HERBALIFE INTERNATIONAL INC, 10-K405, 2000-03-30

HERBALIFE INTERNATIONAL INC
10-K405, 2000-03-30
DRUGS, PROPRIETARIES & DRUGGISTS' SUNDRIES

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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, 1999

[ ] 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. Yes [X]

The Aggregate market value of the Registrant's Class A and Class B Common
Stock on February 29, 2000 held by nonaffiliates was approximately $143 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 February 29, 2000
was:

10,002,549 Shares of Class A Common Stock
18,650,014 Shares of Class B Common Stock

DOCUMENTS INCORPORATED BY REFERENCE

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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.

ITEM 1. BUSINESS

BACKGROUND AND CORPORATE ORGANIZATION

GENERAL

We are 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, 1999, we conducted business in 46 countries
located in Asia/Pacific Rim, Europe and The Americas. Retail sales in those
regions represented 43.6%, 26.2% and 30.2%, respectively, of our total retail
sales in 1999.

We have experienced substantial growth in retail sales in recent years.
From 1995 to 1999, our retail sales grew from $923.6 million to $1.79 billion,
representing a compound annual growth rate of 18%.

Our products are marketed exclusively through a network marketing system.
This system enables our 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 we operate, 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 Herbalife's products
themselves. Our 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

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

In December 1997, our 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."

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Herbalife International, Inc. operates through 44 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.

EXECUTIVE OFFICES

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

GROWTH STRATEGY

Our business strategy is comprised of the following principal elements:

MAINTAIN AND GROW OUR DISTRIBUTOR BASE. We recognize the strategic
importance of our distribution network and constantly strive to motivate and
grow our distributor base. Our distributors have financial incentives to make
sales and to encourage sales by their downlines. As the number of distributors
in a given distributor's downline increases, the potential for additional sales
by the downline and the financial reward for that distributor also increase. We
intend to continue to offer compelling financial incentives to our distributors
and to offer support and motivation in order to further expand our distributor
base throughout the world. For example, we provide ongoing support in the form
of motivational events and training programs, both live and via the Herbalife
Broadcast Network, which delivers programming via television to subscribing
distributors. We also utilize teleconferences and a wide range of promotional
literature, including catalogs and newsletters, in multiple languages and
tailored to meet the particular needs of Herbalife distributors worldwide. Each
month, in addition to over 100 Herbalife sponsored live events, our distributors
conduct several thousand local training and motivational events.

The opportunity to become an Herbalife distributor 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. Additionally, the
introduction of new products that target consumers outside our core product
lines attracts new distributors to Herbalife who may not otherwise have been
attracted to our distribution system. For example, by offering our new personal
care and cosmetics line, which includes our recently introduced "Colour"
cosmetic products, we expect to attract a new segment of people interested in
selling cosmetics who might not otherwise be interested in selling weight
management or nutritional products.

EXPAND PRODUCT OFFERINGS. We intend to leverage our distribution channel by
offering new products that we identify as suitable for the direct selling
market. To facilitate our expansion into new product lines, we have an in-house
product development staff and utilize external consultants, scientists and
physicians. From January 1998 through December 1999, we introduced 9 new weight
management products, 25 new nutritional products and 37 new personal care
products. We intend to introduce several new products in 2000, and we plan to
extend our new "Colour" cosmetics line into our other markets. We also have
extended our dietary and nutritional product line to address children's dietary
issues and to target a market with aging and longevity concerns.

We own substantially all of our product formulas, and we contract with
various manufacturers to produce our products to precise specifications. Without
the managerial and operational overhead of owning manufacturing facilities, we
have the flexibility to experiment with new products and product variations and
to choose from products offered to us by other product developers.

EXPAND INTO NEW MARKETS. We plan to continue to increase our sales by
introducing popular Herbalife products into our existing markets where they are
not yet available and by entering new markets. Of the 71 weight management
products and dietary and nutritional supplements that we offer, only a limited
number are currently available in all 46 of our operating countries. The timely
introduction of new, high-quality products into an existing market generates
enthusiasm among our distributors by creating additional sales opportunities.
The introduction of new products frequently results in increased sales of
existing Herbalife products. For example, we believe that the increase in
overall sales in Europe in 1999 was at least partly due to

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the introduction of new products, such as our protein bar that was introduced in
Europe in April 1999. We plan to introduce our "Colour" cosmetics line in the
Czech Republic and Slovak Republic in 2000. We will continue to evaluate
potential new markets based on the demand for our products as well as the
potential to create an effective distribution base. We recently opened India,
and we plan to open China in late 2000.

We employ a staff of government relations personnel throughout the world
who take a systematic, proactive approach to working with government and
licensing agencies in both new and existing markets to ensure that our products
and distribution model are in compliance with all local laws and regulations. We
also utilize outside market consultants and work with private organizations
throughout the world to prepare for introducing our products in diverse markets.

PRODUCT OVERVIEW

Our products include weight management products, dietary and nutritional
supplements, and personal care and cosmetic products. We currently market 171
products, exclusive of (1) variations in product flavors and colors, (2)
reformulations of products to satisfy regulatory requirements within a
particular country and (3) similar variations of our basic product line. A
limited number of our personal care products are classified in the United States
as OTC drugs. See "-- Regulation."

The following chart summarizes the number of products we offer in our
principal product categories as of December 31, 1999 and retail sales
information by product category during the indicated periods. We have
reclassified prior year numbers to conform with current year presentation of
product classification.

PRODUCT SALES BY CATEGORY

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
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1999 1998 1997
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PERCENT OF PERCENT OF PERCENT OF
PRODUCT CATEGORY RETAIL TOTAL RETAIL RETAIL TOTAL RETAIL RETAIL TOTAL RETAIL
(NUMBER OF PRODUCTS IN CATEGORY) SALES SALES SALES SALES SALES SALES
-------------------------------- -------- ------------ -------- ------------ -------- ------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Weight Management (15)............ $ 741.0 41.3% $ 648.4 39.4% $ 575.8 38.6%
Dietary and Nutritional
Supplements (56)................ 807.8 45.0% 729.6 44.4% 678.9 45.5%
Personal Care Products (100)...... 198.1 11.1% 199.0 12.1% 166.6 11.2%
Literature, Promotional and
Other........................... 46.6 2.6% 67.8 4.1% 69.4 4.7%
-------- -------- --------
Total................... $1,793.5 $1,644.8 $1,490.7
======== ======== ========
</TABLE>

WEIGHT MANAGEMENT PRODUCTS. Our weight management products include the
following: (1) Formula 1 Protein Mix, a protein powder in four different flavors
designed as a meal replacement; (2) the four Thermojetics(R) weight management
tablets (original green, green, beige and yellow) used as part of our weight
management program; and (3) Thermojetics(R) Herbal Concentrate, an herbal
beverage blended from five natural botanicals, now offered in three different
flavors. Since January 1998, we have introduced the following products to the
Thermojetics(R) system: (1) Chew Slim herbal diet gum; (2) WaferFull chewable
wafers; (3) MentaBalance(R) amino acid and herbal supplement; and (4)
CarboGuard(R) micronutrient fiber and herbal supplement. In December 1999, we
introduced a new alternative Thermojetics(R) program, named the Thermojetics(R)
High-Protein, Low-Carb Program, which is comprised of snack bars, the
Thermojetics(R) Gold Herbal Supplement Tablets and shake, soup and drink mixes.
For the last three years, approximately 40% of our sales was derived from our 15
weight management products and approximately 20% was derived from our Formula 1
Protein Mix.

DIETARY AND NUTRITIONAL SUPPLEMENTS. Our dietary and nutritional
supplements include a variety of products, each containing herbs, vitamins,
minerals and other natural ingredients. Some of these products are targeted to
specific consumer groups. For example, we offer Tang Kuei, Woman's Choice and
Women's Advantage specifically for women; Male Factor 1000(R), Male Performance
Complex and Ultimate Prostate Formula for men; Kindermins(R), Dinomins and
DinoShakes(R), which are designed to meet the nutritional needs

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of children; and the Longetics(R) Program for mature adults. We also offer
several antioxidants, such as Extreme C tablets, Mega Garlic, Schizandra Plus,
RoseOx, and Echinacea Plus. Other signature products include Herbal-Aloe,
multivitamin, Cell Activator(R), Cell-U-Loss(R), N.R.G., Thermo-Bond(R),
Aminogen, Florafiber, Xtra-Cal, Herbalifeline(R), Sleep Now, Herbal Calmative
and A.M. Replenishing and P.M. Cleansing formulas.

PERSONAL CARE AND COSMETIC PRODUCTS. We market our entire personal care
product line under the name Dermajetics(R), which we initially launched in 1995.
The Dermajetics(R) product line consists of the following products: (1) the Skin
Survival Kit, consisting of a day and night moisturizer, a deep cleaning facial
mask and a hydrating eye gel; (2) Nature's Mirror(R), consisting of a cleanser,
toner and moisturizer for each of three different skin types and four specialty
care products; (3) Parfums Vitessences, consisting of six eaux de toilette,
three for men and three for women; (4) "Man" and "Woman" fragrances; (5) Good
Hair Day, consisting of seven hair care products; (6) Ocean Currents(R),
consisting of five bath products; (7) the Acne Treatment System, consisting of
four products; (8) AromaVie(R), consisting of three aromatic soaps and oils; and
(9) other specialty personal care products, including Herbal Aloe Gel and
Lotion, Soothing Spray, Cleansing Bars, Body Wash, Super APR (Arthritis Pain
Relief), a sun care line, Body Buffing and Toning Cream, and Dinokids(TM), a
children's line consisting of four products.

We market our cosmetics product line under the name "Colour," which we
launched in 1998 and currently offer in the United States, Canada, Europe,
Mexico, Venezuela and Japan. The "Colour" products consist of four collections
of eye and cheek colors as well as: lipsticks; coordinated eye, brow and lip
pencils; lash colors; concealers; and two-in-one foundations.

EDUCATIONAL AND PROMOTIONAL MATERIALS

We also sell educational and promotional materials, including sales aids,
informational videotapes and cassette recordings. In addition, we sell
distributor kits at a worldwide average cost of approximately $77 per kit, which
an individual must purchase in order to become one of our distributors (except
in South Korea, where there is no charge for a distributor kit). Sales of
distributor kits are not subject to distributor allowances. Accordingly, we
receive the entire retail sales amount from the sale of the distributor kits.

PRODUCT MANUFACTURING AND DEVELOPMENT

We expand our product lines through the development of new products. New
product ideas are derived from a number of sources, including trade
publications, scientific and health journals, our executives, staff and
consultants and outside parties. In advance of introducing products into our
markets, local counsel and other representatives retained by us investigate
product formulation matters as they relate to regulatory compliance and other
issues. Our products are then reformulated to suit both the regulatory and
marketing requirements of the particular market. See "-- Regulation."

All of our products are manufactured by outside companies. Raven currently
manufactures most of our powder products, and D&F currently supplies most of our
tablet and capsule products. For a number of years prior to 1998, we were
subject to requirements contracts with each of Raven, D&F and Dynamic, each of
which is a subsidiary of Global Health Sciences, Inc. Under these contracts, we
agreed to purchase all of our requirements of powder products from Raven and all
of our requirements of tablet, capsule and specified other products from Dynamic
or D&F, to the extent that each manufacturer was capable of manufacturing the
products. Our aggregate purchases from Raven and D&F have represented a majority
of our product purchases.

In September 1997, we entered into three-year agreements with Raven, D&F
and Dynamic, pursuant to which revised pricing and other provisions became
effective on January 12, 1998. These agreements provide the ability for us to
source and develop products with other third party manufacturers, subject to
minimum percentage purchase and other requirements for dietary and nutritional
supplement products and a small number of other products falling into specified
product categories. As a result, and because these agreements confirm our
ownership of product formulations for substantially all of our dietary and
nutritional supplement products, we have the capacity, and in the future may
seek, to "second source" particular dietary and
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nutritional supplement products with multiple manufacturers. In addition, a
number of our new products, such as the Thermojetics High-Protein Low-Carb
weight management products, are being manufactured for us by new manufacturers.
Increasingly, our in-house staff has been conducting product research and
development and product formulation. However, we have historically relied on
Raven and D&F for these services, and we will continue to do so, albeit to a
lesser extent, in the future.

PRODUCT RETURN AND BUY-BACK POLICIES

All of our 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
us for products returned to them by consumers if they return the products to us
on a timely basis. In addition, in most jurisdictions, we maintain a buy-back
program pursuant to which we will repurchase products sold to a distributor
provided that the distributor resigns as an Herbalife distributor, returns the
product in marketable condition within twelve months of original purchase and
meets some documentation and other requirements. We believe 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
0.9% of annual retail sales during the last five years.

NUMBER OF PRODUCTS OFFERED BY CATEGORY
(AS OF DECEMBER 31, 1999)

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<TABLE>
<CAPTION>
NUMBER OF
FOOD AND
NUMBER OF DIETARY TOTAL
WEIGHT SUPPLEMENT NUMBER OF NUMBER OF
MANAGEMENT PRODUCTS PERSONAL CARE PRODUCTS
YEAR PRODUCTS (56 IN PRODUCTS (171 IN
COUNTRY ENTERED(1) (15 IN TOTAL) TOTAL) (100 IN TOTAL) TOTAL)
------- ---------- ------------- ---------- -------------- ---------
<S> <C> <C> <C> <C> <C>
EUROPE
United Kingdom........................ 1984 5 14 85 104
Israel................................ 1989 3 13 30 46
Spain................................. 1989 4 8 85 97
France................................ 1990 4 8 85 97
Germany............................... 1991 5 8 85 98
Italy................................. 1992 5 9 85 99
Portugal.............................. 1992 5 8 85 98
Czech Republic........................ 1992 2 15 31 48
Netherlands........................... 1993 5 9 85 99
Belgium............................... 1994 5 13 85 103
Poland................................ 1994 2 6 41 49
Denmark............................... 1994 2 10 85 97
Sweden................................ 1994 4 10 85 99
Russia................................ 1995 5 19 55 79
Switzerland........................... 1995 4 7 85 96
Austria............................... 1995 3 7 85 95
Norway................................ 1995 4 7 83 94
Finland............................... 1995 5 13 85 103
South Africa.......................... 1995 2 6 85 93
Greece................................ 1996 2 2 85 89
Turkey................................ 1998 2 2 30 34
Botswana.............................. 1998 2 6 77 85
Lesotho............................... 1998 2 6 60 68
Namibia............................... 1998 2 6 84 92
Swaziland............................. 1998 2 6 39 47
Iceland............................... 1999 3 9 79 91
Slovak Republic....................... 1999 2 11 -- 13
THE AMERICAS
United States......................... 1980 15 49 97 161
Canada................................ 1982 7 17 89 113
Mexico................................ 1989 6 18 42 66
Dominican Republic.................... 1994 1 4 -- 5
Venezuela............................. 1994 4 11 61 76
Argentina............................. 1994 2 6 37 45
Brazil................................ 1995 2 6 40 48
Chile................................. 1997 2 3 38 43
Jamaica............................... 1999 5 14 49 68
</TABLE>

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(1) Throughout the Report, "entering", "opening", "commencing operations" or
"doing business" in a market or country means that we have obtained either
regulatory approval of, or the favorable opinion of local legal counsel with
respect to, our network marketing system, have obtained all requisite
regulatory approvals of at least one product and have commenced sales and
shipment of that product within the market or country. With respect to
Japan, from 1989 through 1992, we operated under a licensing arrangement in
Japan and reported license fees with respect thereto as revenue.
Subsequently, in 1993,

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we formed a new Japanese subsidiary whose revenues were then included in our
results of operations. Accordingly, we consider Japan to have been "opened"
in 1993.

NETWORK MARKETING SYSTEM

Our products are distributed exclusively through a network marketing system
consisting of over one million distributors as of December 14, 1999. Included in
the number of active distributors as of December 14, 1999, are distributors and
supervisors whose distributorships were terminated subsequent to July 31, 1999
but who may have renewed, or in the future may renew, their distributorships.
This is consistent with our established internal policies and past practices.

Distributors are generally independent contractors who purchase products
directly from us 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. We believe that our 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 our distributors
therefore work on a part-time basis. We believe that our network marketing
system is ideally suited to marketing our products because sales of the products
are strengthened by ongoing personal contact between retail consumers and
distributors, many of whom use our products themselves. We encourage our
distributors to use our products and to communicate the results of their use of
the products to their retail customers.

Distributors' earnings are derived from several sources. First,
distributors may earn profits by purchasing our products at wholesale prices,
which are discounted 25% to 50% from suggested retail prices depending on the
distributor's level within our distributor network, and selling our 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 (1) royalty overrides of 1% to 5% on product sales on each of up to
three downline supervisor levels and (2) upon becoming a qualifying "TAB Team"
member, production bonuses of 2% to 6% on product sales within their downline
organizations. The TAB Team is comprised of the Global Expansion Team, the
Millionaire Team and the President's Team. President's Team members may earn up
to 7%. Combining these sources of earnings and including participation in the
President's Team bonus, as described below, our total "pay-out" on products
subject to distributor royalty overrides currently is approximately 73% of our
suggested retail sale price (i.e., 50% distributor allowance plus up to 23% of
suggested retail sales prices in royalty overrides and similar bonuses, before
reflecting a 7% shipping and handling fee charged to distributors by us).

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

To become a distributor, a person must be sponsored by an existing
distributor and must purchase a distributor kit from us, except in South Korea,
where there is no charge for a distributor kit. To become a supervisor or
qualify for a higher level, distributors must achieve specified volumes of
product purchases or earn certain amounts of royalty overrides during specified
time periods and must re-qualify for the levels once each year. To attain
supervisor status, a distributor generally must purchase, either from us 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 our 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, which consist of the Global Expansion Team, the
Millionaire Team and the President's Team, by earning increasing amounts of
royalty overrides based on purchases by distributors within their organizations.
Supervisors contribute significantly to our sales and some key supervisors who
have attained the highest levels

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within our distributor network are responsible for generating a substantial
portion of our sales and for recruiting a substantial number of our
distributors.

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

<TABLE>
<CAPTION>
FEBRUARY 28,*
--------------------------------------------------
2000 1999 1998 1997 1996
------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C>
Approximate Number of Supervisors......... 160,000 147,000 139,000 115,000 99,000
</TABLE>

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* In February of each year, we delete from the rank of supervisor those
supervisors who did not satisfy the supervisor qualification requirements
during the preceding twelve months. Distributors who meet the supervisor
requirements at any time during the year are promoted to supervisor status at
that time, including any supervisors who were deleted, but who subsequently
requalified. We rely on distributors' certifications as to the amount and
source of their product purchases from other distributors. Although we apply
review procedures with respect to the certifications, they are not directly
verifiable by us.

We also have two compensation and incentive programs designed to motivate
distributors at both the most senior and junior levels within our distributor
network. Members of the President's Team work closely with us to develop and
implement new initiatives and strategies for increasing sales and distributor
productivity throughout our entire distributor organization. Qualifying
President's Team members have the opportunity to participate in the President's
Team Bonus, which for 1999 consisted of a total available awards package of one
percent of our 1999 total product retail sales, or approximately $16.3 million.
The distribution of the President's Team Bonus is based in part upon each
President's Team member's participation in corporate-sponsored training and
motivational events. In this manner, we attempt to involve our most senior
distributors in our sales, training, motivation and strategic planning efforts.
In addition to these programs, we periodically offer a variety of special
promotions related to particular products or sales periods, involving special
cash bonuses, vacations and other awards.

For our most junior distributors, those who have not yet attained
supervisor status, we 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
our products, rather than the standard 25%. In addition, in 1996, we introduced
the Herbalife Advantage Program ("HAP"), which uses a product brochure that
enables our 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.

We seek to expand our distributor base in each market by offering
distributors attractive compensation opportunities. We believe our international
sponsorship program provides a significant advantage to our distributors as
compared with distributors in some other network marketing organizations because
the program permits distributors in any country to sponsor distributors in other
countries where we are licensed to do business and where we have obtained
required product approvals and to earn the same level of royalty overrides and
bonuses on sales by those distributors as if both distributors resided in the
same country.

We maintain a computerized system for processing distributor orders and
calculating distributor royalties and bonus payments, which enables us to remit
the payments promptly to distributors. We believe that prompt remittance of
royalty overrides is vital to maintaining a motivated network of distributors
and that our distributors' loyalty to us has been enhanced by our history of
consistently making royalty override and bonus payments on a scheduled basis.

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GEOGRAPHIC AREAS OF OPERATIONS

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

<TABLE>
<CAPTION>
TOTAL RETAIL SALES BY COUNTRY (IN THOUSANDS)
YEAR ------------------------------------------------------------
COUNTRY(1) ENTERED 1999 1998 1997 1996 1995
---------- ------- ---------- ---------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Australia...................... 1983 $ 18,372 $ 17,028 $ 20,644 $ 24,059 $ 30,803
New Zealand.................... 1988 1,352 1,757 1,802 1,799 2,535
Hong Kong...................... 1992 44,996 34,709 21,808 11,698 10,783
Japan.......................... 1993 518,447 547,653 525,738 311,117 81,730
Philippines.................... 1994 1,914 1,215 1,264 1,935 13,219
Taiwan......................... 1995 48,293 44,503 47,644 26,226 4,424
South Korea.................... 1996 129,279 30,928 14,631 1,951
Thailand....................... 1997 7,094 8,865 9,907
Indonesia...................... 1998 8,160 4,018
India(4)....................... 1999 4,938
---------- ---------- ---------- ---------- --------
ASIA/PACIFIC RIM............... $ 782,845 $ 690,676 $ 643,438 $ 378,785 $143,494
United Kingdom................. 1984 $ 16,652 $ 13,794 $ 11,833 $ 12,487 $ 15,296
Israel......................... 1989 7,951 7,076 8,132 8,419 30,133
Spain.......................... 1989 11,377 10,681 9,371 9,792 15,730
France......................... 1990 19,262 15,523 12,913 12,379 13,129
Germany........................ 1991 63,976 55,492 44,059 54,340 115,555
Italy.......................... 1992 121,134 99,185 65,026 54,449 56,687
Portugal....................... 1992 8,164 5,182 3,545 3,097 8,934
Czech Republic................. 1992 16,434 20,153 14,758 13,733 15,112
Netherlands.................... 1993 28,803 21,095 18,188 15,248 18,237
Belgium........................ 1994 3,117 2,484 2,310 2,370 3,775
Poland......................... 1994 13,517 13,917 13,883 16,218 6,238
Denmark........................ 1994 6,697 5,827 4,699 3,747 11,263
Sweden......................... 1994 13,699 19,269 21,061 16,488 17,845
Russia(2)...................... 1995 30,920 96,661 157,819 142,078 29,593
Switzerland.................... 1995 27,277 28,379 17,315 14,412 4,911
Austria........................ 1995 15,419 13,434 10,076 7,385 3,134
Norway......................... 1995 22,602 17,458 14,822 8,279 367
Finland........................ 1995 7,592 9,559 9,073 14,702 300
South Africa(3)................ 1995 23,173 19,915 13,337 21,497 7,707
Greece......................... 1996 2,976 2,224 898 227
Turkey......................... 1998 1,924 5,431
Botswana(3).................... 1998 462 64
Lesotho(3)..................... 1998 272 40
Namibia(3)..................... 1998 502 250
Swaziland(3)................... 1998 79 5
Iceland(4)..................... 1999 3,466
Slovak Republic(4)............. 1999 1,993
---------- ---------- ---------- ---------- --------
EUROPE......................... $ 469,440 $ 483,098 $ 453,118 $ 431,347 $373,946
</TABLE>

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<PAGE> 11

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

(2) We operate through various import/export companies located in Russia to
conduct transactions in our products with Russian distributors.

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

(4) We initiated operations in Iceland and Jamaica in the first and second
quarters of 1999, respectively. We initiated operations in India and the
Slovak Republic in the fourth quarter of 1999.

GEOGRAPHIC SALES TRENDS. The opening of new markets is an important
component of our business strategy. From January 1, 1995 through December 31,
1999, we commenced operations in 22 new countries. In 1999, these countries
contributed $379 million of retail sales, representing 21% of our total retail
sales. Consistent with our growth strategy, we opened markets in India, Iceland,
Jamaica and the Slovak Republic in 1999.

After entering a new country, we have in many instances experienced an
initial period of rapid growth in sales as new distributors were recruited,
followed by a decline in sales. We believe 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 some
instances, we have become aware that certain sales in certain existing markets
were attributable to purchasers who distributed our products in countries that
had not yet been opened. When these countries were opened, the sales in existing
markets shifted to the newly opened markets, resulting in a decline in sales in
the existing markets. In determining when and where to open new markets, we will
continue to seek to minimize the impact on distributor focus in existing markets
and to ensure that adequate distributor support services and other Herbalife
systems are in place to support the growth.

Another significant factor contributing to these sales declines is the
adverse publicity that sometimes arises when we experience rapid growth within a
market, thus drawing the attention of the media and our competitors. We believe
that these unfavorable press reports are generally based upon a lack of
familiarity with us and our network marketing system and often originate from
competitive forces in the local market. For instance, in Germany in late 1994
through 1995, reports erroneously alleged that we were in some manner affiliated
with a disfavored religious group. In other cases, including a situation in
France that resulted in the arrest of some 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 our network marketing system. See "Regulation -- Transfer Pricing and
Similar Regulations" below. The effect of occasional adverse publicity has at
times also led to increased regulatory scrutiny in some countries, which may
also have an adverse effect on sales. For

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<PAGE> 12

example, during the third quarter of 1995, we received inquiries from
governmental agencies within Germany and Portugal related to our 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." We subsequently suspended
the sale of the product in those countries at the request of the regulators. We
may in the future attempt to reintroduce the product as a "beverage" in one or
both of these markets.

We continually seek 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, we have: (1) created
regional planning and strategy groups that include senior members of our
distributor base, (2) increased focus and budgets for governmental relations and
(3) hired additional distributor support representatives. We also seek to
introduce annually in each targeted market additional products not previously
offered. In some markets, we have enhanced our presence and visibility by
opening new, more attractive and conveniently located distributor sales centers.
We believe that these initiatives favorably impact operations, and we intend to
continue to deploy these initiatives in an effort to provide a platform for
renewed growth.

For a discussion of retail sales trends in our geographic regions in recent
periods, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and our consolidated financial statements and related
notes included elsewhere in this Report.

NEW MARKET EXPANSION PROGRAM. We engage 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 we decide to enter a new market, we first hire
local legal counsel with expertise in the product approval process to help
ensure that our network marketing system and products comply with all applicable
regulations and that our profits may be expatriated. In addition, local counsel
helps to establish favorable public relations in the new market by acting as an
intermediary between us and local regulatory authorities, public officials and
business people. Local counsel is also responsible for explaining our products
and product ingredients to appropriate regulators and, when necessary, arranging
for local technicians to conduct required ingredient analysis tests of our
products. In recent years, we have expanded our 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, our local
counsel work with regulatory agencies to confirm that all of the ingredients of
our products are permissible within the new market. During the regulatory
compliance process, we may alter the formulation, packaging or labeling of our
products to conform to applicable regulations as well as local variations in
customs and consumer habits, and we may modify some aspects of our network
marketing system as necessary to comply with applicable regulations. Where
reformulations of our principal weight management products are required, we
attempt to obtain substitute or replacement ingredients. Where regulatory
approval in a foreign market is not required, we obtain the favorable opinion of
local counsel as to compliance with all applicable regulations. See "Regulation"
below.

Following completion of the regulatory compliance phase, we undertake the
steps necessary to meet the operational requirements of the new market. In the
majority of our new markets, we establish a storefront sales center in one or
more major cities and provide for product purchases by telephone. Product is
shipped to the purchaser from a warehouse located in the general geographic
region. In addition, we initiate plans to satisfy the inventory, personnel and
transportation requirements of the new market, and we modify our distributor
manuals, cassette recordings, video cassettes and other training materials as
necessary to be suitable for the new market. In some instances where we have
achieved rapid sales growth in a new market, such as in Japan, we have
experienced inventory shortages as a result of the large demand for our
products.

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<PAGE> 13

PRODUCT DISTRIBUTION

Our weight management products, dietary and nutritional supplements, and
some personal care and cosmetic products are distributed to foreign markets
either from the facilities of our manufacturers or from our Los Angeles
distribution center. Products are distributed in the United States market from
our Los Angeles distribution center or from our Memphis distribution center.
Products are generally transported by cargo ship or plane to our international
markets and are warehoused in either one of our foreign distribution centers or
a contracted third party warehouse and distribution center. After arrival of the
products in a foreign market, distributors purchase the products from the local
distribution center or the associated sales center. Our 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. Our new line of "Colour" cosmetics products is being manufactured in
Italy and Germany.

Beginning in 1996, we undertook the process of reconfiguring our European
product distribution system. As a part of this process, we have reduced the
number of European warehousing facilities from nine to five and have opened new
distribution sales service 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 our products, marketing
system and upcoming events. In addition, we have 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, we also
implemented a new inventory management system and established a new centralized
warehouse facility in Venrey, Netherlands. We anticipate 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 TELECOMMUNICATION SYSTEMS

In order to facilitate our continued growth and support distributor
activities, we continually upgrade our management information and
telecommunication systems. These systems include: (1) a centralized host
computer located in our Inglewood, California, Operations Center, which is
linked to our international markets through a dedicated wide area network that
provides on-line, real-time computer connectivity and access; (2) local area
networks of personal computers within our markets, serving our regional
administrative staffs; (3) an international e-mail system through which our
employees communicate; (4) a standardized Northern Telecom Meridian
telecommunication system connecting all of our markets; and (5) an inventory
management system that has been installed in the United States, Japan and in
most other significant distribution centers. These systems are designed to
provide financial and operating data for management, timely and accurate product
ordering, royalty override payment processing and inventory management and
detailed distributor records. Since January 1, 1996, we have invested
approximately $43 million to enhance our management information and
telecommunication systems. We intend to continue to invest in our systems in
order to strengthen our operating platform. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."

REGULATION

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

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<PAGE> 14

PRODUCTS. The formulation, manufacturing, packaging, storing, labeling,
promotion, advertising, distribution and sale of our products are subject to
regulation by one or more governmental agencies, including (1) the FDA, (2) the
FTC, (3) the Consumer Product Safety Commission ("CPSC"), (4) the United States
Department of Agriculture ("USDA"), (5) the Environmental Protection Agency
("EPA") and (6) the United States Postal Service. Our activities also are
regulated by various agencies of the states, localities and foreign countries in
which our products are manufactured, distributed and sold. The FDA, in
particular, regulates the formulation, manufacture and labeling of foods,
dietary supplements and OTC drugs, such as those distributed by us. FDA
regulations require us and our suppliers to meet relevant good manufacturing
practice ("GMP") regulations for the preparation, packing and storage of foods
and OTC drugs. GMPs 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, we believe, 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 some limitations,
dietary ingredients that were on the market before October 15, 1994. A dietary
supplement that contains a dietary ingredient that was not on the market before
October 15, 1994 will require evidence of a history of use or other evidence of
safety establishing that it is reasonably expected to be safe. Manufacturers of
dietary supplements that make specified types of statements on dietary
supplements, including some product performance claims, must have substantiation
that the statements are truthful and not misleading.

The majority of the products marketed by us are classified as dietary
supplements under the FFDCA. The adoption of new regulations in the United
States or in any of our international markets, or changes in the interpretation
of existing regulations, could have a material adverse effect on us. 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 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, and the new
labeling requirements became effective in March 1999. We were required to revise
a substantial number of our product labels by the effective date. In addition,
we are required to continue our ongoing program of securing substantiation of
our product performance claims and of notifying the FDA of some types of
performance claims made for our products. Our substantiation program involves
compiling and reviewing the scientific literature pertinent to the ingredients
contained in our products. On various occasions, the FDA has sent us "courtesy
letters," objecting to some performance claims that we had proposed. Generally,
in those instances, we revised our product claims to reflect the FDA's comments.

In January 2000, the FDA published a final rule that defines the types of
statements that can be made concerning the effect of a dietary supplement on the
structure or function of the body pursuant to the DSHEA. Under the DSHEA,
dietary supplement labeling may bear "structure/function" claims, which are
claims that the products affect the structure or function of the body, without
prior FDA review. They may not, without prior FDA review, bear a claim that they
can prevent, treat, cure, mitigate or diagnose disease (a disease claim). The
new final rule describes how the FDA will distinguish disease claims from
structure/function claims. We are currently evaluating the impact, if any, of
the new final rule upon the labeling of our current dietary supplement products.

In addition, in some markets, including the United States, claims made with
respect to weight management products, dietary and nutritional supplements,
personal care or cosmetic products, or other Herbalife products may change the
regulatory status of the products. In the United States, for example, it is
possible that the FDA could take the position that claims made for some of our
products place those products within the scope of an FDA "over-the-counter"
(OTC) drug monograph. OTC monographs prescribe

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<PAGE> 15

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 us are
labeled as OTC monograph drugs, and we believe that we are 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, we would be required either to comply with the applicable monographs
or to change the claims made in connection with the products. We cannot be sure
that we could do so effectively, or that any changes would not adversely affect
sales and marketing of an affected product.

As a marketer of dietary and nutritional supplements and other products
that are ingested by consumers, we are subject to the risk that one or more of
the ingredients in our products may become the subject of 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, we offer the Thermojetics(R) original green herbal tablet only in the
United States, except in those states in which regulations may prohibit or
restrict the sale of the 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, we 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 regulations were
proposed or issued at that time, we renewed sales of Thermojetics(R) original
green herbal tablets in the United States in October 1995, except in those
states in which regulations may prohibit or restrict the sale of the product.
During the three-month suspension period, we 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 the products do not contain Ma Huang. The Thermojetics(R) original
green tablets accounted for approximately 2% of retail sales in 1997, 1998 and
1999 although the marketing of all varieties of the Thermojetics(R) weight
management tablets and the other products in the Thermojetics(R) line have
contributed significantly to our retail sales. We also previously offered the
Thermojetics(R) original green herbal tablet in Canada but, in response to
Canadian marketing issues and regulatory concerns, we 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 our
Thermojetics(R) original green tablet. We have not received any communications
from the FDA with respect to these reports. However, many other companies
manufacture products containing various amounts of Ma Huang, and the FDA has on
record hundreds of reports of adverse reactions to these products. We are a
defendant in two legal actions by individuals claiming that ingestion of
Thermojetics(R) original green tablets caused them to suffer medical problems.
We believe that we have 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 effects such 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. We do not market our 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 the 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

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<PAGE> 16

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 our
original green Thermojetics(R) product contains less than the eight milligrams
of ephedrine alkaloids per serving permitted under the FDA proposal, we have
reviewed the possible impact of the FDA proposal, if it is finalized in its
current form, upon our continued marketing of our Thermojetics(R) original green
tablet. In response to the proposal, or to a final regulation that is
substantially similar to the proposal, we may be required to: (1) withdraw or
reformulate our product with reduced ephedrine levels, or with a substitute for
Ma Huang; (2) relabel our product with different warnings or revised directions
for use; (3) not make specific statements, possibly including statements related
to weight loss, with respect to any product containing Ma Huang; and/or (4)
withdraw our product from the weight management program and reposition it in a
different category.

Even in the absence of an FDA final regulation, we may elect to reformulate
and/or relabel our product containing Ma Huang. Although we believe that our Ma
Huang product could be reformulated and relabeled, there can be no assurance in
that regard. In addition, any reformulation and/or relabeling could have a
material adverse effect on sales of our products containing ephedrine or any
other products within the Thermojetics(R) Weight Management Program, which
constitutes a significant portion of our weight management products, even though
these products do not contain ephedrine. During 1997, 1998 and 1999, our weight
management products constituted 38.6%, 39.4% and 41.3%, respectively, of our
retail sales.

In addition to Thermojetics(R) original green tablets, we currently
distribute two other products containing ephedrine alkaloids: Thermojetics(R)
green (refresh) tablets and Thermojetics(R) gold tablets. These products both
contain sida cordifolia, which, like Ma Huang, is a botanical source of
ephedrine alkaloids. Independent laboratory tests indicate that Thermojetics(R)
green tablets contain less than the eight milligrams of ephedrine alkaloids per
serving permitted under the 1997 FDA proposal, while Thermojetics(R) gold
tablets contain slightly in excess of that amount. Both products are currently
offered in the United States and other countries, except in those states in
which regulations may prohibit or restrict the sale of the products. As with the
Thermojetics(R) original green tablets, we have reviewed our options with
respect to these products if the 1997 FDA proposal on dietary supplements
containing ephedrine alkaloids is finalized in its current form, or in a form
substantially similar to the 1997 proposal. The available options for these
products are the same as those outlined earlier with respect to Thermojetics(R)
original green tablets.

With respect to state regulation of dietary supplements containing
ephedrine alkaloids, in addition to the six states that currently prohibit or
restrict the sale of such products, our sales of our three ephedrine-containing
products in Texas are affected by a Texas regulation that became effective on
November 1, 1999. The new regulation permits the sale of ephedrine-containing
dietary supplements in Texas, but requires that additional information be
included on the labels of all products sold in Texas. We have developed specific
labels for Texas, and believe that we are in compliance with the new Texas
requirements.

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

Some of the products marketed by us 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 under the NLEA. The NLEA regulates health claims,
ingredient labeling and nutrient content claims characterizing the level of a
nutrient in the product.

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<PAGE> 17

In foreign markets, prior to commencing operations and prior to making or
permitting sales of our products in the market, we may be required to obtain an
approval, license or certification from the country's ministry of health or
comparable agency. Where a formal approval, license or certification is not
required, we nonetheless seek a favorable opinion of counsel regarding our
compliance with applicable laws. Prior to entering a new market in which a
formal approval, license or certificate is required, we work extensively with
local authorities in order to obtain the requisite approvals. The approval
process generally requires us to present each product and product ingredient to
appropriate regulators and, in some instances, arrange for testing of products
by local technicians for ingredient analysis. The approvals may be conditioned
on reformulation of our products or may be unavailable with respect to some
products or some ingredients. Product reformulation or the inability to
introduce some products or ingredients into a particular market may have an
adverse effect on sales. We must also comply with product labeling and packaging
regulations that vary from country to country. Our failure to comply with these
regulations can result in a product being removed from sale in a particular
market, either temporarily or permanently.

The FTC, which exercises jurisdiction over the advertising of all of our
products, has in the past several years instituted enforcement actions against
several dietary supplement companies for false and misleading advertising of
some of their 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 we also utilize.
Although we have not been the target of FTC enforcement action for the
advertising of our products, we cannot be sure that the FTC will not question
our advertising or other operations in the future. In November 1998, the FTC
issued a guide for the dietary supplement industry, describing how the FTC
applies the law that it administers to advertisements for dietary supplements.
It is unclear whether the FTC will subject advertisements of this kind,
including our advertisements, to increased surveillance to ensure compliance
with the principles set forth in the guide.

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

In some markets, it is possible that improper product claims by
distributors could result in our products being reviewed 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, we might
be required to make labeling changes.

Through our manuals, seminars and other training materials and programs, we
attempt to educate our distributors as to the scope of permissible and
impermissible activities in each market. We also investigate allegations of
distributor misconduct. However, our distributors generally are independent
contractors, and we are unable to monitor directly all of their activities. As a
consequence, we cannot be sure that our distributors comply with applicable
regulations. Misconduct by distributors in the past has had, and could again
have, a material adverse effect on us in a particular market or in general.

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

Any or all of these requirements could have a material adverse effect on
our results of operations and financial condition. All of our officers and
directors are subject to a permanent injunction 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. We
consented to the entry of this injunction without in
17
<PAGE> 18

any way admitting the allegations of the complaint. The injunction prevents us
and our officers and directors from making specified claims in future
advertising of our products and requires us to implement some documentation
systems with respect to payments to our distributors. At the same time, the
injunction does not prevent us from continuing to make specified claims
concerning our products that have been made and are being made, provided that we
have a reasonable basis for making the claims.

We are aware that, in some of our international markets, there has been
recent adverse publicity concerning products that contain 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. Some of our products contain
substances that would be or might be classified as GMOs. We cannot anticipate
the extent to which regulations in our markets will restrict the use of GMOs in
our products or the impact of any regulations on our business in those markets.
In response to any applicable regulations, we would, where practicable, attempt
to reformulate our products to satisfy the regulations. We believe, based upon
currently available information, that compliance with regulatory requirements in
this area should not have a material adverse effect on us or our business.
However, because publicity and governmental scrutiny of GMOs is a relatively new
and evolving area, there can be no assurance in this regard. If a significant
number of our products were found to contain GMOs and regulations in our markets
significantly restricted the use of GMOs in our products, our business could be
materially adversely affected.

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

We also are subject to the risk of private party challenges to the legality
of our 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 successfully
challenged in a class action by Omnitrition distributors who alleged that
Omnitrition was operating an illegal "pyramid scheme" in violation of federal
and state laws. We recently were named as a defendant in a case that attempted
to challenge the legality of our marketing system on similar grounds. The court
in that case subsequently dismissed the challenge. See "Legal Proceedings"
below. We believe that our 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 our marketing system and that described in the Omnitrition case.
Further, it is an ongoing part of our business to monitor and respond to
regulatory and legal developments, including those that may affect our network
marketing 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 our network
marketing system could have a material adverse effect on our business. An
adverse determination could: (1) require us to make modifications to our network
marketing system, (2) result in negative publicity or (3) have a negative impact
on distributor morale. In addition, adverse rulings by courts in any proceedings
challenging the legality of multi-level marketing systems, even in those not
involving us directly, could have a material adverse effect on our operations.

TRANSFER PRICING AND SIMILAR REGULATIONS. In many countries, including the
United States, we are subject to transfer pricing and other tax regulations
designed to ensure that appropriate levels of income are
18
<PAGE> 19

reported as earned by our U.S. or local entities and are taxed accordingly. In
addition, our operations are subject to regulations designed to ensure that
appropriate levels of customs duties are assessed on the importation of our
products.

Although we believe that we are in substantial compliance with all
applicable regulations and restrictions, we are subject to the risk that
governmental authorities could audit our transfer pricing and related practices
and assert that additional taxes are owed. For example, we are currently subject
to pending or proposed audits that are at various levels of review, assessment
or appeal in a number of jurisdictions involving transfer pricing issues, income
taxes, value added taxes, withholding taxes and related interest and penalties
in material amounts. In some circumstances, additional taxes, interest and
penalties have been assessed, and we will be required to litigate to reverse the
assessments. We expect that none of the pending or proposed audits, assessments
or litigation will have a material adverse effect on our business. However,
ultimate resolution of these matters may take several years, and the outcome is
uncertain.

In the event that the audits or assessments are concluded adversely to us,
we may or may not be able to offset or mitigate the consolidated effect of
foreign income tax assessments through the use of U.S. foreign tax credits.
Currently, we are utilizing most, but not all, of our foreign tax credits in the
year in which they arise. Further, because the laws and regulations governing
U.S. foreign tax credits are complex and subject to periodic legislative
amendment, we cannot be sure that we would in fact be able to take advantage of
any foreign tax credits in the future.

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

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

COMPLIANCE PROCEDURES. As indicated above, Herbalife, our products and our
network marketing 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, we began to institute
formal regulatory compliance measures by developing a system to identify
specific complaints against distributors and to remedy any violations by
distributors through appropriate sanctions, including warnings, suspensions and,
when necessary, terminations. In our manuals, seminars and other training
programs and materials, we emphasize that distributors are prohibited from
making therapeutic claims for our products.

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

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

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<PAGE> 20

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

It is an ongoing part of our business to anticipate and respond to new and
changing regulations and to make corresponding changes in our operations to the
extent practicable. In furtherance of these efforts, in 1994 we formed our
External Affairs Group, currently consisting of 12 employees, and in 1995 we
created the position of Chief International Counsel. Our External Affairs 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 our products and network marketing system comply with regulatory
requirements. However, although we devote considerable resources to maintaining
our compliance with regulatory constraints in each of our markets, we cannot be
sure that (1) we would be found to be in full compliance with applicable
regulations in all of our markets at any given time or (2) the regulatory
authorities in one or more markets will not assert, either retroactively or
prospectively or both, that our operations are not in full compliance. These
assertions or the effect of adverse regulations in one market could negatively
affect us in other markets as well by causing increased regulatory scrutiny in
those other markets or as a result of the negative publicity generated in those
other markets. These assertions could have a material adverse effect on us in a
particular market or in general. Furthermore, depending upon the severity of
regulatory changes in a particular market and the changes in our operations that
would be necessitated to maintain compliance, these changes could result in our
experiencing a material reduction in sales in the market or determining to exit
the market altogether. In this event, we would attempt to devote the sources
previously devoted to the market to a new market or markets or other existing
markets. However, we cannot be sure that this transition would not have an
adverse effect on our business and results of operations either in the short or
long term.

TRADEMARKS

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

COMPETITION

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

The business of marketing weight management products, dietary and
nutritional supplements, and personal care and cosmetic products also is highly
competitive. This market segment includes numerous manufacturers, distributors,
marketers, retailers and physicians that actively compete for the business of
consumers both in the United States and abroad. The market is highly sensitive
to the introduction of new products or weight management plans, including
various prescription drugs, that may rapidly capture a significant share of the
market. As a result, our ability to remain competitive depends in part upon the
successful introduction of new products. In addition, we anticipate that we will
be subject to increasing
20
<PAGE> 21

competition in the future from sellers that utilize electronic commerce. We
cannot be sure of the impact of electronic commerce or that it will not
adversely affect our business.

EMPLOYEES

As of December 31, 1999, we had 2,170 full-time employees. These numbers do
not include our distributors, who generally are independent contractors rather
than our employees. We consider our employee relationships to be satisfactory.
Except for some employees in Mexico, none of our employees is a member of any
labor union, and we have never experienced any business interruption as a result
of any labor disputes.

ITEM 2. PROPERTIES

We lease all of our physical properties located in the United States. Our
executive offices, relocated to Century City, California in February 1996,
include approximately 116,000 square feet of general office space under lease
arrangements expiring in February 2006. We lease an aggregate of approximately
137,000 square feet of office space, computer facilities and conference rooms at
the Operations Center in Inglewood, California, under a lease that expires in
October 2006, and approximately 150,000 square feet of warehouse space in two
separate facilities located in Los Angeles and Memphis. The Los Angeles and
Memphis agreements have terms through June 2001 and August 2006, respectively.
We also lease warehouse and office space in a majority of our other geographic
areas of operation. We believe that our existing facilities are adequate to meet
our current requirements and that comparable space is readily available at each
of these locations.

ITEM 3. LEGAL PROCEEDINGS

We are from time to time engaged in routine litigation. We regularly review
all pending litigation matters in which we are involved and establish reserves
deemed appropriate by us for these litigation matters.

On December 16, 1998, Moshe and Dorit Miron, two of our Israeli
distributors, filed a lawsuit in the United States District Court for the
Northern District of California, in which we were the named defendant (the
"Miron Suit"). The case appeared to be primarily a claim for breach of contract.
In addition, the plaintiffs in the Miron Suit initially appeared to attempt to
challenge the legality of our marketing system. Subsequently, the court
dismissed this purported challenge. See "-- Regulation -- Network Marketing
System." Further, in November 1999, the court dismissed the case in its entirety
without leave to amend. The plaintiffs have appealed the dismissal to the United
States Court of Appeals for the Ninth Circuit. We believe that we have
meritorious defenses to the allegations that appear to be asserted against us.

Some of our subsidiaries have been subject to tax audits by governmental
authorities in their respective countries, some of which governmental
authorities are proposing that additional income taxes, value added taxes,
withholding taxes and related interest and penalties are due. We and our tax
advisors believe that we have substantial defenses to their allegations that
additional taxes are owing, and we are vigorously contesting the additional
proposed taxes and related charges. However, these matters may take several
years to resolve, and we cannot be sure of their ultimate resolution. See
"-- Regulation -- Transfer Pricing and Similar Regulations."

On September 14, 1999, three putative class action lawsuits, one entitled
Patricia Lisa and Harbor Finance Partners v. Mark Hughes, et al., Case No. BC
216711, one entitled Kevin Coyle v. Mark Hughes, et al., Case No. BC 216759 and
one entitled Stuart H. Savett v. Herbalife International Inc., et al., Case No.
BC 216761, were filed in the Superior Court of the State of California, County
of Los Angeles. Five similar lawsuits subsequently were filed in the same court:
(1) one lawsuit on September 15, 1999, entitled Kenneth Schweitzer v. Herbalife
International, Inc. et al., Case No. BC 216823; (2) two other lawsuits on
September 16, 1999, entitled Frances Longstreth v. Herbalife International,
Inc., et al., Case No. BC 216911, and Rae Ellen Plattus v. Christopher Pair, et
al., Case No. BC 16904; (3) one lawsuit on September 17, 1999, entitled Lee
Brenin v. Mark Hughes, et al., Case No. BC 216932; and (4) one lawsuit on
September 23, 1999, entitled Michael Vaupel v. Mark Hughes, et al., Case No. BC
217257. In addition, four similar lawsuits were filed in the District Court,
Clark County, Nevada: (1) one lawsuit on September 14, 1999, entitled Colleen M.
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<PAGE> 22

Tharp vs. Herbalife International, Inc., et al., Case No. A408158II; (2) one
lawsuit on September 15, 1999, entitled Francis Mcfarlain, IRA v. Herbalife
International, Inc., et al., Case No. A408159I; and (3) two lawsuits on
September 22, 1999, entitled Kevin Coyle v. Mark Hughes, et al., Case No.
A408466, and Charles Fruscione and Jerome Glowacki v. Herbalife International,
Inc., et. al., Case No. A408478. These lawsuits are referred to collectively as
the "Lawsuits."

The Lawsuits challenge the fairness to our public stockholders of the
pending tender offer and merger transactions (collectively, and including
certain related transactions, the "Transactions") proposed by Mark Hughes, the
Company's Chairman, President and CEO/Principal Stockholder. The Lawsuits
contain allegations that, among other things, (1) the price to be paid in the
tender offer and the merger does not reflect the value of our assets, and (2)
the tender offer and the merger are unfair because they would deprive our public
stockholders of the ability to share proportionately in our future growth in
profits and earnings. The Lawsuits also contain allegations that the Special
Committee formed to evaluate the Transactions was not independent, and that our
directors breached their fiduciary duties to our public stockholders in
approving the Transactions. The plaintiffs have requested (1) an injunction
prohibiting the defendants from proceeding with the Transactions, (2)
unspecified damages, (3) costs and attorneys' fees, and (4) other relief.

In January, 2000, the defendants in the Lawsuits reached an agreement with
the representative plaintiffs' counsel to settle the Lawsuits. Under the terms
of the settlement agreement, among other things, a payment (the "Supplemental
Payment") will be required to be made to the settlement class members (which
include, generally, our public stockholders and the holders of the DECS
securities issued by DECS Trust III) in an amount equal to $0.81 per share or
DECS security. The individual defendants will not be entitled to the
Supplemental Payment, and our employees who hold stock options will not be
entitled to the Supplemental Payment solely with respect to those options. In
addition, the settlement agreement requires us to make certain changes in our
public disclosures relating to the Tender Offer and the Merger; to seek a
"bring-down" fairness opinion from the financial adviser to the Special
Committee of our Board of Directors; to re-open dissenters' rights for an
additional period of time and increase the percentage of stockholders (from 3%
to 5%) seeking dissenters' rights that would permit Mr. Hughes to elect not to
close the Tender Offer; and to pay plaintiffs' legal fees. All but the last of
the foregoing requirements have been fulfilled. In addition, the settlement
agreement provides that if we were to complete an initial public offering of our
Japanese subsidiary, Herbalife of Japan, within a specified period of time, then
we would be required to pay to the settlement class members an amount equal to
the greater of $15 million and 20% of the net proceeds generated in the initial
public offering. We and the representative plaintiffs' counsel obtained final
court approval of the settlement agreement on February 9, 2000. The terms of the
settlement, including the making of the Supplemental Payment, remain subject to
certain conditions. There can be no assurance that these conditions will be
satisfied.

Other than as disclosed in this Report, we believe that no litigation
currently pending against us will have a material adverse effect on our
consolidated financial position and results of operations. See
"-- Regulation -- Transfer Pricing and Similar Regulations" for a discussion of
some pending tax matters.

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

None.

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<PAGE> 23

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
1999
First Quarter............................................. $16 1/4 $10 7/8 $13 $ 8 29/32
Second Quarter............................................ 12 1/8 10 9 3/4 8 5/16
Third Quarter............................................. 16 10 1/16 15 5/8 8 3/8
Fourth Quarter............................................ 15 1/4 12 11/16 14 15/16 11 5/8
</TABLE>

As of February 29, 2000, 10,002,549 and 18,650,014 shares of the Company's
Class A Stock and Class B Stock, respectively, were issued and outstanding and
were held by 323 and 916 stockholders of record, respectively.

23
<PAGE> 24

ITEM 6. SELECTED FINANCIAL DATA

The selected financial data as of and for the five years ended December 31,
1999 have been derived from our audited consolidated financial statements and
related notes. 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>
1999 1998 1997 1996 1995
------------ ------------ ------------ ------------ ----------
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AND OTHER DATA AMOUNTS)
<S> <C> <C> <C> <C> <C>
OPERATIONS:
Retail sales.......................... $1,793,508 $1,644,837 $1,490,693 $1,200,144 $923,644
Less -- distributor allowances on
product purchases................... 837,283 778,195 708,241 568,209 434,640
---------- ---------- ---------- ---------- --------
Net sales............................. 956,225 866,642 782,452 631,935 489,004
Cost of sales......................... 246,642 230,818 205,070 168,432 143,557
Royalty overrides..................... 277,363 250,905 233,883 184,669 138,940
---------- ---------- ---------- ---------- --------
Gross profit.......................... 432,220 384,919 343,499 278,834 206,507
Marketing, distribution and
administrative expenses............. 339,647 306,589 257,514 210,087 176,046
---------- ---------- ---------- ---------- --------
Operating income...................... 92,573 78,330 85,985 68,747 30,461
Restructuring expenses................ -- -- -- -- 2,300
Interest income -- net................ 1,750 2,533 4,535 4,084 3,404
---------- ---------- ---------- ---------- --------
Income before income taxes and
minority interest................... 94,323 80,863 90,520 72,831 31,565
Income taxes.......................... 36,314 31,132 34,850 28,040 11,837
---------- ---------- ---------- ---------- --------
Income before minority interest....... 58,009 49,731 55,670 44,791 19,728
Minority interest..................... 1,086 1,233 1,003 -- --
---------- ---------- ---------- ---------- --------
Net income............................ $ 56,923 $ 48,498 $ 54,667 $ 44,791 $ 19,728
========== ========== ========== ========== ========
SHARE DATA:
Earnings per share:
Basic............................... $ 1.99 $ 1.68 $ 1.81 $ 1.50 $ 0.66
Diluted............................. 1.86 1.60 1.72 1.43 0.65
Cash dividends per common share..... 0.60 0.60 0.60 0.60 0.74
FINANCIAL CONDITION:
Working capital....................... $ 133,137 $ 120,623 $ 125,986 $ 109,662 $ 85,126
Total assets.......................... 415,819 348,183 314,580 269,114 207,690
Total debt............................ 8,380 4,996 4,115 4,799 2,964
Stockholders' equity.................. 206,602 163,811 154,733 138,468 109,530
OTHER DATA:
Number of Countries................... 46 42 36 34 32
</TABLE>

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<PAGE> 25

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

GENERAL

We are a marketer of weight management products, dietary and nutritional
supplements, and personal care and cosmetic products. We market and sell these
products exclusively through a network of independent distributors. As of
December 14, 1999, we had more than one million distributors marketing and
selling our products in 46 countries located throughout Asia/Pacific Rim, Europe
and the Americas. The following summarizes our retail sales by region for the
time periods indicated.

<TABLE>
<CAPTION>
NUMBER OF
COUNTRIES
YEAR ENDED DECEMBER 31, OPEN AS OF
-------------------------------- DECEMBER 31,
1999 1998 1997 1999
-------- -------- -------- ------------
(DOLLAR AMOUNTS IN MILLIONS)
<S> <C> <C> <C> <C>
Asia/Pacific Rim....................... $ 782.8 $ 690.7 $ 643.4 10
Europe................................. 469.4 483.1 453.1 27
The Americas........................... 541.3 471.0 394.2 9
-------- -------- -------- --
Total Retail Sales........... $1,793.5 $1,644.8 $1,490.7 46
======== ======== ======== ==
</TABLE>

Subsequent to commencement of operations in 1980, our network of
independent distributors has grown substantially. The total number of
supervisors was 160,000 as of February 28, 2000, an increase of 9% from the same
date in the prior year. See "Business -- Network Marketing System." 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, 1999 was 13%.

PRESENTATION OF RETAIL SALES

Throughout this Report, "retail sales" are determined as the gross sales
amounts reflected on our invoices to our distributors. We do not receive the
amount reported as "retail sales," and we do not monitor the actual retail
prices charged for our products. "Net sales" represent the actual purchase
prices paid to us by our distributors, after giving effect to distributor
discounts referred to as "distributor allowances," which total approximately 50%
of suggested retail sales prices. Distributor allowances as a percentage of
sales may vary by country depending upon regulatory restrictions that limit or
otherwise restrict the allowances. We receive our net sales price in cash or
through credit card payments upon receipt of orders from distributors. We
utilize importers in a limited number of markets and, under some circumstances,
we extend credit terms. Our "gross profit" consists of net sales less (1) "cost
of sales," consisting of the prices we pay to our manufacturers for products and
costs related to product shipments, duties and tariffs and similar expenses, and
(2) "royalty overrides," currently consisting of (A) royalty overrides and
bonuses, which total approximately 15% and 7%, respectively, of the suggested
retail sales prices of products earned by qualifying distributors on sales
within their distributor organizations, (B) the President's Team Bonus payable
to some of our most senior distributors in the aggregate amount of approximately
an additional 1% of product retail sales, and (C) other one-time incentive cash
bonuses to qualifying distributors. Because of local country regulatory
constraints, we may be required to modify our typical distributor incentive
plans as described above. Currently, we offer a reduced distributor discount and
pay reduced royalty overrides to distributors in South Korea. We also offer
reduced distributor allowance and pay reduced royalty overrides with respect to
certain products worldwide. Royalty overrides, as reported in our consolidated
financial statements and selected financial data appearing elsewhere in this
Report, are net of a shipping and handling fee (6% of retail sales until January
31, 1999 and 7% after February 1, 1999) that we charge our distributors on
purchases of products from us.

Our use of "retail sales" in reporting financial and operating data
reflects the fundamental role of "retail sales" in our accounting systems,
internal controls and operations, including the basis upon which distributor
bonuses are paid. The retail sales price of our products is reflected in
distributor invoices as the price charged to distributors together with, in most
cases, a deduction for the corresponding distributor allowance. The retail sales
price is used by us to calculate, among other things, royalty overrides and
"volume points" earned by distributors. Volume points are point values assigned
to each of our products that are equal in all countries and

25
<PAGE> 26

are used as a supervisor qualification criteria. In addition, we rely upon
"retail sales" data reflected in daily sales reports to monitor results of
operations in each of our markets.

The significance of our "net sales" is to reflect, generally, the prices
actually received by us after deducting the basic distributor allowance, but
before deducting royalty overrides and bonuses. The ratio of our "net sales" to
"retail sales" is relatively constant because distributor allowances
historically total approximately 50% of suggested retail sales prices.
Accordingly, factors that affect "retail sales" generally have a corresponding
and proportionate effect on "net sales." To the extent the ratio of "net sales"
to "retail sales" varies from period to period, these variances have resulted
principally from sales of our distributor kits and other educational and
promotional materials, for which there are no distributor allowances and
increased sales on which we offer reduced distributor allowances and pay reduced
royalty overrides.

RESULTS OF OPERATIONS

Our results of operations for the periods described below are not
necessarily indicative of results of operations for future periods, which depend
upon numerous factors including our ability to enter new markets and to
introduce additional and new products into our markets.

YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31,
1998. Retail sales for year ended December 31, 1999 increased 9.0% to $1,793.5
million, as compared to retail sales of $1,644.8 million in the prior year,
because of new product introductions, international expansions and growth in
existing countries.

Retail sales in Asia/Pacific Rim increased $92.1 million, or 13.3%, during
1999 as compared to the prior year. In local currency, retail sales for
Asia/Pacific Rim increased 0.7%. The region's sales growth was primarily due to
retail sales increases in South Korea of $98.4 million and the favorable effect
of currency translation for the region. Partially offsetting the increases was a
$29.2 million decline in retail sales in Japan, representing a 5.3% decline in
1999 compared to the prior year. In local currency, retail sales in Japan
decreased 17.7%, primarily due to the result of weak consumer demand.

Retail sales in Europe decreased $13.7 million, or 2.8%, in 1999 as
compared to the prior year. In local currency, retail sales for Europe increased
2.1%. The decrease in the region's retail sales reflects the ongoing uncertain
economic conditions in Russia, where retail sales decreased $65.7 million or
68.0%. Excluding Russia, retail sales in Europe increased 13.5% over the prior
year. The region's growth, excluding Russia, was primarily due to retail sales
increases in Italy, Germany and the Netherlands of 22.1%, 15.3% and 36.5%,
respectively.

Retail sales in the Americas increased $70.3 million, or 14.9%, in 1999 as
compared to the prior year. In local currency, retail sales for the Americas
increased 19.9%. The region's sales growth was primarily due to retail sales
increases in the United States of $51.6 million and in Mexico of $20.4 million.
Partially offsetting the increases was a decline in retail sales for Brazil of
$8.1 million, representing a 17.7% decline compared to the prior year. In local
currency, however, retail sales in Brazil increased 29.1% for the year ended
December 31, 1999.

Retail sales of weight management products increased 14.3% in 1999, and
retail sales of dietary and nutritional supplements increased 10.7%, as compared
to the prior year. The increases in the two product lines were due primarily to
(1) the same factors identified in the geographical segments previously
discussed and (2) the introduction of new weight management products in Europe
during the second quarter of 1999, which contributed to relatively stronger
growth for the weight management product line. The personal care product line
decreased 0.5% in 1999 as compared to the prior year. The decrease in personal
care sales was primarily due to the significant decrease in Russian sales, which
has a proportionately higher percentage of personal care sales as compared to
other countries. Prior year numbers for retail sales by product line have been
reclassified to conform with current year presentation.

Gross profit of $432.2 million for 1999 was $47.3 million, or 12.3% higher
than gross profit of $384.9 million in the prior year. As a percentage of retail
sales, gross profit for 1999 as compared to the same period in the prior year
increased from 23.4% to 24.1%. The increases in gross profit as a percentage of
retail sales primarily resulted from the lower cost for weight management and
dietary and nutritional supplement
26
<PAGE> 27

products. Although our principal supplier revised its pricing in conjunction
with a contract renewal effective January 1998, gross margin did not benefit
until inventories purchased at old prices were fully utilized during the second
quarter of 1998. In addition, 1998 included a $9.4 million charge relating
primarily to Russia. Partially offsetting the improvements in the gross margin
was a $5.3 million special distributor bonus earned in June of 1999 and costs
associated with a limited-time sales promotion in Russia.

Marketing, distribution and administrative expenses, as a percentage of
retail sales, were 18.9% for 1999 as compared to 18.6% for the same period in
1998. These expenses for the same periods increased 10.8% to $339.6 million from
$306.6 million in the prior year. The increase includes the effect of our
continuing investment in corporate and operational support, enhanced product
distribution capabilities and Year 2000 conversion expenses. In addition, 1999
was negatively impacted by $7.4 million of foreign exchange losses compared to
foreign exchange losses of $0.8 million for the same period in 1998. The foreign
exchange losses for 1999 include $5.8 million of yen option premium expenses
that we incurred in connection with our purchase of options to protect our
financial results from a potential weakening of the Japanese yen.

The Japanese yen and the Korean won strengthened against the U.S. dollar,
as compared to the exchange rates in effect during 1998, resulting in
proportionately higher revenues, expenses and income when translated into the
U.S. dollar reporting currency. For 1999, the effect of the stronger Japanese
yen and Korean won on our net income per diluted share was approximately $0.47,
excluding the cost of the related foreign exchange contracts. The effect of
foreign currency changes of this nature in countries other than Japan and South
Korea was not individually material to our operations. However, the cumulative
effect amounted to a decrease in net income per diluted share for 1999 of
approximately $0.15.

Income taxes of $36.3 million for 1999 increased from $31.1 million in the
prior year. As a percentage of pre-tax income, income taxes remained unchanged
at 38.5% in 1999. As reported for the year ended December 31, 1999, 75% of our
income before income taxes came from sources outside the United States and was
subject to tax in the respective countries in which we operate. When that income
is returned to and taxed by the United States, foreign tax credits help reduce
the U.S. tax on that income. Currently, we are utilizing most, but not all, of
our foreign tax credits in the year in which they arise.

Net income for 1999 increased 17.3% to $56.9 million from $48.5 million
reported in the prior year.

YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31,
1997. Retail sales for the year 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 $47.3 million, or 7.4%, 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/Pacific 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. Excluding Russia, retail sales in Europe
increased 31%.

Retail sales in the Americas increased $76.8 million, or 19.5%, in 1998 as
compared to the prior year. In local currency, retail sales for the 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%.

27
<PAGE> 28

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: (1) higher
in-country distribution expenses primarily due to facility and staff expansions,
new country openings in Turkey and Indonesia; (2) higher administrative expenses
due to staff additions and other costs related primarily to building the
appropriate infrastructure; (3) higher marketing costs resulting from increased
sales event activity in 1998; and (4) 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 our 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 an
adverse affect on our net income of $7.5 million, or approximately $0.25 on
earnings 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.

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

LIQUIDITY AND CAPITAL RESOURCES

We historically have met our working capital and capital expenditure
requirements, including funding for expansion of operations, through net cash
provided by operating activities.

For the year ended December 31, 1999, net cash provided by operating
activities was $87.4 million, compared to $57.2 million in 1998. The increase
resulted primarily from: (1) increases in net income; (2) reductions in the
decrease in deferred income taxes; (3) reductions in receivables; (4) reduction
in prepaid expenses and other current assets; and (5) increases in accounts
payable, royalty overrides, various accrued liability accounts, and advanced
sales deposits. The increase was partially offset by higher other assets and
lower income tax payable.

Capital expenditures for 1999 were $30.1 million compared to $19.1 million
in 1998. The majority of the 1999 expenditures resulted from investment in
management information systems and the expansion of office facilities and
equipment in the United States.

In connection with our entry into each new market, we fund inventory
requirements and typically establish either a full-service distribution center,
sales office, fulfillment center or compliance office, or a combination of the
foregoing. Although the capital requirements associated with entry into new
markets vary, we estimate that up to $7.0 million will be required for
pre-opening expenses, capital expenditures and other operating cash flow needs
associated with our new market expansion activities in year 2000.

28
<PAGE> 29

As of December 31, 1999, we had $133.1 million in working capital. Cash,
cash equivalents and marketable securities were $139.4 million at December 31,
1999 compared to $105.9 million at December 31, 1998.

We have not been subjected to material price increases by our suppliers for
several years. We believe that we have the ability to respond to a portion or
possibly all of any price increases by raising the price of our products. Our
purchases from our suppliers generally are made in U.S. dollars, while our sales
to our distributors generally are made in local currencies. Consequently,
strengthening of the U.S. dollar versus a foreign currency can have a negative
impact on operating margins and can generate transaction losses on intercompany
transactions. From time to time, we enter into forward exchange contracts and
other hedging arrangements to manage our foreign exchange risk on intercompany
transactions. During 1999, most Asian currencies remained stable or strengthened
against the U.S. dollar, while most European and South American currencies
decreased in value against the U.S. dollar.

On January 1, 1999, eleven of the fifteen member countries of the European
Union adopted a single European Currency -- the euro. The conversion rates
between the existing sovereign currencies and the euro have been fixed. The euro
is traded on currency exchanges and is used in business transactions. Beginning
in January 2002, new euro-denominated bills and coins will be issued, and
existing currencies will be withdrawn from circulation. We have conducted a
review of our information and business systems, and those of our European
affiliates, to address the impact of the euro conversion. We have initially
offered both the existing currencies and the euro to settle distributor sales,
and we ultimately will offer to process orders in the euro currency. To prepare
for this transition, some computer systems will require modifications or
replacement. We are still evaluating subsequent phases to the euro conversion,
which may include system modifications to allow the payment of distributor
royalty overrides in the euro currency. We do not expect that the incremental
costs associated with these subsequent phases will be significant. In response
to the euro conversion, we may make some price adjustments to ensure pricing
consistency within the European market.

On September 13, 1999, the Company publicly announced a proposed purchase
of the outstanding common shares by entities controlled by Mark Hughes, the
Company's Chairman, President and CEO/ Principal Shareholder. The proposed
transaction would be accomplished in a merger of MH Millennium Acquisition Corp.
(the "Purchaser") into the Company. As contemplated by the merger agreement, on
September 17, 1999, the Purchaser commenced a tender offer to purchase all of
the Company's outstanding shares at a price of $17.00 per share in cash. In
addition, in connection with the settlement of certain litigation against the
transactions, a supplemental payment of $.81 per share would be paid to the
settlement class members (who include, generally, our public stockholders and
holders of the DECS securities issued by DECS Trust III); see "Item 3. Legal
Proceedings." Following the successful completion of the offer, the Purchaser
would be merged into the Company. The offer is conditioned upon, among other
things, the Purchaser obtaining financing for the offer, the merger and related
transactions.

The expiration date of the tender offer has been extended on a number of
occasions, most recently to March 31, 2000. On March 9, 2000, Mr. Hughes issued
a press release indicating that he and his advisors are continuing to address
the financing for the transaction. He indicated that difficult conditions in the
credit markets, in particular the high yield financing market, have delayed, and
may require a restructuring of, the planned financing. He indicated that there
can be no assurance that appropriate financing for the transaction will be
obtained.

Under the terms of the agreement governing the tender offer and the merger,
Mr. Hughes is entitled to further extend the tender offer. However, the
Company's Board of Directors may elect to terminate the agreement in the event
that both the tender offer and the merger have not been completed by March 31,
2000. Consequently, Mr. Hughes has requested that the Special Committee of the
Board agree to an amendment to the merger agreement to extend the March 31, 2000
date. There can be no assurance that the Special Committee will grant Mr.
Hughes' request.

As of December 31, 1999, we had $32.0 million of credit facilities,
including a $25 million unsecured committed line of credit, supporting letters
of credit in addition to providing borrowings in the aggregate amount of $8.2
million.
29
<PAGE> 30

In order to provide a portion of the funds to complete the Transactions, we
intend to borrow the required funds from banks and other financing sources.

We believe that we will be able to finance our working capital and capital
expenditure requirements for the foreseeable future with internally generated
funds. However, if the Transactions are completed, we will significantly reduce
our current cash balance and will incur annual financing expenses associated
with the debt incurred. We expect in the future to periodically utilize
additional financing for working capital or other purposes.

For a discussion of certain contingencies that may impact liquidity and
capital resources, you should see "Note 10, Contingencies," in our consolidated
financial statements included in this Report.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

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

FOREIGN EXCHANGE RISK. We enter into foreign exchange derivatives in the
ordinary course of business primarily to reduce our exposures to currency
fluctuations attributable to intercompany transactions and translation of our
local currency revenue. Most of these foreign exchange contracts are designated
for forecasted transactions. The use of these derivative instruments allows us
to reduce our overall exposure to exchange rate movements, because the gains and
losses on these contracts substantially offset losses and gains on the assets,
liabilities, and forecasted transactions being hedged. The fair value of option
contracts are based on dealer quotes.

Foreign exchange option contracts are used primarily to hedge
yen-denominated intercompany sales made by Herbalife International of America,
Inc. to Herbalife of Japan. The exchange rate at which these contracts may be
exercised is based upon the daily average exchange rate for a particular month.
We have guidelines that establish a $5 million limit on the amount of
outstanding option premiums.

The following table provides information about the details of our option
contracts at December 31, 1999.

<TABLE>
<CAPTION>
U.S. DOLLAR AVERAGE
EQUIVALENT STRIKE ORIGINAL FAIR MATURITY
FOREIGN CURRENCY COVERAGE PRICE VALUE VALUE DATE
---------------- ----------- ------- -------- ----- ----------
<S> <C> <C> <C> <C> <C>
Japanese Yen.................................... 3,000,000 118 92,000 -- 01/31/2000
Japanese Yen.................................... 3,000,000 118 95,000 -- 02/29/2000
Japanese Yen.................................... 3,000,000 118 97,000 -- 03/31/2000
--------- ------- ---
9,000,000 284,000 -- --
========= ======= ===
</TABLE>

30
<PAGE> 31

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

<TABLE>
<CAPTION>
U.S. DOLLAR
EQUIPMENT 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 and bank loans. The
objective of these contracts is to reduce the impact of foreign currency
movements on the subsidiary's operating results. The fair value of forward
contracts are based on dealer quotes.

The table below describes the forward contracts that were outstanding at
December 31, 1999.

<TABLE>
<CAPTION>
FORWARD
CONTRACT POSITION IN MATURITY CONTRACT FAIR
FOREIGN CURRENCY DATE US DOLLARS DATE RATE VALUE
---------------- -------- ----------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
Buy British Pound/Sell Norwegian Kroner.... 04/19/99 802,000 04/14/00 12.4833 829,000
Buy British Pound/Sell Finnish Marka....... 04/19/99 813,000 04/14/00 8.7451 879,000
Buy British Pound/Sell Swedish Kroner...... 06/25/99 739,000 04/14/00 13.1085 766,000
Buy British Pound/Sell Norwegian Kroner.... 06/25/99 492,000 04/14/00 12.4730 509,000
Buy British Pound/Sell Danish Kroner....... 06/25/99 436,000 04/14/00 11.1090 463,000
Buy USD/Sell Turkish Lire.................. 09/14/99 147,000 03/13/00 613,050 139,000
Buy USD/Sell Turkish Lire.................. 09/14/99 3,000,000 09/14/00 824,000 2,209,000
</TABLE>

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 1,807,000 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>

The Company periodically utilizes bank debt at certain foreign subsidiaries
to reduce the impact of foreign currency movements on the subsidiary's operating
results. At December 31, 1999 the Company's foreign subsidiaries had $4,551,000
of outstanding bank debt.

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, we have instructed
various subsidiaries to maintain most of their surplus cash in U.S. dollars. At
December 31, 1999, the total amount of foreign subsidiary cash held primarily in
Japan and Korea was $99.5 million of which $31.8 million was maintained or
invested in U.S. dollars.

31
<PAGE> 32

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

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

The following table lists our cash equivalents and short-term investments
at December 31, 1999:

<TABLE>
<CAPTION>
FAIR
2000 2001 2002 2003 2004 THEREAFTER TOTAL VALUE
----------- -------- -------- ------- -------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Cash equivalents............... $29,432,000 $ -- $ -- $ -- $ -- $ -- $29,432,000 $29,432,000
Average interest rate........ 3.63%
Short term investments......... 329,000 -- -- -- -- -- 329,000 333,000
Average interest rate........ 3.93%
Long term investments.......... -- 279,000 185,000 92,000 92,000 186,000 834,000 834,000
Average interest rate........ -- 4.24% 4.45% 4.72% 4.66% 3.25%
----------- -------- -------- ------- -------- -------- ----------- -----------
Total.................. $29,761,000 $279,000 $185,000 $92,000 $ 92,000 $186,000 $30,595,000 $30,599,000
=========== ======== ======== ======= ======== ======== =========== ===========
</TABLE>

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 THEREAFTER TOTAL VALUE
---------- -------- -------- -------- ------- ---------- ---------- ----------
<S> <C> <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 48 through 73.

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

None.

32
<PAGE> 33

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Our Board of Directors is presently comprised of six members, all of whom
hold office until the next annual meeting of our stockholders and until his
successor has been elected. Each of our officers is elected by our Board of
Directors and serves at the discretion of the Board.

<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Mark Hughes............ 44 Chairman of the Board, Chief Executive Officer and
President
Christopher Pair....... 45 Director, Executive Vice President, Chief Operating Officer
and Secretary
Michael E. Rosen....... 53 Director, Executive Vice President, Chief Executive
Corporate Marketing and Corporate Development
Edward J. Hall......... 53 Director
Alan Liker............. 62 Director
Christopher M. Miner... 48 Director
Robert A. Sandler...... 56 Executive Vice President and General Counsel
Timothy Gerrity........ 49 Executive Vice President and Chief Financial Officer
</TABLE>

MARK HUGHES founded our business in 1980. Since that time, Mr. Hughes has
controlled the operations of our business either (1) as the sole individual
general partner of the California limited partnership through which we conducted
our business from inception to December 1985, (2) as the President and Chairman
of the Board of the California corporation through which we conducted our
business for the interim period from October 1981 to August 1983, (3) as the
President and Chairman of the corporate general partner of the California
limited partnership through which we conducted our business from May to December
1985, or (4) as the President and Chairman of the corporation through which we
conducted our business from January 1986 to November 1986. In November 1986, Mr.
Hughes became our Chairman of the Board, Chief Executive Officer and President
when we acquired Herbalife International of America, Inc. in a stock-for-stock
reorganization, and he has continued in those positions since that time.

CHRISTOPHER PAIR joined us in March 1985 as Executive Assistant to the
President. From May 1991 to November 1996, Mr. Pair served as our Executive Vice
President -- International and Corporate Administration and Secretary. In
November 1996, he became our Executive Vice President and Chief Operating
Officer. Mr. Pair has been one of our directors since May 1990, and he is our
Corporate Secretary. Prior to 1985, Mr. Pair served in various management
positions with U.S. Leasing, Raytheon Data Systems and Consolidated Foods. He is
Vice-Chairman of the Direct Selling Educational Foundation and serves on its
Executive Committee. Mr. Pair also is Vice-Chairman of the Board of Directors of
the Direct Selling Association, and is a member of its Executive and Finance
Committee and its Long-Range Planning Committee. In addition, he serves on the
Board of Directors of the Counsel for Responsible Nutrition and The American
Herbal Products Association, and he is a member of the CEO Council of The World
Federation of Direct Selling Associations. Mr. Pair received his B.S. and M.B.A.
degrees from the University of Redlands.

MICHAEL E. ROSEN joined us in August 1993, and he currently is our
Executive Vice President and Chief Executive Corporate Marketing and Corporate
Development. Mr. Rosen's responsibilities include (1) our international and
domestic marketing, (2) developing our personal care and cosmetic lines, (3)
investor relations and (4) external affairs. In addition, he has served as one
of our directors since January 1996. Prior to joining us, Mr. Rosen was Chairman
of the JCP Television Shopping Network, which he founded in 1986.

EDWARD J. HALL a certified public accountant, is an independent investor.
From April 1995 through November 1998, he served as the Chief Financial Officer
of Cruttenden Roth Incorporated, an investment banking firm. He served in a
similar capacity for H.J. Meyers & Co., Inc. an investment banking firm based in
Beverly Hills, California from March 1991 through March 1995. From 1988 through
1990, Mr. Hall was an Executive Vice President of Angeles Corporation, an
investment management firm. Prior to joining Angeles

33
<PAGE> 34

Corporation, Mr. Hall was with Deloitte & Touche LLP, where he had been an audit
partner since 1980. Mr. Hall was elected a director of the Company in March
1992.

ALAN LIKER has served as a business advisor to a number of individuals and
companies during the past several years. Currently, Mr. Liker serves as a
business adviser to Budget Rent-A-Car of Southern California. Until their sale
in 1989, Mr. Liker was a director of Shaklee Corporation and its Japanese
affiliate, Shaklee KK. From 1976 to 1980, he was a principal of Xerox
Development Corporation, a strategic planning unit of Xerox Corporation. Mr.
Liker previously was a law professor at Harvard University, University of
California (Los Angeles) and University of Southern California law schools. He
was elected to our Board of Directors in December 1993. Previously, Mr. Liker
was a director of Budget Group, Inc., First Charter Bank and the JCP Television
Shopping Network.

CHRISTOPHER M. MINER has served as a business advisor to a number of
companies and private investors during the past several years, including Redfish
Telemetrix, Inc., a telecommunications company, where he served as CEO and CFO
from May 1997 to December 1999. He has served as Chief Financial Officer of Wow!
Laboratories, Inc., an oral healthcare company, from July 1996 to December 1998.
Mr. Miner co-founded Vis-A-Vis Communications, Inc. (formerly Workstation
Technologies, Inc.) in 1989. Vis-A-Vis is a developer of interactive
communications software and hardware products. Prior to founding Vis-A-Vis
Communications, from 1987 to 1989, Mr. Miner served as the Chief Financial
Officer of Technology Marketing, Inc., a custom electronic engineering
organization and board level test product manufacturer. Prior to joining
Technology Marketing, he served as the Chief Financial Officer and Director for
Media Systems Technology, Inc., a software manufacturer, from 1981 to 1987. Mr.
Miner received his M.B.A. from California State University in 1976. He was
elected a director of the Company in March 1996.

ROBERT A. SANDLER joined us in January 1997 as our Executive Vice President
and General Counsel. From 1975 to the present, Mr. Sandler has been a member of
Sandler & Morse, a law firm that he co-founded. From 1985 to 1994, Mr. Sandler
served in various capacities with various companies within the Siemens family of
companies, including most recently as the Executive Vice President and General
Counsel of Siemens Pacesetter. He received his A.B. degree from the University
of California, Los Angeles and his J.D. degree from the University of Southern
California. Currently, Mr. Sandler is a director of Physic-Control, a
manufacturer of external defibrillators.

TIMOTHY GERRITY joined us in May 1985, and he currently serves as our
Executive Vice President and Chief Financial Officer. Mr. Gerrity, a certified
public accountant, is responsible for our worldwide financial affairs. His
previous experience includes various management positions with Wickes
Corporation, Deloitte & Touche LLP and Fluor Corporation. Mr. Gerrity recently
was appointed a member of the Finance Committee of the Direct Selling
Association. He received his B.S. degree from California State University at
Northridge and his M.B.A. degree from the University of Southern California.

ITEM 11. EXECUTIVE COMPENSATION

DIRECTOR COMPENSATION

Each director who is not one of our officers or consultants receives
$45,000 per year for his services as a director, plus (1) $5,000 per year for
each committee of our Board on which he serves or (2) $10,000 if he serves as
chairman of a committee. Any outside directors serving on the board of directors
of any of our foreign subsidiaries are paid fees of $2,500 annually for each
foreign subsidiary board on which they serve. Directors who also are officers
receive no separate compensation for their services as directors.

34
<PAGE> 35

EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE. The following table sets forth the annual and
long-term compensation of our Chief Executive Officer and four additional most
highly compensated executive officers for the fiscal year ended December 31,
1999 (the "Named Officers").

<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
-------------------------------------
AWARDS
ANNUAL COMPENSATION ------------------------
--------------------------------------- SECURITIES PAYOUTS
OTHER ANNUAL RESTRICTED UNDERLYING ---------- ALL OTHER
NAME AND COMPENSATION STOCK OPTIONS/ LTIP COMPENSATION
PRINCIPAL POSITION YEAR SALARY($) BONUS($)(1) ($)(2) AWARD(S)($) SARS(#) PAYOUTS($) ($)(3)
------------------ ---- ---------- ----------- ------------ ----------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mark Hughes............... 1999 $1,000,056 $9,550,000 $240,300 -- $187,019
President, Chief 1998 1,000,011 4,500,000 -- -- 375,000 -- 129,013
Executive Officer 1997 1,000,012 6,757,563 -- -- 1,000,000 -- 126,237
and Chairman of the
Board
Christopher Pair.......... 1999 $1,000,000 $1,838,000 $115,000 129,439 $399,525
Executive Vice President 1998 1,098,558 920,000 -- -- 150,000 -- 227,483
and Chief Operating
Officer 1997 894,615 896,000 -- -- 200,000 -- 216,426
Michael E. Rosen.......... 1999 $1,000,001 $1,314,500 $715,000 29,439 $297,415
Executive Vice
President, 1998 896,154 630,000 600,000 -- 150,000 -- 128,080
Chief Executive
Corporate 1997 694,616 784,000 600,000 -- 150,000 -- 107,220
Marketing and Corporate
Development
Robert A. Sandler......... 1999 $ 800,000 $ 643,998 $ 60,000 -- $100,679
Executive Vice President 1998 697,115 360,000 -- -- 50,000 -- 96,660
and General Counsel 1997 492,884 448,000 -- -- 325,000 -- 48,022
Timothy Gerrity........... 1999 $ 700,000 $ 966,000 $ 60,000 -- $ 92,200
Executive Vice President 1998 548,692 540,000 -- -- 100,000 -- 81,441
and Chief Financial
Officer 1997 447,308 672,000 -- -- 75,000 -- 84,877
</TABLE>

- ---------------
(1) The 1999, 1998 and 1997 amounts include bonuses earned under the 1994
Performance-Based Annual Incentive Compensation Plan (the "1994 Plan"). See
"-- Description of Benefit Plans -- 1994 Performance-Based Annual Incentive
Compensation Plan." The 1999 amount for Mr. Rosen excludes an aggregate of
$1,077,500 in bonuses paid in 1999 pursuant to individual performance goals
established under the 1994 Plan; such amounts were previously reported as
earned by Mr. Rosen pursuant to a deferred compensation arrangement with
him.

(2) The listed amounts for 1997 and 1998 reflect deferred compensation pursuant
to a Deferred Compensation Agreement between us and Mr. Rosen. See
"-- Employment Contracts and Change in Control Arrangements." For 1999, the
listed amounts represent payments for car allowances for Mr. Hughes, Mr.
Pair, Mr. Sandler and Mr. Gerrity. In the case of Mr. Rosen, the listed
amount for 1999 represents payments for a car allowance in the amount of
$115,000 and earned deferred compensation in the amount of $600,000.

(3) For 1999, these amounts represent payments under the 401(k) Tax-Sheltered
Savings Plan, Executive Medical Plan, Executive Long Term Disability Plan,
Executive Life Insurance Plan and Deferred Compensation Plan. The amount
with respect to the 401(k) Tax-Sheltered Savings Plan was $4,800 for each of
Mr. Pair, Mr. Rosen, Mr. Sandler and Mr. Gerrity. The amount with respect to
the Executive Medical Plan was $7,136 for each of Mr. Hughes, Mr. Pair, Mr.
Rosen, Mr. Sandler and Mr. Gerrity. Amounts with respect to the Executive
Long Term Disability Plan were $2,960, $10,317, $8,587, $2,960 and $5,337
for Mr. Hughes, Mr. Pair, Mr. Rosen, Mr. Sandler and Mr. Gerrity,
respectively. Amounts with respect to the Executive Life Insurance Plan were
$200,349, $99,969, $5,783 and $4,927 for Mr. Pair, Mr. Rosen, Mr. Sandler
and Mr. Gerrity, respectively. Amounts with respect to the Deferred
Compensation Plan were $176,923, $176,923, $176,923, $80,000 and $70,000 for
Mr. Hughes, Mr. Pair, Mr. Rosen, Mr. Sandler and Mr. Gerrity, respectively.

35
<PAGE> 36

OPTION GRANTS IN LAST FISCAL YEAR. The following table sets forth grants of
options to purchase shares of Class A Stock ("Class A Stock Options") and
options to purchase shares of Class B Stock ("Class B Stock Options") during the
fiscal year ended December 31, 1999 to the Named Officers.

<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-----------------------------------------------------------
TOTAL OPTIONS
SECURITIES GRANTED TO
UNDERLYING EMPLOYEES EXERCISE GRANT DATE
OPTIONS IN FISCAL OR BASE EXPIRATION PRESENT
NAME GRANTED(#)(1) YEAR(%) PRICE($/SH)(2) DATE VALUE($)(3)
---- ------------- ------------- -------------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Mark Hughes
Class A......................... -- -- -- -- --
Class B......................... -- -- -- -- --
Christopher Pair
Class A......................... -- -- -- -- --
Class B......................... 129,439 65.37% $8.625 4/15/09 $381,580
Michael E. Rosen
Class A......................... -- -- -- -- --
Class B......................... 29,439 14.87% $8.625 4/15/09 $ 86,785
Robert A. Sandler
Class A......................... -- -- -- -- --
Class B......................... -- -- -- -- --
Timothy Gerrity
Class A......................... -- -- -- -- --
Class B......................... -- -- -- -- --
</TABLE>

- ---------------
(1) Options granted in 1999 to Christopher Pair and Michael Rosen are
exercisable in cumulative 50% installments commencing one year from date of
grant, with full vesting occurring on the second anniversary.

(2) We granted all options based on the closing price for our Common Stock, as
reported on the Nasdaq National Market.

(3) In accordance with the rules of the Securities and Exchange Commission, we
used the Black Scholes option pricing model to estimate the grant date
present value of the options set forth in this table. We cannot predict or
estimate the future price of our Common Stock, and no option pricing model,
including the Black Scholes model, can accurately determine the value of an
option. Accordingly, we cannot assure you that the value realized by an
officer, if any, will be at or near the value estimated in accordance with
the Black Scholes model. The assumptions that we used for the valuation
include: 59.78% price volatility; 5.08% weighed average risk free rate of
return; 5.5% dividend yield and options exercises averaging 3.4 year term.
We did not make any adjustment for non-transferability or risk of
forfeiture.

36
<PAGE> 37

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES. The following table sets forth information with respect to: (1) shares
of Common Stock acquired on exercise of Class A Stock Options and Class B Stock
Options in 1999 and (2) unexercised options to purchase shares of Class A Stock
or Class B Stock that we granted in fiscal 1999 and prior years.

<TABLE>
<CAPTION>
SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
SHARES OPTIONS AT OPTIONS AT
ACQUIRED ON VALUE FISCAL YEAR-END(#) FISCAL YEAR-END($)(1)
NAME EXERCISE(#) REALIZED($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
---- ----------- ----------- -------------------------- --------------------------
<S> <C> <C> <C> <C> <C> <C>
Mark Hughes
Class A............. -- -- 308,331 566,670 1,965,610 3,612,521
Class B............. -- -- 466,663 533,336 3,149,975 3,600,018
Christopher Pair
Class A............. -- -- 61,369 33,106 391,227 211,051
Class B............. -- -- 152,966 365,453 1,032,521 2,207,930
Michael E. Rosen
Class A............. -- -- 99,165 23,335 656,656 148,761
Class B............. -- -- 228,331 196,108 1,541,234 1,264,851
Robert A. Sandler
Class A............. -- -- 48,331 60,002 308,110 382,513
Class B............. -- -- 106,665 160,002 719,989 1,080,014
Timothy Gerrity
Class A............. -- -- 56,499 28,501 368,775 181,694
Class B............. -- -- 132,999 137,001 897,743 924,757
</TABLE>

- ---------------
(1) Represents the difference between the market price of our Common Stock on
December 31, 1999 and the exercise price of the options.

DESCRIPTION OF BENEFIT PLANS.

1994 Performance-Based Annual Incentive Compensation Plan. We maintain the
1994 Plan (1) to provide additional compensation as an incentive to some key
executives and consultants to attain the specified performance objectives of
Herbalife and our subsidiaries and affiliated corporations and (2) to ensure the
continued availability of their full-time or part-time services to us.
Specifically, the individuals entitled to participate in the 1994 Plan are those
Herbalife executive officers and consultants determined by the Compensation
Committee of our Board of Directors (the "Compensation Committee"), which acts
as administrator of the 1994 Plan.

The amount of an available award to a participant or the aggregate amount
of available awards to all participants for each award period is determined by
the Compensation Committee based upon an objective computation (the "Formula")
of our actual performance relative to pre-established performance goals. The
performance goals included in the Formula for each award period are selected by
the Compensation Committee from among the following performance measures: (1)
level of retail sales, in the aggregate or for a particular category or
categories of retail sales; (2) net cash flow; (3) net income; (4) operating
income; (5) earnings per share; (6) return on sales; (7) reduction in
expenditure levels for a particular category or categories of expenses versus a
prior period; (8) return on total capital; (9) return on equity; and (10)
increase in the price of our Common Stock over a specified time period. No
participant is ever entitled to earn in excess of $10 million under the 1994
Plan with respect to any single calendar year. With respect to participants
whose service relationship terminates during an award period, the Compensation
Committee provides for prorated awards based upon satisfaction of performance
goals for the entire award period, with the proration formula to be set by the
Compensation Committee in its discretion.

37
<PAGE> 38

Awards granted pursuant to the 1994 Plan may be made (1) in cash, (2)
through the issuance of shares of Class A Stock or Class B Stock, or (3) through
a combination of either of these methods. The total number of shares of Common
Stock that may be issued under the 1994 Plan in any fiscal year may not exceed
5% of the number of issued and outstanding shares of Common Stock at the
beginning of the prior fiscal year. The Compensation Committee may, in its
discretion and subject to the consent of each affected participant, approve the
advance of all or a portion of a target cash award to a participant prior to the
conclusion of an award period. Each advance, if made, is a full recourse
obligation of the participant and bears interest from the date of the advance
until repaid or deemed earned at the applicable Federal rate, as specified in
the 1994 Plan, for loans of a comparable term.

1992 Executive Incentive Compensation Plan. In 1992, our Board adopted the
Herbalife International, Inc. 1992 Amended and Restated Executive Incentive
Compensation Plan (the "1992 Plan"). Eligible participants under the 1992 Plan
consist of our executive vice presidents, vice presidents, country managers and
other executive officers and key employees (other than our Chief Executive
Officer and President) and consultants as designated by our Chief Executive
Officer in conjunction with the Compensation Committee, which administers the
1992 Plan.

The 1992 Plan provides for the payment of bonuses to participants for each
year that the 1992 Plan is in effect. Awards are made to participants based upon
the extent to which corporate performance goals and individual performance goals
(set in advance by our Chief Executive Officer together with, in the case of
corporate performance goals, the Compensation Committee) are met. To be eligible
for payment with respect to a particular award period, a participant is required
to be employed by us on the last day of the award period, subject to specified
exceptions. Awards granted pursuant to the 1992 Plan may be made (1) in cash,
(2) through the issuance of shares of Class A Stock or Class B Stock, or (3)
through a combination of either of these methods. The total number of shares of
Common Stock that may be issued under the 1992 Plan in any fiscal year may not
exceed the excess of (1) 5% of the number of issued and outstanding shares of
Common Stock at the beginning of the prior fiscal year over (2) the number of
shares of Common Stock issued during the prior fiscal year pursuant to the 1994
Plan.

1991 Option Plan. The purpose of our Amended and Restated 1991 Stock Option
Plan (the "Option Plan") is to secure for us and our stockholders the benefits
arising from stock ownership by key employees, directors, consultants and other
persons selected by the Stock Option Committee of our Board of Directors (the
"Stock Option Committee"), which administers the Option Plan. As of December 31,
1999, approximately 150 persons were eligible to participate in the Option Plan.

Options granted under the Option Plan may be designated as (1) "incentive
stock options" for federal income tax purposes or (2) options that are not
qualified for this treatment, or "non-qualified stock options." All options
granted under the Option Plan are non-transferable (except that limited estate
planning and similar transfers of non-qualified stock options are permitted) and
are exercisable in installments determined by the Stock Option Committee, except
that each option is to be exercisable in minimum annual installments of 20%
commencing with the first anniversary of the option's grant date. Each option
granted has a term specified in the option agreement, but all options expire no
later than ten years from the date of grant. Incentive stock options granted to
a person holding more than 10% of the total voting power of our capital stock
must expire within five years from the date of grant.

In the case of incentive stock options, the exercise price must be at least
equal to 100% of the fair market value of our Common Stock on the date the
option is granted. The exercise price for incentive stock option grants to a
person holding more than 10% of the total voting power of our capital stock must
equal 110% of the fair market value of our Common Stock. The exercise price of a
non-qualified option need not be equal to the fair market value of our Common
Stock at the date of grant, but may be granted with any exercise price that is
not less than 85% of fair market value at the time the option is granted, as the
Stock Option Committee may determine.

Deferred Compensation Plans. We maintain three deferred compensation plans
for select groups of management or highly compensated employees: (1) the
Herbalife Management Deferred Compensation Plan, effective January 1, 1996 (the
"Management Plan"), which is applicable to directors and vice presidents;
38
<PAGE> 39

(2) the Herbalife Senior Executive Compensation Plan, effective January 1, 1996
(the "Senior Executive Plan"), which is applicable to eligible employees at the
rank of Senior Vice President and higher; and (3) the Herbalife International of
America, Inc. Executive Officer Deferred Compensation Plan. The Management Plan
and the Senior Executive Plan are referred to below as the "Deferred
Compensation Plans." The Executive Officer Deferred Compensation Plan is
described below under "Employment Contracts and Change in Control Arrangements."

The Deferred Compensation Plans are unfunded and their benefits are paid
from our general assets, except that we have contributed amounts to a "rabbi
trust" whose assets will be used to pay benefits if we remain solvent, but can
be reached by our creditors if we become insolvent. The Deferred Compensation
Plans allow eligible employees, who are selected by the administrative committee
that manages and administers the plans (the "Deferred Compensation Committee"),
to elect annually to defer up to 50% of their annual base salary and up to 100%
of their annual bonus for each calendar year (the "Annual Deferral Amount"). We
make matching contributions on behalf of each participant in the Senior
Executive Plan ("Herbalife Matching Contributions") of 100% of the amount
deferred by each participant from the participant's annual base salary, up to
(1) 15% of the participant's annual base salary in the case of a participant who
is an Executive Vice President, (2) 12.5% of the participant's annual base
salary in the case of a participant who is a Senior Vice President, and (3) 10%
(or such greater percentage, not to exceed 15%, that the Deferred Compensation
Committee may determine in the case of any particular participant) of the
participant's annual base salary in the case of any other participant.
Furthermore, our Compensation Committee may designate any participant to receive
an Herbalife Matching Contribution of 20% of his or her annual base salary if
the Annual Deferral Amount of such designated participant equals or exceeds 10%
of such designated participant's annual base salary. Our Compensation Committee
has designated Messrs. Hughes, Rosen and Pair to receive the enhanced Herbalife
Matching Contributions.

Each participant in a Deferred Compensation Plan may determine how his or
her Annual Deferral Amount and Herbalife Matching Contributions (if any) will be
deemed to be invested by choosing among several investment funds or indices
designated by the Deferred Compensation Committee. The Deferred Compensation
Plans, however, do not require us actually to acquire or hold any investment
fund or other assets to fund the Deferred Compensation Plans. The entire
interest of each participant in a Deferred Compensation Plan is always fully
vested and nonforfeitable. 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 and payable
two or more years from the first day of the year in which the Annual Deferral
Amount is actually deferred. Subject to the short term payout provision and
specified exceptions for unforeseeable financial emergencies, a participant may
not withdraw, without incurring a ten percent (10%) withdrawal penalty, all or
any portion of his or her account under the Deferred Compensation Plans prior to
the date that such participant either (1) is determined by the Deferred
Compensation Committee to have incurred permanent and total disability or (2)
dies or otherwise terminates employment with us.

Retirement Plan. We adopted, effective September 1997, a Supplemental
Executive Retirement Plan (the "Retirement Plan") providing retirement benefits
for a select group of management and highly compensated employees. The
Retirement Plan is unfunded and its benefits are paid from our general assets,
except that we have contributed amounts to a "rabbi trust" whose assets will be
used to pay benefits if we remain solvent, but can be reached by our creditors
if we become insolvent. The normal retirement benefit under the Retirement Plan
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. The term "compensation" for this purpose means the average yearly
base compensation of the five calendar years within the last 10 years of
employment that would yield the highest average. A participant may elect at any
time to receive a lump sum equal to 90% of the actuarial equivalent of his or
her vested benefits under the Retirement Plan, in which case the participant
will forfeit his or her remaining benefits under such plan and cease to
participate in such plan.

A participant who reaches the "early retirement date" may choose to retire
and to receive an early retirement benefit equal to the normal retirement
benefit. A participant who becomes disabled will receive a
39
<PAGE> 40

benefit equal to his normal retirement benefit. A participant generally reaches
his or her early retirement date when he or she completes 10 years participation
in the plan and reaches age 55. An employee whose employment with us terminates
before he or she reaches early retirement date will receive the actuarial
equivalent of his or her vested benefits paid in a lump sum within 90 days of
the termination. Upon a change in control of Herbalife, a participant will
receive a lump sum payment equal to (1) the actuarial equivalent of the normal
retirement benefit, or (2) if payment of benefits has begun, the actuarial
equivalent of the remaining quarterly installments. A participant becomes fully
vested in his or her interest in the Retirement Plan on his or her normal or
early retirement date, death, or disability, or upon a change in control of
Herbalife. If a participant's employment is terminated for cause, we have the
discretion to reduce his or her vested benefit to zero. In all other cases, we
determine a participant's vested interest as follows:

<TABLE>
<CAPTION>
YEARS OF PARTICIPATION IN PLAN VESTED PERCENTAGE
------------------------------ -----------------
<S> <C>
less than 5.......................................... 0%
5............................................... 20
6............................................... 40
7............................................... 60
8............................................... 80
9............................................... 100
</TABLE>

The administrator of the Retirement Plan has the discretion to credit a
participant with additional years of service as of his or her commencement of
participation in the Retirement Plan.

For illustration purposes only, the following table provides examples of
the annual benefit payable under the Retirement Plan beginning at age 65.

<TABLE>
<CAPTION>
YEARS OF SERVICE
----------------------------------------------------
COMPENSATION 15 20 25 30 35
------------ -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
$ 125,000................................... $ 32,813 $ 43,750 $ 43,750 $ 43,750 $ 43,750
150,000.................................. 39,375 52,500 52,500 52,500 52,500
175,000.................................. 45,938 61,250 61,250 61,250 61,250
200,000.................................. 52,500 70,000 70,000 70,000 70,000
225,000.................................. 59,063 78,750 78,750 78,750 78,750
250,000.................................. 65,625 87,500 87,500 87,500 87,500
300,000.................................. 78,750 105,000 105,000 105,000 105,000
400,000.................................. 105,000 140,000 140,000 140,000 140,000
450,000.................................. 118,125 157,500 157,500 157,500 157,500
500,000.................................. 131,250 175,000 175,000 175,000 175,000
600,000.................................. 157,500 210,000 210,000 210,000 210,000
700,000.................................. 183,750 245,000 245,000 245,000 245,000
800,000.................................. 210,000 280,000 280,000 280,000 280,000
900,000.................................. 236,250 315,000 315,000 315,000 315,000
1,000,000.................................. 262,500 350,000 350,000 350,000 350,000
1,100,000.................................. 288,750 385,000 385,000 385,000 385,000
1,200,000.................................. 315,000 420,000 420,000 420,000 420,000
</TABLE>

Messrs. Hughes, Pair, Rosen, Sandler and Gerrity have 20, 14, 6, 3 and 14
years of participation, respectively. "Compensation" covered by the Retirement
Plan is equal to the amounts set forth in "Summary Compensation Table" under the
heading "Salary."

401(k) Profit Sharing Plan. We maintain a tax-qualified profit sharing plan
pursuant to Sections 401(a) and 401(k) of the Code (the "401(k) Plan"). The
401(k) Plan allows any eligible employee, including specified common-law
employees, to contribute each pay period from 2% to 17% of the employee's
earnings (but not in excess of $10,500 per year, as adjusted for increases in
the cost of living after 2000) for investment in mutual funds held by the 401(k)
Plan's trust. We make contributions to the 401(k) Plan in an amount

40
<PAGE> 41

equal to 3% of the earnings of each employee who elects to defer 2% or more of
his or her earnings. The 401(k) Plan also imposes restrictions on the aggregate
amount that may be contributed by higher-paid employees in relation to the
amount contributed by the remaining employees. A participating employee is fully
vested at all times in his or her contributions and in the trust fund's earnings
attributable to his or her contributions. The employee has no vested interest in
our contributions and earnings of the trust fund attributable to our
contributions until he or she completes three years of service with us, and the
employee is not fully vested in our contributions and earnings of the trust fund
attributable to our contributions until he or she has completed seven years of
service with us. However, an employee becomes fully vested in our contributions
and earnings of the trust fund attributable to our contributions (1) upon the
employee's death, (2) upon the employee's disability, or (3) upon the employee
reaching the 401(k) Plan's normal retirement age, which is the latter of age 65
and the completion of five years of service with us. An employee may not
withdraw all or any portion of his or her account prior to the date that the
employee either (1) incurs a hardship or (2) terminates employment with us.

Executive Medical Plan. The Executive Medical Plan is an insured hospital
and medical reimbursement plan covering executives and key employees and their
dependents during the executive's or employee's employment by us. The Executive
Medical Plan provides coverage of medical expenses incurred beyond our basic
plan. For the fiscal year ended December 31, 1999, the Executive Medical Plan's
cost to us was approximately $36,000.

Executive Long-Term Disability Plan. The Executive Long-Term Disability
Plan is an insured disability plan covering executives and key employees. It
provides for extended disability insurance for its participants with premiums
paid by us. For the fiscal year ended December 31, 1999, the Executive Long-Term
Disability Plan's cost to us was approximately $30,000.

Executive Life Insurance Plan. The Executive Life Insurance Plan covers
executives and key employees and provides for life insurance benefits in excess
of those available under our basic plan. Premiums are paid by us. For the fiscal
year ended December 31, 1999, the Executive Life Insurance Plan's cost to us was
approximately $311,000.

EMPLOYMENT CONTRACTS AND CHANGE IN CONTROL ARRANGEMENTS. Effective as of
August 9, 1994, we entered into a Deferred Compensation Agreement with Mr.
Rosen, pursuant to which Mr. Rosen received $600,000 in cash deferred
compensation from us on each of the first five anniversary dates of such
Deferred Compensation Agreement. Mr. Rosen's right to receive such deferred
compensation is subject to our right to delay payment until our deduction for
the payment would no longer be disallowed under Section 162(m) of the Code. We
have amended and restated the Deferred Compensation Agreement in its entirety as
the Herbalife International of America, Inc. Executive Officer Deferred
Compensation Plan, (the "Executive Officer Plan"), effective as of January 1,
1998, to make the following changes: (1) deferred amounts will bear interest at
a rate equal to the current general account crediting rate on SunLife of
Canada's corporate universal life product effective on January 1st of each year;
(2) we will contribute amounts to a "rabbi trust" whose assets will be used to
pay benefits if we remain solvent, but can be reached by our creditors if we
become insolvent; and (3) Mr. Rosen may elect to receive payments in the form of
installments payable over five years or 10 years, but may receive 90% of the
unpaid balance at any time, provided that the payment would be deductible to us
and provided that he would forfeit the remaining 10% of the unpaid balance.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION. During 1999,
the Compensation Committee consisted of Messrs. Edward Hall and Christopher
Miner.

41
<PAGE> 42

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table lists, as of February 29, 2000, information as to the
beneficial ownership of Class A Common Stock and Class B Common Stock by (i)
each of the Company's directors, (ii) the Company's Chief Executive Officer and
each of the four other most highly compensated executive officers as indicated
in the Summary Compensation Table under "Compensation of Directors and Executive
Officers -- Executive Compensation" below, (iii) all directors and executive
officers as a group, and (iv) each person or entity believed by the Company to
beneficially own more than five percent (5%) of the Common Stock outstanding. In
each instance, information as to the number of shares owned and the nature of
ownership has been provided by the individuals identified or described and is
not within the direct knowledge of the Company.

<TABLE>
<CAPTION>
NUMBER OF NUMBER OF
SHARES OF PERCENT OF SHARES OF PERCENT OF PERCENT OF
NAME AND ADDRESS OF CLASS A CLASS A CLASS B CLASS B COMMON
BENEFICIAL OWNER(1) COMMON STOCK COMMON STOCK COMMON STOCK COMMON STOCK STOCK
------------------- ------------ ------------ ------------ ------------ ----------
<S> <C> <C> <C> <C> <C>
Mark Hughes(2).................. 5,954,330 57.4% 11,758,665 61.1% 59.9%
1800 Century Park East
Los Angeles, CA 90067
Christopher Pair(3)............. 64,893 * 228,070 1.2% 1.0%
1800 Century Park East
Los Angeles, CA 90067
Michael E. Rosen(4)............. 113,751 1.1% 272,219 1.4% 1.3%
1800 Century Park East
Los Angeles, CA 90067
Robert A. Sandler(3)............ 61,664 * 133,332 * *
1800 Century Park East
Los Angeles, CA 90067
Timothy Gerrity(3).............. 59,832 * 139,666 * *
1800 Century Park East
Los Angeles, CA 90067
Edward J. Hall(5)............... 16,998 * 43,996 * *
P.O. Box 407
Newport Beach, CA 92662
Alan Liker(3)................... 14,665 * 39,330 * *
150 South Doheny Drive
Beverly Hills, CA 90211
Christopher M. Miner(3)......... 12,531 * 39,997 * *
Redfish Telemetrix, Inc.
3183 Airway Avenue, Bldg E
Costa Mesa, CA 92626
Fidelity Management & Research
Company(6).................... 1,037,500 10.4% 2,010,500 10.8% 10.7%
82 Devonshire Street
Boston, MA 02109
All executive officers and
directors as a group (8
persons)(7)................... 6,298,664 58.8% 12,655,275 62.9% 61.5%
</TABLE>

- ---------------
* Less than one percent (1%).

(1) The persons in this table have sole voting, investment, and dispositive
power with respect to all shares of the Common Stock shown as beneficially
owned by them, subject to community property laws where applicable.

(2) Includes 183,333 shares of Class A Common Stock and 366,666 shares of Class
B Stock owned by the Herbalife Family Foundation. Mr. Hughes acts as a
director of the foundation but has no pecuniary interest in the shares. Also
includes 374,997 shares of Class A Common Stock and 599,997 shares of Class
B Common Stock issuable upon exercise of stock options which are exercisable
presently or within 60 days of this Proxy Statement. Also includes 5 million
shares of Class B Common Stock held by affiliates of Mr. Hughes that are
subject to forward purchase contracts with DECS(SM) Trust III, a

42
<PAGE> 43

Delaware business trust. Pursuant to the terms of the forward purchase
contracts, such shares (or a portion thereof) or an equivalent amount of
cash is required to be delivered to DECS(SM) Trust III in February 2001 in
order to enable DECS(SM) Trust III to settle the DECS(SM) securities issued
by that entity. Until settlement of the DECS(SM), generally, Mr. Hughes'
affiliates retain any voting rights and the right to receive dividends with
respect to the Class B Common Stock. In addition, such shares have been
pledged in favor of DECS(SM) Trust III to secure the obligations under the
forward purchase contracts.

(3) Consists of shares issuable upon exercise of stock options which are
exercisable presently or within 60 days of this Proxy Statement.

(4) Includes 102,498 shares of Class A Common Stock and 249,717 shares of Class
B Common Stock issuable upon exercise of stock options which are exercisable
presently or within 60 days of this Proxy Statement.

(5) Includes 14,665 shares of Class A Common Stock and 39,330 shares of Class B
Common Stock issuable upon exercise of stock options which are exercisable
presently or within 60 days of this Proxy Statement.

(6) Information based on Technimetrics Service Report as of December 31, 1999.

(7) Includes an aggregate of 705,745 shares of Class A Common Stock and
1,466,753 shares of Class B Common Stock issuable upon exercise of stock
options which are exercisable presently or within 60 days of this Proxy
Statement.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

In 1996, we began to seek regulatory approvals to make an initial public
offering of shares of Herbalife of Japan in Japan. On December 30, 1996, in
preparation for the possible offering, we sold shares of Herbalife of Japan to
some of our directors and executive officers, as well as to resident managers of
Herbalife of Japan, as an incentive for increased efforts to facilitate the
operation of the Herbalife of Japan business and the success of the offering.
The following table lists the purchasers of the shares, the percentage of
Herbalife of Japan's outstanding shares represented thereby, and the purchase
price paid to us by each individual as of the date of the sale:

<TABLE>
<CAPTION>
PERCENTAGE OF
HERBALIFE JAPAN AGGREGATE
NAME SHARES PRICE(1)
---- --------------- ----------
<S> <C> <C>
Mark Hughes....................................... 5.000% $3,300,000
Christopher Pair.................................. 0.575 379,500
Michael E. Rosen.................................. 0.575 379,500
Timothy Gerrity................................... 0.575 379,500
Alan Liker........................................ 0.200 132,000
Other............................................. 0.075 49,500
----- ----------
Total................................... 7.000% $4,620,000
===== ==========
</TABLE>

- ---------------
(1) The purchase price for shares of Herbalife of Japan was denominated in
Japanese yen. The dollar amounts reflect conversion at the yen-to-dollar
exchange rate in effect on the date of purchase of the shares.

The purchase price for the shares was determined, in part, based upon a
formula prescribed by a Japanese regulatory authority responsible for some
aspects of public offerings of securities in that country, as applied to
Herbalife of Japan's 1995 results of operations. Our Board of Directors
separately sought and obtained a valuation of the shares from an independent
investment banking firm, Houlihan, Lokey, Howard & Zukin, Inc., which rendered
an opinion to the effect that the fair market value of the capital stock of
Herbalife of Japan was $66 million. This amount was in excess of the formula
prescribed by the Japanese regulatory authority. Consequently, the purchase
price per share was increased to the fair market value of the shares as
indicated in the Houlihan, Lokey, Howard & Zukin opinion. Our Board of
Directors, based in part on the Houlihan, Lokey, Howard & Zukin opinion and the
determination of price derived under the formula (which

43
<PAGE> 44

is utilized generally in Japan in connection with public offerings) and taking
into account the uncertainty of completion of the offering in Japan and other
pertinent factors, has determined that the purchase price reflects the fair
market value of the shares.

For each of the foregoing individuals, the purchase price for the shares
was paid to us approximately 30% in cash and approximately 70% in the form of a
full recourse promissory note bearing interest at 6.31% per annum in the case of
Mr. Hughes (loan denominated in U.S. dollars) and 2.125% per annum in the case
of each individual other than Mr. Hughes (loans denominated in Japanese yen),
with principal and accrued interest payments due over five years ending December
31, 2002. The aggregate amount outstanding under the promissory notes at
December 31, 1999 was $1.8 million.

In 1997, we engaged Mr. Liker to provide consulting services though 1999 in
connection with the offering in Japan. Under the terms of the oral agreement
with Mr. Liker, he received $80,000 in 1999 from us for his consulting services.

We have no current intention to make an initial public offering of
Herbalife of Japan shares, based on, among other things, economic and financial
market conditions in Japan and the impact from the completion of the Tender
Offer and the Merger and the third party financing incurred in connection with
those transactions. Our settlement agreement with the representative plaintiffs'
counsel to settle the Lawsuits provides that, if we were to complete an initial
public offering of Herbalife of Japan within a specified period of time, then we
would be required to pay the settlement class members an amount equal to the
greater of $15 million and 20% of the net proceeds generated in the initial
public offering. See "Legal Proceedings."

In accordance with our 1994 Plan, we made advances of targeted performance
bonus amounts during 1997 and 1998 to Mr. Hughes, during 1997, 1998 and 1999 to
Mr. Pair, during 1998 to Mr. Rosen, and during 1997 and 1998 to each of Mr.
Sandler and Mr. Gerrity. As of December 31, 1999, the remaining outstanding
principal and accrued interest obligations for Mr. Pair and Mr. Sandler were
$466,158 and $182,647, respectively. As of December 31, 1999, there were no
remaining outstanding principal and accrued interest obligations in the case of
Mr. Hughes, Mr. Rosen, and Mr. Gerrity. During 1999, the highest outstanding
principal and accrued interest obligations were $1,965,499 in the case of Mr.
Hughes, $466,158 in the case of Mr. Pair, $369,935 in the case of Mr. Rosen,
$182,647 in the case of Mr. Sandler, and $552,947 in the case of Mr. Gerrity.
Each advance is a full recourse obligation of the executive with a maturity date
not exceeding 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 advances. The interest rates for any outstanding advances during
1999 ranged from 4.67% to 5.68%. As of February 29, 2000 all the advances were
repaid, with the exception of one loan to Mr. Pair in the principal amount of
$575,000.

In addition, we made a loan of $1,964,000 to Mr. Hughes during 1999. Such
loan is a demand obligation and bears interest at the rate of 4.62% per annum,
the AFR for obligations of such maturity at the time of the loan. As of December
31, 1999, the entire amount of the loan, plus accrued interest of approximately
$83,000, was outstanding.

44
<PAGE> 45

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................................ 48
Consolidated Balance Sheets -- December 31, 1999 and 1998... 49
Consolidated Statements of Income for the years ended
December 31, 1999, 1998 and 1997.......................... 50
Consolidated Statements of Changes in Stockholders' Equity
for the Years Ended December 31, 1999, 1998, and 1997..... 51
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999, 1998, and 1997......................... 52
Notes to Consolidated Financial Statements.................. 53
</TABLE>

2. FINANCIAL STATEMENT SCHEDULES

None

3. EXHIBITS

45
<PAGE> 46

<TABLE>
<CAPTION>
EXHIBIT PAGE NO./
NUMBER DESCRIPTION (FOOTNOTE)
------- ----------- --------------
<S> <C> <C>
10.11 Employment Agreement between the Company and Chris Pair
dated April 3, 1994......................................... (3)
10.12 The Company's Executive Officer Deferred Compensation Plan,
amending and relating the Deferred Compensation Agreement
between the Company and Michael Rosen....................... (5)
10.13 Office lease agreement between the Company and State
Teacher's Retirement System, dated July 20, 1995............ (6)
10.14 Form of stock appreciation rights agreements between the
Company and certain directors of the Company................ (6)
10.15 The Company's Senior Executive Deferred Compensation Plan,
effective January 1, 1996, as amended....................... (6)
10.16 The Company's Management Deferred Compensation Plan,
effective January 1, 1996, as amended....................... (6)
10.17 Master Trust Agreement between the company and Imperial
Trust Company, Inc., effective January 1, 1996.............. (6)
10.18 The Company's 401K Plan, as amended......................... (6)
10.19 Agreement Concerning Share Allocation Plan for Specific
Directors of Herbalife of Japan K.K. dated December 30,
1996........................................................ (8)
10.20 Consulting Agreement between David Addis and Herbalife of
America, Inc. dated January 27, 1997........................ (8)
10.21 Agreement between Herbalife International of America, Inc.
and D&F Industries, Inc. dated September 2, 1997............ (9)
10.22 Agreement between Herbalife International of America, Inc.
and Dynamic Products, Inc. dated September 2, 1997.......... (9)
10.23 Agreement between Herbalife International of America, Inc.
and Raven Industries, Inc. d/b/a Omni-Pak Industries, dated
September 2, 1997........................................... (9)
10.24 The Company's Supplemental Executive Retirement Plan........ (12)
10.25 Credit Agreement between Herbalife International of America,
Inc. and First National Bank of Chicago, dated December 14,
1998........................................................ (13)
10.26 Agreement and Plan of Merger, dated September 13, 1999,
among MH Millennium Holding LLC, MH Millennium Acquisition
Corp., Mark Hughes, the Mark Hughes Family Trust and
Herbalife International, Inc................................ (15)
21 List of subsidiaries of the Company......................... (16)
23.1 Independent Auditor's Consent............................... (16)
27 Financial Data Schedule..................................... (16)
</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.

46
<PAGE> 47

(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 Annual Report on Form 10-K for
the year ended December 31, 1998.

(14) Incorporated by reference to the Company's Definitive Proxy Statement
relating to its 1999 Annual Meeting of Shareholders.

(15) Incorporated by reference to Annex A of the Offer to Purchase dated
September 17, 1999 contained in Schedule 14D-1 filed by MH Millennium
Holdings LLC, MH Millennium Acquisition Corp., The Mark Hughes Family Trust
and Mark Hughes on September 17, 1999.

(16) Filed herewith.

(b) REPORTS ON FORM 8-K:

None.

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

(d) OTHER FINANCIAL STATEMENT SCHEDULES:

None.

47
<PAGE> 48

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, 1999 and
1998, 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, 1999. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999 in conformity with accounting principles generally accepted in
the United States of America.

DELOITTE & TOUCHE LLP
Los Angeles, California
February 22, 2000

48
<PAGE> 49

HERBALIFE INTERNATIONAL, INC.

CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998

ASSETS

<TABLE>
<CAPTION>
NOTES 1999 1998
----------- ------------ ------------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................... 2, 4 $138,280,000 $100,721,000
Marketable securities....................................... 2 1,163,000 5,186,000
Receivables, (net of allowance for doubtful accounts of
$2,534,000 in 1999 and $1,316,000 in 1998, respectively)
including related party receivables of $5,333,000 (1999)
and $7,746,000 (1998)..................................... 2, 6, 8 30,326,000 44,471,000
Inventories................................................. 2, 3 101,557,000 88,138,000
Prepaid expenses and other current assets................... 12,396,000 17,665,000
Deferred income taxes....................................... 2, 13 20,368,000 21,870,000
------------ ------------
Total current assets............................... 304,090,000 278,051,000
------------ ------------
PROPERTY -- at cost: 2, 5
Furniture and fixtures...................................... 17,252,000 16,090,000
Equipment................................................... 66,500,000 44,789,000
Leasehold improvements and building......................... 26,535,000 22,361,000
------------ ------------
110,287,000 83,240,000
Less accumulated depreciation and amortization.............. (54,614,000) (45,792,000)
------------ ------------
55,673,000 37,448,000
------------ ------------
DEFERRED COMPENSATION ASSETS................................ 6, 7 27,929,000 18,059,000
OTHER ASSETS including related party receivables of $861,000
(1999) and $1,794,000 (1998).............................. 8 12,734,000 4,642,000
DEFERRED INCOME TAXES....................................... 2, 13 12,279,000 6,696,000
GOODWILL, net of accumulated amortization of $1,773,000
(1999) and $1,601,000 (1998).............................. 2 3,114,000 3,287,000
------------ ------------
TOTAL.............................................. $415,819,000 $348,183,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable............................................ 2 $ 22,009,000 $ 14,963,000
Royalty overrides........................................... 2 64,268,000 58,389,000
Accrued compensation........................................ 27,773,000 18,132,000
Accrued expenses............................................ 31,338,000 29,007,000
Dividends payable........................................... 4,299,000 4,296,000
Current portion of contracts payable and bank loans......... 4, 5 6,151,000 2,639,000
Advance sales deposits...................................... 2 8,753,000 7,919,000
Income taxes payable........................................ 2, 10, 13 6,362,000 22,083,000
------------ ------------
Total current liabilities.......................... 170,953,000 157,428,000
NON-CURRENT LIABILITIES:
Contracts payable, net of current portion................... 4, 5 2,229,000 2,357,000
Deferred compensation liability............................. 6, 7 27,194,000 17,244,000
Other non-current liabilities............................... 5,223,000 4,748,000
------------ ------------
Total liabilities.................................. 205,599,000 181,777,000
------------ ------------
MINORITY INTEREST........................................... 2, 8 3,618,000 2,595,000
------------ ------------
COMMITMENTS AND CONTINGENCIES............................... 5, 6, 7, 10
STOCKHOLDERS' EQUITY: 11
Class A Common stock, $0.01 par value; 33,333,333 shares
authorized, 10,002,568 (1999) and 9,980,753 (1998) shares
issued and outstanding.................................... 100,000 100,000
Class B Common stock, $0.01 par value; 66,666,667 shares
authorized, 18,650,198 (1999) and 18,603,561 (1998) shares
issued and outstanding.................................... 187,000 186,000
Paid-in capital in excess of par value...................... 55,390,000 54,823,000
Retained earnings........................................... 150,712,000 110,941,000
Accumulated other comprehensive income...................... 2 213,000 (2,239,000)
------------ ------------
Total stockholders' equity......................... 206,602,000 163,811,000
------------ ------------
TOTAL.............................................. $415,819,000 $348,183,000
============ ============
</TABLE>

See the accompanying notes to consolidated financial statements.
49
<PAGE> 50

HERBALIFE INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997

<TABLE>
<CAPTION>
NOTES 1999 1998 1997
--------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Retail sales........................... 2 $1,793,508,000 $1,644,837,000 $1,490,693,000
Less -- distributor allowances on
product purchases.................... 2 837,283,000 778,195,000 708,241,000
-------------- -------------- --------------
Net sales.............................. 2 956,225,000 866,642,000 782,452,000
Cost of sales, including purchases from
related parties of $17,369,000
(1998), and $66,771,000 (1997)....... 8 246,642,000 230,818,000 205,070,000
Royalty overrides...................... 2 277,363,000 250,905,000 233,883,000
Marketing, distribution and
administrative expenses.............. 5, 6, 8 339,647,000 306,589,000 257,514,000
Interest income -- net................. 1,750,000 2,533,000 4,535,000
-------------- -------------- --------------
Income before income taxes and minority
interest............................. 94,323,000 80,863,000 90,520,000
Income taxes........................... 2, 10, 13 36,314,000 31,132,000 34,850,000
-------------- -------------- --------------
Income before minority interest........ 58,009,000 49,731,000 55,670,000
Minority interest...................... 2, 8 1,086,000 1,233,000 1,003,000
-------------- -------------- --------------
NET INCOME............................. $ 56,923,000 $ 48,498,000 $ 54,667,000
============== ============== ==============

EARNINGS PER SHARE..................... 2, 11
Basic................................ $ 1.99 $ 1.68 $ 1.81
Diluted.............................. $ 1.86 $ 1.60 $ 1.72

WEIGHTED AVERAGE SHARES
OUTSTANDING
Basic................................ 28,603,000 28,897,000 30,193,000
Dilutive effect of stock
options......................... 1,976,000 1,445,000 1,610,000
-------------- -------------- --------------
Diluted.............................. 30,579,000 30,342,000 31,803,000
============== ============== ==============
</TABLE>

See the accompanying notes to consolidated financial statements.
50
<PAGE> 51

HERBALIFE INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
<TABLE>
<CAPTION>
PAID IN ACCUMULATED
CAPITAL IN OTHER
COMMON COMMON EXCESS OF RETAINED UNEARNED COMPREHENSIVE
STOCK A STOCK B PAR VALUE EARNINGS COMPENSATION INCOME
--------- -------- ----------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
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)
Issuance of 21,831 of Class A Common
Stock and 46,663 Shares of Class B
Common Stock under the 1991 Stock
Option Plan........................... -- 1,000 469,000
Additional capital from tax benefit of
1991 stock option plan................ 98,000
Cancellation of fractional Shares....... (1,000)
Net income.............................. 56,923,000
Translation adjustments................. 2,477,000
Unrealized loss on marketable
securities............................ (25,000)
Total comprehensive income..............
Cash dividends declared................. (17,151,000)
--------- -------- ----------- ------------ --------- -----------
Balance at December 31, 1999............ $ 100,000 $187,000 $55,390,000 $150,712,000 $ -- $ 213,000
========= ======== =========== ============ ========= ===========

TOTAL
STOCKHOLDER'S COMPREHENSIVE
EQUITY INCOME
------------- -------------
<S> <C> <C>
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
Issuance of 21,831 of Class A Common
Stock and 46,663 Shares of Class B
Common Stock under the 1991 Stock
Option Plan........................... 470,000
Additional capital from tax benefit of
1991 stock option plan................ 98,000
Cancellation of fractional Shares....... (1,000)
Net income.............................. 56,923,000 $56,923,000
Translation adjustments................. 2,477,000 2,477,000
Unrealized loss on marketable
securities............................ (25,000) (25,000)
-----------
Total comprehensive income.............. $59,375,000
===========
Cash dividends declared................. (17,151,000)
------------
Balance at December 31, 1999............ $206,602,000
============
</TABLE>

See the accompanying notes to consolidated financial statements.
51
<PAGE> 52

HERBALIFE INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997

<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................. $ 56,923,000 $ 48,498,000 $ 54,667,000
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................ 14,091,000 15,801,000 10,966,000
Deferred income taxes.................................... (4,081,000) (10,803,000) (2,984,000)
Amortization of unearned compensation.................... -- 152,000 260,000
Stock grant.............................................. -- 88,000 462,000
Unrealized foreign exchange (gain) loss.................. (572,000) (1,059,000) 1,735,000
Minority interest in earnings............................ 1,086,000 1,233,000 1,003,000
Other.................................................... -- 393,000 299,000
Changes in operating assets and liabilities:
Receivables.............................................. 13,155,000 4,621,000 (18,896,000)
Inventories.............................................. (12,003,000) (13,024,000) (31,355,000)
Prepaid expenses and other current assets................ 6,635,000 (6,987,000) (2,002,000)
Other assets............................................. (7,967,000) (172,000) (885,000)
Accounts payable......................................... 7,401,000 1,601,000 (2,301,000)
Royalty overrides........................................ 5,832,000 (661,000) 16,885,000
Accrued expenses and accrued compensation................ 11,209,000 6,401,000 4,938,000
Advance sales deposits................................... 948,000 (10,835,000) 10,869,000
Income taxes payable..................................... (15,160,000) 12,518,000 6,709,000
Deferred compensation liability.......................... 9,950,000 9,476,000 4,935,000
------------ ------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES.................. 87,447,000 57,241,000 55,305,000
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property.................................... (30,113,000) (19,098,000) (13,090,000)
Proceeds from sale of property........................... 65,000 131,000 176,000
Net changes in marketable securities..................... 3,998,000 38,613,000 (181,000)
Deferred compensation plan............................... (9,870,000) (11,595,000) (4,009,000)
------------ ------------ ------------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES........ (35,920,000) 8,051,000 (17,104,000)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid........................................... (17,148,000) (17,530,000) (18,150,000)
Distribution to minority interest........................ (1,063,000) (505,000) (98,000)
Additions to bank loans and contracts payable............ 3,303,000 1,483,000 510,000
Principal payments on bank loans and contracts payable... (2,233,000) (1,544,000) (3,337,000)
Exercise of stock options................................ 470,000 5,061,000 4,949,000
Stock repurchases........................................ -- (32,480,000) (25,963,000)
Recapitalization cost.................................... -- (616,000) --
Contribution from minority interest...................... 1,000,000 -- --
------------ ------------ ------------
NET CASH USED IN FINANCING ACTIVITIES...................... (15,671,000) (46,131,000) (42,089,000)
------------ ------------ ------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH
EQUIVALENTS.............................................. 1,703,000 2,647,000 (4,680,000)
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS....... 37,559,000 21,808,000 (8,568,000)
CASH AND CASH EQUIVALENTS AT JANUARY 1..................... 100,721,000 78,913,000 87,481,000
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT DECEMBER 31................... $138,280,000 $100,721,000 $ 78,913,000
============ ============ ============
CASH PAID DURING THE YEAR
Interest Paid............................................ $ 1,812,000 $ 1,321,000 $ 506,000
============ ============ ============
Income Taxes Paid........................................ $ 47,428,000 $ 27,012,000 $ 27,110,000
============ ============ ============
</TABLE>

See the accompanying notes to consolidated financial statements.
52
<PAGE> 53

HERBALIFE INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. GENERAL

Herbalife International, Inc. and its subsidiaries (the "Company") markets
weight management products, dietary and nutritional supplements and personal
care and cosmetic products worldwide. The Company's products 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, 1999, the Company conducted business in
46 countries. 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
accumulated other comprehensive income on the accompanying consolidated
statements of changes in stockholders' equity. Transaction losses, which were
$7,417,000, $771,000 and $1,564,000 in the years ended December 31, 1999, 1998
and 1997, respectively, are included in marketing, distribution and
administrative expenses on the accompanying consolidated statements of income.
The transaction losses for the year ended December 31, 1999 includes $5,800,000
of yen option premium expenses.

Forward Exchange Contracts and Option Contracts

The Company enters into forward exchange contracts and option contracts in
managing its foreign exchange risk on intercompany transactions and bank loans
and does not use the contracts for trading purposes.

Gains, losses and premiums on option contracts related to qualifying hedges
are deferred and recognized in operating income when the underlying hedged
transaction occurs.

Foreign currency forward exchange contracts are marked to market through
operating income based upon changes in the spot rate from the date of contract
inception through the balance sheet date. The discount or premium on such
contracts is amortized to expense over the life of the contracts. Assets and
liabilities underlying such contracts that are denominated in a currency other
than the functional currency of the recording entity are remeasured at each
balance sheet date, with the corresponding gain or loss included as a component
of operating income.

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 and foreign and
domestic bank accounts. To reduce its credit risk, the Company monitors the
credit standing of the financial institutions that hold the Company's cash and
cash equivalents.

53
<PAGE> 54
HERBALIFE INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Marketable Securities

The Company's marketable securities are classified as "available for sale".
Fluctuations in fair value are included in accumulated other comprehensive
income on the accompanying consolidated statements of changes in stockholders'
equity. Marketable securities are comprised primarily of tax-exempt municipal
bonds.

Accounts Receivable

Accounts receivable consist principally of receivables from credit card
companies arising from the sale of product to the Company's distributors, and
receivables from importers, who are utilized in a limited number of countries to
sell product to distributors. Due to the geographic dispersion of its credit
card receivables, the collection risk is not considered to be significant.
Although receivables from importers can be significant, the Company performs
ongoing credit evaluations of its importers and maintains an allowance for
potential credit losses.

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, receivables and accounts
payable approximate fair value due to 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
year end. The fair value of option and forward contracts are based on dealer
quotes. The book values of the Company's debt instruments are considered to
approximate their fair values because the interest rates of these instruments
are based on current rates offered to the Company.

Inventories

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

Long-Lived Assets

Depreciation of furniture, fixtures and 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.

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.

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

54
<PAGE> 55
HERBALIFE INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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 -- See Footnote 8 -- "Transactions with Related Parties". The minority
stockholders' interest in the equity of Herbalife Japan is approximately 7%.

In October 1999, the Company entered into a joint venture with an unrelated
third-party to conduct business in the People's Republic of China. The minority
investor's interest is approximately 40%.

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 the
distributor allowance. 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. The Company purchases other dietary and nutritional
products from Dynamic Products, Inc. ("Dynamic"). D&F, Raven and Dynamic are all
subsidiaries of Global Health Sciences, Inc. The Company has agreements with
Raven, D&F and Dynamic that 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
supplements, and a small number of non-nutritional supplement products falling
into specified product categories. Because the contracts confirm the Company's
ownership of product formulations for substantially all of the Company's
nutritional products, the Company has the capacity to "second source" particular
nutritional supplement products with multiple manufacturers. In addition, a
number of the Company's new dietary and nutritional products are being
manufactured for the Company by other 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. The Company's contracts with Raven, D&F and Dynamic expire in
January 2001.

Earnings Per Share

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

Basic earnings per share is computed using the weighted average number of
common shares outstanding during the period. Diluted earnings per share reflects
the incremental shares issuable upon assumed exercise of stock options.
55
<PAGE> 56
HERBALIFE INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Reclassifications

Certain reclassifications were made to the prior year financial statements
to conform to the current year presentation.

Use of Estimates

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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 Pronouncement

In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement, as amended, establishes
requirements for the recording and reporting of derivative financial
instruments, including hedging transactions. The company will adopt the
statement on January 1, 2001 and is still in the process of evaluating the
impact, if any, that will result from its implementation.

3. INVENTORIES

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

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1999 1998
------------ -----------
<S> <C> <C>
Product.................................................. $ 90,816,000 $75,182,000
Literature............................................... 6,054,000 7,009,000
Promotional items........................................ 4,687,000 5,947,000
------------ -----------
Total.......................................... $101,557,000 $88,138,000
============ ===========
</TABLE>

4. CONTRACTS PAYABLE AND BANK LOANS

Contracts payable and bank loans consist of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1999 1998
---------- ----------
<S> <C> <C>
Capitalized leases, due in monthly installments through 2003
(Note 5).................................................. $3,829,000 $3,748,000
Bank loans.................................................. 4,551,000 1,248,000
---------- ----------
Total............................................. 8,380,000 4,996,000
Less current portion........................................ 6,151,000 2,639,000
---------- ----------
Long-term portion........................................... $2,229,000 $2,357,000
========== ==========
</TABLE>

Annual scheduled payments of bank loans and contracts payable are:
$6,151,000 (2000), $1,523,000 (2001), $659,000 (2002), and $47,000 (2003).

The Company has a credit agreement (the "Credit Agreement") with a bank
expiring December 31, 2000, which provides for unsecured borrowings and letters
of credit of up to $25,000,000. Amounts under the Credit Agreement bear interest
at the Company's option at either the euro dollar rate plus 0.5% per annum or
the alternative base rate consisting of the higher of (i) the corporate base
rate of interest announced by the

56
<PAGE> 57
HERBALIFE INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

lender or (ii) the sum of the federal funds effective rate (as published by the
Federal Reserve Bank of New York) plus one half percent. Borrowings under the
Credit Agreement were $428,000 and zero at December 31, 1999 and December 31,
1998, respectively. Additionally, the Company used the Credit Agreement to
secure letters of credit of $3,602,000 and $4,400,000 at December 31, 1999 and
1998, respectively. The Credit Agreement contains certain restrictive covenants
that require the Company to maintain a minimum level of consolidated tangible
net worth, as defined and a minimum current ratio, among other items.

The Company has two lines of credit (the "Lines of Credit") for Turkey and
India under separate agreements with two separate banks which provide for
unsecured borrowings of up to $7,000,000 and bear interest at LIBOR plus 3.75%
and LIBOR plus 6.52%, respectively. The Lines of Credit provide for borrowings
at local interest rates, set when borrowings are made, and do not include stated
expiration dates. Borrowings under the Lines of Credit were $4,123,000 and
$1,248,000 at December 31, 1999 and 1998, respectively.

At December 31, 1998 the Company pledged cash and cash equivalents to
secure financing primarily for the benefit of its foreign subsidiaries,
including letters of credit, leases and other obligations in the amount of
$2,500,000. There were no amounts pledged at December 31, 1999.

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, 1999 were as follows:

<TABLE>
<CAPTION>
OPERATING CAPITAL
----------- ----------
<S> <C> <C>
2000....................................................... $14,816,000 $1,968,000
2001....................................................... 11,892,000 1,497,000
2002....................................................... 10,453,000 685,000
2003....................................................... 9,073,000 48,000
2004....................................................... 7,622,000 --
Thereafter................................................. 9,810,000 --
----------- ----------
Total............................................ $63,666,000 4,198,000
===========
Less: Amounts included above representing interest......... 369,000
----------
Present value of net minimum lease payments................ $3,829,000
==========
</TABLE>

Rental expense for the years ended December 31, 1999, 1998, and 1997 was
$18,339,000, $18,336,000 and $14,299,000 respectively.

Property under capital leases is included in property on the accompanying
consolidated balance sheets as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1999 1998
----------- ----------
<S> <C> <C>
Equipment.................................................. $ 8,420,000 $6,935,000
Less: accumulated amortization............................. (4,689,000) 3,487,000
----------- ----------
Total............................................ $ 3,731,000 $3,448,000
=========== ==========
</TABLE>

57
<PAGE> 58
HERBALIFE INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

6. EMPLOYEE COMPENSATION PLANS

In addition to the stock option plan discussed in Note 11, 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 of the Board of Directors, based on the attainment of certain
corporate and business objectives. No bonuses were awarded under this plan for
1999, 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 1999, 1998 and 1997 were
$16,165,000, $6,950,000 and $8,400,000, respectively.

In accordance with the 1994 Plan, the Company made advances of targeted
performance bonus amounts to the participants. As of December 31, 1999 and 1998,
the remaining outstanding principal and accrued interest was $649,000 and
$5,912,000, respectively and is included in receivables on the accompanying
consolidated 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, 1999 and 1998 range from 5.32% to 5.57% and 4.33% to 5.58%,
respectively.

The Company also maintains a profit sharing plan pursuant to Sections 401
(a) and (k) 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 3% of the
earnings of each employee who elects to defer 2% or more of his or her earnings.
Participants are partially vested in the Company contributions after three years
and fully vested after seven years. The Company contributed $974,000, $675,000
and $470,000 for the years ended December 31, 1999, 1998 and 1997, 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 allow eligible employees to
elect annually to defer up to 50% of their base annual salary and up to 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 100% of the amount deferred by each participant up to (1) 15%
of the participant's annual base salary in the case of a participant who is an
Executive Vice President, (2) 12.5% of the participant's annual base salary in
the case of a participant who is a Senior Vice President, and (3) 10% (or such
greater percentage, not to exceed 15%, that the Deferred Compensation Committee
may determine in the case of any particular participant) of the participant's
annual base salary in the case of any other participant. Furthermore, the
Compensation Committee of the Board of Directors may designate any participant
to receive a matching contribution of 20% of the annual base salary if the
Annual Deferral Amount of such designated participant equals or exceeds 10% of
such designated participant's annual base salary.

Each participant in either of the deferred 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 two
or more years from the first day of the year in which the Annual

58
<PAGE> 59
HERBALIFE INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Deferral Amount is actually deferred. The gross deferred compensation expense
was $7,747,000, $7,485,000 and $4,683,000 for 1999, 1998 and 1997, respectively.
The deferred compensation expense net of participant contributions was
$2,488,000, $2,371,000, and $1,078,000 for 1999, 1998 and 1997, respectively.
The long term deferred compensation liability under the deferred compensation
plans was $21,395,000 and $12,899,000 at December 31, 1999 and 1998,
respectively.

Effective as of August 9, 1994, the Company entered into a Deferred
Compensation Agreement (the "Agreement") with a Senior Executive. The gross
deferred compensation expense under the Agreement was $400,000, $600,000 and
$600,000 in 1999, 1998 and 1997, respectively. The Company amended and restated
the Agreement in its entirety as the Herbalife International of America, Inc.
Executive Officer Deferred Compensation Plan, (the "Executive Officer Plan")
effective as of January 1, 1998. Under the Executive Officer Plan, deferred
amounts bear interest on January of each year. The executive may elect to
receive payments in the form of installments payable over five years or ten
years, but may receive 90% of the unpaid balance at any time, provided that the
payment would be deductible to the Company and provided that the remaining 10%
of the unpaid balance be forfeited. The long term deferred compensation
liability under the Executive Officer Plan was $1,348,000 and $2,025,000 at
December 31, 1999 and 1998, respectively.

The three deferred compensation plans are unfunded and their benefits are
paid from the general assets of the Company, except that the Company has
contributed $19,693,000 and $13,670,000 as of December 31, 1999 and 1998,
respectively 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.

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 $8,236,000 and $4,389,000 as of December
31, 1999 and 1998, respectively, 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
participation 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 participation, and
gradually increases to 100% when he or she has completed nine years of
participation. The Plan Administrator has the discretion to credit a participant
with additional years of participation as of his or her date of hire or

59
<PAGE> 60
HERBALIFE INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year/inception........... $ 9,029,000 $ 5,965,000
Service cost................................................ 1,214,000 989,000
Interest cost............................................... 546,000 432,000
Actuarial (gain) loss....................................... (2,346,000) 1,643,000
Benefits paid............................................... (31,000) --
----------- -----------
Benefit obligation at end of year........................... $ 8,412,000 $ 9,029,000
=========== ===========
Funded status............................................... $(8,412,000) $(9,029,000)
Unrecognized actuarial (gain) loss.......................... (735,000) 1,643,000
Unrecognized prior service cost............................. 4,696,000 5,066,000
----------- -----------
Net amount recognized....................................... $(4,451,000) $(2,320,000)
=========== ===========
Amounts recognized in the consolidated balance sheets
Consist of:
Accrued benefit liability................................. $(5,021,000) $(6,246,000)
Intangible asset.......................................... 570,000 3,926,000
----------- -----------
Net amount recognized....................................... $(4,451,000) $(2,320,000)
=========== ===========
WEIGHTED-AVERAGE ASSUMPTIONS AS OF DECEMBER 31
Discount rate............................................... 7.5% 6.5%
Rate of compensation increase............................... 4% 4%
COMPONENTS OF NET PERIODIC BENEFIT COST
Service cost................................................ $ 1,214,000 $ 989,000
Interest cost............................................... 546,000 432,000
Amortization of prior service cost.......................... 371,000 371,000
Amortization of actuarial loss.............................. 31,000 --
----------- -----------
Net periodic pension cost................................... $ 2,162,000 $ 1,792,000
=========== ===========
</TABLE>

8. TRANSACTIONS WITH RELATED PARTIES

On April 23, 1998, Raven and D&F, two of the significant suppliers of the
Company's products, and 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 a former employee of the Company in
Dynamic (representing 5% of the formerly outstanding ownership). Total purchases
from Raven were $16,379,000 and $63,424,000 for the period January 1, 1998
through April 23, 1998 and for the year ended December 31, 1997. Total purchases
from Dynamic were $990,000 and $3,347,000 for the period January 1, 1998 through
April 23, 1998 and for the year ended December 31, 1997.

In addition to advances described in Note 6, the Company has made
additional advances to certain officers and a Director. The aggregate
outstanding principal and accrued interest was $3,717,000 and $963,000 at
December 31, 1999 and 1998, respectively (included in receivables on the
accompanying consolidated balance sheets). Each outstanding advance is a full
recourse obligation of the officer. The rates for outstanding advances at
December 31, 1999 and 1998 range from 4.67% to 5.68% and from 5.06% to 5.68%,
respectively.

60
<PAGE> 61
HERBALIFE INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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 was $1,828,000 and $2,665,000 at December 31, 1999 and 1998,
respectively and is included in receivables and other assets on the accompanying
consolidated 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. AGREEMENT AND PLAN OF MERGER

On September 13, 1999, the Company publicly announced a proposed purchase
of the outstanding common shares by entities controlled by Mark Hughes, the
Company's Chairman, President and CEO/ Principal Shareholder. The proposed
transaction would be accomplished in a merger of Millennium Acquisition Corp.
(the "Purchaser") into the Company. As contemplated by the merger agreement, on
September 17, 1999 the Purchaser commenced a tender offer to purchase all of the
Company's outstanding shares at a price of $17.00 per share in cash. In
addition, in connection with the settlement of certain litigation against the
transactions, a supplemental payment of $.81 per share would be paid to the
public stockholders. Following the successful completion of the offer, the
Purchaser would be merged into the Company. The offer is conditioned upon, among
other things, the Purchaser obtaining financing for the offer, the merger and
related transactions (the "Transaction").

Under the terms of the agreement governing the tender offer and the merger,
Mr. Hughes is entitled to further extend the tender offer. However, the
Company's Board of Directors may elect to terminate the agreement in the event
that both the tender offer and the merger have not been completed by March 31,
2000. Consequently, Mr. Hughes has requested that the Special Committee of the
Board of Directors agree to an amendment to the merger agreement to extend the
March 31, 2000 date. There can be no assurance that the Special Committee will
grant Mr. Hughes' request.

10. CONTINGENCIES

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

On December 16, 1998, Moshe and Dorit Miron, two of the Company's Israeli
distributors, filed a lawsuit in the United States District Court for the
Northern District of California, in which the Company was the named defendant
(the "Miron Suit"). The case appeared to be primarily a claim for breach of
contract. In addition, the plaintiffs in the Miron Suit initially appeared to
attempt to challenge the legality of the Company's marketing system.
Subsequently, the court dismissed this purported challenge. Further, in November
1999, the court dismissed the case in its entirety without leave to amend. The
plaintiffs have appealed the dismissal to the United States Court of Appeals for
the Ninth Circuit. The Company believes that it has meritorious defenses to the
allegations that appear to be asserted against the Company.

61
<PAGE> 62
HERBALIFE INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Some of the Company's subsidiaries have been subject to tax audits by
governmental authorities in their respective countries, some of which
governmental authorities are proposing that additional income taxes, value added
taxes, withholding taxes and related interest and penalties are due. The Company
and its tax advisors believe that there are substantial defenses to their
allegations that additional taxes are owing, and the Company is vigorously
contesting the additional proposed taxes and related charges. However, these
matters may take several years to resolve, and the Company cannot be sure of
their ultimate resolution.

On September 14, 1999, three putative class action lawsuits were filed in
the Superior Court of the State of California, County of Los Angeles. Five
similar lawsuits subsequently were filed in the same court. In addition, four
similar lawsuits were filed in the District Court, Clark County, Nevada. These
lawsuits are referred to collectively as the "Lawsuits."

The Lawsuits challenge the fairness to the public stockholders of the
pending tender offer and merger transactions proposed by Mark Hughes, the
Company's Chairman, President and CEO/Principal Stockholder. The Lawsuits
contain allegations that, among other things, (1) the price to be paid in the
tender offer and the merger does not reflect the value of our assets, and (2)
the tender offer and the merger are unfair because they would deprive the public
stockholders of the ability to share proportionately in the Company's future
growth in profits and earnings. The Lawsuits also contain allegations that the
Special Committee formed to evaluate the Transactions was not independent, and
that the directors breached their fiduciary duties to our public stockholders in
approving the Transactions. The plaintiffs have requested (1) an injunction
prohibiting the defendants from proceeding with the Transactions, (2)
unspecified damages, (3) costs and attorneys' fees, and (4) other relief.

In January, 2000, the defendants in the Lawsuits reached an agreement with
the representative plaintiffs' counsel to settle the Lawsuits. Under the terms
of the settlement agreement, among other things, a payment (the "Supplemental
Payment") will be required to be made to the settlement class members (which
include, generally, the public stockholders and the holders of the DECS
securities issued by DECS Trust III) in an amount equal to $0.81 per share or
DECS security. The individual defendants will not be entitled to the
Supplemental Payment, and the Company employees who hold stock options will not
be entitled to the Supplemental Payment solely with respect to those options. In
addition, the settlement agreement requires the Company to make certain changes
in the public disclosures relating to the Tender Offer and the Merger; to seek a
"bring-down" fairness opinion from the financial adviser to the Special
Committee of the Board of Directors; to re-open dissenters' rights for an
additional period of time and increase the percentage of stockholders (from 3%
to 5%) seeking dissenters' rights that would permit Mr. Hughes to elect not to
close the Tender Offer; and to pay plaintiffs' legal fees. All but the last of
the foregoing requirements have been fulfilled. In addition, the settlement
agreement provides that if the Company was to complete an initial public
offering of our Japanese subsidiary, Herbalife of Japan, within a specified
period of time, then the Company would be required to pay to the settlement
class members an amount equal to the greater of $15 million and 20% of the net
proceeds generated in the initial public offering. The Company and its
representative plaintiffs' counsel obtained final court approval of the
settlement agreement on February 9, 2000. The terms of the settlement, including
the making of the Supplemental Payment, remain subject to certain conditions.
There can be no assurance that these conditions will be satisfied.

11. 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

62
<PAGE> 63
HERBALIFE INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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 were retroactively adjusted to reflect the Recapitalization.

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 was
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 net income were $240,000 and $1,332,000 for the years ended
1998 and 1997, respectively. There was no stock based compensation costs in
1999.

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 7,900,000 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, 1999 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%.

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 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>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Net Income -- as reported................... $56,923,000 $48,498,000 $54,667,000
Net Income -- pro forma..................... 47,944,000 33,190,000 46,881,000
Basic EPS -- as reported.................... 1.99 1.68 1.81
Basic EPS -- pro forma...................... 1.68 1.15 1.55
Diluted EPS -- as reported.................. 1.86 1.60 1.72
Diluted EPS -- pro forma.................... 1.59 1.14 1.49
</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.

63
<PAGE> 64
HERBALIFE INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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>
1999 1998 1997
--------------------- --------------------- ---------------------
CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Risk free interest rate............ 4.72% 5.21% 4.44% 4.51% 6.49% 6.49%
Expected option life............... 4.9 years 3.7 years 3.7 years 3.7 years 4.9 years 4.9 years
Volatility......................... 60.65% 59.78% 61.09% 59.54% 75.18% 75.18%
Dividend yield..................... 4.70% 5.50% 3.00% 3.50% 3.50% 3.50%
</TABLE>

Option groups outstanding at December 31, 1999, 1998 and 1997 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>
1999
Outstanding at January 1........... 2,240,000 $ 7.85 5,107,000 $ 6.58
Granted............................ 1,000 14.38 198,000 8.69
Exercised.......................... (22,000) 7.39 (46,000) 6.63
Canceled........................... (1,000) 8.00 (23,000) 6.63
--------------- ------ --------------- ------
Outstanding at December 31......... 2,218,000 $ 7.86 5,236,000 $ 6.66
====== ======
Available for grant at December
31............................... 1,000 337,000
--------------- ---------------
Total reserved shares..... 2,219,000 5,573,000
=============== ===============
Exercisable at December 31......... 1,217,000 $ 7.75 2,553,000 $ 6.54
=============== ====== =============== ======
Option prices per share
Granted.......................... $14.38 $ 8.63 - $11.63
Exercised........................ $ 7.38 - $ 8.00 $ 6.63
Weighted average fair value of
options Granted during the
year............................. $ 5.57 $ 3.02
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 $ 7.60 1,462,000 $ 6.48
=============== ====== =============== ======
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
</TABLE>

64
<PAGE> 65
HERBALIFE INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The following table summarizes information regarding option groups
outstanding at December 31, 1999:

<TABLE>
<CAPTION>
WTD AVG WTD WTD
REMAINING AVG AVG
OPTIONS CONTRACTUAL EXERCISE OPTIONS EXERCISE
OUTSTANDING LIFE PRICE EXERCISABLE PRICE
----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
Range of Exercise Prices:
Class A
$ 0.88.............................. 19,000 2 Years $ 0.88 19,000 $0.88
$ 7.38.............................. 273,000 5 Years $ 7.38 259,000 $7.38
$ 7.50.............................. 25,000 6 Years $ 7.50 25,000 $7.50
$ 8.00.............................. 1,900,000 7 Years $ 8.00 914,000 $8.00
$14.38.............................. 1,000 9 Years $14.38 -- $ --
Class B
$ 0.88.............................. 38,000 2 Years $ 0.88 38,000 $0.88
$ 6.63.............................. 5,000,000 7 Years $ 6.63 2,515,000 $6.63
$ 8.63.............................. 159,000 9 Years $ 8.63 -- $ --
$ 8.88.............................. 38,000 9 Years $ 8.88 -- $ --
$11.63.............................. 1,000 9 Years $11.63 -- $ --
</TABLE>

12. 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.

65
<PAGE> 66
HERBALIFE INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The Company has operations throughout the world (46 countries as of
December 31, 1999) 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>
1999 1998 1997
-------- -------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
TOTAL RETAIL SALES:
United States...................................... $ 835.5 $ 824.9 $ 745.7
Japan.............................................. 518.4 547.7 525.7
South Korea........................................ 129.3 30.9 14.6
Russia............................................. 30.9 96.7 157.8
All others......................................... 703.7 611.1 497.4
Elimination of intersegment sales(1)............... (424.3) (466.5) (450.5)
-------- -------- --------
Total retail sales......................... 1,793.5 1,644.8 1,490.7
-------- -------- --------
DISTRIBUTOR ALLOWANCES:
United States...................................... 325.1 335.3 294.3
Japan.............................................. 251.8 265.4 253.7
South Korea........................................ 51.6 12.3 5.8
Russia............................................. 14.4 42.9 73.4
All others......................................... 325.4 284.3 233.2
Elimination of intersegment allowance(2)........... (131.0) (162.0) (152.2)
-------- -------- --------
Total distributor allowances............... 837.3 778.2 708.2
-------- -------- --------
Net sales............................................ $ 956.2 $ 866.6 $ 782.5
======== ======== ========
OPERATING INCOME(3):
United States...................................... $ 224.5 $ 210.2 $ 206.2
Japan.............................................. 60.4 62.9 61.2
South Korea........................................ 26.4 5.8 1.1
Russia............................................. (14.2) 5.0 26.4
All others......................................... 24.3 28.5 12.4
Corporate expenses................................. (44.1) (35.7) (30.3)
Net interest income................................ 1.7 2.5 4.5
Elimination of intersegment gross profit........... (184.7) (198.3) (191.0)
-------- -------- --------
Total operating income..................... 94.3 80.9 90.5
-------- -------- --------
Income taxes....................................... (36.3) (31.2) (34.8)
Minority interest.................................. (1.1) (1.2) (1.0)
-------- -------- --------
Net Income........................................... $ 56.9 $ 48.5 $ 54.7
======== ======== ========
TOTAL ASSETS:
United States...................................... $ 154.8 $ 116.2 $ 138.5
Japan.............................................. 65.8 69.4 57.9
South Korea........................................ 41.6 10.9 2.1
Russia............................................. 11.4 11.0 16.2
All others......................................... 111.0 112.1 81.5
Corporate(4)....................................... 35.8 31.9 23.0
Elimination........................................ (4.6) (3.3) (4.6)
-------- -------- --------
Total assets............................... $ 415.8 $ 348.2 $ 314.6
======== ======== ========
</TABLE>

66
<PAGE> 67
HERBALIFE INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
CAPITAL EXPENDITURES:
United States...................................... $ 21.7 $ 14.5 $ 10.5
Japan.............................................. 1.1 1.9 2.4
South Korea........................................ 1.1 0.5 --
Russia............................................. 0.3 0.5 --
All others......................................... 5.9 1.7 0.2
-------- -------- --------
Total capital expenditures................. $ 30.1 $ 19.1 $ 13.1
======== ======== ========
Notes:
(1) Includes intersegment sales of:
United States................................. $ 419.4 $ 460.4 $ 447.0
All others.................................... 4.9 6.1 3.5
-------- -------- --------
Total...................................... $ 424.3 $ 466.5 $ 450.5
======== ======== ========
(2) Includes distributor allowance reclass of:
United States................................. 131.0 162.0 152.2
Elimination................................... (131.0) (162.0) (152.2)
-------- -------- --------
Total...................................... -- -- --
======== ======== ========
(3) Includes depreciation and amortization of:
United States................................. $ 9.1 $ 11.5 $ 6.9
Japan......................................... 1.2 1.2 0.8
South Korea................................... 0.3 0.1 0.1
Russia........................................ 0.2 -- --
All Others.................................... 3.3 3.0 3.1
-------- -------- --------
Total...................................... $ 14.1 $ 15.8 $ 10.9
======== ======== ========
(4) Corporate assets includes:
Goodwill...................................... $ 3.1 $ 3.3 $ 3.5
ST deferred taxes............................. 20.4 21.9 16.8
LT deferred taxes............................. 12.3 6.7 2.7
-------- -------- --------
Total...................................... $ 35.8 $ 31.9 $ 23.0
======== ======== ========
</TABLE>

<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
REVENUE BY PRODUCT LINE IS AS FOLLOWS:
Weight management.................................... $ 741.0 $ 648.4 $ 575.8
Dietary and nutritional supplements.................. 807.8 729.6 678.9
Personal care products............................... 198.1 199.0 166.6
Literature, promotional and other.................... 46.6 67.8 69.4
-------- -------- --------
Total retail sales......................... $1,793.5 $1,644.8 $1,490.7
======== ======== ========
</TABLE>

For the period ended December 31, 1999, South Korea has been identified as
a reportable segment. Segment data for prior periods has been presented for
comparative purposes.

67
<PAGE> 68
HERBALIFE INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

13. INCOME TAXES

The components of income before income taxes were:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Domestic.................................... $23,432,000 $28,082,000 $44,769,000
Foreign..................................... 70,891,000 52,781,000 45,751,000
----------- ----------- -----------
$94,323,000 $80,863,000 $90,520,000
=========== =========== ===========
</TABLE>

Income taxes are as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
CURRENT:
Foreign..................................... $33,999,000 $33,048,000 $25,397,000
Federal..................................... 3,910,000 6,133,000 9,858,000
State....................................... 2,486,000 2,754,000 2,579,000
DEFERRED:
Foreign..................................... 1,652,000 (395,000) 1,156,000
Federal..................................... (5,204,000) (9,814,000) (3,749,000)
State....................................... (529,000) (594,000) (391,000)
----------- ----------- -----------
$36,314,000 $31,132,000 $34,850,000
=========== =========== ===========
</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,
--------------------------
1999 1998
----------- -----------
<S> <C> <C>
DEFERRED INCOME TAX ASSETS:
Intercompany profit in inventory.......................... $ 1,760,000 $ 1,131,000
Accruals not currently deductible......................... 16,098,000 15,479,000
Foreign tax credits and tax loss carryforwards of certain
foreign subsidiaries.................................... 11,791,000 5,539,000
Less valuation allowance.................................. (9,124,000) (3,458,000)
Depreciation/amortization................................. 837,000 201,000
Deferred compensation plan................................ 10,630,000 6,786,000
Accrued state income taxes................................ 691,000 630,000
Accrued vacation.......................................... 2,132,000 1,670,000
Unrealized foreign exchange............................... 1,367,000 --
Other..................................................... -- 2,670,000
----------- -----------
36,182,000 30,648,000
----------- -----------
DEFERRED INCOME TAX LIABILITIES:
Payments to former partners............................... 863,000 896,000
Inventory deductibles..................................... 186,000 136,000
Unrealized foreign exchange............................... -- 1,050,000
Other..................................................... 2,486,000 --
----------- -----------
3,535,000 2,082,000
----------- -----------
Net....................................................... $32,647,000 $28,566,000
=========== ===========
</TABLE>

68
<PAGE> 69
HERBALIFE INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

At December 31, 1999, the Company's deferred income tax asset for U.S.
foreign tax credits of $6,299,000 and net operating loss carryforwards of
certain foreign subsidiaries of $5,492,000 was reduced by a valuation allowance
of $9,124,000. The net operating loss carryforwards expire in varying amounts
between 2000 and 2007. 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.

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,
---------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Tax expense at United States statutory rate..... $33,013,000 $28,302,000 $31,682,000
Increase (decrease) in tax resulting from:
Foreign sales corporation..................... (193,000) (194,000) (1,846,000)
U.S. foreign tax credits...................... (5,289,000) (6,671,000) (7,926,000)
Increase (decrease) in valuation allowances... 5,667,000 1,857,000 156,000
Differences between U.S. and foreign tax rates
on foreign income.......................... 2,695,000 8,380,000 10,541,000
State taxes, net of federal benefit........... 1,616,000 1,297,000 1,428,000
Other......................................... (1,195,000) (1,839,000) 815,000
----------- ----------- -----------
Total................................. $36,314,000 $31,132,000 $34,850,000
=========== =========== ===========
</TABLE>

Cumulative undistributed earnings of foreign subsidiaries for which no
deferred taxes have been provided approximated $20,700,000 at December 31, 1999.
Deferred income taxes on these earnings have not been provided as these amounts
have been reinvested in the foreign subsidiaries.

14. FINANCIAL INSTRUMENTS

The Company enters into foreign exchange derivatives contracts in the
ordinary course of business primarily to reduce its exposure 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
Japanese Yen denominated intercompany sales made by Herbalife International of
America, Inc. to the Company's Japanese subsidiary. 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 amount of outstanding option premiums.

The following table provides information about the details of the Company's
option contracts:

<TABLE>
<CAPTION>
U.S. DOLLAR AVERAGE
EQUIVALENT STRIKE FAIR MATURITY
FOREIGN CURRENCY COVERAGE PRICE VALUE DATE
---------------- ----------- ------- ---------- --------------
<S> <C> <C> <C> <C>
At December 31, 1999
Japanese Yen.................................. $ 9,000,000 118 -- Jan - Mar 2000

At December 31, 1998
Japanese Yen.................................. $90,000,000 120 $1,781,000 Jan - Dec 1999
</TABLE>

69
<PAGE> 70
HERBALIFE INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Foreign exchange forward contracts are occasionally used to hedge
non-functional currency advances between subsidiaries and bank loans. 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:

<TABLE>
<CAPTION>
CONTRACT FORWARD POSITION MATURITY CONTRACT FAIR
FOREIGN CURRENCY DATE IN US DOLLARS DATE RATE VALUE
---------------- ---------- ---------------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C>
At December 31, 1999
Buy British Pound/Sell Norwegian
Kroner............................ 04/19/1999 $ 802,000 04/14/2000 12.4833 $ 829,000
Buy British Pound/Sell Finnish
Marka............................. 04/19/1999 813,000 04/14/2000 8.7451 879,000
Buy British Pound/Sell Swedish
Krona............................. 06/25/1999 739,000 04/14/2000 13.1085 766,000
Buy British Pound/Sell Norwegian
Kroner............................ 06/25/1999 492,000 04/14/2000 12.4730 509,000
Buy British Pound/Sell Danish
Kroner............................ 06/25/1999 436,000 04/14/2000 11.1090 463,000
Buy USD/Sell Turkish Lire........... 09/14/1999 147,000 03/13/2000 613,050 139,000
Buy USD/Sell Turkish Lire........... 09/14/1999 3,000,000 09/14/2000 824,000 2,209,000

At December 31, 1998
Buy German Mark/Sell Pound
Sterling.......................... 12/14/1998 1,807,000 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 foreign subsidiary cash held primarily
in Japan and Korea was $99.5 million of which $31.8 million was maintained or
invested in U.S. dollars.

70
<PAGE> 71
HERBALIFE INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

14. QUARTERLY INFORMATION (UNAUDITED)

<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
FIRST QUARTER ENDED MARCH 31
Retail sales............................................ $428,799,000 $398,447,000
Net sales............................................... 226,439,000 209,776,000
Operating margin........................................ 101,178,000 92,674,000
Net income.............................................. 11,712,000 14,788,000
Net income per common share:
Basic................................................... $ 0.41 $ 0.51
Diluted................................................. $ 0.38 $ 0.48
Dividends per share paid................................ $ 0.15 $ 0.15
SECOND QUARTER ENDED JUNE 30
Retail sales............................................ $425,765,000 $398,142,000
Net sales............................................... 226,350,000 209,944,000
Operating margin........................................ 100,556,000 96,223,000
Net income.............................................. 12,192,000 15,328,000
Net income per common share:
Basic................................................... $ 0.43 $ 0.53
Diluted................................................. $ 0.40 $ 0.50
Dividends per share paid................................ $ 0.15 $ 0.15
THIRD QUARTER ENDED SEPTEMBER 30
Retail sales............................................ $446,041,000 $402,704,000
Net sales............................................... 238,893,000 213,032,000
Operating margin........................................ 108,677,000 94,041,000
Net income.............................................. 15,545,000 7,052,000
Net income per common share:
Basic................................................... $ 0.54 $ 0.25
Diluted................................................. $ 0.51 $ 0.24
Dividends per share paid................................ $ 0.15 $ 0.15
FOURTH QUARTER ENDED DECEMBER 31
Retail sales............................................ $492,903,000 $445,544,000
Net sales............................................... 264,543,000 233,890,000
Operating margin........................................ 121,809,000 101,981,000
Net income.............................................. 17,474,000 11,330,000
Net income per common share:
Basic................................................... $ 0.61 $ 0.40
Diluted................................................. $ 0.57 $ 0.38
Dividends per share paid................................ $ 0.15 $ 0.15
</TABLE>

71
<PAGE> 72

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, 2000
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 President, March 30, 2000
- ------------------------------------------------ Chief Executive Officer (Principal
Mark Hughes Executive Officer)

/s/ CHRISTOPHER PAIR Director and Executive Vice March 30, 2000
- ------------------------------------------------ President,
Christopher Pair Chief Operating Officer

/s/ MICHAEL E. ROSEN Director and Executive Vice March 30, 2000
- ------------------------------------------------ President,
Michael E. Rosen Chief Executive of Corporate
Development/Marketing

/s/ EDWARD HALL Director March 30, 2000
- ------------------------------------------------
Edward Hall

/s/ ALAN LIKER Director March 30, 2000
- ------------------------------------------------
Alan Liker

/s/ CHRISTOPHER M. MINER Director March 30, 2000
- ------------------------------------------------
Christopher M. Miner
</TABLE>

72
<PAGE> 73

HERBALIFE INTERNATIONAL, INC.

EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT PAGE NO./
NUMBER DESCRIPTION (FOOTNOTE)
------- ----------- --------------
<S> <C> <C>
3.1 Amended and Restated Articles of Incorporation.............. (10)
3.2 Amended and Restated Bylaws................................. (2)
4.1 Form of Class A Common Stock and Class B Common Stock
Certificates................................................ (12)
10.1 Final Judgment and Permanent Injunction, entered into on
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........................................................ (1)
10.2 The Company's 1991 Stock Option Plan, as amended............ (7), (14)
10.3 The Company's 1992 Executive Incentive Compensation Plan, as
amended..................................................... (2), (7)
10.4 Form of Individual Participation Agreement relating to the
Company's Executive Compensation Plan....................... (2)
10.5 Form of Letter Agreement between the Compensation Committee
of the Board of Directors of the Company and Mark Hughes.... (2)
10.6 Form of Indemnity Agreement between the Company and certain
officers and directors of the Company....................... (2)
10.7 Trust Agreement among the Company, Citicorp Trust, N.A. and
certain officers and directors of the Company............... (2)
10.8 Form of Stock Appreciation Rights Agreement between the
Company and certain directors of the Company................ (2)
10.9 1994 Performance Based Annual Incentive Compensation Plan,
as amended and restated in 1996............................. (4), (7), (11)
10.10 Form of Promissory Note for Advances under the Company's
1994 Performance Based Annual Incentive Compensation Plan... (5)
10.11 Employment Agreement between the Company and Chris Pair
dated April 3, 1994......................................... (3)
10.12 The Company's Executive Officer Deferred Compensation Plan,
amending and relating the Deferred Compensation Agreement
between the Company and Michael Rosen....................... (5)
10.13 Office lease agreement between the Company and State
Teacher's Retirement System, dated July 20, 1995............ (6)
10.14 Form of stock appreciation rights agreements between the
Company and certain directors of the Company................ (6)
10.15 The Company's Senior Executive Deferred Compensation Plan,
effective January 1, 1996, as amended....................... (6)
10.16 The Company's Management Deferred Compensation Plan,
effective January 1, 1996, as amended....................... (6)
10.17 Master Trust Agreement between the company and Imperial
Trust Company, Inc., effective January 1, 1996.............. (6)
10.18 The Company's 401K Plan, as amended......................... (6)
10.19 Agreement Concerning Share Allocation Plan for Specific
Directors of Herbalife of Japan K.K. dated December 30,
1996........................................................ (8)
</TABLE>

73
<PAGE> 74

<TABLE>
<CAPTION>
EXHIBIT PAGE NO./
NUMBER DESCRIPTION (FOOTNOTE)
------- ----------- --------------
<S> <C> <C>
10.20 Consulting Agreement between David Addis and Herbalife of
America, Inc. dated January 27, 1997........................ (8)
10.21 Agreement between Herbalife International of America, Inc.
and D&F Industries, Inc. dated September 2, 1997............ (9)
10.22 Agreement between Herbalife International of America, Inc.
and Dynamic Products, Inc. dated September 2, 1997.......... (9)
10.23 Agreement between Herbalife International of America, Inc.
and Raven Industries, Inc. d/b/a Omni-Pak Industries, dated
September 2, 1997........................................... (9)
10.24 The Company's Supplemental Executive Retirement Plan........ (12)
10.25 Credit Agreement between Herbalife International of America,
Inc. and First National Bank of Chicago, dated December 14,
1998........................................................ (13)
10.26 Agreement and Plan of Merger, dated September 13, 1999,
among MH Millennium Holding LLC, MH Millennium Acquisition
Corp., Mark Hughes, the Mark Hughes Family Trust and
Herbalife International, Inc................................ (15)
21 List of subsidiaries of the Company......................... (16)
23.1 Independent Auditor's Consent............................... (16)
27 Financial Data Schedule..................................... (16)
</TABLE>