UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) |
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For the quarterly period ended June 30, 2004 |
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OR |
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TRANSITION REPORT PURSUANT
TO SECTION 13 OR 15(d) |
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Commission file number: 333-115363 |
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WH HOLDINGS (CAYMAN ISLANDS) LTD.
(Exact name of registrant as specified in its charter)
Cayman Islands |
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N/A |
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(State or other jurisdiction of incorporation or organization) |
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(I.R.S. Employer Identification No.) |
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P.O. Box 309GT
Ugland House, South Church Street
Grand Cayman, Cayman Island
(Address of principal executive offices) (Zip code)
(310) 410-9600*
(Registrants telephone number, including area code)
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 ý No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes o No ý
Number of shares of registrants common shares outstanding as of June 30, 2004 was 104,164,038.
* C/O Chief Financial Officer of Herbalife International, Inc.
WH HOLDINGS (CAYMAN ISLANDS) LTD.
Index to Financial Statements and Exhibits
Filed with the Quarterly Report of the Company on Form 10-Q
For the Three and Six Months ended June 30, 2004
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Managements Discussion and Analysis of Financial Condition and Results of Operations |
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1
WH HOLDINGS (CAYMAN ISLANDS) LTD.
(Unaudited)
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December 31, 2003 |
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June 30, 2004 |
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ASSETS |
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CURRENT ASSETS: |
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Cash and cash equivalents |
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$ |
150,679,000 |
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$ |
157,132,000 |
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Restricted cash |
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5,701,000 |
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Receivables net of allowance for doubtful accounts of $2,527,000 (2003) and $4,731,000 (2004), and including related party receivables of $323,000 (2003) |
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31,977,000 |
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33,155,000 |
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Inventories |
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59,397,000 |
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70,503,000 |
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Prepaid expenses and other current assets |
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20,825,000 |
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25,521,000 |
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Deferred income taxes |
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9,164,000 |
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8,963,000 |
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Total current assets |
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277,743,000 |
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295,274,000 |
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Property, at cost, net of accumulated depreciation and amortization of $17,607,000 (2003) and $22,292,000 (2004) |
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45,411,000 |
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46,524,000 |
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Deferred compensation plan assets |
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21,340,000 |
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21,420,000 |
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Other assets |
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5,795,000 |
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6,279,000 |
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Deferred financing costs, net of accumulated amortization of $10,266,000 (2003) and $13,295,000 (2004) |
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33,278,000 |
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30,625,000 |
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Marketing franchise |
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310,000,000 |
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310,000,000 |
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Distributor network, net of accumulated amortization of $26,539,000 (2003) and $35,906,000 (2004) |
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29,661,000 |
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20,294,000 |
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Product certification, product formulae and other intangible assets, net of accumulated amortization of $9,491,000 (2003) and $12,841,000 (2004) |
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13,219,000 |
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9,935,000 |
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Goodwill |
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167,517,000 |
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167,517,000 |
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TOTAL |
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$ |
903,964,000 |
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$ |
907,868,000 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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CURRENT LIABILITIES: |
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Accounts payable |
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$ |
22,526,000 |
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$ |
23,639,000 |
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Royalty overrides |
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76,522,000 |
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73,922,000 |
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Accrued compensation |
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19,127,000 |
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21,125,000 |
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Accrued expenses |
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59,669,000 |
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83,471,000 |
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Current portion of long term debt |
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72,377,000 |
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22,213,000 |
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Advance sales deposits |
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6,574,000 |
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11,698,000 |
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Income taxes payable |
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19,427,000 |
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43,062,000 |
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Total current liabilities |
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$ |
276,222,000 |
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$ |
279,130,000 |
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NON-CURRENT LIABILITIES: |
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Long term debt, net of current portion, including related party debt of $23,700,000 (2003) and $5,808,000 (2004) |
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252,917,000 |
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482,114,000 |
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Deferred compensation |
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22,442,000 |
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18,932,000 |
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Deferred income taxes |
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111,910,000 |
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96,863,000 |
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Other non-current liabilities |
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2,685,000 |
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2,721,000 |
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Total liabilities |
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$ |
666,176,000 |
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$ |
879,760,000 |
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COMMITMENTS AND CONTINGENCIES |
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STOCKHOLDERS EQUITY: |
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Preferred shares, $0.001 par value (aggregate liquidation preference $446,241,000 (2003)), 12% Series A Cumulative and Convertible, 106,000,000 (2003) shares authorized, 102,013,572 (2003) shares issued and outstanding |
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$ |
102,000 |
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Common shares, $0.001 par value, 250,000,000 shares authorized, 104,164,038 (2004) shares issued and outstanding |
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$ |
104,000 |
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Paid-in-capital in excess of par value |
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183,407,000 |
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1,330,000 |
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Accumulated other comprehensive income |
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3,427,000 |
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2,718,000 |
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Retained earnings |
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50,852,000 |
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23,956,000 |
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Total stockholders equity |
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$ |
237,788,000 |
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$ |
28,108,000 |
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TOTAL |
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$ |
903,964,000 |
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$ |
907,868,000 |
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See the accompanying notes to consolidated financial statements
2
WH HOLDINGS (CAYMAN ISLANDS) LTD.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
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Three Months Ended |
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Six Months Ended |
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June 30, |
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June 30, |
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June 30, |
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June 30 |
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Product sales |
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$ |
248,310,000 |
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$ |
278,519,000 |
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$ |
488,708,000 |
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$ |
556,658,000 |
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Handling & freight income |
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40,568,000 |
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45,641,000 |
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80,209,000 |
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91,554,000 |
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Net sales |
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288,878,000 |
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324,160,000 |
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568,917,000 |
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648,212,000 |
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Cost of sales |
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58,401,000 |
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66,245,000 |
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115,362,000 |
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129,863,000 |
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Gross profit |
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230,477,000 |
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257,915,000 |
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453,555,000 |
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518,349,000 |
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Royalty overrides |
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103,481,000 |
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114,532,000 |
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202,991,000 |
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230,388,000 |
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Marketing, distribution & administrative expenses (including $1,850,000, $1,721,000, $4,929,000 and $3,519,000 of related party expenses for the three and six months ended June 30, 2003 and 2004, respectively) |
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86,724,000 |
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105,199,000 |
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171,100,000 |
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213,039,000 |
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Interest expense - net |
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10,255,000 |
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14,256,000 |
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20,202,000 |
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41,629,000 |
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Income before income taxes |
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30,017,000 |
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23,928,000 |
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59,262,000 |
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33,293,000 |
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Income taxes |
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12,803,000 |
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11,840,000 |
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25,177,000 |
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21,689,000 |
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NET INCOME |
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$ |
17,214,000 |
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$ |
12,088,000 |
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$ |
34,085,000 |
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$ |
11,604,000 |
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See the accompanying notes to consolidated financial statements
3
WH HOLDINGS (CAYMAN ISLANDS) LTD.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
(Unaudited)
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Preferred |
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Common |
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Paid in Capital |
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Accumulated |
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Retained |
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Total |
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Comprehensive |
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Balance at December 31, 2003 |
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$ |
102,000 |
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$ |
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$ |
183,407,000 |
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$ |
3,427,000 |
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$ |
50,852,000 |
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$ |
237,788,000 |
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Redemption of 102,013,572 preferred shares |
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(102,000 |
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(183,013,000 |
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(183,115,000 |
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Issuance of 104,054,388 common shares |
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104,000 |
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(104,000 |
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Issuance of 109,650 common shares from the exercise of stock options |
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124,000 |
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124,000 |
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Additional capital from stock options |
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916,000 |
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916,000 |
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Dividends declared |
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(38,500,000 |
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(38,500,000 |
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Net income |
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11,604,000 |
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11,604,000 |
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$ |
11,604,000 |
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Translation adjustments |
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(2,124,000 |
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(2,124,,000 |
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(2,124,000 |
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Unrealized gain on derivatives |
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3,179,000 |
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3,179,000 |
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3,179,000 |
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Reclassification adjustments for loss on derivative instruments |
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(1,764,000 |
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(1,764,000 |
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(1,764,000 |
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Total comprehensive income |
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$ |
10,895,000 |
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Balance at June 30, 2004 |
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$ |
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$ |
104,000 |
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$ |
1,330,000 |
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$ |
2,718,000 |
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$ |
23,956,000 |
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$ |
28,108,000 |
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See the accompanying notes to consolidated financial statements.
4
WH HOLDINGS (CAYMAN ISLANDS) LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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Six Months Ended |
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June 30, |
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June 30, |
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CASH FLOWS FROM OPERATING ACTIVITIES |
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Net income |
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$ |
34,085,000 |
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$ |
11,605,000 |
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Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation and amortization |
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12,591,000 |
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23,018,000 |
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Amortization and discount of deferred financing costs |
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4,089,000 |
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3,397,000 |
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Deferred income taxes |
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(994,000 |
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(14,746,000 |
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Unrealized foreign exchange loss |
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888,000 |
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1,656,000 |
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Write-off of deferred financing costs and unamortized discount |
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4,077,000 |
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Other |
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364,000 |
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1,095,000 |
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Changes in operating assets and liabilities: |
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Receivables |
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(5,032,000 |
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(1,673,000 |
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Inventories |
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5,552,000 |
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(13,126,000 |
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Prepaid expenses and other current assets |
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926,000 |
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(2,689,000 |
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Accounts payable |
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(3,356,000 |
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1,532,000 |
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Royalty overrides |
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(4,911,000 |
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(1,246,000 |
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Accrued expenses and accrued compensation |
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(5,591,000 |
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27,079,000 |
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Advance sales deposits |
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3,626,000 |
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5,324,000 |
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Income taxes payable |
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5,389,000 |
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23,796,000 |
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Deferred compensation liability |
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(10,422,000 |
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(3,510,000 |
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NET CASH PROVIDED BY OPERATING ACTIVITIES |
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37,204,000 |
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65,589,000 |
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CASH FLOWS FROM INVESTING ACTIVITIES: |
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Purchases of property |
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(4,821,000 |
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(10,320,000 |
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Proceeds from sale of property |
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19,000 |
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5,000 |
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Changes in marketable securities, net |
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1,268,000 |
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Net change in restricted cash |
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2,402,000 |
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5,701,000 |
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Changes in other assets |
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(27,000 |
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(3,324,000 |
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Deferred compensation plan assets |
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10,964,000 |
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(80,000 |
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NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES |
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9,805,000 |
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(8,018,000 |
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CASH FLOWS FROM FINANCING ACTIVITIES: |
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Dividends paid on Preferred Shares |
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(38,500,000 |
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Issuance of 15.5% Senior Notes and 9.5% Notes |
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579,000 |
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267,438,000 |
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Borrowings from long-term debt |
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2,613,000 |
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217,000 |
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Principal payments on long-term debt |
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(6,486,000 |
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(52,397,000 |
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Redemption of Preferred Shares |
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(183,115,000 |
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Proceeds from issuance of Common Shares |
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4,000,000 |
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Repurchase of 15.5% Senior Notes |
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(39,644,000 |
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Exercise of Stock Options |
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86,000 |
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NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES |
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706,000 |
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(45,915,000 |
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EFFECT OF EXCHANGE RATE CHANGES ON CASH |
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2,582,000 |
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(5,203,000 |
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NET CHANGE IN CASH AND CASH EQUIVALENTS |
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50,297,000 |
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6,453,000 |
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CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD |
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64,201,000 |
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150,679,000 |
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CASH AND CASH EQUIVALENTS, END OF PERIOD |
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$ |
114,498,000 |
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$ |
157,132,000 |
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CASH PAID FOR: |
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Interest |
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$ |
16,745,000 |
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$ |
28,402,000 |
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Income taxes |
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$ |
19,268,000 |
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$ |
14,139,000 |
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NON-CASH ACTIVITIES: |
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Acquisitions of property from capital leases |
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$ |
5,148,000 |
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$ |
1,510,000 |
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See the accompanying notes to consolidated financial statements
5
WH HOLDINGS (CAYMAN ISLANDS) LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
WH Holdings (Cayman Islands) Ltd., a Cayman Islands exempted limited liability company (Holdings), incorporated on April 4, 2002, and its direct and indirect wholly owned subsidiaries, WH Intermediate Holdings Ltd., a Cayman Islands company (WH Intermediate), WH Luxembourg Holdings S.à.R.L., a Luxembourg unipersonal limited liability company (Lux Holdings), WH Luxembourg Intermediate Holdings S.à.R.L. (Herbalife Lux), formerly known as WH Luxembourg CM S.à.R.L, a Luxembourg unipersonal limited liability company, and WH Acquisition Corp., a Nevada corporation (WH Acquisition), were formed on behalf of Whitney & Co., LLC (Whitney) and Golden Gate Private Equity, Inc. (Golden Gate), in order to acquire Herbalife International, Inc., a Nevada corporation, and its subsidiaries (Herbalife or Predecessor) on July 31, 2002 (the Merger). Holdings and its subsidiaries are referred to collectively herein as the Company. Holdings 12% Series A Cumulative Convertible Preferred Shares are referred to as preferred shares and Holdings Common Shares are referred to as common shares.
2. BASIS OF PRESENTATION
The unaudited interim financial information of the Company has been prepared in accordance with Article 10 of the Securities and Exchange Commissions Regulation S-X. Accordingly, they do not include all of the information required by generally accepted accounting principles for complete financial statements. The Companys financial statements as of and for the three and six months ended June 30, 2004 include WH Intermediate and all of its direct and indirect subsidiaries. In the opinion of management, the accompanying financial information contains all adjustments, consisting of normal recurring adjustments, considered necessary to present fairly the Companys financial statements as of June 30, 2004 and for the three months and six months ended June 30, 2003 and June 30, 2004. Operating results for the three and six months ended June 30, 2004, are not necessarily indicative of the results that may be expected for the year ending December 31, 2204.
Reclassifications
Certain reclassifications were made to the prior period financial statements to conform to current period presentation.
3. TRANSACTIONS WITH RELATED PARTIES
The Company has entered into agreements with Whitney and Golden Gate to pay monitoring fees for their management and other services and to pay certain other expenses. Under the monitoring fee agreements, the Company is obligated to pay an annual aggregate amount of up to $5.0 million, but not less than $2.5 million, to Whitney and Golden Gate, for an initial period of ten years subject to the provisions in Herbalifes amended and restated credit agreement (the Credit Agreement). For the three months ended June 30, 2003 and June 30, 2004, the Company expensed monitoring fees in the amount of $1.3 million for both periods and other expenses of $0.6 million and $0.4 million, respectively. For the six months ended June 20, 2003, and June 30, 2004, the Company expensed monitoring fees in the amount of $2.5 million for both periods and other expenses of $2.4 million and $1.0 million, respectively. As of June 30, 2004, Whitney affiliated companies held $4.8 million of the outstanding term loan balance and senior executives of Whitney held $1.0 million of Herbalifes 11 ¾% Senior Subordinated Notes due 2010 (the 11 ¾% Notes). Also, in March 2004, Holdings redeemed $17.3 million of the 15.5% Senior Notes held by certain Whitney affiliated companies and paid an additional $5.0 million repurchase premium and $0.5 million accrued interest.
4. LONG TERM DEBT
Long term debt consisted of the following (in millions):
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December 31, |
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June 30, |
|
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11 ¾% Notes |
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$ |
158.2 |
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$ |
158.3 |
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Borrowing under senior credit facility |
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119.8 |
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71.1 |
|
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15.5% Senior Notes |
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39.6 |
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Discount - 15.5% Senior Notes warrant |
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(1.6 |
) |
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9.5% Notes |
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267.7 |
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Capital leases |
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5.5 |
|
5.5 |
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Other debt |
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3.8 |
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1.7 |
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325.3 |
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504.3 |
|
||
Less: current portion |
|
72.4 |
|
22.2 |
|
||
|
|
$ |
252.9 |
|
$ |
482.1 |
|
6
In March 2004, the Company and its lenders amended the Credit Agreement. Under the terms of the amendment, the Company made a prepayment of $40.0 million to reduce outstanding amounts under Herbalifes senior credit facility. In connection with this prepayment, the lenders under Herbalifes Senior Credit Facility waived the March 31, 2004 mandatory amortization payment of $6.5 million along with a mandatory 50% excess cash flow payment for the year ended December 31, 2003.The amendment also lowered the interest rate to LIBOR plus a 2.5% margin and increased the capital spending allowance under the Credit Agreement and permitted Holdings to complete a recapitalization. The schedule of the principal payments was also modified so that the Company was obligated to pay approximately $4.4 million on March 31, 2004, and in each subsequent quarter through June 30, 2008.
In March 2004, Holdings and its wholly-owned subsidiary WH Capital Corporation completed a $275 million offering of 9.5% Notes due 2011 (the 9.5% Notes). The proceeds of the offering together with available cash were used to pay the cash redemption price due upon redemption of all outstanding Holdings 12% Series A Cumulative Convertible preferred shares, including all accrued and unpaid dividends, to redeem Holdings 15.5% Senior Notes and to pay related fees and expenses. Interest on the 9.5% Notes will be paid in cash semi-annually in arrear on April 1 and October 1 of each year, starting on October 1, 2004. The Notes are Holdings general unsecured obligations, ranking equally with any of the existing and future senior indebtedness and senior to all of Holdings future subordinated indebtedness. Also, the 9.5% Notes are effectively subordinated to all existing and future indebtedness and other liabilities of Holdings subsidiaries.
5. 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 when a probable loss estimate can be made.
Herbalife is a defendant in a purported class action lawsuit pending in the U.S. District Court of California (Jacobs v. Herbalife International, Inc., et al) originally filed on February 19, 2002 challenging marketing practices of several distributors and Herbalife under various state and federal laws. Without in any way admitting liability or wrongdoing, the Company has reached a binding settlement with the plaintiffs, subject to final court approval. Under the terms of the settlement, the Company will (i) pay $3 million into a fund to be distributed to former Supervisor-level distributors who had purchased Newest Way to Wealth materials from the other defendants in this matter, (ii) up to a maximum aggregate amount of $1 million, refund to former Supervisor-level distributors the amounts they had paid to purchase such Newest Way to Wealth materials from the other defendants in this matter, and (iii) up to a maximum aggregate amount of $2 million, offer rebates on certain new purchases of Herbalife products to those current Supervisor-level distributors who had purchased Newest Way to Wealth materials from the other defendants in this matter.
Herbalife and certain of its distributors have been named as defendants in a purported class action lawsuit filed July 16, 2003 in the Circuit Court of Ohio County in the State of West Virginia (Mey v. Herbalife International, Inc., et al). Herbalife removed the lawsuit to federal court and the plaintiff sought to remand the lawsuit to state court. The plaintiffs motion was denied. The complaint alleges that certain telemarketing practices of certain Herbalife distributors violate the Telephone Consumer Protection Act and seek to hold Herbalife liable for the practices of its distributors. The Company believes that it has meritorious defenses to the suit.
As a marketer of dietary and nutritional supplements and other products that are ingested by consumers or applied to their bodies, the Company has been subjected to various product liability claims. The effects of these claims to date have not been material to the Company, and the reasonably possible range of exposure on currently existing claims is not material. The Company believes that it has meritorious defenses to the allegations contained in the lawsuits. The Company currently maintains product liability insurance with an annual deductible of $10.0 million.
Certain of the Companys subsidiaries have been subject to tax audits by governmental authorities in their respective countries. In certain of these tax audits, governmental authorities are proposing that significant amounts of additional taxes and related interest and penalties are due. The Company and its tax advisors believe that there are meritorious defenses to the allegations that additional taxes are owing, and the Company is vigorously contesting the additional proposed taxes and related charges.
These matters may take several years to resolve, and the Company cannot be sure of their ultimate resolution. However, it is the opinion of management that adverse outcomes, if any, will not likely result in a material adverse effect on our financial condition and operating results.
7
6. COMPREHENSIVE INCOME
Comprehensive income is summarized as follows (in millions):
|
|
Three Months Ended |
|
Six Months Ended |
|
||||||||
|
|
June 30, 2003 |
|
June 30, 2004 |
|
June 30, 2003 |
|
June 30, 2004 |
|
||||
Net income |
|
$ |
17.2 |
|
$ |
12.1 |
|
$ |
34.1 |
|
$ |
11.6 |
|
Unrealized gain (loss) on derivatives, net of tax |
|
|
|
1.3 |
|
(2.9 |
) |
3.2 |
|
||||
Reclassification adjustments for gain (loss) on derivatives, net of tax |
|
|
|
(0.6 |
) |
2.7 |
|
(1.8 |
) |
||||
Foreign currency translation adjustment, net of tax |
|
1.5 |
|
(2.0 |
) |
1.7 |
|
(2.1 |
) |
||||
Comprehensive income |
|
$ |
18.7 |
|
$ |
10.8 |
|
$ |
35.6 |
|
$ |
10.9 |
|
The net change on derivative instruments represents the fair value of changes caused by marking to market these instruments on June 30, 2004. Foreign currency translation adjustment measures the impact of converting primarily foreign currency assets and liabilities of foreign subsidiaries into US dollars.
7. SEGMENT INFORMATION
The Company is a network marketing company that sells a wide range of weight management products, nutritional supplements and personal care products within one reportable segment as defined under Statement of Financial Accounting Standards No (SFAS) 131, Disclosures about Segments of an Enterprise and Related Information. The Companys products are primarily 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 in 58 countries throughout the world and is organized and managed by geographic area. In the first quarter of 2003, the Company elected to aggregate its operating segments into one reporting segment, as management believes that the operating segments have similar operating characteristics and similar long term operating performance. In making this determination, management believes that the operating segments are similar in the nature of the products sold, the product acquisition process, the types of customers sold to, the methods used to distribute the products, and the nature of the regulatory environment. However, the Company does recognize revenue from sales to distributors in four geographic regions: The Americas, Europe, Asia/Pacific Rim and Japan.
|
|
Three Months Ended |
|
Six Months Ended |
|
||||||||
(in millions) |
|
June 30, 2003 |
|
June 30, 2004 |
|
June 30, 2003 |
|
June 30, 2004 |
|
||||
Net Sales: |
|
|
|
|
|
|
|
|
|
||||
United States |
|
$ |
69.7 |
|
$ |
69.3 |
|
$ |
136.6 |
|
$ |
133.4 |
|
Japan |
|
26.8 |
|
21.6 |
|
62.3 |
|
51.5 |
|
||||
Others |
|
192.4 |
|
233.3 |
|
370.0 |
|
463.3 |
|
||||
Total Net Sales |
|
$ |
288.9 |
|
$ |
324.2 |
|
$ |
568.9 |
|
$ |
648.2 |
|
|
|
|
|
|
|
|
|
|
|
||||
Operating Margin: |
|
|
|
|
|
|
|
|
|
||||
United States |
|
$ |
27.9 |
|
$ |
24.9 |
|
$ |
57.5 |
|
$ |
52.5 |
|
Japan |
|
12.9 |
|
11.6 |
|
30.2 |
|
26.9 |
|
||||
Others |
|
86.2 |
|
106.8 |
|
162.9 |
|
208.5 |
|
||||
Total Operating Margin |
|
$ |
127.0 |
|
$ |
143.3 |
|
$ |
250.6 |
|
$ |
287.9 |
|
|
|
|
|
|
|
|
|
|
|
||||
Marketing, distribution, and administrative expense |
|
$ |
86.7 |
|
$ |
105.1 |
|
$ |
171.1 |
|
$ |
213.0 |
|
Interest expense (income), net |
|
10.3 |
|
14.3 |
|
20.2 |
|
41.6 |
|
||||
Income before income taxes |
|
30.0 |
|
23.9 |
|
59.3 |
|
33.3 |
|
||||
Income taxes |
|
12.8 |
|
11.8 |
|
25.2 |
|
21.7 |
|
||||
Net Income |
|
$ |
17.2 |
|
$ |
12.1 |
|
$ |
34.1 |
|
$ |
11.6 |
|
|
|
|
|
|
|
|
|
|
|
||||
Net sales by product line: |
|
|
|
|
|
|
|
|
|
||||
Weight management |
|
$ |
125.0 |
|
$ |
140.0 |
|
$ |
244.7 |
|
$ |
282.1 |
|
Inner nutrition |
|
125.5 |
|
138.0 |
|
248.8 |
|
277.3 |
|
||||
Outer Nutrition® |
|
25.7 |
|
28.0 |
|
51.9 |
|
57.7 |
|
||||
Literature, promotional and other |
|
12.7 |
|
18.2 |
|
23.5 |
|
31.1 |
|
||||
Total Net Sales |
|
$ |
288.9 |
|
$ |
324.2 |
|
$ |
568.9 |
|
$ |
648.2 |
|
8
|
|
Three Months Ended |
|
Six Months Ended |
|
||||||||
|
|
June 30, 2003 |
|
June 30, 2004 |
|
June 30, 2003 |
|
June 30, 2004 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Net sales by geographic region: |
|
|
|
|
|
|
|
|
|
||||
The Americas |
|
$ |
104.6 |
|
$ |
116.1 |
|
$ |
205.0 |
|
$ |
227.3 |
|
Europe |
|
117.0 |
|
137.4 |
|
223.0 |
|
274.0 |
|
||||
Asia/Pacific Rim |
|
40.5 |
|
49.1 |
|
78.9 |
|
95.2 |
|
||||
Japan |
|
26.8 |
|
21.6 |
|
62.0 |
|
51.7 |
|
||||
Total Net Sales |
|
$ |
288.9 |
|
$ |
324.2 |
|
$ |
568.9 |
|
$ |
648.2 |
|
|
|
December 31, 2003 |
|
June 30, 2004 |
|
|
|
|
|
||
Total Assets: |
|
|
|
|
|
|
|
|
|
||
United States |
|
$ |
601.0 |
|
$ |
582.4 |
|
|
|
|
|
Japan |
|
62.9 |
|
55.4 |
|
|
|
|
|
||
Others |
|
240.1 |
|
270.1 |
|
|
|
|
|
||
Total Assets |
|
$ |
904.0 |
|
$ |
907.9 |
|
|
|
|
|
8. STOCK BASED COMPENSATION
The Company has two stock based employee compensation plans which are the WH Holdings (Cayman Islands) Ltd. Stock Incentive Plan (The Management Plan) and WH Holdings (Cayman Islands) Ltd. Independent Directors Stock Incentive Plan (The Independent Directors Plan). The Management Plan provides for the grant of options to purchase common shares of WH Holdings to members of management of the Company. The Independent Directors Plan provides for the grant of options to purchase common shares of WH Holdings to independent directors of the Company.
The Company applies the intrinsic-value-based method of accounting prescribed by Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations including the Financial Accounting Standards Board (FASB) Interpretation No. 44, Accounting for Certain Transactions involving Stock Compensation, an interpretation of APB Opinion No. 25, issued in March 2000, to account for its stock option plans. Under this method, compensation expense is recorded on the date of grant only if the then current market price of the underlying stock exceeded the exercise price. SFAS 123, Accounting for Stock Based Compensation, established accounting and disclosure requirements using a fair-value-based method of accounting for stock based employee compensation plans. As allowed by SFAS 123, the Company has elected to continue to apply the intrinsic-value-based method of accounting described above, and has adopted only the disclosure requirements of SFAS 123.
The following table illustrates the effect on net income if the fair-value-based method had been applied to all outstanding and unvested awards in each period:
|
|
Three Months Ended |
|
Six Months Ended |
|
||||||||
(in millions) |
|
June 30, 2003 |
|
June 30, 2004 |
|
June 30, 2003 |
|
June 30, 2004 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Net income as reported |
|
$ |
17.2 |
|
$ |
12.1 |
|
$ |
34.1 |
|
$ |
11.6 |
|
Add: Stock-based employee compensation expense included in reported net income, net of tax |
|
0.2 |
|
0.3 |
|
0.2 |
|
0.6 |
|
||||
Deduct:Stock-based employee compensation expense determined under fair value based methods for all awards, net of tax |
|
(0.4 |
) |
(0.6 |
) |
(0.7 |
) |
(1.4 |
) |
||||
Pro forma net income |
|
$ |
17.0 |
|
$ |
11.8 |
|
$ |
33.6 |
|
$ |
10.8 |
|
9. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company designates certain derivatives as fair value hedges. For all qualifying and highly effective fair value hedges, the changes in the fair value of a derivative and the gain or loss on the hedged asset or liability relating to the risk being hedged are recorded currently in earnings. These amounts are recorded in marketing, distribution and administrative expenses and provide offsets to one another.
9
The Company designates certain derivatives as cash flow hedges. The Company engages in a foreign exchange hedging strategy for which the hedged transactions are forecasted foreign currency denominated intercompany transactions. The hedged risk is the variability of the foreign currency where the hedging strategy involves the purchase and sale of average rate options. For the outstanding cash flow hedges on foreign exchange exposures at June 30, 2003 and June 30, 2004, the maximum length of time over which the Company is hedging these exposures is approximately one year. The Company also engages in an interest rate hedging strategy for which the hedged transactions are forecasted interest payments on the variable rate term loan. The hedged risk is the variability of interest rate where the hedging strategy involves the purchase of interest rate caps. There is no ineffective portion for the three and six months ended June 30, 2003 and June 30, 2004. For all qualifying and highly effective cash flow hedges, the changes in the effective portion of the fair value of the derivative are recorded in other comprehensive income (OCI). At June 30, 2004, the net gain in OCI was $0.02 million. Substantially, all of the OCI amounts will be reclassified to earnings within 12 months.
10. RESTRUCTURING RESERVE
As of the date of the Merger, the Company implemented a plan to reduce costs of the business and recorded a severance and restructuring accrual as part of the cost of the Merger. The accrued severance is for identified employees including executives, corporate functions and administrative support.
The following table summarizes the activity in the Companys restructuring accrual (in millions):
Balance at December 31, 2003 |
|
$ |
2.5 |
|
Additional accrual |
|
|
|
|
Cash payments |
|
(0.6 |
) |
|
Balance at June 30, 2004 |
|
$ |
1.9 |
|
The Company expects to pay these restructuring costs through 2005.
11. SUPPLEMENTAL INFORMATION
The consolidated financial statement data as of June 30, 2004 and for the three and six months ended June 30, 2003 and June 30, 2004, have been aggregated by entities that guarantee the 11 ¾% Notes (the Guarantors) and entities that do not guarantee the 11 ¾% Notes (the Non-Guarantors). The Guarantors include WH Intermediate, Lux Holdings, Lux Intermediate, Herbalife Lux (collectively, the Parent Guarantors) and Herbalifes operating subsidiaries in Brazil, Finland, Israel, Japan, Mexico, United Kingdom, U.S. (except for Herbalife Investment Co., LLC), Sweden, Taiwan and Thailand (collectively, the Subsidiary Guarantors). All other subsidiaries are Non-Guarantors. Herbalife is the borrower of the 11 ¾% Notes.
Holdings is the borrower of the 9.5% Notes but is not a guarantor of the 11 ¾% Notes. Obligations under the 9.5% Notes are generally not guaranteed by any of the subsidiaries. Under certain circumstances, however, the subsidiaries may be required to guarantee the obligation.
Consolidating condensed unaudited statements of income for guarantors and non-guarantors for the three and six months ended June 30, 2003 and June 30, 2004 are summarized as follows (in millions):
|
|
Three Months Ended June 30, 2003 |
|
|||||||||||||||||||
|
|
WH Holdings |
|
Parent |
|
Herbalife |
|
Subsidiary |
|
Non- |
|
Eliminations |
|
Total |
|
|||||||
Net sales |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
249.7 |
|
$ |
68.4 |
|
$ |
(29.2 |
) |
$ |
288.9 |
|
Cost of sales |
|
|
|
|
|
|
|
54.5 |
|
33.8 |
|
(29.9 |
) |
58.4 |
|
|||||||
Royalty overrides |
|
|
|
|
|
|
|
62.5 |
|
41.0 |
|
|
|
103.5 |
|
|||||||
Marketing, distribution & administrative expenses |
|
0.2. |
|
0.4 |
|
2.3 |
|
63.5 |
|
20.3 |
|
|
|
86.7 |
|
|||||||
Equity in subsidiary (income) loss |
|
(19.2 |
) |
(19.6 |
) |
(25.1 |
) |
(0.7 |
) |
(0.1 |
) |
64.7 |
|
|
|
|||||||
Interest expense - net |
|
1.8 |
|
|
|
8.7 |
|
(0.2 |
) |
|
|
|
|
10.3 |
|
|||||||
Intercompany charges |
|
|
|
|
|
(2.8 |
) |
36.6 |
|
(33.8 |
) |
|
|
|
|
|||||||
Income before income taxes |
|
17.2 |
|
19.2 |
|
16.9 |
|
33.5 |
|
7.2 |
|
(64.0 |
) |
30.0 |
|
|||||||
Income tax expense (benefit) |
|
|
|
|
|
(2.7 |
) |
13.5 |
|
2.0 |
|
|
|
12.8 |
|
|||||||
NET INCOME (LOSS) |
|
$ |
17.2 |
|
$ |
19.2 |
|
$ |
19.6 |
|
$ |
20.0 |
|
$ |
5.2 |
|
$ |
(64.0 |
) |
$ |
17.2 |
|
10
|
|
Three Months Ended June 30, 2004 |
|
|||||||||||||||||||
|
|
WH Holdings |
|
Parent |
|
Herbalife |
|
Subsidiary |
|
Non- |
|
Eliminations |
|
Total |
|
|||||||
Net sales |
|
$ |
|
|
$ |
143.5 |
|
$ |
|
|
$ |
152.2 |
|
$ |
93.5 |
|
$ |
(65.0 |
) |
$ |
324.2 |
|
Cost of sales |
|
|
|
27.8 |
|
|
|
52.0 |
|
48.6 |
|
(62.1 |
) |
66.3 |
|
|||||||
Royalty overrides |
|
|
|
3.6 |
|
|
|
60.0 |
|
50.9 |
|
|
|
114.5 |
|
|||||||
Marketing, distribution & administrative expenses |
|
0.1 |
|
2.1 |
|
7.7 |
|
73.4 |
|
22.1 |
|
(0.2 |
) |
105.2 |
|
|||||||
Equity in subsidiary (income) loss |
|
(19.6 |
) |
(27.1 |
) |
(11.2 |
) |
(0.9 |
) |
|
|
58.8 |
|
|
|
|||||||
Interest expense - net |
|
7.1 |
|
0.3 |
|
6.5 |
|
0.7 |
|
(0.3 |
) |
|
|
14.3 |
|
|||||||
Intercompany charges |
|
|
|
117.2 |
|
(41.7 |
) |
(39.5 |
) |
(36.0 |
) |
|
|
|
|
|||||||
Income before income taxes |
|
12.4 |
|
19.6 |
|
38.7 |
|
6.5 |
|
8.2 |
|
(61.5 |
) |
23.9 |
|
|||||||
Income tax expense (benefit) |
|
0.3 |
|
|
|
11.6 |
|
(2.4 |
) |
2.3 |
|
|
|
11.8 |
|
|||||||
NET INCOME (LOSS) |
|
$ |
12.1 |
|
$ |
19.6 |
|
$ |
27.1 |
|
$ |
8.9 |
|
$ |
5.9 |
|
$ |
(61.5 |
) |
$ |
12.1 |
|
|
|
Six Months Ended June 30, 2003 |
|
|||||||||||||||||||
|
|
WH Holdings |
|
Parent |
|
Herbalife |
|
Subsidiary |
|
Non- |
|
Eliminations |
|
Total |
|
|||||||
Net sales |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
496.3 |
|
$ |
128.8 |
|
$ |
(56.2 |
) |
$ |
568.9 |
|
Cost of sales |
|
|
|
|
|
|
|
109.5 |
|
62.4 |
|
(56.5 |
) |
115.4 |
|
|||||||
Royalty overrides |
|
|
|
|
|
|
|
125.6 |
|
77.4 |
|
|
|
203.0 |
|
|||||||
Marketing, distribution & administrative expenses |
|
0.2 |
|
0.5 |
|
4.7 |
|
126.8 |
|
38.8 |
|
|
|
171.0 |
|
|||||||
Equity in subsidiary (income) loss |
|
(37.7 |
) |
(38.2 |
) |
(49.5 |
) |
(1.0 |
) |
|
|
126.4 |
|
|
|
|||||||
Interest expense - net |
|
3.4 |
|
|
|
17.3 |
|
(0.4 |
) |
(0.1 |
) |
|
|
20.2 |
|
|||||||
Intercompany charges |
|
|
|
|
|
(5.0 |
) |
68.1 |
|
(63.1 |
) |
|
|
|
|
|||||||
Income before income taxes |
|
34.1 |
|
37.7 |
|
32.5 |
|
67.7 |
|
13.4 |
|
(126.1 |
) |
59.3 |
|
|||||||
Income tax expense (benefit) |
|
|
|
|
|
(5.7 |
) |
27.1 |
|
3.8 |
|
|
|
25.2 |
|
|||||||
NET INCOME (LOSS) |
|
$ |
34.1 |
|
$ |
37.7 |
|
$ |
38.2 |
|
$ |
40.6 |
|
$ |
9.6 |
|
$ |
(126.1 |
) |
$ |
34.1 |
|
|
|
Six Months Ended June 30, 2004 |
|
|||||||||||||||||||
|
|
WH Holdings |
|
Parent |
|
Herbalife |
|
Subsidiary |
|
Non- |
|
Eliminations |
|
Total |
|
|||||||
Net sales |
|
$ |
|
|
$ |
294.0 |
|
$ |
|
|
$ |
297.1 |
|
$ |
177.4 |
|
$ |
(120.3 |
) |
$ |
648.2 |
|
Cost of sales |
|
|
|
58.4 |
|
|
|
96.2 |
|
91.7 |
|
(116.4 |
) |
129.9 |
|
|||||||
Royalty overrides |
|
|
|
7.8 |
|
|
|
123.2 |
|
99.4 |
|
|
|
230.4 |
|
|||||||
Marketing, distribution & administrative expenses |
|
|
|
5.2 |
|
14.9 |
|
150.5 |
|
42.4 |
|
|
|
213.0 |
|
|||||||
Equity in subsidiary (income) loss |
|
(36.9 |
) |
(29.1 |
) |
(10.5 |
) |
(1.7 |
) |
|
|
78.2 |
|
|
|
|||||||
Interest expense - net |
|
25.3 |
|
0.5 |
|
15.0 |
|
2.4 |
|
(1.6 |
) |
|
|
41.6 |
|
|||||||
Intercompany charges |
|
|
|
214.2 |
|
(63.6 |
) |
(76.4 |
) |
(74.2 |
) |
|
|
|
|
|||||||
Income before income taxes |
|
11.6 |
|
37.0 |
|
44.2 |
|
2.9 |
|
19.7 |
|
(82.1 |
) |
33.3 |
|
|||||||
Income tax expense (benefit) |
|
|
|
0.1 |
|
15.0 |
|
0.5 |
|
6.1 |
|
|
|
21.7 |
|
|||||||
NET INCOME(LOSS) |
|
$ |
11.6 |
|
$ |
36.9 |
|
$ |
29.2 |
|
$ |
2.4 |
|
$ |
13.6 |
|
$ |
(82.1 |
) |
$ |
11.6 |
|
11
Consolidating condensed unaudited balance sheet data for guarantors and non-guarantors as of June 30, 2004 and December 31, 2003 are summarized as follows (in millions):
|
|
June 30, 2004 |
|
|||||||||||||||||||
|
|
WH Holdings |
|
Parent |
|
Herbalife |
|
Subsidiary |
|
Non- |
|
Eliminations |
|
Total |
|
|||||||
CURRENT ASSETS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Cash and marketable securities |
|
$ |
2.7 |
|
$ |
16.3 |
|
$ |
1.6 |
|
$ |
87.2 |
|
$ |
49.3 |
|
$ |
|
|
$ |
157.1 |
|
Receivables |
|
|
|
0.1 |
|
6.5 |
|
20.7 |
|
12.3 |
|
(6.5 |
) |
33.1 |
|
|||||||
Intercompany receivables (payables) |
|
|
|
(24.6 |
) |
199.7 |
|
(95.4 |
) |
(79.7 |
) |
|
|
|
|
|||||||
Inventories |
|
|
|
32.8 |
|
|
|
28.7 |
|
18.3 |
|
(9.3 |
) |
70.5 |
|
|||||||
Other current assets |
|
|
|
11.0 |
|
1.3 |
|
19.9 |
|
2.3 |
|
|
|
34.5 |
|
|||||||
Total current assets |
|
2.7 |
|
35.6 |
|
209.1 |
|
61.1 |
|
2.5 |
|
(15.8 |
) |
295.2 |
|
|||||||
Property net |
|
|
|
1.8 |
|
0.5 |
|
39.1 |
|
5.1 |
|
|
|
46.5 |
|
|||||||
OTHER NON-CURRENT ASSETS |
|
232.3 |
|
94.9 |
|
432.8 |
|
131.8 |
|
68.9 |
|
(394.5 |
) |
566.2 |
|
|||||||
TOTAL ASSETS |
|
$ |
235.0 |
|
$ |
132.3 |
|
$ |
642.4 |
|
$ |
232.0 |
|
$ |
76.5 |
|
$ |
(410.3 |
) |
$ |
907.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
CURRENT LIABILITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Accounts payable |
|
$ |
|
|
$ |
9.1 |
|
$ |
|
|
$ |
10.4 |
|
$ |
4.1 |
|
$ |
|
|
$ |
23.6 |
|
Royalties overrides |
|
|
|
1.1 |
|
|
|
40.8 |
|
32.0 |
|
|
|
73.9 |
|
|||||||
Accrued compensation and expenses |
|
8.5 |
|
15.3 |
|
8.6 |
|
54.1 |
|
18.1 |
|
|
|
104.6 |
|
|||||||
Other current liabilities |
|
|
|
3.9 |
|
25.1 |
|
47.6 |
|
6.9 |
|
(6.4 |
) |
77.1 |
|
|||||||
Total current liabilities |
|
8.5 |
|
29.4 |
|
33.7 |
|
152.9 |
|
61.1 |
|
(6.4 |
) |
279.2 |
|
|||||||
NON-CURRENT LIABILITIES |
|
267.7 |
|
(0.6 |
) |
337.8 |
|
(4.7 |
) |
0.4 |
|
|
|
600.6 |
|
|||||||
STOCKHOLDERS EQUITY |
|
(41.2 |
) |
103.5 |
|
270.9 |
|
83.8 |
|
15.0 |
|
(403.9 |
) |
28.1 |
|
|||||||
TOTAL LIABILITIES & STOCKHOLDERS EQUITY |
|
$ |
235.0 |
|
$ |
132.3 |
|
$ |
642.4 |
|
$ |
232.0 |
|
$ |
76.5 |
|
$ |
(410.3 |
) |
$ |
907.9 |
|
|
|
December 31, 2003 |
|
|||||||||||||||||||
|
|
WH Holdings |
|
Parent |
|
Herbalife |
|
Subsidiary |
|
Non- |
|
Eliminations |
|
Total |
|
|||||||
CURRENT ASSETS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Cash and marketable securities |
|
$ |
9.4 |
|
$ |
13.8 |
|
$ |
0.1 |
|
$ |
92.5 |
|
$ |
40.6 |
|
$ |
|
|
$ |
156.4 |
|
Receivables |
|
1.5 |
|
|
|
|
|
23.0 |
|
7.5 |
|
|
|
32.0 |
|
|||||||
Intercompany receivables (payables) |
|
|
|
(23.3 |
) |
196.7 |
|
(89.4 |
) |
(84.0 |
) |
|
|
|
|
|||||||
Inventories |
|
|
|
26.0 |
|
|
|
23.9 |
|
15.0 |
|
(5.5 |
) |
59.4 |
|
|||||||
Other current assets |
|
|
|
2.2 |
|
(2.5 |
) |
26.9 |
|
3.4 |
|
|
|
30.0 |
|
|||||||
Total current assets |
|
10.9 |
|
18.7 |
|
194.3 |
|
76.9 |
|
(17.5 |
) |
(5.5 |
) |
277.8 |
|
|||||||
Property, net |
|
|
|
2.1 |
|
0.3 |
|
37.7 |
|
5.3 |
|
|
|
45.4 |
|
|||||||
OTHER NON-CURRENT ASSETS |
|
238.7 |
|
65.8 |
|
448.9 |
|
129.8 |
|
68.5 |
|
(370.9 |
) |
580.8 |
|
|||||||
TOTAL ASSETS |
|
$ |
249.6 |
|
$ |
86.6 |
|
$ |
643.5 |
|
$ |
244.4 |
|
$ |
56.3 |
|
$ |
(376.4 |
) |
$ |
904.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
CURRENT LIABILITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Accounts payable |
|
$ |
0.1 |
|
$ |
8.2 |
|
$ |
|
|
$ |
10.4 |
|
$ |
3.8 |
|
$ |
|
|
$ |
22.5 |
|
Royalties overrides |
|
|
|
0.7 |
|
|
|
45.7 |
|
30.1 |
|
|
|
76.5 |
|
|||||||
Accrued compensation and expenses |
|
|
|
10.2 |
|
8.7 |
|
44.7 |
|
15.2 |
|
|
|
78.8 |
|
|||||||
Other current liabilities |
|
(0.2 |
) |
0.4 |
|
41.1 |
|
55.6 |
|
1.5 |
|
|
|
98.4 |
|
|||||||
Total current liabilities |
|
(0.1 |
) |
19.5 |
|
49.8 |
|
156.4 |
|
50.6 |
|
|
|
276.2 |
|
|||||||
NON-CURRENT LIABILITIES |
|
38.0 |
|
0.3 |
|
351.9 |
|
(0.9 |
) |
0.7 |
|
|
|
390.0 |
|
|||||||
STOCKHOLDERS EQUITY |
|
211.7 |
|
66.8 |
|
241.8 |
|
88.9 |
|
5.0 |
|
(376.4 |
) |
237.8 |
|
|||||||
TOTAL LIABILITIES & STOCKHOLDERS EQUITY |
|
$ |
249.6 |
|
$ |
86.6 |
|
$ |
643.5 |
|
$ |
244.4 |
|
$ |
56.3 |
|
$ |
(376.4 |
) |
$ |
904.0 |
|
12
Consolidating condensed unaudited statement of cash flows data for guarantors and non-guarantors for the six months ended June 30, 2004 and June 30, 2003 is summarized as follows (in millions):
|
|
Six Months Ended June 30, 2003 |
|
||||||||||||||||||
|
|
WH Holdings |
|
Parent |
|
Herbalife |
|
Subsidiary |
|
Non- |
|
Eliminations |
|
Total |
|
||||||
Net cash provided by (used in) operating activities |
|
35.1 |
|
$ |
38.3 |
|
$ |
27.0 |
|
$ |
55.3 |
|
$ |
24.8 |
|
$ |
(143.3 |
) |
$ |
37.2 |
|
Net cash provided by (used in) investing activities |
|
(35.4 |
) |
(38.3 |
) |
(25.3 |
) |
3.2 |
|
(0.3 |
) |
105.9 |
|
9.8 |
|
||||||
Net cash provided by (used in) financing activities |
|
4.6 |
|
|
|
(1.9 |
) |
(24.4 |
) |
(15.0 |
) |
37.4 |
|
0.7 |
|
||||||
Effect of exchange rate changes on cash |
|
|
|
|
|
|
|
1.0 |
|
1.6 |
|
|
|
2.6 |
|
||||||
Cash at beginning of period |
|
|
|
|
|
0.3 |
|
38.4 |
|
25.5 |
|
|
|
64.2 |
|
||||||
Cash at end of period |
|
4.3. |
|
$ |
|
|
$ |
0.1 |
|
$ |
73.5 |
|
$ |
36.6 |
|
$ |
|
|
$ |
114.5 |
|
|
|
Six Months Ended June 30, 2004 |
|
|||||||||||||||||||
|
|
WH Holdings |
|
Parent |
|
Herbalife |
|
Subsidiary |
|
Non- |
|
Eliminations |
|
Total |
|
|||||||
Net cash provided by (used in) operating activities |
|
$ |
(17.2 |
) |
$ |
32.7 |
|
$ |
49.2 |
|
$ |
29.3 |
|
$ |
15.9 |
|
$ |
(44.3 |
) |
$ |
65.6 |
|
Net cash provided by (used in) investing activities |
|
9.9 |
|
(27.1 |
) |
0.8 |
|
(17.4 |
) |
(3.9 |
) |
29.7 |
|
(8.0 |
) |
|||||||
Net cash provided by (used in) financing activities |
|
6.3 |
|
|
|
(48.6 |
) |
(16.4 |
) |
(1.9 |
) |
14.6 |
|
(46.0 |
) |
|||||||
Effect of exchange rate changes on cash |
|
|
|
(3.0 |
) |
|
|
(0.8 |
) |
(1.4 |
) |
|
|
(5.2 |
) |
|||||||
Cash at beginning of period |
|
3.7 |
|
13.7 |
|
0.2 |
|
92.5 |
|
40.6 |
|
|
|
150.7 |
|
|||||||
Cash at end of period |
|
$ |
2.7 |
|
$ |
16.3 |
|
$ |
1.6 |
|
$ |
87.2 |
|
$ |
49.3 |
|
$ |
|
|
$ |
157.1 |
|
Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Organization
WH Holdings (Cayman Islands) Ltd., a Cayman Islands exempted limited liability company (Holdings), incorporated on April 4, 2002, and its direct and indirect wholly owned subsidiaries, WH Intermediate Holdings Ltd., a Cayman Islands company (WH Intermediate), WH Luxembourg Holdings S.à.R.L., a Luxembourg unipersonal limited liability company (Lux Holdings), WH Luxembourg Intermediate Holdings S.à.R.L. (Herbalife Lux), formerly known as WH Luxembourg CM S.à.R.L, a Luxembourg unipersonal limited liability company, and WH Acquisition Corp., a Nevada corporation (WH Acquisition), were formed on behalf of Whitney & Co., LLC (Whitney) and Golden Gate Private Equity, Inc. (Golden Gate), in order to acquire Herbalife International, Inc., a Nevada corporation, and its subsidiaries (Herbalife or Predecessor) on July 31, 2002 (the Merger). Holdings and its subsidiaries are referred to collectively herein as the Company.
Critical Accounting Policies
Our financial statements contain all adjustments, consisting of normal recurring adjustments necessary to present fairly our financial statements. Our unaudited interim consolidated financial statements are prepared in conformity with Article 10 of Securities and Exchange Commissions Regulation S-X, which require us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the year. Actual results could differ from those estimates. We consider the following policies to be most critical in understanding the judgments that are involved in preparing the financial statements and the uncertainties that could impact our results of operations, financial condition and cash flows.
13
Allowances for product returns are provided at the time the product is shipped. This accrual is based upon historic trends and experience. If the actual product returns differ from past experience, changes in the allowances are made.
We write down our inventory to provide for estimated obsolete or unsalable inventory based on assumptions about future demand for our products and market conditions. If future demand and market conditions are less favorable than managements assumptions, additional inventory write-downs could be required. Likewise, favorable future demand and market conditions could positively impact future operating results if written-off inventory is sold.
We perform goodwill impairment tests on an annual basis and on an interim basis if an event or circumstance indicates that impairment may have occurred. We assess the impairment of other amortizable intangible assets and long-lived assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors we consider important that could trigger an impairment review include significant underperformance compared to historical or projected operating results, substantial changes in our business strategy and significant negative industry or economic trends. If such indicators are present, we evaluate the fair value of the goodwill of the reporting unit compared to its carrying value. For other intangible assets and long-lived assets we determine whether the sum of the estimated undiscounted cash flows attributable to the assets in question is less than their carrying value. If less, we recognize an impairment loss based on the excess of the carrying amount of the assets over their respective fair values. Fair value of goodwill, other intangible assets and long-lived assets is determined by discounted future cash flows, appraisals or other methods. If the long-lived asset determined to be impaired is to be held and used, we recognize an impairment charge to the extent the present value of anticipated net cash flows attributable to the asset are less than the assets carrying value. The fair value of the long-lived asset then becomes the assets new carrying value, which we depreciate over the remaining estimated useful life of the asset. To the extent we determine there are indicators of impairment in future periods, additional write-downs may be required.
Contingencies are accounted for in accordance with SFAS 5, Accounting for Contingencies. SFAS 5 requires that we record an estimated loss from a loss contingency when information available prior to issuance of our financial statements indicates that it is probable that an asset has been impaired or a liability has been incurred at the date of the financial statements and the amount of the loss can be reasonably estimated. Accounting for contingencies such as legal and income tax matters requires us to use judgment. Many of these legal and tax contingencies can take years to be resolved. Generally, as the time period increases over which the uncertainties are resolved, the likelihood of changes to the estimate of the ultimate outcome increases.
Deferred income tax assets have been established for net operating loss carryforwards of certain foreign subsidiaries and have been reduced by a valuation allowance to reflect them at amounts estimated to be ultimately recognized. The net operating loss carryforwards expire in varying amounts over a future period of time. Realization of the income tax carryforwards is dependent on generating sufficient taxable income prior to expiration of the carryforwards. Although realization is not assured, we believe it is more likely than not that the net carrying value of the income tax carryforwards will be realized. The amount of the income tax carryforwards that is considered realizable, however, could change if estimates of future taxable income during the carryforward period are adjusted.
In December 2003, the SEC issued Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition, which codifies, revises, and rescinds certain sections of SAB No. 101, Revenue Recognition, in order to make this interpretive guidance consistent with current authoritative accounting and auditing guidance and SEC rules and regulations. The changes noted in SAB No. 104 did not have a material effect on our consolidated results of operations, consolidated financial position, or consolidated cash flows.
In May 2003, the FASB issued SFAS 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. SFAS 150 establishes standards on the classification and measurement of certain instruments with characteristics of both liabilities and equity. SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise effective at the beginning of the first interim period beginning after June 15, 2003. SFAS 150 requires the classification of any financial instruments with a mandatory redemption feature, an obligation to repurchase equity shares, or a conditional obligation based on the issuance of a variable number of its equity shares, as a liability. The adoption of SFAS 150 did not have a material effect on our consolidated financial returns.
In April 2003, the FASB issued SFAS 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities, effective for contracts entered into or modified after June 30, 2003. This amendment clarifies when a contract meets the characteristics of a derivative, clarifies when a derivative contains a financing component, and amends certain other existing pronouncements. The adoption of SFAS 149 did not have a material effect on our consolidated financial statements.
The FASB issued Interpretation 46 (FIN 46), Consolidation of Variable Interest Entities in January 2003, and a revised interpretation of FIN 46 (FIN 46-R). FIN 46 requires certain variable interest entities (VIEs) to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or sufficient equity to finance its
14
activities without additional subordinated financial support from other parties. The provisions of FIN 46 are effective immediately for all arrangements entered into after January 31, 2003. We have not invested in any entities that we believe are VIEs for which we are the primary beneficiary. The adoption of FIN 46 and FIN 46-R had no impact on our financial position, results of operations, or cash flows.
In November 2002, the FASB issued Interpretation No. 45 (FIN 45), Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, which addresses the disclosure to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees. The disclosure requirements are effective for interim and annual financial statements ending after December 15, 2002. We do not have any material guarantees that require disclosure under FIN 45.
FIN 45 also requires the recognition of a liability by a guarantor at the inception of certain guarantees. FIN 45 requires the guarantor to recognize a liability for the non-contingent component of a guarantee, which is the obligation to stand ready to perform in the event that specified triggering events or conditions occur. The initial measurement of this liability is the fair value of the guarantee at inception. The recognition of the liability is required even if it is not probable that payments will be required under the guarantee or if the guarantee was issued with a premium payment or as part of a transaction with multiple elements. The initial recognition and measurement provisions are effective for all guarantees within the scope of FIN 45 issued or modified after December 31, 2002. We have adopted the disclosure requirements of FIN 45 and will apply the recognition and measurement provisions for all guarantees entered into or modified after December 31, 2002
For the year ended December 31, 2003 and the six months ended June 30, 2004, we have not entered into any guarantees within the scope of FIN 45.
General
We are a worldwide marketer of weight management, inner nutrition and Outer Nutrition® products that support our customers wellness and healthy lifestyles. We market and sell these products through a global network marketing organization comprised of over one million independent distributors in 58 countries.
Retail sales represent the gross sales amounts reflected on our invoices to our distributors. We do not receive the amount reported as retail sales, and we do not monitor the actual retail prices charged for our products. Product sales represent the actual product purchase price paid to us by our 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 distributor allowances. Net Sales represent product sales including handling and freight income. We utilize importers in a limited number of markets and, under some circumstances, we extend credit terms to these importers. Our gross profit consists of net sales less cost of sales, consisting of the cost to manufacture products in our China factory, the prices we pay to our third party manufacturers for products and costs related to product shipments, duties and tariffs, freight expenses relating to shipment of products to distributors and importers and similar expenses.
Royalty overrides consist of (i) 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, (ii) the Presidents Team Bonus payable to some of our most senior distributors in the aggregate amount of approximately an additional 1% of product retail sales, and (iii) other one-time incentive cash bonuses to qualifying distributors. These payments generally represent compensation to distributors for the development, retention and improved productivity of their distributor sales organizations. Because of local country regulatory constraints, we may be required to modify our typical distributor incentive plans. Consequently, the total distributor discount percentage may vary over time. We also offer reduced distributor allowances and pay reduced royalty overrides with respect to certain products worldwide.
Sales, related royalty overrides, and allowances for product returns are recorded when the merchandise is shipped in accordance with our shipping terms when title passes. Advance sales deposits represent prepaid orders for which we have not shipped the merchandise.
Marketing, distribution and administrative expenses represent our operating expenses, components of which include labor and benefits, sales, training and marketing events, professional fees, travel and entertainment, advertising, occupancy costs, communication costs, bank fees, depreciation and amortization, foreign exchange fees and other miscellaneous operating expenses.
Most of our sales outside the United States are made in the respective local currencies. In preparing our financial statements, we translate revenues into U.S. Dollars using average exchange rates. Additionally, the majority of our purchases from our suppliers generally are made in U.S. Dollars, while sales to distributors generally are made in local currencies. Consequently, a strengthening of the U.S. Dollar versus a foreign currency can have a negative impact on our reported sales and operating margins and can generate transaction losses on
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intercompany transactions. Throughout the last five years, foreign currency exchange rates have fluctuated significantly. From time to time, we enter into foreign exchange forward contracts and option contracts to mitigate our foreign currency exchange risk.
Results of Operations
The growing consumer focus on good health and increasing obesity rates throughout the world continue to provide an excellent opportunity for us to grow our business selling weight management products and inner and outer nutritional products
Our 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 our ability to attract and retain new distributors, further penetrate existing markets, open new markets and introduce additional and new products into our markets.
Three Months Results
Net income for the three months ended June 30, 2004, was $12.1 million, which was $5.1 million lower than the prior-year same period. The decrease in net income for the three months was primarily due to amortization of intangibles, higher labor costs and promotional expenses, and higher interest expenses, partially offset by increased net sales in all geographic regions except for Japan and the favorable impact of the appreciation of foreign currencies. Overall the appreciation of foreign currencies had a $2.8 million favorable impact on net income.
Six Months Results
Net income for the six months ended June 30, 2004, was $11.6 million, which was $22.5 million lower than the prior-year same period. The decrease in net income for the six months was primarily due to increased operating expenses and higher interest expenses, offset by increased net sales in all geographic regions, except for Japan. Operating expenses increased due to additional amortization of intangibles, the unfavorable impact by the appreciation of foreign currencies, higher labor and promotional costs and provisions made for various tax matters. Overall the appreciation of foreign currencies had a $5.7 million favorable impact on net income.
Excluding the impact of the additional amortization of intangibles relating to the Merger and the positive impact from appreciation of foreign currencies, net income for the current three and six-month period would have been $4.4 million and $21.3 million, respectively, lower than the prior year same periods, which was due to higher interest expense resulted from the refinancing transaction in March 2004.
Sales by Geographic Regions
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|
Three Months Ended June 30 |
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|
2003 |
|
2004 |
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||||||||||||||||||||||||||||
(in millions) |
|
Retail |
|
Distributor |
|
Product |
|
Handling |
|
Net Sales |
|
Retail |
|
Distributor |
|
Product |
|
Handling |
|
Net |
|
% Change |
|
||||||||||
The Americas |
|
$ |
168.3 |
|
$ |
79.7 |
|
$ |
88.6 |
|
$ |
16.0 |