<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 OF 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________
Commission file number 0-15712
HERBALIFE INTERNATIONAL, INC.
-----------------------------
(Exact name of Registrant as specified in its charter)
Nevada 22-2695420
------ ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1800 Century Park East, Los Angeles, California 90067
----------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
(310) 410-9600
--------------
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(Former Name, Former Address and Former Fiscal Year,
If Changed Since Last Report)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 of 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes No
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares outstanding of each of the registrant's classes of Common
Stock, as of April 30, 1999 was:
Shares of Class A Common Stock 9,982,407
Shares of Class B Common Stock 18,604,873
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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 Three Months Ended March 31, 1999
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page No.
--------
<S> <C> <C>
Item 1. Financial Statements:
Consolidated Balance Sheets 2 - 3
Consolidated Statements of Income 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6 - 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9 - 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities and Use of Proceeds 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 16 - 17
Signature 18
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HERBALIFE INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $117,525,000 $100,721,000
Marketable securities 7,470,000 5,186,000
Receivables 30,890,000 44,471,000
Inventories 80,417,000 88,138,000
Prepaid income taxes 3,109,000 2,931,000
Prepaid expenses and other current assets 12,726,000 14,734,000
Deferred income taxes 19,582,000 21,870,000
------------ ------------
Total current assets 271,719,000 278,051,000
Property, at cost, net of accumulated depreciation and
amortization of $49,108,000 (1999) and $45,792,000 (1998) 37,584,000 37,448,000
Deferred compensation plan assets 22,474,000 18,059,000
Other assets 4,255,000 4,642,000
Deferred income taxes 6,987,000 6,696,000
Goodwill, net of accumulated amortization of
$1,645,000 (1999) and $1,601,000 (1998) 3,243,000 3,287,000
------------ ------------
TOTAL $346,262,000 $348,183,000
============ ============
</TABLE>
See the accompanying notes to consolidated financial statements
2
<PAGE> 4
HERBALIFE INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
------------- -------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 14,169,000 $ 14,963,000
Royalty overrides 62,529,000 58,389,000
Accrued compensation 19,307,000 18,132,000
Accrued expenses 27,985,000 29,007,000
Dividends payable 4,288,000 4,296,000
Current portion of contracts payable and bank loans 3,092,000 2,639,000
Advance sales deposits 11,848,000 7,919,000
Income taxes payable 6,147,000 22,083,000
------------- -------------
Total current liabilities 149,365,000 157,428,000
NON-CURRENT LIABILITIES:
Contracts payable, net of current portion 2,022,000 2,357,000
Accrued deferred compensation plan liability 19,060,000 17,244,000
Other non-current liabilities and deferred credits 5,314,000 4,748,000
------------- -------------
Total liabilities 175,761,000 181,777,000
------------- -------------
MINORITY INTEREST 2,844,000 2,595,000
------------- -------------
STOCKHOLDERS' EQUITY:
Common stock A, $0.01 par value; 33,333,333 shares
authorized, 9,982,325 (1999) and 9,980,753 (1998) shares
issued and outstanding 100,000 100,000
Common stock B, $0.01 par value; 66,666,667 shares
authorized, 18,604,709 (1999) and 18,603,561 (1998)
shares issued and outstanding 186,000 186,000
Paid-in-capital in excess of par value 54,855,000 54,823,000
Retained earnings 118,373,000 110,941,000
Accumulated other comprehensive income (5,857,000) (2,239,000)
------------- -------------
Total stockholders' equity 167,657,000 163,811,000
------------- -------------
TOTAL $ 346,262,000 $ 348,183,000
============= =============
</TABLE>
See the accompanying notes to consolidated financial statements
3
<PAGE> 5
HERBALIFE INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
March 31, March 31,
1999 1998
------------ ------------
<S> <C> <C>
Retail sales $428,799,000 $398,447,000
Less: Distributor allowances on product purchases 202,360,000 188,671,000
------------ ------------
Net sales 226,439,000 209,776,000
Cost of sales 58,491,000 54,511,000
Royalty overrides 66,770,000 62,591,000
Marketing, distribution & administrative expenses 82,133,000 68,963,000
Interest income - net 404,000 878,000
------------ ------------
Income before income taxes and minority interest 19,449,000 24,589,000
Income taxes 7,488,000 9,467,000
------------ ------------
Income before minority interest 11,961,000 15,122,000
Minority interest 249,000 334,000
------------ ------------
NET INCOME $ 11,712,000 $ 14,788,000
============ ============
EARNINGS PER SHARE:
Basic $ 0.41 $ 0.51
Diluted 0.38 0.48
CASH DIVIDENDS PER COMMON SHARE $ 0.15 $ 0.15
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 28,585,000 29,217,000
Effect of stock options 2,000,000 1,492,000
------------ ------------
Diluted 30,585,000 30,709,000
============ ============
</TABLE>
See the accompanying notes to consolidated financial statements
4
<PAGE> 6
HERBALIFE INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
March 31, 1999 March 31, 1998
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 11,712,000 $ 14,788,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 4,041,000 2,968,000
Deferred income taxes 1,834,000 (790,000)
Amortization of unearned compensation -- 65,000
Stock grant -- 88,000
Unrealized foreign exchange loss 487,000 15,000
Minority interest in earnings 249,000 334,000
Changes in operating assets and liabilities:
Receivables 12,147,000 7,617,000
Inventories 5,515,000 (8,193,000)
Prepaid expenses and other current assets 545,000 (3,436,000)
Other assets 283,000 (197,000)
Accounts payable (223,000) 6,405,000
Royalty overrides 5,940,000 1,250,000
Accrued expenses and accrued compensation 2,688,000 (3,328,000)
Advance sales deposits 4,252,000 (7,562,000)
Income taxes payable (15,048,000) 3,315,000
Deferred compensation liability 1,816,000 3,330,000
------------- ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 36,238,000 16,669,000
------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property (4,676,000) (2,300,000)
Proceeds from sale of property 35,000 29,000
Changes in marketable securities (2,285,000) 6,209,000
Deferred compensation plan (4,415,000) (8,303,000)
------------- ------------
NET CASH USED IN INVESTING ACTIVITIES (11,341,000) (4,365,000)
------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid (4,296,000) (4,500,000)
Additions to loans payable 484,000 858,000
Principal payments on loans payable (369,000) (380,000)
Exercise of stock options 32,000 2,084,000
Stock repurchases -- (19,572,000)
Recapitalization costs -- (611,000)
------------- ------------
NET CASH USED IN FINANCING ACTIVITIES (4,149,000) (22,121,000)
------------- ------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (3,944,000) (162,000)
------------- ------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 16,804,000 (9,979,000)
CASH AND CASH EQUIVALENTS AT JANUARY 1 100,721,000 78,913,000
------------- ------------
CASH AND CASH EQUIVALENTS AT MARCH 31 $ 117,525,000 $ 68,934,000
============= ============
</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. and
subsidiaries (the "Company") has been prepared in accordance with Article 10 of
the Securities and Exchange Commission's Regulation S-X. In the opinion of
management, the accompanying interim financial information contains all
adjustments, consisting of normal recurring adjustments, necessary to present
fairly the Company's financial statements as of March 31, 1999 and for the three
month periods ended March 31, 1999 and 1998.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments and for hedging activities and
will be effective January 1, 2000. The Company has not yet analyzed the impact
of adopting this statement.
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 adopted
SOP 98-1 on January 1, 1999, as required. The effects of adopting this SOP did
not have a material impact on consolidated financial position, results of
operation or cash flows.
RECLASSIFICATIONS
Certain reclassifications were made to prior year statements to conform to
current year presentation.
2. EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income by the weighted
average number of shares outstanding. Diluted earnings per share includes the
dilutive effect of stock options.
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.
On December 16, 1998, Moshe and Dorit Miron, two Israeli distributors of the
Company, filed a lawsuit in the United States District Court for the Northern
District of California, in which the Company is the named defendant (the "Miron
Suit"). Although the Miron Suit is in its early pleading stages and it is
difficult to ascertain what causes of action the plaintiffs are attempting (or
have the right) to allege against the Company, the case appears to be primarily
a claim for breach of contract. In addition, the Miron Suit appears to attempt
to challenge the legality of the company's marketing system. The Company
believes that it has meritorious defenses to the allegations that appear to be
asserted against the Company. Due to the uncertainty inherent in any litigation
and the early stage of this proceeding, however, there can be no assurances that
the Company will obtain a favorable resolution of the Miron Suit or that an
adverse disposition of the case would not have a material adverse effect on the
Company.
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.
6
<PAGE> 8
HERBALIFE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. COMPREHENSIVE INCOME
Comprehensive income is summarized as follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 1998
------------ ------------
<S> <C> <C>
Net Income $ 11,712,000 $ 14,788,000
Foreign currency translation adjustment (3,617,000) (431,000)
Unrealized gain/(loss) on marketable securities (1,000) 91,000
------------ ------------
Comprehensive income $ 8,094,000 $ 14,448,000
============ ============
</TABLE>
5. SEGMENT INFORMATION
The Company is a network marketing company that sells a wide range of weight
management products, food and dietary supplements and personal care products
within one industry as defined under SFAS 131, "Disclosures about Segments of an
Enterprise and Related Information." The Company's products are manufactured by
third party providers and then sold to independent distributors who sell
Herbalife products to retail consumers or other distributors.
The Company has operations throughout the world (43 countries as of March 31,
1999) and is organized and managed by geographic segments. Information reviewed
by the Company's chief operating decision makers on significant geographic
segments, as defined under SFAS 131, is prepared on the same basis as the
consolidated financial statements and is as follows:
7
<PAGE> 9
FINANCIAL INFORMATION BY GEOGRAPHIC SEGMENT
<TABLE>
<CAPTION>
Three months ended
March 31,
1999 1998
-------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C>
TOTAL RETAIL SALES:
United States(1) ........................... $ 195.7 $ 218.5
Japan ...................................... 145.1 127.6
Russia ..................................... 11.2 46.1
All others(1) .............................. 178.6 141.4
Elimination of intersegment sales(1) ....... (101.8) (135.2)
--------------------
TOTAL RETAIL SALES ...................... 428.8 398.4
--------------------
DISTRIBUTOR ALLOWANCES:
United States .............................. 74.4 90.6
Japan ...................................... 70.8 61.9
Russia ..................................... 5.2 21.1
All others ................................. 82.2 64.9
Elimination of intersegment allowance (U.S.) (30.2) (49.9)
--------------------
TOTAL DISTRIBUTOR ALLOWANCES ............ 202.4 188.6
--------------------
NET SALES .................................... $ 226.4 $ 209.8
====================
OPERATING INCOME:
United States .............................. $ 50.4 $ 56.7
Japan ...................................... 20.7 18.7
Russia ..................................... (3.7) 9.6
All others ................................. 10.2 8.0
Elimination of intersegment gross profit ... (46.4) (58.3)
--------------------
TOTAL ................................... 31.2 34.7
--------------------
Corporate expenses ......................... (12.2) (11.0)
Net interest income ........................ 0.4 0.9
Income taxes ............................... (7.5) (9.5)
Minority interest .......................... (0.2) (0.3)
--------------------
NET INCOME ................................... $ 11.7 $ 14.8
====================
NOTES:
(1) Includes intersegment sales of:
United States $ 100.8 $ 132.8
All others 1.0 2.4
--------------------
Total $ 101.8 $ 135.2
====================
SALES BY PRODUCT LINE
Weight Management $ 225.8 $ 204.9
Food & Dietary Supplement 140.2 118.4
Personal Care Products 51.8 55.2
Other 11.0 19.9
--------------------
Total Sales $ 428.8 $ 398.4
====================
</TABLE>
8
<PAGE> 10
HERBALIFE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Throughout this report, "retail sales" are determined as the gross sales amounts
reflected on the Company's invoices to its distributors. The Company does not
receive the amount reported as "retail sales," and the Company does not monitor
the actual retail prices charged for the Company's products. "Net sales"
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% (up to 7% beginning February
1, 1999), 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 through January 31, 1999 and 7% beginning
February 1, 1999) 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 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 FIRST QUARTER 1999 TO 1998
Retail sales for the three months ended March 31, 1999 increased 7.6% to $428.8
million as compared to sales of $398.4 million in the prior year.
9
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS (CONTINUED)
COMPARISON OF FIRST QUARTER 1999 TO 1998 (CONTINUED)
RETAIL SALES BY GEOGRAPHICAL SEGMENTS (DOLLARS IN MILLIONS):
<TABLE>
<CAPTION>
Three Months Ended March 31,
---------------------------------------------------
% % Change in
1999 1998 Change Local Currency
-------- -------- ------ --------------
<S> <C> <C> <C> <C>
Asia/Pacific Rim $ 193.4 $ 151.4 27.7% 17%
Europe 114.3 135.8 (15.8)% (16)%
The Americas 121.1 111.2 8.9% 15%
-------- -------- ------ ----
Total Retail Sales $ 428.8 $ 398.4 7.6% 5%
======== ======== ====== ====
</TABLE>
Retail sales within the Asia/Pacific Rim region increased 27.7% to $193.4
million in the first quarter of 1999 as compared to the same period in 1998. In
Japan, first quarter retail sales of $145.1 million represents a 13.7% increase
from $127.6 million in the prior year. In local currency retail sales in Japan
increased 3%. Retail sales in South Korea and Hong Kong increased to $19.2
million and $9.3 million, respectively, compared to $1.9 million and $4.7
million in the prior year.
In Europe, retail sales decreased 15.8% to $114.3 million in the first quarter
of 1999 as compared to the same period in 1998. The decrease reflects the
ongoing uncertain economic conditions in Russia, where retail sales decreased
75.7% to $11.2 million. Excluding Russia, retail sales increased 15% over the
corresponding prior year period. Retail sales in Italy increased 23.5% to $27.0
million from the prior year period, and Germany increased 7.5% to $14.7 million.
Retail sales in the Americas increased 8.9% to $121.1 million in the first
quarter of 1999 as compared to the same period in 1998. The increase was
negatively impacted by the significant devaluation of the Brazilian Real, which
resulted in a retail sales decrease in Brazil of 31.6% to $8.2 million. In local
currency retail sales in Brazil increased 7%. Retail sales in the United States,
Mexico and Canada increased 10.6%, 60.7% and 26.2% to $94.9 million, $8.4
million and $5.9 million, respectively.
RETAIL SALES BY PRODUCT SEGMENTS (DOLLARS IN MILLIONS):
<TABLE>
<CAPTION>
Three Months Ended March 31,
-------------------------------
%
1999 1998 Change
-------- -------- ------
<S> <C> <C> <C>
Food & Dietary Supplements $ 225.8 $ 204.9 10.2%
Weight Management 140.2 118.4 18.4%
Personal Care 51.8 55.2 (6.2)%
Literature/ Promotional/ Other 11.0 19.9 (44.7)%
-------- -------- ------
Total Retail Sales $ 428.8 $ 398.4 7.6%
======== ======== ======
</TABLE>
For the three month period ended March 31, 1999, retail sales of weight
management and food & dietary supplements increased 18.4% and 10.2%,
respectively, as compared to the same period in the prior year. The increases in
the product segments were primarily due to the same factors identified in the
geographical segments previously discussed. The personal care product segment
decreased 6.2% compared to the same period in the prior year, mostly due to the
significant decrease in Russian sales, which had a proportionate higher percent
of personal care sales compared to other countries. Prior year numbers have been
reclassified to conform with current year presentation.
OPERATING INFORMATION:
Gross profit of $101.2 million for the three months ended March 31, 1999 was
$8.5 million, or 9.2%, higher than gross profit of $92.7 million in the prior
year. As a percentage of retail sales, gross profit for the three months ended
March 31, 1999 as compared to the same period in the prior year increased from
23.3% to 23.6%. The increase in gross profit as a percentage of retail sales
primarily resulted from lower purchased cost of weight management and
nutritional products and a special distributor incentive program in 1998, which
was not repeated in 1999. Partially offseting these benefits were costs
associated with a limited time sales promotion in Russia.
10
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS (CONTINUED)
COMPARISON OF FIRST QUARTER 1999 TO 1998 (CONTINUED)
Marketing, distribution and administrative expenses, as a percentage of retail
sales, were 19.2% for the three month period ended March 31, 1999 as compared to
17.3% for the same period in 1998. These expenses for the same periods increased
19.1% to $82.1 million from $69.0 million in the prior year. The increase
includes the effect of the Company's continued investment in corporate and
operational support, enhanced product distribution capabilities and Year 2000
conversion cost. In addition, the first quarter of 1999 was negatively impacted
by $3 million of Yen option premium expenses, options which were purchased to
protect financial results from a potential weakening of the Japanese Yen.
The Japanese Yen strengthened against the U.S. Dollar resulting in
proportionately higher revenues, expenses, and ultimately income when translated
into the U.S. Dollar reporting currency. The effect of the stronger Japanese Yen
on the Company's net income per diluted share for the three months ended March
31, 1999 was approximately $.07 as compared to the exchange rates in effect for
the same period of 1998. The effect of foreign currency changes of this nature
in countries other than Japan was not individually material to the operations of
the Company; however, the strengthening of the U.S. Dollar in relation to the
currencies of countries other than Japan amounted to approximately $.03 per
diluted share as compared to the exchange rates in effect for the same period in
the prior year.
Income taxes of $7.5 million for the three months ended March 31, 1999 decreased
from $9.5 million in the prior year. As a percentage of pre-tax income, income
taxes remained unchanged at 38.5% in 1999.
Net income for the three months ended March 31, 1999 decreased 20.8% to $11.7
million as compared to the prior year.
LIQUIDITY AND CAPITAL RESOURCES:
The Company has historically met its working capital and capital expenditure
requirements, including funding for expansion of operations, through net cash
provided by operating activities. For the three months ended March 31, 1999, net
cash provided by operating activities was $36.2 million, compared to $16.7
million for the same period in 1998. The increase primarily resulted from (i)
reductions in receivable and inventory balances; and (ii) increases in accounts
payable, accrued expenses and compensation, and advanced sales deposits. The
increase was partially offset by reductions in the income tax payable balance.
Capital expenditures for the three months ended March 31, 1999 were $4.7 million
compared to $2.3 million for the same period in the prior year. The majority of
the 1999 expenditures resulted from investment in management information systems
and the expansion of office facilities and equipment in the U.S. For 1999, the
Company is planning to invest approximately $22 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 $9 million will be
required for pre-opening expenses, capital expenditures and other operating cash
flow needs associated with its 1999 new market expansion activities.
Stockholders' equity increased $3.8 million to $167.7 million during the three
months ended March 31, 1999. For the first quarter of 1999, net income of $11.7
million was offset by dividends declared of $4.3 million and a translation loss
of $3.6 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 $125.0 million at
March 31, 1999 compared to $105.9 million at December 31, 1998.
11
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS (CONTINUED)
COMPARISON OF FIRST QUARTER 1999 TO 1998 (CONTINUED)
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 1999, most Asian, European and
American currencies remained stable against the U.S. Dollar with the exception
of the Brazilian Real. The 31% devaluation of the Brazilian Real during the
first quarter of 1999 did not have a material impact on net income and earnings
per share for the quarter. The foreign exchange loss of $3.9 million for the
first quarter of 1999 as compared to a loss of $0.6 million for the same period
in 1998 was principally due to a $3 million yen option premium expense.
The Company is undertaking projects to address Year 2000 issues. The "Year 2000
issue" is the result of computer programs being written using two digits rather
than four to define the applicable year. If the Company's computer programs with
date-sensitive functions are not Year 2000 compliant, they may fail or make
miscalculations due to interpreting a date including "00" to mean 1900, not
2000. The result may be disruptions to operations, including, among other
things, a temporary inability to process transactions or engage in similar
normal business activities.
The Company has established a project team to identify and address the Company's
Year 2000 risks and issues in an attempt to ensure the integrity and reliability
of the Company's information systems and business processes. The project team
has (i) completed a review of its computer systems worldwide relating to order
processing, distribution disbursements, and other financial systems and (ii)
developed a comprehensive project plan (the "Plan") as a means for ensuring the
Year 2000 compliance of all information technology ("IT") systems, including
applications, operating systems, mainframe, mid-range and client server
platforms and all non-information technology ("Non-IT") systems, including
embedded applications and equipment, and to seek to ensure that key third
parties are Year 2000 compliant by the end of the year. The Company has
identified high risk applications that are critical to its business, recognizing
the fact that timely compliance of these systems is crucial, and, therefore, has
designed its Plan to address these systems first.
The Company's Plan includes remediating certain existing software and converting
to new software for certain other applications. The Plan is underway and the
Company believes it will be completely in effect by the end of the third quarter
of 1999. Testing and certification of the Company's computer systems and their
applications is scheduled to be completed shortly thereafter. In addition, the
Company has developed contingency plans for both software that has been selected
for remediation and for those applications that will have to be replaced. The
project team has also developed a third contingency plan (applicable to both
remediation and replacement efforts) which involves the development of certain
manual procedures that could be utilized to render the Company's IT and Non-IT
systems Year 2000 compliant. It is expected that the Plan together with the
contingency plans will enable the company to achieve Year 2000 compliance in a
timely fashion.
The Company has also identified and contacted key third parties to determine the
status of their Year 2000 compliance and any probable impact on the Company. If
key third parties are not Year 2000 compliant and their non-compliance causes a
material disruption to any of their respective businesses, the Company's
business could be materially adversely affected. Disruptions could also include,
among other things, a financial institution's inability to take and transfer
funds; an interruption in delivery of supplies from vendors; a loss of voice and
data connections; a loss of power to the Company's facilities; and other
interruptions to the normal course of the Company's operations, the nature and
extent of which is hard to foresee. The Company will continue to evaluate the
nature of these risks, but at this time is unable to determine the probability
that any such risk will occur, or if it does occur, what the nature, length of
other effects, if any, it may have.
As of March 31, 1999, the Company had incurred approximately $14 million for
Year 2000 efforts. Future costs are estimated to be up to $11 million, which are
expected to be funded through operating cash flows. Such expenditures are
expensed or capitalized, as appropriate. The financial impact of making any
required system changes or other remediation efforts cannot be known precisely
at this time, but it is not expected to be material to the Company's financial
position, results of operations, or cash flows.
12
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS (CONTINUED)
COMPARISON OF FIRST QUARTER 1999 TO 1998 (CONTINUED)
Under the current Plan, Year 2000 compliance should not pose significant
operational problems. While the Company believes it will be able to resolve the
Year 2000 issue in a timely manner, if it is unable to complete the installation
of replacement systems and the required changes to existing critical systems, or
if those with whom it conducts business are unsuccessful in implementing timely
solutions, the Year 2000 issue could have a material adverse effect on the
Company's operations and results of operations, including its ability to process
and distribute orders.
On January 1, 1999, eleven of the fifteen member countries of the European Union
adopted a single European Currency -- the euro. The conversion rates between the
existing sovereign currencies ("legacy currencies") and the euro have been
fixed. The euro is traded on currency exchanges and is used in business
transactions. Beginning in January 2002, new euro-denominated bills and coins
will be issued, and legacy currencies will be withdrawn from circulation. The
Company has conducted a review of its information and business systems, and
those of its European affiliates, to address the impact of the euro conversion.
The Company has initially offered both the legacy currencies and the euro to
settle distributor sales and will ultimately offer to process orders in the euro
currency. To prepare for this transition, certain computer systems will require
modifications or replacement. The initial remediation and testing process was
completed in December 1998 and cost approximately $500,000. The Company is still
evaluating subsequent phases to the euro conversion, which may include, among
other things, system modifications to allow payment of distributor royalties in
euro. The incremental costs associated with these subsequent phases will not be
significant as the system modifications will be incorporated into the Company's
year 2000 efforts. In response to the euro conversion, the Company may make
certain price adjustments to ensure pricing consistency within the European
market.
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 and again in July 1998,
the Board authorized two additional $20 million stock repurchase programs, the
first of which was completed in September 1998. Pursuant to these stock
repurchase programs, the Company expended $7.5 million, $26.0 million and $32.5
million in 1996, 1997 and 1998, respectively. No stock repurchases were made in
the first quarter of 1999.
The Company has pledged cash and cash equivalents to secure bank financing
primarily for the benefit of its foreign subsidiaries, including letters of
credit, lines of credit, leases, and other obligations. As of March 31, 1999, an
aggregate of $2.5 million had been pledged against $2.0 million of commitments
for debt obligations.
At March 31, 1999, the Company had $30.2 million of credit facilities, including
a two year unsecured committed line of credit totaling $25 million, of which
$9.3 million is outstanding. The majority of these facilities expire in 2000.
These facilities are subject to normal banking terms and conditions and do not
materially restrict the Company's activities. The terms of the $25 million line
of credit agreement contain, among other provisions, requirements for
maintaining defined levels of working capital, net worth and fixed charge ratio.
For a discussion of certain contingencies that may impact liquidity and capital
resources, see "Note 3, Contingencies," in the Company's consolidated financial
statements included herein.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The Company is exposed to market risks which arise during the normal course of
business from changes in interest rates and foreign currency exchange rates. On
a selected basis, the Company uses derivative financial instruments to manage or
hedge these risks. All hedging transactions are authorized and executed pursuant
to written guidelines and procedures.
See disclosures under Item 7a. "Quantitative and Qualitative Disclosures about
Market Risks" in the Company's annual report on Form 10-K for the fiscal year
ended December 31, 1998. No significant changes have occurred during the first
quarter of 1999.
13
<PAGE> 15
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.
14
<PAGE> 16
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, 1998 and in footnote
three to the Financial Statements included in Item 1 of this document.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
15
<PAGE> 17
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 (1)
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
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 (2)
Executive Compensation Plan
10.5 Form of Letter Agreement between the Compensation Committee of the Board (2)
of Directors of the Company and Mark Hughes
10.6 Form of Indemnity Agreement between the Company and certain officers and (2)
directors of the Company
10.7 Trust Agreement among the Company, Citicorp Trust, N.A. and certain (2)
officers and directors of the Company
10.8 Form of Stock Appreciation Rights Agreement between the Company and (2)
certain directors of the Company
10.9 1994 Performance Based Annual Incentive Compensation Plan, as amended and (4), (7), (11)
restated in 1996
10.10 Form of Promissory Note for Advances under the Company's 1994 Performance (5)
Based Annual Incentive Compensation Plan
10.11 Employment Agreement between the Company and Chris Pair dated April 3, 1994 (3)
10.12 The Company's Executive Officer Deferred Compensation Plan, amending and (5)
relating the Deferred Compensation Agreement between the Company and
Michael Rosen
10.13 Office lease agreement between the Company and State Teacher's Retirement (6)
System, dated July 20, 1995
10.14 Form of stock appreciation rights agreements between the Company and (6)
certain directors of the Company
10.15 The Company's Senior Executive Deferred Compensation Plan, effective (6)
January 1, 1996, as amended
10.16 The Company's Management Deferred Compensation Plan, effective January 1, (6)
1996, as amended
10.17 Master Trust Agreement between the company and Imperial Trust Company, (6)
Inc., effective January 1, 1996
10.18 The Company's 401K Plan, as amended (6)
</TABLE>
16
<PAGE> 18
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE NO./(FOOTNOTE)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
10.19 Agreement Concerning Share Allocation Plan for Specific Directors of (8)
Herbalife of Japan K.K. dated December 30, 1996.
10.20 Consulting Agreement between David Addis and Herbalife of America, Inc. (8)
dated January 27, 1997.
10.21 Agreement between Herbalife International of America, Inc. and D&F (9)
Industries, Inc. dated September 2, 1997
10.22 Agreement between Herbalife International of America, Inc. and Dynamic (9)
Products, Inc. dated September 2, 1997
10.23 Agreement between Herbalife International of America, Inc. and Raven (9)
Industries, Inc. d/b/a Omni-Pak Industries, dated September 2, 1997
10.24 The Company's Supplemental Executive Retirement Plan (12)
10.25 Credit Agreement between Herbalife International of America, Inc. and (14)
First National Bank of Chicago, dated December 14, 1998
21 List of subsidiaries of the Company (14)
27 Financial Data Schedule (15)
</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) 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 Shareholders.
(14) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1998.
(15) Filed herewith.
17
<PAGE> 19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: May 12, 1999
HERBALIFE INTERNATIONAL, INC.
(Registrant)
By: /s/ TIMOTHY GERRITY
----------------------------
Timothy Gerrity
Executive Vice President and
Chief Financial Officer
18
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 117,525,000
<SECURITIES> 7,470,000
<RECEIVABLES> 30,890,000
<ALLOWANCES> 0
<INVENTORY> 80,417,000
<CURRENT-ASSETS> 271,719,000
<PP&E> 86,692,000
<DEPRECIATION> 49,108,000
<TOTAL-ASSETS> 346,262,000
<CURRENT-LIABILITIES> 149,365,000
<BONDS> 2,022,000
0
0
<COMMON> 286,000
<OTHER-SE> 167,371,000
<TOTAL-LIABILITY-AND-EQUITY> 346,262,000
<SALES> 226,439,000
<TOTAL-REVENUES> 428,799,000
<CGS> 58,491,000
<TOTAL-COSTS> 125,261,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 19,449,000
<INCOME-TAX> 7,488,000
<INCOME-CONTINUING> 11,712,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,712,000
<EPS-PRIMARY> .41
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