S-1 1 a2143847zs-1.htm S-1
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As filed with the Securities and Exchange Commission on October 1, 2004

Registration No. 333-          



SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549


FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933


WH HOLDINGS (CAYMAN ISLANDS) LTD.*
(Exact Name of Registrant as Specified in Its Charter)

Cayman Islands
(State or Other Jurisdiction of
Incorporation or Organization)
  5122
(Primary Standard Industrial
Classification Code No.)
  N/A
(I.R.S. Employer
Identification No.)

P.O. Box 309GT
Ugland House, South Church Street
George Town, Grand Cayman, Cayman Islands
(310) 410-9600
(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant's Principal Executive Offices)


Brett R. Chapman, Esq.
General Counsel
WH Holdings (Cayman Islands) Ltd.
P.O. Box 309GT
Ugland House, South Church Street
George Town, Grand Cayman, Cayman Islands
(310) 410-9600
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service)


Copies to:

Jonathan K. Layne
Gibson, Dunn & Crutcher LLP
2029 Century Park East
Los Angeles, CA 90067
(310) 552-8500
  Gregg A. Noel
Nicholas P. Saggese
Skadden, Arps, Slate, Meagher & Flom LLP
300 South Grand Ave, Suite 3400
Los Angeles, CA 90071
(213) 687-5000

*To be renamed HERBALIFE LTD. prior to
the effectiveness of this Registration Statement.


        Approximate date of commencement of proposed sale to the public: As soon as practicable after this registration statement becomes effective.

        If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended (the "Securities Act"), check the following box:    o

        If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    o

        If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    o

        If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    o

        If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box.    o


CALCULATION OF REGISTRATION FEE


Title of Each Class of
Securities To Be Registered

  Proposed Maximum
Aggregate
Offering Price

  Amount of
Registration Fee(1)


Common Shares, $.001 par value   $345,000,000   $43,711.50

(1)
Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) under the Securities Act.

        The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.




PROSPECTUS Subject to Completion
Issued October 1, 2004

The information in this preliminary prospectus is not complete and may be changed. We and the selling shareholders may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and we and the selling shareholders are not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

                      Shares

LOGO

COMMON SHARES


We are offering                      of our common shares. This is our initial public offering and no public market currently exists for our shares. We anticipate that the initial public offering price will be between $                      and $                       per share.


We will apply to have our common shares approved for listing on the New York Stock Exchange under the symbol "HLF."


Investing in our common shares involves risks. See "Risk Factors" beginning on page 10.


PRICE $              A SHARE


 
  Price to
Public

  Underwriting
Discounts and
Commissions

  Proceeds to
Herbalife

Per Share   $            $            $         
Total   $                     $                     $                  

We have granted the underwriters the right to purchase up to an additional                     common shares to cover over-allotments.

The Securities and Exchange Commission and state regulators have not approved or disapproved these securities, or determined if this prospectus is truthful or complete.  Any representation to the contrary is a criminal offense.

The underwriters expect to deliver the shares to purchasers on                           , 2004.


MORGAN STANLEY   MERRILL LYNCH & CO.
Banc of America Securities LLC    

 

 

Citigroup

 

 

 

 

Credit Suisse First Boston

                           , 2004


[PANEL 2 FRONT COVER]

[PANEL 3 FRONT COVER]

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TABLE OF CONTENTS

 
  Page
Prospectus Summary   1
Risk Factors   10
Disclosure Regarding Forward-Looking Statements   24
Market Data   25
Our Recapitalization   25
Use of Proceeds   27
Dividend Policy   28
Capitalization   29
Dilution   30
Unaudited Pro Forma Condensed Consolidated Financial Information   32
Selected Consolidated Historical Financial Data   39
Management's Discussion and Analysis of Financial Condition and Results of Operations   42
Business   63
Management   86
Principal Shareholders   103
Certain Relationships and Related Transactions   107
Description of Share Capital   110
Description of Material Indebtedness   115
Shares Eligible for Future Sale   118
United States Federal Income Tax Consequences   120
Cayman Islands Tax Consequences   123
Underwriters   124
Legal Matters   127
Experts   127
Available Information   127
Index to Consolidated Financial Statements   F-1

        You should rely only on the information contained in this document or to which we have referred you. We have not authorized anyone to provide you with information that is different. This document may only be used where it is legal to sell these securities. The information in this document may only be accurate on the date of this document.

i



PROSPECTUS SUMMARY

        The following summary should be read in conjunction with, and is qualified in its entirety by, the more detailed information and financial statements (including the accompanying notes) appearing elsewhere in this prospectus. Prior to the consummation of the offering described in this prospectus, we intend to amend our Memorandum and Articles of Association to change our name to Herbalife Ltd. Unless otherwise noted, the terms "we," "our," "us," "Company" and "Successor" refer to WH Holdings (Cayman Islands) Ltd. ("Herbalife") and its subsidiaries, including WH Capital Corporation ("WH Capital Corp.") and Herbalife International, Inc. ("Herbalife International") and its subsidiaries for periods subsequent to Herbalife International's acquisition on July 31, 2002 by an investment group led by Whitney & Co., LLC and Golden Gate Private Equity, Inc. (the "Acquisition"), and the terms "we," "our," "us," "Company" and "Predecessor" refer to Herbalife International before the Acquisition for periods through July 31, 2002. Herbalife is a holding company, with substantially all of its assets consisting of the capital stock of its indirect, wholly-owned subsidiary, Herbalife International. See "—Corporate Structure." You should carefully consider the information set forth under "Risk Factors." In addition, certain statements in this prospectus are forward-looking statements which involve risks and uncertainties. See "Disclosure Regarding Forward-Looking Statements."

HERBALIFE

        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.

        We offer products in three principal categories: weight management, nutritional supplements which we refer to as "inner nutrition" and personal care 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. We also sell literature and promotional materials designed to support our distributors' marketing efforts. The following table illustrates our principal product categories:

Product Category
  Description
  Representative Products
Weight Management
(43.1% of 2003 Net Sales)
  Meal replacements, weight-loss accelerators and a variety of healthy snacks   Formula 1
Personalized Protein Powder
Total Control
®
High Protein Bars and Snacks

Inner Nutrition
(43.6% of 2003 Net Sales)

 

Dietary and nutritional supplements containing herbs, vitamins, minerals and other natural ingredients

 

Niteworks
Garden 7
Aloe Concentrate
Joint Support

Outer Nutrition®
(9.1% of 2003 Net Sales)

 

Skin cleansers, moisturizers, lotions, shampoos and conditioners

 

Skin Activator® Cream
Radiant C™ Body Lotion
Herbal Aloe Everyday Shampoo
Mystic Mask

        We are committed to providing products with scientifically demonstrated efficacy. We have significantly increased our emphasis on scientific research in the fields of weight management and nutrition over the past two years. We believe that our focus on nutrition science will continue to result in meaningful product enhancements

1



that differentiate our products in the marketplace. Our research and development organization combines the experience of product development scientists within our Company with a team of world-renowned scientists. Additionally, through contributions from the Company, the Mark Hughes Cellular and Molecular Nutritional Lab was established at UCLA (the "UCLA Lab"). In 2003, we introduced Niteworks™, a cardiovascular product developed in conjunction with Louis Ignarro, Ph.D., a Nobel Laureate in Medicine. In addition, in March 2004, we introduced ShapeWorks™, a comprehensive weight management program based on the clinical experience and the 15 years of meal replacement research of David Heber, M.D., Ph.D., professor, and Director of the UCLA Center for Human Nutrition.

        We recently established a 12-member Scientific Advisory Board, comprised of world-renowned scientists, and a Medical Advisory Board consisting of leading medical doctors. We consult with members of our Scientific Advisory Board on the advancements in the field of nutrition science, while our Medical Advisory Board provides training on product usage and gives health-news updates through Herbalife literature, the internet and live training events around the world. The boards, both chaired by Dr. David Heber, support our internal product development team by providing expertise on obesity and human nutrition, conducting product research and advising on product concepts.

        We believe that the direct selling channel is ideally suited to marketing our products. Through education, ongoing personalized customer care and first-hand testimonials of product effectiveness, distributors can motivate their customers to begin and maintain their wellness and weight management programs. We are focused on building and maintaining our distributor network by offering financially rewarding and flexible career opportunities through sales of quality, innovative products to health conscious consumers. We believe the income opportunity provided by our network marketing program appeals to a broad cross-section of people throughout the world, particularly those seeking to supplement family income, start a home business or pursue entrepreneurial, full and part-time employment opportunities. Our distributors, who are all independent contractors, profit from selling our products and can also earn royalties and bonuses on sales made by the distributors whom they recruit to join their sales organizations. We actively support our distributors through a broad array of motivational, educational and support services, including individual recognition, reward programs and promotions, and participation in local, national and international Company-sponsored sales and training events and Extravaganzas.

Our Market Opportunity

        According to the World Federation of Direct Selling Associations, the global direct selling market, which includes sales through network marketing and direct mail, reached $86 billion in sales in 2002. The area in which we primarily compete, health and wellness, comprised 15.4% of the 2002 total direct selling market according to the Direct Selling Association. According to the Nutrition Business Journal, the U.S. nutritional supplements market grew 5.7% in 2003 to $19.8 billion, of which the weight-loss supplements segment represented $4.2 billion, or 21.3%. In addition, the Nutrition Business Journal reported that sales of weight-loss supplements are projected to grow at a 6.8% compound annual growth rate from 2004 through 2010.

        We believe that the increasing prevalence of obesity and the aging worldwide population are driving demand for nutrition and wellness-related products. The number of obese adults worldwide has increased from 200 million in 1995 to 300 million in 2000, an increase of 50% based on a study by the World Health Organization. Trends in dieting have followed the higher prevalence of obesity. A 2003 U.S. News & World Report article estimated that 44% of women and 29% of men in the U.S. were on a diet on any given day. Additionally, according to the Centers for Disease Control, by 2030, the number of adults aged 65 or over is expected to increase from 6.9% to 12.0% of the worldwide population.

2



Our Competitive Strengths

        We believe that our success stems from our ability to inspire and motivate our distributor network with a range of quality, innovative products that appeal to consumer preferences for healthy living. We have been able to achieve sustained and profitable growth by capitalizing on the following competitive strengths:

        Large, Highly-Motivated Distributor Base.    We had over one million distributors, including over 233,000 supervisors, as of June 30, 2004. Because we believe the network marketing model is the most effective way to sell our products, we devote significant resources and management attention to assist our distributor leadership in recruiting and retaining our distributors. We have structured our compensation system to encourage distributors to remain active in the business.

        Diverse and Well-Established Product Portfolio.    We are committed to building brand, distributor and customer loyalty by providing a diverse portfolio of health-oriented and wellness products. We currently have 126 products encompassing over 3,100 SKUs across our three primary product categories. While we improve upon our product formulations based upon developments in nutrition science, several of our products have been in existence for many years. For example, we first introduced our weight management product, Formula 1, in 1980, and it remains our best-selling product.

        Nutrition Science-Based Product Development.    We endeavor to meet the highest industry standards for quality, safety and efficacy. We believe that our science-based product development approach enhances our distributors' credibility with customers, enabling them to more effectively sell our products. We have an internal team of scientists dedicated to continually evaluating opportunities to enhance our existing products and to develop new products.

        Scalable Business Model.    Our business model enables us to grow our business with minimal investment in our infrastructure and other fixed costs. We require no company-employed sales force to market and sell our products, we incur no direct incremental cost to add a new distributor, and our distributor compensation varies directly with sales. In addition, our distributors bear the majority of our consumer marketing expenses, and supervisors sponsor and coordinate a large share of distributor recruiting and training initiatives.

        Geographic Diversification.    We have a proven ability to establish our network marketing organization in new markets. Since our founding 24 years ago, we have expanded into 59 countries, including 22 countries in the last six years. While sales within our local markets may fluctuate due to economic conditions, competitive pressures, political or social instability or for other reasons, we believe that our geographic diversity mitigates our financial exposure to any particular market.

        Experienced Management Team.    Since the Acquisition, we have significantly strengthened our management team with experienced executives from both inside and outside our industry who have successfully managed and grown international, consumer-oriented businesses. In April 2003, Michael O. Johnson became our CEO after spending 17 years with The Walt Disney Company, where he most recently served as President of Walt Disney International. Since joining our Company, Mr. Johnson has assembled a team of experienced executives, including Gregory Probert, COO and formerly CEO of DMX Music and COO of The Walt Disney Company's Buena Vista Home Entertainment division; Richard Goudis, CFO and formerly COO of Rexall Sundown; and Brett R. Chapman, General Counsel and formerly Senior Vice President and Deputy General Counsel of The Walt Disney Company. In addition, Henry Burdick, former Chairman and CEO of Pharmanex, now part of Nu Skin Enterprises, is Vice Chairman and in charge of new product development.

3



Our Business Strategy

        We believe that our network marketing model is the most effective way to sell our products. Our objective is to increase the recruitment, retention and productivity of our distributor base by pursuing distributor, consumer, product and infrastructure strategies. Our strategic initiatives consist of the following:

        Enter New Markets.    A key component of our growth strategy is to continue to enter into and expand new markets, particularly China. China remains a relatively untapped direct selling and nutritional supplement market and represents a significant market opportunity. In addition, we are evaluating the feasibility of opening new countries in Eastern Europe, Southeast Asia and South America.

        Further Penetrate Existing Markets.    We believe that there are several opportunities to further penetrate our existing markets. For example, in the U.S., we offer approximately 100 products, while in our other key markets, we offer on average only 53 products. The Company has a three-year plan to license and introduce many of its key products in its major international markets. Even in the U.S., our largest market, we believe that there are opportunities to further penetrate the market given that sales are concentrated in 13 metropolitan areas.

        Pursue Local Initiatives.    We empower our local managers to pursue initiatives to address the many unique local and regional needs of our diverse geographic markets. To broaden access to management and provide leadership locally, we have deployed senior management to international regional offices. Management is encouraged to establish programs, like our nutrition clubs in Mexico, and to tailor our products to appeal to local tastes and customs.

        Introduce New Products and Develop Niche Market Segments.    We are committed to providing our distributors with unique, innovative products to help them increase sales and recruit new distributors. We are focused on incorporating the best science and most current nutrition insight into our products and will clinically test our products as appropriate to better understand their health benefits. We also intend to repackage and reposition current products and introduce new products to better target cultural, ethnic and niche market segments and to broaden the demographic profile of our distributor base.

        Further Invest in Our Infrastructure.    In 2003, we embarked upon a strategic initiative to significantly upgrade our technology infrastructure globally. We intend to invest an aggregate of approximately $50 million in connection with this initiative, of which we have invested approximately $16 million as of June 30, 2004. We are implementing an Oracle enterprise-wide technology solution, a scalable and stable open architecture platform, to enhance the efficiency and productivity of the Company and our distributors. In addition, we are upgrading our internet-based marketing and distributor services platform, MyHerbalife.com. Through this platform our distributors can access timely reports regarding their down-line sales organizations and obtain information concerning promotional activities, new product releases and local sales and training events. We expect these initiatives to be substantially complete in 2006.

Our Sponsors

        We acquired Herbalife International on July 31, 2002, which we refer to herein as the "Acquisition." We were formed by and on behalf of an investment group led by Whitney & Co., LLC ("Whitney") and Golden Gate Private Equity, Inc. ("Golden Gate Capital"), which we refer to collectively herein as the "Equity Sponsors," to consummate the Acquisition.

        Whitney was established in 1946 by John Hay Whitney as one of the first U.S. firms involved in the development of the private equity industry. Today, Whitney remains a private firm owned by investing professionals and its main activities are to provide private equity and debt capital for middle market growth companies. Whitney manages approximately $5 billion of assets for endowments, foundations and pension plans and is currently investing its fifth outside equity fund, Whitney V, L.P., a fund with committed capital of $1.1 billion.

4



        Golden Gate Capital is a San Francisco-based private equity investment firm with over $2.5 billion of capital under management from leading endowments and a number of Fortune 500 CEOs. The firm's charter is to partner with world-class management teams to invest in change-intensive, growth businesses. The principals of Golden Gate Capital have a long and successful history of investing with management partners across a wide range of industries and transaction types, including leveraged buyouts and recapitalizations, corporate divestitures and spin-offs, build-ups and venture stage investing. Additionally, the principals of Golden Gate Capital draw on their strong consulting heritage at Bain & Company in their investment approach.

Corporate Structure and Information

        We were incorporated under the laws of the Cayman Islands in April 2002 and have a foreign holding and operating company structure. Our first and second tier subsidiaries are organized either in the United States, Luxembourg or the Cayman Islands. We believe that this foreign holding and operating company structure provides us with an effective platform to organize our international business activities and to take advantage of favorable environments to implement our international business, operating and financial strategies. International activities are an important part of our business. For the fiscal year ended December 31, 2003, approximately 76% of our net sales were generated outside the U.S.

        Our principal executive offices are located c/o Herbalife International at 1800 Century Park East, Los Angeles, California, 90067, and our telephone number is c/o Herbalife International at (310) 410-9600. Our website address is www.herbalife.com. The information on our website is not a part of this prospectus. We have included our website address in this document as an inactive textual reference only.

THE RECAPITALIZATION

        We are offering our common shares as described in this prospectus as part of a series of recapitalization transactions that we anticipate closing in connection with the consummation of this offering (the "Transactions"), as follows:

    a tender offer for any and all of Herbalife International's outstanding 113/4% senior subordinated notes due 2010, which we refer to as the 113/4% Notes, and related consent solicitation to amend the indenture governing the 113/4% Notes;

    the redemption of 40% of our outstanding 91/2% notes due 2011, which we refer to as our 91/2% Notes;

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

    the payment of a special cash dividend to our current shareholders. As a new purchaser of our common shares, you will not be entitled to participate in this cash dividend.

The closing of this initial public offering is conditioned upon the execution of a new senior credit facility and the receipt by Herbalife International of tenders from the holders of at least a majority of the outstanding aggregate principal amount of the 113/4% Notes.

5


THE OFFERING

Common shares offered                     shares

Common shares outstanding after this offering

 

                  shares

Use of proceeds

 

We estimate that our net proceeds from the sale of shares in this offering will be approximately $278.4 million, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. We intend to use the net proceeds, together with borrowings under the new senior credit facility and Company cash, to effect the Transactions. See—"Use of Proceeds."

New York Stock Exchange symbol

 

HLF

Risk factors

 

See "Risk Factors" beginning on page 10 of this prospectus for a discussion of factors you should carefully consider before deciding to invest in our common shares.

        Unless we specifically state otherwise, all information in this prospectus assumes no exercise of the over-allotment option granted by us in favor of the underwriters.

6



SUMMARY CONSOLIDATED FINANCIAL DATA

        The following table sets forth certain of our historical financial data and certain unaudited pro forma financial data. We have derived the summary consolidated financial data as of December 31, 2002 and 2003 and for the year ended December 31, 2001, the seven month period ended July 31, 2002, the five month period ended December 31, 2002, and the year ended December 31, 2003, from our audited financial statements and the related notes included elsewhere in this prospectus. We have derived the summary consolidated financial data as of and for the six months ended June 30, 2003 and as of and for the six months ended June 30, 2004 from the unaudited financial statements and related notes included elsewhere in this prospectus. The table also contains summary unaudited pro forma financial information which gives effect to the offering and the Transactions described in the "Unaudited Pro Forma Condensed Consolidated Financial Statements" included elsewhere in this prospectus. The summary financial data set forth below are not necessarily indicative of the results of future operations and the unaudited pro forma financial information does not purport to present our actual financial position or results if the offering and the Transactions actually occurred on the date specified in the unaudited pro forma condensed consolidated financial statements. The summary financial data should be read in conjunction with our audited consolidated financial statements, the selected consolidated historical financial data, the unaudited financial statements, and the unaudited pro forma condensed consolidated financial statements, and, in each case, the related notes included elsewhere in this prospectus, in addition to the discussion under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations."

        We present EBITDA because management believes it provides useful information regarding our ability to service and/or incur debt and that it provides a more comparable measure of our profitability. However, such a measure is not in accordance with accounting principles generally accepted in the United States, or GAAP. You should not consider EBITDA in isolation from or as a substitute for net income, cash flows from operating activities and other consolidated income or cash flow statement data prepared in accordance with accounting principles generally accepted in the United States or as a measure of profitability or liquidity.

 
  Predecessor
  Company
 
  Year Ended
December 31,
2001

  January 1 to
July 31,
2002

  August 1 to
December 31,
2002

  Year Ended
December 31,
2003

  Six Months
Ended
June 30,
2003

  Six Months
Ended
June 30,
2004

 
  (in thousands, except per share amounts)

Statement of Income Data:                                    
Net sales   $ 1,020,130   $ 644,188   $ 449,524   $ 1,159,433   $ 568,917   $ 648,212
Gross profit     778,608     503,635     354,523     923,648     453,555     518,349
Operating income(1)     68,775     14,304     52,889     107,036     79,464     74,922
Net income     42,588     9,212     14,005     36,847     34,085     11,604
Earnings per share                                    
  Basic   $ 1.40   $ 0.28   $   $   $   $ 0.15
  Diluted   $ 1.36   $ 0.27   $ 0.14   $ 0.34   $ 0.32   $ 0.11
Weighted average shares outstanding                                    
  Basic     30,422     32,387                 104,097
  Diluted     31,250     33,800     102,041     106,891     105,065     110,020
Pro forma net income (unaudited)                     $           $  
Pro forma earnings per share (unaudited)                                    
  Basic                     $           $  
  Diluted                     $           $  

Other Financial Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Retail sales (unaudited)(2)   $ 1,656,168   $ 1,047,690   $ 731,505   $ 1,894,384   $ 927,578   $ 1,059,561
EBITDA (unaudited)(3)     86,106     25,837     64,313     162,641     92,055     97,940
Acquisition transaction expenses         54,708     6,183            
Depreciation and amortization     18,056     11,722     11,424     55,605     12,591     23,018
Capital expenditures(4)     14,751     6,799     3,599     20,435     9,969     11,830

7



 


 

As of June 30, 2004


 
 
  Actual
  Pro Forma
As Adjusted(5)

 
 
  (in thousands)

 
Balance Sheet Data:              
Cash, cash equivalents and marketable securities   $ 157,132   $ 31,846  
Total working capital(6)     16,144     (79,711 )
Total assets     907,868     757,218  
Total debt     504,327     367,943  
Other long-term liabilities     118,516     140,432  
Shareholders' equity     28,108     3,955  

(1)
Operating income for the seven months ended July 31, 2002 and the five months ended December 31, 2002 includes pre-tax charges of $54.7 million and $6.2 million, respectively, relating to fees and expenses in connection with the Acquisition and, for the year ended 2003, includes a $5.1 million charge for legal and related costs associated with litigation resulting from the Acquisition.

(2)
In previous years, we reported retail sales on the face of our income statement in addition to the required disclosure of net sales. Retail sales represent the gross sales amount reflected on our invoices to our distributors. We do not receive the retail sales amount. "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.


Retail sales data is referred to in "Management's Discussion and Analysis of Financial Condition and Results of Operations." Our use of retail sales reflect the fundamental role of "retail sales" in our accounting systems, internal controls and operations, including the basis upon which our distributors are paid. In addition, information in daily and monthly reports reviewed by our management relies on retail sales data.


The following represents the reconciliation of retail sales to net sales for each of the periods set forth above:

 
  Predecessor
  Company
 
 
  Year Ended
December 31,
2001

  January 1 to
July 31,
2002

  August 1 to
December 31,
2002

  Year Ended
December 31,
2003

  Six Months
Ended
June 30,
2003

  Six Months
Ended
June 30,
2004

 
 
  (in thousands)

 
Retail sales   $ 1,656,168   $ 1,047,690   $ 731,505   $ 1,894,384   $ 927,578   $ 1,059,561  
Distributor allowance     (774,513 )   (492,997 )   (345,145 )   (899,264 )   (438,870 )   (502,903 )
Product sales     881,655     554,693     386,360     995,120     488,708     556,658  
Handling and freight income     138,475     89,495     63,164     164,313     80,209     91,554  
   
 
 
 
 
 
 
Net sales   $ 1,020,130   $ 644,188   $ 449,524   $ 1,159,433   $ 568,917   $ 648,212  
   
 
 
 
 
 
 
(3)
EBITDA represents net income plus income taxes, net interest expense and depreciation and amortization. We present EBITDA because management believes it provides useful information regarding our ability to service and/or incur debt and that it provides a more comparable measure of our profitability. However, such a measure is not in accordance with GAAP. You should not consider EBITDA in isolation from or as a substitute for net income, cash flows from operating activities and other consolidated income or cash flow statement data prepared in accordance with GAAP or as a measure of profitability or liquidity.

The following table represents a reconciliation of net income to EBITDA:

 
  Predecessor
  Company
 
  Year Ended
December 31,
2001

  January 1 to
July 31,
2002

  August 1 to
December 31,
2002

  Year Ended
December 31,
2003

  Six Months
Ended
June 30,
2003

  Six Months
Ended
June 30,
2004

 
  (in thousands)

Net income   $ 42,588   $ 9,212   $ 14,005   $ 36,847   $ 34,085   $ 11,604
Income taxes     28,875     6,267     14,986     28,721     25,177     21,689
Interest (income) expenses, net     (3,413 )   (1,364 )   23,898     41,468     20,202     41,629
Depreciation and amortization     18,056     11,722     11,424     55,605     12,591     23,018
   
 
 
 
 
 
EBITDA   $ 86,106   $ 25,837   $ 64,313   $ 162,641   $ 92,055   $ 97,940
   
 
 
 
 
 

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(4)
Includes acquisitions of property through capitalized leases of $3.8 million for 2001, $2.1 million for the seven months ended July 31, 2002, $1.4 million for the five months ended December 31, 2002, $6.8 million for the year ended December 31, 2003, $5.1 million for the six months ended June 30, 2003 and $1.5 million for the six months ended June 30, 2004.

(5)
The pro forma as adjusted column reflects the consummation of the Transactions as if they had occurred on June 30, 2003, including our sale of              shares in the offering at an assumed initial public offering price of $             per share, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

(6)
Includes cash, cash equivalents, restricted cash and marketable securities.

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RISK FACTORS

        Investing in our common shares involves a high degree of risk. You should carefully consider the following risk factors in addition to the other information contained in this prospectus before deciding whether to invest in our common shares. If any of the following risks actually occurs, our business, financial condition and results of operations would suffer. In this case, the trading price of our common shares would likely decline and you might lose all or part of your investment in our common shares. The risks described below are not the only ones we face. Other risks, including those that we do not currently consider material or may not currently anticipate, may impair our business.

Risks Related to our Business

Our failure to establish and maintain distributor relationships could have a material adverse effect on our business.

        We distribute our products exclusively through approximately one million independent distributors, and we depend upon them directly for substantially all of our sales. To increase our revenue, we must increase the number of or the productivity of our distributors. Accordingly, our success depends in significant part upon our ability to attract, retain and motivate a large base of distributors. There is a high rate of turnover among our distributors, a characteristic of the network marketing business. The loss of a significant number of distributors could materially adversely affect sales of our products and could impair our ability to attract new distributors. In our efforts to attract and retain distributors, we compete with other network marketing organizations, including those in the weight management product, dietary and nutritional supplement, and personal care and cosmetic product industries. Our operating results could be harmed if our existing and new business opportunities and products do not generate sufficient interest to retain existing distributors and attract new distributors.

        We estimate that, of our over one million independent distributors, we had approximately 191,000 supervisors as of February 1, 2004. These supervisors, together with their downline sales organizations, account for substantially all of our revenues. Our distributors, including our supervisors, may voluntarily terminate their distributor agreements with us at any time. The loss of a group of leading supervisors, together with their downline sales organizations, or the loss of a significant number of distributors for any reason, could adversely affect sales of our products, impair our ability to attract new distributors and have a material adverse effect on our business, financial condition and results of operations.

We are not in a position to exert the same level of influence or control over our independent distributors as we could were they our own employees.

        Our distributors are independent contractors and, accordingly, we are not in a position to directly provide the same direction, motivation and oversight as we would if distributors were our own employees. As a result, there can be no assurance that our distributors will participate in our marketing strategies or plans, accept our introduction of new products, or comply with our distributor policies and procedures.

        Extensive federal, state, and local laws regulate our business, our products, and our network marketing program. While we have implemented distributor policies and procedures designed to govern distributor conduct and to protect the goodwill associated with Herbalife trademarks and tradenames, it can be difficult to enforce these policies and procedures because of the large number of distributors and their independent status. Violations by our distributors of applicable law or of our policies and procedures in dealing with customers could reflect negatively on our products and operations, and harm our business reputation. In addition, it is possible that a court could hold us civilly or criminally accountable based on vicarious liability because of the actions of our independent distributors.

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Adverse publicity associated with our products, ingredients or network marketing program, or those of similar companies, could adversely affect our business.

        The size of our distribution force and the results of our operations may be significantly affected by the public's perception of our company and similar companies. This perception is dependent upon opinions concerning:

    the safety and quality of our products and ingredients;

    the safety and quality of similar products and ingredients distributed by other companies;

    our distributors; and

    the direct selling business generally.

        Adverse publicity concerning any actual or purported failure of our company or our distributors to comply with applicable laws and regulations regarding product claims and advertising, good manufacturing practices, the regulation of our network marketing program, the licensing of our products for sale in our target markets, or other aspects of our business, whether or not resulting in enforcement actions or the imposition of penalties, could have an adverse affect on the goodwill of our company and could negatively affect our ability to attract, motivate and retain distributors, which would have a material adverse effect on our ability to generate revenue. We cannot ensure that all distributors will comply with applicable legal requirements relating to the advertising, labeling, licensing or distribution of our products.

        In addition, our distributors' and consumers' perception of the safety and quality of our products and ingredients as well as similar products and ingredients distributed by other companies can be significantly influenced by national media attention, publicized scientific research or findings, widespread product liability claims and other publicity concerning our products or ingredients or similar products and ingredients distributed by other companies. Adverse publicity, whether or not accurate or resulting from consumers' use or misuse of our products, that associates consumption of our products or ingredients or any similar products or ingredients with illness or other adverse effects, questions the benefits of our or similar products or claims that any such products are ineffective, inappropriately labeled or have inaccurate instructions as to their use, could have a material adverse effect on our reputation or the market demand for our products.

        Adverse publicity concerning network marketing and public perception of direct selling businesses generally could negatively affect our ability to attract, motivate and retain distributors as well.

Our failure to appropriately respond to changing consumer preferences and demand for new products or product enhancements could significantly harm our distributor and customer relationships and product sales.

        Our business is subject to changing consumer trends and preferences, especially with respect to diet products. Our continued success depends in part on our ability to anticipate and respond to these changes, and we may not respond in a timely or commercially appropriate manner to such changes. Furthermore, the nutritional supplement industry is characterized by rapid and frequent changes in demand for products and new product introductions and enhancements. Our failure to accurately predict these trends could negatively impact consumer opinion of our products, which in turn could harm our customer and distributor relationships and cause the loss of sales. The success of our new product offerings and enhancements depends upon a number of factors, including our ability to:

    accurately anticipate customer needs;

    innovate and develop new products or product enhancements that meet these needs;

    successfully commercialize new products or product enhancements in a timely manner;

    price our products competitively;

    manufacture and deliver our products in sufficient volumes and in a timely manner; and

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    differentiate our product offerings from those of our competitors.

        If we do not introduce new products or make enhancements to meet the changing needs of our customers in a timely manner, some of our products could be rendered obsolete, which could have a material adverse effect on our revenues and operating results.

The high level of competition in our industry for customers and distributors could adversely affect our business.

        The business of marketing weight management and nutrition products is highly competitive and sensitive to the introduction of new products or weight management plans, including various prescription drugs, which may rapidly capture a significant share of the market. These market segments include numerous manufacturers, distributors, marketers, retailers and physicians that actively compete for the business of consumers both in the United States and abroad. In addition, we anticipate that we will be subject to increasing competition in the future from sellers that utilize electronic commerce. Some of these competitors have longer operating histories, significantly greater financial, technical, product development, marketing and sales resources, greater name recognition, larger established customer bases, and better-developed distribution channels than we do. Our present or future competitors may be able to develop products that are comparable or superior to those we offer, adapt more quickly than we do to new technologies, evolving industry trends and standards or customer requirements, or devote greater resources to the development, promotion and sale of their products than we do. Accordingly, we may not be able to compete effectively in our markets and competition may intensify.

        We are also subject to significant competition for the recruitment of distributors from other network marketing organizations, including those that market weight management products, dietary and nutritional supplements, and personal care products as well as other types of products. Our ability to remain competitive depends, in significant part, on our success in recruiting and retaining distributors through an attractive compensation plan, the maintenance of an attractive product portfolio, and other incentives. We cannot ensure that our programs for recruitment and retention of distributors will be successful.

We are affected by extensive laws, governmental regulations, administrative determinations, court decisions and similar constraints both domestically and abroad.

        In both domestic and foreign markets, the formulation, manufacturing, packaging, labeling, distribution, importation, exportation, licensing, sale and storage of our products are affected by extensive laws, governmental regulations, administrative determinations, court decisions and similar constraints. Such laws, regulations and other constraints may exist at the federal, state or local levels in the United States and at all levels of government in foreign jurisdictions. There can be no assurance that we or our distributors are in compliance with all of these regulations. Our failure or our distributors' failure to comply with these regulations or new regulations could lead to the imposition of significant penalties or claims and could have a material adverse effect on our business. In addition, the adoption of new regulations or changes in the interpretations of existing regulations may result in significant compliance costs or discontinuation of product sales and may adversely affect the marketing of our products, resulting in significant loss of sales revenues. For example, the Food and Drug Administration ("FDA") has announced plans to issue new guidance or regulations relating to low carbohydrate claims for foods, which could adversely affect our sales of such products.

        On March 13, 2003, the FDA proposed a new regulation to require current good manufacturing practices, or "cGMPs", in the manufacturing, packing and holding of dietary supplements in the United States. The proposed rules would establish the minimum cGMPs necessary to ensure that, if a company engages in activities relating to manufacturing, packaging or holding dietary ingredients or dietary supplements, it does so in a manner that will not adulterate or misbrand those dietary ingredients or dietary supplements. The provisions would require manufacturers to engage in testing in order to evaluate the identity, purity, quality, strength, and composition of their dietary ingredients and dietary supplements.

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We currently anticipate that the FDA's final GMPs will be adopted by the end of this year and will become effective in 2005. The new cGMPs, if promulgated, will increase our supply chain costs by requiring our various contract manufacturers to expend additional capital and resources on quality control testing.

        In addition, we are subject to importation, health and safety and food and drug regulations that vary from country to country and that can delay or prevent the introduction of new products into a given country or marketplace or suspend or prohibit the sale of existing products in a given country or marketplace. For example, we may be required to possess an import business license and to register or license our products prior to importation and sale into a given country. There can be no assurance that we or our distributors have obtained all required licenses prior to introducing products into a given country or marketplace or that we will not be required to continue to expend resources to reformulate our products to satisfy the varying regulations in the markets in which we operate.

Our network marketing program could be found not to be in compliance with current or newly adopted laws or regulations in one or more markets, which could have a material adverse effect on our business.

        Our network marketing program is subject to a number of federal and state regulations administered by the Federal Trade Commission and various state agencies in the United States as well as regulations on direct selling in foreign markets administered by foreign agencies. We are subject to the risk that, in one or more markets, our network marketing program could be found not to be in compliance with applicable law or regulations. Regulations applicable to network marketing organizations generally are directed at preventing fraudulent or deceptive schemes, often referred to as "pyramid" or "chain sales" schemes, by ensuring that product sales ultimately are made to consumers and that advancement within an organization is based on sales of the organization's products rather than investments in the organization or other non-retail sales-related criteria. The regulatory requirements concerning network marketing programs do not include "bright line" rules and are inherently fact-based, and thus, even in jurisdictions where we believe that our network marketing program is in full compliance with applicable laws or regulations governing network marketing systems, we are subject to the risk that these laws or regulations or the enforcement or interpretation of these laws and regulations by governmental agencies or courts can change. The failure of our network marketing program to comply with current or newly adopted regulations could have a material adverse effect on our business in a particular market or in general.

        We are also subject to the risk of private party challenges to the legality of our network marketing program. The multi-level marketing programs of other companies have been successfully challenged in the past, and in a current lawsuit, allegations have been made challenging the legality of our network marketing program. An adverse judicial determination with respect to our network marketing program, or in proceedings not involving us directly but which challenge the legality of multi-level marketing systems, could have a material adverse effect on our business.

A substantial portion of our business is conducted in foreign markets.

        Approximately 76% of our net sales for the year ended December 31, 2003, were generated outside the United States, exposing our business to risks associated with foreign operations. For example, a foreign government may impose trade or foreign exchange restrictions or increased tariffs, which could adversely affect our operations. We are also exposed to risks associated with foreign currency fluctuations. For instance, purchases from suppliers are generally made in U.S. dollars while sales to distributors are generally made in local currencies. Accordingly, strengthening of the U.S. dollar versus a foreign currency could have a negative impact on us. Although we engage in transactions to protect against risks associated with foreign currency fluctuations, we cannot be certain any hedging activity will effectively reduce our exchange rate exposure. Our operations in some markets also may be adversely affected by political, economic and social instability in foreign countries. As we continue to focus on expanding our existing international operations, these and other risks associated with international operations may increase.

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There can be no assurance that we can further penetrate existing markets or that we can successfully expand our business into new markets.

        Our ability to further penetrate existing markets in which we compete or to successfully expand our business into additional countries in Eastern Europe, Southeast Asia, South America, or elsewhere, to the extent we believe that we have identified attractive geographic expansion opportunities in the future, are subject to numerous factors, many of which are out of our control. For example, in China, our sales are currently regulated to be conducted on a wholesale basis to local retailers. In the event that we are permitted in the future to conduct direct selling efforts in China, we will be required to expend significant resources to establish a competitive infrastructure to compete with certain of our competitors that have already established, or are in the process of establishing, significant business operations in China. In addition, the lack of a comprehensive legal system and the uncertainties of enforcement of existing legislation and laws in China and in any additional countries into which we would like to expand our operations, could have an adverse effect on our ability to conduct business in those markets.

        In addition, government regulations in both our domestic and international markets can delay or prevent the introduction, or require the reformulation or withdrawal, of some of our products, which could have a material adverse effect on our business, financial condition and results of operations. Also, our ability to increase market penetration in certain countries may be limited by the finite number of persons in a given country inclined to pursue a direct selling business opportunity. Moreover, our growth will depend upon improved training and other activities that enhance distributor retention in our markets. We cannot assure you that our efforts to increase our market penetration and distributor retention in existing markets will be successful.

Our growth may be limited by our contractual obligation to sell our products only through our Herbalife distributor network and to refrain from changing certain aspects of our marketing plan.

        In connection with the Acquisition, we entered into an agreement with our distributors to provide assurances that the change in ownership of our company would not negatively affect certain aspects of their business. Through this agreement, we committed to our distributors that we would not sell Herbalife products through any distribution channel other than our network of independent Herbalife distributors. Thus, we are contractually prohibited from expanding our business by selling Herbalife products through other distribution channels that may be available to our competitors, such as over the internet, through wholesale sales, by establishing retail stores, or through mail order systems. Since this is an ongoing or open-ended commitment, there can be no assurance that we will be able to take advantage of innovative new distribution channels that are developed in the future.

        In addition, our agreement with our distributors provides that we will not change certain aspects of our marketing plan without the consent of a specified percentage of our distributors. For example, our agreement with our distributors provides that we may increase, but not decrease, the discount percentages available to our distributors for the purchase of products or the applicable royalty override percentages (including roll-ups) and production and other bonus percentages available to our distributors at various qualification levels within our distributor hierarchy. We may not modify the eligibility or qualification criteria for these discounts, royalty overrides and production and other bonuses unless we do so in a manner to make eligibility and/or qualification easier than under the applicable criteria in effect as of the date of the agreement. Our agreement with our distributors further provides that we may not vary the criteria for qualification for each distributor tier within our distributor hierarchy, unless we do so in such a way so as to make qualification easier.

        Although we reserved the right to make these changes to our marketing plan without the consent of our distributors in the event that changes are required by applicable law or are necessary in our reasonable business judgment to account for specific local market or currency conditions to achieve a reasonable

14



profit on operations, there can be no assurance that our agreement with our distributors will not restrict our ability to adapt our marketing plan to the evolving requirements of the markets in which we operate.

We depend on the integrity and reliability of our information technology infrastructure, and any inadequacies may result in substantial interruptions to our business.

        Our ability to timely provide products to our distributors and their customers, and services to our distributors, depends on the integrity of our information technology system, which we are in the process of upgrading, including the reliability of software and services supplied by our vendors. The most important aspect of our information technology infrastructure is the system through which we record and track distributor sales, volume points, royalty overrides, bonuses and other incentives. We have encountered, and may encounter in the future, errors in our software or our enterprise network, or inadequacies in the software and services supplied by our vendors. Any such errors or inadequacies may result in substantial interruptions to our services and may damage our relationships with, or cause us to lose, our distributors if the errors or inadequacies impair our ability to track sales and pay royalty overrides, bonuses and other incentives. Such errors may be expensive or difficult to correct in a timely manner, and we may have little or no control over whether any inadequacies in software or services supplied to us by third parties are corrected, if at all.

We do not manufacture our own products so we must rely on independent third parties for the manufacture and supply of our products.

        All of our products are manufactured by outside companies, except for a small amount of products manufactured in our own manufacturing facility in China. We cannot assure you that these outside manufacturers will continue to reliably supply products to us at the levels of quality we require, especially after the FDA imposes cGMPs regulations. In the event any of our third-party manufacturers were to become unable or unwilling to continue to provide us with products in required volumes and at suitable quality levels, we would be required to identify and obtain acceptable replacement manufacturing sources. There is no assurance that we would be able to obtain alternative manufacturing sources on a timely basis. An extended interruption in the supply of products would result in loss of sales. In addition, any actual or perceived degradation of product quality as a result of reliance on third party manufacturers may have an adverse effect on sales or result in increased product returns and buybacks.

If we fail to protect our trademarks and tradenames our ability to compete could be negatively affected.

        The market for our products depends to a significant extent upon the goodwill associated with our trademark and tradenames. We own, or have licenses to use, the material trademark and tradename rights used in connection with the packaging, marketing and distribution of our products in the markets where those products are sold. Therefore, trademark and tradename protection is important to our business. Although most of our trademarks are registered in the United States and in certain foreign countries in which we operate, we may not be successful in asserting trademark or tradename protection. In addition, the laws of certain foreign countries may not protect our intellectual property rights to the same extent as the laws of the United States. The loss or infringement of our trademarks or tradenames could impair the goodwill associated with our brands, harm our reputation and have a material adverse effect on our financial results.

We are not assured compliance by distributors with labeling laws.

        Our products are sold principally as foods, dietary supplements and cosmetics and are subject to rigorous FDA and related legal regimens limiting the types of therapeutic claims that can be made for our products. The treatment or cure of disease, for example, is not a permitted claim for these products. While we train and attempt to monitor our distributors' marketing materials, we cannot ensure that all such materials comply with bans on therapeutic claims.

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Our intellectual property may not be adequate to provide us with a competitive advantage or to prevent competitors from replicating our products.

        Our future success and ability to compete depends upon our ability to timely produce innovative products and product enhancements that motivate our distributors and customers, which we attempt to protect under a combination of copyright, trademark, trade secret laws, confidentiality procedures and contractual provisions. However, our products are not patented domestically or abroad, and the legal protections afforded by our common law and contractual proprietary rights in our products provide only limited protection and may be time-consuming and expensive to enforce and/or maintain. Further, despite our efforts, we may be unable to prevent third parties from infringing upon or misappropriating our proprietary rights. Additionally, our competitors could independently develop non-infringing products that are competitive with, equivalent to, and/or superior to our products.

        Monitoring infringement and/or misappropriation of intellectual property can be difficult and expensive, and we may not be able to detect any infringement or misappropriation of our proprietary rights. Even if we do detect infringement or misappropriation of our proprietary rights, litigation to enforce these rights could cause us to divert financial and other resources away from our business operations. Further, the laws of some foreign countries do not protect our proprietary rights to the same extent as do the laws of the United States.

One of our products constitutes a significant portion of our retail sales.

        Our ShapeWorks™/Formula 1 meal replacement product constitutes a significant portion of our sales, accounting for approximately 20% of net sales for the fiscal year ended December 31, 2003. If consumer demand for this product decreases significantly or we cease offering this product without a suitable replacement, our operations could be materially adversely affected.

The loss of the services of members of our senior management team could adversely affect our business.

        We depend on the continued services of our senior management team and the relationships that they have developed with our senior distributor leadership. No assurance can be given that the loss of one or more of our executive officers would not have an adverse impact on us. If any of these executives does not remain with us, our business could suffer. The loss of such key personnel could have a material adverse effect on our ability to implement our business strategy and our continued success will also be dependent upon our ability to retain existing, and attract additional, qualified personnel to meet our needs. We currently do not maintain "key person" life insurance with respect to our senior management team.

Our substantial amount of consolidated debt could adversely affect our consolidated financial condition.

        In connection with the consummation of the Acquisition and with the offering of our 91/2% Notes, we have incurred a substantial amount of debt. At June 30, 2004, our total debt was $504.3 million and our shareholders' equity was $28.1 million. Our substantial amount of debt may have important consequences for us. For example, it may:

    increase our vulnerability to general adverse economic and industry conditions;

    limit our ability to obtain additional financing to fund working capital, capital expenditures and other general corporate requirements;

    require us to dedicate a substantial portion of our cash flow from operations to payments on our debt, thereby reducing the availability of our cash flow for other purposes;

    limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;

    place us at a competitive disadvantage compared to our competitors that have less debt; and

16


    make it difficult for us to meet our debt service requirements if we experience a substantial decrease in our revenues or an increase in our expenses.

The covenants in our existing indebtedness limit, and the covenants in our new credit facilities will limit, our discretion with respect to certain business matters.

        Our existing notes and senior credit facilities contain numerous financial and operating covenants that restrict, and the terms of our new credit facilities will contain covenants that restrict, our and our subsidiaries' ability to, among other things:

    pay dividends, redeem share capital or capital stock and make other restricted payments and investments;

    incur additional debt or issue preferred shares;

    allow the imposition of dividend or other distribution restrictions on our subsidiaries;

    create liens on our and our subsidiaries' assets;

    engage in transactions with affiliates;

    guarantee other indebtedness of the Company; and

    merge, consolidate or sell all or substantially all of our assets and the assets of our subsidiaries.

        In addition, our subsidiaries' existing senior credit facility requires, and we expect their new senior credit facility will require us to meet certain financial ratios and financial conditions, including minimum interest charge and fixed charge ratios and a maximum leverage ratio. Our and their ability to comply with these covenants may be affected by events beyond our control, including prevailing economic, financial and industry conditions. Failure to comply with these covenants could result in a default causing all amounts to become due and payable under our outstanding notes and/or the senior credit facilities, which is secured by substantially all of our assets, which the lenders thereunder could proceed to foreclose against.

If we do not comply with transfer pricing and similar tax regulations, we may be subjected to additional taxes, interest and penalties in material amounts.

        As a multinational corporation, in many countries including the United States, we are subject to transfer pricing and other tax regulations designed to ensure that our intercompany transactions are consummated at prices that have not been manipulated to produce a desired tax result, that appropriate levels of income are reported as earned by our United States or local entities, and that we are taxed appropriately on such transactions. In addition, our operations are subject to regulations designed to ensure that appropriate levels of customs duties are assessed on the importation of our products. We are currently subject to pending or proposed audits that are at various levels of review, assessment or appeal in a number of jurisdictions involving transfer pricing issues, income taxes, customs duties, value added taxes, withholding taxes, sales and use and other taxes and related interest and penalties in material amounts. In some circumstances, additional taxes, interest and penalties have been assessed, and we will be required to pay the assessments or litigate to reverse the assessments. Ultimate resolution of these matters may take several years, and the outcome is uncertain. If the United States Internal Revenue Service or the taxing authorities of any other jurisdiction were to successfully challenge our transfer pricing practices, we could become subject to higher taxes and our earnings would be adversely affected.

We may be held responsible for certain taxes or assessments relating to the activities of our distributors.

        Our distributors are subject to taxation, and in some instances, legislation or governmental agencies impose an obligation on us to collect taxes, such as value added taxes, and to maintain appropriate records. In addition, we are subject to the risk in some jurisdictions of being responsible for social security and

17



similar taxes with respect to our distributors. In the event that local laws and regulations or the interpretation of local laws and regulations change to require us to treat our independent distributors as employees, or that our distributors are deemed by local regulatory authorities in one or more of the jurisdictions in which we operate to be our employees rather than independent contractors under existing laws and interpretations, we may be held responsible for social security and related taxes in those jurisdictions, plus any related assessments and penalties, which could have a material adverse effect on our business.

We may incur material product liability claims, which could increase our costs and adversely affect our revenues and operating income.

        Our products consist of herbs, vitamins and minerals and other ingredients that are classified as foods or dietary supplements and are not subject to pre-market regulatory approval in the United States. Our products could contain contaminated substances, and some of our products contain innovative ingredients that do not have long histories of human consumption. We generally do not conduct or sponsor clinical studies for our products and previously unknown adverse reactions resulting from human consumption of these ingredients could occur. As a marketer of dietary and nutritional supplements and other products that are ingested by consumers or applied to their bodies, we have been, and may again be, subjected to various product liability claims, including that the products contain contaminants, the products include inadequate instructions as to their uses, or the products include inadequate warnings concerning side effects and interactions with other substances. It is possible that widespread product liability claims could increase our costs, and adversely affect our revenues and operating income. Moreover, liability claims arising from a serious adverse event may increase our costs through higher insurance premiums and deductibles, and may make it more difficult to secure adequate insurance coverage in the future. In addition, our product liability insurance may fail to cover future product liability claims thereby requiring us to pay substantial monetary damages and adversely affecting our business. Finally, given the higher level of self-insured retentions that we have accepted under our current product liability insurance policies, which are as high as approximately $10 million, in certain cases we may be subject to the full amount of liability associated with any injuries, which could be substantial.

There can be no assurance that we can achieve increased operational or tax benefits as a result of our planned corporate restructuring.

        We are in the process of restructuring our corporate organization to be more closely aligned with the international nature of our business activities. There can be no assurance that the Internal Revenue Service or the taxing authorities of the states or foreign jurisdictions in which we operate will not challenge the tax benefits that we expect to realize as a result of the realignment. If the intended tax treatment is not accepted by our taxing authorities we could fail to achieve the operational and financial efficiencies that we anticipate as a result of the restructuring. Additionally, if the Internal Revenue Service determines that (1) we understated the value of any intangible asset rights used by one of our foreign subsidiaries in computing our federal income tax liability for the year of such use, or (2) we are unable to offset a portion of the tax resulting from the restructuring with foreign tax credit carryovers as anticipated, then certain tax benefits of the restructuring that we anticipate achieving could be disallowed, in which case we would not benefit from a reduction in our overall blended effective tax rate and we would be required to pay additional taxes for the period in which we believed that we had achieved a lower overall blended effective tax rate. In connection with such an event, we would also record a charge in our financial statements for the effect of the back taxes mentioned in the preceding sentences and our blended effective tax rate would increase in subsequent periods.

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A few of our shareholders collectively control us and have the power to cause the approval or rejection of all shareholder actions and may take actions that conflict with your interests.

        Immediately following this offering and the use of proceeds therefrom, affiliates of Whitney and Golden Gate Capital will own approximately    % and     %, respectively, of the voting power of our share capital. Accordingly, the Equity Sponsors collectively will have the power to cause the approval or rejection of any matter on which the shareholders may vote, including the election of directors, amendment of our memorandum and articles of association and approval of significant corporate transactions and they will have significant control over our management and policies. This control over corporate actions may also delay, deter or prevent transactions that would result in a change of control. In addition, even if all shareholders other than the Equity Sponsors voted together as a group, they would not have the power to adopt any action or to block the adoption of any action favored by the Equity Sponsors if the Equity Sponsors act in concert. Moreover, the Equity Sponsors may have interests that conflict with yours.

Risks Related To This Offering

There has been no prior public market for our common shares, and an active trading market may not develop.

        Prior to this offering, there has been no public market for our common shares. An active trading market may not develop following completion of this offering or, if it is developed, may not be sustained. The lack of an active market may impair your ability to sell your shares at the time you wish to sell them or at a price that you consider reasonable. The lack of an active market may also reduce the fair market value and increase the volatility of your shares. An inactive market may also impair our ability to raise capital by selling shares and may impair our ability to acquire other companies or technologies by using our shares as consideration.

The trading price of our common shares is likely to be volatile, and you might not be able to sell your shares at or above the initial public offering price.

        The initial public offering price for the common shares sold in this offering will be determined by negotiation between the representatives of the underwriters and us. This price may not reflect the market price of our common shares following this offering and we cannot assure you that the market price will equal or exceed the initial public offering price of your shares. The trading price of our common shares is likely to be subject to wide fluctuations. Factors affecting the trading price of our common shares may include:

    variations in our financial results;

    announcements of new business initiatives by us or by our competitors;

    recruitment or departure of key personnel and key distributors;

    changes in the estimates of our financial results or changes in the recommendations of any securities analysts that elect to follow our common shares or the common shares of our competitors;

    our failure to timely address changing customer or distributor preferences; and

    market conditions in our industry and the economy as a whole.

        In addition, if the market for weight management, nutrition, or network marketing stocks or the stock market in general experiences loss of investor confidence, the trading price of our common shares could decline for reasons unrelated to our business or financial results. The trading price of our common shares might also decline in reaction to events that affect other companies in our industry even if these events do not directly affect us.

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Non-compliance with the Sarbanes-Oxley Act of 2002 could materially adversely affect us.

        The SEC, as directed by Section 404 of the Sarbanes-Oxley Act of 2002, adopted rules which will require us to include in our annual reports on Form 10-K, beginning in fiscal 2005, an assessment by management of the effectiveness of our internal controls over financial reporting. In addition, our independent auditors must attest to and report on management's assessment of the effectiveness of such internal controls over financial reporting. Management has made the decision to early-adopt these rules effective for our fiscal year ending December 31, 2004. While we intend to diligently and thoroughly document, review, test and improve our internal controls over financial reporting in order to ensure compliance with Section 404 of the Sarbanes-Oxley Act, if our independent auditors are not satisfied with the adequacy of our internal controls over financial reporting, or if the independent auditors interpret the requirements, rules and/or regulations differently than we do, then they may decline to attest to management's assessment or may issue a report that is qualified. This could result in an adverse reaction in the financial marketplace due to a loss of investor confidence in the reliability of our financial statements, which could negatively impact the price of our common shares.

If securities analysts do not publish research or reports about our business or if they downgrade our stock, the price of our stock could decline.

        The trading market for our common shares will rely in part on the research and reports that industry or financial analysts publish about us or our business. We do not control these analysts. Furthermore, if one or more of the analysts who do cover us downgrades our stock, the price of our stock could decline. If one or more of these analysts ceases coverage of our company, we could lose visibility in the market, which in turn could cause our stock price to decline.

If our involvement in an October 2004 magazine article about Herbalife were held to be in violation of the Securities Act, we could be required to repurchase common shares sold in this offering. You should rely only on statements made in this prospectus in determining whether to purchase our shares.

        Information about Herbalife has been published in an article appearing in the October 4, 2004 issue of Forbes Magazine and entitled "Supplemental Income". While work on this article by Forbes commenced in October 2003, the story was not pursued by the magazine at that time due to several personnel changes at the publication. Work on the article resumed in April 2004 when our Chief Executive Officer and another then-senior executive were interviewed. These interviews took place well before we had determined to proceed with an initial public offering of our common shares and well before the filing of our registration statement of which this prospectus is a part. The article presented certain statements about Herbalife in isolation and did not disclose many of the related risks and uncertainties described in this prospectus. As a result, the article should not be considered in isolation and you should make your investment decision only after reading this entire prospectus carefully.

        You should carefully evaluate all the information in this prospectus, including the risks described in this section and throughout the prospectus. We have in the past received, and may continue to receive, media coverage, including coverage that is not directly attributable to statements made by our officers and employees. You should rely only on the information contained in this prospectus in making your investment decision.

        We do not believe our involvement in the Forbes Magazine article constitutes a violation of Section 5 of the Securities Act. However, if our involvement were held by a court to be in violation of the Securities Act, we could be required to repurchase the shares sold to purchasers in this offering at the original purchase price, plus statutory interest from the date of purchase, for a period of one year following the date of the violation. We would contest vigorously any claim that a violation of the Securities Act occurred.

20



Future sales of shares by existing shareholders could cause our stock price to decline.

        If our existing shareholders sell, or indicate an intention to sell, substantial amounts of our common shares in the public market after the 180-day contractual lock-up, which is subject to adjustment, and other legal restrictions on resale discussed in this prospectus lapse, the trading price of our common shares could decline below the initial public offering price. Based on the number of shares outstanding as of                        , 2004, upon completion of this offering, we will have                        outstanding common shares, assuming no exercise of the underwriters' over-allotment option. Of these shares, only common shares sold in this offering will be freely tradable, without restriction, in the public market. Morgan Stanley & Co. Incorporated and Merrill Lynch, Pierce, Fenner & Smith Incorporated, on behalf of the underwriters, may, in their sole discretion, permit our officers, directors, employees and current shareholders to sell shares prior to the expiration of the lock-up agreements.

        After the lock-up agreements pertaining to this offering expire (180 days or more from the date of this prospectus, subject to adjustment), all of our outstanding shares will be eligible for sale in the public market, but they will be subject to volume limitations under Rule 144 under the Securities Act. In addition, the            shares subject to outstanding options and rights under our Stock Incentive Plan and Independent Directors' Stock Incentive Plan will become eligible for sale in the public market to the extent permitted by the provisions of various vesting agreements, the lock-up agreements and Rules 144 and 701 under the Securities Act. If these additional shares are sold, or if it is perceived that they will be sold in the public market, the trading price of our common shares could decline.

You will experience immediate and substantial dilution in the net tangible book value of the shares you purchase in this offering.

        The initial public offering price of our common shares will be substantially higher than the book value per share of the outstanding common shares after this offering. Therefore, based on an assumed initial public offering price of $            per share, if you purchase our common shares in this offering, you will suffer immediate and substantial dilution of approximately $            per share. If the underwriters exercise their over-allotment option, or if outstanding options to purchase our common shares are exercised, you will experience additional dilution. See "Dilution" for more information.

Limited Protection of Shareholder Interests—Holders of our common shares may face difficulties in protecting their interests because we are incorporated under Cayman Islands law.

        Following this offering, our corporate affairs will be governed by our amended and restated memorandum and articles of association, by the Companies Law (2004 Revision) and the common law of the Cayman Islands. The rights of our shareholders and the fiduciary responsibilities of our directors under Cayman Islands law are not as clearly established as under statutes or judicial precedent in existence in jurisdictions in the United States. Therefore, you may have more difficulty in protecting your interests in the face of actions by our management, directors or controlling shareholders than would shareholders of a corporation incorporated in a jurisdiction in the United States, due to the comparatively less developed nature of Cayman Islands law in this area.

        Unlike many jurisdictions in the United States, Cayman Islands law does not specifically provide for shareholder appraisal rights on a merger or consolidation of a company. This may make it more difficult for you to assess the value of any consideration you may receive in a merger or consolidation or to require that the offeror give you additional consideration if you believe the consideration offered is insufficient.

        Shareholders of Cayman Islands exempted companies such as ourselves have no general rights under Cayman Islands law to inspect corporate records and accounts or to obtain copies of lists of shareholders of the company. Our directors have discretion under our articles of association to determine whether or not, and under what conditions, our corporate records may be inspected by our shareholders, but are not obliged to make them available to our shareholders. This may make it more difficult for you to obtain the

21



information needed to establish any facts necessary for a shareholder motion or to solicit proxies from other shareholders in connection with a proxy contest.

        Subject to limited exceptions, under Cayman Islands law, a minority shareholder may not bring a derivative action against the board of directors. Maples and Calder, our Cayman Islands counsel has informed us that they are not aware of any reported class action or derivative action having been brought in a Cayman Islands court.

Provisions of our articles of association and Cayman Islands corporate law may impede a takeover, which could adversely affect the value of our common shares.

        Our articles of association permit our board of directors to issue preference shares from time to time, with such rights and preferences as they consider appropriate. Our board of directors could authorize the issuance of preference shares with terms and conditions and under circumstances that could have an effect of discouraging a takeover or other transaction.

        In addition, our articles of association contain certain other provisions which could have an effect of discouraging a takeover or other transaction, including a classified board, the inability of shareholders to act by written consent, a limitation on the ability of shareholders to call special meetings of shareholders and advance notice provisions.

        Unlike many jurisdictions in the United States, Cayman Islands law does not provide for mergers as that expression is understood under corporate law in the United States. However, Cayman Islands law does have statutory provisions that provide for the reconstruction and amalgamation of companies, which are commonly referred to in the Cayman Islands as "schemes of arrangement." The procedural and legal requirements necessary to consummate these transactions are more rigorous and take longer to complete than the procedures typically required to consummate a merger in the United States. Under Cayman Islands law and practice, a scheme of arrangement in relation to a solvent Cayman Islands company must be approved at a shareholders' meeting by each class of shareholders, in each case, by a majority of the number of holders of each class of a company's shares that are present and voting (either in person or by proxy) at such a meeting, which holders must also represent 75% in value of such class issued that are present and voting (either in person or by proxy) at such meeting (excluding the shares owned by the parties to the scheme of arrangement).

        The convening of these meetings and the terms of the amalgamation must also be sanctioned by the Grand Court of the Cayman Islands. Although there is no requirement to seek the consent of the creditors of the parties involved in the scheme of arrangement, the Grand Court typically seeks to ensure that the creditors have consented to the transfer of their liabilities to the surviving entity or that the scheme of arrangement does not otherwise have a material adverse effect on the creditors' interests. Furthermore, the Grand Court will only approve a scheme of arrangement if it is satisfied that:

    the statutory provisions as to majority vote have been complied with;

    the shareholders have been fairly represented at the meeting in question;

    the scheme of arrangement is such as a businessman would reasonably approve; and

    the scheme of arrangement is not one that would more properly be sanctioned under some other provision of the Companies Law.

There is uncertainty as to your ability to enforce certain foreign civil liabilities in the Cayman Islands.

        We are incorporated as an exempted company with limited liability under the laws of the Cayman Islands. A material portion of our assets are located outside of the United States. As a result, it may be difficult for persons purchasing our common shares to enforce judgments against us or judgments obtained

22



in U.S. courts predicated upon the civil liability provisions of the federal securities laws of the United States or any state of the United States.

        We have been advised by our Cayman Islands counsel, Maples and Calder, that although there is no statutory enforcement in the Cayman Islands of judgments obtained in the United States, the courts of the Cayman Islands will—based on the principle that a judgment by a competent foreign court imposes upon the judgment debtor an obligation to pay the sum for which judgment has been given—recognize and enforce a foreign judgment of a court of competent jurisdiction if such judgment is final, for a liquidated sum, not in respect of taxes or a fine or penalty, is not inconsistent with a Cayman Islands judgment in respect of the same matters, and was not obtained in a manner, and is not of a kind, the enforcement of which is contrary to the public policy of the Cayman Islands. There is doubt, however, as to whether the Grand Court of the Cayman Islands will (i) recognize or enforce judgments of U.S. courts predicated upon the civil liability provisions of the federal securities laws of the United States or any state of the United States, or (ii) in original actions brought in the Cayman Islands, impose liabilities predicated upon the civil liability provisions of the federal securities laws of the United States or any state of the United States, on the grounds that such provisions are penal in nature.

        The Grand Court of the Cayman Islands may stay proceedings if concurrent proceedings are being brought elsewhere.

23



DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

        This prospectus contains "forward-looking statements" within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). All statements other than statements of historical fact are "forward-looking statements" for purposes of federal and state securities laws, including any projections of earnings, revenue or other financial items; any statements of the plans, strategies and objectives of management for future operations; any statements concerning proposed new services or developments; any statements regarding future economic conditions or performance; any statements of belief; and any statements of assumptions underlying any of the foregoing. Forward-looking statements may include the words "may," "will," "estimate," "intend," "continue," "believe," "expect" or "anticipate" and other similar words.

        Although we believe that the expectations reflected in any of our forward-looking statements are reasonable, actual results could differ materially from those projected or assumed in any of our forward-looking statements. Our future financial condition and results of operations, as well as any forward-looking statements, are subject to change and to inherent risks and uncertainties, such as those disclosed in this prospectus. Important factors that could cause our actual results, performance and achievements, or industry results to differ materially from estimates or projections contained in forward-looking statements include, among others, the following:

    our relationships with, and our ability to influence the actions of, our distributors;

    adverse publicity associated with our products or network marketing organization;

    changing consumer preferences and demands;

    the competitive nature of our business;

    regulatory matters governing our products and network marketing program;

    risks associated with operating internationally, including foreign exchange risks;

    our dependence on increased penetration of existing markets;

    contractual limitations on our ability to expand our business;

    our reliance on our information technology infrastructure and outside manufacturers;

    the sufficiency of trademarks and other intellectual property rights;

    product concentration;

    our reliance on our management team;

    product liability claims;

    uncertainties relating to the application of transfer pricing and similar tax regulations; and

    taxation relating to our distributors.

        Additional factors that could cause actual results to differ materially from our forward-looking statements are set forth in this prospectus, including under the headings "Prospectus Summary," "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business" and in our "Prospectus Summary—Summary Consolidated Financial Data" and the related notes. We do not intend, and undertake no obligation, to update any forward-looking statement.

        Before deciding whether to invest in our common shares, you should carefully consider the matters set forth under the heading "Risk Factors" and all other information contained in this prospectus. All subsequent written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by the cautionary statements.

24



MARKET DATA

        Market data and other statistical information used throughout this prospectus are based on independent industry publications, government publications, and reports by market research firms or other published independent sources. Some data are also based on our good faith estimates, which are derived from our review of internal surveys, as well as the independent sources listed above. Although we believe that these sources are reliable, we have not independently verified the information and cannot guarantee its accuracy or completeness.


OUR RECAPITALIZATION

        The net proceeds of the offering of our common shares, together with available cash, will be used to consummate a recapitalization of our company, which will consist of the following transactions (the "Transactions"), and are conditioned upon the successful completion of this offering, as described in more detail below:

    a tender offer and consent solicitation for all of Herbalife International's outstanding 113/4% Notes and the payment of accrued interest in connection therewith;

    the redemption of 40% of our outstanding 91/2% Notes and the payment of accrued interest and a redemption premium in connection therewith;

    the retirement of our existing senior credit facility;

    the establishment of a new senior credit facility;

    the payment to our current shareholders of a special cash dividend in the amount of $200.0 million; and

    the payment of related transaction fees and expenses.

        Tender Offer and Consent Solicitation for 113/4% Notes.    Prior to this offering, Herbalife International will commence a tender offer and consent solicitation with respect to all of the outstanding $160.0 million aggregate principal amount of 113/4% Notes for an expected aggregate consideration of $        million plus accrued interest. The closing of this offering of our common shares will be conditioned upon the tender by the holders of at least a majority in the aggregate principal amount of the existing 113/4% Notes outstanding, and the consummation of the tender offer and consent solicitation is conditioned upon the closing of this offering.

        Redemption of Our 91/2% Notes.    We intend to use a portion of the net proceeds of this offering to redeem $110.0 million in aggregate principal amount of our outstanding 91/2% Notes, which represents 40% of the aggregate principal amount of 91/2% Notes originally issued under the indenture governing the notes. In connection with this redemption, we will be required to pay an expected aggregate of $10.5 million in redemption premium plus accrued interest to the holders of the 91/2% Notes that we redeem. This redemption is permitted under the indenture governing our 91/2% Notes, which provides that we may at any time on or prior to April 1, 2007, use the proceeds of certain equity offerings to redeem up to 40% of the aggregate principal amount of 91/2% Notes originally issued at a redemption price equal to 109.50% of the principal amount, plus accrued and unpaid interest and liquidated damages, if any, to the redemption date. See "Description of Material Indebtedness—Existing 91/2% Notes."

        Repayment of the Existing Senior Credit Facility.    Our existing senior credit facility consists of a term loan and a revolving credit facility. We expect to pay the entire principal amount outstanding under the existing senior credit facility, which was $71.1 million as of June 30, 2004 and consists entirely of term loan borrowings. These term loan borrowings bear interest at variable rates with a weighted average interest rate as of January 1, 2004 of 5.1% per year. The terms of the existing senior credit facility allow us to prepay without premium or penalty.

25


        New Senior Credit Facility.    Concurrently with the closing of this offering, we will enter into a new $225.0 million senior secured credit facility with a syndicate of financial institutions, including affiliates of Morgan Stanley & Co. Incorporated and Merrill Lynch, Pierce, Fenner & Smith Incorporated as joint lead arrangers and joint book-managers. In this prospectus, we refer to this credit facility as the new credit facility. We expect that the new senior credit facility will include an undrawn senior secured revolving credit facility with total availability of up to $25.0 million, which we refer to as the new revolver, and a senior secured term loan facility in an aggregate principal amount of $200.0 million, which we refer to as the new term loan. We expect that the new revolver and the new term loan will each have a     -year maturity. We expect the new term loan to amortize at a per annum rate not to exceed    %. The closing of this offering is conditioned upon the closing of the new senior credit facility. See "Description of Material Indebtedness—New Senior Credit Facility."

        Payment of a Special Cash Dividend to Our Current Shareholders.    We intend to use a portion of the net proceeds from this offering and the Transactions to pay a $200.0 million special cash dividend to our current shareholders. The record date for this dividend will be one day prior to closing of this offering. Consequently, you will not be entitled to participate in this dividend as a result of your purchase of our common shares in this offering and your interest in our common shares will be diluted. See "Dilution."

        As a result of the borrowings we expect to make initially under the new credit facility, the tender and consent solicitation for our 113/4% Notes, and the redemption of 40% of the aggregate outstanding principal amount of our 91/2% Notes in connection with this offering, we anticipate that upon the consummation of this offering we will have approximately $367.9 million of total debt outstanding, net of unamortized underwriting fees.

26



USE OF PROCEEDS

        We estimate that we will receive net proceeds of approximately $278.4 million from the sale of our common shares in this offering after deducting underwriting discounts and commissions and estimated offering expenses. If the underwriters' over-allotment option is exercised in full, we estimate that we will receive net proceeds of approximately $321.2 million. The following table summarizes the estimated sources and uses of funds for the Transactions and assumes:

    an offering of                        shares at an assumed offering price of $    per share, which is the midpoint of the filing range;

    the tender of 100% of the 113/4% Notes;

    the redemption of 40% of our outstanding 91/2% Notes and the payment of accrued interest and a redemption premium in connection therewith;

    the retirement of our existing senior credit facility;

    the establishment of a new senior credit facility;

    the payment to our current shareholders of a special cash dividend in the amount of $200.0 million; and

    the payment of related transaction fees and expenses.

        We cannot determine what the actual net proceeds from the sale of our common shares in the offering will be until the offering is completed. As a result, the actual results may differ.

 
  Amount
 
  (in millions)

Sources of Funds      
  Gross offering proceeds   $ 300.0
  Borrowings under New Credit Facility     200.0
  Existing excess cash     120.0
   
    Total sources   $ 620.0
   
 
 

Amount

 
  (in millions)

Uses of Funds      
  Payment of special cash dividend   $ 200.0
  Redemption of 40% of 91/2% Notes(1)     110.0
  Tender for 113/4% Notes(2)     160.0
  Repayment of existing credit facility(3)     66.7
  Accrued interest     11.1
  Estimated fees and expenses of the offering and the Transactions(4)     72.2
   
    Total Uses   $ 620.0
   

(1)
Interest on the 91/2% Notes is payable semi-annually in arrear on April 1 and October 1 of each year, and the notes mature on April 1, 2011. The proceeds of the offering of the 91/2% Notes were used, together with available cash, to effect a recapitalization of the Company. See "Description of Material Indebtedness—Existing 91/2% Notes."

(2)
Interest on the 113/4% Notes is payable semi-annually in arrear on January 15 and July 15 of each year, and the notes mature on July 15, 2010.

(3)
As of June 30, 2004, outstanding borrowings under the existing senior credit facility were $71.1 million. However, we expect that $66.7 million will be outstanding under the existing senior credit facility as of the closing date of the Transactions.

(4)
Includes transaction fees and expenses of $         million, a tender premium for the 113/4% Notes of $         million and a redemption premium for the 91/2% Notes of $         million.

27



DIVIDEND POLICY

        Promptly following the consummation of the offering of the common shares offered by this prospectus, we plan to make a distribution of approximately $200.0 million to our current shareholders. You will not participate in this distribution. See "Our Recapitalization—Payment of a Special Cash Dividend to Our Current Shareholders" for more information.

        Although we have not yet adopted a formal plan to pay dividends in the future, management is currently evaluating dividend policies. However, the declaration and payment of dividends to holders of our common shares will be entirely at the discretion of our board of directors and will depend upon many factors, including our financial condition, earnings, legal requirements and other factors our board of directors deems relevant. The terms of our current and future indebtedness may also restrict us from paying cash dividends.

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CAPITALIZATION

        The following table sets forth our cash and cash equivalents and capitalization as of June 30, 2004:

    (i)
    on an actual basis; and

    (ii)
    on a pro forma as adjusted basis to reflect the this offering and the Transactions.

        You should read this table in conjunction with "Use of Proceeds," "Selected Consolidated Historical Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations," our consolidated financial statements, and the unaudited pro forma condensed consolidated financial statements and, in each case, the related notes included elsewhere in this prospectus.

 
  As of June 30, 2004
 
 
  Actual
  Pro Forma
As Adjusted

 
 
  (in millions)

 
Cash and cash equivalents(1)   $ 157.1   $ 31.8  
   
 
 
Total debt (including current portion):              
  Existing revolving credit facility   $   $  
  Existing term loan borrowings(1)     71.1      
  New senior credit facility         200.0  
  Capitalized leases and other debt     7.2     7.2  
  113/4% Notes, net(2)     158.3      
  91/2% Notes, net(3)     267.7     160.7  
   
 
 
    Total debt   $ 504.3   $ 367.9  
   
 
 
Shareholders' equity:              
  Common shares, par value $0.001 per share, 250,000,000 shares authorized actual and pro forma, 104,164,038 shares outstanding actual and        shares outstanding pro forma as adjusted   $ 0.1   $ 0.1  
  Paid in capital in excess of par     1.3     279.7  
  Accumulated other comprehensive income     2.7     2.7  
  Retained earnings (accumulated deficit)     24.0     (278.6 )
   
 
 
    Total shareholders' equity     28.1     4.0  
      Total capitalization   $ 532.4   $ 371.9  
   
 
 

(1)
The existing term loan has a $4.4 million amortization on each of September 30, 2004 and December 31, 2004. Accordingly, on September 30, 2004, we made a mandatory repayment of $4.4 million to the lenders under the term loan.

(2)
Net of $1.7 million of unamortized discount as of June 30, 2004 actual.

(3)
Net of $7.3 million and $4.3 million of unamortized underwriting fees as of June 30, 2004 actual and pro forma as adjusted, respectively.

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DILUTION

        If you invest in our common shares, your interest will be diluted to the extent of the difference between the initial public offering price per share of our common shares and the pro forma as adjusted net tangible book value per share of our common shares immediately after this offering and the consummation of the Transactions. Pro forma net tangible book value per share represents the amount of our total tangible assets less total liabilities, divided by that number of our common shares outstanding at June 30, 2004 after giving effect to this offering and the Transactions.

        Investors participating in this offering will incur immediate, substantial dilution. Our pro forma net tangible book value was $(475.0) million, computed as total shareholders' equity less goodwill and other intangible assets, or $             per common share outstanding at June 30, 2004. Our pro forma as adjusted net tangible book value at June 30, 2004 would have been $             million, or $             per common share, following the consummation of this offering and the Transactions, based upon the following assumptions:

    an offering of                        shares at an assumed offering price of $      per share, which is the midpoint of the filing range;

    the tender of 100% of the 113/4% Notes;

    the redemption of 40% of our outstanding 91/2% Notes and the payment of accrued interest and a redemption premium in connection therewith;

    the replacement of our existing senior credit facility with a new senior credit facility;

    the payment to our current shareholders of a special cash dividend in the amount of $200.0 million; and

    the payment of related transaction fees and expenses.

        This represents an immediate increase in pro forma net tangible book value of $             per common share to our existing shareholders and an immediate dilution of $             per share to the new investors purchasing shares in this offering. The following table illustrates this per share dilution:

Assumed initial public offering price per common share   $  
  Pro forma net tangible book value per share at June 30, 2004   $  
  Increase in net tangible book value per share attributable to this offering      
  Decrease in net tangible book value per share attributable to the Transactions   $  

Pro forma as adjusted net tangible book value per share after the offering

 

 

 

Dilution per share to new investors

 

$

 

        The following table sets forth on a pro forma as adjusted basis, at June 30, 2004, the number of common shares purchased or to be purchased from us, the total consideration paid or to be paid and the average price per share paid or to be paid by existing holders of our common shares, by holders of options

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and warrants outstanding at June 30, 2004, and by the new investors, before deducting estimated underwriting discounts and estimated offering expenses payable by us.

 
  Shares Purchased
  Total Consideration
   
 
  Average Price
Per Share

 
  Number
  Percent
  Amount
  Percent
 
  (dollars in thousands, except per share amounts)

Existing shareholders         % $       % $  
New investors         %         %    
Total       100 % $     100 % $  

        The discussion and tables above are based on the number of common shares outstanding at June 30, 2004.

        To the extent outstanding options and warrants are exercised, new investors will experience further dilution.

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UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

        The following unaudited pro forma condensed consolidated financial statements are based on our historical financial statements, included elsewhere in this prospectus, adjusted to give effect to the following transactions:

        (A) The 91/2% Notes offering on March 8, 2004, including: (1) the receipt of proceeds from the offering of the 91/2% Notes; (2) the distribution to the holders of Herbalife's Preferred Shares; (3) the purchase of Herbalife's 15.5% senior notes at a negotiated price; (4) the application of available cash to reduce outstanding amounts under Herbalife International's existing senior credit facilities; and (5) the payment of related fees and expenses.

        (B) The transactions contemplated in this offering, including: (6) the receipt of proceeds from this offering; (7) the receipt of proceeds from the new senior credit facility; (8) the payment related to the $110 million redemption of 91/2% Notes; (9) the payment related to the tender offer for $160 million of 113/4% Notes; (10) the payment to replace Herbalife International's existing senior credit facilities; (11) the payment of accrued interest on the 91/2% Notes and 113/4% Notes; (12) the payment of shareholders' dividend; and (13) the payment of related fees and expenses.

        The unaudited pro forma condensed consolidated statements of income for the year ended December 31, 2003, and the six months ended June 30, 2004, give effect to the items (1) to (13) above, as if the transactions had occurred as of January 1, 2003. The unaudited pro forma condensed consolidated balance sheet gives effect to the items (6) to (13) as if they had occurred on June 30, 2004. The pro forma adjustments are based upon available information and certain assumptions that the Company believes are reasonable. The unaudited pro forma condensed consolidated financial statements do not purport to represent what the Company's financial condition or results of operations would actually have been had these transactions in fact occurred as of the dates indicated above or to project the Company's results of operations for these periods indicated or for any other period.

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UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEETS

As of June 30, 2004

 
  June 30, 2004
  Pro forma
adjustments

  Pro forma
 
 
  (in thousands)

 
Assets                  

Current Assets:

 

 

 

 

 

 

 

 

 
 
Cash and cash equivalents

 

$

157,132

 

(125,286)

(1)

$

31,846

 
  Receivables     33,155         33,155  
  Inventories     70,503         70,503  
  Prepaid expenses and other current assets     25,521         25,521  
  Deferred income taxes     8,963         8,963  
   
     
 
      Total current assets     295,274         169,988  
  Property, net     46,524         46,524  
  Deferred compensation assets     21,420         21,420  
  Other assets     6,279         6,279  
  Deferred financing costs     30,625   (25,364) (2)   5,261  
  Intangible assets     340,229         340,229  
  Goodwill     167,517         167,517  
   
     
 
      Total   $ 907,868       $ 757,218  
   
     
 

Liabilities and Shareholders' Equity

 

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

 

 
 
Accounts payable

 

$

23,639

 

 

 

$

23,639

 
  Royalty overrides     73,922         73,922  
  Accrued expenses and other liabilities     104,596   (12,029) (1)   92,567  
  Current portion of long-term debt     22,213   (17,402) (3)   4,811  
  Other current liabilities     54,760         54,760  
   
     
 
      Total current liabilities     279,130         249,699  
  Long-term debt, net of current portion     482,114   (118,982) (3)   363,132  
  Deferred compensation liability     18,932         18,932  
  Deferred income taxes     96,863   21,916   (4)   118,779  
  Other non-current liabilities     2,721         2,721  
   
     
 
      Total liabilities     879,760         753,263  
  Common shares     104         104  
  Paid-in capital     1,330   278,400   (4)   279,730  
  Retained earnings     23,956   (302,553) (4)   (278,597 )
  Accumulated other comprehensive income     2,718         2,718  
   
     
 
      Shareholders' equity     28,108         3,955  
   
     
 
      Total   $ 907,868       $ 757,218  
   
     
 

33



UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME

For the Year Ended December 31, 2003

 
  Historical
  Pro forma
Adjustments
for the 91/2%
Notes Offering

  Pro forma
for the 91/2%
Notes Offering

  Pro forma
Adjustments
for this
Offering

  Pro forma
for the 91/2%
Notes Offering and
this Offering

 
  (in thousands, except per share amounts)

Product sales   $ 995,120       $ 995,120       $ 995,120
Handling and freight income     164,313         164,313         164,313
   
     
     
Net sales     1,159,433         1,159,433         1,159,433
Costs of sales     235,785         235,785         235,785
Royalty overrides     415,351         415,351         415,351
Marketing, distribution, and administrative expenses     401,261         401,261   394   (5)   401,655
Interest expense, net     41,468   18,094 (6)   59,562   (31,254 )(7)   28,308
   
     
     
Income before income taxes     65,568         47,474         78,334
Income taxes     28,721   1,152 (8)   29,873   7,388   (9)   37,261
   
     
     
Net income   $ 36,847       $ 17,601       $ 41,073
   
     
     

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 
  Basic                          
  Diluted   $ 0.34                    

Pro forma earnings per share, (unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 
  Basic   $                   $  
  Diluted   $                   $  

Pro forma weighted average shares (unaudited):

 

 

 

 

 

 

 

 

 

 

 

 

 
  Basic                          
  Diluted                          

34



UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME

For the Six Months Ended June 30, 2004

 
  Historical
  Pro forma
Adjustments
for the 91/2%
Notes Offering

  Pro forma
for the 91/2%
Notes Offering

  Pro forma
Adjustments
for this
Offering

  Pro forma
for the
91/2% Notes
Offering and
this Offering

 
  (in thousands, except per share amounts)

Product sales   $ 556,658         556,658         556,658
Handling and freight income     91,554         91,554         91,554
   
     
     
Net sales     648,212         648,212         648,212
Cost of sales     129,863         129,863         129,863
Royalty overrides     230,388         230,388         230,388
Marketing, distribution, and administrative expenses     213,039         213,039   (127 )(5)   212,912
Interest expense, net     41,629   (12,095) (6)   29,534   (14,232 )(7)   15,302
   
     
     
Income before income taxes     33,293         45,388         59,747
Income taxes     21,689   269   (8)   21,958   3,259   (9)   25,217
   
     
     
Net income   $ 11,604       $ 23,430       $ 34,530
   
     
     
Earnings per share:                          
  Basic   $ 0.15                    
  Diluted   $ 0.11                    

Pro forma earnings per common share (unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 
  Basic   $                   $  
  Diluted   $                   $  

Pro forma weighted average shares:

 

 

 

 

 

 

 

 

 

 

 

 

 
  Basic                          
  Diluted                          

35



NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(1)    Cash and Cash Equivalents:    Reflects the net effect of the Transactions on the cash balance as follows (in thousands):

Gross proceeds from this offering   $ 300,000  
Borrowings from the new senior credit facility     200,000  
Redemption of 91/2% Notes     (110,000 )
Tender offer for 113/4% Notes     (160,000 )
Replacement of existing senior credit facility     (71,057 )
Accrued interest on notes and term loan under the existing senior credit facility     (12,029 )
Shareholders' dividend     (200,000 )
Redemption premium on 91/2% Notes, tender offer premium on 113/4% Notes and transaction fees and expenses     (72,200 )
   
 
Change in cash   $ (125,286 )
   
 

(2)    Deferred Financing Costs:    Reflects the following (in thousands):

Fees and expenses related to the borrowings from the new senior credit facility   $ 3,000  
Write-off of the unamortized portion of the deferred financing costs relating to the repayment of existing debt     (28,364 )
   
 
    $ (25,364 )
   
 

(3)    Long-term Debt:    Reflects the transaction items related to debt as follows:

 
  Non-Current
Portion

  Current
Portion

 
 
  (in thousands)

 
Redemption of 91/2% Notes   $ (110,000 ) $  
Tender offer for 113/4% Notes     (160,000 )    
Replacement of existing senior credit facility     (53,655 )   (17,402 )
Write-off unamortized discount     4,673      
New senior credit facility     200,000      
   
 
 
Adjustment to long-term debt   $ (118,982 ) $ (17,402 )
   
 
 

36


(4)    Shareholders' Equity:    Reflects the adjustments to shareholders' equity as follows:

 
  Common shares
  Paid in capital
  Retained earnings
 
 
  (in thousands)

 
Adjustments to historical shareholders' equity:                    
  Issuance of common shares   $   $ 278,400   $  
  Shareholders' dividend                 (200,000 )
  Redemption premium on 91/2% Notes, tender offer premium for 113/4% Notes, write-off of deferred financing costs and discount and transaction fees and expenses                 (80,637 )
  Tax effect of redemption premium on 91/2% Notes, tender offer premium for 113/4% Notes, write-off of deferred financing costs and discount                 (21,916 )
   
 
 
 
Total adjustments to historical shareholders' equity   $   $ 278,400   $ (302,553 )
   
 
 
 

As the adjustments to historical shareholders' equity are considered to be non-recurring amounts resulting directly from the Transactions, they have not been included as pro forma adjustments in the accompanying unaudited pro forma condensed consolidated statements of income.

(5)    Marketing, distribution and administrative expenses:    Represents an adjustment to reflect the ongoing effect on compensation expense of the acceleration of certain outstanding stock options triggered by the Transactions and an adjustment to reflect compensation expense for options granted in August and September 2004 based on the expected offering price of $          , the mid-point of the filing range.

 
  Year ended
December 31, 2003

  Six Months Ended
June 30, 2004

 
 
  (in thousands)

 
Options acceleration   $ 394   $ (127 )
Options granted prior to this offering          
   
 
 
    $ 394   $ (127 )

(6)    Interest expense, net:    Represents adjustments to interest expense to reflect the effects of the 91/2% Notes offering on March 8, 2004, including elimination of interest income related to cash used by the Company to effect these transactions:

 
  Year ended
December 31, 2003

  Six Months Ended
June 30, 2004

 
 
  (in thousands)

 
Elimination of historical interest:              
  Interest expense on 15.5% senior notes   $ (6,031 ) $ (12,501 )(a)
  Interest expense on existing senior credit facility     (2,127 )   (385 )
  Amortization of related discount and deferred financing costs     (1,539 )   (4,542 )
  Interest income on the Company cash used for repayment of debt     613     253  
   
 
 
    $ (9,084 ) $ (17,175 )
Interest on the new borrowings:              
  Interest expense on the 91/2% Notes     26,125     4,867  
  Amortization of related discount and deferred financing costs     1,053     213  
   
 
 
  Net interest expense adjustment   $ 18,094   $ (12,095 )
   
 
 

(a)
Includes write-offs of deferred financing costs and discounts, as well as premiums associated with the repayment of debt as part of the March 8, 2004, Notes offering.

37


(7)    Interest Expense, Net:    Represents adjustments to interest expense related to the Transactions in connection with this offering:

 
  Year ended
December 31, 2003

  Six Months Ended
June 30, 2004

 
 
  (in thousands)

 
Elimination of historical interest:              
  Interest on 91/2% Notes subject to the proposed redemption   $ (10,450 ) $ (5,356 )
  Interest expense on 113/4% Notes subject to the proposed tender offer     (20,477 )   (9,508 )
  Interest on the portion of the term loans to be repaid     (5,009 )   (1,670 )
  Amortization of related deferred financing costs and discounts     (5,906 )   (2,813 )
  Interest income on the Company cash used for repayment of debt     1,988     815  
   
 
 
    $ (39,854 ) $ (18,532 )
Interest on the new senior credit facility:              
  Interest expense on the new senior credit facility     8,000     4,000  
  Amortization of related deferred financing costs and discounts     600     300  
   
 
 
    Net interest expense adjustment   $ (31,254 ) $ (14,232 )
   
 
 

(8)    Income Taxes:    The following represents the tax effect, using the Company's incremental tax rate, of the adjustments related to the 91/2% Notes offering. The Company believes that it will not be able to obtain a tax benefit for the interest expense on the 91/2% Notes. The unaudited pro forma condensed consolidated financial statements do not reflect a tax benefit for such interest expense.

 
  Year ended
December 31, 2003

  Six Months Ended
June 30, 2004

 
  (in thousands)

    $ 1,152   $ 269

(9)    Income Taxes:    The following represents the tax effect, using the Company's incremental tax rate, of the adjustments related to the Transactions. The Company believes that it will not be able to obtain a tax benefit for the interest expense on the 91/2% Notes or the new senior credit facility. The unaudited pro forma condensed consolidated financial statements do not reflect a tax benefit for such interest expense.

 
  Year ended
December 31, 2003

  Six Months Ended
June 30, 2004

 
  (in thousands)

    $ 7,388   $ 3,259

38



SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA

        The following table sets forth certain of our historical financial data. We have derived the selected historical consolidated financial data as of December 31, 2002 and 2003 and for the year ended December 31, 2001, the seven month period ended July 31, 2002, the five month period ended December 31, 2002 and the year ended December 31, 2003 from our audited financial statements and the related notes included elsewhere in this prospectus. The selected historical consolidated financial data as of December 31, 1999, 2000 and 2001 and for the years ended December 31, 1999 and 2000 have been derived from our audited financial statements for such years, which are not included in this prospectus. We have derived the selected historical consolidated financial data for the six months ended June 30, 2003 and as of and for the six months ended June 30, 2004 from our unaudited consolidated financial statements and the related notes included elsewhere in this prospectus. The selected consolidated historical financial data set forth below are not necessarily indicative of the results of future operations and should be read in conjunction with the discussion under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations," and the historical consolidated financial statements and accompanying notes included elsewhere in this prospectus.

        We present EBITDA because management believes it provides useful information regarding our ability to service and/or incur debt and that it provides a more comparable measure of our profitability. However, such a measure is not in accordance with GAAP. You should not consider EBITDA in isolation from or as a substitute for net income, cash flows from operating activities and other consolidated income or cash flow statement data prepared in accordance with accounting principles generally accepted in the United States or as a measure of profitability or liquidity.

 
  Predecessor
  Company
 
 
  Year Ended
December 31,

  January 1 to
July 31,

  August 1 to
December 31,

  Year Ended
December 31,

  Six Months
Ended
June 30,

  Six Months
Ended
June 30,

 
 
  1999
  2000
  2001
  2002
  2002
  2003
  2003
  2004
 
 
  (in thousands, except per share amounts)

 
Income Statement Data:                                                  
Net sales   $ 1,098,885   $ 1,085,484   $ 1,020,130   $ 644,188   $ 449,524   $ 1,159,433   $ 568,917   $ 648,212  
Cost of sales     264,909     268,992     241,522     140,553     95,001     235,785     115,362     129,863  
   
 
 
 
 
 
 
 
 
Gross profit     833,976     816,492     778,608     503,635     354,523     923,648     435,555     518,349  
Royalty overrides     397,143     382,322     355,225     227,233     159,915     415,351     202,991     230,388  
Marketing, distribution and administrative expenses(1)     344,260     363,731     354,608     207,390     135,536     401,261     171,100     213,039  
Acquisition transaction expenses(2)         9,498         54,708     6,183              
   
 
 
 
 
 
 
 
 
Operating income(1)     92,573     60,941     68,775     14,304     52,889     107,036     79,464     74,922  
Interest income (expense), net     1,750     2,354     3,413     1,364     (23,898 )   (41,468 )   (20,202 )   (41,629 )
   
 
 
 
 
 
 
 
 
Income before income taxes and minority interest     94,323     63,295     72,188     15,668     28,991     65,568     59,262     33,293  
Income taxes     36,314     25,318     28,875     6,267     14,986     28,721     25,177     21,689  
   
 
 
 
 
 
 
 
 
Income before minority interest     58,009     37,977     43,313     9,401     14,005     36,847     34,085     11,604  
Minority interest     1,086     1,058     725     189                  
   
 
 
 
 
 
 
 
 
Net income   $ 56,923   $ 36,919   $ 42,588   $ 9,212   $ 14,005   $ 36,847   $ 34,085   $ 11,604  
   
 
 
 
 
 
 
 
 
Earnings per share                                                  
  Basic   $ 1.99   $ 1.28   $ 1.40   $ 0.28   $   $   $   $ 0.15  
  Diluted   $ 1.86   $ 1.22   $ 1.36   $ 0.27   $ 0.14   $ 0.34   $ 0.32   $ 0.11  
Weighted average shares outstanding                                                  
  Basic     28,603     28,827     30,422     32,387                 104,097  
  Diluted     30,579     30,353     31,250     33,800     102,041     106,891     105,065     110,020  

39


 
  Predecessor
  Company
 
 
  Year Ended
December 31,

  January 1 to
July 31,

  August 1 to
December 31,

  Year Ended
December 31,

  Six Months
Ended
June 30,

 
 
  1999
  2000
  2001
  2002
  2002
  2003
  2003
  2004
 
 
  (in thousands)

 

Other Financial Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Retail sales (unaudited)(3)   $ 1,793,508   $ 1,764,851   $ 1,656,168   $ 1,047,690   $ 731,505   $ 1,894,384   $ 927,578   $ 1,059,561  
EBITDA (unaudited)(4)     105,488     75,576     86,106     25,837     64,313     162,641     92,055     97,940  
Net cash provided by (used in):                                                  
  Operating activities     95,414     46,141     95,465     37,901     28,039     94,648     37,204     65,589  
  Investing activities     (43,517 )   (49,968 )   (16,366 )   18,995     (456,046 )   2,854     9,805     (8,018 )
  Financing activities     (16,041 )   (14,079 )   (3,456 )   (35,292 )   491,519     (18,831 )   706     (45,915 )
  Depreciation and amortization     14,001     15,693     18,056     11,722     11,424     55,605     12,591     23,018  
Capital expenditures(5)     32,607     25,383     14,751     6,799     3,599     20,435     9,969     11,830  
 
  Predecessor
  Company
 
  As of
December 31,

  As of
December 31,

  As of
June 30,

 
  1999
  2000
  2001
  2002
  2003
  2004
 
  (in thousands)

Balance Sheet Data:                                    
Cash and cash equivalents(6)   $ 139,443   $ 140,250   $ 201,181   $ 76,024   $ 156,380   $ 157,132
Receivables, net     30,326     24,600     27,609     29,026     31,977     33,155
Inventories     101,557     99,332     72,208     56,868     59,397     70,503
Total working capital     133,137     145,211     177,813     7,186     1,521     16,144
Total assets     415,819     416,937     470,335     855,705     903,964     907,868
Total debt     8,380     8,417     10,612     340,759     325,294     504,327
Shareholders' equity     206,602     222,401     260,916     191,274     237,788     28,108

(1)
The year ended December 31, 2003 includes $5.1 million in legal and related costs associated with litigation resulting from the Acquisition.

(2)
The year ended December 31, 2000 includes fees and expenses in connection with a proposed acquisition transaction by our founder, Mark Hughes. The seven months ended July 31, 2002 and the five months ended December 31, 2002 include fees and expenses related to the Acquisition.

(3)
In previous years, we reported retail sales on the face of our income statement in addition to the required disclosure of net sales. Retail sales represent the gross sales amount reflected on our invoices to our distributors. We do not receive the retail sales amount. "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" represents product sales including handling and freight income.


Retail sales data is referred to in "Management's Discussion and Analysis of Financial Condition and Results of Operations." Our use of retail sales reflect the fundamental role of "retail sales" in our accounting systems, internal controls and operations, including the basis upon which the distributors are being paid. In addition, information in daily and monthly reports reviewed by our management relies on retail sales data.

40



The following represents the reconciliation of retail sales to net sales for each of the periods set forth above:

 
  Predecessor
  Company
 
 
  Year Ended
December 31,

  January 1 to
July 31,

  August 1 to
December 31,

  Year Ended
December 31,

  Six Months
Ended
June 30,

  Six Months
Ended
June 30,

 
 
  1999
  2000
  2001
  2002
  2002
  2003
  2003
  2004
 
 
  (in thousands)

 
Retail sales   $ 1,793,508   $ 1,764,851   $ 1,656,168   $ 1,047,690   $ 731,505   $ 1,894,384   $ 927,578   $ 1,059,561  
Distributor allowance     (837,283 )   (820,723 )   (774,513 )   (492,997 )   (345,145 )   (899,264 )   (438,870 )   (502,903 )
   
 
 
 
 
 
 
 
 
Product sales     956,225     944,128     881,655     554,693     386,360     995,120     488,708     556,658  
Handling and freight income     142,660     141,356     138,475     89,495     63,164     164,313     80,209     91,554  
   
 
 
 
 
 
 
 
 
Net sales   $ 1,098,885   $ 1,085,484   $ 1,020,130   $ 644,188   $ 449,524   $ 1,159,433   $ 568,917   $ 648,212  
   
 
 
 
 
 
 
 
 
(4)
EBITDA represents net income plus income taxes, net interest expense, and depreciation and amortization. We present EBITDA because management believes it provides useful information regarding our ability to service and/or incur debt and that they provide a more comparable measure of our profitability. However, such measures are not in accordance with GAAP. You should not consider EBITDA in isolation from or as a substitute for net income, cash flows from operating activities and other consolidated income or cash flow statement data prepared in accordance with GAAP or as a measure of profitability or liquidity.


The following table represents a reconciliation of net income to EBITDA:

 
  Predecessor
  Company
 
  Year Ended
December 31,

  January 1 to
July 31,

  August 1 to
December 31,

  Year Ended
December 31,

  Six Months
Ended
June 30,

  Six Months
Ended
June 30,

 
  1999
  2000
  2001
  2002
  2002
  2003
  2003
  2004
 
  (in thousands)

Net income   $ 56,923   $ 36,919   $ 42,588   $ 9,212   $ 14,005   $ 36,847   $ 34,085   $ 11,604
Income taxes     36,314     25,318     28,875     6,267     14,986     28,721     25,177     21,689
Interest (income) expense, net     (1,750 )   (2,354 )   (3,413 )   (1,364 )   23,898     41,468     20,202     41,629
Depreciation & amortization     14,001     15,693     18,056     11,722     11,424     55,605     12,591     23,018
   
 
 
 
 
 
 
 
EBITDA   $ 105,488   $ 75,576   $ 86,106   $ 25,837   $ 64,313   $ 162,641   $ 92,055   $ 97,940
   
 
 
 
 
 
 
 
(5)
Includes acquisition of property from capitalized leases of $1.9 million, $0.4 million, $3.8 million, $2.1 million, $1.4 million, $6.8 million, $5.1 million and $1.5 million for 1999, 2000, 2001, the seven months ended July 31, 2002, the five months ended December 31, 2002, the year ended December 31, 2003, and the six months ended June 30, 2003 and 2004, respectively.

(6)
Includes restricted cash of $10.6 million and $5.7 million as of December 31, 2002 and December 31, 2003, respectively, and $1.3 million of marketable securities at December 31, 2002.

41



MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

        You should read the following discussion and analysis in conjunction with "Selected Consolidated Historical Financial Data" and the related notes and our consolidated financial statements and related notes, each included elsewhere in this prospectus.

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.

        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 financial measure that we use to evaluate and compare our business over periods and by regions is Retail Sales, as defined herein. On a company-wide basis we also use EBITDA, as defined herein, to understand the overall profitability of our core business from period to period. These measures are not prepared in accordance with accounting principles generally accepted in the U.S., or GAAP, and are not substitutes for net sales and net income respectively, but are used by management to better understand our business. We have provided a more complete disclosure and reconciliation to the relevant GAAP measures below.

        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.

42



Volume Points by Geographic Region

 
  For the year ended December 31,
  For the six month period ended June 30,
 
 
  2001
  2002
  % change
  2003
  % change
  2003
  2004
  % change
 
 
  (Volume Points in thousands)

 
The Americas   606,006   679,560   12.1 % 688,064   1.3 % 330,857   363,743   9.9 %
Europe   413,822   472,312   14.1   525,026   11.2   267,346   303,766   13.6  
Asia/Pacific Rim   263,907   271,970   3.1   229,397   (15.7 ) 111,197   122,922   10.5  
Japan   149,652   124,585   (16.8 ) 102,465   (17.8 ) 52,811   38,456   (27.2 )
   
 
     
     
 
     
Worldwide   1,433,387   1,548,427   8.0 % 1,544,952   (0.2 )% 762,211   828,887   8.7 %
   
 
     
     
 
     

        Another key non-financial measure we focus on is the number of distributors qualified as supervisors under our compensation system. Distributors qualify for supervisor status based on their Volume Points. The growth in the number of supervisors is a general indicator of the level of distributor recruitment which generally drives net sales in a particular country or region. Our compensation system requires each supervisor to re-qualify for such status each year, prior to February. There is significant variation in the number of supervisors from the fourth quarter to the first quarter of any given year due to the timing of the re-qualification process. This fluctuation is normal and consistent, and does not reflect a dramatic underlying change in the business in comparing these two sequential quarters and will become more meaningful period to period throughout the year.

        The following tables show trends in the number of supervisors over the reporting period by region, and fluctuations within each notable country are discussed in the appropriate net sales section below where pertinent. In February of each year, we delete from the rank of supervisor those supervisors who did not satisfy the supervisor qualification requirements during the preceding twelve months. Distributors who meet the supervisor requirements at any time during the year are promoted to supervisor status at that time, including any supervisors who were deleted, but who subsequently requalified.


Number of Supervisors by Geographic Region as of Reporting Period

 
  As of December 31,
  As of June 30,
 
 
  2001
  2002
  % change
  2003
  % change
  2003
  2004
  % change
 
The Americas   95,800   105,474   10.1 % 110,165   4.4 % 83,810   93,492   11.6 %
Europe   70,224   76,587   9.1   84,665   10.5   65,758   84,876   29.1  
Asia/Pacific Rim   70,749   65,111   (8.0 ) 55,564   (14.7 ) 43,445   40,258   (7.3 )
Japan   36,018   31,906   (11.4 ) 24,485   (23.3 ) 21,313   15,202   (28.7 )
   
 
     
     
 
     
Worldwide   272,791   279,078   2.3 % 274,879   (1.5 )% 214,326   233,828   9.1 %
   
 
     
     
 
     

Number of Supervisors by Geographic Region as of Requalification Period

 
  As of February,
 
  2001
  2002
  2003
  2004*
The Americas   55,465   62,737   67,921   75,359
Europe   42,419   47,230   51,290   70,239
Asia/Pacific Rim   43,230   40,423   35,637   31,790
Japan   23,589   22,013   18,287   13,946
   
 
 
 
Worldwide   164,703   172,403   173,135   191,334
   
 
 
 

*
In 2004 certain modifications were made to the requalifications resulting in approximately 19,000 additional supervisors.

43


Summary Financial Results

        For the six months ended June 30, 2004, net sales increased by 13.9%, driven by increases in all regions except for a decrease in Japan. These increases resulted from a combination of an increase in the number of our supervisors, generally favorable foreign currency exchange rates, a comprehensive promotional program in Europe and the launch of new products, while the decrease in Japan was driven by factors including strong competition and limited product launches.

        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 was primarily due to higher amortization of intangibles in connection with the Acquisition, higher interest expense, higher promotional expenses and labor costs, 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 $5.7 million favorable impact on net income.

        As we previously anticipated, the impact associated with the discovery of Bovine Spongiform Encephalopathy ("BSE"), commonly known as "mad cow disease," in the United States, did not have a material effect on our business.

Presentation

        As a result of the acquisition of Herbalife International, Inc. ("Herbalife International") on July 31, 2002 by an investment group led by Whitney & Co., LLC and Golden Gate Private Equity, Inc. (the "Acquisition"), the audited financial statements included elsewhere herein consist of financial information from Herbalife International and its subsidiaries (collectively, our "Predecessor") and Herbalife and its subsidiaries (collectively, the "Successor," "we," "us," "our" or the "Company"). The results of operations and cash flows of our Predecessor prior to the Acquisition incorporated in the following discussion are the historical results and cash flows of our Predecessor. These results of our Predecessor do not reflect any purchase accounting adjustments, which are included in our results subsequent to the Acquisition. Due to the results of purchase accounting applied as a result of the Acquisition and the additional interest expense associated with the debt incurred to finance the Acquisition, our results of operations may not be comparable in all respects to the results of operations of our Predecessor prior to the Acquisition. However, our management believes a discussion of our 2002 operations is made more meaningful by combining our results with the results of the Predecessor. Accordingly, for the purpose of management's discussion and analysis of financial condition and results of operations, our results of operations, including our segment operations and cash flows for the year ended December 31, 2002 have been derived by combining the results of operations and cash flows of our Predecessor for the period starting January 1, 2002 through July 31, 2002 with the results of operations and cash flows of the Successor for the period starting August 1, 2002 through December 31, 2002. The terms "we," "us," "our" and "Company" refer to our Predecessor before the Acquisition for periods through July 31, 2002 and to the Successor after the Acquisition for periods subsequent to July 31, 2002, or the entire year from January 1, 2002 to December 31, 2002, as the context requires.

        "Retail Sales" represent the gross sales amounts on our invoices to distributors before distributor allowances (as defined below), and "net sales", which reflects distribution allowances and handling and freight income, is what the Company collects and recognizes as net sales in its financial statements. We discuss Retail Sales because of its fundamental role in our compensation systems, internal controls and operations, including its role as the basis upon which the distributor discounts, royalties and bonuses are awarded. In addition, information in daily and monthly reports reviewed by our management relies on Retail Sales data. However, such a measure is not in accordance with GAAP. You should not consider Retail Sales in isolation from, nor is it a substitute for, net sales and other consolidated income or cash flow statement data prepared in accordance with GAAP, or as a measure of profitability or liquidity. A reconciliation of net sales to Retail Sales is presented below. "Product sales" represent the actual product purchase price paid to us by our distributors, after giving effect to distributor discounts referred to as

44



"distributor allowances," which approximate 50% of 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.

        Our "gross profit" consists of net sales less "cost of sales," which represents the prices we pay to our raw material suppliers and manufacturers of our products as well as costs related to product shipments, duties and tariffs, freight expenses relating to shipment of products to distributors and importers and similar expenses.

        "Royalty Overrides" are our most significant expense and consist of:

    royalty overrides, or commissions, and bonuses, which total approximately 15% and 7%, respectively, of the Retail Sales of weight management, inner nutrition, Outer Nutrition® and promotional products;

    the Mark Hughes Bonus payable to some of our most senior distributors in the aggregate amount of approximately 1% of Retail Sales of weight management, inner nutrition, Outer Nutrition® and promotional products; and

    other discretionary incentive cash bonuses to qualifying distributors.

        Royalty Overrides are generally earned based on Retail Sales, and approximate in the aggregate about 23% of Retail Sales or approximately 35% of our net sales. Royalty Overrides together with the distributor allowances represent the potential earnings to distributors of up to approximately 73% of Retail Sales. The compensation to distributors is generally for the development, retention and improved productivity of their distributor sales organizations and is paid to several levels of distributors on each sale. Because of local country regulatory constraints, we may be required to modify our typical distributor incentive plans as described above. 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.

        "Marketing, distribution and administrative expenses" represent our operating expenses, components of which include labor and benefits, sales events, professional fees, travel and entertainment, distributor marketing, occupancy costs, communication costs, bank fees, depreciation and amortization, foreign exchange gains and losses and other miscellaneous operating expenses.

        "113/4% Notes" refers to Herbalife International's 113/4% senior subordinated notes due 2010. "91/2% Notes" refers to our 91/2% notes due 2011.

        Most of our sales to distributors 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. 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 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

        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 recruit and retain new distributors, open new markets and further penetrate existing markets and introduce new products and develop niche market segments.

45



        The following table sets forth selected results of our operations expressed as a percentage of net sales for the periods indicated.

 
  Predecessor
  Company
  Combined
  Company
 
 
   
   
   
   
   
  Six Months Ended
June 30,

 
 
  Year Ended December 31, 2001
   
  August 1 to December 31, 2002
  Year Ended December 31, 2002
  Year Ended December 31, 2003
 
 
  January 1 to July 31,
2002

 
 
  2003
  2004
 
Operations:                              
Net sales   100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales   23.7   21.8   21.1   21.5   20.3   20.3   20.0  
   
 
 
 
 
 
 
 
Gross profit   76.3   78.2   78.9   78.5   79.7   79.7   80.0  
Royalty overrides   34.8   35.3   35.6   35.4   35.8   35.7   35.5  
Marketing, distribution & administrative expenses   34.8   32.2   30.1   31.4   34.7   30.0   32.9  
Acquisition transaction expenses     8.5   1.4   5.6        
   
 
 
 
 
 
 
 
Operating income   6.7   2.2   11.8   6.1   9.2   14.0   11.6  
Interest income (expense), net   0.4   0.2   (5.4 ) (2.0 ) (3.5 ) (3.6 ) (6.5 )
   
 
 
 
 
 
 
 
Income before income taxes and minority interest   7.1   2.4   6.4   4.1   5.7   10.4   5.1  
Income taxes   2.9   1.0   3.3   2.0   2.5   4.4   3.3  
   
 
 
 
 
 
 
 
Income before minority interest   4.2   1.4   3.1   2.1   3.2   6.0   1.8  
Minority interest   0.0   0.0   0.0   0.0   0.0   0.0   0.0  
   
 
 
 
 
 
 
 
Net income   4.2   1.4   3.1   2.1   3.2   6.0   1.8  
   
 
 
 
 
 
 
 

Six months ended June 30, 2004 compared to six months ended June 30, 2003

Net Sales

        The following chart reconciles Retail Sales, product sales and net sales:

Sales by Geographic Region

 
  Six Months Ended June 30,
   
 
 
  2003
  2004
   
 
 
  Retail Sales
  Distributor
Allowance

  Product
Sales

  Handling & Freight Income
  Net
Sales

  Retail
Sales

  Distributor Allowance
  Product
Sales

  Handling & Freight Income
  Net
Sales

  Change In Net Sales
 
 
  (in millions)

   
 
The Americas   $ 330.0   $ (156.6 ) $ 173.4   $ 31.6   $ 205.0   $ 367.7   ($174.6 ) $ 193.1   $ 34.2   $ 227.3   10.9 %
Europe     365.4     (174.2 )   191.2     31.8     223.0     447.9   (213.9 )   234.0     40.0     274.0   22.9  
Asia/Pacific Rim     126.8     (57.0 )   69.8     9.1     78.9     155.9   (71.7 )   84.2     11.0     95.2   20.7  
Japan     105.4     (51.1 )   54.3     7.7     62.0     88.1   (42.7 )   45.4     6.3     51.7   (16.6 )
   
 
 
 
 
 
 
 
 
 
     
Total   $ 927.6   $ (438.9 ) $ 488.7   $ 80.2   $ 568.9   $ 1,059.6   ($502.9 ) $ 556.7   $ 91.5   $ 648.2   13.9 %
   
 
 
 
 
 
 
 
 
 
     

        Net sales in The Americas increased $22.3 million or 10.9% for the six months ended June 30, 2004, compared to the same period in 2003. In local currency, net sales increased by 10.7% for the six months ended June 30, 2004, as compared to the same period in 2003. The fluctuation of foreign currency rates had no material impact on net sales for the six months ended June 30, 2004. The increase in net sales was a result of sales growth in Brazil and Mexico of 85.9% and 23.5%, respectively. Growth in Brazil was driven by an increase in the number of supervisors of 58.5%, which reflected a renewed emphasis on distributor

46



and customer retention programs. Growth in Mexico was driven by an increase in the number of supervisors of 25.4%, which reflected a renewed emphasis on distributor and customer retention programs locally, as well as the growth in Nutrition Clubs, which are new and innovative means by which distributors are introducing our products to new customers. This was partly offset by a decline in net sales in the U.S., which was a result of a 5.0% decrease in the number of supervisors, with a corresponding volume point decrease when compared to the prior year same period. This is a continuation of a downward trend in the U.S., although the 5.0% decrease in 2004 is half the decrease experienced in the same period in 2003. We continue to address this issue through renewed cooperation and partnership between senior distributor leadership and company management in the U.S. Through regional "mini-extravaganzas", the opening of regional sales centers and our renewed cooperation and partnership, key markets in the U.S. such as New York, Miami, Houston and Atlanta have improved significantly over 2003. Management and senior distributor leadership will continue to focus on other key under-performing markets, including Los Angeles, Chicago and Dallas.

        Net sales in Europe increased $51.0 million or 22.9% for the six months ended June 30, 2004, compared to the same period in 2003. In local currency, net sales increased 11.7% for the six months ended June 30, 2004, as compared to the same period in 2003. The fluctuation of foreign currency rates had a $25.0 million positive impact on net sales for the six months ended June 30, 2004. Certain markets such as Belgium (up 57.6%), Netherlands (up 29.5%), Portugal (up 44.5%), Spain (up 78.2%), Switzerland (up 44.1%) and Turkey (up 134.6%) recorded significant net sales growth as a result of an eight-month promotion ending in June, that helped our distributors increase recruiting. The Company initiated a new promotion, "The Atlanta Challenge" at the Barcelona Extravaganza in July, as a means to incent distributors to qualify for the Company's 25th Anniversary Extravaganza in April 2005 in Atlanta. We believe this promotion will help maintain the positive momentum in Europe through 2004.

        Net sales in Asia/Pacific Rim increased $16.3 million or 20.7% for the six months ended June 30, 2004, compared to the same period in 2003. In local currency, net sales increased 16.3% for the six months ended June 30, 2004, as compared to the same period in 2003. The fluctuation of foreign currency rates had a $3.5 million positive impact on net sales for the six months ended June 30, 2004. The increase was attributable mainly to an increase in the number of supervisors in Taiwan (up 31.2%), partly offset by a decrease in the number of supervisors in South Korea (down 48.6%). We have implemented several distributor focused initiatives in mid-2003 to help stem the sales decline in South Korea. We have seen the positive impact of these programs through a stabilization of sales beginning in the second half of 2003, with net sales approximating $9 million in each subsequent quarter.

        Net sales in Japan decreased $10.3 million, or 16.6% for the six months ended June 30, 2004, compared to the same period in 2003. In local currency, net sales in Japan decreased 24.7% for the six months ended June 30, 2004, as compared to the same period in 2003. The fluctuation of foreign currency rates had a $4.6 million favorable impact on net sales for the six months ended June 30, 2004. The decline in our performance in the Japanese market over the last several years, including 2004, is a reflection of a general deterioration in economic conditions, strong competition, limited product launches and country management which did not properly motivate distributor leadership. Beginning in February 2004, our net sales in Japan have stabilized due to a renewed focus on distributor recruitment and retention programs. In addition, we hired a new company manager in the third quarter of 2004 and are continuing to expand our product line and implement new promotional programs.

47


Sales by Product Category

 
  Six Months Ended June 30,
   
 
 
  2003
  2004
   
 
 
  Retail Sales
  Distributor
Allowance

  Product
Sales

  Handling & Freight Income
  Net
Sales

  Retail
Sales

  Distributor Allowance
  Product
Sales

  Handling & Freight Income
  Net
Sales

  Change In Net Sales
 
 
  (in millions)

   
 
Weight Management   $ 410.1   $ (200.9 ) $ 209.2   $ 35.5   $ 244.7   $ 474.2   $ (233.1 ) $ 241.1   $ 41.0   $ 282.1   15.3 %
Inner Nutrition     417.0     (204.3 )   212.7     36.1     248.8     466.3     (229.3 )   237.0     40.3     277.3   11.5  
Outer Nutrition®     87.0     (42.6 )   44.4     7.5     51.9     96.9     (47.6 )   49.3     8.4     57.7   11.2  
Literature, Promotional and Other     13.5     8.9     22.4     1.1     23.5     22.2     7.1     29.3     1.8     31.1   32.3  
   
 
 
 
 
 
 
 
 
 
     
Total   $ 927.6   $ (438.9 ) $ 488.7   $ 80.2   $ 568.9   $ 1,059.6   $ (502.9 ) $ 556.7   $ 91.5   $ 648.2   13.9 %
   
 
 
 
 
 
 
 
 
 
     

        Due to the launch of our ShapeWorks™ product line, net sales of weight management products increased at a higher rate than net sales of inner nutrition and Outer Nutrition® products. Literature, Promotional and Other, which includes product buy-backs and returns in all product categories, increased due to a decrease in returns and refunds. We expect shifts within these categories from time to time as we launch new products.

Gross Profit

        The price of key raw materials coupled with the purchase price of our major products has declined slightly over the reporting period. We believe that we have the ability to mitigate price increases by raising the prices of our products or through shifting product sourcing to alternative manufacturers. Furthermore, because gross profit percentages do not vary significantly among our product mix, we do not expect significant fluctuations in our gross profit as a percentage of sales other than that associated with ongoing cost reduction initiatives. Gross profit was $518.3 million for the six months ended June 30, 2004, compared to $453.6 million in the same period in 2003. As a percentage of net sales, gross profit for the six months ended June 30, 2004 increased from 79.7% to 80.0% as compared to the same period in 2003.

Royalty Overrides

        Royalty Overrides as a percentage of net sales were 35.5% for the six months ended June 30, 2004 as compared to 35.7% for the same period in 2003. The ratio varies slightly from period to period primarily due to changes in the mix of products and countries because full Royalty Overrides are not paid on certain products or in certain countries. Due to the structure of our compensation plan, we do not expect to see significant fluctuations in Royalty Overrides as a percent of sales.

Marketing, Distribution, and Administrative Expenses

        Marketing, distribution, and administrative expenses as a percentage of net sales were 32.9% for the six months ended June 30, 2004, as compared to 30.1% for the same period in 2003.

        For the six months ended June 30, 2004, marketing, distribution and administrative expenses increased $41.9 million to $213.0 million from $171.1 million in the same period in 2003. The increase included: $10.9 million in additional intangibles amortization expense, due to the final allocation in the third quarter of 2003 of the purchase price in connection with the Acquisition; $8.5 million in higher salaries and wages, due primarily to normal merit increases, the impact of foreign currency fluctuations, a lower bonus expense in 2003 based on the then anticipated results, and increases related to the strengthening of the senior management team; $4.2 million in additional professional fees associated with higher legal expenses, technology expenses and higher manufacturing consulting expenses related to the

48



start-up of the facility in China and, to a lesser extent, fees relating to our corporate restructuring; $5.4 million in additional promotional expenses related primarily to the ShapeWorks™ launch, the eight-month European promotion program noted above which ended in June 2004 and expenses related to our 25th anniversary promotion, $4.0 million in higher non-income taxes due primarily to higher sales in certain jurisdictions and $2.6 million of expenses relating to the transactions that we consummated in connection with the offering of our 91/2% Notes in March 2004. The changes discussed above include the unfavorable impact of foreign currency fluctuations on operating expenses of $7.0 million. We currently expect our marketing, distribution and administration expenses for the remainder of 2004 to remain essentially flat with the first six months of 2004, which would represent approximately a 5% increase for full year 2004 from 2003 levels, due primarily to the timing of certain sales and marketing events, including certain expenses associated with our 25th Anniversary Extravaganza. In anticipation of our potential initial public offering, we expect to take a charge in the quarter ended September 30, 2004 for expenses associated with grants of 1.2 million stock options in August 2004 and September 2004, taking into account the difference between the estimated initial public offering price and the option exercise prices over the relevant vesting periods. We do not believe this charge will be material to the results of operations for the quarter ended September 30, 2004 or for any future period.

Net Interest Expense

        Net interest expense was $41.6 million for the six months ended June 30, 2004 as compared to $20.2 million in the same period in 2003. The higher interest expense was primarily due to the premium of $15.0 million associated with the repurchase of our 151/2% senior notes and the additional interest expense of $6.4 million associated with our higher debt levels related to the addition of $275 million of 91/2% Notes issued in March 2004.

Income Taxes

        Income taxes were $21.7 million for the six months ended June 30, 2004, as compared to $25.2 million for the same period in 2003. As a percentage of pre-tax income, the estimated effective income tax rate was 65.1% for the six months ended June 30, 2004, as compared to 42.5% in the same periods in 2003. The increase in the effective tax rate was caused primarily by the non-deductible premium related to the repurchase of our 15.5% senior notes and the non-deductible interest expense associated with the 91/2% Notes.

Foreign Currency Fluctuations

        Foreign currency fluctuations had a favorable impact of $5.7 million on net income for the six months ended June 30, 2004, compared to what current year net income would have been using last year's foreign exchange rates. For the six months ended June 30, 2004, the regional effects were a favorable $4.8 million in Europe, a favorable $1.6 million in Asia/Pacific Rim and a favorable $0.8 million in The Americas, partially offset by an unfavorable $1.6 million in Japan.

Net Income

        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 was due to the factors noted above, primarily higher amortization of intangibles in connection with the Acquisition, higher interest expense, higher promotional expenses and labor costs, 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 $5.7 million favorable impact on net income.

49



Year ended December 31, 2003 compared to year ended December 31, 2002

 
  Predecessor
  Company
  Combined
  Company
 
 
  January 1 to July 31, 2002
  August 1 to
December 31, 2002

  Year ended
December 31, 2002

  Year ended
December 31, 2003

 
 
  (in millions)

 
Operations:                          
Net sales   $ 644.2   $ 449.5   $ 1,093.7   $ 1,159.4  
Cost of sales     140.6     95.0     235.6     235.8  
   
 
 
 
 
Gross profit     503.6     354.5     858.2     923.6  
Royalty overrides     227.2     159.9     387.1     415.4  
Marketing, distribution & administrative expenses     207.4     135.5     342.9     401.3  
Acquisition transaction expenses     54.7     6.2     60.9      
   
 
 
 
 
Operating income     14.3     52.9     67.2     107.0  
Interest income (expense), net     1.4     (23.9 )   (22.5 )   (41.5 )
   
 
 
 
 
Income before income taxes and minority interest     15.7     29.0     44.7     65.6  
Income taxes     6.3     15.0     21.3     28.7  
   
 
 
 
 
Income before minority interest     9.4     14.0     23.4     36.8  
Minority interest     0.2         0.2      
   
 
 
 
 
Net income   $ 9.2   $ 14.0   $ 23.2   $ 36.8  
   
 
 
 
 

        For the year ended December 31, 2003, net income increased to $36.8 million from $23.2 million in 2002. Net sales for the year ended December 31, 2003 increased 6.0% to $1,159.4 million from $1,093.7 million in 2002, helped by the appreciation of foreign currencies, primarily the euro.

        Excluding the impact of pre-tax amortization expense of intangibles resulting from the Acquisition of $34.5 million and $1.5 million in 2003 and 2002, respectively, transaction expenses of $60.9 million in 2002 relating to the Acquisition, 2003 legal and related costs associated with litigation resulting from the Acquisition of $5.1 million, $6.2 million in incremental fees and expenses paid to our Equity Sponsors in 2003, and the favorable impact of foreign currency appreciation of approximately $15.8 million in 2003, operating income increased 5.7% to $137.0 million in 2003 from $129.6 million in 2002. The improved result was attributed to increased sales throughout Europe, Brazil and Mexico, partly offset by the decreased sales in the U.S., Japan and South Korea. We expect that sales in the U.S., Japan and South Korea will improve following the execution of our revitalization initiatives for 2004, which are described below. We anticipate some impact associated with the discovery of BSE in the United States, but do not expect this issue to have a material effect on our business.

Net Sales

Sales by Geographic Regions

 
  Year Ended December 31,
   
 
 
  2002
  2003
   
 
 
  Retail
Sales

  Distributor
Allowance

  Product
Sales

  Handling &
Freight
Income

  Net
Sales

  Retail
Sales

  Distributor
Allowance

  Product
Sales

  Handling &
Freight
Income

  Net
Sales

  Change
in Net Sales

 
 
  (in millions)

   
 
The Americas   $ 683.1   $ (324.7 ) $ 358.4   $ 65.9   $ 424.3   $ 687.9   $ (328.9 ) $ 359.0   $ 65.4   $ 424.4   0.0 %
Europe     560.3     (266.3 )   294.0     48.7     342.7     733.4     (349.4 )   384.0     64.2     448.2   30.8  
Asia/Pacific Rim     294.7     (130.0 )   164.7     20.8     185.5     271.6     (123.6 )   148.0     19.5     167.5   (9.7 )
Japan     241.1     (117.1 )   124.0     17.2     141.2     201.5     (97.4 )   104.1     15.2     119.3   (15.5 )
   
 
 
 
 
 
 
 
 
 
     
Total   $ 1,779.2   $ (838.1 ) $ 941.1   $ 152.6   $ 1,093.7   $ 1,894.4   $ (899.3 ) $ 995.1   $ 164.3   $ 1,159.4   6.0 %
   
 
 
 
 
 
 
 
 
 
     

50


        Net sales growth in The Americas was flat with 2002. In local currency, net sales increased by 1.9%. The slight increase was a result of increases in both Brazil and Mexico, which were mostly offset by declining sales in the U.S. Net sales in Brazil and Mexico increased 71.4% and 13.3%, respectively, while net sales in the U.S. declined 10.3% in 2003. In the fourth quarter of 2003, the rate of net sales decline in the U.S. slowed in connection with the introduction of a new sales promotion. In 2004, it is our goal to revitalize the U.S. market through new product introductions, the enhanced use of internet tools, the opening of strategically located sales centers and the implementation of distributor leadership initiatives.

        Net sales in Europe increased $105.5 million or 30.8% in 2003 compared to the prior year. In local currency, net sales increased 14.7% as compared to 2002. The appreciation of the euro and other European currencies was a primary reason for the overall sales increase, but net sales in many of the established countries like Belgium (up 115.1%), France (up 59.9%), Netherlands (up 33.2%), Spain (up 72.2%), Switzerland (up 54.9%) and Turkey (up 371.5%) showed notable growth. In 2004, it is our goal to increase sales by strengthening our presence in Europe and in particular in Russia and Greece by expanding our distributor services and taking over the management of product distribution, which in the past has been handled through third party importers.

        Net sales in Asia/Pacific Rim decreased $18.0 million or 9.7% in 2003 as compared to the prior year. In local currency, net sales decreased 13.3%. The sales decrease was due to a $32.5 million or 42.5% decline in South Korea partly offset by a $9.6 million or 25.0% increase in Taiwan. During 2003, we implemented several new initiatives to help the distributors in South Korea regain momentum, including improving their incentive arrangements and introducing new internet tools and several new products. We believe that these initiatives have helped stabilize sales during the second half of 2003.

        Net sales in Japan decreased $21.9 million or 15.5% during 2003 as compared to the prior year. In local currency, net sales in Japan decreased 22.8%. The decline in the Japanese market over the last year has continued due to strong competition and the general deterioration in economic conditions in Japan. In 2004, it is our goal to revitalize the Japanese market through new product introductions, enhanced use of internet tools, and the implementation of distributor leadership initiatives.


Sales by Product Category

 
  Year Ended December 31,
   
 
 
  2002
  2003
   
 
 
  Retail
Sales

  Distributor
Allowance

  Product
Sales

  Handling &
Freight
Income

  Net
Sales

  Retail
Sales

  Distributor
Allowance

  Product
Sales

  Handling &
Freight
Income

  Net
Sales

  Change
in Net Sales

 
 
  (in millions)

   
 
Weight Management   $ 779.8   $ (381.1 ) $ 398.7   $ 66.9   $ 465.6   $ 840.4   $ (413.2 ) $ 427.2   $ 72.9   $ 500.1   7.4 %
Inner Nutrition     797.7     (389.8 )   407.9     68.4     476.3     849.0     (417.5 )   431.5     73.6     505.1   6.0  
Outer Nutrition®     182.0     (88.9 )   93.1     15.6     108.7     177.6     (87.3 )   90.3     15.4     105.7   (2.8 )
Literature, Promotional and Other     19.7     21.7     41.4     1.7     43.1     27.4     18.7     46.1     2.4     48.5   12.5  
   
 
 
 
 
 
 
 
 
 
     
Total   $ 1,779.2   $ (838.1 ) $ 941.1   $ 152.6   $ 1,093.7   $ 1,894.4   $ (899.3 ) $ 995.1   $ 164.3   $ 1,159.4   6.0 %
   
 
 
 
 
 
 
 
 
 
     

        The increase in net sales for weight management and inner nutrition products was due to our increased emphasis on science-based products. In addition, during 2002 we rationalized our Outer Nutrition® line by eliminating color cosmetics, resulting in decreased net sales in 2003. We believe that our Outer Nutrition® product line is now better aligned with our other product categories.

Gross Profit

        Gross profit was $923.6 million for the year ended December 31, 2003 compared to $858.2 million in the prior year. As a percentage of net sales, gross profit for the year ended December 31, 2003 increased

51



from 78.5% to 79.7% as compared to the prior year. The increase in gross profit reflected inventory management initiatives which have reduced obsolescence, lower freight and duty expenses, and the favorable impact of stronger foreign currencies.

Royalty Overrides

        Royalty Overrides as a percentage of net sales were 35.8% for the year ended December 31, 2003 as compared to 35.4% in the prior year. The ratio varies slightly from period to period primarily due to a change in the mix of products and countries because full Royalty Overrides are not paid on certain products or in certain countries. Due to the structure of our compensation plan, we do not expect to see significant fluctuations in Royalty Overrides as a percent of sales.

Marketing, Distribution and Administrative Expenses

        Marketing, distribution and administrative expenses as a percentage of net sales were 34.6% for the year ended December 31, 2003, as compared to 31.4% in the prior year. For the year ended December 31, 2003, these expenses increased $58.4 million to $401.3 million from $342.9 million in the prior year. The increase included $34.5 million amortization expense of intangibles in 2003 compared to $1.5 million in 2002. In addition, marketing, distribution and administrative expenses were unfavorably impacted by approximately $10.9 million due to the appreciation of foreign currencies, by approximately $6.9 million due to increased promotional expenses, by approximately $9.1 million due to litigation costs and related legal expenses, and by approximately $6.2 million due to fees and expenses paid to our Equity Sponsors subsequent to the Acquisition. Lower salaries and wages expense partly offset the increased expense reflecting efficiencies realized from various cost savings initiatives.

Acquisition Transaction Expenses

        In 2002, we recorded $21.9 million relating to fees and $39.0 million of stock option expenses in connection with the Acquisition.

Net Interest Expense

        Net interest expense was $41.5 million for the year ended December 31, 2003 as compared to $22.5 million in the prior year. The increase was mainly due to a full year's interest expense relating to the term loan, the 113/4% Notes and the 15.5% senior notes in 2003, as compared to only five months of interest expense for those same items in 2002.

Income Taxes

        Income taxes were $28.7 million for the year ended December 31, 2003 as compared to $21.3 million for the prior year. As a percentage of pre-tax income, the annual effective income tax rate was 43.8% for 2003 and 47.6% for 2002. The higher effective tax rate in 2002 reflected primarily the non-deductibility of certain acquisition-related expenses incurred in 2002.

Foreign Currency Fluctuations

        Currency fluctuations had a favorable impact of $9.5 million on net income for the year ended December 31, 2003 when compared to what current year net income would have been using 2002 foreign exchange rates. For the year ended December 31, 2003, the regional effects were an unfavorable impact of $3.2 million in The Americas, a favorable impact of $1.5 million in Asia/Pacific Rim, a favorable impact of $11.2 million in Europe, and no material impact in Japan.

52



Net Income

        Net income for the year ended December 31, 2003 was $36.8 million compared to net income of $23.2 million for the prior year. Net income increased primarily because of the factors noted above.

Year ended December 31, 2002 compared to year ended December 31, 2001

        Net sales for year ended December 31, 2002 increased 7.2% to $1,093.7 million, as compared to net sales of $1,020.1 million in the prior year.

Net Sales

Sales by Geographic Region

 
  Year Ended December 31,
   
 
 
  2001
  2002
   
 
 
  Retail
Sales

  Distributor
Allowance

  Product
Sales

  Handling &
Freight
Income

  Net
Sales

  Retail
Sales

  Distributor
Allowance

  Product
Sales

  Handling &
Freight
Income

  Net
Sales

  Change
in Net Sales

 
 
  (in millions)

   
 
Americas   $ 620.2   $ (291.9 ) $ 328.3   $ 58.6   $ 386.9   $ 683.1   $ (324.7 ) $ 358.4   $ 65.9   $ 424.3   9.7 %
Europe     459.5     (216.1 )   243.4     39.8     283.2     560.3     (266.3 )   294.0     48.7     342.7   21.0  
Asia/Pacific Rim     271.9     (118.9 )   153.0     19.0     172.0     294.7     (130.0 )   164.7     20.8     185.5   7.8  
Japan     304.6     (147.6 )   157.0     21.0     178.0     241.1     (117.1 )   124.0     17.2     141.2   (20.7 )
   
 
 
 
 
 
 
 
 
 
     
Total   $ 1,656.2   $ (774.5 ) $ 881.7   $ 138.4   $ 1,020.1   $ 1,779.2   $ (838.1 ) $ 941.1   $ 152.6   $ 1,093.7   7.2 %
   
 
 
 
 
 
 
 
 
 
     

        Net sales in The Americas increased $37.4 million or 9.7% as compared to the prior year. In local currency, net sales increased by 13.7%. The increase was mainly due to well-organized distributor sales meetings, and strong local leadership.

        Net sales in Europe increased $59.5 million or 21.0% in 2002 as compared to the prior year. In local currency, net sales in Europe increased 14.6%. The increase was partly due to strong local distributor leadership and effective lead generation system.

        Net sales in Asia/Pacific Rim increased $13.5 million or 7.8% during 2002 as compared to the prior year. In local currency, net sales for Asia/Pacific Rim increased 5.8%. The increase was due to sales growth in Australia, Taiwan and Thailand of 39.9%, 11.1% and 76.1%, respectively.

        Net sales in Japan decreased $36.8 million, or 20.7% during 2002 as compared to the prior year. In local currency, net sales for Japan decreased 18.3%. The decline was due to deteriorating economic conditions and the intensified competitive sales environment.


Sales by Product Category

 
  Year Ended December 31,
   
 
 
  2001
  2002
   
 
 
  Retail
Sales

  Distributor
Allowance

  Product
Sales

  Handling &
Freight
Income

  Net
Sales

  Retail
Sales

  Distributor
Allowance

  Product
Sales

  Handling &
Freight
Income

  Net
Sales

  Change
in Net Sales

 
 
  (in millions)

   
 
Weight Management   $ 707.9   $ (345.2 ) $ 362.7   $ 59.2   $ 421.9   $ 779.8   $ (381.1 ) $ 398.7   $ 66.9   $ 465.6   10.4 %
Inner Nutrition     744.6     (363.1 )   381.5     62.2     443.7     797.7     (389.8 )   407.9     68.4     476.3   7.3  
Outer Nutrition®     178.2     (86.9 )   91.3     14.9     106.2     182.0     (88.9 )   93.1     15.6     108.7   2.4  
Literature, Promotional and Other     25.5     20.7     46.2     2.1     48.3     19.7     21.7     41.4     1.7     43.1   (10.8 )
   
 
 
 
 
 
 
 
 
 
     
Total   $ 1,656.2   $ (774.5 ) $ 881.7   $ 138.4   $ 1,020.1   $ 1,779.2   $ (838.1 ) $ 941.1   $ 152.6   $ 1,093.7   7.2 %
   
 
 
 
 
 
 
 
 
 
     

53


        For the year ended December 31, 2002, net sales of weight management, inner nutrition and Outer Nutrition® products increased as compared to the prior year. The increases were partially offset by a decrease in sales of literature, promotional and other materials and an increase in returns and refunds.

Gross Profit

        Gross profit was $858.2 million for the year ended December 31, 2002 compared to $778.6 million in the prior year. As a percentage of net sales, gross profit for the year ended December 31, 2002 increased from 76.3% to 78.5% as compared to the prior year. The increase in gross profit reflected the realization of product cost savings attributable to new supply contracts initiated in 2001 and a reduction in the inventory provision for slow moving and anticipated obsolescence when comparing 2002 to 2001.

Royalty Overrides

        Royalty Overrides as a percentage of net sales were 35.4% for the year ended December 31, 2002 as compared to 34.8% in the prior year. The ratio varies slightly from period to period primarily due to a change in the mix of products and countries because full Royalty Overrides are not paid on certain products or in certain countries.

Marketing, Distribution and Administrative Expenses

        Marketing, distribution and administrative expenses as a percentage of net sales were 31.4% for the year ended December 31, 2002, as compared to 34.8% in the prior year. For the year ended December 31, 2002, these expenses decreased $11.7 million to $342.9 million from $354.6 million in the prior year. The decrease was due to $9.3 million in charges for non-income tax contingencies for various tax audits in 2001, a $5.4 million decrease in severance expense from 2001 to 2002, partially offset by $1.3 million higher foreign exchange losses in 2002.

Acquisition Transaction Expenses

        In 2002, we recorded $21.9 million relating to fees and $39.0 million of stock option expenses in connection with the Acquisition.

Net Interest Expense

        Net interest expense was $22.5 million for the year ended December 31, 2002 as compared to net interest income of $3.4 million in the prior year. In 2002, the interest expense was mainly related to the term loan, Herbalife's 15.5% senior notes and the 113/4% Notes issued to finance the Acquisition.

Income Taxes

        Income taxes were $21.3 million for the year ended December 31, 2002 as compared to $28.9 million for the prior year. As a percentage of pre-tax income, the annual effective income tax rate was 47.6% and 40% for 2002 and 2001, respectively. The increase in the effective rate reflected primarily the non-deductibility of the Acquisition-related expenses and the interest expenses incurred by us in 2002.

Foreign Currency Fluctuations

        Currency fluctuations had an unfavorable effect of $1.0 million on net income for the year ended December 31, 2002 when recalculating current year net income using last year's foreign exchange rates. For the year ended December 31, 2002, the regional effects were $3.2 million unfavorable in The Americas, $1.1 million unfavorable in Asia/Pacific Rim, $3.3 million favorable in Europe, and no material impact in Japan.

54



Net Income

        Net income for the year ended December 31, 2002 was $23.2 million compared to net income of $42.6 million for the prior year. Excluding the impact of Acquisition expenses, amortization of intangibles and changes in net interest expense, net income for the year ended December 31, 2002 would have been $76.2 million. Net income excluding the impact of Acquisition expenses for the year ended December 31, 2002 increased principally because of a 7.2% increase in net sales and a 2.1% increase in gross profit as a percentage of net sales.

Liquidity and Capital Resources

        We have historically met our working capital and capital expenditure requirements, including funding for expansion of operations, through net cash flows provided by operating activities. Our principal source of liquidity is our operating cash flows. Variations in sales of our products would directly affect the availability of funds.

        For the six months ended June 30, 2004, we generated $65.6 million from operating cash flows compared to $37.2 million in the same period in 2003. The increase in cash generated from operations is primarily related to an increase in working capital of $35.5 million and a decrease in working capital of $13.8 million for the six months ended June 30, 2004 and 2003, respectively. The increase in cash generated from changes in working capital for the six months ended June 30, 2004 was mainly due to an increase in accrued expenses, primarily from interest on long term debt, non-income taxes and an increase in income taxes payable, partially offset by the cash used to increase inventory related to the introduction of new products.

        Capital expenditures including capital leases for the six months ended June 30, 2004 were $11.8 million compared to $10.0 million in the same period in 2003. The majority of these expenditures represented investments in management information systems, internet tools for distributors and office facilities and equipment in the United States. We expect to incur additional capital expenditures of up to $18 million for the remainder of 2004.

        In connection with the Acquisition, we consummated certain related financing transactions including Herbalife International's issuance of its 113/4% Notes in the amount of $165 million, and entering into Herbalife International's senior credit facility, consisting of a term loan in the amount of $180 million and a revolving credit facility in the amount of $25 million.

        The following summarizes our contractual obligations at June 30, 2004 and the effect such obligations are expected to have on our liquidity and cash flow in future periods:

 
  Payments due by period
 
  Total
  2004
  2005
  2006
  2007
  2008
  2009 & thereafter
 
  (in millions)

Term Debt   $ 71.1   $ 8.7   $ 17.4   $ 17.4   $ 17.4   $ 10.2   $
113/4% Notes     158.3                         158.3
91/2% Notes     267.7                         267.7
Capital lease     5.5     1.9     2.9     0.7            
Other debt     1.7     1.2     0.5                
   
 
 
 
 
 
 
Total   $ 504.3   $ 11.8   $ 20.8   $ 18.1   $ 17.4   $ 10.2   $ 426.0
   
 
 
 
 
 
 

Operating leases

 

$

20.6

 

$

6.2

 

$

8.8

 

$

4.1

 

$

0.9

 

$

0.4

 

$

0.2

55


        The following summarizes our contractual obligations on a pro forma basis at June 30, 2004, to reflect the recapitalization transactions as if they had occurred on June 30, 2004:

 
  Payments due by period
 
  Total
  2004
  2005
  2006
  2007
  2008
  2009 & thereafter
 
  (in millions)

New senior credit facility   $ 200.0   $   $ 2.0   $ 2.0   $ 2.0   $ 2.0   $ 192.0
91/2% Notes     160.7                         160.7
Capital Lease     5.4     1.9     2.8     0.7            
Other Debt     1.8     1.3     0.5                
   
 
 
 
 
 
 
Total   $ 367.9   $ 3.2   $ 5.3   $ 2.7   $ 2.0   $ 2.0   $ 352.7
   
 
 
 
 
 
 
Operating Leases   $ 20.6   $ 6.2   $ 8.8   $ 4.1   $ 0.9   $ 0.4   $ 0.2
   
 
 
 
 
 
 

        In March 2004, we and our lenders amended our existing senior credit facility. Under the terms of the amendment, we made a prepayment of $40.0 million to reduce outstanding amounts under our senior credit facility. In connection with this prepayment, the lenders under the 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 existing senior credit facility and permitted our parent company to complete the transactions that we consummated in connection with the offering of our 91/2% Notes in March 2004. The schedule of the principal payments was also modified so that we were obligated to pay approximately $4.4 million on March 31, 2004 and in each subsequent quarter through June 30, 2008.

        In March 2004, we and our wholly-owned subsidiary WH Capital Corporation completed the $275 million offering of our 91/2% Notes. The proceeds of the offering together with available cash were used to pay the cash redemption price due upon redemption of all outstanding Herbalife 12% Series A Cumulative Convertible preferred shares, including all accrued and unpaid dividends, to redeem our 151/2% senior notes and to pay related fees and expenses. Interest on the 91/2% 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 91/2% Notes are our 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 91/2% Notes are effectively subordinated to all existing and future indebtedness and other liabilities of our subsidiaries.

        As of June 30, 2004, we had working capital of $16.1 million. Cash and cash equivalents were $157.1 million at June 30, 2004, compared to $150.7 million at December 31, 2003. Simultaneously with the consummation of this offering, we anticipate closing a series of recapitalization transactions, including:

    a tender offer for any and all of the outstanding 113/4% Notes and related consent solicitation to amend the indenture governing the 113/4% Notes;

    the redemption of 40% of our outstanding 91/2% Notes;

    the replacement of Herbalife International's existing $205.0 million senior credit facility, under which loans in an aggregate principal amount of $71.1 were outstanding on June 30, 2004, with a new $225.0 million senior credit facility; and

    the payment of a $200.0 million special cash dividend to our current shareholders.

        We expect that cash and funds provided from operations and available borrowings under our new revolving credit facility will provide sufficient working capital to operate our business, to make expected capital expenditures and to meet foreseeable liquidity requirements, including debt service on the 91/2% Notes and the senior credit facility. There can be no assurance, however, that our business will generate sufficient cash flows or that future borrowings will be available in an amount sufficient to enable us to service our debt, including our outstanding notes, or to fund our other liquidity needs.

56


        The majority of our purchases from suppliers are generally made in U.S. dollars, while sales to Herbalife distributors generally are made in local currencies. Consequently, strengthening of the U.S. dollar versus a foreign currency can have a negative impact on operating margins and can generate transaction losses on intercompany transactions. For discussion of our foreign exchange contracts and other hedging arrangements, see the quantitative and qualitative disclosures about market risks described below.

Quarterly Results of Operations

 
   
   
   
  Company
 
 
  Quarter ended
 
 
  Predecessor
  Combined(1)
   
   
   
   
   
   
   
 
 
  March 31,
2002

  June 30,
2002

  September 30,
2002

  December 31,
2002

  March 31,
2003

  June 30,
2003

  September 30,
2003

  December 31,
2003

  March 31,
2004

  June 30,
2004

 
 
  (in thousands except per share amounts)

 
Operations:                                                              
Net sales   $ 265,794   $ 281,989   $ 272,581   $ 273,349   $ 280,039   $ 288,878   $ 290,392   $ 300,125   $ 324,052   $ 324,160  
Cost of sales     57,072     62,734     58,892     56,857     56,961     58,401     58,987     61,437     63,618     66,245  
   
 
 
 
 
 
 
 
 
 
 
Gross profit     208,722     219,255     213,689     216,492     223,078     230,477     231,405     238,688     260,434     257,915  
Royalty Overrides     94,726     98,643     95,651     98,125     99,510     103,481     104,971     107,389     115,856     114,532  
Marketing, distribution & administrative expenses     81,149     94,598     91,756     81,606     84,376     86,724     111,090     119,072     107,840     105,199  
Acquisition transaction expenses         4,035     50,673                              
   
 
 
 
 
 
 
 
 
 
 
Operating income     32,847     21,979     (24,391 )   36,761     39,192     40,272     15,344     12,227     36,738     38,184  
Interest income (expense), net     575     452     (12,984 )   (10,428 )   (9,947 )   (10,255 )   (11,404 )   (9,862 )   (27,373 )   (14,256 )
   
 
 
 
 
 
 
 
 
 
 
Income before income taxes and minority interest     33,422     22,431     (37,375 )   26,333     29,245     30,017     3,940     2,365     9,365     23,928  
Income taxes     13,369     8,972     (12,198 )   11,110     12,374     12,803     2,241     1,302     9,849     11,840  
   
 
 
 
 
 
 
 
 
 
 
Income before minority interest     20,053     13,459     (25,177 )   15,223     16,871     17,214     1,699     1,063     (484 )   12,088  
Minority interest     140     48                                  
   
 
 
 
 
 
 
 
 
 
 
Net income   $ 19,913   $ 13,411   $ (25,177 ) $ 15,223   $ 16,871   $ 17,214   $ 1,699   $ 1,063   $ (484 ) $ 12,088  
   
 
 
 
 
 
 
 
 
 
 
Earnings per share                                                              
  Basic   $ 0.62   $ 0.41   $   $   $   $   $   $   $ (0.02 ) $ 0.12  
  Diluted   $ 0.60   $ 0.39   $ (0.01 ) $ 0.15   $ 0.16   $ 0.16   $ 0.02   $ 0.01   $   $ 0.11  

Weighted average shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  Basic     32,007     32,591                             26,607     104,125  
  Diluted     33,291     34,051     102,041     102,041     103,841     106,667     108,784     108,678     109,892     110,132  

(1)
For the purposes of this presentation we have combined the result of operations of our Predecessor for the period July 1, 2002 through July 31, 2002 and the Company for the period August 1, 2002 through September 30, 2002. The earnings per share information pertain only to the Company for the period August 1, 2002 through September 30, 2002. Basic and diluted earnings per share for the predecessor for the period July 1 through July 31, 2002 was $(0.73) and $(0.75), respectively.

57


Contingencies

        We are from time to time engaged in routine litigation. We regularly review all pending litigation matters in which we are involved and establish reserves deemed appropriate by management for these litigation matters when a probable loss estimate can be made.

        Herbalife International 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 International under various state and federal laws. Without in any way admitting liability or wrongdoing, we have reached a binding settlement with the plaintiffs, subject to final court approval. Under the terms of the settlement, we 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 our products to those current supervisor-level distributors who had purchased Newest Way to Wealth materials from the other defendants in this matter.

        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). 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. We believe that we have 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, we have been subjected to various product liability claims. The effects of these claims to date have not been material to us, and the reasonably possible range of exposure on currently existing claims is not material. We believe that we have meritorious defenses to the allegations contained in the lawsuits. We currently maintain product liability insurance with an annual deductible of $10.0 million.

        Certain of our 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. We and our tax advisors believe that there are meritorious defenses to the allegations that additional taxes are owing, and we are vigorously contesting the additional proposed taxes and related charges.

        These matters may take several years to resolve, and we 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.

Quantitative and Qualitative Disclosures About Market Risks

        We are exposed to market risks, which arise during the normal course of business from changes in interest rates and foreign currency exchange rates. On a selected basis, we use derivative financial instruments to manage or hedge these risks. All hedging transactions are authorized and executed pursuant to written guidelines and procedures.

        We have adopted SFAS 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS 133, as amended and interpreted, established accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. All derivatives, whether designated in hedging relationships or not, are required to be recorded on the balance sheet at fair value. If the derivative is designated as a fair-value hedge, the changes in the fair value of the derivative and the underlying hedged item are recognized concurrently in earnings. If the

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derivative is designated as a cash-flow hedge, changes in the fair value of the derivative are recorded in other comprehensive income ("OCI") and are recognized in the statement of operations when the hedged item affects earnings. SFAS 133 defined new requirements for designation and documentation of hedging relationships as well as ongoing effectiveness assessments in order to use hedge accounting. For a derivative that does not qualify as a hedge, changes in fair value are recognized concurrently in earnings.

        A discussion of our primary market risk exposures and derivatives is presented below.

Foreign Exchange Risk

        We enter into foreign exchange derivatives in the ordinary course of business primarily to reduce exposure to currency fluctuations attributable to intercompany transactions and translation of local currency revenue. Most of these foreign exchange contracts are designated for forecasted transactions.

        We purchase average rate put options, which give us the right, but not the obligation, to sell foreign currency at a specified exchange rate ("strike rate"). These contracts provide protection in the event the foreign currency weakens beyond the option strike rate. In some instances, we sell (write) foreign currency call options to finance the purchase of put options, which gives the counterparty the right, but not the obligation, to buy foreign currency from us at a specified strike rate. These contracts serve to limit the benefit we would otherwise derive from strengthening of the foreign currency beyond the strike rate. Such written call options are only entered into contemporaneously with purchased put options. The fair value of option contracts is based on third-party bank quotes.

        The following table provides information about the details of our option contracts at June 30, 2004.

Foreign Currency

  Coverage
  Average Strike Price
  Fair Value
  Maturity Date
 
  (in millions)

   
  (in millions)

   
Purchased Puts (We may sell Yen/Buy USD)              
Japanese Yen   $ 10.5   103.34-107.25   $ 0.4   July-Sep 2004
Japanese Yen   $ 10.5   102.98-106.80   $ 0.4   Oct-Dec 2004
Purchased Puts (We may sell Euro/Buy USD)              
Euro   $ 11.8   1.1564-1.2304   $ 0.6   July-Sep 2004
Euro   $ 11.8   1.1550-1.2292   $ 0.7   Oct-Dec 2004

        Foreign exchange forward contracts are occasionally used to hedge advances between subsidiaries and bank loans denominated in currencies other than their local currency. The objective of these contracts is to neutralize the impact of foreign currency movements on the subsidiary's operating results. The fair value of forward contracts is based on third-party bank quotes.

        The following table provides information about the details of our forward contracts at June 30, 2004.

Foreign Currency

  Contract
Date

  Forward
Position

  Maturity
Date

  Contract
Rate

  Fair Value
 
   
  (in millions)

   
   
  (in millions)

Buy CAD Sell EURO   6/2/04   $ 1.1   7/6/04   1.6650   $ 1.1
Buy DKK Sell EURO   6/2/04   $ 0.8   7/6/04   7.4354   $ 0.8
Buy AUD Sell EURO   6/2/04   $ 3.4   7/6/04   1.7587   $ 3.5
Buy SEK Sell EURO   6/2/04   $ 0.8   7/6/04   9.1301   $ 0.8
Buy NOK Sell EURO   6/2/04   $ 0.9   7/6/04   8.2050   $ 0.9
Buy TWD Sell EURO   6/2/04   $ 3.5   7/6/04   40.7500   $ 3.5
Buy GBP Sell USD   6/22/04   $ 3.3   7/26/04   1.8140   $ 3.3
Buy SEK Sell USD   6/22/04   $ 1.6   7/26/04   7.5850   $ 1.6
Buy JPY Sell USD   6/22/04   $ 18.4   7/26/04   109.0000   $ 18.5
Buy EURO Sell USD   6/22/04   $ 1.0   7/26/04   1.2080   $ 1.0
Buy EURO Sell RUB   6/23/04   $ 3.0   7/26/04   35.3000   $ 3.0

        All foreign subsidiaries, excluding those operating in hyper-inflationary environments, designate their local currencies as their functional currency. At June 30, 2004, the total amount of foreign subsidiary cash was $77.0 million, of which $12.0 million was invested in U.S. dollars.

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Interest Rate Risk

        We have maintained an investment portfolio of high-quality marketable securities. According to our investment policy, we may invest in taxable and tax exempt instruments including asset-backed securities. In addition, the policy establishes limits on credit quality, maturity, issuer and type of instrument. We do not use derivative instruments to hedge our investment portfolio.

        The table below presents principal cash flows and interest rates by maturity dates and the fair values of our borrowings as of June 30, 2004. Fair values for fixed rate borrowings have been determined based on recent market trade values. The fair values for variable rate borrowings approximate their carrying value. Variable interest rates disclosed represent the rates on the borrowings at June 30, 2004. Interest rate risk related to the our capital leases is not significant.

 
  Expected Maturity Date
 
  2004
  2005
  2006
  2007
  2008
  Thereafter
  Total
  Fair Value
Long-term Debt                                                
  Fixed Rate (in millions)                       $ 158.3   $ 158.3   $ 184.8
  Average Interest Rate                                         11.75 %    
  Variable Rate (in millions)   $ 8.7   $ 17.4   $ 17.4   $ 17.4   $ 10.2       $ 71.1   $ 71.1
  Average Interest Rate     3.7 %   3.7 %   3.7 %   3.7 %   3.7 %                
  Fixed Rate (in millions)                       $ 267.7   $ 267.7   $ 290.1
  Average Interest Rate                                   9.5 %   9.5 %    

        Interest rate caps are used to hedge the interest rate exposure on the term loan which has a variable interest rate. It provides protection in the event the LIBOR rates increases beyond the cap rate. The table below describes the interest rate cap that was outstanding at June 30, 2004.

Interest Rate

  Notional Amount
  Cap Rate
  Fair Value
  Maturity Date
 
  (in millions)

   
  (in millions)

   
Interest Rate Cap   $ 30.6   5 %   October 2005

Critical Accounting Policies

        Our accounting policies are described in Note 2 in the Notes to Consolidated Financial Statements contained herein. Our Consolidated Financial Statements are prepared in conformity with accounting principles generally accepted in the United States, 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 its results of operations, financial condition and cash flows.

        Revenue is recognized when products are shipped and title passes to the Independent Distributor or importer. Product sales are after a discount referred to as "Distributor Allowances." Amounts billed for freight and handling costs are included in net sales. The Company generally receives the net sales price in cash or through credit card payments at the point of sale. Related royalty overrides and allowances for product returns are recorded when the merchandise is shipped.

        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 management's assumptions, additional inventory write-downs could be

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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 asset's carrying value. The fair value of the long-lived asset then becomes the asset's 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.

New Accounting Pronouncements

        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

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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 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"), Guarantor's 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.

        The FASB recently issued a proposed pronouncement that, if finalized in its current form, would require that we record compensation expense for stock options issued based on the estimated fair value of the options at the date of grant. We currently are not required to record stock-based compensation charges if the employee's stock option exercise price is equal to or exceeds the fair value of the stock at the date of grant. We have not yet determined what impact, if any, the proposed pronouncement would have on our financial statements.

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BUSINESS

Herbalife

        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 fiscal 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.

        We offer three categories of products: weight management, inner nutrition, and Outer Nutrition®. Our weight management product portfolio includes meal replacements, weight-loss accelerators and a variety of healthy snacks. In March 2004, we launched the ShapeWorks™ weight management program, an enhancement to our best-selling Formula 1 weight management product, which personalizes protein intake and includes a customized meal plan. Our collection of inner nutrition products consists of dietary and nutritional supplements, each containing quality herbs, vitamins, minerals and natural ingredients in support of total well-being and long-term good health. In 2003, we introduced Niteworks™, which supports energy, vascular and circulatory health. Our Outer Nutrition® products include skin cleansers, moisturizers, lotions, shampoos and conditioners, each based on botanical formulas to revitalize, soothe, and smooth body, skin and hair. Weight management, inner nutrition, and Outer Nutrition® accounted for 43.1%, 43.6% and 9.1% of our net sales in fiscal year 2003, respectively.

        We are committed to providing products with scientifically demonstrated efficacy. We have significantly increased our emphasis on scientific research in the fields of weight management and nutrition over the past two years. We believe that our focus on nutrition science will continue to result in meaningful product enhancements that differentiate our products in the marketplace. Our research and development organization combines the experience of product development scientists within our Company with a team of world-renowned scientists. Additionally, through contributions from the Company, the Mark Hughes Cellular and Molecular Nutrition Lab was established at UCLA (the "UCLA Lab"). In 2003, we introduced Niteworks™, a cardiovascular product developed in conjunction with Louis Ignarro, Ph.D., a Nobel Laureate in Medicine. In addition, in March 2004, we introduced ShapeWorks™, a comprehensive weight management program based on the clinical experience and the 15 years of meal replacement research of David Heber, M.D., Ph.D., Professor of Medicine and Public Health at the UCLA School of Medicine, Director of the UCLA Center for Human Nutrition and Director of the UCLA Center for Dietary Supplement Research in Botanicals.

        We recently established a 12-member Scientific Advisory Board, comprised of world-renowned scientists, and a Medical Advisory Board consisting of leading scientists and medical doctors. We consult with members of our Scientific Advisory Board on the advancements in the field of nutrition science, while our Medical Advisory Board provides training on product usage and gives health-news updates through Herbalife literature, the internet and live training events around the world. The boards, both chaired by Dr. David Heber, support our internal product development team by providing expertise on obesity and human nutrition, conducting product research, and advising on product concepts. In addition, in early 2003, we contributed to the establishment of the UCLA Lab. The UCLA Lab's mission is to advance nutrition science to new levels of understanding by using the most progressive research and development technologies available.

        We believe that the direct-selling channel is ideally suited to marketing our products, because sales of weight management, nutrition and personal care products are strengthened by ongoing personal contact between retail consumers and distributors. This personal contact may enhance consumers' nutritional and health education and motivate consumers to begin and maintain wellness and weight management

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programs. In addition, by using our products themselves, distributors can provide first-hand testimonials of product effectiveness, which can serve as a powerful sales tool.

        We are focused on building and maintaining our distributor network by offering financially rewarding and flexible career opportunities through sales of quality, innovative products to health conscious consumers. We believe the income opportunity provided by our network marketing program appeals to a broad cross-section of people throughout the world, particularly those seeking to supplement family income, start a home business or pursue entrepreneurial, full and part-time, employment opportunities. Our distributors, who are all independent contractors, profit from selling our products and can also earn royalties and bonuses on sales made by the distributors whom they recruit to join their sales organizations.

        We enable distributors to maximize their potential by providing a broad array of motivational, educational and support services. We motivate our distributors through our performance-based compensation plan, individual recognition, reward programs and promotions, and participation in local, national and international Company-sponsored sales events and Extravaganzas. We are committed to providing professionally designed educational training materials that our distributors can use to enhance recruitment and to maximize their sales. We and our distributor leadership conduct thousands of training sessions annually throughout the world to educate and motivate our distributors. These training events teach our distributors not only how to develop invaluable business-building and leadership skills, but also how to differentiate our products with their consumers. Our corporate- sponsored training events provide a forum for distributors, who otherwise operate independently, to share ideas with us and each other. In addition, our internet-based Herbalife Broadcasting Network delivers, on a 24-hour basis worldwide, educational, motivational and inspirational content, including addresses from our CEO. Our efficient and effective distribution, logistics and customer care support system assists our distributors by providing next-day sales capabilities and support services. We further aid our distributors by generating additional demand for our products through traditional marketing and public relations methods, such as through television ads, sporting event sponsorships and endorsements.

        We were founded in 1980 by Mark Hughes and acquired in July 2002 by Whitney, Golden Gate and their affiliates. We are incorporated in the Cayman Islands.

Our Market Opportunity

        According to the World Federation of Direct Selling Associations, the global direct selling market, which includes sales through network marketing and direct mail, reached $86 billion in sales in 2002. The area in which we primarily compete, health and wellness, comprised 15.4% of the 2002 total direct selling market according to the Direct Selling Association. According to the Nutrition Business Journal, the U.S. nutritional supplements market grew 5.7% in 2003 to $19.8 billion, of which the weight-loss supplements segment represented $4.2 billion or 21.3%. In addition, the Nutrition Business Journal reported that sales of weight-loss supplements are projected to grow at a 6.8% compound annual growth rate from 2004 through 2010.

        We believe that the increasing prevalence of obesity and the aging worldwide population are driving demand for nutrition and wellness-related products. The number of obese adults worldwide has increased from 200 million in 1995 to 300 million in 2000, an increase of 50% based on a study by the World Health Organization. Trends in dieting have followed the higher prevalence of obesity. A 2003 U.S. News & World Report article estimated that 44% of women and 29% of men in the U.S. were on a diet on any given day. According to the Centers for Disease Control, by 2030, the number of adults aged 65 or over is expected to increase from 6.9% to 12.0% of the worldwide population.

Our Competitive Strengths

        We believe that our success stems from our ability to inspire and motivate our distributor network with a range of quality, innovative products that appeal to consumer preferences for healthy living. We

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have been able to achieve sustained and profitable growth by capitalizing on the following competitive strengths:

        Large, Highly-Motivated Distributor Base.    We had over one million distributors, including over 233,000 supervisors, as of June 30, 2004. Because we believe the network marketing model is the most effective way to sell our products, we devote significant resources and management attention to assist our distributor leadership in recruiting and retaining our distributors. We structured our compensation system to encourage distributors to remain active in the business and to build down-line sales organizations of their own, which can serve to increase their income and to increase our product sales.

        Diverse and Well-Established Product Portfolio.    We are committed to building brand, distributor and customer loyalty by providing a diverse portfolio of health-oriented and wellness products. We currently have 126 products encompassing over 3,100 SKUs across our three primary product categories. The breadth of our product offerings enables our distributors to sell a comprehensive package of products designed to simplify weight management and nutrition. While we improve upon our product formulations based upon developments in nutrition science, several of our products have been in existence for many years. For example, we first introduced our weight management product, Formula 1, in 1980, and it remains our best-selling product. We believe that the longevity and variety in our product portfolio significantly enhances our distributors' abilities to build their businesses.

        Nutrition Science-Based Product Development.    We endeavor to meet the highest industry standards for quality, safety and efficacy. We have significantly increased our emphasis on scientific research in the fields of weight management and nutrition during the past two years. We have an internal team of scientists dedicated to continually evaluating opportunities to enhance our existing products and to develop new products. These new product development efforts are reviewed by doctors and scientists who we believe are among the most respected medical and nutrition experts in the world, and who constitute our Scientific Advisory Board and Medical Advisory Board. In addition, in the past year we provided a donation to assist in the establishment of the UCLA Lab. We believe that the UCLA Lab provides opportunities for Herbalife to access cutting-edge science in herbal research and nutrition that may ultimately be applied to enhance and advance our product development efforts.

        Scalable Business Model.    Our business model enables us to grow our business with minimal investment in our infrastructure and other fixed costs. We require no company-employed sales force to market and sell our products, we incur no direct incremental cost to add a new distributor, and our distributor compensation varies directly with sales. In addition, our distributors bear the majority of our consumer marketing expenses, and supervisors sponsor and coordinate a large share of distributor recruiting and training initiatives. Furthermore, we can readily increase production and distribution of our products as a result of our multiple third party manufacturing relationships and our global footprint of in-house distribution centers.

        Geographic Diversification.    We have a proven ability to establish our network marketing organization in new markets. Since our founding 24 years ago, we have expanded into 59 countries, including 22 countries in the last six years. While sales within our local markets may fluctuate due to economic conditions, competitive pressures, political or social instability or for other reasons, we believe that our geographic diversity mitigates our financial exposure to any particular market. For the fiscal year ended December 31, 2003, 36.6% of our net sales were in the Americas, 38.7% in Europe, and 24.7% in Asia/Pacific Rim.

        Experienced Management Team.    Since the Acquisition, we have significantly strengthened our management team with experienced executives from both inside and outside our industry who have successfully managed and grown international, consumer-oriented businesses. In April 2003, Michael O. Johnson became our Chief Executive Officer after spending 17 years with The Walt Disney Company, where he most recently served as President of Walt Disney International. During his tenure at Disney,

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Mr. Johnson successfully led several multi-billion dollar branded and international businesses. Since joining our Company, Mr. Johnson has assembled a team of experienced executives, including Gregory Probert, Chief Operating Officer and formerly Chief Executive Officer of DMX Music and Chief Operating Officer of The Walt Disney Company's Buena Vista Home Entertainment division; Richard Goudis, Chief Financial Officer and formerly Chief Operating Officer of Rexall Sundown; and Brett R. Chapman, General Counsel and formerly Senior Vice President and Deputy General Counsel at The Walt Disney Company. In addition, Henry Burdick, former Chairman and CEO of Pharmanex, now part of Nu Skin Enterprises, is Vice Chairman and in charge of new product development.

Our Business Strategy

        We believe that our network marketing model is the most effective way to sell our products. Our objective is to increase the recruitment, retention and productivity of our distributor base by pursuing distributor, consumer, product and infrastructure strategies. Our strategic initiatives consist of the following:

        Enter New Markets.    A key component of our growth strategy is to continue to enter into and expand new markets, particularly China, which represents a significant market opportunity. China remains a relatively untapped direct selling and nutritional supplement market. As a result of China's admission to the World Trade Organization, China has agreed to establish direct-selling regulations by December 2004. As such, we believe that China could become one of the largest direct-selling markets in the world over the next several years. We plan to aggressively build our China business. We have hired a managing director for China and are in the process of acquiring real estate and registering our products there. In addition, we are evaluating the feasibility of opening new countries in Eastern Europe, Southeast Asia and South America.

        Further Penetrate Existing Markets.    We believe that there are several opportunities to further penetrate our existing markets. For example, in the U.S., we offer approximately 100 products, while in our other key markets, we offer on average only 53 products. The Company has a three-year plan to license and introduce many of its key products in its major international markets. For example, ShapeWorks™ and Niteworks™ are currently not sold in Europe, Japan or Korea. We are currently working with local regulators to have these products licensed in those markets and expect to be in a position to commence sales in certain of those markets as early as the fourth quarter of 2004. We believe that introducing new products such as ShapeWorks™ and Niteworks™ into these key markets can help increase distributor recruitment, retention and productivity. Even in the U.S., our largest market, we believe that there are opportunities to further penetrate the market given that sales are concentrated in approximately 13 metropolitan areas. Management is working with distributor leadership to develop specific marketing plans to further penetrate these and other markets. These plans include developing products that suit individual lifestyles and appeal to ethnic tastes, and building local sales centers.

        Pursue Local Initiatives.    We empower our local managers to pursue initiatives to address the many unique local and regional needs of our diverse geographic markets. To broaden access to management and provide leadership locally, we have deployed senior management to regional offices in the Americas, Asia/Pacific, Europe, Japan and China. Management is encouraged to establish programs and to tailor our products to appeal to local tastes and customs. For example, we introduced a green tea flavored version of our Formula 1 protein shake in Japan in 2003. In addition, our distributors have established nutrition clubs in Mexico that provide access to Herbalife nutrition products through single-serve packaging which suits the daily consumption habits in Mexico. This program is especially well suited for countries or communities where consumers do not buy in bulk but prefer to shop daily. These nutrition clubs have played a significant role in Mexico's growth. We believe that our distributors could enhance their sales by introducing similar programs in countries with similar economic and demographic profiles.

        Introduce New Products and Develop Niche Market Segments.    We are committed to providing our distributors with unique, innovative products to help them increase sales and recruit new distributors. We

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are focused on incorporating the best science and most current nutrition insight into our products and will clinically test our products as appropriate to better understand their health benefits. We also intend to repackage and reposition current products to better target cultural, ethnic and niche market segments and to broaden the demographic profile of our distributor base. For example, we are expanding our weight-management, cardiovascular and anti-aging product lines, developing products to serve the children's nutrition, sports nutrition and general nutrition markets and targeting a new generation of distributors under 30 years old, "stay-at-home moms" and athletes.

        Further Invest in Our Infrastructure.    In 2003, we embarked upon a strategic initiative to significantly upgrade our technology infrastructure globally. We intend to invest an aggregate of approximately $50 million in connection with this initiative, of which we have invested approximately $16 million through June 30, 2004. We are implementing an Oracle enterprise-wide technology solution, a scalable and stable open architecture platform, to enhance the efficiency and productivity of the Company and our distributors. In addition, we are upgrading our internet-based marketing and distributor services platform, MyHerbalife.com. Through this platform our distributors can access timely reports regarding their down-line sales organizations and obtain information concerning promotional activities, new product releases and local sales and training events. We expect these initiatives to be substantially complete in 2006.

Product Overview

        For 24 years, our products have been designed to help distributors and customers from around the world lose weight, improve their health, and experience life-changing results. We have built our heritage on developing formulas that blend the best of nature with innovative techniques from nutrition science, appealing to the growing base of consumers seeking to live a healthier lifestyle.

        We currently market and sell 126 products encompassing over 3,100 SKUs through our distributors and have approximately 1,600 trademarks globally. We group our products into three categories: weight management, inner nutrition, and 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. These programs target specific consumer market segments, such as women, men, mature adults, sports enthusiasts, as well as weight-loss and weight-management customers and individuals looking to enhance their overall well-being.

        The following table summarizes our products by product category. The net sales figures are for the year ended December 31, 2003.

Product Category

  Description
  Representative Products
Weight Management
(43.1% of 2003 Net Sales)
  Meal replacements, weight-loss accelerators and a variety of healthy snacks   Formula 1
Personalized Protein Powder
Total Control®
High Protein Bars and Snacks

Inner Nutrition
(43.6% of 2003 Net Sales)

 

Dietary and nutritional supplements containing quality herbs, vitamins, minerals and other natural ingredients

 

Niteworks
Garden 7
Aloe Concentrate
Joint Support

Outer Nutrition®
(9.1% of 2003 Net Sales)

 

Skin cleansers, moisturizers, lotions, shampoos and conditioners

 

Skin Activator® Cream
Radiant C™ Body Lotion
Herbal Aloe Everyday Shampoo
Mystic Mask

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    Weight management

        We believe that our products have helped millions of people manage their weight safely and effectively. Our weight-management products include the following:

    Formula 1 Protein Drink Mix, a meal-replacement protein powder available in five different flavors;

    Formula 2 Multivitamin-Mineral & Herbal Tablets, which provide essential vitamins and nutrients and are part of our weight-management programs;

    Personalized Protein Powder, a high-quality soy and whey protein source developed to be added to our meal replacements to boost protein intake and decrease hunger;

    accelerators, including Total Control®, Cell Activator and Snack Defense™, which address specific challenges associated with dieting; and

    healthy snacks, formulated to provide between-meal nutrition and satisfaction.

        Our best-selling Formula 1 meal replacement product has been part of our basic weight management program for 24 years and generates approximately 25% of our net sales year-to-date through June 30, 2004. In March 2004, we introduced ShapeWorks™, a personalized protein-based meal replacement program based on the clinical experience and 15 years of meal replacement research of Dr. David Heber, Director of the UCLA Center for Human Nutrition. The ShapeWorks™ program incorporates several of our leading weight management products, including the products listed above. Our distributors help identify body type, analyze lean body mass, and customize a ShapeWorks™program that can help increase metabolism and control hunger.

    Inner nutrition

        We market numerous dietary and nutritional supplements designed to meet our customers' specific nutritional needs. Each of these supplements contains quality herbs, vitamins, minerals and other natural ingredients and focuses on specific lifestages and lifestyles of our customers, including women, men, children, mature adults, and athletes. For example, in 2003, we introduced Niteworks™, a product developed in conjunction with Nobel Laureate in Medicine, Dr. Louis Ignarro. Niteworks™ supports energy, circulatory and vascular health and enhances blood flow to the heart, brain and other vital organs. Another new product, Garden 7™, provides the phytonutrient benefits of seven servings of fruits and vegetables, has anti-oxidant and health-boosting properties, and comes in convenient daily packs which can make nutrition simple. We have also recently introduced Herbalifeline®, a new product that provides a supplemental daily intake of the Omega-3 fatty acids, eicosapentaenoic acid and docosahexaenoic acid, which we believe can help maintain healthy triglyceride levels that are already within normal range and reduce joint discomfort.

    Outer Nutrition®

        Our Outer Nutrition® products complement our weight-management and inner nutrition products and improve the appearance of the body, skin and hair. These products include skin cleansers, toners, moisturizers and facial masks, shampoos and conditioners, body-wash items and a selection of fragrances for men and women under the brand names Nature's Mirror®, Radiant C™ and Skin Activator®, among others. For example, our Radiant C™ Daily Skin Booster harnesses the antioxidant power of vitamin C in a light gel-cream to help seal in moisture and minimize the appearance of fine lines and wrinkles. In addition, we offer Skin Activator®, an advanced cream based on glucosamine, almond oil, green tea and sugar that is also designed to reduce the appearance of fine lines and wrinkles, help skin regain a smoother, firmer appearance, and protect from dryness.

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    Literature, promotional and other products

        We also sell literature and promotional materials, including sales aids, informational audiotapes, videotapes, CDs and DVDs designed to support our distributors' marketing efforts, as well as start-up kits called "International Business Packs" for new distributors. For the year ended December 31, 2003, $48.5 million or 4.2% of our net sales were derived from literature and promotional materials

Product Development

        We are committed to providing our distributors with unique, innovative products to help them increase sales and recruit additional distributors. We accomplish this through reformulating existing product lines and by introducing new products. We have built a world-class product development team including eight Ph.D.'s to formulate, review and evaluate new product ideas. This team is headed by our Vice Chairman Henry Burdick, founder and former Chairman, CEO and President of Pharmavite, makers of the Nature Made brand of supplements, and former Chairman and CEO of Pharmanex, now part of Nu Skin Enterprises. Our product developers receive valuable input from the Company's marketing group, our distributors, employees, and scientific and medical advisors and gather information from numerous outside parties including scientific and medical journals, third party manufacturers, and trade publications. This team identifies targeted new product focus areas as well as ways to enhance our existing products. Once a particular market opportunity has been identified, our marketing and science professionals collaborate to ensure a successful development and launch of the product.

        During the past two years, we have significantly increased our emphasis on the science of weight management and nutrition. This is illustrated by our assembly of a dedicated internal product development team composed of leading scientists as well as our recent establishment of a Scientific Advisory Board and Medical Advisory Board. Our Scientific Advisory Board is comprised of 12 renowned international scientists who are experts in the fields of obesity and human nutrition, and who conduct product research and advise on product concepts. Members of this board include David Heber, M.D., Ph.D., Professor of Medicine and Public Health at the UCLA School of Medicine, Director of the UCLA Center for Human Nutrition and Director of the UCLA Center for Dietary Supplement Research in Botanicals, and Louis Ignarro, Ph.D., Distinguished Professor of Pharmacology at the UCLA School of Medicine and Nobel Laureate in Medicine. We have a consulting arrangement with a firm with which Dr. Ignarro is affiliated and Dr. Heber is a consultant to a public relations firm that we engage. In addition, our Medical Advisory Board is comprised of three leading scientists and medical doctors, who provide training on product usage and give health-news updates through Herbalife literature, the internet, and live training events around the world.

        In 2003, we contributed to the establishment of the UCLA Lab. The UCLA Lab's mission is to advance nutrition science to new levels of understanding by using the most progressive research and development technologies available. For example, the UCLA Lab may enable UCLA researchers for the first time to fingerprint herbs and to couple this with tests of the effects of herbs on living cells. We intend to take full advantage of the expertise at UCLA by committing to support research that will identify the active ingredients in botanicals and their biologic effects.

        We believe our focus on nutrition science and our efforts at combining our own research and development efforts with the scientific expertise of our Scientific Advisory Board, the educational skills of the Medical Advisory Board, and the resources of the UCLA Lab will result in meaningful product introductions and give our distributors and consumers increased confidence in our products.

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Network Marketing Program

    General

        Our products are distributed through a global network marketing organization comprised of over one million independent distributors in 59 countries, except in China where our sales are currently regulated to be conducted on a wholesale basis to local retailers. In addition to helping them achieve physical health and wellness through use of our products, we offer our distributors, who are independent contractors, what we believe is one of the most attractive income opportunities in the direct selling industry. Distributors may earn income on their own sales and can also earn royalties and bonuses on sales made by the distributors in their sales organizations. We believe that our products are particularly well-suited to the network marketing distribution channel because sales of weight management and health and wellness products are strengthened by ongoing personal contact between retail consumers and distributors. We believe our continued commitment to developing innovative, science-based products will enhance our ability to attract new distributors as well as increase the productivity and retention of existing distributors. Furthermore, our international sponsorship program, which permits distributors to sponsor distributors in other countries where we are licensed to do business and where we have obtained required product approvals, provides a significant advantage to our distributors as compared with distributors in some other network marketing organizations.

        In connection with the Acquisition, we entered into an agreement with our distributors on July 18, 2002 that no material changes adverse to the distributors will be made to the existing marketing plan and that we will continue to distribute Herbalife products exclusively through our independent distributors. We believe that this agreement has strengthened our relationship with our existing distributors, improved our ability to recruit new distributors and generally increased the long-term stability of our business.

    Structure of the network marketing program

        To become a distributor, a person must be sponsored by an existing distributor, except in China where no sponsorship is allowed, and must purchase an International Business Pack from us, except in South Korea, where there is no charge for a distributor kit. To become a supervisor or qualify for a higher level, distributors must achieve specified volumes of product purchases or earn certain amounts of royalty overrides during specified time periods and must re-qualify for the levels once each year. To attain supervisor status, a distributor generally must purchase products representing at least 4,000 volume points in one month or 2,500 volume points in two consecutive months. China has its own unique qualifying program. Volume points are point values assigned to each of our products that are equal in all countries and are based on the suggested retail price of U.S. products (one volume point equates to one U.S. dollar). supervisors may then attain higher levels, which consist of the World Team, the Global Expansion Team, the Millionaire Team, the President's Team, the Chairman's Club and ultimately the Founder's Circle, earn increasing amounts of royalty overrides based on purchases by distributors within their organizations and, for members of our Global Expansion Team and above, earn production bonuses on sales in their downline sales organizations. Supervisors contribute significantly to our sales and some key supervisors who have attained the highest levels within our distributor network are responsible for their organization's generation of a substantial portion of our sales and for recruiting a substantial number of our distributors.

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        The following table sets forth the number of our supervisors at the dates indicated:

 
  February*
 
  2000
  2001
  2002
  2003
  2004**
The Americas   46,113   55,465   62,737   67,921   75,359
Europe   44,297   42,419   47,230   51,290   70,239
Asia/Pacific Rim   37,561   43,230   40,423   35,637   31,790
Japan   32,025   23,589   22,013   18,287   13,946
   
 
 
 
 
Worldwide   159,996   164,703   172,403   173,135   191,334
   
 
 
 
 

*
In February of each year, we delete from the rank of supervisor those supervisors who did not satisfy the supervisor qualification requirements during the preceding twelve months. Distributors who meet the supervisor requirements at any time during the year are promoted to supervisor status at that time, including any supervisors who were deleted, but who subsequently requalified. We rely on distributors' certifications as to the amount and source of their product purchases from other distributors. In order to retain distributors, we have modified our requalification criteria to provide that any distributor that earns at least 4,000 volume points in any 12-month period can requalify as a supervisor. Although we apply review procedures with respect to the certifications, they are not directly verifiable by us.

**
In 2004 certain modifications were made to the requalifications resulting in approximately 19,000 additional supervisors.

    Distributor earnings

        Distributor earnings are derived from several sources. First, distributors may earn profits by purchasing our products at wholesale prices, which are discounted 25% to 50% from suggested retail prices, depending on the distributors' level within our distributor network, and selling our products to retail customers or to other distributors. Second, distributors who sponsor other distributors and establish their own sales organizations may earn (i) royalty overrides, 15% of product retail sales in the aggregate, (ii) production bonuses, 7% of product retail sales in the aggregate and (iii) President's Team bonus, 1% of product retail sales in the aggregate. Royalty overrides together with the distributor allowances represent the potential earnings to distributors of up to approximately 73% of retail sales. In China, distributors are limited to earn profits from retailing our products by purchasing our products with discounts and rebates up to 50% of suggested retail price and then reselling them to customers. Distributors may also earn a 5% or 10% sales volume bonus on their own purchases.

        Distributors earn the right to receive royalty overrides upon attaining the level of supervisor and above, and production bonuses upon attaining the level of Global Expansion Team and above. Once a distributor becomes a supervisor, he or she has an incentive to qualify, by earning specified amounts of royalty overrides, as a member of the Global Expansion Team, the Millionaire Team or the President's Team, and thereby receive production bonuses of up to 7%. We believe that the right of distributors to earn royalty overrides and production bonuses contributes significantly to our ability to retain our most productive distributors.

    Distributor motivation and training

        We believe that motivation, inspiration and training are key elements in distributor success and that we and our distributor supervisors have established a consistent schedule of events to support these needs. We and our distributor leadership conduct thousands of training sessions annually on local, regional and global levels to educate and motivate our distributors. Every month, there are hundreds of 1-day Success Training Seminars held throughout the world. Twice a year, in each major territory or region, there is a

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3-day World Team School typically attended by 2,000 to 5,000 distributors. In addition, once a year in each region, we host an Extravaganza to which our distributors from around the world can come to learn about new products, expand their skills and celebrate their success. So far this year, through September of 2004, Extravaganzas in Nashville, Barcelona and Bangkok have been attended by 45,000 of our distributors and in November we plan to host the year's final Extravaganzas in Mexico City and Sao Paulo.

        In addition to these training sessions, we have our own "Herbalife Broadcast Network" that we use to provide distributors continual training and the most current product and marketing information. The Herbalife Broadcast Network can be seen on the internet.

        Distributor reward and recognition is a significant factor in motivating our distributors. Each year, we invest approximately $40 million in regional and worldwide promotions to motivate our distributors to achieve and exceed both sales and recruiting goals. Typical of our worldwide promotions are our 25th Anniversary Cruise, which distributors can qualify to attend by achieving 100,000 Volume Points over a 10-month period, and our Atlanta Challenge, under which distributors can earn rewards for exceeding their prior year base-line performance.

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Geographic Presence

        We conduct business in 59 countries located in the Americas, Europe, Asia/Pacific Rim (excluding Japan) and Japan. The following chart sets forth the countries we have opened in each of these markets as of September 30, 2004 and the year in which we commenced operations in those countries:

Country

  Year
Entered

  Country
  Year
Entered

  Country
  Year
Entered

Europe       The Americas       Asia/Pacific Rim and Japan    
 
United Kingdom

 

1983

 

    USA

 

1980

 

    Australia

 

1982
  Spain   1989       Canada   1982       New Zealand   1988
  France   1990       Mexico   1989       Hong Kong   1992
  Israel   1991       Venezuela   1994       Japan   1993
  Germany   1991       Dominican Republic   1994       Philippines   1994
  Portugal   1992       Argentina   1994       Taiwan   1995
  Czech Republic   1992       Brazil   1995       Korea   1996
  Italy   1992       Chile   1997       Thailand   1997
  Netherlands   1993       Jamaica   1999       Indonesia   1998
  Russia   1994       Panama   2000       India   1999
  Belgium   1994       Colombia   2001       China   2001
  Poland   1994       Bolivia   2004       Singapore   2003
  Denmark   1994               Macau   2002
  Sweden   1994                
  Austria   1995                
  Switzerland   1995                
  South Africa   1995                
  Norway   1995                
  Finland   1995                
  Greece   1996                
  Turkey   1998                
  Botswana   1998                
  Lesotho   1998                
  Namibia   1998                
  Swaziland   1998                
  Iceland   1999                
  Slovak Republic   1999                
  Cyprus   2000                
  Ireland   2000                
  Morocco   2001                
  Croatia   2001                
  Latvia   2002                
  Ukraine   2002                
  Estonia   2003                

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The following chart sets forth the number of countries we have opened in each of the Americas, Europe, Asia/Pacific Rim (excluding Japan) and Japan as of June 30, 2004 and net sales information by region during the past three fiscal years.

 
  Year ended December 31,
   
   
Geographic region

  Percent of
total net sales
2003

  Number of countries
open as of
June 30, 2004

  2001
  2002
  2003
 
  (in millions)

   
   
The Americas   $ 386.9   $ 424.3   $ 424.4   36.6 % 12
Europe     283.2     342.7     448.2   38.7   34
Asia/Pacific Rim (excluding Japan)     172.0     185.5     167.5   14.4   12
Japan     178.0     141.2     119.3   10.3   1
   
 
 
 
 
Total   $ 1,020.1   $ 1,093.7   $ 1,159.4   100.0 % 59
   
 
 
 
 

        The fiscal year ended December 31, 2003 marks the first year in which we separately recognize revenues from sales to distributors in Japan and the net sales information reported in the table above for prior periods reflects the net sales attributable to that market during those periods. For more information about our results of operation in these four geographic regions, see Note 11 in the Notes to Consolidated Financial Statements included elsewhere herein.

        Historically a significant portion of our sales have been from a few countries. In 2003, our top six countries accounted for approximately 56.4% of total net sales. Over the most recent five years, the top six countries of each year have gone from representing approximately 72.5% of net sales in 1999 to 56.4% of net sales in 2003.

        After entering a new country, we in many instances experience an initial period of rapid growth in sales as new distributors are recruited, followed by a decline in sales. We believe that a significant factor affecting these markets is the opening of other new markets within the same geographic region or with the same or similar language or cultural bases. Some distributors then tend to focus their attention on the business opportunities provided by these newer markets instead of developing their established sales organizations in existing markets. Additionally, in some instances, we have become aware that certain sales in certain existing markets were attributable to purchasers who distributed our products in countries that had not yet been opened. When these countries were opened, the sales in existing markets shifted to the newly opened markets, resulting in a decline in sales in the existing markets. To the extent we decide to open new markets in the future, we will continue to seek to minimize the impact on distributor focus in existing markets and to ensure that adequate distributor support services and other Herbalife systems are in place to support growth.

Manufacturing and Distribution

        All of our weight management, nutritional and personal care products are manufactured for us by third party manufacturing companies, with the exception of products distributed in and sourced from China where we have our own manufacturing facility. We source our products from multiple manufacturers, with our top three suppliers—Nature's Bounty, Fine Foods and Pharmachem—accounting for approximately 44% of our sales for the fiscal year ended December 31, 2003. In addition, each of our products is available from a secondary vendor if necessary. While our manufacturers meet our quality and production standards, we also have our own state-of-the-art quality control lab in which we routinely test products received from vendors. We have established excellent relationships with our manufacturers and have obtained improvements in supply services, product quality and product delivery. Historically, we have not been subject to material price increases by our suppliers, and we believe that in the event of price increases, we have the ability to respond to a portion of the price increases by raising the prices of our products. We own the proprietary formulations for substantially all of our weight management products and dietary and nutritional supplements.

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        In order to coordinate and manage the manufacturing of our products, we utilize a significant demand planning and forecasting process that is directly tied to our production planning and purchasing systems. Using this sophisticated planning software and process allows us to balance our inventory levels to provide exceptional service to distributors while minimizing working capital and inventory obsolescence. We maintain a monthly forecast accuracy of better than 80%, which facilitates the above planning process.

        Our global distribution system features centralized distribution and telephone ordering systems coupled with storefront distributor service centers. Distribution and service centers are conveniently located and attractively designed in order to encourage local distributors to meet and network with each other and learn more about our products, marketing system and upcoming events. In addition, they can showcase the business while improving their selling productivity. Our major distribution warehouses have been automated with "pick-to-light" picking systems which consistently deliver over 99.5% order accuracy and handling systems that provide for inspection of every shipment before it is sent to delivery. Shipping and processing standards for orders placed are either the same day or the following business day. We have central sales ordering facilities for answering and processing telephone orders. Operators at such centers are capable of conversing in multiple languages.

        Our products are distributed to foreign markets either from the facilities of our manufacturers or from our Los Angeles and Venray, Netherlands distribution centers. Products are distributed in the United States market from our Los Angeles distribution center or from our Memphis distribution center. Nutrition products manufactured in countries globally are generally transported by truck, cargo ship or plane to our international markets and are warehoused in either one of our foreign distribution centers or a contracted third party warehouse and distribution center. After arrival of the products in a foreign market, distributors purchase the products from the local distribution center or the associated sales center. Our Outer Nutrition® products are predominantly manufactured in Europe and the United States. The products manufactured in Europe are shipped to a centralized warehouse facility, from which delivery by truck, ship or plane to other international markets occurs.

Product Return and Buy-Back Policies

        In most markets, our products include a customer satisfaction guarantee. Under this guarantee, within 30 days of purchase, any customer who is not satisfied with an Herbalife product for any reason may return it or any unused portion of it to the distributor from whom it was purchased for a full refund from the distributor or credit toward the purchase of another Herbalife product. If they return the products to us on a timely basis, distributors may obtain replacements from us for such returned products. In addition, in most jurisdictions, we maintain a buy-back program, pursuant to which we will repurchase products sold to a distributor provided that the distributor resigns as an Herbalife distributor, returns the product in marketable condition generally within twelve months of original purchase and meets certain documentation and other requirements. We believe this buy-back policy addresses a number of the regulatory compliance issues pertaining to network marketing programs.

        Historically, product returns and buy-backs have not been significant. Product returns, refunds and buy-back expenses approximated 1.9%, 2.4% and 2.5% of retail sales in 2003, 2002 and 2001, respectively.

Management Information, Internet and Telecommunication Systems

        In order to facilitate our continued growth and support distributor activities, we continually upgrade our management information, internet and telecommunication systems. These systems include: (1) a centralized host computer located in Southern California, which is linked to our international markets through a dedicated wide area network that provides on-line, real-time computer connectivity and access; (2) local area networks of personal computers within our markets, serving our regional administrative staffs; (3) an international e-mail system through which our employees communicate; (4) a standardized Northern Telecom Meridian telecommunication system in most of our markets; (5) a fully integrated

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Oracle supply chain management system that has been installed in our distribution centers; and (6) internet websites to provide a variety of online services for distributors (status of qualifications, meeting announcements, product information, application forms, educational materials and, in the United States, sales ordering capabilities). These systems are designed to provide financial and operating data for management, timely and accurate product ordering, royalty override payment processing, inventory management and detailed distributor records. We intend to continue to invest in our systems in order to strengthen our operating platform.

        Our Corporate Restructuring.    Unrelated to this offering, we are in the process of restructuring our corporate organization to be more closely aligned with the international nature of our business activities. The restructuring is taking place over a period of several months and is targeted for completion by December 31, 2004, although certain steps may not be fully completed until the first quarter of 2005. The restructuring is expected to accomplish several objectives including: the realignment of our operating assets according to the geographic location of our business activities, and a lowering of the overall blended effective tax rate that arises from our countries of operation while minimizing incidences of double taxation. Our management believes the restructuring should achieve the intended objectives, however, no assurances can be given that these objectives will be achieved.

Regulation

        General.    In both our United States and foreign markets, we are affected by extensive laws, governmental regulations, administrative determinations, court decisions and similar constraints. Such laws, regulations and other constraints exist at the federal, state or local levels in the United States and at all levels of government in foreign jurisdictions, including regulations pertaining to: (1) the formulation, manufacturing, packaging, labeling, distribution, importation, sale and storage of our products; (2) product claims and advertising, including direct claims and advertising by us, as well as claims and advertising by distributors, for which we may be held responsible; (3) our network marketing program; (4) transfer pricing and similar regulations that affect the level of U.S. and foreign taxable income and customs duties; and (5) taxation of distributors (which in some instances may impose an obligation on us to collect the taxes and maintain appropriate records).

        Products.    In the United States, the formulation, manufacturing, packaging, storing, labeling, promotion, advertising, distribution and sale of our products are subject to regulation by various governmental agencies, including (1) the FDA, (2) the Federal Trade Commission ("FTC"), (3) the Consumer Product Safety Commission ("CPSC"), (4) United States Department of Agriculture ("USDA"), (5) the Environmental Protection Agency ("EPA"), (6) the United States Postal Service, (7) United States Customs and Border Protection, and (8) the Drug Enforcement Administration. Our activities also are regulated by various agencies of the states, localities and foreign countries in which our products are manufactured, distributed and sold. The FDA, in particular, regulates the formulation, manufacture and labeling of conventional foods, dietary supplements, cosmetics and over-the-counter ("OTC") drugs, such as those distributed by us. FDA regulations require us and our suppliers to meet relevant current good manufacturing practice ("cGMP") regulations for the preparation, packing and storage of foods and OTC drugs. On March 7, 2003, the FDA released for comment its proposed cGMP's for dietary supplements. If FDA issues the final cGMPs for dietary supplements late 2004, as FDA's Acting Commissioner now expects, we will have up to a year to ensure compliance. We expect to see an increase in certain manufacturing costs as a result of the necessary increase in testing of raw ingredients and finished products and compliance with higher quality standards.

        Most OTC drugs are subject to FDA Monographs that establish labeling and composition for these products. Our products must comply with these Monographs, and our manufacturers must list all products with the FDA and follow cGMP. Our cosmetic products are regulated for safety by the FDA, which requires that ingredients meet industry standards for non-allergenicity and non-toxicity. Performance claims for cosmetics may not be "therapeutic."

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        The U.S. 1994 Dietary Supplement Health and Education Act ("DSHEA") revised the provisions of the Federal Food, Drug and Cosmetic Act ("FFDCA") concerning the composition and labeling of dietary supplements and, we believe, is generally favorable to the dietary supplement industry. The legislation created a new statutory class of dietary supplements. This new class includes vitamins, minerals, herbs, amino acids and other dietary substances for human use to supplement the diet, and the legislation grandfathers, with some limitations, dietary ingredients that were on the market before October 15, 1994. A dietary supplement that contains a dietary ingredient that was not on the market before October 15, 1994 will require evidence of a history of use or other evidence of safety establishing that it is reasonably expected to be safe. Manufacturers or marketers of dietary supplements in the United States and certain other jurisdictions that make product performance claims, including structure or function claims, must have substantiation in their possession that the statements are truthful and not misleading. The majority of the products marketed by us in the United States are classified as conventional foods or dietary supplements under the FFDCA. Internationally, the majority of products marketed by us are classified as foods or food supplements.

        In January 2000, the FDA a issued a regulation that defines the types of statements that can be made concerning the effect of a dietary supplement on the structure or function of the body pursuant to DSHEA. Under DSHEA, dietary supplement labeling may bear structure or function claims, which are claims that the products affect the structure or function of the body, without prior FDA approval, but with notification to the FDA. They may not bear a claim that they can prevent, treat, cure, mitigate or diagnose disease (a disease claim). The regulation describes how the FDA distinguishes disease claims from structure or function claims. The FDA later issued a Structure/Function Claims Small Entity Compliance Guide.

        As a marketer of dietary and nutritional supplements and other products that are ingested by consumers, we are subject to the risk that one or more of the ingredients in our products may become the subject of regulatory action. A number of states restricted the sale of dietary supplements containing botanical sources of ephedrine alkaloids. As a result of these state regulations, we stopped sales of its dietary supplements containing botanical sources of ephedrine alkaloids due to a shift in consumer preference for "ephedra free products" and a significant increase in products liability insurance premiums for products containing botanical sources of ephedrine group alkaloids. On December 31, 2002, we ceased sales of Thermojetics® original green herbal tablets containing ephedrine alkaloids derived from Chinese Ma huang, as well as Thermojetics® green herbal tablets and Thermojetics® gold herbal tablets (the latter two containing the herb Sida cordifolia which is another botanical source of ephedrine alkaloids). On February 6, 2004, the FDA published a rule finding that dietary supplements containing ephedrine alkaloids present an unreasonable risk of illness or injury under conditions of use recommended or suggested in the labeling of the product, or, if no conditions of use are suggested in the labeling, under ordinary conditions of use, and are therefore adulterated.

        The FDA has on record a small number of reports of adverse reactions allegedly resulting from the ingestion of our Thermojetics® original green tablet. These reports are among thousands of reports of adverse reactions to these products sold by other companies.

        As a further outgrowth of the FDA ephedra safety review, the FDA, in January 2004, announced that it would undertake a review of the safety of the herb Citrus aurantium. We use Citrus aurantium in ShapeWorks™ total control and Thermojetics® green ephedra free dietary supplements sold in the United States and in a number of international markets. Unconfirmed reports of "serious" adverse events, reportedly associated with Citrus aurantium, were disclosed by the FDA to the New York Times during April 2004. Under the Freedom of Information Act, we obtained a copy of those anecdotal serious adverse event reports. No Herbalife dietary supplement containing Citrus aurantium was cited by the FDA. Indeed, many cited products from other companies did not even contain Citrus aurantium. Nonetheless, we decided to reformulate our products and will no longer market dietary supplements in the United States containing

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Citrus aurantium. Internationally, due to longer licensing lead times, we will reformulate our foreign products containing Citrus aurantium by 2006.

        The FDA's decision to ban ephedra triggered a significant reaction by the national media, some of whom are calling for the repeal or amendment of DSHEA. These media view supposed "weaknesses" within DSHEA as the underlying reason why ephedra was allowed to remain on the market. We have been advised that DSHEA opponents in Congress may use this anti-DSHEA momentum to advance existing or new legislation to amend or repeal DSHEA. We currently expect to see the following: (1) calls for mandatory reporting of serious adverse event reports for supplements; (2) premarket approval for safety and effectiveness of dietary ingredients; (3) specific premarket review of dietary ingredient stimulants that are and will be used to replace ephedra; (4) reversal of the burden of proof standard which now rests on the FDA; and (5) a redefining of "dietary ingredient" to remove either botanicals or selected classes of ingredients now treated as dietary ingredients.

        On September 16, 2002 the FDA changed its policies for notifying companies of anecdotal adverse event reports for dietary supplements. Since then, to date we have received six anecdotal special nutritional adverse events reports from the FDA. We are in the process of refining our processes for gathering and reporting "serious" dietary supplement adverse event reports in those markets where such reporting is required. Currently, this process is managed by our Medical Affairs department in collaboration with Distributor Relations Call Centers.

        On March 7, 2003, the FDA proposed a new regulation to require current good manufacturing practices affecting the manufacture, packing, and holding of dietary supplements. The proposed regulation would establish standards to ensure that dietary supplements and dietary ingredients are not adulterated with contaminants or impurities, and are labeled to accurately reflect the active ingredients and other ingredients in the products. It also includes proposed requirements for designing and constructing physical plants, establishing quality control procedures, and testing manufactured dietary ingredients and dietary supplements, as well as proposed requirements for maintaining records and for handling consumer complaints related to cGMPs. We are evaluating this proposal with respect to its potential impact upon the various contract manufacturers that we use to manufacturer our products some of whom might not meet the new standards. It is important to note that the' proposed regulation, in an effort to limit disruption, includes a three-year phase-in for small businesses of any final regulation that is issued. This will mean that some of our contract manufacturers will not be fully impacted by the proposed regulation until at least 2007. However, the proposed regulation can be expected to result in additional costs and possibly the need to seek alternate suppliers.

        In December 1999, we introduced a new line of weight management products that are suitable for diets that are high in protein and low in carbohydrates. The line, which consists of eight nutritionally balanced high-protein products that are also low in carbohydrates, is called the HPLC Program. To date the FDA has not authorized the use of a low carbohydrate claim on the label of individual food products, and therefore, we have not made such a claim on the label of any of the eight products that together comprise our HPLC Program. We believe, however, that it is permissible to accurately describe the entire program as one that is suitable for a diet that is high in protein and low in carbohydrates, and we have elected to do so by virtue of the name that we have selected for this weight management program.

        Some of the products marketed by us are considered conventional foods and are currently labeled as such. Within the United States, this category of products is subject to the Nutrition, Labeling and Education Act ("NLEA"), and regulations promulgated under the NLEA. The NLEA regulates health claims, ingredient labeling and nutrient content claims characterizing the level of a nutrient in the product. The ingredients added to conventional foods must either be generally recognized as safe by experts ("GRAS") or be approved as food additives under FDA regulations.

        In foreign markets, prior to commencing operations and prior to making or permitting sales of our products in the market, we may be required to obtain an approval, license or certification from the relevant

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country's ministry of health or comparable agency. Where a formal approval, license or certification is not required, we nonetheless seek a favorable opinion of counsel regarding our compliance with applicable laws. Prior to entering a new market in which a formal approval, license or certificate is required, we work extensively with local authorities in order to obtain the requisite approvals. The approval process generally requires us to present each product and product ingredient to appropriate regulators and, in some instances, arrange for testing of products by local technicians for ingredient analysis. The approvals may be conditioned on reformulation of our products, or may be unavailable with respect to some products or some ingredients. Product reformulation or the inability to introduce some products or ingredients into a particular market may have an adverse effect on sales. We must also comply with product labeling and packaging regulations that vary from country to country. Our failure to comply with these regulations can result in a product being removed from sale in a particular market, either temporarily or permanently. The United Kingdom's Medicines and Healthcare Products Regulatory Agency is expected to soon issue a list of botanical ingredients it considers as medicinal by claim or function that could adversely impact some of our present UK formulations, depending on the permitted claims.

        The FTC, which exercises jurisdiction over the advertising of all of our products, has in the past several years instituted enforcement actions against several dietary supplement companies and against manufacturers of weight loss products generally for false and misleading advertising of some of their products. These enforcement actions have often resulted in consent decrees and monetary payments by the companies involved. In addition, the FTC has increased its scrutiny of the use of testimonials, which we also utilize. Although we have not been the target of FTC enforcement action for the advertising of our products, we cannot be sure that the FTC, or comparable foreign agencies, will not question our advertising or other operations in the future. It is unclear whether the FTC will subject our advertisements to increased surveillance to ensure compliance with the principles set forth in the guide.

        In Europe, a pending EU Health Claim regulation, now being discussed within the European Parliament, could, if enacted, have an adverse effect on existing product "wellness," "well-being" and "good for you" claims presently made on existing product labeling, literature and advertising. We and our industry allies are vigorously working to address this pending debate in ongoing discussion with Parliamentarians and the European Commission.

        In some countries, regulations applicable to the activities of our distributors also may affect our business because in some countries we are, or regulators may assert that we are, responsible for our distributors' conduct. In these countries, regulators may request or require that we take steps to ensure that our distributors comply with local regulations. The types of regulated conduct include: (1) representations concerning our products; (2) income representations made by use and/or distributors; (3) public media advertisements, which in foreign markets may require prior approval by regulators; and (4) sales of products in markets in which the products have not been approved, licensed or certified for sale.

        In some markets, it is possible that improper product claims by distributors could result in our products being reviewed by regulatory authorities and, as a result, being classified or placed into another category as to which stricter regulations are applicable. In addition, we might be required to make labeling changes.

        We are unable to predict the nature of any future laws, regulations, interpretations or applications, nor can we predict what effect additional governmental regulations or administrative orders, when and if promulgated, would have on our business in the future. They could, however, require: (1) the reformulation of some products not capable of being reformulated; (2) imposition of additional record keeping requirements; (3) expanded documentation of the properties of some products; (4) expanded or different labeling; (5) additional scientific substantiation regarding product ingredients, safety or usefulness; and/or (6) additional distributor compliance surveillance and enforcement action by us.

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        Any or all of these requirements could have a material adverse effect on our results of operations and financial condition. All of our officers and directors are subject to a permanent injunction issued in October 1986 pursuant to the settlement of an action instituted by the California Attorney General, the State Health Director and the Santa Cruz County District Attorney. We consented to the entry of this injunction without in any way admitting the allegations of the complaint. The injunction prevents us and our officers and directors from making specified claims in future advertising of our products and required us to implement some documentation systems with respect to payments to our distributors. At the same time, the injunction does not prevent us from continuing to make specified claims concerning our products that have been made and are being made, provided that we have a reasonable basis for making the claims.

        We are aware that, in some of our international markets, there has been recent adverse publicity concerning products that contain ingredients that have been genetically modified ("GM"). In some markets, the possibility of health risks or perceived consumer preference thought to be associated with GM ingredients has prompted proposed or actual governmental regulation. For example, the European Union has adopted a EC Regulation 1829/2003 affecting the labeling of products containing ingredients that have been genetically modified, and the documents manufacturers and marketers will need to possess to ensure 'traceability' at all steps in the chain of production and distribution. This new regulation, which took effect in 2004, is being implemented by us and our contract manufacturers, resulting in modifications to our labeling, and in some instances, to some of our foods and food supplements sold in Europe. Differing GM regulations affecting us also have been adopted in Brazil, Japan, Korea, Taiwan and Thailand. We cannot anticipate the extent to which future regulations in our markets will restrict the use of GM ingredients in our products or the impact of any regulations on our business in those markets. In response to any applicable regulations, we would, where practicable, attempt to reformulate our products to satisfy the regulations. We believe, based upon currently available information, that compliance with regulatory requirements in this area should not have a material adverse effect on us or our business. However, because publicity and governmental scrutiny of GM ingredients is a relatively new and evolving area, there can be no assurance in this regard. If a significant number of our products were found to be genetically modified and regulations in our markets significantly restricted the use of GM ingredients in our products, our business could be materially adversely affected.

        In addition, in certain of our markets, there has been recent adverse regulatory and press attention to ingredients that may cause what is commonly referred to as mad cow disease. Certain of our products contain ingredients derived from bovine sources. We are not aware of any infection or contamination of any of our products by BSE. Should any such infection or contamination be detected, it could have a material adverse effect on our business. Additionally, if governments preclude importation of products from the U.S. containing bovine-derived ingredients, it could adversely impact product availability and/or future price. Further, even if no such infection or contamination is detected, adverse publicity concerning the BSE risk, or governmental or regulatory developments aimed at combating the risk of BSE contamination by regulating bovine products and/or by-products, could have a material adverse effect on our business. We anticipate some impact associated with the discovery of BSE in the United States, such as in Mexico, which recently restricted the importation of certain of our products containing bovine-derived ingredients produced in part from U.S. cattle. Affected products being held at the border currently include Cell Activator, Floral Fiber, HPLC Drinks plus Fiber and Herb Tablets. Our manufacturing department is working to replace the U.S. sourced ingredients with comparable materials from other countries of origin not similarly precluded.

        We are also in the process of complying with recent regulations within the European Union, Australia, Brazil, Canada, China, Hong Kong, Japan, Taiwan and Thailand affecting the use and/or labeling of irradiated raw ingredients. To date, we have dealt with irradiation compliance questions involving three products sold in the Netherlands and one product sold in Switzerland.

        Compliance with GMO, BSE and irradiation regulations can be expected to increase the cost of manufacturing certain of our products.

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        Network marketing program.    Our network marketing program is subject to a number of federal and state regulations administered by the FTC and various state agencies as well as regulations in foreign markets administered by foreign agencies. Regulations applicable to network marketing organizations generally are directed at ensuring that product sales ultimately are made to consumers and that advancement within our organization is based on sales of the organization's products rather than investments in the organization's or other non-retail sales related criteria. For instance, in some markets, there are limits on the extent to which distributors may earn royalty overrides on sales generated by distributors that were not directly sponsored by the distributor. When required by law, we obtain regulatory approval of our network marketing program or, when this approval is not required, the favorable opinion of local counsel as to regulatory compliance. Nevertheless, we remain subject to the risk that, in one or more markets, our marketing system could be found not to be in compliance with applicable regulations. Failure by us to comply with these regulations could have a material adverse effect on our business in a particular market or in general.

        We also are subject to the risk of private party challenges to the legality of our network marketing program. For example, in Webster v. Omnitrition International, Inc., 79 F.3d 776 (9th Cir. 1996), the multi-level marketing program of Omnitrition International, Inc. ("Omnitrition") was successfully challenged in a class action by Omnitrition distributors who alleged that Omnitrition was operating an illegal "pyramid scheme" in violation of federal and state laws. We believe that our network marketing program satisfies the standards set forth in the Omnitrition case and other applicable statutes and case law defining a legal marketing system, in part based upon significant differences between our marketing system and that described in the Omnitrition case.

        Herbalife International 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 International under various state and federal laws. Without in any way admitting liability or wrongdoing, we have reached a binding settlement with the plaintiffs, subject to final court approval. Under the terms of the settlement, we 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 our products to those current supervisor-level distributors who had purchased Newest Way to Wealth materials from the other defendants in this matter.

        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). 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. We believe that we have meritorious defenses to the suit.

        It is an ongoing part of our business to monitor and respond to regulatory and legal developments, including those that may affect our network marketing program. However, the regulatory requirements concerning network marketing programs do not include bright line rules and are inherently fact-based. An adverse judicial determination with respect to our network marketing program could have a material adverse effect on our business. An adverse determination could: (1) require us to make modifications to our network marketing program, (2) result in negative publicity or (3) have a negative impact on distributor morale. In addition, adverse rulings by courts in any proceedings challenging the legality of multi-level marketing systems, even in those not involving us directly, could have a material adverse effect on our operations.

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        Transfer pricing and similar regulations.    In many countries, including the United States, we are subject to transfer pricing and other tax regulations designed to ensure that appropriate levels of income are reported as earned by our U.S. or local entities and are taxed accordingly. In addition, our operations are subject to regulations designed to ensure that appropriate levels of customs duties are assessed on the importation of our products.

        Although we believe that we are in substantial compliance with all applicable regulations and restrictions, we are subject to the risk that governmental authorities could audit our transfer pricing and related practices and assert that additional taxes are owed. For example, we are currently subject to pending or proposed audits that are at various levels of review, assessment or appeal in a number of jurisdictions involving transfer pricing issues, income taxes, duties, value added taxes, withholding taxes and related interest and penalties in material amounts. In some circumstances, additional taxes, interest and penalties have been assessed, and we will be required to litigate to reverse the assessments. We and our tax advisors believe that there are substantial defenses to the allegations that additional taxes are owing, and we are vigorously against the imposition of additional proposed taxes. The ultimate resolution of these matters may take several years, and the outcome is uncertain.

        In the event that the audits or assessments are concluded adversely to us, we may or may not be able to offset or mitigate the consolidated effect of foreign income tax assessments through the use of U.S. foreign tax credits. Currently, we anticipate utilizing the majority of our foreign tax credits in the year in which they arise with the unused amount carried forward. Because the laws and regulations governing U.S. foreign tax credits are complex and subject to periodic legislative amendment, we cannot be sure that we would in fact be able to take advantage of any foreign tax credits in the future. As a result, adverse outcomes in these matters could have a material impact on our financial condition and operating results.

        Other regulations.    We also are subject to a variety of other regulations in various foreign markets, including regulations pertaining to social security assessments, employment and severance pay requirements, import/export regulations and antitrust issues. As an example, in many markets, we are substantially restricted in the amount and types of rules and termination criteria that we can impose on distributors without having to pay social security assessments on behalf of the distributors and without incurring severance obligations to terminated distributors. In some countries, we may be subject to these obligations in any event.

        Our failure to comply with these regulations could have a material adverse effect on our business in a particular market or in general. Assertions that we failed to comply with regulations or the effect of adverse regulations in one market could adversely affect us in other markets as well by causing increased regulatory scrutiny in those other markets or as a result of the negative publicity generated in those other markets.

        Compliance procedures.    As indicated above, Herbalife, our products and our network marketing program are subject, both directly and indirectly through distributors' conduct, to numerous federal, state and local regulations, both in the United States and foreign markets. Beginning in 1985, we began to institute formal regulatory compliance measures by developing a system to identify specific complaints against distributors and to remedy any violations by distributors through appropriate sanctions, including warnings, suspensions and, when necessary, terminations. In our manuals, seminars and other training programs and materials, we emphasize that distributors are prohibited from making therapeutic claims for our products.

        Our general policy regarding acceptance of distributor applications from individuals who do not reside in one of our markets is to refuse to accept the individual's distributor application. From time to time, exceptions to the policy are made on a country-by-country basis.

        In order to comply with regulations that apply to both us and our distributors, we conduct considerable research into the applicable regulatory framework prior to entering any new market to

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identify all necessary licenses and approvals and applicable limitations on our operations in that market. Typically, we conduct this research with the assistance of local legal counsel and other representatives. We devote substantial resources to obtaining the necessary licenses and approvals and bringing our operations into compliance with the applicable limitations. We also research laws applicable to distributor operations and revise or alter our distributor manuals and other training materials and programs to provide distributors with guidelines for operating a business, marketing and distributing our products and similar matters, as required by applicable regulations in each market. We, however, are unable to monitor our supervisors and distributors effectively to ensure that they refrain from distributing our products in countries where we have not commenced operations, and we do not devote significant resources to this type of monitoring.

        In addition, regulations in existing and new markets often are ambiguous and subject to considerable interpretive and enforcement discretion by the responsible regulators. Moreover, even when we believe that we and our distributors are initially in compliance with all applicable regulations, new regulations regularly are being added and the interpretation of existing regulations is subject to change. Further, the content and impact of regulations to which we are subject may be influenced by public attention directed at us, our products or our network marketing program, so that extensive adverse publicity about us, our products or our network marketing program may result in increased regulatory scrutiny.

        It is an ongoing part of our business to anticipate and respond to new and changing regulations and to make corresponding changes in our operations to the extent practicable. Although we devote considerable resources to maintaining our compliance with regulatory constraints in each of our markets, we cannot be sure that (1) we would be found to be in full compliance with applicable regulations in all of our markets at any given time or (2) the regulatory authorities in one or more markets will not assert, either retroactively or prospectively or both, that our operations are not in full compliance. These assertions or the effect of adverse regulations in one market could negatively affect us in other markets as well by causing increased regulatory scrutiny in those other markets or as a result of the negative publicity generated in those other markets. These assertions could have a material adverse effect on us in a particular market or in general. Furthermore, depending upon the severity of regulatory changes in a particular market and the changes in our operations that would be necessitated to maintain compliance, these changes could result in our experiencing a material reduction in sales in the market or determining to exit the market altogether. In this event, we would attempt to devote the resources previously devoted to the market to a new market or markets or other existing markets. However, we cannot be sure that this transition would not have an adverse effect on our business and results of operations either in the short or long-term.

Trademarks

        We use the umbrella trademarks Herbalife, Thermojetics, Dermajetics, and have several other trademarks and trade names registered in connection with our products and operations. Our trademark registrations are issued through the United States Patent and Trademark Office and in comparable agencies in the foreign countries. We consider our trademarks and trade names to be an important factor in our business. We also take care in protecting the intellectual property rights of our proprietary formulas.

Competition

        The business of marketing weight management and nutrition products is highly competitive. This market segment includes numerous manufacturers, distributors, marketers, retailers and physicians that actively compete for the business of consumers both in the United States and abroad. The market is highly sensitive to the introduction of new products or weight management plans, including various prescription drugs that may rapidly capture a significant share of the market. As a result, our ability to remain competitive depends in part upon the successful introduction of new products. In addition, we anticipate that we will be subject to increasing competition in the future from sellers that utilize electronic commerce. We cannot be sure of the impact of electronic commerce or that it will not adversely affect our business.

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        We are subject to significant competition for the recruitment of distributors from other network marketing organizations, including those that market weight management products, nutritional supplements, and personal care products, as well as other types of products. Some of our competitors are substantially larger than we are, and have available considerably greater financial resources than we have. Our ability to remain competitive depends, in significant part, on our success in recruiting and retaining distributors through an attractive compensation plan and other incentives. We believe that our production bonus program, international sponsorship program and other compensation and incentive programs provide our distributors with significant earning potential. However, we cannot be sure that our programs for recruitment and retention of distributors will be successful.

Employees

        As of June 30, 2004, we had 2,276 full-time employees. These numbers do not include our distributors, who are independent contractors rather than our employees. Except for some employees in Mexico and in some European countries, none of our employees are members of any labor union, and we have never experienced any business interruption as a result of any labor disputes.

Properties

        We lease all of our physical properties located in the United States. Our executive offices, located in Century City, California, include approximately 115,000 square feet of general office space under lease arrangements expiring in February 2006. We lease an aggregate of approximately 144,000 square feet of office space, computer facilities and conference rooms at the Operations Center in Inglewood, California, under a lease that expires in October 2006, and approximately 150,000 square feet of warehouse space in two separate facilities located in Los Angeles and Memphis. The Los Angeles and Memphis lease agreements have terms through June 2006 and August 2006, respectively. In Venray, Netherlands, we lease our European centralized warehouse of approximately 175,000 square feet. The lease expires in June 2007. We also lease warehouse, manufacturing plant and office space in a majority of our other geographic areas of operation. We believe that our existing facilities are adequate to meet our current requirements and that comparable space is readily available at each of these locations.

Legal Proceedings

        We are from time to time engaged in routine litigation. We regularly review all pending litigation matters in which we are involved and establish reserves deemed appropriate by management for these litigation matters when a probable loss estimate can be made.

        Herbalife International 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 International under various state and federal laws. Without in any way admitting liability or wrongdoing, we have reached a binding settlement with the plaintiffs, subject to final court approval. Under the terms of the settlement, we 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 our products to those current supervisor-level distributors who had purchased Newest Way to Wealth materials from the other defendants in this matter.

        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). The complaint alleges that certain telemarketing practices of

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certain Herbalife International distributors violate the Telephone Consumer Protection Act and seeks to hold Herbalife International liable for the practices of its distributors. We believe that we have 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, we have been and are currently subjected to various product liability claims. The effects of these claims to date have not been material to us, and the reasonably possible range of exposure on currently existing claims is not material to us. We believe that we have meritorious defenses to the allegations contained in the lawsuits. We currently maintain product liability insurance with an annual deductible of $10 million.

        Certain of our 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. We and our tax advisors believe that there are substantial defenses to their allegations that additional taxes are owing, and we are vigorously contesting the additional proposed taxes and related charges.

        These matters may take several years to resolve, and we 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 effect on our financial condition and operating results.

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MANAGEMENT

        Biographical information follows for each person who serves as a director and/or an executive officer of Herbalife and Herbalife International. The table sets forth certain information regarding these individuals (ages are as of September 30, 2004).

Name*

  Age
  Position with Herbalife
  Director/Officer Since*
Peter M. Castleman(4)(5)   48   Chairman of the Board   2002
Michael O. Johnson(3)(6)   50   Chief Executive Officer, Director   2003
Gregory Probert(6)   48   Chief Operating Officer   2003
Henry Burdick(4)(6)   62   Vice Chairman, Director   2002
Richard Goudis(6)   43   Chief Financial Officer   2004
Brett R. Chapman(6)   49   General Counsel   2003
Kenneth J. Diekroeger(1)(2)   42   Director   2002
James H. Fordyce(1)(2)(5)   45   Director   2002
Markus Lehmann   43   Director   2003
Charles L. Orr(2)   61   Director   2002
Jesse T. Rogers(1)(5)   47   Director   2002
Leslie Stanford(4)   47   Director   2002

(1)
Member of the compensation committee of Herbalife and Herbalife International.

(2)
Member of the audit committee of Herbalife and Herbalife International.

(3)
Non-voting member of the executive committee of Herbalife and Herbalife International.

(4)
Member of the product committee of Herbalife and Herbalife International.

(5)
Member of the executive committee of Herbalife and Herbalife International.

(6)
Officer of Herbalife.

*
Directors are currently elected each year to terms of one year, until the following year's meeting of shareholders. Prior to the listing of our common shares on the New York Stock Exchange, we intend to divide our board into three classes of the same or nearly the same number of directors, each serving staggered three-year terms. See "Description of Share Capital." In addition, we expect that shortly prior to the listing of our common shares on the New York Stock Exchange the board will elect three new directors, (a) each of whom will be "independent," as defined under and required by the federal securities laws and the rules of the New York Stock Exchange, (b) each of whom will be members of our audit committee, and (c) one of whom will be an "audit committee financial expert," as this term has been defined by the SEC in Item 401(h)(2) of Regulation S-K.

        Peter M. Castleman is the Chairman of our Board. Mr. Castleman is Managing Partner of Whitney, a position that he has held for more than a decade. Prior to joining Whitney over fifteen years ago, Mr. Castleman was with Morgan Stanley & Co. and prior to that with J.P. Morgan & Co., Inc. Mr. Castleman received his MBA from Harvard Business School and his undergraduate degree from Duke University. Mr. Castleman is currently a director of several private companies. He was previously a director of numerous other companies, including The North Face, Inc., Advance Paradigm, Eon Labs Inc., and Pharmanex, Inc.

        Michael O. Johnson is Chief Executive Officer. Mr. Johnson joined Herbalife in April 2003 after 17 years with The Walt Disney Company, where he most recently served as President of Walt Disney International, and also served as President of Asia Pacific for The Walt Disney Company and President of Buena Vista Home Entertainment. Mr. Johnson has also previously served as a publisher of Audio Times magazine, and has directed the regional sales efforts of Warner Amex Satellite Entertainment Company for three of its

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television channels, including MTV, Nickelodeon and The Movie Channel. Mr. Johnson received his Bachelor of Arts in Political Science from Western State University.

        Gregory Probert is Chief Operating Officer of Herbalife. Mr. Probert joined Herbalife in August 2003 after serving as President and CEO of DMX MUSIC for over 2 years. Mr. Probert joined DMX MUSIC after serving as Chief Operating Officer of planetLingo, where he led the team that designed and built the company's first product, an online conversational system for the $20 billion ESL market in Japan. Immediately prior to planetLingo, Mr. Probert spent 12 years with The Walt Disney Company, where he most recently served as Executive Vice President and Chief Operating Officer for the $3.5 billion Buena Vista Home Entertainment worldwide business. Mr. Probert's positions with The Walt Disney Company also included service as Executive Vice President and Managing Director of the International Home Video Division, Senior Vice President and Managing Director of Buena Vista Home Entertainment, Asia Pacific Region, based in Hong Kong, and Chief Financial Officer of Buena Vista International, Disney's theatrical distribution arm, among others. Mr. Probert received his Bachelor of Science from the University of Southern California and his MBA from California State University, Los Angeles.

        Henry Burdick is Vice Chairman and in charge of new product development. Mr. Burdick was the co-founder and at various times served as the Chairman, President and CEO of Pharmavite Corporation, the makers of the Nature Made brand of nutritional supplements. In May 1996, following his retirement from Pharmavite, Mr. Burdick invested in a research and development company called Generation Health. He renamed the operating company Pharmanex, and was Chairman and CEO until it was sold in 1998 to Nu Skin Enterprises, Inc., a NYSE listed company. Mr. Burdick was born in Santiago, Cuba and received a B.A. from California State University, Northridge.

        Richard Goudis joined Herbalife in June 2004 as Chief Financial Officer. From 1998 to 2001, Mr. Goudis was the Chief Operating Officer of Rexall Sundown, a Nasdaq 100 company that was sold to Royal Numico in 2000. After the sale to Royal Numico, Mr. Goudis had operations responsibility for all of Royal Numico's U.S. investments, including General Nutrition Centers, or GNC, Unicity International and Rexall Sundown. From 2002 to May 2004, Mr. Goudis was a partner at Flamingo Capital Partners, a firm he founded with several retired executives from Rexall Sundown. Prior to working at Rexall Sundown, Mr. Goudis worked at Sunbeam Corporation and Pratt & Whitney.

        Brett R. Chapman joined Herbalife in October 2003 as General Counsel. Prior to joining Herbalife, Mr. Chapman spent thirteen years at The Walt Disney Company, most recently as Senior Vice President and Deputy General Counsel, with responsibility for all legal matters relating to Disney's Media Networks Group, including the ABC Television Network, the company's cable properties including The Disney Channel and ESPN, and Disney's radio and internet businesses. Prior to working at The Walt Disney Company, Mr. Chapman was an associate at the law firm of Skadden, Arps, Slate, Meagher & Flom LLP. Mr. Chapman received his Bachelor of Science and Master of Science in Business Administration from California State University, Northridge and his Juris Doctorate from Southwestern University School of Law.

        Kenneth J. Diekroeger is a Managing Director of Golden Gate Capital. From 1996 to 2000, Mr. Diekroeger was a managing director, and partner with American Industrial Partners. Earlier in his career, Mr. Diekroeger was a consultant at Bain & Company. Mr. Diekroeger received his MBA from Stanford University and his Bachelor of Science in Industrial Engineering from Stanford University. He is currently a director of several private companies.

        James H. Fordyce is a partner with certain Whitney-affiliated entities and has been with Whitney since July 1996. Prior to joining Whitney, Mr. Fordyce was with Heller Financial and prior to that with Chemical Bank. Mr. Fordyce received his MBA from Fordham University and his undergraduate degree from Lake Forest College. Mr. Fordyce currently is a director of several private companies.

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        Markus Lehmann has been an independent Herbalife distributor for 13 years. A member of the International Chairman's Club, Mr. Lehmann is active with distributors of Herbalife's products throughout the world. Mr. Lehmann has been active in training other Herbalife distributors around the world, and has served on various strategy and planning groups for Herbalife. He is involved in various charities including the Herbalife Family Foundation.

        Charles L. Orr is self-employed as an independent director and advisor to companies operating in the e-commerce, financial services and direct selling industries. From 1993 through 2000, Mr. Orr was President and CEO of Shaklee Corporation which included the brand names of Harry and David, Jackson and Perkins and Shaklee. His prior business affiliations include CIGNA, Continental Insurance, Federated Investors, RCA Computer Systems, Southwestern Life and Xerox. Mr. Orr received his MBA from the University of Connecticut and Bachelor of Arts from Wesleyan University. He is an advisor to several private companies, a former director of Provident Mutual Life Insurance Company and currently serves as a board member of the Direct Selling Education Foundation.

        Jesse T. Rogers is a Managing Director of Golden Gate Capital. Prior to joining Golden Gate Capital, Mr. Rogers was a partner at Bain & Company for over ten years, where he served as the West Coast head of the consumer products practice and founded Bain & Company's worldwide Private Equity Group. Mr. Rogers received his MBA from Harvard Business School and his Bachelor of Arts from Stanford University. He is currently a director of several private companies and previously served as a director of Beringer Wine Estates and Bain & Company.

        Leslie Stanford has been an independent Herbalife distributor for 23 years. A member of the International Chairman's Club, Ms. Stanford is active with distributors of Herbalife's products throughout the world. Ms. Stanford has been active in training other Herbalife distributors around the world, and has served on various strategy and planning groups for Herbalife. She graduated from the University of Alberta, and is involved in various charities including the Herbalife Family Foundation.

Director Compensation

        Each independent director currently receives $25,000 per year for services as a director, plus (1) $5,000 for each Board meeting attended by the director, (2) $2,500 for each committee of the Board on which the director serves, (3) $3,000 per diem for other meetings and (4) reimbursement of all travel and related expenses. Additionally, each independent director was granted options to purchase 50,000 common shares of Herbalife at a strike price of $0.44 and options to purchase 50,000 common shares of Herbalife at a strike price of $1.76. These options will vest pro rata with 5% vesting on the date of grant and the balance vesting in equal quarterly installments over 19 calendar quarters. In addition the Board granted Henry Burdick options to purchase 300,000 common shares of Herbalife at a strike price of $0.44 and options to purchase 300,000 common shares of Herbalife at a strike price of $1.76. Both of these grants to Henry Burdick are fully vested.

        Directors who are employees of Herbalife or any of its affiliates or have been designated as directors by the affiliates of Herbalife or its distributors are not independent directors for purposes of director compensation and, in lieu of the compensation described above, receive an annual stipend in the amount of $1,000 for their service as directors.

Executive Compensation

        Summary Compensation Table.    The following table sets forth the annual and long-term compensation of our Chief Executive Officer and each of the four other most highly compensated executive officers

88


(collectively, the "Named Executive Officers") for the fiscal years ended December 31, 2001, 2002 and 2003.

 
   
   
   
  Long-Term Compensation Awards
   
 
 
   
  Annual Compensation
   
   
  Securities
Underlying
Options/
SARs(#)

   
   
 
Name and Principal
Position

   
  Other Annual
Compensation ($)(2)

  Restricted
Stock
Award(s)($)

  LTIP Payouts($)
  All Other
Compensation ($)(3)

 
  Year
  Salary($)
  Bonus($)(1)
 
Michael O. Johnson
Chief Executive Officer (Joined the Company April 3, 2003)
  2003   $ 604,807 (12) $ 1,350,000   $   $   5,911,845   $   $ 25,790 (5)
Brian L. Kane(4)
Prior CEO and Current President, Europe
  2003
2002
2001
  $

726,202
725,384
700,000
  $

425,000
982,500
792,000
  $



60,000
  $



  1,811,375

   

  $

65,389
2,386,977
392,420
(6)

Carol Hannah(4)
Prior CEO and President Distributor Communications and Support
  2003
2002
2001
  $

712,500
777,885
752,000
  $

425,000
1,054,688
792,000
  $



60,000
  $



  1,811,375

   

  $

35,344
3,435,425
476,305
(7)

Gregory Probert
Chief Operating Officer (Joined the Company July 31, 2003)
  2003   $ 207,885 (12)   450,000           850,000       $ 6,231  
David Kratochvil
Chief Logistics Officer
  2003
2002
2001
  $

400,000
425,961
400,000
  $

100,000
125,000
95,385
  $



30,000
  $



 
300,000
  $



  $

31,135
86,428
108,533
(9)
(10)
John Purdy
Senior Vice President Asia/Pacific Rim
  2003
2002
2001
  $

387,308
380,000
350,000
  $

95,000
125,000
74,712
  $



30,000
  $



 
300,000
  $



  $

35,151
178,597
305,032
(10)

Robert Levy
Senior Vice President The Americas
  2003
2002
2001
  $

380,000
380,000
360,868
  $

95,000
150,000
83,462
  $



30,000
  $



 
300,000
  $



  $

49,766
49,502
37,966
(11)


(1)
The 2001 amounts reflect bonuses earned under the 1994 Performance-Based Annual Incentive Compensation Plan. The 2002 bonus amounts of Mr. Kane and Ms. Hannah were earned under the 1994 Performance-Based Annual Incentive Compensation Plan for the first six months and a discretionary bonus was awarded for the last six months of 2002 and the year ended December 31, 2003.

(2)
Amounts shown represent payments for non-accountable expense reimbursement allowances and the aggregate of other payments or benefits that do not individually exceed 25% of the total perquisite or personal benefits for Messrs. Kane, Kratochvil, Purdy, Levy, and Ms. Hannah.

(3)
For 2003, these amounts represent payments under the Executive Long-Term Disability Plan, Executive Life Insurance Plan, the Herbalife International Employees 401(k) Profit Sharing Plan and Trust, the Executive Medical Plan, the Deferred Compensation Plan, private use and transfer of a company-owned car, and employee awards.

(4)
Until April 3, 2003, Mr. Kane and Ms. Hannah served as Co-Presidents.

(5)
Mr. Johnson's amount includes $1,575 from the Executive Long-Term Disability Plan, $929 from the Executive Life Insurance Plan, $11,517 from the Executive Medical Plan, and $11,769 from the Deferred Compensation Plan.

(6)
Mr. Kane's amount includes $2,100 from the Executive Long-Term Disability Plan, $1,238 from the Executive Life Insurance Plan, $6,000 from the 401(k) Tax-Sheltered Savings Plan, $15,356 from the Executive Medical Plan, $20,553 from the Deferred Compensation Plan, and $20,142 for private use of company owned car including the fair value of the car when transferred to Mr. Kane.

(7)
Ms. Hannah's amount includes $2,100 from the Executive Long-Term Disability Plan, $1,238 from the Executive Life Insurance Plan, $6,000 from the 401(k) Tax-Sheltered Savings Plan, $5,452 from the Executive Medical Plan, and $20,554 from the Deferred Compensation Plan.

(8)
Mr. Probert's amount includes $700 from the Executive Long-Term Disability Plan, $413 from the Executive Life Insurance Plan, $5,119 from the Executive Medical Plan.

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(9)
Mr. Kratochvil's amount includes $1,680 from the Executive Long-Term Disability Plan, $1,238 from the Executive Life Insurance Plan, $6,000 from the 401(k) Tax-Sheltered Savings Plan, $10,678 from the Executive Medical Plan, and $11,539 from the Deferred Compensation Plan.

(10)
Mr. Purdy's amount includes $1,596 from the Executive Long-Term Disability Plan, $1,238 from the Executive Life Insurance Plan, $6,000 from the 401(k) Tax-Sheltered Savings Plan, $15,356 from the Executive Medical Plan, and $10,962 from the Deferred Compensation Plan.

(11)
Mr. Levy's amount includes $1,596 from the Long-Term Disability Plan, $1,238 from the Executive Life Insurance Plan, $6,000 from the 401(k) Tax-Sheltered Savings Plan, $15,356 from the Executive Medical Plan, $10,962 from the Deferred Compensation Plan, and $14,615 from vacation pay-out.

(12)
Amounts are pro-rated to reflect partial year served in such office.

Option Grants in Last Fiscal Year.

        The following table contains information concerning options to purchase common shares of Herbalife granted in 2003 to each of the Named Executive Officers. In the judgment of the Board, the per share exercise price of all options described below are higher than the fair market value of Herbalife's common shares on the grant date.

 
  Individual Grants
Name

  Number of
Securities
Underlying
Options
Granted

  Percent of
Total Options
Granted to
Employees in
Fiscal Year

  Exercise Price Per Share($)
  Expiration
Date

  Grant Date Present Value ($)(1)
  Grant
Date

Michael O. Johnson   1,182,369
1,182,369
1,182,369
1,182,369
1,182,369
  7
7
7
7
7
%
%
%
%
%
$



0.44
1.76
5.28
8.80
12.32
  4/3/2013
4/3/2013
4/3/2013
4/3/2013
4/3/2013
  $



1,123,251



  4/3/2003
4/3/2003
4/3/2003
4/3/2003
4/3/2003

Brian L. Kane

 

1,207,583
603,792

 

7
3

%
%

$

0.44
1.76

 

3/10/2013
3/10/2013

 

$

809,081

 

3/10/2003
3/10/2003

Carol Hannah

 

1,207,583
603,792

 

7
3

%
%

$

0.44
1.76

 

3/10/2013
3/10/2013

 

$

809,081

 

3/10/2003
3/10/2003

Gregory Probert

 

250,000
150,000
150,000
150,000
150,000

 

1
1
1
1
1

%
%
%
%
%

$




2.50
3.50
5.50
8.50
11.50

 

7/31/2013
7/31/2013
7/31/2013
7/31/2013
7/31/2013

 

 






 

7/31/2003
7/31/2003
7/31/2003
7/31/2003
7/31/2003

David Kratochvil

 


 


 

 


 


 

 


 

 

John Purdy

 


 


 

 


 


 

 


 

 

Robert Levy

 


 


 

 


 


 

 


 

 

(1)
In accordance with the rules of the Securities and Exchange Commission, we used the Black Scholes option pricing model to estimate the grant date present value of the options set forth in this table. The assumptions used for the valuation include: 0% expected volatility; 3% risk free rate of return; 0% dividend yield and options exercise averaging 5 year term. We did not make any adjustment for non-transferability or risk of forfeiture.

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Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values.

        The following table sets forth information with respect to: (1) common shares of Herbalife acquired upon exercise of stock options and (2) unexercised options to purchase common shares of Herbalife granted as of December 31, 2003.

 
   
   
   
   
  Value of Unexercised
In-the-Money
Options at
Fiscal Year-End
($ in millions)(1)

 
   
   
  Securities
Underlying
Unexercised
Options at Fiscal Year-End(#)

Name

  Shares
Acquired on
Exercise(#)

  Value
Realized($)

  Exercisable
  Unexercisable
  Exercisable
  Unexercisable
Michael O. Johnson             5,911,845   $   $ 3.5
Brian L. Kane           543,413   1,267,962   $ 0.9   $ 2.2
Carol Hannah           543,413   1,267,962   $ 0.9   $ 2.2
Gregory Probert             850,000   $   $
David Kratochvil           75,000   225,000   $ 0.1   $ 0.3
John Purdy           75,000   225,000   $ 0.1   $ 0.3
Robert Levy           75,000   225,000   $ 0.1   $ 0.3

(1)
Represents the difference between the fair market value of common shares on December 31, 2003 of $            based on an independent valuation on September 30, 2003, and the exercise price of the options.

Description of Benefit Plans

        WH Holdings (Cayman Islands) Ltd. Stock Incentive Plan.    Herbalife has established a stock incentive plan that provides for the grant of options to purchase common shares of Herbalife or stock appreciation rights to employees or consultants of Herbalife. The purpose of the plan is to promote the long-term financial interest and growth of the Company by attracting and retaining employees and consultants who can make a substantial contribution to the success of the Company, to motivate and to align interests with those of the equity holders. The stock incentive plan is administered by the compensation committee. Herbalife has reserved 18,717,546 of its common shares (reduced by any common shares that are subject to awards granted under the WH Holdings (Cayman Islands) Ltd. Independent Directors Stock Option Plan) for issuance under the stock incentive plan.

        Each stock option agreement and SAR award agreement will specify the date when all or any installment of an award is to become exercisable but, generally, no award may be exercisable after the expiration of 10 years from the date it was granted. Upon termination of employment for any reason other than "cause," the unvested awards would continue to be exercisable for a period of time, following which the award will terminate.

        WH Holdings (Cayman Islands) Ltd. Independent Directors Stock Option Plan.    Herbalife has established an independent directors stock option plan that provides for the grant of options to purchase common shares of Herbalife to independent directors of Herbalife. Directors who are employees of Herbalife or any of its affiliates or have been designated as directors by the affiliates of Herbalife or its distributors are not independent directors for purposes of director compensation. Herbalife has reserved 1,000,000 of its common shares for issuance under the independent directors stock option plan.

        The purpose of the plan is to promote the long-term financial interest and growth of the Company by attracting and retaining independent directors who can make a substantial contribution to the success of the Company, to motivate and to align interests with those of the equity holders. The option plan is administered by the compensation committee. One million shares have been reserved for grant under this plan.

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        Taken together, approximately 15.5% of the Company's share capital at the time of the Acquisition (18.7 million shares) are available for grant under the Stock Incentive Plan and the Independent Directors Stock Option Plan. As of December 31, 2003, the Company had granted options net of cancellations to acquire approximately 16.9 million of its common shares to eligible employees under the Stock Incentive Plan and options to acquire approximately 0.8 million of its common shares to independent directors under the Independent Directors Stock Option Plan. In the aggregate under the two plans, the Company has granted options to acquire approximately 17.7 million of its common shares, which is equal to 17.4% of its current share capital. No additional stock options or stock appreciation rights will be granted under either the Stock Incentive Plan or the Independent Directors Stock Option plan following the consummation of this offering.

        Deferred Compensation Plans.    We maintain three deferred compensation plans for select groups of management or highly compensated employees: (1) the Herbalife Management Deferred Compensation Plan, effective January 1, 1996 (the "Management Plan"), which is applicable to eligible employees at the rank of either vice president or director; (2) the Herbalife Senior Executive Compensation Plan, effective January 1, 1996 (the "Senior Executive Plan"), which is applicable to eligible employees at the rank of Senior Vice President and higher and (3) the Supplemental Senior Executive Deferred Compensation Plan (the "Supplemental Plan") effective July 30, 2002. The Management Plan and the Senior Executive Plan are referred to as the "Deferred Compensation Plans." The Deferred Compensation Plans were amended and restated effective January 1, 2001.

        The Deferred Compensation Plans are unfunded and benefits are paid from our general assets, except that we have contributed amounts to a "rabbi trust" whose assets will be used to pay benefits if we remain solvent, but can be reached by our creditors if we become insolvent. The Deferred Compensation Plans allow eligible employees, who are selected by the administrative committee that manages and administers the plans (the "Deferred compensation committee"), to elect annually to defer up to 50% of their annual base salary and up to 100% of their annual bonus for each calendar year (the "Annual Deferral Amount"). We make matching contributions on behalf of each participant in the Senior Executive Plan, which matching contributions are 100% vested at all times ("Matching Contributions").

        Effective January 1, 2002, the Senior Executive Plan was amended to provide that the amount of the Matching Contributions is to be determined by us in our discretion. For 2002 the Matching Contribution was equal to an amount of up to 7.5% of a participant's annual base salary. Effective January 1, 2003, the Matching Contribution has been reduced to 3% and remains 3% for 2004.

        Each participant in a Deferred Compensation Plan may determine how his or her Annual Deferral Amount and Matching Contributions, if any, will be deemed to be invested by choosing among several investment funds or indices designated by the Deferred compensation committee. The Deferred Compensation Plans, however, do not require us to actually acquire or hold any investment fund or other assets to fund the Deferred Compensation Plans. The entire interest of each participant in a Deferred Compensation Plan is always fully vested and non-forfeitable.

        In connection with a participant's election to defer an Annual Deferral Amount, the participant may also elect to receive a short-term payout, equal to the Annual Deferral Amount and the Matching Contributions, if any, attributable thereto plus earnings, and shall be payable two or more years from the first day of the year in which the Annual Deferral Amount is actually deferred. As of January 2004, the Deferred Compensation Plans were amended to allow for deferral of the short-term payout date if the deferral is made within the time period specified therein. Subject to the short-term payout provision and specified exceptions for unforeseeable financial emergencies, a participant may not withdraw, without incurring a ten percent (10%) withdrawal penalty, all or any portion of his or her account under the Deferred Compensation Plans prior to the date that such participant either (1) is determined by the Deferred compensation committee to have incurred permanent and total disability or (2) dies or otherwise terminates employment.

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        The Supplemental Plan is unfunded and all benefits thereunder are paid from our general assets, except that we have contributed amounts to a "rabbi trust" whose assets will be used to pay benefits if we remain solvent, but can be reached by our creditors if we become insolvent. The Supplemental Plan allows employees to participate who are highly compensated and who are eligible to participate in the Herbalife International, Inc. Senior Executive Change in Control Plan (the "Change in Control Plan"). The Deferred compensation committee allows eligible employees to defer up to 100% of their Change in Control Payment. A "Change in Control Payment" is an amount equal to three times an eligible employee's compensation.

        Each participant in the Supplemental Plan will be deemed to have invested in funds that provide a return equal to the short-term applicable federal rate, within the meaning of the Internal Revenue Code of 1986, as amended (the "Code"). The Supplemental Plan, however, does not require us to actually acquire or hold any investment fund or other assets to fund the Supplemental Plan. The entire interest of each participant in a Supplemental Plan is always fully vested and non-forfeitable. In connection with a participant's election to defer the Change in Control Payment, the participant may also elect to receive a short-term payout, equal to the deferral amount plus earnings and payable two or more years from the first day of the year in which the deferral amount is actually deferred. Subject to the short-term payout provision and specified exceptions for unforeseeable financial emergencies, a participant may not withdraw, without incurring a ten percent (10%) withdrawal penalty, all or any portion of his or her account under the Supplemental Plan prior to the date that such participant either (1) is determined by the Deferred compensation committee to have incurred permanent and total disability or (2) dies or otherwise terminates employment.

        Executive Retention Plan.    We have an Executive Retention Plan effective March 15. 2001. The purpose of the Executive Retention Plan is to provide financial incentives for a select group of management and highly compensated employees of the Company to continue to provide services to the Company during the period immediately before and immediately after change in control, as defined.

        As a result of certain actions by Herbalife International's Board, the Acquisition was not deemed to be a Change in Control under the Executive Retention Plan. Thus, the consummation of the Acquisition did not result in the payment of any benefit pursuant to the Executive Retention Plan.

        We also established an Executive Retention Trust to provide benefits under the Executive Retention Plan. The Executive Retention Trust is an irrevocable trust established with an institutional trustee. This irrevocable trust's assets will be used to pay the benefits of the Executive Retention Plan and are not intended to be reachable by our creditors. The value of the assets in the irrevocable trust was $2.7 million as of June 30, 2004. The Administrative Committee of the Executive Retention Plan will establish an individual account in the Executive Retention Trust for each participant in the Executive Retention Plan. Until the occurrence of a change in control, the Administrative Committee will control the investment of the assets in the Executive Retention Trust, and will determine the allocation of the assets of the Executive Retention Trust to the individual accounts of participants. Each participant who qualifies for a benefit under the Executive Retention Plan will receive a lump sum benefit equal to the dollar amount in his or her individual account in the Executive Retention Trust. The benefit shall be paid within 90 days after the participant qualifies for the benefit. If a participant's employment with the Company terminates before the participant qualifies for a benefit under the Executive Retention Plan, the participant's account in the Executive Retention Trust will revert to us. A participant's benefit under the Executive Retention Plan will be reduced if the amount would cause payment of federal excise tax.

        401(k) profit sharing plan.    We maintain a tax-qualified profit sharing plan pursuant to Sections 401(a) and 401(k) of the Code (the "401(k) Plan"). The 401(k) Plan allows any eligible employee, including specified common-law employees, to contribute each pay period from 2% to 17% of the employee's earnings (but not in excess of $13,000 per year, as adjusted after 2003) or $16,000 in the case of those participants over 50 years of age for investment in mutual funds held by the 401(k) Plan's trust. We make

93



contributions to the 401(k) Plan in an amount equal to 3% of the earnings of each employee who elects to defer 2% or more of his or her earnings and beginning on January 1, 2003 a matching contribution equal to one dollar for each dollar of deferred earnings not to exceed 3% of the participant's earnings. The 401(k) Plan also imposes restrictions on the aggregate amount that may be contributed by higher-paid employees in relation to the amount contributed by the remaining employees. A participating employee is fully vested at all times in his or her contributions and in the trust fund's earnings attributable to his or her contributions. An employee becomes fully vested in our contributions and the earnings of the trust fund attributable to our contributions (1) upon the employee's death, (2) upon the employee's disability, or (3) upon the employee reaching the 401(k) Plan's normal retirement age, which is the latter of age 65 and the completion of five years of service with us. An employee may not withdraw all or any portion of his or her account prior to the date that the employee either (1) incurs a hardship or (2) terminates employment with us. Effective January 1, 2003, the 401(k) Plan was amended to provide that an employee vests in 20% increments annually until fully vested upon the fifth anniversary of his participation in the 401(k) Plan.

Employment Contracts

        On April 3, 2003, we announced the appointment of Mr. Michael O. Johnson as Chief Executive Officer and director. Our subsidiaries, Herbalife International and Herbalife International of America, Inc. ("Herbalife America") entered into an executive employment agreement (the "Johnson Employment Agreement") with Mr. Johnson effective as of April 3, 2003. For his services, Mr. Johnson is entitled to receive an annual salary of $850,000. Under the terms of the Johnson Employment Agreement, in addition to his salary, Mr. Johnson shall be entitled to participate in or receive benefits under each benefit plan or arrangement made available by the us to our senior executives on terms no less favorable than those generally applicable to senior executives of Herbalife International and Herbalife America.

        Mr. Johnson is also eligible to receive an annual cash bonus in such amounts, and based on such targets, established annually by the Board of Directors in accordance with the Johnson Employment Agreement. Mr. Johnson's annual bonus for the fiscal year ending December 31, 2003 was $1,350,000 and was dependent, in part, on our operating subsidiaries' 2003 EBITDA performance.

        In addition, Mr. Johnson has been granted stock options under the WH Holdings (Cayman Islands) Ltd. Stock Incentive Plan to purchase an aggregate of 5,911,845 common shares of Herbalife at exercise prices as follows: 1,182,369 shares at $0.44 per share, 1,182,369 shares at $1.76 per share, 1,182,369 shares at $5.28 per share, 1,182,369 shares at $8.80 per share, and 1,182,369 shares at $12.32 per share. The options vest under a schedule over time through June 30, 2008. The options expire 10 years after the date of grant.

        In the event of any Change of Control (as defined in the WH Holdings (Cayman Islands) Ltd. Stock Incentive Plan), 50% of the shares granted pursuant to the options (pro rata according to the number of shares exercisable at the relevant exercise prices specified above for each of the individual tranches) will become immediately vested and exercisable. If, following any Change of Control, all or any portion of the options remain outstanding and Mr. Johnson's employment is terminated (other than by reason of Mr. Johnson's resignation without Good Reason or termination by us for Cause (each as defined in the Johnson Employment Agreement)) at any time following such Change of Control, 100% of the shares granted pursuant to the options will immediately vest and become exercisable. In the event Mr. Johnson's employment is terminated by reason of Mr. Johnson's death or disability or during the 90 day period before any Change of Control, 100% of the shares granted pursuant to the options will immediately vest and become exercisable.

        Under the terms of the Johnson Employment Agreement, the term of Mr. Johnson's employment is for the period commencing on April 3, 2003, until his employment is terminated for a variety of reasons including death, disability, termination by Herbalife International and Herbalife America with our without

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cause, termination by Mr. Johnson with or without good reason and termination in connection with certain organic transactions.

        Upon termination of Mr. Johnson's employment by Herbalife International and Herbalife America for cause, or by Mr. Johnson without good reason, Mr. Johnson would be entitled to his then current accrued and unpaid base salary through the effective date of termination as well as 100% of any accrued and unpaid bonus for any years preceding the year of termination, and not for the year of termination. Mr. Johnson would also be entitled to any rights that may exist in his favor to payment of any amount under any employee benefit plan or arrangement of Herbalife International or Herbalife America, other than those set forth in the Johnson Employment Agreement, in accordance with the terms and conditions of any such employee benefit plan or arrangement.

        Upon termination of Mr. Johnson's employment by Herbalife International and Herbalife America without cause, or by Mr. Johnson for good reason, in addition to the benefits described in the preceding paragraph, Mr. Johnson would also be entitled to an additional amount equal to two years' base salary and bonus for the year of termination, payable in twenty four equal monthly installments.

        In the event that Mr. Johnson's employment with Herbalife International and Herbalife America is terminated by Herbalife International and Herbalife America without cause, or by Mr. Johnson for good reason, during the period beginning 90 days prior to and ending 90 days following a Sale Event (as defined in the Johnson Employment Agreement), which Sale Event results in the cancellation or termination of Mr. Johnson's stock options, or in the event that Mr. Johnson delivers written notice of his resignation (for any reason) upon the consummation of or within 90 days following such a Sale Event, in addition to the benefits described in the preceding two paragraphs (to the extent payable pursuant to the terms thereof), Mr. Johnson would also be entitled to an additional amount equal to his annual base salary multiplied by the number of tranches of Mr. Johnson's stock option grant described above that are out-of-the-money at the time of such Sale Event, meaning that Mr. Johnson receives no consideration in respect of the cancellation or termination of such tranches in connection with the Sale Event.

        We have also entered into an executive employment agreement (the "Probert Employment Agreement") effective July 31, 2003 with Mr. Gregory Probert through our subsidiary Herbalife America. Pursuant to the Probert Employment Agreement, Mr. Probert served as Executive Vice President until December 31, 2003 and as Chief Operating Officer thereafter. The term of the Probert Employment Agreement expires on August 11, 2006. For his services as Executive Vice President, Mr. Probert was compensated at a pro-rated salary of $525,000 per annum. Starting on January 1, 2004, for his services as Herbalife America's Chief Operating Officer, Mr. Probert is entitled to receive an annual salary of $680,000. Under the terms of the Probert Employment Agreement, in addition to his salary, Mr. Probert is entitled to participate in or receive benefits under each benefit plan or arrangement made available by us to our senior executives on terms no less favorable than those generally applicable to senior executives of Herbalife America.

        In addition, Mr. Probert received an annual cash bonus of $450,000 for the fiscal year ending December 31, 2003 and is eligible to receive an annual cash bonus equal to 100% of the applicable annual bonus thereafter, calculated in accordance with the then-current bonus formula approved by us for our most senior officers.

        Mr. Probert has also been granted stock options under the WH Holdings (Cayman Islands) Ltd. Stock Incentive Plan to purchase an aggregate of 1,250,000 common shares of Herbalife at exercise prices as follows: 250,000 shares at $2.50 per share, 150,000 shares at $3.50 per share, 80,000 shares at $4.50 per share, 150,000 shares at $5.50 per share, 80,000 shares at $6.50 per share, 230,000 shares at $8.50 per share, 80,000 shares at $10.50 per share, 150,000 shares at $11.50 per share and 80,000 shares at $12.50 per share. The options vest under a schedule over time through September 1, 2009. The options expire 10 years after the date of grant.

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        In the event of any Change of Control (as defined in the WH Holdings (Cayman Islands) Ltd. Stock Incentive Plan), 50% of the shares granted pursuant to the options (pro rata according to the number of shares exercisable at the relevant exercise prices specified above for each of the individual tranches) will become immediately vested and exercisable. If, following any Change of Control, all or any portion of the options remain outstanding and Mr. Probert's employment is terminated (other than by reason of Mr. Probert's resignation without Good Reason or termination by us for Cause at any time following such Change of Control, 100% of the shares granted pursuant to the options will immediately vest and become exercisable. In the event Mr. Probert's employment is terminated by reason of Mr. Probert's death or disability or during the 90 day period before any Change of Control, 100% of the shares granted pursuant to the options will immediately vest and become exercisable.

        Upon termination of Mr. Probert's employment by us without cause, or upon his resignation for good reason, if such termination occurs prior to August 11, 2005, Mr. Probert would only be entitled to receive one year's then current salary plus bonus. If such termination occurs between August 11, 2005 and August 11, 2006, Mr. Probert would be entitled to receive one year's then current salary. In the event that Mr. Probert has not obtained subsequent employment by the one year anniversary of his termination, we would commence paying Mr. Probert's salary in accordance with our payroll practices for senior executives, through the remainder of Mr. Probert's employment term, subject to Mr. Probert's duty to mitigate. Such payments would cease if Mr. Probert obtains employment or fails to document his reasonable efforts to seek employment in accordance with the Probert Employment Agreement.

        We have also entered into an executive employment agreement (the "Goudis Employment Agreement") effective June 1, 2004 with Mr. Richard Goudis through our subsidiary Herbalife America. Pursuant to the Goudis Employment Agreement, Mr. Goudis will serve as Chief Financial Officer beginning June 14, 2004 for a term of three years. For his services as Chief Financial Officer, Mr. Goudis will be entitled to a salary of $430,000 for his first full calendar year of employment, $475,000 for his second year, and $500,000 for his third year. Under the terms of the Goudis Employment Agreement, in addition to his salary, Mr. Goudis is entitled to participate in or receive benefits under each benefit plan or arrangement made available by us to our senior executives on terms no less favorable than those generally applicable to senior executives of Herbalife America.

        In addition, Mr. Goudis will be eligible to receive an annual cash bonus equal to 50% of his then-current base salary, calculated in accordance with the then-current bonus formula approved by us for our most senior officers. We also agreed to grant to Mr. Goudis options under the WH Holdings (Cayman Islands) Ltd. Stock Incentive Plan to purchase an aggregate of 475,000 common shares of Herbalife at exercise prices as follows: 80,000 shares at $4.01 per share; 10,000 shares at $4.50 per share; 80,000 shares at $6.00 per share; 10,000 shares at $6.50 per share; 80,000 shares at $8.00 per share; 10,000 shares at $8.50 per share; 80,000 shares at $10.00 per share; 10,000 shares at $10.50 per share; 80,000 shares at $12.00 per share and 10,000 shares at $12.50 per share. The options vest at the rate of 5% per calendar quarter. The options expire 10 years after the date of grant. Upon termination of Mr. Goudis' employment by us without cause, or upon his resignation for good reason, Mr. Goudis would be entitled to receive his then current base salary for the remainder of the term under the Goudis Employment Agreement, subject to his duty to mitigate; provided that such payments would cease if Mr. Goudis obtains subsequent employment or fails to document to us on a monthly basis that he is making reasonable efforts to seek employment.

        Mr. Burdick is an at-will employee and for his services as Vice Chairman, Mr. Burdick is entitled to receive an annual salary of $500,000. In addition, Mr. Burdick is eligible to receive a discretionary bonus. For 2003 the bonus was zero.

        Mr. Burdick was granted 50,000 options to purchase Herbalife common shares at an exercise price of $0.44 per share and 50,000 options to purchase Herbalife common shares at an exercise price of $1.76 per share under the WH Holdings (Cayman Islands) Ltd. Independent Directors Stock Option Plan, of which 30,000 were exercisable within 60 days of December 31, 2003. In addition the Board granted Mr. Burdick

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options to purchase 300,000 common shares of Herbalife at a strike price of $0.44 and options to purchase 300,000 common shares of Herbalife stock at a strike price of $1.76 under the WH Holdings (Cayman Islands) Ltd. Independent Directors Stock Option Plan. These 600,000 options have vested. In 2003, Mr. Burdick accepted an executive management position with us and now serves as our Vice Chairman. As a result, Mr. Burdick may no longer be considered an independent director. Under the WH Holdings (Cayman Islands) Ltd. Independent Directors Stock Option Plan, the termination of Mr. Burdick as an independent director results in the unexercisable portion of the options granted pursuant to the plan terminating on the date of such termination and the remaining exercisable portion of the options granted pursuant to the plan becoming exercisable for thirty days following termination as an independent director. In light of the fact that the termination of Mr. Burdick's status as an independent director occurred at the request of the Board, in 2003, the Compensation Committee of the Board took action to waive those provisions that would have resulted in the termination of the unexercisable portion of Mr. Burdick's options granted under the plan and that would have caused the remaining exercisable portion of those options to become exercisable for only thirty days following the termination of his status as an independent director.

        In connection with the engagement of Mr. Burdick as Vice Chairman, Mr. Burdick was granted an aggregate of 400,000 options to purchase common shares of Herbalife under the WH Holdings (Cayman Islands) Ltd. Stock Incentive Plan at exercise prices as follows: 80,000 shares at $0.44 per share, 80,000 shares at $1.76 per share, 80,000 shares at $5.28 per share, 80,000 shares at $8.80 per share, and 80,000 shares at $12.32 per share. The options vest under a schedule over time through June 30, 2008. The options expire 10 years after the date of grant.

        In the event of any Change of Control (as defined in the WH Holdings (Cayman Islands) Ltd. Stock Incentive Plan), 50% of the shares granted pursuant to the options (pro rata according to the number of shares exercisable at the relevant exercise prices specified above for each of the individual tranches) issued to Mr. Burdick under that plan will become immediately vested and exercisable. If, following any Change of Control, all or any portion of the options issued to Mr. Burdick under the WH Holdings (Cayman Islands) Ltd. Stock Incentive Plan remain outstanding and Mr. Burdick's employment is terminated (other than by reason of Mr. Burdick's resignation without Good Reason or termination by us for Cause) at any time following such Change of Control, 100% of the shares granted pursuant to the options issued to Mr. Burdick under that plan will immediately vest and become exercisable. In the event Mr. Burdick's employment is terminated by reason of Mr. Burdick's death or disability or during the 90 day period before any Change of Control, 100% of the shares granted pursuant to the options issued to Mr. Burdick under the WH Holdings (Cayman Islands) Ltd. Stock Incentive Plan will immediately vest and become exercisable.

        On October 6, 2003, we appointed Mr. Brett R. Chapman as General Counsel. We have entered into an executive employment agreement (the "Chapman Employment Agreement") with Mr. Chapman effective as of October 6, 2003 for a term of three years through our subsidiary, Herbalife America. For his services, Mr. Chapman is entitled to receive an annual salary of $435,000. Under the terms of the Chapman Employment Agreement, in addition to his salary, Mr. Chapman shall be entitled to participate in or receive benefits under each benefit plan or arrangement made available by us to our senior executives on terms no less favorable than those generally applicable to senior executives of Herbalife America.

        In addition, Mr. Chapman received an annual cash bonus of $140,000 for the fiscal year ending December 31, 2003 and is eligible to receive an annual cash bonus equal to 50% of his base salary, calculated in accordance with the then-current bonus formula approved by us for our most senior officers. Mr. Chapman's target bonus is set in the Chapman Employment Agreement at an amount equal to 50% of Mr. Chapman's annual salary for the year with respect to which the bonus is to be paid.

        Mr. Chapman has also been granted stock options under the WH Holdings (Cayman Islands) Ltd. Option Plan to purchase an aggregate of 475,000 common shares of Herbalife at exercise prices as

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follows: 150,000 shares at $2.50 per share, 43,750 shares at $3.50 per share, 30,000 shares at $4.50 per share, 43,750 shares at $5.50 per share, 30,000 shares at $6.50 per share, 73,750 shares at $8.50 per share, 30,000 shares at $10.50 per share, 43,750 shares at $11.50 per share and 30,000 shares at $12.50 per share. The options vest under a schedule over time through October 6, 2008. The options expire 10 years after the date of grant.

        In the event of any Change of Control (as defined in the WH Holdings (Cayman Islands) Ltd. Stock Incentive Plan), 50% of the shares granted pursuant to the options (pro rata according to the number of shares exercisable at the relevant exercise prices specified above for each of the individual tranches) issued to Mr. Chapman under that plan will become immediately vested and exercisable. If, following any Change of Control, all or any portion of the options issued to Mr. Chapman under the WH Holdings (Cayman Islands) Ltd. Stock Incentive Plan remain outstanding and Mr. Chapman's employment is terminated (other than by reason of Mr. Chapman's resignation without Good Reason or termination by us for Cause (as defined in the Chapman Employment Agreement)) at any time following such Change of Control, 100% of the shares granted pursuant to the options issued to Mr. Chapman under that plan will immediately vest and become exercisable. In the event Mr. Chapman's employment is terminated by reason of Mr. Chapman's death or disability or during the 90 day period before any Change of Control, 100% of the shares granted pursuant to the options issued to Mr. Chapman under the WH Holdings (Cayman Islands) Ltd. Stock Incentive Plan will immediately vest and become exercisable.

        Upon termination of Mr. Chapman's employment by us without cause, or upon his resignation for good reason, Mr. Chapman would be entitled to receive one year's then current salary. In the event that Mr. Chapman has not obtained subsequent employment by one year after termination, we would commence paying Mr. Chapman's salary in accordance with our payroll practices for senior executives, through the remainder of Mr. Chapman's employment term, subject to Mr. Chapman's duty to mitigate. Such payments would cease if Mr. Chapman obtains employment or fails to document his reasonable efforts to seek employment in accordance with the Chapman Employment Agreement.

        We have also entered into an executive employment agreement (the "Kane Employment Agreement") with Brian Kane through our subsidiary Herbalife Lux. The Kane Employment Agreement became effective as of April 4, 2004. The term of the Kane Employment Agreement expires on March 10, 2006. Under the Kane Employment Agreement, Mr. Kane is engaged as President, EMEA. For his services, Mr. Kane is entitled to receive an annual salary of £309,943. Under the terms of the Kane Employment Agreement, in addition to his salary, Mr. Kane shall be entitled to participate in or receive benefits under each benefit plan or arrangement made available by Herbalife Lux to its senior executives on terms no less favorable than those generally applicable to senior executives of Herbalife Lux.

        Under the terms of the Kane Employment Agreement, Herbalife Lux may terminate Mr. Kane's employment without Cause (as defined in the Kane Employment Agreement) at any time upon six months prior written notice (or pay and continued benefits in lieu thereof). In the event Herbalife Lux terminates Mr. Kane's employment with or without Cause, Mr. Kane terminates his employment or Mr. Kane dies or becomes Disabled (as defined in the Kane Employment Agreement), Herbalife Lux must pay Mr. Kane all accrued base salary, benefits and other amounts Mr. Kane is entitled to as of the date of termination.

        Mr. Kane has been granted stock options as of March 10, 2003 under the WH Holdings (Cayman Islands) Ltd. Option Plan to purchase 1,207,583 common shares of Holdings at an exercise price of $0.44 per share and 603,792 common shares of Holdings at an exercise price of $1.76 per share. The options granted to Mr. Kane are subject to a vesting schedule whereby 15% of the options vest immediately and thereafter, vest at a rate of 5% each quarter until all of the options become fully vested and exercisable as of June 30, 2007. The options expire 10 years after the date of grant.

        Under the terms of the stock option grants, in the event Mr. Kane's employment with Herbalife is terminated for whatever reason, the unexercisable portion of Mr. Kane's stock options will terminate on the date of such termination and the exercisable portion of Mr. Kane's stock options will be treated as

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follows. Subject to Herbalife's right to repurchase the shares and subject to the shareholders' agreement, if Mr. Kane's employment is terminated for Cause, the exercisable portion of Mr. Kane's stock options will terminate on the date of such termination. If Mr. Kane's employment is terminated for any reason except for Cause, the exercisable portion of Mr. Kane's stock options will be exercisable for 30 days following the termination. If Mr. Kane's employment is terminated on account of a "disability" as defined in Section 22(e) of the Code or death, Mr. Kane or Mr. Kane's personal representative may exercise the exercisable portion of Mr. Kane's stock options for 90 days following the termination of employment on account of such disability or Mr. Kane's death. In addition, in connection with certain transaction involving a change in control (as defined in the stock option agreement) or the initial public offering of Herbalife's common shares whereby the sponsors sell 100% of their investments in the debt and equity securities of Herbalife, the previously unexercisable portion of Mr. Kane's stock options will immediately become 100% vested and exercisable immediately prior to the closing of any such transaction.

        We have also entered into an executive employment agreement (the "Hannah Employment Agreement") with Carol Hannah through our subsidiaries Herbalife and Herbalife America. The Hannah Employment Agreement became effective as of March 10, 2003. The Hannah Employment Agreement is for a three year term. Ms. Hannah is engaged as President of Distributor Communications and Support. For her services, Ms. Hannah is entitled to receive an annual salary of $712,500. Under the terms of the Hannah Employment Agreement, in addition to her salary, Ms. Hannah shall be entitled to participate in or receive benefits under each benefit plan or arrangement made available by us to our senior executives on terms no less favorable than those generally applicable to senior executives of Herbalife and Herbalife America.

        Under the terms of the Hannah Employment Agreement, if, at any time during the term of the Hannah Employment Agreement, (1) Herbalife terminates Ms. Hannah's employment without Cause (as defined in the Hannah Employment Agreement) Herbalife must pay Ms. Hannah (in addition to all accrued base salary, bonus for the year preceding the year of termination, benefits and other amounts Ms. Hannah is entitled to) an amount equal to one year's salary and bonus (the bonus for the year of termination shall be equal to one year's base salary). In addition, Herbalife shall continue to afford to Ms. Hannah medical, dental, vision, long-term disability and life insurance benefits for one year. If Ms. Hannah (1) dies or (2) becomes disabled at any time during the term of the Hannah Employment Agreement, upon the Death or Disability of Ms. Hannah (as defined in the Hannah Employment Agreement), Herbalife must pay Ms. Hannah or her beneficiaries or estate (in addition to all accrued base salary, bonus for the year preceding the year of termination, benefits and other amounts Ms. Hannah is entitled to as of the date of termination) Ms. Hannah's base salary and bonus for one year (the bonus for the year of termination shall be equal to one year's base salary). In the event Ms. Hannah terminates her employment or Herbalife terminates Ms. Hannah's employment for Cause, Herbalife must pay Ms. Hannah all accrued base salary, bonus for the year preceding the year of termination, benefits and other amounts Ms. Hannah is entitled to as of the date of termination.

        Ms. Hannah has been granted stock options as of March 10, 2003 under the WH Holdings (Cayman Islands) Ltd. Option Plan to purchase 1,207,583 common shares of Holdings at an exercise price of $0.44 per share and 603,792 common shares of Holdings at an exercise price of $1.76 per share. The options granted to Ms. Hannah are subject to a vesting schedule whereby 15% of the options vest immediately and thereafter, vest at a rate of 5% each quarter until all of the options become fully vested and exercisable as of June 30, 2007. The options expire 10 years after the date of grant.

        Under the terms of the stock option grants, in the event Ms. Hannah's employment with Herbalife is terminated for whatever reason, the unexercisable portion of Ms. Hannah's stock options will terminate on the date of such termination and the exercisable portion of Ms. Hannah's stock options will be treated as follows. Subject to Herbalife's right to repurchase the shares and subject to the shareholders' agreement, if Ms. Hannah's employment is terminated for Cause, the exercisable portion of Ms. Hannah's stock options will terminate on the date of such termination. If Ms. Hannah's employment is terminated for any reason

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except for Cause, the exercisable portion of Ms. Hannah's stock options will be exercisable for 30 days following the termination. If Ms. Hannah's employment is terminated on account of a "disability" as defined in Section 22(e) of the Code or death, Ms. Hannah or Ms. Hannah's personal representative may exercise the exercisable portion of Ms. Hannah's stock options for 90 days following the termination of employment on account of such disability or Ms. Hannah's death. In addition, in connection with certain transaction involving a change in control (as defined in the stock option agreement) or the initial public offering of Herbalife's common shares whereby the sponsors sell 100% of their investments in the debt and equity securities of Herbalife, the previously unexercisable portion of Ms. Hannah's stock options will immediately become 100% vested and exercisable immediately prior to the closing of any such transaction.

        Ms. Hannah recently notified us of her intention to retire from the Company. As a result, we entered into an amicable separation agreement and general release with her (the "Separation Agreement"), pursuant to which we agreed to terminate the Hannah Employment Agreement and to provide for certain mutual releases of claims, effective as of June 30, 2004. In addition, we entered into a consulting agreement with Ms. Hannah to engage her as an independent contractor to consult on all aspects of the Company's business through April 30, 2006. For her services, Ms. Hannah will receive a consulting fee of $59,375 per month during the term of the consultancy.

        In addition to his duties as a member of our board of directors, Charles L. Orr periodically provides consulting services to Herbalife related to certain projects. Since the beginning of our last fiscal year, Mr. Orr has received approximately $93,000 as compensation for such services.

Board Structure

        Our board of directors currently consists of nine directors. Our board of directors has determined that Mr. Orr is "independent," as defined under and required by the federal securities laws and the rules of the New York Stock Exchange, and it is anticipated that each of the three new directors that will be named to our board of directors prior to the listing of our shares on the New York Stock Exchange will be "independent," as defined under and required by the federal securities laws and the rules of the New York Stock Exchange.

Committees of the Board

        The standing committees of our board of directors currently consist of an audit committee, a compensation committee, a corporate governance and nominating committee, and an executive committee.

Audit Committee

        The principal duties of our audit committee are as follows:

    monitor the integrity of the Company's financial reporting process and systems of internal controls regarding finance, accounting, and reporting;

    monitor the independence and performance of the Company's independent auditors and internal auditing department; and

    provide an avenue of communication among the independent auditors, management, the internal auditing department, and the board of directors.

        Our audit committee is currently composed of Messrs. Fordyce, Orr and Diekroeger, each of whom, it is anticipated, will resign from the audit committee contemporaneously with the listing of our common shares on the New York Stock Exchange. In addition, we expect that shortly prior to the listing of our common shares on the New York Stock Exchange the board will elect three new directors, (a) each of whom will be "independent," as defined under and required by the federal securities laws and the rules of

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the New York Stock Exchange, (b) each of whom will be members of our audit committee, and (c) one of whom will be an "audit committee financial expert," as this term has been defined by the SEC in Item 401(h)(2) of Regulation S-K.

        Our board of directors has adopted a written charter for the audit committee which will be available on our website prior to completion of the offering.

Compensation Committee Interlocks and Insider Participation

        From January 1 through December 31, 2003, the Compensation Committee consisted of Messrs. Jesse Rogers, James Fordyce, Steven Rodgers, and Ken Diekroeger. Steven Rodgers was an officer of Herbalife from April 2002 through December 31, 2003, and resigned from the Board of Directors effective June 8, 2004.

        We expect that shortly prior to the listing of our common shares on the New York Stock Exchange the compensation committee will be composed of four directors, at least two of whom are "independent" as that term is defined by the rules of the New York Stock Exchange at the time of the listing of our common shares.

Corporate Governance and Nominating Committee

        We expect that shortly prior to the listing of our common shares on the New York Stock Exchange the board will form a corporate governance and nominating committee, composed of four directors, at least two of whom are "independent" as that term is defined by the rules of the New York Stock Exchange at the time of the listing of our common shares.

        The principal duties of the corporate governance and nominating committee are expected to be as follows:

    to recommend to our board of directors proposed nominees for election to the board of directors by the stockholders at annual meetings, including an annual review as to the renominations of incumbents and proposed nominees for election by the board of directors to fill vacancies that occur between stockholder meetings; and

    to make recommendations to the board of directors regarding corporate governance matters and practices.

        Our board of directors will adopt a written charter for the corporate governance and nominating committee prior to the listing of our shares on the New York Stock Exchange, which will be available on our website prior to completion of the offering.

Executive Committee

        Our board of directors has delegated to the executive committee the authority to act for the board on most matters during intervals between board meetings, except with respect to issuances of stock, declarations of dividends and other matters that, under Cayman Islands law, may not be delegated to a committee of the board of directors. The principal duties of the executive committee are as follows:

    to develop and implement our policies, plans and strategies; and

    to approve, modify or reject certain acquisitions or investments.

        The executive committee currently is composed of Messrs. Castleman (Chairman), Rogers, Fordyce, and Johnson (non-voting).

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Codes of Conduct and Ethics and Corporate Governance Guidelines

        Our board of directors has adopted a code of business conduct and ethics applicable to our directors, officers and employees in accordance with applicable rules and regulations of the SEC and the NYSE. To the extent they are not already embodied therein, we will, prior to the completion of this offering, supplement this code with corporate governance guidelines in accordance with the rules and regulations of the NYSE. Our code of ethics and conduct is available on our website.

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PRINCIPAL SHAREHOLDERS

        Whitney V, L.P. and Whitney Strategic Partners V, L.P. (together with certain affiliated investment funds) and CCG Investments (BVI), L.P. (together with certain of its co-investment funds), as well as selected members of our distributor organization and our management are the owners of all of the outstanding capital stock of Herbalife. The address for Whitney V, L.P. and Whitney Strategic Partners V, L.P. is c/o Whitney & Co., LLC, 177 Broad Street, Stamford, Connecticut 06901. The address for CCG Investments (BVI), L.P. is c/o Golden Gate Private Equity, Inc., One Embarcadero Center, 33rd Floor, San Francisco, California 94111.

        Herbalife's outstanding securities, as of June 30, 2004, consisted of 104.2 million common shares, par value $0.001 per share, each share being entitled to one vote on matters submitted to shareholders' vote.

        Management participates in our equity through option grants by Herbalife under a stock incentive plan. See "Certain Relationships and Related Transactions—Certain Transactions Relating to Herbalife—WH Holdings (Cayman Islands) Ltd. Stock Incentive Plan."

        The following table shows the beneficial ownership of common shares of Herbalife as of June 30, 2004, and thus the indirect beneficial ownership of the equity interest of Herbalife International as of that date, (1) each of Herbalife's and Herbalife International's directors, (2) each of our five mostly highly compensated executive officers, (3) all directors and executive officers as a group and (4) each person or entity known to Herbalife to beneficially own more than five percent (5%) of the outstanding common shares of Herbalife.

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        For purposes of this table, information as to the number and percentage of shares beneficially owned is calculated based on the number of common shares outstanding as of June 30, 2004.

 
  Beneficial Ownership of Herbalife
 
 
  Number of Shares Beneficially Owned Prior to this Offering
 
Name and address of beneficial owner

 
  Number
  %
 
Whitney V, L.P.**   52,032,570   50.0 %
Whitney Strategic Partners V, L.P.**   456,460   *  
Whitney Private Debt Fund, L.P.**   805,585   *  
Green River Offshore Fund**   85,929   *  
Total   53,380,544   51.3 %
CCG Investments (BVI), L.P.***   26,454,793   25.4 %
CCG Associates—QP, LLC***   1,329,857   1.3 %
CCG Associates—AI, LLC***   123,654   *  
CCG Investment Fund—AI, LP***   354,406   *  
CCG AV, LLC—Series C***   872,712   *  
CCG AV, LLC—Series E***   708,836   *  
CCG CI***   452,484   *  
Total   30,296,742   29.1 %
Peter M. Castleman(2)**   53,380,544   51.3 %
James H. Fordyce**   0   *  
Jesse T. Rogers(3)***   30,296,742   29.1 %
Kenneth J. Diekroeger(3)***   30,296,742   29.1 %
Leslie Stanford(4)****   2,582,955   2.5 %
Markus Lehman****   1,105,682   1.1 %
Charles L. Orr(5)****   54,205   *  
Henry Burdick(6)****   1,312,181   1.3 %
Michael O. Johnson(7)****   1,740,701   1.7 %
Brian L. Kane(8)****   1,008,641   *  
Gregory Probert(9)****   250,000   *  
David Kratochvil(10)****   133,409   *  
John B. Purdy(11)****   155,000   *  
Robert Levy(12)****   133,409   *  
All Directors and Executive Officers as a Group (18 persons)          
Total   92,153,469   85.6 %

*
Less than 1%.

**
c/o Whitney & Co., LLC, 177 Broad Street, Stamford, Connecticut 06901.

***
c/o Golden Gate Private Equity, Inc., One Embarcadero Center, 33rd Floor, San Francisco, California 94111.

****
c/o Herbalife International, Inc., 1800 Century Park East, Los Angeles, California 90067.

(1)
Applicable percentage of ownership as of June 30, 2004 is based upon 104,164,038 common shares outstanding, and the relevant number of shares of common stock issuable upon exercise of stock options which are exercisable presently or within 60 days. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission, and includes voting and investment power with respect to shares. Unless otherwise indicated below, to our knowledge, all persons listed below have sole voting and investment power with respect to their common shares,

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    except to the extent authority is shared by spouses under applicable law and to the extent provided in the shareholders' agreement. See "Certain Relationships and Related Transactions—Certain Transactions Relating to Herbalife—Shareholders' Agreement." Pursuant to the rules of the Securities and Exchange Commission, the number of common shares deemed outstanding includes shares issuable pursuant to options or warrants held by the respective person or group which may be exercised within 60 days of June 30, 2004.

(2)
Represents shares beneficially owned by Whitney V, L.P., Whitney Strategic Partners V, L.P., Whitney Private Debt Fund, L.P. and Green River Offshore Fund. Mr. Castleman is a managing member of the entities that are the general partners of Whitney V, L.P., Whitney Strategic Partners V, L.P., and Whitney Private Debt Fund, L.P., and accordingly he may be deemed to share beneficial ownership of such shares as well as the shares owned by Green River Offshore Fund. Mr. Castleman disclaims beneficial ownership of all shares owned by Whitney V, L.P., Whitney Strategic Partners V, L.P., Whitney Private Debt Fund, L.P. and Green River Offshore Fund, except to the extent of his pecuniary interest in each such entity.

(3)
Represents shares beneficially owned by CCG Investments (BVI), L.P., CCG Associates—QP, LLC, CCG Associates—AI, LLC, CCG Investment Fund—AI, LP, CCG AV, LLC—Series C, CCG AV, LLC- Series E and CCG CI, LLC, the "Golden Gate Entities." Messrs. Rogers and Diekroeger are managing members of the entities that are general partners of the Golden Gate Entities. Accordingly, they may be deemed to share beneficial ownership of such shares. Each of Messrs. Rogers and Diekroeger disclaim beneficial ownership of all shares owned by the Golden Gate Entities, except to the extent of his pecuniary interest in the Golden Gate Entities.

(4)
Represents shares beneficially owned by Leslie Stanford though Blueline Capital, LLC.

(5)
Mr. Orr was granted 50,000 options to purchase common shares of Herbalife at an exercise price of $0.44 per share and 50,000 options to purchase common shares of Herbalife at an exercise price of $1.76 per share, of which 40,000 are exercisable within 60 days of June 30, 2004.

(6)
Mr. Burdick was granted 50,000 options to purchase common shares of Herbalife at an exercise price of $0.44 per share and 50,000 options to purchase common shares of Herbalife at an exercise price of $1.76 per share, of which 40,000 are exercisable within 60 days of June 30, 2004. In addition, the Board granted Mr. Burdick options to purchase 300,000 common shares of Herbalife at a strike price of $0.44 and options to purchase 300,000 common shares of Herbalife at a strike price of $1.76. These 600,000 options have vested and are exercisable within 60 days of June 30, 2004. Mr. Burdick was granted an additional 80,000 options to purchase common shares of Herbalife at an exercise price of $0.44 per share, 80,000 options to purchase common shares of Herbalife at an exercise price of $1.76 per share, 80,000 options to purchase common shares of Herbalife at an exercise price of $5.28 per share 80,000 options to purchase common shares of Herbalife at an exercise price of $8.80 per share 80,000 options to purchase common shares of Herbalife at an exercise price of $12.32 per share, of which 104,000 are exercisable within 60 days of June 30, 2004.

(7)
Mr. Johnson was granted 1,182,369 options to purchase common shares of Herbalife at an exercise price of $0.44 per share, 1,182,369 options to purchase common shares of Herbalife at an exercise price of $1.76 per share, 1,182,369 options to purchase common shares of Herbalife at an exercise price of $5.28 per share 1,182,369 options to purchase common shares of Herbalife at an exercise price of $8.80 per share and 1,182,369 options to purchase common shares of Herbalife at an exercise price of $12.32 per share, of which 1,537,081 are exercisable within 60 days of June 30, 2004.

(8)
Mr. Kane was granted 1,207,583 options to purchase common shares of Herbalife at an exercise price of $0.44 per share and 603,792 options to purchase common shares of Herbalife at an exercise price of $1.76 per share, of which 724,550 are exercisable within 60 days of June 30, 2004.

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(9)
Mr. Probert was granted 250,000 options to purchase common shares of Herbalife at an exercise price of $2.50 per share, 150,000 options to purchase common shares of Herbalife at an exercise price of $3.50 per share, 150,000 options to purchase common shares of Herbalife at an exercise price of $5.50 per share, 150,000 options to purchase common shares of Herbalife at an exercise price of $8.50 per share, and 150,000 options to purchase common shares of Herbalife at an exercise price of $11.50 per share, of which 250,000 are exercisable within 60 days of June 30, 2004.

(10)
Mr. Kratochvil was granted 150,000 options to purchase common shares of Herbalife at an exercise price of $0.44 per share and 150,000 options to purchase common shares of Herbalife at an exercise price of $1.76 per share, of which 105,000 are exercisable within 60 days of June 30, 2004.

(11)
Mr. Purdy was granted 150,000 options to purchase common shares of Herbalife at an exercise price of $0.44 per share and 150,000 options to purchase common shares of Herbalife at an exercise price of $1.76 per share, of which 105,000 are exercisable within 60 days of June 30, 2004.

(12)
Mr. Levy was granted 150,000 options to purchase common shares of Herbalife at an exercise price of $0.44 per share and 150,000 options to purchase common shares of Herbalife at an exercise price of $1.76 per share, of which 90,000 are exercisable within 60 days of June 30, 2004.

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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Redemption of Preferred Shares

        A portion of the proceeds from the offering of the 91/2% Notes was applied to pay the cash redemption price for all of our outstanding 12% Series A Cumulative Convertible Preferred Shares (the "Preferred Shares"). To permit us to convert the Preferred Shares, we amended our charter documents to permit our board of directors to elect to convert all of the outstanding Preferred Shares into the right to receive a cash payment, for each Preferred Share converted, equal to the original issue price for the Preferred Shares ($1.76 per share), and all accrued and unpaid dividends, plus one common share of the Company. In connection with the consummation of this repurchase, all of the outstanding warrants to purchase our Preferred Shares were exercised in exchange for our Preferred Shares, and all of our Preferred Shares (including the Preferred Shares issuable upon the exercise of the warrants) were then converted into an aggregate of approximately 104.1 million of our common shares.

        All of the outstanding Preferred Shares, immediately prior to their conversion into common shares, were held by the Equity Sponsors and their affiliates, certain members of our management, and selected distributors. In addition, affiliates of the Equity Sponsors and GarMark Partners, L.P. ("GarMark") held warrants to purchase an aggregate of 2,040,816 of the Preferred Shares. These parties held certain rights that may have presented an actual or potential conflict of interest in connection with our proposal to convert the Preferred Shares.

        Certain Equity Sponsors (and/or their affiliates) and the selected distributors holding Preferred Shares were and are parties to a shareholders' agreement pursuant to which they have certain rights to determine the composition of our board of directors. See "—Shareholders' Agreement."

        In addition, an affiliate of Whitney, one of the Equity Sponsors, was a party to a securities purchase agreement providing that affiliate with the right to designate one observer to our board of directors to attend each meeting of the board and each meeting of the committees of the board for so long as that party holds at least $10 million of our 15.5% senior notes (the "Senior Notes") (subject to certain exceptions). We purchased all of the Senior Notes on March 8, 2004. See "—Purchase of Senior Notes."

Purchase of Senior Notes

        A portion of the proceeds from the offering of the 91/2% Notes was applied to purchase our Senior Notes (face value $38.0 million) at a negotiated price.

        All of the Senior Notes, immediately prior to the closing of their repurchase, were held by GarMark, Whitney Private Debt Fund, L.P. ("Whitney Private Debt"), and Green River Offshore Fund Ltd. ("Green River"). Whitney Private Debt and Green River are affiliates of Whitney. GarMark purchased $23 million in principal amount of the Senior Notes and received Warrants for 1,235,231 of the Preferred Shares and Whitney Private Debt purchased $15 million in principal amount of the Senior Notes and received warrants for 805,585 of the Preferred Shares on July 31, 2002 pursuant to a Securities Purchase Agreement (the "Securities Purchase Agreement") among Herbalife, as issuer, and GarMark and Whitney Private Debt, as purchasers. On November 27, 2002, Green River purchased $1.6 million in principal amount of the Senior Notes from GarMark and received Warrants for 85,929 of the Preferred Shares from GarMark.

        The holders of the Senior Notes held certain rights that may have presented an actual or potential conflict of interest in connection with our proposal to purchase the Senior Notes. The Securities Purchase Agreement provided that each holder of $10 million or more of the Senior Notes (subject to certain exceptions) could designate one observer to our board of directors to attend each meeting of the Board and each meeting of the committees of the board. Each of Whitney Private Debt and GarMark held $10 million or more of the Senior Notes. In addition, certain affiliates of Whitney were and are parties to a shareholders' agreement with certain of our other shareholders pursuant to which Whitney V, L.P., an affiliate of Whitney, is permitted to nominate four individuals to our board of directors, and two additional

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nominees to our board must be acceptable to Whitney V, L.P. and CCG Investments (BVI), L.P., an affiliate of Golden Gate Private Equity, Inc. This agreement will terminate upon the consummation of this offering.

        On February 3, 2004, the board of directors approved the offering of the 91/2% Notes, the repurchase of our Senior Notes and the related transactions, subject to development of th