other countries in which the Company operates,
excluding Japan, amounted to approximately $0.07 and $0.16 per diluted share for
the three and six months ended June 30, 1998 as compared to the exchange rates
in effect for the same periods in the prior year.
Income taxes of $9.8 million and $19.2 million for the three and six months
ended June 30, 1998 increased from $8.6 million and $16.2 million in the prior
year respectively. As a percentage of pre-tax income, income taxes remained
unchanged at 38.5% in 1998.
Net income for the three and six months ended June 30, 1998 increased 11.9% and
17.6% to $15.3 million and $30.1 million from $13.7 million and $25.6 million as
compared to the same periods in prior year.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically met its working capital and capital expenditure
requirements, including funding for expansion of operations, through net cash
provided by operating activities. For the six months ended June 30, 1998, net
cash provided by operating activities was $18.2 million, compared to $19.1
million for the same period in 1997. The decrease primarily resulted from (i)
increased inventory levels primarily resulting from the introduction of new
products and the establishment of higher minimum stock levels; (ii) increases in
prepaid expenses due to timing; (iii) reductions in advanced sales deposits also
relating to timing; and (iv) payment of the President's Team Bonus. These
reductions were partially offset by: (i) reductions in receivable balances; (ii)
increased accounts payable balances due to timing; and (iii) increased net
income.
Capital expenditures for the six months ended June 30, 1998 were $5.0 million
compared to $7.0 million for the same period in the prior year. The majority of
the 1998 expenditures resulted from the expansion of office facilities and
equipment in the U.S., the U.K. and Japan. For 1998 and 1999, the Company is
planning to invest approximately $16 million in the continued development of
management information systems and expansion of new and existing facilities. In
connection with its entry into each new market, the Company funds inventory
requirements and typically establishes either a full-service distribution
center, sales office, a fulfillment center or compliance office, or a
combination of the foregoing. While the capital requirements associated with
entry into new markets vary, the Company estimates that up to $8 million will be
required for pre-opening expenses, capital expenditures and other operating cash
flow needs associated with its 1998 new market expansion activities.
Stockholders' equity decreased $2.2 million to $152.6 million during the six
months ended June 30, 1998. In 1998, net income of $30.1 million and the
issuance of capital stock, including related tax benefits, of $7.5 million were
offset by stock repurchases of $28.6 million and dividends declared of $8.7
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.
10
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
Cash and cash equivalents totaled $62.3 million at June 30, 1998 compared to
$78.9 million at December 31, 1997. At June 30, 1998, the Company's cash, cash
equivalents and marketable securities aggregate balance was $89.8 million, which
represents a $32.9 million decrease from the balance as of December 31, 1997.
The decrease is primarily a result of increased inventory levels and the stock
repurchases as described above.
The Company has not been subjected to material price increases by its suppliers
for several years. The Company believes that it has the ability to respond to a
portion or possibly all of any price increases by raising the price of its
products. Purchases by the Company from its suppliers are made in U.S. Dollars,
while sales to distributors are generally made in local currencies.
Consequently, strengthening of the U.S. Dollar versus a foreign currency can
have a negative impact on operating margins and can generate losses on
intercompany transactions. The Company from time to time enters into forward
exchange contracts and other hedging arrangements to manage its foreign exchange
risk on intercompany transactions. As of June 30, 1998 the Company had $45
million in notional amounts of Yen put options with short-term maturities
through December 31, 1998.
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 addition, the
Board of Directors adopted a $30 million stock repurchase program, which was
completed in February 1998. In February 1998 and again in July 1998, the Board
adopted two additional $20 million stock repurchase programs representing a
continuation of the company's share repurchase efforts in recent years. Pursuant
to these stock repurchase programs, for the year to date through July 1998 the
Company had expended $29.1 million in the aggregate to repurchase 1.3 million
shares.
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 June 30, 1998, an
aggregate of $12.9 million had been pledged against $19.7 million of commitments
for debt obligations, contingent guarantees, and foreign exchange activity.
Generally, these debt arrangements expire in less than one year. The Company
also enters into other unsecured guarantees related mainly to short-term
currency hedge arrangements.
In June 30, 1998, the Company had $4.7 million of credit facilities of which
$0.6 million is outstanding. The majority of these facilities expire in 1998.
These facilities are subject to normal banking terms and conditions and do not
materially restrict the Company's activities.
11
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD LOOKING STATEMENTS
With the exception of the actual reported financial results and other historical
information, the statements made in the Management's Discussion and Analysis of
Financial Condition and Results of Operations and elsewhere in this report are
forward looking statements that involve risks and uncertainties that could
affect actual future results. Such risks and uncertainties include, but are not
limited to: the regulatory environment, consumer acceptance of network
marketing, economic conditions in the countries the Company operates, the
presence of possible competitors, adverse publicity and in-region cultural or
demographic factors and other risks indicated in the Company's filings with the
Securities and Exchange Commission, including the Company's filing of a
registration statement on Form S-3 in March 1998.
12
<PAGE> 14
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See discussion under "Legal Proceedings" in the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1997 and in
footnote three to the Financial Statements included in Item 1 of this
document.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Stockholders of the Company held on May 21,
1998 in Beverly Hills, California, 9,300,422 shares of the Company's
Class A Common Stock were present either in person or by proxies
solicited by management pursuant to Regulation 14A under the Securities
Exchange Act of 1934.
The Stockholders voted on the following matters:
To elect six directors to serve on the Company's Board of Directors:
<TABLE>
<CAPTION>
Number Number
of Shares of Shares
For Withheld
--------- ---------
<S> <C> <C>
Mark Hughes 9,158,214 142,208
Christopher Pair 9,158,210 142,212
Michael Rosen 9,158,214 142,208
Edward J. Hall 9,158,210 142,212
Alan Liker 9,158,214 142,208
Christopher M. Miner 9,158,214 142,208
</TABLE>
To amend and restate the company's Amended and Restated 1991 Stock
Option Plan (the "Option Plan'), among other things, to increase the
aggregate number of shares which may be issued upon exercise of all
options granted under the Option Plan (excluding shares previously
issued upon option exercise but including shares subject to existing
outstanding options) from 6,800,000 to 7,500,000.
<TABLE>
<CAPTION>
Percent of
Shares Shares Voting
--------- -------------
<S> <C> <C>
Votes For 5,673,923 73
Votes Against 2,149,956 27
Votes Abstaining 9,789 --
Broker Non-Votes 1,466,754 n/a
</TABLE>
ITEM 5. OTHER INFORMATION
None.
13
<PAGE> 15
HERBALIFE INTERNATIONAL, INC.
EXHIBIT INDEX
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Exhibit Number Description Page No./(Footnote)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
3.1 Amended and Restated Articles of Incorporation (10)
3.2 Amended and Restated Bylaws (2)
4.1 Form of Class A Common Stock and Class B Common Stock Certificates (12)
10.1 Final Judgment and Permanent Injunction, entered into on October, 1986 by the parties
to that action entitled People of the State of California, et al., v Herbalife
International, Inc. et al., Case No. 92767 in the Superior Court of the State of
California for the County of Santa Cruz (1)
10.2 The Company's 1991 Stock Option Plan, as amended (7), (13)
10.3 The Company's 1992 Executive Incentive Compensation Plan, as amended (2), (7)
10.4 Form of Individual Participation Agreement relating to the Company's Executive
Compensation Plan (2)
10.5 Form of Letter Agreement between the Compensation Committee of the Board of Directors
of the Company and Mark Hughes (2)
10.6 Form of Indemnity Agreement between the Company and certain officers and directors of
the Company (2)
10.7 Trust Agreement among the Company, Citicorp Trust, N.A. and certain officers and
directors of the Company (2)
10.8 Form of Stock Appreciation Rights Agreement between the Company and certain directors
of the Company (2)
10.9 1994 Performance Based Annual Incentive Compensation Plan (4), (7), (11)
10.10 Form of Promissory Note for Advances under the Company's 1994 Performance Based
Annual Incentive Compensation Plan (5)
10.11 Employment Agreement between the Company and Chris Pair dated April 3, 1994
(3)
10.12 Deferred Compensation Agreement between the Company and Michael Rosen (5)
10.13 Office lease agreement between the Company and State Teacher's Retirement System,
dated July 20, 1995 (6)
10.14 Form of stock appreciation rights agreements between the Company and certain
directors of the Company (6)
10.15 The Company's Senior Executive Deferred Compensation Plan, effective January 1, 1996
(6)
10.16 The Company's Management Deferred Compensation Plan, effective January 1, 1996
(6)
10.17 Master Trust Agreement between the company and Imperial Trust Company, Inc.,
effective January 1, 1996 (6)
10.18 The Company's 401K Plan (6)
10.19 Agreement Concerning Share Allocation Plan for Specific Directors of Herbalife of
Japan K.K. dated December 30, 1996. (8)
10.20 Consulting Agreement between David Addis and Herbalife of America, Inc. Dated January
27, 1997. (8)
10.21 Agreement between Herbalife International of America, Inc. and D&F Industries, Inc.
dated September 2, 1997 (9)
10.22 Agreement between Herbalife International of America, Inc. and Dynamic Products, Inc.
dated September 2, 1997 (9)
10.23 Agreement between Herbalife International of America, Inc. and Raven Industries, Inc.
d/b/a Omni-Pak Industries, dated September 2, 1997 (9)
10.24 The Company's Supplemental Executive Retirement Plan (12)
10.25 Form of Underwriting Agreement (14)
10.26 Form of Purchase Contract Between the Selling Stockholder and the Trust (14)
21 List of subsidiaries of the Company (12)
27 Financial Data Schedule (15)
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
14
<PAGE> 16
(1) Incorporated by reference to the Company's Annual Report on
Form 10-K for the year ended December 31, 1987.
(2) Incorporated by reference to the Company's Registration
Statement on Form S-1 (No. 33-66576) declared effective by the
Securities and Exchange Commission on October 8, 1993.
(3) Incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the three months ended June 30, 1994.
(4) Incorporated by reference to the Company's Definitive Proxy
Statement relating to its 1994 Annual Meeting of Stockholders.
(5) Incorporated by reference to the Company's Annual Report on
Form 10-K for the year ended December 31, 1994.
(6) Incorporated by reference to the Company's Annual Report on
Form 10-K for the year ended December 31, 1995.
(7) Incorporated by reference to the Company's Definitive Proxy
Statement relating to its 1996 Annual Meeting of Stockholders.
(8) Incorporated by reference to the Company's Annual Report on
Form 10-K for the year ended December 31, 1996.
(9) Incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the three months ended September 30, 1997.
(10) Incorporated by reference to the Company's Registration
Statement on Form 8-K declared effective by the Security and
Exchange Commission on December 12, 1997.
(11) Incorporated by reference to the Company's Definitive Proxy
Statement relating to the Special Shareholder Meeting held on
December 11, 1997.
(12) Incorporated by reference to the Company's Annual Report on
Form 10-K for the year ended December 31, 1997.
(13) Incorporated by reference to the Company's Definitive Proxy
Statement relating to its 1998 Annual Meeting of Stockholders.
(14) Incorporated by reference to the Company's Registration
Statement on Form S-3 (No 333-46201) declared effective by the
Securities and Exchange Commission on March 23, 1998.
(15) Filed herewith.
(b) REPORTS ON FORM 8-K:
None.
(c) OTHER EXHIBITS:
See "Item 14(a)3. Exhibits."
(d) OTHER FINANCIAL STATEMENT SCHEDULES:
None.
15
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: August 13, 1998
HERBALIFE INTERNATIONAL, INC.
(Registrant)
By: /s/ TIMOTHY GERRITY
-------------------
Timothy Gerrity
Executive Vice President and
Chief Financial Officer
16
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 62,295,000
<SECURITIES> 27,505,000
<RECEIVABLES> 38,693,000
<ALLOWANCES> 0
<INVENTORY> 91,842,000
<CURRENT-ASSETS> 253,389,000
<PP&E> 68,213,000
<DEPRECIATION> 38,740,000
<TOTAL-ASSETS> 309,239,000
<CURRENT-LIABILITIES> 134,406,000
<BONDS> 2,292,000
0
0
<COMMON> 289,000
<OTHER-SE> 152,264,000
<TOTAL-LIABILITY-AND-EQUITY> 309,239,000
<SALES> 209,944,000
<TOTAL-REVENUES> 398,142,000
<CGS> 53,635,000
<TOTAL-COSTS> 113,721,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 25,339,000
<INCOME-TAX> 9,756,000
<INCOME-CONTINUING> 15,328,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,328,000
<EPS-PRIMARY> 0.53
<EPS-DILUTED> 0.50
</TABLE>
