<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
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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 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 November 3, 1999 was:
Shares of Class A Common Stock 10,002,378
Shares of Class B Common Stock 18,649,672
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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 September 30, 1999
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
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 - 8
Item 2. Management's Discussion and Analysis of Financial 9 - 16
Condition and Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities and Use of Proceeds 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 18 - 19
Signature 20
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HERBALIFE INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $116,830,000 $100,721,000
Marketable securities 2,232,000 5,186,000
Receivables 36,087,000 44,471,000
Inventories 93,556,000 88,138,000
Prepaid income taxes 7,611,000 2,931,000
Prepaid expenses and other current assets 17,438,000 14,734,000
Deferred income taxes 20,762,000 21,870,000
------------ ------------
Total current assets 294,516,000 278,051,000
Property, at cost, net of accumulated depreciation and
amortization of $49,642,000 (1999) and $45,792,000 (1998) 49,718,000 37,448,000
Deferred compensation plan assets 26,287,000 18,059,000
Other assets 4,657,000 4,642,000
Deferred income taxes 6,966,000 6,696,000
Goodwill, net of accumulated amortization of
$1,730,000 (1999) and $1,601,000 (1998) 3,157,000 3,287,000
------------ ------------
TOTAL $385,301,000 $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>
September 30, December 31,
1999 1998
------------- -------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 20,566,000 $ 14,963,000
Royalty overrides 56,367,000 58,389,000
Accrued compensation 27,056,000 18,132,000
Accrued expenses 29,819,000 29,007,000
Dividends payable 4,297,000 4,296,000
Current portion of contracts payable and bank loans 4,688,000 2,639,000
Advance sales deposits 14,853,000 7,919,000
Income taxes payable 3,067,000 22,083,000
------------- -------------
Total current liabilities 160,713,000 157,428,000
NON-CURRENT LIABILITIES:
Contracts payable, net of current portion 2,483,000 2,357,000
Accrued deferred compensation plan liability 24,268,000 17,244,000
Other non-current liabilities and deferred credits 5,144,000 4,748,000
------------- -------------
Total liabilities 192,608,000 181,777,000
------------- -------------
MINORITY INTEREST 2,343,000 2,595,000
------------- -------------
STOCKHOLDERS' EQUITY:
Common stock A, $0.01 par value; 33,333,333 shares
authorized, 10,002,568 (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, 18,629,198 (1999) and 18,603,561 (1998) shares
issued and outstanding 186,000 186,000
Paid-in-capital in excess of par value 55,278,000 54,823,000
Retained earnings 137,431,000 110,941,000
Accumulated other comprehensive loss (2,645,000) (2,239,000)
------------- -------------
Total stockholders' equity 190,350,000 163,811,000
------------- -------------
TOTAL $ 385,301,000 $ 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 NINE MONTHS ENDED
---------------------------------- ----------------------------------
September 30, September 30, September 30, September 30,
1999 1998 1999 1998
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Retail sales $ 446,041,000 $ 402,704,000 $ 1,300,605,000 $ 1,199,293,000
Less: Distributor allowances on product purchases 207,148,000 189,672,000 608,923,000 566,541,000
--------------- --------------- --------------- ---------------
Net sales 238,893,000 213,032,000 691,682,000 632,752,000
Cost of sales 63,469,000 57,738,000 179,586,000 165,884,000
Royalty overrides 66,747,000 61,253,000 201,686,000 183,929,000
Marketing, distribution & administrative expenses 82,918,000 82,559,000 245,929,000 223,205,000
Interest income - net (157,000) (396,000) (993,000) (2,072,000)
--------------- --------------- --------------- ---------------
Income before income taxes and minority interest 25,916,000 11,878,000 65,474,000 61,806,000
Income taxes 9,978,000 4,573,000 25,208,000 23,795,000
--------------- --------------- --------------- ---------------
Income before minority interest 15,938,000 7,305,000 40,266,000 38,011,000
Minority interest 393,000 253,000 816,000 842,000
--------------- --------------- --------------- ---------------
NET INCOME $ 15,545,000 $ 7,052,000 $ 39,450,000 $ 37,169,000
=============== =============== =============== ===============
EARNINGS PER SHARE:
Basic $ 0.54 $ 0.25 $ 1.38 $ 1.28
Diluted 0.51 0.24 1.30 1.24
CASH DIVIDENDS PER COMMON SHARE $ 0.15 $ 0.15 $ 0.45 $ 0.45
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 28,588,000 28,764,000 28,587,000 29,004,000
Effect of stock options 1,754,000 476,000 1,756,000 1,082,000
--------------- --------------- --------------- ---------------
Diluted 30,342,000 29,240,000 30,343,000 30,086,000
=============== =============== =============== ===============
</TABLE>
See the accompanying notes to consolidated financial statements
4
<PAGE> 6
HERBALIFE INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
September 30, September 30,
1999 1998
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 39,450,000 $ 37,169,000
Adjustments to reconcile net income to net cash
Provided by operating activities:
Depreciation and amortization 10,108,000 9,304,000
Deferred income taxes 1,008,000 12,000
Amortization of unearned compensation 152,000
Stock Grant 88,000
Unrealized foreign exchange loss 1,092,000 952,000
Minority interest in earnings 816,000 842,000
Other (102,000) 340,000
Changes in operating assets and liabilities:
Receivables 7,193,000 7,415,000
Inventories (5,763,000) (22,612,000)
Prepaid expenses and other current assets (7,253,000) (5,899,000)
Other assets 41,000 (4,291,000)
Accounts payable 6,189,000 (2,270,000)
Royalty overrides (1,515,000) (3,993,000)
Accrued expenses and accrued compensation 10,533,000 1,869,000
Advance sales deposits 6,755,000 (7,056,000)
Income taxes payable (17,527,000) (2,908,000)
Deferred compensation liability 7,024,000 7,048,000
------------- -------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 58,049,000 16,162,000
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property (21,158,000) (9,024,000)
Proceeds from sale of property 51,000 70,000
Net changes in marketable securities 2,928,000 34,761,000
Deferred compensation plan assets (8,228,000) (10,498,000)
------------- -------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (26,407,000) 15,309,000
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid (12,880,000) (13,192,000)
Distribution to minority interests (1,069,000) (505,000)
Additions to loans payable 1,901,000 858,000
Principal payments on loans payable (1,296,000) (1,053,000)
Exercise of stock options 455,000 4,932,000
Stock repurchases (32,343,000)
Recapitalization costs (616,000)
------------- -------------
NET CASH USED IN FINANCING ACTIVITIES (12,889,000) (41,919,000)
------------- -------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (2,644,000) (1,792,000)
------------- -------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 16,109,000 (12,240,000)
CASH AND CASH EQUIVALENTS AT JANUARY 1 100,721,000 78,913,000
------------- -------------
CASH AND CASH EQUIVALENTS AT SEPTEMBER 30 $ 116,830,000 $ 66,673,000
============= =============
</TABLE>
See the accompanying notes to consolidated financial statements
5
<PAGE> 7
HERBALIFE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 September 30, 1999 and for the
nine month periods ended September 30, 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, 2001. The Company has not yet analyzed the impact
of adopting this statement.
RECLASSIFICATIONS
Certain reclassifications were made to prior year statements to conform to the
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. AGREEMENT AND PLAN OF MERGER
On September 13, 1999, the Company publicly announced a proposed purchase of the
outstanding common shares by entities controlled by the Company's Chairman,
President and CEO/Principal Shareholder. The proposed transaction would be
accomplished in a merger of Millennium Acquisition Corp. (the "Purchaser") into
the Company. As contemplated by the merger agreement, on September 17, 1999 the
Purchaser commenced a tender offer to purchase all of the Company's outstanding
shares at a price of $17.00 per share in cash. Following the successful
completion of the offer, the Purchaser will be merged into the Company. The
offer is conditioned upon, among other things, the Purchaser obtaining financing
for the offer, the merger and related transactions. Approximately $500 million
will be required to finance the offer of which approximately $440 million will
be financed through third party indebtedness, and the balance of approximately
$60 million will be funded from the Company's cash balances. Concurrently with
the closing of the merger, approximately $214 million will be loaned to entities
controlled by the Company's Chairman, President and CEO/Principal Shareholder.
The third party indebtedness is expected to be financed with a combination of
borrowing by the Company under a new senior credit facility with a syndicate of
major commercial banks and by issuance of new subordinated debentures to
qualified institutional buyers. It is expected that the senior credit facility
will consist of one or more term loans and a revolving credit facility, and that
it will be secured by substantially all of the Company's assets. The
subordinated debentures will be unsecured and are expected to have a term of an
estimated seven to ten years. The Company intends to repay the indebtedness
principally through the Company's future cash flows. It may also refinance
portions of the indebtedness in the future. Although the Company cannot be
certain whether or when any of the conditions to the transaction will be
satisfied or that the Company will complete the transaction, the Company
anticipates completing the transaction in the first quarter of 2000.
4. CONTINGENCIES
The Company's French and Italian subsidiaries have been subject to tax audits by
governmental authorities in those countries, each of whom are proposing that
material value added, withholding, and income taxes are due. The Company and its
tax advisors believe that the Company has substantial defenses and the Company
is vigorously contesting the additional proposed taxes and related charges.
However, the ultimate resolution of these matters is unknown and may take
several years.
6
<PAGE> 8
HERBALIFE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 initially appeared
to attempt to challenge the legality of the company's marketing system.
Subsequently, the purported challenge to the legality of the marketing system
was dismissed by the court. 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.
Shortly after the September 13, 1999 public announcement of the proposed going
private transaction, putative class action suits were filed challenging the
fairness of the proposed transaction to the Company's shareholders. In
substance, the complaints allege among other things, that the price to be paid
does not reflect the value of the Company's assets, and that the transaction is
unfair because it will deprive the public stockholders of the ability to share
proportionately in the Company's future growth in profits and earnings. The
lawsuits also allege that the Special Committee of the Board formed to evaluate
the transaction was not independent, and that the Company's directors breached
their fiduciary duties to the public stockholders in approving the proposed
transaction. The plaintiffs have requested an injunction prohibiting the
defendants from proceeding with the proposed transaction, unspecified damages,
costs and attorneys' fees, and other relief. The Company and the Purchaser plan
to vigorously defend against the lawsuits and any other actions that may be
brought in connection with the proposed transaction. There can be no assurances,
however, with regard to the ultimate outcome of such suits or to the impact that
an adverse result would have on the Company's and the Purchaser's ability to
consummate the proposed transaction.
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.
5. COMPREHENSIVE INCOME
Comprehensive income is summarized as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- -----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net Income $ 15,545,000 $ 7,052,000 $ 39,450,000 $ 37,169,000
Foreign currency translation
adjustment 3,389,000 474,000 (384,000) (1,660,000)
Unrealized gain/(loss) on
marketable securities (19,000) (70,000) (22,000) 5,000
------------ ------------ ------------ ------------
Comprehensive income $ 18,915,000 $ 7,456,000 $ 39,044,000 $ 35,514,000
============ ============ ============ ============
</TABLE>
6. 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 (44 countries as of September
30, 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
HERBALIFE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FINANCIAL INFORMATION BY GEOGRAPHIC SEGMENT
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------- -----------------------
1999 1998 1999 1998
-------- -------- ---------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
TOTAL RETAIL SALES:
United States(1) ........................... $ 223.2 $ 202.0 $ 639.1 $ 629.5
Japan ...................................... 126.8 135.4 372.6 386.4
Russia ..................................... 5.4 14.6 24.8 91.6
All others(1) .............................. 203.8 161.0 596.8 454.5
Elimination of intersegment sales(1) ....... (113.2) (110.3) (332.7) (362.7)
------------------- -----------------------
TOTAL RETAIL SALES ...................... $ 446.0 $ 402.7 $ 1,300.6 $ 1,199.3
=================== =======================
DISTRIBUTOR ALLOWANCES:
United States .............................. $ 91.3 $ 80.1 $ 253.5 $ 258.4
Japan ...................................... 61.0 65.1 180.6 186.7
Russia ..................................... 2.4 6.1 11.4 40.8
All others ................................. 92.0 74.3 270.3 209.9
Elimination of intersegment allowance (U.S.) (39.6) (35.9) (106.9) (129.3)
------------------- -----------------------
TOTAL DISTRIBUTOR ALLOWANCES ............ $ 207.1 $ 189.7 $ 608.9 $ 566.5
------------------- -----------------------
NET SALES .................................... $ 238.9 $ 213.0 $ 691.7 $ 632.8
=================== =======================
OPERATING INCOME:
United States .............................. $ 47.1 $ 53.8 $ 151.8 $ 162.2
Japan ...................................... 19.4 14.4 50.9 49.7
Russia ..................................... 0.8 (4.4) (3.2) 9.4
All others ................................. 17.9 1.7 41.8 19.5
Elimination of intersegment gross profit ... (46.2) (44.8) (137.4) (152.6)
------------------- -----------------------
TOTAL ................................... $ 39.0 $ 20.7 $ 103.9 $ 88.2
=================== =======================
Corporate expenses ......................... (13.3) (9.2) (39.4) (28.5)
Net interest income ........................ 0.2 0.4 1.0 2.1
Income taxes ............................... (10.0) (4.6) (25.2) (23.8)
Minority interest .......................... (0.4) (0.2) (0.8) (0.8)
------------------- -----------------------
NET INCOME ................................... $ 15.5 $ 7.1 $ 39.5 $ 37.2
=================== =======================
NOTES:
(1) Includes intersegment sales of:
United States .......................... $ 112.9 $ 109.2 $ 327.5 $ 358.0
All others ............................. 0.3 1.1 5.2 4.7
------------------- -----------------------
Total .................................... $ 113.2 $ 110.3 $ 332.7 $ 362.7
=================== =======================
SALES BY PRODUCT LINE
Food & Dietary Supplement .............. $ 197.0 $ 195.0 $ 602.0 $ 557.6
Weight Management ...................... 193.3 150.1 523.9 443.4
Personal Care Products ................. 45.8 41.1 140.5 142.2
Literature/Promotional/Other ........... 9.9 16.5 34.2 56.1
------------------- -----------------------
Total Sales .......................... $ 446.0 $ 402.7 $ 1,300.6 $ 1,199.3
=================== =======================
</TABLE>
8
<PAGE> 10
HERBALIFE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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.
Distributor allowances as a percentage of sales may vary by country depending
upon regulatory restrictions which limit or otherwise restrict such allowances.
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. Because of local country regulatory constraints, the
Company may be required to modify its typical distributor incentive plans as
described above. Currently the company offers a reduced distributor discount and
pays reduced royalty overrides to distributors in Korea. Royalty overrides, as
reported in the financial statements 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. 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.
PRODUCT SALES
Retail sales for the three and nine months ended September 30, 1999 increased
10.8% and 8.4% respectively, to $446.0 million and $1,300.6 million as compared
to sales of $402.7 million and $1,199.3 million for the corresponding periods of
the prior year.
9
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (CONTINUED)
RETAIL SALES BY GEOGRAPHICAL SEGMENTS (DOLLARS IN MILLIONS):
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- ------------------------------------
% Change in % Change in
Local Local
1999 1998 US$ Currency 1999 1998 US$ Currency
------ ------ ---- ---- -------- -------- ----- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Asia/Pacific Rim $193.6 $174.1 11.2% (6%) $ 554.3 $ 480.4 15.4% 1%
Europe 109.3 108.9 0.4% 6% 345.5 370.2 (6.7%) (4%)
The Americas 143.1 119.7 19.5% 24% 400.8 348.7 14.9% 20%
------ ------ ----- ---- -------- -------- ----- ---
Total Retail Sales $446.0 $402.7 10.8% 6% $1,300.6 $1,199.3 8.4% 5%
====== ====== ===== ==== ======== ======== ===== ===
</TABLE>
Retail sales within the Asia/Pacific Rim region increased 11.2% and 15.4% or
$19.5 million and $73.9 million for the three and nine months ended September
30, 1999, respectively, as compared to the same periods in 1998. The region's
year over year sales growth was primarily due to retail sales increases in Korea
of $25.2 million and $71.0 million for the three and nine months ended September
30, 1999, respectively, and also to the favorable effect of currency translation
for the region. Partially offsetting the increases was a $8.6 million and $13.8
million decline in retail sales for Japan, representing a 6.4% and 3.6% decline
for the three and nine months ended September 30, 1999 compared to the
corresponding periods in the prior year. In local currency, retail sales in
Japan decreased 24% and 17% for the three and nine months ended September 30,
1999. The decrease in Japan is primarily a result of a weak consumer demand.
In Europe, retail sales increased 0.4% or $0.4 million in the third quarter and
decreased 6.7% or $24.7 million for the nine months ended September 30, 1999
respectively, as compared to the same periods in 1998. The decrease in the
region's retail sales for the nine months reflects the ongoing uncertain
economic conditions in Russia, where retail sales decreased 72.9% or $66.9
million. Excluding Russia, retail sales in Europe increased 10.3% and 15.2% over
the corresponding prior year periods. The regions growth, excluding Russia, was
primarily due to retail sales increases in Italy, Germany and the Netherlands.
Retail sales for the three and nine months in Italy increased 26.5% and 27.0%,
in Germany increased 16.2% and 16.6% and in the Netherlands increased 41.3% and
45.5%, respectively.
Retail sales in the Americas increased 19.5% and 14.9% or $23.4 million and
$52.1 million for the three and nine months ended September 30, 1999,
respectively, as compared to the same periods in 1998. The region's sales growth
was primarily due to retail sales increases in the United States of $17.5
million and $40.0 million and in Mexico of $6.0 million and $14.1 million for
the three and nine months ended September 30, 1999, respectively. Partially
offsetting the increases was a $1.5 million and $6.5 million decline in retail
sales for Brazil, representing a 13.9% and 19.7% decline for the three and nine
months ended September 30, 1999 compared to the corresponding periods in the
prior year. In local currency retail sales in Brazil increased 37% and 19% for
the three and nine months ended September 30, 1999.
RETAIL SALES BY PRODUCT LINES (DOLLARS IN MILLIONS):
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
% %
1999 1998 Change 1999 1998 Change
-------- -------- ------ -------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
Food & Dietary Supplements $197.0 $195.0 1.0% $ 602.0 $ 557.6 8.0%
Weight Management 193.3 150.1 28.8% 523.9 443.4 18.2%
Personal Care 45.8 41.1 11.4% 140.5 142.2 (1.2%)
Other 9.9 16.5 n.m. 34.2 56.1 n.m.
-------- -------- ----- -------- -------- ------
Total Retail Sales $ 446.0 $ 402.7 10.8% $1,300.6 $1,199.3 8.4%
======== ======== ===== ======== ======== ======
n.m. -- not meaningful
</TABLE>
10
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (CONTINUED)
For the three and nine months ended September 30, 1999, retail sales of food &
dietary supplements increased 1.0% and 8.0%, respectively, as compared to the
same periods in the prior year. Retail sales of weight management products
increased 28.8% and 18.2%, respectively, for the three and nine months ended
September 30, 1999. The increases in the two product lines were primarily due to
the same factors identified in the geographical segments previously discussed,
and the introduction of new weight management products in Europe during the
second quarter of 1999 which contributed to relatively stronger growth for the
weight management product line. The personal care product line increased 11.4%
for the quarter, when compared to the same period in 1998 and decreased 1.2% for
the nine months when compared to the same period in the prior year. The increase
in personal care sales for the quarter was mostly due to the introduction of
color cosmetics in the U.S. and Canada. The decrease in personal care sales for
the nine months was mostly due to the significant decrease in Russian sales,
which had a proportionately higher percent of personal care sales compared to
other countries. Prior year numbers for retail sales by product line have been
reclassified to conform with current year presentation.
OPERATING INFORMATION:
Gross profit of $108.7 million and $310.4 million for the three and nine months
ended September 30, 1999 was $14.7 million, or 15.6%, and $27.5 million, or 9.7%
higher than gross profit of $94.0 million and $282.9 million in the prior year,
respectively. As a percentage of retail sales, gross profit for the three and
nine months ended September 30, 1999 as compared to the same period in the prior
year increased from 23.4% to 24.4% and 23.6% to 23.9%, respectively. The
increases in gross profit as a percentage of retail sales primarily resulted
from somewhat lower distributor incentives earned and the lower cost for weight
management and nutritional products. Although the Company's principal supplier
revised its pricing in conjunction with a contract renewal effective January
1998, gross margin did not benefit until inventories at old prices were fully
utilized during the second quarter of 1998. Additionally, the 1998 third quarter
included a $3.5 million charge relating to Russia inventory reserves. Partially
offsetting the improvements in the gross margin was a $5.3 million special
distributor bonus earned in June of 1999 and costs associated with a limited
time sales promotion in Russia.
Marketing, distribution and administrative expenses, as a percentage of retail
sales, were 18.6% and 18.9% for the three and nine months ended September 30,
1999 as compared to 20.5% and 18.6% for the same periods in 1998. These expenses
for the same periods increased to $82.9 million and $245.9 million from $82.6
million and $223.2 million in the prior year. The increase for the nine months
includes the effect of the Company's continuing investment in corporate and
operational support, enhanced product distribution capabilities and Year 2000
conversion expenses. In addition, the nine months ended September 30, 1999 were
negatively impacted by $6.2 million foreign exchange losses compared to losses
of $0.2 million for the same period in 1998, respectively. The foreign exchange
loss for the nine months ended September 30, 1999 includes $4.8 million Yen
option premium expenses, options which were purchased to protect financial
results from a potential weakening of the Japanese Yen.
The Japanese Yen and the Korean Won strengthened against the U.S. Dollar when
compared to the exchange rates in effect for the same period of 1998, resulting
in proportionately higher revenues, expenses, and income when translated into
the U.S. Dollar reporting currency. The effect of the stronger Japanese Yen and
Korean Won on the Company's net income per diluted share was approximately $0.18
and $0.40 for the three and nine months ended September 30, 1999, respectively.
The effect of foreign currency changes of this nature in countries other than
Japan and Korea was not individually material to the operations of the Company;
however, the cumulative effect amounted to a decrease of approximately ($0.07)
and ($0.11), respectively in net income per diluted share for the three and nine
months ended September 30, 1999.
Income taxes of $10.0 million and $25.2 million for the three and nine months
ended September 30, 1999 increased from $4.6 million and $23.8 million as
compared to the same periods 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 and nine months ended September 30, 1999 increased
120.4% and 6.1% to $15.5 million and $39.5 million as compared to comparable
prior year periods.
11
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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 nine months ended September 30, 1999,
net cash provided by operating activities was $58.0 million, compared to $16.2
million for the same period in 1998. The increase primarily resulted from (i)
reductions in the increase in inventory; and (ii) increases in accounts payable,
and various accrued liability accounts. The increase was partially offset by
lower income tax payable.
Capital expenditures for the nine months ended September 30, 1999 were $21.2
million compared to $9.0 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. During the fourth quarter of 1999, the Company is planning additional
capital expenditures of approximately $5 million or a total of approximately $26
million in 1999 for 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 $6 million will be required for pre-opening
expenses, capital expenditures and other operating cash flow needs associated
with its 1999 new market expansion activities.
As of September 30, 1999, the Company had $133.8 million in working capital.
Cash, cash equivalents and marketable securities were $119.1 million. The
Company also had $36.1 million of credit facilities, including a $25 million
unsecured committed line of credit, of which $13.3 million is securing letter of
credits, contingent guarantees and loans. 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.
The Company believes it will be able to finance its working capital and capital
expenditure requirements for the foreseeable future with internally generated
funds. However, if the transaction contemplated by the agreement of merger
described below is consummated, the Company will significantly reduce its
current cash balance and will incur annual financing expenses associated with
the $440 million in debt incurred in the transaction. Therefore, the Company
expects in the future to periodically utilize additional financing.
Stockholders' equity increased $ 26.5 million to $190.3 million during the nine
months ended September 30, 1999. The increase resulted from net income of $39.4
million offset by dividends declared of $12.9 million and a currency translation
adjustment of $2.7 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.
Stock Repurchase Plan
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 nine months of 1999.
Agreement and Plan of Merger
On September 13, 1999, the Company publicly announced a proposed purchase of the
outstanding common shares by entities controlled by the Company's Chairman,
President and CEO/Principal Shareholder. The proposed transaction would be
accomplished in a merger of Millennium Acquisition Corp. (the "Purchaser") into
the Company. As contemplated by the merger agreement, on September 17, 1999 the
Purchaser commenced a tender offer to purchase all of the Company's outstanding
shares at a price of $17.00 per share in cash. Following the successful
12
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
completion of the offer, the Purchaser will be merged into the Company. The
offer is conditioned upon, among other things, the Purchaser obtaining financing
for the offer, the merger and related transactions. Approximately $500 million
will be required to finance the offer of which approximately $440 million will
be financed through third party indebtedness, and the balance of approximately
$60 million will be funded from the Company's cash balances. Concurrently with
the closing of the merger, approximately $214 million will be loaned to entities
controlled by the Company's Chairman, President and CEO/Principal Shareholder.
The third party indebtedness is expected to be financed with a combination of
borrowing by the Company under a new senior credit facility with a syndicate of
major commercial banks and by issuance of new subordinated debentures to
qualified institutional buyers. It is expected that the senior credit facility
will consist of one or more term loans and a revolving credit facility, and that
it will be secured by substantially all of the Company's assets. The
subordinated debentures will be unsecured and are expected to have a term of an
estimated seven to ten years. The Company intends to repay the indebtedness
principally through the Company's future cash flows. It may also refinance
portions of the indebtedness in the future. Although the Company cannot be
certain whether or when any of the conditions to the transaction will be
satisfied or that the Company will complete the transaction, the Company
anticipates completing the transaction in the first quarter of 2000.
Year 2000
The Company has undertaken 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, as well as to seek to ensure that key third
parties are Year 2000 compliant by the end of 1999. 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 remediation of certain existing software and
conversion to new software for certain other applications. The Plan is
effectively completed and the Company believes that the remaining software
upgrades and conversions will be completed by the end of 1999. Testing and
certification of the Company's computer systems and their applications have been
substantially completed. In addition, the Company developed contingency plans
for both software that was selected for remediation and for those applications
that were to be replaced. The project team 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 manner.
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.
13
<PAGE> 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
As of September 30, 1999, the Company had incurred approximately $23 million for
Year 2000 efforts of which approximately $19 million (related to the
implementation of new Year 2000 compliant systems) has been capitalized. Future
costs are estimated to be up to $2 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.
Under the Plan, the Year 2000 is not expected to pose significant operational
problems. While the Company believes it will be able to resolve the remaining
Year 2000 issues 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.
Euro
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
the euro. The incremental costs associated with these subsequent phases is not
expected to be significant. In response to the euro conversion, the Company may
make certain price adjustments to ensure pricing consistency within the European
market.
Inflation and Currencies
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 currencies remained
stable or strengthened against the U.S. Dollar while most European and South
American currencies decreased in value against the U.S. Dollar.
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
nine months of 1999 other than described below under "Foreign Exchange Risk".
14
<PAGE> 16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FOREIGN EXCHANGE RISK
The following table provides information about the details of the Company's
option contracts at September 30, 1999.
<TABLE>
<CAPTION>
U.S. Dollar
Equivalent Average Strike Original Fair Maturity
Foreign Currency Coverage Price Value Value Date
- ----------------- ----------- -------------- -------- ------ ----------
<S> <C> <C> <C> <C> <C>
Japanese Yen 6,000,000 120 332,400 0 10/29/1999
Japanese Yen 6,000,000 120 319,800 1,527 11/30/1999
Japanese Yen 6,000,000 120 324,000 5,542 12/30/1999
Japanese Yen 3,000,000 118 91,740 7,939 01/31/2000
Japanese Yen 3,000,000 118 94,590 11,482 02/29/2000
Japanese Yen 3,000,000 118 96,780 14,580 03/31/2000
---------- --------- ------
27,000,000 1,259,310 41,070
========== ========= ======
</TABLE>
The table below describes the forward contracts that were outstanding at
September 30, 1999.
<TABLE>
<CAPTION>
Forward
Contract Position in Maturity Contract Fair
Foreign Currency Date US Dollars Date Rate Value
- --------------------------------------- -------- ----------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
Buy USD/Sell Argentina Peso 05/24/99 100,000 10/27/99 1.0360 96,510
Buy USD/Sell Argentina Peso 05/24/99 100,000 11/29/99 1.0450 96,172
Buy USD/Sell Argentina Peso 05/24/99 100,000 12/27/99 1.0490 96,259
Buy USD/Sell Thailand Baht 03/11/99 200,000 11/17/99 38.7300 210,906
Buy USD/Sell Thailand Baht 03/11/99 200,000 12/17/99 38.8700 210,387
Buy British Pound/Sell Norwegian Kroner 04/19/99 819,895 04/14/00 12.4341 800,002
Buy British Pound/Sell Finnish Marka 04/19/99 818,958 04/14/00 8.8343 799,642
Buy British Pound/Sell Swedish Kroner 06/25/99 740,954 04/14/00 13.3150 739,904
Buy British Pound/Sell Norwegian Kroner 06/25/99 501,070 04/14/00 12.4700 490,324
Buy British Pound/Sell Danish Kroner 06/25/99 4,369,463 04/14/00 11.3020 434,927
Buy USD/Sell Turkish Lire 09/13/99 147,003 03/13/00 613050 143,014
Buy USD/Sell Turkish Lire 09/13/99 3,000,000 09/14/00 824000 2,919,618
</TABLE>
15
<PAGE> 17
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 and Form 10-K for the fiscal
year ended December 31, 1998.
16
<PAGE> 18
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On September 14, 1999, three putative class action lawsuits, one
entitled Patricia Lisa and Harbor Finance partners v. Mark Hughes, et.
al., Case No. BC 216711, one entitled Kevin Coyle v. Mark Hughes, et.
al., Case No. BC 216759 and one entitled Stuart H. Savett v. Herbalife
International, Inc., et. al., Case No. BC 216761, were filed in the
Superior Court of the State of California, County of Los Angeles,
challenging the fairness of the tender offer and merger transactions
described below under "Item 2 -- Liquidity and Capital Resources -
Agreement and Plan of Merger." Five similar lawsuits were later filed in
the same court, one on September 15, 1999, entitled Kenneth Schweitzer
v. Herbalife International, Inc. et. al., Case No. BC 216823, two others
on September 16, 1999, entitled Frances Longstreth v. Herbalife
International, Inc. et. al., Case No. BC 216911 and Rae Ellen Plattus
vs. Christopher Pair, et. al., Case No. BC 16904, one on September 17,
1999, entitled Lee Brenin vs. Mark Hughes, et al., Case No. BC 216932,
and one entitled Michael Vaupel vs. Mark Hughes, et al., Case No. BC
217257. In addition, four similar lawsuits were filed in the District
Court, Clark County, Nevada, one on September 14, 1999, entitled Colleen
M. Tharp vs. Herbalife International, Inc., et al., Case No. A408158II,
one on September 15, 1999, entitled Francis Mcfarlain, IRA vs. Herbalife
International, Inc., et. al., Case No. A4081591, and two on September
22, 1999, one entitled Kevin Coyle vs. Mark Hughes, et al., Case No.
A408466 and another entitled Charles Fruscione and Jerome Glowacki vs.
Herbalife International, Inc., et. al., Case No. A408478. These lawsuits
are referred to collectively herein as the "Lawsuits".
The Lawsuits challenge the fairness of the proposed transaction to the
Company's public stockholders, alleging, among other things, that the
price to be paid in the tender offer and the merger does not reflect the
value of the Company's assets, and that the tender offer and the merger
are unfair because they will deprive the public stockholders of the
ability to share proportionately in the Company's future growth in
profits and earnings. The Lawsuits also allege that the Special
Committee formed to evaluate the transactions was not independent, and
that the Company's directors breached their fiduciary duties to the
public stockholders in approving the proposed transactions. The
plaintiffs have requested an injunction prohibiting the defendants from
proceeding with the proposed transactions, unspecified damages, costs
and attorneys' fees, and other relief.
The Company and Mr. Hughes believe that the Lawsuits are without merit
and plan to vigorously defend them and any other actions that may be
brought in connection with the proposed transactions. There can be no
assurances, however, with regard to the outcome of any such suits or to
the impact that an adverse result would have on the Company and the
ability of the purchaser in the tender offer to consummate the tender
offer, the merger and the related transactions.
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.
17
<PAGE> 19
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)
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.
</TABLE>
18
<PAGE> 20
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE NO./(FOOTNOTE)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
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
10.26 Agreement and Plan of Merger, dated September 13, 1999, among MH
Millennium Holdings LLC, MH Millennium Acquisition Corp., Mark Hughes, The
Mark Hughes Family Trust and Herbalife International, Inc. (16)
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.
(16) Incorporated by reference to Annex A of the Offer to Purchase dated
September 17, 1999 contained in Schedule 14D-1 filed by MH Millennium
Holdings LLC, MH Millennium Acquisition Corp., The Mark Hughes Family
Trust and Mark Hughes on September 17, 1999.
19
<PAGE> 21
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: November 12, 1999
HERBALIFE INTERNATIONAL, INC.
(Registrant)
By: /s/ TIMOTHY GERRITY
-------------------------
Timothy Gerrity
Executive Vice President and
Chief Financial Officer
20
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