<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, 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 [X] No [ ]
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares outstanding of each of the registrant's classes of Common
Stock, as of November 1, 2000 was:
Shares of Class A Common Stock 10,150,887
Shares of Class B Common Stock 18,994,745
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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 Nine Months Ended September 30, 2000
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Item 1. Financial Statements:
Consolidated Balance Sheets 2 - 3
Consolidated Statements of Income 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6 - 9
Item 2. Management's Discussion and Analysis of Financial Condition and 10 - 17
Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities and Use of Proceeds 18
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 19 - 21
Signature 22
</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,
2000 1999
------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 91,045,000 $138,280,000
Marketable securities 26,969,000 1,163,000
Receivables, including related party receivables of
$5,307,000 (2000) and $5,333,000 (1999) 31,877,000 30,326,000
Inventories 109,786,000 101,557,000
Prepaid expenses and other current assets 28,141,000 12,396,000
Deferred income taxes 9,757,000 20,368,000
------------ ------------
Total current assets 297,575,000 304,090,000
Property, at cost, net of accumulated depreciation and
amortization of $61,902,000 (2000) and $54,614,000 (1999) 61,972,000 55,673,000
Deferred compensation plan assets 30,996,000 27,929,000
Other assets 7,646,000 12,734,000
Deferred income taxes 12,534,000 12,279,000
Goodwill, net of accumulated amortization of
$1,903,000 (2000) and $1,773,000 (1999) 2,984,000 3,114,000
------------ ------------
TOTAL $413,707,000 $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>
September 30, December 31,
2000 1999
------------- -------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 18,861,000 $ 22,009,000
Royalty overrides 62,148,000 64,268,000
Accrued compensation 23,186,000 27,773,000
Accrued expenses 31,188,000 31,338,000
Dividends payable 4,367,000 4,299,000
Current portion of contracts payable and bank loans 7,453,000 6,151,000
Advance sales deposits 7,768,000 8,753,000
Income taxes payable -- 6,362,000
------------- -------------
Total current liabilities 154,971,000 170,953,000
NON-CURRENT LIABILITIES:
Contracts payable, net of current portion 1,674,000 2,229,000
Deferred compensation liability 26,706,000 27,194,000
Other non-current liabilities 5,444,000 5,223,000
------------- -------------
Total liabilities 188,795,000 205,599,000
------------- -------------
MINORITY INTEREST 2,058,000 3,618,000
------------- -------------
STOCKHOLDERS' EQUITY:
Common stock A, $0.01 par value; 33,333,333 shares
authorized, 10,145,671 (2000) and 10,002,568 (1999)
shares issued and outstanding 101,000 100,000
Common stock B, $0.01 par value; 66,666,667 shares
authorized, 18,964,455 (2000) and 18,650,198 (1999)
shares issued and outstanding 190,000 187,000
Paid-in-capital in excess of par value 58,555,000 55,390,000
Retained earnings 167,105,000 150,712,000
Accumulated other comprehensive income (3,097,000) 213,000
------------- -------------
Total stockholders' equity 222,854,000 206,602,000
------------- -------------
TOTAL $ 413,707,000 $ 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 NINE MONTHS ENDED
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
--------------- --------------- --------------- ----------------
<S> <C> <C> <C> <C>
Retail sales $ 442,001,000 $ 446,041,000 $ 1,341,659,000 $ 1,300,605,000
Less: Distributor allowances on product purchases 204,787,000 207,148,000 623,707,000 608,923,000
--------------- --------------- --------------- ---------------
Net sales 237,214,000 238,893,000 717,952,000 691,682,000
Cost of sales 63,810,000 63,469,000 189,317,000 179,586,000
Royalty overrides 67,500,000 66,747,000 202,182,000 201,686,000
Marketing, distribution & administrative expenses 85,907,000 82,918,000 268,029,000 245,929,000
Buy-out transaction expenses -- -- 9,498,000 --
Interest income - net 473,000 157,000 1,550,000 993,000
--------------- --------------- --------------- ---------------
Income before income taxes and minority interest 20,470,000 25,916,000 50,476,000 65,474,000
Income taxes (8,188,000) (9,978,000) (20,190,000) (25,208,000)
--------------- --------------- --------------- ---------------
Income before minority interest 12,282,000 15,938,000 30,286,000 40,266,000
Minority interest (476,000) (393,000) (898,000) (816,000)
--------------- --------------- --------------- ---------------
NET INCOME $ 11,806,000 $ 15,545,000 $ 29,388,000 $ 39,450,000
=============== =============== =============== ===============
EARNINGS PER SHARE:
Basic $ 0.41 $ 0.54 $ 1.02 $ 1.38
Diluted $ 0.39 $ 0.51 $ 0.96 $ 1.30
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 28,861,000 28,588,000 28,723,000 28,587,000
Dilutive effect of stock options 1,199,000 1,754,000 1,795,000 1,756,000
--------------- --------------- --------------- ---------------
Diluted 30,060,000 30,342,000 30,518,000 30,343,000
=============== =============== =============== ===============
</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, 2000 September 30, 1999
------------------ ------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 29,388,000 $ 39,450,000
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation and amortization 11,720,000 10,108,000
Deferred income taxes 10,355,000 1,008,000
Unrealized foreign exchange loss 2,006,000 1,092,000
Minority interest in earnings 898,000 816,000
Other 684,000 (102,000)
Changes in operating assets and liabilities:
Receivables (2,861,000) 7,193,000
Inventories (10,893,000) (5,763,000)
Prepaid expenses and other current assets (17,745,000) (7,253,000)
Other assets 6,952,000 41,000
Accounts payable (2,189,000) 6,189,000
Royalty overrides (99,000) (1,515,000)
Accrued expenses and accrued compensation (2,100,000) 10,533,000
Advance sales deposits (542,000) 6,755,000
Income taxes payable (6,402,000) (17,527,000)
Deferred compensation liability (488,000) 7,024,000
------------- -------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 18,684,000 58,049,000
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property (21,474,000) (21,158,000)
Proceeds from sale of property 90,000 51,000
Changes in marketable securities (25,744,000) 2,928,000
Deferred compensation plan (3,067,000) (8,228,000)
------------- -------------
NET CASH USED IN INVESTING ACTIVITIES (50,195,000) (26,407,000)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid (12,906,000) (12,880,000)
Distribution to minority interest (1,452,000) (1,069,000)
Additions to bank loans 3,971,000 1,901,000
Principle payments on bank loans and contract payables (3,183,000) (1,296,000)
Exercise of stock options 3,171,000 455,000
Stock repurchases (16,000) --
Contribution from minority interest (1,006,000) --
------------- -------------
NET CASH USED IN FINANCING ACTIVITIES (11,421,000) (12,889,000)
------------- -------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (4,303,000) (2,644,000)
------------- -------------
NET CHANGE IN CASH AND CASH EQUIVALENTS (47,235,000) 16,109,000
CASH AND CASH EQUIVALENTS AT JANUARY 1 138,280,000 100,721,000
------------- -------------
CASH AND CASH EQUIVALENTS AT SEPTEMBER 30 $ 91,045,000 $ 116,830,000
============= =============
</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, 2000 and for the
nine month periods ended September 30, 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 to be adopted by the Company on
January 1, 2001. The Company does not expect the adoption of this statement to
have a material impact on the financial statements.
In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin No. 101 ("SAB 101"), which provided the staff's views in
applying generally accepted accounting principles to selected revenue
recognition issues. SAB 101, as amended, was implemented by the Company on
October 1, 2000. The implementation of SAB 101 did not have a material impact on
the Company's financial statements.
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. 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
establishes 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, and accordingly,
does not believe this matter will have a material impact on it's financial
statements.
Some of the Company's subsidiaries are subject to tax audits by governmental
authorities in their respective countries, some of which governmental
authorities are proposing that additional 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.
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."
6
<PAGE> 8
HERBALIFE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The Lawsuits challenged the fairness to the public stockholders of the "going
private" and related transactions (the "Transactions") proposed by Mark Hughes,
formerly 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. Accordingly, the Company does not believe
this matter will have a material effect on it's financial statements.
On September 29, 2000, a putative class action lawsuit was filed in the District
Court, Clark Country, Nevada (Tharp v. Herbalife International, Inc. et al.).
This lawsuit alleges breaches of fiduciary obligations by the Company's
directors and its majority stockholder in connection with the adoption by the
Company of the Preferred Share Purchase Rights Plan and the rejection of a
purported offer by a third party to acquire a controlling interest in the
Company. The plaintiffs in the lawsuit request (1) an order compelling the
individual defendants to take steps to "expose Herbalife to the marketplace in
an effort to create an active auction of the Company", (2) an order enjoining
the defendants from certain unspecified conduct having as its purpose the
entrenchment of the defendants in office (3) unspecified damages, and (4) other
relief. The Company has not yet answered the complaint. Based upon its
preliminary analysis, the Company believes that the lawsuit is without merit and
intends to defend it vigorously. Accordingly, the Company does not believe this
matter will have a material effect on it's financial statements.
4. COMPREHENSIVE INCOME
Comprehensive income is summarized as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------------- --------------------------------
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
------------ -------------- ------------- ------------
<S> <C> <C> <C> <C>
Net income $ 11,806,000 $ 15,545,000 $ 29,388,000 $ 39,450,000
Foreign currency translation
adjustment (1,608,000) 3,389,000 (3,371,000) (384,000)
Unrealized gain/(loss) on
marketable securities 68,000 (19,000) 61,000 (22,000)
------------ ------------ ------------ ------------
Comprehensive income $ 10,266,000 $ 18,915,000 $ 26,078,000 $ 39,044,000
============ ============ ============ ============
</TABLE>
5. SEGMENT INFORMATION
The Company is a network marketing company that sells a wide range of weight
management products, food and dietary supplements and personal care products
within one industry as defined under SFAS 131, "Disclosures about Segments of an
Enterprise and Related Information." The Company's products are manufactured by
third party providers and then sold to independent distributors who sell
Herbalife products to retail consumers or other distributors.
7
<PAGE> 9
HERBALIFE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The Company has operations throughout the world (49 countries as of September
30, 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:
FINANCIAL INFORMATION BY GEOGRAPHIC SEGMENT
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- --------------------
2000 1999 2000 1999
---- ---- ---- -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
TOTAL RETAIL SALES:
United States $ 194.2 $ 214.0 $ 603.1 $ 626.2
Japan 103.4 126.8 306.5 372.6
South Korea 36.0 35.2 99.0 88.2
Russia 6.8 5.4 21.6 24.8
All other 183.9 168.7 564.7 508.6
Elimination of intersegment sales(1) (82.3) (104.1) (253.2) (319.8)
------------------ ---------------------
TOTAL RETAIL SALES $ 442.0 $ 446.0 $1,341.7 $1,300.6
------------------ --------------------
DISTRIBUTOR ALLOWANCES:
United States $ 78.7 $ 86.7 $ 232.6 $ 247.1
Japan 50.0 61.0 147.8 180.6
South Korea 14.2 14.3 39.1 35.3
Russia 3.2 2.4 10.1 11.4
All others 84.4 77.7 261.8 235.0
Elimination of intersegment allowance (U.S.) (25.7) (35.0) (67.7) (100.5)
------------------ --------------------
TOTAL DISTRIBUTOR ALLOWANCES $ 204.8 $ 207.1 $ 623.7 $ 608.9
------------------ --------------------
NET SALES $ 237.2 $ 238.9 $ 718.0 $ 691.7
================== ====================
OPERATING INCOME:
United States $ 36.0 $ 35.8 $ 131.4 $ 139.9
Japan 14.5 21.4 41.8 52.3
South Korea 7.8 7.8 23.0 20.4
Russia (0.1) 1.0 (2.6) (3.9)
All others 6.6 14.6 18.8 30.1
Corporate expenses (13.4) (16.0) (57.6) (46.3)
Net interest income 0.5 0.2 1.6 1.0
Elimination of intersegment gross profit (31.4) (38.9) (105.9) (128.0)
------------------ --------------------
TOTAL $ 20.5 $ 25.9 $ 50.5 $ 65.5
------------------ --------------------
Income taxes (8.2) (10.0) (20.2) (25.2)
Minority interest (0.5) (0.4) (0.9) (0.8)
------------------ --------------------
NET INCOME $ 11.8 $ 15.5 $ 29.4 $ 39.5
================== ====================
NOTES:
(1) Includes intersegment sales of:
United States $ 81.9 $ 103.9 $ 251.2 $ 314.7
All others 0.4 0.2 2.0 5.1
------------------ --------------------
TOTAL $ 82.3 $ 104.1 $ 253.2 $ 319.8
================== ====================
SALES BY PRODUCT LINE
Food & Dietary Supplement $ 192.1 $ 201.2 $ 594.3 $ 591.5
Weight Management 189.3 189.1 561.7 534.4
Personal Care Products 51.2 45.8 144.4 140.5
Literature, Promotional and Other 9.4 9.9 41.3 34.2
------------------ --------------------
Total Retail Sales $ 442.0 $ 446.0 $1,341.7 $1,300.6
================== ====================
</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 in particular
markets 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 allowances 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.
9
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RETAIL SALES
Retail sales for the three and nine months ended September 30, 2000 decreased
0.9% and increased 3.2% respectively, to $442.0 million and $1,341.7 million as
compared to sales of $446.0 million and $1,300.6 million for the corresponding
periods of the prior year.
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
2000 1999 Change Currency 2000 1999 Change Currency
---- ---- ------ -------- ---- ---- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Asia/Pacific Rim 190.8 193.6 -1.4% -5.0% 555.6 554.3 0.2% -5.5%
Europe 96.0 109.3 -12.2% 0.1% 315.0 345.5 -8.8% 2.0%
The Americas 155.2 143.1 8.5% 8.2% 471.1 400.8 17.5% 17.4%
---------- --------- -------- -------- --------- ---------- ------ -------
Total Retail Sales 442.0 446.0 -0.9% 0.3% 1,341.7 1,300.6 3.2% 3.5%
========== ========= ======== ======== ========= ========== ======= ========
</TABLE>
Retail sales in Asia/Pacific Rim decreased 1.4% and increased 0.2%, or $2.8
million and $1.3 million, for the three months and nine months ended September
30, 2000, respectively, as compared to the same periods in 1999. The decrease
for the three months ended September 30, 2000 was mainly due to retail sales
decrease in Japan of 18% to $103.4 million, which was partly offset by increases
in retail sales in India, Taiwan and Hong Kong. Retail sales in India, which
began selling products in November 1999, were $10.8 million for the three months
ended September 30, 2000 and retail sales for Taiwan and Hong Kong increased 45%
and 39% to $16.5 million and $15.6 million, respectively, compared to the same
period last year. For the nine months ended September 30, 2000, retail sales
were unchanged when compared to the same period last year. Within the region,
retail sales in India of $41.0 million and increases in retail sales in Taiwan
and South Korea of 34% and 12% to $45.5 million and $99.0 million, respectively,
were offset by a decrease in retail sales in Japan of 18% to $306.5 million, as
compared to the same period in 1999. In local currency, retail sales for the
region decreased 5.0% for the three months ended September 30, 2000 and
decreased 5.5% for the nine months ended September 30, 2000.
Retail sales in Europe decreased 12.2% and 8.8%, or $13.3 million and $30.5
million, for the three months and nine months ended September 30, 2000,
respectively, as compared to the same periods in 1999. The region's sales
decreases were primarily due to the weakening of European currencies against the
U.S. Dollar resulting in lower sales for the region when translated into the
U.S. Dollar, the Company's reporting currency. In local currency, retail sales
for the region increased 0.1% for the three months ended September 30, 2000 and
increased by 2.0% for the nine months ended September 30, 2000. Retail sales in
Italy decreased 22% and 12% measured in U.S. dollar for the three and nine
months ended September 30, 2000. Retail sales decreases were partially offset by
a retail sales increase in Germany of 5% and 9% for the three months and nine
months ended September 30, 2000, respectively, as compared to the same periods
in 1999.
Retail sales in the Americas increased 8.5% and 17.5%, or $12.1 million and
$70.3 million, for the three months and nine months ended September 30, 2000,
respectively, as compared to the same periods in 1999. The region's sales
increases were primarily due to increases in the United States, Mexico and
Brazil. Retail sales in the United States for the three and nine months ended
September 30, 2000 increased 2% and 13% respectively, to $112.4 million and
$351.7 million as compared to sales of $110.2 million and $311.5 million for the
corresponding periods of the prior year. Retail sales in Mexico for the three
and nine months ended September 30, 2000 increased 68% and 73% respectively, to
$21.2 million and $54.8 million as compared to sales of $12.7 million and $31.6
million for the corresponding periods of the prior year. Retail sales in Brazil
for the three and nine months ended September 30, 2000 increased 16% and 24%
respectively, to $10.7 million and $32.7 million compared to sales of $9.3
million and $26.4 million for the corresponding periods of the prior year. In
local currency, retail sales for the region increased 8.2% and 17.4% for the
three and nine months ended September 30, 2000, respectively.
10
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RETAIL SALES BY PRODUCT SEGMENTS (DOLLARS IN MILLIONS):
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-----------------------------------------------------------------------------------
% %
2000 1999 Change 2000 1999 Change
--------- ------------- ------------ ------------ ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Food & Dietary Supplements 192.1 201.2 -4.5% 594.3 591.5 0.5%
Weight Management 189.3 189.1 0.1% 561.7 534.4 5.1%
Personal Care 51.2 45.8 11.8% 144.4 140.5 2.8%
Literature/ Promotional/ Other 9.4 9.9 -5.1% 41.3 34.2 20.8%
--------- ------------- ----------- ------------ ------------- ----------
Total Retail Sales 442.0 446.0 -0.9% 1,341.7 1,300.6 3.2%
========= ============= =========== ============ ============= ==========
</TABLE>
The third quarter decrease in the food and dietary supplements line was
primarily due to the same factors identified in the geographical segments
previously discussed. The increase in personal care sales was primarily due to
the introduction in September 2000 of color cosmetics in South Korea. For the
nine months ended September 30, 2000, the increase in the literature,
promotional and other category was primarily due to increases in sales of
distributor kits (containing products, training materials, and distributor
applications) and a reduction in returns. Prior year numbers for retail sales by
product line have been reclassified to conform with current year presentation.
OPERATING INFORMATION:
---------------------
Gross profit of $105.9 million and $326.5 million for the three and nine months
ended September 30, 2000 was $2.8 million lower and $16.1 million higher, or
2.6% lower and 5.2% higher than gross profit of $108.7 million and $310.4
million in the same periods of 1999. As a percentage of retail sales, gross
profit for the three and nine months ended September 30, 2000 as compared to the
same periods in the year 1999 decreased from 24.4% to 24.0% and increased from
23.9% to 24.3%, respectively. For the three months ended September 30, 2000, a
change in sales mix and a special distributor incentive paid out in the third
quarter of 2000 contributed to the decrease in gross profit as a percentage of
retail sales. The adverse impact from the change in sales mix is a consequence
of Japan's sales decline, where the gross profit as a percent of retail sales is
relatively higher than in other markets. For the nine months ended September 30,
2000, gross profit, as a percentage of retail sales, increased primarily due to
lower special distributor incentives paid in 2000 compared to 1999.
Marketing, distribution and administrative expenses, as a percentage of retail
sales, were 19.4% and 20.7% for the three and nine months ended September 30,
2000 as compared to 18.6% and 18.9% in the same periods in 1999. These expenses
for the same periods increased 3.6% and 9.0% to $85.9 million and $268.0 million
from $82.9 and $245.9 million in the same periods in 1999. For the three months
ended September 30, 2000, the increase was primarily due to an increase in
staffing concentrated in the Company's distributor service groups, professional
fees to support technology initiatives and foreign exchange losses. These
increases were offset by lower sales event expenses for the period compared to
last year. For the nine months ended September 30, 2000, the increase was mainly
due to higher sales event expenses, new country operating expenses (primarily
India), and increases in infrastructure costs. These increases were partially
offset by a gain related to a key man life insurance policy of approximately $5
million, which was recognized during the quarter ended June 30, 2000.
In the current year first quarter, the Company recorded a one-time charge of
$9.5 million, equivalent to $0.18 per diluted share, relating to fees and
expenses in connection with the termination of a proposed buy-out transaction.
Excluding the non-recurring charge, net income for the nine months ended
September 30, 2000 would have been $35.1 million or $1.14 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 nine months of 2000, most European currencies weakened against the
U.S. dollar, while most Asian currencies remained stable or strengthened against
the U.S. dollar. In the Americas, there was no significant change in currencies
against the U.S. dollar. During this period, 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 and nine months ended September 30, 2000 was an increase of
approximately $0.03 and $0.13, respectively, as compared to the exchange rates
in effect for the same periods of 1999. The strengthening of the Yen was offset
by the weakening of European currencies against the U.S. Dollar resulting in a
decrease of $0.04 and $0.15 in net income per diluted share for the three and
nine months ended September 30,
11
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
2000 as compared to the same periods. Although the effect of foreign currency
changes of this nature in other countries was not individually material to the
operations of the Company; in the aggregate, the strengthening of the U.S.
Dollar in relation to the currencies of other countries for the three and nine
months ended September 30, 2000 had a positive effect of approximately $0.02 and
$0.06 per diluted share as compared to the exchange rates in effect for the same
periods in the prior year.
Income taxes of $8.2 million for the three months ended September 30, 2000
decreased from $10.0 million in the same period of 1999. For the nine months
ended September 30, 2000 income taxes of $20.2 million decreased from $25.2
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. This rate could vary
depending upon changes in the future mix of income.
Net income for the three and nine months ended September 30, 2000 decreased
24.1% and 25.5% to $11.8 million and $29.4 million as compared to the same
periods 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 nine months ended September 30, 2000,
net cash provided by operating activities was $18.7 million, compared to $58.0
million for the same period in 1999. The primary uses of cash resulted from
increases in inventory and prepaid balances and a decrease in income taxes
payables.
Capital expenditures for the nine months ended September 30, 2000 were $21.5
million compared to $21.2 million for the same period in 1999. The majority of
the 2000 expenditures resulted from continued investment in management
information systems and expansion of new and existing facilities. The Company is
planning additional capital expenditures of approximately $5.5 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 $1.3 million will be required for pre-opening
expenses, capital expenditure and other operating cash flow needs associated
with its remaining 2000 new market expansion activities.
Stockholders' equity increased $16.3 million to $222.9 million during the nine
months ended September 30, 2000. For the nine months of 2000, net income of
$29.4 million was offset by dividends declared of $13.0 million and a
translation loss of $3.4 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 $118.0 million at
September 30, 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. In its recent SEC filings,
Global has disclosed that it has 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 has been actively
engaged in discussions with other lenders to replace or refinance the existing
line, and that it was also considering raising additional capital to cure the
deficiency under the existing line. Global warned, however, that there
12
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
can be no assurance that it will obtain a replacement facility or that any
replacement facility would provide it with significant additional liquidity. In
addition, in a June 23, 2000 press release, Global reported disappointing second
quarter earnings, which it attributed primarily to a reduction in sales to the
Company during that period, and indicated that it had been unable to obtain
replacement credit for its existing secured credit facility. Global further
indicated that it was considering various alternatives to improve liquidity,
including retaining a financial advisor, implementing significant cost reduction
measures and/or obtaining supplemental or alternative debt and/or equity
arrangements. In August 4, 2000 and September 15, 2000 press releases, Global
further reported that it had retained a financial advisor and legal counsel in
connection with a possible restructuring of its senior notes and senior secured
bank debt. On November 1, 2000, Global announced that it would not make the
interest payment to its noteholders due on that date, indicating that Global's
senior secured lenders had insisted that no payments be made to noteholders
"pending resolution of the negotiations."
The Company's supply agreements with Global expire at the end of 2000. The
Company is continuing to work toward the continuation of a significant supply
relationship with Global after the expiration of the current supply agreements,
on prudent and competitive business terms. However, there can be no assurance
that a continuing supply relationship will be achieved. Further, there can be no
assurance that Global's financial condition, or a deterioration in such
financial condition or in the relationship between Global and its creditors, or
actions by such creditors to protect their positions, will not result in a
supply interruption to, or otherwise materially and adversely affect, the
Company. The Company has "second sourced" substantially all of its weight
management products and food and dietary supplements with alternative
manufacturers, and the Company recently placed binding purchase orders with
certain of those manufacturers covering most of the Company's product
requirements in the weight management and food and dietary supplement product
categories for the first quarter of 2001. Consequently, even assuming that the
Company and Global reach an agreement whereby Global will make material supply
deliveries to the Company as part of the Company's first quarter of 2001
requirements (and there can be no assurance that such an agreement will be
achieved), the Company expects to purchase the substantial majority of its
requirements for that quarter from other manufacturers. The Company anticipates,
given the substantial quantity of product involved, that the Company may well
experience supply disruptions, out-of-stock situations and similar supply
problems as it begins purchasing product from new manufacturers. However, the
Company is devoting substantial resources to ensuring a smooth transition and
currently expects that supply problems, if any, will be temporary and will not
have a material adverse effect on the Company's results of operations. Despite
the Company's efforts, however, there can be no assurance that the purchase of
substantial quantities of products from new manufacturers will not have such a
material adverse effect.
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.
On July 27, 2000, the Company's Board of Directors adopted a Preferred Share
Purchase Rights Plan (the "Plan"), in order to encourage any person or group
interested in acquiring the Company to negotiate with the Board of Directors of
the Company prior to attempting an acquisition. Under the terms of the Plan,
which expires on August 21, 2010, the Company declared a dividend of one
Preferred Share Purchase Right (collectively, the "Rights"), for each
outstanding share of Class A Common Stock and Class B Common Stock held at the
close of business on August 21, 2000. Initially, the Rights are attached to the
Common Stock and not represented by separate certificates. The Rights will
become exercisable, if not earlier redeemed, only after a person or group (an
"Acquiring Person") has acquired, or announced a tender offer which would result
in a person or group acquiring, 15% or more of the Company's Class A Common
Stock or the combined classes of Common Stock. Initially, each Right will
entitle shareholders to buy one one-hundredth of a share of newly created Series
A Junior Participating Preferred Stock of the Company at an exercise price of
$40.00. However, if a person or group becomes an Acquiring Person, the Plan
allows the Company's shareholders to purchase, at an exercise price of $40.00
per Right, subject to adjustment, Class B Common Stock of the Company having a
market value at that time of $80.00. The Company will generally be entitled to
redeem the Rights at $.01 per Right at any time until a person or group has
become an Acquiring Person. Until exercise, a
13
<PAGE> 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Right holder, as such, has no rights as a shareholder of the Company. Rights
held by an Acquiring Person will become void and will not be exercisable to
purchase shares at the bargain price. In addition, under certain circumstances
involving the acquisition of the Company in a merger or other business
combination that has not been approved by the Board of Directors of the Company,
each Right will entitle its holder to purchase, at the Right's then-current
exercise price, a number of the acquiring company's common shares having a
market value at that time of twice the exercise price of the Rights.
As of September 30, 2000, the Company had $33 million of credit facilities,
including a $25 million unsecured committed line of credit. These facilities
provide letters of credit and borrowings. The total borrowings amounted to $5.1
million as of September 30, 2000.
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 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. 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. The fair value of option contracts are
based on dealer quotes.
Foreign exchange option contracts are used primarily to hedge yen-denominated
intercompany sales made by Herbalife International of America, Inc. to Herbalife
of Japan. The exchange rate at which these contracts may be exercised is based
upon the daily average exchange rate for a particular month. The Company has
guidelines that establish a net $5 million limit on the amount of annual option
premiums. The Company purchases yen put options, which give the Company the
right, but not the obligation, to sell yen at a specified exchange rate ("strike
rate"). These contracts provide protection in the event the yen weakens beyond
the option strike rate. In some instances, the Company sells (writes) yen call
options, which give the counterparty the right, but not the obligation to buy
yen from the Company at a specified strike rate. These contracts serve to limit
the benefit the Company would otherwise derive from strengthening of the yen
beyond the strike rate. Such written call options are only entered into
contemporaneously with purchased put options, the result of which, on a combined
basis is to create a floor and a ceiling on the effective exchange rate received
for the hedged yen-denominated transactions.
14
<PAGE> 16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following table provides information about the details of our option
contracts at September 30, 2000.
<TABLE>
<CAPTION>
U.S. DOLLAR AVERAGE
EQUIVALENT STRIKE FAIR MATURITY
COVERAGE RATE VALUE DATE
-------- --------- ---------- -------------
<S> <C> <C> <C> <C>
PURCHASED PUTS (COMPANY MAY SELL YEN/BUY USD)
Japanese Yen............................................. $ 6,000,000 107-108 $ 56,000 Sept - Oct 2000
Japanese Yen............................................. 6,000,000 107-108 72,000 Sept - Nov 2000
Japanese Yen............................................. 6,000,000 107-108 85,000 Sept - Dec 2000
------------- ---------
$ 18,000,000 $ 213,000
WRITTEN CALLS (COUNTERPARTY MAY BUY YEN/SELL USD)
Japanese Yen............................................. $ 6,000,000 100-101 $ - Sept - Oct 2000
Japanese Yen............................................. 6,000,000 99-100 - Sept - Nov 2000
Japanese Yen............................................. 6,000,000 98-99 (3,000) Sept - Dec 2000
------------- ---------
$ 18,000,000 $ (3,000)
</TABLE>
Foreign exchange forward contracts are occasionally used to hedge non-functional
currency loans between subsidiaries and bank borrowings. The objective of these
contracts is to reduce the impact of foreign currency movements on the
subsidiary's financial results. The fair value of forward contracts are based on
dealer quotes.
The table below describes the forward contracts outstanding at September 30,
2000:
<TABLE>
<CAPTION>
Fair
Contract Forward Position Maturity Contract Value in
Foreign Currency Date in U.S. Dollars Date Rate US Dollars
--------------------------- --------- ------------------ ---------------------- --------------- ------------
<S> <C> <C> <C> <C> <C>
Buy DEM / Sell USD 09/11/00 $1,524,000 10/30/00-8/31/01 2.23-2.26 $1,558,000
Buy FRF / Sell USD 09/11/00 1,454,000 10/30/00-7/31/01 7.50-7.59 1,486,000
Buy ITL / Sell USD 09/11/00 8,595,000 10/31/00-8/31/01 2216-2245 8,808,000
Buy GBP / Sell FRF 04/13/00 1,507,000 03/30/01 10.6874 1,536,000
Buy GBP / Sell ITL 06/23/00 1,447,000 06/15/01 3,034 1,541,000
</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 September 30, 2000 the Company's foreign subsidiaries had $5.3
million of outstanding bank debt.
All foreign subsidiaries, excluding those operating in hyper-inflationary
environments, designate their local currencies as their functional currency. At
September 30, 2000, the total amount of cash held by foreign subsidiaries
primarily in Japan and Korea, was $74.0 million of which $5.5 million was
maintained or invested in U.S. dollars.
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.
15
<PAGE> 17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following table lists the Company's cash equivalents and short-term
investments at September 30, 2000:
<TABLE>
<CAPTION>
FAIR
2000 2001 2002 2003 2004 THEREAFTER TOTAL VALUE
------------- -------- --------- -------- -------- ------------ --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Cash equivalents.............. $ 6,987,000 $ -- $ -- $ -- $ -- $ -- $ 6,987,000 $ 6,987,000
Average interest rate....... 3.95%
Short term investments........ 118,000 -- -- -- -- -- 118,000 118,000
Average interest rate....... 3.22%
Long term investments......... 26,786,000 -- -- -- -- -- 26,786,000 26,851,000
Average interest rate....... 3.32%
-----------------------------------------------------------------------------------------------
Total................. $ 33,891,000 -- -- -- -- -- $ 33,891,000 $33,956,000
===============================================================================================
</TABLE>
16
<PAGE> 18
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.
17
<PAGE> 19
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 Note 3 to the
Financial Statements included in Item 1 of this document.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On July 27, 2000, the Company's Board of Directors adopted a Preferred
Shared Purchase Rights Plan (the "Plan"). See Item 2 - Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Stockholders of the Company held on July 27, 2000
in Beverly Hills, California 8,467,455 shares of the Company's Class A
Common Stock were present either in person or by proxies solicited by
management pursuant to Regulation 14A under the Securities Exchange Act of
1934.
The Stockholders voted on the following matters:
To elect six directors to serve on the Company's Board of Directors:
<TABLE>
<CAPTION>
Number Number
of Shares of Shares
For Withheld
--------- --------
<S> <C> <C>
Christopher Pair 8,423,782 43,673
Conrad Klein 8,423,782 43,673
Edward J. Hall 8,423,782 43,673
John Reynolds 8,423,782 43,673
Christopher M. Miner 8,423,782 43,673
Francis Tirelli 8,423,782 43,673
</TABLE>
ITEM 5. OTHER INFORMATION
None.
18
<PAGE> 20
HERBALIFE INTERNATIONAL, INC.
(A) 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)
4.2 Rights Agreement, dated as of July 27, 2000, between the Company and U.S. Stock Transfer (16)
Corporation
10.1 Final Judgment and Permanent Injunction, entered into on October, 1986 by the parties to (1)
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), (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 (2)
Plan
10.5 Form of Letter Agreement between the Compensation Committee of the Board of Directors of the (2)
Company and Mark Hughes
10.6 Form of Indemnity Agreement between the Company and certain officers and directors of the (2)
Company
10.7 Trust Agreement among the Company, Citicorp Trust, N.A. and certain officers and directors (2)
of the Company
10.8 Form of Stock Appreciation Rights Agreement between the Company and certain directors of the (2)
Company
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 (5)
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 relating the (5)
Deferred Compensation Agreement between the Company and Michael Rosen
10.13 Office lease agreement between the Company and State Teacher's Retirement System, dated July (6)
20, 1995
10.14 Form of stock appreciation rights agreements between the Company and certain directors of (6)
the Company
10.15 The Company's Senior Executive Deferred Compensation Plan, effective January 1, 1996, as (6)
amended
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 (6)
January 1, 1996
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. (8)
dated December 30, 1996.
</TABLE>
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<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE NO./(FOOTNOTE)
---------------- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
10.20 Consulting Agreement between David Addis and Herbalife of America, Inc. dated January 27, (8)
1997.
10.21 Agreement between Herbalife International of America, Inc. and D&F Industries, Inc. dated (9)
September 2, 1997
10.22 Agreement between Herbalife International of America, Inc. and Dynamic Products, Inc. dated (9)
September 2, 1997
10.23 Agreement between Herbalife International of America, Inc. and Raven Industries, Inc. d/b/a (9)
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 First National Bank (13)
of Chicago, dated December 14, 1998
10.26 Agreement and Plan of Merger, dated September 13, 1999, among MH Millennium Holding LLC, MH (15)
Millennium Acquisition Corp., Mark Hughes, the Mark Hughes Family Trust and Herbalife
International, Inc.
10.27 Employment agreement, dated as of October 5, 2000, between Christopher Pair and Herbalife (18)
International, Inc. and Herbalife International of America, Inc.
10.28 Employment agreement, dated as of August 20, 2000, between Robert A. Sandler and Herbalife (18)
International, Inc. and Herbalife International of America, Inc.
10.29 Employment agreement, dated as of November 1, 2000, between John Reynolds and Herbalife (18)
International, Inc. and Herbalife International of America, Inc.
10.30 Employment agreement, dated as of August 20, 2000, between Timothy Gerrity and Herbalife (18)
International, Inc. and Herbalife International of America, Inc.
10.31 Employment agreement, dated as of August 20, 2000, between Carol Hannah and Herbalife (18)
International, Inc. and Herbalife International of America, Inc.
10.32 Employment agreement, dated as of August 20, 2000 between Brian Kane and Herbalife (18)
International, Inc. and Herbalife International of America, Inc.
10.33 Employment agreement, dated as of November 1, 2000 between Conrad Lee Klein and Herbalife (18)
International, Inc. and Herbalife International of America, Inc.
10.34 The Company's Senior Executive Change in Control Plan, effective June 29, 2000. (18)
10.35 The Company's Management Employee Change in Control Plan, effective June 29, 2000. (18)
21 List of subsidiaries of the Company (17)
27 Financial Data Schedule (18)
</TABLE>
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(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.
20
<PAGE> 22
(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 Current Report on Form 8-K,
dated as of August 2, 2000, which included as Exhibit A the form of
Certificate of Designation of Series A Junior Participating Preferred
Stock, as Exhibit B the Form of Rights Certificate, and as Exhibit C the
Summary of Rights to Purchase Preferred Shares
(17) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1999.
(18) Filed herewith.
(B) REPORTS ON FORM 8-K
The Company filed a Current Report on Form 8-K with the Securities and
Exchange Commission dated August 2, 2000, which reported pursuant to Item
5, the adoption of the Preferred Share Purchase Rights Plan by the
Company's Board of Directors.
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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 9, 2000
HERBALIFE INTERNATIONAL, INC.
(Registrant)
By: /s/ TIMOTHY GERRITY
-----------------------------
Timothy Gerrity
Executive Vice President and
Chief Financial Officer
22
