UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 


 

(Mark One)

 

 

ý

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

For the quarterly period ended September 30, 2004

 

 

OR

 

 

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission file number:  333-115363

 


 

WH HOLDINGS (CAYMAN ISLANDS) LTD.

(Exact name of registrant as specified in its charter)

 

Cayman Islands

N/A

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

 

P.O. Box 309GT
Ugland House, South Church Street
Grand Cayman, Cayman Island

(Address of principal executive offices) (Zip code)

 

(310) 410-9600*

(Registrant’s 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 registrant’s common shares outstanding as of September 30, 2004 was 104,888,588.

 


* 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 Nine Months ended September 30, 2004

 

PART I. FINANCIAL INFORMATION

 

 

 

Item 1.

Financial Statements:

 

 

 

 

 

Unaudited Consolidated Balance Sheets

 

 

 

 

 

Unaudited Consolidated Statements of Income

 

 

 

 

 

Unaudited Statements of Changes in Stockholders’ Equity

 

 

 

 

 

Unaudited Consolidated Statements of Cash Flows

 

 

 

 

 

Notes to Unaudited Consolidated Financial Statements

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risks

 

 

 

 

Item 4.

Controls and Procedures

 

 

 

 

Forward Looking Statements

 

 

 

 

PART II. OTHER INFORMATION

Item 1.

Legal Proceedings

 

 

 

 

Item 2.

Changes in Securities and Use of Proceeds

 

 

 

Item 3.

Defaults Upon Senior Securities

 

 

 

Item 4.

Submission of Matters to a Vote of Security Holders

 

 

 

Item 5.

Other Information

 

 

 

Item 6.

Exhibits and Reports on Form 8-K

 

 

 

Signatures and Certifications

 

 

1



 

PART I.  FINANCIAL INFORMATION

 

Item 1.  FINANCIAL STATEMENTS

 

WH HOLDINGS (CAYMAN ISLANDS) LTD.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

ASSETS

 

 

 

December 31, 2003

 

September 30, 2004

 

CURRENT ASSETS:

 

 

 

 

 

Cash and cash equivalents

 

$

150,679,000

 

$

164,669,000

 

Restricted cash

 

5,701,000

 

 

Receivables net of allowance for doubtful accounts of $2,527,000 (2003) and $4,680,000 (2004), and including related party receivables of $323,000 (2003)

 

31,977,000

 

33,408,000

 

Inventories

 

59,397,000

 

77,751,000

 

Prepaid expenses and other current assets

 

20,825,000

 

30,606,000

 

Deferred income taxes

 

9,164,000

 

2,661,000

 

Total current assets

 

277,743,000

 

309,095,000

 

 

 

 

 

 

 

Property, at cost, net of accumulated depreciation and amortization of $17,607,000 (2003) and $25,529,000 (2004)

 

45,411,000

 

49,788,000

 

Deferred compensation plan assets

 

21,340,000

 

19,564,000

 

Other assets

 

5,795,000

 

6,603,000

 

Deferred financing costs, net of accumulated amortization of $10,266,000 (2003) and $14,876,000 (2004)

 

33,278,000

 

29,103,000

 

Marketing franchise

 

310,000,000

 

310,000,000

 

Distributor network, net of accumulated amortization of $26,539,000 (2003) and $40,589,000 (2004)

 

29,661,000

 

15,611,000

 

Product certification, product formulae and other intangible assets, net of accumulated amortization of $9,491,000 (2003) and $13,917,000 (2004)

 

13,219,000

 

8,861,000

 

Goodwill

 

167,517,000

 

167,517,000

 

TOTAL

 

$

903,964,000

 

$

916,142,000

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

CURRENT LIABILITIES:

 

 

 

 

 

 

Accounts payable

 

$

22,526,000

 

$

21,413,000

 

 

Royalty overrides

 

76,522,000

 

75,984,000

 

 

Accrued compensation

 

19,127,000

 

22,714,000

 

 

Accrued expenses

 

59,669,000

 

85,554,000

 

 

Current portion of long term debt

 

72,377,000

 

22,411,000

 

 

Advance sales deposits

 

6,574,000

 

13,401,000

 

 

Income taxes payable

 

19,427,000

 

32,016,000

 

 

Total current liabilities

 

$

276,222,000

 

$

273,493,000

 

 

 

 

 

 

 

 

 

NON-CURRENT LIABILITIES:

 

 

 

 

 

 

Long term debt, net of current portion, including related party debt of $23,700,000 (2003) and $5,808,000 (2004)

 

252,917,000

 

479,328,000

 

 

Deferred compensation

 

22,442,000

 

13,706,000

 

 

Deferred income taxes

 

111,910,000

 

105,798,000

 

 

Other non-current liabilities

 

2,685,000

 

2,611,000

 

 

Total liabilities

 

$

666,176,000

 

$

874,936,000

 

 

 

 

 

 

 

 

 

COMMITMENTS AND CONTINGENCIES

 

 

 

 

 

 

 

 

 

 

 

 

 

SHAREHOLDERS’ EQUITY:

 

 

 

 

 

 

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

 

$

102,000

 

 

 

Common shares, $0.001 par value, 350,000,000 shares authorized, 104,888,588 (2004) shares issued and outstanding

 

 

$

105,000

 

 

Paid-in-capital in excess of par value

 

183,407,000

 

2,486,000

 

 

Accumulated other comprehensive income

 

3,427,000

 

3,169,000

 

 

Retained earnings

 

50,852,000

 

35,446,000

 

 

Total shareholders’ equity

 

$

237,788,000

 

$

41,206,000

 

 

 

 

 

 

 

 

 

TOTAL

 

$

903,964,000

 

$

916,142,000

 

 

See the accompanying notes to consolidated financial statements

 

2



 

WH HOLDINGS (CAYMAN ISLANDS) LTD.

CONSOLIDATED STATEMENTS OF INCOME

 

(Unaudited)

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,
2003

 

September 30,
2004

 

September 30,
2003

 

September 30
2004

 

 

 

 

 

 

 

 

 

 

 

Product sales

 

$

249,191,000

 

$

274,671,000

 

$

737,899,000

 

$

831,329,000

 

Handling & freight income

 

41,200,000

 

45,138,000

 

121,409,000

 

136,692,000

 

Net sales

 

290,391,000

 

319,809,000

 

859,308,000

 

968,021,000

 

Cost of sales

 

58,987,000

 

68,961,000

 

174,349,000

 

198,824,000

 

Gross profit

 

231,404,000

 

250,848,000

 

684,959,000

 

769,197,000

 

Royalty overrides

 

104,971,000

 

111,978,000

 

307,962,000

 

342,366,000

 

Marketing, distribution & administrative expenses (including $1,650,000, $1,652,000, $7,127,000 and $5,171,000 of related party expenses for the three and nine months ended September 30, 2003 and 2004, respectively)

 

111,089,000

 

102,772,000

 

282,190,000

 

315,811,000

 

Operating Income

 

15,344,000

 

36,098,000

 

94,807,000

 

111,020,000

 

Interest expense – net

 

11,404,000

 

13,604,000

 

31,606,000

 

55,233,000

 

Income before income taxes

 

3,940,000

 

22,494,000

 

63,201,000

 

55,787,000

 

Income taxes

 

2,241,000

 

11,004,000

 

27,418,000

 

32,693,000

 

NET INCOME

 

$

1,699,000

 

$

11,490,000

 

$

35,783,000

 

$

23,094,000

 

Earnings per share:

 

 

 

 

 

 

 

 

 

Basic

 

$

 

$

0.11

 

$

 

$

0.22

 

Diluted

 

$

0.02

 

$

0.10

 

$

0.34

 

$

0.21

 

Weighted average shares outstanding

 

 

 

 

 

 

 

 

 

Basic

 

 

104,530,000

 

 

104,242,000

 

Diluted

 

108,784,000

 

111,320,000

 

106,265,000

 

110,492,000

 

 

See the accompanying notes to consolidated financial statements

 

3



 

WH HOLDINGS (CAYMAN ISLANDS) LTD.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)

 

 

 

Preferred
Stock

 

Common
Stock

 

Paid in Capital
in Excess of
Par Value

 

Accumulated
Other
Comprehensive
Income

 

Retained
Earnings

 

Total
Shareholders’
Equity

 

Comprehensive
Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2003

 

$

102,000

 

$

 

$

183,407,000

 

$

3,427,000

 

$

50,852,000

 

$

237,788,000

 

 

 

Conversion of 102,013,572 preferred shares

 

(102,000

)

 

 

(183,013,000

)

 

 

 

 

(183,115,000

)

 

 

Issuance of 104,054,388 common shares

 

 

 

104,000

 

(104,000

)

 

 

 

 

––

 

 

 

Issuance of 834,200 common shares from the exercise of stock options

 

 

 

1,000

 

760,000

 

 

 

 

 

761,000

 

 

 

Additional capital from stock options

 

 

 

 

 

1,436,000

 

 

 

 

 

1,436,000

 

 

 

Dividends paid

 

 

 

 

 

 

 

 

 

(38,500,000

)

(38,500,000

)

 

 

Net income

 

 

 

 

 

 

 

 

 

23,094,000

 

23,094,000

 

$

23,094,000

 

Translation adjustments

 

 

 

 

 

 

 

(1,656,000

)

 

 

(1,656,000

)

(1,656,000

)

Unrealized gain on derivatives

 

 

 

 

 

 

 

3,162,000

 

 

 

3,162,000

 

3,162,000

 

Reclassification adjustments for loss on derivative instruments

 

 

 

 

 

 

 

(1,764,000

)

 

 

(1,764,000

)

(1,764,000

)

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

$

22,836,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at September 30, 2004

 

$

 

$

105,000

 

$

2,486,000

 

$

3,169,000

 

$

35,446,000

 

$

41,206,000

 

 

 

 

See the accompanying notes to consolidated financial statements.

 

4



 

WH HOLDINGS (CAYMAN ISLANDS) LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

Nine Months Ended

 

 

 

September 30,
2003

 

September 30,
2004

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

Net income

 

$

35,784,000

 

$

23,094,000

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

43,953,000

 

34,287,000

 

Amortization and discount of deferred financing costs

 

5,927,000

 

5,213,000

 

Deferred income taxes

 

1,539,000

 

491,000

 

Unrealized foreign exchange loss

 

1,534,000

 

389,000

 

Write-off of deferred financing costs and unamortized discounts

 

1,368,000

 

4,077,000

 

Other

 

1,506,000

 

1,743,000

 

Changes in operating assets and liabilities:

 

 

 

 

 

Receivables

 

(7,301,000

)

(1,355,000

)

Inventories

 

6,008,000

 

(18,991,000

)

Prepaid expenses and other current assets

 

4,000

 

(8,087,000

)

Accounts payable

 

(702,000

)

(1,052,000

)

Royalty overrides

 

3,739,000

 

286,000

 

Accrued expenses and accrued compensation

 

(9,140,000

)

30,068,000

 

Advance sales deposits

 

1,745,000

 

6,894,000

 

Income taxes payable

 

(2,961,000

)

12,660,000

 

Deferred compensation liability

 

(9,948,000

)

(8,736,000

)

NET CASH PROVIDED BY OPERATING ACTIVITIES

 

73,055,000

 

80,981,000

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

Purchases of property

 

(9,509,000

)

(16,810,000

)

Proceeds from sale of property

 

39,000

 

27,000

 

Changes in marketable securities, net

 

1,280,000

 

 

Net change in restricted cash

 

3,621,000

 

5,701,000

 

Changes in other assets

 

(245,000

)

(3,723,000

)

Deferred compensation plan assets

 

10,868,000

 

1,776,000

 

NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES

 

6,054,000

 

(13,029,000

)

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

Dividends paid on Preferred Shares

 

 

(38,500,000

)

Issuance of 15 1/2% Senior Notes and 9 1/2% Notes

 

872,000

 

267,437,000

 

Borrowings from long-term debt

 

3,603,000

 

1,709,000

 

Principal payments on long-term debt

 

(15,483,000

)

(59,072,000

)

Conversion of Preferred Shares

 

 

(183,115,000

)

Proceeds from issuance of Common Shares

 

4,505,000

 

 

Repurchase of 15 1/2% Senior Notes

 

(5,681,000

)

(39,644,000

)

Exercise of Stock Options

 

 

761,000

 

NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES

 

(12,184,000

)

(50,424,000

)

 

 

 

 

 

 

EFFECT OF EXCHANGE RATE CHANGES ON CASH

 

3,930,000

 

(3,539,000

)

 

 

 

 

 

 

NET CHANGE IN CASH AND CASH EQUIVALENTS

 

70,855,000

 

13,989,000

 

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

 

64,201,000

 

150,679,000

 

CASH AND CASH EQUIVALENTS, END OF PERIOD

 

$

135,056,000

 

$

164,668,000

 

 

 

 

 

 

 

CASH PAID FOR:

 

 

 

 

 

Interest

 

$

32,318,000

 

$

38,646,000

 

Income taxes

 

$

29,114,000

 

$

20,930,000

 

 

 

 

 

 

 

NON-CASH ACTIVITIES:

 

 

 

 

 

Acquisitions of property through capital leases

 

$

5,876,000

 

$

3,871,000

 

 

See the accompanying notes to consolidated financial statements

 

5



 

WH HOLDINGS (CAYMAN ISLANDS) LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1.         ORGANIZATION AND RECAPITALIZATION

 

Organization

 

WH Holdings (Cayman Islands) Ltd., a Cayman Islands exempted limited liability company (“Herbalife”), 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 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 International”) on July 31, 2002 (the “Acquisition”).  Herbalife and its subsidiaries are referred to collectively herein as the Company.

 

Recapitalization

 

On October 1, 2004, Herbalife filed a registration statement with the U.S. Securities and Exchange Commission (the “SEC”) in connection with an initial public offering (the “IPO”).  Herbalife plans to change its name to Herbalife Ltd. prior to the effectiveness of the registration statement.  Herbalife is offering its common shares as part of a series of recapitalization transactions that it anticipates closing in connection with the consummation of the IPO as follows:

 

                  a tender offer for any and all of Herbalife International's outstanding 11¾% senior subordinated notes due 2010, which are referred to as the 11¾% Notes, and related consent solicitation to amend the indenture governing the 11¾% Notes;

 

                  the redemption of 40% of its outstanding 9 1/2% notes due 2011, which are referred to as the 9 1/2% Notes;

 

                  the replacement of Herbalife International’s existing $205.0 million senior credit facility with a new $225.0 million senior credit facility;

 

                  the payment of a special cash dividend to the current shareholders of Herbalife in the amount of $109.3 million, subject to upward adjustment in the event the underwriters exercise their over-allotment option.  The new purchasers of Herbalife’s common shares in the IPO will not be entitled to participate in this special cash dividend; and

 

                  the amendment of Herbalife's amended and restated Memorandum and Articles of Association to: (1) effect a 1:2 reverse stock split of Herbalife's common shares; (2) increase Herbalife's authorized common shares to 500 million shares; and (3) increase Herbalife's authorized preference shares to 7.5 million shares.

 

The closing of the IPO is conditioned upon the closing of Herbalife International’s new senior credit facility and the receipt by Herbalife International of tenders from holders of at least a majority of the outstanding aggregate principal amount of the 11¾% Notes.

 

2.         BASIS OF PRESENTATION

 

The unaudited interim financial information of the Company has been prepared in accordance with Article 10 of the SEC’s Regulation S-X.  Accordingly, it does not include all of the information required by generally accepted accounting principles for complete financial statements. The Company’s financial statements as of and for the three and nine months ended September 30, 2004 include Herbalife 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, necessary to present fairly the Company’s financial statements as of September 30, 2004 and for the three and nine months ended September 30, 2003 and September 30, 2004. Operating results for the three and nine months ended September 30, 2004, are not necessarily indicative of the results that may be expected for the year ending December 31, 2004.

 

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 & Co., LLC (“Whitney”) and Golden Gate Private Equity, Inc. (“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 Herbalife International’s amended and restated credit agreement (the “Credit Agreement”).  For the three months ended September 30, 2003 and September 30, 2004, the Company expensed monitoring fees in the amount of $1.3 million and other expenses of $0.4 million for both periods.  For the nine months ended September 23, 2003, and September 30, 2004, the Company expensed monitoring fees in the amount of $3.8 million for both periods and other expenses of $3.4 million and $1.3 million, respectively.  As of September 30, 2004, Whitney affiliated companies held $4.8 million of the outstanding term

 

6



 

loan balance under the Credit Agreement and senior executives of Whitney held $1.0 million of the 11¾% Notes.  Also, in March 2004, Herbalife redeemed $17.4 million of the 15 1/2% Senior Notes due 2011 held by certain Whitney affiliated companies and paid an additional $5.0 million repurchase premium and $0.5 million in accrued interest.

 

Whitney and Golden Gate (and/or their affiliates) were and are parties to a Share Purchase Agreement (the “Share Purchase Agreement”) pursuant to which they originally purchased the Herbalife’s Shares.  Under the terms of the Share Purchase Agreement, Whitney and Golden Gate can, subject to approval by Herbalife’s board of directors and 75% of its shareholders, require Herbalife to pay a dividend to all of its shareholders related to certain income that may be taxable to them resulting from their ownership of Herbalife’s shares.  The Company has recently completed its analysis with regard to this potential payment and based on this analysis, Herbalife may be required to make a $1.4 million payment to its shareholders related to certain income that may be taxable to them for the year ended December 31, 2003.  In addition, Herbalife may be required to make a payment to its shareholders related to certain income that may be taxable to them for the year ended December 31, 2004.  Herbalife has not yet determined the amount, if any, that could be payable in connection with the 2004 taxes.  Both amounts would become distributable to the shareholders if and when the board of directors and 75% of Herbalife shareholders approve the payment of these amounts.  As of the date of this filing, Herbalife’s board of directors has not made a determination to make these distributions.  If and when such a determination is made, these amounts will be recorded as dividends.

 

4.         LONG TERM DEBT

 

Long term debt consisted of the following (in millions):

 

 

 

December 31,
2003

 

September 30,
2004

 

11¾% Notes

 

$

158.2

 

$

158.3

 

Borrowing under senior credit facility

 

119.8

 

66.7

 

15 1/2% Senior Notes

 

39.6

 

 

Discount – 15 1/2% Senior Notes warrant

 

(1.6

)

 

9 1/2% Notes

 

 

267.9

 

Capital leases

 

5.5

 

6.7

 

Other debt

 

3.8

 

2.1

 

 

 

325.3

 

501.7

 

Less: current portion

 

72.4

 

22.4

 

 

 

$

252.9

 

$

479.3

 

 

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 the Credit Agreement. In connection with this prepayment, the lenders under the Credit Agreement 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, increased the capital spending allowance under the Credit Agreement and permitted the Company 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, Herbalife and its wholly-owned subsidiary WH Capital Corporation completed a $275.0 million offering of 9 1/2% Notes due 2011.  The proceeds of the offering together with available cash were used to pay the original issue price in cash due upon conversion of 104.1 million outstanding Herbalife 12% Series A Cumulative Convertible preferred shares including 2.0 million warrants exercised as described below, to pay all accrued and unpaid dividends, to redeem Herbalife’s 15 1/2% Senior Notes and to pay related fees and expenses.  The total price of $52.1 million to redeem the 15 1/2% Senior Notes consisted of $39.6 million aggregate principal amount (excluding $1.7 million of unamortized discount), an $11.4 million purchase premium and $1.1 million of accrued interest from January 1, 2004 up to (but not including) March 8, 2004.  At any time after July 31, 2002 and on or before July 15, 2012, warrants issued with the 15 1/2% Senior Notes could be exercised to purchase an equivalent amount of preferred stock at an exercise price of $0.01 per share.  The number of warrants outstanding after July 31, 2002 and exercised on March 8, 2004 to purchase an equivalent amount of preferred shares was 2,040,816.  The proceeds of the 9 1/2% Notes were used in part to redeem and convert these preferred shares into common shares.  Interest on the 9 1/2% Notes will be paid in cash semi-annually in arrears on April 1 and October 1 of each year, starting October 1, 2004.  The 9 1/2% Notes are Herbalife’s general unsecured obligations, ranking equally with any of the existing and future senior indebtedness and senior to all of Herbalife’s future subordinated indebtedness.  Also, the 9 1/2% Notes are effectively subordinated to all existing and future indebtedness and other liabilities of Herbalife’s 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.

 

7



 

Herbalife International was a defendant in a purported class action lawsuit 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 International under various state and federal laws.  Without in any way admitting liability or wrongdoing, the Company has reached a binding settlement with the plaintiffs.  Under the terms of the settlement, the Company (i) paid $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) will pay 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) will offer rebates up to a maximum aggregate amount of $2 million, 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.  As of December 31, 2003, these amounts were adequately reserved for in the Company’s financial statements.

 

Herbalife International 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 International had removed the lawsuit to federal court and the court has recently remanded the lawsuit to state court.  The complaint alleges that certain telemarketing practices of certain Herbalife International distributors violate the Telephone Consumer Protection Act and seeks to hold Herbalife International liable for the practices of its distributors.  More specifically, the plaintiffs’ complaint alleges that several of Herbalife’s distributors used pre-recorded telephone messages and autodialers to contact prospective customers in violation of the TCPA’s prohibition of such practices.  Herbalife’s distributors are independent contractors and, if any such distributors in fact violated the TCPA, they also violated Herbalife’s policies, which require its distributors to comply with all applicable federal, state and local laws.  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 Company’s subsidiaries have been subjected 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 aggregate amount of assessed taxable penalties and interest to date is approximately $34.0 million.  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 or operating results.  This opinion is based on our belief that any losses we suffer in excess of amounts reserved would not be material, and that we have meritorious defenses.  Although we have reserved an amount that we believe represents the most likely outcome of the resolution of these disputes, if we are incorrect in our assessment we may have to pay the full amount assessed.

 

6.         COMPREHENSIVE INCOME

 

Comprehensive income is summarized as follows (in millions):

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,
2003

 

September 30,
2004

 

September 30,
2003

 

September 30,
2004

 

Net income

 

$

1.7

 

$

11.5

 

$

35.8

 

$

23.1

 

Unrealized gain (loss) on derivatives, net of tax

 

(0.4

)

 

(3.4

)

3.2

 

Reclassification adjustments for gain (loss) on derivatives, net of tax

 

0.4

 

 

3.2

 

(1.8

)

Foreign currency translation adjustment, net of tax

 

1.2

 

0.5

 

3.0

 

(1.7

)

Comprehensive income

 

$

2.9

 

$

12.0

 

$

38.6

 

$

22.8

 

 

The net change on derivative instruments represents the fair value of changes caused by marking to market these instruments on September 30, 2004. Foreign currency translation adjustment, net of tax measures the impact of converting primarily foreign currency assets and liabilities of foreign subsidiaries into U.S. dollars.

 

8



 

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 (“SFAS”) No. 131, “Disclosures about Segments of an Enterprise and Related Information.”  The Company’s 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 sells products in 59 countries throughout the world and is organized and managed by geographic region.  In the first quarter of 2003, the Company elected to aggregate its operating segments into one reporting segment, as management believes that the Company’s operating segments have similar operating characteristics and similar long term operating performance.  In making this determination, management believes that the operating segments are similar with regard to the nature of the products sold, the product acquisition process, the types of customers products are sold to, the methods used to distribute the products, and the nature of the regulatory environment.

 

Revenue reflects direct sales of products to distributors based on the distributors’ geographic location.  Sales attributed to the United States are the same as reported in the geographic operating information.

 

The Company’s geographic operating information and sales by product line are as follows:

 

 

 

Three Months Ended

 

Nine Months Ended

 

(in millions)

 

September 30,
2003

 

September 30,
2004

 

September 30,
2003

 

September 30,
2004

 

Net Sales:

 

 

 

 

 

 

 

 

 

United States

 

$

68.1

 

$

61.4

 

$

204.6

 

$

194.9

 

Japan

 

27.9

 

22.4

 

90.2

 

73.9

 

Others

 

194.4

 

236.0

 

564.5

 

699.2

 

Total Net Sales

 

$

290.4

 

$

319.8

 

$

859.3

 

$

968.0

 

 

 

 

 

 

 

 

 

 

 

Operating Margin:

 

 

 

 

 

 

 

 

 

United States

 

$

27.4

 

$

24.8

 

$

84.8

 

$

77.2

 

Japan

 

13.2

 

12.4

 

43.5

 

39.3

 

Others

 

85.8

 

101.7

 

248.7

 

310.3

 

Total Operating Margin*

 

$

126.4

 

$

138.9

 

$

377.0

 

$

426.8

 

 

 

 

 

 

 

 

 

 

 

Marketing, distribution, and administrative expense

 

$

111.1

 

$

102.8

 

$

282.2

 

$

315.8

 

Interest expense (income), net

 

11.4

 

13.6

 

31.6

 

55.2

 

Income before income taxes

 

3.9

 

22.5

 

63.2

 

55.8

 

Income taxes

 

2.2

 

11.0

 

27.4

 

32.7

 

Net Income

 

$

1.7

 

$

11.5

 

$

35.8

 

$

23.1

 

 

 

 

 

 

 

 

 

 

 

Net sales by product line:

 

 

 

 

 

 

 

 

 

Weight management

 

$

126.9

 

$

137.4

 

$

371.5

 

$

419.5

 

Inner nutrition

 

126.1

 

138.5

 

374.9

 

415.9

 

Outer Nutrition®

 

24.0

 

28.3

 

75.9

 

86.0

 

Literature, promotional and other

 

13.4

 

15.6

 

37.0

 

46.6

 

Total Net Sales

 

$

290.4

 

$

319.8

 

$

859.3

 

$

968.0

 

 

9



 

Net sales by geographic region:

 

 

 

 

 

 

 

 

 

The Americas

 

$

107.2

 

$

116.1

 

$

312.1

 

$

343.5

 

Europe

 

114.2

 

127.5

 

337.1

 

401.6

 

Asia/Pacific Rim

 

41.1

 

53.8

 

120.0

 

149.0

 

Japan

 

27.9

 

22.4

 

90.1

 

73.9

 

Total Net Sales

 

$

290.4

 

$

319.8

 

$

859.3

 

$

968.0

 

 

 

 

December 31,
2003

 

September 30,
2004

 

 

 

 

 

Total Assets:

 

 

 

 

 

 

 

 

 

United States

 

$

601.0

 

$

574.5

 

 

 

 

 

Japan

 

62.9

 

55.5

 

 

 

 

 

Others

 

240.1

 

286.1

 

 

 

 

 

Total Assets

 

$

904.0

 

$

916.1

 

 

 

 

 

 


* Non-U.S. royalty checks that have aged, for a variety of reasons, beyond a certainty of being paid, are taken back into income.  Management has calculated this period of certainty to be three years worldwide, whereas previously this period varied by country, ranging from 12 months to 30 years.  In order to achieve consistency among all countries, the Company adjusted the period over which such amounts would be taken into income to three years on a Company-wide basis.  The impact of this change for the three and nine months ended September 30, 2004 is a pretax benefit of approximately $2.4 million.

 

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 the 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 Herbalife to members of the Company’s management.  The Independent Directors Plan provides for the grant of options to purchase common shares of Herbalife to the Company’s independent directors.

 

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

 

10



 

only if the then current market price of the underlying stock exceeds the exercise price. SFAS 123, Accounting forStock 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 vested awards in each period:

 

 

 

Three Months Ended

 

Nine Months Ended

 

(in millions)

 

September 30,
2003

 

September 30,
2004

 

September 30,
2003

 

September 30,
2004

 

 

 

 

 

 

 

 

 

 

 

Net income as reported

 

$

1.7

 

$

11.5

 

$

35.8

 

$

23.1

 

Add: Stock-based employee compensation expense included in reported net income, net of tax

 

0.2

 

0.3

 

0.3

 

0.8

 

Deduct: Stock-based employee compensation expense determined under fair value based methods for all awards, net of tax

 

(0.3

)

(0.5

)

(0.9

)

(1.9

)

Pro forma net income

 

$

1.6

 

$

11.3

 

$

35.2

 

$

22.0

 

 

9.         DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

 

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 September 30, 2003 and September 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 nine months ended September 30, 2003 and September 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 September 30, 2004, the OCI balance was zero.

 

10.      RESTRUCTURING RESERVE

 

As of the date of the Acquisition, as defined herein, 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 Acquisition.  The accrued severance is for identified employees including executives, corporate functions and administrative support.

 

The following table summarizes the activity in the Company’s restructuring accrual (in millions):

 

Balance at December 31, 2003

 

$

2.5

 

Additional accrual

 

––

 

Cash payments

 

(1.5

)

Balance at September 30, 2004

 

$

1.0

 

 

The Company expects to pay these restructuring costs through 2005.

 

11.      SUPPLEMENTAL INFORMATION

 

The consolidated financial statement data as of September 30, 2004, and for the three and nine months ended September 30, 2003 and September 30, 2004, have been aggregated by entities that guarantee the 11¾% Notes (the “Guarantors”) and entities that do not guarantee the 11¾% Notes (the “Non-Guarantors”).  The Guarantors include WH Intermediate Holdings Ltd. (“WH Intermediate”), WH Luxembourg Holdings S.à.R.L., (“Lux Holdings”), WH Luxembourg Intermediate Holdings S.à.R.L. (“Lux Intermediate”), Herbalife International Luxembourg S.à.R.L. (“Herbalife Lux”) formerly known as WH Luxembourg CM S.à.R.L. (collectively, the “Parent Guarantors”) and Herbalife’s 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 International is the issuer of the 11¾% Notes.

 

11



 

Herbalife is the issuer of the 9 1/2% Notes but is not a Guarantor of the 11¾% Notes.  Obligations under the 9 1/2% Notes are not guaranteed by any of our subsidiaries.  However, under certain circumstances in the future, our subsidiaries may be required to guarantee the 9 1/2% Notes.  Consolidating condensed unaudited statements of income for Guarantors and Non-Guarantors for the three and nine months ended September 30, 2003 and September 30, 2004 are summarized as follows (in millions):

 

 

 

Three Months Ended September 30, 2003

 

 

 

WH Holdings
(Cayman
Islands) Ltd.

 

Parent
Guarantors

 

Herbalife
International, Inc.

 

Subsidiary
Guarantors

 

Non-
Guarantors

 

Eliminations

 

Total
Consolidated

 

Net sales

 

$

 

$

 

$

 

$

253.1

 

$

69.4

 

$

(32.1

)

$

290.4

 

Cost of sales

 

 

 

 

56.5

 

35.1

 

(32.6

)

59.0

 

Royalty overrides

 

 

 

 

63.9

 

41.0

 

 

 

104.9

 

Marketing, distribution & administrative expenses

 

0.1

 

0.9

 

28.0

 

63.2

 

19.0

 

 

111.2

 

Equity in subsidiary (income) loss

 

(3.4

)

(4.6

)

(27.9

)

(0.6

)

 

36.5

 

 

Interest expense – net

 

1.6

 

 

10.0

 

(0.2

)

 

 

11.4

 

Intercompany charges (income) expense

 

 

 

(2.5

)

35.8

 

(33.3

)

 

 

Income before income taxes

 

1.7

 

3.7

 

(7.6

)

34.5

 

7.6

 

(36.0

)

3.9

 

Income tax expense (benefit)

 

 

 

(11.8

)

11.8

 

2.2

 

 

2.2

 

NET INCOME (LOSS)

 

$

1.7

 

$

3.7

 

$

4.2

 

$

22.7

 

$

5.4

 

$

(36.0

)

$

1.7

 

 

 

 

Three Months Ended September 30, 2004

 

 

 

WH Holdings
(Cayman
Islands) Ltd.

 

Parent
Guarantors

 

Herbalife
International, Inc.

 

Subsidiary
Guarantors

 

Non-
Guarantors

 

Eliminations

 

Total
Consolidated

 

Net sales

 

$

 

$

149.5

 

$

 

$

150.9

 

$

93.9

 

$

(74.5

)

$

319.8

 

Cost of sales

 

 

38.1

 

 

53.7

 

47.1

 

(69.9

)

69.0

 

Royalty overrides

 

 

5.5

 

 

58.0

 

48.4

 

 

111.9

 

Marketing, distribution & administrative expenses

 

0.1

 

5.0

 

6.5

 

70.6

 

20.6

 

 

102.8

 

Equity in subsidiary (income) loss

 

(18.3

)

(20.7

)

(9.5

)

(1.0

)

 

49.5

 

 

Interest expense – net

 

6.4

 

0.3

 

7.1

 

0.3

 

(0.5

)

 

13.6

 

Intercompany charges (income) expense

 

 

103.0

 

(27.1

)

(43.0

)

(32.9

)

 

 

Income before income taxes

 

11.8

 

18.3

 

23.0

 

12.3

 

11.2

 

(54.1

)

22.5

 

Income tax expense (benefit)

 

 

 

3.3

 

5.2

 

2.5

 

 

11.0

 

NET INCOME (LOSS)

 

$

11.8

 

$

18.3

 

$

19.7

 

$

7.1

 

$

8.7

 

$

(54.1

)

$

11.5

 

 

 

 

Nine Months Ended September 30, 2003

 

 

 

WH Holdings
(Cayman
Islands) Ltd.

 

Parent
Guarantors

 

Herbalife
International,
Inc.

 

Subsidiary
Guarantors

 

Non-
Guarantors

 

Eliminations

 

Total
Consolidated

 

Net sales

 

$

 

$

 

$

 

$

749.4

 

$

198.2

 

$

(88.3

)

$

859.3

 

Cost of sales

 

 

 

 

166.1

 

97.5

 

(89.3

)

174.3

 

Royalty overrides

 

 

 

 

189.6

 

118.4

 

 

308.0

 

Marketing, distribution & administrative expenses

 

0.3

 

1.4

 

32.6

 

190.1

 

57.8

 

 

282.2

 

Equity in subsidiary (income) loss

 

(41.2

)

(42.9

)

(77.4

)

(1.7

)

 

163.2

 

 

Interest expense – net

 

5.0

 

 

27.3

 

(0.7

)

 

 

31.6

 

Intercompany charges (income) expense

 

 

 

(7.6

)

103.9

 

(96.3

)

 

 

Income before income taxes

 

35.9

 

41.5

 

25.1

 

102.1

 

20.8

 

(162.2

)

63.2

 

Income tax expense (benefit)

 

 

 

(17.5

)

38.9

 

6.0

 

 

27.4

 

NET INCOME (LOSS)

 

$

35.9

 

$

41.5

 

$

42.6

 

$

63.2

 

$

14.8

 

$

(162.2

)

$

35.8

 

 

12



 

 

 

Nine Months Ended September 30, 2004

 

 

 

WH Holdings
(Cayman
Islands) Ltd.

 

Parent
Guarantors

 

Herbalife
International,
Inc.

 

Subsidiary
Guarantors

 

Non-
Guarantors

 

Eliminations

 

Total
Consolidated

 

Net sales

 

$

 

$

443.5

 

$

 

$

448.0

 

$

271.2

 

$

(194.7

)

$

968.0

 

Cost of sales

 

 

96.5

 

 

149.9

 

138.9

 

(186.5

)

198.8

 

Royalty overrides

 

 

13.2

 

 

181.3

 

147.9

 

 

342.4

 

Marketing, distribution & administrative expenses

 

0.1

 

10.2

 

21.5

 

221.0

 

63.0

 

 

315.8

 

Equity in subsidiary (income) loss

 

(55.2

)

(49.8

)

(20.0

)

(2.6

)

 

127.6

 

 

Interest expense – net

 

31.8

 

0.8

 

22.0

 

2.7

 

(2.1

)

 

55.2

 

Intercompany charges (income) expense

 

 

317.3

 

(90.7

)

(119.5

)

(107.1

)

 

 

Income before income taxes

 

23.3

 

55.3

 

67.2

 

15.2

 

30.6

 

(135.8

)

55.8

 

Income tax expense (benefit)

 

 

0.1

 

18.4

 

5.7

 

8.5

 

 

32.7

 

NET INCOME (LOSS)

 

$

23.3

 

$

55.2

 

$

48.8

 

$

9.5

 

$

22.1

 

$

(135

)

$

23.1

 

 

Consolidating condensed unaudited balance sheet data for Guarantors and Non-Guarantors as of September 30, 2004 and December 31, 2003 are summarized as follows (in millions):

 

 

 

September 30, 2004

 

 

 

WH Holdings
(Cayman
Islands) Ltd.

 

Parent
Guarantors

 

Herbalife
International,
Inc.

 

Subsidiary
Guarantors

 

Non-
Guarantors

 

Eliminations

 

Total
Consolidated

 

CURRENT ASSETS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and marketable securities

 

$

2.7

 

$

5.2

 

$

0.1

 

$

112.0

 

$

44.7

 

$

 

$

164.7

 

Receivables

 

1.1

 

0.4

 

6.5

 

21.2

 

10.7

 

(6.5

)

33.4

 

Intercompany receivables (payables)

 

 

(14.1

)

226.3

 

(140.9

)

(71.3

)

 

 

Inventories

 

 

33.6

 

 

38.0

 

20.0

 

(13.8

)

77.8

 

Other current assets

 

 

14.0

 

1.3

 

14.3

 

3.6

 

 

33.2

 

Total current assets

 

3.8

 

39.1

 

234.2

 

44.6

 

7.7

 

(20.3

)

309.1

 

Property net

 

 

1.7

 

0.6

 

42.1

 

5.4

 

 

49.8

 

OTHER NON-CURRENT ASSETS

 

250.6

 

115.7

 

421.4

 

136.9

 

69.1

 

(436.5

)

557.2

 

TOTAL ASSETS

 

$

254.4

 

$

156.5

 

$

656.2

 

$

223.6

 

$

82.2

 

$

(456.8

)

$

916.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

 

$

9.7

 

$

 

$

9.0

 

$

2.7

 

$

 

$

21.4

 

Royalties overrides

 

 

1.3

 

 

45.2

 

29.5

 

 

76.0

 

Accrued compensation and expenses

 

14.7

 

18.9

 

3.9

 

51.3

 

19.4

 

 

108.2

 

Other current liabilities

 

(0.2

)

5.6

 

13.9

 

47.7

 

7.1

 

(6.3

)

67.8

 

Total current liabilities

 

14.5

 

35.5

 

17.8

 

153.2

 

58.7

 

(6.3

)

273.4

 

NON-CURRENT LIABILITIES

 

267.9

 

(0.5

)

347.8

 

(14.4

)

0.7

 

 

601.5

 

STOCKHOLDER’S EQUITY

 

(28.0

)

121.5

 

290.6

 

84.8

 

22.8

 

(450.5

)

41.2

 

TOTAL LIABILITIES & STOCKHOLDER’S EQUITY

 

$

254.4

 

$

156.5

 

$

656.2

 

$

223.6

 

$

82.2

 

$

(456.8

)

$

916.1

 

 

13



 

 

 

December 31, 2003

 

 

 

WH Holdings
(Cayman
Islands) Ltd.

 

Parent
Guarantors

 

Herbalife
International
Inc.

 

Subsidiary
Guarantors

 

Non-
Guarantors

 

Eliminations

 

Total
Consolidated

 

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

 

STOCKHOLDER’S EQUITY

 

211.7

 

66.8

 

241.8

 

88.9

 

5.0

 

(376.4

)

237.8

 

TOTAL LIABILITIES & STOCKHOLDER’S EQUITY

 

$

249.6

 

$

86.6

 

$

643.5

 

$

244.4

 

$

56.3

 

$

(376.4

)

$

904.0

 

 

Consolidating condensed unaudited statement of cash flows data for Guarantors and Non-Guarantors for the nine months ended September 30, 2003 and September 30, 2004 is summarized as follows (in millions):

 

 

 

Nine Months Ended September 30, 2003

 

 

 

WH Holdings
(Cayman
Islands) Ltd.

 

Parent
Guarantors

 

Herbalife
International,
Inc.

 

Subsidiary
Guarantors

 

Non-
Guarantors

 

Eliminations

 

Total
Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash provided by (used in) operating activities

 

$

36.4

 

$

61.4

 

$

106.7

 

$

45.5

 

$

31.9

 

$

(208.8

)

$

73.1

 

Net cash provided by (used in) investing activities

 

(37.3

)

(43.3

)

(52.6

)

(0.2

)

(2.1

)

141.6

 

6.1

 

Net cash provided by (used in) financing activities

 

5.5

 

 

(54.4

)

(14.7

)

(15.9

)

67.3

 

(12.2

)

Effect of exchange rate changes on cash

 

 

 

 

2.0

 

1.9

 

 

3.9

 

Cash at beginning of period

 

 

0.1

 

0.4

 

38.3

 

25.5

 

(0.1

)

64.2

 

Cash at end of period

 

$

4.6

 

$

18.2

 

$

0.1

 

$

70.9

 

$

41.3

 

$

 

$

135.1

 

 

14



 

 

 

Nine Months Ended September 30, 2004

 

 

 

WH Holdings
(Cayman
Islands) Ltd.

 

Parent
Guarantors

 

Herbalife
International,
Inc.

 

Subsidiary
Guarantors

 

Non-
Guarantors

 

Eliminations

 

Total
Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash provided by (used in) operating activities

 

$

0.4

 

$

42.2

 

$

48.0

 

$

71.8

 

$

10.2

 

$

(91.6

)

$

81.0

 

Net cash provided by (used in) investing activities

 

(8.5

)

(48.6

)

5.0

 

(21.1

)

(2.4

)

62.6

 

(13.0

)

Net cash provided by (used in) financing activities

 

7.0

 

 

(53.0

)

(30.7

)

(2.7

)

29.0

 

(50.4

)

Effect of exchange rate changes on cash

 

 

(2.2

)

 

(0.4

)

(1.0

)

 

(3.6

)

Cash at beginning of period

 

3.7

 

13.8

 

0.1

 

92.5

 

40.6

 

 

150.7

 

Cash at end of period

 

$

2.6

 

$

5.2

 

$

0.1

 

$

112.1

 

$

44.7

 

$

 

$

164.7

 

 

Item 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Organization

 

WH Holdings (Cayman Islands) Ltd., a Cayman Islands exempted limited liability company (“Herbalife”), 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.á.R.L., a Luxembourg unipersonal limited liability company (“Lux Holdings”), WH Luxembourg Intermediate Holdings S.á.R.L. (“Herbalife Lux”), formerly known as WH Luxembourg CM S.á.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 on July 31, 2002 (the “Acquisition”).  Herbalife and its subsidiaries are referred to collectively herein as “we”, “our”, “ours” or “us”.

 

Recapitalization

 

On October 1, 2004, Herbalife filed a registration statement with the U.S. Securities and Exchange Commission (the “SEC”) in connection with an initial public offering (the “IPO”).  Herbalife plans to change its name to Herbalife Ltd. prior to the effectiveness of the registration statement.  Herbalife is offering its common shares as part of a series of recapitalization transactions that it anticipates closing in connection with the consummation of the IPO as follows:

 

                  a tender offer for any and all of Herbalife International's outstanding 11¾% senior subordinated notes due 2010, which are referred to as the 11¾% Notes, and related consent solicitation to amend the indenture governing the 11¾% Notes;

 

                  the redemption of 40% of its outstanding 9 1/2% notes due 2011, which are referred to as the 9 1/2% Notes;

 

                  the replacement of Herbalife International’s existing $205.0 million senior credit facility with a new $225.0 million senior credit facility;

 

                  the payment of a special cash dividend to the current shareholders of Herbalife in the amount of $109.3 million, subject to upward adjustment in the event the underwriters exercise their over-allotment option.  The new purchasers of Herbalife’s common shares in the IPO will not be entitled to participate in this special cash dividend; and

 

                  the amendment of Herbalife's amended and restated Memorandum and Articles of Association to: (1) effect a 1:2 reverse stock split of Herbalife's common shares; (2) increase Herbalife's authorized common shares to 500 million shares; and (3) increase Herbalife's authorized preference shares to 7.5 million shares.

 

The closing of the IPO is conditioned upon the closing of Herbalife International’s new senior credit facility and the receipt by Herbalife International of tenders from holders of at least a majority of the outstanding aggregate principal amount of the 11¾% Notes.

 

Overview

 

We are a global network marketing company that sells weight management, nutritional supplement and personal care products.  We pursue our mission of “changing people’s lives” by providing a financially rewarding business opportunity to distributors and quality products to distributors and customers who seek a healthy lifestyle.  We are one of the largest network marketing companies in the world with net sales of approximately $1.2 billion for the year ended December 31, 2003.  We sell our products in 59 countries through a network of over one million independent distributors.  We believe the quality of our products and the effectiveness of our distribution network, coupled with geographic expansion have been the primary reasons for our success throughout our 24-year operating history.

 

15



 

We offer products in three principal categories: weight management products, nutritional supplements which we refer to as “inner nutrition” and personal care products which we refer to as “Outer Nutrition®”.  Our products are often sold in programs, which are comprised of a series of related products designed to simplify weight management and nutrition for our consumers and maximize our distributors’ cross-selling opportunities.

 

Industry-wide factors that affect us and our competitors include the increasing prevalence of obesity and the aging of the worldwide population, which are driving demand for nutrition and wellness-related products and the recruitment and retention of distributors.

 

The opportunities and challenges upon which we are most focused are driving recruitment and retention and improving distributor productivity by entering new markets, further penetrating existing markets, pursuing local distributor initiatives, introducing new products, developing niche market segments and further investing in our infrastructure.  We are continuing to strengthen the cooperation between senior management and distributor leadership to focus on these key initiatives.

 

A key non-financial measure we focus on is Volume Points on a Royalty Basis (hereafter “Volume Points”), which is essentially our weighted unit measure of product sales volume.  It is a useful measure for us, as it excludes the impact of foreign currency fluctuations and ignores the differences generated by varying retail pricing across geographic markets.  In general, an increase in Volume Points in a particular region or country directionally indicates an increase in local currency net sales.

 

Volume Points by Geographic Region

 

 

 

For the three months
ended September 30,

 

For the nine months
ended September 30,

 

 

 

2003

 

2004

 

% change

 

2003

 

2004

 

% change

 

 

 

(Volume Points in millions)

 

 

 

 

 

 

 

The Americas

 

171.1