HERBALIFE INTERNATIONAL INC, 10-K405, 1999-03-30

HERBALIFE INTERNATIONAL INC
10-K405, 1999-03-30
DRUGS, PROPRIETARIES & DRUGGISTS' SUNDRIES

Previous: CRESTFUNDS INC/, 485BPOS, 1999-03-30

Next: CAPITAL BUILDERS DEVELOPMENT PROPERTIES II, 10-K, 1999-03-30

<PAGE> 1

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K
(MARK ONE)

[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998

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

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER 0-15712

HERBALIFE INTERNATIONAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

<TABLE>
<S> <C>
NEVADA 22-2695420
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)

1800 CENTURY PARK EAST, LOS ANGELES, CALIFORNIA 90067
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>

(310) 410-9600
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)

SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: CLASS A COMMON
STOCK, $.01 PAR VALUE
CLASS B COMMON STOCK, $.01 PAR VALUE

Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]

The Aggregate market value of the Registrant's Class A and Class B Common
Stock on March 1, 1999 held by nonaffiliates was approximately $121 Million.
(Determination of stock ownership by non-affiliates was made solely for the
purpose of responding to the requirements of this Form and the Registrant is not
bound by this determination for any other purpose.)

APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [ ] No [ ]

The number of shares outstanding of the registrant as of March 1, 1999 was:

9,980,747 Shares of Class A Common Stock
18,603,551 Shares of Class B Common Stock

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement to be filed with the Securities and Exchange
Commission within 120 days after the close of the Registrant's fiscal year ended
December 31, 1998, are incorporated by reference in Part III of this Form.

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2

FORWARD LOOKING STATEMENTS

With the exception of the actual reported financial results and other
historical information, the statements made in the Management's Discussion and
Analysis of Financial Condition and Results of Operations and elsewhere in this
report are forward looking statements that involve risks and uncertainties that
could affect actual future results. Such risks and uncertainties include, but
are not limited to: the regulatory environment, consumer acceptance of network
marketing, economic conditions in the countries the Company operates, the
presence of possible competitors, adverse publicity and in-region cultural or
demographic factors and other risks indicated in the Company's filings with the
Securities and Exchange Commission.
<PAGE> 3

ITEM 1. BUSINESS

BACKGROUND AND CORPORATE ORGANIZATION

GENERAL

Herbalife International, Inc. (the "Company") is a network marketing
company that sells a wide range of weight management products, food and dietary
supplements and personal care products worldwide. As of December 31, 1998, the
Company conducted business in 42 countries located in Asia/Pacific Rim, Europe
and The Americas. Retail sales in those regions represented 42.0%, 29.4% and
28.6%, respectively, of the Company's total retail sales in 1998.

The Company has experienced substantial growth in retail sales in recent
years. From 1994 to 1998, the Company's retail sales grew from $884.1 million to
$1.64 billion, representing a compound annual growth rate of 17%.

The Company's products are marketed exclusively through a network marketing
system. This system enables the Company's independent distributors to earn
profits by selling Herbalife products to retail consumers or other distributors.
Distributors may also develop their own distributor downline organizations by
sponsoring other distributors to do business in any market where the Company
operates, entitling the sponsors to receive royalty overrides (cash incentives,
including royalties and bonuses) on product sales within their downline
organizations.

Management believes that Herbalife's network marketing system is ideally
suited to its products, which emphasize a healthy lifestyle, because sales of
such products are strengthened by ongoing personal contact between retail
consumers and distributors, many of whom use the Company's products themselves.
The Company's network marketing system appeals to a broad cross-section of
people throughout the world, particularly those seeking to supplement family
income, start a home business or pursue employment opportunities other than
conventional, full-time employment.

HISTORY AND ORGANIZATION

The Company began operations in February 1980 as a California limited
partnership and operated in that form through December 1985, with the exception
of an interim period from October 1981 through August 1983 when the business was
operated through a California corporation. In January 1986, the Company's
business was transferred from the California limited partnership to its
corporate general partner, Herbalife International of America, Inc. ("Herbalife
of America"). In November 1986, Herbalife of America was acquired in a
stock-for-stock reorganization by Sage Court Ventures, Inc. ("Sage Court"). As a
result of the acquisition, Herbalife of America became a wholly owned subsidiary
of Sage Court and the former stockholders of Herbalife of America acquired a
controlling interest in Sage Court. Sage Court's name was formally changed to
Herbalife International, Inc. in December 1986.

In October 1993, the Company and certain selling stockholders sold a total
of 6,047,000 shares of Common Stock in a public offering (the "1993 Offering").
The Company issued and sold 2,647,000 shares as part of this transaction.

In December 1997, the Company's common stock, par value $.01 per share (the
"Old Common Stock") was reclassified into voting class A common stock ("Class A
Stock") and non-voting class B common stock ("Class B Stock"). The
reclassification of the Old Common Stock is referred to herein as the
"Recapitalization," and the Class A Stock and Class B Stock are together
referred to herein as the "Common Stock."

Herbalife International, Inc. operates through 42 domestic and foreign
subsidiaries, virtually all of which are wholly owned. Except as the context
otherwise requires, references to "Herbalife" and the "Company" include
Herbalife International, Inc. and its operating subsidiaries.

1
<PAGE> 4

EXECUTIVE OFFICES

The Company's executive offices are located at 1800 Century Park East, Los
Angeles, California 90067. The Company's telephone number is (310) 410-9600.

GROWTH STRATEGY

The Company plans to continue capitalizing on its strong operating platform
and intends to pursue a growth strategy comprised of the following four
principal elements:

Expand Product Offerings and Develop New Product Lines. The Company is
committed to expanding its product line by developing and offering new products
and introducing existing products into markets where they are not currently
offered. The timely introduction of new, high quality products creates sales
opportunities for distributors, and also serves to generate enthusiasm among
distributors and provide them with additional promotional opportunities to sell
other Company products. During 1998, the Company introduced 38 new products
(exclusive of flavor and color variations).

Revitalize Sales in Certain Existing Markets. In order to increase sales in
markets, such as France, Germany, Italy and Spain, that had experienced a
leveling off or decline in sales, management implemented several revitalization
initiatives. These initiatives include extensive training and motivational
programs, appointment of regional planning and strategy groups that include
senior distributors, enhanced government relations, introduction of new
products, and establishment of distributor sales centers. The Company believes
that these initiatives favorably impact operations and are partly responsible
for the strong sales growth in Italy and Germany during 1998. The Company will
continue to deploy these initiatives in an effort to provide a platform for
renewed growth.

Expand Into New Markets. The opening of new markets is an important
component of the Company's business strategy. From January 1, 1994 through
December 31, 1998, the Company has commenced operations in 26 new countries,
consisting of five in Asia/Pacific Rim, 16 in Europe and five in The Americas.
During 1998, these countries contributed $385 million of retail sales,
representing 23% of the Company's total retail sales. The Company believes there
are numerous additional markets in which its network marketing system and
products should prove successful. In 1998, the Company opened six new markets,
Turkey, Botswana, Lesotho, Namibia, Swaziland and Indonesia and plans to open
India, Iceland and the Slovak Republic in 1999, together with Jamaica, which
just opened. Additional new markets currently under consideration include China,
Colombia, Ecuador and Morocco. The Company evaluates these and other new markets
based, in part, on the Company's ability to create a distributor base in
potential markets. In determining when and where to open new markets, the
Company will continue to seek to minimize the impact on distributor focus in
existing markets and to ensure that adequate distributor support services and
other Company systems are in place to support the growth.

Enhance Sales and Motivational Training. The Company will continue to seek
increased sales opportunities through its network marketing system by utilizing
extensive training and motivational programs. The Company will also hold
extravaganzas and other large scale events and numerous training and
motivational programs worldwide. In addition, the Company will continue to offer
extensive training programs through various methods of telecommunication,
including broadcast faxes, pre-recorded telephone message services and live
multi-lingual teleconferences on a global basis, and will seek to expand the
motivational and training programming and audience of the Herbalife Broadcast
Network ("HBN network"). Approximately 17,000 HBN home systems are currently in
place. The Company believes distributors frequently invite other distributors
and customers into their homes to view the 2 to 3 hours of HBN network
programming available each week.

PRODUCT OVERVIEW

The Company's products include weight management products, food and dietary
supplements, personal care products and educational and promotional materials.
The Company currently markets 132 products, exclusive of variations in product
flavors and colors, reformulations of products to satisfy regulatory

2
<PAGE> 5

requirements within a particular country and similar variations of the Company's
basic product line. A limited number of the Company's personal care products are
classified in the United States as OTC drugs. See "-- Regulation".

The following charts summarize the number of products offered by the
Company in its principal product categories as of December 31, 1998 and retail
sales information by product category during the indicated periods. Prior year
numbers have been reclassified to conform with current year presentation of
product classification.

PRODUCT SALES BY CATEGORY

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------------
1998 1997 1996
--------------------------- --------------------------- ---------------------------
PERCENT OF PERCENT OF PERCENT OF
PRODUCT CATEGORY TOTAL RETAIL TOTAL RETAIL TOTAL RETAIL
(NUMBER OF PRODUCTS IN CATEGORY) RETAIL SALES SALES RETAIL SALES SALES RETAIL SALES SALES
- -------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Weight Management(20).......... $ 512.8 31.2% $ 448.9 30.1% $ 358.3 29.9%
Food and Dietary
Supplements(34).............. 865.2 52.6% 805.8 54.1% 666.0 55.5%
Personal Care Products(78)..... 198.9 12.1% 166.6 11.2% 115.4 9.6%
Literature, Promotional and
Other........................ 67.9 4.1% 69.4 4.6% 60.4 5.0%
-------- -------- --------
Total................ $1,644.8 $1,490.7 $1,200.1
======== ======== ========
</TABLE>

3
<PAGE> 6

NUMBER OF PRODUCTS OFFERED BY CATEGORY
(AS OF DECEMBER 31, 1998)

<TABLE>
<CAPTION>
NUMBER OF
FOOD AND
NUMBER OF DIETARY TOTAL
WEIGHT SUPPLEMENT NUMBER OF NUMBER OF
MANAGEMENT PRODUCTS PERSONAL CARE PRODUCTS
YEAR PRODUCTS (34 IN PRODUCTS (132 IN
COUNTRY ENTERED(1) (20 IN TOTAL) TOTAL) (78 IN TOTAL) TOTAL)
------- ---------- ------------------- ---------- ------------- ---------
<S> <C> <C> <C> <C> <C>
ASIA/PACIFIC RIM
Australia 1982 7 9 50 66
New Zealand 1988 8 6 49 63
Hong Kong 1992 5 3 54 62
Japan 1993 8 7 44 59
Philippines 1994 6 1 14 21
Taiwan 1995 4 1 43 48
South Korea 1996 4 2 19 25
Thailand 1997 4 1 28 33
Indonesia 1998 6 2 0 8
EUROPE
United Kingdom 1983 8 10 65 83
Israel 1989 8 8 24 40
Spain 1989 5 4 65 74
France 1990 6 3 70 79
Germany 1991 6 3 64 73
Italy 1992 6 4 64 74
Portugal 1992 6 5 63 74
Czech Republic 1992 7 11 26 44
Netherlands 1993 7 3 63 73
Belgium 1994 8 6 66 80
Poland 1994 5 4 23 32
Denmark 1994 6 4 64 74
Sweden 1994 6 4 63 73
Russia 1995 14 13 45 72
Switzerland 1995 4 3 55 62
Austria 1995 6 2 64 72
Norway 1995 5 1 48 54
Finland 1995 8 5 59 72
South Africa 1995 5 4 54 63
Greece 1996 2 2 61 65
Turkey 1998 4 0 26 30
Botswana 1998 5 4 54 63
Lesotho 1998 5 4 54 63
Namibia 1998 5 4 54 63
Swaziland 1998 5 4 54 63
THE AMERICAS
United States 1980 20 34 73 127
Canada 1982 13 11 64 88
Mexico 1989 8 13 29 50
Dominican Republic 1994 6 1 10 17
Venezuela 1994 4 2 46 52
</TABLE>

4
<PAGE> 7

- ---------------
(1) Throughout the Report, "entering", "opening", "commencing operations" or
"doing business" in a market or country means that the Company has obtained
either regulatory approval of, or the favorable opinion of local legal
counsel with respect to, its network marketing system, has obtained all
requisite regulatory approvals of at least one product and has commenced
sales and shipment of that product within the market or country. With
respect to Japan, from 1989 through 1992, the Company operated under a
licensing arrangement in Japan and reported license fees with respect
thereto as revenue. Subsequently, in 1993, the Company formed a new Japanese
subsidiary whose revenues were then included in the Company's results of
operations. Accordingly, the Company considers Japan to have been "opened"
in 1993.

Weight Management Products. For the last three years, approximately 30% of
the Company's sales were derived from the 20 weight management products that the
Company markets as the Thermojetics(R) Weight-Management System. These weight
management products include the following: (i) Formula 1, a protein powder in
four different flavors designed as a meal replacement, (ii) the four
Thermojetics(R) weight management tablets (original green, green, beige and
yellow), (iii) Thermojetics(R) Herbal Concentrate, an herbal beverage blended
from five natural botanicals, now offered in three different flavors and (iv) a
variety of other nutritional products, such as Cell-U-Loss(R), Activated Fiber,
N.R.G. (Nature's Raw Guarana), Thermo-bond(R) and Aminogen(R). In addition, the
Company has introduced five new products to the Thermojetics(R) system: Chew
Slim(TM) herbal diet gum, WaferFull(TM) chewable wafers, MentaBalance(TM) amino
acid and herbal supplement, and CarboGuard(TM) micronutrient and herbal
supplement, and Protein Bar, a protein-rich snack bar.

Food and Dietary Supplements. The Company's food and dietary supplements
include a variety of products, each containing herbs, vitamins, minerals and
other natural ingredients. Such products are sold under various names, including
Herbal-Aloe, Florafiber, Xtra-Cal, Herbalifeline(R), Tang Kuei Plus, Male Factor
1000(R), Schizandra Plus(R), RoseOx, Sleep Now, Herbal Calmative and A.M.
Replenishing and P.M. Cleansing formula. In addition, in 1996, the Company
launched its Health & Fitness Program and Bulk & Muscle Program, together with
its Longetics Program designed for the needs of mature adults, which offer
various products consisting of a protein drink mix, a multivitamin, mineral and
herbal tablet and Cell Activator(R). In 1996, the Company also introduced
products designed to meet the nutritional needs of children, consisting of
Kindermins(R), a liquid multivitamin/herbal formula, and Dinomins(TM), a
chewable vitamin tablet, and in 1998, Dinoshake, a nutritional children's drink
mix.

Personal Care Products. The Company's entire personal care product line is
marketed under the name Dermajetics(R), which was initially launched in 1995.
Currently, the Dermajetics(R) product line consists of the following products:
The Skin Survival Kit, consisting of a day and night moisturizer, a deep
cleaning facial mask and a hydrating eye gel, all packaged in a cosmetic bag;
Parfums Vitessence(TM), consisting of six eaux de toilette, three for men and
three for women; Man and Woman fragrances; Nature's Mirror(R), consisting of a
cleanser, toner and moisturizer for each of three different skin types and four
specialty care products; Good Hair Day, consisting of seven hair care products;
Ocean Currents(R), consisting of five bath products; Acne treatment system
consisting of four products; Aroma Vie(R), consisting of three aromatic soaps
and oils; and other specialty personal care products, including Herbal Aloe Gel
and Lotion, Soothing Spray, Cleansing Bars, and Body Wash, Super APR (Arthritis
Pain Relief), a suncare line and Body Buffing and Toning Cream, and Dinokids, a
children's line consisting of four products. In addition, during 1998 the
Company

5
<PAGE> 8

introduced a new line of color cosmetics in Russia. The Company intends to
launch the color cosmetics line in Europe and the United States in 1999.

Educational and Promotional Materials. The Company also sells distributor
kits, which an individual must purchase (at a worldwide average cost of
approximately $83 per kit) in order to become a distributor of the Company, as
well as other educational and promotional materials. Such materials include
sales aids, informational videotapes and cassette recordings. Sales of
distributor kits are not subject to distributor allowances (i.e., the Company
receives the entire retail sales amount from the sale of distributor kits).

Product Manufacturing and Development. The Company expands its product line
through the development of new products. New product ideas are derived from a
number of sources, including trade publications, scientific and health journals,
the Company's executives, staffs and consultants and outside parties. In advance
of introducing products into its markets, local counsel and other
representatives retained by the Company investigate product formulation matters
as they relate to regulatory compliance and other issues. The Company's products
are then reformulated to suit both the regulatory and marketing requirements of
the particular market. See "-- Regulation."

All of the Company's products are manufactured by outside companies. Raven
Industries ("Raven") currently manufactures most of the Company's powder
products, and D&F Industries ("D&F") currently supplies most of the Company's
tablet and capsule products. For a number of years prior to 1998, the Company
was subject to requirements contracts with each of Raven, D&F and Dynamic
Products, Inc. ("Dynamic") pursuant to which the Company agreed to purchase all
of its requirements of powder products from Raven and all of its requirements of
tablet, capsule and certain other products from Dynamic or D&F, to the extent
each such manufacturer was capable of manufacturing such products. In 1996, 1997
and 1998, aggregate purchases by the Company from Raven and D&F represented a
majority of the Company's product purchases. In September 1997, the Company
entered into new three-year agreements with Raven, D&F and Dynamic, pursuant to
which revised pricing and other provisions became effective on January 12, 1998.
The new contracts provide, among other things, the ability for the Company to
source and develop products with other third party manufacturers, subject to
minimum percentage purchase and other requirements for nutritional supplement,
and a small number of non-nutritional supplement, products falling into
specified product categories. As a result, and because the new contracts confirm
the Company's ownership of product formulations for substantially all of the
Company's nutritional products, the Company has the capacity, and in the future
may seek, to "second source" particular nutritional supplement products with
multiple manufacturers. In addition, a number of the Company's new products,
such as WaferFull(TM) and Chew Slim(TM) weight management products are being
manufactured for the Company by new manufacturers. Increasingly, the Company's
in-house staff has been conducting product research and development and product
formulation. However, the Company has historically relied on Raven and D&F for
these services, and will continue to do so, albeit to a lesser extent, in the
future.

The Company's ability to enter new markets and sustain satisfactory levels
of sales in each market has been in the past and is likely to continue to be
dependent in significant part upon its own ability and the ability of its
manufacturers, including Raven and D&F, to develop new products and reformulate
existing products for introduction into the Company's markets. Beginning in
1997, the Company has significantly expanded its in-house product research and
development and product formulation staffs, which now consist of several
employees of the Company who are increasingly involved in such activities. With
the transition in the Company's relationship with Raven and D&F from exclusive
to non-exclusive contracts, there can be no assurance that the Company will seek
or continue to obtain the same amount or quality of product research,
development or formulation services from Raven and D&F that it has received in
the past. While the Company expects to obtain similar such services from
in-house personnel and alternative manufacturers in the future, there can be no
assurance that there will not be some disruption in the Company's business from
time to time as these support services begin to be provided internally or by
alternative manufacturers.

Pursuant to its new contracts with Raven, D&F and Dynamic, the Company owns
the proprietary rights to substantially all of its weight management products
and food and dietary supplements. However, there can be no assurance that
another company will not replicate one of the Company's products. In addition,
Raven

6
<PAGE> 9

and D&F continue to own certain product formulations and manufacturing processes
relating to certain of the Company's nutritional products.

Product Return and Buy-Back Policies. All of the Company's products include
a customer satisfaction 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 to the distributor from whom it was purchased for a full refund
from the distributor or credit toward purchase of another Herbalife product.
Distributors may obtain replacements from the Company for products returned to
them by consumers if they return such products to the Company on a timely basis.
In addition, in most jurisdictions, the Company maintains a buy-back program
pursuant to which it will repurchase products sold to a distributor provided
that the distributor resigns as a Company distributor, returns the product in
marketable condition within twelve months of original purchase and meets certain
documentation and other requirements. The Company believes this buy-back policy
addresses a number of the regulatory compliance issues pertaining to network
marketing systems. See "Regulation -- Network Marketing System." Historically,
product returns and buy-backs have not been significant, averaging 0.8% of
annual retail sales during the last five years.

Recent Regulatory Developments. The development and marketing of the
Thermojetics(R) weight management tablets (original green, green, beige and
yellow) and other products in the Thermojetics(R) line have contributed
significantly to the Company's retail sales. One of the ingredients in the
Thermojetics(R) original green herbal tablet is a Chinese herb, Ma Huang, which
contains naturally occurring ephedrine in small quantities. Ephedrine products
have been the subject of adverse publicity in the United States and other
countries relating to alleged harmful effects, including the deaths of several
individuals. Currently, the Company offers the Thermojetics(R) original green
herbal tablet only in the United States (except in certain states in which
regulations may prohibit or restrict the sale of such product). On April 10,
1996, the FDA issued a statement warning consumers not to purchase or ingest
dietary supplements containing natural sources of ephedrine that are claimed to
produce certain effects (none of which are claimed by the Company's product). On
June 4, 1997, the FDA issued a proposed regulation for dietary supplements
containing ephedrine alkaloids. The proposed regulation would include
prohibitions against dietary supplements containing eight milligrams or more of
ephedrine alkaloids per serving, and would not permit such products to contain
any other stimulant, diuretic or laxative ingredients. In addition, labeling of
supplements would be prohibited from suggesting or recommending conditions of
use that would result in an intake of eight milligrams or more of ephedrine
alkaloids within a six-hour period, or a total daily intake of 24 milligrams or
more. The FDA proposal would also include prohibitions against certain claims of
suitability for weight loss and other uses or benefits. However, no final
regulation has been issued to date. There can be no assurance as to the final
form of any new FDA regulations or that the FDA will not seek to impose
additional regulations, possibly prohibiting, limiting potencies or placing
other restrictions on the sale of such products, or the impact, if any, of any
such regulations or actions on the Company. In addition, in September 1997 the
FDA issued regulations governing the labeling and marketing of dietary
supplement products. The Company was required to revise a substantial number of
its product labels to reflect the new requirements prior to the March 23, 1999
effective date. The Company does not expect the cost or impact of such actions
to be material.

In addition, during the third quarter of 1995, the Company received
inquiries from certain governmental agencies within Germany and Portugal
relating to the Company's product, Thermojetics(R) Instant Herbal Beverage,
which does not contain Ma Huang. The inquiries related to the caffeine content
of the product and the status of the product as an "instant tea," which was
disfavored by the regulators, versus a "beverage." The sale of this product in
these countries was subsequently suspended by the Company at the request of the
regulators. The Company may in the future attempt to reintroduce the product as
a "beverage" in one or both of these markets.

The Company is aware that, in certain of its international markets, there
has been recent adverse publicity concerning products that contain substances
generally referred to as "genetically modified organisms" ("GMOs"). In some
markets, the possibility of health risks thought to be associated with GMOs has
prompted proposed or actual governmental regulation. A number of the Company's
products contain substances that would or might be classified as GMOs. The
Company cannot anticipate the extent to which regulations in its markets will
restrict the use of GMOs in its products or the impact of such regulations on
the
7
<PAGE> 10

Company's business in those markets. In response to any applicable regulations,
the Company would, where practicable, attempt to reformulate its products to
satisfy such regulations, and the Company believes, based upon currently
available information, that compliance with regulatory requirements in this area
should not have a material adverse effect on the Company or its business.
However, because publicity and governmental scrutiny of GMOs is a relatively new
and evolving area, there can be no assurance in this regard.

NETWORK MARKETING SYSTEM

The Company's products are distributed exclusively through a network
marketing system consisting of an extensive network of distributors.
Distributors are generally independent contractors who purchase products
directly from the Company or from other distributors for resale to retail
consumers and other distributors. Distributors may elect to work on a full-time
or part-time basis. The Company believes that its network marketing system
appeals to a broad cross-section of people worldwide, particularly those seeking
to supplement family income, start a home business or pursue employment
opportunities other than conventional, full-time employment, and that a majority
of its distributors therefore work on a part-time basis. The Company believes
that its network marketing system is ideally suited to marketing its products
because sales of such products are strengthened by ongoing personal contact
between retail consumers and distributors, many of whom use the Company's
products themselves. The Company encourages its distributors to use the
Company's products and to communicate the results of their use of such products
to their retail customers.

Distributors' earnings are derived from several sources. First,
distributors may earn profits by purchasing the Company's products at wholesale
prices (which are discounted 25% to 50% from suggested retail prices depending
on the distributor's level within the Company's distributor network) and selling
the Company's products to retail customers at retail prices. Second,
distributors may earn profits by selling products to distributors within their
downline organization who receive a lower discount percentage than the selling
distributor. Third, distributors who sponsor other distributors and establish
their own downline organizations may earn royalties of 1% to 5% on product sales
on each of up to three downline supervisor levels and production bonuses of 2%
to 6% on product sales within their downline organizations upon becoming a
qualifying "TAB Team" member (up to 7% for President Team members beginning
February 1, 1999). Combining these sources of earnings and including
participation in the President's Team bonus (as described below), the Company's
total "pay-out" in 1998 on products subject to distributor royalty overrides is
approximately 72% (73% beginning February 1, 1999) of the Company's suggested
retail sale price (i.e. 50% distributor allowance plus up to 22% (23% beginning
February 1, 1999) of suggested retail sales prices in royalty overrides and
similar bonuses, before reflecting a 6% handling fee (7% beginning February 1,
1999) charged to distributors by the Company).

Distributors earn the right to receive royalties 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 royalties) as a
member of the Global Expansion Team, the Millionaire Team or the President's
Team and thereby receive production bonuses (2%, 4% and 6% through January 31,
1999 and up to 7% beginning February 1, 1999). The Company believes that the
right of distributors to earn royalties and production bonuses contributes
significantly to the Company's ability to retain its most productive
distributors.

To become a distributor, a person must be sponsored by an existing
distributor and must purchase a distributor kit from the Company (except in
Korea, where there is no charge for a distributor kit). To become a supervisor
or qualify for a higher level, distributors must purchase a certain amount of
the Company's products or earn certain amounts of royalties during specified
time periods and must re-qualify for such levels once each year. To attain
supervisor status, generally, a distributor must purchase, either from the
Company or other distributors, products representing at least 4,000 volume
points in one month or 2,500 volume points in two consecutive months (volume
points are point values assigned to each of the Company's products that are
equal in all countries and are based on the suggested retail price of U.S.
products). Supervisors may then attain higher levels (i.e., the Global Expansion
Team, the Millionaire Team or the President's Team) by earning increasing
amounts of royalties based on purchases by distributors within their
organizations. Supervisors contribute significantly to the Company's sales and
certain key supervisors who have attained the
8
<PAGE> 11

highest levels within the Company's distributor network are responsible for
generating a substantial portion of the Company's sales and for recruiting a
substantial number of the Company's distributors.

The following table sets forth the approximate number of the Company's
supervisors at the dates indicated:

<TABLE>
<CAPTION>
FEBRUARY 28,*
---------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C>
Approximate Number of
Supervisors...................... 147,000 139,000 115,000 99,000 90,000
</TABLE>

- ---------------

* Every February 28th, the Company deletes 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
such time (including any supervisors who were deleted, but who subsequently
requalified). The Company relies on distributors' certifications as to the
amount and source of their product purchases from other distributors. Although
the Company applies certain review procedures with respect to such
certifications, they are not directly verifiable by the Company.

The Company also has two compensation and incentive programs designed to
motivate distributors at both the most senior and junior levels within the
Company's distributor network. The Company's most senior distributors consist of
approximately 397 distributors (as of December 31, 1998) who comprise the
President's Team and who work closely with Mark Hughes, CEO and President of the
Company, to develop and implement new initiatives and strategies for increasing
sales and distributor productivity throughout the Company's entire distributor
organization. Qualifying President Team members have the opportunity to
participate in the President's Bonus, which for 1998 consists of a total
available awards package of one percent of the Company's 1998 total product
retail sales, or approximately $15.7 million. The distribution of the
President's Bonus is determined by Mark Hughes and is based in part upon each
President Team member's participation in corporate-sponsored training and
motivational events. In this manner, the Company attempts to involve its most
senior distributors in the development and growth of the Company in order to
support the sales, training, motivation and strategic planning efforts of Mark
Hughes. In addition to these programs, the Company periodically offers a variety
of special promotions related to particular products or sales periods, involving
special cash bonuses and other awards, such as Get-A-Way vacations.

For the Company's most junior distributors, those who have not yet attained
supervisor status, the Company instituted a "Success Builder" program. This
program permits a distributor who purchases products representing 1,000 volume
points in one month to obtain a 42% distributor allowance from suggested retail
prices on the Company's products, rather than the standard 25%. In addition, in
1996, the Company introduced the Herbalife Advantage Program ("HAP"), which uses
a product brochure that enables the Company's junior distributors to obtain an
extra 10% distributor allowance over the standard 25% and to order products by
individual unit (rather than by cases) to better suit their inventory and usage
needs. The Success Builder and HAP programs are designed to provide incentives
to distributors who are in the initial stages of building distributor
organizations and to encourage them to reach supervisor status.

The Company seeks to expand its distributor base in each market by offering
distributors attractive compensation opportunities. The Company believes its
international sponsorship program provides a significant advantage to its
distributors as compared with distributors in certain other network marketing
organizations because the program permits distributors in any country to sponsor
distributors in other countries (where the Company is licensed to do business
and where the Company has obtained required product approvals) and to earn the
same level of royalties and bonuses on sales by those distributors as if both
distributors resided in the same country.

The Company maintains a computerized system for processing distributor
orders and calculating distributor royalties and bonus payments which enables it
to remit such payments promptly to distributors. The Company believes that
prompt remittance of royalties is vital to maintaining a motivated network of

9
<PAGE> 12

distributors and that its distributors' loyalty to the Company has been enhanced
by the Company's history of consistently making royalty and bonus payments on a
scheduled basis.

GEOGRAPHIC AREAS OF OPERATIONS

The following chart sets forth the countries in which the Company currently
operates, the year operations were commenced in each country and retail sales
information by country during the past five years.

<TABLE>
<CAPTION>
RETAIL SALES BY COUNTRY
TOTAL RETAIL SALES (IN THOUSANDS)
YEAR --------------------------------------------------------------
COUNTRY(1) ENTERED 1998 1997 1996 1995 1994
---------- ------- ---------- ---------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Australia............. 1982 $ 17,028 $ 20,644 $ 24,059 $ 30,803 $ 29,155
New Zealand........... 1988 1,757 1,802 1,799 2,535 3,206
Hong Kong............. 1992 34,709 21,808 11,698 10,783 5,323
Japan................. 1993 547,653 525,738 311,117 81,730 18,759
Philippines........... 1994 1,215 1,264 1,935 13,219 80
Taiwan................ 1995 44,503 47,644 26,226 4,424
South Korea........... 1996 30,928 14,631 1,951
Thailand.............. 1997 8,865 9,907
Indonesia(5).......... 1998 4,018
---------- ---------- ---------- -------- --------
ASIA/PACIFIC RIM:..... $ 690,676 $ 643,438 $ 378,785 $143,494 $ 56,523
---------- ---------- ---------- -------- --------
United Kingdom........ 1983 $ 13,794 $ 11,833 $ 12,487 $ 15,296 $ 30,769
Israel................ 1989 7,076 8,132 8,419 30,133 73,278
Spain................. 1989 10,681 9,371 9,792 15,730 30,733
France................ 1990 15,523 12,913 12,379 13,129 46,968
Germany............... 1991 55,492 44,059 54,340 115,555 159,482
Italy................. 1992 99,185 65,026 54,449 56,687 72,009
Portugal.............. 1992 5,182 3,545 3,097 8,934 11,073
Czech Republic........ 1992 20,153 14,758 13,733 15,112 24,423
Netherlands........... 1993 21,095 18,188 15,248 18,237 17,581
Belgium............... 1994 2,484 2,310 2,370 3,775 1,965
Poland................ 1994 13,917 13,883 16,218 6,238 792
Denmark............... 1994 5,827 4,699 3,747 11,263 2,377
Sweden................ 1994 19,269 21,061 16,488 17,845 1,799
Russia(3)............. 1995 96,661 157,819 142,078 29,593
Switzerland........... 1995 28,379 17,315 14,412 4,911
Austria............... 1995 13,434 10,076 7,385 3,134
Norway................ 1995 17,458 14,822 8,279 367
Finland............... 1995 9,559 9,073 14,702 300
South Africa(4)....... 1995 19,915 13,337 21,497 7,707
Greece................ 1996 2,224 898 227
Turkey(5)............. 1998 5,431
Botswana(4)(5)........ 1998 64
Lesotho(4)(5)......... 1998 40
Namibia(4)(5)......... 1998 250
Swaziland(4)(5)....... 1998 5
---------- ---------- ---------- -------- --------
EUROPE:............... $ 483,098 $ 453,118 $ 431,347 $373,946 $473,249
---------- ---------- ---------- -------- --------
United States......... 1980 $ 364,459 $ 298,661 $ 279,596 $333,595 $294,987
Canada................ 1982 21,269 17,452 13,848 12,042 10,789
Mexico................ 1989 24,404 15,973 11,590 15,125 25,422
Dominican Republic
(2)................. 1994 68 127 33 101 2,500
Venezuela............. 1994 5,464 3,667 5,568 11,152 1,527
Argentina............. 1994 6,161 4,784 3,185 10,006 19,061
Brazil................ 1995 45,835 50,094 76,192 24,183
Chile................. 1997 3,403 3,379
---------- ---------- ---------- -------- --------
THE AMERICAS:......... $ 471,063 $ 394,137 $ 390,012 $406,204 $354,286
---------- ---------- ---------- -------- --------
TOTAL RETAIL SALES.... $1,644,837 $1,490,693 $1,200,144 $923,644 $884,058
========== ========== ========== ======== ========
</TABLE>

10
<PAGE> 13

- ---------------
(1) The Company records sales data based on the country from which distributor
orders are shipped by the Company. Sales by distributors to other
distributors or retail consumers may occur in other countries, although such
sales generally violate geographic limitations imposed by the Company on
product sales.

(2) Sales in the Dominican Republic are shipped from the United States.

(3) The Company operates through various import/export companies located in
Russia to conduct transactions in the Company's products with Russian
distributors.

(4) South African, Botswana, Lesotho, Namibia and Swaziland sales are included
in the European region.

(5) The Company initiated operations in Turkey and Indonesia in the first and
third quarters of 1998, respectively. Botswana, Lesotho, Namibia and
Swaziland were all initiated in the fourth quarter of 1998.

Geographic Sales Trends. The opening of new markets is an important
component of the Company's business strategy. From January 1, 1994 through
December 31, 1998, the Company commenced operations in 26 new countries. In
1998, these countries contributed $385 million of retail sales, representing 23%
of the Company's total retail sales. Consistent with its growth strategy, the
Company opened markets in Turkey, Indonesia, Botswana, Lesotho, Namibia and
Swaziland in 1998 and plans to open India, Iceland and the Slovak Republic in
1999, together with Jamaica, which just opened. Additional new markets currently
under consideration include China, Morocco, Colombia and Ecuador.

After entering a new country, the Company has in many instances experienced
an initial period of rapid growth in sales as new distributors were recruited,
followed by a decline in sales. The Company believes that a significant factor
affecting these markets has been the opening of other new markets within the
same geographic region or with the same or similar language or cultural bases
and the corresponding tendency of some distributors to focus their attention on
the business opportunities provided by new markets instead of developing their
established downline organizations in existing markets. Additionally, in certain
instances, the Company has become aware that certain sales in certain existing
markets were attributable to purchasers who distributed such product in
countries which had not yet been opened. When these countries were opened, such
sales in existing markets shifted to the newly opened markets, resulting in a
decline in sales in the existing markets. In determining when and where to open
new markets, the Company will continue to seek to minimize the impact on
distributor focus in existing markets and to ensure that adequate distributor
support services and other Company systems are in place to support the growth.

Another significant factor contributing to such sales declines is the
adverse publicity that sometimes arises when the Company experiences rapid
growth within a market, thus drawing the attention of the media and the
Company's competitors. The Company believes such unfavorable press reports are
generally based upon a lack of familiarity with the Company and its network
marketing system and often originate from competitive forces in the local
market. For instance, in France in late 1994 through 1995, certain reports
erroneously alleged that the Company was in some manner affiliated with a
disfavored religious group. In other cases, including a situation in France that
resulted in the arrest of certain Herbalife distributors, adverse publicity has
arisen from allegations of tax improprieties, which typically occur when a
country applies its tax laws for the first time to a sales and distribution
system that is relatively new to that country, as is often the case with the
Company's network marketing system. See "-- Regulation -- Transfer Pricing and
Similar Regulations." The effect of occasional adverse publicity has at times
also led to increased regulatory scrutiny in certain countries, which may also
have an adverse effect on sales. For example, during the third quarter of 1995,
the Company received inquiries from certain governmental agencies within Germany
and Portugal related to the Company's product, Thermojetics(R) Instant Herbal
Beverage. The inquiries related to the caffeine content of the product and the
status of the product as an "instant tea," which was disfavored by the
regulators, versus a "beverage." The sale of this product in these countries was
subsequently suspended by the Company at the request of the regulators. The
Company may in the future attempt to reintroduce the product as a "beverage" in
one or both of these markets.

Management continually seeks to revitalize sales in markets, such as
France, Germany and Spain, that have experienced an initial period of growth
followed by a leveling off or decline in sales, including by providing extensive
training and motivational program support to distributors. In addition, the
Company has

11
<PAGE> 14

created regional planning and strategy groups that include senior members of the
Company's distributor base, increased focus and budgets for governmental
relations and hired additional distributor support representatives. The Company
also seeks to introduce annually in each targeted market additional products not
previously offered. In certain markets, the Company has enhanced its presence
and visibility by opening new, more attractive and conveniently located
distributor sales centers. The Company believes that these initiatives favorably
impact operations and the Company will continue to deploy these initiatives in
an effort to provide a platform for renewed growth.

Asia/Pacific Rim. Retail sales in Asia/Pacific Rim increased $47.2 million
or 7.3% during 1998 as compared to the prior year. The increase resulted from
strong retail sales in Japan, Hong Kong and South Korea. South Korea and Hong
Kong increased retail sales to $30.9 million and $34.7 million, respectively,
representing a 111% and 59% increase over 1997. In Japan retail sales increased
4% to $547.7 million. Retail sales in other Asia/Pacific Rim countries decreased
5% or $3.9 million compared to 1997.

Europe. Retail sales in Europe increased $30.0 million or 6.6% in 1998 as
compared to the prior year. Within the region, retail sales in Italy increased
53% to $99.2 million, Germany increased 26% to $55.5 million and Switzerland
increased 64% to $28.4 million. These gains were offset by a weakening in Russia
where retail sales decreased 39% to $96.7 million. During the 1998 third and
fourth quarters, retail sales in Russia decreased by 61% and 87%, respectively,
compared to the corresponding quarters in 1997. Excluding Russia, retail sales
in Europe increased 31%.

The Americas. Retail sales in the Americas increased $76.9 million, or
19.5% in 1998 as compared to the prior year. The increase in retail sales
primarily resulted from retail sales increases in the United States, Canada and
Mexico of $65.8 million, $3.8 million and $8.4 million, respectively. Partially
offsetting these increases was a decline in Brazil of $4.3 million, or 9%.

The Company is exposed to risks associated with the current economic and
currency crises in Russia, Brazil and parts of Asia. Because of the significance
of these markets, a sustained economic slowdown and/or currency crisis could
have a material adverse impact on the Company's business. It is not possible for
the Company to predict the future economic climate in these markets.

New Market Expansion Program. The Company engages in a structured and
thorough analysis of potential new markets, including analysis of regulatory
conditions, product approval procedures, competitive forces, synergies between
new and existing countries and distributor presence or interest in new markets,
before selecting markets to enter. When the Company decides to enter a new
market, it first hires local legal counsel with expertise in the product
approval process to help ensure that the Company's network marketing system and
products comply with all applicable regulations and that the Company's profits
may be expatriated. In addition, local counsel helps to establish favorable
public relations in the new market by acting as an intermediary between the
Company and local regulatory authorities, public officials and business people.
Local counsel is also responsible for explaining the Company's products and
product ingredients to appropriate regulators and, when necessary, arranging for
local technicians to conduct required ingredient analysis tests of the Company's
products. In recent years, the Company has expanded its hiring of local firms
with experience in governmental relations and public relations prior to opening
a market in order to ensure a more favorable business environment upon entering
the market.

Where regulatory approval in a foreign market is required, the Company's
local counsel work with regulatory agencies to confirm that all of the
ingredients of the Company's products are permissible within the new market.
During the regulatory compliance process, the Company may alter the formulation,
packaging or labeling of its products to conform to applicable regulations as
well as local variations in customs and consumer habits, and the Company may
modify certain aspects of it network marketing system as necessary to comply
with applicable regulations. Where reformulations of the Company's principal
weight management products are required, the Company has historically found
substitute or replacement ingredients to be readily available, although there
can be no assurance in this regard in the future. Where regulatory approval in a
foreign market is not required, the Company obtains the favorable opinion of
local counsel as to compliance with all applicable regulations. See
"-- Regulation."

12
<PAGE> 15

Following completion of the regulatory compliance phase, the Company
undertakes the steps necessary to meet the operational requirements of the new
market. The Company has recently developed a centralized distribution and
telephone ordering system. In the majority of its new markets, the Company
establishes a storefront sales center in one or more major cities and provides
for product purchases by telephone. Product is shipped to the purchaser from a
warehouse located in the general geographic region. In addition, the Company
initiates plans to satisfy the inventory, personnel and transportation
requirements of the new market, and the Company modifies its distributor
manuals, cassette recordings, video cassettes and other training materials as
necessary to be suitable for the new market. In certain instances where the
Company has achieved rapid sales growth in a new market, such as in Japan, the
Company has experienced inventory shortages as a result of the large demand for
the Company's products.

Although the Company intends to expand into new markets, there can be no
assurance that the Company can open markets on a timely basis or that such new
markets will prove to be profitable. Significant regulatory and legal barriers
must be overcome before marketing can begin in any new market. In addition,
expansion of the Company's operations into new markets entails substantial
working capital and capital expenditure requirements associated with both the
regulatory compliance and operations phases of the process. The lead-time and
costs associated with opening anticipated new markets may significantly exceed
those of entering new markets in the past due to greater regulatory barriers,
the necessity of adapting to entirely new regulatory systems and problems
related to entering new markets with different cultural bases and political
systems from those encountered in the past. The lead-time necessary to open a
new market is generally up to two years but may be more.

PRODUCT DISTRIBUTION

The Company's weight management products, food and dietary supplements and
some personal care products are distributed to foreign markets either from the
facilities of the Company's manufacturers or from the Company's Los Angeles
distribution center. Products are distributed in the United States market from
the Los Angeles distribution center or from the Company's Memphis distribution
center. Products are generally transported by cargo ship or plane to the
Company's international markets and are warehoused in either one of the
Company's 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. The Company's Dermajetics(R) personal care 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 ship or plane to other international markets occurs. The
Company's new line of color cosmetics products are being manufactured in Italy
and Germany.

Beginning in 1996 and continuing in 1997 and 1998, the Company undertook
the process of reconfiguring its European product distribution system. As a part
of this process, the Company has reduced the number of European warehousing
facilities from nine to five and has opened new distribution sales centers.
These sales 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 Herbalife's products, marketing system and upcoming events. In
addition, the Company has opened a central sales ordering facility in the United
Kingdom for answering and processing telephone orders from other European
countries. Operators at this center are capable of conversing in 17 different
languages. As part of this reconfiguration, the Company also implemented a new
inventory management system and established a new centralized warehouse facility
in Venrey, Netherlands. Management anticipates that the reconfigured European
distribution system, featuring centralized distribution and telephone ordering
systems coupled with convenient storefront distributor service centers, will be
the model for developing distribution and distributor service systems in other
regions of the world.

MANAGEMENT INFORMATION AND TELECOMMUNICATIONS SYSTEMS

In order to facilitate its continued growth and support distributor
activities, the Company continually upgrades its management information and
telecommunications systems. These systems include, among other things: (i) a
centralized host computer located in the Company's Inglewood, California
Operations Center,
13
<PAGE> 16

which is linked to Herbalife's international markets through a dedicated wide
area network that provides on-line, real-time computer connectivity and access;
(ii) local area networks of personal computers within Herbalife's markets,
serving the Company's regional administrative staffs; (iii) an international
e-mail system through which Herbalife employees communicate; (iv) a standardized
Northern Telecom Meridian telecommunications system connecting all of the
Company's markets; and (v) an inventory management system that has been
installed in the U.S., Japan and in most other significant distribution centers.
These systems are designed to provide, among other things, financial and
operating data for management, timely and accurate product ordering, royalty
payment processing and inventory management and detailed distributor records.
During 1996, 1997 and 1998, the Company has invested in excess of $23 million to
enhance its computer and telecommunications systems. Additional significant
expenditures, including those to address computer system upgrades and Year 2000
compliance, are planned for the next several years. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."

REGULATION

In both its United States and foreign markets, the Company is subject to
and affected by extensive laws, governmental regulations, administrative
determinations, court decisions and similar constraints (as applicable, at the
federal, state and local levels) including, among other things, regulations
pertaining to (i) the formulation, manufacturing, packaging, labeling,
distribution, importation, sale and storage of the Company's products, (ii)
product claims and advertising (including direct claims and advertising by the
Company as well as claims and advertising by distributors, for which the Company
may be held responsible), (iii) the Company's network marketing system, (iv)
transfer pricing and similar regulations that affect the level of foreign
taxable income and customs duties, and (v) taxation of distributors, which in
some instances may impose an obligation on the Company to collect the taxes and
maintain appropriate records.

Products. The formulation, manufacturing, packaging, storing, labeling,
advertising, distribution and sale of the Company's products are subject to
regulation by one or more governmental agencies, including the Food and Drug
Administration ("FDA"), the Federal Trade Commission ("FTC"), the Consumer
Product Safety Commission ("CPSC"), the United States Department of Agriculture
("USDA"), the Environmental Protection Agency ("EPA") and the United States
Postal Service. The Company's activities are also regulated by various agencies
of the states, localities and foreign countries in which the Company's products
are manufactured, distributed and sold. The FDA, in particular, regulates the
formulation, manufacture and labeling of foods, dietary supplements and OTC
drugs, such as those distributed by the Company. FDA regulations require the
Company and its suppliers to meet relevant good manufacturing practice ("GMP")
regulations for the preparation, packing and storage of these products. GMP's
for dietary supplements have yet to be promulgated but are expected to be
proposed.

The 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, the Company believes, is
generally favorable to the dietary supplement industry. The legislation creates
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 certain
limitations, dietary ingredients that were on the market before October 15,
1994. A dietary supplement which contains a new dietary ingredient (i.e., one
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 of dietary supplements that make certain types of
statements on dietary supplements, including certain product performance claims,
must have substantiation that such statements are truthful and not misleading.

The majority of the products marketed by the Company are classified as
dietary supplements under the FFDCA. In addition, the adoption of new
regulations in the United States or in any of the Company's international
markets, or changes in the interpretation of existing regulations, could have a
material adverse effect on the Company. In September 1997, the FDA issued
regulations governing the labeling and marketing of dietary supplement products.
The regulations cover: 1) the identification of dietary supplements and their
nutrition and ingredient labeling; 2) the terminology to be used for nutrient
content claims, health content
14
<PAGE> 17

claims, and statements of nutritional support; 3) labeling requirements for
dietary supplements for which "high potency" and "antioxidant" claims are made;
4) notification procedures for statements on dietary supplements; and 5)
premarket notification requirements for new dietary ingredients in dietary
supplements. The notification procedures became effective in November 1997,
while the new labeling requirements became effective in March 1999. The Company
was required to revise a substantial number of its product labels by the
effective date. The Company does not expect the cost or impact of such actions
to be material. In addition, the Company is required to continue its ongoing
program of securing substantiation of its product performance claims and of
notifying the FDA of certain types of performance claims made for its products.
On various occasions, the FDA has objected to certain proposed performance
claims by way of "courtesy letters" to the Company. Generally, the Company has
revised its product claims to reflect the FDA's comments.

In addition, in certain markets, including the United States, claims made
with respect to weight management, dietary supplement, personal care or other
products of the Company may change the regulatory status of the products. In the
U.S., for example, it is possible that the FDA could take the position that
claims made for certain of the Company's products place those products within
the scope of an FDA "over-the counter" (OTC) drug monograph. OTC monographs
prescribe permissible ingredients and appropriate labeling language, and require
the marketer or supplier of the products to register and file annual drug
listing information with the FDA. A limited number of the products sold by the
Company are labeled as OTC monograph drugs, and the Company believes that it is
in compliance with the applicable monographs. In the event that the FDA asserted
that product claims for other products caused them to fall within the scope of
OTC monographs, the Company would be required either to comply with the
applicable monographs or change the claims made in connection with the products.
There can be no assurance that the Company could do so effectively, or that any
such changes would not adversely affect sales and marketing of an affected
product. The Company's substantiation program involves compiling and reviewing
the scientific literature pertinent to the ingredients contained in the
Company's products.

As a marketer of food and dietary supplements and other products that are
ingested by consumers, the Company is subject to the risk that one or more of
the ingredients in its products may become the subject of adverse regulatory
action. For example, one of the ingredients in the Thermojetics(R) original
green herbal tablet is a Chinese herb, Ma Huang, which contains naturally
occurring ephedrine in small quantities. Ephedrine products have been the
subject of adverse publicity in the United States and other countries relating
to alleged harmful effects, including the deaths of several individuals.
Currently, the Company offers the Thermojetics(R) original green herbal tablet
only in the United States (except in certain states in which regulations may
prohibit or restrict the sale of such product). In response to potential federal
regulatory proposals that may have affected the sale of the Thermojetics(R)
original green tablets in the United States, the Company suspended sales of the
product for approximately three months commencing in July 1995 and introduced a
reformulated herbal green tablet that did not contain Ma Huang. When no such
regulations were proposed or issued at that time, the Company renewed sales of
Thermojetics(R) original green herbal tablets in the United States in October
1995 (except in certain states in which regulations may prohibit or restrict the
sale of such product). During the three-month suspension period, the Company did
not experience a material change in the level of sales of the reformulated
Thermojetics(R) green tablets versus sales of the Thermojetics(R) original green
tablets in the recently preceding months. However, it is possible that a longer
suspension period could have resulted in a decrease in sales of the reformulated
Thermojetics(R) green tablets or other products within the Thermojetics(R)
Weight Management System (even though such products do not contain Ma Huang).
The Thermojetics(R) green tablets accounted for approximately 2% of retail sales
in 1997 and 1998, although the marketing of the Thermojetics(R) weight
management tablets (original green, green, beige and yellow) and other products
in the Thermojetics(R) line have contributed significantly to the Company's
retail sales. The Company also previously offered the Thermojetics(R) original
green herbal tablet in Canada but, in response to Canadian marketing issues and
regulatory concerns, the Company suspended sales of the product in February
1994.

The FDA has on record a small number of reports of adverse reactions
allegedly resulting from the ingestion of Ma Huang contained in the Company's
Thermojetics(R) original green tablet. The Company has not received any
communications from the FDA with respect to these reports. However, many other

15
<PAGE> 18

companies manufacture products containing various amounts of Ma Huang and the
FDA has on record hundreds of reports of adverse reactions to these products.
The Company is a defendant in two legal actions by individuals claiming that
ingestion of Thermojetics(R) original green tablets caused them to suffer
medical problems. The Company believes that it has substantial defenses to these
actions and that the matters are not material. On April 10, 1996, the FDA issued
a statement warning consumers not to purchase or ingest dietary supplements
containing ephedrine that are claimed to produce such effects as euphoria,
heightened awareness, increased sexual sensations or increased energy, because
these products pose significant adverse health risks, including dizziness,
headache, gastrointestinal distress, irregular heartbeat, heart palpitations,
heart attack, strokes, seizures, psychosis and death. The Company does not
market its Ma Huang product with any of these claims. On June 4, 1997, the FDA
issued a proposed regulation for dietary supplements containing ephedrine
alkaloids. The proposed regulation would prohibit dietary supplements containing
eight milligrams or more of ephedrine alkaloids per serving, and would not
permit such products to contain any other stimulant, diuretic, or laxative
ingredients. In addition, labeling of supplements would be prohibited from
suggesting or recommending conditions of use that would result in an intake of
eight milligrams or more of ephedrine alkaloids within a six-hour period, or a
total daily intake of 24 milligrams or more. The FDA proposal would also require
a warning not to take the product for more than seven days, and would prohibit
the supplements from being represented, either expressly or implicitly, as being
suitable for long-term uses, such as for weight loss or body building.
Similarly, claims for increased energy, increased mental concentration, or
enhanced well-being that encourage the consumer to take more of the product to
achieve more of the purported effect would be required to be accompanied by a
warning stating that taking more than the recommended serving may cause a heart
attack, stroke, seizure, or death.

Although tests performed by an independent laboratory indicate that the
Company's original green Thermojetics(R) product contains less than the eight
milligrams of ephedrine alkaloids per serving permitted under the FDA proposal,
the Company is reviewing the possible impact of the FDA proposal, if it is
finalized in its current form, upon the Company's continued marketing of its
Thermojetics(R) original green tablet. In response to the proposal, or to a
final regulation which is substantially similar to the proposal, the Company may
be required to: (i) withdraw or reformulate its product with reduced ephedrine
levels, or with a substitute for Ma Huang, (ii) relabel its product with
different warnings or revised directions for use, (iii) not make certain
statements, possibly including weight loss, with respect to any product
containing Ma Huang and/or (iv) withdraw its product from the weight management
program and reposition it in a different category. Even in the absence of an FDA
final regulation, the Company may elect to reformulate and/or relabel its
product containing Ma Huang. While the Company believes that its Ma Huang
product could be reformulated and relabeled, there can be no assurance in that
regard or that reformulation and/or relabeling would not have an adverse effect
on sales of such product or related products within the Thermojetics(R) Weight
Management Program, even though such products do not contain Ma Huang. During
1998 and 1997 the Company's weight management products contributed 31.2% and
30.1%, respectively, of total sales.

Some of the products marketed by the Company are considered conventional
foods and are currently labeled as such. Both this category of products and
dietary supplements are subject to the Nutrition, Labeling and Education Act
("NLEA"), and regulations promulgated thereunder, which regulates health claims,
ingredient labeling and nutrient content claims characterizing the level of a
nutrient in the product.

In foreign markets, prior to commencing operations and prior to making or
permitting sales of its products in the market, the Company may be required to
obtain an approval, license or certification from the country's ministry of
health or comparable agency. Where a formal approval, license or certification
is not required, the Company nonetheless seeks a favorable opinion of counsel
regarding the Company's compliance with applicable laws. Prior to entering a new
market in which a formal approval, license or certificate is required, the
Company works extensively with local authorities in order to obtain the
requisite approvals. The approval process generally requires the Company 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. Such approvals may be conditioned on reformulation of the
Company's products or may be unavailable with respect to certain products or
certain ingredients. Product reformulation or the inability to introduce certain
products or ingredients into a particular market may have an adverse effect on
sales. The Company must also

16
<PAGE> 19

comply with product labeling and packaging regulations that vary from country to
country. The Company's failure to comply with such regulations can result in,
among other things, a product being removed from sale in a particular market,
either temporarily or permanently.

The FTC, which exercises jurisdiction over the advertising of all the
Company's products, has in the past several years instituted enforcement actions
against several dietary supplement companies for false and misleading
advertising of certain products. These enforcement actions have 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 are
utilized by the Company. While the Company has not been the target of FTC
enforcement action for the advertising of its products, there can be no
assurance that the FTC will not question the Company's advertising or other
operations in the future. In November of 1998 the FTC issued a guide for the
dietary supplement industry, describing how the FTC applies the law which it
administers to dietary supplements advertisements. It is unclear whether the FTC
will subject such advertisements, including those of the Company, to increased
surveillance to ensure compliance with the principles set forth in the guide.

In certain countries, the Company may also be affected by regulations
applicable to the activities of its distributors because in some countries the
Company is, or regulators may assert that the Company is, responsible for its
distributors' conduct, or such regulators may request or require that the
Company take steps to ensure its distributors' compliance with regulations. The
types of regulated conduct include, among other things, representations
concerning the Company's products, income representations made by the Company
and/or distributors, public media advertisements (which in foreign markets may
require prior approval by regulators) and sales of products in markets in which
such products have not been approved, licensed or certified for sale. In certain
markets, it is possible that improper product claims by distributors could
result in the Company's products being reviewed or re-reviewed by regulatory
authorities and, as a result, being classified or placed into another category
as to which stricter regulations are applicable. In addition, certain labeling
changes might be required.

Through its manuals, seminars and other training materials and programs,
the Company attempts to educate its distributors as to the scope of permissible
and impermissible activities in each market. The Company also investigates
allegations of distributor misconduct. However, the Company's distributors are
generally independent contractors, and the Company is not able to monitor
directly all distributor activities. As a consequence, there can be no assurance
that the Company's distributors comply with applicable regulations. Misconduct
by distributors has in the past and could again have a material adverse effect
on the Company in a particular market or in general.

The Company is unable to predict the nature of any future laws,
regulations, interpretations or applications, nor can it predict what effect
additional governmental regulations or administrative orders, when and if
promulgated, would have on its business in the future. They could, however,
require the reformulation of certain products not able to be reformulated,
imposition of additional recordkeeping requirements, expanded documentation of
the properties of certain products, expanded or different labeling and
additional scientific substantiation regarding product ingredients, safety or
usefulness. Any or all such requirements could have a material adverse effect on
the Company's results of operations and financial condition. All of the officers
and directors of the Company are subject to a permanent injunction entered 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. The Company consented to the entry of this injunction without
in any way admitting the allegations of the complaint. The injunction prevents
the Company and such officers and directors from making certain specified claims
in future advertising of the Company's products and requires the Company to
implement certain documentation systems with respect to payments to the
Company's distributors. At the same time, the injunction does not prevent the
Company from continuing to make certain specified claims concerning its products
which have been and are being made, provided that it has a reasonable basis for
making such claims.

17
<PAGE> 20

nisms" ("GMOs"). In some markets, the possibility of health risks thought to be
associated with GMOs has prompted proposed or actual governmental regulation. A
number of the Company's products contain substances that would or might be
classified as GMOs. The Company cannot anticipate the extent to which
regulations in its markets will restrict the use of GMOs in its products or the
impact of such regulations on the Company's business in those markets. In
response to any applicable regulations, the Company would, where practicable,
attempt to reformulate its products to satisfy such regulations, and the Company
believes, based upon currently available information, that compliance with
regulatory requirements in this area should not have a material adverse effect
on the Company or its business. However, because publicity and governmental
scrutiny of GMOs is a relatively new and evolving area, there can be no
assurance in this regard.

Network Marketing System. The Company's network marketing system 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 are
generally directed at ensuring that product sales are ultimately made to
consumers and that advancement within such organizations be based on sales of
the organizations' products rather than investments in the organizations or
other non-retail sales related criteria. For instance, in certain markets there
are limits on the extent to which distributors may earn royalties on sales
generated by distributors that were not directly sponsored by the distributor.
Where required by law, the Company obtains regulatory approval of its network
marketing system or, where such approval is not required, the favorable opinion
of local counsel as to regulatory compliance. However, the Company remains
subject to the risk that, in one or more of its markets, its marketing system
could be found not to be in compliance with applicable regulations. Failure by
the Company to comply with these regulations could have a material adverse
effect on the Company in a particular market or in general. See "-- Product
Distribution."

The Company is also subject to the risk of private party challenges to the
legality of its network marketing system. 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 challenged in a
class action by certain Omnitrition distributors who alleged that Omnitrition
was operating an illegal "pyramid scheme" in violation of federal and state
laws. The Company was recently named as a defendant in a case that, among other
things, attempts to challenge the legality of the Company's marketing system on
similar grounds. See "Legal Proceedings." The Company believes that its network
marketing system 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 the Company's marketing system
and that described in the Omnitrition case. Further, it is an ongoing part of
the Company's business to monitor and respond to regulatory and legal
developments, including those that may affect its network marketing system.
However, the regulatory requirements concerning network marketing systems do not
include "bright line" rules and are inherently fact-based. An adverse judicial
determination with respect to the Company's network marketing system could have
a material adverse effect on the Company. Among other things, such a
determination could require the Company to make modifications to its network
marketing system, result in negative publicity or 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 the Company, could have a material adverse effect on the Company.

Transfer Pricing and Similar Regulations. In many foreign countries, the
Company is subject to transfer pricing regulations, restrictions on management
fees charged by the Company to its local subsidiary and similar regulations and
restrictions designed to ensure that appropriate levels of income are reported
as earned by the local subsidiary and taxed by the foreign governmental
authorities. In addition, the Company's operations in foreign countries are
subject to regulations designed to ensure that appropriate levels of customs
duties are assessed on the importation of the Company's products.

While the Company believes it is in substantial compliance with all
applicable regulations and restrictions, it is subject to the risk that foreign
governmental authorities could audit its transfer pricing and related practices
and asserts that additional taxes are owed. For example, the Company is
currently subject to pending or proposed audits which are at various levels of
review, assessment or appeal in a number of foreign jurisdictions, including
Italy and France, involving transfer pricing issues, income taxes, value added
taxes,
18
<PAGE> 21

withholding taxes and related interest and penalties in material amounts. In
certain circumstances, additional taxes, interest and penalties have been
assessed, and the Company will be required to litigate to reverse the
assessments. In addition, Italian criminal tax proceedings are pending against
the former managing director of the Company's Italian subsidiary in his capacity
as such with respect to certain tax issues affecting the Company (and not
affecting distributors or the taxation of distributors). The Company has been
advised by its Italian tax counsel that referral of tax charges to criminal
authorities in Italy is a relatively common procedure (pursuant to statutory
provisions requiring referral of specific types of claims based upon the amounts
thereof) and in any event believes that the Company has strong defenses to the
charges. None of the pending or proposed audits, assessments or litigation is
expected to have a material adverse effect on the Company. However, ultimate
resolution of these matters may take several years and the outcome is uncertain.

In the event that such audits or assessments are concluded adversely to the
Company, the Company believes that it may be able to offset or mitigate the
consolidated effect of foreign tax assessments through the use of U.S. foreign
tax credits. Currently, the foreign tax credits are being fully utilized, so
that additional such credits might not be usable to offset current taxes.
Further, because the laws and regulations governing U.S. foreign tax credits are
complex and depend, among other things, on tax treaties with foreign nations in
addition to U.S. tax laws, there can be no assurance that the Company would in
fact be able to take advantage of any such foreign tax credits in the future.

Other Regulations. The Company is also subject to a variety of other
regulations in various foreign markets, including regulations pertaining to
social security assessments and value added taxes, employment and severance pay
requirements, import/export regulations and antitrust issues. As an example, in
many markets, the Company is substantially restricted in the amount and types of
rules and termination criteria that it can impose on distributors without
causing social security assessments to be payable by the Company on behalf of
such distributors and without incurring severance obligations to terminated
distributors. In some countries, the Company may be subject to such obligations
in any event.

Failure by the Company to comply with such regulations could have a
material adverse effect on the Company in a particular market or in general.
Such assertions or the effect of adverse regulations in one market could
adversely affect the Company 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, the Company, its products and
its network marketing system 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, the Company 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 its manuals, seminars and other training
programs and materials, the Company emphasizes that distributors are prohibited
from making therapeutic claims for the Company's products.

The Company's general policy regarding acceptance of distributor
applications from individuals who do not reside in one of the Company's markets
is to refuse to accept such 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 the Company and its
distributors, the Company conducts considerable research into the applicable
regulatory framework (typically, with the assistance of local legal counsel and
other representatives) prior to entering any new market to identify all
necessary licenses and approvals and applicable limitations on the Company's
operations in that market. The Company devotes substantial resources to
obtaining such licenses and approvals and bringing its operations into
compliance with such limitations. The Company also researches laws applicable to
distributor operations and revises or alters its distributor manuals and other
training materials and programs to provide distributors with guidelines for
operating a business, marketing and distributing the Company's products and
similar matters, as required by applicable regulations in each market. The
Company, however, is unable to monitor its supervisors and distributors
effectively to ensure that they refrain from distributing the Company's products
in countries

19
<PAGE> 22

where the Company has not commenced operations, and the Company does not devote
significant resources to such monitoring.

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

It is an ongoing part of the Company's business to anticipate and respond
to such new and changing regulations and make corresponding changes in the
Company's operations to the extent practicable. In furtherance of these efforts,
in 1994 the Company formed its Government Relations Group, currently consisting
of 14 employees, and in 1995 created the position of Chief International
Counsel. The Company has budgeted approximately $6.1 million to government
relations activities worldwide for 1999. The Company's Government Relations
Group and international legal personnel seek to establish relationships with
regulators and community leaders in both new and existing markets and strive to
ensure that the Company's products and network marketing system comply with
regulatory requirements. However, while the Company devotes considerable
resources to maintaining its compliance with regulatory constraints in each of
its markets, there can be no assurance that the Company would be found to be in
full compliance with applicable regulations in all of its markets at any given
time or that the regulatory authorities in one or more markets will not assert,
either retroactively or prospectively or both, that the Company's operations are
not in full compliance. Such assertions or the effect of adverse regulations in
one market could negatively affect the Company 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. Such assertions could
have a material adverse effect on the Company in a particular market or in
general. Furthermore, depending upon the severity of regulatory changes in a
particular market and the changes in the Company's operations that would be
necessitated to maintain compliance, such changes could result in the Company
experiencing a material reduction in sales in such market or determining to exit
such market altogether. In such event, the Company would attempt to devote the
resources previously devoted to such market to a new market or markets or other
existing markets, but there can be no assurance that such transition would not
have an adverse effect on the Company's business and results of operations
either in the short or long term.

TRADEMARKS

The Company uses the umbrella trademarks Herbalife(R), Thermojetics(R),
Dermajetics(R) and several other trademarks and tradenames in connection with
its products and operations. Trademark registrations are either issued or
pending in the United States Patent and Trademark Office and in comparable
agencies in many other countries. The Company considers its trademarks and
tradenames to be an important factor in its business. The Company's product
formulations are not protected by patents and are generally not patentable.

COMPETITION

The Company is subject to significant competition for the recruitment of
distributors from other network marketing organizations, including those that
market weight management products, food and dietary supplements and personal
care products, as well as other types of products. Some of the Company's
competitors are substantially larger and have available considerably greater
financial resources than the Company. The Company's ability to remain
competitive depends, in significant part, on the Company's success in recruiting
and retaining distributors through an attractive compensation plan and other
incentives. The Company believes that its production bonus program,
international sponsorship program and other compensation and incentive programs
provide its distributors with significant earning potential. However, there can
be no assurance that the Company's programs for recruitment and retention of
distributors will be successful.

20
<PAGE> 23

In addition, the business of marketing weight management, food and dietary
supplement and personal care 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, the
Company's ability to remain competitive depends in part upon the successful
introduction of new products.

EMPLOYEES

As of December 31, 1997 and 1998, the Company had 1,459 and 1,742 full-time
employees, respectively. These numbers do not include the Company's
distributors, who generally are independent contractors rather than employees of
the Company. The Company considers its employee relationships to be
satisfactory. Except for certain employees in Mexico, none of the Company's
employees is a member of any labor union, and the Company has never experienced
any business interruption as a result of any labor disputes.

ITEM 2. PROPERTIES

The Company leases all of its physical properties located in the United
States. The Company's executive offices, re-located to Century City, California
in February 1996, include approximately 87,000 square feet of general office
space under a lease that expires in January 2006. The Company leases an
aggregate of approximately 183,000 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
146,000 square feet of warehouse space in two separate facilities located in Los
Angeles and Memphis. The Los Angeles and Memphis agreements have terms through
June 2001 and August 2006, respectively. The Company also leases warehouse and
office space in a majority of its other geographic areas of operation. The
Company believes that its existing facilities are adequate to meet its current
requirements and that comparable space is readily available at each of these
locations.

ITEM 3. LEGAL PROCEEDINGS

The Company is from time to time engaged in routine litigation. The Company
regularly reviews all pending litigation matters in which it is involved and
establishes reserves deemed appropriate by management for such litigation
matters.

On December 16, 1998, Moshe and Dorit Miron, two Israeli distributors of
the Company, filed a lawsuit in the United States District Court for the
Northern District of California, in which the Company is the named defendant
(the "Miron Suit"). Although the Miron Suit is in its early pleading stages and
it is difficult to ascertain what causes of action the plaintiffs are attempting
(or have the right) to allege against the Company, the case appears to be
primarily a claim for breach of contract. In addition, the Miron Suit appears to
attempt to challenge the legality of the Company's marketing system. See
"-- Regulation -- Network Marketing System." The Company believes that it has
meritorious defenses to the allegations that appear to be asserted against the
Company. Due to the uncertainty inherent in any litigation and the early stage
of this proceeding, however, there can be no assurances that the Company will
obtain a favorable resolution of the Miron Suit or that an adverse disposition
of the case would not have a material adverse effect on the Company.

Other than as disclosed herein, the Company believes that no litigation
currently pending against it will have a material adverse effect on its
consolidated financial position and results of operations. See
"-- Regulation -- Transfer Pricing and Similar Regulations" for a discussion of
certain pending tax matters.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

21
<PAGE> 24

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

PRICE RANGE OF COMMON STOCK

The Company's Common Stock has been quoted on the NASDAQ National Market
System since April 21, 1992. The Old Common Stock was quoted under the symbol
"HERB." As a result of the Recapitalization (including a related Class B Stock
dividend), as of December 12, 1997, the Old Common Stock was effectively split
into Class A Stock and the Class B Stock. The Class A Stock and the Class B
Stock have been quoted on the NASDAQ National Market System under the symbols
"HERBA" and "HERBB," respectively, since December 15, 1997. The table below sets
forth, for the periods indicated, the high and low sales prices of the Old
Common Stock, and, commencing December 15, 1997, the Class A Stock and the Class
B Stock, as reported on the NASDAQ National Market System. The sales prices in
the table were taken from a written summary provided to the Company by NASDAQ.
Prices reflect inter-dealer prices, without retail mark-up, mark-down or
commission and may not represent actual transactions.

<TABLE>
<CAPTION>
CLASS A STOCK CLASS B STOCK
-------------- --------------
HIGH LOW HIGH LOW
----- ----- ----- -----
<S> <C> <C> <C> <C>
1997
First Quarter................................... $37 3/4 $14 3/4
Second Quarter.................................. 21 1/8 15 3/4
Third Quarter................................... 26 1/4 14 7/8
Fourth Quarter through December 12, 1997........ 27 7/8 19 1/4
Fourth Quarter commencing December 15, 1997..... $24 $20 1/2 $23 $20
1998
First Quarter................................... $28 5/8 $19 7/16 $27 1/4 $17 3/4
Second Quarter.................................. 29 21 1/2 26 7/8 19 1/8
Third Quarter................................... 28 1/2 8 7/8 23 7/8 6 5/8
Fourth Quarter.................................. $15 3/16 $ 7 1/2 $12 1/8 $ 6
</TABLE>

As of March 1, 1999, 9,980,747 and 18,603,551 shares of the Company's Class
A Stock and Class B Stock, respectively, were issued and outstanding and were
held by 308 and 952 stockholders of record, respectively.

22
<PAGE> 25

ITEM 6. SELECTED FINANCIAL DATA

The selected consolidated financial data set forth below for each of the
years in the five-year period ended December 31, 1998 are derived from the
audited consolidated financial statements of the Company. The selected financial
and operating data should be read in conjunction with Management's Discussion
and Analysis of Results of Operations and Financial Condition and the
consolidated financial statements and related notes.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
1998 1997 1996 1995 1994
------------ ------------ ------------ ---------- ----------
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AND OTHER DATA AMOUNTS)
<S> <C> <C> <C> <C> <C>
OPERATIONS:
Retail sales............................ $1,644,837 $1,490,693 $1,200,144 $923,644 $884,058
Less -- distributor allowances on
product purchases..................... 778,195 708,241 568,209 434,640 417,177
---------- ---------- ---------- -------- --------
Net sales............................... 866,642 782,452 631,935 489,004 466,881
Cost of sales........................... 230,818 205,070 168,432 143,557 130,707
Royalty overrides....................... 250,905 233,883 184,669 138,940 125,820
---------- ---------- ---------- -------- --------
Gross profit............................ 384,919 343,499 278,834 206,507 210,354
Marketing, distribution and
administrative expenses............... 306,589 257,514 210,087 176,046 139,629
Restructuring expenses.................. 2,300
Interest income -- net.................. 2,533 4,535 4,084 3,404 2,919
---------- ---------- ---------- -------- --------
Income before income taxes and minority
interest.............................. 80,863 90,520 72,831 31,565 73,644
Income taxes............................ 31,132 34,850 28,040 11,837 27,616
---------- ---------- ---------- -------- --------
Income before minority interest......... 49,731 55,670 44,791 19,728 46,028
Minority interest....................... 1,233 1,003
---------- ---------- ---------- -------- --------
Net income.............................. $ 48,498 $ 54,667 $ 44,791 $ 19,728 $ 46,028
========== ========== ========== ======== ========
SHARE DATA:
Earnings per share:
Basic(1)................................ $ 1.68 $ 1.81 $ 1.50 $ 0.66 $ 1.54
Diluted(1).............................. 1.60 1.72 1.43 0.65 1.50
Cash dividends per common share......... $ 0.60 $ 0.60 $ 0.60 $ 0.74 $ 0.80
FINANCIAL CONDITION:
Working capital......................... $ 120,623 $ 125,986 $ 109,662 $ 85,126 $ 89,825
Total assets............................ 348,183 314,580 269,114 207,690 174,057
Long term obligations................... 2,357 2,666 2,306 1,779 1,014
Stockholders' equity.................... 163,811 154,733 138,468 109,530 109,815
OTHER DATA:
Number of Countries..................... 42 36 34 32 24
</TABLE>

- ---------------
(1) Basic earnings per share are computed by dividing net income by the weighted
average number of common shares outstanding. The weighted average number of
common shares outstanding for 1994, 1995, 1996, 1997 and 1998 were (in
thousands) 29,864; 29,904; 29,803; 30,193 and 28,897 respectively. Diluted
earnings per share assumes the maximum dilutive effective of stock options
using the Treasury Stock method. Common shares used in the calculation for
1994, 1995, 1996, 1997 and 1998 were (in thousands) 30,768; 30,313; 31,379;
31,803 and 30,342 respectively.

23
<PAGE> 26

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

RECENT DEVELOPMENTS AND OUTLOOK

The Company utilizes a worldwide network marketing system to market weight
management products, food and dietary supplements and personal care products. As
of December 31, 1998, the Company conducted business in 42 countries located
throughout Asia/Pacific Rim, Europe and The Americas.

The Company has reported increased annual retail sales and net sales in
each year since 1988 and has reported profits for each year since 1990. See
" -- Presentation of Retail Sales." Retail sales increased from $884.1 million
in 1994 to $1.64 billion in 1998, representing a compound annual growth rate of
17%.

The Company markets its products globally. For the twelve months ended
December 31, 1998, 77.8% of retail sales were attributable to markets located
outside of the United States. The following summarizes the Company's retail
sales by region for the time periods indicated.

<TABLE>
<CAPTION>
NUMBER OF
COUNTRIES OPEN
1998 1997 1996 AS OF 12/31/98
-------- -------- -------- --------------
(DOLLAR AMOUNTS IN MILLIONS)
<S> <C> <C> <C> <C>
Asia/Pacific Rim................ $ 690.7 $ 643.4 $ 378.8 9
Europe.......................... 483.1 453.1 431.3 25
The Americas.................... 471.0 394.2 390.0 8
-------- -------- -------- --
Total Retail Sales.... $1,644.8 $1,490.7 $1,200.1 42
======== ======== ======== ==
</TABLE>

For the twelve months ended December 31, 1998, a relatively small number of
countries accounted for a large portion of the total retail sales. Of the 42
countries in which the Company operated during the twelve months ended December
31, 1998, four countries accounted for 67% of total retail sales, which is a
small decrease from 70% in 1997. The concentration of retail sales in a small
number of countries is expected to make the Company's earnings in future periods
more susceptible to various risks.

In 1998, the Company experienced retail sales growth in 32 countries
(including six new countries) representing an aggregate increase in retail sales
of $230.3 million compared with 1997. The growth in these countries was
partially offset by a $76.2 million aggregate decrease in retail sales in the
remaining 10 countries in which the Company operated during both periods.
Measured in local currency, 37 countries had growth in retail sales with the
remaining 5 countries experiencing a decline in retail sales. As a part of the
Company's growth strategy, management implements various initiatives to
revitalize sales in countries where the Company has experienced a loss in retail
sales.

Subsequent to commencement of operations in 1980, the Company's network of
independent distributors has grown substantially. The total number of
supervisors are 147,000 as of February 28, 1999, an increase of 6% from the same
date in the prior year, and a much larger number of distributors. The recent
sharp decline in sales in Russia prevented a large number of Russian
distributors from requalifying as supervisors. Excluding Russia, the increase in
the number of supervisors from February 28, 1998 was 23%.

Consistent with the Company's growth strategy, the Company has continued
its efforts to expand its global presence by opening operations in new countries
where the Company believes there is or will be demand for its products and
participation in its network marketing system. From January 1, 1994 through
December 31, 1998, the Company commenced operations in 26 new countries. During
1998, these countries contributed $385 million of retail sales, representing 23%
of the Company's total retail sales. During 1998, the Company commenced
operations in Turkey, Indonesia, Botswana, Lesotho, Namibia and Swaziland and
plans to open new markets in India, Iceland and the Slovak Republic in 1999,
together with Jamaica, which just opened. Additional new markets currently under
consideration include China, Colombia, Morocco and Ecuador. There can be no
assurance that the opening of any new markets will occur as planned or that any
markets opened will generate significant retail sales.

24
<PAGE> 27

The Company is exposed to risks associated with foreign currency
fluctuations. For instance, the Company's purchases from suppliers are generally
made in U.S. dollars while its sales to distributors are generally made in local
currency. Accordingly, strengthening of the U.S. dollar versus a foreign
currency can have a negative impact on the Company's results. Although the
Company engages in currency hedging transactions to protect against certain
risks associated with foreign currency fluctuations, there can be no assurance
that such fluctuations will not have an adverse effect on the Company's results.
See Item 7A -- "Quantitative and Qualitative Disclosure About Market Risks".

The Company believes that, in certain of its markets, the opening of other
new markets within the same geographic region or with the same or similar
language or cultural bases has resulted in a corresponding tendency of some key
distributors to focus their attention on business opportunities provided by new
markets instead of developing their established downline organizations in
existing markets. Additionally, in certain instances, the Company has become
aware that certain sales in certain existing markets were attributable to
purchasers who distributed such product in countries which had not yet been
opened. When these countries were opened, such sales in existing markets shifted
to the newly opened markets, resulting in a decline in sales in the existing
market. As the Company expands its geographic coverage, the opportunity for such
occurrence will decrease.

In order to increase sales in markets, such as France, Germany, Italy and
Spain, that had experienced a leveling off or decline in sales, management
implemented several revitalization initiatives. These initiatives include
extensive training and motivational programs, appointment of regional planning
and strategy groups that include senior distributors, enhanced government
relations, introduction of new products, and establishment of distributor sales
centers. The Company believes that these initiatives favorably impact operations
and is partly responsible for the strong sales growth in Italy and Germany
during 1998. The Company will continue to deploy these initiatives in an effort
to provide a platform for renewed growth.

In recent years, the Company sought to diversify its product offerings by
substantially expanding its personal care product line to include skin care,
perfumes, hair care, body lotions, color cosmetics, soaps and gel products, and
by expanding food and dietary supplement products. From 1996 to 1998, sales of
the personal care product line increased from $115.4 million to $198.9 million,
representing 9.6% and 12.1% respectively, of total retail sales. From 1996 to
1998, sales of food and dietary supplements increased from $666.0 million to
$865.2 million, representing 55.5% and 52.6% respectively, of total retail
sales. From 1996 to 1998, sales of the weight management product line increased
from $358.3 million to $512.8 million, representing 29.9% and 31.2%,
respectively, of total retail sales. The Company intends to continue expanding
product offerings in the personal care, food & dietary supplements and weight
management product lines throughout 1999.

PRESENTATION OF RETAIL SALES

Throughout this report, "retail sales" are determined as the gross sales
amounts reflected on the Company's invoices to its distributors. The Company
does not receive the amount reported as "retail sales," and the Company does not
monitor the actual retail prices charged for the Company's products. "Net sales"
represent the actual purchase prices paid to the Company by its distributors,
after giving effect to distributor discounts (referred to as "distributor
allowances"), which total approximately 50% of suggested retail sales prices.
The Company receives its net sales price in cash or through credit card payments
upon receipt of orders from distributors. Importers are utilized by the Company
in some markets and, under certain circumstances, credit terms are extended. The
Company's "gross profit" consists of net sales less (i) "cost of sales,"
consisting of the prices paid by the Company to its manufacturers for products
and costs related to product shipments, foreign duties and tariffs and similar
expenses, and (ii) "royalty overrides," currently consisting of (a) royalties
and bonuses, which total approximately 15% and 6% (up to 7% beginning February
1, 1999), respectively, on the suggested retail sales prices of products earned
by qualifying distributors on sales within their distributor organizations, (b)
the President's Team Bonus payable to certain of the Company's most senior
distributors in the aggregate amount of approximately an additional 1% of
product retail sales, and (c) other one-time incentive cash bonuses to
qualifying distributors. Royalty overrides, as reported in the financial
statements and selected financial data appearing elsewhere herein, are net of a
handling fee (6% of
25
<PAGE> 28

retail sales through January 31, 1999 and 7% beginning February 1, 1999) charged
by the Company to its distributors on purchases of products from the Company.

The Company's use of "retail sales" in reporting financial and operating
data reflects the fundamental role of "retail sales" in the Company's accounting
systems, internal controls and operations, including the basis upon which
distributor bonuses are paid. The retail sales price of the Company's products
is reflected in distributor invoices as the price charged to distributors
together with, in most cases, a deduction for the corresponding distributor
allowance. The U.S. retail sales price is used by the Company to calculate,
among other things, royalty overrides and "volume points" earned by
distributors. Volume points are point values assigned to each of the Company's
products that are equal in all countries and are used as a supervisor
qualification criteria. In addition, management relies upon "retail sales" data
reflected in daily sales reports to monitor results of operations in each of the
Company's markets.

The significance of the Company's "net sales" is to reflect, generally, the
prices actually received by the Company after deducting the basic distributor
allowance, but before deducting royalty overrides and bonuses. The ratio of the
Company's "retail sales" to "net sales" is relatively constant because
distributor allowances historically total approximately 50% of suggested retail
sales prices. Accordingly, factors that affect "retail sales" generally have a
corresponding and proportionate effect on "net sales." To the extent the ratio
of "retail sales" to "net sales" varies from period to period, such variances
have resulted principally from sales of the Company's distributor kits and other
educational and promotional materials, for which there are no distributor
allowances. Sales of such items initially decreased and thereafter stabilized as
a percentage of total retail sales since 1991, but such decreases have not had a
material impact on the ratio of the Company's "retail sales" to "net sales" or
on the Company's operating margin.

RESULTS OF OPERATIONS

The Company's results of operations for the periods described below are not
necessarily indicative of results of operations for future periods, which depend
upon numerous factors including the Company's ability in the future to enter new
markets and introduce additional and new products into its markets.

1998 COMPARED TO 1997

Retail sales for the twelve months ended December 31, 1998 increased 10.3%
to $1.64 billion, as compared to retail sales of $1.49 billion in the prior year
because of new product introductions, international expansion and growth in
existing countries.

Retail sales in Asia/Pacific Rim increased $47.2 million or 7.3% during
1998 as compared to the prior year. In local currency, retail sales for
Asia/Pacific Rim increased 18%. The increase resulted from strong retail sales
in Japan, Hong Kong and South Korea. South Korea and Hong Kong increased retail
sales to $30.9 million and $34.7 million, respectively, representing a 111% and
59% increase over 1997. In Japan retail sales increased 4% to $547.7 million.
Retail sales in other Asia/ Pac Rim countries decreased 5% or $3.9 million
compared to 1997.

Retail sales in Europe increased $30.0 million or 6.6% in 1998 as compared
to the prior year. In local currency, retail sales for Europe increased 9%.
Within the region, retail sales in Italy increased 53% to $99.2 million, Germany
increased 26% to $55.5 million and Switzerland increased 64% to $28.4 million.
These gains were offset by a weakening in Russia, where retail sales decreased
39% to $96.7 million. During the 1998 third and fourth quarters, retail sales in
Russia decreased by 61% and 87%, respectively, compared to the corresponding
quarters in 1997. The uncertain economic environment in Russia continues to have
a substantial impact on sales. Although current sales in Russia has stabilized,
there is no assurance that it will continue at that level in the future.
Excluding Russia, retail sales in Europe increased 31%.

Retail sales in the Americas increased $76.9 million, or 19.5% in 1998 as
compared to the prior year. In local currency, retail sales for Americas
increased 22%. The increase in retail sales primarily resulted from retail sales
increases in the United States, Canada and Mexico of $65.8 million, $3.8 million
and $8.4 million, respectively. Partially offsetting these increases was a
decline in Brazil of $4.3 million, or 8.5%. The recent

26
<PAGE> 29

devaluation of the Brazilian real and the uncertain economic conditions could
lead to further decline in sales in that market.

In 1998, retail sales in all the product segments demonstrated strong
growth as compared to the prior year period. The increases in all the categories
were primarily due to the same factors identified in the geographical segment
discussion above.

Gross profit of $384.9 million for 1998, was $41.4 million, or 12.1% higher
than the gross profit of $343.5 million in the prior year. As a percentage of
retail sales, gross profit for 1998 as compared to the same period in the prior
year increased modestly from 23.0% to 23.4%. The increase in gross profit as a
percentage of retail sales primarily resulted from a special 1997 distributor
incentive program, which was not repeated in 1998. Partially offsetting this
benefit was an increase in costs of goods sold which increased from 13.8% of
retail sales in 1997 to 14.0% in 1998. The increase in costs of goods sold
reflects additional inventory charges of $9.4 million, primarily related to
Russia. Exclusive of these charges, costs of goods sold for 1998 would have been
13.4% of retail sales primarily attributable to lower negotiated costs of weight
management and nutritional products sourced from a primary supplier.

Marketing, distribution and administrative expenses, as a percentage of
retail sales, were 18.6% for 1998 as compared to 17.3% for the same period in
1997. These expenses for the same periods increased 19.1% to $306.6 million from
$257.5 million in the prior year. The increase resulted from: (a) higher
in-country distribution expenses primarily due to facility and staff expansions,
new country openings in Turkey and Indonesia, (b) higher administrative expenses
due to staff additions and other costs related primarily to building the
appropriate infrastructure, (c) higher marketing costs resulting from increased
sales event activity in 1998, and (d) incremental costs associated with Year
2000 system issues.

The weakening of the Japanese Yen against the U.S. Dollar during 1998
resulted in proportionately lower revenues, expenses, and ultimately income when
translated into the U.S. Dollar reporting currency. Comparing the weighted
average exchange rates in effect during 1997 and 1998, the adverse effect of the
weaker Japanese Yen on the Company's net income and earnings per diluted share
for the 1998 period was $6.2 million and approximately $0.20, respectively. The
effect of foreign currency changes of this nature in countries other than Japan
had the adverse affect on the Company's net income of $7.5 million or
approximately $0.25 on earning per diluted share.

Income taxes of $31.1 million for 1998 decreased from $34.9 million in the
prior year. As a percentage of pre-tax income, income taxes remained unchanged
at 38.5% in 1998. To the extent the Company's operations in high tax
jurisdictions such as Japan continue to grow disproportionately relative to the
balance of the Company's operations, the Company's utilization of its foreign
tax credits in the U.S., may be further limited which could, accordingly, result
in the Company incurring a higher overall income tax rate on its worldwide
operations in the future.

Net income for 1998 decreased 11.3% to $48.5 million, from $54.7 million
reported in the corresponding prior year period.

1997 COMPARED TO 1996

Retail sales for the twelve months ended December 31, 1997 increased 24.2%
to $1.49 billion, as compared to retail sales of $1.20 billion in the prior
year.

Retail sales in Asia/Pacific Rim increased $264.6 million or 69.9% during
1997 as compared to the prior year. The increase resulted from strong retail
sales in Japan and Taiwan. Retail sales in Japan increased $214.6 million, or
69.0%. In Taiwan, retail sales for 1997 increased $21.4 million, or 81.7%.
Retail sales in other Asia/Pacific Rim countries for 1997 increased $28.6
million, or 69.1% as compared to 1996. The increases in the other Asia/Pacific
Rim countries resulted from the opening of South Korea in November 1996 and
Thailand in June 1997 coupled with increased retail sales in Hong Kong.

Retail sales in Europe increased $21.8 million or 5.1% in 1997 as compared
to the prior year. Within the region, retail sales in Italy and Russia increased
$10.6 million, or 19.4%, and $15.7 million, or 11.1%,

27
<PAGE> 30

respectively, in 1997 compared to 1996. Offsetting the retail sales increases
were declines in Germany, South Africa and Finland of $10.3 million, $8.2
million and $5.6 million, respectively in 1997 as compared to the prior year.
Although retail sales in Germany, South Africa and Finland declined in
comparison to the prior year periods, they remained relatively stable over the
four quarters of 1997.

Retail sales in the Americas increased $4.1 million, or 1.1% in 1997 as
compared to the prior year. The increase in retail sales primarily resulted from
retail sales increases in the United States, Canada and Mexico of $19.1 million,
$3.6 million and $4.4 million, respectively, and retail sales of $3.4 million
resulted from the opening of Chile in March 1997. Partially offsetting these
increases was a decline in Brazil of $26.1 million, or 34.3%. The retail sales
decrease in Brazil was primarily due to a difficult regulatory environment
which, among other factors, impeded the introduction of new products within the
country. During each of the 1997 third and fourth quarters, retail sales in
Brazil increased as compared to the preceding quarters. The 1997 fourth quarter
retail sales in Brazil exceeded the same period in 1996 by 9.7%.

In 1997, retail sales in all the product segments demonstrated strong
growth as compared to the prior year period. The increase in personal care
retail sales primarily resulted from a strong reception of the product line in
Japan and its introduction in Russia during July 1996. The increases in the
remaining categories were primarily due to the same factors identified in the
geographical segment discussion above.

Gross profit of $343.5 million for 1997, was $64.7 million, or 23.2% higher
than the gross profit of $278.8 million in the prior year. As a percentage of
retail sales, gross profit for 1997 as compared to the same period in the prior
year decreased modestly from 23.2% to 23.0%. The decrease in gross profit as a
percentage of retail sales primarily resulted from additional royalty override
expenses from a special 1997 distributor incentive program designed to motivate
distributors to achieve incremental sales growth.

Marketing, distribution and administrative expenses, as a percentage of
retail sales, were 17.3% for 1997 as compared to 17.5% for the same period in
1996. These expenses for the same periods increased 22.6% to $257.5 million from
$210.1 million in the prior year. The increase resulted from: (a) higher
in-country distribution expenses primarily due to facility and staff expansions
in Japan, new country openings in Chile and Thailand, and from a full year of
operations in South Korea, (b) higher administrative expenses due to staff
additions and other costs related primarily to supporting sales expansion in
foreign countries, and (c) higher marketing costs resulting from increased sales
event activity in 1997.

The weakening of the Japanese Yen against the U.S. Dollar during 1997
resulted in proportionately lower revenues, expenses, and ultimately income when
translated into the U.S. Dollar reporting currency. Comparing the weighted
average exchange rates in effect during 1996 and 1997, the adverse effect of the
weaker Japanese Yen on the Company's net income and earnings per diluted share
for the 1997 period was $7.9 million and approximately $0.25, respectively. The
effect of foreign currency changes of this nature in countries other than Japan
was not material to the operations of the Company.

Income taxes of $34.9 million for 1997 increased from $28.0 million in the
prior year. As a percentage of pre-tax income, income taxes remained unchanged
at 38.5% in 1997.

On December 30, 1996, the Company sold an approximate 7% interest in it's
Japanese subsidiary to certain officers (see Note 8 to the Consolidated
Financial Statements). In 1997, the earnings attributed to the minority interest
in the Japanese subsidiary were $1.0 million.

Net income for 1997 increased 22.1% to $54.7 million, from $44.8 million
reported in the corresponding prior year period.

LIQUIDITY AND CAPITAL RESOURCES

The Company has historically met its working capital and capital
expenditure requirements, including funding for expansion of operations, through
net cash provided by operating activities.

In 1998, net cash provided by operating activities was $57.2 million,
compared to $55.3 million in 1997. The increase primarily resulted from lower
credit card receivable balances primarily resulting from Japan, and

28
<PAGE> 31

a comparatively smaller increase in inventory levels. These increases were
partially offset by decreased net income and less cash flow provided by advanced
sales balances.

Capital expenditures for 1998 were $19.1 million compared to $13.1 million
for the prior year. The majority of the 1998 expenditures resulted from
investments in management information systems and the expansion of new and
existing facilities, particularly in the U.S. In connection with its entry into
each new market, the Company funds inventory requirements and typically
establish either a full-service distribution center, sales office, a fulfillment
center or compliance office, or a combination of the foregoing. While the
capital requirements associated with entry into new markets vary, the Company
estimates that up to $9 million will be required for pre-opening expenses,
capital expenditures and other operating cash flow needs associated with its
1999 new market expansion activities.

Stockholders' equity increased $9.1 million to $163.8 million in 1998.
During 1998, net income of $48.5 million and the issuance of capital stock upon
exercise of stock options, including related tax benefits, of $8.0 million were
partially offset by $17.1 million of dividends declared, stock repurchases of
$32.5 million and a change in accumulated other comprehensive income of $2.6
million. The payment of dividends is determined by the Board of Directors at its
discretion and the amounts of dividends declared and paid in future quarters
will depend, among other factors, on profitability, as well as other planned
uses of the Company's cash resources.

Cash and cash equivalents and marketable securities totaled $105.9 million
at December 31, 1998 compared to $122.7 million at December 31, 1997.

In September 1997, the Company entered into new agreements with its
suppliers of weight management and food and dietary supplement products. See
"Business -- Product Overview -- Product Manufacturing and Development." The new
contracts became effective January 12, 1998 and replace the contracts previously
in effect. The new contracts provide, among other things, the ability for the
Company to source and develop products from other third party manufacturers,
within certain contractual limitations. The new contracts provide the
opportunity for cost savings for certain products; however, the realization of
any product cost savings will be affected by the Company's future product
development.

The Company has not been subjected to material price increases by its
suppliers for several years. The Company believes that it has the ability to
respond to a portion or possibly all of any price increases by raising the price
of its products. Purchases by the Company from its suppliers are generally made
in U.S. Dollars, while sales to distributors are generally 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. The Company from time to time
enters into forward exchange contracts and other hedging arrangements to manage
its foreign exchange risk on intercompany transactions. During 1998, several
Asian, European and American currencies weakened against the U.S. Dollar
resulting in a foreign exchange loss of $0.8 million as compared to a loss of
$1.6 million in 1997. Although the results for 1998 was not impacted by the
recent decline in the Brazilian real, the devaluation is expected to adversely
impact net income for the first quarter of 1999 by an estimated $1 million. The
devaluation and the uncertain economic conditions in Brazil could lead to
further decline in sales in that market.

The Company is undertaking projects to address Year 2000 issues. The "Year
2000 issue" is the result of computer programs being written using two digits
rather than four to define the applicable year. If the Company's computer
programs with date-sensitive functions are not Year 2000 compliant, they may
fail or make miscalculations due to interpreting a date including "00" to mean
1900, not 2000. The result may be disruptions to operations, including, among
other things, a temporary inability to process transactions or engage in similar
normal business activities.

The Company has established a project team to identify and address the
Company's Year 2000 risks and issues in an attempt to ensure the integrity and
reliability of the Company's information systems and business processes. The
project team has (i) completed a review of its computer systems worldwide
relating to order processing, distribution disbursements, and other financial
systems and (ii) developed a comprehensive project plan (the "Plan") as a means
for ensuring the Year 2000 compliance of all information technology

29
<PAGE> 32

("IT") systems, including applications, operating systems, mainframe, mid-range
and client server platforms and all non-information technology ("Non-IT")
systems, including embedded applications and equipment, and to seek to ensure
that key third parties are Year 2000 compliant by the end of the year. The
Company has identified high risk applications that are critical to its business,
recognizing the fact that timely compliance of these systems is crucial, and,
therefore, has designed its Plan to address these systems first.

The Company's Plan includes remediating certain existing software and
converting to new software for certain other applications. The Plan is underway
and the Company believes it will be completely in effect by the end of the third
quarter of 1999. Testing and certification of the Company's computer systems and
their applications is scheduled to be completed shortly thereafter. In addition,
the Company has developed contingency plans for both software that has been
selected for remediation and for those applications that will have to be
replaced. The project team has also developed a third contingency plan
(applicable to both remediation and replacement efforts) which involves the
development of certain manual procedures that could be utilized to render the
Company's IT and Non-IT systems Year 2000 compliant. It is expected that the
Plan together with the contingency plans will enable the company to achieve Year
2000 compliance in a timely fashion.

The Company has also identified and contacted key third parties to
determine the status of their Year 2000 compliance and any probable impact on
the Company. If key third parties are not Year 2000 compliant and their
non-compliance causes a material disruption to any of their respective
businesses, the Company's business could be materially adversely affected.
Disruptions could also include, among other things, a financial institution's
inability to take and transfer funds; an interruption in delivery of supplies
from vendors; a loss of voice and data connections; a loss of power to the
Company's facilities; and other interruptions in the normal course of the
Company's operations, the nature and extent of which is hard to foresee. The
Company will continue to evaluate the nature of these risks, but at this time is
unable to determine the probability that any such risk will occur, or if it does
occur, what the nature, length of other effects, if any, it may have.

As of December 31, 1998, the Company had incurred approximately $10.5
million for Year 2000 efforts. Future costs are estimated to be up to $15
million, which are expected to be funded through operating cash flows. Such
expenditures are expensed or capitalized, as appropriate. The financial impact
of making any required system changes or other remediation efforts cannot be
known precisely at this time, but it is not expected to be material to the
Company's financial position, results of operations, or cash flows.

Under the current Plan, Year 2000 compliance should not pose significant
operational problems. While the Company believes it will be able to resolve the
Year 2000 issue in a timely manner, if it is unable to complete the installation
of replacement systems and the required changes to existing critical systems, or
if those with whom it conducts business are unsuccessful in implementing timely
solutions, the Year 2000 issue could have a material adverse effect on the
Company's operations and results of operations, including its ability to process
and distribute orders.

On January 1, 1999, eleven of the fifteen member countries of the European
Union adopted a single European Currency -- the euro. The conversion rates
between the existing sovereign currencies ("legacy currencies") and the euro
have been fixed. The euro is traded on currency exchanges and is used in
business transactions. Beginning in January 2002, new euro-denominated bills and
coins will be issued, and legacy currencies will be withdrawn from circulation.
The Company has conducted a review of its information and business systems, and
those of its European affiliates, to address the impact of the euro conversion.
The Company has initially offered both the legacy currencies and the euro to
settle distributor sales and will ultimately offer to process orders in the euro
currency. To prepare for this transition, certain computer systems will require
modifications or replacement. The initial remediation and testing process was
completed in December 1998 and cost approximately $500,000. The Company is still
evaluating subsequent phases to the euro conversion, which may include, among
other things, system modifications to allow payment of distributor royalties in
euro. The incremental costs associated with these subsequent phases will not be
significant as the system modifications will be incorporated into the Company's
year 2000 efforts. In response to the euro conversion, the Company may make
certain price adjustments to ensure pricing consistency within the European
market.

30
<PAGE> 33

In January 1996, the Company's Board of Directors approved a one million
share stock repurchase program, which was completed in April 1997. In April
1997, the Board of Directors adopted an additional $30 million stock repurchase
program which was completed in February 1998. In February 1998 and again in July
1998, the Board authorized two additional $20 million stock repurchase programs,
the first of which was completed in September 1998. Pursuant to these stock
repurchase programs, the Company expended $7.5 million, $26.0 million and $32.5
million in 1996, 1997 and 1998, respectively.

The Company has pledged cash and cash equivalents to secure bank financing
primarily for the benefit of its foreign subsidiaries, including letters of
credit, lines of credit, leases, and other obligations. As of December 31, 1998,
an aggregate of $2.5 million had been pledged against $2.0 million of
commitments for debt obligations.

At December 31, 1998, the Company had $31.6 million of credit facilities,
including a two year unsecured committed line of credit totaling $25 million, of
which $6.8 million is securing letter of credits and contingent guarantees. The
majority of these facilities expire in 1999. These facilities are subject to
normal banking terms and conditions and do not materially restrict the Company's
activities.

For a discussion of certain contingencies that may impact liquidity and
capital resources, see "Note 9, Contingencies," in the Company's consolidated
financial statements included herein.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

The Company is exposed to market risks, which arise during the normal
course of business from changes in interest rates and foreign currency exchange
rates. On a selected basis, the Company uses derivative financial instruments to
manage or hedge these risks. All hedging transactions are authorized and
executed pursuant to written guidelines and procedures. A discussion of the
Company's primary market risk exposures and derivatives is presented below.

FOREIGN EXCHANGE RISK

The Company enters into foreign exchange derivatives in the ordinary course
of business primarily to reduce its exposures to currency fluctuations
attributable to inter-company transactions and translation of its local currency
revenue. Most of these foreign exchange contracts are designated for forecasted
transactions. The use of these derivative instruments allows the Company to
reduce its overall exposure to exchange rate movements, since the gains and
losses on these contracts substantially offset losses and gains on the assets,
liabilities, and forecasted transactions being hedged.

Foreign exchange option contracts are used primarily to hedge anticipated
Yen revenues resulting from product sales to Japan. The exchange rate at which
these contracts may be exercised is based upon the daily average exchange rate
for a particular month. The Company has guidelines which establish a $5 million
limit on the net amount of option premiums that can be purchased to hedge these
exposures.

31
<PAGE> 34

The following table provides information about the details of the Company's
option contracts at 12/31/98.

<TABLE>
<CAPTION>
U.S. DOLLAR
EQUIVALENT AVERAGE STRIKE FAIR MATURITY
FOREIGN CURRENCY COVERAGE PRICE VALUE DATE
---------------- ----------- -------------- ---------- ----------
<S> <C> <C> <C> <C>
Japanese Yen................................. 9,000,000 120 7,000 01/29/1999
Japanese Yen................................. 9,000,000 120 59,000 02/26/1999
Japanese Yen................................. 9,000,000 120 102,000 03/31/1999
Japanese Yen................................. 9,000,000 120 136,000 04/30/1999
Japanese Yen................................. 9,000,000 120 170,000 05/28/1999
Japanese Yen................................. 9,000,000 120 192,000 06/30/1999
Japanese Yen................................. 6,000,000 120 155,000 07/30/1999
Japanese Yen................................. 6,000,000 120 212,000 08/31/1999
Japanese Yen................................. 6,000,000 120 203,000 09/30/1999
Japanese Yen................................. 6,000,000 120 193,000 10/29/1999
Japanese Yen................................. 6,000,000 120 170,000 11/30/1999
Japanese Yen................................. 6,000,000 120 182,000 12/30/1999
----------- ----------
$90,000,000 $1,781,000
=========== ==========
</TABLE>

Foreign exchange forward contracts are occasionally used to hedge
non-functional currency advances between subsidiaries. The objective of these
contracts is to neutralize the impact of foreign currency movements on the
subsidiary's operating results.

The table below describes the forward contracts that were outstanding at
12/31/1998.

<TABLE>
<CAPTION>
CONTRACT FORWARD POSITION IN MATURITY CONTRACT FAIR
FOREIGN CURRENCY DATE US DOLLARS DATE RATE VALUE
---------------- ---------- ------------------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C>
Buy German Mark/sell Pound
Sterling........................ 12/14/1998 1,807,0000 03/31/1999 2.759 1,805,000
Buy Pound Sterling/sell Dutch
Guilders........................ 08/12/1998 1,243,000 02/26/1999 3.202 1,210,000
Buy Norwegian Kroner/sell French
Franc........................... 08/28/1998 912,000 06/30/1999 1.316 905,000
Buy Swedish Krona/sell French
Franc........................... 08/28/1998 345,000 06/30/1999 1.367 317,000
</TABLE>

All foreign subsidiaries excluding those operating in hyper-inflationary
environments designate their local currencies as their functional currency. In
anticipation of future intercompany or dividend payments, the Company has
instructed various subsidiaries to maintain most of their surplus cash in U.S.
dollars. At year end the total amount of subsidiary cash that was maintained or
invested in U.S. dollars was $11.4 million.

INTEREST RATE RISK

The Company currently maintains an investment portfolio of high quality
marketable securities. According to its investment policy, the Company may
invest in taxable and tax exempt instruments including asset-backed securities.
In addition, the policy establishes limits on credit quality, maturity, issuer
and type of instrument. All securities are classified as available for sale, and
recorded in the balance sheet at fair value with fluctuations in fair value
reported as a component of accumulated other comprehensive income in
stockholders equity. The Company does not use derivative instruments to hedge
its investment portfolio.

All highly liquid investments with a maturity of three months or less at
the date of purchase are considered to be cash equivalents. The remaining
investments are considered short-term if maturities range between three and
twelve months or long term if maturities range between thirteen and sixty
months.

32
<PAGE> 35

The following table lists the Company's cash equivalents and short-term
investments at December 31, 1998.

<TABLE>
<CAPTION>
FY FY FY FY FY FAIR
1999 2000 2001 2002 2003 TOTAL VALUE
---------- -------- -------- -------- ------- ---------- ----------
($ THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Cash equivalents................ 224,000 -- -- -- -- 224,000 224,000
- -Average interest rate.......... 3.66%
Short term investments.......... 4,260,000 -- -- -- -- 4,260,000 4,271,000
- -Average interest rate.......... 5.86%
Long term investments........... -- 299,000 301,000 199,000 99,000 898,000 915,000
- -Average interest rate.......... -- 3.50% 3.50% 3.50% 3.50%
---------- -------- -------- -------- ------- ---------- ----------
Total.................. $4,484,000 $299,000 $301,000 $199,000 $99,000 $5,382,000 $5,410,000
========== ======== ======== ======== ======= ========== ==========
</TABLE>

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The consolidated financial statements of the Company, together with the
Report thereon of Deloitte & Touche LLP, independent auditors, are included
elsewhere herein on pages 37 through 61.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information called for by Item 10 of Part III is incorporated by reference
to the Company's definitive Proxy Statement for the 1998 Annual Meeting of
Stockholders to be filed with the Securities and Exchange Commission within 120
days after the close of the year ended December 31, 1998.

ITEM 11. EXECUTIVE COMPENSATION

Information called for by Item 11 of Part III is incorporated by reference
to the Company's definitive Proxy Statement for the 1998 Annual Meeting of
Stockholders to be filed with the Securities and Exchange Commission within 120
days after the close of the year ended December 31, 1998.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Information called for by Item 12 of Part III is incorporated by reference
to the Company's definitive Proxy Statement for the 1998 Annual Meeting of
Stockholders to be filed with the Securities and Exchange Commission within 120
days after the close of the year ended December 31, 1998.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information called for by Item 13 of Part III is incorporated by reference
to the Company's definitive Proxy Statement for the 1998 Annual Meeting of
Stockholders to be filed with the Securities and Exchange Commission within 120
days after the close of the year ended December 31, 1998.

33
<PAGE> 36

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) DOCUMENTS FILED AS PART OF THIS REPORT:

1. FINANCIAL STATEMENTS

The following financial statements of the Company are filed with this
report and can be found on the pages indicated below:

<TABLE>
<CAPTION>
DESCRIPTION PAGE NO.
----------- --------
<S> <C>
Independent Auditors' Report................................ 37
Consolidated Balance Sheets -- December 31, 1998 and 1997... 38
Consolidated Statements of Income for the years ended
December 31, 1998, 1997 and 1996.......................... 40
Consolidated Statements of Changes in Stockholders' Equity
for the Years Ended December 31, 1998, 1997, and 1996..... 41
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 1997, and 1996......................... 42
Notes to Consolidated Financial Statements.................. 43
</TABLE>

2. FINANCIAL STATEMENT SCHEDULES

3. EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE NO./(FOOTNOTE)
------- ----------- -------------------
<S> <C> <C>
3.1 Amended and Restated Articles of Incorporation (10)
3.2 Amended and Restated Bylaws (2)
4.1 Form of Class A Common Stock and Class B Common Stock (12)
Certificates
10.1 Final Judgment and Permanent Injunction, entered into on (1)
October, 1986 by the parties to that action entitled
People of the State of California, et al., v Herbalife
International, Inc. et al., Case No. 92767 in the Superior
Court of the State of California for the County of Santa
Cruz
10.2 The Company's 1991 Stock Option Plan, as amended (7), (13)
10.3 The Company's 1992 Executive Incentive Compensation Plan, as (2), (7)
amended
10.4 Form of Individual Participation Agreement relating to the (2)
Company's Executive Compensation Plan
10.5 Form of Letter Agreement between the Compensation Committee (2)
of the Board of Directors of the Company and Mark Hughes
10.6 Form of Indemnity Agreement between the Company and certain (2)
officers and directors of the Company
10.7 Trust Agreement among the Company, Citicorp Trust, N.A. and (2)
certain officers and directors of the Company
10.8 Form of Stock Appreciation Rights Agreement between the (2)
Company and certain directors of the Company
</TABLE>

34
<PAGE> 37

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE NO./(FOOTNOTE)
------- ----------- -------------------
<S> <C> <C>
10.9 1994 Performance Based Annual Incentive Compensation Plan, (4), (7), (11)
as amended and restated in 1996
10.10 Form of Promissory Note for Advances under the Company's (5)
1994 Performance Based Annual Incentive Compensation Plan
10.11 Employment Agreement between the Company and Chris Pair (3)
dated April 3, 1994
10.12 The Company's Executive Officer Deferred Compensation Plan, (5)
amending and relating the Deferred Compensation Agreement
between the Company and Michael Rosen
10.13 Office lease agreement between the Company and State (6)
Teacher's Retirement System, dated July 20, 1995
10.14 Form of stock appreciation rights agreements between the (6)
Company and certain directors of the Company
10.15 The Company's Senior Executive Deferred Compensation Plan, (6)
effective January 1, 1996, as amended
10.16 The Company's Management Deferred Compensation Plan, (6)
effective January 1, 1996, as amended
10.17 Master Trust Agreement between the company and Imperial (6)
Trust Company, Inc., effective January 1, 1996
10.18 The Company's 401K Plan, as amended (6)
10.19 Agreement Concerning Share Allocation Plan for Specific (8)
Directors of Herbalife of Japan K.K. dated December 30,
1996
10.20 Consulting Agreement between David Addis and Herbalife of (8)
America, Inc. dated January 27, 1997
10.21 Agreement between Herbalife International of America, Inc. (9)
and D&F Industries, Inc. dated September 2, 1997
10.22 Agreement between Herbalife International of America, Inc. (9)
and Dynamic Products, Inc. dated September 2, 1997
10.23 Agreement between Herbalife International of America, Inc. (9)
and Raven Industries, Inc. d/b/a Omni-Pak Industries,
dated September 2, 1997
10.24 The Company's Supplemental Executive Retirement Plan (12)
10.25 Credit Agreement between Herbalife International of America, (14)
Inc. and First National Bank of Chicago, dated December
14, 1998
21 List of subsidiaries of the Company (14)
23.1 Independent Auditor's Consent (14)
27 Financial Data Schedule (14)
</TABLE>

- ---------------
(1) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1987.

(2) Incorporated by reference to the Company's Registration Statement on Form
S-1 (No. 33-66576) declared effective by the Securities and Exchange
Commission on October 8, 1993.

(3) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the three months ended June 30, 1994.

(4) Incorporated by reference to the Company's Definitive Proxy Statement
relating to its 1994 Annual Meeting of Stockholders.

35
<PAGE> 38

(5) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1994.

(6) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1995.

(7) Incorporated by reference to the Company's Definitive Proxy Statement
relating to its 1996 Annual Meeting of Stockholders.

(8) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1996.

(9) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the three months ended September 30, 1997.

(10) Incorporated by reference to the Company's Registration Statement on Form
8-K declared effective by the Security and Exchange Commission on December
12, 1997.

(11) Incorporated by reference to the Company's Definitive Proxy Statement
relating to the Special Shareholder Meeting held on December 11, 1997.

(12) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1997.

(13) Incorporated by reference to the Company's Definitive Proxy Statement
relating to its 1998 Annual Meeting of Shareholders.

(14) Filed herewith.

(b) REPORTS ON FORM 8-K:

None.

See "Item 14(a) 3. Exhibits."

(d) OTHER FINANCIAL STATEMENT SCHEDULES:

None.

36
<PAGE> 39

INDEPENDENT AUDITORS' REPORT

To the Stockholders of Herbalife International, Inc.:

We have audited the accompanying consolidated balance sheets of Herbalife
International, Inc. and subsidiaries (the "Company") as of December 31, 1998 and
1997, and the related consolidated statements of income, changes in
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on the
financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Herbalife International, Inc.
and subsidiaries at December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.

DELOITTE & TOUCHE LLP
Los Angeles, California
February 24, 1999

37
<PAGE> 40

HERBALIFE INTERNATIONAL, INC.

CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997

ASSETS

<TABLE>
<CAPTION>
NOTES 1998 1997
----- ------------ ------------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents.................................. 2,4 $100,721,000 $ 78,913,000
Marketable securities...................................... 2 5,186,000 43,794,000
Receivables, including related party receivables of
$6,642,000 (1998) and $10,259,000 (1997)................. 6,8 44,471,000 46,021,000
Inventories................................................ 2, 3 88,138,000 71,583,000
Prepaid income taxes....................................... 2,931,000 695,000
Prepaid expenses and other current assets.................. 14,734,000 7,466,000
Deferred income taxes...................................... 2, 12 21,870,000 19,502,000
------------ ------------
Total current assets............................. 278,051,000 267,974,000
------------ ------------

PROPERTY -- at cost: 2, 5
Furniture and fixtures..................................... 16,090,000 14,521,000
Equipment.................................................. 44,789,000 29,381,000
Leasehold improvements and building........................ 22,361,000 20,061,000
------------ ------------
83,240,000 63,963,000
Less accumulated depreciation and amortization............. (45,792,000) (34,225,000)
------------ ------------
37,448,000 29,738,000
------------ ------------
OTHER ASSETS............................................... 6, 8 22,701,000 13,409,000
DEFERRED INCOME TAXES...................................... 2, 12 6,696,000
GOODWILL(net of accumulated amortization of $1,601,000 and
$1,428,000 in 1998 and 1997, respectively)............... 2 3,287,000 3,459,000
------------ ------------
TOTAL............................................ $348,183,000 $314,580,000
============ ============
</TABLE>

See the accompanying notes to consolidated financial statements
38
<PAGE> 41

HERBALIFE INTERNATIONAL, INC.

CONSOLIDATED BALANCE SHEETS (CONTINUED)
DECEMBER 31, 1998 AND 1997

LIABILITIES AND STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
NOTES 1998 1997
----------- ------------ ------------
<S> <C> <C> <C>
CURRENT LIABILITIES:
Accounts payable........................................ 2, 8 $ 14,963,000 $ 12,654,000
Royalty overrides....................................... 2 58,389,000 56,643,000
Accrued compensation.................................... 18,132,000 19,516,000
Accrued expenses........................................ 29,007,000 19,137,000
Dividends payable....................................... 4,296,000 4,634,000
Current portion of contracts payable and bank loans..... 4, 5 2,639,000 1,449,000
Advance sales deposits.................................. 2 7,919,000 18,375,000
Income taxes payable.................................... 2, 9, 12 22,083,000 9,580,000
------------ ------------
Total current liabilities..................... 157,428,000 141,988,000

NON-CURRENT LIABILITIES:
Contracts payable, net of current portion............... 4, 5 2,357,000 2,666,000
Deferred income taxes................................... 2, 12 -- 1,739,000
Other non-current liabilities........................... 6, 7, 8 21,992,000 11,586,000
------------ ------------
Total liabilities............................. 181,777,000 157,979,000
------------ ------------
MINORITY INTEREST....................................... 2, 8 2,595,000 1,868,000
------------ ------------
COMMITMENTS AND CONTINGENCIES........................... 5, 6, 7, 9

STOCKHOLDERS' EQUITY: 10
Class A Common stock, $0.01 par value; 33,333,333 shares
authorized, $9,980,753 (1998) and $9,811,623 (1997)
shares issued and outstanding......................... 100,000 98,000
Class B Common stock, $0.01 par value; 66,666,667 shares
authorized, $18,603,561 (1998) and $19,818,248 (1997)
shares issued and outstanding......................... 186,000 198,000
Paid-in capital in excess of par value.................. 54,823,000 50,319,000
Retained earnings....................................... 110,941,000 109,106,000
Unearned compensation................................... -- (152,000)
Accumulated other comprehensive income.................. 2 (2,239,000) (4,836,000)
------------ ------------
Total stockholders' equity.................... 163,811,000 154,733,000
------------ ------------
TOTAL......................................... $348,183,000 $314,580,000
============ ============
</TABLE>

See the accompanying notes to consolidated financial statements
39
<PAGE> 42

HERBALIFE INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996

<TABLE>
<CAPTION>
NOTES 1998 1997 1996
--------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Retail sales..................... 2 $1,644,837,000 $1,490,693,000 $1,200,144,000
Less -- distributor allowances on
product purchases.............. 2 778,195,000 708,241,000 568,209,000
-------------- -------------- --------------
Net sales........................ 2 866,642,000 782,452,000 631,935,000
Cost of sales, including
purchases from related parties
of $17,369,000 (through April
23,1998), $66,771,000 (1997)
and $56,374,000 (1996)......... 8 230,818,000 205,070,000 168,432,000
Royalty overrides................ 2 250,905,000 233,883,000 184,669,000
Marketing, distribution and
administrative expenses........ 5, 6, 8 306,589,000 257,514,000 210,087,000
Interest income -- net........... 2,533,000 4,535,000 4,084,000
-------------- -------------- --------------
Income before income taxes and
minority interest.............. 80,863,000 90,520,000 72,831,000
Income taxes..................... 2, 9, 12 31,132,000 34,850,000 28,040,000
-------------- -------------- --------------
Income before minority
interest....................... 49,731,000 55,670,000 44,791,000
Minority interest................ 2, 8 1,233,000 1,003,000
-------------- -------------- --------------
NET INCOME....................... $ 48,498,000 $ 54,667,000 $ 44,791,000
============== ============== ==============
EARNINGS PER SHARE............... 2, 10
Basic.......................... $ 1.68 $ 1.81 $ 1.50
Diluted........................ $ 1.60 $ 1.72 $ 1.43
CASH DIVIDENDS PER COMMON
SHARE.......................... $ 0.60 $ 0.60 $ 0.60
WEIGHTED AVERAGE SHARES
OUTSTANDING
Basic.......................... 28,897,000 30,193,000 29,803,000
Dilutive effect of stock
options................... 1,445,000 1,610,000 1,576,000
-------------- -------------- --------------
Diluted........................ 30,342,000 31,803,000 31,379,000
============== ============== ==============
</TABLE>

See the accompanying notes to consolidated financial statements
40
<PAGE> 43

HERBALIFE INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
<TABLE>
<CAPTION>
PAID IN ACCUMULATED
CAPITAL IN OTHER
COMMON COMMON EXCESS RETAINED UNEARNED COMPREHENSIVE
STOCK A STOCK B OF PAR VALUE EARNINGS COMPENSATION INCOME
-------- -------- ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995........ $300,000 $40,417,000 $ 69,323,000 $ (1,716,000) $ 1,206,000
Issuance of 839,000 shares of Common
Stock under the 1991 Stock Option
Plan.............................. 8,000 4,721,000
Issuance of Common Stock under the
1994 Incentive Compensation
Plan.............................. 1,307,000
Additional capital from tax benefit
of 1991 Stock Option Plan......... 4,284,000
Repurchase of 575,000 Shares of
Common Stock...................... (6,000) (7,471,000)
Amortization of unearned
compensation...................... 1,304,000
Net income.......................... 44,791,000
Translation adjustments............. (2,175,000)
Unrealized loss on Marketable
Securities........................ (45,000)
Total comprehensive income..........
Cash dividends declared............. (17,780,000)
-------- -------- ----------- ------------ ------------ -----------
Balance at December 31, 1996........ $302,000 $43,258,000 $ 96,334,000 $ (412,000) $(1,014,000)
Issuance of 669,826 shares of Common
Stock under the 1991 Stock Option
Plan.............................. 7,000 4,942,000
Issuance of Common Stock under 1994
Incentive Compensation Plan....... 865,000
Additional capital from tax benefit
of 1991 Stock Option Plan......... 3,448,000
One-for-three reverse Stock split... (206,000) 206,000
Stock split effected in the form of
a stock dividend.................. 206,000 (206,000)
Repurchase of 503,000 shares of
Common Stock A and 789,000 shares
of Common Stock B................. (5,000) (8,000) (2,194,000) (23,756,000)
Amortization of unearned
compensation...................... 260,000
Net income.......................... 54,667,000
Translation adjustments............. (3,877,000)
Unrealized gain on marketable
securities........................ 55,000
Total comprehensive income..........
Cash dividends declared............. (18,139,000)
-------- -------- ----------- ------------ ------------ -----------
Balance at December 31, 1997........ $ 98,000 $198,000 $50,319,000 $109,106,000 $ (152,000) $(4,836,000)
Issuance of 159,000 shares of Class
A Common Stock and 346,000 Shares
of Class B Common Stock under the
1991 Stock Option Plan............ 2,000 3,000 5,056,000
Issuance of Common Stock under 1994
Incentive Compensation Plan....... 1,000 873,000
Additional capital from tax benefit
of 1991 Stock Option Plan......... 2,092,000
Recapitalization costs.............. (616,000)
Repurchase of 3,000 shares of Class
A Common Stock and 1,585,000
shares of Class B Common Stock.... (16,000) (2,901,000) (29,563,000)
Amortization of unearned
compensation...................... 152,000
Net income.......................... 48,498,000
Translation adjustments............. 2,591,000
Unrealized gain on marketable
securities........................ 6,000
Total comprehensive income..........
Cash dividend declared.............. (17,100,000)
-------- -------- ----------- ------------ ------------ -----------
Balance at December 31, 1998........ $100,000 $186,000 $54,823,000 $110,941,000 $(2,239,000)
======== ======== =========== ============ ============ ===========

TOTAL
STOCKHOLDER'S COMPREHENSIVE
EQUITY INCOME
------------- -------------
<S> <C> <C>
Balance at December 31, 1995........ $109,530,000
Issuance of 839,000 shares of Common
Stock under the 1991 Stock Option
Plan.............................. 4,729,000
Issuance of Common Stock under the
1994 Incentive Compensation
Plan.............................. 1,307,000
Additional capital from tax benefit
of 1991 Stock Option Plan......... 4,284,000
Repurchase of 575,000 Shares of
Common Stock...................... (7,477,000)
Amortization of unearned
compensation...................... 1,304,000
Net income.......................... 44,791,000 44,791,000
Translation adjustments............. (2,175,000) (2,175,000)
Unrealized loss on Marketable
Securities........................ (45,000) (45,000)
----------
Total comprehensive income.......... 42,571,000
==========
Cash dividends declared............. (17,780,000)
------------
Balance at December 31, 1996........ $138,468,000
Issuance of 669,826 shares of Common
Stock under the 1991 Stock Option
Plan.............................. 4,949,000
Issuance of Common Stock under 1994
Incentive Compensation Plan....... 865,000
Additional capital from tax benefit
of 1991 Stock Option Plan......... 3,448,000
One-for-three reverse Stock split...
Stock split effected in the form of
a stock dividend..................
Repurchase of 503,000 shares of
Common Stock A and 789,000 shares
of Common Stock B................. (25,963,000)
Amortization of unearned
compensation...................... 260,000
Net income.......................... 54,667,000 54,667,000
Translation adjustments............. (3,877,000) (3,877,000)
Unrealized gain on marketable
securities........................ 55,000 55,000
----------
Total comprehensive income.......... 50,845,000
==========
Cash dividends declared............. (18,139,000)
------------
Balance at December 31, 1997........ $154,733,000
Issuance of 159,000 shares of Class
A Common Stock and 346,000 Shares
of Class B Common Stock under the
1991 Stock Option Plan............ 5,061,000
Issuance of Common Stock under 1994
Incentive Compensation Plan....... 874,000
Additional capital from tax benefit
of 1991 Stock Option Plan......... 2,092,000
Recapitalization costs.............. (616,000)
Repurchase of 3,000 shares of Class
A Common Stock and 1,585,000
shares of Class B Common Stock.... (32,480,000)
Amortization of unearned
compensation...................... 152,000
Net income.......................... 48,498,000 48,498,000
Translation adjustments............. 2,591,000 2,591,000
Unrealized gain on marketable
securities........................ 6,000 6,000
----------
Total comprehensive income.......... 51,095,000
==========
Cash dividend declared.............. (17,100,000)
------------
Balance at December 31, 1998........ $163,811,000
============
</TABLE>

See the accompanying notes to consolidated financial statements
41
<PAGE> 44

HERBALIFE INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996

<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income............................................... $ 48,498,000 $ 54,667,000 $ 44,791,000
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 15,801,000 10,966,000 10,557,000
Deferred income taxes.................................. (10,803,000) (2,984,000) (9,683,000)
Amortization of unearned compensation.................. 152,000 260,000 1,304,000
Stock grant............................................ 88,000 462,000 2,497,000
Unrealized foreign exchange (gain) loss................ (1,059,000) 1,735,000 (368,000)
Minority interest in earnings.......................... 1,233,000 1,003,000 --
Other.................................................. 393,000 299,000 256,000
Changes in operating assets and liabilities:
Receivables............................................ 4,621,000 (18,896,000) (10,377,000)
Inventories............................................ (13,024,000) (31,355,000) (7,454,000)
Prepaid expenses and other current assets.............. (6,987,000) (2,002,000) (1,388,000)
Other assets........................................... (172,000) (885,000) (1,035,000)
Accounts payable....................................... 1,601,000 (2,301,000) (466,000)
Royalty overrides...................................... (661,000) 16,885,000 11,335,000
Accrued expenses and accrued compensation.............. 6,401,000 4,938,000 20,065,000
Advance sales deposits................................. (10,835,000) 10,869,000 (6,790,000)
Income taxes payable................................... 12,518,000 6,709,000 11,802,000
Deferred compensation liability........................ 9,476,000 4,935,000 2,832,000
------------ ------------ ------------
CASH PROVIDED BY OPERATING ACTIVITIES.................... 57,241,000 55,305,000 67,878,000
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property.................................. (19,098,000) (13,090,000) (15,401,000)
Proceeds from sale of property......................... 131,000 176,000 549,000
Net changes in marketable securities................... 38,613,000 (181,000) (8,553,000)
Deferred compensation plan............................. (11,595,000) (4,009,000) (2,455,000)
------------ ------------ ------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES...... 8,051,000 (17,104,000) (25,860,000)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid......................................... (17,530,000) (18,150,000) (17,869,000)
Distribution to minority interest...................... (505,000) (98,000)
Additions to bank loans and contracts payable.......... 1,483,000 510,000 1,219,000
Principal payments on bank loans and contracts
payable............................................. (1,544,000) (3,337,000) (1,619,000)
Exercise of stock options.............................. 5,061,000 4,949,000 4,729,000
Stock repurchases...................................... (32,480,000) (25,963,000) (7,477,000)
Recapitalization cost.................................. (616,000) -- --
Other.................................................. -- -- (6,000)
------------ ------------ ------------
NET CASH USED IN FINANCING ACTIVITIES.................... (46,131,000) (42,089,000) (21,023,000)
------------ ------------ ------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH
EQUIVALENTS............................................ 2,647,000 (4,680,000) (2,690,000)
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS..... 21,808,000 (8,568,000) 18,305,000
CASH AND CASH EQUIVALENTS AT JANUARY 1................... 78,913,000 87,481,000 69,176,000
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT DECEMBER 31................. $100,721,000 $ 78,913,000 $ 87,481,000
============ ============ ============
CASH PAID DURING THE YEAR
Interest Paid.......................................... $ 1,321,000 $ 506,000 $ 352,000
============ ============ ============
Income Taxes Paid (Refunded)........................... $ 27,012,000 $ 27,110,000 $ 21,186,000
============ ============ ============
</TABLE>

See the accompanying notes to consolidated financial statements

42
<PAGE> 45

HERBALIFE INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. GENERAL

Herbalife International, Inc. and its subsidiaries (the "Company") markets
weight management products, food and dietary supplements and personal care
products worldwide. The Company's products, which consist of herbs and other
natural ingredients, are marketed through a network marketing system in which
"distributors" who are generally independent contractors purchase products for
resale to retail consumers and other distributors. As of December 31, 1998, the
Company conducted business in forty-two countries located in the Asia/Pacific
Rim, Europe and Americas. In the Company's foreign markets, distributors market
the same, or essentially the same products, as those sold in the United States
and in fundamentally the same manner.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Consolidation Policy

The consolidated financial statements include the accounts of the Company
and its subsidiaries; all significant intercompany transactions and accounts
have been eliminated.

Translation of Foreign Currencies

Foreign subsidiaries asset and liability accounts are translated for
consolidated financial reporting purposes into U.S. dollar amounts at year-end
exchange rates. Revenue and expense accounts are translated at the average rates
during the year. Foreign exchange translation adjustments are included in other
comprehensive income. Transaction losses, which were $771,000, $1,564,000, and
$3,013,000 in the years ending December 31, 1998, 1997 and 1996, respectively,
are included in marketing, distribution and administrative expenses in the
accompanying Consolidated Statements of Income.

Forward Exchange Contracts

The Company enters into forward exchange contracts in managing its foreign
exchange risk on intercompany transactions and does not use the contracts for
trading purposes. Gains and losses related to qualifying hedges are deferred and
recognized in operating income when the underlying hedged transaction occurs.
Premium payments on such contracts are amortized to expense over the life of the
contracts.

Cash and Cash Equivalents

The Company considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents. Cash and cash
equivalents are comprised primarily of money market accounts, foreign and
domestic bank accounts, and tax-exempt municipal bonds with short-term
maturities. To reduce its credit risk, the Company monitors the credit standing
of the financial institutions that hold the Company's cash and cash equivalents.

Marketable Securities

The Company's marketable securities are classified as "available for sale".
Fluctuations in fair value are included in other comprehensive income.
Marketable securities are comprised primarily of tax-exempt municipal bonds with
contractual maturities of up to five years.

43
<PAGE> 46
HERBALIFE INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Fair Value of Financial Instruments

The Company has estimated the fair value of its financial instruments using
the following methods and assumptions:

The carrying amounts of cash and cash equivalents, accounts receivable, and
accounts payable approximate fair value because of the short term maturity of
these instruments.

Marketable securities are based on the quoted market prices for these
instruments.

Foreign exchange contracts are based on exchange rates at December 31,
1998. The fair value of option contracts are based on dealer quotes.

Inventories

Inventories are stated at lower of cost (on the first-in, first-out basis)
or market.

Advertising Costs

The Company expenses advertising costs in the period incurred. Literature
and promotional items are sold to distributors and are included in inventories
and are charged to cost of sales as they are sold.

Long-Lived Assets

Depreciation of furniture, fixtures and other equipment is computed on a
straight-line basis over the estimated useful lives of the related assets, which
range from three to six years. Leasehold improvements are amortized on a
straight-line basis over the life of the related asset or the term of the lease,
whichever is shorter.

Goodwill is being amortized over periods ranging from fifteen to forty
years.

Long-lived assets are reviewed for impairment, based on undiscounted cash
flows, whenever events or changes in circumstances indicate that the carrying
amount of such assets may not be recoverable.

Income Taxes

Income tax expense includes income taxes payable for the current year and
the change in deferred income tax assets and liabilities for the future tax
consequences of events that have been recognized in the Company's financial
statements or income tax returns. A valuation allowance is recognized to reduce
the carrying value of deferred income tax assets if it is believed to be more
likely than not that a component of the deferred income tax assets will not be
realized.

Royalty Overrides

An independent distributor may earn commissions called royalty overrides or
production bonuses based on retail volume. Such commissions are based on the
retail sales volume of certain other members of the independent sales force who
are sponsored by the distributor.

Minority Interest

On December 30, 1996, the Company sold shares of Herbalife Japan to certain
Company Directors, Executive Officers and Resident Managers of Herbalife Japan.
The minority interest represents the minority stockholders' approximate 7%
interest in the equity of Herbalife Japan -- See Footnote 8 -- "Transactions
with Related Parties".

44
<PAGE> 47
HERBALIFE INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Revenue Recognition

The Company records its retail sales based upon suggested retail prices as
reflected on the Company's sales invoices to its distributors. The Company does
not receive the amount reported as retail sales, but generally receives the net
sales price in cash or through credit card payments upon receipt of orders from
distributors. The net sales price is the suggested retail price less a
distributor allowance approximating 50%. Sales, related royalty overrides, and
allowances for product returns are recorded when the merchandise is shipped.
Advance sales deposits represent prepaid orders for which the Company has not
shipped the merchandise.

Sources of Supply and Product Development

All of the Company's products are manufactured by outside companies. Raven
Industries ("Raven") currently manufactures most of the Company's powder
products, and D&F Industries ("D&F) currently supplies most of the Company's
tablet and capsule products. For a number of years prior to 1998, the Company
was subject to requirements contracts with each of Raven, D&F and Dynamic
Products, Inc. ("Dynamic") pursuant to which the Company agreed to purchase all
of its requirements of powder products from Raven and all of its requirements of
tablet, capsule and certain other products from Dynamic or D&F, to the extent
each such manufacturer was capable of manufacturing such products. In 1996 and
1997, aggregate purchases by the Company from Raven and D&F represented a
majority of the Company's product purchases. In September 1997, the Company
entered into new three-year agreements with Raven, D&F and Dynamic, pursuant to
which revised pricing and other provisions became effective on January 12, 1998.
The new contracts provide, among other things, the ability for the Company to
source and develop products with other third party manufacturers, subject to
minimum percentage purchase and other requirements for nutritional supplement,
and a small number of non-nutritional supplement, products falling into
specified product categories. As a result, and because the new contracts confirm
the Company's ownership of product formulations for substantially all of the
Company's nutritional products, the Company has the capacity, and in the future
may seek, to "second source" particular nutritional supplement products with
multiple manufacturers. In addition, a number of the Company's new products,
such as WaferFull(TM) and Chew Slim(TM)weight management products are being
manufactured for the Company by new manufacturers. Increasingly, the Company's
in-house staff has been conducting product research and development and product
formulation. However, the Company has historically relied on Raven and D&F for
these services, and will continue to do so, albeit to a lesser extent, in the
future.

Earnings Per Share

At December 31, 1997, the Company adopted Statement of Financial Accounting
Standard No. 128 ("SFAS 128"), "Earnings per Share". SFAS 128 replaces the
presentation of primary earnings per share with a presentation of basic earnings
per share based upon the weighted average number of common shares outstanding
for the period. It also requires dual presentation of basic and diluted earnings
per share for companies with complex capital structures. Earnings per share for
the current and prior periods have been presented in conformity with the
provisions of SFAS 128

Net income as presented in the consolidated income statement is used as the
numerator in the earnings per share calculation for both the basic and diluted
computations.

Stock Compensation

Effective January 1, 1996, the Company adopted the disclosure provisions of
SFAS No. 123, "Accounting for Stock-Based Compensation". This statement
establishes financial accounting and reporting standards for stock-based
employee compensation plans, such as stock purchase plans, stock options,
restricted stock and stock appreciation rights as well as non-employee equity
transactions. The Company has not changed the

45
<PAGE> 48
HERBALIFE INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

method of accounting for its employee stock compensation plans, but as permitted
by this statement, has provided the fair value disclosure requirements in
Footnote 10.

Use of Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions. Such estimates and assumptions affect the reported amounts of
assets and liabilities and the disclosure of contingent assets and liabilities
at the date of the financial statements, and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from those
estimates.

Recently Issued Accounting Pronouncements

At December 31, 1998, the Company adopted Statements of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income," (SFAS 130), No.
131, "Disclosures about Segments of an Enterprise and Related Information" (SFAS
131) and No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits" (SFAS 132). The adoption of these standards expanded or
modified disclosures but had no impact on consolidated financial position,
results of operations or cash flows.

In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments and for hedging activities and
will be effective January 1, 2000. The Company has not yet analyzed the impact
of adopting this statement.

In April, 1998, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") 98-5, "Reporting on the Cost of Start-up
Activities." This Statement requires that all start-up activities, including
organizational costs, be expensed as incurred. The Company elected to adopt SOP
98-5 on January 1, 1998. The effects of adopting this SOP did not have a
material impact on consolidated financial position, results of operations or
cash flows.

In March, 1998, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." This Statement establishes
guidance on the capitalization of software for internal use. The Company will
adopt SOP 98-1 on January 1, 1999 as required. The Company has not yet analyzed
the impact of adopting this statement.

3. INVENTORIES

Inventories consist primarily of finished goods available for resale and
can be categorized as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1998 1997
----------- -----------
<S> <C> <C>
Product........................................... $75,182,000 $61,048,000
Literature........................................ 7,009,000 4,990,000
Promotional items................................. 5,947,000 5,545,000
----------- -----------
Total................................... $88,138,000 $71,583,000
=========== ===========
</TABLE>

46
<PAGE> 49
HERBALIFE INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

4. BANK LOANS AND CONTRACTS PAYABLE

Bank loans and contracts payable consist of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1998 1997
---------- ----------
<S> <C> <C>
Capitalized leases, due in monthly installments
through 2003 (Note 5)............................. $3,748,000 $3,824,000
Bank loans.......................................... 1,248,000 291,000
---------- ----------
Total..................................... 4,996,000 4,115,000
Less current portion................................ 2,639,000 1,449,000
---------- ----------
Long-term portion................................... $2,357,000 $2,666,000
========== ==========
</TABLE>

Annual scheduled payments of bank loans and contracts payable are:
$2,639,000 (1999), $1,346,000 (2000), $780,000 (2001), $187,000 (2002), and
$44,000 (2003).

The Company has revolving bank credit facilities in Turkey in the amount of
$2,000,000. The credit facilities will continue to be available until written
notice is provided. The credit facilities provide for borrowings at local
interest rates, set when borrowings are made. The borrowings are collateralized
by cash investments on account with the bank. At December 31, 1998, there was
$1,248,000 outstanding at December 31, 1998.

The Company has a line of credit arrangement expiring December 31, 2000,
which provides for unsecured borrowings of up to $25 million with the interest
rate based on Libor plus 1/2%. The Company had no borrowings under the line of
credit agreement at December 31, 1998, although $4.4 million was used to secure
letters of credit. The terms of the line of credit agreement contain, among
other provisions, requirements for maintaining defined levels of working
capital, net worth and fixed charge ratio.

The Company has pledged cash and cash equivalents to secure financing
primarily for the benefit of its foreign subsidiaries, including letters of
credit, leases and other obligations. As of December 31, 1998, an aggregate of
$2.5 million had been pledged against $2.0 million of commitments for debt
obligations.

5. LEASE OBLIGATIONS

The Company has warehouse and office facilities, furniture and fixtures and
equipment under leases which expire at various dates through 2009. Under the
lease agreements, the Company is also obligated to pay property taxes,
insurance, and maintenance costs.

Certain of the leases contain renewal options. Future minimum rental
commitments for non-cancelable operating leases and capital leases at December
31, 1998 were as follows:

<TABLE>
<CAPTION>
OPERATING CAPITAL
----------- ----------
<S> <C> <C>
1999............................................... $10,971,000 $2,028,000
2000............................................... 9,984,000 1,820,000
2001............................................... 7,193,000 825,000
2002............................................... 5,826,000 194,000
2003............................................... 5,667,000 45,000
Thereafter......................................... 12,996,000 --
----------- ----------
Total.................................... $52,637,000 4,912,000
===========
Less: Amounts included above representing
interest......................................... 1,164,000
----------
Present value of net minimum lease payments........ $3,748,000
==========
</TABLE>

47
<PAGE> 50
HERBALIFE INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Rental expense for the years ended December 31, 1998, 1997 and 1996 was
$18,336,000, $14,299,000 and $9,434,000, respectively.

Property under capital leases is included in property in the accompanying
balance sheets at December 31, 1998 and 1997 as follows:

<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Equipment........................................... $6,935,000 $6,105,000
Less: accumulated amortization...................... 3,487,000 2,096,000
---------- ----------
Total..................................... $3,448,000 $4,009,000
========== ==========
</TABLE>

6. EMPLOYEE COMPENSATION PLANS

In addition to the stock option plan discussed in Note 10, the Company has
two incentive compensation plans: the 1992 Executive Incentive Compensation Plan
(the "1992 Plan") and the 1994 Performance-Based Annual Incentive Compensation
Plan (the "1994 Plan"). Under the 1992 plan, a target percentage of earnings
before bonuses and income taxes may be awarded to Officers, Directors and Key
Employees, as determined by the Chief Executive Officer and Compensation
Committee, based on the attainment of certain corporate and business objectives.
The expense under the 1992 Plan for 1996 was $320,000. No bonuses were awarded
under this plan for 1998 or 1997.

The 1994 Plan provides additional compensation as an incentive to key
executives and consultants to attain certain specified performance objectives of
the Company. The amount of the available awards to individual participants and
the aggregate amount to all participants is determined based upon objective
performance goals as determined by the Compensation Committee of the Board of
Directors. The amounts awarded under the 1994 Plan for 1998, 1997 and 1996
totaled $6,750,000, $8,400,000 and $5,850,000, respectively.

In accordance with the 1994 Plan, the Company made advances of targeted
performance bonus amounts during 1998, 1997 and 1996 to the participants. As of
December 31, 1998, the remaining outstanding principal and accrued interest was
$6,000,000, included in receivables in the accompanying balance sheets. Each
advance is a full recourse obligation of the executive with a maturity date of
two years following the date of the advance. In addition, the advances bear
interest at the applicable federal rate (AFR) for two-year notes at the time of
the advances. The rates for outstanding advances at December 31, 1998 range from
4.33% to 5.64%.

The Company also maintains a profit sharing plan pursuant to Sections 401
(k) and (m) of the Internal Revenue Code. The plan is available to substantially
all employees who meet length of service requirements. Employees may elect to
contribute 2% to 17% of their compensation, and the Company will match a portion
of the participant's contribution. Participants are partially vested in the
Company contributions after three years and fully vested after seven years. The
Company contributed $646,000, $470,000 and $399,000 for the years ended December
31, 1998, 1997 and 1996, respectively.

In 1996, the Company implemented two non-qualified, deferred compensation
plans for select groups of management: the "Management Plan" and the "Senior
Executive Plan". The Deferred Compensation Plans are unfunded and their benefits
are paid from the general assets of the Company, except that the Company has
contributed certain amounts to a "rabbi trust" whose assets will be used to pay
the benefits if the Company remains solvent, but can be reached by the Company's
creditors if the Company becomes insolvent. The Deferred Compensation Plans
allow eligible employees to elect annually to defer up to fifty percent (50%) of
their base annual salary and up to one hundred percent (100%) of their annual
bonus for each calendar year (the "Annual Deferral Amount"). The Company makes
matching contributions on behalf of each participant in the Senior Executive
Plan of one hundred percent (100%) of the amount deferred by each participant up
to ten percent (10%) of the participant's base annual salary. Each participant
in either of the Deferred

48
<PAGE> 51
HERBALIFE INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Compensation Plans has at all times a fully vested and non-forfeitable interest
in each year's contribution, including interest credited thereto, and in any
Company matching contributions, if applicable. 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
plus interest. Such amount is payable in five or more years from the first day
of the year in which the Annual Deferral Amount is actually deferred. The gross
deferred compensation expense was $6,144,000, $4,683,000 and $2,826,000 for
1998, 1997 and 1996, respectively. The deferred compensation expense net of
participant contributions was $2,780,000, $1,078,000 and $616,000 for 1998, 1997
and 1996, respectively. The long-term deferred compensation liability, included
in other noncurrent liabilities in the accompanying balance sheet, was
$13,845,000 and $7,336,000 for December 31, 1998 and 1997, respectively.
Included in other assets is the related deferred compensation investment of
$12,445,000 and $6,464,000 for December 31, 1998 and 1997, respectively.

In addition, effective as of August 9, 1994, the Company entered into a
Deferred Compensation Agreement with a Senior Executive, pursuant to which this
employee has received and will continue to receive $600,000 in cash deferred
compensation from the Company on each of the first five anniversary dates of
such Deferred Compensation Agreement on which this employee remained
continuously employed by the Company. The gross deferred compensation expense
under the agreement with this employee was $600,000 for each of the three years
ended December 31, 1998. The long-term deferred compensation liability under the
agreement with this employee, included in other noncurrent liabilities in the
accompanying balance sheet, was $2,025,000 and $1,425,000 for December 31, 1998
and 1997, respectively.

7. RETIREMENT PLAN

In September 1997, the Company implemented a nonqualified, non-contributory
Supplemental Executive Retirement Plan ("SERP") providing retirement benefits
for a select group of management and highly compensated employees. The SERP is
unfunded and its benefits are paid from the general assets of the Company,
except that the Company has contributed $4,389,000 to a "rabbi trust" whose
assets will be used to pay benefits if the Company remains solvent, but can be
reached by the Company's creditors if the Company becomes insolvent. The normal
retirement benefit under the SERP is 60 quarterly installment payments
commencing at age 65, each of which equals one-quarter of 1.75% of
"compensation" times the number of years of service up to 20 years. A
participant becomes fully vested in his or her interest in the SERP on his or
her normal or early retirement date, death, or disability, or on a change in
control of the Company. If a participant's employment is terminated for cause,
the Company has the discretion to reduce his or her vested benefit to zero. In
all other cases, a participant's vested interest is zero until he or she has
completed five years of service, and gradually increases to 100% when he or she
has completed nine years of service. The Plan Administrator has the discretion
to credit a participant with additional years of service as of his or her date
of

49
<PAGE> 52
HERBALIFE INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

hire or commencement of participation in the SERP. The following table shows the
net periodic pension cost and other data about the SERP:

<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of
year/inception.................................. $ 5,965,000 $ 5,561,000
Service cost...................................... 989,000 270,000
Interest cost..................................... 432,000 134,000
Actuarial loss.................................... 1,643,000
----------- -----------
Benefit obligation at end of year................. $ 9,029,000 $ 5,965,000
=========== ===========
Funded status..................................... $(9,029,000) $(5,965,000)
Unrecognized actuarial loss....................... 1,643,000
Unrecognized prior service cost................... 5,066,000 5,437,000
----------- -----------
Net amount recognized............................. $(2,320,000) $ (528,000)
=========== ===========
Amounts recognized in the statement of
consolidated balance sheet consolidated balance
sheets consist of:
Accrued benefit liability....................... $(6,246,000) $(4,233,000)
Intangible asset................................ 3,926,000 3,705,000
----------- -----------
Net amount recognized............................. $(2,320,000) $ (528,000)
=========== ===========

1998 1997
----------- -----------
WEIGHTED-AVERAGE ASSUMPTIONS AS OF DECEMBER 31
Discount rate..................................... 6.5% 7.25%
Expected return on plan assets.................... N/A N/A
Rate of compensation increase..................... 4% 4%

1998 1997
----------- -----------
COMPONENTS OF NET PERIODIC BENEFIT COST
Service cost...................................... $ 989,000 $ 270,000
Interest cost..................................... 432,000 134,000
Amortization of prior service cost................ 371,000 124,000
----------- -----------
Net periodic pension cost......................... $ 1,792,000 $ 528,000
=========== ===========
</TABLE>

8. TRANSACTIONS WITH RELATED PARTIES

On April 23, 1998, Raven Industries ("Raven") and D&F Industries ("D&F"),
two of the significant suppliers of the Company's products, and Dynamic
Products, Inc. ("Dynamic") another supplier to the Company, concluded a bond
offering. Part of the proceeds from the offering was used to repurchase certain
ownership interests in such entities, including the entire ownership interest of
Mr. Hughes, CEO and President of the Company in Raven and Dynamic (representing
1/3 and 1/5 of the formerly outstanding ownership, respectively), as well as the
entire ownership interest of an employee (formerly a Director and Executive
Officer) of the Company in Dynamic (representing 5% of the formerly outstanding
ownership). Total purchases from Raven Industries were $16,379,000, $63,424,000
and $53,193,000 for the period January 1, 1998 through April 23, 1998 and for
the years ended December 31, 1997 and 1996, respectively. Total purchases from
Dynamic Products, Inc. were $990,000, $3,347,000 and $3,181,000 for the period
January 1, 1998 through April 23, 1998 and for the years ended December 31, 1997
and 1996, respectively. At December 31, 1997, the aggregate amounts payable to
these suppliers were $103,000.

In addition to advances described in Note 6, the Company has made
additional advances of $704,000 to certain officers and a Director. The
outstanding principal and accrued interest was $642,000 at December 31,

50
<PAGE> 53
HERBALIFE INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

1998 (included in receivables on the accompanying balance sheet). Each
outstanding advance is a full recourse obligation of the officer with a maturity
date of three months to 30 months. The advances bear interest ranging from 5.06%
to 5.75%.

The Company engaged Nutrient Research Consultants, Ltd., which is wholly
owned by an employee (former Director and Executive Officer), to perform
consulting services related to the formulation and testing of nutritional
products. For the year ended December 31, 1996, payments by the Company to this
consulting firm amounted to $230,000. No payments were made to this firm in 1997
and 1998.

In December 1996, the Company sold an approximate 7% interest in its
Japanese subsidiary to certain Company directors, executive officers and
resident managers of Herbalife Japan K.K.. The aggregate sales price was
$4,620,000: $1,386,000 in cash and $3,234,000 in full recourse interest bearing
notes. The notes are payable in 16 equal quarterly principal and interest
installments, beginning in March 1998, as amended. The outstanding note
receivable balance at December 31, 1998 and 1997 was $2,665,000 and $3,224,000,
respectively (included in other assets on the accompanying balance sheet). The
sales price of the shares was determined based upon a valuation performed by an
independent investment banking firm. The profit recognized from the sale has
been deferred until the interest ultimately is sold to a third party.

9. CONTINGENCIES

The Company is subject to transfer pricing regulations, restrictions on the
management fees it charges to its worldwide subsidiaries and similar regulations
and restrictions designed to ensure that appropriate levels of income are
reported as earned by each local subsidiary and taxed by the appropriate
governmental authorities. In addition, the Company's operations in foreign
countries are subject to regulations designed to ensure that appropriate levels
of customs duties are assessed on the importation of the Company's products.

While the Company believes it is in substantial compliance with all
applicable regulations and restrictions, it is subject to the risk that
governmental authorities could audit its transfer pricing and related practices
and assert that additional taxes are owed. For example, the Company is currently
subject to pending or proposed audits which are at various levels of review,
assessment or appeal in a number of foreign jurisdictions, including Italy and
France, involving transfer pricing issues, income taxes, value added taxes,
withholding taxes and related interest and penalties in material amounts. In
certain circumstances, additional taxes, interest and penalties have been
assessed, and the Company will be required to litigate to reverse the
assessments. In addition, Italian criminal tax proceedings are pending against
the former managing director of the Company's Italian subsidiary in his capacity
as such with respect to certain tax issues affecting the Company (and not
affecting distributors or the taxation of distributors). The Company has been
advised by its Italian tax counsel that referral of tax charges to criminal
authorities in Italy is a relatively common procedure (pursuant to statutory
provisions requiring referral of specific types of claims based upon the amounts
thereof) and in any event believes that the Company has strong defenses to the
charges. None of the pending or proposed audits, assessments or litigation is
expected to have a material adverse effect on the Company. However, ultimate
resolution of these matters may take several years and the outcome is uncertain.

In the event that such audits or assessments are concluded adversely to the
Company, the Company believes that it may be able to offset or mitigate the
consolidated effect of foreign income tax assessments through the use of U.S.
foreign tax credits. Currently, the foreign tax credits are being fully
utilized, so that additional such credits might not be usable to offset current
taxes. Further, because the laws and regulations governing U.S. foreign tax
credits are complex and depend, among other things, on tax treaties with foreign
nations in addition to U.S. tax laws, there can be no assurance that the Company
would in fact be able to take advantage of any such additional foreign tax
credits in the future.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

to ascertain what causes of action the plaintiffs are attempting (or have the
right) to allege against the Company, the case appears to be primarily a claim
for breach of contract. In addition, the Miron Suit appears to attempt to
challenge the legality of the company's marketing system. The Company believes
that it has meritorious defenses to the allegations that appear to be asserted
against the Company. Due to the uncertainty inherent in any litigation and the
early stage of this proceeding, however, there can be no assurances that the
Company will obtain a favorable resolution of the Miron Suit or that an adverse
disposition of the case would not have a material adverse effect on the Company.

Furthermore, the Company is from time to time engaged in routine
litigation. The Company regularly reviews all pending litigation matters in
which it is involved and, estimating the impact of such litigation matters,
establishes reserves considered appropriate by management. The Company's
estimates of the impact of these matters may change as the matters progress and
are ultimately resolved.

10. STOCKHOLDERS' EQUITY

At a Special Meeting of the Company's shareholders held on December 11,
1997, the Company's shareholders approved a recapitalization plan (the
"Recapitalization"), pursuant to which the Company's Articles of Incorporation
were amended and restated to: (i) effect a one-for-three reverse split (the
"Reverse Split") of the Old Common Stock, (ii) reclassify each resulting whole
share of Old Common Stock as a share of Class A Stock, (iii) create a new class
of non-voting common stock, designated Class B Stock, and (iv) fix the relative
rights, powers and limitations of the Class A Stock and the Class B Stock. The
Recapitalization did not change the aggregate number of shares of the Company's
authorized and outstanding capital stock. On December 12, 1997, the
Recapitalization became effective and the Company's Board of Directors declared
a dividend of two shares of Class B Stock on each whole share of Class A Stock
resulting from the Reverse Split. On December 15, 1997, trading of both the
Class A Stock and the Class B Stock commenced on the NASDAQ National Market
system. Common stock options and SARs have been retroactively adjusted to
reflect the Recapitalization.

The Company's 1991 Stock Option Plan ("1991 Plan"), as amended, permits the
granting of non-qualified stock options to key employees and consultants to
purchase 7,400,000 shares of the Company's Class A Stock and/or Class B Stock
(less shares previously exercised) at prices not less than 85% of the fair
market value of such shares on the date the option is granted. All options
outstanding at December 31, 1998 were granted at the fair market value of such
shares on the grant date. The contractual life of the options are generally 10
years and vest ratably over a maximum of 5 years in minimum annual installments
of 20%.

The Company's 1994 Plan allows for the granting of stock based performance
awards authorized by the Compensation Committee of the Board of Directors.
Compensation costs for these awards are recorded based on the quoted market
price of the Company's common stock at the end of the period in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and related Interpretations.

The employees are entitled to receive dividends, but assumption of full
beneficial ownership vests ratably over five years and is contingent upon
remaining in continuous employment for the vesting period. Paid-in Capital in
Excess of Par Value and Unearned Compensation were recorded for the market value
of the shares issued. Unearned Compensation is being amortized to compensation
expense over the vesting period and is shown as a reduction of stockholders'
equity. Stock based compensation costs included in the determination of income
were $240,000, $1,332,000, and $4,798,000 for the years ended 1998, 1997, and
1996, respectively.

During October, 1998, 1.9 million Class A Stock options and 5.1 million
Class B Stock options were repriced by the Company to reflect the then current
stock price of $8.000 and $6.625 respectively.

The Company accounts for stock option grants in accordance with Accounting
Principles Board Opinion No. 25. Had compensation cost for stock option grants
been calculated using the fair value provisions of

52
<PAGE> 55
HERBALIFE INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123), the Company's net earnings and earnings per share
would have been reduced to the pro forma amounts indicated in the following
table:

<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Net Income -- as reported........... $48,498,000 $54,667,000 $44,791,000
Net Income -- pro forma............. $33,190,000 $46,881,000 $42,054,000
Basic EPS -- as reported............ $ 1.68 $ 1.81 $ 1.50
Basic EPS -- pro forma.............. $ 1.15 $ 1.55 $ 1.41
Diluted EPS -- as reported.......... $ 1.60 $ 1.72 $ 1.43
Diluted EPS -- pro forma............ $ 1.14 $ 1.49 $ 1.38
</TABLE>

The pro forma effect on net income for the years presented is not
necessarily representative of the pro forma effect on net income for future
years since the pro forma compensation costs relate only to stock options
granted or repriced since January 1, 1995.

The fair value of the stock options granted during the years presented was
determined using the Black-Scholes option pricing model and the following
weighted average assumptions:

<TABLE>
<CAPTION>
1998 1997 1996
--------------------- --------------------- ---------------------
CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Risk free interest rate............ 4.44% 4.51% 6.49% 6.49% 6.47% 6.47%
Expected option life............... 6.7 years 6.7 years 6.9 years 6.9 years 5.5 years 5.5 years
Volatility......................... 61.09% 59.54% 75.18% 75.18% 77.68% 77.68%
Dividend yield..................... 3.00% 3.50% 3.50% 3.50% 5.20% 5.20%
</TABLE>

53
<PAGE> 56
HERBALIFE INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Option groups outstanding at December 31, 1998, 1997 and 1996 and related
option information follows:

<TABLE>
<CAPTION>
CLASS A STOCK CLASS B STOCK
-------------------------------------------- -------------------------------------
WEIGHTED WEIGHTED
OPTIONS AVERAGE SARS OPTIONS AVERAGE SARS
--------------- -------- --------------- --------------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
1998
Outstanding at January 1..... 2,041,000 $14.27 -- 4,156,000 $14.40 --
Granted...................... 374,000 22.12 -- 1,334,000 19.89 --
Repriced..................... 1,907,000 8.00 -- 5,075,000 6.63 --
Exercised.................... (159,000) 9.86 -- (346,000) 9.57 --
Surrendered for repricing.... (1,907,000) 17.53 -- (5,075,000) 16.30 --
Canceled..................... (16,000) 10.65 -- (37,000) 10.61 --
--------------- ------ --------------- --------------- ------ --------
Outstanding at December 31... 2,240,000 $7.85 -- 5,107,000 $ 6.58 --
====== =============== ====== ========
Available for grant at
December 31................ 15,000 45,000
--------------- ---------------
Total reserved shares.... 2,255,000 5,152,000
=============== ===============
Exercisable at December 31... 736,000 1,462,000
=============== ===============
Option prices per share
Granted.................... $8.00 - $22.13 $6.63 - $26.00
Exercised.................. $7.38 - $19.88 $6.68 - $19.88
Weighted average fair value
of options granted during
the year................... $4.22 $3.67
1997
Outstanding at January 1..... 1,312,000 $10.92 62,000 2,627,000 $10.92 124,000
Granted.................... 933,000 17.29 -- 1,940,000 17.45 --
Exercised.................. (222,000) 7.39 (10,000) (448,000) 7.39 (20,000)
SAR's converted to
options.................. 52,000 15.55 (52,000) 104,000 15.55 (104,000)
Canceled................... (34,000) 15.56 -- (67,000) 15.56 --
--------------- ------ --------------- --------------- ------ --------
Outstanding at December 31... 2,041,000 $14.27 -- 4,156,000 $14.40 --
====== =============== ====== ========
Available for grant at
December 31................ 226,000 377,000
--------------- ---------------
Total reserved shares.... 2,267,000 4,533,000
=============== ===============
Exercisable at December 31... 389,000 778,000
=============== ===============
Option prices per share
Granted.................... $15.69 - $25.13 $15.69 - $25.13
Exercised.................. $0.88 - $13.00 $0.88 - $13.00
Weighted average fair value
of options granted during
the year................... $9.46 $9.56
1996
Outstanding at January 1..... 972,000 $6.69 20,000 1,944,000 $ 6.69 40,000
Granted.................... 638,000 14.96 58,000 1,277,000 14.96 117,000
Exercised.................. (280,000) 5.64 (5,000) (559,000) 5.64 (11,000)
Canceled................... (18,000) 7.38 (11,000) (35,000) 7.38 (22,000)
--------------- ------ --------------- --------------- ------ --------
Outstanding at December 31... 1,312,000 $10.92 62,000 2,627,000 $10.92 124,000
====== =============== ====== ========
Available for grant at
December 31................ 221,000 441,000
--------------- ---------------
Total reserved shares.... 1,533,000 3,068,000
=============== ===============
Exercisable at December 31... 256,000 513,000
=============== ===============
Option prices per share
Granted.................... $10.13 - $19.88 $10.13 - $19.88
Exercised.................. $0.88 - $15.25 $0.88 - $15.25
Weighted average fair value
of options granted during
the year................... $7.23 $7.23
</TABLE>

54
<PAGE> 57
HERBALIFE INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The following table summarizes information regarding option groups
outstanding at December 31, 1998.

<TABLE>
<CAPTION>
WTD AVG
NUMBER REMAINING WTD AVG OPTIONS WTD AVG
OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
AT 12/31/98 LIFE PRICE AT 12/31/98 PRICE
----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
Range of Exercise Prices:
Class A
$0.88...................................... 19,000 3 Years $0.88 19,000 $0.88
$7.38...................................... 290,000 6 Years $7.38 238,000 $7.38
$7.50...................................... 25,000 7 Years $7.50 20,000 $7.50
$8.00...................................... 1,906,000 8 Years $8.00 459,000 $8.00
Class B
$0.88...................................... 38,000 3 Years $0.88 38,000 $0.88
$6.63...................................... 5,069,000 8 Years $6.63 1,424,000 $6.63
</TABLE>

11. SEGMENT INFORMATION

The Company is a network marketing company that sells a wide range of
weight management products, food and dietary supplements and personal care
products within one industry as defined under SFAS 131, "Disclosures about
Segments of an Enterprise and Related Information." The Company's products are
manufactured by third party providers and then sold to independent distributors
who sell Herbalife products to retail consumers or other distributors.

55
<PAGE> 58
HERBALIFE INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The Company has operations throughout the world (42 countries as of
December 31, 1998) and is organized and managed by geographic area. Transactions
between geographic segments generally represent export sales from the United
States to foreign operations. Information reviewed by the Company's chief
operating decision makers on significant geographic segments, as defined under
SFAS 131, is prepared on the same basis as the consolidated financial statements
and is as follows:

<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
TOTAL RETAIL SALES:
United States(1)........................... $ 893.4 $ 745.7 $ 656.7
Japan...................................... 547.7 525.7 311.1
Russia..................................... 96.7 157.8 142.1
All others(1).............................. 642.0 512.0 471.1
Elimination of intersegment sales(1)....... (535.0) (450.5) (380.9)
-------- -------- --------
TOTAL RETAIL SALES...................... 1,644.8 1,490.7 1,200.1
-------- -------- --------
DISTRIBUTOR ALLOWANCES:
United States(2)........................... 369.5 294.3 269.7
Japan...................................... 265.4 253.7 149.0
Russia..................................... 42.9 73.4 68.1
All others................................. 296.7 239.0 219.2
Elimination of intersegment allowance(2)... (196.3) (152.2) (137.8)
-------- -------- --------
TOTAL DISTRIBUTOR ALLOWANCES............ 778.2 708.2 568.2
-------- -------- --------
NET SALES.................................... $ 866.6 $ 782.5 $ 631.9
======== ======== ========
OPERATING INCOME(3):
United States.............................. $ 244.5 $ 206.2 $ 175.9
Japan...................................... 62.9 61.2 36.2
Russia..................................... 5.0 26.4 14.9
All others................................. 34.1 13.5 26.8
Elimination of intersegment gross profit... (232.5) (191.0) (160.7)
-------- -------- --------
TOTAL................................... 114.0 116.3 93.1
-------- -------- --------
Corporate expenses......................... (35.7) (30.3) (24.4)
Net interest income........................ 2.5 4.5 4.1
Income taxes............................... (31.1) (34.9) (28.0)
Minority interest.......................... (1.2) (1.0) --
-------- -------- --------
NET INCOME................................... $ 48.5 $ 54.6 $ 44.8
======== ======== ========
TOTAL ASSETS:
United States.............................. $ 116.2 $ 138.5 $ 143.2
Japan...................................... 69.4 57.9 29.6
Russia..................................... 11.0 16.2 10.6
All others................................. 123.0 83.6 68.8
Corporate(4)............................... 31.9 23.0 19.5
Elimination................................ (3.3) (4.6) (2.6)
-------- -------- --------
TOTAL ASSETS............................ $ 348.2 $ 314.6 $ 269.1
======== ======== ========
</TABLE>

56
<PAGE> 59
HERBALIFE INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
CAPITAL EXPENDITURES:
United States.............................. $ 14.5 $ 10.5 $ 11.4
Japan...................................... 1.9 2.4 0.5
Russia..................................... 0.5 -- --
All others................................. 2.2 0.2 3.5
-------- -------- --------
TOTAL CAPITAL EXPENDITURES.............. $ 19.1 $ 13.1 $ 15.4
======== ======== ========
Notes:
(1) Includes intersegment sales of:
United States......................... $ 528.9 $ 447.0 $ 377.2
All others............................ 6.1 3.5 3.7
-------- -------- --------
Total.............................. $ 535.0 $ 450.5 $ 380.9
======== ======== ========
(2) Includes distributor allowance reclass
of:
United States......................... 196.3 152.2 137.8
Elimination........................... (196.3) (152.2) (137.8)
-------- -------- --------
Total.............................. -- -- --
======== ======== ========
(3) Includes depreciation and amortization
of:
United States......................... $ 11.5 $ 6.9 $ 5.9
Japan................................. 1.2 0.8 0.3
Russia................................ -- -- --
All Others............................ 3.1 3.3 4.4
-------- -------- --------
Total.............................. $ 15.8 $ 11.0 $ 10.6
======== ======== ========
(4) Corporate assets includes:
Goodwill.............................. $ 3.3 $ 3.5 $ 3.6
ST deferred taxes..................... 21.9 16.8 15.7
LT deferred taxes..................... 6.7 2.7 0.2
-------- -------- --------
Total.............................. $ 31.9 $ 23.0 $ 19.5
======== ======== ========
</TABLE>

<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
REVENUE BY PRODUCT LINE IS AS FOLLOWS:
Weight management............................ $ 512.8 $ 448.9 $ 358.3
Food and dietary supplements................. 865.2 805.8 666.0
Personal care products....................... 198.9 166.6 115.4
Literature, promotional and other............ 67.9 69.4 60.4
-------- -------- --------
Total retail sales................. $1,644.8 $1,490.7 $1,200.1
======== ======== ========
</TABLE>

12. INCOME TAXES

The components of income before income taxes were:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Domestic............................ $28,082,000 $44,769,000 $23,298,000
Foreign............................. 52,781,000 45,751,000 49,533,000
----------- ----------- -----------
$80,863,000 $90,520,000 $72,831,000
=========== =========== ===========
</TABLE>

57
<PAGE> 60
HERBALIFE INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Income taxes are as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1998 1997 1996
------------ ----------- -----------
<S> <C> <C> <C>
CURRENT:
Foreign................................ $ 33,048,000 $25,397,000 $26,349,000
Federal................................ 6,133,000 9,858,000 8,774,000
State.................................. 2,754,000 2,579,000 2,600,000
DEFERRED:
Foreign................................ (395,000) 1,156,000 (3,367,000)
Federal................................ (9,814,000) (3,749,000) (5,589,000)
State.................................. (594,000) (391,000) (727,000)
------------ ----------- -----------
$ 31,132,000 $34,850,000 $28,040,000
============ =========== ===========
</TABLE>

The tax effects of temporary differences which gave rise to deferred income
tax assets and liabilities are as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1998 1997
----------- -----------
<S> <C> <C>
DEFERRED INCOME TAX ASSETS:
Intercompany profit in inventory.................... $ 1,131,000 $ 1,693,000
Accruals not currently deductible................... 15,479,000 11,798,000
Foreign tax credits and tax loss carryforwards of
certain foreign subsidiaries...................... 5,539,000 3,966,000
Less valuation allowance............................ (3,458,000) (1,601,000)
Depreciation/amortization........................... 201,000 --
Deferred compensation plan.......................... 6,786,000 2,960,000
Accrued state income taxes.......................... 630,000 640,000
Accrued vacation.................................... 1,670,000 --
Other............................................... 2,670,000 1,283,000
----------- -----------
30,648,000 20,739,000
----------- -----------
DEFERRED INCOME TAX LIABILITIES:
Depreciation/amortization........................... -- 975,000
Payments to former partners......................... 896,000 931,000
Inventory deductibles............................... 136,000 748,000
Unrealized foreign exchange......................... 1,050,000
Other............................................... -- 322,000
----------- -----------
2,082,000 2,976,000
----------- -----------
NET................................................. $28,566,000 $17,763,000
=========== ===========
</TABLE>

At December 31, 1998, the Company's deferred income tax asset for U.S.
foreign tax credits ($1,039,000) and tax loss carryforwards of certain foreign
subsidiaries totaling $5,539,000 was reduced by a valuation allowance of
$3,458,000. The tax loss carryforwards expire in varying amounts between 1999
and 2008. Realization of the income tax carryforwards is dependent on generating
sufficient taxable income prior to expiration of the carryforwards. Although
realization is not assured, management believes 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 be reduced in the near term if estimates of future taxable income during
the carryforward period are reduced.

58
<PAGE> 61
HERBALIFE INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The tax expense differs from the "expected" income tax expense by applying
the United States statutory rate of 35% as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Tax expense at United States statutory
rate................................... $28,302,000 $31,682,000 $25,491,000
Increase (decrease) in tax resulting
from:
Foreign sales corporation.............. (194,000) (1,846,000) (332,000)
U.S. foreign tax credits............... (6,671,000) (7,926,000) (4,497,000)
Increase (decrease) in valuation
allowances.......................... 1,857,000 156,000 (626,000)
Differences between U.S. and foreign
tax rates on foreign income......... 8,380,000 10,541,000 6,556,000
State taxes, net of federal benefit.... 1,297,000 1,428,000 1,240,000
Other.................................. (1,839,000) 815,000 208,000
----------- ----------- -----------
TOTAL.......................... $31,132,000 $34,850,000 $28,040,000
=========== =========== ===========
</TABLE>

Cumulative undistributed earnings of foreign subsidiaries for which no
deferred taxes have been provided approximated $13,891,000 at December 31, 1998.
The additional taxes payable on the earnings of foreign subsidiaries, if
remitted, would be substantially offset by U.S. tax credits for foreign taxes
paid.

13. FINANCIAL INSTRUMENTS

The following table provides information about the details of the Company's
option contracts at 12/31/98:

<TABLE>
<CAPTION>
U.S. DOLLAR AVERAGE
EQUIVALENT STRIKE FAIR MATURITY UNREALIZED
FOREIGN CURRENCY COVERAGE PRICE VALUE DATE LOSS
---------------- ----------- ------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Japanese Yen................. $90,000,000 120 $1,781,000 Jan-Dec 1999 $1,915,000
</TABLE>

59
<PAGE> 62
HERBALIFE INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The table below describes the forward contracts that were outstanding at
12/31/1998:

<TABLE>
<CAPTION>
CONTRACT FORWARD POSITION MATURITY CONTRACT UNREALIZED
FOREIGN CURRENCY DATE IN US DOLLARS DATE RATE LOSS
---------------- ---------- ------------------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C>
Buy German Mark/sell Pound
Sterling........................ 12/14/1998 $1,807,000 03/31/1999 2.759 $ (2,000)
Buy Pound Sterling/sell Dutch
Guilders........................ 08/12/1998 1,243,000 02/26/1999 3.202 (33,000)
Buy Norwegian Kroner/sell French
Franc........................... 08/28/1998 912,000 06/30/1999 1.316 (7,000)
Buy Swedish Krona/sell French
Franc........................... 08/28/1998 345,000 06/30/1999 1.367 (28,000)
</TABLE>

14. QUARTERLY INFORMATION (UNAUDITED)

<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
FIRST QUARTER ENDED MARCH 31
Retail sales.................................... $398,447,000 $323,944,000
Net sales....................................... 209,776,000 169,977,000
Operating margin................................ 92,674,000 73,351,000
Net income...................................... $ 14,788,000 $ 11,916,000
Net income per common share:
Basic........................................... $ 0.51 $ 0.39
Diluted......................................... $ 0.48 $ 0.38
Dividends per share paid........................ $ 0.15 $ 0.15
SECOND QUARTER ENDED JUNE 30
Retail sales.................................... $398,142,000 $350,020,000
Net sales....................................... 209,944,000 184,891,000
Operating margin................................ 96,223,000 81,636,000
Net income...................................... $ 15,328,000 $ 13,700,000
Net income per common share:
Basic........................................... $ 0.53 $ 0.45
Diluted......................................... $ 0.50 $ 0.44
Dividends per share paid........................ $ 0.15 $ 0.15
</TABLE>

60
<PAGE> 63
HERBALIFE INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
THIRD QUARTER ENDED SEPTEMBER 30
Retail sales.................................... $402,704,000 $393,894,000
Net sales....................................... 213,032,000 207,227,000
Operating margin................................ 94,041,000 92,113,000
Net income...................................... $ 7,052,000 $ 14,253,000
Net income per common share:
Basic........................................... $ 0.25 $ 0.47
Diluted......................................... $ 0.24 $ 0.45
Dividends per share paid........................ $ 0.15 $ 0.15
FOURTH QUARTER ENDED DECEMBER 31
Retail sales.................................... $445,544,000 $422,835,000
Net sales....................................... 233,890,000 220,357,000
Operating margin................................ 101,981,000 96,399,000
Net income...................................... $ 11,330,000 $ 14,798,000
Net income per common share:
Basic........................................... $ 0.40 $ 0.49
Diluted......................................... $ 0.38 $ 0.47
Dividends per share paid........................ $ 0.15 $ 0.15
</TABLE>

61
<PAGE> 64

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereto duly authorized.

Dated: March 30, 1999

HERBALIFE INTERNATIONAL, INC.

By: /s/ TIM GERRITY
Tim Gerrity
Executive Vice President,
Chief Financial Officer
(Principal Financial and Accounting
Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <C> <S>

/s/ MARK HUGHES Chairman of the Board and March 30, 1999
- ------------------------------------------------ President, Chief Executive
Mark Hughes Officer (Principal Executive
Officer)

/s/ CHRISTOPHER PAIR Director and Executive Vice March 30, 1999
- ------------------------------------------------ President, Chief Operating
Christopher Pair Officer

/s/ MICHAEL E. ROSEN Director and Executive Vice March 30, 1999
- ------------------------------------------------ President, Chief Executive of
Michael E. Rosen Corporate Development/Marketing

/s/ EDWARD HALL Director March 30, 1999
- ------------------------------------------------
Edward Hall

/s/ ALAN LIKER Director March 30, 1999
- ------------------------------------------------
Alan Liker

/s/ CHRISTOPHER M. MINER Director March 30, 1999
- ------------------------------------------------
Christopher M. Miner
</TABLE>

62
<PAGE> 65

HERBALIFE INTERNATIONAL, INC.

EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE NO./(FOOTNOTE)
- ------- ----------- -------------------
<C> <S> <C>
3.1 Amended and Restated Articles of Incorporation (10)
3.2 Amended and Restated Bylaws (2)
4.1 Form of Class A Common Stock and Class B Common Stock (12)
Certificates
10.1 Final Judgment and Permanent Injunction, entered into on (1)
October, 1986 by the parties to that action entitled People
of the State of California, et al., v Herbalife
International, Inc. et al., Case No. 92767 in the Superior
Court of the State of California for the County of Santa
Cruz
10.2 The Company's 1991 Stock Option Plan, as amended (7), (13)
10.3 The Company's 1992 Executive Incentive Compensation Plan, as (2), (7)
amended
10.4 Form of Individual Participation Agreement relating to the (2)
Company's Executive Compensation Plan
10.5 Form of Letter Agreement between the Compensation Committee (2)
of the Board of Directors of the Company and Mark Hughes
10.6 Form of Indemnity Agreement between the Company and certain (2)
officers and directors of the Company
10.7 Trust Agreement among the Company, Citicorp Trust, N.A. and (2)
certain officers and directors of the Company
10.8 Form of Stock Appreciation Rights Agreement between the (2)
Company and certain directors of the Company
10.9 1994 Performance Based Annual Incentive Compensation Plan, (4), (7), (11)
as amended and restated in 1996
10.10 Form of Promissory Note for Advances under the Company's (5)
1994 Performance Based Annual Incentive Compensation Plan
10.11 Employment Agreement between the Company and Chris Pair (3)
dated April 3, 1994
10.12 The Company's Executive Officer Deferred Compensation Plan, (5)
amending and relating the Deferred Compensation Agreement
between the Company and Michael Rosen
10.13 Office lease agreement between the Company and State (6)
Teacher's Retirement System, dated July 20, 1995
10.14 Form of stock appreciation rights agreements between the (6)
Company and certain directors of the Company
10.15 The Company's Senior Executive Deferred Compensation Plan, (6)
effective January 1, 1996, as amended
10.16 The Company's Management Deferred Compensation Plan, (6)
effective January 1, 1996, as amended
10.17 Master Trust Agreement between the company and Imperial (6)
Trust Company, Inc., effective January 1, 1996
10.18 The Company's 401K Plan, as amended (6)
10.19 Agreement Concerning Share Allocation Plan for Specific (8)
Directors of Herbalife of Japan K.K. dated December 30,
1996.
</TABLE>
<PAGE> 66

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE NO./(FOOTNOTE)
- ------- ----------- -------------------
<C> <S> <C>
10.20 Consulting Agreement between David Addis and Herbalife of (8)
America, Inc. dated January 27, 1997.
10.21 Agreement between Herbalife International of America, Inc. (9)
and D&F Industries, Inc. dated September 2, 1997
10.22 Agreement between Herbalife International of America, Inc. (9)
and Dynamic Products, Inc. dated September 2, 1997
10.23 Agreement between Herbalife International of America, Inc. (9)
and Raven Industries, Inc. d/b/a Omni-Pak Industries, dated
September 2, 1997
10.24 The Company's Supplemental Executive Retirement Plan (12)
10.25 Credit Agreement between Herbalife International of America, (14)
Inc. and First National Bank of Chicago, dated December 14,
1998
21 List of subsidiaries of the Company (14)
23.1 Independent Auditor's Consent (14)
27 Financial Data Schedule (14)
</TABLE>