<PAGE> 1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
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 May 2, 2000 was:
Shares of Class A Common Stock 10,002,943
Shares of Class B Common Stock 18,650,801
================================================================================
<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, 2000
<TABLE>
<CAPTION>
Page No.
--------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
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 16
Item 2. Changes in Securities and Use of Proceeds 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 17 - 18
Signature 19
</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,
2000 1999
------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 98,298,000 $138,280,000
Marketable securities 1,110,000 1,163,000
Receivables, including related party receivables of
$4,521,000 (2000) and $4,637,000 (1999) 32,011,000 30,326,000
Inventories 119,692,000 101,557,000
Prepaid expenses and other current assets 24,126,000 12,396,000
Deferred income taxes 10,203,000 20,368,000
------------ ------------
Total current assets 285,440,000 304,090,000
Property, at cost, net of accumulated depreciation and
amortization of $57,601,000 (2000) and $54,614,000 (1999) 57,800,000 55,673,000
Deferred compensation plan assets 30,507,000 27,929,000
Other assets 6,918,000 12,734,000
Deferred income taxes 12,145,000 12,279,000
Goodwill, net of accumulated amortization of
$1,816,000 (2000) and $1,773,000 (1999) 3,071,000 3,114,000
------------ ------------
TOTAL $395,881,000 $415,819,000
============ ============
</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,
2000 1999
------------- -------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 13,847,000 $ 22,009,000
Royalty overrides 60,136,000 64,268,000
Accrued compensation 17,768,000 27,773,000
Accrued expenses 32,622,000 31,338,000
Dividends payable 4,298,000 4,299,000
Current portion of contracts payable and bank loans 4,912,000 6,151,000
Advance sales deposits 14,347,000 8,753,000
Income taxes payable - 6,362,000
------------- -------------
Total current liabilities 147,930,000 170,953,000
NON-CURRENT LIABILITIES:
Contracts payable, net of current portion 1,832,000 2,229,000
Deferred compensation liability 29,515,000 27,194,000
Other non-current liabilities 5,299,000 5,223,000
------------- -------------
Total liabilities 184,576,000 205,599,000
------------- -------------
MINORITY INTEREST 3,839,000 3,618,000
------------- -------------
STOCKHOLDERS' EQUITY:
Common stock A, $0.01 par value; 33,333,333 shares
authorized, 10,002,731 (2000) and 10,002,568 (1999) shares
issued and outstanding 100,000 100,000
Common stock B, $0.01 par value; 66,666,667 shares
authorized, 18,650,524 (2000) and 18,650,198 (1999) shares
issued and outstanding 187,000 187,000
Paid-in-capital in excess of par value 55,394,000 55,390,000
Retained earnings 152,343,000 150,712,000
Accumulated other comprehensive income (558,000) 213,000
------------- -------------
Total stockholders' equity 207,466,000 206,602,000
------------- -------------
TOTAL $ 395,881,000 $ 415,819,000
============= =============
</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,
2000 1999
------------ ------------
<S> <C> <C>
Retail sales $458,423,000 $428,799,000
Less: Distributor allowances on product purchases 214,467,000 202,360,000
------------ ------------
Net sales 243,956,000 226,439,000
Cost of sales 62,896,000 58,491,000
Royalty overrides 69,722,000 66,770,000
Marketing, distribution & administrative expenses 92,254,000 82,133,000
Buy-out transaction expenses 9,498,000 --
Interest income - net 663,000 404,000
------------ ------------
Income before income taxes and minority interest 10,249,000 19,449,000
Income taxes 4,099,000 7,488,000
------------ ------------
Income before minority interest 6,150,000 11,961,000
Minority interest 221,000 249,000
------------ ------------
NET INCOME $ 5,929,000 $ 11,712,000
============ ============
EARNINGS PER SHARE:
Basic $ 0.21 $ 0.41
Diluted $ 0.19 $ 0.38
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 28,653,000 28,585,000
Dilutive effect of stock options 2,588,000 2,000,000
------------ ------------
Diluted 31,241,000 30,585,000
============ ============
</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, 2000 March 31, 1999
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 5,929,000 $ 11,712,000
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation and amortization 3,754,000 4,065,000
Deferred income taxes 10,299,000 1,834,000
Unrealized foreign exchange loss 493,000 487,000
Minority interest in earnings 221,000 249,000
Other 88,000 (24,000)
Changes in operating assets and liabilities:
Receivables (2,073,000) 12,147,000
Inventories (18,528,000) 5,515,000
Prepaid expenses and other current assets (12,696,000) 545,000
Other assets 5,759,000 283,000
Accounts payable (7,904,000) (223,000)
Royalty overrides (3,255,000) 5,940,000
Accrued expenses and accrued compensation (7,353,000) 2,688,000
Advance sales deposits 5,722,000 4,252,000
Income taxes payable (6,511,000) (15,048,000)
Deferred compensation liability 2,321,000 1,816,000
------------- -------------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (23,734,000) 36,238,000
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property (6,057,000) (4,676,000)
Proceeds from sale of property 5,000 35,000
Changes in marketable securities 74,000 (2,285,000)
Deferred compensation plan (2,578,000) (4,415,000)
------------- -------------
NET CASH USED IN INVESTING ACTIVITIES (8,556,000) (11,341,000)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid (4,298,000) (4,296,000)
Additions to bank loans 560,000 484,000
Principal payments on bank loans and contract payables (2,176,000) (369,000)
Exercise of stock options 4,000 32,000
------------- -------------
NET CASH USED IN FINANCING ACTIVITIES (5,910,000) (4,149,000)
------------- -------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (1,782,000) (3,944,000)
------------- -------------
NET CHANGE IN CASH AND CASH EQUIVALENTS (39,982,000) 16,804,000
CASH AND CASH EQUIVALENTS AT JANUARY 1 138,280,000 100,721,000
------------- -------------
CASH AND CASH EQUIVALENTS AT MARCH 31 $ 98,298,000 $ 117,525,000
============= =============
</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, 2000 and for the three
month periods ended March 31, 2000 and 1999.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement as amended, establishes
requirements for the recording and reporting of derivative financial
instruments, including hedging transactions. The Company will adopt the
statement on January 1, 2001 and is still in the process of evaluating the
impact, if any, that will result from its implementation.
RECLASSIFICATIONS
Certain reclassifications were made to the prior year financial 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 Mark Hughes, the Company's
Chairman, President and CEO/Principal Shareholder. On September 17, 1999, an
entity controlled by Mr. Hughes commenced a tender offer for those shares. On
April 10, 2000, the Company announced that Mr. Hughes had determined to
terminate the tender offer. Shortly thereafter, the Board of Directors of the
Company formally terminated the agreement and plan of merger governing the
proposed transaction. These transactions are referred to collectively as the
"Transactions." Mr. Hughes reported that, after discussions with his advisors,
he had concluded that difficult conditions in the credit markets, in particular
the high yield financing market, had made it impracticable to obtain financing
for the proposed Transactions on reasonably acceptable terms. Costs of
$11,498,000 were incurred in connection with the proposed Transactions of which
Mr. Hughes is obligated for $2.0 million. The remaining amount of $9,498,000 was
expensed during the period ended March 31, 2000.
4. CONTINGENCIES
The Company is from time to time engaged in routine litigation. The Company
regularly reviews all pending litigation matters in which it is involved and
establish reserves deemed appropriate by management for these litigation
matters.
On December 16, 1998, Moshe and Dirot Miron, two of the Company's Israeli
distributors, filed a lawsuit in the United States District Court for the
Northern District of California, in which the Company was named defendant (the
"Miron Suit"). The case appeared to be primarily a claim for breach of contract.
In addition, the plaintiffs in the Miron Suit initially appeared to attempt to
challenge the legality of the Company's marketing system. Subsequently, the
court dismissed this purported challenge. Further, in November 1999, the court
dismissed the case in its entirety without leave to amend. The plaintiffs have
appealed the dismissal to the United States Court of Appeals for the Ninth
Circuit. The Company believes that it has meritorious defenses to the
allegations that appear to be asserted against the Company.
Some of the Company's subsidiaries have been subject to tax audits by
governmental authorities in their respective countries, some of which
governmental authorities are proposing that additional income taxes, value added
taxes, withholding taxes and related interest and penalties are due. The Company
and its tax advisors believe that there are substantial defenses to their
allegations that additional taxes are owing, and the Company is vigorously
contesting the additional proposed taxes and related charges. However, these
matters may take several years to resolve, and the Company cannot be sure of
their ultimate resolution.
6
<PAGE> 8
HERBALIFE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On September 14, 1999, three putative class action lawsuits were filed in the
Superior Court of the State of California, County of Los Angeles. Five similar
lawsuits subsequently were filed in the same court. In addition, four similar
lawsuits were filed in the District Court, Clark County, Nevada. These lawsuits
are referred to collectively as the "Lawsuits."
The Lawsuits challenged the fairness to the public stockholders of the
Transactions proposed by Mark Hughes, the Company's Chairman, President and
CEO/Principal Stockholder. The Lawsuits contained allegations that, among other
things, (1) the price to be paid in the tender offer and the merger did not
reflect the value of the Company's assets, and (2) the tender offer and the
merger were unfair because they would deprive the public stockholders of the
ability to share proportionately in the Company's future growth in profits and
earnings. The Lawsuits also contained allegations that the Special Committee of
the Board of Directors formed to evaluate the Transactions was not independent,
and that the directors breached their fiduciary duties to the Company's public
stockholders in approving the Transactions. The plaintiffs requested (1) an
injunction prohibiting the defendants from proceeding with the Transactions, (2)
unspecified damages, (3) costs and attorneys' fees, and (4) other relief.
In January 2000, the defendants in the Lawsuits reached an agreement with the
representative plaintiffs' counsel to settle the Lawsuits. Under the terms of
the settlement agreement, among other things, (1) a payment (the "Supplemental
Payment") was required to be made to the settlement class members (which
included, generally, the public stockholders and the holders of the DECS
securities issued by DECS Trust III) in an amount equal to $0.81 per share or
DECS security, and (2) the Company was required to pay the plaintiffs' legal
fees. The Company and the representative plaintiffs' counsel obtained final
court approval of the settlement agreement on February 9, 2000, and the judgment
dismissing the Lawsuits subsequently became final. However, because the
Transactions challenged in the Lawsuits were not completed (meaning, among other
things, that the Supplemental Payment to class members and the payment of the
plaintiffs' legal fees were not made), the release of claims in favor of the
defendants did not become effective. Consequently, it is possible that the
plaintiffs in the original Lawsuits, or new plaintiffs, could file new lawsuits
relating to the proposed Transactions.
5. COMPREHENSIVE INCOME
Comprehensive income is summarized as follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------------
2000 1999
------------ ------------
<S> <C> <C>
Net Income $ 5,929,000 $ 11,712,000
Foreign currency translation adjustment (792,000) (3,617,000)
Unrealized gain/(loss) on marketable securities 21,000 (1,000)
------------ ------------
Comprehensive income $ 5,158,000 $ 8,094,000
============ ============
</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 (46 countries as of March 31,
2000) and is organized and managed by geographic areas. Transactions between
geographic segments generally represent export sales from the United States to
foreign operations. 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
FINANCIAL INFORMATION BY GEOGRAPHIC SEGMENT
<TABLE>
<CAPTION>
Three months ended
March 31,
-------------------------------
2000 1999
------------ ------------
(DOLLARS IN MILLIONS)
<S> <C> <C>
TOTAL RETAIL SALES:
United States ....................................... $ 194.2 $ 194.6
Japan ............................................... 108.3 145.1
South Korea ......................................... 31.0 19.2
Russia .............................................. 8.0 11.2
All other ........................................... 188.9 159.4
Elimination of intersegment sales(1) ................ (72.0) (100.7)
------------ ------------
TOTAL RETAIL SALES ............................... 458.4 428.8
------------ ------------
DISTRIBUTOR ALLOWANCES:
United States ....................................... 72.1 73.9
Japan ............................................... 52.3 70.8
South Korea ......................................... 12.4 7.8
Russia .............................................. 3.7 5.2
All others .......................................... 88.6 74.4
Elimination of intersegment allowance (U.S.) ........ (14.6) (29.7)
------------ ------------
TOTAL DISTRIBUTOR ALLOWANCES ..................... 214.5 202.4
------------ ------------
NET SALES ............................................. $ 243.9 $ 226.4
============ ============
OPERATING INCOME:
United States ....................................... $ 42.6 $ 53.6
Japan ............................................... 14.5 21.8
South Korea ......................................... 7.3 3.9
Russia .............................................. (2.0) (3.8)
All others .......................................... 5.5 9.5
Corporate expenses .................................. (26.7) (20.2)
Net interest income ................................. 0.7 0.4
Elimination of intersegment gross profit ............ (31.7) (45.8)
------------ ------------
TOTAL ............................................ 10.2 19.4
------------ ------------
Income taxes ........................................ (4.1) (7.5)
Minority interest ................................... (0.2) (0.2)
------------ ------------
NET INCOME ............................................ $ 5.9 $ 11.7
============ ============
NOTES:
(1) Includes intersegment sales of:
United States ................................ $ 71.4 $ 99.7
All others ................................... 0.6 1.0
------------ ------------
Total ............................................ 72.0 100.7
============ ============
SALES BY PRODUCT LINE
Food & Dietary Supplements ................... $ 207.9 $ 197.2
Weight Management ............................ 190.1 168.8
Personal Care Products ....................... 49.0 51.8
Literature, promotional and other ............ 11.4 11.0
------------ ------------
Total Retail Sales ........................ $ 458.4 $ 428.8
============ ============
</TABLE>
8
<PAGE> 10
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 its 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 that limit or otherwise restrict the allowances. The Company
receives its net sales price in cash or through credit card payments upon
receipt of orders from distributors. The Company utilizes importers in a limited
number of markets and, under some circumstances, the Company extends credit
terms. The Company's "gross profit" consists of net sales less (1) "cost of
sales," consisting of the prices the Company pays to its manufacturers for
products and costs related to product shipments, duties and tariffs and similar
expenses, and (2) "royalty overrides," currently consisting of (A) royalty
overrides and bonuses, which total approximately 15% and 7%, respectively, of
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 some 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. Consequently, the total
distributor discount percentage may vary over time. The Company also offers
reduced distributor allowance and pays reduced royalty overrides with respect to
certain products worldwide. Royalty overrides, as reported in the Company's
consolidated financial statements and selected financial data appearing
elsewhere in this Report, are net of a shipping and handling fee (6% of retail
sales until January 31, 1999 and 7% after February 1, 1999) that the Company
charges 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 its accounting systems,
internal controls and operations, including the basis upon which distributor
bonuses are paid. The retail sales price of the Company's products is reflected
in distributor invoices as the price charged to distributors together with, in
most cases, a deduction for the corresponding distributor allowance. The retail
sales price is used by the Company to calculate, among other things, royalty
overrides and "volume points" earned by distributors. Volume points are point
values assigned to each of the Company's products that are equal in all
countries and are used as a supervisor qualification criteria. In addition, the
Company relies upon "retail sales" data reflected in daily sales reports to
monitor results of operations in each of its 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 "net sales" to "retail 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 "net sales" to "retail sales" varies from period to period, these 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 and increased sales on which the Company offers reduced distributor
allowances and pay reduced royalty overrides.
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 2000 TO 1999
Retail sales for the three months ended March 31, 2000 increased 6.9% to $458.4
million as compared to sales of $428.8 million in the same period of 1999.
9
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RETAIL SALES BY GEOGRAPHICAL SEGMENTS (DOLLARS IN MILLIONS):
<TABLE>
<CAPTION>
Three Months Ended March 31,
--------------------------------------------------------------------
% % Change in
2000 1999 Change Local Currency
------------ ------------ ------------ --------------
<S> <C> <C> <C> <C>
Asia/Pacific Rim $ 185.6 $ 193.4 (4.0%) (11.7%)
Europe 112.7 114.3 (1.4%) 9.1%
The Americas 160.1 121.1 32.2% 31.5%
------------ ------------ ------------ ------------
Total Retail Sales $ 458.4 $ 428.8 6.9% 5.9%
============ ============ ============ ============
</TABLE>
Retail sales in Asia/Pacific Rim decreased $7.8 million or 4.0% for the three
months ended March 31, 2000 as compared to the same period in 1999. In local
currency, retail sales for Asia/Pacific Rim decreased by 11.7%. The decrease in
the region's retail sales was primarily due to retail sales decreases in Japan
of $36.8 million or 25.4%. In local currency, Japan's retail sales decreased
31.5% primarily due to weaker consumer demand. Partially offsetting the
decreases were retail sales growth in South Korea, Taiwan and Hong Kong of $11.9
million, $3.8 million and $1.4 million, respectively, and the favorable effect
of currency translation for the region.
Retail sales in Europe decreased $1.6 million, or 1.4% for the three months
ended March 31, 2000 as compared to the same period in 1999. In local currency,
retail sales for Europe increased 9.1% recognizing a general strengthening of
the U.S. dollar against most European currencies. The decrease in the region's
retail sales was primarily due to decreases in Czech Republic, Russia and
Switzerland of $2.4 million, $3.2 million and $2.6 million respectively.
Partially offsetting the decreases were increases in Germany and Italy of $3.3
million and $1.9 million, respectively.
Retail sales in the Americas increased $39.0 million, or 32.2% for the three
months ended March 31, 2000 as compared to the same period in 1999. In local
currency, retail sales for the Americas increased 31.5%. The region's sales
growth was primarily due to retail sales increases in the United States, Mexico
and Brazil of $27.8 million, $7.4 million and $3.4 million, respectively. In the
United States, the increase was primarily due to the continued growth and the
introduction of the high protein low-carbohydrate program in late 1999.
RETAIL SALES BY PRODUCT SEGMENTS (DOLLARS IN MILLIONS):
<TABLE>
<CAPTION>
Three Months Ended March 31,
------------------------------------------------
%
2000 1999 Change
------------ ------------ ------------
<S> <C> <C> <C>
Food & Dietary Supplements $ 207.9 $ 197.2 5.4%
Weight Management 190.1 168.8 12.6%
Personal Care 49.0 51.8 (5.4%)
Literature/ Promotional/ Other 11.4 11.0 3.6%
------------ ------------ ------------
Total Retail Sales $ 458.4 $ 428.8 6.9%
============ ============ ============
</TABLE>
For the three months ended March 31, 2000, retail sales of weight management
products increased 12.6%, and retail sales of food and dietary supplements
increased 5.4%, as compared to the same period in 1999. The increases in the two
product lines were primarily due to (1) the same factors identified in the
geographical segments previously discussed and (2) the introduction of new
weight management products, which contributed to relatively stronger growth for
the weight management product line. The personal care product line decreased
5.4% in the first quarter of 2000 as compared to the same period of 1999. The
decrease in personal care sales was primarily due to the introduction of color
cosmetic products in Europe during the first quarter of 1999, which resulted in
a higher than average sales volume during the initial period. Prior year numbers
for retail sales by product line have been reclassified to conform with current
year presentation.
10
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OPERATING INFORMATION:
Gross profit of $111.3 million for the three months ended March 31, 2000 was
$10.1 million, or 10.0%, higher than gross profit of $101.2 million in the same
period of 1999. As a percentage of retail sales, gross profit for the three
months ended March 31, 2000 as compared to the same period in the year 1999
increased from 23.6% to 24.3%. The increase in gross profit as a percentage of
retail sales primarily resulted from: (1) the effect of a lower distributor
payout ratio; and (2) a special distributor incentive paid in the first quarter
of 1999, which was not repeated in the first quarter of 2000.
Marketing, distribution and administrative expenses, as a percentage of retail
sales, were 20.1% for the three months ended March 31, 2000 as compared to 19.2%
in the same period in 1999. These expenses for the same periods increased 12.4%
to $92.3 million from $82.1 million in the same period in 1999. The increase
resulted from: (1) higher in-country distribution expenses primarily due to
facility and staff expansions related to increased sales volumes and expenses
associated with the opening of India; and (2) higher marketing costs resulting
from increased sales event activities in 2000.
In the first quarter of 2000, the Company recorded a non-recurring charge of
$9.5 million relating to fees and expenses in connection with the termination of
a previously proposed buy-out transaction. Excluding the non-recurring charge,
net income for the first quarter would have been $11.6 million or $0.37 per
diluted share, equal to an increase of $0.18 per diluted share higher than
actual net income per diluted share reported.
In the first quarter of 2000, most European currencies weakened against the U.S.
dollar, while most Asian currencies remained stable or strengthened against the
U.S. dollar. There was no significant changes with the Americas currencies
against the U.S. dollar. In particular, 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, 2000 was approximately $0.04 as
compared to the exchange rates in effect for the same period of 1999. 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 had an adverse effect of approximately $0.02 per diluted share
as compared to the exchange rates in effect for the same period in the prior
year.
Income taxes of $4.1 million for the three months ended March 31, 2000 decreased
from $7.5 million in the same period of 1999. As a percentage of pre-tax income,
the estimated annual effective income tax rate increased to 40.0% from 38.5% due
to a change in the mix of foreign and domestic income.
Net income for the three months ended March 31, 2000 decreased 49.4% to $5.9
million as compared to the same period in 1999.
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, 2000, net
cash used in operating activities was $23.7 million, compared to net cash
provided by operating activities of $36.2 million for the same period in 1999.
The primary uses of cash resulted from increases in inventory and income tax
installments.
Capital expenditures for the three months ended March 31, 2000 were $6.1 million
compared to $4.7 million for the same period in 1999. The majority of the 2000
expenditures resulted from continued investment in management information
systems. The Company is planning additional capital expenditures of
approximately $15 million during the current year for the further development of
management information systems and expansion of new and existing facilities. In
connection with its entry in each new market, the Company funds inventory
requirements and typically establishes either a full-service distribution center
or 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 expenditure and other operating cash flow needs
associated with its 2000 new market expansion activities.
11
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Stockholders' equity increased $0.9 million to $207.5 million during the three
months ended March 31, 2000. For the first quarter of 2000, net income of $5.9
million was offset by dividends declared of $4.3 million and a translation loss
of $0.8 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 $99.4 million at
March 31, 2000 compared to $139.4 million at December 31, 1999.
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 from its suppliers generally are made in U.S. dollars, while
sales to its distributors generally are 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. From time to time, the Company enters into forward exchange
contracts and other hedging arrangements to manage foreign exchange risk on
intercompany transactions.
For a number of years, a substantial majority of the Company's weight management
products and food and dietary supplements have been manufactured and sold to the
Company by subsidiaries of Global Health Sciences, Inc. ("Global"). In September
1997, the Company entered into new three-year supply agreements with those
subsidiaries that became effective in January 1998. Recently, in its Form 10-K
for its 1999 fiscal year and Form 10-Q for its 2000 fiscal year first quarter,
Global disclosed that it had failed to meet the minimum EBITDA requirement under
its senior bank credit facility, resulting in the failure to meet other
financial covenant ratios as well. Global reported that it is actively engaged
in discussions with other lenders to replace or refinance the existing line, and
that it is also considering raising additional capital to cure the deficiency
under the existing line. Global warned, however, that there can be no assurance
that it will obtain a replacement facility or that any replacement facility
would provide it with significant additional liquidity. Global also indicated
that its senior bank lenders have informed Global that they intend to forbear
from declaring a default, on a day-to-day basis, but that their continued
forbearance is contingent upon Global's success in raising additional capital or
obtaining a replacement credit facility. While the Company has no current
expectation that it will suffer any disruption in supply from the Global
companies, and while the Company has identified alternative sources of supply
for many of the products purchased from the Global companies, any disruption in
supply from the Global companies, from whatever cause, could have a material
adverse effect on the ability of the Company to obtain product supplies in a
timely manner and, ultimately, on the Company's results of operations.
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 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 existing
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 initially
offered both the existing currencies and the euro to settle distributor sales,
and it ultimately will offer to process orders in the euro currency. To prepare
for this transition, some computer systems will require modifications or
replacement. The Company is still evaluating subsequent phases to the euro
conversion, which may include system modifications to allow the payment of
distributor royalty overrides in the euro currency. The Company does not expect
that the incremental costs associated with these subsequent phases will be
significant. In response to the euro conversion, the Company may make some price
adjustments to ensure pricing consistency with the European market.
As of March 31, 2000, the Company had $32 million of credit facilities,
including a $25 million unsecured committed line of credit, supporting letters
of credit in addition to providing borrowings in the aggregate amount of $7.5
million.
12
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Company believes that it will be able to finance its working capital and
capital expenditure requirements for the foreseeable future with internally
generated funds. The Company expects in the future to periodically utilize
additional financing for working capital or other purposes.
For a discussion of certain contingencies that may impact liquidity and capital
resources, see "Note 4, 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. A discussion of the Company's primary
market risk exposures and derivatives is presented below.
FOREIGN EXCHANGE RISK
The Company enters into foreign exchange derivatives in the ordinary course of
business primarily to reduce exposure to currency fluctuations attributable to
intercompany transactions and translation of local currency revenue. Most of
these foreign exchange contracts are designated for forecasted transactions. The
use of these derivative instruments allows the Company to reduce overall
exposure to exchange rate movements, because the gains and losses on these
contracts substantially offset losses and gains on the assets, liabilities, and
forecasted transactions being hedged.
Foreign exchange forward contracts are occasionally used to hedge non-functional
currency advances between subsidiaries and bank loans. The objective of these
contracts is to reduce the impact of foreign currency movements on the
subsidiary's operating results. The fair value of forward contracts are based on
dealer quotes.
The table below describes the forward contracts that were outstanding at March
31, 2000.
<TABLE>
<CAPTION>
Contract Forward Position Maturity Contract Fair
Foreign Currency Date in U.S. Dollars Date Rate Value
- ------------------- -------- ---------------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
Buy Euro / Sell USD 02/23/00 7,000,000 08/25/00 0.98338 7,372,000
Buy USD / Sell TRL 09/14/99 3,000,000 09/14/00 824,000 2,216,000
Buy GBP / Sell NOR 04/19/99 791,000 04/14/00 12.4833 850,000
Buy GBP / Sell FIN 04/19/99 802,000 04/14/00 8.7451 896,000
Buy GBP / Sell SEK 06/25/99 729,000 04/14/00 13.1085 765,000
Buy GBP / Sell NOR 06/25/99 485,000 04/14/00 12.4730 522,000
Buy GBP / Sell DKK 06/25/99 430,000 04/14/00 11.1090 475,000
</TABLE>
The Company periodically utilizes bank debt at certain foreign subsidiaries to
reduce the impact of foreign currency movements on the subsidiary's operating
results. At March 31, 2000 the Company's foreign subsidiaries had $3.5 million
of outstanding bank debt.
All foreign subsidiaries, excluding those operating in hyper-inflationary
environments, designate their local currencies as their functional currency. At
March 31, 2000, the total amount of foreign subsidiary cash held primarily in
Japan and Korea was $69.9 million of which $1.7 million was maintained or
invested in U.S. dollars. Subsequent to March 31, 2000, the Company received
dividends amounting to $17.0 million from its Japanese subsidiary.
13
<PAGE> 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTEREST RATE RISK
The Company currently maintains an investment portfolio of high-quality
marketable securities. According to the Company's investment policy, the Company
may invest in taxable and tax exempt instruments including asset-backed
securities. In addition, the policy establishes limits on credit quality,
maturity, issuer and type of instrument. All securities are classified as
available for sale and recorded in the balance sheet at fair value with
fluctuations in fair value reported as a component of accumulated other
comprehensive income in stockholders equity. The Company does not use derivative
instruments to hedge its investment portfolio.
All highly liquid investments with a maturity of three months or less at the
date of purchase are considered to be cash equivalents. The remaining
investments are considered short-term if maturities range between three and
twelve months or long term if maturities range between thirteen and sixty
months. The fair value of cash equivalents and investments are based on dealer
quotes.
The following table lists the Company's cash equivalents and short-term
investments at March 31, 2000:
<TABLE>
<CAPTION>
FAIR
2000 2001 2002 2003 2004 THEREAFTER TOTAL VALUE
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Cash equivalents ....... $19,771,000 $ -- $ -- $ -- $ -- $ -- $19,771,000 $19,771,000
Average interest rate. 3.58%
Short term investments . 153,000 -- -- -- -- -- 153,000 157,000
Average interest rate. 3.45%
Long term investments .. -- 281,000 186,000 93,000 187,000 187,000 934,000 953,000
Average interest rate -- 4.43% 4.69% 5.17% 3.54% 3.54%
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total .......... $19,924,000 $ 281,000 $ 186,000 $ 93,000 $ 187,000 $ 187,000 $20,858,000 $20,881,000
=========== =========== =========== =========== =========== =========== =========== ===========
</TABLE>
14
<PAGE> 16
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.
15
<PAGE> 17
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, 1999 and in footnote
four 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.
16
<PAGE> 18
HERBALIFE INTERNATIONAL, INC.
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE NO./(FOOTNOTE)
------ ----------- -------------------
<S> <C> <C>
3.1 Amended and Restated Articles of Incorporation (10)
3.2 Amended and Restated Bylaws (2)
4.1 Form of Class A Common Stock and Class B Common Stock Certificates (12)
10.1 Final Judgment and Permanent Injunction, entered into on October, 1986 by
the parties to that action entitled People of the State of California, et
al., v Herbalife International, Inc. et al., Case No. 92767 in the
Superior Court of the State of California for the County of Santa Cruz (1)
10.2 The Company's 1991 Stock Option Plan, as amended (7), (14)
10.3 The Company's 1992 Executive Incentive Compensation Plan, as amended (2), (7)
10.4 Form of Individual Participation Agreement relating to the Company's
Executive Compensation Plan (2)
10.5 Form of Letter Agreement between the Compensation Committee of the Board
of Directors of the Company and Mark Hughes (2)
10.6 Form of Indemnity Agreement between the Company and certain officers and
directors of the Company (2)
10.7 Trust Agreement among the Company, Citicorp Trust, N.A. and certain
officers and directors of the Company (2)
10.8 Form of Stock Appreciation Rights Agreement between the Company and
certain directors of the Company (2)
10.9 1994 Performance Based Annual Incentive Compensation Plan, as amended and
restated in 1996 (4), (7), (11)
10.10 Form of Promissory Note for Advances under the Company's 1994 Performance
Based Annual Incentive Compensation Plan (5)
10.11 Employment Agreement between the Company and Chris Pair dated April 3, 1994 (3)
10.12 The Company's Executive Officer Deferred Compensation Plan, amending and
relating the Deferred Compensation Agreement between the Company and
Michael Rosen (5)
10.13 Office lease agreement between the Company and State Teacher's Retirement
System, dated July 20, 1995 (6)
10.14 Form of stock appreciation rights agreements between the Company and
certain directors of the Company (6)
10.15 The Company's Senior Executive Deferred Compensation Plan, effective
January 1, 1996, as amended (6)
10.16 The Company's Management Deferred Compensation Plan, effective January 1,
1996, as amended (6)
10.17 Master Trust Agreement between the company and Imperial Trust Company,
Inc., effective January 1, 1996 (6)
10.18 The Company's 401K Plan, as amended (6)
10.19 Agreement Concerning Share Allocation Plan for Specific Directors of
Herbalife of Japan K.K. dated December 30, 1996. (8)
10.20 Consulting Agreement between David Addis and Herbalife of America, Inc.
dated January 27, 1997. (8)
</TABLE>
17
<PAGE> 19
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE NO./(FOOTNOTE)
------ ----------- -------------------
<S> <C> <C>
10.21 Agreement between Herbalife International of America, Inc. and D&F
Industries, Inc. dated September 2, 1997 (9)
10.22 Agreement between Herbalife International of America, Inc. and Dynamic
Products, Inc. dated September 2, 1997 (9)
10.23 Agreement between Herbalife International of America, Inc. and Raven
Industries, Inc. d/b/a Omni-Pak Industries, dated September 2, 1997 (9)
10.24 The Company's Supplemental Executive Retirement Plan (12)
10.25 Credit Agreement between Herbalife International of America, Inc. and
First National Bank of Chicago, dated December 14, 1998 (13)
10.26 Agreement and Plan of Merger, dated September 13, 1999, among MH
Millennium Holding LLC, MH Millennium Acquisition Corp., Mark Hughes, the
Mark Hughes Family Trust and Herbalife International, Inc. (15)
21 List of subsidiaries of the Company (16)
27 Financial Data Schedule (17)
</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 Annual Report on Form 10-K
for the year ended December 31, 1998.
(14) Incorporated by reference to the Company's Definitive Proxy Statement
relating to its 1999 Annual Meeting of Shareholders.
(15) Incorporated by reference to Annex A of the Offer to Purchase dated
September 17, 1999 contained in Schedule 14D-1 filled by Millennium
Holdings LLC, MH Millennium Acquisition Corp., the Mark Hughes Family
Trust and Mark Hughes on September 17, 1999.
(16) Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 1999.
(17) Filed herewith.
18
<PAGE> 20
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 10, 2000
HERBALIFE INTERNATIONAL, INC.
(Registrant)
By: /s/ TIMOTHY GERRITY
-------------------
Timothy Gerrity
Executive Vice President and
Chief Financial Officer
19
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 98,298,000
<SECURITIES> 1,110,000
<RECEIVABLES> 32,011,000
<ALLOWANCES> 0
<INVENTORY> 119,692,000
<CURRENT-ASSETS> 285,440,000
<PP&E> 115,401,000
<DEPRECIATION> 57,601,000
<TOTAL-ASSETS> 395,881,000
<CURRENT-LIABILITIES> 147,930,000
<BONDS> 1,832,000
0
0
<COMMON> 287,000
<OTHER-SE> 207,179,000
<TOTAL-LIABILITY-AND-EQUITY> 395,881,000
<SALES> 243,956,000
<TOTAL-REVENUES> 458,423,000
<CGS> 62,896,000
<TOTAL-COSTS> 132,618,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 10,249,000
<INCOME-TAX> 4,099,000
<INCOME-CONTINUING> 5,929,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,929,000
<EPS-BASIC> 0.21
<EPS-DILUTED> 0.19
</TABLE>
